While many energy companies are struggling to make ends meet in the current difficult financial environment, the service/fee-based liquids and gas transportation and terminals businesses of Kinder Morgan Inc. (KMI) and its master limited partnership, Kinder Morgan Energy Partners LP (KMP), showed tremendous growth in the third quarter, and CEO Richard Kinder said the companies see nothing standing in the way of continued double-digit growth despite the crisis in parts of the industry.

KMI reported a 38% increase in earnings to $0.66 per share in the third quarter compared to the same period last year. Net income rose to $80.4 million from 58.2 million, or $0.48 per share, for the third quarter last year. KMP announced record earnings with third quarter net income up 35% to $158.2 million, or $0.50 per unit.

“The third quarter is the most profitable quarter in the history of the [KMP] partnership, as our stable, fee-based assets continue to produce strong, reliable cash flow,” said Kinder. “The record earnings can be attributed to solid internal growth, as well as contributions from acquired assets. Our outstanding results demonstrate that our strategy to own and operate assets that have minimal exposure to commodity price variations continues to be successful in various types of market conditions.” Kinder also repeatedly highlighted that neither KMP nor KMI have marketing and trading businesses.

He also noted during a conference call that the company has a solid balance sheet and has taken steps to improve it further. “During the third quarter we’ve done these things to shore up our balance sheet:

Kinder added that any CEO who doesn’t talk about company weaknesses or risks going forward “is either lying to you or doesn’t even know his own business.” Some of the weaknesses or risks Kinder Morgan currently has, he said, include problems in the power generation business, regulatory risks in the pipeline business and what are perceived to be risks in not being able to complete acquisitions to fuel growth. Kinder said the latter “risks” were pointed out in an article in Wednesday’s Wall Street Journal.

He said the WSJ theory is that KMI’s aggressive $6.5 billion spending spree over the past five years probably will not be duplicated over the next five, and therefore, the growth seen over the last five years probably will not be duplicated either.

“I can think of stronger words but let me just call that ‘hogwash,'” said Kinder. “We think we can and will acquire additional assets on good terms…but we have substantial internal growth at KMP, and therefore at KMI, without making additional acquisitions.” Kinder noted that most of the company’s growth in the third quarter came from internal improvements not from acquisitions.

However, the company does face some risks, as Kinder stated. “Certainly our power development activities are not up to where we thought they would be when we went into power development over two years ago, he said. “We have not calculated any earnings from future [power] development activities for the balance of 2002 or 2003. On a going-forward basis, we simply look to operate the plants that we already have… I think that’s a risk that we have to contain on a going basis.”

Regarding regulatory risks in the pipeline business, Kinder noted that the company’s shippers on the Pacific Products pipeline system are challenging the grandfathering of rates at FERC. Kinder said he believes any adverse ruling would run contrary to the Energy Policy Act of 1992 and would not survive an appeal by the company to the D.C. Circuit. “We could get an adverse ruling on that point along the way,” he said. “We’ll reserve for any expected reparations that might be ordered in this case, and we think in any event that any outcome would not cause the distribution to KMP unit holders to be reduced in any way whatsoever…”

Kinder expressed optimism that the company’s management team would be able to handle any adverse conditions going forward. “We have no short-term or long-term liquidly or balance sheet issues that would impact the viability of this company.” However, like most other energy firms, its share price has been drawn down by those of its peers. Kinder noted KMI is priced at only about 11 times 2003 consensus earnings versus a 16-times multiple for the S&P 500. In addition, KMP is paying about a 7.5% tax deferred yield, “which is more than 350 basis points over 10-year Treasuries,” Kinder noted. For additional details on KMI and KMP earnings, visit the company’s web site at www.kmi.com.

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