MLPs After Their Worst Year

One year ago I began writing for Seeking Alpha; my first article was an introduction to MLPS. They had come through a very difficult period, as was the case for the stock market. The Alerian MLP Index declined from its peak of 342 in July 2007. First it slipped into the low 300s and then fell to the high 200s, a little better performance than the Dow.

Following my article was "Terrible September", the worst month for the stock market, which included the Lehman collapse. Markets (including MLPs) fell off a cliff. In just one month, the index fell from 270 to 226, a 4 year low at that point. The stock market kept falling. The index plunged below 160 at its lows.

However, it remained above its starting point of 100 at the end of 1995. Markets roared back from their lows in March with MLPs leading the charge. The MLP index rose to 238, up 35% in 2009 and distributions add another 8%.

Most MLPs have gotten through the credit crisis in better shape than their units traded on stock exchanges. MLPs are energy companies which typically build pipelines and terminals for moving and holding petroleum and natural gas. They need a constant supply of capital for these projects and that has been available even in the last year.

A few smaller MLPs were adversely affected by the economic downturn and have had to reduce or eliminate their distribution to focus on paying down debt. Constellation Energy Partners (CEP) is one I follow. Their unit price is a little above the $2.25 distribution they paid 2 years ago. They have a short track record of getting gas from Alabama's Black Warier Basin. Management has been changed and the reduced distribution was eliminated in Q3 to concentrate on paying down debt. For the venturesome who think chaos brings opportunity, Constellation Energy may be of interest. If it gets straightened out and they restore the distribution there will be an excellent return.

However distribution reductions at MLPs have been few. Most have been able to finance capital expansion. Kinder Morgan (KMP), the largest MLP, early in 2009, declared their intention to pay a record distribution of $4.20 per unit in 2009 and are delivering. Meanwhile, they haven continued a multi billion dollar expansion program for their pipelines and terminals. Kinder Morgan has increased debt and are on track for selling $1 billion of equity to help finance expansion.

The future for MLPs has not changed from last year, the nation needs much more capital investment by MLPS and this is a national priority. In the worst financial crisis since the Great Depression, their ability to obtain additional financing for projects speaks highly about their growth potential.

A new investment product is available for those who want to invest in MLPs using a portfolio approach. A closed end investment fund with the ticker symbol AMJ tracks the Alerian MLP Index equivalent to 10% of the index. AMJ shares allow an investor to participate in industry growth and share in the related investment income. It has the added advantage of being a corporation paying dividends, thus tax hassle associated with distributions is avoided.

Whether buying units for direct investment in an MLP or purchasing shares in equivalents, such as Kinder Morgan (KMR) or Enbridge Energy (EEQ), MLP investment should be considered for growth and high income with tax advantages. Their financial strength during the current financial crisis is an impressive reminder of where they are going.

Disclosure: no positions

Comments

[Income4Sail:]

I followed your comments on MLPs through the downturn and picked out the units I felt could hold up. (not tied to commodity prices) I already had EPD and NRGY from way back. Both have continued to pay/raise their distribution and NRGY has shown a fair bit of growth as well. I picked up more of both on the downturn. I also picked up KMP while it was in the gutter, and while not a fan of MLPs tied to oil and gas prices, I grabbed up a bunch of LINE based on their hedging into 2011. A common theme in your articles is the tax ramifications, specifically the "dreaded" K-1 form. I am finding that TurboTax Deluxe has consistently improved how it deals with the K-1. Last year I think I actually had to "fudge" one or two lines, and that with 4 MLPs! Anyone who is skiddish on their taxes will not like their first experience with it, despite partner instructions. Great articles please continue to publish them.

Sep 09 05:10 AM

[epeon:]

I like MLPs and bought several of them a few months ago. I bought both LINE and DPM when they were way down. I still own ARLP which really hasn't gone anywhere, but I stil collect the dividend. So, I like them.

Sep 09 09:24 AM

[whisperonth...:]

Last year was the first for me to use TurboTax and deal with MLPs. I have used TurboTax for a few years, and the MLPs changed the time it took, but now I know how, and it will be easier this year. The difficult part was finding WHERE to enter the information. I'm sure that with the comments they've gotten and the questions they've answered, they will find an easier way for us to locate this info.

As for investing, I like these MLPs because of the dividends. My investments are directly intended to supplement retirement income and they're doing just fine in that. I have LINE, NRGY, and a few more, and am always looking for something new. It's all about the money, and with the way stocks tend to fluctuate, basing my retirement plan on the price of the stock doesn't seem to be the most reliable plan. Instead, I'll take my payback now, thanks! Give me the cash (dividends or distributions, or whatever they want to call it).


On Sep 09 05:10 AM Income4Sail wrote:

> I followed your comments on MLPs through the downturn and picked
> out the units I felt could hold up. (not tied to commodity prices)
> I already had EPD and NRGY from way back. Both have continued to
> pay/raise their distribution and NRGY has shown a fair bit of growth
> as well. I picked up more of both on the downturn. I also picked
> up KMP while it was in the gutter, and while not a fan of MLPs tied
> to oil and gas prices, I grabbed up a bunch of LINE based on their
> hedging into 2011. A common theme in your articles is the tax ramifications,
> specifically the "dreaded" K-1 form. I am finding that TurboTax
> Deluxe has consistently improved how it deals with the K-1. Last
> year I think I actually had to "fudge" one or two lines, and that
> with 4 MLPs! Anyone who is skiddish on their taxes will not like
> their first experience with it, despite partner instructions. Great
> articles please continue to publish them.

Sep 09 09:39 AM

[Ozarker:]

That's what CPA's are for. Put them to work and save the economy.


On Sep 09 05:10 AM Income4Sail wrote:

> I followed your comments on MLPs through the downturn and picked
> out the units I felt could hold up. (not tied to commodity prices)
> I already had EPD and NRGY from way back. Both have continued to
> pay/raise their distribution and NRGY has shown a fair bit of growth
> as well. I picked up more of both on the downturn. I also picked
> up KMP while it was in the gutter, and while not a fan of MLPs tied
> to oil and gas prices, I grabbed up a bunch of LINE based on their
> hedging into 2011. A common theme in your articles is the tax ramifications,
> specifically the "dreaded" K-1 form. I am finding that TurboTax Deluxe
> has consistently improved how it deals with the K-1. Last year I
> think I actually had to "fudge" one or two lines, and that with 4
> MLPs! Anyone who is skiddish on their taxes will not like their first
> experience with it, despite partner instructions. Great articles
> please continue to publish them.

Sep 09 10:24 AM

[mc2406:]

MLPS are one of a few remaining dependable venues for income investors. Makes you wonder when the pandering professional pols in Washington will go after this as a tax shelter?

Sep 09 11:05 AM

[Chancer:]

With KMR, which pays dividends in shares, you do not have the tax problems. There is no tax until you sell the shares.

If you need the cash, you can just sell the shares.

Sep 09 01:30 PM

[mbkelly75:]

Keep in mind also that MLPs tend to not be correlated to either Stocks or Bonds so having them in your portfolio can add safety and stability to it - and the dividends are wonderful to have also. I have my account set up to automatically re-invest dividends and interest in the security that paid them so as long as the dividends are stable - I do not care all that much where the price of the security goes.

Sep 10 03:03 PM