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Simplification Transactions | 9 Months Ended
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Sep. 30, 2016
Simplification Transactions |
Simplification Transactions | Simplification Transactions On July 11, 2016, PAA, PAGP, AAP, PAA GP, GP LLC and GP Holdings entered into a Simplification Agreement pursuant to which, upon closing, in exchange for the issuance by PAA to AAP of approximately 245.5 million common units representing limited partner interests in PAA (“PAA Common Units”) and the assumption by PAA of AAP’s outstanding debt (as of September 30, 2016, approximately $603 million but expected to be approximately $641 million as of November 15, 2016), AAP will contribute the IDRs to PAA and PAA GP’s 2% economic general partner interest in PAA will be converted into a non-economic general partner interest in PAA. Following the closing of the transactions contemplated by the Simplification Agreement (the “Simplification Transactions”), which is expected to occur on November 15, 2016, both PAA and PAGP will continue to be publicly traded. PAA will be required to repay AAP's outstanding debt within two business days after the consummation of the Simplification Transactions. Among other approvals, the terms of the Simplification Agreement and the Simplification Transactions were unanimously approved by a conflicts committee comprised of independent directors of the Board of Directors of GP LLC on behalf of PAA, and unanimously approved by the Board of Directors of GP Holdings on behalf of PAGP. In addition to the terms described above, the Simplification Agreement also provides for the following:
• | Under a unified governance structure, the Board of Directors of GP Holdings will have oversight responsibility over both PAA and PAGP. In addition, starting in 2018, PAGP Class A and Class B shareholders and PAA common and preferred unitholders will have the right to participate in the election of directors of GP Holdings whose terms expire. Under the current structure, PAA common unitholders are not eligible to participate in the election of directors of GP Holdings and PAGP Class A and Class B shareholders only participate in such elections following a reduction in ownership of the private general partner owner group to below 40%.
• | In addition, similar to the current structure, for so long as each of EMG Investment, LLC (an affiliate of The Energy & Minerals Group), KAFU Holdings, L.P. (an affiliate of Kayne Anderson Investment Management Inc.) and Oxy Holding Company (Pipeline), Inc. (a subsidiary of Occidental Petroleum Corporation), together with their respective affiliates (together, the “Original Designating Parties”), own at least a 10% interest in the initial outstanding AAP units (i.e., as of the closing of the Simplification Transactions), such party will continue to be entitled to designate one director to the Board of Directors of GP Holdings. The calculation of such qualifying interest will include, in addition to any PAGP Class A shares owned by an Original Designating Party or its affiliates, any PAA common units received by such Original Designating Party of its affiliates in connection with their exercise of the Redemption Right (defined below).
• | AAP will execute a reverse split to adjust the number of AAP units such that the number of outstanding AAP Class A units (assuming the conversion of AAP Class B units into AAP Class A units) equals the number of PAA Common Units received by AAP at the closing of the Simplification Transactions. Simultaneously, PAGP will execute a reverse split to adjust the number of PAGP Class A and Class B shares outstanding to equal the number of AAP units it owns following AAP’s reverse unit split. As a result of these reverse splits, each PAGP Class A share will correspond, on a one-to-one basis, to an underlying PAA Common Unit held by AAP which is attributable to PAGP’s ownership in AAP.
• | Holders of AAP Class A units other than PAGP and GP LLC will continue to have the right to exchange their AAP Class A units (together with the corresponding PAGP Class B shares and, if applicable, GP Holdings company units) for PAGP Class A shares on a one-for-one basis or, alternatively, to redeem such ownership and related rights for their proportionate share of PAA Common Units held by AAP, subject to certain limitations (the “Redemption Right”). Upon any such redemption, the holders of AAP Class A units receiving PAA Common Units will have registration rights with respect to such PAA Common Units.
Pursuant to the terms of the Simplification Agreement, AAP agreed that if (i) the closing of the Simplification Transactions does not occur prior to the record date for PAA’s distribution of available cash in respect of the third quarter of 2016 and (ii) the amount of such distribution is below a quarterly level of $0.70 per common unit, AAP will borrow funds under its existing credit agreement as necessary to make a special “true-up” distribution to AAP’s unitholders that, when added to the distributions to be paid to AAP in respect of its indirect 2% general partner interest and IDRs, equals the total distribution such unitholders would have received had the closing of the Simplification Transactions occurred prior to such third quarter record date. As the Simplification Transactions did not close prior to the PAA third quarter distribution record date of October 31, 2016 and PAA declared a quarterly distribution of $0.55 per common unit for its third quarter distribution, it is currently estimated that the incremental borrowings that will be made by AAP will be approximately $33 million. The consummation of the matters contemplated by the Simplification Agreement is subject to customary closing conditions and may be terminated under certain conditions. On September 26, 2016, PAGP announced November 15, 2016 as the date for the special meeting of its shareholders to consider and vote upon a proposal to approve the Simplification Transactions. We currently expect that the closing of the Simplification Transactions will take place on November 15, 2016. These transactions are between and among consolidated subsidiaries of PAGP that are considered entities under common control. These equity transactions will not result in a change in the carrying value of the underlying assets and liabilities. Pro Forma Results Selected PAA historical consolidated financial information has been adjusted below to give effect to pro forma events that are directly attributable to the proposed Simplification Transactions and are based upon currently available information and certain estimates and assumptions made by management. Therefore, the unaudited pro forma amounts presented below are not necessarily reflective of the results of operations or financial position of PAA that would have resulted had the Simplification Transactions been consummated as of the dates indicated, and are not necessarily indicative of the future results of operations or the future financial position of PAA following completion of the proposed Simplification Transactions. Selected unaudited pro forma results of operations for the three and nine months ended September 30, 2016 are presented below giving effect to the Simplification Transactions as if they had occurred on January 1, 2016 (amounts in millions, except per unit data):
| Three Months Ended September 30, 2016 |  | Nine Months Ended September 30, 2016
Net income attributable to PAA | $ | 294 |  |  | $ | 589 |
Basic net income per common unit | $ | 0.40 |  |  | $ | 0.77 |
Diluted net income per common unit | $ | 0.40 |  |  | $ | 0.77 |
Selected unaudited pro forma balance sheet amounts as of September 30, 2016 are presented below giving effect to the Simplification Transactions as if they had occurred on September 30, 2016 (amounts in millions):
| As of September 30, 2016
LONG-TERM LIABILITIES |  |
Other long-term debt, net of unamortized debt issuance costs | $ | 1,114 |
PARTNERS’ CAPITAL |  |
Common unitholders | $ | 6,898 |
General partner | $ | — |
Total partners’ capital | $ | 8,464 |

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