A Simpler MLP Can Be Better

“Oceania was at war with Eurasia; therefore Oceania had always been at war with Eurasia.”1984, George Orwell.

The hurriedly organized investor call with Plains All American (PAA ) a week ago (rushed because of approaching Hurricane Harvey) must have been inspired by the revisionist history propagated by “the Party” in Orwell’s polemic against totalitarianism. PAA’s distribution “reset” (Newspeak for a cut) was larger than previously expected and was directed towards rapidly lowering leverage. Like Orwell’s Ministry of Truth, they explained “…we have assessed the appropriate distribution level to accelerate our deleveraging objectives.”

It’s as if balance sheet strength was always their main objective. There’s no mention of paying stable distributions to their unit holders, which in a different era was the reason for investing in MLPs. If you listened between the lines, you could hear, “We care most about our leverage; therefore, we’ve always cared most about our leverage.”

In January, when PAA acquired a Permian gathering system for $1.2BN they reaffirmed prior 2017 EBITDA guidance of $2.3BN and hinted it might be higher. During their 2Q17 earnings call they cut it to $2BN because of the collapse in their Supply and Logistics (S&L) segment (see MLP Investors Learn About Logistics). Nonetheless, they still forecast 15% growth in 2018, reaching their 2017 target a year late and with a better mix of earnings even more oriented towards traditional, fee-based cashflows since their S&L business has shrunk.

Nonetheless, rating agencies determined that this represented too much risk for an investment grade debt issuer. It’s part of a pattern whereby MLP managements are finding that their goals are not aligned with those of their traditional equity investors. An “It’s not you, it’s me” kind of moment. Although you didn’t ask for this, we went for growth with leverage and risked the distribution. Sorry. Get over it. Ironically, Moody’s still downgraded PAA’s debt to junk in spite of steps that favored debt holders over equity.