Note 10—Partners’ Capital and Distributions

Units Outstanding

Partners’ capital at December 31, 2012 consists of 335,283,874 common units outstanding, representing a 98% effective aggregate ownership interest in the Partnership and its subsidiaries after giving effect to the 2% general partner interest.

Distributions

We distribute 100% of our available cash within 45 days after the end of each quarter to unitholders of record and to our general partner. Available cash is generally defined as all of our cash and cash equivalents on hand at the end of each quarter, less reserves established by our general partner for future requirements.

General Partner Incentive Distributions. Our general partner is entitled to receive incentive distributions if the amount we distribute with respect to any quarter exceeds levels specified in our partnership agreement. As a result of the two-for-one unit split that was effected on October 1, 2012, the partnership agreement was amended to adjust the quarterly incentive distribution provisions. Under the provisions of the amended partnership agreement, the general partner is entitled, without duplication, to 15% of amounts we distribute in excess of $0.2250 per unit, referred to as our MQD, 25% of the amounts we distribute in excess of $0.2475 per unit and 50% of amounts we distribute in excess of $0.3375 per unit (referred to as “incentive distributions”).

Per unit cash distributions on our outstanding units and the portion of the distributions representing an excess over the MQD were as follows:

	Year
	2012				2011				2010
			Excess				Excess				Excess
	Distribution (1)		over MQD		Distribution (1)		over MQD		Distribution (1)		over MQD
First Quarter	$	0.5125	$	0.2875	$	0.4788	$	0.2538	$	0.4638	$	0.2388
Second Quarter	$	0.5225	$	0.2975	$	0.4850	$	0.2600	$	0.4675	$	0.2425
Third Quarter	$	0.5325	$	0.3075	$	0.4913	$	0.2663	$	0.4713	$	0.2463
Fourth Quarter	$	0.5425	$	0.3175	$	0.4975	$	0.2725	$	0.4750	$	0.2500

(1) Distributions represent those declared and paid in the applicable period.

In order to enhance our distribution coverage ratio and liquidity in connection with a significant acquisition, our general partner has, from time to time, agreed to reduce the amounts due to it as incentive distributions. Upon closing of the Pacific acquisition in November 2006, the Rainbow acquisition in May 2008 and the PNGS Acquisition in September 2009, our general partner agreed to reduce the amounts due to it as incentive distributions by a total of $83 million as displayed on an annual basis in the following table (in millions):

Acquisition	2007		2008		2009		2010		2011		Total
Pacific	$	20	$	15	$	15	$	10	$	5	$	65
Rainbow	—		3		6		1		—		10
PNGS	—		—		1		5		2		8
Total	$	20	$	18	$	22	$	16	$	7	$	83

In connection with the BP NGL Acquisition, our general partner agreed to reduce the amount of its incentive distributions by $3.75 million per quarter through February 2014 and $2.5 million per quarter thereafter. Through December 31, 2012 our general partner’s incentive distributions had been reduced by $11.25 million related to this acquisition. See Note 3 for further discussion of the BP NGL Acquisition.

Total cash distributions made were as follows (in millions, except per unit amounts):

	Distributions Paid								Distributions
	Common		General Partner						per limited
Year	Units		Incentive		2%		Total		partner unit (1)
2012	$	684	$	271	$	14	$	969	$	2.11
2011	$	575	$	204	$	12	$	791	$	1.95
2010	$	512	$	160	$	10	$	682	$	1.88

(1) Distributions per limited partner unit are presented as adjusted for the two-for-one unit split effected on October 1, 2012.

On January 7, 2013, we declared a cash distribution of $0.5625 per unit on our outstanding common units. The distribution was paid on February 14, 2013 to unitholders of record on February 1, 2013, for the period October 1, 2012 through December 31, 2012. The total distribution paid was approximately $274 million, with approximately $189 million paid to our common unitholders and $4 million and $81 million paid to our general partner for its general partner and incentive distribution interests, respectively.

Noncontrolling Interests in Subsidiaries

As of December 31, 2012, noncontrolling interests in our subsidiaries consisted of the following: (i) an approximate 36% interest in PNG and (ii) a 25% interest in SLC Pipeline.

PNG Initial Public Offering

On May 5, 2010, PNG completed its IPO of 13,478,000 common units representing limited partner interests at $21.50 per common unit. The number of units issued at closing included 1,758,000 common units issued pursuant to the full exercise of the underwriters’ over-allotment option. Net proceeds received by PNG from the sale of the 13,478,000 common units were approximately $268 million and were used to repay amounts outstanding under our credit facilities and for general partnership purposes. The common units offered represented approximately 23% of the outstanding equity of PNG.

Prior to the PNG IPO, we owned 100% of PNGS’ natural gas storage business, the predecessor of PNG, and related operating entities. Immediately prior to the closing of the IPO, we contributed 100% of the equity interests in PNGS and its subsidiaries to PNG in exchange for approximately 18.1 million common units, approximately 13.9 million Series A subordinated units, 11.5 million Series B subordinated units and a 2% general partner interest and incentive distribution rights. In conjunction with the PNG IPO, we recorded noncontrolling interest of $167 million associated with the book value of PNG sold to the public. We also recorded an increase to our partners’ capital of approximately $101 million associated with the net increase from our share of the proceeds received in the offering partially offset by the dilution of our interest in PNG resulting from the IPO.

Series A and Series B Subordinated Units. The Series A subordinated units are not entitled to receive any distributions until the common units have received the MQD ($1.35 on an annualized basis) plus any arrearages in the payment of the MQD from prior quarters. The Series A subordinated units will convert to common units once certain earnings and distribution targets are met for three consecutive, non-overlapping four-quarter periods. The Series B subordinated units are not entitled to participate in quarterly distributions. Instead, the Series B subordinated units convert to Series A subordinated units in distinct tranches upon the achievement of defined benchmarks tied to the amount of capacity in service at Pine Prairie and increases in PNG’s quarterly distributions. The Series B subordinated units will convert into Series A subordinated units on a one-for-one basis for each tranche when the respective benchmarks are reached for (i) the aggregate amount of working gas storage capacity at Pine Prairie that has been placed into service, (ii) the distributable cash flow generated by PNG for two consecutive quarters sufficient to pay a quarterly distribution of at least the annualized distribution benchmark on the weighted average number of outstanding common units and Series A subordinated units and all of such Series B subordinated units and (iii) the quarterly distribution of available cash of at least the annualized distribution benchmark for two consecutive quarters on all outstanding common units and Series A subordinated units and the corresponding distributions on PNG’s general partner’s 2% interest and the related distributions on the incentive distribution rights.

Modifications of Holdings in and Conversion of PNG Subordinated Units

On August 16, 2010, the Amended and Restated Agreement of Limited Partnership of PNG was amended and restated (the “Second Amended and Restated Agreement”) to reduce the number of Series A subordinated units by 2.0 million and increase the number of Series B subordinated units by an equivalent amount. The Second Amended and Restated Agreement also increased the number of potential conversion tranches on Series B subordinated units from three to five. In addition, the terms of the Series B subordinated units were modified to extend the conversion period by raising the operating and financial performance benchmarks of approximately one-third of the Series B subordinated units outstanding prior to this modification. This amendment was intended to increase the distribution coverage and organic growth profile of PNG’s common and Series A subordinated units and improve PNG’s posture with respect to potential acquisitions. We accounted for this transaction as an exchange between entities under common control and accordingly, we reclassified the book value of the 2.0 million Series A subordinated units at the time of the modification to Series B subordinated units.

The following table sets forth the changes made to our holdings in the limited partner units of PNG as a result of the August 2010 modification (units in millions):

	Prior to Modification	Modification		Post Modification
PNG Units Owned by PAA:
Common Units	18.1	—		18.1
Series A Subordinated Units	13.9	(2.0	)	11.9
Common & Series A Subordinated Unit Subtotal	32.0	(2.0	)	30.0
Series B Subordinated Units (Performance Thresholds):
Tranche 1 ($1.44 / 29.6 Bcf)	4.6	(2.0	)	2.6
Tranche 2 ($1.53 / 35.6 Bcf)	3.8	(1.0	)	2.8
Tranche 3 ($1.63 / 41.6 Bcf)	3.1	(1.0	)	2.1
Tranche 4 ($1.71 / 48.0 Bcf)	—	3.0		3.0
Tranche 5 ($1.80 / 48.0 Bcf)	—	3.0		3.0
Series B Subordinated Unit Subtotal	11.5	2.0		13.5
Total PNG Units Owned by PAA (1)	43.5	—		43.5

(1) See “PNG Transaction Grants” in Note 15.

In February 2012, PNG modified the terms of the first three tranches of the PNG Series B subordinated units held by PAA. The modification increases the quarterly distribution benchmark for Tranche 1, 2 and 3 from annualized levels of $1.44 per unit, $1.53 per unit and $1.63 per unit, respectively, to an annualized level of $1.71 per unit. The following table presents the operational and financial benchmarks, as modified, for conversion of the Series B subordinated units into Series A subordinated units for each tranche (units in millions):

	Series B Subordinated Units to Convert into Series A Subordinated Units	Working Gas Storage Capacity (Bcf)	Annualized Distribution Level
Tranche 1	2.6	29.6	$	1.71
Tranche 2	2.8	35.6	$	1.71
Tranche 3	2.1	41.6	$	1.71
Tranche 4	3.0	48.0	$	1.71
Tranche 5	3.0	48.0	$	1.80

PNG’s general partner will determine whether the in-service operational tests set forth above have been satisfied. To the extent that the operational tests described above are satisfied prior to or during the two-quarter period applicable to the financial tests described above, the holder of the Series B subordinated units subject to conversion will be entitled to receive the quarterly distribution payable with respect to the second quarter of such two-quarter period. In all other circumstances, where the operational tests are satisfied following the two-quarter period applicable to the financial tests, the holder of the Series B subordinated units subject to conversion will be entitled to receive any distribution payable following the satisfaction of such operational tests.

Any Series B subordinated units that remain outstanding as of December 31, 2018 will automatically be cancelled.

Following conversion of any Series B subordinated units into Series A subordinated units, such converted Series B subordinated units will further convert into common units (together with any other outstanding Series A subordinated units) to the extent that the tests for conversion of the Series A subordinated units are satisfied. In determining whether such conversion tests have been satisfied, the Series B subordinated units that have converted into Series A subordinated units will be treated as Series A subordinated units from and after the date of their conversion into Series A subordinated units.

If at the time the above operational and financial tests are satisfied, the subordination period has already ended and all outstanding Series A subordinated units have converted into common units, the Series B subordinated units will instead convert directly into common units on a one-for-one basis and participate in the quarterly distribution payable to common units.

PNG Common Unit Issuance

During February 2011, in connection with the Southern Pines Acquisition, PNG completed a private placement of approximately 17.4 million PNG common units to third-party purchasers for net proceeds of approximately $370 million. In addition, we purchased approximately 10.2 million PNG common units for approximately $230 million, including our proportionate general partner contribution of $12 million (collectively, “the PNG offering”). Also, during both May 2011 and May 2012, a portion of the PNG Transaction Grants vested and was settled with 58,672 PNG units, which were owned by us. See Note 15 for further detail. As a result of these transactions, our aggregate ownership interest in PNG decreased from approximately 77% to approximately 64%. The following table sets forth our ownership changes in the limited partner units of PNG from December 31, 2010 to December 31, 2012 (units in millions):

	December 31, 2010	February 2011 PNG Issuance	May 2011 and May 2012 Transaction Grants		December 31, 2012
PNG Units Owned by PAA:
Common Units	18.1	10.2	(0.1	)	28.2
Series A Subordinated Units	11.9	—	—		11.9
Series B Subordinated Units	13.5	—	—		13.5
Total PNG Units Owned by PAA	43.5	10.2	(0.1	)	53.6

In addition to our limited partner interest, we also own the general partner’s 2% interest and the incentive distribution rights in PNG.

In conjunction with the PNG offering, we recorded an increase in noncontrolling interest of $306 million and an increase to our partners’ capital of approximately $64 million. The increases result from the portion of the proceeds attributable to the respective ownership interests in PNG, adjusted for the impact of the dilution of our ownership interest resulting from the transaction.

Noncontrolling Interests Rollforward

The following table reflects the changes in the noncontrolling interests in partners’ capital (in millions):

	Year Ended December 31,
	2012			2011			2010
Beginning balance	$	524		$	231		$	63
Sale of noncontrolling interests in a subsidiary	—			306			167
Net income attributable to noncontrolling interests	33			28			9
Distributions to noncontrolling interests	(48		)	(40		)	(10		)
Equity compensation expense	4			3			3
Distribution equivalent right payments	(1		)	—			—
Other comprehensive income/(loss):	—			—			—
Reclassification adjustments	(4		)	—			—
Net deferred gain/(loss) on cash flow hedges	1			(4		)	—
Other	—			—			(1		)
Ending balance	$	509		$	524		$	231

The following table sets forth the impact upon net income attributable to Plains giving effect to the changes in our ownership interest in PNG, which is recognized in partners’ capital (in millions):

	Year Ended December 31,
	2012		2011		2010
Net income attributable to Plains	$	1,094	$	966	$	505
Transfers to the noncontrolling interests:
Increase in capital from sale of PNG units	—		64		101
Change from net income attributable to Plains and net transfers to the noncontrolling interest	$	1,094	$	1,030	$	606

LTIP Vesting

In connection with the settlement of vested LTIP awards, we issued approximately 1.0 million common units, as adjusted for the two-for-one unit split, during 2012, which resulted in an increase to partners’ capital of approximately $34 million, including the general partner’s contribution.

PAA Equity Offerings

Continuous Offering Programs. On May 9, 2012, we entered into an equity distribution agreement with respect to the offer and sale, through our sales agent, of common units representing limited partner interests having an aggregate offering price of up to $300 million. The final sales under this equity distribution agreement occurred during September 2012. Under this agreement, we sold an aggregate of approximately 7.2 million common units, as adjusted for the two-for-one unit split, generating proceeds of approximately $302 million, including our general partner’s proportionate capital contribution, net of approximately $4 million of commissions to our sales agent. The net proceeds from sales were used for general partnership purposes.

On September 13, 2012, we entered into an additional equity distribution agreement with several financial institutions pursuant to which we may offer and sell, through our sales agents, common units representing limited partner interests having an aggregate offering price of up to $500 million. Sales of such common units will be made by means of ordinary brokers’ transactions on the NYSE at market prices, in block transactions or as otherwise agreed upon by our sales agent and us. Under the terms of the agreement, we have the option to sell common units to any of our sales agents as principal for its own account at a price to be agreed upon at the time of the sale. For any such sales, we will enter into a separate terms agreement with the sales agent.

Through December 31, 2012, we sold an aggregate of approximately 4.8 million common units, as adjusted for the two-for-one unit split, under this agreement, generating proceeds of approximately $222 million, including our general partner’s proportionate capital contribution, net of approximately $2 million of commissions to our sales agents. The net proceeds from sales were used for general partnership purposes.

Other Equity Offerings. During the three years ended December 31, 2012, we completed the following offerings of our common units, not associated with our Continuous Offering Programs, as shown in the table below (in millions, except unit and per unit data):

						General
		Gross		Proceeds		Partner					Net
Period	Units Issued (2)	Unit Price (2)		from Sale		Contribution		Costs			Proceeds
March 2012 (1)	11,500,000	$	40.015	$	460	$	9	$	(14	)	$	455
2012 Total	11,500,000			$	460	$	9	$	(14	)	$	455

November 2011 (1)	12,000,000	$	32.515	$	390	$	9	$	(13	)	$	386
March 2011 (1)	15,870,000	$	32.000	508		10		(15		)	503
2011 Total	27,870,000			$	898	$	19	$	(28	)	$	889

November 2010 (1)	9,560,000	$	31.300	$	299	$	6	$	(9	)	$	296
2010 Total	9,560,000			$	299	$	6	$	(9	)	$	296

(1) These offerings of common units were underwritten transactions that required us to pay a gross spread. The net proceeds from these offerings were used to reduce outstanding borrowings under our credit facilities and for general partnership purposes. The net proceeds from the March 2012 offering were also used to fund a portion of the BP NGL Acquisition.

(2) Units issued and gross unit price are presented as adjusted for the two-for-one unit split effected on October 1, 2012.

Class B Units of Plains AAP, L.P.

In August 2007, the owners of Plains AAP, L.P. authorized the board of directors of Plains All American GP LLC to issue Class B units of Plains AAP, L.P. (“AAP LP Class B Units”). At December 31, 2012, approximately 182,125 AAP LP Class B Units were outstanding, of which 130,250 had been earned. A total of 17,875 AAP LP Class B Units are reserved for future issuances. See Note 15 for further discussion of the AAP LP Class B Units.