With all of its business segments contributing, Kinder Morgan Inc. (KMI) Wednesday reported a 51% increase in first quarter earnings, with net income up 56%. The returns were fueled by a 39% earnings increase of KMI’s general partner Kinder Morgan Energy Partners LP (KMP), which is expected to lead the Houston-based midstream company on a path toward double-digit earnings growth this year.

KMI net income for the quarter was $88.4 million ($0.71 per share), compared with $56.8 million ($0.47 per share) a year ago, and partner KMP reported first quarter income of $141.4 million ($0.48 per unit), up 39% over net income of $101.7 million ($0.44 per unit) for the first quarter of 2001. Ahead of schedule, KMP, the country’s largest master limited partnership, announced an increase in the first quarter 2002 cash distribution per common unit to $0.59 ($2.36 annualized), payable on May 15, 2002 to unitholders of record as of April 30, 2002 — a 12% increase over a year ago, and its 12th increase since it was formed five years ago.

Calling it an “all-time record quarter,” CEO Richard D. Kinder said the results were driven by KMP and the strong performance of its other operating segments. “While weather and commodity price swings are negatively impacting others in the energy industry, our results continue to demonstrate that Kinder Morgan’s fee-based assets make us unique. Quarter after quarter we have continued to produce significant earnings per share growth despite volatile market conditions.”

KMI expects to achieve a second quarter consensus earnings estimate of $0.54 and the 2002 consensus estimate of $2.61. KMP expects to increase its per unit cash distribution to an annualized rate of more than $2.50 by the end of 2002, “without additional acquisitions,” Kinder said. For the year, KMP expects to reach its 2002 consensus earnings estimate of $1.81 per unit, or about 16% growth versus 2001. For the second quarter, KMP expects approximately 15% growth in earnings per unit compared to the second quarter of 2001.

KMI’s investment in KMP contributed $78.2 million of pre-tax earnings to KMI in the first quarter, up 63% from $48.1 million in the same period a year ago. KMI will receive $81.8 million in total distributions from its investment in KMP for the first quarter of 2002, up from $57.6 million for the first quarter of 2001. As KMP’s cash flow grows, KMI’s general partner share of that cash flow grows accordingly. Attributing KMP’s success to “solid internal growth” and contributions from its acquired assets, Kinder noted that the first quarter results “represent the most profitable quarter” in its five-year history. “The distribution increase occurred a full quarter ahead of our original expectations, and the distribution will be for $0.59 per common unit instead of our projected $0.575.”

KMP’s Products Pipelines segment delivered a 15% increase in first quarter 2002 earnings to $98.8 million, compared to $85.8 million during the same period a year ago. The Natural Gas Pipelines segment had quarterly earnings of $79 million, up 19% from $66.3 million a year ago.

Kinder noted that KMI was able to produce the numbers while maintaining a strong balance sheet and increasing its stock repurchase program by $100 million to $400 million overall. “KMI expects to generate more than $400 million in free cash flow in 2002 and has a total debt-to-capital ratio of 48%, which is below our long-term target of 50%,” he said.

KMI’s other operating businesses also reported an overall increase in segment earnings of approximately 3% for the first quarter. KMI subsidiary Natural Gas Pipeline Company of America had first quarter earnings of $95.6 million, up from $93.9 million in the first quarter of 2001, and said its transportation and storage capacity were “remaining virtually sold out on the pipeline.”

Segment earnings in retail operations were $24.9 million in the first quarter of 2002, up from $23.5 million during the same period the previous year. The company has added almost 16,000 new meters since the end of the first quarter 2001, through both the acquisition of a small distribution company in Colorado and growth in the company’s existing service territories. The CEO said that a hedging program initiated two years ago to normalize the winter heating load also helped. Also up were the power and other operations, which recorded segment earnings of $9.7 million, compared to $9.6 million a year ago.

“Reducing volatility related to weather has helped us produce more stable and reliable cash flow in retail. For example, even though volumes were down approximately 9% due to warmer weather, our hedges mitigated the impact on our earnings,” Kinder said.

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