金德摩根 (KMI) 2008 Q2 法說會逐字稿

I would like to thank you all for holding for the quarterly earnings conference call. At this time your lines are on a listen-only during the conference, until the question and answer session. The call is also being recorded. If you have any objections you may disconnect. I'd like to turn it over to Rich Kinder. Sir, you may begin.

Okay. Thank you, Ed, and welcome to the Kinder Morgan quarterly investor call. As usual, we will be making statements that may fall under the Securities Act of 1933 and the Securities and Exchange Act of 1934. Also, as usual, I will give an overview of the quarter and some of our strategic projects, and then our President, Park Shaper, will give you all the financial details, and then we'll take any questions that you may have.

Let me start with slightly different approach than we normally do. We had a tremendous second quarter, as you know if you've read the release. We had distributable cash flow per unit of $1.14. We raised the distribution to $0.99, which is about 16% ahead of where we were in the second quarter a year ago. But I think it might be well to start out -- in this kind of stressful economic times, it might be helpful to just sort of reiterate and talk through the Kinder Morgan strategy again.

As most of you know, we are investors in the midstream energy business and we have a very long-term investing horizon. I think the right way to think of us is really as a toll road, where most of our customers agree to pay fixed tolls for a long period of time at the time we build the toll road, and that's true of our natural gas pipelines, our CO2 pipelines, and most of our terminals. Now on our products pipelines, the amount of use of the toll road can vary, but in that scenario we do have inflation escalators and the ability to true up our tolls if the volumes decline or increase precipitously. So while I would analogize us to a toll road, we do have some exposure to commodity prices. Some of that exposure is positive and some of it is negative.

Most of the positive exposure is over in our CO2 segment, where if you have higher WTI prices, this results in higher prices under a lot of our CO2 contracts with third parties. In other words, under those contracts we have a floor price and then we have some sharing of upside with our customers if WTI prices go higher. We also get a benefit in our CO2 segment on the price we get for our NGLs because they are not hedged, and then on the relatively small amount of our crude production that is not hedged we get a slight benefit from higher WTI prices but that is relatively minimal.

If you look at the negative side of the equation, the segment that is hit the most is our products pipeline group, and there, when you have higher product prices that result in less demand and therefore less throughput through our products pipeline, the volume decreases. We also have a negative impact from the fact that we use vast quantities of diesel fuel. At our terminals group alone, we use about 1 million gallons a month of diesel to fuel our heavy equipment. And so that is a negative impact from higher prices. And then, of course, we power our pipelines with natural gas and electricity. To the extent that those prices increase, that's a negative.

I think if you look at the whole enterprise in general, the positives outweigh the negatives, although it's hard to quantify. But I think we generally benefit somewhat from higher oil and gas prices. But, as we'll talk to you in a little bit, while we are well above plan, very nicely above plan for the quarter and year-to-date and expect to end the year that way, we'd be above plan even if the prices were the same as we had in our original budget numbers that we came up with prior to the January conference. Now, beyond this kind of quantitative assessment I've given, higher prices also benefit us by increasing the, I guess you could say, the desire of our producers to get their production to market as quickly as possible, particularly if they have aggressive drilling programs. And I think this is particularly true in the natural gas field where we're seeing and feeling a lot of producer push to build new pipelines and to take large amounts of capacity on those new pipelines at fixed rates for an extended period of time. So that is sort of the impact of commodity prices on what's essentially a commodity neutral organization like ours.

And if you then look at what our business segments are really all about, we have a lot of critical mass. We own the largest independent products pipeline system in America. We are the largest owner/operator of bulk and liquids terminals. We are the largest transporter and marketer of CO2. And we're certainly one of the largest natural gas systems in the country. If you look at this group of assets, which we think are pretty world-class, it gives us tremendous amount of diversity, which I think allows us to do just what we did this quarter, which is to prosper even under widely varying economic scenarios.

Now let me talk about the second quarter. As I said, we upped the quarterly cash distribution to $0.99, that is $3.96 on an annualized basis, up from $0.96 in the prior quarter. And a year-ago we were distributing $0.85, or $3.40 annualized, so that is a 16%, actually a little over 16% increase since the comparable quarter of 2007, very consistent with what our plan is for the year. As you know, we anticipate a 16% increase in distributions in our plan versus full year '07. We have now indicated we expect to exceed that plan. KMP had quarterly distributable cash flow before certain items, and the certain items were basically meaningless in the quarter, of about $294 million, that is 43% above the second quarter a year-ago. And then distributable cash flow per unit, which we believe is the best way of measuring our performance, was $1.14 this quarter. That is up 31% from the $0.87 per unit that we had for the comparable period last year.

If you look at the first six months, our distributable cash flow was 4 -- $574 million. That is 46% above the same six month period last year. And I think another thing to note, and Park will take you through all of this in more detail, is that the excess of distributable cash flow above the declared distributions for the first two quarters of 2008 is approximately $79 million. So we had a lot of excess cash above our distributions.

Now if you look at it on a segment-by-segment basis, we had really outstanding performance, I think, from all of our business segments with the exception of products pipeline. We had good performance there, almost up to plan, but certainly we have been impacted by lower throughput on our products pipeline as a result of high prices, particularly for gasoline. I think the quarter was particularly strong, as we said in our release, when you consider this lower gasoline demand, a pretty sluggish economy, and pretty wholesome increases in construction and fuel costs that do impact our operations.

So looking first at our products pipeline segment, we, and of course we judge this as earnings before DD&As the way we report, earnings before DD&A was about $137 million. That's down 8% from the same period a year ago. If you exclude the North System, which was in the numbers in the second quarter of 2007 but we sold it in the fourth quarter of '07, then the earnings before DD&A were down only about 3%. Through the first two quarters products is down 5% from the plan and we expect it to fall modestly short of its annual budget growth target of 5%.

The segment's refined products revenues were still above last year, but the volumes have clearly been impacted by reductions in demand driven by high crude and product prices. We've often been asked when does the elasticity begin, and I think we found it at $4.00 gasoline.

To put that in perspective, total refined products revenues for the quarter were up about 2%, but the volumes were down about 8% compared to a year ago. Now, that's greater than the EIA numbers, for example. However, you have to remember that EIA includes ethanol in its numbers. We don't, obviously, we do not include ethanol in our numbers because we are not shipping ethanol across the pipelines even though we do benefit from ethanol, particularly in a lot of our terminal operations both in Florida, the Southeast, and also in California. The NGL volumes were actually up about 4.6% for the quarter, and for the first six months of 2008, the products revenues were up 2.7%, volumes were down about 6.8% or about 5% if you exclude Plantation. So that is the story on the products pipeline.

If you look at our natural gas pipeline business, we had earnings before DD&A in the second quarter of about $183 million. That is 26% above the second quarter of 2007, and we now expect to exceed our published annual budget growth of 18% year-over-year for the full year. These results were led by contributions from REX, Rockies Express Pipeline, which the west segment is now complete, and that accounted for about 75% of the growth in the segment. But we also had strong performances, as we have over the past several quarters, in our Texas Intrastate group and also in our TransColorado pipelines. Our Intrastate's growth was attributable to really good increasing transportation revenue from a lot of long-term contracts. We were able to secure higher sales margins and we realized greater processing volumes and margins. To put it in perspective, our Texas Intrastate group generated almost half of this segment's earnings before DD&A, and was 40% above its budget for the quarter.

Transport volumes were up 27% from the second quarter of 2007. That is not really surprising because most of that is attributable to the start up of REX-West, and the sales volumes were up 8% and virtually all of it really is in the Texas Intrastates.

Our third segment is our CO2 business, and there we had second quarter earnings before DD&A of just shy of $217 million. That is up 68% from the same period last year, and we are on track to substantially exceed our annual budget target, which was to grow earnings before DD&A by 40%. I think CO2 had an outstanding quarter in virtually every respect. We had stronger than expected oil production at Yates. We had increased CO2 sales and transport volumes as some of our facilities in southwest Colorado are now beginning to come online. As you know, we have a major expansion there. We had higher hedge prices. We had higher oil and CO2 prices in general.

For the quarter, average oil production at Yates was 28,100 barrels per day. That is up 4% compared to the second quarter of '07 and above our budget. At SACROC, the average oil production for the quarter was 27,500 per day, and that is down about 2% from the same period a year ago, but on budget for the quarter. Our CO2 delivery volumes were up 14%, compared to the same quarter a year ago, due to those expansion projects that I talked about.

Turning to our terminals segment, we reported second quarter segment earnings before DD&A of a little over $140 million. That is up 28% from the second quarter a year ago, and just right on our budget for the second quarter, growing at about 24% growth which is what we have projected for the full year. We think our terminals group will come in at or slightly below budget for the full year. And of all this growth, this roughly $30 million in growth in the second quarter, slightly more than half of the growth came from organic opportunities, and the remainder was attributable to acquisitions, primarily the Marine Terminals acquisition which we made in September of '07, and from the Vancouver Wharves operation which we picked up in May of 2007.

Some other statistics I think are kind of interesting in the terminals group, our segment liquids leasable capacity is now up to about 52.5 million barrels, up from about 43.5 million barrels a year ago, and that is due to all these numerous expansion projects that we've been doing on the liquid side, again, doing them only after we have fairly long-term contracts with users of those facilities. As you would expect, liquids throughput increased about 15% compared to a year ago, growing to a record, for us, almost 161 million barrels that we handled, and we set all time records at our big complex here on Houston Ship Channel. Over on the bulk side, the highlight was really that our coal handling increased by 22% in the second quarter. We handled about, a little short of 9 million tons in the quarter, and there we benefited from record coal throughput of 1.1 million tons in June alone at our Pier IX Terminal in Newport News, Virginia.

Our fifth, and by far the smallest, business segment is our Trans Mountain Pipeline up in Canada, and that produced second quarter segment earnings of $33.4 million. That's up by over 60% from a year ago, but it's not really apples to apples because we had a full three months of earnings for the second quarter of '08. Last year we had only two months of earnings from Trans Mountain. The results compared to plan were below plan due to lower revenues caused primarily by delay in the approval of increased tariffs for 2008. Those tariffs are now in effect. They went into effect on June 1 and we now expect that -- this segment to meet or slightly exceed its budget for the full year.

Now if you look at the full year on a company-wide basis, as you know, our target for the year on the budget -- under the budget we published and discussed with you in January, was to declare cash distributions for the full year of $4.02. We now expect to exceed that target for the year.

Now let me talk about some of the strategic developments that occurred during the second quarter. I think one of the great challenges we and other pipeline builders and operators face today is obviously rising construction and material costs, and these continue to create a challenging business environment for our whole industry. We are really focused on managing those increases, trying to identify ways to offset them where we can, and bring in our projects as close to being on time and on budget as possible. And so we each quarter true those up with prior quarters and go back to our analyst conference in January where we discussed all these projects in a lot of detail, so let me do just that.

Right now our total forecasted CapEx on our major projects have increased by a little less than 10% from the projection we made at our January investment conference. Most of the increase during the last quarter has been on our natural gas pipeline major project. There we have faced -- market conditions have driven higher prices for consumables, for labor and construction equipment, and then specific to our REX project we did have certain provisions in the final EIS, the Environmental Impact Statement, that have resulted in substantial increased costs on that project. While we'd rather obviously not see these increases, we remain confident that REX and all of our other projects will still deliver attractive returns to our investors. And I think it's important to remember that when we evaluate these projects, in order to make capital investment decisions, we conservatively estimate the cash flows which leads us to opportunities to outperform.

Now rather than just rest with that kind of wordy gobbledy-gook, let me give you an example. On REX, what we built into our EBITDA structure was that we would get the demand payments which were fully contracted for a period of ten years on the REX project. But as we have put REX in service, we are already providing ancillary services to our shippers which generate revenues for us in excess of the contractual revenues on which we based our expected return. Another example is that on our CO2 improvements in southwest Colorado and on the pipeline running from Colorado over to the Permian Basin in Texas, while our costs have increased, we are realizing much higher prices on our CO2 under these contracts I discussed earlier. So actually our return there is substantially higher in terms of return on invested capital than what we originally projected.

Now, our board has approved about $8 billion in capital projects at KMP, and projects representing about $3 billion out of that $8 billion have been completed and are in service, and most of those came in pretty close to the budget for capital expenditures that we set for them. The remainder of the projects are in various stages of construction, and I would like to spend just a couple of minutes reviewing with you progress on some of the most important of those projects.

I'll start again with Rockies Express, we call REX. What we call REX-West, which is the part of the system that runs from the Cheyenne Hub in Weld County, Colorado, over into Audrain County, Missouri, is now completely finished. We went into service to eastern Kansas on January 12, and then completed the last spread over to Audrain County, Missouri, and put that in service in May of this year. The capacity to pipeline is now 1.5 billion cubic feet per day, and it is operating at or near full capacity.

The next phase of the REX project is from Audrain County, Missouri, on over to Clarington, Ohio, which is essentially on the Ohio-Pennsylvania border, we now have started construction on that. That is about 640 miles of pipeline. We expect to be in service to Lebanon, Ohio, by year end, with full operations to Clarington in the third quarter of 2009. When the whole thing is completed, it's a roughly 1,700 mile pipeline, with a capacity of about 1.8 billion cubic feet per day. I'll remind you that we have binding firm commitments from credit-worthy shippers for all of that capacity, and we are overseeing construction of the project. We own 50%, Sempra and Conoco own the rest. Our current estimate of total construction costs on REX, which includes the bids we now have on the construction of this last segment, is about $5.6 billion in total.

Our second major project, which is a great success story I think, is our Midcontinent Express project. That is the project that runs from southeast Oklahoma, across northeast Texas, northern Louisiana, central Missouri, and interconnects with the Transco Pipeline near Butler, Alabama. Initial design capacity was 1.5 billion cubic feet a day. That has now been fully subscribed with long-term binding commitments. We have just completed a successful open season and we now expect to increase the main segment to 1.8 Bcf per day. This project is a 50/50 joint venture of KMP and Energy Transfer, and we expect to start construction on that, depending on regulatory approvals, within the next month or so.

Construction continues on our approximately $595 million Kinder Morgan Louisiana Pipeline. That's a 133-mile, 42-inch diameter line that moves natural gas across multiple pipeline interconnects from the Cheniere Sabine Pass LNG facility. All of the approximately 3.2 Bcf per day of capacity on that line has been subscribed by Chevron and Total. And we expect to have that operational sometime in the first quarter of 2009.

Now over in the CO2 segment, a major project that we have going is drilling new wells and adding compression in our McElmo Dome area located near Cortez, Colorado. We began commercial production from those facilities in June and we are now producing over 100 million cubic feet per day of CO2. Our share of this project is about $140 million, that includes our share of the Cortez Pipeline also. And the project will continue to ramp up as these wells are added and we expect it to be producing an additional 200 million cubic feet per day from McElmo Dome when we complete all the construction in the fourth quarter.

Now, we have a number of other projects either underway or just completed, and the details on that are in three or four pages of our earnings release, but what I have given you is an outline of the major projects. And I might add we are in active discussions on other major opportunities with our customers, so we see this as a very fertile opportunity for an extended period of time to continue to grow our pipeline and terminal network around North America. So I think if you look at it from a strategic perspective, we've had a great first six months of 2008, we are on track to exceed our budget for all of 2008, which was a growth in distributions of 16%. We continue to make good progress on our expansion projects, which are certainly a big part of the foundation for our future success and growth in distributable cash flow per unit. And with that I will turn it over to Park.

Alright, thanks Rich. I'll go through the numbers as I usually do. Hopefully, everyone has the press release. I'll start on the first numbers page following the press release, but just spend a brief time there. You will see at the bottom of the page the declared distribution $0.99 is what the board declared today. That is up 16.5% from the $0.85 that was declared for the second quarter of 2007, and that means we will distribute $1.95 for the first half of the year, also up 16% from where we were in the first half or what we distributed for the first half of 2007.

Now with that I'll turn to the second page and that's where you can really see the sources of the growth. Let me start at about the middle of the page. Right above weighted average units outstanding, you'll see DCF per unit before certain items, Rich mentioned that's $1.14, up 31% from the $0.87 a year ago. Tremendous growth in DCF per unit, and for the six months $2.26, up 34% from the $1.69 of a year ago. And not only has the DCF per unit grown, or really the truth is, not only have we grown our distributions at 16%, but our actual cash flow has grown more rapidly, again as you see from the DCF per unit, so that our coverage has expanded.

Our coverage, as Rich mentioned, is $79 million through the first half of the year. Our budget through the first half of the year was essentially no coverage. You'll remember our budget for the total year is about $10 million to $12 million of excess coverage. We talked in January about the fact that historically we had budgeted coverage to be fairly tight and, typically, we had out-performed that. We certainly believe that we will have excess coverage in 2008 that is well beyond our budget of $10 million to $12 million. And again, as I said, we are already at $79 million so far. We do expect our distribution will exceed our budget, but we also expect that we will cover our distribution in each of the next two quarters so that our excess coverage is likely to grow as we continue throughout the year.

Moving up from there, as you can see, the actual cash DCF before certain items $294 million, up about 44%, $574 million for the six months, up 46%. The components of that immediately above that sustaining CapEx is up about $10.5 million from where it was a year ago. It's up almost $14 million for the six months. It is on track, or we still expect to have sustaining CapEx of around $196 million, $197 million for the year, consistent with our budget.

Above that you'll see that we actually had a hurt from book cash tax difference during the quarter. We did actually expect in our budget that we would have a little bit of a help, and so actually -- I'm sorry -- in the quarter we expected that there would be a little bit of a hurt. For the year, we expected that we would have a little bit of a help from that. We now do not expect that to be the case. We expect that actually book cash tax difference will be a slight negative for us for the year, but clearly we are overcoming that. And it's largely driven by what we talked about in the first quarter, which are additional taxes related to premiums on our Westridge Dock facility that is part of the Trans Mountain system, and those cash taxes we expect to get back in future years.

You'll see depreciation is up, largely driven by increased depreciation at CO2, and then also increased depreciation at the terminals where we put on additional facilities, and having a full quarter and six months of Trans Mountain. You'll recall that a year ago Trans Mountain was only in the second quarter for two months, because that transaction closed at the end of April, and so for the six month period we had an incremental four months, and for the quarter, we have an incremental one month for this year. And then above that you get to the net income numbers, although again, we believe that the DCF numbers are much more meaningful.

So with that I'll jump to the top and talk about the segments. Rich already covered a lot of this. You'll see products is actually down for the quarter. It's down for the year to date. Now, to have a true apples to apples comparison you need to adjust products for the North System which was sold at the end of the third quarter, beginning of the fourth quarter 2007. If you did that, it would still be down a little bit compared to last year for the quarter. It would be above where it was last year for the six months.

Rich talked about the impact of the product volumes, basically the decline in volumes, driven by higher fuel prices and by weak economic conditions. Now as he mentioned, that, of course, is offset, in part, by our ethanol revenues. We do blend a lot of ethanol at our terminal facilities, and we earn revenues because of that, and then also we do have inflation adjustments on our tariffs on a lot of our refined product lines. So in truth, our refined products revenues are above where they were a year ago, even though our volumes are down, driven by those two factors, but bottom line products is under our budget. We expect it will be under our budget for the year.

Natural gas pipelines, way above last year, it's up about 26% for the quarter. It's up about 32% compared to 2007 year-to-date. Driven by Rockies Express, clearly the addition of that, is having a big impact on the growth year to year, and in also the intrastate pipelines which are having a tremendous year once again, are both above last year, and nicely above their budget for both the quarter and the year to date. CO2 way above last year. It's up about 68% for the quarter. It's up about 64% year-to-date. As Rich mentioned, for crude volumes, SACROC is slightly below last year but right on our plan. Yates is above both last year and our plan. Our S&T business, the CO2 transportation business, volumes are actually above our plan and way above last year because of the addition of the new facilities in southwest Colorado and the Cortez Pipeline. NGL volumes are slightly below last year and below our plan, and that's being hurt by the pipeline pro-rationing issue that is discussed in the press release. We hope that that will be resolved in the very near future. And then, of course, the CO2 segment is getting helped by price, which largely impacts realized CO2 prices and NGL prices and has a little big of an impact on the unhedged crude volumes. Overall, again, we expect CO2 to finish the year well above its budget.

On the terminals side, nice growth from last year, it's up about $30 million or almost 28% for the quarter, the same about 28% year-to-date, driven by a lot of the expansion capital projects. Now it is a little bit under its budget. Most of that occurred in the first quarter, we discussed it at that time, driven a lot by some projects that came on a little bit later than expected but are on now, and then, of course, by the fuel prices, as Rich mentioned, are a little bit of a headwind for the terminal segment.

We expect terminals to come in just a little bit under its budget, and hopefully they can make that back up and hit their budget for the year.

Trans Mountain, once again, we have a full three months this quarter, only two months in '07. For the year-to-date we have a full six months this year, as opposed to just two months a year ago, and so that drives nice growth. We do hope that Trans Mountain will be on its budget for the year.

You will see then total segment earnings before DD&A of $710 million, up 28% from a year ago. For the six months almost $1.4 billion, up 32% from the $1.056 billion a year ago. You may recall that our annual budget for segment earnings before DD&A is just a hair under $2.8 billion. We now expect that we will be nicely over $2.8 billion. So we expect good out performance from our segments this year and, of course, that's growth over $2.2 billion in 2007. So very nice growth coming out of the segments.

With that I'll drop down and talk about G&A. If you go through the DD&A and down through the segment earnings contributions, and underneath that you'll see the G&A, up about $10 million, so that is a negative variance, '08 second quarter versus '07 second quarter. Year-to-date we are off about $23 million or, put in other words, G&A is up about $23 million. Now some of that was expected, although our G&A is running a little bit above those for the budget and year-to-date. The reasons are incremental legal expenses, higher G&A at Trans Mountain, which is driven primarily by increased insurance costs above our budget, and then some tax reserves that show up in G&A.

Interest, below that, you'll see up slightly from a year ago for the quarter, up about $9 million from a year ago for the six months, but well under our budget and under our budget largely as a result of lower rate. We do have 50% floating rate debt, 50% fixed on our floating rate debt, we are realizing interest rates that are below our budget and realizing some benefit from that.

Minority interest essentially unchanged, and so that is basically what is driving the distributable cash flow before certain items. To talk briefly about the certain items, you can see they net to essentially just $1 million for the quarter, and about $3 million for the six months. Now in 2007, there were bigger amounts. A couple of them related to Trans Mountain events prior to the drop down. Again those were 2007 amounts. Some of them relate to non-cash compensation that, for accounting purposes, has to show up on KMP's income statement, but KMP has no responsibility for that compensation. KMP won't be charged any cash, doesn't have to issue any equity, has absolutely no obligation related to this compensation, and never will have to pay anything related to the compensation, but that is not sufficient for the accounting folks. They deem that it still has to show up here on the income statement.

Loss on debt retirement, I think it was an '07 item, as were the environmental reserves. Again on sales you'll see a positive in the second quarter 2008, largely related to the sale of our 25% interest in Thunder Creek. A little bit of residual North System gain flows through in both the second quarter of '08 and the first quarter of '08. You'll see a negative amount, about $13 million mark-to-market of certain upstream hedges, because of the divergence in NGL prices and crude prices that has gone on over the last three to six months. Some of our NGL hedges in our upstream business, which is part of our natural gas pipeline segment, have been deemed to be ineffective from an accounting perspective. What that means is we run this amount here through the income statement, but it is purely a timing item. It has no impact over what we reflect in the segment because what we always reflect in the segment is the actual physical sale, plus or minus any impact from our hedge, and so that will still show up in the segment when the physical sale happens. So really what you are going to see, you have this $13 million negative here in this quarter, you are going to see $13 million come back. We will pull it out as a certain item, down in the certain items, over the next three quarters or four quarters, and what you will see in the segment is exactly what you always see, which is the actual cash that we receive from these transactions. Other is de minimus. So again those are the certain items. I think that really in 2008 there have not been really any certain items of any substance. Again that is what gets us to DCF per unit of $1.14, again nicely covering the distribution of $0.99.

Flipping back to the first page which is the face of the income statement, it does not make a lot of sense to go through this in detail because we don't believe that this gives you a fair representation of what is going on at KMP. And in an effort to highlight that, and then also maybe to demonstrate that we are trying to be fair in this analysis that we show on the second page as opposed to just skew things in our favor, I want to draw your attention to the G&A line that's on the face of the income statement. You'll see there for the quarter it has G&A of about $73 million compared to last year of about $89 million, which indicates that G&A is down by $17 million. Now you may recall a couple of minutes ago, I told you that G&A is actually up $10 million quarter-over-quarter, and if you look at the second page, that is what we show. And that is what we believe to be true. When you strip out these certain items and the one impact -- the one piece that especially has an impact there, is this item that is called allocated non-cash long-term compensation. When you strip out those items and look at what we believe KMP is really responsible for and what will occur going forward, that is what shows up on the second page and that indicates that G&A has gone up by $10 million as opposed to if you just look at the face of the income statement you say, oh great, G&A is down by $17 million. Again, I just highlight that because, hopefully, it will help convince people that what we are trying to do is make a fair representation on the second page.

With that, I'll go to the balance sheet, which should be the last page of your press release, and run through that quickly. Cash and cash equivalents up a little bit. We actually had no commercial paper outstanding at the end of the second quarter. We had a little bit higher cash balance than we would have otherwise. Other current assets is up significantly. Restricted deposits related to hedges are up. AR is up and those are the two main items increasing that. PP&E, you'll see up by over $900 million, that is a function of CapEx which, for the six months, totals about $1.25 billion, less depreciation during those six months.

Investments is up by about $227 million. That is the net impact of the contribution to Rockies Express, and then some cash that was returned from Midcontinent Express when we put in place our credit facility at Midcontinent Express, and then also a reduction due to the sale of the 25% interest in Thunder Creek. Deferred charges and other assets, that is essentially flat. Total assets about $17 billion, up about $2 billion from where we were at the end of '07. Notes payable and current maturity, as I mentioned, we really don't have any commercial paper outstanding. We do have a piece of long-term debt that comes up in the first half of 2009 that now shows up as a current maturity, so that's essentially what's on that line.

Other current liabilities, you'll see up almost $1.1 billion. AP is up a fair amount. And then the mark-to-market of the hedges, again, for the most part we have hedge accounting which means we do value the hedges on a current market basis but we only do it on the balance sheet, and a fair amount of that shows up here in the current liabilities section. Long-term debt you'll see is up about $1.3 billion. We've issued a significant amount of long-term debt, termed up a fair amount of debt in the first half of the year, and then we had the one maturity that rolled out of long-term debt into a current maturity, so basically went the other way. Value of interest rate swaps just fluctuates with the forward interest rate curve. Other is up about $1.1 billion, over $1.1 billion. That again is the hedge values being adjusted there.

Minority interest down a touch. You'll see in accumulated other comprehensive loss, again that is the hedge value being adjusted there. Primarily it's a function of our crude hedges, so you'll say, well, wow, that is a big negative, almost $1.7 billion, but of course the value of all of the crude that we have in the ground has gone up on an equivalent basis but that is not reflected on the balance sheet. Other partners' capital, up about $400 million, that is a function of primarily equity issuance and a little bit of the excess cash flow. So where that gets us in terms of total debt, you'll see a little under $8 billion for the quarter. That is up from $7 billion at the end of 2007, and at the end of the first quarter we were about $7.6 billion.

Now, so in terms of measuring the strength of the balance sheet we like to look at our debt to EBITDA ratio and you'll see it shows up as 3.4, basically unchanged. Now if you took that out another decimal point, which all of you can do just by running the calculation, you'll see at the end of 2007 it was 3.43, and at the end of June 2008, it's 3.37. So it does still round to 3.4 although there has been improvement in that measure and, we believe, given the stability of the assets that we own and operate, that is a very strong balance sheet, with debt just 3.4 times our EBITDA.

And while we are on debt and talking about the capital issues, clearly capital markets have been a little sketchy, really, for the last 12 months. Again I think based upon the strength of the diversified portfolio of stable assets that we own and operate, we have not had any issues accessing capital. And to demonstrate that to you, just this year, so in the first six months of 2008, we have termed up $1.6 billion of debt, so we've issued new debt of $1.6 billion, and this is just at KMP, and we've issued equity of $384 million. If you go back another six months from that, so if we look in the last 12 months, we have issued $2.1 billion of debt and we've issued equity of $727 million. Now if you add on to that the KMR distributions, which are effectively an equity issuance built-in equity issuance, you would add on another $275 million of equity, and you'd be at KMP in the last 12 months issuing $2.1 billion of debt and $1 billion of equity. And even on top of that, we have had some requirements for our pipeline joint ventures.

At MEP in the first quarter of this year we put in place a $1.4 billion credit facility, so access to new capital of $1.4 billion. And then last month at Rockies Express, we termed up $1.3 billion of debt there, which we used to pay down commercial paper that we had outstanding. If you add all of that up in the last 12 months, we've raised $4.8 billion of debt and $1 billion of equity. And so again in the last 12 months in rather tumultuous capital markets, we've raised $4.8 billion of debt for KMP and for it's pipeline joint ventures, and for KMP, we've raised $1 billion of equity, granted that's including the KMR distributions. But it is $1 billion of equity that we have to invest. So again I think that demonstrates the strength of the assets that we own and operate.

Now as I usually do let's talk about the change in debt. For the quarter, it's up a little under $400 million, about $389 million, and for the first half of the year it's up a little under $1 billion, about $970 million. And so what's driving that -- well, CapEx, not including sustaining, for the quarter is about $550 million and for the first half is about $1.17 billion. And then on top of that in the first half, we had a contribution to Rockies Express of about $300 million. So that is additional cash going out. Now we did raise about $50 million in the quarter in the first half through divestitures, largely or exclusively the sale of Thunder Creek. So that was a source of cash of about $50 million for the quarter and the first half.

We did have equity issuance in the first half of $384 million. Again, all that occurred in the first quarter. We did retain cash due to KMR distributions of about $70 million for the quarter and $138 million in the first half. We also received from Midcontinent Express $63 million in the first quarter, so that only applies to the first half. Margin deposits have increased, again posting margin related to hedges, by $108 million in the quarter and about $207 million in the first half. And then offsetting that source of cash we have had excess cash flow, as we mentioned, of about $40 million in the quarter and about $79 million in the first half. And what that means -- where what we end up with is working capital and other items have been essentially flat for the first half, it's actually been a source of about $120 million in the first quarter -- I mean, in the second quarter. So if you look at what is going on in the second quarter AR and AP was a little bit of a use of cash. Other current assets and other current liabilities was a source of cash of about $173 million. That is driven primarily by prepayments that we have collected from customers.

And then we have a little bit of a change in our bank accounts relative to what is in the bank, versus what checks have been written and sent and thus show up on the book. And various other items that total up, again, there a few negatives, which are the AR and AP, the change in the overdrafts, and the other items that offset the $173 million source from other current assets and other current liabilities that get you to about the $123 million positive that we are seeing from working capital in the quarter. And, again when you sum up all those items, that gets you to a change in debt about $390 million for the quarter, about $970 million for the first half. Most of it is going to CapEx and the contributions to REX, offset by the fund-raising that we are doing primarily on the equity side.

So we have had a significant amount of CapEx, products continues to work on the projects it has underway. It spent about $55 million in the first quarter, about a little under $100 million in the first half, across a variety of projects finishing up the El Paso to Phoenix expansion. A little bit on the ethanol project down in central Florida, some on the Miramar tanks, and in various other tank projects and pipeline expansions that are going on.

Natural gas, the CapEx was about $220 million in the quarter, right about $400 million in the first half. The biggest piece of that was the Louisiana pipeline, about $150 million in the quarter and almost $300 million in the first half. CO2 CapEx was about $116 million in the quarter, almost $260 million year to date. A lot of that going on at SACROC and, of course, continuing the southwest Colorado expansion, and then a little bit at Yates.

Terminals continue to have a lot of expansion projects going on there, about $83 million of CapEx in the quarter, a little over $200 million in the first half. A lot of that at Pasadena and Galena Park, finishing up the North 40 project in Edmonton, and then a whole slew of other projects.

And then at Trans Mountain, we spent about $71 million in the quarter, about $216 million in the first half. The vast majority of that is going to the Anchor Loop project, a little bit on finishing the pump station expansion.

And that is all that I have. I will hand it back to Rich.

Okay, and Ed, we will take any and all questions people may have now.

Thank you, sir. (OPERATOR INSTRUCTIONS). First question comes from Ross Payne. Your line is open. State your affiliation, please.

Ross Payne with Wachovia. Good quarter guys. A couple of questions here. Number one, how much was unhedged on the CO2 business? Second of all, in that regard, Oxy came out talking about a new CO2 extraction plant they're going to build. What kind of impact do you guys see from that?

Unhedged on the oil side, essentially almost all of our oil production was hedged. So very little of the oil production was unhedged. Now we got a big increase, as you know, which was in our plan from the fact that one set of hedges obviously rolled off, another set of hedges came on and they were substantially higher prices, all of that we described to you in January. Where we did benefit was in two areas in CO2 from price, and that was at our NGLs are unhedged, I think our net NGL production was around 9,100 barrels, or thereabouts. That's unhedged, we put all the hedges against the crude oil. To the extent that NGL prices are higher we benefited there, and they obviously have some relationship to crude, not as easy to determine as it has been in the past.

And then the second thing where we benefit is a lot of our CO2 contracts with third parties are based on a floor price, but they have escalators based on the price of oil if it gets above a certain level, and those are trued up every quarter, so we have already trued up now for the third quarter, for example. So that was a significant benefit of higher prices on our CO2 results. Now, with regard to the Oxy situation, there is tremendous increased demand by Oxy and by a lot of other players in the Permian. In fact Oxy and others are looking to us to supply additional CO2 for them in the out-years. We have nothing else we can give them in the short-term but as we have some other contracts fall off we have some room in the portfolio a few years out, and they are looking to expand their takes from us. So, our view and I think our Oxy's view is they see a big increase in the amount of CO2 that they want to use in the Permian Basin to increase their oil production as do others, and so we don't see as having any impact on the demand for our CO2 that we move each day down the line from southwest Colorado.

Thanks very much. Just switching gears to REX real quick and I'll step off here. Can you let us know roughly what the contribution for REX was, EBITDA was, for the natural gas group, what your pro rata share of the REX debt currently is, and last of all, obviously the project has increased in price. Is there a maximum debt to EBITDA level that you guys are comfortable with at REX that you are going to keep it at?

I don't think we disclosed our pro rata share of EBITDA. We haven't talked about the REX EBITDA separately. Our pro rata share of the debt now - -

It's at $2.5 billion total, so half of that - -

In terms of the debt overall, the debt is not expected to go above $3 billion.

That's right.

And so we do not expect that REX will have debt beyond $3 billion.

Great. That's it from me guys. Thanks.

Next question comes from Adam Rothenberg. Your line is open. State your affiliation.

Hi, that is Adam Rothenberg, Zimmer Lucas Partners.

Hi, Adam.

Hi. Good quarter guys.

Thank you.

Could you talk a little bit when we think about the '08 distribution, when that is above budget, how much do you think that's going to be above, and in light of the crude forecast, being above where you guys are at?

Well, we've said and it's always a work in progress, we start the year saying we are going to distribute a certain amount, in this case $4.02. I think at the end of the first quarter we said we would meet or exceed that. Now we are saying we will exceed that. We'll see how the results turn out these last two quarters. There are a lot of moving pieces. We are highly confident, or we wouldn't say it, that we are going to have the fire power to exceed the $4.02, but we'll make the determination by how much as the succeeding quarters go by, and obviously we are delighted to have a lot of excess coverage. I think that is good in a number of respects, and one thing is that nobody knows where crude prices are going.

We are again - - we would still be above our plan even without, if crude prices were just on our plan numbers, which I think were down in the '90s, WTI but given that we are not certain where crude prices are going, I think it would irresponsible to try to distribute every last penny that you are getting from higher crude prices in a given year where they're that far above budget. We are looking at all these factors. We are confident we will beat our $4.02. We are on track to do that, but I wouldn't want to specify any more than that at this point.

The only thing I'll add is our distribution is going up by 16% this year, and we are now confident that it's going to go up by more than what we said originally. Originally it was increasing by 16%.

Sure. And just to switch gears, on the $8 billion of total CapEx that you talk about, how much is locked down and protected from cost inflation, versus additional costs?

Let me start with the fact that I said, and these are approximate numbers, that we have completed about $3 billion of it and put it in service, and that is our share of these various projects, just like $8 billion does not include eight eighths of REX, it includes 50% of REX. So $3 billion, or three-eighths of this is all put away, done, and then the remaining roughly $5 billion is our current best estimate. I don't know that I could estimate. Steve Kean maybe could, but a high proportion of it is obviously locked in, because on REX for example, all of our pipe is bought, all of our compression is bought. The only thing left on REX is obviously these, as we've explained last time in gory detail, these are time and material contracts now. We have prices that our contractors believe where they would come in, but there is upside or down side off of those prices. We think it's fairly modest but there are no guarantees in life. And so it's relatively - - if you add the $3 billion to pipe and compression that's locked in on these projects, certainly well over half is locked and put away as you said, and about the only exposure is on this time and material contracts at least on the major pipeline projects. Steve, anything you want to add to that?

In general, the projects where we get to the point where we have customers signatures on contracts and that sort of thing, in general, our projects are going out in time to lock in the cost that they can at that point in time, so the costs are becoming clear at the same time that the economics are coming together on the project (inaudible). But you can't do that with everything, and some of the contracts, specifically the time and materials and contracts, that Rich mentioned, will fluctuate over time. But again, in general, trying to lock it in as soon as we can. And I think that is evidenced by the fact that the cost increases that you are seeing on these projects and the cost environment that we have today are not as up as much as general costs are.

Just to pick one number for you, I think the cost of pipe on some of our earlier projects where we ordered the pipe up front was in the $1,200 per ton range. Today same pipe is going for in the range of $2,500 per ton. So by locking in early we save enormous amounts of money, and of course, we did lock on REX, Kinder Morgan, Louisiana, and Midcontinent Express.

Got it. And lastly, with 3.4 times leverage, you guys are well below your peers. Do you think for additional CapEx it can debt financed, rather than equity financed?

I think we'll continue to look at all of our investments at kind of 50% equity, 50% debt mix, and my expectation is that that will probably keep us in the low three's in terms of debt to EBITDA.

Great. Thanks, guys.

Next question will come from Darren Horowitz . Please state your affiliation, please

Darren Horowitz with Raymond James. Again, to echo everybody's earlier comments, Rich great quarter.

Thank you.

My first question is on the Louisiana Pipeline. It seems now that the inservice date is going to be April 1, and if memory serves correct, I think last quarter you had mentioned it was going to be about three months early, which would have pegged in around at the beginning or first quarter '09.. Can you give us a little bit more color as to any changes or nuances that are different there?

We could have brought this in earlier, but clearly this is very consistent with what I've said in prior calls. Clearly there's no great demand. Let me back up. All this transportation (inaudible) is underwritten for 20 years period of time by Chevron and Total. But in point of fact, there is no LNG, virtually no LNG going through Cheniere, so they really have no need and no obligation to ship this before the April 1st date. So we could probably incur some additional expense and bring it in in that January time frame that we originally talked about, but we've decided to just not spend any additional costs and bring it in on time, and therefore as close to budget as we can. We have some costs overruns, but that's the main reason. We are making good progress.

The tough part of the construction there is laying the pipe through the lake and Steve I think we are about 75% finished with that part of it? And then we go through some swamps, and then I can say this because my wife is from Louisiana, they call it there the uplands portion. I'm not sure I equate that section of Louisiana with uplands, but anyway we are getting out of the lake. We are making good progress through the swamp, and we will soon be in the fertile uplands, but we've elected not to have an all out push like we might on REX or other projects where there's a lot of pent-up demand for that capacity right off the bat.

I appreciate the color. So it sounds like you are taking a bit more of a prudent approach to costs, specifically in that area.

That's correct.

Okay, switching gears, Rich, over to the CO2 division,n I want to address a point that Ross initially asked and you answered when you were discussing additional room in your portfolio to expand your CO2 presence in the Permian. Can you give us a little bit more color on the nine new production wells at the McElmo Dome, ramping up the 200 of NCF a day? Your target the fourth quarter, but can you give us a little bit more color as to the timing and maybe any expectation for CO2 production into the first half of '09, because it seems like demand would underscore more production.

I'd be happy to. The southwest Colorado expansion really has three parts to it. One part is to expand the production at McElmo Dome. That's our historic production area that turns out about one billion cubic feet per day, today that goes down Cortez. That is point one, to expand that by 200 million cubic feet a day. The second part is to expand Doe Canyon, which is a new production field a few miles away from McElmo Dome, and that we own about 80-plus percent of, Is to develop that to produce 100 million cubic feet a day, and then to expand the Cortez Pipeline by 200 million cubic feet a day. So we're going to have, when everything is finished in the fourth quarter, 200 million additional cubic feet per day, coming down to the Permian Basin, the other 100 cubic feet we've sold to a producer over in southern Utah who is going to take is, so coming the other way out of southwest Colorado. That is where the 300 is going.

We have drilled the wells at Doe Canyon and put the plant in there. Those wells have come on better than expected. We are now producing 100 million cubic feet a day. We thought it would take five or six wells to do that. We are now doing it on two or three wells - - two wells Mark says - - doing that with just two wells. That's how prolific those wells are, so that 100 million is done.

On the McElmo Dome we originally intended to drill nine wells to produce an additional 200 million cubic feet her day. We completed most of those wells. The only hang-up is we've had some problems getting permission to drill some of the horizontal wells that are not cited on the national monument out there, but the horizontal portion of the wells actually intrudes on the subsurface of the monument, so that's very difficult to get permitted. It's taking longer than we thought, but the wells we've drilled have been better than we thought. So we may actually only drill seven or eight wells instead of the full nine.

Now the other thing that has to be done is we have to ramp up the compression on Cortez in order to get that additional 200 million down the line. We are up to being able to move 100 million additional, but we have one of the points where we are adding compression that has not been fully permitted in the state of New Mexico, and we are actually now going to move generators on to work that until we get the final permits for that which could sloff over into early '09. Therefore we are adding some generators to actually bring it up online, in the fourth quarter we will be able to move the full 200 million. So I guess, we are dancing as fast as we can on this, but there are a lot of permitting issues, particularly when there's anything close to the monument area out there in southwest Colorado.

Sure I appreciate it. And then, ne final question switching back to the natural gas pipeline for a minute. When you're looking at MEP, Can you give us a sense of the current pulse of the regulatory approval on the line, and the second question is any opportunity to either expand zone one capacity further, or additional expansions given the geographic footprint, it could probably use more capacity, certainly as the (inaudible) kind of ramps up over time?

No question and between what I said and what is in the earnings release. Let me repeat that. We started out with planned capacity of 1.5 Bcf a day. That is now completely subscribed to, then we went out with a binding open season, which was just completed last week, on additional 300 million cubic feet a day, which can be done just by adding power. That was fully subscribed and a binding open season. So we now have commitments for extended periods from credit-worthy shippers for 1.48 Bcf a day. And that will include the expansion that we are talking about for the last 300 of it.

And beyond that, we certainly think there's opportunity. We are in the drawing board process right now. The next expansibility will not be as cheap, and it will be incremental, in terms of rate making we think. So we are now planning that and we'll be going out to our customers, who didn't make the cut in the binding open season, to work with them and I think there's a very good likelihood nothing is certain, but very good likelihood that we will further expand.

Can you give us an idea as to the magnitude, Rich?

Too early to tell. We are just going to look at that and see what our producers want, and usually, Darren, in these expansions there's kind of a sweet spot where we can expand this much by adding "X" amount of pipe of this size and then leaving room for still additional compression on the new pipe and it will cost "Y", or we can do a little less or a little more, and that takes some engineering work, which we are in the process of doing right now. We hope to complete that then go back to the other shippers who didn't get the capacity they wanted in the open season, and be able to say okay for "X", we are willing to build an additional, whether it's 200, 300, 400 million cubic feet a day.

Thank you, Rich.

Next question will come from Brian [Zehran]. Your line is open, state your affiliation please.

Brian [Zehran] from Lehman Brothers.

Hi Brian.

Hi, and congratulations on the quarter.

Thank you. Regarding the cost inflation on the organic growth project, Midcontinent Express had a increase from your last estimate. Is there further risk to the cost estimate for Midcontinent Express? Well, we think not. We took our board through that today. Our natural gas group came in and went through, line by line, exactly what drove that price increase and we still have a fair amount of contingency left in it.

But again, there are no guarantees, and I've been in this business almost 30 years, and just as I've never seen it as good in terms of producing demand for signing up long-term capacity on natural gas pipelines, I've never seen the cost environment in terms of pressure, and in terms of, frankly, issues on quality at work force and that kind of thing that we have now in the pipeline space. We think we've nailed it all, and we think that any increases will be none or minima,l but again there are no guarantees. It's a very good project from a return standpoint, particularly including this very effective expansion that we now have subscribed. So it's very good, but we are going to do everything we can to hold it where it is, and virtually, everything is locked in but we still have these times and materials contracts, which if you have a real rainy period those could increase. There are just some moving parts. Steve, our Chief Operating Officer, anything you want to add to that?

I think you covered it, and there is, as you mentioned in the beginning, a good amount of contingency, and that contingency is there for a reason, that is that construction costs do tend to vary. We hope that will help insulate us from further increases.

We have most of the right-of-way already locked up, and again this runs across, unlike Kinder Morgan Louisiana, and unlike parts of REX, Midcontinent Express doesn't run across a lot of scenic riverways or environmental crossings, and a lot of it parallels other pipeline right-of-way. That is all a plus for the project. So we feel pretty good about it, but all I can say is we watch these things like a hawk, and we think we are doing a good job of managing. It's just that some increases have been unavoidable. We think we've nailed all of those but, again, there aren't any guarantees, and we could some have additional price creep on one of these projects. We don't expect it, and if we did have additional price creep, we think it would be fairly small.

In terms of operating expenses, you are describing that, and that is probably high commodity prices are a positive for Kinder, but in terms of operating expenses which segments are more exposed to higher electricity costs and fuel costs?

On diesel fuel cost our terminals is the most exposed. As I said, we use a million gallons a month in our terminals, and to the extent that diesel prices are up if they are up $1.00, that's $1 million a month, if they're up $2.00 that's $2 million a month. We are able to go back and collect some of that. We have some contracts where we are able to extract a fuel surcharge, some we are not. That's where the most pressure is on the diesel side.

On the natural gas and electric power side, we have varying mixes in our pipelines, some are more fueled by natural gas, some by electricity. Now we do on a lot of our pipelines of course, have pass-through clauses where we actually are able to pass through the cost of that as part of our tariff. It's sort of a mixed bag. Probably the most direct impact of higher commodity prices on the whole business is in the product pipeline, where as we've had lower demand, we have lower throughput, and on the terminal side where we experience substantially higher diesel prices.

Thank you.

Next, Ed?

Next one comes from John Edwards.

Your line if open, state your affiliation, sir. Hi everybody. John Edwards, with Morgan Keegan.

John, how are you?

Good, how are you? At the analyst meeting at the beginning of the year you were talking about there was - - 83% of the oil was unhedged for '08, and I think it was 73% for '09, and I'm just wondering where you are at.

You said unhedged. You meant hedged.

I'm sorry, hedged. 17% was unhedged, right. I am just wondering where you stand now, and is there continued opportunity to go above your $82.00 per barrel budget.

Those hedges are essentially what is on for the year. So that is the right way to think about it what is hedged for this year. The number, the chart that you are referring to, is a BOE chart, so that includes NGLs in it.

That's why we say, John, basically we allocate all our hedges to the crude oil side, so as a practical matter, virtually 100% of the crude oil is hedged and all of the NGLs are unhedged. And that's where, aside from CO2 contracts, that is the second significant upside for pricing on the CO2 side.

Okay, so that is essentially what you were saying barrels of oil equivalent.

That's right.

Now it includes the NGLs. It does not include an approximation for CO2, which just gets into a very difficult calculation, because of the floors that Rich mentioned, and how you translate that back. But it does include the NGL barrels.

And then have you locked up additional on 2009 and 2010 since the beginning of the year?

No. We put on additional hedges but they've been in out years.

Okay. And then could you - - in the past you talked about submersible pump issues out at CO2. You didn't mention it this time. Is that largely resolved at this point?

I'm happy to say it is, where's the wood? Our failure rate on the pumps has gone down dramatically. We have a new vendor out there. He's now been with us since last fall I guess, and they've done a better job and our failure rate is now down to our target level. So we are doing a lot better on that. Actually, I would just say, we talked about it before.

SACROC is an enormously complicated unit, and again things are going very well there in terms of performance, and I think we've had some - - we've corrected a lot of the problems. You are never 100% complete, but I think we've gone a long way. Submersible pumps are doing a lot better. We are hitting our targets. I think we are doing better on our power supply, although I would tell you in that part of west Texas, you still have wind storms or storms come across a couple times a month that we end up losing part of the field for six hours or something, but I think we made a lot of improvements there. It's pretty wild and wooly country in terms of weather.

So you are expecting to stay at this 27,500 production level for SACROC, and a little over 28 for Yates for the rest of the year?

We expect to be on budget for SACROC, which I believe is 27,700, for the full year average, and then at Yates, our current expectation is that we'd be on, and to maybe slightly above our budget for the full year.

Great. That's all I have.

Thank you.

Next question comes from Dan Jenkins. Your line is open, state your affiliation.

Hi, State of Wisconsin Investment Board, and congratulations on a nice quarter. Just a couple of operational things. I was wondering, on the product pipelines, you talked about how they are impacted by the demand destruction from higher prices. I was wondering if you can give us a sense of how change in volumes would impact the revenues that you are seeing on those, like what a 1% decline or 2% decline in volume, how would that translate in the revenues you see.

Again what we've said is for the quarter we were down around 8%. Year-to-date, down about 6%, and that's impacted the revenues, as we said we are now, I think Park said we are now running about 5% below plan. And our products pipeline people have put into their current estimate what they expect the volumes to be for the rest of the year, which is essentially where they are. Maybe a little bit of an uptick in the fourth quarter, but essentially pretty low volumes for the year, and that's where we come out. We expect to be as, I think Park said, kind of consistent in terms of earnings before DD&A where we are today, around 5% below plan, which would translate to be $30 million or a little more, based on the plan as you know, a little north of $600 million. I don't have any sensitivity of what each 1% is, but that kind of gives you an idea.

If you are just talking about revenue, clearly our revenue is just the volume times the tariff, and everything else being held equal, if you lose 1% volume then you lose 1% revenue. Now if you take that to the bottom line, clearly when you have less volume going through you require less power, and so it doesn't all fall to the bottom line. There's a little bit of variable cost there. And then the other issue is everything is not equal. The tariff does change as a function of inflation, and if you are talking about 1% of volume that has gone away because it's been replaced with ethanol, in all likelihood, we are receiving that ethanol at our terminal at the end of the pipe, and we are storing it and then we are blending it into the fuel stream and then we are sending it out over our rack, and we are getting paid to do that. So when you start to get into dynamics like that, it gets very difficult to try to assess the impact of a specific percent change in volume.

Okay. And I was wondering on the NGLs, you mentioned that there has been a problem. I was wondering if you can give a little more color there of what that is, and when you expect that to be solved, as far as getting those - -

We've been prorated by pipeline that moves NGLs from west Texas down to the ship channel, and it was because, I think, of some fuel issues, contamination issues in the mix of products being shipped through the pipeline. This is a third party pipeline, not ours.

And the contamination didn't come from us.

And the contamination didn't come from us, right. And they've now indicated that they think they are close to getting it solved, in which case, the pro-rationing should end, but we don't have a specific date on that yet.

Okay. And then, I think I saw on your release the volumes were down on Trans Mountain and given that you increased the capacity this year versus last year and people expect production to be going up from those areas, I was wondering if you can give a little more color on what might be behind that.

In the second quarter, there were a number of production issues with the oil sands of production and with some of the upgraders and then there was a refinery fire and a shutdown, so a whole bunch of sort of discreet things combined, for just less through-put available to go through the pipeline. Now we do have, our tariff allows us to capture some of that. It's not a strict dollar for dollar decline but our volumes were down in the quarter because of that.

And then the last thing I was wondering is on the financing plan. You mentioned you've issued $384 million of equity so far, and I think about $900 million of debt. And I think in your plan you talked about $1 billion of equity. Can you give any - - when the timing we would see those additional units and would we expect more equity than debt in the second half?

I think the actual amounts for the year to date are $1.6 billion of debt, and almost $400 million of equity, and I think the actual equity that we are going to issue is a little bit less than that, and you have to take off the KMR issuance, which is included in there and is actual equity that we will raise. So I expect going forward we'll continue to try to finance our expansions and acquisitions, 50% debt and 50% equity and when the timing is right, then we'll issue some of those as appropriate.

Okay. Thank you.

Thanks.

Next question will come from Sharon. Your line is open, state your affiliation Sharon.

Sharon Lui, Wachovia.

Hi Sharon.

Hi there. Rich, I was wondering if you can just comment on the hydrostatic test that's planned on REX West for September, and just if the disruption may impact your cash flow.

We have announced, and it's really all posted on the REX website that we are going to hydrostatically test a section of the REX line. Generally from September 3rd to about September 26th. I really think all the information is there. We will - - that will have some modest impact on our revenues in September. That is all in our current forecast, but we are hydrotesting. We are in compliance with the DOT regulations now, but ultimately as we finish the project, the pipeline will need to operate at a higher pressure, and we need to test it in order to get that design level in compliance at the higher pressure level, and that's what we are doing. We are working with our customers on that, but right now we have it scheduled for that time period in September.

We'll obviously do it as quickly as we can. If we can do it more quickly we can, but the details, and it's obviously not a full curtailment of all the capacity. It's just again on the area from eastern Kansas over into Missouri, that needs to be hydrotested. So again a lot of the capacity on KMI and Northern Natural Gas and NGPL will still be there. So it's a curtailment of the part of the 1.5 bid we are shipping today. Obviously, we wanted to give our customers advanced notice, some of them may be able to find other outlets, and then we'll get it back in service as quickly as we can. It's relatively minimal in terms of the reduced cash flow for us.

Okay. Do you have an update I guess on Northeast Express?

Really, not much to report. We continue to work with some customers there to extend the line from Clarington on east over to Princeton, New Jersey, and perhaps on north to Lindon. We are not going to do, as we said, unless and until we get throughput signed up. We have some meetings with some of the shippers early next week, and we'll just see how it goes. Again if we could get, I think I've said last time, I think it's about 50/50. There are other competing proposals, and we'll just see whether we can get customers to sign up for throughput.

I will say, as I've said really briefly at the end of what I said, the prepared remarks, we have a number of pipeline projects we are working on. A lot of them close to our present lines, including an expansion of MPP, but several other major potential projects, none of which we are at all prepared to announce today, because we don't have shipper agreements signed yet. We are continuing to work on them. Some I think we will get, some we won't. That's the category I put Northeast Express in. Again, as I've said a million times we do not believe in the old movie title field of dreams build it and they will come. We believe in signing after throughput and then building it. If we could get throughput agreements signed, we will build these pipelines and if we can't, we won't, it's that simple.

Terrific.

Next question will come from Barrett Blasky. Please state your affiliation.

Yes, it's Barrett Blasky with RBC. Great quarter guys. A couple of questions over on the refined side. Rich you mentioned the elasticity point seems to have finally been found here. What do you think we need to back down to, in terms of commodity pricing to see this go a little more inelastic again?

I don't know. Clearly we looked at this very closely, Barrett. Clearly there was a difference between the first quarter and second quarter, the second quarter was more of a deterioration, and so I guess that would say that on gasoline, someplace between $3.75 and $4.00. $4.00 seems to have some magic impact, and there is some variation around the country. But certainly the trend line pretty well across the board was down for the first part of the second quarter.

So I've got to believe, and I don't know, but I've got to believe that at $4.00 people are cutting back. Maybe at $3.75 they cut back less, but I am not here to predict that. We'll just roll with the punches, whatever they are.

With prices the way they are, is this a disincentive to go do additional refines, products pipeline, and focus more on other areas?

I think it makes you look very carefully at your growth numbers, but we'll still continue to look at expansion opportunities when that expansion is needed to serve a market and try to look at the long term. But it will make us look very carefully at our growth assumptions, I think.

Okay. Thank you.

Next question will come from Becca Followill. Your line is open. State your affiliation.

Pickering-Holt, good afternoon. The follow-up question I have on the REX, the hydrostatic testing, any chance of moving that later in the year when it wouldn't have so much impact on basis?

We've discussed that with our customers. Right now, it's still scheduled for September. We are working to see what the most appropriate date, but right now the schedule posted on the website is still September.

To move the date, would you have to get DOT approval, or what would you have to do to move that date?

No we would not need DOT approval.

It's just at your discretion?

Yes working with our customers.

To clarify, you said you needed too the hydrostatic testing to increase the pressures, but why not do it before the lines went in service? Why now, why at this point?

Well, the lines were hydrostatically tested before they went into service, all the lines were, but in this particular case, in order to be able to allow us to operate at a higher percentage of the maximum allowable operating pressure, we needed to hydrotest to a higher - - actually I think, hold a spike test for a longer period of time, and it's that part of the testing that we need to do again. And clearly it would have been preferable to do before the pipe went into service, but we are going to get it taken care of it as quickly as we can, and in the meantime of course we are moving (inaudible).

Perfect. Thank you so much.

Thanks, Becca.

Next question comes from John Edwards. Your line is open.

A follow-up, Morgan Keegan again. I forgot to ask you, with the weak economy in other areas, are you seeing - - from your comments it didn't sound that way, but are you seeing any beginnings of relief on the cost side on your major construction projects?

No we are frankly not, John. I think that there is so much building going on in our area, our industry, that I think still the pressure is pretty great. There's some anecdotal evidence, we talked to contracts who say they are having the capability to do more spreads. They are training more welders. All those things are steps in the right direction, but so far we haven't seen the corner being turned. So I think that the pipelines and similar construction is still pretty hot.

Okay. And then I forgot to ask you with all the increment weather earlier this year, did that impact your REX-East schedule at all? I know you really hadn't started construction with most of the heavy rains, but did that impact you at all?

Not on REX-East. On REX-West construction is finished, but we are still restoring the right of way. Certainly that had some impact. Hard to plant new grass seed when you are under two feet of water, unless you want rice. So at any rate, it's had some impact there, but not on REX-East. But now, if we have rain later in the fall in Illinois and Indiana, then that will have an impact.

Thanks.

Our next question comes from [Yves Siegel]. Your line is open.

[Hawaii] Capital. Good evening. Just a quick follow-up on a potential growth projects going forward. Given the cost escalations of getting the projects done, for new projects will the tariffs be sufficient enough so that you can still get the same sort of returns that historically you have gotten number one, so the second part of that is given, as you discussed, the tightness in the market, how much lead time do you need to be able to procure pipe and get contractors to even contemplate new projects?

Your first question is certainly tariffs I think in general will be higher, I'm not speaking just from Kinder Morgan. Tariffs in general will be higher than they have been on the prior projects. If you had to replicate REX today at today's steel prices, today's compression prices, no telling what the tariff would be but it would sure be a whale of a lot higher than the, roughly, $1.10 across the whole system that is our present tariff. So tariffs will get higher in general to reflect the higher cost of construction.

That said, I think with Kinder Morgan and other companies this size may actually have an advantage because we are using a lot of the major contractors, particularly, when you get to 42-inch pipe, there are very few contractors who could really do this. We have good relationships. We know who is good and who is not. So I think we may have more insight into it than most.

So to the extent we can land new projects, we will make as certain as we possibly can that we have built in the current costs at that time of doing that project, including labor escalations and including pipe costs, and the pipe costs are fairly easy to lock down and most of these, they may not be prices you like, but you can ascertain what the prices are. And of course you do have some lead time in terms of getting in line at the mill because the permitting process on any of these projects is the most significant time consumer in the project. So it may take you 18 months to permit and nine month to build, in a hypothetical example. So you can lock in the price and you don't have to ask the mill to deliver today or tomorrow. That is where you get scalped. You can set a price and agree with them obviously for delivery 18 or 20 months out. So we will be happy to build more pipelines but only obviously if we can get a good return on those that we build.

Thank you guys. Thanks Yves.

Is that it?

At this time I show no further questions.

Well thank you all for spending the time with us. We are delighted with our quarter, and we'll talk to you again. If you have any questions, call Kim and she'll be happy to answer you.

At this time that will conclude today's conference.