By and large, however, the group has passed with flying colors: The vast majority of MLPs have continued to boost their distributions despite the downturn.

Of the 48 companies in the industry benchmark Alerian MLP Index, only three have cut their payouts over the past year, as detailed in the table below.

Even better, 37 stocks in the index have boosted distributions over the past year, and 20 hiked payouts in the second quarter. Among MLPs increasing their distributions for the quarter, the average boost is 2.2 percent; partnerships increasing their payouts over the past 12 months hiked distributions by an average of 7.3 percent.

These statistics highlight the basic investment case for MLPs. The group offers both high, tax-advantaged yields and the potential for significant distribution growth over time.

This consistent performance and income growth hasn’t gone unnoticed: The Alerian MLP Index has rallied more than 47 percent since the end of 2008, trouncing the S&P 500 over the same time period by a margin of nearly 5-to-1.

And as the chart below shows, MLPs have also handily outperformed other popular income-oriented groups such as high-yield bonds and real estate investment trusts (REITs).

Source: Bloomberg

But despite that impressive rally, the MLP group remains historically inexpensive, and opportunities abound. One of the more common measures of valuations for MLPs is to compare the yield on the Alerian MLP Index to the yield on a 10-year US government bond.

When the Alerian MLP Index offers a high yield relative to bonds that indicates the index is relatively inexpensive. High spreads have typically marked attractive buying opportunities for the group.

Historically, the Alerian MLP Index has offered a yield between 1 and 3 percent above the yield on the 10-year bond. But check out the chart of this yield spread over the past three years:

Source: Bloomberg

During the height of the credit boom in mid-2007, the Alerian MLP Index soared and the spread to Treasuries dropped to record-low levels near 0.5 percent. In 2006 and 2007, MLPs benefited from cheap, easy credit; partnerships often use debt to fund their expansion and easy access to debt means the group has a low cost of capital.

But during the credit crunch last year, the spread soared to record highs of close to 10 percent over Treasuries. While most MLPs maintained their distributions through the crunch, investors sold off the group aggressively alongside most other stocks.  Meanwhile, the yield on US government bonds collapsed as investors abandoned stocks and ran for the relative safe haven of government bonds.

As the Alerian MLP Index has rallied this year, the yield on the index has fallen. Meanwhile, the yield on the 10-year bond has moved off its lows–the spread has shrunk from its highs near 10 to around 4.5 to 5 percent more recently.

Although this is a big move, the Alerian MLP Index continues to offer a spread to treasuries that is two to three times the historic average.

In other words, MLPs have seen a significant rally, but the index has rallied from extraordinarily depressed levels in late 2008. Despite the sharp move off the lows, there’s plenty of room on the upside.

The Nitty Gritty

Four recommendations in the MLP Profits Portfolios have already reported earnings and hosted quarterly conference calls so far this season: Enterprise Products Partners (NYSE: EPD), Kinder Morgan Energy Partners (NYSE: KMP), Sunoco Logistics Partners (NYSE: SXL) and Navios Maritime Partners (NYSE: NMM).

Enterprise Products Partners raised its quarterly distribution to USD1.28 per unit on an annualized basis, up around 6 percent over the same quarter one year ago.

With MLPs, the most relevant metric isn’t earnings but distributable cash flow (DCF). Standard earnings measures include a number of non-cash charges such as depreciation.

Because most MLPs own depreciable assets such as pipelines, these non-cash depreciation charges can be significant but are simply an accounting construct and don’t actually mean that Enterprise pays out cash.

In fact, depreciation charges are actually a benefit form investors in MLPs because these accounting charges reduce tax liability.

DCF is simply a measure that strips out non-cash charges to provide a truer picture of how much cash a particular company has available to pay out in a given quarter. In this case, Enterprise generated $328 million in the quarter, enough to cover its higher quarterly distribution by around 1.1 times, considered healthy coverage for an MLP.

And Enterprise took a total of $16 million in one-off charges that impacted DCF. The list includes ongoing charges related to last years hurricanes and charges related to its upcoming planned purchase of TEPPCO Partners (NYSE: TPP). Excluding these one-off effects, DCF coverage would have been even higher.

Enterprise’s business remained firm across the board. The company reported record volumes of natural gas flowing through its pipelines; because fees are based on volumes, not the value of the gas transported, this represents upside for Enterprise.

As we noted in the July 16, 2009 Aggressive MLP Spotlight article Gathering Yields, the company does have some exposure to the volatile gathering and processing (G&P) business. But unlike some of the smaller pure-play G&P MLPs, Enterprise’s diversified business model makes it resilient in the face of volatile commodity prices.

Compared to the second quarter of 2008, Enterprise believes lower natural gas prices hit its G&P revenues by a total of about USD50 million in revenues. That’s not much of an impact when you consider that gas was trading near record highs in the second quarter of 2008 and has collapsed to multi-year lows in the most recent quarter.

Conservative Portfolio holding Enterprise Products Partners remains a buy.

Fellow Conservative holding Kinder Morgan Energy Partners reported quarterly DCF of USD0.99 and reported a distribution of USD1.05.

Unlike Enterprise, the company didn’t fully cover its distribution this quarter. However, as we explained in the May 22, 2009 article Safety First, this shortfall was totally expected.

And the company remains on track to generate enough DCF to cover its distributions of USD4.20 planned for the full fiscal year. In fact, when asked about how the MLP was tracking compared to its annual targets, management indicated increasing confidence in its ability to more than cover its full-year distribution.

Next year–when Kinder plans to bring new pipelines and other organic growth projects into service and begins to generate fee revenue from them–there’s significant room for upside to distributions.

The only segment of Kinder’s business that has any significant exposure to commodity prices is its carbon dioxide (CO₂) pipeline business; the company pumps CO₂ into mature oilfields to help generate increased production. Some of the fees generated by Kinder’s CO₂ business are related to oil prices. Although much of this exposure is hedged, Kinder does have some uncovered production.

But with oil prices rallying in the second quarter, prices are now at or above Kinder’s assumptions at the beginning of the year. This commodity-price headwind may actually be turning into a tailwind for Kinder.

Conservative Portfolio member Kinder Morgan Energy Partners remains a buy.

Conservative Portfolio holding Sunoco Logistics Partners reported largely stronger-than-expected quarterly results. The company’s DCF was sufficient to cover distributions about 1.7 times, among the highest coverage ratios of any MLP.

Sunoco Logistics owns refined products pipelines used to transport gasoline, diesel and jet fuel from oil refineries and is paid a fee based on volumes transported. Clearly, volumes of all of these refined products are lower than they were one year ago thanks to weak economic activity and falling demand for oil products.

But this isn’t really a problem for Sunoco Logistics. First, its pipelines are located in regions where volumes haven’t fallen off as much as for the nation as a whole. And second, the MLP is boosting the fees it charges by enough to more than compensate for the decline in volumes. In fact, Sunoco Logistics’ latest tariff increase of 7.5 percent took effect July 1.

In addition, some of its businesses benefit from contango in the crude oil futures market, a condition where long-term oil futures trade at a significant premium to near-month futures. Suffice to say that contango encourages companies to store crude oil and Sunoco Logistics charges fees related to the storage of oil volumes.

One of the steadiest MLPs you’ll encounter, Sunoco Logistics Partners is a buy.

Aggressive Portfolio Holding Navios Maritime Partners released better-than-expected results this week. The company covered its distribution of USD0.40 for the quarter by 1.18 times.

As explained at length in the June 18, 2009 article Maritime Rules, Navios Maritime has 100 percent of its revenues locked in under long-term contracts for this year and next. That means it’s not really exposed to volatile swings in rates associated with dry bulk ships near term.

In addition, Navios reported an up-tick in interest for its ships driven by a resurgence of economic activity, particularly in developing countries. Buy Navios Maritime Partners.