Plains All American Pipeline, L.P. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Amounts are in millions of dollars, except per-unit data. PAA operates midstream transportation, facilities, and supply-and-logistics businesses in the United States and Canada.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Revenue | $5,942 | $11,684; down 49% |
| Operating income | $369 | $493; down 25% |
| Net income attributable to PAA | $283 | $384; down 26% |
| Basic / diluted net income per limited partner unit | $0.36 / $0.35 | $0.74 / $0.73 |
| Operating cash flow | $732 | $822 |
| Adjusted EBITDA (non-GAAP) | $622 | $567; up 10% |
| Implied distributable cash flow (non-GAAP) | $444 | $411; up 8% |
| Total debt at March 31 | $9,316 | $10,049 at December 31, 2014 |
| Cash at March 31 | $458 | $403 at December 31, 2014 |
| Available liquidity at March 31 | $4,375 | Working capital deficit of $78 |
Reported operating margin was approximately 6.2%, compared with 4.2% a year earlier; the large movement in commodity-linked revenue makes this ratio less informative about underlying segment economics. Comprehensive loss attributable to PAA was $93, including $376 of other comprehensive loss, principally $298 of currency translation losses.
Changes and operating drivers
- Supply and Logistics segment profit fell 48% to $130, despite 9% higher combined crude-oil gathering and NGL sales volumes. Management cited compressed crude-oil differentials and less opportunity for above-baseline margins. Lower commodity prices drove much of the revenue decline; the filing reports Q1 WTI prices of $43–$54 per barrel versus $92–$105 in Q1 2014.
- Transportation segment profit increased 17% to $241, supported by higher throughput and tariff-related revenues, including growth from expansion projects and BridgeTex-related equity earnings.
- Facilities segment profit declined 8% to $142. Lower rail fees and Canadian-dollar weakness contributed, partly offset by lower natural-gas-related storage costs.
- Interest expense rose 31% to $102, mainly reflecting a higher average debt balance; depreciation and amortization rose 11% to $107 as projects entered service. Lower income-tax expense partly offset these pressures.
- Q1 capital spending was $700: $586 expansion, $50 maintenance, and $64 acquisitions. Operating cash flow was below the prior-year level; investing used $666, while financing cash flow was a net use of $6. A $1.1 billion March unit offering helped fund investment and repay commercial-paper borrowings.
Outlook, capital returns, and risks
- Management projected 2015 expansion capital of $2.1–$2.25 billion, subject to timing and scope changes, and maintenance capital of $205–$225. It expected most expansion spending to benefit results in 2016 and beyond. The filing does not provide a clear full-year earnings or cash-flow forecast.
- PAA declared a quarterly distribution of $0.6850 per limited partner unit, payable May 15, 2015, an approximately 8.7% year-over-year increase. Management stated it believed liquidity and borrowing capacity were sufficient for expected commitments, but noted prolonged financial-market disruption or adverse energy-price volatility could materially harm results and liquidity.
- Debt maturities included $150 of 5.25% notes due June 2015 and $400 of 3.95% notes due September 2015; management intended to use the commercial-paper program to repay them. A new $1.0 billion, 364-day revolving facility was entered into in January. PAA reported covenant compliance and no commercial-paper borrowings outstanding at quarter-end.
- Environmental reserves were $75 at March 31, undiscounted; actual remediation costs could exceed reserves. Disclosed matters included pipeline releases in Mississippi and Alberta, and a Canadian pipeline-regulator order and penalty. After quarter-end, the EPA issued a notice alleging Clean Air Act violations at the Bakersfield rail facility; PAA disputed the allegations, and no penalties had been assessed as of the filing.
- Derivative and market exposures remain significant. Q1 derivative activity recognized a net loss of $47 in earnings; the filing also reports $237 of net derivative loss deferred in accumulated other comprehensive income. Management identifies commodity prices, interest rates, Canadian-dollar movements, project execution, volumes, counterparties, regulation, and environmental events as risks.
Investor facts to verify
- Whether the decline in Supply and Logistics margins and earnings reflects persistent market conditions or a temporary compression of differentials and unusual valuation items.
- Progress, costs, timing, and expected returns on the $2.1–$2.25 billion 2015 expansion program.
- Funding and refinancing plans for the 2015 note maturities, and the effect of equity issuance and unit-count growth on per-unit cash generation.
- Coverage of the $0.6850 distribution by recurring distributable cash flow, noting that DCF is a non-GAAP measure and Q1 implied DCF exceeded distributions by $24.
- Potential additional environmental and regulatory costs, particularly the Bakersfield EPA notice and Canadian pipeline matters.