金德摩根 (KMI) 2006 Q1 法說會逐字稿

Hello and welcome to the Kinder Morgan quarterly conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to our host, Mr. Rich Kinder. Sir, you may begin.

Thank you and welcome to the Kinder Mor -- Kinder Morgan quarterly analyst call. As usual, we'll be talking about results from Kinder Morgan, Inc., which is one of the largest mid-stream energy companies in America and among it's other assets owns the general partner and a significant amount of limited partner units of Kinder Morgan Energy Partners, KMP, which is a large master limited partnership. So I will use those two symbols, KMI and KMP, in accordance with our New York Stock Exchange symbols. Also, as usual, we will be making statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. I'll give an overview of the quarter's activity. Then I will turn it over to Park Shaper, who will go through the financials in great detail. And then Steve Kean, our Chief Operating Officer, will talk very briefly about safety environmental issues, including a new effort at transparency. We will, starting this month, post -- we are posting safety and environmental results on our website, just like we post our budget and financial results; one more way, we think, to be transparent about the Kinder Morgan businesses. And then, finally, we'll take any and all questions that you might have.

Knowing that everybody on this call can read the earnings releases, I'll just divide the information that's really in those releases into two clumps; the good news and the bad news. Thankfully, the good news predominates, and let me start with that. The good news comes in two areas. First of all, a very good financial performance in the first quarter and, secondly, tremendous advances on some important project developments on some acquisitions, on some contract executions, all of which are very important for the next several years performance at the Kinder Morgan Companies. And in that respect, I'd have to say that, in our almost ten years of existence, this is the best quarter we've had in terms of developing and finalizing new projects which, in our admittedly prejudiced opinion, bodes very well for the future.

So let me start with the earnings. KMI had a really great first quarter. Earnings were up 29%. That's earnings before special items, up 29% from 2005. We exceeded our budget by a fairly significant margin. We think the year is off to a very good start. And the factors driving that good performance were NGPL, Natural Gas Pipeline of America, had another outstanding quarter, as we find that demand for transportation and storage of natural gas across that portion of the country just continues to grow, and we continue to do a good job on renewing contracts and on park and lend transactions. So, NGPL had a ver -- another very good quarter and Park will go into the financial details.

The general partner of KMP was another driver of the growth at KMI. That's our largest -- generally our largest single profit center at KMI. It had a good quarter, led by the natural gas pipelines at KMP. And we'll talk about that in more detail in just a minute. And then our Canadian operations added, for the first time, to KMI results. Had a good quarter, slightly ahead of our estimate in the acquisition plan and, therefore, slightly ahead of our 2006 plan for the first quarter. And that looks like all of that's working out very well, and Park will break that out and give you a lot of details. Turning to KMP from an earnings perspective, KMP was also above its plan for the first quarter and raised the quarterly distribution to $0.81 or $3.24 annualized. That's an increase of 7% from the distributions we made for the first quarter a year ago. There, as I said, the real driver was our natural gas pipelines group. And within that, particularly our Texas Intrastate Pipelines, as we continue to experience good opportunities for our capacity and our storage here in the state of Texas.

Our Terminals group also was well above -- over 20% above its 2005 performance and also above its 2006 plan for the first quarter. The Products Pipeline system's kind of a mixed bag. The -- overall the volumes were up a little less than 1%; .8% to be specific. Now, that was still almost almost three times the increase of the national average. The EIA reported nationwide average increase in refined products for the first quarter was .3%. So we were at .8 versus .3. But the .8 disguises some pluses and minuses that I'll share with you. Activity on the West Coast -- throughput on the West Coast was very strong. The Pacific system was up 2.5% in volumes, and Calnev, that's our line that runs from southern California over to Las Vegas, was up almost 12% for the quarter. So that -- the negative in the system was Plantation in the southeastern United States which actually -- their throughput was down a little less than 4%, mostly because diesel shipments were down on that system. You strip out Plantation, just by way of comparison, the volumes only the rest of our pipelines in the Products Pipeline group would be up by 2.9%, again versus a .3% national average.

Now, moving beyond the earnings in the two Companies, let me talk a little bit about some of the progress we made on future projects. First of all, starting with the biggest single project we've ever had at Kinder Morgan, the Rockies Express project, or, as we call it, REX. This is a $4.4 billion project. That number is an 8-H number and includes the roll-up of all the Entrega assets into the Rockies Express project. By the way, effective last Friday, we did rename Entrega, and it is now just part of Rockies Express. But this is a $4.4 project that will take natural gas production in Wyoming and western Colorado, move it over to the Cheyenne hub, and then run 1,300 miles across the heart of America, ending at Clarington, Ohio, and the eastern part of Ohio. The capacity of that line is 1.8 billion cubic feet per day. And as we reported at the end of February, all of that capacity is now fully subscribed by credit-worthy customers. Now, to remind you, we own at the present time two-thirds.

Now, to remind you, we own at the present time two-thirds. Our partner, Sempra, owns one-third, although as we're said, there is the opportunity for shippers to buy up to a quarter of the project, so it might be that we own 50%, Sempra 25 and the producers 25, but we will always operate the project. Those options come up in June, and so we will find out whether the producers buy in at that time. Other important news on the REX front is that we have now ordered virtually all our pipe and virtually all our compression for the entire project, at prices which are within the project budget. And it's very reassuring to us, and I would think would be reassuring to investors, that we are locking in prices consistent with the project economics that we've shared with you.

As I said, Entrega is now rolled in as the western-most portion of the project. If you think through, this whole project is going to be moving from west to east. The first phase of that so-called Entrega project is now in interim service that goes from western Colorado around Meeker, Colorado, up to Wamsutter, Wyoming. The second phase should go in by the end of this year. We should be effective with it, in service, by January of '07, and that will run on over to the Cheyenne hub on the Colorado-Wyoming border. Then we expect to run from the Cheyenne hub over to eastern Missouri by year-end, 2007. The next phase will run from there to Ohio by year-end, 2008, with full completion no later than mid-2009. And we're now modestly hopeful that with might actually beat that by a few months. We're also, as I've mentioned previously, now looking at now extending this pipeline further east and its storage opportunities along the line. So it's a very good project, getting better as we go along, and we're locking-in the economics that we've previously shared with you.

The Kinder Morgan Louisiana line, another large scale project, that's a $500 million project. It's 150 miles of pipe moving gas from L&G Regas facilities along the Louisiana gulf coast, to across the state of Louisiana, with numerous interconnect points with interstate and intrastate pipelines in Louisiana. There, again, we've ordered virtually all the pipe, and again, it's within the level that we had budgeted for in our project economics. Also similar to REX, all the capacity on this line is also subscribed by Chevron and Total on a long-term basis. We anticipate a start up in early 2009. Now if you just look at REX and Kinder Morgan Louisiana, as I've said in the past, and taking into account that we own 100% of the Louisiana line, 50% projected of REX, these two projects will be substantially accretive at the KMP level and $0.50 to $0.60 per share accretive at the KMI level by 2009, and positive earnings and cash flow impact from these projects beginning in calendar year 2008. So very significant to us.

Now, moving on down with some other significant items that we're working on and have finished to a certain extent, at our Texas Intrastate system, we just announced this week that we've now signed a new significant long-term contract with Centerpoint -- that's the local distribution company for Houston -- which will start on April 1, 2007, and that calls for Centerpoint taking transportation capacity of one bcf a day, and they will take 16 bcf of storage capacity. o, one bcf a day of transport capacity, 16 bcf of storage capacity.A long-term contract, very significant to our Texas Intrastate system, and we're delighted to have an expanded relationship with Centerpoint, which has been a customer of ours for many, many years.

On our NGPL system, including the new affiliated pipeline in northern Illinois that we've announced in the last few days, we're now committed to spend about $150 million in expansion capital over the next two years to expand our transportation storage capacity on that line, all at very nice economic terms. On our Products Pipeline system, we are now finishing up the first phase of our east line expansion, and that runs from El Paso over to Tucson and Phoenix. The pipe portion of it is now virtually complete. We're awaiting completion of the tank farm at El Paso. We expect to be in service with the pipeline and tank farm no later that June 1st of this year. That's a $210 million project.

We also expect to build a second phase of that project, and we are in the permitting stages now on that, and we expect to bring that online no later than the fourth quarter of 2007. That's a $145 million project and will take the total capacity of that east line up to the point where it will be able to move 170,000 barrels per day into Tucson from El Paso, and 155,000 barrels a day on in to the rapidly growing Phoenix market. Together these two expansions from the east will allow us to serve all of Arizona's rapidly growing demand for gasoline, jet fuel, and diesel for many years to come, and we'll be able to service from either from the California refineries or from the Texas refineries. As you know, we have been prorating that line coming in from El Paso for the last couple of years. or even longer than that, and so we're delighted that, beginning this June, we're going to break that bottleneck and expand it even more by late 2007.

Also on our Products Pipeline system, I mentioned earlier the tremendous growth we're seeing in the Las Vegas market. That, of course, is the fastest growing metropolitan area in America. Our present line capacity going in there -- coming from southern California over to Vegas -- is about 140,000-barrels per day. It's almost full at this time. We're averaging about 137,000 barrels a day of throughput. And so, in some months on a seasonal basis, we're actually having to prorate that system. We're now in the process -- we've already authorized spending about $25 million on pipeline and additional tanks, both at the California end and the Las Vegas end -- to take that 140,000 barrels per day capacity up to 156,000 barrels per day by the fourth quarter of 2007. And we're now exploring a further expansion, which would increase that capacity on up from 156,000 barrels a day to 220,000 barrels a day by 2010. And that would probably be an expansion in the $300 million range. Now, we have not -- our board has not approved that yet. We don't have the final economics for it , but given the prolific growth of Las Vegas, I think it's likely that we will be coming forward with that project sometime later this year. The planning stages of it, it will take two or three years to permit and build.

Now, in our Terminal group at KMP, we've had a number of important developments. We signed an important long-term contract to handle significant additional volumes of imported coal at our Newport News, Virginia, terminal. That is under-pending a $70 million expansion there. And we've also acquired three additional terminals in our Terminal group for about $63 million, two here in Texas on the ship channel, just outside Houston, and one in California, which is the largest railcar ethanol-handling facility in the western United States. We have become an increasingly large player in the ethanol field. both on a terminal and supply basis, and we're anxious to expand further, presuming we can do it on economic basis. And in addition to handling that additional ethanol in California, the two facilities here in Houston will give us additional capacity to handle bulk products here in Texas.

At our CO2 segment at KMP, we have purchased an additional producing property in the Permian Basin. This should lead to more opportunities for CO2-induced recovery. We're also expecting to expand our CO2 pipeline capacity upstream of the Permian Basin to serve increasing demand for CO2, primarily from third parties and from our partner, Exxon. Our share of that would be about $120 million over the next two years. It would be vitally needed additional CO2 that would be termed up under contracts with third parties in the Permian Basin.

At Kinder Morgan Canada, we have received commercial support from the shippers in Alberta for what we call our Transmountain Phase One expansion. That's a $500 million U.S. project that will take our capacity on Transmountain from 225,000 barrels to 300,000 barrels per day. And in May, we will launch our open season for an additional 100,000-barrel per day Phase Two Transmountain expansion. Also at Kinder Morgan Canada, we continue to make progress on a major expansion of our corridor pipeline. That's the pipeline that transports bichamin from the oil sands down to the upgraders at Edmonton.

So that's sort of a laundry list of ten or 11 projects that we've made significant progress on. I mention those one more time because, with all these projects, I think you can tell from our tone that we're very bullish on the future earnings and cash flow growth at both KMI and KMP over the next several years. And we believe, as I guess a lot of management teams do, that our equity -- value of our equity is just not reflect this future growth in earnings and cash flow over the next several years. So, we continue to believe that, particularly after the price movement of the last six or eight weeks, that KMI and KMP equities are undervalued, relative to what we expect to be able to deliver in the future.

Now, that's the good news. Let me -- we pride ourselves on being transparent, so in our press release we talked pretty specifically about some issues in our CO2 operations, specifically the SACROC unit. Let me put that all in perspective for us. If you look at KMP's CO2 operations, they really have three components. One is the SACROC unit, the second is the Yates field, and a third is our S&T, supply and transport facilities running all the way from the production areas in southwest Colorado down through the pipelines -- the Cortez pipeline, across New Mexico and then through our pipeline distribution network in the Permian Basin. Let me take those in turn. The Yates field is well ahead of its plan for 2005, and we expect to continue to run ahead of plan for the balance of 2006. Our S&T operations, our pipelines and upstream, also running ahead of plan and, in fact, at record volumes. In fact, we're moving a billion cubic feet a day, which is full capacity, across the Cortez pipeline, running from Colorado down to the Permian Basin. And we expect that trend line to continue throughout the year, also.

But SACROC is a different story. As you can see from the numbers and from the text of the KMP release, for the first quarter we ran a little less than 3,000 barrels below our plan for the first quarter, and we expect to finish the year with about the same discrepancy to our budget. Now, that shortfall would produce a reduction of about $45 million in CO2 segment's earnings from DD&A for the full year, if the SACROC situation does not turn around. Now, other KMP segments have already made up part of that shortfall by exceeding our budget in the first quarter, which I said earlier, which Park will take you through. And we'll certainly work to close the rest of that gap coming from CO2 operations throughout the remaining three quarters and make as much of that up as we possibly can, both in the CO2 segment and in our other segments at KMP. Certainly there are no guarantees on that or anything else in life, but we're not revising our budget target of 328 in distributions at this time and still hopeful that we can make that. Now, that's our announced budget target for the year at KMP.

I guess I would close by saying, given the very strong performance of all of our segments at KMI, it almost goes without saying we will still expect to meet in full our target of $5 per share earnings before the certain item at KMI. So that's where we are, and I'll turn it over to Park, and then he'll turn it over to Steve, and then we'll take any questions you might have on anything we talked about or anything else from the earnings release. Park?

Alright. Thanks, Rich.The good news that I have is that it's the first quarter and so you won't have to listen to me ramble on for as long as normal. The bad news is it's the first time that KMI has reported KMP in a consolidated fashion, and so I'm going to walk you through how that shows up on KMI's financial statements. But, before I get to KMI, we'll start at KMP, and so hopefully everyone has the press releases, and I will start on the first financial page at the back of the press release for KMP. You'll see that's the face of KMP's income statement. Three lines up from the bottom in 2006 from the first quarter, you'll see $0.84 of net income before DD&A, less sustaining CapEx per unit. That's basically distributable cash flow per unit. That compares to the distribution that the board approved today of $0.81. That's about $7 million of excess coverage. You'll recall, from January that our budgeted excess coverage is $9 million. We're actually ahead of budget in total for the first quarter. The distributable cash flow total is about $186 million in the quarter, and that's about $10 million above our budget for the quarter. So, as Rich highlighted, it was a very strong quarter.

Looking at the components of the distributable cash flow, you can see the sustaining CapEx totaled about $26 million. That's a little bit ahead of the $24 million in the first quarter last year. Now, comparing that to the full-year budget of $170 million, it looks like the run rate's a little bit low. That is normal for the first quarter. And so we still expect that we will be at, maybe slightly below the $170 million of sustaining capital expenditures at KMP for the year. DD&A is up. That's largely a result of acquisitions in the Terminal segment, a little bit of expansions, also, at terminals and then some expansions in the Natural Gas segment. Net income is slightly ahead of our budget.

Now, when you compare these numbers to 2005, a few things to note. One, on the face of the income statement, you are seeing the numbers after certain items in 2005. There weren't any certain items in the first quarter in 2006. But in 2005, we had about $27 million of settlement, which show up here. Now, they're broken out on the next page. Even when you look at the next page, you'll see that the net income per unit was greater in 2005 than it is in 2006. ou'll see, though, in the relevant measure, and what we normally talk about at KMP and focus on is the distributable cash flow and the distribution. You'll see the distributable cash flow per unit was was also greater in 2005. Now I just told you that's consistent with our budget. We are actually above budget in 2006.

And so, why is that happening? And this is consistent with what we said in January. I'm about to go over this, but I figured I'd give you the overview. Segment earnings before DD&A are actually up about $35 million, and then we're losing that to G&A and interest. G&A is largely driven by the increased benefits costs and insurance, and interest is largely driven by higher rates, although we also have a higher balance. And so that's what's going on when you compare the first quarter of '06 versus the first quarter of '05. But again, we ended up above our budget. We're ahead of where we expected to be in the first quarter of 2006.

With that, I'll go to the second page, and you can see the segments laid out there. Looking at segment earnings before DD&A at the top of that page, Products Pipelines is basically flat with where it was a year ago. Rich talked about the volumes. Again, very strong on the West Coast. A little bit weaker on Plantation, primarily due to some warmer winter weather on the East Coast, and then some shifts in -- in jet fuel shipments. Calnev, as Rich mentioned, up 12% in volume, very strong in terms of earnings before DD&A. Overall, Product Pipelines is under our budget. It's under it by about $6 million from where we thought it would be in the first quarter. About $5 million of that is related to environmental expenses that we budgeted differently and that we expensed differently last year. And so, again, that's a change in the variance, both from our budget and from last year, of about $5 million, and we expect we'll see that throughout the rest of this year.

Natural Gas Pipelines, up about $20 million from a year ago, well above its budget, driven primarily by the Texas Intrastates, which were well above budget and above last year. We expect that the Natural Gas Pipelines will be above their budget for the year. CO2's essentially on budget. It's about $1.2 million below where it was last year. The volumes are laid out down below. Rich talked about the fact that SACROC volumes are below where we expected them to be in first quarter, and will continue to be below, we expect, for the year. Yates volume's ahead of budget and the [Macalmo] and Cortez volumes also ahead of budget. Now, Rich gave you the -- a preview of what we think will happen for the rest of the year at CO2. There's a $45 million shortfall when we look forward for the rest of the year, relative to budget.

Terminal's about $90 million of earnings before DD&A, up about $16 million from a year ago. The biggest piece of that is the TGF acquisition, which occurred in April or May of 2005, driving significant growth year-over-year. Our coke volume from -- at the TGF asset are very strong, and well above where they were a year ago. Terminal's ahead of its budget for the year by a little over $1 million ahead of its budget for the quarter, and we expect it to be on or above its budget for the year. Total segment earnings before DD&A, $481 million. As I mentioned, that's $35 million above 2005, and it is above our budget, that we're ahead of where we thought we'd be in terms of segment earnings.

And so, let's drop down and look at where we got hurt in the quarter and, again, most of it's consistent with our budget. If you look at the G&A line of about $61 million compared to about $46 million a year ago, about $14 .5 million above last year, this is actually a little over $2 million ahead of our budget. The reason for the variance, both to last year and to budget, are the same. Benefits, as I mentioned, including payroll taxes, slightly higher insurance costs, driving that increase in G&A. Now, some of the benefits we actually expect to be timing, and so we think, relative to budget, some of that will come back throughout the year. And so we feel like our budget for G&A for the year is probably about where we will end up. Interest. About $77 million compared to about $60 million a year ago, so up $17 million. Our balance is up, versus the first quarter of 2005, on average about $650 million. Two main reasons for that.

One, about $180 million is out, as a result of Rockies Express. This is both the purchase of Entrega and a little bit of expansion CapEx hat has already begun. That actually was not in our budget, but we walked through that in February, when we announced that we were going forward with the Rockies Express project. Not only that. We laid out, in detail, how we expect to finance that, going forward. This is consistent with that. Then the other increase in the debt balance year-over-year is a function of acquisitions and expansion projects.

Now, in addition to the higher balance, the rate is also up. And our average rate, when you take out the debt from Rockies Express, which is the right thing to do because the interest on that expansion project is being capitalized, as it will, until the segments are put into service -- when you back that debt out, our average rate is up about 75 basis points, and that's just a function of the increase in floating rates from a year ago until now. The interesting thing about that is we're about 50% fixed, 50% floating, consistent with how we've been for a long time. But in order for our average rate, which goes across both fixed and floating, to go up by 75 basis points, then the floating rate must have gone up by 150 basis points. So that's the magnitude of increase in floating rates that we've seen over the last 12 months.

Minority interest is basically the general partner. Then you see the certain items. which are basically all in the first quarter of 2005. backed out there. We get you to net income, and again dropping down to the net income before certain items and the DCF before certain items, you'll see that the first quarter '06 slightly below the first quarter of '05, but consistent with our budget, consistent with where we expect it to be.

With that, I'll go back to the first page. Revenue's up about $400 million. Price of gas has an impact there, just like it does on operating expenses. DD&A I discussed, largely a function of the acquisitions in the Terminal segment. G&A we discussed. Toti is up, as CO2, as a function of the oil production, and also due to the acquisitions on the Terminal side and a little bit of the expansions on the Natural Gas side. Operating income up about $36 million or 13.5%. Earnings from equity investments is down slightly. Our tariff on Cortez gets reset annually at a lower rate, and so, even though volumes at Cortez were stronger, the net earnings at Cortez were a little bit lower. Plantation was a little bit lower for the quarter, offset by improved performance at Red Cedar. And then interest we've already discussed. Other net is essential de minimis, and minority interest we've discussed. Again, takes you down to the numbers that we talked about before. The one thing I will remind you of and Rich said a minute ago, our budget is to distribute $3.28 per unit, and so, when we look at how we are performing, we're looking at how we are doing in order to meet that budget target of $3.28 of distribution.

With that, let me go to the balance sheet for KMP, which is the last page in the KMP earnings release, the last financial page. I'll walk down this quickly. Cash essentially unchanged. Other current assets has gone down by about $200 million. Most of that is a reduction in accounts receivable. PP&E is up. That's a function of the investment in Rockies Express, which again was the acquisition of Intrega and a little bit of expansion capital. I'll remind you, we currently own 66%, 67% of Rockies Express. Sempra owns one-third. That means that we consolidate the entire project onto our balance sheet.

So what you see in PP&E is all of the project, and then you have a little bit pulled out in minority interest, and we'll talk about that when we get down to -- to that line. Investments unchanged. Deferred charges and other assets moves around a little bit, with the mark-to-market of the hedges. Total assets about $12 billion, up about $100 million from where we were at the beginning of the year. Other current liabilities is down about $330 million. That's primarily a reduction in accounts payable. Long-term debt is up about $480 million. Rockies Express is $180 million of that. And I'll walk you through the other changes in debt in a minute.

Market value of interest rate swaps just fluctuate with the forward curve for interest rates. The other liabilities is primarily moving with the mark-to-market of the hedges. Minority interest you see is up $90 million. That is Sempra's interest in Rockies Express. OCI, other comprehensive loss, varies with the mark-to-market on the hedges and, then, other partners' capital essentially unchanged. That take you down to net debt of about $5.7 billion. It's up from about $5.2 billion at the beginning of the year. That's an increase of about $463 million. I'll reconcile that for you in just a minute. So you'll see that debt to total cap is up about 54%, up from about 52.4% at the beginning of the year. Now, the one thing to recall there is this includes about $180 million of debt associated with Rockies Express. If you were to back that out, we would be flat debt to cap. We'd be right at 52.4%, flat with where we were at the end of the year. And again, we detailed the financing plan for Rockies Express in our release on February 28th.

So let's talk about the change in debt. Debt is increased by $463 million. I already told you 180 of that, approximately, came from Rockies Express. We had other expansion and CapEx of about $170 million. We generated cash from KMR distributions. Again, that's essentially reinvestment of distributions of about $47 million, so that was a source of cash. And then we had a use of cash for working capital and other items of about $165 million. That's a fairly large number. Let me tell you what the components of that 165 use of cash are. AR and AP is a use of cash of about $90 million. There is a big piece of that that was just a payment that rolled over from the end of the year. And otherwise it's just kind of normal movements in AR and AP. We had an increase in margin deposits of about $33 million, an increase in gas and storage of about $13 million, and then other current assets and current liabilities were a use of cash of about $30 million. And those accumulate to about the $165 million use of cash for working capital and other items.

The other thing I'll do give you a little bit of a breakdown on the expansion expenditures for the quarter. Again, they totaled almost $170 million. About $44 million of that was a product that was primarily the east line expansion. About $14 million of that was on the Natural Gas side, a variety of smaller projects there. About $74 million of that was at CO2, just continued investment in SACROC, for the most part. Now, about $34 million of that was at Terminals; the Shipyard River expansion, some tanks that we're adding in Pasadena, and a variety of other smaller projects. So, that is KMP.

With that, I will jump over to KMI. So again, at the back of the KMI release, you'll see the financial pages. I'll start at the first financial page, which is the income statement. And note that 2006 consolidates KMP, 2005 does not. 2005 is represented, as we reported 2005, again, so there are significant differences between the two columns, because of the consolidation of KMP. Now, you're going to see some differences later, as well. I'll highlight one for you here. Revenue is up ten times at KMI in the first quarter of 2006, versus the first quarter of 2005. That is a function of consolidation. It's a function of accounting. It is not true that -- that business activity at KMI has changed by ten times from 2005 to 2006. I don't think this is the last time that we're going to say this, but impacts of consolidation are just accounting. Nothing has changed with the business. Nothing has changed financially. The accounting has changed and how it's represented on this page has changed. You're going to see that in a little bit more detail on the next page.

In total, you'll see earnings before certain items at KMI. The $1.54, it's up $0.29 from about $1.19 a year ago. There was a certain item in the quarter at KMI. It totaled about $0.10 of earnings per share. It was related to some interest rate swaps that we put on at the time of the Terasen acquisition at the end of last year that did not qualify for hedge accounting under GAAP. We modified those swaps so that they do qualify for hedge accounting, but in so doing, we had to take a $14 million charge. Now, that charge is noncash. It is nonrecurring. It's really an opportunity accounting charge -- opportunity-caused accounting charge. Again, we look at the numbers, ignoring that amount.

With that, let me go to the second page. You will look -- you'll see the segments broken down here, but let me help describe what you're going to see, because it's a little bit different than how we've presented it before and, again, that's because we are now consolidating KMP at KMI. So the first column is KMI with KMP consolidated. The middle column is a pro forma column for 2006 that puts 2006 on the same basis as how 2005 and all of the prior years were reported. And so, what this does is it deconsolidates KMP from KMI, and reports KMP on the equity method. One thing I'll do for you. Before we even start, go down to income from continuing operations before income taxes and certain items. $312.6 million in the first column. Note in the second column, it is also $312.6 million. Consolidation or not consolidation has no impact on the bottom line. This is just accounting. Again, I don't think it's the last time that we're going to say that, but it is just accounting. It is different ways of representing the same thing.

I'm going to talk primarily about the second column and the third column, because I think that's the way that most people have thought about KMI. What you see at first is the equity and earnings of Kinder Morgan Energy Partners. The easiest place to look at this is actually, if you flip to the next page, you see the normal section that we present entitled 'KMI Earnings Attributable to KMP.' And you'll see the total of that $147.7 million, up from $137.6 million a year ago, about 7%, and actually slightly ahead of our budget, consistent with what we said when we went over KMP. KMP was slightly ahead of its budget. It's impact on KMI is slightly ahead of KMI's budget. You look at NGPL, $127 million -- I'm sorry, I went back to the page before then, looking at the segment earnings. NGPL $127 million of segment earnings, up from 114 a year ago. That's up $13 million, about 11%, well ahead of its budget. Rich talked about the strength that we're seeing at NGPL and, truthfully, have seen for the last couple of years, continue to see very nice performance there. We expect that NGPH will be ahead of its budget for the year.

Tariffs and Gas, $116 million of segment earnings. Clearly we did not own Tariffs and Gas a year ago, so it did not show up in 2005. That is slightly ahead of our budget. We expect that Tariffs and Gas will end up on its budget for the year, if not maybe a little bit ahead. Kinder Morgan Canada, $28 million of segment earnings. Again, we did not own that last year. It is just a slight bit, $200,000 below where we expected it to be in the first quarter. We expect that Kinder Morgan Canada will be on its budget for the year. Kinder Morgan Retail, you'll see $28 million compared to $33 million a year ago, so below last year but right on our budget. This is really just a little bit of timing throughout the year. We expect that Kinder Morgan Retail will be on its budget for the full year. Power is actually up about $1 million from a year ago. It's slightly behind its budget, and it may end the year just slightly behind its budget.

Then you'll see, if you happen to look in the first column, the segments from KMP. So, again, on a consolidated basis, we will actually report the segments of KMP. I think it's easier to look at it on an equity-accounting basis and just look at the single impact -- single-line impact of KMP on KMI, and we already discussed all of the segments at KMP. That takes you down to segment earnings of $478 million, again in the middle column, up from $316 million. That's up $162 million. Now, clearly, a lot of that comes from Tariffs. $144 million of that coming from Tariffs. Interest expense. On an unconsolidated basis, $41 million of interest expense. That's up from -- I'm sorry. I -- that's G&A. I skipped a line. On G&A, $41 million of G&A ,up from $17 million a year ago. That's an increase of $25 million. $23 million of that came from the acquisition of Terasen, and G&A is on -- actually slightly ahead of our budget for the year.

Now, again, just to point this out, what you see in the first column is a combination of KMI's G&A and KMP's G&A. Same thing goes on the interest expense line. In the first column, that is KMI's G&A an -- I mean, KMI's interest and KMP's interest. If you look at just KMI without KMP, you'd see the $105 million. That's up from about $36 million, about a $69 million increase. $66 million of that came from the acquisition of Terasen. Our debt balance from a year ago is actually up about $4.4 billion. $4.5 billion of that increase, or more than the total increase, is a result of the acquisition of Terasen. Absent the acquisition of Terasen, debt would actually be down from a year ago by $100 million. Also, we do have floating rate debt at KMI, and the rate on that debt, or the average rate on the total debt is up about 60 basis points. The interest expense, deferable interest debentures, those are our trust, trusts preferreds. Same on the capital securities. Those are some comparable securities at Terasen, and so you can see the cost of those securities.

Minority interest, again the big piece in the first column is backing out all of KMP and KMR that KMI does not own. And so what you end up with,, again, when you consolidate, is a huge minority interest line. If you look at the middle column, the pro forma column, you'll see the minority interest is about $15 million. It's actually a little bit lower than where it was a year ago. And there, it's primarily KMR. Again, even when we're not consolidating KMP, we still consolidate KMR, and the minority interest comes out in this line. Other than that, essentially unchanged. Takes you from income for continuing operations before taxes and certain items, again, $313 million. It's the same, whether you consolidate or account for it on the equity method. Your bottom line income does not change. All that changes is where the things show up in the lines up above. Income taxes, $104 million. You will note that the effective rate has declined. That is a result of the financing of the Terasen acquisition, and so tou see some of the benefits of the Terasen acquisition show up there on that income tax line.

And that takes you to income from continuing operations before certain items, about $209 million. That is the $1.54 that I was talking about before, compares to the $1.19 a year ago. You didn't see the certain items, $14 million after tax in '06. About $3 million after tax in '05. What's there in '05 is just the impact on KMI of the certain items at KMP. The $27 million in settlements that I mentioned when we talked about KMP in 2005, this is the piece that flows through to KMI. One other thing I'll point out, if you sum up those total impacts of Terasen, which are the segment earnings from Kinder Morgan Canada and from Terasen Gas, the interest expense in the G&A that I talked about, the interest expense on the capital securities, a little bit of other net, and then the income tax piece that's attributable to Terasen -- and this is not giving Terasen the full benefit of the efficient financing we put in place -- but you get a total of about $42 million. If you then deduct that from the $209 million of income from continuing operations before certain items, and you back out the shares that we issued in the Terasen transaction, you find that Terasen's impact on KMI in the first quarter of 2006 was about $0.20 a share.

Now, when we announced the transaction, we talked about maybe a $0.35 to $0.40 impact, and so this seems large for a one-quarter impact of Terasen on KMI. The reason is that Terasen is seasonal. The biggest piece of the business is Terasen Gas, which is the LDC in British Columbia, which has bigger quarters in the first and the fourth quarter, and so your seeing the impact of that seasonality here. Now, it's also true that Terasen is performing slightly ahead of what we expected it to do. So, you're seeing a little bit of outperformance and then a big impact from seasonality.

With that, I'll go back to the page before that, which is the face of the income statement again, and I'll walk down from the top. And, again, there are a lot of differences here, driven primarily by two things. One, the 2006 column is consolidating KMP. Two, we've made the Terasen acquisition. And, so, those are the main differences that you'll see on the face of the income statement from '05 to '06. Remember what you see here is KMP unconsolidated in '05, but consolidated in '06. Total revenues are up $3.1 billion in the quarter. 2.4 of that is from consolidating KMP. $640 million of that is from acquiring Terasen. Total operating costs and expenses are up $2.7 billion. 2.1 of that is from consolidating KMP. Over 500 of it is from acquiring Terasen. Operating income up $430 million, 300 of that from KMP. 119 from the acquisition of Terasen. And you see those same effects as you fall down to all of the other items there.

We talked about interest expense. Again -- and you can back this out, because we've provided you with the information on the next page -- $76 million of that comes from KMP. 66 -- this piece you wouldn't know from the following page -- $66 million of that comes from Terasen. So, again, you get down to a number -- and, of course, these numbers included the impact of certain items, but consistent with what we talked about before. One thing that may look unusual is the other net item on the front of the income statement. That's where the certain items show up. And so, that's why those numbers vary so dramatically from '06 to '05 -- or really from '05 to '06, because the certain item of $22 million pre-tax -- that's $14 million after tax -- but $22 million pre-tax in the first quarter of 2006 shows up on that line. So again, a very strong quarter at KMI. $1.54 heads for our full-year budget of $5 a share.

I will now go to the balance sheet, which should be the last page in your KMI release. Let me orient you again, here. Very similar to how we represented the income statement. The first column is with KMP consolidated. The middle column is pro forma, reporting 2006 as we reported KMI historically and so, with KMP reported on the equity method. And then in 2005, again we reported KMP under the equity method. So 2005 is as reported, with KMP under the equity method. So again, the main comparisons I'm going to make are between the second column, the middle column, which is '06 pro forma, and the third column, which is 2005, as reported. Cash and cash equivalents haven't changed much. We actually have a cash balance at KMI. We don't have any commercial paper outstanding at the parent, currently. Other current assets declined by about $250 million, primarily a reduction in accounts receivable, a reduction in inventory, and the impact of the mark-to-market of swaps.

Investments, essentially unchanged between the pro forma column and the 2005 column. Now, there's a significant change between the pro forma column and the consolidated version, and that's because, when you account for KMP under the equity method, then your investment in KMP shows up in this investment line. When you go to consolidate KMP, then you eliminate that investment in the investment line, and you show all of KMP's assets in all of these other rows, and so that's what's going on there. Goodwill, you'll see is essentially unchanged, once you back out the impact from KMP. PP&E is essentially unchanged, once you back out the impact from KMP. Other assets is down about $60 million, and that's a function of a variety of small things aggregating up to that. And, again, the bigger impact is just the consolidation of KMP.

And what you have on an apples-to-apples basis compared to the beginning of the year, or the end of 2005, are assets at $17 billion, down slightly from about $17.5 billion. Now, if you look at KMI on a consolidated basis, meaning it's consolidating KMP, you have $27 billion of that. That's when you combine the two companies. Liabilities and stockholders equity, you know, the notes payable and current maturities I'll talk about when I talk about all of the debt. Other current liabilities, once you take out KMP, it declined by about $200 million. That's largely accounts payable reduction, a reduction in the Tariffs and Gas rate stabilization account, and a little bit of the mark-to-market on hedges. Other liabilities and deferred credit, once you back out KMP, you have an increase of about $70 million. That comes from the mark-to-market of the hedges and then a few other smaller items. Long-term debt I'll talk about when we get down below and, again, aggregate it with the notes payable and current maturity. Again, here you see the deferable interest debentures and the capital securities. Those are the trusts and the comparable securities at Terasen, Inc.

It takes you down to minority interest. Now clearly, when you consolidate KMP, your minority interest goes way up, because of all of the interest in KMP that we don't own. All the delimited partner units and the KMR shares that we don't own show up on that line. If you back out the impact of consolidated KMP, you see that line's essentially unchanged. Accumulated other comprehensive loss has not changed significantly. Other stockholders equity -- another important thing to note -- consolidating does not impact equity. You'll see, whether you consolidate or not, other stockholders equity stays the same. Again, all consolidation is doing is moving around the rows where these numbers show up. And if you account for it under the equity method, essentially everything shows up. Everything is aggregated onto the investment line on the balance sheet. If you consolidate, it shows up in all of those detailed lines. But under either methodology, your equity balance is the same. Again, takes to total liabilities and stockholders equity, which is -- which is unchanged.

So now look at the net debt. In the consolidation column, you see net debt of $12.6 billion. In the pro forma column, you see net debt of $6.9 billion. And then at the end of 2005 you see net debt of $7.1 billion. GAAP has not created an additional $5.7 billion obligation for KMI. Accountants cannot say all of a sudden KMI owes an additional $5.7 billion. This is a function of accounting. It has nothing to do with finance, has nothing to do with debt that KMI is responsible for. The debt that KMI is responsible for has not changed, and cannot change because of accounting. What this is doing is consolidating all of KMP's debt onto KMI's balance sheet. KMP's debt totals about $5.7 billion. KMI is not recoursed for that debt. Really, for the vast majority of it, there is a small portion of it, about $700 million worth, that KMI has remained recourse on, as a result of drop-down transactions.

This is detailed in our 10-K. It's been detailed in our 10-K for years. And that was done in order to structure those transactions appropriately. But that is a very small portion of this total debt. Again, this debt, $5.7 billion, KMP is completely capable of servicing. KMP has serviced, historically, every expectation that KMP is a triple B plus rated entity. or B double A 1, will continue to be able to service that debt. I think the appropriate way to look at KMI's debt is to look at the $6.9 billion, which comes to about 54.6% debt-to-cap, down slightly from the 55.6 debt-to-cap at the end of 2005. at means is debt has decreased, actually, by about $190 million, and just a minute, I'll talk through how that happened, and it's largely a function of the cash that we generated.

So you go to the next section there. Start with income from continuing operations, add back depreciation, take off sustaining capital expenditures, take off cash taxes, and you get to cash flow of $269 million for the quarter. It's up from about $258 million for the quarter of 2005, and that increases even in the face of a big increase in cash taxes for the first quarter of 2006 relative to the first quarter of 2005. This is consistent with our budget of $760 million of cash flow in 2006. One thing I'll point out, you'll see the sustaining CapEx about $37 million. That seems low, relative to our full year budget of about $256 million, but the first quarter is typically low in terms of sustaining capital expenditures. So we expect that we will likely still spend that $256 million sustaining CapEx in 2006.

So we generated $269 million of cash. Where did that go? 189 of it, as I mentioned before, went to paying down debt. The dividends used cash of $117 million. We repurchased shares of about $34 million. We had expansion CapEx of about $30 million, and then we had a source of cash of working capital and other items of about $100 million. Now, I'm going to talk about a few of those items real quick. But again that's how we were able to reduce debt is that we generated cash and we paid down that debt.

On the share repurchase side, $34 million in the quarter. I'll remind you that was a carryover from 2005. We ended up having more share repurchase in 2005 than we originally budgeted, largely because we sold some KMR shares in order to generate capital gains and prevent some capital loss carry-forwards from expiring. Those KMR sales generated additional cash. We took a portion of that cash and we repaid debt, and we took a portion and we increased our share repurchase. We did not complete the amount of share repurchase that we had planned or forecasted for 2005 in 2005, and so this $34 million was the completion of that.

Expansion CapEx, I mentioned about $30 million. About 13 of that was at NGPL. A large part of that on the cross haul and then a couple of storage expansions at Sayer and North Lansing. A small amount at Retail, a small amount at Kinder Morgan Canada, although we expect Kinder Morgan Canada to be bigger throughout the year, and then a small amount at Terasen Gas. Our budget for expansion capital of the year came on about $356 million. And then working capital and other items, again a source of cash, about $100 million. Working capital itself, which is the AR and AP in the current assets and current liabilities, generated cash of about $155 million. And then we had a use of cash for the rate stabilization account at Tariffs and Gas of about $37 million. And then an increase in gas and storage, which is the use of cash of about $19 million. And that totals to that about $100 million source of cash from working capital and other items.

And with that, I am finished going through the financial statements, and I'll hand it to Steve to talk about some of the EH&S news.

Alright. Thanks, Park. In the investor conference at the beginning of the year, we promised that. by the end of the first quarter. we would come out with an external publication of our environment, health, and safety statistics. so you and others in the public could see how we're doing on operations. and specifically on EHS. And this is consistent with our overall belief that external transparency promotes internal focus and discipline, but also that these numbers put our performance in context -- our operations performance in context relative to our peers, as well as relative to our previous performance, so that we can show whether we are improving against our own performance.

Now, it's not easy to come up with objective measures that actually convey good information, and you can fool yourself by looking at different measures or different numbers, so we laid out a couple of requirements. One, the statistics that we're going to use have to be meaningful and convey relevant information to external audiences. And secondly, they have to be subject to independent verification. And so we've got three separate measures, and I think they meet those criteria. And I think, also, that generally, over time, if you're doing well on these measures -- even though they're only showing you part of the picture -- if you're doing well on these things, you have to be doing a lot of things pretty well.

So, there are three sets of data, and these are now -- as of midday today, they are posted on our web site. If you want to look for them, if you go across the top of our website, there are five or six drop-down menus there. There's one for environment and safety. If you pull that down, the first tab. I believe. is these measures. So, they're one click away from the front page on the website. Three sets of data. One is our safety data; injury and illness rates and vehicle accident rates across all our business units. That's the first report you'll see. Then we have DOT-reportable incidents on our gas systems. That's both transmission and distribution systems, and both U.S. and Canada. And then we have our DOT-reportable incidents and volumes for our liquids transmission lines. And on most of these measures, we're comparing the most recent 12 months which would be through March 31st. And so this'll be a mid-month kind of thing that we'll be updating every month, and we're showing a three-year Kinder Morgan average.

If you look at the safety performance statistics, you can see our 12-month rates on there. The top half of the sheet is focusing on recordable -- OSHA recordable injuries and illnesses, and we have a comparator from each of the industry segments that our different units are in, and we show every business unit, and then we show our three-year rate. And we highlight our 12-month rate in green, if it's better than the industry average, and in red, if it's worse. And you can see if you're looking at it that it's all green across the board on all of our -- all of our business units. And the same also holds true for the avoidable Company vehicle accidents measure. So, good performance over the last 12 months. And in all but one case, performance that is an improvement over the three-year previous rate, and that one exception is Kinder Morgan Canada. Its three-year is extremely low and significantly better than the industry rate, and the 12-month rate is not much worse, and still better than the industry rate. So that's the safety statistics.

Gas pipeline incidents are next, and here we're again using 12-month data, and we show our own three-year average. What we're representing on here is, separately for transmission and distribution, the incident rate per thousand miles. So it's an incident rate per thousand miles under operations. It's basically how many times you're having to call your regulator and tell them that something went wrong per thousand miles of pipe that you own or operate. And the criteria are either there's an incident that causes some kind of an injury or death, which thankfully is not the case in our case, or you have $50,000 or more in damage, which can include gas loss, which is typically the trigger that applies for our reporting. And if you're looking at that, you can see that, for both our transmission and our distribution assets, we are better than the industry average.

The last item is the releases from our onshore pipelines, and here the news is not quite as good, but I believe it's getting better. What we have focused on here, in order to get an apples-to-apple comparison, it is releases that occur on pipeline right-of-way. And the reason that I think that's relevant is because those are the incidents, or those are the releases that are most likely -- or that have the greatest impact on the public or on third parties. This would be releases that occur on our systems on someone else's land or someone else's property. Doesn't count things, for example, like releases in the terminal facility, where it's right in front of us, we can see it, it's on our property, and we can attend to it -- we can attend to it quickly. And here we're looking at two sets of rates. One, again, is a rate per thousand miles, and you can see there, we're reasonably close, a bit above the industry average.

The other rate focuses, though, on the amount of through-put and distance travel, and it's denominated in terms of billion barrel miles. So this is taking the amount of product that we're moving and the distance over which we're moving it, and we're using that to come up with a rate, bot in terms of the number of incidents per billion barrel miles -- and there you can see we're right only the industry averages -- as well as the barrels or the volume spilled per billion barrel miles. And there you can see that we are not as good as the industry average and, in fact, are almost twice the industry average. Now, as time goes on and if our performance remains -- remains reasonably good, we have the majority of the volume that goes into this calculation is associated with a single incident that happened in May of 2005. So, if we continue to perform well, our average should come down by the time we're reporting this at mid-year, and it should come down actually below the industry average. Now, we'll wait and see how all that turns out, but that's certainly our hope. That's our objective, as well.

Now, this data is reported through March 31st, as well, so it does not capture April incidents. In fact, we did have a release in April, but the statement that I made earlier about the majority in the last 12 months being associated with that single May incident remains true, even counting the April incident. So those of our statistics. Not sure we'll talk about them on every call, but certainly we'll be updating them every month, and you're welcome to look at them and ask any questions you have about them. And with that, back to Rich.

Well good. Thanks, Steve. I appreciate it. And with that, we'll take any questions you may have. Lou, you want to come back on?

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question will come from Dan Jenkins. Please state your company name.

Hi. Dan Jenkins, State of Wisconsin Investment Board.

Hi, Dan.

Hi. Just a couple things, mainly on -- first on your CapEx budget and financing plans for this year. You know, I know you went through it a little bit your -- when you talked about the pipelines, and I think you mentioned for the Rockies that that would probably be financed at the project level. That's Right?

Yes, that is correct. Especially since it's a joint venture now with us and Sempra, potentially with other producers. That debt will be put on at that project level.

What about for the other? You know, you have a lot of other projects going on. At what point would we expect to see financing for those? Would you come to the public markets to -- for the debt for those?

You know, we expect that we will finance those the way we have financed all of our projects historically, which is typically at the corporate level. Again, unless it's a joint venture, in which case we think about financing it at the project level. We expect that we will finance it with at least 50% equity. That's the way we run economics on all of our projects. We can't tell you any timing, as to when that equity will be issued or when debt will be termed up. We can tell you that we expect that, for the Rockies Express project, which is a -- which is a very large project, that we'll likely make equity investments after segments come into service.

Do you expect that you'll need to come sometime in '06 for those other projects, besides Rockies?

Well, it'll just depend on, Dan, when their completion dates are. But we have always, during the nine years -- and almost all these are at KMP -- and since the existence of the partnership, what we routinely do is, again, we finance at least 50% equity and the rest debt. And we will just continuously come back as we need funds on that basis. But a lot of these projects, obviously -- for instance, the Kinder Morgan Louisiana, which is the second largest project, the significant expenditures won't even happen until the 2007, 2000 -- actually late 2007, 2008 timeframe. So a lot of these will be phased in over that period of time.

With respect to the nonreqs, I mean expenditures, our budget calls for about $225 million of equity that we will do at some point in the year. You have to remember, also, that the KMR distribution offset some of the equity that we need to issue, and the KMR distribution will generate about $200 million this year. With that, you don't have to go to market to do that. That just comes on a quarterly basis, when we pay the dividend distribution.

Very simplistically, on those numbers, you've got about $450 million of equity and you'd have about $450 million debt, so you'd have the ability to finance $900 million worth of CapEx in this given year.

Okay, and then my second question was on the realized prices in your CO2 operation. I was just wondering if you could let me know how much of that is hedged going forward and what the prices were -- you know, how much one would expect the prices to get closer to what the market prices are? I think it was around $30 and $41 in the first quarter.

Yes, and you know we laid this out in January, and the hedge profile has not changed significantly, and so you can find this in the presentation from the investor conference in January. But we are 90%-plus hedged in -- for the remainder of 2006. We're probably pushing 90% hedge in 2007. In 2008, it probably drops down to about 75 to 80% and falls thereafter. What I would expect to see is a function, both of the prices of the hedges and the prices of the unhedged volumes, is that you'll see this realized weighted average oil price march up time, over time. One thing that I will point out, just so that everybody remembers what these numbers represent, the realized weighted average price per barrel of $30.47 for the first quarter of 2006 takes all of our hedges and applies it to our oil production. The realized weighted average NGL price per barrel is assuming that none of the hedges apply to the NGLs, so that is an unhedged number on the NGLs. That's just how the calculation is done.

But again, generally, you should expect to see the prices rise as you go forward, because we have placed these hedges over a period of years to make certain that we had adequate returns on the capital we were investing in our CO2 projects, primarily SACROC, to a lesser extent, Yates. ,of course, as we place these, we have guidelines, Company policy each year, on what a minimum and maximum hedge percentage is. And so, obviously, the later we place the hedges, the higher the price, as we've had a [contango] market in oil. So, those prices will rise, in some instances pretty dramatically if you look between now and 2010, for example.

Okay. Thank you.

Next question.

Our next question will come from Scott Soler. Ple --

Hi, Scott. How are you?

Please state your company name.

Hi. Scott Soler with Morgan Stanley. Hey, Rich. Some of my questions got answered, but I had two questions, Company specific, and then an industry question. I thought you all would be in a very good position them, industry. But, on the Company, when we look at -- there's a couple things we've been thinking about. One is on the -- given the value of general partnerships right now, and where most of these GP offerings have gone public, and combined with the fact that your stock's at 91, but arguably on the asset value could be worth more like -- up to 120 on our analysis, is there any -- I mean, this is an option that you always have at your convenience, but has there been any thought toward maybe doing a partial IPO of the GP stake in KMP, taking that cash, buying back stock or using it for other reinvestment opportunities being there's so many opportunities that are kind of currently available to you?

Let me just say that we, as I said, are disappointed with our stock at $91, given the value of the GP and the value of these future projects. And we continue to look at all kinds of alternatives to increase the value of the shares. Frankly, I'd like to own a lot more than 18% of the Company myself, so you can bet we will continue to look at ways to increase the value to our shareholders. And we have not decided on any course of action, but we just continued to look at all our alternatives. Park, you wanted to add --

No, I think you said it exactly right.

Okay. And then, also, we've been doing some work around, looking at some of the well connects that have been coming on, and how much supply has shifted around in areas from the Gulf of Mexico with high decline, to the Rockies to east Texas to parts of the mid continent. And what we're trying to understand, too, is looking at the map of where all your assets are situated, you've listed close to $8 billion of potential projects that you all talked about at the conference, but when we look at where your assets are located, they may be up to, potentially, another $3 or $4 billion of potential, and this is our own assumptions. But, is it accurate to say that there are probably other projects that could be out there over the next few years that might come your way, in addition to what you guys have laid out, when you guys came out in January?

Yes. That $8 billion would seem to be at the low end of the range now. A lot of [inaudible] projects, and Scott Parker, who runs our Natural Gas Pipeline group, is here today. But, again, this is a very good time to be, I think, in the natural gas transportation business for just the reason you said. Not only do you have increasing use of natural gas, depending on a lot of factors. But even if you had no increased usage, just the shifting -- the huge shift of supply sources means you need the equivalent of a whole new network, and that's why I think it explains our ability to to put together 1.8 bcf a day of long-term through-put commitments on our Rockies Express.

And you may -- we publicly released the other day that capacity in the Louisiana area now is so tight that we're going out with an open season to expand certain portions of our NGPL line. You never know until you get the results back in an open season how that will come out, but we're -- think it's pretty likely that we will have significant interest there. And what that will really do is allow us to move more gas from areas of Texas that are not being able to get out now over to the Henry Hub and the interconnections in Louisiana. Scott, have I said that right? I think --

Right.

And we have some other projects like that we're looking at, too.

You know, we have an open season that's going on in the Mid-Continent Express pipeline, which is just a proposed pipeline and it's a nonbinding open season. That would be another pipeline that would move gas across Texas and Oklahoma and over into Arkansas and all the way to Alabama, and interconnect with pipelines there. Again, you've got to get the customer commitments before you can forward on them, and Scott's not the only one that's got his hands full with projects. But -- and I think you're alluding to this, as well -- but Ian Anderson at Kinder Morgan Canada has more opportunities than he can pile on his plate. And again, you've got to get the customer commitment, but we're working hard to work with customers and to provide them with a project that meets their needs and adds value, and we'd love to build a whole lot more.

And then, finally, you're probably the best Company to comment on this, and you all don't have a bias either way toward gas prices really, so it'd be probably good -- you'd be a good source of thinking through this issue is we get pressed a lot with question that we'll be full storage, potentially barring another round of big hurricanes, by September. And what we've been asked a lot by different folks is, well, you get to 3.4 trillion cubic feet of storage by September, but is there the potential you might have a lot more gas than that and storage and how would that affect gas prices? The only reason I'm asking you, Rich, is because it doesn't seem to us as though there's a big profit motive, because of somewhat regulated nature of storage, to have that much new storage added. And so we kind of look at this that we're getting back to September 1st -- sorry, November 1st, and you're probably at full storage, but we begin the cycle all over again, because we're not seeing that much supply response in [So many] Basin, still. It's a really long-winded question, but I guess could you kind of -- could you all just generally comment on proposed storage you see and how that -- I mean, we're only seeing something like 80 bcf of proposed storage over the next four years. It might be higher than that, but that's just on information that we have from doing work on our energy team?

Yes, I'll ask Scott Parker to answer that.

Yes, we would say that we think there's a lot -- a greater opportunity for additional storage development. I mean, just our NGPL alone has 20 bcf under construction right now of incremental storage. Our interest day-to-day in storage, also. So, our Company alone will add 40 bcf in a year or two. So we would think -- and there's a great demand out there. We're totally sold out on every [inaudible] storage capacity that we have across our pipelines' companies. So, we think there'll be more storage developed. We're high on and bullish on it, and it's the easiest way for our customers to meet the significant swings in the marketplace right now.

Yes, I think that last sentence, Scott, is very important. Significant swings in the marketplace. And that's just going to be exacerbated as L&G comes on the shore at the end of this decade. That you're going to have a lot of product coming ashore, but it's not something that's going to move out the same amount every day on a regular basis, so they're going to have to have storage. So I don't know that there is a direct correlation or linear relationship between the amount of storage and the size of the market. I think a lot of it will be, again, coming back to the supply sources and the means of supplying the market will be different. And that very factor, I think, will drive a need for additional storage, particularly along the gulf coast, and then in conjunction with the Rockies Express project, for example. We think there will be significant storage opportunities there, as people want to ship every day across the system, but they may not have a market each and every day in the east.

I guess one other thing to add to that is that the phenomena that you're describing, coming out of the season and being basically full on storage, might affect how you would look at, for example, single-cycle storage assets. But a lot of the storage assets, including the assets that we're looking at developing, are more than single cycle, so it's not just dealing with winter-summer spreads. It's dealing with intrayear, intramonth and, in some cases, intraday spreads. And the value proposition for those kinds of assets is driven by volatility, and certainly we continue to see plenty of volatility, and people remain vulnerable to that volatility, and that continues to drive demand for storage development.

Okay. Thank you.

Okay, Scott. Thank you.

Our next question will come from Mr. Ross Payne. Sir, please state your company name.

Ross Payne with Wachovia.

Oh, Ross. How are you?

How you doing, Rich? Obviously, as lot of great organic opportunities here, and I don't want to turn and focus on too many negatives here. But do want you to maybe talk a little bit more about SACROC and one of the divisions -- or one of the areas that did not work for you and any kind of prognosis for what that may look like in the future? And the second thing is on Plantation. In the press release it does talk about diesel and jet being down and -- because of weather. Can you delve into that a little bit?

Yes, let's talk about both of those. And Tim Bradley, who runs our CO2 operations is right here. But let me -- about SACROC, put this in perspective. When we bought the SACROC unit in April of 2001 -- 2000, excuse me, 2000, it was producing 8,000 barrels a day. Today it's producing about 31,500 barrels a day in the first quarter of this year. So it still had enormous growth. As you know, we -- the highest growth -- the highest production we've ever had was around 34,000 barrels a day, and we would hope and think and believe we can get it back to that, or maybe a little bit above that, as we go forward. The other thing, which I didn't mention in my little talk, was that ironically of the various areas of SACROC, the various formations within the field, all of them are doing at or better than we originally projected in terms of oil recovered, except this one, which is the Bullseye, which is -- and that's where the shortfall's occuring. In fact, if you lump the other parts of the field -- remember, this is a 50,000 acre unit -- the rest of them would be slightly ahead to moderately ahead of where we projected they would be. It's just this one component, but it's a pretty big component, that is not producing the way we thought it was.

And with that, let me ask Tim to comment on that and talk about a little more detail on it.

Thank you, Rich. We have six active projects that are undergoing soon to ejection at the present time. Some of these were started in 2001, 2002, and they continue to the present day. Of those six different projects, Center Line 3, Center Line 4, 5, Center Ring 1, Center Ring 2, and Bullseye, all of them are performing very close to our original expectations. Some of them are exceeding our original expectations. The one exception being, 29 out of 102 patterns of the Bullseye project on the eastern and southeastern side of the field. We recently converted those 29 patterns to continuous water injections, since it appeared as though the CO2 injection is not being as efficient as we expected it to be and we wanted to redeploy that in a more efficient proportion of the field. And at that point in time, when we made that decision late last year, Bullseye was producing 11,000 barrels a day out of a total of 31,300. And those patterns contributed to a drop of about 3,000 to 3,500 barrels a day in the last three months.

This is a remarkable change that we did not anticipate, and what that tells us is that there's still oil to be produced in these patterns. Even though they're in the least-efficient portion of the field, there's still oil to be produced in these patterns and, therefore, we're going to have to find ways to go back out and get them and use more CO2 in that area. Specifically, some mechanical interventions and profile modifications are a likely strategy to be able to extract the remaining oil in those patterns. But, given the fact that CO2 supplies are tight, the industry is producing and delivering CO2 capacity, we thought it more important, at this point in time, to put that CO2 into more efficient areas of the field and, therefore, that's why we took them from those 29 patterns.

We don't believe that the oil has gone any where in those patterns in Bullseye. We believe we still have a good chance of extracting it. It's just that we're focusing our efforts for the present time in more efficient areas of the field. We do expect Bullseye to probably decline by another 1,000, 1,500 barrels a day from its present level, and we'll more than make that up by more efficient operations in the field, as well as some water flood operations in the platform.

Speaking about next year, it's probably a little bit too early to get specific about it, but our forecasting tools indicate that we could be in the 32,000 to 33,000 barrels a day level next year, as opposed to approximately 31,000 barrels a day this year.

Okay.

And I guess the other thing, you know, when we originally talked about SACROC, we had a lot of questions. What was the original oil in place? How much additional, as a percentage basis, can you recover? And we said, hey, on the areas we're going to touch, there's something like two billion barrels of original oil in place, and we think we can be about 10% additional recovery through CO2 plugs. If you look at these six patterns -- or six areas, excuse me, that Tim's talking about, one of them is actually up around 14% projected recovery, now. And I think all, except Bullseye, are 10% or greater, and Bullseye is probably coming in at 8%, maybe a little higher than that, but certainly less than 10%, at this particular time. So that just kind of gives you an idea of what we were shooting for and where we are, again. Most of them have been working fine, but -- and Bullseye may recover, and -- but we wanted to be -- we pride ourselves on transparency, and when we saw this flaw up at Bullseye and realized the impact it could have on cash flow, we wanted to be completely up-front with that, and that's what we tried to be.

Now, on your Plantation pipeline issue, the real issue there is that -- Park alluded a little bit of the difference in weather -- that's the one pipeline network on our Products Pipeline side where we're not the big Kahuna. And, of course, we are the second pipeline going through that area. Colonial is the biggest, and they have the longest run on into -- into the northeast, in terms of New York. We stop at suburban Washington D.C. And so, a year ago in the first quarter -- you may or may not remember -- it was cooler, and Colonial was actually running full and on allocation for a good portion of the quarter, which slammed some of, primarily, diesel and --

Fuel oil.

-- and fuel oil -- yes, diesel fuel oil to come over on the Plantation system. This year, because of the milder weather, Colonial was not full during the first quarter, so at Plantation we did not pick up the diesel that we did last year. The diesel that could move on -- that was originally schedule to move on Colonial just moved on Colonial this year, or the fuel oil. It was not backed out as it was last year. So that's why, as Park was telling you, I think, the diesel number, in particular, on Plantation were significantly down from last year. I think even on Planation the gasoline volumes were up.

They were. Gasoline was up about 6%, diesel was down about 21%. And then the jet was also down 18%.

And that's the -- of course, in terms of the airports we serve off of Plantation, one of them is Dulles, of course, and Independence Air went bankrupt. So there was less jet fuel consumed at the end of the pipeline at Dulles. So, anyway, a number of factors, but that's the reason.

Okay. Thanks very much. That's very helpful on both -- both issues there. Rich, let me ask you this on the CO2. It sounds like CO2 is close to capacity on you pipelines and you're looking to address that and getting more CO2 in the SACROC and other areas is going to be important , too. If you can just kind of talk about what the game plan is there in the near future?

Yes, absolutely. To put this in perspective for you, the CO2 usage in the Permian Basin is about 1.5 billion cubic feet a day. Of that, about a billion of it comes down from our production area at McElmo Dome in southwest Colorado, moves down across Cortez into the Permian Basin. And we're -- so we're not only supply two-thirds, but we're really the only formation that has ready, economic ability to substantially expand production. Now as you recall, we own and operate all these -- we operate all these assets. But in terms of ownership, we own 50% of Cortez, Exxon owns 37%. We operate -- we own a little less than 50% of the field at McElmo Dome. Exxon owns about 30% and the rest is split up amongst some junior partners. And, so, we intend to expand the production at McElmo Dome by 200 to 300 million a day.

And then we have an adjacent field called Doe Canyon, which we own 88% of, which we will also probably open up, given the demand, and move that down to -- down Cortez. So, in total, we probably in a first phase expansion that should be on line end of -- about two years from now, in early '08, we should have about 300 million more of production between McElmo Dome and Doe Canyon, and we should add 200 million a day of capacity on the Cortez line. And we'll go from about a billion to about 1.2 billion of capacity. Then, if demand continues as strong as we think it is, we can then take another phase to take that -- both the production at Doe and McElmo up to another level and add more capacity on the Cortez line. So we could addition -- we could take that all the way up to 1.3 or 1.4.

The cost of doing this first phase, getting, let's say, 300 million a day of additional production and 200 million a day of additional capacity, would be on a [inaudible] basis about $200 million, and our share of that, which the board has approved, would be slightly over $120 million. And we think those all can be done at good returns, and it's just -- and we would only do it, obviously, as we flush out long-term contracts for CO2 usage in the Permian, which is not a problem today. We have more potential demand for CO2 than we can handle right now, so we need to add this in order to fill that demand. So, we're very bullish on what we call the S&T, the supply and transport part of our CO2 operations.

Tim, anything you want to add to that?

All I can say, then, is that our expansion plans have yet to be presented to our partners at our source field and our pipeline, and we plan to make transmittal of those proposals here in the next few days and, of course, discuss with them their views and their consideration of alternative approaches. And so, the final plans may not be exactly as Rich outlined, but we expect it'll be pretty close to it.

Okay, thanks. One final and I'll surrender the mic, here. If you can talk a little bit about this additional property you purchased that's likely to go, I guess, CO2?

Tim?

\We bought a package of properties from Journey. We closed on that transaction at the end of last month. One of the properties is an attractive enhanced oil project that is about 40 miles as the crow flies from the SACROC unit. Other portions of the package are either small working interests in oil fields that are near our CO2 pipelines, or are projects that are just not good CO2 [NOISE ON CALL]. We're in the process of retaining a firm to help us flip the properties that just don't fit into our business model, and that process is just about to get started. We took over operations of the one target field, and we are acquiring the operating staff -- technical staff to help further evaluate the CO2 plug feasibility there, the water flood enhancements. It's a little bit too early to tell exactly what the time table's going to be, but in our economics, we assumes that it wasn't going to happen overnight. We assumed that the evaluation of the development opportunities would take us at least a year and a half or two years to fully evaluate, quantify assessment risks, and start the implementation. So, probably more to come on that in the next several months.

Obviously, Ross, the way run the return numbers on this in our acquisition plan, we have one model if we never did CO2. Thereby, you would avoid the cost of the CO2 infrastructure and the cost of extending our pipeline on up to that. And you would still have a very nice ROE, even if you never put an MCF of CO2 in the ground. If you put an MCF of CO2 in the ground, and it works out the way we think it could be a really good project, and this is the same way we went in to SACROC. It was -- would have been an okay project, if we had never put the CO2 enhanced recovery efforts into it, but it's an extraordinarily good project when you're able to use the CO2 enhanced recovery.

Okay, and how much was that acquisition?

The total cost was about $60 million or a little over, as we publicly disclosed, and we will be selling a substantial portion of that. And then, if the CO2 proves to be correct, we will be investing more in the CO2. I would estimate that, if the CO2 goes fine, we will have something a little less than $100 million in the project before it's all said and done.

Great. Okay, thanks very much, guys.

Thank you. Next question.

[Alex Myer], please state your company name.

[inaudible] Capital. Congratulations on the quarter.

Thank you.

Just one question, and that's related to the Natural Gas segment. I missed part of the call, so you may have talked about it already. It looks like you beat you budget for the quarter by about $20 million, and I'm just wondering if you're upping guidance at all, at least for that segment, or if you expect it to still be flat year-over-year?

Park, go ahead.

Yes, we did beat budget as Natural Gas pipelines, and we do expect that they will be above their budget for the year.

And is that $20 million just related to some of the hurricane -- hurricane activity in the last, you know, few months?

You know, the variance from last year was about $20 million. The variance -- we don't publish a quarterly budget, and variance from budget was not that same number. I mean, again I think that we will above budget on the Natural Gas pipes for the year.

Okay, great. Thank you.

Our next question will come from. Faisel Kahn. Please state your company name.

Citigroup, Investment Research.

Hi, Faisel. How are you?

Good, how you doing this afternoon?

Fine.

I just wanted to go back to a previous question on SACROC. I think I understand now that it -- this really has to do with one part of this field. But can you talk about why you feel pretty confident that you won't experience some of the same production falloff at other parts of the field?

Absolutely. Tim?

Most of our projects have been on line longer that Bullseye, and they're a mature stage right now, and they on a -- they are on a very predictable decline and matching our forecast very well. In Center Ring project -- Center Ring 1 and Center Ring 2, it's still way to early to tell what they're long-term potential's going to be. However, they are on the opposite side of the field of Bullseye. They're closer to the Center Line projects. And as we look at the geology of the SACROC field, we feel as though the heterogeneity that we see in Bullseye, and kind of expected -- not, perhaps, as much as we're witnessing -- but we will not see quite as much of that performance in the Center Ring projects. Like I said, time will tell, but they are on the other side of the field, closer to other areas that are performing a little bit better than our expectation, so at this point in time, we don't see any reason to downgrade the expectation for those projects.

Okay, thanks.

The most important point is that, if Bullseye had been the very first project and it had been sailing along and then, had a dramatic decline, and all the other projects were later, you'd say, well, maybe they'll face the same thing. But it's just the opposite. Several of these other projects are much longer lived than Bullseye, and have kept right on our plan -- or as we said earlier, in some instances, well above what we expected them to be on our projections as far as [deminsionous] curves of production were concerned. So I think Tim's absolutely right. As of this time -- now, again, there's no guarantees in life, but it doesn't seem to be something that would impact the rest of the field.

Okay, makes sense. On the hedges, then, does that mean that you kind of -- maybe until you get a better handle on this one part of the field, that you might reduce the amount of hedging you've been doing in the past?

Well, again, we're always very careful on hedges and we have a policy that is based off a -- not of some projection of what we're going to do in three or four years, based on, well, we're going to spend more capital here and there. We base it totally on our AFB. In other words, what the board has already approved in terms of capital expenditure, so that tends to give us a little leeway. The second thing is, as Park pointed out, you know we, I guess in a sense, kind of under report our production, particularly at SACROC, because we produced a little over 31,000 barrels a day of crude oil at SACROC, but we produced another 9,000 barrels of NGL's, and -- which are virtually all unhedged. So we have a little room there, to the extent that if we were off a thousand barrels one way or another, or more, we do have the NGL's that would absorb whatever hedges there are. So we're not going to go out and be having to buy on the open market. But, we are very conservative in the way we figure this and, certainly, the fact that you can't predict these thing accurately to the nth degree makes us more conservative on our hedges, that's true.

Okay, I'm just forgetting now. Is this light -- is this light crude or is this heavy crude?

SACROC is light crude. It's very much WTI. The Yates production is a heavier grade of crude.

And there was one question on the pipeline -- the Natural Gas pipeline. The Mid-Continent Express proposal you guys have outstanding.

Yes.

I think there's a competing pipeline that Centerpoint is talking about. Is that something that could compete directly with this project, or --

Well, there's a -- yes, potentially. They have a little bit different route. But, yes, there's -- just as there were competing projects to move the Rockies gas away from the Cheyenne hub and we ended up being the party that got the commitments there, there are competing projects to move from this area of north Texas and Oklahoma across, again to get it further east and, again, to get connectivity into the pipeline grid that basically serves everything west of -- or east of the Rockies. And, so, certainly there are competing projects, and we're at the very preliminary stages of that particular project, and we'll just see how it goes. And we're not, at all, saying that's done project. That's not in any of the numbers we've presented or anything else. It's just -- and I don't even think I mentioned that in my 11 or 12 projects that we were -- had made real progress on. We're just starting on that path, but we think we probably have as good a chance as anybody to put a project together there. And again, the whole thing -- I've been in this business over 25 years, and this is probably the best time to be in the natural gas pipeline and storage business that I've seen.

And, again, not to beat a dead horse, but the reason's pretty simple. The supply sources are changing, the demand is going up some place -- in some places, and the demand is even changing, in terms of geographic location. I mean, if you believe, as I think the market's accepted, that you're going to have significant L&G landed in Baha, California, and being regassed at Sempra's facility and coming on north into California, that, in most people's views, is depressing the appetite of producers in the Rockies and the Mid-Continent and even in the San Juan Basin to move to California. So they're much more interested in moving it the other way. That's what led to Rockies Express. As we've said, we're going to have transcolorado in position where we'll be actually physically able to move San Juan gas north to Meeker, connect it in to Rockies Express, and move it all the way around. So you could sit in the San Juan Basin and, of course, Conoco, that now owns Burlington, has 400 million a day of capacity on Rockies Express, they can, should they so choose, move an MCF all the way from the San Juan in northwest New Mexico, all the way up across Transcolorado into what was call Entrega, now the western part of Rockies Express, up to Wamsutter, over to Cheyenne. From Cheyenne all the way across into the eastern portion of the country, and I think eventually beyond Clarington, Ohio, on into Pennsylvania. You'll be able to access that all the way from San Juan Basin, and that's all made possible by all this [inaudible] interconnectivity and new investment we've made.

Though that's just one detailed example, you could do the same thing on a lot of other areas around the Rockies and Mid-Continent. They just -- and the Barnett Shale in Texas. And we're certainly not the only pipeline playing this game. There are a lot of others, and we're very careful to make sure we have long-term commitments before build these projects.

Okay. Thanks for your time.

Thanks.

Our next question will come from Mark Easterbrook. Please state your company name.

Good afternoon. My first question's already been answered by the many questions on SACROC, but just quickly two questions. Will you continue to report both consolidated and nonconsolidated numbers for KMI? And then, secondly, have you guys closed on the selling of the water utility up in Canada?

Let me answer the second question first. We have not closed on the sale, yet. We anticipate that will be within the next three or four weeks. We've down to, I think, two regulatory approvals that we still need to get. It's not a matter of -- that they're contested, it's just a matter of their working the way through the process of those two regulatory agencies, and we would expect to get them in the first part of May. So that's the water utility. We still expect to close that.

On a considated, nonconsolidate reporting, Park, go ahead.

Yes, I think we will continue to report it both ways, similar to how you saw it today in the earnings release for the rest of 2006. And I think at that point in time we'd reevalute. We'd talk to you guys, understand how people are looking at it, what people are comfortable with seeing, and figure out what to do then. But recognize, in our K's and Q's, it's going to be represented the way the first page of the income statement is, whereby 2006 is considated, 2005 is not, and the balance sheet would show up in a similar fashion.

Okay, thanks.

Okay. Anything else, Mark?

That's it.

Thank you.

We have a question from John Golden. Please state your company name.

JPMorgan Asset Management.

Good afternoon.

Hi, good afternoon. Just a quick question. I'm trying to work through some of the pro formas for the two companies, specifically for KMI on the consolidation basis. On the cash flow statement I'm to reconcile on a pro forma KMI and KMP, and what it looks like, if I take KMI and KMP previously and add them together, that sum amount won't equal the new consolicated operating cash flow. And if I'm not mistaken, what I need to do on the new cash flow statement is back out the equity and earnings from KMP. In addition, on the operating cash flow, back out the distributions from KMP. Is that correct?

Yes. I mean, we haven't presented even a summary cash flow statement for KMP, so I'm not sure how you're calculating operating cash flow for KMP. I think, generally, what you've said is correct. I think you're probably better off waiting for the Q to come out, so that all of the information is available and you can better perform that reconciliation.

Okay, that sort of helps me with the funds from operation. I appreciate that. Let me just reach on down on the consolidated cash flow statement, again. Dividend paid. On KMP, historically always in the financing activities, there's multiple line items for distributions to common and the distributions to the general partner. Likewise, in a standalone reporting basis, there's the common dividends paid under KMI. Now when we consolidate, under the financing section it should just be common dividends paid to both limited partners and to the holders of actual KMI. Is that correct? Then we won't have an outflow or see an outflow for payment to GP?

Correct.

Okay, alright. Thank you. That helps me get to my free cash flow. I appreciate it.

Thank you.

And, sir, I'm showing no other questions.

Okay. Well, very good. Appreciate whatever segment of the population that has hung on for almost two hours. Again, thanks for calling in. We think we had a good first quarter and we'll look forward to talking to you again in three months. Thank you.

Thank you. This will conclude today's call.