MLPs Survive and Thrive After 2009

Includes: EPD, KMP
by: Avi Morris

The Alerian MLP Index had its best year in 2009, which will probably be its best year for the foreseeable future. In the last few weeks, MLPs reported 2009 results along with distribution announcements for Q1 in 2010. Kinder Morgan (NYSE:KMP), with an excellent track record, started from a modest Enron pipeline system to become the largest MLP, said they plan to pay an annual distribution of $4.40 in 2010, another record (see conference call transcript here). Enterprise Products (NYSE:EPD) merged with TEPPCO in 2009, making it the current largest MLP. They raised the distribution for Q1 in 2010 to another record, the 22nd consecutive quarterly distribution increase (see their Q4 conference call transcript here). Other MLPs increased distributions for Q1 after giving favorable guidance for 2010.

MLP reports were not as strong as the sharp increase in the MLP index would suggest. On the positive side, MLPs went through THE financial crisis of our lifetime. They were able to sell units to build equity base for supporting additional borrowings which financed capital expenditures to build pipelines and terminals.

Even marginal MLPs, such as BreitBurn (BBEP) and Constellation Energy (CEP), managed to secure financing for their capital expenditures. BreitBurn just settled legal actions which will allow them to pay a distribution in Q2 at an annual rate of $1.50. Constellation reports next week, hopefully it will be encouraging.

Operations gave more of a mixed picture. Much of MLP growth is from expansion of pipelines and building new pipelines. There was little mention of how much organic (internal) growth contributed versus how much was attributable to investments which came on stream in 2009.

Also, MLPs have a history of raising distributions even when earnings decline. That can be justified because distributions are paid from distributable cash flow, not earnings. But that is not given enough attention to properly communicate justification for higher distributions.

In addition, MLPs have a bias for increasing distributions to raise unit prices so that they receive more money when selling units to the public.

The bottom line is that the main business for MLPs is operations; for most that means pumping more oil and gas through their pipelines. Business continued but it's difficult to measure "real" growth. Some used the word challenging to describe business last year. Their other main business is to attract investment capital so they can continue with expansion programs. That went well at a time when many, many businesses were begging for investment capital.

2010 started well for MLPs. This year looks like it will be similar to many previous years. Gains will come from distributions and maybe modest investment gains (if there are any after a spectacular 2009).

Disclosure: No positions