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Kinder Morgan Energy Partners, LP (NYSE:KMP)

Q2 2007 Earnings Call

July 18, 2007 4:30 pm ET

Executives

Richard Kinder - Chairman & CEO of KMR

Park Shaper - Director & President of KMR

Kimberly Dang - CFO of KMR

Jim Wulk - CFO of CO2

Analysts

Dan Jenkins - State of Wisconsin Investment Board

John Edward - Morgan Keegan

Alex Maier - Zimmer Lucas

Barrette Laskey - RBC

Gabe Moreen - Merrill Lynch

Dennis Coleman - Banc of America Securities

Presentation

Operator

Good morning, good afternoon or good evening and thank you all for holding. I would like to remind all parties that your lines have been placed on a listen-only-mode, until the question-and-answer session in today’s call. The call is also being recorded, if anyone has any objection you may disconnect at this time.

I would now like to turn the call over to Mr. Rich Kinder. Thank you sir, you may begin.

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Richard Kinder

Okay. Thank you Olly (ph) and welcome to the Kinder Morgan Energy Partners Second Quarter Analysts Call. As usual, we’ll be making statements within the meaning of Securities Act 1933 and the Securities Exchange Act 1934.

I will give an overview of the results for the quarter and significant developments during the quarter. Park Shaper, our President will then give you the financial details and then as usual we’ll take any questions, which you may have.

It was a very good quarter for KMP, we increased the quarterly distribution to $0.85 from $0.83 and we produced distributable cash flow per unit of $0.87 versus $0.77 a year ago, which is an increase of 13%.

As based on the year-to-date results and our outlook for the balanced year, we now believe we will meet or exceed the $3.44 distribution per unit target, which was in the budget for 2007.

KMP reported second quarter distributable cash flow before certain items of almost $205 million, up 19% from $172 million for the same period in 2006. Total segment earnings before DD&A increased by 13% over $553 million versus the same period last year and well above our plan in the budget for the second quarter.

Our results were delivered -- were driven by outstanding performances from the products pipeline and natural gas pipeline business segments. And we have solid contributions from our recently acquired a Trans Mountain pipeline.

And these policies were somewhat offset by continuing the low budget oil production for SACROC unit and our CO2 business segment. Also during the quarter, we continued to make a lot of progress on new projects and expansions, I’ll remind you that KMP intends to invest about $2.7 billion in 2007 on new projects, all of which are expected to result in significant future growth for KMP.

And in addition to that $2.7 billion we’ve already made about $600 million in acquisitions this year, the largest by far of which was the Trans Mountain drop down. For the first six months of 2007, total segment earnings were about $1.60 billion, up 9% a year-to-date.

Now, let me talk briefly about each business segment, I’ll start with the products pipeline, they generated second quarter earnings over 15% higher than a year ago. Well above their plan for the quarter, we believe they are on track to exceed the published annual budget for this segment.

Adversely, all the assets in the group produced higher earnings before DD&A than the comparable quarter a year ago, and the results were really driven by particularly strong performances from the Pacific operations and our Transmix operations together with the Cochin pipeline.

I always try to talk a little bit about volumes on the product’s assistant. Volumes were up 2.7% for the quarter, if you exclude Plantation Pipe Line, which is impacted by competing pipeline that began service mid year of 2006, total refined products excluding Plantation increased by 4.7% and that compares to about a 1.8% national increase for the EIA number, so good growth in volumes in our products pipelines.

Again, excluding Plantation for the quarter, gasoline volumes were up over 3% and diesel volumes up about 6%, jet volumes up a little over 8%. We kind of uses as the bell cow our Pacific System, and the revenues there were up 5.9% for the quarter.

And in fact during June, we set an all time record throughput of about 37 million barrels through this system. A lot of that was driven by Arizona volumes, which were up almost 15% for the quarter.

And this primarily reflects the fact that about this time last year, we brought on the expansion of the east line in Arizona, and that drove the increase in Arizona volumes. But volumes in California were up by over 3.5% for the quarter.

So products pipeline had a exceptionally good quarter, really hard to recall if anything there, performance well above last year, well above plans.

The Natural Gas Pipeline segment grew its earnings by 10% compared to the second quarter 2006. And again it's well above its plan for the quarter and we believe it's on track to exceed its published annual budget.

The driving force in the Natural Gas Pipeline segment was our Texas Intrastate Pipelines, that portion of the pipeline group produces a more than half of the segments earnings, and their earnings before DD&A were up 36%, that is the earnings of the Texas Intrastate group. That was driven by higher sales margins as we’ve renewed and signed new contract. We had increased transportation revenue as a result of higher volumes and we had very good value from our storage activities in the state of Texas.

Transport volumes for the Natural Gas Pipeline segment increased by about 14%, compared to the second quarter of last year.

Now, let me to the CO2 segment. They’ve produced earnings, which were up about $2 million or almost $3 million from last year or about 2%, but the segment was well below its plan for the quarter and we expected to be substantially short of their published annual budget.

Overall, if you break apart that CO2 segment it continues to perform pretty well with the exception of oil production at the SACROC unit. So, we had an increase in oil production at Yates. We had higher NGL sales. We had improved CO2 sales and transport business.

Our average oil production from the second quarter was 27,000 barrels per day at Yates; that was up 3% compared to a year ago. And we produced 28,000 barrels per day at SACROC, which was a decline of 9% versus the second quarter of 2006. On the bright side, the NGL sales volumes were up about 8%.

The segment is doing well, I think except for SACROC. There, we continue to work on our sub-pump failure rate and on our down hold conformance issues in an effort to improve production.

Reinecke, and this has been a great asset for us over the last several years. We still expect greater things from it. And the years that we’ve owned it, we’ve increased the oil production from 8,500 barrels per day. When we took over to the level that we have today. When we took over to the level that we have today.

In our Terminal segment, we had earnings that were up about 8% from the second quarter a year ago, and basically on plan, just slightly under our plan for the quarter. We’d believe that segment is on track to meet it’s annual budget target.

We had growth in the Terminal segment compare to last year driven by both organic opportunities and some acquisitions. But internal growth accounted for well over half of the growth in the quarter. And a lot of that internal growth came from our huge Pasadena and Galena Park liquids complex on the Houston Ship Channel.

We’ve been continuously expanding that as you know and we have a lot more expansion to go. So, we continue to grow our revenues and earnings from that asset.

We also had organic growth coming out of our Shipyard River Terminal, which we expanded last year that’s in Charleston, South Carolina. And we had good news from both our IMT and Harvey terminals in Louisiana. And we continue to experience higher ethanol volumes particularly at our Argo terminal in the Chicago area.

Our final segment of KMP is presently constitute is our Trans Mountain pipeline that, as you recall that’s the Canadian pipeline that we acquired on April 30th. It delivered the earnings before DD&A of over $20 million this quarter. It was above it’s planned for the quarter and it’s on track to meet it’s annual budget or perhaps exceeded by a bit.

The driver there is, the Trans Mountain is experiencing significantly higher volumes when you compare it from the second quarter last year. Due impart to a pump station expansion that we have completed now, it’s actually completed in the first quarter and this boosted the capacity on Trans Mountain to approximately 260,000 barrels per day.

We’ve started on an additional expansion that will increase capacity on the pipeline to approximately 300,000 barrels per day. And that expansion is expected to be in service by late 2008.

As I said earlier at the start of the call, KMP is on track to meet or exceed it’s budgeted $3.44 in cash distributions per unit for the full year and to sum it all up in essence to strong performance of our products pipeline and natural gas pipeline segments or more than overcoming the shortfall in the CO2 segment.

Now let me talk about some strategic developments that occurred during the second quarter. Earlier this month, we agreed to sell our North System to Oneok Partners for approximately $300 million, that’s an NGL and refined product system that runs from Kansas up to the Chicago area.

Let me make two or three comments about that; first of all this is an creative transaction for us, this an asset that in 2006 produced about $16 million, which tripled cash flow for us.

We’re doing considerably better than that in 2007 because had more winter demand for propane. And so, those kind of multiples -- it was a good decision for us to sell it.

Now let me say, the buyer Oneok has marketing upsides and synergy with storage that it owns in the area that I think they can do better with this asset than we have. But I would leave you with the impression that this was a very good transaction for us. We hope and expect to close it end of third quarter of this year.

Now we have it all for lot of construction going on and that construction and those new projects virtually all of which are fully subscribed from a commercial standpoint, those projects are really huge drivers of future growth at KMP. So I think it's important to talk about them at least a little bit every quarter.

The biggest by far, of course, is our Rockies Express project or the REX project as we call it. To refresh your recollection a little bit, that’s about a $4.4 billion project that will carry natural gas from the Rockies, all the way across the Midwest, ending in Clarington, Ohio, basically on the Ohio-Pennsylvania border.

We completed the first phase of it and put into service in January. That was the so called the trigger phase and that gets us from Western Colorado, up through Wyoming to the Cheyenne Hub, which is on the Colorado-Wyoming border.

We have now begun construction on REX-West, which will run from that Hub to near Mexico, Missouri and Audrain County, which gives a lot of pipeline connectivity coming across the Midwest. We are building that in seven spreads, all of them are started. They seem to be up to a good start. And we expect to have a REX-West in service on the target date at the end of this year.

REX-East’s course is the segment that goes from Audrain County, Missouri, across Illinois, Indiana and Ohio, to the end point of the REX system. We expect to start that construction next spring and have that completed, as far as pipeline in this construction is concerned, by the end of the year 2008. We’ll still be adding some compression in early 2009. So that the whole system will be complete in mid 2009.

And again that will move a 1.8 billion cubic feet a day across America. It’s a huge project and it will be a very nicely profitable for us and our partners. The second project, that also has had some positive developments during the quarter, is our Kinder Morgan, the Louisiana pipeline. That’s a pipeline, we own a 100%, out of that a $500 million project, 135 miles of mostly large diameter 42” pipe.

It will take regasified LNG from the Cheniere Sabine Pass terminal, moving across what we call ‘Pipeline Ally’ in Louisiana. All of this capacity is fully subscribed by 20 year -- for 20 years by Chevron in total. And we expect this pipeline to be operational no later than April 1, 2009. And we have now received final approval from the third, during the month of June, to build that project.

Another large pipeline project that we had is our Midcontinent Express project, which runs from East Texas, across Louisiana and Mississippi, in -- slightly inside Alabama. Again we’re on track there for 2009 start up and the great majority of the capacity there is also subscribed under long-term contracts.

During the quarter, actually in the month of May, we announced, what's not a large project in dollar terms, but I think it’s pretty significant to our intrastate operations in Texas. And that’s our plan to build what we call the Goodridge pipeline, which is a $70 million plus pipeline designed to bring new natural gas supplies out of East Texas to markets in the Houston and Beaumont areas. This will significantly increase the overall capacity of our Texas Intrastate in this particular and important area of our market.

We have now entered into a long-term binding agreement with CenterPoint Energy Services, one of our best customers, to provide firm transportation for a significant portion of the initial 225 million cubic feet per day of project capacity. So that’s a goal and I think that's going to be very important for our Intrastate Pipeline.

Moving on to the terminal section. We've had a number of developments there. At -- in Louisiana, we’ve recently announced a commitment to spend over $40 million. We are acquiring additional terminal, building a new facility to help meet the growing need for additional terminal services along the Gulf Coast.

Very importantly, in May we close the Vancouver Wharves transaction. That’s a bulk terminal in Vancouver, British Colombia that handles over 3.5 million tones of cargo annually. Also has a lot of significant rail infrastructure. We think it can be used for multiple purposes, and we think that will be a very good project for us.

And we continue to make progress on our new large-scale terminal in Edmonton, which is about a $150 million project, that will store over 2 million barrels of products in the Edmonton area of Alberta, Canada.

Another thing that I think challenges a significant development, but is not really within any of these groups, and that is the opinion of the District Columbia Circuit Court of Appeals during the quarter in a case that involved us, which allowed the income tax allowance of four MLP’s. I think this is generally good for KMP and I think it’s generally good for the rest of segment -- sector.

So I think if you look at the quarter in terms of these strategic developments, I feel that we continue to make significant progress in adding assets at very attractive returns on investing capital, which should lead to extra long-term growth in distributional cash flow, over the next several years at KMP. So, we had a good quarter, and we’re glad to be moving in with these projects.

With that I'll turn it over to Park.

Park Shaper

Okay. Thanks Rich. I may go through the numbers, so hopefully everybody has press release in front of them. And I will be dealing with the last three pages there, which are the financial statements -- preliminary financial statements for KMP.

The First page, is the page of the income statement, and this quarter we have a tremendous number of accounting treats, that we believe do not reflect the real performance of the assets. And for that reason, the phase of the income statement is not overly meaningful.

If you'll go to the second page, we attempt to break all of those accounting items out for you. And we can go through the true performance of the asset, and then when you talk about what those accounting items are as well.

And so on the second page, a little below halfway down, you’ll see DCF per unit before certain items, that Rich mentioned in the details in the press release. That compares to the $0.85 distribution, and so we had coverage of two pennies its hair under $5 million.

It compares to $0.77 distributable cash flow per unit for the second quarter of 2006. So that’s up about 13%, from where we were last year. Before I go on, I want to point out the couple of things that we talked about last quarter, and then one new thing that’s here in our distributable cash flow calculation.

As you recall from the first quarter, we started at that point to include in our distributable cash flow totaled the DD&A from REX, and that’s a same in CapEx from REX. And that space was occurred while REX is accounted for under the equity method, and it’s really in the consolidated income statement all of it shows up with the single line equity in earnings and Rockies Express, and that’s because we only own 50% of it and really after construction we will only own 50% of it.

But compare this at new pipeline, and it is significant there is a really -- its not that big a deal this year. But beginning next year want some more of the pipes and service, there will be a rather large difference between the DD&A and the sustaining CapEx.

So beginning in the first quarter, we started to include those announced again in our DD&A, and in our sustaining CapEx.

The second thing that we did in the first quarter, as we started to add the difference between book and cash taxes, and so that's a line. And again both of these changes we did in the first quarter, I just want to remind you that they are in there.

Now there is one new thing, this quarter is small its called Cochin Imputed Interest Expense. What this represents is part of that Cochin acquisition really the remaining 50% that we acquired from BP in the first quarter.

We agreed to pay them about $55million, but $50 million of that is deferred over five years. From an accounting perspective, what you do is, is you put a payable on your balance sheet for less than the $50 million, and then you accrued that amount up for the $50 million overtime.

Well, that’s not really a cash expenses, it’s related to this acquisition that we have acknowledged up from the beginning as a $55 million acquisition, I guess its present value it’d be less than that. But again it's just getting to that full $55 million, that amount shows up an interest expense, we're backing it out down here because it doesn’t really relate to distributable cash flow.

Now its small $600,000 and at the second quarter it was also $600,000 in the first quarter. So, you'll see those amount again there in the total of or the some that had a free distributable cash flow.

So, again we go back for the quarter $0.87 versus $0.77 a year ago, $0.85 distribution versus $0.81 distribution a year ago. Distributions up about 5%, for the first half of the year we generated $1.69 of distributable cash flow, and we're going to distribute a $1.68.

The distribution for the first quarter was $0.83, again for the second quarter its $0.85. Now, for the second quarter, in terms of total distributable cash flow, you’ll its about $205 million, its up from a $172 million a year ago. That’s 19% growth in total distributable cash flow.

So, what drove that grow again Rich, has mentioned a lot of this. But I'll jump up to the top of that page, where we go through the segment earnings before DD&A. You will see products pipeline for the quarter up about $19 million, or almost 15% for the six months up $36 million or about 14%. Driven by as Rich, mentioned record volume at Pacific, which in part were driven by the expansion of East Line going into Arizona.

So, Pacific was both above our plan and above 2006. Cochin was also those above our plan, and above 2006. As were West Coast terminals and the Transmix operation. So those assets were that really drove its strong performance in the products pipeline segment

And we do expect that products pipeline will be above its budget for segment earnings before DD&A for the year, even after you pull out the North System. So again, very strong performance as the product pipelines.

Natural gas pipelines, up about $14 million for the quarter relative to last year, up about $6 million year-to-date relative to last year nicely above their budgets driven primarily by the Texas Intrastate, which were significantly above their budget and significantly above last year.

But also had nice performance from cash for Douglas and from KMIGT that was offset a little bit by the additional of Rockies Express and as we talked about in January as in the first quarter Rockies Express is actually a negative in 2007. It will be a significant positive in the coming years, but it’s a negative in 2007. Red Cedar is a little bit below last year, and a little bit below its budget. As this Trailblazer for those three items are relatively small compared to the significant outperformance of the Intrastate and the other assets.

So natural gas pipeline is also having a very strong year, and will end up the year above its budget in terms of earnings before DD&A. CO2, this is the one area where we are underperforming, but again its focused on a SACROC volumes. The S&T business is above its plan. The Yates business at least the volumes are above the plan, there are little bit hurt on freights, relative to our budget.

And then the SACROC volumes are above, now Rich talked about the volumes, they’re also laid out down below. SACROC oil production for the quarter was about 28,000 barrels a day that’s down from where we were in the second quarter a year ago about 308,000 barrels a day.

For the six months it was 289,000 barrels a day down from 31,000 barrels a day in the first half of 2006. Yates volumes meanwhile are up nicely between 7,000 versus 262 for the quarter, and 266 versus 256 for the year-to-date. So, again consistent with what we talked about. Now, CO2 is actually ahead of last year in terms of segment earnings before DD&A was up $3 million for the quarter, and up $7 million year-to-date. Although, again it is under its budget and will be under its budget for this year.

Terminals is essentially on budget, its above last year about $8.5 million up for the quarter, its about $17 million up for year-to-date that’s up right about where we expected it would be. There are some ins and outs in our various terminals, some of the liquid terminals especially in the Houston Ship Channel are performing very well, some of the bulk facilities especially some of the steel facilities in the Mid-Atlantic are little bit under their budget.

But when you net it all out again terminals is basically where we expected them to be and we think they will on their budget for the year. TransMontaigne you’ll see generated almost $21 billion in earnings before DD&A for the quarter, was less than total for the year as well that transaction closed at the end of April. We did pick up one extra month relative to where when we thought the transaction will close again in the budget. But even beyond that TransMontaigne’s volume as Rich mentioned are stronger than we expected and so the asset itself is outperforming, and we expect it will outperform its budget for the year.

Total segment earnings before DD&A is about $553 million, up 13% for the quarter, and they are north of $1.50 billion for the six months, that increased of almost $87 billion up about 9% for the first half of 2007.

So again, segment performance is very strong across the board, say if the one piece of CO2 which is -- which are the SACROC volumes.

With that I’ll now drop down actually, all the below to segment earnings contribution, and you’ll see a general and an administrative line there the G&A expense. It increased about $5 million for the quarter its up about $6 million year-to-date. It is over our budget a little bit year-to-date, primarily it is some timing on capitalized overhead, which is the function of timing on capital expenditures, a little bit of increments of having TransMontaigne for extra month, and some higher legal expenses.

But we do expect the G&A will be over for the year. Our interest net is up, you’ll see about $15 million from where it was a year ago. For the quarter its up about $29 million for the first half of 2007, but it is there on its budget. This is exactly where we thought the interest would end up, our balance is greater, that the function of expansion CapEx and acquisition, the biggest acquisition being the acquisition of TransMontaigne. Our rate is a little bit higher as well, probably about 30 to 35 basis points, compared to where it was a year ago.

Interest will likely be below our budget for the year, largely a result of forecasting the sale of the North System, which wasn’t a part of our budget. And so clearly will be a benefit to the capital that we have deployed for the year. Minority interest is essentially unchanged.

Let me skip over to the certain items and go down to the net income before certain items, you’ll see $250 million, up from 242 and the reason it’s not up more is really a function of DD&A.

And you can see in the DD&A section up above. DD&A is up about $37 million, driven by the CO2 segment, the DD&A is up about $29 million. But DD&A has no impact on cash, and so really it will be added back to get to distributable cash flow.

Then you have the general partner’s interest in the net income, takes you to limited partners interest in net income, add back the DD&A and you could see the significant increase in DD&A there. And then you add any booked cash tax difference. That difference in the second quarter is very small, $600,000. Due-to-date it’s about $6 million. The currency and imputed interest expense is also very small, about $600,000.

And then you take off the training capital expenditures, about $36 million for the quarter, about $63 million for the first half. That’s consistent with our budget with one exception. Our budget was about $156.5 million of sustaining CapEx for the year. The budget was done before we finalized the Cochin transaction, and actually as the Brazil took away that transaction into the Cochin.

Sustaining CapEx, it’s going to be lower than budget by about $4.5 million. And so we now believe that we will induct sustaining CapEx right around the $152 million. And so that’s what our forecast is now, just $4.5 million, under what our budget was all driven by the reduction at Cochin.

And so that they can guess it that the DTS reported certain items, $205 million, up 19% for the quarter. It was $393 million, up about 9% for the first half. And so that’s what the FX really did. That was how they perform. That’s what we believe they will be able do going forward with of course, continued growth from both organic sources and any acquisitions.

But what’s not included in those numbers are these items that are labeled certain items. And I am going to through those and explain them to you. They are reflected on the first sheet and this is the reason why I skipped right over the first sheet, said it doesn’t have much meaning. And I don’t believe that any of these items are meaningful, but for accounting purposes we have to include them.

And one thing I won't to note, and this is consistent with what we have done historically. Some of these things in here will actually help us. They would be a booster earnings or a booster distributable cash flow if we were to include them. But we don’t believe that we should include them. We don't believe that they’re appropriate to include in distributable cash flow. So we’re not just pulling out negative items that we don’t account at first, we’re pulling out all items that we believe are non-economic in nature.

And so the first two relates to Trans Mountain. And this is complicated and it complicates the balance sheet as well, which we’ll get to in just a minute. But because KMI now consolidates KMP and that happened a little over year-and-a-half ago, this is -- Trans Mountain is the first drop down transaction we have done since that change in accounting took effect.

Accounting says that when you transfer an asset of one control entity to another under-control is basically dictated whether or not it consolidates. Then the new entity, let’s figure it essentially bought this asset from another controlled entity, has to reflect on its financial statements like it has owned the asset historically. So even, previous to the transaction.

And so in other words, KMP bought Trans Mountain at the end of April of this year. But in our financial statements KMP now has to reflect Trans Mountain on its financial statement as if it has owned it since the beginning of 2006. And that includes balance sheet amounts and income statement in fact. And so that means that if we didn’t back this out, we would be reflecting Trans Mountain income in the quarter for the month of April, which KMP was not entitled to. And for the six months, for January through April, which again KMP is not entitled to, it has owned the asset at that point of time.

But the accounting rules are what the accounting rules are and we have to follow them. So we follow them on the income statement, but what we’re doing here is backing that out for you. And so if you see on the first line, it’s Trans Mountain net income, $5.8 million, that’s the amount for April of 2007. That’s the amount in the quarter that relates to the time period in which KMP did not own Trans Mountain.

Now again, we have to go back and add it in 2006 as well, and you will see the $7.3 million that we backed out there. Once again I’ll point out, this is not segment earnings before DD&A, which is the number that we reflect up above for the segment. This is net income. And so the numbers are a little bit different. You can’t compare it to the number that you reflected up above.

Okay. And then for the six months, we pulled out about $15 million, which is the time period from January through April 2007. We pulled out about $13.5 million for 2006. Now that’s the full sixth months for 2006. And again KMP didn’t own this asset at all in 2006. So we’re backing that out.

Now the limelight below that actually reflects an impairment of goodwill that KMI took in the first quarter of 2007. But now because KMP has to reflect like it owned Trans Mountain since the beginning of 2006, all of a sudden this amount shows up on KMP’s income statement as well. And KMP never had its goodwill on its book.

I think it never took this impairment. It happened at KMI. But accounting says it has to be reflected here. That’s a $373 million negative. Now that was in KMI’s income statement when it filed its Q in the first quarter of this year. If you want to go back and check it, feel free. But again, we're backing that out. That is not a charge that KMP has to pay.

And in true, this is, how crazy this accounting is. KMP essentially have to assume KMI’s basis in Trans Mountain. So, KMP now reflects Trans Mountain on its balance sheet as a caring value that is even greater than what KMP’s pay.

KMP pays $550 million for Trans Mountain. But, because of this accounting growth KMP is caring Trans Mountain on its balance sheet like it paid $840 million, doesn’t make any sense. Again economically all that KMP is paid for this asset is $550 million, but the accounting rules dictate that has a carrier at that higher amount. That the higher amount is even after this $373 million cuts off.

And so, the higher amount is where it was after at the time of the dropdown after KMI has taken this right off. So, sorry this is so confusing, it doesn’t make any sense to us either, but we are trying to back it all out, so that you could see again what the true performance is.

The next couple items, the gain on the sale is really a 2006 item, that was in there a year ago, gain on notes payable, this is another accounting treat. I talked about the note payable that we have to BP, but those are Cochin acquisitions.

This is the $50 million that is spread over time. Well, a portion of Cochin is in Canada. Now our agreement with BP, states that we will pay them U.S. dollars. We generate U.S. dollars we have U.S. dollars to pay them. We have no currency exposure there, from economic perspective.

From accounting perspective, the present portion of Cochin is in Canada, a portion of that note payable is associated with the Canadian operations. And then from an accounting perspective, you have to run currency fluctuation through the income statement. So, again there is no economic impacting here. We have BP U.S. dollars, we generate U.S. dollars we paid them U.S. dollars.

But, from an accounting perspective, we have to run these currency fluctuations through the income statement. What you see here is the end. We could have not backed that out, and we would have shown $800,000 in more income, our more distributable cash flow. But, we don’t think we should get credit for that. Its not economic, it doesn’t generate cash, it doesn’t have any meanings. And so we’re backing it out here.

The next item is environmental reserves. Now there was large adjustments to the environmental reserves a year ago and again that shows up $18 million in the quarter. Now on this quarter, we had a small and its $2 million, little over $2 billion related to a specific incident in California this is the amount that we believe we’re going to have to spend to clean up that specific incident if a one time charge that we’re identifying it here as such.

The loss on debt, retirement was really a first quarter 2007 issue. We talked about it at the time its related to a new or some debt at Red Cedar's that was refinanced. So, again that’s the first quarter item that we discussed at that time.

The next one is another a real accounting treat. Allocated acceleration of non-cash long terms compensation. Its part of the NBO transaction, which closed in the second quarter. All unvested of stock options and restricted stock were cash out, its part of that transaction. That cost was borne by the NBO group.

And so this have to detain on our all of the cash to pay our employees for their restricted stock and their options was paid by the NBO group. Due to the factor into the transaction all of them understood that it would be that one. But accounting says, that you have to extend the uninvested portions and accounting says that even if KMP is not paying for any of that, KMP has to take its share of expense.

So once again this relied and zero and not has impacted KMP. KMP is not paying any cash for these items, its not issuing any units, not issuing any equity, there is no liability, no payments that comes from KMP. But accounting says that we have to reflect its extends of KMP. $22 million in the quarter is that $24 million for the year-to-date for the six months. And so again, we are backing that out.

You might feel the challenge that we get little frustrating when accounting principles completely ignore economic reality.

And Hurricanes, this is again first quarter item. And relatively small, but again within there we discussed back that in the first quarter. The other line is really a 2006 item and you can see down in the footnote that’s related to settlement. Again, all positive, but onetime items that we were not taking credit for.

That’s gives you to again the sub total of certain items. In total is almost $18 million negative for the quarter, but if you taken out the $22 million, which is related to the acceleration of the long-term compensation, now the rest of the items is actually totaled to a positive.

Similarly if you look at, the six months the total is about $386 million now almost double that’s to Trans Mountain goodwill impairment. But again was taken at KMI not at KMP that’s $373 million. And then if you take out the $24 million again that’s associated with the long-term compensation. Again, the remaining items totaled to a positive.

I’m only pointing that out, because I do want to make it clear, that what we’re doing here is identifying the accounting items that we don’t believe have any economic meanings. And we’re trying to back all those out, whether they benefit us or hurt us.

We’re trying back out the accounting items that don’t have economic meanings. You know with that, you can look at the front page of the income statement again that’s the GAAP income statement. The certain items are all throughout there including this large write-off, it shows up in the six months.

Including the compensation expense that shows up in there. But again KMP has no economic responsibility for and never will have to pay for. And so also again, I don’t think that the front page of the income statement is also meaningful.

With that, I’ll go to the third page, the last page of the press release and it is the balance sheet. And here we get introduce to more profit.

As I said, Trans Mountain has to be included in KMP’s financial statements beginning in January of 2006, what that means is our December 31, 2006 numbers that are listed in this columns are actually different from what was in our 10-K for December 31, 2006. And for what was in our first quarter 10-Q for December 31, 2006.

They’ve been adjusted it to include Trans Mountain’s carrying value and again it KFI’s carrying value for Trans Mountain as of that date. Now one other portion, I mean only has Trans Mountain that is in there, but on December 31, it was added in, at the higher carrying amount, because KMI took the goodwill write down in the first quarter of 2007, which associated in that reduction is reflected in the change from December to June.

So I go through this and talk about what changed. Cash and cash equivalent is up a little bit that’s just normal fluctuations in those values. Now, other current assets is up about $38 million, that’s largely accounts receivables, a little bit a gap in storage offset a little bit by market-to-market hedges which again, we go -- we have hedge accounting on those transactions to disclose through the balance sheet.

PP&E that’s of about $636 million, a largely function of the expansion CapEx and acquisitions. Now the big acquisition was clearly Trans Mountain, but remember December 31 2006 on this page had already been adjusted to include Trans Mountain. And so, that particular transaction does not show up in this change from December 31 to June 30th.

Investments, a change of about 10 – just a few things moving around, deferred charges in other assets, now you’ll see this is going down, by that $433 million. That’s the function of the goodwill write-off, that again happened at KMI in the first quarters, but because of this accounting now have to be reflected at KMP.

So $373 million of that change is a function of that goodwill write-off again that happened at KMI and then there is the mark-to-market of the hedges flow through on this line as well.

Total assets about $13.9 billion, half from the last $13.6 billion at the end of December. Now liabilities and capital, those payable in current maturities, I’ll talk about that when we talk about debt. Other current liabilities down about $222 million. What’s driving this, there's a $224 million in our company notes payable. Those associated with Trans Mountain that was on the book, on KMI’s books on January 31.

Now it has been removed by the time of the drop down. But again remember KMP have to reflect Trans Mountain as it was reflected on KMI's book on 12/31. So, it shows up there and then it goes away. So that reduction is the elimination of that inner company payable.

Long-term debt, I'll talk about in a minute. The value of the interest rate swaps just moves with the forward interest rate. Other, you can see other liabilities pump up to $120 million that’s largely the mark-to-market on the hedges.

Partner's capital, other comprehensive loss is basically unchanged. Other partner's capital looks like, what it have on these numbers gone down by $384 million. But again this is getting caught up in this Trans Mountain accounting.

What did happen in other partner's capital from December 31 and these numbers to June 30th, it did have $373 million write-off there was at KMI, but now gets reflected at KMP.

Now, had also went up other partner's capital was increased by $224 million elimination of the inner company note payable and with, from a note payable to equity. Now then it was decreased because while December 31, 2006 reflects Trans Mountain in there and through that at ended April of 2007 KMP paid $550 million for Trans Mountain.

So, you have to account for that $550 million some how it was an increase in debt at that point in time and net reduction came out of equity, so as reduction in equity at that point in time. The net also went up by $300 million equity offer that we had in May. The totals about $400 million and that’s really has changed in other Partners capital. So, you look at that and you think wow! Partners capital went down, this not a good thing, what’s going on here?

Now Partners capital is $5.4 billion, Partners capital at the end of December 31, 2006 as we originally reported, it’s not including Trans Mountain was less than $4.9 billion. Partners capital is actually gone up by over $500 million apples-to-apples at KMP. And that is really a function of two things, one, is the equity offering we issued $300 million to pay more shares, that increases Partners capital.

The second is we had magically created equity through this accounting. I told you before that KMP is carrying have to carry the Trans Mountain at higher carrying value than what it pay. Well, the difference between those two numbers shows up in equity and so KMP’s returning Trans Mountain at about $840 million that is what it was at the time of the transaction. We need to only pay $550 million. So, KMP magically created almost $300 million of equity. So that’s what’s going on there in the Partners capital line.

Now, getting down to debt to cap, we told you before that we don’t think that’s the most meaningful measures. What’s going on here when Trans Mountain skews this calculation even more? You’ll see December, 31 calculation implies that we were at 49% debt to cap at the end of 2006. For those of you, who have been following us, you’ll probably say, hey, that’s a little bit low. What we actually reported at the end of the year was about 54% debt to cap.

The reason it’s change is because of that addition of Trans Mountain, which magically created equity. Now you want to see the debt to cap now is about 54% and that is a little bit lower than were we would be, sorry, we wouldn’t have this magic $300 million of equity that was created as part of Trans Mountain transaction. But again we don't think debt to cap is the most meaningful measure of our credit, of our balance sheet quality anyway.

Look at the measure directly below that the debt to EBITDA to 3.64 was up from about 3.32. Those numbers and so it’s basically it’s just the ratio of debt to EBITDA Those numbers are unhacked by the Trans Mountain. And so our debt has not been changed, because our EBITDA has not been changed because of it. And so these numbers did not change as a result of these accounting.

So they are a true reflection of the strength of our balance sheet. Again we believe it’s very strong still under, well under four times debt to EBITDA, it has gone up since the beginning of the year that’s consistent with our expectation for this year because we have a tremendous amount of expansion capital. So it’s directly inline with were thought it would be.

Now totaled debt, again totaled debt undefined by the $300 million, you’ll see it is about $6.6 billion it’s up from about $5.7 billion at the beginning of the year. So it’s up about $835 million. For the quarter at the end of March we were a little over $6 billion, we’re up about $550 million for the quarter. Well, due to those increases the expansion CapEx for the quarter is about $335 million.

For the first half it’s about $583 million. We made contribution to equity investment. This is largely the Midcontinent Express pipeline of about $39 million in the quarter, about $44 million in the first half. We’ve had acquisition, so this is including the cash that went out before Trans Mountain, $593 million for the quarter, $598 million for the first half.

We assumed about $43 million of debt associated with the total transaction really once we owned the 100% that came on to our balance sheet. Those $43 million that are not in the quarter but to get in at the end of first quarter was half, during the first half. And so all of those were uses of cash or increased debt.

Going to other way we had the equity offer that’s generated $300 million of cash in the quarter and for the first half with our TMR distributions, which are equivalent to equity offerings generated about $53 million in the quarter, $105 million booked in the first half.

We know, we had appropriate cash and working capital and other items that was relatively small, about $28 million in the first half that was all really from account receivable versus accounts payable.

Now, on the expansion CapEx numbers again rather large 335 in the second quarter, 583 in the first half actually below our budget, lower than what we expected to spend at this in point in time. Some of that was in the product segment about 50.25 almost a 100 year-to-date. Most of that is on EPX, the next El Paso to Phoenix expansion.

On the natural gas side about $70.25 million about $94 million on year-to-date. A lot of that on the Marcum and storage expansion, a little bit on the TransColarado expansion, some on the intrastate expansion and East Texas to NGTR and a little bit on the Louisiana pipeline. And CO2 is still about $70.25 million, almost up to 150 year-to-date, that’s largely SACROC a little bit of Yates. And then of course, our southwest Colorado expansion, where we are increasing our production and our ability to transform CO2.

On the terminal side, we have a whole bunch of projects going on spent about $108 million in the quarter almost to $190 million year-to-date. A lot of here in Houston Ship Channel in Pasadena and Galena Park continue finishers on our Edmonton North 40 Terminal and the expansion at Pier IX.

In then of course we had a Trans Mountain in the quarter, it’s been around $60 million on a ongoing expansion there, primarily Anchor Loop. And that of course is the year-to-date number also. So, that is the financial statements for KMP.

Richard Kinder

Okay. Thank you Park. And however I’ll go back to you and open up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Dan Jenkins, you may ask your question and please state your company name.

Dan Jenkins - State of Wisconsin Investment Board

Hi, Dan Jenkins, State of Wisconsin Investment Board.

Richard Kinder

Hey Dan, how are you?

Dan Jenkins - State of Wisconsin Investment Board

Very good. Sir, if you could just expand a little bit on the continued under performances of SACROC is that, again just -- do you expect that to pickup later and when you get the other parts of pay orders that, does the period like its been producer less or what’s the kind of underline issues at SACROC?

Richard Kinder

Well, I think we talked about it and last time we had Tim Bradley on the call, last quarter. And it’s continuing issues with some -- sub pumps we had about 2000 barrels a day struggling due to these submersible pumps.

We have well over 300 wells that have submersible pumps and as we report last time our failure rate is higher than we had projected and that’s leading to less production. Overall we still think this is a field that has about 2 billion barrels original oil in place and we still think we’re on target doing well, and have a very good recovery range as a percentage of original oil in place.

But they are a lot of moving parts and primarily it’s a matter of the sub pumps and what we call down hold performance issues which we also talked about last time, both of which we are working to correct. And I think we are on the right way of link. But we don’t, again as Park said that I said that we expect CO2 for the full year to be a substantial under it plans solely because of SACROC and everything else is fine.

So, we do see the balance in the year some up tick from the volumes where they were in the second quarter. But there is no magic on so over board in the second half of the year. I think the important thing is and of course, if you look at ‘07 as we’ve said the strong performance of the rest of the companies is more than over coming that versus our budget.

And then if you look at, ahead ’08 of course, CO2 as old hedges growing of, new hedges growing on and that’s a tremendous up side because we will have our average oil price there next to even if the volume stake cost and we don’t think, we really think that will go up till 2008. And even if they stayed constant we would have enormous upside as those hedge prices, the average hedge prices move up.

And the same thing happens in 9, 10 or 11 you’re going from an average hedge price in 30’s to an average hedge price at 11 of about the $70 barrel. So, we have enormous upside even if the volume just stayed flat in terms of actual distributable cash flow. Now again we expect to have up upside in volumes, but we still expected to fall short for this plan for the year. Will that help you?

Dan Jenkins - State of Wisconsin Investment Board

Yeah, that helps. And I also was wondering as far as, now capital needs in the second half and obviously you have a lot of projects going on so forth, what kind of this, the plan as far any new units issued or debt issuance so forth?

Park Shaper

Yes, it’s the system of what we talked about in January and we will continue to plan our expansion and acquisition with 50% debt, 50% equity and we’ll continue to issue equity and term up of debt when we think the time for us.

Dan Jenkins - State of Wisconsin Investment Board

Okay. And the only last thing I was wondering, is we’re still investors in the old KMI bonds and I was wondering that will – it just be SEC issuances for us to get any financial information about that unit?

Park Shaper

Yes, the Q will be filled in the beginning of August.

Dan Jenkins - State of Wisconsin Investment Board

Okay. Thank you.

Richard Kinder

Next question.

Operator

Thank you. John Edward may ask your question and please state your company name.

John Edward - Morgan Keegan

Yes good afternoon everybody. It’s John Edward with Morgan Keegan.

Richard Kinder

Hi, John, how you’re doing?

John Edward - Morgan Keegan

Oh, pretty well. Nice quarter.

Richard Kinder

Thank you.

John Edward - Morgan Keegan

And I was wondering, can you give a little more detail on, you had a significant out performance, about the Texas intrastate pipelines, could you give a little more, what was driving that?

Richard Kinder

Yes. We’re delighted with the way that entity is performing. First of all, as its true in all our pipelines, you have contracts with very strong links and as those rollover we were able to renew those contracts at slightly higher transportation rates, so that was positive.

While we are not a huge processors as part of our operations. We do have some process again treating facilities on our systems and we benefited there from the spread between natural gas energy, oil prices, which is continuing into this quarter.

And then finally, as we showed our overall volumes were just up. Yes, it’s a tremendous asset that we have because as all of you know I think as Texas is vote for largest producer of natural gas and the largest consumer of natural gas in United States.

And our idea is to own as much of that market as we can in terms of connecting the supply with the demand. And I think that’s probably going to continue to increase, as we face all these refining capacity issues and expansions of refinery capacity, particularly, over in the Port Arthur, Beaumont area that’s going to drive the need, there for more natural gas.

And again particularly this new system that we are building in East Texas we’re going to be able to access massive borrowings from South Texas which we’ve always been able to do. And now increasingly additional volumes of East Texas which is as you know is a rapidly growing oil production area.

So, I think, this is the kind of success we’re going to continue to have, but it was a wide range of things. We did very well with our storage in the quarter. Our storage is in high demand, not just in Texas, but every place and again I think that’s going to continue to grow in terms of demand on the going forward basis.

So I think you all saw about nothing like having good assets in the right place at the right time and I think that’s just what we have with our Texas Intrastate and there was a very good performance.

John Edward - Morgan Keegan

And then did you have any with although the vein we’ve been getting in Texas. Did that I mean, would it have it been even stronger, had there not been some of the adverse weather we’ve been experiencing in the state of Texas?

Richard Kinder

Certainly John, I think, that there would have been more absolute throughput on the system, if we had about normally hotter moth particularly last month or six weeks. But again, don’t know how much impact that would have. But, I would say that’s probably negative, if it would have been even stronger performance, if we had hotter weather.

John Edward - Morgan Keegan

Okay. And then, just with the North System sale obviously you got a very good price for that and some of the EBITDA numbers you were putting you are discussing obviously a very high multiple. Is that, I mean, in terms of your budget this year is that basically going to be considered incremental to the budget our do you adjust for that?

Richard Kinder

We will adjust when we sell the North System, if that’s what you mean in other words, if we complete that sometime in the third quarter we certainly hope and expect to then at that point in time the EBITDA from the North System will disappear from KMP and return but that will take $300 million of cash, which will initially go just to pay down debt.

John Edward - Morgan Keegan

Right.

Richard Kinder

And then obviously, it will also again as Park said we fund everything around here 50-50 debt equity. It will also at a longer term whenever we put additional equity it will decrease the need or modestly for equity. So if you look at it, we think that was eventually 50% of that goes to debt reduction and 50% of it goes to reduction in the amount of units outstanding that you will have. They are pretty modest in the scheme of the whole thing, but based on that it is accretive on a going forward basis.

Kimberly Dang

But, John if you are asking if we go back and adjust our base budget and pull out North System?

John Edward - Morgan Keegan

No.

Kimberly Dang

We’re not adjusting our base project.

John Edward - Morgan Keegan

Okay

Kimberly Dang

That part compares to…

Richard Kinder

Yeah and again we probably have a lot of peculiarities, but one thing is once we do a budget, we stick with that budget for the whole year and then we just explain for you, for our employees, because our bonus system is based on this for any of our contingencies what all the variations on and after that budget, but it’s a kind of slippery slope if you start to redefine.

John Edward - Morgan Keegan

Okay. And then I’ll ask one more and then I’ll get back in the line, because I don’t want to monopolies all the time here. But on the, in terms of your volumes now for SACROC what are you expecting for the second half?

Richard Kinder

Well our current estimate is that we’ll have some modest improvement to this number and mostly in the fourth quarter. We have a lot of patterns so that’s a pattern of both injection wells and recovery wells.

Another pattern that we have completed that will be coming online and again we are going through all of these sub-pumps. We have a new contract, new contract we are doing the sub-pumps wash large and we’re replacing those sub-pumps as we go. And the combination of those two things we think will leave the higher volumes particularly in the fourth quarter. I might also add about SACROC. We’re not just, we are very cash driven company and we are not just throwing money at this problem.

Actually we now estimate that out total expansion capital budget for SACROC is will be down about $40 million this year from what it was in the original budget. So we’re actually splitting a little less, we’ve being very careful about how we impact the sub-pump and down whole performance issues.

John Edward - Morgan Keegan

Okay, great. I’ll get back in line.

Richard Kinder

Okay, John. Thank you. Good questions.

John Edward - Morgan Keegan

Okay. Thank you.

Operator

(Operator Instructions) Alex Maier, your line is open. Please state your company name.

Alex Maier - Zimmer Lucas

Zimmer Lucas. just one real quick question.

Richard Kinder

Sure.

Alex Maier - Zimmer Lucas

As one the CBS had an update on MidCon Express just around the contracting or the potential to merge your project with another potential competitor of Midcontinent?

Richard Kinder

Well, first off all as I said and I skipped over it too quickly the Midcontinent Express is largely subscribe, we have a little bit of volume left that we’re working with two or three producers to tie out that the great bulk of it is subscribed most of the 10 year contracts and it’s a very viable project with recently good returns. So we anticipate going forward and do not anticipate merging it within the other project.

And of course we have pretty good hand along the production and the demand for pipeline capacity coming out of that part of Texas, because, we own the Texas Intrastate system, and then of course we have NGPL, which of course is the important part of that. And what we’re finding is that given the increases in the Barnett Shale production really just kind of pushing like a tidal wave to the east, that the bottom X were just occurring further and further east, but there is a lot these producer, and I think just fiber so went optionality.

And they want to be able to get into pipelines and they are going to the Midwest to the Southeast and to the Northeast, and I think that’s why you have the tremendous need that underpins a projects like Centerpoint’s project, which is already in service like our project and like the Boardwalk competing project, I think that at least from our standpoint with the commitments we’ve got, we anticipate there is going to be room for all of those projects, there’s just tremendous need to move the gas about

And I think that, in the long-term and I’ve been in this business for almost 30 years. The most important single thing that’s happening on the natural gas side, is there’s tremendous change in the supply sources for gas across the United States. So we’re seeing, you really think about it, three big areas of new supply, we are going to see much new supply coming out of Canada, we’ve talked about that, that’s the function of using natural gas to recover additional oil and the oil sand supply and the decline in the Western Canadian Sedimentary Basin.

So we are not going to recover additional oil in the oil sands plain, and the decline in the western Canadian sedimentary basis. So we are not going to see additional buying, we think we’re going to see a decline there, I think that’s the prevailing view in the industry.

We’re seeing a decline in offshore gulf of Mexico, particularly in some of the shallow areas, but where the three areas of growth over the next five or ten years are going to be Rocky mountain area, and that’s what we’re serving with our REX expansion and of course also with our TransColorado system and our other systems coming out Rocky.

Second area is the Barnett Shale in Texas which has tremendous growth and is experiencing it now and that’s what’s led the Midcontinent, the need for a system like Midcontinent. And again people want to push as Far East and into the Northeast as they come, as they can which is the highest margin business.

And then the third is, which is longer term is the L&G that’s going to come a shore along the Gulf Coast as time goes on, probably primarily in the 10 and 11 time frame. Our response to that if you will is the Kinder Morgan, Louisiana line.

But those because you have the shipping supplies coupled with a pretty nice growth, you know little over 1% to 1.5% growth over the next many years I think and natural gas demand largely driven by power demand. You’re going to have the need for a lot of new systemic improvement and I think we are in the force (ph) for that surely have the other one -- is not the only a lot of other pipeline are doing improvements too.

But I think we’re in a very good position with our footprint to continue to expand our system. And I think us having new follow on projects even when REX, Midcontinent and the Louisiana line are completed

Alex Maier – Zimmer Lucas

And when do you think you’re going have to make a decision, a final decision about will they move forward, I guess that will be when you buy pipe or compression, right?

Richard Kinder

Which project you’re talking about?

Alex Maier – Zimmer Lucas

Just for Midcontinent express.

Richard Kinder

We’ve already made the final decision go forward and we’ve already ordered five compressor.

Alex Maier – Zimmer Lucas

Okay.

Richard Kinder

Yes.

Operator

Our next Question from Barrette Laskey (ph) your line is open. Please state your company name.

Barrette Laskey - RBC

Yes, this is Barrette Laskey at RBC. I wondered if you could talk a little bit more about the use of the proceeds for the Sell North System?

Richard Kinder

Yes, initially the money would go to pay down debt and but again in longer term we would look at it again as I said we’re 50-50. Our target is always to be 50-50, debt equity in terms of financial expansions.

And so in the long run we’ll put out $150 million less equity and they have paid down $150 million of debts. So, but short-term when we get the $300 million we’ll simply be paying down debt.

Barrette Laskey - RBC

Thank you.

Richard Kinder

Thanks.

Operator

Gabe Moreen your line is open. Please state your company name.

Gabe Moreen - Merrill Lynch

Hi, Merrill Lynch. Good afternoon every one.

Richard Kinder

Hi, how are you doing?

Gabe Moreen - Merrill Lynch

Good, thanks. I got a quick question on completing project, taking refine products into the Las Vegas market. I was wondering if that would have any impact on your plans for expanding Cremer's?

Richard Kinder

Well, obliviously we look at the total situations. We are on the first agenda tomorrow for a decision on the rate treatment that we’ve asked for, we’ll see what that decision is. If it’s favorable and embraces the issues that we’re concerned about, we would plan to go ahead with our project. We have tremendous economies of scale. We’re a lot closer to Las Vegas than Tallmadge City is. We already have a system up and running including terminals at deliver system into the airport and every place else so. I think that in the year-end we have enormous advantages of scale and customer relationship and Las Vegas infrastructure. But again any body can spend money and build whatever they want, so whatever our competitors do or don’t do I wouldn’t mine comment on that’s there business.

Gabe Moreen - Merrill Lynch

John, is the follow up to reach there in terms of what you are looking for rather that procuring is it pertaining to rates of return or is it securing volume at your commitments or what?

Park Shaper

No its primarily similar to what the for granted Columbia recently in terms of looking at the additional expenditure, as an additional project it being able to charge appropriately for that expenditure.

Gabe Moreen - Merrill Lynch

Got it. And here Richard, one final question from in terms of the DC circuit core rolling. (inaudible) your positive, but thinking about bringing some sort of finality to litigation around us of SFPP this - that will be move any closer we still just I think a long way away to this shipping settled down and in sort of final front?

Richard Kinder

Well again this rare cases, started in 1992, which was six years before we have involved in SFPP. We were always be happy to settle it and we think that, if you look at what the folks done with the DC circuit is down and people can appeal and argue about, but the DC circuit as essentially taken our position on a tax allowance.

And the perk in the past as essentially taken the shippers position on the ungrant powering if you will of the rates of the west line, which ungrant probably pursuant to their order May 1st of last year so we kind of break that what are the rates are today is where the Perk and the D.C. Circuit have said as the right thing, and we would be willing to go forward on that kind of basis and saying and pay the reparation at flow out that as you know we've already reserved on the books of $105 million for that.

So, we would be prepared to move forward, but again it just depends on what the shippers on the other side would want to do, I‘ll be happy to settle this thing for the buyers, but I sure can't predict what they are going to do?

Gabe Moreen - Merrill Lynch

Got it. Thanks very much.

Operator

Thank you. Dennis Coleman your line is open. Please say your company name.

Dennis Coleman - Banc of America Securities

Banc of America Securities. Thanks.

Richard Kinder

Hey, Dennis.

Dennis Coleman - Banc of America Securities

Hi, how are you? Quick question maybe a little bit strategically. We spend lot of time on the these calls talking about SACROC and weather we’re going to have production or not.

One other thing that we've all kind have been attention to I think is the rise of the EMP focused MLP. And I mean is there any structure that kind of helps get that from away from you it’s little bit or it’s just kind of spin off or sale anything like that that you are looking out with regard the capital is flowing into these EMP focused MLP’s?

Park Shaper

Dennis, its Park. I mean, I think that’s a question and there is no doubt that we've been looking at those structures. But I would not expect that to do anything differently. I don't think we do any spin off or separate MLP.

But, I would say is that people are interested in EMP, MLP I think KMP is the best one it’s out there. I think it’s probably the largest and look at their size, I think it has the best assets to be held in KMP, when you talk about the oil fields that we add on the amount of production in the ground barrel, billions of barrels reserve that we have, the proven technology for giving them out and the long term nature of that production.

We don’t believe that there is better asset out there from a production prospective that you would be appropriate for MLP. For year’s we talked about, well, it doesn’t quit fit the MLP, its not as stable as a pipeline but we still belief that it’s a -- but it’s a good investment. All of a sudden a lot of people has gone all the way beyond this. But again, we believe that as far as production and asset in MLP, you don’t get any better than the fields that we have.

Dennis Coleman - Banc of America Securities

Okay. Thanks

Operator

Thank you. Our last question comes from John Edward. Your line is open. Please state your company name.

Park Shaper

Hi, John.

John Edward - Morgan Keegan

Yes, hi. I has a few more. What’s the mix now at SACROC or I guess in your in CHT assailment the mix you are experiencing between hedged and unhedged volumes, given how production just come up little from budget and then also if you comment on the margin per barrel that you’re experiencing?

Park Shaper

We actually have Jim Wulk (ph) who is a CFO of the CO2 Group sitting here. Jim.

Jim Wulk

I think on the stock outside was the 100% hedged at this point this year that will come down obviously next year with lower hedged volumes and hopefully higher production volumes. 88 or probably running about 65% to 70% hedge and then again as Park mentioned earlier talking about the NGO price, none of that is hedged?

John Edward - Morgan Keegan

Okay.

Park Shaper

Well, I think the NGO equivalent production at SACROC is…

Richard Kinder

37.

Park Shaper

3,700 barrels a day. So that’s all unhedged and then again about a third of our volume yet is unhedged. But if you look at just the oil volumes of SACROC about a 100% hedged and then we have strict policy guidelines and that declines in the out years as far as percentage hedge

John Edward - Morgan Keegan

Okay. Then the margin per barrel you’re experiencing on the production

Park Shaper

Yeah, I mean, I think on the margin question, I think in the January conference materials I think we went through that again this year. I know we had a near stop and we are very close to what shows up there and you can refer back to that metal, I show you where we are in March.

John Edward - Morgan Keegan

Okay, fine. That’s what I have been using, I just wanted to see if there’s any deviation from that. And in terms of any weather impacts on your construction schedule?

Park Shaper

You mean our pipeline construction?

John Edward - Morgan Keegan

Yes, in your pipeline construction?

Park Shaper

No, as a matter of fact we are very pleased the court gave us the final orders to proceed on REX-West that we have seven spreads going, such huge projects, seven spreads going and they’ve started sequentially during the month of June with the last one starting at the last week of June the first one I think around the 10th of June

So we are just six weeks into it but so far it looks very good, we have not had weather problems and actually amazingly we already starting to well a pipe in a couple of places. So I just talked with our people this morning on this and they are feeling very good about the progress of construction so far now. We are long way from finished but again the REX-West is going largely across other pipeline right away and it’s fairly partially populated areas. So I think we’re -- are in some kind of major weather issue we’re poised to deliver that system on time.

John Edward - Morgan Keegan

Okay. Great. And then on the Vancouver Wharves transaction, did you disclose a number on that or not?

Park Shaper

I think we did but I think it will show up in the Q and we paid about $50 million.

Richard Kinder

37-38

Park Shaper

About $40 million upfront, now we are committed to spend some inclusion capital in some of the out years and we’ve obviously taken into the account the present value of that perseverance, clean up that we committed to do as part of the transaction. And again, that has about 3.5 -- handles about 3.5 million barrels -- I mean 3.5 million tons of bulk and we’re very helpful that we will be able to increase those volumes substantially going forward basis. That’s the great asset and we are delighted to have it in the Kinder Morgan family. We’re really making some real progress in our terminal segment in Canada, not only that but again they admins of (inaudible) that Park referred to. We’re on schedule there with that construction and again that all fully subscribed with fairly long-term contracts. So, we think we have got couple of other projects pretty close to moving forward on the terminal side in Kansas. So I think we can go…

John Edward - Morgan Keegan

Okay. Then lastly on the plantation pipeline, volumes have been off a bit. What’s the -- I mean in terms of caparison year-over-year what are we, how they, what was it this quarter?

Park Shaper

It was that the Bongo pipeline went into effect, which took the Motiva volumes off of plantation. It was a new pipeline that came up and hooked into colonial as suppose to base loading plantation. And that went into service about this time, I think last year sometime around mid-year. So those comparisons should be getting the impact of the Bingo pipeline will be in the numbers beginning in the third quarter. So you will have easier comparison. With that, I want to say 60,000 to 70,000 barrels of throughput that was going into plantation that is not now.

John Edward - Morgan Keegan

Okay, great. All right. Thanks a lot.

Park Shaper

Yes.

Operator

And sir I am showing no further questions.

Park Shaper

Okay, well listen, thank you all very much. And again we’re delighted that you spend some time with us and if you have further questions, feel free to call Kim Dang and she will answer all. Thank you. Bye.

Operator

Thank you. This does conclude the conference call, you may disconnect at this time.

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Source: Kinder Morgan Energy Partners Q2 2007 Earnings Call Transcript
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