This week my MLP Profits co-editor Elliott Gue and I addressed the Orlando MoneyShow. This year’s event was bigger than most, and there was, not surprisingly, a great deal of interest in MLPs.

Here are the highlights of questions we answered at the show, many of which have also been frequent queries of other MLP Profits readers. We’ll have our roundup of Growth Holdings’ results next week.

• How exposed are MLPs to inflation and higher interest rates?

That depends entirely on the MLP. The most exposed are MLPs that are financially weak and barely covering distributions with cash flow. There are an alarming number of these–Capital Products Partners LP (NSDQ: CPLP) for one, which we highlighted last week as a sell–is one that’s already blown up.

We’ve rated them all sells in How They Rate. The MLPs that rely on carried interest to pay dividends and aren’t in the energy business are also extremely exposed to higher interest rates and inflation, as well as to having their tax advantages revoked by the Obama administration and Congress this year.

Going down our Portfolio listings, the Conservative Holdings are probably most exposed, as they don’t benefit directly from rising energy prices. The Aggressive Holdings are least exposed, as they are major beneficiaries of strength in commodity prices. The Growth Holdings fall somewhere in between but do have some exposure, so they’re somewhat hedged.

Of course, this reading depends on energy prices keeping up with inflation. But that’s always been the case, and with basically no wage pressure in the US, rising energy prices are pretty much the only we’re going to get any inflation at all.

By the way, Enterprise Products Partners LP (NYSE: EPD) and the rest of the Conservative Holdings do offer some protection against inflation with their reliably rising distributions. That may not keep pace against a major spike in inflation, but over time there’s no better hedge for income investors than a robustly rising dividend.

• How are MLPs affected by the Obama budget? Are we facing tax increases with Washington nearly broke?

At this point, there’s absolutely no movement to tax energy-focused MLPs, either in Congress or in the Obama budget. There is, however, a bill that’s passed the House of Representative to tax what’s called “carried interest,” an accounting technique used mainly by hedge funds to shield income from taxes. Hedge funds are less popular than banks with the public these days, so it looks like an easy sell to us.

Unfortunately, a number of MLPs such as AllianceBernstein Holding LP (NYSE: AB) are basically financial constructs that are at severe risk to a change in the law. This is not reflected in their unit prices, as they remain popular with many investors. But it’s absolutely critical to unload them now.

Again, there’s no movement whatsoever to tax energy focused MLPs. In fact, the last Congress–also firmly controlled by Democrats–actually extended their advantages. If carried interest MLPs are hit and are forced to cut dividends, there could be some carryover in selling for even energy MLPs. That, however, would be a dynamite time to buy in our view.

• Why do MLPs always seem to sell off whenever they issue new equity units?

Call it investor skepticism about companies of any sort delivering on their promises. Basically, the market is acting as though every share issue meant dilution and therefore lower cash flow. But in reality, the opposite thing is happening here.

MLPs are issuing equity and putting it to good use in new cash-generating projects. And because they’re issuing after a torrid run last year–many MLPs basically trade where they did before the crash in 2008–they’re getting the capital cheaply. More projects make economic sense and they can grow cash flow and distributions faster.

Late last year, when MLPs seemed to be going to the moon, equity issues had less of an immediate impact on prices than they do now. And I suspect if this market stays unsettled over the next several weeks, MLP equity issues are going to continue to trigger selloffs, possibly severe ones as was the case with Aggressive Holding Navios Maritime Partners LP (NYSE: NMM). But the impact will be temporary, even in the most severe cases, provided management eventually demonstrates it’s putting that money to work profitably.

There are of course no guarantees, and that’s why we have to continually check out earnings. But our favorites demonstrated their underlying strengths during the last recession very well, and there’s no reason to believe they won’t this time around as well.

The bottom line: Selloffs in our favorite MLPs due to unit issues are always strong buying opportunities, particularly if you’re light in these positions.

• What is “return of capital”?

It’s an accounting construct that allows MLPs and other entities like oil royalty trusts to push through basically all income and expenses directly to the unitholder, without direct taxation from Uncle Sam.

For investors, the portion of the dividend that’s a return of capital is deducted from your cost basis, rather than taxed in the year paid. You don’t pay a tax until you sell. The K-1s mailed by MLPs have all the details and they’re actually far easier to file than ever before.

• Are MLPs OK to hold in IRAs?

We’ve been getting this question a lot lately, in part because strong MLPs have been racking up such impressive capital gains. From a pure distribution tax standpoint, it’s better to hold MLPs outside IRAs, because you lose the advantage of return of capital (see above) if you hold them in an IRA.

On the other hand, IRAs do shelter any capital gains you might receive over time, and you’ll never have to pay taxes on the return of capital even if you sell.

In our view, the quantum gains we made in MLPs last year aren’t likely to repeat in 2010, as they were in large part a recovery from the 2008 meltdown. We do look to make a lot of money going forward as our MLPs boost distributions and the unit prices follow behind. But the best way to handle the tax situation if you’re living off your investment is to hold the MLPs outside IRAs to get the full tax advantage. Otherwise, the dividends you receive are just going to be taxed at your ordinary rate as you pull the funds out of your IRA.

By the way, K-1s and other tax issues should not be a problem for IRA investors. Rather these issues are handled by your custodian.

• Would closed-end mutual funds offered by Kayne Anderson, Tortoise and others be affected by a carried interest tax change?

These funds are not themselves MLPs, so they would not be directly affected by any change in the tax law. They would be affected to the extent that they hold MLPs that rely heavily on carried interest for income, such as AllianceBernstein Holding. These MLPs are likely to get their heads handed to them and they’ll take a toll on any fund that owns them.

Good funds like our Portfolio pick Kayne Anderson Energy Total Return (NYSE: KYE) focus on energy MLPs and so should not be overly exposed. But it’s also a good idea to keep tabs on their holdings to make sure they’re not heavy on the potential time bombs. That’s one reason we prefer holding individual MLPs to funds–you’ll always know what you own.

• Why aren’t earnings per share a good measure of MLPs’ profitability?

MLPs’ key tax advantage over corporations is they can minimize earnings per share, and therefore their tax liability. As a result, earnings per share always understate real profitability. In fact, the numbers often bear no resemblance to true profitability at all. That’s why it’s critical to use distributable cash flow or funds from operations instead as your profit gauge. These measurements factor out the accounting that MLPs enjoy and give you a bare bones figure for how well dividends are covered.

Most MLPs do provide very reliable data on distributable cash flow and funds from operations. Unfortunately, some really force you to back out the numbers. The best place to look is what’s commonly known as the “Statement of Cash Flows,” always included with the Income Statement and Balance Sheet whenever an MLP issues results. Take operating cash flow is a good number, but be sure to subtract balance sheet items. It’s also instructive to subtract out capital spending.

• When are MLPs going to issue their K-1s?

Most should be getting them out to their unitholders this month. You can also check their websites, and we’ll be providing some information on the MLP website in coming weeks.

• What level of debt is acceptable for MLPs?

Here, too, the measurements of debt are different for MLPs than conventional companies, particularly if you look at equity as a gauge to measure against. In general, we look at debt in relation to cash flow. An MLP with total debt of 2 to 3 times annual cash flow is generally healthy if they have very reliable cash flows.

For energy producer MLPs, we like to see something along the order of 1.2 to 1.3 times, which is what many Canadian trusts offer. But again, we want to measure debt in relation to the underlying enterprise and businesses that are more stable–such as pipelines–can support much higher levels of debt than other businesses.

• How will cheap and plentiful natural gas in the US affect MLPs going forward? Should we be worried?

As a matter of fact, you should be encouraged, particularly for MLPs that own and operate energy infrastructure. Many MLPs, like Enterprise Products, are growing rapidly precisely because US shale reserves need an awful lot of new infrastructure in coming years.