Kinder Morgan Energy Partners Q3 2007 Earnings Call Transcript

Oct.17.07 | About: Kinder Morgan (KMP)

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

Q3 2007 Earnings Call

October 17, 2007 4:30 pm ET

Executives

Rich Kinder - President and CEOof KMR

Park Shaper - President of KMR

Tim Bradley - VP of KMR andPresident of CO2 of KMR

Scott Parker - VP of KMR andPresident of Natural Gas Pipelines of KMR

Analysts

Yves Siegel - Wachovia

Sam Arnold - Credit Suisse

Robert Lane - SMH Capital

John Edward - Morgan Keegan

John Tysseland - Citigroup

Stan Jenkins - State of Wisconsin InvestmentBoard

Operator

Thank you all for standing by. Atthis time, all lines have been placed on a listen-only mode throughout theduration of today's conference. Today's conference is being recorded. If you dohave any objections, you may disconnect at this time.

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

Rich Kinder

Okay. Thank you, Angie andwelcome, everybody to the Kinder Morgan Energy Partners' Third Quarter EarningsCall. As usual, we'll be making statements within the meaning of Securities Actof 1933 and the Securities Exchange Act of 1934.

Also, as usual I'll give anoverview of the results and significant developments during the third quarter,and then Park Shaper, our President will give the financial details of thequarter. And then we'll take any questions, which you may have.

Let me just start off with a fewkey points. The third quarter for KMP was a record quarter in terms ofdistributable cash flow about $230 million of distributable cash flow, whichworks out to be about $0.96 per unit. Secondly, we raised the distribution perunit to $0.88 for this quarter or $3.52 annualized, that's up from $0.85 in thepreceding quarter and up 9% from $0.81 distribution in the third quarter of'06.

We also now expect to exceed our2007 budget target of distribution per unit of $3.44. So, those were some ofthe highlights. Let me just talk a little bit about the business segments. Allof our business segments reported an increase in earnings before DD&A. Andoverall, the total segment earnings before DD&A increased by about 17% toalmost $567 million versus the same period a year ago.

For the first three quarters,segment earnings before DD&A were up 12% to $1.6 billion and we are well onour way to generating north of $2.2 billion in segment earnings before DD&Ain 2007. I might also add that during the quarter, we continue to makesignificant progress on our new projects expansions and these are expected toresult in substantial future growth at KMP, including our share of jointventure projects like Rockies Express, we plan to investment approximately $3billion in expansion projects at KMP this year alone.

Now let me just go throughsegment by segment with an overview and then Park will talk about each in detail.

Our products pipeline earningsbefore DD&A were up substantially from the comparable period a year ago.This segment is well above its plan for the quarter. We expect it to exceed itspublished annual budget and have very nice growth compared to 2006. All of theindividual assets in the products pipeline segment reported higher earningsbefore DD&A than in the third quarter of 2006. We had particularly strongperformance from Cochin,which was partially impacted by the fact that we bought out the other 50% ofthat pipeline earlier this year.

And we also had good performancefrom Plantation,Pacific, CALNEV and the West Coast Terminals. So, a very good performance allacross the line on the products pipeline system, well above budget, well aboveplan, expect them to stay that way for the rest year.

Natural Gas Pipeline segment, weare up modestly from a very strong third quarter last year, but well above theplan for the quarter, well above the plan for the year. And we expect thenatural gas pipeline to exceed its published annual budget for the year.

The growth was really drivenprimarily by our Texasintrastate pipelines. They generated more than half of the segment's earningsbefore DD&A and in turn the drivers there in Texas were primarily higher sales margins aswe renewed contracts and added new contracts. We had good increasedtransportation revenue from higher volumes and rates, and we were able toextract greater value from our storage activity. So, across the Board, thatasset is performing very well for us and has been all year.

Our CO2 segment had third quarterearnings before DD&A that were up about 9% from a year ago but as wepreviously reported, we still expect the segment to fall substantially short ofits published annual budget due to continued below-budget oil production at theSACROC Unit.

On the other hand, deposits forthe quarter compared to the same period last year included an increase in ouroil production in Yates filed where we have now are climbing above 28,000barrels a day. On an ongoing basis, we averaged 27.1 for the third quarteritself. And we also had higher NGL volumes due to increased recoveries at our SACROCgas processing operations.

Our both business segment, ourTerminals group had earnings that were up about 11% from the third quarter ayear ago, it is slightly below plan for the quarter, we expected to finish theyear at or slightly below its published annual budget. There the growth wasattributable to both acquisitions and organic growth opportunities from aninternal growth standpoint.

We put into service new tankcapacity at Galena Park. We had increasedpetcoke throughput at the Port of Houston. We had strongethanol volumes at our Argo terminal in Illinois.And we had good performances from our facilities in the lower river region in Louisiana.

On the acquisition front, we hadmade few acquisitions since the third quarter last year, and these werepositive contributors to the results this quarter. Devco, which owns aproprietary technology that transforms molten sulfur into solid pellets we'vetalked about this on prior calls, is an addition and is producing earningslightly above its plan.

Vancouver Wharves, which is abulk marine terminal in the Port of Vancouver, was broughton inline earlier this year.

And finally, our Marine Terminalswhich consist of five facilities in four states that handle scrap, alloys andfinished steel products under a long-term contract with Nicor was closed inSeptember and we had one month of earnings from those facilities.

Our final business segment ofcourse is our Trans Mountain Pipeline that was drop down into KMP in the springof this year. It had third quarter earnings before DD&A and little over $22million, we expect this segment to meet its annual budget target maybe exceedit just a little bit.

Throughput was up 16% on thisasset, compared to the third quarter of 2006, in part due to the pump stationexpansion that came on in the spring of this year.

So, that's sort ofsegment-by-segment overview of the quarter. Again, all segments outperformedtheir performance in the third quarter of 2006.

Now, let me share some updateswith you on some other developments during the third quarter, particularly onsome of the major pipeline projects that are underway. And again, I'll just gothrough the segments in order.

On our products pipeline, our EPXproject which is about $150 million project, which is an additional expansionof our East Line from El Paso over to Tucson, Arizona.This project is scheduled to come on line by December 1st, it's on target andon budget, and this will take our capacity on that line to over 200,000 barrelsper day.

KMP is also continuing thedevelopment of the major expansion to CALNEV pipeline system into Las Vegas, that's roughlya $400 million project. The pipeline expansion is expected to be complete inlater 2010 or early 2011. Also in our products group, we completed the sale ofNorth System to ONEOK on October 5th, for approximately $300 million in cash.

Now, more of our expansionopportunities are well in our natural gas pipelines group and let me sort ofupdate you on those, of course by far the biggest single project we had is ourRockies Express. And we completed the Entrega segment on that at the beginningof this year and that runs from Western Colorado up through Wyoming and overthe Cheyenne Hub, we are now in full swing on building what we call REX-Westwhich runs from the Cheyenne Hub over to Eastern Missouri in Audrain County,Missouri that is on schedule and we expect it to be in service by January 1,2008 and it’s also on its budget.

With regard to REX-East which isthe project that will then go from Audrain County, Missouri to Clarington, Ohiowhich is on the Pennsylvania border, we have filed for our certificate of publicconvenience and necessity, we are working with the FERC on the scheduling orderit's still early in the process and we remained hopeful that we'll be able tobring this project in on target with most of it coming online at the end of2008 where full operations all the way to Clarington and with all compressionin service by June of 2009.

I'll remind you again that,that's a $4.4 billion project that's the total REX of cost, we own right now51% upon completion of other project we'll own 50% on partner to Sempra andConocoPhillips, the throughput capacities 1.8 billion cubic feet a day and allof that is subscribed under long-term contracts.

Another major project is ourMidcontinent Express Pipeline and this month we filed an application with theFERC requesting a certificate of public convenience and necessity to authorizethe construction and operation of this line which is about 500 miles long andwill run from Oklahoma to Alabama taking away rapidly growing production toBarnett Shale is about $1.3 billion project, it will have initial capacity ofabout 1.4 billion cubic feet a day. We now have about 1 billion cubic feet aday signed up under long-term transportation rates and we expect to be addingmore shortly.

Another major project that wetalked to you about in the past is the Kinder Morgan Louisiana line. Againabout $500 million project that will connect with the Cheniere Sabine Pass LNGterminal and then run about 132 miles across pipeline alley in Louisiana.

Total throughput will be about 3.2Bcf a day. It's fully subscribed on 20-year contract. And one good news therewe now have received the permit on that from the firm and we expect now tobring that into service on about January 1st, 2009. That's about three monthsearlier than we had originally expected. So, that's moving ahead of our plan.

And then finally, in our Trans Mountainsegment, we began construction in August on our Anchor Loop project. That'sabout $440 million project. And it's the second phase of our Trans Mountainpipeline system expansion that will take our capacity up to 300,000 barrels perday. And we expect this second phase to be completed no later than November of2008. We have already commissioned 11 new pump stations this year that hasboosted capacity from about 225,000 barrels a day to 260,000 barrels per day.And the pipeline has been operating at capacity ever since those new pumpstations came online.

So, that's an overview of ourperformance during the quarter and how we are coming on our major projects. AndI guess before turning it over to Park, I'd just conclude with this thought. Ireally think that the key strength of this company is our ability to generatestrong and growing cash flow from what we believe is really a great set ofassets. And I think the results of this quarter, which is just an excellentquarter for us, and the results year-to-date really just demonstrate thestrength of our assets and how they can deliver cash flow to the bottom-lineand to our unitholders. And I think the very encouraging thing is that thiscash flow will only continue to grow dramatically as these major new projectsI've been discussing come online, beginning in 2008 and 2009.

So, with that I'll turn it overto Park.

Park Shaper

Thanks Rich. And I'll go to thenumbers. Hopefully everybody has the press release in front of them. I am goingto go through the three numbers of stages at the back of that.

The first one is the incomestatement. It is actually not overly meaningful, especially when you look atthe nine months, primarily for reasons that we discussed last quarter. Reallythe two biggest impact being, one was the drop down of Trans Mountain,and the second was the MBO that occurred at (inaudible).

Because the dropdown oftransaction occurred after KMI started to consolidate KMP, it caused KMP toaccount for that transaction as it has always owned the TransMountain, even though it didn't buy Trans Mountainuntil the end of April of this year. But what that means is KMP's incomestatement reflects Trans Mountain in there for theentire year and [throughput reflects] of being in there for 2006.

In addition, KMP's balance sheetreflects Trans Mountain having been in there for theentire year. Again, even though that transaction didn't close until the end ofApril, it has some additional distortions on the balance sheet. We'll talkabout those in a minute. But it also required a KMP-recognized in the firstquarter. And so this is prior to KMP bought the assets, a goodwill write downthat occurred at KMR.

So, again that didn't happen atKMP, but the accounting rules required us to recognize that at KMP. And thatalso had some impact on the balance sheet. But really what I am getting at is,the first sheet is not very meaningful. There are also some charges in thererelated to compensation costs that are completely covered at KMI or at Knight.This KMP, not only is it non-cash, KMP had no obligation for those expenses atall. But again the accounting rules forces to include that on the incomestatements.

So, the second page pulls all ofthat out. One of the other things that shows up here on the first page is,you'll see that the North System is now discontinued. Well, you'll see thatthere are some discontinued operations there. That is the North System. Thattransaction is closed but the North System was known by KMP for the entirety ofthe third quarter. And so, we had to back in to the products pipeline segmentfor the third quarter again, because we received all of the cash that itgenerated in that quarter.

As Rich mentioned, thedistribution, it's going to be $0.88 for the quarter, except 9% from where itwas a year ago. It's up $0.02 from where it was in the second quarter. It'sahead of where we expected it to be and we are on track to exceed our budget of$3.44.

With that, let's go to the secondpage and a little bit down from the middle of the page just about the weightedaverage unit outstanding, you'll see the $0.96 of Bcf per unit before certainitems for the quarter. Again as Rich mentioned, that's 19% from where we werein the third quarter a year ago. And also as Rich mentioned this is before wesee any significant impact from the huge expansion project that will comeonline really in 2008 and beyond.

Typically, Rockies Express whenwe talked about this, when we went over the budget in January, Rockies Expressis a drag on negative earnings before DD&A in 2007, now it’s positive in2008, once REX-West comes online. But my point is, we are achieving this growthprior to the impact of those significant projects.

Our DCF per units is $2.65 forthe nine months up from $2.44 that 9% growth year-to-date. The excess coverageagain the $0.96 is covering a distribution of $0.88, so the excess coverage inthe quarter is very significant about $19.5 million excess coverage is over $21million year-to-date.

The DCF that Rich mentioned is$230 million is a couple of lines above that, that's up 26% from where we werea year ago, $623 million for the nine month is up almost 15% from either ninemonths of 2006.

Now, you'll see sustainingcapital expenditures are up, which actually is a negative for distributablecash flow, about $32 million in the quarter compared to about $16 million ayear ago, about $95 million for the nine month compared to about $76 million foryear ago.

Now, as we've discussed each ofthe last two quarters, we are now truly not book versus cash taxes and thiscalculation distributable cash flow, that was done in large measure becausewith the addition of Trans Mountain in April, the GAAP between book and cashtaxes grew, and so you can see that's actually about $14 million that’s reallyless cash tax that we were paying relative to book taxes in the quarter withalmost $21 million in the nine months. Then you'll see really the earnings inthe DD&A above that. I am going to talk about that when we go through thesegments and Rich really touched on those today already. But before we get tothe segments let me talk about certain items. The certain items in the quarterare really relatively small, there is one significant one it's listed hereunder legal settlements and that's the one with quick settlement of about $15million, few other smaller things going in various directions.

Of course the certain items forthe nine months are large, as we talked about last quarter, we pulled out theearnings from Trans Mountain for the four months prior to when KMP owned, as Isaid before on phase of the income statement KMP is actually recognizingearnings from Trans Mountain, but even before when it has owned it.

We back that out because KMP isnot actually getting that cash flow, and then you have the goodwill impairmentwhich is fairly large, you have what's call allocated non-cash long-termcompensation, is the other big amount really in the nine months, that it isdifferent from the quarter. I think that is the incentive compensation thatcame about because of the close of the NBL at 90, none of that was payable byKMP. It wasn't payable in cash, it wasn't payable in equity, it was not anobligation of KMP and it never will be an obligation of KMP. But the accountingrules force us to allocate some of that to KMP. So, we are pulling that out,again it has no impact on cash, has no impact on equity, it is not somethingthat KMP is responsible for that we are backing it out here.

So, summary of the certain itemsand really why we think that shouldn't pay attention for those items. And so,what's driving the performance, again Rich touched on, most of this if we go upto the top. Product pipelines are about $38 million for the quarter, up about$75 million year-to-date. We expect them to be well above their budget in termsof earnings before DD&A and that's even including the negative impact ofnot having the North System in there for the fourth quarter. So, we haveincluded the North System in this segment for the first three quarters, whichis the time period in which we owned it. We will not include it in there in thefourth quarter, and so that's a negative for the segment. Now of course, it's apositive down below because there are capital cost reductions from receivingthe $300 million of cash but the segment doesn't see the benefits of those. So,all it sees is the negative of removing the asset and it will be nicely aboveits budget even after that negative.

Natural gas pipelines are up alittle bit for the quarter and a little bit year-to-date but well over theirbudget and on their way to dramatically exceeding their budget for the year, asRich mentioned driven by the intrastates and some of the Casper-Douglas Systemin the Rocky Mountains.

CO2 is above last year, it's upabout $11 million or almost 9%, it's up almost 5% year-to-date but it is underour budget. Now, that's driven by lower SACROC volumes and you can see theSACROC volumes are down at the bottom of the sheet, they are about 27,000barrels a day, 27,300 barrels a day, so down from last year. Now, Yates volumesare up and the S&T business is performing very well but we do expect theCO2 segments will fall significantly short of its budget for the year.

Terminals is up nicely from lastyear about 11% for the quarter, about 10% year-to-date. They are just a hairunder their budget and they will end the year just a little bit either half orlittle bit under their budget. And then, you have Trans Mountain, which ofcourse was not part of KMP a year ago, even though the base of the incomestatements includes it but was not a part of KMP a year ago, we have pulled itout here, it shows that $22 million improvement for the quarter because of the purchaseof Trans Mountain and then of course $43 million year-to-date. Now relative tobudget, we did pickup an extra month of Trans Mountain,and so we are getting that benefit relative to our budget.

Total segment earnings beforeDD&A is about $567 million, up 17% for the quarter, $1.6 billion, up 12%year-to-date, on track to exceed $2.2 billion in the segment earnings beforeDD&A for the year, and so a very strong performance from the segment.

With that, I'll drop belowDD&A and the segment earnings contribution and you'll see the G&A linewas about $60 million for the quarter, just a little bit above a little bithigher expense than last year about $188 million, about $7 million more expensefor the nine months.

And it was also just a hair aboveour budget for the quarter, a little less than $4 million, but into that $18million above our budget for the year-to-date. Now a significant portion ofthat's actually timing. Probably $6 million to $7 million of that we expect tocome back in the fourth quarter.

But then we have legal expenses,which are running over budget. Our Trans Mountain that extra month caused us tohave an extra month of G&A for Trans Mountain and then a little bit ofadditional benefit approval, driving that increase in G&A relative tobudget.

Your interest line is up about$14 million for the quarter, and interest expense up that amount, up about $41million for the nine months. Our balance is up about $1 billion on average 2007versus 2006. Our average rate is down a little bit. It's done about 30 basispoints in the quarter, about 10 basis points in the year. And so those arethings that are impacting the incremental balance driving higher interest, buta little bit of an offset from slightly lower rate.

And again that takes you down toyour net income before certain items and really your DCF before certain itemsis about $230 million for the quarter or $0.96, a very strong quarter for KMP.

With that I'll go to the lastpage of the press release, which is the balance sheet and go through that foryou. Cash is up a little bit. That's just a function of normal fluctuation.Other current asset is down a little bit, but really unchanged. The biggestchange was the function of the hedges that we have. PP&E is up. Now onething I just point out here, December 31, 2006 does include Trans Mountain.Now when we originally reported December 1, 2006, it didn't because we didn'town Trans Mountainat that time but after the Trans Mountain dropdown we had to go back and restateDecember 31, 2006 as if Trans Mountain were in there.And also, December 31 was before KMI tookthe goodwill impairment which is took in the first quarter, so this December 31reflects Trans Mountain before the goodwill write down.

Now one other and you can see theimpact of the goodwill write down on the balances in a minute. One other[launch] and we mentioned it in the press release, we mentioned it last quarteris that KMP's carrying value for Trans Mountain for accounting purposes has toequal KMI's carrying value prior to the transaction. What that means is thatKMP is carrying Trans Mountain on its balancesheet at more than what it pay. KMP paysabout $550 million for Trans Mountain carrying at thatclose to $850 million.

Now again that has no impact oneconomic, it's just accounting. That's the way that we have to account for it.But really what you see then in PP&E is even though we acquired Trans Mountainsince December 31 that does not have an impact on the PP&E line because itwas already in there at 12/31. Now we have had a significant amount of CapEx since then. I'll go throughthat in a minute. It's right around a $1 billion.

We have made the Marine Terminalsacquisition, which is little over $100 million and a couple of smalleracquisitions. And then, we had DD&A going the other way. So that reallyexplains the change in PP&E that you'd see.

Investments is up a little bit,primarily investment in the Midcontinent Express partnership. Deferred chargesand other assets, you have the Trans Mountain write-downreduces goodwill, again that has to be reflected at KMP even though it didn'thappened at KMP. And then, that is offset by -- so that would reduce this line,you write-down the goodwill, that is offset by an increase in this line, whichis the North System assets and are now represented down here because they areheld for sale. And so, all of their assets, really all their PP&E is movedinto the deferred charges and other assets line.

So, total assets are about $14.4billion, up about $846 million from where we were at the end of December.Although, again, this isn't really where we were at the end of December.

Liabilities and partners'capital, the notes payable and current maturities of long-term debt, I willtalk about that in just a minute. Other current liabilities is down about $150million, this again is a distortion from Trans Mountainhaving to reflect that on our balance sheet at the end of December. It reallyrepresents what we had to call a related party payable at that time, because itrelated to Terasen Inc. , which was in effect financing TransMountain expansion CapEx at that pointin time because Terasen Inc. owned Trans Mountain at that point intime. So, it had to be reflected that way on KMP's books and then of course itgoes away at the time of the drop down in Trans Mountainat KMP. So, that's really what's driving that decline there.

Long-term debt is up over $2billion. We have issued over $2 billion of long-term debt this year, about $1billion in the first quarter, about $500 million in the second quarter, about$550 million in the third quarter. But total that I'll talk about in just aminute, fairly the interest rate slops is unchanged, other is really unchanged,minority interest unchanged, accumulated other comprehensive loss has notchanged significantly, that's primarily the value and the hedges.

Other partner's capital was down$400 million. In truth from what we actually reported and where we really wereon December 31, 2006, it is up about $550 million. Again KMP without the impactof Trans Mountain reported other partner'scapital of just a hair under $4.9 billion on December 31, 2006. And so the realchange is an increase of about $550 million, what you're seeing here is theimpact of adding Trans Mountain on at a higher averaging value at that pointin time and then it's coming down by the write-off of the Trans Mountaingoodwill, from the day again the restated amount on December 31 to September30.

So, total debt is about $7billion. It's up from about $5.7 billion at the end of the year. It's up from alittle under $6.6 billion at the end of June. Then you'll see the debt-to-capcalculation there, again that's not overly meaningful, it is consistent withour expectations but we believe the more meaningful measure is down below, it'sthe debt-to-EBITDA number, and that's about 3.7 times but still KMP itself is 4times debt-to-EBITDA, this is where we expected it to be, it's actually alittle bit favorable to where we expected it to be. And at the end of the year,it's about 3.32 times we did expect this ratio to go up during the year. Butagain, still a very strong balance sheet at KMP, sub four times debt-to-EBITDA.

Now, let's talk about the changein debt real quick. I mentioned before, from 630 to 930 debt went up by about$429 million year-to-date it is up by about $1.26 billion, what's driving that.And again, just I'll refresh your memory. Tom, what we do is generate cash thatmeasured by our distributable cash flow and then we pay our distribution as ourdistributable cash flow. And then, when we need to invest in several of ourexpansion projects or acquisitions, didn't go and raise that capital typicallyas finance initially with debt, and then we go and raise equity and reduce thedebt with that.

And so, typically what you haveis cash out flows our full investing activity and then the cash in-flows arethe financing activity. And so the change in debt is really the differencebetween what we have invested and then what we've raised its equity, and thenthere are couple of other smaller things. But really what I am going to gothrough, the investments that we've made and then the equity that we haveraised.

And so expansion CapEx about $424million for the quarter, a little over $1 billion year-to-date and this doesnot include Rockies Express because Rockies Express is accounted for on theequity method and so, these all are projects in addition to the investment inRockies Express. Now again, Rockies Express is essentially self financing rightnow, as it comes in service we expect that will make and if the other partnerswill make an equity contribution, but it is financing itself, right now.

So, expansion again $424 millionfor the quarter a little over $1 billion year-to-date, actually it's time tomake some contributions to equity investment, it was very small in quarterabout $3 million it has been about $47 million year to date that's primarilyMidcontinent Express, so contributions from Midcontinent Express to get thatproject going.

We have made acquisitions $105million of cash out for the quarter primarily the marine terminals acquisitionabout $701 million year-to-date now that does include the cash that went outfor Trans Mountain and so that's the biggest part of that $550 million and thenthe Marine Terminals and then a couple of small we have Cochin and a couple ofsmaller Terminals acquisition.

In the Cochinacquisition, we acquired the other 50% of Cochin. We did have to take on and reflecton our balance sheet another $43 million of debt, so that's an increase in debtit actually occur in the first quarter but when you go back and talk about thechange in debt from the beginning of the year, that's another $43million ofdebt that needed to be added on. And so, those are really the investments thatwe've made, offsetting that and still cash coming in that reduces debt, we hadan equity offer in the second quarter of about $300 million. Every quarter weessentially have equity offerings that are as the KMR distributions becauseagain those are made in shares, we generate the cash to support thedistribution but we actually distribute the share, supply the regular quarterlyequity offering, that's about $60 million in the third quarter, so that's a $164million year-to-date.

And then we've had sources ofcash from working capital and other places of about $43 million for the quarterand about $73 million year-to-date, so again those are the sources of cashprimarily equity offerings that are offsetting the investments that will make.

We equate on the working capitalstuff as I said it's about $43 million source of cash for the quarter about $73million source year-to-date, and it includes another items really a smalleritems besides just working capital. But [AR and AP] are still worth about $30million for the quarter and year-to-date. Other current assets and currentliabilities are a source of about $54 million for the quarter, about $10million year-to-date, our distributions from our equity investments thatexceeded our earnings by about $4 million for the quarter and about $35 millionyear-to-date. We had cash outflows for increased margin deposits of about $35million for the quarter and about $40 million year-to-date. We had otherinvesting activities of about $10 million for the quarter and year-to-date.

And now on the year-to-date side,we tried to make an interest rate swap that generates about $15 million incash. We have had other ancillary asset sales that generated about $12 millionin cash. And then we have had some changes in inventory, really reductions innatural gas and natural gas liquid's inventory that provided about $12 millionin cash year-to-date. And that gives you a very close again to those sources ofcash that I mentioned for the quarter and year-to-date.

Now, with that significantexpansion CapEx during the quarter, I will run through a highlight of what thatwas, again the total for the quarter and the year. The total for the quarter is$424 million and the total for the year is just ahead over a $1 billion, and so,a significance expansion CapEx investments.

On the product side, for thequarter, we invested about $54 million and year-to-date about $147 million. Thebigger piece of that is the EPS expansion. This is the second El Paso to Phoenix expansion on our Phoenix system.

On the natural gas side, theexpansion CapEx was about $44 million for the quarter, about $138 millionyear-to-date. And that's a variety of project, TransColorado expansions orLouisiana Pipeline and Marcum and storage expansion, the east Texas connection to NGPL on our intrastate.And so a number of things are driving that.

At CO2, the expansion CapEx is$110 million for the quarter, about $270 million year-to-date. That's largelyat SACROC, and then capitalized CO2. On the Terminal side, a significantinvestment, $139 million for the quarter, $325 million year-to-date. Spreadacross a number of projects. Significant ones include the expansion for Pasadena and GalenaPark, our terminal expansion up in Edmonton, the (inaudible)expansion project, the new tank for Amboy and a whole series of smallerprojects.

And then finally in Trans Mountain,expansion CapEx was $66 million for the quarter and it's been $126 millionsince KMP acquired it at the end of April.

So, again that's kind of a summaryof the major expansion project. We do have a whole lot of expansions going on.You're seeing the impact of some of those smaller projects and of our cashflows. You'll continue to see the impact of the smaller projects and you'll seethe impact of the bigger projects going forward. With that, I'll give it backto Rich.

Rich Kinder

Okay. And Angie, we'd be preparedto take any questions now.

Question-and-Answer Session

Operator

Thank you. (OperatorInstructions). Okay. Our first question comes from Yves Siegel. Please stateyour company name and you may ask your question.

Yves Siegel - Wachovia

Thanks. It's Yves Siegel fromWachovia. Good afternoon, everybody.

Rich Kinder

Yves, how are you doing?

Yves Siegel - Wachovia

Great, Rich. Thanks. Couple ofquick ones. One may not be so quick. Can you describe what's going on in theintrastate market in Texas?Some advantage points of being in a competitive market, but being able torollover and contract to higher margins?

Rich Kinder

Yeah. I think we obviously have alot of very good connectivity. I think you start with a proposition that mostof you understand. Texasis both the largest producer of natural gas and the largest consumer of naturalgas. Really, all we are doing is connecting up the two, because we have greatconnectivity in the Ship Channel and over in the Beaumont/Port Arthur, we areable to extract fairly decent margins on the services we have performed.

It's a very fluid market.Obviously, we are having some declines in production in South Texas, someincreases in East Texas and certainlyincreases in the Barnett Shale area. And, I think we are able to take advantageof that. We've also had good processing margins. We do have some processing inthe State of Texasas part of our intrastate.

So, again I have used this phrasea lot of times here, but it's having a great footprint and we are not the onlyones. It's a very competitive market. But I think we have a really excellentfootprint. We have a good relationship with our customers, particularly bothelectric generators and LDCs here in the Houstonarea. And I just think we are doing a good job for our customers and we getpaid accordingly.

Yves Siegel - Wachovia

And just in terms of how muchre-contracting occurs, the way the contract mix sets up right now, do you havea lot more of re-contracting that goes on or --?

Rich Kinder

Jim, go ahead.

Jim Wulk

I think about 25% to 30% of thosecontracts roll in any given year. That's the re-contracting that we work foranother year.

Yves Siegel - Wachovia

Got it. Thanks. And then just twoother ones. In terms of CO2, question A and B, do you essentially say, SACROCis what SACROC is and we've gotten good returns. But in terms of expectations,the 27,000 barrels a day is short of the run rate that you think about goingforward. And then the second, well, part B of the CO2 question is, any furtherprospects for expanding pipelines to other area?

Rich Kinder

Let me answer the second onefirst and then Tim Bradley who runs our CO2 segment he can answer the firstone. As far as projects for expansion of our pipeline system, let me remindeverybody that we are now spending on an 8-days basis, a little over $200million to expand the McElmo Dome to go in the Doe Canyon, those are the twobig production areas in Southwest Colorado. And then to expand Cortez pipeline,that's a pipeline that runs from Southwest Colorado down to Permian Basinof West Texas.All of that will be a little over $200 million and that's how we'll be comingonline in 2008. And so we are expanding that. Now, we as part of McElmo Dome, being able to deliver a littlemore gas that's going west into Utah, that's part of this expansion. And welook at other opportunities to use that to go in other directions but so farthe economics have just not been there for us. Best kind of story on theexpansion side.

I'll let Tim answer on the SACROCside.

Tim Bradley

Our challenges in SACROC in thepast 12 months or so, actually a little bit longer, have been that as westarted out our development in 2002-2003, we were seeing recoveries on theorder of 10% to 11% of the overall place. As we expanded in other field, that'sgenerally dropped to around 7.5% or 8% of the original oil in place. This is alittle bit unexpected, but not a big surprise in a large geologically complexfield at SACROC. We've not completed our budget exercise, that's a little bitpremature to forecast what our 2008 targets are going to be, but probably30,000 barrels a day or little bit less could be our expectation for next year.And we have had some mechanical problems with our pumping equipment, down holesubmersible pumps, as I operated the failure rate a little bit higher than we'dforecasted in the budget, a little bit higher than industry standards, and wehave been working to improve that and we made some progress. Expect thatprogress to continue in the next year from where it is now.

We do expect to move into thejuicy portion of the SACROC field, the platform, probably starting at the endof 2008 beginning in 2009. It is more geologically complex, but it has got muchgreater oil in place in the areas that we have been targeting with our recentpattern additions. So, it's premature to say whether it's going to perform at7% to 8% level, as we've seen recently as we climb back up to higherrecoveries. But take my words, we are continuing to work on ways to improve oursleep efficiency, we have done some conformance treatments with some polymer toplug-off these sounds and have seen, a response out of 12 of these patterns anincrease of 1,400 barrels a day from what we completed just a few months ago,using that polymer technology. We are going to continue to do more and more ofthat. And hopefully we can get the production back up to levels we expected whenwe started back in the early 2000 timeframe.

Yves Siegel - Wachovia

Great. And then, just to push onlast question. How do you guys think of project finance, given the slight ofCapEx that you have going forward?

Park Shaper

I mean by project finance, I willassume that you mean the joint venture project, but I can answer on both cases.

Yves Siegel - Wachovia

I was thinking joint venture,yeah.

Park Shaper

Yeah. I don't think our approachto financing will change and I don't think that the current environment willhave a significant impact on that. In terms of the joint ventures generallythey are self-financing meaning, the commitments that we have on those projectscan support their own financing and so we go and we put generally facilities inplace and those that provide debt financing during constructions and then thosefacilities are taken out with termed-up debt and equity contributions from thepartners once the assets are in service and that's what we're doing at RockiesExpress, that's what we will do at Midcontinent Express.

Rich Kinder

Thank you, Yves. I'll just add tothat. Obviously, if you just look at the roster of the shippers on any of theseprojects, Rockies Express, Midcontinent, the Louisiana line, these are strong creditworthy shippers and they are committed to long periods of time. So, you havevery good credit support behind these projects and so we see the present methodof financing is working just fine for us.

Park Shaper

Yeah. And the other thing I'lladd and I don't think that this much you're asking but just thought that nobodygets confused, on our non-joint venture projects, projects that we own 100%. Wejust finance those corporately, meaning; it's our overall corporate financestructure. Generally, we will issue debt in the short-term for expansion CapEx.It'll get termed up through debt offerings and through equity offeringsovertime.

Yves Siegel - Wachovia

Thank you, guys.

Rich Kinder

Okay.

Operator

Thank you, Sam Arnold. Pleasestate your company name and you may ask your question.

Sam Arnold - Credit Suisse

Hi, Sam Arnold with CreditSuisse.

Rich Kinder

Hi Sam, how are you doing?

Sam Arnold - Credit Suisse

Doing well, you guys? You arealright?

Rich Kinder

Yeah.

Sam Arnold - Credit Suisse

Alright, great. First question isgasoline volumes you said were down, I assume that's just due to competition inplantation and not any type of general trend?

Rich Kinder

Well, I think you just need tolook the overall numbers and again if you take plantation out, which I think isprobably the best way to try to get a read on it. Excluding that, we're upabout 6% for the quarter and 2% for the nine months to-date. Now, that'soverall refine products, and I'm looking for my EIA number, but I think EIA forthe nine months was up, 1.1. So, again, on October refined products up about,we're just about double what the national average is for the first nine months,if you strip out plantation. So, I think that we had good volumes on Calnev andCentral Florida. But again, plantations remain[same when] impacted.

Sam Arnold - Credit Suisse

Okay. But on the East Coast, youguys aren't seeing any type of slowing demand as a result of elevated prices?

Rich Kinder

I don't think we are. I mean theprices are what they are and it's a competitive market. So, it's harder for usto extrapolate. Plantationis not the big dog on the block, southeast, whereas in the West Coast, we arebasically the only pipeline out there. So, we can give you a better feel forvolumes there than we can in the East Coast. I (inaudible) the East Coast hasgotten report that we are going [through].

Sam Arnold - Credit Suisse

Okay. That makes sense. Alright.And on the Calnev, you guys reported that Calnev will start in 2010. Is thatmid, late, early?

Rich Kinder

I think it’s probably late 2010,given the permitting, then the construction won't take all that long. Butcoming across the Californiadesert and with certain of the endangered species there, we have sometortoises, I can't remember which tortoise it is, and we have sand flies outthere that we need to protect. So, it's going to take a while to permit. Andthat's the main thing. But we are starting on that. We have got the firstdrilling that gave us the right treatment to justify going forward.

And we are beginning to startpreliminary engineering work. And the buyers at Calnev, again, I think beforethe quarter, we're running something close to 145,000 barrels a day, which ispretty much pull out. And now, we have taken with our new expansions, we rosethat up to a little over 150,000 barrels a day as we move forward. But you cansee we don't have a lot of room there. We were satisfied of this expansion. Ithink a very real need for the future in Las Vegas.

Sam Arnold - Credit Suisse

Okay. And do you have people tofind out for you? Is that firm capacity or is it kind of more specific?

Rich Kinder

No. This is strictly like ourother products lines. Natural gas products are very different. The productslines we are building, and establish the [tariff under perk rate] making andthen the shippers ship on a nominated basis every month, same way with expandedSFPP with both last year's Texas to Arizona expansion and this year's EPXexpansion.

Sam Arnold - Credit Suisse

Got it. Okay. Great. One more, ifI may. If you could talk a little bit about the REX-West construction, I knowyou guys mentioned that you still thought you are going to hit the Januaryfirst start-up date. Can you talk a little bit about like percentage complete?Is the lay rate going as expected, if you have all the land acquired and kindof some details around that?

Rich Kinder

Yeah. We have all the landacquired. And I think the right way to describe and then Scott Parker, may behe can jump in. But it's broken into seven spreads with six differentcontractors. Each spread roughly 90 to 100 miles. And we are further along onthe western portion and within the eastern part. We had better weather on thewestern part. But in certain spreads of it, we are 90% complete, in terms ofhaving the pipeline in the ground welded and we are about just backfilling now.And others on the more eastern part of it, we are not that high yet. Buteverything is going well. And again, we expect to be on time and on budget onboth selected points.

Sam Arnold - Credit Suisse

Great. Okay. Thanks. Good quarterand let somebody else get a chance.

Rich Kinder

Alright, Sam. Thank you.

Operator

Thank you. Robert Lane, your line is open. Pleasestate your company name and you may ask your questions.

Robert Lane - SMH Capital

Robert Lane, SMH Capital. Please. Iapologize if a couple of these questions have been asked already. The first is,are you all looking to do another major equity offering, a registered offeringat some point in the fourth quarter given the level of leverage that you haveright now?

Rich Kinder

I think, we have previously saidthat we expect to do another equity offering in the fourth quarter. We expectto do that.

Robert Lane - SMH Capital

Okay. Thanks. And the second oneis sort of a follow up from a conversation I had with Kim and she said, all mypeople answer on the call. Once you have REX-West up and running, what's thegas line field going to be? How many Bcfs you are going to have actually in theline once the pipeline is up and running?

Rich Kinder

Yeah. And Kim told me that youwould ask that. I don't know if we want to say it specifically, but I can tellyou that it's not significantly relative to the Rockies[characteristics].

Robert Lane - SMH Capital

Okay. That's all I had for rightnow. Thanks guys.

Rich Kinder

Okay.

Operator

Thank you. John Edward, your lineis open. Please state your company name and you may ask your questions.

John Edward - Morgan Keegan

Yeah. Hi, everybody. John Edwardwith Morgan Keegan. Nice quarter.

Rich Kinder

Thank you.

John Edward - Morgan Keegan

Just to follow-up on one of thequestions Yves was asking on financing REX, the project finance rates that youare seeing, given what's going on the credit markets. Have you seen any impactto your cost of financing on that?

Rich Kinder

Tim is here.

Tim Bradley

I think in general on that, therehas been slight increase just overall with the market. But given what Rich saidearlier, particular on the Rockies Express, with the strength of the counterparties there, we still feel very comfortable with doing financing in there,when the project is online. And I think you would see us doing that once itstarts coming online on Rockies West next year, then with the follow-on in 2009when the project's finally completed.

Park Shaper

Yeah, and the only thing I'd addis, we expect all of these projects to be investment oriented, and while therehas clearly been a lot of movement in the credit market. It has beensignificantly less in the investment grade market. And so we've got noindication that there will be any difficulties in getting these financingsdone, especially with projects of stable cash flows like the ones that we have.

Tim Bradley

Yeah, and on the short-term endof the market. I mean we are issuing CP right now at about where we wereearlier in the year or so, short-term rates haven't changed significantly.

John Edward - Morgan Stanley

Okay, great. And then, just canyou remind us how much you have spent on REX this quarter and year-to-date?

Park Shaper

I don't have that in front of me.

Rich Kinder

Yeah, me neither. I think thetotal Entrega and REX-West given the whole I think the project is about $4.4billion and these are approximate numbers. Entrega that department goes to(inaudible) and REX-West going over to Eastern Missouri.Totaling around $2.3 billion to $2.4 billion, out of that total $4.4 billion.

Park Shaper

Yeah, and I'm thinking it isprofitable if you look at it we've spent approximately $2.1 billion on thatproject today, right?.

Rich Kinder

Project to-date and when we'refinished we'll be -- REX-West will be in the $2.3 billion to $2.4 billion.

John Edward - Morgan Stanley

So that was not all this year?

Rich Kinder

No, not all this year, that'sright. And that's obviously [A dates], we're just responsible for everything.

John Edward - Morgan Stanley

Okay. And then, a kind of anotherfollow-up to Yves question on the re-contracting, are you seeing then onre-contracting the natural gas? In Texasare you seeing an overall average rates so they, are they about the same or arethey heading a little bit higher or a little bit lower?

Rich Kinder

They are heading higher, they areheading higher.

John Edward - Morgan Stanley

Okay. Alright, great. Thanks. AndI think that's it.

Rich Kinder

Okay. Thank you, John.

Operator

Thank you. John Tysseland, yourline is open. Please state your company name and you may ask your question.

John Tysseland - Citigroup

Hi. Thank you, John Tysselandfrom Citigroup.

Rich Kinder

Hi, John.

John Tysseland - Citigroup

Hi, guys. Quick question, Richyou had mentioned that are still hopeful that you can get

REX-East on line by January of'09, but can you put in context the recent time line that was laid out by theFERC in terms of it's environmental review and how that might impact yourexpectations and if you potentially can speed them up at all?

Rich Kinder

Yeah. I'll ask Scott Parker tohead our natural gas pipeline briefly and to take your question.

Scott Parker

Yeah, as you see about our filingwe could work with FERC and as Rich stated early in the process, I mean he iswith the environmental filing and is our responsibility to get the date inthere so they can do their analysis and we think we've got things back ontrack, we are hopeful and we are working with them so as Rich said we are all-- hold out and get back on and continue forward on the schedule that weproposed initially that's our plan and that's what we are proceeding to do.

John Tysseland - Citigroup

Fair enough, if it is delayeddoes it impact your contractual commitments at all or is just more or less youkind -- you missed out a little bit on the hard of a winner [heating] seasonthink kind of the tail ender at the beginning of the ramp up of that pipeline?

Rich Kinder

Yeah any delay on any of ourprojects doesn't give anybody the right to terminate and leave, there is justthe delay and when we collect our financing as you describe.

John Tysseland - Citigroup

Okay, and then lastly, the $1billion so far year-to-date. Does that mean you are pretty much on target forthe inorganic growth spending on target for that $1.6 billion that you laid outat the beginning of the year is that -- has that moved up or down at allexpectations for full year, excluding acquisitions?

Park Shaper

Yeah, I think we are still prettyclose to that and we might fall a little bit under it, but I think I wouldrequest for that with the regional body.

John Tysseland - Citigroup

Okay. And then lastly the MidcontinentExpress looking at the most recent pursuits with the $1.4 billion in terms ofCapEx spending there, has that creeped up a little bit it seems like I rememberback it was about $1.25 billion beginning?

Rich Kinder

It's $1.27 billion right now, sospecifically it rounds to $1.3 billion, not $1.4 billion.

John Tysseland - Citigroup

Okay. Okay so it is -- alrightwell thank you very much.

Rich Kinder

Okay.

Rich Kinder

Just one thing we did add a fewfacilities which were contracted for our top fiscal very early, the numbermight have been lower but that number that you gave is the correct one.

John Tysseland - Citigroup

Okay.

Rich Kinder

Alright.

John Tysseland - Citigroup

Thank you.

Park Shaper

Thank you.

Operator

Thank you. Stan Jenkins, yourline is open. Please state your company name and you may ask your question.

Stan Jenkins - State of WisconsinInvestment Board

Hi, State of WisconsinInvestment Board. A couple of things, first on the REX-West when that'scompleted say at the beginning of the year how long will that take for you toactually fill that pipe and start seeing cash flows and deliveries out of thatpart of that project?

Rich Kinder

The way we've contracted for thatpipeline when we put it in service on or before the first of the year, our shipworks began paying it immediately whether they use it or not. It's up to themwhether they ship on it but we get our money that's the way we contract on thegas pipeline for this opportunity.

Park Shaper

No, obviously given what'shappened with the basis differentials in the Rockiestoday, we think that these shippers will, for the most part, be very anxious tomove their gas further east.

Rich Kinder

And just to clear that is the endservice data not like our pipeline structure base and life still has to happenafter that or anything that's a conserved state.

Stan Jenkins - State of WisconsinInvestment Board

Okay. Also on that it's been --financially the project level that I assume that when it goes in service then youwould have to finance your portion of that and at that time. So would you beissuing [still down] about 30% debt and 50% partnership in this probably atthat sometimes in the fourth quarter as finance to that is coming online?

Park Shaper

Well, I mean, you are right. Wewould finance our own equity portion of that and that would be permanentlyfinanced. Sometime in the fourth quarter, the first quarter next year, secondquarter next year, some point in there, we slightly had an equity offering andlike we have, like return on investment.

Stan Jenkins - State of WisconsinInvestment Board

Okay. I think that's all I have,good quarter.

Rich Kinder

Okay, thank you.

Operator

Thank you. At this time it seemsthere are no other questions.

Rich Kinder

Okay. Well, thank you all verymuch for bearing with us for an hour and we think we had a very good quarterand we look forward to answering any other question you may have, do you haveany tough questions you can just call Kim, she will answer them. Thank you andhave a good evening.

Operator

Thank you. That does completetoday's conference. You may now disconnect from the audio portion.

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