Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed this Form 10-K for the fiscal year ended December 31, 2014. PAGP is primarily a holding company: its cash-generating assets were its interest in Plains AAP, L.P. (AAP), which receives cash from Plains All American Pipeline, L.P. (PAA). PAGP owned 34.1% of AAP’s limited partner interests, representing a 31.8% economic interest after AAP Management Units. PAGP consolidates AAP and PAA for accounting purposes, so consolidated results largely reflect PAA’s operating business and include substantial noncontrolling interests.
PAA operates crude oil and NGL transportation, storage, terminalling, processing and marketing assets in the United States and Canada through Transportation, Facilities, and Supply and Logistics segments.
Financial performance and key metrics
Unless indicated otherwise, amounts below are consolidated, in U.S. dollars, and include PAA and noncontrolling interests. PAGP-attributable income is much smaller than consolidated net income.
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $43.464 billion | $42.249 billion | Up 2.9% |
| Operating income | $1.783 billion | $1.724 billion | Up 3.4% |
| Net income | $1.328 billion | $1.374 billion | Down 3.3% |
| Net income attributable to PAGP | $70 million | $15 million | Up $55 million |
| Basic / diluted income per Class A share | $0.48 / $0.47 | $0.10 / $0.10 | Public-company periods are not directly comparable |
| Net cash from operating activities | $1.988 billion | $1.948 billion | Up 2.1% |
| Net cash used in investing activities | $3.296 billion | $1.653 billion | Higher investment spending |
| Net cash from/(used in) financing activities | $1.672 billion | $(274) million | — |
Consolidated gross margin, as defined in the quarterly financial data, was $2.114 billion in 2014 versus $2.084 billion in 2013. Segment profit totaled $2.291 billion, up 6%: Transportation $925 million (up 27%), Facilities $584 million (down 5%), and Supply and Logistics $782 million (down 5%). Transportation’s growth reflected higher volumes and equity earnings; softer Facilities and Supply and Logistics results partly offset it.
2014 segment volumes increased: Transportation volumes rose 10% to 4.079 million barrels per day, and Supply and Logistics volumes rose 7% to 1.157 million barrels per day. Supply and Logistics revenue is high-volume and low-margin; revenue growth should not be read as equivalent profit growth.
Fourth-quarter 2014 revenue was $9.459 billion, versus $10.631 billion in fourth-quarter 2013. Fourth-quarter net income was $370 million versus $305 million; PAGP-attributable income was $24 million versus $12 million. Fourth-quarter basic and diluted EPS were $0.14 and $0.13, respectively. The filing does not provide a clear fourth-quarter segment-profit comparison.
At December 31, 2014, consolidated total debt was $10.585 billion: $9.298 billion long-term and $1.287 billion short-term. Cash and cash equivalents were $404 million, current assets $4.181 billion, current liabilities $4.756 billion, and working capital was negative $575 million. Reported available liquidity was approximately $2.622 billion, subject to facility terms and covenant compliance. PAA was in compliance with its debt covenants at year-end.
Capital investment in 2014 included $1.099 billion of acquisition capital, $2.026 billion of expansion capital and $224 million of maintenance capital. PAGP paid $91 million of Class A distributions during 2014; distributions to noncontrolling interests were $1.305 billion. The declared fourth-quarter Class A distribution was $0.203 per share, paid February 13, 2015.
Material changes versus the prior comparable period
- Transportation segment profit increased $196 million, supported by stronger Permian Basin and Eagle Ford volumes, rate changes, and higher equity earnings. A 50% BridgeTex interest was acquired in November 2014 for approximately $1.088 billion.
- Facilities segment profit declined $32 million. Natural gas storage results were weaker due to less favorable contract renewals, severe-cold-weather deliverability costs, and limited hub-service opportunities; these were partly offset by higher NGL facility fees and condensate-processing revenue.
- Supply and Logistics segment profit fell $40 million. A $75 million long-term crude inventory valuation adjustment and a $10 million NGL inventory adjustment weighed on results; certain derivative gains partly offset inventory-related effects.
- Inventory valuation charges rose sharply to $289 million from $7 million in 2013, reflecting lower commodity prices. The filing reports $160 million of gains on derivatives associated with hedged inventory in 2014.
- Interest expense increased to $349 million from $309 million, and income tax expense doubled to $212 million from $106 million. The tax increase included amortization of PAGP’s deferred tax asset and higher Canadian-related tax expense.
- Total debt increased to $10.585 billion from $8.343 billion, largely alongside growth capital spending and debt issuance. PAA issued $2.595 billion of senior notes in 2014 and raised $848 million net from common-unit sales.
Outlook, commentary, risks and contingencies
Management said the sharp decline in crude oil and NGL prices in the second half of 2014 and early 2015 prompted producers to reduce planned 2015 capital spending. Management expected slower North American production growth, compressed differentials and increased competition to pressure volumes or unit margins, particularly in Supply and Logistics. It also noted that additional infrastructure could reduce market constraints and that sustained production declines could lead to underused assets. Management considered the longer-term North American resource base intact, but gave no assurance that market equilibrium, expected project returns, or acquisition benefits would materialize.
PAA planned approximately $1.75–$1.95 billion of 2015 expansion capital, plus $205–$225 million of maintenance capital. Major projects include Permian Basin expansions, Fort Saskatchewan facilities, rail terminals, Diamond and Red River pipelines, and Cactus. Management expected most 2015 project spending to contribute to growth in 2016 and later, with limited contribution to 2015 results. PAA entered into a new $1.0 billion, 364-day unsecured credit agreement in January 2015.
PAA’s cash distributions, and therefore PAGP’s capacity to distribute cash, depend on PAA’s cash generation and AAP’s receipts from PAA. PAGP has no material operating cash flow independent of this chain. AAP’s incentive distribution rights are a major source of its cash receipts and may be reduced or modified; AAP had agreed to quarterly reductions of $5.5 million in 2015, $5.0 million in 2016 and $3.75 million thereafter. A reduction in PAA distributions could disproportionately reduce AAP’s receipts.
Key risks include lower throughput from reduced producer activity, commodity-market and differential changes, project delays or cost overruns, overbuilding or underutilization of infrastructure, counterparty credit exposure, refinancing and capital-market access, interest and currency movements, and regulatory changes. PAA’s commercial activities depend in part on market structure and volatility; extended periods without favorable contango, backwardation or price volatility may weaken results.
Environmental and safety matters include an $82 million undiscounted environmental liability reserve at year-end 2014, net of separately recorded recovery receivables of $8 million. The filing notes possible costs above reserves. The Kemp River releases in Canada had estimated cleanup costs of $15 million, with $9 million spent through year-end; regulatory investigations were ongoing. In February 2015, the Canadian NEB imposed a CAD $76,000 penalty and ordered additional corrective actions and audits; further penalties remained possible. PAGP also elected to self-insure hurricane and windstorm property damage risk, while maintaining third-party liability coverage. The filing states that ordinary-course legal proceedings were not expected to have a material adverse effect.
The financial statements received an unqualified audit opinion from PricewaterhouseCoopers LLP, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2014.
Most important facts for investors to verify
- Whether PAA’s distributions and cash generation remain sufficient to support AAP receipts and PAGP’s Class A distributions, including the effects of IDR reductions.
- Actual 2015 producer activity, throughput, contract commitments and margins following the sharp decline in crude oil prices.
- Execution, funding and expected returns for the $1.75–$1.95 billion expansion program, including permitting, construction timing and committed shipper volumes.
- Debt maturities, covenant headroom and liquidity availability, particularly given the working-capital deficit and reliance on commercial paper and capital markets.
- How lower commodity prices, inventory marks and derivative settlements affect reported earnings and cash flow; confirm the distinction between consolidated results and PAGP-attributable results.
- Whether environmental reserves, insurance coverage and required Canadian pipeline corrective actions adequately reflect potential future costs.