Plains All American Pipeline, L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Amounts are in U.S. dollars; financial amounts are generally in millions unless stated otherwise. Plains transports, stores, terminals and markets crude oil, refined products and natural gas liquids, and operates natural gas storage assets through Transportation, Facilities and Supply and Logistics segments.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $9,218 | $7,694; up 20% |
| Operating income | $313 | $285 |
| Net income | $237 | $185 |
| Net income attributable to Plains | $230 | $182; up 26% |
| Diluted net income per limited partner unit | $1.02 | $0.90; up 13% |
| Adjusted EBITDA (non-GAAP) | $472 | $348; up 36% |
| Implied distributable cash flow (non-GAAP) | $342 | $241; up 42% |
| Cash from operating activities | $317 | $654 |
- Segment profit was $380, up 9%: Transportation $162 (up 18%), Facilities $90 (up 15%), and Supply and Logistics $128 (down 4%). Revenue growth chiefly reflected higher commodity prices and volumes; it should not be read as equivalent growth in operating earnings.
- Management attributed improved results to higher use of certain transportation assets, acquisition and expansion contributions, and increased lease-gathering volumes. Favorable crude quality and basis differentials helped Supply and Logistics, but the segment also recorded a $61 derivative mark-to-market loss, versus a $20 gain in Q1 2011.
- Equity compensation expense rose to $39 from $20. GAAP interest expense was $65 in both periods. Operating cash flow fell year over year, partly because Q1 2011 had greater cash inflows from NGL inventory liquidation; Q1 2012 cash was also used to build crude inventory.
Balance sheet, debt and liquidity
- At March 31, cash was $14; total assets were $17,081. Total debt was $6,551, compared with $5,199 at year-end 2011. Debt included $757 short-term and $5,794 long-term; $500 of 4.25% notes were due September 2012.
- Working capital deficit was approximately $276. Management reported total available liquidity of approximately $2,339, including revolving and hedged-inventory facility availability and cash. Plains said it was in compliance with credit-facility covenants.
- March financing included $1,250 of senior notes: $750 at 3.65% due 2022 and $500 at 5.15% due 2042. Plains also issued 5.75 million common units for net proceeds of $455. These financings supported the BP NGL acquisition and general partnership needs.
- Cash used for investing was $1,890, including $1,632 placed in restricted cash for the BP NGL transaction and $263 of property and equipment additions. Cash from financing was $1,560. The quarterly distribution declared was $1.045 per limited partner unit, payable May 15, 2012.
Material developments, outlook and risks
- BP NGL acquisition: Closed April 1, 2012, after the reporting period, for approximately $1.67 billion, subject to adjustments. The acquired business includes Canadian and U.S. NGL assets, including pipeline, storage and fractionation interests. At quarter-end, approximately $1.63 billion was held in restricted cash. Plains described integration and realizing expected benefits as risks.
- Capital program: Management projected 2012 expansion capital expenditures of $950–$1,100 and maintenance capital expenditures of $140–$160. Timing, scope, permitting, regulatory approvals, weather, materials and labor costs could change estimates.
- Distributions: The general partner agreed to reduce incentive distributions by $15 annually for two years and $10 annually thereafter following the acquisition; the first approximately $4 reduction was to apply to the May 2012 distribution. The declared quarterly distribution was $1.045 per unit, approximately 7.7% above the prior-year level.
- Business risks: Supply and Logistics margins may normalize as takeaway infrastructure develops; results are exposed to commodity basis differentials, volatility, weather and market structure. Other stated risks include acquisition integration, project execution, counterparty and financing access, pipeline outages, environmental liabilities, Canadian currency exposure, and insurance availability.
- Environmental and legal matters: Environmental reserves were approximately $74, with $15 of recorded recovery receivables. Plains cautioned actual remediation costs may exceed reserves. A dispute with ExxonMobil over remediation responsibility at the Paulsboro terminal remained; Pemex litigation alleges Plains dealt in condensate after it was allegedly stolen, and seeks damages and penalties. Management said ordinary-course legal proceedings were not expected to have a material adverse effect, but outcomes remain uncertain.
- Plains had elected not to renew hurricane insurance in 2011 and instead self-insured that property risk; third-party hurricane liability coverage remained in place. No specific earnings or distribution guidance beyond the stated capital and distribution plans was provided.
Important facts for investors to verify
- Post-quarter acquisition accounting, financing and integration progress for the BP NGL assets, including any working-capital or purchase-price adjustments.
- Liquidity and refinancing plans for the $500 million September 2012 note maturity, and the impact of higher debt on interest costs and distribution coverage.
- Whether forecast 2012 capital spending is completed on budget and on schedule, and whether new projects generate the expected fee-based earnings.
- Trends in segment profit and cash generation excluding derivative mark-to-market effects; assess non-GAAP adjusted EBITDA and implied DCF alongside GAAP results.
- Changes in environmental reserves and recoveries, litigation exposure, hurricane risk retention, and the effects of margin normalization in Supply and Logistics.