金德摩根 (KMI) 2004 Q1 法說會逐字稿

Good afternoon. Welcome to the analysts' conference call. All participants will be in a listen-only mode until the question-and-answer portion, and today's meeting is being recorded. If you have any objections, you may disconnect at this time. I will now turn the meeting over to Mr. Rich Kinder, Chairman and CEO of Kinder Morgan.

Thank you, Josh (ph), and welcome to the Kinder Morgan conference call. As usual today, I will be talking about Kinder Morgan Inc., which is a large midstream energy company. Among its assets, it owns a general partner and about 17 percent of the units of Kinder Morgan Energy Partners, which I will refer to as KMP, and that is America's largest pipeline master limited partnership.

Also as usual, we will be making statement within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. I will give you an overview of the first quarter and cover a few other matters. Mike Morgan will have some brief comments. Park Shaper, our CFO, will go over the details regarding earnings and cash flow at both companies, and then, as always, we will answer any and all questions that you may have.

Let me start by announcing that Mike Morgan has decided to step aside as president of Kinder Morgan, effective with the July '04 Board meeting. He will continue in active involvement with the Companies and as a member of the KMI Board of Directors. As Mike will explain, he's decided to devote the bulk of his time and efforts to the Morgan Family Foundation and the family investment company. But we're delighted that we will still be able to draw on his knowledge and skill as a member of the Board of Directors for many years to come. And I want to thank Mike for everything he has done for Kinder Morgan over the last seven years.

We will certainly miss him once he is no longer with us full-time, post July, but as most of you know, the heart of this Company is in the operating leadership of our business segments and our 5500 plus employees, and I can assure you that we won't miss a beat. Park and I will continue as the Office of the Chairman, and we will continue to be a Company run by shareholders, for shareholders, producing solid and growing earnings and cash flow, and will continue whenever appropriate to distribute that cash flow to our shareholders through dividends and share buybacks.

Now let me talk about the first-quarter results. As Park will explain, we had record earnings at both KMI and KMP, and raised the distribution once again at KMP, this time to 69 cents a quarter or $2.76 per year on an annualized basis. We are on track to meet or exceed our budgeted earnings per share at KMI, and our budgeted distributable cash flow per unit at KMP, both of which we posted on our website at the time of our annual analysts' meeting back in January of this year. These strong results were driven by solid, and in some cases exceptional, performance at all of our business segments, and we believe all of our segments are on track to meet or beat their budget targets for the year 2004.

Now, while we watch the relevant metrics at all of our business units very closely, we pay particularly close attention to three areas. The first is the volume growth in refined products that move on our products pipeline system, especially those on our Pacific system. Let me calibrate that for you a little bit. The national growth in refined products generally runs between 1 and 2 percent per year, year in and year out. As we have shared with you before, we expect about 3 percent volume growth because, for the most part, we have better demographics. As we have said ad nauseam, we serve 8 of the 10 fastest-growing metropolitan areas in America. We then take that 3 percent volume growth plus about 1 percent in tariff growth that we anticipate, and that is how we get to our target of about 4 percent revenue growth on our products pipeline segment at KMP.

So year in and year out, we expect to get about 3 percent volume growth. In the first quarter of '04, we did much better than our long-range forecast, and let me share those numbers with you. Our overall system volumes across our whole products pipeline system increased by 6 percent year-to-year. Gasoline was up 5 percent. Jet fuel up about 8 percent. And let me give you some representative airport numbers there. Las Vegas was up 11 percent. Reagan Airport at Washington was 16 percent. Charlotte was up 13 percent. Orlando was up 7 percent. San Francisco was up 11 percent. Those are all airports that we serve exclusively. So very good growth across the country in jet fuel. On the distillate side, the uptick was almost 7 percent. If you break out Pacific, the growth there was about 5.6 percent, just a little less than the 6 percent average that we had for the whole system. So very strong growth.

Those are numbers that are accurate to the barrel. Obviously, the next number I am giving you is not as accurate. We estimate that the nationwide growth rate for refined products in the first quarter will come in at a little less than 2 percent; 1.8 percent is the latest number we have. Let me emphasize that that is based on estimates for the month of March nationwide; we have not seen exact numbers obviously. But the thrust of this ought to be that our volume growth is about three times the national average, and that is very positive.

I don't want to mislead you to think we're going to average 6 percent for the whole year or that that is a recurring number forever. Again, that is double our year in, year out targets. But very good growth for the first quarter, and I would say that the second quarter is also starting out very positively in terms of refined products volume.

The second metric we watch is in the CO2 segment of KMP, and that is the crude oil production at our SACROC unit in the Permian Basin of West Texas, where we use our CO2 flooding techniques to recover additional barrels of oil from mature fields. To remind you, when we took over this unit in the year 2000, the production was a little over 8000 barrels per day. In 2003, we averaged about 20,000 barrels per day, ending the year at about 23,000 barrels per day. Our budget target for 2004 is to take the average production on a daily basis to about 30,000 barrels. In the first quarter, we averaged about 26,100 barrels per day, right on target and on our budget for 2004. We expect to average 30,000 barrels per day for 2004 and expect that Kinder Morgan CO2 will probably modestly exceed its budget for the year in terms of earnings before DD&A in light of higher crude prices, although I will remind you that that is a positive only as to the 10 percent or so of our production for the year that has not already been hit (ph).

The third metric we watch very closely is at KMI, and that is the percentage of our transportation and storage capacity at NGPL which is contracted for. If we look at the balance of this year and into '05, that is also a pretty positive message, I think. I will remind you that if we have firm commitments on that capacity, we get paid regardless of the amount of natural gas actually shipped on NGPL, and on this metric, I think we're also in very good shape. And let me share some numbers with you. Our storage on NGPL is now fully subscribed until April of '05. On our long haul transportation capacity, we are now at 97 percent subscribed through the third quarter of this year, and 89 percent in the fourth quarter of this year. And we certainly would expect to resubscribe most of what rolls over in the fourth quarter well before that quarter actually occurs.

Looking ahead to 2005, we have less than 10 percent of our capacity on the transportation side coming up for renewal in 2005, versus about one-third in a normal year. So again, the rest of '04 looks very positive in terms of capacity utilization at NGPL, as does '05. I think what this shows is that the our team has done a great job renewing contracts and providing good service to our many customers.

So in sum, all of these three key metrics are very favorable for us at this time, and the combination of those helped lead to the outstanding first quarter that we had. I would mention two other interesting metrics that also drive our results, and both of these are on the liquids terminal side. Obviously, while we make our money there largely through the contracting of facilities, not through the absolute throughput, throughput during the first quarter in our liquids pipeline group was up 9 percent. I think that is another sign of how strong the products volumes are around the country. The second metric on the liquids terminal side is that in the first quarter, we handled about 26 percent of all the imported gasoline volumes in the United States through our New York Harbor facilities.

In other events, we also today expanded our share repurchase program at KMI to $550 million authorization from the previous authority of $500 million. We have repurchased about 455 million shares since the inception of this program in August 2001. This is another signal that we remain committed to returning cash to our shareholders in a tax efficient manner, either through dividends or share repurchases, while maintaining a strong balance sheet. And Park will take you through that, and again will demonstrate to you how strong the cash flow was in the first quarter this year, continuing a trend that we have seen for some extended period of time now.

Finally, before turning this call over to Mike and Park, let me talk briefly about the SFPP rate case -- that's our Pacific products pipeline system. As you know, and as we press released at the time, the Federal Energy Regulatory Commission reached a Phase I decision on March 26th of this year. In that decision, the FERC reviewed a June, 2003 non-binding administrative law judge initial decision, which found evidence of substantial change in economic circumstances to ungrandfather all of SFPP's West line, North line, and Oregon line rates.

The FERC on March 26th reversed the ALJ's decision ungrandfathering the North and Oregon lines, but affirmed the ALJ's decision to ungrandfather the West line rates for certain years. The FERC Phase I order did not establish prospective rates or determine the amount of reparations to be paid. Those issues are pending in the Phase II cost of service portion of the case that is currently before the ALJ.

The Phase II ALJ decision, we don't know when that will come out. We would expect it probably late this quarter or some time in the third quarter of 2004. It too is a non-binding initial decision that will go back to the Commission. The FERC will then review and issue a Phase II decision, which we estimate will be some time in the first half of 2005, and at that point, we will order rate reductions and reparations. Again -- and these are strictly estimates -- we would estimate that the rate reductions would take effect some time in the neighborhood of the second quarter of 2005 and that rate reparations would probably be payable some time in an April, 2006 timeframe.

Now obviously, the Phase I decision itself is likely to be appealed to the U.S. Court of Appeals, and I'm certain that the Phase II decision, when it is finally rendered, will also be on appeal. And while I'm not interested in trying the rate case on this phone call or at any other time, other than before the courts, we believe and our attorneys believe that we have strong grounds for appeal and possible reversal.

The question you're probably wondering is how does this Phase I FERC decision affect our previous guidance, where we have said on these calls and in all our securities filings that on a going-forward basis, we think about a 15 cent per unit reduction distributable cash flow would occur if we were to ultimately, after all appeals, lose Phase II of this case. The short answer is that because the North system and the Oregon line were not ungrandfathered, there is a modest positive effect there. But because we now expect the case to be resolved later than originally planned, we are not changing our 15 cent guidance at this time. And let me explain.

The original 15 cent guidance was based on the impact of two components were we to ultimately lose the case. First, the ongoing cost of financing, approximately $154 million of reparations. Second, the effect of approximately $45 million in prospective rate reductions on an annualized basis. Taken together, these equate to about 15 cents per KMP unit.

The positive effect, as I said, of the favorable decision on the Oregon and North lines is roughly offset by the effect of a later decision than we originally thought. So while postponing an unfavorable decision is positive, the size of the reparations owed continues to grow with the passage of time. Reparations grow due to accumulating interest and the delay in implementing prospective rate reductions. Today, are best guess, as I said --and it is just a guess -- is that prospective rate reductions would take effect in the second quarter of '05. Reparations would be owed sometime in '06. These dates are approximately 15 months later than our original calculations. So a long-winded way of saying that for all these reasons, we decided to stay with our 15 cents guidance in the event that we lose this case.

We remain optimistic that we will do better than that, even if we were to lose Phase II, and we still think we have a very good chance of improving important parts of this decision. I guess I can guarantee you two or three things in regard to this case. Number one, this case will continue to be litigated for a number of years, no matter which side prevails in Phase II. Second, we will plan for the worst case while working for the best. And while a loss of everything that I have sketched out for you is 15 cents would temporarily reduce our growth and distributions to unitholders, it would not cause us to cut our distribution. I would remind you that if you look at '04, we plan to grow our distribution by about 21 cents this year, so 15 cents represents less than one year's growth at KMP.

Finally, as we make additional investments on our Pacific system, part of that 15 cents will be offset obviously by additional earnings as we bring more rate base into play. We're spending a lot of money on that system, and specifically, as you know, we are planning a roughly $200 million expansion of the East line running from El Paso through Tucson into Phoenix. So that's probably more than you wanted to hear on the SFPP rate case, but I thought we would get that out front and perhaps lessen the number of questions that we would go through, although we will be happy answer anything further on it.

So that's an update on where we stand. Again, I would emphasize one of the best quarters we've ever had, record earnings at both companies. Everything seems to be clicking on all cylinders. And with that, I will turn it over to Mike Morgan.

Thanks, Rich. And obviously, as Rich and the press release indicated, today I announced my intention to change my role from President of the three Kinder Morgan companies to a Director of KMI effective the next Board meeting. This was not an easy decision, but I am confident that the change makes the most sense for me and my family. And I wanted to take a couple minutes just to anticipate and answer a few of your questions.

Probably your first question is why am I making the change. The answer is pretty straightforward. It is that I want to spend more of my time leading two different Morgan family institutions, Portcullis Partners, number one, and the Morgan Foundation, number two. Portcullis owns the majority of my family's investments, including a very large investment in Kinder Morgan. With Portcullis, I look forward to the challenge of transforming it from a passive investment portfolio into an active private equity and investment management business.

I also hope to make a very meaningful impact by leading the philanthropic activities of the Morgan Foundation. Philanthropy is something that my family and I care deeply about. I have been very fortunate, in large part due to Kinder Morgan, and I feel a responsibility to try to make a difference. That is why I am making the change.

I think the second question is should this change concern shareholders, and the simple answer is no. While I believe I've made a positive contribution to Kinder Morgan over the last seven years, it is important to remember that we have built a solid foundation for the Company by both acquiring and building fee-based assets that serve strategic markets. For example, I don't believe my change in role will affect the demand for gasoline in Southern California or the demand for natural gas in Chicago. If it does, I will come back, but I will ask Rich for a raise in that event.

Furthermore, the reality is Kinder Morgan has 5600 employees around the country who are focused on maintaining and improving the performance of these assets every day. We have a very deep and talented management team, and we are fortunate to have the best CEO in the industry, hands down. By continuing to serve as an active Board member, I will continue to have input on issues which are important to all shareholders, and put simply, I believe Kinder Morgan has the leadership, the people, and the assets in place to be successful over the long-term.

I want to emphasize that this change should not be viewed as a change in my family's commitment to the Company. When Bill, my dad, announced his retirement 2.5 years ago, he stated his intention that in the aggregate, the Morgan family maintained $100 million position in Kinder Morgan. The family maintains over that amount today, most of it through Portcullis, and my change in role does not change the family's intentions as a major shareholder. Finally, because there is always speculation that changes like this result from some internal conflict or dispute, let me try and set the record straight. First, I have complete confidence in the Company's strategy and senior team. If I didn't, I wouldn't stay on the Board. Second, I have a great relationship with Rich, Park, Joe and the rest of the senior team. I consider them my closest friends and most trusted business colleagues. My biggest regret about this decision is that I'll spend less time with them on a day-to-day basis. I think they feel the same way, but I will let them speak for themselves. It's an open mike, after all.

For Joe Listengart, my transition is very difficult because he now has to take my role as the most rapidly balding member of the senior management team. So I'll leave that with Joe. Finally, let me just add I am not going to disappear. If you are a shareholder or employee who is bothered by this change or who has any question about the company, you can ask me today, you can ask me next quarter, you can ask me at next year's analysts meeting or at any other time.

That's enough on that. Now I'll turn it over to Park to go through the details of what was a very good quarter.

Thanks, Mike. I'm sure most of you are very happy that it's the first quarter, and so I only have a limited amount of time to bore you. I'm going to start with T&T (ph). Hopefully, you all have the press releases in front of you. If you go to the first earnings page, I will start at the bottom. Really second line from the bottom, you will see the declared distribution. The KMP Board today authorized the distribution for the first quarter of 69 cents. That is up from 64 cents a year ago and 68 cents for the fourth quarter of 2003. That is an 8 percent increase in the distribution per unit.

You will see on the line above that that the quick and dirty calculation of distributable cash flow came out to 77 cents. That is up from 71 cents in the quarter a year ago. That's about 9 percent growth. The other thing that I want to point out there is not only is that a coverage ratio of 1.12 times, but that also represents excess coverage of $16 million. Hopefully, many of you remember in our conference in January, we went through our budget. We talked about the fact that we were budgeting for a significant excess of distributable cash flow over the distribution. That excess is $28 million. We have realized $16 million of it in the first quarter.

Continuing up from there, you'll see sustaining capital expenditures, about 11 cents for the quarter, up from about 9 cents a year ago. And again, the total dollars are at the bottom, about $20.2 million, up from a little over $17 million a year ago. That is exactly on track for our annual budget of about $116 million of sustaining capital expenditures in 2004. It does represent less then one quarter pro rata share of that, but that is because due to weather, the first quarter is normally a little bit less than the subsequent quarters.

Jumping a couple lines above the sustaining capital expenditures per unit, you will see the net income per unit of 52 cents. That compares to 50 cents before the change in accounting principle a year ago, or 52 cents after the change in accounting principle a year ago. That is also consistent with our budget of $2.12 of earnings per unit for the year. Once again, I'll say, as we say every quarter, we believe the distribution per unit is a much more relevant metric at KMP than the earnings per unit.

With that one, I go to the second page of the KMP earnings release and walk you through the segments and what has been driving this strong performance. The first segment is products pipelines. Rich talked about the volumes and the tremendous strength that we saw in the first quarter. Just below the middle of the page, you see the actual products pipelines volumes, most of which Rich already discussed. In terms of earnings before DD&A, products pipelines was up about $5.6 million from a year ago. That's about 5 percent growth. With these volumes, we would actually expect a little bit higher growth than that, but offsetting the very strong volumes was a weakness on the North system due to the lack of propane supply on the North system, which is an issue that we believe we will resolve and we won't see in the future

Then also, the settlement of an old Plantation environmental liability that worked against it. But even with those two items, Products was up about 5 percent for the quarter in terms of earnings before DD&A, and was above our budget for the first quarter.

Natural gas pipelines, you'll see about $103 million, up from about $91.5 million in the quarter a year ago. $11.5 million of growth, driven largely by the Texas (ph) intrastates, offset by small declines at Trailblazer, which was expected because of the change in the rate case, and a couple of the other Rocky Mountain assets. But again, natural gas pipeline significantly in excess of where we expected it to be in our budget for the first quarter, and so on track to meet or exceed that budget for the year.

C02, Rich mentioned the volumes. You can see they're down at the bottom of the page. The first one is the C02 delivery volumes. It is up about 79 percent from a year ago. SACROC oil production, Rich talked about -- it is up 54 percent to 26.1 thousand barrels a day, up from 17,000 barrels a day in the quarter a year ago. Yates oil production is down slightly. Remember, this is the first full quarter that we have operated the Yates facility and so the full impacts of the things that we're doing there have not been completely felt yet.

And then note the realized weighted average oil price -- $25, $25.37 this quarter, compared to $24.87 a quarter a year ago. The only thing I want to point out there -- two things actually. One, clearly we're hedging, because current oil prices are significantly in excess of that. Two, we do realize some benefit from the higher oil prices in the volumes that are unhedged. And so jumping back up to the top in the earnings before DD&A, you'll see it's up about $36 million.

A portion of that does come from the acquisition of Yates, which was completed in November of 2003, but then a significant portion comes from the volume growth at SACROC. And then of course we get a little bit of help again from that higher oil price than what we had in the budget. All of that means that C02 was also well ahead of its budget for the first quarter. Now, the total $77.7 million is about 24 percent of our annual budget of $322 million, but again we expect growth throughout the year there, so C02 is on track to realize that budget as well.

On the terminal side, again the liquids in the bulk terminal up about $3.8 million from a year ago, almost exactly one-quarter of its annual budget. It actually is a little bit ahead, a little over $1 million ahead of where we thought it would be for the first quarter in terms of our budget. So very nice performance there, driven largely by our liquid facilities in the Houston and New York Harbor area.

Totaling up the segment earnings before DD&A, you'll see $358 million, up from $301.6 million a year ago. That is almost $57 million of growth in segment earnings before DD&A, or a 19 percent increase, and it is also nicely ahead of where we thought we would be for the first quarter. So again, we are on track to realize our budget.

I normally skip over the next section, which is actually the DD&A by segment, but there is one item that I want to talk about. If you look on the C02 line, you'll see the DNA of about $27.5 million, up from $12.3 million a year ago. A lot of that we expected with the acquisition of Yates, but because we acquired Yates in November, when we were finalizing our budget, we actually are ending up in the actuals for the year with DD&A slightly ahead of our budget. This does not impact earnings before DD&A. This does not impact distributable cash flow. But it does impact earnings.

We expect that to continue, and so what that means is that will have a slightly reducing impact on our earnings for the year. We are not changing our expectations. Clearly, it does not impact our expectation that we will distribute $2.84 per unit this year. It does have an impact on the earnings per unit expectation of $2.12, but again, given how all of the segments are performing, we still expect to hit that target.

With that, I am going to drop below the segment earnings contribution to the G&A line. You'll see it's about $48.3 million for the quarter; it's up from about $36 million from a year ago. That is very significant growth on the G&A line of about $12 million. We have a benefits increase this year that will actually increase our G&A above our budget by approximately 6 or $7 million. So again, our G&A for the full year will be ahead of our budget. It won't be ahead by this full $12.2 million. A significant portion of that $12.2 million is just timing between the quarters relative to 2004 and 2003. But again we do expect the G&A will be up for the year.

The net debt costs you'll see are up about $2.3 million. This is exactly consistent with our budget. What we have is slightly higher debt. It is actually up by about $500 million. That is a function of the expansion projects and the acquisitions that happened from the end of March of 2003 to the end of March 2004, offset by a reduction in the average rate.

Minority interest is essentially just the general partner minority interest and that is just a function of earnings. The cumulative effect of change in accounting principle was all last year, just implementing the asset retirement obligation change. What that leads you to is net income of $192 million, compared to a little over $170 million a year ago, growth in net income of $21 million or 12.5 percent, and slightly ahead of our budget for the first quarter. So we are well on track to realize our annual budget net income of $800 million.

With that, let me jump back to the first page, and I will go down the income statement. Revenues you'll see are slightly up. Really what you have here are a couple of offsetting factors. The intrastates, which are impacted by gas prices, are down a touch from the quarter a year ago. CO2 revenue with the acquisition of Yates is up. Operating expenses you'll see are also down. That is largely a function of gas prices. DD&A we talked about. That is largely the acquisition of Yates. G&A we discussed. TOTI is up, and that's a function of Yates and property tax rates, which are increasing and which we did have built into our budget.

You get an operating income number of $225 million, up from $195 million, so growth of $30 million in operating income, 15 percent increase. Earnings from equity investments are down. There are couple of things driving this. One is the Plantation issue that I already discussed. The second is that in 2004, the MKM partnership no longer exists. So that amount was in the 2003 numbers, but that was dissolved last June, and so it is not in the 2004 numbers. Amortization of excess cost of equity investments, unchanged. Interest expense we have discussed. Other, essentially unchanged. Minority interest we have discussed. Again, it takes you down, after the change in accounting principle, the net income of 191.7 compared to 170 million a year ago.

With that, let me go to the balance sheet, which again is the final page in the KMP earnings release. I'll walk through this quickly. You'll see cash and cash equivalents are largely unchanged. Other current assets, down just slightly. TP&E (ph) is up as a function of the acquisitions; we did acquire Exxon Mobil terminals this quarter for $50 million; the expansion projects in the first quarter, which totaled about $130 million; and then of course sustaining CAPEX, which was $20 million, also increases TP&E, and then the DD&A reduces it.

Investments, flat. The deferred charges and other assets are up slightly. That is really just the mark to market of our swaps and our other hedges. On the liabilities and capital side, notes payable and current maturities of long-term debt, I will talk about that when I total up the debt down below. Other current liabilities, essentially flat. Debt, again, I will discuss in a minute. Market value of interest rate swaps just moved, with fluctuations in the forward curve for interest rates. The other line is largely a function of the mark to market of hedges. Minority interest unchanged, and partners’ capital is up $187 million.

What that means in terms of debt to cap is that you actually have a reduction in debt from the beginning of the year to $4.15 billion down from about $4.3 billion, and that is largely a function of the equity that was issued in the quarter, and I will go through that in just a minute. Total capitalization up slightly, so you have a reduction in debt to total cap to about 52.6 from 54.7. Again, what has driven the reduction in total debt of about $143 million? Well, the outflows are the acquisitions, again, which was $50 million, and the expansion capital, which was $130 million. So that is the cash out.

Now, the cash coming in to offset that, the equity offering -- we had a units offering in February of $238 million. We had a smaller KMR share offering of $15 million. We had KMR distributions, which represent an equity infusion, of $34 million. We had a source of cash from working capital and other minor items of $19 million. And then as I mentioned before, our distributable cash flow exceeds our distributions by $16 million. Those items total up to $142 million reduction in debt -- or $143 million reduction in debt.

A couple of additional details on the expansion capital projects. The largest investment or expansion CAPEX in the quarter was clearly at CO2 at the SACROC project. That totaled about $76 million. At products, we invested about $23 million on the Concord to Sacramento line and the East line expansion. In the natural gas segment, it was about $11 million of expansion capital. And on the terminals, about $20 million. Again, that totals to the 130. I will remind you our budget for expansion capital for the year is $609 million, and we expect still to spend approximately that amount. That's it for KMP.

What that, why don't I go to KMI. Again hopefully, you have the press release. And if you will go to the first numbers page there -- and I will once again start at the bottom. About three lines up from the bottom, you see diluted earnings per common share about $1.02. That is up from 90 cents from the quarter a year ago, or 13 percent growth in earnings per share. Dividends on the bottom line you'll see are similarly up significantly. This represents dividends paid in the quarter. And of course we did increase our dividends at the last Board meeting, but I just want to point out that that is 3.75 times increase in the dividend.

On the next page, we will see the detail behind the growth at KMI. At the top, you have equity in earnings of KMP, but the place to look at the real impact of KMP -- the place to find the real impact of KMP on KMI is in the second section. It's titled "earnings attributable to investments in KMP." And the last line in that section, "pre-tax KMI earnings from investment in KMP," you'll see $110.5 million, up from $94.7 million in the quarter a year ago, about $16 million increase or almost 17 percent. So again, tremendous growth at KMI from its investment in KMP, and that is slightly ahead of our expectations for where we would be in the first quarter.

Segment earnings, continuing with NGPL, 106.7 million, up from $100 million in '03, 6.7 percent increase. Rich went through the strength that we had in recontracting at NGPL. NGPL continues to perform very well. TransColorado, you will see is actually down for the quarter from the quarter a year ago -- $5.6 million compared to $7.3 million a year ago. That is because we now have fewer contracts which are sensitive to basis differentials at TransColorado than we did a year ago. And a year ago, basis differentials were very wide. So we had a very nice first quarter in 2003; what we have now are very stable earnings.

Retail you'll see is up about $2 million from a year ago, performing very well. We had slight meter growth and then a couple of other items which drove that growth. By the way, TransColorado is consistent with our expectations for the year and will be on budget. Retail as well is slightly ahead of budget at this point in the year, and so we expect that they will be able to meet their budget. One thing you might note is that $33.7 million is about 49 percent of our annual budget. Now clearly in retail we have seasonality, and so that is consistent with our expectations. The second and the third quarters will clearly be lower than the first quarter, although again that is consistent with our budget.

On the power side you'll see growth of about $800,000. That is consistent with our budget. It is largely driven by slightly stronger performance at the Colorado plant. Total segment earnings of $278.5 million, up from $253 million in '03. $25 million of growth or about 10 percent increase, so very strong there. Also slightly ahead of where we expected the segments to be at this point. G&A for KMI, you see the first quarter is up about $6 million. This is largely timing between the quarters of 2004 and 2003. We did budget for an increase in G&A of about $4 million for 2004. We still are consistent with that budget, so we expect that KMI G&A will be on budget for the year.

Interest expense you will see is down significantly, $7.5 million. That is consistent with our budget. Our debt is down by about $300 million from where it was a year ago, and the rate is slightly lower. Now I will remind you here I probably should have done this when we talked about interest expense at KMP, that we do have 50 percent floating at KMI and 50 percent floating at KMP. And in our budget every year we build in an increase in interest rates. What we assume in our budget and we went through this in January is that floating rate interest will be 100 basis points higher in the fourth quarter then it was in the first quarter, and so again our budget has built into it increases in floating-rate debt. We haven't seen any of those increases yet. There certainly have been a lot of noise about interest rates in the last couple weeks and people are concerned that they are going up. Of course the ten-year treasury has gone up but our floating-rate is set against three-month LIBOR for the most part and three-month LIBOR is still about 1.15 percent and has not move much in the last couple of weeks.

Now again we continue to forecast an increase in those floating rates. We just haven't seen it yet. The next line, interest expense, this is really the TRUCs. They've been renamed because of the change in accounting principle. Deferrable interest debentures and they show up on this line in 2004. For the first quarter of 2003 they show up on the line below, which is other, and on the face of the income statement they show up in minority interest. So again its just a function of geography there, but the dollar amounts are the same.

The other component of the other line is the KMR minority interest, which you see identified down below as well. That takes you to income before income taxes, up about 14 percent. Then net income of $127 million compared to $111 a year ago, $16 million increase or about 14 percent growth. With that I will go back to the first page in the income statement. You'll see total revenues are up about 10 percent. That is driven by gas prices. It is also driven a little bit by the consolidation of Triton Power, which happened at the beginning of the year. We don't put a whole lot of relevance in that revenue number. Gas purchases and other costs of sales up slightly. The O&M is up about $6 million. That is also the consolidation of Triton. When we consolidated Triton, and this was because of a change in accounting principle, it did not have any impact on our bottom line, but you see a slight increase in revenues and a slight increase in O&M.

G&A we discussed; depreciation and amortization is essentially flat. And TOTI is up a little bit. Again that is because property tax rates are slightly up. Operating income you'll see is flat but what I do want to point out as I do every quarter is that operating income is before KMI's interest in KMP. That comes on the next line and you will see that line is up $17 million. We don't think operating income is an overly relevant measure at KMI. We would encourage you instead to look at the segment earnings, which are on the next page and which we just discussed.

The equity and earnings of other equity investments largely power plants and horizon up slightly. Interest expense we discussed. Here again is the interest expense on the trust and then the minority interest line you can see is down, and that is because the trucks show up on that line in 2003. And the other net is di minimus. Again takes you down to net income of $127 million, up from 111 for diluted earnings per share of 1.02 up from 90 cents.

With that, I will go to the balance sheet, which is the last page there. Here we summarize our cash flow at KMI. Starting with the balance sheet, the assets are largely unchanged, still a little bit over $10 billion. Liabilities and stockholders equity, notes payable and current maturities and long-term debt; that's gone up by $500 million because of a March, 2005 maturity and has been moved from long-term debt into current maturities. And of course, we have adequate capacity under our commercial paper programs to pay down all of that. I'm not saying that is what we will do, but if we needed to, then we could.

Other current liabilities down just slightly. Other liabilities and deferred credits are essentially flat. Long-term debt you see the reduction of moving the $500 million up and I will talk a little bit more about the debt in a minute. The deferrable interest debentures are the trucks and the value of the interest rate swaps again just moved with movements in the forward interest rate curve.

Minority interest unchanged. Stockholders equity is up about $70 million. That takes you down to the total debt line, which is down about $35 million from the beginning of the year. Remember that our budget calls for a reduction in debt of about $100 million for the year, and we still expect that we will realize that and clearly we are on track to do that. It also takes the ratio of debt to cap down to 42 percent from about 43 percent.

Dropping down to look at the back of the envelope cash flow calculation, you'll see that we generated about $224 million of cash in the first quarter of '04. That is completely consistent with our budget of a little under $580 million for the year. What happened to the $224 million, $35 million went to debt reduction. About $9 million went to expansion capital. Our total expansion budget for the year is $60 million. Clearly it's a little bit heavier weighted towards the last three quarters than the first quarter.

Dividends paid during the quarter were $70 million. Share repurchase was just $2 million. We did have to post margin on our oil hedges that totaled about $48 million. This margin posting does occur at KMI because we do all of our hedging at KMI. What I will emphasize, though, is that that margin posting earns interest. And so while it does represent a cash outflow -- and this really -- again, $48 million went out in the quarter, and many of you probably know that oil prices went up significantly from the beginning of the quarter to the end of the quarter -- and even with that significant move, again we only had to post $48 million worth of margin. We do get paid interest on that, and so while it does -- we would have otherwise used that $48 million to reduce debt, and so our debt reduction is slightly lower. But again, we are receiving interest while that margin is posted, and we expect that that margin will come back to us throughout the year. So that was another $48 million.

Use of cash. We had a use of cash for working capital and assorted other minor items of about $44 million. That was largely AP, a reduction in Accounts Payable, and a reduction in accrued interest. We have large interest payments at the end of the first quarter and the end of the third quarter, so that balance always moves down in the first quarter and the third quarter. That totals to essentially the $224 million of cash that we generated in the quarter. And that is it, and I'll hand it back over to Rich.

Okay, and with that we will take any and all questions that you may have. Josh, if you want to come back on, we will start the questions.

Thank you. (OPERATOR INSTRUCTIONS) David Fleischer of Kayne Anderson.

Threw me for a loop there -- Kayne Anderson. But now I remember.

Thanks for remembering, Rich. Notwithstanding my comments earlier, I would like to ask a similar question and then maybe a couple of you, Rich. Maybe the first question for Mike is is a lack of visible succession capability to CEO a contributing factor to him in his decision? And secondly, Rich, are there other management changes to follow in the near-term future? And will you, Rich Kinder, be CEO still in five years or is it likely to be someone else?

I'll let Mike start with that.

As I said in my comments, I do think we have the best CEO in the industry, and it was not a lack of visible CEO succession that drove this decision. It was the other factors I talked about. So I think that's the simple answer. I am doing this for a unique set of reasons, and really it's driven by the responsibilities I have to my family.

To answer your other question, David, we don't anticipate other changes at this time. Clearly, we will be looking at the overall management. Park and I will be Office of the Chairman and we will look as we go down the road as to other changes we may make, but we don't anticipate any other at this time. Again, I would emphasize, as I have so many times, and many of you on this call have attended our annual analysts' meetings, that we have a very good bench, very good strength across the system, and very strong heads of our business segments. And those are the people that we rely on to drive the operating results day in and day out, and I think we have a team that is well-suited for the future.

I'm sorry Mike is leaving, but we've got a strong management team and we will be just fine, and when the time comes, we have a succession plan, which I talked to the Board about. If I get hit by the beer truck, we have a succession plan in place. And when I ride off into the sunset, I guarantee you that we will have a very good team in place. As I said before, if I get hit by the beer truck, the stock would fall probably, and that's the time to buy.

Do you intend to outlast Mr. Greenberg at AIG?

Probably not that long. He is still skiing at 78 or whatever, I think.

Okay, thank you.

Sam Brothwell with Merrill Lynch.

Good afternoon. Mike, will miss you.

The feeling's mutual. I'm not going to be gone, though. I'm not dying (multiple speakers).

I had to jump off for a second. If you covered this, forgive me. But can you give us an update on the drop-down of TransColorado?

Yes, we are still looking at that and nothing to report today. It's kind of a work in progress. But I will tell you on TransColorado we have now gotten all the approvals from the FERC and all the environmental approvals we need. We are building the additional compressor stations, and we expect to meet our target of having the expansion online by August 1. So everything is on track and we are still working on the drop-down. We don't have any announcement on that today.

Okay. And just at KMP, Park, you alluded to some of the DD&A and the G&A cost pressures, and you indicated you are still comfortable. And I know earnings aren't the key metric here, but some of these are cash items. Can you maybe elaborate a little bit on how you expect to make some of those up?

It is really the strength of the segments. I think as we went through there, you saw how each one of the segments is performing, and so that is what gives us comfort that we will still hit our targets for the year.

Okay, thanks.

Yves Siegel with Wachovia Securities.

Mike, best of luck to you. I commend your decision there. I have a couple of questions. Rich, number one, is the increase in steel prices having any impact on the expansion projects going forward? And number two, can you describe are there any cost pressures that you are seeing other than what, Park, you described earlier in terms of benefits?

Let me start with the steel issue. Certainly, steel prices are higher, although in the last couple of weeks we have seen as bit of leveling off in steel prices, but they are certainly higher. And when we are planning expansions, we have either had to put a steel price escalator into it or lock in steel prices in advance, one or the other. We are not exposing ourselves to the risk on steel prices. Now we do believe that this is a temporary phenomenon. We think steel prices will come back down. Whether they will go back down to $600 a ton, I don't know. But we don't expect them to stay in the $1100 to $1200 a ton area. But we have, in the projects we're working on, made certain that we are not exposed to that risk.

With regard to other cost pressure, clearly benefits and insurance are the two things that we continuously look at and continuously experience increases in. But we think they are all manageable, and they are all in the numbers. And actually, as Park said, we had some timing differences on KMP that really the earnings and cash for the first quarter were even stronger because we did make significant accruals for benefits, particularly for bonuses in the first quarter, that some of that is timing.

Just to clarify that, while we talked about the fact the G&A will be above our budget for 2004, part of the reason why we call it timing is that that won't happen in 2005, meaning that same expense won't be there in 2005. And so it is just something that we have to get past this year.

If I could just push it one more question. What are your thoughts in terms of possibly trying to settle the rate case?

I think I would not look on that as a likely event. I think there is still an awful lot -- this has probably got years to go before we rest, to paraphrase Robert Frost. But I don't think settlement is likely. I think we are too far apart. We've talked in the past and never been able to get close. So I think we will continue to see what happens, and again, there are an awful lot of shoes still to drop here. Again, as I tried to explain, probably too laboriously, how many appeals and cross-appeals have to happen before this thing is finally resolved.

All right, thank you.

Jay Yannello with UBS.

Mike, best of luck. I'm jealous a little, but best of luck. Question is with the run-up in oil prices, Rich, is there a new slate of hedges you might have out for '09 that you want to talk about, or did you not do anything material?

We continue to layer on hedges, and so, especially at these prices -- the 2005 strip is above $31 right now. That is a very attractive price for an organization that builds all of its models and assesses all of its expansion opportunities at $20 a barrel. So we are continuing to lock in prices, and as you alluded to, we have locked in all the way out to '09.

I guess I would just add that all the numbers -- and we just review all this with the Board again today on our CO2 operations -- all the numbers we ran that gave us these very, very high returns on our CO2 business at SACROC were run based on $20 oil. And in point of fact -- and these are kind of ballparking -- you saw a lot of these in Tim Bradley's presentation at the analysts' meeting. But our cash costs of producing a barrel of oil at SACROC without the CO2 is about $6. With the CO2, it's about $9.

So as you can see, at $20, it is a very profitable. At 25, 30, and $35, it is a real barn burner. And we continue to do our evaluation on a going-forward basis out there based on $20 oil, hedged -- whatever hedges are in place obviously; and then after that we use $20 oil out in the future. So we think we're being very conservative on that, and it just proves again what a dynamite project that SACROC field and now Yates is going to be for us.

Can we get the specifics at a later date, maybe in the Q, on the new hedges?

I don't think there will be any specifics on the hedges that were layered on in the first quarter, but in general, what we talk about holds, which is when you look out zero to 12 months, we are around 85 to 90 percent hedged. 12 to 18 or 24 months, we are 70 to 75 percent hedged. And we are 50 percent hedged for a couple years after that. Again, we have hedges going all the way out to '09. And those are rolling numbers. What that means, in order to maintain that is exactly as you alluded to -- we have to continue to put on hedges. Now, of course when prices are as high as they have been the last couple months, then we will tend to put on a little bit more than we would otherwise.

But we stay within those guidelines.

Park, I know this has been asked hundreds of times and I know the answer has always been no, and I know you are well in the money still and if any of us had our finger on the trigger, we would have pulled it well too early. But if for any reason the outlook is actually physically experienced an upward move in interest rates steadily, let's say, for 12 and then 18 months, would you consider a change in the postures to the 50-50? I know nothing is in stone, but are you fairly confident at this point that you may not revise that?

You are accurate. We consider it all the time, but we do believe that over the long run, floating rates are cheaper than fixed rates, and so we have no expectation that we will change our policy at this point.

Okay, thank you.

David Maccarone with Goldman Sachs.

Congratulations, Mike. Best of luck. Park, I wanted to ask if you could just update us on what your expectations for terms of size and potential timing on the KMP equity offering looking out the rest of this year, just based on (technical difficulty) presence, growth investments netting for KMR and so forth?

Yes, in our budget we had $300 million of equity issued during the year. We had about $200 million of that in the first half and about $100 million in the second half. In February, we issued net about $240 million, so we've done almost all of it already. I would expect that we will have another equity offering at some point in the second half of the year, but we don't really have any more specifics than that. I would expect that it will probably be for $100 million or more, and so we would probably end up doing a little bit more than our budget.

Okay. And then separately, I was wondering if you could discuss your progress towards compliance of Sarbanes-Oxley section 404, the internal controls, as it relates to affiliate issues and maybe the corporate entities. And be as specific as you can, maybe, in terms of who is in charge, how much time this is going to take and how much money, how much expense might occur as a result.

Certainly very topical. We have a concerted effort underway to comply. Clearly, it has been going on for many months. We think we are on track to comply. It is requiring a fair amount of internal time and effort. People are doing it on top of their normal jobs, and they are certainly to be commended for that. It is not a fun task, but the documentation is underway and will be completed. And it will lead to PWC conducting their test and I am sure attesting that we are in compliance.

Deloitte is assisting us with that effort, and has been very valuable in that effort. The total cost we're factored into our budget now -- it is not completely defined because nobody has been through this before, and so I can't assure you that it will come in exactly where it was on the budget. I can assure you that if it comes in over our budget, it will not be significant.

I would just add to that that we are getting weekly updates. I think we have 32 different working groups or something close to that number, and they have definitive timelines that they have to meet and we are tracking their progress as we go.

It's a good point, Mike. And it's similar to the way that we do things and that we have shown many of you in the past. We have weekly reports where we're tracking this, and it has a stoplight on it, and we're holding people accountable to getting it done. And Garner Dodson (ph) is our man in charge and has been very focused on getting this done.

We get reports each Monday, and again. we have something like 32 separate areas, and each one of them is assigned -- red, yellow, green. We now have -- obviously all of them started out red. All of them have at least moved into the yellow now, and we have probably one-third or so that have already moved into the green area, and that number is increasing every week. Obviously, this is a laborious process, but it is what it is, and we're fully committed and fully on track to meet all the requirements.

Okay, thanks for the thorough answer.

Rebecca Followill with Howard Weil.

A couple questions for you. Could you address on the CPUC proceeding where that stands? I have been waiting for some time for the outcome of that. I'm just looking at --

We have nothing new on the CPUC proceeding. It has been argued and it's before the Administrative Law Judge. Any decision rendered would then go to the full Commission. We do not anticipate any material impact from the CPUC.

There is a piece of it that will likely come out before the main case, and that may come out sometime in the next few months. But we don't really have any better expectation than that.

Okay. And do you have net production numbers on oil production for the Yates fields?

By net, you mean our share?

Your share and after royalties.

It's essentially 42 percent of total that you have on the page, and you will see that the exact number for Yates was 17.8.

(multiple speakers) 42 percent of that number then?

Yes, that's right.

That's the net to our share after royalty -- that's correct.

The last question, can you talk a little bit more because I'm confused on this, on the hedges. You are doing your oil hedges at the KMI level for KMP. can you clarify how that works?

We do all of our hedges for both entities at KMI. And essentially, KMP stands behind the hedges that are for KMP. But we don't do much of this. We have a two-person hedging group, and so it doesn't make sense for us to try to split it up. But yes, what that means is that KMI post-margins -- now if KMI did not get paid back interest on that margin, then KMP would pay KMI the interest on it. But our counterparties pay us interest on any margin that we post. And so KMI is kept whole, and we always ensure that KMI is kept full on anything that it is doing for KMP.

Does that answer your question or something else on that?

That's great. Thank you very much.

Andrew Arbenz with Morgan Stanley Investment.

Just had a quick question near the end of KMI release related to simplified calculation of cash flow per your press release. That number is 224 million, up strongly from 198 the year before. Then when you drop down to net cash flows provided by continuing operations, you are at 167 million, which is pretty close to flat with last year. And I guess the other adjustment is the main item. And I'm just wondering, with the dynamics of the business being very strong, why would cash flows from continuing operations be kind of flat?

When I went this part -- when I went through the uses of that $224 million in cash, I talked about a $44 million use of cash for working capital and other assorted items. And I talked about the fact that -- I didn't actually give you these numbers, but I'm happy to -- $25 million of that was related to a reduction in accounts payable and $35 million of that was related to a reduction in accrued interest. Those are the biggest pieces there. You'll see those two items total up to $60 million.

There are some other ins and out that will be laid out completely on the detailed cash-flow statement. But the real key is we expect over time that our working capital will be flat. We do have fluctuations during quarters, like you're seeing here, but what we do in our simplified calculation is ignore those fluctuations in working capital.

Thank you.

If you look back over the last two or three years, you will find that you'll have pluses and minuses and it will vary from Company to Company, but generally runs to be about flat.

I appreciate it. Thank you.

David Labonte with Smith Barney.

Mike, best of luck to you. Park, could you please tell us what the financial benefit was from your unhedged position in the recent quarter on the SACROC production?

I don't have that exact number, but you can assume roughly that 10 percent of our volumes were unhedged. And our hedged price, we went through in January and we laid that out, and if I'm remembering correctly, it was around $24.50, somewhere around there. And you can see that our weighted average price ended up a little over 25. And so I think if you take those numbers, you'll be able to back into what the benefit was.

Of course, you're still running at what -- 80 percent hedged for the remainder of 2004? Is that the right way to look at it?

It is a little bit above that. And it does depend on whether you look at barrels including NGL barrel equivalents or if you just look at oil production. And the reason that that differs is we don't hedge as high a percentage of our NGLs because the NGL production is not stable as the oil production. So the oil production we will hedge in the near months in the 85 to 90 percent, sometimes even above 90 percent range. The NGL production we only hedge at about the 50 percent level, but many of the numbers that we talk about -- and I do think specifically the numbers that we went over in January -- included the NGL barrels. And that gets you to a ratio that is more in the 80 to 85 percent range.

Last question, Park. The settlement, I guess, related to Plantation. Can you talk a little bit about that and what the financial impact was?

It was only a couple million dollars. Again, this is a 30-year-old environmental issue that I neglected to say, I think, but it does say in the press release that we do expect to recover from insurance.

Okay. Thanks a lot.

Dan Jenkins (ph) with State of Wisconsin Investments.

I just wanted to follow up when you talked about your budget as far as the floating-rate debt. Did you say you budgeted 100 basis point increase? Is that what you said?

Yes, that is correct. And really what it is is that we budget for the fourth quarter floating-rate debt to cost 100 basis points more than the first quarter did.

Okay, so it essentially would then average up over the year, so in a sense it would be like 50 for the year. Would that be a good way to look at it?

That's approximately right. Truthfully, the way that we do it is we take a three-month LIBOR, which sets our floating-rate debt, and we add 33 basis points a quarter. And by the time you get to the fourth quarter, then you are 100 basis points higher than your first quarter.

Could you let us know what that amount is? Say it went up 200 instead of 100, do you know what (multiple speakers)?

It's pretty easy to calculate. At KMI, we have about $3 billion of debt outstanding, and so that means about 1.5 billion is floating. Every 100 basis point increase -- and this would be a full year increase of 100 basis points above our budget -- would cost us $15 million. Similarly at KMP, you have a little bit over $4 billion of debt outstanding, so we have about $2 billion that's floating, 100 basis points over our budget would cost us about $20 million.

Again, those would be -- you would have to have a spike of 100 basis points on January 1 and stay above our budget, including the increases over the year, for the whole year. For example, this year for the first quarter, we actually have seen no increase -- in fact, a slight decrease in what our budget number was for the first quarter.

Our budget for LIBOR for the first quarter was 1.17 percent. It is currently at 1.15. For a lot of the first quarter, it's more around 1.13.

Okay, I understand that. I just wanted to get a sense of the magnitude.

(OPERATOR INSTRUCTIONS)

You don't show anybody else waiting?

Not at the moment.

Thank you all their very much for participating. Again, we're delighted with the quarter we had, and if any of you have any follow-up questions, please feel free to call me or Mike or Park or Kim. Thank you very much.