Business context and reporting period
Plains All American Pipeline, L.P. (PAA) filed this Form 10-K for the fiscal year ended December 31, 2012. The partnership transports, stores, terminals and markets crude oil and refined products; processes, transports, stores and markets natural gas liquids (NGL); and owns natural gas storage assets through its majority interest in PAA Natural Gas Storage. Operations are reported in Transportation, Facilities, and Supply and Logistics. The filing’s per-unit amounts reflect a two-for-one unit split effective October 1, 2012.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $37.797 billion | $34.275 billion | Up 10% |
| Net income | $1.127 billion | $994 million | Up 13% |
| Net income attributable to Plains | $1.094 billion | $966 million | Up 13% |
| Diluted net income per limited partner unit | $2.40 | $2.44 | Down 2% |
| Adjusted EBITDA | $2.107 billion | $1.598 billion | Up 32% |
| Implied distributable cash flow (DCF) | $1.550 billion | $1.149 billion | Up 35% |
| Cash from operating activities | $1.240 billion | $2.365 billion | Down $1.125 billion |
| Capital expenditures: acquisitions, expansion and maintenance | $3.641 billion | $2.055 billion | Up $1.586 billion |
| Total debt at year-end | $7.406 billion | $5.199 billion | Up $2.207 billion |
| Total assets | $19.235 billion | $15.381 billion | Up $3.854 billion |
| Declared distributions per unit | $2.11 | $1.95 | Up 8% |
Revenue is dominated by high-volume, low-margin commodity sales; revenue growth should therefore be considered alongside segment profit and cash generation. Total segment profit was $1.945 billion, up 25%. Transportation profit rose 28% to $710 million, Facilities rose 35% to $482 million, and Supply and Logistics rose 16% to $753 million. Segment profit per barrel was $0.56, $0.38 and $2.05, respectively; Supply and Logistics’ per-barrel profit was unchanged from 2011.
Operating cash flow fell chiefly because PAA built crude oil inventory in 2012, using cash, whereas inventory reductions had boosted operating cash flow in 2011. Investing cash outflow was $3.392 billion; financing cash inflow was $2.151 billion. The filing does not provide a single consolidated operating margin measure.
Material changes versus the prior year
- Acquisition and expansion activity accelerated: PAA spent $2.286 billion on acquisitions and $1.185 billion on internal growth projects. Major transactions included the approximately $1.68 billion BP NGL acquisition and the $503 million US Development Group rail-terminal acquisition.
- Higher production and throughput in key North American crude oil regions, added assets and expansion projects supported fee-based results and lease-gathering volumes. Favorable crude oil location and quality differentials also benefited Supply and Logistics.
- NGL sales volumes increased, in part due to BP NGL, but lower NGL prices and less favorable conditions weighed on margins. Derivative-related mark-to-market effects, net of inventory valuation adjustments, were a $74 million loss in 2012 versus a $62 million gain in 2011.
- Net income rose, but diluted earnings per unit declined as weighted-average diluted units increased 10%, reflecting equity issuance and other unit growth.
- Depreciation and amortization increased to $482 million from $249 million, including $168 million of long-lived asset impairments. Interest expense rose to $288 million from $253 million, principally reflecting new debt issuance.
Outlook, risks and unusual items
Management described North American crude oil production growth and infrastructure needs as supportive of PAA’s assets and growth plans, while warning that margins may normalize as new infrastructure alleviates bottlenecks. The 2013 expansion-capital estimate was $1.05–$1.20 billion, subject to timing and scope changes. Projects included pipelines, terminal expansions and rail facilities. No clear 2013 earnings or DCF guidance value is provided in the supplied filing text.
- Liquidity and debt: Year-end cash was $24 million, working capital was negative $36 million, and stated available liquidity was approximately $2.410 billion, subject to covenant compliance. Debt included approximately $6.3 billion of long-term debt and $1.1 billion of short-term debt. PAA reported compliance with its debt covenants. A $250 million 5.63% note was due in December 2013.
- Asset impairment: The partnership recorded $168 million of impairment losses, primarily after deciding not to proceed with the Pier 400 terminal project and in connection with the planned sale of certain refined-products pipelines. The pipeline sale agreement was signed in February 2013, with closing expected in the second quarter.
- Environmental matters: A June 2012 Rangeland pipeline release discharged about 3,000 barrels into the Red Deer River and Gleniffer Reservoir. Estimated cleanup costs were $51 million before insurance recoveries; a $36 million insurance receivable was recorded at year-end. PAA also disclosed a February 2013 Bay Springs release estimated at about 125 barrels, with cleanup costs expected not to exceed $10 million before insurance.
- Other risks: Key exposures include commodity-market structure and volatility, possible normalization of gathering margins, acquisition and project execution, capacity overbuild, customer and counterparty credit, interest rates, regulation, pipeline integrity, environmental liabilities, and insurance coverage. PAA had elected to self-insure hurricane property-damage risk.
- Distribution: The fourth-quarter 2012 distribution of $0.5625 per unit was paid February 14, 2013. Distributions are not guaranteed and may be restricted by debt defaults or affected by reserves and cash flow. The general partner receives incentive distributions; it agreed to reduce them in connection with the BP NGL acquisition.
- Contingencies: PAA reported approximately $96 million of environmental reserves at year-end, offset in part by $42 million of probable insurance and third-party recoveries. In a Pemex condensate case, PAA Marketing was dismissed from the April 2012 suit in February 2013; a summary-judgment motion remained pending in the May 2011 case. Management did not believe ordinary-course legal proceedings would have a material adverse effect.
Management reported that 2012 adjusted EBITDA and DCF exceeded its February 2012 guidance by approximately 28% and 36%, respectively, and that distribution coverage was approximately 160%. These are management-reported, non-GAAP or operating measures and should be evaluated with the reconciliations and definitions in the filing. The external auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Review the definitions and reconciliations for adjusted EBITDA, implied DCF, distribution coverage and segment profit; these are not GAAP measures.
- Assess the sustainability of Supply and Logistics margins and the effect of new pipeline, terminal and rail capacity on regional differentials and utilization.
- Check funding needs and returns for the $1.05–$1.20 billion 2013 expansion program, alongside acquisition integration and the planned pipeline-asset sale.
- Reconcile the decline in operating cash flow with inventory changes, distributions, debt growth and financing raised through equity and senior notes.
- Monitor the 2013 note maturity, borrowing availability, covenant headroom and the effects of variable-rate debt and market collateral requirements.
- Track final remediation costs, insurance recoveries and regulatory outcomes for the Rangeland and Bay Springs releases, as well as the remaining Pemex litigation.