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.
Good reporting of the current agreement, but there are some things to consider:
The last I remember--and this may have changed--management owned more XTXI than XTEX, and XTXI owns a big piece of XTEX.
The agreement between XTXI and XTEX can be re-written or amended. Both management and creditors would probably think this appropriate, given the many changes in circumstance since it was written. I'd expect that to happen well before XTEX is in position to make any distributions.
While XTEX has been selling assets, there is reason to question whether they have actually been generating cash in today's market, or how much. The reports I've read indicate XTEX was not only over-leveraged but that many of their assets were not earning their keep. When your carrying costs include 9% interest, selling assets can increase cash flow.
Also notice they haven't sold the crown jewels, and they've bought a couple assets that produce immediate cash flow. Don't you think their lenders needed to approve those purchases beforehand? And don't you think the lenders saw those immediate additions to cash flows?
None of this means Crosstex will survive, but when I look at management's actions over the past year and the changes in the market, I am much encouraged. And I think XTXI's IDRs will be worth more than the market expects today. Just to be sure, though, I own both!
From the prospectus....
Minimum Quarterly Distribution. Common units are entitled to receive distributions from operating surplus of $0.50 per quarter, or $2.00 on an annualized basis, before any distributions are paid on the Partnership's subordinated units.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. The general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in Crosstex Energy, L.P.'s partnership agreement.
If for any quarter:
• the Partnership has distributed available cash from operating surplus to its common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and
• the Partnership has distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution; then, the Partnership will distribute any additional available cash from operating surplus for that quarter among the unitholders and the general partner in the following manner:
• First, 85% to all of its unitholders, pro rata, 13% to the holders of the incentive distribution rights, pro rata, and 2% to the general partner until each unitholder receives a total of $0.625 per unit for that quarter (the "first target distribution");
• Second, 75% to all of its unitholders, pro rata, 23% to the holders of the incentive distribution rights, pro rata, and 2% to the general partner, until each unitholder receives a total of $0.75 per unit for that quarter (the "second target distribution"); and
• Thereafter, 50% to all of its unitholders, pro rata, 48% to the holders of the incentive distribution rights, pro rata, and 2% to the general partner.
All a person really needs to understand is that XTXIis levered to XTEX. So XTXI disproportionally benefits from distribution growth at the GP and an increase in the size of the partnership when more LP units are issued when holding the distribution constant.
XTXI is hurt disproportionally when the size of the partnership shrinks via asset sales and from distribution cuts.
XTEX has been selling off assets and will be resuming its distribution at a lower level. XTXI's new distribution (whenever that happens) will have dropped further than XTEX's distribution.
Considering that XTEX & XTXI traded at near parity before the crash... XTEX should now trade at a premium to XTXI.
I don't know where you're getting your cut and paste regarding IDRs, but this is a cut and paste from the 2008 10K:
"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 $0.25 for that quarter, 23.0% of all cash distributed after each unit has received $0.3125 for that quarter and 48.0% of all cash distributed after each unit has received $0.375 for that quarter."
Has this changed?
In addition, XTXI owns about 16million shares of XTEX, and is also entitled to a 2% management fee.
Still and all, XTEX is a far better bet when the dividend returns, since the return for XTXI shareholders would be poor at the levels of distributions that XTEX is likely to see in the next few years.
$.25 distribution? Gee, I hope so, but that seems a bit starry-eyed to me. I'm expecting $.10 in August, 2010, and will be thrilled if it's anything larger.
Good catch! The 2009Q3 XTXI 10Q says the same thing, so it appears that the IDRs haven't changed:
"Under the quarterly incentive distribution provisions, generally the Partnership’s general partner is entitled to 13.0% of amounts the Partnership distributes in excess of $0.25 per unit, 23.0% of the amounts it distributes in excess of $0.3125 per unit and 48.0% of amounts it distributes in excess of $0.375 per unit."
(source: http://www.sec.gov/Archives/edgar/data/1209821/000095012309059024/c91954e10vq.htm page 15)
The rest of the original poster's analysis was solid, so how the IDR levels could have gotten doubled is a bit of a mystery. But regardless, the spread between XTXI and XTEX continues to grow... XTXI trading at its lowest level relatve to XTEX since March, so it appears the market agrees with your assessment that XTEX is the better bet:
What that says to me is that there will probably be no distribution until they can get it to the first level of IDR, which I read as .25 per share. They will continue to restructure and pay down debt until XTXI gets their share too. Although we are chafing hoping to get distributions as soon as possible, we are not making those decisions and the GP is, so you can bet that self interest will play the greatest role.