Plains All American Pipeline (NYSE: PAA ) reported first-quarter earnings after the market closed on Monday. Analysts were expecting earnings per unit of $0.98 and revenue of $11.27 billion; Plains recorded $1.27 per unit and $10.62 billion in revenue. These numbers don't tell the whole story, so let's drill down for three important takeaways that go beyond the top and bottom lines.
1. Shattering expectations
Plains CEO Greg Armstrong has been very candid in the past regarding the conservative nature of management's expectations, or as he describes it not conservative but "realistic". Plains will low-ball budget expectations even if management sees favorable tailwinds in the market place, because those tailwinds are not guaranteed. Even so, the first-quarter performance of its business segments – particularly the supply and logistics unit – destroyed even the wildest of expectations.
Adjusted EBITDA exceeded mid-point expectations by about $739 million, a 20% improvement. The performance even exceeded the high-end of expectations by 15%. As a result, management is increasing full-year EBITDA guidance by 7%, or $135 million, to $2.16 billion. Supply and logistics did the heavy lifting, posting adjusted profit of $407 million, compared to $197 million a year ago. Transportation was up slightly to $175 million, and facilities climbed 56% to $156 million, year over year.
Plains continues to increase its distribution on a regular basis. The first-quarter payout will rise 10% to $0.575 per unit, resulting in an annualized distribution of $2.30 per unit.
Beyond this immediate story, the long-term track record of distributions at Plains is exceptional. Not only is the partnership able to generate enough cash to cover increasingly larger distribution payments, but it is also retaining plenty of cash. In 2012, Plains paid out $968 million in distributions while socking away $582 million for the partnership. Guidance for 2013 has Plains paying out $1.16 billion in distributions, while keeping $400 million on hand. Again, given that management tends to be realistic in its guidance, investors can feel pretty confident that these goals will be met.
But let's not forget the all important coverage ratio. If all goes according to plan, Plains will sport about 135% distribution coverage while increasing distributions by 9%-10%. Not bad.
3. Don't get swept away
Armstrong made an important point about Plains' earnings toward the end of the conference call. He reminded us that though the supply and logistics segment had breathtaking earnings this quarter, 99% of Plains capital expenditures are targeted at increasing the fee-based business of the transportation and facilities segments. The growth of those segments will be reliable, because it is not based on margins and price differentials, and that is important as management figures out what the new baseline performance for the supply and logistics segment will be.
It was no doubt an exceptional quarter for Plains All American. The company joins American midstream peers Kinder Morgan Energy Partners (NYSE: KMP ) and Enterprise Products Partners (NYSE: EPD ) with investor-friendly first-quarter results. KMP increased distributable cash flow by $88 million, while EPD provided a coverage ratio of 1.5 times distributions. Yield hungry investors will want to take a closer look at these three opportunities, as all are sporting yields above 4%. Year-to-date unit price growth for the group stands at or above 9%, with Plains leading the way with just shy of a 30% return.
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