A Closer Look at Plains All American Pipeline’s Earnings

Plains All American Pipeline (NYSE: PAA  ) reported fourth-quarter and full-year earnings after the market closed on Wednesday. Analysts were expecting earnings per unit of $0.77 and revenue of $10.79 billion. Plains recorded $1.01 per unit and $9.44 billion in revenue, but these numbers don't tell the whole story, so let's take a closer look.

General rundown
2012 was a heck of a year for Plains. The partnership broke some records and handily outperformed its own guidance on a quarterly and an annual basis in several categories, including:

  • Adjusted EBITDA
  • Distributable cash flow
  • Distribution coverage
  • Adjusted net income per diluted unit

Net income for the year was $1.09 billion, up from $966 million in 2011. Adjusted net income per diluted limited partner unit was $3.35, compared to $2.62 a year ago.

Q4: Digging deeper
All that good news had to come from somewhere. Plains was very clear in November about what it expected out of each segment in the fourth quarter, so let's break down how the actual performance of each business unit compares to those expectations.

  • Supply and logistics: Management expected this segment to generate exceptional results on the strength of macro market factors, and that's exactly what happened -- and then some. Earnings came in at $267 million, $74 million above mid-point guidance. Fourth-quarter volumes met expectations, averaging 1.1 million barrels per day, but the profit per barrel was much higher, resulting in the gains. Plains credits the overperformance to stronger butane margins and wider price differentials for domestic crude.
  • Transportation: Management expected this segment to perform in line with its third-quarter results, generating about $192 million. In reality, earnings came in above guidance at $198 million. Higher volumes drove the improved performance, which could have actually been higher, had it not been for expenses related to a pipeline spill earlier in the year.
  • Facilities: Management expected earnings from this segment to fall below third-quarter earnings, but segment profit came in $8 million higher than midpoint guidance, at $141 million. Plains credits the rail assets it acquired in December, as well as higher than expected profitability from its Canadian NGL business with the bump.

It was a terrific quarter, and a great year for Plains, but did investors reap the rewards as well?

The distributions
Yes, investors will absolutely benefit from the partnership's success. Plains has already announced it will increase fourth-quarter distributions to $0.5625 per unit. This represents a 9.8% increase over last February's distribution, and a 3.7% increase over the distribution paid just last quarter. Management also announced that Plains' strong fiscal shape allows it to increase its 2013 targeted distribution growth from 7%-8% to 9%-10%.

Distributable cash flow for the fourth quarter came in at $455 million, up from last year's number of $343 million. The pop was enough to drive Plains' distribution coverage up 10 percentage points over last year, to 176%.

For the full year, the partnership recorded a distribution coverage of 160%, 14 percentage points higher than 2011. Total distributable cash flow came in at $1.55 billion, significantly higher than the $1.15 billion Plains posted last year.

A quick look ahead
Plains does not expect to benefit from its supply and logistics segment in 2013 the way it did in 2012. As midstream infrastructure comes online and relieves the bottlenecks in key producing regions, the market will balance. Plains has forecast a $260 million drop in segment profit year over year, resulting in an $82 million drop in 2013 EBITDA guidance of $2.03 billion. Despite this, Plains still plans to increase distributions by 9%-10% this year, with distribution coverage of 125%.

For the other segments, Plains expects volumes and profit per barrel in its transportation unit to increase 6.5% and 5% respectively, over 2012's numbers. Its facilities unit should see a volume increase of 17 million barrels of oil equivalent per month over 2012's numbers, thanks to new projects coming online and recent acquisitions.

The partnership also plans to spend $1.1 billion on its 2013 capital expenditures program. That number is right in line with 2012 spending of $1.2 billion. There are many projects in the works, with costs ranging from $150 million to $20 million, with uses as varied as rail terminals, storage projects, and pipeline expansions.

Foolish takeaway
Plains joins Kinder Morgan (NYSE: KMI  ) in recording a fantastic fourth-quarter performance. Investors may be disappointed with the partnership's forecast of a 4% drop in EBITDA for 2013, but should keep in mind that Plains is increasing its fee-based business by 15% in a single year. That growth provides balance sheet stability and plenty of reassurance for a future full of distribution increases.

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