Why did net income decline in 2001 despite higher revenues and gross margin?

Net income fell to $44.2 million from $77.5 million in 2000. The 2000 results included gains of $28.1 million on crude linefill sales and $20.1 million on the sale of the Emidio-to-McCamey segment of the All American Pipeline, as well as $9.7 million of deferred swap gains and a $15.1 million extraordinary loss. The 2001 results included a $6.1 million charge for unit vesting tied to the General Partner Transition, a $5.0 million inventory writedown, a $3.0 million receivables reserve, and higher general and administrative expenses of $46.6 million. Management states that excluding these items, 2001 net income would have been $57.3 million.

What drove the Canadian expansion and what did it cost?

In 2001 the partnership acquired substantially all of the Canadian crude pipeline, gathering, storage and terminalling assets of Murphy Oil Company Ltd. for about $161.0 million in cash, including financing and transaction costs. These included about 450 miles of mainlines, about 1.1 million barrels of storage in Kerrobert, Saskatchewan, and 121 trailers. It also acquired CANPET Energy Group for about $42.0 million plus $25.0 million for inventory, and the Wapella Pipeline System for about $12.0 million. Canadian revenues were $718.4 million in 2001, and Canadian long-lived assets were $188.2 million.

How concentrated is the partnership's pipeline revenue in offshore California production?

The Santa Ynez and Point Arguello fields accounted for about 26% of gross margin in 2001, down from about 46% in the second half of 1998. Volumes from these fields have declined, from 92,000 and 60,000 average daily barrels in 1995 to 51,000 and 18,000 in 2001. A 5,000 barrel per day decline would reduce annual pipeline tariff revenues by about $2.8 million. The transportation agreements expire in August 2007 and carry minimum tariffs with annual escalations, and the tariff was increased about 11% effective January 9, 2002.

What is the status of the litigation related to the 1999 unauthorized trading losses?

The unauthorized trading by a former employee produced losses of approximately $174.0 million, including associated costs and legal expenses. The class action securities settlement, in which the partnership deposited about $30.0 million in January 2001, received final court approval on January 18, 2002, with a total cost of $14.9 million after insurance reimbursements. The Delaware derivative litigation settlement of about $1.1 million was approved on March 6, 2002, and the Texas derivative litigation was settled in principle for about $112,500, subject to court approval.

What are the distribution levels and the subordinated unit conversion outlook?

The minimum quarterly distribution is $0.45 per common unit. Cash distributions per common unit were $0.4750, $0.5000, $0.5125 and $0.5125 in the four quarters of 2001. On February 14, 2002, a distribution of $0.5125 per unit was paid, totaling about $23.2 million. The subordination period cannot end before December 31, 2003. Management states that the first four-quarter test period was satisfied as of September 30, 2001, and that if requirements continue to be met, 25% of subordinated units would convert in the fourth quarter of 2003 and the remainder in the first quarter of 2004, though it gives no assurance of this.

PAA/PAAPU 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 21, 2002. Cited figures are marked; the original filing is the authoritative source.

Plains All American Pipeline, L.P.

(filed as Plains All American Pipeline, L.P.) reported 2001 net income of $44.2 million^a on revenues of $6.87 billion, compared with net income of $77.5 million on $6.64 billion of revenue in 2000. Management states that excluding listed unusual and non-recurring items, net income would have been $57.3 million in 2001. Gross margin rose to $142.3 million in 2001 from $127.7 million in 2000, driven largely by the Murphy Oil Canadian acquisition, while gathering and marketing margins weakened in a flat-to-contango crude market.

Adjusted EBITDA was $109.6 million^b, and operating cash flow was negative $30.0 million, largely because of inventory build, which management says would otherwise have been about $88.0 million positive. The partnership expanded into Canada in 2001 through the Murphy Oil Canadian midstream acquisition for about $161.0 million, the CANPET marketing business, and the Wapella pipeline. It also completed a General Partner Transition in June 2001, after which Plains Resources' effective ownership fell to about 29%.

Total debt at year-end 2001 was $456.2 million, and partners' capital rose to $402.8 million^c from $214.0 million, largely due to unit offerings. Management reports the partnership was within its targeted credit profile at December 31, 2001. In early 2002 it completed or announced further acquisitions, including Coast/Lantern and a 22% stake in Butte Pipe Line Company, and a Cushing Terminal expansion to about 5.3 million barrels.

Investors should weigh the partnership's dependence on Santa Ynez and Point Arguello offshore California volumes, which declined from 1995 through 2001, and the legacy effects of the 1999 unauthorized trading losses of approximately $174.0 million^d, which led to lawsuits that are now largely settled. Quarterly distributions reached $0.5125 per unit in the fourth quarter of 2001, and a $0.5125 distribution was paid on February 14, 2002.

02—Key points

Key Highlights

2001 net income of $44.2 million, down from $77.5 million in 2000; revenues rose to $6.87 billion from $6.64 billion
Gross margin increased to $142.3 million from $127.7 million, with pipeline gross margin up to $71.3 million from $51.8 million, mainly due to the Murphy acquisition
Gathering and marketing plus terminalling and storage gross margin fell to $75.9 million (excluding a $5.0 million inventory writedown) from $82.9 million, reflecting a weak market environment
Canadian expansion: Murphy Oil Canadian midstream assets acquired in May 2001 for about $161.0 million, plus CANPET (about $42.0 million plus $25.0 million inventory) and Wapella (about $12.0 million)
Operating cash flow was negative $30.0 million in 2001, primarily due to inventory purchased and stored; excluding inventory purchases, operating cash flow was about $88.0 million
Total debt of $456.2 million at December 31, 2001; partners' capital increased to $402.8 million, with $227.5 million of units issued during 2001
Santa Ynez and Point Arguello offshore California fields accounted for about 26% of gross margin in 2001 and face natural production declines; the All American Pipeline tariff rose about 11% effective January 2002

03—Questions

Frequently Asked Questions

Why did net income decline in 2001 despite higher revenues and gross margin?
Net income fell to $44.2 million from $77.5 million in 2000. The 2000 results included gains of $28.1 million on crude linefill sales and $20.1 million on the sale of the Emidio-to-McCamey segment of the All American Pipeline, as well as $9.7 million of deferred swap gains and a $15.1 million extraordinary loss. The 2001 results included a $6.1 million charge for unit vesting tied to the General Partner Transition, a $5.0 million inventory writedown, a $3.0 million receivables reserve, and higher general and administrative expenses of $46.6 million. Management states that excluding these items, 2001 net income would have been $57.3 million.
What drove the Canadian expansion and what did it cost?
In 2001 the partnership acquired substantially all of the Canadian crude pipeline, gathering, storage and terminalling assets of Murphy Oil Company Ltd. for about $161.0 million in cash, including financing and transaction costs. These included about 450 miles of mainlines, about 1.1 million barrels of storage in Kerrobert, Saskatchewan, and 121 trailers. It also acquired CANPET Energy Group for about $42.0 million plus $25.0 million for inventory, and the Wapella Pipeline System for about $12.0 million. Canadian revenues were $718.4 million in 2001, and Canadian long-lived assets were $188.2 million.
How concentrated is the partnership's pipeline revenue in offshore California production?
The Santa Ynez and Point Arguello fields accounted for about 26% of gross margin in 2001, down from about 46% in the second half of 1998. Volumes from these fields have declined, from 92,000 and 60,000 average daily barrels in 1995 to 51,000 and 18,000 in 2001. A 5,000 barrel per day decline would reduce annual pipeline tariff revenues by about $2.8 million. The transportation agreements expire in August 2007 and carry minimum tariffs with annual escalations, and the tariff was increased about 11% effective January 9, 2002.
What is the status of the litigation related to the 1999 unauthorized trading losses?
The unauthorized trading by a former employee produced losses of approximately $174.0 million, including associated costs and legal expenses. The class action securities settlement, in which the partnership deposited about $30.0 million in January 2001, received final court approval on January 18, 2002, with a total cost of $14.9 million after insurance reimbursements. The Delaware derivative litigation settlement of about $1.1 million was approved on March 6, 2002, and the Texas derivative litigation was settled in principle for about $112,500, subject to court approval.
What are the distribution levels and the subordinated unit conversion outlook?
The minimum quarterly distribution is $0.45 per common unit. Cash distributions per common unit were $0.4750, $0.5000, $0.5125 and $0.5125 in the four quarters of 2001. On February 14, 2002, a distribution of $0.5125 per unit was paid, totaling about $23.2 million. The subordination period cannot end before December 31, 2003. Management states that the first four-quarter test period was satisfied as of September 30, 2001, and that if requirements continue to be met, 25% of subordinated units would convert in the fourth quarter of 2003 and the remainder in the first quarter of 2004, though it gives no assurance of this.

04—Continue

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