Plains All American Pipeline, L.P. — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009; unaudited. Amounts are in millions of dollars unless noted. Plains transports, stores, terminals and markets crude oil, refined products, LPG and natural gas-related products through its Transportation, Facilities and Marketing segments.
Financial performance
- Revenue: Q3 revenue was $4,857, down 45% from $8,862 a year earlier. Nine-month revenue was $12,442, down 50% from $25,118, largely reflecting lower commodity prices and therefore lower reported marketing sales and purchase costs.
- Profit: Q3 operating income was $166 versus $243; net income attributable to Plains was $122 versus $206, and diluted earnings per limited partner unit were $0.65 versus $1.41. For nine months, operating income rose to $606 from $451; net income attributable to Plains rose to $469 from $339, and diluted earnings per unit increased to $2.82 from $2.08.
- Segment results: Q3 segment profit fell to $230 from $296. Marketing profit declined to $44 from $138, more than offsetting gains in Transportation ($129 versus $119) and Facilities ($57 versus $39). Nine-month segment profit increased to $792 from $612, led by Marketing ($282 versus $190), Facilities ($155 versus $107) and Transportation ($355 versus $315).
- Cash flow and spending: Nine-month operating cash flow was $347 versus $239. Investing cash outflow was $437 versus $1,115, including $117 for acquisitions and $354 for property, equipment and other additions. Financing provided $98 versus $886. Operating cash flow was weighed down by a $349 inventory build, primarily associated with crude-oil contango storage.
- Liquidity: At September 30, cash was $16; management reported a $157 working-capital surplus and $1,639 of available liquidity, including $1,198 under the revolving facility and $425 under the hedged-inventory facility. Management said it believed liquidity was sufficient and reported compliance with debt covenants.
- Debt and capital: Total debt was $4,834, up from $4,286 at year-end 2008; senior notes were $4,135, with $692 of short-term debt. Plains issued $1.35 billion of senior notes during the first nine months, repaid $175 million of notes, and raised $458 million net from common-unit issuances. Common and general-partner distributions paid totaled $442. The Q3 distribution declared for payment in November was $0.92 per unit.
Material changes and notable items
- On September 3, Plains acquired the remaining 50% indirect interest in PAA Natural Gas Storage (PNGS) for $215, bringing ownership to 100%. PNGS had about 40 Bcf of storage capacity, with another 10 Bcf under construction at Pine Prairie. The purchase included assumed debt of $446 and resulted in a reported $9 net gain; the purchase-price allocation remained preliminary.
- Q3 2008 Marketing results included a $163 mark-to-market gain, partly offset by a $65 inventory valuation adjustment; Q3 2009 included an $11 mark-to-market gain. Management cited weaker LPG results, tighter crude differentials and lower volumes in Q3 2009, partly offset by a stronger contango structure. For the nine-month comparison, early-2009 contango and LPG margins supported earnings.
- Equity compensation expense increased to $47 for nine months from $27, primarily reflecting the change in unit price; the accrued liability for awards and distribution equivalent rights was about $70 at quarter-end.
- After quarter-end, Plains completed an approximately $40 acquisition of Tulsa-area storage and related assets, redeemed $250 of 7.13% notes on October 5 (with an expected approximately $4 loss), and renewed its hedged-inventory facility with $500 of capacity, expandable subject to lender commitments.
Outlook, risks and contingencies
- The filing gives no specific earnings or distribution forecast. Management described planned internal growth and expansion projects, and said results for the interim period should not be viewed as indicative of full-year results. The general partner agreed to reduce incentive distributions by a further $8 over two years in connection with PNGS, beginning with the November 2009 distribution.
- Key stated risks include commodity-market structure and volatility, throughput and production levels, counterparties and credit access, execution and integration of acquisitions and growth projects, financing availability, Canadian currency and tax matters, and environmental events and insurance availability. Management cautioned that prolonged financial-market disruption or energy-price volatility could adversely affect results, liquidity or cash flows.
- Environmental liabilities totaled approximately $48 at September 30, including $11 current; related probable insurance and third-party recovery receivables were $3. The filing describes pending federal enforcement discussions over earlier pipeline releases, including possible penalties and injunctive remedies; amounts and outcomes remain uncertain. Other disclosed matters include a SemCrude setoff dispute involving about $23, a Pacific pipeline-spill case with a stated statutory maximum penalty of approximately $3.7, and other legacy remediation and compliance matters.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the Marketing segment can sustain earnings as contango, differentials, volumes and commodity prices change, and how derivative mark-to-market results relate to later physical transactions.
- Post-PNGS operating contribution, completion and capacity of Pine Prairie expansion, final purchase-price allocation, and the effect of acquisition-related debt and financing.
- Debt maturities, facility availability and covenants, and the ability to fund capital spending and distributions while managing working-capital and inventory needs.
- Final outcomes, accrual adequacy and potential operational restrictions for the disclosed spill, environmental, SemCrude and legacy matters.
- Whether the stated incentive-distribution reductions and planned projects are realized as described; the filing provides no numerical earnings guidance.