金德摩根 (KMI) 2002 Q2 法說會逐字稿

Good afternoon and thank you for holding. Welcome to the Kinder Morgan Telecommunications Quarterly Earnings Conference call. All participants will able to listen only until the Question and Answer session of the conference. This call is being recorded, as the request of Kinder Morgan. If you have any objections, you may disconnect at this time.

I'd like to introduce your conference host, Mr. Rich Kinder, Chairman and CEO. Sir, you may begin.

OK, thank you Courtney, and welcome to all of our participants, this afternoon. As usual, we will be talking the Kinder Morgan family of companies, as most of you know, Kinder Morgan, Inc. is one the major midstream energy players in North America, I'll refer to that as KMI, its NYSE symbol. Among other assets, KMI owns the General Partner of Kinder Morgan Energy Partners, which is America's largest pipeline master limited partnership and I'll refer to that company as KMP, also it's stock exchange symbol. We'll also remind you, that of course, during the course of this conversation, today, we will undoubtedly be making forward looking statements, under the Securities Act of 1933, and the Securities Exchange Act of 1934.

With all those disclaimers out of the way, let me start by saying, that I'll discuss the operating and financial highlights, some thoughts on our strategy and corporate philosophy, I'll then turn it over to Park Schaffer, our Chief Financial Officer, who will follow with the details of our second quarter and year to date earnings in cash flow including a comparison of our actual results year to date, with the 2002 budget, which we presented our January analysts conference and posted at that time, on our Web site. And when Park's finished we will, as usual, answer any and all questions that you might have.

Let me start with KMI.

KMI today, reported a 44% increase in earnings per share, compared to second quarter of 2001,net income for the quarter was a little short of $73M. Our .59 cents a share compared to about $50M or .41 cents per share during the same period a year ago. The KMI board made two important decisions today.

First, it authorized additional share repurchases of KMI stock, up to $50M. And secondly, it increased the quarterly dividend to .10 cents per share, or .40 cents annualized, from the current level of .05 cents a quarter, or .20 cents annualized.

Backing up these decisions with the fact that KMI had another truly outstanding quarter, I think we continue to demonstrate, as we said in our press release, that KMI really is a different of energy company. Our fee based assets have allowed us to consistently grow earnings per share, through a variety of market conditions. I'll remind you again, we do not have marketing and trading businesses, and our assets have minimal exposure to commodity price variations.

While we certainly understand the concerns that exist in the general market, we do encourage investors evaluate Kinder Morgan it's fundamentals rather than lumping us into peer groups that have risky and more volatile businesses.

Let me go back to the dividend increase. This is the first dividend increase at KMI since the company was formed via merger, in October of 1999, and both the dividend increase, and repurchasing the shares, I think, again, indicates the board's belief in our underlying financial strength and the long term stability of the very strong cash flow at KMI. And Park will take you through that in more details.

Let me say, that we believe that share repurchase is probably the most effective way for returning excess cash to shareholders. That said, we've also decided to increase the portion we return via our dividend. It's a pretty conservative payout ratio, paying out .40 cents; that's about a 1% yield, and has a payout ratio of something along the lines of 15% of net income. Let me just say, very clearly, we shared this with you before, on an annual basis, but we've looked out the next three years, and we expect to generate well over $1.2B in free cash flow. While a portion of that $1.2B and excess will be used to pay down debt, and a portion of it will be funding what we believe will be very modest expansion projects at KMI, much of that cash will be returned to share holders, and we'll do it two ways: through additional share repurchases, and dividends. And I can just tell you, that as the largest shareholder of KMI, and the lowest compensated CEO in the energy industry, I want to assure you again, that all of our shareholders will be, that management will remain focused on delivering long term shareholder value to our group of shareholders. Let me say one other thing about the $1.2B, we expect that to generate a free cash flow of well over $400M this year, we do have about $30M of that from differed taxes year-to-date, that differed tax will ramp down, earnings we expect to go up, so we may be a little conservative when we just say over $1.2B, it could be significantly larger than that, but certainly, at least $1.2B or a little better over the next three years.

KMI's very good results in the second quarter were driven primarily, as usual, by it's ownership of the general partner of KMP, Park will talk about that, and a solid performance by a natural gas pipeline company of North America, which we will refer to as NGPL. Again, Park will go through more detail, on a segment by segment earnings.

Looking ahead, we expect an earnings per share growth of more than 30% at KMI for the full year of 2002. We are comfortable with the 3rd quarter consensus earning estimate of .63 cents. WE are comfortable with 2002 consensus estimate of $2.62. I think it's important to remember that we expect cash flow to continue to exceed earnings throughout the balance of this year and the foreseeable future. Now, I want to spend just a minute, talking about some other significant operational achievements, at KMI in the second quarter. During the quarter, the [Horizon] pipeline, which is an $80M system, a joint venture with [Nicor], which is our largest customer, on NGPL, we built that to increase pipeline transportation capacity into the Northern Illinois market. We completed that, and placed it in service in May. The great bulk of that capacity is underwritten by a long term transportation contract with [Nicor] and that is now in service. The 51 mile lateral extension pipeline, off of NGPL into the Metropolitan East area of St. Louis, is under construction, on schedule, on budget, and we expect to complete it in August of this year. We also, during the quarter, NGPL filed an application with the [Frk] for a $31M project to add significant additional storage capacity in our North Lancing Field in Texas. We expect to complete that in the summer of '03, and again all of that storage is sold under a long term contract. Also, in some very late developments, as most of you know, our power subsidiary, we're not a power merchant, but we do have a few power plants and we were constructing two new natural gas powered plants, 550 megawatts each, we did complete those on time, and we built them for merchant partners who will be responsible for supplying the gas to and selling the power from those plants, they were completed and turned over to the operators at the beginning of July. Those two facilities, as you will recall, one is located in Jackson, MI, just outside of Detroit, and we will continue to operate that, the other is in [Wrightsville], AK, just outside of Little Rock. That will be operated by [Mirak]. But we have completed both of those and we retain a preferred interest in both plants. Let me again say, that these are both tolling arrangements, as you know, and we do not have exposure from a commodities stand point, either on the gas supply side, or on the electric sale side. So that sums up what we've done at KMI. Let me turn to KMP.

Here we had a significant development, in that we announced today, an increase in the second quarter, cash distribution per common unit to .61 cents per quarter, or $2.44 annualized. Now, to put that in perspective, that's a 16% increase over the second quarter of 2001,and represents an increase from the first quarter of 2002, when we distributed .59 cents, or $2.36 per year, annualized. During the quarter, we reported a net income of about $145M at .48 cents per unit. That was up 39% over the second quarter of 2001. Our distribution increase is the 13th increase we have made in the distribution over the past 5.5 years and again, as I said, with regard to KMI, this is also true at KMP, that we have stable fee based assets, again, with minimal commodity exposure. And again, quarter after quarter we have produced strong reliable cash flow. We continue to perform at both KMP as well as KMI, to outperform the 2002 plan that we published on our Web site in detail for all of you last Jan. And I just have to say, I'm still looking for any other companies brave enough, or foolish enough to be that transparent with the start of a budget year, but I haven't found any yet. So we did post that, for everybody to see, and we have exceeded what we projected back in Jan. As far as, to what you can attribute these record quarters, this record quarter at KMP, we had solid internal growth, as well as contributions from acquired assets, we'll try to break that out for you. We generated ..64 cents per unit of distributable cash flow for the second quarter, and again, we're distributing .61 cents, we expect distributable cash flow for the year to exceed $2.45. We expect to increase the per unit cash distributions to an annualized rate of at lease $2.50 by the end of the fourth quarter this year, and we're also comfortable with the [indiscernible]consensus estimates and earning estimates for KMP of $1.82 per unit, which would be an increase of 16% over 2001 and with the ..44per unit cash distributions to an annualized rate of at lease $2.50 by the end of the fourth quarter this year, and we're also comfortable with the [indiscernible]consensus estimates and earning estimates for KMP of $1.82 per unit, which would be an increase of 16% over 2001 and with the .44 cent estimate for the third quarter.

Now while Park at KMP, like KMI, will discuss the financial details on a segment by segment basis, let me mention three important operational results for the quarter. The first has to do with volumes on our products pipeline system. We had strong internal growth in our products pipeline group, driven by strong gasoline volumes. Those volumes were up over 6% for the quarter, and over 7% for the first 6 months of this year. Compared to the same periods a year ago. That's pretty significant, because most nationwide estimates that I have seen for year-to-date gasoline usage have been up about 2%, so we are significantly exceeding the national average, in terms of gasoline growth. I think that's probably attributable to two things, first of all, I'd like to think good management, and aggressive working with our customers to increase through put, but it's also, I think, a testament to the strong demographic growth in the areas where we serve, primarily the California, West Coast, Arizona market, and also, the South Eastern market, where we had good growth on both. For example, Plantation pipeline, our pipeline that serves the south east, we own 51%, Exxon owns 49%; actually reported all-time record throughput in the second quarter, averaging 663,000 barrels per day of gasoline, jet and diesel fuel. Now, let me comment, so gasoline is very strong, and that in and of itself was enough to drive our refined products to modest increases for the quarter and year to date. While jet fuel volumes were still down, they did show gradual improvement in the second quarter, when compared the first. If you remember, jet fuel makes up only 15-20% of our products volumes, and at the beginning of the year we said we expected those volumes to be down for the first couple of quarters, 15-20% they were actually down 14% in the first quarter, 9% in the second quarter, so at least with regard to the anecdotal evidence we have, it seems that jet fuel usage is picking up, at least at the airports we serve, around the country. Second operational fact I wanted to discuss with you is the results at [Taos]. If you look at our natural gas pipeline segment, you see a huge growth in earnings and Park will go into detail on that, certainly the most significant acquisition since the second quarter of 01, for all of KMP was the [Taos] pipeline system, that's a Texas Intrastate system, that we bought for $750M and closed on earlier this year. That asset accounted about $22.7M of the roughly $40M increase in natural gas pipeline earnings. If you annualize that, that works out to be a little over $90M a year, again on assets we paid $750M for. That on the low end, of what we expected to get, we said that previously $90- 95M was our range we expected. But it is within that range, and we expect to grow the volumes as we go forward, so that payouts acquisition seems to be of to a pretty good start, although, as I say, we do expect some growth in that, but we are within the range that we expected to get, and it does show that bought it at a pretty reasonable multiple [indiscernible] cash flow.

And the third operational number I'd like to share with you, is the CO2 delivery volumes on our CO2 pipeline segment were up very nicely – 17% quarter over quarter, 15% year-to-date. And the oil volumes at our [Sacrock] unit increased by 35% in second quarter, and 30% year- to-date. Both of those are somewhat ahead of our schedule, and, as we said in the past, we look for very strong growth from our CO2 in 2003 and beyond. And with regard to crude oil production out of [Sacrock], we have already hedged the great majority of the expected volume for calendar year 2003. Now there were several other important strategic accomplishments during the second quarter associated with KMP. As we previously announced, we intend to do a KMR offering. We have our - vote of KMR shareholders, which is a pre-condition of that, scheduled for next Tuesday, and we hope to start the Road Show shortly thereafter. We will use the proceeds raised from that KMR offering to pay down debt, which will finance the recently acquired [Taos] gas system. That will reduce our debt-cap ratio at KMP from the order of 55% down into the low 40s, and again, we expect to start that Road Show shortly. We also, I think it's important to remember on that, that this is not something we've got to do, in order to pay down debt, to go forward on some new project, this is simply doing what we promised to do, which is to fund the equity portion of our acquisitions and this just takes care of the [Taos] acquisition that we made as an orderly process. The other series of major occurrences in the second quarter, have to do with expansion projects, and right not, KMP is making good progress on more than $400M of expansion projects. Now most of these we previously announced, we did announce one new one in the press release today, and that is that we have reached agreements to build a pipeline to Monterey Mexico. We will start at the southern end of our Kinder Morgan Texas system in [Sapata] county, and it will run to Monterey. In Monterey, the pipeline will connect to a new 1000megawatt power plant, currently under construction, and will also connect to the [Pemex] natural gas distribution system for Monterey. Pemex has subscribed for all the capacity on the pipeline which is 375M cf per day, for a term of 15 years, pending obtaining the remaining rights of way, and that's virtually all done, and the final government permits we expect this 95mile 30inch pipeline to be in service in the second quarter of 03, and it will be very immediately [indiscernible]to cash flow at both KMP and KMI.

Among the other projects that we're moving ahead on that we previously announced, just the other day we announced that we and Exxon, as part of the Plantation system, we're going to build a $116M project to increase capacity into the Knoxville TN area. That project, like virtually everything we do, is being supported by long term contracts with major oil companies. We've also announced an additional $50M in investments in our terminals business, primarily to significantly increase storage capacity, both on the New York harbor facilities that we own, and at our Pasadena terminal, on the Houston Ship channel. Both these projects are supported by long term contracts with existing shippers. We've also announced $160M investment in a new CO2 pipeline and additional infrastructure to support our expanded CO2 flooding program at the [Sacrock] unit.

These projects will dramatically increase our CO2 deliveries by about 60%, and equally importantly, the oil production at [Sacrock] is expected to grow from a little over 12T barrels a day, now, to more than 20T barrel by late 2003. And we expect it to grow to much greater numbers in 04 and the years beyond 2003.

Finally, we've talked about a couple of projects on our natural gas pipeline system at KMP. One of course, is virtually complete, and that's a $70M project to build an 85 mile natural gas pipeline here in Texas, with a capacity of 325M cf a day. That will serve 2 large electric generating plants near Dallas. All of that capacity is full subscribed for an extended period of time. In addition, we are developing a pretty good size storage capacity at our Cheyenne Market center in Weld County Colorado. That will provide additional services for growing natural gas suppliers coming out of Wyoming. Again, that's supported by long-term customer contracts.

So all in all, we think it was a very good second quarter and year- to-date at both KMI and KMP.

Now let me conclude with a couple of minutes talk about some strategic and philosophical issues.

I think there is a crisis of trust right now, in corporate America.

And specifically in the midstream energy area. Now this crisis was caused by the acts of a few people, but I think it has cast a shadow over virtually all corporate managements and particularly in our area. Now how is this malaise get lifted? I think certainly, partly by the passage of time, but I think largely by honest management, operating in an open environment producing transparent earnings and cash flow quarter after quarter, year after year. Most of the abuses, it seems to me, have come the disconnect between the interests of the principles, i.e. the shareholders; and the interests of the agents, i.e. the CEO and senior management teams at various corporations. At Kinder Morgan we don't have this principle/agent disconnect problem.

Instead, we have the lowest paid CEO at any major company in America, that's according to the latest Business Week survey. With one of the highest ownership positions in the S&P 500. I'll remind you that my compensation package includes no options, no bonuses, and the only value I derive from Kinder Morgan results from my ownership of 20% of Kinder Morgan[indiscernible]and several hundred thousand units of KMP. So my incentives, it seems to me, are about as aligned with the rest of the shareholders as they can be. So when your casting about your net to find witches in the brew, I just ask you to ask the question, "Where is my incentive, or the incentive of the senior management team to sacrifice the long term interests of the company and shareholders for short term profits. I don't have any damn options to cash in, don't have any bonus that is going to be inflated because we did better this quarter or this year, versus next year, or 2004. I we've said this before, and if you detect a note of frustration in my voice, it's very real, we get lumped with everybody else, and yet we are a very different company, in terms of the alignment of management interests, the so-called agents, with the alignment of the owners of the company, the so-called shareholders.

Now let me turn the second problem. I think the second problem in this crisis of confidence is a lack of transparency in earning and cash flow at major American companies. In other words, if the earnings aren't readily discernable, how the hell can you trust them?

Now, we believe we've done a pretty good job of being as open as possible. Again, as I said earlier, I don't know any other companies that post their budget at the beginning of the year and then on their Web site, and invite their shareholders and other interested parties to look at that and see how they compare with that projection throughout the calendar year. We're going to continue to do that. In other words, once we've completed the budget process for 03, we will again, post on our website and share with our investors what our projections are for calendar year 03. You can again, judge exactly what the growth is going to be, and see how you agree or disagree with that, and then you can watch to see whether we can meet those target.

Let me also be very clear that all our budget numbers, as they were this year, will be built on present assets, and the expansions and extensions of our present systems, without considering acquisitions.

Then, as we announce acquisitions, we'll share with you the multiple of first year distribute cash flow we're paying and you can readily figure the accretion from those acquisitions at both KMI and KMP that you should expect to see over the coming years. And let me say, that there is an enormous amount of assets coming on the market. Now I don't have to review with you what those are, that said, frankly, I'm kind of tired of debating whether it's a buyers market, or a sellers market, and what multiple distributable cash flow we might be paying.

Suffice it to say, that there are going to be acquisitions and those acquisitions are just the icing on the cake at Kinder Morgan. We will not over pay, and that even without acquisitions, if we don't make another acquisition, we remain committed and convinced that we can grow KMI's earnings per share at 18 – 20% per year and KMP's distributions per unit at 8 – 10% a year. And this year, 2002 should be proof of that when you see the budget for 03, I think you'll be even more convinced.

I have one final strategic thought. For five and a half years a Kinder Morgan, we've had the same strategy; it's not rocket science: We want to build and acquire great cash producing assets. We want to operate those assets in a cost efficient manner we want to pay extraordinary attention to details, and we want to align management incentives with those of our share holders.

We're going to continue this strategy. It's the right strategy, and we're not going to deviate from that strategy for whatever the flavor of the day is. Whether the fashionable flavor of the day is marketing and trading, or Jerry Garcia ice cream bars, which I happen to like, we're not going to deviate from this rock certain strategy that has served us so well over these last several years.

Now, let me just say, that we will continue to strive to deliver outstanding results and benefits to all our shareholders, as we did in the second quarter, and as we have throughout the last several years.

With that, I'll turn it over to Park for a more detailed discussion of the Financial numbers. Park.

Park Schaffer, CFO: Thanks Rich. I'm going to go over the financial sheets that are included as part of the earning release. I'll start with KMP.

Starting on the first financial page, begin behind the text of the earnings release. At the bottom of that page, you'll see the declared distribution for the second quarter of 2002 of .61 cents.

As Rich mentioned, that is up from .59 cents for the first quarter of this year, also up from .525 cents for the second quarter of 2001.

Again, as Rich mentioned, at 16% growth in our distribution. That distribution is supported by distributable cash flow of around .64 cents, as demonstrated by the line directly above that, net income before [DDNA] less sustaining capex. A proxy for distributable cash flow, again of .64 cents giving us very strong coverage over that distribution. If you look at the six months of 2002, you'll see net income before [DDNA], less sustaining capex of a $1.29, versus a distribution of $1.20. Again, very strong coverage. The components of that net income, before [DDNA], less sustaining capex, is a net income per unit, a few lines above, of .48 cents. You add to that depreciation and amortization per unit of .26 cents, then you take of a dime of sustaining capex, again this is for the second quarter of 02. That get's you to the .64 cents. A quick comment on the sustaining capital expenditures, you'll see that they are about $17M in the second quarter of 02, that's up from the first quarter of 02, it's also up from the second quarter of 2001. As we said when we went over this in the first quarter of this year, sustaining capital expenditures are not smooth. They will be lumpy over the year. If you look at the 6 months, you'll see that sustaining capex is about $30M for the first 6 months of 02, and is about $31M for the first six months of 01. Now again, you know, in comparing the two quarters, it's basically equivalent. In addition, we have published our 02 budget, as Rich mentioned. Our 02 budget [indiscernible] capital expenditure for 2002 at $74M. Now we actually are coming in below that if you were just to [indiscernible] lay that $74M across the year. At this point in time, we are still expecting to expend $74M in sustaining capex for the year 2002, although there is a chance that we will come in below that. With that, let me flip to the second page, to show you where this growth is coming from. At the top of the second page, you'll have segment earnings before [DDNA]. Starting with product Pipeline $110M in the second quarter, compared to $102M in the second quarter a year ago, up about 80%. Most of this is derived from internal growth, there's a portion of it, that comes from our increased ownership of the [Coachin] pipeline and that equates to about $1.6M for the quarter. The internal growth, is driven by the increase in product pipeline of volumes, as you see down below in volume highlight section, gasoline shipments have increased 6% percent for the quarter, and they're up 7% for the 6 months. At the same time, diesel volumes and jet volumes are down slightly, although they're down less in the second quarter than they were in the first quarter. Because we shipped so much more gasoline, than we do diesel and jet fuel, our volumes are actually up. Product Pipelines volumes are up for the quarter, about 1%, and for the 6 months, about .5%. The NGL volumes were down slightly, but again, the total delivery volumes on the products pipeline are still up to flat. Again that's driving the internal growth on the products pipeline segment, in looking at the 6 months for that segment, again, up in the top line, $209M compares to the budget that we published in Jan., of $414M for the first year. That's over 50%. We're on track to realize that budget for 2002 for product pipelines.

On the Natural gas pipelines line, you will see we're up about $34M for the quarter, and about $47M for the 6 months. Now again, as Rich mentioned, a large part of that is driven by the Taos acquisition.

Almost $23M of that increase comes from that. We also have lower expenses, due to the elimination of the lease payment from the Kinder Morgan Texas pipeline. But still, we have very nice internal growth in the natural gas pipeline segment. Driven by KMI GT, and, to a larger extent, by the expansion of the trailblazer pipeline which came on in May. Again, looking at the 6 months number, of a bout $153M of earnings before [DDNA], for natural gas pipelines, we have a full year budget of $347M, which means, that half way through the year we've only hit 44% of our budget. But recognize that we did not have a full 6 months of Taos. When you take that into account, we're very much on track to hit our budget for natural gas pipeline.

CO2 pipelines, is only up slightly, for the quarter, versus last year. $30M versus $28.6M, and for the 6 months, it's up about $2.5M.

Now again, as Rich Mentioned, this is driven by the reduction in prices that we're realizing on our Sacrock volumes We talked about this in Jan. which was built into our plan and it was as expected.

Then again, if you go down to the volume line, you'll see the delivery volumes for the CO2 pipelines were up 17.5% for the quarter, and 16% for the 6 months. And Sacrock oil production grew even more dramatically, it's up 35% for the quarter, and up 30% for the 6 months. Now those volumes, again, are offset by a reduction in price, and so that's why you don't see dramatic increases in the segment earnings before DDNA line. Now, looking forward to 03 and 04, again, we hedge the prices of the Sacrock production and we have locked in prices that are at or above our prices in 02. We expect that we will continue to realize dramatic volume growth, and so we will see significant growth in the CO2 pipeline segment going forward.

That being said, the 6 month number, of almost $59M, compares to the full year budget of $113M. We're over half way through our budget, we expect we'll be up at, or above that $113M number for 02.

On the terminal segment. $50.7M versus $38.4M a year ago, up $12M for the quarter. Some of this is acquisitions, we have added a number of terminals in the second half of 01 and the first half of 02. But we are also seeing very nice growth in our liquid terminals. Very nice internal growth. And our liquids terminals primarily at [Carteret] and at Pasadena. Looking at the 6 month number, of $96.5M that compares to a budget of $197M we're dead on to hit that full year number.

I'm going to drop down next to the GNA line, which you'll see is about $3.2M for the quarter compared to about $18M a year ago, the largest reason for the increase is the acquisitions that we've made that have added to our GNA.

If you look at the 6 months number, of $56.6 M, that compares to our budget of $100M. We're running over in GNA due to some classification differences between the budget and the way we actually report, we actually expect the GNA will be above for the year. It'll probably be in the magnitude of 10 – 15% above that $100M number. But that is made up in other lines and again, as we've said, we're still comfortable that we will hit our targets for the year. The Net Debt cost, directly below that, you'll see about $44M compared to $45M last year, and about 83 million for the 6 months, compared to the $95m last year.

Our balance is slightly higher at KMP, we're realizing lower interest rates in the current low interest rate environment, and we are absolutely on target to come in at or below our full year budget of $181M of interest expense, for the year 2002.

The line right below that is Minority Interest, were basically flat or a little bit better than last year, for both the quarter and the 6 months, our budget there is $11M we're likely to come in slightly below that. All of that adds up to net income of $145M for the quarter, compared to $104M for the quarter a year ago, 39% growth.

Similarly, the $286M for the 6 moths compared to the $206 for 01, its 39% over last year.

I'm going to flip back to the first page, real quick, 'cause I just want to make a couple of point there. You'll see revenues are up, largely because of acquisitions, operating expenses are also up, largely because of acquisitions. A lot of people look at revenues, and they look at operating income, I will tell you that we would rather have people focus on the segment earnings, before DDNA, because we capture equity investments, in there, that below in the segments, and you don't have fluctuations in segment earnings before DDNA, due to prices like you do, in the revenues line. So again, changes in revenues are not overly meaningful. The depreciation and amortization line is up slightly, GNA we just discussed, and the TOTi is basically dead on for the full year. That gives you operating income that's up about 24%, for the quarter, and up about 22% for the six months, although, again, I would refer you to the segment earnings before DDNA Totals, as being more meaningful. For the main reason, that the next line is earnings from equity investments, included in here, plantation, Cortes, Red Cedar are the primary drivers of this, and they do show up in the segment earnings before DDNA, and I don't thing that excluding them gives you a very meaningful measure. Those numbers are up, primarily due to better performance at Plantation, as Rich mentioned, Plantation had a record quarter in the second quarter. Amortization of excess costs of equity investments is related to that line, and the interest expense and other and minority expense we've already touched on, again, taking you back down to the same Net income number.

With that, let me turn to the balance sheet for KMP, which is the last page in the earnings release for KMP. You will see the changes in assets and PPNE are primarily related to investments, and are at total assets are up a little over a billion, again, primarily related to acquisition, and some to expansion capital. And I'll give you some numbers for that in just a minute. The Notes payables, and current maturities of long term debt, I'll pick up in the debt that I'll discuss in a minute. The other current liability and the other are up again, primarily related to acquisitions, minority interests is down, due to the acquisition of Trail Blazer, that we didn't own before, the second quarter. And partners Capital is down a little bit, again, that's a function of earnings, less a distribution, and it's also affected by other comprehensive income.

But the real key is our total debt of $3.77B dollars, compared to the beginning of the year of $3.73B, an increase of a little bit over a billion dollars. Why has the debt gone up that much? We had [indiscernible] about a little over $850M on acquisitions, the largest part was Taos. Also included in there are the portions of Trail Blazer that we didn't own, that we acquired during 2002. We also acquired an other interest in Coachin, we acquired the Laser terminal, we hired a terminal called IMT, and a couple of other small terminals acquisitions, again, add up to a little over $850M.

We've extended $133M on expansion projects in this first 6 months of 2002, those projects were primarily Sacrock, the Trail Blazer, Laser Expansion, the north Texas pipeline, expansion [indiscernible] and Pasadena and [indiscernible] liquids terminals, and expansion projects going on at CalNev.

We also had a slight reduction in cash and a slight increase in the value of [indiscernible] which affected our debt balance. When you add all of that up, you get to the billion dollars. Now, note that what I did not mention in there are distributions. That's because, if you look at the cash that we generated in the quarter, and I'm going to give you kind of a "back of the envelope cash flow statement.

If you look at the Cash we generated in the quarter. It was more than our distributions. Distributions, again, are funded by internally generated cash. On the income statement, you can add up our net income, and go before general partners interest and net income, and I am going to do the 6 months number for you, add to that, depreciation and amortization and take off sustaining capex, and for the 6 moths, you'll get to $342M. For those 6 months, we will distribute $327M. Now again, note that number. That number is expected to be North of $700M for the whole year. We are on target to hit that, again, our distributions will go out as we go through out the year. We increased the distribution from the second quarter over the first quarter, so again, just by that fact, it is growing.

We will distribute more than $700M in 2002. Again, distributable cash flow, $342M, total distributions $327M.

A couple of other comments about pay [indiscernible] balance sheet, we are at about 55% debt to cap, at this point in time, we do expect to haven equity offering, in the near future, we expect that we will be at about 42-45% after that offering. Again, getting us back near our target of 40% debt to 60% equity. We had very strong coverage ratios at KMP, I want you to know, that KMP is rated A- by S&P, and DAA1 by Moodys. Some of you may realize that S&P has KMP on Credit watch negative, and has had KMP on credit watch negative since December 2001. There is an issue that S&P is concerned about, regarding the separation between KMP and KMI. S&P has KMI rated BBB, and again has KMP rated A-. Even though we think the fundamentals of KMP support this A- rating, there's a chance that S&P may reduce KMP from A- to BBB+ because of that separation issue, and again, separation just means they want the ratings to be close together.

Again KMP would go to BBB+, even though we think the fundamentals support a higher credit rating. KMP would be an extraordinarily strong BBB+ company, it's coverage ratios are very strong, even before we do the equity offering, our debt to [indiscernible] is about 4 times, after we do the equity offering, our Debt to [indiscernible] would be just a little over three times. It doesn't change our commitment to maintaining a strong balance sheet, and it doesn't change the strengthening of those coverage ratios over time.

With that let me go to KMI, and again, if you'd go to the financial pages, that are behind the text pages of the earnings release. I'll start with the first page at the bottom, you'll see KMI's earnings per share, of .59 cents compared to .41 cents a year ago, the income before extraordinary item is probably the best one to look at. Again that's up 44% to the quarter last year. The drivers of that growth are laid out on the second page. The first line, of course is the equity earning from KMP, which is the biggest driver of growth. The first line on the second page gives you the equity and earnings from KMP exactly as it shows up on the income statement. Probably though, the more relevant way to look at it is laid out in the middle of the page, in the section titled earnings attributable to investments in KMP. You'll see there the first three lines layout the general partner interests, the Limited partner units, that's the earnings on the KMP units that we own, and then the limited partner I units, this is the earnings related to all of the KMR shares. From that total you need to pull out the amortization of excess investment, which again we no longer do in 2002, and then you also need to pull out the pre-tax minority interest in KMR in order to get to a pre-tax KMI earnings from investments from KMP. You'll see that that total is $81.5M, that's up from $55.7M a year ago, that's up over $25M or 46% for the quarter. If you look at the 6 months, it's $160M compared to $104M a year ago, up 54% for the 6 months. Just another measure for you, the total distributions that we will receive from KMP for the Second Quarter, are $86M in 02, and $67-68M in 01. And for the 6 months, $168M in 02 and $125M in 01. Returning to the top line, because this is the line that you'll have a comparison to for the budget, you'll see for the 6 months were at $183M compared to a budget of $404M, again, that is slightly below 50% of the budget, but we expect the distribution from KMP to grow throughout the year and so we are right on track for hitting that budget number.

The other KMI segments are NGPL, which showed nice growth in the quarter, $84M, compared to $80M a year ago. That's up about 4.6 % the Horizon Pipeline did come on line during the quarter, and that's driving some of NGPL's internal growth. For the 6 months, NGPL delivered $180M of earnings, compared to a budget of $360M we're dead-on to hit our budget. Retail had a very nice quarter up $1.9M from the quarter a year ago, this is due to a few things, first of all, a hedging program, second, the Small Citizens acquisition that we made and third, a slight improvement in choice margins in Nebraska. For the 6 months, we have earned $41M compared to a budget of $60.5M, again, we are over budget at retail, and expect that we'll probably come in slightly over that number. The Power and Other line see it's significantly down from last year, over $13M. There are a couple of things that are driving this, The first is the [Watenburg] asset, which, you know we disclosed to everybody, which sold at the end of 2001. Those earnings are no longer in this segment, We basically don't realize those earnings anymore in 2002.

Additionally, our development fees on the power plants that we developed are slightly below where they were last year, maybe even more than slightly. And actually, even below our budget. The timing on those development fees has changes slightly, and it won't come in over a longer period of time. Now that means when you look at the 6 months for the Power and Other segment, we're about $15.7M for those 6 months, compared to a budget of 50M, We are under our budget, and we will not get to that target. We will probably end up about 10M low on the power line for 2002. Now we will make that up on other lines, and that is why we are confident that we'll still get our targets for the full year. Moving on to GNA expenses, Although, first of all, let me point out the total there for all of the segments, $189M compared to $164M a year ago, up $25M or 15%, and for the 6 months, 410M as compared to 340M a year a go, up 21% from last year. GNA is up slightly about 1M for the quarter, and up about 4M for the year.

We're running slightly ahead of our budget of $59M for the year, that's about 53% for the first 6 months. We expect that actually we will be at or near that target of 69M for the year, it shook some timing issues, on the GNA Expense.

On the interest expense line 40M compared to 56M a year ago and for the 6 months 79M, compared to 115M a year ago. Significantly lower than a year ago, also, significantly lower than our budget of 179M.

We will come in under on the Interest expense line for the full year.

The other line is primarily KMR Minority Interest, which is up, because we only had a partial period in the second quarter of 01, and then the 6 months of 01, also our equity and earnings are up, Minority Interests is an expense, and so that's a higher expense the equity and earnings clearly are earning, so that's greater earnings that two offset each other somewhat, but again, the minority interest is bigger and you see a slightly higher expense in the other line.

It takes us again to the income before Extraordinary Item in total dollars up 45% for the quarter, and up 51% for the year. Real quick on the volumes at the bottom of the page, you'll see NGPL volumes are up significantly for the quarter, about 15%, up about 6 % for the 6 months, I'll remind you that short term fluctuation in volumes on a natural gas pipeline, don't have a direct impact on our financials.

Once again, let me flip back to the first page, because I want to touch on revenues and operating income there, again, some people like to look at revenues and operating income, I will tell you, I don't think those are the best places to look to measure our performance operating revenues are down slightly, a large part of that is the reduction in development fees, and the loss of [Watenburg], operating income is down slightly for largely the same two reasons, but again, if you look at the subtotal on the prior page, that totals all the segment earnings, you'll see once you include the affects of KMP, our business segment are performing very well, and generating a tremendous amount of growth.

With that, let me go to the balance sheet for KMI which is the last page in your KMI press Release. The assets have not changed significantly, other than the investments where we recognize some of the investments that we've made in the expansion project, primarily the power plant, in the second quarter, and the Horizon Pipeline. On the liability section, again I'll talk about debt in a minute, we have a reduction in other current liability coz payables are down slightly. Everything else is more or less flat, the share holders equity has not grown tremendously even though we have generated 161M of net income, we repurchased a significant amount of stock in the first half of 02. Getting to the capital section, you'll see Net Debt of 3.275B up from a little over 3B at the beginning of the year.

That's an increase of 25M.

Let me walk though again a back of the envelope cash flow statement so that you understand why we've seen that increase. Net income about 161M DDNA about a 52M differed cash [indiscernible]of about 29M and sustaining capex of about 31M, again, add the net income, DDNA, and deferred taxes, subtract the sustaining capex and you get 211M.

this is for the 6 months of 2002, demonstrating we were on track to generate north of 400M in free cash flow, before expansion projects, and share repurchases. At KMI, for 2002. Once again, that number is $211M for the first 6 months of 02. But at the same time, we've expended 140M on share repurchases, about 50M on the Horizon in St.

Louis Expansion project, and about 180M on the power expansion project. We then add a couple of one time cash expenditures in the second quarter, on was related to a pre-payment of gas costs that we will recover over time, and the second is a voluntary contribution to our pension plan, and we also have some timing related to the KMP distribution, when you add all that up you get 466M of the use of funds, you subtract the 211M and you get to the 255-256M increase in debt.

A couple of things to point out there. The big uses of cash there, are the share repurchase and the expansion projects. Those were unusually high in the first half of 2002. We expect that share repurchases going forward will be a slightly lower number, will especially be lower in the second half of 2002, we expect that expansion projects in particular, will be significantly lower. In the second half of 02 we will complete the St.Louis project, and we will have some additional power expansion expenditures, those will total probably around 60M. Looking past 2002, we expect that our expansion capital budget at KMI is probably in the 20-30M range, unless some projects come along that we decide we should do at KMI.

The reason it will be so low going forward, is, remember we do most of our capital expansions and acquisitions at KMP. We expect we will continue to do that, so [indiscernible] first half of 2002 was an extraordinary large couple of quarters for expansion capital, and it won't be like that going forward.

Again we know that's what drove the increase in debt, and that debt will decline over time. Even with that increase in debt, our debt to total cash is at 49%, up from 47% at the beginning of the year.

Still very strong, the coverage rate, shows that KMI are also Very strong, and will only strengthen KMI, as I mentioned earlier, is rated bbb at S&P and is rated at BAA2 at Moody, and we are committed to maintain a strong balance sheet there, as well.

With that, I'll hand it back over to Rich.

OK, thank you Park, we'll take any questions that you might have, Courtney, if you want to come back on.

Thank you Sir, at this time we are ready to begin the question and answer session, if you would like to ask a question, please press Star one, you will be announced prior to asking your question. If you would like to with draw your question, press Star two. Once again, to ask a question, please press Star one. One Moment.

The first question comes from David Fleisher, sir you may ask you question, and please state you company name.

Good afternoon, David.

Thank you, Hi Rich [indiscernible]. Boy that was lot there, can you just go over all those numbers again, Park? No.

Let me ask two different question, here.

You mentioned CO2, you focused on the [indiscernible] volumes, Earlier this year you talked about the expansion of Sacrock, and the investment opportunities from that, but also, you mentioned in passing, the tremendous opportunity to take your technology on the road, and find out similar fields, and the returns on this project look to be huge, and the potential to expand this business looks to be substantial, what can you tell us about where you are on that, what are you willing to tell us at this point, I guess first?

Well, we continue to look for additional opportunities like Sacrock, and I wouldn't want to comment on anything specific, but there do seem to be similar fields out there, but we're not prepared to announce anything yet. The Sacrock is very significant, very rewarding as you point out for us, we're actually running as we speak, 12,500 barrels a day, we are actually a bit constrained, because we are adding more compression on our system out there, so we can both inject more CO2, and do some more re-injection.

Actually, we probably are [indiscernible]in 500-1000 barrels even as we speak, and we expect that number to be North of 20,000 barrels by the end of 03, as we say in our release to day, and longer term, as you know, we talked about 30,000 barrels a day, we now expect that to be substantially higher than that. So, It's a great project for us, and we're doing it in incremental steps, with very good returns on each of these incremental steps, and we are looking for more opportunities to do that, and that's about all I can say at the present time.

Ok, I'd like to push some more, but I guess I can't.

Secondly, On the NGPL seems to have seen some rate increases here, and your starting to see some nice benefits after not for a while, and Tell me where you are on this slope of getting these rate increases, and is it accelerating now, should we look for it to be accelerating in the next several years, what are the contracts to be renegotiated over the next year, and what might we expect to get from that?

I think that's the key thing, I think, as we said before, this is a game of singles and doubles, you re negotiate your contracts as they come up, we have 3 major LBC contracts come up between late 02 and mid 03, all three of those are in advanced stages of being negotiated, we expect all those to be satisfactory renewed.

We'll announce them and the details of them when we actually conclude the agreements. But we are making very good progress on that, and the other thing, of course, is, I think, very important, is the additional electric load, and there we have attached about 20,000 megawatts over the past three or four years to the system. That's beginning to show up in our volumes, it's very difficult to get apples to apples year to year, because the differences in weather obviously, but we believe we are running between 250 – 350M cf additional, coming to some of these projects. Now David, I want to emphasize these are not necessarily high rate type of structures, but it additional throughput that we otherwise wouldn't get. So we're seeing some growth too. So, yea, I think it continues to be singles and doubles, and the other thing is, we feel very good about renewing our customers, the demand for storage in particular is very high, and we've reviewed a lot of that, for long term, as long as we can do under our tariffs, some cases 10 years. So we feel very good about where NGPL is going, we talked about growth over the few years, and the 4% a year area and I think we are well positioned to do that.

In addition, we'll benefit from the St. Louis extension which will come online in August, and again our 50% in Horizon, which we only got a little bit of this quarter, because it came on line in May.

OK, the last question I'll ask of Nell, it has to do with Trans Colorado, which you interestingly didn't mention, which [end of tape 1] [begin tape 2]

Good tariffs approaching the max rate tariffs, on that Trans Colorado line. I wouldn't want to comment on pending litigation, except to say that we do expect a decision, probably within the next couple of months. But TransColorado is performing better, as you would expect, because of the tremendous need for more capacity coming out of the Rockies.

Ok, thank you

Thank you

Our next questions comes from Wayne Cooperman, Sir you may ask you question and please state your company name.

Well, I'm glad I'm not the first question, you seem like your in a little bit of a mood. Just a question on acquisitions, obviously there's a lot for sale, it seems like a lot of these companies have been trying to sell the pipelines into their own LPs, What do you think about that, and are you willing to.. If someone wants to sell it to themselves at a sweetheart price, what is your view on making a top paying bid, given that , I assume the LP holders don't want to get ripped off, by the parent company. If that make any sense.

Yes, is certainly does, I think first of all, Yea, there are an awful lot of assets out there, you pick up the trade press, almost any day, and read about more pipelines that are being offered, as various companies try to restructure their balance sheets. Some of them, were not interested in, some of them we are, we'll continue to bid on them, certainly some of them will go into what you term captive MLPs and I think a lot of them will not, and there is only so much capacity in those captive MLPs, but again, I think we just have to see where come, we're not going to overpay for any acquisitions, I think we'll get our fair share of what comes on the market, but certainly I got to predict what that's going to be, but there are a lot of acquisitions out there, We would not do a copying bid, our sole process for doing the bid is to carefully analyze what the cash flow will be, and pay a certain multiple of that depending on what kind of growth we see in the future and how stable we think the revenues are, and in general, that ranges from low side on some of our terminal acquisitions, as low as 4 times, up to 8 times for some of the pipeline acquisitions, and as we said before, Wayne, we averaged about 7 times over the first through the year end at 2001 on a multiple first [indiscernible] cash flow, so, we'll continue to look at these things, we'll not overpay, just to top somebody, we'll only pay what their worth. And again, I want to emphasize, that I don't personally think we're getting any credit at all with our stock price, for acquisitions, and so be it, so what we're going to do, is stress our internal growth, an where we are, and as we said repeatedly, and we are doing that this year, more than doing it this year, we're going to grow for the foreseeable future earnings at KMI by 18-20% a year, without acquisitions, and we'll grow distributions per unit at KMP by about 8 –10% a year, again without acquisitions.

Now as we said before, we think year in and year out, there's enough acquisition opportunities, that you drive that up by KMP to the mid teens and KMI up to the 28 – 30% range, but again, rather than postulate that, or argue where were going to come out, on an internal growth basis and as we make these acquisitions, and we have a couple more to announce later this quarter, in all likelihood, if we can finally get the horses in the corral when we do that, we'll show you exactly what the projected accretion is, and you can add that to the base budget. Again, it comes back to being as transparent as possible.

And the Acquisitions, how are you going to pay for them? Or what is your preferred method?

Well, some of the Acquisitions, obviously depends on the sellers, and in some cases they want to take units, in some cases we pay cash, in which case we will finance with a combination of debt and equity keeping on track, as Park Said to keep our, at KMP debt to total Cap ratio someplace in the range of 40% debt and 60% equity.

And let me say, that at KMR we have about a billion dollars worth of KMR units out there, we're trading right now, between 7 and 7.5% yield, so we're putting out, in round figures, 70 – 75M per year in new equity through those KMR in kind distributions. Once we complete the new offering of KMR units, that number will rise dramatically, and so, we have an on going funding source for equity that could approach 125 – 150M a year, once this next offering is finished. And that goes a long way toward paying for our internal expansions and some small acquisitions. Now, to the extent we make more large acquisitions, we would intend obviously once their completed, as we did with JATX, as we did with Santa Fe, as we did with Taos, and we go back and show you exactly how [indiscernible] they are, and we would anticipate funding a portion of that with new KMR equity. But we have pretty much leeway to do small acquisitions and our internal expansions without even going back for and other offering, subsequent to what we're going to be doing in the next few weeks.

Great, well, thanks a lot, I appreciate, thanks for all the details on the call.

Thank you

Our next question comes from David Labonte, Sir you may ask your question and [interrupted]

Hey David, how ya doing?

Good Rich, thanks a lot. What is your view with respect to dividend growth going forward and how do you plan to balance dividend increase as relative to share repurchases at KMI?

That's a very good question, David, and this was a very tough decision for this management team and the board. I think as we look at what the investing public is interested in, again, our goal line here is to serve the best interests of the shareholders for the long term. We felt that having a dividend component to that return with shareholders was worthwhile. We're asking people to buy and hold our shares, and we they should get some type of interim reward, in what's become a topsy turvey market to say the least. And that's how we came to the decision to go from .20 cents on an annualized basis, to .40 cents. We discussed this for several hours, with our board, over the last two meetings, and we would anticipate that we will review this level of dividend on a periodic basis, and as our earnings grow, we'll look to see there are, or whether there should be additional increases in the dividend.

Do you see there being a pair ratio that you'll be looking to be in a range of? Or how do you envision that going forward?

Well, that's the exact question we discussed with the board, and obviously, if you look at the payout ratio right now, at .40 cents, I guess, Park, that's about 15% give or take, of the consensus earnings growth, which doesn't sound like a tremendously high payout ratio, so we'll continue to look at that, and we wanted to take the first step, again to show that we're serious about returning cash to our shareholders, and then we'll continue to look at it and at some point in time we'll, I think, fine tune it a little more, and sorta give you a payout range, but I think for right now, it would be our intent to look at this for a couple of quarters see where we're going and then we'll take another look at it.

Ok, I was also hoping you could talk about your price sensitivity relative to a KMP equity offering. Obviously, KMPs experienced a high level of volatility in the recent months, what are your views, in respect to doing a deal with this type of volatility.

Ok, let me answer, I'm going to ask Park to answer that in just a minute, but I do want to make one interesting point, among the many surprises, ya know, you think when your as old and grey as I am, and been here this long, you've seen everything, one of things that's really surprised me, in this particular bear market, is I would have thought there would have been an absolute rush to quality in terms, and yield, in terms of dividends that the MLPs are paying. I not speaking of Kinder Morgan, I'm just speaking in general, and particularly giving the relatively high percentage of tax deferral, my gosh, to get a 7-8% yield, when 10 year trades are at substantially less than 5%, and to get most of that tax sheltered with some upside appreciation, even if you don't believe that as a whole, that MLPs are going to grow, your getting very nice yields for this kind of market situation, I've been surprised that that hasn't happened, I've also been mad as the dickens at our general counsel that it seems that for so many reasons we are precluded from buying, you will notice, I don't know if those have been files, but a number of us did buy, when we could buy last month, before they slammed the door shut again because it was KMR offering. But I personally bought again, at KMP at last month as did several other members of the management team. But I think, let me turn to Park for the first part of your question, as to price sensitivity and the short answer is it doesn't really matter as much as you might think. Park, go ahead.

Yea, I mean, I think, please keep in mind that we're certainly limited in what we can say, given that there is an impending offering, but I think it is safe to say that price will have an impact in how much we do, but I think it is the impact.

You're not restricted by any covenants or anything like that at this point, or that's not an urgent factor at that point.

That is not a factor.

No it's not.

And lastly, I had a KMP operating question. How much do you think GATX added to the year over year increase in the product segment, vis a vis reduced expenses, increase volume, etc.?

Ya know, we put all this together, and actually we have some with GATX Assets in the products pipeline group, some in a liquid terminals group, Mike or Park might have a better number, as we told you, share with you the first quarter, those tremendous growth year over year, and has worked out to be a very very nice return on that investment,

But in the press release, you'll see anecdotal ways that the liquids terminals are up 11% in segment income, quarter over quarter, internal growth only, that's primarily made up of the big Pasadena and [Glena Park] facilities here in the Huston ship channel, and of course [CarterRet] up in New York, and then the only non-GAPX would be the Delta Terminal in Louisiana, those are the big pieces of the terminal side of the segment, again, they had very nice internal growth of 11%,

on top of that Mike, I'd say, we actually have been surprised at how well, I think we said this in the past, how well the liquids terminals have performed. We were very interested in those assets, but I think we under estimated the growth opportunities there. The products pipeline by GATX were the CalNev pipeline and the central Florida pipeline. Both of them had decent quarters, and decent 6 months, but the Orlando airport is one of the airports that's been more harder hit in the reduction of Jet fuel reductions volumes, and so the growth there has not been extraordinary, like I saw in the Central Florida pipeline. But Las Vegas airport has come back better than most airports, so CalNev has actually been performing fairly well, and there are still some of the GAPX terminals, the ones that are on the West Coast, that are connected to for the most part, our product pipeline, those show up in the product pipeline segment, and those are also performing very well. Demand for storage, whether It's natural gas, or on the Liquid Terminals business, has been very strong.

Also, David I would add, that Frankly, something that I didn't see at the time we made the GATX acquisition, thanks to Jeff Armstrong and his team, we are really have a natural hedge, with regard to east coast shipments, if refined products are moving to the east coast from the Huston refinery complex, virtually all those products, go through our Pasadena terminal which is the largest products terminal in the world, go through there, to get into Colonial, and the other systems, if they don't come from the Houston refinery complex instead, based on [orb] opportunities that come from Europe, and that's been very true during large portions of this year, then they come through our facility [CarterRet] in New York Harbor, and both of those terminals had very good second quarters and very good year to date. [CarterRet] at one time, we had as many as 12 ships sitting out in New York Harbor waiting to unload, and so it's been very advantageous for us. SO I think the short answer is, GATX has performed wonderfully well, better than we expected in our Performa for this point in time, but it's kind of like we're assembling Humpty Dumpty, to put it all back together and tell you exactly what those numbers are, maybe we can try to do that, and have it for the next quarter.

Alright guys, Thanks a lot

Thank you.

The next question comes from Bill [Packser] Sir you may ask your question, and please state your company name.

Merrill Lynch Investment Managers, Rich I have three questions.

The first question is "When can you run for president?"

Never, next question.

The other thing you can do is be a guide for [indiscernible] I think you could get this market going again.

The question that I had was two fold: One, as I listened and looked at the financial Statements, obviously your interest expense has been a nice benefit this year, because lower interest rates. To what extent do you intend to lock into these rates while their low, and secondly , what's your exposure, if rates start to go up, a little bit? Then I have a second question as well.

Park?

Yea, you know have pretty much settled on an approach of 50% floating and 50% fixed. And it is absolutely not our [cast] to try to predict what's going to happen with interest rates. And that's really why we settled on that philosophy, we don't want to take full exposure to fluctuations on interest rates, on the other hand, I think it's been demonstrated that over time floating rate are lower than fix rates. We're realizing that benefit now, what we will continue to do, and I think, you see it in spades when you compare our interest expense to what we budgeted for the year. We will continue to be very conservative in how we forecast interest rates.

We have rate increases forecasted in for the second half of 2002, I can't tell you what that amount will be, I can tell you that I think we're conservative in our forecast when we publish a budget for 03, we will have assessed what our exposure is to interest rates and we will produce a conservative forecast.

OK, the second question Rich, is the [FRK] announced that they had some serious concerns about how people are pricing pipelines today. And they want to look at it. I don't even know what you guys are doing with respect to any of this stuff their talking about, which primarily revolves around fears the [frk] has, that people are actually charging more than their negotiated rates, rather than less.

Do you guys have any exposure to any of this stuff the [frk]s looking into?

Let me start with our understanding, as to where the [frk] is on this, Our understanding is that Pat Woods made it pretty clear in at least one meeting where we had people there when he said that he wasn't interested in getting into what pipelines were making on a case by case basis, as long as those pipelines were expanding, and plowing that money back into hard assets, he said he would have concerns, if found pipelines were over earning, and taking that money and putting it elsewhere. Obviously, we're examples of the former, not the latter, and with regard to, we could go through all the pipelines, but NGPL being the largest, at NGPL of course, we have no obligation to ever file another rate case, were not at max tariffs, Some of our storage, but virtually none of our transport are at max tariff, so we actually have room to increase tariff, if the market will allow, so we're not up to max tariff, or trying to seek negotiated rates above max terries, the only way we could be challenged, and certainly it's always open, is that either a customer or the [frk] staff could bring a section 5 proceeding, that is very time consuming, expensive, long term and is prospective only. In terms of any relief, it's very rare that that happens, but I certainly can't rule it out, and I will say again, Bill that I think we talked about this at the prior conference call. People asked, what are some of the risks of your business, you say you've pretty well eliminated commodity exposure, by hedging, for what little exposure you have, you've certainly eliminated any marketing trading risks, because we're not in that business. But we are a huge regulated pipeline. Through Several subsidiaries, and this is what Bill Morgan, Bill Allison, and Deb McDonald, and I have done for a combined, I guess we all have about 25 years, in it, so over 100 years, is manage regulated pipelines, and that's part of the risk you take. Certainly you try to do the best you can, and erring on regulated assets and you try to serve your customers the best you can, and to the extent that some one wants to complain about your rate, you need to go explain those rates. We don't' think [indiscernible] risk, but certainly regulation is always out there.

Ok, great, thanks very much.

The next question comes from Carl Kirst, you may ask you question, and please state your company name

Alright Carl,

Good Afternoon everybody, hell of quarter. Most of my questions have really been hit, but just a couple of clean up really, going back to NGPL, on the contract, restructuring the LDC Contract, I guess that comes in late 02, Just sense of Magnitude, could you give us a sense that what percentage does that make up of your total capacity, and 2, as you go through the advanced stages right now, are you finding any changes in term particularly with respect to duration or is it pretty much the same continual telescoping in of the duration, that would be the first question.

You might remember back when we first merged with KM, in October of 99 and we came out, and the first thing we had to do, was roll over all three of the big LDCs, [Nicor] people, [Nipsco] and we did that, pushing the contracts out to expiration on average in ‘03 through ‘05, so the average role over there was a little over 3 years, and what we're saying is as those come up and we're in negotiations, at this point, we fully expect those to roll on and deal with roughly the same term, and with I guess the conservative way to say it would be no economic surprises in those roll overs.

Ok, no that's helpful.

And the largest of those contracts, is on a capacity basis, and again, you got variations on throughput capacity, but the largest of those contracts is around [BCF today], Let's say in the range of 20 – 25% of system throughput, that's misleading, of course, because as you know over a third of our revenues come from storage and that largest customer is [Nicor], and [Nicor]has it's own storage, so we don't have a lot of storage from [Nicor], so that would be a percentage of transportation capacity and again, I just can't say enough about how well NGPL was doing in terms of, I think, improving relationships with the customers, Deb Mc Donald and her team have done just an excellent job of working with the customers and, like Mike said, we would anticipate renewing contracts on terms that are very clear both to us and to our customers.

Great. I appreciate that. Do you have the actual number on the oil hedges? The stock option is just going to be such a great deal for you guys as we go from '03 to '04. I'm just wondering how much growth in '04 we might see if, Heaven forbid, oil prices actually sustain in the mid-twenties.

I can give you some rough numbers related to our hedges, and clearly we're layering on more every day. And so it changes over time. Although, you know, for the next 12 months you are already 90 percent plus hedged and so it won't vary much there.

In '02, you know, slightly under $22 for our hedges. In '03, we'll be slightly above $22. And for '04 we're coming in at the $22 to $23 range.

Okay, that's helpful. Last question. Just on KMP, on the product pipelines. I was just trying to get a little bit more into the earnings, the earnings for the pipeline, the products being about eight percent but overall total system throughput roughly flat. The down volumes on the jet fuel and the diesel, is that actually dragging and the gasoline is just up so strong, or -

Good question. And we probably should have broken it for you. The disconnect between volumes and revenues. On the volume side you're absolutely right. The right way to think about it is that gasoline on our system is up enough to cover the downturn in diesel and a modest downturn in distillate, too. And that's when you get to the bias.

Now, the revenues are much more favorable than that and hence the bottom line growth, because most of our gasoline volumes are higher tariff volumes. And, for example, our biggest single shipping point on Pacific is Phoenix. So that run from L.A. out to Phoenix is $1.30 per barrel and we've seen enormous growth in the Arizona market, order and year to date. So you're getting $1.30 for every additional barrel, and that's primarily gas. We move some jet fuel, but primarily gasoline out to Phoenix.

On the other hand, the San Francisco Airport, which, by the way, next to Orlando has been a very weak airport of all the airports we serve, the San Francisco Airport, even though the volumes are down there, doesn't hurt as much because our average tariff, we're just coming across the bay from the refinery complex in the Oakland area, so we're only getting 17 cents on average to go to San Francisco Airport.

So that's kind of the difference. We were fortunate to have. The increase has been in the more long haul volumes, which obviously have the higher tariffs.

Perfect. Keep it up.

Thanks.

Our next question comes from Ricky Sandler. Sir, you may ask your question and please state your company name.

Sure. Eminence Capital. Hi. How you doing? Just a question on kind of the puts and takes between the first quarter and the second quarter, particularly KMP. If I look sequentially, KMP's I guess distributable cash flow is roughly flat per share if I adjust for the sustaining Capex. It's actually down a little but, but adjusted it's a kind of flat. Given that [indiscernible] came on and financed [indiscernible] at seemingly low rate, that should be pretty accretive, and I think you mentioned you also ended up a trailblazer. So that should be accretive.

So could you just sort of talk about what went the other way sequentially? Because I don't understand the business maybe quite as well as some other people. And then, given that it looks like the GP's interest actually went up sequentially. So, you know, if there's something going the other way, how is it that GP's interest goes up sequentially as well?

I think the distribution went up from 59 cents to 61 cents -

I’m looking at distributable cash flow, which went from 66 to 64.

But as you increase the distribution you increase the general partner's distribution and you also reduce your net income per unit. And so that's going to be the biggest impact that you're seeing, is the impact of the increased distribution.

Okay. So there was more cash flow and basically most of it went to GP and so the LP was flat sequentially?

No, no. The LP's are getting another two cents per unit. I mean, everyone's getting another two cents per unit. And so [indiscernible] in your coverage, which is just the coverage for the limited partners, you do pull off, the general partner gets an additional distribution as well, and you pull that off before you make the calculation. So that's why you're not seeing the increase come through the way you're looking at it. The truth is, there was more cash generated, and so we distributed more cash, and we still had a significant coverage.

In other words, put another way, Ricky, if you had not increased the distribution the second quarter, just kept to the 59 cents, your distributable cash flow, instead of being 64 cents a unit, would have been 66 to 67 cents a unit.

Yeah, 67 plus.

Yeah, a little over 67. So that's a difference.

Okay. And can you just explain that to me. I understand what you said why it happened. I just want to know what the theoretical reason behind it is.

There is an equation that's laid out in the partnership agreement that governs the calculation. We went through it in the January conference and actually Kim Allen would be more than happy to walk you through that calculation offline.

Just give Kim Allen a call in Industrial Relations and she will be happy to take you through it in detail.

Thanks.

Our next question comes from John Woodbury. Sir, you may ask your question and please state your company name.

Hi. This is John Woodbury with Cobalt. Congratulations on another great quarter. In the [indiscernible] about your business I guess as I understand it you purchased about 90 million in the first quarter and it looks like about 50, I guess, in the second. And I imagine that the new authorization is for an additional 50 million?

Yes.

What sort of, what would guide you to perhaps increase it to 100 or cut it to 25?

Well, I think again, sort of like the dividend question. Again, and it's unfortunate we have to keep going through the aberration these first two quarters. But I think if you look at it long term, what you're going to see, as Bart gave you the components of our cash flow, of our free cash flow, we're going to have in excess of $400 million each year. And that can go for - and that's after sustaining Capex and after all interest costs. It can go for three things. We can use it to pay dividends. We can use it to buy back shares. Four things. We can use it to pay down debt. Or we can use it to do capital expenditures. Expansion Capex at KMI.

The aberration this quarter or this year to date is that we tried to do all of our capital expenditures at KMP. That's where it's the most tax efficient way to do it. We tried to put all of our expansions in KMP. But this particular time period we had primarily these electric plants. And, as you know, electric generating doesn't qualify for MLP treatment. So we actually did have significant capital expenditures at KMI.

Absent that, as we look ahead to '03 and our preliminary budget, for example, at KMI we see expansion Capex in the 20 to $30 million range, next to nothing. So as we look at that and as you can see even at the 40 cent dividend we're paying out about $50 million in dividends. So that leaves you with over 300, say around $325 million or $340 million of additional cash flow. Certainly we use some of that to pay down debt, to keep our balance sheet in good strength. The rest of it we will continue to use to buy back shares.

And again, we're in this for the long haul. We're trying to deliver value. I can just tell you personally I never sold a share. I own 20 percent of the company right now. I'd be happy to own 25 or 30 percent. So we'll continue to get share repurchase program to our shareholders. But rather than set specific targets at the beginning of any year, we're just going to continue to look at the cash flow as we go and then have the board continue to look at the relationship between that cash flow and how we want to use it, and in particular the relationship between what we pay in dividends and what we pay through a share repurchase program.

It's fair to me to characterize it as you're running your business, you have a long-term horizon and a particularly low share price based on a metric of free cash. Multiple isn’t sufficiently enticing for you to sort of maybe change your budgetary process?

Well, I think what I'd say, John, is that we prefer, if we're buying back shares, we prefer to buy them back at a low price rather than a high price.

Of course.

But I think you are accurate in your assessment that the true governing factor is the cash that we're generating. It's not our trying to be opportunistic.

Gotcha. Listen, thanks so much. Happy to be shareholders.

Our next question comes from [Vidula Murty]. You may ask your question and please state your company name.

SAC Cap. Good afternoon.

Good afternoon. How you doing?

I'm doing fine. Thank you. Very good call. One of the things you mentioned, you talked about with the power project, is the towing arrangements that you have [indiscernible] and I don't recall exactly who the other tower might be. I think it might be Williams; I'm not certain.

That's correct, it is.

Can you go through any potential exposures to KMI as a result of credit problems at Mirint or Williams in the event that their problems were for some reason to get more severe and they might be unable to perform on their tolls or some other types of issues come up? How does that work in terms of your preferred interest in these projects, and is there any risk that some of this can be put back to you, or can you just kind of talk about, you know, that type of thing.

Yes, Vidula, I'd be happy to take that. You are right in our biggest exposure is to Williams and to Mirint are related to those power plants. But you're also correct in that our interest is a preferred interest. You know, we do not own either of these plants and we are not recourse on the debt associated with those plants. And so in the event that the tolling party, Mirint or Williams, cannot meet their obligations, the debt holders do not have recourse back to us.

Now, again, you accurately pointed out we have a preferred investment. We'd like to earn a return on that preferred investment. And that becomes more questionable when these plants are tolled and they're in a merger environment. Although, I mean, the dispatch at least from the Jackson plant today has been very strong. So we are in a protected position and we are not recourse on the debt associated with the plant.

Is there a scenario that you could, even if it's not probable, that you could discuss whereby your preferred interest in them might be vulnerable to a potential write-off or needing to be remarketed or any of that kind of thing?

I think you know in the extremes you can come up with any type of scenario. I think we are very comfortable with our investment in these plants.

Can you remind us how much the investment is?

Yes. In the Jackson plant it will be around $100 million, and in the [Weissville] plant around 50 million.

Thank you very much.

Our next question is from Steve Errico. You may ask your question and please state your company name.

Congratulations on a great quarter. Just - the cash flow [indiscernible] you went over it and I just want to make sure that - I'm beginning to hear you mention that you're going to use actually the cash flow to pay down debt and half to buy back stock. You obviously bought back more stock and did not pay any debt. I just want to make sure you're comfortable with the rating agency's outlook on that, and would it imply that the second half of the year we might see the inverse of that?

I think that's absolutely right. I think you will see the same amount of free cash flow a little better than we had without these capital expenditures. As we said, the board's authorized 50 million in additional share repurchases, far less than we've repurchased in the first half. So, yes, I think you can see some, expect to see some debt pay-down between now and year end. That's our game plan.

Thank you very much.

Our next question comes from Douglas Kidd. You may ask your question and please state your company name.

Founders Funds. Would you please recap for me the amount that you said was spent in the first half on share repurchase?

Yes. The cash is about $140 million.

Okay. When I look at the share count, I don't see a decrease and I don't know if that's just because I'm looking at average shares or if there's some other explanation on the share count.

You are looking at average shares and you're also looking at fully diluted shares. And so at the end of the year - actually, the share count that you're looking at is on the income statement and that's from a year ago. In November of 2001 we had a security that was originally put out by KN Energy called the [indiscernible] that converted to about 13 million shares of equity. And so you would see a share count again, and this is rough. If you just look at the '01 number, around 115 million. You'd see a share count of 128 million plus if we hadn't been doing a share repurchase.

You see where we are, Douglas? It's on the line, number shares used in computing basic earnings per share. And a year ago before the [indiscernible] converted it was 115 million shares. You add back the 13 million shares in November. So 13-1/2. You'd be at almost 129 million shares. Since that time, since a year ago we have bought back a total of about $400 million worth of stock, and that's taken us down from the $129 million level to $122 million.

And part of the issue is, you know, you'd have a better number if you had the full balance sheet again in order to, you know, release earnings at this point 15 days after the end of the quarter we're giving you a preliminary abbreviated balance sheet. But if you refer to our first quarter Q, compare it to - which is in that first quarter Q, the end of the year '01 you'll see the reduction. And when the Q comes out, which will be the beginning of August, you'll see it again there.

Very good. Thank you.

Once again, if you'd like to ask a question, please press star one. One moment.

Well, it looks like we have answered all the questions. If there are no more, again, we appreciate your patience and thank you very much. We think we had a great quarter, and if you have any further questions, please feel free to call any of us, and particularly Kim Allen in investor relations, who will be happy to answer any of your questions. Thank you and have a good day.