PLAINS GP HOLDINGS, L.P. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. PAGP is a holding partnership whose cash flows depend on its indirect investment in Plains All American Pipeline, L.P. (PAA). Consolidated results largely reflect PAA and its subsidiaries; PAGP’s consolidated balance sheet includes a substantial deferred tax asset.
Financial performance
| Metric (millions, except per-share data) | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $5,873 | $5,170 | $18,618 | $14,231 |
| Operating income | $43 | $348 | $887 | $774 |
| Net income | $31 | $279 | $607 | $538 |
| Net income attributable to PAGP | $4 | $24 | $69 | $102 |
| Basic net income per Class A share | $0.03 | $0.24 | $0.49 | $1.03 |
| Adjusted EBITDA (non-GAAP) | $489 | $462 | $1,449 | $1,567 |
Q3 revenue rose 14%, but operating income and PAGP-attributable income fell sharply. Operating results included a $216 million negative adjustment for derivative activity net of inventory valuation adjustments; depreciation and amortization increased to $152 million from $33 million, partly reflecting acquired and completed assets and asset-sale losses. For the first nine months, revenue increased 31%, while adjusted EBITDA declined 8%. Transportation and Facilities adjusted EBITDA rose; Supply and Logistics adjusted EBITDA fell to a $32 million loss from $208 million of income, reflecting margin compression and market conditions.
Cash flow and investment: Nine-month operating cash flow was $1.915 billion, versus $636 million, helped by reduced crude inventory and hedging-margin balances. Investing cash outflow was $1.963 billion, including $1.282 billion for acquisitions and $778 million for property and equipment additions. Cash ended the period at $36 million.
Balance sheet, debt and liquidity
- Total assets were $27.710 billion; partners’ capital was $12.505 billion.
- Total debt was $11.407 billion, down from $11.839 billion at December 31, 2016. This includes $9.881 billion of senior notes and short-term borrowings; debt is principally at PAA.
- Current assets and current liabilities were each reported at $4.018 billion. Management reported a working capital deficit of less than $1 million.
- Reported available liquidity was approximately $2.490 billion, including $2.454 billion of facility and commercial-paper capacity and $36 million of cash. PAA was in compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- Distribution reset: PAA reset its annualized common-unit distribution to $1.20, effective with the Q3 distribution payable in November 2017. PAGP’s corresponding quarterly distribution fell to $0.30 per Class A share from $0.55. Management estimated the PAA reset would reduce annual distribution outflow by about $725 million.
- Balance-sheet plan: PAA’s stated plan included about $700 million of targeted asset sales, reducing hedged inventory and related debt by about $300 million, and reducing total debt by approximately $1.4 billion from June 30, 2017 levels through March 31, 2019. Management cautioned that targets were not assured. PAA subsequently issued Series B preferred units for $788 million net proceeds in October 2017.
- Capital spending: Management expected approximately $1.050 billion of 2017 expansion capital and gave a preliminary 2018 expansion-capital forecast of $700 million. It expected rising production to support pipeline utilization, but near-term Supply and Logistics earnings were described as difficult to forecast.
- Acquisitions and divestitures: PAGP acquired the Alpha Crude Connector system for approximately $1.217 billion and a propane terminal for $41 million. Nine-month non-core asset-sale proceeds were $407 million. About $630 million of assets were classified as held for sale at quarter-end; the California terminal sale agreement had been terminated and a replacement sale agreement was entered into in Q4.
- Line 901 and environmental exposure: The 2015 California crude-oil release remains subject to investigations, criminal proceedings, lawsuits and potential additional fines or costs. The company estimated aggregate incident costs of approximately $300 million, with a remaining gross liability of $64 million and a recognized insurance receivable of about $39 million. Lines 901 and most of 903 remained out of service, with no restart timeline; idled assets had a carrying value of approximately $124 million. Total environmental reserves were $134 million.
- Other risks and unusual items: Management cited intense competition, excess infrastructure capacity, narrow differentials and low volatility as pressures on margins, especially in Supply and Logistics. Potential Capline volume declines could lead to retirement costs or impairment; the carrying value of PAGP’s interest was $196 million. A proposed federal corporate tax-rate reduction, if enacted, could require a write-down of part of PAGP’s deferred tax asset.
Most important facts for investors to verify
- Whether PAA achieves planned debt reduction and asset-sale proceeds, and how retained cash flow and preferred financing are allocated.
- The sustainability of operating cash flow and segment earnings, particularly the recovery or continued weakness of Supply and Logistics.
- Any changes in Line 901/903 liabilities, insurance recoveries, litigation outcomes, operating status or potential impairment.
- Whether the announced distribution level is supported by cash generation and how it affects PAGP distributions.
- Actual capital spending, project returns, Capline outlook and completion of asset sales classified as held for sale.