In the short term, raising capital via new unit issuance, can act as a drag on performance because issuing new units dilutes the stakes of existing holders.

But we maintain that these new unit issues bode well for the sector, especially when MLPs use the proceeds to fund new acquisitions and organic expansion projects that generate additional distributable cash flow and set the table for higher distributions.

Several of our favorite names are already putting the some of the cash they’ve raised to good use. Here’s a rundown of some of the recent acquisitions and expansion projects announced by three of our Growth Portfolio Holdings.

Inergy LP (NSDQ: NRGY) was the first recommendation in the MLP Profits Growth Portfolio to report fourth-quarter results. The propane MLP announced its 32nd consecutive quarterly distribution increase, a 6 percent bump to $0.685 per unit–up from $0.645 one year ago.

Inergy’s existing operations continue to perform, plus the MLP has made several bolt-on acquisitions and embarked on a handful of expansion projects that will continue to support distribution growth.

Inergy generates cash flow from two business lines: propane distribution and midstream natural gas operations. The company’s propane business serves residential, commercial and industrial consumers, but the residential consumer accounts for around 70 percent of the segment’s sales. Propane is primarily used for heating homes and water so demand is seasonal; close to three-quarters of Inergy’s propane sales occur from October to March.

Inergy and other propane distributors typically procure propane supplies on the wholesale market; propane is produced from the processing of natural gas and the refining of crude oil. The partnership then transports that propane to individual customers, selling it for the wholesale price plus a per gallon retail markup. Since the markup is relatively stable over time, Inergy doesn’t take on much commodity price risk. When propane prices rise at the wholesale levels, Inergy simply raises retail prices to pass along those costs.

One key driver of propane demand is, of course, the weather. Propane volumes sold declined slightly in the fourth quarter of 2009, as the weather was slightly milder than in the preceding year. However, during the fourth-quarter conference call, management stated that cold weather was driving higher year-over-year volumes in early 2010, a trend that should continue given the recent spate of bitter-cold temperatures across much of the US. 

Inergy’s residential focus is a major advantage. Residential heating demand is far more stable than demand for propane in industrial and commercial applications. And the residential business is sticky; Inergy supplies tanks to 90 percent of its customers making it difficult and expensive to switch providers.

Inergy has traditionally grown its propane business via acquisitions. As much as 60 percent of the US propane distribution business is still controlled by relatively small firms that lack the scale and cost advantages Inergy enjoys.

In late January, Inergy announced it was selling 5 million units plus an additional 750,000 as part of an over-allotment option, raising nearly $200 million after fees. As is typical, the MLP’s units sold off after the offering was announced. However, the share sale is a major positive for Inergy over the long term; the partnership using the proceeds to fund a series of acquisitions that will generate new sources of distributable cash flow.

Recent examples include the purchase of Liberty Propane and MGS Corporation. The former, acquired for $223 million, was the ninth-largest propane distributor in the US, serving roughly 100,000 customers, while MGS is a smaller player focused in New Jersey and New York that serves 6,000 customers. Although the integration of these businesses into Intergy’s existing operations continues, management noted that both acquisitions are performing well so far this year.

Inergy’s natural gas midstream business consists of three natural gas storage facilities that boast a combined capacity of close to 40 billion cubic feet of gas. The MLP’s gas storage business is backed 100 percent by long-term, fee-based contracts that insulate revenues from commodity price risk and shifts in economic conditions.

All of Inergy’s natural gas storage facilities are strategically located near the Marcellus Shale, one of the hottest unconventional natural gas fields in the US. As development in the Marcellus accelerates, demand for storage and pipeline infrastructure will increase in tandem. Inergy is well-placed to benefit via bolt-on acquisitions and organic expansion projects.

For example, in early January, the firm announced the acquisition of the Seneca Lake gas storage facility and two related pipelines in New York for $65 million from the New York State Electric and Gas Corporation. This facility has a capacity of 2 billion cubic feet (bcf) is located near Inergy’s US Salt Gas Storage development, a salt cavern the MLP plans to transform into a gas storage facility with a capacity of 5 to 10 bcf.

Inergy also plans to build out its natural gas liquids (NGLs) business to handle NGLs produced alongside gas in the Marcellus Shale. And the MLP has proposed a series of pipelines that would connect its storage assets in New York with other pipeline and processing facilities. 

As we explained in the July 31, 2009, issue of MLP Profits, MLPs Earning Their Keep, and in the Feb. 8, 2010, issue, Questions and Answers, investors should ignore the headline earnings number and focus on distributable cash flow (DCF) when evaluating an MLP’s fundamentals. Standard earnings figures include significant non-cash expenses, such as depreciation, which have no bearing whatsoever on an MLP’s ability to pay and grow its distributions over time.

In the final three months of 2009, Inergy generated $83.9 million in distributable cash flow. That’s enough to cover its quarterly payout roughly 1.5 times after paying incentive distribution fees to its general partner. The propane business is seasonal, so this likely overstates full-year coverage somewhat; however, in its most recent fiscal year ended Sept. 30, 2009, Inergy covered its payout better than 1.1 times, a solid coverage ratio for an MLP. Buy Inergy under 37. 

In late January, DCP Midstream Partners (NYSE: DPM) announced plans to acquire an interstate natural gas liquids (NGLs) pipeline from Buckeye Partners (NYSE: BPL) for $22 million in cash. The pipeline is 350 miles long and connects wells and gas processing facilities in Colorado to the Conway gas hub in Kansas.

DCP Midstream Partner’s general partner (GP) is controlled by DCP Midstream, LLC, a joint venture between Spectra Energy (NYSE: SE) and ConocoPhillips (NYSE: COP).  The GP currently uses the pipeline to transport NGLs from its processing facilities in the Rockies and, as part of this deal, has signed a 10-year transportation agreement with DCP Midstream Partners. This guarantees the MLP steady fee-based revenues from the pipeline

Buy DCP Midstream Partners dips below 28.

Energy Transfer Partners (NYSE: ETP) announced a deal to acquire a series of midstream natural gas midstream operations in the Haynesville Shale region of Louisiana and East Texas. These assets include a 120-mile gas gathering system and natural gas treatment facilities.

This is an exciting acquisition for two reasons. First, the economics of the Haynesville Shale are among the best of any of the major US natural gas shale plays currently under development. Even as operators have scaled back drilling activity in more expensive-to-produce unconventional fields such as the Barnett Shale, more rigs have been deployed in Louisiana. Gas production from Louisiana has risen for 11 consecutive months–even as total US gas production faltered due to uneconomic commodity prices.

Rapid development of the Haynesville shale spells the need for more natural gas storage, processing and gathering infrastructure. Energy Transfer’s new acquisition is well placed to take advantage of this growth.

More important, Energy Transfer Partners is currently building the Tiger Pipeline, a 180-mile long gas pipeline that will transport gas out of the Haynesville. That line is due to begin operations in 2011 and is already backed by long-term, fee-based arrangements with producers. In fact, there is so much interest in Tiger that Energy Transfer Partners recently announced its intention to expand the planned capacity; any additional capacity would likely be backed by long-term capacity reservation deals that guarantee fee-based revenues.

It makes perfect sense for Energy Transfer to acquire assets in the Haynesville to integrate into its Tiger system. Buy Energy Transfer under 45.