Plains GP Holdings, L.P. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. PAGP is a holding partnership whose results consolidate Plains All American Pipeline (PAA) and related entities; accordingly, most reported operating results reflect the broader PAA business. PAGP owned approximately 42% of AAP at quarter-end.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5.170 billion | $5.551 billion | $14.231 billion | $18.156 billion |
| Operating income | $348 million | $334 million | $774 million | $915 million |
| Net income | $279 million | $228 million | $538 million | $593 million |
| Net income attributable to PAGP | $24 million | $32 million | $102 million | $93 million |
| Basic EPS | $0.09 | $0.14 | $0.39 | $0.42 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $630 million | $1.213 billion |
The filing does not present a consolidated gross margin measure. Segment profit was $428 million in Q3, down from $487 million, and $1.261 billion for the first nine months, down from $1.371 billion.
- Segments, Q3: Transportation profit was $261 million versus $254 million; Facilities was $173 million versus $146 million; Supply and Logistics recorded a $6 million loss versus $87 million profit.
- Cash flow and investment: Nine-month investing cash use was $854 million, versus $2.069 billion in 2015; financing provided $224 million. Cash ended at $34 million. Property and equipment additions were $1.030 billion.
- Debt and liquidity: Total debt was $11.620 billion, compared with $11.931 billion at December 31, 2015. Working capital deficit was $303 million. Reported available liquidity was approximately $2.577 billion, and PAA and AAP were in compliance with credit covenants.
- Distributions: PAGP declared $0.2065 per Class A share for Q3, payable November 14, 2016, a 10.6% reduction from the prior quarter’s $0.2310. PAA’s Q3 common-unit distribution was reduced to $0.55 from $0.70.
Changes versus prior period and notable items
- Revenue declined 7% in Q3 and 22% year to date, principally reflecting lower commodity prices and reduced Supply and Logistics activity. Supply and Logistics segment profit fell sharply amid compressed margins, competition, and weaker market conditions.
- Transportation and Facilities segment profits improved, supported by higher pipeline volumes, acquisitions, expansion projects and, for the year-to-date comparison, lower Line 901-related costs.
- Reported Q3 depreciation and amortization was $33 million versus $108 million. The 2016 quarter included net gains associated with asset sales and joint venture formations; year-to-date expense also included approximately $80 million of rail and terminal impairments and an $18 million write-off of assets taken out of service. Year-to-date results included approximately $99 million of net gains from asset sales and joint venture formations.
- Nine-month results included a $42 million gain from fair-value changes in the preferred distribution rate reset option. The filing also reports $178 million of deferred cash-flow-hedge losses during the first nine months.
- Operating cash flow fell to $630 million from $1.213 billion, with working-capital changes—including higher inventory and hedging margin balances—contributing to the decline.
Outlook, risks and contingencies
- Capital plan: Management forecast 2016 expansion capital of $1.375–$1.475 billion and maintenance capital of $175–$185 million. Nine-month investment in midstream infrastructure was approximately $1.065 billion.
- Management outlook: Lower production growth, excess takeaway capacity, contractual shipper commitments and intense competition are pressuring differentials and unit margins, particularly in Supply and Logistics. Management cautioned that cash-flow and distribution growth may be lower than previously expected for several years; project returns and future market recovery are uncertain.
- Simplification: The proposed transaction was expected to close November 15, 2016, subject to approvals and customary conditions. AAP would contribute its IDRs and economic general partner interest to PAA in exchange for approximately 245.5 million PAA common units, with PAA assuming AAP debt. AAP expected to borrow about $33 million for a distribution true-up related to PAA’s reduced Q3 distribution.
- Line 901: The 2015 California pipeline spill remains subject to open investigations, criminal charges, lawsuits and potential additional penalties. The company estimated total incident costs of approximately $280 million, with an $87 million remaining gross liability and a $68 million insurance-recovery receivable at September 30. Line 901 and Line 903 remained shut down, with no restart timeline. Actual costs may exceed estimates.
- Other disclosed exposures include environmental incidents, pipeline safety matters and commodity, interest-rate and Canadian-dollar risks. The filing states that future environmental costs and claims may exceed recorded reserves.
Most important facts for investors to verify
- Whether the simplification transaction closed as expected and how its final terms affect PAGP’s ownership, distributions and governance.
- Whether cash flow, liquidity and covenant headroom remain adequate amid working-capital needs, capital spending and scheduled debt maturities.
- Whether the reduced PAGP and PAA distributions are sustainable and what operating performance supports future distributions.
- Whether Supply and Logistics margins and volumes stabilize, and whether planned expansion spending achieves expected returns.
- Updates to Line 901 liabilities, insurance recoveries, lawsuits, investigations, penalties and pipeline restart prospects.
- The timing and proceeds of planned asset sales and the effect of derivative fair-value movements on reported earnings and cash flow.