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. Unless the context otherwise requires, references to "we," "us," "our," and "PAGP" are intended to mean the business and operations of PAGP and its consolidated subsidiaries.
Our discussion and analysis includes the following:
•Executive Summary
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies and Estimates
•Recent Accounting Pronouncements
A comparative discussion of our 2021 to 2020 operating results and performance measures can be found in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 1, 2022 . Executive Summary Company Overview We are aDelaware limited partnership formed in 2013 that has elected to be taxed as a corporation forUnited States federal income tax purposes. As ofDecember 31, 2022 , our sole cash-generating assets consisted of an approximate 81% limited partner interest in AAP through our ownership of approximately 194.4 million AAP units. We also own a 100% managing member interest inGP LLC .GP LLC is aDelaware limited liability company that holds the non-economic general partner interest in AAP. AAP is aDelaware limited partnership that, as ofDecember 31, 2022 , directly owned a limited partner interest in PAA through its ownership of approximately 241.0 million PAA common units (approximately 31% PAA's total outstanding common units and Series A preferred units combined). AAP is the sole member of PAA GP, aDelaware limited liability company that directly holds the non-economic general partner interest in PAA. PAA's business model integrates large-scale supply aggregation capabilities with the ownership and operation of critical midstream infrastructure systems that connect major producing regions to key demand centers and export terminals. As one of the largest midstream service providers inNorth America , PAA owns an extensive network of pipeline transportation, terminalling, storage and gathering assets in key crude oil and NGL producing basins (including thePermian Basin ) and transportation corridors and at major market hubs inthe United States andCanada . PAA's assets and the services it provides are primarily focused on crude oil and NGL.
Market Overview and Outlook
Crude oil and other petroleum liquids are supplied to the global market by producers around the world, with the majority coming from theOrganization of Petroleum Exporting Countries ("OPEC"), theRussian Federation and North American producers, among others. The chart below depicts the relationship between global supply of crude oil and other petroleum liquids and demand since the beginning of 2018 and theU.S. Energy Information Administration's ("EIA") Short-Term Energy Outlook as ofJanuary 2023 : 69
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
World Liquid Fuels Production and Consumption Balance (1)
(in millions of barrels per day)
[[Image Removed: pagp-20221231_g6.jpg]]
(1)Barrels produced and consumed per quarter.
Global crude oil demand at the end of 2022 was near pre-COVID levels, with the EIA and other third parties forecasting demand to exceed 2019 levels by the second half of 2023 and continue to grow for the foreseeable future. We believe this demand growth combined with the multi-year backdrop of reduced upstream investment and a continuation ofOPEC discipline and Western sanctions on Russian petroleum could further exacerbate many of the supply concerns that emerged in 2022. This includes tight global markets and continued commodity price volatility. As a result, we expect North American energy supply to play a critical long-term role in meeting global demand and thePermian Basin to drive the vast majority ofU.S. production growth in the coming years. It is against this macro backdrop that we expect to generate significant positive free cash flow on a multi-year basis, supported by our existing asset base and integrated business model. Our financial strategy and long-term capital allocation framework is focused on generating meaningful multi-year free cash flow and improving shareholder returns by (i) increasing returns of capital to equity holders, primarily through increased distributions, (ii) making disciplined accretive investments and (iii) maintaining an investment grade credit profile and ensuring balance sheet flexibility.
Overview of Operating Results
During 2022, we continued to build momentum and reinforce our long-term positioning by taking actions to further optimize our asset base and streamline our operations. We recognized net income of$1.163 billion for the year endedDecember 31, 2022 compared to net income of$600 million for the year endedDecember 31, 2021 . Results from our operations increased for 2022 over the comparable 2021 period driven primarily by more favorable margins in our NGL segment, as well as increased earnings from our crude oil pipelines due to higher tariff volumes and higher loss allowance revenue attributable to higher volumes and commodity prices. However, these items were partially offset by the impact of the monetization of contango hedges that benefited the 2021 period, 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 inFebruary 2021 ("Winter Storm Uri") recognized in the first quarter of 2021. 70
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements Additionally, results for 2022 included a net loss on asset sales and asset impairments of$269 million , primarily related to the impairment of certain of ourCalifornia crude oil assets, compared to a net loss on asset sales and asset impairments of$592 million included in results for 2021, a majority of which was related to the write-down of our natural gas storage facilities, which were classified as held for sale in the second quarter and sold in the third quarter. The 2022 period also includes net gains of approximately$346 million , primarily associated with the remeasurement of our previously held 65% interest in Cactus II to fair value in connection with our acquisition of an additional 5% interest in Cactus II inNovember 2022 .
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):
Year Ended December 31, Variance
2022 2021 $ %
Product sales revenues $ 55,948 $ 40,883 $ 15,065 37 %
Services revenues 1,394 1,195 199 17 %
Purchases and related costs (53,176) (38,504) (14,672) (38) %
Field operating costs (1,315) (1,065) (250) (23) %
General and administrative expenses (330) (298) (32) (11) %
Depreciation and amortization (968) (777) (191) (25) %
Gains/(losses) on asset sales and asset
impairments, net (269) (592) 323 55 %
Equity earnings in unconsolidated entities 403 274 129 47 %
Gains/(losses) on investments in unconsolidated
entities, net 346 2 344 **
Interest expense, net (405) (425) 20 5 %
Other income/(expense), net (219) 19 (238) **
Income tax expense (246) (112) (134) (120) %
Net income 1,163 600 563 94 %
Net income attributable to noncontrolling
interests (995) (540) (455) (84) %
Net income attributable to PAGP $ 168 $ 60 $ 108 180 %
Basic and diluted net income per Class A share $ 0.86 $ 0.31 $ 0.55 **
Basic and diluted weighted average Class A shares
outstanding 194 194 - **
** Indicates that variance as a percentage is not meaningful.
Revenues and Purchases
Fluctuations in our consolidated revenues and purchases and related costs are
primarily associated with our merchant activities and generally explained in
large part by changes in commodity prices. Our crude oil and NGL merchant
activities are not directly affected by the absolute level of prices because the
commodities that we buy and sell are generally indexed to the same pricing
indices. Both product sales revenues and purchases and related costs will
fluctuate with market prices; however, the absolute margins related to those
sales and purchases will not necessarily have a corresponding increase or
decrease. 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.
71--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
A majority of our sales and purchases are indexed to West Texas Intermediate
("WTI"). The following table presents the range of the NYMEX WTI benchmark price
of crude oil over the last two years (in dollars per barrel):
NYMEX WTI
Crude Oil Price
During the Year Ended December 31, Low High Average
2022 $ 71 $ 124 $ 94
2021 $ 48 $ 85 $ 68
Product sales revenues and purchases increased for the year ended December 31,
2022 compared to the year ended December 31, 2021 primarily due to higher prices
in 2022.
Revenues from services increased for the year ended December 31, 2022 compared
to the year ended December 31, 2021 primarily due to higher prices and volumes
in 2022 (a portion of which was related to contributions from recently completed
acquisitions and joint venture transactions), partially offset by the impact of
the sale of our natural gas storage facilities in the third quarter of 2021.
See further discussion of net revenues (revenues less purchases and related costs) 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 year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to (i) employee-related costs, including an increase in equity-indexed compensation expense due to changes in plan assumptions and a higher PAA common unit price (a portion of which is excluded in the calculation of Adjusted EBITDA and Segment Adjusted EBITDA), (ii) higher information systems costs due to ongoing systems integration work and (iii) higher office rent due to an operating cost abatement in the prior year, partially offset by (iv) costs associated with the formation of the Permian JV in the prior year.
Depreciation and Amortization
Depreciation and amortization expense increased for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 largely driven by depreciation and amortization expense on assets (i) contributed byOryx Midstream Holdings LLC ("Oryx Midstream") upon formation of the Permian JV and (ii) consolidated in connection with our acquisition of an additional interest in Cactus II. See Note 7 to our Consolidated Financial Statements for additional information.
Gains/(Losses) on Asset Sales and Asset Impairments, Net
The net losses on asset sales and asset impairments for 2022 primarily included (i) a$330 million non-cash impairment charge recognized in the fourth quarter of 2022 related to certain crude oil assets inCalifornia and (ii) gains recognized from the sale of land and related assets inLong Beach, California , as well as Line 901 and theSisquoc toPentland portion of Line 903, a portion of which relates to the transfer of an asset retirement obligation to the purchaser. See Note 6 and Note 7 to our Consolidated Financial Statements for additional information. The net losses on asset sales and asset impairments for 2021 primarily included (i) an approximate$220 million non-cash impairment charge recognized in the third quarter related to the write-down of certain crude oil storage terminal assets as a result of decreased demand for our services due to changing market conditions, (ii) an approximate$475 million non-cash impairment charge related to the write-down of ourPine Prairie and Southern Pines natural gas storage facilities upon classification as held for sale (these assets were sold inAugust 2021 ), and (iii) a gain of$106 million related to the asset exchange agreement (the "Asset Exchange") involving the sale of one of our crude oil pipelines inCanada in exchange for additional interests in certain of the Empress natural gas processing plants.
See Note 6 and Note 7 to our Consolidated Financial Statements for additional information regarding these asset sales and asset impairments.
72--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
Equity Earnings in Unconsolidated Entities
See discussion of equity earnings in unconsolidated entities in the "-Analysis of Operating Segments" section below.
Gains/(Losses) on Investments in Unconsolidated Entities, Net
During the fourth quarter of 2022, we recognized (i) a gain of$370 million associated with the remeasurement of our previously held 65% interest in Cactus II to fair value in connection with our acquisition of an additional 5% interest in Cactus II inNovember 2022 and (ii) a loss of$25 million associated with the difference between the fair value and historical book value of assets contributed by the Permian JV in exchange for an additional interest in OMOG. See Note 7 and Note 9 to our Consolidated Financial Statements for additional information regarding these transactions.
Interest Expense, Net
Interest expense is primarily impacted by:
•our weighted average debt balances;
•the level and maturity of fixed rate debt and interest rates associated therewith;
•market interest rates and our interest rate hedging activities; and
•interest capitalized on capital projects.
The following table summarizes the components impacting the interest expense variance (in millions, except percentages):
Average Weighted Average
LIBOR/SOFR Interest Rate (1)
Interest expense for the year ended
0.1 % 4.2 % Impact of retirement of senior notes (22) Impact of lower capitalized interest 13 Impact of interest rate swap (7) Other (4)
Interest expense for the year ended
1.9 % 4.3 %
(1)Excludes commitment and other fees.
See Note 11 to our Consolidated Financial Statements for additional information regarding our debt and related activities during the periods presented.
Other Income/(Expense), Net
The following table summarizes the components impacting Other income/(expense), net (in millions):
Year Ended December 31,
2022 2021
Gain/(loss) on mark-to-market adjustment of Preferred Distribution Rate Reset Option embedded derivative (1)
$ (189) $ 14
Net gain/(loss) on foreign currency revaluation (2) (36) 3
Other 6 2
$ (219) $ 19 (1)See Note 13 to our Consolidated Financial Statements for additional information.
73--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
(2)The activity during the periods presented was primarily related to the impact from the change inthe United States Dollar to Canadian dollar exchange rate on the portion of our intercompany net investment that is not long-term in nature.
Income Tax (Expense)/Benefit
The net unfavorable income tax variance for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily a result of higher year-over-year income as impacted by fluctuations of the derivative mark-to-market valuations 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, which excludes the portion of Adjusted EBITDA attributable to noncontrolling interests in consolidated joint venture entities. 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 and impairments, of unconsolidated entities), gains and losses on asset sales and asset impairments, goodwill impairment losses and gains or losses 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/(Loss), the most directly comparable measures as reported in accordance with GAAP, and should be viewed in addition to, and not in lieu of, our Consolidated Financial Statements and accompanying notes.
Performance Measures
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) provide additional information about our core operating performance, (ii) provide investors with the same financial analytical framework upon which management bases financial, operational, compensation and planning/budgeting decisions and (iii) present measures that investors, rating agencies and debt holders have indicated are useful in assessing us and our results of operations. These non-GAAP measures may exclude, for example, (i) charges for obligations that are expected to be settled with the issuance of equity instruments, (ii) gains and losses on derivative instruments that are related to underlying activities in another period (or the reversal of such adjustments from a prior period), gains and losses on derivatives that are either related to investing activities (such as the purchase of linefill) or purchases of long-term inventory, and inventory valuation adjustments, as applicable, (iii) long-term inventory costing adjustments, (iv) items that are not indicative of our core operating results and/or (v) other items that we believe should be excluded in understanding our core operating performance. These measures may further be adjusted to include amounts related to deficiencies associated with minimum volume commitments whereby we have billed the counterparties for their deficiency obligation and such amounts are recognized as deferred revenue in "Other current liabilities" in our Consolidated Financial Statements. We also adjust for amounts billed by our equity method investees related to deficiencies under minimum volume commitments. Such amounts are presented net of applicable amounts subsequently recognized into revenue. We have defined all such items as "selected items impacting comparability." We do not necessarily consider all of our selected items impacting comparability to be non-recurring, infrequent or unusual, but we believe that an understanding of these selected items impacting comparability is material to the evaluation of our operating results and prospects.
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."
74--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
The following table sets forth the reconciliation of the non-GAAP financial
performance measures Adjusted EBITDA and Adjusted EBITDA attributable to PAA
from Net Income (in millions):
Year Ended December 31, Variance
2022 2021 $ %
Net income $ 1,163 $ 600 $ 563 94 %
Interest expense, net 405 425 (20) (5) %
Income tax expense 246 112 134 120 %
Depreciation and amortization 968 777 191 25 %
(Gains)/losses on asset sales and asset
impairments, net 269 592 (323) (55) %
(Gains)/losses on investments in unconsolidated
entities, net (346) (2) (344) **
Depreciation and amortization of unconsolidated
entities (1) 85 123 (38) (31) %
Unallocated general and administrative expenses
(2) 5 6 (1) (17) %
Selected Items Impacting Comparability:
Derivative activities and inventory valuation
adjustments (280) (271) (9) **
Long-term inventory costing adjustments (4) (94) 90 **
Deficiencies under minimum volume commitments,
net 7 (7) 14 **
Equity-indexed compensation expense 32 19 13 **
Foreign currency revaluation 4 (4) 8 **
Line 901 incident 95 15 80 **
Significant transaction-related expenses - 16 (16) **
Selected Items Impacting Comparability - Segment
Adjusted EBITDA (3) (146) (326) 180 **
Mark-to-market adjustment of Preferred
Distribution Rate Reset Option embedded
derivative (4) 189 (14) 203 **
Foreign currency revaluation (5) 37 (3) 40 **
Selected Items Impacting Comparability -
Adjusted EBITDA (6) 80 (343) 423 **
Adjusted EBITDA (6) $ 2,875 $ 2,290 $ 585 26 %
Adjusted EBITDA attributable to noncontrolling
interests in consolidated joint ventures (7) (365) (94) (271) (288) %
Adjusted EBITDA attributable to PAA $ 2,510 $ 2,196 $ 314 14 %
** 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 and impairments) of 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 20 to our Consolidated Financial Statements.
(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 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 13 to our 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.
75--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
(6)Other income/(expense), net on our 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,
Cactus II and
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.
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 (d)
our proportionate share of the depreciation and amortization expense (including
write-downs related to cancelled projects and impairments) of unconsolidated
entities, further adjusted (e) for certain selected items including (i) gains
and losses on derivative instruments that are related to underlying activities
in another period (or the reversal of such adjustments from a prior period),
gains and losses on derivatives that are either related to investing activities
(such as the purchase of linefill) or purchases of long-term inventory, and
inventory valuation adjustments, as applicable, (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 and (f) to
exclude the portion of all preceding items that is attributable to
noncontrolling interests in consolidated joint venture entities ("Adjusted
EBITDA attributable to noncontrolling interests in consolidated joint
ventures"). See Note 20 to our Consolidated Financial Statements for a
reconciliation of Segment Adjusted EBITDA to Net income/(loss) attributable to
PAGP.
In connection with our merchant activities, our Crude Oil and NGL segments may
enter into intersegment transactions for the purchase or sale of products, along
with services such as the transportation, terminalling or storage of products.
Intersegment transactions are conducted at rates similar to those charged to
third parties or rates that we believe approximate market. Intersegment
activities are eliminated in consolidation and we believe that the estimates
with respect to these rates are reasonable. Also, our segment operating and
general and administrative expenses reflect direct costs attributable to each
segment; however, we also allocate certain operating expenses and general and
administrative overhead expenses between segments based on management's
assessment of the business activities for the period. The proportional
allocations by segment require judgment by management and may be adjusted in the
future based on the business activities that exist during each period. We
believe that the estimates with respect to these allocations are reasonable.
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.
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 our assets or third-party assets to
sales locations, including our terminals, third-party connecting carriers,
regional hubs or to refineries. Our merchant activities are subject to our risk
management policies and may include the use of derivative instruments to hedge
our exposure.
Our Crude Oil segment generates revenue through a combination of tariffs,
pipeline capacity agreements and other transportation fees, month-to-month and
multi-year storage and terminalling agreements and the sale of gathered and
bulk-purchased crude oil. Tariffs and other fees on our pipeline systems are
typically based on volumes transported and vary by receipt point and delivery
point. Fees for our terminalling and storage services are based on capacity
leases and throughput volumes. Generally, results from our merchant activities
are impacted by (i) increases or decreases in our lease gathering crude oil
purchases volumes and (ii) the overall strength, weakness and volatility of
market conditions, including regional differentials and time spreads. In
addition, the execution of our risk management strategies in conjunction with
our assets can provide upside in certain markets. The segment results also
include the direct fixed and variable field costs of operating the crude oil
assets, as well as an allocation of indirect operating costs.
76--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements The following tables set forth our operating results from our Crude Oil segment: Operating Results (1) Year Ended December 31, Variance (in millions) 2022 2021 $ % Revenues$ 55,080 $ 40,470 $ 14,610 36 % Purchases and related costs (52,088) (37,540) (14,548) (39) % Field operating costs (1,003) (824) (179) (22) % Segment general and administrative expenses (2) (250) (221) (29) (13) % Equity earnings in unconsolidated entities 403 274 129 47 % Adjustments (3): Depreciation and amortization of unconsolidated entities 85 123 (38) (31) % Derivative activities and inventory valuation adjustments (11) (252) 241 ** Long-term inventory costing adjustments (3) (67) 64 ** Deficiencies under minimum volume commitments, net 7 (7) 14 ** Equity-indexed compensation expense 32 19 13 ** Foreign currency revaluation 3 (3) 6 ** Line 901 incident 95 15 80 ** Significant transaction-related expenses - 16 (16) ** Adjusted EBITDA attributable to noncontrolling interests in consolidated joint ventures (364) (94) (270) ** Segment Adjusted EBITDA$ 1,986 $ 1,909 $ 77 4 % Maintenance capital $ 112$ 100 $ 12 12 % Year Ended December 31, Variance Average Volumes 2022 2021 Volumes % Crude oil pipeline tariff (by region) (4) Permian Basin (5) 5,638 4,412 1,226 28 % Other (5) 1,927 1,793 134 7 % Total crude oil pipeline tariff 7,565 6,205 1,360 22 % Commercial crude oil storage capacity (5) (6) 72 73 (1) (1) % Crude oil lease gathering purchases (4) (7) 1,382 1,330 52 4 % ** 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 20 to our Consolidated Financial Statements for additional discussion of such adjustments.
(4)Average daily volumes in thousands of barrels per day calculated as the total volumes (attributable to our interest for assets owned by unconsolidated entities or through undivided joint interests) for the year divided by the number of days in the year. Volumes associated with acquisitions represent total volumes for the number of days we actually owned the assets divided by the number of days in the period.
(5)Includes volumes (attributable to our interest) from assets owned by unconsolidated entities.
77--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
(6)Average monthly capacity in millions of barrels per day calculated as total volumes for the year divided by the number of months in the year.
(7)Of this amount, approximately 1,073 and 1,038 thousand barrels per day were purchased in thePermian Basin for the years endedDecember 31, 2022 and 2021, respectively. Segment Adjusted EBITDA Crude Oil Segment Adjusted EBITDA was favorably impacted for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 by higher volumes on our pipelines, favorable Canadian crude oil differentials and higher loss allowance revenue. These favorable impacts were partially offset by (i) the monetization of contango hedges that benefited the 2021 period, (ii) the sale of our natural gas storage facilities inAugust 2021 (which were reported in our Crude Oil Segment) and (iii) gains related to hedged power costs resulting from Winter Storm Uri recognized in the first quarter of 2021. The following is a more detailed discussion of the significant factors impacting Segment Adjusted EBITDA for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . •Permian JV. InOctober 2021 , we closed on the transaction with Oryx Midstream to merge our respectivePermian Basin assets, with the exception of our long-haul pipeline systems and certain of our intra-basin assets, into the Permian JV. The significant year-over-year growth in our tariff volumes in thePermian Basin region was primarily from the Permian JV assets, largely due to additional volumes from the pipelines contributed by Oryx Midstream as well as increased production and new connections. We deduct the portion of the financial results attributable to Oryx Midstream's 35% interest in the Permian JV in determining Segment Adjusted EBITDA, which partially offset the favorable impact of the volume growth when comparing Segment Adjusted EBITDA for 2022 compared to 2021. •Pipeline Projects. TheCapline pipeline reversal project and phase two of the Wink to Webster pipeline project were placed in service in the first quarter of 2022, which favorably impacted equity earnings in unconsolidated entities and our tariff volumes in 2022. The variance in equity earnings in unconsolidated entities for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was also driven by the unfavorable impact to the prior period of the recognition of our proportionate share of the write-off of costs associated with a capital project canceled during the second quarter of 2021 (which impacted equity earnings in unconsolidated entities but is excluded from Segment Adjusted EBITDA and thus is reflected as an "Adjustment" as "Depreciation and amortization of unconsolidated entities" in the table above). •Pipeline Loss Allowance Revenue. Pipeline loss allowance revenues increased for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 due to a combination of higher prices and higher volumes during 2022. •Market Opportunities. Our results for the year endedDecember 31, 2022 benefited from favorable Canadian crude oil differentials and the sale of excess linefill and inventory in a higher crude oil price environment; however, in comparison to the year endedDecember 31, 2021 , these favorable variances were offset by the benefit of the monetization of contango hedges during the year endedDecember 31, 2021 . •Natural Gas Storage Assets. We sold our natural gas storage facilities inAugust 2021 , impacting the comparison of our results for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Net revenues from our natural gas storage facilities were approximately$76 million for the year endedDecember 31, 2021 , which included the benefit of favorable margins from hub activities related to Winter Storm Uri, as mentioned below. •Winter Storm Uri. During the first quarter of 2021, Winter Storm Uri had a negative impact on our volumes; however, this impact was more than offset during the 2021 period by gains related to hedged power costs, which are reflected in equity earnings and field operating costs, and favorable margins from hub activities at our natural gas storage facilities resulting from Winter Storm Uri. 78
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements •Line 2000 Pipeline. In the third quarter of 2022, we temporarily ceased service on Line 2000 inCalifornia as a precautionary measure following a routine inspection, which unfavorably impacted our results for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Line 2000 was returned to service in the first quarter of 2023. •Field Operating Costs. The increase in field operating costs for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to (i) an increase in estimated costs 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), (ii) the impact of gains related to hedged power costs resulting from Winter Storm Uri recognized in the first quarter of 2021, (iii) incremental operating costs from the Permian JV, (iv) increased utilities as a result of higher volumes, (v) increased costs resulting from higher third-party trucked volumes and (vi) higher fuel prices, partially offset by (vii) the sale of our natural gas storage facilities inAugust 2021 .
Segment General and Administrative Expenses. See the "-Consolidated Results" section above for a discussion of general and administrative expenses.
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 increase in maintenance capital spending for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to ongoing station upgrades, integrity projects and tank maintenance, partially offset by lower costs due to the completion of certain projects.
NGL Segment
Our NGL segment operations involve natural gas processing and NGL fractionation,
storage, transportation and terminalling. Our NGL revenues are primarily derived
from a combination of (i) providing gathering, fractionation, storage, and/or
terminalling services to third-party customers for a fee, and (ii) extracting
NGL mix from the gas stream processed at our Empress straddle plant facility as
well as acquiring NGL mix, which is then transported, stored and fractionated
into finished products and sold to customers.
Generally, our segment results are impacted by (i) increases or decreases in our
NGL sales volumes, (ii) the overall strength, weakness and volatility of market
conditions, including the differential between the price of natural gas and the
extracted NGL, as well as location differentials and time spreads, and (iii) the
effects of competition on our NGL margins. In addition, we utilize various risk
management strategies to manage our commodity exposure.
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 as well as the impact of
comparative performance between financial reporting periods that bisect the
five-month peak heating season.
79--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
The following tables set forth our operating results from our NGL segment:
Operating Results (1) Year Ended December 31, Variance (in millions) 2022 2021 $ % Revenues$ 2,761 $ 1,968 $ 793 40 % Purchases and related costs (1,587) (1,324) (263) (20) % Field operating costs (312) (241) (71) (29) % Segment general and administrative expenses (2) (75) (71) (4) (6) % Adjustments (3): Derivative activities (269) (19) (250) ** Long-term inventory costing adjustments (1) (27) 26 ** Foreign currency revaluation 1 (1) 2 ** Segment Adjusted EBITDA$ 518 $ 285 $ 233 82 % Maintenance capital $ 99$ 68 $ 31 46 % Year Ended December 31, Variance Average Volumes (in thousands of barrels per day) (4) 2022 2021 Volumes % NGL fractionation 137 129 8 6 % NGL pipeline tariff 192 179 13 7 % Propane and butane sales (5) 94 110 (16) (15) % ** 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 20 to our Consolidated Financial Statements for additional discussion of such adjustments.
(4)Average daily volumes calculated as the total volumes (attributable to our interest for assets owned through undivided joint interests) for the year divided by the number of days in the year.
(5)During the fourth quarter of 2022, we modified our sales volumes reported to include only propane and butane sales. Prior to the fourth quarter of 2022, our reported sales volumes included other NGL products, primarily ethane, that represented a significant portion of our total NGL sales volumes but did not contribute significantly to Segment Adjusted EBITDA. Sales volumes for earlier periods presented herein have been recast to include only propane and butane.
Segment Adjusted EBITDA
NGL Segment Adjusted EBITDA increased for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily due to the favorable impact of higher realized fractionation spreads between the price of natural gas and the extracted NGL ("frac spreads") and increased NGL mix produced at our straddle plants.
Significant variances in the components of Segment Adjusted EBITDA are discussed in more detail below:
80--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements Net Revenues. Net revenues from our NGL activities, excluding the impact of derivative activities and inventory valuation and long-term inventory costing adjustments, increased for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily due to higher realized frac spreads, increased NGL mix produced at our straddle plants and higher field operating cost recoveries at our Empress straddle plants as part of our commercial agreements, primarily related to higher utilities-related costs. This was partially offset by lower NGL sales volumes due to a reduction in lower margin hub activity. Additionally, net revenues for the year endedDecember 31, 2022 include the benefit of a full year of increased ownership in the Empress straddle plants and higher product gains at certain of our NGL facilities. Field Operating Costs. The increase in field operating costs for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to increased utilities-related costs from (i) increased production at certain of our Empress straddle plants, (ii) our increased ownership in the Empress straddle plants and (iii) higher utility-related prices in the 2022 period. The increase in utilities-related costs was largely offset by the benefit to net revenues from operating cost recoveries realized through commercial agreements.
Segment General and Administrative Expenses. See the "-Consolidated Results" section above for a discussion of general and administrative expenses.
Maintenance Capital . The increase in maintenance capital spending for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to (i) a turnaround at one of our Empress facilities during 2022 and (ii) various maintenance capital projects on our Co-Ed pipeline system. This increase was partially offset by the absence of certain costs in 2022 that were incurred in 2021, including repair costs at the Fort Saskatchewan facility.
Liquidity and Capital Resources
General
Our primary sources of liquidity are (i) cash flow from operating activities and (ii) borrowings under PAA's credit facilities or commercial paper program. In addition, we may supplement these primary sources of liquidity with proceeds from asset sales, and in the past have utilized funds received from sales of equity and debt securities. Our primary cash requirements include, but are not limited to, (i) ordinary course of business uses, such as the payment of amounts related to the purchase of crude oil, NGL and other products, other expenses and interest payments on outstanding debt, (ii) investment and maintenance capital activities, (iii) acquisitions of assets or businesses, (iv) repayment of principal on long-term debt and (v) distributions to our Class A shareholders and noncontrolling interests. In addition, we may use cash for repurchases of common equity. We generally expect to fund our short-term cash requirements through cash flow generated from operating activities and/or borrowings under PAA's commercial paper program or credit facilities. In addition, we generally expect to fund our long-term needs, such as those resulting from investment capital activities or acquisitions and refinancing long-term debt, through a variety of sources (either separately or in combination), which may include the sources mentioned above as funding for short-term needs and/or the issuance of additional equity or debt securities and the sale of assets. As ofDecember 31, 2022 , although we had a working capital deficit of$535 million , we had approximately$3.0 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
December 31, 2022
Availability under PAA senior unsecured revolving credit facility (1) (2) $ 1,317
Availability under PAA senior secured hedged inventory facility (1) (2)
1,281
Amounts outstanding under PAA commercial paper program -
Subtotal 2,598
Cash and cash equivalents (3) 381
Total $ 2,979
(1)Represents availability prior to giving effect to borrowings outstanding under the PAA commercial paper program, which reduce available capacity under the facilities.
(2)Available capacity under the PAA senior unsecured revolving credit facility and the PAA senior secured hedged inventory facility was reduced by outstanding letters of credit of$33 million and$69 million , respectively. 81
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
(3)Excludes restricted cash of
Usage of PAA's credit facilities, which provide the financial backstop for PAA's commercial paper program, is subject to ongoing compliance with covenants, as discussed further below. PAA's borrowing capacity and borrowing costs are also impacted by its credit rating. See Item 1A. "Risk Factors-Risks Related to PAA's Business-Loss of PAA's investment grade credit rating or the ability to receive open credit could negatively affect its borrowing costs, ability to purchase crude oil, NGL and natural gas supplies or to capitalize on market opportunities." We believe that we have, and will continue to have, the ability to access PAA's commercial paper program and credit facilities, which we use to meet our short-term cash needs. We believe that our financial position remains strong and we have sufficient liquid assets, cash flow from operating activities and borrowing capacity under PAA's credit agreements to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures. We are, however, subject to business and operational risks that could adversely affect our cash flow, including extended disruptions in the financial markets and/or energy price volatility resulting from current macroeconomic and geopolitical conditions associated with the COVID-19 pandemic and/or actions byOPEC . A prolonged material decrease in our cash flows would likely produce an adverse effect on our borrowing capacity and cost of borrowing. See Item 1A. "Risk Factors" for further discussion regarding risks that may impact our liquidity and capital resources.
Credit Agreements, Commercial Paper Program and Indentures
PAA has three primary credit arrangements, which we use to meet our short-term cash needs. These include PAA's$1.35 billion senior unsecured revolving credit facility maturing in 2027,$1.35 billion senior secured hedged inventory facility maturing in 2025 and$2.7 billion unsecured commercial paper program that is backstopped by PAA's revolving credit facility and its hedged inventory facility. The credit agreements for PAA's revolving credit facilities (which impact PAA's ability to access its commercial paper program because they provide the financial backstop that supports PAA's short-term credit ratings) and the indentures governing its senior notes contain cross-default provisions. A default under PAA's credit agreements or indentures would permit the lenders to accelerate the maturity of the outstanding debt. 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. PAA was in compliance with the covenants contained in its credit agreements and indentures as ofDecember 31, 2022 .
Cash Flow from Operating Activities
The primary drivers of cash flow from operating activities are (i) the collection of amounts related to the sale of crude oil, NGL and other products, the transportation of crude oil and other products for a fee, and the provision of storage and terminalling services for a fee and (ii) the payment of amounts related to the purchase of crude oil, NGL and other products and other expenses, principally field operating costs, general and administrative expenses and interest expense. Cash flow from operating activities can be materially impacted by the storage of crude oil in periods of a contango market, when the price of crude oil for future deliveries is higher than current prices. In the month we pay for the stored crude oil, we borrow under the PAA credit facilities or commercial paper program (or use cash on hand) to pay for the crude oil, which negatively impacts operating cash flow. Conversely, cash flow from operating activities increases during the period in which we collect the cash from the sale of the stored crude oil. Similarly, the level of NGL and other product inventory stored and held for resale at period end affects our cash flow from operating activities. In periods when the market is not in contango, we typically sell our crude oil during the same month in which we purchase it and we do not rely on borrowings under the PAA credit facilities or commercial paper program to pay for the crude oil. During such market conditions, our accounts payable and accounts receivable generally move in tandem as we make payments and receive payments for the purchase and sale of crude oil in the same month, which is the month following such activity. In periods during which we build inventory, regardless of market structure, we may rely on the PAA credit facilities or commercial paper program to pay for the inventory. In addition, we use derivative instruments to manage the risks associated with the purchase and sale of our commodities. Therefore, our cash flow from operating activities may be impacted by the margin deposit requirements related to our derivative activities. See Note 13 to our Consolidated Financial Statements for a discussion regarding our derivatives and risk management activities. Net cash provided by operating activities for the years endedDecember 31, 2022 and 2021 was approximately$2.4 billion and$2.0 billion , 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. 82
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements During 2022, we decreased the volume of our crude oil inventory due to opportunities for inventory liquidation during the year, and we also had lower margin balances required as part of our hedging activities, both of which reduced required funding by short-term debt. These decreases were partially offset by higher NGL volumes at the end of 2022 due to inventory builds as part of the winter heating season. During 2021, we decreased the volume of both our crude oil inventory due to fewer storage opportunities in the contango market and our NGL inventory as well as the margin balances required as part of our hedging activities, all of which reduced required funding by short-term debt. The cash inflows associated with these activities were partially offset by higher prices for inventory purchased and stored at the end of the current period compared to the end of 2020.
Investing Activities
Capital Expenditures
In addition to our operating needs, we also use cash for our investment capital
projects, maintenance capital activities and acquisition activities. We fund
these expenditures with cash generated by operating activities, financing
activities and/or proceeds from asset sales. In the near term, we do not plan to
issue common equity to fund such expenditures. The following table summarizes
our investment, maintenance and acquisition capital expenditures (in millions):
Year Ended December 31,
2022 2021
Investment capital (1) (2) (3) $ 334 $ 237
Maintenance capital (1) (3) 211 168
Acquisition capital (2) (4) 284 32
$ 829 $ 437
(1)Capital expenditures made to expand the existing operating and/or earnings
capacity of our assets are classified as "Investment capital." Capital
expenditures for the replacement and/or refurbishment of partially or fully
depreciated assets in order to maintain the operating and/or earnings capacity
of our existing assets are classified as "Maintenance capital."
(2)Contributions to unconsolidated entities, accounted for under the equity
method of accounting, that are related to investment capital projects by such
entities are recognized in "Investment capital." Acquisitions of initial
investments or additional interests in unconsolidated entities are included in
"Acquisition capital."
(3)Investment capital and Maintenance capital, net to our interest, was
approximately
(4)Acquisition capital for 2022 includes (i) an additional ownership interest in certain straddle plants included in our NGL segment, (ii) the purchase of an additional 5% interest in Cactus II and (iii) the remaining 50% interest inAdvantage Pipeline Holdings LLC . Acquisition capital for 2021 represents the cash consideration paid as part of the Asset Exchange transaction. See Note 7 to our Consolidated Financial Statements for additional information.
Investment Capital Projects
Our investment capital programs consist of investments in midstream
infrastructure projects that build upon our core assets and operations. The
majority of this investment capital consists of highly-contracted projects that
complement our broader system capabilities and support the long-term needs of
the upstream and downstream sectors of the industry value chain. The following
table summarizes our investment in capital projects (in millions):
Year Ended December 31 ,
Projects 2022 2021
Complementary Permian Basin Projects (1) $ 191$ 73 Permian Basin Takeaway Pipeline Projects (2) 33
75
Selected Facilities/Downstream Projects (3) 28 41 Other Projects 82 48 Total $ 334$ 237 83
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
(1)Includes projects associated with assets included in the Permian JV.
(2)Represents pipeline projects with takeaway capacity out of thePermian Basin , including investments for our proportionate share of the projects of Wink to Webster Pipeline andCactus II Pipeline .
(3)Includes projects at our
Projected 2023 Capital Expenditures. Total investment capital for the year endingDecember 31, 2023 is currently projected to be approximately$420 million ($325 million net to our interest). Approximately half of our projected investment capital expenditures are expected to be invested in the Permian JV assets. Additionally, maintenance capital for 2023 is currently projected to be$205 million ($195 million net to our interest). We expect to fund our 2023 investment and maintenance capital expenditures primarily with retained cash flow. Divestitures
Proceeds from the sale of assets have generally been used to fund our investment capital projects and reduce debt levels. The following table summarizes the proceeds received from divestitures during the last two years (in millions):
Year Ended December 31,
2022 2021
Proceeds from divestitures (1) $ 60 $ 875 (1)Represents proceeds, including working capital adjustments, net of transaction costs.
Ongoing Activities Related to Strategic Transactions
We are continuously engaged in the evaluation of potential transactions that support our current business strategy. In the past, such transactions have included the sale of non-core assets, the sale of partial interests in assets to strategic joint venture partners, acquisitions and large investment capital projects. With respect to a potential divestiture or acquisition, we may conduct an auction process or participate in an auction process conducted by a third party or we may negotiate a transaction with one or a limited number of potential buyers (in the case of a divestiture) or sellers (in the case of an acquisition). Such transactions could have a material effect on our financial condition and results of operations. We typically do not announce a transaction until after we have executed a definitive agreement. In certain cases, in order to protect our business interests or for other reasons, we may defer public announcement of a transaction until closing or a later date. Past experience has demonstrated that discussions and negotiations regarding a potential transaction can advance or terminate in a short period of time. Moreover, the closing of any transaction for which we have entered into a definitive agreement may be subject to customary and other closing conditions, which may not ultimately be satisfied or waived. Accordingly, we can give no assurance that our current or future efforts with respect to any such transactions will be successful, and we can provide no assurance that our financial expectations with respect to such transactions will ultimately be realized. See Item 1A. "Risk Factors-Risks Related to PAA's Business-Acquisitions and divestitures involve risks that may adversely affect PAA's business." Financing Activities Our financing activities primarily relate to funding investment 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.
Borrowings and Repayments Under Credit Arrangements
We had no net borrowings or repayments under the PAA credit facilities or
commercial paper program during the year ended
During the year endedDecember 31, 2021 , we had net repayments under the PAA credit facilities and commercial paper program of$712 million . The net repayments resulted primarily from cash flow from operating activities and proceeds from asset sales, which offset borrowings during the period related to funding needs for capital investments, inventory purchases and other general partnership purposes. 84
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
In connection with the sale of ourPine Prairie and Southern Pines natural gas storage facilities inAugust 2021 , we repaid our twoGO Zone term loans totaling$200 million . See Note 7 for additional information regarding the sale of our natural gas storage facilities.
Senior Notes
Repayments of PAA Senior Notes. During 2022, PAA repaid the following senior unsecured notes in full (in millions):
Year Description Repayment Date
2022 $750 million 3.65% PAA Senior Notes due June 2022 March 2022 (1)
(1)PAA repaid these senior notes with cash on hand and borrowings under its commercial paper program.
OnJanuary 31, 2023 , PAA redeemed its 2.85%,$400 million senior notes. PAA utilized a combination of cash on hand and borrowings under its commercial paper program to repay these senior notes. PAA also intends to utilize a combination of cash flow from operating activities, proceeds from asset sales and borrowings under its commercial paper program to repay its 3.85%,$700 million notes dueOctober 2023 . Registration Statements PAGP Registration Statements. We have filed with theSEC a shelf registration statement that, subject to effectiveness at the time of use, allows us to issue up to a specified amount of equity securities ("PAGP Traditional Shelf"). AtDecember 31, 2022 , we had approximately$939 million of unsold securities available under the PAGP Traditional Shelf. We also have access to a universal shelf registration statement ("PAGP WKSI Shelf"), which provides us with the ability to offer and sell an unlimited amount of equity securities, subject to market conditions and its capital needs. We did not conduct any offerings under the PAGP Traditional Shelf or PAGP WKSI Shelf during the years endedDecember 31, 2022 or 2021. 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 a specified amount of debt or equity securities ("PAA Traditional Shelf"), under which PAA had approximately$1.1 billion of unsold securities available atDecember 31, 2022 . PAA also has access to a universal shelf registration statement ("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.
Common Equity Repurchase Program
InNovember 2020 , the board of directors of our general partner approved a$500 million common equity repurchase program (the "Program") to be utilized as an additional method of returning capital to investors. The Program authorizes the repurchase from time to time of up to$500 million of PAA's common units and/or our Class A shares via open market purchases or negotiated transactions conducted in accordance with applicable regulatory requirements. Ultimately, the amount, timing and pace of potential repurchase activity will be determined by a number of factors, including market conditions, PAA's financial performance and flexibility, PAA's actual and expected Free Cash Flow after distributions, the absolute and relative equity prices of PAA's common units and our Class A shares, and the extent to which PAA is positioned to achieve and maintain its targeted leverage ratio. No time limit has been set for completion of the Program, and the Program may be suspended or discontinued at any time. The Program does not obligate PAA or us to acquire a particular number of common units or Class A shares. Any PAA common units or Class A shares that are repurchased will be canceled. PAA repurchased common units under the Program during the years endedDecember 31, 2022 and 2021 for a total purchase price of$74 million and$178 million , respectively, including commissions and fees. The remaining available capacity under the Program as ofDecember 31, 2022 was$198 million . 85
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements Distributions to Our Class A Shareholders We distribute 100% of our available cash to our Class A shareholders of record within 55 days following the end of each quarter. 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, among other things, the proper conduct of our business (including future capital expenditures and anticipated credit needs), compliance with legal or contractual obligations and funding of future distributions to our shareholders. See Item 5. "Market for Registrant's Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities-Cash Distribution Policy" for additional discussion regarding distributions. OnFebruary 14, 2023 , we paid a quarterly distribution of$0.2675 per Class A share ($1.07 per Class A share on an annualized basis). The distribution was paid to Class A shareholders of record as ofJanuary 31, 2023 , with respect to the quarter endedDecember 31, 2022 . See Note 12 to our Consolidated Financial Statements for details of distributions paid during the three years endedDecember 31, 2022 .
Distributions to Noncontrolling Interests
Distributions to noncontrolling interests represent amounts paid on interests in consolidated entities that are not owned by us. As ofDecember 31, 2022 , noncontrolling interests in our subsidiaries consisted of (i) limited partner interests in PAA including a 69% interest in PAA's common units and PAA's Series A preferred units combined and 100% of PAA's Series B preferred units, (ii) an approximate 19% limited partner interest in AAP, (iii) a 35% interest in the Permian JV, (iv) a 30% interest in Cactus II and (v) a 33% interest inRed River . See Note 12 to our Consolidated Financial Statements for details of distributions paid to noncontrolling interests during the three years endedDecember 31, 2022 . Distributions to PAA's Series A preferred unitholders. Holders of PAA's Series A preferred units are entitled to receive quarterly distributions, subject to customary anti-dilution adjustments, of$0.525 per unit ($2.10 per unit annualized). Subject to certain limitations, followingJanuary 28, 2021 , the holders of PAA's Series A preferred units have the right to make a one-time election to reset the distribution rate. InJanuary 2023 , PAA received notice that the Series A preferred unitholders elected the Preferred Distribution Rate Reset Option. EffectiveJanuary 31, 2023 , the new Series A preferred unit distribution rate is equal to 9.375% per annum on the original issue price (approximately$2.46 per unit annualized). The quarterly distribution to be paid inMay 2023 will reflect a pro-rated amount of$0.58516 per unit. See Note 12 to our Consolidated Financial Statements for additional information. Distributions to PAA's Series B preferred unitholders. Holders of PAA's Series B preferred units are entitled to receive, when, as and if declared by PAA's general partner out of legally available funds for such purpose, cumulative cash distributions, as applicable. Through and includingNovember 15, 2022 , holders were entitled to a distribution equal to$61.25 per unit per year, payable semiannually in arrears on the 15th day of May and November. On and afterNovember 15, 2022 , distributions on the Series B units accumulate based on a floating rate equal to the applicable three-month LIBOR (or, if discontinued, a substitute or successor rate determined by the calculation agent) plus a spread of 4.11% and is payable quarterly on the 15th day of February, May, August and November. The distribution rate for the quarterly distribution paid onFebruary 15, 2023 was 8.71614% ($22.27 per Series B preferred unit). See Note 12 to our Consolidated Financial Statements for further discussion of PAA's Series B preferred units. Distributions to PAA's common unitholders. OnFebruary 14, 2023 , PAA paid a quarterly distribution of$0.2675 per common unit ($1.07 per common unit on an annualized basis). The total distribution of$187 million was paid to common unitholders of record as ofJanuary 31, 2023 , with respect to the quarter endedDecember 31, 2022 . See Note 12 to our Consolidated Financial Statements for details of distributions paid during the three years endedDecember 31, 2022 .
Contingencies
For a discussion of contingencies that may impact us, see Note 19 to our Consolidated Financial Statements.
Commitments
See Note 11 to our Consolidated Financial Statements for information regarding
our debt obligations and Note 19 for information regarding our leases and other
commitments.
86--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements Purchase Obligations In the ordinary course of doing business, we purchase crude oil and NGL from third parties under contracts, the majority of which range in term from thirty-day evergreen to five years, with a limited number of contracts with remaining terms extending up to 12 years. We establish a margin for these purchases by entering into various types of physical and financial sale and exchange transactions through which we seek to maintain a position that is substantially balanced between purchases on the one hand and sales and future delivery obligations on the other. We do not expect to use a significant amount of internal capital to meet these obligations, as the obligations will be funded by corresponding sales to entities that we deem creditworthy or who have provided credit support we consider adequate.
The following table includes our best estimate and the timing of these payments
as of
2028 and
2023 2024 2025 2026 2027 Thereafter Total
Crude oil, NGL and other purchases
(1) $ 22,660 $ 19,940 $ 18,528 $ 17,568 $ 15,582 $ 41,216 $ 135,494
(1)Amounts are primarily based on estimated volumes and market prices based on
average activity during December 2022 . The actual physical volume purchased and
actual settlement prices will vary from the assumptions used in the table.
Uncertainties involved in these estimates include levels of production at the
wellhead, weather conditions, changes in market prices and other conditions
beyond our control.
Letters of Credit. In connection with our merchant activities, we provide
certain suppliers with irrevocable standby letters of credit to secure our
obligation for the purchase and transportation of crude oil, NGL and natural
gas. Our liabilities with respect to these purchase obligations are recorded in
accounts payable on our balance sheet in the month the product is purchased.
Generally, these letters of credit are issued for periods of up to seventy days
and are terminated upon completion of each transaction. Additionally, we issue
letters of credit to support insurance programs, derivative transactions,
including hedging-related margin obligations, and construction activities. At
December 31, 2022 and 2021, we had outstanding letters of credit of
approximately $102 million and $98 million , respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303 of Regulation S-K.
Investments in Unconsolidated Entities
We have invested in entities that are not consolidated in our financial statements. None of these entities had debt outstanding as ofDecember 31, 2022 . We may elect at any time to make additional capital contributions to any of these entities. The following table sets forth selected information regarding these entities as ofDecember 31, 2022 (unaudited, dollars in millions): Total Cash Our Total and Ownership Entity Restricted Entity Type of Operation Interest Assets Cash BridgeTex Pipeline Company, LLC Crude Oil Pipeline 20%$ 792 $ 26 Capline Pipeline Company LLC Crude Oil Pipeline 54%$ 1,268 $ 33 Diamond Pipeline LLC Crude Oil Pipeline (1) 50%$ 896 $ 1 Eagle Ford Pipeline LLC Crude Oil Pipeline (1) 50%$ 779 $ 25 Eagle Ford Terminals Corpus Christi LLC Crude Oil Terminal and Dock (1) 50%$ 214 $ 5 OMOG JV LLC Crude Oil Pipeline (1) 57%$ 434 $ 13 Saddlehorn Pipeline Company, LLC Crude Oil Pipeline 30%$ 612 $ 19 White Cliffs Pipeline, LLC Crude Oil Pipeline 36%$ 407 $ 7 Wink to Webster Pipeline LLC Crude Oil Pipeline 16%$ 2,129 $ 83 Other investments$ 519 $ 24
(1)We serve as operator of the asset.
87--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP and rules and regulations of theSEC requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities, at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Although we believe these estimates are reasonable, actual results could differ from these estimates. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for our (i) estimated fair value of assets and liabilities acquired and identification of associated goodwill and intangible assets, (ii) fair value of derivatives, (iii) accruals and contingent liabilities, (iv) property and equipment, depreciation and amortization expense and asset retirement obligations, (v) impairment assessments of property and equipment, investments in unconsolidated entities and intangible assets and (vi) inventory valuations have the greatest potential impact on our Consolidated Financial Statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates. Therefore, we consider these to be our critical accounting policies and estimates, which are discussed below. For further information on all of our significant accounting policies, see Note 2 to our Consolidated Financial Statements. Fair Value of Assets and Liabilities Acquired and Identification of AssociatedGoodwill and Intangible Assets. In accordance withFinancial Accounting Standards Board ("FASB") guidance regarding business combinations, with each acquisition, we allocate the cost of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. If the initial accounting for the business combination is incomplete when the combination occurs, an estimate will be recorded. We also expense the transaction costs as incurred in connection with each acquisition, except for acquisitions of equity method investments. In addition, we are required to recognize intangible assets separately from goodwill. Determining the fair value of assets and liabilities acquired, as well as intangible assets that relate to such items as customer relationships, acreage dedications and other contracts, involves professional judgment and is ultimately based on acquisition models and management's assessment of the value of the assets acquired and, to the extent available, third-party assessments. InNovember 2022 , we and Enbridge Inc. ("Enbridge") purchased Western Midstream Partners, LP ("WES")'s 15% interest inCactus II Pipeline, LLC ("Cactus II") for an aggregate amount of$265 million . Enbridge acquired 10% and we acquired 5% of Cactus II, with each paying a proportionate share of the purchase price. We and Enbridge are now the sole owners of Cactus II, with 70% and 30% respective ownership interests. We previously accounted for our 65% interest in Cactus II as an equity method investment. In addition to the change in ownership, there were changes in governance which led to a change in control. We now control Cactus II and reflect Cactus II as a consolidated subsidiary in our Consolidated Financial Statements, with Enbridge's 30% interest reflected as a noncontrolling interest. See Note 7 to our Consolidated Financial Statements for discussion of the methods, assumptions and estimates used in the determination of the fair value of the assets and liabilities acquired and identification of associated intangible assets. InOctober 2021 , we and Oryx Midstream completed the formation of the Permian JV. See Note 7 to our Consolidated Financial Statements for discussion of the methods, assumptions and estimates used in the determination of the fair value of the assets and liabilities acquired and identification of associated intangible assets. Fair Value of Derivatives. The fair value of a derivative at a particular period end does not reflect the end results of a particular transaction, and will most likely not reflect the gain or loss at the conclusion of a transaction. We reflect estimates for these items based on our internal records and information from third parties. We have commodity derivatives and interest rate derivatives that are accounted for as assets and liabilities at fair value on our Consolidated Balance Sheets. The valuations of our derivatives that are exchange traded are based on market prices on the applicable exchange on the last day of the period. For our derivatives that are not exchange traded, the estimates we use are based on indicative broker quotations or an internal valuation model. Our valuation models utilize market observable inputs such as price, volatility, correlation and other factors and may not be reflective of the price at which they can be settled due to the lack of a liquid market. Less than 1% of total annual revenues are based on estimates derived from internal valuation models. 88
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements The Preferred Distribution Rate Reset Option of our Series A preferred units is an embedded derivative that is recorded at fair value in our Consolidated Balance Sheets. The valuation model utilized for this embedded derivative contains multiple inputs, some of which involve management judgment, including our common unit price, ten-yearUnited States treasury rates, default probabilities and timing estimates to ultimately calculate the fair value of our Series A preferred units with and without the Preferred Distribution Rate Reset Option. Although the resolution of the uncertainties involved in these estimates has not historically had a material impact on our results of operations or financial condition, we cannot provide assurance that actual amounts will not vary significantly from estimated amounts. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Note 13 to our Consolidated Financial Statements for a discussion regarding our derivatives and risk management activities. Accruals and Contingent Liabilities. We record accruals or liabilities for, among other things, environmental remediation, potential legal claims or settlements and fees for legal services associated with loss contingencies, and bonuses. Accruals are made when our assessment indicates that it is probable that a liability has occurred and the amount of liability can be reasonably estimated. Our estimates are based on all known facts at the time and our assessment of the ultimate outcome. Among the many uncertainties that impact our estimates are the necessary regulatory approvals for, and potential modification of, our environmental remediation plans, the limited amount of data available upon initial assessment of the impact of soil or water contamination, changes in costs associated with environmental remediation services and equipment, the duration of the natural resource damage assessment and the ultimate amount of damages determined, the determination and calculation of fines and penalties, the possibility of existing legal claims giving rise to additional claims and the nature, extent and cost of legal services that will be required in connection with lawsuits, claims and other matters. Our estimates for contingent liability accruals are increased or decreased as additional information is obtained or resolution is achieved. A hypothetical variance of 5% in our aggregate estimate for the accruals and contingent liabilities discussed above would have an impact on earnings of up to approximately$16 million . Although the resolution of these uncertainties has not historically had a material impact on our results of operations or financial condition, we cannot provide assurance that actual amounts will not vary significantly from estimated amounts. Property and Equipment, Depreciation and Amortization Expense and Asset Retirement Obligations. We compute depreciation and amortization based on estimated useful lives. These estimates are based on various factors including condition, manufacturing specifications, technological advances and historical data concerning useful lives of similar assets. Uncertainties that impact these estimates include changes in laws and regulations relating to restoration and abandonment requirements, economic conditions and supply and demand in the area. When assets are put into service, we make estimates with respect to useful lives and salvage values that we believe are reasonable. However, subsequent events could cause us to change our estimates, thus impacting the future calculation of depreciation and amortization. We record retirement obligations associated with tangible long-lived assets based on estimates related to the costs associated with cleaning, purging and, in some cases, completely removing the assets and returning the land to its original state. In addition, our estimates include a determination of the settlement date or dates for the potential obligation, which may or may not be determinable. Uncertainties that impact these estimates include the costs associated with these activities and the timing of incurring such costs. A hypothetical variance of 5% in our aggregate estimate for the retirement obligations discussed above would have an impact on earnings of up to approximately$6 million . Although the resolution of these uncertainties has not historically had a material impact on our results of operations or financial condition, we cannot provide assurance that actual amounts will not vary significantly from estimated amounts. See Note 6 and Note 10 to our Consolidated Financial Statements for additional information on our property and equipment, intangible assets and depreciation and amortization expense. See Note 2 to our Consolidated Financial Statements for additional information on our asset retirement obligations. Impairment Assessments of Property and Equipment, Investments in Unconsolidated Entities and Intangible Assets. We periodically evaluate property and equipment for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. Any evaluation is highly dependent on the underlying assumptions of related cash flows. We consider the fair value estimate used to calculate impairment of property and equipment a critical accounting estimate. In determining the existence of an impairment of carrying value, we make a number of subjective assumptions as to:
•whether there is an event or circumstance that may be indicative of an impairment;
•the grouping of assets;
•the intention of "holding", "abandoning" or "selling" an asset;
89--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements
•the forecast of undiscounted expected future cash flow over the asset's estimated useful life; and
•if an impairment exists, the fair value of the asset or asset group.
In addition, when we evaluate property and equipment and other long-lived assets for recoverability, it may also be necessary to review related depreciation estimates and methods.
Investments in unconsolidated entities accounted for under the equity method of accounting are assessed for impairment when events or circumstances suggest that a decline in value may be other than temporary. Examples of such events or circumstances include continuing operating losses of the entity and/or long-term negative changes in the entity's core business. When it is determined that an indicated impairment is other than temporary, a charge is recognized for the difference between the investment's carrying amount and its estimated fair value. We consider the fair value estimate used to calculate the impairment of investments in unconsolidated entities a critical accounting estimate. In determining the existence of an other-than-temporary impairment of carrying value, we make a number of subjective assumptions as to:
•whether there is an event or circumstance that may be indicative of a decline in value of the investment;
•whether the decline in value is other than temporary; and
•the fair value of the investment.
Intangible assets with indefinite lives are not amortized but are instead periodically assessed for impairment. Intangible assets with finite lives are amortized over their estimated useful life as determined by management. Impairment testing entails estimating future net cash flows relating to the business, based on the grouping of assets and management's estimate of future revenues, future cash flows and market conditions including pricing, demand, competition, operating costs and other factors. Uncertainties associated with these estimates include changes in production decline rates, production interruptions, fluctuations in refinery capacity or product slates, economic obsolescence factors in the area and potential future sources of cash flow. In addition, changes in our weighted average cost of capital from our estimates could have a significant impact on fair value. We cannot provide assurance that actual amounts will not vary significantly from estimated amounts. Resolutions of these uncertainties have resulted, and in the future may result, in impairments that impact our results of operations and financial condition. A change in our outlook or use could result in impairments that may be material to our results of operations or financial condition. See "-Executive Summary- Market Overview and Outlook" and Note 6, Note 9 and Note 10 to our Consolidated Financial Statements for additional information. Inventory Valuations. Inventory, including long-term inventory, primarily consists of crude oil and NGL and is valued at the lower of cost or net realizable value, with cost determined using an average cost method within specific inventory pools. At the end of each reporting period, we assess the carrying value of our inventory and use estimates and judgment when making any adjustments necessary to reduce the carrying value to net realizable value. Among the uncertainties that impact our estimates are the applicable quality and location differentials to include in our net realizable value analysis. Additionally, we estimate the upcoming liquidation timing of the inventory. Changes in assumptions made as to the timing of a sale can materially impact net realizable value. During the years endedDecember 31, 2022 and 2021, we did not record any charges related to the valuation adjustment of our inventory. During the year endedDecember 31, 2020 , we recorded charges of$233 million related to the valuation adjustment of our crude oil inventory due to declines in prices. See Note 5 to our Consolidated Financial Statements for further discussion regarding inventory. 90
--------------------------------------------------------------------------------
Table of Contents
Index to Financial Statements Line 901 Incident Insurance Receivable. InMay 2015 , we experienced a crude oil release from our Las Flores to Gaviota Pipeline (Line 901) inSanta Barbara County, California . We have estimated that the aggregate total costs we have incurred or will incur with respect to the Line 901 incident will be approximately$740 million , which includes actual and projected emergency response and clean-up costs, natural resource damage assessments, fines and penalties payable pursuant to the Consent Decree, certain third-party claims settlements, and estimated costs associated with our remaining Line 901 lawsuits and claims, as well as estimates for certain legal fees and statutory interest where applicable. As ofDecember 31, 2022 , we have recognized a long-term receivable of approximately$225 million for the portion of the release costs that we believe is probable of recovery from insurance, net of deductibles and amounts already collected. In the fourth quarter of 2022, insurers responsible for the majority of our remaining insurance coverage formally communicated a denial of coverage. We intend to vigorously pursue recovery from our insurers of all amounts for which we have claimed reimbursement. We believe that our claim for reimbursement from our insurers is strong and that our ultimate recovery of such amounts is probable. Various factors could impact the timing and amount of recovery of our insurance receivable, including future developments that adversely impact our assessment of the strength of our coverage claims, the outcome of any dispute resolution proceedings with respect to our coverage claims and the extent to which insurers may become insolvent in the future. We cannot provide assurance that actual receivable amounts will not vary significantly from our estimated amounts. See Note 19 to our Consolidated Financial Statements for further discussion regarding the Line 901 incident and our related insurance receivable.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements for information regarding the effect of recent accounting pronouncements on our Consolidated Financial Statements.
© Edgar Online, source
