PLAINS GP HOLDINGS, L.P. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with fiscal 2021. This is an annual report, not a standalone fourth-quarter results report.
Business context
PAGP is a publicly traded limited partnership taxed as a corporation. It has no direct operating assets; its cash flow depends on distributions from Plains AAP, which in turn receives distributions from Plains All American Pipeline, L.P. (PAA). PAA operates crude oil and natural gas liquids (NGL) pipelines, storage, terminals, processing and related merchant businesses in the United States and Canada.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $57.342 billion | $42.078 billion |
| Net income | $1.163 billion | $600 million |
| Net income attributable to PAGP | $168 million | $60 million |
| Basic and diluted earnings per Class A share | $0.86 | $0.31 |
| Adjusted EBITDA | $2.875 billion | $2.290 billion |
| Adjusted EBITDA attributable to PAA | $2.510 billion | $2.196 billion |
| Net cash from operating activities | $2.404 billion | $1.991 billion |
| Cash and cash equivalents at year-end | $404 million | $452 million |
Revenue increased 36%, substantially reflecting higher commodity prices in merchant sales and purchases. Because purchases and related costs rose alongside sales, revenue growth alone does not indicate comparable growth in operating margin. Net income attributable to PAGP was affected by noncontrolling interests in PAA and consolidated joint ventures.
- Segment performance: Crude Oil Segment Adjusted EBITDA was $1.986 billion, up 4%; NGL Segment Adjusted EBITDA was $518 million, up 82%. Management attributed the NGL increase mainly to stronger fractionation spreads and increased NGL mix production.
- Cash flow and investment: Operating cash flow was $2.404 billion. Investment, maintenance and acquisition capital expenditures totaled $829 million, compared with $437 million in 2021. Reported cash flow was also influenced by inventory and hedging-margin movements.
- Debt and liquidity: Consolidated debt was $8.446 billion, including $1.159 billion short-term debt and $7.287 billion long-term debt. Available liquidity was approximately $2.979 billion, including cash and available credit capacity, subject to covenant compliance. PAGP reported a $535 million working-capital deficit; PAA was in compliance with its debt covenants at year-end.
- Margins: Adjusted EBITDA was approximately 5.0% of reported revenue in 2022, versus approximately 5.4% in 2021. This ratio is affected by large, lower-margin merchant sales; the filing does not present a single GAAP operating-margin measure that captures the economics of the business.
- Distributions: PAGP paid $0.8325 per Class A share during 2022, versus $0.72 in 2021. The fourth-quarter 2022 distribution was $0.2675 per share, paid in February 2023.
Material changes and unusual items
- Net income included a $370 million gain from remeasuring PAGP’s existing Cactus II interest to fair value when it acquired an additional 5% interest and obtained control; Cactus II became consolidated, with Enbridge’s 30% interest recorded as noncontrolling interest.
- Results also included a $330 million non-cash impairment of California crude oil assets. In comparison, 2021 included a $475 million impairment on natural gas storage facilities subsequently sold and other asset impairments.
- Other income included a $189 million loss from fair-value remeasurement of PAA’s Series A preferred-unit distribution-rate reset option. The related preferred holders elected the reset in January 2023; the new rate took effect January 31, 2023.
- PAA repaid $750 million of senior notes in 2022. It subsequently redeemed $400 million of notes in January 2023; $700 million of notes were due in October 2023.
Outlook, risks and contingencies
- Management expects multi-year free cash flow, citing near-pre-pandemic global crude demand, anticipated demand growth, and the Permian Basin’s expected role in U.S. production growth. These are expectations, not guarantees.
- For 2023, planned investment capital was approximately $420 million ($325 million net to PAGP’s interest) and maintenance capital approximately $205 million ($195 million net). Management expected to fund these primarily with retained cash flow.
- Key risks include crude and NGL volume and price-market changes, competition and pipeline capacity overbuild, customer and counterparty credit, interest rates, access to investment-grade financing, inflation and supply-chain costs, regulation and climate-transition policies, severe weather, operational incidents and cybersecurity. PAGP’s ability to distribute cash depends on PAA distributions and available cash; distributions are not guaranteed.
- Line 901 incident: The company estimated total incident costs of approximately $740 million and a remaining gross liability of about $105 million at year-end. It recorded a $225 million long-term insurance receivable, but insurers covering most of the remaining claim denied coverage. Recovery is contested, and the timing and amount are uncertain. Certain related lawsuits also remained pending.
- The filing disclosed Canadian tax reassessments of approximately $142 million, including penalties and interest, relating primarily to historical transfer pricing. PAGP had remitted approximately $115 million and disputes the assessments; it had not recorded a liability, stating its position was more likely than not to be sustained.
Important facts for investors to verify
- Whether PAA’s operating cash flow and distributions can sustain PAGP’s shareholder distributions, particularly through commodity cycles and required capital spending.
- How much of the $225 million Line 901 insurance receivable is ultimately recovered, and the resolution or cost of remaining claims.
- Progress on California asset integrity and Line 2000, which returned to service in the first quarter of 2023, and any further impairment or operating costs.
- Debt maturities, liquidity and covenant headroom, including the October 2023 notes and the effect of the Series A preferred distribution reset.
- Whether 2023 capital spending, project execution and the management outlook are consistent with realized free cash flow and segment performance.