金德摩根 (KMI) 2001 Q1 法說會逐字稿

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I'd like to thank all participants for holding. At this time, your lines will be in a listen-only mode until the question and answer session of the call. I would also like to remind all parties that this call is being recorded at the request of Kinder Morgan Incorporation. [If you happen] to have any objections, you may disconnect at this time. I would like to turn the call over to your speaker, Mr. Rich Kinder, chairman and CEO of Kinder Morgan Incorporation. Thank you Sir. You may begin.

Okay. Thank you Mike, and welcome to all of you who have called in. As usual, we will be talking about the Kinder Morgan companies, both Kinder Morgan Inc. and Kinder Morgan Energy Partners. Kinder Morgan Inc., of course, is a large mid-stream energy company that owns numerous assets, among them, the fact that it is the general partner of Kinder Morgan Energy Partners, which is America's largest pipeline MLP. I will refer to Kinder Morgan Inc. as KMI and Kinder Morgan Energy Partners as KMP. Obviously, during the course of this session, we will be making forward-looking statements within 2 the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. With those disclaimers, let me get started. This was obviously, for those of you who have read the press release, an outstanding first quarter for both KMI and KMP, driven primarily, by truly superb growth in all of our business units at KMP. This was reflected in the earnings of both companies and in the larger than expected distribution increase at KMP and where we announced, this afternoon, the board approved, a couple of hours ago, an increase in the distribution to $1.05 for this quarter or $4.20 annualized rate. Let me start with KMI, and obviously the two companies are closely related, and we will go through both companies sequentially. KMI reported earnings of about $57 million which was 47 cents per common share, compared to about $46 million or 41 cents a share in the first quarter of 2000. This was above the consensus estimate which was just short of 46 cents. Obviously, in addition to that, we had previously announced, a buyback of high coupon debt, and we did have an extraordinary charge for that early extinguishment of debt. We had a very good first quarter. As we said, in our earnings 3 release, that we are on track to deliver a 40% growth in earnings per share this year, as we have indicated. The principal driver was our ownership of the general partner of KMP as the earnings from that general partner more than doubled compared to the first quarter a year ago, and I'll talk about the KMP results in more detail in a few minutes. But additionally, all of the other business segments at KMI produced increased earnings. I think, the real message here, if I could editorialize a little bit, is that we have assembled a premier, fee-based portfolio of assets which are really incredibly important to the energy business in this country, and these assets are demonstrating time and time again, that they are capable of delivering strong financial results, [we've known that]. But, I think what we are showing now is they can deliver these results even in a slowing national economy. As most of you know, our model and our strategy is really not rocket science. We take good assets in the energy infrastructure of this country. We work very hard to control the costs, and more importantly, to increase the revenue growth or increase throughput. We are able to drop the bulk of that revenue increase to the bottom line and then, particularly with regard to 4 those assets that are KMP, we are able to turbocharge those bottom line earnings through the general partner sharing mechanism that goes up to KMI. This produces very good internal growth, and when you add a series of accretive acquisitions, it's really a very viable model, we believe, for long-term sustained high growth in earnings, and that's exactly what we are demonstrating quarter after quarter. Now, let me take a look at the business segments at KMI. First, the general partner of KMP. For the first quarter, KMI will receive $57.5 million in total cash distributions from KMP, means we are on an annualized run-rate now of almost $250 million a year. We expect that to increase as we continue to raise the distribution at KMP, but that's up 83% from the $31 millionduring the same time period last year, and as most of you who follow us know, as KMP's cash flow grows, KMI's share of that cash flow grows dramatically because of the sharing arrangement. The reasons for the growth at KMP were largely internal growth together with the strong performance from our recent acquisitions, including GATX which is coming in on a very positive note. After the effects of equity accounting and amortization, KMP 5 contributed just over $48 million of pre-tax earnings to KMI in the first quarter, compared to 22 million in the first quarter of 2000, so well more than doubling the performance year to year. This is the kind of growth we told you was coming, the kind of growth we think you can bank on for the future. So, very strong performance from the general partner of KMP. Turning to the other business segments of KMI, Natural Gas Pipeline of America, which is a large natural gas pipeline serving the upper Midwest, had segment earnings of about $94 million, up from $92 million that it reported in the first quarter of 2000. Natural had another very solid quarter. I've said before, this is a game of singles and doubles, and [_______________] hurricane has continued to hit those singles and doubles. They've increased dramatically the amount of firm transportation capacity that is under contract. As we've detailed elsewhere in our earnings release, they continue to surpass our expectations in attaching additional electric generating load. We've now attached 11,500 megawatts since we took over the operation of NGPL. That's 20 plants on the system, and in 2001 alone, that's dropped $11 million into the revenue stream, most of which will come on-line 6 in the second quarter and beyond. That will only grow as more and more of these 11,500 megawatts actually come on-line, begin operating and begin using natural gas. In addition, both the St. Louis extension and our Horizon Pipeline project in Northern Illinois are on schedule for a midyear 2002 completion and in service state, and they will add measurably to Natural's earnings in 2002 and beyond. We think we have positioned this pipeline very well for the future, and that you are seeing the first steps for what is going to be a real great pipeline success story. Our next segment is retail. Retail earned $23.5 million in the first quarter, up almost 20% from the 19.8 million reported during the first quarter last year, and I think, it's also important to note that we have now established a weather hedging program to reduce the volatility in this business segment, and we are very willing to give up some of the upside to produce consistent results. That worked very well for us this winter season, and I think you can expect to see us do that on a continuing basis. Our power and other operations had segment earnings of about $9 million which was about a 50% increase from the earnings a year ago. This segment 7 continued to grow primarily from reflection of the fee income associated with our natural gas fired power development. Now, looking ahead, which I know, is the most important thing on most of your minds, let me say again, we anticipate 2001 earnings per share growth at 40% which is approximately $1.80 per share. That's coming on top of a 70% plus growth from 1999 to 2000 and certainly continues a trend that we expect will go on in 2002 and beyond. Let me just say that due to the transfer of our Kinder Morgan Texas Pipeline to KMP, which by the way, of course, is the reason or one major reason why the revenues at KMI were down, but revenues at KMP were up, because Kinder Morgan Texas is a bigger revenue generator. But with that transfer, the earnings at the KMI level in 2001 are expected to be more evenly distributed quarter-to-quarter than they have been in the past, and if you are looking at the second quarter, we expect 50 to 60% growth earnings in the second quarter which will put us in the 32 to 34 cent range versus the second quarter of 2000, when we reported 21 cents. Now let me turn to KMP which was a huge success story in the first quarter. I think the most important [thing] there is that we announced today that we increased the distribution to $1.05 per quarter 8 which is obviously an annualized rate of $4.20. That is 35% higher than the distribution we were paying a year ago for the first quarter of 2000. We were paying 77.5 cents a quarter. It's 11% higher than the 95 cents per unit that we paid for the fourth quarter of 2000. It's 5 cents higher than the number we gave you for guidance about a month ago, and that simply reflects the tremendous [positives] we're seeing in the KMP earning stream just across all of the KMP business segments. I've said it before, and I'll say it again. This is the finest assembly of assets I've seen in my 20 years in this business. They are really humming, and they are going to continue to hum. I might also mention, just from a credibility standpoint that this is the 10th distribution increase since we formed Kinder Morgan in February of 1997, and 17 quarters since then, we've increased the distribution 10 times. On a split-adjusted basis, we've gone from about 31 cents a unit to $1.05, pretty good growth for a sleepy old master limited partnership. On the net income side, and obviously, the net income is much less important in an MLP, but we did have a record quarter in terms of net income, reporting about $102 million in net income or 89 cents a 9 share which was up 71% from the $60 million that we reported a year ago. That is a record. The consensus was 73 cents per unit, so clearly this was a substantial increase anyway you look at it. The results that drove us to the increase in distribution and to the record earnings really reflect both outstanding internal growth and very, very good performance by the recently acquired pipeline and terminal assets that we have now folded into Kinder Morgan. Now, let me go down segment by segment. Products pipelines, and for those of you [_______________] Kinder Morgan, we now have more than 10,000 miles of pipe, transporting almost 2 million barrels a day of jet fuel, diesel, and natural gas liquids. Products pipeline's earnings at about $86 million were up 32% compared to about $65 million in earnings for the first quarter of 2000. Now obviously, the segment earnings were aided by the additions of the GATX assets that went into the products pipeline group. Those are the West Coast terminals and the central Florida pipeline [_______________], and also were aided by our purchase of 32% interest in the Cochin pipeline system. But I want to remind you that I want to talk a little bit about internal growth. The two largest product pipelines in this segment are 10 Pacific Pipeline and the Plantation Pipeline. Both experienced deliberate volume growth of 5% or better. Now, that's much better than our targets on both of those entities and I think, again, show that in terms of gasoline and jet fuel delivery in two very important segments of the country, the West Coast, including Arizona and Nevada, and the Southeast, we are seeing very strong demand for these products, and we're able to take advantage of it. So when you have 5% volume growth off of this kind of base, you are looking at the foundation for a very strong year, and so far, the indications in the second quarter are that kind of growth is continuing. The revenue growth of both those pipelines was even higher than the volume metric growth. Also, Plantation experienced better bottom line results because, as we told you we would do, we've taken over the operations of Plantation, and we've been able to achieve significant cost savings in that entity. Beginning in the second quarter, of course, the earnings from the Calnev Pipeline company, that's the products pipeline that goes from the Los Angeles area up to Las Vegas, which by the way is the fastest growing metropolitan area in the country according to the latest 11 census results, those results from Calnev will be in the second quarter. They were not in the first quarter because we did not close the Calnev transaction until March 30th of this year. So extremely good performance in our products pipeline segment. Looking to natural gas pipeline segment, there again we've upsized that segment considerably, primarily as a result of the $300 million in natural gas assets that were transferred from KMI to KMP at year end 2000. Segment income before DD&A in this segment was just over $66 million. That was an 84% increase over the 36 million that we reported for this segment in the first quarter of 2000. Now again, the addition of Kinder Morgan Texas and the other assets that we transferred at year end 2000 were important drivers of this growth, but again, we had very good internal growth operating earnings at KMIGT, that's the old KM interstate system, were up 18% quarter-to-quarter by way of example, and Red Cedar Gathering, our major gathering system in southwest Colorado, was up 19% in operating earnings for the quarter. So we had good internal growth augmented by the transfer of new assets into that segment that were done at the end of the year 2000. Our third business segment at KMP is Kinder Morgan CO2 pipelines. 12 There, we had earnings of about 27.5 million, not too bad an increase after the 3.6 million a year ago, 668% increase in earnings in that segment. Again, a large part of that was driven by the fact that we have made significant acquisitions in the CO2 segment since the first quarter of 2000, but again apples-to-apples, the volumes on our CO2 pipelines system out in New Mexico and West Texas were up 5% year to year on apples-to-apples basis. We're seeing a lot of increased interest in CO2 flooding, and again, as you know, the key there is to sign these long-term contracts. We think, we'll have some significant additional announcements of more long-term contracts as 2001 unfolds. A very positive story there and a lot more upside to come, we believe later this year and certainly in 2002. Our fourth business segment in KMP is our bulk terminals. That's composed of about 30 terminals that transload petroleum coke and other aggregates. There, our earnings were a little over $15 million compared to $11.8 million a year ago, a 30% increase. Earnings growth there somewhat attributable to our ongoing acquisition strategy, but also we had very strong internal growth at our coal terminals and primarily at 13 Cora, Illinois, and Grand Rivers, Kentucky. There again apples-to-apples, we had a volume increase of about 6% from the first quarter of 2000 to the first quarter of 2001. So, we think that's going to be a very good story with more acquisition opportunities and more internal growth in the future. Our final and newest business segment is our liquids terminal group. This includes the five larger terminals that we acquired from GATX. These are the assets that are not associated with our existing product pipelines, and there are five terminals located in New York, Chicago, Philadelphia, and Houston, and these terminals store and transfer primarily petroleum products, but also chemicals. First quarter earnings before DD&A in that segment were 20.4 million. Obviously, we have nothing to compare that with, but they were nicely higher than we had planned in our acquisition model. As usual, as we have a habit of doing with acquisitions, we've had a smooth assimilation. We think the GATX acquisition is already paying its way. The cost reductions that we modeled have already been achieved. So I think that we're going to see increased benefits there. We're also finding that we're benefiting from the alternatives that we give our customers in this 14 segment. If you have the ability, for instance, on the product side, to connect through multiple pipeline connections as have particularly here on the Gulf Coast, that gives your customers a service that they really like in these times of volatile products prices that we're looking at as we move into the summer months. So we expect very strong performance for the remainder of the year in our newest business segment. Looking ahead, we expect more acquisitions, more internal growth. We've now basically achieved what we previously said was our year end target for annualized distributions per unit, and we said we'd get the 4.10 to 4.20. Well we're now at 4.20. So we have raised the target for year end to between 4.30 and 4.40 per unit. While we don't focus very much on earnings at KMP, it's a cash flow business, we do now expect those earnings to come in at $3 to $3.10 per unit in 2001. So what we're really seeing here is internal growth, stronger than we've seen in the past, really consistent with everything we've looked for in this company, and then on the acquisition front, we think the pipeline for future acquisitions is very good. So we are really seeing here is internal growth stronger 15 than we have seen in the past, really consistent with everything we have looked for in this company. Then, on the acquisition front, we think the pipeline for future acquisitions is very good. We had both the KMI and KMP board meetings today, and we briefed our boards on over $2 billion in potential acquisitions we are looking at, and as I have always said, we will not get all or even most of those acquisitions, but that gives you an idea of the number of the acquisitions we are looking at, and we expect to be able to announce at least one of those within the next few weeks, and that will be also accretive earnings at KMP obviously or we wouldn't do it. Finally, before I take questions, anticipating some of those questions for an update on institutional shares at KMP, we are in the process of getting all the documents finalized with the SEC, and I really can't talk further about it until the [reds] are printed, but we expect that to come about pretty shortly, and we will then be able to do the road show at that time. [So it's hard to imagine], as we go ahead, a much better quarter than we had, very strong, solid performance, and we look for more in the same in the future, and that's why we are so confident in talking in terms of these very 16 substantial earnings and distribution growth targets that we put out on the table, and with that, I'll take any questions you may have.

At this time, if anybody does wish to ask a questions simply press *1. Once again, that's *1 for any questions or comments. Your first question from Yves Siegel of First Union.

Hi Yves. How are you doing?

Pretty well. Congratulations.

Thought you were going [_______________].

They can call me whatever they want to.

It's alright, but [_______________] call you any bad name. I can tell you that.

As long as I can still cash my check, that's alright. Just two quick ones. One is what's driving the increase or better than anticipated increase on the petroleum products 17 pipeline side, number one. Do you anticipate that continuing? And then number two, any opportunities coming about on the coal side do you think?

Let me just answer those in order. First of all, on the products pipeline side, really good demand across the system. For instance on the Pacific system, as I said, volumes were up 5%, revenues were up over 8%. I didn't mention on the central Florida pipeline, which was on the GATX assets, volumes were up 8.5% year to year. A large demand for gasoline and jet fuel which does not seem to be abating [_______________] across the system. Volumes in Arizona were up almost 4%. Military volumes were up over 6%. That's a pretty insignificant portion of the load, and California volumes are very consistently in that 5% range, not [restraining] some of the other issues that are occurring in California. So, we don't see anything about that abating. Las Vegas, the volumes on Calnev, and we didn't have Calnev in the first quarter, but apples-to-apples, we are up between 3.5 and 4%, so just very good across-the-board growth in all of our segments, and we definitely think that that will continue. 18 You know, again, to put everything in perspective, and you've been wanting to follow this since the start way back when we bought the Pacific system, we said at that time, we were going to target 3% annual growth in volumes, that we get about another 1% other type of revenue growth for a total of 4% revenue growth [for the] fact that we beat that every single year, and of course, this year beginning July 1st, we will have a FERC mandated tariff increase of just under 2%. So a lot of very positive things happening, and we definitely think that we will continue to see that kind of increase. A lot of demographic growth. You look at Las Vegas, a lot of additional flights going in and out. We are going to have, I think, one of our first expansions on the Calnev system will be to further increase the volumes that we can get to the airport in Las Vegas which is a nice upside for us. On the coal side, I think there will be some opportunities to acquire additional terminals, and we are looking at some right now. The volumes at Cora and GRT were record sizes. GRT set a record for the quarter, and for all 3 months of the quarter, Cora set a record for 2 months of the quarter. It would have in January, 19 but it couldn't because of some freeze up problems on the Mississippi river. So we think there are going to be opportunities on the coal side, and we will be very opportunistic on that.

Rich, if I could just last followup. Are you other than the Calnev pipeline, are you bumping up on constraints anywhere else on the pipeline system there? And the second, if you can address just maintenance capex. Where that stands right now, given all these acquisitions?

Okay, first of all, on the constraint side, you know, we have tried to purchase these systems, a large part based on upside from increased throughput, and if the capacity wasn't there, we try to expand it as rapidly as we can in anticipation of increased throughput, and the primary example of that, of course, was our Los Angeles expansion and more recently the Santiago expansion. We are now in pretty good shape. On the Calnev line, we have significant additional capacity available there, and we particularly on the gasoline side, we have very good expansion opportunities on the central Florida pipeline. I think, we are about 70% utilized there, and on all of our pacific system, 20 we have good upside without expansion capex with the exception of, probably over the next 2 or 3 years, we are going to have to work on the system [roundups] between San Francisco and Sacramento, but other than that, it's relatively small. By doing what we have done in southern California and in Arizona, we are set for the next 6 to 8 years on our volumes going down to Santiago and up to Phoenix and Tucson. So we feel very good about that. We have just completed an expansion, of course, horsepower expansion on plantation, so we are in very good shape there. So, I think, overall, we look at this on a very opportunistic basis, Yves, but I think for the most part, we have additional ability to move additional volumes in our system without spending money. On the maintenance capex, Park, you want to talk about that?

We are pretty much right on target on maintenance capex. We announced the GATX transaction at the end of the November, so we are aware that when we put together our final plan for 2001, we were able to incorporate those sustaining capex needs into the plan, and everything is right on target through the first quarter. 21

And I guess, while we are on that, we ought to say those of you [having off the last piece] of KMP are going to pick this up. But clearly, we had 89 cents in earnings. You add the 48 cents of DD&A, subtract the 24 cents of sustaining capex, and you end up with $1.13 that we really could have distributed. We distributed $1.5, so I think the coverage is very good there.

Thank you.

I have your next question from David Fleischer of Goldman Sachs.

Hi David, how you doing?

Good. I am doing very well, Rich, but I am not doing quite as well as you are doing here. I wanted to get into the GATX assets a little bit. In you press release, you called it an outstanding performance. In your comments, you talked about it [in] a very positive note. At your conference back in January, you had given us some numbers, you know, what you were buying it for, multiple and [distributable] cash flow 8.6 times 22 [distributable] cash flow. I am wondering particularly on the terminals up front since those you had in earlier, whether you have been able to do something more with them, whether you found more there, and what that means coming in a very positive note up front. I am trying to understand whether the actual earnings in cash flow from [_______________] those assets are going to be greater than you're thinking because you also have the benefit of a stronger currency since you bought it for cash and when you finance this, being able to pay for it with fewer units.

That latter point is very well taken, and certainly the overall accretion will be even better because the unit price has gone up considerably since we did that. As far as multiple of [distributable] cash flows, as we said in the January meeting, we really stretched on GATX because it was right down the middle of fairway for us. It was exactly the kind of assets we wanted to acquire. You know, it's too early to say, gee, we really bought that at 7.3 or 7.4 times [distributable] cash flow in year one, but we are definitely going to be better than the 8.6 when all the horses and cows are in the corral, I think. I 23 think it would be premature to say exactly what that'll be, but it's definitely been better. Again all the volumes are looking good. We have already approved 3 minor expansion capexes for individual terminals to increase the storage capacity. It is just there is a tremendous demand both in the Northeast and down here on the Gulf Coast for additional storage capacity that has access to multiple forms of transportation, and of course, that's what we have got. You know, just by way of provoking some thought, David, the Northeast is a net importer of about 900,000 barrels a day of product, and Carteret is really the best positioned terminal up there. So I think we have tremendous opportunities on our Pasadena terminal down here in Houston. We are moving almost a million barrels a day now into Colonial pipeline going up to New York and into Explore going up to Chicago. I think that is the largest products terminal in the world in terms of daily throughput. So we have some really good assets here and [_______________] strength. What we said we'll always do is we'll take good assets that maybe were not being marketed quite as aggressively as they could be, that maybe weren't in the mainstream of the seller's business, but 24 they sure as hell are in the mainstream buyer business, and we're going to be able to grow them very dramatically I think.

Can you tell us as far as the terminals which you said were higher than you had modeled in the acquisition model, was that because of getting your cost reductions faster or more fully into effect or was it higher volumes? Was it something else as far as that than maybe the second part [_______________] question is on the pipelines now that you have gotten a better look at them on account of, I am wondering you clearly paid a lesser price for the terminals and that's [more accretive] up front, but the growth is presumably at least more on the pipeline side. What do you see as you have looked more at the possibilities of those and in what time frame should we be expecting that growth?

Okay let me start with the reason the terminals are performing better is a combination of, we think we are pretty efficient on taking the costs out, and they are mostly nonessential corporate overhead-type cost. We have done all that. For example, we have cut the administrative headquarter staff from 66 to 25 about 25. We have cut the overall employees. There were 760 employees. We have 595, so we have, and we are done. No more cuts. So we have more than gotten the cost savings that we modeled into this just as when we did KM. We said we'd get 60 to 70; we actually got about 72 or 73 million a year. Here, we probably outperformed on an annualized basis by maybe $0.5 million to $1 million a year in cost, but the larger part of it, you know, you can't save your way to prosperity, and the larger part of it is that the volumes and the tariffs that we are getting on those volumes are just better and better. We have some tanks at Pasadena, for example, that were not being fully utilized by one of our customers. They were more than happy when we were able to go out and sublease those to other parties at higher tariffs, and we split that with them up front. It was nice for them, but it dramatically increased the amount of revenue we were getting off those tanks. We see the ability to do more and more of those. We [_______________] we have plenty of expansion space particularly at Galena park which is [now] connected to Pasadena; that's the adjacent terminal on the Houston [_______________] town. 26 We are going to make some pretty quick terminal construction down there, so [_______________] we are seeing higher tariffs just really full-out use of these facilities and then the lower cost, and so I think you are going to see that. So I think that's on the part of GATX pipeline side, you now, again we just took over Calnev two and a half weeks ago. So it is a little early to tell there except that we've already started work on an expansion to the airport there, and there is a tremendous demand for jet fuel in Las Vegas. We are going to try to serve that market better. Then, as I reported earlier, volumes year-to-year were up about 8.5% at central Florida pipeline which is a little better than we expected. So early indications are all very positive, and clearly, I think the pipelines, we will know more in another quarter or two.

Okay thanks Rich. You don't sound like a sleepy old CEO.

And you have your next question from Michael [_______________] of [_______________].

Hi Michael, how are you doing? 27

I am well, Rich. How are you doing?

Fine.

I have three quick questions. The original KN Energy pipeline coming out of the Rockies going east. The [_______________] pipeline. Is that going to turn into a very strategic asset as we drill in the Rockies? So what's the capacity utilization there now, and would you be expanding it? That's the first question. Second question is on the Cochin, the 32% on Cochin, from what I understand there is no tax angle there. I don't quite understand why you had that one. Then, the third is in the coal, why would a railroad or a utility sell you a coal terminal? I know you are interested in them, but why would they give up control?

Very good. Let me take those in turn Michael. First of all on the old KN Energy pipeline which is Kinder Morgan Interstate Gas Transmission, KMIGT. The capacity there is pretty well fully subscribed. As you know, ONEOK took a lot of that capacity when we sold them the marketing company, the portion of 28 which is called the Pony Express, part of KMIGT, which runs over to Kansas City. There is a lot more demand for, we believe, coming for future capacity to deliver gas out of the Powder River Basin, and those of you who follow the natural gas business, I mean, we are certain, I think you would agree that's one of the great growth areas in this country, in the lower 48, for onshore gas production. So we think there will be growth. We are looking right now and talking to customers and expanding that system. We have already, of course, announced and fully subscribed a major expansion on our Trailblazer system which closely parallels that. So, yes Michael, there are tremendous strategic advantages now in that pipeline which just weren't there 2 or 3 years ago because this pipeline comes right across the midsection of the continent, connects with the NGPL going into Chicago, connects with Northern Natural going into Minneapolis, St. Paul, and a number of other smaller pipelines. So, there is real opportunity there, and we're going to be taking advantage of that. The Cochin, purchase of that 32%, the question on the tax angle, we do get pretty close to the same treatment we would get from a US asset. It is a complicated 29 structuring arrangement, but it's pretty tax efficient maybe to about 90% as efficient as buying that asset in the United States, and that's the way because the way we structured it and the way the various arrangements of the purchase were made. The strategic underpinning for that acquisition though is that we believe having an oar in the water in the Western Canada Sedimentary Basin is damn important. Eventually, if we can make a nice return on our investment now, eventually there will be huge additional liquids [NGLs] coming out of Canada because eventually, we are convinced you will have a pipeline bringing wet gas from the north slope of Alaska and probably from Mackenzie Delta right down into the heart of Alberta where there is a lot of processing capacity, and then we will be in a prime position to fill up Cochin. We bought it at present volumes, and we believe those volumes will dramatically increase over a period of time. Your third question, why would a railroad sell to us. I think there are, it's not just railroads, it's utilities and others who want to take those [funds] and redeploy them into maybe peaker power plants or something like that, or maybe they promised the rating agencies that they are going to keep their debt at a certain 30 level, and they want to spend it on some other more core business. I think the largest message there or the most likely means of acquisition is twofold. Number one, companies who it's not a core business for them, and they are happy to take some cash off the table and what to them looks like, on an after-tax basis, a pretty subpar return. If we can get in there and maybe increase the efficiency a little bit and increase the volumes and put it in a pretax operating mode, it becomes a much better project for us than for them, and the second group of potential sellers obviously there are still a lot of bulk terminals owned by what we call the mom and pops. There, the currency of an MLP unit is very helpful because you got a group of families who have built their whole life around a particular terminal. They have been drawing salaries out of it. Now they can sell it, and they can exchange and defer taxes by taking units, and then perhaps more importantly to them, they can continue to get a good income stream off of the distributions that the KMP units pay. So we think there are a lot of opportunities there, and we think we will have some good news over the next few months to report on that terminal side. 31

Okay thanks.

Your next question is from Ron Londe of AG Edwards.

Hi! Ron. How are you doing?

Pretty good, Rich. How're you? I have a couple of questions surrounding GATX. One, I always read about is there were five-year lows in inventories for products, and maybe give us some insight on what the capacity utilization at GATX is overall. And also out of Texas, do you think GATX is going to be able to get product on the Centennial and Longhorn pipelines.

Yeah. Let me take the latter question first. If Longhorn, looking at [_______________] who runs that segment for us and came over from GATX. If Longhorn or when Longhorn gets certificated, we will be the major sourcing point for Longhorn. Centennial, in discussions I am told. No further comment on that, but we will be the major sourcing point. In fact, Ron, they've reserved I think three large tanks or some number of large tanks at the 32 Pasadena terminal for just that purpose. We are able to sublease those now to others, but we would be a beneficiary in that respect of Longhorn. So when you put all that together, one reason we are moving a million barrels a day and you put that in perspective, all of the Colonial system going to New York moves a little less than 2 million a day, all of our Pacific system moves a little over a million a day. So these are huge volumes, and they make up. It's the largest single sourcing point for Colonial and certainly the largest single sourcing point for Explorer going up into the Midwest. As far as utilization of the terminals overall at GATX, that obviously varies between terminal to terminal and between products and chemicals, but they have some pretty good utilization rates ranging from about 75% at some of the terminals up to almost a 100% at Pasadena, and that is why we are on a fast track project to add capacity on the [ship channel]. So that's one where we do have the opportunity to spend some capital very wisely I think, and with most of these, you know it's amazing when you have volatility as you are seeing in the products market. You have a lot more interest on the part of your customers in terming up some of these arrangements for capacity. If you are not 33 exactly sure where the market is going on pricing or on demand or exactly how the reformulated product is going to work, it behooves you to maybe line up a little bit of extra storage capacity, and that is exactly what we are seeing in spades in the Northeast, in Houston, and in LA [harbor]. So these and as all places where we are the big kahuna, and we are very well positioned to take advantage of those [_______________].

Talking about big kahunas, in California, I hate to beat a dead horse, I know you did a fantastic job in getting around all of the electricity problems, supply problems they had out there, what's your prognosis for this summer and have you done anything differently as you approach the summer to keep your performance intact?

I think certainly, there is a lot of moving parts to what is going to happen this summer. A lot of people will be more expert on it than we are, but I think we are very well plugged in to the electricity situation out there. One big plus we have, and the reason that we have not seen, here we had interruptions of 34 about 100 hours in Northern California early in the first quarter and 60 or 70 hours in Southern California, and yet we reported a record quarter. That is because we have additional, going back to an earlier question from Yves Siegel, I think, we have excess capacity on all those lines. Thank goodness, we expanded that LA system. We move, for example, on that main LA line, what we call our South Line coming out the refineries, anywhere from 360,000 to 380,000 barrels a day. We could actually move 500,000 plus, and if we put a DRA, probably get another 50,000 barrels. So we have some capacity if we are down for a couple of hours, it's not a problem for us. The real thing we worry about, again coming back to my earlier point is there sufficient storage at our sources which are the LA refineries to keep them operated through a 4, 6, 8 hour shutdown, and that's what we are worry about, but we are not at all concerned. We are going to have higher cost of electricity. Some of that we will be able to recoup by selling back into the system at certain times, so it's certainly, but it's [not that we have cranked in] our numbers. We anticipate that we will be spending a little more money on our Pacific system this summer on electricity. Obviously, the other question, and 35 I know you know this Ron, but just in case anybody else out there has questions, we are not, repeat, not a creditor of PG&E or [_______________]. In fact, we are [_______________] to both of these people because we pay them every month for the electricity we use. So we don't have any exposure in any way to that side of the equation. So we look at California, it's a manageable problem. It still [_______________] good market for us and do not anticipate that it will have any material impact on the results of our Pacific operation, let alone Kinder Morgan as a whole.

My last question is given the terrific earnings you are having, do you anticipate any change in the tax [deferent] status of the units.

Tax deferred. You're getting at the shield Ron?

Right.

No, I think we think again it will stay pretty consistent for new buyers of units, but that tax shield will start off somewhere north of 90%, and of course over 36 time, that changes, but that's an estimate that's subject to all sorts of different provisions.

Okay. Thank you.

You have your next question from [_______________] of Merrill Lynch. 00:47: 5 RICHARD KINDER: Hi, [_______________]. How are you doing?

Well, as usual, not as good as you, Rich.

Yeah, right.

I have got two quick ones. The Illinois Commerce Commission today released their findings on improprieties or the lack thereof. Fortunately, it went on in the Midwest, but given the kind of winter that was experienced there and given the costs that were incurred, are you seeing, you mentioned earlier that things were firming up and you expect to sign more firm deals, but can you give us any examples of the sting that these guys felt is causing them to get more on a firm basis versus that of a spot basis or interruptible, and kind of address the revenue. Obviously on the gas 37 sale side you are doing more transportation. I assume that's the biggest side of the gas sales shortfall, but I am just curious should we now start to see a firming up of those revenues from the firm side, and is your sharing mechanism working the way you designed it to, given the winter that showed up will be the first one. The second one is a little bit shorter, is TransColorado. Is that benefiting at all out of the California situation with things heading for the west? Thank-you.

Okay, thanks [_______________]. First of all on the Illinois situation. Yeah, I think on the natural gas side, we are also seeing some firming up. This was by the way, in the market area of NGPL, we were at about a pretty normal winter actually about a 104% of normal-degree days. So just slightly colder than normal for our service territory, but the amazing thing is all that winter, Alliance was moving more volumes than they originally expected or we expected to move because the gas was drier. They were moving in the order of about 1.6 [pcf] a day, and yet, we found tremendous demand all winter. A lot of that was going into Wisconsin. A lot getting 38 dropped off into [Vector], but the main message, I think, is that the Chicago metropolitan area since the last time it was really tested has seen a dramatic increase in gas demand, and anecdotal evidence to me is the most important thing. We saw it in the fact of how well NGPL was able to do in terms of protecting its throughput and more importantly in its capacity reservation fees, and then we're seeing it in demand on both the St. Louis extension and the Horizon project. I think it's highly likely that we probably will be in the process of expanding Horizon before we build it, and if that sound good, the demand is in extreme northern Illinois for additional natural gas. A lot of this is electric generating role, a lot of it is through the LDC. So, when you have that kind of demand stirring the pot not withstanding all the additional gas coming in from Canada, I think, again just like I was talking about over on the product side when you see more volatility in pricing, when you see more demand out there than you expected, it all leads customers to want to move toward terming up, and that's what we're seeing both on transportation and on storage on our natural gas assets. On the sharing, I would assume you're referring to the 39 Equilon contract, and that's worked fine. I think it was beneficial for both of us. It comes up for renewal in October. We think that's really a valuable capacity, so we'll see exactly where it shakes out and who gets what, but that capacity has become, we'll say, infinitely more valuable, but substantially more valuable than it was two years ago when we were searching out to fill up that hole that had been there for 18 months or so. TransColorado, that's the pipeline I've said to all of you, had I [_______________] we would never have built, I can tell you that, but amazingly we are seeing some progress there as you have this tremendous demand of our gas in Southern California. It's leading to a more representative basis differential between the northern part of the Rockies and even the Colorado producing areas like the Piceance Basin and Blanco in the New Mexico hub, and that certainly benefits TransColorado. So it's certainly not any profit maker at this point. Thank goodness, it's basically cash flow breakeven now, but you got to take the [DDNA] off, so it will undoubtedly be a money loser for us this year on a moderate scale, and that's all cranked into the numbers obviously, but we're seeing, we're going to have a pretty good summer 40 there compared to what we've had in the past because the differential has widened out to 40 cents or better for several months during the summer, and we've signed up some pretty good additional volumes, but if you know anybody who wants to ship down there, we still have some capacity [_______________] so it's not all taken, and that is not a great investment.

Thanks Rich and continued success.

Thank-you.

You have your next question from Denis Ross of Ross Financial Management.

Hi Dennis. How are you doing?

Good. Just had a question on the CO2 situation. Your volumes were up about 4 to 5% and your profits were incredibly higher. So obviously, price was a factor. How much was the price up on average and do you think that's sustainable?

Well, let me clarify one 41 thing. First of all, you're right, the volumes apples-to-apples were up 5% year-to-year. In the first quarter, a year ago, we only owned 20% of what was at that time known as Shell CO2. So the right way to compare it from a bottom line standpoint would be to take the earnings in that segment a year ago, 3.6 million, and multiplying x 5, and you'd get roughly 18 to 19 million compared to the 27.5 million we had this year. So the [real growth] in bottom line was $8 or $9 million not $24 million on an apples-to-apples basis, number one. Number two, since that time, of course, we then bought [that CRC] pipeline and the SACROC unit and that also added to it. So, certainly we are getting a little better price for our CO2 today to the extent that we have variability on the contracts, but most of this is driven by our expansion and by the volume growth, but the future looks very good. There are really two players out there that can deliver big quantities of CO2 and that's us and Exxon, and of course the two of us, we own a little more than Exxon of the big source field in Colorado, but both us are the two who can deliver it, but whoever delivers it comes right down the Cortez pipeline, and most of it comes right on through our Central Basin pipeline. We own 50% of 42 Cortez, a 100% of Central Basin. So as you see increased demand, and you're going to see substantially increased demand coming on in 2002 and beyond. You're going to see a lot more throughput and lot more revenues. In fact, we're just now drilling two new major wells in McElmo Dome. That's the big source field outside of Cortez, Colorado. That will allow us to increase production up there by about a 100 million a day, and we need that as we look at the increased demand, and we have the most economic producing wells certainly in America, maybe in the world for CO2 in that field, and so we see a lot of upside there, but most of that will come from increased demand as we attach new producers who need more supply.

Thank-you.

And your next question is from [_______________] of [_______________].

Hey [_______________], how are you doing?

Good, Rich. Great quarter. 43

Thank-you.

Continue to do an excellent job. A question for you in a broader sense to start, in an environment with very high energy prices and very strong demand, have you seen anything, or in your gut, do you feel anything on your pipelines and your terminals that you are getting volumes that are just gotten ahead of themselves, are not sustainable or where you're getting some uptick in price even though you try to be price neutral, that you know, just gotten ahead of itself, and we should expect some cooling since you're blowing the doors out so much, and then I've got another one.

Okay, yeah, let me answer that. No, I don't think so on the pipeline side because again, it comes back to the storage. There's just not enough storage to have a big inventory problem on our [_______________] or something like that. In other words, you can fill up, let's take Phoenix, you can fill up all those tanks in the Phoenix terminal that we and the others own there, and I don't know the exact amount of supply, but it's down two or three weeks at most, maybe 10 or 11 days, he's saying, 44 of supply. So, you see the market demand gets pretty quickly back to our system and back to the refinery. So, it's not like we have filled up a bunch of terminals in the west or on Plantation. [Gee,] we've got three months' supply sitting there as things cool off. We will lose throughput volumes. So we feel very good, and in fact, we're going in. If anything, inventory should have a pretty big swing here such as it is because we're going into the formulated gasoline season across the country and particularly on the West Coast. So I don't think we're getting ahead of ourselves, and I think we don't anticipate cooling, as you put it, on the products pipeline side, but the only place we have seen any downturn from the slowing, supposedly slowing national economy, is in some of our bulk terminals business. Coal's been very strong, but for instance, some of the cement import terminals are probably off a few percentage points from where you expect them to be, and our two coal export terminals are probably down 10 to 20% from where you expect them to be because the US prices for coal have gone up, and more coal is staying home, but these are kind of pimples on the elephant's behind in terms of the overall situation, but on our major entities, the 45 products pipeline, the liquids terminals, the product terminals are, we're just seeing a very strong demand for our transportation and stores capabilities.

I love the metaphors too. They're right. I do. Second question, you said you're looking at 2 billion of opportunities all over. Just two questions. There's been a couple of people who are trying to duplicate your structure. It will take them longer to catch up. Have you seen anybody competitive with you or any price pressure from that side? Secondly, is there any new area that's not in the KMP mix right now that you would find attractive either within that 2 billion you talked about [inshore] or outside? Then last, it seems you're finding a much better home for the KMP units in acquisitions rather than KMI shares and then on account of the internal transfer that was originally envisioned. Is that true in your opinion?

Yeah, starting with the last, I think that's basically true, and that's been an important part of our strategy obviously. Coming back to the first question, you know, I 46 don't think we have seen any significant price pressure. I'm looking at, [Mike] certainly we have competition and duplication, and you're quite right, it will take a long time for these other MLPs to catch up. Again, I would remind you that our sheer size of our MLP is a true advantage. Our enterprise value is now north of $7 billion in the MLP. The next largest MLP in enterprise value is about $3.5 billion, and after that they probably drop down to 2-2.5 range. So we are substantially larger than any other MLP, and that gives us, I think two or three advantages. One is we have a bigger float on our units. We have more units outstanding. Some buyers [are more] willing to take those units presumably than he would be to take other units, but secondly if you look at the major acquisitions like GATX. You know, it is hard for a competitor MLP to pony up to the table and do a billion dollar deal, and we were able to do it, and we know there were people who bid higher numbers for parts of GATX than we bid for the whole, but those people I don't know whether they wanted the whole thing or not, but they weren't able to pony up for the whole [_______________]. So I think we have some real advantages, but certainly we have competition on every deal. 47 That's one among many reasons why we don't get by the small percentage of deals we look at, and we'll continue to have competition. It is not just from MLPs. You know, Williams has been a competitor on a lot of things, El Paso, and [_______________] has been a competitor from time to time, so there are lots of competitors out there, and the question is we believe we do have a cost of capital advantage on almost anybody by using an MLP that has a lower yield structure so lower cost to capital, and we think we are in good shape, but we certainly won't win them all. On the new areas question, yeah, there are some other areas [where] we are not going to buy trucking companies or mattress manufacturers, but we do we think have some step-out areas in the midstream energy infrastructure that are very good, and one of them is natural outstep from our coal terminals. We think there are going to be opportunities for us to acquire coal handling facilities from utilities, as utilities deregulate. They can take that money and go build peakers or whatever they want to build or just pay down debt, and again, as I said earlier in response to another question, we can bring some advantages to the table there. So I think 48 the coal [handing] is very similar to the bulk terminals we operate, and I think we can bring some economies of scale there. But I think there will be some step-outs which, you know, we're not interested in going very far from our core energy infrastructure. We're very, very pleased with our model. It is working. We know what we're doing, and every time we get bigger, we just have more opportunities to make more accretive acquisitions because that will guarantee you that out of GATX, before this year is out, several acquisitions that may be small, they may be mid size, will come out of step-out opportunities that we would not have had if did not own these big GATX former GATX terminals.

Great. Thanks and congratulations to you and your team.

Thanks [_______________].

Your next question is from Carl Brown.

Hi, Carl. How're you doing?

I am good. How are you? 49

Fine.

Question with regard to the 11500 megawatts of capacity that have been added to NGPL. Do you have an equity interest in whatever spark spread that those plants can capture, or is it simply the increased demand for throughput that those plants generate?

No, it's the increased demand for throughput. Probably the current [_______________] say that of that 11500 megawatts, I guess there is exactly 550 of it or 275 net to us that is a Kinder Morgan Power Project. So virtually nothing that [_______________] that is a customer, but very [_______________] we do not own these power plants. They're all third parties, and we will make our money through transporting the gas to those facilities, but also through storage and other services that we perform more or less on a peaker basis for these utilities. I think there is tremendous upside there, and one of the things, what you'll see with all these things or what we're seeing is that most of these units with some exceptions are starting out as peakers. Then, if you look at what we expect to be 50 attached in the O3, O4 time frame, you're seeing more and more of it go to base load, and of course, the closer you get to the base load that is the more frequently you dispatch these units, it has a tremendous impact on the amount of throughput on our pipeline, so this is going to be a real big driver of NGPL growth in the future, and we haven't even seen the tip of the iceberg yet. We're just beginning to start, you know, as I have said, I think we said in the press release even $10 or $11 million or $11 million in annual transportation revenue for 2001, strictly related to that portion of those 11,500 megawatts that will be connected for the summer season this year. That will grow in the second half of O2 and even more in O3 just from the fact that more and more of these come on line, and then as they move down stream from peakers toward mid load and then base load plants, when you get down to O4 and O5, I think you are going to see tremendous increases in demand and in particular during the sweltering summer months.

And what percentage of the 11500 do you think will be connected for this season? 51

Mike, I think we have about 4000. I think it's 3800 or 4000 for this season.

Thanks.

Your next question is from David [_______________].

Hi, David. How're you doing?

Good Rich. How're you doing?

Fine.

You just actually answered both of my questions with respect to, you know, some of the opportunities in NGPL. I was kind of wondering how many more plants you see possibly being hooked up over the next few years. Then two, I was hoping you could possibly provide an update on Hub America. And then finally, do you think you'll see some earnings growth on NGPL this year.

The first question is to clarify that, you know, we say 11,500, and these are kind of confusing numbers. That's what 52 we've aimed for right now, and as I just said about roughly 4000 of that will be on line this year, about another 4000 next year and so on, but every year, we'll be attaching additional, and we stick by what we have said previously that we think each year probably 3000 to 4000 of new capacity gets [_______________] up. So now you are connecting what you have already signed, but you are going to be adding new incremental capacity every year, so that's why we can't establish to 11,500. I think this time next year you say how many of you signed up at 11,500, it will be 15,000 probably, but so we will have continued growth just on stair step basis. Hub America is working out very well for us and as usual [_______________] something, and we thought it was going to primarily move Canadian. For those of you who don't know, Hub America is a concept. You put your gas into NGPL or into Kinder Morgan system, we'll redeliver it to you to any third party pipeline. So usually we just want to interconnect. You can get it to Florida or the East Coast or wherever. We thought the big movement would be toward the East Coast. We've had some of that, but this winter, we have had a lot of volume going back to California, and 53 people forget that NGPL has a large system by the [_______________] Permian Basin. We didn't think it was worth very much, but it wasn't doing much volume until the demand in California happened. Now it's running full-out, and in fact, I expect that before the summer is over, we will have dramatically increased the size of our connection to one of the West Coast pipelines so that we can shovel or transport more gas off of NGPL going to California, same Hub America concept. They can put it in for instance, put it in at the Powder River Basin, and KMIGT will re-deliver it off of NGPL from the Permian Basin going to California. That's a hell of good service to provide, and I think because you are not investing a lot of capital, it allows you to use Hub America wherever it makes the most sense on a pricing basis. From the earnings growth standpoint at NGPL this year, you know, I think we will end up the year up a bit from 2001, then I think you'll see 2002 as we set all [_______________] the latter half of 2002, when we have these two new pipelines on and significant additional generation load connected is when I think you'll really start to see a nice increase, but I mean, this is game of singles and doubles, but I mean, comparing NGPL today with where it was two years 54 ago is apples and oranges. It's just a far better system.

My first question was, and I think you've said this in the past, you are looking for about 12,000 megawatts new power load to be connected to the system by 2004, and I guess my question which is more or less, do you see that number going up over time, any new developments along that. I think you more or less answered that [by saying] maybe another 3000 you know in 2005.

I think that's right.

Okay. Thanks a lot.

And your next question is from [_______________].

[_______________] again. How are you?

Still not as good as you. I am really trying. I am sorry to ask you, but I keep thinking more of a macro picture here. We have got this NGPL and your gas pipeline in general was about 10% of the daily capacity in 55 the US on the regulated side of business. Clearly, regulated pipeline is doing very well. The perception and the outlook is for them to continue to do well. Do you see yourself getting more aggressive on that side of the ledger versus KMP. You know, to have a real defining event to make the [C. Corp] that much bigger. I don't want this to come across the wrong way. It's not like you really need one, but it just seems like to me that you are itching to make this thing a grander platform if you will?

We are only itching to make money for our shareholders, but you made the right question at the right point. We are very comfortable with our business plan. We grew our earnings by over 70% last year. We are going to grow them 40% this year. We have said long-term, we can do 20 to 30%, and we can do that year in and year out. I think by Labor Day, we will be able to share some real good numbers for 2002 with you and give you an idea where we are there, and I think you will like those numbers. You will see that the growth is sustainable, and we can continue to do that with just the strategy we have. Obviously, we would not rule out another what we call transforming transaction, and that's 56 about the only way I could see using KMI stock, and it would have to be a [_______________] deal. It would have to be another KM type deal where we could have billions of dollars in assets that we could run through the shredder and separate them out and put those that belong in the MLP in the MLP, clean it up, back to basic is the same type of strategy, but it takes two to tango. We will see if there is a company out there in the future that makes that deal make sense, and I will assure you we are not going to do it unless it makes sense for the KMI shareholders since I am a KMI shareholder. So we would not rule that out, but we are not interested in size for size's sake, and we are interested in the bottom line and the return to shareholders, and we are finding these wonderful opportunities in these 50 million here and 200 million there type acquisition opportunities. So something bigger comes along that's fine, if it doesn't we will continue, and I think you are going to see some really nice expansion opportunities on the natural gas side that step-outs, like something out for KMIGT, some thing out for NGPL, two projects we already have, and to the extent we can, we're going to do some of those in KMP. 57

Thank you very much, Rich.

Once again, any questions or comments.

Well, with that we have taken an hour and 15 minutes of your time. We appreciate it very much. We think we had a tremendous first quarter. We think you are going to see an outstanding 2001. As we always say we think the best is yet to come. So thanks very much for your time.