Plains GP Holdings, L.P. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. PAGP is a holding partnership whose cash-generating interest is primarily its approximate 81% limited partner interest in AAP, which in turn owns an interest in Plains All American Pipeline (PAA). The consolidated statements largely reflect PAA’s operations.
Financial performance and position
- Q2 revenue: $11.60 billion, down 29% year over year; product sales fell 30%, largely reflecting lower commodity prices. Services revenue rose 14% to $401 million.
- Q2 earnings: Operating income was $375 million, versus $408 million; net income was $333 million, up 39%; net income attributable to PAGP was $48 million, up 55%. Basic and diluted EPS was $0.25, versus $0.16.
- Six-month results: Revenue was $23.94 billion, down 20%; operating income was $845 million, up 21%; net income was $776 million, up 73%; PAGP-attributable net income was $117 million, up 121%; EPS was $0.60, versus $0.27.
- Margins: Approximate consolidated operating margin was 3.2% in Q2 versus 2.5% a year earlier; six-month operating margin was 3.5% versus 2.3%. These percentages are calculated from reported revenue and operating income; high-volume commodity sales make revenue-based margins less informative.
- Adjusted EBITDA: Consolidated Adjusted EBITDA was $700 million in Q2, essentially flat year over year, and $1.513 billion for six months, up 9%. Segment Adjusted EBITDA in Q2 was $529 million for Crude Oil (up 7%) and $62 million for NGL (down 48%).
- Cash flow: Six-month operating cash flow was $1.629 billion, versus $1.129 billion. Investing cash flow was negative $6 million, including $267 million of property and equipment additions and $284 million of asset-sale proceeds. Financing cash flow was negative $1.099 billion, including $640 million of distributions paid.
- Debt and liquidity: Total debt was $7.997 billion at June 30, down from $8.446 billion at year-end. Cash and cash equivalents were $936 million on the balance sheet; reported available liquidity was $3.491 billion, including $918 million cash excluding restricted cash. PAA was in covenant compliance. Its $700 million 3.85% notes were due October 2023.
- Capital and distributions: First-half investment and maintenance capital expenditures were $182 million and $109 million, respectively. PAGP’s quarterly distribution was $0.2675 per Class A share, unchanged from the prior quarter.
Material changes and notable items
- Crude Oil segment performance benefited from higher pipeline volumes, particularly in the Permian and on Capline, tariff escalations and favorable Canadian market opportunities. Average crude oil pipeline tariff volumes increased 13% in Q2.
- NGL segment earnings declined in Q2, primarily due to lower propane sales volumes associated with facility turnarounds and deferred sales, and the absence of weather-related benefits seen in Q2 2022.
- Lower commodity prices drove lower product sales and purchase costs; management notes that these movements generally do not translate directly into equivalent changes in operating income.
- First-half earnings included an approximately $140 million gain from the February sale of the Keyera Fort Saskatchewan interest. A $140 million gain also contributed to the reported $150 million net gain on asset sales and impairments for the six months.
- In January, PAA Series A preferred unitholders elected a distribution-rate reset, increasing the quarterly rate to approximately $0.615 per unit. Related fair-value accounting produced a $58 million gain in first-half 2023, compared with a $147 million loss in first-half 2022.
- After quarter-end, on July 28, 2023, the partnership acquired the remaining 43% interest in OMOG for approximately $225 million; OMOG is now wholly owned and consolidated.
Outlook, risks and contingencies
- Management projected 2023 investment capital of approximately $420 million ($325 million net to its interest) and maintenance capital of $205 million ($195 million net). It expected to fund these expenditures primarily with retained cash flow. The filing does not provide a specific earnings or revenue forecast.
- Management stated it believed liquidity, operating cash flow and borrowing capacity were sufficient for financial commitments, debt service, contingencies and anticipated capital expenditures. This depends on continued covenant compliance and access to credit facilities and commercial paper.
- The 2015 Line 901 incident remains a significant contingent matter. Estimated aggregate costs were approximately $740 million, with a remaining gross liability of about $98 million and a recognized long-term insurance receivable of approximately $225 million. Insurers disputed coverage for part of the $230 million class-action settlement; arbitration and recovery efforts were ongoing. An unfavorable resolution could materially affect results.
- Other risks include environmental and pipeline incidents, litigation, commodity-price and market-structure changes, lower throughput or production, weather, competition, regulation, counterparty performance, insurance limitations, cyber events, and financing-market or interest-rate changes.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during Q2.
Investor verification priorities
- Review the underlying PAA and segment results, including whether crude pipeline volume growth and market-based opportunities persist and whether NGL volumes recover.
- Verify refinancing or repayment of the $700 million notes due October 2023, continued covenant compliance and the composition of reported liquidity.
- Track Line 901 insurance arbitration, the recoverability and timing of the $225 million receivable, remaining claims and any changes to estimated costs.
- Assess whether the Keyera sale gain and the preferred distribution-rate reset accounting distort comparisons of recurring earnings and cash generation.
- Monitor execution and funding of the OMOG acquisition and 2023 capital plan, alongside the sustainability of distributions.