Business Context and Reporting Period
This Form 8-K, filed on November 15, 2016, by Plains GP Holdings, L.P. (PAGP), reports the closing of the "Simplification Transactions" pursuant to a Simplification Agreement dated July 11, 2016. The transactions unified the governance structure of the Plains Entities (PAGP, Plains All American Pipeline, L.P. (PAA), and Plains AAP, L.P. (AAP)). The Simplification Proposal was approved by approximately 90.3% of PAGP's outstanding Class A and Class B shares, and all closing conditions were satisfied on the filing date.
Key Financial Metrics and Capital Structure Changes
This filing focuses on structural reorganization rather than operational financial performance; therefore, revenue, profit, and cash flow metrics are not provided. Key financial and capital structure events include:
- Debt Assumption and Repayment: PAA assumed AAP's remaining indebtedness under the AAP Credit Agreement, which consisted of $550 million in term loan borrowings and $92 million in revolving credit facility borrowings. PAA repaid this credit agreement in full and terminated it on November 15, 2016.
- Equity Issuance: PAA issued 245,500,000 PAA Common Units to AAP as consideration for the conversion of PAA GP's general partner interest and the redemption of incentive distribution rights (IDRs).
- Class C Shares: PAGP issued 477,648,826 non-economic Class C shares to PAA. These shares provide voting rights for the election of PAGP GP directors but do not participate in cash distributions.
- Expense Allocation: Under the new Omnibus Agreement, PAA will pay all direct and indirect expenses of the Plains Entities (excluding income taxes), including director compensation, insurance, and professional fees.
Material Changes Versus Prior Period
The filing details a fundamental shift in the corporate and partnership structure of the Plains Entities:
- Governance Unification: The board of directors of GP LLC was eliminated. PAGP GP now manages the business and affairs of PAGP, AAP, and PAA. The PAGP GP board size increased from seven to ten members.
- Shareholder Rights: The "trigger date" for PAGP shareholders to elect eligible PAGP GP directors was accelerated to the Closing date. Annual meetings for director elections will commence in 2018.
- Redemption Rights: Holders of AAP Units (excluding PAGP and GP LLC) were granted a "Redemption Right" to exchange AAP Units for PAA Common Units. This right is restricted for the first 12 months for certain holders to prevent technical tax terminations.
- General Partner Interest: PAA GP's 2% economic general partner interest in PAA was converted into a non-economic interest, and all IDRs held by AAP were redeemed.
Outlook, Risks, and Management Commentary
Management Commentary: The transactions were designed to simplify the corporate structure and align the interests of the various entities. The new structure allows PAA's limited partners to direct the voting of PAGP's Class C shares, effectively giving them a voice in the election of PAGP GP directors starting in 2018.
Risks and Contingencies:
- Tax Termination Risk: Restrictions on the exercise of AAP Unit Redemption Rights for the first 12 months are specifically designed to reduce the risk of a technical tax termination of PAA.
- Debt Structure: While the AAP Credit Agreement was terminated, the Omnibus Agreement clarifies that PAGP may lend proceeds of future indebtedness to AAP, which may then lend to PAA, with PAA reimbursing net fees and expenses.
Important Facts for Investor Verification
- Verify the exact number of PAA Common Units issued to AAP (245,500,000) and the impact on PAA's total outstanding unit count.
- Confirm the mechanics of the "pass-through vote" for PAA limited partners regarding the election of PAGP GP directors, effective in 2018.
- Review the specific restrictions on AAP Unit Redemption Rights for the first 12 months post-closing, particularly for Greg Armstrong and Harry Pefanis (100% restriction) and other holders (approx. 22% restriction).
- Examine the Omnibus Agreement to understand the full scope of expense reimbursement obligations now borne by PAA.
- Check the updated board composition of PAGP GP, noting the addition of Christopher M. Temple, Gary R. Petersen, and J. Taft Symonds.