Plains GP Holdings, L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. PAGP consolidates PAA and its subsidiaries, so consolidated figures primarily reflect PAA’s operating business. PAGP owned a 22.4% limited partner interest in AAP at quarter-end.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $11.684 billion | $10.620 billion |
| Operating income | $492 million | $655 million |
| Net income | $372 million | $535 million |
| Net income attributable to PAGP | $14 million; $0.11 per Class A share | $1 million; comparable EPS not presented |
| Cash provided by operating activities | $817 million | $978 million |
| Capital expenditures | $609 million | $403 million |
| Total debt at period-end | $8.217 billion | $8.343 billion at Dec. 31, 2013 |
| Cash at period-end | $32 million | $43 million at Dec. 31, 2013 |
| Available liquidity | $2.039 billion | Not provided for comparison |
Revenue rose about 10%, while operating income fell about 25% and net income fell about 30%. Reported revenue is heavily influenced by high-volume, low-margin Supply and Logistics activity; the filing does not provide a consolidated margin figure. PAGP’s attributable income increased from $1 million, but the 2013 comparison reflects predecessor-period reporting and is not a like-for-like Class A share comparison.
- Segment profit: Transportation $206 million, up 26%; Facilities $154 million, up 3%; Supply and Logistics $249 million, down 43%. Total segment profit declined 19% to $609 million.
- Transportation benefited from higher North American crude production and completed expansions, including Permian and Eagle Ford projects. Supply and Logistics faced fewer favorable crude-oil location-differential opportunities as infrastructure constraints eased.
- Net income included a $37 million natural-gas inventory write-down after severe winter weather increased storage deliverability costs. Depreciation and amortization rose to $96 million from $82 million, partly due to accelerated depreciation on certain pipelines and newly completed projects.
- Other comprehensive loss was $136 million, including $124 million of currency translation adjustments.
Liquidity, debt and capital allocation
PAGP reported a $622 million working-capital deficit but stated that approximately $2.039 billion of liquidity was available, including credit-facility capacity and cash. PAA and AAP were in compliance with credit-agreement covenants at March 31, 2014. Operating cash flow was lower year over year; management attributed Q1 cash generation in part to inventory reductions and related proceeds used to repay commercial-paper borrowings.
Q1 investing cash outflow was $524 million, principally reflecting $468 million of additions to property, equipment and other assets. Financing cash outflow was $302 million, including $309 million of distributions to noncontrolling interests and $17 million paid to Class A shareholders. PAA issued approximately 2.8 million common units for net proceeds of $148 million during the quarter.
After quarter-end, PAA issued $700 million of 4.70% senior notes due 2044; net proceeds of approximately $691 million were intended for commercial-paper repayment and general partnership purposes. PAGP declared a quarterly distribution of $0.17055 per Class A share, payable May 15, 2014.
Outlook, risks and contingencies
- Management forecast 2014 expansion capital expenditures of $1.75–$1.95 billion, subject to timing and scope changes; Q1 internal-growth spending was $563 million. Total Q1 capital expenditures, including maintenance, were $609 million.
- Management said it expected crude-oil logistics margins to normalize further as new infrastructure addresses transportation constraints, while stating that business fundamentals remained strong. No earnings or full-year distribution guidance is provided in the supplied filing text.
- Key risks include commodity-market structure and volatility, project execution and permitting, access to capital, counterparty credit, Canadian-dollar movements, weather, and potential declines in shipped or processed volumes. Management cautioned that prolonged financial-market disruption or adverse energy-price volatility could materially affect results and liquidity.
- Environmental liabilities were estimated at $91 million undiscounted, net of separately recorded recovery receivables of approximately $10 million. The filing warns remediation costs could exceed reserves. Releases on the Rainbow, Rangeland, Bay Springs and Kemp River pipelines involved remediation and/or potential regulatory penalties; certain investigations or proceedings remained unresolved.
- Management did not believe ordinary-course litigation would have a material adverse effect. Pemex claims against Plains were dismissed in the Big Star case, with the appeal period expired; a motion to obtain final judgment in the Murphy case remained pending. PNG merger-related suits were voluntarily dismissed without settlement payments or concessions.
Most important facts for investors to verify
- Whether the sharp decline in Supply and Logistics segment profit persists as infrastructure expansion normalizes crude-oil differentials.
- Whether the $1.75–$1.95 billion expansion program stays within forecast and produces expected volumes and returns.
- Liquidity and refinancing capacity, including the effect of commercial-paper borrowings and the post-quarter $700 million notes issuance.
- Actual costs, reserves and regulatory outcomes for pipeline releases, environmental remediation and remaining legal matters.
- The sustainability of PAGP distributions, which depend on cash received through AAP and are subject to reserves and operating, financing and market risks.