Business context and reporting period
Plains All American Pipeline, L.P. (PAA) filed this Form 10-K for the fiscal year ended December 31, 2014. PAA owns and operates midstream energy infrastructure in the United States and Canada. Its three segments are Transportation, Facilities, and Supply and Logistics. The filing also presents fourth-quarter results; it is an annual report, not a standalone Q4 filing.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $43.464 billion | $42.249 billion |
| Net income attributable to PAA | $1.384 billion | $1.361 billion |
| Basic net income per limited partner unit | $2.39 | $2.82 |
| Operating cash flow | $2.004 billion | $1.954 billion |
| Adjusted EBITDA (non-GAAP) | $2.200 billion | $2.292 billion |
| Implied distributable cash flow (non-GAAP) | $1.559 billion | $1.665 billion |
| Total debt at year-end | $10.049 billion | $7.828 billion |
| Cash and cash equivalents at year-end | $403 million | $41 million |
| Declared distributions per unit | $2.55 | $2.33 |
- Segment profit: Transportation $925 million, up 27%; Facilities $584 million, down 5%; Supply and Logistics $782 million, down 5%. Total segment profit increased 6% to $2.291 billion.
- Net interest expense rose 12% to $340 million; income tax expense rose to $171 million from $99 million, primarily reflecting Canadian operations and derivative-related deferred tax expense.
- Cash used in investing activities was $3.296 billion, including $1.932 billion of additions to property and equipment and $1.246 billion invested in unconsolidated entities. Reported capital expenditures were $1.099 billion for acquisitions, $2.026 billion for expansion, and $224 million for maintenance.
- Year-end working capital deficit was $576 million. Reported liquidity was approximately $2.582 billion, including cash and available capacity under credit facilities, net of commercial paper outstanding; facility availability depends on covenant compliance.
- At year-end, approximately $9.3 billion of debt was fixed-rate and $734 million variable-rate. The filing reports total consolidated debt above $10 billion.
Material changes versus the prior comparable period
- Annual revenue rose about 3%, but net income attributable to PAA rose only 2%; basic earnings per unit fell 15%, partly reflecting an 8% increase in weighted-average units outstanding and higher interest, depreciation, and taxes.
- Adjusted EBITDA fell 4% and implied DCF fell 6%. Management attributed the weaker overall results primarily to less favorable Supply and Logistics and Facilities performance, partly offset by Transportation growth.
- Transportation benefited from higher North American production, expanded pipeline capacity, and increased equity earnings. Average segment throughput rose 10% to 4.079 million barrels per day.
- Supply and Logistics segment profit declined 5% despite 7% higher average volumes. Results included a $75 million long-term crude inventory valuation adjustment and $10 million for NGL inventory; reported inventory valuation charges across the business totaled $289 million, partly offset by $160 million of derivative gains.
- Facilities segment profit declined 5%, including weaker natural gas storage economics, severe-cold-weather deliverability costs, and limited hub-service opportunities. A reporting reclassification moved natural gas commercial optimization activity from Facilities to Supply and Logistics beginning in 2014.
- Debt increased, reflecting investment and financing activity. PAA acquired a 50% interest in BridgeTex for approximately $1.088 billion and raised $2.595 billion net from senior note issuance and $866 million net from common-unit offerings.
Fourth-quarter snapshot
Q4 2014 revenue was $9.459 billion versus $10.631 billion in Q4 2013. Net income attributable to PAA was $389 million versus $309 million; operating income was $530 million versus $394 million. Gross margin, as defined in the filing, was $597 million versus $478 million. The quarter included significant declines in crude oil and NGL prices and a long-term inventory valuation adjustment.
Outlook, management commentary, risks, contingencies, and unusual items
- Management’s 2015 plan called for $1.75–$1.95 billion of expansion capital and $205–$225 million of maintenance capital. Major projects include Permian Basin expansions, Cactus, Eagle Ford, Fort Saskatchewan, and rail projects. Management expected most 2015 expansion spending to contribute to growth in 2016 and beyond.
- Management said its 2014 adjusted EBITDA slightly exceeded, and DCF was in line with, the midpoint of its February 2014 guidance. It reported a 10% increase in the annualized distribution rate to $2.64 per unit and approximately 111% distribution coverage. The February 2015 quarterly distribution was $0.675 per unit.
- Management cautioned that the late-2014 and early-2015 crude oil and NGL price declines had prompted producers to reduce capital plans. Slower production growth, declining throughput, compressed differentials, increased competition, and infrastructure overbuild could pressure volumes and margins, particularly in Supply and Logistics.
- Other notable exposures include commodity-market structure and volatility, counterparty creditworthiness, financing access and borrowing costs, Canadian-dollar movements, and the execution and returns of major projects and acquisitions. The filing states that PAA did not hold inventory or derivatives for outright commodity-price speculation and generally sought to hedge its commercial exposures.
- Environmental liabilities were reserved at an estimated undiscounted $82 million at year-end, down from $93 million. PAA warned actual remediation costs may exceed reserves. Disclosed matters include prior pipeline releases and a Canadian National Energy Board compliance order; a $76,000 CAD penalty was imposed in February 2015, with possible additional penalties.
- PAA elected to self-insure hurricane and windstorm property-damage risk, while maintaining third-party liability coverage. This leaves the Partnership exposed to losses not covered by insurance, reserves, or indemnities.
- PAA was in compliance with debt covenants at December 31, 2014. It entered into a new $1.0 billion, 364-day credit agreement in January 2015. The filing also identifies $550 million of senior-note maturities in 2015.
Important facts for investors to verify
- Review the reconciliation and assumptions behind adjusted EBITDA and implied DCF, including the unusually large 2014 inventory and derivative adjustments; these are non-GAAP measures.
- Assess debt growth, 2015 maturities, available liquidity, covenant headroom, and the funding mix for the 2015 capital program and distributions.
- Track producer spending, throughput, committed shipper volumes, and project milestones for major expansion investments, especially in the Permian and Eagle Ford.
- Evaluate the sustainability of distribution growth against DCF, distribution coverage, capital needs, and the general partner’s incentive distributions.
- Monitor environmental reserve adequacy, regulatory actions, insurance limitations, and counterparty exposure amid energy-market stress.