金德摩根 (KMI) 2004 Q3 法說會逐字稿

Welcome and thank you for standing by. At this time, all the participants are in a listen-only mode. After the presentation, we'll conduct a question-and-answer session. To ask a question, please press star, 1. Today's conference is being recorded. If you have any objections you may disconnect at this time. Now, we'll turn the meeting over to Mr. Rich Kinder. Thank you, sir, you may begin.

Okay, thank you, Kim. And welcome to Kinder Morgan quarterly earnings call. Let me start with our usual 3 housekeeping items. We'll be talking about Kinder Morgan, Inc., which is large midstream energy company I will refer to that by it's New York Stock Exchange symbol KMI, and among other assets, KMI owns the general partner of Kinder Morgan, Energy Partners, the largest pipeline master limited partnership and I will refer to that by it's New York Stock Exchange symbol KMP. So we'll be talking about KMI and KMP. And as usual we'll be making statements that fall within the meaning of the Securities Act of 1932 and the Securities Exchange Act of 1934. I will give an overview of what's happened this past quarter and outlook for the rest of the year and then our Chief Financial Officer, Park Shaper, as usual will go into a great deal of detail on the financial matters. And then, as always, we'll take any and all questions that you might have. Let me start by touching briefly on the financial highlights and I will do this only briefly because, again, Park will cover them in detail. At KMI earnings per share for the quarter was up 17%. We now expect to slightly exceed our budgeted earnings per share number of $3.71 for all of 2004. Equally importantly, we also expect to exceed our 2004 budgeted cash flow number, which, as you recall, in our posted budget was $578 million. So everything looks to be strong in terms of both earnings and cash flow at KMI. Turning to KMP, with financial highlights, today our board raised the distribution to 73 cents per unit. That's an annualized rate of $2.92. That represents an 11% increase over the third quarter of '03 when we distributed 66 cents per quarter or $2.64 annualized. If anyone is keeping records that's the 21st increase in distributions since KMP was created back in early 1997.

Also at KMP we now expect to modestly exceed our budgeted distributions per unit of $2.84 per calender year 2004. Equally importantly, KMP, through the first 3 quarters of 2004, has generated distributable cash flow in excess of its distributions of approximately $31.6 million. That's what we call excess coverage. The budget for that for the whole year was $28 million. So the message there is, that we're raising the distribution more rapidly than we thought we would be able to do in our original budget, but at the same time, our excess coverage is actually going up and we've already achieved our annual goals and then some. All of these facts demonstrate that our earnings and cash flow at both companies remain very strong and growing. Now, let me spend a couple of minutes updating you on our acquisitions and our expansion capital projects for the year. Let me start with the acquisitions, as usual we have made all of those at KMP and KMP is now announced about $300 million in acquisitions year-to-date. Or about $320 million if you count inclusion CapEx that we expect to spend on those acquired assets over the next few years. All but one of those acquisitions has already closed and the final acquisition we expect to close at the end of this month. Now, from that $300 million in expenditures for acquisitions we expect to realize approximately $50 million in first full year distributable cash flow. That means that these acquisitions were made at an average of about 6 times first year distributable cash flow. In addition, we expect future growth for most of those assets, so that the multiple would be even better if you looked at an average of the first 3 years or the first 5 years. In addition, we have now termed up the contracts on TransColorado, which is currently part of KMI, to the extent that we expect it's likely that we will transfer that asset from KMI to KMP in an arm's length transaction prior to year end 2004. Both boards have agreed to move forward, obviously, contingent upon fairness opinions and final documentation. So it's not yet a done deal, but we're hopeful we can close it sometime this fourth quarter.

The result of that will be obviously accretive to KMP distributable cash flow. From the KMI perspective it will be neutral to very mildly positive in terms of earnings per share. Obviously with the cash KMI will receive it will have more fire power to paydown still more debt and buyback additional shares at KMI. We view it as very positive transaction for both companies, assuming it gets done during the fourth quarter. Now, in addition to these acquisitions we expect from an internal expansion standpoint, that KMP is on track to spend between $600 and $650 million this year on internal expansion projects. These projects include CO2 development at both SACROC and the Yates fields. We'll talk more about that later. The north line expansion on our Pacific system, which is about a $90 million project running a new pipeline from the San Francisco Bay Area over to Sacramento. We expect that to be completed by December 15th. We're starting our east line expansion project on the Pacific system from El Paso across to Tucson. The Texas Intrastate Natural Gas System has had several projects, most notably expansion around the Austin area, to the tune of about $30 million. The Cheyenne Market Center Storage project in the Rockies and then on top of all that we've had over $50 million of expansion projects in our Terminal segment. So if you really look at KMP, we're reinvesting close to $1 billion in our businesses this year, about two-thirds of that through internal expansion and one-third through acquisitions, and that's not including any future acquisitions we might do nor is it including TransColorado. But absent TransColorado about $1 billion is being reinvested at KMP in our core businesses this year at returns we consider to be very attractive. And I think the returns I shared with you on the acquisitions, we feel that on the expansion capital, we're doing at least that well in terms of return.

Now, KMI, of course, will make far fewer expenditures because we try to make all of our acquisitions and as much of our expansions as possible at KMP, but at KMI, that said, we'll spend about $90 million this year, which is a little bit above our original budget, because we found some additional good opportunities for expansion there. And that $90 million will be spent on expansion projects. What are we spending it on? Well, we have 2 good sized projects to expand our capacity in our retail segment on the rapidly growing western slope of Colorado. Secondly, we have several storage projects that we're undertaking on NGPL and will complete this year and early next year and then finally we spent about $30 million on the TransColorado expansion at the south end, which has now been completed. Turning to the drivers of our outstanding third quarter earnings and cash flow at both companies, let me start with KMP and take each of their business segments for you. The Products Pipeline Group experienced solid, but I wouldn't call it spectacular growth, in throughput. Total refined projects volumes were up 2.1% for the quarter and they are now up 3.2% year-to-date. Absent the ethanol conversion volumes on the West Coast that we always give you the numbers on, absent that, the volumes would be up 2.7% for the third quarter and 3.8% year-to-date. That's a good bit above the national average. Not quite as fast as the first quarter, better than the second quarter. If you look at in terms of individual products, gasoline was up about 2% for the quarter, 2.9% adjusting for the ethanol volumes that have converted and jet fuel was up about 8% for the quarter.

The other big contributor to our Southeast Terminals Group -- was our Southeast Terminals Group which continued its strong performance, well above what we anticipated in our acquisition plan, and obviously, we're adding significantly to that terminal group by virtue of the purchase that we just announced earlier this week of nine terminals in the southeast along the Charter-Triad. Another number that we often share with you, and I will do so again, is that we give you the volumes for refined products. The revenue from our refined products part of our products pipeline group were up 6.7% for the third quarter and that was helped by strong performance at the various terminals that are attached to our pipelines and in that group particularly those that attached to our Pacific pipeline. Turning now to our natural gas pipeline segment. Very strong performance there and that was led by our Texas Intrastate System, where we had strong throughput and good margins particularly on our sales segment and we continue to benefit from putting our 2 major intrastates together. Park will share with you some of the outstanding numbers that that particular group is producing and how far above both 2003 and our budget we are both year-to-date and what our estimates are for the rest of the year. Now turning to our third segment, our CO2 pipeline segment, they had another fine quarter and let me give you some statistics there. Our CO2 pipeline delivery volumes coming out of our fields in southwestern Colorado, being moved across New Mexico into the Permian Basin. Those volumes were up 16%. Our average oil production at SACROC, as we talked about last time, is now picking up nicely. We averaged 27,700 barrels per day in the third quarter which was up 33% over the third quarter of '03. We expect, as we indicated to you in the last call we expect to average between 28,000 and 2,500 barrels per day for all of 2004, versus the budget target of 30,000 barrels per day and we now expect to end the year producing about 33,000 barrels per day, versus our original target in our budget of about 34,000 barrels per day at year-end. To give you an idea of the continuing pickup, through the first 18 days of this month, of October, we're averaging close to 31,000 barrels per day. So that's the SACROC numbers. At Yates, we averaged 20,200 barrels per day for the third quarter that's up about 2% over a year ago.

You will recall that our target at Yates is to average 20,000 barrels per day or better over the next several years, with production ramping up through our horizontal well program and through the CO2 as CO2 injections began to take effect over the next year or 18 months. So a very fine quarter from our CO2 operations, things seem to be on track there. In our Terminals Group -- in our Terminals Group our growth was driven by record throughput of refined products at our terminals on the ship channel in Pasadena and Buena Park, Texas. There for the third quarter volumes were up 15% over a year ago. And another strong driver of the growth in terminals was the dramatic increase in coal and pepcoke volumes that were up 22% from the same quarter in 2003. I think it's also helpful to note that the terminals EBITDA was up by 13% quarter-to-quarter and only 2% of that increase came from acquisitions. The other 11% came from internally generated growth. So the Terminals Group continues to experience a very good 2004. So those are the main drivers at KMP. Turning to KMI, the main driver was obviously the income from KMI's interest in KMP, including its ownership of the general partner and its ownership of significant limited partnership units and the combined total of those earnings was up 22% over the third quarter of 2003. The remainer of the segments at KMI, namely Natural Gas Pipeline of America, TransColorado Retail and Power are all on track to meet or exceed their budgeted net income for full year 2004. Another important development at KMI during the third quarter, was a decision of NGPL to invest a little over $50 million over the next year or so to expand the transportation storage capacity on NGPL, in northeast Texas and southern Oklahoma. These new projects are secured by long-term contracts with customers that will generate stable fee-based income for NGPL and therefore for KMI. And that roughly $52 million will be primarily '05 expenditures not in the '04 numbers I have been discussing for you. So that's still another portent of good growth in NGPL and KMI for 2005 and beyond.

Also at NGPL it continues to renew long-term contracts as they expire. The result is that 99% of our firm long haul transportation capacity has been sold out through the first quarter of '05 and storage is fully contracted through April of 2005. Let me conclude by making 3 points: First, we continue to run these companies for the long term and for the benefit of our shareholders. Second, as you can see from the numbers and will understanding even more when Park talks we are generating strong earnings and cash flow at both KMI and KMP and we're committed to returning that cash to our shareholders whenever possible. We are also, I think, this earnings in cash flow augers well for significant dividend increase at KMI when our board meets its January meeting and makes its annual consideration of dividend policy. And it also augers well, I believe, for continuing to grow the distributions at KMP for next year and beyond. Now, we're achieving this earnings and cash flow growth, and this is the third point, through a combination of internal expansion opportunities and acquisitions. We are re-investing, as I said, if you count the 2 companies together, over $1 billion in our core businesses at attractive returns. We have done this for several years now. We have no reason to believe it will not continue in '05 and beyond and I think what it all comes down to is that disciplined allocation of capital is the most important job of any management team, particularly in a capital intensive business like we are in. I think you should hold us to a high standard on that particular point and I believe we're living up to that standard. And with that, I will turn it over to Park for more financial details.

All right, thanks, Rich. And as per usual, I'm going to go off of the financial pages that are behind the earnings releases. I will start with KMP and the first financial page there, behind the text, is the income statement. 3 lines up from the bottom, net income before DD&A less sustaining CapEx, that's what we normally call distributable cash flow, you'll see for the quarter we generated 78 cents a unit compared to 67 cents for the third quarter a year ago. That's a 17% growth. For the 9 months $2.29 up from $2.03. That's about 13% growth for the year. Now, of course, that is what is driving our increase in distributions that we hope we can grow at 8% a year, clearly the cash flow is growing well in excess of that. Taking a look at the distribution, you can see it's 73 cents. That is up from last quarter and up from a year ago. A year ago it was 66 cents, that's almost 11% growth over the year. For the year-to-date we will have distributed $2.13, that's up from $1.95 a year ago. It's about 9% growth. We do now expect that our distribution for the year will be $2.86 at least. That's up from our full year budget of $2.84. Net income, which is a few lines above that, net income per unit, about 59 cents, that's up from 49 cents a year ago. It's $1.62 for the 9 months up from $1.47. As we always say, we consider the distributable cash flow and the distribution to be more important than the net income. You will also see sustaining capital expenditures there, both in a per unit amount and a total dollar amount.

Looking at the total dollars, it's about $37 million for the third quarter '04, It's up from about 22 a year ago. It's about 83, up from about 62 a year ago for the 9 months. Our full year budget on sustaining capital is about $116 million. At this point, at KMP, we actually expect that we'll be about 5 or $6 million over that. Really about $5 million above that $116 million. Now, you know, we may come in somewhere plus or minus a couple of million dollars around that, but we expect we'll be a little bit above where we are -- or what our original budget was. And then the other thing I would like to point out, as Rich mentioned, is we took the distribution up but not only did we take the distribution up but we've already exceeded our full year budget for excess coverage. In our budget we called for $28 million of distributable cash flow in excess of our distributions. Through the first 9 months we're already at $31.6 million and, again that's just through the first 9 months. We expect we'll have some excess coverage in the fourth quarter as well. With that I will go to the second page and talk about the segments. Rich has already talked a lot about the drivers and, you know, looking at products pipelines you can see the volumes down in the middle of page that Rich already went over. In terms of earnings before DD&A, Products pipelines is up about 11.5% for the quarter, it's up about 8% for the 9 months to date, its full year budget is about $483 million. Product pipelines will actually end up at just a little bit short of that, only about 1% short of that. Now, of course, they are still trying to hit that actual budget number and hopefully they will be successful but where we are right now, our forecast is just a hair short of that.

On the natural gas pipeline side, up about 13% for the quarter. It is up about 11% year-to-date, driven by, as Rich said, the strong performance at the Texas Intrastates. The Texas Intrastates, and this is just actually the combination of Kinder Morgan Texas and Tejas, will generate north of $200 million of earnings before DD&A in 2004. That's well above budget and it's well above last year. So, again, the performance there has been very strong. Trailblazer has been down relative to last year and that's because of the rate settlement that went into effect at the beginning of 2004 and that was a part of our budget. Red Cedar has been a little bit weaker relative to budget as well. But because of the strength of the intrastates, the natural gas pipeline segment will well exceed its budget of $383.5 million of earnings before DD&A. CO2 is very strong, you'll see an increase of about $33 million for the quarter or 62%, up about $98 million year-to-date or 69%, that growth being driven clearly by the additional interest in Yates and by the growth in volumes at SACROC. Expenses have been a little bit higher than we originally anticipated but we've gotten a little bit of benefit from price as well. CO2 will end the year well above its annual budget of $322 million of earnings before DD&A. Terminal, also a very strong quarter, up about 11% for the quarter, up about 9% year-to-date, as Rich mentioned, driven by very strong volumes in the Houston ship channel area and by strong call in pepcoke volumes. Terminals will also exceed its budget. It's annual budget is $256.7 million, it's expected to come in above that. Now, in total, you will see that we are almost at 1.1 billion of segment earnings before DD&A through the first 9 months and we are on track to exceed our budget of $1.45 billion in segment earnings before DD&A for the year. So, again, we should beat that.

G&A -- so I'm going to drop -- skip over the DD&A and drop below the earnings and you will see down there the G&A line. It's up about $1 million from a year ago. We are actually up about $17 million for the 9 months. And we do expect G&A to end up above our budget for the year. Our budget did have -- or actually our budget was relatively flat to 2003. It was up about $1 million. We think we'll end up somewhere about $17 million above that budget. And that's driven primarily by a timing issue that's related to benefits that we'll see in 2004 and we wont see going forward. Also by increased PwC and Deloitte & Touche fees. PwC being our external auditor and Deloitte & Touche being our internal auditor and that's primarily related to Sarbanes compliance. Also, it's up because of the global acquisition, that drives some additional G&A, and then a little bit of franchise tax expense and a little bit of legal expense that was not budgeted. We're coming in a little bit high on those line items. And then a few miscellaneous things that are primarily related to benefits, as well. On the net debt cost line, you know, up about 2.6 for the quarter. We are up about 6.6 year-to-date. Our balance is up on average about $600 million, our average rate is just slightly below where we were in 2003 and that's what's driving the increase in debt costs. We actually believe that we'll end up just a little bit favorable to our budget for the year. I will remind you that we build in an increase in interest rates in our budget so even though floating rates have gone up, we do still expect that we'll end up slightly below our full year budget. Minority interest is largely the general partner and then a couple of other items that don't have really any effect in 2004. And you will see that our net income is up about 25% for the quarter, it's up about 18% year-to-date. And so very strong performance out of KMP driven by those business segments.

With that, I will go back to the first page and just touch on a couple of items. Revenues are not overly relevant because of the Texas Intrastates. Our revenue are impacted by natural gas prices. You will see revenues are up but, again, operating expenses are up as well. Those 2 kind of move in tandem. DD&A is high. It's above last year. It's just a little bit above our budget. The growth is related to the acquisition of Yates, to the increased production at SACROC and to an increased depreciation rate that we instituted this year on our oil production. So it really all comes in the CO2 segment. G&A we discussed. TOTI is up and that's the acquisition of Yates that's driving the increase there relative to last year. Earnings from equity investments, you see some movement there, especially when you look year-to-date and that's because the MKM partnership was dissolved in the second quarter of 2003. So we had a quarter and a half or so of earnings from the MKM partnership in 2003 that showed up on this line that doesn't show up there in 2004. Interest expense we have discussed. Other is minor and we talked about the minority interest. It takes us down to that net income, again, that grew by about 25% for the quarter. And in limited partners interest in net income is up about $26 million or 28% for the quarter. It's up about $43 million or almost 16% year-to-date. So very strong growth at KMP. With that I will go to the last page of KMP earnings release which is the balance sheet. Clearly, as always, this is a preliminary balance sheet. Cash and cash equivalents are basically unchanged. The other current assets haven't changed much.

PP&E goes up which is a function of expansion capital and acquisitions and I'm going to provide a little bit of detail on that in just a minute. Investments unchanged. Deferred charges and other assets, this has gone up a little bit, in part because we now have a note receivable to plantation. Plantation prior to the third quarter had third-party outstanding debt. During the third quarter we retired that debt at Plantation and the 2 Plantation partners, being KMP and ExxonMobil, loaned the money to Plantation. And so we have just revised that debt and you will see the impact in a couple of spots. Total assets about $9.8 billion up from about $9.1 billion at the beginning of the year. On the liability side, other current liabilities is up, large part of this is hedges. Again, we do hedge our oil production. We do get hedge accounting treatment on those hedges, which means it is mark-to-market on the balance sheet and you see part of the impact come through here. Long-term debt is up about $300 million from the beginning of the year and I'm going to talk about that, actually, the net debt increase in just a minute. Market value of interest rate swaps is basically unchanged. Other is impacted, again, by the hedges. Minority interest is unchanged. Partners capital is actually down about $100 million and here again the mark-to-market of the hedges runs through other comprehensive income. And we have a reduction of actually $386 million that's coming through partners capital as a result of the hedges that flow through other comprehensive income. Absent that, partners capital would actually increase. And this does matter because it actually impacts our debt-to-total cap calculation. It does not have any economic impact. I mean, the right way to think about this is oil prices are higher, so the value of our production is higher. We have hedged the majority of that production and those are true hedges. I mean, what it means is we've locked in what we are going to get on those barrels. These hedges will settle and all of this value will flow back out of other comprehensive income without having any economic impact on the partnership.

Now, to take a look at that impact you will see total debt $4.6 billion, it's up from about $4.3 billion at the end of the year, that's about a $315 million increase. In debt-to-total cap is up to 57% from a little under 55% at the end of the year. Now, one of those impacts, again, is the other comprehensive income going through partners capital. Also you have the Plantation debt of about $95 million which now shows up on KMP's balance sheet. It always existed there, but since Plantation was not consolidated it didn't show up on KMP's balance sheet. But I will give you the full reconciliation of that change in debt. Again, year-to-date it's an increase in debt of about $315 million, 95 of that is the plantation debt. We had $115 million in acquisitions. That's a little bit ahead of what our budget called for, actually, $50 million ahead and I will point out that that does not include Global because Global, although it's closed, closed in the fourth quarter at the beginning of October, it did not close in the third quarter. And it does not include Charter-Triad because Charter-Triad has not yet closed. We've had $468 million of expansion capital and those increases have been offset by equity. We've issued $253 million of equity.

The KMR distributions, which is the equivalent of an equity offering as well, has raised $109 million and then we've had a source of cash from working capital of about $37 million. Now, I will remind you that our budget called this year for us to raise about $300 million in equity. We have, actually, now made acquisitions in excess of our budget. We expect that we will issue equity. It called for $300 million, we already issued 253, so the budget would normally call for an additional equity offering. We still believe that in the fourth quarter we will raise additional equity and that this debt-to-cap number will be lower when we end the year. The other thing I will do, I will give you a little bit of overview of the expansion capital projects at KMP. I think Rich touched on this a little bit. $468 million on track for our $600 million budget at KMP. Year-to-date we've spent about $222 million on the CO2 segment, almost all of that going to SACROC. We spent about $78 million on the Concord to Sacramento line in the product segment. That's the expansion of that line, again, running in northern California. We spent a little bit on terminals expansions on the West Coast and on the east line, again, within our product segment. We've had a natural gas expansion, the Cheyenne Market Center storage expansion, for about $23 million and then also the Rancho pipeline we spent about $20 million on that this year. And then in our terminal segment, we've had several projects, the largest of which is one in Minnesota, and another one in the New York harbor, where we spent about $17 million adding tanks. And so those are just a few representative large expansion projects.

With that, I will actually go to KMI. So, again, in the KMI earnings release, if you turn to the first financial page there, the income statement, and go to the bottom about 3 lines up from the bottom you'll see the diluted earnings per common share, 90 cents for the quarter it's up from 77 cents a year ago, 17% growth. For the year we have now reported $2.75, that's up from $2.43 a year ago, 32 cent increase or about 13%. On the next page, again, you will see the segments that are driving that. The first line is equity and earnings of KMP, but to see the true impact of KMP on KMI, you need to go to the middle section, its called earnings attributable to investments in KMP. You will see the pretax earnings of $122 million up from $100 million for the third quarter, 22% growth. For the 9 months 347 up from $293 million, that's about 19% growth. As you would expect, because the distribution at KMP is running ahead of our plan, the impact of KMP on KMI will also be ahead of our plan. Looking at the other segments, NGPL, about 95 million for the quarter, it's up almost 3%. Year-to-date it's about $295 million, that's up from what we really consider to be about $280 million a year ago. A year ago, and we've said this repeatedly, there was an interest income item that we really considered to be part of NGPL and so we include with the segment. Now, but still very nice growth from a year ago and on track to hit its annual earnings target of about $389 million. One thing I will say about NGPL, it had a very strong quarter and even stronger than it appears here. There was a sustaining project, and this is just a difficulty with forecasting sustaining CapEx.

There was a sustaining project at NGPL related to a hydrotest of a section of pipe that actually resulted in no pipe being replaced. When we budget and forecast sustaining capital expenditure we, based on historical results, estimate, you know, how much pipe will have to be replaced associated with all of these tests and it is a replacement of pipe that actually gets capitalized. If you don't replace any pipe then you actually expense the entire test. That actually happened this quarter to the tune of $5 million on NGPL. Essentially what happens is we went out and ran the test. We didn't find any pipe that needed to be replaced and so we expensed the hydrotest. NGPL had a strong enough performance that it actually overcame that. Net it's a huge benefit to KMI. It actually means that KMI sustaining CapEx number comes down by even more than the $5 million. And that's because, of course, in the budget we had budgeted for some replacement of pipe. We didn't have to replace anything. I'm going to talk about that a little bit more when I give you where we expect sustaining CapEx to end up for KMI. TransColorado is up significantly from last year. TransColorado had another expansion that came on in August. We're seeing the impact of that in this quarter. TransColorado is up just slightly year-to-date and it's on track to hit its budget and actually be a little bit above its budget of about $26 million. Retail was a little bit below, about $2 million the quarter, below the quarter a year ago. It's about 1.3 million below year-to-date but it's still on track to hit its budget of a little under $69 million. And actually we think it will slightly exceed that and that represents nice growth over what we reported in 2003 of about $65.5 million. It was impacted by slightly lower irrigation volumes in the third quarter of this year, but, again, it's on track to hit its budget.

Power is also below where it was a year ago, both for the quarter and year-to-date. That's because we did have some remaining development fees that flowed through in 2003. We don't have those in 2004. That was anticipated in the budget and power is expected to come in actually a little bit above its budget which is about $13.5 million for the year. Total segment earnings for KMI, you can see are up about $29 million for the quarter, that's about 13%. They are up about $74 million or about 11% year-to-date. So very strong performance out of the segments at KMI. G&A, you will see, is actually down just a touch for the quarter. It's up about $6.5 million year-to-date. We did budget for an increase in G&A at KMI. We will actually come in a little bit ahead of budget, actually unfavorable to budget on G&A at KMI as well. The total is a little over $2 million most of that is related to legal expenses running a little bit ahead of budget and then again PwC and Deloitte & Touche fees related Sarbanes compliance running a little bit ahead of budget. Interest expense at KMI you'll see is down just a touch for the quarter. It's down about -- actually about 11.4 million dollars year-to-date. The reason that number is higher than what you may see when you look at what's printed on the page is, again, interest expense that we look at for year-to-date 2003 is a little over $110 million and that's, again, the item that I talked about related to NGPL. The reason that interest expense is down so much is our balance is down significantly. It's down an average of a couple hundred million dollars and I will talk about that when we get to the balance sheet. The rate at KMI is more or less flat. Other is primarily KMR minority interest and that takes you down to -- of course you take off our income taxes.

Net income is up 17% from a year ago, and it's up 14% year-to-date. Returning to the first income statement page, again, revenues we don't believe are overly relevant at KMI. Again, they are a little sensitive to commodity prices, to natural gas prices because in our retail segment, we sell gas to our customers but it's completely a pass through. Gas purchases and other cost of sales also move because of that. O&M is up and this is related to the consolidation of Triton Power. Triton Power has no net impact on our financial statements. It is all canceled out by the time you get to the bottom but because of a change in accounting principle in 2004 we're required to consolidate it and then pull it all out in minority interest. G&A we discussed. Depreciation is flat and TOTI is essentially flat. Operating income here, we don't believe is overly relevant because it does not include the impact of KMP and, again, you see that impact on the next line. And then you get to -- well, the equity and earnings of other equity investments that's primarily a power plant in Colorado called Fort Lupton and the Horizon joint venture. Interest expense we've discussed. Minority interest is -- here. you see a big change because we are pulling out the impact of Tritan Power. Again, it's all netted out on that minority interest line. And then other is negligible and, again, you get down to the 17% increase in net income for the quarter and the 14% increase year-to-date. One thing I will say about earnings at KMI as we said in the press release and Rich mentioned, we do now expect that we will exceed our budget for earning per share for the year.

Our budget is $3.71. We expect we'll come in a couple of pennies above that and there's one item that's netted off of there that I want to mention. Some of you might have seen we are calling about $75 million of debt at KMI, as it carries an interest rate of about 8.75%. Very economic for us to call that debt but that's going to result in an after-tax charge of about $3 million loss on early extinguishment of debt. That's about a penny and a half at KMI. The number that we're giving you, the couple pennies above the $3.71 is net of that one-time impact. Again if you canceled out that one-time impact, then we would be a penny and a half even above that. So hopefully that's clear. The couple pennies above budget we're going to be is net of that impact that we will see in the fourth quarter. Now, of course, we will more than make up for that earnings reduction. It's not even all cash. But we'll more than make up for that earnings reduction in the subsequent quarters through a reduction in interest expense. With that I will go to the balance sheet. It's the last page in the KMI release. Cash essentially unchanged. Other current assets largely unchanged and investments largely unchanged. PP&E is up slightly, it's just a function of CapEx and I will talk about that a little bit in a minute. Total assets just a hair under $10 billion. Notes payable and current maturities of long-term debt. What you have in here is a $500 million maturity in March of 2005, the $75 million that we'll call and actually that will be paid down next week, and then $38 million of commercial paper is where we ended up on commercial paper at the end of the quarter.

Now, one thing -- difference between this number and what you saw last quarter, is there's a $150 million that was in current maturities last quarter that has moved back to long-term debt. We moved it to current maturities last quarter because it was putable by the holders. They had the right to put it back to us. We said at that time that it was on the margin. We didn't know whether it would be put or not. Well, the put date came and went last Friday and none of that was put back to us. And so, again, that will be outstanding for another 20 years plus and so it is moved back to long-term debt. That was $150 million moved back to long-term debt. Other current liabilities is down a bit. We have big interest payments in the month of September, so accrued interest is down. AP is down slightly as well. Other liabilities and deferred credits unchanged. Outstanding notes and debentures. You know, I will talk about that when I get to the bottom. If you are wondering why it's gone down so much from the beginning of the year, that is just the $500 million maturity in March of '05 that now shows up in current maturities and the $75 million that we're going to call this month, that, again, has been moved to current maturities. The deferred interest debentures, those are the trusts, they don't change. Trust preferred securities, swap value essentially unchanged, minority interest basically unchanged.

Stockholders equity is up about $92 million from the beginning of the year and that's just retained earnings. Total debt $2.86 billion, that's down from 2.96 billion or 96 million reduction in debt. I will remind you that our full-year target reduction in debt was $100 million so through 9 months we have essentially already accomplished that budget target. Total debt to total capital 41% compared to about 43% at the beginning of the year. Below that we have our preliminary cash flow estimate. This is a number that Rich was mentioning. Our full-year budget for this simplified cash flow calculation is about $578 million. We expect that we will exceed that for the full year. Through 9 months we're about $480 million up from about $413 million a year ago. One thing that I will mention here, here you see the sustaining capital expenditures. It's about $54 million through the 9 months. Our budget was about $99 million. Because of the reductions that I mentioned at NGPL, along with a couple of other reductions at NGPL and at retail, we now expect sustaining capital expenditures at KMI to total about $80 million and that's partly why the cash flow number will be bigger than our budget. Now, so we generated $480 million during the 9 months. Let me tell what we did with that. We reduced debt by $96 million, we already covered that We had expansion capital of $57 million. We repurchased shares of $55 million. Our full-year budget there is $60 million. So we have, again, almost completely hit that budget. And we paid dividends of $208 million. And then we had a use of cash from working capital and other items of about $64 million. Net totals up to the 480. Now we have reduced debt, almost on target with our budget. We have repurchased shares almost on target with our budget. We have paid dividends, as we budgeted.

One thing I will mention and Rich mentioned this when he went over it. We do expect our expansion capital in 2004 to be slightly ahead of our budget about $23 million ahead. That's because of an incremental storage project at NGPL that came up during the year and a couple of additional projects at retail that came up during the year. One an automated meter reading project and, two, another expansion on the western slope of Colorado that will both generate very nice returns for us. And so, again, we expect expansion capital to be a little bit ahead of our budget for the full year. And that is it for KMI. I will hand it back over to Rich.

Park, did you want to comment at all on the breakout we did on the KP on the crude versus NGL pricing.

Yeah, I'm sorry, I didn't go over that but we did provided some new information on the volume sheet for KMP. And if you look at the CO2 volumes, again this is the second page of KMP's earnings release. There are a number of lines here that we normally present. Delivery volumes relate to CO2 deliveries and they are up nicely. SACROC oil production, Rich mentioned, is up 33% for the quarter and he talked about our year targets there. Yates oil production, this is also a number that we have been presenting. The next line is actually a new line, it's NGL sales volumes. You can see it's about 7.7 thousand barrels a day up from about 3400 barrels a day a year ago and its about 7300 barrels a day from the 9 months up from about 3600 barrels a day a year ago. NGL volumes have been growing for really 2 reasons. One is just the production at SACROC is growing and you get more liquids out as you produce more oil and the second is we've expanded our natural gas plants. And so we have been able to strip more of those liquids out. Now then we show a realized weighted average price per barrel. That's the oil price per barrel. That's the same calculation as we have historically shown but we've added a line below it which is the realized weighted average NGL price and there's an issue here that's footnoted that we hope everybody will understand. We apply all. of our hedges against our weighted average oil price. What that means is our weighted average NGL price as it's represented here is represented as if it were unhedged. Now the truth is there's a portion of our hedges that we actually ascribe to our NGL production and so there's a portion of those hedges that should be allocated to this bottom line but I think it's actually simpler and more consistent with the way we have reported it in the past to show it this way. So we wanted to add this information, one, because we think it will help everybody track our performance, and, two, because as our NGL volumes grow, and as prices grow, you know, the impact of these effects gets more significant. So hopefully you will find that as additional beneficial disclosure.

Okay. And with that, Kim, we'll go back to you and open the floor for questions. Kim, are you on?

Yes, sir. Thank you. At this time if you would like to ask a question, press star, 1. You will be prompted to record your name. Again to ask a question, please press star, 1. Our first question comes from David Maccarone and please state your company name.

It's Goldman Sachs.

Hi, Dave, how are you doing.

I'm fine. I was hoping you could give us some color on the Texas Intrastate System. You are saying -- oh I think Park was indicating it's well above budget and you've benefited from higher margins. Can you quantify the impact of the higher unit margins in the quarter and year-to-date and then talk about the contribution from volume growth and any changes in the cost structure, and, you know, maybe what I'm getting at really is how would the Texas Intrastate benefit, let's say, gas prices rise another dollar or if they were to fall $2 from here.

Well, there's a lot of moving parts in the Texas Intrastates because, of course, their mission in life is to connect the big producing areas primarily in south Texas to a lesser extent east Texas with the tremendous usage areas of the ship channel outside of Houston and on over to Beaumont. So there's a lot of moving parts here. One reason that we've had an improvement in margins and I don't think we can break out exactly the difference between increased volumes and margins. As you can see the volumes are up pretty nicely. And that's shown up on your attachment that covers all the KMP gas pipelines and all of that increase came from the Texas Intrastates. But a lot of what's happening, David, is that we are able to extend our gathering systems, if you will, further and generally we can make larger margins if we buy gas closer to the well head as opposed to buying it at a hub point some place in Texas. And you know, Texas a very liquid market so there's a lot of hub points. But that's mostly what's driving it, as we continue to try to be the preferred purchaser, if you will, as close to the well head as possible. The impact of gas prices, you know, we do sell some gas on a net back basis where we get a percentage of the price, so if it's $5 or $6 gas, we make more than if it's $3 or $4 gas. But the majority of our revenues and profits come from the contracts that are not tied specifically to price. So we've never really quantified, you know, on the margin we make a little more if it is higher. On the other hand, you have some end users when gas price gets higher may curtail their use. So I don't think that gas prices will significantly drive us one way or another. I think the main driver here has been we now have a system that is really much more web like, that covers a lot more of Texas and we're able to access more sources of supply closer to the well head and we're able to access virtually every industrial customer now in the ship channel in Beaumont. And again, as I said earlier, Texas is both the largest producer of natural gas in America and the largest consumer of natural gas and we're really just a middle man in between.

Okay. And then just on TransColorado can you give us a sense for the price of the sell down and what type of financing assumptions you are going to use and would you expect this to be part of fourth quarter KMP equity offering?

Yeah, the answer to your last question is that would certainly be considered in the equity offering. We're working out the details of it right now, subject to both boards' approval. But I think you can think in terms of at first that KMI will probably take back some relatively small part of it as equity. The rest will be cash from KMP and the purchase price, I think, you can figure will be in the $2.50 to 300 -- 250 million to $300 million range.

Okay. Thank you.

And recognize that there have been a number of expansion at TransColorado, too, that are currently in place and one that's coming -- well it's been signed up and will come online next year.

Okay? Next question.

Your next question comes from Wayne Cooperman and please state your company name.

Wayne, are you on? Apparently not. Let's go to the next one, Kim.

Okay. I'm sorry, your Mr. Cooperman? Okay, our next question comes from David Fleischer and please state your company name.

Kayne Anderson Capital Advisors. Hi, Rich.

Hi, David.

You talked a bit more last quarter, last call about a possible transaction at Kinder Morgan. I'm wondering if this is now less likely or still a real possibility.

Well, we continue to look. And, again, I didn't mean to stir up a hornet's nest at that time, and, again what I was trying to say is that we think we can grow just fine with this combination of internal expansion and the smaller one off purchases that we can do it, as we just demonstrated this year, you know, just we've averaged about 6 times distributable cash flow which is well in excess of our cost of capital and drives nice returns to the unit holders and to KMI. That's one end of the spectrum. Where we haven't done real well, and where, frankly, I don't know how well we'll do, if people are still willing to pay 9 or 10 times EBITDA or distributable cash flow for some of these larger pipelines, we're not going to pay that! So that's just too thin from a cost-of-capital standpoint, and so what I was trying to emphasize is the other end of -- completely the other end of the spectrum is if we could do a transforming transaction at a much more reasonable level, say 7, 7.5 times EBITDA or something in that range, we would certainly consider it. And we will still consider that and we looked at a lot of things. Never comment on opportunities beyond what's already in the bag and so it wasn't meant to suggest something was imminent. It's just to suggest that that's another whole area that we wouldn't rule out at some point now or in the future.

Okay. Let me go to something totally different that might be more imminent. We're looking at some fairly extraordinary oil prices, relative to your costs and relative to assumptions, really as far as the eye can see, out into, you know, the forward market here. Are you considering -- would you consider locking in prices much further out into the future? Can you give us a little sense on what you think thoughts are there.

Well, we had a long discussion on that very subject with our board today and Park, do you want to kind of take them through what our hedges are now in terms of percentages?

Yeah, I will give you our existing position. You know, clearly we're almost 90% hedged for the rest of '04. We are about 88% hedged for '05, we're about 66% hedged for '06, this is all off of expected production, about 44% hedged in '07, 29% in '08, about 17% in '09, and about 20% in 2010. So we already have layered on hedges pretty far out. We continue to layer on additional hedges. And we'll continue to evaluate, you know, what the appropriate strategy is there.

Yeah. It is very good question and one that we wrestled with, the prices are very nice. On the other hand, there's certainly a feeling among a lot of people that they are going up still further and so that's what we're wrestling with. It's a very nice problem to have. I will remind you again that we did all the economics on the SACROC play based on $20 prices and this is sweet crude at SACROC, so every dollar above that, of course, is enormously profitable and I will remind you again that this is a -- a project that has in the areas we are drilling in, doing our enhanced recovery in, has about 2 billion barrels original oil in place. Generally, one would expect that CO2 recovery will do some place 10, 11, 12% some place in that range on an all in basis. So you start talking about something, 200 million barrels or better, that we should recover over the life of our CO2 projects out there and then multiply that times the cost -- I mean, multiply that times what we can get for those barrels now and figuring what our cost per barrel is, anything north of $20 and when you certainly get up into the $30 and $40 range becomes an enormous -- enormously profitable for us. So certainly we're delighted, these are great problems to have. On the other hand, we clearly recognize that we are an MLP. We recognize that production does not last forever. Although it's becoming more and more apparent and we'll talk about this in the January meeting, but the SACROC is a very long lived production platform, we think, and we'll probably be longer than we originally thought before any decline and then also we have Yates which, as we said all along, is a different field and it will, we think, will be able to sustain production for several years there. Many, many years there, north of 20,000 barrels but it will not be something that goes to 35 and 40,000 barrels. So I think we have got a nice problem to have but clearly one reason that we are, as Park was telling you, have more excess cash or excess cash coverage is that we want to be very careful with and husband cash coming off of SACROC.

Have you learned anything more since you started that drilling program in the spring at Yates of, you know -- for the CO2 -- I'm sorry the CO2 injection program in the spring, you've had 6 months experience now. Do you see the 20,000 barrels, as the right figure or do you think you might be able to get that up.

Well, it's too early to tell on that. Generally it takes CO2 and we have very little experience and generally it takes a year to 18 months before that starts having measurable impact. I will tell you that -- that just -- we seem to be maybe seeing a little bit of impact from it already, a little faster than we thought. But it's too early to tell. The second thing that's very important out there is our horizontal drilling program, our HDH program, and that seems to be going better, a little bit better than we thought, and, you know, we are actually expected that this last half of this year, that we would probably fall below 20,000 barrels in terms of production because we -- there's very rapid decline on these horizontal, these HDH wells and we thought there would not be any measurable impact from CO2. It turns out the combination, the HDH is doing a little better. Maybe it's a little bit from the CO2 but we are actually through the first 18 days this month, we are at about 20,500 on -- on Yates. We will see if that holds the rest of the quarter but we are hopeful that it will be 20,000 and maybe as we get some CO2 impact maybe that goes up, you know, a couple thousand barrels or something like. But, again, we don't expect to see a 30 or 40,000 barrel production ratio here.

Okay. Thank you.

Mm-hmm. Next question.

Your next question comes from Ross Payne. Please state your company name.

Wachovia.

Hi, Ross. How are you doing?

How are you doing guys? Good quarter. Just a couple of followup questions here. Park, you mentioned the 150 million that was putable to the company that actually they didn't put those -- put those notes to you what is the interest rate on that and does that -- you know, would you guys have been able to refinance that at a lower rate?

It's about 6.67% on -- on that debt and so, yeah, you know, we could have refinanced it at lower than that currently.

Okay. On the hedges too, it looks like you guys have pushed out the hedges a good bit here and that's encouraging. Park, do you have levels of what you expect price realizations to be in '04 and if you can kind of give us an idea of what that looked like relative to '03 and finally, if -- if you have any levels you want to throw out there for what hedges you've done in '05, '06 and beyond.

Yeah, clearly we report the realized price every quarter and, I mean, I think that's the right thing to expect for '04 and the '03 numbers are right there as well. For '05, you know, when we put the majority of those hedges on a while ago so I wouldn't expect a big increase really in '05 or '06 and then after that you would probably start to see, you know, that price march up.

Okay. Very good. One last question, can you let us know kind of what the run rate EBITDA or what LTM EBITDA for TransColorado is going to look like towards the end of the year?

Post expansion, David. It's going to be around, post expansion, this first expansion, about 35 million of EBITDA.

Yeah.

And we have announced -- of course we signed a new contract on the north end. The main part of that is expenditure, which is relatively small will be just some compression. Will be next year there will be another small swatch in 2007. The impact of that from an EBITDA distributable cash standpoint will come online in '06. That's right.

You know historically, just so everybody realizes it's going to be tough to see that. You know, we had an expansion that came on August of this year and we had an expansion that came on August of last year and of course we have another expansion -- we won't really see the benefit of the next expansion until 2006. Now all of that is clearly incorporated into the models that the investment bankers will be looking at and basing their fairness opinions on for the 2 separate boards but when people look historically they won't necessarily be able to find that specific run rate.

But it clearly, when we do our budget for '05 and we'll post it just like we always do, the TransColorado number will take into account a full year of -- of the expansion that's been done. It will not take into account this north end expansion which will come on in '06.

Okay. Just so I'm clear, the 35 is an LTM number or kind of where you expect it to be run rating at the end of the year.

Run rating at the end of the year and abe a full year of 2005.

That's a reasonable expectation for 2005 and so it is actually prior to the next expansion that will come on.

Great. Thanks, guys.

Okay. Next question.

I think our next question comes from Yves Siegel. And please state your company name.

How are you doing?

I'm fine, thank you. I know it's early. Do you have a preliminary number for expectations for growth CapEx in '05, and where do you -- where do you think that's going to come from?

Are you talking about expansion CapEx in '05 at KMP?

Yes, sir.

Yes, compared to -- and it is very preliminary, our real budget sessions are coming up in November but I think, Park and I were just talking about this today. I think, Park, probably pretty close to where we are this year. Like $600 million.

I think that's the best guess. If anything it might be a hair below so maybe it's 500 to 600 million, but, our serious budget sessions are coming up in about 2 weeks and so we'll be refining that going forward.

The main drivers,Yves, will be for next year we'll continue to spend a healthy amount of money on CO2 but not as much as this year. Those expenditures are beginning to tail off. The peak years were '03 and '04, but still something in all likelihood north of 200 million next year and then next year, again, assuming we don't hit any blockages from environmental permitting standpoint, we expect next year will be the year for the major part of the expenditures on our east line expansion, on the Pacific system, as you recall that's roughly a $200 million project. We spent about $20 million on it this year doing the part running through Tucson. And we're well along in the permitting and getting right-of-way through Indian reservations and that kind of thing. So we would expect to do a big chunk of that. And then we also have, we believe, some more opportunities for terminal expansions, particularly hopeful that next year will be the year we can get our major expansion of tanks out in the Carson facility and L.A. Harbor. We -- we have a plan there to add 18 tanks and we already have 10 of them contracted for, and, again, we're waiting for the final environmental permits there. If all goes according to plan, and certainly we have to -- to finish our environmental review, which we expect to do this quarter, but we would expect to start construction there in the spring and actually start bringing some of those tanks online in late third quarter, early fourth quarter next year. So we got a lot of different projects and I really, again, you know, nothing is forever but we feel very confident that this roughly billion dollar level -- that's where it was in '03, if you remember. That's where it is in '04, that that's about the level that we're going to be able to re-invest without any transforming transaction and without any billion dollar or $700 or $800 million pipeline acquisition. If that comes, it will be all in in addition to that. And when you can do it at the kind of numbers we are doing it, you can see how that it drives forward. You can just take our 50 million on 300 million and if you work out what kind of return that is, based on a cost of capital, our cost of capital, you can see the spread is very nicely accretive to KMP unit holders and therefore indirectly at KMI.

Rich, what is the outlook for further expansion out of the Rockies?

We continue to work on that. Again, we will not do it unless we have a great majority of the throughput signed up. We have -- we are moving forward in some respects, but nothing that we have inked yet that we're ready to announce. We'll just see what happens. I think we will know a lot more by the end of this quarter. There are a lot of moving parts. A lot of production. They just had a Roper on some capacity on TransColorado and people came in and took a big chunk of it out at max tariff. So, I mean, there's still a tremendous need for capacity coming out of the Rockies. And we'll just see whether producers and others are willing to sign long-term contracts. We are not going to build it on spec. So we're still somewhat optimistic, but I certainly wouldn't count it until the horse is in the corral and when we were talking about the kind of dollars that Park and I are talking about for '05, we don't have any project of that size in there. That would be additive to what we're talking about.

Okay. And if I could just push it on the CO2, when -- when you all talked about the percentage of production hedged, can you just describe what you think the profile on the production is going to look like when you get out to 2010, you know, from roughly whatever the 30,000 barrels of exiting this year and have you decided on -- because I remember when you revised your budget in the second quarter, I think you were thinking about perhaps a -- a slightly different development plan. Can you just review where you are regards to that, and then, finally, as it relates to CO2, as -- as production ramps up, any sign of -- anything going to happen on the operating costs? Is that going to be pretty steady Eddy as you go through the years?

Well, first of all, let me talk about the production profile. At the January analyst meeting we'll be prepared to have Tim Bradley take you through kind of a range of expectations and, you know, we'll just -- we'll give you a low range, for example, that if we stop right now and didn't do anything else, which is not going to happen, and the high range, would be if we go all the way through the what's called the platform, which is the thickest pay in the whole thing that we haven't gone into yet. And we'll give you a range on that and a lot will depend on, you know, what our percentage of recovery is. And -- but it will be, you know, somewhat of a shot group as we have given you in the past. And then with regard to operating costs, yeah, as we have more volumes the operating costs generally go down. Again, this will vary year-to-year. One thing that's going to help us in the future is that a big part of our operating costs, because that -- that's such a massive project out there, as we use enormous quantities of electricity, we will have our own power plant coming online next April 1st, is that right, for March or April, of next year, which will significantly reduce those power costs. So that will be a drop. A lot of moving parts there but we think the general trend line ' 05 and beyond will be down. This year, if you break it out it will actually be up over '04, as Park said earlier, largely because of power costs.

Thank you.

Mm-hmm. Next question.

I think our next question comes from Scott Soler and please state your company name.

Hi, Scott.

Hi, Rich, Morgan Stanley. I'm only asking 2 questions today because we're in the bottom the fourth.

What's the score?

Cardinals are up 4-3.

4 to 3, okay.

We're already on our third pitcher. Quickly. So 2 questions. The first is if Bush signs the American Jobs Creations Act, Rich, I guess there's just a couple of things, one to understand. One, would it be on your plate of options to potentially issue more KMP to take in KMR, or get rid of KMR and kind of simplify the structure a little bit? That's my first part of that question?

I think that's Park, already.

Yeah, I think the right way to think about that is if that solves everyone's problem with owning KMP, if all of a sudden institutions say, okay, I don't care about UBTI, I don't care about state tax filings, I don't care about processing k-1s, I'm going to buy all of the MLP equity that I want to own now. Then we would say, you know, KMR may not any longer be relevant and we'd look at our options at that point in time. If it doesn't solve that problem, if you have institutions who say, you know, look, I'm still not -- I don't want to process K- 1s, I don't want to deal with state tax filings and I have an issue with UBTI, well, then there's a reason to keep KMR. And so I think it's going to take some time to see the impact. We're clearly happy that it's going to happen and we'll wait and see what happens.

I mean, Park, on your initial discussions, have you all gone on the road to talk to the investors? I mean, if they can get good return in MLPs, wouldn't you think that would override the admin -- and they could probably figure out the administrative issues or are we missing something? Have you talked to investors and gotten a pretty good sense for this?

We sure hope that that would override it but, you know, we can't tell you for sure. We've had a number of investors in the past who have had issues. Their back offices have been unwilling to process K-1s, they've been unwilling to tackle those issues. We've had a number of investors who haven't and who said, okay, you know, fine, I'm going to own MLP Equity. I mean, we had -- we've had in the past very large mutual fund owners of KMP. And so it varies by investor and I think it's really going to be, yeah, something that we just have to see what happens.

Okay. And the second question is on your - you know we were talking about Sarbanes-Oxley, looking at -- I assume those are accrued audit fees. Or do y'all pay them out quarterly or is that -- I mean, is most of that just a big accrual and not something else.

We actually pay them monthly.

Okay.

As much as it hurts us.

And then, I mean, when you look at that cost, I would -- I would presume that the first year or 2 that you are implementing all the different risk controls and all the different boxes you have to check for Sarbanes. Does the costs go down or do we have kind of a level -- you know, should SG&A just tie to audit fees and other Sarbanes fees kind of be flat going forward or how --

We have a PwC, our partner is in the room with us today and I'm looking at him. I would certainly hope there will be a precipitous decline in the future. But he's not nodding his head at that so we'll just see. Clearly there is a learning curve for everybody here and we've had a major increase in our fees because of Sarbanes and we would hope that -- that over the time period we could start to drive that down a little bit, but we'll just see.

Okay. Last quick question, Rich, on -- regarding the benefit of higher oil prices to your production. Would y'all be of the mind to increase your cash coverage ratio and retain more cash for any reason to reinvest that and not have to issue equity to fund some of the growth CapEx or how -- I guess Park, how are y'all thinking about that balance?

You know, just purely from the aspect of, okay, we're generating more cash, you know, let's hold that back, we wouldn't take that approach. Now, what we do do is we think about, okay, what's our cash flow stream going to look like? And so, you know, you need to manage the depletion on the back end which is the reason that we're retaining more now. The other thing that we would do is, you know, if on your unhedged portion, either your unhedged portion is larger or you're getting, you know, a bigger gap on your unhedged portion, then you might increase your coverage a little bit for that because it's having a, you know, disproportionately larger impact. Right now our unhedged portion is so small that it really -- it doesn't have that big an impact on us.

Okay, okay. All right. Thanks.

Okay. Next question.

I'm sorry, your next question comes from Faisel Khan. Please state your company name. Credit Suisse First Boston.

Just had a question on the -- talk about the recontracting on NGPO. Are you recontracting at higher rates than you did in the past or is it kind of flat?

Generally, it's flat to -- to a little better. And particularly as strong demand right now for our Amarillo line, in other words, capacity going into Chicago and particularly strong demand for storage and I think a lot of that, of course, is number one the high gas prices in general and then the volatility and the nature of the contango market between summer and winter.

Right.

So a lot of -- I think a lot of reasons for that, and so right now we are generally recontracting at least where we are and sometimes we are getting a little bit more. And -- but particularly on our Amarillo line and that's one reason we're getting ready to spend this money in the mid-continent area, because, as you know we bought Black Marlin from Northern Natural, a little bitty line that crosses the Texas/Oklahoma border. But building around that we will be able to significantly expand both our storage capacity there and our cross haul capacity so that we're running so full on our Amarillo line, from the mid-continent up to Chicago, that if we can work some across the cross haul into our Louisiana line and then up that way to Chicago, the Louisiana line is generally not as full, that's a real plus for us. So we're emphasizing that and trying to -- trying to expand it as much as we can. You know, we're really committed to -- and Chairman Wood at Berk has said several times that he's looking and expecting for pipelines as this natural gas demand continues to grow, pipelines will step up to the plate, and -- and do the kind of expansions that's necessary. And we think that's exactly what we are doing. We're doing it on a NGPL. We're trying to do it coming out of the Rockies. We talked with you in the past. We'll talk more about that in January at our conference about header systems for the L&G facilities that we see being built along the Gulf Coast. And there we think we have a real advantage because we have so much pipeline capacity if you add together what we have on our intrastates in Texas and then the big NGPL lines running across Texas and Louisiana. So, we are really -- for our part and I think other pipelines are too, we're doing our damnest to step up and build additional capacity and that's -- one thing that's driving that is our ability to recontract on NGPL.

Okay. Are you guys going to have to issue a reserve report at KMP at the end of the year?

Mark?

Beginning, we believe, with our 2004 10-K, we will be including some information on reserves.

Okay. My last question is I just want to understand that you said during the call that your far ahead your budgeted CO2. I just want to understand that most of that increase is coming from the commodity price, is that correct?

Yes. We're a little bit under budget on volumes and we're getting a pickup in price.

Is that NGL price or the oil price.

Again, you know, it's a little bit of both. The way we represent it on the form it looks like, you know, we're hedged on the oil and unhedged on the NGLs. The truth is some of the hedges apply to the NGL so it's a little bit of both.

Okay, so your trying to hedge some of the NGL production?

We do hedge a smaller proportion of the NGL production but we do hedge a portion of the NGL production

Okay, fair enough. Thank you.

Next question.

Once again as a reminder if you would like to ask a question, please press star, 1.

Sounds like people are ready to go back to the ball game and get ready for the Yankees/Red Sox. So thank you all very much and if you have additional questions, please feel free to call me or Park or Kim. Thank you.