Boyz, Boyz, I was simply trying to answer the original question, not get into every element of the KMP business model. You should know hedging contracts against the price of oil is what the term implies. KMP is the most diversified MLP out there, in my opinion.
KMP producing what? C02? KMP sells transportation capacity on its pipelines. Dune7 appears to suggest that KMP enters into hedges to protect the cash flow from its pipelines. Revenue from providing transportation service apparently fluxuates based on the price of crude.
Remember, MLP's are like toll gates. It is KMP's hedging effort (contract) to lessen the markets price fluctuations of oil and give KMP a better insight of future cash flow. Simply put, if the price of crude rises above 93.75 the contracted oil company has the benefit of moving its products through KMP piplines at that price level's cost. If the price of crude drops below, then KMP benefits in the ratio, having secured the contract at higher costs to the oil company. Earnings, as related to this measure, should not concern you greatly. Cash flow is the key. There is much more to it, however, this is the short answer. MLP's are not c-corporations. Cash flow and their costs to cover their distribution should be your chief concerns.
"Simply put, if the price of crude rises above 93.75 the contracted oil company has the benefit of moving its products through KMP piplines at that price level's cost. If the price of crude drops below, then KMP benefits in the ratio, having secured the contract at higher costs to the oil company."
So if KMP didn't enter into any hedges, what would happen? How is KMP hurt or helped by rises or declines in the price of crude flowing thru its pipes? The more valuable the product, the more KMP charges the customer to ship it? Why does KMP care if it has to charge the customer more? Competition from rival pipelines or what?
One would think that the customer would be more concerned about declines in the price of crude if it has to pay the same transportation charges for a product that has declined in value. Its margins would be squeezed.
Talking about difficult topics is like working out in the gym. No pain, no gain.