金德摩根 (KMI) 2013 Q3 法說會逐字稿

Welcome to the quarterly earnings conference call.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, you may begin.

Okay, thank you, Kelly, and welcome, everybody, to the third-quarter earnings call at Kinder Morgan. As usual, we'll be making statements within the Securities Act of 1933 and the Securities Exchange Act of 1934. I'll give an overview of the quarter and 2013. Steve Kean, our Chief Operating Officer, will go into more details of segment performance and talk about our project backlog and then Kim Dang, our Chief Financial Officer, will review the details of the financial results for the quarter and year to date and then we'll take your questions. The Kinder Morgan Companies had a good third quarter and I think we're on track for a very good year. At KMI, we raised the dividend to $0.41. That's an increase of 14% from the third quarter of 2012.

In terms of cash available for dividends in the quarter, it was up 17% from the comparable quarter a year ago. We're on track for 14% growth in declared dividends for the full year of '13 and we expect to declare at least $1.60 versus $1.40 for the full year of 2012 and versus the '13 original budget at KMI of $1.57. KMI continues to benefit from strong growth and performance at KMP and from solid cash flow generation at EPV. At KMP, we raised the distribution to $1.35. That's up 7% from the third quarter of 2012. Our DCF before certain items was up 22% for the quarter. For the full year of 2013, we expect to declare dividends of $5.33. That's up 7% from the full year 2012 and is $0.06 above the $5.27 target in our budget for 2013. At EPB, we raised the distribution to $0.65. That's an increase of 12% from the third quarter of 2012.

For the full year of '13 we still expect to distribute $2.55 per unit and that's up 13% from full year 2012 and consistent with EPB's budget for the full year 2013. I believe the long-term opportunities for the Kinder Morgan Companies look very positive. Our project backlog, which Steve will talk about in more detail, grew again this quarter to about $14.4 billion versus $14 billion last quarter and $12.6 billion at the time of our investor conference in January of 2013. These projects in the backlog are spread across all five of our business segments and in addition to that backlog, there are numerous other projects that we're working on that have great potential and are likely to occur but they are not sufficiently definite to put in our backlog at this time. We remain very bullish on the future of natural gas as the fuel of choice in the US for decades to come.

We see increased demand coming from increased use for electric generation; downstream industrial use, particularly along the Gulf Coast; LNG liquefaction for export; and exports to Mexico. All-in all we expect demand for natural gas in the US, including the exports of LNG and to Mexico, to increase from a level of about 70 Bcf a day today to something approaching 90 Bcf per day over next 10 years. And we think with our 70,000 plus miles of natural gas pipelines, we expect to benefit enormously from this growth. We also expect to benefit substantially from additional production of and demand for NGLs, condensate and crude driven by the shale plays, particularly the Eagle Ford, where we have committed almost $900 million to our crude and condensate facilities and also production from the Marcellus and Utica. We also expect continued strong demand for CO2 in the Permian Basin, which we are attacking by expanding the source and transportation part of our CO2 segment. And we see continued demand for additional liquid storage facilities in our Terminals Group.

And finally we continue to progress on our major expansion of the Trans Mountain system in Canada. Let me conclude my part by talking briefly about our ability to reduce O&M expenses on the El Paso pipelines we acquired back in May of 2012. In an earlier call we itemized in some detail the changes in sustaining CapEx between 2011, which was prior to our acquisition, and 2013 and we showed we were actually spending more on pipeline integrity on these pipes when you total both sustaining CapEx and expenses related to that area. Since that call we've gotten a couple of questions regarding the reduction in O&M between 2011 and 2013. And we thought the simplest way to explain this is to compare the GAAP O&M expenses for 2011 for the major El Paso pipelines--that's Tennessee Gas pipeline, El Paso Natural Gas, Colorado Interstate and Southern Natural Gas--to compare the 2011 GAAP O&M expenses in those -- for those four pipelines with the budgeted expenses on those same categories for the same pipelines in 2013.

This is as close to apples-to-apples as I think you can get and obviously all these figures are public record and you can verify them. In 2011 these expenditures were $865 million and the budget number for 2013 is $674 million or a difference of $191 million. The budget for 2013 is obviously the budget, the year is not yet finished but just as a sanity check we went back and looked at the trailing 12 months as of 6/30/13 and that's $670 million. So we're very much on track with where the budget is. So you subtract $674 million from $865 million and you get a difference of $191 million. Of that $191 million difference, we reconciled about $182 million of it for you or 95% of that reduction. And let me give you a brief overview of those changes.

Payroll benefits and associated employee expenses resulted in a decrease of $161 million. Now that's not surprising because as a result of the merger, we eliminated 803 positions in the combined entity. Out of that $161 million reduction, $121 million of it was as a result of personnel reductions in G&A and at the Gas Group level. Only approximately $40 million resulted from field reductions. The next item is actually an increase and that's the pipeline integrity expenses. We spent $63 million more in 2013 than was spent under prior management in 2011. That is completely consistent with the increase we talked about in the earlier call relating to sustaining CapEx. We had lower non-pipeline integrity maintenance expenses of $33 million.

Our cost of gas across these pipeline systems was $28 million less in '13 than it was in '11. Vehicle and aviation expenses were reduced by $12 million and we had maintenance savings in the O&M categories related to the vested offshore assets, primarily at the Tennessee gas pipeline, of $11 million. If you put all of those up that I've just mentioned, that's an explanation for a reduction of $182 million. And if you want more detail on that, David Michaels, our Vice President of HR and his people -- Vice President of Investor Relations, can give you more detail on all of these items. But I think in my judgment what all this shows once again is that while at Kinder Morgan we try to operate our pipelines in the most efficient manner possible, when we acquire assets, we reduce fat, not muscle or bone. And I think our EHS record supports that conclusion. So with that, I'll turn it over to Steve for a review of the segments and talking about our project backlog. Steve?

All right. I'm going to go through the segments focusing on performance third quarter to third quarter, last year versus this, our expectations versus plan for the full year and then some of the business drivers and the backlog. Starting with gas, the gas segment at KMP is up 59% on an earnings before DD&A basis to $608 million versus $383 million in the same quarter last year. The increase is the result of the drop down transactions, TGP and EPNG, and also the acquisition of the other 50% of El Paso Midstream from a third-party owner and the closing of the Copano transaction in May of this year. So these acquisitions more than offset the year-over-year negative of the divested Rockies assets that we had to sell pursuant to the FTC order to close the El Paso transaction. With respect to the performance versus plan this segment is expected to exceed its plan for the year but entirely as a result of the Copano acquisition.

From a volume standpoint, higher Eagle Ford volumes drove improved year-over-year performance at the Texas Intrastates, but we had lower overall transport volumes across the segment versus the third quarter of last year as a result of lower gas demand for electric generation versus the record year that we experienced in 2012. If you look -- focus in on EPB, that lower demand in electric generation on the SNG system and the impact of rate case settlements on SNG and WIC caused EPB's asset earnings before DD&A to be down slightly in the quarter versus third quarter last year, $286 million versus $299 million last year. But looking ahead, we added to our project backlog in this segment, primarily in EPB. And overall we continue to identify and capture opportunities for expansion driven by export opportunities in LNG, Mexico and even Canada; and on the need to transport gas out of the shale plays, primarily Eagle Ford and Marcellus.

And turning to Mexico in particular, we believe that US gas exports are the best way to meet growing Mexican demand and we believe that our assets are perhaps the best positioned to serve that demand. Turning to CO2, segment earnings before DD&A in this segment were $349 million for the quarter, up 5% from last year and on track to slightly exceed its budgeted growth of 5% for the full year. The growth here was driven by higher oil and NGL volumes and higher prices. The growth in oil volumes was due to Katz and the recently acquired Goldsmith unit and that more than offset slight year-over-year declines at SACROC and Yates. Katz oil production in particular was about 2,700 barrels per day average for the quarter versus 1,800 barrels a day a year earlier, so up 50%. And Katz has been running around 3,250 in the current month. So moving in the right direction.

We continue to see strong demand for CO2 and are actively pursuing several large development projects to bring more CO2 to our fields and also to the market. Products segment earnings before DD&A for the quarter was $202 million, up 9% versus last year and expected to be slightly below its budgeted growth of 12% on a full-year basis. The shortfall to full-year plan is primarily due to the impact of the California Court of Appeals rate decision on Asset PP that we talked about last quarter, and due to lower volumes on KMCC versus the volumes we had in the plan. Now with respect to KMCC, we have contract minimums on that asset and we receive revenues even when shippers aren't using their full entitlement. But we don't recognize those revenues until make-up rights are fully taken into account. So there's a little bit of an uplift associated with that business going from 2013 into 2014.

Those two negatives are offsetting above-plan performance that we experienced at Goshen, Transmix, and the Products Segment terminals facilities. And again this segment is up nicely from last year. It has a number of very good projects under construction and in the backlog. Also of note in this segment is the strong increase in refined products volumes year over year, with volumes up 6.6% on a quarter-to-quarter basis when you include Plantation and 4.1% without Plantation. That's the biggest upward move we've seen for quite a while. We saw increases in gasoline, biofuels and NGL volumes versus the third quarter last year. Now some of that was probably some short haul volumes that may not recur but it was an uptick certainly in what appears to be the base business.

Terminals. Segment earnings before DD&A for the third quarter was $199 million, up 7% from last year, but we expect this segment to be slightly below its budgeted 12% growth on a full-year basis. Year-over-year growth was driven by increased throughput and higher renewal rates at Pasadena and Galena Park liquids facilities here in the ship channel as well as additional petcoke volumes and revenues versus the same quarter last year. Our bulk volumes were essentially flat year over year looking at third quarter. We had decreasing coal volumes but we had increases in petcoke and steel volumes versus third quarter last year. We also started bringing online our BOSTCO terminal project in the ship channel. That project is already being expanded and will under the current contracts be expanded to a total of 7.1 million barrels of capacity with associated barge and dock space, and ship dock space.

And this is one of several projects that we've had where we've gotten expansions under contract before we've even gotten the first project done. That's true of BOSTCO, it's true of our Edmonton facility and also true of our Splitter facility in the Houston ship channel. Phase one of our IMT coal terminal expansion was completed during the quarter and we continue to identify and capture a lot of new opportunities for expansion in this business too. Kinder Morgan Canada segment earnings before DD&A were $44 million versus $56 million in the same quarter last year. And that decline was due almost exclusively to the sale of our Express Platte pipeline system and a weaker Canadian dollar year over year. But the main story for this segment is as it has been our progress on the $5.4 billion expansion of our Trans Mountain pipeline, which we're expanding from 300,000 barrels a day to 890,000 barrels a day.

That expansion is under long-term contracts, which have been approved by the NEB. Still to come there is the filing of our facilities application with the NEB, which we expect to finish in December -- or file in December of this year and still expect in service by the end of 2017. Now turning to other elements of our project backlog. Starting with our January investor conference and several times since then we've updated that backlog and it's been growing with every update. And this includes our high-probability projects, projects that are under construction but aren't yet producing revenue, under contract but don't have permits perhaps, or very close to having contracts but anyway, projects that we have a high degree of confidence they're going to get done. So this quarter the backlog increased from $14 billion to $14.4 billion.

Also during the quarter we had almost $300 million of capital projects come on line, and when they come on line we roll them off the backlog. So what we're seeing is additions to that backlog that increased the overall backlog while offsetting the projects that came into service. Of the larger projects that came into service, Parkway and our refined products pipeline project came online, that's our facility in Louisiana and Mississippi and our petcoke handling facility for BP at its Whiting, Indiana, refinery. Now a few facts about the composition of the backlog across the business units and across the years. The Gas Group is up from last time, from $2.7 billion to $2.9 billion. Most of that increase is associated with additional pipeline capacity and LNG liquefaction investment on the SNG and Elba Island assets. So these are primarily in our EPB project area, or EPB MLP.

We do not have in the backlog our joint venture projects with Mark West to process gas in the Marcellus and Utica and ship wide grade to the Gulf Coast. We believe we have a very attractive solution for producers presented in both of those projects but we won't add them to the backlog until we see commitments come through and we're still working on those commitments. The Products Group backlog is up slightly but still rounding to $1 billion, same as last time, and new projects in the Eagle Ford and on Goshen are more than replacing the now-in-service Parkway project. Terminals is also up slightly but still rounding to $2.1 billion, same as last time. The new projects there, primarily liquids facilities including some crude by rail projects and expansions of those projects, are offsetting projects going into service during the quarter, which included the BP petcoke facility as well as a fertilizer terminals expansion and IMT. CO2 is up to a little over $2.9 billion from what had been just under $2.8 billion previously.

And there's some shifting there from EOR, enhanced oil recovery projects into more CO2 source and transportation project. And in this segment, our backlog is a little bit more based on development plans, our development plans as opposed to commitments to specific customers. As a consequence, as those development plans change these numbers move a little bit more than our other business segments do, but up in CO2 since our last update. And again, the biggest project is KM Canada, the $5.4 billion expansion. And a reminder on this project too that we're in development and will be in development for quite a while and our development costs are recovered through demand charges that we receive on firm capacity that we sold across our dock.

So this is a project where we're getting our development costs recovered. You'll also recall the recent investor presentations we showed you, the backlog as we were showing it to you was kind of back-end loaded as a consequence of the TMX project coming on toward the end of the backlog and also the liquefaction projects. And then it was a bit front-end loaded with projects that were in the near term and the middle years were a little more hollowed out, '14 to '15 were a little bit lower. We also told you that we expected as we went on that we would fill those years. Most of our projects were contracting for 12 to 24 months out and that's happened.

So in the revised backlog, we've increased 2014 and '15 by almost $600 million and almost $300 million, respectively. So the bottom line is that we're continuing to find new opportunities that are more than offsetting projects that are going into service. We have a large number of projects coming into service in the fourth quarter, which is a good thing, and we've got a lot of good prospects. We'll update this once we get through the fourth quarter. So that's it for the backlog and with that I'll turn it over to Kim.

I'll go through the numbers, starting with KMP, and you should have four pages of numbers. I'm going to go and focus on the second page of numbers, which is our distributable cash flow and it is how we look at performance. Let me point out that that distributable cash flow is reconciled to our GAAP numbers and we provide the detail for you on all of the certain items and adjustments. But in the quarter, as Rich mentioned, DCF was $1.27 per unit. That's down slightly from the third quarter of last year but on a year-to-date basis $3.94, up $0.22 or 6% on a year-to-date basis. And for the full year, we expect DCF per unit to be up about 6.7%.

The $1.27 based on $1.35 declared distribution results in about $34 million of negative coverage in the quarter. And as we've told you all year, we expect coverage to be negative in the second and third quarter, positive in the first and fourth and positive for the full year. On a year-to-date basis the $3.94 compares to the distribution of $3.97 and so we're about $14 million short but again for the full year, expect to cover. The $1.27 translates into DCF of $554 million. That's up $99 million or 22% versus the third quarter in 2012. Let me just reconcile that $99 million for you, what's driving that growth. If you look at the top of the page our segments are up $262 million and of that $262 million, $225 million is coming from the Gas Group.

So about 86% of the segment growth and earnings before DD&A is coming from natural gas. And as Steve said, that's driven by the drop downs from KMI and from the Copano acquisition offset by the FTC sale. The other segments are also up nicely with the exception of Kinder Morgan Canada that is down slightly because of the Express sale. G&A is an increase of $22 million quarter to quarter and that's largely about $18 million of that $22 million is associated with the El Paso and Copano acquisitions offset by the benefit of the FTC sales. Interest is up $49 million in the quarter, almost all associated with incremental debt balance as a result of the acquisitions and expansion capital. Sustaining CapEx is up $14 million in the quarter versus last year. We expect expansion capital to be up in 2013 versus 2012.

And then you have a small amount of other items that are up $6 million -- or an increase of $6 million in expense. So that gets you to $171 million in increase in distributable cash flow. You look at the GP interest and the increase in non-controlling interest of $72 million and that takes you to $99 million of growth in distributable cash flow in the quarter. For year to date, as I said $326 million in growth and distributable cash flow. Look at what's driving that. If you look up at the segments, the segments are up $887 million year to date.

$771 million is coming from the Gas Group, based on the same factors that drove the quarter. And then you have $51 million coming from CO2, $54 million from Products, $23 million from Terminals. So nice growth in those segments and that's offset by a $12 million decline in the Kinder Morgan Canada segment as a result of the Express sale. G&A, we have increased G&A of $70 million year to date, a little over $60 million of that is associated with the acquisitions net of the divestitures. Interest is up $173 million year to date versus 2012 and that's a result both of the increase in debt balance and a higher average rate. The higher average rate is driven by the rate of -- the interest rate on the drop-down debt, which KMP assumed in conjunction with the drop downs, which was at a slightly higher rate than the existing average rate at KMP.

Sustaining CapEx is up $36 million in the quarter and then we have other items that are about $46 million that you see in the adjustments to DCF. The biggest impact there is the sale of REX and part of the impact of the sale of REX comes back when we add back the JV DD&A, which is in our adjustments between net income to get to DCF. So that's a $46 million impact. That gets you to $562 million of increase in cash coming from these assets. Then the GP interest and non-controlling interest is an increase of about $236 million. So take the $236 million from the $562 million and that gets you to $326 million increase in distributable cash flow for the quarter.

Now looking at the segments versus our budget, as Steve mentioned, Natural Gas is above its budget on a year-to-date basis and we expect it to exceed its budget for the full year by approximately 11%. If you look at it without Copano, the natural gas segment would be slightly below its budget. On CO2 we expect it to be approximately $30 million above its budget. If you look at the price of WTI relative to the prices in our budget for WTI and you look at our metric and our sensitivity to oil prices of about $6 million in DCF for every dollar change in price you would expect that segment to be up about $45 million, and then you would expect it also to be up a little bit incrementally for the Goldsmith acquisition. And so horse shoes and hand grenades you would expect that segment to be up about $50 million versus the $30 million I mentioned.

So what's offsetting the price impact on crude is that we have -- we are realizing a lower NGL price than we had in our budget, we have slightly lower oil volumes, and then we have some higher expenses in some of our oil fields. Products we expect to be slightly below our budget and Terminals we expect to be below its budget about 4% largely as a result of lower coal volumes, lower steel volumes than what we budgeted, lower ethanol volumes versus what we budgeted and a contract that we lost with CSX. KMC we expect to be about 7% below its budget as a result of the Express sale. But overall, the Express sale is accretive to KMP's DCF, but the positive benefits show up in the interest line and due to reduced debt issuance and reduced issuance unit shows up in our Shares Outstanding. G&A for the full year we expect to be up about $16 million and that is largely associated with Copano. Interest is going to be up about $13 million and that's largely also as a result of the Copano acquisition.

But the increase in interest expense associated with the Copano acquisition is being somewhat offset by higher capitalized interest as a result of increased expansion capital spending versus our budget. Sustaining CapEx we expect to be slightly over our budget. On a year-to-date basis we have a large positive in sustaining CapEx but that's timing. For the full year we expect to be about $5 million negative versus our budget. And all of that and more is Copano and then it's being slightly offset by some positives in capitalized overhead. So that's KMP's distributable cash flow. Turning to KMP's balance sheet, if you look we ended the quarter at 3.9 times debt to EBITDA, which is consistent with where we ended the second quarter.

We expect to end the year approximately about 3.8 times and our budget was to end the year about 3.7 times but realize that we don't have a full-year benefit of the Copano acquisition in the EBITDA numbers. Year to date our debt balance is up $3.7 billion and in the quarter it is up about $500 million. Looking at the factors driving that, the $500 million change in debt for the quarter, we spent about a little over $800 million in expansion CapEx. We contributed about $70 million in contributions to equity investments, so we had uses of capital of approximately $875 million. That was offset by -- we issued equity that accounted for about $481 million and then we had a little bit over $100 million of other uses of capital, which is largely accrued interest which was $144 million use of capital during the quarter. And then that's being offset by contributions that we get from JV partners in -- for consolidated investments and we received about $30 million in proceeds from the sale of the TGP offshore assets.

On a year-to-date basis we have capital used for expansions and acquisitions and contributions to equity investments, about $9.6 billion. That's $6.9 billion in acquisitions which are primarily the drops, Copano acquisition and the Goldsmith acquisition. There's $558 million of debt that comes on to our balance sheet as a result of acquiring the second half of EP&G. We spent about a $1.9 billion in expansion CapEx and a little over $200 million in contributions to equity investments. We have raised equity of about $5.6 billion, offsetting that $9.6 billion of capital uses. So you've got about $300 million in other items which are -- we received $400 million in Express proceeds.

We received a little under $100 million in swap unwinds, we received a little over $100 million in contributions from JV partners, we had the sale of the TGP offshore and then we had a little over $300 million in working capital uses primarily associated with accrued interest. There were some taxes that we had to pay in conjunction with the Express proceeds. We have Copano acquisition expenses and also some inventory timing. So that is KMP. Turning to EPB, again here I will focus on the second page which is our calculation of distributable cash flow. But we have reconciled this to our GAAP income numbers for you and provided you a lot of detail on any of the reconciling items.

On EPB, the distribution for the quarter is $0.65. That is 12% growth quarter over quarter and that translates into $1.90 on a year-to-date basis which is up 16%. Based on the distributable cash flow per unit of $0.58 our coverage, we're about $14 million negative in the quarter and consistent with what I said about KMP and what I said about EPB last quarter we expect that it will have negative coverage in the second and the third quarter, positive coverage in the first and the fourth and that we will have positive coverage in the full year. Year to date, coverage is positive, about $13 million. The $0.58 of distributable cash flow per unit translated to distributable cash flow in total of $127 million. That's down about $22 million versus the third quarter of last year and so let me just take you through that.

The assets are down about -- and you can see this at the top of the page, Earnings Before DD&A, down about $13 million. The biggest piece of that is Southern Natural Gas which was impacted by the rate case and also lower volumes as a result of higher gas prices and cooler weather, the WIC rate case. And then those are being somewhat offset by an increase in the Elba Express pipeline as a result of an expansion that came on in April 1 of this year. G&A is a benefit quarter to quarter of $4 million. Interest, small change. It is an increase of $1 million. And then sustaining CapEx is a benefit. We spent less sustaining CapEx in the third quarter of this year than we did in the third quarter of 2012 of about $4 million. So that gets you to about a $6 million decrease in cash flow generated by the assets net of interest cost.

The GP is an increase in the GP incentive about $16 million and that's a result of the higher distribution and more units outstanding. So when you combine that with the $6 million coming from the assets, that's about a $22 million decrease quarter to quarter. For the nine months, the $425 million of DCF before certain items is relatively flat versus the nine months in 2012. The assets are up $39 million; $31 million of that you can see on the line Earnings Before DD&A of $888 million versus $857 million in 2012. Then about $8 million of it shows up in reduced minority interest or non-controlling interest expense further down the page and we've talked about the reason for that in prior quarters. G&A is lower in the nine months of 2013 versus 2012 by $23 million and that's the cost savings that we are realizing as a result of the merger.

Interest is an increase of $12 million and that's primarily based on rate where we termed out some debt that was on EPB's revolver in the fourth quarter of last year associated with the May drop-downs. Then sustaining CapEx is a benefit of about $5 million year to date versus the three quarters in 2012 and then other items are about $2 million. So that takes you to about $57 million increase coming from the assets net of interest costs and then the GP interest is up about $59 million on the higher distributions and more units so that you're about flat on a year-to-date basis. Now for the full year versus our budget, if you look at it, it is -- we will hit the $2.55 in distribution. We will come in slightly below on coverage and that's just a result of moving the Gulf LNG drop out of this year. There are some other moving parts.

We had the WIC rate case which was -- we did not anticipate in our budget and some lower contract renewals on WIC but that's offset by lower G&A and some better performance out of the other assets so that the entire variance for the year is largely due to the Gulf LNG drop moving out. Looking at EPB's balance sheet, they ended the quarter at 3.6 times debt to EBITDA. That's down from the end of last year and flat to the second quarter. We expect to end the year at about 3.8 times debt to EBITDA and that's just some timing on equity issuance and interest payments between now and the end of the fourth quarter. Reconciling their debt, the change in debt at EPB for the quarter was a reduction of $14 million; for the year to date it was a reduction of $122 million. In the quarter we spent $25 million on expansion CapEx, coverage as I mentioned earlier was a negative $14 million and then we had positive working capital and other items of a little over $50 million which primarily relates to accrued interest and accrued taxes.

Year to date, expansion capital was $68 million. We've raised equity of $87 million. Coverage was a positive $13 million and then we have working capital and other items of about $90 million, again, which is largely associated with accrued interest and accrued taxes. Turning to KMI, the declared dividend for the quarter, $0.41, compares to cash available per share of $0.41, so basically flat on coverage. Cash available to pay dividends, $424 million. That's up $62 million or 17% versus the third quarter in 2012, so let me just take you through what's driving that growth. The increases coming from the MLPs and the distributions coming from the MLPs is $102 million increase. We have lower interest expense of approximately $62 million.

Now some of that's timing because we used the accrual method in 2012 because we only had a partial year on the El Paso acquisition. So cash distorted the numbers on a partial year. So you have a little bit of difference in timing just accrual versus cash, but most of it is driven by the debt pay down as a result of the drop downs. You've got about $95 million reduction in the quarter as a result of reduced cash generated from the assets that we've dropped. We have about a $15 million increase in cash taxes and then we have about $8 million in lower G&A to get you to the $62 million. Year to date, cash available to pay dividends of $1.231 billion, that is an increase of $259 million or 27%, and let me just walk you through that increase. The interest in the MLP EPB and KMP is an increase of $422 million. We actually have higher interest year to date of $39 million.

What you see there is a full year of -- or year to date we have in all periods. We have the El Paso debt versus we only had it in a partial period last year but that's being somewhat offset by the decreased interest associated with debt pay down on the drops. We've got $33 million reduction in cash generated from our other assets as a result of the drops. We've got a $76 million increase in cash taxes as a result of the higher income and then we've got a $15 million in higher G&A largely as a result of having a full year of El Paso. And so that gets you to the $259 million increase in cash available to pay dividends. Now, for the full year, as Rich said, we expect to distribute at least $1.60. That $1.60 is above our original budget of $1.57 per share because we raised the distribution of the dividend by $0.03 as a result primarily of the Copano acquisition.

But the reason we say at least $1.60 is because we expect that we will generate our cash available, both $1.57 and $1.60 were based on distributing everything that we had. We expect at this point that we will have some excess cash available largely as a result of delaying the Gulf LNG drop and that asset staying at KMI for four additional months and better performance on other retained assets. Looking at KMI's balance sheet, KMI ended the quarter with $9.78 billion of debt. That is down about $1.6 billion from the end of the year. Now what you see on this page is $10.23 billion of debt at the end of last year but that's a recast number. Where we actually ended the year was $11.4 billion. And then in the quarter, debt is actually up about $300 million, so quick reconciliation for you on the quarter.

We repurchased warrants about $330 million, we spent some money on some legacy environmental issues and the environmental -- and the legacy marketing bucket El Paso of about $28 million. And then we actually generated cash in excess of what we reflect in the metric largely as a result of lower taxes that we're paying versus what's in the metric. Because in actuality we are using all of the NOL that we can possibly use and so we're paying lower cash taxes versus in the metric we only reflect about a $300 million use of the NOLs. So you have lower cash taxes in reality than what we reflect in the metric. Year to date, $1.6 billion, a decrease in debt, $2.2 billion in proceeds that we got from the drops in the sale of B2B and then also debt that was assumed by KMP in the drop-down transactions.

We repurchased $463 million of warrants, we made a $50 million contribution to the pension, we've made about $60 million of investments in the two MLPs to maintain KMI's 2% interest, we've contributed about $50 million to equity investments, and then we've got about $50 million in other items, the largest of which is the difference between the book and cash taxes. At KMI, on a fully consolidated basis we expect that we'll end the year maybe a shade higher than what I said last quarter. Last quarter I said about 5 times, maybe end about 5.1 times and that's a result of the warrant repurchase occurring faster than we originally anticipated. So with that, Rich? Turn it back to you.

Thank you, Kim. Thank you, Steve. We will take questions from the callers.

(Operator Instructions)

Darren Horowitz, Raymond James.

I realize the Marcellus and Utica liquids project isn't in the budge and that it was announced as a letter of intent contingent upon sufficient shipper commitments and various approvals. But since the JV announcement the competitive landscape has changed a little bit. You've got an additional proposal for a big LPG dock in Lake Charles and another large player moving forward with a second big marine terminal expansion. I'm curious how that changes the playing field as you view the project and more importantly the odds of it getting done.

Again, as we've said all along, Darren, we'll only do this if we have the commitments. So far we're seeing a lot of customer interest. Steve, what do you want to add to that?

I think one of the things that is still to be completed, particularly focused -- you really have to look at this project in two parts. All right? The first part is the processing part. There appears to be a lot of demand for additional processing capacity and we expect there will be even more as the producers get a handle on the composition of their Utica volumes as it starts coming out of the ground. So that's one aspect of the project. The other is the wide grade line and that's what you're mainly focused on. And there I think that having more outlets potentially for this product as it moves south, the way we've proposed it is we could build either into Southwest Louisiana or into Mont Belvieu.

And what we're talking to shippers about or producers about right now is what they would prefer. And what we've also put on the table--when I say we I mean us and Mark West--is the interest that we have in potentially building some fractionation capacity for them. So the fact that there might be some additional destinations, it certainly complicates the picture but it's still something that we're willing to invest in and willing to hear what our producers think in terms of where they want to go. But that's the thing we've got to still get straightened out and be able to present to our producers but we're really kind of looking in part for them to tell us where it is that they want to go.

Steve, my last question shifting gears a little bit over to the BOSTCO terminal. Appreciate the color there but beyond the remaining 30 tanks that should arrive online over the next six months and hitting that aggregate capacity threshold that you outlined how do you guys think about land adjacent to that or the ability to leverage that footprint possibly to add more splitting capacity for the export of a complementary product like gas, oil or light naptha to Latin America, how does -- ultimately how does this refined product push to the Gulf Coast whether or not it's there or Galena Park or Corpus, how does that work into your downstream plan to add more capability?

Well it's a good thing for our asset set on the Houston ship channel. We have the largest independent terminalling facility of Pasadena and Galena Park. Over the years, we've been adding cross-channel lines to improve the connectivity, KMCC has that as a destination. We're looking for ways to interconnect that big operation which is also expanding with the BOSTCO facility. So overall the push to move more product into storage and then out either by pipeline or on ship or barge is a positive thing and John Schlosser is here. Do you want to add anything?

We see the ground swell of product that's trying to get to the water there. You have the opportunity for two additional docks at BOSTCO. We're building a new dock at the Greensport facility at our partner Watco's facility and we announced the AES facility which will have an additional dock as well. With that will come additional tanks and additional ability to move product to the water.

Brian Zarahn from Barclays.

Following up on Darren's first question on the Marcellus, Utica wide grade line, where are the potential shippers leaning towards in terms of destination of Belvieu or Louisiana?

I think there's interest in both. I don't know that there's a preponderance. I guess we've heard more talk about the ship channel than anything else, when you say Belvieu.

Probably Belvieu on the margins.

Just because Mont Belvieu is still viewed and I think correctly as the most liquid point in the whole infrastructure play, so I'd say we've had a little more interest there.

In terms of if that's the market would you lean towards third parties or would you look at adding your own fracs and if you were going to build your own where would it be? Inside Belvieu or outside Belvieu?

Well I think we're working with a number of parties now on both ends of the transaction, in other words, with some of the potential shippers and also present owners of frac capacity and together with Mark West and we're just looking what all our alternatives are, I think. We haven't made a decision on that yet.

Okay, and any type of ballpark range of potential cost without the fracs for the project?

Well what we've said and look we're in a very competitive situation here as you know, Brian, so we have not really broken the components out. We've just pointed to north of $2 billion as the kind of all-in investment here.

Okay and then any update on the hedges for 2014 and 2015 production in the CO2 business?

Kim, do you have those?

Sure, I can tell you what they are. I'll have you look at the -- you want 2014, we are 66% hedged at about $94 a barrel, 2015 we're about 43% hedged and depending on the way you look at our collars, between $90 or $92. If you have the market price then it's $92. If you have it in at the put price or the floor it's $90.

Ted Durbin from Goldman Sachs.

Question on the CapEx budget overall and you talked about how you had this sort of hollow part in the 2014 and 2015 that you're now filling in. I'm just wondering if you can give us a sense of where the budgets looking like for '14 at least. Is it up or down versus this year and then how that might translate into your goals for distribution growth of say 5% to 6%?

Well, if you look at '14, Steve is right. We're filling in those holes and right now in this project backlog we have about $3.4 billion, a little north of that for 2014. We're just starting the budget process and I'm sure there will be additional projects added to that when we go through the budget with all of our business segments over the next three weeks, starting next week. But that's what we currently have in this backlog and again I would look at that as a pretty conservative number compared to where I think we will end up.

Does that include drop-downs as well I'm assuming?

No, that does not include drop-downs.

Just capital projects.

Got it. And then if I can just shift over to the Gulf LNG, and you mentioned it a little bit in the prepared remarks kind of waiting on it as the drop-down to EPB. I'm just wondering if you can give us a little bit more detail on where you are in terms of contracting. It sounds like you said you're going to wait maybe four months. Is that a reasonable time frame to think about when you might have a sense of what the contracts are or is that just we're sort of pushing that out and they get pushed a little bit farther? Just talk [it through] Gulf LNG for us.

I think we will have detailed information on the drops of the remaining assets by the end of this year, we'll be able to disclose that. Once we get through the budget process I think we'll be able to tell you what we expect to be able to do.

Got it. And then just coming back to the Marcellus and actually on the natural gas side, you've obviously got a lot of growth there and a lot of producers are concerned about where basis differentials were and some of the discounting that you saw this summer. I'm wondering if there are some bigger things that you're thinking about around takeaway there because of the big growth in the Basin around your assets.

There are a number of things we're thinking about and for competitive reasons I really wouldn't want to go into all of them. But obviously we believe that in the long term there needs to be significant additional capacity built into New England and we obviously on Tennessee have the pipe to do that or the base to do that. That depends again on shipper commitments. We'll just see where that comes out. But we think there's additional volumes to go to -- into Canada and as I've said before our belief is that eventually virtually all of Eastern Canada will be served out of the Marcellus and Utica. Again our pipeline network lends itself very well to that and I think we'll have some announcements pretty shortly on that. And then of course there's the takeaway for wide grade to get the NGLs out and we think there are a lot of opportunities for us there. We're very happy with the kind of footprint we have in the Marcellus and Utica and we think we're going to be able to use that to our advantage and to help our customers over the next several years.

Is the demand for takeaway are you sensing that the producers are willing to sign up for capacity more or is this more going to be a demand pull from the utilities or power generators?

I think on the New England expansion it's going to be primarily demand pull.

Craig Shere, Tuohy Brothers.

Looks like SACROC was off second quarter in a row, Yates was down sequentially and the Katz ramp is still a little under budget. Do you all still feel comfortable production will grow over the next couple years and is permitting for new field injections becoming an issue?

I'll have Jim Wuerth -- the answer is yes, we do. And Jim I'll let you answer that.

Yes, I think SACROC is always a little up and down, so I might mention that as of right now through October running close to 32,000 barrels a day. So a lot of it just depends on how quick we're able to get patterns ready, get injection permits, and monitor the flood. So it's going to be up and down but I expect SACROC to continue to be relatively flat for several years to come. Yates is a big field that is on a slow decline and we'll work it as well as we can but there will be a slight decline there each year. And Katz is running, as Steve mentioned, about 3,250 right now for the month so it's getting real close to the budget numbers. And I think what we're going to see at Goldsmith is we've got great opportunities there. Continues to be a lot of opportunities I think out there for CO2 flooding. The demand is still real high for CO2 and that bodes well for us.

And is permitting becoming an issue as far as being able to move forward on some of these opportunities?

Right now we're having a little problem with the Railroad Commission, just lack of staff there but nothing that we aren't able to work around I think.

Okay, and while I'm on the subject of EOR, simple question for you. If all of EOR's CO2 needs were acquired from third parties, do you believe that you would in fact capitalize more CO2 purchases and book higher DCF than you're reporting now?

We wouldn't record higher capitalized CO2, that's correct.

Okay, so --

If we were selling the CO2 to third parties, yes, on our S&T side we would have had higher DCF.

I got you. So the intra-Company sales results in more conservative accounting?

I believe that's a good way to say it.

Okay and last question, given some of the recent headwinds affecting KMI's share price from some market perceptions, how do you think about the alternatives of repurchasing warrants versus existing shares and how much capacity do we have to keep renewing these equity repurchases every quarter?

Well we look at that based on growth projections and based on what we believe the return is on purchasing warrants versus shares. As you see today, the Board authorized an additional $250 million to be used for either shares or warrants at our discretion. We just continue to look at what makes the most sense to buy back shares or buy back warrants.

I got you. In speaking with some clients, Rich, that the comment was made that your own repurchases were not a large percentage of your annual distributions that you get. And I just wonder if you'd like to opine on the value of the equity right now.

That's, of course, you guys' expertise, not mine but I believe obviously the equity is undervalued at KMI. You have a stock that is yielding 4.5% now and has growth of 14% this year and declared dividends. We've said we believe long term it's 9% to 10%. And at KMP, you have a security that's yielding 6.5% with growth of 7% this year. We've said long term we believe 5% to 6% there. So to me that's a very good investment but that's again not mine to opine. I'm obviously prejudiced. I think the stock in units are tremendously under-priced in my view but again that's for the market to determine.

John Edwards from Credit Suisse.

Just if I could follow up on the -- your Y grade pipeline from the Marcellus. With the production there it seems to be continue to ramp faster than most expect. At least in the past people have said there's just room for one of these pipeline projects to come to the Gulf. Do you think if things continue in that direction, there might be room for two projects--yours and the competitor.

Yes, I'd say, John, that's possible, but we can't look at it that way and we won't look at it that way. We're going to get out there and compete and see if we can get the first project. The thing you have to keep in mind is it's not just the first pipe that goes in the ground. There's expansion capabilities and things like that. So there's definitely an advantage to being the first one that gets built of these two. So we're just looking at it as it's -- one or the other is going to win the day. And the other thing to take into account, I know you are very familiar with this, but production targets or expectations and actual production on the one hand versus willingness and ability to commit contractually for a long term on the other are two different things. So what it comes down to is whether people will put ink on paper to sign up for the capacity.

(Operator Instructions)

Kevin Kaiser from Hedgeye Risk Management.

A question on CapEx for gathering and processing. What is CapEx budget for gathering and processing on a quarterly basis including Copano?

I don't know if we have that number broken down.

We don't break it out separately. It's part of our natural gas CapEx.

We have CapEx on Copano and Altamont and some in Texas, some in other -- in Texas as well but we don't have a break out of that.

Okay so no break out for GNP by sustaining CapEx versus expansion CapEx either?

No, I think that's just aggregated in our total Gas Group.

Total Natural Gas segment aggregates all of the -- whether sustaining CapEx or the expansion CapEx is all aggregated.

Okay, and then on the Company wide -- so the budget for this year for sustaining CapEx will be $339 million. That's before Copano. If KMP only spent that on an annual basis, so no organic expansion CapEx, how would the segments perform over the long term? Would the Company be able to keep cash flow flat?

I'm sorry, I don't--

Well, I think that we have growth -- are you asking if there's growth absent spending CapEx in KMP?

The question is really if the budget was only limited to the sustaining CapEx, would the additional asset base be able to -- would it be maintained -- would the cash flows be maintained over the long term $339 million?

Oh, I see your question. Yes, we've said this several times and these are ballpark numbers, of course, but generally speaking that 5% or 6% this year happens to be 7% growth in distributions. We think probably 1.5% to 2% is organic growth, in other words, if you didn't spend any capital you would get that. At KMP that comes from a number of things. One is, of course, the inflation escalator that we have on our FERC-regulated products pipelines. The second is on automatic escalators that we have on some of our terminal assets. So you'd probably have we estimate 1.5% to 2% growth if you didn't spend any capital. And then the rest of that growth comes from -- primarily from new projects that come on line.

That's obviously subject to market conditions. Market conditions determine the growth on just the existing asset base on a stand-alone basis.

Right and how would 1% to 2% organic growth be possible with just $339 million if you spend about $400 million in ENP alone and that's not in the sustaining CapEx budget?

As I just said, I'm not following your question I guess. You ask how much organic growth you had without expansion CapEx and that's the kind of number that we use, about 1.5% to 2%. Kim?

Kevin, is your question if CO2 production would stay flat if we weren't spending expansion capital?

No, the question is really if you -- on the business, the entire KMP business how would cash flows trend over the long term if we only spend $339 million a year in Capital Expenditures.

I think Rich just answered it.

Okay and then the last question I have is do you consider distributable cash flow to be synonymous with free cash flow?

Kevin, look, what we're looking at is how much cash flow that the MLP generates before expansion capital. Because our partnership agreement requires us to finance expansion capital, to distribute everything that we generate and to finance our expansion capital. So what we are comparing, distributable cash flow is to the cash flow that we have available for distributions to our unit holders before we factor in expansion CapEx.

Okay, so you would say it's not -- you would not say that free cash flow and distributable cash flow are the same thing?

If you're defining free cash flow as cash flow after expansion CapEx, then I would say that distributable cash flow and free cash flow are not the same thing but it depends on how you're defining free cash flow.

I would define free cash flow as cash flow from operations minus the capital expenditures needed on an annual basis to maintain those cash flows from operations?

Well that is not, unfortunately, that is nice that you would interpret it that way but that's not the way that our partnership agreement defines it and therefore, that's not the way we are allowed to segregate it.

Becca Followill, US Capital Advisors.

Can you talk a little bit about the interim outlook for EPB post '13 but before the Elba export facility comes online given the roughly $80 million in rate reductions with these two rate settlements at WICK and S&G and then the step down in rates at SL&G at year end?

There's no question that we've been very clear about this that of course the rate case on SNG and the rate case on WICK will be a negative impact. We settled both of those and they had some negative impact, as Kim said, in 2013 but that will increase because we'll have a full year in '14. We, of course, have longer term obviously the Elba Island LNG project is a huge positive and we have some other smaller growth opportunities coming online in EPB. And then we anticipate we will have drop-downs into EPB that will help in terms of distributable cash flow.

So there will be drops in the interim that will help bridge that gap?

That's true, Becca.

Okay, thank you and then what is the timing for filing for abandonment of Tennessee of the portion of the line that you're looking to convert?

Tom, do you have a time frame?

Yes, I think we would be looking at that into early next year.

Early next year would be the probable answer.

Thank you, and then the last question on the CO2 business, just by my quick back of the envelope on the numbers it looks like operating expense was up pretty materially during the quarter. Was there something unusual there or is that just a function of maybe adding Goldsmith or is there something else going on that's maybe short term in nature?

Jim?

I would guess it's probably Goldsmith. We haven't seen anything unusual that has popped up on us at all.

Did they have materially higher per unit O&M cost?

Depends on what you're comparing it to. If you're comparing it to Yates the answer would be yes. If you're comparing it to SACROC, probably comparable.

Okay just on the overall average basis it just looked like it's up meaningfully.

There are no further questions at this time.

Okay, well, thank you all very much. We appreciate your time and attention. Have a good evening. Thank you.

Thank you for participating in today's conference call. You may disconnect at this time.