With The MLP Index At A Record High, 3 High Yield MLPs With Growing Dividends

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 |  Includes: EEP, KMP, LINEQ
by: Avi Morris

MLPs are on fire because of the boom to build more energy projects in the U.S. and Canada. The Alerian MLP Index is up a dazzling 69 YTD to 454 (already an incredible yearly gain), triple the recession low in November 2008. The comparable index with reinvested income has almost quadrupled from the recession low, rising from 370 to 1464. Dow Jones Industrials has little more than doubled from its low in early 2009.

MLPs are partnerships with ownership measured in units that have tax advantages. Most interesting are 3 large MLPs because they created comparable corporations paying quarterly dividends. The 3 MLPs are Kinder Morgan (NYSE:KMP), Enbridge Energy Partners (NYSE:EEP) and Linn Energy (LINE).

MLP

Price

Current Dividend

Yield

Ownership

Kinder Morgan Partners

$89.77

$5.16

5.7%

Units

Kinder Morgan Mgmt (NYSE:KMR)

$87.85

$5.16

5.9%

Shares

Kinder Morgan Inc (NYSE:KMI)

$38.68

$1.48

3.8%

Shares

El Paso Pipeline Partners (NYSE:EPB)

$39.14

$2.32

5.9%

Units

Enbridge Energy Partners

$30.14

$2.17

7.2%

Units

Enbridge Energy Mgmt (NYSE:EEQ)

$30.22

$2.17

7.2%

Shares

Linn Energy

$37.97

$2.90

7.6%

Units

LinnCo (LNCO)

$39.05

$2.84

7.3%

Shares

Berry Petroleum (BRY)

$46.29

$0.32

0.7%

Shares

Click to enlarge

Kinder Morgan Energy Partners is one of the largest MLPs, owning more than 44,000 miles of pipelines and 180 terminals. Kinder Morgan, Inc., the general partner (a corporation), owns the largest midstream and the 3rd largest energy company in North America and operates 73,000 miles of pipelines. The pipelines transport gas and oil, and terminals store petroleum products and chemicals. KMI owns general partner interests of KMP and El Paso Pipeline Partners , El Paso Corp was acquired last year, along with interests in Kinder Morgan Management , another corporation.

On March 28, KMP entered into a long-term, fee-based agreement with BP North America, subsidiary of BP (NYSE:BP), to underwrite an additional 50,000 barrels per day (bpd) of petroleum condensate processing facility being constructed near the Houston Ship Channel, by investing an additional $170 million to the previously announced $200 million facility. The transaction is expected to be accretive to cash distributable to KMP unit-holders upon its completion in 2015.

KMP completed the acquisition of El Paso Natural Gas and El Paso Midstream assets from KMI for $1.6 billion (including $560 million of debt) at the start of March. The transaction is expected to be accretive for distributions.

Enbridge Energy Partners owns the U.S. segment of the world's longest crude oil pipeline system with an export capacity (from Canada) of 2.5 million barrels, transporting 13% of U.S. oil imports. Natural gas transmission pipelines, largely located in the Mid-Continent and Gulf Coast area, deliver 2.5 billion cubic feet of natural gas daily.

As part of its $2.3 billion capital spending program in 2013, an affiliate of EEP and Phillips 66 (NYSE:PSX) have just agreed to a 3-year deal to load Bakken shale crude oil at the Enbridge Berthold, North Dakota, terminal beginning in May, with 40,000 barrels per day (bpd) by November. The Berthold facility will have an ultimate capacity of 2.2 million barrels of contract storage. The Bakken Pipeline Expansion is now complete and in service, providing 145,000 bpd of capacity for growing production from the Bakken and Three Forks formations in Montana, North Dakota, Manitoba and Saskatchewan.

Enbridge Energy Management, the comparable corporation for EEP, last month sold over 10 million EEQ shares for approximately $273 million to help finance capital expansion programs.

LINN Energy has grown to become a top independent upstream energy company with 4.8 Tcfe (trillion cubic feet equivalent) of proved reserves in producing U.S. basins (the Mid-Continent, Permian Basin, Hugoton Basin, Rockies, Michigan and California). In 2012, LINN spent more than $1 billion on its oil and natural gas capital program, drilling 440 gross wells.

Its active acquisition program focuses on oil and natural gas basins for growth. Accretive assets have long-life and high-quality production with low-risk development opportunities. LINE is the industry leader in hedging which is used to provide long-term cash-flow predictability by reducing exposure to oil and natural gas price fluctuations.

In February, LINE announced a merger with Berry Petroleum to increase liquids (petroleum) exposure over 50% of proved reserves from 46% currently. The acquisition will increase LINE proved reserves by 1.65 Tcfe. BRY shareholders will receive 1.25 shares of LinnCO , the comparable corporation to LINE, by June 30. Regulatory approval was received and shareholders will give final approval in the coming weeks.

These companies are investing billions of dollars to help the U.S. become energy independent. Now investors have a choice when investing. While traditional MLPs have high yields with tax advantages, there is a fair amount of tax hassle. Corporations allow investors to buy shares paying dividends. KMR and EEQ pay stock dividends which do not generate 1099 tax forms. LNCO had an IPO last October that raised $1.2 billion. It pays dividends with money and only 13% of last year's dividend was taxed as a qualified dividend (the balance was not taxable).

Bargain hunters interested in buying at a discount will be interested in BRY. There will be no regularity challenge. After unit and shareholder approval, 5 shares of LNCO will be swapped for 4 shares of BRY. 4 shares of BRY at $46.29 cost $185.16 and 5 shares of LNCO at $39.05 are worth $195.25, a 5½% premium. Management is guiding that the merger will be accretive to distributable cash flow per unit (used for paying dividends/distributions) by 40¢.

These huge energy companies have excellent records of growth and announcements about expansion projects are common. KMP distributions grew from 94¢ in 1997 to $5.16 currently and EEP distributions rose from $1.18 in 1993 to $2.17. KMP expects to declare cash distributions of $5.28 per unit in 2013 versus $4.98 last year. EEP is guiding that annual distributions should increase annually by 2-5%. LINE distributions rose from $2.18 in 2007 and management is guiding $3.08 in 2013.

With sluggish GDP growth and low interest rates continuing, high current income with records of growth is attractive for investors. Additionally, tax-deferred accounts (such as IRAs), are more sensitive to income earned. If the index pulls back following MLP selling, as is possible from record levels, a stream of growing dividends will feel good.

Disclosure:

I am long EEQ, LNCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.