金德摩根 (KMI) 2006 Q2 法說會逐字稿

Welcome, and thank you for standing by. At this time, your lines have been placed in a listen-only mode until -- .

Go ahead, Calvin.

This call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to Mr. Rich Kinder. Sir, you may begin.

Thank you, Calvin. This is the Kinder Morgan quarterly earnings call. I'd like to welcome you all.

Throughout the conversation, we'll be talking about Kinder Morgan, Inc. which is a large midstream energy company in North America. I'll refer to that as KMI. Among the assets that KMI owns, of course, is the general partner interest in Kinder Morgan Energy Partners, one of the -- America's largest [inaudible] partnerships. And I'll refer to that by its New York Stock Exchange ticker symbol, KMP. As usual, we'll be making statements that may fall within the Securities Act of 1933, and the Security Exchange Act of 1934. And also as usual, I'll give the highlights of the quarter and year-to-date performance. Park Shaper, our President, will go through the financials in great detail. And then we'll take any questions that you may have.

I will say at the start that we cannot discuss the offer by management and other investors to take KMI private at a $100 per share cash offer that was made at the end of May. We cannot discuss that beyond what's in the press release itself and what we have previously disclosed.

Let me start with KMI. KMI reported an 11% increase in earnings per share from continuing operations before certain items. Park will talk about the certain items. But this quarter, both at KMI and KMP, there were certain extraordinary items that all -- the majority of which were positive, resulted in a positive net at both companies.

And just like we did in the first quarter, we have separated those out in the interest of being completely transparent, not claiming credit for anything that we didn't produce from operations. Starting with KMI, NGPL was well above its budget, both during the quarter and year-to-date. This is a result of successful recontracting. It's a result of putting new facilities in service at NGPL. And also as a result of just a strong market for the transportation and storage services which they offer. We expect them to remain substantially above budget for the full year 2006.

Our Canadian operations, consisting of the large retail distribution network in British Columbia and our Canadian pipeline operations, all of which were acquired in the Terasen acquisition late in 2005. In total, those 2 operations are slightly above our budget year-to-date, and we expect them to be at or slightly above their budget for the full year 2006. Our U.S. retail operations is somewhat below budget year-to-date.

That's largely the result of revenue accrual process changes, and we expect them to be on budget for 2006. The contribution that KMP has made to KMI, basically on budget year-to-date. And we expect them to be approximately at that budget, or perhaps slightly below, for the full year-to-date, and Park will get into more detail on all of that. In total at KMI, we expect to meet our budget targets of $5 per share, earnings per share in 2006 for the full year, and full year cash flow of $760 million. That's free cash flow. And we've defined that for you, and Park will talk about that in detail.

Turning to KMP, we have 4 business segments there, and I'll talk briefly about each of the 4. Our Natural Gas segment is running well above its plan. All 4 segments, by the way, are all above their performance, both for the quarter and year-to-date compared to 2005. But as you know, we really compare against our budget which we post each January for this year in 2006.

In that vein, Natural Gas is well above its plan year-to-date and for the quarter, and we expect the Natural Gas segment to remain well above plan for the year. As we said in the release, they produced about $275 million in earnings before DD&A for the first half of the year. Their target for the total year is slightly above $500 million. 501 to be specific. So they are running nicely above plan.

That's being driven largely by very good performance in our Texas Intrastate Pipeline System, and that in turn is largely being driven by success in recontracting, in placing additional storage online, getting good returns on that. And we're also in that segment getting good performance from our Red Cedar and Casper-Douglas gathering systems in the Rockies.

Our second segment is our Terminals Group. That's running above plan year-to-date, and we expect that to remain above plan for the full year 2006. That's being driven by several factors, most important of which are increasing volumes being run in our petcoke facilities. We are now the largest handlers of petcoke in the United States, and we are seeing year-to-year increases, and increases above our budget, in terms of volumes handled. It's also being driven by increasing products imports, particularly into our terminals in New York Harbor. And it's also being driven by increased volumes of ethanol, which we are moving through our terminals, primarily in the upper Midwest.

Our CO2 segment is slightly below plan, year-to-date. You will recall that in our quarterly conference call at the end of the first quarter, we detailed the performance to a large extent and said that at that time that we projected that the CO2 segment would be about $45 million below its budget for the full year. We now have made up some of the ground in that particular segment. Our current estimate is that, instead of being short for our budget in 2006 by $45 million, that number will be more like $20 million. So we continue to make progress there. The driving factors are much what we talked about in the first quarter. We continue to get outperformance compared to budget, and certainly compared to last year, at both Yates and in our transportation and marketing of CO2. And we continue to see SACROC with volumes that are a little less than we had in the plan, and we detailed all of that for you in the first quarter.

On our Products Pipeline segment, we are below plan, year-to-date. We expect to end up the year below plan. And that's largely being driven by 2 factors, neither of which was in our original budget. The first is the SFPP rate case effect. We did put those new, lowered rates in effect on May 1st. That was not in our budget. And as pursuant to a decision which the Federal Energy Regulatory Commission released after our budget was completed at the end of 2005. And the second factor is that we are now trueing up our environmental reserves on a quarterly basis, as opposed to an annual basis, and we did not have that in our budget. And those 2 factors together account for almost all of the shortfall in the first half of the year, and the same will be true for the remainder of the year.

So if you put all of these factors together, again our target -- basically we're on target year-to-date, as Park will explain. But as we look out for the rest of the year, and look at our target, which is to make $3.28 in distributions on a per unit basis, we still hope to meet that range, that $3.28. We could fall a bit short. And we said in the release that we think we'll be someplace between $3.24 and $3.28 for the year. Again, we hope to be able to make the $3.28 as we see how all these various segments come out. So again, Natural Gas well above plan. Terminals above plan. CO2 improving, but still below plan. Products Pipeline below plan for the reasons I've talked about.

Now, let me spend a few minutes talking about what's really the most significant thing for KMP, and potentially for KMI, in the long-term, and that's how our major new expansion projects are going. And we have some pretty important news, I think, to talk about there, and we did detail most of it in the KMP release. In our Products Pipeline segment, during the second quarter, we placed in service our East Line expansion. That's the products line that runs from El Paso, Texas, over to Tucson and Phoenix, Arizona. It was about a $210 million project. It allows us to take the throughput on that particular line from a little less than 100,000 barrels a day to 147,000 barrels a day. That is now in service. We are seeing good volumes, and that will be somewhat of an upside for the Products Pipeline segment over the remainder of the year.

In our Terminal segment, we have now begun construction on a new $133 million crude oil tank farm located in Edmonton, Alberta. It's adjacent to our own Trans Mountain pipeline, and also adjacent to other pipelines that serve that particular terminal hub. This project has a capacity of almost 2.2 million barrels. All of that capacity is subscribed to under long-term contracts, and we expect that tank farm to be in service by the third quarter of 2007. It's our first new terminal opportunity in Canada, which is really an offshoot of the Terasen acquisition, although being done at KMP, and we expect other opportunities in that vein in the future.

In our CO2 segment, we have now -- we did in the month of June, hedge an additional incremental 23 million barrels of oil production at both our SACROC and Yates fields for the years 2007 through 2011. And we did that by entering into a new hedge facility that very significantly does not require the posting of margin. So that's a big enhancement we think to cash flow at KMP in the years that I mentioned.

In the Natural Gas Pipeline segment, we had several developments, one of which was that we announced during the second quarter, a $76 million storage expansion project at our Dayton natural gas storage field. That's in Liberty County, Texas. And that will allow us to develop a new underground cavern that we think will hold about 5.5 billion cubic feet of incremental working gas storage capacity. And that will be a great place -- great plus for us in terms of further enhancing our storage capabilities in the Texas and Gulf Coast region. Also we have now filed our application with the FERC to expand our capacity on our TransColorado pipeline system. That's about a $60 million expansion. And very importantly, that will allow natural gas to move northbound from the Bronco Hub area in northwest New Mexico, to our Meeker Hub in Colorado. And at that point, it will be able to enter our Rockies Express Pipeline through an interconnect, and that will allow about 250 million cubic feet a day of incremental northbound capacity. We expect that to be in service no later than January 1st of 2008, obviously subject to appropriate regulatory approvals.

Most importantly of all of our project -- projects, and also in the Natural Gas Pipeline segment is our Rockies Express Pipeline project. That's a 1,600 plus mile project that will be one of the largest natural gas pipelines ever constructed in North America, which will move about 1.8 billion cubic feet a day from the Cheyenne Hub in the Rockies to Clarington, Ohio, which is on the Ohio-Pennsylvania border. We also announced in June that Conoco Phillips had exercised their option to take 25% of that project -- actually, they take 24% at this time, and will get another percent when the project is completed. So, right now, that project is owned 51% by Kinder Morgan Energy Partners, 25% by Sempra, 24% by Conoco. Come the completion of the project, it will be 50, 25, 25, and KMP will continue at all times to operate.

Now, to give you an update on the particulars of that very important, roughly $4.5 billion project, as you know, we have begun interim service on the first segment, which is the 136-mile segment of the pipeline, which runs from the hub at Meeker, Colorado, that I referred to earlier, up to the Wamsutter Hub in south central Wyoming. We have now begun construction on an approximately 200-mile segment from that Wamsutter Hub directly across Wyoming to the Cheyenne Hub, which is located just south of the Wyoming-Colorado border in Weld County, Colorado, and we expect that segment to be completed and in service by January 1st, 2007. The next phase is what we identify as REX West. That's a 713-mile segment running from that Cheyenne Hub to eastern Missouri, around Mexico and Missouri. And we expect to commence service on that part of the line on January 1st, 2008. And in May, the FERC certificate was filed for that REX West segment.

The final segment of the line is about a 620-mile segment which runs from eastern Missouri to the Clarington Hub. We call that, rather imaginatively, REX East, and we expect that to be in interim service as early as January 1st, 2009, and fully completed by June of 2009. And in June, the EPA prefiling for REX East was made with the FERC. So we're marching forward on all aspects of that, and we intend and expect to complete it on schedule and on budget. And with that, I'll turn it over to Park who will go through the financials for the quarter and year-to-date. Park?

Great. Thanks, Rich. And hopefully everybody has the press release that came out about 45 minutes ago. And I will start with KMP. If you'll flip to the back of the release where the financial pages are, that's what I'll be going over. On the first financial page, which is the standard income statement, you can see at the bottom, for the quarter it shows distributable cash flow of about $0.81. Now as Rich mentioned, for the quarter at both KMI and KMP, we had certain items that net were a positive, and so we don't think that that's the right number to focus on. I would encourage you to flip the page to the next page that shows the income statement broken out by segments, and separates out the certain items, and you'll see a little over halfway up the page, DCF per unit before certain items of $0.79. That's what we believe to be the appropriate number, in terms of what the operations generated.

And before I go past that, let me highlight the certain items for you, and you can see them again in that same column up 10 or 12 lines. The first one is a gain on sale. This comes from the sale of the Douglas gathering assets that we completed earlier in the quarter, or during the second quarter. The total of about $42.5 million in proceeds. The book gain is $15 million. And what we're doing here is removing that from normal operations, and separating it out as a certain item. Below that you see an increase to our environmental reserves of about $18 million. That is an increase because certain clean-up efforts that previously were not quantifiable, are now quantifiable, and we have added to certain other efforts that are ongoing. So again we've increased environmental reserves by about $18 million.

The other line totals almost $8 million. That is a mix of a number of things. There are a couple of contractual arrangements, where there was either a buyout that resulted in a gain for us, or a reserve that was associated with that contractor, that was no longer necessary. And then there was an insurance arrangement that was terminated, that resulted in a small loss. And a little bit of hedge in effectiveness associated with our CO2 operations, where those positions have been closed out. And all of those net to just a little under $8 million. And then when you sum up those 3 certain items, you get to $4.9 million total, which is about $0.02, which is the difference between $0.81 on the front and the $0.79 here.

Now, talking about the $0.79 in distributable cash flow, that compares to a distribution that the Board declared today of $0.81. The distribution itself was up about 4% from the $0.78 a year ago, consistent with our budget. And truthfully, the $0.79 was also consistent with our budget. The components of that, as you move up the page, you'll see about $35 million in sustaining CapEx for the quarter, compares to about 29 for the quarter a year ago. For the 6 months, almost $61 million of sustaining capital, compared to about $53 million of sustaining capital. Our budget for sustaining capital of the year is a little north of $170 million. We still expect that we'll be around that level, although we may end up a little bit below it. Clearly the first half of the year was not 50% of that $170 million level. So we may end up below that.

Above that you see the DD&A line. It has grown to about $98.6 million for the quarter. It's about $193 million year-to-date. That actually is a little bit ahead of our budget. CO2 DD&A is running ahead of where we expected it would be. That has an impact on net income, and you'll see net income at 112, up from about 107 a year ago for the 6 months, it's about 229 compared to 246. Again, this is the Limited Partners' net income before certain items. Almost all of that difference for the 6 months is a function of higher DD&A. You can see that the 2 lines are right there. The Limited Partners' net income for the 6 months is down $17 million. The DD&A for the 6 months versus last year is also an increase of $6 million if you net those 2 -- sorry, 16. If you net those 2 -- and actually it's 17. If you net those 2, then they basically cancel out.

And so what's driving this? You go up to the top and you look at the segments, and Rich touched on a number of this. Products Pipeline is $130 million for the quarter, up from 123 a year ago. For the 6 months, 256 up from $249 million. It's up about 5% for the quarter, about 3% year-to-date. As Rich mentioned, that's actually below our budget, driven largely by the rate case, which again was not included in our budget. And those lower rates went into effect in May. Also by the increased environmental expense, which was also not in our budget. And then a little bit by some underperformance at the North System and at Transmix.

If you look at the volumes at the bottom of the page for the Products Pipelines, you'll see total refined products volumes down about 2% for the quarter, down less than 1% year-to-date. Those numbers do include Plantation, and Plantation's volumes were more negatively impacted than any of the other assets. If you look at those same total refined product volumes without Plantation, they were basically flat for the quarter, as compared to the down 2%. And they were up 1.4% for year-to-date. So essentially 2% better than the numbers show up there for both the quarter and the year-to-date, again, when you back out the impact of Plantation. And I'll remind you, we only own a little over 50% of Plantation, but what we represent here is the full volume amount.

I'm moving on to the Natural Gas Pipelines. Very nice growth for the quarter, up 14%. Up 15% versus last year, year-to-date. And as Rich mentioned, above our plan. We expect that the natural gas pipelines will end up the year above our plan, driven by strong performance at the intrastates, at KMIGT, at Red Cedar, and at Casper-Douglas. CO2 you can see is up about 10% versus last year. For the quarter, it's up about 4% year-to-date versus last year. Now, it is under our plan, it's only under a little bit in the first half of the year. But we now expect that CO2 will be under our plan, as we mentioned, by about $20 million in the -- for the year. In the first quarter, of course, we talked about CO2 being under by $45 million, and so that has shrunk. Things have gotten a little bit better during the second quarter, although still not back to budget. And again, we get very nice performance. We're getting very nice performance through the first half at Yates and at our sales and transportation business. We expect those to continue. But SACROC oil production is under our plan, and we expect it to be under our plan for the year. You see those volumes down below. You can see the strength in the CO2 volumes, up 7% for the quarter. You can see the SACROC oil production is down actually quarter-over-quarter, whereas the Yates oil production is up nicely.

Terminals up significantly from last year, about 31% for the quarter, about 26% year-to-date. It is also above our budget. Terminals is getting very nice performance, one, from acquisitions, and we did acquire TGS, which is a major petcoke handler at certain facilities in the Gulf Coast region, at the end of April last year. So for the quarter, we have 1 additional month of TGS in there. For the 6 months, we have 4 additional months of TGS in there. But as we mentioned in the press release, even if you look year-over-year in the months where we owned those facilities, which are June and May, the volumes are up nicely at those assets. So we're getting some nice organic growth out of those assets as well.

On top of that, we have expanded capacity, and this shows up at the bottom of the page in the volumes, at our liquids facilities, while we have increased utilization. So we're getting very nice growth out of that, as well. So strong performance in the Terminal segment. When you total up the segment earnings before DD&A, we're up almost $60 million, or about 13% for the quarter. We're up about $92 million, or 10.5% year-to-date, and we are right on where we expected to be from a segment earnings before DD&A at midyear. Now, again that's outperformance at the Natural Gas Pipes and Terminals and a little bit of underperformance at Products Pipelines and CO2.

Dropping down to talk about G&A, you'll see it's about $61 million, up about $14 million from a year ago, up about $28 million year-to-date. Now, a lot of that was expected and driven by acquisitions, although G&A is running above our budget. And it's above our budget because of higher legal costs, higher insurance costs, and some higher benefits costs. Now, the benefits costs that are above the budget we believe are largely timing, and we believe those will come back to us as we go throughout the year. The interest line is next, up almost $17 million for the quarter, up about $33.5 million year-to-date. Very consistent with our budget, so this is about where we expected to be. The balance is up as a result of acquisitions and expansions, and we will talk about that some more when we get to the balance sheet. And of course, rates have gone up as well. Our average rate is up about 70 basis points from where it was a year ago.

And that just takes you down to minority interest is essentially unchanged, and it takes you down to the net income, including the certain items. And we've talked about net income without the certain items. Turning back to the standard income statement on the prior page, I'll just point out that the certain items are included in there, and that distorts some of these comparisons, including the Casper-Douglas sale -- or not Casper-Douglas, but the Douglas gathering sale, which shows up in other net for the quarter and for the year-to-date. And that's why the other net is so much higher. That gain on sale shows up there. But in truth, the right way to think about the quarter is $0.79 of distributable cash flow, $0.81 distribution. Our excess coverage year-to-date is a little over $2 million. We had some excess coverage in the first quarter, and a little bit under in the second quarter, although again, that is consistent with our budget. That's the way we expected the excess coverage to come out.

With that, I'll go to the balance sheet, which is the last page in the KMP press release. Cash is up about $20 million, but basically unchanged. Other current assets is down by about $180 million. That's largely a reduction in accounts receivable. PP&E is up by about $300 million. That's total CapEx, offset by DD&A. And then of course, the asset sale reduced that a little bit. The acquisitions increased it a little bit. And I'll talk some more about CapEx and acquisitions in just a minute. Investments essentially unchanged. The change in deferred charges and other assets is driven by the mark-to-market of our hedges. Looking at -- well, total assets is just under $12 billion. Liabilities and partners capital, the other current liabilities is down about $250 million. That is completely a reduction in accounts payable, offset by some increase in accrued taxes and some other accruals. Long-term debt, I'll talk about in just a minute. The market value of interest rate swaps is just the mark-to-market on the swaps. And then the other liabilities there is up almost $200 million. That's the mark-to-market of the hedges flowing through on that line. Similarly, minority interest is not changed. Accumulated other comprehensive loss is impacted by the mark-to-market of the hedges, and that drives all of that change. And other partners capital is essentially flat.

That takes you down to total debt of about $5.7 billion. That's about 54.8% debt-to-cap. At the beginning of the year, we were about $5.2 billion, about 52.4% debt-to-cap. We actually were about 55.6 debt-to-cap at Q1. Now, one thing I should point out about the balance sheet, with Conoco's involvement in Rockies Express that took place in June, their option to participate and their assumption of 24% of the equity in REX currently, which will go to 25 once construction is complete, we no longer consolidate Rockies Express onto our financial statements.

We now treat it as an equity investment, and so it will show up and be accounted for under the equity method. It does not have much impact on the comparison that you see on this page, because we did not have a significant investment in Rockies Express at December 31st, 2005. It does cause a little bit of a difference between the first quarter balance sheet and the second quarter balance sheet. Of course, the first quarter balance sheet is not represented here. But I just wanted to highlight that for you.

The other thing it means, is that the Rockies Express debt no longer shows up in our total debt. And so the $5.7 billion debt number really is our true debt number. If you looked at the first quarter debt, excluding Rockies Express, it really would have been about $5.5 billion. And so that's the real comparison. What that means is the change in debt from the beginning of the year to the middle of the year, is a little over $500 million. The change in debt for the quarter is about $220 million.

In both cases, an increase. And so where did that come from? Again, it's a $220 million increase for the quarter, a $506 million increase for the 6 months. Acquisitions were about $127 million of that. Now, this again, excludes the acquisition of Entrega, which is included as part of the Rockies Express project. I'll talk about that a little bit more in a minute. But excluding the acquisition of Entrega, total acquisitions about $127 million. That's largely some terminals that we acquired, and then the Journey assets that we acquired within the CO2 segment.

Expansion CapEx, $168 million for the quarter, $332 million year-to-date. Again, both of those numbers exclude Rockies Express. The KMR distributions are a source of cash for the quarter of about $47 million. For the year-to-date, about $94 million. And then from working capital and other items, we had a source of cash in the quarter of about $28 million. We've had a use of cash year-to-date of about $140 million. Now, both of those are largely AR, AP, and other working capital items, especially on the year-to-date. Hopefully, we will see some of that come back to us during the year, although we did have 1 specific item that just rolled over from the prior year. It was a payable that was not paid in '05, that showed up in '06, and that will lead to a negative amount for this year as we go forward.

Taking a quick look at the expansion CapEx, on the product side, we spent about $50 million in the quarter, about $95 million year-to-date. That's largely the ongoing East Line expansion, although it is in service now. But we continue to look at, and actually move forward with another expansion on the East Line, so we'll continue to see expenditures there. On the Natural Gas side, again excluding Rockies Express, we spent about $14 million in expansion capital for the quarter. About $27 million year-to-date. A little bit on the Louisiana pipeline, and then on some storage expansions, specifically at Dayton and at [Marquam]. On the CO2 side, we spent about $57 million for the quarter, about $130 million year-to-date. Most of that is at SACROC.

On the Terminal side, about $46 million in the quarter, about $80 million year-to-date. Continued expansion at Shipyard River. Continue to add tanks at Pasadena and in the New York Harbor, and also some expenditures at Pasadena to handle more ethanol. And so that's KMP excluding Rockies Express, and again that's the way that KMP will be reported from a GAAP perspective. Just so that you know what's going on with Rockies Express, the primary expenditure in the first quarter was the acquisition of Entrega. It was about $245 million. And then the expansion CapEx largely came in the second quarter, and it was about $170 million has been spent year-to-date in expansion for Rockies Express. That's it for KMP.

With that, I'll go to KMI. And again, if you flip to the back of the press release, there are the financial pages for KMI. Looking at the face of the income statement, it would appear as if KMI - and KMI truthfully has - generated about a $1.17 in net income per share for the quarter. But as we mentioned, there are positive certain items in that number, and so if you'd flip to the next page, we'll take a look at KMI really operations without the certain items included. And you'll see about 5 lines up from the bottom of that page, $1.05 is the earnings per share, net income per share, before certain items. So that you understand what the certain items are at KMI, you can look above that.

You'll see retail balance sheet adjustments are really some true-ups that we did at retail totaled about $5 million negative, that we took this quarter. And then there's this deferred tax liability change, which is a positive about $19 million. We've talked about this in the past. What happened here is the Texas state tax laws changed.

What that resulted in is a revised effective tax rate for KMI, and it was a very, very small change. It's a positive. It was a very, very small reduction in our ongoing tax rate. But what it results in, whenever that changes, we have to apply that rate to our deferred tax balance. And you may recall that KMI has a very large deferred tax balance. It is actually north of $3.1 billion. And when you apply even a very small tax rate change to that large balance, you get a big change, and that change has to be run through the balance sheet. That's what you see here. It's a $19 million gain. Just as we have done for these items in the past, we are not trying to claim credit for that. We are identifying it for you separately.

And one thing I'll remind you of, we've talked about this in the past, that deferred tax balance at KMI is not something that just comes back in over time. It is not time dependent. It is event dependent. It is a function of a difference in tax basis between the stock and the assets of both the interest in the general partner and in GPL. That's what creates that large deferred tax liability. The only way that those taxes would become due, is if we were to sell the assets of the GP or of NGPL. Completely within our control. And I'll remind you again, if we were to sell the stock in either the GP or NGPL, we would not have that huge tax effect, because the basis in the stock is higher.

So again, it's a little complicated. We've talked about it in the past. The important thing to remember, it is not something that comes back in over time. It is something that is event driven and within our control as to whether that is ever incurred. And truthfully our expectation is that it never will be incurred.

Then there is the other line here, it shows up in zero when you look at it in terms of dollars. It's really a number of things netting each other out. It shows up as $0.01 down when you look at it on a per-share basis. But the KMP certain items have an impact on KMI. They show up on this line. And then KMI has a similar charge for termination of an insurance contract that shows up on that line. But net you'll see it's about $0.12 positive from those certain items for the quarter, and again we have backed those out for you.

Now, to further the complication, you will also note, just like last quarter, that there are 3 columns for each period on the income statement. At the beginning of 2006, GAAP rules changed, and that enabled us - truthfully, we tried to do this in the past, but we were told we couldn't - that enabled us to consolidate KMP into KMI. But we did not restate 2005, and in truth, this is the way we had presented our budget. The way that we typically look at KMI is with KMP accounted for under the equity method. And so what we've done here, and we think it simplifies the comparison, is we presented a pro forma column, which is in the middle of both of these sets of columns, one for the 3 months and one for the 6 months.

We presented a pro forma column that is 2006, as if we were not consolidating KMP, but we're treating it on the equity account method. And that's the column that I'm going to go down again. I think it's the way that people historically have thought about KMI. I think it is an easier way to think about KMI.

So I'm going to compare the pro forma columns to the 2005 as-reported columns. So what's driving the $1.05, which was up about 10% from $0.95 a year ago, and then the $2.60 which was up about 21% from the $2.15 a year ago? KMP clearly had a nice impact on the growth. You can look at the equity in earnings of KMP line, but I'll remind you, that consolidates 100% of KMR. I think the better way to look at KMP is to flip to the next page, and you'll see the pre-tax KMI earnings attributable to KMP before certain items, about $148 million.

It's up about $11 million from where it was in the second quarter of 2005. And then the $295 million for the 6 months is up $21 million from where it was for the 6 months -- first 6 months of 2005. And that's essentially on our budget.

Now, as Rich mentioned, we expect that KMP will distribute somewhere between $3.24 and $3.28 in 2006 -- or for 2006 is probably the better way to say it, because that last distribution will actually come, it will be sent out in February of '07. Our budget cost for $3.28, we still hope that we will hit that $3.28, but again our budget did not include the rate case, and the impact of that. It did not include the environmental expenses that we are taking. CO2 is under its budget. So we'll have to see actually where we come out for the year. If KMP hits its budget of $3.28 of distribution, then the KMP line, the KMP's impact on KMI, will be on budget. If it ends up below that, then KMP's impact on KMI will be below budget. Regardless, we still believe that KMI will deliver $5 per share in earnings per share, and that's because NGPL is performing very well, and the rest of the assets are on target.

Taking a look at NGPL, it's up -- it's earnings for the quarter were $120 million, up $20 million from where they were a year ago. For the 6 months, it's up $33 million, or almost 16%. NGPL continues to perform very strong. There is very strong demand for transportation and storage along that system. It is above our budget. We expect it will end the year above our budget. Terasen Gas, $57 million in segment earnings for the quarter, $173 million for the year. You can see the seasonality there in Terasen Gas to be expected. Clearly, no comparison versus last year. It is a little bit ahead of where we thought it would be at this point in the year.

Kinder Morgan Canada, about $25 million of segment earnings, $53 million for the 6 months. A little bit behind where we think it -- where we budgeted it to be at this point, but we think it will end up at, or very close to its budget. Power, you see what looks like -- I'm sorry, power. Retail, you see what looks like a very unusual budget, very unusual quarter. About $100,000 in earnings compared to 4.9 a year ago. Again, this is largely timing. We are still confident that retail will hit its budget for the year, which is about $58.6 million of segment earnings. Power is consistent with where it was last year. It's a hair under its budget. Power will end up at, or maybe slightly below its budget for the year. Total segments were up about $112 million from a year ago. Now clearly, that includes a big impact from the Terasen assets that were acquired. About 82 of that comes from the Terasen assets. For the first 6 months, those segments are up about $274 million. Now, about $226 million of that comes from the Terasen assets that were acquired.

G&A, $40 million compared to about 18.5 a year ago. That's an increase of about $21.6 million. $21.1 million of that comes from the Terasen assets, so that's what's driving the increase. Similarly, if you look at the 6 months, it's up about $46.2 million. About $44 million of that comes from the Terasen assets. G&A is slightly negative, meaning the expense is slightly above where we thought it would be in terms of the budget, but we think that's probably timing. We expect we'll end upright about our budget for the year. Interest expense you'll see is up about $70 million. $67 million of that is a result of the Terasen acquisition. For the 6 months, it's up about $138 million. 133 of that is a result of the Terasen acquisition. Clearly, our balance is up significantly as a result of the Terasen acquisition. Our average rate is also up about 50 basis points.

The next 2 interest expense lines don't vary. They're related to trust preferred securities both at Terasen and at KMI. The minority interest line, once you back out KMP, is largely the KMR shares that we don't own. And in other net is essentially unchanged. Again, that takes you down to the income from continuing operations before certain items -- it's actually about $142 million, up about $24 million from a year ago, and up about $85 million year-to-date. Turning back a page, again looking at the standard income statement format, this does not have a whole lot of meaning, comparing this year to last year, for 3 main reasons. 1, KMP is consolidated, as we've discussed. 2, the Terasen acquisition, which happened at the end of November last year. And 3, the certain items are also dispersed throughout that income statement page. So I'd encourage you really to focus on the second page of the press release to look at the performance for the quarter.

With that I'll go to the balance sheet, which is the last page of the KMI release. You'll see that cash is up about $50 million. That's just truthfully, with very little commercial paper outstanding at KMI, and that's driving most of that. Other current assets is down about $330 million. That's largely a reduction in accounts receivable. It's about $200 million of that. And then you had a reduction in inventory and an increase in gas and storage. Investments -- now again I should have mentioned, I'm largely going to compare the second and third columns, and those are the variances that I'm talking about. Which again, the middle column is 2006 pro forma, as if we were not consolidating KMP. So when I talk about the changes, those are the 2 columns I'm comparing. Investments, essentially unchanged once you back out KMP. The goodwill changed a little bit. That is a function both of some purchase accounting adjustments related to the Terasen acquisition, and to the impact of currency fluctuations on that goodwill balance at Terasen.

PP&E you'll see, is up about $180 million. That's largely CapEx, which is about $180 million. Then a reduction from depreciation and amortization, and a little bit of adjustments from purchase accounting adjustments due to the Terasen acquisition. And then other assets is down about $80 million. That's largely hedges and some deferred purchase gas costs. Takes you, total assets you see about $17.5 billion. Now, if you want to look at it including the KMP assets, you'd look at it as $27 billion, and look at that incredible growth from $17.5 billion of assets a year ago.

Looking at liabilities, notes payable and current maturities and long-term debt, I'm going to talk about that when we talk about the total debt. Other current liabilities, down about $150 million. It's largely a reduction in accounts payable. Other liabilities and deferred credits is up almost $190 million, that's largely mark-to-market on the swaps. Long-term debt, again I'll talk about that in just a minute. Minority interests, essentially unchanged once you take out the impact of KMP. Accumulated other comprehensive loss has gone down by about $100 million. That's the mark-to-market on the hedges. And in other, stockholders' equity is up about $120 million, largely a function of earnings.

Taking a look at the net debt, again, I think the middle column is the one to focus on. It's about $6.9 billion, compared to about $7.1 billion at the beginning of the year. Debt has declined by about $215 million year-to-date. Additionally, if you looked at the first quarter balance, it was about $25 million above that. And so during the quarter there was a reduction of about $25 million in debt. Now, some people may be tempted to look at the $12.6 billion balance that shows up when you consolidate KMP. I'll remind you, as we did last quarter, that the accounting change that led to the consolidation of KMP onto KMI in no way obligated KMI to pay KMP's debt. And so you really, if you want to know what KMI's obligations are, then you need to back out the KMP debt. KMP is a BBB plus rated entity. It generates a tremendous amount of cash flow. It has every ability to service all of its debt. And so KMI, 1, is not legally responsible for the vast majority of that debt. And, 2, even if it were -- again, which it's not -- would probably never have to pay up on that, because KMP can support its own debt.

Looking at the debt-to-cap, you see it's about 54% at the 6 months, down from about 55.6% at the beginning of the year. Again, that's the reduction of about $215 million in debt. Dropping down to take a look at the simplified calculation of cash flow, you can see when you take your earnings, add DD&A, take off sustaining CapEx, and take off cash taxes, you're at about $420 million. We're on track to realize our $760 million of cash flow under this back of the envelope, or simplified calculation for the year. At the end of the first quarter, we were at about $269 million. Sustaining CapEx, you can see for the 6 months, is about $86 million. Our budget's actually $256 million. And so we are under kind of the run rate there. I expect we will end up close to budget. We may end up under it.

One thing I'll point out on the reconciliation of that simplified calculation to the cash from continuing operations, is the biggest piece of that and the main reason why it was negative in 2005, but there's a positive other adjustment there now, is because of the consolidation of KMP. And so that's what's changing that. You basically have all of KMP cash from operations showing up on that other adjustments line, because now, when you look at KMI's cash flow statement, all of KMP's cash from operations show up there, whereas previously they didn't.

Okay. So, let's talk about how we use that cash flow. We generated about $150 million in the quarter. We've generated about $420 million year-to-date. We already talked about the fact that debt's been reduced about $25 million in the quarter, about $215 million year-to-date. We've also paid dividends, about $117 million in the quarter, about $234 million year-to-date. we've had expansion capital of about $64 million in the quarter, about 94 year-to-date. And then we did have some share repurchase in the first quarter, totals about $34 million. We didn't have any in the second quarter. And that really was what was leftover from 2005. At the time we did the Terasen acquisition, we stated publicly that we were not going to repurchase any additional shares for the time being until we started to show some reduction in debt, which clearly, we are already showing.

There was also a source of cash -- well, 2 things. 1, there's a source of cash from the water sale, totaled about $100 million in the quarter, and so that's both the quarter and the year-to-date. And then there was a source of cash from working capital and other items, largely driven from accounts receivable and accounts payable. And a little bit from some other working capital items. On the expansion CapEx side, NGPL spent about $19 million for the quarter, about $32 million year-to-date, largely a Sayre storage expansion and some other smaller expansions going on. Kinder Morgan Canada spent about $35 million in the quarter, about $41 million year-to-date. Clearly, we have a lot of expansions opportunities there. The Anchor Loop and pump station expansions are moving forward. We'll start to see bigger dollars on those coming soon. Terasen Gas, about $9 million for the quarter, $17 million year-to-date. And then retail had some small expansion CapEx during the quarter and year-to-date. About $1 million in the quarter, $3 million year-to-date. And that is it with the financials. I will hand it back to Rich.

Okay. With that, we'll open the line for any questions that you may have. Calvin, you want to come back on?

[OPERATOR INSTRUCTIONS] Carl Kirst.

Park, I think with that speed and enunciation, you should think of a night job as a Texas auctioneer. A couple of operating questions. First off, on TMX-2 and, Park, you maybe even alluded to this when you said we might be hearing something soon, there seemed to be some positive statements in the press release talking about finalizing shipper commitments.

Notwithstanding the Tesoro announcement we had last week where they decided not to go with their upgrade of the Washington refinery, just wanted I guess, to confirm that I'm getting that feel right. That you guys at this point are very encouraged that the TMX-2 is in fact going forward. And if that's the case, I know there was at least some speculation that perhaps the refiners would want to go with the better price point, and actually even assess TMX-3. I didn't know if you had anything you could share there.

This is Rich. Really can't, Carl, at this point. As you know, we're in the process of trying to secure those commitments. And that's what we had in that paragraph at the top of page 4. And beyond that, we're just working with the shippers right now, trying to move that project forward. As Park said, of course again to kind of review the bidding, TMX is currently constituted as about 225,000 barrels a day capacity. We have shipper support through ITS agreement to go to 300,000 barrels per day.

That's the 2 things Park was talking about that we're underway with now. And we're working to try to go to TMX-2 which is to take it from 300 to 400, but we really don't have anything definitive to report today.

Rich, do you -- and I understand if you can't mention, but with the binding open season having closed in mid-June, is there a sense of how long these things typically take before you would have that in hand one way or the other?

Yes, well we extended that open season, and we're still working with the producers to finalize what their nominations might be. And I think we'll know more over the next month to 6 weeks.

Great. That's very helpful. Then final, last operating question. On NGPL, the 20% year-over-year, that's a really great gain. The intrastate Texas dynamics that are going on there, the recontracting, are you seeing that of very short-term durations, 1 year? Or is that being recontracted out at longer term?

It's being generally recontracted out at longer terms. We're finding that shippers, I think, have certainly recognized the benefits of having longer term transportation. And so, as contracted capacity comes up, it either gets renewed for fairly long terms by whoever had the right of renewal on it, if indeed there was one, and often there is. Or if not, we just put it out in a bid package, and it gets rebid at generally whatever the maximum term is. And the maximum term we can get generally is 5 years.

Great. Thanks and good luck.

Dan Jenkins.

I was wondering a little bit on your capital structure, and what your cash needs are going to be in the third quarter and fourth quarter. It looks like your CapEx is going to be somewhat higher in those quarters, and then it looks like you have $100 million of Terasen debt that matures at the end of this month. So I was just curious, are you going to need to come to the market at all for new debt or are you going to issue any new partnership units, or what? What are your capital needs going to be in the second half?

It's not clear to me whether you're talking about KMI or KMP, but I think I can answer it for both. At KMI, we have plenty of capacity under our existing facilities for both the maturities in the second half and the expansion CapEx. Although truthfully we generate enough cash at KMI that I think we will be net reducing debt, not taking out new capital, like we did in the first half of the year. At KMP, clearly we continue to expand there.

We expect that, as we have in the past, that we will finance those expansions and acquisitions with 50% debt and 50% equity. And again, I think you can assume that that will happen going forward.

And remember, of course, at KMP, every quarter we are in essence putting out equity at KMR, roughly $50 million a quarter, and rising.

Thank you.

Next question.

Tom Milak.

I just wonder if you could give us a little more incremental information on the hedge -- the new hedge facility, the average price, and if this is a prepay or just a straight-up swap?

It is a swap. And we swapped about 23 million barrels, again under an arrangement which does not require the posting of any security. And the average price -- remember part of this was done with anticipated production at SACROC, which is like WTI, and part was done with Yates volumes, which is WTS. So we hedged at an average of about $66 a barrel for the WTI, and about $61 a barrel for the WTS. All in all, this will produce about a $1.5 billion in cash over that period from 2007 through 2011.

Okay. Great. Thank you very much. Can you say who the counter party is?

Yes. It's Goldman Sachs. We announced that at the prior announcement.

All right. Thank you.

And they were all swaps. I think that was part of the question.

Yes. They were all swaps. I'm sorry.

Great. Thank you.

Next question.

Ross Payne.

My first question is on the environmental. What was the true-up at the end of last year, and what is your true-up for 2006 expected to be?

The true-up for last year was actually similar to what we took, and in this quarter it was basically for some activities that previously had not been estimable. And for some ongoing projects, a reevaluation there. So they are very similar items. I would say at this point, although things can change, at this point we don't expect that we would have anything like that again for the remainder of the year.

Okay. Also can you refresh our memory on the rate impact that wasn't budgeted, what the impact of that is going to be for 2006?

Yes. It's about $20 million, is what we estimate the impact of the reduction in rates to be. And again that started beginning of May.

Okay. And finally on Plantation, it looks like some of the new fuels are impacting you guys. So I guess what is happening is some lost market share at Plantation to Colonial. Do you see any changes to that or any of the refineries that you guys are servicing moving to upgrade their facilities to deal with newer fuels? Or what's your expectations in terms of future volumes?

Well, I think Plantation is very much -- and of course when you take out the fact that we only own half of it, it's not a significant event, other than from a volumetric standpoint. It's not a significant event from a bottom line impact. But clearly, what's happening on Plantation is we think set out in the press release, is that there is alternative pipeline service in those markets in the southeast, and there are some changes in supply patterns.

As you know, our main 2 suppliers are the Exxon refinery at Baton Rouge and the Chevron refinery at Pascagoula. And it's really oversimplification to say, but it's really basically how they're going to react to the new ultralow sulfur diesel, and what they're going to send and where they're going to send it and what they're going to blend and what they're not going to blend. So we continue to work with them, and we continue to work in other ways to maximize the usage of our facilities, including some pretty imaginative things we're looking at, none of which we can talk about yet. But right now, that's what we're facing, and it is leading to a drop-off in volumes on Plantation. And that's why we wanted to give you the numbers, both with the Plantation volumes in it and without Plantation. And that's kind of where we are right now.

Again, I think we've probably -- of course, we're right in the middle, or just effectuated the changeover, and I think we're going to need to see 2 or 3 months to see how all this shakes out, and who wants to do what in what market.

Okay, thanks very much, guys.

Faisel Kahn.

Just wanted to make sure I understood something. On the 23 million barrels of production you've hedged, should I be just assume that's done ratably over the next 5 years? Or is there sort of weighting to that over the next 5 years?

You should not assume that. It -- because obviously we were filling in areas where we did not have swaps or puts. It is more back-end loaded. And so there's more in -- if you look at a total of what we hedged at both SACROC and Yates, 2007 relatively small grows, and 8 goes up again, and 9 up again in 10, and the biggest is in 2011. It's really back-end loaded is the right way to think about it.

Okay. Fair enough. And then on Rockies Express, you said that you're going to deconsolidate that now. And so that will be equity earnings going forward, is that correct?

Yes, that's correct.

In terms of how you finance the rest of the facility, does that mean that it's all project financed debt? Is that correct?

That facility was already put in place. There's a $2 billion credit facility in place at Rockies Express that again, is just related to that project.

Okay. And is that a recourse to KMP? Or is that -- ?

Our proportion is, and then each partner is responsible, or ultimately recourse on their own portion, although of course, the project is supported by very creditworthy shippers with long-term contracts. So we have no expectation that we would ever have to come up with that.

And then of course, remember that one of the beauties of the way the Rockies Express project is structured, is that is comes on in phases. So as we complete these phases, they will actually start producing income. So we'll have a fairly sizeable income as REX West, for example, goes operational on January 1st, 2008. And as we complete those projects, they'll come out of the debt, and that's the point where the 3 parties will then be responsible for contributing their portion of it. And that's when we will start having earnings on them.

Okay. Got you. Thank you.

Alex Meyer.

I just wanted to ask you about your comments on the tax basis of the GP, as well as the stock in the GP. When you're talking about the stock of the GP, are you talking about KMI?

No. We're talking about KMGP, Inc. It's a subsidiary that is 100% owned by KMI.

And can you talk about what maybe the basis is in that? Tax basis?

The tax basis? Yes, again, I don't have it in front of me, and I'm not sure exactly why it's relevant, because it's not something that would ever come up unless we were going to sell that asset. But what I can tell you is that the tax basis in the stock is much greater than the tax basis in the assets.

So again, to be real clear on these deferred taxes -- and I thought Park was -- but on both NGPL and the GP, these are 100% owned subsidiaries of KMI. If you were ever to sell either one of those in a stock transaction, you would not have an issue with the deferred taxes.

It's the fact that the basis in the assets in those particular entities are different than the basis in the stock, that if you ever reach down - I can't imagine why you would ever do this - and went down and said we're going to tell the NGPL assets, but not the stock of Natural Gas Pipeline of America, then you would trigger deferred taxes. So it is totally in our control. Can't imagine that we would ever do that. The same with the GP.

I can't imagine we'd ever go down and look at the assets under the GP. If you sold anything, and we certainly have no intention of selling anything, would be, you would sell the stock. So Park's only point was that the $3.1 billion in deferred taxes is it's there because of accounting requirements, but it's not something like some other deferred taxes where, gee, eventually we're going to have to pay that bill just as time goes by.

In this case, we never have to pay the taxes unless we do what would seem to us to be a very foolish decision, to reach down and somehow for some unknown reason, sell the assets underlying the stock in those 2 subsidiaries.

It's completely within our control, if that is ever incurred.

Great. Thank you.

Denis Coleman.

I just want to clarify. I guess I thought that the Goldman Sachs facility was somehow tied to the buyout offer or the going-private offer. I don't want to get into territory where you can't comment, but as a completely separate transaction, has nothing to do one with the other?

The only way that we were able to put that in place was in conjunction with that offer.

But we did go ahead and have the right to go ahead and execute on it during the quarter, and that's what what we did. Again, you have to remember that given the cost of production of these barrels out there in the Permian Basin in our CO2 segment, being able to hedge at these kind of numbers is a massive source of future cash flow for us. And the biggest negative in doing those hedges, is that you have to post if the prices go against your position, even though you're going to deliver every one of those barrels, you have to post credit. And by being able to do a facility where that did not require the posting is very advantageous to KMP we think, and so we went ahead and did it.

No, the advantages are clear. I'm just trying to make sure I understand any of the implications for the MBO if there are any. I know you made it clear you don't want to comment there.

That's right. Okay? Anything else?

That's it.

Becca Followill.

Actually, that was my question. And just to clarify, you said that the hedging facility is in place regardless of whether or not the MBO goes through?

That's correct.

Is it tied to -- is it backed by KMI's balance sheet?

No.

No.

Okay. Thank you.

Rick Gross.

Rick Gross, I assume.

I'm just fine. I just wanted to follow-up only the REX cash accounting. If you're going to get equity income, whether or not in the early years income's going to match the cash you receive, or whether or not the investment -- the continued investment in the pipeline will preclude dividends being paid?

No. We would expect that distributions out will match cash generated, and that we will make equity contributions as necessary to fund expansion.

Vivec Powell.

First question, KMIGP, is that a principal subsidiary, or is it not? The KMP general partnership and trust in KMI?

Is it a what?

A principal subsidiary.

Would it be viewed as a principal subsidiary? I'm trying to figure out whether it is included in the 10% lien or not. I mean, that's the objective.

Truthfully, I think you'd have to consult an attorney on that, and I probably would before I'd answer, as well.

Okay, so you're saying you're not sure yet?

Right.

Okay. Second is, the fixed income -- investors are feeling a little bit of a pain here. Is there anything we should look forward to in terms of good news?

You know, what I'd say is we've talked about these projects that are coming along, and I think they're going to be very positive for both KMP and KMI. And I think both the debt holders and the equity holders are going to benefit tremendously from them. And so they're going to generate a lot of cash and the debt holders will get paid what their due and the equity holders will benefit.

And is KMP likely to retain its investment grade rating at the current [inaudible] of 50%?

The ratings are dependent upon the rating agencies. They're the ones who determine that. I think you can look at their announcements at the time of the announcement of the transaction, and interpret from that. I think some of them specifically said that KMP will.

We expect KMP to remain investment grade. That's right.

Okay. Thank you.

I'm showing no further questions at this time.

All right. Well then, thank you very much. We appreciate you listening to us for an hour and 15 minutes, and we look forward to talking to you again in the next quarter. If you have any further questions, feel free to give Kim, or any of us a call. Thank you.

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.