金德摩根 (KMI) 2005 Q2 法說會逐字稿

Hello and welcome to the Kinder Morgan quarterly conference call. All lines will be in a listen-only mode until the question-and-answer portion of today's call. (Operator Instructions). At the request of the call leader, this conference is being reported. Any objections, please disconnect at this time. I would now like to turn the conference over to your host, Mr. Richard Kinder. Sir, you may begin your call.

Okay, thank you, and welcome to the Kinder Morgan quarterly investor call for the second quarter of 2005. I will be talking about Kinder Morgan Inc., which is one of America's largest midstream energy companies, and I will refer to it by its New York Stock Exchange Symbol, KMI.

Among our other assets, of course, KMI owns the general partner interest and significant limited partnership interest in Kinder Morgan Energy Partners, which is one of the largest pipeline mass limited partnerships in America, and I will refer to it by its New York Stock Exchange Symbol, KMP.

As usual, the Securities Act of 1933 and the Securities Exchange Act of 1934 apply to any forward-looking statements that might be made. And also, as usual, I will give an overview; Park Shaper, our President, will give the financial details, and then we will take any questions that you might have.

We had another strong quarter at both KMI and KMP, and that allowed us to do two things that were very important. We increased the dividend at KMI to $0.75 a quarter or an annualized rate of $3.00. And we increased the distribution at KMP to $0.78 a quarter or $3.12 per year.

Let me try to put both of those in context. Regarding the KMI dividend, this is the second increase this year. Probably more importantly, if you look at trends, this dividend or this rate of dividend represents an increase 15 times above that which we paid in the second quarter of '02. So, three years ago at this time, we were paying $0.05 a quarter or $0.20 a year; today, we're paying $0.75 a quarter or $3.00 a year.

We expect to be able to continue to raise our dividend at least consistent with our annual earnings growth rate, which we estimate to be in the 10 to 12% range at KMI. And we will review the dividend again, as we always do, in the first quarter of 2006 at our mid-January meeting of the Board.

Also, at KMI, in addition to increasing the dividend, during the past six months, we bought back about $190 million worth of stock. Both the dividend and the stock repurchase is consistent with our goal of returning cash to our shareholders in an economic and tax-efficient manner whenever it's appropriate.

At KMP, the distribution increase of $0.78 cents or $3.12 on an annualized basis represents an increase of 10% over what we were paying in the second quarter of 2004. Again, to look back at trends, this is the 11th consecutive quarter in which we have increased the KMP distribution and it's the 24th increase in 34 quarters since this management team took over Kinder Morgan Energy Partners.

Now, let me look at the performance that really drove our ability to increase our dividends and distribution. So let me start as usual with KMI. Our ownership of the general partner of KMP was the biggest contributor to KMI's performance, because of course, as KMP grows, it benefits KMI through its interest as the general partner.

I will talk more about why KMP had a good quarter in just a minute, but I also want to emphasize that KMI also benefited from another very solid quarter. The Natural Gas Pipeline of America, or NGLP -- NGPL, as most of you know, is the large interstate natural gas system which serves the Chicago area. And NGPL had good throughput volumes during the quarter, up about 10%.

Our transportation capacity is 96% sold out through 2005 and our storage is fully contracted until April of 2006. And we continue to have good success with renewing the contracts as they come up for renewal.

Also at KMI, our much smaller retail and power operations continue to perform at or above plan, and we expect that to continue for the rest of the year. As you would expect, the cash flow at KMI was also strong. We are where we expected to be at the end of two quarters of this year. And as we looked toward the rest of the year, as far as outlook for KMI is concerned, as you know, in our January budget, which we posted on our website and discussed at our analyst call at that time, we projected or we budgeted earnings per share of $4.22 for 2005, and we expect to meet or exceed that target for this year.

Now, let me turn to KMP, and as I normally do, I'll look at each of the four business segments and give you sort of a strategic overview and then Park will give you the financial details underpinning that strategic overview.

I'll start with the products pipeline. It's kind of a mixed bag for the products pipeline group this quarter. Let me start with volumes. They were up on the West Coast and in central Florida. For instance, on our Pacific mainline, the volumes were up about 2%, but volumes were down on our NGL pipelines, largely due to lack of demand for propane in the Midwest and also on our plantation system in the Southeast. So, that's the story on volumes.

On revenues, they were up nicely really across the segment, benefiting from our associated terminals and from modest tariff increases, some of which of course are inflation escalators that are put into effect annually. And we did benefit that when comparing it to -- benefit from that when comparing to a year ago.

That brings us to earnings before DD&A, and they were up modestly, about 3% for the quarter and 7% year-to-date. But we'll probably fall a bit short of the plan for the year in our products pipeline segment. That plan called for growth a little above 12% in earnings before DD&A, and Park will give you more details on that. But we will fall, we believe now, slightly short of the budget goals.

Turning to our Natural Gas Pipelines group, this is a very positive story, both when you compare it to second quarter of '04 and when you compare it to our budget or our plan for 2005. In that segment, obviously we're benefiting from the TransColorado drop-down -- it's now at KMP instead of at KMI, where it was a year ago. And we're benefiting greatly from strong performance on our Texas Intrastate pipeline systems, on our Kinder Morgan Interstate gas transmission coming out of the Rockies and we've had nice growth on our Red Cedar system in southwest Colorado.

We expect these trends to largely continue for the rest of the year and we expect the full year in the natural gas pipeline group to be well above plan, as well as, obviously, well above last year.

In our CO2 Pipeline segment, there, we had outstanding growth versus 2004 in both volumes and earnings. And Park will go into that in detail. When you compare the second-quarter results to our original January budget, Yates is about 5400 barrels per day above plan and we now expect it to be significantly above plan for the balance of the year.

At SACROC for the second quarter, SACROC is about 4800 barrels per day below the original January plan for the second quarter, but consistent or in fact just a tad above the revised outlook that we discussed with you in our April first-quarter conference call. The primary issue at SACROC remains water disposal. We generate an awful lot of water right now. I think we're generating about 560,000 barrels per day of water. And we -- as the production is expected to ramp up, we'll be generating another 200,000 barrels per day or so on top of that over the next several months.

Last time I talked to you about the fact that we were drilling a number of water disposal wells. The formation that we were drilling into at that time was not successful at holding the kind of volumes of water we need to put in that formation. So we went to a second formation and we're now drilling in that -- the Wolfgang (ph) formation. That's been very successful in terms of the first few wells, and assuming that those wells continue to hold the kind of water that the first wells are, we should be on track for substantial increases in SACROC oil production later in the year, and our projections are that the fourth quarter will be stronger than the third.

Our present estimate for the year goes something like this. We think SACROC will average about 3000 or so barrels per day below its plan for full-year 2005. We think Yates will average at least 4000 barrels per day above its plan for full-year 2005. So, when you put all of this together in the CO2 business segment, including, I might add, very good performance in CO2 production at our McElmo Dome fields in Colorado, very strong sales to third parties in the Permean Basin, which you would expect to happen given the price of oil today, and good throughput on our crude oil pipeline that connects our Permean Basin properties to the El Paso refineries.

Given all of these factors, and including the SACROC and Yates volume projections that I talked about, we expect our CO2 segment to meet its pretty aggressive budget goal of 34% growth in earnings before DD&A for full-year 2005. So, that's our projection on CO2.

In terms of terminals, our new acquisitions are performing very well and our Houston ship channel operations, where we have the largest refined products terminal in the world, had their best second quarter ever. Really the only negative in the terminals group was a decline in refined products volume in some of our Northeast terminals, largely due to the fact that the gasoline market had turned contango during the second quarter. We don't consider that to be a long-term problem, and in fact, the fundamentals of the market are strong. And in fact, right now, the gasoline market is now moving back into backwardation, which means that most of our customers will want to empty their tanks sooner rather than later.

Also at KMP -- well, let me, before I leave the terminals, we expect terminals to exceed their budget numbers for the full-year 2005, as well as be well ahead of 2004. So, if you just look at the segments, we expect our products pipeline to be modestly under its plan. We expect Natural Gas Pipelines to be above. We expect CO2 to be on plan. And we expect terminals to be above.

Also at KMP, we now expect our expansion CapEx and our acquisitions to well exceed $1 billion for full-year 2005, even if we do no more acquisitions than those we've already announced. And certainly we do expect to do more over the remainder of the year. The importance of that I think is that we remain on targets to continue to reinvest heavily in our business and therefore to be able to grow KMP and also KMI for 2006 and beyond.

Our original budget target for 2005 for KMP was to have total declared cash distributions of $3.13, and we believe we're on track to meet or exceed that amount.

So that's an overview, and with that, I'll turn it over to Park.

All right. Well, thanks, Rich, and I'll go through the numbers in a little bit more detail; Rich really got all of the highlights. I will start with KMP. And so hopefully, again, those of you have the earnings releases and you can turn to the first page -- the first numbers page of the earnings release following the text.

At the bottom of that page, you will see the Board has declared a distribution for the second quarter of $0.78. We did generate distributable cash flow in the second quarter of $0.79 per KMP unit. For the six months, the total distribution is $1.54, compared to distributable cash flow of $1.63. What that means in terms of excess coverage is about $2 million for the quarter, about $18 million year-to-date.

Now, both of those numbers are after the litigation and environmental settlements, which were $3 million in the quarter and $33 million for the six months. If you add those numbers back, for the six months, the excess coverage would actually be $51 million. There's another adjustment that you can make. We had an Enron receivables settlement in the first quarter that was $3 million positive. You probably want to back that off. You'd end up with $48 million of excess coverage through the first half of the year. Clearly, that compares favorably to our $39 million budget for the entire year. So again, before those settlements, we've already exceeded our budget for the entire year.

Now, I'm also going to talk a lot, as Rich did, about our plan for the remainder of the year -- basically how our forecast compares to the budget. And that's because we're now at the middle of the year; we have a good sense as to -- or a better sense as how we expect things to shake out, and there are a few moving parts.

As Rich said, performance has been very strong to date. We do expect that our distributions for the year will be at or above our target of $3.13. We expect that our excess coverage will be above the $39 million before you take out the litigation and environmental settlement. It will probably end up a little bit below that $39 million after the impact of those settlements. Of course, we did not have those settlements in our budget. So that's to be expected.

One other piece, as Rich mentioned, primarily because of the SACROC volumes and how we expect those to come in for the remainder of the year, again, as we talked about in April, the second quarter and third quarter are going to be below our budget and we expect the fourth quarter to be closer to our budget on those volumes. And in a little bit, because of some timing on the Natural Gas Pipeline segment, we think the third quarter is going to be weaker than we originally expected. Now, it will be made up for in the fourth quarter, and in truth, it has also been made up for in the first and second quarters. Again, they've come in stronger than what we expected.

We originally budgeted for very little excess coverage in the third quarter. And now, with our expectations that the third quarter will come in a little bit weaker than our original budget, we may actually have negative coverage in the third quarter, meaning that the distributable cash flow may not cover the distribution.

Now, that's for the quarter only. We will still have cumulative coverage when you sum up the three quarters. And then, of course, it could surprise us to the upside and we could end up with coverage for the quarter. But we didn't want to put that out there now. Again, we expect that the fourth quarter will be stronger. A lot of this is timing -- you know, shifts to the first half of the year or to the fourth quarter, and we expect that we will be on our distribution for the year.

I'll also talk about earnings, although again, earnings are less important for KMP, we believe that the important metrics are the ones that we just discussed -- the distribution per unit and the distributable cash flow per unit. But you will see that the earnings are $0.50 for the quarter. It's down from about $0.51 last quarter. $1.04 year-to-date, up from $1.03 a year ago.

Now, one thing that's impacting those earnings are, again, the litigation and environmental settlements -- total $33 million year-to-date. Now, the other thing that's impacting them is the DD&A, and especially related to our CO2 activities, the DD&A rate has gone up, and you will see on a per unit basis DD&A is up about 18% from where it was a year ago. For the quarter, it's up about 17% from where it was a year ago for the six months.

Now looking at our full year, again, we've published our budget. We talked about the full-year target of $2.23 per unit in terms of earnings at KMP. Once again, if you look at that number after the impact of the settlement, we'll probably end up a little bit below that number. If you look at it before the impact of those settlements, again, operations are outperforming where we were in the budgets and will probably end up a little bit above it. So we just wanted to lay that out and kind of clarify where we expect that to come out for the year.

Now, the last thing I want to touch on this page is sustaining CapEx. It is coming in -- you will see about -- almost $29 million for the quarter, up from 26 a year ago. About $53 million for the six months, up from 46 million a year ago. Our full-year budget in sustaining CapEx was about $126 million. We actually expect it will come in a little above that, maybe around $10 million above that, so in the $135 million range.

The increase primarily related to some incremental expenditures at Cochin, which is a joint venture pipeline transporting NGL that comes out of Canada. BP actually operates that pipeline -- due to acquisitions. And so, as we acquire assets, that leads to incremental sustaining CapEx. And then a little bit of shift from ONN -- that's a natural gas pipelines (ph). And I'm going to talk about this both at KMP and KMI, but there was a FERC rule that we discussed back in January that we expected to be implemented in 2005, and we budgeted as if it would be implemented in 2005.

Recently, the FERC decided to implement that at the beginning of 2006. What that means for KMP is that there will be a shift in 2005 of a little over $2 million from O&M expense to sustaining CapEx. And so again, earnings will go up a little bit as a result of that, sustaining CapEx will go up a little bit as a result of that. It has no impact on distributable cash flow.

With that, let me go to the second page and we will talk about the segments. Starting with products pipelines, you will seep products pipelines are up about 3% in earnings before DD&A for the quarter, up almost 7% for the six months. But I'm going to focus a lot on how they are doing relative to plan. As Rich mentioned, we expect products to come in a little bit under our plan for the full year. It will be about 2 to 2.5% below our plan.

The Pacific operations specifically are going to be a little bit under. They were a little under for the first half. They will probably be a little bit over in the second half. North System is a little bit under due to reduce propane volumes -- propane demand. Transmix is a little bit under due to reduced transmix volumes. Cochin is a little bit under, again due to propane volumes. And in the Southeast, terminals are over, the volumes at those recently acquired terminals have been stronger than expected and they were over in the first half and we expect that they will be over their budget in the second half.

Natural Gas Pipeline is showing tremendous growth this year. It's up about 20% -- over 20% for the quarter; over 20% for the year-to-date. Now of course, TransColorado is a new asset in that segment that was acquired last November from KMI, and so that comparison is not apples-to-apples. But even the existing assets are performing very well, especially the Texas Intrastate and the Red Cedar joint venture. Both of those assets we expect to continue to be above plan in the second half of the year.

Then, there is a little bit of timing -- some assets that were above in the second and the first half won't be above in the second half. And as I've said before, that's contributing a little bit to the expected weakness in the third quarter. But ultimately, we expect Natural Gas Pipelines to be substantially above their full-year budget target.

CO2, up 51% in the second quarter versus where it was in 2004. Up 55% for the six months versus where it was a year ago. Again, Rich mentioned the SACROC volumes -- I talked about them a little bit as well -- being lower in the second and third quarters than we expected, and actually, even the fourth quarter it will be lower than our budget, but we expect them to be coming back nicely.

So, if you look at the full year, and Rich did talk about this, we expect SACROC to be under its budget for the full year. We expect Yates to be above its budget for the full year. And we expect the CO2 business -- the sales and transportation of CO2 to be above its budget for the full year. And ultimately, we think CO2 will end up right on its budget for the year, which is significant growth above where it was in 2004.

On the terminal side, up about 18% for the quarter, up about 18% for the year-to-date, driven largely by the acquisitions, especially the TGS acquisition in the second quarter, but also by nice performance from existing assets. And we expect both of those to continue in the second half, so that we will get incremental performance from the assets that we've acquired. And we expect that the existing assets will continue to perform above budget.

What that means is terminals is expected to come in considerably above its budget in the second half of the year. You'll see that the total segment earnings, then, are up about 21% for the quarter; they are up about 23% for the six months. So again, very strong performance across the business segments in the first half of the year.

With that, let me drop down to the G&A line. You will see 47 million in the quarter. It's up from about $39.5 million for the quarter a year ago -- about $90.5 million year-to-date, up from about 87.7 a year ago. The increase in G&A is driven by acquisitions -- clearly, as we acquire assets, we have incremental G&A to go with it -- and by some incremental legal costs. You will see broken out below that the settlements, $3 million. That's an incremental amount for some environmental settlements that are expected on the West Coast, and then the $30 million approximately that we took in the first quarter.

Net debt costs are up about $20 million from where they were a year ago for the quarter. They are up about $33 million from where they were a year ago for the six months. The debt balance has gone up as a result of the expansion projects in the last year and the acquisitions in the last year. Additionally, the rate has gone up. Again, 50% of our debt is floating, 50% is fixed. The average rate across all of our debt is up about 80 to 90 basis points over the last 12 months. And so that's driving that increase -- that combination of additional debt outstanding and additional rate is driving that increase.

Now, relative to budget, actually, rates have gone up quicker than what we had in our budget. I will remind you, and we talk about this in detail every January, we generally expect floating rates to go up about 100 basis points over the course of a year. That works out to about 33 basis points a quarter because we budget the fourth quarter to be 100 basis points higher than the first quarter. So far this year, rates have gone up a little bit higher than that. That means when we look at our interest expense expected for the full year, we expect it to be higher than our budget by around $20 million.

Minority interest is just the general partner minority interest; it's a calculation. The loss on early extinguishment of debt is a last-year issue -- takes you to net income, again, up 14% in total dollars for the quarter; it's up about 15% for the year-to-date. Now, again, when you factor all of these things in, continued outperformance at most of the segments -- CO2 we expect to be on budget; products we expect to be a little bit under. We expect G&A will be a hair over, mostly as a function of the acquisition. We expect interest expense will be a little bit higher than our budget. But when you add all of that in, we still expect to hit our target of $3.13 of distribution per unit for the year and we expect that our excess cash flow, at least when looked at before these litigation settlements, will be above our published target of $39 million.

With that, I will go back to the first income statement page and just go through it quickly. Revenues are impacted by gas prices, so that's not overly meaningful. The same thing goes for operating expenses. DD&A is up as a function of the acquisitions and the expansion CapEx. G&A we discussed. TOTI is up as a function of acquisitions and increased production. That gets you an operating income number that's up about $44 million or 19% for the quarter. It's up almost $88 million or 19% for the six months.

Earnings from equity investments -- Plantation is a little bit down, Red Cedar is nicely up, and so you see some increases there. There are a few other items that go on that line, but those are the big changes. Amortization of excess cost of equity investments basically unchanged. Interest expense we discussed. Other is largely interest income and it is up a little bit. That's largely a result of the intercompany debt that we have on at Plantation now. Minority interest, again, is just a calculation, and we already discussed the net income number and the per-unit numbers.

So, why don't I go to the balance sheet, which is the last page of the KMP release. Cash and cash equivalents of $63 million. That's largely just timing for the end of the quarter. Other current assets are up a little bit. That's primarily a function of the mark-to-market on the hedges. PP&E is up largely as a function of expansion CapEx. Investments are basically unchanged. Deferred charges and other assets is up largely as a result of the TGS acquisition. In the TGS acquisition, we got a number of contracts -- long-term contracts with very creditworthy major customers, and we assigned some intangible value to those contracts. And of course, the value will be amortized over the life of the contract.

Also, that line item is up as a result of the mark-to-market of the hedges.

Total assets is about 11.3 billion, up from about 10.6 billion, largely as a result of expansion CapEx and acquisitions. Notes payable, we'll talk about when we get to the debt piece. Other current liabilities is up about $215 million. That's largely the mark-to-market on the hedges. Long-term debt is up $525 million. We had a $500 million new issue in March of this year, and then that's just changes in the commercial paper balance, and I'm going to talk about the total change in debt in just a minute.

Market value of interest rate swaps is just a function of the forward curve for interest rates. Other is up largely as a function of the mark-to-market of the hedges. Again, we have hedge accounting, but that means we mark-to-market those amounts in the balance sheet, and you see it flow through on a number of these items. Really, minority interest unchanged. Accumulated other comprehensive loss is a function of the mark-to-market on the hedges. Other partners' capital is up a little bit.

Total debt is a little under $5.2 billion. It's up from $4.7 billion at the beginning of the year. That's an increase of about $462 million, and again, I will get into those details in just one minute. Debt to total cap is a little under 54%. That's up from a little under 52% at the beginning of the year. It's consistent with our expectations for where we thought we would be at this point in the year, although we didn't budget all of the acquisitions that we had made, and so it's a little bit higher than that.

Now, we do expect that we will issue equity at some point in the second half of the year, and we expect that the debt to cap at KMP will end the year at closer to 50%. So it will be a reduction in debt to cap from the beginning of the year to the end of the year.

Let's talk about the change in debt. For the quarter, the debt went up by $316 million. Year-to-date, the debt is up $462 million. Let me start with the quarter. Again, an increase in debt of $316 million. Acquisitions in the quarter were about $187 million -- the cash paid for acquisitions. That was largely TGS.

Now, let me make a point. There are several acquisitions that have been announced that were not close by the end of the second quarter. That includes the Port Mobil acquisition from ExxonMobil, that includes the Southern Shore Terminal acquisition, the terminal acquisition from Terra and it includes the Dayton Storage deal. All of those either have closed or we expect to close in the third quarter, but you don't see the impact of those acquisitions on the debt number at the end of the second quarter.

So, again, $187 million of cash was used for acquisitions. $169 million of cash was used for expansion CapEx. I will give you a little bit of detail on that in a minute.

We generated cash of $42 million from the KMR distributions. And those things net out to essentially the $316 million increase in debt. Now what that means is working capital and other items were basically flat, really has varied by a couple of million dollars. But when you sum up AR and AT and various other working capital items and a couple of other items in this quarter, they netted out to basically zero.

Now, for the year-to-date, the change in debt was $462 million. Acquisitions were $190 million. Expansion CapEx was $290 million. The KMR distributions generated or we retained about $82 million for the six months. And then there was a use of cash of about $65 million for working capital and other items.

Let me tell you quickly about some of those items. AR and AT were a use of cash of about $28 million. Accrued interest and accrued taxes were a source of cash of about $33 million. So, you net those out and working capital didn't have a big change. Margin posted was a use of cash of about $32 million. Gas and other NGL inventory was a use of cash of about $21 million. And then the difference between earnings from equity investments and distributions from those equity investments was a use of cash of about $19 million.

So, again, you sum those up and you get to the approximately $65 million use of cash, again, which adds up to the $462 million increase in debt for the year-to-date.

Now, on the expansion CapEx, about -- I will just round -- $170 million for the quarter, $290 million year-to-date. On the product side, the quarter expenditures were about $44 million. The year-to-date expenditure is about $74 million. The largest expenditure there was the East Line expansion, which is ongoing. We had a little bit of leftover from the Concord to Sacramento expansion in the product segment.

On the natural gas side, expansion CapEx was about $15 million for the quarter, about $21 million year-to-date. The Markham storage expansion was the biggest piece of that and then a few other smaller items. CO2, expansion CapEx $74 million for the quarter, $125 million year-to-date. And that's the ongoing expansion at SACROC for the most part, also some expenditures for the power plant that we were building to serve SACROC, which came online in June.

Terminal side, about $36 million for the quarter, $68 million year-to-date. New tanks at Pasadena and the Houston Ship Channel, the largest expenditure. Some additional bolt terminals expansions and a variety of other expansions there.

As Rich mentioned before, our full-year budget on expansion CapEx was $600 million. Given the terminals opportunities and other opportunities that we see now, we actually expect that we will spend a little bit more than that for the year in expansion CapEx.

With that, I'll go to KMI. And so, again, in the KMI earnings release, if you will go to the first numbers page, and really I'm going to spend most of my time on the second page here. If you look at this page, it appears that earnings per share was $0.99 for the quarter, up from $0.84 from a year ago, but there's a gain on sales of KMR that we would not count -- we didn't include in our budget, and we would back that out. And then that is netted by a small additional item that really is laid out on the second page. So, why don't we skip right to that page, and you will see diluted earnings per share from continuing operations before certain items of $0.95. That's the real, ongoing, meaningful number in our opinion.

Now, you will see that certain items totaled to about $0.04. What that is is a gain from the sale of KMR shares. We've sold about $75 million worth of KMR shares in the quarter offset by a minority interest item that is also a onetime item that net out to about $0.04 a share. So, again, we would back off the $0.99 cents by $0.04, and $0.95 is what we believe to be the meaningful number.

Now, that of course compares to $0.84 a year ago. That's an increase of about 13%. Year-to-date, it's $2.11, up from $1.85. That's an increase of about 14%.

Now, again, for the year, we expect that KMI will hit or exceed its budget of $4.22 of earnings per share. Taking a look at the segments -- first, KMP -- the best place to look at the impact of KMP on KMI is in the middle section. You will see over $134 million of pre-tax earnings from KMP in the quarter, up from 114.5. That's an over 17% increase. You will see almost $267 million for the six months, up from $225 million. That's an increase of almost 19%.

KMP is on track to deliver to KMI what we expected it to deliver in its budget, and that is even including the impact of the settlements, which do flow through -- the settlements at KMP do flow through to KMI to have an impact of almost $5 million. And even after that impact, we expect that KMP will be on track to deliver to KMI what we expected in the budget.

The other segment, NGPL, has had a very strong year -- up about $6 million for the quarter. It's up over $13 million year-to-date. We expect that NGPL will come in over its budget for the full year.

TransColorado is now at KMP, and so it does not show up in 2005 at KMI. Retail, basically flat for the year. It's down about 600,000 for the six months, but on track for its budget of about 4% growth, so expect that we will see that for the full year for retail, if not a little bit above. Power is a little bit above last year. It's about 600,000 above for the quarter, 1.2 million above for the year-to-date. Power is on track to slightly exceeded its budget for the full year.

Then, you add up the segment earnings, including KMP -- you'll see we're up about $25 million or over 10% for the quarter and over $50 million and over 10% for the six months. And again, the segments are set to deliver to KMI a little bit over what we expected in the budget.

G&A expenses you'll see are actually down a little bit for the quarter. They seem to be down a little bit more year-to-date. I'll remind you that also at KMI, we had settlements of some Enron receivables in the first quarter that also equaled about $3 million that came through on this line. And so our outperformance on G&A for the six months is a little bit overstated. That being said, we did budget for G&A to be down at KMI for the year, and we expect that we will hit that budget. So G&A should be lower at KMI for 2005 than it was in 2004.

Interest expense is up about $6 million for the quarter, almost $10 million year-to-date. The balance is actually down on average 2 to $300 million. The rate is up, just as it was at KMP. Now, relative to the budget, just as we said at KMP, interest rates have gone up quicker than what we budgeted. So we expect that interest expense will be a little bit higher at KMI than our full-year budget.

The interest expense defer to interest debentures are the trusts, and that doesn't change. Other is largely the KMR minority interest. And again, that takes you down, if you go to income from continuing operations, net of tax, you will see up 117 million versus $104 million, which is up about $12.5 million or about 12% and 262 million versus 231 million; that is up over $30 million or over 13% from a year ago. And now again, with the outperformance that we expect from the segments, including KMP, and even considering that interest expense will be a little bit above what we expected in the budget, we expect KMI to come in at or above its full-year earnings target of $4.22.

Going to the first page quickly, again, operating revenues, especially at retail, are affected by gas prices, so they are not overly meaningful. Gas purchases and other costs of sales are similarly affected. O&M is up a little bit. Part of that is insurance and part of that is NGPL, but nothing that we don't expect to be consistent with our budget. G&A, we talked about. DD&A is up a little bit. That's largely due to incremental expansion and sustaining CapEx, primarily at NGPL. TOTI is basically flat.

Operating income -- one, TransColorado is pulled out. Two, as always, this number is before the impact of KMP, so we don't think it's an overly meaningful number. You see the impact of KMP on the next line. Now, of course that line includes 100% of KMR and then the portion of KMR that we don't own gets pulled out on the minority interest line.

Interest expense we discussed. Minority interest, again, is largely KMR. Other net, you see a big number for the quarter and for the year-to-date. This is where the gain on sale of the KMR shares is flowing through. And again, we don't expect to count that towards kind of our ongoing earnings expectations. Again, that takes you down the first page, it looks like $0.99; we would say you should really think about it as $0.95.

With that, I'll go to the balance sheet. The balance sheet for KMI -- cash is down significantly from the beginning of the year, but I will remind you at the beginning of the year, we had a large cash balance as a result of the sale of TransColorado. We stated at that point we intended to use a portion of that to pay down debt that we already had at that point, and we intended to use a portion of that to repurchase shares. We did most of that share repurchasing in the first quarter. And I will give you a summary of where we are for the year in just a minute.

Other current assets is up by almost $100 million. That is some additional gas in storage and some additional prepays and then a little bit of mark-to-market on hedges. Investments is down a little bit. That's the flowthrough of the other comprehensive income at KMP. It has an impact here on KMI. PP&E is basically flat. Other assets is up a little bit. Mark-to-market of the swaps and then a little bit of prepaid pension expense.

Total assets, $9.9 billion, down about $200 million from where we were at the beginning of the year, and that is a trend that is not unexpected. Notes payable, you will see 163 million -- that's largely the commercial paper outstanding at the end of June. At the end of the year, it was a maturity that came due in March that was paid off at that point in time. Other current liabilities is down about $61 million. That's payables, accrued interest and some other accruals driving that reduction.

Other liabilities and deferred credit is largely unchanged. Outstanding notes and debentures -- we did have a new issue of $250 million in March of this year. So we had a $500 million maturity. We paid off half of it with new long-term debt. We paid off the other half just with commercial paper.

The deferred interest debentures are the trucks (ph) -- they don't change. Interest rate swaps changed as a function of the forward curve for interest rates. Minority interest is unchanged. Accumulated other comprehensive loss is largely the flowthrough of KMP's OTI. Other stockholders' equity is down a little bit. Earnings is taking that up, but then the share repurchase that happened through the first half of the year, the $190 million, reduced the shareholders' equity.

If you look at total debt, 2.666 billion, up from a little less than 2.6 billion. Again, it was a little low -- artificially low at the end of the year. We said at that time that we thought that the normalized debt level was 2.75 billion. We said that we expected to end 2005 at about 2.7 billion. We built into our budget about $50 million of debt reduction. Now, we're lower than that already, and the reason that we are lower than it is that we have had about $93 million of KMR sales, which were not built into our budget, and so that has reduced that number.

Now I will also talk about the components of the change in debt in just a minute, but essentially we are at 38% debt to cap, basically a little bit above where we were at the end of the year.

Cash flow -- you know, our budget target for cash flow for the year is up $623 million. We generated about $316 million year-to-date. Now, some of you may remember that the first quarter was very large. Now, we said at the time that it was artificially large due to the timing of tax payments. And so the first quarter is about $252 million, second quarter about $58 million. We doubled up on tax payments in the second quarter, had very little tax payments in the first quarter, but essentially we're on track to hit our budget of $623 million.

Now, I do want to take an opportunity to talk a little bit about sustaining CapEx at KMI. We also expect sustaining CapEx to be up at KMI. This is largely due to some incremental expenditures at NGPL and then due to the same accounting issue that I mentioned before. NGPL intends to spend about 10 to 15 million more dollars in 2005 than if originally budgeted on its integrity program, and that includes a significant amount of additional hydrotesting and a significant amount of incremental pipe replacement.

In addition, the FERC rule change that I mentioned before that we had budgeted to happen at the beginning of 2005 and now won't happen until the beginning of 2006 had about a $6 million impact for the full year at KMI, and so that's about $6 million that moved O&M expense, a reduction in expense, and goes to sustaining capital, an increase of sustaining capital. And so, again, we expect that sustaining capital at KMI will be up to $20 million above our budget. Our budget was almost $101 million. But even with that, we expect that we will still come in right about the $623 million budget for the full year.

Now, let me talk quickly about the change in debt. The reduction in debt for the quarter was about $58 million. Year-to-date, it's actually up about $80 million. Let me walk through the quarter first. You will see cash flow was about $64 million. I misspoke earlier; I called it 58, but that was the change in debt. The cash flow for the quarter was $64 million. Share repurchase during the quarter was a use of cash of about $36 million. Dividends in the quarter were a use of cash of about $85 million. Expansion CapEx was about $10 million during the quarter. The KMR sales during the quarter were a source of cash of about $75 million. And in working capital and other items were a source of cash of about $50 million.

That $50 million came from a variety of sources. Working capital was a big part of it. We also had some margin returns, some other derivative adjustments that returned about $30 million, offset by a little bit of increase in gas and storage, a little bit of difference between earnings and distributions from equity investments, and then a couple of other items totaled to that $50 million source of cash in the second quarter.

Year-to-date, we have had a reduction in debt -- I mean, sorry, an increase in debt of about $80 million. Now, what drove that cash flow of $316 million -- share repurchase was a use of cash of $190 million. Dividends was a use of cash of $172 million. Expansion CapEx was a use of cash of $14 million. We've had contributions to our pension plans of $34 million. KMR sales totaled $92 million. And then working capital and other is a use of cash of about $78 million.

Now, that $78 million is a little bit from working capital items and then you have actually an increase -- or use of cash around derivative accounting, a use of cash for accrued interest, a use of cash for gas and storage and deferred purchase gas costs, and a little bit of a use of cash for distributions versus earnings from equity investments. And those things totaled to $78 million approximately use of cash, which again gets us to an increase in debt of about $80 million.

And that is really it for KMI, and I will hand it back over to Rich.

And with that, Anita, we will take any and all questions that people might have.

(Operator Instructions). Ross Payne.

Ross Payne with Wachovia. First question. It looks like product pipeline volumes are relatively flat quarter-over-quarter. Are you seeing some impact from high fuel prices? And secondarily, is there any kind of market share gain or loss in your opinion across your systems?

The answer to both of those I think is essentially no. I think this is the most rational explanation of it. Again, Pacific volumes were up about 2%. That's pretty consistent with the EIA numbers nationwide. The real downturn was primarily on the Plantation pipeline system, and this was largely a matter of allocation on the north end of the Plantation system up in the Carolinas and Virginia in that we just couldn't get the right allocation that the customers needed and the right product mix up there.

And in addition, there were some issues with one refinery connected to Plantation. So even though Plantation had a pretty good quarter because it's -- a lot of its long-haul volumes -- the higher share of long-haul volumes were fine, it did have allocation issues and some short haul issues coming out of one of its refineries. I think that was the major decline.

Now, I think on the NGL side, a totally different issue there, as we said. Both the North System and Cochin had real declines in terms of propane demand in the Midwest, just didn't happen. Also, on the refined products, I mentioned that the mainline volumes on Pacific were up about 2%. Central Florida volumes, Park, I think were up around 9%, is that right?

Yes, they were very strong.

Very strong in central Florida. So it was primarily this problem on Plantation in southeast, largely an allocation issue. So I think there were some specific things. Of course, on most of our systems, it's really not a market share gain because, for instance, on the Pacific and CALNEV and Central Florida, we are the only pipeline serving those areas. Certainly, on the Plantation system, we have a big competitor in Colonial. And I don't think that had major impact on the volumes, but I think the other two things I mentioned were the bigger issues. But it could be some market share loss there, but I don't really think so.

Okay. Just kind of a follow-up to that. You know, for Plantation, do you expect it to kind of return to more normalized budgeted figures going into Q3 and Q4? And second of all, if you could also expand on the transmix, what's going on there?

Yes, I think Plantation we expect to normalize itself. Yes. On transmix, we had a -- as you may recall, a couple of years ago we signed a long-term, 10-year agreement with Duke to market all of the transmix output. We just operate these facilities around the country. They're a very large producer of transmix, and then Duke was the buyer under this long-term contract. It took it, it sold it and we got a set price on it. So, very simple deal.

Duke, as part of its retrenchment to its core areas, put that on the market and completed the sale. I think it was around the first of this year or early this year -- maybe last fall, Park says -- to Shell. And so Shell took over from Duke on doing that marketing. And, for whatever reasons, they're still marketing the minimum quantities that they are required to do, but they are not marketing as much as Duke was marketing at the full return on it (ph).

And we're looking at ways of working with Shell and other ways of getting this back to the higher level, the level we enjoyed with Duke. And I think that's probably -- we'll see some uptick; we have some new opportunities coming online in the October time-frame. So probably more a fourth-quarter than a third-quarter event. But that is the main thing, for whatever reasons, we had a change in the party that is buying the offtake from these plants, and I think that's the driving force.

John Freeman.

Raymond James. On the 48 million expansion project, basically to expand the terminal there at the Houston Ship Channel and the one in South Carolina, can you elaborate a little on the timing of when those would be completed, and also maybe a little bit more detail on the South Carolina terminal in terms of exactly what's going on there?

Yes, I will be happy to. We have owned for a number of years what we call our shipyard river terminal just outside of Charleston, South Carolina. It's been a very successful terminal. It's what we would call a mixed-use bulk terminal, moves a lot of different products, some for import, some for export. We have now signed a contract, a long-term contract with a large third-party customer. And that customer is going to move in at a minimum 3 million tons of coal, imported coal into the Southeast.

And to do that, we are expanding the system, adding a dock, adding some other facilities to accommodate that. I think that that additional revenue from that will be coming in, I think, sometime in the first half of next year. I'm not sure exactly when. And we're hoping to do even a larger-scale expansion there by buying some additional land. That's not done yet. We have the ability to ramp up that contract significantly. And that's the story on South Carolina. It's a very good return for us -- very good investment in terms of a multiple cash flow.

The money on the Houston ship channel is we are building several additional tanks -- several hundred thousand barrels of additional volume that we can handle refined products here in the Houston Ship Channel on behalf of a major customer, who again has signed a long-term contract at very good credit -- kind of a household name that wants additional storage capacity on the Ship Channel.

We have -- of course, I don't have these numbers at my fingertips, but we have dramatically increased the capacity on the Ship Channel since we took over those assets from GATX about four years ago to the extent that now our Ship Channel complex at Pasadena and Glen Park is we believe now the largest single independent refined products terminal in the world.

And we just benefit from being operated at the true crossroads of the American energy system. We have the largest petrochemical complex. We have huge refinery volumes coming out. And we are simply -- the input point to put those into pipeline systems, not necessarily our own, that go in various directions -- Colonial going to the Northeast, others going to the Midwest, others going West, and so a tremendous demand for that. People like capacity at the point of origin. And so that's what we're doing.

I think we will in all likelihood have additional expansion opportunities there if you look out over the next year to 18 months. So that's very good business for us, very good terms, and as I said, the second quarter was the all-time high of second-quarter volumes through that terminal complex since they'd been operational.

Thank you. Last question I have and then I will turn it over. Can you give an update on where you all are in the process on the Carthage Pipeline, both in getting approval and on the firm commitments? I know you all opened -- had open season announced a couple of months ago on that.

Yes, I think we're still working on that. We don't have anything new to announce yet. We're still working with our customers and if and when we have completed those agreements, we will have something to announce. But I think given the status of negotiations right now, we don't have any more comments on that.

Alex Meyer.

Zimmer Lucas. Just a couple of questions for you just in terms of the production profile of SACROC and Yates for '05 going forward. I'm just wondering if I guess the budget is something good to use as a benchmark?

I'm not sure I understood the question, Alex. You're saying is the budget a good benchmark for '05?

'05 onwards, or just how the production profile is going to be I guess different relative to what you originally budgeted? I don't know if any of the issues at SACROC with, I guess, the water.

The best information that you can go by is what we presented in the January conference.

Okay, and I guess the second question would just have to be around what kinds of distributable cash flow multiples do you sense for I guess the Dayton storage facility as well as the Exxon and Southern Shore terminals?

As a multiple, both of them are within the range that we consistently talk about between six and eight times distributable cash flow. That's after sustaining CapEx, although I will say that Dayton -- those figures may be a little skewed because we plan to initiate a rapid expansion of that facility, and as we do, we will have to shut off some of the present use of it for a period of about 18 months while we're doing that expansion. And that will drive a little lower return on the front end, much better return about the third year out. I'm looking at Steve Kean, who really masterminded this acquisition.

And we really haven't talked much about Dayton, and we should. This is a significant acquisition for us. You count assumed debt and payment to Jenco, it's right at $100 million. And then we'll be spending some additional capital to expand the cabins. We think -- and we have a long-term arrangement on a big portion of this capacity with Jenco that they are taking back for a period of years.

But long-term, we think our storage capacity in the Gulf Coast is very valuable. Again, as I've said many times, we believe that the most of the new LNG will come ashore in an area between Corpus Christi, Texas and Lake Charles, Louisiana. This is right in the heart of that. It connects to our own pipeline system. So we will have the ability to move in and out fairly rapidly. It's got good characteristics. We like the specifications of the field and the storage facility itself. And we think storage is going to be at a premium in the out years in this part of Texas.

So we're really delighted with acquisition, and we got it at a good multiple. But again, it's a little bit back-end-loaded because of this expansion we have to do.

On the Port Mobil facility on Staten Island, we're going to have pretty good distributable cash flow from day one on that. We're also going to spend money expanding that and that cash flow will ramp up, but we won't have the same issue of a hawk (ph) expected to be pretty ratable going up in accordance with what we have spent and will spend.

Okay, and in terms of I guess the $48 million of expansion capital, is it fair to assume the kind of I guess six to eight times distributable cash flow multiple there or should it probably be a little bit lower because you probably have higher returns on organic projects?

It's a good bit lower. It's a good bit lower. It's a good bit better than six to eight times. In those kind of things we do better than that.

Becca Followill.

Howard Weil. Two questions for you. One, on a net basis, can you break out for us the gain on KMR on a pre-tax basis? Just because when I look at it on tax affecting it, the other income line still seems kind of big, and I know there's this other minority interest line, and could you explain that along with it? And then I've got another follow-up question.

Park?

Yes, the -- this is Kim, Becca. The gain on KMR was 21 million on a pre-tax basis.

So, the tax impact there seems a little disproportionate and that's because of the accounting around some capital loss carryforwards, which you will remember is the reason why we're selling KMR in the first place.

Exactly. And then the minority interest item you mentioned, you said that there was a small minority interest item.

That total was about $3.4 million.

Great. And then, the other item is -- you'd talked about earlier in the year possibly making additional acquisitions of oil properties in order to do some additional CO2 flooding. Have you guys done any more of that? Have you actually made any or agreed to any other acquisitions on the oil side?

Well, we did this little acquisition, Claytonville, that we disclosed -- I guess we made it in the first quarter. And beyond that, we looked at a lot of things in all our business segments. But there's nothing else we would comment on at this time.

Martin Perlman.

Perlman Associates. Congratulations again and again and again. It seems like every quarter. I may have missed this, because my phone cut out for a moment. But I was wondering what the current status is of the rate case out on the West Coast. I know that the Company is getting bigger and bigger and so the rate case in an absolute amount or a relative amount of the Company is getting less and less important, so I'm just wondering where it stands.

Really two developments over the quarter, neither one of which is determining much of anything, but the one was that, as you know, I think you know, the Commission defer (ph) issued an opinion that in the reinterpretation of Lakehead, which was bounced out by the DC circuit, that it would allow full tax reimbursement -- in other words, a full tax component to the rate of MLPs assuming that the MLP can show that its ultimate owners are taxpayers. We view that as very favorable for not just SFPP and Kinder Morgan, but MLPs in general, although I will say obviously the devil is always in the details. And each company filing to have the tax component in there when it goes through its filing will have to establish that its owners are taxpayers.

We believe virtually all of our owners are taxpayers and have so filed with the Commission in the June filing that was required. So, that's a positive for all the MLPs and for Kinder Morgan, because if you recall, when we did this kind of worst-case estimate of $0.15 impact at KMP if we lost everything on the case, we assumed we would get no tax reimbursement in order to give the investors -- try to be as transparent as possible with the worst possible case.

So it would seem that we will be helped by this because we will clearly, I think, down to the FERC ruling get some or all of the tax treatment -- credits for tax increment in the rates.

The second thing that happened is that FERC affirmed its position that the West Line was not grandfathered and that's being appealed by both sides now back to the DC circuit. We still don't have a decision on the so-called Phase 2 ALJ decision on exactly what the SFPP pipeline would have to pay by way of reparations or exactly how much the reduction would be. We've given you all those numbers in the past, and again, but we don't have any final decision on that. So, again, really not much update, other than the significant thing -- everything is kind of where it was except that based on the FERC decision, they've now allowed a tax component for MLPs to be reflected in their rates.

Scott Soler.

Just one quick question. When we look at your dividend payout ratio today at 71% with estimates for the year, you all have a high-class problem right now because of your GP stake in KMP that your free cash flow, as we model it at least over the next couple of years, is going to exceed your rate of earnings growth. And what I was curious about is do you guys care that much about the actual dividend payout ratio, and would that actually cap the dividends that you might pay out a couple of years from now? In other words, if the free cash flow to KMI is growing at such a rate that you could actually increase your dividend to possibly a bit higher rate than your earnings growth, would you consider doing so to return that cash? Or would there be a dividend payout ratio that would be so high that it might cap?

The answer is yes, we would not allow the dividend payout ratio to cap the payout. We would certainly be prepared to explain exactly that, and you hit the nail on the head, of course. The fact is that, as we've said so many times, KMI is a really unique animal because a huge amount of cash coming in from KMP that obviously is really free and clear cash flow. So we think our payout ratio range should be a little different than an ordinary company. So that is why we're very careful to say that we would anticipate that the dividend increase would be at least comparable on a percentage basis to the annualized growth in earnings.

Yes, I will reiterate what Rich said, but add one caveat. We believe that the payout ratio relative to earnings is irrelevant. Again, what matters is how much of your cash flow you are paying out, and we think that is a relevant thing to look at, and when we think about where our dividend should be, we look at that.

Now, that being said, there are some people who pay attention to the payout ratio, and the ones that matter are the rating agencies. And so, if the rating agencies are going to be focused on a payout ratio, then we're at least going to have to pay attention to it and work with them to continue to convince them that it's really not a relevant metric.

Yes, no question. I just wanted to make sure. Thank you.

(Operator Instructions).

Okay. Well, listen, thank you very much for listening. We think we had another very good quarter, and we look forward to talking to you in three or four months, if not sooner. Thank you.

Thank you Mr. Kinder, and I would like to thank everyone for participating in today's teleconference call and have a great day.