When it comes to selecting the right master limited partnership investment, you want to make sure you're getting the most bang for your buck -- that is, that you're buying an MLP that will pay out most of its cash to you for the lifetime of your investment. Because most MLPs are paying their general partners and their limited partners every quarter, it's important to look into who gets what come distribution time.
Today we're going to dig into some SEC filings to see what the distribution story is at Kinder Morgan Energy Partners (NYSE: KMP) and Enterprise Products Partners (EPD +0.29%).
Inside the 10-Q
Beginning with Kinder Morgan, we want to track down the "Consolidated Statements of Cash Flows" section of the partnership's quarterly filing. We find it toward the bottom of Page 7, and it gives us this breakdown for the first nine months of the year:
|
Distributions to Partners and Non-Controlling Interests | Amount |
|---|---|
|
Common units |
$1,068 |
|
Class B units |
$21 |
|
General partner |
$1,213 |
|
Noncontrolling interests |
$30 |
Source: SEC filing. Dollar figures in millions.
You can see that the general partner, which in this case is Kinder Morgan, Inc. (KMI 1.79%), is the winner here. Kinder Morgan Energy Partners paid it $1.213 billion over the course of three quarters, while limited partners in possession of common units received $1.068 billion.
How does that happen? Let's look at the breakdown for KMP's third-quarter distributions for more insight.
|
Per-unit cash distribution declared for the period |
$1.35 |
|
Per-unit cash distribution paid in the period |
$1.32 |
|
Cash distributions paid in the period to all partners |
$845.00 |
|
I-unit distributions made in the period to KMR |
1,880,172 |
|
General Partner's Incentive Distribution | |
|
Declared for the period |
$434.00 |
|
Paid in the period |
$416.00 |
Source: SEC filing. Dollar figures in millions.
This table tells us what we need to know. In the third quarter, KMP announced that it would pay KMI $434 million in incentive distribution rights. It made its second-quarter payment of $416 million, which explains the "declared for the period" and "paid in the period" line items.
We also see that Kinder Morgan paid out $845 million to all partners, including the GP, which means that roughly half of cash available for distribution went to KMI. When you factor in KMI's ownership of 9% of the limited partner units of KMP, you can see that it walks away with more than half of the cash available for distributions.
This is what's known in the MLP space as being in the "high splits" for incentive distribution rights, or IDRs. These payments send a certain percentage of incremental distributable cash flow over to the general partner, incentivizing the GP to continue to grow the business. The IDR stake can range from 2% to 50% of incremental cash flow.
Your portfolio
Does Kinder Morgan's distribution story make it a bad option for your portfolio? Not necessarily, but it does highlight the advantages of an MLP like Enterprise Products Partners that does not pay incentive distribution rights to a general partner. Enterprise is able to direct its cash elsewhere, be it toward limited partner distributions, paying off debt, or investing in acquisitions or organic growth projects. The absence of IDRs lowers Enterprise's cost of capital and makes it more competitive relative to its peers, like Kinder Morgan.
