Plains All American Pipeline, L.P. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Financial figures are in millions of dollars except per-unit data and where noted. Plains transports, stores, terminals and markets crude oil, refined products and LPG, and operates natural-gas storage through its majority-owned PNG subsidiary.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $8,859 | $6,124 | $16,553 | $12,248 |
| Operating income | $298 | $192 | $583 | $403 |
| Net income attributable to Plains | $225 | $131 | $408 | $282 |
| Basic / diluted limited-partner earnings per unit | $1.14 / $1.13 | $0.65 / $0.65 | $2.04 / $2.03 | $1.45 / $1.45 |
| Adjusted EBITDA (non-GAAP) | $366 | $248 | $714 | $521 |
| Implied distributable cash flow (non-GAAP) | $259 | $161 | $498 | $363 |
For the first six months, operating cash flow was $972, compared with $283 in 2010; investing cash outflow was $1,027, including $751 for acquisitions; and financing cash inflow was $43. Cash and cash equivalents were $23 at June 30. Management attributed the stronger operating cash flow in part to working-capital changes and lower inventory, so it should not be read as a direct measure of recurring earnings.
Total debt was $5,531 at June 30, down from $5,957 at year-end 2010. Current assets were $4,633 and current liabilities $3,983, producing the reported $650 working-capital surplus. Plains reported $2,169 of available liquidity, including $23 cash, and said it was compliant with credit covenants. Interest expense was $128 for the half-year, versus $120 a year earlier.
Changes and operating drivers
- Six-month net income attributable to Plains rose 45% to $408. Segment profit increased 33% to $714: Supply and Logistics rose 90% to $285, Facilities rose 27% to $164, and Transportation rose 3% to $265.
- Supply and Logistics benefited from higher gathered volumes, active development in crude-oil and liquids-rich producing regions, favorable crude quality differentials and market structure. Six-month segment profit per barrel increased to $1.83 from $1.07. Revenue growth also reflected higher commodity prices and does not alone indicate margin growth.
- Facilities results benefited from the Southern Pines natural-gas storage acquisition, completed by PNG in February for approximately $752 net of cash acquired, and prior expansion projects. Plains’ ownership of PNG declined from approximately 77% to 64% after PNG issued units to third parties.
- Transportation’s six-month profit improved modestly, but Q2 segment profit fell to $128 from $130. Rainbow Pipeline disruption and lower volumes on certain systems offset growth elsewhere.
- Cash distributions declared for the quarter were $0.9825 per limited-partner unit, payable August 12, 2011; management described this as a 4.2% year-over-year increase. The March equity offering issued 7.935 million common units for net proceeds of $503, increasing the unit count and diluting existing holders.
Outlook, risks and unusual items
- Management projected 2011 expansion capital expenditures of $575–$650 and maintenance capital of $95–$105. No specific earnings or cash-flow guidance was provided. Management expected Canadian income-tax expense to remain higher during the rest of 2011 following tax-law changes and a January restructuring.
- The April 29 Rainbow Pipeline release was estimated at approximately 28,000 barrels. Plains estimated gross cleanup and remediation costs of $72; at June 30, it had accrued a remaining gross liability of $58 and recorded a $59 insurance receivable. Cleanup was expected to be substantially complete by Q1 2012, excluding long-term monitoring. Estimates and recoveries remain subject to uncertainty and regulatory review. Separately, forest fires caused additional Rainbow downtime and expenses.
- Plains reported total environmental reserves of $122 at June 30, versus $66 at year-end, and warned actual remediation costs could exceed reserves. It chose to self-insure hurricane and windstorm property damage for 2011/12 after previously purchasing limited coverage.
- Q1 results included a $23 loss on early redemption of $200 of 7.75% senior notes. Plains issued $600 of 5.00% notes due 2021 and redeemed the 7.75% notes; total debt nevertheless declined from year-end. The company also noted higher Canadian taxes and increased equity-compensation expense.
- Key risks include commodity-market structure and volatility, effectiveness of hedging, counterparty credit, pipeline outages and environmental liabilities, project execution and approvals, access to capital, insurance availability, Canadian-dollar movements, weather, and natural-gas storage demand. Plains stated its derivatives are for risk management, not speculation. Disclosure controls were assessed as effective.
Investor verification priorities
- Track Rainbow remediation progress, regulatory restart approval, insurance collections and whether the $72 gross cost estimate or $58 remaining liability changes.
- Assess how much of improved cash generation and segment performance is repeatable versus working-capital releases, market conditions, acquisitions and commodity-price effects.
- Verify delivery and funding of the $575–$650 expansion-capital plan, the Southern Pines integration and expected returns on growth projects.
- Monitor debt maturities, refinancing needs, covenant headroom and liquidity; confirm the impact of the March unit issuance on per-unit cash generation and distributions.
- Review the assumptions behind the distribution outlook, higher Canadian tax burden, and the decision to self-insure hurricane and windstorm property damage.