金德摩根 (KMI) 2002 Q3 法說會逐字稿

Good afternoon, and thank you for standing by. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded at the request of Kinder Morgan Inc. If you have any objections, you may disconnect at this time. I would like to introduce your host for today's call, Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. You may begin.

Thank you, Darla, and welcome to the Kinder Morgan conference call. As usual, we will be talking about the Kinder Morgan companies, including Kinder Morgan, Inc., which is one of the largest midstream energy players in America, and trades under the New York Stock Exchange under KMI. I will refer to that company as KMI. And we'll also be talking about Kinder Morgan Energy Partners, which is the largest pipeline master limited partnership in America. That trades on the Exchange under the moniker KMP and I will refer to that as KMP. As always, we will be making statements that involve the Securities Act of '33 and the Securities Exchange Act of '34. I'll give you an overview of our third quarter earnings, our outlook for the balance of '02 and '03 for both companies, and discuss some general strategic issues. Then our President, Mike Morgan, will discuss some non-financial achievements that occurred in the third quarter. And our Chief Financial Officer, Park Shaper, will go through the financial results in detail as usual, and then we'll take any questions that you might have.

Let me start with KMI. KMI [today] [records] a 38 percent increase in earnings per share, compared to the third quarter of 2002. That works out to be 66 cents per share versus 48 cents a year ago and versus a consensus that was 63 cents up until a couple of days ago. We said we expected to beat 63 cents, I think it's since 64 cents right now. At any rate, we [are at] 66 cents; that's a little over $80 million dollars versus about $58 million dollars a year ago in the third quarter. Throughout KMI and KMP, all of our business units with one exception experienced very nice growth in the third quarter. Once again, our fee-based businesses and our ownership of the general partner, of Kinder Morgan Energy Partners, produced these outstanding results.

I think it may be important to note that in the first nine months of 2002, we have generated more earnings than in all of 2001, and also that we have exceeded the financial projections which were detailed in our annual budget which we put on our website back in January. All of this should mean is that KMI is what we've been saying; it's a different kind of energy company. We've consistently grown our earnings over the last three years through a variety of market conditions. I'll remind any newcomers to this call that we don't have marketing and trading businesses and our assets have minimal exposure to commodity price variations.

Let me talk about the results at each KMI business segment, beginning with KMI's interest in KMP. That interest contributed about $88 million in pre-tax earnings to KMI; that was up 44 percent, from $61 million dollars in the same period a year ago. I would remind you that as KMP's cash flow grows, KMI's general partner share of that cash flow grows as well. And KMP's cash flow continues to increase, driven largely during this quarter by internal growth along with contributions from the recent Tejas acquisition.

Our second major segment at KMI is the Natural Gas pipeline Of America, NGPL, and that recorded third quarter segment earnings of about $89 million, up a little over $5 million dollars from the same segment a year ago. Year to date now through the first nine months, NGPL is up 4 percent, right in line with our budget expectations and what we've communicated previously. Mike will discuss in more detail some important contract renewals and other events that have occurred at NGPL that make us very bullish on the future earnings capacity of that very large pipeline.

Our third business segment at KMI is our retail operations. Third quarter, of course, is not a particularly big volume general revenue generator in retail, which is seasonal in nature. But we did have $7.6 million in earnings; that was up a little less than $2 million dollars from the third quarter of 2001 in the first nine months of this year; we're up 15 percent there. I think the increase primarily reflects some customer growth from the acquisition of a small distribution company we bought in Colorado in late 2001. We also had a 23 percent increase in volumes and a very solid irrigation season in the West.

Our final segment at KMI is our power and other operations. They will contribute less than 4 percent of KMI's total segment earnings in 2002, and in the third quarter they earned $7 million dollars. That's down from $21 million in the third quarter of 2001. This was expected. We previously announced this reduction, and this reflect two things: the sale of the Wattenberg natural gas gathering facilities in Colorado, which was closed in December of 2001, so that's no longer an earner in this segment. And then more power plant development fees, which we had previously communicated to you. In addition, our 50 percent interest in TransColorado produced $4.8 million dollars in equity earnings from the third quarter, up significantly over the same period a year ago. TransColorado is of course a joint partnership interstate pipeline which stretches from northwestern Colorado into northern New Mexico where it hooks into pipes going to California.

Still on KMI, let me talk a little bit about future expectations. We expect to end the full year 2002 with an earnings per share growth of more than 35 percent, 2002 versus '01. We expect 2002 earnings for full year of at least $265. That's above consensus modestly and well ahead of our published annual plan of $2.58 that we posted on our website and revealed at our analysts conference in January of '02.

As we look into '03, let me say that we have not completed our annual budget process for 2003, but we are fairly far along on it. We expect 15 to 20 percent growth next year, '03 versus '02 and KMI earnings per share, without, that's without, assuming any additional acquisitions at KMP or KMI. So 15 to 20 percent growth without acquisitions on a going-forward basis.

Now, let me turn to KMP. KMP had record earnings in the third quarter of this year. It earned $158 million, or 50 cents a unit. That compares to the third quarter of 2001, when we earned $116 million dollars or 37 cents per unit. That's an increase of 35 percent. The consensus estimate for KMP for the third quarter was 44 cents, so we beat that by 6 cents. We declared our distribution of 61 cents and we still expect to be able to increase that distribution; that's an annual rate of $2.44, and we expect to be able to increase that to at least 62.5 cents or an annual run rate of $2.50 at the end of the fourth quarter. Again, consistent with what we've talked about. This distribution that we're making is an 11 percent increase over the third quarter of 2001 distribution [indiscernible] 55 cents. As I said, this is the most profitable quarter in the history of KMP. Again, it's our stable fee-based assets that continue to [indiscernible] some strong and alive with cash flow. We can attribute most of this growth to internal growth, and I'll go through that in some detail in a couple of minutes, as well as contributions from acquired assets, primarily the Tejas acquisition that was made earlier in the year.

We think, and of course we're biased, but one more time, these results demonstrate that our strategy of owning and operating assets that have minimal exposures to commodity-priced variations is a successful strategy in various times of market conditions. And again, just like KMI, KMP does not have marketing and trading businesses.

Now, let me talk briefly about the segment earnings in each of our business segments at KMP, and I'll talk in terms of, as we always do, in terms of earnings before DD&A for each of these segments. The Product pipeline segment, our largest segment, had an 11 percent increase in the third quarter earnings before DD&A, to about $109 million; that compared with $98 million during the same period a year ago. All but $1 million dollars of that was internal growth, so we had a little over $10 million of internal growth. That was largely driven by strong gasoline volume. Gasoline volumes, as we show on the press release, were up 4.2 percent for the quarter and 5.9 percent for the first nine months of this year.

We continue to see high – that contrasts with a national average that's running between 1.7 and 2 percent, depending on which survey you're looking at – shows one more time that our strategy of trying to serve some of the fastest-growing markets in America is paying dividends. As you recall, we serve six to ten of the fastest-growing metropolitan areas in America, including Southern California, Phoenix, Arizona; Las Vegas, Nevada, Orlando and Tampa, Florida; Atlanta, Georgia and Charlotte, North Carolina. And we had strong growth across those markets. In fact, in our Product pipeline group, we really have nine pipeline units and seven of those nine were above the '02 plan. All nine of them were above '01 results for the third quarter. So despite a continued leakage in jet fuel at the beginning of the year, the Product pipeline experienced an outstanding year and we look for continued good results in that segment.

Turning to jet fuel volumes, and we've broken all this out separately for you and Parker will talk about it in more detail, but I think it's very interesting that our jet fuel volumes have continued to improve quarter to quarter sequentially, and now in the third quarter we have reached the 2001 [level]. So we started out the year with a decline a little under 15 percent; in the second quarter it was a little under 10 percent, and now it's back to even. So when you couple that with the strong growth in gasoline, that's what is really driving the throughput and driving the revenue growth in our system. And we are now up – we were up 5 percent year to date in revenues on our Product pipeline system, and you know we've talked to you historically about 3 to 4 percent as an annual target for an ongoing growth.

Our second segment at KMP is our Natural Gas pipelines. There we had earnings of $83 million dollars before DD&A, and that's up 50 percent from the $55 million that we earned in the third quarter of '01. That $27-plus million increase is attributable to the recent Kinder Morgan Tejas acquisition, but also to substantially improved results at our recently expanded Trailblazer pipeline system that runs out of the Rockies.

Our third segment is our C02 pipeline. There we delivered third quarter earnings before DD&A of $34 million dollars. That was up 29 percent from $26 million in the same period in '01. Really a double-barreled shotgun here; pipeline delivery volumes of C02 increased by 17 percent in this segment. Oil production in the SACROC unit in the [Permean] Basin increased by approximately 50 percent compared to the third quarter of a year ago. It appears to us that our strategy of investing in additional development of SACROC, which we announced earlier this year, is beginning to pay off, and we're now more fully utilizing all of our C02 pipelines to meet the growing demand of SACROC and elsewhere in the [Permean] Basin.

As many of you know, SACROC is one of the largest and oldest oil fields in the U.S. which uses C02 injection technology, and it continues to perform better than we originally expected. In the third quarter alone, it produced about 1.2 billion barrels of oil during that quarter. SACROC is expected to generate about 4 percent of KMP's cash flow in 2002 and is one of the only areas where KMP is exposed to commodity price risk. As we previously said, and Park will go over in more detail, this risk is mitigated by a long-term hedging strategy that results in more stable realized prices, although we will not hit the peaks and we will not experience the valley.

Our Terminals segment, the fourth segment at KMP, reported a 23 percent increase in third quarter earnings before P&A, to $53 million from $43 million in the third quarter of '01. Those results were driven by very strong internal growth of approximately 13 percent of the Liquids terminals and by a strong performances by a number of small acquisitions on the bulk side. And Mike will talk more about some of those expansion opportunities on the Liquid side.

Looking ahead from the KMP standpoint, as I said we expect to increase our per-unit cash distribution to an annualized rate of at least $2.50 following the next quarter, the fourth quarter 2002, as we previously indicated. And we expect our cash distribution [indiscernible] to grow 8 to 10 percent '03 versus '02 in internal growth alone without additional acquisitions.

Now, let me turn to a little bit of a more strategic outlook. Let me talk for a minute about what I see, an what this management team sees, as the strengths and weaknesses of the Kinder Morgan companies.

First of all, from a strengths standpoint, I think we have a great collection of mid-stream energy assets, the best set of assets I've worked with in my roughly quarter of a century in this business. Almost all of our assets are fee-based; we have very little commodity exposure, as I talked about earlier. And we have, of course, no marketing and trade; we have no telecom business. Third strength is that we have, I think, very stable and growing cash flow from those assets; we've demonstrated that quarter after quarter. Equally importantly, I think in these kind of Nervous Nellie times, we have a very solid balance sheet.

Just to indicate it one more time, that during this third quarter we've done these things to shore up our balance sheet. We've sold about $330 million dollars of KMR equity; we've turned up about $1.5 billion dollars of debt at KMI and KMP, and this morning we announced that we have extended our credit facilities at both companies. So what I think we have demonstrated is that we have the ability to raise capital with both the equity and debt markets in what are really pretty unparalleled times of nervousness, and we've done it on very good terms, and I'll come back to that a little later.

The next thing I would indicate as a strength is that we have very good top line growth. I think, again, the third quarter numbers demonstrate this, driven in large part by the fact that we serve such good demographic areas across America, particularly with our Product pipeline system. And then finally, I think we have a management team that has a track record of creating value for our shareholders.

I've said before that if anybody just lists the strengths of the company like that, and doesn't talk about risks or weaknesses of the company, you ought not to be very comfortable with the management team, because that management team and specifically the CEO is either lying to you or doesn't even know his own business. So let me talk about some of what I perceive are risks and weaknesses, if you want to call them that, in the Kinder Morgan story. And I think it's particularly important because we hear a lot of the [sharks] talk about irrelevant or just flat incorrect issues. So let me talk about what you really ought to be looking at, if you want a true roadmap to look at Kinder Morgan [technical difficulty] will perform in the future.

Let's start with power. Certainly our power development activities are not up to where we thought they would be when we went into power development over two years ago. We have not calculated any earnings from future development activity for the balance of '02 or '03. On a going-forward basis, we simply look to operate the plants that we already have, [technical difficulty] completed and up and running, and in all of those plants we have tolling agreements. So that's, I think, a risk; it's a risk that we have contained on a going-forward basis, but it's something that did not turn out in accordance with our original expectations.

A second area of risk that I think you should pay attention to is the regulatory risk, and I've referred to this before. I think it's safe to say that anytime you have a company that owns as many thousands of miles of regulated interstate pipelines as we do, will have to manage through regulatory risk. Now, let me give you an example of that. As we've been disclosing since at least 1997, in all of our Securities filings, we have certain shippers on our Pacific Product pipeline system that are challenging the grandfathering of the rates at the Federal Energy Regulatory Commission. We think that any ruling disallowing grandfathering would be contrary to the Energy Policy Act which Congress passed in 1992, and we think any such ruling would not survive an appeal to the D.C. Circuit. But we could get an adverse ruling on that point along the way. We're reserved for any expected reparations that might be ordered in this case, and we think in any event, any outcome would not cause the distribution to KMP [unit]-holders to be reduced in any way whatsoever. It would have a very minimal impact on earnings at KMI. I mention all of this not so much to predict any outcome as just to remind you of the general regulatory risk that exists in our business. And let me say that I believe we have a management organization which has successfully dealt with similar issues over many years, and will be able to continue to manage those regulatory risks.

A third risk, which I guess was pointed out in some people's minds by an article in this morning's Wall Street Journal, is the risk that we are unable to make acquisitions. Put in simple form, this is the theory that even though we made over $6 billion dollars of acquisitions in the past five and a half years, that if KMP cannot acquire additional assets, growth will come to a grinding and sudden stop. I can think of stronger words, but let me just call that hogwash.

First of all, let me say that we think w can and will acquire additional assets on good terms, and we will make additional acquisitions. But, that said, I want to detail again [indiscernible], and I guess we just haven't done a good enough job of doing this, that we have substantial internal growth at KMP and therefore KMI, without making any additional acquisitions. That's why we're very careful to share with you key indicators like the volumes and revenue growth on our Product pipeline systems where we can have apples-to-apples numbers year to year. Kind of like same store sells. We can now do that on the Product pipeline side; we can now do that on the Liquids Terminals side. We can't yet do it on Natural Gas pipelines, because we had a major acquisition; we can't do it on bulk terminals because we have several small discreet acquisitions over the last year.

But let's just look at the results of this quarter, through the lens of whether or not we are producing internal growth. Let's take each business segment.

The Product pipeline. As I said, we're up 11 percent, or $10.5 million dollars; a massive total of $1 million dollars of that came from the additional acquisition of 10 percent of the Cochin, [indiscernible] percentage ownership of Cochin up by 10 percent. All the rest of it came from internal growth. We have no other acquisitions in that section. And again, primarily driven by strong growth in gasoline demand across all of our Product pipeline segments.

Turning to the C02 segment. There, as I said, we had 29 percent quarter to quarter growth without any acquisitions, so about $8 million dollars of internal growth in this quarter alone, all driven by internal expansion opportunity.

We said in Liquids Terminals we grew our bottom line there by 13 percent solely through internal growth; we had no acquisitions during the quarter there or during this year.

At KMI, [indiscernible]'s growth was derived by good contract renewals; by adding additional electric power load, and by internal expansion projects that came on line in the second and third quarters this year. No external acquisitions. In fact, if you look at very carefully, and I would encourage you to do so, the only segment of all our segments that benefited substantially from acquisitions in the third quarter was our Natural Gas segment at KMP, where the Tejas acquisition obviously helped create the 50 percent growth rate that we had. And even in that segment, there were also significant benefits from our recent internal expansion of the Trailblazer system coming out of the Rockies.

So, I think what you saw in this past quarter is a glimpse of the future, where we are confident that internal top line growth and good expansion opportunities within our [businesses] will [compel us] to significant growth at both KMP and KMI. As I stated earlier, that's why we expect 15 to 20 percent growth in earnings per share at KMI, from '02 to '03, without assuming any new acquisitions, and we expect our cash distribution per unit at KMP to grow 8 to 10 percent, again, without any acquisitions. And you should take comfort, I think, from the results that we reported today, that those are reasonable assumptions on a going-forward basis.

Now, let me conclude my part of the call with two thoughts. First of all, while we're obviously not pleased with the price, the recent price, of KMI shares and KMP units, it's up to you and the other investors to decide whether KMI is appropriately priced when it's trading at only about 11 times '03 consensus earnings, versus a 16 times multiple for the S&P 500. And it's up to you to decide whether KMP is trading at a correct level when it's paying about 7.5 percent tax-deferred yield, which is more than 350 basis points over ten-year Treasuries. We can't control what you think or how the market will react to the pricing.

But the second point, and I think it's even more important, is this. This management team is going to focus on learning the businesses, and our businesses, as you can see from today's report, as you have every quarter this year, our businesses are doing extraordinarily well. Let me make it very clear that we have no – no – short term or long-term Liquidity or balance sheet issues that would impact the viability of this company. Put another way, we will go back to the capital markets debt or equity only when we choose to do so, not out of any desperation or at a time dictated by others. So let the price be where it is and reflect what the market thinks; we're going to go ahead managing this set of assets for the long-term interest of our shareholders. We'll continue to focus on the business, not the market, and we'll make every effort to extend our record of delivering real earnings and real cash flow and therefore real value to our shareholders. That's our story and that's our game plan for the future.

And with that, let me turn to Mike to talk about some non-financial items from the third quarter. Mike?

Thanks, Rich, and I'm only going to cover a couple of areas, again, focusing on internal growth and the success we've had in the most recent quarter. When you look at it, the internal growth in both companies are really driven by several things.

First of all, volumes, particularly on the Product pipelines, Rich spent some time going through that. But more than volumes, it's signing people up to long-term contracts and executing on our strategy of building attractive expansion opportunities. So I'm going to spend a few minutes and go through some recent success on contracts and our expansion projects.

First of all, at KMI and NGPL, we had a very significant quarter. We rolled over contracts with five of NGPL's six largest customers. These contracts represent about $165 million in firm annual revenues and I'll remind you, NGPL is a little over 40 percent of KMI's cash flow, but these contracts represent about 45 percent of the long haul of capacity, primarily in the Chicago market, 25 percent of our [fuel] storage, and 70 percent of our no-notice storage, which is really the main product we have for the LDC customers. That's very significant, obviously. [Nitrole], our largest customer, was a huge part of that. We rolled them over in the third quarter, along with Nipsco, MidAmerican, We Energies, and People's. And let me -- just because I think this is so critical, and this has been an issue, you may remember, going all the way back to the '99 merger with K.N. Energy, where we faced a big slug of rollovers and extended those contracts out for about three years, which is about the average increase this time – just to take a minute and go through that.

Our big no-notice storage service, back in January, at our analysts' presentation, you'll remember, we had about 2.5 [VCF] that was expiring in '02; we have sold all that at an average term of a little less than 5 years. Looking ahead to '03, at the start of the year, we had 35.9 VCF to sell; we have already sold all but one VCF of what's expiring in '03, again, for about a two-year average term.

Turning away from that to our NSS, which is really the fuel area storage, at the start of '02, we had 46 VCF to sell; we have sold all that for an average of almost 6 years. Looking to '03, at the start of '02, we had 83 VCF to sell; we have already sold 51 VCF at almost four-year average term. That's all the storage side. If you look at the long-haul transportation, we had, at the beginning of this year, and again, I'll spend some time on this with you, about a VCF expiring. We have recontracted all of that. Looking at '02 – and if you look at '03, and really what we've got next year, in January we were looking at 1.7 VCF expiring in '03; we have already worked the '03 down to less than 900 -- I'm sorry, we have recontracted 900 and have about 750 a day today, looking at '03. Again, to contrast that: January of '02 we had a VCF we were trying to deal with; today, we're not even to January yet; we expect we'll make progress between now and January; we have 750 a day, about; that's spread very ratably over the course of '03. So NGPL is in a very strong contractual situation.

The other thing that Rich did mention is success in attaching power plant load. We have attached 4900 megawatts to NGPL this summer. We are going to get, in '02, $18 million dollars in revenues from plants that we have attached. Now, not all of that is incremental. But roughly half of that amount is incremental revenue. And as we look forward to '03, we believe the plants we've attached will add about $28 million in revenue. Again, for '03, we expect to sign up about 4,000 megawatts; 2900 is already under contract.

That's really it for NGPL. Other significant contracts at KMI: We've restructured in the power business a long-term tolling agreement on one the front-range power plants. That was approved by the Colorado PUC. It was very effective because it eliminated our residual commodity price risk associated with that contract. Very consistent with our strategy of avoiding commodity price risk at all times.

The Texas intrastate had two very large contracts. This, of course, is down in KMP. The BP deal was a major transaction. It ramps up from about 600 a day to a VCF today on Tejas; also includes 19 VCF of storage on KMPP. This really is a great contract for reducing the risk profile of the intrastate business because it increases the contract life and switches a large portion of the revenues to demand charges which are paid regardless of volumes. In addition, we had a big transaction with Southern Union, where we extended for five years, 8 VCF of sales and about 4 VCF of storage.

Also in the NLP, the big interstate system that comes out of the Rockies, as you may remember, has an average contract life of about ten years, so very little comes available; we've recontracted all of that. We extended our largest bulk customer in the bulk terminals division, and that's the Tennessee Valley Authority; extended them for another five years, and have made significant progress on the [records] side. That's really the contractual situation; great performance across the business units; that's the bread and butter that's helps assure the cash flow out of these assets.

Now, let me talk quickly about the projects, starting again at KMI. On NGPL, we've got three big projects. We've had the Horizon joint venture, which came online in May for $80 million, underwritten by a ten-year contract; we own half of that; Nicor owns the other half. We did bring online in August our St. Louis expansion; again, it's about a $37 million dollar project; $300 a day; that's underwritten by a ten-year long-term contract. And we're making significant progress on our North Lansing storage expansion, which is a $35 million dollar expansion project. We've had a successful opening season; we filed with the FERC and are expecting to hear on that by December. That'll be in service next year.

Also from a project perspective, I would remind you that all construction of the power plants in both Jackson, Michigan and Wrightsville, Arkansas, were completed early in the third quarter. We are meeting all of our heat rate and availability targets following the commercial operation date; don't see any operational issues there, and as Rich said, we have no plans for additional construction in the power segment at this point.

On the products side, we have completed the expansion of our Las Vegas terminal. This, of course, is down in KMP. On the Texas intrastates, the gas side, are very significant projects in KMP. We completed our North Texas $70 million dollar pipeline; that's underwritten by a thirty-year firm contract from Florida Power & Life. That went in service last month. We announced today in the press release an $87 million dollar project to Monterrey, Mexico, underwritten by a fifteen-year deal with [Pemex]. We will begin construction of that this month and that will be in service in April of next year. And then we are underway with a large open season on West Texas, which is about a $160 million dollar project. Still need to get those deals signed and in the door before we begin any kind of construction. We would expect to know on that in the next several months.

The other big area where we're spending a lot of time on projects are in the Rocky Mountains. Obviously, there's a desperate need for additional pipeline capacity out of the Rocky producing basins. Our Advantage pipeline had a very successful open season. Advantage is a $288 million dollar project. We have $483 a day of interest, or a $330 a day project. We are now in binding open season, and again, need to wait until we get those firm contracts in hand before we fold anything, but are expecting to know within a month on that. In addition, the Cheyenne storage project, which is about a $30 million dollar project, is in FERC process. Again, that's underwritten by ten-year contracts.

As Rich alluded to in C02, the $160 million SACROC expansion is on time and on budget. Volumes are running well ahead of plan at this point and on the Liquids terminal we've had good success, both in its Houston ship channel and our $35 million dollar expansion up in [Carter Way]. I go through all that detail just to remind you that we have a tremendous number of growth opportunities internally, both from signing additional contracts and also from funding these very attractive expansion projects. One advantage we have, on the expansion side, is that we can really control our own destiny. We can work it – we get long-term contracts at very attractive returns and we think those are projects that will drive growth at the company for years to come.

Finally, before I turn it over to Park, who will go through a lot of the numbers here for a few minutes, we thought it would be appropriate to take a moment and introduce, on the lighter side, a new feature for our quarterly conference call. We're calling this Kinder Morgan's I.I. list. This is not to be confused with the esteemed Institutional Investor analysts' ranking. "I.I." in this case stands for Inaccurate Innuendo. And it's our David Letterman like tribute to some of the more outrageous statements that have printed about Kinder Morgan in recent months. I would say all of these statements have been made by so-called independent analysts, who seem more interested in raising alarming questions than conducting reasoned analysis or actually seeking the truth. None of these people discussed these questions with our team, nor, it seems, have they spent much time reading our SEC filings, our published annual budgets, or other investor information. We can only assume that these folks are economically motivated to spread fear through their inaccurate and, in many cases, libelous reports. We would encourage our investors, when confronted with this garbage, to please call Tim, Park, or me, and ask the questions of us directly. Frankly, we have not been stumped yet, but again, onto the first Kinder Morgan I.I. List.

I.I. Strategy No. 5: Raise vague questions about frightening sounding topics. This is something we've seen a lot of, and let me give you an example quote. Quote, "The company's terrorist insurance appears to end in a few months and it may or may not be renewed." Well, technically, this is an accurate statement; it is hard to see how this helps investors, and I will tell you the reality is, it was renewed as expected and consistent with our published 2002 budget.

I.I. Strategy No. 4: Criticize the company's disclosure. We've seen many examples of this, including quotes like, "A lot is not disclosed," and another quote that we saw printed, "Disclosure is much less than complete." Obviously, this also sounds very scary. We have found it amusing and have been disappointed that the analysts in these cases have not felt it was necessary to elaborate on what types of things we haven't disclosed. The reality is, we pride ourselves on our disclosure. We publish our budgets annually and track performance against those, as you're about to hear Park go through, in a lot of detail.

I.I. Strategy No. 3: Allege inadequate cash flow to meet company obligations. Here's one example of that, a quote in a published report that said, quote, "Kinder Morgan was in violation of its debt covenants earlier this year." The reality: we have never violated our debt covenants and have obviously had a lot of success in extending our credit as recently as yesterday. Example 2 of this is this quote, which was, "Limited partner distributions exceed cash flow." This is also inaccurate. We generate more cash than we distribute, and all distributions are, of course, required by and governed by our partnership agreement.

On to I.I. Strategy No. 2, which is one of my personal favorites; that is: Accuse management of selling their stake in the company even when they haven't. In this case, an analyst referred to the, quote, "half-truth" of Rich's salary being a dollar a year and wrote that, and I'm quoting here, "Executives commonly write undisclosed derivative contracts on the equity they own." In reality, Rich has not sold, hedged, borrowed against, colored, or encumbered his 20 percent stake in KMI in any way. The dollar a year he gets is not a half-truth; it's his compensation package with no options, no bonus, and no restricted stock. Furthermore, Rich got his stake in KMI, KMP and KMO the old-fashioned way: he invested money and bought shares.

Finally, the I.I. Strategy No. 1: If all else fails, try to precipitate a Liquidity crisis, no matter how flawed your analysis. This took hyperbole to a new level. In this quote we have, again, quote, and this is just ahead of one of our bond offerings, "Nor are the long-term prep markets likely to be receptive. Junk status for [tender's] debt seems overdue; just in case of a ripple effect, we are transferring some of our personal cash reserves from money market funds to Treasury bills on the next option." This is – here, the analyst is implying that Kinder Morgan is about to [crater] the commercial paper market in the United States. The reality: our ratings, as we've talked about, were confirmed. BWA1, we're on BBB-plus for KMP; we've issued a lot of paper, including thirty-one year debt at 7.3 percent. KMP has a cumulative bond maturity of about $68 million dollars between now and 2005. We have $200 million in '05 and none in '06. We are in very, very solid shape. And I will just end with one last thought. When you read this stuff, your first question of these analysts should be, "Have you ever talked to the management team?" All the people I've quoted here never have. The other thing is, any independent analyst who doesn't realize that Mike Morgan and Bill Morgan are actually two different people probably shouldn't be relied on for factual information regarding Kinder Morgan.

I've said my piece, and I will now turn it over to Park for the financial review.

Thanks, Mike. Onto the numbers. For those of you listening, hopefully you have the earnings releases in front of you, because I'll be going through the financial pages on the back of both the KMP and the KMI earnings release. I'll start at KMP.

The first financial page, which is our income statement, and I'll start at the bottom, actually. The Board of Directors today declared a distribution of 61 cents, up 11 percent from the 55 cents a quarter, or a year ago in the third quarter. For the nine months, we will have distributed $1.81. That's up from $1.60 for the nine months of 2001, a 13 percent increase. To support net distribution, we generated 63 cents of distributable cash flow in the third quarter. That's up from 55 cents a year ago, which is a 15 percent increase. For the nine months, we generated $1.92 of distributable cash flow, up from $1.62 a year ago, which is an 18 percent increase. To put those in different terms, we will, or we have generated, in distributable cash flow, cash that is available to be distributed to our limited partners, $110 million dollars in the third quarter alone, and $325 million dollars in the nine months of this year. That's cash that is available to be distributed to our limited partners. We are not distributing all of that to them, but that is available to be distributed. And that's the power of these assets, that is after all debt service, that is after the general partners' share.

Skipping a line above that, sustaining capital expenditures for the quarter are about 13 cents, or about $22 million dollars. That is up from about $10 million dollars in the third quarter a year ago. We talked about this in the first quarter earnings call; we talked about this during the second quarter earnings call, and I'll say it again. Sustaining capital expenditures will not come in [indiscernible]. At the same time, we have an annual budget, which we published in January, that we expect to spend $47 million dollars in sustaining capital expenditures in 2002. That is still our budget; that is still our expectation; we will come in right around that level. For the nine months, we have spent $52 million dollars in [sustaining cap ex], and that compares to $40 million dollars a year ago.

Skipping up a couple lines, you'll see net income per unit was 50 cents. [Indiscernible] increase today to 45 cents; prior to today, it was 44 cents, so clearly a net income per limited partner unit came in well above consensus. For the nine months, net income was $1.46, compared to $1.16 for the nine months of 2001; that's a 25 percent increase. If you'll skip to the second page, we'll walk through a little bit around where that growth came from, and I'm going to touch on this briefly. A lot of these points have already been made by Rich and Mike.

But starting in segment earnings before [DD&A], Product pipelines are up $10.5 million dollars for the quarter, and up $31 million dollars for the nine months. Most of this growth is internal growth; again, for the quarter, $1 million dollars of that increase was related to an additional interest in Cochin. To see what's driving the internal growth, go down to the volume section, which begins at about the middle of the page. You'll see our gasoline volumes there, which are up 4 percent for the quarter, and are up 6 percent for the 9 months. You'll see the diesel volumes right under that; they are down slightly, about 2 percent for the quarter compared to last year, and they're down about 6 percent for the nine months. Again, that's compared to a 2001 that was particularly strong in diesel volume because of high natural gas prices which caused some shifting some diesel, and because of weather.

Jet fuel gets flat for the third quarter and is down about 7.5 percent for the year. As Rich mentioned, this is pretty remarkable. After 9/11, we are now back to the same levels in the third quarter as we were a year ago. For the first quarter, we were down a little less than 15 percent in jet volume; in the second quarter, we were down a little less than 10 percent in jet volume, and in the third quarter, we're flat. We expect in the fourth quarter we'll be up, because the fourth quarter of 2001 was a very low quarter in terms of jet fuel volumes.

Now, that being said, gasoline is a bigger portion of our volumes than either diesel fuel or jet fuel, meaning our total volumes for the quarter on refined products are up 2 percent, and for the year, they're up 1 percent. That's also about the percentage increase for all of our Products pipelines delivery volumes, [a] volume increase of about 2 percent for the quarter and about 1 percent for the year. Now, since we tend to have, as gasoline volumes tend to be a little bit longer haul, and we get a tariff increase each year, that 2 percent quarterly volume increase translates into a 5 percent quarterly revenue increase. And the 1 percent year to date volume increase translates into a 3 percent year to date revenue increase. So, again, revenues on the Product pipelines are up 5 percent for the third quarter, and they're up 3 percent year to date. That's driving the 11 percent increase in segment earnings before DD&A for the quarter, and the 11 percent increase in segment earnings before DD&A for the nine months.

I'll also compare that to budget for you. Our budget, again posted on the Web, for the Product pipelines for 2002, is $414 million dollars for the full year. To date, through nine months, we've generated $319 million dollars. That's 77 percent of our budget. We are on target to meet or exceed our budget.

Moving to the Natural Gas pipelines, they're up almost $28 million dollars, or 50 percent for the quarter, up almost $75 million dollars at 46 percent for the year. Clearly, a big factor there is the acquisition of Tejas, but another big factor is the expansion of Trailblazer. If you want to compare that to budget, budget for the Natural Gas pipelines is $347 million dollars for the full year. We have generated $236 million dollars through nine months. That is 68 percent of our budget. But the Natural Gas pipeline segment is one of the few segments at KMP, essentially the only segment at KMP, that is seasonal. The fourth quarter will be larger than the second quarter and the third quarter. We are right on target to achieve our budget on the Natural Gas pipeline segment. The other thing I'll point out is the first quarter did not have a full quarter of Tejas. So again, we're on target to hit our budget on the Natural Gas pipeline segment.

C02 pipeline is a very positive surprise. Up about $7.6 million, or 29 percent for the quarter, up about $10 million or 12 percent for the year. Again, driven by volumes. If you drop down and look at the volumes, the delivery volumes of C02 are up 17 percent, both for the quarter and for the year. The SACROC oil production volumes are up over 50 percent, third quarter 2002 over third quarter 2001, and are up 37 percent for the nine months of '02 over the nine months of '01, again, demonstrating the effectiveness of the expansion project that we have going on at SACROC. I'll remind you again, that we do have direct commodity exposure in SACROC oil production, and we've hedged that exposure away. We do not like to be subjected to that commodity price flexibility. But again, that has driven the tremendous growth at C02, and it's actually exceeded our expectations. The full year budget for C02 and earnings before DD&A is $113 million. The nine month production so far is $93 million, which is over 82 percent of our annual budget. We will exceed budget in the C02 pipeline segment.

The Terminals segment is up about $10 million dollars for the quarter, and that's about $31 million dollars for the nine months. Again, internal growth is driving a lot of this, especially on the Liquid terminal side. As you look at the volumes at the bottom, leasable capacity has increased by about 5 percent and utilization has also increased, driving that internal growth. The bulk volumes are actually down; that's due to a reduction in volumes of [salt] that we handle, and a reduction due to a facilities in Louisiana that we no longer provide services for. But the internal growth in the Terminals segment is still strong. The 9 month generation of terminals is $151 million dollars, compared to an annual budget of $197 million dollars. We are 77 percent towards our budget; we will be at or above budget in that segment as well.

So those are the segments. Let me drop down then to the expenses. The GNA line, we are up a little bit [indiscernible] the quarter, and year to date, NPNA, [as] the result of the acquisitions that we've made. The debt is up a little bit for the quarter; it's actually down a little bit for the nine months. Our debt is a little bit above where it was a year ago, or actually, the balance is actually above where it was a year ago as a result of acquisitions. Our rate, our average rate, is down, and so that's why you see, actually, for the nine months, we are below interest expense a year ago.

Minority interest is at $2, significant effects offsetting each other; the general partners' minority interest is increasing; the minority interest relating to Trailblazer has decreased because we bought, we purchased the remaining interest, in Trailblazer.

Which takes us to the net income line, where we generated $150 million to $58 million dollars of net income, but compared to $116 million dollars a year ago, a $42 million dollar increase, or 37 percent. And for the nine months, $444 million dollars of net income compared to $322 in 2001; $122 million dollars more or 38 percent growth.

With that, let me go back to the first page; I'll touch on a couple of items there. First of all, revenues are up significantly. As we told you in the past, and we will tell you in the future, revenues are not an overly meaningful number. The reason they are up is because of the acquisition of Tejas; it's also the reason that operating expenses are up significantly. Again, we would focus more on segment earnings. Depreciation and amortization is up because of acquisitions; GNA we talked about; COTI is up because of acquisitions. Takes you to an operating income line, $189 million for the quarter compared to $145 for '01; that's up $45 million or 31 percent. For the nine months, $528 million, compared to $422 million; up $106 million dollars, or 25 percent. Again, very strong growth, driven by all of our segments.

Equity & earnings – earnings from equity investments – is also up, driven largely by Plantation and Cortez. And the other item, we have gone through.

Down to the net income line, which we talked about on the prior page. If you take out, you go to the next section, and take out the general partners' interest, you see 'limited partners' net income' of $88 million compared to the $61 million dollars in the quarter a year ago, is a 44 percent increase. And for the nine months, $247 million dollars compared to $175 million dollars a year ago; a 41 percent increase. Again, very strong growth in all of the segments [technical difficulty], driving very nice distribution growth to our partners.

With that, flip back a couple pages and you'll see a preliminary balance sheet for KMP. I'll walk down this fairly quickly. Cash is flat; other current assets is up. A note that this comparison is to the end of 2001, and the reason it's up in other current assets is because of the acquisition of Tejas; it increased our receivables; we bought those receivables onto our books.

TP&E is [indiscernible] over a billion dollars of a result of acquisitions and expansions. Investments is just a function of earnings from our equity investments. Deferred charges in [other] assets is up significantly; that is both the addition of Tejas and other acquisitions, and also the fair market value of our fixed to floating rate swaps, which get valued on the asset side in that line, and you'll see it show up on the liability side in just a minute.

Total assets, $8.1 billion compared to $6.7 billion at year end; that's up about 20 percent. Going down to liabilities, you'll see notes payable and current maturity of long-term debt of zero. We issued equity during the quarter; we also termed up debt during the quarter; we actually did have, at quarter end, $132 million dollars of commercial paper outstanding. That commercial paper could be refinanced under a long-term multi-year credit facilities so it shows up in long-term debt. I'll get to the change in debt in just a moment.

Other current liabilities is up as a result of the acquisitions. Long-term debt, again, is up; we had [turned up] some debt and we had acquisitions since the beginning of the year. I'll reconcile that difference for you in just a minute. You see the market value and interest rate [indiscernible] line there. Other is unchanged; minority interest is unchanged, and partners' capital is up as a result of the equity offering.

Going down to total debt, it's about $3.55 billion compared to about $2.7 billion at the end of the year. That's an increase of about $820 million. Again, I'll walk you through that reconciliation in a minute, but first, let me point out that that is a debt to total cap of about 51 percent. That is a very stable level, given the set of assets that we own and the cash flows that we generate, but at the same time, our long-term target is still 40 percent debt to cap, and we expect that if we do a significant acquisition or significant expansion project, we will issue more equity, and we will return closer to that target of 40 percent debt to cap.

Real quick debt reconciliation for you. For the quarter, debt went down by $250 million dollars. We issued equity publicly of $330 million dollars; we also had KMR distributions, which is effectively an equity issuance, of another $19 million dollars during the quarter. So that's $350 million dollars of additional equity that was issued during the quarter. Offsetting that, we had expansion projects that totaled about $120 million dollars. That's largely the SACROC expansion; also, we finished up the North Texas expansion and we had some other expansion projects ongoing, including at our Liquids terminal assets. In addition to that, we generated from working capital, in the quarter, $14 million dollars. And so again, I will tell you it is preliminary; our cash flow statement will be available when we file our Q. But we generated, from working capital, it was a source for cash of $14 million dollars in the quarter.

That reconciliation takes you to the decline in debt, again, of $250 million dollars. So with $350 million of equity, $120 million dollars of expansion capital, reduced by the $15 million dollars that came from working capital, and you get a decline in debt of $250 million dollars. Year to date, debt has increased $820 million dollars. Again, we have issued equity here to date, including the KMR distributions, about $380 million dollars. Offsetting that, we have expansion capital of about $300 million dollars. That's a very important number, actually. We have had opportunities to invest in our assets, $300 million dollars worth of capital in the nine months of this year. Those are very high return projects; the SACROC project is a big part of it; the North Texas Natural Gas pipeline is a big part of it; the Liquids terminal expansions are a big part of it. And we are very happy to make those investments.

In addition, we've acquired assets for $900 million dollars. A large portion of that is Tejas. If you add together the $900 million dollars of acquisitions with the $300 million dollars of expansion capital, and you subtract the $380 million dollars of equity issued, you get $820 million dollars, which equals the debt increase for the year. One thing you should understand: we fund distributions through cash generated from our assets. We fund expansion projects and acquisitions through additional capital, both from the equity side and the debt side. One thing I'm going to reiterate again, because some people [weren't] paying attention to it: working capital for the quarter was a source of cash of $14 million dollars. Working capital for the nine months was a use of cash of $2.5 million dollars. Basically flat. Working capital for the nine months has been flat. That's it for KMP.

Let me go over KMI, so again, if you'll turn to that press release, and go to the financial pages. I'll start real quick on the first financials page, which is [indiscernible] statement, and just point out the earnings per share of 66 cents; that compares to a consensus estimate that went out after our announcement last week, to 64 cents prior to our announcement last week that we would exceed consensus. It was 63 cents. But again, 66 cents versus consensus of 64, and versus last year's 49 or 48, depending on whether you go before or after extraordinary item, shows about a 35 percent increase in earnings per share for the third quarter '02 over the third quarter '01. Additionally, for the nine months, we generated about $1.96. It's equivalent to all of the earnings per share that we generated in 2001. I'll remind you, it's only been three quarters for 2002.

We generated $1.96, compared to $1.37 a year ago, which is an increase of about 43 percent. The source of that growth, again, is on the second page. The first line is our equity and earnings in KMP. You'll see that line is up about 33 percent for the quarter, about 44 percent for the year. Let me remind all of you that KMI consolidates KMR, so the equity and earnings line of KMP includes 100 percent of the earnings recognized by the KMR shares. In the middle of the page, we've reconciled that to what the net effect is on KMI's income statements. So if you go to the middle section, you'll see the general partner interest of $72 million for the quarter, up 28 percent, the limited partner units; and then 100 percent of the limited partner I units for the KMR shares, which total the $101.5 equity and earnings above. From that, you need to deduct the pre-tax minority interest related to KMR, and these are the KMR shares that KMR actually does not own. That takes you to the pre-tax KMR earnings from investments in KMT of $88 million dollars compared to $61 million dollars a year ago, an increase of $27 million dollars or 44 percent. For the nine months, that's $248 million compared to $165 million at nine months a year ago; that's a 50 percent increase.

The other segments, NGPL is up nicely, about $5 million dollars for the quarter; about $10 million dollars year to date. NGPL's budget is $360 million dollars; it has generated year to date $268 million dollars, which is exactly 75 percent of its budget. It's on target to achieve that budget. Just to give you the budget numbers on the equity and earnings from KMP, that's $404 million dollars compared to the $285 million dollars that we've generated; that's about 71 percent. It is below 75 percent which would be the three-quarter mark; but distributions from KMP, or the impact of KMP on KMI, increases its quarter and so that's right where we expect it to be to hit our target.

The retail segment is up about $2 million dollars for the quarter; it's up about $5 million dollars for the year. The annual budget's about $60.5 million dollars. We've generated $38.5 year to date; it's about 64 percent. But this is a seasonal segment. Retail has a much larger fourth quarter than it does a second and a third quarter. And so again, we're on track to achieve budget there.

Power and other is down $14 million from a year ago, and for the nine months, it's down about $28 million dollars from a year ago. This segment is not performing where we expected it to be. We expect it to come in under budget. As Rich mentioned, we are not pursuing any more development opportunities, although that was not in the budget at the beginning of the year. We also no longer have earnings from Wattenberg, which is, again, valid in terms of a comparison to '01, because there were Wattenberg earnings there, but is not valid in terms of earnings from the budget. In terms of the difference from the budget, we have more deferred development fee into 2003 than we did, than we expected, when we put the budget together late last year.

That takes you to segment earnings [indiscernible] line of $205 million dollars for the quarter, compared to $181 million a year ago, a 13 percent increase. For the nine months, $615 million dollars compared to $520 million dollars, or an 18 percent increase. Very nice growth.

G&A expenses are basically flat for the quarter. They're up a little bit for the year; we had a slight increase in benefit costs, but we're pretty much tracking to our budget. Interest expense net is down significantly, $12 million dollars for the quarter; it's down $47 million dollars for the nine months compared to last year. It's also coming in below our budget; we budgeted for an increase in interest rate; we have not seen that.

The other line is basically flat; you have minority interest related to KMR increasing here, and you have earnings from TransColorado increasing as well; those two primarily offset each other. That gets you to income, before income taxes, an increase of about 35 percent for the quarter, 46 percent for the nine months. And then after income taxes and the extraordinary items, you have net income of $80 million dollars for the quarter, compared to 58 million dollars for 2001; that's an increase of 38 percent. And for the nine months, $241 million dollars compared to $153 million dollars, which is an increase of 58 percent of the net income line over last year.

One quick head's up I want to give you guys for the fourth quarter. When we reported the second quarter, we talked about the fact that our effective tax rate declined in the second quarter. We took it down to 39.5 percent. We're still in the process of evaluating what the recurring effective tax rate will be going forward. We will determine that in the fourth quarter; it is likely to be somewhere in between 39 percent and 39.5 percent. Once we've made that determination, we will reduce the carrying value of our deferred tax liabilities. That reduction will result in a gain, a one-time gain, that we'll recognize in the fourth quarter. We don't know the amount; we will quantify it once we've established what our going-forward effective tax rate will be.

In addition, in the fourth quarter, we are undertaking an effort to reevaluate the carrying value of some of our power investments, especially assets related to our development effort and our non-operated [plants]. We don't know what the result of that evaluation effort will, but if there is a change in carrying values that result from it, we will take that impact in the fourth quarter. We expect that the net effect of the gain from the change in taxes, which we will realize, and any impact from a change in value in our power assets, will have an insignificant impact in the fourth quarter and I want to note for you that both of them – the tax change that will happen and any change in the power investments – are non-recurring, non-cash items.

With that, I'll go back to the first page, and let me touch on a couple of things there. You'll see total revenues are down slightly. For the quarter; it's down about $40 million dollars or $41 million dollars for the nine months. Again, we would recommend that you do not focus much on revenues; the reason for the change here is three-fold. One, development fees are down from a year ago. Two, Wattenberg is no longer recognized; and three, retail revenues are commodity price sensitive.

Gas [purchases] and other cost of sales also fluctuate; O&N is basically flat. G&A we discussed; depreciation and amortization is flat; POPI is basically flat. That gets you to an operating income number of $85 million. That's down from $91 million a year ago, but again, the reasons for that decline are: Wattenberg is no longer included, and the power development fees have declined. Now, we would argue that the relevant number to look at, to see how KMI is performing, is the segment earning total that we went over on the prior page, as opposed to the operating income number, for the primary reason that the operating income number does not include the impact of Kinder Morgan Energy Partners. Same thing we've been saying for years. So, again, we would recommend that you look at that number, including the impact of Kinder Morgan Energy Partners, which shows up on the next line where you see the equity and earnings line.

You also have the equity and earnings of other equity investments; it is up significantly from a year ago, primarily as a result of strong performance at TransColorado. The interest expense, minority interest and other [net] we have discussed; the other net is primarily interest income at this point. And that takes you down to the net income line, which we also already covered. So why don't I move on to the balance sheet.

Two pages back, you'll find our preliminary balance sheet. Cash and cash equivalents [is up] at quarter end; that is a result of the financing activities that went on in the third quarter. At KMI, just like KMP, we [turned up] $750 million dollars worth of debt. Other current assets is down about $164 million dollars. Accounts receivable is the main portion of that, which declined from year end. Investment increased primarily as a result of the [KMR] offering. That increases that line, and also power investments, which relate to the two plants that came on line this year, Wrightsville and Jackson.

PP&E is basically flat; other assets have gone up, but primarily the market value [is flat] at about $120 million dollars and a couple of other one-time items that fall into that line.

Total assets is about $10.1 billion dollars, up from about $9.6 billion dollars at year end.

[Indiscernible] payable on current maturities, $700 million dollars. What that represents is a maturity that actually has already come in October of $200 million dollars. That's an issue that we've already retired. We paid it down with cash that you see above, and with some commercial paper that we drew. At the quarter end, we did not have any commercial paper outstanding. At this point in time, we do have a little bit of commercial paper outstanding; again, we [come down] to that commercial paper to pay off the $200 million dollar debt issue. Also, we have $500 million dollars of debt that's due in March, that shows up on that line.

Other current liabilities have declined because payables have declined. Other liabilities and deferred credits is basically flat. Long term debt has increased as a result of the debt issuance, and I'll give you a debt reconciliation in just a minute. The market value of interest rate [indiscernible] is broken out there. Capital trust securities are unchanged; minority interest has increased as a result of the KMR issuance, and stockholders' equity has increased as a result of net income less repurchases throughout the year.

Net debt, or total net debt in cash, is about $3.2 billion dollars, compared to about $3.0 billion dollars at the end of December. The debt to cap is essentially flat; about 47.5 percent compared to about 47.4 percent at the end of December. The change in debt balance has been, in the second quarter, a reduction of about $20 million dollars – for the third quarter, sorry. We generated cash in that quarter of $110 million dollars; that's net income of $80 million dollars plus DD&A of $26.4, plus deferred taxes of $23 million dollars, less sustaining cap ex for the quarter, of about $20 million dollars, gets us to the $110 we returned to equity holders in the form of dividends and share repurchase of about $20 million dollars. We had expansion projects of about $40 million dollars in the quarter, and we had another $30 million dollars resulting from a slight increase in working capital of $15 million dollars in the third quarter, and some timing around distributions. Again, that nets out to a $20 million dollar decrease in debt for the third quarter. Year to date debt has increased about $220 million dollars. We generated about $320 million dollars of cash; that's net income of $242 million dollars, plus DD&A of $78, plus deferred taxes of $52, less sustaining capital of $51, gets you to the $321 million dollars of cash that's been generated for the first three quarters of this year.

We have returned to equity holders $170 million dollars during the year; that's about $25 million in the form of dividends and about $145 million in the form of share repurchases. We have had expansion investments of about $250 million dollars and then we've had some one-time and timing items for $120 million dollars, which again, takes the $321 million dollars of cash generated and reconciles it to the $225 million dollar increase in debt.

Real quick for the change in working capital at KMI. As I mentioned, in the third quarter, working capital was a use of cash of about $15 million dollars. For the nine months year to date, working capital has been a source of cash, a source of cash, of about $11 million dollars at KMI.

And that is the balance sheet and the summary, and with that, I'll give it back to Rich.

Okay, thank you, Park. We'll take any questions that you might have. Darla, if you want to instruct them.

Thank you, sir. At this time, if you would like to ask a question, please press star, one. I will announce you prior to asking your question. To withdraw your question, you may press star, two. One moment, please. Mr. David Fleischer, please state your company name.

Goldman Sachs. I think after the last hour and ten minutes or so, it's awfully hard for anyone to buy into criticism, Inaccurate Innuendo No. 4, that you have inadequate disclosure. Let me make another proposal for that list, and get your response to this. One comment I get, one way or the other, when questioned [indiscernible], is what happens if these guys do a big acquisition, a great big acquisition, you know, big eyes out there, see some good opportunity, and then they can't finance it? And if you could kind of combine that question with, how do you think in terms of the size of acquisitions and the overall question of use of capital and the risk in use of capital?

That's a good question, David. Let me start by saying that, again, we will not make any acquisition unless it is very nicely [accretive], both at the KMP and KMI levels. We're looking at a lot of things. We may or may not find acquisitions that we want to make, but we won't make them unless they're [accretive] and unless we're sure that we can finance them. Talking about the financing – of course, now, remember, in general, we are generating about $140 million dollars of equity at KMP through the issuance of KMR stock dividends every quarter. It's like a massive drift program each year, so that finances internal expansion and perhaps some small acquisitions. But for bigger acquisitions, what we would do is one of two things. We would either have a bridge loan or we would partner with other equity players who would participate as investors in that project. And which would significantly reduce the amount of equity capital that we had to raise. Obviously, if we went in ourselves, without a partner and had a bridge loan, at the end of that bridge loan, we would have to do things; turn up the debt and go to the equity markets. So that's why I said earlier, we won't go to the equity markets, only on our terms and under our choices, and we believe any bridge loan that we could get would be for a significant period of time.

Let me say that we have signed instruments with third parties who are interested -- it's non-binding on both sides – who are interested in participating with us on pre-agreed transaction terms, in making any acquisition that will fit both our template and theirs. We've decided exactly what equity contributions would be made, how the profits would be shared, what the management fees would be in that particular instance. So I believe it's inaccurate and wrong to believe that in any major acquisition, we would be out there swinging from the fences by ourselves. Park?

One point that I'd make is the two options that Rich mentioned are not mutually exclusive. We could go and finance this with a bridge facility and lay private equity following that. And so we are absolutely exploring all of our opportunities to raise funds and with the capital markets the way they are today, and we are very comfortable that for the right acquisition, we have plenty of excess capital.

Great. And on a more specific question, on C02, where your volumes have moved up nicely with these strong oil prices; clearly it's in your interest to try and spend money faster. You didn't give us much guidance here, and I'm wondering what guidance you can give us in terms of what you're going to be able to do, to speed up the development, if that's possible to do by very much, and then secondly, where are you in terms of other prospects using your technology, your capabilities in other fields, in the [indiscernible]; is it a lot tougher to do with [fastbacks] revealed?

Very good question. Let me say first of all that obviously this is a very long-term play over the years, but we certainly are moving as quickly as we possibly can. We are moving in the compression that we need and in fact we would expect the production to ramp up fairly significantly in the next few months as it started [the last] bottleneck and that compression gets brought online. So we are moving as expeditiously as we can. But again, it's a very long-term play. We are very satisfied; we're now averaging over 14,000 barrels a day of production from SACROC; by the way, Park can correct me, I think it's about 90 percent hedged for the front 12 months and --

It's a 75 percent hedge at 12 to 18 months and a 15 percent hedge 18 to 24 months.

So they have large portions of it hedged. With your other question, we are looking very seriously at other opportunities to put our skill and expertise to use, and have zeroed in on a couple of opportunities that can't [indiscernible] yet, but we are in negotiations and they may or may not lead to a deal that would further increase the throughput on our C02 facilities and give us an opportunity to share our expertise with others in a way where we would get most of the upside from the development of the additional volumes that you get by [tertiated] recovery. And that's what this whole play is about. It's not about us becoming an oil company; it's simply about us – we have a tremendous C02 infrastructure and tremendous C02 expertise. And when we can get that extra 12 or 14 percent recovery of barrels [indiscernible] in place in a particular field, we're going to do that, and to the extent we can keep the lion's share of that, we're willing to make the equity investment that it takes to get that additional oil out of [indiscernible]. So it's a very good growth opportunity for us, exceeding our expectations at this point in time; we think there are going to be additional opportunities there.

Do you have those hedge prices handy?

I'm sure Park does.

[Indiscernible].

[Indiscernible] Chief Financial Officer, too, he can tell you.

They range from $22 to $24, primarily, and some even a little higher than that. But predominately $22 to $24.

Thank you.

Our next question comes from [Yves Siegel].

Two questions. One is just a follow-up with David. When would you expect that C02 would peak? Are we looking at three years, five years down the road? I know it's hard to tell right now.

On the SACROC unit, 2008 to 2010 range, so several years in the future.

And then, Mr. Morgan – Mike – [general laughter].

Go ahead, Yves.

I've seen you both in the same room at the same time. In terms of the contract renegotiations or negotiations that you've had so much success on, are they pretty much on the same economic terms, or have you been able to see some upside?

There have been ins and outs, depending on the contract, but I would say they're on slightly better economic terms, not a [step function] up or anything of that nature. Roughly the same; slight improvement.

And then Park, I apologize if you did mention it, but how much of the debt is floating, and has there been any change in the thought process?

There hasn't. As has been our policy in the past, and continues to be our policy, about 50 percent of our debt is floating at both KMI and KMP. That's true currently and we expect that to be true going forward.

I’ll try not to ask it every quarter, but thank you. [General laughter.]

Next question.

Our next question comes from Chip [Rilley]. You may ask your question.

There's just this continuing focus on the 40 percent debt to total capital level. And can you just talk about the trade-offs of getting there to the 40 percent debt to capital before looking at another acquisition? How important is it -- I mean, as a long-term growth goal -- to the rating and to your plans? And can you discuss at what places of the equity would it make sense to try and get there a little more proactively? Just to hit the issue head-on.

Park?

Yes, Chip, the truth is, we don't expect to get to 40 percent debt to cap before we do another significant acquisition or significantly expansion project, and this is consistent with what we have told the rating agencies. We expect that following, or in anticipation of, a significant acquisition or a significant expansion project, that we would issue equity and in that process, we would intend to get closer to the 40 percent. The truth is, our assets can support, easily, a 50 percent debt to cap level. They're very [sustainable] assets; they generate very strong cash flows; our cash flow coverage ratios are incredibly strong. That being said, we target 40 percent because we'd really like to preserve our flexibility in pursuing whatever opportunities happen to come along. And that is still our target for maximizing our flexibility. Again, we're very comfortable at the 50 percent range; 40 percent is our target; we expect that in conjunction with some investments – an acquisition or expansion project – then we will issue more equity, and we will approach that target.

Do you have any sensitivity on where it makes sense to not issue equity for an acquisition, as far as the underlying -- I mean, your record high spread to the Treasuries and stuff here.

Well, I think that's a function of the acquisition itself. And obviously, as I said at the beginning, Chip, we're not going to do any acquisition unless it is not just barely accretive but nicely accretive to both unit holders and to KMI, and that's really a function of your cost and capital versus your [indiscernible] cash flow that you're generating from the assets you're acquiring. And you know, again, I just -- we're obviously getting absolutely no credit in either the stock prices for acquisitions – hell, we're not even getting credit for internal growth. But again, I think you look at this a little differently when you have the kind of internal growth prospects that Mike was detailing to you. We have a lot of opportunities to do significant internal growth, both just from top line growth in our Products pipeline, our C02 business, and then from the opportunities to expend additional capital in C02 and several other areas, and on the Natural Gas side, and so, you know, we're very confident we can maintain this very nice growth portfolio without ever going to the equity market. And what that drives you to do, is just be damn careful about what you do, as we've always been, but be very, very careful here that you don't go out unless you're absolutely certain that it's very accretive and that you have your financing locked and loaded.

I think Rich mentioned several times accretion – you should understand that when we say accretion, we're talking about distributable cash flow of accretion. So increase in the distribution per unit, which is directly a function of the return on the acquisition or the project, and your cost to capital. I mean, they are directly tied together. And when he talks about the acquisition, or the expansion opportunity, has to have significant accretion, that means it has to earn its cents of [indiscernible] capital.

Okay, and it's accretion to the unit holder, not to distributable cash flow before the GP's [indiscernible].

Absolutely. To the individual unit, because otherwise, you're just drinking your own whiskey or smoking your own dope here, and you're not really getting the bottom line, which is, of course, in any major acquisition, if you're putting out more equity, you've got to count the costs of servicing that additional equity, just like you have to count the cost of servicing the additional debts you take on. So absolutely, Chip, it's on a per-unit basis. And also, from an internal growth standpoint, as I was just talking about, we're talking about 8 to 10 percent – we've been saying this for a couple of years now – 8 to 10 percent internal growth per unit without making additional acquisitions at all. So both of those are on a per-unit distribution, not an overall [indiscernible] distribution.

And you know – the best quote that you guys neglected to talk about this morning was the, "I'm sitting around waiting to see Rich Kinder put up a track record." But that was a little over my head, because you guys have met your goals. Anyway, congratulations.

Our next question comes from Paul [Zanaker]. You may ask you question.

Good afternoon. I wanted to step back a bit and talk about the bank lines. I know you said you didn't have any violations. Did you need any waivers on the lines, for the first question?

Yes, back in February, we did obtain a temporary adjustment to our covenant in our credit facilities at KMP as a result of the Tejas acquisition.

Okay. And secondly, the press release on the KMP bank line extension, I guess which came out this morning or late yesterday, you were able to raise your debt EBIDTA measure from four times to five times, and it looks like you're under it right now. I'm just wondering, was there a set-down provision at the banks that you didn't mention in that release? Are the banks now giving you looser reins as far as where you want to manage your leverages in terms of debt EBIDTA?

There is no set-down provision there. That was put in place at our request because we wanted the flexibility not to have to go back to the banks to request a waiver. We are currently below four times debt to EBIDTA. And that's where we expect to be on a normal basis. We expect that in the future, we will make acquisitions. When we make acquisitions, we may go slightly above four times, like we did as a result of the Tejas acquisition, temporarily, until we issue equity. Because of that, we changed the covenant, and the banks agreed to this, to five times EBIDTA as the debt limit. Again, they agreed to that; we just put that change into the new facility.

Had the four times limited been what you traditionally had with the banks?

Yes, that is what we've had for a number of years.

Thank you.

Our next question comes from [Ross Paine]. You may ask you question.

Wanted to just talk about acquisitions [indiscernible]. Given where your cost of capital is right now, can you give us an indication of what kind of multiples you can purchase, say in Natural Gas pipeline that's out there; what kind of multiple you can pay and have it [indiscernible].

Well, I think you can work the numbers. I don't think we're going to talk about what multiples we will and won't pay for an asset acquisition, but it's not a hard model to run.

Yes, I mean, [indiscernible] – if the question is what we can pay and still have it be accretive, that's very different than what we will pay. And what we can pay and have it be accretive is significantly higher than what we will pay.

And you look at the cost of capital; you can look at what our [debt] costs are and what our equity costs are, and have [indiscernible] on a pre-tax basis, and figure out our average cost to capital. And then obviously, above that, related to Park's point is that it obviously depends on the quality of the asset, the size of the asset, how strategic it is and what growth opportunities we feel are inherent. And let me say another thing, that we may be disadvantaged, or we may be too conservative, because we're just old-time pipeline operators. But for example, we [look] not just in multiples of EBIDTA, we look at multiples of first-year [indiscernible], as we have on all our acquisitions for the last five and a half years. And but that's a significant difference. For example, you may say, well, the EBIDTA on one pipeline is $100 million dollars and the EBIDTA on another pipeline is $100 million dollars, but the sustaining cap ex – what you have to take out to get to your distributable cash flow – may be radically different. You may have one pipeline where it takes $20 million dollars a year of sustaining cap ex, so your real cash flow that you ought to base your acquisition model on, is $80 million. You may have another pipeline where it's $40 million dollars a year of sustaining cap ex, in which case it's $60 million. But these – some people who are just thinking in EBIDTA terms would have you believe that both of those are worth the same amount. They may be in somebody's twisted arithmetic, but not in ours. And so we would value that differently. We would look at one cash flow at $80 million and one at $60 million. And we'd look at the growth portfolio or the growth characteristics of each pipeline. But clearly, you've got to clear that cost to capital, and we would think, clear it by a pretty significantly amount.

That's very clear; I appreciate that. Speaking of maintenance capital expenditures, how did you guys come to that specific number, and also [indiscernible] in talking about maintenance capital expenditure, touch on maybe your safety record and how that would [indiscernible].

The maintenance capital number is a bottom-up number. It's generated by operations people who are managing these pipes, and who are assessing what is required to keep the assets performing at the level that they're currently performing. And we have a very detailed budget that goes out [indiscernible] the next year always and they're looking out many years past that and scheduling their maintenance items again so that they can stay on top of the maintenance that's required for the assets. And we're very proactive in that sense. Our approach is to avoid incidents rather than try to recover them; and I think that's led to a very enviable record in terms of safety and lack of incidents on all of the assets that we operate.

Great. And one final question. Can you talk about what you expect in terms of tariff increases? [Indiscernible] inflation minus one percent? What are your expectations?

You're talking about tariff increases on the [indiscernible] pipelines?

That is correct.

As you recall, those go into effect July 1st of each year, based on the inflation escalator less 1 percent for the previous calendar year. So for example, going back a bit, the inflation increase was put into effect on July 1st of '01 was about 2 percent; on July 1st of '02, that they just implemented a few months ago, it was basically 1 percent. We won't know until the end of this year what it will be for July 1st of '03, but it'll probably be 1 percent or thereabouts. And so that's the range. So 2 percent was probably a little high. One percent is probably more normal. But it's varied over the years. It's a strict formula that's mandated by the FERC, and that formula was just renewed for a five-year period; I think last year, is that right, Tom? Last year.

Our next question comes from Eric [Olphin]. You may ask your question.

I just have a question about stock buy-backs in the quarter. You may have mentioned earlier and I may have missed it. Did you buy back any stock in the quarter?

[The partners bought] back a little, about $5 million dollars worth.

Just out of curiosity, you were talking about your strong balance sheet – why are you buying back stock? Why don't you try to pay down some debt instead?

We are. We're doing both. A share repurchase [the same debt pay-down]. We expect that we'll generate about $400 million dollars a year in free [cash flow] and we will send that, half, to equity holders more or less, and half towards debt reduction.

The [difference] this year was in large part due to the expansion projects that Park detailed earlier.

Also on your pension – I know you made a pension contribution earlier this year. Are you looking at taking down your assumed rate of return on the pension?

That's an issue for the fiduciary committee and I assume that they will review that. At this point, I don't know what their intention is.

Is there any kind of an additional hit that's going to come for the rest of the year?

If there was any change there, it would have minimal reduction; it would have no impact in '02 we would budget any change in '03.

And we are modestly over-funded in our pension right now, even after the [indiscernible] results that all pension funds have exhibited over the past couple of years. We're still modestly over-funded.

Our next question comes from David Pincus. You may ask your question.

I'm with [Indiscernible] Capital Advisors. First of all, I wanted to commend you on doing a good job of laying out the internal growth in a painstaking way so that people can see it. But I wanted to get your thoughts, number one, on the trading of KMP and KMR and the differential, you know, the gap that's developed between those. And I realize, you know, there was a I-share offering, but what can you do about it? Because it does seem like it is going to hurt your cost to capital if it does continue, since the KMR shares would be the ones that would be beneficial to issue.

The thing we're going to do is when the blackout period's over Monday morning, I'm going to personally buy some KMR shares, I can tell you that. So you can look for that filing. [Indiscernible] have much impact, but it's a hell of a good bargain.

One important thing, I think, for folks to understand is that KMR and KMP represent the same economic interest in the partnership and the same legal claim, effectively, on the assets of the partnership. And the fact that they're trading apart is really, on any kind of rational theory, a very strange situation. And again, the key issue there is the distribution, the 61 cents that the KMR holders will receive is paid with reference to the average KMR price. And so that means that you're really getting 61 cents of value; you have the same economic claim on the assets, and you should be trading at roughly the same yield. In fact, when you really break it down, you look at the tax efficiency of the two securities and KMR is slightly more tax efficient. That being said, the spread has been a little bit wider; recently - you know, only be guessing at this point, but you'd have two dynamics out there; one is our own KMR offering, where the spread widened as we went through that process. The other is the recent [end-bridge] offering where the spread was widened and in fact the deal was priced with reference to our spread, so we've kind of wondered what those dynamics have done to that trading. But as Rich said, it certainly – it's a strange situation and certainly seems like an interesting opportunity.

I'm just wondering, you know; you have to do more to get institutions, I guess, in the KMR shares or something. Obviously, you didn't want to have an exchangeability feature because of the negative that had with the credit rating agency. But you know, it does seem to be a problem, and I'm hoping you have some kind of solution for it. I'm also wondering, could you use the KMI excess cash flow to buy KMR or KMP shares instead of buying back shares of KMI? Is there any reason you couldn't do that? And if you could do it, would you do it?

There is no good reason post the elimination of the Exchange, why we couldn't do that. We couldn't while we were in the Exchange mechanism, for a bunch of complicated SEC-related reasons. But we no longer have matching trades down, so we could do a buying of that, and that's something that the management team and the board will consider on a going-forward basis.

Wouldn't you get sort of more bang for the buck if you did that, at this point? I mean, obviously, the KMR shares are not that Liquid anyway. But wouldn't you get more bang for the buck if you did that? As opposed to buying KMR shares back?

Well, it's something we will continue to look at, and again, we've been in a blackout period for several weeks. So we have been out of the market totally on all of our stocks in that period of time. So we really haven't had any opportunity to react, even if we'd wanted to, on that type of thing.

Our next question comes from Carol Coale. You may ask your question.

Hi, good afternoon. You raised something interesting in the course of your call today that I just wanted to ask you about. You said that you bulk terminal volume had decline because of the Louisiana facility that was no longer being served. And that made me want to ask you, was that because of any credit issues with the operator of that facility? And then along those lines, are you experiencing any change in your volume given that the operators of a lot of these [hard] facilities, I would think, are not only suffering capital crisis, credit crises, and do you forecast any impact on your volumes going forward from the disasters that are happening around you?

Let me address the bulk terminal issue first. And then a couple of our terminals, again, all we do are really fee for service – provide the service of operating the facility, where we make the very low margin, effectively providing the people to operate the terminal. And that was the reference to kind of what changed there; it was really a pretty minor issue. And then I'm sorry – to hit the second question – it was more generally on credit?

In general, since you are volume-driven and that has affected your performance, and that was a driver in the quarter, the operators of plants and pipeline systems and refineries – all of these companies have suffered not only loss of equity capital but also just are under credit deterioration and financial deterioration.

I think you've got to go by business unit, Carol. The key thing there is obviously the Product pipelines business, you know, 85 percent of the revenues in the Products pipeline business are with major oil companies and a few major refineries on the West Coast in particular. Very good credit situation there with no issues. When you look at the gas pipeline group, the bulk of our revenues are coming from local distribution companies; some producing contracts.

Obviously, we have some exposure to a few of the merchant companies and the gas pipeline segment. We have got a number of those folks on pre-pay; we manage that exposure every week and think, again, it's a pretty minimal exposure. I remind you, when Enron went down, very quickly – a huge player, a huge merchant – between the two companies, we took an $11 or $12 million dollar hit, Park? Very de minims impact, and most of what would be at risk would be two or three months worth of receivables; you know, as they kind of spiral into bankruptcy, you sometimes can't keep them current. But we are very on top of the working capital. Again, here, too, you're talking about a lot of interaction with other major oil companies. The bulk terminals business is widely diversified; you've got everybody from TDA to other electric utilities to Dupont, you know, Exxon, other big industrial type customers.

So you know, when you look across the broad portfolio of the businesses, we don't have a lot of credit concerns. Obviously, as we've referred to, I guess the other area to talk about would be power. And again, we have protected ourselves constantly on power by taking preferred interests and doing tolling contracts and things of that nature, but that's something we need to keep our eye on and keep looking at.

And just quickly, a second question. Has the closing of the West Coast ports had any relationship or effect on your Products pipeline?

No, this has not had any impact. It doesn't deal with our Products pipelines at all.

It really just deals with the container ships, primarily, and some of the bulk facilities.

[Indiscernible] bulk facilities that could be affected to the tune of a few hundred thousand dollars if there were a work stoppage. So far, in fact, we just reported [indiscernible] today, the bulk terminals operation has had no loss of income from the slowdown that happened earlier in the month.

Our next question comes from Steve [Orego].

Two questions. Number one, at the end you raised guidance for the year on KMP to $1.85, but the consensus is for 45 cents for the fourth quarter, which would bring me to $1.91. I was just wondering if you could reconcile that for me.

We said at least $1.85.

And then also, I noticed – and I'm happy to hear this, if this is the case – but it looks like you guys are kind of increasing your coverage ratio on the dividends. Is that seasonal, Park, or is that just a change in management thinking? We used to run at about 1.01 or 1.02 and we're running a little bit higher than that, in terms of coverage?

That really just fluctuates. I wouldn't expect a significant change there. I would expect us to be in the 1.03, 1.04, 1.05 range consistently.

Our next question comes from Bob Peck. You may ask your question.

Thank you for going over in more detail on the internal growth, which was helpful. I'm wondering if in some way you can separate the growth that comes naturally from the existing assets versus the growth that would be coming from the expansion [indiscernible].

That's difficult to do because, obviously, within a business unit we can very clearly delineate that we didn't have any acquisitions in that unit during a year or quarter, but we may have had some expansions and some growth. On the Liquids Terminals side, for example, we spent some money to build new facilities, both primarily in Houston and New York Harbor -- we'd increased our total package by about 5 percent year to year – but the utilization percentage has also gone up by two percent points, so it's kind of a combination.

Bob, the other place we do that is at our annual analysts conference. We have a lot of material that goes through on an asset by asset basis, but it's just not practical to do that every quarter.

Probably the closest thing to same store sales is the Products pipeline group, and again, there we had a growth of about $11 million dollars in the quarter, and $1 million dollars of it was from that additional interest in Cochin that we bought. But again, and we've given guidance that we think overall will have about 4 percent top line growth, and had taken through, and that's on our website, having to model that down, if it is truly incremental growth [indiscernible] the bottom line.

And in another way, think about it. I mean, expansion projects generally are very closely related to assets that we already own. And so – and not only [is it difficult] to do, it's not even overly meaningful to do. You know, the Trailblazer expansion was a pipeline that we already owned, and we just added compression on that pipeline to increase capacity. And we got very nice growth as a result of that. You know, it was an expansion project, but I mean, I think that has to be considered a [indiscernible] for internal growth.

Yeah, that's where you go segment by segment, look at returns on capital employed, and those type of metrics help on that area.

Right. And just on that, can you just quickly review the – you mentioned in the call, and this referred to the return on capital in expansion projects being quite attractive. Can you help us in just reviewing what you're seeing there?

Yes, and it varies project to project. But, you know, on average, we're seeing returns on a leveraged basis that are up in the low 20 percent range, down to the mid teens range. Park, go ahead.

Just on some of the projects that we have completed in 2002 -- this includes Trailblazer, North Texas pipeline, and a number of the Liquids Terminals project – you have an IRR that ranges from the upper teens to the mid-20's to well in excess of that. And so that is a leveraged return, but again, most of the returns are mid-20's or higher, and some are well in excess of mid-20's.

And that is the return to the unit holder after interest and GP take and everything else?

This is just the [IRR] on the project, and so --

[Indiscernible] 60 percent equity, 40 percent debt, so we'd run all our numbers at KMP, and that's the return to the 60 percent equity component.

Our next question comes from Chris [Melendez]. You may ask you question.

I'm from [UBF Principal Finance]. I had a couple of quick questions. You talked about before you do a major acquisition, you have the financing set up and make sure that it's accretive. How do you interact with the rating agencies if that's going to occur? Do you run by these things before you take action?

Again, [indiscernible]. We have conversations with the rating agencies before those deals are announced.

Is it safe to assume that right now, you guys are sort of at your capacity for ability to do something large with regard to the rating agencies? I guess what I'm trying to say is, do you feel like you're up against your capacity with their flexibility? I know that you have the Liquidity and access to the market and all that other stuff, but in terms of what they think of the overall credit, where do you think you guys stand?

I think we have additional capacity, and I think for the right transaction, for the right price, the rating agencies understand our business; they understand the assets that we own and operate; they understand the returns that we generate; they understand our approach to financing these things, and we would go to them and talk to them about what our intentions are. And I don't think we are at capacity at all.

And I think we've established the track record – again, we've done over thirty transactions in the last five and a half years, for $6.2 billion; we've issued about $3.5 billion of equity as we've gone, and every time, we go and tell them, here's our financing plan; here's how we're going to raise equity and debt capital. You know, large transactions like Tejas, they'll put us on [indiscernible] outlook, and then the successful financing of those things, and then when we do it, the rating gets resolved. But I think that - you know, for a billion dollar deal, I expect we can do that exact same process. They'd be likely to put us on an outlook; they want to make sure that we've got our long-term financing in place. But hopefully they've established enough of a track record on, when we say we're going to issue equity, we do it, even in horrible markets like the end of July was, when we did our last equity offering, and I expect that's bought us some credibility with the agencies.

Yeah, and I agree with all that. One last statement is that its just a different environment in the utility markets than it was even six months or three months ago, and the rating agencies are much more hostile, and are giving credit much less flexibility and are looking over a much shorter period of time, and I just want to make sure that that's taken into kind of how you evaluate these transactions going forward.

They do, and that is – we are taking that into account, and again, we would not do an [indiscernible], obviously, without talking it through with the rating agencies first.

And I mean, reflect on the different companies that are having difficulties and that have run into trouble, and think about the kinds of businesses that they're in, and what has led to their trouble. And think about the kinds of businesses that we're in. And do those businesses have any of those same issues? I mean, the truth is no, and it's the kind of thing that we're focused on, and that's the kind of [indiscernible] that we expect to do in the future.

That's very helpful. I appreciate all the time.

Our next question comes from Loren [Mark]. You may ask your question.

Most of my questions have been answered already, but I'm just curious if you could give us some insight into the $27.6 million dollar increase in the Natural Gas pipeline area. Can you break that down a little bit between the Tejas part of it and the expansion on the Trailblazer, to the best you can?

The great bulk of it is Tejas; you know – I don't have it front of me, but around 20.

One of the difficulties that we had at this time – we talked about it last quarter – is we operate Tejas and [Kenny Morgan, Texas] as a single entity. And so differentiating between Tejas and KMPT at this point is difficult and will become increasingly more difficult. But that being said, I think the number that Mike mentioned, the $20 million dollars, is more or less right.

Our next question comes from Yves Siegel. You may ask your question.

In terms of acquisitions, just to beat a dead horse, you know, some of the other companies have been able to issue stock to the company they were buying it from. And I realize some of the assets that are out there right now are from companies that really do need the cash. You had mentioned earlier, in the commentary, that you are looking at private equity participants. But anyway, to make a long question even longer, are there sellers out there that are interested in taking back stock?

There are sellers – in fact, one of the ones we're looking at right now – and again, we don't have the horse in the corral – they are interested in taking [oil] units. But again, it depends what type of asset's being sold and who the seller is. We find generally that in our terminals area is where you have private ownership of people who are sophisticated investors and often interested in taking units because of the favorable tax consequences. And we see less of that, frankly, in these [indiscernible] pipeline sales that are out there – the Enrons and others who are selling pipeline assets. Most of these entities, for whatever reasons, are very focused on cash and not as much on taking back equity. But there are some circumstances where we think we can place units with the sellers, and that would be very good if we can do it.

Are they being indifferent as to KMT or KMR?

Depends on the seller, I think. Again, some want cash and some are happy to accumulate the units.

Our next question comes from Steve [Ballentine]. You may ask your question.

I just wanted to follow up on your comment about this private equity opportunity in terms of funding a deal and just get a sense of, is that just to reduce the size of the equity need that you would have by sharing a deal with somebody? Or is it sort of a structured way for you to maintain the economics of a larger deal than you might otherwise want to finance?

Yeah, [indiscernible] what it is, it's just another source of equity for us. And in contrast, what we've discussed with one party in particular and with some others is a joint venture that would be in place for a number of years, and generally, [indiscernible], equity players are interested in [indiscernible] after a few years, and earning their [indiscernible] level of return. And in the structure that we've discussed, it enables them to buy them out after a period of time, with units, or cash, [at own] option. But we can use our own equity to buy them out and own 100 percent of whatever assets we may jointly purchase. It also allows for management fees on our side, as we would be the ones managing the assets. It is a very attractive structure; it is just one alternative to [indiscernible] public equity.

But typically, private equity guys would prefer 30 percentish kind of returns? I mean, can you give that up and still make it look economic?

On these kinds of assets, the acceptable returns are lower. They're very stable assets and they recognize that.

And then you're also talking about, presumably, acquisition multiples that are low enough to support this in this environment.

Yes, I mean, we had run numbers on acquisitions, and it works.

Our last question comes from Chip [Rilley]. You may ask your question.

It seems like the same pressures that are sitting on you guys and sitting on the buyers and coming from the rating agencies are the same pressures that have made a lot of the companies, the Enron's and everybody else – well, Enron's different – but other players – want to sell things and shore up their own balance sheet. So I guess what would give I that situation is price on the assets. Do you see that? Or are you seeing new players come into the market, like MidAmerican or somebody like that, keeping the prices up or higher than where they normally would be.

You know, it seems a very sort of asset to asset. We certainly have seen some new players come in. MidAmerican is one. On the other hand, we're seeing there are some of the assets that haven't been quite so front burner, I guess, on the front burner, not as widely known or [indiscernible]. There does seem to be some reduction in price there. I think there's not been as much reduction in multiples as you would expect, given the entry of some new players. But I think this thing's got a long way to play out. There's an awful lot out there right now that's just in the bid process and we'll see who's got an appetite for how much, and I think that will really determine how much is paid. And again, we're being very careful on this. If anything, we will err on the side of being conservative. We have a very, very good company here and we're simply not going to put this at risk by making any kind of wild stretch to buy an asset. And if we can get it on terms that are acceptable to us and very nicely accretive on a per-unit basis to KMP distributions and to earnings per share at KMI, we'll do it. If not, guys, we are perfectly happy with the model we've got right now, and the model that we're showing internally for internal growth in '03 and beyond.

At this time, we have no further questions.

Thank you very much. We appreciate your patience for the last two hours. Have a good evening.