On Tuesday, Plains All American Pipeline PAA announced the negotiated terms of its proposed merger with its natural gas storage subsidiary, PAA Natural Gas StoragePNG. PNG’s public unitholders are to receive 0.445 common unit of PAA, higher than the proposal of 0.435 common unit announced in August.

The amount is equivalent to about $23.27 per PNG unit, or 2.3% higher than before. The increase probably resulted from the several legal investigations launched after the initial proposal, regarding fair value for PNG and thus the potential breach of fiduciary duties by PNG’s board. A third-party advisor and PNG’s conflicts committee, composed of independent directors, approved the revised valuation, which is now subject to a majority affirmative vote by PNG unitholders at a special meeting. PAA already owns 46% of PNG’s outstanding common units.

The transaction, worth $770 million, would add about 14.7 million common units to PAA’s unit count. To mitigate some of this dilution and the partnership’s rising cost of capital, Plains’ general partner has agreed to a permanent reduction in incentive distributions in tandem with the merger agreement.

Plains’ general partner (which itself came public last week) will forfeit $12 million in 2014 as well as 2015, $10 million in 2016, and $5 million per year thereafter in incentive distribution payments.

We are maintaining our fair value estimate of $48 per unit and our wide moat rating.