Plains GP Holdings, L.P. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unless otherwise noted, financial amounts are in millions. PAGP’s consolidated results substantially reflect PAA and its subsidiaries; PAGP owned approximately 43% of AAP, and most consolidated earnings belong to noncontrolling interests.
Financial performance
- Revenue: $4,111, down 31% from $5,942 in Q1 2015. Operating income was $281 versus $370; net income was $177 versus $262.
- PAGP-attributable earnings: $36, up from $31. Basic and diluted earnings were $0.14 per Class A share in both periods; weighted-average shares increased 19% to 253 million.
- Segment profit: $443 versus $513. Transportation rose to $247 from $241 and Facilities to $159 from $142; Supply and Logistics fell to $37 from $130.
- Cash flow: Operating cash flow was $631 versus $729. Investing used $287 versus $666, including $372 of property and equipment additions. Financing used $338; cash increased $10 to $40.
- Debt and liquidity: Total debt was $10,459 at quarter-end, down from $11,931 at year-end 2015. Working capital was negative $282. Reported available liquidity was $3,917, including cash and borrowing capacity, subject to covenant compliance; PAA and AAP reported compliance.
- Capital and distributions: Q1 acquisition, expansion and maintenance capital was $85, $370 and $47, respectively. PAGP paid $55 in Class A distributions and $375 to noncontrolling interests. A $0.231-per-share Class A distribution was declared for payment in May.
Material changes and drivers
- Lower crude oil and NGL prices reduced reported Supply and Logistics revenue and purchase costs; segment profit also weakened. Management cited increased competition, excess infrastructure, lower lease-gathering margins, softer propane margins and unfavorable foreign-exchange results.
- Transportation and Facilities improved, supported by higher volumes and expansion activity in certain systems, increased storage utilization and lower operating costs. Transportation results were adversely affected by Line 901/903 shutdowns and some refinery downtime.
- Depreciation and amortization increased to $114 from $105, and net interest expense to $116 from $107, partly reflecting completed expansion projects and financing. Q1 results also included approximately $56 of gains and $50 of impairment losses related to non-core asset sales, reported within depreciation and amortization.
- In January, PAA issued approximately 61 million Series A preferred units for about $1.6 billion net proceeds. The units carry an 8% annual cumulative distribution, rank senior to other PAA equity for distributions and liquidation, and may be paid in additional units through 2017 under specified terms.
Outlook, risks and contingencies
- Management projected 2016 expansion capital of $1.4–$1.6 billion and maintenance capital of $190–$210 million. It expected most remaining 2016 capital-program funding to come from the preferred-unit proceeds. No specific earnings or distribution-growth guidance was provided in the supplied filing text.
- Management warned that lower production, compressed basis differentials, excess takeaway capacity and competition may pressure volumes and unit margins—particularly in Supply and Logistics—and constrain cash-flow and distribution growth. Project timing, costs and returns remain uncertain.
- Line 901 incident: The 2015 California crude-oil release remains subject to investigations, claims and litigation; Lines 901 and 903 were not operating, and no restart timeline had been established. Management estimated total incident costs of approximately $269, with a remaining gross liability of $104 and an insurance receivable of approximately $74. The estimate excludes certain losses that were not probable and estimable; additional costs, fines or penalties could be material. The filing also reported $176 of total environmental reserves, including Line 901 amounts.
- Other disclosed matters include a separate Illinois release estimated to cost less than $10, a PHMSA proposed $190,000 penalty relating to a Texas release, and a Clean Air Act notice concerning a Bakersfield facility. Management did not believe the current legal proceedings, individually or together, would materially adversely affect consolidated results, while noting uncertainties.
- Commodity, interest-rate and currency risks are managed with derivatives. The filing reported $292 of net derivative losses deferred in accumulated other comprehensive income and a $60 liability for the preferred-unit distribution-rate-reset embedded derivative.
Important facts for investors to verify
- Whether Supply and Logistics earnings and volumes stabilize amid low prices, competition and excess capacity.
- Available liquidity, covenant compliance, debt maturities and the ability to fund capital spending and distributions as planned.
- Progress, costs, insurance recoveries, regulatory outcomes and potential additional liabilities related to Line 901/903 and other incidents.
- Actual returns, timing and funding for the $1.4–$1.6 billion expansion program, and completion of announced asset sales and acquisition plans.
- The preferred units’ cumulative 8% distribution burden, payment form, conversion terms and reset-option valuation.