ETP Stock: 1 Crucial Thing Investors Need to Know Before Investing in Energy Transfer Partners LP

With a distribution yield north of 9%Energy Transfer Partners certainly catches the eye of income investors. However, before rushing out to buy this company because of its very robust yield, there is one very important thing investors need to know about ETP's stock.

It has to pay the parentThe first thing investors need to realize before diving into Energy Transfer Partners is the fact that the company is not in total control of its destiny. As the following chart shows, it is one of several entities that are managed by Energy Transfer Equity .

Source: Energy Transfer Partners LP Investor Presentation

Under this relationship Energy Transfer Equity owns 100% of the general partner interest in Energy Transfer Partners as well as 100% of the incentive distribution rights, and it also owns 1% of the outstanding limited partner units, which is what retail investors own. As a result of this structure, Energy Transfer Partners sends large cash distributions to Energy Transfer Equity each quarter, which in a sense is the management fees it earns. We can see a breakdown on the screenshot from Energy Transfer's latest earnings press release.

Source: Energy Transfer Equity Press Release

We can see in that snapshot that Energy Transfer Equity received $24 million in cash from its ownership of 1% of the outstanding limited partner units, $7 million from its 100% general partner interest, and a whopping $317 million from incentive distribution rights. Those last two line items are cash outflows that Energy Transfer Partners needs to pay that other MLPs without a general partner don't. Because of this, other MLPs have more cash that could be sent to limited partner unitholders via a larger cash distribution or retained to fund growth projects.

Keeping it all in house A prime example of a company that doesn't have a general partner to pay is Enterprise Products Partners as it acquired its general partner in 2010 thus eliminating the 2% economic general partner interest and incentive distribution rights. That incentive distribution right was very expensive as it required Enterprise Product Partners to pay up to 25% of its incremental distribution growth to its general partner.

Since that time Enterprise Products Partners has retained a lot of that extra cash and used it to help fund growth projects, saving it from tapping the debt or equity markets quite as frequently.

Source: Enterprise Products Partners LP Investor Presentation

As the chart in the bottom left hand corner shows, the company has retained nearly $1 billion in recurring distributable cash flow each year since acquiring its general partner.

The other thing to keep in mind is that as Enterprise Products Partners' distributable cash flow grows, it directly benefits unit holders as they either enjoy a rising distribution or the increasing asset base. Energy Transfer Partners investors, on the other hand, don't enjoy as direct a correlation to its growth because a portion of its cash flow is always being funneled to its general partner.

Investor takeawayThe bottom line here is that investors need to realize that Energy Transfer Partners pays a pretty big portion of its cash flow to its general partner. While there are some very important benefits to having a general partner, such as it being a source of capital for growth, those benefits come at a pretty hefty cost. It's why investors considering ETP stock need to take a closer look at its relationship with Energy Transfer Equity and make sure they are comfortable with it before investing in the company.

The article ETP Stock: 1 Crucial Thing Investors Need to Know Before Investing in Energy Transfer Partners LP originally appeared on

Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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