Investorsare buying into Plains AllAmerican Pipeline LP's messaging that its with general partnerPlains GP Holdings LPand the related dividend cuts are more good news than bad.
Pricesfor both partnerships jumped at the opening bell and ascended through Middaytrading on July 12. Shortly after 1:15 p.m. ET, PAA units had increased more than11% to $29.81, while PAGP units were up more than 12.4% to $11.13.
Speakingthe day after Plains announced the $7.2 billion transaction, CEO Greg Armstrongdoubled down on the benefits of the simplification, saying it will alignshareholder interests effectively, lower costs of capital, strengthendistribution coverage and bolster the entity's credit profile. Andthe announced 21% dividend cut for Plains All American unitholders is anotherstep to make sure the partnership can not only weather a lower for longer oilprice scenario, but thrive in it.
"I think what we've done is we've cleared the decks tobe able to be an active participant to use our competitive synergies,"Armstrong said. "Before … we were at a little bit of a disadvantage. Wethink … we have the absolutely best crude oil platform out there. There aresome incremental opportunities, both on the organic growth side and then wethink there's going to [be some] on the consolidation side."
Eliminatingthe incentive distribution rights will improve Plains cost of capital andtrimming the cash distribution is expected to save the partnership about $320million. Going forward, Plains does not intend to drop its distributioncoverage ratio below 1.15x, and it is committed to a long-term debt to adjustedEBITDA ratio target of about 3.5x to 4.0x.
"Lookingbeyond 2016, we believe that contributions from completing our ongoing capitalproject program, including step-ups and minimum volume commitments provided,with the simplification and the distribution reset … should position PAA tomake solid progress for our target minimum distribution coverage level of 115%as well as facilitate incremental investment and position PAA to resumeattractive levels of future distribution growth," Armstrong said.
Theexisting PAA management will continue in their current roles, and Armstrongemphasized the importance of having a unified board structure once the dealwraps in the fourth quarter.
"Thedirectors of this unified board will have oversight of both PAA and PAGP andconsist of 10 members, six of whom are independent board members, threedesignated board members and the CEO, all of which are current members of thegeneral partners of PAA or PAGP," Armstrong said.
Armstrongrevealed that there was no clear consensus for an optimal solution regardingthe fold-in. "We realized we could not make everyone happy all the time,"he said. "However, we did…evaluate the suggestions we received verycarefully, and we believe we arrived at a very fair and appropriatesimplification solution."
PlainsAll American, which is acquiring the economic rights associated with the 2%general partner interest and the incentive distribution rights from affiliatePlains AAP LP for 245.5 million common units, will assume all of the generalpartner's debt of roughly $593 million.
CFOAl Swanson believes the deal will elicit a positive response from Moody's andS&P Global Ratings. "The rating agencies didn't sign off on it, butthey're fully aware of what we're doing before we did it," he said. "Wethink both agencies would view the steps that we're taking, with the[distribution] reset and importantly, elimination of the IDR … will be apositive."