Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed this Form 10-Q for the quarter ended September 30, 2013. The financial statements are unaudited and report the historical results of Plains All American GP LLC and subsidiaries, PAGP’s predecessor—not PAGP as a standalone public company. PAGP completed its IPO on October 21, 2013; the $2.8 billion of net proceeds was distributed to selling owners.
The underlying business operates through Transportation, Facilities, and Supply and Logistics, with activities in crude oil and refined-products transportation, storage and marketing, and natural gas liquids and natural gas storage and processing.
Financial highlights
Amounts below are in millions of dollars unless otherwise indicated.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $10,703 | $9,354 | $31,617 | $28,358 |
| Operating income | $296 | $246 | $1,332 | $1,022 |
| Net income | $236 | $170 | $1,070 | $790 |
| Net income attributable to GP LLC | $1 | $1 | $3 | $2 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $1,589 | $874 |
- Operating income increased 20% in Q3 and 30% for the nine-month period. Net income increased 39% and 35%, respectively. Nearly all net income was attributable to noncontrolling interests.
- Segment profit was $408 in Q3 2013 versus $466 in Q3 2012, and $1,640 for the first nine months versus $1,404. Q3 Supply and Logistics segment profit fell to $64 from $142; nine-month profit rose to $673 from $544.
- At September 30, 2013, total debt was $8,138, compared with $7,606 at December 31, 2012. Cash was $34; working capital surplus was approximately $134. Available liquidity, including cash and undrawn facilities, was approximately $2,948.
- Cash used in investing activities was $1,340 for the first nine months, versus $2,376 in 2012; cash used in financing activities was $237, versus cash provided of $1,508. Capital expenditures for acquisitions, internal growth projects and maintenance totaled $1,396, compared with $2,611.
- Management reported 2013 projected expansion capital expenditures of $1,600–$1,725, subject to timing and scope changes. No earnings or distribution guidance was provided in the supplied filing text.
Material changes and management commentary
- Nine-month performance benefited from the USD Rail Terminal and BP NGL acquisitions, completed in December 2012 and April 2012, respectively; completed growth projects; and stronger NGL marketing margins. Crude oil margins were pressured as new infrastructure narrowed previously favorable differentials.
- Q3 Supply and Logistics segment profit declined 55%, primarily reflecting fewer favorable crude oil margin opportunities as takeaway constraints eased. Nine-month segment profit improved 24%, supported by NGL marketing conditions and higher volumes.
- Facilities segment profit increased 29% for the nine-month period, with contributions from acquired rail terminal and NGL assets and expansion projects. Transportation segment profit increased 1%.
- Operating cash flow benefited in part from reducing crude oil inventory and liquidating barrels previously stored during contango conditions. Management said it believed liquidity was sufficient and that the company was in compliance with its credit covenants, while warning that financial-market disruptions or adverse energy-price volatility could materially affect results and liquidity.
- PAA issued $700 million of 3.85% senior notes due 2023 and established a commercial-paper program with a maximum outstanding amount of $1.5 billion. Credit-facility maturities were extended, and the AAP term loan facility was increased to $500 million.
Risks, contingencies and unusual items
- PAA’s proposed acquisition of the remaining publicly held PNG common units, announced October 22, 2013, required unitholder approvals and other conditions. The filing described a unit-for-unit exchange and anticipated closing in late Q4 2013 or Q1 2014. Several lawsuits challenged the transaction and sought to enjoin or rescind it; outcomes were uncertain.
- Environmental liabilities were estimated at $99 million undiscounted at September 30, 2013, partly offset by $10 million of receivables for probable insurance or third-party recoveries. Pipeline releases and remediation create potential exposure beyond recorded reserves. The Bay Springs release incurred approximately $6 million of cleanup costs; approximately $15 million was accrued for the Kemp River releases.
- Q3 2012 included a $125 million impairment, primarily related to the abandoned Pier 400 terminal project. 2013 impairments were $8 million for Q3 and $15 million for the nine-month period.
- Commodity, interest-rate and Canadian-dollar risks are managed using derivatives; derivative fair values and related earnings can fluctuate. The filing states the company does not use derivatives to speculate on outright commodity-price changes.
- Management reported no material change in internal control over financial reporting and concluded disclosure controls were effective. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm how the predecessor financial statements and the October 2013 IPO transactions affect interpretation of PAGP’s ownership, earnings and cash available for distributions; IPO proceeds went to selling owners, not to PAGP as operating-company capital.
- Track Supply and Logistics margins, crude oil differentials and NGL demand, as Q3 weakness contrasted with nine-month growth.
- Assess leverage, upcoming debt maturities, facility availability, covenant compliance and the company’s capacity to fund its stated expansion program.
- Follow the PNG merger approvals, litigation and any resulting changes to ownership, incentive distribution rights or unit count.
- Monitor environmental remediation costs, insurance recoveries and regulatory proceedings related to pipeline releases.