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Crosstex Energy, AŞ Message Board

  • lisahuang54321 lisahuang54321 Dec 28, 2009 4:46 PM Flag

    IDRs (from the Crosstex website)

    In the below cut-and-paste, 'us' refers to XTXI and 'the partnership' referes to XTEX:

    "The incentive distribution rights entitle us to receive an increasing percentage of cash distributed by the Partnership as certain target distribution levels are reached. Specifically, they entitle us to receive 13.0% of all cash distributed in a quarter after each unit has received $0.50 for that quarter, 23.0% of all cash distributed after each unit has received $0.625 for that quarter and 48.0% of all cash distributed after each unit has received $0.75 for that quarter."

    According to this, XTXI won't receive any cash for the IDRs if XTEX distributes less than $0.50 per quarter. Looking at the historical payouts by XTEX it paid more than 50c per quarter from Jan '06 to Nov '08. As part of their debt reduction, Crosstex has been selling assets which used to produce distributable cash flow. Since that cash-flow will no longer be there, when XTEX resumes distributions it is surely going to be less than 50c per quarter. That means XTXI will not receive anything for the IDRs which in turn means XTXI distributions will be less than before to a larger extent than for XTEX.

    As an illustration, compare the distributions for the two entities for Q1 2008 and Q1 2009.
    XTEX: Q1/08 0.61, Q1/09 0.25
    XTXI: Q1/08 0.26, Q1/09 0.09

    So unless you expect that XTEX will be paying out more than $2 per year any time soon (I don't) then distribution reinstatement for XTEX is likely to be relatively better than that for XTXI.

    Based on historical payouts above, it's reasonable to expect that XTEX distribution will be 3 times higher than XTXI's.

    Couple that with the fact that XTEX distributions are tax deferred due to it being an MLP, while XTXI distributions will be taxed at qualified dividend tax rates in the tax year received, this means that XTEX units will produce relatively more income than XTXI once distributions resume.

    This is the reason for the divergence between XTEX and XTXI unit prices which will persist and possibly increase so long as investors anticipate resumption of distributions in 2010.

    Those people saying that XTXI price can be expected to converge or catch-up to XTEX have a lack of understanding about how XTXI gets distributable cash from XTEX.

    Of course, if XTEX was able to distribute >$0.75 per quarter then XTXI would become relatively more valuable but they cannot possibly pay out higher distributions than before when cash-flow producing assets have been sold off.

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