(12-04-2014, 11:46 AM)Joey Batz Wrote: I'm just wondering what the difference is between oil/gas MLPs and their parent companies. I know that the MLPs have a much more complicated tax structure and seem to have higher yields, but is there a major difference in performance? What about in what they actually do? Is it a matter of the MLP just dealing in one specified part of the business (midstream oil/gas pipelines) while the parent company owns a major stake of the MLP and takes care of the rest of the business? That seems to be what I'm getting in general.
The reason I'm asking is because I'm currently looking at OKE vs OKS, and have received different recommendations. OKS is looking like the better deal of the two on the surface, but I'd rather not deal with the complicated tax structure if possible. Any recommendations?
Briefly:
An MLP is a partnership, subject to the partnership rules laid out by the IRS. Partnerships are income pass-through entities. Partnership income is not taxed at the partnership level; taxes are paid by the individual partners as part of their personal income tax regime.
An MLP is a specific type of publicly traded partnership. There are two types of partners: 1) a general partner (GP), of which there is only one, and which is responsible for operating the partnership business(es) and which holds liability for the enterprise, and 2) some number of limited partners (LPs), which provide capital to the partnership and receive some amount of cash distribution from the partnership.
The parent you refer to is the owner of the general partner. The owner can be either a C-corp, like KMI or OKE, or another partnership, like ETE.
In your case, OKE is a C-corp that owns the GP interest of OKS, and OKS unit holders are the LPs. OKE pays corporate income tax, which is principally why its yield is substantially less than OKS.
I mentioned ETE above because it is a partnership that owns the GP interest of ETP and several other LPs. ETE does not itself have a GP, which is significant. As a partnership, its operating income is not taxed, but since it does not have a GP, it does not have Incentive Distribution Rights (IDRs).
IDRs are the contractual arrangement between the GP and the LPs that provides a strong incentive for the GP to pay distributions to the LPs. The distribution income is principally why investors buy LP units. Without a contract between the GP and the LPs, the GP would be under no obligation to distribute anything to the LPs.
The downside of IDRs is that as the amount of distributable income increases, the percentage of the distributable income paid to the GP increases. This eventually becomes a material drag on the finances of the MLP, and is why Kinder Morgan converted to a C-corp.
I suggest you learn more about IDRs, and read the 10-Qs and 10-Ks of OKS and OKE to find their IDR schedule.
This is an excellent source of information on MLPs:
http://naptp.org/
