Plains All American Pipeline, L.P. (PAA), Kinder Morgan Inc (KMI): Buy This MLP When It Hits the Street

Page 1 of 2

At the end of last month, Plains All American Pipeline, L.P. (NYSE:PAA) announced that its general partner, Plains GP Holdings, planned to go public, trading on the New York Stock Exchange under the ticker symbol “PAGP”. Today, I’ll look at why a general partner would want to go public and what opportunity exists for investors when it happens.

Why go public?
The typical role of a general partner is to manage growth and operations at a master limited partnership. General partners can be privately held, structured as MLPs themselves, or set up as C corporations.

There are a handful of reasons a general partner would want to become a publicly traded security, but by far the most important one is exploiting the value of incentive distribution rights.

Incentive distribution rights refer to the quarterly payments a general partner receives once distributions at an MLP reach a previously agreed upon level. At inception, a general partner typically receives 2% of cash flow to correspond with its 2% equity stake and nothing else.

Plains All American Pipeline, L.P. (NYSE:PAA)As the MLP grows and distributions increase to a certain amount, the general partner will receive its 2% stake and an increasing percentage of what’s left of incremental cash flow. The exact amount and corresponding percentage due the general partner varies from partnership to partnership. Some general partners will receive “high splits,” which means IDR levels will go up to 50% of incremental cash flow, while others will stop around 25% or 30%. Additionally, in many cases the general partner reserves the right to reset IDR payments or put them on hold.

By going public, a general partner opens up more opportunities to raise equity. The GP can then use this new capital access to fund growth projects at its MLP.

IDR close-up
Let’s look at the blueprint for Plains All American Pipeline, L.P. (NYSE:PAA)’s incentive distribution payments to Plains GP for a better understanding of how this works.

PAA Distribution PAGP Cut
< $0.2250 GP Stake 2%
IDR 0%
> $0.2250 GP Stake 2%
IDR 15%
> $0.2475 GP Stake 2%
IDR 25%
> $0.3375 GP Stake 2%
IDR 50%

Source: Plains All American SEC Filing.

Based on this chart, you can see that if Plains All American Pipeline, L.P. (NYSE:PAA) distributes $0.3375 to unitholders, it must distribute 50% of its incremental cash flow to its general partner. Given that PAA’s most recent distribution was $0.5875, this is already happening. For the full-year 2012, Plains All American’s IDR payments to its general partner totaled $271 million. When you combine the GP’s 2% stake and all of the common units it owns, the total cash PAA handed over was $969 million.

That being said, many general partners will waive all, or a portion of, IDRs for a limited time if the MLP makes a large acquisition. It often takes time for new assets to prove themselves on the balance sheet and general partners are, by and large, amenable to temporary reductions.

Investors win
Now that Plains All American Pipeline, L.P. (NYSE:PAA) GP is going public as a master limited partnership, it will receive incentive distribution rights from PAA and turn around and pay out much of that cash as distributions to investors. Because of the graduated IDR structure, and the fact that the 2% general partner stake also grows whenever the MLP issues equity, general partners tend to grow their distributions at a faster rate than the MLP itself.

Let’s take a look at some other GP/MLP options that are making investors rich right now:

  • Because of its various stakes in the partnership, Kinder Morgan Inc (NYSE:KMI) received 51% of all Kinder Morgan Energy Partners LP (NYSE:KMP) quarterly distributions in 2012. KMP paid KMI $1.32 billion in IDRs alone last year.
  • In 2012, Williams Partners L.P. (NYSE:WPZ) paid its general partner Williams Companies, Inc. (NYSE:WMB) $1.1 billion for its various stakes in the partnership, including $413 million in IDRs.
Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!