There seems to have been a great deal of confusion regarding the relationship between the MLP and the sponsor, as you can see from a two-day chart. First, congratulations to those who kept their wits and common sense about them and bought in yesterday. Now, let's look at the 10K regarding the fee:
"For each quarter for which we have paid cash distributions that equaled or exceeded the Target Distribution our general partner will be entitled to a quarterly management incentive fee, payable in cash, equal to 0.25% of our management incentive fee base . . ."
Note that the fee is triggered only if WE get paid. They took part in cash, and the rest in units, 6.1M of them. That's where the confusion comes in. These are Class B units, but they are convertible, and the number is computed as follows:
"(a) the product of: (i) the applicable conversion percentage [up to 80%]; and (ii) the average of the management incentive fee paid to our general partner for the quarter immediately preceding the quarter for which such fee is to be converted and the management incentive fee payable to our general partner for the quarter for which such fee is to be converted, divided by (b) the cash distribution per unit for the most recently completed quarter. "
The units are entitled to the distribution, yes, but the regular management fee is cut, and "the reduction in the management incentive fee as a result of any conversion will directly offset the increase in distributions required by the newly issued Class B units. " In other words, they don't get a "retroactive" distribution, not really.
Note they don't get another chance at this unless next year's fee base is 115% of 2012's base. In other words, they have to do well. Barring a liquidation or sale of the company, the result of the incentive is that management swaps the fee for distributions, and continues to get them.
Here is what Hinds Howard (MLP analyst) said on the subject:
" Preferred Units. QRE has 16.7mm preferred units (issued as part of a $577mm drop down acquisition in late 2011) that will convert to common units as early as 2013. Upon conversion, the preferred units will be paid full common unit distributions instead of $0.21 per unit quarterly rate they receive now. Were those units to be converted today, we estimate that QRE would have 2013E distribution coverage of 0.93x, well below 1.2x estimated with the preferred units.
Race to Conversion Called. QRE has been in a race to execute enough accretive acquisitions by the time the preferred units convert to be able to cover and growth distribution post-conversion. We believe QRE won that race in 2012 with its $468mm of acquisitions throughout the year, and will focus 2013 on building coverage to the point of being able to grow distributions per unit in conjunction with the preferred unit conversion in late 2013.
Management must be confident that they have won the race as well, because QRE’s GP elected to convert 80% (the maximum) of its management incentive fee into class B units, adding another 6.1mm units (class B units) that will immediately receive cash distributions. "
Ah, I did not understand that, management should have made it clear these were not NEW units, because it looked like they were granting themselves tens of millions in equity, potentially. Instead they apparent;y . . . converted . . . existing units. No wonder it recovered so quickly yesterday. I though they . . . converted . . . their fees, and they did, in essence, but only from fee to distribution. I think they need to think more carefully what they say next time!! I didn't get that even after reading the 10K.
Is this "fair"? I don't know, what is fair? When you buy a unit of QRE, you are bargaining for a certain distribution and you assume that the distribution will continue at increase modestly over time, that's what MLP's offer. If the sponsor gets a windfall, and it doesn't threaten that bargain, who cares how rich they get? With 6M units, and with future incentives based on distributions, they have every incentive to keep distributions robust. That's a good thing if you keep your own goal in mind as a public unit holder, to keep getting paid. That's all that matters, what goes on behind the curtain doesn't, so long as something doesn't go seriously wrong.
Judging by the market reaction today, apparently at least a few people have figured that out!
thanks Ruby (and to others on the board) for the good discussions of information and perspectives, I learned a fair bit- enuf to overcome my initial reaction and add first thing this morning
for clarification then, is it true that IF by Q4 next year 1) assets have increased 115% over this Q and 2) cash distributions at least equal the Target Distribution for each Q of the coming year, THEN the GP could issue on the order another 6 million-ish shares, if they choose to do a similar conversion of management fee into units?
if so that could create another buying opportunity
also, what are the Target Distributions for the coming year?
thank you again for your helpful and informative comments
Very good post. I didn't read the 10K, but this same type of thing happened to me several years ago when MLP's were just getting popular. I didn't buy that time, but I did learn a lesson. I have been avg. down from when I bought a $21, I bought a pretty good chuck yesterday and today's action got me even.
Good posts, ruby. Thanks to posters like you ginning me up with the facts, I bought yesterday. Obviously, the right thing to do.
Stocks near their 52 week lows are worth a careful look everytime. For some reason, people are most nervous near lower risk levels.