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Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets. This master limited partnership has consistently increased distributions since 1997.

There are three ways to invest in the partnership:

The first is by purchasing the limited partner units traded on the NYSE as Kinder Morgan Energy Partners under the ticker KMP. These are limited partnership units, which generate K-1 tax forms to unitholders. Most of the distributions which investors receive on a quarterly basis represent a return of capital, which means that it is not taxable unless investors decide to sell their units or unless their cost basis drops below $0. This return of capital reduces the cost basis of investors. The lower cost basis would trigger capital gains when units are sold. When the tax basis drops below $0, any distributions are taxed as ordinary income.

The second is by purchasing the LLC units traded on the NYSE as Kinder Morgan Management under the tickerKMR. KMR is a limited partner in and manages and controls the business and affairs of KMP. KMR has no properties and its success is dependent upon its operation and management of KMP and KMP's resulting performance. The only asset that KMR owns is KMP shares. Investors in KMR do not receive cash distributions, but receive shares proportional to the ownership interest they have in the stock. The cash distributions for KMP and KMR are equal, the only difference is that KMR distributions are paid in the form of additional shares.

The third way to invest in Kinder Morgan is by purchasing shares in the general partner interest, which recently started trading on the NYSE as Kinder Morgan, under ticker KMI. KMI owns the general partner and limited partner units in KMP. KMI also owns 20 percent of and operates Natural Gas Pipeline Company of America (NGPL), which serves the high-demand Chicago market. Another valuable asset behind KMI is the Incentive distribution rights behind the general partner, which entitles it to 50% of the distributions above certain thresholds. This is why any growth in KMP distributions would really accelerate growth in KMI dividends. KMI is set up as a corporation, which is why investors should receive a form 1099- DIV at the end of the year and have their dividends taxed at no more than 15%.

I purchased the i-units of KMR since I am in the accumulation phase and since they are trading at a steep discount to KMP units. It is true that KMR shares do not offer a “cash payment” per se, although investors could sell the additional shares received each quarter and obtain cash income that way. Investors could purchase KMR and hold it in tax deferred retirement accounts such as ROTH-IRAs for example, without worrying about the unrelated business tax income (UBTI). Although in a previous article I have discussed why I do not believe the UBTI is an issue for tax-deferred accounts, nevertheless some investors might still worry about this potential tax penalty.

I also purchased KMI as a dividend growth play. While the yield is decent at 4%, I view the company to have excellent dividend growth potential.

Disclosure: Long KMR and KMI

Source: Kinder Morgan Partners: One Company, Three Ways to Invest