01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Plains All American Pipeline, L.P.
(PAA) reported 2016 net income attributable to PAA of $726 milliona, down from $903 million in 2015, with total revenues of $20.18 billion versus $23.15 billion. Management attributed the decline to less favorable crude oil and NGL market conditions, increased competition, and mark-to-market losses on derivatives, partly offset by contributions from recent acquisitions and expansion projects and lower field operating costs. Adjusted EBITDA was $2,169 million in 2016 versus $2,213 million in 2015, and implied distributable cash flow was $1,414 million versus $1,474 million, leaving a DCF shortfall of $151 million against distributions paid of $1,565 million.
The partnership completed the Simplification Transactions in November 2016, eliminating its incentive distribution rights and resetting the quarterly distribution. The filing states that the annual reduction in cash distributions is approximately $320 millionb, and the February 2017 distribution was set at $0.55 per common unit. Management also raised $1.6 billion of Series A preferred units in January 2016 and about $805 million of net proceeds through its continuous offering program, and it sold non-core assets for roughly $550 million in 2016.
Total debt was $11.84 billionc at year end, with approximately $2.4 billion of liquidity available. Looking ahead, the company acquired the Alpha Crude Connector gathering system in February 2017 for $1.215 billion, plans expansion capital of about $800 million for 2017 (down from $1.4 billion in 2016), and expects to end 2017 with long-term debt at or below year-end 2016 levels. The filing notes that Moody's placed the company's investment grade rating under review for downgrade in late January 2017, and that the Line 901 crude oil release in 2015 continues to generate significant pending litigation and regulatory investigations.
02—Key points
Key Highlights
- Net income attributable to PAA fell to $726 million in 2016 from $903 million in 2015, and basic and diluted net income per common unit were $0.43 versus $0.78 and $0.77.
- Adjusted EBITDA was $2,169 million in 2016 versus $2,213 million in 2015; Supply and Logistics segment adjusted EBITDA fell to $359 million from $568 million.
- The Simplification Transactions eliminated incentive distribution rights, with an annual reduction in cash distributions of approximately $320 million; the February 2017 distribution was $0.55 per unit, a year-over-year decrease of approximately 21%.
- Implied DCF of $1,414 million did not cover distributions paid of $1,565 million, a shortfall of $151 million in 2016.
- Long-term debt-to-adjusted EBITDA is expected to remain above the target range near term, with management expecting improvement as 2017 funding and asset sales close.
- The company acquired the Alpha Crude Connector gathering system for $1.215 billion in February 2017 and plans $800 million of 2017 expansion capital.
- Moody's placed the company's senior unsecured investment grade rating under review for downgrade in late January 2017; the Line 901 incident remains subject to pending criminal, regulatory and class action proceedings.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Plains All American Pipeline kept $0.04.
- Revenue$20.18B100.0%
- Cost of revenue−$17.23B85.4%
- Gross profit$2.95B14.6%
- Operating costs−$1.96B9.7%
- Operating income$994.0M4.9%
- Interest, other & tax−$268.0M1.3%
- Net income$726.0M3.6%
Where FY2016 revenue went
$20.18B- Cost of revenue: $17.23B, 85% of revenue
- Net income: $726.0M, 3.6% of revenue
- Operating costs: $1.96B, 9.7% of revenue
- Interest, other & tax: $268.0M, 1.3% of revenue
Kept 3.6% as net incomeNet income $726.0M · 3.6%Interest, other & tax $268.0M · 1.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $20.18B$23.15B | −12.8% |
| Cost of Revenue | $17.23B$19.73B | −12.6% |
| Gross Profit | $2.95B$3.43B | −13.9% |
| Operating Expenses | $19.19B$21.89B | −12.3% |
| Operating Income | $994.00M$1.26B | −21.2% |
| Interest Expense | $467.00M$432.00M | +8.1% |
| Net Income | $726.00M$903.00M | −19.6% |
| EPS (Basic) | $0.43$0.78 | −44.9% |
| EPS (Diluted) | $0.43$0.77 | −44.2% |
05—Questions
Frequently Asked Questions
Why did net income decline in 2016?
Management cited less favorable crude oil and NGL market conditions, increased competition, and mark-to-market losses on certain derivative instruments. These were partly offset by contributions from recent acquisitions and expansion projects and lower field operating costs, including the absence of Line 901 costs recognized in 2015. Higher depreciation and interest expense also weighed on results.
How did the Simplification Transactions affect unitholders?
The Simplification Transactions, closed November 15, 2016, eliminated the incentive distribution rights and the economic rights of the 2% general partner interest in exchange for issuing 245.5 million common units to AAP and assuming $642 million of AAP debt. The filing states this resulted in an annual reduction in cash distributions of approximately $320 million, which management said will significantly enhance distribution coverage and credit profile.
Is the distribution covered by cash flow?
In 2016, implied distributable cash flow was $1,414 million against distributions paid of $1,565 million, a DCF shortfall of $151 million. The filing states that DCF shortfalls are funded from previously established reserves, cash on hand, or borrowings. The reduced distribution level beginning with the February 2017 payment is intended to improve coverage.
What are the main risks to the investment case?
The filing highlights volume declines from reduced producer activity, competition from overbuilt midstream infrastructure, and minimum volume commitment shortfalls. It also cites risks from the credit rating (Moody's review for downgrade), leverage above target levels, and pending litigation, regulatory investigations and fines related to the May 2015 Line 901 crude oil release, with the company estimating aggregate Line 901 costs of approximately $280 million.
What is the company's liquidity position and capital plan?
At December 31, 2016, the company reported approximately $2.4 billion of liquidity, including $47 million of cash. Total debt was $11.84 billion. For 2017, expansion capital is planned at about $800 million, down from $1.4 billion in 2016, and the company intends to fund 2017 acquisition and expansion capital through asset sales, equity issuances and retained cash flow, ending 2017 with long-term debt at or below 2016 levels.
06—Continue