As a result, propane distribution is basically a utility-like business. Owing to the expense and difficulty of reaching a wide range of dispersed locations, there’s generally no established hardware network to the home. Rather, delivery is more often than not made by truck or other form of mobile transport.

In addition, there’s no reason a region can’t be served by multiple suppliers, as no legal franchises exist. And there are no regulatory bodies, such as those that oversee electric, gas and water utilities, and even telephone companies.

Nonetheless, customers tend to be locked into single supplier, usually by contracts of some sort but more often than not by force of habit. That hasn’t changed despite the growing population of many rural areas. And there’s little sign it will any time soon, though some towns have grown enough to make an in ground, utility-operated natural gas distribution system economic.

This adds up to steady cash flows for propane distributors. The best have been able to grow by acquiring smaller operators and building economies of scale. And that, in turn, spells an ideal model for running high dividend-paying master limited partnerships (MLP).

Two years into one of the worst recessions in US history, the four primary US propane pure-play MLPs are all holding up well. There have been zero distribution cuts, and three of the four have continued to increase their payouts at least once over the past year: AmeriGas Partners (NYSE: APU), Inergy LP (NSDQ: NRGY) and Suburban Propane Partners (NYSE: SPH).

In addition, none of the four have had any problem accessing credit, enabling them to continue growing future cash flows by adding new distribution territory. Finally, all four are also getting a boost from an unexpected quarter: The yawning gap between the price of oil as set by world markets and the price of North American natural gas, which is floundering under hefty inventories and inability to be exported globally.

First, natural gas is the primary element for refining propane. Low gas prices have therefore helped reduce operating costs for propane distributors. To be sure, cost increases and savings are generally passed right through to customers. But all else equal, lower prices make it a lot easier for those customers to use propane.

Meanwhile, higher oil prices mean higher heating oil prices, which make that fuel less competitive than either natural gas in urban areas or propane in rural areas. That’s a strong inducement to either keep using propane or to actually switch to the fuel, which lifts propane distributors’ sales and cash flows.

Propane demand is heavily impacted by one factor well beyond distributor MLPs’ control: weather. A mild winter always brings lower demand, and therefore lower cash flows. And because virtually all cash flow is earned in the cold months, the impact can be quite intense.

Propane MLPs’ managements are well aware of the weather’s make-or-break potential and are constantly at work to cut costs and expand to offset its impact. Managements also generally maintain more conservative financial policies than do MLPs with less weather-affected sources of cash flow, such as the energy pipeline and storage outfits in our MLP Profits Conservative Holdings.

That means holding debt under control but also maintaining higher dividend coverage ratios. AmeriGas, for example, has consistently maintained a distributable cash flow to distributions ratio of at least 1.4-to-1. Distribution growth is consistently low-balled in order to maintain those superior ratios.

Barring another increase this year, both AmeriGas and Suburban Propane will likely exceed 1.6-to-1 in their coverage ratios for full year 2009. That’s a bit above what’s needed and likely means further increases, in addition to the 1.2 percent Suburban just announced this week.

Coverage ratios are a bit lower for Inergy and Ferrellgas Partners (NYSE: FGP), the fourth leading pure play in the propane group. That more than anything else explains why Inergy yields over 9 percent and Ferrellgas–which is also burdened by a higher debt load–pays out more than 11 percent, while both AmeriGas and Suburban dish out at a rate of just 7.6 percent.

As many investors have learned all too well over the past two years–including those buying MLPs–shooting for the highest yield often leads to disaster. You generally do a lot better by sacrificing even several points of yield on the front end in favor of buying an MLP, trust or stock that is actually growing its payout.

That’s never been truer than in the last couple of years, when so many pressures have hit at once. And with the overall economy’s prospects still in doubt, it’s likely to stay true for some time.

How They Rate, for example, lists a number of MLPs that have slashed their distributions recently, simply because those pressures have become too great. And the yield-chasers who bought them are paying the price with lower income and vastly lower share prices as well. Some are even bona fide bankruptcy candidates.

I’ve followed Ferrellgas for many years in Utility Forecaster. During this time, the rapidly growing, Ferrell-family-dominated enterprise has never once cut its distribution.

On the other hand, neither have they increased it from the 50 cents in the MLP’s initial charter, a history that now goes back more than a decade.

In fact, dividend coverage has always been an adventure, and the MLP has spent more time on the UF Dividend Watch List than all but a handful of essential services businesses.

As for the industry’s safest, AmeriGas and Suburban are certainly worthy long-term holdings. AmeriGas enjoys the resolute financial backing of UGI Corp (NYSE: UGI), now an immensely profitable global propane distributor.

Both, however, have broken out to new 52-week highs this month. They’re still well below their mid-2007 highs, and I have little doubt they’ll get back there, as they relentlessly growth their businesses and boost dividends.

As far as a Portfolio addition goes, however, Inergy presents the best combination of reliable growth, high yield and low price. We’re adding it to the Growth Holdings to reflect the greater risks of propane distributors versus fee-based energy pipeline and storage outfits, as well as its lower distribution coverage than either AmeriGas or Suburban.

The shares are up sharply this year. But that’s mainly because they had so much ground to recover after being carried to such an extremely low valuation in last year’s market panic. Units are still down by more than 25 percent from their mid-2007 high and sell for just 80 percent of annual sales, in addition to the 9 percent plus yield that’s been increased every quarter since the MLP’s inception in late 2001.

Inergy’s rebound, however, has also been fueled by a dramatic profit rebound, beginning in its fiscal second quarter and expected to continue going forward. Note the third and fourth quarters are both hot ones, so first and second (ended March 31) essentially determine full year results.

Adjusted cash flow surged 25 percent in the first half of fiscal 2009 to $2.55 per diluted partnership unit. The MLP also raised $300 million in long-term capital for growth, setting the stage for more.

Propane distribution contributed the lion’s share of profits, as lower costs allowed the MLP to offset a drop in retail propane gallon sales to 124.7 million from 138.6 million a year earlier.

Inergy’s burgeoning business in propane related operations swelled to $35.4 million, up 22.5 percent over the past year. These include appliance services, transportation and wholesale operations that are less weather-dependent.

Inergy also has a thriving gas midstream business that saw earnings rise 12.1 percent and further offset the negative impact of mild weather on fiscal second quarter results. These include the low-risk business of natural gas storage, as well as transportation and supply logistics.

Distribution coverage for the 12 months ended March 31 was a basically solid 1.2-to-1. A series of new midstream projects could add to third and fourth quarter cash flows this year, actually causing that number to improve in coming months. One is a liquid propane gas storage facility in New York, gearing up for operation in mid-winter 2010.

The key risk to Inergy’s distribution is from the economy. Same store volumes–i.e., excluding acquisitions–were actually off nearly 10 percent in the fiscal second quarter. Management attributes about 5 to 7 percent from conservation and the rest to the economy, as 25 percent of volumes are sold to commercial sources.

That’s a disturbing trend if it continues. It would severely challenge Inergy’s ability to compensate with growth and cost cutting. On the other hand, management reports some improvement, particularly on the commercial front and the midstream construction is on track, with the US Salt project looking particularly promising. And the MLP’s considerable assets in the Marcellus Shale region are also a big plus, with Pennsylvania “rocking and rolling,” in management’s words.

If you’re looking for the safest of the safe, stick to the Conservative Holdings. But if you’re willing to take on slightly more risk for a higher yield that could go a lot higher in coming years, new Growth Holdings recommendation Inergy LP is a buy up to 32.

Note the next dividend is slated to be declared in the next few days.