Investors in Master Limited Partnerships (MLPs) have more limited rights than most equity investors in corporations. They’re called Limited Partners (LPs) for a reason. There’s often a General Partner (GP) who runs the business on behalf of the LPs. GPs have preferential economics, governance, and information rights, and we concluded many years ago that the GP/MLP relationship looks a lot like the one between a hedge fund manager and his hedge fund (see MLPs and Hedge Funds Are More Alike Than You Think). GPs earn Incentive Distribution Rights (IDRs) rather than the ubiquitous “2 & 20” that has financed so many hedge fund and private equity fortunes. But the result is similar since IDRs pay the GP more as the profits of the MLP grow.
Most of the big MLPs have simplified their structure in recent years. IDRs have come to be viewed as an unnecessary drag on LP returns, and it’s turned out that MLP investors aren’t a great source of capital (see Why the Shale Revolution Hasn’t Yet Helped MLPs). Simplification usually results in a collapsing of the GP/MLP dual entity into a single one. In such cases, the result is often a corporation with no IDRs. The objective is to gain access to a far wider investor base in order to fund growth. Kinder Morgan began this trend in 2014 (see What Kinder Morgan Tells Us About MLPs).
Energy Transfer Partners (ETP) is the largest of the remaining MLPs that retains the old structure, with Energy Transfer Equity (ETE) as its GP. CEO Kelcy Warren understands better than most how lucrative the GP/MLP structure is, since it’s created the bulk of his personal wealth which is in invested in ETE. The market price of ETP reflects some skepticism that the current arrangement will persist, as reflected in ETP’s 13% yield. Consistent with Kelcy’s swaggering posture on such issues, ETP recently raised its payout so as to convey just how confident they are in the safety of the distribution. A merger of the two entities with ETE as the surviving entity would result in ETP LPs receiving ETE units which yield “only” 7%. ETP’s high yield presumably reflects the view of many that such a transaction is possible. And yet, we calculate that ETE’s 2018 Distributable Cash Flow will jump from $1BN to over $1.8BN, due to the expiry of previously granted IDR waivers and contribution from two major projects being moved into production. This could support a substantial jump in ETE’s cash available for payouts, so ETP investors have less to fear in a combination of the two.
