PLAINS GP HOLDINGS LP quarterly report, Q2 FY2015

Business context and reporting period

Plains GP Holdings, L.P. (PAGP) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. PAGP primarily owns interests in and controls Plains All American Pipeline, L.P. (PAA); its consolidated results substantially reflect PAA and its subsidiaries. Amounts below are in millions of dollars except per-share data, and the results include substantial noncontrolling interests.

Financial performance and position

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Revenue	$6,663	$11,195	$12,605	$22,878
Operating income	$208	$364	$575	$854
Net income	$103	$275	$365	$647
Net income attributable to PAGP	$30	$15	$61	$29
Basic / diluted net income per Class A share	$0.14 / $0.14	$0.11 / $0.11	$0.28 / $0.27	$0.21 / $0.21

For the six months, operating cash flow was $654, down from $954. Investing cash use was $1,343, including $1,031 of property and equipment additions and $119 invested in unconsolidated entities. Financing provided $316; cash fell from $404 at year-end to $30.
At June 30, total debt was $10,612, including $915 short-term debt and $9,697 long-term debt. Total assets were $24,754 and partners’ capital was $10,014. Working capital was negative $529.
Management reported available liquidity of approximately $3,097, including credit-facility and commercial-paper availability and $30 of cash. PAA and AAP were in compliance with debt covenants.
Q2 segment profit was $186 Transportation, $144 Facilities and $41 Supply and Logistics, compared with $221, $134 and $133, respectively, in Q2 2014. Six-month segment profit was $428, $285 and $171, versus $427, $288 and $382.
The quarterly distribution declared for Q2 was $0.227 per Class A share, payable August 14, 2015; management described this as a 23.8% year-over-year increase. The six-month cash flow statement reports $92 of distributions paid to Class A shareholders and $713 to noncontrolling interests.

Changes versus the prior comparable period

Q2 revenue declined 40% and six-month revenue declined 45%, primarily reflecting lower commodity prices and lower Supply and Logistics revenues; revenue largely includes commodity purchases and should not be read as a direct measure of margin.
Six-month net income fell 44%, primarily due to weaker Supply and Logistics results, higher depreciation and amortization, higher interest expense and costs and lost revenue associated with the Line 901 incident. PAGP-attributable net income nevertheless rose, reflecting changes in the allocation of consolidated income to noncontrolling interests and a larger Class A share base.
Supply and Logistics segment profit fell 69% in Q2 and 55% for the six months. Management cited compressed crude-oil differentials and fewer above-baseline margin opportunities. Six-month derivative and inventory valuation impacts were a net loss of $159, versus a net gain of $51 in 2014.
Transportation volumes increased, but Q2 segment profit declined, notably due to Line 901-related costs and downtime, lower loss-allowance revenue and Canadian-dollar weakness. Facilities Q2 segment profit improved, while six-month profit was approximately flat.
Interest expense rose to $211 for the six months from $166, mainly reflecting debt issued in 2014. Operating cash flow was also lower, in part because the prior-year period benefited from liquidation of NGL and natural-gas inventory.

Outlook, risks and unusual items

Management forecast 2015 expansion capital of $2.1-$2.3 billion, including potential timing or scope adjustments, and maintenance capital of $205-$225 million. It expected most expansion investment to be in fee-based Transportation and Facilities businesses, with limited contribution to 2015 results and growth expected from 2016 onward.
Management warned that lower crude prices, compressed differentials, slower producer investment and production growth, competition, reduced infrastructure constraints and possible asset underutilization could pressure volumes, unit margins, cash flow and distribution growth. It could not assure targeted project returns or continued access to capital on favorable terms.
Line 901 incident: A May 2015 crude-oil release in Santa Barbara County reached the Pacific Ocean. The worst-case spill estimate was approximately 2,400 barrels but remained under review. Lines 901 and 903 were subject to PHMSA corrective requirements; no restart timeline for Line 901 was established. Government investigations, claims and six class-action lawsuits were pending.
PAA estimated aggregate Line 901 costs at approximately $257, including response, cleanup, assessments, certain claims, fines and legal fees; the estimate excluded lost revenue. At June 30, the remaining gross liability was $221 and the recognized probable insurance receivable was $192. The filing cautions that costs could exceed the estimate; fines and penalties or criminal/civil charges remained possible.
Environmental reserves totaled $297 at June 30, compared with $82 at year-end, alongside $200 of receivables considered probable of recovery from insurance and third parties. A separate July 10 release in Illinois was estimated to cost less than $10; a lawsuit and regulatory order followed.
Other disclosed matters included a $102,900 PHMSA penalty paid for Cushing tank cathodic protection, an EPA notice concerning the Bakersfield rail facility, and ongoing Canadian pipeline regulatory matters. Management said it did not believe the known legal proceedings would have a material adverse effect, but noted uncertainty and potential exposure.
PAA’s $400 senior notes were due in September 2015; management intended to repay them using commercial-paper borrowings. The filing also identifies commodity, interest-rate, foreign-exchange, counterparty, environmental, regulatory and financing risks.

Important facts for investors to verify

Progress of Line 901 investigations and remediation, final spill-volume assessment, insurance recoveries, claims, potential penalties and any change to the $257 cost estimate or $221 remaining liability.
Whether Line 901 or Line 903 restrictions materially affect transportation volumes, revenue and cash flow, and whether any restart approvals or timetable are established.
Liquidity, commercial-paper access, debt maturities and covenant compliance, particularly given $30 cash, the working-capital deficit and the planned September 2015 note repayment.
Execution and funding of the $2.1-$2.3 billion expansion-capital plan, including project timing, spending and expected returns.
Whether Supply and Logistics margins recover, and how commodity differentials, market structure, production levels and derivative/inventory valuation changes affect segment profit.
Distribution sustainability and the effect of noncontrolling interests and potential AAP-unit exchanges on PAGP-attributable earnings and diluted per-share results.