RESEARCHER
Kinder Morgan, Inc. Reports 167% Dividend Increase
Sat Aug 16 03:36:59 2003
64.140.158.114

Kinder Morgan, Inc. Reports 29% EPS Increase; 167% Dividend Increase
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HOUSTON, July 16 /PRNewswire-FirstCall/ -- Kinder Morgan, Inc. (NYSE: KMI) today reported a 29 percent increase in second quarter diluted earnings per share to $0.76, up from $0.59 for the comparable period in 2002. Second quarter net income was $94.2 million, up from $72.5 million for the same period last year. For the first six months of the year, net income was $205.3 million, or $1.66 per diluted share, compared to $160.8 million, or $1.30 per diluted share, for the first six months of 2002, an increase in earnings per share of 28 percent. Cash flow was $130.0 million for the second quarter and $287.7 million for the first six months of the year, consistent with KMI's revised full-year forecast of approximately $530 million. KMI's published annual cash flow budget for the year was nearly $470 million. (Cash flow is defined as pre-tax income before DD&A, less current income taxes and sustaining capital expenditures.)

According to Chairman and CEO Richard D. Kinder, KMI's strong results were driven by its ownership of the general partner of Kinder Morgan Energy Partners, L.P. (NYSE: KMP) and solid performance by its fee-based assets. "KMI had a terrific second quarter, with all of our business segments reporting increased earnings over the same period last year. We also are delighted to increase our quarterly dividend to $0.40 per share ($1.60 per share annually), payable on Aug. 14, 2003, to shareholders of record as of July 31, 2003. As announced last month, we increased the dividend in response to recently enacted federal tax legislation. At the same time, we are committed to continue strengthening our balance sheet," Kinder said. KMI has reduced debt this year by more than $280 million, including $120 million in the second quarter, thereby lowering its debt-to-capital ratio to approximately 44 percent from 48 percent at the end of 2002.

Overview of Business Segments

KMI's interest in KMP contributed $97.8 million of pre-tax earnings to KMI in the second quarter, a 20 percent increase over $81.5 million for the comparable period a year ago. KMI will receive $103.9 million in total distributions from its investment in KMP (including KMR share distributions) for the quarter, up from $86.2 million for the second quarter a year ago. These results are consistent with KMI's published budget target of 16 percent annual growth from its interest in KMP. "KMP's cash flow continued to increase in the second quarter, primarily due to internal growth on its pipeline and terminal assets," Kinder said. As KMP's cash flow grows, KMI's general partner share of that cash flow grows as well, up to 50 percent of incremental cash flow.

Natural Gas Pipeline Company of America (NGPL) reported second quarter segment earnings of $84.3 million, up slightly from $84.0 million for the same quarter last year. NGPL's solid performance is primarily attributable to the continuation of successful re-contracting of long-haul capacity and expansion projects coming on line since the end of the second quarter last year. "We continue to successfully re-contract firm transportation capacity on NGPL," Kinder said. "Firm capacity on the pipeline is virtually sold out through October of 2003 and 95 percent contracted for through March of 2004." NGPL recently entered into new long-term transportation or storage contracts with such creditworthy customers as BP Energy Company, We Energies, Tenaska Marketing Ventures, The Peoples Gas Light and Coke Co. and Nicor Gas. In addition, NGPL received earnings contributions in the quarter from recent expansion and extension projects. For example, the NGPL lateral extension into the eastern portion of the St. Louis metropolitan area began service in the third quarter of 2002, and service began in April of this year for the 10.7 Bcf of NSS storage service expansion at the North Lansing facility in east Texas. NGPL remains on target to meet its published annual budget of nearly 5 percent annual growth.

TransColorado reported segment earnings of $5.3 million for the second quarter, versus the $2.1 million recorded by KMI for its 50 percent interest in the same period a year ago. "TransColorado continues to exceed the expectations that we had when we increased our ownership in this pipeline to 100 percent in October of 2002," Kinder said. "While we have already achieved 78 percent of this segment's $16.0 million published annual budget and are certainly on a pace to surpass it, keep in mind that the rate provisions under a few of TransColorado's contracts vary with basis differentials and they may not remain as favorable in the second half of the year as they were in the first two quarters." Throughput increased by about 7 percent in the second quarter and 23 percent during the six months ended June 30. Long-haul capacity on TransColorado, which provides a strategic link between developing Rocky Mountain natural gas supply resources and the southwestern United States, is fully subscribed into 2004.

Segment earnings for Retail in the second quarter were $6.3 million, up slightly from $6.1 million for the comparable period in 2002. The increase primarily reflects reduced expenses. With segment earnings of $37.8 million for the first six months of the year, Retail is on target to achieve slightly more than its 2003 published annual budget of $65.3 million.

Power, which is expected to account for about 2 percent of KMI's total segment income in 2003, recorded second quarter earnings of $10.8 million compared to $5.9 million for the same period last year. Approximately $2 million of the increase reflects increased contributions from tolled power plants in Colorado and Michigan, and about $2.8 million of the increase is attributable to an increase in net plant development fees. This is the final quarter that this segment expects to recognize power development fees. As a result, Power remains on track to meet its 2003 published annual budget of $19.4 million, even though it has already achieved 71 percent of its target for the year.

Executive Compensation

Following its board meeting today, Kinder Morgan also announced a change in its compensation policies to more closely align senior management compensation with the long-term interests of its shareholders and unitholders. Chairman and CEO Richard D. Kinder will continue to receive $1 per year in salary with no bonuses, options, grants of restricted stock or other compensation. The ten most senior executives (excluding Mr. Kinder) will continue to have their base salaries capped at $200,000 per year and will continue to be eligible for annual bonuses when KMI and KMP meet their annual earnings per share and distributions per unit targets. In addition, these senior executives will no longer be eligible for options and have received grants of restricted stock which will vest 25 percent after three years and the remaining 75 percent after five years. It is expected that executives will receive no further equity compensation during the five-year life of these restrictions. In total, 575,000 shares of restricted KMI shares have been issued under a shareholder approved plan. As a result, KMI and KMP will each expense approximately $3.5 million annually. All other employees will be eligible for annual grants of options which will fully vest after three years. Fewer than 700,000 options to purchase KMI shares are expected to be issued annually. Other than restricted stock, executives will continue to have only those benefits which are available to every Kinder Morgan employee.

Chief Financial Officer C. Park Shaper plans to sell approximately 37,000 KMI shares and 82,000 KMP units. He will use the proceeds to repay a $5 million personal loan guaranteed by KMI and KMP as part of a previously disclosed retention agreement that was effective Jan. 17, 2002. Pursuant to the terms of the agreement, Shaper was required to purchase common stock of both KMI and KMP in the open market with the loan proceeds. On the fifth anniversary date of the agreement, provided he was still employed by Kinder Morgan, the company would have assumed Shaper's obligations under the loan.

Because the Sarbanes-Oxley Act of 2002 does not allow companies to issue or guarantee new loans to executives, Shaper and Kinder Morgan have agreed that it would be prudent for Shaper to repay the loan now. "Even though the continuation of our agreement was allowed by the Sarbanes-Oxley Act, the Kinder Morgan management team, including Park, believes that it is appropriate in today's business environment to eliminate the previous retention agreement," explained Kinder. Shaper will repay the loan in its entirety, and instead will participate in the restricted stock plan with other senior executives.

Outlook

In April, KMI raised its annual earnings guidance for 2003 to between $3.23 and $3.28 per share, up from its published 2003 budget target of $3.18. The company remains comfortable with that range.

Kinder Morgan, Inc. is one of the largest energy transportation and storage companies in America, operating more than 35,000 miles of natural gas and products pipelines and approximately 80 terminals. Kinder Morgan, Inc. owns the general partner interest of Kinder Morgan Energy Partners, L.P., the largest publicly traded pipeline limited partnership in the U.S. in terms of market capitalization. Combined, the two companies have an enterprise value of approximately $21 billion. (Enterprise value is market value of the equity securities plus net debt, excluding interest rate swaps.)

Please join us at 4:30 p.m. Eastern Time on Wednesday, July 16, at www.kindermorgan.com for a LIVE webcast conference call. (KMI's published annual budget is posted on its web site under Investors/Archived Presentations/2003 Analyst Conference.)

In this release, we present a measure of cash flow that differs from cash flow measures prepared under Generally Accepted Accounting Principles (GAAP). In this release, we have defined cash flow to be pre-tax income before depletion, depreciation and amortization (DD&A), less current taxes and less sustaining capital expenditures. In each case, the amounts included in the calculation of these measures are computed in accordance with GAAP, with the exception of sustaining capital expenditures. Sustaining capital expenditures are defined as capital expenditures (determined in accordance with GAAP) which do not increase the capacity of the asset. We routinely calculate and communicate this measure to investors. We believe that continuing to provide this information results in consistency in our financial reporting. In addition, we believe that this measure is useful to investors because it provides investors with a quick, simple and reasonable estimate of our cash flow available for expansion projects, debt repayment, dividends and share repurchases.

We believe the most directly comparable cash flow measure computed under GAAP is "cash flow provided by operating activities." This GAAP measure differs from the cash flow measure used in this release in that (1) it is not reduced for sustaining capital expenditures, and (2) it is affected by a number of items that are not taken into account in the cash flow measure used in this release, including (i) adjustments for equity in earnings, (ii) distributions from equity investments, (iii) minority interests in income of unconsolidated subsidiaries, (iv) deferred purchased gas costs, (v) deferred revenues, (vi) changes in gas in underground storage, (vii) changes in other working capital items, (viii) net gains or losses on sale of facilities, (ix) proceeds from termination of interest rate swaps and (x) other, net. We have attached a reconciliation of cash flow to preliminary cash provided from operations for actual reported results. Cash flow should be considered in conjunction with cash provided from operations, as defined by generally accepted accounting principles.

This news release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although Kinder Morgan believes that its expectations are based on reasonable assumptions, it can give no assurance that such assumptions will materialize. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein are enumerated in Kinder Morgan's Forms 10-K and 10-Q as filed with the Securities and Exchange Commission.

KINDER MORGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Operating Revenues:
Natural Gas Transportation
and Storage $162,974 $143,410 $345,827 $296,816
Natural Gas Sales 70,490 54,291 193,489 175,067
Other 18,401 16,033 31,417 33,252
Total Operating Revenues 251,865 213,734 570,733 505,135

Operating Costs and Expenses:
Gas Purchases and Other
Costs of Sales 79,852 53,310 192,807 154,557
Operations and Maintenance 31,549 33,225 61,450 62,305
General and Administrative 18,786 17,108 35,194 36,658
Depreciation and Amortization 29,047 25,994 58,672 51,998
Taxes, Other Than Income Taxes 7,383 7,226 14,557 14,391
Total Operating Costs and
Expenses 166,617 136,863 362,680 319,909

Operating Income 85,248 76,871 208,053 185,226

Other Income and (Expenses):
Equity in Earnings of
Kinder Morgan Energy
Partners 113,732 93,394 225,227 183,485
Equity in Earnings of
Other Equity Investments 2,719 4,056 5,202 6,428
Interest Expense, Net (31,314) (39,810) (71,288) (79,358)
Minority Interests (15,476) (12,824) (31,397) (25,601)
Other, Net (874) 1,477 122 5,050
Total Other Income and
(Expenses) 68,787 46,293 127,866 90,004

Income Before Income Taxes 154,035 123,164 335,919 275,230
Income Taxes 59,841 50,712 130,655 114,390

Net Income $94,194 $72,452 $205,264 $160,840

Basic Earnings Per Common
Share $0.77 $0.59 $1.68 $1.31

Number of Shares Used in
Computing Basic Earnings
Per Common Share (Thousands) 122,218 122,015 122,048 122,703

Diluted Earnings Per
Common Share $0.76 $0.59 $1.66 $1.30

Number of Shares Used in
Computing Diluted Earnings
Per Common Share (Thousands) 123,474 123,230 123,285 124,026

Dividends Per Common Share $0.15 $0.05 $0.30 $0.10