A typical MLP structure
An MLP has one or more GPs (general partners) and thousands of limited partners or unitholders (limited partners holding publicly traded units). The GP manages the partnership and usually has about a 2% ownership stake in the partnership. In contrast, the limited partners provide capital but don’t play any role in managing the partnership. The limited partners receive quarterly cash distributions, while the GPs may hold incentive distribution rights (or IDRs).
NRP’s operating assets are owned by its operating subsidiaries. At the time of NRP’s IPO, Arch Coal and WPP Group transferred certain assets and liabilities to NRP. In return, they were allotted certain common units, subordinated units, limited partner interest, and IDRs.
In this master limited partnership, NRP is the general partner and owns 2% of general partner interest with 65% of IDRs. In contrast, WPP Group owned 25% of IDRs, and the remaining 10% was owned by Arch Coal. However, Arch Coal sold its subordinated units, general partner interests, and incentive distribution rights to a private investment group in the fourth quarter of 2003. Also, Arch Coal sold the majority of its common units in NRP in the first quarter of 2004. As of December 26, 2016, Arch Coal no longer holds any membership interest in NRP.
MLPs are pass-through entities that don’t pay any corporate tax, thereby lowering their cost of capital. Instead, the unitholders (shares in MLPs are called units and the shareholders are called unitholders) of an MLP pay taxes at the individual level. MLPs also help corporations to unlock the value of their assets by exchanging them for MLP common units or IDRs. However, not all corporations can form an MLP. According to the IRS, at least 90% of the MLP’s income must come from activities in specific areas like mining, oil and gas, income from commodity investments, and real estate.
Next, let’s look at the business model of Natural Resource Partners.