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

Q3 2007 Earnings Call

October 17, 2007 4:30 pm ET

Executives

Rich Kinder - President and CEO of KMR

Park Shaper - President of KMR

Tim Bradley - VP of KMR and President of CO2 of KMR

Scott Parker - VP of KMR and President 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 Investment Board

Operator

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

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

Rich Kinder

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

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

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

We also now expect to exceed our 2007 budget target of distribution per unit of $3.44. So, those were some of the highlights. Let me just talk a little bit about the business segments. All of our business segments reported an increase in earnings before DD&A. And overall, the total segment earnings before DD&A increased by about 17% to almost $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 on our way to generating north of $2.2 billion in segment earnings before DD&A in 2007. I might also add that during the quarter, we continue to make significant progress on our new projects expansions and these are expected to result in substantial future growth at KMP, including our share of joint venture projects like Rockies Express, we plan to investment approximately $3 billion in expansion projects at KMP this year alone.

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

Our products pipeline earnings before 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 its published annual budget and have very nice growth compared to 2006. All of the individual assets in the products pipeline segment reported higher earnings before DD&A than in the third quarter of 2006. We had particularly strong performance from Cochin, which was partially impacted by the fact that we bought out the other 50% of that pipeline earlier this year.

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

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

The growth was really driven primarily by our Texas intrastate pipelines. They generated more than half of the segment's earnings before DD&A and in turn the drivers there in Texas were primarily higher sales margins as we renewed contracts and added new contracts. We had good increased transportation revenue from higher volumes and rates, and we were able to extract greater value from our storage activity. So, across the Board, that asset is performing very well for us and has been all year.

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

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

Our both business segment, our Terminals group had earnings that were up about 11% from the third quarter a year ago, it is slightly below plan for the quarter, we expected to finish the year at or slightly below its published annual budget. There the growth was attributable to both acquisitions and organic growth opportunities from an internal growth standpoint.

We put into service new tank capacity at Galena Park. We had increased petcoke throughput at the Port of Houston. We had strong ethanol 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 had made few acquisitions since the third quarter last year, and these were positive contributors to the results this quarter. Devco, which owns a proprietary technology that transforms molten sulfur into solid pellets we've talked about this on prior calls, is an addition and is producing earning slightly above its plan.

Vancouver Wharves, which is a bulk marine terminal in the Port of Vancouver, was brought on inline earlier this year.

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

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

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

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

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

On our products pipeline, our EPX project which is about $150 million project, which is an additional expansion of 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 and on budget, and this will take our capacity on that line to over 200,000 barrels per day.

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

Now, more of our expansion opportunities are well in our natural gas pipelines group and let me sort of update you on those, of course by far the biggest single project we had is our Rockies Express. And we completed the Entrega segment on that at the beginning of this year and that runs from Western Colorado up through Wyoming and over the Cheyenne Hub, we are now in full swing on building what we call REX-West which 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 is the project that will then go from Audrain County, Missouri to Clarington, Ohio which is on the Pennsylvania border, we have filed for our certificate of public convenience and necessity, we are working with the FERC on the scheduling order it's still early in the process and we remained hopeful that we'll be able to bring this project in on target with most of it coming online at the end of 2008 where full operations all the way to Clarington and with all compression in 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 now 51% upon completion of other project we'll own 50% on partner to Sempra and ConocoPhillips, the throughput capacities 1.8 billion cubic feet a day and all of that is subscribed under long-term contracts.

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

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

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

And then finally, in our Trans Mountain segment, we began construction in August on our Anchor Loop project. That's about $440 million project. And it's the second phase of our Trans Mountain pipeline system expansion that will take our capacity up to 300,000 barrels per day. And we expect this second phase to be completed no later than November of 2008. We have already commissioned 11 new pump stations this year that has boosted 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 pump stations came online.

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

So, with that I'll turn it over to Park.

Park Shaper

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

The first one is the income statement. It is actually not overly meaningful, especially when you look at the nine months, primarily for reasons that we discussed last quarter. Really the 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 of transaction occurred after KMI started to consolidate KMP, it caused KMP to account for that transaction as it has always owned the TransMountain, even though it didn't buy Trans Mountain until the end of April of this year. But what that means is KMP's income statement reflects Trans Mountain in there for the entire year and [throughput reflects] of being in there for 2006.

In addition, KMP's balance sheet reflects Trans Mountain having been in there for the entire year. Again, even though that transaction didn't close until the end of April, it has some additional distortions on the balance sheet. We'll talk about those in a minute. But it also required a KMP-recognized in the first quarter. And so this is prior to KMP bought the assets, a goodwill write down that occurred at KMR.

So, again that didn't happen at KMP, but the accounting rules required us to recognize that at KMP. And that also 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 there related 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 at all. But again the accounting rules forces to include that on the income statements.

So, the second page pulls all of that 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 that there are some discontinued operations there. That is the North System. That transaction is closed but the North System was known by KMP for the entirety of the third quarter. And so, we had to back in to the products pipeline segment for the third quarter again, because we received all of the cash that it generated in that quarter.

As Rich mentioned, the distribution, it's going to be $0.88 for the quarter, except 9% from where it was a year ago. It's up $0.02 from where it was in the second quarter. It's ahead 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 second page and a little bit down from the middle of the page just about the weighted average unit outstanding, you'll see the $0.96 of Bcf per unit before certain items for the quarter. Again as Rich mentioned, that's 19% from where we were in the third quarter a year ago. And also as Rich mentioned this is before we see any significant impact from the huge expansion project that will come online really in 2008 and beyond.

Typically, Rockies Express when we talked about this, when we went over the budget in January, Rockies Express is a drag on negative earnings before DD&A in 2007, now it’s positive in 2008, once REX-West comes online. But my point is, we are achieving this growth prior to the impact of those significant projects.

Our DCF per units is $2.65 for the nine months up from $2.44 that 9% growth year-to-date. The excess coverage again the $0.96 is covering a distribution of $0.88, so the excess coverage in the quarter is very significant about $19.5 million excess coverage is over $21 million 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 were a year ago, $623 million for the nine month is up almost 15% from either nine months of 2006.

Now, you'll see sustaining capital expenditures are up, which actually is a negative for distributable cash flow, about $32 million in the quarter compared to about $16 million a year ago, about $95 million for the nine month compared to about $76 million for year ago.

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

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

We back that out because KMP is not actually getting that cash flow, and then you have the goodwill impairment which is fairly large, you have what's call allocated non-cash long-term compensation, is the other big amount really in the nine months, that it is different from the quarter. I think that is the incentive compensation that came about because of the close of the NBL at 90, none of that was payable by KMP. It wasn't payable in cash, it wasn't payable in equity, it was not an obligation of KMP and it never will be an obligation of KMP. But the accounting rules 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 something that KMP is responsible for that we are backing it out here.

So, summary of the certain items and 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 up to 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 terms of earnings before DD&A and that's even including the negative impact of not having the North System in there for the fourth quarter. So, we have included the North System in this segment for the first three quarters, which is the time period in which we owned it. We will not include it in there in the fourth quarter, and so that's a negative for the segment. Now of course, it's a positive down below because there are capital cost reductions from receiving the $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 above its budget even after that negative.

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

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

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

Total segment earnings before DD&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 before DD&A for the year, and so a very strong performance from the segment.

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

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

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

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

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

With that I'll go to the last page of the press release, which is the balance sheet and go through that for you. 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 biggest change was the function of the hedges that we have. PP&E is up. Now one thing 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't own Trans Mountain at that time but after the Trans Mountain dropdown we had to go back and restate December 31, 2006 as if Trans Mountain were in there. And also, December 31 was before KMI took the goodwill impairment which is took in the first quarter, so this December 31 reflects Trans Mountain before the goodwill write down.

Now one other and you can see the impact 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 quarter is that KMP's carrying value for Trans Mountain for accounting purposes has to equal KMI's carrying value prior to the transaction. What that means is that KMP is carrying Trans Mountain on its balance sheet at more than what it pay. KMP pays about $550 million for Trans Mountain carrying at that close to $850 million.

Now again that has no impact on economic, 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 Mountain since December 31 that does not have an impact on the PP&E line because it was already in there at 12/31. Now we have had a significant amount of CapEx since then. I'll go through that in a minute. It's right around a $1 billion.

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

Investments is up a little bit, primarily investment in the Midcontinent Express partnership. Deferred charges and other assets, you have the Trans Mountain write-down reduces goodwill, again that has to be reflected at KMP even though it didn't happened 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, which is the North System assets and are now represented down here because they are held for sale. And so, all of their assets, really all their PP&E is moved into the deferred charges and other assets line.

So, total assets are about $14.4 billion, 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 will talk about that in just a minute. Other current liabilities is down about $150 million, this again is a distortion from Trans Mountain having to reflect that on our balance sheet at the end of December. It really represents what we had to call a related party payable at that time, because it related to Terasen Inc. , which was in effect financing TransMountain expansion CapEx at that point in time because Terasen Inc. owned Trans Mountain at that point in time. So, it had to be reflected that way on KMP's books and then of course it goes away at the time of the drop down in Trans Mountain at KMP. So, that's really what's driving that decline there.

Long-term debt is up over $2 billion. We have issued over $2 billion of long-term debt this year, about $1 billion 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 a minute, fairly the interest rate slops is unchanged, other is really unchanged, minority interest unchanged, accumulated other comprehensive loss has not changed 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 were on December 31, 2006, it is up about $550 million. Again KMP without the impact of Trans Mountain reported other partner's capital of just a hair under $4.9 billion on December 31, 2006. And so the real change is an increase of about $550 million, what you're seeing here is the impact of adding Trans Mountain on at a higher averaging value at that point in time and then it's coming down by the write-off of the Trans Mountain goodwill, from the day again the restated amount on December 31 to September 30.

So, total debt is about $7 billion. It's up from about $5.7 billion at the end of the year. It's up from a little under $6.6 billion at the end of June. Then you'll see the debt-to-cap calculation there, again that's not overly meaningful, it is consistent with our expectations but we believe the more meaningful measure is down below, it's the debt-to-EBITDA number, and that's about 3.7 times but still KMP itself is 4 times debt-to-EBITDA, this is where we expected it to be, it's actually a little 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. But again, still a very strong balance sheet at KMP, sub four times debt-to-EBITDA.

Now, let's talk about the change in 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 that measured by our distributable cash flow and then we pay our distribution as our distributable cash flow. And then, when we need to invest in several of our expansion projects or acquisitions, didn't go and raise that capital typically as finance initially with debt, and then we go and raise equity and reduce the debt with that.

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

And so expansion CapEx about $424 million for the quarter, a little over $1 billion year-to-date and this does not include Rockies Express because Rockies Express is accounted for on the equity method and so, these all are projects in addition to the investment in Rockies Express. Now again, Rockies Express is essentially self financing right now, as it comes in service we expect that will make and if the other partners will make an equity contribution, but it is financing itself, right now.

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

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

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

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

We equate on the working capital stuff as I said it's about $43 million source of cash for the quarter about $73 million source year-to-date, and it includes another items really a smaller items besides just working capital. But [AR and AP] are still worth about $30 million for the quarter and year-to-date. Other current assets and current liabilities are a source of about $54 million for the quarter, about $10 million year-to-date, our distributions from our equity investments that exceeded our earnings by about $4 million for the quarter and about $35 million year-to-date. We had cash outflows for increased margin deposits of about $35 million for the quarter and about $40 million year-to-date. We had other investing 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 in cash. We have had other ancillary asset sales that generated about $12 million in cash. And then we have had some changes in inventory, really reductions in natural gas and natural gas liquid's inventory that provided about $12 million in cash year-to-date. And that gives you a very close again to those sources of cash that I mentioned for the quarter and year-to-date.

Now, with that significant expansion CapEx during the quarter, I will run through a highlight of what that was, 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 the quarter, we invested about $54 million and year-to-date about $147 million. The bigger 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, the expansion CapEx was about $44 million for the quarter, about $138 million year-to-date. And that's a variety of project, TransColorado expansions or Louisiana 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 largely at SACROC, and then capitalized CO2. On the Terminal side, a significant investment, $139 million for the quarter, $325 million year-to-date. Spread across 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 smaller projects.

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

So, again that's kind of a summary of 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 cash flows. You'll continue to see the impact of the smaller projects and you'll see the impact of the bigger projects going forward. With that, I'll give it back to Rich.

Rich Kinder

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

Question-and-Answer Session

Operator

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

Yves Siegel - Wachovia

Thanks. It's Yves Siegel from Wachovia. Good afternoon, everybody.

Rich Kinder

Yves, how are you doing?

Yves Siegel - Wachovia

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

Rich Kinder

Yeah. I think we obviously have a lot of very good connectivity. I think you start with a proposition that most of you understand. Texas is both the largest producer of natural gas and the largest consumer of natural gas. Really, all we are doing is connecting up the two, because we have great connectivity in the Ship Channel and over in the Beaumont/Port Arthur, we are able 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, some increases in East Texas and certainly increases in the Barnett Shale area. And, I think we are able to take advantage of that. We've also had good processing margins. We do have some processing in the State of Texas as part of our intrastate.

So, again I have used this phrase a lot of times here, but it's having a great footprint and we are not the only ones. It's a very competitive market. But I think we have a really excellent footprint. We have a good relationship with our customers, particularly both electric generators and LDCs here in the Houston area. And I just think we are doing a good job for our customers and we get paid accordingly.

Yves Siegel - Wachovia

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

Rich Kinder

Jim, go ahead.

Jim Wulk

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

Yves Siegel - Wachovia

Got it. Thanks. And then just two other ones. In terms of CO2, question A and B, do you essentially say, SACROC is 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 going forward. And then the second, well, part B of the CO2 question is, any further prospects for expanding pipelines to other area?

Rich Kinder

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

I'll let Tim answer on the SACROC side.

Tim Bradley

Our challenges in SACROC in the past 12 months or so, actually a little bit longer, have been that as we started out our development in 2002-2003, we were seeing recoveries on the order of 10% to 11% of the overall place. As we expanded in other field, that's generally dropped to around 7.5% or 8% of the original oil in place. This is a little bit unexpected, but not a big surprise in a large geologically complex field at SACROC. We've not completed our budget exercise, that's a little bit premature to forecast what our 2008 targets are going to be, but probably 30,000 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 hole submersible pumps, as I operated the failure rate a little bit higher than we'd forecasted in the budget, a little bit higher than industry standards, and we have been working to improve that and we made some progress. Expect that progress to continue in the next year from where it is now.

We do expect to move into the juicy portion of the SACROC field, the platform, probably starting at the end of 2008 beginning in 2009. It is more geologically complex, but it has got much greater oil in place in the areas that we have been targeting with our recent pattern additions. So, it's premature to say whether it's going to perform at 7% to 8% level, as we've seen recently as we climb back up to higher recoveries. But take my words, we are continuing to work on ways to improve our sleep efficiency, we have done some conformance treatments with some polymer to plug-off these sounds and have seen, a response out of 12 of these patterns an increase 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 of that. And hopefully we can get the production back up to levels we expected when we started back in the early 2000 timeframe.

Yves Siegel - Wachovia

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

Park Shaper

I mean by project finance, I will assume 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 approach to financing will change and I don't think that the current environment will have a significant impact on that. In terms of the joint ventures generally they are self-financing meaning, the commitments that we have on those projects can support their own financing and so we go and we put generally facilities in place and those that provide debt financing during constructions and then those facilities are taken out with termed-up debt and equity contributions from the partners once the assets are in service and that's what we're doing at Rockies Express, that's what we will do at Midcontinent Express.

Rich Kinder

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

Park Shaper

Yeah. And the other thing I'll add and I don't think that this much you're asking but just thought that nobody gets confused, on our non-joint venture projects, projects that we own 100%. We just finance those corporately, meaning; it's our overall corporate finance structure. Generally, we will issue debt in the short-term for expansion CapEx. It'll get termed up through debt offerings and through equity offerings overtime.

Yves Siegel - Wachovia

Thank you, guys.

Rich Kinder

Okay.

Operator

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

Sam Arnold - Credit Suisse

Hi, Sam Arnold with Credit Suisse.

Rich Kinder

Hi Sam, how are you doing?

Sam Arnold - Credit Suisse

Doing well, you guys? You are alright?

Rich Kinder

Yeah.

Sam Arnold - Credit Suisse

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

Rich Kinder

Well, I think you just need to look the overall numbers and again if you take plantation out, which I think is probably the best way to try to get a read on it. Excluding that, we're up about 6% for the quarter and 2% for the nine months to-date. Now, that's overall refine products, and I'm looking for my EIA number, but I think EIA for the 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 and Central Florida. But again, plantations remain [same when] impacted.

Sam Arnold - Credit Suisse

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

Rich Kinder

I don't think we are. I mean the prices are what they are and it's a competitive market. So, it's harder for us to extrapolate. Plantation is not the big dog on the block, southeast, whereas in the West Coast, we are basically the only pipeline out there. So, we can give you a better feel for volumes there than we can in the East Coast. I (inaudible) the East Coast has gotten 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 that mid, late, early?

Rich Kinder

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

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

Sam Arnold - Credit Suisse

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

Rich Kinder

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

Sam Arnold - Credit Suisse

Got it. Okay. Great. One more, if I may. If you could talk a little bit about the REX-West construction, I know you guys mentioned that you still thought you are going to hit the January first 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 kind of some details around that?

Rich Kinder

Yeah. We have all the land acquired. And I think the right way to describe and then Scott Parker, may be he can jump in. But it's broken into seven spreads with six different contractors. Each spread roughly 90 to 100 miles. And we are further along on the western portion and within the eastern part. We had better weather on the western part. But in certain spreads of it, we are 90% complete, in terms of having 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. But everything is going well. And again, we expect to be on time and on budget on both selected points.

Sam Arnold - Credit Suisse

Great. Okay. Thanks. Good quarter and let somebody else get a chance.

Rich Kinder

Alright, Sam. Thank you.

Operator

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

Robert Lane - SMH Capital

Robert Lane, SMH Capital. Please. I apologize 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 offering at some point in the fourth quarter given the level of leverage that you have right now?

Rich Kinder

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

Robert Lane - SMH Capital

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

Rich Kinder

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

Robert Lane - SMH Capital

Okay. That's all I had for right now. Thanks guys.

Rich Kinder

Okay.

Operator

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

John Edward - Morgan Keegan

Yeah. Hi, everybody. John Edward with Morgan Keegan. Nice quarter.

Rich Kinder

Thank you.

John Edward - Morgan Keegan

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

Rich Kinder

Tim is here.

Tim Bradley

I think in general on that, there has been slight increase just overall with the market. But given what Rich said earlier, particular on the Rockies Express, with the strength of the counter parties 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 it starts coming online on Rockies West next year, then with the follow-on in 2009 when the project's finally completed.

Park Shaper

Yeah, and the only thing I'd add is, we expect all of these projects to be investment oriented, and while there has clearly been a lot of movement in the credit market. It has been significantly less in the investment grade market. And so we've got no indication that there will be any difficulties in getting these financings done, especially with projects of stable cash flows like the ones that we have.

Tim Bradley

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

John Edward - Morgan Stanley

Okay, great. And then, just can you 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 the total Entrega and REX-West given the whole I think the project is about $4.4 billion 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 is profitable if you look at it we've spent approximately $2.1 billion on that project today, right?.

Rich Kinder

Project to-date and when we're finished 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's right. And that's obviously [A dates], we're just responsible for everything.

John Edward - Morgan Stanley

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

Rich Kinder

They are heading higher, they are heading higher.

John Edward - Morgan Stanley

Okay. Alright, great. Thanks. And I think that's it.

Rich Kinder

Okay. Thank you, John.

Operator

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

John Tysseland - Citigroup

Hi. Thank you, John Tysseland from Citigroup.

Rich Kinder

Hi, John.

John Tysseland - Citigroup

Hi, guys. Quick question, Rich you 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 the FERC in terms of it's environmental review and how that might impact your expectations and if you potentially can speed them up at all?

Rich Kinder

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

Scott Parker

Yeah, as you see about our filing we could work with FERC and as Rich stated early in the process, I mean he is with the environmental filing and is our responsibility to get the date in there so they can do their analysis and we think we've got things back on track, 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 we proposed initially that's our plan and that's what we are proceeding to do.

John Tysseland - Citigroup

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

Rich Kinder

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

John Tysseland - Citigroup

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

Park Shaper

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

John Tysseland - Citigroup

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

Rich Kinder

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

John Tysseland - Citigroup

Okay. Okay so it is -- alright well thank you very much.

Rich Kinder

Okay.

Rich Kinder

Just one thing we did add a few facilities which were contracted for our top fiscal very early, the number might 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, your line is open. Please state your company name and you may ask your question.

Stan Jenkins - State of Wisconsin Investment Board

Hi, State of Wisconsin Investment Board. A couple of things, first on the REX-West when that's completed say at the beginning of the year how long will that take for you to actually fill that pipe and start seeing cash flows and deliveries out of that part of that project?

Rich Kinder

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

Park Shaper

No, obviously given what's happened with the basis differentials in the Rockies today, we think that these shippers will, for the most part, be very anxious to move their gas further east.

Rich Kinder

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

Stan Jenkins - State of Wisconsin Investment Board

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

Park Shaper

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

Stan Jenkins - State of Wisconsin Investment Board

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

Rich Kinder

Okay, thank you.

Operator

Thank you. At this time it seems there are no other questions.

Rich Kinder

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

Operator

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

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Source: Kinder Morgan Energy Partners Q3 2007 Earnings Call Transcript
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