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

Q4 2007 Earnings Call

January 16, 2008, 4:30 PM ET

Executives

Richard D. Kinder - Chairman and CEO

C. Park Shaper - President

Scott Parker - President, Natural Gas Pipelines

Analysts

Noah Lerner - Hartz Capital

Dan Jenkins - State of Wisconsin Investment Board

John Edwards - Morgan Keegan

Operator

Welcome and thank you for standing by. At this time, all participants will be in a listen-only mode. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Rich Kinder. Thank you, sir; you may begin.

Richard D. Kinder - Chairman and Chief Executive Officer

Okay. Thank you Ana and welcome everybody to the fourth quarter of analyst call for Kinder Morgan Energy Partners. As usual, I'll give an overview of the performance for the fourth quarter and for full year, 2007; Park will go through the financial details and then we'll threw it open for any and all questions that you might have.

Also as usual, we will be making statements within the meaning of Securities Act of 1933 and the Securities Exchange Act of 1934.

I think we had an awfully good year at Kinder Morgan for 2007. As you know, we measure ourselves by the distributable cash flow we generate and distribute it to our unitholders. They... our Board raised the distribution per unit from $0.88 to $0.92 per quarter or $3.68 per year. That $0.92 distribution comes out of distributable cash flow per unit this quarter of $1. So, we had a very nice coverage for the quarter and for the year. And that $0.92 represents an increase of 11% when you compare to the fourth quarter of 2006, when we distributed $0.83.

If you look at the full year, we distributed $3.48. That's 7% above the $3.26 we distributed for 2006. And our distributable cash flow per unit for 2007 is $3.65; that compares to $3.30 a year ago and led to DCF above our distribution coverage of about $40 million for 2007. Also, the distribution of $3.48 for 2007 was $0.04 better than our budget target of $3.44 for the full year.

For the full year, we produced DCF before certain items of $865 million. That was up 16% from $743 million of 2006. So those are a lot of numbers I know, but I think the important thing is that we achieve these results without significant contributions from a number of large projects that we were building during 2007 and '08. For example, our Rockies Express project, Kinder Morgan Louisiana, the Midcontinent Express, all of these will begin paying dividends in 2008 with REX-West completion and then increasing in 2009, 2010 and beyond as these other projects come on line. So, while we had a very good year in 2007, we certainly expect accelerating growth in 2008 and beyond, as these major projects come online.

Now as we usually do, let me talk a little bit about the individual business segments and how each of them contributed to the growth, and a little bit what we have planned for the future in each of those segments; and I'll start with our Products Pipeline Group. We had $586 million of earnings before DD&A for 2007. That's a 17% increase from 2006 and nicely above the 2007 plan. The leading contributors there were our Cochin Pipeline. There, we benefited from improved performance and from the fact that we now own a 100% of it as opposed to 50% in the past. We also had improved results of Transmix and Plantation Pipe Line. But really each of the operating units of this segment were above 2006.

If you look across the whole Products Group, revenues were up 6.2% for the year. Volumes for the year were actually down 0.4%, four-tenths of 1%. But if your strip out Plantation, which we usually do because as you recall, we had a major competitive pipeline come online there in the mid 2006. If you strip out Plantation, we were up 0.8%, eight-tenths of 1% on volumes, and that's pretty flat to EIA national numbers, which were up 0.9% for 2007.

It's... I think it's kind of interesting to see where these volumes were generated. Our Pacific system was up 1.1% for the year in volumes, with Arizona up 5.2%, of course we added some capacity lending from the East there during 2007. The volumes in Southern California were actually down 0.5%, five-tenths of a percent and that was primarily lower volumes in the San Diego area and some of that certainly was as a result of fires which occurred in the fourth quarter. But for whatever reason, there was a decline in the San Diego area.

CALNEV, our line that goes into Las Vegas was off in the year by 2.3% in volumes. Las Vegas was down on 2.2%; McCarran, the big airport in Las Vegas was actually up 1.7%, and about two-thirds of the overall volume shortfall occurred on our Intrastate deliveries off of CALNEV, as it runs through Southern California and that's... the good news there is that those are mostly low tariff volumes.

Our Central Florida pipeline; that was up 2% for the year, with Orlando particularly strong at 4.8% positive for 2007, and the Orlando airport up 6.6%. Plantation, as I said was down for the competitive reasons I have mentioned, about 3.5%, but we actually had positive revenue due to some tariff changes and the fact that most of the revenues and most of the volumes we lost were short of volumes.

Looking at the expansion front for our Products Pipeline, we finished around the 1st of December our $153 million East Line expansion from El Paso to Tucson and Phoenix. That took our capacity to over 200,000 barrels per day on that line and when you combine that with the 2006 expansion which we put in service in that year for a cost of $210 million, we believe we now have the capacity to serve the needs of the fast growing Arizona market from both West and East for many years to come.

We began preliminary work on our major $400 million plus CALNEV expansion project. We expect to bring that in service in early 2011 and even since the end of the year we've completed an open season and signed binding contracts for offloading storage and blending of ethanol at our Tampa and Orlando, Florida terminals. This is not a huge project, it is little over $25 million to be spent now; but I think it demonstrates the future potential for more ethanol activity in Florida and Southeast, including the possibility of moving the ethanol on a batch basis on our Central Florida pipeline from Tampa to Orlando. We are now exploring that, we think it's going to work. If so, that will be the first line in North America that will run ethanol on a batch basis. And we should have a discussion on that probably in the second to third quarter of this year.

In addition, we entered into other arrangements that should help us continue to escalate our ethanol presence throughout the country. Again, we are not investing in ethanol; we were just handling on behalf of credit worthy entities.

Turning to our Natural Gas Pipelines, we had earnings before DD&A of $600 million in 2007. That was up 8% above 2006 and about 12% above our plan in 2007. The real drivers of this growth were the Texas Intrastates system where we had a record year. And I think there the good results came from higher sales margins on renewal and incremental contracts, we had increased transportation revenues from higher volumes and weights, and we continue to realize greater value for our storage activities in state of Texas.

Our transport volumes were up about 10% for the year. Our KMIGT and TransColorado pipelines, both the Rocky Mountain pipelines off course were modestly above both 2006 and the plan, and our Casper-Douglas processing operation had a strong 2007. This segment, the Natural Gas Pipeline segment is where a great many of our largest CapEx projects are housed and let me spend just a couple of minutes updating you on those. Of course, the most significant project in the whole company is our Rockies Express project and last Saturday, January 12th, we went online with about 1.4 billion cubic feet of capacity on REX-West, running from the Cheyenne Hub, in Weld County, Colorado to the ANR delivery point in Brown County, Kansas. We have about 213 remaining miles on REX-West, of which we'll continue eastward to Audrain County, Missouri. We expect our last segment to be in service in early February. That will take our capacity to 1.5 Bcf.

REX-West is little over 700 miles in length, 42-inch diameter pipe and we are now able to connect with KMIGT, Northern Natural Gas, NGPL and ANR and again, when we finish the last spread in early February, we will also connect to Panhandle Eastern. So, that's REX-West, and we are delighted at its in-service and that particular part came in pretty much on time. Our target date was the end of 2007 as you recall and on budget.

Now turning to REX-East, that's the last part of the project, that will run from Audrain County, Missouri to Clarington, Ohio on the Ohio Pennsylvania border. And there, we got a favorable draft environmental report in late November of last year, subject to receipt of the regulatory approvals, we anticipate we'll go into interim service there as early as the end of this year, the end of 2008 and be fully operational with all compression online by January 2009. When completed that we'll have a total of capacity of 1.8 Bcf per day and all of that capacity is fully secured by 10 year long-term contracts from creditworthy shippers. So that's a big project for us and so far so good. Not without challenge, I might add, anytime you are building any major project in North America today, you have challenges and we'll continue to confront those challenges and hope we would meet them on REX-East as we have on REX-West.

In December 2007, we opened... we completed successful non-binding open season on an expansion of REX which we've imagined, we call the Northeast pipeline, we are not too good with names, and then say proposed 375 mile extension of REX that would do two things. It would extend the pipelines endpoint from Clarington out to out to Princeton, New Jersey and would also add capacity on the segment line between Lebanon, Ohio and Clarington and then on out to Princeton.

Our market interest was very good. It exceeded the pipeline initial design estimate of 1.5 Bcf per day. Clearly, with the rubber beats the road is in getting the binding agreements done and that's what we are working on right now. Subject to getting these agreements and the regulatory approvals, this pipeline could go into service in late 2010. So we continue to build off our success in putting the REX project together, although I will again emphasize, until we get binding agreements, it's not a done deal as far as the Northeast Express project is concerned.

Another one of our major projects in the Natural Gas Group is our Midcontinent Express Pipeline. As you recall, that's about a $500 million project, extending from southeast Oklahoma across northeast Texas, northern Louisiana, central Mississippi ending at a connection with the Transco Pipeline near Butler, Alabama. It would have capacity of 1.4 Bcf a day. We have long-term binding commitments of over 1 Bcf a day now and expect to sign up the rest of that capacity as we go forward. We expect to bring that in service by March of 2009, assuming the receipt of corporate regulatory approvals and again as you know, that's a 50-50 joint venture between ourselves and Energy Transfer.

Our final major natural gas project is one of our older projects, the Kinder Morgan Louisiana Pipeline. That's about a $517 million project that would transport natural gas from the Cheniere Sabine Pass LNG terminal across Louisiana over states of 135 miles, will have a capacity of moving about 3.2 billion cubic feet a day and all of that capacity is fully subscribed for 20 years. We now expect that pipeline to be in service by 1/1/09 and that's about 3 months ahead of our original schedule.

So all in all, things are looking good on the expansion front for our Natural Gas Pipelines and as you could imagine and as you know, this will be a huge driver of growth in the future and I think we are making good progress on all the projects.

The completion of REX-West will obviously have significant positive impact on 2008 distributable cash flow and REX-East and the rest of these projects will have measurable impact in 2009, 2010 and beyond. So that's sort of the story on Natural Gas Pipelines.

Turning to CO2, the CO2 pipeline operations produce about $537 million of earnings before DD&A in 2007. That's up 10% from 2006, but significantly below the plan we had for them in 2007. If you look at the CO2 operations, the oil production at Yates and our sales and transport business at our NGL production were all strong, but oil production at SACROC was below plan and even below 2006. To put this in perspective, the volumes at Yates we are up 4% and a record production at Yates at least since we invested there several years ago, but SACROC volumes were down 10%, NGL volumes for the year were up 8.5%.

With regard to expansion there, today, many of you know, about 22% of the oil production in the Permian Basin of West Texas and Mexico results from these CO2 and about two-thirds of that CO2 comes from the CO2 producing fields in the Southwest Colorado than we operate and then move that production down our Cortez Pipeline.

We are spending about $200 million on batch [ph] basis, to increase the production and the pipeline capacity coming out of Colorado and it breaks down kind of like this. By mid year of 2008, we will have increase our production ability or capacity at McElmo Dome from about 1 Bcf a day to about 1.2 Bcf a day and we will have... and there we own a 45% working interest.

At Doe Canyon, new to our field that we are opening up for we own 88%, we are bringing that online this week. That's just roll about a 100 million cubic feet a day and then we are completing the expansion of the Cortez Pipeline from Colorado to the Permian Basin by 200 million cubic feet a day. So we will be increasing total production at Southwest Colorado by 300, about 100 million of that will move to a customer we have in Southern Utah, the other 200 million will come down the line to Permian Basin. All of that will be completed by mid-year 2008, and its running flat or slightly above our original budget, but still looks like a very nice project for us.

Turning to our Terminals operations for 2007, terminals produced about $242 million of earnings before DD&A. That was up 12% in 2006 and about flat to our 2007 plan. The increase there was driven primarily by organic growth by internal expansions and somewhat by the acquisitions Vancouver Wharves and the Marine Terminals that we made during the calendar year 2007.

I think we've also positioned ourselves pretty well for the future. We have about 20 new tanks coming online either in the fourth quarter of 2007 or the first quarter of 2008. That added about 1 million barrels of new capacity in service in the fourth quarter of '07, and we will be bringing online about 3.75 million barrels in the first quarter of 2008. Almost all of this capacity is subscribed under contracts that average about 5 years in duration. So, we have a very good idea there of what the sustained cash flow will be and again, these projects that will be immediately accretive to the cash flow we generate.

In addition, we've announced that we have entered into a long-term contract with BP to invest about $56 million to construct a new petcoke terminal at BP's Whiting, Indiana refinery. This terminal will handle about 2.2 million tons per year of petcoke and from a new coker that BP is building to process heavy crude from Canada. I think this is probably more important beyond just the amount of the project because we think it's an example of our strategy to expand our petcoke handling capacity, which is now primarily concentrated on the Gulf Coast, many of you know we are, we believe we are the largest petcoke handler in America and we are anxious to expand and utilize that expertise in the Midwest and elsewhere where opportunities continue to develop.

Turning to our fifth business segment, Trans Mountain; that's our Canadian crude oil products line that runs from Edmonton down to Vancouver and into Washington State. We had about $57 million of earnings before DD&A, that's about 6% above our '07 plan. The volumes were up 13% in 2006, due to expanding capacity from our pump station expansion that was a $225 million project; it was completed during '07. Our Anchor Loop expansion costing about $470 million is expected to be completed later in 2008 and that will raise our capacity to 300,000 barrels per day, that's the much needed expansion of capacity and we should be very well with that project.

Now let me touch briefly on the certain items category from this quarter, we all know we don't pay a lot of attention to them but we did have a lot of moving parts there. In our certain items, we have a large gain form the sale of our North System, which we completed early in the fourth quarter, offset by some legal and environmental reserves, primarily additional reserves relating to our ongoing series of rate cases on our West Coast Products Pipeline. These additional reserves, I think you can break up really resulted from 3 things; first of all, from the passage of time, which just means as we said before, as you go on without final settlement or final orders in the case whatever reparations you owe, continue to accrue interest, we have set all that out in our prior regulatory filings.

And you also have additional refunds, owed on interim rates. And here we trued all that up, through year end 2008. So we've done all that, perceptively not only for the time since we did our last reserve here at the end almost 2 years ago, but we also trued up through 2008. Then obviously we've had some new cases filed, we've taken that into account in computing our reserves. And then finally, third basket is the impact of new decisions, in this rapidly or slowly moving contest, decisions on how you calculate your rates, and how the numbers are calculated, the most recent of which came on at the end of December. The decision was actually largely favorable to us because it included the full commission reaffirming our right to include our income tax allowance in our rates. Obviously, these reserves that we set up are all non-cash, unless and until reparations are paid.

So let me conclude by reiterating that our 2008 budget target for distributions per unit is $4.02 per unit for 2008, that's up 16% compared to the $3.48 we declared for 2007. This robust growth as we've said previously is being spearheaded primarily by REX-West, by higher hedge prices in our CO2 segment on our fuel production and by anticipated strong performance from the rest of our assets. And we are going to go over our outlook for 2008 and beyond at our annual investors conference, which will be here at Houston on January 24th and which will be webcast live, so anybody wants to can listen in.

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

C. Park Shaper - President

Alright, thanks Rich. And I am going to go over the financial pages that were attached to the part of the press release. I'll start on the first numbers page, so after the text of the press release. And this is the phase of the income statement, the GAAP income statement. As we were discussing since the second quarter, the drop down of Trans Mountain and then also other certain items had caused distortion on the income statement. And so I really think it is more meaningful to look at the second page and we'll talk about certain items on that page. But just at the bottom of the last line of that page, you can see the Board today approved the distribution for the fourth quarter of $0.92, up from $0.83, that's an 11% increase. And for the year, the distribution is $3.48, up from $3.26 that we distributed a year ago, that's up 7% in terms of the annual distribution per unit.

And with that, let's turn to the second page and I'll actually start at the bottom of the first section, there is a line weighted average units outstanding. Right above that, you see the distributable cash flow per unit before certain items of $1 for the fourth quarter, up from about $0.87 in the fourth quarter a year ago, that's a 15% increase. For the year, as Rich mentioned $3.55 compared to $3.30, that's an 11% increase.

Once again, our budget in terms of distributable cash flow per unit was $3.46. So, we are significantly above our budget even with the higher distribution. Again, the budgeted distribution was $3.44, we ended up at $3.48. This $3.65 is compared to the distribution of $3.48, generates the excess cash flow that Rich mentioned of $40 million. And so we budgeted for $5 million of excess cash flow on a distribution of $3.44. We actually achieved a distribution of $3.48 and excess cash flow of $40 million. So it's a very strong year.

Moving up from that, you will see net income per unit. Don't believe that's just meaningful as the distributable cash flow per unit that we just went over. You will see distributable cash flow before certain item $242 million for the quarter, up from $200 million in the quarter a year ago and 865 in terms of distributable cash flow before certain items for the year, up from $743 million a year ago, that's the 16% increase that Rich mentioned.

Immediately above that you will see sustaining capital expenditures; $58 million for the quarter, up from a year ago, about $153 million for the year. Our budget on sustaining CapEx was about a $156.5 million, but we were very close to the budget and in truth all of the variance is explained by Cochin. At the time that we did the budget, our transaction with BP has not been finalized. The way that that transaction was ultimately negotiated, it actually reduced the sustaining CapEx that we realized at Cochin during 2007 and that really explains the variance between the actual of about a $153 million and the budget of about $156.5 million. Now clearly across all of our business units, somewhere a little bit up a sustaining CapEx were a little bit down. But again absence of change on Cochin we were essentially right on our expectation.

The point I am making there is that the out performance in terms of distributable cash flow did not come from a reduction in sustaining capital expenditures.

Now book cash taxes, immediately above that. That is something that we added this year, really as the function of the drop down of Trans Mountain. We had some differences in prior years and truthfully we had income taxes from some of our assets that are not qualifying that we own in C Corps; that goes for Canadian assets as well. We pay Canadian taxes on those assets and so with the acquisition of Trans Mountain and of the other half of Cochin, those overall taxes went up and the difference between our book taxes on cash taxes became more meaningful and we have been discussing this every quarter in this year. But that's what that line is. It was a difference of $30 million for the quarter. It was a difference of $51 million for the year, significantly above where it was in 2006, you can see we've put the 2006 numbers in there. Again that's largely, because of the acquisition of the remaining half of Cochin and the acquisition of Trans Mountain, which was effective at the end of April.

DD&A, it is up significantly, now that's mostly driven by oil production at our CO2 segment. It's also up because of the acquisition of Trans Mountain and the terminals as a result to the expansion project and acquisition. And that takes you again to limited partner's net income and then the general partner's interest and net income, as a net income before certain items above that. You will see that's about $50 million, over $50 million for the quarter, and over about $70 million for the year, although again I think a more meaningful measure is the distributable cash flow number that we talk about.

With that, I am going to continue just moving up the page and talk about the certain items, which has really kind of the next section. You will see the first one; the Trans Mountain before drop down amount. This is what I was talking about when we talk about the distortions on the income statement. Because KMP is now consolidated into Knight Inc. when we now do a transaction where an asset is sold from Knight down to KMP, we have to account for that asset at KMP as if KMP had owned it for as long as it Knight have. Now that's complicated, but effectively what it means is even though KMP did not buy Trans Mountain until the end of April, KMP has to reflect it on its financial statements as if it has owned Trans Mountain since the beginning of 2006.

Now it didn't own Trans Mountain until April, the end of April of 2007 and so what we are doing in the certain item period is backing now the impacts of Trans Mountain from prior to that date, prior to the end of April in 2000.There was one small amount in the fourth quarter, $1.3 million. That related to some periods prior to April, April or earlier of 2007, so we're backing that out.

Additionally, there is the large goodwill impairment that was actually taken at Knight Inc. in the first quarter of 2007. Again, it was taken at Knight Inc. before the asset was dropped down to KMP, but because of the accounting rules we have to reflect that on KMP's income statement. Again, even though it was the first quarter '07 item prior to the drop down and so that's the big amount that you see in the 12 months. And again, that's been in there all year at least since the second quarter, the $373 million so, that's not a KMP item and so we're backing it out.

Now the next item is the gain on sales. This is the gain on the sale of the North System. That was approximately a $300 million transaction; the book gain is a little over a $150 million. So we were not taking credit for that in the recurring distributable of cash flow, we're backing it out. Here we did add into our environment reserves largely due to a change in the time frame in which we are estimating them. That was about $15 million in the fourth quarter. We had a little bit of an increment again back in the second quarter, so the total for the year is $17.5 million.

The loss on debt retirements was back in the first quarter, related to a refinancing at Red Cedar, which is a joint venture in which we own a little under 50%. Allocated non-cash long-term compensation, this is related to the NBO that took place at Knight. This is compensation that for accounting purposes, we have to allocate to KMP, but that KMP will never be responsible for. KMP will not issue any equity for this; KMP will not pay any cash for this. This will never be an item that economically impact KMP. But for accounting purposes, we have to represent it on the income statement. So again, we pull it out here as a certain item. Now it's bigger for the 12 months because at the time of the close of the transaction, those accelerated vesting on restricted stock and option, because KMP was not responsible for that, does not pay any of that, neither will pay any of that. But it has to be reflected on their income statement.

Legal reserves and settlement, this is where the large increase to primarily the rate case reserves, but also to some other legal reserves are showing up. You can see it's about a $139 million for the quarter. Now, when you look at it for the year, it's larger almost a $182 million. That's because the core settlement and some other legal settlements are also in there, most of which occurred in the third quarter and we are in the third quarter Q.

Now to refresh your memory, I think most people were aware that, those settlements actually occurred after we released our earnings release in the third quarter, but before we filed our third quarter Q. So there were incorporated into our 10-Q for the third quarter. They did not show up on our earnings release for the third quarter.

And then there are some items related to the hurricane that were primarily a year ago, although a little bit of gain I'm sure about this year, but again we are not taking credit for. And then other is essentially a minimal, except for 2006 the major footnote that talked about, the items that show up down there in 2006 contract settlements and the reserve release. So it's big, those are the certain items we want everybody to understand, we want people to understand why we are not incorporating them into what we believe to be our appropriate measure of returning distributable cash flow.

With that, I will jump up to the top and Rich has really covered a lot of the segments, I will go over them briefly. Products Pipelines is up about $9 million for the quarter versus last year, up $84 million year-to-date, as Rich mentioned above its budget, it's above its budget by almost $15 million. And that's even in the face of loosing the North System for the fourth quarter. So we sold the North System effective at the end of the third quarter and so we didn't get any earnings from it in the fourth quarter, even though it was included in our budget, so strong year in the Products Pipeline segment.

Our Natural Gas Pipeline segment, even stronger up from a year ago by $39 million for the... in the quarter. For the entire year, up about $46 million, significantly above their budget driven by the Texas Intrastate.

CO2, while it is above last year by about $30 million for the quarter and about $47 million for the year, is below our budget, largely driven or completely driven by volumes at SACROC lower than our budget. Of course, as Rick said the other piece of the CO2 segment, gates and the SMP business are performing very well.

Terminals are essentially on budget for the year in terms of earnings before DD&A, but it is a little bit under budget from a distributable cash flow perspective. Term loans in one of the segment where sustained CapEx was a little bit higher than what we had in our budget. But it is very strong here and nice growth from a year ago, of $17 million or 16% for the quarter. That's almost $46 million or almost 12% year-to-date.

Trans Mountain, again we did not have last year in there, although this way, if you look on the front page of the income statement, it does include last year of Trans Mountain even though KMP didn't own it then. But the way that we think is the right way to look at it, Trans Mountain was not a part of our distributable cash flow year ago. It is this year and essentially on budget for the year.

Let me drop down to G&A, which is about 15 lines down, segment earnings contribution below the segments there. You will see G&A for the quarter is up about $21 million from a year ago, it's up about $28 million for the entire year, is about $20 million above our budget. And the drivers of that one were Trans Mountain and that's in part an additional month of Trans Mountain. In our budget, we have the acquisition at the end of May. We actually did it at the end of April. It's in part a function of foreign exchange rate, which while they helped up in the segment, they help on the income aspect, they actually hurt on the interest expense that they basically made the G&A cost at Trans Mountain when you translate it from Canadian dollars back to U.S. dollars, greater in terms of U.S. dollars than what we had in the budget.

Legal expenses were up due to a couple of item that when we did the budget in November of 2006 we expect it to be settled, they ended up taking up longer than we thought to get settled and so we had additional expenses in 2007 related to those items that was about $7 million. Texas margin tax, which is a new tax, it is by about $5 million and then there were some additional headcount personnel expenses of about $3 million. And so that explains again the $20 million variance for the entire year between G&A and our G&A budget.

On the interest line, it's up from last year, for the quarter about $15 million, year-to-date about $56 million, but actually under our budget by a little over $4 million. So it came in right about where we expected it to be. Compared to a year ago, our debt balance is greater, both for the quarter and the year, our average rate is about the same, and truth in the fourth quarter, it is a little bit under where it was in the fourth quarter of 2006, and have seen a little bit favorable interest rate environment relative to a year ago. We expect that to continue in 2008. And then the change in the debt overall, I'll talk about when we get to the balance sheet.

So again, those are the items that dropped down to your distributing cash flow before certain items of about on a per unit basis about $1 for the quarter, about $3.65 a year-to-date. I'm not really going to talk about the front of the income statements, but it is again all the Trans Mountain changes and the other certain items, made those comparisons not meaningful. There is just a lot of noise moving in and out.

And so I will then go to the balance sheet, which is the last financial page in the press release. And taking a look at it and once again, it is a little bit distorted even on the balance sheet because of the Trans Mountain transaction. Again, we had to treat Trans Mountain as if it was owned by KMP since the beginning of 2006. What that means is what this shows the December 31, 2006 numbers that are here don't really reflect where KMP was at the end of 2006, because KMP at that time did not own Trans Mountain. And if you go back and look at what we reported a year ago, you will see numbers that differ from what we are sowing here. And that's because after that transaction was completed, we had to go back and restate the end of 2006 as if we had owned Trans Mountain. And so again that distorts some of the comparisons, but the most meaningful ones still apply and so I will touch on those. I mean, this is consistent with what we have been talking about, since the second quarter earnings call. We talked about it in July. We talked about it in October, talking about it again now hopefully we'll get beyond these when we get into 2008.

You will see the changes in these numbers, other current assets are up a little bit because primarily accounts receivable, PP&E is up as function of expansion CapEx, acquisitions, and then clearly offset by deprecation during the year. Investments are up as a function of our contributions to Rockies Express and the Midcontinent Express project. Deferred charges and other assets go down, and that's because again, the Trans Mountain goodwill is in here as of the beginning of the year and then Knight took a write down on that goodwill in the first quarter. And of course that write down, that initial goodwill balance has to be reflected here and then that write down and goodwill has to reflected here, that's the big change in that line.

Total assets about $15.2 billion, no stable and current maturities, I'll talk about when I talk about overall debt. Other current liabilities, AC [ph] is up some approved taxes, and interests are up some. Long-term debt, I'll talk about in a minute. Value of interest rates swaps just fluctuates with the forward curve for interest rates. The other line is moving as a result of two items; one is our hedges, which I would show up on this line and the second are the environmental and legal reserves, so that increase shows up on this line. Similarly, the hedges impact accumulated to other comprehensive loss. So that's what's driving the change there. Other partner's capital looks like it went down from a year ago. And in truth, if you go back and look at our December 31, 2006 balance sheet, what we reported at that time, other partners capital was about $4.9 billion and so if you compare to that, we are up about $951 million, and so we are up somewhere when we reported.

And again, even that increase if you go back to a year ago is distorted because we actually created equity through the Trans Mountain acquisition. So has KMP has secured Trans Mountain at Knight's asset value as opposed to what it paid for it, we actually created equity on KMP's balance sheet as a function of that. So again KMP is caring Trans Mountain on its book a greater event what it paid. And that created some equity. Again that's just accounting, don't consider it to be overly meaningful. And really for those reasons, we don't think the debt of cash calculation is an overly meaningful calculation, I think that's true to MLP's overall. I think it's especially true, when you have these kind of distortions going through your other partners capital line.

So we'll focus more as we have been on the debt to EBITDA line. And so if you go to that section, you'll see total debt a little over $7 billion, that's up from a little over 5.7 at the end of December. These numbers are good comparisons. So we're up about $1.3 billion, for the year. Now for the quarter, if you go back and you look at where we were at the end of September, we were just a hair under $7 billion at the end of September, so in the fourth quarter, debt only went up by $11 million.

So I'll talk about those changes in debt in just a minute. Real quick look in at debt to EBITDA, you'll see at the end of the year we are at 3.4 times, rather at 3.4 times, at the beginning of the year we were at 3.3 times, at the end of September we were at 3.7 times. And so the debt to EBITDA measure, which we think is the more meaningful measure of the strength of our balance sheet, has improved since the end of the third quarter. It is up slightly since the beginning of the year; that increase is consistent with our expectations. We are right where we expected to be and at 3.4 times the lead that we have a very strong balance sheet.

So let's talk about the change in debt real quick. As I said, for the quarter, the change is about a $11 million. Year-to-date it's a little under $1.3 billion. Talking about year-to-date a real quick, our expansion CapEx was a hair under, really about $1.55 billion. Our contribution to our equity investments again primarily Rockies Express and Midcontinent with a little under $300 million in total acquisitions was a little over $700 million, where that get you is in between $2.5 and $2.6 billion of cash investments, so the total that we put out for expansions and acquisitions. If you are going to finance that 50-50 then you would expect to get to go up by right around $1.3 billion, which is exactly what it did. So consistent with our financing expectations is the increase in debt.

For the quarter, expansion CapEx was actually about $560 million so it's a very big quarter. Contributions to Rockies Express and Midcontinent were about $230 million and acquisitions were essentially zero. Now offsetting that for the year we did assume about $43 million in debt when we acquired the other 50% of Cochin and so that is an incremental amount $43 million as on to that debt amount. And then the sources of cash of the equity that we raise to finance the equity portion of this expansion and acquisition CapEx is as follows.

Assets sales were about $300 million both in the quarter and for the year. Equity issuance was about $343 million for the quarter, about $641 million for the year. The KMR distributions were essentially another equity issuance, they totaled about $63 million for the quarter, about $227 million for the year.

And then we had a source of cash from working capital and other items about $85 million for the quarter, a little over $150 million for the year. So, again those things net out with the investments and expansion CapEx to get to your change in debt of $11 million for the quarter and a little under $1.3 billion year-to-date.

Now, I talked about sources of cash and working capital and other items, where that's coming from real quick. ARNAC for the quarter were actually a use of cash of about $60 million, year-to-date a source of cash about $13 million. Other current assets and current liabilities were a source of cash in the quarter of about $55 million, year-to-date about $90 million. Distributions versus earnings from equity investments, basically flat for the quarter, a source of cash at a little over $30 million year-to-date, largely related to the refinancing of Red Cedar we put on additional debt there, distributed additional cash out.

We just terminated a couple of interest rate swaps throughout the year. That cost us about $15 million in cash in the fourth quarter and we're neutral on those terminations for the year. We did have incremental margin deposits for our hedges of about $30 million for the quarter, about $70 million year-to-date. We had other uses or actually sources of cash from operating activities, about $92 million for the quarter, about $114 million year-to-date. A lot of that is timing on dock premiums that we collect at our Westrich facility in British Columbia.

For the year, gas and NGLs and storage went down, over the source of cash of about $12 million, debt issuance cost costs us about $14 million for the year; that was the use of cash. Changes, differences in actual cash and bank accounts versus book; the change is about $18 million use of cash for the quarter about $27 million use of cash year-to-date.

Our CapEx accruals, so this is CapEx for the cash to pay our suppliers that have not yet gone out, about $63 million source of cash for the quarter, about $78 million year-to-date. And then just ins and outs related to Trans Mountain adding that in at the beginning of the year relative to where we ended up, the use of cash year-to-date of about $71 million. Now again those are a lot of items and a lot of numbers, but they sum up to right around $85 million source of cash for the quarter, and a little over $150 million source of cash year-to-date.

Now expansion CapEx, talk about that real quick. Again, the numbers were big. Excluding Midcontinent and Rockies Express, for the quarter is about $560 million, year-to-date almost $1.56 billion or $1.57 billion. So again, we talked about this. We have a number of very good expansion projects ongoing. We are going to see some very good results from that going forward. The real high level what those were: the Product segment we spent about $72 million in the quarter, about $219 million for the year. The El Paso to Phoenix expansion that came online in December was the biggest piece of that and some other terminal and account net expansions.

From a natural gas side, it's been about $95 million in the quarter, about $233 million for the year. The Louisiana Pipeline was a big piece of that although it was less than we thought we would spend in 2007. That just got pushed back primarily to 2008. TransColorado expansion, some storage expansions. There are a number of things going on in the natural segment at KMP.

At CO2, expansion CapEx about a $117 million for the quarter, $387 million year-to-date, capitalized CO2 as a piece of that, the South West Colorado expansion that Rich talked about those expanding the source fields and the Cortez pipeline was a big piece of that clearly continued expansion SACROC and at Yates to slightly lesser extent.

On the Terminal side, tremendous year in terms of expansion CapEx, $146 million of the quarter. $472 million year-to-date, as Rick mentioned we bought on 1 billion barrels of liquid storage in the fourth quarter, we're going to bring on 3.75 million barrel, new liquid storage in the first quarter of 2008. We have contracts for all of that storage. That was taking place in Edmonton, Alberta and Houston ship channel on the New York Harbor and Chicago, to a number of places where we're adding that capacity. And we added some expansion going on primarily at Pier Nine and Shipyard River on the bulk side.

And in the Trans Mountain clearly, we have one major project continuing and another major project that ended earlier this year. We spend a $128 million in the quarter, $265 million that KMP owned the asset in 2007. Most of that was on the Anchor Loop, which is the project that is ongoing a little bit of it related to the pump station expansion, which was completed earlier this year. So again in high level expansion CapEx and I think that wraps up the balance sheet. I'll hand it back to Rich.

Richard D. Kinder - Chairman and Chief Executive Officer

Okay. And with that, we'll take any questions you might have. Ana, you want to jump back on?

Question And Answer

Operator

Certainly. [Operator Instructions]. Okay, our first question comes from Noah Lerner. Please state your company name.

Noah Lerner - Hartz Capital

The company name is Hartz Capital. Thanks guys, lot of information. Quick follow-up, I found it interesting you mentioned the use of pipeline for ethanol. To-date my understanding has been conventional wisdom says that ethanol won't go through the pipelines, and I was just curious what kind of issues you've run into and if you think long term this might be... might be able to lead into use of long haul pipes for ethanol transport?

Richard D. Kinder - Chairman and Chief Executive Officer

Well, that's a very good question. And it is a very difficult conundrum to solve. As you may know, the Brazilians have done this for some period of time. The conventional wisdom of course is that ethanol acts as a solvent. So it picks up any extraneous material that you have in your pipeline and theoretically you can dirty up your ethanol and have impact on other product that you are moving through the line like gasoline or jet fuel in a batch line. So, in order to do this, it requires a certain amount of capital to absolutely clean the pipeline to install some new equipment to make sure we keep it clean, beyond what you do just as a normal batch line. We are working all that in cooperation with PHMSA, the Department of Transportation and other regulatory groups, all of which are pretty enthusiastic about this. And we believe that on that relatively short line there is a good chance we will be able to introduce that as I said in the mid-year timeframe, second or third quarter, but only if we and the regulators get completely comfortable with the fact that we can do it without harm to any of the product that's moved through.

Now, I don't want to overemphasize the benefits of this. This is a relatively short line. Doing it on a 100-mile line is different from doing it on a 1000-mile line. But certainly it would have I think significant ramifications if we're able to do it even on this relatively short line. And of course it would... if you could extrapolate that to a broader area, would pay enormous dividends because the biggest single logistical problem in ethanol is that it's almost all produced in the upper Midwest where the market part is limited, it needs to go to California, it needs to go to the East Coast, and increasingly given the pricing arrangement it needs to go to other places in the country, specifically including Florida and the Southeast.

So it could play a very important role in really implementing the mandate that's federal government's put on. But again, we are pretty cautious about things like this and right now all we can say is we think we have a better than 50-50 chance, pretty good chance at getting this done in this relatively short line and then we will see what happens after that, but it is very interesting.

Noah Lerner - Hartz Capital

Great, thank you very much.

Operator

Our next question comes from Dan Jenkins. Please state your company name.

Dan Jenkins - State of Wisconsin Investment Board

Good afternoon, State of Wisconsin Investment Board.

Richard D. Kinder - Chairman and Chief Executive Officer

Hi, Dan, how are you?

Dan Jenkins - State of Wisconsin Investment Board

Pretty good, how are you doing?

Richard D. Kinder - Chairman and Chief Executive Officer

Fine.

Dan Jenkins - State of Wisconsin Investment Board

Few things here. I was just wondering given that REX-West has gone into service, first of all, does that mean that you need to now finance that out of KMP? And then secondly, you mentioned $500 million increase in your outlook and you mentioned the three main pieces where the REX-West, the hedges and then other items, I was wondering if you could kind of break out the $500 million between those three pieces.

Richard D. Kinder - Chairman and Chief Executive Officer

Well, let me answer that one first, we are going to go through that in detail at the analyst conference in about 10 days. We'll take you through that piece by piece. But the main parts are what we said, REX-West coming online, the increased prices on the hedges on our oil production CO2 and then of course as Park mentioned, things like our terminals business and other expansions we've done that bring all this new terminal capacity online, for example, will be a nice additional addition to terminals earnings. Now with the REX-West being in service, I don't know Park, do you want to comment?

C. Park Shaper - President

Yes, we will, and as we've discussed before, we will put in place permanent financing as those pieces of REX come in service. As I was discussing, we've made a significant equity contribution to Rockies Express in the fourth quarter of last year. We will continue to look at it as the year progresses terming up some debt at Rockies Express, and consider the financing that we need to put in place once REX-East comes on.

Dan Jenkins - State of Wisconsin Investment Board

And on the REX-East, I was curious if you could update us where you are at on the regulatory approvals, what still needs to be done, what are you waiting for?

Richard D. Kinder - Chairman and Chief Executive Officer

Yes, we've got Scott Parker in the room who runs our Natural Gas Group. Do you want to just update briefly on REX-East, Scott?

Scott Parker - President, Natural Gas Pipelines

Sure. We are still on schedule with FERC. Right now the FERC is scheduled on behalf of them [ph] on the right way, which we participated in and we are moving forward on the schedule that we publicly released before that the FERC affirmed and are still projecting our end services that Rich had described.

Richard D. Kinder - Chairman and Chief Executive Officer

And what we hope is that we'll be able to get all the approvals, actually start construction, I guess, in the May timeframe. Is that about right?

Scott Parker - President, Natural Gas Pipelines

That's right and then in the summer we kick off construction during the regular construction period and construct all the way through and up until in-service like December.

Dan Jenkins - State of Wisconsin Investment Board

Okay. And then finally, you were talking too fast for me on the year-to-date CapEx for the Products Pipelines and Natural Gas Pipelines. So, could you give me those numbers again?

C. Park Shaper - President

Yes, absolutely. So, year-to-date expansion CapEx on the Products Pipelines is $219 million and on the Natural Gas Pipelines $233 million. And we will be providing more details on this next weekend at the conference.

Dan Jenkins - State of Wisconsin Investment Board

Okay thank you.

Richard D. Kinder - Chairman and Chief Executive Officer

Okay, thank you.

Operator

Our next question comes from John Edwards. Please state your company name.

John Edwards - Morgan Keegan

John Edwards from Morgan Keegan. Good afternoon everybody.

Richard D. Kinder - Chairman and Chief Executive Officer

Hi, how are you doing today?

John Edwards - Morgan Keegan

Doing well. Nice quarter. Rich, can you just briefly give us an update on what the... what's your... I know you'll go in to this at the analyst meeting in detail, but what's the backlog now on your capital expansion projects?

Richard D. Kinder - Chairman and Chief Executive Officer

Yes, we... as we've said, we have... it's actually now a little over $6.5 billion of projects that we are committed on and we've actually with REX-West and that's a big part of it, Steve Keane is sitting right here, about $3.5 billion is now in service. So we have roughly $3 billion or a little over still to bring in service between now and basically middle of '09 for the most part.

John Edwards - Morgan Keegan

Okay, thank you. That's all I had.

Richard D. Kinder - Chairman and Chief Executive Officer

Okay John.

Operator

[Operator Instructions].

Richard D. Kinder - Chairman and Chief Executive Officer

Okay, sounds like we have answered your question. Park did such a good job that there are a fewer questions. Well, anyway we appreciate you listening in. And again, we will have our investor conference here next week and we look forward to seeing a lot of you in person. In the instance you are not, it will be webcast and you can listen to it. So thank you very much and have a good evening.

Operator

That concludes today's conference. You may disconnect your line at this time.

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Source: Kinder Morgan Energy Partners, L.P. Q4 2007 Earnings Call Transcript
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