金德摩根 (KMI) 2003 Q1 法說會逐字稿

Good afternoon and thank you for joining the quarterly earnings conference call. I'd like to remind all participants that this call is being recorded. If anyone has any objections, you may disconnect at this time. Also all participants will be able to listen only until the question and answer session of the conference. I'd like to turn the call over to Mr. Richard D. Kinder. Sir, you may begin.

Thank you, [Katy]. This is Richard D. Kinder, Chairman and CEO of Kinder Morgan. Welcome to the Kinder Morgan conference call. Let me first of all apologize for our early start. This is the first day of Passover and we had a number of questions from various people participating in this call, who were anxious that we started as soon as possible, particularly for those on the east coast. And that's why we moved it up from our normal start time. We did just get our release out about 15 or 20 minutes ago. We obviously will go through it in detail and you can follow through on this call.

As usual, we'll be talking about both Kinder Morgan companies. Kinder Morgan Inc., which is one of the largest midstream energy companies in America, and we'll refer to that under New York Stock Exchange symbol KMI. Among the assets that KMI owns, of course, is the general partner interest in Kinder Morgan Energy Partners, which is the largest pipeline [master] limited partnership in America, and we'll refer to that company by its New York Stock Exchange symbol as KMP.

Also as usual, we will be, during the course of this meeting, undoubtedly making comments within the meeting of the Securities Act of 1933 and the Securities Exchange Act of 1934.

I will take you through a general overview of first quarter performance. And then turn it over to Park Shaper, our Chief Financial Officer, who will take you through the details of the financials, including balance sheet for the first quarter for both companies, and then as always, we will take any and all questions that you might have.

Let me just start with an overview. We have several important items to report today. First, we had an outstanding first quarter throughout both companies and inversely, every business segment of those companies. Secondly, we raised our guidance in terms of KMI earnings per share for full year '03. Third, we increased the distribution per unit at KMP. And fourth, as expected, KMI was a significant generator of free cash flow for the quarter. In short, I think we had a record quarter. Better than we expected. And once again, we believe this validates our very simple asset based strategy. And I think more than that, it also again confirms that through internal growth alone, and virtually everything we talk about today will be internal growth, through internal growth alone we can produce solid, sustainable growth in earnings and cash flow.

Now let me turn first to KMI. KMI today reported a 27% increase in first quarter earnings per share, to $0.90 up from $0.71 in the first quarter of 2002.

Perhaps equally importantly we talk a lot about cash flow. As we lay out in the statement, cash flow in the first quarter was $157.7m That's consistent with our 2003 published annual budget target of $469m for the year. And we define cash flow as pretax income, before DD&A, less current taxes and less sustaining capital expenditure. So we had a very good first quarter. And as Park will take you through, we used that to pay down significant amounts of debt.

As a result of this strong first quarter performance, today we are raising KMI's annual earnings guidance for 2003 by $0.05 to $0.10. That will take us to $3.23 to $3.28 as a range. That's up from our published 2003 budget target, been on our web site since January and we took you through that at our January meeting and that target was $3.18. So we now expect to come in $3.23 to $3.28. Just to remind you, the high end of that range, $3.28, would represent a 15% increase in earnings per share for 2003 over 2002, based on internal growth alone. So that's the kind of range we've talked about, we can achieve year in and year out and we expect to achieve that again in 2003, even though we're coming off a very strong 2002, as you know.

Additionally, I think it's important that we substantially paid down KMI's debt in the first quarter, reducing our debt to outstanding by about $160m a little over. And that took our debt to total capital ratio from 48% to 46% at KMI.

Now as we usually do, let me talk about each business segment briefly. Obviously, as usual, the driving force in the increased earnings at KMI is our interest in KMP. And this quarter KMP contributed $94.7m of pretax earnings to KMI. That's up 21% over the $78m for the same period in 2002. These results are consistent with our budget target of about 16% annual growth from our interest in KMP and I'll remind you that our interest in KMP is expected to generate about 45% of KMI's overall earnings in 2003. KMP, in turn, continued to increase its cash flow in the first quarter, again, and we'll talk about this in just a couple minutes, overwhelmingly due to internal growth on this pipeline and terminal assets. Obviously, as I think all of you know, as KMP's cash flow grows, KMI's general partners share of that cash flow grows as well, up to 50% of incremental cash flow. So that's the first segment to talk about. Very nice growth there at 21%.

The second is our NGPL, our large interstate pipeline serving Chicago and other points in the upper Midwest. NGPL reported first quarter segment earnings of $100m. That was up 5% from a little over $95m the same period in 2002, right on target with our annual budget. The increase is attributable to long haul capacity being sold out in the first quarter and to some expansion and extension projects, which came on-line since the end of the first quarter of '02.

Might also add that as you look at the volume numbers that we always furnish you in conjunction with our release, NGPL experienced particularly high quarterly throughput of a little over 551 trillion BTUs. Now that's up about 13% over the first quarter of 2002, due in part to the additional assets and the weather that was about 3% colder than normal. Now, let me emphasize, as we've said so many times, that increased throughput on NGPL does not directly correlate to an increase in NGPL short-term earnings because of course, the great bulk of our earnings in revenue come from the throughput agreements which have capacity charges. But I think this increased throughput does bode well for future contract negotiations because it demonstrates that our competitors are using and really need this transportation capacity. So as these contracts continuously rollover, as you know, I think that bodes well for our future contract negotiations and our ability to renew these contracts on favorable terms.

This month NGPL began 10.7 BCF of [NSS] storage service expansion at our North Lancing Storage Facility. All of that's subscribed under long-term contracts, so that's another positive development for the rest of this year and beyond.

Turning next to TransColorado. That's our interstate pipeline coming out of Colorado into the [Vuaco] hub and northwest New Mexico. TransColorado reported segment earnings of $7.3m for the first quarter compared to a little less than $100,000 a year ago. Obviously a substantial improvement. And I've got to say, achieved about 45% of what we had budgeted its income for in 2003. So we're going to exceed the original budget that we posted for TransColorado, but I think it's important to keep in mind that the rate provisions under a few of TransColorado's contracts vary somewhat with basis differentials, so those basis differentials may or may not remain as favorable throughout the year as they were in the first quarter. So we'll comfortably beat our budget for the year, but it may not beat it as much as this first quarter results would suggest. Let me say that the winter certificated capacity on TransColorado was fully sold out for the first time and long haul capacity is now fully subscribed, well into 2004. Our throughput was up 42% on the pipeline.

Segment earnings for retail were $31.5m, that's up $6.6m from $24.9m for the first quarter of 2002. More than half of that came as a result of lower costs, higher margins and our unregulated business, some good customer growth in Colorado, and continued success with our winter hedging program. But I do want to note that about $3mof this increase in the first quarter is attributable to a timing shift between this quarter and the fourth quarter of 2003. We're just budgeting more accurately now than we have in the past. We've got a new system in effect that's helping us do that. So again, retail is on target to achieve slightly more than its annual segment income budget of $65.3m that's posted on the web. But again, we will lose some of this back in the fourth quarter. We'll still end up above the budget.

Looking ahead, we have two new expansion projects underway in western Colorado that should help us mainly in '04 and beyond.

The final segment at KMI is power. That's expected to account for only about 2% of KMIs total segment income in 2003. And that segment reported earnings of $2.9m , way down from the $9.7m in the first quarter of 2002. This $2.9m is right on budget. It's what we expected because of course, as we announced at the end of the fourth quarter, we have phased ourselves out. New power development fees. There were no power plant development fees in the first quarter as contrasted to the first quarter of '02 when there were, and we will have no further power plant developments that we're aware of beyond where we are now, but we do retain an interest in five natural gas [fired] power plants around the country.

Now let me turn to KMP. KMP today reported all time record quarterly net income. The board of KMP increased the first quarter cash distribution per unit to $0.64. That's $2.56 annualized. That's up from $0.625 or $2.50 annualized. This is an 8% increase over the cash distribution per unit of $0.59 that we paid for the first quarter of '02. We have now increased the distribution 15 times in the just over six years that we've had Kinder Morgan, and just by way of information, we are now distributing more cash to our unit holders in one quarter, $0.64, than we did in all of 1996, which was $0.63 per unit for the whole year, and that was the year before the partnership became Kinder Morgan.

So that's the kind of results we have been able to demonstrate in this company over the last six plus years. These record quarterly results were driven overwhelmingly by internal growth as we continue to focus on increasing the utilization of our existing assets and in investing in capital expansion projects which build necessary infrastructure to help meet growing energy demand in our market areas.

Now again, like I did on KMI, let me talk briefly about each business unit at KMP.

Let me start with the products pipelines. We had earnings before DD&A in that segment of $108.7m compared to $99.8m for the same period a year ago. That's a 9% increase, and all of this increase came from internal growth. The two biggest factors for growth were an increase of 16% in revenues from the terminal assets on KMP's Pacific system, and then about a $3m quarter-over-quarter improvement in the North system. That's our NGL system, running into the upper Midwest. And earnings in this segment were just a shade, about a $1m or so below our expectations for the quarter, but we still expect to meet our published 2003 budget target of 5% annual growth in this segment. Segment revenues grew 4.8% and pipeline volumes were actually down 1.5%, and let me take a minute to explain that.

There're really three reasons why the volumes were down, which is unusual for us in our product segment. The first is one we've talked to you about before. As you know, most of the California refiners have now switched from using MTBE as an additive to ethanol, and as you know, ethanol cannot be transported via pipeline. We got to blend it in the gasoline at the terminals near the [in use] markets. So as we said at the beginning of the year, our pipeline volumes would be down slightly. It takes about 5% of your volumes off of your throughput for the California volumes, but our terminal revenues and margins would be up significantly we said, and that's exactly what happened. And that accounted for most of that 16% growth in terminal revenues on the West Coast that I had talked about. Overall let me say that conversion to ethanol is right on target for us. It's having the expected, slightly positive impact overall on our bottom line.

Second reason why we had this modest decline in volumes is something that's now corrected itself, and that is short-term supply disruptions, to a certain extent to refiners in southern California, but mainly in the southeast. And most of this decline actually came on our plantation system in the southeastern United States. That's now virtually over. Most of our refinery customers are running full out now.

Third and also a temporary thing, we believe, is that military jet fuel volumes which make up only about 3% of the total volumes in our segment declined significantly in the quarter, and the reason for that's obvious: the military aircraft on the various bases, particularly in the west, were deployed to the Middle East. Those are starting to come back now. As you probably know, two of the aircraft carrier groups are coming back, one of those into the San Diego base that we supply the jet fuel for. So that's a third reason for the decline, one that we think will now have any ongoing impact. We'll note that commercial jet fuel volumes, which are about 13% of the total volumes of the segment, were actually up slightly for the quarter versus a year ago, although I'd be the first to admit that there's a lot of moving parts. As we look ahead at these volumes for the rest of the year, in talking to the management team at our product segment, their belief is that we will see flat to slightly positive year-to-year comparisons in the second quarter of 2003 and that we will then see improving deliveries across the board in the third and fourth quarters of '03. But very good performance of the products pipeline. Again, revenues up close to 5% and basically right on target for the year with a 9% increase in earnings.

Now, turning to the natural gas pipeline segment, this segment produced first quarter earnings before DD&A of $91.6m. That was up 16% from slightly over $79m in the first quarter of 2002, on target to meet our 2003 budget of 12% annual growth here. Increase is primarily attributable to strong internal growth on our Rocky Mountain pipelines. We also had earnings from our Texas Intrastate pipelines, up slightly from quarter to quarter. That's principally due to contributions from the addition of our north Texas system and our new Monterey pipeline, which just went operational very late in the quarter, and that is now up and running. That will move 375m cubic feet a day fully subscribed by Pemex for 15 years. Total segment volumes for our natural gas segment were up 7% compared to the same period a year ago, so overall very good performance in that segment.

The third segment and the one that showed the greatest growth, again, as we projected, is our CO2 pipeline segment. Again, there we had earnings before DD&A of $42m. That's up 45% from the $28.9m in the same period a year ago. We built aggressive growth targets into our published 2003 plan. Again, all of this is internal growth. Notwithstanding those, I think, pretty aggressive targets, so we actually beat those pretty handily in the first quarter of '03. We're being a little cautious, because it's early in the year, of increasing the annual outlook for that, so we haven't built any of that into our increase of $0.05 to $0.10 for KMI nor any increase at KMP for that because we just want to wait as we get a little further in the year. Oil production at the SACROC unit in the first quarter averaged almost 17,000 barrels a day. That was an increase of 52% from the same period in 2002 where we produced a little over 11,000 barrels per day. Probably more significantly as we've continued to add compression since the first of the month, we will probably this month be well over 19,000 barrels on average, and right now we for several days now have been crossing the 20,000-barrel-per-day number. As you know, our target for the entire year is to average 20,000 barrels per day at SACROC for the whole year. My belief is we will probably now exceed that.

And let me also say on delivered volumes, aside from our SACROC oil production, delivered volumes by Kinder Morgan to our customers increased by 12%. The other owners at McElmo Dome actually decreased their production, so we actually had a total decrease in the CO2 pipeline volumes coming across the Cortez pipeline, but not as a result of any of our volumes. All of our volumes were up.

CO2, as you know, is one of the only areas in all of our operations where KMP is exposed to any commodity price risk, but here we mitigate that risk by entering into long-term hedges where we intend to generate more stable realized prices. We've added this quarter and will continue to do this, our realized weighed average oil prices, and for this quarter that realized average oil price including hedges was $24.88 for this segment. That compared to 22.98 for the same period in 2002. So outstanding performance from CO2 pipelines. Hard to imagine we could be doing much better there. Everything is panning out as well as or better than we originally expected in this segment.

Our final business segment in the KMP is our terminal segment. We had a very strong quarter there. Our terminal segment earnings before DD&A were $58m, a 21% increase from the $47.8m in the same period a year ago. Very much on our annual target there. We had good coal volumes at Grand Rivers and [Cory], Illinois terminals, good fertilizer and soot ash exports on the west coast. And then we had some expansion projects that came on line in our liquids area that increased utilization as well as leaseable capacity. All but about $4m of our growth, about two-thirds of it, came from internal sources. So if you look across the board, virtually everything but about $4m came from acquisitions that we made since the first quarter of 2002. All the rest of this tremendous growth at KMP was internally generated.

I'd also add that, while we're on the terminals segment, that we had about 10% volume growth in our liquids terminals volumes, and just by way of, I guess, explanation as to how large we're getting in this segment, in the month of March, 2003, we handled 28% of all the imports of gasoline into the United States. And again, as you I'm sure follow, those imports are growing pretty dramatically as we go forward, and particularly in the Northeastern part of this country.

Consistent with our budget for 2003, we expect over the course of the year to declare cash distributions of at least 263 per unit. Also consistent with what we've earlier said, that we expect to add distributions at year-end of at least $0.68 per unit, or 272 annualized. By the fourth quarter, we would hope to do better than that. And again, I want to emphasize that these expectations include contributions only from assets currently owned by KMP, do not include the benefit of any future acquisitions, and we certainly expect to have some of those as the year goes on.

One other development that we put in the release that I would like to share with you, because I think it's significant. Some of you may not be aware of this: during the first quarter, 2003, the Federal Energy Regulatory Commission made a significant positive adjustment to the index which products pipelines use to adjust their regulated tariffs for inflation. For several years, really since its inception, the old index used percent growth and the producer price index finished goods, and then subtracted 1%. The new index that was just published on February 24 eliminates that 1% reduction. As a result, KMP products segment, has filed for rate adjustments on a number of its products pipelines, and we are realizing those benefits from the new index beginning this month in the second quarter of 2003. So that's very positive, and will obviously be a positive factor for the rest of this year and beyond for KMP and for any other products pipeline that files its tariffs accordingly. So that includes our segment- by-segment examination.

Let me just conclude by again emphasizing that virtually all the growth I've outlined in the last 15 minutes, quarter to quarter, was internally generated. And what I think this shows is that our critical mass is now allowing us to deliver outstanding growth. Let me also say, I know some of you might be tired of hearing this, but I'm not tired of saying it: we are managing these companies for the long-term, not the short-term. We're managing these companies as principals, not as agents. And to that end, we're making what I think are very good long-term strategic investments to expand and extend our pipelines and terminals, primarily, obviously, at KMP. Now, in the first quarter this year, for example, we completed on time and on budget the Monterey Pipeline that I mentioned. That was an $87m project, again fully subscribed for 15 years. And we continue to grow our CO2 business, where we invested $65m in the first quarter this year to build out the Centerline Pipeline Project, which is virtually completed now, and by expanding our CO2 flood capacity in our SACROC unit. So we continue to see good opportunities to build all this critical mass. We continue to take advantage of them at KMP.

Now, turning back at KMI, a little different story there. KMI is really a unique animal. It is a cash flow machine. We expect $400m or so of cash flow this year after interest, after sustaining capex, and after expansion capex. And certainly our first quarter cash flow, that Park is going to go through with you in detail, is consistent with that kind of performance. So what do we do with this? We're going to return all of that money to our shareholders, and we're going to do it in three ways. We're going to pay down debt, as we've used virtually all of that free cash flow for in the first quarter this year, and we're going to do stock buybacks, and continue to increase the dividend at KMI over the years. Now, I think it's significant that after our debt at KMI is lowered to appropriate levels, certainly more of that free cash flow, which we expect to increase each year, will go to dividends and stock buybacks. I think that's an extremely positive scenario for our shareholders. And with that, I will turn it over to Park to take you through the details of the financial performance. Park?

Thanks, Rich, and fortunately for all of you it's the first quarter, so I won't get to bore you as long as I normally do. But I'll start with KMP as per usual. Hopefully, if you have the release in front of you, you can go to the first financial page behind the text, again on the KMP release, and that's where I'll begin. At the bottom of the page, you'll see we are declaring a distribution of $0.64 for the quarter. That is up from $0.625 for the fourth quarter. It's up from $0.59 for the first quarter a year ago. That's growth year-over-year of almost 8.5%.

Stepping up a line from there, you can see that our net income before DD&A left (indiscernible) was about $0.71 for the quarter, up from about $0.66 a year ago. There was about $0.02 of that that relates to a change in accounting principle, and so is a gain as a function of that. And so if you look before that gain from the change in accounting principle, we actually generated about $0.59 of distributable cash flow, compared to about $0.66 a year ago. That is very nice coverage, 1.075 over the $0.64 distribution.

Again, just stepping a line above that, you'll see sustaining capital expenditures were a little over $0.09 per unit for the quarter, compared to about $0.08 per unit a year ago. That's about 18% growth, and the actual numbers grew even more rapidly than that. It was about $17m of sustaining capex, compared to about $13.2m a year ago. That's growth of 29%, but that's entirely consistent with our budget. It's entirely consistent with what we discussed with you in our analyst conference in January. We still expect that sustaining capital expenditures for the year will be $95m. Now, that's even though the first quarter is less than 25% of that $95m, and we talked about this a year ago. The first quarter is historically a low quarter for sustaining capital expenditures.

Depreciation and amortization, $0.28 a unit compared to $0.26 a unit a year ago, about 10% growth. Again, we'll talk about this in a minute. You'll see it on the second page. The actual dollars are growing more rapidly than that, largely related to conservative assumptions that we're making around production, DD&A related to the production at the SACROC field.

Net income per unit about $0.50, compared to about $0.48 a year ago. If you turn to the second page, we can see where this comes from. Rich has already talked, for the most part, about how the segments perform. Again, starting at the top of the page, segment earnings before DD&A for products pipelines, up about $9m, or 9%. The volumes were down. You can see that in the volume section. Rich went through all of that. Part of it was expected. Part of it we believe is temporary and will come back this year. North System had a very strong first quarter as a function of cold weather. In total, the products pipelines for the quarter were about a touch below our budget, about 1% below our budget, but we still expect that they will be back on track and on budget for the full year.

Natural gas pipelines up about $12.5m, or 16% year over year, driven by very strong performance from the interstates coming out of the Rocky Mountains, and also good performance in the intrastate enhanced by the introduction of Monterey and the North Texas Pipeline. Also very strong volume growth on the natural gas pipeline segment, exactly in line with our budget, right where we thought they would be.

CO2 pipelines extraordinary performance, up $13m from a year ago, or 45%. As Rich mentioned, driven primarily by volumes at SACROC, which are up 52% to 17,000 barrels a day of production. The actual CO2 delivery volumes are down slightly, again as Rich mentioned, as a function of our partners at McElmo taking less deliveries. Again, we have added a realized weighted average oil price to the volume section, and as Rich pointed out, it's about 24.88 for this year, compared to about 22.98 in the first quarter of '02. I want to remind you, that includes both hedged volume, hedged prices, and unhedged prices. But in the CO2 pipelines, extraordinary performance for the quarter. They are running very well relative to their budget.

Terminals came in at about $58m, up over $10m from a year ago. Again, all but $4m of that, or $6.2m of that was internal growth driven by increases in capacity. The volumes were also strong on the Terminal segment. You see the total for the segment earnings before DD&A is up about $45m, or almost 18%.

We have added a new section here, which just lays out the DD&A for each of the segments. All that I will point out in that section is the CO2 pipelines DD&A, which is up 64%. Now again, as we talked about in our investor conference in January, we are accruing depreciation at SACROC in a very conservative manner, and that is what's driving this tremendous growth in depreciation on the CO2 pipeline segment.

I'm going to drop all the way down to GNA. This is right under the segment, "Earnings Contribution." You'll see GNA is up about $5m for the quarter. This is mostly due to some timing on some legal bills, which is very difficult to forecast accurately. It is slightly ahead of where we thought we'd be in the first quarter, but we still expect to be on budget for the year. Net debt costs are up almost $6m. This is a function of slightly higher average balance from the first quarter this year relative to the first quarter a year ago, and slightly lower rate.

Now, the average balance is up primarily because a year ago, in the middle of the quarter, we acquired Tejas, and so the cash that went out for Tejas went out in the middle of the quarter a year ago. And so at the beginning of the quarter that debt was not outstanding, and that is the primary driver of the larger balance and the primary driver of the growth in interest expense, and interest expense is exactly on where we thought it would be for the year.

Minority interest has declined slightly, and that's because Trailblazer still had minority interest outstanding in the first quarter a year ago. It no longer does. In the second quarter of 2002, we acquired that remaining one-third interest in Trailblazer.

The last item there is the cumulative effect of the change in accounting principle. This is related to the adoption of FAS 143, which relates to asset retirement obligations, and because of that adoption, we are realizing a gain of about $3.5m. Net income, $170m compared to $141m a year ago, up over 20%.

With that, why don't I go back to the first page? I'll take you down the income statement there. You'll see that revenues have increased significantly. This is a function of gas prices. Gas prices were high in the first quarter, especially in Texas, and the place at KMP where gas prices affect us are on the Texas intrastate. Now, you see the offset in operating expenses, also up considerably. Revenues are up $986m. Operating expenses are up $941m. Again, just a function of gas prices.

Depreciation and amortization is up slightly. This is a result of the conservative assumptions at CO2, the expansion capex that we have spent in the last year, and of the acquisitions that we've made in the last year.

GNA we talked about. TOTI is up as a function of the expansion product and the acquisitions. Operating income is up almost $30m to $195mm, or almost 18%. The earnings from equity investments is up a little bit. This includes primarily Plantation, Red Cedar, and Cortez Pipelines. Amortization of excess cost is flat. Interest expense, we've already discussed. Other is essentially flat. Minority interest is primarily the Trailblazer item again, that we discussed previously.

Again, that takes you down to the income before change in accounting principle of $167m, and after the change in accounting principle of $170m. To calculate the limited partner (indiscernible) net income, you pull off the general partner's interest. You get $90.6m up about 14% from a year ago, and after the change in accounting principle, $94m , up about 18% from a year ago. The net income per unit is about $0.50 before the change in accounting principle, or about $0.52 after the change in accounting principle.

I know that some of you out there probably like to compare the earnings per unit to consensus. We'll say that we think you should focus primarily on the distribution. But for those of you who do, consensus as of yesterday was, I believe, $0.51. So again, after the accounting change, we were at $0.52. Before the accounting change, we were at $0.50. But for those of you who do make the comparison, I want to remind you that consensus can be unduly impacted by outlier posts. We have about 12 people who have posted for KMP. Nine of them are right around our expectations, and right where we ended up, about $0.50 per unit. There are three who are not near there, and in fact there was one who posted $0.59 this week. We operate a very stable set of asset share. We try to be very clear in what we expect these assets to generate. We lay out our budget. We go through it in detail in the analyst conference in January. Again, realize that consensus can be impacted those outlier folks.

With that, let me go to the balance sheet, which is behind the two income statement pages. You'll see cash and cash equivalents essentially flat. Other current assets is up about $300m. That's all accounts receivable related to the increase in gas prices. PP&E is up about $137m. That's a function of the capital expenditures and I'll give you a little bit more detail on that in a minute.

Investments essentially flat. Deferred charges and other assets essentially flat. Total assets total about $8.8b.

The notes payable and current maturity for March 31 reflect a little bit of current maturities. I'm going to talk about that when I talk about talk debt in just a minute.

Other current liabilities is up as a function of accounts payable, which again results from higher gas prices. That long-term debt let me touch on in just a minute.

Market value of interest rate [flocked] is down a touch. That's just a function of the forward curves for interest rate. Other is flat, minority interest is flat, partner's capital is flat.

Drop down you'll see total debt at March 31 of $3.765b, up from $3.619b, 52% debt-to-cap compared to 51% at the end of the year. It's an increase of $146m. Let me reconcile that for you. The largest component is $124m of expansion capital that we spent during the first quarter. That expansion capital was largely C02. As Rich mentioned before we spent $65m on SACROC in the first quarter. We spent $16m finishing up the Monterey Pipeline. We spent $23m on projects at our liquids terminals including some tanks that we finished up at Carteret in the New York Harbor. And we spent about $20m on other projects. Again, that total is $124m. We spent $6m on acquisitions in the quarter. We had a use of cash for working capital of about $37m, which is primarily interest payments that go out in March, and so accrued interest declines from December to the end of March. And then we had some other timing items, which total about $8m And then we gained about $29m from KMR distributions that are made in additional shares rather than in cash. You total that up and it is the 146. And that's actually it for KMP, with that I'll move on to KMI.

Again, in the press release for KMI the first page is after the text are the financial pages. I'll begin at the first financial page and just start at the bottom. It's actually three lines up from the bottom. Diluted earnings per share, as Rich mentioned, is $0.90 this quarter compared to $0.71 a year ago, 27% increase. Once again for those of you who compare to consensus, consensus was $0.85 for the quarter. Let me go to the second page and give you the detail on this. Starting with the equity and earnings from Kinder Morgan Energy Partners, rather than look at the top line, the most meaningful line is in the section right below that, the section that's titled "Earnings Attributable to Investment in KMP." And you'll see the total there of about $95m of contribution from KMP compared to $78m a year ago, earned increase of 21%. Very strong growth coming from the ownership interest in KMP.

Jumping back up to the other NGPL had a very strong quarter up almost 5% exactly on track to realize its budget this year. TransColorado up significantly. I mean one point to 93,000 from a year ago is only a 50% interest. We bought the remaining 50% in TransColorado in October, but even if you doubled it I'd think it's a pretty strong comparison to a year ago. TransColorado clearly is performing very well, and as Rich mentioned will exceed our budget expectations and is why we are increasing our expectations for the year.

Retail also had a very strong quarter up $6.6m. Again, I'll remind you that $3m of that is just timing with the fourth quarter and so we expect that to come back in the fourth quarter. The remainder is a function of very nice cost reductions and improved margins, which for the most part we expected in the budget. And so we expect retail to be right on or slightly above their budget for the year.

Power down again, because we did not see any development fees in the first quarter exactly as we expected and we expect them to be on their budget for the year. Total segment earnings $253m, compared to the $220m a year ago; increase of about $33m or about 15%. GNA is down about $3m. This actually is also because of timing around legal expenses, which are difficult to forecast. Although at KMI it's going a little bit the other way and actually GNA is slightly below where we thought it would be for the quarter, although again we expect we'll be right about our budget for the year. Interest expense is a little bit larger than it was a year ago, and that's because the average balance is slightly higher, but the rate was a little bit lower. Now, this is actually the opposite of KMP. While the balance at KMI is slightly higher on average than it was a year ago, in this quarter, in 2003 the balance declined from the beginning of the year to the end of the year as compared to the year 2002 when the balance increased from the beginning of the year to the end of the quarter. What you have right now is a debt balance at the end of March 2003 that is almost identical to what the debt balance was at the end of March 2002. We're at $3.156b in debt currently at the end of March 2003; we were at $3.14b at the end of March 2002.

Interest expenses are right where we expected it to be and right on track with our budget. Other is primarily the minority interest related to KMR and to the truck payment, and again that is right where we expected it to be.

Income, before income taxes is up almost 20%. Net income is up 26%, $111m compared to $88m a year ago.

With that let me step back to the first page. Taking a look at revenue there is a modest impact on KMI *revenues from gas prices. This comes in the retail division where their revenues are a function of gas prices. Now again, their expenses, the cost of gas sold, is also a function of gas prices. So you see a little bit increase in revenues, you see a little bit increase in gas purchases and other costs per sales.

[Going in] is flat. GNA we discussed. Depreciation and amortization is up about $3.6m and that's because we did not recognize depreciation and amortization on a consolidated basis for TransColorado a year ago. We do now because we own 100% of TransColorado.

Taxes other than income taxes are flat. Operating income $122.8m compared to $108.4m are up about 13% and that's up 13% before you even get to KMP. Again, the equity and earnings of KMP come in on the next line, we talked about that. Other equity investments are primarily interest and power plants. Interest expense we discussed, minority interest is KMR, and other net is primarily minor things like interest income and other income. Again, taking you down to the 20% almost growth and income before income taxes, the 26% growth in net income, and the 27% growth in diluted earnings per common share of $0.90 compared to $0.71 a year ago.

And with that let me move to the balance sheet, which again is behind the two income statement pages. Cash is essential flat. Other current assets has declined by about $130m, which is made up a variety of things including a receivable from KMP which was on the books at the end of the year so it was really a timing issue and was resolved very quickly in January but that was about a $40m item. Gas and storage was about $37m. These are all reductions in other current assets. Tax receivable reduced by about $32m and interest receivable, which is a function of (the swaps) and again was reduced because we paid interest payments or received payments on the (swaps) in March, that came down about $16m. So a number of small components make up that $133m reduction.

Investments essentially flat, that fluctuates a little bit primarily as a function of earnings and distribution. PP&E essentially flat, other assets changed a little bit and that's a function of primarily the market value of interest rate flux. Total assets $9.9b, down about $164m from where we were at the end of 2002.

On notes payable and current maturities of long-term debt up $330m compared to $500m at the end of the year. At the end of the year this represented a maturity that came due at the beginning of March. In March we paid that maturity down with commercial paper. We had then actually throughout the quarter reduced our commercial paper balance so that you see the comparable amount is $333m. We'll talk about this a little bit more as we get into the debt.

Other current liabilities is down slightly primarily due to reduction in accounts payable and a reduction in accrued interest. Again, KMI like KMP has interest payments due primarily in March and September. Other liabilities and deferred credit unchanged. Long-term debt I'll talk about in a minute. Interest rate flux has gone down a little bit again as a function of the forward curve for interest rates and because at the time that we paid off the March maturity, that was a maturity that had not been [flocked] back or floated, but when we paid it off with commercial paper the balance went from fixed to floating. What we did at that time is reversed out of one of our interest rate flux to keep us at our target of 50% floating 50% fixed. The result of reversing out of that flux was we received $28m in cash and we reduced the carrying value of our interest rate flux. The capital trust securities are the trusts unchanged. Minority interest doesn't change. Stockholders equity up about $100m as a result of net income.

Total debt, as I mentioned before, $3.156b down from $3.317b at the end of year; 46% debt-to-cap down from 48% debt-to-cap at the end of the year. So we reduced debt by about $161m. Let me reconcile that for you. As we discussed before and is in the press release, we generated cash flow of about $158m. We have added that reconciliation to this page and you can see it at the bottom where you go from income before income taxes, add that depreciation and amortization, take off sustaining capital expenditures, which were about $13m at KMI for the first quarter. That is below the run rate that we expect we will realize throughout the year. We are still comfortable with about $85m of sustaining capital expenditures at KMI for the year. And then you take off current income taxes to get to the $158m. Now that's almost exactly the debt pay down. There actually are a number of ins and outs that reconcile that to about the same number. When you see the cash flow statement that will be published in the queue, you'll see working capital combined with a couple of other items that don't actually fall in working capital, but are similar, which include the gas and storage balance, includes the swap payment of $28m that we got. That nets to about an $8m use of cash. Investments, expansion capital and investments total about $15m in cash throughout the year. And then dividends and repurchases total about $20m for the quarter. Now again, that is almost all dividends that were relatively small repurchases for the quarter. Again, then offsetting that is the cash that we received for the related party settlement from KMP of around $50m. And again, if you net those out, you get right back to $160m, which is the cash that was used to reduce debt and again took debt from about $3.3b down to about $3.15b. And actually, that is it.

Very good, Park. All you ever wanted to know and we're lucky there's only one quarter this time. With that, [Katy], if you'll come back on, we'll take any questions that you may have.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press star 1 on your touchtone phone. You will be announced prior to asking your question. To withdraw your question you may press star 2. Once again, to ask a question, please press star 1.

One moment.

Our first question comes from Ananth Moore(ph)of Brookside Capital. You may ask your question.

Hey, guys. Good quarter.

Thank you.

A couple of housekeeping items for Park and one specific question, Rich or Park. The last item that you gave us on KMI, $50m cash from KMP, what exactly is that, Park?

This is on the cash flow statement that was in the queue, this was some timing issues between KMP and KMI, and so essentially KMP at the end of the year owed KMI about $50m. That was settled in the first week or two of January. It primarily results from the fact that those inner-company balances aren't known until we close the books. We closed the books and we settled them immediately. But the balance sheet date is as of the end of the year. And so again, it's difficult to get some of those things settled before the end of the year. Now that being said, that balance that we had at the end of the year was unusually high. We don't expect to ever see a balance that high again.

All right. And on the tax rate on KMI, 39%, is that ongoing for the year? I mean it's down 280 odd basis points from the quarter before.

Thirty-eight is the true effective marginal tax rate. Now when you do the calculation you probably do get 39. There are a number of things that are in there which distort that calculation. The first one is the impact of consolidating 100% of the taxes of KMR, even though the pretax income is reduced by the after tax minority interest of KMR. Now this is something we've been through before. It's something that we're more than happy to walk through with you off-line if it's difficult to understand as I explain it here. But that does distort the calculation if you just take income taxes and divide it into income before taxes.

Got you.

It will always look a little higher than the actual effective tax rate, which again is 38% as we said in the past.

The right way to think about it is if KMI earns another dollar of income before taxes, it will have to pay $0.38 of tax on that.

Got you. And then, just on the product pipeline side, you know, with the FERC ruling that's come out for this inflation stuff, I mean I guess two questions around it, one, you know, do you expect to see more people trying to come out and challenge the grandfathering? And Two, you know, any update that you might have on the current ongoing mitigation that's out there?

No, we don't think that--in fact when we filed, you had to file a conforming tariff if you wanted to increase your rates and when you did, those who are opposed to grandfathering on the West Line protested and the FERC overruled the protest and put it into effect. So that issue's been settled. With regard to the overall grandfathering challenge, and again, we've explained this virtually every quarter, I'm glad you brought it up again, we do not have a ruling from the administrative law judge, we expect a ruling certainly sometime here in the intermediate future. It's not binding, obviously, until it goes to the full commission and we've talked about that before. We believe it's certainly manageable, whatever the result is. But this is a long energy process and I'm glad you brought it up because again, as I've said many times, people ask, "Well what are all the risk in this business? Everything sounds like it's going so well." I want to just emphasize as I always have that when you run as many miles of pipeline as we do, subject to regulation by the FERC and by various states, it's a constant regulatory series of issues. I've personally been doing this for about a quarter of a century now, Deb Macdonald almost as long. So I think we have the wherewithal to manage that regulatory risk, but certainly there is that challenge out there and we would expect a decision sometime this year.

Thanks. Great quarter.

Thank you.

Dinardo Yusy (ph) of Royalist Research. You may ask your question.

Hi Denado,(ph) how you doing?

I'm doing fine, Rich, but still not as good as you.

Right, right, right.

Obviously Rich, you emphasized a lot about the internal growth and you know, how superior it's been, virtually across the board to the industry, to just about anybody else out there. But--and your management skills and your teams management skills are, you know, or legendary proportions and it just begs the question of we've seen two, you know, reasonably good panhandle arguably wasn't up to the standards that you were looking for, as you indicated at the conference, and then as we've seen the TGT come across, your Texas Gas and go to, you know, a [Lowes] Corp., of all places. And I just can't help but ask, you know, there's got to be some things that you're not seeing, I think it went for a little over seven times EBITDA, you know, was that something that's not in your long-term interest to grow the pipeline and take full advantage of the skill that you bring to the table versus virtually anybody else, certainly somebody like, not knocking [Lowes], but I can't imagine that they can run that pipe or any of the others that might come out there. And there's going to be more assets, I know, for sale, and just wanted to get your thoughts on.

Sure. Mike?

Yeah. [Denado], I think the way to say it, we don't obviously want to comment on any specific acquisition, we have a policy against doing that. I think it's--we have said repeatedly that if you assume that we are taking a look at interstate pipelines that become available, that's a safe assumption to make. You know, we feel like the way we evaluate pipelines we have very attractive opportunities and have a good chance at being successful this year as more of the assets come up. You know, clearly, to the extent we're not winning bids, it's because we're not bidding as much, if that's the case and that can be from a variety of factors. The things we've talked about in the past, again, without specific reference to any one project, multiple could be part of it, it could also be a different assessment of regulatory risk or sustaining capital requirement. And, you know, there've been a number of these large pipes where we have not been the prevailing bidder and those are generally the factors that have been at play. But we're not going to comment with respect to TGT, or any specific asset.

Thank you so much and again congratulations.

Thank you Denado.

David Fleischer of Goldman Sachs. You may ask your question.

Hi David, how you doing?

I'm doing good Rich. And you had a great quarter there. I wanted to ask you first about the CO2 business where by the numbers you gave us from the 17,000 barrels you had been at earlier in the quarter, really for the bulk of the quarter, and now you've jumped up to well over 19,000 as you indicated and have exceeded 20,000, it sounds as if that call it almost 3,000 barrel increase is related to the compression that came on, I gather, the end of March, pretty much on the schedule you'd given us. But I guess my question is trying to understand how the drilling plan that you had talked about some different options as you were evaluating it back at the conference in January, fits into the growth profile from here versus the requirement for that, you know, new pipe capacity, which--and the question is, is that expected to come on in May? Just trying to understand what that float might be and how much you might exceed your target of 20,000 barrels a day for the full year as the drilling plan comes along. What have you learned since you talked to us in January about the trade-offs and the complexity there as you're pursuing that? It sounds like you're continuing to spend that money.

Yeah, very good series of questions David. I think--and Tim Bradley, who runs our CO2 operations, is sitting here in the room with me. But, overall we just had a long review with the board today on the progress there, but overall everything is moving ahead very much as we anticipated. There's a lot of moving parts in this, but I think overall we're very pleased with how it's going. The key here is getting compression online. You're absolutely right, we did put another [tronch] and we've had several [tronches] of compression coming online. We had really two major [tronches] almost back-to-back during mid-March and then another one the first week in April. That's what's allowed us--the second [tronch] in particular--to have this nice jump in volumes. Certainly the centerline pipeline. So right now, with the compression on, we are not constrained by the not having the centerline pipeline on yet. If we didn't, we'd expect it to come online, Tim, in May?

During May.

During May, right on schedule. And so it will not have been an impediment device, if that were delayed until July or August, and it's not, we're really finished, we're testing it now, then yes, that could delay it. But the main thing is the compression. And we did have, notwithstanding these great volumes we had in the first quarter, we actually, Tim, on the one phase of compression we're actually 10 or 15 days late is where we're at?

Yes.

Yeah. So that actually retarded the growth that we would otherwise have gotten, even though we had a 52% growth we would have done modestly better had that compression come online. It's a very complicated thing that had to do with the siding of it and some vibrations we experienced, so it took us 10 or 15 days longer to put it on. Then, the phase two for this year that came on the first week in April actually came on three or four days ahead. And we did not have the same problems and it's working just fine as both sets are now. So everything looks very good and you know, the reason that we're not, even though they had a superb first quarter, obviously very nicely above a year ago, nicely above our plan for the first quarter, we're not upping the CO2 projections yet. As we bring this pipeline on, as we add more compression, we're probably being conservative, but that's the way we want to go right now. But it's off to a very good start and I think the real test you ought to be looking at is when these [lines] are coming online. Again, if you assumed it's a linear projection you would say that you had crossed the 20,000 barrel mark at the end of June, we've already crossed it, I think we will cross it permanently--and there is some volatility day-to-day here, I think we will cross it permanently probably late this month or early May. As a matter of fact, I told Tim that when we crossed it we're going to have a barbecue in Schneider, Texas, just as we did when we crossed the 10,000 barrel and we've already scheduled that barbecue in May, so I think Tim's pretty confident that we're going to be across it on a permanent basis by then. So it looks like we're doing better than expected, everything is going very well. We're still realizing just superb IRRs, I think we've said in the past that we're going to be spending, if everything continues to work, we're going to be spending around $230m, part this year, we spent $65 in the first quarter. Overall we expect to spend--if everything goes right--a little less than $600m, and that's without the CO2, which of course comes back to us, on this project over the next several years. We believe that looking at that $600m on an incremental return, we will earn--and so far it's very consistent with this--an [unlevered], an [unlevered] IRR approaching 40%. So that's how good this project is. It's almost a once in a career type project, it's that good. And Tim and his team have just done a fantastic job of implementing it and it is going modestly better than we expected, even as bullish as we were in January.

Sounds great. Let me ask you a second question--a separate question. On the pipeline projects you filed for other expansion projects and some of the others in the industry seem constrained, unwilling, out of the Rockies and everywhere to move forward on that, can you give us an update on how your open seasons are coming along and what customers are saying to you, and you know, what, you know, your feel for this ability--for the ability of these products to sustain the pipeline, you know, mostly gas pipeline, but pipeline, you know, growth profile going ahead?

Yeah, let me--and I may miss some and if I do, hopefully Mike or Park will jump in. But let's start on the natural gas side. Again, one of the real thrusts, one of the real tsunamis we're trying to ride here is I think everything on this call knows there's been tremendous volatility in gas prices in the Rockies, and the basis differential particularly between Wyoming and the Midwest but at times between western Colorado and California or Texas. These basis differentials have been huge. I don't have the average in front of me, but I would guess the CIG or Cheyenne Hub, either one, which is where most of the [power] river basin gas comes out. The difference between that and the Midwest price is probably averaged north of $2 year to date. And some days it's been over $3. So clearly what that shows is there's a tremendous need for additional capacity coming out all those areas. We're trying to take advantage of that and we have, as you know, open seasons on a modest trailblazer expansion, 50 million a day, could be more than that. We have our Advantage project, which would be 350 million a day or so, which would be a Kinder Morgan Interstate gas transmission project. And then we have our expansion on TransColorado and a potential extension. We have not wrapped up the open seasons on these yet. So far the response has been good, but until we get binding commitments, one never knows. Then we also have the Silver Canyon, which would essentially take the TransColorado expansion on out through Phoenix into Ehrenberg at the California border. So that's one whole phase. We'll get some of those. We probably won't get them all. But I think that's very important. Another real indication is, some of you may not know this, that the state of Wyoming set up what they call a Wyoming Pipeline Authority and created bonding authority of $1b there to address the very issue we're talking about, which is to participate perhaps as an equity investor, perhaps as a bond investor, in an additional capacity out of Wyoming, they're having a series of meetings. In fact, our presentation to them is next week. We're going to give them probably more than they want to hear about Kinder Morgan's opportunities to help them. What's happening really I think if you cut through it the reason that no pipeline expansion of any size has been built is because the bigger producers in the Rockies are better taken care of, particularly in Wyoming, than the smaller producers. So what you have is a myriad of small producers who are very hesitant to sign up for long-term capacity on their own. They know today they would clean up. We could build a new capacity for well less than $0.50 on a basis differential, that we're getting from the Cheyenne Hub to intersect with the major Midwest pipelines. That basis differential, as I said, has averaged over $2 all year. So it would seem a no-brainer, but for some of the small producers they just don't have the financial wherewithal or the ability to get letters of credit to do that. So there are two ideas that may work. One is this Wyoming Pipeline Authority. The other is that since we don't have very many financially strong marketers out there to aggregate anymore, I think you're going to see some of the LDCs do some aggregation where they will agree to take load on the expansion at a particular point so that the small producers know they have somebody to sell to. It will make it a lot easier to hold the capacity. Now TransColorado is a little different. The capacity out of western Colorado is so constrained and the growth is so fast in those basins that I think you will have even some major producers step up to take capacity on that one. So that's the Rockies. I think we'll get additional projects there.

Our west Texas project still looks very good. That would move more gas from the Waha hub out to El Paso to serve El Paso and to go on over to [Pimex's] connection at the border.

Obviously our Monterey expansion is now complete.

On the products pipeline, the Northern California expansion, which will be done over the next couple years, that's new capacity from San Francisco Bay up to Sacramento. That looks like it's on schedule. We're doing environmental permitting on that right now. If everything works we hope to build that out and have it in service by late '04.

I probably missed some others, Mike, but that's the bulk of these pipeline opportunities, and we have a lot of them. I think I didn't mention the North Lansing Storage Hub. That's about a $35m project. The Cheyenne Storage--both of those are under construction right now, of course. All fully subscribed. So I think we have still enormous potential and as I said, the difference is we are financially solvent. We have the ability to do expansions at KMP. We'll do just as many as we can as long as the returns are good. That differentiates us from a number of our competitors. So I think it looks very good and that's one reason we are so bullish about internal growth. Again, I think this quarter demonstrates again and as we look at the year at the upper end of the guidance we've now given you, we're delivering to you at 15% internal growth at KMI. We're delivering an 8%, a little better increase in distributions at KMP on top of a 6.5% to 7% yield, and we're doing all that at virtually 98%, 99% with internally generated opportunities. So we feel very good about these opportunities continuing.

Thank you, Rich.

Yeah.

John Edwards of Deutsche Bank, you may ask your question.

Hi, John. How are you?

Oh, good, and very good quarter.

Thank you.

Could you comment a little bit in light of what happened with gas storage and the fact that you are sounds like investing it in gas storage? Are you looking at internal growth opportunities there as well?

Absolutely. Absolutely. I think as you look ahead, and this would be a subject of endless discussion, but as you look at the volatility we've seen, all the trends in gas supply, the just strange relationship between summer and winter prices, the draw down, the lack of gas in storage, all of these things lead me to believe that storage over the long term is going to be a very smart play and very, very needed both on the physical basis and on a financial basis. I think this year's very strange, as you know. Most all of our storage is subscribed, although we do have a little bit coming out that we'll sell over the course of the summer. But this year is very strange because there is not enough difference between summer prices and winter prices to justify the cost of storage. That's going to have to change or on a national basis the storage is not going to get refilled or we're going to have very high gas prices come the winter. So we think storage is very valuable. We are delighted that we have as much as we do, particularly to NGPL. We're adding to it in very place we can. We particularly of course like non-jurisdictional storage or storage in conjunction with our Texas Intrastates and we're working on opportunities there.

Okay, thanks. Then as far as raising guidance, I guess I gathered from Park's comment that that was attributed to the much more positive than expected performance at TransColorado. But you've also had another couple of positive developments here and I was wondering how much credit you're giving. You mentioned the FERC Adjustment to the way you're going to be able to handle the pricing adjustments, and you've made some rate filings there. Then how much, perhaps, you may have factored in from interest rates staying so low. If I recall, your original budget was contemplating a barely significant increase in variable interest rates.

Well, there are a lot of variance in and out any time you have a budget. Park, do you want to comment on it?

Yeah, I mean what I would say is that at KMP our expectations have not changed even given all of the considerations that we went through today. We still expect to be on our budget in terms of the net income per unit. We expect to meet the targets that we set in terms of distributions per unit. But at KMI, again as we indicated, we do expect slightly stronger performance and so we have increased our expectations. Specifically on interest rates, we do have in our budget growth and interest rates. We had an average rate in the fourth quarter that was 100 basis points higher, at least with respect to the floating rate, than our average rate in the first quarter. Current projections clearly are below that. We do expect that we'll probably get some pickup as go throughout the year, but it's really too early to tell at this point. We'll continue to monitor it and clearly you'll be able to see when we report second quarter how we're performing relative to our budget.

John, you mentioned the products pipeline specifically, again, the tariff increase which will start benefiting us in the second quarter. Remember Park mentioned we're about a percent below what we thought due to the variety of factors in the first quarter. So part of the reason we're comfortable that we're going to be back on plan for products is, you know, we had some small things go against and FERC Adjustment is something going in our favor for nine months of the year.

It's not huge it's, you know, it's about a $1.5m between now and July. The new filing goes into effect July, the PPIs adjusted every July 1st, so we'll have a couple million dollars positive in the second half from it.

Well and I'm sure everyone realizes the PPI in 2002 was actually a decline. And so the rates in a third quarter and the fourth quarter will actually be lower than they are in the second quarter. Now they'll still be higher than they were in the first quarter.

Right, and then you've talked this one other topic, you know, you've talked before maybe if there's any additional thoughts you have on perhaps industries efforts to, you know, to remove the non-qualifying income issue for mutual funds, you know, with respect to, you know, MLP units.

My understanding is, Dave is this right, or Kim it's in the bill, is that right?

The bill has been filed in house.

The bill has been filed in the house and senate with that on it and, you know, I think it will just depend on--it will be part of the overall tax bill and as you know there's a few if there are catfish in the bill this is a minnow. So we'll see. Are there whales in the bill I guess this is a minnow. So we'll see how it comes out. But it is in both the house and senate right now filed and we'll just see what happens. I think, you know, there's a reasonably good chance I don't think there's any significant opposition to it. It's a question of whether when you finally get around to a conference committee on the tax bill whether it makes the cut.

Okay, great thanks a lot. Great quarter.

Thank you.

Craig [Sirrus] Standard Imports, you may ask your question.

Hi.

Hi, Craig.

Congratulations on the quarter.

Thank you.

A couple of questions: Do you have a total capex number for the quarter?

In total capex, at KMP or KMI or both?

KMI, I'm sorry, KMI.

At KMI we had about $13.4m of sustaining and about $6m of expansion.

$6m expansion?

$6m on expansion, yes.

Okay, and how was retail impacted by, you know, the higher oh the potential for bad debt, the higher prices and the increases in consumption per rate payer?

Actually one of the reasons for the positive performance of retail versus the same quarter versus the same quarter last year is that we actually had a lower exposure to bad debt. Because I think our systems run in the relatively affluent rural areas we don't have much of a bad debt problem. Our bad debt reserve is about half of one percent that contrasts with I don't know where some LDCs in large cities may have as much as 2.5% to 3%. So, we have a very little exposure and in fact it's actually improving year-to-year so that has not been a problem for us.

You didn't see and I'm sorry I wasn't following you all back then, after the 2001 went through you didn't experience anything.

No, we did not and in fact we're even experienced as we've gone on it's improved year-to-year and part of that is that more and more of our base now is in western Colorado, which is a very upscale area. We serve almost all of the ski areas; we don't have a lot of nonpayment's there.

Okay, and you mentioned that when you reach your debt target that you'll be accelerating share by back and dividend growth, what is your debt target?

Well, I did not use the word "debt target," I said, "appropriate level of debt" and that's something that we would certainly probably sit down and discuss with what's that company S & P or somebody like that before we did it. But our thought is that at some point and time clearly this company (indiscernible) becoming stronger and stronger it's a cash flow machine. I think if Park and I had to put any number on it now we'd certainly like to take the debt onto around $3b maybe it starts with a two. But there certainly we think will come a point and time when it will know--right now as you know we've said publicly and in every other sector that we plan to use of this $400m in pre-cash flow after everything, including expansion cap ex that came up, we plan to do three things with it: Pay down debt and we said we'd use about half of it to pay down debt, and we'll use the other half to pay dividends, and to do stock buy-backs. Now in the first quarter, Park, I think our total stock buy-backs, we had a massive buy-back of about $2m, is that right?

Yeah.

So we did virtually no stock buy-back in the first quarter, we paid down $161m in debt and our dividends for the year at the present level are $0.60 times 120m shares, about a little over $70m. So, we have a lot of firepower. And at some point in time, clearly, I think we will have paid the debt down to a level where we would feel more comfortable with rationing up the amount of money we use for dividends and stock buy-backs. And while I'm on that subject, obviously I think it's a strong generator of free cash flow, even if the President's policy and proposal on dividends does not pass we will continue to look on an annual basis at increasing the dividend, that'll be a decision the board will make each year. If it does pass, and looking like to me, and this is my uninformed opinion, that probably the most likely outcome if you get anything at all here will probably be reducing at the capital gains rate. We'll just--again, the board will have to take a look at how we split the equity part of the free cash flow, but I just can't emphasize enough, in my opinion, as a 20% owner of this company, how positive it is to have this amount of cash flow because nothing but good can come out of it. You know, we can keep our balance sheet very strong and we can distribute a lot of cash to our shareholders either through stock buy-backs or through dividends. So that's what we'll continue to look at and we're not suggesting right now that over the next couple of quarters we're going to change at all in using money, the proportion between debt and use to the equity holders, but certainly in the long-term I think we'll have more and more cash available to distribute to the equity side of the house. Park, anything that'll (inaudible) this out?

Just a couple more quick questions. You know, there's been a couple people on the call asking about, you know, different potential acquisitions that you may or may not have looked at. Do you have, you know, a range or a top end limit for the size of acquisition you'd be willing to consider?

No, we really don't. You know that's an art not a science, we've always looked at--and again, virtually any acquisition we would anticipate would be at KMP. In fact, one acquisition we passed on rather recently, it wasn't a question of price so much as the seller couldn't get it into a partnership form to allow us to put it in KMP. And we couldn't get there on the numbers at KMI, we're just not inclined--and never say never--but certainly we're not inclined to make acquisitions at KMI unless you have some sort of transforming transaction at some point in time. But we intend to make our acquisition at KMP, we think we've got a lot of firepower there and there of course we will issue equity to fund a portion of that, as we've always done. So we're not limited and we're looking at a lot of things and I think people always talk about pipelines because they are kind of the headline items, but there are a number of good terminals acquisitions out there, there are some other potential CO2 opportunities out there, some of which we're working on. So there's a lot of opportunities and we'll continue to look at them, but again, if you put yourself in our shoes, as good as this story is and as positive and as many opportunities as we have internally to expand and grow and deploy cash at KMP and therefore generate cash up to KMI, we're certainly not going to do anything foolhardy or stretch to do an acquisition, just to say we've done one.

And just the last question to make sure I understand this. Timing issues lead to both the $3m segment, higher segment profit for retail and also a full $3m of lowered GNA, or was only a portion of the $3m (indiscernible)?

The two were unrelated, but at retail there's $3m of the increase in the first quarter that will come back, that we expect to get back in the fourth quarter of this year. And that was part of our budget all along. We were expecting that. In GNA, yes, we think both at KMI and KMP, that slight excess of GNA and KMP and the slight reduction in GNA at KMI from what we were expecting, are both timing issues.

And that's all factored in. We're comfortable--what we're saying is don't be too much into the GNA improvement, we've assumed that the GNA will just be on budget, not better than budget for the year. We've assumed that it's too early to play with the interest rate assumptions, so we've left that as is. And notwithstanding all of that, which some may view as conservative, but we think is realistic at this point in time; we have still increased our guidance by $0.05 to $0.10.

Great. Thank you.

Scott Soler (ph) of Morgan Stanley. You may ask your question.

Hi Scott, how are you?

Good Rich. How are you doing?

Fine.

Good. Most of my questions have gotten asked, I just want to ask two general questions. First question is, in the last few years are there any conditions that have changed in the industry that have made certain assets good assets versus lesser quality assets, particularly in pipelines, as you all have gone out and looked at different assets in the industry and looked at others looking to purchase assets in the industry?

You know, I think on the natural gas side, as you look at things, I mean the way things are changing, clearly, you know, bottlenecks evolve over time, growth and supply bases can change over time and that can make different pipes more or less attractive depending on those dynamics. You know, those tend to be things that evolve relatively slowly and somewhat predictably. You know, that would be the main thing.

Well, the only other thing I'd add to that, Mike, is the pipeline safety rules have changed over time, which make--and I'm not sure that this changes that much because, I mean, integrity was paramount before and it is now. And so it's not--I don't think it has a significant issue, but it is something that you have to factor in when you look at a pipeline is--even if you think it's in good shape and it's in the condition that you want it, we would have greater expense just because the changes in the integrity rules.

I think we've emphasized this so many times, Scott, that we buy pipelines and all assets based on distributable cash flow, not EBITDA, so I know the fashionable thing and the easy thing to determine is you just say, "Well don't (indiscernible) EBITDAs X and Joe Blow is paying so many times EBITDA." But, again, as we've said before, some pipelines have a very strong EBITDA and relatively small sustaining cap ex, therefore a very strong distributable cash flow, some pipelines have what looks like good EBITDA, but have a lot of distributable cash flow--I mean a lot of sustaining cap ex for some of the reasons Park's talking about. Now coming back to Mike's bottleneck point, you know, the classic example of that is Trans Colorado. And Trans Colorado was not a good investment, I've said I would never have done that, had I been running the company at the time, because we didn't have any throughput agreements. Now as it turns out, we've had, for a whole variety of factors, some geological, some the fact that environmental issues elsewhere in the Rockies have led to more drilling in the Piceance Basin and elsewhere in western Colorado, so you've had a dramatic increase in drilling, a lot of gas trapped there that needs to get out, hence the basis differential has been volatile and for the most part pretty strong, so that's why we got all the capacities subscribed now. So that's becoming, I think, a very strong investment for us and one that we'll probably be able to expand, as will I think we and others be able to expand out of Wyoming because of these bottlenecks. So we have--we need natural gas in this country desperately, from any place in the lower 48 and the pipelines have got to be able to get that out and get it to market and that's why I think it would be very shortsighted on behalf of any regulatory agency or any of our superbly intelligent politicians to think that they should do anything that would restrict the predictability of pipeline returns on equity investments because, believe me fellas, we need all the pipeline investment we can get in this country if we're really going to match supply with demand.

And my second question, Rich, is you all have pretty decent capacity if you all were going to do an asset acquisition already and then just probably need some small equity issuance, but in terms of the equity issuance at KMP, would you all consider doing another I units offering, or when you're looking at your menu of what you can do in equity right now, what would probably be most likely if you were to do so?

I think it would just depend on where the units were trading, where KMP's trading versus KMR at the time you did it and what the market looked like. We clearly have access in either currency if we wanted to use it.

Okay. Well, thanks.

Thanks Scott.

Rebecca Followill (ph) of Howard Weil. You may ask your question.

Hi Rebecca, how are you?

Good, thank you. Three questions for you, I'll make them quick because it's almost good evening instead of good afternoon. On retail I understand that the $3m was due to timing, but you still--absent that, it's still 15% POP in the earnings for the quarter. Can you give us a little more color on what you're talking about on the margins expanding, et cetera? Second is, on KMR units, how much have you bought back on that so far after you announced the possibility of buying it back in January? And then third, on the KMI buy-back you mentioned $2m in the first quarter, what is the authorization level on buy-backs? Thank you very much.

Okay, first on the retail, the--as Park said, about $3m of it was timing. The rest was we had lower costs, we had put into effect this remote system where we expected to spend about--a little over $4m on it, went into play about this time last year, we expected to get about $1.3m, $1.4m a year, we're getting a little bit better than that and we've improved that since last year. We got a little higher margins in our unregulated businesses, that's our choice gas system-wide sales. We got good success with our winter hedging program that is we hedged it to take any risk out, and then we did have some customer growth in Colorado. So, all of those things together, and none of them was particularly significant, but altogether they resulted in a little over $3m in improvement first quarter of '03 compared to '02. The other $3m we simply put better systems into play in retail today, so we can, on a quarterly by quarterly basis, close the billing books a little better than we could up until we got that system into play. So, as a practical matter, because we do so much business in the first quarter, that's really (indiscernible) to switch, we'll do more in the first quarter, less in the fourth quarter. So that's really it on retail. On the KMR buy-back part--

Yeah, the KMR repurchases were relatively insignificant, less than $500,000.

And we continue to look at that and may do more. And then on KMI--.

The KMI, the authorization is for $450m of total share repurchase, to date we've done about $415m. That was $415m is what we've done, $450m is the authorization.

Over the last year and a quarter, I guess. Or thereabouts.

Right.

And so obviously, as time goes on, the board is fully onboard with what we're doing and obviously to the extent that we exhaust that $450 limit, we will go back to the board for more and I believe they would approve it. And I think that answers your questions.

That's great. Thank you very much.

Thank you.

Yves Siegel (ph)of Wachovia. You may ask your question.

Hi Yves, how you doing?

I'm fine, thank you. I've got three quick ones also. The first is just conceptually, you spoke about storage assets becoming more important, you also spoke about perhaps small independent or LDCs getting together to help out in terms of taking up some pipeline capacity. What's your thought process on marketing today, and it goes back to the part of the question also in terms of how the industry may have changed. And I'm thinking primarily just physical deliveries the good old fashioned ways?

Ya, one thing we probably should have said, that is a very good question Yves, one other way of course that interstate particularly, the interstate market natural gas size change is that the marketers who were the great aggregators have for the most part no longer players. And I said before the real issue becomes who steps in and does that? because there need to be some aggregation and I think you will see the LDCs do this, to a certain extent you might have some major producers do it. As you know BP has taken significant capacity on our Texas central states (ph)and they are doing some aggregation, and they now have a billion a day capacity as you know on our Texas central States (ph). So I think you will see the strong producers perhaps step in and do some of that. We the pipeline can not do it without crating affiliate issues again. So I don’t think the pipelines for the most part will be the ones to step in. I think you will have some LDCs step in, now if they don’t, if you don’t have this aggregation than what is going to happen is I think you probably are going to see probably duplication in a sense that LDCs and other end users to protect themselves in a volatile market, are simply—if they can’t depend on the old marketers to be there to produce that 100 million a day of swing capacity in Chicago on a cold day, than those LDCs that were contracting for that capacity will have to step up and do it themselves. None of them want to their commission at the end of the winter season, well we had to cut off schools and shopping centers because we didn’t bother to replace the capacity that previously Enron and DinerG (ph)and others were providing for us, but we new they weren’t any more, but we weren’t doing anything about it. So people will step in to fill this void. I think this particular summer will be challenging because of the confluence of factors that I mentioned earlier. In the long run there is a vacuum here and the vacuum will be filled. But that is a very big challenge, and clearly fiscal deliveries become more important, security supply become more important and de bottlenecking becomes more important. You have to get that gas into the market area, and just having the capacity way up stream the inability to get it past the bottleneck on a cold day is just not going to hack it.

Ok Great. The other two ones are quickly in terms of looking at the potential pipeline acquisitions. Is the regulatory environment a critical issue. i.e. if a pipeline is on across the service does that present a major problem in being able to acquire?

I’ll say the regulatory regime of a particular pipeline makes a difference. The top end of the piping order for us is a pipeline that does not have to go back for a rate case that has already settled its issued with its customer, and where if we can save money we can keep that for our share holders versus have to troopup for every three years. The trade for that is that if they can't go back for a rate case, the customers benefit too because they're not subject if things go the other way. So that's a plus for us, and we look very carefully at the regulatory issues. If we know, for example, that pipeline has a rate case in a couple of years, and that they've had a lot of overhead, they've been from a prior high-spending parent that has things like jet airplanes and sporting tickets that we don't have. We don't have anything to allocate, because we don't do it. So, that's going to be less attractive to us, you know. So, we look at all of that. I mean it's pretty complicated, and a lot more complicated, I think, than just looking at, well, what's EBITDA for the last 12 months?

And then thirdly, Rich, if you could, could you explain what happened on the deliveries on the CO2? Why that was down, and is that something we have to be concerned about going forward?

No, I don't think so. Actually, I'll give you even more numbers. You don't know, I kind of like numbers. The [Sack Rock] notwithstanding, all of the additional volumes we produced, because we did have some days when we shut the compression down that I talked about, and we were installing two batches of compression over the quarter, we actually still had a modest increase. We went from 162 to 168 BCF in what we actually---

One hundred thirty-two.

One hundred thirty-two to 138. Excuse me. Up six, or about 15% or so, at [Sack Rock]. Overall, our volumes, if you take into account the third-party volumes to [Oxy] and others, Chevron are other two big customers, we were up 12%. Exxon-Mobil owns the other. We own 50% of Cortez and 50% of McElmo dome, or roughly 50%. The other major player there that owns a little less than we do is Exxon, the old Mobil operations, and they were down significantly. We don't know why, because that's primarily their own production. We assume they either had a decline or were starting up some new production. But we do have a couple of new floods, third-party floods, coming on. Hobbs, I guess, is the biggest one. They're coming on in the second quarter and beyond. So, we do not think that this 10% downturn in volumes coming across the pipeline system will continue. We expect that to balance back and certainly, part of the help will be, of course, once Centerline comes on, that will be drawing more volumes through those upstream pipelines at Cortez and the rest of the pipelines.

And if I could, just how significant potentially are the acquisition opportunities are other opportunities in CO2 outside of [Sack Rock] that you see out there?

Well, we've looked at a number of things, and obviously what we're looking at--we're not interested in becoming an EMP Company or an oil company. We'd only do something if we found another baby [Sack Rock], or maybe smaller brother [Sack Rock] that we could do. And we have identified a couple, and we are talking to them and they could be, you know, fairly significant. But again, just like buying a pipeline is very complicated, buying a unit that you're going to increase the CO2 floods is also very complicated and the big advantage we have is we know the Permian Basin like the back of our hand, because we're the party that's been supplying CO2 to all these floods. So we know where we think there are opportunities for additional floods and where there aren't. So I think my guess is at some point in time, hopefully sooner not later, we will find a very good flood project to do. But again, it'll be only if it really is a very good project for us.

Thank you very much.

Chip Rooey (ph)of Kremer Rosenthal, you may ask your question.

Hi,Chip, how are you doing?

Hi. Most of them have been answered, just one on the storage. Was there any market impact from selling any natural gas out of storage into the market? You know, storage levels are a little [plungeable] and demand was so strong, you know, up here and in the Midwest this summer. Just curious on that.

No. I think actually, our storage--you know, we're always, as we said, we're always a little low on natural gas, particularly on Northern, and I think it was right on budget, wasn't it Mike? In part four of the quarter, I think. We did not see anything a surprise, and in fact--

There were days when we had to buy.

There were days we actually had to buy just to satisfy the physical demands of the NGPL System. And so to stack the cushion up so we could withdraw more the next day is very, very confusing, particularly toward the end of February and the first week of March. It got really very hairy, both in Texas and in the Midwest. So actually, I don't think we--it'd be unfair to claim that we had any benefit from the weather in terms of selling gas out of cushion. It would have been nice if we could have done it, I guess, but really didn't work out that way. Does that answer your question, Chip?

Sure does. Thank you.

Thank you. Our final question comes from George [Kim] of Searchlight Capital. You may ask your question.

Hi, my question has been answered. Thank you.

Okay, that's it.

All right, Jamie, is that it?

Yes, that's---there are no further questions.

Well, we thank you very much. It's been a long call, and obviously we're delighted with the quarter. Think the best is yet to come, second quarter starting off very strong for us, as you could tell from some of the things we've said, and obviously if you have more detailed questions, Kim or Mike or Park of myself would be happy to talk to you offline. And keep that in that order, would you? Thank you all, and have a good holiday.