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Plains All American Eliminates IDRs and Cuts Distributions

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Jul. 13 2016, Published 8:52 a.m. ET

Simplification agreement

After the Market closed on July 11, 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% GP (general partner) interest. In exchange, PAA will issue 245.5 million new common units and assume ~$593 million of outstanding debt from PAGP’s affiliate Plains AAP. The implied transaction value is ~$7.2 billion.

Plains All American Pipeline had been working on the simplification process for several months, and an outcome was much awaited. Plains All American Pipeline’s stock rose 10.6% on July 12. The transaction is expected to close in the fourth quarter of 2016.

The above chart shows Plains All American Pipeline’s stock price and its 50-day and 200-day moving averages over the last year. The stock has surged 28% YTD (year-to-date). In comparison, the Alerian MLP ETF (AMLP), an ETF of top energy MLPs, has risen nearly 7% YTD.

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3Q16 distribution cut

Plains All American Pipeline also announced an expected 3Q16 distribution of $0.55 per common unit. This represents a 21% reduction from PAA’s current distributions. PAGP’s 3Q16 distribution is expected to be $0.21 per unit. This represents an 11% reduction for PAGP on a pro forma basis. In the absence of a simplification transaction, PAGP’s reduction would have been ~39%.

The elimination of IDRs and the proposed distribution cut will result in an annualized reduction in cash distributions of ~$320 million.

Distributions for 2Q16 will remain unchanged compared to 1Q16 for both PAA and PAGP.

In the next part of this series, we’ll discuss the rationale and benefits of the transaction and distribution cut.

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