Why Plains All American Raises Distributions Conservatively

PAA’s distributions

On October 7, 2015, Plains All American Pipeline (PAA) declared a 0.7% quarter-over-quarter rise in distributions to $0.70 per unit. The MLP’s distributions per unit rose for the 25th quarter in a row. It has increased its quarterly distributions in 44 out of the past 46 quarters. The consensus estimate for Plains All American’s per unit distribution for all of 2015 is $2.78, a 6.6% rise over distributions in 2014.

The graph below shows the growth in Plains All American Pipeline’s quarterly per unit distribution. It also shows the consensus per unit distribution estimates for 4Q15 and 1Q16. PAA forms ~5.9% of the Global X MLP ETF (MLPA) and ~0.6% of the Multi-Asset Diversified Income ETF (MDIV).

Why Plains All American Raises Distributions Conservatively

Plains All American’s distribution coverage

Plains All American Pipeline’s distribution coverage for 2Q15 was 0.73x. The low coverage was due partially to seasonality. For the first six months of 2015, the distribution coverage was 0.93x.

An MLP’s distribution coverage is the ratio of its distributable cash flow to total distributions. A ratio below 1.0 is considered risky, as it shows the MLP is distributing more cash than it is generating. This can’t continue in the long run.

Plains All American Pipeline targets a distribution coverage ratio of 1.05x over the long term. PAA announced only a modest distribution growth for 3Q15, partly due to its low distribution coverage. The MLP expects modest or no distribution growth over the rest of 2015 and throughout 2016. This is aimed to bring the coverage ratio close to 1. An expected 10% adjusted EBITDA growth in 2016 over 2015 combined with modest or no distribution growth should help PAA attain this target.

Magellan Midstream Partners (MMP) and Sunoco Logistics Partners (SXL) had coverage ratios of 1.3x and 1.47x, respectively, for 2Q15. Enbridge Energy Partners (EEP) has a distribution coverage ratio marginally below 1.