A focus on reliable fee-based energy infrastructure, supplemented with commodity price sensitive cash flows with the promise of dramatic upside as economic conditions improve: That’s the hallmark of our Growth Portfolio holdings.

This week we’re adding Energy Transfer Partners (NYSE: ETP) to their ranks. We’ve followed this one for some time and have long admired management’s growth strategy of combining rock-steady assets with riskier, faster-growing ones.

That’s part and parcel of the merger that created this limited partnership (LP) in the 1990s, which combined Heritage Propane with pipeline outfit Energy Transfer to create an immensely profitable whole.

Most of the history since then has been a virtually uninterrupted growth progression, as Energy Transfer Partners has continued to add assets with acquisitions as well as construction.

The 500-mile Midcontinent Express Pipeline (MEP), built as a joint venture with Conservative holding Kinder Morgan Energy Partners (NYSE: KMP), is the latest of these.

The final segment of the pipeline, which links gas markets and infrastructure across the middle of the US, started up August 3. The system now gives shippers and producers in the Barnett Shale, Bossier Sands and other producing regions access to markets in the Eastern US. It will now contribute roughly two months of cash flow to third quarter earnings.

Fee-generating assets like the MEP are the backbone of Energy Transfer and comprise the majority of cash flows. The good news is they’ve generally held up well during this recession.

Intrastate volumes at its Texas system rose 31 percent in the second quarter versus year-earlier levels; the LP is having no problem attracting business. Interstate volumes were flat, but will get a shot in the arm from the completion of the MEP.

Once roughly half of income, propane operations have shrunk relative to the LP’s overall business. However, they remain extremely profitable, generating 66 percent higher operating income in the first six months of 2009 despite mild temperatures and the impact of the recession. That’s a testament to management’s skill in controlling costs by realizing scale advantages.

Propane distribution is a surprisingly utility-like business. Owing to the expense and difficulty of reaching a wide range of dispersed locations, there’s generally no established hardware network to the home. Rather, delivery is more often than not made by truck or other form of mobile transport.

In addition, there’s no reason a region can’t be served by multiple suppliers, as no legal franchises exist. And there are no regulatory bodies, such as those that oversee electric, gas and water utilities, and even telephone companies.

Nonetheless, customers tend to be locked into single supplier, usually by contracts of some sort but more often than not by force of habit. That hasn’t changed despite the growing population of many rural areas. And there’s little sign it will any time soon, though some towns have grown enough to make an in ground, utility-operated natural gas distribution system economic.

The result is an exceptionally steady though unregulated business. All of the major pure-play propane distributors have held and even increased dividends during the recession of the past two years. Energy Transfer’s propane business is no different.

The LP, however, did experience a cash flow shortfall in the part of its business that is affected by changes in commodity prices, mainly natural gas. That, in turn, triggered much lower second quarter overall cash flows.

One reason for the shortfall was simply less drilling in the key San Juan Basin area due to lower natural gas prices. That hurt the throughput at the company’s midstream energy business.

The real damage, however, came from falling margins for natural gas liquids, which reduced profit per throughput.

The bottom line was a more than halving of midstream operating income, which depressed overall operating income at the same time debt interest to finance new assets reached more than $100 million for the quarter. That was 47 percent higher than year earlier levels, and the result was sharply lower cash flow.

If there’s good news here it’s that this bad news was entirely due to falling natural gas prices, which reduced activity. And it’s hard to imagine things getting appreciably worse from here on that score.

First, spot prices for gas are now at a seven-year low. But the cotango–comparing current prices to what’s needed to lock down supplies in the forward contracts–is historically wide. That’s only happened in the past when gas prices were at a bottom–the last time at the end of the 2002 recession–and were poised for a huge rebound.

One reason gas is weak is the high inventories that almost always occur this time of year due to seasonal factors. And given the steep cuts in production throughout North America, it won’t take much of a change in the weather–or revival of industrial demand–to reduce them sharply. That, in turn, would drive prices higher and hence activity at the LP’s assets.

Second, Energy Transfer’s commodity price-dependent operations are now a much smaller part of its earnings, which nonetheless still managed to cover the distribution despite the shortfall. And as the LP continues to beef up its base of fee-generating assets, they’ll be even less important for covering distributions going forward.

In short, second quarter 2009 is almost certain to prove a nadir for Energy Transfer’s cash flows. Distribution coverage, even with gas prices so low, was still solid in the second quarter and will be the rest of the year even under pessimistic assumptions for natural gas.

The unit price is down and the yield is up, to around 8.5 percent, over the past couple of weeks. This reflects the bad second quarter news, but not the likely upside. That makes now an ideal time to buy and lock away Energy Transfer Partners up to 45 for long-term growth and income.