In 2010, the Alerian MLP Total Return Index gained 35.9%, significantly outperforming the S&P 500 Index increase.

The strong performance was driven by solid fundamentals for the asset class, including improved refined-product demand and consumption, increased infrastructure demands from new shale-gas plays such as the Eagle Ford and Marcellus, on-time and on-budget completion of organic projects, and robust acquisition activity. These factors enabled MLPs in the Alerian MLP Index to raise their distributions by an average 6% year-over-year (third-quarter 2010 versus third-quarter 2009).

New investors are flocking to the MLP-asset class as they seek above-average and less-risky after-tax yields, further encouraged by falling interest rates. Also, offerings of various MLP structured products, mutual funds and closed-end funds have made the asset class more accessible.

After a two-year hiatus dating back to May 2008, the MLP initial public offering (IPO) market finally reopened in 2010 with six new MLPs. Among the two natural gas storage, two coal, one natural gas gathering and one general partner IPOs, the average offering size was $275 million, representing a 21% increase from the average offering size of $226 million in 2007.

Additionally, the MLP asset class raised nearly $11.4 billion in equity via 59 follow-on offerings, representing a 75% increase versus the $6.5 billion raised in 2009 via 51 follow-on offerings. The dramatic increase in the average public follow-on offering’s size is largely attributable to the number of MLP growth projects and acquisitions. But it is also a testament to burgeoning interest in the asset class, as most offerings have been placed overnight.

Fueling these equity raises has been a large backlog of organic projects and more than $40 billion of asset and corporate acquisitions. Some notable acquisitions in 2010: gathering assets in shale areas, crude and refined product transportation assets from the integrated majors, drop-down interests from public parent corporations, and general partner mergers or buybacks.

Looking forward in 2011, with an overall lower cost of capital, MLPs are expected to benefit from the consolidation of midstream assets, either from exploration and production companies and majors redirecting their capital programs toward higher growth areas, or from private-equity firms monetizing investments. Additionally, given industry analysts’ expectations for continuing low natural gas prices through 2011, drilling in liquids-rich gas areas is likely to grow. This should provide a wide variety of expansion opportunities.

Overall, MLPs have generated roughly 17% annualized returns over the past 15 years, mainly due to consistent growth in their cash distributions. With top-line growth driven by energy-demand expansion, attractive organic-investment opportunities, and asset-acquisition prospects, MLPs are expected to continue generating strong risk-adjusted returns over the long term.

Emily Wang, a CPA, is a director for Alerian. The Alerian MLP Index, a composite of the 50 most prominent energy MLPs, is calculated using a float-adjusted, capitalization-weighted methodology and is disseminated real-time on a price-return basis (NYSE: AMZ) and on a total-return basis (NYSE: AMZX).

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