Business context and reporting period
Plains All American Pipeline, L.P. (NYSE: PAA) filed this Form 10-K for the fiscal year ended December 31, 2018. It owns and operates crude oil, natural gas liquids (NGL) and natural gas transportation, storage, terminalling and logistics assets in the United States and Canada. Its three segments are Transportation, Facilities, and Supply and Logistics. The filing also provides fourth-quarter results; the annual figures below are for the full fiscal year.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $34.055 billion | $26.223 billion | +30% |
| Operating income | $2.277 billion | $1.153 billion | +97% |
| Net income attributable to PAA | $2.216 billion | $856 million | +159% |
| Basic net income per common unit | $2.77 | $0.96 | +$1.81 |
| Adjusted EBITDA | $2.684 billion | $2.082 billion | +29% |
| Net cash from operating activities | $2.608 billion | $2.499 billion | +4% |
| Total debt at year-end | $9.209 billion | $9.920 billion | -$711 million |
Net margin was approximately 6.5% in 2018, compared with 3.3% in 2017. Adjusted EBITDA and implied distributable cash flow (DCF) are non-GAAP measures defined by the partnership and may not be comparable with similarly named measures at other companies.
- Segment results: Transportation Adjusted EBITDA rose to $1.508 billion from $1.287 billion, supported by higher Permian volumes and expansion projects. Facilities Adjusted EBITDA declined to $711 million from $734 million. Supply and Logistics Adjusted EBITDA increased to $462 million from $60 million, reflecting favorable crude oil differentials, higher lease-gathering and NGL margins, and more favorable derivative mark-to-market effects.
- Cash generation and investment: Implied DCF was $1.948 billion, up from $1.312 billion. Cash distributions to common unitholders were $871 million; implied DCF available to common unitholders was $1.787 billion. The filing reports $1.888 billion of expansion capital and $252 million of maintenance capital in 2018.
- Liquidity: Year-end liquidity was $2.882 billion, including $66 million cash and $2.816 billion available under credit facilities. Working capital surplus was $77 million. The partnership reported compliance with debt covenants.
- Debt and interest: Face value of consolidated debt was approximately $9.3 billion; about $9.1 billion was fixed-rate and $0.2 billion variable-rate. Interest expense fell to $431 million from $510 million, primarily due to a lower average debt balance. Long-term debt maturities include $500 million in 2019 and $500 million in 2020.
- Distributions: Common-unit distributions were $1.20 per unit for 2018, down from $1.95 in 2017. The quarterly rate was $0.30 throughout 2018; the fourth-quarter distribution was paid in February 2019.
Material changes versus the prior comparable period
- Revenue increased mainly with higher commodity prices and activity in Supply and Logistics; this segment generated most reported revenue but operates on relatively low margins.
- Transportation tariff volumes rose 14% to 5.791 million barrels per day, including a 31% increase in Permian Basin volumes. Total Transportation segment volumes also rose 14%.
- 2018 earnings included $200 million gain on the sale of a 30% interest in BridgeTex; sale proceeds were $868 million. Asset sales overall generated $1.334 billion of proceeds, and reported net gains on asset sales and impairments were $114 million.
- Net income also benefited from improved Supply and Logistics results and lower interest expense. Income tax expense increased to $198 million from $44 million, primarily reflecting higher income and derivative mark-to-market effects in Canadian operations.
- Cash distributions per common unit fell from $1.95 to $1.20. The partnership said it was retaining cash, divesting assets and reducing leverage under its 2017 leverage-reduction plan.
Outlook, commentary, risks and unusual items
- Management expected approximately $1.1 billion of 2019 expansion capital, predominantly for Permian takeaway pipelines and related projects. It said these projects were expected to contribute minimally to 2019 results, with growth expected from 2020 onward.
- The partnership expected 2019 regional crude oil differentials to be narrower than in 2018, in part due to Canadian production curtailments and new Permian pipeline capacity. Management described the longer-term U.S. production outlook as constructive but cautioned that competition and potential infrastructure overbuild could pressure throughput and margins.
- Management said leverage-reduction objectives remained on track for the first half of 2019, while emphasizing that completion and timing were not assured. The plan included lower distributions, asset sales, preferred equity issuance, working-capital management and funding growth from cash flow in excess of distributions.
- The 2018 fourth quarter was notably strong: revenue was $8.786 billion, operating income $1.315 billion, net income $1.117 billion and basic net income per unit $1.46. The filing does not provide a clear quarterly reconciliation of the drivers behind this increase.
- Line 901: The 2015 California pipeline release remained a material ongoing contingency. PAA estimated total costs incurred or expected at approximately $355 million and a remaining gross liability of $76 million at year-end 2018. It had recognized a $53 million receivable for probable insurance recovery not yet collected. The partnership disclosed a 2018 jury conviction on one felony and eight misdemeanor counts, with post-trial options under evaluation; it did not expect resulting fines or penalties to materially affect financial position or operations. Further claims, proceedings and costs remain possible.
- Other exposures: Environmental liabilities, pipeline safety and integrity costs, climate and other regulatory changes, severe weather, cyber events, customer and counterparty credit, interest rates, Canadian-dollar movements, and competition are key risks. The filing also reports approximately $60 million of Canadian tax reassessments relating principally to transfer pricing; approximately $40 million had been remitted and recorded as an asset while PAA contested the assessments.
- Credit ratings were investment grade at S&P and Fitch; Moody’s had downgraded PAA below investment grade in 2017. Loss of remaining investment-grade ratings could raise borrowing costs or restrict supplier credit.
Important facts for investors to verify
- Review the audited statements and non-GAAP reconciliations, particularly the contribution of the BridgeTex sale, derivative effects, and other selected comparability adjustments to 2018 earnings and DCF.
- Assess the sustainability of 2018 Supply and Logistics margins and whether higher Permian throughput can persist amid new pipeline capacity, narrower differentials and producer spending changes.
- Track leverage-reduction progress, debt maturities, covenant headroom, credit ratings and whether cash flow after distributions can fund the 2019 capital program.
- Monitor Line 901 proceedings, remaining liabilities, insurance recoveries and any additional environmental or legal exposure; the disclosed estimates may change.
- Confirm project commitments, costs, timing and shipper support for Cactus II, Wink to Webster and other growth projects, as well as the proposed Capline reversal.
- Consider the distribution reduction and preferred-unit cash obligations when evaluating cash available to common unitholders; distributions are not guaranteed.