Portfolio Action Summary:

• SXL and EQM added to Growth Portfolio (see Best Buys)
• MMP upgraded to Buy below $60
• KYE downgraded to Sell
• BWP downgraded to Hold
• DPM downgraded to Hold
• EPB downgraded to Hold
• ETP downgraded to Hold
• PVR downgraded to Hold
• TPG buy below target raised to $46

Alliance Holdings GP LP (Nasdaq: AHGP) justified last month’s Best Buy recommendation with a 2 percent monthly advance, aided by strong quarterly results from the MLP it manages, Alliance Resource Partners LP (Nasdaq: ARLP). ARLP grew EBITDA by 14.7 percent on a 4.5 percent revenue gain, as a 13.3 percent volume increase offset the 6.8 percent decline in coal prices, year-over-year. The volume gains cut costs per ton nearly 12 percent year-over-year and 1.5 percent sequentially. The partnership raised annual estimates for production and revenue modestly, and the low end of its net income guidance by 25 percent. The strong results allowed general partner AHGP to lift its payout 12.5 percent year-over-year and 3 percent sequentially. At the new distribution rate, AHGP still yields 4.9 percent despite a double-digit growth rate. Buy below $68.

Boardwalk Pipeline Partners LP (NYSE: BWP) retreated 4 percent in the last month as quarterly rssults fell moderately short of expectations.  Adjusted earnings ex-items rose 5 percent year-over-year, while distributable cash flow jumped 15 percent on lower maintenance spending and non-capitalized interest expense, as well as sale of base gas from Boardwalk’s pipeline network.  The distribution held steady at $0.5325 cents per unit, for a 7.2 percent yield at the current unit price. But one-time factors suggest that the reported distribution coverage ratio of 1.21 probably overstates Boardwalk’s safety and the flexibility of its fairly leveraged balance sheet. Many of the questions on the earnings conference call related to development costs for the eagerly anticipated pipeline under joint development with Williams (NYSE: WMB) for the transport of natural gas liquids from the Marcellus and Utica shales to the Gulf Coast.  Pending further information on the progress of the project, we are lowering our rating on BWP to Hold.  

Buckeye Partners LP (NYSE: BPL) units shed 2 percent over the last month, surrendering half the gain notched in the prior period. Recently reported quarterly results fell modestly shy of estimates, but the crude and fuel shipper did raise its distribution for the second quarter in a row, by 1.2 percent sequentially and 2.4 percent year-over-year, for a current yield of 6.2 percent. The coverage ratio slipped to 1.02 from 1.21 in the prior quarter as a result of a seasonal slowdown in cash flow. But aggregate pipeline volumes rose more than 3 percent year-over-year, and the partnership continued adding long-term customers at three key storage terminals. And while the coverage could take a further hit in the current quarter as a result of the conversion of B class units into common, Buckeye signaled it plans to continue raising the distribution by 1.25 cents in each of the next few quarters. Th partnership has made some progress on paying down its high debt levels, and should be able to do more as recent investments start to pay off.  Continue to buy BPL on dips below $70.

DCP Midstream Partners LP (NYSE: DPM) was the biggest loser among all portfolios in the past month, slumping 15 percent to erase the entirety of the prior month’s startling surge.  Credit Suisse downgraded units to Underperform on the basis of valuation early in the period. And while quarterly distributable cash flow tripled in a year’s time as a result of aggressive dropdowns from the MLP’s sponsors, it fell short of what was needed to fully cover the announced 6 percent year-over-year distribution. The MLP warned that full-year coverage will fall short of its targeted range of 1.1 to 1.2 times, given the timing of its investments in organic growth projects. DPM also launched a sizeable secondary offering to help finance acquisitions. The partnership retains excellent prospects for continuing growth, and the units remain up nearly 19 percent year-to-date not counting the distributions. The current 5.7 percent yield provides a fair risk-adjusted return. But with distribution growth at the lower end of the targeted growth range, we’re downgrading DPM to Hold.

El Paso Pipeline Partners LP (NYSE: EPB) units shed 5 percent in the last month, despite a 15 percent year-over-year increase in the distribution to 63 cents per unit in the earnings report released last month. The yield moved up to 6 percent, but the partnership did report a year-over-year drop in distributable cash flow and incentive payments to general partner Kinder Morgan (NYSE: KMI)took a bigger bite from the bottom line. Over the first half of the year, distributable cash flow was still up 7 percent from a year ago. In an SEC filing at the end of last month, EPB warned that its general partner KMI has decided to postpone the planned dropdown of its 50 percent interest in the Mississippi LNG terminal known as Gulf LNG to EPB, and could instead offer it to Kinder Morgan Partners (NYSE: KMP) once the government rules on its application for LNG exports from the facility. The loss of the dropdown wouldn’t jeopardize EPB’s annual distribution target, but it would reduce its margin for error and growth opportunities. We’re downgrading EPB to a Hold out of concern that the loss of the project will depress the unit price, but the strong growth in the distribution is an offsetting positive.

Energy Transfer Equity (NYSE: ETE) was the newsletter’s best-performing holding, scoring a 9 percent monthly gain. As predicted in last month’s portfolio update, it has benefited from the growing realization that incentive distribution rights from subsidiary partnerships Energy Transfer Partners (NYSE: ETP), Regency Energy Partners (NYSE: RGP) and, now, Sunoco Logistics (NYSE: SXL) too (see Best Buys) will add up to one of the juicier growth stories in the MLP space once the waivers on some of these distribution rights expire in two to three years. Adding to the enthusiasm was this week’s approval by the US Department of Energy of a project to export liquefied natural gas by ETE’s joint venture with the UK-based BG Group (NYSE: BG). The project could ship up to 2 billion cubic feet of natural gas per day overseas from ETE’s complex at Lake Charles, Louisiana. ETE capped off a busy week by reporting a 14 percent year-over-year gain in distributable cash flow, making us feel even better about last month’s hike in the buy below target. Continue buying ETE below $69.

Energy Transfer Partners LP (NYSE: ETP) gained 3 percent over the last month, all of it since the preliminary government approval for the Lake Charles, Louisiana LNG export project, in which it will participate alongside ETE. Distributable cash flow was up 40 percent year-over-year as a result of recent acquisitions, topping estimates. But the really big deal was the one in which general partner ETE will exchange some 50 million ETP units for a 50 percent interest in ETP’s incentive distribution rights from subsidiary partnership Sunoco Logistics (NYSE: SXL). This will be immediately accretive for ETP, allowing the partnership to resume modest distribution increases (initially by a penny per quarter) and to push its coverage ratio back above 1. In the longer term, the exchange will be advantageous for ETE, which plans to acquire all of SXL’s IDRs eventually. We’re downgrading ETP to a Hold not because there’s anything wrong with the partnership, but because ETE and SXL are the more attractive investments within the Energy Transfer family. 

Enterprise Products Partners LP (NYSE: EPD) gave up the 4 percent it gained the prior month, even though the largest MLP continued to post strong results. Pipeline volumes are up 20 percent year-over-year, while the gross operating margin — the partnership’s preferred profit measure — rose 11 percent. EPD hiked the distribution 7.1 percent from a year ago, the 36th consecutive quarterly increase taking the prospective yield to 4.4 percent. Not bad considering the partnership retained a third of its distributable cash flow to finance growth projects that should  boost distributions down the road. Continue to buy EPD below $66.

Genesis Energy (NYSE: GEL) was the biggest loser in the Conservative Portfolio over the last month, surrendering 7 percent after advancing 3 percent in the prior period. Much of the decline took place in the wake of last week’s in-line quarterly results, which may have disappointed some investors with high expectations. Still, the oil shipper delivered typically strong results, with pro-forma cash before reserves rising 21 percent in a year’s time in support of the previously announce 11 percent year-over-year distribution increase. It was the 32 consecutive quarterly increase by fast-growing Genesis.  Investors may have been put off by the fact that cash before reserves including one-time items grew just 6 percent year-over-year as a result of operating disruptions the partnership described as one-time events. But analysts participating on the conference call chose to focus on robust expansion plans seeking to capitalize on surging onshore and offshore US oil production. Given the long history of double-digit growth at Genesis, management has more than earned the benefit of the doubt.  Buy GEL up to $55.

Inergy Midstream LP (NYSE: NRGM) reported a 31 percent jump in distributable cash flow and boosted its per-unit distribution 5.3 percent year-over-year amid a merger with Crestwood Midstream Partners that’s expected to close by the end of September.  “It’s clear to us that size does matter in this business as the projects just seem to get larger and larger,” the CEO of the combined entity said on the earnings conference call. With a yield of 6.7 percent and gathering pipelines in some of the nation’s fastest-growing shale basins, NRGM retains attractive growth potential. But we remain concerned about the drag from incentive distribution rights with 50 percent of growth set to be creamed off by the partnership’s general partner. NRGM remains a Hold.

Kayne Anderson Energy Total Return (NYSE: KYE) jumped 4 percent in the last month, and continues to offer a 6.5 percent yield based on distributions that have remained flat since 2008. But instead of continuing to recommend the closed-end fund, we’re taking this opportunity to purge it from our Growth Portfolio. Subscribers are advised to do the same after considering personal tax implications. The main advantage of closed-end funds is the diversification they provide, along with the convenience of a 1099 miscellaneous income tax form instead of the pesky K-1’s from each individual MLP. The downside is that closed-end funds are taxed on the distributions they receive, and often use leverage to offset that hit. But leverage can be costly. For example, the KYE, in addition to its 1.8 percent management fee and 0.2 percent cost for “other expenses” is paying 2.2 percent of assets in interest expense and distributions on mandatory redeemable preferred stock. So the total expense ratio is a startling 4.2 percent, and no amount of investing savvy is likely to offset that drag on performance in the long run. You’d be much better off buying an index-lined exchange-traded note like the UBS E-TRACS Alerian Infrastructure Index ETN (NYSE: MLPI), reviewed here.  Sell KYE.

Kinder Morgan Energy Partners LP (NYSE: KMP) shed 4 percent in the last month despite announcing a 7 percent year-over-year distribution hike as it begins to digest the recent Copano acquisition. Sapping the gain in cash available for distribution to the limited partners was a 23 percent increase in incentive distribution payments to general partner and recent Growth Portfolio addition Kinder Morgan (NYSE: KMI), the main reason we continue preferring KMI to KMP. KMI managed a 14 percent year-over-year dividend increase for its shareholders, though its equity performed no better than KMP’s. With a huge range of valuable assets and expert management, KMP units and KMI shares remain bargains at current levels.  KMI is yielding 4.3 percent with double-digit growth all but guaranteed as a result of lucrative incentive distribution rights, while KMP is yielding an unusually rich 6.4 percent for a partnership of its scale and reliability. Continue buying KMP below $86 and KMI below $42.

Legacy Reserves LP (Nasdaq: LGCY) tacked on a 5 percent gain for the second straight month after boosting its per-unit distribution by half a cent sequentially and 3.6 percent year-over-year. Adjusted EBITDA rose 6 percent sequentially, boosted by tighter crude differentials, and distribution coverage improved to 1.17. At the current unit price the yield stands at 8.5 percent. Buy LGCY below $29.

Magellan Midstream Partners LP (NYSE: MMP) was one of the strongest performer in the Conservative portfolio, eking out a 1 percent gain on top of last month’s 5 percent advance. Recently reported earnings topped estimates, and led the crude and refined products shipper to raise annual profit guidance. It now expects to deliver distribution growth of 16 percent for the full year, with a solid 1.3 coverage ratio, and to follow that up with a 15% distribution gain in 2014. Shipping volumes improved across the board, as did margins, and the partnership earned a credit upgrade from Standard & Poor’s. At the current price the targeted 2013 distribution works out to a 3.9 percent yield, and the future looks bright. We’re upgrading MMP to a Buy below $60.  

Mid-Con Energy Partners LP (Nasdaq: MCEP) was the Aggressive Portfolio outperformer, rising more than 10 percent in the last month as many upstream MLPs were shook off suspicions based on the accounting issues at Linn Energy. This week, MCEP reported a second-quarter production increase of 48 percent year-over-year and 3 percent sequentially, while adjusted EBITDA was up 50 percent in a year’s time and 10 percent sequentially. MCEP raised its distribution by a penny per unit, an increase of 2 percent sequentially and 8 percent year-over-year. Distribution coverage widened to 1.26 from 1.21. MCEP remains a Buy below $24.

Navios Maritime Partners LP (NYSE: NMM) treaded water  this month as the dru bulk shipper’s unexpectedly strong quarterly results offset the recent decline in shipping rates. Fleet additions made over the last year boosted quarterly EBITDA 24 percent, even as time charter-equivalent rates slid 13 percent year-over-year. NMM kept its distribution level at 0.4425 cents per unit, for an annual yield of 12 percent at the current unit price. Despite the scheduled expiration of several key charter contracts signed in better times next year, the CEO extended his pledge to maintain current distributions through the end of 2014. NMM remains a Hold pending further indications that China’s growth slowdown has stabilized following upbeat macroeconomic data this week.

Oiltanking Partners LP (NYSE: OILT) was down nearly 4 percent for the month heading into Thursday’s report, but finished above breakeven after blowing past estimates. The oil storage specialist also boosted the per-unit distribution 5 percent sequentially and 18 percent year-over-year. A long track record of rapid growth amid surging demand for oil storage explains why the yield remains at a modest 3.4 percent, as unit price keeps up with distribution increases. Continue to buy OILT on dips below $50.

PVR Partners LP (NYSE: PVR) was the clear laggard in the Aggressive Portfolio over the last month, slumping more than 15 percent since reporting disappointing results and cutting its annual earnings forecast on July 24. Management blamed delays by Marcellus gas producers in connecting their wells to the partnership’s gathering system, as well as unexpectedly low demand for its water deliveries. The midpoint of the reduced EBITDA range for its Eastern Midstream segment was $37.5 million, or 18 percent, below the old midpoint. And while the CEO suggested much of the shortfall was due to timing issues, PVR doesn’t have much room for error after heavily leveraging its balance sheet to acquire and build up Marcellus assets last year. We are downgrading PVR to a Hold and will look to exit the position at the earliest opportune moment. 

Regency Energy Partners LP (NYSE: RGP) units gained not quite 2 percent in the last month, nearly matching their performance in the prior period, as the Energy Transfer Equity (NYSE: ETE) affiliate continued to focus on gathering and processing in some of the fastest growing shale plays.  The partnership recently nudged its quarterly distribution half a penny higher, and now yields 6.7 percent. Distributable cash flow in the most recent quarter matched the amount of the distribution, an improvement on the recent coverage ratios. The partnership’s gathering system in west Texas saw a 14 percent sequential volume gain over the first quarter of 2013, while its south Texas gathering system volume jumped 30 percent sequentially, positioning RGP to continue growing its distribution. Continue to Hold RGP.

Spectra Energy Partners LP (NYSE: SEP) slumped 11 percent this month, correcting last month’s 25 percent surge amid excitement over accelerated asset dropdowns by sponsor Spectra Energy (NYSE: SE). On Tuesday, Spectra provided the long-awaited details, agreeing to turn over its remaining US transmission and storage assets to SEP in exchange for 172 million new limited partner units, 3.5 million new general partner units, $2.2 billion in cash and $2.5 billion in debt assumed by the MLP. Total tab: a hefty $12.3 billion. The price tag was a bit richer than expected, and SEP is expected to finance the deal with debt rather than equity issuance ahead of the closing expected by year’s end. In what was surely an afterthought, Spectra Partners reported a 4.7 percent quarterly increase in cash available for distribution and a niftier 20 percent year-over-year distribution gain. At the current unit price that works out to a yield of 4.9 percent. The distribution gains will slow from here given the sheer scale of the big dropdown by Spectra. Distributions are expected to compound at a 9 percent annual rate in 2014 and 2015, and the partnership will aim for distribution coverage in the 1.05 to 1.15 range. Although the deal will certainly give SEP great visibility and scale, it will also weigh it down with a lot of debt. We’re maintaining the Hold rating assumed after last month’s runup for the time being.

Targa Resources Partners LP (NYSE: NGLS) retreated 7 percent in the last month, surrendering much of its gain over the prior period.  Four weeks ago, the NGL gatherer and processor boosted its quarterly distribution 3 percent sequentially and 11 percent year-over-year, in line with the trend over the last four years. And while the distributable cash flow covered just 80 percent of the latest payout  as a result of a heavy capital spending slate, Targa continues to expect a 1.0 coverage ratio for the year and 1.2 in the longer run as the new projects come on line and exports of natural gas liquids from its Texas terminal expand. The 5.8 percent yield suggests the unit price may not go back below our buy below target of $44 any time soon. But if it did without a change in the fundamentals, that would be a buying opportunity.

Teekay LNG Partners LP (NYSE: TGP) slid 4 percent in the last month, negating much of the prior month’s gain. Distributable cash flow was down 2 percent in the most recent quarter as a result of a heavy rate of dry dockings, while the distribution held steady for a 6.3 percent yield with a healthy 1.18 coverage ratio. But the real story remains the partnership’s preparations for the ramp in LNG exports from US, Australia and Paua New Guinea in the second half of this decade, which will require scores of costly new ships to ply the new intercontinental routes. TGP has already chartered two of its newest vessels to first-mover Cheniere Energy (NYSE: LNG) for LNG exports from its Gulf Coast terminal starting in 2016. And it’s in excellent position to profit from more such deals with low cost of capital, a solid book of near-term business and options on additional efficient new carriers to be delivered in 2016-2017. In the meantime, a joint venture to transport liquefied petroleum gas is performing well.  We’re raising out price target to $46 to take advantage of the recent dip and the long-range opportunity.

Vanguard Natural Resources (Nasdaq: VNR) managed a 3 percent rebound this month, after a 9 percent slump the prior period as Linn Energy unfairly tarnished other upstream MLPs. As noted in the July Best Buys, VNR has been much more conservative in its borrowing and capital spending. Recent quarterly results showed the distribution coverage improving from 1.00 to 1.05 behind a 17 percent sequential gain in distributable cash flow as weather issues abated. Earlier in July, Vanguard kept its quarterly distribution level at $0.2050 per unit, good for a yield of 8.9 percent at the current share price. Buy VNR below $28.