Plains All American Pipeline, L.P. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. PAA operates midstream transportation, storage, terminalling, processing and supply/logistics businesses for crude oil, NGL and natural gas in the U.S. and Canada.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $8.375 billion | $8.398 billion |
| Operating income | $714 million | $381 million |
| Net income | $970 million | $288 million |
| Basic / diluted net income per common unit | $1.26 / $1.20 | $0.33 / $0.33 |
| Operating cash flow | $1.033 billion | $521 million |
| Capital expenditures | $397 million, including $351 million expansion and $46 million maintenance | $343 million |
| Adjusted EBITDA (non-GAAP) | $862 million | $593 million |
| Implied DCF (non-GAAP) | $691 million; $654 million available to common unitholders | $443 million available to common unitholders |
Revenue was nearly unchanged, while net income rose 237%. The increase included a $267 million non-cash gain from the Capline investment transaction, improved operating results and favorable derivative-related effects; it should not be read as a comparable increase in recurring earnings. Segment Adjusted EBITDA was $399 million in Transportation (up 19%), $184 million in Facilities (down 1%) and $278 million in Supply and Logistics (up $206 million).
Transportation benefited mainly from higher Permian Basin production, volumes and completed expansions. Supply and Logistics improved on favorable crude grade differentials, higher NGL margins and derivative effects. Facilities results were broadly stable. PAA reported no consolidated gross-margin figure in the supplied filing text.
At March 31, 2019, cash and cash equivalents were $436 million, with a further $33 million restricted. Working capital surplus was $65 million; reported available liquidity was approximately $3.281 billion, including cash. Total debt was $9.326 billion, including $8.943 billion of senior notes. PAA reported covenant compliance and no outstanding commercial paper borrowings at quarter-end. Total partners’ capital was $12.762 billion.
Changes, outlook and management commentary
- Operating cash flow increased year over year, aided in part by sales of crude and NGL inventory and changes in working capital. Cash flow is therefore affected by inventory and settlement timing.
- Management expected approximately $1.35 billion of 2019 expansion capital, primarily focused on the Permian Basin; Q1 expansion capital was $351 million. The filing does not provide a specific full-year earnings forecast.
- In April 2019, PAA announced completion of its leverage reduction plan and lowered its targeted long-term debt-to-Adjusted-EBITDA ratio to 3.0x–3.5x. It also increased the annualized common-unit distribution 20%, from $1.20 to $1.44, beginning with the May 2019 payment. Future increases were made contingent on leverage and coverage targets and annual review.
- Common-unit distributions paid in Q1 totaled $218 million; preferred distributions paid totaled $37 million. A further $0.36 per common unit was declared for May 15, 2019.
- PAA adopted lease accounting Topic 842 on January 1, 2019, recording approximately $560 million of right-of-use assets and $570 million of lease liabilities at adoption, with no material impact on earnings or cash flows. At March 31, reported operating lease liabilities were $487 million.
- PAA formed the 20%-owned Wink to Webster joint venture, developing a Permian-to-Gulf Coast pipeline with capacity above 1 million barrels per day, targeted to begin operations in the first half of 2021. Capline was contributed to an equity-method venture; the $267 million fair-value gain depends on assumptions including shipper interest and future pipeline service.
Risks, contingencies and unusual items
- Line 901 incident: PAA estimated aggregate costs incurred or expected at approximately $355 million and reported a remaining undiscounted gross liability of $75 million at quarter-end. It had recognized a $53 million receivable for probable insurance recovery, in addition to amounts already collected. Actual costs could exceed estimates; regulatory investigations, claims and litigation remained pending. PAA was sentenced in April 2019 to fines and penalties of just under $3.35 million, with possible victim restitution hearings to follow. Line 901 and most of Line 903 remained out of service, with no restart timeline established.
- Broader operating risks include environmental releases, changing crude and NGL differentials, commodity and currency movements, volumes and production, competition or infrastructure overbuild, project execution, counterparty credit, access to capital and insurance, and severe weather or other disruptions.
- Commodity derivatives generated a net gain recognized in earnings of $246 million in Q1, versus a net loss of $53 million in Q1 2018, across commodity, currency, interest-rate and preferred-rate-reset derivatives. Derivative results and market movements can be volatile; management’s non-GAAP measures exclude specified items and may not be comparable with other companies’ measures.
Most important facts for investors to verify
- How much of the earnings and Adjusted EBITDA improvement reflects sustained operating performance versus derivative timing, inventory adjustments and the one-time Capline gain.
- Whether PAA delivers its $1.35 billion expansion program on schedule and within budget, and whether new capacity receives sufficient shipper commitments.
- Progress toward the 3.0x–3.5x leverage target and sustainable distribution coverage after the distribution increase.
- Updates to Line 901/903 liabilities, insurance recoveries, litigation, regulatory actions and any restart prospects.
- Debt maturities and refinancing execution, liquidity availability, covenant compliance and cash-flow sensitivity to inventory, commodity markets and working-capital swings.