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The Fortnightly 40 Financial Ratings

Which is the best energy company?

Fortnightly Magazine - September 2005

a commodity business," he warns.

"To be successful in the commodity business you have to understand that high prices don't last forever. I think some companies are sowing the seeds of their own demise by betting that energy prices are going to remain high," predicts Rattie.

He notes that in the 150 years of history in the gas industry there never has been a period of time that prices have moved as far and as fast without crashing. "High prices cause new supply, discourage demand and ultimately cause prices to retreat. It happened every time in the past and I think it will happen in the future," he says, dryly.

He believes Questar's more conservative risk management, and a portfolio including pipeline and utility businesses makes the company more stable than others. "We are offering investors … better potential for return and growth and long-term price appreciation than pure utilities. But less commodity price risk and exposure to falling commodity prices than pure E&P companies."

Geoffrey S. Chatas, executive vice president and chief financial officer of Progress Energy (No. 2), also attributes some of his company's high earnings in the last few years to natural gas operations. "We have very niche operations in natural gas. These are all efficient operations with proven reserves. We have about 225 billion cubic feet of proven reserves." But unlike Questar, he says, the biggest contributor to the bottom line is Progress Energy's electric utility operations, in North Carolina, South Carolina and Florida, which have some of the highest growth rates in the country. The other contributor to the company's earnings is the synthetic-fuel business. Chatas also says his company's ability to avoid many of the "melt down scenarios" that others did not, has contributed to the company's overall financial health.

Certainly, it is the conservative approach to operating assets that distinguishes many of the winners, even when their earnings are anything but. Just listen to what we heard from this year's Fortnightly 40  winner.

Enter the Transporter

Kinder Morgan, No. 1 in this year's ranking, bills itself on its Website as, "A Different Kind of Energy Company." Certainly, the company's financial performance distinguishes itself from its peers. It hasn't been just different, but effective at producing a high return on investment.

C. Park Shaper, president of Kinder Morgan, Inc., attributes the company's success not only to the company's assets, which include pipelines, terminals, gas distribution and gas-fired power plants, to name a few, but also to the structure of the company itself. Kinder Morgan is one of the first companies to make effective use of a corporate structure known as the master limited partnership (MLP).

"Back in 1997, [founders Rich Kinder and Bill Morgan] made a conscious decision to try something different. They wanted to use a master limited partnership as a growth vehicle," Shaper says, explaining that at the time it was an unusual choice.

According to a report written in early July by Gary M. Vasey, vice-president, trading and risk management, UtiliPoint International, MLPs were created by Congress in the 1980s primarily to stimulate