金德摩根 (KMI) 2005 Q1 法說會逐字稿

Good Afternoon. Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation we'll conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]. I now would like to turn the meeting over to Mr. Rich Kinder. Sir, you may begin.

Thank you, Mark, and welcome everybody to the quarterly conference call for the Kinder Morgan companies. As usual, I'll be referring to Kinder Morgan, Inc., which is a major mid-stream energy company in America, and among its other assets it owns the general partner in KMP, Kinder Morgan Energy Partners, which I'll refer to as KMP which is one of the largest pipeline master limited partnerships in America.

Also as normal, Park and I will be making statements that fall under the Securities Act of 1933 and the Securities Exchange Act of 1934. I'll give an overview of the quarter and then turn it to Park Shaper, our Chief Financial Officer, for financial details and then together, we'll answer any questions that you may have.

The first quarter 2005 was very strong and profitable for both KMI and KMP. Let me start with KMI. KMI had earnings from continuing operations in the first quarter of $ 1.17 per share. That compares with $1.02 per share a year ago, first quarter of '04 up 15%.

I might add that the earnings for KMI were at an all-time record high for any quarter. The drivers were really two: First, the strong performance by Natural Gas Pipeline of America, or NGPL, and then we had very good performance resulting from our ownership in the general partner of KMP, and I'll obviously talk about the performance of KMP when I talk about that entity.

Let me go to NGPL. NGPL's strong results were driven by an increase in transportation margins and storage revenues. We continue to benefit from successful contract negotiations, and right now, our firm long haul transportation capacity on NGPL is 91%, sold out through the rest of this year. , On the storage side, we're fully contracted until April of 2006. Now, as most of you know, most of these contracts that NGPL has roll over every three to four years and the key is to renew them. We're always at risk for that renewal. And how well we do depends on how good a job we do on renewing them.

Right now, performance on NGPL is very strong. It also continues to make strategic investments for the future. I would like to mention a couple of those. In March of this year, NGPL received its birth certificate, authorizing a ten billion cubic feet expansion of our Sayres storage build in Oklahoma. This was about a $35 million project, and we expect to begin service on that in the spring of 2006. All of that expansion capacity has been contracted for under long-term agreements.

In addition and maybe more importantly, we just completed an open season for 10BCF expansion at our North Lansing storage facility also in Texas. And there, the binding long-term proceeding agreements have been executed for all of the capacity. We intend to file very shortly for project approval with the FERC. This is about a $64 million project and we would expect to begin service in the spring of 2007. So, just in those two additions, one already approved by the FERC, long-term contracts underpinning it, construction started, and the second one, long-term contracts going to the FERC, construction to start late this year, early next year. Those two together will add 20BCF and will spend roughly $100 million on storage in the Gulf Coast area of the United States.

I think both of these projects demonstrate our belief that storage, particularly in these areas, will have great future value to us and our customers. We're doing some of the same things on our Texas intra-state operations and in fact, because of their need for storage, the Texas intra-states are taking of some the capacity on the north Lansing facility.

Still at KMI if we talk about the outlook for the rest of the year, let me mention a couple of things. In January, of course, we published our KMI budget. At that time, we showed earnings of about $4.22 per share in 2005. As we've now completed the first quarter, we expect to meet or exceed that target.

We also have talked in the past about our dividend policy and we've said we intend to increase our dividend at least on an annual basis, and in our discussion with the KMI board today, we've agreed that mid-year point of this year at our July meeting, we would review the cash flow which is very strong to date. Assuming it stays that way, we will consider very seriously a dividend increase at that July 20th meeting. No promises, but we'll consider it depending on where we stand from a cash perspective at KMI halfway through the year.

Now, let me turn to KMP. Again, KMP had all-time record quarterly earnings, probably more importantly, we announced today an increase in the quarterly cash distribution per common unit, to $0.76. That's $3.04 annualized. That amount represents a 10% increase over the first quarter 2004 cash distribution per unit, which was $0.69, or $2.76 annualized.

Just by way of reference, I believe this is the tenth consecutive quarter in which KMP has increased its distribution, and it is the 23rd increase out of 33 quarters since the current management took over in February of 1997. The distributable cash flow per unit was $0.86. And it would have been $0.98 per unit without the previously announced settlement of a Texas lawsuit. So, a very strong quarter in terms of earnings and cash flow at KMP.

That was driven by all four of our business units reporting increased earnings before DD&A. In aggregate, that total was up 25% from the first quarter in 2004. Our success is attributable, we believe -- both the strong internal growth and the contributions from acquisitions and Park will break all of that out for you. Excluding the lawsuit settlement, KMP's four business segments generated distributable cash flow in excess of distributions of approximately $47 million in the first quarter, which means the company would have exceeded its entire 2005 published annual budget of $39 million in the first quarter alone.

Even when you take the $25 million settlement off, distributable cash flow in excess of distributions was $22 million in the first quarter. Now, let me discuss each segment at KMP. The Products Pipeline Segment, the growth there was driven by contributions from the acquired Southeast terminals. That's going very well for us. And strong earnings from both our Pacific system and our plantation system offset somewhat by a weak quarter for our NGL pipelines. Overall segment revenues increased by about 11% compared to the first quarter of 2004.

Some of you follow revenue from refined products which is a more limited comparison and that number was up 7% from a year ago. The 11% increase was primarily attributable to increased capacity on the expanded North line, on our Pacific system which we put into service in December. From additional fees of ethanol blending in our West Coast terminals and from some pretty extraordinary volume growth on our central Florida pipeline. I guess, if you're looking for economic indicators, it appears people are back at the Disney complex at central Florida and staying at least judging from the demand for gasoline and jet fuel in the Orlando area.

In terms of refined product volumes, diesel and jet fuel were strong while gasoline was weak. Particularly on the west coast in January and February. Largely we believe because of the historically heavy rainfall and snow that California received in those months. We did see a pretty good pick up in gasoline volumes in California and the West Coast in the month of March.

I would also remind you , I guess when you look at these volumes, that of course because last year was a leap year, that makes a difference of about 1% in volume, so probably had you been apples to apples, our increase of about 1.1% in overall volumes would have been a little greater. But revenue is very strong. Volume is strong in diesel and jet. Not as strong in gasoline.

Turning to our natural gas pipelines segment, it had a particularly strong first quarter. The growth in this segment was driven by really strong earnings for my Texas intrastate group. From our red cedar system in southwest Colorado along with contributions from the acquired trans-Colorado pipeline. Overall transport segment volumes on our pipelines, natural gas pipelines were up about 3% compared to the first quarter a year ago.

Turning to our CO2 segment, there, of course, we had very strong growth in the first quarter. And the growth was led by increased oil production at both SACROC and the H field and by contributions to the wink pipeline which we acquired in the third quarter of 2004. As most of you know. We continue to pursue CO2 in the perm-in basin in west Texas. We plan to invest about $240 million this year to turn the ramp up oil production at the SACROC unit and to expand our CO2 operation at the H field. Average oil production for the first quarter at SACROC was. 33,800 barrels per day. That was up from about 30% from the same period a year ago.

At Yates, the average crude oil production was 24,100 barrels per day, up 35% from a year ago. Compared to our expectations for the first quarter of 2005, in other words, the assumptions that underpin the budget that we posted on our web site back in January, Yates outperformed our budget by about 4,000 barrels per day. SACROC underperformed by about 800 barrels per day.

Let me try to give you our expectations for both units for the balance of 2005, starting with SACROC. Our expectation for SACROC production for the remainder of the year, we believe it will gradually increase as we add more patterns, particularly in the second half of the year. At the present time, we plan to reduce the reservoir pressure modestly, and will return it closer to the minimum miscibility pressure, in an attempt to reduce the demand on our gas handling and water disposal capabilities.

Accordingly, we expect SACROC to average between 34,000 and 35,000 barrels for the year -- per day for the year versus our target of a little over 36,000 in our budget. We would expect it to be lower in the second and third quarters and higher in the fourth quarter. And given the number of patterns we plan, we actually think that by the fourth quarter, we will actually exit the year above what our original target was.

At Yates, we're obviously very pleased with our production so far this year. This outstanding performance is really attributable to two successful programs we've put in place since we acquired this field from Marathon. First, we've enjoyed a really excellent horizontal drilling program. And some of our new horizontals have initially tested at over 1,000 barrels per day. Of course, they stabilize at a much lower rate over the long-term. We plan to drill over 100 horizontals this year and are planning to propose to our joint interest owners to extend the program well into 2006.

The other really pleasant surprise has been the quick and sustained response to CO2 injection. We're now believe we're producing over -- 1500 barrels per day, attributable to CO2 injection which began in a portion of the field in March of 2004 and we just received approval from our joint owners to expand the CO2 injection into other parts of the field. We expect Yates to average between 22,000 and 23,000 barrels per day for the year or over 3,000 barrels per day over the numbers we assume in our plan.

Although I would add if our CO2 and horizontals continue at the present level, we could do better than those numbers. But at any rate, sum and substance we expect Yates to be substantially above plan for the year and obviously substantially above last year. We expect SACROC to be modestly below the plan for the year, still substantially above last year. And we expect the CO2 segment as a whole, to slightly exceed its earnings and cash flow target for 2005 and indeed, it was comfortably above the planned numbers in the first quarter on that basis.

Now, turning to the terminal segment, our fourth business unit at KMP. Growth there was driven by contributions from two acquisitions in the fourth quarter of 2004. If you recall, we bought more than 20 small terminals along the Mississippi River system, and then we bought the Fairless Hill Terminal on the Delaware River in Bucks County, Pennsylvania. So that was an acquisition contributed about half of the growth. The other half the of growth came from strong throughput at both our liquids at bulk terminals. We had a truly extraordinary quarter in terms of volumes and revenue and our two terminals on the Houston ship channel, and overall, our liquids terminal has recorded a 5% increase in through put compared to the first quarter of 2004.

Our bulk terminals reported a 5% or excuse me, a 17% increase in throughput based on strong coal, petcoke and cement volumes. I will want to assure you that those five and 17% increases are apples to apples in the sense that the acquisitions that we made during 2004 were added into the 2004 numbers. So, really strong volume growth. At both our liquids and bulk terminals and we expect that to continue throughout the year. It is also well ahead of its plan for 2005 through the first quarter.

Now, let me turn to some other matters at KMP. Let me start by -- as you will note in today's KMP release, there is a possibility that the Attorney General of California may file a criminal charge against KMP or its subsidiary on the West Coast relating to the Suzanne Marsh incident that occurred in April of 2004 and how we reported certain releases from our facilities in California. As we explained in the news release, we believe that we acted appropriately in these situations.

We do not believe that the resolution of these matters will have a material adverse impact on KMP's financial condition or on the results of its operations. We explained in some detail how we reacted appropriately in the release. But let me again emphasize Kinder Morgan's commitment to safety and satisfactory environmental performance. We're spending over $220 million this year on sustaining Cap Ex at both of the Kinder Morgan companies to maintain the quality of our pipelines and terminals.

Ironically, I might add that the line running through Suzanne Marsh has now been completely replaced and removed from the marsh at a cost of almost $100 million. That line opened at in December of 2004. In a further ironic incident, part of this whole process, we applied for the permits to replace the line in 2001. It took until early 2004 to receive those permits so that we could truly replace the line, which we did in about seven months.

Our goal is for each of our business segments at Kinder Morgan to outperform the relevant industry average of safety criteria. And secondarily, to constantly improve over the -- our own prior year performance. We're tracking this on a monthly basis, and I'm pleased to report for the first quarter of 2005, the majority of our segments outperform their comparable industry averages. So we continue to work very hard on the issue of safety and environmental good citizenship.

Now let me turn to some other important strategic happenings during the first quarter. KMP received approvals from the city of Carson, California, that's in the L.A. basin, for a major expansion at our Carson petroleum products and storage transfer terminal. Ten new tanks are scheduled to be constructed and placed into operation late this year and into 2006.

That will add about 800,000 barrels of additional storage capacity for products in the southern California market like gasoline, jet fuel, and diesel. Ultimate we expect to build about 18 new tanks at the Carson terminal at a cost of about $70 million to help meet the growing California demand. So, that's a very big long term project for us, over the next couple of years.

Consistent with our discussion at our annual investors conference in January, we announce today that KMP has bought 64% interest in the Claytonville oil field unit. This is a small unit also in the Permian basin about 30 miles east of our SACROC unit. We paid about $6 million for it. We'll operate the field which is about 5% the size of SACROC but appears to be a good candidate for C02 injection operations.

Assuming that reservoir studies confirm this potential, we would plan to invest about an additional $30 million which could take the production in the field from about 200 barrels per day to approximately 4,000 barrels per day over a period of a few years. Interestingly enough, the $6 million investment that we made is, we believe, a good stand alone investment because even if we never did a CO2 flood, the field is throwing off the interest about $1.2 million per year in distributable cash flow. To put it another way, we acquired it at about a multiple about five times DCF.

Next point I want to make, also as we discussed at the January meeting, at that time, I said we were looking seriously into the. petcoke business. We were already a fairly large player. Last year, Kinder Morgan handled about 7 million tons of petroleum coke, and we wanted to expand that. We have now announced, just last week, that we're buying seven bulk terminal operations from TransGlobal Solutions for about $245 million. We'll pay $184 million in cash. $46 million in KMP units at closing which we expect next week, and we'll put out an additional $15 million in KMP units two years after closing. Transactions expected to be immediately accreted to unit holders and it will make us the largest handler of petcoke in the United States. Together, we'll be handling about 17 million tons of petcoke.

These bulk terminal assets are located in Texas, and they all have long-term fee- based petcoke handling contracts in place with major refineries including Exxon Mobil, Shell, Linedale, CITGO, Conoco, Phillips, and Premcorp. Petcoke, as you know, is used as a fuel in the cement and power generation industries. We're paying about seven and a half times distributable cash flow. So it's a good acquisition from a financial perspective.

But I think more importantly, this is an important strategic move for us as the U.S. refiners rely on heavier crudes, more petcoke will be produced and handled. So we see great long-term potential for the petcoke business. In short, we believe we continue to build a great company at Kinder Morgan, and expect to majorly increase shareholder value for a long time to come. And with that, I'll turn it over to Park.

Thanks, Rich. All of you all can be grateful that it is first quarter. And even though I'll try to be brief, since there's no year-to-date numbers to cover, the content will ensure that I am.

We'll start with KMP. Hopefully you have the KMP earnings release in front of you and I can start on the first numbers page which is the standard income statement. At the bottom, you'll see the declared distribution as Rich has mentioned. The Board today declared a distribution of $0.76 up from $0.69 a year ago. 10% increase up from $0.74 in the fourth quarter of '04. So it is a $0.02 cent increase this quarter.

Right above that, you'll see the net income before DD&A, last sustaining Cap Ex per unit of $0.86 cents. That's up from $0.77. That is an 11.6% incase. Additionally the number is post -- the legal settlement which was a surprise to us, and came in, in the quarter of $25 million, if you back that out, we would have been at $0.98 cents distributable cash flow per unit. An increase of about 27%, over the first quarter a year ago.

Again, Rich mentioned excess coverage. After the litigation settlement, the excess coverage is about $22 million. If you back out the litigation settlement, the excess coverage is $47 million. Again, our full year budget was $39 million. So we're doing very well against that full-year budget even after the impact of the surprise legal settlement.

I'll talk briefly about net income per unit although we don't believe that that's the most meaningful measure for KMP. We believe it is more important to focus on the distribution and the excess distributable cash flow above the distribution or the distributable cash flow per unit. But the net income per unit was $0.56 compared to $0.52 a year ago. And again, if you backed out that litigation settlement, it would have been $0.68.

With that on the page right behind that, you can look at the segments. Rich talked a lot about the volumes, and what drove this. You'll see products pipelines at $125.6 million up over $11 million from a year ago. Up about 10% in terms of earnings before DD&A. Now the volumes were a little bit weaker than we expected, especially gasoline on the West Coast even though it came back nicely in March. That led to the Pacific to actually be slightly under where we thought it would be.

The combination of the slightly weaker volumes and the additional expenses that were incurred as a function of the weather. And the combination of that and the weaker performance on the north system when we talked about the NGLs, caused products to actually be a little bit under its budget, even though it was 10% above last year, it was just a hair under the budget a few million dollars under budget.

Natural gas pipelines. Almost $124 million up from $103 million. $20.6 million increase or 20% increase. Very strong performance there driven by the intrastates by the acquisition of Trans-Colorado and by strong performance at Red Cedar. Similarly, natural gas pipelines was strongly ahead of its budget for the first quarter.

CO2. $123 million almost, up from $78 million. An increase of $45 million or 58% year over year driven by the increased volumes at SACROC, and at Yates, and of course the acquisition of the Wink pipeline had an impact on that segment as well. On the terminal segment, $74.2 million up from $63 million, so up $11 million over the prior quarter. 17.5% increase above its budget. CO2 was also above its budget. Part of that outperformance was driven by the liquids pipelines and the bulk volumes which Rich had mentioned.

Additionally, the Fairless Hills acquisition was not included in our budget, and so the segment was benefiting from that. Year over year, it was also benefiting from the Global Terminals acquisition. You look at total segment earnings, $446 million up from $358 million. That's an $88 million increase in segment earnings before DD&A or about a 25% increase and significantly ahead of our first quarter budget.

With that, I will drop down to G&A. It is in the segment earnings contribution section. You'll see G&A for the quarter is about $43.5 million compared to about $48.3 million a year ago. Almost a $5 million reduction. It was actually about dead on our budget. A few things going on there.

One is during last year, we had an additional item that was just a one-time item that showed up in G&A related to benefits. Additionally, this year, we're getting a $3 million benefit from a settlement of receivables from Enron. We essentially sold those receivables to a third party. Realized cash and we recognized that here. Now, slightly offsetting that of course, is the G&A associated with acquisitions. Again, the Fairless Hills acquisition is the only one made to date, and of course, it was not in the budget. It was made at the end of last year. It was made after we finished the budget. And so it was not included in the budget.

Going forward, toward the TGS acquisition will be in the numbers and will cause G&A to be ahead of our budget for the full year, of course offset by the additional cash flow generated from that acquisition. You'll see in G&A, the legal settlement also falls there. We've broken it out on a separate line here. That's the $25 million amount. Dropping the net debt cost, $60 million up from about $47 million a year ago. About a $13 million increase, right on where we expected we would be in the first quarter. The balance is up from a year ago. It's a function of expansion Cap Ex, and acquisitions. The rate is also up based upon the increase in floating rate debt, again we're about 50% fixed, 50% floating. Most of that floating is not short term, it's termed up debt that is swapped back to floating, but we do have that exposure and floating rates are higher in the first quarter of 2005 than they were in the first quarter of 2004.

That drops you down to net income. $229 million up from about $192 million, up $37 million or over 19% and then of course, if you look at it without the litigation settlement, we would be at $254 million or up $62 million from a year ago for about 32% above where we were a year ago.

With that, I'll go back to the first page and walk you down the face of the income statement. Revenues are up. That's a function of gas prices and the addition of the global terminals in the terminal segment. Operating expenses similarly up. DD&A is largely a function of increased oil production in the CO2 segment, that accounts for the majority of that $17.5 million increase. The remainder is associate with the acquisitions.

G&A, it looks here like it is up $20 million. It is up $20 million here but the $25 million settlement is included in that. So if you back that out, it would actually be down for the year. COTI is up slightly. It is a function of oil production as well. And then also acquisitions. Takes you to operating income up $49 million for the year or 22% again after the litigation settlement.

Earnings from equity investments up a little over $5 million. Stronger performance from Plantation. Plantation had an environmental reserve that it took in the first quarter of 2004. Stronger performance from Red Cedar in there as well.

Amortization of excess costs of equity investments unchanged. Interest expense we've discussed. And again,.that takes you down to net income as we discussed before and drops you down to the net income per unit, and again ultimately to the distributable cash flow per unit and the declared distribution.

One additional comment I'll make. You'll see that sustaining capital expenditures were $0.12 per unit or about $24 million for the first quarter of 2005. That's up from about $0.11 per unit, or about $20 million for the first quarter of 2004. It is on track to meet our budget of about $126 million of sustaining capital expenditures at KMP in 2005. It is not quite ratable. It is not quite aboard $126 million. But that's consistent with what we typically see in the first quarter. It is normally a little bit lighter in terms of sustaining Cap ex.

With that, I'll go to the last page of the KMP press release which is the balance sheet. You'll see on the assets side, nothing has significantly changed. There are a few small movements that are related to hedge marking to market or hedge accounting. True hedge accounting just flows through the balance sheet here. And that affects some of those lines.

On the liability side, other current liabilities, that change is primarily related to the changes in the value of the hedges again. Long-term debt I'll discuss in a moment. Market value swaps and fluctuates with the forward interest rate curve. The other long term liabilities have gone up a significant amount, and that's again, a function of the change in value of the hedges.

Minority interest unchanged. Accumulated other comprehensive loss is up considerably. Again, that's the change in the value of the hedges that we have in place and then partners, capital, other partners capital is essentially flat.

Talking about debt, you'll see debt of $4.868 billion up from about $4.7 billion. At the beginning of the year that is an increase of $146 million. I'll walk you in a minute through exactly what drove the increase.

The debt to total caps is about 52.5%. It is up from 51.8% at the beginning of the year. That's consistent with our budget. Consistent with our expectations, that we'll end the year actually in a little bit lower debt to cap than where we began the year. Given everything that we have in our budget. We still expect to come about.

One thing I will note for those of you who might have noticed, we did have a maturity in March. We also issued debt in March. We put out a 30-year paper at KMP in the month of March. About $500 million. We used $200 million of that to pay off a maturity and the remainder to reduce commercial paper.

Let's talk about the change in debt. Again, it increased $146 million. With $6 million of acquisitions which was the Claytonville acquisition. We had Cap ex of $120 million. We had a use of cash for working capital of about $62 million and I'll return to that in a minute. Then we had KMR distributions which are a source of cash of $42 million during the quarter. Again, those four items net to that change in debt of $146 million.

Two items I'll give you more detail on, Cap ex in the quarter and again, this is expansion Cap ex. Not sustaining Cap ex. Sustaining Cap ex was covered by cash that's generated from the assets. Expansion Cap ex is not. Expansion Cap ex, to break it down by the segments. Product pipelines was about $30 million. The biggest piece of that was the east line expansion which is ongoing. The natural gas pipelines were about $5 million of that. A little bit of a pipeline in south Texas and finishing up a storage expansion.

CO2 was $52 million of the 120 consistent with our full year budget to spend $240 million, primarily at SACROC in 2005. And terminals with $32 million, a whole variety of different expansion projects there. We're adding some tanks in the Houston ship channel. We're adding some pipelines to connect the Pasadena and Galena Park terminals. And we have a whole variety of other smaller projects ongoing. Very nice return projects and the terminal segment. Again, that totals to the $120 million of expansion capital.

The other piece I want to break down for you, we did have a use of cash, a $62 million in working capital. Now the first quarter is typically a poor working capital quarter for us. Now, I can -- let me break this down for you. Truthfully, most of it came from accounts receivable and accounts payable. Accounts receivable, were actually down significantly but AP was down more so then we had a $55 million use of cash between receivables and payables. On top of that, we traditionally have large interest payments in the first quarter and the third quarter. That caused accrued interest to go down by $20 million, that's a use of cash. Accrued taxes actually went up by about $16 million, so that largely offsets that. Then you have various other smaller items that again total to that $62 million use of cash. We still believe that for the full year, working capital will end up about flat.

With that, I'll go to KMI so again in the KMI earnings release, the first financial page is the income statement. And you'll see at the bottom, income from continuing operations, diluted earnings per share. $1.17, that's up from $1.02 a year ago or a 15% increase. Let me walk through the details on the next page. The first line on the next page is the equity and earnings of KMP. Now, of course, we consolidate KMR, so 100% of KMR shows up in that line and is netted off in minority interest down below. To see the true net effect, skip down to the next section, titled Earnings Attributable to Investments in KMP. You'll see the total there is about $133 million. It's up from $110.5 a year ago -- over a $22 million increase. That's a 20% increase from a year ago. So again, very nice contributions to KMI from KMP.

Now, I will point out that that's actually reduced by about $4 million by KMI's share of the $25 million litigation settlement at KMP. It's a portion that comes through in earnings, gets reflected in the KMP units and the KMR shares that KMI owns. Reduce that by $4 million but again, that's consistent with our budget and on track with our expectations for what KMP will deliver to KMI in 2005.

Jumping back up to the top. NGPL had a strong quarter up almost 7.5 or about 7% and ahead of its budget. TransColorado of course is now at KMP so it no longer shows up at KMI. Retail slightly under a year ago but actually ahead of our budget just slightly. So consistent with where we expected retail to be. Power had a strong quarter up about $600,000 from a year ago. Also a budget due to some stronger performance at a power plant in Colorado. So, again, nice performance out of power although it is a very small piece of KMI.

That takes the total segment earnings including KMP to almost $308 million for the quarter. Up from $278 or almost $279 million for the quarter a year ago or $29 million increase. 10.5% growth over the quarter a year ago, and a little bit ahead of our budget. G&A expenses, you'll see $16.7 million down from $22.3 million, over a $5.5 million reduction. We're expecting a slight reduction in G&A at KMI during the year.

Now, we also benefited at KMI from the Enron settlement. There is about $3.1 million of this that is related to cash that we received, again, from a third party selling them our Enron receivables. So happy to get that cash. That's reflected there. If you back that out, G&A is right where we expected it to be for the quarter, a little bit better than where we expected it to be. Interest expense, you'll see about $36 million up from almost $32.5 million. About a $3 million increase. Balance is down almost $300 million in the first quarter of 2005. From the first quarter of 2004.

But the rate again has increased and similarly at KMI, we have 50% floating rate so that has increased interest expense. The interest expense related to the deferrable interest debentures, those are the trucks and that's flat. Other is largely KMR minority interest although there's one item here that I will note.

We did realize a gain during the quarter of $4.5 million, related to the sale of some KMR shares. Now at our conference in January, we announced the fact that KMI has some capital loss carry-forwards over that expire in 2005. In order for KMI to realize the capital gain, to offset those capital loss carry-forwards, KMI is going to sell a little less than three million KMR shares during the year. That's out of its total balance and you can see it is listed here of almost 15 million KMR shares that KMI owns. It will sell about $3 million of that.

The only reason we're selling the shares is to generate a capital gain so that we can offset this capital loss that will expire this year. We sold a small portion of that in the first quarter. We expect that we'll sell the remainder of that throughout this year. It could come fairly quickly. None of the sales have happened on the open market. We expect the majority of the remaining shares will be sold in private transactions. You get income from continuing operations about $241 million up from about $208 million, that's about a 16% increase and significantly above our budget.

Income taxes, one thing I'll note here there is about a million dollars of income taxes that really relate to 2004 that are flowing through here. That gets you the income from continuing operations of $146 million up from $127 million a year ago. That's about a 15% increase. There were four unusual items that I noted for you just to summarize those.

One, the flow through of the litigation settlement from KMP. Two, the Enron settlement. Three, the gain from the KMR sale. And four, the little bit of income tax expense that came from 2004. Those things now to less than a penny. It is actually a little bit less than a penny positive. So, again, we think that they're essentially irrelevant to the total quarter, but we did want to highlight all of those for you so you know that they're there.

Flipping back to the first page of the income statement, you'll see total operating revenue is actually down about $16 million. Part of that is timing. The other part of it is TransColorado. Of course, TransColorado was in KMI in the first quarter of 2004. It is not there in the first quarter of 2005. You see a similar issue on gas purchases and other cost of sales.

O&M is basically flat. G&A we talked about on the second page. The depreciation amortization is basically flat. COTI basically flat. Operating income you'll see is up about $7 million. Again, we don't place a whole lot of input on operating income because it is before the impact of KMP.

You see the impact of KMP at least in terms of total equity earnings. On the next line of course that includes 100% of KMR. And the KMR minority interest is pulled off down below. Interest expense we talked about as we did with the interest expense related to the trucks. Minority interest is largely to KMR minority interest. Other net is where you would see the $4.5 million gain from the KMR sales flow-through.

Again, that takes you to the income of continuing operation before income taxes. You'll note we have a small loss on disposable of discontinued operations. This is a receivable related to an old asset that had to be written off. That flowed through there. Again, that total -- the $1.17 income from continuing operations compared to the $1.02 a year ago.

With that, I'll go to the KMI balance sheet which is the last page of the KMI release. Cash and cash equivalents is actually down considerably from the end of last year. If you'll recall, we had a lot of cash on the balance sheet last year as a result of the sale of TransColorado. And we talked about the fact we had reduced some debt as a result of that then we were going to repurchase additional shares with that. And we did successfully complete the share repurchase related to transcolorado in the first quarter. I'll talk more about that in a minute.

Other current assets, slightly changed. Investments is down a little bit and that's a function of flowing through the portion of KMP's other comprehensive income that KMI has. PP&E flat, other assets, basically flat. You'll see total assets $9.8 billion, compared to about $10.1 billion at the end of the year.

Notes payable on current maturities. KMI had a $500 million maturity in March. That's the $505 million you see there at the end of the year. That was paid off. KMI did term up a little bit of debt in March. Actually it issued a ten year for $250 million, and you'll see that down in the long-term debt. What remains there at the end of March is commercial paper that's outstanding. Other current liabilities unchanged. Other liabilities and deferred credits, small adjustment to deferred tax there. The outstanding notes and debentures in the long term debt, again, up $250 million. That's the issuance of new debt in March.

The trucks are the next line, and then of course the value of the interest rate swaps, it just fluctuates with the forward curve. Minority interests unchanged. Accumulated other comprehensive loss includes again KMI's portion of KMP. This is equity accounting so that's why that flows through there.

Other stockholder's equity. You'll see it is actually down $70 million, and that's because of the large number of share repurchases we had during the quarter. It actually totalled -- the commitments totalled $169 million. The cash that flowed out during the quarter was $154 million. The reduction you see here in the shareholder's equity again is the $169. I'll talk about the $154 which is the cash number, when we get down to the cash flow.

On the debt, you'll see $2.724 billion of debt outstanding at the end of the quarter, compared to $2.586 outstanding at the end of 2004. Hopefully you'll recall that in January, I talked about what we believed our normal debt rate to date once we got through this additional share repurchase, and that was $2.7 billion. That's where we expect to end 2005, is at $2.7 billion. We're $24 million ahead of that. We're actually doing quite well because you'll see there is some timing in our cash flows. Then we're going to go through in a minute. So, I think that we're in very good shape, from a debt perspective, to be consistent with our overall budget and you'll see the debt to cap is 39% compared to the 37.5% at the end of the year.

Dropping down and looking at our back of the envelope cash flow calculation, you'll see that after sustaining capital expenditures and cash taxes, we generated $252 million of cash during the first quarter. Now, one thing -- two things I want to point out. First on the cash paid for income taxes. We make estimated federal tax payments on April 15th, June 15th, September 15th and December 15th. What that means is there is not a federal tax payment in the first quarter and there are two in the second quarter. So that is why -- you see the same thing in 2004. That's why the cash paid for income taxes is so low in the first quarter and we'll get hit twice with it in the second quarter. And year-to-date, it will essentially balance out.

Additionally, the sustaining capital expenditures of almost $11.5 million, our full-year budget is $100.6 million, almost $101 million. Again, the first quarter is typically a little bit lower in terms of sustaining Cap ex than the other quarters. Now, the combination of those two things, slightly lower than average sustaining Cap ex and not making a cash tax payment in the first quarter means that this back of the envelope number is very large.

$252 million is more than we expect in an average quarter, because for the year, we expect that we will generate about $623 million of cash flow here after sustaining capital, before expansion, before dividends, before debt reduction, before share repurchase. So, again, this is an above-average quarter mainly for those reasons although clearly performance was quite strong as well.

Now, let me reconcile something for you and then I'm going to come back to a number here. Debt went up by $138 million. That's a difference from the 2.724 and the 2586. And we generated $252 million to cash flow. Let me reconcile the change in debt for you. With you have a source of cash of $252 million. Again, generated by the business. Share repurchase totalled $154 million in cash. Dividends total $86 million.

We had contributions to our pension plans and benefits plans of $34 million during the quarter. We talked about this in January. The biggest portion of this was just a discretionary contribution. We actually -- our plans were overfunded at the end of the year. But we thought it was wise to go ahead and make an additional contribution to those plans to ensure they continue to stay overfunded so, again, $34 million contributed to the pension plans in the first quarter. We don't expect that we'll make any additional contribution for the rest of the year.

Expansion Cap ex was only $4 million for the year. That's a use of cash of four for the quarter. Budget for the year is $38 million. We're still on track to hit the budget. We did generate cash from the KMR sale of about $17 million. So that's a source of cash. And then working capital, with the use of cash actually about $145 million. That's a big number and there are a couple of things that compounded in there. One is just seasonality and couple of the same things that hit us in KMP.

And the other is on our hedges, we have some natural gas hedges at KMI. Natural gas prices went up during the quarter, which actually caused us to post some margin during the quarter. We expect that we'll get that margin back sooner than those hedges roll off, because we think that we can negotiate different hedging arrangements, different margin arrangements with our counterparties. We would expect that cash to come back fairly quickly. So again, it was a big number, $145 million. Let me give you the components , working capital.

Accounts receivable and accounts payable were a use of cash of about $24 million. We think that's seasonal, we think that will come back during the year. But again, AR and AP were use of cash of about $24 million. Accrued interest reduced and so it was a use of cash of $39 million. That's the timing on interest payments. Again, we'll get that in the first quarter and the third quarter.

Bonus accrual was a use of cash of $29 million. That's an annual thing. We pay bonuses in the first quarter and so that cash goes out in the first quarter. It doesn't go out in any of the other quarters. And then the hedge margin posting was $74 million. And so that's the biggest item and again, we expected a lot of that will come back in the near future.

Even if it didn't come back because we changed arrangements with our counter parties, these natural gas hedges are relatively short-lived, they go out maybe 12 months, they would come back over that time frame. Now, there are -- those totals will get you to a little bit above $145 million. There is about $20 million that comes back the other way from a variety of smaller items. So, again, actually if you go back to the change in debt of $138, you have $252 million of cash flow. You had share repurchase of $154 million. You had dividends of $86 million. You had pension contribution of $34 million. Expansion Cap ex $4 million. KMR sales $17 million. Working capital about $145 million. Then had you a couple of other items that were actually positive a little over $15 million. And that gets to your change in debt.

One other thing I want to reconcile for you, if you go, continue down that page, you will see we reconcile the simplified calculation of cash flow and the net cash flow provided by continuing operations. You'll see the cash from operations is only about $44 million and this reconciling item is about $220 million. We've already talked about most of these items so let me put this together for you. Not all of the items that I went through actually show up in cash from operations. Or affect cash from operations. But I can point out for you which ones do.

First of all, the working capital of about $145 million. That's again a negative $145 million. We think that's all timing. We think working capital will be flat for the year. So, we expect that to come back. The pension contribution of $34 million also falls in there.

And then there are basically two other items. One is timing on distributions and KMR distributions and the other is an increased cost or use of cash for gas and storage that total about $42 million between those two items. You add those things up and you get to the $220 million that you see there reconciling our simplified calculations, and the cash from operations. So, again, a lot of numbers. Sorry to go through it quickly. But hopefully that gives you a a sense of what was going on. I'll hand it back to Rich.

Ok. If there's ever an Academy Award for transparency, and open [kimono], I'm nominating Park Shaper. With that, we'll take questions you may have.

We'll begin the Q&A session. [OPERATOR INSTRUCTIONS]. Our first question comes from Jay Yannello from UBS.

Good evening. Park, a real small question at first, I'm on the road, and I don't have the numbers in front of me. You said there was a lumpy item last year in, I think it was G&A, what was the size of it and what was it? It was a few million dollars as it related to benefits.

It was a few million dollars, and it was related to benefits. We talked about it in the first quarter last year and actually we talked about it in just about every quarter last year.

All right. Ok, fine. Also oil hedging. Was there any additional oil hedging done in the first quarter?

There were not, actually, any additional swaps put on during the first quarter.

Ok. Finally, Rich, there is -- Williams has an MLP pending. Duke is talking about another MLP. I realize you have a lot of internal growth still.

Just your observations about more other midstream entities coming on the market. Any pros or negatives to that. What do you think about what's going on?

Oh, I think it is probably pretty neutral. There are pluses and minuses. I think on the plus side, Jay, the more MLPs that come out, the more this becomes an accepted class for investment. I think MLPs, still even with some of much more interest in the last six months or so with the formation of some of these funds, still MLPs don't have the widespread attention that [Reets] get for example. So, I think the more the merrier in terms of having more MLPs out there.

The negative is more entities chasing the same kind of assets. For us though, again, I want to emphasize that we have such a big footprint now. Our budget calls for us to spend a little over $600 million in expansion Cap ex at KMP this year. We've already had about another $50 million in projects generated by our various operating groups . I suspect we'll be someplace approaching 700, 650 to 700 for the year, we've already committed now $250 million in acquisitions, so I think we have plenty of opportunities. We'll certainly reinvest with KMP. I'm confident, at least a billion dollars. Another thing that's important to me is to look at the returns we get, every April with our board, we talk about what the returns are.

Last year, on our investments, the investments we made during 2003, then we looked at the return in terms of the distributable cash flow in 2004. And on investments of $427 million in acquisitions, we returned $103 million in cash flow, or a multiple of 4.1. For all of the acquisitions that we've done since we started Kinder Morgan, our actual performance has been, we've averaged about 6.6 times EBITDA. 7.1 times distributable cash flow on over $4 billion of acquisitions that we've made.

That's excluding SFPP and the original acquisition, and SACROC. At the beginning, they even would make it more favorable. But the point is we're still able to make acquisitions and again, this TGS is being made at about seven and a half times distributable cash flow and we're still having to make acquisitions and certainly make expansion expenditures on very good multiples with very good IRRs. The more the merrier. We think we've got a real niche that we can continue to expand.

All right. One more thing again, I'm on the road. I don't have the press release in front of me. But the whole California thing. Given than you tried to replace it, this seems like something that could be worked out given the facts. What are you going to do with this going forward?

Well, you know, we'll see. I think we felt -- we've always prided ourselves at Kinder Morgan of being transparent. When we have an issue, positive or negative, we put it out there and explained it to our investors. We don't like to surprise anybody. This is a very recent development. And we thought the appropriate thing to do was to put it in this press release. I think the press release speaks for itself.

We have remediated the area. We've replaced that line. Completely, the line doesn't even exist through Suzanne Marsh. And we spent over $10 million on remediating the whole area. It is unfortunate nobody likes to have any kind of release. We think we performed appropriately as we explained in the press release. And you know, we just wanted to make you aware of it. As we said, we don't believe it will have any material adverse effect from a financial standpoint. We'll see where it works out on a going forward basis.

All right. Thanks.

The next question is from Sam Brothwell with Merrill Lynch. Go ahead.

I'm doing ok, Rich. How are you?

Fine.

A couple of questions. Does a little bit of weakness at SACROC. I mean we seem to be coming up just a little bit short of target on this thing. Is that giving you any concern about the ultimate productive capacity or life of the field as you look down the road?

No. I don't think it is. But I've got Tim Bradley here who runs our CO2 operations. Tim, you want to talk to that?

I would agree with the answer. Rich. We don't see any weakness in the long-term potential of SACROC's oil production operations.

And what we're doing right now, Sam, quite frankly, is that we had a short fall in injection last year, as you might recall. We probably overcompensated a little bit. Late last year and early this year. We increased reservoir pressure a little bit too far and now we need to slow things back down again to get them back on an even keel.

Normally this is a pretty straightforward operation in a closed system, and SACROC has a small aquifer attached to it and therefore we have to juggle its impact on what we do to manage reservoir pressure. Short answer is we don't think there is any negative impact to the long-term oil production at SACROC.

I would add two things to that. First of all in the sense, we're a victim of our own success, I guess because what we found is as we've injected large quantities of CO2 in there, they've moved through the reservoir very rapidly. That's what you want to see in a lot of respects. But that's led to a lot of CO2 and associated gas coming up out of the recovery wells.

And we have limited capability, as Tim is saying, to absorb all of that into our infrastructure. So we're lowering the pressure a little bit. Then we'll be adding more new patterns which we have not done in the first quarter. Kind of hydrating the patterns as we go forward.

But to give you the overall view on SACROC, remember, this is a unit that had about two and a half billion barrels of original oil in place. Where we're conducting CO2 operations today, we're only up at about -- in areas covering about a billion barrels, we haven't even gone into the platform yet which, alone, contains about 800 million barrels.

We estimated on what we're working on so far, we're getting about 11% additional recovery, on the roughly billion barrels of reservoirs that we're in now. And we're assuming slightly lower in the platform. Maybe more like 9%. We would certainly hope that we would do as well as we do in the rest of it. The pay is very thick there. So, there is moving parts. But we feel very good about our ability to continue to grow this unit. And again, you put everything together and CO2 is above its financial plan for the first quarter and we expect to be for the year as a whole, above.

Very good. One other quick thing. Maybe you can just update us, Rich. On regulatory issues, if there have been any developments on SFPP

And also if you could comment a little bit about the outcome of the form two audit at Natural and any thoughts on what if anything that might lead to.

I would be happy to comment on both of them. First of all, on SFPP, absolutely nothing has happened this quarter. And again, we will just await that whenever something does happen, as you know, now there is a rule making at the FERC on the whole issue of Lakehead, so, we'll just see how all of that comes out and what the timing is. So, nothing new on SFPP. I think we've explained all of that to you in terms of worst case analysis.

Now, with regard to form two at NGPL, we think that there were no -- it was a very good audit, we think. We don't see anything coming out of that. Obviously on a going forward basis, I assume what you're leaning toward is the possibility of a Section Five. Which is always a possibility. There is no Section Five filed.

Let me just talk about our three interstate natural gas pipelines. NGPL has no obligation to file a rate case again. Trailblazer, I think it is either '09 or '10 when it files the next time. And K-MITE has no obligation to file again, although it was obligated to file and did file a cost and revenue study last year. I think it is important to note on NGPL that this was a rate case settled back in '97. For those of you with long memories, at that time, there were two new pipelines coming into Chicago. A lot of recontracting risks.

NGPL we didn't even own at the time. Went in and asked for help on the recontracting risk, should it get some payments as its customers decontracted, took capacity on the two new lines coming into Chicago. The commission said no. And black box trade on that was that NGPL has to take the recontracting risk. But it got to have a fuel component risk and it just got to take the upside or downside of what it could do with the assets. So, that was the -- the trade, I think. It is operating in a highly competitive market.

The most of its transportation contracts still are not at max term. It is taking all of the fuel risks. And the other thing I would add is it has been reinvesting. For example, over the next 15 years, the sustaining Cap Ex that we're putting in at NGPL, will allow us to completely in phases, replace virtually all of the compression on NGPL's system. So in point and fact, we're kind of rebuilding the pipeline from ground zero and that's all sustaining Cap ex. Not expansion. The way the accountants classify it.

So these are major expenditures that we're putting back into this system. We're operating very openly and honestly under the rate case settlement. Again, Section Fives can be done. They haven't been done. Burden is on those who file. It is a perspective only. I guess I would say that certainly an expressed objective of the commission and I think of the administration, is to encourage infrastructure development.

Lord knows we need a lot of natural gas infrastructure development if we're going to service the new source of supply both coming out of the Rockies, and the -- and the L & G systems that are going to be necessary coming out of the Gulf Coast. I would argue that to start opening Section Fives on NGPL or a bunch of other interstate pipelines is pretty counterproductive to what's good for the industry and good for the country in terms of infrastructure development.

But that's not my decision. All I can say is that this is the way NGPL is operating and we're not even at max tariffs on most of our transportation.

Ok. Thanks a lot, Rich.

next question is from Ross Payne of Wachovia.

Hi, Ross.

First question is can you talk about how you're using hedging at KMI. Because the number did seem to be higher than we're accustomed to seeing.

At KMI, we do have some fuel recoveries again as part of NGPL's tariff. We do have hedgings that we do at retail. And so that's what's going on there.

Ok. Park, how do you use that on the retail front to -- is that just for the retail network? You're just trying to lock in your profits there?

There are a variety of ways it's used in some of the states where we do business. We actually hedge for the regulated customers. Actually in Wyoming and Nebraska, we operate in a choice system as well and so for some of those customers who have chosen us as a gas provider, we're providing them with the gas and for many of those customers we do it under a fixed price or a winter guard type product where we lock in their prices in advance. And so clearly, we use hedges to lock in our exposure at that time.

I think, Ross, and Dan still in here, I think that about 40% of our Wyoming meters are on that choice gas program and I think about 70% of the Nebraska meters are on that. So, these are big parts of our meters. What you do is they elect, at this time of year, as to whether they want to lock in a price for the coming winter and then when that happens, you hedge that.

Because obviously we're guaranteeing a price for them and we're back to back hedging it. It is a one-year hedge, as Park said, all of these hedges, what we had, was a real run up in natural gas prices. All of this will come back to us no later than 12 months and most of it probably sooner than that.

Ok, so it is a wash. Ok. Second of all, Rich, if you can just kind of touch on it. Once again, you did it during the analyst's conference. But you know, where do you see your CO2 strategy going in the future? Are you going to expand that into other areas or are you content to where it is? And as a percentage of your business or EBITDA, where do you see that going over the next 12 to 18 months?

Well, I think obviously we've shown you where we think it will be over the next 12 months and CO2 as a segment, Park is about --

27% -- 28% of the total at KMP.

And of that 27, 28%, 2/3 of that in the oil production and the Permian Basin, and the rest is what we get paid for moving the CO2 to third party customers. So, overall, it is on the order of a little less than 20%. Probably 18% or 19% that's actually coming from the CO2 floods. I think we see some opportunities to continue to grow there. Obviously as you can see from the numbers, we've got a lot of other growth at KMP, so while you may see some slight move up, I don't think you're going to see a situation where CO2 is a 40% or 50% or anything like that. I think it will continue to be relatively where it is today. Maybe grow a few percentage points.

Now, there are several opportunities and again, I think before December 26th of last year, tragically, nobody had ever heard the word tsunami except for us, who used it but what said all along that it is a very descriptive word. What we try to do is ride tsunamis in each of our business units. In CO2 what we have here is obviously there is no more valuable barrel of crude in the world than light sweet crude produced in the Permian basin of Texas. And these are very mature fields.

The Permian basin today, about 180,000 barrels per day is coming from CO2 injection. There is about 1.5 billion cubic feet per day of CO2 being moved into the Permian basin. Of that, about a billion of it is coming out of our fields. At McElmo Dome that we and Exxon own. It is coming down our Cortez line and being injected. We're taking part of that for Yates and SACROC.

The rest of it is going to Exxon to Oxy and other third parties. As we see continued growth in CO2 use, quite aside from whatever we do from producing oil, we think we're going to need to expand Mcelmo Dome, we can easily take that up another 100 million a day with modest expenditures and offsetting any decline curve. It is a very prolific field. I think longer term, we'll probably turn to -- if the facts, economics justify it, to a neighboring field that we own over 80% of, called Doe Canyon. also in southwest Colorado.

So, number one opportunity is there's going to be more need for our CO2 to come down the line, into the Permian basin, and be used in plugs. Second opportunity is things like Claytonville, the smaller SACROC-like. We may buy. I think it highly unlikely we'll find SACROC or Yates. This is not the focus of KMP.

And then the third -- but very good opportunities to increase oil production. The third opportunity is eventually as we said before, we think there will be opportunities to use CO2 for tertiary recovered and other fields that have similar geological characteristics. One area we think we'll use CO2 is California and they don't have any kind of quantity of CO2 equal to what they would need. Our fields in southwest Colorado strategically located. Vis- a-vis California and have plenty of potential capacity to produce the kind of production we would need to service California. So, there is a lot of things that we're looking at in CO2. Only some of which has to do with our oil production through CO2.

Ok. As it relates to those comments, Rich, where are you -- you talked about doing some things at the actual domes to increase capacity. How about the pipelines that you currently have in place. What's the utilization and what ability do you have to grow the capacity utilization on those?

We have pretty good capacity remaining on the pipelines that are within the permian basin itself. Where the capacity constraint would be is on the Cortez line. That's the main line that comes from southwest Colorado across to Mexico into the Permian basin of west Texas. We own 50%, Exxon 37. We operate and Tim, I guess if we were to move significant new additional -- we have -- could move on the line. So, we could move about another 200 million a day which is what we would need the next few years. We got beyond moving 1.2 billion a day, we would have to add -- made some capital expenditures to add expenditures on Cortez.

The final thing. You mention the neighboring field. Was that Duke Canyon?

Doe Canyon. Like a deer.

Doe Canyon is a much smaller field than McElmo Dome, but we believe that it could be developed if it is economic. Could be underwritten by contracts to deliver the CO2 and deliver volumes of 100 million to 200 million cubic feet per day for many many years.

Ok. Very good. That's all for me, thanks, guys.

Ok. Thank you, Ross.

We show no further questions. We'll turn it back over to you for further comments.

Well, very good. We appreciate your spending one hour and 15 minutes with us. We think we have a very good quarter. We look forward to having a very good year. Thank you for listening in.