No. of Recommendations: 27
Richard Kinder, Q2 02 conference call, 7/17/02

Transcript (edited by Whitney Tilson) provided by FDfn.com (I highly recommend this service, if you can afford it)

"Let me conclude with a couple minutes to talk about some strategic and philosophical issues. I think there's a crisis of trust right now in corporate America and specifically in the mid-stream energy area. This crisis was caused by the acts of a few people, but I think it has cast the shadow over virtually all corporate managements and particularly in our area.

Now how does this cloud get lifted? I think certainly partly by the passage of time, but I think largely by honest managements operating in an open environment, producing transparent earnings and cash flow quarter after quarter and year after year.

Most of the abuses it seems to me have come from the disconnect between the interest of the principals -- the shareholders -- and the interest of the agents -- the Chief Executive Officer and senior management teams at various corporations. At Kinder Morgan, we don't have this principal-agent disconnect problem. Instead we have the lowest paid [$1/year] Chief Executive Officer at any major company in America -- that is according to the latest Business Week survey -- with one of the highest ownership positions in the S&P 500. I will remind you my compensation package includes no options, no bonuses, and the only value I derive from Kinder Morgan results from my ownership of 20% of Kinder Morgan Inc. and several hundred thousand units of KMP. So my incentives is seems to me are about as aligned with the rest of the shareholders as they can be.

So when you're casting about your net to find witches in the brew, I just ask you to ask the question: Where is my incentive or the incentive of the senior management team to sacrifice the long-term interest of the company and the shareholders for short-term profits? I don't have any damn options to cash in. I don't have any bonus that is going to be inflated because we did better this quarter or this year versus next year or 2004. I know we have said this before, and if you detect a note of frustration in my voice, it is very real. We get lumped with everybody else, and yet we are a very different company in terms of the alignment of management interests -- the so-called agents -- with the alignment of the owners of the company, the so-called shareholders.

Now let me turn to the second problem. I think the second problem in this crisis of confidence is a lack of transparency in earnings and cash flow at major American companies. In other words, if the earnings aren't readily discernable, how the hell can you trust them? We believe we have done a pretty good job of being as open as possible. Again as I said earlier, I don't know any other companies that post their budget at the beginning of the year and then on their website and invite their shareholders and other interested parties to look at that and see how they compare with that projection throughout the calendar year. We are going to continue to do that. In other words, once we've completed the budget process for '03, we will again post on our website and share with our investors what our projections are for calendar year '03. You can again judge exactly what the growth is going to be, and you can see how you agree or disagree with that, and then you can watch to see whether we can meet those targets.

Let me also be very clear that all of our budget numbers as they were this year will be built on our present assets and the expansions and extensions of our present systems without considering acquisitions. Then as we announce acquisitions, we will share with you the multiple of cash flow we're paying, and you can readily figure the accretion from those acquisitions at both KMI and KMP that you should expect to see over the coming years.

Now let me say there is an enormous amount of assets coming on the market. I don't have to review with you what those are. That said, frankly I'm kind of tired of debating whether it's a buyer's market or a seller's market and what multiple distributable cash flow we might be paying. Suffice it to say, there are going to be acquisitions, and those acquisitions are just icing on the cake at Kinder Morgan. We will not overpay, and even without acquisitions…we remain committed and convinced that we can grow KMI's earnings per share at 18-20% per year and KMP's distributions per unit at 8-10% per year. This year 2002 should be proof of that. When you see the budget for '03, I think you will be even more convinced.

One final strategic thought: For 5.5 years at Kinder Morgan, we've had the same strategy. It is not rocket science. We want to build and acquire great cash-producing assets. We want to operate those assets in a cost efficient manner. We want to pay extraordinary attention to details, and we want to align management incentives with those of our shareholders. We're going to continue the strategy. It is the right strategy, and we are not going to deviate from that strategy for whatever the flavor of the day is. Whether the fashionable flavor of the day is marketing and trading or Jerry Garcia ice cream bars, which I happen to like, we are not going to deviate from this rock-certain strategy that served us so well over the last several years. Now let me say we will continue to strive to deliver outstanding results and benefits to all of our shareholders as we did in the second quarter and as we have throughout the last several years.
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