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Why Plains All American Is Expecting Another Distribution Cut

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Why Plains All American Is Expecting Another Distribution Cut PART 1 OF 2

PAA Fell 12% in After-Hours Trading on Potential Distribution Cuts

PAA’s 2Q17 results

Plains All American Pipeline (PAA) announced its 2Q17 results on August 7, 2017, after the markets closed. The company’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) fell nearly 5% year-over-year in 2Q17. Plains All American Pipeline also revised its full-year 2017 EBITDA guidance down by 8%. Moreover, PAA revised its preliminary 2018 EBITDA guidance for its supply and logistics segment to a range of $100 million to $300 million from its prior forecast of ~$300 million.

PAA Fell 12% in After-Hours Trading on Potential Distribution Cuts

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Potential distribution cut?

Probably the worst news for Plains All American Pipeline’s investors in its 2Q17 earnings release was a potential distribution cut. Plains All American Pipeline’s supply and logistics segment operations are margin-based. These operations have been facing severe headwinds for the last several quarters. Learn more about the segment’s activities and performance in PAA’s Supply and Logistics Segment May Face Headwinds in 1H17.

PAA also revised downwards its 2017 and 2018 EBITDA guidance as a result of lower expected contributions from its supply and logistics segment. The company now intends to exclude earnings from its supply and logistics segment for calculating distributable cash flows for distribution. This would require resetting the distribution to a level supported by its fee-based earnings.

Plains All American has not yet specified what this level would be. It intends to “finalize fee-based distribution policy approach over the next sixty days.”

Based on PAA’s preliminary 2018 distributable cash flow forecast excluding the Supply and Logistics segment’s contribution, a $1.80 per unit distribution level would provide implied fee-based coverage of ~110%. This means if the company does intend to keep its fee-based coverage at ~110%, it may cut distributions by ~18% for 2018. PAA cut its distributions by 21% in 3Q16.

PAA fell ~12% in after-hours trading on August 7.

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