Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Plains All American Pipeline LP is trying -- again -- to draw a line under the recent past. For investors, it isn't so easy.

Plains is the worst-performing large-cap master limited partnership this year by a pretty wide margin. It is down almost two-thirds from its peak in late 2014.

Trail Pipe
Plains All American trails its large-cap MLP peers by a wide margin this year
Source: Bloomberg
Note: Master limited partnerships with a market cap of $10 billion or more. Performance is year-to-date as of Sep. 5, 2017.

Plains announced late last month that, after several stop-gaps and last year's dividend cut to reduce leverage, another cut was coming. Quarterly distributions would drop from 55 cents per unit to 30 cents, down from a peak of 70 cents last summer.

Besides the cut itself, there's a little history here that could further gall investors.

Just over a year ago, Plains announced a deal within its own family: It gave 245.5 million units (roughly the equivalent of ordinary shares) in itself, a pro-forma stake of just over one-third at the time, to its general partner. In return, the general partner would eliminate its so-called "incentive distribution rights", or IDRs, in Plains.

Once a common feature of the sector, IDRs are a cut of the MLP's cash flow for the general partner -- which controls the MLP and is often largely owned by the founders and management -- that escalates along with distributions to ordinary investors.

Everyone was fine with this in good times: Plains units tripled between 2009 and 2014. But amid the energy crash, it became obvious the IDR burden had gotten too big (see this for an explanation). 

So the idea was to ditch IDRs in return for a one-time slug of new units. At the time, the annualized IDR payment to Plains' general partner was $620 million. So the $7.2 billion paid, including the debt assumed, represented a trailing multiple of 11.6 times.

IDRs operate like a ladder with increasing space between the rungs. As distributions to ordinary investors rise past predetermined levels, the matching payments to the general partner get stepped up in big increments -- that's how they incentivize increases.

When the deal was announced, the quarterly payout to ordinary Plains investors was 70 cents a unit. To illustrate how the cash payments worked at the different incentive levels, here's a chart breaking down the annualized payouts Plains was making to both limited partners and the general partner at that level (before any waivers):

The Skew
When Plains All American was paying ordinary investors 70 cents a quarter, that last 36 cents or so translated into huge bonus payments for the general partner
Source: Plains All American Pipeline, Bloomberg Bloomberg Gadfly analysis
Note: Implied annualized distributions to Plains All American Pipeline's limited partners and incentive distribution rights to its general partner at each payment level of a 70 cent quarterly distribution.

You can see how, for the general partner, virtually all the money is made once distributions rise above that magic level of 33.75 cents a quarter.

But the process also works in reverse. Here's how much those IDRs would generate at the lower payout levels announced since then (again, these are implied levels before any waivers):

The skewed nature of incentive payments to the general partner means they get virtually wiped out when distributions are cut by a little over half
Source: Plains GP Holdings, Bloomberg Gadfly analysis

So now think about that deal again. A distribution cut, the first, was announced the same day, taking it to 55 cents per unit. So by the time the deal closed in November, the effective forward-looking multiple was 19.1 times, roughly in line with where listed general partners trade.

Now August 2017 rolls around. With the distribution having been cut again, in retrospect the implied multiple was somewhat higher:

Thanks, Partner!
The distribution cuts announced since the deal was struck mean Plains All American has effectively ended up paying a multiple of more than 100 times for the IDRs
Source: Plains GP Holdings, Bloomberg, Bloomberg Gadfly analysis
Note: Implied forward multiples of the next four quarter's estimated IDR payments based on distribution guidance, disregarding any waivers. August 2017 data calculated using Plains All American's closing unit price on August 25 and assuming quarterly distributions of 30 cents per unit, as per guidance.

Another way to look at this is how the distributions on the new units will compare with what the IDRs would have generated, if they were still in place, over the next five years. Announcing the latest distribution cut, Plains said the lower level should allow for distributions to start growing again at "a mid-to-upper single digit" rate, perhaps after an initial step change in 2019.

For illustrative purposes, assume there's a 20 percent hike in 2019, followed by 7 percent growth each year thereafter. Here's how the general partner's alternative income streams would stack up under that scenario:

Better Off Without IDRs? IDK
The deal's terms mean that, assuming distributions start growing in 2019, the general partner's income on the new units will be far higher than it would have been from the IDRs
Source: Plains GP Holdings, Plains All American Pipeline, Bloomberg Gadfly analysis
Note: Assumes 2018 distribution of $1.20 per unit; 20 percent growth in 2019, and 7 percent per year thereafter.

Now I know what you're thinking: Hindsight is 20/20. Absolutely. Who could possibly have foreseen a year ago that Plains would end up needing to slash distributions so much that those IDRs would shrivel up?

The concept of getting rid of the IDRs had been discussed since at least November 2015, in part because they were a deterrent to new investors. So clearly, something had to be done. For its part, Plains points out it had a conflicts committee conducting "an arms-length negotiation" of the deal, using separate advisors and based on the conditions at the time. The back-and-forth is laid out in some detail in this regulatory filing

What's more, the general partner has also taken a hit on the units it got in exchange for the IDRs; they're down almost a quarter since the deal closed. Even so, at today's price they imply a forward multiple of more than 100 times.

The bigger point is that this is another dose of salt in any long-time limited partner's wounds. Since the deal, they've watched their investment tank by roughly half again and their payouts drop further. And, in the process, they were diluted by roughly a third in exchange for something that -- yes, in hindsight -- wasn't worth that much.

Markets look forward rather than backward, of course; so, at this point, fixing Plains' balance sheet is the priority.

That doesn't mean the track record should be ignored, though. Plains has been on the back foot for at least 18 months, as evidenced by its repeated attempts to deal with its debt and business mix, as well as persistent talk of a hoped-for rebound in energy prices. It is notable that consensus Ebitda forecasts, as compiled by Bloomberg, are now actually slightly below even the downside projections laid out in the merger proxy.

The latest dividend cut, and the new light in which it puts last year's deal, is another blow to management's credibility. History provides no guarantee of future returns, of course. But it provides useful clues, nonetheless.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at

To contact the editor responsible for this story:
Mark Gongloff at