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Kinder Morgan, Inc. (NYSE:KMI)

Q2 2011 Earnings Call

July 20, 2011 4:30 pm ET

Executives

Rich Kinder – Chairman and CEO

Park Shaper – President

Tim Bradley – President, CO2

Kimberly Allen Dang – Vice President and CFO

Analysts

Darren Horowitz – Raymond James

Bradley Olsen – Tudor, Pickering, Holt

John Tysseland – Citigroup

Ted Durbin – Goldman Sachs

John Edwards – Morgan Keegan

Brian Zarahn – Barclays Capital

Yves Siegel – Credit Suisse

TJ Schultz – RBC Capital Markets

Cathleen Keane [ph] – Bank of America/Merrill Lynch

Operator

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

Rich Kinder

Okay. Thank you, Tamera, and thanks to everyone for calling in. This is the Kinder Morgan earnings call and we’ll 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 C-corp., owns the general partner of KMP together with LP units in KMP and KMR and a 20% interest in natural gas pipeline 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’ll 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 from $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 during 2011 and that resulted in $1.16 per share in terms of dividends.

We’re now on track to do better than $820 million, and therefore we’re raising the dividend to reflect the improved performance in terms of cash generated. The higher cash in 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 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’s a 6% increase over the distribution that we paid in the second quarter of 2010. Our budget target at KMP is to deliver or to 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 products 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’re doing a little bit better than the EIA numbers. But that said, I think it does show that there is a fragile recovery, and I think we are seeing some impact from higher gas prices. We 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 product 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. It had a very nice increase in military volumes in the West, over 20%. But on our commercial volumes of jet fuel across the system, they were up approximately 9.5%. So that’s 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 Plantation Pipe Line were positive compared to a year ago. Our Central Florida Pipeline was down compared to a year ago largely because of a 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 there with a number of customers to ship additional volumes above our original 50,000 a day commitment from Petrohawk.

Our Carson Terminal in Travis Air Force Base expansions in California are on budget and expected to be in service somewhat ahead of our original target. Now, also pertain to the Products Pipelines segment, 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 regard an adverse decision from the CPUC, the main tenant of which was that contrary to its own past procedure and 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 Appellate Courts because we believe it is contrary to other decisions outstanding and to precedent. But accounting requires that we go ahead and take that right down now even though we may or may not be successful in our appeal. And we’ve decided to do that, and that makes up the 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 partners of 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’s the Haynesville gathering and treating system by Fayetteville Express pipeline, which went into service the 1st of this year, and by good results in our Casper-Douglas processing assets up in Wyoming. The negatives in the quarter were lower volumes in fuel recoveries at KMIGT, higher property taxes at Rockies Express, and an adverse decision on fuel recoveries 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 1st, 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 in the Eagle Ford Shale in South Texas. As a 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 a day 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 the BHP’s presentation, you saw some pretty significant ramp-up in dollars they expect to spend on their drilling program, and 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 in Haynesville and Eagle Ford.

We now own also the 25% of what’s called EagleHawk Field Services in the Eagle Ford. That is 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 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’ve 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 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 the expansion projects in 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 and 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. NGL volumes were strong for the quarter, although our net volumes were, as expected, below the second quarter of 2010 because of a contractual reduction in our net interest and the production from the Snyder gas plant. But the volumes themselves were 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 floods remained slower than planned, but is within the range of 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 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.

Overall 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’re 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 we’re 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’s consistent with last year, that’s 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’s 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 petcoke 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 volumes not quite as strong, but still steel volumes were up 3% for the quarter and over 10% year-to-date.

In this segment, we continue 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 leads 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 release that until all of the documents are signed with our customers, which we think would 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 of 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 at 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 the second quarter had the 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 the tsunami.

Looking at a more specific indication of how strong things are, we’ve taken a very preliminary look at 2012. It’s very preliminary, but we expect growth in all five of our business segments. 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’re telling you is that in 2011 we’re going to do better than we thought and it looks like in 2012 we’re also going to be able to chain [ph] the bar at better than the numbers we talked about just a few months ago when we were on the IPO road show. Now, that said, we’ll 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’re 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.

Park Shaper

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 really did 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’ll really go 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’re seeing is really just the effect of seasonality and a little bit of timing. A fair amount of this, really more than this was expected. As I said, we are above our budget. And so it’s really related to seasonality. 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’ve 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. We are above $70 million currently, as we look at our forecast. That’s actually down a little bit from where we were at the end of the first quarter. You may recall that. But that’s 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 and 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, you have net income per unit. We don’t believe that’s an overly meaningful measure. I think DCF per unit much more relevant. And so going above that, you have DCF before certain items. You will 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 expected 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’ve spent a little bit more in ’11 than we did in ’10. We actually had spent less than our budget year-to-date. And that’s 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 & 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’s 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’re 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 ’11. Year-to-date, cash taxes were less than book taxes by a little over $10 million.

Above that, you have DD&A. DD&A is 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 will see that it’s 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’s higher. We think that’s a more relevant way to look at it. Again, we are looking for cash flow as opposed to accounting earnings.

And above that, you have the general partner’s interest. You will note that the second quarter 2010 is when we had the interim capital transaction. We treated that as if it had not occurred from a KMP perspective, but if we had not added it back in, it would have shown KMP as generating significantly more cash than what KMP generates on a recurring basis. So that’s what’s going on on that line, is that it’s 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’ll just catch some highlights. On the Products Pipelines side, 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’s 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 build the budget.

The main reasons are the inventory accounting change that took place in the second quarter of 2010. And that had a positive on 2010 second quarter that the second quarter of ’11 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, but 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 assets. 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 this, but it’s 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, all together, as we look out for the year, we expect CO2 segment to be above 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 it’s a function of flooding and tornadoes 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, our petcoke volumes and its 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 the quarter; $1.73 billion year-to-date, 6% up year-to-date, and a little bit ahead of our plan for the quarter. As we look forward, our annual budget was about $3.65 billion in segment earnings before DD&A. Our current forecast has a slightly above $3.7 billion of segment earnings before DD&A. So again, outperformance at the segment level, helping to drive expected outperformance overall.

With that, I’ll jump over DD&A and skip over the segment earnings contributions and get to G&A. And you will see it’s 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 current forecast has less than $1 million negative to forecast. And so, essentially right on for the year.

Interest, you will see, is up slightly. So, solidly greater interest for the quarter, also for the year-to-date. But it is under budget for the quarter and it’s under budget year-to-date. We expect it will be under budget for the entire year. And basically what’s 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 net income. I’ll talk about the certain items quickly. Rich has already touched on the largest. The allocated non-cash long-term compensation, we will not have any more current amount in that line, but the past amounts show up there. Allocated non-cash employee growth share plan 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 had 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’s primarily environmental and is very small. The legal reserves at $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 and 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’s showed 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 after 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 write-offs there when an event happens, and then you see positive amounts come through like you’re seeing there when we recover insurance proceeds. And so that’s what’s going on on that line.

And in the gain or loss on sale of assets and asset disposition expenses, we’ve 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. We have sold the first piece of it and did realize that cash in the second quarter. And that’s the positive amount that you see here. There still is another piece to come, 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. It did result in our writing off a receivable that we have related to fuel recoveries, which shows up in the certain item amount in all the prior periods related to that, and so prior to 2011. The 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. 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’s approximately $170 million. The exact number will be defined once we come out with the third quarter results in October. So again, that’s 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 down that fairly quickly, cash and cash equivalents are up considerably. That’s a function of some cash that we have in Canada and a function of the prefunding that we did for the Petrohawk transaction. So we issued equity in June. We raised cash then, but again the transaction didn’t close until July 1st. The balance sheet and financials are as of June 30th. And so we had 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’ll 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. The Eagle Ford investment, the Deeprock acquisition, and then on REX and MEPs, the balance is moving the other way.

Deferred charges and other assets, that’s 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 – really it’s 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 in the middle of March 2012.

We also have a debt issue that can be put to us on February 1st of 2012. As we said last quarter, we would love for that issue to be put to us. It’s 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 rates. And then in Other is where you see the rate case reserve being added in. And so it’s 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’ll get into that in more detail in a minute. So the total balance sheet is about $22.3 billion. That’s 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 prefunding of the Petrohawk acquisition. And so you will see debt-to-EBITDA of about 3.4 times. Again, that was temporary. The very next day the debt went up because we closed on the Petrohawk transaction.

And so we’re really around about 3.65 to 3.7 times right now although, as we said before, we believe that that really understates the strength of the balance sheet because that number is what all of the debt outstanding related to the acquisition but includes none of the EBITDA because we’re doing a trailing 12-month EBITDA number here. We are not pro forma-ing our EBITDA for acquisitions and expansions that come on throughout the year. So really we think that – 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’ll probably end the year right around that range, in the 3.6 to 3.7 range. That’s a little bit higher than where our budget was.

And the reason why it’s higher, for the exact same reason that I just mentioned, is 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’s where we expect to end 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 contribution 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, at the market program raised equity at $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 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’s 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, source of cash of about $35 million, AR and AP generated about $70 million, other current assets and other current liabilities were use of cash of about $50 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’s 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, little over $40 million year-to-date. Largely that’s the project going on in Eagle Ford although what shows up in this number are just the pieces of that that are 100% ours. The portion that we are a part of the JV or in the JV contributions, and I’ll 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 going on at SACROC and then of course the ongoing expansion at Katz. On the Terminals side, a little under $60 million for the quarter, about $120 million year-to-date. And that’s a whole variety of smaller projects that are going on there. And Kinder Morgan Canada, about $3 million for the quarter; $5 million year-to-date.

And in the contributions to JVs, 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’s about a little less than $30 million in the quarter and a little over $40 million year-to-date. And we’ve also made some contributions to Red Cedar and to the Deeprock joint venture, which is the oil tanks at Cushing that we bought into in the beginning of this year.

And that is it for KMP. I will move on to KMI. And again, 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 increased almost 13% to $575 million.

Similarly, the distributions on the KMP units and the KMR shares have gone up, primarily as a function of the distributions themselves going up, the 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 PipeCo distributions to us, you will see almost $6 million in the quarter, about $10 million year-to-date. That’s a little bit below our budget although for the full year, our full year forecast, we do expect NGPL distributions to be on budget. Total distributions received, $336 million. It’s up almost 14% for the quarter, but that’s in part because there was not an NGPL distribution in the second quarter of ’10. For the six months, $664 million, it’s up 11% from the second quarter of 2010.

G&A, essentially consistently with our budget, we actually expect it slightly unfavorable and we expect it to be slightly unfavorable for the year, but it’s around $1 million in total and it’s related to legal costs and a little bit of incremental tax expense that’s really related to some state tax consulting work that has resulted in much greater savings. It’s just that those savings 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 expected 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’s 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 it was a $205 million dividend in each quarter, which means if you look at the second quarter of ’11, 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 swings quarter-to-quarter, in the first quarter, we tend to have high coverage because we have no tax payment.

Now, we do have a cash interest payment, but still we tend to have high coverage in the first quarter. In the second quarter, we tend to have low coverage because we have two tax payments. The third quarter tends to be low coverage because we have a tax payment and an interest payment. And then the fourth quarter tends to be high coverage because we have a tax payment, but no interest payment.

And 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 received 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, 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 and 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 has what made us comfortable in increasing the dividend to $0.30.

Now, one of the things 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 are 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’s also done in terms of our budgeted and forecasted 2011 KMI dividend because what we budgeted and forecasted is what we will pay during the four quarters of 2011. So when we talked about $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 of paid versus declared.

The next page is the income statement for KMI. I’m not going to spend any time on this. I don’t think that 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 movements that you see in here 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 shareholders litigation, but especially insurance recovery from the shareholder litigation, shows up here we have not counted that as ongoing recurring cash flow. And then there our purchase accounting effects that show up here that again I think just stored the understanding of what is driving KMI. There is one thing that I’ll point out when you get down to diluted earnings per common share.

You will see that there are two numbers there, and it’s true of the basic earnings per common share as well. There are 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 As, the Class Bs, and the Class P. And you will find this in footnote two. But keep in mind that the total number of P shares that all of the As, Bs and Cs can convert into is fixed.

And what that means is, however things are divided between the As, Bs and Cs, the Ps have no impact. However this stuff is divided between the As, Bs and Cs, it has no impact on the Ps. It will never dilute the Ps, it will never impact the Ps. It’s all just amongst – it is a part and it’s a fixed part, and it just – what will be determined going forward is how it’s split between the As, Bs and Cs.

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’s not any reason to pay attention to it. And there’s not any real reason or there’s not any real information you’re going to glean from the basic earnings per common share for the Class P shares as well. I think it’s 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’m not going to go through it in detail this quarter. The reconciliation is there. You can look at it. If you have questions on it, I’d be 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 have break out the KMP amount so that you can see the differences.

Now that being said, there are still distortions. For example, the property, plant and equipment. That KMI line is 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 has to be implemented at the time of the MBO, 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’m 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 show that down at the bottom, and again as always, we’ll take you through what’s going on there. So KMI’s debt, about $3.2 billion, a little over $3.2 billion. It’s up about $17 million from where it was at the end of 2010. It’s also about $42 million from it 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 dividends actually paid in the quarter were just $100 million.

We paid out the special bonus, which was cash but didn’t actually come from the company. We paid out that bonus of $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 $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 gives you to the $42 million essentially increase in debt.

For year-to-date, debts gone up about $17 million. We generated $405 million. We paid dividends of $410 million, except the $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 of the year of about $21 million. KMR again was in essence of use of cash of $30 million because we received those shares, but we haven’t yet converted them to cash. We had the MBO insurance receivable of $46 million. And then we had some fees and 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. The big items again are just cash generated and dividends paid, although again this year there is 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. I’ll give it back to Rich.

Rich Kinder

Okay. Tamera, we’re prepared to take any questions if you’ll come back on. Tamera, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Darren Horowitz. Please announce your company.

Darren Horowitz – Raymond James

Raymond James. Good afternoon, Rich, everybody.

Rich Kinder

Darren, how are you?

Darren Horowitz – Raymond James

Good. Thank you. Rich, just a couple quick questions. I want to go back to an earlier point regarding CO2. Can you just talk about the associated cost to increase 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 will be very helpful.

Rich Kinder

Okay. Yes. I’ll start and then I’ll ask Tim Bradley, who is sitting next to me and 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’re 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 the Southwest Colorado and then either expanding the present infrastructure to get it down to the Permian or building new infrastructure that would tie and to other areas of the Permian. With that, I’ll kind of let Tim take a crack at it.

Tim Bradley

Thank you, Rich. Our current look at what we are planning to initiating the 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 of 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, $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 to just 100 million cubic feet a day. Those discussions are very early. It’s probably premature to get into that. But that’s another element of our valuation that we’re 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 work in progress, and we’re hoping to pin these things down from an operational standpoint as well as from a contractual standpoint in the weeks and months to come.

Darren Horowitz – Raymond James

Tim, I appreciate the color. Rich, final question for me. Regarding that new 300,000 barrel a day crude/condensate 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, 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.

Rich Kinder

I think we said last time, Darren, that even if we didn’t move any more than the 50,000 barrels a day, it provides with adequate return above our cost of capital. So anything on top of that, we just increase. There is 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 volume. 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 into figuring up 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’s going to be a very good project. As we said earlier, we’d expect to get at least a mid-teens return on the overall project and maybe significantly better than that.

Darren Horowitz – Raymond James

I appreciate it, Rich. Thank you.

Rich Kinder

Thank you.

Operator

Next question comes from Bradley Olsen. Could you please state your company name?

Bradley Olsen – Tudor, Pickering, Holt

Tudor, Pickering, Holt. Good afternoon, guys.

Rich Kinder

Good afternoon, Brad.

Bradley Olsen – Tudor, Pickering, Holt

Just a couple quick ones. On the Natural Gas segment, I guess I was kind of 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 kind of either of those systems that are going to be persisting or do you expect kind of a return to the margin levels from the first quarter going forward?

Park Shaper

We typically have seasonality in the Natural Gas Pipeline segment. I think we have published those. I mean, you can just go historically and look at our segment earnings for before DD&A or the segment for the last few years and you will 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’re 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.

Bradley Olsen – Tudor, Pickering, Holt

Okay. Thank you.

Rich Kinder

And a point on SEC [ph], Fayetteville was in service on the 1st of January of this year. So that was in both quarters.

Bradley Olsen – Tudor, Pickering, Holt

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

Rich Kinder

That’s 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.

Bradley Olsen – Tudor, Pickering, Holt

Right. Okay. Great. Thanks for that. And as far as the charge that you guys took in 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 kind of 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?

Rich Kinder

Well, let me say first of all, of course, it’s a long way from here to Tipperary. We’re going to appeal this and we’ll 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 in excess coverage over the years. But we just have to look at that and see what our cumulative coverage is at that time and what it looks like going forward and where we are with regard to when the actual cash payments get made.

Park Shaper

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’s what’s resulted in the additional reserve this period. But the ICT analysis is different from the accounting reserve analysis. And so, as Rich says, we’ll make that determination at that time. I think the important thing is what we’ve stated when the decision came out and what we 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.

Bradley Olsen – Tudor, Pickering, Holt

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 kind of area projects that you and Watco might have announced – or made an announcement earlier this year about pursuing?

Rich Kinder

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 are areas we’re involved in. And this looks very good from the standpoint of – again, we talked about this as linked 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’re even going to be providing some truck capacity for them to get them to a central point. And we can do to help our customers on an interim basis until pipeline capacity gets built up that we want to deal them [ph] that specifically applies to the situation that presently exists in Oklahoma, of course.

Bradley Olsen – Tudor, Pickering, Holt

Great. Thanks a lot for the color.

Operator

Next question comes from John Tysseland. Could you please announce your company?

John Tysseland – Citigroup

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

Rich Kinder

Well, we think we have a detailed engineering and we have already contracted to the long lead-time items. And so far, anything we are running a bit under our estimate on the condensate line, just a bit under the 220, but I wouldn’t reduce that at this time. I think that’s about where we end up. We think we have numbers that embrace what the current situation is. And again, we’ve already tied up the long lead-time items.

Park Shaper

And further protection to us, just remember that a significant portion of the crude/condensate line is conversion of an existing line. And so it does require that we lay new pipe, we just have to do some work to convert it from gas service to crude or condensate service.

Rich Kinder

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 1st. And that’s coming in right at its budget. So we are not seeing any kind of wild inflation on the pipelines side. And I know there have been 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.

John Tysseland – Citigroup

And then I think back to parts kind of when on the conversion. I mean, obviously that gives you a lot of cost advantage there. And during your cost cap, you could charge a lower rate. Do you kind of see it as – you know, if producers do want to sign up for capacity or incremental capacity coming out of a region that this is a low-cost option or do you see I guess some of the pipelines go into Corpus Christi as being competitive?

Rich Kinder

Certainly I think any pipeline coming out of Eagle Ford is competitive, as we said before. It’s 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 can get to Corpus, and once you’ve used up, forever you’re going to use the refineries here, you can 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 that we will be able to make use of some of our huge tank position at the Pasadena/Galena 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 diluents [ph].

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’s going to seek the highest best use, some that 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 diluents. Just all kinds of different uses, and some of that depends on the exact grade of condensate coming through the line and there will be blending opportunities. So we think overall we’re going to offer, we hope, something close to one-stop shopping, but there is lot of competition out there and there will be a lot of good services offered to people who are producing condensate in Eagle Ford. And that should be the case.

John Tysseland – Citigroup

That’s great color and very helpful. Does that mean that you potentially could be looking at some more Houston tank expansions given what’s going on right now?

Rich Kinder

We are looking at those opportunities, yes.

John Tysseland – Citigroup

And then lastly, a quick clarification question on the S&T business and 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?

Rich Kinder

That’s from third parties, John.

John Tysseland – Citigroup

Okay. Okay, great. Thank you.

Operator

Next question comes from Ted Durbin with Goldman Sachs. Your line is open.

Ted Durbin – Goldman Sachs

Thanks. If I could come back to – and I appreciate the sort of preliminary look on the 2012 outlook. Can you break down – if you say you’re going to 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’ve done, the organic growth? Can you give us a little more detail there?

Rich Kinder

I think, again, we’ve just done an overview at the treetop level, and I think to give any more color on it will need to wait till we get through the budget process, which as usual we will put out in the mid-November timeframe.

Park Shaper

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

Kimberly Allen Dang

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

Ted Durbin – Goldman Sachs

Yes, that is helpful. Thank you. And then if you could just talk a little bit more about – it sounds like you are pretty previous on the acquisition of Petrohawk. How much more upside you might see in the Haynesville and Eagle Ford from the acquisition?

Rich Kinder

Well, you all need to judge that too. The numbers that we saw published by BHP show that contrasted with Petrohawk spending about $2.9 billion, I think, at the present time for drilling that BHP 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’s 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 will see them ramp up the drilling program and the production in the Haynesville and for that matter in the Eagle Ford also. But certainly I think it will be a positive for our investment in both places. And again, I know there’s some doubt in commerce [ph] out there about the Haynesville.

We’re very positive this is an area that’s 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’re now running modestly above 1 Bcf a day. We said that’s what we projected we would average for the year, and we hope to end the year at about 1.2 Bcf a day. So we are over the 1 Bcf and still growing now. So we think that Haynesville is going to turn out to be a very good investment for us.

Ted Durbin – Goldman Sachs

That’s helpful. Thanks. If I could just one more – do you have any updates on the Bakken? I know you’ve tried to get some volumes on the Cochin there. Any update on the success you are having there?

Rich Kinder

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

Ted Durbin – Goldman Sachs

Okay. That’s it for me. Thanks a lot.

Rich Kinder

Thanks.

Operator

Next question comes from John Edwards with Morgan Keegan. Your line is open.

Rich Kinder

Hey, John, how are you doing?

John Edwards – Morgan Keegan

Yes. Good afternoon, Rich. Doing well. Thank you. Just real quick, you mentioned very strong demand for CO2 and I’m just wondering – as far as pricing, are you seeing that firm up as well?

Rich Kinder

Yes, our – and I’ll let Tim jump in on that. Yes, we are seeing a firming up of pricing. Tim?

Tim Bradley

Yes. I think without getting too specific, we did 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 are seeing is that that percentage of oil price is increasing. So we’re 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 as the percentage. So, very strong conditions for us to look at some significant expansion opportunities.

John Edwards – Morgan Keegan

Okay, great. Thank you. That’s all I had.

Rich Kinder

Okay.

Operator

Next question comes from Brian Zarahn from Barclays Capital. Your line is open.

Brian Zarahn – Barclays Capital

Good afternoon.

Rich Kinder

Hey, Brian, how are you doing?

Brian Zarahn – Barclays Capital

I’m doing well, Rich. Thank you. 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?

Rich Kinder

We’ll just look at that. I think the third quarter would probably be a good time when we would look at it. 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’s looking above plan in the third quarter also. So I think we will 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. But if the year continues to develop as well as it looks like it will, we’re going to look seriously at that for the third and fourth quarter.

Park Shaper

And Rich, you actually reminded me of something that I forgot to say earlier, but – I talked about the second quarter. 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 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 again, I just wanted to provide that information for everybody’s benefit.

Brian Zarahn – Barclays Capital

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

Kimberly Allen Dang

$2.5 billion.

Park Shaper

Yes, including acquisitions.

Kimberly Allen Dang

Including the Petrohawk acquisition, yes.

Rich Kinder

Including Petrohawk acquisition, about $2.5 billion.

Brian Zarahn – Barclays Capital

Okay. And then regarding the BHP’s acquisition of Petrohawk, has that increased or decreased the probability of you acquiring the remaining stake at EagleHawk?

Rich Kinder

We really don’t know that. We will just have to see what BHP’s attitude is on that. We certainly – assuming 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 in the Haynesville to have a little more to go ahead and buy the rest of it. But that would be a decision BHP will have to make, and we look forward to working with them anyway we can because they will be our biggest customer on KinderHawk up in Haynesville, and we’ll have this joint venture with them down in Eagle Ford. So we want to work with them and we just see how things come out.

Brian Zarahn – Barclays Capital

Okay. And then on the Products Pipeline business, the central part is volume. Do you expect that to be short-term issue or more sustained due to increased competition?

Rich Kinder

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 our couple other terminals besides. And then some of it get distributed in the Tampa area and then some get put into pipeline and moved over to Orlando where we have the terminal and distributed from that point. And what we’ve had is a competing terminal up at Port Canaveral that has brought in supply that the supply is apparently considerably cheaper than – because of the source of the supply, considerably cheaper so that it’s not really a matter of the tariff on the pipeline itself. So they’ve been able to take some volume away particularly in that area, east of Orlando where they are trucking in. I have no idea whether that supply – source of cheaper supply is going to stay or not, but I suspect it will not be permanent, but I don’t know exactly when that would change.

Brian Zarahn – Barclays Capital

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

Kimberly Allen Dang

Sure. I can tell you what they all are. 2011, we’re at $71 and 88% hedged; 2012, we are 67% hedge at $89; ’13 is 45% at approximately $92; ’14 is 23% at approximately $93; and ’15 is 10% at close to $100.

Rich Kinder

And those are excluding NGLs –

Kimberly Allen Dang

That’s with the heavy NGLs. That was the way we presented it.

Brian Zarahn – Barclays Capital

Thank you.

Operator

Next question comes from Yves Siegel with Credit Suisse. Your line is open.

Rich Kinder

Hi, Yves, how you’re doing?

Yves Siegel – Credit Suisse

Terrific. Thank you. I just have some clarifying questions. Just going back to CO2, Tim, could you mention what you thought the infrastructure investment would be if you increase capacity on the production side?

Tim Bradley

We have preliminary numbers, and that leaves at approximately $600 million increased capacity by 100 million feet a day. But also to sustain that increased production capacity for nearly a decade, that doesn’t include the pipe option. 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 disposition that we want to evaluate and add to that capital aspect. But again, it’s very early estimates and we’re still doing some front-end engineering work to refine those estimates. And those numbers include both the cost of well drilling as well as that facilities that would be associated with that increased production.

Yves Siegel – Credit Suisse

So what’s the timeline if you would go forward with that?

Tim Bradley

The first phase of the project, if we were to be able to contract the volumes 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. The first phase of it, which would be approximately the first 50 million feet a day or so.

Yves Siegel – Credit Suisse

And how quick could you turn that investment into revenue?

Tim Bradley

Probably a two-year total construction project based upon our recent history when we’ve expanded the McElmo Dome and did the Doe Canyon development. We started that in 2006. It didn’t get completely finished until sometime in 2008. So I think that that’s a reasonable framework to assume at this point.

Rich Kinder

(inaudible) will be talking about bringing it on piecemeal as we went, and that’s compared to there’s 50 million a day that could come on more quickly than the rest of it.

Yves Siegel – Credit Suisse

Okay. Could you also just expand again on what you’re thinking on Trans Mountain and how much capital that might absorb if you would go ahead with it?

Rich Kinder

Yes. This is – it has the potential to bring in enormous projects. But again, we don’t want to get out in front of ourselves, the advantage that we have with Trans Mountain, 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 in on top of what I’ve just mentioned, probably another, and these are ballpark figures, something in the range of $3 billion. But all of that is – I think 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 is a lot of interest in getting to ports on the West Coast. We could build ourselves in relative terms pretty quickly. But again we’re 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.

Yves Siegel – Credit Suisse

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

Rich Kinder

Well, I think – in fact we’re 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 sometime this fall we’ll be able to go out, whether it’s a full blown open season or what, we’re 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 days we have, and I don’t want to oversell it, because again, there’s lot of issues on doing this. But the advantage we have is the ability to do it piecemeal.

You want to pick up 60,000 to 80,000 barrels, we could do that relatively quickly with much lower cost throughput agreements than if you’re going to build 500,000 barrels obviously at one time for billions of dollars. So that’s an advantage we have, and we also have a right of way that we’ve been on 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’re trying to be very realistic about it. We think we offer very good alternative we’ve seen. And there’s a saying it seems as time has come but – you know, we’ll just have to see how well this plays out.

Yves Siegel – Credit Suisse

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

Rich Kinder

Well, it started out, I guess, in the mind of a reporter who asked a question and we said – Mark Kissel, who runs our Western Pipelines, said, well, yes, we might do a backhaul and might move volumes west through displacement, and I guess the confusion was that he thought displacement was we’re going to turn the line route. 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 that we’ve got contracts, we still have 8.5 years to run that call for us to do it from west to east and it’s completely full right now. So one would think that certainly, as you have 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 goal on Ruby out to the West Coast. So you actually, in theory, could be somebody producing a molecule in Marcellus, could actually get it to Oregon. Whether that happens, I don’t know. But that would certainly be a displacement. Backhaul 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 to add some – change some compression on some of the stations that depended on how far you wanted to go. I think we are far a long distance from reversing that line, but again we said so many times if we have pipe in the ground, I think you have a huge advantage of. We will make it do whatever our customers want us to do in the long-term with that very valuable, huge 42-inch conduit that we have in REX.

Yves Siegel – Credit Suisse

Let’s just pretend I didn’t ask that question, okay? And here’s 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 since the partnership?

Rich Kinder

If the right opportunity came along, we would do that. If we have 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 non-qualifying asset sitting up there, and instead of being able to explain very simply, hey, we’re 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 have 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’ll just continue to look at it.

Yves Siegel – Credit Suisse

Thank you very much.

Operator

Next question comes from TJ Schultz with RBC Capital Markets.

TJ Schultz – RBC Capital Markets

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

Rich Kinder

We think that for KinderHawk, for the year, we’ll 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 a little bit better, but right on plan we think.

TJ Schultz – RBC Capital Markets

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

Park Shaper

Yes. And in the segment, the excess above budgeted forecast is from the transaction. And just to be clear, getting – he said the recent Hawk transaction. I mean, the only transaction that had an impact in the first half of ’11 was the one that was closed in the second quarter of ’10. The transaction that just closed this year didn’t close until July 1st. And so we had no impact in the first half.

TJ Schultz – RBC Capital Markets

Okay. Got it. Just moving on to export coal opportunity, you’ve talked before about 28 million to 30 million tons of export capacity kind of at a cost of $175 million. I know you’ve talked about getting into more advanced conversations. Just curious as to that 28 million to 30 million tons is still kind of the potential for the capacity there.

Rich Kinder

Yes. I think just looking at the whole field, I think if anything we’re bullish now than we were. As you know, we’re already expanding IMT pursuant to a long-term contract with one coal producer. We have already expanded and are continuing to expand some of our Houston Ship channel facilities to handle another export coal. We expect to have an announcement on additional customer at IMT within the next few weeks and probably additional there and in Houston 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.

And we have other opportunities in some of our other terminals that we are actively working on, but we’re further way from actually having signed deals yet. So we’ve met with a lot of management that we think that the appetite for coal in China and India is enormous. It’s pulling various supply sources from around the world, which gives us 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’s now going to India. So there’s just a lot of – it is a worldwide market and we’re finding that the major American coal companies are very interested in tying up for long periods of time facilities that will 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 wherever they have long-term contracts.

TJ Schultz – RBC Capital Markets

Great. Thanks, guys.

Operator

Next question comes from Cathleen Keane [ph] from Bank of America/Merrill Lynch.

Cathleen Keane – Bank of America/Merrill Lynch

Good evening, everyone.

Rich Kinder

Hi, how are you doing?

Cathleen Keane – Bank of America/Merrill Lynch

Good. 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?

Rich Kinder

Tim?

Tim Bradley

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’re prorating our customers a bit, we’re prorating ourselves a bit. So we’re kind of boxing at the present time now. Once the CO2 supply situation relaxes a bit, I think that’s certainly an option that we would consider. But at the present time, we’ve got activated 12 patterns, which is close to our plan year-to-date, but we’re probably going to go a little bit slower because our CO2 supplies that are available for the rest of the year a little bit less than what we had expected.

Cathleen Keane – Bank of America/Merrill Lynch

Got you. Okay. Thanks, guys.

Operator

We show no further questions.

Rich Kinder

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

Operator

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

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