Limited partnerships are still around

The federal government’s SIFT (specified investment flow-through) tax which came into effect on Jan. 1, 2011 was supposed to eradicate the income trust business.

It almost succeeded but not quite. A few trusts and limited partnerships remain and are proving to be immensely popular with savvy yield-hungry investors. Here are two that I recommend.

Brookfield Renewable Energy Partners (TSX: BEP.UN). This Bermuda-based limited partnership (LP) is part of the Brookfield Asset Management empire. By locating offshore, it escapes the provisions of the SIFT tax and is able to make tax-advantaged distributions to investors.

The LP released its fourth-quarter and 2011 year-end results recently and there were no big surprises, good or bad. The financials were pro forma because of the November amalgamation of the Brookfield Renewable Power Fund and the renewable power assets of Brookfield Renewable Power Inc. to form the new LP.

Revenue from actual generation for the full year came in at just over $1.3 billion compared to slightly less than $1.2 billion in 2010. Note that the LP reports its results in U.S. dollars. Funds from operations (FFO) were $419 million ($1.60 per unit), up from $350 million ($1.33 per unit) in the previous year. Total power generation increased 10 per cent from the previous year.

The partnership continues to expand its portfolio and recently completed construction of four renewable power facilities totalling approximately 280 megawatts of capacity. Three of these are in the U.S. and one in Ontario. /p>

In addition, after the quarter end Brookfield Renewable acquired 223 megawatts of new wind generation assets in California. These consisted of a 150 megawatt wind farm with a 24-year power purchase agreement with Southern California Edison, an incremental 50 per cent interest in a 102 megawatt Coram wind farm, and a further 22 megawatts of additional operating wind generation capacity. These assets are all located in close proximity to one another in the Tehachapi region, recognized as a proven, attractive wind resource region.

The LP announced a modest 2.2 per cent increase in its distribution for 2012, bringing it to $1.38 annually to yield 5.05 per cent at the April 13 closing price of $27.32.

Inter Pipeline Fund (TSX: IPL.UN). Inter Pipeline is a limited partnership based in Alberta. Unlike most LPs and trusts, it did not convert to a corporation when the SIFT tax came in but has continued to thrive nonetheless.

In fact, Inter Pipeline reported record results for 2011. Funds from operations increased 19 per cent year-over-year to a $394 million, up $62 million from 2010 despite becoming a taxable entity. Net income increased 5 per cent to $248 million.

The partnership said that throughput volumes on its oil sands and conventional oil pipeline systems averaged a record 956,200 barrels per day (bbls/d).

Last fall, Inter announced a 9.4 per cent distribution increase, the largest ever. It marked the eighth consecutive year the fund has hiked its payment. Including sustaining capital, the payout ratio in 2011 was an excellent 67.2 per cent so the distribution is safe.

They payments also come with a tax advantage if the units are held in a non-registered account. For the 2011 tax year, 59.17 per cent of the distributions are fully taxable while 40.83 per cent represent tax-deferred return of capital.

The units have almost doubled in price since Inter was first recommended in my Income Investor newsletter in October 2009 but the yield is still attractive at 5.39 per cent based on the April 13 closing price of $19.49.

Ask a financial advisor if these LPs are suitable for your portfolio.

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