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| PAA > SEC Filings for PAA > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
Introduction
The following discussion is intended to provide investors with an understanding of our financial condition and results of our operations, and should be read in conjunction with our historical consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations as presented in our 2007 Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following financial information, see the "Notes to the Condensed Consolidated Financial Statements."
Highlights - Second Quarter of 2008 and 2007 (in millions, except per unit data)
Three Months Six Months
Three Months Favorable/(Unfavorable) Six Months Favorable/(Unfavorable)
Ended June 30, Variance Ended June 30, Variance
2008 2007 $ % 2008 2007 $ %
Transportation segment
profit $ 106 $ 80 $ 26 33 % $ 195 $ 153 $ 42 27 %
Facilities segment profit 36 29 7 24 % 68 51 17 33 %
Marketing segment profit (5 ) 101 (106 ) (105 )% 52 167 (115 ) (69 )%
Segment profit 137 210 (73 ) (35 )% 315 371 (56 ) (15 )%
Depreciation and
amortization (52 ) (52 ) - 0 % (100 ) (92 ) (8 ) (9 )%
Interest expense (49 ) (41 ) (8 ) (20 )% (91 ) (82 ) (9 ) (11 )%
Interest income and other
income (expense), net 10 - 10 N/A 12 5 7 140 %
Income tax benefit (expense) (5 ) (12 ) 7 58 % (3 ) (12 ) 9 75 %
Net income $ 41 $ 105 $ (64 ) (61 )% $ 133 $ 190 $ (57 ) (30 )%
Earnings per basic limited
partner unit $ 0.13 $ 0.78 $ (0.65 ) (83 )% $ 0.70 $ 1.40 $ (0.70 ) (50 )%
Earnings per diluted limited
partner unit $ 0.13 $ 0.78 $ (0.65 ) (83 )% $ 0.69 $ 1.39 $ (0.70 ) (50 )%
Basic weighted average units
outstanding 120 110 10 9 % 118 110 8 7 %
Diluted weighted average
units outstanding 121 111 10 9 % 119 111 8 7 %
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Key items impacting the comparison of the first six months of 2008 to the first six months of 2007 include:
† Two months' contributions to earnings from the May 2008 acquisition of Rainbow Pipe Line Company, Ltd. ("Rainbow"), which was completed for consideration of approximately $688 million, as well as increased earnings resulting from prior acquisitions;
† Increased earnings from expansion activities that became operational subsequent to June 30, 2007;
† Decreased earnings in the marketing segment resulting from less favorable market conditions;
† A loss of approximately $92 million related to the mark-to-market impact for open derivative instruments (compared to a loss of approximately $2 million for the first six months of 2007). This larger than usual mark-to-market adjustment is due to the significant increase in crude oil prices and volatility during the period;
† Equity compensation plan expense of $24 million compared to approximately $40 million for the prior period. The decreased expense is primarily the result of the decrease in unit price for the first six months of 2008 compared to the increase in unit price for the first six months of 2007. The impact of the change in unit price was partially offset by additional LTIP grants that are considered probable of vesting and additional expense for Class B units. The Class B plan was not in existence in the first six months of 2007;
† The issuance of $600 million of senior notes for net proceeds of approximately $597 million and the issuance of approximately 7 million limited partner units for net proceeds of approximately $315 million; and
† Capital expenditures for internal growth projects of $256 million for the first half of 2008, which represent approximately 56% of the 2008 planned expansion capital expenditures.
Acquisitions and Internal Growth Projects
The following table summarizes our capital expenditures incurred in the periods indicated (in millions):
Six Months Ended
June 30,
2008 2007
Acquisition capital $ 688 $ 26
Investment in unconsolidated entities (1) 40 9
Internal growth projects 256 257
Maintenance capital 37 22
$ 1,021 $ 314
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Acquisitions
In May 2008, we completed the Rainbow acquisition for approximately $688 million. See Note 4 to our Condensed Consolidated Financial Statements for discussion of the Rainbow acquisition, including details of the purchase price and related allocation.
Internal Growth Projects
Our internal growth projects include the construction and expansion of pipeline systems and crude oil and LPG storage facilities. Following are some of the more notable projects undertaken in 2008 and the forecasted expenditures for the year (in millions):
Projects 2008 Patoka tankage $ 46 Paulsboro tankage 30 Kerrobert mainline connection 21 Fort Laramie tank expansion 22 Pier 400 (1) 13 West Hynes tankage 13 Kerrobert facility 12 Edmonton tankage and connections 11 Other projects, including acquisition related expansion projects (2) 292 Total (3) $ 460 |
(2) Primarily pipeline connections, upgrades and truck stations, new tank construction and refurbishing and carryover of projects started in 2007, including the Salt Lake City pipeline, for which estimated costs have increased approximately $50 million over the May 29, 2008 estimate, primarily due to adverse soil conditions. Such amount also includes expansion capital projects associated with the Rainbow acquisition that are expected to be commenced in 2008.
(3) Approximately $256 million of capital expenditures for expansion projects was incurred in the first six months of 2008.
We forecasted approximately $70 million in capital expenditures for maintenance projects during calendar year 2008, of which approximately $37 million was incurred in the first six months.
Results of Operations
Analysis of Operating Segments
We manage our operations through three operating segments: (i) Transportation,
(ii) Facilities and (iii) Marketing. In order to evaluate segment performance,
management focuses on a variety of measures including segment profit, segment
volumes, segment profit per barrel and maintenance capital investment. See Note
15 to our Consolidated Financial Statements in our 2007 Annual Report on
Form 10-K for further discussion on how we evaluate segment performance.
Transportation
The following table sets forth the operating results from our transportation
segment for the periods indicated:
Three Months Six Months
Three Months Favorable Six Months Favorable
Ended (Unfavorable) Ended (Unfavorable)
Operating Results (1) June 30, Variance June 30, Variance
(in millions, except per
barrel amounts) 2008 2007 $ % 2008 2007 $ %
Revenues
Tariff activities $ 199 $ 164 $ 35 21 % $ 373 $ 317 $ 56 18 %
Trucking 33 30 3 10 % 64 56 8 14 %
Total transportation
revenues 232 194 38 20 % 437 373 64 17 %
Costs and Expenses
Trucking costs (23 ) (20 ) (3 ) (15 )% (45 ) (38 ) (7 ) (18 )%
Field operating costs
(excluding equity
compensation expense) (81 ) (73 ) (8 ) (11 )% (160 ) (140 ) (20 ) (14 )%
Equity compensation
expense - operations (2) (1 ) (3 ) 2 67 % (2 ) (5 ) 3 60 %
Segment G&A expenses
(excluding equity
compensation expense) (3) (14 ) (11 ) (3 ) (27 )% (28 ) (24 ) (4 ) (17 )%
Equity compensation
expense - general and
administrative (2) (8 ) (8 ) - - % (10 ) (15 ) 5 33 %
Equity earnings in
unconsolidated entities 1 1 - - % 3 2 1 50 %
Segment profit $ 106 $ 80 $ 26 33 % $ 195 $ 153 $ 42 27 %
Maintenance capital $ 11 $ 9 $ 2 22 % $ 25 $ 13 $ 12 92 %
Segment profit per barrel $ 0.38 $ 0.30 $ 0.08 27 % $ 0.37 $ 0.30 $ 0.07 23 %
Three Months Six Months
Three Months Favorable Six Months Favorable
Ended (Unfavorable) Ended (Unfavorable)
Average Daily Volumes June 30, Variance June 30, Variance
(in thousands
of barrels) (4) 2008 2007 Volumes % 2008 2007 Volumes %
Tariff activities
All American 43 47 (4 ) (9 )% 45 48 (3 ) (6 )%
Basin 377 407 (30 ) (7 )% 370 374 (4 ) (1 )%
Capline 247 231 16 7 % 218 233 (15 ) (6 )%
Line 63/Line 2000 160 181 (21 ) (12 )% 161 181 (20 ) (11 )%
Salt Lake City Area
Systems 96 105 (9 ) (9 )% 96 101 (5 ) (5 )%
West Texas/New Mexico
Area Systems 427 395 32 8 % 402 381 21 6 %
Manito 72 74 (2 ) (3 )% 70 74 (4 ) (5 )%
Rainbow 132 - 132 N/A 66 - 66 N/A
Rangeland 59 64 (5 ) (8 )% 60 64 (4 ) (6 )%
Refined products 107 105 2 2 % 111 110 1 1 %
Other 1,229 1,163 66 6 % 1,206 1,125 81 7 %
Tariff activities
total 2,949 2,772 177 6 % 2,805 2,691 114 4 %
Trucking 89 107 (18 ) (17 )% 93 108 (15 ) (14 )%
Transportation total 3,038 2,879 159 6 % 2,898 2,799 99 4 %
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(2) Equity compensation expense related to our equity compensation plans.
(3) Segment G&A expenses reflect direct costs attributable to each segment and an allocation of other expenses to the segment based on management's assessment of the business activities for that period. The proportional allocations by segment require judgment by management and may be adjusted in the future based on the business activities that exist during each period.
(4) Volumes associated with acquisitions represent total volumes for the number of days we actually owned the assets divided by the number of days in the period.
Transportation segment profit and segment profit per barrel for the three- and six-month periods ended June 30, 2008 were impacted by the following:
Operating Revenues and Volumes. As noted in the table above, our transportation segment revenues and volumes increased for both the three- and six-month periods ended June 30, 2008 as compared to the same periods ended June 30, 2007. The discussion below presents the significant variances in revenues and average daily volumes between the comparative periods:
† Acquisitions - Revenues and volumes for the three and six months ended June 30, 2008 were impacted by the Rainbow acquisition, which occurred in May 2008, and various other systems brought into service throughout the year. The Rainbow acquisition contributed approximately $12 million of additional revenues for both the three and
six months ended June 30, 2008, and additional volumes of approximately 132 thousand barrels per day and 66 thousand barrels per day for the same periods, respectively.
† Loss Allowance Revenue - As is common in the industry, our tariffs incorporate a loss allowance factor that is intended to, among other things, offset losses due to evaporation, measurement and other losses in transit. We value the variance of allowance volumes to actual losses at the average market value at the time the variance occurred and the result is recorded as either an increase or decrease to tariff revenues. The average price of crude oil was substantially higher during 2008 than it was in 2007. As a result, loss allowance revenues increased by approximately $10 million and $20 million for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007, respectively.
† Expansion projects - The Cheyenne expansion project, completed during the latter half of 2007, contributed additional revenues of approximately $2 million and $4 million for the three and six months ended June 30, 2008, respectively, as well as additional volumes of approximately 34 thousand barrels per day and 33 thousand barrels per day for the same periods, respectively.
† Foreign exchange - Revenues from our Canadian pipeline systems increased for the three and six months ended June 30, 2008, compared to the three and six months ended June 30, 2007, primarily due to the appreciation of Canadian currency. The Canadian to US dollar exchange rate appreciated to an average of $1.01:1 for the three months ended June 30, 2008 compared to an average of $1.10:1 for the three months ended June 30, 2007. The average exchange rate for the six months ended June 30, 2008 was $1.01:1 compared to an average of $1.13:1 for the six months ended June 30, 2007.
† Trucking - Revenues from trucking increased for the six months ended
June 30, 2008 compared to the six months ended June 30, 2007 due to
(i) contribution from an acquisition that was completed during the first quarter
of 2007 and (ii) an increase in rates during the second quarter of 2007.
Revenues from trucking for the three months ended June 30, 2008 were consistent
with those for the three months ended June 30, 2007. Volumes from trucking
decreased for the three and six months ended June 30, 2008 compared to the same
periods for 2007 due to (i) a strategic decision to replace short haul contracts
with more profitable long haul contracts and (ii) a decrease in demand due to
warmer weather.
† Rate increases - Rates increased on the majority of our pipeline systems in the third quarter of 2007 and resulted in increased revenues for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007. Rates on these systems are increased through indexing by the FERC (on July 1 of each year), by state and Canadian regulatory agencies and/or through market-based escalation.
† Other factors - Our revenues and volumes are impacted by miscellaneous other factors for the respective periods including, but not limited to, refinery turnarounds and downtime and new or revised contracts.
Field Operating Costs. The 2008 increased costs primarily relate to
(i) utilities costs, which increased due to higher market prices, (ii) payroll
and employee benefits, (iii) increased maintenance costs and (iv) additional
pipeline inspection and integrity maintenance costs in the first quarter of 2008
compared to the first quarter of 2007. Pipeline inspection and integrity
maintenance costs for the second quarter of 2008 were comparable to the costs
for the second quarter of 2007.
General and Administrative Expenses. Our G&A expenses were impacted in 2008 by equity compensation charges that decreased in 2008 compared to 2007, primarily as a result of the decrease in unit price for the first six months of 2008 compared to the increase in unit price for the first six months of 2007. The impact of the change in unit price was partially offset by additional LTIP grants that are considered probable of vesting and additional expense for Class B units. The Class B plan was not in existence in the first six months of 2007.
Maintenance Capital. The increase in maintenance capital for the six months ended June 30, 2008 is primarily due to the timing of current projects and projects that were carried over from 2007. In addition, maintenance capital in the first six months of 2007 was lower than forecast.
Facilities
The following table sets forth the operating results from our facilities segment for the periods indicated:
Three Months Six Months
Three Months Favorable Six Months Favorable
Ended (Unfavorable) Ended (Unfavorable)
Operating Results (1) June 30, Variance June 30, Variance
(in millions, except per
barrel amounts) 2008 2007 $ % 2008 2007 $ %
Storage and terminalling
revenues (1) $ 65 $ 54 $ 11 20 % $ 124 $ 99 $ 25 25 %
Field operating costs (25 ) (21 ) (4 ) (19 )% (48 ) (39 ) (9 ) (23 )%
Segment G&A expenses
(excluding equity
compensation expense) (2) (4 ) (5 ) 1 20 % (8 ) (10 ) 2 20 %
Equity compensation
expense - general and
administrative (3) (3 ) (3 ) - - % (4 ) (5 ) 1 20 %
Equity earnings in
unconsolidated entities 3 4 (1 ) (25 )% 4 6 (2 ) (33 )%
Segment profit $ 36 $ 29 $ 7 24 % $ 68 $ 51 $ 17 33 %
Maintenance capital $ 5 $ 2 $ 3 150 % $ 10 $ 6 $ 4 67 %
Segment profit per barrel $ 0.21 $ 0.21 $ - - % $ 0.20 $ 0.19 $ 0.01 5 %
Three Months Six Months
Three Months Favorable Six Months Favorable
Ended (Unfavorable) Ended (Unfavorable)
June 30, Variance June 30, Variance
Volumes (4) 2008 2007 Volumes % 2008 2007 Volumes %
Crude oil, refined
products and LPG storage
(5)
(average monthly
capacity in millions of
barrels) 55 43 12 28 % 54 43 11 26 %
Natural gas storage, net
to our 50% interest
(average monthly
capacity in billions of
cubic feet ("bcf")) 14 13 1 8 % 13 13 - - %
LPG processing
(average throughput in
thousands of barrels per
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Facilities total
(average monthly
capacity in millions of
barrels) (6) 58 46 12 26 % 57 45 12 26 %
(2) Segment G&A expenses reflect direct costs attributable to each segment and an allocation of other expenses to the segment based on management's assessment of the business activities for that period. The proportional allocations by segment require judgment by management and may be adjusted in the future based on business activities that exist during each period.
(3) Equity compensation expense related to our equity compensation plans.
(4) Volumes associated with acquisitions represent total volumes for the number of months we actually owned the assets divided by the number of months in the period.
(5) Effective with the second quarter of 2008, facilities segment volumes with respect to crude oil and refined products are reported based on total shell capacity to provide uniform comparisons with respect to our activities for these products. Previously, such volumes were reported based on a combination of shell capacity and working capacity depending on the terms of the third-party or intra-company lease agreements. Natural gas and LPG volumes, which consist primarily of underground storage facilities, reflect working capacity as that is the primary basis upon which such facilities are leased. Corresponding metrics for prior periods have been conformed to this uniform approach.
(6) Calculated as the sum of: (i) crude oil, refined products and LPG storage capacity; (ii) natural gas capacity divided by 6 to account for the 6:1 mcf of gas to crude oil barrel ratio; and (iii) LPG processing volumes multiplied by the number of days in the period and divided by the number of months in the period.
Facilities segment profit and segment profit per barrel for the three- and six-month periods ended June 30, 2008 were impacted by the following:
Operating Revenues and Volumes. As noted in the table above, our facilities segment revenues and volumes increased for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007. The table below presents the significant variances in revenues (in millions) and volumes (in millions of barrels per month) between the comparative periods:
Volumes
Crude Oil, Refined Natural LPG and
Products and LPG Gas Crude
Revenues Storage(1) Storage(2) Processing(3)
Three Months Ended June 30,
2008 compared to Three Months
Ended June 30, 2007:
(Increase)/Decrease due to:
Acquisitions (4) $ 4 4 - -
Expansions (5) 5 7 - -
Other (6) 2 1 1 (3 )
Total variance $ 11 12 1 (3 )
Volumes
Crude Oil, Refined Natural LPG and
Products and LPG Gas Crude
Revenues Storage(1) Storage(2) Processing(3)
Six Months Ended June 30, 2008
compared to Six Months Ended
June 30, 2007:
(Increase)/Decrease due to:
Acquisitions (4) $ 7 4 - -
Expansions (5) 10 6 - -
Other (6) 8 1 - (1 )
Total variance $ 25 11 - (1 )
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(2) Average monthly capacity (in bcf).
(3) Barrels per day (in thousands).
(4) Revenues and volumes were impacted in 2008 by 2007 acquisitions. The Bumstead and Tirzah acquisitions were completed in the third and fourth quarters of 2007 and, in the aggregate, contributed additional revenues of approximately $4 million and $7 million for the three and six months ended June 30, 2008, . . .
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