Back when I (Energy Pipeline News editor Noel Griese) was working on a graduate degree at the University of Wisconsin in the 1970s, I ran data on more than 140 independent nations of the world looking for the correlates of economic development. What factors, I wanted to know, using three-wave lagged correlations as the tool to determine causality, explained growth in gross national product?
The upshot of the research was that one inanimate factor and one animate factor (independent or causal variables) explained almost all growth in national GNP (dependent variable).
The inanimate correlate of growth in GNP is energy consumption per capita. The greater the energy consumption per capita, the greater the growth in GNP. The animate factor is education per capita. The higher the education of the population, the greater the growth in GNP. Energy consumption per capita is a far more powerful predictor than education. Put the two primary correlates together, and you explain almost all of the growth in GNP for a given country.
The United States and the other nations of the world are currently wallowing in one of the most severe economic recessions since World War II. To emerge from that recession, we will almost certainly have to invest large amounts of capital in energy and education.
Despite conservation efforts, the existing energy infrastructure of the United States just can't keep up with our ever-increasing thirst for energy. By 2030, Americans will require an estimated 131.2 quadrillion BTUs of energy - up 33 percent from 2005.
While it’s difficult to invest in education, with few available opportunities, investing in energy is easy. A multitude of investment opportunities exist.
One opportunity promising better than average returns is to invest in pipeline limited partnerships, or in the mutual funds that invest in the LPs. In a future article, I'll explore why investing in the mutual funds is less complicated from a tax standpoint than investing directly in the LPs.
The advantage of investing in LPs is that they offer consistently higher, more secure yields than most other investments.
In the past, the average yield of LPs has ranged anywhere from 7-10 percent, and currently it hovers well above eight percent.
One of the LPs in which the editor is currently investing, while it has above-average risk, is currently yielding 53 percent in dividends – and that does not include the capital gains likely to be realized as pension funds start reinvesting in LPs offering high yields, driving up the unit price.
That's not to say LPs are immune to market implosions like the one that began last year - they aren't. Mutual funds that were heavily invested in LPs, in order to meet cash calls from investors, often sold off the LPs to get the cash they needed to meet those calls. That drove down the unit prices of the LPs, and kicked up the yield.
In addition to having their prices driven down by cash call selling, the LP prices are depressed because they rely on new capital investments to keep growing. That requires loans and new stock issues – things that dried up in the current tight recessionary economy.
But historically, the LPs have outperformed other asset classes, such as stocks. Between 1998 and 2007, LPs beat the S&P 500 average seven out of 10 years.
Sunday, March 22, 2009
Making money in pipeline LPs (Part 3): tax consequences
Because LPs are partnerships and not corporations, their income is pass-through, which means it's not subject to "double taxation" from corporate income tax. Therefore, more cash is available for unit holder distributions (which, by law, must consist of the company's entire cash flow after operational, maintenance and debt expenditures are met).
What's more, due to the way limited partnerships work, as much as 90 percent of those taxes are deferred until the unit is sold - a nice perk for investors thinking long term.
But LPs also have their tax drawbacks. For institutional investors, they're an administrative headache, and even individual investors may run into some paperwork-related problems. Dividends paid by LPs held in IRA’s are taxable, unlike common stock dividends paid into the IRAs. In some cases, even state taxes on dividends paid to LP unit holders may be taxed. Holding LPs in an IRA or other tax-deferred account could potentially set off an obscure tax known as the unrelated business taxable income, which is why some funds, such as endowments, avoid MLPs altogether.
What's more, due to the way limited partnerships work, as much as 90 percent of those taxes are deferred until the unit is sold - a nice perk for investors thinking long term.
But LPs also have their tax drawbacks. For institutional investors, they're an administrative headache, and even individual investors may run into some paperwork-related problems. Dividends paid by LPs held in IRA’s are taxable, unlike common stock dividends paid into the IRAs. In some cases, even state taxes on dividends paid to LP unit holders may be taxed. Holding LPs in an IRA or other tax-deferred account could potentially set off an obscure tax known as the unrelated business taxable income, which is why some funds, such as endowments, avoid MLPs altogether.
Making money in pipeline LPs (Part 4): Capital losses
Like almost all other asset classes, LP unit prices nose-dived in 2008. The Alerian MLP Index, the sector's benchmark, lost 41.5 percent of its value last year, and as of March 2, 2009, it was 48 percent below its peak.
In part, MLPs suffered so greatly because of the credit squeeze. Since MLPs pay out most of their profits in unit holder distributions, they must rely heavily on loans to finance any growth initiatives. When lenders pulled back, the companies ran into cash shortages.
Mutual and pension funds that were heavily invested in the LPs, when they faced cash calls from clients who wanted to get out of the tanking stock market, sold off many of the LPs in order to raise cash to meet cash call demands, That helped to drive down their prices.
In addition, hedge funds that had loaded up on LPs in good times, dumped them as the market tanked. Due to the administrative and tax obstacles mentioned above, institutional investors were largely prevented from scooping them up.
But LP fundamentals remain strong.
In part, MLPs suffered so greatly because of the credit squeeze. Since MLPs pay out most of their profits in unit holder distributions, they must rely heavily on loans to finance any growth initiatives. When lenders pulled back, the companies ran into cash shortages.
Mutual and pension funds that were heavily invested in the LPs, when they faced cash calls from clients who wanted to get out of the tanking stock market, sold off many of the LPs in order to raise cash to meet cash call demands, That helped to drive down their prices.
In addition, hedge funds that had loaded up on LPs in good times, dumped them as the market tanked. Due to the administrative and tax obstacles mentioned above, institutional investors were largely prevented from scooping them up.
But LP fundamentals remain strong.
Making money in pipeline LPs (Part 5): accessing LPs
Investors can access MLPs in many ways.
Those looking for broad exposure can check out the Alerian BearLinx MLP Select Index ETN (NYSE: BSR), which tracks the Alerian MLP Index, or play a number of closed-end funds investing solely in MLPs, such as:
Kayne Anderson MLP Investment Company (NYSE: KYN)
Tortoise Energy Infrastructure Corporation (NYSE: TYG)
Fiduciary/Claymore MLP Opportunity Fund (NYSE: FMO)
Energy Income and Growth Fund (NYSE: FEN)
Tortoise Energy Capital Corporation (NYSE: TYY)
Those looking for broad exposure can check out the Alerian BearLinx MLP Select Index ETN (NYSE: BSR), which tracks the Alerian MLP Index, or play a number of closed-end funds investing solely in MLPs, such as:
Kayne Anderson MLP Investment Company (NYSE: KYN)
Tortoise Energy Infrastructure Corporation (NYSE: TYG)
Fiduciary/Claymore MLP Opportunity Fund (NYSE: FMO)
Energy Income and Growth Fund (NYSE: FEN)
Tortoise Energy Capital Corporation (NYSE: TYY)
Making money in pipeline LPs (Part 6): investing directly in LPs
Individuals can invest in the pipeline LPs directly, although they should first discuss the tax consequences with their CPA or tax advisor. In general, larger LPs that have steadily increased their distribution payouts are safer bets than smaller ones or exploration/production companies, which are more dependent on commodity prices than other MLPs. Some players include the following.
Kinder Morgan Energy Partners (NYSE: KMP), the largest transporter of natural gas in Texas, the Midwest and the Rockies; and North America's biggest carbon dioxide supplier. LMP is one of the two partners in the huge Rockies Express gas pipeline project now being constructed.
TEPPCO Partners (NYSE: TPP), which runs a range of U.S. natural resource businesses, including pipelines, gathering systems, marine transports and storage.
NuStar Energy (NYSE: NS), which runs 8,500 miles of pipeline, 85 terminal facilities, four crude oil storage tanks and two asphalt refineries.
Enterprise Products Partners LP (EPD) is a $25 billion in revenues company and a leading integrated provider of natural gas, natural gas liquids, processing, transporting and storage services via 32,000 miles of pipeline. The $1.86 dividend, which has been raised in each of the last dozen years, yields a nice 9.9 percent and might be raised again this year to $1.95. In 2008, EPD’s Offshore Pipeline and Services segments posted weak numbers, a result of hurricane damage to these properties. EPD’s Petrochemical Services division also posted weak profits due to lower volumes and reduced demand for fuel. However, EPD’s NGL pipelines and onshore natural gas pipelines posted a dramatic rise in income, higher margins and increased marketing volumes recently. EPD is trading 14 points down from its 12-month high and two points above its 12-month low. Its 10-year dividend growth rate is about nine percent. A significant portion of the dividend income (about 80 percent) is considered return of capital and not taxable.
Energy Transfer Partners LP (NYSE: ETP) is a $10 billion revenue master limited partnership that gathers, processes, stores and transports products via its 16,000-mile pipeline primarily to users in Texas. EPD also owns Heritage Propane, the third largest marketer in the U.S. with 1.1 million customers in 40 states. The $3.58 dividend, about 80 percent return of capital, provides a current yield of 10.5 percent and has been raised every year since EPT came public at a split-adjusted $15 in 2004. Most analysts expect solid gains in 2009, 2010 and 2011 from earnings as well as attractive dividend increases in each of those years. Meanwhile, three major building programs should come online late this year, which should ensure continued growth in revenues, earnings and dividends. EPS is down 30 points from its 12-month high and trades eight points above its 12-month low. Dividend growth since coming public five years ago is 21 percent.
Plains All American Pipeline LP (NYSE: PAA) is a $32 billion master limited partnership with a $3.57 dividend yielding 9.6 percent. PAA’s dividend growth rate since coming public in 1999 at $20 is a good 9.7 percent. PAA owns 15,000 miles of pipeline and leases another 5,000 through which it stores, ships and markets crude oil, refined products and liquid petroleum gas. Several recent ventures should double PAA’s daily crude capacity to three million barrels a day and its recent acquisition of Pacific Energy Ltd. should add about $70 million to earnings by 2010 or 2011.
Kinder Morgan Energy Partners (NYSE: KMP), the largest transporter of natural gas in Texas, the Midwest and the Rockies; and North America's biggest carbon dioxide supplier. LMP is one of the two partners in the huge Rockies Express gas pipeline project now being constructed.
TEPPCO Partners (NYSE: TPP), which runs a range of U.S. natural resource businesses, including pipelines, gathering systems, marine transports and storage.
NuStar Energy (NYSE: NS), which runs 8,500 miles of pipeline, 85 terminal facilities, four crude oil storage tanks and two asphalt refineries.
Enterprise Products Partners LP (EPD) is a $25 billion in revenues company and a leading integrated provider of natural gas, natural gas liquids, processing, transporting and storage services via 32,000 miles of pipeline. The $1.86 dividend, which has been raised in each of the last dozen years, yields a nice 9.9 percent and might be raised again this year to $1.95. In 2008, EPD’s Offshore Pipeline and Services segments posted weak numbers, a result of hurricane damage to these properties. EPD’s Petrochemical Services division also posted weak profits due to lower volumes and reduced demand for fuel. However, EPD’s NGL pipelines and onshore natural gas pipelines posted a dramatic rise in income, higher margins and increased marketing volumes recently. EPD is trading 14 points down from its 12-month high and two points above its 12-month low. Its 10-year dividend growth rate is about nine percent. A significant portion of the dividend income (about 80 percent) is considered return of capital and not taxable.
Energy Transfer Partners LP (NYSE: ETP) is a $10 billion revenue master limited partnership that gathers, processes, stores and transports products via its 16,000-mile pipeline primarily to users in Texas. EPD also owns Heritage Propane, the third largest marketer in the U.S. with 1.1 million customers in 40 states. The $3.58 dividend, about 80 percent return of capital, provides a current yield of 10.5 percent and has been raised every year since EPT came public at a split-adjusted $15 in 2004. Most analysts expect solid gains in 2009, 2010 and 2011 from earnings as well as attractive dividend increases in each of those years. Meanwhile, three major building programs should come online late this year, which should ensure continued growth in revenues, earnings and dividends. EPS is down 30 points from its 12-month high and trades eight points above its 12-month low. Dividend growth since coming public five years ago is 21 percent.
Plains All American Pipeline LP (NYSE: PAA) is a $32 billion master limited partnership with a $3.57 dividend yielding 9.6 percent. PAA’s dividend growth rate since coming public in 1999 at $20 is a good 9.7 percent. PAA owns 15,000 miles of pipeline and leases another 5,000 through which it stores, ships and markets crude oil, refined products and liquid petroleum gas. Several recent ventures should double PAA’s daily crude capacity to three million barrels a day and its recent acquisition of Pacific Energy Ltd. should add about $70 million to earnings by 2010 or 2011.
Friday, March 20, 2009
Enbridge pipeline hits snag crossing Indian reservation
DULUTH, Minn. - Along a 1,000-mile Enbridge Energy pipeline proposed to move Canadian crude oil to a tank farm in Superior, Wis., one 13-mile stretch through the Fond du Lac Indian reservation has proven the most difficult to plot.
Enbridge and Fond du Lac officials have been unable to negotiate a settlement on the crossing in recent months, leading Enbridge to propose a 21-mile detour around the reservation.
On March 19, the Minnesota Public Utilities Commission denied Enbridge that detour, at least for the time being.
PUC commissioners, meeting in St. Paul, agreed to delay final action on the pipeline route until a deal is reached or until an ongoing federal Environmental Impact Statement is completed by the U.S. State Department, probably in May.
The pipeline detour around the reservation was opposed by environmental groups, the Fond du Lac Band and the Minnesota Department of Natural Resources. They said the best route would run through the reservation - alongside an existing Enbridge pipeline - to have less impact on the environment.
Sara Van Norman is acting as attorney for the Fond du Lac band on the issue.
Lorraine Grymala, community affairs manager for Enbridge, said the PUC decision won’t necessarily delay the pipeline project if a final decision comes quickly.
“We’re disappointed. But this could still work out assuming the commission can take quick action when the federal EIS is approved,’’ Grymala said.
Enbridge and the Fond du Lac officials have failed to find an agreeable price for a 20-year easement to cross the reservation. Short of that deal, Enbridge would need an act of Congress to cross the property without Fond du Lac approval, PUC staff said. While the PUC can use eminent domain to run pipelines across other lands, the state does not have that right on tribal land.
Enbridge and Fond du Lac officials have been unable to negotiate a settlement on the crossing in recent months, leading Enbridge to propose a 21-mile detour around the reservation.
On March 19, the Minnesota Public Utilities Commission denied Enbridge that detour, at least for the time being.
PUC commissioners, meeting in St. Paul, agreed to delay final action on the pipeline route until a deal is reached or until an ongoing federal Environmental Impact Statement is completed by the U.S. State Department, probably in May.
The pipeline detour around the reservation was opposed by environmental groups, the Fond du Lac Band and the Minnesota Department of Natural Resources. They said the best route would run through the reservation - alongside an existing Enbridge pipeline - to have less impact on the environment.
Sara Van Norman is acting as attorney for the Fond du Lac band on the issue.
Lorraine Grymala, community affairs manager for Enbridge, said the PUC decision won’t necessarily delay the pipeline project if a final decision comes quickly.
“We’re disappointed. But this could still work out assuming the commission can take quick action when the federal EIS is approved,’’ Grymala said.
Enbridge and the Fond du Lac officials have failed to find an agreeable price for a 20-year easement to cross the reservation. Short of that deal, Enbridge would need an act of Congress to cross the property without Fond du Lac approval, PUC staff said. While the PUC can use eminent domain to run pipelines across other lands, the state does not have that right on tribal land.
Thursday, March 19, 2009
Willbros to build three pump stations for Enbridge in Canada
CALGARY, Alta. - Willbros Group Inc. said on 16 March that its upstream segment has been awarded new projects from Enbridge Pipelines Inc. with respect to the continuing build-out of crude oil transportation systems from the oil sands in Alberta, Canada.
Under the contract, Willbros Canada will construct three additional pump stations on the Alberta Clipper pipeline system: one in Hardisty, Alta., and two in Saskatchewan province.
The projects have already started and are expected to be completed in the third quarter of 2009, Willbros Group said.
Under the contract, Willbros Canada will construct three additional pump stations on the Alberta Clipper pipeline system: one in Hardisty, Alta., and two in Saskatchewan province.
The projects have already started and are expected to be completed in the third quarter of 2009, Willbros Group said.
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