金德摩根 (KMI) 2004 Q4 法說會逐字稿

Thank you all for holding. At this time, I'd like to inform participants that their lines will be on a listen-only mode for the duration of the call, until the question-and-answer session (technical difficulty) being recorded. If you have objections, you may disconnect at this time.

I'd now like to turn the call over to Mr. Rich Kinder. Sir, you may begin.

Thanks to all of you for joining for joining in for our quarterly Kinder Morgan conference call. As usual, we'll be talking about Kinder Morgan, Inc., which (technical difficulty) refer to under its New York Stock Exchange symbol as KMI. KMI is one of the largest midstream energy companies in America, and among its other assets, it owns the general partner interest in Kinder Morgan Energy Partners, one of the largest MLPs in America, which I will refer to by its New York Stock Exchange symbol, KMP. As usual, I'll give an overview of our operations and then turn the podium over to Park Shaper, our Chief Financial Officer, who will give the financial details, and then we'll answer any and all questions that any of you may have.

Both KMI and KMP had record earnings for 2004. Reflecting that performance and our positive outlook for 2005 and beyond, we increased our dividend at KMI from 56.25 cents per quarter or $2.25 annualized to 70 cents per quarter or $2.80 annualized. That's an increase of 24 percent. I might also mention that as recently as the first quarter of 2002, we were paying $0.20 a share. In comparison to that level, we've increased our dividend by 14 times in the last 2.5 years.

As Park will detail, our 2004 free cash flow at KMI was very strong and well above our budget target. Frankly, we think we've been conservative in the amount of this KMI dividend increase, and believe that in the future we'll be able to make significant additional increases in the dividend on a going-forward basis. Let me just kind of give you an idea how conservative -- and we will be sharing more of these details with you at the analyst meeting next week here in Houston -- but we expect free cash flow in 2005 of $623 million at KMI. We expect expansion CapEx of only 38 million, leaving $585 million available for dividends, debt repayment or buyback of stock. The dividends, at $2.80 for a full year, would be $343 million, leaving $242 million excess cash flow available for general purposes, including stock buyback or any debt paydown.

I might also mention, as Park will take you through, that we paid down $100 million more in debt than our '04 budget called for. And as we go forward in '05, we expect to hold that same level of debt and do not expect to see it creep up again. So you'll see KMI's balance sheet is very, very strong at this point

The other piece of information at KMI, if you looked at our earnings release, we've also raised our budgeted earnings number for 2005 to $4.22 per share. That's an 11 percent increase over the $3.81 in 2004. So all in all, we think we are poised for a very positive year in 2005 at KMI.

At KMP, we've raised the quarterly distribution per unit to 74 cents. That's $2.96 annualized. That's a 9 percent over the fourth quarter of '03 distribution, and it brings the total distributions declared for 2004 to $2.87. That's up 9 percent from the total '03 distributions of $2.63 per unit, and again, we like to compare ourselves to the budget that we post at the beginning of each year on our website. This $2.87 in distribution compares to the $2.84 distribution per unit called for in our 2004 annual budget.

I might also mention that our total distributable cash flow per unit at KMP grew significantly faster than 9 percent. In fact, it grew at about 15 percent from $2.69 in 2003 to $3.10 in 2004, as the excess coverage was $46 million in 2004 versus $28 million in our budget versus $15 million in 2003. So again, as we've said ad nauseum at Kinder Morgan, cash is king. And once again, both KMP and KMI had enormous cash-generating years, and we look for that to continue in 2005. For example, our budget target for 2005 calls for distributions per unit of $3.13, again a 9 percent increase over the $2.87 that we distributed for calendar year 2004.

So that's an overview of both companies' cash and earnings performance. Now let me talk about some of the factors driving our strong performance. At KMI, earnings per share was up 16 percent for the fourth quarter and 14 percent for the year. Now, Park will discuss a number of nonrecurring special items, overwhelmingly non-cash, which netted the positive earnings. We are not claiming any credit for those. The numbers we are basing off, all these numbers I've talked about, come right off the front page of the KMI earnings release -- talking about $1.03 earnings per share for the fourth quarter versus 89 cents a year ago, $3.81 for the year versus $3.33 a year ago. As Park will tell you, both of those handily exceeded our budget numbers for the quarter and the year 2004.

Driving the performance at KMI, of course, first of all, was our ownership of the KMP general partner and the limited partner units. That was the biggest single contributor to growth, and that exceeded our 2004 budget target by a fair margin. Park will talk about that.

Looking at the rest of KMI's segments, Natural Gas Pipeline of America also had above budget growth. And there, that performance was driven by what I think is really very successful recontracting of both transportation and storage contracts, also by expanding margins, particularly on capacity originating in the midcontinent area. About 90 percent of Natural (technical difficulty) long-term transportation capacity is sold out through all of 2005, and our storage capacity is fully contracted through April of 2006. So I think we are in very good shape with regard to rollover of contracts on Natural. We are continuing to expand our system whenever the opportunities arise. I would just mention two examples of that. One is our new storage capacity at Sayre Field in Oklahoma. The second is the expansion of our mainline cross-oil capacity across Oklahoma and Texas. Both of these will be in service in the spring of 2006. Altogether, we're spending about $56 million on those two projects. In the future, we are looking very hard at additional storage potential projects. We are also, in the longer term, looking for LNG opportunities to put together header systems, and we will be talking a good deal more about that at our analyst conference next week here in Houston. But NGPL, I think, on very firm footing to continue to grow both in 2005 and beyond, and that's where our budget for 2005 indicate (ph) when we talk to you about it next week in detail.

Retail -- there we have placed new assets in service during 2004, particularly in Western Colorado. We continue to have very nice growth in Colorado meters, offset in part by meter losses in Nebraska. As Park will talk about, Retail had a very nice growth 2004 over 2003, and we again see growth '05 compared to '04. So across the board, all our major segments out-performed their plan at the KMI level, even including our power operations which, while down somewhat from 2003, because we are no longer a developer of plants, still beat its budget for 2004.

Now, turning to KMP, let me take each segments there. Our CO2 segment was our fastest-growing business, achieving results well above 2003 and well above the 2004 budget. That growth was driven by increased oil production at both SACROC and Yates Fields, by strong CO2 volumes across our system, by an increase in our Yates ownership position of 50 percent and by our third-quarter acquisition of the Kaston Pipeline System, which we have renamed the Wink Pipeline. That's a crude oil system that connects our SACROC unit to El Paso in West Texas.

Now, let me talk about some of those factors in a little more detail. At SACROC, our average oil production in the quarter, fourth quarter, was up 39 percent over the fourth quarter of 2003. For the full year 2004, production in SACROC was up 41 percent. We averaged 32,200 barrels per day in the fourth quarter versus 23,100 in the fourth quarter of 2003. Maybe more importantly, in December we averaged over 33,000 barrels per day at SACROC.

You will recall that in our last conference call, our last quarterly call in October, I said that we expected to end the year at about 33,000 barrels per day at SACROC, versus our original budget of 34,000 barrels per day, and we modestly exceeded that goal in December. While it's very early in the new year, January month to date is well above 34,000 barrels per day at SACROC.

Now, to put all this in context, those of you who have followed us for several years recall that when we took over the operation of the SACROC unit, in 2000 it was producing a little over 8,000 barrels per day. So we've gone from 8,000 to over 34,000 barrels per day.

At Yates, production was up 16 percent for the fourth quarter and 3 percent for the year. The fourth-quarter production averaged 21,400 barrels per day. December averaged 22,500 barrels per day. January month to date is well over 23,000 barrels per day.

Now, let me put those numbers at Yates in context for you. We've always said, since we bought out Marathon's position in Yates, that if we could get 20,000 barrels per day consistently at Yates, we thought that would be a good, sustainable number. Obviously, we are running significantly ahead of that target for the last few months. Now, it's too early to predict, I think, the long-range implications of these recent figures, particularly since we have just started flooding with CO2 in the second quarter of 2004, and those volumes of CO2 increased significantly in the third and fourth quarters. But we are pleased with the trendline and especially without while our horizontal well program is doing, and we intend to drill about 100 additional horizontal wells during calendar year 2005. So Yates has been very much on an uptrend -- again, too early to see exactly where it's heading, but very encouraging so far. Our CO2 pipeline deliveries across the whole system were at a record for 2004, up 27 percent over 2003.

Now, let me get to the Natural Gas Pipeline segment. This was another major contributor to our success at KMP and indirectly at KMI. The Natural Gas segment was also ahead of both 2003 and its 2004 budget. The Texas Intrastate Group was particularly strong, as we experienced better results from a broader pipeline footprint in Texas. We were also able to increase our term sales by about 10 percent year over year during 2004.

As many of you know, Texas is both the largest producer and consumer of natural gas, and owning what we believe is the largest intrastate pipeline in such an environment is obviously a choice asset. We believe we have put the two systems together, the Tejas and the old MidCon Texas, and that we are really functioning very well across the state. We believe we can continue to grow this segment by continuing to offer more services to our customers and by expanding and extending the system and longer-term by providing takeaway capacity to LNG regas facilities that we think will be built later in the decade, along with Texas Gulf Coast. So again, I think we will be able to leverage off of our Texas Intrastate assets just as we will off of NGPL's Texas and Louisiana assets to perform a vitals (ph) function and move this LNG gas when it comes online later in this decade.

Let me turn next to our Terminal segment. It also exceeded its budget target for '04, and experienced solid growth in income and cash flow compared to 2003. I think we are benefiting in this segment, first of all, from growth in the imports of refined products, where we handle about 1 in 4 of all the barrels of refined products imported into the United States, and we are also benefiting from the proliferation of boutique fuels, which are increasingly differentiated on a geographic basis, therefore leading to greater demand for storage capacity that we have to sell.

I think also we are finding we have the ability to acquire additional terminals at reasonable multiples of distributable cash flow, and I will talk more about that in just a minute. While throughput in this segment is not directly determinative of revenue in this business, it does indicate, I think, the overall strength of demand. And in this regard, throughput at both our bulk and liquids terminals had pretty dramatic increases for both the quarter and year in 2004.

We've tried to go back and separate out what came from the acquisitions we made in the Terminals Group and what came from internal growth, and we found that these were the applicable numbers. On the bulk side for 2004, we experienced growth of about 18.5 percent. It sounds like a very large number. That's in volumetric throughput. 10 percent of that came from non-acquisition activity. So we had 10 percent internal growth, 8.5 percent growth from the acquisitions that we made in the segment during 2004.

On the liquids side, we made no acquisitions in the Terminals segment on the liquids side. So the 8 percent growth we had there was all from internal sources. So that's a good indicator, I think, that demand for the kind of service we offer is growing pretty rapidly as this economy in general does better across America.

Now, let me turn to the Products Pipeline segment. This was the only business unit in either KMP or KMI that did not exceed its budgeted target for 2004, and even this segment was short by less than 2 percent, as Park will take you through. And even this segment, while short by 2 percent against its plan, had a very substantial 8 percent increase when it's compared to 2003.

Let me give you some other statistics about the Products Pipeline that we generally share with you. Revenue per unit was up 5 percent for calendar year 2004 and 4.6 percent for the fourth quarter. You will recall that our overall targeted run rate in that segment is we like to see about 4 percent revenue growth and about 3 percent volume growth. In this case, we got about 5 percent revenue growth for the year.

Now, let's turn to volume growth. Products volumes at our segment were up 2.1 percent for the year. That's pretty much in line with the EIA estimate of 2.1 percent for product in the entire United States. However, we need to make a couple of adjustments here, if you really want to get apples to apples. If you adjust for the refinery shutdown that we had on our plantation system, as a result of Hurricane Ivan, that number goes to 2.5 percent growth in volume. And if you adjust, as we do internally, for the California conversion to ethanol in our Pacific system, the growth number becomes 2.9 percent, pretty much in line with our recurring 3 percent long-term target -- 3 percent per year growth in volume at KMP product segment. In this segment, we placed in service our new Northern California line during December. We actually had only one or two weeks in rates during December. And we expect substantial progress during 2005 on our East line expansion from El Paso to Tucson, which will have an in-service date in mid-2006. And we also expect to spend significant dollars in a major expansion of our Carson tank facilities in L.A. Harbor.

So those are the developments and the operational numbers in the Products Pipeline segment. Now, I've talked about our earnings and cash flow outlook for 2005. One reason we continue to grow in both categories, I believe, is the capital we reinvested in our business, and let me just conclude by sharing some numbers with you. In 2004, we spent about $600 million on expansion CapEx at generally very attractive returns, and KMP made approximately $620 million in acquisitions, at an average of 7 times distributable cash flow.

Without the TransColorado drop-down, KMP spent about $350 million on acquisitions from third parties, at an average 6.5 multiple of distributable cash flow. So the message there is we are unable and willing to reinvest money, both in expansions and in acquisitions, as long as the cash flow numbers are reasonable. And I think that's what leads to very good returns on invested capital, very good equity returns that we will share with you in a lot of detail next week at our analyst conference, which of course will be carried live on our website and will be posted on the website for future reference.

For 2005, our budgets projects KMP spending about $600 million again on expansion CapEx. While we don't have any acquisitions built into the '05 plan, we do expect to make some during the year. And we are making progress right now on some acquisitions we expect to be able to announce during the first quarter of 2005.

So, that's a general operational update, and with that, I'll turn it over to Park for the financial details. Park?

Thanks, Rich. As per usual, I will start with KMP. Hopefully, most of you have the earnings releases for KMI and KMP. If you go to the first numbers slide or numbers page on the KMP release, you'll see the income statement down at the bottom. You'll see the declared distribution which the Board declared today of 74 cents for the quarter, $2.87 for the year. And it's up from $2.63 a year ago, the 9 percent increase that Rich mentioned, also up 9 percent for the quarter. Our budget was $2.84, so we exceeded the budget by 3 cents. We also said that we expected to end the year at a run rate between $2.90 and $2.94, and of course we are at a run rate of $2.96, so we've exceeded that target, as well.

The distributable cash flow per unit is directly above that -- 81 cents for the quarter. That's a coverage ratio of almost 1.1 over the 74 cent distribution, $3.10 for the year, coverage ratio of 1.08 over the $2.87 distribution. Also, that is where you can see, on a total dollar basis, the $46 million of excess coverage. Again, our budget was $28 million. We've come in at 46. The excess coverage in 2003 was $15 million.

The total distributions for the year are almost $978 million versus a $940 million budget. The distributable cash flow generated for the year is north of $1 billion versus the $968 million budget. You'll also see sustaining CapEx for the year $119 million versus our $116 million budget. Most of the overrun there was due to the Cochin project. It's also a little bit lower than what we said at the end of the third quarter. We thought we'd end the year in the low 120's, but we have actually come in a little bit under that.

With that, let me go to the second page. We can look at the segments and see what is driving this performance. The first segment in earnings before DD&A, the Products Pipeline, you'll see up nicely, up about 6 percent for the quarter, up about 8 percent for the year, to $475.5 million of earnings before DD&A. Now, as Rich mentioned, that is actually under our budget. Our annual budget was a little over $483 million, so we are under by about $7.5 million, but only about 1.6 percent below that budget.

Truthfully, if you adjust for a couple of items that occurred in the first quarter and the fourth quarter related to some environmental and litigation reserves, Products almost hit its full-year budget.

Natural Gas Pipelines is up 7 percent for the quarter, up about 10 percent for the year, to almost $411 million of earnings before DD&A versus a budget that was $383.5 million -- so $27 million above the budget, driven by the strong performance at the Texas Intrastate.

CO2 had growth of 85 percent in the quarter, growth of 74 percent for the year, driven by the increase in volumes that Rich went over earlier -- also dramatically exceeded its budget, the $353.5 million of earnings before DD&A compared to a budget of $322 million, so $31 million over the plan for CO2.

Terminals came in for the quarter up about 10 percent for the year, up about 9 percent to $263 million, compared to a budget of a little under $257 million, so about $6.5 million over plan for the terminals.

That gives you total segment earnings before DD&A north of $1.5 billion, and that's up $243 million from where we were a year ago. And it's above the budget; the budget was about $1.445 billion, so up from the budget by about $57 million. So strong performance across the board, against Products a hair under the plan, everybody else above the plan, in total nicely above the plan for the segments.

When you look at G&A, so I'm going to drop down past the DD&A and past the earnings including DD&A. You'll see the G&A line was about $45 million for the quarter, up about $3 million from a year ago, $170.5 million for the year, up from 150.5 from a year ago, so about $20 million over last year. In addition, our budget was about $151 million, so we are about $19 million over the budget.

The reason for this overage, first and foremost, is a benefits item that we've talked about since the first quarter. There is essentially a nonrecurring bonus accrual in here that we will see in 2004 and we won't see going forward. In addition, we have slightly higher PwC and Deloitte & Touche fees associated with Sarbanes-Oxley. We have higher legal fees, slightly higher insurance, and slightly higher other benefits. And when you add those up, those total the $20 million increase from last year and the $19 million increase versus plan. And the one thing I did leave out is actually the Global acquisition, which are some terminals we acquired in the fourth quarter, also led to incremental G&A and will lead to incremental G&A in 2005.

You'll see the net debt costs up about $7 million for the quarter. We are up about $13.5 million year to date to $195 million. Our budget for interest was actually $201 million, so we are under the budget.

Now, just comparing to last year, the balance is up. We have invested, as Rich mentioned, about $600 million in expansion CapEx and $600 million in acquisitions; that is driving the increase in debt. Now, we have financed a significant portion of that with equity, and I'll talk about that when we get to the balance sheet, but the net balance has gone up.

Our average rate was basically about flat for the year. Now, of course, rates -- and we do have a portion that is floating-rate; it's still about 50/50. Rates have gone up over the course of 2004, but when you look at the average rate for 2004 compared to the average rate of 2003, they were about equivalent.

Minority interest is largely a general partner interest. Loss on our early extinguishment of debt is a small item for the quarter, a little bit bigger. That's a retirement of certain debt issuances.

Now, environmental reserve -- you'll see a net decrease of 300,000 here. Now, when we actually file the 10-K, you are going to see bigger movements between the segments. We have netted them out here, and the net impact on the bottom line is just 300,000. But in fact, Products had an increase to its environmental reserve, which will show up as additional expense for the segment. Natural Gas Pipelines and Terminals had a decrease in their environmental reserve, which will show up as a benefit for those segments, but really what it was in total is it turned out that the total reserve across the entire company was very close to where it should be. It's just a $300,000 adjustment. Again, the segments for the K will have those adjustments in them. We will footnote it so that you can identify those amounts and tie back to these numbers.

At the bottom, you get to net income. It's up for the quarter and up to 831.5 million for the year. That's growth of almost 19 percent on the net income line.

Rich talked about the volume, so I'm going to go back to the first page of the KMP release -- at least the first numbers page -- so back to the face of the income statement. Starting at the top, you'll see revenues are up considerably, largely driven by the strong performance at the Texas Intrastate and, of course, natural gas prices have an impact there. But our revenues at KMP for the year were almost $8 billion.

Operating expenses similarly increased. DD&A is up significantly, almost $70 million for the year. For the most part that is CO2, and it's driven by the increased production, which drives a higher DD&A.

G&A we discussed. TOCI is also up significantly for the year, almost 19 million. Again, that's driven by CO2. The increased oil production drives an increase in severance taxes, which come through on this line.

Operating income is up about 21 percent to 974 million from 807 million. Earnings from equity investments you'll see down a little bit for the quarter and down for the year. There are a few effects going through here. One, the MKM joint venture was dissolved in 2003, so you don't see its impact when you look at the full year. Second is Red Cedar was down a little bit for the year, and the third is Plantation was down a little bit for the year. Now, Plantation -- that's in part because of the increase in interest expense there, but that is intercompany debt, so we get the interest income actually at KMP.

Interest expense we've discussed. Other essentially unchanged minority interest we've discussed.

Income before income taxes is up about 20 percent. You will see income taxes of almost $20 million for the year 2004. About half of that actually is Plantation, and the remainder are the bulk Terminals assets that we owned in C-Corp form, and in taxes that we pay on Cochin in Canada and Monterrey in Mexico.

This takes you to the net income that we discussed before, the 831.5, up from 697 a year ago. Of course, the year-ago number, 697, is including the effect of a change in accounting principle. It's 694 prior to that.

That also takes you down to net income per unit of 2.22 cents, up from $1.98, although, as we frequently say, the much more meaningful measures for KMP are the distribution and the distributable cash flow per unit.

With that, I'll go to the balance sheet, which is the last page of the KMP release. Walking through it quickly, cash and cash equivalents essentially unchanged. Other current assets is up. That's an increase in AR; it's actually more than offset by an increase in AP. We actually had a source of cash from working capital for the quarter and for the year, and I'll detail that in a minute.

PP&E is up almost 1 billion 1. That's assumption of acquisitions and expansion offset by normal DD&A. Investments is basically flat; deferred charges and other assets is up slightly. One of those is a note receivable to Plantation, which was new this year. And then the value of hedges flow through on a number of lines, and one of them is this line.

Total assets 10.6 billion, up from 9.1 billion at the beginning of the year.

Notes payable -- that's combined as a debt, and we'll talk about that in a minute.

Other current liabilities you'll see up about 380 million; 250 of that is an increase in AP. Again, the AP and AR is in large part driven by gas prices, so that will have an impact. And then also there's some value of hedges that flow through here.

Long-term debt I'll talk about in a minute.

Market value of interest rate swaps -- that's just a function of the forward curve for interest rates.

Other -- you'll see an increase of 231 million, again attributable to the hedges.

Minority interest unchanged.

Accumulated other comprehensive loss we have broken out from Partners' Capital, and this is, again, a function of our current market position on our hedges. That's why the change is so big, about 300 million from the beginning of the year to the end of the year. We had more oil hedges on, and oil price has gone up significantly since the beginning of the year. That's what drives that.

Other Partners' Capital you will see is up almost $700 million from the end of '03 to the end of '04, and I will talk about what drove that as we talk about the debt-to-cap.

If you look at total debt, 4.7 billion, up from about 4.3 billion at the end of '03; it's an increase of about $425 million. I'll detail exactly what drove that. The debt-to-cap ratio is a little under 52 percent. It's down from a little under 54 percent at the beginning of the year, so down 2 percentage points. In addition, at the end of the third quarter, if you look at the debt-to-cap excluding the other comprehensive loss, there's about 54.6 percent. And so the debt-to-cap from the end of the third quarter to the end of the fourth has actually come down almost 3 percentage points. Again, I'll discuss why that is. The actual debt from the end of the third quarter to the end of the fourth has gone up a little over $100 million. At the end of the third quarter, it was 4.6 billion, and now we are at 4.7 billion.

And so let me talk about the changes in debt. Again, for the year, it went up 426 million. For the quarter, it went up 111 million. I'll give you the reconciliation for the year first. Expansion inclusion for the year totaled about $625 million of CapEx. Acquisitions totaled about 585 million. That's the cash and equity, meaning units, that went out for acquisitions. Equity issuance for the year totaled $638 million. I'll give you a breakdown of that in a minute, but we issued $638 million of equity during the year. KMR distributions totaled almost $150 million; it's 149. So that's effectively additional equity issuance of $150 million. We didn't take on Plantation debt, intercompany debt of $95 million. So that increased total debt at KMP by that $95 million. We had excess coverage, excess cash flow, of $46 million. That's a reduction in debt of 46. And then working capital and other items also provided cash of about $46 million. You add those items up, and you get the change in debt of $426 million.

For the quarter, debt went up $111 million. The capital expenditures, non-sustaining capital expenditures, were 158 million in the quarter. Acquisitions were 435 million in the quarter, so that's cash out. Offsetting that, you had equity issuance of 385 million in the quarter -- I'll detail that again in a minute. You had KMR distribution, which is basically additional equity issuance of $40 million during the quarter. You had working capital, a source of cash from working capital of $43 million during the quarter, and you had excess coverage of 14. And that, again, totals to the 111.

Now, let me break out of couple of these. Equity issuance -- $638 million for the year, $385 million for the quarter. In February, we issued units in a public offering for about $238 million. We also sold some KMR to a closed-end MLP fund that totaled about $15 million. That was it until the fourth quarter. In the fourth quarter, we had a November public issuance of units for $268 million. We issued some KMR shares to another MLP closed-in fund for $53 million, and then, in the TransColorado transaction, KMI took back $64 million of units. So, again, you sum that up, you get $638 million of equity issued for the year, $385 million of equity issued for the quarter. And that's what enabled us, even with all of this investment, to reduce our debt-to-cap over the course of the year and, again, end up at a little bit under 52 percent for the year. And it also demonstrates our continued commitment to finance the expansion opportunities and acquisitions with a considerable portion of equity.

Now, let me give you a little bit more detail also on the expansion projects. About $155 million of the $625 million total was in Products. The largest project there was the Concord and Sacramento line. About $73 million of that total was at the Natural Gas Pipeline. A large storage project, the Cheyenne Market Center Storage project, came on during the year. We also brought online the Rancho Pipeline, which runs to the Austin area, another large project for the year.

The CO2 CapEx for the year was $300 million. Most of that was at SACROC. And on the Terminals side, we spent $98 million, some of that in the New York Harbor on additional tanks there, some of it on a project in the Midwest at our Dakota terminal, where we're handling cement, and then a variety of smaller projects.

Additionally, if you want to break down the acquisitions, total for the year, $585 million. 435 of that came in the fourth quarter. The two acquisitions prior to the fourth quarter -- one, terminals that we acquired in the first quarter, Southeast Terminals, for $50 million; second, the Wink Pipeline for $100 million that we acquired in the third quarter. Then in the fourth quarter, the Global terminals for $70 million, the Charter-Triad terminals for $72 million, TransColorado for $275 million, and additional interest in Cochin for $11 million and another terminal, (indiscernible) terminal for $8 million. That totals our 585 for the year and our 435 for the quarter. Again, a lot of investment opportunities at KMP -- continue to find opportunities to invest at very attractive returns and continue to be committed to financing those investments with a considerable portion of equity.

With that, I'll go to KMI. And so, again, hopefully you have the KMI press release. And if you go to the back, I'll start at the first numbers page, which is the KMI income statement. Unfortunately, the face of the income statement is not overly meaningful, given the special items that fell in the fourth quarter of 2003 and the fourth quarter of 2004. So, actually, we'll go directly to the second page, and there we'll be able to reconcile these items for you and show you what's truly being generated just from our assets.

About a third of the way down the page, there's a line, "Diluted Earnings Per Share From Continuing Operations Before Certain Items." The total there is $1.03 for the quarter compared to 89 cents last year and, for the year, $3.81 compared to $3.33 for 2003, up 16 percent for the quarter, up 14.5 percent for the year. And the 3.81 compares to our budget of 3.71, so we did nicely exceed our budget.

Now, part of the reason why we exceeded our budget is our effective tax rate has actually come down. The benefit of the effective tax rate for the year was about 4 cents, and so 4 cents of that 3.81 really came from that change. But that change also leads to the largest impact that we have identified here as other items. The income tax adjustment line relates to taking that new effective tax rate and applying it to our large deferred tax liability on the balance sheet. And when you do that and you revalue those deferred tax liabilities, the net result is a 52 cent increase in earnings that flows through the income statement in the fourth quarter of 2004. We have separated that out for you here. We are not trying to claim credit for that as earnings that will be generated on a recurring basis. So we have specifically identified that separately for you here.

In addition, during the quarter, we had a revaluation of certain power investments. The largest item here was a reduction in value for a power plant that we own a net profits interest in, that's located in Greeley, Colorado and operated by a third party. This asset actually had a new contract, a new off-take contract signed about 15 months ago. And it has traded hands twice in the last 18 months. As we evaluated the impact of those events, we determined that we should reduce the carrying value in that asset.

That is partially offset by the remainder of the Jackson development fee which came through, which, again, we are not showing up in operating income or not showing up in -- as we define segment earnings. We are showing down here in the certain items. In addition, we have recognized gains on turbines that we have sold, surplus turbines that we have sold. And at the same time, we have revalued our remaining turbine and boiler inventory. The net impact of that is a reduction. The net of the gains and the reduction in carrying value of what remains is a small loss. And there were a couple of items related to litigation that were settled during the quarter that were a net positive. Again, all of those things net out to the 7 cent reduction in earnings that you see identified on the revalue of power investments line.

We also had a loss on early extinguishment of debt. We called about $75 million of debt in October. We discussed this at the third-quarter earnings call. And then a couple of smaller items that totaled to another reduction, about 1 cent. Again, that totaled $1.48 for the quarter. It totals $4.23 for the year. There is also a loss of about 5 cents related to discontinued operations that you see back on the first page. Again, all of those things we have identified separately. The real way to think about the earnings for the quarter and for the year is $1.03 for the quarter and $3.81 for the year -- still very strong, and let's walk through the segments and see where that was generated, starting with KMP.

The top of the second page shows you the equity and earnings of KMP. Now, that includes 100 percent of KMR, and then the minority interest is broken out down below. The easier place to look at it is in the section titled "Earnings Attributable to Investments in KMP." And you'll see pretax KMI earnings from KMP of almost $130 million for the quarter, up 23 percent from the quarter a year ago, and $477 million for the year, up 20 percent from where we were a year ago. Additionally, our budget for the pretax contribution from KMP was about $462.5 million. We beat our budget by about $14.5 million as a result of the strong performance of the assets at KMP.

NGPL had a very strong year at about $98 million for the quarter. It was up about 2.6 percent, about $393 million for the year. That's up almost 6 percent from the 372 you see there. Now, of course, as we talked about in 2003, there is a $4 million item that shows up as a benefit in interest expense that we really attribute to NGPL. With that adjustment, NGPL was up about $16.6 million from a year ago or about 4.4 percent. Now, probably more meaningful, the $393 million at NGPL was up about $4 million over our budget of about $389 million.

TransColorado has been transferred to KMP, and so you see about one month in the quarter and about 10 months for the year, and so that isn't really a viable comparison. TransColorado did come in just a hair under its plan for 2004.

Retail's about $600,000 above its plan, and had a very strong fourth quarter, up about $5 million from where it was a year ago. Retail benefited from nice growth in meters during the year. Agriculture volume was actually down during the summer and down relative to 2003, but stronger than expected in the fourth quarter. We had some grain drying that came on late.

Power actually had a very good year, as well, although it looks like it is down from last year. Actually, it is down from last year, but last year, we had development fees that we recognized in the first half of the year. We did not have any of those in 2004, and so the $15.3 million of earnings compares favorably to the $13.5 million budget that we had for power. So power was up about 1 million 7 from its plan.

You see total segment earnings of about $1.06 billion, up from $950 million approximately in '03, also above our budget about 1.036 billion, so up about $20 million from our budget.

G&A at KMI was about flat for the quarter. You'll see it's up about $6 million from a year ago. It's actually only up about $2 million versus our plan. Our plan was just a hair under $76 million. The reason for the variance to plan -- again, some PwC and Deloitte & Touche fees a little bit higher than he had planned, and legal fees a little bit higher than we had planned.

Interest expense you'll see slightly up for the quarter. It is down for the year, actually, about $10.5 million when you adjust for the interest items that really should be a part of NGPL. More meaningfully, comparing it to our budget, it is just a hair under our budget, a little over $500,000 under our budget. The average rate at KMI, again, was a little bit flat. The balance was below last year. Interest expense -- the next two items really relate to the trust preferred securities, and then other is primarily minority interest, which is largely KMR, but then also some impact from the Triton energy asset or entity that we now consolidate, but which nets out to zero impact on the bottom line. And so that flows through a little bit here.

Income from continuing operations you'll see is up about 15 percent for the year. Income taxes -- again, the new effective tax rate for 2004 is about 37.57 percent, down from about 38 percent a year ago. So we get a little bit of a pickup on the income tax side. And then income from continuing operations before certain items up almost 15.5 percent for the year to $476 million, about $15 million ahead of our budget.

With that, I'll go back to the first page and walk through the face of income statement. You'll see that total revenues are up slightly, as are gas purchases, where actually gas purchases and other costs of sales are down about $5 million. O&M is up about $35 million. The majority of that is the consolidation of Triton, which runs through -- part of it runs through on that line.

G&A we discussed. Depreciation and amortization is essentially flat. TOCI is down slightly, just a little bit improved, with reduction from the sale of TransColorado and a little bit of improvement on NGPL and Retail. And then you'll see some revaluation of power investments here.

Essentially, here, you're starting to get into some of the identified certain items that flowed through at different points on the income statement and, truthfully, made the income statement less than meaningful. The second page, again, is where you are going to find more meaning. And again, when you get down even to the earnings per share, you're seeing $1.48 for the quarter when, really, it should be $1.03; and 4.23 or 4.18 for the year -- really, it should be 3.81.

With that, I will go on to the balance sheet. KMI has a considerable amount of cash on its balance sheet at the end of December and, truthfully, has no commercial paper outstanding at the end of December. In part, this is because of the sale of TransColorado. TransColorado generated $211 million of cash for KMI. The rest of the proceeds, $64 million, came in units. KMI has repurchased its own shares with about $43 million of those proceeds, and so the remainder, which is about $168 million, shows up here in cash. Now, what that means is we would have had a cash balance and no commercial paper outstanding even without the sale of TransColorado. The sale of TransColorado is increasing it.

Other current assets largely unchanged. Investments is up, and that's a function of the TransColorado sale; again, we got $64 million of units in that transaction, and that is what is increasing this line. Then you'll see PP&E is down. That's a function of the sale of TransColorado. Those assets no longer appear here. Other assets essentially unchanged. You'll see total assets essentially unchanged, right about $10 billion.

Now, notes payable and current maturities -- we have a $500 million maturity in March of this year, and of course we have $800 million of capacity in commercial paper or our bank line. Than we have $177 million of cash. So we could easily take that out with cash and commercial paper, if we wanted to.

Other current liabilities unchanged; other liabilities and deferred credits unchanged. Long-term debt, the outstanding notes and debentures -- it looks like it's down a lot from last year, but you need to add back the current maturities. And I'll talk about total debt in a minute. The deferred interest debentures are the trust preferred securities. Value of interest rate swaps, again, just fluctuate with the forward curve. Minority interest and equity of subsidiaries is the KMR minority interest, or the minority interest related to KMR. Again, we've broken out accumulated other comprehensive income from other stockholders' equity.

So that takes you down to a total debt number you'll see of 2.586 billion, compared to an end-of-the-year '03 balance of 2.96 billion, approximately. That looks like a reduction of $373 million. Its meaningful here to, again, take away the impact of the TransColorado sale, so that you can see what was generated just from operations and so that you can compare to our budget and what we expected to do. And if you adjust for the sale of TransColorado, our debt at the end of the year is actually 2.75 billion. That's down $205 million from the beginning-of-the-year balance. In our budget, we budgeted for a reduction in debt of $100 million. We have reduced debt by more than $200 million. So we have significantly exceeded our budget goal. And I'll talk in a little bit about how we did that. Additionally, if you want to look at the third quarter we had about $2.86 billion in debt then, and so again, removing the impact of TransColorado, we have come down about $100 million from where we were at the end of the third quarter. Debt-to-cap that shows up here is about 38 percent. That includes the impact of TransColorado. If you take out the impact of TransColorado, we're at about 39 percent. Again, KMI has a phenomenally strong balance sheet.

Looking at cash that was generated during the year, you see the $612 million. One thing I'll note about that is we have less cash paid for income taxes, at $200 million, and we've footnoted it. We have actually paid or we did pay in 2004 $144 million in cash taxes, but we expect that in the first quarter of this year we will pay another approximately $56 million related to 2004. So we kept that there although, when I talk about the debt balance, we're actually getting that benefit. That's part of why there is that incremental $100 million reduction in debt.

The $612 million compares to our budget of $578 million, so we exceeded our budget by $35 million -- so, very nice performance there. What did we do with the $612 million? We had expansion capital of 82 million; that was up from our budget of 64. Were reduced debt by $205 million. We paid dividends of about 279 -- let's call it $280 million. We repurchased shares with about $60 million. Now, again, that was our budget, and so we did that $60 million. Now, total share repurchase for the year was $103 million, but 43 million of that is a function of the TransColorado sale. 60 is part of our normal cash generation. And in the last item, we generated cash from working capital of about $14 million.

In the fourth quarter, we actually generated about $132 million. We used that $25 million, went to expansion capital; about 109 million went to debt reduction; $70 million went to the dividends; about $5 million went to share repurchase, again excluding the TransColorado portion; and then we generated cash from working capital and other items of about $56 million.

Now, a little bit of detail on the expansion capital. NGPL spent about $25 million during the year. Those were largely storage projects at North Lansing, Sayre, Iowa, a little bit on the Black Marlin expansion. Retail spent about $42 million of expansion capital. The Montrose-Ouray project came online. The Roaring Fork expansion came online, and we're in the midst of our automated meter reading project. And then, of course, there was about $15 million of expansion CapEx from TransColorado, which was a part of KMI up until the beginning of November.

Again, very strong performance at KMI, shown in both the earnings and the strong cash flow. And with that, I'll hand it back to Rich.

And before we take questions, just to reconcile -- we pride ourselves on transparency and being able to reconcile numbers -- I referred to $620 million in acquisitions, including TransColorado, in 2004. Park referred to 585 million in cash actually going out. The difference is in some of these acquisitions we provided for future inclusion capital, and we think it's certainly the fairest way to present an acquisition, to include all of the cash you paid at the time plus what you have to spend in the future to get those desired returns. So --

And we assume some liability (multiple speakers) in the cash number but are payments that we expect to make.

So, while we put out 585 million from KMP in cash, including assumed liabilities and inclusion capital, the total that we committed to on these various acquisitions was $620 million during the year.

And with that, Abe, I'll turn it back to you, and we'll take any and all questions that you all may have.

(OPERATOR INSTRUCTIONS). Sam Brothwell, Merrill Lynch.

Just a couple of detail questions on the numbers. What's behind the change in the effective tax rate?

Well, it's largely changes in state taxes.

State taxes?

Yes.

And so you've caught all that up in the (multiple speakers).

Those things fluctuate over time, and we continually evaluate their impact on our effective tax rate.

So on a go-forward basis for earnings, you have picked that up in the deferred balance, but I would expect that we would have a little bit of incremental cash flow, prospectively?

It shows up in the '04 recurring earnings. We have that new tax rate in there. And in our '04 budget numbers, we have that new tax rate in there. It's just the change in the deferred tax balance that we are running through or that we are separately identifying, because that's a big just kind of one-time adjustment.

And then, in terms of your budget for '05, you've talked in the past about a potential 15 cent per unit hit for the SFPP case and a similar earnings hit at KMI. Can you elaborate at all on what you have baked into your '05 outlook?

That is not baked into the '05 budget, which today we have clarified at 4.22 as we finalized the budget. 4.20 was our preliminary lock. We now think it's 4.22. The numbers at KMP were unchanged, with distribution started at 3.13 for the year. And that does not have any impact from an SFPP rate case resolution. We are going to show you probably more than you want to see about that at the analyst conference -- it will be posted on our website next week -- and take you through various permutations. We have absolutely nothing to report on that case since the last call; nothing has happened. But we want to give you a very good idea, and the range is still the same as what we've talked about in the past.

And finally, real quick, Rich, you alluded to having, it sounds like, plenty of capacity to grow the KMI dividend going forward. Do you think you'll follow the same kind of pattern of doing it on an annual basis, or would you ease into addressing it each quarter?

We're going to kind of hold that in abeyance. We will do it no less frequently than every January, and we reserve the right -- we wouldn't do it every quarter, but we might look at it midyear. Again, things seem to be starting very solidly for us in '05. But no promises. We definitely will reevaluate it at least once a year.

David Fleischer, Kayne Anderson Capital Advisors.

Hi, David. How are you doing?

I'm doing well, Rich. You are obviously doing well here. A few separate questions here. Not that you sound as if you're slowing up -- I said, not as if you sound as if you're slowing up here. But my question is, is the office of the Chairman well enough populated to keep track of everything?

Well, we hope so. But again, we are looking and talk to the Board about expanding that office of the Chairman some time, I would think, during this year. We will probably add a third person to it. We do want to beef it up some more. I think we're functioning just fine, and again, as I've said so many times, a real strength of this organization is the presidents of our business units. But our intention, I've said all along from the time Mike left -- and Mike remains a very active Board member, I might add, Mike Morgan -- but that we would replace that slot. And we intend to do that, and my expectation is we will do it sometime this year.

I suspect you are working Mike real hard for almost nothing now.

That's right.

Second question -- is there a distribution coverage ratio at KMP that we should be thinking of as a maximum and a minimum now, as we try to forecast your distributable cash flow going forward?

I don't think that there's necessarily a maximum and a minimum coverage ratio that we look at. We wanted to increase the budgeted amount of coverage in 2005 from where we had budgeted in 2004, but that will be something that we continue to evaluate. And it's really more a function of, long-term, what we expect distributable cash flow to do than it is a function of the current year.

And I want to ask you a third question that I know you are not going to answer about why you pooh-poohed any possibility of Yates being more than 20,000 barrels as you flow through 23,000 here, but we'll save for next week.

Well, no; that's a good question. And again, let me just address that. We did, when we bought this asset -- in fact, Tim Bradley, who runs the CO2 operation, was quoted in the Houston or Midland papers saying that he thought this was an asset that could produce 20,000 barrels a day for as long as he would live. And nobody kind of knew his life expectancy -- I will tell you he's not quite 50 years old, so he's got, hopefully, a good life expectancy. And the issue was this is a very long-term asset, a very stable -- different than SACROC, not as much upside, but very stable. And since -- so we would have been tickled pink to hit 20,000 barrels. That's kind of been our long-range target.

Two things have happened. One is that this horizontal -- this HDH, this horizontal well program that we have -- the wells are just IP-ing at higher rates of oil than we would have expected. Now, you can just write that off to chance, because they are scattered around the field on a progressive basis; we just kind of circle the field. Or you could say that the CO2 flooding that we started back in about April of 2004 is already beginning to work its magic and driving more oil up into these wells. We just can't tell yet which it is; it could just be random chance, but it is encouraging that the wells are both -- the initial production is greater than past experience before we started flooding, and they are holding up better. In other words, these wells have a pretty heady decline, but they are not declining as fast as the wells in earlier programs were. And Park and I just spent half a day going through all these things last week, and it's just hard to tell. So that's why, while we are very encouraged with production that is running 15 percent above what we anticipated, and already well above what we had planned for 2005 budget, but I think it's too early to say that we are getting real good migration because of the CO2. I think we have to wait probably another couple of quarters before we see whether this really lasts.

Jay Yannello, UBS.

Mine is kind of a follow-up to Dave's question. Maybe this is for Park. On the excess cash, it was -- I think it was 15 million in 2003; the target was 28 in 2004. You came in at 46. Are you saying that at the beginning of each year, you're going to kind of baseline into (ph) 28 and see how the year goes? Or kind of maybe a preview for the conference, what is like a baseline number we should assume for '05? Or is that just not determined yet?

I'm happy to tell you, and we'll go through it in detail next week. But our budget profile is $39 million of excess coverage. And so it's not -- the 28 isn't a magic number. Again, as we said, in December, when we released that, that we would be budgeting an amount that was greater than we budgeted for in 2004. So we're going to budget for $39 million of excess coverage in '05.

And, Rich, going back to you, the usual question you get all the time -- just a little preview of what you see or just observations in the M&A market, both for assets and possible company acquisitions down the road?

I think it's difficult. There's an awful lot of money chasing deals. We are just not going to go out and buy things for 12 or 13 times EBITDA. Remember the numbers I just quoted on our 2004 acquisitions were off distributable cash flow, not EBITDA. So in other words, we've already deducted all the sustaining capital off of there, and we are still able to do, even if you count TransColorado with long-term contracts through 2008 on almost all the capacity, we are able to do all of this at 7 times. And if you knock out TransColorado, it's at 6.5 times. So I think we're living proof that there are assets out there that can be acquired at reasonable multiples, and we will continue to do that. And our cost of capital now is very simple here. And if you give us grades, you can grade this management team down on a lot of things; but doggone it -- that's the right word, doggone it -- over the last eight years, I think we have proven we get an A in capital allocation. And we have bought things at the right price and we have run them right.

So if you look at it from that parameter, our cost of capital analysis is very simple. Our equity component is the distribution grossed up by the general partners' share, and you can just round that to about 11 percent today. If you want to pick a number and say that the debt is about 6 percent, you split the debt -- and just assume it's 50/50 for simple purposes -- you've got a cost of capital of 8.5 percent pretax. That means that, heck, we can buy things at 10 or 11 times, but we'd be very close to that line, and we are just not going to get down into that level. We are finding we can buy things that -- obviously, a 7 multiple implies something on the order of 14 percent. And so we are finding we can buy things at that level, plus we can make hundreds of millions of dollars of expenditures at very good numbers across all of our business units, and we did 600 million of that last year. So that's our reaction, and I think we're proving year after year that we are reinvesting a hell of a lot of money in this company, over $1 billion a year, at very good returns.

Now, as I've said before, we continue to look at things, whether it's a transforming (ph) transaction or a bigger purchase, but only if they make sense for the long run. We are not interested in getting bigger for bigger's sake, we are only interested in making acquisitions if they make sense for the shareholders of the Company. So anything can happen. There are some more assets out there on the auction block now. We'll look at them, and we'll see what happens in 2005. Our budget is built -- when we talk about 4.22 and the $623 million of free cash flow, that is built without any additional acquisitions.

But your latest observation is there has been no change and there is still a lot of money chasing a lot of these things?

That would be my -- yes.

(OPERATOR INSTRUCTIONS).

It looks like it's 20 'til 6 in New York; people are heading out, so we appreciate very much your attention. We think we had a good quarter and a great year, and if you have other questions, we'll be happy to answer them. Talk to to Kim or Park or myself. Thank you very much.

This concludes today's conference.