Kinder Morgan Energy Partners LP (KMP)

Do not judge KMP by the P/E Ratio.

KMP is organized as a master limited partnership (MLP), meaning that it pays no corporate tax and offers a high yield for investors.

Typically, MLPs are not valued based on earnings and P/E ratios. For master limited partnerships, we calculate ratios using distributable cash flow (DCF) rather than earnings. The reason is that non-cash charges like depreciation and amortization are included in the earnings measure. These can be significant for MLPs because their assets typically throw off large non-cash depreciation charges.

Distributable cash flow is basically net income with non-cash charges added back. From this adjusted figure we subtract maintenance capital expenditures (CAPEX), which is a measure of how much money it costs annually to keep up, repair and maintain existing infrastructure. The final figure is a close approximation of how much cash an MLP actually has on hand to pay distributions to partners.

Kinder Morgan had distributable cash flows of $3.65 per share for 2007 and paid out a total of $3.48 in distributions. Over the next few years, KMP should be able to generate distributable cash flow growth of more than 10%. Meanwhile, the shares trade at roughly 15 times 2007 DCF, an attractive valuation for an MLP.