PLAINS GP HOLDINGS, L.P. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. PAGP completed its IPO on October 21, 2013; the annual consolidated results include predecessor GP LLC and PAA operations for the full year, while PAGP’s reported per-share earnings and distributions relate only to the post-IPO period. Unless otherwise noted, financial amounts below are consolidated and in U.S. dollars.
Business context
PAGP is a holding partnership whose principal cash-generating asset is its 22.1% limited partner interest in Plains AAP, L.P. (AAP), representing an approximately 20.6% economic interest after AAP Management Unit dilution. AAP holds PAA’s incentive distribution rights (IDRs) and indirect 2% general partner interest. PAGP’s cash flow therefore depends principally on distributions from AAP, which depend on PAA. PAA operates crude oil and NGL pipelines, storage and terminal facilities, and supply and logistics businesses in the United States and Canada.
Key financial metrics
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Total revenue | $42.249 billion | $37.797 billion | Up 12% |
| Operating income | $1.724 billion | $1.424 billion | Up 21% |
| Net income, consolidated | $1.374 billion | $1.118 billion | Up 23% |
| Net income attributable to PAGP | $15 million | $3 million | PAGP began public trading in October; 2013 EPS of $0.10 covers only the post-IPO period |
| Operating cash flow | $1.948 billion | $1.232 billion | Up 58%; inventory reductions contributed to 2013 cash generation |
| Investing cash flow | $(1.653) billion | $(3.392) billion | 2013 included $1.622 billion of internal growth capital and asset-sale proceeds |
| Total debt | $8.343 billion | $7.606 billion | Includes $1.113 billion short-term debt and $7.230 billion long-term debt |
| Cash and available liquidity | $43 million cash; $1.953 billion total liquidity | — | Liquidity includes available PAA facilities, net of commercial paper, and AAP facility availability |
Revenue is heavily weighted to the high-volume, low-margin Supply and Logistics segment. Reported gross margin was $2.084 billion, approximately 4.9% of revenue; operating income margin was approximately 4.1%. Segment profit totaled $2.167 billion, up 11%: Transportation $729 million (+3%), Facilities $616 million (+28%), and Supply and Logistics $822 million (+9%).
At year-end, current assets were $4.965 billion and current liabilities $5.413 billion, a reported working-capital deficit of approximately $448 million. The filing reports no covenant default; PAA and AAP were in compliance at December 31, 2013.
Material changes versus 2012
- Growth reflected the full-year contribution of the 2012 BP NGL acquisition, rail terminal assets acquired from USD, and transportation and facilities expansion projects.
- Transportation average daily volumes rose 7% to 3.712 million barrels; Facilities’ comparable aggregate activity measure increased 13% and Supply and Logistics volumes rose 7% to 1.078 million barrels per day.
- Supply and Logistics benefited from stronger NGL demand and margins, but narrower crude oil differentials reduced opportunities to capture crude-related market dislocations.
- Depreciation and amortization fell to $378 million from $483 million, principally because 2012 included approximately $168 million of asset impairments, compared with $20 million in 2013. Interest expense rose to $309 million from $295 million, and income tax expense rose to $106 million from $55 million, largely reflecting increased Canadian taxable earnings.
- Capital expenditure on internal growth projects increased to $1.622 billion from $1.185 billion; acquisition capital fell to $19 million from $2.286 billion, excluding the PNG merger, which was completed with PAA units valued at approximately $760 million.
Outlook, risks and unusual items
- Outlook and investment: Management cited North American production growth and infrastructure needs as favorable for PAA’s assets, while cautioning that new infrastructure could normalize margins and that production growth, project returns and acquisition outcomes are uncertain. PAA’s 2014 expansion capital plan was $1.6–$1.8 billion, with a base plan of approximately $1.7 billion.
- Distributions: PAA increased its annualized distribution to $2.40 per common unit, up 10.6% from the prior year, and reported distribution coverage of approximately 143%. PAA declared a fourth-quarter distribution of $0.615 per unit. PAGP’s post-IPO fourth-quarter distribution was prorated to $0.12505 per Class A share; the filing gives a full-quarter equivalent of $0.15979 per share, or $0.63914 annualized. AAP agreed to reduce IDR payments in connection with the BP NGL acquisition and PNG merger, reducing cash potentially available to PAGP.
- Environmental matters: The year-end environmental liability reserve was approximately $93 million, with $10 million of probable insurance and third-party recoveries recorded. 2013 incidents included the Bay Springs release (about 120 barrels; approximately $6 million cleanup cost) and Kemp River releases (about 700 barrels; estimated remediation cost of $15 million). Earlier Rainbow and Rangeland releases had incurred approximately $70 million and $46 million, respectively, in cleanup and remediation costs through year-end 2013. Further regulatory actions or costs remain possible.
- Rail and operational risk: The filing discusses heightened regulatory scrutiny of crude-by-rail safety following derailments and a February 2014 DOT emergency order; future railcar requirements could raise costs. PAGP also self-insures hurricane property risk and faces risks from spills, severe weather, cyberattacks, counterparties and insurance availability.
- Other exposures: PAA’s market-sensitive supply and logistics earnings depend in part on crude differentials, contango/backwardation and volatility. Customer concentration is notable: Marathon represented 15% of 2013 revenue, ExxonMobil 13%, and Phillips 66 11%. PNG merger class-action claims remained pending in Delaware and Texas; the federal action was dismissed in February 2014. Management did not expect ordinary-course litigation outcomes, individually or collectively, to materially harm results.
- Governance and reporting: Legacy Owners held approximately 77.9% of PAGP shares at year-end and retain significant governance influence. Management found disclosure controls effective; the company did not yet provide a management assessment or auditor attestation on internal control over financial reporting under the new-public-company transition period.
Most important facts for investors to verify
- Whether PAA’s distributions and AAP’s resulting distributions to PAGP can sustain PAGP’s per-share distribution, particularly after IDR reductions, debt service and reserves.
- Whether reported consolidated growth translates into cash available to PAGP shareholders: PAGP-attributable 2013 net income was only $15 million, and most consolidated earnings belong to noncontrolling interests.
- Execution, cost and contracted demand for the $1.6–$1.8 billion 2014 expansion program, and whether new capacity pressures transportation and logistics margins.
- Available liquidity, commercial-paper use, debt maturities, covenant headroom and the pledged AAP assets—including IDRs and the indirect PAA general partner interest—under AAP’s credit facility.
- Environmental reserve adequacy, outcomes of Canadian regulatory proceedings and any additional remediation or rail-safety costs not covered by insurance or indemnities.
- Potential dilution and future public-market share supply from Legacy Owner exchange rights and AAP Management Unit conversions, as well as the implications of concentrated ownership and conflicts of interest.