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MLPs have become popular investments in the last 10 years because they are thought of as yields securities, and, as a bonus, have provided excellent capital appreciation. The Alerian MLP Index began 1996 at 100 and has risen to 452. Its yield has been in high single digits until the last 5 years when it has been around 6% (presently 5.9%). One problem with investing in MLPs is tax hassle from the distributions paid.

Kinder Morgan Energy Partners (KMP), Enbridge Energy Partners (EEP) and Linn Energy (LINE) are 3 MLPs that have companion stocks, giving a choice when investing. The companion corporations share in MLP growth and dividends are derived from distributions which simplifies tax issues associated with K-1 tax forms. The first 2 corporations are: Kinder Morgan Management (KMR) and Enbridge Management (EEQ) that pay stock dividends (not appropriate for investors needing current investment income). LINE is the third MLP. Last year, LINE had a $1.2 billion IPO for its companion corporation, LinnCO (LNCO), which pays dividends with money, and that generates 1099s. The 2012 dividend was not taxable. But its units and shares have had extraordinary volatility in recent weeks because of bear attacks.

Distribution

Price

/Dividend

Yield

Kinder Morgan Partners

$83.36

$5.28

6.3%

Kinder Morgan Mgmt

$81.12

$5.28

6.5%

Kinder Morgan Inc (KMI)

$38.17

$1.60

4.2%

El Paso Pipeline Partners (EPB)

$42.42

$2.48

5.8%

Enbridge Energy Partners

$30.59

$2.17

7.1%

Enbridge Energy Mgmt

$30.29

$2.17

7.2%

Linn Energy

$26.80

$2.90

10.8%

LinnCo

$29.50

$2.90

9.8%

Kinder Morgan

Kinder Morgan is the largest midstream and the third largest

energy company in North America with a market value over $100 billion. Its track record has been impressive by any standard. It owns and operates 82,000 miles of pipelines and 180 terminals. The pipelines transport natural gas, gasoline, crude oil and CO2. Terminals store petroleum products and chemicals such products as ethanol, coal, petroleum coke and steel. Kinder Morgan, Inc., which had an IPO in 2011 and joined the S&P 500 last year, owns the general partner interests of Kinder Morgan Energy Partners and El Paso Pipeline Partners, along with limited partner interests in KMP and EPB and shares in Kinder Morgan Management .

While KMI controls the operations, KMP is the main company with the longest track record. KMP has delivered an average annual return of 24% since 1996 including reinvested distributions. The distribution rose every year, from 94¢ in 1997 to $4.98 in 2012, and the current annual rate is $5.28.

In 2013, KMP expects 40% of segment earnings (before DD&A and certain items) will come from the natural gas pipeline business, and that percentage is expected to increase going forward. Of more than $13 billion in capital expenditures, $5.4 billion is in Kinder Morgan Canada to expand its operations from the Alberta oil fields, $3.5 billion in natural gas pipelines and the balance in CO2 projects and other energy pipelines. Management is guiding that annual growth for KMP and EPB will be 5-6% and KMI should be 9-10%, which will extend streaks of higher annual distributions/dividends.

Enbridge Energy

EEP operates crude oil and natural gas transportation systems in the US. Its crude oil system is the largest transporter of growing oil production from western Canada, moving oil from Alberta, Canada, to Illinois and a branch goes to eastern Canada. Another pipeline brings oil to Cushing, Oklahoma (a major oil hub). EEP operates the US portion and Enbridge, Inc. (ENB), the general partner, operates the Canadian portion.

In June, EEP filed an IPO for Midcoast Energy Partners (MEP), an MLP whose initial asset will consist of 40% ownership interest in the natural gas and NGL midstream business. EEP will retain ownership of the general partner and all the incentive distribution rights. The offering should raise $400-$500 million.

There were other significant financing agreements in the last 2 months. ENB will invest $1.2 billion in a new class of EEP preferred units to reduce third party financing required by EEP for funding its growth program. EEP also announced that it will reduce its economic interests in the Lakehead system expansions (the main pipeline system in the upper Midwest) from 40% to 25%. Additionally, ENB will purchase the accounts receivables of certain EEP subsidiaries through 2016 until EEP's current capital commitments are funded.

ENB has helped with EEP finances in the past. At the depth of the recession in November 2008, ENB bought 16.25 million units of EEP at a price of $30.76 ($500 million). The current unit price is about the same, but there has been a 2-1 split and growing distributions have been a bonus. The 2 companies work together as partners.

Q2 net income for EEP was $75 million, down $22 million from last year, primarily due to lower natural gas liquids prices and the deferred distribution from the recently issued preferred units. Performance is expected to strengthen in H2-2013 and pipeline deliveries should increase as capital projects enter service. The long-term outlook remains strong as the multi-billion growth program is expected to deliver low risk growth.

Linn Energy

LINE is a leading upstream MLP, different than most other midstream MLPs (they bring energy from the source to the destination). LINE extracts gas and oil with fracking technology, and uses hedges to lock in prices for production (as do many leading corporation which deal in commodities). Last month, Caterpillar (CAT) said it had currency translation and hedging losses. Because its accounting practices have been questioned, LINN has not purchased puts in 2013 and does not have plans to do so.

The units/shares for Linn have been unusually active and volatile this year, especially in the last 2 months. The lower line shows LINE and the higher line is LNCO.

LINE and LNCO -- 2013


(Click to enlarge)

This year shorts have been vocal about accounting methods LINE uses to calculate distributable cash flow. They allege that management does not know what it's doing (and that's being kind) and distributable cash flow is overstated which will lead to a major cut in distributions/dividends.

2 months ago, LINE submitted accounting documents to the SEC for review and there have been several law suits following the falling unit/stock prices. In this fluid situation, LINE wants to go forward with its plans to merge with Berry Petroleum (BRY), but that will have to wait until the SEC publishes its findings. While nobody knows what the SEC will discover, the SEC makes numerous inquiries. Last week, International Business Machines (IBM) learned it is facing an SEC investigation into how it reports revenue from offsite cloud services. LINE also faces other challenges in completing the BRY merger. The shorts are still out there and can be expected to lead more bear attacks, causing security prices to plunge.

The 3 MLPs now have 4 corporations paying dividends. But each has a different story. KMI and KMR are part of the largest company and KMP has an outstanding record of rewarding its partners. EEP has a record of growth over 20 years. Current results are sluggish because of the capital program, costs precede earnings.

LINE is in a class by itself being challenged by an army of shorts. But it has fans. Bank of America Merrill Lynch and Goldman Sachs gave buy recommendations after the plunge in early July. While LINE management will not be able to say much until the SEC investigation is completed, it started paying monthly distributions/dividends (based on a $2.90 annual rate) last month and the second one will be paid next week. But this company is not for sissies, only for very brave investors attracted to double digit yields.

The diversity of the 4 corporations gives investors a variety of choices for investing in MLPs. Stock dividends from KMR and EEQ provide high yields and are appropriate for investors who like dividend reinvestment programs. KMI has an attractive yield, providing current income while offering more growth potential. LNCO has an enormous yield reflecting the high risk, which will be of interest to the very bravest investors. High income and growth from MLPs is available without major tax hassle.

Source: 3 MLPs Have 4 Stocks That Pay Dividends With High Yields