金德摩根 (KMI) 2004 Q2 法說會逐字稿

Thank you for standing by. At this time all participants are in a listen-only mode. After the presentation we will conduct a question and answer session. To ask a question please press star 1. Today's conference is being recorded if you have any objections you may disconnect at this. Now I'll turn the meeting over to Mr. Rich Kinder. Sir you may begin.

Okay thank you Tracy and welcome to the Kinder Morgan Second quarter earnings call. Today we will be talking about Kinder Morgan Inc. Which I'll refer to as KMI it's the New York Stock Exchange. One of America's largest midstream energy companies. Among its KMI owns the general partners of Kinder Morgan Energy Partners which I'll refer to as KMP. Which is America's largest pipeline master ended partnership.

As usual we'll be making statements within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934. I'll give an overview then Park Shaper our Chief Financial Officer will give you the financial details and balance sheets. And then as always we'll take any and all questions that you have. Let me start by reviewing the operating highlights in the second quarter. Then I'll discuss what we expect for the rest of 2004 and beyond. This is the best second quarter we have every had at KMI. And it's a record for any quarter at KMP. In both cases in terms of earnings from continuing operations. So very good quarter.

So let me start with KMP. The important news is there I think is that we raised the distribution from $0.69 a quarter to $0.71 a quarter or $2.84 annualized distribution. This is the 20th increase in distribution since KMP was founded in 1997. More importantly it represents a 9% increase over the second quarter of 2003. And distributable cash flow per unit grew at 11%. And as Park will talk about we continue to provide more coverage for our distribution on a going forward basis. But this 9% increase from year to year is very consistent with our expectations. Of being able to raise the distribution by 8%-10% a year before the impact of any significant acquisitions. This increase in distribution on top a 6%-7% yield for the distribution itself should lead to attract us the same total annual returns for our KMP unit holders.

All segments at KMP showed strong increases in earnings. And all are expected to meet or beat their financial targets for 2004 as expressed that as you know we posted on our website back in January. As you recall we judge our performance off this budget. Including the funding of all our employee bonus programs at the end of the year. Let's look briefly at each segment of KMP. Starting with the natural gas segment the real superstar here is our Texas intrastate pipeline. We are now realizing the benefits of combining the Tejas with our KMPP system and that combination produced earnings well above 2004 budget and well above the second quarter of 2003. Our strategy on these intrastate pipelines is to continue expanding our footprint in what is a very competitive marketplace. Our expansion into the Austin Texas area is now complete and operational. And we're looking at additional opportunities across the state.

Which as you know is both the largest producer of natural gas and the largest consumer of natural gas. Not a bad place to own a pipeline. Also in the natural gas segment, but relating to our Rocky Mountain portion of that segment, we completed our Cheyenne market storage project. And that commenced service on June 1. That provides our customers with an additional 6 billion cubic feet of storage capacity. And I think is pretty typical of what we can do with regard to internal expansions along our pipelines.

Or CO2 segment continues to produce extraordinary results. Oil production, our SACROC field averaged 27,400 barrels in the second quarter. That's an increase of 40% from the second quarter of 2003. And let me talk about that second quarter production and year to date production in a little more detail at SACROC. During the first half of this oil production at SACROC field has been 98% of our budget. It has been averaging 26,700 barrels a day. That's up 46% over last year.

During the second quarter, we found that as additional areas of field was brought online, they were injecting and therefore responding faster than we anticipated. So in the second quarter we intentionally slowed the pace of new patterns editions so as not to overload our production facilities and particularly, our gas processing facilities. The response of this action materialized in July with production being about 1,500- 2,000 barrels behind our target for the month of July.

We've now got the necessary facilities in place and we have been able to commence activating new patterns that we choose to delay earlier it in the year. Consequently, we anticipate that the oil production will probably slightly lag our plan during the third quarter but will continue to increase. And that average daily production for the year will be between 28,000 and 30,000 barrels per day at SACROC. So, we may be modestly below our target of 30,000 barrels per day, but we expect to meet or beat our financial target. So far this year, we are ahead of our budget targets on CO2.

We expect to beat or meet the targets for the year, due to much higher oil prices than anticipated oil prices on the steel unhedged portion of our production. So that's SACROC. Things seems to be moving well there. Although again we may be slightly below our 30,000 barrel target for the year. We've also had very strong CO2 production in CO2 segment.

That's coming out of our McElmo dome field of Southwest Colorado and our CO2 delivery volumes were up 32% in the quarter, versus the second quarter of '03. At our third major asset, the Yates oil field, we averaged 18,600 barrels per day during the second quarter. Our long-term target there, as you know, is 20,000 barrels, which we think is sustainable for a multiyear period.

We are now in the second phase of our horizontal well program. It's turning out to be so profitable that we intend to ask our partners to expand its scope in a phase 3 later this year. Even though we kicked off phase 2 of this program, a little bit later than we expected due to getting all of the necessary partners' consent to do it.

Due to the success we've had in this horizontal well program we are now actually producing at above 20,000 barrels, in other words above our long range target for the last several days and for most of the month of July. It's certainly too early to declare a victory and I'm not prepared to say we have crossed the 20,000 barrel threshold because some of these horizontal wells have pretty severe declines in production as they produce over an extended period of time. But so far, we are very encouraged with this program.

We also began our CO2 injections March of this year as we said before, of course, those won't produce any meaningful results in terms of oil production until some time in the middle '05 range. Yates seems to be doing very well at this point in time. It looks like it's going to be a good acquisition. And we are running again at 20,000 barrels, right now which is above our acquisition plan.

In our products pipeline segment, we had a total refined buy and growth of about 1.7% in the second quarter. And we are up 3.7% year to date with gasoline up 3% year to date. Now let me calibrate that for you by comparing those numbers to the EIA estimates, nationwide. The total against our 3.7 year to date in refined products as a whole, the EIA numbers year to date indicate 2.6%, our gasoline was up 3.0%.

EIA numbers 2.2% and our Pacific gasoline volumes, if you adjust for the conversion to ethanol would be about 4.4% increase year to date versus the 2.2 average at EIA. So, the other way I would calibrate this as you know we have talked for years about roughly 3% revenue growth on our products - - Excuse me 3% volume growth on our products pipeline. And abut 4% revenue growth. We are getting that this year in spades. As we did last year. And our revenue growth on our products system was 4.3% year to date. So we're modestly ahead of our 4% recurring target there.

Some other volume numbers that may be interesting to you, the volume growth for second quarter was lead by our central Florida system that was up 7.6% for the quarter. The Orlando Airport was up 16% for the quarter at jet fuel lines. CALNEV which is our line into Las Vegas was up 3.6%. And our main line Pacific system on refined products as a whole was up 1.8% for the quarter or 2.1% if adjusted for the to conversion to ethanol.

I would like to say that our Pacific volumes were impacted by general draw down on terminal gasoline and jet fuel inventories during the month of June, primarily in Arizona. And in fact, we entered July with some of the lowest inventories in the Arizona terminals on record. Whenever they dip below 50%, they're reaching a pretty low area. At the end of June, we are down into mid-40's.

Jet fuel volumes on our system were very strong. Up 8.3% in the second quarter. That's against the EIA numbers of 4% flat estimated for the same period of time. And that jet fuel really was system wide. And we had upsides versus '03 in both military and commercial jet demand, as those volumes continued to rebound from 2003. Now let me mention 3 other issues that pertain to the product segment.

First of all, as most of you know, we have had 2 spills in our Pacific system in the last year. 1 in Arizona in late July of last year, just about a year ago and 1 in Northern California in April of this year. Let me put that in perspective for you. Now let me make clear that our goal is to run a system without any spills. But just to put it in perspective across all of our products pipeline systems in 2003, we moved 776 million barrels on our systems. And we had net spills totaling 454 barrels or about about - - and most of that was in the Arizona spill that we talked about, which occurred in July of 2003.

That's for calendar year 2003. Now to calibrate that further for you, that's the equivalent of spilling 1 teaspoon of gasoline out of 12 tank trucks loaded down with 180 barrels in each truck. So, while we never want to minimize the seriousness of any leak on our system, I want to reassure you it we are operating a very safe system and that our spills are diminimous. Whether compared to other pipeline systems or certainly compared to alternatives type of transportation of gasoline.

Further, in response to the fact that we have had these 2 spills, we've had a complete bottoms of all of our products pipeline system, making certain we're doing everything humanly possible to operate these pipelines as safely as we can. Now while I would never guarantee that with 35,000 miles of pipeline including 10,000 in products segment we won't have additional spills. We are doing our damndest to prevent them.

We're also spending and this is across all of our assets, we are spending this year at KMI, and KMP approximately $210 million on maintenance or sustaining CapEx for 2004. That's up from about $170 million in 2003. And when you look at all of these financial results and improved earnings, that's after deducting or eating this additional roughly $40 million in costs, a big chunk of which is at KMP and goes under sustaining CapEx there thus reducing our distributable cash flow. So all of that is banked into our forecast and I wanted to share that with you.

Second point on our product system is, we have begun construction on our $88 million expansion project in Northern California. This will replace a 14 inch pipe which runs between the Sacramento Bay Area and Sacramento, with a new 20 inch pipe to better serve the growing markets of Northern California and Northern Nevada. The new line should be in service by the December of this year. Then the 14 inch line where the California spill occurred in April will no longer be operating post that December end service date.

The irony of this situation is that our Board approved this project for Northern California in 2001 and it took until May of 2004 it to get the necessary environmental and regulatory approvals to build. The third point that is germane to the products pipeline segment is that just yesterday, the Dc Circuit Court of Appeals issued a decision in the OR 92 SFPP Rate Case, now this is not the OR 96 Rate Case which as you know is presently before an administrative law judge at the FERT. A preliminary review of this 70+ page decision indicates 3 significant items the court decided.

The first thing was the court, in this OR 92, SFPP upheld the grandfather of SFPP's west line. Now while this is good news, I it don't want anybody to get too excited about it, because obviously, the fact situation in OR 96, which is before the ALJ with a recommendation to ungrandfather the west line is a different fact situation. But the fact remains that in OR 92 the court, once again, upheld grandfathering of the west line. Secondly, the court decided, for the most part, it denied the shipper's claim for broader reparation periods. And thirdly, the court appears to have disallowed any income tax recovery, for the ungrandfathered lease line rates because SFPP is part of a master limited partnership.

Our preliminary review suggests that none of this would materially alter the financial impact of the SFPP Rate Case guidance we've previously shared with you. In other words, what we have said is that OR 96 has what we referred to as an extremely negative outcome, including ungrandfathering the west line, which would be in contravention to this decision yesterday. Including ungrandfathering the west line, it would result in a reduction of about $0.15 in distributable cash flow per unit at KMP on a going forward basis.

And that still appears to be accurate, even with this latest decision. And again, it obviously, if the grandfathering were allowed to stand in OR 96 like in OR 92, that would change the whole thing in a very positive vein for us. But again, we are not stating that's going to happen. It's too early to tell what will happen in OR 96 when it finally gets to the DC Circuit. But, we did want to update you on that decision. It just came out yesterday.

Now, turning to our terminal segment, we continue to see solid, internal growth and we are expanding our footprint in key port locations around the country including New York Harbor, Houston and Tampa, Florida. We now, if you combine the number of terminals, both in our terminal segment and in our products pipeline segment, we now have 99 terminals around the country. We are now handling about 25% of all gasoline imported to the United States. And about 25% of all gasoline in the country now moves through our terminals or products pipeline and that's without any double counting we just count the volumes once.

I might also add that while, in this segment, most of the earnings come from purchases of tankage capacity by third parties. We do look into buying from time to time. It's kind of interesting in the second quarter, our volumes of imported gasoline at new York Harbor were up 20% versus a year ago. Our bulk terminal volumes, as a whole,were up 9%. As we've see more coal exported from the United States through some of our East Coast to Gulf Coast terminals and our liquids terminals volumes throughput were up by 6.6%. So very solid internal growth. So that's KMP.

Let me turn to KMI, as Park will explain, the second quarter, very positive financial results we are driven by KMI's interest in KMP and by a very strong quarter NGPL. Aside from this strong earnings. The story here is cash flow. Through the first half of 2004 we have now generated $288 million of free cash flow. That's after all interest costs and sustaining CapEx. And we are on target to meet our 2004 targets or slightly exceed them. We now expect to have about $4.65 per share in free cash flow this year.

Now, to calibrate that for you, the first year after we merged these companies back in '99, we had just a shade over $2 in free cash flow on an apples to apples basis. Remember, that this is cash that is available to pay dividends, buy back shares, reduce debt or to use as capital expansion projects. But remember that most of our expansions and acquisitions done at KMP. So our need for expansion capital dollars at KMI is pretty limited. Thus allowing us to return truly significant amounts of cash to our shareholders through dividends and shares repurchases.

Let me comment on our dividend policy. We are now paying $2.25 per KMI share,that's a yield of about 3.7%. Assuming continued strong cash flow at KMI, we would expect to increase that dividend substantially when our Board conducts its annual review of the dividends in January, 2005 and that increase would be part of the distribution paid for the fourth quarter of '04, payable in February of 2005. So, we would anticipate that within the next few months, we will be revising our dividends upwards, substantially.

Now, let's look at the rest of 2004. I would make a few simple statements here, we are on track to meet or exceed our budget target of $3.71 per share earnings at KMI. At KMP as you now had budgeted distributions per unit of $2.84. And we expect to exceed that target, in fact with today's declaration of $0.71 a quarter distribution, we are already at that annualized rate of $2.84 with our second quarter distribution. And we still expect to end 2004 with distributions per unit of somewhere between 2.90 and 2.94.

We expect to invest $1 billion in the Kinder Morgan families of companies this year. About 650 million in internal expansion CapEx with about 90% of that at KMP and the balance in acquisitions almost all at KMP. Now, we hope that acquisitions between now and year end will include the drop drown of TransColorado from KMI to KMP. In that regard the expansion of TransColorado which I'll remind you is fully subscribed will be online in August, on time and on budget. And we are awaiting some additional positive contractual developments on that system before we finally fix a fair and adequate transfer price between KMI and KMP.

Let me make another point. I would not rule out additional large scale acquisitions, but we will make large scale acquisitions only at reasonable multiples of cash flow and only when strategically sensible. I think we have shown in our website poster, we don't need significant acquisitions to continue to grow both KMP and KMI at very nice levels. Let me take you through that very briefly.

For example, if as we have the past 2 years, we continue to spend about $650 million of expansion CapEx overwhelmingly KMP and if we do about 350 million of acquisitions at KMP, All within a very reasonable range that we saw in '03, '04 and we foresee '05; And if we do those at a reasonable multiple distributable cash flow you can read that at about 7 times distributable cash flow, Then obviously we get higher returns on our internal projects than we do on some of the acquisitions. But if we average 7, that's very consistent with our long-term outlook and this year's performance.

Together with moderate top line growth at KMP and KMI you read that in the 3%-4% range. Remember I just told you that our product system is up over 4%. Our terminal is up over 6%, you are going to see NGPL up, well over the 4% range. So, if we just average 3%-4% top line growth on the rest of our assets, that combination of facts will produce 8% to 10% growth in distributable in distributions per unit at KMP.

An 10% to 12% growth per earnings per share at KMI. When you add that growth to the yield we are delivering at both of these entities, we think that's a very positive story for investors. While we continue to look at acquisitions, we are doing just fine as we are. The important thing is by expanding our footprint in our multiple businesses, we have lot of opportunities for very good profitable investments.

And in fact our Board today for the 2 companies combined, approved, almost $100 million of additional capital expenditures, almost all of which will be spent in 2005. Finally, I would also not rule out another transforming transaction at the KMI level a la the KN Energy. But let me say that such a transaction will only be done if it makes sense from a cash flow earnings and strategic perspective.

In short, I would close by saying that Kinder Morgan is a different kind of company. Our success over the last 7 years has been based on stringent allocation of capital, requiring superior returns on capital deployed, together with high insider ownership, a long-term viewpoint and a no frills solid day to day execution of our plan. That's our strategy it works and we are sticking to it. With that, I'm turn it over the financial to Park.

All right thank you Rich. I'm going to start with KMP so hopefully most of you have the earnings releases in front of you. You can turn to the first numbers pages for KMP. I'll start at the bottom. You'll see the Board as approved a distribution of $0.71 as Rich mentioned. That's up from $0.65 for the second quarter a year ago. Growth of 9% for the 6 months, we will have distributed $1.40 up from $1.29. That growth as well of about 9% and as Rich mentioned, we are exactly on track for hitting our full year target, which is to distribute $2.84 per unit and to end the year with an annual distribution run rate between $2.90 and $2.94.

Now we had tremendous coverage over that distribution in the quarter. $0.74 compared to the $0.71 distribution. That's a coverage ratio of 1.04 compared to our coverage ratio a year ago of 1.02 and for the 6 months, we generated $1.51 distributable cash it flow per unit and only distributed $1.40. That's a coverage ratio of 1.08.

In addition, the dollar amount of excess coverage in the quarter was $5. 5 million. And the amount for the 6 months is almost $22 million. Our annual budget calls for excess coverage of $28 million. So, we are well on track to meeting that annual excess coverage dollar amount. Moving up the page and actually both in per unit and at the bottom in total dollars you will see sustaining capital expenditures of about $0.13 compared to about $0.12 in the quarter a year ago.

It's about $0.24 cents it for the 6 months, compared to about $0.22 cents for a year ago. And in terms of total dollars for the quarter, it was about 26 million, compared to 23 million a year ago. For the 6 months about 46 million compared to about 40 a year ago. Our full year budget for sustaining capital expenditures at KMP is $116 million. We still expect that we will come in in that range and that was part of what Rich mentioned when he talked about the total sustaining CapEx at both KMI and KMP.

You will see the DD&A per unit and the actual dollars of DD&A have grown rapidly. We talked about this when we went over the budget in January. This is a function of both the Yates acquisition and our very conservative approach to DD&A at all of our CO2 operations and so that leads to a DD&A growth that is greater than our earnings growth rate. But again, DD&A is noncash, so it's just gets added back to the earnings.

Looking at the earnings per unit, which we believe is less relevant than the distributable cash flow per unit and the distribution per unit. You see $0.51 for the quarter, compared to $0.48 as year ago and $1.03 compared to 40.98a year ago. One of the points I will make on this page, when you look at the distributable cash flow growth both on a per unit basis and in terms of total dollars, it is growing more rapidly than the distribution.

Now this makes sense because our excess coverage is growing. I want to give you a sense of how rapidly that distributable cash flow is growing. The $0.74 compared to the $0.66 a year ago is growth of almost 12%. Similarly $1.51, compared to the $1.66 is growth of 11%. So, again growing more rapidly than the distribution.

It you look at the actual dollars for the 6 months of 2004, we generated $45 million more distributable cash flow than we did in the first 6 months of 2003 for a growth rate in dollars of distributable cash flow of 18%. Now, let's go to the next page and look at the segments and see what's driving this growth. Rich talked a lot about the volumes. Let me fill in here with the actual earnings before DD&A. Starting with the product pipeline, 119.3 million up from 110.5 a year ago about 8% growth in earnings before DD&A and for 6 months, it' about 6.5% growth to almost $234 million. Our full year budget for earnings before DD&A fore the products pipeline is about $483 million.

We are on track to meet or exceed that budget. As Rich mentioned, we have strong performance in terms of volume and Pacific, CALNEV and the rest of the refined products system. We also got a very strong performance in terms of dollars out of the coaching system well above last year and ahead of our expectations. Natural gas pipeline, $95.4 million up from about 89 million a year ago 7.4% growth in earnings before DD&A.

For the quarter, we are up 10% it from where we were a year ago to 199 million. From $180 million, our full year budget, $383.5 million. We are on track to meet or exceed that, driven largely by the performance at the intra states. And Rich went through a lot of that. Really recognizing a lot of value and the combination of those assets. CO2, tremendous growth, $76 million up from $47 million in the second quarter a year ago 61% growth for the quarter.

$154 million, up from $189 million in the 6 months. That's 72, almost 73% growth for the 6 months. Again, driven by the Yates acquisition and the very strong SACROC volumes, Rich gave you an estimate of what we expect to see for the rest of the year. I will make one comment in the volume section towards the bottom of the page.

We always present our realized weighted average oil price per barrel. I want to let you know that when we do this, when we calculate this number, we apply all of our hedges to our oil production. In practice we're actually hedging a little bit of NGL production as well. But again when we calculate this, we don't represent it that way. And effectively, what that means is if you look at all of our volume, oil production volume and natural gas liquids, the realized price is a little higher than this, because the current soft prices are than our hedge prices. So a again I just wanted to point out that methodology.

On the terminal segments, about $66 million up from about $60 million a year ago. 9.4% growth for the 6months, up almost 8% and on track to hit its full year budget for earnings before DD&A of almost $257 million. Now when you look at total segment earnings before DD&A, 356 million up from about 307 million.

Almost $50 million worth of growth in the quarter up 16% growth for the 6 months, $715 million up from 608 over $100 million worth of growth it's about 17.5%. So very strong growth in all of the segments. A little bit from acquisitions primarily from internal growth. In the next section, you see the DD&A broken down by segments. And you can see that most of the growth is coming from the CO2 segment.

I'm actually going to drop down to the G&A line which under the segment earnings contribution so in the middle of that section. G&A for the quarter about $39.5 million up from about $35.7 million that's an increase of 3.8 million and for the 6 months, it's almost 88 million, up from about 72 million, an increase of a little bit less than 16 million. Our full year budget for G&A is $151 million. We actually expect and we talked about this in the first quarter earnings call that G&A will be up for the year from its budget.

It's largely due to timing on some benefits. We expect to end up in there somewhere $5 million and $10 million above our budget on G&A. And again that hasn't changed from what we discussed in the first quarter. The net debt cost about $46.5 million, up from about $45 million and then for 6 months a little less than $94 million up from about $90 million. This is largely driven by an increase in outstanding debt. It's offset by a slight reduction in average rates.

The reason that it is up from a period of a year ago, are primarily the Yates acquisition and the acquisition of Southeast terminal assets and the expansion capital expenditures that have occurred in the last year. So again consistent with our forecast. We expect debt will come in right around, or potentially below our full year forecast. Now minority interests, loss on early extinguishment of debt cumulative effective coming up with an effects of change in accounting principle all diminimous. I will point out the loss of the early extinguishment of debt that did occur this quarter, we actually did retire a higher priced debt and did have to recognize an expense of about $1.4 million.

In order to do that, we will actually make more than that back in terms of lower interest expense over the next 6 to 12 months. That takes you to net income, about $195.2 million. It's up from about $169 million. 15.5% growth, that is a record quarter as Rich mentioned. It is the highest net income quarter that KMP has ever had.

For the 6 months $387 million up from $339 million or 14% growth and of course, on track to meet our target of about $800 million of net income. With that I'm going to flip back to the first page of the KMP income statement to touch on a couple of items there. Revenues are up, but again revenues are largely irrelevant. They are assumptions of natural gas prices.

Because of the Texas Intrastate natural gas prices also drive operating expenses so you see a similar increase there. DD&A we talked about. G&A we talked about, taxes, other than income taxes are up as a result of the Yates acquisition and higher production in the CO2 segment. Takes you to operating income, that's up about 16% for the quarter and about 16% for the year. Very strong performance on the operating income line. Earnings from equity investments you'll see are a little down for both the quarter and the year.

It this is largely the result of the NK partnership not being around in the first half of 2004, whereas it did exist in the first half of 2003. Amortization of excess costs of equity investments haven't changed. And the rest, we have already discussed, interest expense, other and minority interest. And again, that takes us down to the record net income for the quarter of $195 million. And with that, I'll go to the balance sheet for KMP.

It's the last page of the KMP release and walk down that quickly. Cash and cash largely unchanged. Other current assets are up a little bit. Accounts receivables is up and so is accounts payable. I'll give you a little bit detail on net working capital in a minute.

PP&E is up, and that's a function of and this again is just for the 6 months of this year, function of the second half of the Southeast terminal acquisitions which did occur this year and then expansion capital that's been invested this year. Investments are flat. Deferred charges and other assets declined a little bit. This is where market to market on our hedges, one of the places where it's accounted it for on the balance sheet.

Total assets is up about $350 million. You'll see note to payables and current maturities of long-term debt, up a little bit. I'll point out that we do have a $200 million maturity in March of '05. The remainder is commercial paper. Other current liabilities is up as I discussed previously.

Long-term debt, I'll talk about that, when we total up the debt. Market value of interest rate flux just fluctuates with forward interest rate curve. Other is another place where the mark to market value of hedges and interest rates flux comes into play. Minority interest unchanged. And partners' capital up about $100 million from the beginning of the year. Looking at the total debt $4.26 billion down from about $4.3 billion at the beginning of the year, so it's a reduction of $34 million.

I'm reconcile that for you in a minute. Debt to total cap is down to about 53.8% from 54.7% at the beginning of the year, as we expected. Now year-to-date we have reduced debt by about $34 million. Let me tell you how we did this. We actually issued equity of $253 million that did all occur in the first quarter. The K&R distributions have resulted in a source of cash of about $73 million. The excess distributable cash flow above our distribution has resulted in a source of cash of about $16 million.

Working capital an other items provide a source of cash of about $35 million. So, all of those are sources now they're offset by expansion capital that totals about $293 million and acquisition of about about $50 million. But, which, again are the Southeast terminals. Now, if you look at the large expansion items, I'll just tell you the distribution there. Again $293 million, almost 150 million of it came in the CO2 segment and that's our expansion at SACROC including the power plant that we are building there.

The terminals had a little less than $50 million of expansion capital, largely tanks that were put in service and the in New York Harbor, including some that came on in late June. And so we'll feel the full effect in the second half of the year. On the products side, we invested about $50 million in the 6 months of this year. Largely on the Concord to Sacramento expansion project. On the natural gas side, about $40 million, mostly split between 2 projects the C&C storage expansion, that's the Cheyenne Market Center Expansion. And then, the Rancho pipeline on the Texas Intrastate.

Then those totalled to approximately the $293 million of expansion capital and again, that, combined with the sources of cash which is largely equity issuance and retained cash results in the reduction in debt of $34 million from the beginning of the year. With that, I'll go to KMI. At the back of the KIM earnings release, you should have the financial pages for KMI.

I'll start at the first financial page and about the third line from the bottom. You will see diluted earnings per common share about $0.84 up from $0.76 a year ago, almost 11% growth for the 6 months, $1.85. Up from a $1.66. Over 11% growth. And on track for a full year target of $3.71 earnings per share at KMI.

In the press release we point out that has grown from $0.74 cents for the full year of 1999. So, again, since the time of the merger of the general partner with KN Energy when Kinder Morgan Inc was formed, the earnings per share have grown tremendously. One other thing I'll point, on the bottom line the dividends per common share clearly up significantly at the beginning of this year. We increased our dividends to the $2.25 annual run rate.

On the second page, to look at what is driving the growth at KMI the first line is equity and earnings of KMP. Now, that includes is 100% of KMR because KMI does consolidate KMR. The right way to see to see the net impact of KMP on KMI is to look at the section in the middle, it's titled Earnings Attributable to Investments in KMP. You will see the last line of that section pretext KMI earning from investments in KMP, $114.5 million. Up from $98 million in the second quarter of 2003.

For the 6 month, $225 million up from 192.5 for the first 6 months of 2003. That's a 17% growth in both the quarter and the 6 months., So, tremendous growth that KMI realizes from its investments in KMP and on track on line to to hit our annual budget of $462.5 million for 2004. On the other segment NGPL is having a tremendous year. It has had a tremendous amount of success in recontracting its available capacity. And that is shown in these numbers. You'll see 93.4 million, compared to 84.3 million.

Now I'm going to remind you of an issue that we talked about a year when we released our second quarter for 2003. There is actually a benefit of about $415 million that's related to NGPL that shows up on the interest line. And so the way we would look at NGPL is that it's really for the quarter, about 93.4 million compared to about 88.5 a year ago. That's 5.6% growth. So very nice growth.

For the 6 months, it's about 200 million, compared to about 188.5. For the 6 months a year ago about 6.2% growth. And so all I did was add the 4.15 million to the 2003 NGPL. And I'm going to do a similar adjustment, when we look at the interest expense. NGPL clearly on track to hit its full year annual budget of $389 million almost. Having already earned $200 million.

TransColorado is basically flat for the quarter. It's actually down for the year. If you will recall in the first quarter of 2003, TransColorado had more contracts that were sensitive to basis differentials. And basis differentials were very wide. So we had a very strong first quarter 2003. We talked about it then and we talked about the last quarter when we released earnings. Bottom line is TransColorado is on track to meet its full year budget $26 million.

You will see, it in order to do that, the second has half has to be bigger than the first half. The reason why is it's bigger is because the expansion of TransColorado comes online at the beginning of August. Retail is down about $1.3 million almost $1.4 million for the quarter. It's actually up almost $1 million for the year. We still expect retail to come in full year, at about $68.7 million. That's actually up over $3 million from where we came in a year ago. And retail is on track to meet or exceed that budget. So all you're seeing here is a little bit of noise between quarters.

Power at 3.9 million is almost $7 million below last year and similarly for the months, is about $6 million for below last year. This is again consistent with our budget. We realize the last bit of our development fees in 2003 specifically if the quarter of 2003. We didn't expect to realize those in 2004. until And so again power is on track to hit its budget full year of about $13.5 million. You will see total segment earning s and we believe this is a better measure than operating income for KMI because it incorporates the impact of KMP.

Total segment earnings about 240.5 million up from about 220.5. $20 million increase, that's 9% growth for the quarter. For the 6 months $519 million up from about $45 million or almost 10% growth. And on track to hit our full year budget, $1.36 billion in segment earnings from these segments at KMI. G&A expenses about $20 million compared to about $19 million a year ago. And then for the 6 months about $42 million, compared to about $35 million for a year ago. You will see we are up $7 million for the first 6 months.

We actually budgeted and increased in G&A of about $4 million and we still expect it will come in on that budget. So tou are saving a little bit of timing between the first half and the second half. We expect G&A at KMI will come in about its budget of about $75.8 million.

Interest expense net, you will see what appears to be an increase in interest expense to 32. 4 million from the 31.3. But, again, as I did with NGPL, I would adjust the 2003 number. And I think the real comparison is between 32.4 and 35.5, a reduction of over $3 million in interest expense and similarity for the 6 months, the comparison would be between the 64.8 and 75.4 for 2003. It's a reduction of $10.6 million. The reason our interest expenses come down is because our average debt balance at KMI is $200 million below where it was a year ago.

That's just the result of our paying down debt with cash flow that's generated at KMI. The next couple of lines interest expense, deferable interest debentures, these are the trusts that show up on their own line, now. They were not on their own line. They were part of minority interest through the first half of 2003. And then there was a change in accounting principle which lead them to be shown on their own line. Others for 2004 is largely KMR minority interest.

That takes you to income before income taxes $172 million, up about 12% from a year ago. about 13% for the 6 months and the net income of $104 million. Again this is a record second quarter for KMI for net income. It's up over $10 million from a year ago or almost 11%. And for the 6 months, 231.4, up from 205.3 over $26 million increase in net income or almost 13%. And again, on track to hit our budget in terms of net income of $460 million for the year. With that, a couple more items on the first page of the KMI income statement. Operating revenues are down.

Again, we don't think that there is a whole lot of meeting in the operating revenue. You see a similar reduction in gas purchases and other costs of sales. Remember, retail has revenues that are sensitive to natural gas prices. O&M, you see what appears to be an increase in O&M of about $6 million for the quarter and about $13 million for the year.

That's a result of the change in accounting principle that forced us to consolidate the Triton, a piece of the Michigan power plant. It's actually all pulled out in the minority interest down below. So this has no net impact on KMI's earnings. G&A, depreciation is mostly flat. G&A we've already talked about. COTI is essentially flat. Operating income you see a small increase, but recognize that operating income is before the impact of KMP on KMI. You see the impact of KMP on the next line. Equity earnings of other equity investments essentially unchanged.

We talked about interest expense, we talked about minority interest and we talked about other net. And again that just takes us down to the record net income of 104.4 million compared to $94.4 million a year ago. And the earnings per share of $0.84 compared to $0.76 a year ago. With that, I'll go to the balance sheet for KMI and our cash flow estimate. First, looking at the balance sheet. And this is the last page of the earnings release for KMI, the last numbers page. Cash is largely unchanged. Other current assets largely unchanged.

Same with investments and PP&E you see a little bit of fluctuation in other assets. Again these are swaps and hedges that are mark to market on balance sheet. And so you get some fluctuations there. Total assets down about $50 million. Notes payable in current maturity of the long-term debt. You see it's up significantly. A little of this is commercial paper, but really the big pieces are $500 million maturity that we had in March of '05 and $150 million, not a maturity, but a bond that can be put to us in November of this year.

This bond is trading right about the put price, and so, we actually don't know how much of it will actually be put to us in November. Now, of course, if it is put to us, we have more than ample liquidity at KMI in order to just take it into commercial paper back stopped by our press facilities. Just to give you a sense of that, we have about $100 million actually at the end of the quarter. $65 million of commercial paper outstanding at KMI on an $800 million facility. So, no problem in dealing with these bonds, if they are put to us.

But we actually don't know if it's going to be again just a decision of the holders, as to how many of those are actually put to us in November of this year. The majority of those bonds are 2028. And so they are long dated maturity, but again they may come back to us. Other current liabilities down slightly Other liabilities and deferred credits unchanged. Long-term debt, let me talk about that when I total the debt. The deferable interest debentures again are the trust deferreds that now show up on this line. Interest rates flops again just a function of the forward interest rate curve. Minority interest largely unchanged. Shareholders' equity is up about $76 million.

Total debt 2.9 billion down from about 2.96. The production of $58 million in debt. If you'll recall our annual budget calls for us to reduce debt by $100 million throughout the year, so we are on track to realize that portion along with the other portion. Ratio of total debt to total cap is down below 42% from about 42.8% at the beginning of the year. So again the balance sheet at KMI is very, very strong and continues to strengthen, as you would expect and is consistent with our budge. Now, let's look at the cash flow numbers. By our calculation of cash flow and this is again the number that we talk about that can be used for expansion capital, dividend, share repurchase and debt reduction. For the 6 months was $288 million. That compared to $299 million a year ago. The real difference is that income was up but cash taxes were up as well.

Now the cash tax number you'll see of $117 million. And if you go back and look at our budget we forecast a total of about $200 million of cash taxes for the year. We are still comfortable with that forecast. We still expect that our budget that our actual cash taxes will come in at our budget of $200 million and that our cash flow will be at or above the $578 million that was our budget. Now, this $288 million, what did we do with it? We reduced debt by $58 million.

We paid dividends of $139 million. We repurchased shares for the 6 months of $39 million. We spent $28 million on expansion capital and that was largely the Montrose, the year rate project in retail. The North Lansing project, which was a storage expansion and the TransColorado expansion. Then, we had to use this cash for working capital and certain other items of about $24 million. And that totals up to that $288 million of cash flow that was generated for the first 6 months of 2004.

Now, again we are committed to returning that cash to our investors, both in the form of debt reduction and dividends and share repurchases to our equity holders. We expect we'll continue to generate a tremendous amount of cash flow, going forward and once again our full year budget for that $578 million. With that, I'll give it back to Rich.

Okay thank you Park. And Tracy, we'll take any questions people may have.

Thank you sir. At this time we're ready for a question and answer session. If you would like to ask a question please press star 1. You will be prompted to record your name.To withdraw your request, press star 2. One moment, please for our first question. David fleisher of cane anderson, you may ask your question. David Fleisher of Cane Anderson, you may ask your question.

Hi David how are you?

Good Rich how are you?

Fine.

You mentioned in your comments Rich that additional areas of SACROC were responded more quickly. Can this benefit be generalized to significant portions of the field? Or is this more specific to this area and does it mean that there will be more oil recovery from the field? Or just that you are getting it more quickly from these areas?

First of all, the right way to think about it, that it's in this area of the field, these are pretty generalize numbers, but basically, the oil in place at SACROC on the areas we intend under our plan to use tertiary recovery on is 2 billion barrels of original oil in place About 1.1 billion of those barrels are on the areas where we have programs operative.

And that's where this quicker response came and kind of overwhelmed our processing and compression facilities as a matter of fact. So we had to shut down adding new patterns until we could catch. Now we've brought some more compression online. Got more processing facilities online. So now in just the latter 3 weeks we've started back up with the new pattern. The other and probably the thickest pay zone, which is another 900 million barrels of original oil in place is in the so-called platform. And that's the one -- in fact the board today just to approve the first test wells in that, which will be done in the third and fourth quarters. So, we are just -- we are - - additional production is on what we have done so far and calibrated it a little over half of the total in place in the field.

So I guess I'm trying to understand whether the curve - - recovery of the oil is actually the only change or whether the total area of the change curve has changed with this adjustment?

I would look at it as our CO2 people do. They feel like the recoverable reserves have not changed measurably, it may be a shade positive, but basically still consistent with our original estimate. It just came on a little faster than we thought.

Okay, second question. how do you view the 10 times EBITDA that we have seen of late here very recently? And is that why perhaps a transforming transaction for the Company might hold more appeal to you?

I think that's of interest. I can tell you we are not interested in paying 10 times EBITDA for assets. As you know, we always look at everything distributable cash flow which is usually but not always is about another multiple beyond it. But is we pay 10 times EBITDA, we would be looking at 11 times distributable cash flow. Which would still be right on the borderline just barely accretive. And while, certainly, we are a large, strong Company and we can afford to make acquisitions, we are not interested in doing things to to just squeak by as barely accretive. We think we can do a lot better.

For example in our internal expansion projects, we are doing many of them in the 5 or 6 times suitable cash flow range. And much better and we have lots of opportunities to spent internally. Again, just as our footprint gets larger, the bigger we get. We have a terminal acquisition in the works that at about 6.2 times the distributable cash flow. So I mean, a lot of things go into the process. We are trying to find better ways to invest. And of course a transforming transaction again you would hope to obtain at a very reasonable multiple of EBITDA or again you wouldn't do it.

Okay, thanks, Rich.

Thank you, David.

Scott Soler of Morgan Stanley, you may ask your question.

David asked a big chunk of one of my questions. A couple of questions I had, one regarding CapEx, maintenance CapEx and your entire pipeline system, with the Pipeline Safety Act, when you look out over the next couple of years, you look at maintenance capital across your pipelines, could you talk about what pipelines that would apply to and then how much money or what kind of percentage increase perhaps for you guys and probably for many others in the industry if you look out a few years?

Well, we think we are pretty much at the run rate where we will be today if you look at all the pipelines. There will be some variations, but sometimes, those variations go both ways, I'll give you a vignette on NGPL as part, again, of all of the Pipeline Integrity act requires you to pick so many miles each year a certain percentage each year. On NGPL, in our budget, we had estimated that we would be to spend sustaining CapEx as a result of piggin of 40 or 50 miles of pigging in a particular section.

We pigged it. We found there was no need for sustaining CapEx. Now, that's still an O&M cost. It's still, in a way, you could think of it as cost of operating the pipeline, but it didn't it sustained CapEx, because in that case, we didn't find anything. A lot of moving parts, but again, I come back to these numbers.

This is for the whole system in both companies, but $170 million in 2003 going to $210 million in '04. And we think it's a good marker. Could it be 215 or 220 next year? Of course. Could it be 200? Yeah, but it probably would not be below that. I think we are pretty well in a range where we will be for the next several years. Now, you know that under all of these integrity acts there is a complicated matrix decision-making process, but you basically inspect, first, those areas that you believe judgmentally are the most vulnerable to leaks or other problems.

So, in a sense, we are culling the bad at the front end. And you might say that as you fix those, you are getting the bad problems out of the way over the 5 year term, they will get left. And then certainly when you complete that term, you are going back over things that you just repaired 4 or 5 years before. So you can argue that long-term the curve will be down. On the other side you're probably going to have inflation and costs and everything. So again horseshoes and hand grenades. What we're thinking is that we're probably at the burn rate we will be for next several years.

Okay. I'm going to ask the second part to David's question, which is when you all were looking at acquisitions, are there certain segments of your business that prices look better? That you might be more apt to do deals particularly. And then in terms of entity transforming, would it be potentially with other NLP's or would it be more over at KMI?

Let me answer those in order, the segments we are finding more appealing you're right is smaller operations, where there is not a bakeoff with a whole bunch of players. Another category, is areas that are natural step outs for us. Where we can take some costs out that other parties can't. Or where there simply aren't many other bidders.

I referenced earlier, we don't talk a lot about our terminal segment but this has become a stand alone business, it has become a pretty damn big company on its own right. We have a national footprint now of inland water ways, Gulf Coast, East Coast, West Coast. We are in a very good position to make stepout transactions like we did with the Exxon terminals earlier this year, like we did with the Shell terminals in the West late last year. You'll recall those were for the most part adjacent to other products terminals we had.

So we were able to shut down and combine people and combine assets, so, there is a lot of niche opportunities like that. You know, we are going to have some associated additional pipelines opportunities in Texas, that look very good. So that's where we're honing in. Not that we are not looking at every transaction, I think Warren buffet said it best you can undo 10 years of hard work with 1 stupid transaction.

And so far we have not made a stupid transaction in 7 years and we're not about to start now. So we are very stringent. We may make mistakes but they certainly won't be just from grandiose plays on asset. Now, as far as the transforming transaction, it could be any place. But when I speak of that I speak of something where KMI would go out and do another major deal a la KN Energy. Where you have the opportunity to take a huge company or a large company put it together and create something very special strategically. Take costs out of the system and certainly be nicely accretive from an earnings and most important to us from a cash flow stand point.

When you look at KMI, again, it's unique to me in my career to see an entity that has this much true cash flow and it's still continuing to grow. The secret to remember, Parks numbers. We are targeting $463 million coming out of KMP at the KMI this year. And another $388 million coming out of NGPL. And that $463 million, is really I call it golden EBITDA because it's much stronger than EBITDA. It truly is the basis of free cash flow. Because all of the costs of driving the expansion of that are born down KMP. KMO is continuing to grow and providing for it's own capital.

Rich, I don't know if you can answer this, whether you were talking about -- I don't recall you saying that before. I guess I'm trying to understand that. Is there something you are currently looking at that looks interesting or are you talking much more generally over the next couple of years?

Are you talking about the $463 million or what?

The transforming transaction.

We would never comment. I'm just speculating that in general, we continue to look. I thought I said this every couple of quarters. I just wouldn't rule out a transforming transaction.

Sam Brothwell of Merrill Lynch, you may ask your question.

A lot of things I wanted to address that have been hit in the last couple of questions. But, maybe, shifting gears a little bit, given all of the focus on new production of the Rockies, can you give us any sense of where you stand on expanding your capacity to move gas out of that region? You alluded to some expansion at the Cheyenne hub. And then perhaps two other things, squaring the idea of a transforming transaction against your mention of a potential substantial increase in the dividend. And finally, there wasn't announcement about the OPS fine. And maybe you could just elaborate on that a little bit? Sure. Good questions.

Let me start with the production coming out of the Rockies. Of course as Park the TransColorado expansion will be effective in the next couple of weeks, August 1. We are looking at other moderate expansions on that. We are also continuing to look at the advantage expansion.

We had an open season there. We are partially subscribed. We are not fully subscribed there. What we are finding is as that more volume are anticipated to come out of the Rockies and into the mid-continent, there is a tremendous need for additional take away capacity in the mid-continent. And where you really see that is that the spreads between mid-continent prices and Chicago prices on NGPL have really blown out.

Spreads far beyond the cost of running gas up our Amarillo line. So that's why we are fully subscribed. And every time something rolls over the roper rights are exercised. So, we are doing some expansions in that area, both on our cross hall capacity. That's our facilities that get more gas from the mid-continent down across our NGPL system so we can take them up the Louisiana line where we do have most parts, many times of the year excess capacity.

We are doing some expenditures there. And we are also adding additional storage in mid-continent area so people can store gas there. And both projects our Board has now approved. As I said today alone, the Board approved $100 million of expenditures. Most of them on things coming out of the mid-continent, so that's a real take away for us and includes, potentially, some outright expansion of NGPL capacity, by adding some compression on the lower part of our main Amarillo line. That will be an open season.

It's not a real significant cost, but a lot of opportunities, there. And then also opportunities to tie things in with some of our Texas Intrastate. As you know, we just went operational with our Austin system July 7th, I think. So we're now there. We now go to within 30 or 40 miles of Waha in our Texas intrastate systems. So we have a lot of opportunities, I think, there. And so just a lot of expansion and in a sense, not all of it is directly related or coming out of the Rockies, but it's indirectly related to the additional 3 foot coming out of the Rockies. Now thing second question as I understood it was the transforming transaction, dividend increase. Let me put it this way.

If we don't do anything in terms of a transforming transaction, we have the capacity to substantially grow the dividend. We intend to do that. We said that all along, we said we review it every January. And so you can look - - unless something unexpected happens to our cash flow. We don't think it will, you can expect the Board to substantially increase the KMI dividend, again, come January.

We would not do a transforming transaction unless it was also positive for the dividend, and I guess I ought to be very clear again. The thing that separates Kinder Morgan from most companies if we do a transforming transaction, it will not be to build a bigger company so the CEO's pay goes up or so that we can have a bigger airplane. It would be only, only because it makes sense to the shareholders and so that shares that some of us own are worth more in terms of more cash flow and more earnings per share.

I think that's exactly the kind of analysis you want in doing a transforming transaction. So the two are not inconsistent, and we will not do a transforming transaction that I can conceive of that would slash our dividend.

We are very keen, as Park said on returning these tremendous amounts of cash flow back to our shareholders. Now, as far as the OPS fine is concerned, we are appealing that. We believe we have complied with every bit of the integrity plans, whether mandated by the Feds or the by State of Texas.

Which is, in some respects, more stringent than the Federal requirements now. Really, I don't want to comment beyond that. The fact that it was announced in Arizona, in the same city where the only significant spill we had in 2003 was - - I don't want to comment on politics or anything like that. But, at any rate, that is a fine that we intend to challenge and we believe that we have been properly inspecting our pipelines all along.

Okay, thanks a lot, Rich.

Okay, Sam.

Yves Siegel, of Wachovia. You may ask your question.

Hi, Eve, how are you?

Pretty good. I like my new last name though.

Yeah, well every quarter, it's different.

I got 3 quick ones, any thoughts to consider a settlement on the Santa Fe case? That's 1. 2. Rich, if there is a change in the government and the repeal of the dividend tax, 15% tax, would that - - I think you said, in the past, that could change, the way you think about the dividends? And the third one is with the asset turnover in Texas in the intrastate market, is that changing the dynamics, in any way, as you see it?

I'll answer those in order. I don't think there is much opportunity for settlement in the SFPB rate case. Tom Benning is sitting right here with me. I think we are going to play this one out. Again we have given you the worst case. It's something that we can live with. We think it would be better than that.

We are prepared to take our chances at the Commission and on up to the Court of Appeals and again, I don't want to tout at all the decision we got yesterday in OR 92 as being any kind of precursor. But it just shows you that the DC Circuit does not particularly bend over backwards to I affirm what the Federal agencies do in a particular case. So, it's kind of a wild card out there and I think, probably frankly, the shippers on the other side would probably want more of a settle than we would be willing to pay. So to paraphrase Groucho Marx "any club that would have me to join. I wouldn't want to join.So have me as a member I wouldn't want to join"

So, I think that's unlikely. I think we'll play it out. The change in the government and the dividend, the way we look at it is this. Let's review the fitting a bit, obviously, unless a change in the Presidency in our judgment would not change the dividend tax rate.

It would take a massive switch in the Senate and the House and that's, I guess, possible the polls aren't showing that. You would have to have a I think a Democratic Presidency and Democratic majorities in both Houses in order to repeal the dividend tax, 15% tax rate before it's normalized expiration of 2008. So, I think, as Microsoft kind of proved this announcement.

Clearly, they are thinking it's good through 2008, too. I think we are pretty safe on the dividend barring a '36 type landslide. Which I don't think we will see, but the bigger risk that you hit on is if you had a Democratic President, committed to not allowing the dividend tax to go forward, it probably wouldn't get extended beyond 2008. I have said, all along and Park has said all along, we would certainly look very seriously at our dividend policy if it returned to people paying 35% on the dividend versus 15%.

We would probably take more of the free cash flow and buy back shares. On you third question the asset turnover changing the State of Texas. Our position is really strong in Texas. I like it, very much.

We will see what happens. My good friend Bob [Bessenhamus] who is a good guy who runs a good company, we'll see if he wants to keep the pipeline part of the TXU assets or whether it that stays with him or goes someplace else. Certainly, we think the opportunities to cooperate with him up there.

Otherwise, we like our footprint. We like the fact that we're serving Austin. Regardless of what happens with TXU.. We have some opportunities with Dallas to connect,our North Texas line. So I don't think we'll see much change in what is happening.

Becca Followill of Howard Weil you may ask your question.

Hi, Becca how are you?

I'm good thank you. I just have some minor questions. Back to the dividend issues, you said that assuming the strong cash flow continues, you expect to increase substantially in January of '05 and absent a transforming transaction your payout currently based on '04 is about 61%, is that the type of payout that you to stick to or are you willing to go higher?

We'll look at what the '05 budget looks like when we do it. But remember payout ratios are less meaningful for KMI than for other companies for the reasons I just talked about. On the '04 projection, you're going to have $463 million of truly free cash flow coming up. So we look at probably more comfortable with a little higher payout ratio than an ordinary utility company, would be where its having to reinvest at the parent company level. Which we are certainly doing where it's good.

But we don't have the reinvestment needs at KMI because of KMP. The second think I want to correct any misimpression. As to the transforming transaction, there will be a dividend increase, if we do a transforming transaction, there will also be a dividend increase.

We won't do it unless the dividend is very secure and able to be increased. So we'll look at it. I think Park refers to it as we would certainly think that we would raise the dividend as least as fast as our earnings went up next year. Is that a fair statement, Park? And possibly somewhat beyond that.

Okay, second thank you. On TransColorado, in line with David Fleisher's question on the premium seem to be pretty heavy out there. How does that effect your ability to transfer that asset over to KMP? And does you think you would might want to bid it in the open market as opposed to a transfer?

Park you want to answer that?

Happy to. Even though some of the transactions lately have had some debt at higher multiples we believe that TransColorado can be transferred at a very fair price at a multiple that KMP is willing to pay. And we will be able to get fairness opinions on that approach. There is a great benefit to KMI from KMP owning assets like TransColorado. And that, clearly, is a factor in both KMI's decision if terms of who to sell the asset to and in banker's evaluations when they go through a fairness statement.

Okay, thank you, and back to the OR 92 versus OR 96. You talked about that there are some differences in the case. Can you go into that a little more not knowing the differences between those 2 cases that would kind of differentiate a decision versus any potential future decision?

The main thing is a different time periods. The OR 96 was later. So the facts that the shippers have alleged as to how much money we are making or much how much we should be allowed to make and what substantial change is based on a different time period than OR 92.

What happened between the '92 to '96 period? What's different in those 2 periods?

Everything is different, volumes are different, throughput is different, costs are different. They look at a base period analysis for or OR 92 than OR 96. The way they interpret the Dc Circuit Court, and again this is very preliminary but looking very quickly at it. Yesterday's decision all they said was with regard to the facts presented on OR 92, the west line should continue to be grandfathered. In other words, there's not been a substantial change.

But the OR 96, obviously, won't be right until the court makes its final decision, on grandfathering and what the reparations are. And what the new rates are. And then that will go up core decision at the Dc Circuit. So we are a long way off obviously as we have said all along from having finality on SFPP rate case situation. We have tried to give you a bottom line, down and dirty worst case analysis. Which is that $0.15 deterioration. And again that includes the costs we would have to pay a slug of reparations when it became final. And the cost of the interest of those reparations is in that $0.15 deterioration and the KMPs distributable cash flow per unit.

Okay thanks. And then 2 minor questions. On the oil production, do you have net volumes, from SACROC and Yates as opposed to the gross volumes?

Well, SACROC you can take basically the number times, we owe 98% of it. So you take the royalty of about you're about 82.5%, I think is your net volumes there.

Yeah, its about 42%.

So about 82.5%, so if you say 30,000 barrels of SACROC you take 82.5% of that. And then 42.5% of 20,000 or whatever number you're using at Yates. Now, in addition, Parks point at SACROC there is several thousand barrels a day of NGL's. The heavier of those obviously are priced off crude. Some were not priced off crude, but there are several thousand additional barrels a day of NGL's in addition to the roughly 30,000 barrels or last quarter, 274 of crude oil production.

And I can even give you a rule of thumb there for the NGL's on the heavier side, what we realized is our share is about 10% and it's just a rule of thumb, about 10% of our net oil production.

Okay, so we should count on volumes another 10% an top of the oil production, gross production, netted out?

Netted out. When you net your SACROC volume, you're getting up to to your 82.5% of your SACROC. you can then add another 10% there. So just multiply it by 1.1 and essentially what you are doing is adjusting for the NGL. You are incorporating at least the heavier end NGL.

For example, If you had 30,000 barrels, of production your your 82.5% would be 24,750 of net equity barrels. Then you would add another 2,475 barrels to that.

Okay, great. And then last question for you on the Co2 volumes, they were up quarter of a quarter, significantly, but sequentially down. Is there some type of seasonality that we didn't see last year, the reason for this sequential decline in CO2 volume?

Yeah and Rich talked about this. This is basically the impact of not putting on additional sections because we feared we were getting ahead of our infrastructure. And in June, we brought on a lot of additional infrastructure. So we are bringing on additional plots of wells and injectors there at SACROC. That's what drove that impact and again, that's what gives us comfort that for the year, we will average 28,000 to 30,000 barrels a day.

And with regard to the CO2 volumes again up 32%. They were higher in the first quarter than in the second quarter. And 2 reasons although both of them up tremendously and year-to-date I think we are at record production out at McElmo and and pretty close to record throughput on our Cortex pipeline. But what drove difference between the 2 quarters was difference in the amount of Co2 used on our own projects, namely SACROC and then Exxon also sells part of that throughput and their volumes were down. As they were doing some reconfiguration and their projects in the second quarter.

And, I'm sorry, just on co2 volume, there is seasonality. Summer months will always be lower than the winter months because of the impact of the temperature on CO2.

Okay, thank you very much.

Ross Payne of Wachovia, you may ask your question.

Okay, quick question. You guys are doing a very good job on your product pipeline if terms of volumes relative to the industry. We did, obviously, see it slow in the second quarter. Any thoughts on why it did slow the growth rate slowed relative to what we saw in the first quarter?

Yes, a very good question, Ross. I think that first of all, the knee jerk answer is that we can definitely trace is that there was a drawdown on inventories in the West, primarily, Arizona. Of course, the reason for that is not hard to infer if you had barrels in one of these terminals and you saw the price coming down. That you've gove over the curve. As you know prices kind of peaked and started down. Then you'd use up the barrels you had now before you refill. Because you thought you could refill cheaper in 2 weeks or 3 weeks. So that's part of it. And again, rule of thumb, anytime the inventories and feedings dip lower than 50%, general it means they have some refill they need to do. I think they were down to about 40%-45% at the end of June.

So, below what we normally expect during the driving season of the summer, but, I think -- so, that's very traceable. Beyond that, you know, specifically, I saw signs in 1 television, 1 of the CNBC programs when they were looking at June numbers on retail sales, gas service stations were off in the month of June compared to what they expected. So there may be a bit more to this than we know. On the other hand, our volumes in Las Vegas and particularly in Florida, Central Florida, were very strong and the volumes in the Southeast were pretty good.

So it's just hard to say and I would say that basically, you almost have to look at these things, as we always say, on a more year by year basis, than getting too worked up about any quarter. But that's our analysis of June to the extent we have any analysis. Two other quick questions, retail profits for KMI gas distribution were down a little bit.

I was wondering if there was any weather-related factors to that. And the second question I had I think that in the first quarter as you guys were injecting CO2, you were experiencing more than expected CO2 coming out on the other side. Therefore, you had to increase your processing capabilities. Has that dynamic changed at all, relative to what we have heard in the first quarter?

Yeah, I think what we saw was a continuation of that trend in the second quarter. And I guess the simplest way to put it was - - is that we began to feel, in the second quarter, that the injectivity was so good and the response was so good that we were going to overcome the process that we had in place, both from a recompression standpoint because obviously, if more CO2 is returned out of the wells, have you to recompress it and put it back down it takes more compression. We had build train after train of compression. We thought we were adequate, but we were getting very close to being topped out. On the compression side and then the same with the processes.

Clearly to the extent you have more oil, you are going to get more NGl's. You got to have more processing ability and again, we were straining at the limits of that. So the CO2 people made the decision, which I think was right at the time. Let's slow down and not put in new patterns, in other words not drill your new injection, wells with removal well surrounding it and until we get a better handle on this and that's what they have done.

Now, 2 things have happened, we have slowed down the production, primarily in June and then we have now gotten new trains on line so we can handle more. So now in July we have gone back in and started the patterns of it. It's pretty much a continuing trend that we were finding in the CO2 area at SACROC Park, do you want to handle the retail profits?

Yeah, on the retail profits again they were down a little bit in the second quarter. There is a small weather impact there.The irrigation season in 2004 doesn't look like it's going to be as strong as the irrigation season in 2003. But that really is a very small piece of what you have seen. For the most part, what you saw in the difference between the second quarter '04 and the second quarter '03 was consistent with our expectations. And as I stated, when I went through it, we expect retails will be at or above its full year plan.

Dan Jenkins, State of Wisconsin Investors, you may ask your question.

Hey, Dan.

Hi, I was wondering as far as your distributions from KMP and your talk about increasing the dividends of KMI you know, as far as how you balance that with your ratings at those 2 entities. I know Moody's has a negative outlook on KMP. And just the fact that you are currently at mid CCC at KMI is that your target for those? And have the rating agencies given you any parameters that they're looking for for you to maintain that as you do these distributions and dividends?

Yeah,it's Park. I'm happy to answer that. We are very focused on our ratings, but I think our ratings are very consistent with our dividend policy and distribution policy. Truth, I would argue that both KPM and KMI are underrated when you look at the tremendous amount of cash flow that generated at both entities, relative to the levels of debt and interest expense. The covered ratios are very strong. And the rating agencies are completely familiar with our dividend policy and our distribution policy and they have factored those into the ratings.

I may argue that may be partly why we aren't more highly rated. Because they are factoring that in. I think they are overcompensating for that. But again, that approach on the dividends and the distribution is something that is discussed with the rating agencies and something they are fully aware of.

Before the Board makes any decision in January, clearly we will look at the '05 numbers and share those with the ratings agencies obviously.

Okay thank you.

David Maccarone of Goldman Sachs, you may ask your question.

Rich, can you talk about the East line expansion a little bit in terms of costs and returns? And put this in context of the West line and throughput there and their overall system economics? And does the OR 92 SFPP information have any impact on all of that with respect to income tax recovery?

Let me talk about the East line expansion first. That's roughly $200 million project and we obviously already completed the one of the key provision of this it, 13 miles through the heart of Tucson. So we have brand new pipes out there. We are hopeful that we can start that project sometime in '05 and be operational about a year, 9 months to a year later. So sometime mid-to late '06.

No it would be online in the first quarter '06.

First quarter of '06. Anyway, '06 expansion in place, that would give us the ability to move significant additional quantities of gas. Right now, we are basically full and prorating at times, that East line. So, there's still the overwhelming source of volume for Arizona would still be from the West line. But we would now have a more larger ability to move from the east. And we would, basically,I think it's fair to say become indifferent as to whether it moves from the west or the east. And you see some switching back and fourth.

There are players that have refineries at both end. And a lot depends on what happens with Longhorn assuming it does start up as they were indicating. Where those volumes go. And how far beyond El Paso they go. So at any rate it's a good project for us. It would have a very good regulated return. That's the way to think about it on an incremental basis, which has already been cleared by the Commission. And so that's kind of where we are, and obviously baked into that is whatever rate making is ordered by the Dc Circuit. If you don't have a tax component, we won't recover a tax component in that particular rate making methodology. Does that answer your question?

Thank you, sir, I show no additional questions.

I was asking David if that answered his question.

His line actually dropped from the queue, sir.

All right, good, thank you all very much. Have a pleasant evening and thanks for spending a pleasant hour and a half with us.

Thank you, gentlemen, this concludes today's conference call, you may disconnect at this time.