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Plains All American in $7.2B deal to simplify ownership structure

Following the footsteps of other major midstream operatorsseeking to reduce their cost of capital, Plains All American Pipeline LP has struck an agreementto simplify the ownership and governance structure of the partnership andrelated companies.

In a transaction valued at about $7.2 billion, Plains AllAmerican will issue 245.5 million shares to an affiliate of general partnerPlains GP Holdings LP,in exchange for permanently eliminating the incentive distribution rights andother economic rights Plains GP holds. It will also give Plains All Americanunit holders the right to vote for a unified board of directors.

When the transaction closes in the fourth quarter, Plains GPaffiliate Plains AAP LP's stake in Plains All American will be about 35%, basedon an exchange rate of 0.3755 Plains All American unit for each Class A unit ofPlains AAP. Plains All American will also assume $593 million in the formeraffiliate's debt.

"We are pleased to announce this simplificationtransaction and related actions, which accomplish several important objectivesfor PAA and its stakeholders, including [Plains GP Holdings]," GregArmstrong, Plains All American Chairman and CEO, said in the July 11 statement."Collectively, these actions will simplify PAA's capital structure, betteralign the interests of its equity stakeholders, improve its overall creditprofile, reduce its cost of incremental capital and improve its distributioncoverage. As a result, PAA will be better positioned to capitalize onattractive growth opportunities and manage its business over the long term."

While Plains GP will remain a publicly traded entity that istreated like a C-corp with a Form 1099 tax reporting structure, the push tosimplify MLP structures through moves like sponsor buybacks has gatheredmomentum since the 2008-09 financial meltdown. After the financial meltdownMagellan Midstream Partners LP,  and  relinquishedtheir incentive distribution rights by merging their general partnership andlimited partnership structures.

More recently in November 2014,  folded up itscomplex of partnerships in a $76billion transaction. Targa Resources Corp. followed suit in November2015 announcing anapproximately $6.67 billion buyback of an outstanding stake in .

The deal gives holders of PAA units the right to participatein the election of the directors of general partner Plains GP. Under the oldstructure, PAA unit holders could not vote in board elections and Plains GPholders only got to vote if a private general partner owner group's stake inthe company fell below 40%. The first election for the unified board will takeplace in 2018, according to the statement.

The transaction was negotiated by a conflicts committeeestablished by Plains All American's general partner and Plains GP's board. Itrequires approval by the majority of Plains GP's shareholders to be completed.The companies have received a tax opinion that the transaction will not betaxable for PAA or to shareholders, according to the statement.

When the transaction is complete, PAA will have 643 millioncommon units outstanding, or 706 million units assuming the conversion ofpreferred units. Holders of Plains AAP units will get the right to swap theirownership and related voting rights for Plains GP Class A shares on a 1-for-1basis. Barclays acted as lead financial adviser to the Plains entities andCitigroup also acted for the company in the transaction.

Distribution cut

Separately but related to the partnerships cost containmentefforts, Plains announced a distribution cut that will take effect for thirdquarter payments.

For the second-quarter distribution, holders of PAA unitswill receive 70 cents per common unit, payable on August 12 to holders ofrecord on July 29. PAGP unit holders will receive a 23.1 cent distribution perClass A share held.

Effective with the third quarter distribution paid inNovember, PAA holders will receive 55 cent distribution, or a 21% reduction.Given the effects of the simplification deal, the pro forma quarterlydistribution to Class A PAGP unit holders will be 20.65 cents, an 11% cut.

Plains also announced a payment-in-kind to Series Apreferred unit holders that will result in 1,237,765 additional preferred unitsbeing issued. The payment-in-kind equates to a 52.5-cent distribution.

Guidance

Plains forecast its 2016 adjusted EBITDA guidance will be inline with the $2.175 billion midpoint guidance released in May.

The partnership will host a conference call on July 12 at8:30 a.m. ET to discuss the moves.