Business context and reporting period
Plains All American Pipeline, L.P. (PAA) is a midstream partnership operating crude oil, NGL and natural gas transportation, storage, gathering and logistics assets in the U.S. and Canada. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the first quarter of 2019.
Financial and operating performance
- Revenue: $8.269 billion, down 1.3% from $8.375 billion. Supply and Logistics revenue was $7.907 billion; Transportation $187 million; Facilities $175 million.
- Profit and impairment charges: Net loss attributable to PAA was $2.847 billion, or $3.98 per common unit, versus net income of $970 million, or $1.26 per unit. The loss largely reflects a $2.515 billion goodwill impairment, $619 million net loss on asset sales and impairments, and $232 million of crude oil and NGL inventory write-downs. Goodwill was fully impaired.
- Segment performance: Segment Adjusted EBITDA was $793 million versus $861 million. Transportation rose 11% to $442 million and Facilities rose 14% to $210 million; Supply and Logistics fell 49% to $141 million, mainly due to less favorable crude differentials, weaker NGL spreads and lower NGL sales volumes.
- Cash flow and investment: Operating cash flow was $890 million, compared with $1.033 billion. Investing activities used $610 million and financing activities used $192 million. Acquisition, expansion and maintenance capital expenditures totaled $711 million, including the $308 million acquisition of Delaware Basin gathering assets.
- Cash, debt and liquidity: Cash and cash equivalents were $38 million; cash plus restricted cash was $160 million. Total debt was $9.781 billion, up from $9.691 billion at year-end 2019. PAA reported a $286 million working-capital deficit and approximately $2.518 billion of liquidity, including available facility capacity. It was compliant with debt covenants at quarter-end.
- Cash generation and distributions: Management’s non-GAAP Adjusted EBITDA was $795 million versus $862 million; implied DCF available to common unitholders was $596 million versus $654 million. Common distributions paid during the quarter were $262 million.
Material changes versus the prior comparable period
- The swing from $970 million of net income to a $2.847 billion net loss was driven primarily by goodwill and other impairment charges. The 2019 comparison included a $267 million non-cash gain related to the Capline transaction.
- Segment Adjusted EBITDA declined 8%. Transportation volumes increased 12%, supported by Permian growth and the Cactus II pipeline; Facilities benefited from storage capacity and a contract deficiency payment. Supply and Logistics EBITDA weakened materially.
- Cash flow from operations decreased by $143 million. Inventory balances fell sharply, with inventory declining from $604 million at year-end to $181 million at quarter-end, reflecting both sales and price-related valuation adjustments.
- Total assets declined to $23.7 billion from $28.7 billion, including the removal of goodwill and reductions in property, equipment and inventory.
Outlook, management commentary, risks and unusual items
- COVID-19 and oil markets: Management described a rapid demand shock, oversupply and high inventories, with storage at key hubs expected to fill by June 2020. It cited industry estimates of second-quarter global crude demand 20%–25% below the prior-year quarter and warned that effects could extend into 2021. Actual impacts were uncertain.
- Capital and distribution actions: After quarter-end, PAA announced a $750 million, or 33%, reduction to its 2020/2021 capital program and targeted approximately $1.1 billion of 2020 expansion capital. It cut the common-unit distribution payable in May by 50%, to $0.18 per unit from $0.36, and announced cost reductions and asset sales. The filing says revised 2020 guidance was issued May 5, but the supplied filing text does not provide a clear numerical guidance value.
- Asset sales and projects: Certain NGL terminal sales closed in April for approximately $163 million, subject to adjustments. A separate $195 million LA Basin terminal sale was expected to close in the second half of 2020, subject to conditions. Red Oak Pipeline was deferred; PAA noted its $54 million carrying value and estimated $122 million including its share of committed costs incurred in the second quarter could be at risk if the project does not proceed.
- Impairments and estimates: In addition to the goodwill and inventory charges, PAA recorded approximately $489 million of non-cash impairment losses on long-lived assets and investments and approximately $167 million on assets classified as held for sale. Valuations rely on uncertain assumptions about volumes, prices, tariffs and future demand.
- Contingencies: For the 2015 Line 901 oil spill, PAA estimated aggregate costs incurred or expected of approximately $400 million. The remaining gross liability was $90 million at quarter-end. A proposed Consent Decree would require $24 million of civil penalties and $22.325 million for natural-resource damages, subject to court approval. PAA warned final costs could exceed its estimates. The broader environmental liability reserve was $142 million.
- Other risks: The filing highlights possible customer defaults, production shut-ins, reduced throughput, counterparty credit deterioration, market and hedging disruption, financing and covenant risks, and uncertainty in completing planned cost reductions and asset sales. Management reported no material pandemic-related operational constraints or significant additional operating costs through the reporting period.
Important facts for investors to verify
- Whether actual 2020 results and any subsequently issued guidance align with management’s revised outlook, especially as demand, production and storage conditions evolve.
- Execution and proceeds of announced asset sales, and whether the reduced capital program and common distribution support liquidity and leverage objectives.
- Debt refinancing needs, access to revolving facilities and commercial paper, covenant compliance, and changes in credit ratings or borrowing costs.
- Further impairments, particularly the Red Oak investment, and whether assumptions used in asset and goodwill valuations remain supportable.
- Court approval and final costs of the Line 901 Consent Decree, insurance recoveries, and exposure from remaining claims and litigation.