金德摩根 (KMI) 2008 Q3 法說會逐字稿

We would like to welcome everyone to today's third quarter earnings review. All participants lines will be on a listen-only mode until the question-and-answer session of today's call. (OPERATOR INSTRUCTIONS) We would also like to inform everyone that today's call is being recorded. If you have any objections you may disconnect at this time. It's my pleasure to turn the call over to Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Thank you, sir, you may begin.

Thank you, Mary. And welcome to the Kinder Morgan third quarter investor call. As usual we will be making statements within the meeting of the Securities Act of 1933 and the Securities Exchange Act of 1934. Also as usual I will give an overview of the quarter and strategic issues affecting the company. And then Park Shaper, our President, will following with a detailed look at the numbers for both the quarter and year to date and then we will take any and all questions you may have. Let me just start by saying that I think it's easy to get distracted by what are certainly tumultuous events that are occuring in our economy and in the stock market today.

I just want to start out by reassuring you that this management team is going to stay focused on what we do best, and that's to produce solid and growing cash flow at Kinder Morgan to benefit both our investors and debt holders. Let me start with the third quarter and year to date results and just give you an overview and Park will give you the details behind the numbers. Today we approved an increase in our distribution per unit to $1.02 or $4.08 analyzed, that's up from $0.99 and it represents a 16% increase over the quarter of 2007 distribution which was $0.88 or $3.52 annualized. Probably a more important number is the distributable cash flow per unit before certain items this quarter was $1.09. That's up 14% from the $0.96 per unit for the comparable period last year. Through nine months of 2008, Kinder Morgan produced distributable cash flow of $856 million, that's up 37% from about $623 million for the same nine months last year. It's also important to point out that the excess of distributable cash flow before certain items above that distribution for the first three quarters was $97 million. Or put another way, our distributions per unit have gone to $297 million for the first three quarters of 2008, versus $256 million for the first three quarters 2007. And even with that increase we still accumulated excess cash flow of $97 million.

We had a strong third quarter, despite really lost business associated with the two hurricanes, that was about $21.5 million that we ate in our segment results. We had decreased demand for gasoline during the quarter. We had a dreadful economy, we had increases in construction and fuel costs that impacted both our existing operations and our capital expansion program. If you look at all this and certainly while we face our share of headwinds on a going forward basis, I think these results demonstrate that our diversified portfolio of very stable assets is capable of generating consistently strong cash flow even in these extremely difficult market market conditions. The results that we produced during the quarter and really for the year to date were led by three of our segments, our CO2 segment, our natural gas pipelines and our terminal segments.

Let me start with a overview of the products pipeline. We had earnings before DD&A of about $141 million. That's down about $14 million or 9% from a year ago. We had the north system in the numbers during the third quarter a year ago, and if you exclude that, it had roughly $11 million of earnings before DD&A in the third quarter, if you exclude that we were down about $4 million from a year ago. Virtually all of that and then some was at SFPP where we had lower through put, SFPP was off about $9 million from a year ago, the rest of the group made up about $5 million of the short fall. So we were down $4 million from a year ago or about 3%. The downturn SFPP is overwhelmingly attributable to lower through put on the system on the west coast. We did have improved results in the segment by our southeast terminals, our west coast terminals and central Florida pipeline when you compare to the third quarter of 2007. Those groups of assets benefited as we had some upgrades and modifications of our facilities which enabled us to generate more revenues by handling more ethanol, and that's become a nice return benefit for us.

If you look at the total refined products revenues for the quarter they were flat. The volumes were down about 7.9% compared to the same period a year ago, if you strip out the hurricane impact on volumes it was 6.9% down. Through the nine months of 2008, products revenues were actually up a little less than 2%, volumes down little more than 7%. Some mix pretty much down across the country, Las Vegas of all places is still positive for the quarter and the year by about 1%. And the gasoline volumes in the central Florida area around Orlando look like they are down, but actually Florida mandated 10% ethanol this year, so quarter-on-quarter, we are down by probably about 2% or 3% in the central Florida area. So those are isolated pockets where demand for gasoline seems to be pretty strong. Turning to our natural gas pipeline segment, they had third quarter segment earnings before DD&A and certain items of $177 million, that's up 25% from $142 million in the third quarter of last year. And the results there were driven by two things.

We had a nice return from our Rockies Express project, compared to last year, plus about $23 million for the quarter even after taking into account the hydrostatic testing that we had during the month of September which shut a big portion of REX down for most of that month. And then the Texas intrastate pipeline group continues to perform very well. It was up $14 million quarter over quarter. And the same trend lines are positive for the year as a whole. Important to note that again there was some negative from the hurricanes in this business segment at the intrastate pipelines, a little less than $4 million of negative impact from the hurricane. Our CO2 segment delivered third quarter segment earnings, before DD&A, of $203 million, that was up 47% from the $138 million a year ago. And that segment sustained about $11 million of lost business as a result of hurricane Ike. And you may wonder why does the CO2 business that's primarily operational in Colorado, New Mexico and western Texas, why would it have a decrease as a result of hurricane Ike?

And the reason is that we had a decrease in NGL sales volumes due to third party fractionation facilities being shut down. This will continue we think until early November when the main fractionator of our largest customer is scheduled to start up at the Beaumont refinery complex. So even overcoming the $11 million they had a very good quarter in the CO2 segment. That was driven by little bit stronger than expected oil production at the SACROC unit increased CO2 sales and transport volumes and higher hedge prices and higher oil and CO2 prices. Among the statistics in CO2 is the fact that our average oil production for the quarter at SACROC was just short of 28,000 barrels per day up about 2% from the same period last year.

Our average oil production at Yates was just a little over 27,000 barrels a day, flat with the third quarter of 2007, and our CO2 delivery volumes up 14%, compared to third quarter of last year, and that's due to the expansion projects in the southwest Colorado that are virtually complete and that have increased our CO2 production that we can move down to the Permian basin across our Cortez pipeline. Expect our CO2 production -- I mean our oil production at SACROC and Yates, both to be slightly above our plan for the year. And I think that's a promising outlook.

In our terminal segment, their third quarter earnings before DD&A, and certain items was $132.4 million, that's up about 21% from a year ago. The great bulk of the growth came from organic opportunities or organic expansions with the other 25% attributable to acquisitions. The expansions that resulted in internal growth expansions at the large liquid on the eastern ship channel in New York Harbor, north 40 Edmonton in Alberta, Canada and Vancouver terminal in Vancouver British Columbia. They also faced hurricane damage as part of the $21.5 million I referenced earlier. And their damage was about $6.3 million in terms of lost business during the third quarter. Total bulk tonnage was up about 9% for the quarter compared to the third quarter of 2007, led primarily by strong coal volumes at several of our terminals. Our fifth business segment Kinder Morgan Canada which we probably refer to as TransMountain had DD&A of $40 million, up 79% from the same period a year ago. And those results primarily reflect completion of the first portion of the anchor loop of the TransMountain pipeline. We were able to boost the through put capacity of TransMountain from 260,000 barrels a day in the third quarter year ago to 285,000 barrels a day now. The final phase is now coming on service, we will be on line by November first, just a few days ahead of our plan. And we will take the capacity up to 300,000 barrels per day and should lead to increased earnings in cash flow at Kinder Morgan Canada.

Now let me talk about the outlook, you will notice for those of you who read the press release carefully that last quarter we said we expected to exceed our target of $4.02 in distribution. I remember through the first three quarters we were $2.97, just to meet the $4.02 would mean $1.05 in distribution per unit in the fourth quarter. Last quarter expected to exceed that target. We now say we expect to meet or exceed that target. We expect our distribution our distributable cash flow per unit to substantially exceed the $4.02 target, that we have for the year. But given the hurricane impact in the third quarter, and additional impact of probably in the neighborhood of $10 million or more in the fourth quarter, we are going to wait for the fourth quarter results to see just how much excess coverage we want and is appropriate for the fourth quarter. We will either meet or exceed our target and we will post you on that obviously at the end of this quarter.

Let me talk about some of our major projects which a good part of the press release is devoted to. A lot of these projects are coming in on time and budget particularly in the products pipeline and terminal segment. We do face continued cost escalation on some of the major pipeline projects in the natural gas segment. This is due to additional regulatory requirements put on us, additional and rising construction and material costs of weather delays among other things. We remain extremely focused on managing these increases and on identifying ancillary opportunities to offset them. Our total forecasted capital expenditures on the major projects are now up about 22% from the numbers we shared with you at our January conference.

Most of that increase in the last quarter as I said has been on our major natural gas pipeline projects, and while we would rather not see the increases obviously, we remain confident that large projects like Rockies express and MidCont Express will deliver attractive returns to our investors. As we said before, when we evaluate these projects at the get go in order the make capital investment decisions we conservatively estimate cash flow which lead to opportunities to out perform. To give you one example on REX we are already providing ancillary services to shippers which generate revenues well in excess of the contractual revenues on which we based our expected return. I will say that on our Kinder Morgan Louisiana system, that does not look like an attractive return at this time. We are working very hard to improve the revenue line on that project and we are actually finding some opportunities to do exactly that.

Now we describe a whole bunch of our projects and acquisitions in our earnings release, I'm not going to go through all of them. You can read them yourself. I want to mention three of the newer ones that occurred since the last time we spoke. The first is that we announced we entered into a purchase and sale agreement to buy a liquids terminal in Phoenix Arizona from Conoco Phillips for about $29 million. This is a liquids facility that has tank capacity of 200 barrels per day, it's located adjacent to our existing terminal in the Phoenix complex, it will increase our storage capacity in that market by about 13%. We expect to close that in early December. It will be immediately accretive to cash flow available for distribution to our unit holders. We also since we last talked, have announced a new [1.3 billion] natural gas pipeline project together with Energy Transfer Partners announced that on October 1st, that's the Fayetteville express project. It's a 42-inch, 187-mile pipeline that will begin in Conway, Arkansas, and end in Quitman County, Mississippi. We have 10 year binding commitments that now total 1.85 billion cubic feet per day out of the initial capacity of 2.0 billion cubic feet per day.

Pending regulatory approvals, we expect to be in service by late 2010 or early 2011, and we expect all of that capacity to be fully committed prior to the time we begin construction on the line. In addition, since we last talked KMP acquired two systems from Knight, Inc., the private entity which owns the general partner of KMP. That purchase includes Knight's one-third interest in the express platte crude oil pipeline system that runs from Alberta Canada down to Illinois and a jet fuel pipeline that serves the Vancouver British Columbia Airport. KMP paid Knight two million KMP units. So it was all equity transaction and the units were worth about $116 million for those assets.

Now, the 500-pound gorilla in the room is obviously the volatility in the capital markets. So let me just address that head on. It's worth discussing how we expect to fund our expansion projects. Several factors here. The first and most important factor is the strength of our existing assets, and our expansions. Our diverse set of energy infrastructure assets will generate about $2 billion of cash flow that can be distributed to our partners 2008, we expect that number to increase in 2009. Let me be clear, that $2 billion is after all operating expenses, debt service and sustaining capital expenditures. That's a very important factor in the strength of our capital structure.

Number two, our expansion projects in aggregate will generate attractive returns on our investments using conservative projects secured by contracted customer commitments even after the cost overruns we've talked about. Third, we have ample access to short-term funds through unused capacity at our credit facilities. Let me talk about those. Year end, even if we don't put out additional capital between now and year end, we will still have undrawn capacity on our KMP line of well over $600 million on 12/31, 2008, and we will have substantial amount on our JV credit facilities. At REX we expect to have well over $500 million and at MidContinental Express well over $200 million of f undrawn capacity at year end without raising any additional capital, equity or debt between now and year end. Our common units KMR shares and debt have performed relatively well although I'm reminded of that old saying: "In the land of the blind the one-eyed man is king." But they performed relatively well compared to our peer group over the last several months. That's allowed us to raise $3.4 billion of long-term debt over the last 15 months, and $843 million of equity over that period of time.

Now if you include the KMR distributions which is essentially a automatic reinvestment program we raised $1.2 billion of equity over that same 15 months. That gives us lot of confidence that we will be able to access these markets to raise new capital. But fourth, in addition, our general partner, Knight, Inc., the general partner of KMP, has substantial financial resources. This year Knight will have EBITDA for $1 billion for calendar year 2008 and we have a debt to ability ratio of 2.6. We're prepared to use those financial resources if necessary and the Board of Directors of Knight today indicated its willingness to contribute up to $750 million to purchase equity from KMP over the next 18 months if necessary to support KMP's capital raising efforts. So I think in summary, what we have at KMP we expect to be able to continue our 12 year tradition of generating strong and growing cash flow, maintaining a strong balance sheet, and providing excellent long-term returns to our investors. And with that I will turn it over the Park.

Alright. Thanks, Rich. As typical I'm going to go through the financial slides attached to the press release. So hopefully everybody has those and can look at them. The first page that you see should be the face of the income statement. And it was a strong quarter, it's been a very strong year, and we expect that to continue. You will see at the bottom of the first section, so up from the bottom section, that declared distribution per unit of $1.02, that's what the board declared today to be paid in November, up 16% from the $0.88 a year ago. That leads to $2.97 of distribution year to date, up 16% from the $2.56 that was distributed a year ago. I'm going to talk mostly on the next page, which is where you can break out the segments and see how we actually earned distributable cash flow of $1.09 for the quarter. You'll find that's the second to last line above the footnotes on the second page you will see the $1.09 of DCF per unit, up from $0.96 a year ago, that's 13% increase, in DCF per unit.

In year to date $3.35 up from $2.65, that's almost a 27% increase above where we were at 2007. So again tremendous growth out of the asset as we expected for 2008. And not only that, our excess coverage is ahead of expectations. As you may recall in the budget we had $10 million of excess coverage for the year. Through three quarters we have $97 million of excess coverage. That's in the face of losing $21.5 million of lost business to the hurricanes, so if not for the hurricanes we would be $21.5 million ahead of that. For the quarter the excess coverage was $18 million. And again that was impacted by the $21.5 million, so that number would have been almost $40 million if not for the hurricanes. So again in the face of the hurricanes which had some impact on our business, our assets performed very well.

Moving up from the DCF per unit before certain items, there's the net income per unit, don't believe that is relevant as the DCF per unit, you have the total DCF before certain items as Rich mentioned $282 million up almost 23% from the $230 million in the third quarter a year ago. And year to date up almost 37% to $856 million. The line right above that sustaining capital expenditures for the quarter, about $43 million compared to $32 million a year ago third quarter, and year to date $120 million compared to $95 million through the first three quarters of 2007. We are on track to be right around our budget of about $196 million of sustaining capital expenditures. But you will see in order for us to hit $196 million, we will have significant sustaining capital expenditures in the fourth quarter, that is our current forecast, but it is a little in disproportionate for how we budgeted the fourth quarter. I'm going to talk about that some more in a minute. Immediately above that, the difference between book and cash taxes, you will see that cash taxes were less than book taxes by about $8.5 million in the quarter, a year ago cash taxes less than book taxes by almost $15 million. Year to date, 2008, cash taxes have actually exceeded book taxes by a little over $10 million.

You may recall that our budget called for the full year of 2008, cash taxes to exceed book taxes by almost $9 million. We expect we will end up around that level, $8 million or $9 million of cash taxes in excess of book taxes. Then above that you have DD&A and then of course net income, general partner shared net income, and the net income before certain items. Again they're all building up to what we believe is the most relevant number. The DCF before certain items and that number DCF per unit before certain items, again showing nice coverage over our distribution.

So how are we driving that? What's driving the growth? If you jump to the top of the second page, you can see the segment earnings before DD&A, this is before certain items as well. Rich already talked about the segments, I will touch on them briefly. Product pipeline under last year both for the quarter and year to date. A lot of that is the fact that north system was sold at the beginning of the fourth quarter a year ago. If you back that out for the third quarter products pipeline a hair under last year. And year to date basically consistent with last year, Rich talked about the volume impacts that we are seeing there. We did have a minor impact for the hurricane on the product pipeline segment of little bit less than $1 million. We do think that because of the lower demand for refined products the products pipeline segment will be under its budget for the full year.

Natural gas pipelines had a very strong quarter again up $35 million from a year ago, up about $126 million, from -- during the first nine months relative to the nine months of 2007, driven largely by the additional of Rockies Express or the growth in Rockies Express, really a function of bring REX west into service, and then significant performance in the Texas intrastates. Now natural gas pipelines did overcome $6.3 million of impact from the hurricane. But even with that we expect the natural gas pipelines to be significantly above budget for the full year. CO2, up about $65 million for the quarter, up $227 million year to date, tremendous growth. Significantly overcoming almost $12 million in impact from the hurricane, again driven off of the NGL volume issued that Rich mentioned, which is a function of fractionators being out of service and one in particular still out of service. SACROC volumes above plan for the quarter, slightly above planned year to date. Yates volumes were a little bit below plan for the quarter and above plan year to date. Clearly we are dramatically exceeding our plan at CO2 and expect to do that for the entire year.

Terminals is the next segment up $23 million for the quarter, up about $80 million year to date, driven by a little bit of acquisitions, as Rich mentioned and significant amount of expansion projects. Terminals were impacted by about $6.3 million of lost business from the hurricanes and the fire. Again nicely overcame that, although the terminal segment we do expect to be slightly under its budget for the full year. Kinder Morgan Canada, which is TransMountain but also includes the Express platte system we dropped down from the general partner in the third quarter and the jet fuel line that we transferred or dropped down in conjunction with that was up significantly from last year for the quarter and year to date largely a part of the expansion that are going on on TransMountain, the last piece of which -- the last piece of Anchor Loop come on at the beginning of November.

Kinder Morgan Canada we expect to be on budget to slightly below budget for the full year. What that gets you is segment earnings before DD&A up about 22%, $693 million, for the third quarter. Nine months of year to date almost $2.1 billion of segment earnings before DD&A and when you look at the full year we will almost hit $2.8 billion of segment earnings before DD&A. We will net the above budget for the full year, again products little bit below, terminals little bit below, Kinder Morgan Canada will be just slightly below, but that will be made up for by outperformance on the natural gas pipelines and the CO2 segment. So we expect we will be above budget in terms of segment earnings before DD&A and again those assets generating $2.8 billion of earnings before DD&A. With that and a drop below the DD&A and the segment earning contribution and look at G&A, you'll see it's up for the quarter and year to date. It's also a little bit ahead of our budget. The reason we're above budget is in part due to Texas margin tax, in part due to incremental G&A at TransMountain, which is a function of insurance costs, and some benefits costs being above budget and then legal is also above budget. We do think that G&A will be above budget for the year.

Interest you will see eventually below where it was in the third quarter of 2007 by about $3 million, slightly ahead of 2007 for the nine months. But well above really a favorable to budget for the nine months and we expect that to hold for the year. Essentially a function of rates being lower than what we had in the budget. So again we expect to get a nice pick up on the interest line for the year. Minority interest is essentially unchanged. Certain items layed out below that, looking at the ones that had items in it for the quarter, the allocated noncash long-term compensation, that is compensation expense that's really a part of [conoco], has to be allocated to Kinder Morgan Energy Partners, no obligation to pay any of that, we will never pay in of that in the form of cash, not in the form of equity, there is no absolutely obligation and will be no payments from KMP related to that. We talk about that every quarter. It will continue to show up every quarter because that's how we have to account for it. Legal reserves and settlements, you'll see $9.5 million for the quarter. But largely related for [FFPP] rates and this amount relates to prior periods being flowed through in this period. So that is that item.

Below that mark to market of certain upstream hedges, positive or favorable $12.2 million, we of course we are showing certain item. You may recall that in the second Q2 we talked about hedges in our upstream operations, these are a little bit of processing of Rocky Mountains, and we had some hedges on there that for accounting purposes were deemed ineffective in the second quarter. We had a charge that showed up in certain items at that point in time. And we said that that time in July that we would expect positive amounts to flow back through to offset that over the next few quarters. This is the biggest piece of it. And you see it's over $12 million, and if you look year to date on that line it's negative about $900,000. So almost everything that showed up there in the second quarter has now come back to us. And really all we did was didn't change for how we account or how things actually flow in terms of cash at the segment. Hurricanes and fires you will see a $15.5 million charge there for the quarter. What this represents are asset write-offs, and so assets on our book that were destroyed or otherwise hurt in the hurricanes. One time expenses associated with the hurricanes.

Now, these amounts will clear will be offset in the future by insurance recoveries. And when they are, those insurance recoveries have to be accounted for as a gain at that point in time, and that gain will show up down here in certain items. So again, expect a positive to come in the future, that will offset these amounts, now it won't offset the full amounts because we have deductibles associated with our insurance programs. Other or few smaller items and minority interests are the minority interest amounts that are associated with those certain items. That takes you back down to net income, which when you flow that through, the depreciation, the book and cash taxes and the sustaining capital expenditures, you get to your DCF before certain items $282 million for the quarter or a $1.09, recovering $1 to distribution.

Briefly I will go back to the first page of the income statement. I don't think there is a whole lot meaningful in the phase of the income statement, there are items scattered throughout there that we pull out and identify for you on the second page, so I think that's a more meaningful way to look at it. I will point out there is a new section, it's the bottom section on the page, segment earnings before DD&A and amortization of excess investment. This is basically segment earnings before DD&A including certain items. So you can compare it to the segment earnings before DD&A at the top of the next page, which excludes certain items, and again the certain items are all identified down below. We do believe how we represent it on the second page is the appropriate way to look at it, I will say that if you look it on the first page you would think that our growth is even stronger than what we are claiming. If you look at the segment earnings before DD&A on the first page, you would say total segments up 29%. We would argue they're only up 22%. If you look for the nine months you'd say they're up almost 69%. And we are telling you they're really only up 29%. Again we believe that the way it is represented on the second page is the correct way to look at it and to understand what these assets are going to generate going forward.

Now, before I go to the balance sheet, couple of quick comments about the fourth quarter. Again as Rich said we expect to meet or exceed our budget of $4.02 of distribution for the year. We have generated $97 million of excess cash flow through the first three quarters, due primarily to two factors, we actually think that excess cash flow will come down when we finish the year. Meaning we won't finish with $97 million of excess cash flow. We will finish with something less. And so what that implies is that in the fourth quarter there will not be excess coverage, but rather we won't fully cover the distribution. The reasons for that are really two items I've discussed. One is the shifting of sustaining capital expenditures from the first three quarters in to the fourth quarter.

That number will be consistent with our budget, but it will be higher in the fourth quarter than what we expected. Then the second issue is continued impact of the hurricanes we currently estimate to be about $111.5 million. That is due to the lower NGL volumes at CO2 and a little bit of continued impact at the terminals. Again what I'm saying is, we don't expect to end the year as a full $97 million of excess coverage. We do expect that we will have significant coverage above our distribution, and so when you look at it for the full year, we will have very significant excess coverage and be well above our budget in terms of excess coverage, for the entire year.

With that I will go to the balance sheet which should be the last page attached to the press release and walk down that quickly, cash and cash equivalence that have changed. Other current assets unchanged. PP&E up largely as a function of expansion CapEx. Investments are up. That's largely a result of the investment in Rockies Express from earlier this year and the drop down of Express, which is equity account enforced shows up on this line. Now reducing the sales of thunder creek which is also accounted for as an equity investment. Then the credit facility in place at MidContinent Express around the return of cash, from MidContinent Express earlier in the year and so that reduced the amounts on this line. Deferred charges and other assets up $200 million. Part of that is the note that we now have as part or our investment in Express. And then other part is just a mark to market of our hedges that just flow through the balance sheet.

Total assets now about $17 billion. Note that payable and current maturities, I will talk about that when I talk about total debt. Current liabilities essentially unchanged, long-term debt again I will get to that in a minute. Value of interest rate swaps just a function of the forward curve for interest rates. Other is up about $200 million, that again is the hedge balance sheet mark to market. Minority interest unchanged. Accumulated other comprehensive loss, you'll see it is up from the ends of 2007. It is down significantly from where it was at the end of June. Some you may recall or go back and look, we were at $2.95 million at the ends of June, now we're at $1.5 billion. Significant reduction with a function of commodity prices during the third quarter. Other partners capital is up as a function of issuing equity and in a little bit of because of the express transaction.

So taking a step down to total debt, under $8.3 billion of total debt, that's up from $7 billion at the ends of 2007, and it's up a little bit from $8 billion at the end of the second quarter. In terms of debt to EBITDA, you'll see it looks like we're just hanging in there 3.4 times. You can run the calculation if you want, but if you take it out of another significant digit, you'll see at the end of the year we were at 3.43 times. We're now at 3.35 times, so it's actually declining, it's still rounds to 3.4 times. At the end of the second quarter we were at 3.37 times.

Let's talk quickly about the change in debt. Year to date it's almost $1.3 billion increase in debt. For the third quarter it's about $300 million increase in debt. So what were the uses of the cash, what did we do with that cash that we borrowed? Expansion capital $1.8 billion year to date and in the third quarter, it was $600 million. That's really what we have been doing. We've been investing in those projects. We have spent about $130 million on acquisitions, a little less than that in the quarter, a little more than that year to date. We also made a contribution to Rockies Express of about $300 million earlier in the year. So those are the large uses of cash. The sources of cash to help fund that, we have issued equity total $500 million year to date. That's about $384 million that's been raised in offerings and about $116 million that was issued to Knight, the general partner in exchange for the express and the jet fuel lines. So again that total's about $500 million of equity.

KMR distributions, are essentially cash retention tool are more appropriately a distribution reinvestment vehicle that raised cash for $70 million in the quarter and almost $210 million year to date. The MEP credit facility as I mentioned before, allowed us to get about $63 million back from MidContinent Express. That didn't happen in the third quarter it happened earlier in the year. We generated $50 million from the divestitures in the year. That was largely to sale of Thunder Creek. Not much in the quarter but $50 million, but up $50 million year to date.

The change in margin deposits generated about $250 million of cash in the quarter, about $40 million source of cash year to date. Excess cash flow as we mentioned earlier, this is cash that hasn't been distributed, about $18 million in the quarter, $97 million year to date. A couple of other things really related to acquisitions, part of it was an additional payment on expansion CapEx on TransMountain and another was just some cash associated with express, with a source of cash of about $7 million in the quarter and about $30 million year to date.

And then working capital and other items were a use of cash of about $25 million in the quarter, about $40 million year to date. Largely AR and AP offset a little bit by other current assets and other current liabilities and then a couple of other minor items that's driving that use of cash, $25 million for the quarter, about $40 million year to date. Now clearly our expansion Cap Ex has been significant, $600 million in the quarter, almost $1.8 billion year to date. Some of that's been in products, $30 million in the quarter product, about $126million year to date at products. That's the Carson tanks and the Miramar tanks and other projects. Natural gas we've only had big expenditures, $275 million in the quarter, $676 million year to date. A lot of that is the Louisiana pipeline construction. On the CO2 segment, we spent about $134 million in the quarter, about $392 million year to date. We'll continue to expand at SACROC and then a little bit at Yates and also the southwest Colorado expansion which is largely in service at this point.

On the terminal side, about $77 million of expansion CapEx in the quarter, $278 million year to date, plus a variety of projects include our efforts our expansions at the Houston ship channel, what we are doing in Louisiana, in the New York Harbor and then of course primarily earlier in the year our north 40 terminal in Edmonton. Kinder Morgan Canada, about $96 million of expansion CapEx in the quarter, about $312 million year to date. That's largely the Anchor Loop project to expand TransMountain. So again if you look at the change in debt it's almost completely driven by the expansion project, a little bit by the contributions to REX and acquisitions. And we have raised significant amount of equity $500 million year to date to offset those expansion activities. And that is all I have. I will hand it back over to Rich.

Okay. And with that, we will talk any quest you might have. Mary?

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTION) Our first question comes from Darren Horowitz with the Raymond James Company. Sir, your line is open.

Good afternoon, thank you. Rich, I thought you did a good job talking about being financially flexibility and obviously liquidity and financing growth is on everybody's minds. So that's going to be the basis for my question. First when you talked about having the flexibility and going through budgeting process for the forward 12 months. When you include the projects like the Fayetteville line can you give us some insight on what that projected CapEx number might be and more importantly the impact that this higher cost to capital environment might have on your average IRR?

Well we really don't have the cost pinned down for next year until we go through the budget process. Particularly on Fayetteville obviously, depending on the regulatory work we don't know how much of that will be spent yet in 2009 versus 2010, we have a good handle on the total cost and have locked in the pipe costs already. But we don't know exactly what the breakout will be between 2009 and 2010 on Fayetteville yet. Park, you want to add anything?

I think you asked about the impact of cost to capital impact on capital IRR. Cost to capital itself doesn't actually impact your return. The objective is to make sure you're earning a return that is well in excess of your cost to capital and clearly we believe that we are doing that just as we have historically. I think everyone who's followed us probably sick of hearing us say this, but we never done projects that were right on top of our capital. We've always whenever we're going to do a project looked for a nice cushion between the return we expected from that project and our cost to capital. We very conservatively estimate cash flows from our projects and we are seeing that on Rockies Express as portions of it come online we are able to generate more cash than in projections. We are confident we are going to earn attractive returns well in excess of our cost to capital on these projects.

Park, let me ask a follow up question, because you touched on something that I'm curious about. Just for context, if you were to rewind 12 months and look at budgeting process in late '07 and early '08, can you help us understand what the spread above your cost to capital, what target return on average you were looking for and how that may change as you look at the forward 12 months?

I guess what I'd say is in this environment where capital is more scarce, no question, and where cost of equity is backed up, and I think what that leads to is less competition for a number of these projects. We will be doing all that we can to lock in higher returns on the projects we commit to going forward. We think it's an attractive environment for doing that.

Okay. Let me switch gears, when you talked about obviously maintaining a conservative approach to cash flow retention for working cap purposes, as you look at the year ahead how do you balance excess cash flow coverage and bottom line DCF growth?

It is a balancing process. We are going to look at that. Our commitment for the last 12 years has been, that's consistent with the MLP rules, that we try to pass on to our unit holders the overwhelming bulk of the cash we generate after debt service and all other costs. Clearly I think we will continue with a eye looking at the ex -- we are entitled to maintain excess coverage for purposes of setting up reserves and for future capital needs, and we will look at that carefully as a balancing process when we set our targets for distributions in 2009. Now of course I think something that ought to give all of you comfort, as you know at our January conference we will spell out in detail what we expect our distributable cash flow per unit to be and how much we expect to distribute and what our target is for if year. You'll see all of that. And in addition I guess I'd mention that the past is not necessarily prologue to the future. But in the past and Park eluded to this earlier, we almost always ended up with more excess coverage, we've met or exceeded our target distribution every year in the existence of this company except for one year and we missed by $0.02 in 2006.

But every year but that one year we have had excess coverage that generally has been greater once we total up the whole year than what we projected in January at our analysts conference. That gives us little bit of comfort on running room. But certainly we will look at that and we are not naive. And clearly in this kind of environment it's something you need to look at is what ratio of excess coverage is appropriate in this kind of environment. And that's what we are going to look at on a going forward basis. Park?

Thank you very much. I appreciate it.

And our next question comes from John Edwards with Morgan Keegan. Sir, your line is open.

Hi, John. How are you doing?

Good. How are you doing?

I'm doing fine. If I complained it wouldn't do any good, right?

Right. Rich, can you talk about how much did the hydrostatic testing impact in terms of the cash flow for the quarter?

Steve Kean is right here and he's got those numbers.

Yes. We had a impact to our interest on REX of about $6 million associated with the charges we weren't able to collect because we had pipe down for most of the month. Now the impact turned out to be little bit less because we did some ancillary services revenues that helped offset that. Looking kind of at the FT line, not the whole story on equity services, we got about $1.5 million that back. It was $6 million to our interest associated with down FT charges associated (inaudible)

Half that shut down we did complete it and it went back in service by October 1st.

Okay. Great. And then I know you went through it, Park, what was the again what was the total capital expenditures for the quarter?

Total Cap Ex for the quarter, was about $600 million -- little over $600 million. Year to date it's a little under $1.8 billion. That doesn't include sustained. But the sustained is on the other page. That's just expansion.

Okay. Great. And then as far as at this point, how much is left to spend on at REX and at MEP?

Well I mean the remainder at REX and MEP for the life of the project, clearly goes beyond 2008 and into 2009. And I think that the remainder at REX is probably about half the project that remains.

About $2 billion. Third of the project. About $2 billion still to be spent at REX. Now a lot of those costs have already been locked in in terms of some of that $2 billion as pipe costs obviously.

Right. Okay. I'm just trying to get an idea. The total cost I think you said now is about $5.6 million or so, so you spent about $3.6 million so far.

It's about $6 million actually total cost.

And we spent about $4 million.

Okay. Alright. So $6 million total and about $4 million spent. Okay. And then the same for MEP?

Spent $500 million of $1.9 billion capital costs.

Did you hear that, John? We spent $500 million to date out of $1.9 billion total. That $1.9 billion we expanded it once as you know, that includes $200 million for the additional expansion that we did, all of which is fully subscribed.

All of those numbers are [88s] express and MEP have their own credit facilities, Rockies Express has its own debt that is outstanding. We'd expect to continue to finance those at the project level.

Right. And along those lines I wanted to confirm you got project facilities that are available until 2011, as I understand it, you're not under any obligation to take those facilities out once you put everything into service. I assume you have flexibility with respect to timing, any capital markets activities with respect to taking those out. Is that a correct understanding?

You're correct.

Okay. Great. Then last would be, as far as any injection of investment by Knight, Inc, what criteria are you looking at if you could give color on your thoughts surrounding that?

Let me say first of all that this is something that as the largest owner of Knight, I will say straight from the horse's mouth, obviously KMP is our prize asset, we believe in it 101%. And we are just going the look at the market and the market for both equity and decide when and how much we think we ought to be buying in equity from KMP. We will just let that be our guideline, and we are clear with the board that we will just evaluate that on an on going basis. We have no immediate need for any cash, debt or equity, we told you what our credit facilities are at the end of the year even after all of the funds that we expect to spend in the fourth quarter on these projects and even assuming no term up of debt no issuance of equity in the fourth quarter. We will watch it on a month by month basis, looking at the market on both the debt and equity side and decide when we want to use the fire power of the $750 million.

I think it's a little everything we tell you about Knight, obviously, John, is a matter of public record in our securities filings, but Knight after sell out of NGL of course is a very under levered company and it's shown by the fact that the debt to EBITDA ratio is about 2.6 times, we have a undrawn credit facility at Knight, we have a credit facility of $1 billion, year end we expect to have virtually nothing drawn on that. Now we do have a final tax payment on the NGL sale that will come up after the first of the year at $200 million. So say in round figures of $750 million to $800 million of undrawn facility plus all the cash flow coming in at Knight for next year, we have EBITDA of over $1 billion this year expect that to grow next year. So we have plenty of cash at Knight to hold in reserve and KMP is our key asset obviously.

Okay. Great. Appreciate the color on that, Rich.

And our next question comes from [Michelle Nesi-Marvins] with Center Coast Capital. Ma'am your line is open.

Hi, Michelle.

Hi. Thanks for taking my call. Just general market question, trying to look for a silver lining. How do you think the constraints in the capital market could create some downward pressure on construction costs and how long do you think it would take for that to evolve?

Well, I think you are going to see downward pressure for two or three reasons, one is, of course, the overall utilization of steel, worldwide is turning downward. You may have seen the latest numbers that China switched from, over the last several quarters have been net importers of steel, they actually reached what I've been reading they actually were a net exporter -- they've been an importer, they were a net exporter at least during the month of September. And we would look for that likely to continue as steel production comes down, steel demand comes down, I think think you will see a lessening of steel price. Now that still has to translate in to the kind of steel that is used in pipeline construction. It's too early to tell when that will happen. I think also as we look out and look at all of the projects going on, in terms of new midstream energy construction, primarily pipeline, it's a little bit like the pink going through the boa constrictor that's coming through right now and over the next 18 months or so, after that we do see what we see downturn and that will also lead I think to contractors getting -- sharpening their pencil a bit on how they will price future projects. That said there are no guarantees in life, we will have to wait and see. I think our guess would be there will be some downward pressure. Too early to tell when and how much.

Okay. Thanks.

And our next question comes from Noah Lerner with Hart's Capital. Sir, your line is open.

Thank you. Good afternoon, everybody. Couple of questions, first, regarding the reduction in the volumes in the products and probably concerns natural gas towards the end of the quarter, I'm going to make a presumption. I'm wondering if you can give any color on what the velocity of the change intraquarter as been on the utilization and the volumes? Are we picking up speed with the reduction in utilization or is it kind of plateaued out and been consistent over the last couple of months now?

Let's talk about the products. It actually was the actual worst month I'm looking at my sheet, was either July or August, September was just a little bit better. But not a lot of difference throughout the quarter but just a little bit better in September. By guess is we probably seen the plateau, and what we are thinking is it will probably stay down at about this level about 7% through the fourth quarter. Again as I said earlier, Noah, there is hits and misses in there. Surprisingly, Las Vegas for whatever reason is actually modestly up for the year. And on the other hand California has been down although California, September, was I believe a shade better than July and August. But I think we will just have to see. Obviously if you look at the glass half full you'd think gasoline prices having fallen as much as they have, $0.70 or so across the board and probably more to come, that you would see some pick up in demand, but offsetting that certainly is if we are in recession I expect we are, how do you weigh the recession against which is a negative for gasoline usage against the positive of lower prices at the pump, and I just don't know. We are just playing it very conservatively and obviously we have the -- any increase in those product bottoms drop almost directly to the bottom line, because we're a high fixed cost, low variable cost business on our products pipeline system. Now aside from the impact and Steve can contradict me -- aside from the impact of the hurricane late in the third quarter, we really haven't seen any downturn in natural gas demand and we look at this very carefully and I've voiced some of this before, our view of the overall demand for natural gas is pretty darn bullish and the reason for that is primarily electricity demand, that if you look at the alternatives to generate additional electricity that this country surely needs as we go forward, there aren't a lot of alternatives. Coal certainly has a negative connotation now in terms of environmental issues.

I think you're not going to see a lot of new coal plants built. Nuclear, which I personally believe, is a big part of the answer on all of the above category people. I think nuclear should be encouraged. Hopefully it will although our two presidential candidates seem to have different view points on that. But I think that's 10 or 12 years off before you have any meaningful or any new nukes at all built. That's not the solution over the next several years. Certainly we have abundant natural gas, the shale plays are coming to fruition, producing a lot of natural gas, we have it and the key is to get the connectivity between the supply sources and the demand sources. We also have alternative fuels. I'm a little bemused and I know all you people are smart enough to figure this out, but if we can find wind power and solar power that's great too. But don't be confused when you say we expect a 50% increase in wind power deliverability that's going from maybe a little less than 2% to 2.5% or 2.75%, say 2% to 3% around. So it's not like it's going to fulfill the growth that's inherited natural gas or replace any of the demand for fossil fuel on the electric generation said. Like it or not we are going to have fossil fuels and natural gas as the prime driver of our electricity needs over the next decade. And so we are very bullish on that. You will have ups and downs of natural gas usage too, But for the most part we feel good and the numbers so far which show that natural gas demand and through put holding up well except when you have disruptions from the hurricanes.

Okay. Great. Just one other question from reading through the press release, looks like you had good test results in Florida on the ethanol pipeline. I know we talked about this a couple of quarters ago, with limitations on long haul pipes, I was wondering if you saw from the success any other opportunities for short haul pipelines for you to add on to expand the opportunities with the ethanol pipelines.

That's a very good question. The test on our central Florida pipeline went very well. We are offering that to our customers later in the fourth quarter and we seem to have an awful lot of pent up demand, given the fact that the 10% Florida mandate now for ethanol and now of course we have the terminal in tampa, the terminal in Orlando and the pipeline connecting the two. Right now for the ethanol part of the demand that 10% is being moved by truck from Tampa over to Orlando, then put into tanks at our Orlando terminal and blended in at the rack to produce the 10% mandated ethanol content. Certainly it's much cheaper to ship by pipeline, even over this relatively short distance than it is to ship by truck. People are definitely going to take advantage of all we can offer them on batching ethanol in Florida. The next one that comes to mind is we have a pipeline system in Oregon, part of SFPP that runs through Portland down to Eugene, Oregon, we would think that's probably the next place we will implement this. On the long haul pipes it's more difficult. We're looking at how we do this.

I certainly would not want a promise that we would batching major quantities of ethanol on plantation or two major facilities on SFPP, the east line and west line. What I would say we said this before on plantation there may be the opportunity. We have multiple lines running across the southeast, there may be the opportunity to segregate out ethanol, take one of those smaller lines and put it in ethanol service on a going forward basis and certainly that's easier to do than batching ethanol, but some of the same technology, making sure that you've got the moisture out of the system, etc., etc., that we've learned on Florida will apply if we wanted to dedicate part of the plantation system to ethanol. And that's something we will continue to look at. It will probably be early 2009 before we are prepared to address that in more detail. But clearly ethanol movement by pipeline is a positive. Another positive as most of you know, is that in the energy bailout -- whatever you call it the $700 billion bailout legislation in Congress, as part of that as you know I think they did put in there that movement ethanol or bio diesel would qualify for MLP treatment. We don't have to count revenues from ethanol or bio diesel handling against the 10% that we're allowed to have come from nonqualifying sources. That's a plus for us and all MLPs, if you can structure your lines in such a way that you can move large quantities of ethanol, you can debottleneck a lot of the rail transportation issues in this country, eliminate the unit trains that are the primary moves of ethanol now and that cash will automatically qualify for MLP treatment and that's a big positive.

One last real quick question. On the increase in the costs between REX and MEP and everything, the press release said it looks like it's 22% over the number from January. Is that basically equal for both or one higher and one lower between the two projects with the excess costs?

Steve?

The 22% number is taking the projects that we were looking at in January, which includes REX and MEP and Louisiana and a bunch of other things, and just looking at that project slate and identifying (inaudible) over $7 million number. That's the 22% increment now. Most of that, about 90% is in the gas group. And vast majority is related to construction cost increases. Try to break it down. This is kind of broken down to our share construction costs increases on REX are about 200 of that. MEP about 110. MLP 281. That explains most of that differential.

Thank you very much.

Thank you.

And our next question comes from Rajul Aggarwal with Marathon Asset Management. Sir, your line is open.

Hi. Thanks for taking my question. Couple of follow ups and couple of follow up questions. One was just on this Cap Ex number, on a previous question you gave the numbers on Cap Ex on REX that have been spent and left to spend. Were those including the 22% increase or was that before the 22% increase?

Including everything. Again,when we said we have $2 billion left to spend, Don think that that's $2 billion of Kinder Morgan money. That's $2 billion on 8H basis, we have financing at the joint venture level that will take care of the debt component of that. And then the contribution from us Sempra and Conoco, will be what is left over on the equity side. Part comes out of the facility and part comes in equity contributions. And our part of the equity contribution is obviously 50% of whatever contribution is necessary.

That's helpful. On the $750 million potential equity infusion from KMI, you said KMI has a $1 billion of EBITDA and it's significantly on the level of what you said. The question I had was one if you receive distributions from KMP to KMI, does that cash come from KMI or are you just (inaudible) and if that is the case how does that EBITDA help the equity infusion I guess?

The cash that comes up from KMP to KMI, comes of course from the standpoint of our general partner interest and also from the ownership of the KMP and KMR units we own at the KMI Knight, that comes up free and clear, we also have NGL distributions that come out of our remaining 20% ownership of NGL, and that's the cash flow we have. Then it's up to Knight to decide what it wants to do with that. And we have the opportunity to either distribute that up or we have the opportunity to pay down what debt is left at Knight. Or we have the opportunity to reinvest it back in KMP or some place else. So we have that in addition to the facility that was essentially undrawn on. Does that answer your question? It's important that Knight is a very healthy company from a cash flow standpoint. And all we have is remaining debt up there, we have to pay the debt out and we have to pay any taxes that are occurred, otherwise free cash flow for Knight to decide how it wants to use.

The reason I was asking was from what you said there isn't, no need for the equity infusion in the near future that you saw. So in next three to six months if you get distributions, if you distribute to the equity of KMI, then that's the only capacity up there would be the facility in some ways. Have you taken any steps to prevent that cash from distributed out to the equity holders or is that just a fluid conversation at this point?

Let me go back again. We have no dividend policy at Knight. That's up to the decision of the Knight board. We can can distribute zero to Knight. We haven't distributed anything to Knight equity holders this year. Or we could distribute all of that cash flow. Clearly given this situation, we will look at that carefully before we make any distributions out to the shareholders in Knight of which I'm the largest shareholder. So we are going to do what is right for the whole enterprise including KMP obviously. Does that answer your question?

It does, it does. That helps. The other two questions I have, there has been a drastic change in commodity prices in the last three months or so and who knows where this is going as to you've talked about the demand side of gas and how you're bullish on that. How does the supply side reaction to this drastic correction in gas prices impact our business if it has any impact, and does the outbreak in gas price have an impact on your business?

I think everything does have some indirect impact if you are a major mid-stream player in the energy field but not a lot. The lower price of natural gas if you want to look at the glass half full you would say it will lead to natural gas arguably recapturing some markets it otherwise would have lost. You may have more production more industrial use of natural gas in the United States. I don't think those are big items one way or the other, but where you have lower prices you'll probably have a little more use. On the negative side, glass half empty side you might say that some people in some places producers may scale back a little bit on their production. If they do that prices would probably firm up again. But we don't think that the change in natural gas price says going to have significant impact on our business unless you had a fall to $2 or $3 and had producers cutting back dramatically, in which case you would have a B type recovery in gas prices. So I think that's kind of a nonevent for us pricing of natural gas.

Okay. And in terms of oil prices in the CO2 segment?

In terms of oil prices clearly as we said before virtually all of our volumes at SACROC and Yates, the oil production there, is hedged under long-term hedges. So we are not exposed to direct commodity price differentials up or down there. The two areas in which we are exposed to indirectly or directly to oil prices are number one, most of our NGLs are not hedged. They're almost impossible to hedge, a very dirty hedge when you start hedging NGLs as a lot of people have experienced. We don't hedge those.

So to the extent that the ratio of oil prices and delta the between oil and natural gas prices both of which declined pretty dramatically as you know, to the extent that delta changes, and it has impact on our NGL volumes that we produce at SACROC about averaging 10,000 barrels -- these are 8H numbers and not our share, about 10,000-barrels a day of that, 15,000 barrels when we get the facility when Exxon gets the facility at Beaumont back on line, that will have impact depending on how that spread turns out. So we kind of benefit in that particular segment from lower natural gas prices, get hurt by lower liquids prices.

Final thing is that we set our prices on a number of our CO2 sales contracts to third parties a lot of those are set with a floor price but upward escalation based on oil prices. And even though this is not a day-to-day thing because most of those are set a quarter in advance. So for example the set for the fourth quarter, was the closing price on September 30th. The price for the third quarter was the closing price on June 30th. But we are exposed there in terms of the amount of our CO2, the value of some of our CO2 sales contracts. So those are the two negatives, on the other side if oil prices come down and sustained way you probably have more product demand. I like to say we are essentially a huge toll road, that said we're probably a little bit biased helped by higher price as little bit in the scheme of things and hurt a little bit by lower prices.

Got it. Just one last question, if I may, this is more you have and you continue to spend quite a bit of money in infrastructure across US and it seems a lot of people looking at the world and saying the world is coming to an end. Does that make you nervous about the CapEx they're putting into the ground as to what all the turmoil may have an impact in terms of market pricing coming forward and how that may impact your business?

Let me start by saying I've been in this business about 30 years, I've seen a lot of ups and a lot of downs and generally this economy and this industry muddles its way through to pretty successful outcomes in the end. Long-term, I'm not that negative on the whole situation. We could have some short-term volatility as everybody knows or even short to medium term volatility. But let me say specifically on the infrastructure, what I like about our game plan at Kinder Morgan is virtually all of these major construction projects are backed up by long-term contracts with the shippers. And where we do not have long-term contracts with the shippers, we generally have the kind of rate-based treatment where if they don't ship the rate to the remaining shippers or remaining volume shipped go up. Okay. So for example on our products pipelines, as while it has a negative short-term input hit to us if volumes go down in the long term we can readjust those tariffs to incorporate the lower through put. So that's kind of the regulatory part of it.

On the non, the less regulated the natural gas pipelines on virtually all projects for example REX we have 1.8 billion cubic feet a day capacity fully subscribed for 10-year period from the date of the final finish of REX. So it really amounts to 11.5 to 12 year contracts with people like Conoco and BP and other strong credits. On MEP, we have all of our through put fully subscribed for 10-year contracts on the base facility and on the recently announced expansion. All that fully subscribed to a number of shippers. And on the Fayetteville project as I just said, it's a two Bcf a day, we are just in the the open season, we already have 1.85 subscribed my people tell me they expect to have the rest of that subscribed by the time we start construction in late 2009. So I'm really -- we are really not -- nothing in life is without risk. Don't get me wrong, but we think we have protected our risk very well, we simply won't build these projects unless we have long-term through put agreements. Steve or Park, anything you want to add to that? Okay. Does that answer your question?

Thank you so much. Appreciate it.

And our next question comes from John John Tysseland with Citigroup. Sir, your line is open.

Hey, John. How are you doing?

Good, Rich. Good afternoon. Thorough conference call as always. Quick question, I guess most of my questions have been answer. Rich, when you seem to emphasize that the amount of distributable cash flow KMP generates when you're speaking about financial flexibility is that another way of saying if you don't get attractive price capital even in today's very tight environment, that you'd consider using the distributable cash flow as a source of financing. Because if you were to take a negative outlook on the markets longer term, KMP actually could finance the growth or the CapEx growth with some distributable cash flow, which is pretty unique among MLPs especially ones that have as large a CapEx budget as KMP does.

Well, we certainly mentioned that because that shows that we do have tremendous flexibility across the board. And as we said in the last part of the press release, John, that we are committed to continue to build a long-term future of this company and we just have a lot of flexibility and we started my first point was the tremendous cash flow that the underlying assets generate. I think we have all kinds of other flexibility too with our credit facilities, with the ability of a very strong general partner to step forward if it's appropriate. And one thing we didn't mention but we've actually in this process had a number of third party infrastructure players come to us and talk about partnering up with us on projects, the very -- these projects are very attractive when you have long-term contracts for all the capacity. So I just think we have an awful loft flexibility. I don't want to compare to any other MLP. We just at Kinder Morgan have a unique set of circumstances, strong partner, good cash flow, extraordinarily good cash fow and you put all that together and I think we are obviously well equipped to weather whatever the market throws at us. Park, you want to add anything to that?

The only thing I'd say, John, I think this was your point as well, when you own assets that are stable diverse set of assets that are key to the energy infrastructure of this country, that has to operate to keep the country returning and generate $2 billion of cash a year and growing, as Rich, said you have a lot of flexibility. You're in a very strong position. And that's -- I think that's what you said, that's what Rich said and the press release says. $2 billion of cash gives you that flexibility.

Well put. Last question is, when you look at the opportunities that you have to further develop infrastructure over the next several years, and you spoken about this in a couple of presentations, do you still expect to spend the same amount maybe on the CO2, if oil prices stay where they are today, or I guess maybe a better way to ask that question is where would you consider scaling back CapEx, should the current capital markets persist?

Well, I don't think we are going to have to scale back CapEx again for all the reasons we talked about. As Park alluded to early, we are clearly looking at higher returns on the CapEx we do spend on new projects. And again we've been approached by players on the other side interested in selling or joint venturing assets they have that I don't think they would have considered before the credit crunch. We haven't pulled the trigger on anything, not saying we will, but certainly there are going to be a lot of opportunities out there. And generally I think at higher returns but still preserving the kind of throughput commitments that we come to expect on our pipeline projects. As far as the CO2 is concerned we evaluate that every year on a conservative price deck on the forward price of oil. If we don't see a very nice return on that, we won't spend the money on it. And this year certainly CO2 is a -- not only a generator of a lot of cash, but even after you take off the, Mark I think alluded to the face we spent three quarters we spent $390 million, expect to spend about $500 million for the year. Our cash flow -- distributable cash flow coming out of that segment is well in excess of that. So we are actually generating a significant amount of precash flow from CO2 operation today, expecting to do the same thing in 2009 and beyond.

The only thing I say consistent with what Rich said is, of course, we will continue to evaluate all future investment decisions based upon the environment we're in at that time, using a conservative projections for oil based upon where it trades at that time. We don't expect to really curtail our existing activity as the CO2 asset, but I do think it's true that if oil prices stay low for a period of time that the cost of the same activities will come down. We will naturally end up spending less on capital at CO2 because the cost of doing the kinds of activities we want to do will decline.

It makes a lot of sense. Last question, Park, when you look at your credit facility, can you remind me if you've swapped today a fixed rate on that, and when those swaps expire?

We have not swapped to a fix rate on the credit facility. So when we borrow it floats.

When you look at fourth quarter you said you were going to be significantly below budget for the year, if you look at fourth quarter --

Above budget. Above budget for the year.

I'm sorry.

That's important.

Yes. So when you look sequentially, quarter over quarter to fourth quarter on interest expense, how much anticipating that to jump?

Interest expense will be favorable to budget. So the actual interest expense will come in under what our budget was. So that's a favorable variance that we expect for the year. And then, I'm sorry, John, what did you ask?

Right. When you look at the fourth quarter relative to the third quarter given what -- near term rates have done --

Rates will be higher. And we factor that into expectations. Rates in the fourth quarter higher than the third quarter.

Yes. Thank you for the clarity, guys.

And our next question comes from Eve Segal with [OER Capital].

Thank you. Good afternoon. Just a quick follow up if I could. Number one, has the commercial paper market opened and what's your view on that?

Commercial paper market is open. And we were issuing commercial paper, that's been consistently. I'm sure many of you saw this week that S&P put us on negative outlook, as part of that took our commercial paper rating to A3. And as far as that there is not a commercial paper market out there for that rating, so we are now drawing our facilities.

Okay. And have you had discussions with S&P in terms of what they would like to see in order to maybe change that?

Yes, and I will let David comment as well, he's directly spoken to them. And I actually think their write up was fairly clear. It was clearly instigated by the delay in putting Rockies Express in service. But what they are looking for is for us to finance these projects going forward. And I think that once we successfully do so, then my expectation is, if everything else stays the same and everything else won't stay the same, so we'll have a discussion with them at that time, but my expectation is everything else stays the same, once we finance if projects that negative out look would come off. Is that consistent?

I would agree with you on that statement, Park.

Okay. Great. And then if I could follow up with CapEx, was there any reason why Louisiana pipeline project seems to disproportionately have more of a cost over run than REX or the MidContinent?

I'm going to turn that over to Steve. Let me say we have -- Go ahead, Steve.

Yes. What we experienced on the Louisiana pipeline is really because of three factors affecting pipeline construction costs generally we've had weather issues, I would certainly experience increase in construction costs generally. We've had some materials quality problems there that we had to remedy. And so that's been -- it's been unquestionably disproportionately impacted by increasing construction costs compared to the others. Again, we are going to look for every way we can to try to get some of that back. We're looking for revenue opportunities. I think as Rich says hard to make that particular project attractive when all is said and done. Actually I want to clarify in the answer I gave to question before, someone was asking about the difference between the 22% number and what I explained really was the difference between Q2 and Q3 in terms of our project update. So the breakdown I gave on the construction cost was on REX and MEP and Louisiana were geared to the Q2 to Q3 change rather than the change from the January.

Okay. Rich, you commented on the impact of or the potential impact of commodity prices. Could you also just comment on the potential impact of the lower oil prices on what might be happening in Canada as far as the oil stands?

Eve, I think it seems to be that most of particularly the larger players up there are still very intent on carrying out their oil sand projects even in the face of -- they've experienced escalation costs and clearly difference in pricing now. And I would expect that we have always said we would haircut some of these dramatic growth projections that some people have come up with for Canada. Any way you cut it you are still going to see a substantial and large increase in the amount of production that's coming out of the oil sands. But yes, I think lower oil prices will certainly have some impact on it. But I think so many of these projects are so far along that they don't have any choice but to finish them up I think. And obviously the various joint ventures and contracts signed with refineries in the US that are retrofitting to accommodate the heavier oil just increases both the desire and the contractual necessity of finishing some of these projects.

But we will continue to watch it. As you know we're finished or will be by the end of this month with our expansion on TransMountain. We will be at 300,000 barrels a day capacity coming over to the lower mainland. And actually right now in our numbers, we have had very good volumes down into Washington State, a part of that goes over the water from our facility in Vancouver harbor, part of it gets consumed in the lower mainland and a significant part goes down to Washington state. We actually I don't know how much of a long-term trend this is, we actually seen the last two months some of the highest volumes going in to Washington state that we've seen in any time since we owned the asset. What that is a result of, I don't know. But clearly we are seeing a lot of demand for it and a lot of demand coming over the water also.

Just two last ones, Rich, you also went over the credit worthiness of the guys on Rockies Express and MidContinent. When you look at Fayetteville expanse or any other type of stuff, are you worried about counter party risk and are you contemplating or are you getting right now -- that hasn't been built yet, but letters of credit? Can you just -- has the world changed enough that you sort of worried about future projects and credit quality?

We are always worried about credit quality in any environment. And we have and I really can't go into details on any of the contract. But virtually all our contracts across our pipelines unless it's with very few exceptions, we do have letters of credit to back up in certain events on a number of our projects including our Fayetteville.

The only thing I will add is we do get credit protection in all instances especially on [perp] regulated pipelines, will are restrictions on what we can get, we live within the perp guidelines on that approach. Then for these projects, Fayetteville is a good example, you look beyond that and say what will happen if a counter party got in trouble. Is this gas going to be produced? And if it's going to be produced, it's quite likely going to have to use this pipeline capacity. Which means in that event your contract likely gets affirmed. But I'm not saying that's always the case. I'm saying we go to that level of analysis as we are evaluating this.

Yes. Before we contract to build a pipeline away from a specific area we look at what the overall formation is going to produce, what the costs structure of that is, and what the market clearing price is. And of course so much of this money that the producers are spending is up front in terms of leasehold costs, so actually the F&P costs in a lot of cases are pretty minor, not minor, but pretty slight compared to the pricing even in today's market.

Okay. And here is the last one which you may or may not want to answer. In terms of acquisition opportunities or JV opportunities that may come your way, are any of these significant stamp out type of transactions as opposed to the singles and doubles that you hit pretty well?

You're right. I wouldn't want to comment on that. Let me just say we would be very careful before we did anything. Of course one way of doing that is if you did something you might do something for equity. It would be self-financing from a going forward standpoint. But it would I depend on the circumstances, we would be careful before we did anything. But there are certainly opportunities out there.

Got it. Thank you.

And our next question comes from Ross Payne with Wachovia.

Hey, guys. First question is, can you tell us how much of the quarter's crude production was hedged and where you are for the rest of the year and for '09?

Sure. Yes. The crude production for 2008 and essentially low 90% hedge, 92% approximately and '09 we're about 82% hedge. That's crude only. Doesn't include NGLs in the denominator.

Okay. Alright. Just listening to your most recent expansion program with ETP, looking at the mileage and the cost, it looks like it's around $7 billion a mile, is that I guess where we are currently because I'm accustomed to seeing things more of the $3 million maybe $4 million range.

Well what we tried to do in the Fayetteville project is really pulled in our full experience with the cost increases experienced on our other projects and frankly that added some. So what you're seeing is hopefully something that has margins for error in it. But it does reflect the worst of what we have seen so far in the pipeline construction arena.

Okay. And finally if I can get a number on where REX debt is, also looking if you could comment on S&Ps actions here, it's kind of interesting that on the second of the month they came out to talk about your Fayetteville expansion and said if you're going to be over 4.5 times debt to EBITDA probably inclusive of REX debt, that they would look at a negative out look and they obviously moved much quicker. If you can give some color on thought as why they did move as quick. If you can give us the REX debt number. Thanks.

The REX debt number $1.9 billion of debt out there in terms of longer term debt, $600 million floater, $1.3 billion of long-term and outstanding on the credit facility is about $1 billion.

Okay. So that's was that $1.3 billion plus $600 million plus $1 billion?

Yes. Almost $3 billion.

And again these are on a 8H basis and then within REX to date the partners contributed about $1 billion of equity into the project. That's how you get to Rich's number earlier, roughly $4 billion in REX.

Okay. And any comments on the rating agency?

I think what we said before, it was prompted by the announcement around the REX delay. And I don't know that we have anything to add to the comments before.

And Park, when you talk about the debt number giving the rating agencies are going to be looking at this, you're including the REX EBITDA in our earnings if you could maybe give us what the debt numbers are at REX. Just when you're going through that, that would be helpful for us. Thanks.

The numbers that we give you at REX is after interest expense. All we do is we take our net income or equity in earnings and we add back our DD&A, we are not adding back the interest expense.

Okay.

Better to look at it without including the REX debt. So what we are trying to give you, when we talk about our distributable cash flow number, is what we expect to receive out of REX in a distribution. And so that's why we add back the DD&A and we take off the sustaining CapEx. It's after the REX debt is already serviced.

Right. I understand that. Being on the debt side we are trying to look at what the rating agencies are looking at from a total debt to EBITDA standpoint inclusive of REX, that's why I was asking for that.

I understand that they are looking at that. We will have more conversations with S&P about that. Rockies Express is an investment grade rated entity, it's supports its own debt and we expect that it will going forward. The $1.3 billion is nonrecourse to the us. We expect additional debt nonrecourse to us. That's consistent with their understanding.

And our next question comes from Burt Zimmerman with Principal Global. Sir, your line is open.

Thank you. Good afternoon, guys. I just had a quick question you mentioned what your credit facility was going to look like at the end of the year. Could you just quickly run through what the credit facilities have available now?

Yes. And today at KMP we have in excess of $800 million, we have almost $900 million at REX, we have about $650 million at MEP. And let me just say in case somebody asked this, those are all net of any commitment from Lehman which was very small, about 3% of our total lines came from Lehman . But we've netted those out even though I think in the end Barclay's may elect to take part of those. But at this time that's not been done. We have been conservative and netted all. It's very minor, as I said, a little over 3% of the total commitment is from Lehman. But we have netted that out and the numbers we're giving you are without

Okay. So you have $800 million left on your KMP revolver now and expect to have $600 million at the end of the year?

Expect more closer to $650 million. Yes.

Okay. So you're only going to draw out another $150 million it sounds like the rest of the year?

We have a little over $800 million and we're going to be a little under $650 million, so yes, $170 million, in that range.

And our next question comes from Rajul Aggarwal with Marathon Asset Management. Sir, your line is open.

Hi, thanks for taking my second set of questions. Just on the facility, on the $600 million floater that I think are recourse to you on the Rockies Express, how do you plan to tackle that?

We expect to refinance it and then of course there will equity contributions coming from the partners as well.

So you think you will be between now and August of '09 you'll be issuing $600 million for REX?

There is a reasonable chance of that.

The reason I'm asking, given what is happening in the current markets you haven't given the thought to using a credit facility finance it.

We could do that as well.

At what point does the credit facility become too tight for the CapEx at REX itself or are you comfortable with the availability you have of debt facility?

We will look at that when we look at 2009 to see how the CapEx is going to flow.

And in terms of your own maturity, the $250 million that you have in '09, how do you plan to refinance that?

We'll either refinance it with long-term debt or we'll refinance it using credit facility or we'll issue equity.

Thank you.

I'm showing no further questions at this time.

Alright, Mary, thank you very much. It's been a long call. Again, as I always say, if you have additional questions feel free to call Kim or any of the rest of our people, and we will try to answer any and all questions that you may have. Appreciate your patience for a long call, and we will talk again soon.