October 20, 2008
FYI - A Timely Investment
Over the past eight years, through 2007, Energy Master Limited Partnerships (MLPs) have been
one of the best asset classes, with the Wachovia MLP Index accumulating performance of
407.83% versus 13.71% for the S&P 500 Index. The MLP Index outperformed the market every
year except for 2005, which was relatively flat (see table below)**.
| Year | Wachovia MLP Index Total Return | S&P 500 Index Total Return |
| 2000 | 42.90% | -9.03% |
| 2001 | 41.80% | -11.85% |
| 2002 | -0.03% | -21.97% |
| 2003 | 45.20% | 28.36% |
| 2004 | 16.50% | 10.74% |
| 2005 | 4.80% | 4.83% |
| 2006 | 26.60% | 15.61% |
| 2007 | 11.70% | 5.48% |
** It should not be assumed that recommendations made in the future will be profitable or will
equal the performance of the securities in these lists. Although these securities may appear
profitable, they may also suffer losses.
Typically, companies structured as MLPs are involved in much needed energy infrastructure
businesses such as oil and gas pipelines and processing, terminals and storage. Some MLPs
derive a good portion of their earnings from Federally regulated operations such as transmission
and storage. Their distributions (dividends) are considered a return on capital so that roughly
80% are tax-deferred to investors. Given the attractiveness of this asset class, institutions,
including hedge funds, both U.S. and foreign, closed end funds, and mutual funds became heavy
buyers in recent years. Hedge funds, in particular, have used leverage to buy MLP stocks.
While aiding the stock market's performance with their involvement, the overall recent equity
decline, coupled with the MLP's relative illiquidity compared with other groups, have been a
disaster because these hedge funds have been forced to reduce their leverage as redemptions
became a problem. The phenomenon actually began when the sub prime issue surfaced in August
2007, as investors became increasingly concerned about credit markets in general, including
MLPs, because of their reliance on new capital to finance projects, make acquisitions and
increase distributions. As a result of this indiscriminate selling of MLPs by hedge funds, pre-tax
yields and basis point spreads vis a vis U.S. Treasury 10-year bonds are at historically high levels
at roughly 9.5% and 576 basis points, respectively as reported by Wachovia on 10/2/2008. The
current 10-yr Treasury bond rate is 3.95%. Therefore, we believe this represents an opportunity
to lock in the kind of returns and capital appreciation potential that could be truly unique.
We point out the following developments to consider:
. The Wachovia MLP Index has declined 25.6% in 2008 (through Sept. 30), the largest sell
off in the asset class' history. Trading volatility is uncharacteristically running
significantly above normal, while institutions and retail selling have damaged the group
to unprecedented levels. Valuations are very depressed, but we believe the business
model is viable and sustainable.
. Many MLPs are "yesterday's" interstate pipelines. They are regulated by the Federal
Government, perform essential services such as moving products, (both oil and gas) to
heat homes, fuel manufacturing plants, and transport goods. While a recession can have
some impact on their businesses, throughput continues in any economic environment.
. MLPs are very transparent compared with other asset classes and industries. Cash
received from operations is applied to debt reduction and infrastructure maintenance,
with any excess paid to limited and general partners. Any cash shortfall shows up as
borrowed capital. There are no mark to market issues and no distinction between GAAP
funds and actual cash.
. MLPs have financed most of their operations and growth externally. While the U.S. is
currently experiencing extremely volatile markets, MLPs have the ability to reduce
capital expenditures and maintain present high dividend levels until capital markets
recover.
Portfolio Positioning
MLPs with the most defensive characteristics, i.e. stable cash flow and strong balance sheets,
derive 75% or more of their revenues from interstate pipeline operations. Pipelines typically
charge shipper customers a rate that includes a minimum amount that must be paid even if
volumes fall below contracted levels. This provides a cushion during recessions. Pipelines'
are typically rated investment grade and, are therefore, the "blue chips" of the MLP asset
class.
The second strongest MLP companies are the combination of pipeline and midstream. These
MLPs have a mix of interstate transmission and non-regulated gas gathering and processing
assets. While less defensive than the pure interstate pipelines, they offer greater long-term
dividend growth potential.
The companies below represent a portfolio of what, in our judgment, are the strongest MLPs
with very attractive total return potential**.
| Pipelines and Midstream LPs | Current Yields* |
| Boardwalk Pipeline Partners | 8.98% |
| Copano Energy, LLC | 10.32% |
| Enbridge Energy Partners | 11.05% |
| Energy Transfer Partners | 9.74% |
| Enterprise Products Partners | 8.42% |
| Kinder Morgan Energy Partners | 7.61% |
| Markwest Energy Partners | 12.60% |
| Oneoke Partners | 8.15% |
| Plains All American Pipeline | 9.28% |
| Targa Resources Partners | 13.72% |
| Williams Partners | 10.36% |
* Source: Reuters - as of October 20, 2008. Any information provided has been prepared from sources believed to be reliable but is not
guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.
Sincerely,
Paul Elliot, CFA Dan Tulis, CFA James Elliot, CFA
Certain statements contained herein may contain "forward-looking statements" within the meaning of the Private Securities and Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results,
performance or achievements of these securities to be materially different from any future results, performance or achievements expressed or implied by
such forward- looking statements. Such factors include, among others, risks and uncertainties associated with the timing and costs of energy sector
production, the demand for and prices of oil/gas products, the timing and amount of capital spending in the nation and world wide, and general economic
factors. This report is not a recommendation to either buy or sell any securities mentioned
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