Economic climate good for acquisitions, Kinder Morgan CEO says

Ann de Rouffignac
OGJ Online

HOUSTON, Jan. 17, 2002 — Richard Kinder, CEO of pipeline operator Kinder Morgan Inc., said the Houston company will continue its growth pattern of generating income internally and through acquisition of stable fee-based energy assets.

This year will be a good year to take advantage of asset sales because companies will be selling, Kinder said, on a conference call with financial analysts. “Never a better time if you are an acquirer of assets with a good balance sheet,” he said.

A one-time chief operating officer of Enron Corp., which filed for bankruptcy protection Dec. 2 and is now the subject of numerous lawsuits and investigations, Kinder left Enron in 1996, when it became clear, according to published reports, that Jeff Skilling would succeed Kenneth Lay as CEO.

Kinder and Bill Morgan, a former Enron pipeline executive, jointly acquired all of the stock of Enron Liquids Pipeline Co. in 1997, and renamed it. Their goal was to create a midstream energy company by using access to low-cost, master limited partnership equity capital, and their own management and operating expertise.

The company has since expanded through the acquisition of pipelines and terminals and more recently into power generation through the gas business. But don’t count on Kinder Morgan to buy power plants. “We haven’t built one megawatt of a merchant plant. That’s not a risk we wanted to take. We won’t do anything without a tolling arrangement,” Kinder said.

Much of KMI’s growth will be generated internally. The product pipelines are underutilized and represent growth opportunities. Kinder said there is room for 5-8 years of growth without any expansion on three of the company’s product pipelines.

In all, he expects a growth rate of 15-20%, making Kinder Morgan seem like an unregulated business. Yet its stable cash flow and 60-40 capital structure “looks and smells” like a utility, he said. With acquisitions tacked on, Kinder said the company resembles a growth stock.

That’s why the company has few industry peers and its connection with the limited partnership Kinder Morgan Energy Partners makes the structure more complicated to understand, he said.

Kinder explained his “risk averse” strategy to the financial community. Debt is structured 50% fixed interest rate and 50% floating interest rate. Analysts quizzed him about why Kinder Morgan didn’t lock in low interest rates now on all of its debt for a longer term.

“We believe long term 50-50 is a good relationship. We don’t try to outguess the market. We are conservative on this,” he said. Kinder Morgan as a policy avoids direct commodity risk, he said. “We are little long on natural gas and we have sold this out– hedged it.”

In terms of possible diversification, analysts asked if the company might look at other opportunities to invest all the free cash it is generating. The company will have $425 million of free cash flow before taxes. “This is a wonderful problem to have,” he said. “We might have further stock buybacks in the future.”

But don’t expect the company to buy a risky asset. “That would be the dumbest thing we could do. Why risk upsetting the wonderful set of assets the partnership has?” he said. He also said Kinder Morgan has no plans to expand internationally since there is significant room to increase market share in the US.

The company has the track record to assure the financial community that the company delivers what it promises, he claimed. “We grew from an enterprise value of $300 million to $20 billion in 5 years,” Kinder said. “We did that with a simple strategy focused on stable fee-based assets that are the core of this company.”

Company raises 2002 earnings estimates

In a difficult year for the economy and particularly for energy companies, Kinder Morgan has reported 2001 earnings of $225.2 million or $1.96/share on revenue of $1.1 billion, beating analysts’ expectations of $1.90/share.

Income for 2000 was $152.4 million or $1.61/share on revenue of $2.8 billion. CEO Rich Kinder said the company had a “great” year with earnings up 52% “handily” beating consensus estimates. He predicted the company could do it again for 2002 and increased earnings guidance to $2.55-$2.65/share from $2.40-$2.50/share. The lower end of the earnings projection is without additional acquisitions.

In mid-day trading, KMI stock was down 45-/share to $56.54. KMI is a midstream energy company that consists of its ownership interest of the general partner of Kinder Morgan Energy Partners LP, Natural Gas Pipeline Co. of America, product pipelines, retail distribution, and power plants.

The partnership contributed $272.4 million in distributions to KMI in 2001, up 82% from 2000. The partnership grew from internal growth in its pipeline and terminal businesses. “NGPL had a strong year in 2001, as transportation and storage capacity remains virtually sold out on the pipeline and management continues to successfully recontract capacity and enter into contracts for new generation load,” Kinder said.

The retail business owned by KMI reported 15% growth in earnings. Kinder emphasized on a conference call that KMI is risk averse and had hedged out weather fluctuations. “But we didn’t do any swaps with bankrupt companies,” he said. ” And we don’t like volatility so we took it out.”

He said the retail unit is expected to grow about 4%/year. KMI’s power business earnings roughly double from last year. The increase reflected the growth in fee income from gas-fired power plant development.

Kinder said the company’s growth strategy doesn’t include owning and operating merchant power plants. “There has been a draconian shift in the power business,” Kinder said. “We are not counting on any new plants this year.”

In terms of exposure to the Enron Corp. bankruptcy protection filing, KMI wrote off $4.8 million and the partnership wrote off $6 million. Enron filed for reorganization Dec. 2 and left many energy companies exposed to open energy contracts.

KMI’s debt is in the 47% range, but Kinder said that is projected to be back down to 40% by the end of 2002. After KMI merged with KN Energy, its debt shot up to 71%. Kinder said KMI has a strong balance sheet and with its strong credit rating can be ready to make future acquisitions as the opportunities arise.

Fourth quarter net income rose 30% to $72.4 million, or 60-/share in 2001, up from $55.3 million, or 47-/share in the year-ago period.


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