Business Context and Reporting Period
This Form 8-K is a current report filed by Plains GP Holdings, L.P. on March 22, 2018. The filing discloses corporate governance actions taken by the Board of Directors of PAA GP Holdings LLC, the general partner of Plains All American Pipeline, L.P. (PAA). The report focuses on the approval of new phantom unit grants and the modification of performance terms for existing equity awards held by Named Executive Officers.
Key Financial Metrics
The filing does not contain standard financial statements, revenue, profit, cash flow, or debt metrics. The only financial data points provided are performance thresholds tied to PAA's Distributable Cash Flow (DCF) per common unit, which serve as vesting conditions for executive compensation:
- Target DCF Thresholds: $1.90, $2.10, $2.30, $2.40, $2.50, and $2.65 per common unit on a trailing four-quarter basis.
- Historical Context: The filing references a distribution reduction decision made in August 2017 to improve distribution coverage and reduce leverage.
Material Changes Versus Prior Period
The primary material change disclosed is a strategic shift in executive compensation structure and performance metrics:
- Grant Frequency: PAA is transitioning from granting larger phantom unit awards every two or three years to smaller annual awards. 2018 is designated as a transition year.
- Performance Metric Shift: The Board amended existing Long-Term Incentive Plan (LTIP) awards and AAP Management Units to change the performance threshold metric from "annualized quarterly distributions per unit" to "DCF per unit on a trailing four-quarter basis."
- Rationale: This modification ensures executive incentives remain tied to underlying financial performance despite the Board's 2017 decision to reduce distributions to retain cash flow.
Guidance, Outlook, and Management Commentary
New Phantom Unit Grants (March 22, 2018):
- Willie Chiang (EVP & COO): 50,000 units.
- Al Swanson (EVP & CFO): 30,000 units.
- Daniel J. Nerbonne (EVP, Operations & Engineering): 25,000 units.
- Vesting Terms: Units vest on the May 2021 distribution date. Accelerated vesting of 50% is possible if PAA generates DCF of $2.30 per unit on a trailing four-quarter basis.
- DERs: Tandem distribution equivalent rights begin paying on the May 2018 distribution date.
Modification of Existing Awards:
- 2016 Phantom Units: Vesting for 55,000 (Chiang), 46,000 (Swanson), and 31,667 (Nerbonne) units is now tied to DCF thresholds of $2.30, $2.50, and $2.65 per unit, with potential acceleration.
- 2015 Phantom Units (Chiang): 120,000 units modified to vest based on DCF thresholds of $2.30, $2.40, and $2.50 per unit between 2018 and 2020.
- AAP Management Units: Terms for 375,521 units (Chiang) and 56,328 units (Nerbonne) were modified to become earned based on DCF thresholds ranging from $1.90 to $2.50 per unit.
Risks and Contingencies: DCF calculations are subject to adjustment for significant asset sales. The filing notes the strategic intent to reduce leverage and improve distribution coverage.
Investor Verification Checklist
- Verify the current trailing four-quarter DCF per common unit to assess the likelihood of accelerated vesting for the new and modified awards.
- Review the August 2017 distribution reduction announcement to understand the baseline for the shift from distribution-based to DCF-based metrics.
- Confirm the total number of outstanding phantom units and AAP Management Units to gauge potential dilution upon vesting.
- Monitor future filings for actual DCF performance against the $2.30 threshold, which triggers 50% accelerated vesting for the 2018 grants.