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Brewer: MLP's questions etc
Old 03-24-2005, 07:22 PM   #1
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Brewer: MLP's questions etc

Hi Brewer
I have read your posts about MLP's. I went back and read the posts on them and also poked around on the web. Following is what I have found, I just want to check with you as to some of the things that I found.

I am just trying to evaluate if MLP's are an asset class I should add to.

1. Most are pipelines, propane and other petroleum products or real estate. They almost seem like commodity plays - the price of gas plays a big role in the payouts. In that case am I getting the same asset class coverage with PCRIX?

2. Payout's are generally in the order of 6%-8%. Has it been at this consistently? What I am thinking about is, did MLP's become popular because everyone is suddenly chasing yield?

3. I understand that MLP's are under researched and pension funds cannot own them - but does also mean that General Partner's have less scrutiny on them? Is it ok that GP's in some cases are big oil companies, is that good or bad - could MLP's be used to hide stuff.

4. As far as the taxes goes - do you in fact file taxes in all the states that the MLP's operates in ie do you file in say NM & TX on top of NJ? I read in fact that in most cases it's ok not to file because states don't mind!!! I don't want to be hauled behind bars in TX - no way!!!
How bad do taxes get with say a couple of MLP's?

5. I am not being negative, just airing questions. I like the fact that there is potential for ineffeciencies in the market and the fact that taxes are complicated might force a few people away! I don't mind doing complicated taxes!

6. Also I looked into ETF's which invest in MLP's - couldn't find an index fund - man that would have been great
The ETF's seem to charge about 1.5-2% as Expenses, high for my taste but then I am paying about 0.74% for PCRIX. Any opinions on ETF's? Also taxes are a piece if cake - its like owning stock.

7. I read that rising interest rates make it tough for the MLP's to raise money, so do they nosedive when interest rates spike up? Also since not much capital investments are possible - most MLP's only seem to do maintainence and are prevented by law from doing any new investements, should appreciation be always accounted for as zero?
Is one getting all the negative of stocks and no postive appreciation?

8. I heard MLP's were popular in late 80's and then they seem to have fallen off the radar screen - any ideas why?

I know I am asking too many questions, maybe I should read more - these were just some things that came to my mind. I won't mind if you just say do more homework!, just say it

thanks
-h
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Re: Brewer: MLP's questions etc
Old 03-24-2005, 10:44 PM   #2
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Re: Brewer: MLP's questions etc

Read Kurt Eichenwald's "Serpent on the Rock: Crime, Betrayal and the Terrible Secrets of Prudential Bache" from 1995. There's probably a copy in a local library.

It's a great documentary into what goes on behind a MLP's creation & manipulation operation. I'm not claiming that all MLPs are crooked, but it's much easier to cheat with an MLP than with a traditional mutual fund or ETF or stock. This book (an entertaining read) will develop your keen sense of paranoia to keep you from mindlessly chasing yield (or from confusing it with a return of capital).
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Re: Brewer: MLP's questions etc
Old 03-25-2005, 03:42 AM   #3
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Re: Brewer: MLP's questions etc

Brewer is definitely the MLP Master - I think I've asked him most of these questions myself at one time or another...here's what he told me (more or less).

MLPs are not necessarily driven by commodity prices. SPH deals with transporation and distribution of gas so the actual price of the gas is not directly relevant. However, they are sensitive to the demand for gas (a warm winter could ding them).

Something like STON has a lot of land for cemetaries...which should keep up with inflation. Their debt is fixed rate, long term so rising rates should reduce the value of that liability.

You want to look for an MLP that has a consistent history of raising the payout. Also check out the distribution coverage ratio to make sure they can make their payments.

I don't own any so I can't speak to the tax issue, but here's some anectdotal evidence:

http://finance.messages.yahoo.com/bb...41283&mid=1070

You might also check out this article:

http://moneycentral.msn.com/content/P72085.asp
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Re: Brewer: MLP's questions etc
Old 03-25-2005, 07:29 AM   #4
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Re: Brewer: MLP's questions etc

Good questions! I will atempt to answer them but I freely acknowledge that there are things cocerning MLPs that are beyond me.

First off, MLPs are not an "asset class." They are a structure. That means that what you really care about is the underlying business, with the structure being a secondary consideration.

1. MLPs typically spew a lot of cash out to investors, so they tend to be in relatively stable, cash rich, slow-growing businesses. Pipelines, retail propane distribution, mortgage ending, and real estate of some kind tend to have these attributes, so they make up a lot of MLPs. I would say that the exposure is NOT similar to PCRIX. For example, a pipeline does not have significant direct commodities exposure. Pipelines charge a transportation fee for use of the line, and either they don't own the actual commodity, or they have hedged the exposure away. They are sensitive to the volume of demand, so if higher commodity prices reduce demand, they might have some exposure. With the current demand-driven commodity spike, this is not an issue.

2. Payouts are definately affected by the level of interest rates. If you could buy a 10 year treasury with a 10% coupon, would you be interested in a risker MLP paying 8%? Probably not. However, the MLPs with good track records of raising distributions over time should act more like a high dividend stock and less like a long term bond. If you look at an MLP like NRGY, they have greatly raised their payout over time.

3. General Partners may have some more room for skullduggery, but no more than most listed small caps, IMO. GPs have two very important incentives to behave themselves: A) insiders generally have large ownership stakes and B) the partnership agreement typically increases cah payouts to the GP if payouts to limited partners get more cash. IOW, it generally doesn't pay them to upset the apple cart.

4. Unless you own an awful lot of a single MLP, I think it is a non-issue. The MLPs I own generally generate taxable losses an the usually have tiny gais or losses in any given state (taxable loss of $4 in NM means that it is well below the threshhold for filing and the state would lose out anyway if you did). The big difference is that you really will need to use turbotax to deal with the filings, since otherwise it is a bear. The software makes it pretty easy, IMO.

6. I think the few MLPs in this space are overly expensive and unproven. I also don't know if you lose out on the taxx advantages of MLPs this way. Unattractive compared with individual MLP holdings, IMO.

7. Virtually all MLPs do expansion investments. Some are financed by internally generaed cashflow. Most significant investments are paid for by new capital raising initiatives. You may be right that higher rates would make this tougher, but I think thats a factor for all businesses. What I like about the structure is that it forces discipline on management. If you raise MLP units and debt capital that requires payouts immediately, you are likely to make damned sure that the investment is a good one.

8. I think there were a lot of questionale oes floated back then. Many were motivated more by the tax code than the prospects of the actual business the MLP was in, which is always a recipe for trouble. Again, this underscores my first point: pay attention to the business when evaluating the MLP. If a bad business is put in an attractive ownership structure, it is still a bad investment.

Hope this helps. I evaluate MLPs like I do any potential equity investment. I think that is the way to avoid trouble and resist overlooking faults because of a high yield.
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Re: Brewer: MLP's questions etc
Old 03-25-2005, 07:58 AM   #5
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Re: Brewer: MLP's questions etc

thanks brewer and the others too...
I will read some more and ask questions again.

I guess if I am going to look at the pipelines, I need to see if I can find what the contrats between the refineries and the MLP's look like also.

Is it a good thing btw for the refinery to be the GP of the pipeline also?

guess back to reading and analysis..

-h
p.s: I was looking at the ptp coalition, which I think got a law passed thah Mutual funds can now invest in MLP's recently, any effect on the prices beause of this? Guess it would be speculative to look at it that way!



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Re: Brewer: MLP's questions etc
Old 03-25-2005, 08:37 AM   #6
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Re: Brewer: MLP's questions etc

Quote:
thanks brewer and the others too...
I will read some more and ask questions again.

I guess if I am going to look at the pipelines, I need to see if I can find what the contrats between the refineries and the MLP's look like also.

Is it a good thing btw for the refinery to be the GP of the pipeline also?

guess back to reading and analysis..

-h
p.s: I was looking at the ptp coalition, which I think got a law passed thah Mutual funds can now invest in MLP's recently, any effect on the prices beause of this? *Guess it would be speculative to look at it that way!


I don't own any pipeline MLPs and haven't really studied tham, so I will refrain from comment. I think the terms on which the material is carried is usally disclosed pretty thoroughly, though.

I'm usually happier to see an unaffiliated GP running MLPs. There are fewer conflicts of interest.

I think that the passing of the law has put some upward pressure on prices, especially for the larger, more liquid names. I also think it offers the chance to really make a killing with the smaller names as they grow, get noticed and the funds start buying in size. Not the be-all and end-all though, at least as far as I can tell.
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Re: Brewer: MLP's questions etc
Old 03-25-2005, 12:52 PM   #7
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Re: Brewer: MLP's questions etc

Mutual funds can now own MLPs, as far as I'm aware.

Just some comments:

Be careful about owning them in an IRA. You could end up paying UBI taxes (!).

Taxes are messy, especially when selling. There are a few structures around that give the yield in shares instead of cash. EE*, KM* and KSL/KPP are some. The downside is that, if it goes bust, you're outta luck. The upside is the convenience and the tax efficiency - you sell when you want and pay taxes (based on cash basis) when you want.

Oh, I've never filed taxes in another state or in Canada.
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