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Pipe Volumes, Storage Demand Send Kinder Morgan, Partnership Earnings Soaring

Pipe Volumes, Storage Demand Send Kinder Morgan, Partnership Earnings Soaring

Increased pipeline volumes and storage demand pushed Kinder Morgan Inc. (KMI) and its energy partnership, Kinder Morgan Energy Partners LP (KMP), to record full-year 2004 and 4Q2004 earnings, the company said last week.

KMI, which bases all of its operations in Houston, reported full-year 2004 diluted earnings per share (EPS) of $3.81, up 14% over the $3.33/share reported in 2003. In the fourth quarter, EPS were $1.03, up 16% from $0.89/share reported in 4Q2003. Thomson First Call expected 4Q2004 earnings of $1/share on revenue of $315.3 million. KMI also raised its quarterly dividend by 24% to 70 cents/share.

CEO Richard D. Kinder attributed the company's success to KMI's fee-based businesses and KMI's ownership of the general partner of KMP. "We significantly exceeded our published annual budget for recurring earnings per share of $3.71 and generated approximately $612 million in cash flow, ahead of our full-year forecast of approximately $580 million," he said.

"KMI's significant cash flow enabled us to substantially increase our dividend, while at the same time repurchase stock, retire debt and fund expansion projects," Kinder said. "In 2004, KMI and KMP combined invested approximately $650 million in capital expansion projects and made acquisitions totaling approximately $325 million, excluding the TransColorado transaction."

The ratio of total debt-to-capital at KMI improved to less than 38% at year-end 2004 from nearly 43% at the close of 2003. Without the impact of the sale of TransColorado, debt-to-capital would have been about 39%.

In 2004, excluding the sale of TransColorado, net debt declined by $205 million -- more than double KMI's published annual budget target of $100 million -- and KMI repurchased $60 million of its shares. At year-end, KMI had used $43 million of the $211 million total cash proceeds from the sale of TransColorado to repurchase its shares.

"In total, we expect to use about $50 million of the proceeds from the sale to reduce debt and $161 million to repurchase KMI shares, which will be completed in 2005," Kinder said. Since beginning its stock repurchase program in August 2001 through the end of 2004, KMI repurchased approximately $555 million of its shares.

KMI's investments in KMP contributed almost $477 million of pre-tax earnings in 2004, up 20% from 2003, more than the forecasted 16% expected rise. In the fourth quarter, KMI's investments in KMP contributed $129.8 million, compared with $105.5 million in 4Q2003.

"KMP had another outstanding year in 2004, and its cash flow continued to increase due to both strong internal growth and contributions from acquisitions," Kinder said. As KMP's distributions grow, KMI's general partner share of those distributions grows as well, up to 50% of incremental distributions.

Driven by an increase in margins on transportation and storage revenues, KMI's Natural Gas Pipeline Co. (NGPL) reported 2004 segment earnings of $392.8 million, almost a 6% increase from $372 million in 2003. In 4Q2004, segment earnings increased by nearly 3% to $97.9 million compared to the same period a year earlier.

"NGPL's firm, long-haul transportation capacity is sold out through March 2005 and almost 90% contracted for the remainder of the year," said the CEO. "Storage is fully contracted until April 2006." Throughput volumes were up about 3% for the year and 4% for the quarter.

TransColorado, which was sold to KMP last November, reported segment earnings of $20.3 million for the year and $2.1 million in 4Q2004. Earnings were down for the year and the quarter because of the sale to the partnership.

Retail reported 2004 earnings of $69.3 million, up 6% from $65.5 million in 2003. In the final quarter, earnings were up 24% to $25.8 million compared with 4Q2003. Annual growth was primarily attributable to strong meter growth in Colorado.

Meanwhile, KMI's Power segment earnings were down for the year, to $15.3 million from $22.1 million in 2003. The impairment of some power assets amounted to a net loss of $0.07/share.

For this year, KMI expects to achieve 11% annual growth, and is forecasting earnings of $4.22/share, up from a previous estimate of $4.20 that was announced just one month ago.

"In 2005 and beyond, we plan to remain focused on owning and operating predominantly fee-based, midstream energy assets in strategic markets that are integral to helping meet the growing demand for energy products across America," Kinder said.

KMP reported annual income of $831.6 million, or $2.22/limited partner unit, up 20% over 2003 income before a change in accounting principle of $693.9 million, or $1.98 per unit. For the fourth quarter, KMP had income of $227.3 million, or $0.59 per unit, a 24% increase over income of $183.7 million, or $0.51 per unit, in 4Q2003. Thomson First Call analysts had expected KMP to report 4Q2004 profit of 55 cents/unit on sales of $1.84 billion.

"Our stable assets generated cash flow to support distributions of more than $975 million for the year, and we increased the distribution per unit in all four quarters," said Kinder.

KMP's Products Pipelines segment delivered an 8% increase in 2004 earnings to $475.5 million, compared with $441.6 million for 2003. In 4Q2004, earnings were up more than 6% to $121.6 million compared with 4Q2003.

KMP's Natural Gas Pipelines segment reported earnings of $410.7 million for 2004, up 10% from $373.4 million in 2003. Quarterly earnings were up more than 7% to $106.9 million compared with 4Q2003.

"Annual growth in this segment was attributable primarily to the Texas Intrastate Pipeline Group, which significantly outperformed its annual budget," Kinder said. This segment also benefited from two months of earnings from the acquisition of TransColorado from KMI.

"TransColorado is a very stable asset, as we have entered into long-term, fixed-price contracts for most of the pipeline's transportation capacity through 2007," Kinder said. "Growth opportunities are also positively impacting TransColorado's financial performance. TransColorado completed a significant expansion project last summer and another one is under way."

For 2005, KMP is forecasting 9% growth -- and may be purchasing some assets, according to Kinder.

"We are optimistic about our chances of making accretive acquisitions in 2005, but we did not include the benefits of any acquisitions in our expectations," Kinder said.

The company will hold an annual investor conference in Houston on Tuesday (Jan. 25).

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