Plains All American Pipeline, L.P. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. PAA owns and operates crude oil, NGL and natural gas midstream infrastructure in the United States and Canada, with Transportation, Facilities, and Supply and Logistics segments. Figures are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $5,833 | $7,886 | $17,327 | $24,515 |
| Net income/(loss) | $146 | $454 | $(2,555) | $1,872 |
| Net income/(loss) attributable to PAA | $143 | $449 | $(2,562) | $1,865 |
| Basic net income/(loss) per common unit | $0.13 | $0.55 | $(3.72) | $2.35 |
| Adjusted EBITDA (non-GAAP) | $682 | $731 | $2,001 | $2,377 |
| Cash from operating activities | $282 | $314 | $1,256 | $1,778 |
| Free cash flow (non-GAAP) | $73 | $(79) | $195 | $535 |
| Free cash flow after distributions (non-GAAP) | $(95) | $(378) | $(466) | $(343) |
At September 30, total debt was $10.171 billion, versus $9.691 billion at year-end 2019. Cash was $25 million; working capital was negative $399 million. Reported available liquidity was approximately $2.773 billion, including facility availability and cash, and PAA said it was in compliance with debt covenants. Total assets were $24.246 billion, down from $28.677 billion at December 31, 2019.
Material changes and drivers
- Q3 revenue fell about 26% year over year; nine-month revenue fell about 29%. Supply and Logistics revenue was the largest component and declined with lower commodity prices and activity.
- The nine-month net loss chiefly reflected a $2.515 billion goodwill impairment, which eliminated all goodwill, and other non-cash asset impairment charges. PAA also recorded a $233 million inventory valuation charge, primarily in Q1.
- Nine-month Adjusted EBITDA decreased 16%. Supply and Logistics segment Adjusted EBITDA fell to $205 million from $571 million; Transportation declined to $1.233 billion from $1.271 billion, while Facilities increased to $560 million from $529 million.
- Q3 Transportation volumes were down 14% year over year. Management cited producer shut-ins, reduced drilling and completion activity, lower throughput and compressed regional differentials. Facilities performance benefited from lower operating costs, while storage activity and new capacity supported some revenues.
- Cash from operations decreased year over year. PAA attributed cash needs in part to increased crude and NGL inventory and related hedging margin balances; investing activities used $1.066 billion during the nine months.
Outlook, capital allocation and notable items
- Management said demand and prices had improved from the early-2020 downturn, but inventories remained elevated and market uncertainty persisted. It expected market impacts to remain negative versus pre-pandemic levels, potentially more pronounced in 2021, citing pandemic resurgence, regulation and geopolitical risks.
- PAA reduced its 2020/2021 investment capital program by $850 million, or 37%, to approximately $1.45 billion; estimated 2020 investment capital was $950 million. It reported approximately $785 million invested in infrastructure through September.
- Common distributions were reduced 50% from the February 2020 level: the quarterly rate was $0.18 per unit, versus $0.36 previously. Preferred distributions continued. Management said cost reductions, capital discipline and asset sales were intended to strengthen liquidity and flexibility.
- Post-quarter events: PAA redeemed $600 million of 5.00% notes on November 3, 2020, using commercial paper borrowings and cash on hand; it also announced a $500 million common-unit/PAGP share repurchase authorization, which may be suspended and does not require purchases.
- Asset sales included $163 million from NGL terminal divestitures and $78 million from selling a 10% Saddlehorn interest. The LA Basin terminal sale closed in Q4 for approximately $200 million, subject to adjustments.
- The Line 901 incident’s estimated total costs were approximately $455 million, with a remaining gross liability of $134 million and a recognized insurance receivable of approximately $112 million at quarter-end. A consent decree approved October 14 required $24 million in civil penalties, $22.325 million for natural-resource damages and injunctive relief. Related class-action matters remained pending; a trial was postponed due to COVID-19.
- Total environmental reserves were $188 million, partly offset by $120 million of recorded insurance and third-party recovery receivables. Management cautioned that actual costs could exceed estimates. COVID-19-related credit stress among energy counterparties also created potential collection risk, although estimated credit losses were described as immaterial.
Key facts for investors to verify
- Whether operating cash flow, facility access and covenant compliance remain adequate given the working-capital deficit, debt level and negative nine-month free cash flow after distributions.
- Whether the reduced common distribution and capital program are sufficient to preserve liquidity if demand, production volumes or asset-sale proceeds disappoint.
- The assumptions behind the full goodwill write-off and other impairments, including projected volumes, commodity prices, tariff rates and discount rates.
- Actual costs, insurance collections and litigation outcomes related to Line 901 and other environmental matters.
- Whether the $500 million repurchase authorization is implemented, and how any purchases compare with debt reduction and other liquidity priorities.