In the last decade, MLPs matured and became a leading choice for investors attracted to high yields and growth. The Alerian MLP Index (AMZ) more than doubled in the last 10 years and annual income almost doubled from 13 to 25. The comparable index, which includes reinvested income is up almost 4 times. Such total rate of return is difficult to find for any security. Below is the 10-year chart for AMZ. The lower line is AMZ and the upper line is the index with reinvested income:
Alerian MLP Index - 10 years
Meanwhile, the Dow Jones Industrials is up only 46% in the last 10 years, and that gain is partially due to the index starting from a depressed level. By contrast, the gain from the end of 1999 is up a paltry 13%. The long-term track record for the Dow is shown below:
Dow Jones Industrials
MLPs' securities have done well because they invested in pipelines and storage terminal capacity primarily for the gas and oil industry. MLP businesses operate like a toll road, receiving fees for transporting energy products. Customers include producers, shippers, oil companies and utilities. Expansion for the nation's energy infrastructure will continue with many new investments being made in shale projects with new technology and discovery of additional shale formations.
3 of the 10 largest MLPs investing heavily in new energy supplies are:
The EEP Liquids business (2/3 of the total) owns the U.S. portion of the world's longest liquid petroleum pipeline (the Lakehead System) that transports crude oil and natural gas primarily from western Canada to refining centers in the Midwest and Ontario, Canada. The Natural Gas business (the other 1/3) operates in the Mid-Continent and Gulf Coast regions.
EEP is the largest supplier of crude oil into the US, moving 13% of daily imports. Enbridge Inc. (ENB), the general partner, and EEP recently completed the largest liquids system expansion in the company's history and have numerous liquids projects underway. About 15% of Texas natural gas production is transported through 3 major natural gas systems which comprise 11,000 miles of gathering and transmission pipelines, 26 processing plants and 10 treating plants.
KMI became the largest midstream and the third largest energy company in North America this year after acquiring El Paso Corp. It operates 75,000 miles of pipelines and 180 terminals. The pipelines transport natural gas, petroleum products and crude oil. KMI owns the general partner and limited partner interests in both KMP and EPB. KMP is one of the largest MLPs and EPB ownership was acquired this year.
In the U.S., KMI has the largest natural gas pipeline and storage operator, the largest transporter of refined petroleum products, the largest terminal operator, the largest transporter and marketer of CO2 and the only oilsands pipeline serving the West Coast of Canada.
LINE is an upstream natural gas and crude oil producer that acquires long life energy properties for more production. It has closed more than $7 billion in acquisitions, paid its 27th consecutive quarterly distribution, grown to a $10 billion market value, and has become the 8th largest MLP.
Its assets are primarily in the middle states with 15,000 oil and natural gas wells. The properties have more than 5 Tcfe (trillion cubic feet equivalent) of proved reserves with geographic and commodity diversity.
These MLPs have rewarded investors over the years with growing security prices and attractive current yields. However, tax hassle and additional record keeping is involved with MLP units. All 3 have companion stock alternatives. EEP and KMP each have a comparable corporation (EEQ and KMR respectively) which pay stock dividends based on distributions and track price movements of the units. 1099's are not issued for stock dividends. LINE just had an IPO for a companion corporation Linn Co (LNCO) paying dividends with money. The first dividend of 71¢, paid last month, is slightly below the comparable distribution 72½¢ paid by LINE. Up to 60% of the dividend will be taxable as a qualified dividend and the balance will not be taxable. The dividend tax status will be announced in January.
Additional investments by MLPs are critical for future growth of the US economy, highlighted by newly discovered shale formations containing gas and oil. The International Energy Agency just forecast the U.S. will become the world's largest oil producer and an exporter of natural gas by 2020. In 2035, it would attain energy self-sufficiency. These companies are planning for additional growth in 2013 and well into the future. They have a superb track record of growth along with high yields providing current income. KMI's yield is above 4%, KMP, KMR and EPB yields are above 6% and the other securities yield over 7%. Even if there is a fiscal cliff slowdown next year, these companies will continue investing for future growth to increase annual distributions.