Why MLPs Continue to Grow Cash Distributions

The Master Limited Partnership (MLP) has two key components.  At the core of the MLP is the General Partner (GP), which actually runs daily operations (e.g., physical management of a pipeline, billing, accounting, etc.)  Limited Partners (LPs), on the other hand, are passive investors in the business and have no part in daily operations.  The goal of the GP is to grow cash distributions (similar to a stock dividend) to the LPs and, since most MLPs operate in the energy space, these distributions tend to grow steadily over time.

However, the GP has an added incentive to grow cash distributions to LP investors.  Why?  While the GP typically only has a 2% initial stake in the business, their share of cash distributions can grow significantly once they reach a predefined threshold.  For example, the GP may only get 2% of cash distributions up to $0.30 per LP unit, but beyond this point their claim may jump to 15% and sometimes can grow to 50%!  Therefore, it is in the interest of the GP to continue growing distributions to LP investors (and is why you rarely see MLPs shrink the cash distribution).