Many factors influence returns on energy assets–and therefore the dividends we receive as limited partners of master limited partnerships (MLP). Energy prices affect everything from the profitability of oil and gas wells to throughput at processing plants and pipelines.

Management’s ability to control costs without sacrificing reliability and safety also looms large. That’s particularly true in the wake of the accidents we’ve seen this year that have provoked more regulatory scrutiny, such as the leak of an Upper Midwest pipeline run by Enbridge Energy Partners LP (NYSE: EEP).

Nothing, however, is as important to setting rates of returns as MLPs’ cost of capital. The lower borrowing rates and higher equity prices go, the lower the cost of money to finance the building and buying of cash-generating assets. And the lower the cost of money, the more profitable even the lowest-risk projects become.

Conversely, higher borrowing costs and lower equity prices mean higher-cost money. That means a higher bar must be met for prospective revenue for new projects to be economically viable.

During the credit crunch/market crash of late 2008 and early 2009, the cost of money was very high. Even acknowledged MLP kingpins Enterprise Products Partners LP (NYSE: EPD) and Kinder Morgan Energy Partners LP (NYSE: KMP) faced borrowing rates of nearly 10 percent on intermediate-term debt. Enterprise Products’ partnership units, meanwhile, at one point yielded nearly double-digits.

The fact that Enterprise was able to boost distributions every quarter in those dark days is testament to management’s ability to find projects that are immensely profitable, even at that high cost of capital. A January 2009 equity offering of 9.6 million units, for example, required a pledge by late founder Dan L. Duncan to reinvest $65 million in dividends received by his investment company EPCO in Enterprise units. That was in addition to an earlier pledge to buy $260 million in new Enterprise units.

Of course, in retrospect, that was a ridiculously good investment for Duncan, who rarely made a bad bet: Enterprise then traded at barely $20 per unit. But it’s a pretty stark example of the hurdles MLPs faced in raising capital in early 2009 and the very high cost they were forced to lock in to secure financing of new projects.

Flash forward to late 2010 and Enterprise’s sale this month of 13,250,000 units, including overallotments of 1,725,000 million units. The price of $41.25 is roughly twice that realized by the early 2009 equity sale. Even factoring in a 10 percent increase in quarterly dividends, that’s a 75 to 80 percent reduction in Enterprise’s cost of equity capital from then–more or less the same cut it’s enjoyed in its cost of debt capital.

You don’t have to be an accountant to catch the benefit to Enterprise and its limited partners–particularly now that the general partner and its IDRs (incentive distribution rights) have been eliminated by last month’s takeover. Mainly, Enterprise’s ongoing projects, including massive investment in the gas liquids-rich Eagle Ford Shale, are being financed at 75 to 80 percent less than its projects were less than two years ago.

Some costs such as steel and wages for needed skilled workers have risen as the economy has crawled back from the edge. But those low capital costs have enabled Enterprise to find projects worth spending $3 to $3.1 billion on this year.

That’s a massive increase from the $1.7 billion spent in 2009. Coupled with at least another $5 billion now slated for completion over the next couple of years–not including acquisitions and as-yet unannounced new construction–Enterprise is set for accelerating cash flow and dividend growth. And the same holds true for well-run MLPs across the board.

Not in the Market

There’s no doubt equity as well as debt financing makes sense for MLPs as rarely before, provided, of course, there are worthwhile projects and acquisitions to spend it on. And with the cost so low, even very low-risk projects generate generous returns. In other words, not only is potential growth greater but MLPs can take less risk to get at it.

Viewed this way, it makes absolutely no sense for MLP managements not to sell equity to raise capital. Nevertheless, equity offerings continue to be viewed as poison by a large number of investors.

Enterprise, for example, now trades nearly $2 below the price of its early December offering and more than 10 percent below its early November high, despite continued strong business developments since. And the same is true of other MLPs offering equity in late 2010.

We’ve commented on equity offerings as a catalyst for selloffs frequently in MLP Profits. Our prescription has generally been to view them as opportunities to buy into positions that have run past our buy targets as well as to get into others that were already below targets but are suddenly a lot cheaper.

In the case of Enterprise, the pullback since early November is definitely a good opportunity to snap up units, with the caveat that no one should ever overload on a single investment. Prior to the equity offering, Enterprise units had consistently traded above our buy target for many weeks. That was despite our decision to ratchet up the target in the wake of the takeover of Enterprise GP Holdings (NYSE: EPE) and the elimination of the IDRs and robust third-quarter earnings presaging an acceleration of dividend growth.

Now, units are again trading well under $42, last week breaking under $40, a price not seen since late September. That’s after 21 collective insider buys totaling 1.025 million units at $42.74 per in late November. That kind of support is typical of Enterprise insiders, who have made 53 buys in 2010. Buy Enterprise Products Partners LP up to 42.

DCP Midstream Partners LP (NYSE: DPM) issued 2,875,000 units in mid-November for $34.96 per. The immediate result was drop of more than $2 per unit, taking the operator of energy infrastructure with some commodity price exposure briefly below our buy target of 35.

The units have since made up more than half their loss, moving beyond that level. There’s every indication now, however, that the funds invested from the offering will help produce the incremental cash flow and dividends to lift the payout in 2011, though spreads between prices of various energy commodities will be a wildcard for about 10 percent of profits. That’s with roughly 56 percent of cash flow from fee-based businesses, and 80 percent of commodity price exposure from the other 44 percent hedged out.

If you weren’t able to get into DCP on this latest dip, don’t despair. Odds are it will either dip or justify a higher target by early next year. Until then, our advice remains to buy DCP Midstream Partners LP up to 35.

Energy Transfer Partners LP (NYSE: ETP) has completed its Tiger Pipeline and Fayetteville Energy Pipeline (FEP) both ahead of schedule and under budget. Both will fire up cash flows in 2011, as Tiger capacity is 100 percent subscribed while FEP is 90 percent sold, and management has already all but promised a dividend boost. There’s even been some revved up insider buying in the low 50s.

All, however, was apparently trumped by the MLP’s filing of documents that enable it to sell up to $200 million in new equity “from time to time” through Credit Suisse Securities. Even that full amount issued all at once–which isn’t happening–would only increase Energy Transfer’s current $9.8 billion market capitalization by a little more than 2 percent.

But the offering has nonetheless knocked the units back below 50, presenting a solid opportunity for those not in yet to grab now up to 7.3 percent and set to conservatively grow another 5 percent or so in the next 12 to 18 months. Our buy target for Energy Transfer Partners LP remains 52.

Kinder Morgan Energy Partners LP (NYSE: KMP) last week announced an equity investment in rail transport company Watco Companies of $150 million, starting with an initial stake of $50 million in January. Watco owns the largest privately held short-line railroad company in the US and operates transload/intermodal and mechanical services divisions. Kinder will share in Watco’s growth and the investment also compliments its existing terminal network.

Management also announced it expects to retire $430 million in debt in 2011, as well as boost its distribution 4.5 percent to an annual rate of $4.60 per unit for the calendar year. Even that wasn’t enough, however, to prevent a selloff in the units in the wake of the announcement of the Watco investment. The result: another shot at buying Kinder Morgan Energy Partners LP under 70, well below our target of 73.

Linn Energy LLC (NYSE: LINE) is also comfortably below our target of 38, after announcing on Dec. 9 the issue of 10 million units with an overallotment option of another 1.5 million. The expected $396 million is an addition of just 7 percent to the current market capitalization of $5.67 billion. And it will cut debt taken on with recent acquisitions to boost output, which led to a 5 percent increase in the distribution in late October.

Management expects further dividend growth as more production gains are realized in 2011 and 2012. And it will be able to deliver even if energy prices weaken, thanks to an aggressive hedging policy that’s locked in selling prices for 100 percent of current output through 2013 and 80 percent in 2014, as of the Dec. 7 conference call.

The equity issue initially knocked the units down to the neighborhood of 36. That’s well below our target of 38, giving those without positions another chance to buy Linn Energy LLC at a very good price.

Since its inception, when Navios Maritime Partners LP (NYSE: NMM) has issued equity, it’s always been to add another first-rate ship to its fleet of dry cargo (non-oil or LNG) vessels. The purchases of the Navios Melodia and Navios Fulvia in mid-November were no exceptions. Both were built in 2010 in South Korea. Melodia is fully chartered until 2022 under a profit sharing contract and Fulvia’s cash flow is locked down until October 2015. Both contracts are insured “by an AA+ rated European Union governmental agency.”

Together, the new ships are expected to generate reliable cash flow of roughly $24.7 million per year, or $182.9 million over the lives of their contracts. At that point, they can be rechartered as the market dictates. In the meantime, their addition is strongly accretive and set to produce a distribution increase most likely to a range of 45 to 47 cents per quarter, a level that should still produce a solid coverage ratio of 1.5-to-1. That’s up from the current 42 cents and would push the overall yield to the 9.6 to 10 percent range, based on Navios’ current unit price.

Not even that could deter selling in the wake of the announcement. That was no doubt spurred by the fact that financing including minting 788,370 new Navios common units, as well as $50 million in a new credit facility and $112 million in balance sheet cash.

Those who look a little closer, however, will see the new units represent less than 2 percent of the MLP’s current total outstanding. The cost of capital is low, as they’re basically proceeds from a successful follow-on equity offering. And the contracts are above current market rate, again demonstrating management’s ability to hurdle difficult markets in dry bulk shipping globally. Take advantage of the temporarily low unit price to buy Navios Maritime Partners LP up to our target of 20.

Spectra Energy Partners LP (NYSE: SEP) slipped under our buy target of 32 last week for the first time since spring, when its dividend was 7.3 percent lower. The primary reason: a public offering of 6,250,000 units–with a 937,500 overallotment option–at a price of $32.87 per announced in early December.

The financing repaid a $7.4 million loan assumed with the purchase of an additional 24.5 percent interest in the Gulfstream Natural Gas pipeline from parent and general partner (GP) Spectra Energy (NYSE: SE). The remaining proceeds will cut debt from the $330 million deal and include a capital contribution from the parent to maintain its percentage ownership in the LP.

Such asset drop-downs are always on very favorable terms, as the GP is essentially moving assets to a more tax-efficient entity. As such, this deal will be accretive to cash flow, spurring faster dividend growth. And it’s being executed at a low capital cost as well.

That didn’t prevent selling in the wake of the equity offering, reaching a point 13 percent below the LP’s early October high. But it has given investors another opportunity to pick up extremely safe Spectra Energy Partners LP below our buy target of 32.

Finally, Targa Resources Partners LP’s (NSDQ: NGLS) general partner launched an initial public offering (IPO) on Dec. 6 that actually beat expectations on price. The buzz about the IPO initially hurt the MLP’s units, though it did not involve any new LP units. Targa Resources Partners LP has since recovered but still sells below our target of 33.

Fearless Forecast

Even the best MLP managers are often surprised by market conditions, particularly if they operate in a commodity price/economic growth-driven business like energy. Fortunately, their success doesn’t depend on being clairvoyant. Rather, management must successfully play the percentages, look for good deals that increase cash flow and try to block out the risk.

Today’s MLP universe–all of which are tracked in How They Rate–is still around today because management did precisely that during the past few years, which rank as some of the most turbulent in decades. Their ability to maintain and grow dividends over that time is a testament to sound financial and risk management policies, as well as ability to find opportunity where others found none.

Looking at them–particularly the 18 companies in the MLP Profits Portfolio–it’s easy to forget now that not every MLP was able to do that. In fact, there were some pretty spectacular crackups in 2008 and even 2009, as historically tough credit conditions exposed businesses based on weak financial and operating strategies.

Happily, the ranks of MLPs that completely imploded like now de-listed US Shipping are relatively few. Most of the battered, rather, followed the example of BreitBurn Energy Partners LP (NSDQ: BBEP), which eliminated its dividend in April 2009 but was able to put its house in order within a year. After three successive quarterly increases, it now pays out 75 percent of what it did in February 2009, before a combination of too much leverage and low energy prices forced drastic measures.

Like most MLPs that have risen from the dead this year, BreitBurn still trades well below its pre-crash high of nearly $36 per unit, set back in May 2007. But it has nearly quadrupled off its lows of late 2008, making back much of the ground lost during the crash.

The best-run MLPs fared far better, and the relative experience of the BreitBurns makes their performance all the more impressive. Enterprise Products Partners, for example, at its autumn high traded some 50 percent above the range it held prior to the 2008 crash. And with 25 consecutive quarterly distribution boosts behind it, it’s set to move higher still.

The question we get is how much more can they run? Can the best MLPs possibly match the gains we’ve seen since their early 2009 lows? Or are we better off taking the profit, paying the taxes and moving onto something else with a higher yield?

A cursory glance at How They Rate reveals a number of MLPs that yield considerably more than Enterprise, as well as the other Conservative Holdings. And after the capital appreciation of the past couple years even the yields of our Aggressive and Growth MLPs are well below where they once were.

As recently as June, for example, Linn Energy yielded comfortably in double-digits, versus only a little over 7 percent now. That’s despite the fact that, even with aggressive hedging, the company at its core sinks or swims with management’s ability to handle what’s fundamentally a very volatile market, mainly oil and natural gas. And the gas half of that market is chronically weak and priced to remain in oversupply indefinitely.

There’s even a fundamentals-based argument for swapping out our picks for MLPs with higher yields. Last week, the Conference Board announced the November Composite Index of Leading Economic Indicators rose 1.1 percent. That’s nearly three times the revised rate of 0.4 percent for October as well as the fifth consecutive monthly gain, and there were positive readings on nine of the ten indicators used.

Coupled with the lowest unemployment insurance claims since mid-2008, that’s a clear sign the US economy is gaining strength. And growth is likely to get a boost from the continued largesse from Uncle Sam, this time mostly in the form of tax cuts.

Borrowing rates for MLPs have risen a bit over the past two months. But the jump has been nowhere close to the spike we’ve seen in US Treasury yields. Enterprise Products Partners’ 10-year debt, for example, still has a yield to maturity of less than 5 percent. Even its bonds maturing in 2068–which are rated just BB by S&P and Fitch–are priced well above par value for a yield to maturity of just 6.5 percent.

The spike in US Treasury yields has had even less impact on MLP equity values. The Alerian MLP Index, for example, is still more than 20 percent above its early summer 2010 low, and far above pre-2008 crash levels as well.

In sum, the cost of capital isn’t quite as low as it was a few weeks ago. But it’s still quite low by historical standards. Less encumbered by leverage from the last cycle, the strongest have taken best advantage of the favorable conditions over the past couple years. But even MLPs that did crash and burn are riding them to recovery. And some are worth a look.

That was our reasoning for picking up units of then-battered Encore Energy Partners LP (NYSE: ENP) back in late April, which we’ve since held for a modest 12 percent gain. We did somewhat better adding Penn Virginia GP Holdings (NYSE: PVG) in May for a 58 percent return.

We’ve upgraded our advice on several other higher-risk fare we had shunned, including Capital Products Partners LP (NSDQ: CPLP). And we’re studying several others for potential Portfolio inclusion.

For now, however, your best bets are still with the high-quality end of the MLP universe. The monster gains of 2009 and 2010 were in large part just a recovery from the panic-selloff of late 2008, which was driven by fear of the end of the world rather than rational assessment of their prospects.

Opportunities to profit from emotional crackups like that come only very rarely. And despite today’s worries about sovereign debt in Europe, the fallout from quantitative easing and other macro problems, we’re in a far different place today.

That makes a repeat of either the 2008 selloff or the 2009-10 recovery highly unlikely anytime soon. What we seeing, however, is the start of an acceleration of dividend growth in the MLP universe, as cash flows start to spill out from recently built or bought assets–financed at the lowest cost of capital in MLP history.

“The Power of Equity” compares each Portfolio MLP’s growth in equity–as measured by total outstanding units–to its dividend growth.  Equity issues finance asset growth, which in turn produces cash flow and distribution growth. As a result, distribution growth generally lags equity growth, usually be several months.

The more expensive the financing, the less distributable cash flow will be produced by buying or building assets. Mainly, more units will have to be issued to raise the same amount of money. That means more dilution for the cash flow added. Conversely, the less expensive the equity financing–i.e., the higher the price offered to investors–the less dilution.

The first key point of the table is comparing the growth in the number of shares for each MLP in 2009 with what’s happened in 2010. Unit prices were generally higher in 2010 than in 2009. Consequently, the cost of equity capital was considerably cheaper in 2010 than in 2009.

Some of our MLPs took advantage of that by issuing considerably more equity units in 2010 than the year before. Their ranks included Genesis Energy LP (NYE: GEL), Inergy LP (NYSE: NRGY), Legacy Reserves LP (NSDQ: LGCY), Linn Energy and Regency Energy Partners LP (NYSE: RGNC). All completed major asset expansions this year, though much of Inergy’s gain was the result of its merger with its former general partner.

Others boosted their units in circulation by roughly the same amount or even somewhat less than the year before, but were able to raise far more equity capital as the result of a much higher unit price. Their ranks included DCP Midstream, Enterprise Products, EV Energy Partners LP (NSDQ: EVEP), Navios Maritime, Spectra Energy Partners, Sunoco Logistics Partners LP (NYSE: SXL) and Targa Resources.

Even Energy Transfer Partners, Kinder Morgan Energy Partners, Magellan Midstream Partners LP (NYSE: MMP) and Teekay LNG Partners LP (NYSE: TGP) realized immense benefits from lower-cost equity. Energy Transfer as noted above completed two massive pipeline projects. Magellan’s major boost in units in 2009, meanwhile, was due to absorbing its general partner. Since then, it’s used improved access to equity capital to grow assets and revive dividend growth.

The only MLP on our list not to take advantage of a better equity market this year was Encore Energy. That’s been in large part due to turmoil surrounding its relationship with Denbury Resources (NYSE: DNR). The company’s cost of equity, however, is nonetheless considerably lower than it was in 2009, promising for future issues.

The second major point of “The Power of Equity” is comparing the last 12 months’ dividend growth to equity growth. Our MLPs’ current distributions are entirely funded by distributable cash flow (DCF). DCF, in turn, is basically revenues less all expenses including debt interest, taxes and maintenance capital costs, which are capital expenditures needed to maintain the business.

DCF generally does not cover the cost of funding asset growth, either by acquisition or construction. Enterprise Products’ third-quarter coverage ratio of 1.4-to-1 basically means it reserved 40 cents of DCF for every dollar of dividends it paid out. That’s a considerable cash cushion that ensures it won’t have to borrow or issue equity to fund all the capital it needs for growth.

It by no means assures that no new capital will be needed, particularly given Enterprise’s aggressive needs. For that, the MLP will have to issue more equity or debt capital, which it has had no problems doing very cheaply this year. And the same goes for the rest of the MLPs in the table.

The most recent 12-month distribution growth rate is a result of rising DCF over the last 12 months. That, in turn, was funded by equity issued largely in 2009 to purchase assets.

Equity issued in 2010 will therefore set the tone for 2011 DCF, and by extension what dividend growth will be next year. And with more capital raised much more cheaply, the implications are strongly bullish for nearly every MLP on our list.

Some have no doubt already passed along some of the benefits, particularly the infrastructure-heavy Conservative Holdings that enjoy greater predictability of DCF thanks to less exposure to energy price volatility. The biggest acceleration in growth from here, however, could well come from the more commodity-price-sensitive fare, assuming oil prices remain on solid ground.

It’s this increasingly likely acceleration in dividend growth that is the strongest argument for sticking with this high-quality lineup, as opposed to cashing in and chasing higher-yielding fare carrying higher risk. In the near term, many factors chase an MLP’s price up and down. In the long run, its dividend growth that calls the tune, as unit prices ratchet up to reflect higher payout levels.

The gains aren’t likely to be as dramatic as those of the past two years. And the ranks of MLPs offering truly secure, 8 to 12 percent yields are as thin as the current number of Washington Wizards victories.