Master Limited Partnerships, or MLPs, are often misunderstood by investors.  There are several difference between a partnership and a corporation.  For example, corporations have shareholders and pay them dividends whereas partnership have unit holders that receive distributions.

The major difference between the two business entities is taxes.  While investors have to pay taxes on income they receive from these types of investments, MLPs don’t have to pay federal and corporate taxes (though there are other tax related issues investors should know and understand before purchasing units of MLPs).  This often leaves more net income available to unit holders that is paid out in dividends.

MLPs offer investors high dividend yields.  The average yield of Master Limited Partnerships is roughly four times that of the yield of the S&P 500.

One such MLP that is offering an attractive dividend is Holly Energy Partners (HEP).

Overview

As a midstream MLP, Holly Energy is responsible for transporting and storing of energy related products.  Holly Energy operates its own crude oil and petroleum pipelines and storage terminals in Texas, Nevada, Washington and seven other U.S. states.  The partnership also operates refinery facilities in Utah and Kansas.  Holly Energy was created in 2004 by HollyFrontier (HFC).  The MLP generates revenue by charging customers fees for transporting and storing their petroleum products.  Holly Energy has a market cap of almost $3.3 billion, making it smaller than many of its MLP brethren.

Recent Earnings Report

Holly Energy reported 2^nd quarter results on August 1^st.  The partnership earned $0.38 per unit, missing estimates by $0.02.  Net income declined 3% to $40.1 million, largely due to higher interest expense.  Revenue grew almost 9% to $118.8 million, though this did come in $4.6 million below expectations.  Over the last decade, Holly Energy has increased its earnings per share at a rate of 12%.

Why earnings totals may have been a slight miss, Holly Energy showed strong growth in its distributable cash flow per share, or DCFPS.  This metric grew $4.3 million, or 7%, from the 2^nd quarter of 2017 to $65.2 million.  Growth in DCFPS allows the company to pay and increase its dividend.

Recent Developments

During the 4^th quarter of 2017, Holly Energy finalized its purchase of the Salt Lake and Frontier pipelines.  These pipelines transport Canadian and Rocky Mountain crude petroleum to refineries in the area around Salt Lake City.  Holly Energy’s crude shipments volumes increased 160% compared to the 2^nd quarter of last year, largely due to these two pipelines.  These acquisitions helped drive 61% revenue growth from crude pipelines.  Management expects that these two pipelines will help drive growth in the future.

In addition to acquisitions, Holly Energy is building a truck loading rack in Orla, Texas.  This facility will help deliver as much as 30,000 barrels of diesel per day.  The project, which will cost between $10-$20 million, should be completed by the end of the 4^th quarter.

The Dividend

Holly Energy currently boasts an 8.5% dividend yield.  With solid DCFPS growth, the partnership should continue to be able to increase its distribution.  Most companies increase their distribution or dividend to shareholders on an annual basis.  Holly Energy has raised its distribution now fifty-five times, often every quarter, for the last 14 years.  On August 9^th, Holly Energy will pay shareholders $0.66 per unit, a 4.3% increase from the same time of last year.

The recent increase is in keeping with management’s goal of growing distributions at a 4% rate for 2018.  The partnership expects to have a coverage ratio slightly higher than 1 for the year, meaning Holly Energy should have no is.

DCFPS has increased at a rate of 8.9% during the last decade.  Even though the collapse in energy prices that began in 2014 weighed on Holly Energy’s EPS and DCFPS results at the time, the partnership continued to pay and raise its distribution.

Conclusion

Master Limited Partnerships are often misunderstood entities, because they are set up differently than most companies.  Investors should be aware of tax issues, but this isn’t a reason to avoid owning an MLP.  Holly Energy managed to raise its distribution during the most recent decline in energy prices all the while having a robust yield.  With recent pipeline acquisitions generating strong returns already, Holly Energy looks poised to continue to increase its distribution going forward.