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Incentive Distribution Rights Revisited

Mar. 11, 2018 8:45 AM ET11 Comments
Hinds Howard profile picture
Hinds Howard

More than once in the last month, I've been asked to review how incentive distribution rights (IDRs) works, and how they impact an MLP. In the earliest days of the blog, I wrote some pieces on the basics of MLPs, including one on IDRs published in December 2009 that you can read here.

Unfortunately, not much has changed in the structure of MLP IDRs. There has been little innovation in the structure and no other midstream MLP IPO since Copano in 2005 that has elected to go public without IDRs (not counting upstream MLPs or variable distribution MLPs). We have had plenty of opportunities for innovation, considering the 78 MLP IPOs since that post in 2009.

Today, there are 54 MLPs with IDRs by my count, out of 85 MLPs that I track. Among non-shipping midstream MLPs, just 42 have IDRs. By market cap, those 54 MLPs represent approximately 43% of the MLP market and 23% of the Midstream market, as discussed in this week's post.

IDR Math Revisited

My original post on IDRs showed the conventional tier set up, but to understand their impact, you need to see them in action. Below are two charts based on a hypothetical MLP with standard IDR tiers that starts out at $1.00/unit distribution and grows that distribution to the 50% tier in 3 years, then grows 8% each year thereafter.

10 years into the MLP's life, the G.P. is receiving over 30% of the MLP's distributed cash flow. The L.P. unitholders have realized strong growth in their distributions of 157% from IPO, but the G.P. has seen its cash flow grow by 5,875% from $2M to almost $120M. That's a great deal for the G.P., especially if they can structure a drop-down MLP that enables the creation of that return just by moving assets from one bucket they control to another.

This article was written by

Hinds Howard profile picture
I serve as Portfolio Manager on the Listed Infrastructure Team at CBRE Clarion Securities, a global asset management firm based in Radnor, PA. My primary focus is on investing in Midstream companies, including Master Limited Partnerships (MLPs), as well as transportation companies (rails, airports) for larger infrastructure investment team.

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Comments (11)

Responsible Capital profile picture
Thanks for the article, Hinds. Have you looked at the IDR structures of the Brookfield subs? Does the math work out the same and overtime the subs become weakened?
Huascar1533 profile picture
Interested in valuation of the IDR from holder’s perspective. Think ETE. Could be esoteric and full of subjective/risky assumptions.
Steven Bavaria profile picture
Thanks - very helpful!
so mlp with no IDR >>>>>> mlp with IDR.
rustylwb profile picture
Were can we find a List of the MLp's that have IDRs. Thanks for the Great Info,
papaone profile picture
rlp---fantastic data in easy to read sortable spreadsheet.

I found when I went to the mlpdata.com web link above that ALL the entries in IDR column are NO, at least on my web browser (Chrome), which I know to be incorrect. However, using the search tool at the top of the page, it appears one can create correct lists by making the appropriate selection for IDRs (Yes/No).
BeaBaggage profile picture
would expect? fund managers who own these companies to be on top of this and know where to best invest..probably expecting too much! Bea
PipelineDancer profile picture
Outstanding intro to IDRs and why they are best avoided. Should be required reading of anyone thinking of buying a MLP and SA should also make it mandatory for any author writing about a MLP ticker symbol that they make a clear disclosure about the presence of IDRs and where in the splits they are. Thanks!
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