While many energy companies may have struggled financially through the second quarter, Kinder Morgan Inc. beat Wall Street estimates with a 45% increase in net income and a 44% increase in diluted earnings per common share compared to the second quarter of 2001. It also doubled its quarterly dividend to 10 cents/share in its first dividend increase since the company was formed via merger in October 1999.

Net income for the second quarter was $72.5 million, or $0.59 per diluted common share, compared to $49.9 million, or $0.41/share, during the same period a year ago. The average of Wall Street earnings estimates was 57 cents per share.

CEO Richard D. Kinder said the company continues to demonstrate that it is “truly is a different kind of energy company. There is an old saying that ‘actions speak louder than words,’ and at KMI, our fee-based assets have consistently grown earnings per share in a variety of market conditions. We don’t have a marketing and trading business, and our assets have minimal exposure to commodity price variations. While we understand the concerns that exist in the current market, we encourage investors to evaluate KMI on its fundamentals, rather than lumping us into peer groups that have risky, volatile businesses.”

Kinder said KMI expects to generate over $1.2 billion in free cash flow over the next three years. While a portion of the $1.2 billion will be used to pay down debt and fund modest expansion projects, Kinder expects much of that cash will be returned to shareholders via additional share repurchases and dividends.

“As the largest shareholder of KMI and the lowest compensated CEO in the energy industry, I want to assure all of our shareholders that management will remain focused on delivering long-term shareholder value.”

KMI’s second quarter results were driven by its ownership of the general partner of Kinder Morgan Energy Partners LP (KMP) and the performance of Natural Gas Pipeline Company of America (NGPL). KMI’s interest in KMP contributed $81.5 million of pre-tax earnings to KMI in the second quarter, up 46%. KMI will receive $86 million in total distributions from its investment in KMP for the second quarter of 2002, up from $67.6 million for the second quarter of 2001. As KMP’s cash flow grows, KMI’s general partner share of that cash flow grows as well, up to 50% of incremental cash flow. “KMP’s cash flow continued to increase in the second quarter due to internal growth on its pipeline and terminal assets, along with contributions from recent acquisitions,” Kinder said.

NGPL reported second quarter 2002 segment earnings of $84 million, up nearly 5% from the same period a year ago. “Pipeline capacity remained virtually sold out during the second quarter, as NGPL successfully renewed and extended a number of customer contracts,” Kinder said. “Throughput on NGPL increased by 15%. However, increased throughput does not directly correlate to the earnings increase in this segment, because the overwhelming majority of NGPL’s firm transportation revenues comes from demand charges that customers pay regardless of the amount of natural gas they ship through the pipeline.”

Segment earnings in retail were $6.1 million in the second quarter of 2002, up $1.9 million from the second quarter of 2001. The increase in earnings primarily reflects customer growth through the late 2001 acquisition of a small natural gas distribution company in Colorado, as well as growth in the company’s existing service territories.

Power and other operations recorded second quarter segment earnings of $5.9 million, down from $19.4 million in the same period a year ago. This reduction reflects the sale of the Wattenberg natural gas gathering facilities in December 2001 and lower power plant development fees. Power is only expected to generate about 4% of KMI’s total segment earnings in 2002, and the company plans no additional construction of new plants.

Looking ahead, KMI management said it expects earnings per share growth of more than 30% for full-year 2002 over 2001. “We are comfortable with the third quarter consensus earnings estimate of $0.63 and the full-year 2002 consensus estimate of $2.62. It is important to remember that cash flow is expected to continue to exceed earnings,” Kinder said.

Kinder Morgan Energy Partners announced an increase in the second quarter 2002 cash distribution per common unit to $0.61 ($2.44 annualized), a 16% increase over the second quarter 2001. The first quarter 2002 distribution per common unit was $0.59 ($2.36 annualized). KMP reported second quarter 2002 net income of $144.5 million, or $0.48 per unit, up 39%. These results represent the most profitable quarter in the history of the partnership.

The products pipelines segment delivered an 8% increase in earnings and the natural gas pipelines segment produced an 87% increase in earnings. The acquisition of the Kinder Morgan Tejas gas system accounted for most of the increase in gas pipeline earnings. The remaining increase was due to internal growth on the Kinder Morgan Interstate Gas Transmission pipeline, increased contract demand volume on the recently expanded Trailblazer system and the elimination of lease payments on Kinder Morgan Texas Pipeline. Earnings from the CO2 Pipelines segment were up slightly from the same period the previous year, and the company’s terminals segment reported a 32% in earnings.

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