PLAINS GP HOLDINGS, L.P. 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 2021 Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following financial information, see the Condensed Consolidated Financial Statements and related notes that are contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our discussion and analysis includes the following:
•Executive Summary
•Results of Operations
•Liquidity and Capital Resources
•Recent Accounting Pronouncements
•Forward-Looking Statements Executive Summary Company Overview We are aDelaware limited partnership that has elected to be taxed as a corporation forUnited States federal income tax purposes. As ofMarch 31, 2022 , our sole cash-generating assets consisted of (i) a 100% managing member interest inGP LLC and (ii) an approximate 81% limited partner interest in AAP through our direct ownership of AAP units and indirect ownership of AAP units throughGP LLC , which also holds the non-economic general partner interest in AAP. As ofMarch 31, 2022 , AAP directly owned a limited partner interest in PAA through its ownership of approximately 241.5 million PAA common units (approximately 31% of PAA's total outstanding common units and Series A preferred units combined). AAP is the sole member of PAA GP, which holds the non-economic general partner interest in PAA. PAA's business model integrates large-scale supply aggregation capabilities with the ownership and operation of critical midstream infrastructure systems that connect major producing regions to key demand centers and export terminals. As one of the largest midstream service providers inNorth America , we own an extensive network of pipeline transportation, terminalling, storage and gathering assets in key crude oil and NGL producing basins (including thePermian Basin ) and transportation corridors and at major market hubs inthe United States andCanada . PAA's assets and the services it provides are primarily focused on crude oil and NGL.
Segment Changes
During the fourth quarter of 2021, we reorganized our historical operating
segments into two operating segments: Crude Oil and NGL. Additionally, during
the fourth quarter of 2021, we modified our definition of Segment Adjusted
EBITDA to exclude amounts attributable to noncontrolling interests in
consolidated joint venture entities. See Note 20 to our Consolidated Financial
Statements included in Part IV of our 2021 Annual Report on Form 10-K for
additional information. All segment data and related disclosures for earlier
periods presented herein have been recast to reflect the new segment reporting
structure and the modification to our definition of Segment Adjusted EBITDA.
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Overview of Operating Results
During the first three months of 2022, we recognized net income of$209 million compared to net income of$392 million recognized during the first three months of 2021. Results for the first three months of 2022 decreased from the comparable 2021 period driven primarily by the impact of the mark-to-market of certain derivative instruments, and, to a lesser extent, the sale of our natural gas storage facilities and higher field operating costs primarily from (i) an increase in estimated costs associated with the Line 901 incident and (ii) gains related to hedged power costs resulting from the extreme winter weather event that occurred inFebruary 2021 ("Winter Storm Uri") recognized in the first quarter of 2021. These items were partially offset by more favorable margins in our NGL segment and increased earnings from higher tariff volumes on our pipelines.
See the "Results of Operations" section below for further discussion.
Results of Operations
Consolidated Results
The following table sets forth an overview of our consolidated financial results calculated in accordance with GAAP (in millions, except per share data):
Three Months Ended
March 31, Variance
2022 2021 $ %
Product sales revenues $ 13,381 $ 8,083 $ 5,298 66 %
Services revenues 313 300 13 4 %
Purchases and related costs (12,785) (7,392) (5,393) (73) %
Field operating costs (346) (219) (127) (58) %
General and administrative expenses (83) (68) (15) (22) %
Depreciation and amortization (231) (178) (53) (30) %
Gains/(losses) on asset sales and asset
impairments, net 42 (2) 44 **
Equity earnings in unconsolidated entities 97 88 9 10 % Interest expense, net (107) (107) - - % Other expense, net (37) (60) 23 38 % Income tax expense (35) (53) 18 34 % Net income 209 392 (183) (47) % Net income attributable to noncontrolling interests (187) (322) 135 42 % Net income attributable to PAGP$ 22 $ 70 $ (48)
(69) %
Basic and diluted net income per Class A share$ 0.11 $ 0.36 $ (0.25)
(69) %
Basic and diluted weighted average Class A shares outstanding 194 194 - - % ** Indicates that variance as a percentage is not meaningful.
Revenues and Purchases
Fluctuations in our consolidated revenues and purchases and related costs are
primarily associated with our merchant activities and generally explained in
large part by changes in commodity prices. Our crude oil and NGL merchant
activities are not directly affected by the absolute level of prices because the
commodities that we buy and sell are generally indexed to the same pricing
indices. Both product sales revenues and purchases and related costs will
fluctuate with market prices; however, the absolute margins related to those
sales and purchases will not necessarily have a corresponding increase or
decrease.
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Additionally, product sales revenues include the impact of gains and losses
related to derivative instruments used to manage our exposure to commodity price
risk associated with such sales and purchases.
The following table presents the range of the NYMEX WTI benchmark price of crude
oil (in dollars per barrel):
NYMEX WTI
Crude Oil Price
Low High Average
Three Months Ended March 31, 2022 $ 76 $ 124 $ 95
Three Months Ended March 31, 2021 $ 48 $ 66 $ 58
Product sales revenues and purchases increased for the three months ended March
31, 2022 , compared to the same period in 2021 primarily due to higher prices and
volumes in the 2022 period.
Revenues from services increased for the three months ended March 31, 2022 ,
compared to the same period in 2021 primarily due to higher prices and volumes
in the 2022 period, partially offset by the impact of the sale of our natural
gas storage facilities in the third quarter of 2021.
See further discussion of our net revenues in the "-Analysis of Operating Segments" section below.
Field Operating Costs
See discussion of field operating costs in the "-Analysis of Operating Segments" section below.
General and Administrative Expenses
The increase in general and administrative expenses for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to (i) costs associated with the formation of the Permian JV, a portion of which are transition related, (ii) employee related costs, including an increase in equity-indexed compensation expense on equity-classified awards (which is excluded in the calculation of Adjusted EBITDA and Segment Adjusted EBITDA) due to changes in plan assumptions, and (iii) higher office rent due to a cost abatement in the prior year.
Gains/(Losses) on Asset Sales and Asset Impairments, Net
During the first quarter of 2022, we recognized a gain of
Depreciation and Amortization
The increase in depreciation and amortization expense for the three months endedMarch 31, 2022 compared to the same period in 2021 was driven by depreciation expense on the assets contributed byOryx Midstream Holdings LLC ("Oryx Midstream") upon formation of the Permian JV. 36 -------------------------------------------------------------------------------- Table of Contents Other Expense, Net The following table summarizes the components impacting Other expense, net (in millions): Three Months EndedMarch 31, 2022 2021
Loss related to mark-to-market adjustment of Preferred Distribution Rate Reset Option (1)
$ (44) $ (67) Net gain on foreign currency revaluation (2) 7 7$ (37) $ (60)
(1)See Note 8 to our Condensed Consolidated Financial Statements for additional information.
(2)The activity during the periods presented was primarily related to the impact from the change inthe United States dollar to Canadian dollar exchange rate on the portion of our intercompany net investment that is not long-term in nature.
Income Tax Expense
The net favorable income tax variance for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to the impact of lower earnings at PAA on income attributable to PAGP, partially offset by the impact of a change in our effective tax rate.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with GAAP,
management uses additional measures known as "non-GAAP financial measures" in
its evaluation of past performance and prospects for the future. The primary
additional measures used by management are Adjusted EBITDA and Adjusted EBITDA
attributable to PAA.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and
amortization (including our proportionate share of depreciation and
amortization, including write-downs related to cancelled projects, of
unconsolidated entities), gains and losses on asset sales and asset impairments,
goodwill impairment losses and gains on and impairments of investments in
unconsolidated entities, adjusted for certain selected items impacting
comparability. Our definition and calculation of certain non-GAAP financial
measures may not be comparable to similarly-titled measures of other companies.
Adjusted EBITDA and Adjusted EBITDA attributable to PAA are reconciled to Net
Income, the most directly comparable measure as reported in accordance with
GAAP, and should be viewed in addition to, and not in lieu of, our Condensed
Consolidated Financial Statements and accompanying notes.
Management believes that the presentation of such additional financial measures
provides useful information to investors regarding our performance and results
of operations because these measures, when used to supplement related GAAP
financial measures, (i) provides additional information about our core operating
performance, (ii) provides investors with the same financial analytical
framework upon which management bases financial, operational, compensation and
planning/budgeting decisions and (iii) presents measures that investors, rating
agencies and debt holders have indicated are useful in assessing us and our
results of operations. These non-GAAP measures may exclude, for example,
(i) charges for obligations that are expected to be settled with the issuance of
equity instruments, (ii) gains and losses on derivative instruments that are
related to underlying activities in another period (or the reversal of such
adjustments from a prior period), gains and losses on derivatives that are
either related to investing activities (such as the purchase of linefill) or
purchases of long-term inventory, and inventory valuation adjustments, as
applicable, (iii) long-term inventory costing adjustments, (iv) items that are
not indicative of our core operating results and/or (v) other items that we
believe should be excluded in understanding our core operating performance.
These measures may further be adjusted to include amounts related to
deficiencies associated with minimum volume commitments whereby we have billed
the counterparties for their deficiency obligation and such amounts are
recognized as deferred revenue in "Other current liabilities" in our Condensed
Consolidated Financial Statements. We also adjust for amounts billed by our
equity method investees related to deficiencies under minimum volume
commitments. Such amounts are presented net of applicable amounts subsequently
recognized into revenue. We have defined all such items as "selected items
impacting comparability." We do not necessarily consider all of our selected
items impacting comparability to be non-recurring, infrequent or unusual, but we
believe that an understanding of these selected items impacting comparability is
material to the evaluation of our operating results and prospects.
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Although we present selected items impacting comparability that management considers in evaluating our performance, you should also be aware that the items presented do not represent all items that affect comparability between the periods presented. Variations in our operating results are also caused by changes in volumes, prices, exchange rates, mechanical interruptions, acquisitions, divestitures, investment capital projects and numerous other factors as discussed, as applicable, in "-Analysis of Operating Segments."
The following table sets forth the reconciliation of the non-GAAP financial performance measures Adjusted EBITDA and Adjusted EBITDA attributable to PAA from Net Income (in millions):
Three Months Ended
March 31, Variance
2022 2021 $ %
Net income $ 209 $ 392 $ (183) (47) %
Interest expense, net 107 107 - - %
Income tax expense 35 53 (18) (34) %
Depreciation and amortization 231 178 53 30 %
(Gains)/losses on asset sales and asset
impairments, net (42) 2 (44) **
Depreciation and amortization of unconsolidated entities (1) 20 20 - - % Unallocated general and administrative expenses (2) 1 1 - - % Selected Items Impacting Comparability: (Gains)/losses from derivative activities and inventory valuation adjustments 88 (198) 286
**
Long-term inventory costing adjustments (92) (41) (51)
**
Deficiencies under minimum volume commitments, net 6 (32) 38
**
Equity-indexed compensation expense 7 5 2
**
Net gain on foreign currency revaluation (2) (1) (1) ** Line 901 incident 85 - 85 ** Selected Items Impacting Comparability - Segment Adjusted EBITDA (3) 92 (267) 359
**
Losses from derivative activities (4) 44 67 (23)
**
Net gain on foreign currency revaluation (5) (7) (7) -
**
Selected Items Impacting Comparability - Adjusted EBITDA (6) 129 (207) 336 ** Adjusted EBITDA (6)$ 690 $ 546 $ 144 26 % Adjusted EBITDA attributable to noncontrolling interests in consolidated joint ventures (7) (76) (3) (73)
**
Adjusted EBITDA attributable to PAA$ 614 $ 543 $ 71 13 % ** Indicates that variance as a percentage is not meaningful.
(1)We exclude our proportionate share of the depreciation and amortization expense (including write-downs related to cancelled projects) of such unconsolidated entities when reviewing Adjusted EBITDA, similar to our consolidated assets.
(2)Represents general and administrative expenses incremental to those of PAA, which are not allocated to our reporting segments in determining Segment Adjusted EBITDA and are excluded in the non-GAAP financial performance measures utilized by management.
(3)For a more detailed discussion of these selected items impacting comparability, see the footnotes to the Segment Adjusted EBITDA Reconciliation table in Note 11 to our Condensed Consolidated Financial Statements.
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(4)The Preferred Distribution Rate Reset Option of PAA's Series A preferred
units is accounted for as an embedded derivative and recorded at fair value in
our Condensed Consolidated Financial Statements. The associated gains and losses
are not integral to our results and were thus classified as a selected item
impacting comparability. See Note 8 to our Condensed Consolidated Financial
Statements for additional information regarding the Preferred Distribution Rate
Reset Option.
(5)During the periods presented, there were fluctuations in the value of CAD to
USD, resulting in the realization of foreign exchange gains and losses on the
settlement of foreign currency transactions as well as the revaluation of
monetary assets and liabilities denominated in a foreign currency. The
associated gains and losses are not integral to our results and were thus
classified as a selected item impacting comparability.
(6)Other expense, net per our Condensed Consolidated Statements of Operations,
adjusted for selected items impacting comparability ("Adjusted Other
income/(expense), net") is included in Adjusted EBITDA and excluded from Segment
Adjusted EBITDA.
(7)Reflects amounts attributable to noncontrolling interests in the
Analysis of Operating Segments
We manage our operations through two operating segments: Crude Oil and NGL. Our CODM (our Chief Executive Officer) evaluates segment performance based on a variety of measures including Segment Adjusted EBITDA, segment volumes and maintenance capital investment. See Note 11 to our Condensed Consolidated Financial Statements for our definition of Segment Adjusted EBITDA and a reconciliation of Segment Adjusted EBITDA to Net income attributable to PAGP. See Note 20 to our Consolidated Financial Statements included in Part IV of our 2021 Annual Report on Form 10-K for our definition of maintenance capital.
Crude Oil Segment
Our Crude Oil segment operations generally consist of gathering and transporting crude oil using pipelines, gathering systems, trucks and at times on barges or railcars, in addition to providing terminalling, storage and other facilities-related services utilizing our integrated assets acrossthe United States andCanada . Our assets serve third parties and are also supported by our merchant activities. Our merchant activities include the purchase of crude oil supply and the movement of this supply on primarily our assets to sales locations, including our terminals, third-party connecting carriers, regional hubs or to refineries. Our merchant activities are subject to our risk management policies and may include the use of derivative instruments to hedge our exposure. Our Crude Oil segment generates revenue through a combination of tariffs, pipeline capacity agreements and other transportation fees, month-to-month and multi-year storage and terminalling agreements and the sale of gathered and bulk-purchased crude oil. Tariffs and other fees on our pipeline systems are typically based on volumes transported and vary by receipt point and delivery point. Fees for our terminalling and storage services are based on capacity leases and throughput volumes. Generally, results from our merchant activities are impacted by (i) increases or decreases in our lease gathering crude oil purchases volumes and (ii) the overall strength, weakness and volatility of market conditions, including regional differentials and time spreads. In addition, the execution of our risk management strategies in conjunction with our assets can provide upside in certain markets. The segment results also include the direct fixed and variable field costs of operating the crude oil assets, as well as an allocation of indirect operating costs. 39
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The following tables set forth our operating results from our Crude Oil segment:
Three Months Ended
Operating Results (1) March 31, Variance
(in millions) 2022 2021 $ %
Revenues $ 13,079 $ 7,853 $ 5,226 67 %
Purchases and related costs (12,393) (7,047) (5,346) (76) %
Field operating costs (282) (165) (117) (71) %
Segment general and administrative expenses (2) (63) (50) (13) (26) %
Equity earnings in unconsolidated entities 97 88 9 10 %
Adjustments (3): Depreciation and amortization of unconsolidated entities 20 20 - - % (Gains)/losses from derivative activities and inventory valuation adjustments 59 (159) 218 137 % Long-term inventory costing adjustments (85) (35) (50) (143) % Deficiencies under minimum volume commitments, net 6 (32) 38 119 % Equity-indexed compensation expense 7 5 2 40 % Net gain on foreign currency revaluation (1) (1) - - % Line 901 incident 85 - 85 N/A Adjusted EBITDA attributable to noncontrolling interests in consolidated joint ventures (76) (3) (73) ** Segment Adjusted EBITDA$ 453 $ 474 $ (21) (4) % Maintenance capital$ 19 $ 28 $ (9) (32) % Three Months Ended March 31, Variance Average Volumes 2022 2021 Volumes % Tariff activities volumes (4) Crude oil pipelines tariff volumes (by region): Permian Basin (5) 5,214 3,753 1,461 39 % South Texas / Eagle Ford (5) 365 320 45 14 % Mid-Continent (5) 472 373 99 27 % Gulf Coast 196 145 51 35 % Rocky Mountain (5) 346 287 59 21 % Western 235 237 (2) (1) % Canada 331 315 16 5 % Crude oil pipelines tariff activities total volumes 7,159 5,430 1,729
32 %
Commercial crude oil storage capacity (5) (6) 72 73 (1)
(1) %
Crude oil lease gathering purchases (4) 1,361 1,174 187 16 % ** Indicates that variance as a percentage is not meaningful.
(1)Revenues and costs and expenses include intersegment amounts.
(2)Segment general and administrative expenses reflect direct costs attributable
to each segment and an allocation of other expenses to the segments. The
proportional allocations by segment require judgment by management and are based
on the business activities that exist during each period.
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(3)Represents adjustments included in the performance measure utilized by our
CODM in the evaluation of segment results. See Note 11 to our Condensed
Consolidated Financial Statements for additional discussion of such adjustments.
(4)Average daily volumes in thousands of barrels per day calculated as the total
volumes (attributable to our interest for pipelines owned by unconsolidated
entities or undivided joint interests) for the year divided by the number of
days in the year. 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.
(5)Includes volumes (attributable to our interest) from assets owned by unconsolidated entities.
(6)Average monthly capacity in millions of barrels per day calculated as total volumes for the period divided by the number of months in the period.
Segment Adjusted EBITDA
Crude Oil Segment Adjusted EBITDA decreased for the three months endedMarch 31, 2022 compared to the same period in 2021 primarily due to (i) the sale of our natural gas storage facilities in August of 2021 and (ii) gains related to hedged power costs resulting from Winter Storm Uri recognized in the first quarter of 2021. These items were partially offset by increased earnings in the first quarter of 2022 from higher tariff volumes on our pipelines.
Variances in the components impacting Segment Adjusted EBITDA are discussed in more detail below.
Revenues, Net of Purchases and Related Costs ("net revenues") and Equity
Earnings in Unconsolidated Entities. The following is a discussion of the
significant factors impacting net revenues and equity earnings in unconsolidated
entities that contributed to the variance in Segment Adjusted EBITDA for the
first quarter of 2022 compared to the first quarter of 2021.
•Production and Market Impacts. Since the trough in demand for crude oil in 2020
related to the COVID-19 pandemic, we have seen steady growth in our volumes,
commensurate with the growth in total U.S. crude oil production, resulting in a
favorable impact on our earnings in the first quarter of 2022 compared to the
first quarter of 2021. This was partially offset by the impact of less favorable
crude oil differentials, including contango profits that benefited the 2021
period.
•Joint Venture Formation and Divestiture Transactions. In October of 2021, we
closed on the transaction with Oryx Midstream to merge our respective Permian
Basin assets, with the exception of our long-haul pipeline systems and certain
of our intra-basin assets into the Permian JV. The pipelines contributed by Oryx
Midstream upon formation of the Permian JV resulted in approximately 640
thousand barrels per day of additional tariff volumes in the Permian Basin in
the first quarter of 2022. We deduct the portion of the financial results
attributable to Oryx Midstream's 35% interest in the Permian JV in determining
Segment Adjusted EBITDA, which offset the favorable impact of the additional
volumes for the first quarter of 2022.
We sold our natural gas storage facilities in August 2021 , which was a
significant driver of the decrease in our results for the first quarter of 2022
compared to the first quarter of 2021 as net revenues from our natural gas
storage facilities in the first quarter of 2021 were approximately $42 million ,
which included the benefit of favorable margins from hub activities related to
Winter Storm Uri, as mentioned below.
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•Winter Storm Uri. During the first quarter of 2021, Winter Storm Uri had a
negative impact on our volumes; however, this impact was more than offset during
the 2021 period by gains related to hedged power costs, which are reflected in
equity earnings and field operating costs, and favorable margins from hub
activities at our natural gas storage facilities resulting from Winter Storm
Uri.
•Pipeline Loss Allowance Revenue. Pipeline loss allowance revenues increased for
the three months ended March 31, 2022 compared to the three months ended March
31, 2021 primarily due to higher prices and volumes during the 2022 period.
•Minimum Volume Commitments. For the three months ended March 31, 2022 and 2021,
Segment Adjusted EBITDA includes approximately $43 million and $26 million ,
respectively, associated with deficiencies under minimum volume commitments
under contracts that have make-up rights. Although the payments have been
received associated with the volume deficiencies, the revenues are not
recognized until future periods when either the shortfall is made up or when the
shipper's make-up rights expire or it is determined that their ability to
utilize the make-up right is remote. During the three months ended March 31,
2022 and 2021, we recognized approximately $37 million and $58 million ,
respectively, associated with deficiencies under minimum volume commitments that
were previously deferred. The amount presented as an "Adjustment" in the table
above reflects the net adjustment for revenues deferred during the period and
the reversal of previously deferred revenues that were recognized during the
period.
•Project Completions. The Capline pipeline reversal project and phase two of the
Wink to Webster pipeline project have been completed and were placed in service
in the first quarter of 2022, which favorably impacted equity earnings in
unconsolidated entities and our tariff volumes for the 2022 period.
Field Operating Costs. The increase in field operating costs for the three
months ended
Segment General and Administrative Expenses. See the "-Consolidated Results" section above for a discussion of general and administrative expenses.
Maintenance Capital . The decrease in maintenance capital spending for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to timing. NGL Segment Our NGL segment operations involve natural gas processing and NGL fractionation, storage, transportation and terminalling. Our NGL revenues are primarily derived from a combination of (i) providing gathering, fractionation, storage, and/or terminalling services to third-party customers for a fee, and (ii) extracting NGL mix supply from the gas stream processed at our Empress straddle plant facility as well as acquiring NGL mix supply, which mix supply is then transported, stored and fractionated into finished products and sold to customers. 42 -------------------------------------------------------------------------------- Table of Contents The following tables set forth our operating results from our NGL segment: Three Months Ended Operating Results (1) March 31, Variance (in millions, except per barrel data) 2022 2021 $ % Revenues$ 735 $ 639 $ 96 15 % Purchases and related costs (512) (454) (58) (13) % Field operating costs (64) (54) (10) (19) % Segment general and administrative expenses (2) (19) (17) (2) (12) %
Adjustments (3): (Gains)/losses from derivative activities and inventory valuation adjustments
29 (39) 68 174 %
Long-term inventory costing adjustments (7) (6) (1) (17) %
Net gain on foreign currency revaluation (1) - (1) N/A
Segment Adjusted EBITDA $ 161 $ 69 $ 92 133 %
Maintenance capital $ 8 $ 7 $ 1 14 %
Three Months Ended
March 31, Variance
Average Volumes (in thousands of barrels per
day) (4) 2022 2021 Volumes %
NGL fractionation 134 144 (10) (7) %
NGL pipeline tariff 176 183 (7) (4) %
NGL sales 168 220 (52) (24) %
** Indicates that variance as a percentage is not meaningful.
(1)Revenues and costs and expenses include intersegment amounts.
(2)Segment general and administrative expenses reflect direct costs attributable to each segment and an allocation of other expenses to the segments. The proportional allocations by segment require judgment by management and are based on the business activities that exist during each period.
(3)Represents adjustments included in the performance measure utilized by our CODM in the evaluation of segment results. See Note 11 to our Condensed Consolidated Financial Statements for additional discussion of such adjustments.
(4)Average daily volumes are calculated as total volumes (attributable to our interest for pipelines and facilities in which we have undivided joint interests) for the period divided by the number of days in the period.
Segment Adjusted EBITDA
NGL Segment Adjusted EBITDA increased for the three months endedMarch 31, 2022 compared to the same period in 2021 primarily due to the favorable impact of higher realized fractionation spreads between the price of natural gas and the extracted NGL ("frac spreads") and higher NGL sales prices, partially offset by lower NGL sales volumes. 43 -------------------------------------------------------------------------------- Table of Contents Significant variances in the components of Segment Adjusted EBITDA are discussed in more detail below. Net Revenues. Net revenues from our NGL activities increased for the three months endedMarch 31, 2022 compared to the same period in 2021 due to higher realized frac spreads and higher NGL sales prices, partially offset by lower NGL sales volumes. Additionally, net revenues for the 2022 period compared to 2021 include the benefit of our increased ownership in the Empress straddle plants effectiveJune 2021 . Field Operating Costs. The increase in field operating costs for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to (i) increased power costs related to our increased ownership in the Empress straddle plants and (ii) higher compensation costs including lower wage subsidies received by our Canadian subsidiary.
Liquidity and Capital Resources
General
On a consolidated basis, our primary sources of liquidity are (i) cash flow from operating activities and (ii) borrowings under PAA's credit facilities or the PAA commercial paper program. In addition, we may supplement these primary sources of liquidity with proceeds from asset sales, and in the past have utilized funds received from sales of equity and debt securities. Our primary cash requirements include, but are not limited to, (i) ordinary course of business uses, such as the payment of amounts related to the purchase of crude oil, NGL and other products, other expenses and interest payments on outstanding debt, (ii) investment and maintenance capital activities, (iii) acquisitions of assets or businesses, (iv) repayment of principal on long-term debt and (v) distributions to our Class A shareholders and noncontrolling interests. In addition, we may use cash for repurchases of common equity. We generally expect to fund our short-term cash requirements through cash flow generated from operating activities and/or borrowings under the PAA commercial paper program or PAA's credit facilities. In addition, we generally expect to fund our long-term needs, such as those resulting from investment capital activities or acquisitions and refinancing long-term debt, through a variety of sources (either separately or in combination), which may include the sources mentioned above as funding for short-term needs and/or the issuance of additional equity or debt securities and the sale of assets. As ofMarch 31, 2022 , although we had a working capital deficit of$472 million , we had approximately$2.4 billion of liquidity available to meet our ongoing operating, investing and financing needs, subject to continued covenant compliance, as noted below (in millions): As of March 31, 2022 Availability under PAA senior unsecured revolving credit facility (1) (2)$ 1,321 Availability under PAA senior secured hedged inventory facility (1) (2) 1,345 Amounts outstanding under PAA commercial paper program (382) Subtotal 2,284 Cash and cash equivalents 117 Total$ 2,401
(1)Represents availability prior to giving effect to borrowings outstanding under the PAA commercial paper program, which reduce available capacity under the facilities.
(2)Available capacity under the PAA senior unsecured revolving credit facility and the PAA senior secured hedged inventory facility was reduced by outstanding letters of credit of$29 million and$5 million , respectively. Usage of PAA's credit facilities, and, in turn, its commercial paper program, is subject to ongoing compliance with covenants. The credit agreements for PAA's revolving credit facilities (which impact PAA's ability to access its commercial paper program because they provide the financial backstop that supports its short-term credit ratings) and the indentures governing its senior notes contain cross-default provisions. A default under PAA's credit agreements or indentures would permit the lenders to accelerate the maturity of the outstanding debt. Additionally, lack of compliance with the provisions in PAA's credit agreements may restrict its ability to make distributions of available cash. PAA was in compliance with the covenants contained in its credit agreements and indentures as ofMarch 31, 2022 . 44 -------------------------------------------------------------------------------- Table of Contents We believe that we have, and will continue to have, the ability to access the PAA commercial paper program and credit facilities, which we use to meet our short-term cash needs. We believe that our financial position remains strong and we have sufficient liquid assets, cash flow from operating activities and borrowing capacity under the credit agreements to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures. We are, however, subject to business and operational risks that could adversely affect our cash flow, including extended disruptions in the financial markets and/or energy price volatility resulting from current macroeconomic and geopolitical conditions associated with the COVID-19 pandemic and/or actions byOrganization of Petroleum Exporting Countries ("OPEC"). A prolonged material decrease in our cash flows would likely produce an adverse effect on our borrowing capacity and cost of borrowing. Our borrowing capacity and borrowing costs are also impacted by PAA's credit rating. See Item 1A. "Risk Factors" included in our 2021 Annual Report on Form 10-K for further discussion regarding risks that may impact our liquidity and capital resources.
Cash Flow from Operating Activities
For a comprehensive discussion of the primary drivers of cash flow from operating activities, including the impact of varying market conditions and the timing of settlement of our derivatives, see Item 7. "Liquidity and Capital Resources-Cash Flow from Operating Activities" included in our 2021 Annual Report on Form 10-K.
Net cash provided by operating activities for the first three months of 2022 and 2021 was$339 million and$789 million , respectively, and primarily resulted from earnings from our operations. During the three months endedMarch 31, 2022 , our cash provided by operating activities was negatively impacted by working capital changes. During the three months endedMarch 31, 2021 , our cash provided by operating activities was positively impacted by working capital changes, including decreases in the volume of inventory that we held, primarily due to the sale of crude oil inventory that had been stored during the contango market and the sale of NGL inventory related to demand for heating during the winter season. The net proceeds from the liquidation of such inventory were used to repay borrowings under PAA's commercial paper program and credit facilities. Investing Activities Capital Expenditures In addition to our operating needs, we also use cash for our investment capital projects, maintenance capital activities and acquisition activities. We fund these expenditures with cash generated by operating activities, financing activities and/or proceeds from asset sales. In the near term, we do not plan to issue common equity to fund such expenditures. The following table summarizes our investment, maintenance and acquisition capital expenditures (in millions): Three Months Ended March 31, 2022 2021 Investment capital (1) (2)$ 109 $ 85 Maintenance capital (1) 27 35$ 136 $ 120 (1)Capital expenditures made to expand the existing operating and/or earnings capacity of our assets are classified as "Investment capital." Capital expenditures for the replacement and/or refurbishment of partially or fully depreciated assets in order to maintain the operating and/or earnings capacity of our existing assets are classified as "Maintenance capital."
(2)Includes contributions to unconsolidated entities, accounted for under the equity method of accounting, related to investment capital projects by such entities.
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2022 Investment and Maintenance Capital . Total investment capital for the year
ended December 31, 2022 is projected to be approximately $330 million ($275
million net to our interest). Approximately half of our projected investment
capital expenditures are expected to be invested in the Permian JV assets.
Additionally, maintenance capital for the full year of 2022 is projected to be
$220 million ($210 million net to our interest). We expect to fund our 2022
investment and maintenance capital expenditures primarily with retained cash
flow.
Divestitures
Proceeds from the sale of assets have generally been used to fund our investment
capital projects and reduce debt levels. The following table summarizes the
proceeds received during the first three months of 2022 and 2021 from sales of
assets (in millions):
Three Months Ended
March 31,
2022 2021
Proceeds from divestitures (1) $ 53 $ 21 (1)Represents proceeds, including working capital adjustments, net of transaction costs.
Ongoing Activities Related to Strategic Transactions
We are continuously engaged in the evaluation of potential transactions that support our current business strategy. In the past, such transactions have included the sale on non-core assets, the sale of partial interests in assets to strategic joint venture partners, acquisitions and large investment capital projects. With respect to a potential divestiture or acquisition, we may conduct an auction process or participate in an auction process conducted by a third party or we may negotiate a transaction with one or a limited number of potential buyers (in the case of a divestiture) or sellers (in the case of an acquisition). Such transactions could have a material effect on our financial condition and results of operations. We typically do not announce a transaction until after we have executed a definitive agreement. In certain cases, in order to protect our business interests or for other reasons, we may defer public announcement of a transaction until closing or a later date. Past experience has demonstrated that discussions and negotiations regarding a potential transaction can advance or terminate in a short period of time. Moreover, the closing of any transaction for which we have entered into a definitive agreement may be subject to customary and other closing conditions, which may not ultimately be satisfied or waived. Accordingly, we can give no assurance that our current or future efforts with respect to any such transactions will be successful, and we can provide no assurance that our financial expectations with respect to such transactions will ultimately be realized. See Item 1A. "Risk Factors-Risks Related to PAA's Business-Divestitures and acquisitions involve risks that may adversely affect our business" included in our 2021 Annual Report on Form 10-K.
Financing Activities
Our financing activities primarily relate to funding investment capital projects, acquisitions and refinancing of our debt maturities, as well as short-term working capital (including borrowings for NYMEX and ICE margin deposits) and hedged inventory borrowings related to our NGL business and contango market activities.
Borrowings and Repayments Under Credit Arrangements
During the three months endedMarch 31, 2022 , we had net borrowings on the PAA credit facilities and commercial paper program of$382 million . The net borrowings resulted primarily from borrowings during the period related to funding needs for capital investments, inventory purchases, senior notes repayments and other general partnership purposes, partially offset by cash flow from operating activities and proceeds from asset sales. 46 -------------------------------------------------------------------------------- Table of Contents During the three months endedMarch 31, 2021 , we had net repayments on the PAA credit facilities and commercial paper program of$576 million . The net repayments resulted primarily from cash flow from operating activities and proceeds from asset sales, which offset borrowings during the period related to funding needs for capital investments, inventory purchases and other general partnership purposes. Repayment of Senior Notes
During the three months ended
Common Equity Repurchase Program
PAA repurchased 2.4 million and 0.4 million common units under the Program through open market purchases that settled during the three months endedMarch 31, 2022 and 2021, respectively, for a total purchase price of$25 million and$3 million , respectively, including commissions and fees. AtMarch 31, 2022 , the remaining available capacity under the Program was$247 million .
Registration Statements
PAGP Registration Statements. We have filed with theSEC a shelf registration statement that, subject to effectiveness at the time of use, allows us to issue, in the aggregate, up to a specified amount of equity securities (the "PAGP Traditional Shelf"), under which we had approximately$939 million of unsold securities available atMarch 31, 2022 . We also have access to a shelf registration statement (the "PAGP WKSI Shelf"), which provides us with the ability to offer and sell an unlimited amount of equity securities, subject to market conditions and capital needs. We did not conduct any offerings under the PAGP Traditional Shelf or the PAGP WKSI Shelf during the three months endedMarch 31, 2022 . PAA Registration Statements. PAA periodically accesses the capital markets for both equity and debt financing. PAA has filed with theSEC a universal shelf registration statement that, subject to effectiveness at the time of use, allows PAA to issue, in the aggregate, up to a specified amount of debt or equity securities (the "PAA Traditional Shelf"), under which PAA had approximately$1.1 billion of unsold securities available atMarch 31, 2022 . PAA also has access to a universal shelf registration statement (the "PAA WKSI Shelf"), which provides it with the ability to offer and sell an unlimited amount of debt and equity securities, subject to market conditions and capital needs. PAA did not conduct any offerings under the PAA Traditional Shelf or the PAA WKSI Shelf during the three months endedMarch 31, 2022 .
Distributions to Our Class A Shareholders
We distribute all of our available cash within 55 days following the end of each quarter to Class A shareholders of record. Available cash is generally defined as all of our cash and cash equivalents on hand at the end of each quarter less reserves established in the discretion of our general partner for future requirements. Our levels of financial reserves are established by our general partner and include reserves for the proper conduct of our business (including future capital expenditures and anticipated credit needs), compliance with legal or contractual obligations and funding of future distributions to our shareholders. See Item 5. "Market for Registrant's Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities-Cash Distribution Policy" included in our 2021 Annual Report on Form 10-K for additional discussion. OnMay 13, 2022 , we will pay a quarterly cash distribution of $0.2175 per Class A share ($0.87 per share on an annualized basis) to shareholders of record at the close of business onApril 29, 2022 for the period fromJanuary 1, 2022 throughMarch 31, 2022 , which represents a$0.0375 per share increase from the distribution paid inFebruary 2022 .
See Note 7 to our Condensed Consolidated Financial Statements for details of distributions paid during or pertaining to the first three months of 2022.
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Distributions to Noncontrolling Interests
Distributions to noncontrolling interests represent amounts paid on interests in
consolidated entities that are not owned by us. As of March 31, 2022 ,
noncontrolling interests in our subsidiaries consisted of (i) limited partner
interests in PAA including a 69% interest in PAA's common units and PAA's Series
A preferred units combined and 100% of PAA's Series B preferred units, (ii) an
approximate 19% limited partner interest in AAP, (iii) a 35% interest in the
Permian JV and (iv) a 33% interest in Red River LLC .
On May 13, 2022 , PAA will pay a quarterly cash distribution of $0.2175 per
common unit ($0.87 per unit on an annualized basis) to unitholders of record at
the close of business on April 29, 2022 for the period from January 1, 2022
through March 31, 2022 , which represents a $0.0375 per unit increase from the
distribution paid in February 2022 .
See Note 7 to our Condensed Consolidated Financial Statements for details of
distributions paid to noncontrolling interests during the three months ended
March 31, 2022 .
Contingencies
For a discussion of contingencies that may impact us, see Note 10 to our Condensed Consolidated Financial Statements.
Commitments
Purchase Obligations. In the ordinary course of doing business, we purchase crude oil and NGL from third parties under contracts, the majority of which range in term from thirty-day evergreen to five years, with a limited number of contracts with remaining terms extending up to 12 years. We establish a margin for these purchases by entering into various types of physical and financial sale and exchange transactions through which we seek to maintain a position that is substantially balanced between purchases on the one hand and sales and future delivery obligations on the other. We do not expect to use a significant amount of internal capital to meet these obligations, as the obligations will be funded by corresponding sales to entities that we deem creditworthy or who have provided credit support we consider adequate.
The following table includes our best estimate of the amount and timing of these
payments as well as other amounts due under the specified contractual
obligations as of
Remainder of 2027 and
2022 2023 2024 2025 2026 Thereafter Total
Crude oil, NGL and other purchases
(1) $ 23,259 $ 26,253 $ 25,271 $ 24,414 $ 23,148 $ 72,905 $ 195,250
(1)Amounts are primarily based on estimated volumes and market prices based on
average activity during March 2022 . The actual physical volume purchased and
actual settlement prices will vary from the assumptions used in the table.
Uncertainties involved in these estimates include levels of production at the
wellhead, weather conditions, changes in market prices and other conditions
beyond our control.
Letters of Credit. In connection with merchant activities, we provide certain
suppliers with irrevocable standby letters of credit to secure our obligation
for the purchase and transportation of crude oil, NGL and natural gas.
Additionally, we issue letters of credit to support insurance programs,
derivative transactions, including hedging-related margin obligations, and
construction activities. At March 31, 2022 and December 31, 2021 , we had
outstanding letters of credit of approximately $34 million and $98 million ,
respectively.
Recent Accounting Pronouncements
See Note 2 to our Condensed Consolidated Financial Statements.
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FORWARD-LOOKING STATEMENTS
All statements included in this report, other than statements of historical
fact, are forward-looking statements, including but not limited to statements
incorporating the words "anticipate," "believe," "estimate," "expect," "plan,"
"intend" and "forecast," as well as similar expressions and statements regarding
our business strategy, plans and objectives for future operations. The absence
of such words, expressions or statements, however, does not mean that the
statements are not forward-looking. Any such forward-looking statements reflect
our current views with respect to future events, based on what we believe to be
reasonable assumptions. Certain factors could cause actual results or outcomes
to differ materially from the results or outcomes anticipated in the
forward-looking statements. The most important of these factors include, but are
not limited to:
•our ability to pay distributions to our Class A shareholders;
•our expected receipt of, and amounts of, distributions from
•declines in global crude oil demand and crude oil prices (whether due to the
COVID-19 pandemic, future pandemics or other factors) that correspondingly lead
to a significant reduction of North American crude oil and natural gas liquids
("NGL") production (whether due to reduced producer cash flow to fund drilling
activities or the inability of producers to access capital, or both, the
unavailability of pipeline and/or storage capacity, the shutting-in of
production by producers, government-mandated pro-ration orders, or other
factors), which in turn could result in significant declines in the actual or
expected volume of crude oil and NGL shipped, processed, purchased, stored,
fractionated and/or gathered at or through the use of our assets and/or the
reduction of commercial opportunities that might otherwise be available to us;
•the effects of competition and capacity overbuild in areas where we operate,
including downward pressure on rates and margins, contract renewal risk and the
risk of loss of business to other midstream operators who are willing or under
pressure to aggressively reduce transportation rates in order to capture or
preserve customers;
•negative societal sentiment regarding the hydrocarbon energy industry and the
continued development and consumption of hydrocarbons, which could influence
consumer preferences and governmental or regulatory actions that adversely
impact our business;
•unanticipated changes in crude oil and NGL market structure, grade differentials and volatility (or lack thereof);
•general economic, market or business conditions inthe United States and elsewhere (including the potential for a recession or significant slowdown in economic activity levels, the risk of persistently high inflation and continued supply chain issues, the impact of coronavirus variants on demand and growth, and the timing, pace and extent of economic recovery) that impact (i) demand for crude oil, drilling and production activities and therefore the demand for the midstream services we provide and (ii) commercial opportunities available to us; •the impact of current and future laws, rulings, governmental regulations, executive orders, trade policies, accounting standards and statements, and related interpretations, including legislation, executive orders or regulatory initiatives that arise out of pandemic related concerns that prohibit, restrict or regulate hydraulic fracturing or that prohibit the development of oil and gas resources and the related infrastructure on lands dedicated to or served by our pipelines;
•environmental liabilities, litigation or other events that are not covered by an indemnity, insurance or existing reserves;
•loss of key personnel and inability to attract and retain new talent;
•fluctuations in refinery capacity in areas supplied by our mainlines and other factors affecting demand for various grades of crude oil and NGL and resulting changes in pricing conditions or transportation throughput requirements; •the successful operation of joint ventures and joint operating arrangements we enter into from time to time, whether relating to assets operated by us or by third parties, and the successful integration and future performance of acquired assets or businesses;
•the availability of, and our ability to consummate, divestitures, joint ventures, acquisitions or other strategic opportunities;
•maintenance of PAA's credit rating and ability to receive open credit from our suppliers and trade counterparties;
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•the occurrence of a natural disaster, catastrophe, terrorist attack (including
eco-terrorist attacks) or other event that materially impacts our operations,
including cyber or other attacks on our electronic and computer systems;
•weather interference with business operations or project construction, including the impact of extreme weather events or conditions;
•significant under-utilization of our assets and facilities;
•the refusal or inability of our customers or counterparties to perform their obligations under their contracts with us (including commercial contracts, asset sale agreements and other agreements), whether justified or not and whether due to financial constraints (such as reduced creditworthiness, liquidity issues or insolvency), market constraints, legal constraints (including governmental orders or guidance), the exercise of contractual or common law rights that allegedly excuse their performance (such as force majeure or similar claims) or other factors; •our inability to perform our obligations under our contracts, whether due to non-performance by third parties, including our customers or counterparties, market constraints, third-party constraints, supply chain issues, legal constraints (including governmental orders or guidance), or other factors or events;
•the incurrence of costs and expenses related to unexpected or unplanned capital expenditures, third-party claims or other factors;
•disruptions to futures markets for crude oil, NGL and other petroleum products, which may impair our ability to execute our commercial or hedging strategies;
•failure to implement or capitalize, or delays in implementing or capitalizing, on investment capital projects, whether due to permitting delays, permitting withdrawals or other factors;
•shortages or cost increases of supplies, materials or labor;
•tightened capital markets or other factors that increase our cost of capital or limit our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, investment capital projects, working capital requirements and the repayment or refinancing of indebtedness;
•the amplification of other risks caused by volatile financial markets, capital constraints, liquidity concerns and inflation;
•the use or availability of third-party assets upon which our operations depend and over which we have little or no control;
•the currency exchange rate of the Canadian dollar to
•inability to recognize current revenue attributable to deficiency payments received from customers who fail to ship or move more than minimum contracted volumes until the related credits expire or are used;
•increased costs, or lack of availability, of insurance;
•the effectiveness of our risk management activities;
•fluctuations in the debt and equity markets, including the price of PAA's units at the time of vesting under its long-term incentive plans;
•risks related to the development and operation of our assets; and
•other factors and uncertainties inherent in the transportation, storage, terminalling and marketing of crude oil, as well as in the processing, transportation, fractionation, storage and marketing of NGL.
Other factors described herein, as well as factors that are unknown or
unpredictable, could also have a material adverse effect on future results.
Please read "Risk Factors" discussed in Item 1A of our 2021 Annual Report on
Form 10-K. Except as required by applicable securities laws, we do not intend to
update these forward-looking statements and information.
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