General Partners Hold a Winning Hand

Last week we held the monthly joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits. The chat is conducted by Igor Greenwald, who is managing editor for TES and chief investment strategist for MLP Profits, and myself.

We got to most of the questions during this session, but there were a few that required an extended answer, or a bit more research. Of the remaining questions, there were about twice as many specific to MLPs versus those that pertained to conventional energy sector corporations. Below I will address most of the remaining MLP questions from the chat. For questions that weren’t MLP-specific, see this week’s issue of The Energy Letter.

Q: Are the general partner units always the best to hold for long term gains and MLP units for current income?

This question really piqued my interest. Intuitively, I felt like it was probably true, but I didn’t want to answer the question until I could dig into it a bit more. I thought it would be interesting to have a look at the historical performance of a few publicly-traded general partners versus their limited partner to find out if that hypothesis is supported.

Consider Kinder Morgan Energy Partners (NYSE: KMP) and its general partner Kinder Morgan  (NYSE: KMI). Over the past year, KMI did indeed outperform KMP, but if we track performance back to the IPO of KMI on Feb. 10, 2011 — KMP outperformed KMI during significant time periods. But both generally tracked each other quite closely in terms of returns.


Next consider Energy Transfer Partners (NYSE: ETP) and Energy Transfer Equity (NYSE: ETE), which owns the general partner and went public in 2006. ETE has significantly outperformed ETP since its IPO, particularly over the past four years:

But it is important to note that ETE also has interests in Sunoco Logistics Partners (NYSE: SXL) and Regency Energy Partners (NYSE: RGP).

Finally, consider NuStar Energy (NYSE: NS) and its general partner NuStar GP Holdings (NYSE: NSH). Like ETE, NSH went public in 2006 and has also significantly outperformed its limited partner since:

5 Best Medical Stocks To Buy For 2014

The vast majority of partnerships don’t have a publicly-traded GP. But in each of these three cases in which the GP is publicly traded, the GP tends to outperform the LP units on long-term gains, an advantage somewhat offset by the typically higher LP yield.

General partners tend to benefit in the long run from incentive distribution rights due from the partnership they manage, which entitle them over time to a rising proportion of the affiliate’s cash flow as it grows, and also, notably, every time the affiliate issues equity

However, there are time periods in all three cases where the LP outperformed on capital appreciation, so your mileage may vary. It will certainly vary with the particulars of the incentive distribution rights, the growth rate and the GP’s other interests.

Q: Is there any tax reason to not hold MLPs in private foundations?

There are additional tax reporting rules for MLPs in private foundations and IRA accounts. Some financial advisors recommend avoiding direct ownership of MLPs in these types of accounts, and instead purchasing an investment vehicle that owns MLPs, or an MLP that has chosen to be taxed as a corporation, in order to avoid the extra tax hassle. If I were seriously considering buying an MLP for a private foundation, I would first consult a tax attorney or a good CPA with experience in these issues.

Q: What are your thoughts on APU?

AmeriGas Partners (NYSE: APU) is the country’s largest retail propane marketer, serving some 2 million customers in all 50 states from approximately 2,100 distribution locations. Units initially dropped about 6 percent last week when an affiliate of Energy Transfer Partners announced a public offering of the 8 million AmeriGas common units that it currently holds. The units yield 7.9 percent, and AmerGas has done a good job of growing distributions over time. The biggest concern is that demand for propane had declined before the recent upswing due to increasing efficiency in buildings and appliances, as well as from customers switching to competing fuels like natural gas. This has led to inconsistent distributable cash flow (DCF), and in 2012 the partnership experienced a shortfall in its distribution coverage.

AmeriGas Partners distribution metrics. Source: APU Investor Presentation.

Nevertheless, the partnership’s growing distribution per unit has been impressive, and company guidance indicates another solid year after a good 2013. The market has been lukewarm toward AmeriGas, as its yield indicates, on perceptions of declining market share and weak propane prices. But propane prices have rebounded in recent months on stronger agricultural and export demand, while APU continues to deliver as promised. The units look very tempting at the current price and yield.

Q: Please comment on Legacy Reserves. It seems to be marching in place.

Among the non-variable MLPs, the upstream MLPs had the worst performance of any subsector in 2013. The upstream group was up about 10 percent as a whole, while the Alerian MLP Index returned 28 percent. Legacy Reserves (Nasdaq: LGCY) actually returned about 14 percent for the year, well above the upstream average. But most of that gain took place in the first quarter of 2013, and then for the rest of the year units traded in a pretty tight range.

Legacy appears to be among the better managed upstream MLPs. The partnership recently recorded its 12th consecutive increase in the distribution, which puts the annualized yield at 8.4 percent. The distribution coverage was solid at 1.3x, and debt remained modest relative to cash flow. Analysts were pleased with the latest quarter, and barring a complete collapse in the price of oil, Legacy should have no problem continuing to grow distributions.

Next week I will address two remaining MLP-related questions that actually entailed seven different partnerships.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)