Legend. Cochin. Pacific 3 CALNEV NGPL KMCO 2. Pacific. KM Te KMTP. Natural Gas Pipeline Company of America-NGPL (KMI) NGPL Natural Gas Storage (KMI)

Transcription

1 2001 Annual Report

2 ic 2 Cochin Pacific MI T 3 Pa CALNEV 3 3 NGPL KMCO 2 Pacific Legend Natural Gas Pipeline Company of America-NGPL (KMI) KM Te NGPL Natural Gas Storage (KMI) Retail Natural Gas Division (KMI) KMTP Gas-Fired Power Plants (KMI) Products Pipelines (KMP) Products Pipeline Terminals (KMP) Transmix Facilities (KMP) Natural Gas Pipelines (KMI/KMP) Natural Gas Storage (KMI/KMP) Natural Gas Processing/Treating Plants (KMP) (2,, 10) (KMI) (KMP) CO2 Pipelines (KMP) Terminals (KMP) Indicates # of facilities in area Kinder Morgan Headquarters Houston, Texas Kinder Morgan, Inc. assets Kinder Morgan Energy Partners, L.P. assets 2

3

4 Real Assets, Real Earnings, Real Cash In 2001, Kinder Morgan, Inc. increased earnings per share by 52 percent over The company also continued to outperform its peers and the S&P 500. At year-end 2001, KMI had delivered a total return of over 360 percent to its shareholders since the KN Energy merger was announced in July of Kinder Morgan, Inc. (KMI) Business Segments $500 $400 $300 $200 $100 $0 July 8, 1999 Shareholder Returns (Since KN Energy merger was announced, with dividends reinvested monthly) Dec. 31, 1999 Dec. 31, 2000 KMI S&P 500 INDEX NATURAL GAS-500 Dec. 31, 2001 General Partner of KMP Owns the general partner interest and a 19 percent limited partnership interest in KMP. Natural Gas Pipeline Company of America (NGPL) Transports up to 5.7 billion cubic feet (Bcf) per day of natural gas through 10,000 miles of pipeline; also has 215 Bcf of working gas storage. Retail Natural Gas Distribution Provides natural gas distribution and related services to approximately 240,000 residential, commercial, agricultural and industrial customers in Nebraska, Wyoming and Colorado. Power Develops natural gas-fired power stations; two 550-megawatt facilities under construction are scheduled to come online in the summer of 2002; also owns an interest in three power plants operating in Colorado. KMI 2001 Segment Income 9% Power and 8% Other Retail 35% Investment in KMP 48% NGPL Kinder Morgan Energy Partners, L.P. (KMP) Business Segments Products Pipelines Largest independent products pipeline owner/operator in the U.S.; transports over 2 million barrels per day of gasoline, jet fuel, diesel fuel and natural gas liquids through 10,000 miles of pipeline; more than 30 terminals with a storage capacity of about 20 million barrels and five transmix facilities. Natural Gas Pipelines Major transporter of natural gas in the Rocky Mountain, Midwest and Texas Gulf Coast areas; 15,000-mile pipeline system has transportation capacity of 7.8 Bcf per day and includes gathering, treating, processing and storage. CO 2 Pipelines Largest producer and transporter of carbon dioxide (CO 2 ) for enhanced oil recovery projects in the U.S.; transports more than 1 Bcf per day of CO 2 ; more than 900 miles of pipeline and significant ownership interests in essential CO 2 infrastructure assets. KMP 2001 Segment Earnings (before DD&A) 18% Terminals 26% Natural Gas Pipelines 13% CO 2 Pipelines 43% Products Pipelines Terminals Largest independent operator of terminals in the U.S.; handle over 55 million tons annually of coal, petroleum coke, soda ash, cement and other materials; storage capacity of 35 million barrels for petroleum products and chemicals; more than 40 facilities nationwide.

5 Dear Fellow Shareholders Record Results We were delighted with our financial performance in 2001, as Kinder Morgan, Inc. (KMI) delivered outstanding earnings for its shareholders. Diluted earnings per share from continuing operations adjusted for asset sales net of nonrecurring charges were $1.96 in 2001, up 52 percent from $1.29 the previous year. This exceeded the 30 to 40 percent growth guidance noted in last year s letter to shareholders. Overall, KMI reported 2001 net income of $225.1 million ($238.6 million before an extraordinary item), compared to $152.4 million in 2000 (also $152.4 million before an extraordinary item). Perhaps more than ever before, 2001 demonstrated that Kinder Morgan is a different kind of energy company. In a year that will be remembered for the tragic events of September 11, as well as an economic downturn, KMI produced record results. Our premier portfolio of midstream assets demonstrated that it is capable of producing reliable cash flow even in extremely difficult market conditions. These fee-based assets at KMI and Kinder Morgan Energy Partners, L.P. (KMP) are integral to the energy infrastructure of the United States and have minimal exposure to commodity price variations. KMI s business segments, Natural Gas Pipeline Company of America (NGPL), Retail and Power, all reported increased earnings in 2001 and contributed substantially to the company s financial success. KMI s earnings per share growth was once again driven by its ownership of the general partner of KMP, as KMI recorded $251.9 million of pre-tax earnings attributable to its investment in KMP. KMI received $272.4 million in total distributions from KMP in The largest publicly traded pipeline master limited partnership (MLP) in America, KMP has established a competitive advantage by becoming the independent industry leader in the U.S. for most of its businesses products pipelines, terminals, CO 2 and transmix. We are also a leading player in the natural gas pipeline industry. Becoming a market-share leader and accumulating critical mass has improved our ability to generate internal growth and pursue expansion opportunities. Financial Reporting/Balance Sheet KMI EPS Growth* $0.74 $1.29 $ *Reflects diluted EPS from continuing operations adjusted for asset sales, net of nonrecurring charges Following the collapse of Enron, corporate America has come under increased scrutiny, and investors have become more concerned about companies financial stability and reporting practices. At KMI, we have always had stringent procedures in place to regularly review the company s finances and to ensure compliance with all reporting requirements of the SEC. We actually go beyond those requirements by detailing our financial expectations, and the underlying assumptions, in public teleconference calls and by making this information available on our web site ( We also work diligently to maintain a strong balance sheet. As promised, KMI s debt-to-capital ratio has improved significantly, declining from approximately 71 percent at the time of the KN Energy merger in mid-1999 to 47 percent at year-end The dramatic balance sheet improvement was attained while delivering strong earnings per share growth and while completing over 90 percent of a $300 million common stock repurchase program. In the first quarter of 2002, we expanded the stock repurchase program to $400 million, which was possible because of KMI s strong cash flow and solid balance sheet. This additional $100 million represents less than a quarter of the over $400 million in free cash flow that KMI is expected to generate in Repurchasing the stock is immediately accretive to earnings per share and is a tax-efficient way to return some of KMI s cash to its shareholders. Looking ahead, we will consider additional increases to our repurchase program depending on operating results and market conditions. Shareholder Value At KMI, we believe it is essential to align shareholder and employee interests if we are to deliver maximum shareholder value over the long-term. Our top two executives, who combined own about 23 percent of the company, each receive $1 a year in salary, with no bonuses or stock options. Their financial rewards are tied directly to the performance of KMI. Additionally, senior executives are limited to a base salary of $200,000 per year. We also avoid unnecessary overhead expenses, such as corporate aircraft, advertising, tickets to sporting events and expensive annual reports. Our All Employee Stock Option Plan creates common incentives between shareholders and employees throughout our organization. Safety Following September 11, all energy companies across America began operating under a state of heightened awareness. For us, this meant hiring additional security guards at certain locations, adding fencing and locked gates at other facilities and training employees to be more cautious and alert. We also are participating at the national level with other companies, industry associations and federal agencies to identify additional measures to improve security % KMI Debt to Total Capital* 61% 47% *As of year-end

6 One of KMI s Natural Gas Control Centers Lakewood, Colorado Safety and operational excellence have always been top priorities at KMI because they reduce total costs over the long-term. For example, we routinely conduct internal inspections on our natural gas and products pipelines by passing sophisticated equipment called smart pigs, through our pipelines. The smart pigs are equipped with sensors that can detect small anomalies, such as corrosion or stress fractures, and alert us to potential problems. Smart pigging greatly reduces the risk of expensive environmental incidents and allows us to perform more cost-effective preventative maintenance on our assets. products pipelines, which are located in some of the fastest growing markets in the country (southern California, Nevada, Arizona, and the Southeast). By focusing on cost control, we can turn 4 percent top-line growth into more significant bottom-line growth. Additionally, growth will result from our investment of about $320 million in 11 expansion projects at KMI and KMP, which are expected to be completed in 2002 and While acquisitions are difficult to predict, we are confident there will continue to be opportunities to add fee-based assets, primarily pipelines and terminals, to KMP s portfolio of midstream businesses. Many energy companies have begun to divest midstream assets in a move to strengthen their balance sheets, and major oil companies are continuing to divest assets following mergers and internal restructuring initiatives. With its low-cost structure, strong currency and tax advantages, KMP is often an ideal buyer of these assets. During the past five years, KMP has completed approximately 30 accretive acquisitions totaling over $6 billion. We plan to continue to utilize KMP as our primary acquisition vehicle. We expect KMI to grow its earnings per share by about 30 percent in Between 2001 and 2005, we are targeting average annual growth in the 18 to 20 percent range, without additional acquisitions by KMP. If we can continue to complete accretive acquisitions at the same rate that we have over the last five years, our growth could climb to almost 30 percent between 2001 and Strategy Our success has been achieved by consistently employing the strategy that we began implementing when KMP was formed in February of We focus on: Operating fee-based assets that are core to the energy infrastructure of growing markets Increasing utilization of these assets while controlling costs to maximize internally generated growth Leveraging economies of scale from incremental expansions and acquisitions Maximizing the benefits of the MLP financial structure We intend to continue executing this proven game plan. By combining this strategy with a passion for quality customer service, we are dedicated to meeting the needs of all of our constituents. Future Outlook Looking ahead, KMI is well positioned for significant earnings per share growth in 2002 and beyond. Through KMI s ownership of KMP s general partner, KMP is expected to continue to fuel much of this growth. While acquisitions have historically been a major driver of growth at KMP, we expect internal growth to play a more significant role moving forward. Why? Because many of our assets have excess capacity and are located in high-growth areas. For example, we expect revenue growth of approximately 4 percent on KMP s Products Terminal near Los Angeles, California We hope you share our enthusiasm for the future and for the financial results that KMI has been able to produce. These superb results are truly remarkable when you consider the nature of the stable, fee-based platform of assets that we have assembled and the strong, reliable cash flow that they are capable of generating. We appreciate the continued support of our shareholders and believe the best is yet to come! Richard D. Kinder William V. Morgan Michael C. Morgan Chairman and CEO Vice Chairman President

7 General Partner of KMP KMI received $272.4 million in total distributions from KMP in KMI s 2001 earnings were driven significantly by KMI s ownership of the general partner of KMP. KMI received $272.4 million in total distributions through its GP and LP interests in KMP for 2001, up 82 percent over Remember, as KMP s cash flow grows, KMI s general partner share of that cash flow grows accordingly. KMP s cash flow continued to increase significantly in 2001 due $207 KMI GP Interest* ($ millions) to internal growth in pipeline and terminal business segments and the strong performance of acquired assets. After the effects of $113 equity accounting and amortization, KMP contributed $251.9 million of pre-tax $58 earnings to KMI in $ , a 122 percent increase over the previous year. In $5 $ , KMP s total distributable cash flow *Includes cash distributions to the 2% GP is expected to increase interest; does not include limited partner units owned by GP/KMI from approximately $540 million to over $700 million. Since it was formed five years ago, KMP has returned over 650 percent to its unitholders. Each of KMP s business segments contributed substantially increased earnings during The Products Pipelines segment delivered a 42 percent increase in 2001 earnings before depreciation, depletion and amortization (DD&A) to $380.2 million. Segment earnings were driven by increased pipeline volumes and by strong performances at the acquired West Coast and Northwest liquids terminals. Overall, revenues increased about 7 percent and volumes were up 2 percent in 2001 (excluding acquisitions), despite a dramatic decline in commercial airline travel in the Products Pipelines KMP s Largest Business Segment Kinder Morgan Interstate Gas Transmission near Casper, Wyoming fourth quarter. Our Pacific operations, which transport more than a million barrels of gasoline, jet fuel and diesel fuel per day in California and other western states, reported increased revenues of nearly 8 percent and volumes were up over 3 percent for the year (excluding acquisitions). During 2001, CALNEV, a 550-mile refined petroleum products pipeline that runs from near Los Angeles to Las Vegas, Nevada, and the 195-mile Central Florida pipeline between Tampa and Orlando, Florida, were added to the products pipelines business segment. These pipelines, along with the terminals previously noted, were part of the $1.2 billion acquisition of U.S. pipelines and terminals from GATX Corporation. The Natural Gas Pipelines segment produced 2001 earnings before DD&A of $226.7 million, a 67 percent increase over Better than expected performance by natural gas assets that were transferred to KMP from KMI, principally Kinder Morgan Texas Pipeline (KMTP), was the primary driver of this dramatic increase in segment earnings. KMTP, a large intrastate pipeline with a transportation capacity of 2.8 billion cubic feet (Bcf) per day, has a strong customer base and excellent growth opportunities. It serves utility and other industrial customers in the Houston Ship Channel and Beaumont/Port Arthur areas of Texas. Other key assets in this segment include Kinder Morgan Interstate Gas Transmission, Trailblazer Pipeline Company and Red Cedar Gathering Company. We have several internal expansion projects under way in this business segment, and we are also pursuing a number of growth opportunities in the Rocky Mountain area. Our natural gas pipelines benefit from a variety of long-term transportation and storage contracts.

8 22 percent at our dry-bulk terminals, which handle coal and other materials. Our liquid-bulk facilities also experienced significant growth. These terminals store and transfer petroleum products and petrochemicals and reported increased volumes of 7.5 percent over the previous year. We added a number of strategically located terminals in 2001, including large liquid-bulk facilities in Houston, New York Harbor, Los Angeles and Chicago. CO2 Process Separator Cortez, Colorado The CO2 Pipelines segment delivered a 39 percent increase in 2001 earnings before DD&A to $111.4 million. This niche business transports and markets carbon dioxide, which is used to enhance recovery from mature oil fields, primarily in the Permian Basin of west Texas. In addition to CO2 pipelines and reserves, Kinder Morgan CO2 Company has a greater than 80 percent ownership stake in the SACROC Unit, one of the largest and oldest oil fields utilizing CO2 injection technology. In December 2001, SACROC produced over 10,000 barrels of oil per day, its highest level of production since By increasing our ownership interests in SACROC and other key CO2 assets, and undertaking a number of expansion projects, this business segment is well positioned for significant future growth. The Terminals segment, which in 2001 included both dry- and liquid-bulk facilities, reported a 232 percent increase in earnings before DD&A to $157 million. Our terminals business continued to experience exceptional growth, primarily due to acquisitions, but we also increased throughput at many of our existing facilities. As a result of both internal growth and acquisitions, volumes for the year increased about Carteret Liquids Terminal New York Harbor KMP announced $1.4 billion in strategic, accretive acquisitions in 2001, the largest being the $750 million purchase of the Tejas Gas intrastate pipeline system in Texas. This transaction closed in February of 2002 and began contributing cash flow immediately to KMP. With a transportation capacity of 3.5 Bcf per day, Kinder Morgan Tejas is a major provider of natural gas to such customers as refineries, petrochemical companies, gas and electric utilities and independent power generators. We expect to realize solid growth on this 3,400-mile system, which gives us access to new, growing markets. NGPL Segment earnings for NGPL were $346.6 million, nearly half of KMI s total segment income in Pier IX Coal Terminal Newport News, Virginia With approximately 10,000 miles of pipeline and peak deliverability of 5.7 Bcf per day, NGPL is an anchor of KMI s business portfolio. Its strong financial performance in 2001 reaffirmed the effectiveness of our ongoing strategy at NGPL: maintaining strong relationships with existing customers; aggressively pursuing and connecting new shippers; and initiating strategic expansion plans to capitalize on opportunities in the marketplace and fuel future growth.

9 A wide array of service options, combined with excellent access to natural gas supplies and key markets, gives NGPL an important competitive advantage in serving utilities, marketers, producers, industrial end users and other shippers. With more than 1,700 interconnecting points to 32 interstate pipelines, 19 intrastate pipelines, a number of gathering systems and over 60 local distribution companies, NGPL provides unique flexibility when it comes to the receipt and delivery of natural gas. NGPL is the largest transporter of natural gas to the high-demand Chicago area, one of the most competitive gas markets in the country. As one of the largest storage operators in the country with 215 Bcf of working gas capacity, we are able to optimize pipeline deliveries and meet peak delivery requirements to principal markets. At NGPL, we have established an outstanding track record of renewing and extending contracts with existing customers. Our success in this area reflects our commitment to customer service and clearly demonstrates that we are meeting our shippers needs by providing them with safe, reliable and efficient natural gas service. Through successful recontracting, and our ability to attract and execute contracts with new customers, virtually all of our pipeline capacity on NGPL is committed through contracts ranging from one to 20 years. In addition to meeting the needs of traditional natural gas users, we are continually looking for innovative ways to leverage the NGPL system. A primary example of this is the power generation market. We have contracted to supply natural gas transportation services to 23 natural gas-fired electric generation facilities along our pipeline network, representing approximately 13,000 megawatts of electric generation capacity. In addition, we expect to attach 3,000 to 4,000 megawatts of additional electric load to the NGPL system each year through As an example, we signed a long-term, firm NGPL is one of the largest natural gas pipelines in the U.S. Expansion projects will increase transportation capacity on NGPL. transportation contract to provide gas to a subsidiary of FPL Group, Inc., to power its new 1,789-megawatt electric generation facility located 20 miles east of Dallas, Texas. In 2001, NGPL also made significant progress on key expansion projects that will enhance our capabilities in existing service areas, as well as extend NGPL s reach into markets that we don t currently serve. For instance, the new Horizon Pipeline Company a joint venture with a subsidiary of Nicor, Inc. will have the capacity to transport 380 MMcf per day of natural gas to customers in the growing northern Illinois region. We will operate the pipeline, which will consist of 27 miles of new pipe and 46 miles of existing NGPL pipe that will be leased by Horizon. The $79 million project is expected to begin service in the spring of In addition, we are building a lateral to extend NGPL s presence into the metropolitan east area of St. Louis. The lateral entails constructing 51 miles of pipeline that will have an initial capacity of 300,000 MMBtu per day. The $36 million pipeline is expected to be placed into service in the third quarter of Retail Retail produced segment earnings of $56.4 million in 2001, up 13 percent over the previous year. KMI s Retail natural gas business segment provides safe and reliable gas distribution and related services to approximately 240,000 residential, commercial, industrial and agricultural customers in Nebraska, Wyoming and Colorado. Retail s steady growth can be attributed to consistently growing its customer base, effectively controlling costs and focusing on quality customer service. In 2001, we added more than 13,000 customers through our purchase of Citizens Communications natural gas division in Colorado. This was a natural extension of our operations in Colorado, as we have extensive experience serving small communities and rural areas. Additionally, we are experiencing internal growth in certain service areas, particularly on the Western Slope of

10