(EDGAR Online via COMTEX) -- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide investors with an understanding of our financial condition and results of our operations and should be read in conjunction with our historical Consolidated Financial Statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations as presented in our 2021 Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following financial information, see the Condensed Consolidated Financial Statements and related notes that are contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our discussion and analysis includes the following:
Results of Operations
Liquidity and Capital Resources
Recent Accounting Pronouncements
We are a Delaware limited partnership that has elected to be taxed as a corporation for United States federal income tax purposes. As of June 30, 2022, our sole cash-generating assets consisted of (i) a 100% managing member interest in GP LLC and (ii) an approximate 81% limited partner interest in AAP through our direct ownership of AAP units and indirect ownership of AAP units through GP LLC, which also holds the non-economic general partner interest in AAP. As of June 30, 2022, AAP directly owned a limited partner interest in PAA through its ownership of approximately 241.5 million PAA common units (approximately 31% of PAA's total outstanding common units and Series A preferred units combined). AAP is the sole member of PAA GP, which holds the non-economic general partner interest in PAA.
PAA's business model integrates large-scale supply aggregation capabilities with the ownership and operation of critical midstream infrastructure systems that connect major producing regions to key demand centers and export terminals. As one of the largest midstream service providers in North America, we own 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. PAA's assets and the services it provides are primarily focused on crude oil and NGL.
During the fourth quarter of 2021, we reorganized our historical operating segments into two operating segments: Crude Oil and NGL. Additionally, during the fourth quarter of 2021, we modified our definition of Segment Adjusted EBITDA to exclude amounts attributable to noncontrolling interests in consolidated joint venture entities. See Note 20 to our Consolidated Financial Statements included in Part IV of our 2021 Annual Report on Form 10-K for additional information. All segment data and related disclosures for earlier periods presented herein have been recast to reflect the new segment reporting structure and the modification to our definition of Segment Adjusted EBITDA.
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Overview of Operating Results
During the first six months of 2022, we recognized net income of $448 million compared to net income of $181 million recognized during the first six months of 2021. Results from our operations increased for the first six months of 2022 over the comparable 2021 period driven primarily by more favorable margins in our NGL segment and increased earnings from higher volumes on our crude oil pipelines. However, these items were partially offset by the impact from the sale of our natural gas storage facilities in the third quarter of 2021 and higher field operating costs in the 2022 period primarily from (i) an increase in estimated costs associated with the Line 901 incident and (ii) gains related to hedged power costs resulting from the extreme winter weather event that occurred in February 2021 ("Winter Storm Uri") recognized in the first quarter of 2021.
Results for the first six months of 2022 included a net gain on asset sales of $46 million, compared to a net loss on asset sales and asset impairments of $370 million included in results for the first six months of 2021. The 2022 period was also impacted by a loss on the mark-to-market adjustment of the Preferred Distribution Rate Reset Option and higher income tax expense.
See the "Results of Operations" section below for further discussion.
Results of Operations Consolidated Results The following table sets forth an overview of our consolidated financial results calculated in accordance with GAAP (in millions, except per share data): Three Months Ended Six Months Ended June 30, Variance June 30, Variance 2022 2021 $ % 2022 2021 $ % Product sales revenues $ 16,007 $ 9,623 $ 6,384 66 % $ 29,388 $ 17,706 $ 11,682 66 % Services revenues 352 307 45 15 % 665 607 58 10 % Purchases and related costs (15,324) (9,277) (6,047) (65) % (28,109) (16,669) (11,440) (69) % Field operating costs (307) (252) (55) (22) % (653) (471) (182) (39) % General and administrative expenses (80) (74) (6) (8) % (163) (142) (21) (15) % Depreciation and amortization (243) (197) (46) (23) % (475) (375) (100) (27) % Gains/(losses) on asset sales and asset impairments, net 3 (369) 372 101 % 46 (370) 416 112 % Equity earnings in unconsolidated entities 104 33 71 215 % 201 121 80 66 % Interest expense, net (99) (107) 8 7 % (206) (213) 7 3 % Other income/(expense), net (118) 84 (202) ** (155) 23 (178) ** Income tax (expense)/benefit (56) 17 (73) ** (91) (36) (55) (153) % Net income/(loss) 239 (212) 451 213 % 448 181 267 148 % Net (income)/loss attributable to noncontrolling interests (208) 143 (351) (245) % (395) (180) (215) (119) % Net income/(loss) attributable to PAGP $ 31 $ (69) $ 100 145 % $ 53 $ 1 $ 52 ** Basic and diluted net income/(loss) per Class A share $ 0.16 $ (0.35) $ 0.51 146 % $ 0.27 $ - $ 0.27 N/A Basic and diluted weighted average Class A shares outstanding 194 194 - - % 194 194 - - %
** Indicates that variance as a percentage is not meaningful.
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Fluctuations in our consolidated revenues and purchases and related costs are primarily associated with our merchant activities and generally explained in large part by changes in commodity prices. Our crude oil and NGL merchant activities are not directly affected by the absolute level of prices because the commodities that we buy and sell are generally indexed to the same pricing indices. Both product sales revenues and purchases and related costs will fluctuate with market prices; however, the absolute margins related to those sales and purchases will not necessarily have a corresponding increase or decrease. Additionally, product sales revenues include the impact of gains and losses related to derivative instruments used to manage our exposure to commodity price risk associated with such sales and purchases.
The following table presents the range of the NYMEX WTI benchmark price of crude oil (in dollars per barrel):
NYMEX WTI Crude Oil Price Low High Average Three Months Ended June 30, 2022 $ 94 $ 122 $ 109 Three Months Ended June 30, 2021 $ 59 $ 74 $ 66 Six Months Ended June 30, 2022 $ 76 $ 124 $ 102 Six Months Ended June 30, 2021 $ 48 $ 74 $ 62
Product sales revenues and purchases increased for the three and six months ended June 30, 2022, compared to the same periods in 2021 primarily due to higher prices and volumes in the 2022 periods.
Revenues from services increased for the three and six months ended June 30, 2022, compared to the same periods in 2021 primarily due to higher prices and volumes in the 2022 periods, partially offset by the impact of the sale of our natural gas storage facilities in the third quarter of 2021.
See further discussion of our net revenues in the "-Analysis of Operating Segments" section below.
Field Operating Costs
See discussion of field operating costs in the "-Analysis of Operating Segments" section below.
General and Administrative Expenses
The increase in general and administrative expenses for the three and six months ended June 30, 2022 compared to the same periods in 2021 was primarily due to
Gains/(Losses) on Asset Sales and Asset Impairments, Net
During the first quarter of 2022, we recognized a gain of $40 million related to the sale of land and buildings in California.
Depreciation and Amortization
The increase in depreciation and amortization expense for the three and six months ended June 30, 2022 compared to the same periods in 2021 was driven by depreciation expense on the assets contributed by Oryx Midstream Holdings LLC ("Oryx Midstream") upon formation of the Permian JV.
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, 2022 2021 2022 2021 Gain/(loss) related to mark-to-market adjustment of Preferred Distribution Rate Reset Option (1) $ (103) $ 77 $ (147) $ 9 Net gain/(loss) on foreign currency revaluation (2) (16) 6 (9) 13 Other 1 1 1 1 $ (118) $ 84 $ (155) $ 23
(1)See Note 8 to our Condensed Consolidated Financial Statements for additional information.
(2)The activity during the periods presented was primarily related to the impact from the change in the United States dollar to Canadian dollar exchange rate on the portion of our intercompany net investment that is not long-term in nature.
Income Tax (Expense)/Benefit
The net unfavorable income tax variance for the three and six months ended June 30, 2022 compared to the same periods in 2021 was primarily a result of increased income in our Canadian operations.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with GAAP, management uses additional measures known as "non-GAAP financial measures" in its evaluation of past performance and prospects for the future. The primary additional measures used by management are Adjusted EBITDA and Adjusted EBITDA attributable to PAA.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization (including our proportionate share of depreciation and amortization, including write-downs related to cancelled projects, of unconsolidated entities), gains and losses on asset sales and asset impairments, goodwill impairment losses and gains on and impairments of investments in unconsolidated entities, adjusted for certain selected items impacting comparability. Our definition and calculation of certain non-GAAP financial measures may not be comparable to similarly-titled measures of other companies. Adjusted EBITDA and Adjusted EBITDA attributable to PAA are reconciled to Net Income, the most directly comparable measure as reported in accordance with GAAP, and should be viewed in addition to, and not in lieu of, our Condensed Consolidated Financial Statements and accompanying notes.
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Management believes that the presentation of such additional financial measures provides useful information to investors regarding our performance and results of operations because these measures, when used to supplement related GAAP financial measures, (i) provides additional information about our core operating performance, (ii) provides investors with the same financial analytical framework upon which management bases financial, operational, compensation and planning/budgeting decisions and (iii) presents measures that investors, rating agencies and debt holders have indicated are useful in assessing us and our results of operations. These non-GAAP measures may exclude, for example,
Although we present selected items impacting comparability that management considers in evaluating our performance, you should also be aware that the items presented do not represent all items that affect comparability between the periods presented. Variations in our operating results are also caused by changes in volumes, prices, exchange rates, mechanical interruptions, acquisitions, divestitures, investment capital projects and numerous other factors as discussed, as applicable, in "-Analysis of Operating Segments."
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Three Months Ended Six Months Ended June 30, Variance June 30, Variance 2022 2021 $ % 2022 2021 $ % Net income/(loss) $ 239 $ (212) $ 451 213 % $ 448 $ 181 $ 267 148 % Interest expense, net 99 107 (8) (7) % 206 213 (7) (3) % Income tax expense/(benefit) 56 (17) 73 429 % 91 36 55 153 % Depreciation and amortization 243 197 46 23 % 475 375 100 27 % (Gains)/losses on asset sales and asset impairments, net (3) 369 (372) (101) % (46) 370 (416) (112) % Depreciation and amortization of unconsolidated entities (1) 17 68 (51) (75) % 37 88 (51) (58) % Unallocated general and administrative expenses (2) 2 2 - - % 3 3 - - % Selected Items Impacting Comparability: (Gains)/losses from derivative activities and inventory valuation adjustments (75) 163 (238) ** 13 (35) 48 ** Long-term inventory costing adjustments (13) (27) 14 ** (105) (68) (37) ** Deficiencies under minimum volume commitments, net 10 6 4 ** 15 (26) 41 ** Equity-indexed compensation expense 7 4 3 ** 15 9 6 ** Net (gain)/loss on foreign currency revaluation 3 (1) 4 ** 1 (2) 3 ** Line 901 incident - - - ** 85 - 85 ** Significant transaction-related expenses - 3 (3) ** - 3 (3) ** Selected Items Impacting Comparability - Segment Adjusted EBITDA (3) (68) 148 (216) ** 24 (119) 143 ** (Gains)/losses from derivative activities (4) 103 (77) 180 ** 147 (9) 156 ** Net (gain)/loss on foreign currency revaluation (5) 16 (6) 22 ** 9 (13) 22 ** Selected Items Impacting Comparability - Adjusted EBITDA (6) 51 65 (14) ** 180 (141) 321 ** Adjusted EBITDA (6) $ 704 $ 579 $ 125 22 % $ 1,394 $ 1,125 $ 269 24 % Adjusted EBITDA attributable to noncontrolling interests in consolidated joint ventures (7) (89) (4) (85) ** (166) (7) (159) ** Adjusted EBITDA attributable to PAA $ 615 $ 575 $ 40 7 % $ 1,228 $ 1,118 $ 110 10 %
** Indicates that variance as a percentage is not meaningful.
(1)We exclude our proportionate share of the depreciation and amortization expense (including write-downs related to cancelled projects) of such unconsolidated entities when reviewing Adjusted EBITDA, similar to our consolidated assets.
(2)Represents general and administrative expenses incremental to those of PAA, which are not allocated to our reporting segments in determining Segment Adjusted EBITDA and are excluded in the non-GAAP financial performance measures utilized by management.
(3)For a more detailed discussion of these selected items impacting comparability, see the footnotes to the Segment Adjusted EBITDA Reconciliation table in Note 11 to our Condensed Consolidated Financial Statements.
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(4)The Preferred Distribution Rate Reset Option of PAA's Series A preferred units is accounted for as an embedded derivative and recorded at fair value in our Condensed Consolidated Financial Statements. The associated gains and losses are not integral to our results and were thus classified as a selected item impacting comparability. See Note 8 to our Condensed Consolidated Financial Statements for additional information regarding the Preferred Distribution Rate Reset Option.
(5)During the periods presented, there were fluctuations in the value of CAD to USD, resulting in the realization of foreign exchange gains and losses on the settlement of foreign currency transactions as well as the revaluation of monetary assets and liabilities denominated in a foreign currency. The associated gains and losses are not integral to our results and were thus classified as a selected item impacting comparability.
(6)Other 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.
(7)Reflects amounts attributable to noncontrolling interests in the Permian JV and Red River LLC.
Analysis of Operating Segments
We manage our operations through two operating segments: Crude Oil and NGL. Our CODM (our Chief Executive Officer) evaluates segment performance based on a variety of measures including Segment Adjusted EBITDA, segment volumes and maintenance capital investment. See Note 11 to our Condensed Consolidated Financial Statements for our definition of Segment Adjusted EBITDA and a reconciliation of Segment Adjusted EBITDA to Net income attributable to PAGP. See Note 20 to our Consolidated Financial Statements included in Part IV of our 2021 Annual Report on Form 10-K for our definition of maintenance capital.
Crude Oil Segment
Our Crude Oil segment operations generally consist of gathering and transporting crude oil using pipelines, gathering systems, trucks and at times on barges or railcars, in addition to providing terminalling, storage and other facilities-related services utilizing our integrated assets across the United States and Canada. Our assets serve third parties and are also supported by our merchant activities. Our merchant activities include the purchase of crude oil supply and the movement of this supply on primarily our assets to sales locations, including our terminals, third-party connecting carriers, regional hubs or to refineries. Our merchant activities are subject to our risk management policies and may include the use of derivative instruments to hedge our exposure.
Our Crude Oil segment generates revenue through a combination of tariffs, pipeline capacity agreements and other transportation fees, month-to-month and multi-year storage and terminalling agreements and the sale of gathered and bulk-purchased crude oil. Tariffs and other fees on our pipeline systems are typically based on volumes transported and vary by receipt point and delivery point. Fees for our terminalling and storage services are based on capacity leases and throughput volumes. Generally, results from our merchant activities are impacted by (i) increases or decreases in our lease gathering crude oil purchases volumes and (ii) the overall strength, weakness and volatility of . . .
Aug 09, 2022
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