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Kinder Morgan Profit Up 12%, KMP Up 18% on Higher Prices

Record energy prices offset the negative impact from Hurricanes Katrina and Rita, sending Kinder Morgan Inc. (KMI) 3Q profit up 12% from a year ago. Third quarter net income slightly surpassed analysts' expectations, to stand at $124.8 million ($1.01/share), compared with $111.9 million (90 cents) for the same period of 2004. Master limited partnership Kinder Morgan Partners LP (KMP) earnings were up 18% for the quarter, contributing $144.2 million, compared with $122.1 million a year ago.

Including certain items, KMI income from continuing operations was down, to stand at $109.2 million (88 cents/share), compared with $111.9 million (90 cents) in 3Q2004. The noncash decline came from "calculated hedge ineffectiveness" on the Natural Gas Pipeline Company of America (NGPL) system. KMI expects essentially all of the decline will result in a positive impact in the fourth quarter, which will be separately identified.

"This was truly an extraordinary quarter," said CEO Richard D. Kinder, who said the company had overcome disruptions from the Gulf of Mexico hurricanes. "We are extremely grateful for the tremendous efforts of many of our employees to protect and repair our assets and help us achieve these results, while also having to deal with personal hardships of their own."

Among the strong accomplishments during the quarter, Kinder pointed to KMI's proposed acquisition of Terasen, which Terasen shareholders approved last week (see related story). The transaction is expected to be accretive to KMI earnings beginning next year, and it will give the company access to the rapidly growing need for infrastructure in the Alberta oil sands and a natural gas utility in British Columbia.

"We also made great strides at KMP towards the realization of two substantial natural gas pipeline projects -- the Rockies Express Pipeline that will deliver Rocky Mountain gas to upper Midwest and Eastern markets and the Louisiana Pipeline that will deliver gas out of LNG facilities along the Gulf Coast (see related story)."

The CEO noted, "we are not without challenges...for example, Retail is now expected to miss its annual budget target...most of our assets are delivering expected results, and we have positioned KMI and KMP well for continued future growth." For 2005, KMI expects to exceed its 2005 budget of $4.22/share and generate approximately $620 million of cash flow.

By segment, KMI's NGPL reported 3Q earnings of $113.2 million, a 19 percent increase from $94.8 million in 3Q2004, and it is expected to exceed its annual budget of 5% growth.

"NGPL's results were driven by an increase in transportation margins and services," Kinder said. "We also continue to benefit from successful contract negotiations, as firm, long-haul transportation capacity on NGPL is sold out through February 2006, and storage is fully contracted until April 2006."

Among other agreements, NGPL recently extended long-term, firm transportation and storage contracts with Nicor and BP Canada Energy Marketing. Combined, these contracts represent 1.1 Bcf/d of firm transportation service and 52.5 Bcf of firm storage capacity. Throughput volumes were up 13% primarily due to warmer than normal weather and high utilization of the Amarillo and Louisiana lines.

Retail reported a 3Q loss of $1.1 million, compared with $4.8 million of earnings in the same period a year ago. The loss was primarily due to the recognition of lower volumes, particularly among residential and commercial customers in Nebraska and Wyoming. Some of the volume shortfall related to 1Q2005 and 2Q2005 and was recognized when volumes were trued up in the third quarter. Retail is expected to fall about 10% short of its published annual budget of 2% growth.

Power generated earnings of $4.6 million, up 11% from $4.1 million in 3Q2004. In 2005, Power is expected to produce about 1% of KMI's total earnings.

Within KMP's segments, the Products Pipelines segment delivered a 6% increase in 3Q2005 earnings to $127.2 million, up from $120.4 million in 3Q2004. Total refined products revenues increased by 9.4%, and volumes increased by 3.4% over a year ago. Natural gas liquids volumes (NGL) were down about 13% due to low demand for propane on the North System and Cochin, and the hurricane-related closure of a petrochemical plant in Lake Charles, LA, served by the Cypress Pipeline.

The Products Pipelines segment earnings are expected to fall short of its targeted 12% growth. Pipeline inspections and repairs on Pacific and Cochin, weak NGL volumes, lower than anticipated revenues from transmix operations and Hurricane Katrina are the principal contributing factors.

The Natural Gas Pipelines segment earnings were $122 million, up 16% from $105.2 million in 3Q2004, and on track to exceed its published annual budget of 7%.

"Growth in this segment was driven by strong performances from the Texas Intrastate Pipeline Group and Red Cedar, along with contributions from the acquired TransColorado pipeline," Kinder said. The Texas Intrastate pipelines generated approximately half of this segment's third quarter earnings. TransColorado, which KMP acquired in 4Q2004, contributed $10.5 million in earnings. The Texas Intrastate pipelines operated throughout Hurricane Rita and experienced only minor damage and some temporary service interruptions. All of its facilities have resumed operations and are available for service.

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