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Must-know: Analysis of Plains All American's first quarter earnings

Part 8
Must-know: Analysis of Plains All American's first quarter earnings (Part 8 of 8)

Why a strong balance sheet provides acquisitions opportunities for PAA

Plains All American Pipeline (PAA) spent a significant amount on acquisitions in 2011 and 2012, but its expenditure came down in 2013. In 2011, it spent $1.4 billion and in 2012, the company made acquisitions worth approximately $2.3 billion. In contrast, PAA total acquisition capital for 2013 was $19 million.

PAA expects its growth through acquisitions to supplement its organic growth. Acquisitions have been a key element of PAA’s growth strategy, and have historically provided platform for subsequent organic growth. In the past, PAA identified and executed efficiently on commercial and operational synergies. Its growth through the inorganic route has intensified from 2007–2012 when the average annual capital spending on acquisitions were $0.9 billion as opposed to $0.3 billion during 2001–2005. Interestingly, the average size of acquisitions has also increased over time.

Acquisition 1Enlarge Graph

PAA has purchased assets and companies that have been integrated with the assets of all its primary operating segments (for example–transportation, facilities, and supply and logistics). The largest acquisition has been the acquisition of BP NGL pipelines for $1.68 billion in April 2012. The acquisition contributed approximately $27 million of additional tariff revenues in 2013. For 2012, the acquisition led to an $89 million increase in tariff revenue and increased volumes by approximately 175,000 barrels per day for PAA.

For 2014, PAA expects to slow down its spending on acquisitions. However, it looks to resort to acquisitions when it finds the target asset-accretive. Greg L. Armstrong, the Chairman and chief executive officer (or CEO) of PAA, made a comment in the conference call of 1Q14, “And third and finally as Al just mentioned a very solid capitalization, substantial liquidity and significant financial flexibility that not only enables us to comfortably execute our ongoing capital program but also to capitalize on attractive acquisition opportunities almost irrespective of capital market conditions at the time such acquisitions are available.”

Acquisition 2Enlarge Graph

PAA has a steady and strong balance sheet. As of March 31, 2014, it had a long-term debt of $6.8 billion compared to $6.7 billion of long-term debt as of December 31. 2013. The company currently at 47% of its long-term debt to book capitalization is within its target for of ~45–50%. Total debt to book capitalization of the company at 50% is less than its target of ~60%. The company’s adjusted EBITDA to interest ratio is currently at 7.3x, which is comfortably above its target ratio of 3.3x. Long-term debt to adjusted EBITDA ratio by the end of 1Q14 is at 3.2x, or lower than PAA’s target of 3.5x to 4.0x. PAA’s cash balance and liquidity available on credit facilities total $2 billion by the end of 1Q14. In 2013, the company’s operating cash flow was $1.95 billion. PAA estimates that it could make more than $1.5 billion cash acquisition in 2014 and remain within its targeted credit metrics.

FERC rate case impact

PAA’s natural gas storage facilities are subject to FERC (or Federal Energy Regulatory Commission) rate regulation. Revenues on its pipelines are impacted by FERC rate changes. These rates include rate increases or decreases on PAA’s intrastate and Canadian pipelines or other negotiated rate changes. The company benefited from a higher rate of tariff set by the FERC effective July 1, 2011, 2012, and 2013. The revision favorably impacted revenues on a majority of the company’s FERC regulated pipelines. However, in 3Q13, tariff rates on certain PAA FERC regulated pipelines were lowered relative to 2012 rates, which partially offset the advantages gained through the upward indexing. Revenues for both the 2012 and 2013 periods were also favorably impacted by increasing tariff rates on certain PAA non-FERC regulated pipelines.

Plains All American Pipeline (PAA) is a master limited partnership operating in the midstream energy space. The general partner of PAA is owned by Plains GP Holdings L.P. (PAGP). PAA is a component of the Alerian MLP ETF (AMLP), the Global X MLP ETF (MLPA), and the Global X MLP & Energy Infrastructure ETF (MLPX).

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