Plains All American Pipeline, L.P. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results; dollar amounts are in millions unless noted. PAA operates crude oil, NGL, natural gas and refined-products infrastructure and logistics businesses through Transportation, Facilities, and Supply and Logistics segments.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $6,078 | $4,950 | $12,745 | $9,060 |
| Operating income | $257 | $146 | $848 | $427 |
| Net income attributable to PAA | $188 | $101 | $632 | $302 |
| Basic net income per common unit | $0.21 | $(0.20) | $0.78 | $(0.13) |
| Adjusted EBITDA | $451 | $474 | $963 | $1,107 |
| Implied distributable cash flow (DCF) | $289 | $314 | $592 | $754 |
| Cash distributions paid | $399 | $433 | $798 | $866 |
- Q2 revenue rose 23% and PAA-attributable net income rose 86% year over year. First-half revenue rose 41% and attributable net income rose 109%. Revenue growth largely reflected higher commodity prices and Supply and Logistics activity; revenue is therefore not a direct indicator of underlying margin performance.
- Despite GAAP earnings growth, Adjusted EBITDA declined 5% in Q2 and 13% for the first half. Implied DCF declined 8% and 21%, respectively. Distributions exceeded implied DCF by $110 in Q2 and $206 for the first half.
- Q2 segment adjusted EBITDA was $298 Transportation, $180 Facilities and $(28) Supply and Logistics, versus $274, $161 and $39 a year earlier. First-half amounts were $571, $368 and $23, versus $555, $327 and $224. Transportation benefited from Permian volumes and the acquired Alpha Crude Connector system; Facilities benefited from acquired Western Canada assets and capacity growth. Supply and Logistics faced margin compression and less favorable market conditions.
- First-half operating cash flow was $1,461, compared with $387 in 2016. Management attributed much of the improvement to lower inventory levels and reduced hedging margin balances, which had been funded with short-term debt; higher inventory prices partly offset the benefit. Investing cash outflow was $1,654 and financing cash inflow was $192. Cash remained $47.
- At June 30, total debt was $11,154, down from $11,839 at year-end 2016. Current liabilities exceeded current assets by $229. Reported available liquidity, including cash, was approximately $2,806; PAA reported covenant compliance.
- Cash distributions to common unitholders were $0.55 per unit for the quarter, unchanged from the prior three quarters, but approximately 21% lower year over year. Preferred distributions were paid in additional Series A units rather than cash.
Material changes, transactions and unusual items
- PAA acquired Alpha Crude Connector in February for approximately $1.217 billion, adding a 515-mile gathering and transmission system in the Northern Delaware Basin. Preliminary acquisition accounting included $646 of intangible assets and $271 of goodwill. PAA also acquired a propane marine terminal for approximately $41 and formed a 50/50 joint venture that acquired the Advantage Pipeline.
- PAA issued 54.1 million common units for net proceeds of $1,664, primarily through an offering linked to PAGP and the Omnibus Agreement. It repaid $400 of 6.13% notes due January 2017.
- Non-core asset sales generated approximately $389 of proceeds in the first half. A further sale of Rocky Mountain pipeline interests for approximately $250 was agreed in Q3; other potential asset-sale discussions were ongoing.
- Q2 results included a $35 inventory valuation charge, largely offset by gains on related hedges. Derivative gains and losses were significant and timing-sensitive: the filing reports $195 of six-month commodity derivative gains in Supply and Logistics revenue, while 2016 included losses. Prior-year depreciation also included substantial impairment and asset write-off charges, contributing to lower 2017 depreciation expense.
- Segment performance remains pressured by intense competition, overcapacity, tight regional and grade differentials, and low market volatility. Management said Supply and Logistics earnings were difficult to forecast and could remain under pressure.
Outlook, risks and contingencies
- Management expected production to increase in the second half of 2017, supporting Transportation utilization, particularly in the Permian. It cautioned that production timing is uncertain and that improved market conditions and targeted returns on projects or acquisitions are not assured.
- Planned 2017 expansion capital was approximately $950; $614 had been invested in the first half. Management expected the capital program to be funded primarily by first-quarter equity proceeds and non-core asset sales.
- On August 7, 2017, PAA disclosed that it was reassessing its common distribution, with a focus on a level supported by DCF from fee-based Transportation and Facilities. No final decision had been made; PAA intended to conclude the review within approximately 60 days. This was a subsequent-period announcement, not a finalized Q2 distribution change.
- The 2015 Line 901 California crude-oil release remains a major contingency. PAA estimated total incident costs of approximately $300, with a remaining gross liability of $78 at June 30 and a $39 insurance receivable; approximately $166 of roughly $205 in costs considered recoverable from insurers had been collected. Investigations, lawsuits and possible fines or penalties remained unresolved, and actual costs could exceed estimates. Line 901 and most of Line 903 remained out of service, with no restart timetable established.
- Total environmental reserves were $150 at June 30. PAA also reported approximately $124 carrying value for the idled California pipeline assets, which could face retirement costs or impairment. It identified potential impairment or retirement exposure for its Capline interest as well.
- Other risks include commodity, interest-rate and currency movements; counterparty credit; access to capital; execution and integration of acquisitions and projects; and regulatory, environmental and pipeline-safety matters.
Most important facts for investors to verify
- Whether the distribution reassessment resulted in a reset, and how any new distribution compares with recurring fee-based DCF.
- Whether operating cash flow and liquidity remain strong after separating working-capital and hedging-margin effects from recurring operations.
- Whether Supply and Logistics margins recover, and whether continued Transportation and Facilities growth offsets segment weakness.
- Final purchase accounting and realized returns for Alpha Crude Connector, and completion, timing and proceeds of announced or potential asset sales.
- Updates to Line 901/903 proceedings, insurance recoveries, the $78 remaining liability and any additional reserves, fines or legal costs.
- Debt maturities, refinancing needs, covenant headroom and the funding mix for remaining 2017 capital spending and distributions.