金德摩根 (KMI) 2006 Q3 法說會逐字稿

Hello and welcome to the quarterly earnings conference call. [OPERATOR INSTRUCTIONS] I will now turn the conference over to Mr. Rich Kinder. Sir, you may begin.

Thank you. This is Rich Kinder, Chairman and CEO of the Kinder Morgan Companies and this is our third quarter earnings call. As usual, we will be talking about Kinder Morgan Inc. which I will refer to as KMI. And of course, KMI is a large midstream pipeline and terminal operator. And among its assets, owns a general partner of KMP, which is one of the largest energy LMP's in America and I will refer to that by its New York Stock Exchange symbol of KMP.

Also as usual, we will be making statements within the meaning of the Securities act of 1933 and the Securities Exchange Act of 1934. I will give an overview of operations and outlook for both Companies and an update on our significant new projects. And then I will turn it over to Park Shaper, our President, who will talk in a lot of detail about the financial performance for the quarter and year-to-date. And then we will open it up for any and all questions you might have. And let me just say from the get go, that obviously some of you may have questions on the MBO and for reasons, I'm sure, you can all understand, we can't go into that beyond what is already public knowledge and filed in our preliminary proxy, which is public information.

Let me start with KMI, and mostly I'm going to talk about where we expect to be for the full year on both of these Companies and then Park will go into a lot more detail on specific performance of each part of the Companies. At KMI, we expect to meet or slightly exceed our $5 earnings per share target for 2006. Now obviously, that target includes the earnings from our retail operations, which are now in discontinued operations because of our previously announced agreement to sell those assets to a subsidiary of GE. And we expect that transaction to close in the first quarter of 2007.

At KMI, our large interstate pipeline that serves Chicago, Natural Gas Pipeline of America, is doing substantially better than planned and we expect that to continue for the remainder of the year. They are in very good position geographically and from an asset footprint basis and I think are getting good results as they renew their contracts. The Canadian operations, which consist of Terasen Gas, the large retail distribution company in British Columbia and Kinder Morgan in Canada, which embraces the -- and includes the oil sands pipelines in Alberta, both are on plan for the year. We expect to get the accretion from the Canadian assets that we purchased from Terasen, consistent with the guidance we gave you when we did that acquisition. We closed it last November and we said at that time we would get $0.30 to $0.35 accretion in the first calendar year, which is 2006. And we expect to achieve that. We expect in total that those two actually will be just a little bit better than our plan.

The KMP segment of KMI, which is very significant and consists of the benefits that KMP receives both as a major unit holder in K&P and as the owner and general partner, and thereby gets the incentive distribution rights. That contribution will probably be just a little bit below plan because we anticipate we will have slightly lower distributions and lower KMP earnings. The earnings have no impact on the cash at KMP, Park will explain that. They are, basically, the reclassification of integrity and O&M from sustaining CapEx to O&M. So, in terms of distributable of cash flow, that doesn't have any significant impact. But it does have an impact on the earnings of KMP, which translates through to KMI. And we also have a higher CO2 DD&A. Again, that does not impact the distributable cash flow but impacts the earnings at KMP, which again, flow through to KMI. So KMI, we expect to be on or slightly above its plan for the year.

Turning to KMP, let me talk about each of the four segments at KMP starting with Natural Gas. Our Natural Gas pipeline segment running 15% above 2005, well above our plan and we expect to be above plan for the full year. The results in that segment are being driven primarily by our Texas intrastates and to a lesser extent by Kinder Morgan Interstate Gas Transmission, our large pipeline coming out of the Rockies and intersecting with various pipelines in the American Midwest. It is a good environment for our pipeline group, both from a transportation and storage vantage point. Both are in great demand. We have a good footprint, a good asset position in both. We're also getting improvement from contract rollovers as contracts come up for renewal. So, Natural Gas pipelines are having a truly extraordinary year.

The second segment is our terminals segment. They are slightly above plan year-to-date and expect them to be slightly above plan for the full year. They're up about 21% from last year. Where they are having particularly good results at our Pasadena and Galena Park complex here on the Houston ship channel, which as most of you know, is the largest petroleum products terminal in the world. We continue to expand, we have excess acreage and we're continuing take advantage of that. We're seeing a growth in volumes also at our bulk terminals. We brought some new facilities online this year and the overall bulk volumes were up over 13% in the quarter. So, terminals also, we expect to end the year above plan slightly. Certainly, not as strong as Natural Gas compared to plan but also having a very good year.

Our third segment is our products pipeline segment. Park will talk into a lot of detail on this, there are a lot of moving parts. It is below plan and will end the year below plan. But that is largely because of the rate case on SFPP, which we have said every quarter was not in our budget for 2006 and that's having a negative impact of about $15 million for the full year. Now, that is between May 1 when we implemented the FERC ordered rates and the end of 2006. The second negative impact on our products pipeline group is that this year we are truing up on a quarterly basis our environmental costs instead of waiting and doing it at year-end. That was not in the plan either.

Absent those two events, our substantive processes, we would be very close to plan for the year. From a volume metric standpoint, the volumes were up for the quarter, 0.4% for the year, for the quarter without Plantation they were up about 2%. We thought we would give you the numbers without Plantation, as we always do. Plantation is sort of a special case because as we have previously said, this year we are feeling the impacts of a new competitive pipeline, the [Bingo] Pipeline, that went operational earlier this year. And as anticipated, that is taking about 70,000-barrels a day off the Plantation system at the point of origin. So absent Plantation, volumes for the quarter were up about 2% in terms of refined products.

And our Pacific was up about 3%. And Calnev, our line that goes into Las Vegas, was up 3% for the quarter. Year-to-date, again taking out Plantation, we were up about 1.6% year-to-date in the refined products volumes. Now, we always like to compare that with the EIA numbers, which give you sort of a vision of what the national demand is. And EIA is up 0.9% year-to-date and 1.9% for the third quarter. So absent Plantation, just as a point of reference, our volumes on our product system are running slightly ahead of the national average for the third quarter and almost double the national average year-to-date, which I think continues to confirm the fact that our West Coast operations, both Pacific and Calnev just tend to grow faster than the national average because of demographic growth. So, that's sort of the update on products pipeline.

On CO2, our CO2 operations will fall short of the plan for the year by $45 millions. Park will go into the details there. There are really three segments to our CO2 operations as you know. There's our transportation and marketing segment, consisting of our upstream production of CO2 and our transportation network to get that CO2 to the Permian Basin for the benefit of ourselves as a producer and for the benefit of several other producers who are customers under mostly long term contracts. And that is the first segment or subsegment of CO2.

And the second subsegment is our Yates operation, a large field located in west Texas in the Permian Basin. Both Yates and the transportation and marketing segments are doing very well. Well above last year and above our plan for 2006. Our SACROC unit at Snyder, Texas, also in the Permian, the volumes are pretty stable now but they are below plan for the year, as we've said previously. And that is what is causing the shortfall. To put this in perspective, the volumes at SACROC in terms of oil production, we had anticipated would be above 34,000 barrels for the year. They will end up more in the 31,000 barrel range. They were actually at 30,300 in the third quarter. Just noticed that for the first 17 days of October, we are running about 1,000 barrels better, with 31,300 barrels. We anticipate that fourth quarter production will be about 31,700 barrels.

Let me just put this whole CO2 operation in perspective, to give you a balanced view of it. We are still above and expect to end the year above 2005 results. And for the full year, we expect to generate close to $500 million of distributable cash flow from our CO2 segment. And that's on an investment of slightly over $2 billion. Or put another way, we are achieving an unlevered cash on cash return on vested capital of close to 25%. And certainly, that's a very nice return on an opportunity to invest that kind of cash.

Now, based on all of these factors, we've said in our release the same thing as we've said in our second quarter conference call that we still believe that our distributions per unit at KMP will be in the range of $3.24 to $3.28 per unit. Our target for the year originally was $3.28, this is the same estimate as we gave you last quarter. What that means is that in the fourth quarter we expect to distribute -- or for the fourth quarter we expect to distribute some place between $0.81 and $0.85 in distributions. If we were making that decision right now based on our current estimate for the fourth quarter, it would be at the low end of that range. But we are still hopeful of doing better as the fourth quarter progresses.

Now, let me be very clear and try to give you a balanced perspective on all of this. And I think one way of looking at it is that at KMP this year we are up. We've got four potential cylinders and we're banging away on about 3.5 of them. With the half of them not performing where we want, primarily the SACROC unit at CO2. And we are not satisfied with that performance. We do still expect to return to stronger growths as our projects come online in '07, '08 and beyond. And as our -- the oil production in the CO2 unit, as you have hedges on that oil production rolling off, replaced by higher hedges as you get out into '07 and particularly in '08, '09, '10 and '11. And we have given you all that information in the past. And that is particularly improved by all of the recent hedges that we did to hedge about $1.5 billion worth of crude oil mostly in the '08, '09, '10 and '11 time frame. And we completed all of that, as you will recall, some -- a couple months ago.

So, that's where we stand with regard to 2006 performance. Now, before I start talking about some of our projects and where we stand on those, let me also just take a minute, we stress a lot about operational excellence, talk a lot about operational excellence and certainly stress it at Kinder Morgan. And if we look at the right way to track that operational excellence, if you look and this is all posted on our Website.

If you look at the prior 12 months, every one of our on racing segment assist better than the industry average in all categories of environmental, health and safety. That is accidents, vehicular accidents. safety issues at our facilities and environmental spills. We put a lot of effort into that. We're spending a lot of money on sustaining CapEx. And we are definitely seeing an improvement in how we track these numbers.

Now, let me talk about some of the significant projects. As you know we have between $7 and $8 billion of projects that we are working on. All of which will come to fruition over the next four years or so. And let me start with the largest, which is the Rockies Express project. To refresh your recollection, that is about a $4.5 billion project. It is a 1,500-mile natural gas pipeline from the Rockies to Clarington, Ohio, which is on the Ohio/Pennsylvania border. And when completed it will move 1.8 billion cubic feet per day.

All of that 1.8 billion cubic feet per day is fully subscribed in 10 year contracts with the major credit worthy entities. Among them EnCana, BP, Sempra and Conoco Phillips. We, at the completion of the project, will own 50% and operate. Sempra will own 25% and Conoco Phillips 25%. We are now in interim service on that system on the first phase, which runs from Meeker, Colorado 136 miles up to Wamsutter, Wyoming, which is kind of in south central Wyoming. We are building the phase that runs from Wamsutter over the Cheyenne on the Wyoming/Colorado border and that's 192 miles. We expect that construction to be completed and in service by 11/07.

All the pipe and compression have been ordered for the entire project and we have now let all the contracts on Rockies Express West, which runs from the Cheyenne to Audrain County in eastern Missouri. We expect that to be built during 2007 in service by 1/1/08. The balance of the project from eastern Missouri over to Clarington, Ohio, most of that will be in service by the beginning of 2009. With final completion by mid-2009. So that's an exciting project. It remains on target. And we believe at this time on budget to be completed, as we have previously stated but I wanted to give you the update.

A second largest project also in KMP's Natural Gas pipeline group is the Kinder Morgan Louisiana line. This is 135 miles line. It's about a $500 million project, that when completed will move 2 BCF a day from the Cheniere Sabine Pass LNG terminal to various delivery points across Louisiana. Although that capacity is subscribed for 20 years by Chevron and Total and we expect that to be in service by the first quarter of 2009. In that particular project, all of the pipe has been ordered and looked in. We obviously, have not left the construction contract for the actual construction of the line.

Another sizeable project that is underway is a major expansion of our Pasadena and Galena Park facility on the Houston ship channel. It is about $195 million project. We are adding additional infrastructure, which is necessary to meet the storage demand along the Gulf Coast for refined products. We are adding about 3.4 million barrels of additional tank capacity. When completed, that will take the total tankage at Pasadena and Galena Park to about 24 million barrels.

All of these additional 3.4 million barrels are fully subscribed. We expect to complete this project by the spring of 2008. And it includes storage for a biodiesel facility, which is going to be located on our land, which we are leasing out to our customer, which will actually produce and operate the biodiesel. Biodiesel is an interesting project for us because it can be moved in pipelines, unlike ethanol. And since we own so many terminals around America, which connect directly into major pipeline systems, like Pasadena and Galena Park, we've become a very attractive alternative for renewals and specifically for biodiesel. So, we expect you will hear more about that on a going forward basis and we will talk more about that in our analysts call -- our analysts conference in January.

Another project also in KMP but this time in our products pipeline segment is the second phase of our east line expansion of our products line that runs from El Paso to Tucson and Phoenix. As you know, the demand in Arizona, like Las Vegas, has been growing very rapidly and we are building up our capacity to handle the growth in demand in the state of Arizona. We spend about $214 million in building phase I. That came on line in July. As a result of that, during the third quarter, our volumes into Arizona from both east and west were up 10.5%, showing that there really was a real need for this line. And it is running close to full capacity. The second phase will add additional capacity from El Paso to Tucson and Phoenix, will cost $145 million and we expect that to be in service about December 1, 2007. So, we look very much forward to having that online and being able to expand our presence in the state of Arizona.

Another thing I would add is that across KMP and both our products pipeline and terminal segment, we are seeing a lot of advantage, both present and future upside, from the storage, transportation and distribution of ethanol. We've become a key player in handling ethanol and if you just look at the third quarter rate of handling of ethanol, on our terminal segment alone we almost tripled our volumes versus the third quarter year ago. Handling over 1 billion gallons, if you annualize the results of the third quarter. 1 billion gallons a year of ethanol in our terminals facility. In addition, in our West Coast terminals that are part of our products pipeline, we're handling significant additional volumes of ethanol there.

So, we are, We believe, the largest storage and blender of ethanol into gasoline in the United States. And again, if you put that in perspective, earlier this year, everything I've read said there was 4.5 billion gallons of ethanol being produced in the United States. We think that will be pushing 6 billion gallons on a run rate by the end of the year. We are handling someplace between 1 and 2 billion gallons of that or a very significant portion.

Our Calnev line, I also want to mention. That's the line that runs from suburban Los Angeles, specifically Colton, California, over to Las Vegas, which, as most of you know, is the fastest growing metropolitan area in America. Today the Board of KMP approved, subject to receiving appropriate regulatory approvals, including appropriate economic returns, an expansion which will cost about -- a little less than $400 million to run a new 16-inch line from Colton all the way into Las Vegas. We believe that will be in service by 2010 when our line, which currently has capacity of 140,000 barrels of day, being expanded right now through a series of small expansions to 256,000 barrels a day.

That 156,000 barrels will be full in that 2010 time frame. And we expect to serve the needs of Las Vegas for many years to come by putting on this large scale expansion. By building this new 16-inch line and then converting the 14-inch line to purely jet service, running from Colton all the way directly into McCarran Airport at Las Vegas, we will immediately increase the capacity from 156,000 barrels to 200,000 barrels a day. And we will have cheat expansibility to be able to add -- to go up to 300,000 barrels a day by just adding compression.

So, we think we are in very good shape there to serve the future demands of what is a very rapidly growing area demographically. Some of you who have followed this may know. that Las Vegas and Clark County convened a Blue Ribbon Commission some months ago. We have been working with that Commission. We have made them very aware of this additional capacity. And I think they are very anxious to see additional capacity coming in to Las Vegas because they recognize, as do we , that Las Vegas is going to have significant growth and need for both gasoline and jet fuel over the next two or three decades.

Turning to Canada. We continue to work on our expansion of our Trans Mountain line, which will take us from 225,000 barrels a day to 300,000 barrels a day. We have our producers committed on that project. That will go in service in two phases over the next couple of years. And we continue to work with our shippers on the possibility of doing what we call Trans Mountain 2, which would take that 300,000 barrels a day up to 400,000 barrels a day in the 2010/2011 time frame. We don't have the commitments necessary to move forward at this very time. We are ready to move forward subject to shipper commitments. We think this is a facility that is going to be very necessary, as we have continued oil sands growth. But obviously, like an all of our projects at KMP or anyplace else at Kinder Morgan, we won't undertake that program unless we have appropriate shipper commitments.

We are also working on a major expansion of the corridor system, which as you know, it moves bitumen from north of Fort McMurray to Edmonton and diluent back up to the Fort McMurray area. We also are now in construction on our north Edmonton terminal. That's $130 million nonregulated terminal complex near Edmonton. It is fully subscribed and over 2 million barrels of storage capacity. We expect that to be in service in 2008.

And I think the north Edmonton terminal is just an example of the additional opportunities we saw when we bought Terasen and we are now seeing on the nonregulated side in Canada. And I think those opportunities will fall both in the terminals category but also in our CO2 segment, as we think they are going to be real opportunities to move CO2 around in the province of Alberta. So, if you look at all of these projects together with a lot of other smaller opportunities that we have and some of which we've discussed with you previously, leads me to be pretty optimistic about the future growth in distributable cash flow and distributions at KMP.

We believe we've got a good long term trend to about 8% per year of growth in distributions per unit at KMP, more to come. We will release our budget for 2007 later this year. And we will discuss the 2007 budget in a lot of detail at our analyst's conference in January. And at that time, we hope to quantify beyond 2007 for you the results of KMP. So you can see the long term growth trend line that we see emerging largely because of the footprint that we have, these new projects that are fully committed and will be coming on line in '07 but particularly '08, '9 and '10.

And then also as the CO2 segments hedges on crude oil production. As the old hedges roll off, new higher priced hedges come on, that's another significant boost to cash flow, particularly in '08, '9 and '10. So that's an overview of where we are. And with that, I will turn it over to Park.

Thanks, Rich. As per usual, we will be looking at the earnings release since hopefully you have them in front of you. Probably more important, this quarter, there are a number of items to reconcile for you. I am sure everyone is going to be able to follow along the first time. But I will start at KMP. And so if you'll turn to the earnings pages of that and it is the first numbers page in the KMP earnings release. And it is the standard format income statement.

Down at the bottom you will see, as the press release indicated, the Board declared a distribution of $0.81 today. We generated $0.81 distributable cash flow. Looking forward, as Rich mentioned, we expect that we will distribute for the year between $3.24 and $3.28. Now, if we end up below our budget, which was of course, $3.28, there are two main reasons. Two of the segments, Natural Gas Pipelines and terminals as Rich mentioned, are at or above their budget. In the case of Natural Gas Pipelines, significantly above their budget.

Two others are below. CO2 is the most significant below its budget. We expect that they will end up below budget by about $45 or $46 million. The variance for budget is completely driven by the volumes at SACROC, again Rich went over this. But it's actually partially made up by volumes at Yates and by performance at the sales and transportation business. Price for the year relative to budget is basically a neutral. It is not having much impact overall but that is on the comparison to budget. Again, the variance to budget for the entire year at CO2, we are expecting to be $45, $46 million of distributable cash flow.

Now, some of you may remember that at the second quarter, we talked about that same variance to budget being about $20 million. It actually in the second quarter earnings call back in July, when we talked about that variance being a little bit lower than what we had thought back when we announced earnings in the first quarter. So, let me also reconcile the difference between what we said in July and what we are saying now. In July, we thought the CO2 would be under by about $20 million. And now we are saying about $45 million. That difference is entirely made up of price.

And so the difference in the forecast from July to October is a function of the change in oil prices and the impact of that change on our unhedged oil production and on our NGO volumes and a little bit on our CO2 sales. We have do have some CO2 sales contracts where the price of the CO2 is tied to the price of oil. The price of oil over that period of time, just in the last quarter, has dropped about $16. When you apply the $16 again to our unhedged volumes to our NGO volumes and a little bit on the CO2 sales you get the deterioration of about $25 million.

And I'm going to say this again, I am sorry to be redundant. The variance to budget, which is about $45 or $46 million, is all volumes. It is all SACROC volumes. The change in the forecast this quarter compared to the forecast last quarter is all price. So hopefully, that is confusing enough for you.

The other major factor and major variance between where we are coming in and the budget, is actually an item that we identified when we went through the budget in detail back in January. And that's the rate case on SFPP. That is costing us about $15 million. Now clearly, there are a number of other things moving around. But those are the two big reasons why we come in under our budget of $3.28 in distribution per unit.

Now a couple of other things I want to touch on, on this page before we moved to the segments and the detail. You will see the sustaining capital numbers appear to be very low relative to where they were a year ago. For the quarter, a little under $16 million, compared to almost $43 million a year ago. Year-to-date, about $76 million, compared to about $96 million a year ago. Now, Rich already mentioned the reason for this as well. And this is the shift in integrity dollars from sustaining CapEx to O&M. Some of you may recall back in January, we talked about the fact that a new FERC rule had been implemented at the beginning of the year that forced us on our natural gas interstate pipelines to move some dollars, integrity spend dollars, from sustaining capital to O&M. And at that time we had done that for our natural gas interstate pipelines in the budget.

And so, the budget reflected that shift for the natural gas interstate pipelines. What had subsequently happened, and this is really a determination that came in July of this year, in conjunction with our auditors we determined that we needed to make that change on not only the natural gas interstate pipelines but also on the natural gas intrastate pipelines and on our product pipelines and actually on our retail division as well. What that means is that relative to budget and relative to last year, dollars have moved from sustaining capital to O&M. Now ultimately, as Rich pointed out and the press release points out. this has no impact on distributable cash flow. Because your O&M goes up but your sustaining CapEx comes down. There is one exception to that, and I will get to that in a minute.

But your O&M goes up, which means your earnings are a little bit lower but your sustaining CapEx comes down and so your distributable cash flow is neutral. The one exception to that is that this rule change also applies to Plantation. We account for Plantation on the equity method. We own a little over 50% but we share a control of that asset with Exxon Mobil. And so we of account for it on the equity method. As a result of that, we recognize in our earnings statement our portion of the earnings of Plantation. And we don't add that DD&A and we don't subtract off the Plantation to sustaining CapEx. So, on Plantation, when there is a shift from sustaining to CapEx to earnings, that results in a negative for us.

That total is about $3 million year-to-date, really the third quarter number and the year-to-date numbers are the same because we just implemented this in the third quarter. The number will be about $4 million for the year. Now, that is the total impact on distributable cash flow. I also will give you the impacts for the quarter and year-to-date and expected for the full year. Sustaining CapEx is down year-to-date and in the third quarter $19 million because of this shift. And so, sustaining CapEx has been reduced $9 million.

Now, O&M is actually up $22 million. And that is not completely true. Because the Plantation does not get split out to O&M. But the total impact on earnings is $22 million. That's the difference I am talking about because we don't reflect Plantation's sustaining CapEx. Those numbers apply to both the third quarter and the year-to-date because in the third quarter we caught up toward the first half of the year. For the total year, we expect that sustaining CapEx will be reduced by about $27 million, as a result of this shift. And this is the change from budget, it's not the change from last year.

And for the full year, so $27 million in the third quarter and year-to-date,-- I am sorry $27 million for the full year on the impact on sustaining CapEx. For the full year impact on earnings, it is $31 million. And again, that difference is the $4 million that I told you would impact a sustaining CapEx. Now, what that means is when we look at sustaining CapEx at the end of year, it will below our full year budget of $170 million. It is going to below it by this $27 million. We expect it will actually be a little bit lower as well because spending is a little bit lower at some of our assets, primarily at [Cochan.]

But we expect that full year sustaining CapEx will be somewhere around $50 million below our budget. Over half of that comes from this shift to O&M and the remainder is just slightly lower spending than the budget that we had. Now, as I mentioned, that had a negative impact on earnings because we've shifted this into O&M, which gets reflected on earnings.

There's even another negative impact to earnings, which is reflected here, which is an increase in DD&A at our CO2 segment. Year-to-date, and actually this is not just CO2, this is total, DD&A is $17.5 above our budget. And for the full year, we think DD&A will be $30 million above our budget. Now again, this increase in DD&A has no impact on distributable cash flow because DD&A gets added back. It doesn't even have an impact on earnings before DD&A because by definition earnings before DD&A are before DD&A.

But it does impact the earnings and so when you look at the net income line on this page, it's about five lines up from the bottom, you see net income per unit about $0.40, compared to, on this page, it is $0.57, which is the number after certain items. If you look at the number before certain items from a year ago, it was $0.60. It's the more valid comparison. Similarly, if you look at year-to-date, it is $1.45 or $1.43, if you take out the certain items. Certain items in 2006 have been a net positive but we are not taking credit for those items. If you look at the net income before certain items, a year ago, it is about $1.78.

The reduction in net income is caused by this shift from sustaining to O&M and by the incremental DD&A. If you add those things back, the net income would be up. Now, that's just for those of you who pay attention to net income. As we've said in the past and we say consistently, we think a much more meaningful measure for the NLP is the distributable cash flow and the distributable cash flow per unit. We present that number to you. It is not impacted by this shift from sustaining to O&M. For the most part, it is not impacted by this increase in DD&A but we want you to be able to reconcile those things.

Now, with that, I will go to the second page, talk about the segments briefly. Rich has covered most of what is going on and what we expect. But on products, I'll note, you will see the earnings before DD&A is down about $15 million from last year. It is down about $8 million for the nine months. That difference is more than made up for by the integrity shift. The integrity shift, and this is again, a reduction in sustaining CapEx but an increase in O&M, which reduces earnings before DD&A, the integrity shift at products for the quarter and year-to-date is $18 million. You add that back and we are above last year. And really that's an apples to apples comparison, adding it back. Because the integrity costs in 2005 showed up in sustaining CapEx, rather than O&M. Now on top of that, we have the impact of the rate case, which is products' earnings. And we also have this impact of the environmental expenses, which we are recognizing quarterly rather than at the end of the year like we did last year.

If you add those things back, products is actually on its budget in terms of distributable cash flow year-to-date. And we expect we will end up on or just slightly below its budget in terms of distributable cash flow for the year. Natural gas pipelines, well above last year, well above budget. We expect they will end up nicely above budget.

CO2, you can see is up from last year by about $7 million for the quarter, up by about $17 million year-to-date. We've discussed CO2, it will end up likely below it budget by about $45 million. In terminals, we've had nice growth. Almost 21% growth in the quarter. Over 24% growth year-to-date. Terminals will end up above its budget for the year. So, having a very strong year.

With that, I will drop down to G&A and you will see that about 10 lines below, about little under $60 million for the quarter. It is up about a little under $13 million compared to last year. It is up about $41 million year-to-date. Most of that was expected. It was part of expansions and acquisitions and other costs that we are aware of and discussed when we went over the budget in January.

But year-to-date, G&A is $18 million above our budget. Now, some of that is timing. And we think we will end up probably around $10 to $12 million above our budget. The portion that is not timing is related to insurance costs, which are higher than our budget, legal costs, which are higher than our budget, and some benefits costs that are higher than our budget.

Interest net, you will see up about $20 million for the quarter. Up about $53 million year-to-date. It is actually little bit above our budget. And the reason it is above our budget it is primarily due to rate. Interest rates have increased more than we budgeted. Now, the main reason why it is up total compared to last year is because of a higher balance. Balance is $400 million greater than it was last year, primarily related to expansions and acquisitions. And we will have a little bit more detail on that when we get to the balance sheet.

The average interest rate is up right around 100 basis points this year relative to where it was the last year. And that's a little bit ahead of where we had it in the budget. Minority interest unchanged. You'll see that certain items, there really are none for the third quarter this year. There was a little bit in the third quarter last year. For the year-to-date in 2006, you can see it is a positive, almost $5 million in terms of certain items but we don't count that. The biggest piece was a gain on a sale of the Douglas gathering system. But we don't count that when we look at what we consider to be ongoing recurring earnings.

And then you get down to the net income. Now again, you will see net income is lower in the quarter, $224 million, compared to $245 a year ago. But you have two big factors there in the increased DD&A and the shifting costs from sustaining cost to integrity that are driving that. Going back to the first page in terms of the income statement. There are volumes there on the bottom of the second page. But I think Rich has covered most of those and they're covered in the earnings release. The first page of the income statement, not overly meaningful. I'll point out that revenue is down for the quarter. That is just a function of gas place prices. We've said that consistently. You see similar impact on the operating expenses for the quarter.

DD&A, we've discussed. TOTI is flat for the quarter. It is up a little bit for the year. And that is driven by CO2 and the terminals acquisitions and expansions. And other expenses is really gain on sale of the Douglas gathering system and identified on certain items on the next page. Earnings from equity investments are down and we talked about Plantation and it is difficulty with a new competing pipeline. But remember also, the shift from sustaining to O&M shows up here. And the Plantation results, which are in the equity and earnings line. And there was also a certain item on Plantation related to environmental earlier in the year, which is impacting the year-to-date.

Now Cortez earnings are also down but that is expected. It's consistent with our budget. Red Cedar earnings are actually up, offsetting Plantation and Cortez a little bit. Those are really all the things that I'm going to note on the face of the income statement.

The last page of the KMP earnings release is the KMP balance sheet. I will go down that real quick. Other current assets have declined a little under $200 million. That is all a decline in accounts receivable from the beginning of the year. PP&E is up a little bit. That is function of acquisitions and expansions. Investments unchanged. The fluctuation in deferred charges and other assets is a mark-to-market on the hedges. Total assets about $12 billion at the end of the quarter. Notes payable and current maturities, I will talk about when I talk about total debt.

Other current liabilities is down, a little over $256 million. And accounts payable is actually down over $300 million, offset by a little bit of an increase in accrued taxes. Long-term debt, I will discuss in a minute. The market value of interest rate swaps just fluctuates with the forward curve of interest rate. Other is down about $150 million. That is largely mark-to-market on the hedges. Minority interest, unchanged. Other comprehensive loss is a function of the mark-to-market on the hedges. Again, when I say mark-to-market, these are all hedges, the qualify for hedge accounting. They're mark-to-market on the balance sheet not through the income statement.

Other partners capital is impacted by the normal things, which are earnings less distributions but then also by virtue of the fact that we issued a little under $250 million net of equity in the quarter. That takes you down to total debt of a little over $5.5 billion. This is up from the $5.2 billion at the end of the year but it's actually down from the $5.7 billion where we were mid year. So debt to cap is a hair under 153%. Up slightly from where we were at the beginning of the year. It is down from a little under 55%, which is where we were at the end of the second quarter.

We have added a couple of additional lines here, basically showing you an EBITDA calculation and then a debt to EBITDA ratio. The debt to EBITDA ratio is probably more meaningful, really for any enterprise in terms of a credit ratio. But even more so for a LLP because of the large distributions out the MLP. And so, we thought from a credit perspective, this would be a good metric to add. And you can see that we are right around 3.25 times debt to EBITDA. Meaning our debt is only a little over 3 times our annual EBITDA. And that is a very strong credit measure, consistent with where we we have been historically. We believe KMP has been, is and will continue to be a very strong credit.

Let me talk a little bit about the change in debt. As I mentioned for the quarter, it was a reduction of a little over $200 million. Year-to-date, it is an increase in debt of about $300 million. I will focus primarily on year-to-date. Again, debt has gone up by about $300 million. The sources of cash kind of offsetting that decrease have been an equity issuance of a little under $250 million. And then the KMR distributions, which are basically a source of cash, a little over $140 million year-to-date.

Cash has been used for acquisitions of about $100 million year-to-date for expansion CapEx of a little over $500 million year-to-date. And then working capital and other items have been a use of cash of about $87 million year-to-date. Net use of cash for working capital and other items it is AR and AP, which are a use of cash of about $118 million. Offset by asset sales. Again, the Douglas sale, which is a source of cash of about $44 million. Those are the big items that total that use of cash of about $87 million.

You look at the expansion CapEx. Again, a little over $500 million year-to-date. About $128 of that has been spent on the product segment. Primarily the east line expansion that is complete and then the second east line expansion that is getting underway. Natural gas has been about $36 million. A little bit on the Louisiana line and some other storage expansions.

CO2, $204 million of expansion CapEx year-to-date. Almost all at SACROC. A little bit on some additional horizontal drain holes at Yates. And then terminals, about $137 million of expansion CapEx year-to-date. A lot of that being spent here on the Houston ship channel at our large facilities at Pasadena and Galena Park. That is the KMP financials.

With that, I will go to KMI. So again, if you have the KMI press release, if you will flip behind the words and go to the numbers. The first page is the face of the KMI income statement. Again, this is the first numbers page behind the text in the KMI press release. This page is really not overly relevant. 2006 is impacted one, by the acquisition of Terasen. And two, by the consolidation of KMP. And so, I don't think you'd have very meaningful compare comparisons when you look at 2006 versus 2005.

So, what I am going to do is turn to the second page. And if you all will go there, you'll see the income statement broken down by segments and other ways. Real quick on earnings per share. Looking at it before certain items and so this is seven lines up from the bottom. About an $1.02, compared to $1.04 a year ago. The reason that we are down is a function of seasonality associated with the Terasen acquisition. If not for that seasonality, we would actually be up significantly. In truth, if you look year-to-date, we are at $3.53 compared to $3.05, 16% up year-to-date.

And so again, we are just seeing some of this seasonality, especially at Terasen Gas. It's the first year that we have it, so you don't have a valid comparison from the prior year. Terasen Gas has strong first quarters and strong fourth quarters. The certain item in the quarter is about $5.8 million related to a deferred tax liability change. This is as a result of moving retail to discontinued operations. That effects our ongoing tax rate because we will have less operations in a couple of states where retail does a lot of business.

It has effectively reduced our expected ongoing tax rate by a very, very tiny amount. Though when you take a tiny amount and apply it to a very big balance, which is our deferred tax liability, you get a relatively small change. Now, it is a gain of almost $6 million. We are not taking credit for that. We are identifying it separately. That's what the certain item is in the quarter. And you can see year-to-date, certain items are positive about $10 million. Again, we are not taking credit for those items.

And now to orient you to this page, again, we have done this the last couple of quarters. You will see the column in the middle for both the third quarter and for the nine months, is pro forma as if KMP were not consolidated. And what that does is it puts the results for the quarter and year-to-date on the same basis as they were reported last year and on the same basis as we went through our budget this year. And so when I talk about variances I'm going to be talking about the variances between the '06 pro forma column and the '05 column for the quarter and the year-to-date.

Quickly on the segments and you can see the impact on the next page and actually there's probably an issue that I should mention there. So, if you look at KMP's impact on KMI. On the following page, you will see it's almost $148 million up from $145 million for the quarter. Up about $24 million year-to-date. KMI is actually sealing the impact of lower KMP earnings. And again, KMP earnings are being hit by this shift from sustained O&M and by the increased DD&A, a couple of things that don't impact DCF. But that earnings number is what is used to calculate the impact of the share ownership and the unit ownership at KMI on KMI.

And so, if you look at the top of that next page where in this section that is KMI earnings attributable to KMP, when you look at the impact of the limited partner units and the limited partner iUnits, which are the KMR shares, you'll see that each of those are down from the prior year. And the reason that they are down is because the earnings at KMP are down. Now again, we don't think that's a very relevant measure but that's the way the accounting works. And so, that's why it flows through in that way. Again, it doesn't have any impact on distributable cash flow. It doesn't have any impact on the distribution. But it does impact the earnings and so it flows through that way. So, KMP's impact on KMI for the year will be a little bit under the budget.

Now, looking at NGPL. It is significantly above last year. It will be above its budget. For this year, NGPL is performing well. Terasen Gas and Kinder Morgan Canada and power are all right around their segment earnings budget and will be right around their earnings budgets for the year. So, they are on track.

And with that, I will drop down to the G&A expenses. Again, if you look at it excluding KMP for the quarter, $37.7 million compared to $14.5 million. For the nine months, about $114 million compared to about $145 million. So, a significant increase. But Terasen was not in there last year. Terasen represents more than the difference for the year. And so in truth, if Terasen were pulled out, then our G&A would be down for 2006 relative to 2005. That being said, we think that the total G&A budget will end up right about where we thought it would be. Maybe $1 million or so positive compared to budget.

Interest expense net, you will see it is up considerably as well. Again, that's a function of the addition of Terasen. We assumed debt and took on debt for the acquisition of Terasen that totaled $4.6 billion. Again, that is the sum of the debt that Terasen already had, plus the debt that we took on as part of the acquisition. So, that is $4.6 billion. In truth, our increase in debt versus a year ago is more like $4.3 to $4.4 billion. So, we have paid down some debt over the course of the last year. But that increase in balance is what is driving the increased interest expense. Of course, we've also had an increase in rate of the same 90 to 100 basis points that I've talked about with KMP.

Overall, interest will end up probably a hair over our budget, mostly related to rates going up a little bit more rapidly than we had budgeted. Minority interests, once you back out the impact of KMP, that's largely just KMR. And that takes you down to the income from continuing operations. Before certain items, again, it is down but that's a function of the seasonality. It is down about $17 million for the quarter. It's actually up about $73 million year-to-date. Again, you see the impact of seasonality here. You will see next quarter as especially Terasen Gas, has a bigger quarter, that that will be a much stronger comparison. But really, all of this is consistent with our expectations.

With that, I will tun back to the first page just briefly. And really, just to reiterate that those comparisons are not overly meaningful. Although, some people might be excited about the fact that through nine months KMI has $9 billion of revenue compared to $700 million a year ago. Just incredible revenue growth. But really again, this page, because of the consolidation of KMP and the acquisition of Terasen, it is not overly meaningful. Hopefully, on the following pages in our discussion, we have been able to make it a little bit more meaningful.

Looking at the balance sheet for KMI, so this is the last page in the KMI release. Cash, essentially unchanged. And again, I will compare the pro forma column, which is the middle column to the third column. Other current assets is up a little bit. Actually, accounts receivable is down but the retail assets, which have been moved into discontinued now show up in other current assets as assets available for sale. And so, that is a significant increase in that line.

Investments, it is up a little bit. It's mainly a function of the investment in KMP. Goodwill is an up a little bit. That's really some purchase price adjustments related to Terasen since the beginning of the year and a little bit of an impact of changes in the foreign currency rates. PP&E is down. That is primarily removing retail. Again, retail was moved into current assets or assets available for sale. And then other assets, down just slightly. Mainly moving out some retail assets and then a little bit to mark-to-market on swaps.

Total assessed assets, a little over $17.5 billion. Notes payable, I'll discuss when I talk about the total debt. Other current liabilities, you'll see is down $150 million, largely reduction in accounts payable. Other liabilities and deferred credits, kind of two big items that offset the results in a little over a $50 million pick up here. One, the mark-to-market as a swaps is a big positive and then deferred income taxes is down, which reduces that. On the long-term debt, again, I will discuss that down below but you can see no real changes on the deferable interest debentures and the capital securities. And then the interest rate swap is again, just a function of the forward interest rate curve.

Minority interest and equities, securities up a little bit for largely KMR once you back out the consolidation of KMP. Accumulated other comprehensive loss, just again, to mark on the hedges and the swaps. Other current -- other stockholders' liability, you see is up about $161 million. That is just net income offset by dividends and takes you down to net debt, a little bit under $7.1 billion, $7.072, compared to beginning of the year about $7.128 billion. It also compares to the second quarter of about $6.9 billion. So, we're actually up a little bit for the quarter. More down a bit for the year.

Debt to cap for the quarter about 54.4%. That is down from the 55.6 where we were at the end of the year. It is up just slightly from where we were at the end of second quarter, we're at 54.2. Now of course, you could look in the first column and say, well you are at 63% debt to cap. But that includes all of KMP's debt, which is consolidated there. And that debt, again, we believe that KMP can handle on its own as its Baa1 and BBB+ credit ratings demonstrate.

Now, one thing real quick on the change in debt. It looks like debt is down a little over $50 million from the beginning of the year to now. And that is true from a balance sheet perspective but recognize also that on the balance sheet, you value it as of the foreign currency value on that date. It you take that into account, then true, cash has been used to reduce debt of about $153 million. So, that will be relevant when we get down and talk about the cash flow and how we have used the cash that we've generated.

So, moving down to the bottom of the page. Cash flow year-to-date, about $491million. That really compares to a second quarter number of about $370 million. Meaning we generated about $120 million during the quarter. The number I mentioned, $370 is a little bit lower than when we showed in our earnings release at the end of the second quarter. And that's because there was a $50 million cash payment that went out in 2006 that was related to 2005 that we did not count in the first or second quarter. That we've decided we are just going to go ahead and count and cash taxes paid in 2006 now going forward.

So, if you look at the cash generated, again, it's about $490 million year-to-date. It is about $123 million for the quarter. I will focus on the year-to-date. So, we've had a source of cash of $491 million from operations. We actually have about another $12 million from retail that doesn't get picked up because that just started from continuing operations. We have had other sources of cash of a little over $110 million from the sale of water. And then we've actually had a source of cash from working capital and other items of about $115 million.

Now, how has that cash been used? Again, debt is down a little over $150 million in terms of the actual cash reduction in debt. A little over $150 million. We've paid $350 million of dividends. We've had expansion capital of about $185 million. And we've got share repurchase, and this was all just in the first quarter, it was making up for what we intended to do but did not complete in 2005 of about $34 million.

So, a couple of items I'll give you a little bit more detail on there. Working capital and other items, a source of cash of about $115. That is primarily accounts receivable and accounts payable. And then a little bit of other working capital totaling to that number. Expansion CapEx, about $185 million. That is spread out. NGPL has had some storage expansions, primarily North Lansing and at Sayer. Kinder Morgan Canada, of course, has the Anchor Loop and Pump Station expansions going on. A little bit at Terasen Gas and even less at retail.

And so that is the balance sheet and the financials for KMI. With that, I will hand it back over to Rich.

Thanks, Park. If you would throw it open for questions. We take any questions people may have.

[OPERATOR INSTRUCTIONS] Our first question comes from Dan Jenkins with State of Wisconsin Investment Board.

Good afternoon, Dan.

I have a couple. First, just trying to get a hold of some of the these offsetting factors. Under environmental planned costs, you mentioned that you are doing those kind of as you go, as opposed to waiting to do them at the end of the year. So, does that mean, in the end, it will pretty much be a wash then, so the next quarter you will see a benefit interest that or what should we expect from those?

Basically, in 2005, we identified as a certain item in the fourth quarter some environmental costs and it will come fairly close to washing with that, the full year 2006 relative to that.

So, would that show up then next quarter?

It will show up in the certain items for 2005 next quarter, yes.

Okay. Then on the SACROC production, if you'd give me a little more color on as far as third quarter and fourth quarter, are you now back up to what the production was that you anticipated originally for those quarters? Or is it still riding below the rate that you had anticipated for the current quarters?

It is still running below our budget for our original budget for 2006. We anticipate the fourth quarter will be up from the third quarter. The third quarter we averaged about 30,300, I think. We anticipate in the fourth quarter it will be about 31,700 is our best estimate at this point. And as I said earlier, Dan, and you can't make much of a trend off of 16 or 17 days. But thus far in October, starting in the fourth quarter, we are pretty close to 31.7. We are 31.3 and change through the first half of October.

So, we have seen an upturn when you compare to the third quarter but it is still not up to where we thought it would be when we did the original budget. And again, original budget for the year was something in the 34,000 range. And we are not going to get back to that in the fourth quarter. And again, as we have talked about before, this is largely a function of one formation called Bullseye, which has simply turned down faster than we thought it would. Our other segments in this huge field, it is a 50,000-acre unit, the other segments are performing pretty much as we expected it them to be. But this Bullseye segment is not producing what we estimated in the budget.

Again, as I said, you have to put the whole thing in perspective. We are still positive to 2005 in terms of distributable cash flow. We expect to end at 2006 positive at 2005 in distributable cash flow. Very good performance at Yates and sales and transport. But down at SACROC by over 3,000 barrels a day and that's what is creating the issue at CO2.

Okay. Thank you.

Thank you, our next question comes from [Sam Arnold] with Credit Suisse.

A quick question for you. You guys are talking about the Calnev expansion, it's in total from the expansion right now is going to be about 34,000 barrels per day by 2010?

Yes, let me review that with you. We have been moving historically 140,000 barrels a day. We have three expansions we've previously talked about. Very small expansions that will take us to 156,000 barrels a day by early next year, we are talking about. And that's just as much as we can do on the present configuration, which consists of a 14-inch and an 8-inch coming into Las Vegas.

By adding this 16-inch, we will be able to immediately go from the 156,000 barrels a day to about 200,000 barrels a day. We can go much higher as soon as we want to add additional compression, which as you know, you have expensive expandability in pipelines and then inexpensive. And it always works in a cycle. And so, the expensive part is laying the pipe in the ground. Then once you get it in the ground, as we will have by 2010, then you can add expansibility relatively cheaply by just adding power.

So, we can actually, if we wanted to power up by 2010, we could immediately go to 300,000 barrels. We don't think that will be needed. So our plan would be and the numbers that I gave you, $388 million, would reflect going to 200,000 barrels per day. And then over the next 10 to 20 years we would look at the demand and continually add power to get it to up to what could be a maximum of 300,000 barrels a day. Now, whether you depend on our numbers or the Blue Ribbon Commission that's been created, that I mentioned, at Las Vegas, the growth rate of the Las Vegas area we believe is some place low side 3.5% to 4% high side, 4.5%.

So, we are ramping up with this expansion to be able to satisfy, if necessary, even the high side of that. And the Blue Ribbon Commission's estimate, frankly, is a little higher than our internal estimates. But we are projecting out many years in the future. And we would handle either one out through, actually we believe 2030 with this expansion. So, with this expansion, and again, assuming we get the appropriate regulatory treatment here, we believe we will be able to sustain this tremendous growth in the Las Vegas area for many years to come.

And of course, running it out of what we're doing by running it -- by expanding this system is we will have a line in that is just dedicated with [GIP], the 14-inch line. And the new 16-inch line, will be gasoline and diesel. And we will have obviously a lot of optionality for the Las Vegas metropolitan area because we have the refinery hub in Las Angeles that we draw off of. But we also, it happens to move through our terminal, because we have the major products terminal there in the Las Angeles Harbor. We can also take in volumes that come in from someplace else by ship and move those in to Las Vegas if that's what our customers want to move. But it gives a lot of optionality together with this is a very large expansion.

And what kind of capacity commitments or anything do you have? Because I know Holly is going to be building a competing line that is going to be taking refined product from Salt Lake City into Las Vegas. And that is going to start up, I thin, about a year or two before yours. Could you talk a little bit about the competition in the area?

I would be very surprised if any other line is built into Las Vegas. There have been no commitments of size. But we don't know. But I expect this is the line that will be built and will satisfy the needs of Las Vegas for many years to come. If you look at -- really, it is only the L.A. Basin that can really supply the kind of volume that Las Vegas for growth. Where Salt Lake City, at least in our judgement, does not remotely have the capacity available to satisfy this kind of growth of Las Vegas. And of course, the cost, there's enormous benefits in terms of costs when you are doing major expansions of large pipe versus a relatively small line. But the market will determine that.

Right. And a question for you too as well, you mentioned it is going to obtain right-of-way and things of nature. Are you still -- aren't you going to use the same right-of-way that you already have on the existing line?

Yes, we will follow, for the most part, the same right-of-way. But a lot of it is in the state of California and it takes a good while to permit that, particularly from an environmental standpoint. If we being can get it done, get the permitting done quicker, and as we said in our release, it will take -- ironically, it goes to 2.5 years to permit the thing and nine months to build it. If we could move that permitting up, we will put it in the service center.

Got it . Great.

Next question.

Our next question comes from Yves Siegel with Wachovia.

Just several follow-up questions, Rich. The first is, as it relates to the potential drop downs from KMI, Trans Mountain and the Edmonton facility, do you have to wait until it MBO is complete before you can present a potential transaction to the Board?

Not necessarily. The Edmonton terminal is already in KMP. It's being built right now and it is already in KMP. So, it will not be a drop down item because it is all ready to be built from the ground up in KMP. On the drop down of TMX, we have said we are committed. We need to have, clearly, fairness opinions on both sides. And we would expect to do that regardless of the MBO. But probably as a practical matter, we won't get it completed until the MBO is done anyway, just from a timing standpoint. But, look to Park here, but I expect we'll probably get that done sometime certainly, in the first half of 2007. Park, you want to add anything?

No. I don't think we can say much more than that.

Second question, on the hedges, is it possible to just quickly review where you stand for 2007 and 2008, 2009, just the volumes and the price?

Park, you want to talk about that?

Yes. In 2007, we are around 97% hedged. in 2008, and actually, I don't have the numbers with me, I don't believe. There we go. Hang on one second. 2008, hang on one second. We are about 89% hedged. In 2009, about 77% hedged. And average prices, and this is just going to be rough because I am just eyeballing a combination of WTI and WTS right, in 2007, probably around $40. 2008, probably $45 to $50. And 2009, is going to be probably around $55.

So, what you have Yves, is -- as you know, is you have these hedges that were entered into pursuant to our program and over the years. And as the lower priced hedges roll off, the higher priced hedges come on and that is what is driving the average price per barrel that we're going to get under hedges. Up considerably year by year on a going forward basis.

And then then last two real quick ones. Could you explain why DD& A is going up, what are the factors that are driving that?

We budgeted for a DD&A increase at terminals largely as a function of expansion CapEx and acquisitions. And then at CO2, just a function of production. We have had an increase at CO2 beyond our budget, largely as a result of this issue at Bullseye, where the reserves that we are recognizing there because of the recovery factor is lower than we expected. The reserves that we're recognizing are lower than we expected, which impacts the denominator in our DD&A calculation. And that is what has driven the DD&A rate up. Now, we expect that that will move around a bit as we continue to add reserves. And that's also impacted by costs. And clearly, oil service costs are high. And so, we'll have to see exactly how it moves over time.

Great. And the last question, just to make sure that I heard correctly. Rich, your expectations are that beyond '06 going out into '07, that at the partnership level, resumption to that 8% type of distribution type growth should be realized again?

Our expectation is that over the next four, five years after 2011, that we will return to that. Some years it will be greater than 8% and some years it will be less than 8%. We haven't, obviously, finished the budget for 2007 yet. And we will be in a position to talk more about that in December, probably.

But as these projects come on line, they will drive the distributions higher. It won't be a straight line because, for example, s I talked about it in terms of Rockies Express and one of the beauties of REX, is that as these facilities come on line, we start collecting tariffs on the line as far as it goes. So, for example, we will have a modest increase in 2007 because we will start collecting tariffs on the segment from Meeker, Colorado up through Wyoming to the Cheyenne hub. A much bigger increase will come at the beginning of 2008 when we start collecting tariffs on the movement from the Meeker hub and Wyoming all the way to Audrain County, Missouri. And then by 2009, we will start collecting on the part that goes all the way into Clarington, Ohio.

So, it will be a staggered growth. So, more of these projects come on in '8, '9, and '10 than in '7. But we expect good growth in '7 and accelerating growth in '8, '9, and '10 Park, anything you want to add to that.

No. I think that's exactly right.

We're looking at it. Again, preliminary numbers and there's a lot of variations obviously. But we expect that the long term trend line that we've talked about in the past of 8% is a good trend line for the next several years.

Rich, are you rooting for the Cardinals tonight, by the way?

No, I'm pretty neutral in this one after the Astros got knocked out. Next question.

Our next question comes from Carl Kirst with Credit Suisse.

Let me -- if I can turn back to TMX-2 and the project is kind of not gelling quite as fast as we hoped. Probably not as fast as you had hoped. Is there some flavor you can give us as to what is sort of going on in the minds of producers? I don't get the sense that those volumes, those commitments are going to anybody else. I don't see any viable projects out there. We could argue without end, Rich. But is this really a matter of project delays, is kind of the first half of that question? And then to the extent that you can comment on this, TMX-2, 1.1 to 1.2 billion, that's a fairly chunk of the KMI part of the project backlog. And again, just to ask, if that project doesn't go forward here, doesn't come together in the next few weeks, there's no reason to believe that that would some how impact the ongoing MBO?

No, it would not. And the drop down, again, subject to fairness opinions and approval by both Boards, is not dependent on TMX- 2 going forward. And I think TMX-2 will almost certainly, eventually be built. Again, we're, as you know, very conservative and we are not going to build it unless and until we have shipper commitments. We have opportunities to expend capital around North America. And this is one good. But we are not going to build it unless we have economic shipper commitments. And that's what we are working on right now.

I think, beyond almost -- it would be very surprising if it doesn't eventually get built. Because again, as you point out, there is -- it has certain markets that only it can serve. Namely, the lower mainland market in Vancouver, which is of course, is the only source of access for crude oil into the one refinery that is remaining there. It -- we ship significant volumes out of Vancouver Harbor to the U.S. West Coast and other places. And then we move anywhere from 80 to 100,000 barrels a day down into the Washington refineries right now.

And there's issues of; are they going to retrofit the refineries to burn more heavy? Right now, frankly, we are moving more light into the Washington refineries because they have not been, for the most part, reconfigured to burn the heavier crude. We think that will happen over a period of time. But the producers have to decide what kind of arrangements they want to make with the refiners. The long term, and you know me and us, we are very key on long term trend lines and just try to ride them as best we can.

The long term trend lines we think are very good because the current sources of supply to all those refineries in Washington State is Alaskan A&S crude, which is declining. The last numbers I saw is that this has nothing to do with the short term issues of pipeline problems in Alaska. Long term trend line is that the production up there, which was about 1 million barrels a day in '05, is expected to be more like 600 to 650, something in that range by 2010. So, enormous part of that is going to Washington State and they are going to have to replace it. Now, they can't -- and this is the best, we think, most economic way of replacing it. They can not retrofit the refineries and burn standard Canadian crude, the equivalent of WTI or something off of that. Or they can retrofit and get what, right now, is -- can be bought at a very nice discount to WTI, namely the heavier crudes that are coming out of the oil sands.

And I think there is a lot of cards still to be played by both producers and refiners as to which they want to do. But either way, we are the only pipeline connection into that area for Canadian production. And we think that overall, the combination of the needs in the lower mainland area, the Vancouver area is growing pretty nicely, the takeaway capacity from the dock at Vancouver, which gives them access to any place they want to go with it. And then the Washington State refineries lead to demand that is going to be sizably north of 300,000 barrels a day that we will have when we finish TMX-1. So, I think TMX-2 will get built but we need to make certain that everything is flanged and the T's are crossed and the I's are dotted.

Absolutely, that was very helpful color. Two other quick questions. One, and I believe you guys have publicly talked about what regulatory approvals are needed with the MBO. But this really has to do -- a question has to do with the state regulatory commissions where you still have the retail ops. And my question is, until that sale actually gets completed, until GE, you guys would still need to get approval from those state Commissioners. Is that correct? The fact that we are in the process of selling to GE doesn't somehow negate the fact that we need those approvals. Is that correct?

Again, we can't comment on the MBO beyond what is in the proxy that has been filed. But I can comment on the retail disposition and tell you that we have filed with the all three states for approval of the GE transaction and we expect to receive that. And again, there's three states involved. And we would expect that we will get that by the first quarter -- some time in the first quarter of next year.

Fair enough. And I understand the sensitivity about what you can say and what you can't about the MBO. So, if you can't answer this, I certainly understand. But if -- with respect to HSR, if there is second request, is that a material development that you would have to acknowledge?

We can't comment on that.

I think we just can't comment, Carl, on the MBO process, other than what is out there in the voluminous proxy that's been filed.

Thanks, and good luck guys.

Thank you. Our next question comes from John Tysseland with Citigroup.

Just a real quick question. On the $150 million, I think that's what you said, Park, regarding the sustainable CapEx for the end of the year, now with the changing in accounting -- or the changing and shifting from sustaining CapEx up to O&M, is that a good number to use on your base assets? Not necessarily the -- your additions and your expansions but on your base assets going forward on a couple of years basis, that $150?

Yes, two things. One, the $150 is actually the sum of where we should end up on sustaining CapEx, plus what has been shifted to O&M as a result of this classification change. And that total again, the shift total for the year will be about $27 million. And that's a reasonable assumption for the next couple of years. Now, reasonable a assumption for now. Once we are through with the '07 budget, we will be going through that in detail in January. And we will be able to give you a better update on '07 at that point in time.

Fair enough. And then, when you said -- when you stated that some of that shift was that $27 million, I think you reached that at about $50 million, the other was just a reduction in spending. What caused you to shift out your spending on some of the sustaining CapEx or is that just stuff that you overestimated at the beginning of the year?

The biggest single impact was on the Cochan Assurance Project. Cochan is an asset that we own less than 50% of and don't operate. But we proportionally consolidate it in contrast it to Plantation that we equity account for. And as result of proportionally consolidating it, then we do recognize -- it kind of hits DD&A and it sustaining CapEx. And the biggest piece of reduction is the reduction is a reduction in expenditures there at Cochan, for what is being call the Cochan Assurance Project.

Okay. And then last question, on the product pipelines, what was your -- what as the now expectation for the year? I missed that part of your presentation.

Basically, as we said is that if you -- the integrity shift doesn't impact distributable cash flow. If you were looking at distributable cash flow and you added back the rate case, which is right around $15 million and the additional environmental expenses, you would get right back. We would expect that the product segment would be right around its overall distributable cash flow budget.

Thanks. Guys, appreciate it.

[OPERATOR INSTRUCTIONS]

Okay. If we don't have any other questions, and you have no one else standing by.

Not at this time, no, sir.

Well, thank you all very much for listening. And if you have further questions, obviously, Kim Dang be available to answer them for you. Thank you.

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