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 2019 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 •Acquisitions and Capital Projects •Results of Operations •Liquidity and Capital Resources •Off-Balance Sheet Arrangements •Recent Accounting Pronouncements •Critical Accounting Policies and Estimates •Forward-Looking Statements Executive Summary Company Overview We are aDelaware limited partnership formed onJuly 17, 2013 that has elected to be taxed as a corporation forUnited States federal income tax purposes. As ofJune 30, 2020 , our sole cash-generating assets consisted of (i) a 100% managing member interest inPlains All American GP LLC ("GP LLC ") that has also elected to be taxed as a corporation forUnited States federal income tax purposes and (ii) an approximate 75% limited partner interest in AAP through our direct ownership of approximately 183.3 million AAP units and indirect ownership of approximately 1.0 million AAP units throughGP LLC .GP LLC is aDelaware limited liability company that also holds the non-economic general partner interest in AAP. AAP is aDelaware limited partnership that, as ofJune 30, 2020 , directly owned a limited partner interest in PAA through its ownership of approximately 248.4 million PAA common units (approximately 31% of PAA's total outstanding common units and Series A preferred units combined). AAP is the sole member ofPAA GP LLC ("PAA GP"), aDelaware limited liability company that directly holds the non-economic general partner interest in PAA. PAA owns and operates midstream energy infrastructure and provides logistics services primarily for crude oil, NGL and natural gas. PAA owns an extensive network of pipeline transportation, terminalling, storage and gathering assets in key crude oil and NGL producing basins and transportation corridors and at major market hubs inthe United States andCanada . PAA's operations are conducted directly and indirectly through its operating subsidiaries and are managed through three operating segments: Transportation, Facilities and Supply and Logistics. See "-Results of Operations-Analysis of Operating Segments" for further discussion. Recent Events & Outlook During the first quarter of 2020, COVID-19 escalated into a global pandemic, which led to widespread shelter-in-place or similar requirements throughoutNorth America and across the world, resulting in significantly reduced energy demand. Early in the second quarter, North American producers responded aggressively by shutting in significant levels of production, which mitigated the pace of crude oil inventory builds and the risk of testing storage maximums. In addition, throughout the second quarter,U.S. refinery utilization increased, the previously steep contango market structure tempered, and crude oil 41
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Table of Contents prices improved to levels supporting the ability for producers to bring a substantial portion of previously shut-in production back on line.
However, theU.S. Lower 48 horizontal crude oil rig count continued to decline and currently sits at approximately 20% of 2019 peak levels. In addition,U.S. inventories of crude oil, gasoline, and distillate remain at historically high levels. The combination of steep shale declines relative to drilling and completion activity, substantial inventory overhang, and the potential for a prolonged demand recovery could challenge the ability for North American liquids production to return to a sustainable growth trajectory in 2020 and potentially into 2021. Furthermore, we expect a continuation of elevated near-term market uncertainty to be driven by risks including potential COVID-19 resurgence, regulatory changes and evolving geo-political dynamics. In aggregate, we expect these market dynamics to have a negative impact on our business relative to pre-pandemic levels, with the impacts in 2021 potentially being more pronounced than in 2020.
In response to the challenging near-term market conditions, we have taken steps to further strengthen our balance sheet, liquidity and long-term financial flexibility. These actions include significantly reducing and continuing to challenge our capital program, reducing the amount of our Class A share distribution payable, progressing asset sales, and reducing costs, while remaining focused on operating safely and responsibly.
Specifically, since April, we have reduced our 2020/2021 capital program by$850 million , or 37%, and have decreased PAA's common unit distributions and our Class A share distributions by 50% (as paid inMay 2020 and payable inAugust 2020 ) versus the distributions paid inFebruary 2020 , which reflects a reduction of$525 million on an annualized basis. We have completed approximately$250 million of asset sales (which amount excludes a previously announced approximately$195 million asset sale that remains under a definitive agreement and is expected to close later in the year). While each of these actions should contribute to a stronger balance sheet and enhanced liquidity and long-term financial flexibility, we can provide no assurance that we will be able to effect certain future actions (such as additional capital reductions, asset sales and expense reductions) and additional actions may be necessary to achieve our balance sheet, liquidity and financial security objectives. In addition, many governments have enacted or are contemplating measures to provide aid and economic stimulus in response to the COVID-19 pandemic. These measures include actions by both theU.S. federal government and the government ofCanada . There has been no material impact to our financial position, results of operations or cash flows resulting from these measures. While some modifications in our operations have been necessary to deal with risks associated with the COVID-19 pandemic, we have not experienced any material constraints in our ability to continue our essential business functions and have not incurred any significant additional operating costs as a result of the pandemic, including costs associated with navigating the applicable shelter-in-place or similar restrictions and implementing our business continuity plans. We remain focused on the health and safety of our workforce, and have modified our operations in ways that we believe are prudent and appropriate in order to protect our employees while continuing to operate our assets in an effective, safe and responsible manner. 42
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Table of Contents Overview of Operating Results, Capital Investments and Other Significant Activities
The macroeconomic and industry specific challenges discussed above have resulted in a number of impairment charges recognized during the first half of 2020 as discussed further below. See "-Liquidity and Capital Resources" for additional discussion of the expected and potential impact of COVID-19 and related market conditions on our business. During the first six months of 2020, we recognized a net loss of$2.6 billion as compared to net income of$1.3 billion recognized during the first six months of 2019. The net loss for the period was driven by goodwill impairment losses of$2.5 billion and was also impacted by non-cash impairment charges of approximately$725 million related to the write-down of certain pipeline and other long-lived assets, certain of our investments in unconsolidated entities, and assets upon classification as held for sale. In addition, we recognized approximately$232 million of inventory valuation adjustments due to declines in commodity prices during the first quarter of 2020.
Our results for the comparative period were also impacted by:
•Less favorable results from our Supply and Logistics segment due to less favorable crude oil differentials, the impact of weighted average inventory costing resulting in lower crude oil margins during the period (which will result in higher margins in the second half of 2020), lower NGL margins and the unfavorable impact of the mark-to-market of certain derivative instruments, resulting from losses recognized in the 2020 period compared to gains in the 2019 period; •Less favorable results from our Transportation segment driven by lower volumes from shut-ins of crude oil production and tight regional basis differentials, a portion of which are covered by minimum volume commitments that will be made up or paid for in future periods, and lower pipeline loss allowance revenue in 2020 due to lower prices and volumes; •Higher depreciation and amortization expense in the 2020 period primarily due to additional depreciation expense associated with the completion of various capital expansion projects and an adjustment to the useful lives of certain assets;
•Unfavorable foreign currency impacts of
•A gain of$21 million recognized in the current period related to the sale of a portion of our interest inSaddlehorn Pipeline Company, LLC inFebruary 2020 , compared to a non-cash gain of$267 million recognized in the 2019 period related to a fair value adjustment resulting from the accounting for the contribution of our undivided joint interest in the Capline pipeline system for an equity interest inCapline Pipeline Company LLC ; partially offset by •Favorable results from our Facilities segment due to increased activity and capacity in our crude oil storage operations and the receipt of a deficiency payment upon the expiration of a multi-year contract, which were partially offset by decreased activity at our rail terminals and the impact from the sale of certain NGL terminals in the fourth quarter of 2019 and the second quarter of 2020; and •An income tax benefit for the first half of 2020 due to the impact of lower earnings at PAA, including goodwill impairment losses, on income attributable to PAGP.
See further discussion of our operating results in the "-Results of Operations-Analysis of Operating Segments" and "-Other Income and Expenses" sections below.
We invested$654 million in midstream infrastructure projects during the six months endedJune 30, 2020 , which primarily related to projects under development in thePermian Basin . Additionally, during the first quarter of 2020, we acquired approximately$308 million of assets, which primarily included a crude oil gathering system located in theDelaware Basin . See the "-Acquisitions and Capital Projects" section below for additional information. InJune 2020 , PAA completed the issuance of$750 million , 3.80% senior notes dueSeptember 2030 . We intend to use the net proceeds from this offering of$742 million , after deducting the underwriting discount and offering expenses, to repay 43 -------------------------------------------------------------------------------- Table of Contents the principal amounts of PAA's 5.00% senior notes dueFebruary 2021 and, pending such repayment, have used a portion of the proceeds to repay outstanding borrowings under PAA's commercial paper program and credit facilities and for general partnership purposes. We also paid approximately$496 million of cash distributions to our Class A shareholders and noncontrolling interests during the six months endedJune 30, 2020 .
Acquisitions and Capital Projects
The following table summarizes our expenditures for acquisition capital, expansion capital and maintenance capital (in millions):
Six Months Ended
June 30,
2020 2019
Acquisition capital $ 308 $ 47
Expansion capital (1) (2) 654 695
Maintenance capital (2) 104 118
$ 1,066 $ 860
(1)Contributions to unconsolidated entities related to expansion projects of
such entities are recognized in "Expansion capital." We account for our
investments in such entities under the equity method of accounting.
(2)Capital expenditures made to expand the existing operating and/or earnings
capacity of our assets are classified as "Expansion 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."
Expansion Capital Projects
InApril 2020 , in response to the current dynamic and uncertain market conditions, we announced our plan to significantly reduce and continue to challenge our capital program. Total expansion capital for 2020/2021 is now targeted to be approximately$1.45 billion , or$850 million (37%) lower than the previously targeted$2.3 billion capital program, and$1.45 billion (50%) lower when eliminating$600 million of assumed joint venture project financing (net to our share) for the Red Oak project, which was deferred inMarch 2020 . During the second quarter, PAA determined that it would not proceed with the project as previously contemplated. The balance of the capital reductions relate to cancellations, cost savings and scope adjustments to other capital projects. The following table summarizes our notable projects in progress during 2020 and the estimated cost for the year endingDecember 31, 2020 (in millions): Projects 2020 Long-haul Pipeline Projects$ 210 Permian Basin Takeaway Pipeline Projects 320 Complementary Permian Basin Projects 205 Selected Facilities/Downstream Projects 140 Other Projects 125
Total Projected 2020 Expansion Capital Expenditures
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Results of Operations
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 Six Months Ended
June 30 , Variance June 30 , Variance
2020 2019 $ % 2020 2019 $ %
Transportation Segment Adjusted EBITDA
(1) $ 346 $ 410 $ (64) (16) % $ 788 $ 809 $ (21) (3) %
Facilities Segment Adjusted
EBITDA (1) 174 172 2 1 % 384 356 28 8 % Supply and Logistics Segment Adjusted EBITDA (1) 3 200 (197) (99) % 144 478 (334) (70) %
Adjustments:
Depreciation and amortization of unconsolidated entities (16) (14) (2) (14) % (33) (27) (6) (22) % Selected items impacting comparability - Segment Adjusted EBITDA (51) (91) 40 ** (189) 4 (193) ** Unallocated general and administrative expenses (2) (1) (1) (100) % (3) (3) - - % Depreciation and amortization (166) (148) (18) (12) % (335) (284) (51) (18) % Gains/(losses) on asset sales and asset impairments, net 1 4 (3) (75) % (618) - (618) N/A Goodwill impairment losses - - - N/A (2,515) - (2,515) N/A Gain on/(impairment of) investments in unconsolidated entities, net (69) - (69) N/A (91) 267 (358) (134) % Interest expense, net (108) (103) (5) (5) % (215) (203) (12) (6) % Other income/(expense), net 18 (6) 24 400 % (13) 18 (31) (172) % Income tax (expense)/benefit 7 3 4 133 % 140 (75) 215 287 % Net income/(loss) 137 426 (289) (68) % (2,556) 1,340 (3,896) (291) % Net (income)/loss attributable to noncontrolling interests (121) (360) 239 66 % 1,991 (1,127) 3,118 277 % Net income/(loss) attributable to PAGP$ 16 $ 66 $ (50) (76) %$ (565) $ 213 $ (778) (365) % Basic net income/(loss) per Class A share$ 0.09 $ 0.41 $ (0.32) (78) %$ (3.08) $ 1.32 $ (4.40) (333) % Diluted net income/(loss) per Class A share$ 0.09 $ 0.40 $ (0.31) (78) %$ (3.08) $ 1.32 $ (4.40) (333) % Basic weighted average Class A shares outstanding 184 162 22 14 % 183 161 22 14 % Diluted weighted average Class A shares outstanding 184 164 20 12 % 183 161 22 14 %
** Indicates that variance as a percentage is not meaningful. (1)Segment Adjusted EBITDA is the measure of segment performance that is utilized by our CODM to assess performance and allocate resources among our operating segments. This measure is adjusted for certain items, including those that our CODM believes impact comparability of results across periods. See Note 13 to our Condensed Consolidated Financial Statements for additional discussion of such adjustments.
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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 measure used by management is earnings before interest,
taxes, depreciation and amortization (including our proportionate share of
depreciation and amortization 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 ("Adjusted EBITDA").
Our definition and calculation of certain non-GAAP financial measures may not be
comparable to similarly-titled measures of other companies. Adjusted EBITDA is
reconciled to Net Income/(Loss), 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 measure
provides useful information to investors regarding our performance and results
of operations because this measure, 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. This non-GAAP measure may exclude, for example,
(i) charges for obligations that are expected to be settled with the issuance of
equity instruments, (ii) gains or 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
related to investing activities (such as the purchase of linefill) and inventory
valuation adjustments, as applicable, (iii) long-term inventory costing
adjustments, (iv) items that are not indicative of our core operating results
and business outlook and/or (v) other items that we believe should be excluded
in understanding our core operating performance. This measure 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.
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.
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, expansion projects and numerous other factors as discussed, as
applicable, in "Analysis of Operating Segments."
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The following table sets forth the reconciliation of this non-GAAP financial
performance measure from Net Income/(Loss) (in millions):
Three Months Ended Six Months Ended
June 30 , Variance June 30 , Variance
2020 2019 $ % 2020 2019 $ %
Net income/(loss) $ 137 $ 426 $ (289) (68) % $ (2,556) $ 1,340 $ (3,896) (291) %
Add/(Subtract):
Interest expense, net 108 103 5 5 % 215 203 12 6 %
Income tax expense/(benefit) (7) (3) (4) (133) % (140) 75 (215) (287) %
Depreciation and amortization 166 148 18 12 % 335 284 51 18 %
(Gains)/losses on asset sales and asset
impairments, net (1) (4) 3 75 % 618 - 618 N/A
Goodwill impairment losses - - - N/A 2,515 - 2,515 N/A
(Gain on)/impairment of investments in
unconsolidated entities, net 69 - 69 N/A 91 (267) 358 134 %
Depreciation and amortization of
unconsolidated entities (1) 16 14 2 14 % 33 27 6 22 %
Selected Items Impacting Comparability:
(Gains)/losses from derivative
activities, net of inventory valuation
adjustments (2) 90 44 46 ** 121 (30) 151 **
Long-term inventory costing adjustments
(3) (51) 25 (76) ** 64 4 60 **
Deficiencies under minimum volume
commitments, net (4) 7 1 6 ** 6 (7) 13 **
Equity-indexed compensation expense (5) 5 4 1 ** 8 7 1 **
Net (gain)/loss on foreign currency
revaluation (6) - 7 (7) ** (13) 12 (25) **
Line 901 incident (7) - 10 (10) ** - 10 (10) **
Significant acquisition-related expenses
(8) - - - ** 3 - 3 **
Selected Items Impacting Comparability -
Segment Adjusted EBITDA 51 91 (40) ** 189 (4) 193 **
Gains from derivative activities (2) 9 7 2 ** (17) (15) (2) **
Net (gain)/loss on foreign currency
revaluation (6) (23) 1 (24) ** 36 - 36 **
Net gain on early repayment of senior
notes (9) (3) - (3) ** (3) - (3) **
Selected Items Impacting Comparability -
Adjusted
EBITDA (10) 34 99 (65) ** 205 (19) 224 **
Adjusted EBITDA (10) $ 522 $ 783 $ (261) (33) % $ 1,316 $ 1,643 $ (327) (20) %
** Indicates that variance as a percentage is not meaningful.
(1)Over the past several years, we have increased our participation in strategic
pipeline joint ventures accounted for under the equity method of accounting. We
exclude our proportionate share of the depreciation and amortization expense of
such unconsolidated entities when reviewing Adjusted EBITDA, similar to our
consolidated assets.
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(2)We use derivative instruments for risk management purposes, and our related
processes include specific identification of hedging instruments to an
underlying hedged transaction. Although we identify an underlying transaction
for each derivative instrument we enter into, there may not be an accounting
hedge relationship between the instrument and the underlying transaction. In the
course of evaluating our results of operations, we identify the earnings that
were recognized during the period related to derivative instruments for which
the identified underlying transaction does not occur in the current period and
exclude the related gains and losses in determining Adjusted EBITDA. In
addition, we exclude gains and losses on derivatives that are related to
investing activities, such as the purchase of linefill. We also exclude the
impact of corresponding inventory valuation adjustments, as applicable. See
Note 10 to our Condensed Consolidated Financial Statements for a comprehensive
discussion regarding our derivatives and risk management activities.
(3)We carry crude oil and NGL inventory that is comprised of minimum working
inventory requirements in third-party assets and other working inventory that is
needed for our commercial operations. We consider this inventory necessary to
conduct our operations and we intend to carry this inventory for the foreseeable
future. Therefore, we classify this inventory as long-term on our balance sheet
and do not hedge the inventory with derivative instruments (similar to linefill
in our own assets). We treat the impact of changes in the average cost of the
long-term inventory (that result from fluctuations in market prices) and
write-downs of such inventory that result from price declines as a selected item
impacting comparability. See Note 5 to our Consolidated Financial Statements
included in Part IV of our 2019 Annual Report on Form 10-K for additional
inventory disclosures.
(4)We have certain agreements that require counterparties to deliver, transport
or throughput a minimum volume over an agreed upon period. Substantially all of
such agreements were entered into with counterparties to economically support
the return on our capital expenditure necessary to construct the related asset.
Some of these agreements include make-up rights if the minimum volume is not
met. We record a receivable from the counterparty in the period that services
are provided or when the transaction occurs, including amounts for deficiency
obligations from counterparties associated with minimum volume commitments. If a
counterparty has a make-up right associated with a deficiency, we defer the
revenue attributable to the counterparty's make-up right and subsequently
recognize the revenue at the earlier of when the deficiency volume is delivered
or shipped, when the make-up right expires or when it is determined that the
counterparty's ability to utilize the make-up right is remote. We include the
impact of amounts billed to counterparties for their deficiency obligation, net
of applicable amounts subsequently recognized into revenue, as a selected item
impacting comparability. We believe the inclusion of the contractually committed
revenues associated with that period is meaningful to investors as the related
asset has been constructed, is standing ready to provide the committed service
and the fixed operating costs are included in the current period results.
(5)Our total equity-indexed compensation expense includes expense associated
with awards that will or may be settled in PAA common units and awards that will
or may be settled in cash. The awards that will or may be settled in PAA common
units are included in PAA's diluted net income per unit calculation when the
applicable performance criteria have been met. We consider the compensation
expense associated with these awards as a selected item impacting comparability
as the dilutive impact of the outstanding awards is included in PAA's diluted
net income per unit calculation, as applicable, and the majority of the awards
are expected to be settled in units. The portion of compensation expense
associated with awards that are certain to be settled in cash is not considered
a selected item impacting comparability. See Note 18 to our Consolidated
Financial Statements included in Part IV of our 2019 Annual Report on Form 10-K
for a comprehensive discussion regarding our equity-indexed compensation plans.
(6)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. These gains
and losses are not integral to our core operating performance and were thus
classified as a selected item impacting comparability. See Note 10 to our
Condensed Consolidated Financial Statements for discussion regarding our
currency exchange rate risk hedging activities.
(7)Includes costs recognized during the period related to the Line 901 incident
that occurred in May 2015 , net of amounts we believe are probable of recovery
from insurance. See Note 12 to our Condensed Consolidated Financial Statements
for additional information regarding the Line 901 incident.
(8)Includes acquisition-related expenses associated with the Felix Midstream
acquisition in February 2020 . See Note 14 for additional information.
(9)Includes net gains recognized in connection with the PAA's repurchase of its
outstanding senior notes on the open market. See Note 8 to our Condensed
Consolidated Financial Statements for additional information.
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(10)Other income/(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.
Analysis of Operating Segments
We manage our operations through three operating segments: Transportation, Facilities and Supply and Logistics. Our CODM (our Chief Executive Officer) evaluates segment performance based on a variety of measures including Segment Adjusted EBITDA, segment volumes, Segment Adjusted EBITDA per barrel and maintenance capital investment.
We define Segment Adjusted EBITDA as revenues and equity earnings in
unconsolidated entities less (a) purchases and related costs, (b) field
operating costs and (c) segment general and administrative expenses, plus our
proportionate share of the depreciation and amortization expense of
unconsolidated entities, and further adjusted for certain selected items
including (i) the mark-to-market of 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 related to
investing activities (such as the purchase of linefill) and inventory valuation
adjustments, as applicable, (ii) long-term inventory costing adjustments, (iii)
charges for obligations that are expected to be settled with the issuance of
equity instruments, (iv) amounts related to deficiencies associated with minimum
volume commitments, net of applicable amounts subsequently recognized into
revenue and (v) other items that our CODM believes are integral to understanding
our core segment operating performance. See Note 13 to our Condensed
Consolidated Financial Statements for a reconciliation of Segment Adjusted
EBITDA to Net income/(loss) attributable to PAGP.
Revenues and expenses from our Canadian based subsidiaries, which use CAD as
their functional currency, are translated at the prevailing average exchange
rates for the month.
Transportation Segment
Our Transportation segment operations generally consist of fee-based activities
associated with transporting crude oil and NGL on pipelines, gathering systems
and trucks. The Transportation segment generates revenue through a combination
of tariffs, pipeline capacity agreements and other transportation fees. Tariffs
and other fees on our pipeline systems vary by receipt point and delivery point.
The segment results generated by our tariff and other fee-related activities
depend on the volumes transported on the pipeline and the level of the tariff
and other fees charged, as well as the fixed and variable field costs of
operating the pipeline.
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The following tables set forth our operating results from our Transportation
segment:
Three Months Ended Six Months Ended
Operating Results (1) June 30 , Variance June 30 , Variance
(in millions, except per barrel data) 2020 2019 $ % 2020 2019 $ %
Revenues $ 457 $ 559 $ (102) (18) % $ 1,036 $ 1,115 $ (79) (7) %
Purchases and related costs (44) (48) 4 8 % (124) (100) (24) (24) %
Field operating costs (140) (186) 46 25 % (302) (360) 58 16 %
Segment general and administrative expenses (2) (24) (27) 3 11 % (51) (54) 3 6 %
Equity earnings in unconsolidated entities 81 83 (2) (2) % 189 172 17 10 %
Adjustments (3):
Depreciation and amortization of unconsolidated
entities 15 14 1 7 % 32 27 5 19 %
Inventory valuation adjustments (6) 2 (8) ** - 2 (2) **
Deficiencies under minimum volume commitments, net 4 1 3 ** - (7) 7 **
Equity-indexed compensation expense 3 2 1 ** 5 4 1 **
Line 901 incident - 10 (10) ** - 10 (10) **
Significant acquisition-related expenses - - - ** 3 - 3 **
Segment Adjusted EBITDA $ 346 $ 410 $ (64) (16) % $ 788 $ 809 $ (21) (3) %
Maintenance capital $ 31 $ 39 $ (8) (21) % $ 64 $ 67 $ (3) (4) %
Segment Adjusted EBITDA per barrel $ 0.64 $ 0.66 $ (0.02) (3) % $ 0.66 $ 0.67 $ (0.01) (1) %
Three Months Ended Six Months Ended
Average Daily Volumes June 30 , Variance June 30 , Variance
(in thousands of barrels per day) (4) 2020 2019 Volumes % 2020 2019 Volumes %
Tariff activities volumes
Crude oil pipelines (by region):
Permian Basin (5) 4,161 4,575 (414) (9) % 4,663 4,423 240 5 %
South Texas / Eagle Ford (5) 321 448 (127) (28) % 389 454 (65) (14) %
Central (5) 355 525 (170) (32) % 380 517 (137) (26) %
Gulf Coast 118 147 (29) (20) % 131 152 (21) (14) %
Rocky Mountain (5) 244 313 (69) (22) % 258 307 (49) (16) %
Western 215 195 20 10 % 209 188 21 11 %
Canada 242 319 (77) (24) % 285 321 (36) (11) %
Crude oil pipelines 5,656 6,522 (866) (13) % 6,315 6,362 (47) (1) %
NGL pipelines 194 182 12 7 % 190 196 (6) (3) %
Tariff activities total volumes 5,850 6,704 (854) (13) % 6,505 6,558 (53) (1) %
Trucking volumes 64 83 (19) (23) % 80 88 (8) (9) %
Transportation segment total volumes 5,914 6,787 (873) (13) % 6,585 6,646 (61) (1) %
** Indicates that variance as a percentage is not meaningful. (1)Revenues and costs and expenses include intersegment amounts.
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(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 13 to our Condensed
Consolidated Financial Statements for additional discussion of such adjustments.
(4)Average daily volumes are calculated as the total volumes (attributable to
our interest) for the period divided by the number of days in the period.
(5)Region includes volumes (attributable to our interest) from pipelines owned
by unconsolidated entities.
The following is a discussion of items impacting Transportation segment operating results for the periods indicated.
Revenues, Purchases and Related Costs, Equity Earnings in Unconsolidated Entities and Volumes. The following table presents variances in revenues, purchases and related costs and equity earnings in unconsolidated entities by region:
Favorable/(Unfavorable) Variance Favorable/(Unfavorable) Variance
Three Months Ended June 30 , Six Months Ended June 30 ,
2020-2019 2020-2019
Purchases and Equity Purchases and Equity
(in millions) Revenues Related Costs Earnings Revenues Related Costs Earnings
Permian Basin region $ (37) $ (5) $ 14 $ 8 $ (34) $ 45
South Texas / Eagle Ford region (4) - (9) (4) - (13)
Central region (7) - (4) (19) - (8)
Canada region (16) - - (14) - -
Other regions, trucking and pipeline loss
allowance revenue (38) 9 (3) (50) 10 (7)
Total variance $ (102) $ 4 $ (2) $ (79) $ (24) $ 17
•Permian Basin region. The decrease in revenues, net of purchases and related
costs, of $42 million and $26 million for the three and six months ended June
30, 2020 , respectively, compared to the same periods in 2019, was primarily due
to lower long-haul pipeline movements to Cushing and Corpus Christi due to tight
regional basis differentials, a portion of which are covered by minimum volume
commitments and will be made up or paid for in future periods. Despite the
voluntary curtailment and shut-in of oil production on our systems due to the
low oil prices in the quarter, the decreases on our long-haul pipelines were
partially offset by higher volumes on certain of our gathering systems,
primarily in the Delaware Basin , including the gathering system we acquired from
Felix Midstream in February 2020 .
The increase in equity earnings over the comparative periods was primarily from
our 65% interest in the Cactus II pipeline, which was placed in service in the
third quarter of 2019, partially offset by lower equity earnings from our 30%
interest in BridgeTex Pipeline Company, LLC primarily due to lower volumes.
•South Texas / Eagle Ford region. Equity earnings from our 50% interest in Eagle
Ford Pipeline LLC decreased for the three and six months ended June 30, 2020
compared to the three and six months ended June 30, 2019 due to a combination of
lower joint tariff volumes from the Permian Basin , and to a lesser extent, lower
regional receipts.
•Central region. The decrease in revenues, net of purchases and related costs,
for the three and six months ended June 30, 2020 compared to the same periods in
2019 was primarily due to lower volumes, primarily due to voluntary curtailments
and shut-ins by oil producers due to the low crude oil prices during the quarter
and increased competition in the region.
The decrease in equity earnings for the three and six months ended June 30, 2020
compared to the same periods in 2019 was primarily due to the impact of refinery
downtime on certain of the demand pull pipelines out of Cushing, Oklahoma , in
which we own a 50% interest.
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•Canada region. Revenues decreased for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 primarily due to voluntary curtailments and shut-ins by oil producers due to the low crude oil prices during the quarter. •Other regions, trucking and pipeline loss allowance revenue. The decrease in other revenues, net of purchases and related costs, for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 was primarily due to lower pipeline loss allowance revenue in 2020 due to lower prices and volumes. Additionally, volumes in ourRocky Mountain region decreased as they were also impacted by voluntary curtailments and shut-ins by oil producers due to the low crude oil prices during the quarter. Field Operating Costs. The decrease in field operating costs for the three and six months endedJune 30, 2020 compared to the same periods in 2019 was primarily due to (i) a decrease in power costs, including a reduction in the use of drag reducing agents due to lower volumes, (ii) additional estimated costs recognized in the second quarter of 2019 associated with the Line 901 incident (which impact field operating costs but are excluded from Segment Adjusted EBITDA and thus are reflected as an "Adjustment" in the table above), (iii) lower compensation costs and (iv) a decrease due to timing of integrity management activities. In addition, the six-month comparative period was favorably impacted by lower equity-based compensation costs on liability-classified awards (which are not included as an "Adjustment" in the table above) due to a decrease in the PAA common unit price.Maintenance Capital . Maintenance capital consists of 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. The decrease in maintenance capital spending for the three months endedJune 30, 2020 compared to the same period in 2019 was primarily due to the timing of integrity management activities.
Facilities Segment
Our Facilities segment operations generally consist of fee-based activities
associated with providing storage, terminalling and throughput services
primarily for crude oil, NGL and natural gas, as well as NGL fractionation and
isomerization services and natural gas and condensate processing services. The
Facilities segment generates revenue through a combination of month-to-month and
multi-year agreements.
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The following tables set forth our operating results from our Facilities
segment:
Three Months Ended Six Months Ended
Operating Results (1) June 30 , Variance June 30 , Variance
(in millions, except per barrel data) 2020 2019 $ % 2020 2019 $ %
Revenues $ 276 $ 291 $ (15) (5) % $ 589 $ 589 $ - - %
Purchases and related costs (7) (4) (3) (75) % (10) (7) (3) (43) %
Field operating costs (72) (88) 16 18 % (159) (175) 16 9 %
Segment general and administrative expenses (2) (27) (21) (6) (29) % (46) (41) (5) (12) %
Equity earnings in unconsolidated entities - - - N/A 2 - 2 N/A
Adjustments (3):
Depreciation and amortization of unconsolidated
entities 1 - 1 ** 1 - 1 **
(Gains)/losses from derivative activities (1) (7) 6 ** - (11) 11 **
Deficiencies under minimum volume commitments, net 3 - 3 ** 6 - 6 **
Equity-indexed compensation expense 1 1 - ** 1 1 - **
Segment Adjusted EBITDA $ 174 $ 172 $ 2 1 % $ 384 $ 356 $ 28 8 %
Maintenance capital $ 15 $ 30 $ (15) (50) % $ 29 $ 46 $ (17) (37) %
Segment Adjusted EBITDA per barrel $ 0.47 $ 0.46 $ 0.01 2 % $ 0.51 $ 0.48 $ 0.03 6 %
Three Months Ended Six Months Ended
June 30 , Variance June 30 , Variance
Volumes (4) 2020 2019 Volumes % 2020 2019 Volumes %
Liquids storage (average monthly
capacity in millions of barrels)
(5) 109 109 - - % 110 109 1 1 %
Natural gas storage (average
monthly working capacity in
billions of cubic feet) 67 63 4 6 % 65 63 2 3 %
NGL fractionation (average
volumes in thousands of barrels
per day) 122 137 (15) (11) % 138 147 (9) (6) %
Facilities segment total volumes
(average monthly volumes in
millions of barrels) (6) 124 124 - - % 125 124 1 1 %
** 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 13 to our Condensed
Consolidated Financial Statements for additional discussion of such adjustments.
(4)Average monthly volumes are calculated as total volumes for the period
divided by the number of months in the period.
(5)Includes volumes (attributable to our interest) from facilities owned by
unconsolidated entities.
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(6)Facilities segment total volumes is calculated as the sum of: (i) liquids
storage capacity; (ii) natural gas storage working capacity divided by 6 to
account for the 6:1 mcf of natural gas to crude Btu equivalent ratio and further
divided by 1,000 to convert to monthly volumes in millions; and (iii) NGL
fractionation volumes multiplied by the number of days in the period and divided
by the number of months in the period.
The following is a discussion of items impacting Facilities segment operating results.
Revenues, Purchases and Related Costs and Volumes. Variances in revenues and average monthly volumes were primarily driven by the following:
•Rail Terminals. Revenues from our rail terminals decreased by$12 million and$17 million for the three and six months endedJune 30, 2020 compared to three and six months endedJune 30, 2019 , respectively, primarily due to decreased activity at certain of our rail terminals as a result of less favorable market conditions. •Crude Oil Storage. Revenues from our crude oil storage operations increased by$10 million and$16 million for the three and six months endedJune 30, 2020 compared to three and six months endedJune 30, 2019 , respectively, primarily due to (i) the addition of an aggregate of 2.7 million barrels of storage capacity at our Midland,Cushing andSt. James terminals and (ii) increased activity at certain of ourWest Coast terminals. •NGL Operations. Revenues from our NGL operations decreased by$11 million for the three months endedJune 30, 2020 compared to the same period in 2019 due primarily to the sale of certain NGL terminals in the fourth quarter of 2019 and the second quarter of 2020 and a net unfavorable foreign exchange impact of approximately$3 million . Revenues increased by$6 million for the six months endedJune 30, 2020 compared to the same period in 2019 due to the favorable impact of the receipt of a deficiency payment of approximately$20 million upon the expiration of a multi-year contract and from higher fees at certain of our NGL storage facilities. Such favorable impact was partially offset by the sale of certain NGL terminals in the fourth quarter of 2019 and second quarter of 2020 and a net unfavorable foreign exchange impact of approximately$4 million . •Natural Gas Processing. Revenues, net of purchases and related costs, from our natural gas processing operations decreased by$6 million for both the three and six months endedJune 30, 2020 compared to the same periods in 2019 primarily due to the unfavorable impact of a$5 million payment to resolve a contractual dispute. Field Operating Costs. The decrease in field operating costs for the three and six months endedJune 30, 2020 compared to the same periods in 2019 was primarily due a net favorable foreign exchange impact as well as decreases resulting from (i) the sale of certain NGL terminals referenced above, (ii) timing of integrity management activities, (iii) reduced activity at our rail terminals and (iv) reductions in compensation and insurance costs, partially offset by (v) the impact of less favorable mark-to-market gains in the current period on fuel hedges (which impacts field operating costs but are excluded from Segment Adjusted EBITDA and thus are reflected as an "Adjustment" in the table above). Segment General and Administrative Expenses. The increase in segment general and administrative expenses for the three and six months endedJune 30, 2020 compared to the same periods in 2019 was primarily due to legal costs (the benefit from this action will be reflected in future periods). The increase during the six-month comparative period was partially offset by lower equity-based compensation costs on liability-classified awards (which are not included as an "Adjustment" in the table above) due to a decrease in the PAA common unit price
Supply and Logistics Segment
Revenues from our Supply and Logistics segment activities reflect the sale of
gathered and bulk-purchased crude oil, as well as sales of NGL volumes.
Generally, our segment results are impacted by (i) increases or decreases in our
Supply and Logistics segment volumes (which consist of lease gathering crude oil
purchases volumes and NGL sales volumes), (ii) the overall strength, weakness
and volatility of market conditions, including regional differentials, and
(iii) the effects of competition on our lease gathering and NGL margins. In
addition, the execution of our risk management strategies in conjunction with
our assets can provide upside in certain markets.
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The following tables set forth our operating results from our Supply and
Logistics segment:
Three Months Ended Six Months Ended
Operating Results (1) June 30 , Variance June 30 , Variance
(in millions, except per barrel data) 2020 2019 $ % 2020 2019 $ %
Revenues $ 2,925 $ 7,915 $ (4,990) (63) % $ 10,834 $ 15,938 $ (5,104) (32) %
Purchases and related costs (2,903) (7,700) 4,797 62 % (10,717) (15,262) 4,545 30 %
Field operating costs (45) (70) 25 36 % (103) (139) 36 26 %
Segment general and administrative expenses (2) (21) (27) 6 22 % (44) (56) 12 21 %
Adjustments (3):
(Gains)/losses from derivative activities, net of
inventory valuation adjustments 97 49 48 ** 121 (21) 142 **
Long-term inventory costing adjustments (51) 25 (76) ** 64 4 60 **
Equity-indexed compensation expense 1 1 - ** 2 2 - **
Net (gain)/loss on foreign currency revaluation - 7 (7) ** (13) 12 (25) **
Segment Adjusted EBITDA $ 3 $ 200 $ (197) (99) % $ 144 $ 478 $ (334) (70) %
Maintenance capital $ 8 $ 3 $ 5 167 % $ 11 $ 5 $ 6 120 %
Segment Adjusted EBITDA per barrel $ 0.03 $ 1.74 $ (1.71) (98) % $ 0.58 $ 1.95 $ (1.37) (70) %
Three Months Ended Six Months Ended
Average Daily Volumes (4) June 30 , Variance June 30 , Variance
(in thousands of barrels per day) 2020 2019 Volumes % 2020 2019 Volumes %
Crude oil lease gathering purchases 1,077 1,102 (25) (2) % 1,198 1,115 83 7 %
NGL sales 94 158 (64) (41) % 156 242 (86) (36) %
Supply and Logistics segment total volumes 1,171 1,260 (89) (7) % 1,354 1,357 (3) - %
** Indicates that variance as a percentage is not meaningful.
(1)Revenues and costs 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 13 to our Condensed
Consolidated Financial Statements for additional discussion of such adjustments.
(4)Average daily volumes are calculated as the total volumes for the period
divided by the number of days in the period.
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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
Three months ended
Six months ended
Our crude oil and NGL supply, logistics and distribution operations 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 for both sales and purchases, revenues and costs related to purchases will fluctuate with market prices. However, the margins related to those sales and purchases will not necessarily have a corresponding increase or decrease. Additionally, net revenues are impacted by net gains and losses from certain derivative activities during the periods. Our NGL operations are sensitive to weather-related demand, particularly during the approximate five-month peak heating season of November through March, and temperature differences from period-to-period may have a significant effect on NGL demand and thus our financial performance.
Segment Adjusted EBITDA and Volumes. The following summarizes the significant items impacting our Supply and Logistics Segment Adjusted EBITDA:
•Crude Oil Operations. Revenues, net of purchases and related costs, ("net
revenues") from our crude oil operations decreased for the three and six months
ended June 30, 2020 compared to the three and six months ended June 30, 2019 ,
primarily due to a combination of (i) significant curtailments and shut-ins by
producers due to the low crude oil prices in the second quarter, (ii) less
favorable differentials in the Permian Basin and Canada and (iii) the impact of
weighted average inventory costing resulting in lower margins during the period
(which will result in higher margins in the second half of 2020), partially
offset by the favorable impact of contango market conditions during the second
quarter of 2020. The decrease in the six-month comparative period was partially
offset by favorable arbitrage opportunities in Canada during the first quarter
of 2020.
•NGL Operations. Net revenues from our NGL operations decreased for the three
and six months ended June 30, 2020 compared to the three and six months ended
June 30, 2019 , primarily due to weaker fractionation spreads, lower border flows
through our straddle plants and the decision to decrease shoulder month sales
volumes and increase winter month sales volumes, plus the absence of the
favorable impact from certain non-recurring items recorded in the second quarter
of 2019.
•Impact from Certain Derivative Activities Net of Inventory Valuation
Adjustments. The impact from certain derivative activities on our net revenues
includes mark-to-market and other gains and losses resulting from certain
derivative instruments that are related to underlying activities in another
period (or the reversal of mark-to-market gains and losses from a prior period),
losses on derivatives that are related to investing activities (such as the
purchase of linefill) and inventory valuation adjustments, as applicable. See
Note 10 to our Condensed Consolidated Financial Statements for a comprehensive
discussion regarding our derivatives and risk management activities. These gains
and losses impact our net revenues but are excluded from Segment Adjusted EBITDA
and thus are reflected as an "Adjustment" in the table above.
•Long-Term Inventory Costing Adjustments. Our net revenues are impacted by
changes in the weighted average cost of our crude oil and NGL inventory pools
that result from price movements during the periods. These costing adjustments
related to long-term inventory necessary to meet our minimum inventory
requirements in third-party assets and other working inventory that was needed
for our commercial operations. We consider this inventory necessary to conduct
our operations and we intend to carry this inventory for the foreseeable future.
These costing adjustments impact our net revenues but are excluded from Segment
Adjusted EBITDA and thus are reflected as an "Adjustment" in the table above.
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•Foreign Exchange Impacts. Our net revenues are impacted by fluctuations in the
value of CAD to USD, resulting in foreign exchange gains and losses on U.S.
denominated net assets within our Canadian operations. These non-cash gains and
losses impact our net revenues but are excluded from Segment Adjusted EBITDA and
thus are reflected as an "Adjustment" in the table above.
•Field Operating Costs. The decrease in field operating costs for the three and
six months ended June 30, 2020 compared to the same periods in 2019 was
primarily driven by a decrease in long-haul third-party trucking costs and a
decrease in company personnel and truck costs as additional pipeline capacity
came into service after the first half of 2019.
•Segment General and Administrative Expenses. The decrease in segment general
and administrative expenses for the three and six months ended June 30, 2020
compared to the same periods in 2019 was primarily driven by lower compensation
costs and decreased travel and entertainment costs. The six-month comparative
period was further favorably impacted by a decrease in equity-based compensation
costs on liability-classified awards (which are not included as an "Adjustment"
in the table above) due to a decrease in the PAA common unit price.
Maintenance Capital . The increase in maintenance capital spending for the three
and six months ended June 30, 2020 compared to the same periods in 2019 was due
to higher tractor trailer lease buyouts.
Other Income and Expenses
Depreciation and Amortization
Depreciation and amortization expense increased for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 largely driven by (i) additional depreciation expense associated with the completion of various capital expansion projects and (ii) a reduction in the useful lives of certain assets.
Gains/Losses on Asset Sales and Asset Impairments, Net
The net loss on asset sales and asset impairments for the six months endedJune 30, 2020 was largely driven by (i) non-cash impairment losses of approximately$446 million related to the write-down of certain pipeline and other long-lived assets due to the current macroeconomic and geopolitical conditions including the collapse of oil prices driven by both the decrease in demand caused by the COVID-19 pandemic and excess supply, as well as changing market conditions and expected lower crude oil production in certain regions, and (ii) approximately$167 million of impairment losses recognized on assets upon classification as held for sale. See Note 14 for additional information regarding these asset impairments.
Goodwill Impairment Losses
During the first quarter of 2020, we recognized a goodwill impairment charge of$2.5 billion , representing the entire balance of goodwill. See Note 6 to our Condensed Consolidated Financial Statements for additional information.
Gain on/(Impairment of) Investments in Unconsolidated Entities, Net
During the three and six months endedJune 30, 2020 , we recognized a loss of$69 million and$112 million , respectively, related to the write-down of certain of our investments in unconsolidated entities. Additionally, during the six months endedJune 30, 2020 , we recognized a gain of$21 million related to our sale of a 10% interest inSaddlehorn Pipeline Company, LLC . See Note 7 to our Condensed Consolidated Financial Statements for additional information. During the six months endedJune 30, 2019 , we recognized a non-cash gain of$267 million related to a fair value adjustment resulting from the accounting for the contribution of our undivided joint interest in the Capline pipeline system for an equity interest inCapline Pipeline Company LLC .
Interest Expense
The increase in interest expense for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 was primarily due to (i) lower capitalized interest in the 2020 period driven by fewer capital projects under construction and (ii) a higher weighted average debt balance during the 2020 period from higher PAA commercial paper and credit facility borrowings. 57
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Other Income/(Expense), Net
The following table summarizes the components impacting Other income/(expense),
net (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019Gain/(loss) related to mark-to-market adjustment of the Preferred Distribution Rate Reset Option (1)
$ (9) $ (7) $ 17 $ 16 Net gain/(loss) on foreign currency revaluation (2) 23 (1) (36) - Other 4 2 6 2$ 18 $ (6) $ (13) $ 18 (1)See Note 10 to our Condensed Consolidated Financial Statements for additional information. (2)The net loss during the three and six months endedJune 30, 2020 was primarily related to the impact that the change in in theU.S. dollar to Canadian dollar exchange rate had on the portion of our intercompany net investment that is not long-term in nature.
Income Tax (Expense)/Benefit
The increase in the income tax benefit for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 was primarily due to the impact of lower earnings at PAA, including goodwill impairment losses, on income attributable to PAGP.
Liquidity and Capital Resources
General
On a consolidated basis, our primary sources of liquidity are (i) cash flow from operating activities, (ii) borrowings under PAA's credit facilities or the PAA commercial paper program and (iii) funds received from sales of equity and debt securities. In addition, we may supplement these sources of liquidity with proceeds from our divestiture program, as further discussed below in the section entitled "-Acquisitions and Capital Expenditures." 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) expansion and maintenance 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. 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 expansion 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 ofJune 30, 2020 , although we had a working capital deficit of$471 million , we had approximately$2.9 billion of liquidity available to meet our ongoing operating, investing and financing needs, subject to continued covenant compliance, as noted below (in millions): As of June 30, 2020 Availability under PAA senior unsecured revolving credit facility (1) (2)$ 1,505 Availability under PAA senior secured hedged inventory facility (1) (2) 1,383 Subtotal 2,888 Cash and cash equivalents 42 Total$ 2,930 58
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(1)Represents availability prior to giving effect to borrowings outstanding under the PAA commercial paper program, which reduce available capacity under the facilities. There were no commercial paper borrowings outstanding as ofJune 30, 2020 . (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$95 million and$17 million , respectively. Current macroeconomic and geopolitical conditions including the collapse of oil prices driven by both the decrease in demand caused by the COVID-19 pandemic and excess supply has caused liquidity issues impacting many energy companies; however, 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 liquidity; however, extended disruptions in the financial markets and/or energy price volatility that adversely affect our business may have a materially adverse effect on our financial condition, results of operations or cash flows. In addition, usage of the PAA credit facilities, which provide the financial backstop for the PAA commercial paper program, is subject to ongoing compliance with covenants. As ofJune 30, 2020 , PAA was in compliance with all such covenants. Also, see Item 1A. "Risk Factors" included in our 2019 Annual Report on Form 10-K and Item 1A. "Risk Factors" in Part II of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 for further discussion regarding such 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 2019 Annual Report on Form 10-K.
Net cash provided by operating activities for the first six months of 2020 and 2019 was$972 million and$1,468 million , respectively, and primarily resulted from earnings from our operations. Additionally, as discussed further below, changes during these periods in our inventory levels and associated margin balances required as part of our hedging activities impacted our cash flow from operating activities. During the six months endedJune 30, 2020 , we increased the volume of our crude oil inventory to be stored during the contango market; however, this increase was offset by lower prices for our inventory stored at the end of the current period compared to the end of 2019. During the six months endedJune 30, 2019 , our cash provided by operating activities was positively impacted by decreases in the volume of inventory that we held, primarily due to the sale of NGL and crude oil inventory. The favorable effects from the liquidation of such inventory were partially offset by the timing of revenue recognized during the period for which cash was received in prior periods.
Acquisitions and Capital Expenditures
In addition to our operating needs discussed above, on a consolidated basis, we also use cash for our acquisition activities and expansion capital projects and maintenance capital activities. Historically, we have financed these expenditures primarily with cash generated by operating activities and the financing activities discussed in "-Equity and Debt Financing Activities" below. In recent years, we have also used proceeds from our divestiture program. We have made and will continue to make capital expenditures for acquisitions, expansion capital projects and maintenance activities. However, in the near term we do not plan to issue common equity to fund such activities. Acquisitions. InFebruary 2020 , we acquired a crude oil gathering system and related assets in theDelaware Basin for approximately$300 million . See Note 14 to our Condensed Consolidated Financial Statements for additional information. Capital Projects. We invested$654 million in midstream infrastructure during the six months endedJune 30, 2020 , and we expect to invest approximately$1.0 billion during the full year endingDecember 31, 2020 . Our expected capital investment for 2020 reflects a reduction from our expected capital investment at year-end 2019 due to the current dynamic and uncertain market conditions. See "-Acquisitions and Capital Projects" for additional information. We expect to fund our 2020 capital program with retained cash flow, proceeds from assets sold as part of our divestiture program or debt. 59
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Divestitures. InJanuary 2020 , we entered into a definitive agreement to sell certain of ourLos Angeles Basin crude oil terminals for$195 million , subject to certain adjustments and expect the transaction to close in the second half of 2020. InApril 2020 , we sold certain NGL terminals for$163 million , subject to certain adjustments. See Note 14 to our Condensed Consolidated Financial Statements for additional information. Additionally, we sold a 10% ownership interest inSaddlehorn Pipeline Company, LLC for proceeds of approximately$78 million . See Note 7 to our Condensed Consolidated Financial Statements for additional information. Ongoing Acquisition, Divestiture and Investment Activities. We intend to continue to focus on activities to enhance investment returns and reinforce capital discipline through asset optimization, joint ventures, potential divestitures and similar arrangements. We typically do not announce a transaction until after we have executed a definitive agreement. However, 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 acquisition or investment efforts will be successful, or that our strategic asset divestitures will be completed. Although we expect the acquisitions and investments we make to be accretive in the long term, we can provide no assurance that our expectations will ultimately be realized. Also, see Item 1A. "Risk Factors-Risks Related to PAA's Business" of our 2019 Annual Report on Form 10-K for further discussion regarding risks related to our acquisitions and divestitures.
Equity and Debt Financing Activities
On a consolidated basis, our financing activities primarily relate to funding expansion capital projects, acquisitions and refinancing of 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. Our financing activities have primarily consisted of equity offerings, PAA senior notes offerings and borrowings and repayments under the credit facilities or the PAA commercial paper program and other debt agreements, as well as payment of distributions to our Class A shareholders and noncontrolling interests. 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 up to an aggregate of$1.0 billion of equity securities (the "PAGP Traditional Shelf"). AtJune 30, 2020 , we had approximately$939 million of unsold securities available under the PAGP Traditional Shelf. 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 six months endedJune 30, 2020 . 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 up to an aggregate of$1.1 billion of debt or equity securities (the "PAA Traditional Shelf"). AtJune 30, 2020 , PAA had approximately$1.1 billion of unsold securities available under the PAA Traditional Shelf. PAA did not conduct any offerings under the PAA Traditional Shelf during the six months endedJune 30, 2020 . 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. The offering of PAA's$750 million , 3.80% senior notes inJune 2020 was conducted under the PAA WKSI Shelf. Credit Agreements, Commercial Paper Program and Indentures. The credit agreements for the PAA revolving credit facilities (which impact PAA's ability to access the PAA commercial paper program because they provide the financial backstop that supports PAA's short-term credit ratings) and itsGO Zone term loans 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. As long as PAA is in compliance with the provisions in its credit agreements, its ability to make distributions of available cash is not restricted. As ofJune 30, 2020 , PAA was in compliance with the covenants contained in its credit agreements and indentures.
During the six months ended
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sales and the issuance of PAA's $750 million , 3.80% senior notes in June 2020 ,
which offset borrowings during the period related to funding needs for capital
investments, inventory purchases and other general partnership purposes.
During the six months ended June 30, 2019 , we had net borrowings under the PAA
credit facilities and commercial paper program of $318 million . These borrowings
resulted primarily from funds needed for general partnership purposes.
In June 2020 , PAA completed the offering of $750 million , 3.80% senior notes due
September 2030 at a public offering price of 99.794%. Interest payments are due
on March 15 and September 15 of each year, commencing on September 15, 2020 . PAA
intends to use the net proceeds from this offering of $742 million , after
deducting the underwriting discount and offering expenses, to partially repay
the principal amounts of our 5.00% senior notes due February 2021 and, pending
such repayment, have used a portion of the proceeds to repay outstanding
borrowings under our commercial paper program, credit facilities and for general
partnership purposes.
Distributions to Our Class A Shareholders
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 law or contractual obligations and funding of future distributions to our shareholders. OnAugust 14, 2020 , we will pay a quarterly distribution of$0.18 per Class A share ($0.72 per Class A share on an annualized basis), which is unchanged from our prior quarterly distribution, but equates to a reduction of 50% compared to the quarterly distribution of$0.36 per Class A share ($1.44 per Class A share on an annualized basis) paid inFebruary 2020 . This reduction was made in response to the current dynamic and uncertain market conditions to further reinforce our commitment to maintaining a solid capital structure and strong liquidity. See "-Executive Summary -Recent Events & Outlook" for further discussion. See Note 9 to our Condensed Consolidated Financial Statements for details of distributions paid during or pertaining to the first six months of 2020. Also, see Item 5. "Market for Registrant's Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities-Cash Distribution Policy" included in our 2019 Annual Report on Form 10-K for additional discussion regarding distributions.
Distributions to Noncontrolling Interests
Distributions to noncontrolling interests represent amounts paid on interests in consolidated entities that are not owned by us. As ofJune 30, 2020 , 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 25% limited partner interest in AAP and (iii) a 33% interest inRed River LLC . See Note 9 to our Condensed Consolidated Financial Statements for additional information. Distributions to PAA's Series A preferred unitholders. OnAugust 14, 2020 , PAA will pay a cash distribution of$37 million ($0.525 per unit) on its Series A preferred units outstanding as ofJuly 31, 2020 , the record date for such distribution for the period fromApril 1, 2020 throughJune 30, 2020 . See Note 9 to our Condensed Consolidated Financial Statements for details of distributions made during or pertaining to the first six months of 2020. Distributions to PAA's Series B preferred unitholders. Distributions on PAA's Series B preferred units are payable in cash semi-annually in arrears on the 15th day of May and November. See Note 9 to our Condensed Consolidated Financial Statements for additional information. Distributions to PAA's common unitholders. OnAugust 14, 2020 , PAA will pay a quarterly distribution of$0.18 per common unit ($0.72 per common unit on an annualized basis) on its common units outstanding as ofJuly 31, 2020 , the record date for such distribution for the period fromJanuary 1, 2020 throughMarch 31, 2020 . See Note 9 to our Condensed Consolidated Financial Statements for details of distributions paid during or pertaining to the first six months of 2020. We believe that 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. A prolonged material decrease in our cash flows would likely produce an adverse effect on our borrowing capacity and cost of borrowing. 61 -------------------------------------------------------------------------------- Table of Contents Contingencies
For a discussion of contingencies that may impact us, see Note 12 to our Condensed Consolidated Financial Statements.
Commitments
Contractual 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 13 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. The table below includes purchase obligations related to these activities. Where applicable, the amounts presented represent the net obligations associated with our counterparties (including giving effect to netting buy/sell contracts and those subject to a net settlement arrangement). 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 2025 and
2020 2021 2022 2023 2024 Thereafter Total
Long-term debt and related interest
payments (1) $ 218 $ 1,049 $ 1,159 $ 1,662 $ 1,083 $ 9,633 $ 14,804
Leases (2) 62 104 98 75 63 357 759
Other obligations (3) 356 482 332 302 276 1,193 2,941
Subtotal 636 1,635 1,589 2,039 1,422 11,183 18,504
Crude oil, NGL and other purchases
(4) 4,404 6,861 6,423 5,886 5,641 15,026 44,241
Total $ 5,040 $ 8,496 $ 8,012 $ 7,925 $ 7,063 $ 26,209 $ 62,745
(1)Includes debt service payments, interest payments due on PAA's senior notes
and the commitment fee on assumed available capacity under the PAA credit
facilities, as well as long-term borrowings under the PAA credit agreements and
the PAA commercial paper program, if any. Although there may be short-term
borrowings under the PAA credit agreements and the PAA commercial paper program,
we historically repay and borrow at varying amounts. As such, we have included
only the maximum commitment fee (as if no short-term borrowings were outstanding
on the PAA credit agreements or the PAA commercial paper program) in the amounts
above. For additional information regarding PAA's debt obligations, see Note 8
to our Condensed Consolidated Financial Statements.
(2)Includes both operating and finance leases as defined by FASB guidance.
Leases are primarily for (i) railcars, (ii) office space, (iii), land, (iv)
vehicles, (v) storage tanks and (vi) tractor trailers. See Note 14 to our
Consolidated Financial Statements included in Part IV of our 2019 Annual Report
on Form 10-K for additional information.
(3)Includes (i) other long-term liabilities, (ii) storage, processing and
transportation agreements (including certain agreements for which the amount and
timing of expected payments is subject to the completion of underlying
construction projects), (iii) certain rights-of-way easements and
(iv) noncancelable commitments related to our capital expansion projects,
including projected contributions for our share of the capital spending of our
equity method investments. The storage, processing and transportation agreements
include approximately $1.9 billion associated with agreements to store, process
and transport crude oil at posted tariff rates on pipelines or at facilities
that are owned by equity method investees. A portion of our commitment to
transport is supported by crude oil buy/sell or other agreements with third
parties with commensurate quantities.
(4)Amounts are primarily based on estimated volumes and market prices based on
average activity during June 2020 . 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.
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Letters of Credit. In connection with supply and logistics 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 June 30, 2020 and December 31, 2019 , we had
outstanding letters of credit of approximately $112 million and $157 million ,
respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303 of Regulation S-K.
Recent Accounting Pronouncements
See Note 2 to our Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
For a discussion regarding our critical accounting policies and estimates, see
"Critical Accounting Policies and Estimates" under Item 7 of our 2019 Annual
Report on Form 10-K.
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:
Factors Related Primarily to the COVID-19 Pandemic and Excess Supply Situation:
•further declines in global crude oil demand and crude oil prices that correspondingly lead to a significant reduction of domestic crude oil, NGL and natural gas 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; •uncertainty regarding the length of time it will take forthe United States ,Canada , and the rest of the world to slow the spread of the COVID-19 virus to the point where applicable authorities are comfortable easing current restrictions on various commercial and economic activities and the extent to which consumer demand and demand for crude oil rebound once such restrictions are lifted; such restrictions are designed to protect public health but also have the effect of significantly reducing demand for crude oil;
•uncertainty regarding the future actions of foreign oil producers such as
•uncertainty regarding the timing, pace and extent of an economic recovery inthe United States and elsewhere, which in turn will likely affect demand for crude oil and therefore the demand for the midstream services we provide and the commercial opportunities available to us; •the effect of an overhang of significant amounts of crude oil inventory stored inthe United States and elsewhere and the impact that such inventory overhang ultimately has on the timing of a return to market conditions that are more conducive to an increase in drilling and production activities inthe United States and a resulting increase in demand for the midstream services we provide; 63 -------------------------------------------------------------------------------- Table of Contents •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 (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, legal constraints (including governmental orders or guidance), or other factors;
•operational difficulties due to physical distancing restrictions and the additional demands such restrictions may place on our employees;
•disruptions to futures markets for crude oil, NGL and other petroleum products, which may impair our ability to execute our commercial and hedging strategies;
•our inability to reduce capital expenditures to the extent forecasted, whether due to the incurrence of unexpected or unplanned expenditures, third-party claims or other factors;
•the inability to complete forecasted asset sale transactions due to governmental action, litigation, counterparty non-performance or other factors;
General Factors:
•our ability to pay distributions to our Class A shareholders;
•our expected receipt of, and amounts of, distributions from
•the effects of competition, including the effects of capacity overbuild in areas where we operate;
•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 in ways that adversely impact our business;
•unanticipated changes in crude oil and NGL market structure, grade differentials and volatility (or lack thereof);
•environmental liabilities or events that are not covered by an indemnity, insurance or existing reserves;
•fluctuations in refinery capacity in areas supplied by our mainlines and other factors affecting demand for various grades of crude oil, NGL and natural gas and resulting changes in pricing conditions or transportation throughput requirements;
•maintenance of PAA's credit rating and ability to receive open credit from suppliers and trade counterparties;
•the occurrence of a natural disaster, catastrophe, terrorist attack (including eco-terrorist attacks) or other event, including cyber or other attacks on our electronic and computer systems;
•the successful integration and future performance of acquired assets or businesses and 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;
•failure to implement or capitalize, or delays in implementing or capitalizing, on expansion projects, whether due to permitting delays, permitting withdrawals or other factors;
•shortages or cost increases of supplies, materials or labor;
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•the impact of current and future laws, rulings, governmental regulations,
accounting standards and statements, and related interpretations, including
legislation or regulatory initiatives that prohibit, restrict or regulate
hydraulic fracturing;
•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, expansion projects, working capital requirements
and the repayment or refinancing of indebtedness;
•general economic, market or business conditions (both within the United States
and globally and including the potential for a recession or significant slowdown
in economic activity levels) and the amplification of other risks caused by
volatile financial markets, capital constraints and liquidity concerns;
•the availability of, and our ability to consummate, divestitures, joint ventures, acquisitions or other strategic opportunities;
•the currency exchange rate of the Canadian dollar;
•continued creditworthiness of, and performance by, our counterparties, including financial institutions and trading companies with which we do business;
•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;
•non-utilization of our assets and facilities;
•increased costs, or lack of availability, of insurance;
•weather interference with business operations or project construction, including the impact of extreme weather events or conditions;
•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, including our ability to satisfy our contractual obligations to our customers; and
•other factors and uncertainties inherent in the transportation, storage, terminalling and marketing of crude oil, as well as in the storage of natural gas and the processing, transportation, fractionation, storage and marketing of natural gas liquids. 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 2019 Annual Report on Form 10-K and in Part II of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Except as required by applicable securities laws, we do not intend to update these forward-looking statements and information. 65
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