Kinder Morgan Energy Partners L.P Management Discusses Q3 2010 Earnings Call Transcript

|
 |  About: Kinder Morgan Energy Partners L.P (KMP)
by: SA Transcripts

Kinder Morgan Energy Partners L.P (NYSE:KMP)

Q3 2010 Earnings Call

October 20, 2010 04:30 p.m. ET

Executives

Rich Kinder - CEO

Park Shaper - President

Tom Martin - President, Natural Gas Pipelines

Tim Bradley - President, CO2

Kim Dang - VP & CFO

Steve Kean - EVP & COO

David Kinder - VP, Corporate Development

Analysts

James Allred - Raymond James

Steve Maresca - Morgan Stanley

Joseph Siano - Credit Suisse

Ross Payne - Wells Fargo

John Tysseland - Citigroup

Brian Zarahn - Barclays Capital

John Edwards - Morgan Keegan

Operator

Welcome and thanks for holding for the Kinder Morgan quarterly earnings conference call. (Operator Instructions). Now I would like to turn the call over to Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, you may begin.

Rich Kinder

Okay thank you and as usual welcome to the call. We'll be making comments within the parameters of the Securities Act of 1933 and the Securities Exchange Act of 1934. I'll give an overview of the performance for the quarter, Park Shaper, our President will take you through the numbers and the usual detail and then we will take whatever questions you may have.

I think the biggest news is probably that we increase quarterly distribution again this time to a $1.11 which is a $4.44 to annualized rate. That's 6% of our distribution in the third quarter of 2009. We still expect full year 2010 total distributions of $4.40 that's up about 5%, 4.8 to specific compared to full year 2009.

Recognition that all of our segments look like they will be in a positive position compared to 2009 on a full year basis earnings before DD&A, on a year-to-date basis on distributable cash flow per unit which is what we think is the most important single indicator for our business. Before certain items we are up 6% year-to-date, we have generated $3.26 per unit of distributable cash flow versus 3.07 a year ago. But the third quarter was actually down year-to-year, $1.02 versus $1.12 a year ago.

That $1.02 is very close to our budget to the third quarter but we have had a number of in and outs for the quarter which Park will take you through a detail but pretty close the budget for the quarter and on track for the $4.40 distribution for the year.

As usual I will just take a look at each individual segment because I think that's probably the best way of explaining the performance in any given quarter a year. Starting with the products pipeline, probably the most important single factor there is that our refined products volumes were up for the quarter compared to a year ago. If you look at on an unadjusted basis it was up by a little less than 1%. If you look at it on an adjusted basis which takes into account the increase in the ethanol mandate California from 5.7% to 10%. They were up 2% I think that's definitely the right way to look at it. The second quarter in a row that the adjusted volumes have been up on a year-to-year basis. This is the first quarter since 2007 that the unadjusted was up quarter-to-quarter.

So, we are beginning to see I think some modest recovery in the throughput volumes on our products pipeline system and the fourth quarter is off to a pretty good start through the first half of October in terms of year-to-year comparison. That said that reminds you that obviously we are coming off some weak comparable periods for 2009.

Other important indicators in our products pipeline group, ethanol volumes were 25% versus the third quarter of 2009 and are actually up 34% for year-to-date. NGL volumes in that segment are up 7%.

And the other significant news since we last talked to you in the products pipeline segment is that we did complete the transaction with Chevron purchasing four of their products terminals around the country for a little less than $40 million including inclusion CapEx and obviously as most of these acquisitions are -- it will immediately accretive to cash flow at the KMP level.

Turning to our natural gas pipeline segment, on the positive side we got a good contribution from our treating business and from our KinderHawk joint venture and from Kinder Morgan Louisiana pipeline. On the negative side we had more results at the Rockies Express and more results at the Texas Intrastate. On Rockies Express the lower results came from the negative impact of higher Ohio property tax assessment. Park will take you through that in more detail. And increased interest compared to 2009 because we termed up some of our loans.

On the Texas Intrastate we had lower prices and less volatility in the Texas market which in turn led to some reduced sales margins and lower storage spreads. Overall as Park will tell you we're still pretty close to our plan for the full year in that segment.

Segment volumes for natural gas pipelines were up 3% for the quarter. That's primarily the impact of our Midcontinent Express Pipeline. There were a number of other significant developments during the quarter and after the quarter end in our Natural Gas Pipeline segment but virtually all of them are very positive to the long run.

First of all our Fayetteville Express Pipeline is nearing completion. In fact the pipeline is finished and in service. We're completing our compressor station and a couple of meager interconnects will be fully operational by December 1st 2010. That's a month ahead of our original target. The construction cost look to come in at about $1 billion. That's against the original budget of about $1.3 billion. So the project is coming substantially under budget move ahead of time. As you recall that's a 50-50 joint venture with Energy Transfer. It has capacity of 2 Bcf per day. 1.85 of that 2 Bcf is fully contracted for a 10 year period.

So other major developments in the Eagle Ford Shale play in South Texas that I wanted to take you through. Our joint venture with Copono is progressing nicely. Construction has begun on the first portion of that line. As you will recall that line has a capacity of 375 million cubic feet a day. We previously announced that we signed ASM Energy for a big quantity of that capacity up to 200 million a day. We expect to announce very shortly binding commitments for the remaining 175 million a day and we've also made significant progress on other Eagle Ford buy ins and projects which we expect to be announcing in the coming months. So I think that's a very exiting shale play. I think we have a lot of exposure there and I think we're going to increase our ability to move product or natural gas out of that area.

Another project, we completed our North Dayton storage facility, that's a $100 million facility and it adds about 7.25 Bcf of working gas capacity for us. In the Hayneville Shale play KinderHawk signed a significant long term agreement with a major third party producer for gathering and treating services on a long term basis. The reason that's important is I think it indicates our belief that we will be able to attract additional third party volumes to that system and as a matter of fact that's part of the third party volumes are running above our acquisition plan. So I think that's an encouraging development for our KinderHawk joint venture.

Turning to our CO2 segment, CO2 is up nicely for the third quarter and year-to-date both on a DCF and earnings before DD&A basis but somewhat below plan is part that we will talk about.

Several moving parts in the quarter in this segment just going down the list, our Sac Rock oil production at 29,000 barrels per day for the quarter was pretty close to the third quarter of 2009 and pretty close to the plant for 2010. Our Sac Rock NGL volumes were actually up 5% over the third quarter of 2009 making this the second best quarter ever for NGL production there and the improvement in NGL volumes basically they raised any shortfall on the Sac Rock total production picture.

Yates was a different picture, the Yates oil volumes entered the quarter or averaged during the quarter about 23,200 barrels per day that was down 8% from a year ago and that certainly the may make it even the CO2 segment that probably the major negative the whole company during the quarter and year-to-date. There is some good news here our current analyses this shows the spinning of the oil column that we talked about last time has stabilized, that's a good sign. Although I will caution you it's clearly the more time that expires without any further thinning, the more comfortable we will be. That's a very positive sign because as long as the oil column doesn't bend that means this level of 23,000 plus barrels per a day should be sort of a bottom indicator or a bottom number that we can work off at Yates and we will continue to work on efforts to increase our overall Yates production.

I think the if you look at the other things impacting our CO2 financial performance for the quarter the price of oil was a few dollars short of our budget target number of $84 but actually one way to look at the overall performance of the CO2 segment is that through a combination of cost reduction and good management. They have made up all of the non-priced short fall virtually all of it leaving just the price short fall as the short fall in the overall segment earnings before DD&A.

In other news in that segment the Eastern Shelf Pipeline project is nearing completion. That project will have an initial throughput capacity of 65 million a day, the ability to go up to up to 200 million cubic feet a day of CO2.

We will be moving CO2 through that line and starting to flood Katz field in December of this year. That's a little ahead of time we expected it to happen. And we expect to get about 25 million barrels of oil out of catch field over the next 15 to 20 years. In addition, I think that this projects the pipeline and the flooding efforts will be a platform for additional floods in that part of the Permian Basin.

Another significant development in our CO2 segment is that during the quarter we have signed over 800 bcf new CO2 sales and delivery contracts with eight different producers. These contracts have an average life of 8.5 years and are staggered in as far as their beginning dates. They are generally on more favorable terms than the older contracts that they are replacing. That's a good sign and we expect to nail more contracts by year end. We are finding a very positive demand for CO2 among producers in the Permian Basin.

Going to our terminals business segment, they had a substantial increase in earnings before DD&A versus the third quarter of 2009 and that really came from both organic growth and acquisitions. Liquids throughput for the quarter was up a little over 6%. Both volumes were up about 7%.

We also benefited from having additional liquids capacity and tanks available during the quarter compared to a year ago. We'd added 1 million barrels on the Gulf Coast alone. And on the bulk side we stronger volumes in steel and ore.

And I always like to look at steel volumes a little bit, the same as we do at the throughput volumes in our products pipeline group because it's in my view a leading indicator of the economy in general. During the third quarter, we moved 6.7 million tones of steel through our terminals and that's versus 5 million tones in the third quarter of 2009.

Now sequentially it's not quite as good. It was actually 7.2 million tones that we had in the second quarter of 2010. These trends are pretty consistent with the national operating rates for the steel industry which we show as 57% in the third quarter of 2009 going up to almost 73% in the second quarter of 2010 and averaging in the third quarter of 2010 just to shade over 70%. So very consistent national numbers with our throughput numbers.

To give you an idea of how important those steel volumes are in terms of revenue, year-to-date in our terminals group the additional steel volumes have added about $40 million to our revenue versus year-to-date 2009. To put all these volumes in context, you may recall that in early 2009 during the worst of the recession the steel volumes on a national basis were in the low to mid 40s range and that was down from a peak before the recession hit of a low to mid 80s.

So certainly we've had a large recovery but not all the way back to where it was before the economic problems surfaced. On the acquisition front, in our terminals group we benefited from the U.S. development in acquisitions made earlier this year. Ethanol volumes were up substantially in the terminals group to over 14 million barrels. Overall the terminals and products pipelines together have handled about 66.5 million barrels through the first three quarters of this year and that's about 30% of all the ethanol used in the United States.

We continue to acquire terminals in our terminals group and expand our facilities. Our most recent acquisition was one that we've just closed a few days ago which was the acquisition of the third terminal in the Norfolk, Newport News, Virginia area.

Turning to Kinder Morgan Canada, for the third quarter that operation is a little below 2009 solely because of change in foreign exchange rates. We expect that entity to exceed both 2009 and is planned for the full year. Year-to-date volumes are up about 6% compared to the comparable period of 2009.

Now before I turn it over to Park I'll just say one more thing. I would again emphasize that the -- it has been a disappointment this quarter. The KMR -- the KMP discount still looks abnormally large to us and because of the difference in price the KMR yield of course is substantially better tax consequences and if you combine all of that with the fact that our belief is that difference between the two will go away and you will get that pick up in value.

We think KMR has a great deal of growth in front of it and that's why if you look at management purchases over the last several quarters they have been overwhelming in the KMR arena and with that I will turn it over to Park for the numbers. Park?

Park Shaper

Right. Thanks Rich. I'm talking to the numbers that are part of the earnings release. So you go back through the text you will get through the first two numbers of why we should face the income statement. And just a quick summary, Rich touched on all these points but there are really kind of four factors that hurt us in the third quarter and let me just run through those four.

First is oil prices, in our budget our prices will be about $84 a barrel. We actually realized about $76 a barrel. Yates of volume as Rich mentioned were down versus budget and came in at about 23.2000 barrels per day. Our budge was 26.2000 barrels a day and one thing to remember on Yates is we own about half of that field and we operate it but the volumes that I gave you there are gross and so it's really only a little bit less than half of that when you check that take up royalty that impact us.

The third piece that heard in the quarter is the REX Ohio Tax issue and Rich mentioned is we did get there in the quarter and a testament from the State of Ohio on property tax that was significantly higher than what we had in our budget and we believe a way count of the realm reality.

We are certainly going to challenge that and appeal it and we are confident that we will be successful on appeal. What we are recognizing here is an increase from our budget although it's not all the way to the assessment.

Really what we are recognizing now and we expect to going forward until this was resolved. It is essentially a number that is reflective of the high end of the various reasonable ways that we can come up to calculate that property tax. So there are a number of different ways that can be calculated.

We ran through those calculations and essentially we took the high end of that and that's what we are recognizing here.

We would hope that will be over due better than that throughout this process. But what it does mean is that we had a catch up in the third quarter for that higher property tax throughout the first three quarters of the year and that impacted us by about $6 million. A little less than $6 million in the quarter.

In the fourth item that hurt us in the quarter, the Texas Intrastate and again Rich mentioned that with lower gas prices and lower gas price volatility that does have an impact on our sales and transportation and storage margins in the Texas Interstates. So we got some of that in the third quarter. And as we look forward oil prices are back closer to our budget in the fourth quarter. So that will be a little bit better than that has been throughout this year.

Yates volume as Rich mentioned well they are not max to where they were at budget time. They seem to have stabilized and September and what we have seen so far in October. Essentially around the level that we averaged for the third quarter but we are encouraged by that, clearly we factored in the higher property tax, Rockies Express going forward. Now in the Intrastate market we will still see weakness there in terms of margins that we do have the Eagle Ford projects that are in progress and certainly as production grows down at the Eagle Ford although that would take a little bit of time. That should be a positive for our Intrastate system.

So that being said, looking at the numbers and so again the first phase of the income statement I think the only thing that's relevant there is to declare distribution per unit of $1.11. You will see that takes us to $3.27 over the three quarters. We're on track to get our annual budget of $4.40.

But to really understand what's going on let's go to the second page, the page right behind that. And I'll start just above the notes. You will see the Bcf per unit of $1.03, Rich mentioned that, that is down from $1.12 for the third quarter of 2009 but it is in line with our budget and so that's right on top of where we expect it to be.

Now clearly the $1.02 is not covering the $1.11 distribution although again clearly that's what we budgeted for and so a large part of this is seasonality. We expected and we mentioned it in prior quarters. We expected not to have coverage in the third quarter. We all are essentially just a tear behind. We're basically $3.20 Bcf per unit for the nine months compared to the $3.27 that will have been distributed and so short on coverage is just a little bit right now.

Now I will point out that in two or three quarters of 2009 we were short about $21 million and ended up fully covering our distribution for the year. Now as we look forward right now, we do think we'll come in right about our expected distribution of 440 in terms of Bcf per unit. So we expect again to be right about one to one coverage for the year.

Stepping up from that you'll see the net income per unit. I don't believe that that is overly relevant again. I think the Bcf per unit is a much more meaningful measure. And then the Bcf before certain items above that, for one thing let me point out really with respect to the Bcf per unit of $1.02. I did say that was consistent with budgets. Now the four items that I went through that I said were handicaps that we faced during the quarter really all show up in segment earnings before DD&A.

So really segment earnings before DD&A in total ended up below our budget for the quarter. We made up for that because again we ended up right about our budget for the quarter. We made up for that because again we ended up right about our budget for the quarter. We made up for that in sustaining CapEx lower cash taxes. And so those things essentially offset the lower segment earnings.

Bcf before certain items about $318 million compared to $320 a year ago, about $994 million compared to $854 million a year ago. For the nine months up about 16%. Sustaining CapEx was right above that. You will see us at about $41 million, pretty flat with $41 million a year ago; $121 million through nine months, up a little bit from the $112 million for 2009. We currently expect sustaining capital expenditures to come in at about $182 million, just a little bit under $182 million, which is lower than our annual budget of about $207 million.

The two lines above that Express & Endeavor contribution and then the book cash tax net, you do see some movement there across the years and then we get a little bit of movement relative to budget but I think the important thing is what ends up in Bcf are the cash distribution from Express & Endeavor and those are on budget.

We expect they will be on budget for the year and then the cash taxes is what ends up down in DCF and there for the year we actually expect will end up about $4 million favorable for the budget but slightly lower cash assets than the budget.

Above that is DD&A you will see it's up about $38 million or in the quarter about $119 million year-to-date, part of that CO2 for higher DD&A and CO2 and part of it is also the natural gas pipeline. But remember some of it is ever on the natural gas pipeline that don't where the DD&A does not show up on the segment.

For our join venture pipes like Rockies Express and MEP and also for the KinderHawk joint venture which shows up in segment earnings before DD&A is the equity earning and then on this line down here we add back their DD&A and their distribution due reflect their earnings before DD&A less their sustaining CapEx.

So effectively what we are doing here is matching the bcf with the actual cash if we get out of the events. But part of what that means is we are adding their DD&A, we are including their DD&A on this line and that's a lot of the change year-to-year because you have higher depreciation on reps and on EP because they came on during the year 2009 and you also did not have KinderHawk during 2009.

Those part of what's driving this increase and above that you have the limited partner's net income. Why don't we jump up to the segment at the top of the page starting with product? You will see it's up about $5 million for the third quarter from a year ago it's about $46 million for the nine month. The quarter was a little bit under budget and truthfully we would have been a little bit higher versus 2009 but there is a little bit timing in our transmits business which really was timing between the second quarter and the third quarter.

When we look at products for the full year we do expect to be under the budget by about 1% and 0.5 for the entire year. Coaching is weaker than budget, Pacific is down form budget because we adjusted some tariffs in September but very nice for us in 2010 over 2009.

On natural gas pipeline segment we are actually down about $6 million in the third quarter relative to where we were a year ago. We are up about $32 million a year-to-date. Now the reason why we were down year-over-year, are Intrastates and Rockies Express for the most part.

It might sound a little bit as well the Intrastates again is what we talked about in the lower margin. Rockies Express is the impact of the Ohio property tax that we mentioned is also the impact of higher interest expense. Now this was budgeted, we expected the reason that interest expense is higher year-over-year is because we have turned up the debt at Rockies Express so you take short term debt to long term debt. We have had a little bit more on the long term debt and so that has reduced the equity earnings as recognized here.

And the other impact on Rockies Express is part of while we were just disgusting; the DD&A has gone up on Rockies Express. What you are seeing here again for the joint ventures what shows up in the segment is after DD&A and we add that DD&A back down below.

So, that particular piece does not affect these at all but it does impact the segment. Now in the natural gas pipeline, when we look at the full year we expect to end up just a little bit above their budget for the year. CO2 you will see up about $31 million for the quarter, up a $150 million year-to-date. It's a great growth versus 2009 but it is still below our budget.

CO2 is about $21 million, below budget in the third quarter and we expect that it will end up below budget for the full year and that amount is a little less than 5% and it's a function of the items that Rich mentioned that I talked about briefly, lower prices impacting us. Again our budget at $84 a barrel in the budget average for the year, lower gain volumes, offset by cost savings and so that's basically what's getting us to again a little bit below budget at CO2 for the year.

Terminals you will see nice growth in the quarter, up about $20 million year-to-date. That's about $53 million. It came in just a little bit under its budget for the quarter. Again as Rich mentioned, steel volumes, a little bit stronger than where they were a year ago. Overall we expect that the terminal segment will come in just a little bit under its budget. It's about 1.5% as well. Under its budget is what we're expecting for the full year 2010.

Kinder Morgan Canada, actually down a little bit from where it was in the third quarter of 2009. It's up about $8 million year-to-date, really performing exactly as expected. Almost all of this variance versus 2009 and versus budget and it's a little bit ahead of its budget for the quarter and we expect it to be above its budget for the year. But almost all of that really just changes in foreign exchange. But again because of that we do expect that the Canada segment will be above its budget for the year.

Before we get to segment earnings before DD&A, up about $46 million for the quarter from a year ago, up $288 million year-to-date from a year ago. Our budget was about $3.36 billion and the segment earnings before DD&A we do think will come in a little bit below that. Again CO2 will be a little bit below product and terminals will be a little bit below natural gas, a little bit above and Canada a little bit above.

Now I'll drop down and talk about G&A and interest. So you need to go down a couple of sections and you'll see general and administrative down there. $96 million expense in the quarter, up from about $85 million in the third quarter of 2009. Similarly for the year we're up about $45 million versus 2009. Most of that was expected. If you look in our variance to budget year-to-date, it's about $16 million. And where we expect the end of the year is about $16 million above our budget. And the reason why we're $16 million above our budget, a chunk of it are legal costs actually related to ongoing disputes with UPRR over some rent on the West Coast and then a few other cases that are out there and are driving significant legal expense.

A little bit of it is book taxes. Now book taxes get backed out down below. So they don't actually impact the distributable cash flow. A big chunk of it are the one items related to insurance that we discussed in the first quarter. Then we have slightly higher benefits and then just like the FX helped on the segment for Canada, for our Canadian G&A that increases the G&A. And so we have a little bit of an increase on our Canadian G&A, again just due to the foreign exchanges.

On interest, you'll see it up from a year ago by about $26 million for the quarter, up about $61 million year-to-date, actually favorable to budgets for the quarter and we expect to come in favorable to budgets for the year.

Our balance is higher, both versus 2009 and versus the budget, our rate is lower than budget it's essentially flat a year ago. But that explains why we are up from last year it's essentially all balanced and why we are down versus budget is essentially all rate.

There are certain items let me pull out a couple of things here in the quarter. The first few items again on the standard thing that always show up. The acquisition cost are again are just cost that previously were capitalized. They are completely a function of doing acquisitions. And then the first big item, and the biggest item in the quarter is to mark to market and effectiveness of certain hedges and a big $9.5 million.

A big chunk of this is actually associated with our crude oil hedges but the important thing to remember here is the net impact of what we actually receive always has and always will show up in the segment when those transactions occur. So for accounting purposes we do have to run some amounts taking through down here and certain items but what you see in the segment is the net impact of where we are actually selling the crude oil incorporating in the hedges and so again what you see down here is just noise.

It moves in and out, you will see while it's negative $9.5 million in the third quarter it's actually positive $4.6 million for the nine months. That's up while this will move around, the line below that is labeled insurance deductible. This relates to a failure that we had on a shift loader at our INT facility and this is the self insurance piece of that.

But we do expect that we will be getting insurance proceeds and replace that shift loader. Environmental resource, there is small adjustment there for the quarter and then asset disposition expenses. We talked about this last quarter, this is related to a specific facility on the West Coast that we are cleaning up and already have a contract to sell and that we will receive more cash from the sale than we are spending on the clean up and some of the amount that shows up in here the year-to-date amount is $17.4 million is actually a book non-cash write-off.

So this is going to be a cash positive for us once the transaction occurs. Now those are really the certain items, there isn't really much to discuss back on the first page of the income statement. I just want you to remember that there are the certain items that flow through and space of the income statement as does when you look at the nine month period that interim capital transaction that occurred in the second quarter.

What we have done when you look at our nine months on the second page that we have essentially treated that like it didn't happen and the reason why that's relevant as we want our limited partner should understand what we are generating on a recurring basis.

If we were to reflect it including the impact of the interim capital transaction it would look like our bcf per unit was higher than what it actually is and we don't want to reflect it that way so we are reflecting it as interim capital transaction didn't happen.

And you see that it's on the line labeled General Partner ICT impact and it's about $167 million for the nine months now getting all that occurred in the second quarter. So with that let's go off to page that goes for the volume Rich touched on most of those and I will turn to the last numbers page which is the balance sheet walk through that briefly now, cash in and cash equivalents is up a little bit to $192 million. Other current assets is down that's a function of reduction in accounts receivables.

PP&E is up a little less than $300 million. That's acquisition plus CapEx less accumulated DD&A. Investment is up about $977 million. That's largely KinderHawk, a little bit of contributions to rest. Deferred charges in other assets is up $600 million. That's largely the mark-to-market of our hedges, a little bit of goodwill in intangibles associated with acquisitions. Total assets about $22 billion, up about $128 billion from where we were at the beginning of the year.

Our notes payable in current maturities of long term debt, $1.4 billion, we have a $250 million maturity next month and a $750 maturity in March of 2011 and then we had commercial paper outstanding of about $415 million at the end of the third quarter.

Other current liabilities is down about $150 million from the beginning of the year.80 is a little part of that. Accrued interest is the biggest part and again that happens at the end of the first quarter and the third quarters because our interest payments are concentrated in the first quarters and the third quarter.

Long term debt, I'm going to talk about in just a minute. The value of the interest rate swap is up about $600 million and then other is down about $370 million, most of which is the mark-to-market on the hedges.

Our partner's capital you will see is down. Again that's the mark-to-market of the hedges. Our other partner's capital is up almost $350 million. That's a function of equity issuance and I'll talk in a minute about how of that we've done year to date. And then non controlling interest essentially unchanged.

In looking at the debt-to-EBITDA you'll see it shows up about 3.8 times which looks to be flat with where we were in the beginning of the year. We're actually down a little bit if you take out in another significant digit. It's 3.77 times compared to about 3.80 times.

Now and so we're consistent with where we expect to be at this point in the year, given our budget plus the impact of the KinderHawk transaction. Now we are actually down on that metric from where we were at the end of the quarter and we talked about at the end of the second quarter, how a couple of items in particular were distorting that number.

We were at about 3.9 times at that point. And the items that were distorting it were one, the [FSTP] settlement has been paid but the interim capital transactions had not yet occurred. And now we are past that because the interim capital transaction has occurred.

And then the second item was KinderHawk and this is still an impact because all of the cash flow is out for KinderHawk but we still only have a four or five month performance in our EBITDA number. And so again that distorts this number.

With that being said, let's talk about the change in the debt. You can see here that the change in debt from the beginning of the year is an increase of about $1.05 billion. And then for the third quarter, that actually went down by about $211 million. So I'll reconcile this for both the quarter and year-to-date, again a reduction in debt for the quarter of $211 million, an increase in debt year-to-date of a little over $1 billion.

And so the uses of cash are really -- so these are the investments that we're making and so it's in CapEx, acquisitions, contributions to joint ventures. So in the third quarter, about $230 million of CapEx, about $25 million for acquisitions and about $30 million of contributions to joint ventures. That totals a investment of about $286 million for the quarter.

For the year we've had about $600 million of capital expenditures, acquisitions of background one in a quarter billion dollars, contributions to joint ventures of about $210 million and then we need accounting here although it's actually investing about settlement payment of a little over $200 million and so year-to-date we have invested including the settlement a little over two in a quarter billion dollars.

So those again are the investments and one of the sources of cash how we embraced capital to finance that and in the quarter we retained cash related to the interim capital transaction so it did not go out for the general partner about $170 million.

We issued equity of $206 million. We retained cash related to the KMR distributions of $97 million and working capital and other items were a source of cash of about $24 million. So again all of those things added together are right around $500 million source of cash. We invested up to $286 million in the quarter; we end up with a reduction in debt for the quarter of about $211 million.

And then year-to-date again the sources of cash interim capital transaction a 170, equity issuance including equity that was issued to fund acquisition about $729 million, KMR distribution resulted in cash retained of about $280 million and then the working capital and other items were a source of cash of about $43 million.

That totals up to a little bit over a $1.2 billion. Again you compare to about two and a quarter billion dollars of investments including the settlement and you know it's about 1.05 increase in debt from the beginning of the year to the end of the third quarter.

On the working capital and other items again it's a source of cash for about the quarter and year-to-date largely driven by accounts receivable and accounts payable and so those two had generated cash and year-to-date and that's largely driving that source of cash.

And in real quick I talked about $230 million of expansion cash items in the quarter and about $600 million year-to-date just to give you a sense of where that is coming from. The product pipelines are about $20 million in the quarter about $73 million year-to-date continue to add tanks at our West Coast terminal facilities and then a number of other smaller projects in that business units.

From a natural gas side we send a little over $50 million in the quarter in fact $85 million year-to-date. The date and storage expansion was a big piece of that, finishing up the Kinder Morgan Louisiana Line and then a variety of smaller projects.

On the CO2 side we invested a little over $85 million in the quarter, a little less than $270 million year-to-date and the projects that are going on there clearly that Sac Rock expansion continues but also the Katz CO2 projects and the Eastern Shelf Pipeline to bring CO2 over to the Katz field.

On the terminal side, we spent about $66 million in the quarter, about 160 year-to-date. At quarter end we continue to add tankage there at that facility in the port of New York and then there are a whole variety of smaller projects there and then Canada we spent about $3 million in the quarter and about $7 million year-to-date.

And with that I will hand it back to Rich.

Rich Kinder

And as we are ready to take questions now, we will come back on.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions). Our first question will come from James Allred from Raymond James. Your line is open.

James Allred - Raymond James

Yes, good afternoon.

Rich Kinder

Good afternoon.

James Allred - Raymond James

Just focusing on the new contract at KinderHawk, I know you have been projecting throughput to be roughly 800 cubic feet by years end, are there any changes to this target at this point and maybe can you provide some insight into the expected volume ramp up at the JV heading into 2011?

Rich Kinder

Yeah, we -- you're absolutely right on your numbers and we still expect to be at roughly 800 by the end of the year. I think the composition of that mix will be a little higher third party, a little lower PetroHawk but we still think that the same number looks to be good. As we head into 2011, we've gotten preliminary estimates from a production profile standpoint and we look like our acquisition plan looks good in terms of volumes for 2011 too. We'll say that overall in the Haynesville in this area of low cost gas in particular in the long run I think you may see some sneezing back of rig utilization up there. There are some positives offsetting that, particularly the drilling that needs to be done to hold the leases. But we're very encouraged by the fact that we're able to basically expand the users of this system by adding a significant third party player which I think that's a result of what we hope to achieve when we went into this partnership was that by creating a true joint venture and having the Kinder name on it that we felt we could be more palatable if that's the right word to third party producers, not that there was anything without PetroHawk running it but its just that we're not a producer. So the prevailing assumption is that we have no reason to prefer one producer over another.

James Allred - Raymond James

Okay, great. And then just kind of switching gears, if maybe the opportunity were to arise to purchase an additional ownership interest in the JV, is that something that you guys would consider or have a comment on?

Rich Kinder

We certainly would always consider opportunities to purchase any pipeline or governing assets. It would just depend on what the price were that came to sale.

James Allred - Raymond James

Okay, thank you.

Operator

Next question comes from Steve Maresca from Morgan Stanley. Your line is open.

Rich Kinder

Hey Steve. How are you doing?

Steve Maresca - Morgan Stanley

I'm doing well. Thanks Rich. Good afternoon everybody. My first question is on the Eagle Ford. Can you talk a little about what you're expectations are going forward in terms of project announcements and what I guess in terms of magnitude what could be needed on top of what you have there?

Rich Kinder

Yeah, let me -- it's a good question Steve. I guess I'll start with at least our overview of the situation. The Eagle Ford of course is a very hot player right now, primarily as most of you all know, driven by the fact that at least in large portions of that acreage it's very wet gas.

So you have a lot of liquids and given the discrepancy between NGL or oil prices versus natural gas prices, it makes for a much more pleasant experience for those producers and you've all seen the announcements, particularly the big Chinese investment with Chesapeake. It's a huge investment going in down there. And the ability to survive a lot better even in low gas environment I think. So we are very enthusiast with but again we will only do projects when we have customers who want to support those projects.

So we started with this JV project and as you recall the capacity is 375 cubic feet a day, our sort of anchorshiper was SM they took the first 200, we now will be advancing, we will be now announcing very shortly who took the rest of that capacity.

So that 375 is now will be now fully committed. We have the ability to expand that system by adding compression we can get it up to around 600 million cubic feet a day. We also will be able to we can do some lean gas gathering in that area also and connect that to our main line system and the advantage we have and we are not the only pipeline company that has just but we have an awful lot of capacity on our Texas Intrastates both the old Kinder Morgan Texas and old pay out system. Coming out of South Texas, so we have the ability to fill up these additional capacity and get it to license where the lead gas can be processed and where the dry gas can get to the markets.

We will probably be doing some additional building to get it over to Interconnect with some other lines and some other processing arrangements that we are making now and then I think we will have the opportunity to have some other major heather systems on both the rich and the lean gas side of it coming into our mainlines that are so. I think there is going to be enormous production. I will be very open about it, these big producers down there are spending 100s of $1 millions maybe even the North of the $1 billion in some case are interested in having more than one outlets. So, Kinder Morgan is not going to be the only player down there, they are clearly a couple other good size players in there.

I think we will get certainly our share of it and the advantage we bring is we have the ultimate take away capacity to get this up to Katy into, the ship channel and whatever people it's taking.

Steve Maresca - Morgan Stanley

Okay my second question and you're brought up Rich in terms of the KMR and KMP discount. What would as consider doing from a corporate standpoint to eliminate that or elevate the discount?

Rich Kinder

Steve that's a very good question, we keep thinking it will eliminate itself these the shares of KMR or very passive economically with the units of KMP and in fact from a tax standpoints you could already think if you are just buying hold a person that's a little better because you don't pay any taxes at all and you sell and then you pay capital gains right. So, it's I think it's a very good tax vehicle too. There are some things we could do in terms of doing some exchanges of KMP for KMR. We like the KMR currency; it's a very good for the company I think because it allows people to buy who will not necessarily be able to buy units of the MLP. So, we like it, we're continuing to look at what we might do, we have not made any definite decisions on it yet.

But as you can tell again as I said earlier that insider buying has been specific to KMR. So, I think that's a good trim line. Park do you want to add anything?

Park Shaper

Yeah the only thing that I would add is anybody who wants to take advantage of what we could do or might do would want to do that before we do it and so sign now and I will tell you take advantages of that opportunity.

Steve Maresca - Morgan Stanley

Okay. Well, thanks a lot for the color.

Operator

Next question comes from Joseph Siano from Credit Suisse. Your line is open sir.

Rich Kinder

Oh, how are you doing?

Joseph Siano - Credit Suisse

Good afternoon. I just want to first quickly follow-up on KinderHawk volumes. Can you elaborate at all on the new agreement, how long the terms are and are there any minimum volume commitments associated with the third party volumes or it just the PetroHawk volume?

Rich Kinder

No actually these are not PetroHawk volumes. This is a third party. I'm going to ask Tom Martin who runs our Natural Gas segment to comment on that.

Tom Martin

Yes, there is a minimum volume profile that's certainly upside beyond the minimum over 10 years.

Joseph Siano - Credit Suisse

Okay

Tom Martin

And it's not PetroHawk.

Rich Kinder

Yeah, it's not PetroHawk. I want to make that clear. We are major producer in the Haynesville.

Joseph Siano - Credit Suisse

Right. So, but I was referring PetroHawk there are minimum volume commitments as well?

Rich Kinder

Oh yes.

Joseph Siano - Credit Suisse

So are they, you're said the mix is kind of shifting more to third parties. Is PetroHawk hitting up against its minimum volumes or are they still above?

Rich Kinder

No they are still way above their minimum volumes.

Park Shaper

Yeah, and the segment was just that relative to what we have expected when we put the volume forecast together, there is a little bit more third party volume and a little bit less PetroHawk volume. I think -- we don't want somebody to think that there is actually more third party volumes than it is PetroHawk volumes. It's just again relative to our expectation is a little bit more third party than there is PetroHawk.

Joseph Siano - Credit Suisse

Right. Got it. And then in terms of….

Park Shaper

Most the parties in and a little bit less PetroHawk in our expectations.

Joseph Siano - Credit Suisse

Right. And in terms of your expectations for volumes out of the Haynesville over the longer term, is it kind of the same story where you may expect to see the third party volumes offsetting maybe some of the lower volumes at PetroHawk and out here as well?

Rich Kinder

Well I think it's too early to judge. As I said earlier, based on the preliminary indications we have for 2011, PetroHawk is projecting that they will have roughly the same level of throughput that we have in our acquisition plan. So -- but the point I was trying to make and the encouraging point is that obviously to the extent that you could bring more third party volumes in, if PetroHawk's volumes turn out to be exactly in the acquisition plan, then we'll have upside to the acquisition plan and also if PetroHawk turns out in the long run to be a little less, we'll have some offset to that. And all I was saying is that so far the gratifying thing is that our third party volumes are running a bit better than we had an acquisition plan even previous to getting this new major third party shipper on and most of those volumes don't even begin to come on until December and beyond.

Joseph Siano - Credit Suisse

Right, okay. Thanks. And then shifting over to the Marcellus potential project, are you hoping to lock in anything before year end and does higher property tax assessment in Ohio for recs have any implications for this project which would be running through Ohio.

Rich Kinder

Well I think we will eventually get our property taxes in a reasonable level in Ohio. So I wouldn't try to meddle the two. The real issue in Marcellus and we put this in the release, I did not mention in my remarks but the real issue on Marcellus is so long we have started doing some preliminary write away in engineering but we're not going to build this project unless we have started doing some preliminary write away and engineering work. But we are not going to build this project unless we have a long term commitments from customers and we have a lot of interest and if and when we get those signed up we will do the project.

Joseph Siano - Credit Suisse

Okay and then searching years to the Fayetteville Express. Are you still pursuing third parties for the reminder of the open capacity there or does it look it's kind of just going to be 1.85?

Rich Kinder

No I think we believe we will be able to fill the rest of that 2 bcf in our own budgets on this we haven't budgeted as coming in over a period of several quarters to fill it out but yeah we think we will eventually get to the 2 bcf but it's a nice project even at 185 and even before we reduce the cost estimates it will be a very nice project and particularly as you get north of 1.85.

Joseph Siano - Credit Suisse

Okay great and the last one for me. If you could just elaborate a little bit on what's driving the lower sustain in CapEx lower to budget?

Rich Kinder

A lot of and I will let Park jump on this too but a lot it is simply that let's put it in perspective, last year as Park said this year we think we are going to come out around 182 feet of hours that's up from about $172 million last year.

So, it's higher than last year but in our budget we had projected spending a little over $200 million and it just looks like now that we are almost 10 months the year behind us that some of this stuff is not going to be physically be able to be done by the end of the year.

Certainly not postponing anything intentionally or doing anything that would negatively impact our maintenance of keeping the assets and get in shape but just when you have a $200 million plus budget. Something's just are not going to get done and every month we threw up the estimate from all the five segments for the year and just looks like that now this number is going to come in as closer to the low 180s versus the low 200s. Park do you have anything to add?

Park Shaper

The only other thing I would say that is everybody should keep in mind that there is a significantly portion of our maintenance and integrity cost that don't show up at the same capital it would rather show up in O&M and so when you are thinking about the total amount that we are spending to maintain pipes, to test our pipes and operate them safely.

It's significantly bigger than what shows up in that same CapEx one.

Rich Kinder

No for example, all your hydrostatic testing now which is big expense as to going through the O&M versus spend in CapEx.

Joseph Siano - Credit Suisse

Okay great. Thanks guys.

Operator

Next question will come from Ross Payne from Wells Fargo. Your line is open sir.

Rich Kinder

How are you doing Ross?

Ross Payne - Wells Fargo

How are you guys doing?

Rich Kinder

Fine.

Ross Payne - Wells Fargo

Good. My first question is related to the Canadian Currency. Do you guys typically hedge that or try to hedge that or you know just didn't found was something that we can expect going forward the best changes in Canadian dollar.

Rich Kinder

No it's so insignificant and the overall mix of things in the company that we don't bother hedging and say what we do is every year at the beginning of the year we said whatever the forward curve. Same thing we do for crude oil, same thing we do for Interstates and as we said whatever the forward curve is and that's what we use and for example for 2010 we use 95. So anytime that's above 95 in general that's a bit positive for us if it's below 95 that's a bit of a negative that's Canadian to the U.S. And so that's the way we do it and we'll look at it. We're just starting through the budget process now. The other day it was almost one to one less it backed off a little bit but I expect we will end up going into next year at who knows 97 to 98, something like that. So that's the way we do it.

Ross Payne - Wells Fargo

Okay. And Rich, can you talk a little bit about coal exports and what you are seeing there and then just kind of your volumes across your coal terminals and secondarily on the oil side, how hedged you guys are going into '11?

Rich Kinder

Yeah, I'll start with the coal exports. This is a very dynamic situation right now and in a positive sense particular for met coal and I'm sure you all read the same things but met coal needs in China and to a lesser extent in India are -- they've it a step up and we're handling a lot of that.

The two major places where we handle export coal are our Newport News, Virginia; what we call Pier IX and there we move around 12 million tones a year that's fully subscribed by a number of coal producers and all that capacity is subscribed and being utilized. We are now working on expanding operations in the Gulf Coast and that's probably also an announcement, our board has approved a major expenditure project there on a Gulf Coast terminal that will allow us to export an additional 4 to 6 million tones a year there and we have an LOI with a major coal producer for a great bulk of that tonnage and now that's something that don't come online till probably early 2012 but it is something we've just approved and we're going forward with and this is a 15 year contract with a major coal producer. So there is going to be a lot of upside in coal exports and I think people are going to be looking bind outlets to be able to get that coal onto the oceans.

So we're very bullish on that but again the real bullishness is coming from the coal producers who are very interested in entering into long term contracts on these and that's a lot better than the swap contracts in general.

With regard to the production profile, as we always say, of course it depends on whether you are including the NGLs or not because we don't hedge the NGLs but looking forward, if you do not include the NGLs, so you're just looking at a crude production at Sac Rock and we're 72% hedged going into -- for calendar year 2011. If you include the NGLs we're 66% hedged.

We're in the process of hedging a little more and I would expect that by the time we go into 2011, we will have about the same sensitivity per dollar change in the crude prices, WTI prices that we have this year which is just a little less than $6 million per dollar sensitivity.

Now the nice thing, we've said this before and you all have these numbers in previous slides that we've shared with you, the nice thing is that of course because each year our hedges, they hedge portion is going up significantly versus a year ago in terms of price per barrel of oil, we've got a nice up tick built in as we come into the 2011 budget. For example our hedges for this quarter are at -- these are WTI again are a little less than $58.

The hedge price on what we have hedged in 2011 is almost $67. So you add that kind of difference to a number of barrels that we are talking about that's significant difference which leads if you just look at the forward curve today will lead us to have a close to $11 barrel increase in our total price per barrel on our crude production next year.

Now that's based on a combination of the hedge price and the forward curve and of course that forward curve could bury the hedge price well and that happens over the next several years. It goes up again in 2012 simply because as we lay the hedges on later they were at higher prices.

Ross Payne - Wells Fargo

Very nice and two other quick questions, Rich if you can elaborate a little bit on what might have been going on operationally at Yates. Is that a water flood or CO2 flood or what might have been causing some of the instability to volumes and then lastly was there a $1 level that the Ohio property tax was over budget, what roughly was that? Thanks. That's it for me

Rich Kinder

Go ahead Tim, Tim Bradley our CO2 President will take the Yates question.

Tim Bradley

On the Yates, the production of Yates started decline steeper than we had forecasted in the second quarter. Our budget for the year was 26,150 and we have averaged in the low 23s during the third quarter which is a bit disappointment but quite frankly the design and the operation of the Yates field is producing oil out of the oil rim while oil that's above in the gas tanks drains down and I would likened this process to sipping water out of the bottom of the cup filled with crushed ices. You can only pull it out as fast as it rains down and we think we are going to hit that equilibrium point here earlier this year.

Crude production at Yates essentially stopped its decline in the third quarter and it's internally flat. So we are encouraged by that, the rate of drainage that we have calculated in our reservoir models and another techniques indicates this rate of drainage appears to be 22 -23,000 barrels a day.

We have been producing just above that so it seems look like they are beginning to improve. To specifically to answer your question it is the CO2 flood, it's not a water flood. We are inducting CO2 into the gas cap to make the oil that you will a little bit more slippery so it drains a little bit more efficiently that it would without CO2.

Though we are disappointed with production compared to budget, we are very pleased with the Yates and asset overall and looking back on our original acquisition economies that we put together in late 2003. Even though the production is falling behind budget this year we are still 4000 barrels a day above that acquisition economic run that we put together in 2003. So it has performed much better than we expected and perhaps it's coming into equilibrium at longer term expectation going forward.

Ross Payne - Wells Fargo

Okay. Thanks Tim.

Rich Kinder

Okay and on the Ohio, Park do you want to take on that?

Park Shaper

Yeah it is $6 million of the impact through the first three quarters and its $8 million of the impact for the year and that's our share of Rockies Express relative to budget.

Ross Payne - Wells Fargo

Great. Okay thanks Park. Thanks guys.

Operator

Next question comes from John Tysseland from Citigroup. Your line is open.

Rich Kinder

Hey John, how are you doing?

John Tysseland - Citigroup

Good guys. Good afternoon. As you we look out over the next 12 months where do you see I guess the most opportunities for KMP to invest capital, is it on the acquisition side or do you think you see more opportunities to build or expand on your assets and how does CO2 really figure into that?

Rich Kinder

Let me say that we are always looking for acquisition, what we are only going to do is if the price is right and if you get into a bidding where we may or may not win that bidding or more so. We are always looking at a number of acquisitions but we don't buy many of those when we look at a number of acquisitions but we don't many of those that we look at because we just are not willing to pay the same price that perhaps other players are.

So I think we'll still continue to have acquisitions but I think we seem to have a pretty full plate right now. I think both from an acquisition and internal expansion standpoint in the shale plays, particularly encouraged about the Eagle Ford and think that we will deploy pretty significant capital down there.

I think some people tend to say well Kinder Morgan is a big company and Eagle Ford, they're not spending that much but what you're seeing in the Copono joint venture that we've previously given you I think is kind of the tip of the ice berg. I think you're going to see us deploy a few hundred million dollars to our account down there over the next coming quarters or next couple of years.

I think we've got additional opportunities in the Haynesville. Perhaps this Marcellus pipeline, if we can get the backing for, we don't talk about it much but on our products pipeline side we have additional tanks under construction out of our Carson facility in LA.

It's about a $70 million project. We have this Travis Airport Space project. All of these are fully underwritten by long term contracts. So we have a lot of opportunities and on the terminal side -- I think we're going to be able to add more tanks.

We're already doing that. So I think we have a lot of growth opportunity. CO2 is certainly one of those growth opportunities. And the Katz, if you combine the pipeline and the flood facilities at camp steel we're spending over $200 million there.

That's going to pay nice dividends. You will see a very nice increase in our Katz volumes I think when we share the 2011 budget with you. But beyond that, I think you will see that as a spring board in two additional ways for our CO2 operation in the Permian basin.

I think it will lead us to probably acquire some other tuck in opportunities and then secondly it will lead us to sale and move more CO2 to other third party operators in that part of the Permian basin. And then still on the CO2, maybe stepping out a little bit but I would say that given all this demand we're seeing for additional CO2 in the Permian basin we just finished an expansion of the Cortez pipeline.

That's the main line that connects South West Colorado CO2 production with the Permian basin. We just finished an expansion of that a couple of years ago. I think that it's very likely that we'll be looking at a further expansion of that in the next couple of years if the CO2 demand continues to increase. So I think we have a lot of opportunities in-house but we'll certainly continue to look for acquisitions.

John Tysseland - Citigroup

And then I guess on your last point, how does the renewed interest in the Permian and the demand for CO2 change your view of CO2 CapEx I guess for the rest of 2010 and looking into 2011 when you think about service cost.

Rich Kinder

When we think about.

Tim Bradley

The service. The cost of a sale.

Rich Kinder

Oh. So far we've been able to do pretty well on holding the line on the cost. As Park said in fact, if you really strip through everything we were able to make up a big part of the Yates downturn in the production with savings across the board.

So while there may be some up tick, I think we feel pretty good about our ability to hold the line on the cost and I think what you're just seeing is that having a oil production in the Continent of the United States is a pretty good thing to have and I think your seeing a lot of players who recognize that fact and if there is negative to that it's might make the acquisition of additional feels more difficult or more expensive.

But I think we got a lot of opportunities in the CO2 area. As far as CapEx is concerned we are actually spending a considerable less this year than our budget. How much less trailing?

Kim Dang

75 million.

Tim Bradley

Expected it now low budget from years expected to meet us $27 million and year-to-date $35 million local budget.

Rich Kinder

So, we are able to do what we said out to do obviously you make some change to go forward over the year but for considerably less than we thought.

John Tysseland - Citigroup

Okay that's helpful and then changing gears last question a little bit back to the hot topic in hand. The KinderHawk JV, are your gathering fees for third party volumes is same that you would realize if they were with PetroHawk and then how do you allocate future capacity and production volumes between third party and PetroHawk?

Park Shaper

I don't want to get into specific about rates but I mean I think they are comparable to deals done, the area and clearly PetroHawk has firm capacity on the line. The deals that we do with other producers are also firm or interruptible depending on how we negotiate the transactions. We do look at the total capacity on the system and allocate it appropriately between all parts.

John Tysseland - Citigroup

All right. Thank you very much.

Rich Kinder

Yeah the right way to think about it is they can essentially sign up for what they want. If they want to sign up and confirm and we can provide it then we'll sell it. If they want to sign up for interruptibles then we can provide that.

John Tysseland - Citigroup

Thank you.

Operator

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

Rich Kinder

Hey Brian. How are you doing?

Brian Zarahn - Barclays Capital

Good Rich, how are you?

Rich Kinder

All right.

Brian Zarahn - Barclays Capital

I guess to beat the M&A horse here we're seeing super majors continue to sell stakes in pipelines and now you look a lot of transactions. Are you seeing a greater opportunity set for to acquire stakes and pipes or increase your stakes and pipes that you have in previous years?

Rich Kinder

We are seeing some of that but not so much pipes at least we haven't seen as in terminals and if you look what we have done this year we have brought these four terminals from Chevron. We also bought Shell terminal in San Diego. We are looking at a number of other terminals with some majors and we bought some of in the South East in past couple years too.

So, I think we will continue to see that, with regard to the pipelines. We will just have to see what develops there is obviously the Koreans made a major purchase of a portion of colonial which we couldn't have made anyway given and of trust concerns with our ownership of applying basics.

But we will continue to look at things and but again there is I think in general Brian there is always a lot of talk about what the majors are going to do and sometimes that happens and sometimes it doesn't. So, I think you need to be -- we need to be a little cautious when it's what the opportunities are there but certainly we will be looking to the extent they bring things up for play.

Brian Zarahn - Barclays Capital

How much of competitive threat is private equity in terms of acquisitions?

Rich Kinder

Well I think it depends on the asset, certainly if there is an asset that you have a producer for example he wants to maintain the control of an asset and kind of free opportunities to expand it. Private equity may be a good solution.

If they don't want to -- not as anxious to maintain control, we're interested in taking more money off the table than I think somebody who can bring capital and operations to the table like us is a better fit. So I think it just depends on the type of asset but certainly private equity has a lot of money and they're looking for things but I think again it depends on what the seller really wants.

Brian Zarahn - Barclays Capital

And then turning to maintenance CapEx, going forward, how do you see that being impacted by all the events taking place, first Enbridge and PG&E so forth.

Rich Kinder

Well I think just in general, as an industry, we're going to see an awful lot of focus at the governmental level on making certain that there is strict compliance guidelines and I don't know exactly where that will come out but I think we'll just have to wait and see on that. With regard to our own sustaining CapEx, I believe we're in full compliance. As you know both the federal government and many other state governments, Texas being one have their own requirements on how often you have to inspect these pipelines with one level of inspection frequency and the high consequence area is lesser out in the rural areas but a set time table. Texas is particularly onerous on that. We're in compliance with all of these. We'll continue to be and in fact in many instances we're actually inspecting more frequently, patrolling more frequently than required. So I think our level of sustaining CapEx is a good level. It's fully doing what we need to do. That said, to the extent that there is additional government regulations that requires additional expenditures, obviously we'll have to make those expenditures. I think it will probably take some period of time for some of this regulation and or legislation to actually take effect. Steve, you want to add anything to that?

Steve Kean

Yeah and I would just say that kind of regardless of what the regulatory requirements of that is, we spend a lot of time and pay a lot of attention to this just from a pure relative standpoint and as Rich kind of alluded there, we ask ourselves all the time, what more should we be doing, at what more does it make sense for us to do and we accelerated certain integrity work. We've accelerated retesting in some instances. Like if there new tools or new techniques that we could bring to bear. We've developed some new tools and techniques ourselves and then we got out and survey our field people and say, putting (inaudible) managing programs side, what more do you think we should be looking at. So we try to ask ourselves the question, what risks can we mitigate, what risks can we get rid off. There are no guarantees in these things. There is always residual risk but I think we're getting better at this every year, getting better at it all the time and certainly have good programs and doing our best to improve them. And the other thing is that I hope the policy makers in this whole process don't forget the risk of third party damage because really that's a big deal to us. We can't make everybody follow the one column rule. As they're looking at things to do they try to fix issues out there and reduce risk further. I think enforcing those rules and closing the gaps would be one of the most effective thing they could do.

Rich Kinder

For example, in some states and correct me in I'm wrong Steve, the one call statute doesn't apply to local governments.

Steve Kean

Right. Idiotic is less. You think that the local county, that's on reach out putting in a little line over to this facility is better equipped to understand the right way protection than the utility? While the utility has to follow it but in many cases the political sub-division is excellent and it got to be changed.

Brian Zarahn - Barclays Capital

I appreciate the color and I just one more on that topic. If there are significant cost increases due to higher regulation. Do you think you can pass most of those along?

Rich Kinder

Well you will certainly think so, in fact I probably want to be on this call I forgot they alluded but something just within the last week. Someone was speculating that an outgrow if governments really want more maintenance activities paid for that got to lead differ increase the PPI adjustment next year. You know it's historically has been PPI plus 1.3% AOPL for one trade associations that come in and ask for a PPI plus I think 3.65 or something like that and so far the court has not ruled. It will be ruling out probably in the first quarter next year because of its ex-effect.

The new five year period starts July 1st of next year. So, that's a suggestion, I don't know if that will happen or not but that's one way to get out of it and another way to get out of it would be just allowing to pass through on jurisdictional lines and I think you will certainly see some of that. If you don't you will certainly pipelines filing rate cases to recover those costs.

I don't believe this will be a major inflection of pain without the ability to collect over a period of time. The capital expenditures that you make but we'll just have to see how it comes up.

Park Shaper

And that's pass through options will vary by asset.

Rich Kinder

Exactly.

Brian Zarahn - Barclays Capital

Okay. Thank you.

Operator

Our next question comes from John Edwards from Morgan Keegan. Your line is open sir.

Rich Kinder

Hey John, how are you doing?

John Edwards - Morgan Keegan

I am doing pretty well. How are you?

Rich Kinder

I am doing good.

John Edwards - Morgan Keegan

Just couple of things Rich on what are you seeing right now in terms of re-contracting on your pipeline, particularly, I guess on the gas side. How are you seeing rates come out there and what's on average now how much is coming up each year for re-contracting?

Rich Kinder

Well we don't have I will start with the later part of the question. We don't have very much coming up in 2010. We do have some roll overs in 2011 but just varies pipeline to pipeline and may sound kind of like compound but so does the re-contracting for example, on our Interstates the jurisdictional storage is pretty low rates and as soon as something comes up we just had somebody, the longer term you offer you get already because we had somebody it was 33 years. We had some storage come up and somebody wanted the customers to make sure it got priority. It did the max rate; it's the maximum we can charge on tariff for 33 years.

That's true on storage which I think is generally easier to sell. With regard to pipeline capacity FT, I think it really varies with the area you are going into or coming out. So for example I think if you are coming out of an area that has a growing production profile and your producers and your customers and they want to make certain they have that capacity. They are going to pay up whatever it takes to get it. If it's a decline basin it's not going to do as well and the same thing on the demand side, if you're going into areas where it gets to the points of liquidity, people on both the supply side and the demand side are going to be willing to pay more than if it's not a liquid point. And one of the things we're doing with recs, we've been -- I think that pretty well is we're serving more and more customers. We're connecting to more and more plants, more and more generating facilities and the more of that you do, the more your building up use for your system and recs of course is running at completely full now, 1.8 Bcf a day across the system, almost all of it going to the east end of the system. So I think it really depends on the pipeline but in general we're able to re contract and get good margins on it but it does vary with the exact location.

John Edwards - Morgan Keegan

Okay. And then with respect to the Marcellus shale, on the NGL win, I know you've answered a couple of questions there. Can you give us any kind of insight on progress on securing contracting commitments or can you not comment on that?

Rich Kinder

Well I think I can just say in general that there's an awful lot of interest in it but I think people are looking at a lot of different alternatives and I think it's just going to depend on whether people are willing to sign up on the dotted line.

John Edwards - Morgan Keegan

Okay, all right. And on the KinderHawk, so now is volume ramp up you are expecting now at this point? You're up to say a little bit above plan? Your I guess 800 by the end of the year and then will you look out beyond that?

Rich Kinder

David?

David Kinder

Yeah, I think in general John it will continue to ramp up from both third party as well as from PetroHawk. In that regard we haven't given any public guidance in that regard. So I don't think we can. But it will continue to ramp up including the minimum commitments from PetroHawk which are five year minimum commitments. So those minimums ramp up over the five year term.

Rich Kinder

And I think we'll probably be able to share more of that with you at the analyst conference when by that time we have the full production profile from PetroHawk and from some of our other customers for the 2011 year.

John Edwards - Morgan Keegan

Okay, great. And then just housekeeping, what's your calculation, a lot of adjustments -- what's your calculation for EBITDA for the quarter.

Kim Dang

I think it's on the -- depends where the balance sheet is John.

John Edwards - Morgan Keegan

Yeah that's the trailing…

David Kinder

The easiest thing, I mean I have -- you can look at that page from last quarter and I will give it to you but it is --well I guess take off the prior quarter. Yeah, we tend to focus more on Bcf and you'll see that's $318 million. I actually haven't done it on a EBITDA basis.

Kim Dang

John we can call you with this.

John Edwards - Morgan Keegan

All right. We'll follow-up. Okay. Thanks very much. That's all I had.

David Kinder

Okay. Thanks John.

Operator

At this time I'm showing no further questions.

Rich Kinder

Okay, well thank you all for a pretty long call here and again if you have other individual questions, if you call Kim or David, we will try to answer them for you. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!