Plains All American Pipeline, L.P. — 2018 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; financial amounts are in millions of dollars unless stated otherwise. PAA operates crude oil, NGL and natural gas midstream infrastructure through Supply and Logistics, Transportation and Facilities segments.
Financial highlights
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $8,398 | $6,667 | Up 26% |
| Operating income | $381 | $591 | Down 36% |
| Net income | $288 | $444 | Down 35% |
| Basic net income per common unit | $0.33 | $0.59 | Down $0.26 |
| Adjusted EBITDA (non-GAAP) | $593 | $512 | Up 16% |
| Implied distributable cash flow (non-GAAP) | $443 | $302 | Up 47% |
| Cash from operating activities | $521 | $816 | Down $295 |
Revenue growth largely reflected higher commodity prices, which raised both sales and purchase costs; revenue growth did not translate into higher GAAP earnings. Management attributed lower net income mainly to smaller mark-to-market gains on certain derivatives. Improved Transportation results and lower interest expense partly offset that decline. Interest expense was $106, versus $129 a year earlier. Segment adjusted EBITDA rose in Transportation to $335 from $273, Facilities was $185 versus $188, and Supply and Logistics was $72 versus $51.
Balance sheet, liquidity and distributions
- At March 31, cash was $23, total debt was $9,824, and total partners’ capital was $11,036. Debt was modestly lower than the $9,920 reported at December 31, 2017.
- Working capital was negative $639. PAA reported total available liquidity of approximately $3.17 billion and compliance with credit-agreement covenants.
- Operating cash flow fell year over year; the filing cites, among other factors, the prior-year benefit from reduced hedge-margin balances and differing inventory movements.
- Q1 cash distributions to common unitholders were $218. The declared quarterly common distribution was $0.30 per unit, unchanged from the prior two quarters but approximately 45% below the $0.55 paid in May 2017. PAA also moved Series A preferred distributions to cash payments after previously paying them in kind.
Changes, outlook and management commentary
- Transportation adjusted EBITDA benefited primarily from higher Permian Basin volumes as production increased and expansion projects entered service. Total Transportation volumes rose 12% year over year.
- Management expected 2018 expansion capital spending of approximately $1.4 billion, primarily focused on the Permian Basin. Q1 spending was $298; maintenance capital was $45.
- PAA received $83 from asset sales during Q1 and approximately $255 from sales completed after quarter-end through May 1. It targeted an additional $700 of divestiture proceeds to help fund the 2018 capital program, but cautioned that further transactions were not assured.
- Management said it was considering accelerating some projects and discussing additional Permian expansions, without formally increasing its capital-program estimate at the time of filing.
- Adoption of Topic 606 and ASU 2017-05 had no material impact on Q1 revenue or opening retained earnings; ASU 2017-05 increased investments and retained earnings by $113 through a cumulative adoption adjustment. The company expected the new lease standard, scheduled for adoption in 2019, to add right-of-use assets and lease liabilities; the amount was not yet quantified.
- A March 2018 FERC policy change will not directly affect PAA’s current cost-of-service rates, which are grandfathered or negotiated, but could affect future index-based tariff escalations from July 2021 onward.
Risks, contingencies and unusual items
- Line 901 spill and related proceedings: PAA estimated total costs incurred or to be incurred at approximately $335, with a remaining gross liability of $87 at March 31. It had collected $174 of approximately $220 it considered probably recoverable from insurers and recorded a related receivable of approximately $46. The company warned that costs could materially exceed its estimates; potential future claims, penalties and other costs may not yet be estimable. Line 901 and most of Line 903 remained out of service, with no restart timeline established.
- Environmental reserves, including Line 901, totaled $153 at quarter-end. The filing describes continuing state criminal charges and civil claims relating to the spill, as well as open government investigations. A securities class action was dismissed with prejudice on April 2, 2018; plaintiffs indicated intent to appeal.
- Commodity, interest-rate and Canadian-dollar exposures are managed with derivatives, but derivative fair values and results can be volatile. The filing reported a $227 net liability fair value for commodity derivatives and a $190 net loss deferred in accumulated other comprehensive income for derivatives.
- Other disclosed risks include lower shipped or processed volumes, competition and margin pressure, project delays or cost increases, divestiture execution, counterparty credit, environmental liabilities, and access to capital. Management cautioned that Q1 results should not be viewed as indicative of full-year results.
Important facts for investors to verify
- Whether Permian growth, completed expansions and planned projects deliver the expected volumes, returns and timing.
- Progress on the $700 divestiture-proceeds target, the use of proceeds, and whether the $1.4 billion expansion-capital plan changes.
- Operating cash generation, debt and liquidity trends, and the ability to fund capital spending and cash distributions while maintaining covenant compliance.
- Developments in Line 901/903 restart prospects, litigation and investigations, insurance recoveries, and any change to the $335 estimated total incident costs or $87 remaining liability.
- The effect of future FERC index decisions on tariff escalations and the eventual balance-sheet impact of lease-standard adoption.
- How much of the reported adjusted EBITDA and distributable cash flow reflects management-defined adjustments rather than GAAP earnings and cash flows.