Kinder Morgan Energy and Terra Nitrogen: Making a Great Case for PTPs

Investing in a Direct Participating Program [DPP] like oil/gas drilling is out of reach for most small investors based on the accredited investor requirements. The rules and regulations imposed by the government may appear to favor wealthy investors over the less funded investors. Fortunately, there is a way for individuals to invest in partnerships similar to a DPP, but without having to be an accredited investor.

“Publicly traded partnerships [PTPs], often known as master limited partnerships [MLPs], are limited partnerships which are traded on public exchanges. A share in a PTP is called a “unit,” and PTP shareholders are known as “unitholders.” PTPs can be found on the New York, American, and NASDAQ exchanges, as well as many regional exchanges.” – National Association of Publicly Traded Partnerships

PTPs/MLPs are a unique class of investments and currently contain a small group of tradable securities numbering a little over 80 companies. Few investors even know about them except for maybe the high profile of new issues like The Blackstone Group L.P. (NYSE:BX).

While the Blackstone L.P. is related to real estate, the majority of the traded partnerships fall under the energy sector. This includes oil and gas pipelines, compressing, refining, marine transport, exploration and production. Propane, heating oil, and coal are other energy related securities. Only a small handful deals with timber, real estate and mortgages.

Those familiar with U.S. and Canadian Royalty Trusts or like to invest for income, may find PTPs to be equally enticing because of the special tax treatment of the distributions. In a typical PTP, 80-90% of the distribution paid is tax free until you sell. Some of these partnerships have been paying double digit distributions for 10 years straight, in addition to the capital gains of the units.

One such high flyer is Kinder Morgan Energy Partners L.P. (NYSE:KMP). Since its inception, its unit price has risen from a split adjusted price of $5.75 to $55.94. During this period, Kinder Morgan has increased its cash distribution 29 times from $0.60 a unit to $3.68 now. That’s a 973% return on top of all the distributions.

The growth and distribution payout of most of these “midstream” energy asset PTPs may continue for much longer periods of time than Royalty Trusts because of one big difference. Royalty Trusts usually have assets that get depleted over time, however, “midstream” energy assets like pipelines, storage tanks, terminals and ships are hard assets.

Non-energy related PTPs have not done so badly either. Take for example Terra Nitrogen Company L.P. (NYSE:TNH), a fertilizer company based in Iowa, has shot up over 2200% in the last 5 years from $6.12 to its current $136.30 per unit with a Div/Yield of 8.60 (6.90%).

In an asset class this small and concentrated only in a few specialized sectors, the task of researching for some potential winners to add to a portfolio can be easier. To find out more about PTPs/MLPs or its tax treatment, visit the National Association of Publicly Traded Partnerships at www.naptp.org. There you can also find a listing of all the PTPs traded on the U.S. stock markets and begin your own research.