So just how much are Incentive Distribution Rights (IDR) worth? Let’s walk through OneOK (NYSE:OKE)’s IDR agreement to get an idea.
OneOK Partners (NYSE:OKS) is a midstream Master Limited Partnership which invests in natural gas midstream processing facilities to extract natural gas liquids from “wet” gas into its more valuable components. OneOk Partners also owns significant natural gas pipelines and gas gathering systems to bring the gas from the wellhead to the gas plants as well as ship it to interstate pipelines.
The general partner of OKS is OneOK. OneOK owns 2% of the shares assigned to its general partner stake which controls OKS as well as 39% of the limited partner shares of OKS. The remaing 59% of OKS is owned by the general public. While I strongly prefer OKE over OKS, I do consider it a good sign for OKS owners that OKE’s high ownership percentage of the limited partner shares does provide some measure of alignment between OKS and OKE. However, as we shall see below, the GP receives just about as much in distributions from OKS for its 2% GP share that it does for its 39% stake in the LP shares.
How can that be? Well, under the incentive distribution provisions, as set forth in ONEOK Partners’ partnership agreement, the general partner receives:
- 15 percent of amounts distributed in excess of $0.3025 per unit;
- 25 percent of amounts distributed in excess of $0.3575 per unit; and
- 50 percent of amounts distributed in excess of $0.4675 per unit.
With OKS currently paying $3.01 in distributions per unit over the last twelve months, the payout is so much higher than the highest threshold of $.4675/unit that almost all of the distribution is subject to the 50% IDR payout. And critically, the GP gets this gain on total units, not just growth in the existing units, so every new unit that OKS issues increases the IDR payment as well.
The following table shows ONEOK Partners’ distributions declared for the periods indicated (Years ending December 31, all numbers in thousands, except unit amounts):
|Distribution per unit||$2.89||$2.69||$2.37|
|General partner distributions||18,625||16,355||12,515|
|Distributions to general partner||278,091||226,450||143,727|
|Limited partner distributions to ONEOK||268,157||249,600||200,524|
|Limited partner distributions to noncontrolling interest||384,988||341,704||281,500|
|Total distributions declared||931,236||817,754||625,751|
The IDR payment of 259 million is just 9 million less than the amount OKE receives for owning 39% of OKS. In effect, the IDR is worth about 38% of OKS!