Rising cash flow boosts distributions, lifting unit prices. Higher unit prices mean equity capital can be raised more cheaply, increasing the number of energy projects that are profitable to acquire or construct. More projects are built or bought, lifting cash flow further and thereafter distributions.

And the cycle begins anew.

That’s the virtuous circle we’ve been the beneficiaries of at MLP Profits since our very first issue in late May 2009. The latest big deal is Growth Holding Inergy LP’s (NSDQ: NRGY) purchase of all of the partnership interests of Liberty Propane LP as well as those of MGS Corporation.

The acquisitions will vault Inergy into the No. 4 position among retail propane marketers, with more than 800,000 customers in 32 states. The cost of $223 million, including the assumption of a tax liability, will be easily absorbed. In fact, it won’t threaten its BB- credit rating, as S&P has stated the deal will “strengthen its footprint in the Northeast and Midwest and contribute additional cash flow at reasonable cost.”

Energy Transfer Partners LP’s (NYSE: ETP) equity offering this month was initially contemplated at 7.5 million units. When officially announced this week, however, the tally had been increased to 8.5 million units, with the underwriters granted a 30-day option to buy another 1,275,000. In addition, the offering price of $44.72 per unit was within 5 percent of the highest level the MLP had seen in more than 18 months.

As has typically been the case with MLP unit offerings, Energy Transfer’s did trigger some initial selling as investors reacted to supposed dilution. The damage, however, was considerably lighter than what was done by selling in the wake of an offering by the MLP last summer. In fact, the units have already rebounded to nearly a point above the offer, an indication of the handsome price it fetched.

Proceeds from the sale will go to finance a range of projects currently underway, including the Tiger Pipeline. And the high price fetched for equity sold should go a long way toward boosting profitability.

The same can be said about DCP Midstream Partners LP’s (NYSE: DPM) unit offering in mid-December. Ditto the equity sale this week by Conservative Holding Enterprise Products Partners LP (NYSE: EPD), which raised $304 million to cut debt.

Low cost of capital and its positive impact on building assets is a major reason why we’ve raised buy targets on many of our holdings over the past couple of months. More profitable projects mean more cash flow, which enables rising distributions and thereby boosts the value of MLP units.

Still Values

There can come a point eventually, however, when price outruns the value of an MLP’s underlying business. The good news is we don’t see that yet at the majority of our picks. Certainly, percentage yields for our recommended MLPs in all three Portfolios have dropped markedly. But the 7 to 9 percent they do offer is still superior to common stocks as well as most bonds, particularly when you factor in distributions are heavily return of capital–and therefore not taxable until you sell.

And our picks’ distributions continue to grow as well. Inergy, for example, raised its payout for 31 consecutive quarters. And while DCP, Energy Transfer and Teekay LNG Partners LP (NYSE: TGP) didn’t boost payouts this year, all covered them comfortably with distributable cash flow and put the pieces in place for growth.

All of our Growth Holdings’ cash flows are anchored by reliable, fee-generating businesses. Each, however, also has some operations where profitability is affected by energy prices, particularly natural gas. That was a drag in the first half of 2009. But it’s emerged as a boon since our initial recommendation, as gas has rebounded back to the $5-to-$6 per million British thermal unit range it held at the beginning of last year.

That’s been mainly due to unexpectedly cold weather in North America, which has begun to soak up the record inventories in storage at the end of November. In contrast, industrial demand, which comprises 29 percent of gas use in a normal year, has apparently bottomed but remains depressed.

Consequently, further gains in gas this year are likely going to take either a lot more cold weather or else a greater acceleration in growth. But even what we’ve seen so far has been enough to lift the fortunes of our Growth Holdings. And sooner or later, we’ll see the kind of growth that will revive industrial demand for natural gas, even as gas usage to generate electricity continues to rise.

We do, however, strongly recommend that all readers confine new buying to MLPs that trade below our buy targets. Based on prices now, that means holding off on purchases of DCP Midstream Partners LP, which has soared over 30 in the past week. It also means being patient with Teekay LNG Partners LP and, to a lesser extent, Energy Transfer Partners LP and Inergy LP.

Remember, the secret to wealth building in MLPs is patiently buying at good prices and watching the rising stream of distributions roll in. You never get anywhere by just chasing yield.

On a final note, the debate over the fate of “carried interest” continues to heat up. As we’ve reported, the US House of Representatives has passed legislation that would effectively close this loophole, which is mostly used by hedge fund managers to shield income from taxes but is also employed by some financial-focused MLPs.

If legislation passes the Senate or finds its way into the upcoming Obama administration budget, it could eliminate the tax advantages of financial MLPs like AllianceBernstein Holding LP (NYSE: AB) and others. The good news is there’s no proposal on the table to eliminate the favorable tax status enjoyed by energy-focused MLPs, the sector for which the partnership deductions were intended.

In fact, energy focused MLPs stand to gain in another very real way from tax changes over the next year. If Congress does nothing, the preferential 15 percent top tax rate on dividends will disappear for common stocks and qualifying preferred stocks. That will push the top tax rate on payouts from these vehicles back to 39.5 percent.

The best outcome for investor tax rates at this point is a push in the top rate from 15 to 20 percent, which has been proposed by powerful Senator Max Baucus (D-MT) and is reportedly favored by the Obama administration. Even this, however, will increase the relative appeal of MLP distributions versus other income-paying options.

All of our MLP Profits Portfolio recommendations are energy-focused and so carry no tax worries for 2011 and beyond. Note, however, that we’ve recommended selling a large number of MLPs tracked in How They Rate due to possible exposure to carried interest legislation.

The recent investor push into MLPs and subsequent run-up in unit prices makes now an ideal time to clear your portfolio of these ticking time bombs. AllianceBernstein, for example is now selling at a new 52-week high. Even in good times, this has been a shaky MLP to own. In a worst-case, it and others like it will be disasters. Sell AllianceBernstein Holding LP.