3 MLPs With Attractive Yields And Growing Income

Includes: ENB, KMP, LNGG
by: Avi Morris

My first article for SeekingAlpha, "Why Buy MLPs?", was written 5 years ago to discuss the MLP industry because MLPs have been and will be excellent long term investments. But that recommendation was tested severely in the first few months.

The Alerian MLP Index (AMZ) had risen from a starting value of 100 in January 1996 to 267 at the start of September 2008, comparable to a compound annual growth rate of 8%. The index including reinvested income had risen to 634, comparable to a compound annual growth rate of 15%. Very few stocks matched that growth. Income from MLPs has always been a major attraction for investors. At the start of September 2008, the yield on the index was 7.8%. Another attraction was low beta. The index rarely had daily price swings that exceeded 1%.

The index had fallen from a (then) record of 342 a year earlier. When the stock market collapsed in September, MLPs were hit hard (aggravated by the demise of Lehman, a heavy backer of MLPs). The index plunged to 152 with a yield of 15.2% in November. Then MLPs rallied and 5 months later the yield fell back to single digits.

Since then MLPs have become even more popular. The index reached a new record of 468 last May, 37% above the record in 2007, and the comparable index including reinvested income more than doubled. Once again, it is extremely difficult to find any stock that has done better.

MLPs operate businesses that are helping make America energy independent. Most are midstream MLPs that move energy (gas and oil) from the source to the downstream market, and, typically are less affected by swings in commodity market price. MLPs are partnerships, not stocks, and ownership is measured with units. Distributions have favorable tax consideration, but that brings some degree of tax hassle. Below are 3 of the largest MLPs with records of growth along with companion stocks that pay dividends without additional tax hassle.






Kinder Morgan Partners (NYSE:KMP)




Kinder Morgan Mgmt (NYSE:KMR)




Kinder Morgan Inc (NYSE:KMI)




El Paso Pipeline Partners (NYSE:EPB)




Enbridge Energy Partners (NYSE:EEP)




Enbridge Energy Mgmt (NYSE:EEQ)




Linn Energy (LINE)




LinnCo (LNCO)




Kinder Morgan

Kinder Morgan Partners --- 5 years

(Click to enlarge)

Kinder Morgan has had extraordinary growth in the last 15 years, becoming the largest midstream MLP with a market value above $100 billion. It has 82,000 miles of pipelines that transport natural gas, gasoline, crude oil and CO2. The 180 terminals store petroleum products and chemicals such products as ethanol, coal, petroleum coke and steel.

The financial structure is a little complicated. Kinder Morgan, Inc. is the general manager. It is a corporation that had its IPO 2 years ago and is member of the S&P 500. KMI 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 , a corporation that pays stock dividends based on distributions paid by KMP. KMP is the company with the longest track record and has delivered an extraordinary average annual return of 24% since 1996 (including reinvested distributions). The distribution rose every year from 94¢ in 1997 to the current rate of $5.28.

The 5-year backlog of investment projects is more than $13 billion. Management is guiding that annual growth for KMP and EPB will be 5-6% and KMI should be 9-10%, which will let them extend streaks of higher annual distributions/dividends.

Enbridge Energy

Enbridge Energy Partners --- 5 years

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EEP, one of the longest serving MLPs, operates crude oil and natural gas transportation systems in the US. The crude oil system is the largest transporter of growing oil production from Canada (the #1 foreign source of petroleum for the US). The pipeline moves oil from Alberta, Canada, to the upper Midwest and onto eastern Canada. EEP operates the U.S. portion of the pipeline and Enbridge, Inc (NYSE:ENB), the general partner, operates the Canadian portion. Enbridge Management is a companion corporation that pays stock dividends based on distributions paid by EEP.

In June, EEP filed an IPO for Midcoast Energy Partners (NYSE:MEP), an MLP whose initial asset will consist of 40% ownership interest in the natural gas and NGL midstream business and EEP will be the general partner. The offering should raise $400-$500 million which will help finance the oil pipeline capital program.

To help finance the EEP capital program, ENB will invest $1.2 billion in new EEP preferred units. Additionally, EEP will reduce its economic interests in the Lakehead system expansions (the main pipeline system in the upper Midwest) from 40% to 25% and ENB will purchase the accounts receivables of certain EEP subsidiaries through 2016 until current capital commitments are funded. ENB has contributed capital in the past. At the depth of the recession in November 2008, ENB bought 16.25 million units of EEP worth $500 million. That has more than doubled. The 2 companies work together as partners.

After sluggish earnings in the last 18 months, EEP performance is expected to strengthen in H2-2013. With almost $2 billion invested annually in the oil pipelines, rising deliveries should increase earnings when capital projects enter service. The long-term outlook remains strong. The multi-billion growth program is expected to deliver low risk growth. EEP has been paying distributions with no reductions since its start in 1991.

Linn Energy

Linn Energy --- 5 Years

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LINE is a leading upstream MLP, different from many others because it extracts gas and oil with fracking technology. The company has used hedging to lock in prices for production (as do many leading corporation which deal in commodities). But its accounting practices have been questioned by short sellers and then the SEC at the end of May. As a result, LINE has not purchased puts in 2013 and does not have plans to do so.

In February, LINE offered to merge with Berry Petroleum (NASDAQ:BRY), a corporation. BRY shareholders will receive shares in LinnCo, a companion corporation for LINE that had an IPO last October. Short sellers, with negative views of accounting at LINE, have been vocal and were rewarded when security prices plunged from above $40 early in the year to the mid $20s. Despite all the controversy about accounting, Linn security prices have stabilized since early July. On September 11 (today), Linn received comments from the SEC (only) asking to amend the August 9 statement related to the proposed merger with BRY. Then LINE, LNCO and BRY set record dates on September 30 for meetings to approve the merger. Linn security prices jumped more than 10% (today).

In July, Linn Energy began paying monthly distribution/dividends (based on the $2.90 annual rate). However the earlier guidance of raising that rate to $3.08 in Q4 has been deferred. Linn security prices have been unusually volatile in recent months. That may not be the end of high volatility if the shorts choose to fight the merger with BRY. Assuming the BRY merger goes through, LINE will continue growing organically and with acquisitions.

These companies provide investment opportunities for investors with different goals. Kinder Morgan has had exceptional success, but comes in different flavors. KMI is the main company. Its yield is moderate but management is guiding for higher growth rates. KMP and EPB have higher yields with tax advantages. KMR is a comparable corporation to KMP that pays stock dividends.

The companion corporation for EEP is Enbridge Energy Management which pays stock dividends. On September 10, EEP announced an offering of 8 million EEQ shares to raise $232 million. For those who don't need current income, the stock dividends provide an attractive yield that is reinvested.

Unlike like the other 2 companion corporations, LNCO pays dividends with money that generate 1099s. The first dividend paid last year was not taxable. Linn securities have the highest yields reflecting increased risk, especially if the shorts fight the BRY merger. LINE has survived adversity. 5 years ago, during the severe recession, it maintained the distribution at a time when a few other MLPs cut theirs.

Following a difficult start 5 years ago, MLPs finished this period with a strong rebound. Even after the recent sell-off by yield securities, the index held up better than others, down only 6% from its record high. New technology, such as fracking and a continuation of demand for ongoing energy projects, bring higher earnings for distribution increases. Whether purchasing MLP units or corporate shares, investors who want attractive yields and growing income have a good choice, like 5 years ago, to participate in growth while earning high income.

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.