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Plains All American: One and Done?

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Prior to the market open on Tuesday, January 12, Plains All American announced their plans to finance their 2 year $2B growth capital commitments and distributable cash flow shortfall while avoiding the capital markets.  While many observers expected Plains to cut their Q4 distribution from $0.70, Plains followed through on their previous suggestions that such a move would not be necessary, confirming their Q4 distribution rate of $0.70.  The more compelling information was related to their $1.5B capital raise from four  energy focused PE shops, Kayne Anderson, EnCap, Energy Minerals Group and First Reserve.  The new capital, expected to close in January, will be raised using a new Perpetual 8% Preferred share, which will pay $2.10 per annum, and offers the buyers the right to convert into PAA units after two years and prohibits the PE investors from hedging their PAA exposure.  Plains also will maintain the option to pay the 8% in new PIK through 2017.


The most important aspect of this these new shares are the Incentive Distribution Rights provisions.  If Plains were to issue new units to the market, each new unit would create an incremental IDR fee paid from PAA to their General Partner, Plains GP Holdings.  If they were to have used that option, the IDR burden would have been $0.8285 per unit at their current distribution rate, or roughly $46MM if they were to have issued 56MM new units (which is the conversion rate for the new preferred's increasing units by 14%).  Over the two year period prior to the conversion option, the total would have been $92MM assuming the 2016 distribution remains flat.  In order to offset this burden, Plains GP agreed to waive their IDR fee for these incremental units by only receiving 50% of the distribution rate above the current rate.  


Plains also provided their 2015 and 2016 outlook and assumptions:


-  2015 Full Year EBITDA will be on low range of guidance due to propane margins and the recent tornadoes. This is about 5% lower from the guidance provided at the beginning of the year.


-  2016 Crude prices will average $47.50 and $67.50 in 2017 with a volume decrease of roughly 5% as indicated below




-  2016 Expected EBITDA $2.3B, a 4.5% increase, but impacted by declining Supply and Logistics margin as indicated below





To summarize, Plains will pay an 8% rate for the capital versus 13% if they had to have issued new units and will likely maintain their current distribution rate through 2017 at the least.  Plains GP shareholders will now also have a flat outlook where neither new units or a distribution increase will change their IDR cash flows through 2017.   Plains investors will be rewarded if crude prices increase, along with volumes.  If prices remain below $40 through Q4 of 2017, volatility and risk increase as the lower for longer ramifications will be a continued focus of speculation and a shrinking base of investors.



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