Kinder Morgan Inc. (KMI), on track to take the company private in 2007, last week reported its ownership in Kinder Morgan Energy Partners LP (KMP) lifted quarterly net income from continuing operations to $137.3 million ($1.02/share), from $128.9 million ($1.04) in 3Q2005. KMP, meanwhile, reported 3Q2006 net income fell to $223.8 million from $245.4 million because of some accounting changes.

During a conference call, CEO Rich Kinder updated financial analysts on KMP’s ambitious Rockies Express Pipeline (REX), a $4 billion, 1,663-mile mega-pipeline project that will transport Rocky Mountain natural gas to Midwest and Northeast markets (see NGI, Sept. 25). Kinder said the steel has been bought, approvals are lined up and it remains “on budget and on time.” KMP is partnering with Sempra Energy and ConocoPhillips on REX.

Because of regulatory and legal issues, Kinder could not discuss the plan to take the company private, but he said the plan remains on track as well (see NGI, Sept. 11).

Of the 3Q2006 results, Kinder said the “natural gas pipelines segment had an outstanding quarter, and the terminals business produced good results, but earnings were less than expected from our products pipelines and CO2 segments.” He blamed KMP’s lower net income on an “accounting reclassification,” which generally has “no impact on distributable cash flow. We continue to be bullish about our future growth opportunities, and we made good progress on a number of major expansions that are expected to generate strong distributable cash flow at KMP in the future.”

KMP’s Products Pipelines segment generated earnings before charges of $116.9 million, down from $132.2 million in 3Q2005.

“More than the entire reduction from the same period last year is attributable to the accounting reclassification that switched a portion of integrity costs from sustaining capital expenditures to operating and maintenance costs,” Kinder said. “This reclassification is generally neutral to distributable cash flow because it also results in lower sustaining capital expenditures.”

KMP’s Natural Gas Pipelines segment delivered an increase of 15% in quarterly earnings before charges to $140.8 million versus almost $122 million a year ago. This segment is expected to easily exceed its published annual budget of $501 million, Kinder said.

“Growth for the quarter was driven by another terrific performance by the Texas Intrastate Pipeline Group, as we continued to see strong demand for our services,” Kinder said. “The intrastates’ results increased significantly compared to the same period last year due to improved sales margins on renewal and incremental contracts, higher value from storage activities and improved processing margins. This segment also benefited from higher transport and sales volumes, strong gas gathering operations at Red Cedar and improved operating results” from its pipelines.

Transport volumes increased by 9% compared with 3Q2005, and sales volumes on the intrastate pipelines increased by almost 2%.

Within KMI, continuing operations income for the period was $143.1 million ($1.06/share), up from $112.8 million ($0.91). KMI’s earnings attributable to KMP included $147.7 million of pretax earnings, up slightly from $145.1 million for the same period a year ago. KMI will receive $162.2 million in total distributions from its investments in KMP for the quarter versus $152.3 million for 3Q2005.

KMI’s Natural Gas Pipeline Company of America (NGPL) reported earnings of $120.1 million, up 6% from $113.2 million. It remains on target to exceed its annual budget of 7% growth. Throughput volumes increased by 6% from a year ago, led by shippers moving significant amounts of natural gas within Texas on NGPL’s Gulf Coast line, Kinder said.

In Canada, KMI’s Terasen Gas, the largest natural gas utility in British Columbia, delivered segment earnings of $40.1 million, ahead of its plan for the quarter and on track to slightly exceed its published annual budget. Terasen serves almost 900,000 customers. Kinder Morgan Canada, the second largest transporter of crude oil and petroleum products in Canada, produced earnings of $30 million, slightly above expectations for the quarter.

KMI’s Power’s segment earnings were $6.9 million, up from $4.6 million in 3Q2005. The increase was attributable to improved performance at the company’s power plants and a nonrecurring gain on surplus equipment sales. Power is expected to generate only about 1% of KMI’s total 2006 published annual budget. Meanwhile, Retail, which is now in discontinued operations, recorded earnings of $1.8 million, compared with a loss of $1.1 million a year earlier.

Including the results of Retail and excluding special items, KMI expects to achieve $5/share in earnings this year. KMP’s budget calls for cash distributions of $3.28/unit for 2006, and it currently expects to distribute $3.24-$3.28.

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