Richard Kinder - Chairman and CEO
Park Shaper - President
Steven Kean - EVP and COO
Tim Bradley - President, CO2
Stephen Maresca - Morgan Stanley
Emily Wang - Raymond James
John Edwards - Morgan, Keegan
Kinder Morgan Energy Partners LP (KMP) Q3 2009 Earnings Call October 21, 2009 4:30 PM ET
Welcome and I'd like to thank you all for holding for today's quarterly earnings conference call. You lines are in a listen-only during today's conference call until the question-and-answer session. (Operator Instructions).
I'd now like to turn over to Richard Kinder. Sir, you may begin.
Okay. Thank you, Ed and welcome to the Kinder Morgan third quarter analyst call. As usual, we'll 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 and then turn it over to Park Shaper, our President, who will go through the financial results in detail and then we'll open the line for any and all questions that you might have.
The third quarter of 2009 was above last year in distributable cash flow per unit, and we think that's the best metric to judge our performance on. We ended up at $1.12 per unit this quarter versus $1.09 a year ago. It was also above our plan for the third quarter by a substantial amount and we obviously more than covered our distribution of $1.05, which we have declared for the third quarter.
For the quarter, four out of our five business segments were above the third quarter of 2008, the one exception being our CO2 business, which was barely lower largely as a result of the difference in crude oil pricing between the two quarters, down about $50 in terms of average WTI price when you compare the third quarter of 2009 back to the third quarter of 2008.
We expect all five of our business segments to exceed their 2008 results for our full year 2009 and we expect to distribute, as we have said, $4.20 per unit for the full year 2009, and we expect to fully cover or virtually fully cover that distribution out of 2009 distributable will cash flow.
In the third quarter as really we have all year, we faced some negatives and we experienced some positives which offset those negatives. And I thought it would be instructive to just take you through both batches, the negatives and positives. Let me start with the negatives.
We continue to experience lower products volumes on our products pipeline system. For the quarter, total refined products were down 2.7% from a year ago. It's interesting that gasoline for the second quarter in a row was positive on a year-to-year comparison. If you include ethanol shipments with it, it was positive, but barely, by 0.2% for the quarter. So we have seen some pickup in gasoline volumes on our system. We have not seen meaningful pickups on jet fuel or particularly on diesel. So that's the first negative we experienced.
The second is in our Terminals group, and that's lower steel volumes. In fact, if you look at the Terminals group, the liquids terminals portion of that business segment is doing very well, ahead of plan and well ahead of last year and the weakness is in the bulk side of the operation, overwhelmingly on steel volumes.
Let me give you some specific volume numbers to back that up. In the third quarter of 2009, we handled 5 million tons of steel. That compares to 9.4 million tons in the third quarter of 2008. Now, I will say that we have seen some meaningful improvement as the year has gone on.
In the second quarter of 2009, we handled 3.1 million tons, again going back to 5 million tons for the third quarter. So we did experience a nice sequential improvement. Maybe that indicates that the bottom has been reached and we're starting to see an upturn, but still well below the third quarter last year, which I might add was our all-time record quarter for steel throughput.
This is pretty consistent with the information we have with regard to overall utilization of capacity in the steel production business in the United States. At the peak in 2007 and for part of 2008, capacity utilization was running in the 85% to 87% range. It dropped as low as 40% in May of this year and now has rebounded in October to around 60%. We will see how it continues to go in the fourth quarter and beyond, but still a weak comparison to a year ago but a better comparison on a sequential basis.
The third negative, of course, is in our CO2 segment and that's oil prices. As you will recall, we targeted our budget an average WTI price of $68 a barrel. Even with the uptick we have seen over the last few weeks, we're still going to fall somewhat short of that, probably if today's forward curve holds something in the approximately $8 short of our original target.
And then the final negative we've experienced is weaker margins in our Texas intrastate pipelines. This is a result of a number of factors, but a lot of it is we obviously are buying and selling our transporting in some cases for a percentage of the natural gas price. And as that percentage has gone down on some of our contractual arrangements, we've experienced weaker margins.
Now, those negatives which we have confronted pretty much all year have been more than offset by a number of positives. Let me kind of take you through those. In the third quarter, as we have all year, we continue to experience good performance in our Products Pipeline group. Specifically, we're up on the Pacific side in our Pacific operations and our West Coast terminals where we've been able to roll some contracts for tankage at higher numbers and also in our Transmix operations, where we've had a good quarter and year-to-date.
A second positive for us has been better volumes in our Canadian operations. For example, in the third quarter, the volumes and our Trans Mountain, that's our big pipeline that comes across from Edmonton to the lower mainland and Vancouver and then drops on down into Washington state. On that pipeline, our volumes in the third quarter were up 24% compared to the third quarter a year ago.
We've also had a positive in terms of higher oil volumes at our SACROC Unit. We're well above a year ago at SACROC. We are slightly below the second quarter of 2009, because in the third quarter we had modestly slowed our CO2 injection rate as we tried to operate our facilities as comfortably and as efficiently as we possibly can.
We've got another positive across the board from cost savings. That's impacted in a positive way both O&M, which obviously stays within the various segments, and G&A which is a separate line item. And finally, we've also had lower interest costs than we anticipated in our plan as our floating-rate debt has experienced lower rates. And then we have brought REX and MEP online during 2008, which is added to the bottom line of our natural gas pipeline operations.
Let me bring you up-to-date on our major projects, particularly those major natural gas pipelines we've been working on for the last few years. We have now finished and put in service Kinder Morgan Louisiana and Midcontinent Express. The last segment of REX, that's a segment that runs from Lebanon, Ohio to Clarington, Ohio, is now completely finished except for one directional drill under one river in Ohio. We expect to complete that within the next few weeks and then REX will be fully in service all the way to Clarington.
That leaves us with a few projects in the Natural Gas segment on an ongoing basis. As you may recall, we've already received FERC permission to expand REX through compression and to actually have a two-phase expansion of MEP, Midcontinent Express, again through a compression. Both of those projects are ahead of schedule and within budget in accordance with the original budget that we set.
The final major project in the Natural Gas group, of course, is the Fayetteville Express project which is a 50/50 joint venture with Energy Transfer which is scheduled for construction in 2010. We have now received just last week our environmental assessment from the FERC. That looks fine. We're ready to proceed as soon as we get the certificate. We will start construction in the early spring and that construction will take place through the rest of 2010. We've also gone a long way on finalizing our contracts on the four spreads that comprise the FEP construction. And so far, those contracts look to be within our budget numbers for the project.
Finally, we've announced or made a few acquisitions since the last time we talked to you, the biggest of which was our acquisition of the natural gas treating facilities of Crosstex. It was approximately $270 million acquisition. Its fee-based natural gas treating, primarily removing CO2 from the gas streams. It's accretive to the bottomline of KMP from the start and we expect it to have some nice growth potential both as a standalone business and also as a way of increasing our connectivity with producers in our Texas Intrastate Pipeline group.
So that's an overview of the quarter, which we consider to have been a good quarter, above our plan. And with that, I'll turn it over to Park for the financial details.
Great. Thanks, Rich. Hopefully everybody has a copy of the press release, and I will be going through the number of pages, which should be at the back of the press release.
The first financial page is the GAAP income statement. Now, towards the bottom right above the bottom section, you'll see the declared distribution per unit $1.05 for the quarter, consistent with our expectations, consistent with our budget, up 3% from $1.02 for the third quarter of 2008. For the nine months, we will have distributed $3.15; that's up 6% from the $2.97 that we distributed in the first three quarters of 2008.
One thing to note here, our total distribution to our limited partners will be just a little bit north of $300 million for the third quarter of 2009. Through those three quarters, we will have distributed $875 million to our limited partners. We're on track to distribute about $1.2 billion to our limited partners for 2009. It was actually brought to our attention earlier this morning by one of our board members that there are very few companies in the United States who distribute north of $1 billion to their holders in a year. And again, the distributions to the limited partners will be around $1.2 billion in 2009 or for 2009.
With that, I'll go to the second page. We talk about how we're covering that distribution. So really I'll start at the bottom of the second page. The second line from the bottom is the DCF per unit. As Rich mentioned and is laid out in the press release, for the quarter we generated $1.12 in distributable cash flow per unit. So we're more than covering the $1.05 distribution.
And if you recall back when we announced the second quarter results, we expected at that time that we may not cover the distribution in the third quarter. We have more than covered it. Actually, we have $19 million of excess coverage. That puts us at a deficit of about $22 million for the year because we didn't cover in the first quarter or the second quarter.
But as we look forward for the full year, we're very close to fully covering the $4.20 distribution. We still have 2.5 months to go. We hope that we get there to fully cover that distribution. If we don't fully cover, we're going to miss by a very small amount. Our total distributions will be about $2.1 billion. And if we don't fully cover that total distribution, it's going to be by a very, very small amount relative to the total amount that we distribute.
Moving above that or actually looking at it, for the full year or the nine months, you'll see $3.07 compared to $3.35 a year ago. You may recall that the first half to first three quarters of 2008 were stronger than kind of the second half last quarter of 2008 largely driven by the economy. It started to really weaken in the second half of the year and crude prices, which came down significantly in the second half of the year. So again, we had a very strong first three months or first three quarters of 2008. Now, when we look at that for the full year, we expect we'll be at or above that number for 2008.
Moving above, you'll see the net income numbers. Really, we think the DCF per unit is a much more relevant measure. The total distributable cash flow for the quarter, $320 million, up about $38 million from where we were last year right about flat for the nine months, $854 million compared to $856 million. Above that, sustaining capital expenditures is about $41 million for the quarter. We were about $43 million a year ago; for the first three quarters, about $112 million. It was about $120 million a year ago.
We expect that for the full year, our sustaining capital expenses will be about $176 million. That is down from our budget of about $202 million. And the reason that that's down is there are some projects that we just didn't have to do. There are cost savings that we've realized on the capital expenditure side. And then there are some projects that have been deferred to later years. But our current estimate again is $176 million. Our total for 2008 was $180.6 million, so we're pretty close. We expect we'll come in pretty close to where we were in 2008.
Above that, you have the line called express contribution. Really all that's doing is backing out the earnings and adding in the distributions from Express. So it's putting Express on a true cash basis. Similarly right above that, you have the book cash tax difference. Here, we're backing out book taxes and then adding in cash taxes.
Now, of course, cash taxes are a negative but when you add back the book, if cash taxes are less than book, then it shows up as a positive here. That's what is going on for the quarter. You can see it's a positive $17 million. For the first nine months, it's a positive $31 million. That is above our budget, and so we think we'll get a little bit positive and really what this means is we'll pay a little bit less in cash taxes in 2009.
Above that, you have DD&A. It's up $50 million, over $50 million for the quarter. It's up almost $150 million year-to-date. That actually is expected and actually is a little bit below our budget. A lot of the increase comes from CO2, and you can see that up above. It also comes from the project that we're bringing online in a little bit smaller amounts.
The reason that the DD&A is less than our budget is because of the CO2 production and increased reserves that we're seeing in CO2 as a function of oil prices. Those reduce the DD&A rate. Now, again, we don't think that is overly relevant. We think it's much more meaningful just to look at our cash numbers.
And then above that, again, you get back to our income numbers. With that, let me jump up to the top of this page and we can talk about the segments and Rich touched on a number of these things. Starting with the Product segment, you'll see we're about $26 million above last year for the quarter. We're about $52 million above last year year-to-date. Product will finish the year above 2008. It is above its budget year-to-date and we actually expect it to end just slightly above its budget for the year.
Pacific, which is the biggest component of the segment, is above 2008 largely due to higher tariffs. It is a little bit below its budget and will probably end the year a little bit below its budget due to lower volumes, the lower gasoline, diesel and jet fuel volumes from what we had in the budget.
Transmix and West Coast Terminals are nicely above 2008 and nicely above their budget and we expect them to end that way as well for the full year. Cochin is below its budget and below 2000 or actually just below its budget. Now, that actually was most extreme in the first quarter and you'll recall that we talked about that at that time. It has come back in the second and third quarters, although we still think that it will end of the year below its full year budget.
On the Natural Gas Pipeline side, up about $18 million for the quarter, up almost $14 million year-to-date but below its budget and we expect will end the year below its budget. Now it's being hurt by the items that Rich mentioned.
The Texas Intrastates are seeing lower margins. And then we are seeing a combination of lower margins on the new pipelines for capacity that was not sold or hasn't been sold previously and a delay in bringing those projects online, so this is primarily Rockies Express and Midcontinent Express. So as we compare that to our budget, those are coming on a little bit later, and so the earnings that we're getting from them for 2009 are a little bit lower than our budget.
Now, in contrast to that, on KMIGT and actually the Louisiana pipeline, we're nicely ahead of where we thought we'd be in 2009, and so we're getting a little bit of a pick-up there. On the CO2 segment, you'll see it's slightly below a year ago, about $5 million below a year ago. Now, that's in the face of a decline in crude prices of about $50 a barrel. So actually that's pretty good performance for the third quarter.
We're also below 2008 for the year-to-date. We actually believe that CO2 will end up slightly above 2008 for the full year. Now, we have an easier comparison when it comes to the fourth quarter because, again, crude prices had dropped by the time we got to the fourth quarter of 2008. And of course, they are up some right now relative to where they were in the first half of this year.
We do expect CO2 to fall slightly short of this budget but really overcoming tremendous headwinds in this segment. The impact of price has been significant and again, it has been significant not just compared to last year but also compared to our budget. CO2 has almost completely overcome that relative to budget based upon the SACROC volumes and based upon the cost reductions that we've realized in that segment.
On the Terminal side, nicely above last year, about $12 million for the quarter, about $23 million for the year, but it is under its budget and all of the shortfall of the budget and actually even more than the shortfall is caused by the reduction in steel volumes that Rich just took you through some of the details on.
Now, we do have a little bit of weakness in coal and a little bit of a weakness in fertilizer relative to our budget. We have some strength on the liquid side as a function of projects coming on earlier than we expected and also as a function of renewing some contracts at slightly better terms. And so that's offsetting the impact of steel a little bit, but we do expect the terminals to end up short of their budget for the year.
Kinder Morgan Canada, you'll see above last year by about $8 million, for the quarter about $22 million year-to-date. Again, there are a couple of items that we've talked about all year that we feel really need to be adjusted for here. One is foreign exchange and actually it's now a positive. Earlier in the year, it was a negative on the segment and it has now turned to a positive.
And the other is the book taxes, as we talked about back in the first quarter. Due to an accounting change, we had to reflect book taxes on a different basis in our Canadian assets than we had assumed in our budget. And so that's been a negative to budget all year. But if you back those impacts out, again a positive from foreign exchange and negative from book taxes, year-to-date Canada is actually above its budget by about $3.6 million and we expect it to end up above its budget or right at its budget.
It is seeing growth this year due to Express being in there for the full year. We acquired that asset from KMI in the third quarter of 2008, and the completion of the Anchor Loop project which happened in 2008. That takes you to total segment earnings before DD&A of about $752 million for the quarter, up from $693 million a year ago, almost $2.15 million for the nine months, up from a little less than $2.1 billion in 2008, the first three quarters.
And we're on track to generate segment earnings before DD&A in excess of $2.9 billion. That will probably be a little bit less than our budget, which was a little over $3 billion, but a still nice growth from 2008 in what's clearly a very difficult environment, so nice growth from 2008 and very close to our annual budget.
With that, I'm actually going to drop all the way down to G&A below the segment earnings contributions. You'll see about $85 million for the quarter, an increase in incremental expense of about $8 million for the quarter and up about $15 million year-to-date but actually below our budget, both for the quarter and for the year-to-date. And we expect that G&A will be below our budget for the full year, largely as a result of the cost savings actions that we took in the first quarter of this year, so we're seeing the results there. As Rich mentioned and I touched on, we also see it in the segment.
Interest expense is below that and you'll see it's about almost $8 million higher for the quarter. It's about $16 million higher year-to-date. Now that was expected as well and in truth it's coming below our budget. It's about $14 million favorable to our budget for the quarter and we expect it will be about $30 million favorable to our budget for the year. And that's a function of lower floating rates. Now, the reason it's above last year is because the balance outstanding is greater and we'll talk about that in more detail when we get to the balance sheet.
Below that are the certain items. For the most part, we've touched on these, just looking at the items that show up for the quarter, the allocated non-cash long-term compensation. This is compensation that happens at KMI that KMP will never pay for, doesn't have to pay any money for, doesn't have to pay any equity for, has no responsibility for. But for accounting purposes, it has to reflect an expense on its books and so we reflect it here.
The mark-to-market of certain upstream hedges, again that's future hedges that we are marking to market here. The true impact of those hedges show up in the segment when the physical transaction occurs. That's actually analogous to a new line which is right below that which is called CO2 hedges. This is an ineffectiveness on our CO2 hedges that represent a difference between financial settlement and the actual physical sales of our crude oil. You can see it's a negative $5.4 million.
Again, the key point here is the impact of this ineffectiveness always has shown up in our segment and will continue to show up in our segment. So the true economic impact historically has shown up in the CO2 segment and will continue to show up in the CO2 segment going forward.
For accounting purposes, what we have to do here is reflect an estimated future value of that impact and that's why it shows up here. So again, this is a future value projected for future transactions. When those transactions actually occur, this difference between the physical sale and the financial transaction shows up in the segment just like it always has. I mean really no change. This is just an accounting item that we need to reflect down here.
Right below that, you'll see actually a $15 million positive on the hurricanes and fires item. This is consistent with what we've been saying all along. When we have these events that are insurable, we frequently have to write-off the book value of the assets that have been damaged and then we go about repairing them and we collect from insurance.
For accounting purposes, when those insurance proceeds come in, they show up as a gain. Well, just like we show the write-off of the assets as a certain item down below when that occurred, and you can see some of that in 2008. When the gain occurs, when we collect from insurance, we will show the gain down here in certain items. And that's what's going on at this quarter.
So that really is the majority, all of the significant certain items and really wraps up the income statement. Again, there is one other thing I'll point out back on the face of the income statement. We frequently say that revenues are not overly meaningful for us. I think this is a good quarter to look at that and to help understand why they are not overly meaningful. So if you turn back to the first page and you look at our revenues, they are down almost 50%, both for the quarter and for the year-to-date.
Now, you could look at operating income but that has certain items in it. I think a more relative thing is to compare on the second page where we have total segment earnings before DD&A. So our revenue is cut in half. So you'd think, well, what's the impact on margin? Well, margin is up. Segment earnings before DD&A, $752 million for the quarter, up almost $60 million for the quarter, about $2.15 billion year-to-date, up about $60 million year-to-date.
So, again, all this is doing is representing the fact that revenues, for the most part, are passthrough. The revenue line is driven a lot by the Texas Intrastate segment where we do buy in some gas, but we back-to-back it with sales transactions of that gas. So, while we reflect the impact of the price of the gas in our revenue line, we're selling on essentially the same basis and so that flows through our costs as well.
So again, changes in revenue don't have a lot of significance and don't have much impact on our ultimate earnings. So again, I'm just pointing that out because this is a good quarter to look at that and understand why we don't think the changes in revenue are overly relevant to our overall performance.
The third page is the volume page. I touched on some of this and Rich has touched on some of it. I will actually go past that and just take a look at the balance sheet.
Cash and cash equivalents are up about $100 million. Part of it is cash that's collecting in Canada and part of it is just timing on our credit facility borrowings. But we'll net that against debt when we talk about our total debt.
Other current assets, you'll see is down almost $320 million from the beginning of the year. That's all accounts receivable. The PP&E is up about $630 million from the beginning of the year. That's our CapEx offset by depreciation.
Investments have changed about $1.6 billion from the beginning of the year. That's our contributions to our joint venture pipeline, primarily Rockies Express and Midcontinent Express. Then deferred charges and other assets is down about $350 million. That is the mark-to-market or the hedges that take place on the balance sheet.
Total assets is about $19.6 billion, up from a little less than $18 billion at the beginning of the year. Notes payable and current maturities of long-term debt, I'll talk about that when I talk about the total debt. Other current liabilities like the other current assets is down. It's down about $475 million. The biggest piece of that is accounts payable. There are also some other accruals that are moving in and out and net to a little bit additional reduction.
Long-term debt, I'll discuss that in just a minute. The value of the interest rate swap, largely just moving with the forward curve for interest rate, although there are some amounts in there that relate to swaps that we have unwound. We did that in the fourth quarter of 2008 and the first quarter of this year and those are fixed amounts that are amortized over the remaining life of that outstanding debt.
Other is up almost $200 million, that's the mark-to-market of the hedges. Similarly, in accumulated other comprehensive loss, that change is the mark-to-market of the hedges. Then you see other partners' capital is up almost $500 million. That's a function of equity issuance offset by distributions in excessive earnings. I'll talk some more about the equity issuance in just a minute.
So that takes us down to total debt of about $10.2 billion, up from about $8.5 billion at the beginning of the year. That's an increase of about $1.7 billion. I'll talk some more about that increase in just a minute. If you compare that to our EBITDA, you'll see EBITDA is up slightly for the nine months. This is a rolling 12-month look. So it's up at the end of September relative to where it was at the end of 2008, but our ratio of debt-to-EBITDA has gone up. It is now at about 3.9 times compared to 3.4 times at the end of the year.
Now, that amount is overstated a little bit primarily because, as projects come online, the full amount of their debt is represented here, but we don't yet have a full 12 months of EBITDA. So that amount will naturally come down as we get a full 12 months of these projects on stream. Additionally, it's impacted by lower oil prices started in the fourth quarter of 2008.
So that has impacted us and clearly prices right now are higher than where they have been over that rolling 12-month period. If you look at the forward curve, they appear like they will stay at that level, although who knows. Then, of course, the reduction in field volumes. I've heard that EBITDA number as well.
With that, let's talk about the change in debt. I talked about the $1.7 billion for the year-to-date. The change in the quarter has been about $937 million, so increase in debt from the end of June to the end of September. In those periods, on expansion capital, we spent about $225 million in the quarter, almost $850 million year-to-date.
The contributions to joint ventures, again this is largely REX and MEP, over $800 million in the quarter and over $1.6 billion year-to-date. Acquisitions, about $9 million in the quarter, about $28 million year-to-date, now that represents the Portland Airport Pipeline that we acquired in the third quarter, and then the Megafleet acquisition earlier.
What is not represented, there is the treating acquisition that actually closed on October 1, so closed in the fourth quarter, not the third quarter. And also the GMX transaction which is not yet closed.
So, those are the investments on the raising capital side other than debt. We've actually issued equity of almost a $150 million in the quarter and over $815 million year-to-date. Now in truth, the total gross amount of equity that we've issued and this is in the press release is $858 million.
Just to reconcile these two numbers for you, the number that I mentioned here is a cash number that is net of underwriter's discounts and it only represents what we'd already received by the end of September. There is a little bit of that $858 million that actually came in and cash in October and so that doesn't show up in my numbers here because I'm talking as of the end of the September.
The KMR distributions have been a source of cash, about $86 million for the quarter, over $250 million year-to-date. We did generate about a $144 million from a swap unwind in the first quarter. We also generated over a $100 million from a transaction with a customer in the first quarter. We had CapEx accruals of about $75 million in the first quarter which is largely cash-related to capital expenditures from 2008 that has not yet been paid out by the end of 2008.
And then there is a large use of cash for working capital and other items, both for the quarter and year-to-date. And there are few unusual items in here that I will talk about, for the quarter it's about $120 million use of cash and for year-to-date its north of $400 million use of cash. If you look at that, AR and AP are a use of cash of about $15 million in the quarter and about $119 million year-to-date.
There are few things that work here, one and probably the largest, it's just an increase in margin. Really the right way to think about it is the month of September. You could think of it for the third quarter versus the month of December or the fourth quarter of 2008. And what happens here is if our margin increases, meaning what we expect to make grows, but we have lag in collecting like everybody does, you have generally collect in the month following when the business happens and you pay your bills in the month following when the business happens.
Well, if that difference between what you expect to collect and what you have to pay out grows, well then you are going to have an increased use of cash or working capital and that's part of what's happened here. Additionally, there are few other items that are more timing related. Now, a number of these things will reverse themselves in 2009, but not all of them will. So, we are not expecting all of this to wind itself out in 2009. We are expecting a substantial portion of it to wind itself out overtime. Now of course there will be other things that happen, it's a dynamic business that may or may not offset that or it may assist it.
In addition to that we have an increase in inventory and gas and storage of over $60 million and that's really year-to-date and that's kind of typical seasonality. Other current assets and current liabilities are use of cash of about $80 million in the quarter and $140 million year-to-date. Again, that's largely timing driven in large part by timing on interest payments, but also some timing on some other accruals.
Then the final largest thing and they are assorted to other smaller things. Kind of largest thing is just the coverage of the distribution and we talked about the fact that we have about $19 million of excess coverage for the third quarter. That distribution doesn't get paid until November 13. And if you look at the distribution that have been paid in the first nine months of this year, then actually we had some negative coverage over that time period.
And so these are distributions for the fourth quarter of 2008 and first and second quarters of 2009. And that's resulted in a use of cash of about a $100 million year-to-date, about $17 million for the third quarter. So you know that the major items that add up to that use of cash for working capital and other items, again tying back to our total change in debt.
Now, to give you a little bit more detail on the expansion capital project; for product, we spent about $40 million in the quarter, a little over $100 million year-to-date. We are expanding our Carson tank facility, adding capacity to handle ethanol in our southeast terminal, expansion of our Travis pipeline to that Air Force Base and a few other smaller projects.
On the natural gas side, it's been about $64 million in the quarter, a little under $300 million year-to-date. By far the biggest piece of that is the Kinder Morgan Louisiana pipeline which is now in service. We also have a couple of smaller storage expansions going on.
On the CO2 side, we've spent about $51 million for the quarter, about $238 million year-to-date. Most of that is going to SACROC as is typical; a little bit of expansion CapEx at Yates. But this number is below our budget as a function of the cost savings that we've realized.
We've seen those benefits not only in OpEx and G&A, but also in expansion CapEx, especially here on the CO2 side. And truthfully and I mentioned it, we've seen it on the sustaining CapEx side, those cost reductions.
Our terminals, it's been about $62 million for the quarter, little under $200 million year-to-date. Ongoing expansion is at Vancouver Wharves, Pasadena and Galena Park which is really where the tanks that have come on early has been, expanded our capacity at our core terminal and our Pier IX terminal and in a variety of other smaller expansions.
And then I've mentioned the large contributions to the joint ventures, north of $800 million for the quarter, north of $1.6 billion year-to-date.
The Rockies Express contribution was over $640 million in the quarter, a little under $1.1 billion year-to-date. And then the MEP contribution was about $132 million for the quarter, over $460 million year-to-date.
So again, those were the biggest items. We've also made a little bit smaller contributions to Fayetteville Express in the quarter and year-to-date.
And that is it for the KMP financials. I'll hand it back to Rich.
Okay, thanks, Park. And Ed if you come back on and open the lines for questions.
(Operator Instructions). Our first question comes from Stephen Maresca from Morgan Stanley, your line is open sir.
Stephen Maresca - Morgan Stanley
Just had three quick topics I wanted to ask a quick question on. First Rich you talked about the Texas interstate and certainly, difficult market conditions in terms of lower margins. I guess two things on that; one, can you just talk about again how much you are exposed in that area in terms of sensitivity fee based versus exposure to buying and sell prices. And then two, as we see natural gas prices come up are you seeing an improvement in that business since the third quarter ended?
Yeah, I think unlike our interstate there is little bit more exposure on the intrastate. But we kind of think if it as being, 70% to 75% or so that's about locked in under some kind of term contractual arrangement. So that's pretty much secured in terms of the cash flow as we come into the year. And it's that last 25% or 30% that ends up being subject to these variables. And so as we look out over the course of the year, we are not certainly getting back anywhere near all of that, but that's the place where there is a play.
Now as prices have come back up, the cyclical part that Rich was referring to where we had some of our purchases that are a combination of a basis as well as a percentage of the Houston ship channel which kind of covers our fuel when it has to be sort of over cover our fuel. As prices come back that part of our business comes back.
Stephen Maresca - Morgan Stanley
On to the second part; just in terms of your oil hedging, is there any update to 2010 for your oil hedging, and I guess any thought to again commodity prices are rising, hedging a little bit more in 2010
Yes, we did add a little bit to our 2010 hedges during the quarter, it wasn't a significant amount. We are reasonably comfortable with where we are right now. In 2010 we are approaching – we are north of 70% hedged in 2010. I think we will continue to evaluate, prices have clearly improved, and we will probably layer some more on as we go forward.
Stephen Maresca - Morgan Stanley
Last question Rich may be this is for you. As you see a lot of these projects come on line and cash flow has been increasing, where are you comfortable now in terms of distribution coverage when you start to think about raising the dividend again?
You mean an ongoing basis?
Stephen Maresca - Morgan Stanley
Yes, ongoing run rate for you
Yes of course it has been our tendency. We have very predictable long-term assets, and so we don't think that we need to have tremendous amount of coverage in excess of our distribution. That said we'd like to have a little bit of coverage and I expect that's where we will continue to be.
We haven't even started; we are just starting our budget process now, but we will lay that out when we release our estimate for 2010. But we would expect to a fully cover 2010, obviously whatever that is plus a little bit. And in 2009 as Park and I both said we are very close to fully covering right now and then very optimistically we will fully cover, we might miss by a little bit but I think we will fully cover and may be have a little bit just spare on top. We just have to see these last two and half months for now.
The next question will come from [Ross Payne] from Wells Fargo. Your line is open, sir.
First question is related to REX and Midcontinent Express, you mentioned that there were some additional capacity there that was probably done at spot and then achieved the profitability you might have been looking for. How much capacity is available on those two systems? Also, where are they running, just generally speaking, from a capacity utilization standpoint?
Let me kind of give you an overview. Steve can jump in here, and you may have kind of misconstrued what Park said on that. What we have is, virtually all 1.8 billion cubic feet a day on REX is fully subscribed. There is just a small sliver that's not that will be available on an ongoing basis. We have found as REX has come online that we have a little bit of additional capacity on top of the 1.8 that varies seasonably and it varies with exactly where the volumes are going, but we do have that available to sell.
That's an upside and as basis differential have gone down what we expected to get for that access is not as great as we thought it would be. As you ramp-up the line, there are also some other odds and ends where we had the ability to sell for a few months some excess capacity. The basis differential simply wasn't what we expected, therefore the spread wasn't.
MEP is fully subscribed on a long-term basis, but again, as we were starting up the second phase, we had the ability to sell some of the capacity before our customers were obligated to fully take that. Again, we expected to sell it where the margins were or the spread was, when we were building, I think the spreads across the country, of course had gone down and so we weren't able to realize as much as we expected.
So these are more or less, with the exception of this bit of additional capacity on REX, and this very small unsold part of the 1.8 Bcf per day. Everything else is really odds and ends around the startup. Steve, do you want to add anything to that?
Yeah, just on the other question on utilization on REX. We've been very sound but we've been lying 1.7 Bcf and 1.8 Bcf on throughput levels and on [any fee] it's been like a little over a Bcf, with a Bcf its own being dropped off its own at one event less than a Bcf going on through, so you got to look at it in two part.
Then I think just to reiterate what Rich was saying a lot of what we were talking about is half of these to sell this year that adds double subject to those basis impacts. That spurns up and terms up when the projects go into affect. So it goes in and under the long-term contracts that we signed up originally, which is a good thing for us in terms of getting the contract value as opposed to at current basis.
Also, obviously, REX and Midcontinent are going to be included in your natural gas segment. Are those generally speaking performing as you expected absent some of the delays I guess?
Yes, they are.
Then my final question is I guess the EBITDA at the end of your financial statement is inclusive of your pro rata share of JVs, if you can give us kind of the current debt numbers at quarter end at MEP and Rockies.
Well, I don't know if you have that. I mean at REX we've got $1.3 billion of permanent debt, that's already on REX and then we had a $1.9 roughly outstanding under the revolver at REX. AT MEP, we have $800 million of permanent debt. That's on that long-term. Then had roughly about $400 million outstanding under the revolver on MEP that basically will that revolver balance will go down to basically zero within the next few weeks.
I mean the right way to think about it is, it's a long-term debt. At REX it's going to be $3 billion in the long-term debt. At MEP, it's going to be $800 million. We're still in construction at Rockies Express, but once we complete that we expect we'll term up that debt, and again it will be $3 billion. At MEP, the final equity contribution happens this month and once that does, then it will be the $800 million. I don't think the interim levels really have that much meaning.
That's very helpful. Just kind of help us figure where it is at the end there. And one final question, it looks like plantation perform better than the rest of the system, is there anything intrinsic going on there that we ought to be thinking about?
From the volume standpoint?
There are lot of moving parts and again that's why we kind of caution not to pay too much attention to plantation compared to some of the other pipelines because it is in the competitive situation that some times lines are full. This quarter we experienced some additional jet fuel movement over to the Dallas Airport in Washington D.C., which kind of made the jet fuel numbers look better than they probably are on a long-term basis, and as I said, that's one reason why I was careful to say that we really haven't seen any meaningful uptick in jet across the whole system because that was more a one-time event.
I wouldn't read a lot into that plantation and it continues to chug along and move the share of the volumes, but again it is subject to more outside events than the other systems are.
Unidentified Company Representative
I think its 2008 results probably affected by the hurricane.
It's another good point. Yes, plantation was the one system that was affected by the hurricanes in the third quarter of 2008. Good point.
Any update on the final switch on date for Rockies Express? That's it for me.
Yes, we have a public posting out there as Rich mentioned in his posting, we've got the one-directional drill to complete and we have posted that for a follow-up notice during the month of November, and when that notice was given, that will be when the directional drill is complete and that will another five to seven days following that to actually tie in, [merge], pack and then activate the line. We'd be communicating to the market through our closing process on the REX going forward as we get closer to the end thing.
Next question comes from Emily Wang from Raymond James. Your line is open, Emily.
Emily Wang - Raymond James
Could you guys provide some updates on the Katz Field project?
This is a project, about $185 million to $190 million total cost. It involves extending our CO2 pipeline in the Permian basin further east and north to serve among other potential uses of CO2 there, our own gas project where we would again do a SACROC or Yates type of flood. And we are so far on target to do that, the cost seem to be very preliminary at this point, the cost seem to be along the lines of what we expected in that number I was sharing with you. We've ordered some of the pipe, we've bought a good bit of it right away. We've already contracted for some of the rig work to be done on the injection wells at the Katz unit itself. So everything seems to be going along and we will not have production out of Katz until 2011.
Emily Wang - Raymond James
On the Texas Interstate system, comparatively can you give us an idea of how it performed this quarter relative to last quarter. And then also on a year-over-year basis?
Yes, on quarter-to-quarter DD&A basis, it's down a little bit from the (inaudible).
I mean as Steve mentioned compared to third quarter, compared to last year down slightly and that's true both for the quarter and year-to-date.
Emily Wang - Raymond James
Okay, but you don't have the information quarter-over-quarter
Emily Wang - Raymond James
Can you guys talk a little bit more about the treating facilities that you acquired from Crosstex, a little bit more about what sort of opportunities you see connecting it to your Texas Interstate group and what sort of facilities running right now and how you plan to increase volumes on it?
Well what we bought was approximately 290 treating units primarily in Texas, Louisiana and Oklahoma. And what these treating units do for the most part is strip CO2 out of the line so that the natural gas will meet pipeline specs where it can go into the long line pipelines like we and others operate. And obviously that has to be done, the producers have a choice they could order and build these things themselves. But what we try to do of the (inaudible) that we both tries to do is to provide one-stop shopping.
So we have our producer who says I got a Haynesville well coming on, the CO2 content is 6%. I need to get it down to 3%. And as opposed to going out and worrying about to building this myself, I am not exactly sure how long the stream in my production will go on and what volumes. I can now call Kinder Morgan, in the past Crosstex and just order up a facility which they will get out to meet generally within a couple of weeks to strip that out because we have inventory of two big yards, one in Odessa and one in Victoria Texas where we store inventory that we can move out to these sites on demand.
So, that's the service we provide, we get paid a fee for doing that. And we think that there is good opportunity to grow that business in a couple of respects. First of all, we think there is a need for that kind of service, we think that the fact that we have thousands of miles of natural gas pipeline in these various areas, it will allow us to have more contact with producers, that should benefit both the business we bought, it should allow us to put in a more of these treaters, number one. But it should also in kind of a cross-fertilization way, help our Intrastate pipeline in Texas connect up more reserves because as people say, I need a treater here.
Well, where's that gas going once it's treated? If we can work with you to move it into one of our systems, we'd be happy to do that. It's kind of an upstream expansion, so we looked at it and we didn't factor in any kind of value to the Texas Intrastate. We think we'll get that but just on a standalone basis. We think it's a nice accretive acquisition premise and then we will have added more synergies with our Texas Intrastate operations that will be a positive.
Emily Wang - Raymond James
And for comparison purposes, the fees, market based or are they set at a certain price and what are the fees relative to what Crosstex is charging?
I'm not going to comment on individual fees obviously. They are not regulated fees.
They are market based and lots of them are contracts that we (inaudible) and so they haven't necessarily changed. Let me add one other thing to your prior question about the quarter-over-quarter change. Because of seasonality that impact most of our assets, we tend not to look at changes, sequential quarters because it's not overtly meaningful. So that's actually why we don't have the information in front of us because we just don't analyze it that way.
Our next question comes from John Edwards from Morgan Keegan. Your line is open, sir.
John Edwards - Morgan, Keegan
Park you were going through and I missed the numbers on the G&A expense, I think that you indicated that we are so much below budget this quarter and year-to-date. Could you repeat that?
Yes it's right around $10 million actually a little lower than $10 million that we are below year-to-date and that's about where we expect to end the year.
John Edwards - Morgan, Keegan
And then where are you in terms of project backlog at this point and then how much is left to spend on REX. I guess you got the expansion, the compression expansion next year, but could you just give an update on that?
Let me talk about the project, backlog then I will let Steve or Park talk or David talk specifically on expenditures. But on the project backlog, what we have still going forward is we have those two expansions already permitted and already fully subscribed on MEP and REX, and again those will come online during 2010 and they are under our budget that we originally had for it and on time for delivery. They are compression projects, we are not really dealing with directional drills, here we are dealing with compression.
Then we have the Fayetteville Express that I talked about, again which will be built during 2010, come online in late 2010 early 2011. And then we have a number of other projects of course is – to Amelia's question of course and I mentioned the rather major expansion of our CO2 network is $187 million Katz project including the pipeline.
We have a number of products pipeline projects still going including some fairly good size tank expansions in our Carson, California facility, a good size project for the military in Northern California at one of their air basis, and then we have a number of terminals projects that are coming online that are presently underway, including a pretty good sized expansion of our (inaudible) facility for a specific customer. We mention that actually I think in the previous call.
So we have a lot of backlog that we will be able to kind of quantify all that when we release our 2010 budget, we will be able to tell you exactly what we expect to be spent on capital expenditures in 2010.
Then in addition, not only have we made these acquisitions that we referred to, but we expect to have a couple more medium sized acquisitions that we will make in the next few months that will also, if you want to look at that is project backlog, that's also upside for potential growth.
So I referred to you before, as far as these major natural gas projects, the pigs going through the boa constrictor and to a certain extent that's true and a lot of the pigs now going through, but we do have some sizable projects still to build. That said, the demand on capital next year is going to be very small or relatively small compared to the amount of funds that we have expended on, particularly on these joint venture pipelines during 2009. Steve (inaudible).
In round numbers, you're going to give the full detail of the budget layout at the analyst meeting, but just a round numbers of about how much.
I really can't say that till we get through the budget we haven't finalized all the terminals projects yet. So you can see that the Fayetteville Express is a $1.2 billion project. You know that Katz is a little less, $200 million project so on so forth.
So, we've got substantial opportunities in front of us. I'm sure there will be some that we're not even aware of today. The opportunities we'll find. We think we're very opportunistic to make acquisitions or do construction projects that are accretive to the bottom line.
Our next question comes from [Eve Seagal] from…
I'm doing well. Thanks, good evening. Just a couple of quick ones. Rich, not surprising, I got confused when you were mentioning Kinder Morgan Louisiana being above budget. Can you just elaborate on that?
Park, do you want to.
Yeah, it's actually above budget, mostly due to the recognition of AFUDC, and so that's what's taken in the above budget.
Sort of a last question, do you see any signs of the economy improving in terms of what you maybe saw during the quarter over-- September over August or what you're seeing in October, especially as you were talking about the bulk terminals and jet fuel and [just so it]?
Yeah, that's a good question Eve and we judge it on kind of the things I talked about in my remarks. We have seen a nice quarter-to-quarter improvement in steel volumes. Right now we're looking at the fourth quarter. Our forecast is that those volumes will be relatively flat with the third quarter. So we will maintain the pickup that we had for second quarter, but we're not expecting to see a lot of growth of that 5 million ton number that we had in the third quarter.
Now, it is instructive on the steel volumes that the 9.4 million tons in the third quarter a year ago was the peak. By the fourth quarter (inaudible), but I think in the fourth quarter it was six in change, 6 million in change. So if we are right and we're relatively flat this quarter at five or maybe a little better than five, we certainly won't have the percentage deterioration year-to-year, that we had in the third quarter, but nevertheless, we would expect to be below the fourth quarter of 2008.
So we are seeing some pick up. I think steel volumes at least what we handle probably we hit low mark sometime in the May-June time frame and we have seen some comeback. But I would caution you that our customers on the steel side are saying, we are not building inventory we can only give you projections for 6 to 8 weeks out because we are simply filling orders as they come in. So that's kind of cautionary.
Again as we talked about Eve on the product side, we are seeing a continued weakness in jet fuel and diesel. We've got to assume and there is lot of moving parts, but we have to assume that diesel is largely a function of lower construction activity particularly in places like Las Vegas and Phoenix and Southern California. Jet is largely a function of simply fewer planes flying to these various destinations.
We have not seen enough turn there, we have seen gasoline volumes come back at least on a year-to-year comparison. They are modestly above where they were a year ago, and that trend seems to be about where we are heading into the fourth quarter.
So those are probably the best indications that we have of real view point into the what I would call the main street economy. I don't know if that helps at all, but that's what we see.
Finally, any sense of that the potential for moving gas further east from Clarington at this point?
Yes, not frankly but certainly nothing that's what I could call actively in the works right now. I think a lot of producers pick up lot of capacity here and kind of adjusting it and watch and see how prices shake out and how Marcellus shakes out. There is just, I think, a lot of factors that are in place or people right now and so I'd say again nothing actively in it works and nothing by any stretch eminent there.
Conceptually, could you guys just give us sense of all these pipes has been built and so we've seen basis flat now across the country. What's your view point if you have one on what we may or we may not see as it relates to basis maybe showing up again at some point.
Well, certainly, you heard us say before that we do not subscribe to the bottomline of the movie build it and they will come feel the dreams. Because when you build the pipeline the basis differential will generally collapse and if you haven't signed up throughput in advance, you are in a lot of trouble. And so that's why we didn't started in this project until we have them all virtually fully subscribed.
That said, I think you're going to see a lot of bottle mix still out there, so you're going to see basis differential in my view move around based on where those bottlenecks are at a given time. So, for example, as the bottlenecks move further east, the spread between Rockies and Midcontinent collapse. When REX and others got further east then that basis collapse, so a base differential collapse. So I think that's what you're going to see.
But I think its going to take some time for all of this to sort of shake out as Steve said, people have taken on additional capacity. They are going to put that to use economic animals, you have marketers, you have LDCs in the mix and I think we're going to have to wait and see where it shakes out and what the supply really is coming out of some of these new shale plays.
Certainly the Marcellus and how that develops is key to the whole thing. So that's kind of a wordy answer but I think that it's just too early to tell. I think you will see basis differentials because you will have bottlenecks. You will have oversupply in one region and undersupply from another region. Steve, I know you want...
I think you've covered it.
Our next question comes from John Edwards. Your line is open again, sir.
John Edwards - Morgan Keegan
Just a follow up, earlier in the year, you're talking about concessions from oil service supplier in your CO2 division and have you seen any claw back there or have you been able to get them to hold back?
Tim Bradley who runs our CO2 will answer that question.
We've not seen any retreat yet with respect to cost increasing as a result of the recent uptake in oil prices. Year-over-year if you look at our operating cost, they are down about 35% through the first half and 37% through the third quarter. The concessions we're getting from our vendors to reduce their cost have kind of slowdown. We're bidding more of our work and we're continuing to see cost reductions arising out of that activity.
There are hungry vendors out there that are very competitive and we're still capitalizing on that, but we've not yet seen cost start to pick up. Wouldn't be surprised to see that if oil continues to remain $70 - $80 a barrel. We might see some upward pressure evolve during the fourth quarter. But at this point in time, we've not seen that.
At this time, I show no further question sir.
Okay, well, thank you very much and again we're happy to answer your questions at any time. If you have more just give Tim or David a call. Thank you. Have a good evening.
At this time now, we conclude today's conference. You may disconnect and thank you for your attendance.