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PAGP > SEC Filings for PAGP > Form 10-Q on 13-May-2014All Recent SEC Filings

Show all filings for PLAINS GP HOLDINGS LP

Form 10-Q for PLAINS GP HOLDINGS LP


13-May-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Introduction

The following discussion is intended to provide investors with an understanding of our financial condition and results of our operations, including periods prior to the closing of our IPO on October 21, 2013. Such analysis 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 2013 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 Internal Growth 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 a Delaware limited partnership formed on July 17, 2013 to own an interest in the general partner and incentive distribution rights ("IDRs") of Plains All American Pipeline, L.P ("PAA"), a publicly traded Delaware limited partnership. Although we were formed as a limited partnership, we have elected to be taxed as a corporation for United States federal income tax purposes. As of March 31, 2014, we owned a 22.4% limited partner interest in AAP, a Delaware limited partnership that directly owns all of PAA's incentive distribution rights and indirectly owns the 2% general partner interest in PAA. AAP is the sole member of PAA GP LLC ("PAA GP"), a Delaware limited liability company that directly holds the 2% general partner interest in PAA.

Since we are the managing member of and control GP LLC, which in turn effectively controls PAA, we reflect our ownership in PAA and its subsidiaries on a consolidated basis in accordance with generally accepted accounting principles. Accordingly, our financial results are combined with those of GP LLC and PAA as well as with their subsidiaries. As such, our results of operations as discussed below do not differ materially from the results of operations of PAA.

PAA owns and operates midstream energy infrastructure and provides logistics services for crude oil, natural gas liquids ("NGL"), natural gas and refined products. The term NGL includes ethane and natural gasoline products as well as products commonly referred to as liquefied petroleum gas ("LPG") such as propane and butane. When used in this Form 10-Q, NGL refers to all NGL products including LPG. 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 in the United States and Canada.


Table of Contents

Overview of Operating Results, Capital Investments and Significant Activities

During the first three months of 2014, net income was approximately $372 million, as compared to net income of approximately $535 million recognized during the first three months of 2013. This decrease was primarily driven by less favorable crude oil market conditions experienced during the comparable 2014 period, which provided fewer opportunities for above-baseline crude oil margins in our Supply and Logistics segment. In addition, our Facilities and Supply and Logistics segments were negatively impacted by costs incurred in our natural gas storage activities to manage deliverability requirements in conjunction with the severe cold weather experienced during the first quarter of 2014. However, such decreases were partially offset by favorable results from our Transportation segment, largely due to the continued increase in North American crude oil production and our related, recently completed capital expansion projects.

Acquisitions and Internal Growth Projects



The following table summarizes our capital expenditures for acquisitions,
internal growth projects and maintenance capital for the periods indicated (in
millions):



                              Three Months
                             Ended March 31,
                             2014        2013
Acquisition capital        $       -     $   1
Internal growth projects         563       358
Maintenance capital               46        44
Total                      $     609     $ 403

Internal Growth Projects



The following table summarizes our more notable projects in progress during 2014
and the forecasted expenditures for the year ending December 31, 2014 (in
millions):



Projects                                                       2014
Permian Basin Area Projects                                    $470
Cactus Pipeline                                                 330
Rail Terminal Projects (1)                                      215
Ft. Sask Facility Projects / NGL Line                           160
Eagle Ford JV Project                                           70
Western Oklahoma Extension                                      65
Mississippian Lime Pipeline                                     50
White Cliffs Expansion                                          40
Line 63 Reactivation                                            40
Natural Gas Storage Expansions                                  25
Other Projects                                                  385
                                                              $1,850
Potential Adjustments for Timing / Scope Refinement (2)    -$100 + $100
Total Projected Expansion Capital Expenditures            $1,750 - $1,950



(1) Includes projects located in or near Bakersfield, CA; Carr, CO; Van Hook, ND; and Western Canada.

(2) Potential variation to current capital costs estimates may result from changes to project design, final cost of materials and labor and timing of incurrence of costs due to uncontrollable factors such as permits, regulatory approvals and weather.

Results of Operations

Analysis of Operating Segments

We manage our operations through three operating segments: (i) Transportation,
(ii) Facilities and (iii) Supply and Logistics. Our Chief Operating Decision Maker (our Chief Executive Officer) evaluates such segment performance based on a variety of measures including segment profit, segment volumes, segment profit per barrel and maintenance capital investment. See Note 18 to our Consolidated Financial Statements included in Part IV of our 2013 Annual Report on Form 10-K for further discussion of how we evaluate segment profit.


Table of Contents

The following table sets forth an overview of our consolidated financial results calculated in accordance with GAAP (in millions, except per share amounts):

                                               Three Months                   Favorable/
                                             Ended March 31,            (Unfavorable) Variance
                                            2014         2013            $                %

Transportation segment profit             $     206    $     164     $       42                26 %
Facilities segment profit                       154          150              4                 3 %
Supply and Logistics segment profit             249          434           (185 )             (43 )%
Total segment profit                            609          748           (139 )             (19 )%
Unallocated general and administrative
expenses                                         (1 )          -             (1 )             N/A
Depreciation and amortization                   (96 )        (82 )          (14 )             (17 )%
Interest expense, net                           (81 )        (78 )           (3 )              (4 )%
Other expense, net                               (2 )          -             (2 )             N/A
Income tax expense                              (57 )        (53 )           (4 )              (8 )%
Net income                                      372          535           (163 )             (30 )%
Net income attributable to
noncontrolling interests                       (358 )       (534 )          176                33 %
Net income attributable to PAGP           $      14    $       1     $       13             1,300 %

Net income attributable to PAGP:
Basic and diluted net income per
Class A share                             $    0.11          N/A            N/A               N/A
Basic and diluted weighted average
number of Class A shares outstanding            135          N/A            N/A               N/A

Transportation Segment

Our Transportation segment operations generally consist of fee-based activities associated with transporting crude oil and NGL on pipelines, gathering systems, trucks and barges. The Transportation segment generates revenue through a combination of tariffs, third-party leases of pipeline capacity and other transportation fees.

The following table sets forth operating results from our Transportation segment for the periods indicated:

                                                  Three Months              Favorable/(Unfavorable)
Operating Results (1)                           Ended March 31,                    Variance
(in millions, except per barrel amounts)       2014          2013               $                %
Revenues
Tariff activities                           $       336    $     320     $             16            5 %
Trucking                                             51           48                    3            6 %
Total transportation revenues                       387          368                   19            5 %

Costs and Expenses
Trucking costs                                      (37 )        (35 )                 (2 )         (6 )%
Field operating costs (excluding
equity-indexed compensation expense)               (129 )       (131 )                  2            2 %
Equity-indexed compensation expense -
operations                                           (4 )         (9 )                  5           56 %
Segment general and administrative
expenses (2) (excluding equity-indexed
compensation expense)                               (22 )        (23 )                  1            4 %
Equity-indexed compensation expense -
general and administrative                           (9 )        (17 )                  8           47 %
Equity earnings in unconsolidated
entities                                             20           11                    9           82 %
Segment profit                              $       206    $     164     $             42           26 %
Maintenance capital                         $        34    $      32     $             (2 )         (6 )%
Segment profit per barrel                   $      0.60    $    0.50     $           0.10           20 %


Table of Contents

                                          Three Months         Favorable/(Unfavorable)
Average Daily Volumes                    Ended March 31,               Variance
(in thousands of barrels per day) (3)     2014      2013         Volumes           %
Tariff activities
Crude Oil Pipelines
All American                                  33       40                 (7 )       (18 )%
Bakken Area Systems                          131      123                  8           7 %
Basin / Mesa                                 745      725                 20           3 %
Capline                                      126      156                (30 )       (19 )%
Eagle Ford Area Systems                      189       48                141         294 %
Line 63 / Line 2000                          125      118                  7           6 %
Manito                                        45       47                 (2 )        (4 )%
Mid-Continent Area Systems                   315      291                 24           8 %
Permian Basin Area Systems                   760      477                283          59 %
Rainbow                                      120      122                 (2 )        (2 )%
Rangeland                                     69       67                  2           3 %
Salt Lake City Area Systems                  131      135                 (4 )        (3 )%
South Saskatchewan                            64       60                  4           7 %
White Cliffs                                  23       22                  1           5 %
Other                                        661      734                (73 )       (10 )%
NGL Pipelines
Co-Ed                                         57       57                  -           - %
Other                                        116      207                (91 )       (44 )%
Refined Products Pipelines                     -      101               (101 )      (100 )%
Tariff activities total                    3,710    3,530                180           5 %
Trucking                                     130      111                 19          17 %
Transportation segment total               3,840    3,641                199           5 %



(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) Volumes associated with assets employed through acquisitions and internal growth projects represent total volumes (attributable to our interest) for the number of days we employed the assets divided by the number of days in the period.

Tariffs and other fees on our pipeline systems vary by receipt point and delivery point. The segment profit generated by our tariff and other fee-related activities depends 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. Revenue from our pipeline capacity leases generally reflects a negotiated amount.

The following is a discussion of items impacting Transportation segment profit and segment profit per barrel for the periods indicated.

Operating Revenues and Volumes. As noted in the table above, our total Transportation segment revenues, net of trucking costs, and volumes increased for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Our Transportation segment results for the comparative periods were impacted by the following:

North American Crude Oil Production and Related Expansion Projects - For the three months ended March 31, 2014, we experienced favorable volume and revenue variances due to increased producer drilling activities as well as the completion of certain of our expansion projects, most notably on our Permian Basin and Eagle Ford Area Systems and our Basin and Mesa pipelines. The Permian Basin Area Systems also benefited from increased movements to a new third-party pipeline connected to Gulf Coast markets. We estimate that increased production combined with our phased-in expansion projects increased revenues by approximately $22 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.


Table of Contents

Loss Allowance Revenue - As is common in the industry, our tariffs incorporate a loss allowance factor that is intended to offset losses due to evaporation, measurement and other losses in transit. We value the variance of allowance volumes to actual losses at the estimated net realizable value (including the impact of gains and losses from derivative-related activities) at the time the variance occurred and the result is recorded as either an increase or decrease to tariff revenues. The loss allowance revenue increased by approximately $10 million for the three months ended March 31, 2014 compared to three months ended March 31, 2013 driven by higher volumes, as well as a higher average realized price per barrel (including the impact of gains and losses from derivative-related activities).

Sale of Refined Products Pipelines - We sold certain refined products pipeline systems and related assets in July 2013 and November 2013. As we did not own these assets during the three months ended March 31, 2014, our revenues and volumes were lower by approximately $10 million and 101,000 barrels per day, respectively, as compared to the three months ended March 31, 2013.

Foreign Exchange Impact - Revenues and expenses from our Canadian based subsidiaries, which use the Canadian dollar as their functional currency, are translated at the prevailing average exchange rates for each month. The average CAD to USD exchange rates for the three months ended March 31, 2014 and 2013 were $1.10 CAD: $1.00 USD and $1.01 CAD: $1.00 USD, respectively. Therefore, revenues from our Canadian pipeline systems and trucking operations were unfavorably impacted by approximately $8 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to the depreciation of the Canadian dollar relative to the U.S. dollar.

Additional noteworthy volume and revenue variances on our pipelines for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 are (i) decreased volumes and revenues on certain of our NGL pipelines due to the discontinuation of an agreement in 2014 to transport volumes on such pipelines and netting joint venture related volumes to our share on a certain pipeline in 2014, which did not impact revenues, (ii) increased volumes and revenues from our new Mississippian Lime pipeline, which was placed into service in the third quarter of 2013, (iii) decreased volumes and revenues on our Capline pipeline due to refinery turnaround in the first quarter of 2014,
(iv) decreased volumes and revenues on our All American pipeline due to maintenance issues and (v) a net decrease in volumes on our crude oil pipelines included in "Other" in the table above, a majority of which is related to
(a) pipelines subject to long-term lease commitments with annual service payments whereby volumes may fluctuate, but such fluctuations do not have a meaningful impact on revenue and (b) pipelines impacted by third-party connection shut-downs and line repairs, which also did not have a significant impact on revenues for the period.

Equity-Indexed Compensation Expense. On a consolidated basis across all segments, equity-indexed compensation expense decreased for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to a less significant impact of the increase in PAA unit price during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. See Note 15 to our Consolidated Financial Statements included in Part IV of our 2013 Annual Report on Form 10-K for additional information regarding our equity-indexed compensation plans.

Equity Earnings in Unconsolidated Entities. The favorable variance in equity earnings in unconsolidated entities for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 was largely due to increased throughput on the Eagle Ford pipeline as a result of increased production, as discussed above.

Facilities Segment

Our Facilities segment operations generally consist of fee-based activities associated with providing storage, terminalling and throughput services for crude oil, refined products, 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 and processing arrangements.


Table of Contents

The following table sets forth operating results from our Facilities segment for the periods indicated:

                                                  Three Months             Favorable/(Unfavorable)
Operating Results (1)                           Ended March 31,                    Variance
(in millions, except per barrel amounts)       2014          2013             $               %
Revenues                                    $       299    $     267     $        32               12 %
Natural gas sales (2)                                 -           87             (87 )           (100 )%
Storage related costs (natural gas
related)                                            (26 )         (6 )           (20 )           (333 )%
Natural gas sales costs (2)                           -          (84 )            84              100 %
Field operating costs (excluding
equity-indexed compensation expense)                (97 )        (86 )           (11 )            (13 )%
Equity-indexed compensation expense -
operations                                           (1 )         (1 )             -                - %
Segment general and administrative
expenses (3) (excluding equity-indexed
compensation expense)                               (13 )        (17 )             4               24 %
Equity-indexed compensation expense -
general and administrative                           (8 )        (10 )             2               20 %
Segment profit                              $       154    $     150     $         4                3 %
Maintenance capital                         $        10    $       7     $        (3 )            (43 )%
Segment profit per barrel                   $      0.42    $    0.42     $         -                - %




                                              Three Months             Favorable/(Unfavorable)
                                             Ended March 31,                   Variance
Volumes (4)                                 2014         2013            Volumes             %
Crude oil, refined products and NGL
terminalling and storage (average
monthly capacity in millions of
barrels)                                        95           94                     1            1 %
Rail load / unload volumes (average
volumes in thousands of barrels per
day)                                           229          216                    13            6 %
Natural gas storage (average monthly
capacity in billions of cubic feet)             97           93                     4            4 %
NGL fractionation (average volumes in
thousands of barrels per day)                   92          100                    (8 )         (8 )%
Facilities segment total (average
monthly volumes in millions of
barrels) (5)                                   121          119                     2            2 %



(1) Revenues and costs and expenses include intersegment amounts.

(2) Effective January 1, 2014, our natural gas sales and costs, primarily attributable to the activities performed by our natural gas storage commercial optimization group, are reported in the Supply and Logistics segment.

(3) 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.

(4) Volumes associated with assets employed through acquisitions and internal growth projects represent total volumes for the number of months we employed the assets divided by the number of months in the period.

(5) Facilities segment total is calculated as the sum of:
(i) crude oil, refined products and NGL terminalling and storage capacity;
(ii) rail load and unload volumes multiplied by the number of days in the period and divided by the number of months in the period; (iii) natural gas capacity divided by 6 to account for the 6:1 mcf of gas to crude Btu equivalent ratio and further divided by 1,000 to convert to monthly volumes in millions; and (iv) NGL fractionation volumes multiplied by the number of days in the period and divided by the number of months in the period.


Table of Contents

The following is a discussion of items impacting Facilities segment profit and segment profit per barrel for the periods indicated.

Operating Revenues and Volumes. As noted in the table above, our Facilities segment revenues, less storage related costs, and volumes increased for the comparative period presented. The significant variances in revenues and average monthly volumes between the comparative periods are primarily due to our ongoing acquisition and expansion activities as discussed below:

NGL Fractionation, NGL Storage and Gas Processing Activities -Revenues from our NGL fractionation and storage and gas processing activities increased by approximately $23 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. This increase was largely driven by increased facility fees and higher processing gains related to the component mix of the products. NGL fractionation volumes, however, were lower during the first quarter of 2014 relative to the comparative period primarily related to reduced streams of NGL mix supply at certain of our facilities that resulted in decreased production rates.

This favorable revenue variance was partially offset by unfavorable foreign exchange impact of approximately $6 million. The average CAD to USD exchange rates for the three months ended March 31, 2014 and 2013 were $1.10 CAD: $1.00 USD and $1.01 CAD: $1.00 USD, respectively. Therefore, revenues from our Canadian operations in our Facilities segment were unfavorably impacted for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to the depreciation of the Canadian dollar relative to the U.S. dollar.

Natural Gas Storage Operations - Net revenues from our natural gas storage operations decreased by approximately $12 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to costs incurred in our natural gas storage activities to manage deliverability requirements in conjunction with the extended period of severe cold weather experienced during the first quarter of 2014.

Rail Terminals - Revenue and volumes from rail load and unload . . .

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