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Equity Compensation Plans
 12 Months Ended
Dec. 31, 2011
Equity Compensation Plans  
Equity Compensation Plans

Note 10—Equity Compensation Plans

 

PAA Long-Term Incentive Plan Awards

 

Our general partner has adopted the Plains All American GP LLC 1998 Long-Term Incentive Plan (the “1998 Plan”), the 2005 Long-Term Incentive Plan (the “2005 Plan”) and the PPX Successor Long-Term Incentive Plan (the “PPX Successor Plan”) for employees and directors, as well as the Plains All American GP LLC 2006 Long-Term Incentive Tracking Unit Plan (the “2006 Plan”) for non-officer employees. The 1998 Plan, 2005 Plan and PPX Successor Plan authorize the issuance of an aggregate of 5.4 million common units deliverable upon vesting. Although other types of awards are contemplated under the plans, currently outstanding awards are limited to “phantom units,” which mature into the right to receive common units of PAA (or cash equivalent) upon vesting. Some awards also include distribution equivalent rights (“DERs”). Subject to applicable vesting criteria, a DER entitles the grantee to a cash payment equal to the cash distribution paid on an outstanding common unit. The 2006 Plan authorizes the grant of approximately 2.1 million “tracking units” which, upon vesting, represent the right to receive a cash payment in an amount based upon the market value of a common unit at the time of vesting. Our general partner is entitled to reimbursement by us for any costs incurred in settling obligations under the plans.

 

At December 31, 2011, the following LTIP awards, denominated in PAA units, were outstanding (units in millions):

 

 

 

PAA

 

 

 

 

 

 

 

 

 

 

 

LTIP Units

 

Distribution

 

Estimated Unit Vesting Date

 

Outstanding

 

Required

 

2012

 

2013

 

2014

 

2015

 

Thereafter

 

2.6

(1)

$3.75 - $4.45

 

0.9

 

0.6

 

0.5

 

0.6

 

—

 

1.4

(2)

$3.80 - $4.25

 

0.6

 

0.5

 

0.2

 

0.1

 

—

 

4.0

(3) (4)

 

 

1.5

 

1.1

 

0.7

 

0.7

 

—

 

 

(1)                                     These LTIP awards have performance conditions requiring the attainment of an annualized PAA distribution of between $3.75 and $4.45 and vest upon the later of a certain date or the attainment of such levels. If the performance conditions are not attained while the grantee remains employed by us, or the grantee does not meet employment requirements, these awards will be forfeited. For purposes of this disclosure, vesting dates are based on an estimate of future distribution levels and assume that all grantees remain employed by us through the vesting date.

 

(2)                                     These LTIP awards have performance conditions requiring the attainment of an annualized PAA distribution of between $3.80 and $4.25.  For these LTIP awards, fifty percent will vest at specified dates regardless of whether the performance conditions are attained. For purposes of this disclosure, vesting dates are based on an estimate of future distribution levels and assume that all grantees remain employed by us through the vesting date.

 

(3)                                     Approximately 2.2 million of the 4.0 million outstanding PAA LTIP awards also include DERs, of which 1.7 million had vested as of December 31, 2011.

 

(4)                                     LTIP units outstanding do not include Class B units of Plains AAP, L.P. (“AAP LP Class B units”) described below.

 

Class B Units of Plains AAP, L.P.

 

In August 2007, the owners of Plains AAP, L.P. authorized the issuance of up to 200,000 AAP LP Class B Units.  AAP LP Class B units become earned in various increments upon the achievement of PAA distribution levels of between $3.50 and $4.80 (or in some cases, within 180 days thereof). When earned, the AAP LP Class B unit awards are entitled to participate in distributions paid by Plains AAP, L.P. in excess of $11 million (as adjusted for debt service costs and excluding special distributions funded by debt) per quarter. Assuming all 200,000 AAP LP Class B units were granted and earned, the maximum participation would be 8% of Plains AAP, L.P.’s distribution in excess of $11 million (as adjusted) each quarter.  The following table contains a summary of AAP LP Class B unit awards:

 

 

 

Reserved for
Future Grants

 

Outstanding

 

Outstanding Units
Earned

 

 

Grant Date
Fair Value Of
Outstanding Class B
Units (1)

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Balance as of December 31, 2010

 

24,500

 

175,500

 

80,063

 

 

$

40

 

Class B unit issuances

 

(8,000

)

8,000

 

—

 

 

4

 

Class B unit forfeitures

 

—

 

—

 

—

 

 

—

 

Class B units earned

 

—

 

—

 

—

 

 

—

 

Balance as of December 31, 2011

 

16,500

 

183,500

 

80,063

 

 

$

44

 

 

(1)                                        Of the grant date fair value, approximately $9 million was recognized as expense during both years ended December 31, 2011 and 2010.

 

Although the entire economic burden of the AAP LP Class B units, which are equity classified, is borne solely by Plains AAP, L.P. and does not impact our cash or units outstanding, the intent of the AAP LP Class B units is to provide a performance incentive and encourage retention for certain members of our senior management. Therefore, we recognize the grant date fair value of the AAP LP Class B units as compensation expense over the service period. The expense is also reflected as a capital contribution and thus, results in a corresponding credit to Partners’ Capital in our Consolidated Financial Statements.

 

PNG Long-Term Incentive Plan Awards

 

During April 2010, PNG’s general partner adopted the PAA Natural Gas Storage, L.P. 2010 Long Term Incentive Plan (the “PNG Plan”) for employees, directors and consultants.  The PNG Plan limits the number of PNG common units that may be delivered pursuant to awards under the plan to 3 million units.  Although other types of awards are contemplated under the plan, currently outstanding awards are limited to phantom units, which mature into the right to receive common units of PNG (or cash equivalent) upon vesting. Some awards also include DERs.

 

At December 31, 2011, the following LTIP awards, denominated in PNG units, were outstanding (units in millions):

 

 

 

PNG

 

 

 

 

 

 

 

 

 

 

 

LTIP Units

 

Distribution

 

Estimated Unit Vesting Date

 

Outstanding

 

Required

 

2012

 

2013

 

2014

 

2015

 

Thereafter

 

0.3

(1)

$1.55 - $1.90

 

—

 

—

 

—

 

0.1

 

0.2

 

0.2

(2)

Other

 

—

 

0.1

 

0.1

 

—

 

—

 

0.5

(3) (4)

 

 

—

 

0.1

 

0.1

 

0.1

 

0.2

 

 

(1)                                     These LTIP awards have performance conditions requiring the attainment of an annualized PNG distribution of between $1.55 and $1.90 and vest upon the later of a certain date or the attainment of such levels. For purposes of this disclosure, vesting dates are based on an estimate of future distribution levels and assume that all grantees remain employed by us through the vesting date.

 

(2)                                     These LTIP awards have performance conditions requiring the conversion of PNG’s Series A and Series B subordinated units (see Note 5). For purposes of this disclosure, vesting dates are based on an estimate of future distribution levels and assume that all grantees remain employed by us through the vesting date.

 

(3)                                     Approximately 0.3 million of the 0.5 million outstanding PNG LTIP awards also include DERs, of which less than 0.1 million had vested as of December 31, 2011.

 

(4)                                     LTIP units outstanding do not include the PNG Transaction Grants or Class B units of PNGS GP LLC described below.

 

PNG Long-term Incentive Plan Award Modification.  On February 2, 2012, the Board of Directors of PNG’s general partner approved the modification of certain awards previously granted under the PNG Plan.  As a result of the modification, approximately 232,500 equity-classified phantom unit awards will now vest in the following manner: (i) approximately 70,000 awards, with distribution equivalent rights also modified to begin payment in February 2012, will vest upon the date PNG pays an annualized distribution of at least $1.45, (ii) approximately 70,000 awards, with distribution equivalent rights also modified to begin payment in May 2013, will vest upon the date PNG pays an annualized distribution of at least $1.50 and (ii) the remainder, with distribution equivalent rights also modified to begin payment in May 2014, will vest upon the date PNG pays an annualized distribution of at least $1.55.  Fifty percent of any awards that have not vested as of the November 2016 distribution date will vest at that time and the remainder will expire.  Additionally, 232,500 of equity-classified phantom unit awards with vesting terms originally tied to the conversion of PNG’s Series A and Series B subordinated units were modified such that all these awards will now fully vest upon conversion of the Series A subordinated units to common units.  Distribution equivalent rights were also granted with respect to these awards beginning February 2012.  There was no financial impact at the time of the modification; however, we anticipate that we will recognize additional equity compensation expense in the future as a result of the modification.

 

PNG Transaction Grants

 

During September 2010, we entered into agreements with certain of our officers, pursuant to which these officers acquired an aggregate of 375,000 phantom common units, phantom Series A subordinated units, and phantom Series B subordinated units representing a portion of the limited partner interests of PNG issued to us in the PNG IPO. The awards, referred to herein as “PNG Transaction Grants,” will vest upon the completion of the service period and certain performance conditions, including the conversion of PNG’s Series A subordinated units into common units of PNG and the conversion of PNG’s Series B subordinated units into Series A subordinated units of PNG.  Upon vesting, these awards will be settled with outstanding common or Series A subordinated units of PNG currently owned by us, resulting in a dilution of our interest in PNG.  As of December 31, 2011, 62,500 PNG Transaction Grants had vested in common units.

 

Class B Units of PNGS GP LLC

 

During July 2010, the Board of Directors of PNG’s general partner authorized the issuance of 165,000 Class B units of PNGS GP LLC (“PNGS GP LLC Class B units”). During 2011, 16,500 PNGS GP LLC Class B units were forfeited. As of December 31, 2011, 74,250 units were outstanding, and the remaining 90,750 units are reserved for future grants. The PNGS GP LLC Class B units earn the right to participate in distributions (i.e. become “earned”) in 25% increments 180 days following annualized PNG distribution levels of $2.00, $2.30, $2.50 and $2.70.  In addition, 50% of the applicable earned units vest immediately upon becoming earned units and the remaining 50% vest on the fifth anniversary of the date of grant. If PNGS GP LLC Class B units become earned units after the fifth anniversary of the date of grant, 100% of such units will vest immediately upon becoming earned units.  When earned, the PNGS GP LLC Class B units participate in quarterly distributions paid to PNG’s general partner to the extent such distributions exceed $2.5 million per quarter.  Assuming all 165,000 PNGS GP LLC Class B units were granted and earned, the maximum participation rate would be 6% of PNG’s quarterly general partner distribution in excess of $2.5 million. As the PNG distribution levels required for vesting are not currently considered to be probable of occurring, no expense was recognized for the PNGS GP LLC Class B Units during the year ended December 31, 2011.

 

Other Consolidated Equity Compensation Information

 

Our LTIP awards include both liability classified and equity classified awards. In accordance with FASB guidance regarding share-based payments, the fair value of our liability classified LTIP awards is calculated based on the closing market price of the underlying PAA or PNG units at each balance sheet date and adjusted for the present value of any distributions that are estimated to occur on the underlying units over the vesting period that will not be received by the award recipients. The fair value of our equity classified LTIP awards is calculated based on the closing market price of the PAA or PNG units on the respective grant dates and adjusted for the present value of any distributions that are estimated to occur on the underlying units over the vesting period that will not be received by the award recipient. This fair value is recognized as compensation expense over the service period.

 

Our LTIP awards typically contain performance conditions based on the attainment of certain annualized distribution levels and vest upon the later of a certain date or the attainment of such levels.  For awards with performance conditions (such as distribution targets), expense is accrued over the service period only if the performance condition is considered to be probable of occurring.  When awards with performance conditions that were previously considered improbable become probable, we incur additional expense in the period that our probability assessment changes.  This is necessary to bring the accrued obligation associated with these awards up to the level it would be as if we had been accruing for these awards since the grant date.  Our DER awards typically contain performance conditions based on the attainment of certain annualized distribution levels and become earned upon the attainment of such levels.  The DERs terminate with the vesting or forfeiture of the underlying LTIP award.  For liability classified awards, we recognize DER payments in the period the payment is earned as compensation expense.  For equity classified awards, we recognize DER payments in the period it is paid as a reduction of partners’ capital.

 

Prior to PNG’s IPO and adoption of the PNG Plan, certain PNG officers and other individuals were granted LTIP awards under the PAA LTIP Plans.  In connection with the adoption of the PNG plan, substantially all of the then outstanding PAA LTIP awards held by PNG officers were converted to PNG LTIP awards.  We recognized incremental compensation expense of less than $1 million during the twelve months ended December 31, 2010 as a result of this modification.

 

Our accrued liability at December 31, 2011 related to all outstanding liability-classified LTIP awards and DERs is approximately $138 million. This liability includes accruals associated with our assessments that the following performance conditions are probable of occurring: (i) an annualized PAA distribution of $4.35, (ii) an annualized PNG distribution of $1.45 and (iii) the conversion of PNG’s Series A subordinated units and the first tranche of PNG’s Series B subordinated units. At December 31, 2010, the accrued liability was approximately $102 million, which includes accruals associated with our assessments that the following performance conditions were probable of occurring: (i) an annualized PAA distribution of $4.00, (ii) an annualized PNG distribution of $1.45 and (iii) the conversion of PNG’s Series A subordinated units and the first tranche of PNG’s Series B subordinated units.  In February 2012, the performance conditions related to PNG’s Series B subordinated units were modified. See “PNG Long- Term Incentive Plan Award Modification” above for further discussion.

 

Our equity compensation activity for awards denominated in PAA and PNG units is summarized in the following table (units in millions):

 

 

 

PAA Units (1)

 

PNG Units (2)(3)

 

 

 

 

 

Weighted Average

 

 

 

Weighted Average

 

 

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

Units

 

Fair Value per Unit

 

Units

 

Fair Value per Unit

 

Outstanding, December 31, 2008

 

3.9

 

$

36.44

 

—

 

$

—

 

Granted

 

0.6

 

$

32.20

 

—

 

$

—

 

Vested

 

(0.6

)

$

34.55

 

—

 

$

—

 

Cancelled or forfeited

 

(0.1

)

$

37.82

 

—

 

$

—

 

Acquired

 

0.1

 

$

26.24

 

—

 

$

—

 

Outstanding, December 31, 2009

 

3.9

 

$

36.40

 

—

 

$

—

 

Granted

 

2.0

 

$

45.66

 

1.1

 

$

20.49

 

Vested

 

(1.1

)

$

32.20

 

—

 

$

—

 

Cancelled or forfeited

 

(0.4

)

$

35.62

 

(0.1

)

$

19.22

 

Outstanding, December 31, 2010

 

4.4

 

$

41.69

 

1.0

 

$

20.55

 

Granted

 

0.5

 

$

55.05

 

—

 

$

—

 

Vested

 

(0.7

)

$

40.68

 

(0.1

)

$

23.62

 

Cancelled or forfeited

 

(0.2

)

$

41.97

 

(0.1

)

$

19.20

 

Outstanding, December 31, 2011

 

4.0

 

$

43.53

 

0.8

 

$

20.55

 

 

(1)                                     Amounts do not include Class B units of Plains AAP, L.P. as discussed above.

(2)                                     Amounts do not include Class B units of PNGS GP LLC as discussed above.

(3)                                     Amounts include PNG Transaction Grants.

 

                We refer to our LTIP Plans, PNG Transaction Grants, AAP LP Class B units and PNGS GP LLC Class B units collectively as “Equity compensation plans.” The table below summarizes the expense recognized and the value of vesting (settled both in units and cash) related to our equity compensation plans (in millions):

 

 

 

2011

 

 

2010

 

 

2009

 

Equity compensation expense

 

$

110

 

 

$

98

 

 

$

68

 

LTIP unit settled vestings (1)

 

$

24

 

 

$

26

 

 

$

19

 

LTIP cash settled vestings

 

$

19

 

 

$

36

 

 

$

8

 

DER cash payments

 

$

4

 

 

$

4

 

 

$

4

 

 

(1)                                        For the year ended December 31, 2011, approximately $2 million relates to unit vestings which were settled with PNG units.

 

Approximately 0.2 million, 0.3 million, and 0.3 million PAA units were issued net of tax withholding of approximately 0.1 million, 0.2 million and 0.2 million units, in 2011, 2010, and 2009 respectively, in connection with the settlement of vested awards. The remaining 0.4 million, 0.6 million and 0.1 million of awards that vested during 2011, 2010 and 2009 respectively, were settled in cash. Based on the December 31, 2011 fair value measurement and probability assessment regarding future distributions, we expect to recognize approximately $90 million of additional expense over the life of our outstanding awards related to the remaining unrecognized fair value. Actual amounts may differ materially as a result of a change in the market price of our units and/or probability assessments regarding future distributions. We estimate that the remaining fair value will be recognized in expense as shown below (in millions):

 

 

 

Equity Compensation

 

 

 

Plan Fair Value

 

Year

 

Amortization (1) (2)

 

2012

 

$

50

 

2013

 

26

 

2014

 

11

 

2015

 

3

 

2016

 

—

 

Total

 

$

90

 

 

(1)                                     Amounts do not include fair value associated with awards containing performance conditions that are not considered to be probable of occurring at December 31, 2011.

 

(2)                                     Includes unamortized fair value associated with AAP LP Class B units, PNGS GP LLC Class B units and PNG Transaction Grants.