金德摩根 (KMI) 2003 Q3 法說會逐字稿

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particularly with the Yankees, Red Sox game just started you will have some of your interest diverted elsewhere. As usual we'll be talking about the Kinder Morgan Inc. family of companies. Kinder Morgan Inc. Inc., which trades in the New York Stock Exchange under KMI and that's the way I'll refer to it is one of the largest mid stream energy companies in America. Among its other assets it also owns the general partner interest in Kinder Morgan Inc. Energy Partners which I'm refer to as KMP. KMP of course is the largest master lender partnership in America. We will also be making statements throughout the call that are subject to Securities Act of 1933 and the Securities Exchange Act of 1934. I'll give an overview of the situation and the earnings, and C. Park Shaper, our Chief Financial Officer, will provide financial details in his usual format of ultimate details. And then Michael C. Morgan, our President, Park and I will be available to answer any and all questions that you may have.

Let me start out by saying that the third quarter of '03 was another positive quarter for the Kinder Morgan Inc. companies. KMI had net income of $95.6m, or $0.77 a share, versus $80.4m or $0.66 a share in the third quarter of '02, an increase of 17% in earnings per share, and an increase of 19% in total earnings. Cash flow continues very strong for the quarter, as Park will talk to you about, and year to date, we have now had free cash flow of $418m. That's well on track to make our amended goal of $530m. As you will recall, we started the year with a budget of $470m, so cash flow continues very strong, and Park will take you through that.

At KMP, we've increased the distribution per unit from $0.65 per quarter or an annualized rate of $2.60 per year to $0.66 per quarter or $2.64 a year. This contrasts with a year ago when we were paying out $0.61 a quarter or $2.44 a year. An increase of a little over 8% and that's very consistent with our objective that we've often spoken of, of increasing distributions per unit at KMP by about 8% to 10% a year from internal growth at KMP without acquisitions. I might add that this distribution increase for this quarter is the 17th increase in distributions over the six and a half years since we formed KMP.

As I said, Park will review the financial performance of each business segment at both KMI and KMP in just a few minutes but I'd like to discuss some important strategic and operational accomplishments for you and provide an outlook on our future performance. First, a comment regarding corporate governance. The boards of our two companies today approved certain steps and is detailed in the earnings release, but they include the formation of a nomination and governance committee and outside lead director for both companies. We believe we have adopted all necessary items as required by all relevant New York Stock Exchange and S.E.C. requirements, even though some of those have not yet been formally adopted by those two agencies. But at any rate we believe we are in full compliance with all of those. Now we have implemented those effective today. In a broader sense I'll remind you of course in my rather jaundiced view of corporate governance, the key thing is are you running it for the shareholders or the officers? I assure you we are running it for the shareholders. We are running a company by the shareholders for the shareholders.

Let me talk about strategic and operational issues. Let me start with the products pipeline segment of KMP. And again Park will take you through the financial numbers. But I want to talk a little bit about the volume numbers. If you look at the volume numbers, included in our earnings release today, they show a decline in overall refined product volumes of about 1.6% for the third quarter, and about 2.3% year to date. As we've previously indicated, those numbers, in order to get apples to apples comparable period of '02, need to be adjusted for the impact of the fact that MTBE in California has now been replaced by methanol on our Pacific system. MTBE is blended at the refinery and move through the pipeline. While ethanol cannot be moved through the pipeline and is blended at the terminal. So we've gone through some length to strip that out. This impact would reduce the 1.6% decline in the third quarter to about a .6% decline and for year to date, the 2.3% decline goes to decline of 1.3%. And incidentally, adjusted for that change the total volumes on the Pacific system which we kind of use as a bell cow, the total volumes on the Pacific systems of all refined products showed an increase of 1.3% for the third quarter and a little less than 1% year to date. Now, that contrasts with our long range target of about 3% and with a national average of historically in the 1% to 2% range. We feel very comfortable that we will experience about a 3% gain in volumes and about a 4% total revenue gain year to year. This ethanol adjustment is important and it reflects economic reality. As you know ordinarily throughput volumes are very important in evaluating the economic performance of our products pipelines. In this case, the loss of revenue occasioned by not moving this ethanol through our pipeline is more than offset by the fees we earn from our customers for blending ethanol into the product at our terminals, and we've said that all along. And Park will take you through the financial numbers which shows of course revenue is increasing and profits are up at the Pacific system.

And the other issue on products volumes we did have some supply issues at certain refineries that ship on the plantation system, which inevitably impacted the volumes on that system on the third quarter. Adjusted with the impact of replacing MTBE with ethanol on our Pacific system all of our pipelines except plantation showed increases product throughput on third quarter and year to date.

The other significant development in this products pipeline segment was our purchase announced in September and closed at the beginning of October of five products terminals in California, Arizona and Nevada from Shell. While this was relatively small with the purchase price of about $20m, and as we indicated we intend to spend $8m to increase the capacity of these tanks, then it's important to note that this is a strategic transaction for two reasons. First of all, it's very strategic to our Pacific products pipeline system. They're right on our pipelines and in a number of cases right next to present terminals that we have. And secondly and maybe more importantly, it demonstrates the willingness of majors to divest mid stream energy assets. We anticipate additional and larger acquisitions of similar terminals over the next six months or so. More to come about that later.

Now, turning to Natural Gas Pipeline of America, NGPL, some important trends there also. As you know the driver of financial performance at KMI, at NGPL is the ability of our team to renew and extend transportation and storage contracts. Now, historically, these contracts have an average life of about three years, and as we've explained before, as they expire, they need to be renewed. So about 30% or so of the contracts should roll over on average every year. We've had an extraordinarily good year of renewing contracts. We are now between 98% and 99% sold out on long-haul transport for the winter season. And our storage is virtually 100% sold out for the next several months.

But let's look further ahead. If you look at calendar year '04, we only have 14% of our long-haul transportation volumes rolling over next year. That contrasts to much higher volumes ordinarily as I said, ordinarily about a third, and in some cases as much as 40%. And the same is true on both market storage and field storage. We have a much lower than normal rollovers in 2004. All of this I think is a very positive sign for NGPL and something I've said before, you ought to watch us on and check us on. What it demonstrates to me as I told our board today our team at NGPL is very proficient in working with our customers to establish and maintain mutually beneficial contractual arrangements. Because frankly you don't roll these contracts over if your customers aren't satisfied with your performance and if they don't really need the capacity whether it's long haul transport or storage.

Now let me talk about CO2 operations, that is of course part of KMP and one of our really fast-growing segments. As Park will tell you they had an outstanding quarter. Earnings before DD&A was up 56%for the quarter and close to that for year to date. The average [missing audio], an increase of 54%. Year to date, we've averaged 19,200 barrels per day of production, that's up 56% from year to date numbers for 2002. In the third quarter, the increase quarter to quarter from rolling quarter from the second quarter of '03 to the third quarter of '03, was about 7%. Now, that sounds kind of nice, but really sort of hit a plateau in the third quarter. As some of -- we were putting on some new patterns during the quarter. That's simply where you have an injection well and then several withdrawal wells around it. As we were doing that. And we had some minor delay in construction due to the weather. Put another way, like I say it was kind of a plateau we hit even though we averaged close to 21,000 barrels. I'm happy to say that here in the first half of October, I think we moved significantly out of that plateau. We are now over 23,000 barrels a day, in the last couple of days we've actually been right at 24,000 barrels. For the full year 2003, we expect to average a little over 20,000 barrels per day, which is consistent with the original budget we started at the beginning of the year and we expect to be producing about 25,000 barrels per day, maybe a little over, by year end, again consistent with our original budget target. So in terms of Sack rock production, I think things are very much on track to achieve our goals for the year.

On the acquisition front in CO2, we're still continuing to discuss with Marathon Oil Company the acquisition of its interest in operator ship in the Yates field, which is of course part of the Permian Basin. Those discussions seem to be going well and we're hopeful of signing and closing this transaction during this fourth quarter of 2003. Although as I've said before, nothing is certain until the horse is in the corral and you put the saddle on. But things look good on that front.

Let me talk a little bit about TransColorado Pipeline which is part of KMI and more importantly a little bit about our general strategy on transporting natural gas out of the Rockies and again I'll bore you to tears with some of the numbers here. But as you're aware, the Rocky Mountain area particularly Wyoming and Colorado constitutes the fastest growing on shore producing area for natural gas in the lower 48 states. Clearly, there's a great need for additional pipeline infrastructure to move that gas toward key markets in the Midwest and elsewhere. We are already a large player in that area. We have our Kinder Morgan Inc. interstate gas transmission, our Trail blazer system, pony express, TransColorado and red cedar system, add that all up we are now moving over 2b cubic feet per day out of Colorado and Wyoming making us we believe the second largest transporter of gas out of those two states. We intend to expand our systems in this area whenever we can obtain long term throughput agreements from credit worthy shippers. In this regard, we announced on September 25th our 125m cubic feet per day expansion of our TransColorado system with all, all of that additional capacity fully subscribed for ten years by a third party credit worthy shipper. And this expansion will move additional gas from the rapidly developing [inaudible] western Colorado, to the Blanco New Mexico hub. We are pursuing additional potential projects out of the Rockies again Colorado and Wyoming and believe there is real potential for growth in this region. But we will not do these projects without good long term throughput agreements. But it could be very significant for us in the future.

We'd also like to talk briefly about our Power segment which is less than 2% of our earnings at KMI. As you know, about a year ago, we scaled back that power operation significantly. We now own interest in three facilities near Denver. And one near Detroit, all told under long term agreements, where other parties bring the gas and market the power and we get paid a fee for producing the electricity. In addition, as you know, we own a preferred stock in a plant near Little Rock, Arkansas, the Wrightsville plant. Mirant company owns the common stock, operates it brings the fuel to the plant and markets the power. Mirant as you probably know filed for bankruptcy in July and last week put this plant into bankruptcy. We have been working with Mirant for some period of time to restructure ourselves that facility. And as you know, at the end of last year we significantly reduced the value of our investment in that plant. We've had a number of questions since Mirant did file, push the plant into bankruptcy and the short answer is we don't know the impact of the plant's filing on these restructuring efforts that we have. We're not in a position now to predict what any specific outcome might be or that it would become necessary to reduce what's a pretty minimal carrying value of our investment any further. But we assure you we'll watch that situation clearly and decide what to do over the next few months.

I think it's important to stress three things. With regard to this plant, first of all, in the event that we decided to do anything in terms of riding down the plant, we did not have any earnings or cash flow from this plant in our '03 budget. We do not have it in any budget or projections beyond '03. And any write-down or reduction in carrying value that we take would be pretty minimal. $30m after tax or less. And of course, it would be noncash in nature. And again it would have no impact on future earnings or cash flow of KMI. So while it's not terribly strategic or significant, we've prided ourselves on being completely open with you, and responding any time there's an issue that impacts us. And certainly the fact that that plant has filed for bankruptcy is an issue for us, and we'll keep you posted on it.

Now let me talk a little bit about our outlook for the remainder of '03, and for '04. First of all, regarding earnings at KMI. Our published '03 earnings budget target for KMI was $3.18 a share. We posted that last January on our Website. In April, we raised the target to a range of $3.23 to $3.28. We now anticipate we will finish the year at the high end of that range. That represents a year-over-year earnings per share growth of 15%, very consistent with what we've talked about in terms of growth targets at KMI.

Turning to KMP, there's been no change in our outlook there. We still expect to declare cash distributions totaling at least $2.63 for the year and end the year at an annualized run rate of $2.72. Both of these represent 8% increases to the comparable numbers for '02 and virtually all of that improvement has come from internal growth so again very consistent with our outlook there that we would expect 8% to 10% growth from internal growth at KMP.

Now, we're already here in October getting a number of questions regarding '04. Let me hasten to say that we have not completed our budget process yet for '04. We're just into it now and will not complete it until shortly before Thanksgiving. When we do complete the process we will release as we always do our earnings per share targets for KMI, and our distribution per unit targets for KMP. And then we'll post the detailed budget on our Website before the date of our January analyst conference, and at that conference we will as usual go through all of our numbers, and our assumptions behind those numbers for '04. We do, however, anticipate completing '03 with very strong cash flow at KMI. And that that trend of increasing free cash flow will contribute -- will continue unabated into 2004. Based on this strong cash flow, we would anticipate recommending to the KMI board of directors at the January 2004 meeting that the present KMI dividend which is $0.40 a quarter or $1.60 per year, be substantially increased for 2004. While I don't think it would be appropriate to specify our number, when our '04 budget process is not complete, and certainly we need to review that budget with the rating agencies before we formalize the increase, I think you can safely assume that the new level of dividend on an annualized basis would be at least, I will emphasize at least $2.00 for calendar year '04 or better. And of course that would be even if it were at $2.00, a 25% increase in dividend from where we are today.

So again, I want to emphasize we are running these companies for cash flow. We continue to experience very strong cash flow, as Park will take you through. We intend to share that cash flow with our constituencies. We will continue to pay down debt. We will continue to pay a good dividend to our shareholders, particularly given the favorable taxation of dividends today, and we will continue to buy back some shares from time to time. So again, we're delighted with the third quarter, and year to date, and with that I will turn it over to Park for the financial details. Park.

All right, thanks Rich. As per usual I will start with KMP and so hopefully all of you have your press releases in front of you and if you turn to the first financial page for KMP, I'll start at the bottom and you'll see that the board today declared a distribution for the third quarter of 2003 of $0.66, that's up from $0.61 a year ago, as Rich mentioned that's an 8% increase. That is also compared to on the line immediately above that $0.67 of distributable cash flow or coverage, and so we -- we had excess coverage again in this quarter. If you look for the nine months, we will distribute $1.95 including a distribution that will go out next month and have coverage of $2.03 coverage ratio of 1.04. And it also represents an 8% increase over the distribution for the first three quarters of last year of $1.81.

A couple of other things to note on this first page. Sustaining capital expenditures, on a per-unit basis they were down a little bit versus last year, on a total dollar base they're actually up. For the year, we, the nine months to date, sustaining capital expenditures have been a little over $62m, compared to $52m a year ago. Our budget for sustaining capex this year is considerably larger than it was in 2002. The budget increased to $95m from about $77m in 2002. We currently expect we'll come in a little bit under that $95m budget for the year.

Depreciation, depletion and amortization is up significantly. It's 20% on a per-unit basis in the quarter. It's up 14% on a per-unit basis for the year. I'll remind you when we went through the budget in the investor conference in January, we talked about the very conservative assumptions that we had modified for this year related to depreciation, especially related to the Sack rock project and that is what is driving this rapid growth in depreciation. And that has an impact on the earnings per unit. You'll see for the quarter, the earnings per unit were $0.49 compared to $0.50 in the quarter a year ago. For the nine months, $1.47 or $1.49 after the change in accounting principle, compared to $1.46.

Now, the reason that the earnings per unit is not growing as rapidly as the distributable cash flow or the distribution, again are the items that we went over back in January. They relate to the increase in depreciation, they relate to the growth in distribution, because as we grow our distribution, that has a negative impact on our earnings per unit. And they relate to the additional units that we had outstanding. And this is the last one is actually different from our original budget because we did not project in our original budget that we would issue units in 2003. And I'll remind you that in May of this year we issued about $170m, a little over $170m worth of KMP units. And so strength in the balance sheet and still able to meet our targets. Now as we always talk about, we think the relevant and most meaningful metrics for KMP are the distribution and distributable cash flow. But I wanted to make those points about the earnings per unit as well.

With that why don't we go to the second page and we can walk through the segments and talk about where this growth came from. Starting with products pipelines and Rich already covered the volumes. But you'll see earnings before DD&A are actually down slightly. About $600,000 from the quarter a year ago. And that is all driven by Coachin (ph). Coachin had a rupture and fire in the third quarter. It was out of service for 29 days, it is in service now but not at the same level as it was. Coachin is an NGO line that runs out of Canada into the Midwest. We own 45% of it operated by BP. That had a reduction of $3.2m in the quarter year over year. So again you see that all of the reduction came as the result of Coachin. When you look at the nine months you'll see products pipelines up about $8.5m from a year ago. The pipelines are the pieces of product pipelines that are up include Pacific, Cal Nevada, central Florida, Transmit (ph)north system are all above where they were a year ago. Plantation is slightly below, and Coachin is below.

Looking at the full year we actually expect that products pipelines will come in slightly below their budget for the year. The total budget is a little over $448m. They will probably be about 2% under that budget, that's 2% under that when we finish the year. Natural gas pipelines up $10m for the quarter. They're up $37m almost $38m year to date. The intrastate themselves were up almost $12m for the quarter. They're up $20m year to date and that's excluding the $20m year to date is excluding the impact of North Texas and Monterey. Again if you add in the impact of North Texas and Monterey, intrastate up $31myear to date. Natural gas pipeline will be on its budget, slightly above it for the year. CO2 pipelines again Rich mentioned the significant growth there about 56% or $19m in the quarter. It's up almost $50m or 53% year to date. Again driven by the tremendous volume growth at Sack rock and CO2 is also exceeding its budget. It's already well over 81% of its budget and it was projected to grow throughout the year. And so the fourth quarter will likely be -- fourth quarter was budgeted to be more than 25% of its annual budget. We expect again that CO2 will finish significantly ahead of its budget for the year. Terminals are up about -- sorry up about $6.4m for the quarter. the $3.6m is the internal portion of the growth in the terminal segment. And there it, the remaining $2.8m is what the small impact from acquisitions that we've had this year on the terminals segment. Terminals are up about $24m or 16% year to date. They are right on their budget, actually just a touch ahead and we expect that they will finish just slightly ahead of their budget. What that means is when you sum up the segment earnings before DD&A you will see for the quarter it's up about 13% for the year, it's up about 15% and we expect that we will end the year ahead of our budget in those segment earnings before DD&A.

Next I'm going to drop down to the G&A which as you go down a couple of sections you'll see underneath the segment earnings. G&A for the quarter about $35.5m up from about $27.5m a year ago or about a $8m increase and for the nine months about $17m above where it was last year. We had projected some growth in G&A due to increases in insurance. The small acquisitions that we've made, we've experienced an increase in G&A even beyond that budget, primarily because of some legal expenses, and some health, pension and other benefits expenses. Part of this is timing and we'll come back a little bit in the fourth quarter but we do expect G&A to end the year slightly ahead of our budget. The net debt cost, you'll see are down for the quarter about $1.6m. They're actually up for the year about $5.3m. What we have is a balance that has increased from a year ago. For the quarter the average balance, and this is just a simple average so it's very rough, is about $163m more debt outstanding than it was a year ago. And year to date, again simple average, about $600m more outstanding than a year ago. The reason it's so much bigger for the year to date is because in the beginning of 2002 we acquired the Tehas (ph) assets which had dramatic increase in our debt from the beginning of 2002. But those of course have been offset by a reduction in rates. Our average rate for the quarter is down about 40 basis points from a year ago, and year to date down about 70 basis points from a year ago. Net results in what you see is again the reduction in interest for the quarter, a slight increase for the year as a result of the higher balance, but we will come in below our budget overall on the interest line for the year.

The last two items really are minor, minority interest which is primarily the general partner and a little bit of some terminal minority interest, and the cumulative effect of the change in accounting principle from the first quarter. That gets you to net income which is grown 10% for the quarter and almost 16% for the year. So again very nice growth in net income.

On the volumes, Rich has really talked about the products pipelines and the natural gas pipelines. There aren't many changes. I do want to touch on the CO2 pipelines, you'll see Sack rock volumes, below that weighted average oil price per barrel, about $23.50for the quarter, about $24.09 for the nine months. The reason I point this out is just to demonstrate the impact of our hedging program. Current prices and you know, nine-month prices for oil are in the $30s as opposed to what we're realizing which is in the $23, $24 range. Again what we do is try to lock in those prices as far in advance as we can so that we have price certainty around our oil production. For 2004, we are hedged at about 90%. For 2005 about 70%. For 2006 about 60% of our expected production. We are layering hedges on all the way out into 2009 at this point.

With that why don't I go back to the first page of the earnings release. I'll walk down this page quickly. At the top revenues are up considerably but revenues are not overly meaningful. We don't pay a whole lot of attention to revenues. They fluctuate with natural gas prices primarily and that's what's driving this change. That same impact hits operating expenses so you'll see operating expenses are up as well. DD&A we discussed we're very conservative in how we are depreciating the production at Sack rock, and as that change which is implemented at the beginning of this year has caused a dramatic increase in the DD&A for the year. G&A, we discussed. Taxes other than income taxes are up a little bit. You'll see operating income up about 8% for the quarter and about 14% for the year. Earnings from equity investments is down slightly. That's the impact primarily of Plantation. And then interest expense we discussed other and minority interest are really no significant changes which again drop you down to the net income which is up about 10% for the quarter, and about 16% for the nine months.

With that let's go to the balance sheet which is the last page of the KMP earnings release. Real quick on the asset side, not much change. PP&E is up about $387m. That's a result of capital expenditures. Now you see some shifting in investments as a result of the dissolution of the MKM partnership. That number went down. Total assets is about 8.7b up from a little under $8.4b at the beginning of the year. On the liabilities side, the notes payable and current maturities I'll cover when I talk about the overall debt. Other current liabilities is down and that's a results of some reclassification, and then just some reductions in prepayments for some of our noncredit worthy customers, have substituted letters of credit for prepayments. Long term debt I'll cover with the debt. Market value of interest rate slots down slightly from the beginning of the year. The other are just other liabilities, basically unchanged. Minority interest unchanged, partners capital up about $153m from the beginning of the year. Takes you down to the total debt of $3.9b, that's up from a little over $3.6b at the beginning of the year. It's an increase of about $281m. It takes our debt to toll cap from about 52% from about 51% at the beginning of the year. And let me reconcile for you that $281m increase in debt outstanding. And essentially at KMP the reason that debt goes up is because of acquisitions and expansion projects and it's offset by any equity that we might issue.

Taking the last one first for the year, we issued about $173m of equity, and then the KMR distributions which are made in additional shares and essentially a distribution reinvestment program equate to the raising of another $92m of equity. So again, an actual offering of about $173m, KMR distributions of another $92m. We have had acquisitions of about $31m, expansion and inclusion of about $346m, and then working capital and other items, that total a use of cash of about $165m. That's a big number, I'll walk through what those items are for you. But again if you total those numbers up you'll get to about the $280 million increase in debt. Taking that working capital and other items, $44m of that was a rate case payment that was made back in April. We talked about that in the second quarter. About $50m of that was really timing on an inter company issue but that was settled at the beginning of the year. Then there's about $31m of that that just happened used in this last quarter in the third quarter that is related to interest payments. The big times of the year that we have interest payments are in September, it's really kind of the August-September time frame, and then the February-March time frame. So our semiannual interest payments are concentrated at those two points in the year. And so you have a reduction from the end of the second quarter and from the end of the year to the end of the third quarter and it's about $31m of a use of cash. And then accounts receivable and accounts payable are both down from the beginning of the year but payables are down about $35m more than receivables, and so that's another $35m use of cash there. And those total up to that working capital and other number which again is about $165m. Now, purely on the working capital side, and this should be clearly evident just because of the accrued interest, we would expect a source of cash from working capital in the fourth quarter. And so we expect that some of that cash will come back to us in the fourth quarter.

On the expansion side, you know, I commented that there's about $346m expansion capital, so far this year. That's largely at CO2 on the Sack rock we spent about $193m to date and then of course we have various other projects going on the products pipelines, primarily ethanol expenditures at our terminals at the natural gas pipelines primarily the completion of the Monterey pipeline and then our liquids terminals which is primarily the buckeye pipeline which is another interconnect with our East coast our New York harbor terminal and then additional tanks on the East coast some in the Houston ship channel and some in the Midwest. So that's the balance sheet for KMP.

With that I will go to KMI. And so again on the KMI earnings release, if you go after the text you'll find the financial pages. I'll start at the bottom of the first financial page. You'll see diluted earnings per common share about three lines up from the bottom of $0.77 as compared to last year's $0.66 an increase of 17%. And then for the year about $2.43 compared to $1.95 an increase of about 25% year to date. Again, as Rich mentioned, our expectations for the year is we'll end up somewhere between $3.23 and $3.28, we expect we'll be at the upper end of that range.

With that I'll go to the second page, talk about where that growth is coming from. The top line is equity and earnings of KMP. But the best place to see the impact that KMP has on KMI is in the middle section. It's titled earnings attributable to investments in KMP. And here we back out the portion of KMR which we do not own. And you see at the bottom of that section, pretax KMI earnings from investments in KMP of $100m from the quarter up from about $88m a year ago, and for the nine months, $293m up from about $248m a year ago. So tremendous growth, about 14% for the quarter, and about 18% year to date. So again, the growth in earnings from KMP is driving the growth at KMI.

NGPL is the next segment. You'll see it's up about $3.5m for the quarter, about 4%. The number you see here shows a growth of about $8m year to date or about 3%. But the truth is as we discussed in the second quarter there's about $4m of earnings that shows up down in the interest expense line, it reduces the interest expense line. It is really related to NGPL, we consider to be a part of NGPL, and thus we would consider their year to date growth to be about $12m or over 4.5%. NGPL is on track to hit its budget for the year. Trans Colorado, $4.9m compared to $4.8m a year ago basically flat. Year to date $17.5m compared to $7m tremendous growth year to date. Now, an unusual issue to notice for the quarter, a year ago, we actually owned -- only owned 50% of TransColorado so the total results for the pipeline actually are down in 2003 for the third quarter relative to the third quarter of 2002, and that is because of the compression in basis differentials. Now, that being said, because basis differentials were so strong in the first half of the year, and especially in the first quarter, we have already exceeded our budget for TransColorado for the year. The $17.5m that we have already recognized from TransColorado compares to a budget of $16m for the year. So we're already over our budget for the year in TransColorado, which means clearly we'll finish the year ahead of our budget.

At retail, you'll see basically flat for the quarter, actually down about $600,000, up about $6m year to date, retail had a very strong first quarter and actually I'd shifted some of the dollars to the first quarter for 2003 from the fourth quarter and we'll see that impact when we get to the fourth quarter. And then for the third quarter of 2003, the total irrigation season was a little bit smaller than it was in 2002. And that's why you see that variance year to date. Retail will finish the year slightly ahead of its budget of about $65m.

Power was down about $1.7m for the quarter. It is down about $3.6m for the year. This actually is consistent with and even exceeds our budget. The reduction is due to development fees that we recognized in 2002. That we will not recognize in 2003. But our full year budget for Power was about -- sorry about $19.4m, we've already recognized $19m year to date. So Power will end the year slightly ahead of budget.

Total segment earnings for KMI has grown almost 13% year to date, and is on track to be ahead of its budget for the year. G&A at KMI you'll see it's up about $2m for the quarter. It's basically flat for the year. It is essentially on track for our budget, although we expect that we will end the year at KMI also slightly ahead of our budget at G&A. And that's due to legal cost actually being a little bit below, but some additional expenses related to health care, pensions and other benefits that will cause G&A to be slightly ahead of our budget in 2003.

Here is a little bit of an unusual item that you'll see both here on the income statement and on the balance sheet. As a result of a new accounting standard, the capital trust securities that we have now will be included in our debt numbers from the beginning of the third quarter forward. From all periods prior to the third quarter of 2003, they will continue to be represented in minority interest, and not in debt on the balance sheet. And so what you have here is interest expense for those capital trust securities that shows up for the third quarter, but it doesn't show up there for the first half of the year. For the first half of the year it's down in minority interest. The dollar amount doesn't change. It's just where it shows up on the income statement and the balance sheet.

Now, the real interest expense at KMI is about $35m. It's down from about $41m a year ago. And then for the nine months, you see $106m, you really should calm that $110m because again there is a $4m benefit that applies to NGPL and compares to $120m a year ago so down about $10m. What's happened at KMI is for the quarter, the debt is significantly below where it was a year ago, and there has been a reduction in rate. For the year the debt is essentially flat with where it was a year ago, and there has been a reduction in rate. So that's what's driving that reduction in interest expense, and we will end the year considerably lower on the interest expense line than our budget for the year. The other line here is really primarily minority interest related to KMR and the trust preferred securities. Again they show up there for the first half of 2003 and for all of 2002.

The volumes at the bottom of the page, you can see NGPL volumes are down a little bit for the quarter but they're flat or actually up a little bit for the year. There was a strong first quarter due to weather. The second -- I mean the third quarter volumes being down really have no impact on earnings, which they typically don't at the natural gas pipelines. But these also tend to be short haul volumes that are lower here. TransColorado is basically flat for the quarter and up for the year and the retail volumes are basically flat and up for the year as well.

I'll go back to the first page of the income statement briefly. Again you'll see operating revenues are up also at KMI as at KMP, revenues are not an overly significant metric. It's not something that we look at closely. They again vary by gas prices, as do gas purchases and other cost of sales. So you'll see that that line is up as well. O & M is down about $2m for the quarter, $3m for the year. G&A we've discussed, depreciation and amortization is up slightly, that's primarily a result of the capital expenditures over the last year and a half or so, and the impact of the new accounting standard related to asset retirement obligations that was implemented at the beginning of the year. Taxes and other income basically flat. Operating income isn't an overly relevant measure because it does not yet include the impact of KMP. And so when you go below that you'll see the equity and earnings of KMP, and then the interest expense lines which we discussed, minority interest which we discussed, other net which essentially is nothing, taking you down to net income which again is up 19% to $95.6m for the quarter and it's up 25% to over $300m for the year to date.

With that I'll go to the balance sheet. Again the last page of the KMI press release, you'll see cash is down slightly at KMI. That's just more efficiency on managing our cash balances allowed us to eliminate a little bit of a negative carry from keeping that cash on our balance sheet versus having commercial paper outstanding. Other current assets has declined. That is primarily related to a couple of receivables coming down specifically inter company receivable that I mentioned before and then some interest receivables related to our swaps which again were settled late in the third quarter. The KMP investments line is primarily just a change in the carrying valve KMP which is a function of our earnings and distributions. PP&E is basically flat, other assets is primarily a function of some adjustments on the assets and liabilities side that offset. You'll see total assets of about $9.9b, a little under $9.9b. It's down over $200m from the beginning of the year. It's down about $63m from the second quarter. We've talked about this phenomenon before. KMI is in a unique position that it is actually able to grow its cash flows while disinvesting. So KMI will be paying cash back to shareholders and reducing debt while growing its cash flows. It's really a very unusual and very powerful dynamic.

On the liability side, notes payable we'll talk about when we get to debt. Other current liabilities have come down. This is largely the same as the other assets that I discussed previously. Other liabilities and deferred credits basically flat. Long term debt again I'll talk about this in a minute but the one thing you should note is the capital trust securities do show up there now. Of course they only show up there going forward from the third quarter of 2003. They don't show up there for any periods prior to this quarter. And then you'll see actually capital trust securities again for all periods prior to this quarter. That's where they show up on the balance sheet. Minority interest unchanged, stockholders equity up $230m for the year. What you get is total debt of a little over $3b at the end of the quarter compared to about $3.3b at the end of the year. The reduction in debt has been $290m year to date. And our debt to cap is now at about 44% compared to the 48% where it was at the beginning of the year. Again, just showing the power of the free cash flow that's being generated at KMI. And you see that again in the next section, you know, our simplified calculation of cash flow, we take income before income taxes, add back depreciation and amortization, take off sustaining capex, and take off current income taxes, and you'll see year to date we've generated $418m of cash. Clearly, $290m of that has gone to reduce debt. Let me tell you where the other cash has gone. So what that $418m, we've paid dividends of $86m. We've had expansion capital of $35m. We've had share repurchases of $29m. And then working capital and other items have been a source of cash at KMI of a little over $20m. Now, again, if you aggregate all those numbers, you'll get to about $290m which is the cash that is left over that has been used to reduce debt.

One final thing that I will note as I wrap up the balance sheet. This is in the press release but we did yesterday renew our 364 day credit facilities at both KMP and KMI on the same terms as they were before. That renewal was significantly oversubscribed by our bank. We certainly appreciate the commitments that they have made to us and their willingness to continue to provide us with those commitments and that debt capacity. With that I'll give it back to Rich.

Okay and with that we'll take any and all questions that you may have.

Participants if you would like to ask a question, simply press star 1 on your phone key pad. If you hear your question answered and wish to withdraw then you would press star 2. Once again that's star 1 to ask a question and star 2 to cancel. One moment while questions register please. Thank you. We ask that when you state your question state your company name. First question comes from Mark Easterbrook.

Hi Mark how are you.

Any type of financial impact from the Phoenix line and what is the capex outlook for 2004, have you given out any numbers for that?

Let me start with the second question, the capex for '04, we're still in the budget process. At KMI, we think the expansion capex will probably be $50m or less. Very minimal. This year, of course, we have a -- we expect to spend about $60m and that's primarily the North Lansing project on the NGPL which most of those expenditures will be this year, there will be some from next year, and then most the Montana Rose to URAY will also be this year. Is So we would anticipate a good reduction from where we are this year. So that's the expansion capex at KMI. KMP, we really don't know yet. But we would expect it to be modestly less than 2003 was. Now, we do expect to have some acquisitions as we have talked about Yates, and certainly expect to make some additional terminal acquisitions. And so we will have some acquisitions, both in this fourth quarter and probably in the first quarter of next next year. With regard to the Phoenix financial impact, Mike you want to talk about that?

I think the key issue on the Phoenix financial impact is to remember that very quickly we were flowing 92% of our normal volumes into the Arizona market following the rupture. So there was very little in the way of a revenue loss associated with Phoenix. And we obviously have explained before, we're fully insured for property damage, things of that nature. The main expenditure we have on Phoenix is, we have accelerated a portion of our east line expansion and we are replacing some eight-inch pipe in the Tucson area with expanded 12-inch pipe and so we are making progress on that. We replaced about a mile and we'll do the full 12 miles by February of next year.

The only thing I'd add to that Mike is not only while we were down did we transport 92% of our normal volumes, but for the month of August, 2003, we actually delivered more into Phoenix than we did in the month of August 2002.

And I guess just to put it in context the line with the problem carries 50,000 barrels a day and all of our products carry 2mbarrels a day.

Does that answer your question?

Quick follow-up, you maintained maintenance capex, could you give us an idea what that would be for KMP?

Only slightly below that.

A million or two or so?

Right.

Okay, thanks.

Okay, next question.

Next question comes from David Fleischer (ph) of Goldman Sachs.

Hi David.

To be sure, a little more clear on your guidance here what you're saying because with 25% increase in the nine-month numbers, the subtraction I think with those numbers, to get to the upper end of the your range, unless it's the very, very, very upper end of your range is basically a 4% increase in the fourth quarter. And as far as CO2 and you know which looks to be blowing through the numbers and TransColorado and even power that look to be exceeding your budget, I just want to be sure that there are no other factors anywhere, you know, like these legal expenses that you mentioned that were in the third quarter and could those, you know, be expected to be continuing in the fourth quarter and beyond, or are there any other factors that you haven't mentioned that might be an offset or are you just being pretty conservative at this point?

Yeah, the thing you need to look at is the fourth quarter results for retail and Power for last year. The fourth quarter results for Re tail and Power this year and this is part of our budget will not be the same as they were last year. And that's why you know again what we are comfortable with for the year is the upper end of that range of $3.23 to $3.28.

Does that answer your question Dave? That is really the big difference, is as we said all along as Park said even though Power is exceeding its budget --

And so is Retail.

And so is Retail, their fourth quarters will be larger and Power had a very large fourth quarter last year.

Let me ask another question. The TransColorado expansion is a ten-year deal fully subscribed. Can you help us understand the terms of this expansion, you know as best you can at least, and you know, what does that imply for the existing capacity in your ability to contract that on terms that might, you know, lend more stability to those earnings, predictability to them and help us understand the profitability then of TransColorado going forward?

That's a very good question. As of right now I don't have that slide in front of me but we just took our board through that today. We are about 90% or 100% down to 95% fully subscribed on all capacity at TransColorado through 2007 now. And that includes the present capacity and this new 125m a day. We have some capacity in 2008 that comes up and we're in the process of renegotiating that. We may even be able to extend that early. I have the slide now. We are obviously including the expansion, which we expect to come on line probably August of next year. We're 93% subscribed for 2004. We would, given the drilling out there, we would expect to rapidly fill the other 7%. And then like in 2006 and 2007 we are 99% and 98%. And that's of the full 425m a day capacity we will have once the expansion is completed. So I think the right way to think about it is we have turned everything up including the expansion with a few odds and ends that roll over very small through 2007. We have a contract coming up in 2008 which we believe will be renewed and perhaps even renewed early. But at any rate, we would anticipate that this TransColorado has become pretty much an MLP type asset now with the new contracts we've signed. And so we will certainly look at, during 2004, if it makes sense, at doing a drop-down into KMP. So we're very delighted with the situation that we've had. And again, it's very interesting on that. I've seen some numbers that it would be very surprising if you added up just talking to our producers out there, in Western Colorado. By West earn Colorado I'm including the San Juan, portion of the San Juan that is in are Colorado which is significant and the Uinta (ph) and Pionce (ph) basin, if everybody does what they're saying they'll do, several major producers out there, good size producers, if everything goes to fruition that we're hearing from them, we could sees West earn Colorado production equal to the San Juan basin equal to the next three years. We are poised to take advantage to that. Tremendous explosion in the number of rigs operating and in the production which bodes very well for this asset.

And that's all at full rates, or you know how can you help us understand financial impact of all of this?

We'll show you when we get to the budget process when we have a number on TransColorado. It's at varying rates, a good bit of it is at full rates, and all of it is at pretty good rates. But there are some deals that were cut before the market got so good out there that are not quite at full rates. But that will all be baked into the '04 budget for you.

Okay, thank you.

Thank you. And our next question comes from Anatol Feygin of J.P. Morgan.

How are you?

I'm well. How are you?

Fine.

Couple of questions one on the use of cash, Park, you talked about the substantial retirement of debt over the last six months. It looked like you took about the safe harbor repurchases, have you buying back $2.5m in the first six months and I think you mentioned $29m total and just wanted to reconcile that with Rich's comment going forward once the dividend has increased the philosophy will be more of a time to time share repurchase kind of algorithm as opposed to having a more continuous program that you guys have had in the past.

Well, we did repurchase about $26m worth of KMI shares in the quarter. That's completely consistent with what we went through in June when we increased the dividend and we laid out for everyone what we expected to do with our $530m of free cash flow which was our revised projection for 2003 up from our original budget of $470m. And I expect and you know this will be a board decision as we get into '04 and in future years. But my expectation is that will be consistent with what we do going forward.

One simple way to look at it is if you again, we expect to be $530m or a little better in terms of free cash flow this year. You would expect next year to be that good or better. But just to pick a number, if you just said KMI is going to throw off $550m of free cash flow after all interest costs, after sustaining capex, even if you had a $2.50 dividend, that would take $300m of the $550m, which would still leave you $250m to either pay down interest, do what I would consider minimum capex, because the major capex is going on at KMP and buy back some shares. So for example, you could pay back -- you could pay a $2.50 dividend and I'm not saying we will, I'm just using that as a number, buy back $200m in dishes mean pay off $200m in debt and still have $50m for expansion capex. You could pay off $100m, buy back $50m worth of stock. So I mean there's a lot of ins and outs there. The thing we are absolutely committed to and again, this is the that this is the management team of the highest ownership interest in any S&P ownership company, we are committed to return this money to our constituencies, including debt holders obviously, maintain a strong balance she sheet, but primarily to our shareholders and we are going to do that in the most expeditious way. And I think it's a delightful problem to have to be worrying about well what do I do with $550m of free cash flow. And again this is made possible by the unique animal. Ordinarily you think the if a company is going to be raising its dividend and paying down its debt it must be starving itself for expansion capital. Well, we're now because again we're not doing our expansion capital primarily at KMI. We're doing the overwhelming amount of it at KMP where it makes the most sense to put these kind of assets.

Corollary sort of follow-up in having paid down debts to this 44% debt to cap have you Park gotten some biding language out of the rating agencies and what they think of this and sort of related to the first part, should we expect the debt retirement to slow down now that you've -- now that you have substantially strengthened the balance sheet?

You know, we continue to believe that both KMI and KMP are underrated by the rating agencies and will continue to have conversations with them to convince them of that. I believe that we will probably continue to have modest debt reduction, just to show the rating agencies and debt holders that we're committed to a strong balance sheet.

Great. A different line of questions on TransColorado. Obviously the basis differential has come in quite a bit in the third quarter. As we look into the forward swap market, it seems to strengthen again. Can you give us your sense? Rich you mentioned work you've done analyzing how much production will be coming out of the basin. What your feeling is for the differential, and how will the process of having that sot of differential correlated contract structure play out if and when this asset does make its way to KMP?

Yeah, I think what you're seeing, it's important to note that this pipeline is running virtually full every day. All the capacity is taken. And the reason that, as opposed to the first quarter of this year, for example, that you're seeing less earnings in the third quarter is that we do have some of our contracts, some of the old contracts were tied to the basis differential. Now, they have minimums, but we're down at those minimums now. So I think one way of looking at it horse shoes and hand grenades is the level of earnings you saw in the third quarter for TransColorado is the minimum you would expect. If the base differential widens again we still have some base differential contracts. That said, as we're signing new contracts we're tending to do them less on a basis dink basis, and more on a set fee, whether it's max tariff or whatever it is. So I think you can see it will be a much more dependable flow regardless of what the basis dink is. Now, the important thing about this is and the fact that it's full is there's so much drilling going on in West earn Colorado that no matter what the basis differential is, they still have to get this production out somewhere. And so it's going to be full, as I said for the foreseeable future. As far as predicting the basis differential, I think you have to look at a whole bunch of factors. But I will just say this, that in both West earn Colorado and Wyoming, what you see is every time a new line is built, and if you're talking about Wyoming, think about the expansion of Kern, you have a new outlet for that gas so the basis differential generally goes down. Then as you have production increasing as it is dramatically then the basis differential Ted tends to widen again. I think that's what you see a little of in the Piance in western Colorado and coming out of Cheyenne hub. There are certainly proposals, we're one of them to build expansion out of Wyoming, we won't do it unless we have firm contracts. That horse is not in the corral yet and I wouldn't predict where we're going. Clearly whoever builds it there is more capacity built out of these basins. We just presented to the FERC yesterday the national petroleum study, I chaired the mid stream section of it so I was up there yesterday. It is really astounding if you look at the supply side of the equation. As I said early on in my comments, the real big growth area for lower 48 onshore is the Rocky Mountain and really extraordinary increases that we ran this study all the way out through 2025. And really I think you're going to see some really nice increases coming out of the Rockies.

The only thing I'd add on that back on TransColorado just to make sure we're clear the expansion capacity, the 125 a day of expansion, fixed price does not vary at all with basis differential. And you're on a couple of contracts left that have any sensitivity with the minimums Rich mentioned.

One last follow-up and then I'll surrender the mic. But you guys with $125m expansion, do you foresee other sort of economic low-cost expansions on TransColorado or is $425m kind of the maximum level before you get into more expensive looping type projects?

We are using up the cheap expansibility on this $125m. We are doing it all with compressor stations so it works very well. We can do more expansion. It would need to be -- we look at it on an economic basis. It would need to be a pretty good sized expansion to justify. There's not another cheap $100m a day. You need to lay some pipe the next time around.

Terrific, thanks very much.

Thank you. Our next question comes from Sam Brothel (ph) of Merrill Lynch.

Hi, how are you? I hope you can hear me on this cheap speaker phone.

We can.

A couple of my questions have been addressed but some come to mind. Rich, you talk about being comfortable liking at a $1.6m, I wonder if you could speak on that a little bit and secondly with respect to eastbound capacity out of the Rockies, elaborate a little bit on how you see --

You faded out there Sam. Eastbound capacity how we see that developing I guess is what you're saying?

Yeah, versus obviously one of your principal competitors has a competing proposal. Maybe you could just kind of flesh out how you see yourselves versus them.

Switching I see talking natural gas. Let me start with the products question first. Again, as we've said before we went back and looked at take Pacific for example, and looked at ten years of Pacific up through 2001 I think was the last look we took. But we found that over those ten years, including through some very weak economic times in California in early '90s that the average revenue increase at Pacific was about 4%. And on average, about 3% of that came from volume growth, about 1% from tariff growth because as you know on products pipelines you have an inflation escalator every year. And so we think that is the long-term trend. Obviously, jet fuel has been severely impacted by a combination of what's happened over the last couple of years. We see that coming back, but if you look at our terminals and our activities place by place, you can see that there's plenty of room for increase there. I would also remind you that of course, the inflation escalator, which was the PPI less 1% is now PPI flat. And that was just approved after appeal by some of the pipelines to the courts. And that will make this escalator in rates marginally better as we go forward. So we feel good about, you know, a target range. We won't hit it every year but some years we exceed. Couple of years ago we were 6% total revenue growth. So I think having about a 3% product growth rate on our Pacific system and about a 4% overall revenue growth rate is about where we think we will be. And we think history backs that up. With regard to capacity coming out of Wyoming, yes, there is a competing proposal. I think there's so much demand that I wouldn't rule out that there's more than one of these systems built. There seems to be an awful lot of demand on the part of producers now in the Rockies, a lot of them want to go east. I think there's not as much interest in the California market as there once was. Being [inaudible], if I had holes in the ground I would want optionally because I believe in the next few years you'll see the California situation turn around from a natural gas supply standpoint because they're going to need more electric generating capacity on a going-forward basis. They have not in my judgment solved that problem yet. I'd want to be connected both places. But there is a lot of demand particularly out of Wyoming now to get to the point in the Midwest where you can access a number of pipelines, CIG's shy into plains does that, so does our what we call expanded advantage project which goes all the way down to the hub point in Kansas. Mike, you want to add anything to that?

Nope.

Does that answer your question?

That did it. Thank you very much.

Okay. Next question.

Thank you. Our next question comes from Phillip Salles from Credit Suisse First Boston.

Hi Phil.

I was hoping you could expand a little bit on the expansion of the Yates field and what kind of earnings potential you see out there and a lot of question on TransColorado again, what percent of the total contracted capacity is actually this basis differential capacity and what's the average duration on those contracts? Thanks.

Okay, I'll take the first question on Yates. I tell you it would be inappropriate to talk the details of it until we have completed it. But it is certainly within the -- certainly an accretive transaction for us if it gets done. And again, our discussions are going well with Marathon. We would anticipate as you know, we dissolved the MKM partnership bought their interest in Sack rock back. We still have a 7.5% interest in Yates. If we bought this it would be an additional 50%, so we would own 52% of Yates which in terms of production is about the same as a little bit less than Sack rock is today. Sack rock as I said is producing 23,000- 24,000 barrels a day now. But for the year it's averaging, you know, a little over -- about 21,000. Or 21,000 for the quarter. At any rate, the Yates production is a little over 20,000 barrels a day so they're roughly same size. Different types of fields, Yates of course is original oil in place something like 5b barrels, originally one of the humongous oil fields in the lower 48 and it's now down to producing about 20,000 barrels a day. They are not using CO2 at this point and we would flood it with CO2. We think it's a good transaction for both us and Marathon. Mike you want to comment on TransColorado?

Don't hold me exactly to this and if this is wrong we'll get back to you and give you the right number. There are a couple of contacts that have been now reduced to somewhere around 50 a day total long haul of around 300 and expanded of 425. And my recollection in part over the next actual couple of yeast those years those are going to stay away. None of this is going to be a material difference but if it's wrong we'll follow up with you.

Basically this is going to be done, we'll try to take you through the analyst meeting in January kind of what an average tariff out there is and you can get a good idea of the earnings power.

Thank you.

Thank you. Our next question comes from Yves Siegel (ph) with Wachovia.

You notice he pronounced Wachovia right.

We got some advertising. It's good to see it's working. A couple of questions and then I'll say good night. No. 1 is Rich, how strategic is the gas utility business to you, and is that potential for divestiture at some point down the road. Second point question is, do you think TransColorado going to the MLP could be a 2004 event and I'm not sure how you would look at the cash that would go up to if you did do it in 2004. And then the third question is, is there anything in the -- and I know there's different versions of the energy bill. But is there anything there that is particularly pleasing to you, and anything that is just the opposite? Thanks.

Okay, let me start with the first question on how strategic is the gas utility business. I assume you mean by that our LDC, our retail operations. I think it is a very nice business. Had we set out to go and buy assets one-off, we would not have bought retail businesses. But it came as part of the KN transaction. We are very pleased with the job that Dan Watson and his team have done in managing it. We have roughly doubled the earnings from that operation in the time since we did the merger in '99. So we are very pleased with it. The thing that separates it out from most retail operations is, as you know, we have three pods of assets. Nebraska, Wyoming and the western slope of Colorado. Wyoming and Nebraska are pretty typical not much growth there but the western slope of Colorado is rapidly growing so we like that a lot in that sense. So it's kind of a unique retail operation and we're pleased with it. On TransColorado, again, that's a decision that the two boards would have to make. But I think it is very possible that during '04, we would complete a transaction that would drop that down into KMP. Once we have the FERC certificate firmly in hand, and everything else, we now have the contracts, we probably will try to term up even a little more. Then we'll have a very solid MLP type asset, and we would expect to have that compression on line, expansion on line, probably by August of next year. So it would be an apropos time sometime around the middle of the year. But we just take a look at that as it goes. On the energy bill that's really a moving target. You know, clearly, I think it makes a lot of sense to have a PUCA reform out. I think that's a positive for anybody with a retail operation. I think it just makes retail businesses more valuable. I think you know, there are a number of other things, as I understand it, they're still trying to get in at the MLP qualification for mutual funds. Again, that has not as much impact on us because we have KMR. But that is certainly a positive I think for the MLP business. You know, on the -- on the part of the legislation that relates to pipelines, you know, one of the big issues is the Alaskan pipeline or the arctic pipeline. We certainly think that that capacity, that gas is going to be needed sometime in the next several years. All the estimates I've seen would be, this would be maybe you get McKenzie delta down in 2010, in fact the national pet petroleum council shows 2010 and the Alaskan pipeline flowing gas in 13, 2013. So these are very long-term. And but I think it would be good for the overall, I think we need that arctic gas. I think you will also see some additional LNG coming in. I think we're going to need LNG, that's very positive for us because if you look at the sites I believe most of them will be positioned along the Gulf coast because it is easier to permit down here. We have pipelines very near the Lake Charles facilities and we have our text intrastate pipelines that Park was telling you how well they are doing. They are very near all of the proposed sites along the Texas coast. So I think the LNG facilities and the NPG studies would show you are going to from enormous growth with 20 years out to the point where you are 13 to 15 BCF a day coming from LNG terminals so that would be very positive for us. So overall, you know, most of the things that in the energy bill don't have much impact on us. What we see is okay with us. I think the real question is whether we get an energy bill through.

Thanks Rich.

Okay, next question.

Our next question comes from John Edwards of Deutsche Bank.

Hi John, how are you?

Good how are you?

Fine.

Just on the Rockies area, before we go on CO2, what's the capacity on that CO2 line, and you know, what's the utilization rate there, and I guess you know, if you can get this Yates transaction, you know, would you have to expand, you know, spend capital expanding the CO2 for the CO2 flood? Give us a little more color on that if you could.

Okay. I've got Tim Bradley (ph) who runs those operations right beside me. Tim.

The Cortez pipeline has a capacity of about 1b to 1.1b cubic feet a day and currently is operating around 850m to 900m feet a day. So we have spare capacity there. That is with two pump stations on the line. We can add additional pump stations if it's economically justified. The central basin pipeline is operating around 250m feet a day. It has a capacity un powered of up to 600m feet a day. So we have plenty of capacity there. In the center line pipeline which we recently built has a capacity of 250m feet a day. It's currently shipping about 150m feet a day so there's spare capacity there. Canyon reef carriers pipeline has spare capacity. Pumps have already been installed, we are choosing not to run them yet because it is cheaper to deliver CO2 to Sack rock without running those purchase pumps. So I'd say woo have another two to 3m a day of capacity that is available to us pretty inexpensively.

We would also add that I think Tim the production of CO2 up in the Cortez field is about at an all time record is that right?

It is approaching an all time record, 850m to 900m feet a day right now. The excretion at the source field is very close to the pipeline capacity 1.1b to 1.2b feet a day, which we.

One of the advantages we always said we had in our pipeline system at KMP is that we had unused capacity on both our products lines and on our Texas natural gas lines. The same thing applies to our CO2 lines and we find use for that capacity, it's obviously one of these low fixed cost, I mean high fixed cost but low variable cost businesses. So that's a real upside for the few future.

And Tim correct me if I'm wrong the demand of CO2 at Yates because of the different geology will be different and at Sack rock less, is that correct?

Our current deliveries at Sack rock are approaching 300m feet a day of CO2 whereas we expect the demand for CO2 at Yates would not exceed 100m feet a day, closer to 50m or 80m feet a day.

The capital, next part of your question, the expansion capital to be spent at Yates if we acquired it would be nothing like we're talking about at Sack rock. It would be pretty minimum am except for the CO2, we would be buying to flood the fields, is that correct?

That's correct.

Okay. So now and you're not currently selling any CO2 to the Yates field, is that right?

That's correct, we are not.

Okay. So that would represent potential expansion opportunity, right?

That's right that would represent more CO2 to be moved through pipelines, and going into the formation.

Okay. And then in the Rockies, do you know what the -- I'm trying to get a sense of what the total capacity for export is, you know, versus production, you know, the pipeline capacity for export versus production. And then what your share of that market is.

That's -- we, as I said earlier, we're moving a little over 2 BCF a day right now if you add up all our systems, I'm not -- counting only, we've tried to count only those systems moving gas out of the Rockies. In other words, we are moving gas out of the Rockies on TransColorado which goes to the Blanco hub and Colorado east to Texas, red cedar we are moving gas that goes into El Paso and trans western out of the Colorado portion of the San Juan field. Colorado we are pony express, K might, trail blazer are all moving significant quantities of gas east out of the Wyoming fields. And that's how you add it up. I don't know what percentage we would have. As we've calculated it, we're the second largest CIG, the old coastal CIG now El Paso is a good bit larger than we are. And then there are three or four like Kern I think is moving about a B and a half a day to California. So I mean, I don't know. I haven't totaled them up John but again our 2 BCF a day we think is the second largest. But there is a lot of -- a lot of new production coming on line. And there's definitely a need for more capacity, and we're we're not the only ones that see that obviously as you can see from the filings. So we'll just see how it comes out. Does that answer your question?

Yeah, yeah. So in other words -- so I guess the issue here is there's plenty of opportunity for more expansion there, and I guess it sounded like from your earlier discussion then, the basis -- the basis differentials, they move up and down as production and pipelines come on, and it sounds like -- are they moving roughly in parallel right now?

Yeah, I think -- no, I think it varies as you have new capacity come on line. You know as recently as last winter before Kern's expansion came on line which I think came on May 1st, there were times in the winter and not just these blowout days where you had a $2 plus differential between Cheyenne and the mid continent. It made sense to move it. Now that differential is more in a range of some days it's as little as $0.10 or $0.15, probably averaging $0.30 or $0.40 now. Any rate we'll see how it develops. But the important thing is in a time of particularly high gas prices its economics 101. As people are going to produce, they're going to drill wells and as they produce gas they've got to get it to the mark. So regardless of the basis differential, they're going to seek ways to get it out of Wyoming, because there's just not enough market for that natural gas in Wyoming or Colorado. So they've got to get it either west to California or east into the Mid continent.

Right. Okay. And an then on a different topic, your debt to cap now is down to 44% at KMI. What -- you know, where do you want that to -- where do you want that to go to? I mean, before you in effect say well that's low enough?

We are very comfortable with it where it is. As I mentioned before we think both KMI and KMP are underrated from the rating agencies. Although as I also mentioned before we will likely continue to reduce debt as we go forward. Because we will be generating a tremendous amount of cash and because we will want to demonstrate a commitment to a strong balance sheet.

So I mean because we were modeling out your coming out at 40% or less by the end of next year. I assume, then, that -- I mean you're not uncomfortable with it going down to those levels and in effect you almost forcing a rate upward?

Just answer it in a nutshell. We're comfortable with where it is but again we're committed to a strong balance sheet and I think we'll want to continue to make payments on the debt. But again I think the key thing is we're going to use this 500 plus million dollars of free cash flow as expeditiously as possible and something we continue to review with the board.

Okay, and then last thing, you mentioned on the life -- on the contracts, you only have 14% renewing next year. Should we assume then that the duration on the contracts are longer now on average than you have before?

They're a little longer. We've been able to re dust some and that is on the long haul transport. It's a little higher than that. It's in the 25%, 22%, 25% range, low 20s I think on the storage. But a lot of it, John, is that we have been able to extend the terms a little bit and we were able to renew some early with some of our major customers that were coming due in late '03 and '04 and we with were able to go ahead and structure those this year. We just had a very good year as I said at renewing and extending contracts. I think that's more than actually extending the terms. I think the real message is people don't renew contracts, extend them early unless number one you have a good relationship with your customers, and number two, you have a -- they have a real need for capacity. So I think both of those things auger very well and we've said day one on NGPL that this is a game singles and doubles. Roll over contracts, get close to our customers, renew storage, renew transport, have modest growth as our market area gross and as we attach more marketing area. That's exactly what has come to pass.

Thanks a lot.

Thank you and our next question comes from Unidentified Speaker.

How are you?

I'm tired now you guys wore me out.

I hope you're on land and not on your yacht.

You're $550m worth of cash flow is a nice thing to worry about and certainly a comfortable one. But what are two or three top concerns as we head into this winter that you see at KMP or KMI and I appreciate your thoughts on that, thanks.

Well, the top concerns for the winter, again, I think you know, nationally there was a lot of mashing of teeth earlier in the summer about whether we would have enough natural gas and storage to get through the winter, unless we have an abnormally cold winter, we are okay on that. That's following through on our NGPL system just about the same way. And that's because we had a very hot summer in the West and South West we had a mild summer in the Midwest and east. So I don't have much concerns about that and again even if they did it wouldn't have any impact on our bottom line we sell capacity not throughput. But I think you know longer term, I want to emphasize again that we are not really very subject to weather at all. I think longer-term, as we've said, the things that we worry about in any Kinder Morgan Inc. shareholder should worry about, is we have a huge system regulated pipelines, and we are always going to have regulatory issues on those pipelines. The SFPP rate case is one example. The largest example of that, we are very far along in settling the little rate case on Trailblazer, I think that will be settled this quarter. So it's really where we are on SFPP there is absolutely no news on that but that's always a concern. And I think clearly as I've said many times, there's always a concern about spills, and the Arizona situation, while had minimal financial impact, I think we behaved appropriately, and the federal government has said that in terms of we did the right thing, in shutting it down when we did. It was a safety issue. But you know, you're always concerned about those type of incidents, and we continue to work very hard on maintaining our pipelines. I think the other thing that we're sensitive to is clearly we have about half floating, half fixed on our debt. This is pretty minimal, and for this year as Park has said we built in a 100 basis point rate increase over the year which did not happen to occur this year. We're going to do that in the budget again. We'll build in at least 100 points for next year off of wherever we end up this year. And you know, every ten basis points, that would be in the budget but every ten basis points outside of that is roughly $1.5m or a little over at each of the companies. So you know, in terms of a $22b enterprise that we have now I guess that's not huge but it is. I think those are the major things that you ought to look at from a Kinder Morgan Inc. perspective.

Thanks Rich and congratulations on a good quarter.

Thank you.

Next question comes from Colorado Soler (ph) of Morgan Stanley.

Hi Rich how are you?

Okay.

We had an LNG conference last week and what became pretty obvious to most of us at the conference was plenty of supply coming out of Trinidad, you are going to have a hard time getting all these regas (ph) facilities built in the United States quick enough to solve the gas problem. I was curious, you all are all looking for opportunities and I was curious on your commentary on ways to make money in LNG.

That's a real good question. Two or three ways to make money. First ace said earlier our pipe lines very close to the Gulf coast regas. Boast those being built now and expanded and the proposed Texas sites so that's the main way that we would make money. Secondly, we would not be adverse to investing in a regas facility if, and only if, it had long term throughput agreements with major credit-worthy companies. But to the extent that an Exxon or a Shell or a BP wanted to lay off part of its capacity or its investment in a regas facility at the appropriate time in the development process, and again, at the right price, we would not be adverse to that. But I think the main way I agree with you that there's going to be a lot of LNG, a lot of supply available, there are a lot of issues, there are pipeline standardization BTU specification issues, but these will all bet get resolved. And on the regas facilities, I think that the FERC is really going to bend over backwards, in a very positive way, I think, to permit these things as quickly as possible, again, with all due regard for environmental concerns and the concerns of all the constituencies. But I think that they're going to do the best they can to move this processing along, because they recognize, I believe, that there is a tremendous need for this LNG. So I think we're bullish on LNG coming ashore, assuming they get sited we may or may not be an investor and we will definitely benefit from moving significant quantities of that gas in both Louisiana and Texas.

Long term you all have goals to grow earnings at NGPL or operating profits 3 to 5% next several years. It looks for the quarter volumes were down 8% Park had already cited mostly, why are volumes, why have volumes dropped and how much of your operating profits are being made up through storage and other services so that when we look out long term when we think about volume growth how much of this is economically driven now or are there other factors on the volumes?

Let me start out by NGPL and I know this is kind of complicated because we have so many different pipelines. NGPL is not a volume story. It is a contract story. And as I was saying, really the matrix or the metrics you ought to be looking at on NGPL are what percentage of our long haul throughput is contracted for and what percentage of our two classification of storage, NSS and DSS, is contracted for. I gave you those. If you look over the winter we are 98%, 99% on throughput transport and 100% on storage. And again next year to stay at that 100% we only have to renew about 14% of our throughput contracts and low 20s on our storage contracts and we believe we'll do both of those obviously. So that's the real issue. And the way you grow is by, as the demand grows, if you can get a little bit better terms, if you can expand a few laterals like we did with Horizon into East St. Louis. And that's the way we would anticipate growing. Now, what happens with the volumes and we are actually up for the year and down the quarter, Park, you want to go ahead?

I didn't say this because I was trying to get through my stuff as quick as upon, relative to the amount of time that I normally take. But those NGPL volumes for the quarter I talked about them being short haul. The truth is they're primarily associated with an asset called Canyon Creek where our rate actually varies depending on the volt. So even on those short haul volumes, our revenue is unaffected by that decline in volume.

Okay. And then Park, while you're on the phone, I guess one other question I had this is my last question was in terms of looking at your interest expense line and looking forward, how much in the quarter was -- I don't think you said it and it was just curious, how much was gain on interest rate swaps for the quarter, was that a big effect at all?

That does not show up in the interest line. All of our swaps are hedges and they're accounted for as hedges. And so there is not an impact in the interest expense line other than you know, the actual cash that changes hands when we make interest payments. Essentially we have swapped some fixed back to floating. The banks that we swapped with are paying the fixed rate to us and we're paying the floating. And so the interest expense line that we recognize is just what we pay, which is just that floating rate.

Yep, okay. All right.

So there's not any -- there's not any impact of future changes in swap value that hits on the interest expense line.

Okay, all right. All right, thanks.

Okay, thank you.

Thank you. Our next question comes from Ron Londy (ph) of A.G. Edwards.

Hi Rich how you doing. Maybe you could give us perspective on the acquisition scene. So far this year compared to last year which was granted an unusual year, acquisitions in Kinder Morgan Inc. in dollar terms has been much lower in the face of continued attractive cost to capital. Maybe you can put it into perspective for us.

I think that's right. And I think maybe two or three things were happening. First of all, of course, obviously the low interest rate environment, which you just cited as a positive, also works a little bit the other way, in that some of the companies who I think otherwise might have pretty much been forced to sell more assets, were helped by the lower interest rate and the available of high-yield debt. So they were able to borrow against the corporate enterprise without selling the assets off in several instances. So that may have had some impact. I think with us, now, I think as I said, we have, and again I don't count anything until the horse is in the corral, that we closed the Shell transaction just at the beginning of this quarter, we have a couple of other terminal deals which hopefully -- which are larger and I hope we'll close at least one in the fourth quarter, probably one in the first quarter next year. No guarantees. We have the Yates transaction we're talking about and a couple of other smaller pipeline deals. So you know, I think that as we look at what we've got on a pretty active level right now, it's around $400 million give or take of things that are pretty close to fruition. So some of this is just, you know, variation. Sometimes you go two or three quarters and nothing happens, and then you have a number of things that happen to hit in a quarter or two. And I think that's part of what we're seeing now and then part of it as I said is, I think there's been less -- less desperation on some of the sellers that we might have thought about six months or a year ago. Mike.

Again I think, you know, with regards to us specifically we're very excited by some of the things we're seeing on the terminal side coming out of the majors, talked about Yates, still believe in the long run we're going to see more gas and products assets hit the market. So not, you know, as Rich said just sometimes it takes time.

Okay, thanks a lot.

Okay, next question.

Thank you our next question comes from Ross Paine (ph) of Wachovia securities.

How does capital expenditures related to Sack rock come into play there and how do you guys look at sustaining capex for those operations?

Park.

You know, the definition of expansion capital is any capital expenditure that increases your capacity of an asset, and sustaining capex is any other expansion capital. And that's straight out of the partnership agreement. What's going on at Sack rock is truly expansion capital. What we're doing is increasing production in that field through additional infrastructure that is being put in place, and through the CO2 which is forcing more oil to the surface. And so almost exclusively, all the capex that's going on at Sack rock is expansion. Now, you know, as we get farther along in this process, and we are adding fewer assets or we stop adding assets there, and the production or at least that investment diminishes, then there will be some sustaining capex to keep those assets in their current mode of operation. But currently it's all expansion.

Okay, yeah, because I was curious about the depletion portion of that.

The which portion?

Depletion portion. How you were dealing with the depletion.

Again, that is all included in our depreciation rate, which I mentioned earlier. And so I mean what is unique about Sack rock or oil production relative to pipelines is that the depreciation comes out on a per-barrel produced basis, as opposed to on kind of a straight-line basis. So that's the distinction there.

Okay. Also on the plantation pipeline, you guys mentioned some continued refinery problems in the Southeast. Could you expand on that a little bit?

Yeah, a couple of things. First of all, some of our -- we had one refinery fire, of course, , this summer. But some of our refiners elected not to opt into Atlanta grade gasoline. They agreed to ship their Atlanta grade on colonial and use plantation for other options. And then one refiner opted to shift more of its production to Florida, and this is one of the Pascagoula refiners, it has the capacity and still does to opt out of the Southeast and go by barge to Tampa. We get some of that back because it helps our products pipeline over in Florida and our Tampa terminal which as Park said are having a pretty good year. But that also impacts plantation some. So that's kind of the right way to look at it. And you know plantation continues to perform well. But it is captive to the refiners who are on it.

Plantation had a record year in 2002 and part of what we have this year is a difficult comparison to that year.

That's right.

Okay, two more quick questions and I'll get off here. First of all on the ethanol blending, can you comment on how much that -- how many capex was required in that NO 3 and any expectations for '04 '04, and to refresh on the Yates acquisition or the Marathon acquisition, the magnitude of that?

Yeah, on Yates, we haven't said publicly what that number is. But it would be sizable. It would be north of $200m.

Fair enough.

With regard to ethanol blending, Park.

You know, it happens at a bunch of different terminals in California, and some in Arizona and so there have been a variety of projects. But the total capex in 2003 is probably around $15m.

And we did have some in 2002 on that. And --

And we might have a little bit in 2004 but not much.

Tapering off?

Yes tapering off. The last holdouts on refiners, the date is January 1st but they're actually switching over on November 1st. We've had two-thirds of the market on ethanol versus MTBE, and the rest are switching over at the end of this month. Most all of our ethanol blending facilities have got to be ready now and again, there might be odds and ends of specific terminals that occur after the first of the year but not a lot.

Great, thanks a lot guys.

Okay.

Thank you. And our next question -- thank you. At this time we have no questions registered.

Okay, well no wonder after two hours. But again we appreciate all the good questions and we appreciate you participating with us today. We think we had another very strong quarter. And we look forward to talking to you again soon. Thank you.

Thank you. This does conclude today's conference call. Thank you very much for your participation and you may disconnect at this time. Have a good day.