金德摩根 (KMI) 2005 Q3 法說會逐字稿

Please stand by for realtime transcript. Hello and welcome to the Kinder Morgan conference call. All lines will be placed in a listen-only mode at this time until the Questiona-and-Answer portion of today's call. At that time you may press star one on your touchtone phone. At the request of our call leader this conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the conference over to our host, Mr. Rich Kinder, thank you, sir, you may begin.

Thank you, Anna, and thanks to all of you for hooking in today, and if my voice is hoarse it is because we had some pretty exciting baseball games down in Houston the past few days. Unfortunately we have to go back to St. Louis tonight and tomorrow night. At any rate, thank you for listening. This is the Kinder Morgan quarterly conference call. As usual I'll refer to Kinder Morgan, Inc., by its New York Stock Exchange symbol KMI, and among other assets of course, KMI owns the general partnership interest in Kinder Morgan Energy Partners, which is the largest partnership in America. I'll refer to that as KMP. Also, as usual, we'll be making statements that are potentially of the Securities Act of 1933 and 1934.

I'll give an overview of the third quarter results and comment on strategic efforts which I think have borne good fruit in this quarter and in the last few days as a matter of fact. Park will give you financial details and then together we'll answer any questions that you might have. Let me just say by way of introduction that I think by any measure the third quarter is exceptional for both KMI and KMP. KMI reported 12% growth and earnings per share before certain items and we've also announced we now expected to exceed our budget target which was $4.22 for the full year. KMP raised distribution to $0.79 per quarter or $3.16 per year and reported record net income. These results were achieved despite the occurrence of two major hurricanes which negatively impacted our terminal and pipeline assets along the U.S. gulf coast. Let me start with KMP. All four business segments there reported increased earnings before DD & A, compared to '04 and we expect three of the 4 business segments to exceed their budget targets for the full year and Park will give you a lot more detail on the financial performance of each of the units and the financial expectations for the year compared to the budget.

Starting segment by segment with our refined products, the revenues from refined products in our products pipeline group were up 6.4% and volume decreased by little less than 1%. If you take into account all of the refined products pipelines in that group. If, however, you exclude plantation pipeline which was of course affected negatively by Katrina and the couldn't quent refinery shut downs in Louisiana and Mississippi, if you exclude plantation, revenues were up 9.4% for the quarter and volumes were up 3.4%, with gasoline volumes up 4.2%.

Now, obviously feel free to interpret this data any way you see fit. But to me it seems like we did not see any slow-down in demand outside of the southeast as a result of higher products' prices during the quarter, and this seemed to be true pretty much across the board on our Pacific system, on our CALNEV system, which serves Las Vegas and in our central Florida pipeline which serves Tampa and Orlando. Even preliminary numbers in October indicate for example that volume in our west coast system are up nicely around 5%. So we just have not seen, at least in our part of the country, a significant down-turn that I think some would have expected.

In our natural gas pipelines we're getting very strong performance out of both our Texas intrastate group and Colorado operations as we previously stated, but I'll say it again we sfeerns experienced minor damage on our Texas pipelines as a result of the hurricanes and all facilities on our natural gas pipelines have now resumed operations.

At our CO2 segment our crude oil volumes at SACROC continued below planThey're currently a shade short of 33,000 barrels per day. We expect them to remain in that range for the balance of the year. We think we now solved our water disposal problem. We still have--have to add some more gas compression as we continue to need to return more gas into the field. But we're well above last year, even at SACROC. The short message is that SACROC was under our budget. Yeats was significantly above. And our CO2 production and source field in Colorado and our pipeline transportation volume for CO2 were well above our budget. So on both a revenue and earnings basis when you balance all of this out, we expect our CO2 segment to actually be above budget. It was above for the quarter and we expect it to be above budget for the year, and as we find that YATES together with increased volume of CO2 are slightly more than offsetting the downturn at volumes at SACROC. Let me turn to the terminals group. We proud of the performance of this segment which experienced numerous shutdowns of various facilities as a result of both hurricanes, notwithstanding that and notwithstanding the fact that the terminal segment like all of our segments took essentially all of the hit that we could identify from the hurricanes in the third quarter from a financial basis notwithstanding this, the terminals had a very good quarter financially well above last year, and they are also on target to exceed their budget for the year.

So if you look at the four segments of KMP, Park will give you a lot more detail. We expect products pipeline to come in slightly under its butch yet. We expect natural gas and CO two to come in above the budget for the year. Looking at KMP overall we remain comfortable that we'll meet or exceed our budget target which was to declare $3.13 in distribution per unit at KMP for the full year '05. Let me turn to KMI, then, and start at KMI, I'll mention a corporate governance item that I don't think we mentioned before, our board has decided that we should let the poison pill at KMI expire and it did in late September. So we no longer have a poison pill. That's obviously an issue that ISS and others have mentioned from time to time. Now, turning to KMI and its financial and operational performance, obviously the strong quarter at KMP was the prime driver at KMI and the impact from KMP on KMI was up 18% quarter to quarter. I want to also pension the natural gas pipeline of America, our big pipeline that delivers natural gas in Chicago, also had an excellent quarter and survived hurricane issues on its southernmost segment that runs into Louisiana.

It has--benefitting from increased transportation margins, benefitting from our ability to renew our contracts for transportation storage across the system and we now expect that operation and GPL to exceed its budget for the full year 2005. Park will discuss the non-cash hedge and effectiveness loss for the quarter which was at NGPL. We disclosed this separately to be as transparent as possible. We expect all of that loss from a third quarter will result in a positive impact of roughly the same amount in the fourth quarter and we will identify it separate in the fourth quarter also. We won't claim any credit for it as ordinary earnings when it comes back as we close out those positions in the fourth quarter. It will have virtually no impact on full-year results. We're also making good progress at NGPL in expanding our storage capabilities and we believe, as I've said before, that there is a real need for additional storage, both for short-term and long-term purposes on our entire pipeline system but particularly on NGPL and on our Texas intrastate assets.

Park will also discuss the net results in power, which was above plan and in retail which was below plan, and the reserve we set up in retail to reflect lower volumes in Nebraska and Wyoming although we continue to count our media count on a [inaudible]basis in the faster growing basis which are located in Colorado. Now, let me discuss some very important strategic happenings in the third quarter and beyond. You have heard me talk in the past about riding the tsunamis, that a key part of our vision is to find megatrends or big waves to ride in the energy field. We've been doing this since we started the Kinder Morgan companies nine years ago and we try to find megatrends and develop opportunities from them. Examples of what we've done in the past was to see the co2 opportunity before a lot of people did. I think we were early and visible on our strategy to do terminal rollup opportunities. I think we saw the opportunities for petco handling as more refiners turned to heavier crude. I think the whole basic original idea nine years of a growth mlp was a tsunami that we rode. We're working on three of these major opportunities or sun nam mis and I'd like to talk about those three and on all three of them we have experienced significant progress since the last time we talked with you. The first of these opportunities, i think, is moving natural gas out of the Rockies. As most of you who follow this industry know, there have been dramatic, continuing increases in production of natural gas in the Rockies, particularly in the Piance basin of western Colorado and in Wyoming. There is not enough take-away pipeline capacity from that area and when you put those two factors together it has created differentials between prices in the Rockies and mid-continent area. Versus prices that producers and others can secure if they move their gas further east or if they sell it under the terms of the benchmark price. Just as an example. One of the trade papers reported today that on Monday the basis differential between Wyoming and Transco zone 6 was $3.67.

That is the kind of differential you have by having gas trapped in the Rockies versus being able to move it toward the East Coast. You put all of this together and the solution, as we saw it, was to build massive capacity running a long distance east and to give our producers, customers, connections to as many pipelines in the Midwest and East as possible. This was the Genesis of our so-called East-to-West--West- to- East pipeline which we have now named very imaginatively I guess, Rockies Express pipeline project. We own two-thirds and Sempra owns one-third.

If we are successful in constructing this, this will be the largest new pipeline project in the United States in over 20 years. It will be a $3 billion or more project and will move up to 2 BCF a day from Cheyenne, Wyoming, across the Midwest and into eastern Ohio. We have conditional commitments for almost half the capacity and strong interest from other parties in the remainder of the capacity. The key announcement this week was our MOU with EnCana to work with us on this project and bid for significant transportation capacity on the pipeline. In addition, EnCana agreed to sell us its INTREGA pipeline which will run from the Piance Basin over to Cheyenne and capable of moving up to 1.5 billion cubic feet per day. This pipeline connects with our TransColorado pipeline at its upstream end and with our Rockies Express at the downstream end. Thus, we will have a seamless pipeline network from the Piance Basin in western Colorado through prolific production areas in Wyoming across to Cheyenne and then across America into eastern Ohio and many eastern pipelines en route. We believe that this is a transforming project certainly for Rockies production. For that matter, for the natural gas supply picture of the United States. The main project will go into service on a phase basis beginning toward the end of 2007 with INTREGA coming on line during 2006. We're very pleased to work with EnCana on this project. They're a good customer of us, and TransColorado. Leading North American gas producer and I think I would comment that it takes leadship like they and Sempra and others are exhibiting if you're going to build megaprojects that solve long-term problems for our industry. You can't sit on your hands and expect these projects to get built on their own accord. So we're very pleased with the developments. There are no guarantees in life, of course, but we are preparing to file our necessary permits and, in fact, we had a team with Washington and we think it is highly likely we will receive the commitments that we need to build this project. It will be of course enormously beneficial to KMP and KMI, as well as Sempra, as well as EnCana and other customers on this line. The second opportunity or megatrend that we have talked about in the past is the opportunity to move gas from the planned L & G regas facilities along the Texas and Louisiana gulf coast away from those facilities and up to points where they--the shippers will have the opportunity to connect with multiple lines that will, in turn, take gas into the Midwest and even into the Northeast. We have now have conditional throughput agreements with multiple shippers for 100% of the capacity on this project which will cost about $500 million and extend for about 140 miles across Louisiana from the Chenier Sabine Pass L & G facility which is in Cameron Parish, Louisiana, on the Texas, Louisiana border.

The main line of this project will move 2 billion cubic feet per day and will allow our shippers to connect with multiple state pipelines for movement east and north. We expect the pipeline to be in service no later than the first quarter of 2009. The third megaopportunity or tsunami we talked about is the oil sands play in Alberta, Canada. Obviously the oil sands play we believe is tremendously important to the future of crude oil production in North America, and we believe that it has the ability to produce an addition--potential to produce an additional million barrels a day within the next five to seven years. To put that in perspective, that is the size of the U.S. Permian Basin production. That crude is going to need to get to markets in the Western Canada and the US and potentially elsewhere, and it will require additional pipeline capacity. The Terasen, the company we have agreed to acquire, already has three pipelines from the oil sand areas, soil sands ear area, and we hope to expand all three of those and take advantage of pipeline opportunities there. Because we saw the oil sands opportunity as so enormous that was the key part of our decision which led us to announce the acquisition of Terasen on August 1.

Yesterday the shareholders of Terasen overwhelmingly approved that transaction. We're now working on regulatory approval, some of which have already been obtained. The others of which we are working on. And we still expect to close that transaction by year-end of 2005. Now, in addition to our plans to expand pipeline capacity whenever we can, on the right financial terms, obviously, we think there are significant opportunities for our terminals group and potentially in the longer term for our CO2 pipeline group. We're working on all these projects and we look forward to being able to participate in the opportunities in the oil sands. As far as the financial aspects of that transaction are concerned, we have said this previously but I'll repeat it, we expect the transaction to be 6 to 8% accretive, in earnings per share in 2006 and thus we expect earnings per share of $5 for 2006 and cash flow of almost $800 million of KMI level. Because of this earnings and cash growth we expect the dividend which is now at $3 per year, at KMI, to be at least $3.50 for 2006, and we plan to take that up with our board at its January meeting. When the acquisition is completed, the Kinder Morgan companies will be the owners and operators of about 40,000 miles of natural gas and petroleum pipelines. We'll have about 1.1 million distribution customers and we'll have about 150 liquids and bulk terminals around America.

We will continue to look for additional megatrends or tsunamis to ride and we'll continue to work to build a company that for the long term will produce real value for our shareholders, our employees, and for the customers we serve. And with that I'll turn it over to Park for the financial details. Park?

Thank you, Rich. I'll start with KMP and so hopefully you have the KMP earnings release in front of you and I'll just go--flip back to the first numbers page, KMP income statement. At the bottom there you'll see the board today declared a distribution for the third quarter of $0.79 cents. That actually was a little bit above our distributable cash flow for the quarter of $0.78. That is consistent with what we mentioned at the second quarter earnings call, consistent with our expectations for the third quarter. Truthfully the third quarter came in stronger than we expected and even in the face of the hurricanes, you know, almost matched that distribution level. Couple of other things I'll point out here before I get to the segment detail on the next page. You'll see versus the third quarter last year, that distributable cash flow or the net income before DD&A is essentially flat. You will see earnings per unit is actually down a little bit, $0.57 versus $0.59. In truth, our earnings before DD & A for the segments is up $72 million and you'll see that on the next page. We had increase in G & A due to acquisitions. Increase in interest due to higher interest rates. And a little bit of additional debt outstanding. I'll talk about that on the next page. We had increase in DD & A, due to CO2 and some acquisitions. And then impacting the distributable cash flow, sustaining CapEx was up. Main point is that we're on track to maintain our budget, declare distributions of $3.13. Now, you know, the earnings per unit, again, is not as relevant a measure at KMP. We believe the more relevant measure is the distributable cash flow per unit and distribution but our budget did call for earnings per unit of $2.23. We will actually end up below that after the legal settlements that we talked about in the first and second quarter which total about $30 million or $33 million.

We will be above that earnings per unit target if you look at it without those legal settlements. If you look at it before those legal settlements we will be that earnings per unit target. We think the main point is where we will end up in terms of distributable cash flow. And then of course what that means for the distribution and the difference between those two is excess distributable cash flow. We had a budget of $39 million. If you look at that number prethe settlements, we are already at $49 million. So we are already above our excess coverage target for the year. We were above it after the second quarter as well. If you look at that number after those settlements, we're at $16 million. For the full year we'll probably end up at a little bit below our $39 million target if you look at it after the settlements. If you look at it before, then we will be well above it. One last thing I'll point out on this page before I get to the segment detail, sustaining CapEx, our full year budget you may remember is about $126 million. You'll see year to date we've spent a little under $96 million. As I said in the third quarter, our full year forecast is now a little bit above that. We actually expect we'll come in a little bit above $140 million. I think what I've said in the third quarter--sorry, in the second quarter earnings call is about $135 million. The largest change there is coach insurance project ran a little bit above we thought it would be, at least what we budgeted for this year. That is main driver there. We're spending more on integrity project especially out on the west coast. Our current estimate for sustaining CapEx for the year is about $140 million, even with that, you know, we expect that we will distribute or declare distributions of $3.13. At least that amount. And we will have excess coverage again prethe legal settlements we'll have excess coverage way in excess of our budget. With that, let me go to the page right behind that where you have the segments and we can see where the growth came from. Starting with products pipeline, about $7 million for the quarter or 6%. It is up about 6% for the year, as well. In the product pipeline as Rich mentioned, Plantation was down for the quarter largely as a result of the hurricanes. As was noted in the press release, took a $5 million charge in the north system, related to inventory issues that we continue to investigate there. We have differences between our book inventories and our physical inventories. We are attempting to recover some of that from some of our counter parties. We are also continuing to reconcile this. For the most part these are old items that we need to go back and reconcile. We are comfortable that we have this issue fixed going forward, although I will say as we continue to reconcile the old activity there could be an additional charge that may come in the fourth quarter of as much as 10 to $12 million.

Now, we need to do a lot more work to sort that out. We hope to have it all sorted out in the fourth quarter but again as we sorted out it could result in additional charge of 10 to $12 million. Now, going forward, products will actually miss its budget for the year by less than 5%. This is consistent with what we said after the second quarter. That is due to a weakness at the north system, a little bit at [coachen] and little bit at Pacific. Largely weather-related. As Rich mentioned had been very strong in the third quarter and early in the fourth quarter. So, again, products will be a little bit under Rich's budget for the full year. Natural gas pipeline is a strong quarter up $17 million or 16% for the quarter, up almost $60 million or almost 19% compared to where we were last year. Now, part of that is TransColorado which is now KMP and was not in the first three quarters of 2004, and then a lot of it is strength at the Texas intrastate and at our Red Cedar system in southwestern Colorado. For the full year we expect that strength to continue and we expect the natural gas pipeline segment to be significantly above its budget for the full year. CO2, Rich mentioned, very nice growth, $34 million or 39% for the quarter. Up almost $118 million or 49% for the nine months year to date. As Rich mentioned, volumes at SACROC are a little bit below our expectations. Volumes at Yeats are above. Volumes, CO2 is above. We're getting a little bit of help. We expected those trends to continue and we expect that CO2 will be a little bit above its full-year budget in terms of earnings before DD & A.

On the terminal side, up $15 million, 22% for the quarter. Up $37 million or 19% year to date. Terminals is benefitting from some acquisitions, specifically the trans global acquisition we acquired a number of coke handling facilities. It is also getting some nice performance from existing assets. Not only that, the terminals deliver this performance in the face of the hurricanes, the terminals was the segment that was most significantly impacted by the hurricanes. Even that being said the impact to terminals was less than $5 million in the quarter and represents what we believe to be the significant portion of the impact that we will recognize from the hurricanes. So we don't expect to have any significant ongoing impact as a result of the hurricanes. Terminals for the year will end up above its budget largely driven by the acquisitions we've made throughout the year.

That takes us to total segment earnings before DD & A. Up $72 million or 19% year-over-year. That is the number I mentioned before. That's for the quarter for the nine months up $234 million from where it was a year ago or 21%. And as noted in the press release, our full-year budget for earnings before DD & A, about 1.74 billion, and we expect we will exceed that for the year. Now, I am going to jump down to the G & A expense you will see it is down in the earnings segment. Up $9 million for the quarter. Up about $12 million for the year. Biggest portion of that is acquisitions which adds incremental G & A. G & A on some natural gas pipe and additional legal expense. On interest you will see it is up $22 million for the quarter. Up about $55 million year to date. It is above our budget as well. Year-over-year the balance is up about $750 million for the quarter, about $500 million year to date and the rate is up a little bit over 100 basis points. And so that incremental balance which is a function of expansions and acquisitions, and the slightly higher rate, is what's driving that incremental expense. For the year, again, the interest rate has risen above our expectations in the budget, although not significantly above, but we expect interest expense for the year will be above our budget.

Minority interest is really down and that's largely a function of a single terminal, the IMT terminal where there is one third minority interest in the INT terminal in New Orleans and that was impacted by the hurricane. That takes us to a net income, up $28 million or 13% for the quarter. Up $86 million or 14% year to date. And it will be on budget for the year in terms of total net income. Just to review that for you, the segments will be above budget. G & A will be above budget because of acquisitions. Interest will be above budget because of rates. But in total we will be on our budget. With that, I'll go back to the first page and just touch on a couple of things here. Revenues you'll see are higher. That is a function of natural gas prices. Same thing impacts operating expenses. DD & A,, we talked about it being up fabout $13 million for the quarter; it is up about $49 million for the year. CO2 is a large portion of that. Also acquisitions at terminals driving DD & A. G & A is up. Severance taxes and also little bit of the terminals acquisition. Operatiup ng income you'll see up $46 million for the quarter, $113 million year to date. Very nice growth. 19% growth year to date. Earnings from equity investments, generally those are dropped into the segments on the second page, you already sue the impacts of that, that is plantation, Cortez and Red Cedar for the most part.

Interest we discussed another net that is primarily interest income coming from Plantation and that is why it is bigger this year than last year. We restructured plantation debt in the last year. And then minority interest we already discussed Taking us down to the net income number that we've touched on on the prior page. That's it for the income statement. Let me touch on the balance sheet on KMP, which is the final numbers page and KMP release. Other current assets you'll see is up significantly. AR is up a fair amount but AP basically balances that out and then mark to market with the hedge impact this line as it does a couple of other lines and I'll show you where that happens. PP & E is up and that is expansion CapEx and a little bit of the TGS acquisition. TGS impacts deferred charges and other assets, that's some good will and contract valuation related to that acquisition. Our total assets to just under $12 billion. Other current liabilities, AP is up, essentially offsetting the AR. Hedges have a big impact on this line and represent the vast majority of $660 million increase. Long-term debt I'll talk about in just a second. Mart valueet of interest rates swaps just fluctuates with the forward curve for interest rates. You'll see the hedges have an impact on the Other line, that is Other Deferred Liabilities as well. And that is all of that $557 million change. And then of course the hedges have an impact on accumulated other comprehensive loss. In Other partners' capital is up a bit.

Total of debt of little under $5.2 billion, it is essentially flat with where we were in the second quarter. It is up about $465 million from the beginning of the year. And so let's talk about those change since the really significant is the year-to-date change of $465 million Let me touch on that first. During the year we have issued equity, generated cash from equity offerings of $285 million. We have paid cash for acquisitions of about $290 million. We also assumed debt in acquisitions of about $49 million. Those are both cash going out. We've had expansion products expenditures of $500 million. And then we have generated cash from KMR distributions to retain that cash of about $126 million, so that's coming back the other way. Working capital and other items amount to a use of cash of $37 million. So, again, those items total up to the $465 million increase in debt during the year. Largest being, of course, acquisitions and expansion offset by equity issuance. Same thing for the quarter, just so you can reconcile it is just a $3 million change debt for the quarter. Equity offering all incurred in the third quarter of $285 million of cash generated there. Acquisitions during the quarter were $96 million and the debt assumption related acquisitions of $49 million also occurred in the third quarter. Expansion projects during the quarter total $212 million. The retained cash from KMR distribution is $44 million during the quarter and working capital and other items totaled to about $25 million. Now, I'm going to come back to those working capital and other items in just a minute.

First, let me give you a quick overview of the acquisitions and the expansion and expends cheers throughout the year. From the acquisitions side in the third quarter, we completed the acquisition of the Dayton storage facility, about $57 million in cash and that's also where we assumed the debt. We acquired Exxon Mobil Staten Island terminal, 22 million dollars. We acquired a few small terminals that total $20 million. Year to date you add on top of that the TGS acquisition which is 184 million in cash and then they took some KMP units in that transaction as well. And then the small CO2 Claytonville acquisition of about $6 million and a couple of other odds and ends, totals the $290 million of acquisitions year to date. On the expansion side, again, it is $500 million year to date, about $212 million for the quarter. Products was about $57 million in the quarter, about $131 million year to date. Largest piece is there, is the East line expansion, that is the single largest piece, alittle bit of completion on the North line expansion, and then the Carson terminal expansion also in there. On the natural gas side, about $23 million for the quarter in expansion capital. About $45 million year to date. The west ranch open version is the largest piece of that. On CO2, expansion CapEx was about $89 million for the quarter. It was $215 million year to date. And then on the terminal side, expansion CapEx $42 million for the quarter and $110 million year to date. I would say especially with respect to terminal projects we found more opportunity as we went throughout the year. We will exceed our expansion capital budget of $600 million for the entire year.

Real quick on the working capital and other items just to remind you it was a source of cash of about $25 million for the quarter. Use of cash of $37 million year to date. Real quick for the quarter. AR and AP essentially cancelled themselves out. There was an increase or really it is a reduction in the crude liabilities which is a use of cash of a little over $30 million and then an increase in accrued taxes of $18 million and then margin returns of about $32 million. Those things basically net out to the $25 million source of cash. Year to date on the $37 million for AR and AP we've actually had a use of cash of about $16 million. For accrued liabilities and again this is largely interest, I'll remind you our big interest payments come in the first and third quarters so we had just gotten past the big interest payments which takes the accrued interest balance down which is use of cash. Year to date that is about $18 million. Accrued taxes went up about $41 million. That includes a taxes other than income. And then a couple of other items, one equity and earnings versus distributions of $18 million and incremental amount which is seasonal of gas and storage about $20 million. Again, you add those up and you get to essentially the use of cash of $37 million year to date. And, again, that's just a component of what's driving the increased debt balance of $465 million. Now, that being said, our debt to cap is still at about 52%. It's pretty consistent with our budget where we would expect it to be. Given the fact that we have made acquisitions throughout the year and we did not budget for those acquisitions.

So, again, the balance sheet in line with our expectations, given the activity this year. With that, I will go to KMI and so, again, if you look at the earnings statement and earnings release and go to the first numbers page you will see the income statement the. At the bottom you'll see income from continuing operations of $0.88 cents. That is after the impact of hedge and effectiveness and we've broken that out as a certain item. Total amount pretax is about $25 million and as Rich said, we expect most of this to come back to us in the fourth quarter. Let me explain a little bit about what this item is and why we think you should look at it independently. Basis differentials did widen in September. They widened more than we had ever seen them widen before. Historically we have not hedged on natural gas. One, because we have physical capabilities which means that we don't fully realize the basis differential so we have flexibility there to minimizes that. Second is that they have not been this volatile. In an environment where they are this volatile, we will hedge and have hedged to a greater extent going forward than we have in the past. For accounting purposes we had to recognize this $25 million which really relates to future periods. Truthfully, it primarily relates to the fourth quarter. Now, that was the accounting adjustment. For our own internal projections, and this is built into our expectations for the segment. We had even prior to the end of the quarter incorporated the impact of the wider basis differential into our expectations. The impact is significantly less than the $25 million, and again, that is because we have the flexibility to avoid wide basis differentials in certain circumstances. We had already incorporated that into our expectations. That will be reflected in NGPL's results in the fourth quarter and reflected in the expectations that I'm about to discuss. What we are doing is removing the accounting adjustment that we had to take in the third quarter and we will remove the flow-back of that accounting adjustment in the fourth quarter. We'll separate both of those items out so that you can see them and so that you can see NGPL for the true impact that the wider basis differentials have on it. Again, it is significantly smaller than this amount. And so what you should expect to see in the fourth quarter is a positive item in the certain items that relate to this hedge and effectiveness which is just this number coming back. This number can change slightly. But our current projection is what will come back in the fourth quarter as $24 million. The number currently in the third quarter is $25 million. This number has flowed through NGPL in the past, it was always so small it was not worth discussing. In the second quarter this year the number was around $500,000. So when you look at the number prethat hedge and effectiveness number, you get an earnings per share of $1.01 up 13% from the $0.90 cents where we were a year ago and we think that is the real number to look at. Now, those of you out there, you can take your choice. You can look at this at $0.88 cents, and then when you look at our results for next quarter, you're going to add about the same amount back on, about another $0.13 back on to our results. If you want to look at it like that, that's fine truthfully for the full year they're going to cancel each other out. With that I'll go to the second page and talk about the segments. Let me start in the middle of the page, talking about earnings attributable to investments. You will see $144 million for the quarter up from $122 million a year ago. That is 18% growth. 413 for the nine months. Up about $66 million for about 19% year to date. On track to hit our budget with the impact we expect KMP to have on KMI. NGPL, you'll see had a strong quarter up about $18 million. I'll point out again this is pre the hedge and effectiveness number. It is broken out down below. And so up about $18 million, up about $32 million, year to date, due to the strong recontracting efforts on NGPL and the strong volumes that we're realizing on NGPL. The volumes don't have a direct impact it is recontracting. NGPL is having a very good year and we expect it will come in above its budget nicely and that is incorporating into that expectation any impact that wider-basis differentials will have on NGPL. TransColorado has been transferred to KMP so it does not show up for 2005. Retail you'll see negative million dollars. So a loss of million dollars in earnings for the quarter. Down for the quarter we're actually down about $6.5 million year to date. This is a change from where we expected retail to be. We have taken an almost $5 million hit in retail related to some lower volume that we've seen and a lot of this actually came about in the first and the second quarters. Now, and this is either related to reduced consumption among our customers and especially residential and commercial customers, or due to difficulties in estimating volumes as we convert from manual meter reads to automatic meter reading.

The truth is we continue to evaluate that. We have an effort under way to determine what is driving this. But because it has now gotten to the third quarter and we were still trying to figure out what it was, we decided to take all of it and this is all of it, into earnings at retail. This will cause retail to be below budget for the year. We expect retail to come in at $5 million under its budget. Power is nice fully above last year, about $460,000. It is almost over a million-seven year to date. Then you'll see a total which is kind of the segment earnings impact at KMI. Of course it includes the impact of KMP. Up $31 million to $286 million for the quarter. Up $84 million or almost 11 percent year to date, and we expect that the segment will deliver above their budget in total at KMI for the year. G&A you'll see it is actually down a little bit for the quarter end year to date consistent with our expectations it is on budget, we expect it in the year on budget at KMI. Interest expense you'll see is up about $6 million for the quarter. It is up about $15 million year to date. Balance is down on average about $200 million. Rate is up about $115 million. We will be a little bit above budget in interest expense at KMI for the year.

The next line interest expense really relates to the trucks. The other is largely the KMR minority interest and little bit of Triton minority interest as we consolidate Triton. That takes you income from continuing operations before income taxes of about 13% for both the quarter and year to date. You take out the taxes, $125 million compared to $112 million a year ago. Up $13 million or 12%. $43 million year to date or 12.5%. And we expect that, again, to exceed our budget and that translates into the $1.01 per share which we think is the most representative number in terms of earnings per share for the quarter at KMI. With that, I'll touch on a couple things on back to the income statement on the first page. You'll see operating revenues are up a little bit. Now, that operating revenue of $294 million for the quarter is after the hedge and effectiveness number that actually flows through revenues. It is also after the reduction due to the sale of TransColorado. Gas purchases and other costs of sales largely as a function of atural gas prices. O and M is up slightly. G & A and we already talked about depreciation and amortization, is essentially flat. TOTI is up a little bit. Some property taxes on NGPL are a little bit higher. Operating income you'll see is a little bit below where it was last year, by about $17 million. And now again the hedge in effectiveness number of $25 million is included in that. In addition TransColorado is in no longer there so you feel the impact of TransColorado. We don't believe operating income is an overly relevant measure for KMI anyway because it does not incorporate the impact of KMP, which you see on the next line. And again, that includes 100% of KMR, so the best way to look at KMP on KMI are the numbers we talked about before, which are on the next page. The rest of these items we have largely discussed. If you look at other net you see a large number in the nine months of 2005. This is the gain on KMR sales that we pointed out in the second quarter and separated out as a certain item.

Again, that takes you to three certain items, $1.01 in earnings per share for the quarter. That is consistent with our budget, consistent with what we expect to generate for the year, which again we expect will be above our budget for the year at KMI. Turning to the KMI balance sheet. Other current assets are up almost $300 million. You have a little bit of increase in gas and storage. You have hedges flowing through there of $200 million, that's most of that and few other items making up that total. Investments you see that is down about $170 million, that is largely KMI's proportionate interest in KMP's other comprehensive income, which has to get represented here. PP & E is basically flat. Other Assets flat. Total assets a little over $10 billion. Notes payable and current maturities of debt, I'll talk about debt in just a minute but just so you understand, in the beginning we did not have much commercial paper, not any. We had cash on hand, which I didn't mention up at the top, that cash was largely related to the sale of TransColorado and was used for share repurchase in the first quarter of this year. What we did have was a $500 million maturity in March of this year. We paid that down half, refinanced long-term. So $250 million of a new issue and half with cash on hand in commercial paper. So what you see for September 30, that amount is essentially all commercial paper. Other current liabilities is up slightly. Actually it is up a lot as a function of the hedges, but then there are a few items, accrued interest, AP and few other accruals that reduce that, about in half.

Other liabilities and deferred credits doesn't change. 250 million dollars as a function of the new issuance I mentioned. Next line is basically the trust and then the interest rate swap. Minority interest unchanged. Accumulated other comprehensive loss, again, the hedges flow through here. Other stockholders' equity is basically flat. You have repurchases you have essentially offsetting the retained earnings. Then you get to total debt, which is actually up about $180 million for the year. As we said, at the beginning of the year, December 31 balance was a little bit low because we had cash on hand from the TransColorado sale which was available tore share repurchase and it was affected in the first quarter of this year. It is also up $100 million from the end of the second quarter and in just a minute I'll go through what is driving that--it takes you through 39% debt to cap, so still a very, very strong balance sheet. In terms of the cash flow measure that we look at, we generated $456 million during the year. That number is actually understated by about $20 million. We talked about this in the first quarter. We did pay $20 million of 2004 taxes in the first quarter of this year. So that would really take it to 476. Important thing is that we're on track to hit our budget target of $623 million in cash flow for the year.

One thing I'll mention, sustained CapEx as it shows up here, $71 million year to date. Our original budget was little over $100 million, we currently expect we'll come in at about $118 million. Two main reasons for that, both at NGPL, and one the FERC rule that would have shifted sustaining CapEx dollars to operating expense and we budgeted for that to be effective at the beginning of this year was postponed until the beginning of next year and what that did was shifted OpPex to sustaining CapEx for the year and so you get incremental sustaining CapEx because of that. So additionally we have the project ongoing at NGPL related to stress corrosion cracking which is requiring additional sustaining CapEx this year. Again, all of that is factored into the $118 million and even with that increase in sustaining CapEx, we believe that we will hit our target of $623 million of cash flow. All right. With that, let me go to the debt reconciliation. Debt went up by $100 million for the quarter, up by $180 million year to date. The components of that cash flow was $140 million for the quarter. I'll go through the quarter first. Share repurchase, use of cash was about $9 million for the quarter. Dividends paid during the quarter are $92 million. Expansion CapEx during the quarter was about $20 million. All of that would actually--I mean, that debt would be about flat and in truth we had working capital and other items of $119 million. The largest piece of that working capital and other items and actually all of it, and more, relates to hedges and it's primarily just timing on hedges and that's why it is in that category. The largest issue there is--are NYMEX hedges. We have to post additional margin at NYMEX and that required $50 million during the quarter.. NYMEX hedges settle in the month prior and so, for example, the hedges for October we actually had to pay the cash for them in September. And so you have that carryover for a month and we don't get the cash from the physical sales until the following month. That is about another $50 million. We have some projected sales that we actually rolled to future months, but we still settled the hedges, the original hedges on those sales earlier. That is about $38 million. And then you have a little bit of put premiums and so some option premiums, about $13 million. You total all those up, you're at about $145 million. There are other working capital items, primarily some accruals, that went up, and some cash raised from option exercises and employee stock purchase program that really offset that and get to $119 million. For the year, debt is an increase of $180 million. We've generated $456 million in cash. We have used $199 million for share repurchase. We have paid dividends of $264 million. We've had expansion CapEx of $34 million. We have contributed to our pension plans in excess of expense of $24 million. We've generated cash from KMR sales of $92 million. And then we have a use of cash for working capital and other items of $187 million. This, again, is largely the hedges, the same items I read off before. Although year to date that change totals about $138 million. So there are a few other negative items, negative working capital items that take us to this $187 million use of cash. They are accrued interest, and again just timing on that interest, about $38 million. Other accruals for the year to date are down about $26 million. And a little bit of timing on distributions is a use of cash of about $36 million. Offset by, again, option exercises and the employee stock purchase programs generate about $55 million. And then another use of cash for gas and storage for about $19 million.

Those things total up to negative about $35 million, $45 million, which take us to about $140 million that was just a function of the hedges up to the $187 million. These are big numbers related to working capital and others. The good news is that preponderance of our hedges actually roll off in the fourth quarter of this year at KMI and what that means is that most of these dollars associated with these hedge amounts, should flow back in the fourth quarter. So what we would expect to see, when we end the year, is that most of these dollars come back. Another way to say that, is that we expect to have a big source of cash from these working capital and other items during the fourth quarter. So when January comes, I should be on this call pointing out that source to you. One of the things that--that I will point out, I talked about KMR sales generating about $92 million, during the year, originally in January we talked about the need to sell some KMR shares to offset capital loss carry-forwards that we have expiring this year. Well, we had events transpire against us a little bit and in truth we'll need to increase the amount of KMR shares that we sell in order to offset all of our capital losses. And the reason is this: The Wrightsville facility which we had a preferred interest in, was put into bankruptcy by Moran, recently changed hands and went to AECC.

That triggered additional capital loss for us. Under the tax rules we have to apply our capital gains during the year to any capital loss that was generated during the year first. And then we can apply it against any capital loss carry-forwards. What that means is that we have additional capital losses we need to cover this year. As a result, the KMI board today approved additional sales of KMR. It is about twice as big as we originally anticipated and so essentially we're going to sell about the same amount that we have already sold, going forward for the rest of the year. We expect to do it in transactions like we already have done this year, in large private placements with interested parties. So, again, that will allow us to offset all of those capital-loss carry-forwards. One other thing I'll reconcile for you. You see a big number down here. This other adjustments line which is reconciling the simplified calculation of cash flow back to the cash flow provided by continuing operation. All these numbers are preliminary. We don't have our final cash flow statement yet but that reconciliation shows $277 million Other adjustment. Let me tell you what that is. $175 million is working capital. This is close to $187 million number I talked about from year to date. The preponderance of that, or this cash amount that is going on out hedges that will settle in the fourth quarter and essentially that should flow back to us.

And then there are a couple of additional items, there is timing, which I mentioned before on the distributions of $36 million. Pension contribution in excess of about expense of $24 million. And then the gas and storage of about $35 million. And you add that up with a few miscellaneous items that total about $10 million, a little bit less than $10 million and you get the $277 million Other adjustment. The key is that a lot of that is driven by these dollars that are out as a result of the hedges which settle in the fourth quarter and which should flow back to us in the fourth quarter and that is it. So I hand it back to Rich.

Okay, thank you, Park. Questions, Ann, if you want to go on and open it for questions, please.

Thank you, we will begin the question-and-answer session. If you would like to ask a question, you may press star one at this time. You will be prompted to record your name, to withdraw your question you may press star two and it should just be a moment Here for our first question. Okay, Scott Soler with Morgan Stanley, you have an open line.

Hey, Rich, how are you doing. Let us hope we don't hang any sliders tonight.

That's right.

Couple things. One I wanted to ask is specific and two are actually industry questions for you, given all the stuff going on right now. On the Rockies Express, have you guys gone on record to talk about the tenure of the capacity? I know you have half of the capacity committed but when the both the shippers and EMP companies are thinking about contracting, has there been any hesitancy to do super long-term contracts to anchor those assets? Maybe talk generally about that.

No, there is not been reluctance to sign long-term contracts and we wouldn't do this project without long-term contracts.

Okay. I didn't know if that was holding back pipelines from being built in the region.

What has been holding back pipelines, Scott Parker, head of our natural gas group, he can comment, I think notwithstanding the dramatic increase you had in Rockies production it took producers a while to get comfortable with what their long-term outlook was going to be and it is only recently that people like EnCana and others say I'm going to have significant production out there to commit to significant volumes. As in response to the press today, while the press release is not absolutely clear on it, EnCana's commitment is 500 million cubic feet a day on a long-term basis.

Okay. And Rich, with all this stuff that's going on between hurricanes and high net gas prices and all kinds of people speculating about what high gas means, it just doesn't yet look to us factually as though you're seeing that much of a loss of, you know, demand destruction at this point. I'm just curious. My question is a couple questions within that question. The Gulf of Mexico in terms of refining capacity and oil and gas production , and L & G terminals, everything is trying to be squeezed between the couple of states in the United States when we need gas all over the place and refining capacity. When you guys are making--working on contracts and thinking along with companies about things you're trying to do long-term, is there really any thought as to the reality of building stuff elsewhere in the country, or I guess also when you look at your customers and $14 gas, are you guys seeing yet anybody truly capitulating and say, I know, we've moved most of the industrial infrastructure off shore the last several years, is there anything that makes--that makes you ponder what could happen with what we're seeing with $14 gas?

You're right, you get a lot of parts to that question. I think the main thing is to separate out the products, crude side from the natural gas side. On the products side, and that's why we went to some detail on the numbers of the volume, numbers on our refined products segment, because we are not seeing outside of the Southeast, which you would expect because of pipeline interruptions and other supply interruptions there, we are not seeing on our particular systems, anyway, a destruction of demand on gasoline and diesel as a result of higher prices, and I think some would expect that we would. Now, that could change, and certainly there is--I've said all along there is elasticity at some point. Where that is in terms of gasoline at the pump price, I don't know. But clearly, at least in our service territories, in the third quarter, did not seem to have an impact, the volumes were very strong. With regard to your question on refining capacity, you know, this is a very complicated question. If you're building refinery, first of all, you have to look at long-term crack spreads not just the crack spreads in a given three-month or one year time period. It takes years to bring a refinery on line and you have to look at your crack spreads over the next 20, 30, 40 years. Also, I think anybody who builds a refinery, certainly wants alternative supplies and that is why I think you see so many refineries on the gulf coast, you see another clump in Los Angeles and you see a much smaller clump in San Francisco, because if and when production from the local areas, production of crude oil, goes down, they have the ability to move in massive quantities of crude for processing by water. And that's what makes the ship channel here in Houston such a huge center. That is what makes Pascagoula, Mississippi, and Exxon's at Baton Rouge work. If they can't get crude supplies from local areas, they can bring it in. And in terms of the Houston ship channel, at one time, of course the overwhelming majority of crude supply was from Texas oil production. Today, and it's, I don't know, certainly less than 20%, maybe as little as 10%, rest of it is coming in primarily by water, from other sources overseas. So just say we're going to throw up refining capacity is not the answer. I mean, it's a much more complicated process than that and I'm afraid what we have to learn to live with is that a lot of it is going to be adjacent to coast--coastal areas just in order to be able to get the divergence or alternative supplies that you would want if you're going to sink billions of dollars. The other thing under refining capacity a lot of plans to increase the size and capacity of refineries, and I think that is the likely answer to increased refinery capacity than is building greenfield refineries. That is my personal view. Any way you cut it, we're going to have significant quantities, imported gasoline coming into this country. We're seeing it right now. We handle about 25% of it. And there is all kinds of refined products moving into the Houston ship channel right now. Odd as that may seem. So there's just a lot of movement.

It is a worldwide market not just in crude oil but in products. Longwinded answer on the natural gas side, I think it is too early to see what's going to happen with demand, when you have high gas prices flowing through to retail customers and commercial customers in the winter. Whether you go back to the Jimmy Carter days of cardigan sweaters and turning down a thermostat, we'll just see. Also, of course, with regard to industrial production, a lot has already moved off shore. A lot of people who--lot of businesses who had natural gas as their prime feed stock had already moved to places where they can get cheaper natural gas. An ironic consequence of the fact that natural gas due to L & G is going to become much more a global enterprise, like crude oil than it's historically been. Once that fully plays out I'm not sure there will be as big an advantage in locating your plant some place else because that some place else, whether it is gutter or some place else in the Middle East or Caribbean island, they will be also play in the L & G market if somebody wants to put up L & G trains. The more we move to a natural gas world market, the less movement there will be. I am certain there will be some movement off shore from the United States but I think a lot of it has probably already been done.

One last question. On Boardwalk Partners, the prospective IPO of these two interstate pipelines, I know this doesn't necessarily apply to your company right now, but just being a guide in the industry and one of the leaders on MLPs, can you talk about--do you think it is a trend that you will potentially see more interstate pipelines being placed into the vehicle over the next number of years from other companies who own them? Or do you think that is a one-off deal and for certain reasons that it might not happen, as much as people might anticipate?

Gee, I think, Scott, that's just on an individual basis and clearly we believe that MLPs are very appropriate entities to hold any kind of long-live cash flow, positive entities, including interstate pipelines, but there are obviously a lot of other factors that go into it. Including the tax basis of the interstate pipeline. Somebody has to bear a step-up in basis if you put them into an MLP as an asset. These are issues that have to be decided individually. I will say the market cap of the MLP group for pipelines reveals this that increasingly more and more companies are interested in putting as many assets as qualify and as make financial sense in the MLP's and I think you'll see MLPs to continue to grow at some rate over the next several years.

Okay. Thank you.

Thank you.

Our next question comes from Yves Siegel with Wachovia.

Hello Rich, Park and Kim. Couple questions, one is on financing. How shall we think about the Rockies Express and Integra, in terms of, you know, having spent a lot of money but not necessarily getting the cash flow very quickly?

Well, that's one of the beauties of the way this is being built and probably we need to do a real good process with all of you from an education standpoint. One of the reasons it fits our pistol so well is that it is going to be built in phases and our shippers will start paying as we build those phases. When Integra gets built, and it will be in two phases, also, phase one over to Wansutta, and second phase over to Cheyenne, people will then start paying on that. We will have commitments on that part of the system. And then we're going to build Rockies Express really in three segments and each of those segments is coming in sequentially and our throughput agreements provide that our customers will pay as each of those segments is finished.

So this will not be an issue where we will have a whole bunch of big construction expenditures without any return coming on those expenditures. So I think the financing is going to work very well. Obviously we have not decided whether we have one partner, we may have other partners. We will certainly own at least 50% of the project. But if we go to the 50%, this could be, you know, financed at that separate level. That said, we're not at all reluctant, we would be very happy to own more than 50%. And just finance it on our own--our share on our own balance sheet. Again, we'll do it at the same kind of ratios that we have. All these numbers are run at 50-50, or more equity thickness.

Rich, when would you actually consummate--

Its a $3 billion project, two-thirds of a $3 billion project is a big deal to a lot of MLP's. We already have a $12 billion balance sheet. It is a deal that we are very excited about, but being able to finance it and ensuring that it doesn't somehow impact our distributions, that's something that we can pretty easily manage.

When would you anticipate actually acquiring Integra?

Scott, you want to.

The, you know, we still have confidentiality with EnCana, so we can't disclose a lot of details. That would be wrapped up along with the second phase of the build of Intrega and then we would acquire it and start our first phase,.

This is it for me. I promise. Could you comment, I guess, Park, or Kim, what the rating agencies are thinking about the Terasen acquisition?

Sure, on, you know, KMI came out--sorry, S & P came out on KMI and K & M and put them on negative watch at the time of the Terasen acquisition. And I think what they said with respect to KMI, was that it wasn't clear to them that the lower business risk from Terasen offset the financial levers that we were thinking on. So we will be meeting with S & P in the next couple of weeks, and obviously would like to convince them that the lower business risk does in fact offset the financial leverage. You're talking about a company, we're going to go to about 55% debt to cap. So you're not talking about leveraging the balance sheet up to 70%. Moody's came out at the time of the Terasen acquisition and affirmed KMI, so I don't think there's any further work on KMI with respect to that.

Okay. Thank you.

Okay. Thank you.

Our next question, comes from Ross Payne with Wachovia Securities.

Hi, Ross.

How you doing, guys. Kind of on the back of what Yves was asking. To get a question on the Rockies Express given it is quite sizeable and you're doing it in phases. Is it going to be the typical 50 percent equity, 50% debt kind of picture? Second to that, two other quick questions. How much did TransColorado generate for you during the quarter, so I can kind of see how the rest of the business did. And, third, as it relates to the CO2, how much was SACROC under budget just generally speaking from a volume or earnings standpoint. Thanks.

Okay. Let me start with the first question. Yes, we anticipate funding this about 50% equity and 50% debt. And, again, as I said earlier, that's what we've used to run all our numbers and it's a very good project for everybody concerned I think. On TransColorado--

$0.5 million of earnings before DD&A, natural gas segment was up $17 million, 10.5 of that came from TransColorado. Your last question was on SACROC volumes and just how far under plan. You know, 30.8 thousand barrels per day was the average for SACROC for the year. I don't remember what the third quarter plan was. I guess it was 35,000 barrels a day. 34 to 35, something like that. That is consistent about what we talked about again in the second quarter earnings.

I think for the year I think it is going to be a little over 32, like 32.5, vs. our original budget was about 36, 36.5

It is running 3 or 4,000 barrels under plan. Yeats is running 4 or 5,000 barrels above plan, SACROC is more valuable to us because we have a much larger ownership interest. The overall demand for CO2 in the Permian Basin, we're producing close to 950 million cubic feet a day in our McElmo Dome field in Colorado and moving it across Cortez pipeline into the Permian Basin. That contrasts, Tim, we were probably doing 750 or 800?

Little over 800.

Up over 100 million cubic feet per day in production and transportation. That is what we call our S & T segment of the CO2 business. So that and Yeats are slightly more than offsetting the decline at SACROC. And at SACROC we just went through a full-day review with Tim Bradley and his team a few days ago, late last week, all of our numbers show that the volume of oil is still there. We still expect to get the kind of oil. We still expect to get the kind of recovery percentage that we expected in the beginning when we started this whole process. It is just that this is a massive project and we clearly have an awful lot of water to dispose of. And we now think we talked about last time about having a water disposal problem. We now think we have solved that with effective disposal through a whole series of wells. And we are now producing so much gas that needs to be reinjected that we need more recompression. We just--the KMP board today just approved some additional compression. It is not very expensive in the scheme of things. But it a lag time to get it on line. So we continue to work to maximize the output, but, you know, the oil is there. It is just a question of making sure we've got all the right infrastructure. We just finished, I guess just actually went fully operational this quarter. You know, this massive new 105-megawatt power plant that we built right on-site which enabled us to have more secure and cheaper sources of power. So there is just a lot of infrastructure to put this together on some given days we've had as many as a thousand people working out there. So, you know, sometimes I'll get a little impatient with Tim and want another thousand barrels of day out of him. But overall I think we're doing very well with the project. Yeats is just superb compared to what we thought it was going to be.

That is helpful. One final question, Rich, can you tell us what capacity you are on CO2 pipes. Do you have plenty there as the business continues to grow?

Actually, if we continue to see the kind of upward movement in demand for CO2 in the Permian Basin, I think sooner rather than later we'll see possibly expanding our Cortez pipeline, main artery coming across. We can only do that if we have a long-term contracts, but we are--and, you know, of course we at Exxon operate all these assets, Exxon is a significant minority owner of the field and pipeline. About 37% of the pipeline and 35% of the field. So they're also participating as a seller, primarily, of CO2, across the pipeline that we jointly own. So but both of us, our sellers, and between us, or between the volume coming up in the McElmo Dome, as I said before, we're supplying close to 75 or 80% of all of the CO2 being consumed in the Permean base son and we believe we have the cheapest expanse ability from the McElmo Dome and Cortez pipeline. And as other producers out there want to use and sign for long-term contracts for another 100 million or 200 million cubic feet per day that will lead us and Exxon will have a voice in this, too, I think it will lead us to jointly conclude that we'll want to expand the Cortez pipeline and want to expand our production platform for CO2 in southwest Colorado.

Okay. Rich, what is the capacity of that line in Cortez?

Right now the capacity of the Cortez line is about 1050, 1 billion 50 cubic feet per day. We're at about 950. We hit about a billion cubic feet a day during certain times of the year.

Okay. Great. Thanks. That's it for me, guys. Thanks.

Thank you.

Our next question comes from Faisel Khan, Citigroup.

Good afternoon. You guys in our models going forward always talked about a 1.9% [ inaudible] for petroleum products supplied per day. I'm trying to figure out if for some reason we did see demand destruction and we saw the growth in petroleum products fall off, what kind of impact would, say, a 1%--1% change in volume growth, what would that do to your earnings trajectory?

Yes, you know the 1.9% is really more the U.S. expected growth rate and I say expected, what it is, historical growth rate and demand for products and refined products. What we seen in areas we served is 3%, 3.5% growth in demand for those refined products, but that being said, I mean, if they were a-1% reduction in that, then our growth in our products pipeline segment would be lower. And, you know, the exact amount of that, you know, we would have to look at that. But that would have an impact on the organic growth in our products pipeline segment.

We've never quantified it on a percentage by percentage basis. I would say, again, and I would think these third-quarter numbers demonstrate that, again, we do believe, since our products pipeline surveyed in the metropolitan areas, including the two fastest metropolitan areas in America, Las Vegas and Phoenix, we're less likely to experience downturn than some other areas of the country, but certainly if it happens, it would--negative to the extent we're not continuing to get that kind of growth. So far we're not seeing that.

As Kim points out, of course, on the pipelines we're entitled to increase in our tariffs of PPIs, produces price index every year, every July we put that in place. To the extent that you think energy prices are going to be high, you would naturally think that is going to drive PPI up. We get--and if that has an impact on demand, we get an offsetting adjustment which is an increase in our tariffs.

Right. Same question. On the EnCana pipeline, do they get a premium at all on the cost of build? What would be the anticipated book value of that project?

I think right now today we again we have confidentiality with EnCana. We can't discuss the purchase price.

We think it is a fair price for both parties. Not a huge premium or anything. We say it is a fair price, but we can't go any further than that given our confidentiality agreement.

We wouldn't do the project if we didn't think we would get a decent return.

Sure, right. On the Terasen deal, I think I read somewhere that the regulators they wanted rig fencing around the gas utility to prevent too much corporate debt.

That's been done. In fact, that was Moody's suggested and came out with a press release last Friday saying that was accomplished to their satisfaction.

Is that influenced how you think about financing that transaction?

Absolutely not. Kim, you want to talk about it quickly?

Sure, the what we did for Moody's was provided criteria and they came out last Friday and said that was sufficient for them to look at Terasen gas is a stand alone credit. Reason that is important, that is important for the BCEC approval where the criteria is that the public utility company is not detrimentally impacted by the transaction. We never planned to finance this transaction at the sub--subsidiary level. We always planned to finance it at KMI, and that's how we will finance it. It is about $2 billion in cash, about a billion in stock and we'll take on some of Terasen's debt. We will do the cash component at KMI and issue debt.

In case somebody else is maybe confused on this. Terasen gas is the British Columbia utility. That is the sub of Terasen, Inc., that operates the distribution system in British Columbia. The other sub of size is the pipeline sub in Calgary, that owns the corridor line that, the trans-mountain line and Terasen's portion of the express.

The right way to think about it is that all of the requirements that we put in, in order to (inaudible) the gap utility were consistent with the way we expected to operate it, anyway. So there was no change in our expectations for the performance from that unit, based upon the requirements that were put in with the (inaudible).

Thank you. Appreciate your time.

Your next question comes from John Tysseland with Citigroup.

It looks as though your Texas intrastate pipeline did pretty well and showed much improved margins from last year. Can you discuss the driver there and are you currently seeing more gas off the intrastate Texas--your intrastate Texas line going to some of the interstates versus your industrial customers?

The answer to that last question is yes. Some, but not a great deal, but some more. The intrastate's are benefitting, again, we talked a lot about this because of the critical mass we have across Texas. We finished the Rancho line. It;s fully subscribed. That gives us the ability to move gas across Texas and ability to serve Austin area and obviously we have a very good position from south Texas up to ship channel and from east Texas down to ship channel. So I think that's really the driver of it is our asset position, and that we have good storage assets we've been able use and volatile markets. All of us, I think, they control of all those assets in a volatile market like we have will become more valuable. Scott, do you want to add anything.

On the second piece, because the interstates right now are providing a premium for our shippers, they're choosing to take more gas to those points. So we saw some supply movement there.

Other thing I would say, I think this is just continued results from a concerted effort that was initiated by Steve King and continue by Tom Martin to take advantage of the asset positions that Rich talked about that we have and to improve our margins and basically better utilize that asset basin. So I think that you accurately analyzed what went on at the intrastate's during the quarter, and we'd like to see that continuing. I think we have seen that for the last couple of years.

Do you think that, you know, as you see production coming back on line and out of the Gulf of Mexico, albeit slow at this stage, but in your industrial customers come back on, that margins would, I guess, come back a bit, or do you think you'll be able to maintain these type of margins?

The large margin spreads were only within a few days of the hurricane. You know, we're back to relatively normal margins across our system. You remember our systems are spread out across Texas, and so we can get supply from different locations than just offshore, which again gives us an advantage. So I think we're back to a relatively normal market across the Texas intrastate in the margins we get going forward.

All right. Thanks for the time. Appreciate it.

If you would like to ask a question, you may press star one at this time.

Okay. Well, it looks like people are--have heard enough of the Kinder Morgan story. An hour and a half is probably enough. We thank you all for tuning in and listening to us. If you have more detailed questions, feel free to call Kim and she'll answer them for you. Thank you all.

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