金德摩根 (KMI) 2010 Q2 法說會逐字稿

Welcome and I would like to thank you all for holding for today's quarterly earnings conference call. At this time, your lines have been placed in a listen-only until the question-and-answer session. (Operator Instructions).

Today's call is being recorded. If you have any objections, you may disconnect. I would now like to now turn over to Rich Kinder, the Chairman and CEO of Kinder Morgan. Sir, you may begin.

Thank you, Ed. Welcome to our analyst call. Let me start by saying that as usual, we will be making statements within the meaning of the Securities Act of 1933 and the Securities and Exchange Act of 1934.

Also as usual I'll give an overview of the quarter. Then Park Shaper, our President, will go through the financial information in great detail. And then we will take any and all questions that you might have.

I guess in a general way, there are three main things to mention at the start of this call. First, we raised the quarterly distribution to $1.09 which is $4.36 annualized. I believe that's about the 37th time since we took over Kinder Morgan in 1997 that we have raised the quarterly distribution.

Secondly, we expect to meet our budget target of $4.40 distributions per unit for the four quarters of 2010. That is just a little short of 5% above the distributions we made for the four quarters of 2009.

Finally, and maybe most importantly when you look at the fundamentals of Kinder Morgan, all five of our business segments were above 2009 in terms of earnings before DD&A both the second quarter and year to date. In fact, all had double-digit increases year to date and all but the Canadian operations had double-digit increases for the second quarter and we expect all five of our business segments to beat their 2009 results for the full year 2010.

With that, let me look at the individual segments and take you through in a little more detail what is going on. Starting with our products pipeline segment, our refined products volumes adjusted for the January 1, 2010 mandated ethanol blending change in California which as you know probably know took the mandated ethanol percentage from 5.7% to 10%, if you adjust for that, I think that's the right way to look at the volumes. Our refined products volumes in the quarter were actually up 0.5% versus the second quarter of 2009.

That's the first year-over-year quarterly increase since the third quarter of 2007. Diesel volumes were particularly strong. They were up almost 5% and especially strong in the state of California.

Now whether all of this is a trend I'm not sure and we're taking a cautious outlook toward this volume growth. But I will say that it looks like we will turn out positive in July also on a month-to-month comparison.

Ethanol volumes in this segment were also strong. They were up 38% over the second quarter of 2009 and that is largely a result of the same California mandate increase that I referred to earlier.

If you look at our natural gas pipelines, they had a good quarter driven by several things. First of all we had two pipelines that are now fully in service that came on in the second quarter of last year, namely our Mid-Continent express line at Kinder Morgan Louisiana. We also had contributions from the treating assets that we acquired from Crosstex back in the fall of 2009.

Our Texas intrastates have performed well. Their volumes were actually up about 3% for the quarter and Rockies Express was also above its 2009 results. We also got modest help from our new KinderHawk joint venture that we closed in late May of this year.

Turning to the CO2 segment, as they had significant growth over $2009, that was driven by higher oil and NGL prices on the unhedged volumes and by a 5% increase in NGL volumes versus 2009 and the slight increase in switch CO2 delivery volumes versus the second quarter of 2009. The oil production at SACROC declined for the second quarter versus 2009 second quarter but it was about flat to our plan year to date.

The Yates oil volumes decreased more than we expected in the second quarter and we're working on strategies to improve that. It appears we've had a thinning of the oil column there so we're doing something to counter that.

We will be deepening some wells even deeper into the oil column, hope to get better drainage from our gas cap. We're drilling some infill wells elsewhere on the facility and we are using surfactants to try to float oil up from below. But that is a negative that our volumes at Yates have turned down somewhat although we expected to be able to correct this.

As we look at the full year at our CO2 operations, we expect to be on plan except for the impact of prices. Put another way, we are offsetting any downturn in crude oil volumes with reduced expenses and other enhancements that go to the bottom line.

And right now to remind you, we have a sensitivity of a little than $6 million per $1.00 change in the WTI price and that WTI price is between $5.50 to $6.00 below what we had expected it to be at the time we did our budget which was simply the forward curve at that time.

So it is an issue but certainly not an insurmountable issue for us. As I said, we still expect to be able to make our full distributions.

In our terminal segment where a number of factors contributed to what was a good quarter there, first of all, we had increased capacity and throughput on our Houston Ship Channel facilities as we brought more capacity online. We had higher steel volumes across our system and I think these numbers are pretty interesting.

If you compare to a year ago, we had an increase in revenue from our steel throughput of about $24 million which is significant. Another way of looking at it is just to look at steel making capacity utilization across the country.

It is running about 74% right now. That contrasts with about 45% in the second quarter a year ago. It's still not back to the high watermark in the 2002 to 2008 time period where the capacity utilization got as high as between 82 and 87%. That said, it certainly is a nice increase since the second quarter a year ago.

We have also been able to increase our bulk exports, particularly of coal, from our Gulf Coast and West Coast terminals. We got benefits from the acquisition of US development and Slay terminals which we made in the first quarter of 2010. Overall, on the bulk side, our total bulk tonnage was up by 27% versus the second quarter a year ago.

The gasoline imports at blending volumes over on the liquid side were down somewhat from the second quarter last year, although that didn't have a particular strong impact on the revenue line because most of our liquids revenue is results from long-term contracts on the storage and handling capacity that we have. In the ethanol handling side in this segment we were up 83% to 14.6 million barrels handled for the quarter.

If you combine our terminals and our products pipeline business segments, we think we are handling about -- we did handle about 45 million barrels of ethanol through the first two quarters of this year and we believe that is about one out of every three barrels of ethanol used in the United States.

On our liquids terminal side, in terms of capacity, we increased by about 6% in the second quarter of 2009 compared to where we were last year and we are now over 58 million barrels of capacity. Turning to Kinder Morgan Canada, we had growth there. It was pretty slight for the second quarter, more significant year to date.

It's been driven during all those periods primarily by increased throughput on our Trans Mountain system as a result of strong ship traffic across our facilities in the Port of Vancouver and we've had some modest impact of a positive sense from the strengthening of the Canadian dollar. So that is sort of a segment by segment review.

Let me talk about a number of other developments that occurred in the second quarter. First of all, we continue to increase our assets and our activities in the expanding natural gas shale plays across America and we're really doing that in three or four ways.

First as I mentioned earlier, we closed on our $900 million plus transaction, acquiring 50% of Petrohawk's gathering and treating assets in the Haynesville shale play. That entity is now renamed KinderHawk Field Services. We expect to have throughput on that system of over 800 million cubic feet per day by year end 2010 and ultimately we expect to have a capacity of about 2 billion cubic feet per day on that system.

Secondly we entered into our first major contract in the Eagle Ford shale in South Texas. This transaction will support our pipeline and processing joint venture with Copano. The contract that we signed calls for up to 200 million cubic feet a day of throughput on our 85 mile system and we expect to bring that system in service in the summer of 2011.

The combined investment of ourselves and our partners is about $137 million and we have additional capacity beyond this initial contract and we expect to sign additional contracts on that capacity in the near future. We also had a successful non-binding open season on our Marcellus NGL line just recently during the second quarter.

And while we negotiate binding throughput agreements, we're now starting our environmental permitting and right-of-way work or the roughly 230 miles of new pipe that will allow us to move NGLs from the Marcellus shale play up to our Cochin facilities in Michigan and on from there to fractionation plants and petroleum facilities near Sarnia, Ontario.

Our final or another play that we have in the shales is our joint venture line, the of Fayetteville Express pipeline, which we will move up to 2 BCF per day of production from the Fayetteville shale in Northwestern Arkansas. That is on schedule and below budget. We expect to be in service by year end 2010.

In our products pipeline segment, we had continued with significant expansions of our large refined products terminal at Carson, California in the Los Angeles area. We just completed during this quarter a $69 million expansion that added six tanks or about 480,000 barrels per day of capacity there.

All of those are under long-term contracts and we are now planning to invest another $85 million to build another seven tanks which will add an additional 560,000 barrels of capacity and six of those seven tanks are already under long-term lease and we expect them to come on service in 2013 and 2014. Now all these projects have gone through together with numerous other ones that we mentioned in our release I think demonstrates a wide range of opportunities that we have to expand and extend what we believe is a very broad national footprint of midstream assets at Kinder Morgan.

So overall I think we are seeing just lots of opportunities to grow our business. I think it seems to be increasing almost on a quarter by quarter basis.

Finally with regard to our SFPP products pipeline system, we paid $206 million to 11 shippers to settle various rate challenges at the FERC, some of which date back to 1992. We previously talked about this in prior calls but the actual settlement was blessed by the commission and we now have paid those dollars out to 11 different shippers.

Due to the support of our general partner, the distribution to KMP's LPs was not impacted by the settlement and in fact the reduction that we are taking and incentive distribution at the general partner level through an interim capital transactions this quarter is expected to allow KMP to resolve its remaining FERC issues and all its CPUC rate case issues without impacting future distributions to its limited partners. And with that, I will turn it over to the Park.

Thank you, Rich. As always, I'll be talking from the numbers. (inaudible) they're in the back of the press release so hopefully everyone has access to that.

The first financial page that you will get to is the GAAP income statement. If you look just above the bottom section which is segment earnings before DD&A, you will see our declared distribution per unit.

That's the $1.09 that Rich mentioned and that's in the press release. So we will be distributing $1.09. That's up about 4% from the $1.05 from a year ago. It's up from the $1.07 that we distributed for the first quarter.

So through six months, we will have distributed $2.16, up from $2.10 in 2009. And the easiest way to look at how we generate cash to support that is to actually turn to the second page.

And there if you look above the notes, it's the second line above the notes, and sorry, I don't normally work up the page here. But DTF per unit before certain items, you'll see $1.06 for the quarter, up from about $0.99 a year ago. So that's up about 7%. $2.24 for the six months, up from $1.95, so up about 15% for the first half of the year.

Now clearly the $1.06 is a little bit less than the $1.09 that we are distributing. We are a little bit short on coverage of about $10 million for the quarter. But if you look at the six months, the $2.24, you'd see the $2.16 that we are disturbing. So for year to date, we had excess coverage of about $24 million.

Now a couple of things to note here. Rich mentioned the interim capital transaction that was taken as part of the settlement payment for the majority of the plaintiff and the FERC rate cases regarding SFPT. And then we took an incremental amount so that we believe we're fully covered [up until 84], any remaining settlements in the FERC case and the CPUC case.

The $1.06 that I'm referring to actually treats that interim capital transaction like it did not happen. And the reason is we are trying to show you what we are generating on a recurring basis.

If we had shown you the number including the interim capital transaction, the distribution to the general partner would be lower and this $1.06 would be significantly higher. We don't think that's what you should focus on because again, that's a one-time item.

We are not saying that we're generating that on a recurring basis. So we have reflected this as if the full payment to the general partner had been made. And that's how you get to the $1.06. As we move up the page, we will show you the exact amount that was in essence added back, treated like it had gone to the general partner even though it hadn't in order to show that.

But one other point before I do that. While we have adjusted and we're showing this number, this $1.06 and the $2.24 as if the interim capital transaction had not happened, we have included in there the general partner give-back which is associated with the KinderHawk transaction.

So as part of that, the general partner agreed not to take any incentive distribution related to equity issued to finance the KinderHawk transaction until after 2011. That impact in the second quarter which is the first quarter that it had any impact was about $5.3 million.

And so an additional adjustment to the general partner distribution in the quarter is that the general partner has foregone about $5.3 million, again associated with the KinderHawk transaction. But with that, let's talk about the distributable cash flow per unit and what's generating that.

Immediately above that [EPS] per unit you see the net income per unit, $0.35, up from $0.34 a year ago and about $0.78, up from $0.55 a year ago for the year to date. Now again, the 2010 numbers there are treated as if the interim capital transaction did not happen.

And again, I will show you that number as we move up. DCF before certain items, $322 million, up from $274 million. That's a $48 million increase or almost 18% growth in distributable cash flow. For the six months, $676 million, up from $534 million; $142 million or almost 27% growth in distributable cash flow. So again, very nice growth being generated by the assets.

One thing I want to point out, on the interim capital transaction, if we hadn't made the adjustments that we made, these numbers would be bigger. We are not showing you the bigger numbers because we we don't think those represent what we generate.

We know they don't represent what we generate on a recurring basis. The adjustment that we made has reduced distributable cash flow and has reduced distributable cash flow per unit and has reduced earnings per unit.

Sustaining CapEx, about $48 million in the quarter, up from about 41 in the second quarter 2009, a little over $80 million for the first half, up from about 71 in the first half of 2009. Our current expectation is that we will have about $197 million of sustaining capital for the year. That is a little bit under our budget of about $207 million. But that is the forecast currently.

The two lines above that express an endeavor contribution and booked cash taxes net. Essentially what we're doing there is we're backing out equity in our earnings with respect to equity -- with respect to Express and Endeavor and putting in cash distributions from those assets.

And then similarly, we're backing out book taxes and putting in cash taxes. The important thing I think to recognize here is that we're on budget in terms of cash distributions from these assets and in terms of cash taxes.

So on budget there, expect that we will be on budget for the year. DD&A you will see above that, it is up for the year both for the quarter and the six months.

It is below what we would expect based upon our budget and that is due to the incremental reserves at CO2. We increased our reserves again at the end of the second quarter just like we did at the end of the first quarter.

At the end of the second quarter it was related to additional patterns in a new area of SACROC that we were flooding and then also to an increase in oil prices. As of the end of 2009, the accounting rules changed and we are now using a rolling 12-month average.

So it's prior 12 month average oil price. And so that average oil price went up as we went from the first quarter to the end of the second quarter and that led to a small increase in reserves.

Limited Partners net income before certain items is above that. You'll see up about 14% for the quarter and up 55% for the year.

And then directly above that is the line I've been referring to, it's called General Partner's interim capital transaction impact. The number that shows up there is $167 million.

The true impact to the General Partner in terms of cash flow is $170 million. It shows up as 166 or 167 here because of two reasons.

One, some of it shows up in minority interests which actually is in net income above this line. And two, some of it shows up as earnings rather than cash just because of the income statement. But again, the true impact, the true reduction in distributions to the General Partner in the quarter is $170 million.

Now what we are doing here is we are reducing income by that on this page to act as if that $170 million has really been distributed. And again we are doing that so you can see what we look like on a recurring basis as opposed to get distorted numbers from the interim capital transaction.

So the line above that shows what actually is going to the General Partner in terms of incentive distributions this quarter, $93 million and it's about $343 million year to date for the first half. Above that, you have net income attributable to KMP before certain items.

As always, we think the most meaningful numbers are distributable cash flow and distributable cash flow per unit and we would certainly focus on those when you want to see how we are performing. Now with that, I will jump up to the top and talk about the segments a little bit more.

Rich already touched on most of this. Our products pipeline's up about $23 million for the quarter, up about $41 million year to date relative to 2009.

It is right on its budget and we expect it to be on its budget for the year. And we're getting strong performance out of the West Coast terminal, Central Florida, Transmix Southeast terminal. So again the products pipelines are performing well, expect them to be on their budget for the year.

Natural gas pipeline's up about $20 million for the quarter, up almost $38 million for the first half relative to 2009. They were also above their budget for the year.

Now that's being driven in part by the KinderHawk transaction. although really KinderHawk has not contributed a whole lot to date. But as you look forward for the year, it will make contributions, bigger contributions in the second half.

And then, by strong performance at some other assets, the intrastates were above their budget in the first half. Rockies Express, reflecting back or remembering back to the first quarter conference call, we talked about the $15 million hit that Rockies Express took in the first quarter.

Rockies Express has done a very good job in recovering from that and was above budget in the second quarter. And while we don't expect REX to be back on its budget for the full year, it is getting very close.

The treating assets, Mid Continent Express are all having good first halves and expected to have a strong full year. And so the natural gas pipelines will be above their budget for the year.

Again part of that is driven by the acquisition of KinderHawk and then part of it is strong performance of other assets offsetting the $15 million hit that we took in the first quarter at Rockies Express. CO2, up $39 million in the first quarter, up $119 million in the first half, essentially consistent with budget in the first half. So we expected this kind of performance. Prices are stronger in the first half of 2010 than they were in the first half of 2009.

As Rich mentioned, the SACROC is just slightly below plan in terms of its volumes. Our NGLs are essentially on plan. Our CO2 volumes are a little bit above plan. Yates volumes are below plan and Rich mentioned some of the things that we're doing to address that.

In addition to that, prices especially for the second half of the year are below our budget. You may recall and I said in the press release, our budget called for average across the year of about $84 per barrel.

It's actually just a little bit under that. Current prices are under that and while we had most of our current production hedged, we still do have that sensitivity, a little less than $6 million per barrel for a full year to $6 million per $1.00 change per barrel sensitivity to that commodity price. That means as we look at the current oil prices, we think CO2 will be a little bit under its budget for the full year.

On the terminal side, up almost $17 million in the quarter, up about $33 million year to date relative to 2009. Terminals are just slightly below its plan. As revenues were up, if expenses are also up, part of that revenues and expenses are a function of acquisitions.

And then part of it is a couple of smaller outside services and other maintenance items that have come through in the first half of this year and probably will continue in the second half of the year. So terminals right now when we look at its forecast, just slightly under its budget for the year.

Kinder Morgan Canada, a little bit above last year, about $11.5 million above for the first half. It is on its budget, we expect it to be on its budget or really just a slight bit above for the year.

Total segment earnings before DD&A, $811 million, up $100 million in the quarter. $1.64 billion, up $242 million in the first half. So again, very strong growth out of these segments relative to last year.

Now, our total budget in terms of segment earnings before DD&A for the year is $3.358 billion. We actually expect it will come in just a hair under that, maybe $20 million or so under it, all driven by CO2 and that's essentially a function of oil prices.

Again, that's very small variance relative to north of $3.3 billion of total distributable cash flow before DD&A. Hopefully we will be able to earn some of that back but as we look at it right now, we expect segment earnings before DD&A to be just slightly under our budget.

With that, I will drop down past the DD&A and past the segment earnings contribution after DD&A and you will see G&A expenses for the quarter about $93 million. That's up from about $74 million in the first half a year ago, for the six months $192 million, up from about $158 million.

These numbers are also slightly ahead of our budget. We did expect that there would be an increase in G&A this year.

This has -- again for the first half we're about $12 million ahead of our budget largely or unfavorable to our budget, higher costs than are budget, largely a result of insurance costs, a lot of which we talked about in the first quarter and then some legal costs and some benefits cost. And some of that is going to be timing and we expect it to come back to us throughout the course of 2010.

Insurance, you'll see $124 million compared to $101 million a year ago and $239 million compared to $205 million a year ago. It is up largely because our debt balance is up. Our overall interest rates are down just slightly, so slightly offsetting the impact of the higher balance.

And then we get into the certain items, looking at the certain items in this quarter, the allocated non-cash long-term compensation, and I will say this again, we have to represent this on KMP's income statement. This is compensation that KMP will never have to pay for, doesn't have to issue any equity for, doesn't pay any cash for, will never be responsible for but we have to show it on its income statement.

Now acquisition costs are just associated with deals that we have done. Marked to market and ineffectiveness of certain hedges, you'll see that deposit is $7.8 million. This is timing.

We said this when negative amounts show up there and these dollar amounts will move in and out. They ultimately will all cancel out.

The important thing to realize is that the ultimate net effect, the ultimate economic impact shows up in the segment at the time that the transaction occurs. That's the way it's always been recorded, that's the way it is still reported. Again accounting makes this run some marked to markets through the income statement prior to the periods when these transactions actually occur. But when the transactions occur, the net impact shows up in the segments.

And then you'll see a bigger item, $15.5 million negative related to environmental expense and loss on asset retirement. This is a former terminal property that we had in Southern California where we have demolished the tanks and we are remediating the property.

We will realize in sales proceeds more than what we are spending in demolition costs and remediation costs and it will even exceed the book value of the tanks that we are writing off. Of course that write-off of book value is non-cash.

But we are going to sell this property. We actually already have agreements to sell it. We just need to finish up the remediation.

What that means is what you're going to see in future periods are positive amounts come through down here that more than offset this $15.5 million loss. Now really again these are the expenses that we need to go ahead and run through for accounting purposes. But for cash purposes, ultimately we're going to end up ahead on this item.

An then fire insurance reimbursement, this is an insurance reimbursement related to prior events. As we write off assets that are associated with an incident, then we run that down through certain items down here as we then recover from insurance companies, then we also run the positive through down here. So those are really the certain items. Most of this again is just timing which is pretty consistent with what normally shows up down there.

I'll flip back a page just briefly because I want to show you net income per unit on the face of the income statement which is a couple of lines above the declared distribution per unit. You will see in the quarter it shows up as $0.88.

Now the reason that is so much bigger is because that includes the impact of the interim capital transaction. As I mentioned, we had pulled that out on the second page to try to give you a more realistic perspective of what our operations are generating.

If we had left it in, the numbers on that second page would've been much bigger and that's what you see here. $0.88 in earnings per unit for the quarter because the General Partners distribution has been reduced. So again, I don't think that gives you the best sense of what's going on with this business.

With that, I'll go to the balance sheet, which is the last financial page of the press release. Just walking down that, cash and cash equivalents essentially unchanged, other current assets essentially unchanged.

Property and plant equipment goes up as a function of acquisitions and CapEx and gets reduced by depreciation. Investments up significantly, over $1 billion. KinderHawk is 50% of that asset that we purchased from Petrohawk is the biggest piece of that and we also had some contributions to Rockies Express and to MDP since the beginning of the year.

Deferred charges and other assets up a little over $400 million. Most of that is marked to market of hedges flowing through. So total assets of about $21.8 billion, up about $1.6 billion from where we were at the beginning of the year.

On the liability side, notes payable and current maturities of long-term debt. I'll talk about debt in total in a minute. But just so that you know what the maturities are, we do have a $250 million maturity in November of this year and a $750 million maturity in March of 2011. And then the remainder of this amount is what we have outstanding on our credit facilities or in commercial paper.

Other current liabilities is down a little bit. Most of that is accounts payable and the marked to market of the hedges.

Long-term debt I will talk about in a moment. The value of interest rate swaps, that just fluctuates with the forward curve for interest rates. Other is down about $365 million. The vast majority of that is the marked to market on the hedges.

Accumulated other comprehensive loss, again the marked to market on the hedges there. Other partners capital is up about $155 million.

From the beginning of the year, it's up about $315 million from the end of the first quarter largely as a function of the equity we issued in the quarter. And I will talk about that when we reconcile the debt.

And so that takes you down to total debt of about $11.7 billion compared to at the end of the year into 2009 or about $10.4 billion. So for the six months we're up about $1.2 billion and I'll go through that in a minute. For the quarter and from the end of the first quarter to the end of the second quarter, we were up about $826 million. Again I will reconcile both of those for you in a minute.

First let me talk about debt to EBITDA. We're at 3.9 times at the end of the second quarter. That's up from 3.8 times at the end of the year, so the beginning of this year. And also we're at about 3.8 times at the end of the first quarter.

Now if you remember back to our budget, we budgeted for this number to go down throughout the year. And in truth, it is. But it is being swamped or it's actually being distorted by the Petrohawk transaction.

So if you think about it, the Petrohawk transition closed in May. We issued all of the dollars. So we paid out all the dollars for that transaction at that point in time.

So all of the debt associated with that transaction shows up here on the balance sheet. But we got less than half of a quarter of EBITDA from that transaction in this quarter and really what we're looking at here is last 12 months of EBITDA. So you have a very small fraction of a year that shows up for that.

So that's going to distort this calculation and really it's going to distort it all this year and it will distort it all the way until a year from now, until the second quarter of 2011 which will be the first quarter in which we have a full year of EBITDA from the Petrohawk transaction in this calculation.

So just real simply, if you back out the impact of the Petrohawk transaction, this ratio of debt to EBITDA would actually be at 3.7 times. And so we would be down from where we were at the beginning of the year and we would be down from where we were at the end of the first quarter, exactly as we expected.

So, let's reconcile the debt real quick. As I said in the quarter, it went up. Debt increased by $826 million. In the first half, it increased by about $1.26 billion.

CapEx in the quarter was about $204 million. In the first half it was about $368 million. Acquisitions in the quarter, about $922 million. That is essentially the Petrohawk transaction.

In the first half, about $1.23 billion. And so that is the Petrohawk KinderHawk transaction plus the US development transactions, the Slay terminals transaction and the Mission Valley terminal that we purchased. So again, for the year, about $1.23 billion in total acquisitions.

Contributions to JVs, about $45 million in the quarter, about $180 million in the first half. And then we had the cash that went out for the FERC settlement, $206 million for the quarter and $206 million in the first half.

What that means is that in the quarter, we invested just a little bit less than $1.4 million. And for the first half, we have invested a little bit less than $2 billion.

Debt has not gone up by that much so where did we generate cash beyond that? An equity issuance in the quarter, about $439 million, and in the first half about $522 million.

Now that equity issuance one is on a net basis. So it's net of the cost of issuing it at any discounts that have been taken on it. And it also does not include a $75 million private placement of KMP units that we did at price at the end of June but that didn't close until July 2.

So that cash has already come in. That transaction is closed but because these financial statements are as of June 30, it doesn't show up here.

So in truth as of July 2, debt was $75 million lower than where it was. But again, we are not including that. So the equity issuance, the $439 million in the second quarter again does not include that $75 million incremental that was done and closed on July 2.

Additionally, we retained cash related to KLR distribution of about $93 million in the quarter, about $183 million in the first half. That number continues to grow.

It will be $96.5 million related to the distribution that will be paid in August. So rapidly approaching $100 million per quarter that we effectively issued through the KLR distribution.

And then there are working capital and other items of about $19 million both for the quarter and the first half. And those were a source of cash of about $19 million.

And so again, if you net those sources of cash against the investments we made in the quarter and the first half, you get to an increase of debt in the quarter of about $826 million and an increase in the first half of about $1.26 billion. Now the working capital and other items, again relatively small [versus] a source of cash of about $19 million.

There really are a number of things that are all relatively small but they move in different directions and even move in different directions between the second quarter and the first half. None of them are significant enough I think to go through. But again, those items did provide a source of cash of about $19 million for the quarter and the first half.

And then on the CapEx, just a little bit of detail although really there are a lot of small projects that are adding up to these total amounts. In the products pipeline in the second quarter, expansion CapEx was about $23 million, and in the first half about $53 million.

Our ongoing expansions at Carson, our Transmix relocation in St. Louis, some work on the Cochin [East End] and then a variety of smaller projects make up those amounts. On the natural gas segment, about $17 million in the quarter, about $33 million in the first half.

A little bit of remaining dollars on Kinder Morgan Louisiana, continued expansion at our Dayton storage facility and then again, a number of smaller projects. CO2 we spent about $112 million in the second quarter, about $182 million in the first half.

Most of that is being spent at SACROC, although we also had the [Eastern shale] pipeline which is under construction and then the CO2 project at Katz which is under development. On the terminal side, about $50 million in the quarter, about $95 million on a year-to-date and again that's a whole bunch of smaller projects.

And then spent a little bit at Kinder Morgan Canada, about $2 million in the quarter and about $5 million in the first half. And those are the financials, I will hand it back to Rich.

Okay, Ed, we will take any questions. Open the line for questions, we will take any questions that you might have.

(Operator Instructions) Steve Maresca, Morgan Stanley.

I have two questions. First is on a recurring business issue and then on one of your growth projects.

Just to go a little bit deeper into detail on the CO2 issue at Yates. Is there something you can just enlighten us on in terms of timing?

You mentioned obviously, Rich, about a thinning oil column and looking to deepening wells and get better drainage for the gas. What is the timing in getting this turnaround and I guess what is also the certainty on getting it turned around at Yates?

I will turn it over to Tim Bradley.

With respect to the long-term depletion plan at Yates, when we acquired the property from Marathon in 2003, we forecasted that the oil production rate would decline at at a fairly gradual rate from the then current rate of just under 20,000 barrels per day. Since that time over the last several years, we have been able to harvest portions of the oil column, intentionally thinning it and getting oil production rates up to 25,000, 26,000, 27,000 barrels a day over the last few years.

So the point that we are running into at this juncture is that we thinned the oil column to a point where we don't think it's wise to continue to thin it. And the way that we would do that would be to add compression and drill more wells.

Looking at the economics of the long-term depletion plan at Yates, we just don't think that's the right move. So now the right move is to balance the rate of drainage down from the gas cap and the amount of withdrawals from the oil ramp.

And we think that based on our simulation studies and work that we have done with our partners, the long-term equilibrium rate is closer to 23,000 barrels per day just based on those physics alone. And that is about what we have been running for the last two or three months, 23,500 or thereabouts.

There are other things we could do at Yates other than just relying upon this drainage mechanism though and Rich touched on these. On the western side of the field, there's an area of the reservoir that is not overlaid by a gas cap.

This is an area of the field that we can drill infill wells and have been doing so for the last two years. Unfortunately these wells are not big producers. Generally they're producing 30 or so barrels per day per well but we have locations that could be -- over 100 of these locations that we could drill this year, next year and the year to come.

So that's one of the things we could do. Another thing we can do is we can is we can deepen wells that have gassed out as a result of this thinning back into the oil column and that will help us produce the oil that remains more efficiently than continuing to [produce them out of] these wells that are completed a little bit higher.

So my expectation is that unless we can develop a surfactant opportunity which represents reserves below the oil water contact, we are doing work on that this year to try and prove up that technology, the gravity drainage process will probably result in a slowly declining rate at Yates over the long term that could be offset by additional development from below the oil water contact with surfactant. But that is yet to be proven and established.

Okay, as a brief follow-up, is this level that you had this quarter something that you think is a base level for the remainder? Or like you said, is it something that will slowly decline from here?

For the long term, it will slowly decline but we are taking steps to offset it to try and keep it flat. What's in our evergreen is a very flat production profile with the recent levels that we've seen.

Moving to one of your projects, Rich, the KinderHawk that you closed, can you talk a little bit what the next steps are? You mentioned you expect to be at 800 million cubic feet a day by the end of the year and then 2 billion obviously capacity ultimately. What are the next steps to get the volume ramp-up in terms of operationally or money spent? If you could discuss that, that would be great.

Well the first thing is that we are working very hard to sign up additional third parties for throughput on the system. And that is running ahead of what we had in our acquisition assumptions.

And in fact, the distributable cash flow that we will receive from KinderHawk is running ahead of what we had in our acquisition assumptions for the balance of 2010. An early look at volumes in 2011 appears to be running ahead also.

So we are so far we're having good luck in increasing these third-party volumes. And we expect to be able to do even more of that. We have several or a few significant contract negotiations underway now, but I think we'll get to a point of assigning within the next -- certainly in the coming quarter.

So we think all of that looks good. The capital that is associated with that obviously will be in the budget.

It looks pretty much on par with what we thought it would be when we did the acquisition. So so far so good I think is the answer.

Longer term, obviously, we are very interested in shale plays. We talked about the steps we've taken in the Eagle Ford and that looks very good. I think we're going to have additional opportunities there also. So, we're very bullish on our activities in the shale plays.

Okay, well I'll get back in the queue but thanks a lot for the color.

Jeremy Tonet, UBS.

I was just hoping if you could give a little color on the natural gas pipeline segment, looking at it quarter on quarter, looking at first quarter versus second quarter of this year and what were some of the drivers of the variance there?

That seasonality is typical in the Texas Intrastate. If you go back and look at prior years, you'll find a similar pattern.

So it was strictly seasonality? Because in 2009, I see the same step but then looking back further, I didn't see quite as much of a seasonality so --

Sometimes there are different things that happen in different quarters and actually I think if you go back to 2008, specifically in the Texas Intrastate, we had some items that were larger in the second quarter of that year. And so there are other things that can shift those dynamics but that is a typical pattern. It was consistent with our budget and our expectations.

Okay, great. Looking at the natural gas pipeline operations outside of the KinderHawk acquisition, is everything reaching -- in line with the budget that you expected in isolation, not looking at that acquisition?

Yes, I think Park went through some of that and I did too. If you look at it, we expect to be above our plan for the year and KinderHawk will certainly contribute to that on a full-year basis.

It's not contributed very much yet because we only closed the thing on May 21. But, the other moving parts are again as Park said, we had this force majeure event on Rockies Express.

The last part -- the easternmost part of Rockies Express from late November until roughly the end of January. And in January, that cost us our 50%, $15 million.

So, we are overcoming that and as Park was saying, right now, they have clawed back within Rockies Express about two-thirds of that shortfall already and we're hopeful we'll get the rest of it. That's not in our numbers right now.

But at any rate, yes, we're very satisfied. The rest of the -- he said, year to date, the Texas Intrastates are above plan.

We expect for the whole year they will probably be about on plan. But because some of this is O&M shifting from quarter to quarter. But overall, yes, natural gas pipeline even if you strip out KinderHawk, looks good.

And, Jeremy, the only thing I will add to your first question is actually there are some specific transactions that the interstates have entered into in the last couple of years which even increased that seasonality. In truth what they do is they add income in the first quarter.

And so if you go back and look at prior years, I think you will see it. It may be bigger now and again, that's just a function of the different transactions that we have entered into around that asset.

Ted Durbin, Goldman Sachs.

Just wanted to get a little bit more detail on your Marcellus NGL pipeline, both on the upstream and the downstream side, kind of how the interest is looking. And if you could give us a sense of what the cost estimates are looking like, where the tariff might come in.

And all this is preliminary, obviously. We had a nonbinding open season, the response was good. Now I've been around this industry a long time and I told you guys many times, nonbinding open seasons are just what the name implies and until you get contracts signed, the horse is not in the corral.

That said, we had a good nonbinding open season. We are now working to finalize contracts with some of those shippers.

In the meantime, we're confident enough that we're going to get a project off the ground that we had begun, our environmental permitting and preliminary right-of-way work while we are signing up the binding contracts.

Again we think it's a very good project and we think we will be able to move NGLs across Ohio -- it's about 230 miles of new construction -- into our Cochin system. And if you look at the overall costs, and these are still very rough numbers, but it would between 500 and $550 million, about the middle of that range, we think. The tariff we previously said was around $0.15. Is that right (multiple speakers)

Yes, but I think the right way to think about it is given the assets that we have already in service which which is primarily Cochin, we believe that we will be very competitive on tariff. We think that ultimately we will be able to offer the most economic project to shippers.

Because we're just building fewer miles than anybody else would because we have this Cochin facility. So we are encouraged right now and we are looking forward to be a successful project.

But again, we're certainly not going to build it until we have contracts. I think we're also going to have the opportunity to -- which is one of the advantages of the setup we have -- to move. We do have some customers who want to move NGLs from the Mid Continent also up to Windsor and Sarnia which would mean moving it across Cochin from west to east which we can certainly do also.

Okay, thanks. If I can just ask one more project related question. You had Enbridge file to build their Gateway pipeline to take crude oil to the West Coast of Canada just a month or two ago.

Can you just discuss the relative merits of that proposal versus what you guys sort of proposed and how you're thinking about that? I realize it's a long-term project but just kind of compare and contrast?

Well I don't want to -- what Enbridge does is their business. I can just tell you that we have a very viable pipeline now that moves 300,000 barrels per day down from Alberta to Vancouver and about one-third of that on into Washington state.

A big chunk of the rest of it is now going across our docks at the Port of Vancouver. And we have been setting records for the amount of crude that is moving onto ships. A lot of that is going to California but some of it is now beginning to go to Asia and elsewhere.

It's a system that can be expanded incrementally. For example, the next expansion that we would have would be about an 80,000 barrel expansion. So the advantage to our customers, to our shippers is that they don't have to sign up for 500,000 barrels per day or 400,000 barrels per day.

They can sign up for a [quarter or all] of 80,000 barrels per day of the next expansion. We have the capacity to eventually take that up to really as much as 700,000 barrels per day through a series of expansions.

So what I like about our position is right now, we are the only conduit for Alberta crude oil to the Pacific coast. We're built, we are in service, we have a long record of moving crude across there and across the dock and we can be expanded on a very incremental basis, again depending on the needs and wants of our customers.

So I think our position is very good. I don't know if we also have the capability of building a pipeline off of our main system across to Northern British Columbia if the customers demand it that way. But we have real throughput from our customers of about 300,000 barrels per day and we think that will move up over the next few years.

Okay, I appreciate the color. Thank you.

Emily Wang, Raymond James.

You guys ,omd talking a little bit more about the sequential growth in the product volumes? I know you guys mentioned that diesel was particularly strong in California.

Can you talk a little bit more about gasoline? And if you think the volume this quarter was just abnormally higher or if this could kind of be a good base run rate going forward?

To be clear, we weren't talking about sequential growth. We weren't comparing year over year.

Yes, we're comparing year over year second quarter of 2010 to second quarter of 2009. So with regard to that growth, again as we said, this is on an overall refined products volume, this is the first time we've had year-over-year quarterly growth since back in the third quarter of 2007.

What we have found was that gasoline I think is a pretty good story. But diesel is a strong story and the only weakness that we have right now is the jet fuel.

The jet fuel volumes were still down on a year-over-year comparison basis. I think that's a result of frankly just fewer flights in and out of some of the airports we serve particularly in California, Arizona and Nevada.

I'm cautiously optimistic but I would say [cautious enough]. When you're down in the trenches fighting these battles day after day and week after week, it's sort of refreshing to look at the full quarter's numbers.

I guess if you look at our overall Company position, the positives would be the tremendous jump again on a year-on-year basis in bulk volumes across our terminals group, the tremendous increase in ethanol handling and then this modest increase in refined products volumes. So I guess you could take those and say gee, it looks like the economy is coming out of the tailspin.

But I'm a little more cautious than that. I think it is, but let's wait another quarter or two and see. You know, just looking, we're at 21 days into July, it looks like overall if you put all the products pipelines together for July and again compare it to July a year ago, we are modestly up again this month. But one month doesn't make the whole quarter, so we'll have to see. so we will have to see.

And the reason that it's important and I think that was Park's point, the reason that it's important is to compare calendar quarter one year to calender quarter the prior year is that there's tremendous differences in utilization based on the quarter of the year. So the only apt comparison I think is quarter to quarter, not sequential quarters. Did that answer your question?

Yes it did. I was just wondering, are there any particular areas that you're seeing the stronger volumes?

Actually it is sort of a mixed bag. For example, we actually saw a pretty nice pickup in Las Vegas for gasoline.

On the other hand, jet fuel at McCaron which is the Las Vegas airport was down. In California, as I said, if you strip out for the ethanol blend increase, gasoline was up in California.

And as I said, diesel was up very nicely in California. The Orlando airport in Florida was for some reason up very nicely. So it just varies.

Military volumes in California and Nevada were up nicely from a year ago. Arizona volumes were down somewhat from a year ago as were Southern California volumes. So it's really a mixed bag. I think the only way you can get to it is just to look at the overall totals for the whole system.

Okay great, great. And shifting gears over to the natural gas side, the Eagle Ford is definitely a very competitive area right now and you guys are able to get the SM energy commitment. How are talks going with some other shippers on signing commitments right now?

I think Don Martin who heads our group is [in the natural gas grid]. We feel very good that we're going to have significant additional capacity signed onto that line.

As we have previously said, the joint venture between Kinder Morgan and Copano, we agreed to build this gathering system together. And then we agreed we would make 375 million cubic feet a day available on our South Texas long line system and they would make the same capacity available on their Houston central processing facilities.

So we're offering one-stop shopping. And the SM contract as we've said provides for up to $200 million a day. It ramps up. We believe we will be able to fill the rest of that capacity on that line.

In addition -- that's the rich gas line. In addition, we are in serious discussion to increase pipeline capacity to build, to serve some customers in the lean gas portion of the field.

So we feel good about where we are in the Eagle Ford. It is competitive. The big advantage we have is that we have a huge infrastructure of natural gas coming out of there.

We're able to go in there and actually buy the gas, redeliver it or transport it down to our customers, all the way into KB or all the way into the ship channel. And we are able with our joint venture of Copano with its rich gas to actually process it on the way at Houston Central.

So we also of course have our Monterrey pipeline that moves natural gas the other way down into Mexico. So we have a lot of outlets for this gas and I think that gives us a competitive advantage but there are other midstream energy companies who have significant positions there too. I'm pretty bullish about what we're going to see in the Eagle Ford except we will be very careful to make sure we get long-term contracts signed up.

Brian Zarahn, Barclays.

I just want to follow up on the Marcellus lateral, what do you estimate the capacity will be on the pipe?

Well we think the capacity will start out in the -- probably in the 70 per day range but we could expand it up to 200 per day. So, that's another advantage of it. We can start fairly small and ramp up as the production and the need to move NGLs out of our the Marcellus comes online.

Okay (multiple speakers) please continue.

So it's a good project from a lot of standpoints. Again, the interest seems to be very good from our shipper customers and we've just got to get that converted into contracts before we actually commit to build the line.

So if you (inaudible) 70,000 barrels a day, what percentage of that capacity would need to be contracted out for you to proceed?

Well I'm not going to get into details of it but certainly far less than 70. It's a very viable project at far less than 70,000 barrels.

Okay, I guess given all of your new projects and recent acquisitions, can you give an update to your 2010 growth CapEx budget?

It's about 150 -- 135 to $150 million incremental to the plan.

The expansion CapEx is and then of course we had -- I can't remember how much in acquisitions in there and we have significantly exceeded that. We had a couple hundred in the budget. It was just from the things that we have identified like a USD and I think we had a play in the budget (multiple speakers)

And we have some incremental Petrohawk.

Right.

On the organic side, you're saying about an incremental $150 million?

Yes. 125 to 150. It will move around a little bit.

Noah Lerner, Hertz Capital.

Quick question, more of a big picture question. I was wondering if you could comment at all what type of impact you think some of these regulatory changes, whether it's the additional disclosure for the volumes of the intrastates and the FERC or from the derivative side from the Fin Reg that was just signed, what impact if any it might have on the business operations and the competitiveness or is it just going to be immaterial, it's not really going to impact business as it's been going on?

Well I think anytime you have more regulations, it puts somewhat of a burden on any kind of any company of this size. I think the regulatory changes as far as reporting intrastate volumes, I don't think we think is significant.

It's a little more reporting effort but really won't have any impact on our business. The derivatives, we will just have to see how that plays out. I think it will be a year or more before we actually get the ranks to see what would happen and there is the possibility you could have some additional costs in terms of derivatives. I don't think it will be significant in the overall scheme of things, but we'll have to wait and see when the regulations come out.

One other final question, if I may. There's been reports in some of the papers about some of your partners looking to bring the GP public.

I just wonder if you could comment on that at all. To your knowledge, are they looking to divest 100% of their interest right away or is it just to get some liquidity for their funds (multiple speakers) investors?

KMI is not a publicly traded company and we don't have any comment about that.

John Edwards, Morgan Keegan.

I have a few questions here. Just one more question on the liquids line out of the Marcellus with respect to timing. When do you think -- assuming you get your -- the rest of your negotiations out, when do you think that would start to go into service?

If we get the rest of the negotiations underway, that's one reason we are starting some of the environmental permitting right now, is we would expect to be third quarter of 2012 we would expect to be in service. And that is assuming we get the contracts signed on a timely basis.

But that's one of the reasons we're doing it now. You may remember from the days when we were building the REX pipeline, the infamous Indiana bats. There were only certain times of the year when you can go out and do certain work because God knows we wouldn't want to disturb these little bats that are nesting or whatever bats do.

So there are some windows of opportunity and that is really what we are doing on the environmental permitting side is getting -- taking advantage or -- taking advantage of those windows of opportunity. But if all that works, we can bring it online by like I said, mid third quarter 2012.

And so how long of a construction time would you envision?

Well the construction time would be basically one construction season because we would run it in multiple spreads. But the -- as you know, the big thing here John is permitting and getting the right of way, permitting and getting the -- all geared up and ready to go. The construction of this won't be the problem from a time standpoint.

Okay, great. And on your interest expense this quarter, just where are you relative to budget on that?

We are actually -- go ahead, Park.

We're on budget and we expect to be slightly below budget for the year.

For the year we expect to be a little bit below budget, few million dollars below budget.

Any comment on the ratings downgrades on MEP and REX by some of the ratings agencies?

No, I think it's just you referring to S&P.

Yes.

I think the important thing is that all of these are investment-grade and they're now stable. David Kinder, you want to add anything to that?

No, I think that's the main point. I think again, John, they look at basis differentials overall as a part of their analysis as well and I think make to a certain extent a judgment on what it will look a long way out and we need to see more time play out and that's why we had all these pipelines built when we had subscribed or were under full subscription from our customers.

I think that's the important thing is that these pipelines are fully contracted for nine years plus. And so there is no issue in the near term. And exactly what the pipeline [sells] and the basis differentials will look like nine years from now is difficult to predict.

For example just during this quarter, the spreads widened significantly on REX and we actually had some period of time where the total basis differential from one end of the system to the other was north of $1.00. So it just varies.

I think what a lot of people haven't quite realized is this natural gas transportation market in North America is inordinately complicated. And to me, the real advantage is going to be if you have steel on the ground and you are a good commercial operator of your pipeline systems, chances are you're going to do very well because it's always the cheapest alternative to route your throughput through pipe that's already built as opposed to -- if you're a shipper -- as opposed to contracting on something that hasn't even been built.

So I think if you look at our pipeline network and others too, I think having that steel on the ground is going to pay real dividends for many, many years even beyond the original time commitments which were 10 years, now a little over nine years, on these pipelines.

Right, I agree. Park, could you give us the maturities again on the debt? I think you said -- I missed the details on that.

The near-term maturity is $250 million in November of this year and then $750 million in March of 2011.

Great, thanks. That's all I had.

Okay.

At this time I show no further questions, sir.

Okay well thank you very much. Thanks everybody for listening in and have a good evening.

At this time that concludes today's conference. You may disconnect and thank you for your attendance.