While many energy companies struggled financially in the third quarter, Kinder Morgan clearly did not. The 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), posted more than 35% earnings growth.

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.

CEO Richard Kinder expects that kind of performance to continue for the company although its share and unit prices clearly don’t reflect that. KMI shares, while rising about $1 last week to about $35 on Friday, were still $22/share less than a 52-week high of $57.50. Kinder noted KMI is priced at only about 11 times 2003 consensus earnings versus a 16-times multiple for the S&P 500. KMP units have performed better than KMI shares, but KMP is paying about a 7.5% tax deferred yield, “which is more than 350 basis points over 10-year Treasuries,” Kinder noted during a conference call with investors.

However, he expressed optimism that the company’s management team would be able to handle any adverse conditions going forward and eventually its stock and unit prices would reflect that. “We have no short-term or long-term liquidly or balance sheet issues that would impact the viability of this company.”

The company took several steps during the quarter to further improve its balance sheet:

“What I think we have demonstrated is we have the ability to raise capital in both the equity and debt markets in what are really pretty unparalleled times of nervousness and we’ve done it on very good terms,” said Kinder.

He noted that the third quarter was the most profitable quarter in the history of the KMP partnership. “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. However, he said, 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, 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.

“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…”

However, he said concerns about the company being able to duplicate the growth seen over the last five years without duplicating the $6.5 billion spending spree over the next five years were unfounded. In last Wednesday’s Wall Street Journal, questions were raised about Kinder Morgan’s ability to continue buying assets to fuel growth.

“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. For additional details on KMI and KMP earnings, visit the company’s web site at www.kmi.com.

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