金德摩根 (KMI) 2011 Q2 法說會逐字稿

Welcome and thank you for joining the quarterly earnings conference call. I would like to inform all parties the call is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the call over to Rich Kinder, Chairman and CEO of Kinder Morgan. Thank you. You may begin.

Thank you, Tamara, and thanks to everyone for calling in. This is the Kinder Morgan earnings call and we will be talking about Kinder Morgan Inc. and Kinder Morgan Energy Partners. Kinder Morgan Energy Partners or KMP is one of the largest MLPs in America and KMI, which is a C-Corp, owns the general partner of KMP together with LP units and KMP and KMR and a 20% interest in Natural Gas Pipelines of America.

As usual, we will be making statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Also as usual, I will give an overview of the quarter. Then Park Shaper, our President, will take you through the financial details and then we will be available for any and all questions that you may have.

Let me start with KMI. The news here is that we raised the dividend $0.29 a quarter or $1.16 per year to $0.30 a quarter or $1.20 annualized. If you go back to the time of the IPO, you will recall that we talked about -- we anticipate $820 million in cash available for dividends at KMI and that -- during 2011 and that resulted in $1.16 per share in terms of dividends. We are now on track to do better than $820 million and, therefore, we are raising the dividend to reflect the improved performance in terms of cash generated.

The higher cash at KMI is because of KMP's performance, including acquisition and expansion opportunities that are exceeding our budget and which will result in higher distributions to KMI during the course of 2011. So we have raised that distribution and on an annualized basis now to $1.20 instead of $1.16.

Now turning to KMP, there we also raised the quarterly distribution, this time to $1.15 or $4.60 annualized. That is a 6% increase over the distribution that we paid in the second quarter of 2010.

Our budget target at KMP is to deliver or declare cash distributions of $4.60 a unit for 2011 and as you recall to produce excess coverage above that of $37 million; and we expect to meet or exceed that target this year.

The second quarter results are slightly above our plan. Year-to-date is slightly above our plan and our current projections which we update weekly around here show us well above our plan for the full year of 2011.

Now let me review our performance and other developments at each of our business segments. And I'll start with our Products Pipelines segment.

There, in terms of refined product volumes, the volumes were actually down 1.3% for the second quarter compared to Q2 of 2010. Year to date, we are up 1.4% in total refined products volumes. Put that in context, the EIA numbers for the nationwide demand were down 1.5% in the second quarter and down 0.5% year to date. So we are doing a little bit better than the EIA numbers, but that said, I think it does show that there is a fragile recovery. I think we are seeing some impact from higher gas prices.

We are also -- have some impact from a couple of new competing terminals particularly one in the state of Florida that I think has resulted in some loss of volumes on our part.

If you break it down by profit for the second quarter, gasoline was down 3.7%, diesel down 3.4%, jet was the positive factor up 11.5% and that was pretty well across the board. Had a very nice increase in military volumes in the West over 20%, but on our commercial volumes and jet fuel across the system they were up approximately 9.5%. So that is kind of the picture from a volumetric standpoint.

In terms of performance within the Products Pipelines segment, our Cochin operations, our West Coast terminals and our Plantation pipeline were positive compared to a year ago. Our Central Florida pipeline was down compared to a year ago, largely because of the decline in volumes.

We had some other significant developments in this segment, some of which you are aware of. We are moving ahead with our condensate line running from the Eagle Ford shale play in South Texas up to the Houston Ship Channel. We expect to have that line in service in the second quarter of 2012. Things seem to be progressing according to plan there. We are in the advanced stages of discussion with a number of customers to ship additional volumes above our original 50,000 a day commitment from Petrohawk.

Our Carson Terminal and Travis Air Force Base expansions in California -- are on budget and expected to be in service somewhat ahead of our original target.

Now also pertaining to the Products Pipelines segment that we did take a certain item in this second quarter, we added to our legal reserve due to the ongoing rate case litigation on our West Coast pipelines in the amount of $165 million. We previously announced, as you know, that we got an adverse decision from the CPUC, the main tenet of which was that contrary to its own past procedure, certainly contrary to what the Federal Energy Regulatory Commission has ruled, it did not allow an income tax allowance.

That is now a CPUC decision. We intend to fight that decision in the appellate courts because we believe it is contrary to other decisions outstanding and to precedent. But accounting requires that we go ahead and take the writedown now, even though we may or may not be successful in our appeal. And we've decided to do that and that makes up a large share of the reserve. As we said in our release, the refunds mandated by this decision that stands will not in our judgment have any impact on our distribution to our limited partnership at KMP or on our dividends to our KMI shareholders.

Now turning to our Natural Gas pipeline segment, they had a good second quarter driven primarily by KinderHawk; that is the Haynesville gathering and treating system by Fayetteville Express Pipeline which went into service the first of this year and by good results in our Casper-Douglas processing assets up in Wyoming.

The negatives in the quarter were lower volumes of fuel recoveries at KMIGT, higher property taxes at Rockies Express, and an adverse decision on fuel recoveries at our trail -- on our Trailblazer system. Overall, our transport volumes were up 16% for the quarter compared to a year ago. And we really had two big developments in this segment since our last conference call.

On July 1, we closed on our agreement to buy Petrohawk's 50% interest in KinderHawk Field Services, and a 25% interest in Petrohawk's Gathering and Treating business at the Eagle Ford shale in South Texas. As consideration for this transaction, we paid $836 million in cash and $77 million in assumed debt.

Now we own 100% of KinderHawk which has over 400 miles of pipeline in the Haynesville Shale play and approximately 2 BCF of capacity -- 2 BCF a day of capacity. We have throughput that is now above 1 BCF today and growing. And we think this is just a tremendous long-term asset. We believe its value has been enhanced by the pending purchase of Petrohawk by BHP; and if you looked at BHP's presentation, you saw some pretty significant ramp up in dollars they expect to spend on their drilling program.

Now that drilling program embraces Haynesville and Eagle Ford together with a smaller position in the Permian. But we think this bodes very well for our assets, both at Haynesville and the Eagle Ford.

We now own, also, the 25% of what is called the Eagle [Lockfield] Services in the Eagle Ford that has 280 miles of gas gathering lines and 120 miles of condensate gathering lines. And we think the Eagle Ford shale is an area that where throughput will grow dramatically as drilling down there continues to expand.

The other significant development in our Natural Gas segment also involves the Eagle Ford and let me just review that with you. Eagle Ford Gathering, which is a 50-50 joint venture between ourselves and Copano Energy, entered into three long-term agreements with shippers in the second quarter and we have now contracted for about 550 million cubic feet a day of Eagle Ford natural gas production. We are providing transportation, processing, and fractionation services to our customers.

Eagle Ford Gathering also entered into a long-term agreement with Williams Partners to process production at the Williams Markham processing facility in Matagorda County, Texas. Initially, we contracted for 100 million cubic feet a day of processing capacity and we have the option to increase that to 200 million a day.

Currently, the JV that we have with Copano expects to have about 400 miles of pipeline with capacity to gather about 700 million cubic feet a day. Remember, I said 550 million has already been contracted for and we anticipate subscriptions for the rest to be completed by the end of the third quarter.

The Natural Gas segment alone has now committed close to $200 million in expansion projects at the Eagle Ford, including its 50% interest in the joint venture. We expect that number to grow as we are seeing lots of opportunities in this play, both within the JV and outside the JV.

In our CO2 segment, we produced growth in the second quarter that exceeded our plan, in the second quarter of 2010, but that was mostly driven by higher oil and NGL prices. On the oil volume front, both SACROC and Yates were just slightly below their plan for the quarter. The NGL volumes were strong for the quarter, although our net volumes were, as expected, below the second quarter 2010 because of the contractual reduction in our net interest in the production from the Snyder gas plant. But the volumes themselves are very strong.

And we also were able in the second quarter to reduce our operating expenses several million dollars below plan.

At Katz, the production response from the recently initiated CO2 plugs remains lower than planned, but is within the range of the modeled outcomes. We now expect to realize only an incremental 250 to 300 barrels per day of oil production this year versus an original budget projection of a little over 1,000 barrels per day incremental. And all of this is in our forecast, so when I talk about where we expect to end up the year, we have reduced the Katz numbers and the production numbers at the CO2 segment accordingly.

Over on the other side of the fence in our CO2 business, we continue to see strong demand from our customers for additional CO2 and we are pursuing expansion opportunities in Southwest Colorado to produce more CO2. In fact, the demand is so strong in the Permian Basin for CO2, that our customers really want all they can get, which means that we are actually at the point where we are prorating our system, including to ourselves.

Our production up in Southwest Colorado is running at 1.3 BCF per day. That is consistent with last year. It is consistent with our budget for this year. And we think with some tweaks we've been able to do, we can get that production up just a little bit more above our plan in the second half of the year. In fact, we believe we will either equal or maybe set a new all-time record for CO2 production up in Southwest Colorado. And it is an area that we continue to see as a major opportunity for us to expand in the future.

In our Terminals segment we continue to see great opportunities for growth. In the second quarter, we benefited from both acquisitions, like the [Watco Rail] transaction and like the recent purchase of the Port Arthur terminal that handles [Pedco] for Total. From those acquisitions and from internal growth, and the internal growth was led by results at our Pasadena, Texas Liquids Terminal.

Our coal volumes were strong, up 12% for the second quarter and 11% year-to-date. Steel volume is not quite as strong, but still up. Steel volumes were up 3% for the quarter and over 10% year-to-date. In this segment, we continued to experience really strong demand from our customers to handle export coal.

As you recall, we are already expanding our IMT Terminal which is south of New Orleans on the Mississippi River and some of our Houston facilities in both cases to accommodate customer needs under long-term contracts. We expect to sign additional contracts resulting in further expansions, giving us the opportunity to serve our customers and deploy significant capital at attractive rates of return.

And in fact, our Board approved another such project today. We won't publicly released that until all of the documents are signed with our customers, which we think will be in the next few weeks.

We are also making progress on providing rail transportation for crude oil through our joint venture with Watco. This is in situations where the pipeline capacity is constrained and our customers want to move crude volumes by rail and we would expect to have additional announcements on that during this third quarter 2011.

Our final segment, of course, is Kinder Morgan Canada and there our financial results are good and we continue to see strong demand for the movement of oil sands production to the West Coast of Canada and down into Washington state. This may lead to a major expansion opportunity for our Trans Mountain system, but only if and when we can reach agreement with our shipper customers for satisfactory throughput arrangements and with adequate returns on our capital invested to justify the expansion.

That said, we will be taking steps to see just what our customers want and that will probably result in an open season sometime during this fall of this year.

In conclusion, let me just leave you with two thoughts. One is generic and one is more specific.

First, the generic thought. While second quarter had its share of challenges for us, the long-term opportunities for Midstream Energy infrastructure development in my judgment have never been better during the 30-plus years I've been in the business.

We talk a lot around here about tsunamis. Those are events or things that have the ability to move the needle. And certainly in my view, the opportunities in the shale plays and export coal opportunities certainly fit the definition of a tsunami.

Looking at a more specific indication of how strong things are, we have taken a very preliminary look at 2012. It is very preliminary but we expect growth in all five of our business segments. And as we look at it, given the increased price on our oil hedges in the CO2 segment, and increased cash flow from expansion and acquisitions in both our Natural Gas and Terminals segments, we expect 2012 growth in KMP's distribution per unit, and therefore in KMI's cash available for dividends to be above our long-range projected targets of 5% growth at KMP and 10% growth at KMI.

So if you look out, what I guess we are telling you is that in 2011, we are going to do better than we thought. And it looks like in 2012 we are also going to be able to [gen the blower] at better than the numbers we talked about just a few months ago when we were on the IPO roadshow.

Now that said, we will be able to give you a lot more detail and comfort on 2012 when we've completed our budget process in the fall. But we are very pleased we were able to raise the dividend on KMI and have another increase in the KMP distribution.

And with that, I will turn it over to Park.

All right. Thanks, Rich, and I will go through the financials. I will start on KMP.

And so the financial pages are attached to the press release behind the text. The first financial page in KMP is the face of the income statement. I will really just touch on towards the bottom, just above the bottom section, declared distribution per unit. As Rich mentioned, $1.15 was what the Board declared today. That is up 6% from the $1.09 in the second quarter of 2010. $2.29 for the first half of 2011 is also up 6% from the $2.16 in 2010.

With that, I will really go on to the next page, which is where we believe the actual performance is much easier to track. And again towards the bottom, the second to last numbers line, you have the DCF per unit before certain items. $1.01 in the second quarter of 2011 versus $1.06 in 2010. But our budget was $0.95 for the quarter. And so the quarter was nicely above our budget.

Similarly, year to date $2.21 compared to $2.24 for a year ago, but our budget for the first half of 2011 was $2.11. So again we are above budget through the first half of the year. That seems a little bit unusual because our coverage in the quarter was actually negative by about $46 million and cumulatively through the first six months our coverage is negative by $26 million.

But again as I just told you, we are actually above our budget. We are ahead of where we expected to be through this point in the year. And so what you are seeing is really just the effects of seasonality and a little bit of timing. Now a fair amount of this is really, really more than this was expected. As I said, we are above our budget.

And so it is really related to seasonality. You know, we did publish our quarterly expectations in terms of distributable cash flow per unit. And again, we are exceeding that. It is relatively consistent with what we have seen in years past.

So again, even though year to date we are under coverage by about $26 million, we are ahead of where we expected to be in our budget.

Additionally as we look out for the full year, and Rich mentioned this, we expect that we will be above budget for the full year. Our budgeted excess cash flow was $37 million. You know, we are above $70 million currently as we look at our forecast.

That is actually down a little bit from where we were at the end of the first quarter. You may recall that.

But that is largely due to lower oil prices now than where oil prices were at the end of the first quarter. And so, really, performance has continued to be strong and we believe -- we know KMP has had a very solid year, year to date, and we expect it to have a solid year going forward.

And just another way to look at that, our budgeted distributable cash flow per unit was $4.72, our current forecast calls for distributable cash flow per unit to be north of $4.80. And that same number was $4.43 in 2010. So again, we are nicely above our budget, showing very strong growth from 2010.

Moving up from that line, directly above it, you have met income per unit. We don't believe that is an overly meaningful measure, in fact, DCF per unit is much more relevant. And so going above that, you have DCF before certain items. You'll see about $324 million up slightly from the second quarter of 2010 and then the $706 million year-to-date is up $30 million from 2010, but the second quarter was up $20 million above our budget. So again nicely above where we expect it to be.

Immediately above that, sustaining capital expenditures, about $49 million in the quarter, a little bit more than what we spent in the second quarter of 2010. Similarly for the six months, we spent a little bit more in 2011 than we did in 2010.

We actually had spent less than our budget year to date and that is something that we see in a lot of years where sustaining capital expenditures get pushed back to the second half of the year and lots of times even to the fourth quarter.

Our full-year forecast on sustaining capital expenditures is about $223 million and our full-year budget is $225 million. So we are right on top of budget in terms of our expectations for the year.

Immediately above that, some small amounts related to cash in excess of earnings for Express, Endeavor and Eagle Ford, and again what this line represents is the cash distributions that are greater than the earnings that we recognized in net income. So you can see about $2.6 million in the second quarter, almost $6 million year to date. That is above last year. It is consistent with our expectations, although on a full-year forecast, we actually think we will be ahead of where we expected to be.

Book cash taxes, again, this is just the difference between cash taxes and book taxes. So we are essentially backing out book taxes and replacing it with cash taxes. You can see in the quarter they were about equal. Cash taxes were a little bit greater than book taxes in the second quarter of 2011. Year to date, cash taxes were less than book taxes by a little over $10 million.

Now above that, you have DD&A. DD&A was a little bit higher than it was last year and it is a little bit above our budget. You will see Limited Partners net income directly above that and you'll see that it is a little bit lower, although if you add those two lines together and you look at net income before DD&A, then you will see that it is higher. We think that is a more relevant way to look at it. Again, we are looking for cash flow as opposed to accounting earnings.

And about that you have the General Partners interest. You'll note that the second quarter of 2010 is when we had the interim capital transaction. We treated that as if it had not occurred from a KMP perspective, because if we had not added it back in, it would have shown KMP as generating significantly more cash that what KMP generates on a recurring basis. So that is what is going on on that line is it is getting added back in.

So again, those are the components that create or add up to the distributable cash flow.

Jumping up to the top, I'll talk briefly about the segments. Rich covered a lot of this. I will just catch some highlights. From the Products Pipelines side, a little bit down from last year in the quarter, up about $10 million year to date. Now it is a little bit under budget for the quarter, but it is actually under budget by less than it is down versus last year which, again, just demonstrates that we expected the Products Pipelines to be under 2010 when we built the budget. The main reason were -- are the inventory accounting change that took place in the 2nd quarter of 2010 and that had a positive impact on 2010's second quarter that the second quarter of 2011 did not quite overcome.

Now as we look at Products Pipelines for the year, clearly we expect very attractive growth versus 2010. As we look at our forecast, we expect them to come in just a little bit under their budget. About 1% under their budget for the year.

Natural Gas Pipelines, up versus last year by about $6 million. Up year to date versus last year by about $9 million. They were slightly under their budget for the quarter, but we do expect the Natural Gas Pipelines segment to be above its budget considerably for the year, largely as a result of the acquisition of the Petrohawk asset. And so, Natural Gas Pipelines will be $45 million to $50 million above its budget for the year, based upon our current forecast.

CO2 side up versus last year by $27 million. Year to date, up $37 million. The quarter was above its budget and we expect that CO2 will come in about $10 million above its budget in terms of segment earnings before DD&A for the year.

Now, Rich mentioned that, mentioned this, but it is largely driven by oil prices and NGL prices being a little bit ahead of our budget. Volumes are just a little bit below at SACROC and at Yates and a little bit below at Katz. But again altogether, as we look out for the year we expect the CO2 segment to be about its budget by about $10 million.

On the Terminals side, for the quarter up about $7 million versus a year ago. Year to date, up about $26 million. They were a little bit under budget for the quarter, largely as a function of the impact of weather and really a lot of it on our customers and their ability to get product to us. And so, this is a function of flooding and tornados that disrupted some of the product movements across the country and resulted in slightly lower volumes at some of our terminals.

And then in addition to that, [Pedco] volumes and hence earnings were a little bit lower due to some issues at some specific refineries, primarily here on the Gulf Coast.

For the year, we expect Terminals will come in slightly under its budget, just a couple of million dollars on a $713 million segment earnings before DD&A budget. So essentially right on it.

Kinder Morgan Canada nicely above last year, about $7.5 million for the quarter. Over $10 million over last year year to date, and also nicely above budget for the quarter, being driven primarily by incremental volumes moving to Washington state. As we look forward for the entire year, we expect that Kinder Morgan Canada will be above their budget for the year.

Total segment earnings before DD&A, $851 million in the quarter up from about $811 million. About 5% growth for that quarter. $1.73 billion year to date, 6% up year to date and a little bit ahead of our plan for the quarter. And as we look forward, our annual budget was about $3.65 million -- sorry, $3.65 billion in segment earnings before DD&A. Our current forecast has us slightly above $3.7 billion of segment earnings before DD&A. So again, outperformance at the segment level, helping to drive expected out performance overall.

With that, I will jump over DD&A and skip over the segment earnings contributions and get to G&A, and you will see it is about $98 million in the quarter, about $5 million greater than a year ago, about $199 million year to date, about $7 million ahead of a year ago. It was slightly unfavorable to budget for the quarter, although when we look forward for the entire year, we expect that G&A, our current forecast has it less than $1 million negative to forecast. And so essentially right on for the year.

Interest, you will see, is up slightly, so slightly greater interest for the quarter, also for the year to date. But it is under budget for the quarter and it is under budget year to date. We expect it will be under budget for the entire year. And basically what is going on there relative to budget is that rate is coming in lower. Now balance will be higher than budget as a function of the Petrohawk acquisition. But net, those two will still result in favorable variance to budget on the interest line.

And so really, those are the components of the net income. I'll talk about the certain items quickly. Rich has already touched on the largest.

You know, the allocated non-cash long-term compensation you know we will not have any more current amounts in that line, but the past amounts show up there. Allocated non-cash employees grow share plant expense. Most of this was in the first quarter. This is not something like the line above it. Not something that KMP will ever have to pay for. It will never pay any cash. It will never pay any equity. It will never pay any funds at all or have any economic impact at all from this compensation.

But for accounting purposes, we have to reflect it here.

Acquisition costs, again, these are costs related to acquisitions that previously were capitalized. We just show them here in certain items.

Legal and environmental expenses, that is primarily environmental and it is very small. The legal reserves of $165 million, those are the rate case reserves that Rich mentioned that are primarily related to the unfavorable decision with respect to an income tax allowance at the CPUC. Mark to market an ineffectiveness of certain hedges. Let me just remind you here that we continue as always to reflect the full impact of these hedges in the segments when the transactions occur.

What show up down here in certain items are the amounts that have to be mark to market in periods prior to the transactions actually taking place. And so really, ultimately, all of the amounts that show up on this line will net out to zero because the total impact is reflected in the segments when the transactions occur.

Insurance deductible, casualty losses and reimbursements. Again, this is where we show the impact of insurable events. Sometimes you see writeoffs there when an event happens and then you see positive amounts come through like you are seeing here when we're cover insurance proceeds. And so that is what is going on on that line.

And then the gain on the loss of sale of assets and asset disposition expenses, we have been talking about this item for almost a couple of years now. But we did have to take some negative amounts related to this for some environmental remediation and writing off some book value which itself was non-cash. But we told you we were in the process of selling this property; and we have sold the first piece of it and did realize that cash in the second quarter and that is the positive amount that you see here. There still is another piece to come. It may not happen until next year, but we are pushing forward with that subsequent sale as well.

Prior period asset write off, this relates to the Trailblazer fuel recovery decision that we got out of FERC that was unfavorable. Now it did result in our writing off a receivable that we had related to fuel recoveries. What shows up in the certain item amount is all the prior periods related to that and so prior to 2011. A 2011 impact shows up in the segment and Rich mentioned that when he talked about the impact on the Natural Gas segment. And then, Other is de minimus.

And so, those are the certain items. One thing to point out it is in the press release and we mentioned this before in conjunction with the Petrohawk transaction. You know, we will have to take evaluation adjustment related to the first half of KinderHawk that we acquired in 2010.

Because that transaction did not close until the third quarter, we can't take that adjustment until the third quarter. So you will see that next quarter and it is approximately $170 million although the exact amount will be defined once we come out with the third-quarter results in October.

So again that is just a little bit of a preview for next quarter. Again, not anything different from what we have previously announced.

The first page of the income statement, if you turn back, really is not overly meaningful because the certain items are spread throughout there. And so I don't think there is a lot of reason to spend much time on that.

And so, with that, I will flip to the balance sheet which is the last financial page in the KMP package. And just running that fairly quickly, cash and cash equivalent are up considerably. That is a function of some cash that we have in Canada and a function of the pre-funding that we did for the Petrohawk transaction.

So we issued equity in June and we raced past him, but again the transaction didn't close until July 1. The balance sheet and financials are as of June 30 and so we have cash on hand that the next day was utilized for that acquisition.

Other current assets is basically flat. PP&E goes up by acquisitions, by expansion CapEx, by sustaining CapEx and then goes down by DD&A. And I will talk more about our investments when we get down and reconcile the debt balance.

Investments is up a little bit. We had the assets that we acquired including Watco because that did not close until this year. Eagle Ford investment, the Deep Rock acquisition and then on REX and MEPs some balances moving the other way. Deferred charges and other assets, that is largely the mark to market of the hedges.

Notes payable and current maturities of long-term debt, we didn't have any commercial paper outstanding at the end of the quarter, but we do have the two maturities here or really one maturity and one put in the first quarter of 2012. We talked about this last quarter. We have a maturity of $450 million comes due middle of March 2012.

We also have a debt issue that can be put to us on February 1 of 2012. As we said last quarter, we would love for that issue to be put to us. It is a 9% issue. We can refinance it at a much lower rate. We do not expect that it will be. And so, in all likelihood this amount will stay here until the end of the first quarter in 2012 and then, that number will move back into long-term debt. But again if anyone wants to put those securities to us, we are happy to take them.

Other current liabilities is basically flat. Long-term debt is up a little bit and I'll talk about that when we reconcile the debt. Value of interest rate swaps essentially just moves with the forward curve of interest rate. And then in other is where you see the rate case reserve being added in. And so, it is up about $170 million. Accumulated other comprehensive loss largely moves with the mark to market on the hedges.

Other partners' capital is up over $300 million as a function of the equity issuance. And I will get into that in more detail in a minute.

So the total balance sheet is about $22.3 billion. It is up about $0.5 billion from where it was at the beginning of the year.

Looking at total debt, a little over $11 billion at the end of the quarter. At the beginning of the year, we were at about $11.4 billion. At the end of the first quarter, we were a little under $11.6 billion. So debt has actually come down $517 million in the quarter and come down $356 million year to date.

Now again, largely that is a result of the pre-funding of the Petrohawk acquisition. And so you'll see debt to EBITDA of about 3.4 times. Now again, that was temporary. The very next day the debt went up because we closed on the Petrohawk transaction. And so, we are really around about 3.65 to 3.7 times right now.

Although as we've said before, we believe that that really understates the strength of the balance sheet. Because that number is with all of the debt outstanding related to the acquisition, but includes none of the EBITDA. Because we are doing a trailing 12-months EBITDA number here. We are not pro formaing our EBITDA for acquisitions and expansions that come on throughout the year.

So really, we think that -- or we know that our balance sheet is stronger than that. But if we look forward to where we expect to be when we end the year, we will probably end the year right around that range in the 3.6 to 3.7 range. That is a little bit higher than where our budget was. And the reason why it is higher, for the exact same reason that I just mentioned, it's the Petrohawk transaction. All of the debt will be outstanding related to that. And of course, we financed a significant portion of it with equity, but again there is a debt portion of that. And only part of the EBITDA will have been earned, only half a year by the time we get to the end of the year.

But again, that is where we expect to in 2011. As we look at it right now, a little bit above our budget in terms of debt to EBITDA; but still, a very strong balance sheet especially when you take into account the fact that that number is understated or conservative.

And so, the debt reconciliation, as I mentioned, debt went down by about $517 million in the quarter and down by $356 million year to date. Now we invested in the quarter in capital expenditures a little over $230 million, in acquisitions a little under $70 million, and in contributions to JVs, a little under $40 million. So those are the investments in the quarter.

Year to date in CapEx, about $450 million, acquisitions a little over $80 million, contributions to JVs just under $60 million, and then, the Chevron settlement which was in the first quarter was $63 million. So offsetting that, the cash that we raised during the quarter and year to date, first for the quarter equity offering, $561 million. The aftermarket program raised equity of $83 million. KMR distributions raised equity of $107 million. We issued about $24 million of equity for an acquisition and so that went out. And then the General Partner contributed about $8 million.

And then we had a source of cash of about $65 million in the quarter. The same numbers for the year to date, again, the equity offering happened in the quarter. It was $560 million. The at the market program has generated $165 million of equity issuance through the first six months. KMR has generated $211 million of equity issuance through the first six months. Again, we put out about $24 million in conjunction with an acquisition. General Partners contributed about $9 million, and working capital and other items have been a source of cash of a little over $30 million.

And so, looking at the working capital and other items, again a source of about $65 million in the quarter. Largely that has come from accrued interest offset a little bit by other current assets and other current liabilities. Those are the big things that generated the cash in the quarter.

For the year to date, a source of cash of about $35 million. AR and AP generated about $70 million. Other current assets and other current liabilities were at use of cash of about $15 million. And then a few other items provided another $15 million source of cash.

And talking about the expansion CapEx, as I mentioned, in the quarter about $230 million, for the year about $450 million. Products was about $31 million of that in the quarter, a little over $50 million year to date. That is the continuation of the Carson Tank expansion, the Travis Air Force Base expansion, and the Cochin [East Leg] expansion.

On the Natural Gas side, about $26 million in the quarter, a little over $40 million year to date. Largely that is the projects going on in the Eagle Ford, although what shows up in this number are just the pieces of that that are 100% ours. The portions that are a part of the JV are in the JV contributions and I will get to those in just a minute.

CO2, about $117 million for the quarter; over $230 million, year to date. A lot of that, most of that going on at SACROC, and then of course the ongoing expansion at Katz.

On the Terminal side, a little under $60 million for the quarter, about $120 million year to date. And that is a whole variety of smaller projects that are going on there. And then Kinder Morgan Canada about $3 million for the quarter, $5 million year to date.

And in the contributions to JVs, as you may remember, that I mentioned a little under $40 million for the quarter and a little under $60 million for the year. Most of that has gone to the Eagle Ford. It is about a little less than $30 million in the quarter and a little over $40 million year to date. And we have also made some contributions to Red Cedar and to the Deep Rock joint venture which is the oil tanks at Cushing that we bought into at the beginning of this year.

And that is it for KMP. I will move on to KMI and then similarly attached to the text you will find the KMI financial pages.

The first page there is a summary of our cash available to pay dividend. So starting at the top there, it starts with the GP distribution. One thing to recall when we talk about KMI, we are talking about what we have received in these quarters. And so, this is based upon dividends and distributions paid and received by KMI during the quarter.

So, in the second quarter, the General Partner distribution increased by over 12% to $290 million. For the year to date, it has increased almost 13% to $575 million. Similarly the distributions on the KMP units and the KMR shares have gone up. Now primarily as a function of the distributions themselves going up, in per unit and per-share distributions going up, but also recall that every quarter we own more KMR shares. And so, there is a compounding impact there.

Total KMP distributions to us, $330 million in the quarter up almost 12%. $654 million year to date, up over 12%, almost 12.5%. NGPL [FICO's] distributions to us you'll see almost $6 million in the quarter about $10 million year to date. That is a little bit below our budget although for the full year, our full-year forecast, we do expect NGPL's distributions to be on budget.

Total distributions received, $336 million. You know it is up almost 14% for the quarter, but that is in part because there was not an NGPL distribution in the second quarter of 2010. For the six months, $664 million, it is up 11% from the 2nd quarter of 2010.

G&A, essentially consistent with our budget. We actually expect it slightly unfavorable and we expect it to be slightly unfavorable for the year, but it is around $1 million in total and it is related to legal costs and a little bit of incremental tax expense, that is really related to some state tax-consulting work that has resulted in much greater savings. It is just that those savings to show up on the cash tax line, not in G&A.

Interest expense, now remember that this is cash interest expense and so we have small payments in the second quarter and the fourth quarter, big payments in the first quarter and the third quarter. A little bit favorable to budget year to date and expect it for the year. And then cash taxes down below is essentially on budget for the first six months.

But when we look forward for the year, we actually expect and it is actually slightly favorable for the first six months. It will be a little bit unfavorable to budget really for reasons that I'm going to get into in a minute when I talk about the complete full-year forecast.

So cash available to pay dividends, about $154 million for the quarter, $405 million year to date. And just thinking about seasonality there, because if you look at the dividends -- and the right way to look at this is the dividends that were paid during the quarter -- they were $205 million essentially in each quarter.

Now some of you may recall that a portion of the dividend that normally would have been paid in the second quarter was actually paid in the first quarter because it related to the period in the first quarter prior to which we were public. But again effectively there was a $205 million dividend in each quarter which means if you look at the second quarter of 2011, that we didn't fully cover that.

Now that's going to be normal seasonality for the second quarter, because we have two tax payments in the second quarter. And so we went through this before, but just to refresh everybody's memory on kind of the big swing quarter to quarter. In the first quarter, we tend to have high coverage because we have no tax payments. Now we do have a cash interest payment, but still we tend to have high coverage in the first quarter. And then, second quarter we tend to have low coverage because we have two tax payments. The third quarter tends to be a low coverage because we have a tax payment and an interest payment. And then, the fourth quarter tends to be the hike average because we have a tax payment, but no interest payments.

Now then the other things that are going on, again just seasonally, is sometimes the NGPL distributions move around and you can see that because we've received about $10 million year to date. And I said that we expect to be on our full-year budget. Our full-year budget is $33 million. And so, those will be greater in the second half than they were in the first half. Additionally, the distributions from KMP tend to grow quarter to quarter because we grow distributions at KMP. So that means that KMI receives more.

And so again beyond kind of the cash taxes and the cash interest you get from KMP, you should expect increasing distributions every quarter.

Now and Rich mentioned this, you know, we have taken the dividend for the third quarter that will be paid in the third quarter to $0.30. So that will be paid in August. We are on track to generate greater than $830 million of cash available to pay dividends and our budget was $820 million. Really a lot of that comes in the second half of the year when the General Partner incentive is going to be above our budget.

Now in conjunction with that, as I mentioned a minute ago, when the General Partner incentive is above budget, it is fully taxable and so our cash taxes also will be above budget in the second half of the year. But again as we look at our forecast, we expect to be above $830 million for the entire year. And that is what made us comfortable in increasing the dividend to $0.30.

Now one other thing, just to think about with respect to KMI, again because we do it all on a paid basis, both in terms of what we receive and in terms of our forecast for the dividend that we will pay, once we're past November, then the KMI budget year is essentially done. I mean it's done in terms of what we expect to receive because we received essentially all of our distributions from KMP at that point once the November distribution is paid.

And it is also done in terms of our budgeted and forecasted 2011 KMI dividend because what we have budgeted and forecasted is what we will pay during the four quarters of 2011. So when we talked about the $1.29 -- sorry, $1.16 for the year, that was what was going to be paid in the four quarters of 2011. Again just something to keep in mind. Another nuance of going off the paid versus declared.

The next page is the income statement for KMI. I am not going to spend any time on this. I don't think that it is overly helpful in seeing what drives KMI. I really believe that the first page is. I think that lays out all of the drivers for KMI.

This also consolidates KMP. So most of the minute that you see and hear are related to KMP. It includes all the certain items at KMP and it includes all of the certain items at KMI. Just to refresh your memory, some of the certain items that are at KMI but not at KMP will include the special bonus, although that showed up in part of KMP as well.

The shareholder litigation but especially the insurance recovery from the shareholder litigation shows up here. We have not counted that as ongoing recurring cash flow.

And then, there are purchase accounting effects that show up here, that again, I think distort the understanding of what is driving KMI. There is one thing that I will point out when you get down to diluted earnings per common share. You will see that there are two numbers there and it is true of the basic earnings per common share as well.

There is the Class P shares and the Class A shares. And the Class A share amount is actually less than the Class P share amount. The only reason for that is because there is some sharing amongst the Class A's, the Class B's, and the Class C's. And you'll find is in footnote 2, but keep in mind that the total number of P shares that all of the A's, B's, and C's can convert into is fixed.

And what that means is that however things are divided between the A's, B's, and C's, the Private Securities Litigation Reform Act the P's have no impact. However this stuff is divided between the A's, B's, and C's, has no impact on the peas. It will never dilute the P's, it will never impact the P's. It is all just amongst -- it is a pot and it is a fixed pot and it just what will be determined going forward is how it is split between the A's, B's, and C's.

So again, this number that you see there, the diluted earnings per common share for Class A shares and the basic earnings per common share for Class A shares has no meaning and really there is not any reason to pay attention to it. And there is not any real reason or -- there is not any real information you are going to glean from the basic earnings per common share for the Class P shares as well. I think it is much more relevant to focus on the cash flow on the first page.

Now the next page is the reconciliation between income from continuing operations and cash available to pay dividends. I went through this in some detail last quarter. I am not going to go through it in detail this quarter. The reconciliation is there. You can look at it. You know if you have questions on it, we are happy to address them.

And so, the last page on the KMI financials is the balance sheet. Now this is the true KMI balance sheet, which means it consolidates KMP. We do break out the KMP amounts so that you can see the differences.

Now that being said, there are still distortions. For example, the property, plant and equipment net KMI line, just about four lines down from the top, KMI does not actually have $2.4 billion of assets. What KMI has is investments in KMP and an investment in NGPL.

But because of the purchase accounting that had to be implemented at the time of the NBO, KMI has to carry KMP's assets at a greater value than where KMP carries them. And so the vast majority of that $2.4 billion that you see there relates to purchase accounting adjustments on KMP assets when they get consolidated into KMI.

Again, I am only bringing this up because, again, I don't think that these numbers are overly meaningful. What is relevant are the debt numbers. And we showed that down at the bottom and again, as always, we will take you through what is going on there. So KMI's debt about $3.2 billion, a little over $3.2 billion. It is about $17 million from where was at the end of 2010. It is also [up] about $42 million from where was at the end of the first quarter.

And so, first starting with the quarter change of $42 million, we had cash flow during the quarter of $154 million. We had dividends of $100 million. Normally that would have been the $205 million that I mentioned, but remember a portion of that was paid in the first quarter and so the dividend is actually paid in the quarter which is the $100 million.

We paid out the special bonus, which was cash, but didn't actually come from the Company. We paid out that bonus up to $100 million in the quarter. We had a tax benefit that doesn't show up in our recurring cash taxes because it really was a one-time benefit of $21 million. So that was a positive.

We did get KMR distributions of $15 million that were not converted to cash. And so, that is a use of cash. And then we had some fees in the General Partner contribution to KMP of about a few more million dollars, which gets you to the $42 million essentially increase in debt.

For year to date, debt has gone up about $17 million. We generated $405 million. We paid dividends of $410 million, except that $64 million of that $410 million was retained in order to fund the after-tax amount of the $100 million bonus. And so, the total dividends paid is really $410 million less $64 million. Then again the $100 million went out. We had the tax benefit for the year of about $21 million.

KMR, again, was in essence a use of cash of $30 million because we received those shares, but we haven't yet converted them to cash. We had the NBO insurance receivable of $46 million and then we had some fees in the GP contribution. Which got us to $17 million of an increase in debt year to date.

So again, those are the things that are going on impacting the debt balance. You know, the big items again are just cash-generated and dividends paid. Although again this year there was a little bit of noise because of the timing on when the dividends are paid and because of the special bonus that was paid and the dividends that were retained as part of that.

And that is KMI and I will give it back to Rich.

Okay. Tamara, we are prepared to take any questions if you will come back on.

(Operator Instructions). Darren Horowitz.

Raymond James. Good afternoon. Rich, just a couple of quick questions. I want to go back to an earlier point regarding CO2. Can you just talk about the associated cost increased production out of Southwest Colorado above that 1.3 BCF a day level? And specifically any additional color into the scale of expansion opportunities you are evaluating would be very helpful.

Yes I will start and then I will ask Tim Bradley who is sitting next to me who heads up our CO2 segment to talk about it. But basically we have a lot of demand from customers very interested in signing significant long-term contracts that would be additive to 1.3 billion cubic feet a day that we are now moving, producing in Colorado and then moving down the line to the Permian.

The costs associated with that would involve obviously producing the CO2 in Southwest Colorado and, then, either expanding the present infrastructure to get it down to Permian, or building new infrastructure that would tie into other areas of the Permian. With that I'll let Tim take a crack at it.

Thank you, Rich. Our current look at what we are planning to initiate an expansion on would include an increase of capacity by approximately 100 million cubic feet a day above what our current production capacity is. And that type of expansion may very well last us for upwards of 10 years at that increased capacity. And the total capital cost of this project is still under study as a result of the front end engineering money that we talked about last quarter but would be on the order of $500 million to $600 million of investment over the next several years if customers are willing to sign up for that increased take.

We do have recent conversations with another customer that is asking us to consider a proposal that would be a much more significant increase than just 100 million cubic feet a day. The discussions are very early. It is probably premature to get into that.

But that is another element of our valuation that we are going to start undertaking at the present time that might increase the capacity by another 200 million feet a day or even more beyond what we are currently producing. So this is a bit of a work in progress and we are hoping to pin these things down from an operational standpoint as well as from a contractual standpoint in the weeks and months to come.

Tim, I appreciate the color. Rich, final question from me, regarding that new 300,000 barrel a day kind of seeing line out of the Eagle Ford. Recognizing that you guys are further along with producers but can, at this point, you give us a sense of the capacity commitments by third parties that you are targeting? I'm really just trying to get a feel beyond that initial 50,000 barrel a day anchor commitment. You know the level of additional commitments that could be forthcoming and more importantly the associated return on that $220 million project as that capacity gets committed?

Well, I think we said last time that even if we didn't move any more than the 50,000 barrels a day, it provides an adequate return above our cost of capital. So anything on top of that would just increase.

There's a couple of moving parts there. One is the volume and we certainly expect to fill the great bulk of the 300,000 barrels a day over some time period. The second moving part is that we are perfectly willing to expand that system outside of Cuero to pick up additional volumes. Some volumes lend themselves to coming into the line at Cuero and some would involve expansions which would be additional capital; and that capital cost would get plugged in to figuring out what our overall return is.

So it just depends on where in the Eagle Ford play the producers want to intersect our line to move their volumes. But we think it is going to be a very good project. As we said earlier, we would expect to get at least a mid-teens return on the overall project and maybe definitely better than that.

I appreciate it, Rich. Thank you.

Thank you.

Bradley Olsen.

Tudor Pickering, Holt. Just a couple of quick ones. On the Natural Gas segment, I guess I was expecting a little bit of a sequential ramp from first quarter to second quarter, just given the fact that you have improving volumes on the KinderHawk system, as well as the fact that Fayetteville Express is coming online. Could you discuss just a little bit, you mentioned that it was Rockies Express property tax, as well as some issues at KMIGT. Are there issues on either of those -- either of those systems that are going to be persisting? Or do you expect a return to the margin levels from the first quarter going forward?

You know, we typically have seasonality in the Natural Gas Pipeline segment. I think we have published those -- I mean truthfully you can just go historically and look at our segment earnings for the -- before DD&A for the segment for the last few years and you'll see that. And so what we saw this quarter was not unusual and actually was expected.

Now the segment was a tiny bit under its budget, but we are talking about $2 million under its budget. And so it was consistent with our expectations.

And so, I apologize if you were expecting sequential growth. But I do recommend that you go and you look at our historic seasonality and the numbers that we have put out that kind of show and lay out that seasonality by segment and you will see how these things vary by season.

(multiple speakers) Fayetteville was in service on the 1st of January of this year. So that was in both quarters.

Okay and there was no volume ramp-up? I guess I was just looking at the significantly higher transportation volumes for this quarter.

Well, that is compared to the second quarter a year ago and of course it is because Fayetteville wasn't online the second quarter a year ago. There is a ramp-up but most of the ramp-up is later this year.

Right. Okay. Great. Thanks for that and as far as the charge that you guys took in the -- the PUC case, are you guys thinking about how that might be allocated to the extent that it would become a realized cash charge? Would you guys approach it with the same way that you did the Santa Fe settlement with an ICT, or how would you determine that being distributed between KMP and KMI?

Well, let me say, first of all, of course it is a long way from here to Tipperary. We are going to appeal this and we will just see what the -- how the orders come out, but if and when the cash payments for refunds are actually due, we think at this time we probably would not require an ICT. We obviously have a great deal of accumulated excess coverage over the years.

But we just have to look at that and see what our accumulative coverage is at that time and what it looks like going forward and where we are with regard to what the actual cash payments get made.

We did take an ICT previously a year ago and we believed at that time that that was going to be sufficient to cover the payments due then and any future payments. Now we were not counting on the fact that the CPUC would refuse an income tax allowance and that is what has resulted in the additional reserve this period. But the ICT analysis is different from the accounting reserve analysis and so, as Rich says, we will make that determination at that time.

I think the important thing is what we've stated, when the decision came out and what we have reiterated in the earnings release is that we don't expect the payment of refunds to have any impact on the KMP distribution or on the KMI dividend.

Okay, great. And just one more question. As far as the Watco investment, you guys mentioned that there might be some announcements forthcoming throughout the third quarter. Would you expect that those announcements have anything to do with rail projects which might help alleviate the bottleneck at Cushing? Or are those more related to, I think, the Eagle Ford area projects that you and Watco might have announced or made an announcement earlier this year about pursuing?

Yes. No, we expect to make announcements on at least one of those and hopefully on both of them. But we think we may have more than one announcement, but certainly both of those areas we are involved in. And this looks very good from the standpoint of, again, that we've talked about this at length on the last call. I won't go over it again, but our customers who want rail capacity both in the Eagle Ford and in fact in the Eagle Ford in some areas we are even going to be providing some truck capacity for them to get them to a central point.

So anything we can do to help our customers on an interim basis until the pipeline capacity gets built up that we want to do and that specifically applies to the situation that presently exists in Oklahoma, of course.

Great. Thanks a lot for the color.

John Tysseland.

Good afternoon. Citigroup. Rich, I suppose once again we are seeing a number of different pipeline projects being announced, except this time on the accrual side of the business. I'm interested on how you are approaching buildout cost this time around and what you have seen, if any, on cost escalations for the infrastructure, particularly out of the Eagle Ford? Are your projects turnkey at this point, or have you just built in some cushion there?

Well, we think we have a detailed engineering and we have already contracted for the long lead time items and so far anything we are running a bit under our [estimated condensate] line, just a bit under the 220, but I wouldn't reduce that at this time. I think that is about where we will end up.

We think we have numbers that embrace what the current situation is and again we have already tied up the long lead time items.

And further protection to us, just remember that a significant portion of the accrued condensate line is conversion of an existing line. And so it doesn't require that we lay new pipe. We just have to do some work to convert it from gas service to accrued or condensate service.

But just on some other indications, with regard to our joint venture line, with Copano, that is basically finished now going into service on August 1, and that is coming in right at its budget. We are not seeing any kind of wild inflation on the pipeline slide. And I know that there's some increases some of the upstream players have reported, but thus far we have not seen that on the pipeline side the kind of assets that we are putting in.

And then I think back to Park's point on the conversion, I mean obviously that gives you a lot of cost advantage there and to earn your cost capital you could charge a lower rate. Do you see it as if producers do want to sign up for capacity or incremental capacity coming out of that region that this is a low-cost option? Or do you see I guess some of the pipelines going to Corpus Christi as being competitive?

Well, certainly, any pipeline coming out of the Eagle Ford is competitive as we said before. It is a different mix of opportunities that are provided at Corpus Christi.

Clearly if you can get into Houston, you have much more refining capacity if you want to know just how that condensate is going to get used, you have more opportunities for usage in Houston. Now you could get to Corpus and once you've used up whatever you are going to use at the refineries there, you could barge it out and there are pluses and minuses to that. But we think what we are offering is very competitive and, even to the extent that we think that eventually we will be able to make use of some of our huge tankage position at Pasadena, [Helena] Park for some of this. And there's even talk as I think you know some of this actually going up explore or elsewhere and going all the way through Southern Lights up into Alberta to be used diluent.

I think that in the long run there is going to be just a hell of a lot of condensate coming out of the Eagle Ford. It is going to seek the highest and best use. Some of it will end up in refineries in Houston. Some in Corpus. Some will go over to Baton Rouge and go into other pipelines there. Some, I think, will end up being used as diluent.

Just all kinds of different uses and some of that tends on exact grade of a condensate coming through the line and there will be blending opportunities. So we think overall we are going to offer, we hope, something close to one-stop shopping. But there is a lot of competition out there and there will be a lot of good services offered to people who are producing condensate in the Eagle Ford and then that should be the case.

That's great color and very helpful. On the -- does that mean that you potentially could be looking at some more Houston tankage expansions, given what's going on right now?

We are looking at those opportunities. Yes.

And then lastly, quick clarification question on the [S&T] business in the CO2 segment. Is the strong demand that you mentioned for incremental volumes for CO2, is that purely from third parties or is that incremental demand from KMP's own operations?

That is from third parties.

Okay. Great. Thank you.

Ted Durbin with Goldman Sachs.

Thanks. If I could come back to that and I appreciate the sort of preliminary look on the 2012 outlook, can you break down -- if you say you are going to be above budget, how much of that is would you say attributable to the CO2 segment and oil prices versus how much of it is the acquisition activity you have done, the organic growth? Can you give us a little more detail there?

No. I think, again, we have just done an overview of the treetop level and I think to give any more color on it, we will need to wait till we get through the budget process, which as usual we will put out into mid-November timeframe.

I mean if you wanted to calculate the impact of the hedges yourself, I mean we do publish what our edge profile is and so you can go and run those calculations.

There's an $18 increase in the hedge price.

Does that help you?

Yes. That is helpful. Thank you. And then if you just talk a little bit more about -- it sounds like you are pretty positive on the acquisition of Petrohawk -- how much more upside you might see in the Haynesville and the Eagle Ford from the acquisition?

Well, you all need to judge that too. The numbers that we saw published by BHP showed that contrasted with the Petrohawk spending about $2.9 billion I think, at the present time, for drilling that BHP has said they were going to take it to $4 billion in 2015 and $6 billion by 2020. I believe those are the numbers. Someone forwarded to us their actual presentation. That is where I took those numbers out of.

So who knows exactly how it will turn out, but I think the positive thing is clearly this is a huge investment by BHP. And I think you'll see them ramp up the drilling program and the production in the Haynesville and for that matter the Eagle Ford, also. But certainly I think it will be a positive for our investment in both places.

And again, I know there are some doubting Thomases out there about the Haynesville. We are very positive this is an area that is going to be producing for 30 years or more to come. And just by way of volume, we are now over, we actually in the last couple of weeks of June crossed over the BCF a day. We are now running modestly above a BCF today. You know we said that is what we projected we would average for the year and we hope to end the year at about 1.2 BCF today. So we are over the 1 BCF and still growing now.

So we think the Haynesville is going to turn out to be a very good investment for us.

That's helpful. Thanks. If I could just -- one more. Do you have any updates on the Bakken? I know you try to get some volumes on the Cochin there. Any update on the success you're having there?

We are still in negotiations and talking about two or three different alternatives but no specific update at this time.

Okay. That's it for me. Thanks a lot.

Thanks.

John Edwards with Morgan Keegan.

Good afternoon. Just real quick, you mentioned very strong demand for CO2. And I'm just wondering are -- as far as pricing are you seeing that firm up as well?

Yes. Our -- and I'll let Tim jump in on that, but yes we are seeing a firming up of pricing. Tim.

Yes, so I think without getting too specific is we do have a number of different customers and a variety of different contracts. But generally over the years, our CO2 contracting has been tied to a certain percentage of oil price and what we're seeing is that that percentage of oil price is increasing. So we are able to capitalize on the tightening supply demand picture by increasing the price. Obviously with current oil prices being approximately $100 a barrel, the calculated value is going up as well in the percentage. So very strong conditions for us to look at some significant expansion opportunities.

Great. Thank you. That's all I had.

Brian Zarahn from Barclays Capital.

Good afternoon. On the 2011 distribution, if you were to exceed the 460 budget, do you think a decision would be more likely in the third quarter or later in the year?

We will just look at that. I think the third quarter would probably be a good time when we would look at it. You know, right now, as Park said, we look to be well above plan and we run our numbers for the third quarter and I think as Park mentioned, that is looking above plan and third quarter also.

So I think we'll just look at that now. We are not going to do anything crazy here, because to us maintaining a healthy level of excess coverage is important. So, but if the year continues to develop as well as it looks like it will, we are going to look seriously at that for the third and fourth quarter.

And, Rich, you actually reminded me of something that I forgot to say earlier, but I talked about the second half. I didn't necessarily break it down by quarter. If we look at our forecast right now by quarter, we have just slight coverage of our expected distribution in the third quarter. And so, then that means that we have tremendous coverage in the fourth quarter. And that gets us to the excess coverage that we are talking about for the year. So I just wanted to provide that information for everybody's benefit.

And then on expansion CapEx for 2011, are you looking at $2.5 billion or above that figure?

$2.5 billion.

Yes including acquisition.

Including (multiple speakers) acquisition.

Including SACROC acquisition about $2.5 billion.

Okay and then regarding BHP's acquisition of Petrohawk, does that increase or decrease the probability of you acquiring the remaining stake at EagleHawk?

We really don't know that. We will just have to see what BHP's attitude is on that. We certainly estimate the price is reasonable, we certainly would want to do just what we did with KinderHawk which is at the appropriate time when we have a willing seller and the thing's built out a little more to go ahead and buy the rest of it. But that will be a decision BHP will have to make and we look forward to working with them any way we can, because they will be our biggest customer on KinderHawk up in Haynesville and we will have this joint venture with him down in the Eagle Ford. So we want to work with them, and we'll just see how things come out.

And then on the [Prius] Pipeline business, the Central Florida's volumes, do you expect that to the short-term issue or more sustained due to increased competition?

It just depends on the issue there is, of course, we are a little bit captive of our customers. Our customers are bringing the fine products into our terminal in Tampa and a couple of other terminals besides and then some of them get distributed in the Tampa area and then, some get put in the pipeline and move over to Orlando where we have a terminal and distribute it from that point.

And what we have had is a competing terminal up at Port Canaveral that has brought in supply, that the supply is apparently and considerably cheaper than -- because of the source of supply -- considerably cheaper so that it is not really a matter of the tariff on the pipeline itself. But they have been able to take some volume away, particularly in that area east of Orlando where they are trucking in.

Now, I have no idea whether that supply source of -- cheaper supply is going to stay or not. I suspect it will not be permanent, but I don't know exactly when that would change.

Final question. Are there any updates to your crude oil hedges?

Sure. I can tell you what they are. 2011 we are at $71 and 88% hedged. 2012, we are at 67% hedged and $89. 2013 is 45% and approximately $92. 2014 is 23% at approximately $93 and 2015 is 10% at, close to $100.

And those are excluding NGLs.

That's with (multiple speakers) NGLs. That was the way we presented it.

Yves Siegel with Credit Suisse.

Just -- if I could have some clarifying questions. Just went back to CO2. Tim, did you mention what you thought the infrastructure investment would be if you increased capacity on the production side?

We have preliminary numbers now at approximately $600 million to increase capacity by 100 million feet a day but also to sustain that increase to production capacity for nearly a decade. That doesn't include the pipe options. The pipe options are still a bit up in the air. We might be able to squeeze that additional capacity in our Cortez system.

Or there may be alternative dispositions if we want to evaluate and add to that capital estimate. But again that is very early estimates, and we are still doing some front-end engineering work to refine those estimates. And those numbers include both costs of well drilling as well as facilities that would be associated with that increased production.

What is the timeline if you were to go forward with that?

The first phase of the project, if we were to be able to contract of items and to secure, the approval of our board would be hopefully later this year, early next year to get that project evaluated and put forth.

That would be the first phase of it which would be approximately the first 50 million feet a day or so.

And how quick could you turn that investment into revenue?

Probably a two-year total construction project based upon our recent history when we had expanded the McElmo Dome and [bid the canyon] development. We started back in 2006. It didn't get completely finished until sometime in 2008. So I think that that is a reasonable framework to assume at this point.

But we would be talking about bringing on piecemeal as we went and braces there is a 50 million a day that could come on more quickly than the rest of it.

Could you also just expand again on what you are thinking on Trans Mountain and how much capital that might absorb if you were to go ahead with it?

Yes this is -- has the potential of being an enormous project. But again, I don't want to get out in front of ourselves. The advantage that we have at Trans Mountain is, as you recall, is that we can expand it piecemeal and this is all public data we have talked about before and certainly with our customers.

But just order of magnitude to get something, we now move 300,000 barrels a day on the system to get the next phase which is some earlier partial looping in certain areas, to get 60,000 to 80,000 barrels additional is about, we believe, about $1.3 billion. If you wanted to go to 300,000 barrels a day, which is a number some people have mentioned, then on top of what I just mentioned, probably another -- and these are ballpark figures -- something in the range of $3 billion.

But all of that is, I think that what I would take away from it is it would be large projects, but it could be done incrementally. And it just depends on what the customers wanted.

Right now, as you know, there's a lot of interest in getting to ports on the West Coast. We could build ours, relative terms, pretty quickly. But again, we are not going to do it if our customers aren't willing to stand up for it. I think they will in the end, but we'll just have to see.

And when do you think you may know if the customers would decide to go ahead with it?

Well, I think, the fact that we are going to be up there next week in Calgary going through with our team up there, so we'll know more after that. But I think they are certainly thinking that some time this fall we will be able to go out, whether it is a full-blown open season or what, we are not certain yet. But we would hope to get some kind of indication this fall as to what, if anything, our customers want to do.

But the advantage we have and I don't want to oversell it, because again there's a lot of issues on doing this. But the advantage we have is the ability to do piecemeal. You want to pick up 60,000 or 80,000 barrels, we can do that relatively quickly with much lower cost throughput agreements than if you are going to build 500,000 barrels obviously at one time for billions of dollars.

So that is an advantage we have and we also have a right of way that we have been on for 50 years. And we think we have pretty good relationships with the First Nations tribes along that right of way, but that is no guarantee that you won't have drawn out proceedings with them and that you won't have issues to get this thing done.

So we are trying to be very realistic about it. We think we offer a very good alternative. We have seen -- you know, that old saying it seems its time has come, but we will just have to see how all of this plays out.

And then, Rich, on Rockies Express, what is the thought process of potentially reversing some of that line?

It started out, I guess, in the mind of a reporter who asked a question and we said that [Mark Kissler] who runs our Western pipeline said will guess we might do a back haul and might move volumes west through displacement. And I guess the confusion was that he thought displacement was we were going to turn them around -- the line around.

Look, if our customers wanted to reverse that line, wanted us to reverse that line tomorrow, we would be happy to work with them and do it. Now we have got contracts that still have 8 1/2 years to run, that would call for us to move it from west to east and it is completely full right now. So one would think that certainly as you add more production in the Marcellus, the first thing you would do is actually have a displacement.

So for example, you could actually redeliver molecules coming into the line on the east part of the system in Opal, Wyoming and have that go on Ruby out to the West Coast. So you actually in theory could be somebody producing a molecule and Marcellus could actually get it to Oregon.

Whether that happens, I don't know. But that would certainly be a displacement. Back haul arrangements would be the first thing you would do long before you reverse the line now. At some point in time you could reverse that line. You have -- you would have to add some -- change some compression on some of the stations that depended on how far you want to go, but you know I think we are far -- a long distance from reversing that line. But again, we have said so many times if you have pipe in the ground, I think you have a huge advantage and we will make it do whatever our customers want us to do and long-term with that very valuable, huge 42-inch conduit that we have in REX.

Let's just pretend I didn't ask that question, okay?

And here is the last question and I'm pretty sure I know the answer to it, but at Kinder Morgan, Inc. level, what's the thought process of perhaps making acquisitions up there with the intent of dropping down assets into their partnership?

If the right opportunity came along, we would do that if we had a plan to drop them down. What we don't want to do is go back to being a mixed business up there where you have some nonqualifying assets sitting up there and instead of being able to explain very simply, hey, we are a general partner and here is what we get from KMP and you get what we get, less taxes and interest. We don't want to get away from that story.

But if we had the right opportunity where we could see a very clear open field to getting it dropped down into KMP, then that might be of interest to us. So we will just continue to look at it.

Thank you very much.

T.J. Schultz with RBC Capital.

Good afternoon. Just two quick questions. First on the Natural Gas segment, can you give us a contribution from to segment earnings before DD&A from the recent HK transaction or, alternatively, just talk about how the business ex that transaction is tracking towards plan?

Yes. We think that for KinderHawk for the year, we will come out pretty much on plan for the year. In other words, we had a plan obviously when we owned half of it and we think that's tracking pretty much to plan. And then now we own 100% of it for the rest of the year and we have put in the plan for the whole 100% to the last six months and we expect that to come out on plan, maybe do a little bit better. But right on plan we think.

So I think you said $45 million to $50 million above plan. So that is everything else is kind of tracking towards plan. So that excess is from the transaction? Is that the right way to look at it?

Yes. In the segment the excess above budgeted forecast is from the transaction. And just to be clear, you said the recent Hawk transaction, I mean the only transaction that had an impact in the first half of 2011 was the one that was closed in the second quarter of 2010. The transaction that just closed this year didn't close until July 1. And so, it had no impact in the first half.

Okay. Got it.

Just moving on to the export coal opportunities. You've talked before about 28 million to 30 million tons of export capacity can of at a cost of $175 million. I know you have talked about getting into more advanced conversations and was just curious as to that 28 million to 30 million times is still kind of the potential for the capacity there?

Yes, I think just looking at the whole field, I think if anything we are more bullish now than we were. As you know we are already expanding IMT pursuant to a long-term contract with one coal producer. We have already expanded and they are continuing to expand some of our Houston Ship Channel facilities to handle another export coal.

We expect to have an announcement on an additional customer at IMT within the next few weeks and probably additional there and in Houston from two additional customers within the quarter, we hope. So a lot of activity here and that's just really on the Houston Ship Channel and south of New Orleans. Then, we have other opportunities at some of our other terminals that we're actively working on, but we are further away from actually having signed deals yet.

So we have met with a lot of management. We think that the appetite for coal in China and India is enormous. It is pulling various supply sources from around the world, which gives opportunities for American producers, not just in the developing world like China and India, but to make up for -- in Europe, for example, for South African coal that is now going to India.

So there's just a lot of -- it is a worldwide market and we are finding that major American coal companies are very interested in tying up for long periods of time facilities that would allow them to move coal product either by rail or barge, and they like optionality of both to facilities like we have on the coast, and then be able to load them in the ships to go where ever they have long-term contracts.

Great. Thanks, guys.

Kathleen King from Bank of America Merrill Lynch.

Just wondering if you guys can talk about the capital plan around the Katz Field given the slower-than-expected ramp in production there? Is there any plan to spend a bit more CapEx there to get things going or --? If you could just talk about that?

Tim?

The short answer is no we are not spending money to accelerate the project. And the key reason for that is that the CO2 supply is so tight, that even if we had the wells and facilities ready to take more CO2, the CO2 just isn't there. Rich had mentioned that we are prorating our customers a bit. We are prorating ourselves a bit. So we are kind of boxed in at the present time.

Now, once the CO2 supply situation like this a bit, then I think that's certainly an option that we would consider. But at the present time, we have activated 12 patterns, which is close to our plan year to date? But we are probably going to go a little bit slower because our CO2 supplies that are available for the rest of the year are a little bit less than what we had expected.

Thanks, guys.

We show no further questions.

Well, thank you all very much. Have a good evening, and if you have any further questions, feel free to contact us. Thank you.

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