Most master limited partnerships have a tiered structure for sharing available cash between the general and limited partners, with the general partner working from an initial two percent up to a potential 50% payout of available cash. Incentive distribution rights (IDRs) give a LP's general partner the right to an increasing share of the incremental distributable cash flow generated by the partnership. As the cash distribution per unit increases, the IDRs allow the general partner to receive an increasing percentage of the available cash flow. IDRs are used to motivate the general partner to rapidly grow the distributions to the limited partners.
Natural Resource Partners L.P. has eliminated all of the IDRs held by its general partner and affiliates of the general partner, issuing 32 million common units to the contributing IDR-holders as consideration. The contribution agreement was filed as Exhibit 10.1 to the Form 8-K filed on 9/21/10 (SEC file no. 001-31465). Prior to the transaction, the IDRs received approximately 24% of the quarterly distribution and 48% of any increase in the distribution. NRP states that elimination of the IDRs will improve its cost of capital through enhanced competitive position in the acquisition markets and increased returns to limited partner unitholders from acquisitions and growth projects.
Several other natural resource partnerships intend to eliminate IDRs in connection with proposed mergers between the limited partnership and the parent of the general partner. In addition to eliminating IDRs, decreasing the cost of capital and improving the ability to accelerate growth in distributable cash flow, each of the mergers agreements proposed or disclosed in the filings listed below are intended to simplify the partnership's capital structure, increase the public float and increase trading liquidity of the market for the LP units:
Penn Virginia GP Holdings, L.P. Form 8-K filed 9/22/10 (001-33171)
Buckeye Partners, L.P. Form S-4 filed 9/14/10 (file no. 333-168090)
Enterprise Products Partners L.P. Form 8-K filed 9/7/10 (001-14323)
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