Master limited partnerships (MLPs) have two classes of ownership: general partners (GPs) and limited partners (LPs). GPs manage the partnership’s operations, receive incentive distribution rights (IDRs), and generally maintain a 2% economic stake in the partnership.

Through ownership of IDRs, several MLP founders, such as Rich Kinder and the late Dan Duncan, became billionaires. IDRs incentivize GPs to grow LP distributions by entitling GPs to receive a higher percentage (generally as much as 50%) of incremental cash distributions when the LP distributions reach certain thresholds. IDRs become more valuable when distributions or the number of shares outstanding increases. As this happens, GPs are often awarded premium valuations and have significantly lower yields than their corresponding MLPs. A pure-play GP owns only the 2% interest in the MLP and IDRs; however, a GP is not prohibited from owning and operating assets.

Originally, GPs were owned only by the MLP sponsor and management teams, but investors clamored to participate. The 2004-2006 period saw 11 GPs go public, but with the 2008 financial crisis, MLP growth slowed, and the yield spread between LPs and GPs narrowed significantly. As financing became more expensive for organic growth projects and acquisitions, six LPs acquired their GPs and eliminated the IDR structure to lower their cost of capital over the long term.

After two years of stellar performance—MLPs returned 85% and 35% in 2009 and 2010, respectively—MLP sponsors again looked to monetize their interests, with Targa Resources Corp. and Kinder Morgan Inc. reopening the GP initial public offering market in 2010 and 2011, respectively.

Unlike the previous boom, which saw GPs come to market as limited partnerships, the current phase of GP offerings has seen many sponsors, Targa and Kinder Morgan included, elect the corporation structure. Rather than receiving a potentially complicated Schedule K-1, C corporation investors receive a simple Form 1099. The simplicity of 1099 tax filing and Individual Retirement Account eligibility also drove the development of the market for pooled MLP access products, particularly those structured as C corporations.

Two upcoming pure-play GPs have taken a page out of that book, as both are taxed as C corporations. Plains GP Holdings expects to come to market later this year and will be the pure-play GP of Plains All American Pipeline. Similarly, ONEOK Inc., already a publicly traded C corporation, announced that it will be spinning off its natural gas distribution business to become the pureplay GP of ONEOK Partners LP. During a conference call discussing the transaction, management indicated that it is planning to increase dividends at the corporate level and provide investors with transparent access to MLP growth without directly owning an MLP. On the day of the announcement, ONEOK Inc. shares rose 26%.

These and other transactions have driven continued speculation that The Williams Cos.(WMB), the GP of Williams Partners LP, will sell or drop down its remaining operating assets to become a pure-play GP. WMB took the first step toward a simplified organizational structure by spinning off its exploration and production business as WPX Energy Inc. in 2011. Additionally, Spectra Energy Corp., the GP of Spectra Energy Partners LP, recently announced a dropdown of its remaining midstream assets, leaving only its interests in its limited partnership and DCP Midstream Partners LP and assets in its gas distribution and Canadian transmission businesses at the corporate level.

For investors interested in direct MLP ownership but unable or unwilling to receive a K-1, a corporate GP can be an attractive option. Others argue that owning both the GP and LP results in redundant exposure to the same set of assets. When making a decision, investors are urged to consider the relative valuations of the GP and LP, the growth opportunities available to the LP and the implications for the IDRs and the capital discipline and financial stewardship of the management team.

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