Kinder Morgan Rolls: Snags Pipeline, Doubles 2Q Earnings 
There's good news and then there's better news. For Houston-based Kinder Morgan Inc. (KMI), every day just seems to be a front-page top-of-the-fold story. Take Wednesday, for instance. Delivering on projections made earlier this month that it would meet or beat consensus earnings estimates, KMI reported great news, with a 107% boost in second quarter earnings over the same period a year ago, and year-to-date earnings up 42%. However, KMI's general limited partner Kinder Morgan Energy Partners L.P. (KMP) almost trumped the broadcast, with its announcement that it would buy a 2,600-mile Texas natural gas pipeline system for $360 million and split its stock two for one. 
KMI's net income for the quarter was $49.9 million, or $0.41 per diluted common share, compared with $24.1 million, or $0.21 for the same period of 2000. During a conference call with investors, CEO Richard Kinder said earnings were driven by its pipeline partner KMP whose earnings "more than doubled compared to the second quarter a year ago," adding that would be "hard to imagine we could have had a much better quarter." Calling KMP the "real driver of the real growth," Kinder said that "while no company can escape economic downturn, KMI is about as minimally exposed as possible." 
Kinder, who said the company is still on track to make additional acquisitions or growth plans before the end of the year, also hinted that another pipeline expansion announcement could be forthcoming. KMP, he said, is in discussions about a "major expansion in the Rockies." Although the West Coast is on most companies' radar screens for pipe growth, Kinder said he thought that a possible pipeline expansion "should go east, but we're just talking." Calling production thus far in the Rocky Mountain basin "a great story," Kinder said the company had "major advantages, and it looks pretty good so far." He did not detail when any announcements may be made. 
KMP's newest pipeline deal, with an affiliate of Occidental Petroleum Corp., includes pipe that primarily transports gas from South Texas and the Texas Gulf Coast region to the greater Houston/Beaumont area, a "very good growth market," Kinder said. The assets are currently leased and operated by KMP as a major part of the Kinder Morgan Texas Pipeline (KMTP) business unit. KMP also signed a five-year agreement to supply almost 90 Bcf of natural gas to chemical facilities owned by Occidental affiliates in the Houston area. 
With KMP's earnings tied into KMI's, Kinder said that "as the operator, we are very familiar with the assets involved in this transaction and their excellent growth potential." The transaction, expected to close in the third quarter, is expected to be immediately accretive to per-unit distributions by about $0.08 annually. Under the lease terms, KMP will pay $40 million annually from 2002 through 2005 and $30 million annually through 2026. 
On track to deliver more than a 40% increase in earnings per share this year, Kinder pointed to KMI's "premier, fee-based portfolio of midstream assets," adding that KMI was "comfortable" with current 2001 consensus earnings estimates of $1.84 per share, but said KMI would raise its 2002 estimate to between $2.40 and $2.50 per share. 
Breaking down its earnings by business segment, Kinder said KMI will receive $67 million in total cash distributions from KMP for the second quarter of 2001, up 81% from $37 million a year ago. "As KMP's cash flow grows, KMI's general partner share of that cash flow grows dramatically," he said. "KMI's cash flow from KMP increased significantly due to internal growth in KMP's pipeline and terminal segments and the strong performance of recent KMP acquisitions." After equity accounting and amortization, KMP contributed $60.5 million of pre-tax earnings to KMI in the second quarter, up from $28.3 million a year ago. 
The Product Pipelines segment delivered a 57% increase in earnings before depreciation, depletion and amortization (DD&A) of $101.8 million in the second quarter, compared to $65.0 million during the same period a year ago. The Natural Gas Pipelines segment produced segment earnings before DD&A of $39.6 million, a 24% increase, which reflected strong earnings growth from Red Cedar Gathering Company and the inclusion of additional gas assets that were transferred from KMI to KMP at the end of 2000. "Adding Kinder Morgan Texas Pipeline to this segment has made our gas pipeline business more seasonal, shifting more of the segment's income to the first and fourth quarters," Kinder explained. "For this reason, the year-to-date increase of 56% in segment earnings before DD&A is more representative than a second quarter comparison." 
Natural Gas Pipeline Company of America (NGPL), a KMI subsidiary, earned $80.3 million in the quarter, up from $80 million in the second quarter of 2000. NGPL benefited, said Kinder, from its "successful recontracting of its long-haul transportation and storage capacity," adding that the subsidiary expects to add approximately 3,000-4000 MW of gas-fired capacity annually through 2004, "which should boost demand." 
Power earnings surged, recording $18.8 million, compared with $8.6 million for the second quarter of 2000--a 119% jump, which the company attributed to growth in fee-income associated with gas-fired power plant development. Two 550 MW plants, expected to come online in the second quarter of 2002, are under construction in Little Rock, AR, and Jackson, MI. "Both of those are on schedule and on budget," Kinder said. 
Retail was the only segment that was down, but Kinder offered a positive spin on this as well. With earnings down $2.2 million from a year earlier, he noted that earnings in the second quarter of 2000 were boosted because of an earlier than normal, high-demand irrigation season. "However, it's precisely that type of volatility that led us to initiate a weather hedging program in late 2000 to normalize our summer-irrigation and winter-heating load. With our hedging now in place, Retail earnings are up 6% year-to-date, and we remain confident that Retail will deliver approximately 10% growth in segment earnings this year." 
By itself, KMP, the largest pipeline master limited partnership in the United States, had a record quarter, with every business segment producing increased cash flow and earnings. "Our results reflect both excellent internal growth and outstanding performance by recently acquired pipeline and terminal assets," said Kinder. KMP declared a second quarter distribution of $1.05 (an annualized rate of $4.20) per unit, that will be payable Aug. 14 to unitholders of record as of July 31. The distribution is 24% higher than the distribution of $0.85 per unit paid for the second quarter of 2000.The two for one stock split will be distributed on Aug. 31 to holders of record on Aug. 17. 
This is the second time that KMP has split the units since its formation in February 1997, Kinder noted. "Since then, KMP has turned over almost 600% to its unitholders." KMP reported record quarterly net income of $104.2 million, or $0.72 per unit, versus $71.8 million, or $0.70 per unit, in the second quarter of 2000.