MLP Profits recommendations are reporting another quarter of rising cash flow and distributions, thanks to successful investment in energy midstream and production assets.

And they’re on track to rewarding investors with a fourth consecutive year of solid total returns as well.

Their 11.3 percent year-to-date average bests the Alerian MLP Index’ 8.9 percent return.

As good as that sounds, however, we’ve noticed a couple of clouds on the horizon. Although they’re still quite far away, we’re moving now to prepare while the sun is still shining brightly.

It’s often said it takes money to make money. And that goes double for master limited partnerships, which must raise capital to buy and build assets.

Rarely have we seen a more favorable environment for MLPs to raise capital than the past three-plus years. Even the highest MLP credit ratings are scarcely BBB.

Yet Enterprise Products Partners LP (NYSE: EPD) has BB+ debt that doesn’t pay off until Jan. 15, 2068, but yields less just 4.07 percent to maturity.

Put another way, investors are willing to accept a return of barely 4 percent a year to lock up money for more than 55 years–in a bond that doesn’t even have an investment-grade rating.

At the same time, MLPs’ cost of equity capital is also at its lowest level ever. Enterprise Products itself has been able to pull off two oversubscribed unit offerings in less than 12 months.

The Energy Transfer and Kinder Morgan groups have been able to complete major acquisitions of former energy giants this year using mostly equity.

Access to cheap capital isn’t necessary for MLPs to maintain current yields. Those cash flows are backed by long-term contracts with some of the world’s strongest energy companies.

Moreover, the assets are paid for already, and MLP management teams still aren’t building anything unless revenue is locked in by contracts first.

Low-cost capital, however, is quite vital when it comes to the new assets needed to fund future distribution growth. And rising MLP returns over the past four years reflect raised expectations that will be easy to disappoint if such growth should slow.

In this issue MLP Profits Co-Editor David Dittman highlights one of the potential threats to low cost capital, possible changes in the tax code to disadvantage MLPs and thereby make their equity less attractive.

Note that MLPs’ tax status will not change in January if the “fiscal cliff” happens. In fact, their advantage over other dividend-paying investments would grow.

The other key threat is a possible surge in borrowing costs. Our MLPs have inoculated themselves against a tightening of credit conditions by pushing out bond maturities further in the future, and reducing their historic exposure to credit lines.

And the faster economic growth needed to push up interest rates would be bullish for new investment opportunities. But again, it could prove a challenge to unit prices of at least some MLPs, given the high expectations built into them.

When you have a portfolio of solidly performing investments, drastic action is rarely if ever a good idea. Rather, incremental moves are the way to go and we have one for you this issue.

We’re selling a huge winner, Sunoco Logistics Partners LP (NYSE: SXL), and replacing it in the Conservative Holdings with what should be another, Oiltanking Partners LP (NSDQ: OILT). I discuss the move in one of this issue’s two Sector Spotlights.

In the other Sector Spotlight David focuses on a rare unloved MLP sector, coal royalty companies.

My In Focus feature includes a review of the raft of MLP initial public offerings, and David and I wrap up earnings for Holdings that have reported so far in Portfolio Update.

As always, please let us know what we can do to improve this service. Note that in between issues we feature the bi-weekly MLP Investing Insider, with updates on major issues as well as for Portfolio Holdings. And we offer a complimentary monthly chat as well.

Thanks for reading.

In This Issue

Earnings season for MLP Profits Portfolio Holdings is in full swing, and the numbers we’ve seen so far have been supportive of long-term growth. See Solid Numbers Support Distribution Growth.

We’re shining a follow-up Sector Spotlight on the oil storage segment and making a change in the Portfolio. See Sector Spotlight: Oil Storage.

Not much good has been written about coal and the companies that produce it lately. We’re changing that in the aftermath of a brutal post-election selloff that’s left several of our coal-focused MLPs on the extreme bargain rack. See Sector Spotlight: Coal.

One of our self-imposed mandates here at MLP Profits is to provide comprehensive coverage of the master limited partnership space, and that includes new issues. We update a couple recent additions to the sector and discuss some newcomers. See In Focus: MLP IPOs: What’s New?.

The quadrennial circus/steel-cage wrestling match also known as a US presidential campaign is finally over. Here’s what the election results means legislatively for MLPs. See News & Notes: Politics and Publicly Traded Partnerships.