Plains All American Pipeline, L.P. — 2011 Third-Quarter 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the same 2010 periods unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are generally in millions. Plains transports, stores, terminals and markets crude oil, refined products and LPG, and operates natural-gas storage through its majority-owned subsidiary PNG.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $8,837 | $6,414 | $25,390 | $18,662 |
| Operating income | $357 | $150 | $939 | $553 |
| Net income | $288 | $84 | $706 | $368 |
| Net income attributable to Plains | $281 | $81 | $688 | $363 |
| Basic/diluted net income per limited partner unit | $1.48 / $1.47 | $0.28 / $0.28 | $3.53 / $3.51 | $1.73 / $1.72 |
| Adjusted EBITDA (non-GAAP) | $414 | $264 | $1,128 | $784 |
| Implied distributable cash flow (non-GAAP) | $310 | $168 | $807 | $530 |
Revenue growth largely reflects higher commodity prices and supply-and-logistics volumes; revenue is not a direct measure of that segment’s profitability. Q3 segment profit was $152 transportation, $95 facilities and $179 supply and logistics; nine-month segment profit was $416, $259 and $464, respectively. Segment profit is a company-defined measure.
- Cash flow: Nine-month operating cash flow was $1,752, versus $463 in 2010; the filing attributes substantial period-to-period cash-flow movement to changes in inventory and working capital. Investing cash use was $1,185, including $758 for acquisitions and $449 for property, equipment and other additions. Financing cash use was $582. Cash ended at $14, down from $36 at year-end 2010.
- Debt and liquidity: Total debt was $5,119 at September 30, 2011, down from $5,957 at December 31, 2010. Current liabilities were $4,126 and current assets $4,190; reported working-capital surplus was $64. Management reported $2,518 of available liquidity, including credit-facility capacity and cash.
- Capital and distributions: Partners’ capital was $5,485, including $529 of noncontrolling interests. Plains issued 7.935 million common units in March for net proceeds of $503. The quarterly distribution declared for Q3 was $0.995 per limited partner unit, payable November 14, 2011; management described it as a 4.7% year-over-year increase.
Material changes versus the prior period
- Nine-month net income attributable to Plains rose $325, or 90%; adjusted EBITDA increased 44% and implied DCF increased 52%. Management cited favorable results in all three segments, especially supply and logistics, supported by active development in crude-oil and liquids-rich regions, strong basis differentials and favorable market structure.
- Supply-and-logistics segment profit increased to $464 from $152 for the nine months. Crude-oil lease-gathering purchase volumes rose 19%; higher marketing margins and derivative results also contributed. Management cautioned that margins vary with market conditions and are not fixed.
- Facilities segment profit increased to $259 from $202, reflecting acquisitions and expansion projects. PNG acquired Southern Pines Energy Center for approximately $752, net of cash acquired; the preliminary allocation included $301 of goodwill.
- Transportation segment profit increased to $416 from $394. Higher tariff rates, production-area volumes and Canadian-dollar translation benefits were partly offset by Rainbow Pipeline downtime and Capline volume declines.
- Plains completed a $600 issue of 5.00% senior notes due 2021 and redeemed $200 of 7.75% notes early, recording a $23 loss. Total debt nevertheless declined, alongside repayments of credit-facility and inventory-facility borrowings.
- Plains’ ownership of PNG declined from approximately 77% to 64% after PNG’s private placement to third parties. This increased noncontrolling interests and contributed to differences between consolidated net income and income attributable to Plains.
Outlook, risks and unusual items
- Capital outlook: 2011 projected expansion capital expenditures were $530–$580, and projected maintenance capital was $100–$110. These are estimates, subject to project timing, scope, approvals, weather and cost changes; the filing provides no explicit earnings or DCF guidance.
- Rainbow Pipeline release: A release in Alberta on April 29 was estimated at approximately 30,000 barrels and affected about 40 acres. The pipeline returned to full service August 30. Estimated total cleanup and remediation cost was approximately $70; the remaining gross liability at quarter-end was $34, with a $44 insurance receivable recognized. Cleanup, monitoring and recoveries remain subject to uncertainty.
- Environmental and insurance exposure: Total environmental reserves were $97, against $66 at year-end 2010; management warned actual costs could exceed reserves. Plains elected to self-insure hurricane property-damage and business-interruption risk for 2011/12 after citing limited and costly coverage.
- Debt and market risks: Credit facilities impose financial and other covenants; management reported compliance. Results and liquidity remain exposed to commodity-market structure and volatility, derivative effectiveness, counterparty credit, production and throughput volumes, financing access, weather, foreign exchange, regulation and acquisitions. The new facilities include leverage limits; PNG’s facility also has a minimum interest-coverage covenant.
- Derivatives and comparability: Nine-month derivative gains/losses recognized in earnings totaled a net loss of $147, compared with a $7 gain in 2010; management’s adjusted measures exclude selected derivative mark-to-market effects. Plains also recorded a $17 foreign-currency revaluation loss in the nine-month period and a $23 early-redemption loss. These items complicate comparisons with operating performance.
- Taxes and other matters: Canadian restructuring effective January 1, 2011 made all Canadian operations subject to Canadian corporate tax; management expected higher tax expense for the remainder of 2011. Plains reported ordinary-course legal proceedings and did not believe their outcomes would materially affect the business, while noting environmental and other claims may create exposure.
Important facts for investors to verify
- Whether the large operating-cash-flow increase persists after the benefit from inventory and working-capital movements.
- Rainbow remediation progress, final costs, insurance collections and any effects on pipeline volumes or operations.
- Whether strong supply-and-logistics earnings and derivative-related gains are sustainable under changing market structure and commodity conditions.
- Southern Pines integration, final purchase-price allocation, PNG’s performance and the implications of Plains’ reduced ownership.
- Debt maturities, refinancing needs, covenant headroom, and whether reported credit availability remains accessible.
- Actual 2011 growth and maintenance capital spending compared with estimates, and the cash-flow coverage of distributions.