Lower cost of equity
Plains All American Pipeline’s (PAA) simplification transaction with Plains GP Holdings (PAGP), announced on July 11, 2016, is expected to lower its cost of equity capital. Elimination of IDRs (incentive distribution rights) reduces PAA’s incremental cost of equity capital. To learn more about IDRs, read The Importance of Incentive Distribution Rights for MLPs.
The above graph shows Plains All American Pipeline’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) and DE (debt-to-equity) ratios over the last four years. In comparison, Spectra Energy (SE) and Enterprise Products Partners (EPD) have DE ratios of 1.4x and 1.1x, respectively.
Plains All American Pipeline (PAA) expects pro forma distribution coverage for 2016 to be around 1.1x. This takes into account the simplification, the distribution cut, and payment of the preferred distribution in kind. The company had earlier provided guidance for coverage of 0.86x in 2016. PAA targets a minimum distribution coverage level of 1.2x and a long-term debt-to-adjusted EBITDA ratio of ~3.5x–4.0x.
In a related press release, Greg Armstrong, chairman and CEO of Plains All American Pipeline, stated, “We are pleased to announce this simplification transaction and related actions, which accomplish several important objectives for PAA and its stakeholders, including PAGP. Collectively, these actions will simplify PAA’s capital structure, better align the interests of its equity stakeholders, improve its overall credit profile, reduce its cost of incremental capital and improve its distribution coverage. As a result, PAA will be better positioned to capitalize on attractive growth opportunities and manage its business over the long term.”
Let’s see what Wall Street analysts recommend for Plains All American Pipeline in the next part of this series.