Kinder Morgan Energy Partners, L.P. (KMP) is a Master Limited Partnership (MLP) that is the largest independent owner and operator of petroleum product pipelines in the U.S., transporting more than two million barrels per day of gasoline, jet fuel, diesel fuel, and natural gas liquids. The partnership also has a capacity to transport 9 billion cubic feet/day of natural gas. It owns or runs about 29,000 miles of pipelines and 180 terminals. The partnership's terminals handle over 80 million tons of coal and other bulk materials annually and have a liquids storage capacity of about 70 million barrels for petroleum products and chemicals. The partnership is also the largest carbon dioxide marketer and transporter in the country.
The partnership divides its operations in four business segments: Product Pipelines (projected to contribute approximately 27% of the partnership's 2007 distributable cash flows), Natural Gas Pipelines (25%), Carbon Dioxide Pipelines (28% - CO2), and Terminals (20%). Knight Inc. (formerly Kinder Morgan, Inc.), one of the largest mid-stream energy companies in the U.S., owns the partnership's general partner interest and also maintains a roughly 10% limited partnership interest.
As an MLP, KMP must distrubute at least 90% of its income from qualifying sources such as natural resource activities, interest, dividends, real estate rents, income from sale of real property, gain on sale of assets, and income and gain from commodities or commodity futures. Much of the distrubution is typically treated as 'return of capital', which causes a downward adjustment to U.S. taxable investor's cost basis. It is not taxable in the year it is recieved, but increases capital gains taxes in the year the MLP units are sold.
Kinder Morgan does business (e.g. owns/manages pipelines) in many states; owners may be required to file income tax returns in each state in which the MLP conducts business, even when no taxes are owed.
MLPs aren't suitable for U.S. investor's IRA accounts because earnings above $1,000 will be considered unrelated business taxable income by the IRS. Tax consequences for foreign owners are generally onerous.
Investors wanting exposure to KMP, but without the tax filing complications, can purchase shares in Kinder Morgan Management LLC (KMR), a NYSE listed company that owns KMP units. The three Kinder Morgan companies, Kinder Morgan Partners (KMP), Kinder Morgan, Inc. (KMI), and the Kinder Morgan management company (KMR), own the same assets: 38,000 miles of natural gas and product pipelines, and 180 terminals. 
Kinder Morgan, Inc. (KMI), is buying El Paso pipeline partners (EP), which owns and operates natural gas transportation pipelines and storage assets. The El Paso transaction is expected to be nicely accretive to dividends of all three companies. 
The corporation’s (KMI) growth, is driven by Kinder partners (KMP), which currently accounts for approximately 98 percent of the distributions that the corporation (KMI) receives. The corporation (KMI) can then drop down some of the El Paso assets to Kinder partners (KMP). The cash from sales to the Kinder partners (KMP) will be used to reduce the leverage used to buy El Paso in the first place. Some of El Paso’s assets will also be sold as cash, or spun off into a separate company and sold. But the assets are so widely spread out geographically that a spin-off is less likely.
The Partners (KMP) has to pay out all of there earnings. So the only way any MLP can get cash is to borrow it, or sell something. Kinder partners (KMP) have to get the cash up to pay dividends anyway. Some they pay to the corporation (KMI) who pays the funds out to shareholders. Rather than receiving and distributing cash, the management company KMR, receives and passes through a dividend in shares known as paid-in-kind distributions. Kinder partners (KMP) the cash that would have been paid out as dividends, to buy assets from the corporation (KMI) and finance acquisitions internally. Over $490 million of the equity required for this investment program is expected to be funded by the management company’s (KMR) dividends. 
One of the reasons the management company (KMR) sells at a discount to the partnership is because the management company (KMR) pays dividends in shares based on the management company’s (KMR) average closing price for the 10 trading days prior to the management company’s (KMR) ex-dividend date.  But when you reinvest a cash dividend you buy at the payment date price. This can be in the Investors favor or against. But because it creates uncertainty it contributes to KMR trading at a discount to KMP which pays cash.
“KMP’s stable and diversified assets continue to grow and produce incremental cash flow in virtually all types of market conditions. We see exceptional growth opportunities in the midstream energy sector, particularly in the natural gas shale plays and in the coal export business.” ~ Chairman and CEO Richard D. Kinder 
“Kinder has made a low-return, humdrum business into a river of money.” ~ Robin West, consulting firm PFC Energy. 
The majority of cash generated by KMP is fee based and is not sensitive to commodity prices. However, in its CO2 segment, the company hedges the majority of its oil production but does have exposure to unhedged volumes, most of which are natural gas liquids.
"The 2009 budget assumes an average West Texas Intermediate (WTI) crude oil price of $68 per barrel for the year ... every $1 change in the average WTI crude oil price per barrel is expected to impact the CO2 segment by approximately $6 million (or about 0.2 percent of our combined business segments' anticipated distributable cash flow). If the average WTI crude oil price per barrel in 2009 were the same as the price experienced in 2008 (about $100 per barrel), then KMP would generate distributable cash flow that could support cash distributions of approximately $4.52 per unit for 2009. This sensitivity to the WTI price is very similar to what the company experienced in 2008." Company press release.
Calculating Net present value (NPV) is one common method for estimating the intrensic value for a time series of cash flows such as MLP distributions. Interest rate assumptions are crucial to the NPV equation.
Because MLPs distribute virtually all available cash to unit holders, they must access the capital markets to finance growth. This dynamic can cause MLPs to be disciplined acquirers, at least compared to traditional corporations, because management teams must demonstrate to unit holders that acquisitions and projects are immediately accretive to earnings. Internal Rate of Return (IRR) is often used in capital budgeting; interest rates figure prominently in this equation as well. Simply: higher interest rates limit growth opportunities.
|Competition||Williams Companies (WMB)||El Paso (EP)||Kinder Morgan Energy Partners, L.P. (KMP)||ENBRIDGE (ENB)||Spectra Energy (SE)||Questar (STR)|
|Market Cap $Mil||10,570.00||5,600.00||13,250.00||11,610.00||11,180.00||4,640.00|
|Gross Profit $Mil||5,437.00||4,403.00||2,145.80||2,909.90||1,926.00||1,394.60|
|Net Profit Margin %||8.02%||9.38%||9.52%||6.32%||19.91%||18.61%|
|Operating Margin %||17.48%||29.13%||8.76%||9.64%||30.41%||31.10%|
|Miles of Interstate Pipeline||14,200.00||42,000.00||25,000.00||2,505.00|
|Yield % ||0.39 / 35.78 = 1.1%||0.16 / 17.24 = 0.9%||3.48 / 53.99 = 6.4%|