Bolstered by record earnings from its general partner share of Kinder Morgan Energy Partners L.P. (KMP), Houston-based Kinder Morgan, Inc. (KMI) also reported record earnings for 2003 Wednesday. KMI continued to expand its pay-outs to stockholders, raising its quarterly dividend again, this time by 41% to $0.5625 per share ($2.25 annualized). The company raised its diluted earnings per share estimate for 2004 to $3.71 from $3.67.

“KMI’s significant cash flow enabled us to substantially increase our dividend for the second time in less than a year, while at the same time paying down more than $350 million in debt in 2003,” Chairman and CEO Richard D. Kinder said. KMI reduced its total debt-to-capital ratio to less than 43% at year-end, down from 48% at year-end 2002.

“We expect annual dividend increases in the future will approximate KMI’s annual growth in earnings. At the new $2.25 annualized rate, our dividend represents less than 50% of KMI’s expected free cash flow in 2004 and approximately 60% of our expected earnings,” Kinder said.

KMI has increased its quarterly dividend by over 10 times from $0.05 to $0.5625 per share in the past 18 months, driven primarily by the passage of federal legislation in 2003 that substantially reduced taxes on dividends. “Given our strong and growing cash flow, we expect to continue to increase our dividend on an annual basis, thereby returning significant cash to our shareholders,” Kinder said.

The quarterly dividend of $0.5625 per share — up from $0.40 per share — will be payable on Feb. 13, 2004, to shareholders of record as of Jan. 30, 2004.

KMI reported diluted earnings per share from continuing operations in 2003 before special items were $3.33, up 17% from $2.84 per share in 2002, and above consensus estimates of $3.29 per share. Comparable earnings per share for the fourth quarter were $0.89, up 10% from $0.81 in 2002, and above consensus estimates of $0.86.

Including special items — principally the non-cash revaluation of its interest in a power plant that was recently placed into bankruptcy by Mirant — 2003 income from continuing operations was $381.7 million, or $3.08 per share, compared to $307.7 million, or $2.49 per share, in 2002.

Kinder said KMI “significantly exceeded our published 2003 budget target of $3.18 recurring earnings per share and generated almost $560 million in cash flow, ahead of our revised full-year forecast of approximately $530 million and our original 2003 budget of about $470 million.” (Cash flow is defined as pre-tax income before DD&A, less cash paid for income taxes and sustaining capital expenditures.)

KMI’s expected cash flow in 2004 is approximately $580 million, and generally represents the amount of cash KMI will have available to pay dividends, repurchase stock, retire debt and fund expansion capital projects.

“We will detail KMI’s 2004 financial plan on Friday, Jan. 23, at our annual investor conference in Houston and, as in past years, post it on our web site so that investors may follow our progress throughout the year,” Kinder explained.

KMI’s general partner interest in KMP contributed $398.3 million of pre-tax earnings to KMI in 2003, up 18% over $338.5 million in 2002, and $105.5 million of pre-tax earnings in the fourth quarter, compared to $90.9 million in the same period the previous year. KMI will receive $421.4 million in total distributions from its investment in KMP for the year, up from $355.3 million for 2002. 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 2003 primarily due to internal growth on its pipeline, terminal and CO2 assets, along with solid performances from acquired assets,” Kinder said.

The other major contribution to KMI earnings came from Natural Gas Pipeline Company of America (NGPL), which reported segment earnings of $372.0 million for 2003 and $95.4 million for the fourth quarter. Results were 3% and 4% higher, respectively, than in the comparable periods of 2002. “NGPL had another terrific year, successfully re-contracting firm transportation and storage capacity and increasing throughput,” Kinder said.

For the winter heating season, approximately 98% of the firm transportation capacity was sold out on NGPL, and storage was fully sold out through 2004. Results also reflect the benefits of a full year of earnings contributions from the St. Louis lateral and Horizon Pipeline expansions. Throughput on NGPL increased by nearly 2% for the year and 3.7% for the fourth quarter.

TransColorado reported segment earnings of $23.1 million for the year and $5.6 million for the fourth quarter. Full-year results were nearly double the previous year, in part due to KMI’s increased ownership stake in TransColorado from 50% to 100% as of October 2002, while quarterly results were flat with last year.

Segment earnings for KMI’s retail business were $65.5 million for 2003, about 2% above 2002.

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