Some view Kinder Morgan (KMP) as just a way to funnel fee income to the General Partners [GP] at the expense of the Limited Partners [LP].

First, lets examine the fee schedule. The GP receive 2% on the first $1.21 of distributions per unit [DPU]; 15% on the next $0.22 DPU; 25% on the next $0.44 DPU. This comes to $1.97 DPU and a fee of $0.167 or a 8.4% fee to the GP.

Beyond the $1.97, the fee becomes 50%. For a $5.00 DPU the fee becomes $1.68 or a 33.6% fee. At a $10.00 DPU the fee rises to $4.18 or 41.8% and at $20 DPU the fee is 45.9% for the GP.

But what do they do for this fee?

KMP has put together 10,000 miles of fuel pipelines and 17,000 miles of natural gas pipelines. It is a source, transporter and marketer of CO2; has 87 million tons of dry-bulk & 103 million barrels liquid, terminal capacity; and 70 million barrels oil & 9.7 billion cubic feet of natural gas storage capacity. To this, they are adding Rockies Express [REX] Pipeline; liquid natural gas terminals for the GOM, pipelines, CO2 investments or, another $4.3 billion in new projects.

For these businesses, expansions and efforts, the GP is well paid. And for passive ownership, the KMP shareholder receives a yield of 6.5% that has been raised from $0.63 in 1996 to $3.68 in 2007 for a compound annual growth rate of 17% (from KMP's March 5, 2008 Presentation, page 8). If debt scares you, note the chart "Net Debt to EBITDA" on the same page. If you hate sharing (and apparently some do) avoid KMP. Look at their March 5, 2008 presentation. This is a bread-and-butter stock.

Disclosure: Author has a long position in KMP

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William Eichler

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