Business context and reporting period
Plains All American Pipeline, L.P. (PAA) filed this unaudited Form 10-Q for the quarter ended June 30, 2021. PAA operates crude oil, NGL and natural gas transportation, storage, processing, and supply and logistics businesses in the U.S. and Canada. Comparisons below are with the second quarter or six months ended June 30, 2020, as applicable. Dollar amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $9,930 | $3,225 | $18,313 | $11,494 |
| Net income/(loss) attributable to PAA | $(220) | $142 | $202 | $(2,705) |
| Net income/(loss) per common unit | $(0.37) | $0.13 | $0.14 | $(3.85) |
| Adjusted EBITDA (non-GAAP) | $579 | $524 | $1,125 | $1,319 |
| Implied DCF (non-GAAP) | $435 | $359 | $842 | $992 |
| Implied DCF available to common unitholders (non-GAAP) | $373 | $297 | $743 | $893 |
- Revenue and margins: Revenue growth largely reflects Supply and Logistics’ high-volume, low-margin commodity sales and higher crude oil prices and volumes; it should not be read as comparable growth in profitability. Supply and Logistics Segment Adjusted EBITDA was $5 in Q2 and $(8) for the first half, versus $3 and $144, respectively, in 2020. Transportation Segment Adjusted EBITDA rose to $433 in Q2 and $821 for the first half; Facilities declined to $140 and $311, respectively.
- Cash flow: First-half cash from operations was $1,026, compared with $974. Free Cash Flow (non-GAAP) was $738 versus $122, and Free Cash Flow after distributions was $379 versus $(370). First-half common, Series A and Series B distributions were approximately $260, $74 and $25, respectively.
- Debt and liquidity: Total debt was $9,845 at June 30, 2021, down from $10,213 at December 31, 2020. Cash was $24, with restricted cash of $7. PAA reported a $487 working-capital deficit but approximately $2,555 of available liquidity, including facility availability and cash. PAA said it was in compliance with debt covenants.
- Margins and other metrics: Interest expense was $107 in Q2 and $213 for the first half. No consolidated profit-margin percentage is stated; reported revenue includes substantial commodity purchase-and-resale activity.
Material changes versus prior periods
- First-half 2021 net income of $207 (before noncontrolling interests) compared with a 2020 net loss of $2,701. The 2020 loss included a $2,515 goodwill impairment and other impairments; 2021 included a $370 net loss on asset sales and impairments.
- Q2 2021 operating results included approximately $475 of noncash impairment on the Pine Prairie and Southern Pines gas storage facilities held for sale, partly offset by a $106 gain on an asset exchange.
- First-half segment Adjusted EBITDA fell 15% to $1,124, chiefly reflecting less favorable crude oil market conditions and lower realized NGL margins in Supply and Logistics, and lower utilization, market rates and asset sales in Facilities. Transportation benefited from minimum-volume deficiency payments and lower operating costs.
- A useful-life estimate change effective January 1, 2021 increased depreciation expense by $36 in the first half; PAA estimates an approximately $72 annual increase going forward.
- First-half 2021 commodity derivative activity recorded a net loss of $542 in the financial statements, while selected timing and inventory items are adjusted in management’s non-GAAP segment measures.
Outlook, management commentary, risks and unusual items
- PAA projected 2021 investment capital of $325 and maintenance capital of $180, expected to be funded with retained cash flow and asset-sale proceeds. The filing does not provide a clear full-year earnings or Adjusted EBITDA guidance figure.
- The August 2, 2021 sale of Pine Prairie and Southern Pines closed for $850, subject to adjustments; PAA also repaid approximately $200 of related GO Zone term loans. These were subsequent events, not June 30 cash proceeds.
- In July, PAA agreed to combine most of its Permian Basin assets and operations with Oryx Midstream in a cashless, debt-free joint venture. PAA expects to own 65%, operate and consolidate the venture, with closing expected in Q4 2021 subject to approvals and other conditions. Management described it as near-term free-cash-flow accretive.
- Line 901 environmental and legal matters remain significant. PAA estimated total incident costs of approximately $485, with a remaining gross liability of $104 and an insurance receivable of approximately $110 at June 30. Certain claims and proceedings remain unresolved; actual costs could exceed estimates and reserves.
- Key risks cited include oil and gas demand and production declines, competition and contract renewals, asset underutilization, counterparty credit and performance, commodity and currency volatility, extreme weather, regulatory and environmental liabilities, and access to capital. COVID-19-related market conditions and Winter Storm Uri affected operations and comparisons.
- PAA repurchased 5.29 million common units for $53 during the first half, with $397 remaining under the program at June 30. Management stated disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported revenue and its year-over-year increase reflects commodity pass-through activity versus durable fee-based earnings and cash generation.
- Whether the $850 storage-asset sale proceeds, debt repayment, and planned use of proceeds match the subsequent-event disclosures and improve leverage as expected.
- Whether the Oryx joint venture closes on schedule and delivers the stated cash-flow, operating, and credit benefits.
- Whether the Line 901 reserve and insurance recovery prove adequate as remaining litigation, restitution hearings, and restoration costs develop.
- How the higher depreciation estimate and lower first-half segment Adjusted EBITDA affect future reported earnings, distributions, and debt reduction capacity.