Plains All American Takes Out Its General Partner - $PAA $PGAP $EPD $MMP

By Albert Alfonso

Plains All American Pipelines (NYSE:PAA) made some headlines last week when it announces its “Simplification Transaction” where it will buyout AAP, an affiliate of its general Partner Plains GP Holdings (NYSE:PAGP), and eliminate IDR payments in exchange for 245.5 million PAA units and the assumption of $593 million in debt. This is a fairly complicated transaction with several moving parts. However, PAA’s rationale for making this deal are fairly straightforward.

Lower distribution and cash savings

By far the biggest reason for this transaction is to reduce PAA’s cash outflows and improve its distribution coverage. . . .

Lower cost of capital

Along with the lower distribution, PAA will no longer have to pay IDRs to PAGP. All incremental distributable cash flow growth will now flow down into PAA, whereas in the past up to 50% would have stayed at PAGP.

No more general partner IDRs is a huge boon as this puts the pipeline company on equal footing with peers such as Enterprise Products Partners (NYSE:EPD) and Magellan Midstream Partners (NYSE:MMP), both of which have consolidated their general partners, and should considerably lower its cost of capital and raise the multiple applied by the market.

Debt and leverage outlook improved

. . . With the reduced distribution, and lower cost of capital, PAA will not only retain some internal cash flows, but also be able to issue equity to fund the budget.




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