Wednesday, July 8, 2009

Master Limited Partnerships

Master Limited Partnerships (MLP) are companies that pay out all of their earnings in dividends. With this corporate structure they avoid paying taxes. In that respect they are somewhat similar to real estate investment trusts (REIT) which also pay out all of their earnings in dividends. Because of this the dividends under current tax law are taxed not at the reduced dividend tax rate but at the full tax rate. That is a very important consideration to keep in mind for both for for MLP and REIT. One of the consequences of this is that investments both in MLP and REIT are more suitable currently for tax deferred accounts rather than for taxable accounts. They are more suitable in both a traditional IRA and a Roth IRA as are also taxable bonds.

Most but not all MLP are pipeline companies. There are also a few propane companies, coal companies, and marine transport companies. In certain instances one can buy shares in either the Limited Partnership or the General Partner. The Limited Partnership pays in many cases an incentive to the general partner that increases with increased distributions reaching about 50% of the distribution amount at a certain point. In other words there generally becomes a point where the general partner takes home half the distributions.

Since limited partnerships pay out all of their income one thing to take note is that in order to build capital projects they rely on borrowed money. Consequently, many have very high debt to equity ratios. In other words some are very highly leveraged.

There are somewhere in the neighborhood of about 80 publicly traded MLP and their general partners which also qualify as limited partnerships themselves.

Since this blog format does not allow publishing data in columnar format, I am limited in that data that I can publish in an understandable manner. I will describe two of the MLP so the reader can become familiar with these investments.

The largest two MLP are Enterprise Product Partners LP ticker EPD with a market cap of about $11 billion and Kinder Morgan Energy Partners LP ticker KMP with a market cap of about $10 billion. In other words most are mid cap companies and some are small cap companies. The median market cap of the pipeline segment is a little less than $3 billion so indeed the average MLP is a small cap company.

EPD operates over 30,000 miles of natural gas, oil, and petrochemical pipelines. In additon they have natural gas processing plants and natural gas storage facilities. They have $18.4 billion in assets and $9.3 billion in debt or about 52% of capitalization. Their revenue is about $20 billion. The current dividend is $2.15 pershare or about 8.6% based on the current stock price of $24.85. The current PE ratio is about 14.2. During the past 10 years the company has increased the dividend annually at a rate of about 8%. EPS however have not increased at so steady a rate although over that period they did increase at about 9% annually. To be noted is that EPD has grown significantly due to acquistions. Their most significant being a $6 billion merger with GulfTerra in 2004. The company has a DRIP plan with a 5% stock discount which is also available through broker held shares.

KMP operates about 24,000 miles of natural gas pipelines also natural gas processing plants and storage facilities. They have $17.5 billion in assets and $10+ billion in debt or about 57% of capitalization. Their revenue is about $10.8 billion. The current dividend is $4.20 or about 8.3% based on the current stock price of $50.75. The current PE ratio is about 31. During the past 10 years the company has increased the dividend annually at a rate of about 12.4% but recently the dividend increase has been at a more modest rate of 8%. EPS has not had so great an increase over that time increasing only 4% annually. Cash flow has however increased more significantly growing at 14% annually.

Other notable pipeline MLP and general partners are BWP, BGH, CPNO, ETE, EPE, EPD, MGG, MMP, NS, OKS, PAA, SXL, TPP and WPZ. Among coal are ARLP, NRP, PVR. Among marine transport are CPLP, NMM, OSP, KSP, TOO, TGP. Among propane are APU, FGP, NRGY, SPH.

If you should choose to invest in a MLP, check carefully their debt load and their track record.

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