Analyzing Plains All American Pipeline after Its Simplification
In July 2016, Plains All American Pipeline (PAA) announced an agreement with an affiliate of Plains GP Holdings (PAGP) to eliminate PAA’s IDRs (incentive distribution rights) and the economic rights associated with PAA’s 2% general partner interest.
In exchange, PAA agreed to issue 245.5 million new common units and assume ~$593 million of outstanding debt from PAGP’s affiliate, Plains AAP.
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PAA had been working on the simplification process for several months, and its outcome was greatly anticipated. The transaction is expected to close in 4Q16.
The above figure depicts the company’s partnership structure after its simplification process in July 2016. PAGP owns 14% economic interest in PAA.
The simplification process is expected to lower PAA’s cost of equity capital. Elimination of IDRs reduces PAA’s incremental cost of equity capital. To learn more about IDRs, read The Importance of Incentive Distribution Rights for MLPs.
The transaction is also expected to positively impact PAA’s coverage and credit profile.
Plains All American Pipeline is a midstream energy MLP headquartered in Houston. The company is primarily engaged in gathering, terminaling, transportation, storage, and logistics services for crude oil, natural gas liquids, natural gas, and refined products in the United States and Canada. On average, PAA handles 4.6 million barrels of natural gas liquids and crude oil per day.
In this series, we’ll analyze PAA’s price targets, the performance of its various segments, its leverage, its distributable cash flows, its capital expenditure, and its distribution growth. We’ll also analyze its valuation compared to those of its peers. Finally, we’ll analyze the key drivers of PAA’s stock price.