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| PAA > SEC Filings for PAA > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Executive Summary
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 2008 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."
Our discussion and analysis includes the following:
† Overview of Operating Results, Capital Spending and Significant Activities
† Internal Growth Projects
† Results of Operations
† Liquidity and Capital Resources
† Recent Accounting Pronouncements
† Critical Accounting Policies and Estimates
Overview of Operating Results, Capital Spending and Significant Activities
During the first quarter of 2009, our operations provided results that exceeded those experienced during the first quarter of 2008. The increase in first quarter 2009 results were driven primarily by our marketing segment, which benefited from a favorable contango crude oil market structure and favorable LPG margins. Additional key items impacting the first quarter of 2009 include:
† Contributions to earnings from the acquisition of Rainbow Pipe Line Company, Ltd. ("Rainbow"), which was completed in May 2008 for consideration of approximately $687 million and higher average pipeline tariff rates.
† Equity compensation plan expense of approximately $11 million for the first quarter of 2009 compared to $6 million for the corresponding prior year period. The increased expense is primarily the result of an increase in unit price for the first three months of 2009 compared to a decrease in unit price for the first three months of 2008.
† The issuance of 5,750,000 limited partner units at $36.90 per unit for net proceeds of approximately $210 million.
Internal Growth Projects
The following table summarizes our capital expenditures for acquisitions,
investments in unconsolidated entities, internal growth projects and maintenance
capital for the periods indicated (in millions):
Three Months Ended
March 31,
2009 2008
Investment in unconsolidated entities $ 2 $ 13
Internal growth projects 79 124
Maintenance capital 22 20
$ 103 $ 157
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Our internal growth projects primarily relate to the construction and expansion of pipeline systems and crude oil storage and terminal facilities. The following table summarizes our more notable projects undertaken in 2009 and the forecasted expenditures for the year (in millions):
Projects 2009 St. James Phase III (1) $ 85 Rangeland tankage and connections 35 Kerrobert pumping project 34 Cushing Phase VII 29 Nipisi storage and truck terminal 20 Patoka Phase II 20 Salt Lake City 14 Pier 400 13 Paulsboro 8 Other projects, including acquisition related expansion projects (2) 92 Total $ 350 |
(2) Primarily pipeline connections and upgrades, truck stations, new tank construction and refurbishing, and carry-over of projects started in 2008.
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 2008 Annual Report on Form
10-K for further discussion on how we evaluate segment performance.
Three Months Favorable/(Unfavorable)
Ended March 31, Variance
2009 2008 $ %
Transportation segment profit $ 112 $ 89 $ 23 26 %
Facilities segment profit 46 31 15 48 %
Marketing segment profit 159 57 102 179 %
Total segment profit 317 177 140 79 %
Depreciation and amortization (58 ) (48 ) (10 ) (21 )%
Interest expense (51 ) (42 ) (9 ) (21 )%
Interest income and other income
(expense), net 4 3 1 33 %
Income tax benefit (expense) (1 ) 2 (3 ) (150 )%
Net income $ 211 $ 92 $ 119 129 %
Earnings per basic limited
partner unit $ 1.42 $ 0.56 $ 0.86 154 %
Earnings per diluted limited
partner unit $ 1.41 $ 0.56 $ 0.85 152 %
Basic weighted average units
outstanding 124 116 8 7 %
Diluted weighted average units
outstanding 125 117 8 7 %
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Transportation Segment
The following table sets forth the operating results from our transportation segment for the periods indicated:
Three Months Ended Favorable/(Unfavorable)
Operating Results (1) March 31, Variance
(in millions, except per barrel
amounts) 2009 2008 $ %
Revenues
Tariff activities $ 201 $ 174 $ 27 16 %
Trucking 24 31 (7 ) (23 )%
Total transportation revenues 225 205 20 10 %
Costs and Expenses
Trucking costs (16 ) (21 ) 5 24 %
Field operating costs (excluding equity
compensation expense) (78 ) (79 ) 1 1 %
Equity compensation expense -
operations (2) (1 ) - (1 ) N/A
Segment G&A expenses (excluding equity
compensation expense) (14 ) (14 ) - - %
Equity compensation expense - general
and administrative (2) (5 ) (3 ) (2 ) (67 )%
Equity earnings in unconsolidated
entities 1 1 - - %
Segment profit $ 112 $ 89 $ 23 26 %
Maintenance capital $ 14 $ 14 $ - - %
Segment profit per barrel $ 0.43 $ 0.36 $ 0.07 19 %
Three Months Ended Favorable/(Unfavorable)
Average Daily Volumes March 31, Variance
(in thousands of barrels per day) (3) 2009 2008 Volumes %
Tariff activities
All American 35 46 (11 ) (24 )%
Basin 393 363 30 8 %
Capline 206 190 16 8 %
Line 63/Line 2000 121 162 (41 ) (25 )%
Salt Lake City Area Systems 104 97 7 7 %
West Texas/New Mexico Area Systems (4) 395 350 45 13 %
Manito 65 69 (4 ) (6 )%
Rainbow 195 - 195 N/A
Rangeland 59 62 (3 ) (5 )%
Refined products 97 115 (18 ) (16 )%
Other 1,141 1,191 (50 ) (4 )%
Tariff activities total 2,811 2,645 166 6 %
Trucking 89 97 (8 ) (8 )%
Transportation segment total 2,900 2,742 158 6 %
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(2) Equity compensation expense related to our equity compensation plans.
(3) 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.
(4) The volumes for the West Texas/New Mexico Area Systems previously included amounts for the Mesa system, which has been reclassified to "Other" for all periods presented.
Transportation segment profit and segment profit per barrel for the three months ended March 31, 2009 were impacted by the following:
Operating Revenues and Volumes. As noted in the table above, our transportation segment revenues and volumes increased for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The significant variances in revenues and average daily volumes between the comparative periods are discussed below:
† Acquisitions and Expansion Projects - Revenues and volumes for the three months ended March 31, 2009 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 $18 million of additional tariff revenues and additional volumes of approximately 195,000 barrels per day for the three months ended March 31, 2009.
† West Texas/New Mexico Area Systems - Revenues for the three months ended March 31, 2009 increased by approximately $9 million in comparison to the three months ended March 31, 2008. The increase in revenues is primarily due to the increased tariff rates and volumes compared to the first quarter of 2008.
† Various Other Systems - Volumes on other various systems declined; however the volume decrease did not materially impact revenues for the three months ended March 31, 2009 compared to the first three months of 2008.
Field Operating Costs. Field operating costs (excluding equity compensation costs of approximately $1 million and the Rainbow acquisition related costs of approximately $4 million) decreased for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily related to utilities and compliance with API 653 and pipeline integrity testing.
Facilities Segment
The following table sets forth the operating results from our facilities segment
for the periods indicated:
Three Months Ended Favorable/(Unfavorable)
Operating Results (1) March 31, Variance
(in millions, except per barrel amounts) 2009 2008 $ %
Storage and terminalling revenues (1) $ 77 $ 59 $ 18 31 %
Field operating costs (27 ) (24 ) (3 ) (13 )%
Segment G&A expenses (excluding equity
compensation expense) (4 ) (4 ) - - %
Equity compensation expense - general
and administrative (2) (2 ) (1 ) (1 ) (100 )%
Equity earnings in unconsolidated
entities 2 1 1 100 %
Segment profit $ 46 $ 31 $ 15 48 %
Maintenance capital $ 6 $ 5 $ 1 20 %
Segment profit per barrel $ 0.26 $ 0.19 $ 0.07 37 %
Three Months Ended Favorable/(Unfavorable)
March 31, Variance
Volumes (3)(4) 2009 2008 Volumes %
Crude oil, refined products and LPG
storage
(average monthly capacity in millions of
barrels) 55 51 4 8 %
Natural gas storage, net to our 50%
interest
(average monthly capacity in billions of
cubic feet ("bcf")) 17 13 4 31 %
LPG processing
(average throughput in thousands of
barrels per day) 14 15 (1 ) (7 )%
Facilities segment total
(average monthly capacity in millions of
barrels) 58 54 4 7 %
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(2) Equity compensation expense related to our equity compensation plans.
(3) 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.
(4) Facilities total calculated as the sum of: (i) crude oil, refined products and LPG storage capacity; (ii) natural gas storage 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 months ended March 31, 2009 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 months ended March 31, 2009 compared to the three months ended March 31, 2008. The significant variances in revenues and average daily volumes between the comparative periods are discussed below:
† Expansion Projects and Acquisitions - The Paulsboro, Patoka, St. James and Ft. Laramie expansion projects resulted in an increase in revenues of approximately $7 million and volumes of approximately 6 million barrels per month for the first three months of 2009 compared to the first three months of 2008. In addition, revenues and volumes for the three months ended March 31, 2009 were impacted by the San Pedro acquisition, which closed during the fourth quarter of 2008. The San Pedro acquisition contributed approximately $2 million in revenues and volumes of approximately 1 million barrels per month for the three months ended March 31, 2009.
† Rate Increases - Revenues for the three months ended March 31, 2009 increased approximately $6 million due to rate increases at various facilities.
Field Operating Costs. Field operating costs (excluding equity compensation charges) have increased in most categories for the three months ended March 31, 2009 in comparison to the three months ended March 31, 2008 primarily related to the expansion projects and acquisitions discussed above.
Marketing Segment
The following table sets forth the operating results from our marketing segment
for the periods indicated:
Three Months Ended Favorable/(Unfavorable)
Operating Results (1) March 31, Variance
(in millions, except per barrel amounts) 2009 2008 $ %
Revenues $ 3,133 $ 7,037 $ (3,904 ) (55 )%
Purchases and related costs (3) (2,904 ) (6,921 ) 4,017 58 %
Field operating costs (49 ) (41 ) (8 ) (20 )%
Segment G&A expenses (excluding equity
compensation expense) (18 ) (16 ) (2 ) (13 )%
Equity compensation expense - general
and administrative (4) (3 ) (2 ) (1 ) (50 )%
Segment profit (2) $ 159 $ 57 $ 102 179 %
Maintenance capital $ 2 $ 1 $ 1 100 %
Segment profit per barrel (5) $ 2.04 $ 0.69 $ 1.35 196 %
Three Months Ended Favorable/(Unfavorable)
Average Daily Volumes (6) March 31, Variance
(in thousands of barrels per day) 2009 2008 Volumes %
Crude oil lease gathering purchases 631 680 (49 ) (7 )%
Refined products sales 36 20 16 80 %
LPG sales 144 136 8 6 %
Waterborne foreign crude oil imported 58 74 (16 ) (22 )%
Marketing segment total 869 910 (41 ) (5 )%
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(2) Includes net gains/(losses) related to inventory valuation adjustments and derivative activities.
(3) Purchases and related costs include interest expense on hedged inventory purchases of approximately $2 million and $6 million for the three months ended March 31, 2009 and 2008, respectively.
(4) Equity compensation expense related to our equity compensation plans.
(5) Calculated based on crude oil lease gathering purchased volumes, refined products volumes, LPG sales volumes and waterborne foreign crude oil imported volumes.
(6) 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.
Marketing segment profit and segment profit per barrel for the three months ended March 31, 2009 were impacted by the following:
Revenues and Purchases and Related Costs. The absolute amount of our revenues and purchases decreased in the first quarter of 2009 as compared to the first quarter of 2008, primarily resulting from lower commodity prices in the 2009 period. The NYMEX benchmark price of crude oil ranged from $33 to $55 per barrel and $86 to $112 per barrel during the first quarter of 2009 and 2008, respectively. Because the commodities that we buy and sell are generally indexed to the same pricing indices for the both the purchase and sale, revenues and costs related to purchases will fluctuate with market prices. However, the margins related to those purchases and sales will not necessarily have a corresponding increase or decrease. Generally, we expect a base level of earnings from our marketing segment that may be optimized and enhanced when there is a high level of volatility, favorable basis differentials or a steep contango or backwardated market structure.
The positive variance between our net revenues and purchases for the applicable periods was primarily attributable to the favorable contango market structure and higher LPG sales margins.
† Contango Market Structure - Earnings in the first quarter of 2009 were favorably impacted by a strong contango market, while the corresponding market conditions during the first quarter of 2008 were slightly backwardated. The market structure for the quarter ranged from $0.70 per barrel to $8.49 per barrel contango and averaged approximately $3.69 per barrel contango. The market structure averaged approximately $0.29 per barrel backwardation for the first quarter of 2008.
† LPG Marketing - Results from our LPG operations were higher in the first quarter of 2009 as compared to the respective period in 2008. We captured higher sales margins in the first quarter of 2009 primarily due to opportunities created by colder than normal weather. A portion of our LPG profits were the result of higher priced fixed price sales satisfied by purchasing lower priced product in a declining market, which effectively accelerated some of the 2009/2010 winter season's profits into the first quarter of 2009. Adding further to the variance, earnings from our LPG marketing activities were negatively impacted in the first quarter of 2008 as higher profits were recognized earlier in the 2007/2008 season due to increased demand.
In addition, results for our marketing operations were positively impacted by a mark-to-market gain of $26 million on derivatives entered into to manage the price risks associated with the future purchase of diluents used in our Canadian crude oil operations. The net gain was a reversal of a mark-to-market loss recognized in earlier periods.
Volumes. The crude oil lease gathering purchases average daily volumes decreased 49,000 barrels per day in 2009 as compared to 2008, however there was not a material impact to earnings. The decrease in volumes was primarily related to a change in methodology for reporting volumes and due to an ongoing effort to reduce low margin barrels. In addition, waterborne foreign crude oil imported volumes have decreased by approximately 16,000 barrels per day for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 as the foreign barrels were not as competitively priced as domestic barrels.
Field Operating Costs. Field operating costs (excluding equity compensation charges) have increased in several categories for the three months ended March 31, 2009 in comparison to the three months ended March 31, 2008. The 2009 increased costs primarily relate to (i) payroll and benefits, (ii) maintenance costs and (iii) third-party trucking fees.
Other Income and Expenses
Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2009 increased $10 million in comparison to the three months ended March 31, 2008 primarily as a result of an increased amount of depreciable assets resulting from our Rainbow and San Pedro acquisition activities and internal growth projects. Depreciation and amortization expense was also impacted by approximately $3 million related to an impairment of excess equipment.
Interest Expense. Interest expense for the three months ended March 31, 2009 increased $9 million in comparison to the three months ended March 31, 2008. The increase primarily resulted from the issuance of $600 million of senior notes completed during the second quarter of 2008. Additionally, interest capitalized to various internal growth projects was lower for the three months ended March 31, 2009 as compared to the same period in 2008 as a result of completion in subsequent quarters of projects under construction at March 31, 2008. These increases were partially offset by an improvement in variable interest charges under our short-term credit facilities as a result of lower interest rates.
Liquidity and Capital Resources
Cash flow from operations and borrowings under our credit facilities are our primary sources of liquidity. At March 31, 2009, we had a working capital deficit of approximately $198 million, approximately $1.3 billion of availability under our committed revolving credit facility and approximately $168 million of availability under our committed hedged inventory facility. We are currently in compliance with the covenants contained in our credit agreements and indentures.
We believe that we have and will continue to have the ability to access our credit facilities, which we use to meet our short-term cash needs. We believe that our financial position remains strong and we have sufficient liquidity; however, extended disruptions in the financial markets and energy price volatility that adversely affect our business may have a material adverse effect on our financial condition, results of operations or cash flows. See Item 1A. "Risk Factors" in our 2008 Annual Report on Form 10-K for further discussion regarding such risks that may impact our liquidity and capital resources.
Cash Flow from Operations
For a comprehensive discussion of the primary drivers of cash flow from our operations, including the impact of varying market conditions and the timing of settlement of our derivative activities, see "Liquidity and Capital Resources-Cash Flow from Operations" under Item 7 of our 2008 Annual Report on Form 10-K.
Our cash flow from operations can be significantly impacted in periods when we are increasing or decreasing the amount of inventory in storage. During the first quarter of 2009, we decreased the amount of our inventory. The decrease in inventory was primarily related to the sale of LPG inventory resulting from end users' increased demand for heating requirements in the winter months. The . . .
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