Kinder Morgan Inc. (KMI) last week touted its business model and record 2002 earnings, which beat consensus Wall Street estimates. However, the company reported a 15% drop (10 cents/share) in fourth quarter net income due to special charges primarily related to a reduction in the carrying value of its power generation assets. Full-year 2002 KMI net income was up 35% to $302.7 million or $2.45/share.

The company also increased its quarterly dividend by 50% to $0.15 per share ($0.60 annualized) and revised its diluted earnings per share estimates for 2003 to $3.18 from $3.11.

UBS Warburg analyst Ron Barone said in a note that despite management’s revised guidance and a Street consensus of $3.15, he is maintaining UBS’ estimate of $3.20 for 2003. He added that he is also maintaining UBS’ recurring 2003 estimate of $2.05 on Kinder Morgan Energy Partners LP (KMP).

KMP, the six-year-old master limited partnership (MLP), reported a 38% jump in net earnings in 2002 of $608.4 million, or $1.96 per common unit. Its fourth quarter net income was $164.2 million, or 50 cents per common unit, compared with $120.7 million, or 40 cents per unit, for the same period of 2001. KMP’s board of directors increased the fourth quarter cash distribution per common unit to 62.5 cents ($2.50 annualized) from 61 cents ($2.44 annualized) in the third quarter.

According to KMI, its diluted earnings per share from continuing operations in 2002 before special items were $2.85, up 45% from $1.96 in 2001, and well above consensus estimates of $2.69 per share. KMI said its earnings per share for the fourth quarter were $0.82, up 37% from $0.60 in 2001, and above consensus estimates of $0.74 per share.

CEO Richard D. Kinder said KMI’s fee-based businesses and its ownership of the general partner of KMP combined to produce strong financial results in 2002. “We significantly exceeded our published 2002 budget target of $2.58 recurring earnings per share and generated over $400 million in cash flow, defined as pretax income before DD&A, less cash taxes and sustaining capital expenditures,” he said. “The net impact of the special items reported in the fourth quarter was within our previously announced range and had no impact on KMI’s cash.”

KMI said its interest in KMP contributed $338.5 million of pre-tax earnings to KMI in 2002, marking a 49% increase over $227.9 million in 2001, and $90.9 million of pre-tax earnings in the fourth quarter, compared to $62.9 million in the same period the previous year. “KMP’s cash flow continued to increase in 2002 due to internal growth on its pipeline and terminal assets, along with strong performances from acquired assets,” Kinder said.

KMI’s Natural Gas Pipeline Company of America (NGPL) reported 2002 segment earnings of $359.9 million, up 4% over 2001. In December, the Federal Energy Regulatory Commission (FERC) gave final approval to NGPL’s request to expand its North Lansing storage field in east Texas. The company said it plans to invest $35.6 million to increase the field’s working gas capacity by 10.7 Bcf, all of which is already subscribed under long-term contracts.

TransColorado reported segment earnings of $12.6 million for the year and $5.7 million in the fourth quarter, compared to losses in both comparable periods of 2001. On Oct. 1, KMI increased its ownership to 100% in the 292-mile interstate pipeline that stretches from northwestern Colorado into northern New Mexico.

Earnings for KMI’s Retail segment for 2002 were $64.1 million, up 13% over 2001, and $25.5 million for the fourth quarter. “Retail’s record annual earnings are primarily attributable to strong irrigation demand, an effective hedging program and growth in Colorado,” Kinder said.

KMI’s Power segment represented 4% of KMI’s total segment earnings in 2002, recording $36.7 million for the year and nearly $14 million in the fourth quarter before special items, which was less than in 2001. As previously disclosed, KMI said the reduction reflects lower power plant development fees.

Kinder noted that KMI will continue to evaluate additional increases in dividends annually as earnings and cash flow grow. “If the president’s proposal to eliminate the double taxation of dividends is passed, we would evaluate paying a significantly larger dividend to our shareholders,” Kinder said. “Our ability to increase our dividend comes from our significant cash flow, which we expect to be approximately $450 million in 2003.”

Looking ahead, KMI said its increased 2003 earnings guidance reflects contributions only from assets currently owned by KMI and KMP and does not include the benefit of future acquisitions. However, the company noted that it is optimistic about its chances for making accretive acquisitions in 2003.

Kinder also noted that KMP’s Natural Gas Pipelines segment earnings were up 44% in 2002, to stand at $325.5 million. Most of the $100 million annual increase came from the contribution of Kinder Morgan Tejas, acquired in the first quarter of 2002, as well as the improved results on the company’s expanded Trailblazer pipeline system.

In the fourth quarter, KMP began construction on the Mier-Monterrey pipeline that will stretch from South Texas to Monterrey, Mexico — one of that country’s fastest growing industrial areas. Mexico’s state-owned oil company Petroleos Mexicanos (Pemex) has entered into a 15-year contract with KMP for all of the capacity on the natural gas pipeline, up to 375 MMcf/d. Construction is expected to be completed in the second quarter. Additionally, Kinder Morgan Interstate Gas Transmission — an interstate pipeline with access to Rocky Mountain natural gas supply basins — sold out all 6 Bcf of its proposed Cheyenne Market Hub storage project in Wyoming and plans to file for regulatory approval with the Federal Energy Regulatory Commission this month.

The Products Pipelines segment delivered an 11% increase in 2002 earnings to $427.3 million. The CO2 Pipelines segment delivered 2002 earnings of $132.2 million, up 18%. And the Terminals segment reported a 26% increase in 2002 earnings to $205.6 million.

KMP expects to have cash distributions this year of $2.63 per unit. Additionally, KMP expects to increase its quarterly cash distribution to 68 cents per unit ($2.72 annualized) by the fourth quarter of 2003.

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