On average, the year-over-year increase in distributions amounts to more than 5 percent, and based on guidance from most of our favorites, distribution growth should accelerate in 2011. Stable credit markets enable energy-focused MLPs to grow through new organic expansion projects and acquisitions. In addition, a general recovery in economic conditions has increased the volumes of oil, natural gas and natural gas liquids (NGL) transported.

In the past two issues of MLP Profits, we’ve covered quarterly results from six MLPs. Here’s a rundown of six more.

Magellan Midstream Partners LP

Refined products pipeline and terminals operator Magellan Midstream Partners LP (NYSE: MMP) reported near-record distributable cash flow (DCF) of $100.7 million, enough to cover its recently raised quarterly distribution of $0.7325 per unit roughly 1.29 times. Management also reiterated prior guidance that it plans to increase the total annual distribution by 4 percent in 2010.

Magellan reported several positive developments during the quarter, including a big jump in the volumes transported through its pipelines. Liquids volumes surged 7 percent from a year ago to 4.8 million barrels per day, the highest level since the fourth quarter of 2007. Management attributed much of this grow to an uptick in distillates volumes, primarily diesel fuel.

Pipeline operators don’t make money from the value of the commodities traveling through their networks; tariffs normally consist of minimum fees plus an additional amount related to the volumes of liquids transported. Higher volumes spell higher distributable cash flow for Magellan.

This is a sign that US energy demand continues to recover. Diesel is a key transportation fuel, used in both trucks and trains; higher volumes suggest an uptick in demand for freight transportation–a broad positive for the US economy. Magellan’s results also back up freight data from the Association of American Railroads and weekly statistics from the Energy Information Administration regarding oil demand.

A 7.6 percent tariff increase that went into effect on July 1, 2009, also boosted year-over-year results; in its most recent quarter, Magellan enjoyed the full benefit of that tariff hike, but in the year-ago quarter the MLP received at a lower tariff rate.

The MLP’s terminal business also reported strong results, and management echoed the positive comments made by other operators, including Conservative Portfolio recommendations Sunoco Logistics Partners LP (NYSE: SXL) and Kinder Morgan Energy Partners LP (NYSE: KMP). Several long-term contracts came up for renewal at its marine terminals in Texas and Connecticut, enabling Magellan to hike rakes on the new deals. The company also added an incremental 700,000 barrels of marine terminals capacity over the course of the past year, primarily through acquisitions.

Magellan’s inland terminals business benefited from higher throughput of gasoline and other refined products–another sign of rising demand–coupled with an uptick in revenues related to ethanol blending. Ethanol blending is becoming an increasingly important business for MLPs with exposure to refining; the US has boosted blending requirements for the biofuel.

A solid slate of new projects should enable Magellan to accelerate distribution growth starting in 2011. As we noted in the July 20 issue of MLP Profits, Why Energy-Focused MLPs are Still a Buy, Magellan took advantage of BP’s (NYSE: BP) travails to purchase oil storage and pipeline assets for $289 million. The deal, which should close on or around Sept. 1, made Magellan one of the largest holders of storage capacity at the key Cushing, Okla. hub virtually overnight.

Most impressive of all, Magellan raised cash to fund the deal through a 5.75 million secondary offering of new units. Although the stock traded slightly lower after the announcement, the units rallied to new highs within five trading days, a sign of strong investor demand.

Magellan has also announced a 50-50 joint venture with an unnamed partner to build an additional 800,000 barrels of refined product storage capacity at its facility in Galena Park, Texas. In addition, the MLP plans to build another 700,000 barrels of capacity at the same facility without a partner. Total capital spending on Magellan’s part is expected to be $65 million, and the tanks will be put into service starting in late 2012.

Finally, the Longhorn Pipeline is a 700-mile pipeline designed to carry refined products from the Houston area to El Paso. The pipeline and some related terminal assets were part of a private firm that went bankrupt during the 2008-09 recession; Magellan purchased the assets at auction. At present, Magellan estimates that the terminal will operate at 29 percent of total capacity this year because demand for refined products transport from east to west Texas is weak.

But management has proposed reversing a segment of the pipeline to transport oil from west Texas to its existing facilities near Houston. On paper, this makes a lot of sense as oil production in West Texas is picking up, along with demand for transportation out of the area.

In addition, management is examining a potential interconnection between the Longhorn Pipeline and the Eagle Ford Shale gathering system. The Eagle Ford is one of the most exciting unconventional plays in the US and produces a combination of oil, natural gas liquids (NGLs) and natural gas. With oil production from that region also picking up, Longhorn could also be a useful outlet for outfits looking to ship their output east.

Magellan is conducting an open season–a way of gauging interest from shippers–for Longhorn that’s scheduled to end Sept. 15. If the company decides to go ahead with the plan, Longhorn could go from being a marginal asset to a valuable part of Magellan’s growth portfolio. The project would take about 18 months to complete, and management has emphasized that it would only pursue the deal if it were able to generate a positive return in terms of distributable cash flow.

With strong distribution coverage and plenty of avenues for distribution growth, Magellan rates a buy under 47 in our Conservative Portfolio. The stock trades slightly above this target, so we recommend buying it on dips. Nonetheless, a successful open season for Longhorn might be enough for us to hike our target later on this year.

Spectra Energy Partners LP

Fellow Conservative Portfolio holding Spectra Energy Partners LP (NYSE: SEP) reported DCF of $33.4 million for the quarter, equivalent to $0.41 per limited-partner (LP) unit. In July Spectra Energy Partners boosted its quarterly distribution to $0.43 per LP unit; after we adjust for the general partner’s (GP) incentive distribution rights, the partnership covered that distribution by a little over 0.9 times.

That being said, Spectra Energy Partners’ DCF is $89.1 million on the year, enough to cover its total distributions for 2010 by a comfortable margin of more than 1.2 times. And management stuck with its guidance for full-year DCF of $175 million, enough to allow the MLP to boost its payout in the back half of 2010 and maintain solid distribution coverage.

Although we always scrutinize names that fail to cover their quarterly payout, the MLP’s issues are temporary in nature and don’t reflect underlying business conditions. Specifically, the interest expenses for debt related to the outfit’s Gulfstream and East Tennessee Natural Gas systems are due in the second and fourth quarters of the year. Because the partnership includes interest expenses in its DCF calculation, second- and fourth-quarter numbers are artificially depressed.

Spectra Energy Partners is involved in a number of growth projects, including natural expansions at Moss Bluff and Egan storage facilities. Management expects the Mount Bluff project to be completed in the second half of 2011, and the Egan expansion to come online in the second half of 2010.

Also in the works is another expansion of the MLP’s Gulfstream natural gas system that transports gas from Mississippi and Alabama to Florida, along with a massive build-out of its Northeastern Tennessee natural gas system. Both projects should be finished in the back half of 2011.

Although Spectra Energy Partners’ existing projects alone should enable the MLP to boost its payout, its general partner, Spectra Energy Corp (NYSE: SE), owns a number of assets that would be suitable for drop-down transactions. In such a deal, the general partner sells assets to the limited partner, typically at a price that makes the transaction immediately accretive to cash flows and allows for further distribution growth. And with its strong unit price and access to credit markets, Spectra Energy Partners also has the scope to make acquisitions from third parties as it did when it purchased the Ozark Gas Transmission system last year.

Spectra Energy Partners boasts solid business and growth prospects and enjoys the support of a strong general partner; however, the stock yields just 5 percent these days, among the lowest of any MLP in our coverage universe. We rate Spectra Energy Partners LP a hold until its valuation becomes more compelling.

Legacy Reserves LP

Up well over 30 percent, Aggressive Portfolio holding Legacy Reserves LP (NasdaqGS: LGCY) has been among our best-performing recommendations this year. The company’s solid showing in the second quarter validated investors’ enthusiasm.

Legacy generated DCF of $0.58 and paid out a total distribution of $0.52, covering its payout by a comfortable 1.12 times. The MLP’s total production in the second quarter stood at the equivalent of 9,516 barrels of oil per day, up 8.6 percent from the first quarter. Crude oil accounts for most of the company’s output.

The partnership traditionally has growth through acquisitions; this year the outfit has closed 11 deals worth a total of $157 million. In the largest of these transactions, Legacy bought 13 oilfields in Wyoming from St. Mary’s Land & Exploration (NYSE: SM) for $125 million. The remaining acquisitions have primarily been small bolt-on deals for oil-producing properties in Legacy’s core region, the Permian Basin of west Texas.

During the conference call, management commented that deal flow should remain robust through year-end. In many cases, sellers are eager to close transactions before the end of 2010 to avoid higher tax rates after Jan. 1. Moreover, last year many sellers were reluctant to part with assets until crude oil prices recovered; no seller wants to conduct a fire sale. But with oil prices trading at much healthier levels, sellers are more willing to entertain offers.

In terms of organic growth, management noted that it plans to spend about two-thirds of its $31 million 2010 capital spending budget in the third and fourth quarters, likely on workovers of existing wells and sinking new wells in existing fields. These expenditures prompted management to advise investors that it might not cover its fourth-quarter distribution in full. However, management expects these organic drilling projects to increase production heading into 2011.

And Legacy’s hedges covering 2011 production are generally more favorable than those in 2010, boosting per barrel realizations. Management expects distribution coverage to be superior in 2011.

Legacy’s rising operating costs are a long-term concern. Drilling expenses, especially for projects targeting oil, have increased this year because of attractive oil and NGL prices and strong demand for rigs and related services. Management expects these costs to creep higher if commodity prices remain near current levels. But increased costs aren’t insurmountable, and Legacy enjoys solid profit margins on the sort of low-risk wells it plans to drill. If prices continue to rise, higher realizations should help offset the impact.

The stock has enjoyed quite a run over the past few months, reducing the yield to 8.4 percent. But late this year or early in 2011, Legacy should be able to boost its payout–the odds increase if management closes another large acquisition before year-end. Aggressive Portfolio holding Legacy Reserves LP is a buy under 25.

Targa Resources Partners LP

Growth Portfolio holding Targa Resources Partners LP (NYSE: NGLS) generated DCF of $55.2 million in the second quarter, enough to cover its $0.5275 per unit distribution 1.4 times. Management signaled confidence in the sustainability of its cash flows, raising the distribution by a full cent for the second quarter, the first time the MLP has hiked its payout since May 2008.

Targa has the most direct leverage to natural gas liquids of any partnership in our coverage universe; we explained NGLs and Targa’s business at great length in the March 15 issue, MLPs and Natural Gas Liquids.

The company’s upstream business consists primarily of gathering and processing, the collection of natural gas from individual wells and the removal of NGLs from the natural gas stream at processing plants. Gas volumes traveling through Targa’s upstream assets were strong in the second quarter, led by a sequential 7 percent jump in throughput at the MLP’s San Angelo Operating Unit (SAOU), a system of 1,500 miles of pipelines and three processing plants in west Texas.

Management cited strong demand for new well connects at SAOU, a sign of rising drilling activity in west Texas, particularly in the Permian Basin. Management expects these trends would continue well into 2011; conversations with drillers suggest a further ramp-up in production from acreage that relies on Targa’s systems.

The Permian Basin is a region best-known for oil production rather than natural gas. However, oil produced in the region does contain associated natural gas–crude dissolved in natural gas–and some plays contain gas that includes a large amount of NGLs and condensate.

Because drilling in this region hinges on oil prices, management expects activity to remain robust. Meanwhile, producers in the region need to separate the associated gas and NGLs from the oil produced; demand for Targa’s assets rises alongside oil drilling activity.

The company also operates gathering systems and processing plants that handle production from offshore wells in the Gulf of Mexico. In this segment, volumes were also strong, up 12 percent from a year ago; last year the lingering impacts of Hurricanes Ike and Gustav weighed on results.  Also worth noting: Targa’s management stated that the oil spill in the Gulf of Mexico has not and should not affect its operations.

Although volumes of gas and NGLs passing through Targa’s systems remain robust, the MLP is also exposed to processing profit margins; most of its contracts are so-called percent of proceeds (POP) deals. In POP contracts, producer and processor agree on how to divvy up total proceeds of NGLs and gas.

There was a slight sequential decline in second quarter operating margins because of a slight decline in oil, condensate and NGL prices relative to the first quarter of 2010. Check out the graph below for a closer look.

Source: Bloomberg

We’ve used this data before to illustrate the relative value of oil and natural gas liquids. The prices of oil and NGLs tend to track one another over the long-term, though prices do diverge sometimes.

Some investors feared that the two commodities had decoupled this year; NGL prices have declined over the past few months, while oil has traded sideways. But NGL prices hit a low of around $39 a barrel in early July and have rallied more than 10 percent. In fact, NGL prices have actually outperformed crude since late June, a good sign for margins in the third quarter.

Regardless of the path of commodity prices, Targa has significant hedges in place to shelter it from near-term volatility; this year about 80 percent of its natural gas exposure and 70 percent of its exposure to NGLs and condensate is hedged. For 2011, hedges cover 70 percent of gas and 60 percent of condensate and oil price exposure. Only a major shift in pricing would imperil Targa’s cash flows.

Targa’s downstream businesses are organized into two segments: Logistics Assets and Marketing and Distribution. The former consists primarily of the company’s fractionation operations, the process of dividing a barrel of NGLs into its constituent components. The latter focuses on selling NGLs under long-term contracts to petrochemical plants and other customers.

Fractionation volumes were roughly flat year over year, though margins were lower in the downstream segment. The latter weakness stems primarily from the timing of proceeds from a business interruption service claim as well as a heavier maintenance schedule in the second quarter of 2010.  The overall business remains solid and is driven by fee-based contracts.

Targa continues to announce new deals that set the stage for future acquisition growth. The latest is the acquisition of a 63 percent interest in the Versado Gas Processing facility located in west Texas for $230 million. The deal is a drop down from its general partner, privately held Targa Resources, and should be immediately accretive to cash flows. Based on strong results at the partnership’s existing processing plants, the acquisition should generate value for unitholders. We also like that Targa’s partner in the joint venture is Chevron (NYSE: CVX), a financially sound big oil company.

To fund this deal, Targa has announced a secondary offering of 6.5 million common units and a $250 million bond offering. Don’t be surprised if Targa’s units sell off in the immediate wake of this secondary offering; such a knee-jerk reaction is typical because new units dilute existing holders’ stakes in the near term.

However, it makes sense for Targa to raise capital at this time. Debt markets are strong again, and most MLPs selling bonds have managed to secure attractive rates. And with the stock not far off its 52-week highs and strong demand for MLPs, the partnership should be able to sell additional units without a hitch.

Moreover, the sale isn’t dilutive over the long term; Targa will use the cash to buy new assets that generate DCF that it can use to hike distributions. All of our recommended MLPs that have sold units in a secondary offering have traded back above their pre-offering price, often within just a week or two. We’d recommend using any short-term dip in Targa Resources Partners LP as an opportunity to buy the MLP at an attractive price and earn an above-average yield.

Encore Energy Partners LP

Aggressive Portfolio holding Encore Energy Partners LP (NYSE: ENP) covered its quarterly distribution of $0.50 per unit by just less than 1.1 times, a healthy coverage ratio for an upstream MLP. Second-quarter production amounted 8,841 barrels of oil equivalent per day, roughly 70 percent of which was crude oil. Overall production was down, 2.2 percent in the quarter though natural gas accounted for most of this decline.

On June 14 the company’s lenders reaffirmed Encore’s borrowing base credit facility of $375 million, leaving the MLP with about $130 million in undrawn credit.

But operational results aren’t the main focus right now. The company’s general partner, Denbury Resources (NYSE: DNR), announced at the end of April that it would seek strategic alternatives for Encore. The most likely “alternative” would be the sale of Encore Energy Partners and Denbury’s general partner (GP) interest in the MLP.

There isn’t much to report about these efforts, though Denbury Resources’ management indicated that the deal is progressing more slowly than it had anticipated. Executives at Legacy Reserves LP indicated that they had examined the deal, but the way Denbury envisions the transaction would appeal more to a private-equity firm.

Encore’s properties are attractive, and its coverage ratio is healthy. That being said, it is a higher risk play than our other Aggressive Portfolio holdings because the stock’s near-term performance MLP will be limited until a deal emerges. We believe that a yield in excess of 10 percent compensates investors for the added risk and expect some sort of resolution over the next few months.

Encore Energy Partners LP rates a buy under 19. Do not be tempted to chase this MLP above our buy target.

Finally, Genesis Energy LP (AMEX: GEL) generated available cash before reserves, equivalent to DCF, of $26.1 million and paid out a total of $17.8 million to its limited and general partners. This equates to a coverage ratio of 1.47, leaving the MLP plenty of room to continue boosting its distributions at a slow-but-steady pace.

Management’s tone on the conference call was decidedly upbeat. The company’s Pipeline Transportation division moves both crude oil and carbon dioxide used in tertiary oil recovery via pipeline. Its Supply and Logistics unit handles the transport and storage of crude and refined products, primarily in support of refineries. Both of these divisions benefited from some of the trends we’ve outlined in my discussion of Magellan Midstream Partners.

Specifically, an uptick in refinery utilization and refined product demand increased throughput and volume-based revenues. In addition, some of the oilfields serves by the Pipeline Transportation unit were temporarily shut in when commodity prices were depressed in 2008 and early 2009; with oil prices on the rise, operators are boosting production.

The Refinery Services segment processes sour gas–natural gas with a high sulfur content–to remove sulfur. The MLP produces and sells sodium hydrosulfide, a chemical that the mining industry uses to separate copper from molybdenum. Management emphasized that demand for sodium hydrosulfide is extremely strong right now, driven by growing demand in emerging markets. In addition, several major mining firms, including Brazil’s Vale (NYSE: VALE), plan expansions to meet ongoing demand growth.

Management also noted that hydrogen sulfide volumes sold in the quarter rose to 38,307 dry short tons, up 83 percent over the year-ago period. The record quarterly sales of the chemical were in the mid-40,000 dry short tons; management hinted that it looks to be at least matching the second-quarter pace in the third quarter–this business could approach record volumes soon.

We also see the potential for acquisitions to help boost Genesis’ DCF going forward. The company recently increased the size of its credit line and extended the maturity. And management stated that the outfit could access additional funds at favorable terms if it chose to tap the public debt markets.

During the question and answer session, management gave the normal line, stating that it was always evaluating opportunities for acquisitions but has strict rules in terms of return on investment. But it’s unlikely the company will sit on that unused credit facility forever, particularly with the more cyclical parts of its business improving rapidly. Genesis Energy LP rates a buy on dips under 21.