PLAINS ALL AMERICAN PIPELINE, L.P. — 2019 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; dollar amounts below are in millions unless stated otherwise. PAA operates crude oil, NGL and natural gas transportation, storage, processing and logistics businesses in the U.S. and Canada.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $7,886 | $8,792 | $24,515 | $25,269 |
| Operating income | $492 | $493 | $1,657 | $962 |
| Net income attributable to PAA | $449 | $710 | $1,865 | $1,099 |
| Basic net income per common unit | $0.55 | $0.91 | $2.35 | $1.30 |
| Adjusted EBITDA (non-GAAP) | $731 | $636 | $2,377 | $1,735 |
| Implied DCF (non-GAAP) | $506 | $433 | $1,787 | $1,206 |
- Q3 revenue declined 10%, mainly reflecting lower Supply and Logistics revenues; operating income was essentially flat. Net income attributable to PAA fell 37%, partly because Q3 2018 included a $210 million gain on an investment in an unconsolidated entity.
- Nine-month net income attributable to PAA rose 70%. Adjusted EBITDA increased 37% and implied DCF increased 48%. Nine-month earnings included a $269 million non-cash Capline-related gain and a $60 million deferred tax benefit from Alberta’s enacted tax-rate reduction.
- Segment Adjusted EBITDA for the first nine months was $1,271 Transportation, $529 Facilities and $571 Supply and Logistics, compared with $1,083, $530 and $120, respectively, in 2018. Transportation benefited from Permian volumes and completed expansions; Supply and Logistics benefited from favorable crude differentials and other factors.
- Operating cash flow was $1,778 for the first nine months, versus $1,294 in 2018. Investing activities used $1,367; financing activities provided $196. Cash and cash equivalents were $609, plus $59 restricted cash, at September 30.
- Total debt was $10,257, including $1,084 classified as short-term; senior notes were $8,937 net. Working capital deficit was $196. PAA reported $3,460 of total liquidity, including available credit facilities, and compliance with its debt covenants.
- Property and equipment additions and other capital spending totaled $919 in the first nine months; reported expansion capital was $988 and maintenance capital $204. Full-year 2019 expansion capital was expected to be approximately $1,350.
Material changes, outlook and management commentary
- Transportation tariff volumes increased 18% in Q3, including 25% growth in Permian crude pipeline volumes. Cactus II entered service in Q3 2019; management cited higher production and expansion projects as key drivers.
- In April 2019, PAA announced completion of its Leverage Reduction Plan and lowered its long-term target debt-to-Adjusted-EBITDA leverage range to 3.0x–3.5x. It set a sustainable minimum annual distribution coverage target of 130% and said future common distribution increases depend on leverage and coverage targets and annual review.
- Management expected 2019 expansion capital of about $1.35 billion, primarily for Permian-related projects, funded through retained cash flow, asset-sale proceeds or debt. W2W and Red Oak pipeline projects were targeted to begin service in 2021; Red Oak remains subject to permits and regulatory approvals.
- PAA issued $1.0 billion of 3.55% senior notes due 2029 in September. It subsequently gave notice to redeem $500 million of 2.60% notes due December 2019 and intended to redeem $500 million of 5.75% notes due January 2020. Credit-facility maturities were extended by one year, to August 2024 and August 2022 for the respective facilities.
- Common-unit distributions were $0.36 per unit for Q3 ($1.44 annualized); the November payment was declared. Management said excess DCF is retained for reserves, capital spending and other partnership needs.
Risks, contingencies and unusual items
- Line 901 incident: PAA estimated total costs incurred or expected at approximately $380 million and reported a remaining gross liability of $79 million at September 30. It had collected $200 million of approximately $255 million in release costs believed probable of insurance recovery and recorded a further $55 million receivable. Additional costs, claims, fines or penalties could exceed estimates. Two remaining felony counts were dismissed in October 2019; other litigation, regulatory matters and natural-resource-damage discussions remained.
- Total environmental liabilities were $135 million, with $62 million recorded as short-term; related probable insurance and third-party recovery receivables totaled $62 million. Actual remediation costs may exceed reserves.
- Commodity, interest-rate and foreign-exchange derivatives can create earnings volatility and margin requirements. PAA reported $281 million of net derivative losses deferred in accumulated other comprehensive income at quarter-end.
- Management identified risks including changes in shipment volumes, competition and infrastructure overbuild, commodity differentials, project permitting or execution, counterparty credit, access to capital, severe weather, cyber events and environmental liabilities. It cautioned that results for the interim period are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of nine-month earnings and DCF growth is sustainable operating performance versus the Capline gain, tax benefit, derivative timing and market differentials.
- Debt maturities and refinancing progress, liquidity availability, covenant compliance, and performance against the 3.0x–3.5x leverage and 130% coverage targets.
- Actual 2019 expansion-capital spending, project costs and timing, including W2W, Red Oak and Capline reversal plans and required approvals or shipper commitments.
- Changes in the Line 901 liability, insurance recoveries, natural-resource damages, litigation and potential additional regulatory penalties.
- Whether cash generation supports planned investment and distributions while maintaining adequate liquidity and balance-sheet flexibility.