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 Incorporated. If you have any objections, you may disconnect at this time. I would like to introduce your host of today's call Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, 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 on 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 [partnership] in America. That trades on the exchange under the moniker of 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 will 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 reported 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 when we said we expect it to be 63 cents, I think consensus of 64 cents right now. We're around 66 cents that's little over $80 million versus about $58 million a year ago in the third quarter. On -- 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 that KMI is what we've been saying it's a different kind of energy company. We have consistently grown our earnings over the last three years in a variety of market conditions. I'll remind any newcomers in 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 the KMI's interest in KMP. That interest contributed about 88 million in pre-tax earnings to KMI. That was up 44 percent from the $61 million in the same period a year ago. I would remind you that as KMP's cash flow grows, KMI 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 reported third quarter segment earnings of about 89 million, up little over $5 million from the same segment a year ago. Year to date, now through the first nine months NGPL is up 4 percent, right inline with our budget expectations and what we've communicated to you previously. Mike will discuss in more detail some important contract renewals and other events that have occurred in 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 -- or 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 $6 million from the third quarter of 2001. Through the first nine months of this year we're up 15 percent there. I think the increase primarily reflects some customer growth from 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 system -- irrigation season in Nebraska. 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; that's down from 21 million in the third quarter of 2001. This was expected. We previously announced this reduction. And this reflects 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 lower power plant development fees, which we have previously communicated to you. In addition, our 50 percent interest in TransColorado produced $4.8 million in equity earnings in 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 the pipes going to California. Still on KMI, let me talk a little bit about future expectation. We expect to end the full year of 2002 with an earnings per share growth of more than 35 percent, 2002 versus '01. We expect 2002 earnings for the 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 [the deal at] our analyst conference in January of '02. As we look at '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 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 on an annual run rate of $2.50 at -- in the fourth quarter again consistent with what we've talked about. This distribution that we are making is an 11 percent increase over the third quarter 2001 distribution, [we'll] be distributing 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 produce a strong and reliable 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 are biased that one more time these results demonstrate that our strategy of owning and operating assets that have minimal exposures to commodity price variations due to a successful strategy in various types 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 did, in terms of earnings before DD&A for each of these segments. The products pipeline segment, our largest segment, had an 11 percent increase in third quarter earnings before DD&A to about 109 million that compares to 98 million during the same period a year ago. All but $1 million of that was internal growth. So we had a little over 10 million of internal growth that was largely driven by strong gasoline volumes. Gasoline volumes, as we show on the press release, were up 4.2 percent in the quarter and 5.9 percent for the first nine months of this year. We continue to see high demand. That's contrasts to a national average that's running between 1.7 and 2 percent depending on which survey you're looking at. It 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 6 of the 10 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 products 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 continued grievance in jet fuel at the beginning of the year, the products pipeline are experiencing an outstanding year; and we look for continued good results in that segment.

Turning to jet fuel volumes, we've broken all this out separately for you; and Park 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 levels. So we started out the year with the decline a little under 15 percent. In the second quarter, it was a little under 10 percent. 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 systems. And we are now up -- we were up 5 percent year to date in revenues on our products pipeline system. And you know, we've talked, you know, historically about 3 to 4 percent as an annual target for ongoing growth. Our second segment at KMP is our natural gas pipelines. There we had earnings of $83 million before DD&A. 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 that our recently expanded Trailblazer pipeline systems that runs out of the Rockies. Our third segment is our CO2 pipelines. There we delivered third quarter earnings before DD&A of $34 million. That was up 29 percent from the 26 million in the same period in '01. Really a double-barreled shotgun here. Pipeline delivery volumes of CO2 increased by 17 percent in this segment. Oil production in the SACROC Unit and the Permian Basin increased by approximately 50 percent compared to the third quarter of the year ago. It appears to us that our strategy of investing in additional development at SACROC, which we announced earlier this year, is beginning to pay off; and we're now more fully utilizing all of our CO2 pipelines to meet the growing demand at SACROC and elsewhere in the Permian Basin. As many of you know, SACROC is one of the largest and oldest oil fields in the US, which uses CO2 projection technology and it continues to perform better than we originally expected. In the third quarter alone it produced about 1.2 million 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 in part we will go into 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 peak and we will not experience valley.

Our Terminal segment, the fourth segment at KMP, reported a 23 percent increase in third quarter earnings before DD&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 at the liquids terminals and by 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, fourth quarter of 2002, as we previously indicated. And we expect our cash distributions per unit to grow 8 to 10 percent '03 versus '02 through 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 and what this management sees as the strengths and weaknesses of the Kinder Morgan companies. First of all from a strength standpoint, I think we have a great collection of midstream energy assets. They are best set of assets I have 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 when we have, of course, no marketing and trading; 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 Nelly times, we have a very solid balance sheet. Let me just indicate one more time that during this third quarter, we've done these things to sure up our balance sheet. We sold about $330 million of KMR equity. We turned up about $1.5 billion 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 in 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 products pipeline system. And then finally, I think we have a management team that has a track record of creating value for its shareholders.

I have said before that if anybody just lists the strengths of the company like that, it doesn't talk about risks or weaknesses of the company. You would not to be very comfortable with the management team, because that management team, except for the CEO, who is either lying to you, or he 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 is 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 road map to look at the Kinder Morgan will perform.

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 activities for the balance of '02 or '03. On a going forward basis, we simply look to operate the plants that we already have, that have been completed through [indiscernible] fundings 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 nothing that did not turn out in accordance with our original expectations. A secondary risk that I think you should pay attention to is the regulatory risk, and I referred to this before. I think it's safe to say that any time 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 products 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 DC Circuit. But we could get an adverse ruling on that point along the way. We are 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 the KMP unit holders to be reduced in any way whatsoever and 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 we'll be able to continue to manage those regulatory risks. The third risk, which I guess was pointed out in some of the 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 a simple form, this is the theory that 5.5 year even though we've made over $6 billion of acquisitions in the past 5 1/2 years, that if KMP cannot acquire additional assets, the growth will come to a grinding and sudden stop. I can think of stronger words, but let me just call that hogwash. Now, first of all, let me say that we think we can and will acquire additional assets on good terms, and we will make additional acquisitions. But that said, I want a detailed and [genuine] impact. And I guess we just haven't done a good enough job at doing this, that we have substantial internal growth at KMP, and therefore, at KMI without making any additional acquisitions. Now 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 sales. We can now do that on the products pipeline side. We can now do that on the liquids terminal 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 had several smaller discrete acquisitions over the last year. But lets just look at the results of this quarter through the lens of whether or not we are producing internal growth. Lets take each business segment.

At the products pipeline, as I said, we were up 11 percent or $10.5 million. A massive total of $1 million of that came from the additional acquisition of 10 percent of Cochin. It took our percentage of ownership of Cochin up by 10 percent. All the rest of it came from internal growth. We had no other acquisitions in that section. And again, primarily driven by strong growth in gasoline demand across all of our products pipeline segment. Turning to the CO2 segment. There, as I said, we had 29 percent quarter-to-quarter growth without any acquisitions. So about $8 million of internal growth in this quarter alone, all driven by internal expansion opportunities. We said in liquid 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, NGPL's growth was derived by good contract renewals, by adding additional electric power load, and by internal expansion projects that came online in the second and third quarters of this year; no external acquisitions. In fact, if you look at it very carefully -- and I would encourage you to do so -- the only statement of all our statements 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 the company [indiscernible]. So I think what you saw in this past quarter is a glimpse of the future, where we were confident that the internal pipeline growth and good expansion opportunities, we had in our [business will] roll out a 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 we should take comfort, I think, from the results we reported today that those are reasonable assumptions on a going forward basis. Now, let me conclude my part of the call with a few thoughts. First of all, while we're obviously not pleased with the price or 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 the 16 times multiple for the S&P 500. And it's up to you to decide whether KMP is it's paying about 7.5 percent tax deferred yield, which is more than 350 basis points over 10-year treasuries. We can't control what you think or we can't trading at a correct level when control what you think or what the -- how the market will react to the pricing. But the second point -- and I think it's even more important -- is this: This managing team is going to focus on running 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 the 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 really going to cover a couple of areas. Again, focusing on internal growth and the successes we've had in the most recent quarter. When you look at the internal growth at both companies are really driven by several things; first of all, volumes, particularly on the product pipelines -- Rich, spend some time going through that. But more than volumes for us 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 little over 40 percent of KMI's cash flow, but these contracts represent about 45 percent of the long-haul 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, Nicor our largest customer was a huge part of that. We rolled them over in the third quarter along with NIPSCO, MidAmerican, WE Energies and Peoples. And let me just discuss -- I think this is so critical and this has been an issue, you may remember, how -- going all the way back to the 99 merger with [KN 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. I'll just take a minute and go through that. Our big no-notice storage service -- back in January at our analyst presentation, you'll remember, we had about 2.5 Bcf that was expiring in '02. We have sold all that at an average term of a little less than five years. Looking ahead to '03, at the start of the year, we already had -- we had 35.9 Bcf to sell. We have already sold all but 1 Bcf 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 field area storage. At the start of '02, we had 46 Bcf to sell. We have sold all that for an average of almost six years. Looking to '03 -- at the start of '02, we had 83 Bcf to sell. We have already sold 51 Bcf at almost four-year average term. That's all on the storage side. If you look at the long-haul transportation, we had at the beginning of this year -- and, again, I'll spent some time on this with you about our Bcf expiring -- we have re-contracted 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 Bcf expiring in '03. We have already worked the '03 down to less than 900 and -- I'm sorry, we've re-contracted 900 and have about 750 a day today, looking at '03. Again, to contrast that -- in January of '02, we had a Bcf that we're trying to deal with. Today, we're not into January; yet we expect we'll make progress between now and January. We have 750 a day left. 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 4,900 megawatts to NGPL this summer. We are going to get, in '02, $18 million in revenues from plants that we have attached. And 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 4000 megawatts; 2,900 of that is already under contract. That's really it for NGPL. Other significant contracts at KMI -- we structured in the -- we restructured, in the power business, a long-term tolling agreement on one of 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 has had two very large contracts. This, of course, is down in KMP. The BP deal was a major transaction that ramps up from about 600 a day to 1 Bcf a day on Tejas and also includes 19 Bcf of storage on KMTP. 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 for about -- where we extended for five years 8 Bcf of sales and about 4 Bcf of storage. Also in the MLP, the big interstate system that comes out of the Rockies, if you may remember, has an average contract life of about 10 years. So very little comes available. We've re-contracted all of that. We extended our largest bulk customer in the bulk terminals division at the Tennessee Valley Authority, extended them for another five years and have made significant progress on the liquid side. That shows a contractual situation, great performance across the business units. That's the bread and butter that helps assure the cash flow out of these assets.

Now, let me talk quickly on the projects starting again at KMI. On NGPL we've had three big projects [inside] the Horizon joint venture, which came online in May for 80 million underwritten by a 10-year contract. We own half of that; Nicor owns the other half. We did bring online in August our St. Louis expansion against about the $37 million projects, 300 a day. That's underwritten by a 10-year long-term contract, and we're making significant progress on our [lower] financing storage expansion, which is a $35 million expansion project. We've had a successful opening season. We followed with the [indiscernible] and are expecting to hear on that by December. That will 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 [indiscernible] Arkansas were completed early in the third quarter. We are meeting all of our [indiscernible] grade and availability targets following the commercial operation date. We 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 product side, we have completed the expansion of our Las Vegas terminal. This, of course, is down in KMP on the Texas Interstate, the gas side -- very significant projects in KMP. We completed our North Texas $70 million pipeline. That's underwritten by a 30-year firm contract with [indiscernible]. That went in service last month. We announced today in the press release an $87 million project to Monterrey, Mexico underwritten by a 15-year deal with Pemex. We have -- we will begin construction of that this month, and that would be in service in April of next year. And then, we are underway with a large open season on West Texas which is about $160 million project -- still need to get those deals signed and in the door before we would 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 is a desperate need for additional pipeline capacity out of the Rocky producing basins. Our advantage pipeline had a very successful open season advantaged as a $288 million project. We had 483 a day of interest for 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 build anything, but are expecting to know within a month on that. In addition the Cheyenne storage project, which is about a $30 million project is in [thought] process. Again, that's underwritten by [10-year] contracts. As Rich alluded to in CO2, 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 the Houston Ship Channel and our $35 million expansion up in [Cardereck]. 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 of 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 II list. This is not to be confused with the esteemed institutional investor analyst ranking. II in this case stands for Inaccurate Innuendo. And it's our David Letterman like tribute to some of the more outrageous statements that have been 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 discuss these questions with our team, nor it seems that they spend 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 Kim, Park or me and ask the questions with us directly. Frankly, we have not been stumped yet. But again, onto the first Kinder Morgan, II List. II strategy number 5, raise vague questions about frightening sounding topics. This is something we've seen a lot of. Let me give you an example "The company's terrorist insurance appears to end in a few months, and it may or may not be renewed." While technically this is an accurate statement, it is hard to see how this helps investors. And I would tell you the reality is it was renewed as expected and consistent with our published 2002 budget. II strategy number 4; criticize the company's disclosure. We've seen many examples of this including a quote, you know -- just quotes like "A lot is not disclosed," and another quote that we saw published. "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 all the types of things we haven't disclosed. The reality is we pride of ourselves on our disclosure. We publish our budgets annually and track performance against those, as you are about to hear Park go through in a lot of detail. Our strategy number three alleged inadequate cash flow to meet company obligations. Here's one example of that, a quote in a published report that said, "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 two 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 required by and governed by our partnership agreement. On the [indiscernible] strategy number two, 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 $1 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, [indiscernible] 20 percent stake in KMI in anyway. The $1 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 KMR the old fashioned way. He invested money and bought shares. Finally, the [indiscernible] strategy number one, that if all else fails try to precipitate a liquidity crisis no matter how flawed you analysis. This took, [indiscernible] believe to a new level. In this quote we have again quote -- and this is just to have one of our bond offerings "Nor are the long term credit markets likely to be receptive." Junk status for Kinder debts seems overdue. Just in case of a ripple effect, we are transferring some of our personal cash reserves from money market funds to treasury build on the next auction. 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 BAA1, BBB+ for KMP. We've issued a lot of paper including 31-year debt at 7.3 percent. KMP has a cumulative bond maturity of about $68 million. Between now and 2005, we have 200 million in '05 and none in '06. We're in very, very solid shape. And I will just end with one last thought. When you read this stuff, your first question of these analyses 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. On to 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, with 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 ago -- I mean, a year ago in the third quarter. For the nine months, we will have contributed $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 -- we have generated, in distributable cash flow, cash that is available to be distributed to our limited partners $110 million in the third quarter alone and $325 million in the nine months of this year. That is 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. Again, that's the power of these assets that is after all debt service that is after the general partner share. Skipping a line above that, sustaining capital expenditures for the quarter are about 13 cents or about $22 million. That is up from about $10 million in the third quarter a year ago. We talked about this in the first quarter earnings call. We talked about this in the second quarter earnings call; and I'll say it again, sustaining capital expenditures will not come in ratably. At the same time, we have annual budget, which we published in January, that we expect to spend $74 million in sustaining capital expenditures in 2002. That is still our budget; that is still our expectation. We will come in at right around that level. For the nine months, we have spent $52 million in sustaining CAPEX; and that compares to $40 million a year ago. Skipping up a couple of lines, you'll see net income per unit was 50 cents. Consensus increased today to 45 cents; prior to today it was 44 cents. So clearly a net income for 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 to a little bit around where those -- where that growth came from, and I can 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, products pipelines are up $10.5 million for the quarter and up $31 million for the nine months. Most of this growth is internal growth. Again, for the quarter $1 million of that increase was related to an additional interest [indiscernible]. 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 nine months. You'll see the diesel volumes right under that bare down slightly about 2 percent for the quarter compared to last year, and they are down about 6 percent for the nine months. Again, that's compared to a 2001 that was particularly strong in diesel fuel volume because of high natural gas prices, which caused some shifting to diesel and because of weather. Jet fuel is flat for the third quarter and is down about 7.5 percent for the year. As Rich mentioned, this is pretty remarkable. After 09/11, 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, and in the second quarter, we are 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 been said gasoline is a bigger portion of our volume than either diesel fuel or jet fuel. It means 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 product pipelines delivery volumes. Again, volume increased about 2 percent for the quarter and about 1 percent for the year. Now, since we tend to have -- gasoline volumes tend to be a little bit longer-haul, and we get a tariff increase each year that's 2 percent quarterly volume increase translated 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 three 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 products pipelines for 2002 is $414 million for the full year. To date, through nine months, we have generated $319 million. That's 77 percent of our budget. We are on target to meet or exceed our budget. Moving to the natural gas pipelines, they are up almost $28 million or 50 percent for the quarter, up almost $75 million or 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 pipeline -- for the natural gas pipelines is $347 million for the full year. We have generated $236 million through nine months. That is 68 percent of our budget, but the natural gas pipeline segment is one of the few segments at KMP -- it's actually the only segment of 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 are on target to hit our budget on the natural gas pipeline segment. CO2 pipelines 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 CO2 were 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 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 CO2, and it's actually exceeded our expectations. The full-year budget for CO2 in 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 CO2 pipeline segment. The Terminals segment is up about $10 million for the quarter and up about $31 million for the nine months. Again, internal growth is driving a lot of this, especially on the liquid terminal side. If you'll 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 were actually down. That's due to a reduction in volumes itself that we handle and a reduction due to a facility in Louisiana that we no longer provide services for. But the internal growth at the terminal segment is still strong. The nine-month generation at terminals was $151 million compared to an annual budget of $197 million. We're 77 percent towards our budget. We'll be at or above budget in that segment as well. So those are the segments. Let me drop down then to the expenses. The G and A line -- we are up a little bit for both the quarter and year-to-date in G and A as a result of the acquisition 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're below interest expense a year ago. Minority interest had two significant affects offsetting each other. The general partners' minority interest is increasing. The minority interest related to travel either had decreased, because we've bought -- we purchased the remaining interest Trailblazer. It takes us to the net income line where we generated $150 million to $58 million of net income when compared to $116 million a year ago, a $42 million increase or 37 percent, and for the nine months $444 million of net income compared to 322 in 2001, a $122 million more or 38 percent growth. With that, let me go back to the first page. And I'll touch on a couple of items there. First of all, revenues are up significantly. As we've told you in the past -- and we will tell you in the future -- revenues are not an overly meaningful number. The reason they're 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 segments earnings. Depreciation and amortization is up because of acquisitions. The G and A, we talked about -- POPI is up because of acquisitions. It 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 or 25 percent -- again, a very strong growth driven by all of our segments. Equity and earnings -- our earnings from equity investments is also up, driven largely by plantation in Cortez. And the other item we have gone through is [indiscernible] to the net income line, which we talked about on the prior page. If you take out -- if you go to the next section and take out the general partner's interest, you'll see limited partner's net income of $88 million compared to the $61 million in the quarter a year ago. That's a 44 percent increase. And for the nine months $247 million compared to a $175 million a year ago, a 41 percent increase. Again, very strong growth in all of the segments, except [indiscernible] driving very nice distribution growth to our partners. With that, flip back a couple of 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, and 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 has increased our receivables and we brought those receivables on to our books. {indiscernible} is up over $1 billion as a result of acquisitions and expansions. Investments is just a function of earnings from our equity investments. Deferred charges and other assets is up significantly, that is both of the addition of Tejas and other acquisitions and also the fair market value of our fixed-to-floating rate swaps, which gets valued on the asset side in debt 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 in the liabilities, you'll see notes payable and current materials of long-term debt of 0. We issued equity during the quarter. We also termed up debt during the quarter. We actually did have, at quarter-end, $132 million of commercial paper outstanding. That commercial paper could be refinanced under our long-term -- our multiyear 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. Our long-term debt again is up. We did term up some debt, and we had acquisitions since beginning of the year. I'll reconcile that difference for you in just a minute. You'll see the market value with interest rates swaps flying there. Other is unchanged. Minority interest is unchanged, and partners' capital is up as a result of the equity offering. Taking billing 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 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. At the same time, our long-term target is still 40 percent debt-to-cap; and we expect that if we do significant acquisition or signification expansion projects, 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. We issued equity, publicly, of $330 million. We also had KMR distributions -- which is effectively an equity issuance -- of another $19 million during the quarter plus $350 million of additional equity that was issued during the quarter. Offsetting that, we had expansion projects that totaled about $120 million. That's largely the SACROC expansion. Also, we finished up the north Texas expansion, and we have some other extension projects ongoing including at our liquids terminals asset. In addition to that, we generated from the working capital, in the quarter, $14 million. And so, again, I will tell you that, just preliminarily, our cash flow statement will be available when we file our Q. But we generated, from working capital, [a resource] of cash of $14 million in the quarter. That reconciliation takes you to the decline in debt again of $250 million. So with 350 million of equity, $120 million of expansion capital reduced by the $15 million that came from working capital, and you get a decline in debt of $250 million. Year-to-date, debt has increased $820 million. Again, we have issued equity year-to-date, including the KMR distributions, of about $350 million. Offsetting that, we have expansion capital of about $300 million. It's a very important number, actually. We have had opportunities to invest, in our assets, $300 million worth of capital in the nine months of this year. It was a very high return project. The SACROC project is a big part of it. The North Texas natural gas pipeline is a big part of it. The liquids terminals expansions are a big part of it. We're very happy to make those investments. In addition, we've acquired assets for $900 million. A large portion of that is Tejas. If you add together the $900 million of acquisitions with the $300 million of expansion capital and you subtract the $380 million of equity issued, you get $820 million, 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 wasn't paying attention to it. Working capital for the quarter was a source of cash of $14 million. Working capital for the nine months was a use of cash of $2.5 million, basically flat. Working capital for the nine months has been flat. That's it for KMP. Let me go over to KMI. So again, if you turn to that press release and go to the financial pages, I'll start real quick on the first financial page which is the income statement and just point out the earnings per share of 66 cents that compares to the consensus estimate that went up after our announcement last month. So 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 upon 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, is equivalent to all of the earnings per share that we generated in 2001. I'll remind you it's only been three quarters of 2002. We generated $1.96 compared to $1.37 a year ago, which is an increase of about 43 percent. The source of that was again on the second page. The first line is our equity and earnings in KMP. You can see that line is up about 33 percent for the quarter, about 44 percent for the year. [indiscernible] let me remind all of you that KMI consolidates KMR. So the equity and earnings line of KMP includes a 100 percent of the earnings recognized on the KMR shares. In the middle of the page we reconciled that to what the net effect is on KMI's income statement. 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 partnering 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. Again, these are the KMR shares that KMI actually does not own. That takes you to the pre-tax KMI earnings from investments in KMP of $88 million compared to $61 million a year; an increase of $27 million or 44 percent. For the nine months, it's 248 million, compared to 165 million nine months a year ago, and a 50 percent increase. The other segments, NGPL is up nicely about $5 million for the quarter, about $10 million year to date. NGPL's budget is $360 million. It has generated, year to date, $268 million which is exactly 75 percent of its budget. It's on target to achieve that budget. Just [computing] the budget numbers on the equity and earnings from KMP, that's $404 million compared to the $285 million 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 each quarter and so that is why where we expect it to be to hit our target. The retail segment is up about $2 million for the quarter. It's up about $5 million for the year. The annual budget is about $60.5 million. 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 has a second and a third quarter. And so again, we are 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 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 they 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, if you were total those lines, of $205 million for the quarter compared to 181 million a year ago or a 13 percent increase for the nine months, $615 million compared to $520 million or an 18 percent increase, very nice growth. G&A expenses are basically flat for the quarter. They are up a little bit for the year. We have a slight increase in benefit costs where we're pretty much tracking to our budget. Interest expense net is down significantly, $12 million for the quarter, and it's down $47 million for the nine months compared to last year. It's also coming in below our budget. We budgeted for an increase in interest rates. We have not seen that. The other line is basically flat. You have minority interest related to KMI 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 for the quarter compared to $58 million for 2001; that's an increase of 38 percent and for the nine months, $241 million compared to $153 million, which is an increase of 58 percent on the net income line over last year. One quick point. Heads 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 are 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 in our non-operated [appointments]. We don't know what the result of that evaluation effort will be; 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 this 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 and tax change that will have any change in the power investments, are non-recurring non-cash items. With that, I'll go back to the first stage, 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 or $41 million for the nine months. Again, we will recommend that you do not focus much on revenues. The reason for the change here is threefold. 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 costs of sales also fluctuate. Our O and M is basically flat. G and A, we discussed. Depreciation and amortization is flat. TOTI is basically flat. It gets you to an operating income number of 85 million. That's down from 91 million a year ago. 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 include 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 that 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 are 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 worth of debt. Other current assets is down about $164 million, accounts receivable is the main portion of that, which declined from year end. Investments 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 online this year, [Rightsville] and Jackson. PP&E is basically flat. Other assets is going up. That's primarily the market value of swaps at about $120 million and a couple of other onetime items that fall into that line. Total assets is about $10.1 billion, up from about $9.6 billion at year end. Notes payable and current maturities, $700 million. What that represents is a maturity that actually has already come in October of $200 million. 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 took out that commercial paper to pay off this $200 million debt issue. Also, we have $500 million of debt that's due in March that shows up on that line. Other current liabilities has declined because payables have declined. Other liabilities and deferred credits is basically flat. Long-term debt has increased as a result of a debt issuance, and I'll give you a debt reconciliation in just a minute. The market value of interest rate swaps has broken out there, capital trust securities is 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, our total debt to cap is about $3.2 billion compared to about $3.0 billion 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 of reduction of about $20 million -- for the third quarter, sorry. We generated cash in that quarter of $110 million; that's net income of $18 million plus DD&A 26.4, plus of deferred taxes of $23 million, less sustaining CAPEX for the quarter of about $20 million gets us to the 110. We returned to equity holders in the form of dividends and share repurchase of about $20 million. We had expansion projects of about $40 million in the quarter, and we had another $30 million resulting from a slight increase in working capital, $15 million in the third quarter and some timing around distributions. Again, that was a [debt] net sale to a $20 million decrease of debt for the third quarter. Year to date debt has increased about $220 million. We generated about $320 million of cash; that's net income of $242 million, plus DD&A of 78, plus deferred taxes of 52, less sustaining capital of 51 gets you to the $321 million of cash that's been generated for the first three quarters of this year. We have returned to equity holders $170 million 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, and then, we've had some one-time and timing items for a $120 million which again takes the $321 million of cash generated and reconciles it to the $225 million increase in debt. We'll wait 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. For the nine months year to date working capital has been a source of cash of about $11 million 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. Darla's asleep I think. Darla, if you'd like to come back over. We're ready for questions.

Thank you sir. At this time if you would like to ask a question, please press "*" "1". I will announce you prior to asking your question. To withdraw your question you may press "*" "2". Once again to ask a question please press "*" "1". One moment, please. Mr. David Fleischer. Please state you company name.

Goldman Sachs. I think after the last hour and 10 minutes or so, it's awfully hard for anyone to buy into criticism. Inaccurate innuendo number 4 could let you have an adequate disclosure. Let me make another proposal for that list and get your response to this. One comment -- I get one way or another, one question-comment - is: what happens, if these guys do a big acquisition -- a great big acquisition? You know, big eyes are out there, see some good opportunity; and then they can't finance it. And if you could, you know, kind of combine that, you know, 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?

Well, let me start. It'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 we can finance them. Talking about the financing -- of course, now remember, in general, we are generating about $120 million of equity at KMP with the issuance of KMR of stock dividends every quarter. It's like a massive [grip] program each year. So that finances internal expansions and, perhaps, some small acquisitions. But for bigger acquisitions, what we would do is one or 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 amounted equity capital that we have to raise. Obviously, if we [indiscernible] our sales with that of partner and have a bridge loan; then, at the end of that bridge loan, we would have to do two things: term up the debt and go to the equity markets. So that's why I said earlier that we will go to the equity markets only on our terms or under our choices, and we believe any bridge loan that we will get would be for a significant period of time. Let me say that we have signed the instruments with third parties who are interested -- non-binding on both sides -- who are interested in participating with us on pre-agreed transaction terms in making any acquisition that would fit both our template and theirs. We decided exactly what equity contributions will be made, how the profits will 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 before the fences by ourselves -- Park.

Yes, one point that I've made is the two options that Rich mentioned are not mutually exclusive. We could go and finance this with a bridge facility and raise [indiscernible] the equity following that. And so we are absolutely exploring all of our opportunities to raise funds and with 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 CO2, where your volumes have risen nicely with these strong oil prices clearly it's in your interest to try to spin money faster. You know, 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, you know, what -- you know, where are you in terms of other prospects using your technology, your capabilities, and other fields [indiscernible] oil, or is it a lot tougher to do a satisfactory deal?

Very good question, let me say. First of all, obviously, this is a very long term 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, sort of, the last [bottleneck] in that compression, I guess, brought on line. 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 and Greg [indiscernible] about 90 percent hedged for the front 12 months and...

It's 75 percent hedged 12 to 18 months and 50 percent hedged 18 to 24 months.

Okay. So we have large portions of it hedged. With the -- your other question, we are looking very seriously in other opportunities to put our CO2 expertise to use and have zeroed in on a couple of opportunities. I can't say they're in the [indiscernible] yet, but we are in negotiations, and they may or may not lead to a deal that would be further -- would further increase the throughput on our CO2 facilities and give us 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 tertiary 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 CO2 infrastructure and a tremendous CO2 expertise. And when we can get that extra 12 or 14 percent recovery of barrels more than twice 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 going to make the equity investment that it takes to get that additional oil [indiscernible]. So, it's a very good growth opportunity for us, exceeding our expectations at this point in time. We think they're going to be additional opportunities there.

Do you have those hedged prices handy?

I'm sure Park does.

Hedge fund prices.

[indiscernible] the chief financial officer. See if he can tell you.

You know, that's from 22 to 24 primarily and some [indiscernible] a little higher than that. But predominantly, 22-24.

Okay. Thank you.

Next question.

Our next question comes from Yves Siegel.

Hi Yves, how are you doing?

Terrific, thank you. Two questions. One, just a follow up with David. When would you expect that CO2 would peak? Are we looking at three years, five years down the road or -- I know it's hard to tell right now.

On the SACROC Unit, 2008 to 2010 range. So several years in the future.

Okay. And then, Mr. Morgan -- Mike.

Go ahead Yves.

I think you're both in the same room, at the same time. Could you -- 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?

Yes. I mean, there's 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.

Okay. 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 is true currently, and we expect that to be true going forward.

Okay. I'll try not to ask it every quarter. But thank you.

Next question.

Our next question comes from Chip Ruvi. You may ask your question.

Hi Chip, how are you doing?

Good, guys. How are you?

Fine.

There's a -- you know, there's just this continuing focus on the 40 percent debt to total capital level and can you just talk about, you know, the tradeoffs of getting there to the 40 percent that's capital before looking at another acquisition? You know, how important is it? I mean, it's a long-term growth goal to the ratings and to your plans. And can you discuss, you know, at what prices of the equity, would it make sense to kind of 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 a significant 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 stable assets. They generate very strong cash flows. Our cash flow coverage ratios are incredibly strong. That being said, we target 40 percent, because we'll 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 investment, an acquisition, or expansion projects that 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, you're at record high spread for the treasuries and stuff here.

Well, I think, that's a function of the acquisition itself. And obviously, as I've said at the beginning Chip, we're not going to do any acquisition unless it is not just fairly accretive but nicely accretive to both unitholders and the KMI. And that's really the function of your cost and capital versus your simple cash flow that you're generating from the assets you're acquiring. And, you know -- and again, I'll 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'll 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 the top line growth in our products pipeline and our CO2 business and then from the opportunities to spend additional capital in CO2 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. What that drives you to do is just be damn careful about what you do -- as we've always been -- but being 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 levels accretion. So increase in the distribution per units, which is directly a function of the return on the acquisition of the project and your cost to capital -- I mean, if they are directly tied together. And when he talked about the acquisition or the expansion, then you have to have significant accretion. That means it has to earn itself for the cost to capital.

Okay. And it's accretion to the unit holder, not to distributable cash flow, you know, before the GP split?

Absolutely. Through the individual [indiscernible] cost. Otherwise, you're just drinking your own whiskey or smoking your own dope here; and you're not really getting to the bottom line, which is of course in any major acquisition, if you're putting out more equity, you've got to count the cost of servicing that additional equity just like you have to cost -- you've got to count the cost of servicing the additional debts taken. So, absolutely, Chip, it's on a per unit basis. And also from the internal growth standpoint, 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 bulk distribution.

Yes. Do you -- and, you know, the "best" -- quotes -- that you guys neglected to talk about this morning was the sitting around waiting to see Rich, kind of, put out the track record. That was a little over my head, because you guys have met your goals. So, congratulations, guys.

Thank you, [indiscernible].

Our next question comes from Paul Zamicker. You may ask your questions.

Good afternoon. What if we 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 line for the first question?

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

Okay. And, secondly, the press release from the KMP bank line extension, I guess, which came out this morning or early yesterday. You extend -- you were able to raise your debt EBITDA measure from 4 times to 5 times, and it looks like you're under a write-down. I'm just wondering, to-date, was there a step-down provision at the banks that you didn't mention in that release or the banks are now giving you loose [indiscernible] as far as where you want to manage your leverages talking in terms of debt EBITDA?

There is no step-down provision there. That was put in place at our request, because we wanted the flexibility to not to have to go back to [indiscernible] to request a wavier. We're currently both low 4 times debt-to-EBITDA, and that's expect - that's where 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 4 times, like we did as a result of the Tejas acquisition, temporarily until we issue equity. Because of that, we changed the covenants, and the banks agreed to this, to 5 times debt -- 5 times EBITDA as the debt limits. Again, they agreed to that. We just put that change into the new facilities.

Is the 4 times a limit than what you've traditionally had with the banks?

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

Okay. Thank you.

Our next question comes Ralph Paine. You may ask your question.

How are you doing, guys?

Fine.

I wanted to just talk about some acquisitions for the quarter. Given where your cost to 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 say you'll have it [accrued]? Obviously, it's...

Well, I think, you could work the numbers. I don't think we're going to talk about what multiples. We will [run tight] for an asset acquisition, but it's not a hard model to run.

Yes, that's right, Timeout. If your question is: what we can pay and still have to be accretive? That's very different from what we will pay.

Exactly.

And so, what we can't pay and have to be accretive is significantly higher from what we will pay.

Okay.

I'm sorry

And you could look at the cost to capital. You can look at what our debt costs are and what our equity costs are and average outs are on a pre-tax basis and figure out our average cost to capital. And then, obviously, what we've -- above that, related to the 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 just don't time pipeline operators but -- for example, we look not just at multiples of EBITDA; we look at multiples of first year's distributable cash flow, as we have it in all our acquisitions for the last five and a half years. And that's a significant difference. For example, you may say, well, the EBITDA on one pipeline is $100 million and the EBITDA on another pipeline is $100 million; but the sustaining CAPEX, which 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 a year line where it's $40 million a of sustaining CAPEX. So your real cash flow that you ought to based your acquisition model on is 80 million, you may have another pipeyear of sustaining CAPEX; in which case, it's 60 million. But these -- some people, who are just thinking in EBITDA terms, will have you believe that both of those will work the same amount. Then maybe, you know, somebody switch to arithmetic, but not in ours. And so we would value that a bit differently. We would look at one cash flow at 80 million and one at 60 million. Then we'd look at the growth portfolio where the growth [indiscernible] of each pipeline. But you know, clearly you got to clear that cost of capital and we've been cleared by a pretty significant amount.

Okay. That's very true. I appreciate that. Speaking of maintenance capital expenditures, how do you guys come to that specific number and also, may be, when you talk about maintenance expenditure touch on, may be, your safety record and how that reflects? How you have maintained?

Go, ahead Park.

Yes, that maintenance capital number is a bottom up number. It's generated by operation people who are managing these types, and who are assessing what is required to keep the asset performing at the level that they are currently performing. And we've very detailed budget that goes down to -- in the next year always, and I'm there looking out many years past that and scheduling their maintenance tie-ups again so that they stay on top of the maintenance that is required for the asset. And we're quite proactive in that test. Our approach is to avoid it rather than try to recover some. And I think that went to as very enviable record in terms of safety and lack of impedance on all of the assets that we operate.

Okay great. And one final question. Can you talk about what you expect in terms of fare for increase? I -- normally, I guess it's inflation minus 1 percent. What are your expectations over the...

From the general increase on the products pipelines?

That is correct.

Yes. As you recall, those go into the 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 just implement few months ago was basically 1 percent. We won't know till the end of this year what it will be for July 1st of '03 but it will be probably 1 percent or thereabouts and so that's the range. So 32 percent was probably a little high, 1 percent is probably more normal but it's varied over the years.

Okay.

There's a distinct formula that's mandated by the [indiscernible]. Formula is just renewed for five year period, I think, last year as I write down.

Yes.

Last year.

Okay. Thank you very much.

Thank you.

Our next question comes from Eric Olson. You may ask your question.

I just have a question about stock buybacks in the quarter. You may have mentioned earlier and I may have missed it. Did you buyback any stock in the quarter?

We bought back a little, about $5 million worth.

Just had a curiosity, you're 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, you know...

We're doing both share repurchases and debt pay down. We expect it will generate about $400 million a year in free cash flow, and we'll send that half to equity holders more or less than half towards debt reduction.

The difference this year was in large part due to the expansion projects with Park detail earlier.

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

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

Is there any kind of an additional heap is going to come for the rest of the year?

No. They would have -- if there was any change there, we would have minimal reduction, we would have no impact in '02 and first in change in [indiscernible].

And we're modestly over funded in our pension right now even after the less and stilt results, the pension department have exhibited over the past couple of years. We're still modestly over funded.

Thank you.

[Time] up.

Next.

Your next question comes from David Pingus. You may ask your question.

Yes. I am with Tera Capital Advisors. First of all I want to commend on doing a good job of laying out the internal growth in a painstaking way so the people can see it. But I wonder if your thoughts number one on, you know, the trading at KMP and KMR and the differential, you know, the gap that's developed between those and I realized, you know, there was a nice year offering but what can you do about it because it does seem like it's going to hurt your cost of capital if it does continue since the KMR shares would be the ones that would be the beneficial to issue of...

The thing we're going to do is run the braodcast over Monday morning, I am going to personally buy some KMR shares. I can tell you that. So, you can look for that finally.

Okay.

Not much impact with this is a hell of a good market.

I mean I'll tell. One important thing I think we folks understand is that KMR and KMP represent the same economic interest and 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. Again, the key issue there is the distribution - the 61 cents of the KMR holders will receive. It stayed with reference to the average KMR price. It's a, you know, that means that you're really getting 61 cents of value, you've have the same economic claim on the assets and you should be trading at roughly the same yield. In fact, a lot of it -- when you really break it down you look at the tax efficiency of the two securities is in KMR slightly more tax recession. That being said, you know, the spread out is going to be little bit wider. Recently, you know, only be guessing at this point but you get two dynamic out there, one is our own KMR offering where the spread widened as we went through that process. The other is the recent Enbridge offering where the spread was widened; and, in fact, the deal was priced with reference to our spread. So we have -- we've, kind of, wondered what those dynamics had done to that trading. But it's -- as Rich said, it's certainly -- it's a strange situation and it certainly seems like an interesting opportunity.

Well, I'm just wondering, you know, you have to do more to get the institutions interested, I guess, in the KMR shares or something. Obviously, you didn't want to have an exchangeability feature because of the negative that you had with the credit rating agency. But, you know, it does seem to be a problem. 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 exchange, to why we couldn't do that. We couldn't follow the revenue exchange mechanism for a bunch of complicated SEC related reasons, but we no longer have matching trades now. So we could do 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, particularly? I mean, obviously, there is -- you know, 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 the black out period for now...

Two weeks.

... for a 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've wanted to on that type of thing.

Okay. Thank you very, very much.

Our next question comes from [Carol Cole]. You may ask your question.

[indiscernible].

Hi, good afternoon. You raised something interesting in the course of your call today that I just want to ask you about. You said that your liquids terminal -- excuse me -- your bulk terminal volumes had declined because of a 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 volumes given that the operators of a lot of these hard facilities, I would think, are not only suffering capital crisis but credit crises? And has that -- do you forecast any impact on your volumes going forward from the disasters that are happening around you?

Yes, let me address the bulk terminal issue first. In a couple of our terminals, again, all we do are really seek and service provide -- provide the service of operating a facility where we make a 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. You -- it was more generally on credit.

In general, the -- since you are volume driven, and that has affected your performance now as a driver in the quarter. The operators of plants and pipeline systems and refineries -- you know, 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 know, you got to go by business, you know, 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 refiners on the West Coast, in particular -- a 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 of some producing contracts. Obviously, we have some exposure to a few of the merchant companies in the gas pipeline segment. We have got a number of those folks on prepay. We manage that exposure every week and think again it's a pretty minimal exposure. I'd remind you when Enron went down very quickly -- a huge player, a huge merchant -- between the two companies, we took $11 million or $12 million hit for, a very phenomenous impact. And most of what would be at risk would be two or three months were our receivables, you know, as they're kind of spiral into bankruptcy. You sometimes can't keep them current. But we are very on top of the working capital. Again, CO2, you're talking about a lot of interaction with other major oil companies. The bulk terminals business is widely diversified. You got everybody from TDA to electric, other electric utilities to Dupont, you know, excelon, and other big industrial type customers. So, you know, we -- when you look across the broad portfolio of the businesses, we don't have a lot of credit concerns. And, obviously, as we referred to, I guess, the other area and talk about would be power. And, again, we have protected ourselves consistently on power by taking preferred interests and doing drilling contracts and things of that nature. But that's something we need to keep our eye on and keep looking at.

Okay. And just, quickly, second question. The closing of the West Coast ports and 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 that we have.

Yes. For the bulk facilities, that could be affected to the tune in a few hundred thousand dollars, if it were -- if there were a work stoppage. So far, in fact, we just reported today, the bulk terminals operations had no loss of income from the slowdown that happened earlier in the month.

Okay. Thank you very much.

Thanks, Carol.

Our next question comes from Steve Arigo.

Hi, Steve. How are you?

Good, Rich, how are you?

Hi.

Thanks for taking the time. It was a great conference call. Two questions. Number one, you -- 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.

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

Hey, you know, that really just fluctuates. And so I wouldn't expect a significant change there. I would expect that to be in the 103, 104, 105 range, consistently.

All right. Great, thanks a lot you guys.

Okay.

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

Hi there, Bob.

Hi, thank you for going over in more detail on the internal growth, which was helpful. I'm wondering if it -- in some way you can separate the growth that comes naturally from the existing assets versus the growth that will be coming from expansion of CAPEX?

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 a quarter, but we may have had some expansions and some growth. On the liquids terminal side; for example, we spent some money to build new facilities both primarily in Houston and New York Harbor. But the -- and then we've increased our total [package] by about 5 percent year to year. But the utilization percentage has also grown up by 2 percentage points. So, it's a kind of a combination of the two.

I mean, Bob the other place we do that is at our Annual Analyst Conference. We have a lot of material that goes through on an asset-by-asset basis. But you know, it's just not practical to do that every quarter.

Probably the closest thing to, you know, same store sales is the products pipeline group. And again, there we had a growth of about $11 million in the quarter, and $1 million of it was from that additional interest in Cochin that we brought.

Okay

But again -- and we've given guidance that we think, overall, we'll have about four percent topline growth, and I had taken you through it. And that's on our website, how we model that down if it is true incremental growth to the bottomline.

And another way to 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, its 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 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 is -- has to be considered a pretty adherent internal growth.

Yes, that's the reason go segment by segment, book at returns on capital employed and those metrics [indiscernible] from that area.

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

Yes, on various project -- but you know for -- on average, we're seeing returns on a leverage basis that are up in the low 20 percent range or down to the mid teen range. Park, go ahead.

Yes, I mean, you know, just in term of the project that we have completed in 2002 includes Trailblazer, North Texas pipeline, and a number of the liquids terminals projects. You have an [IOR] that ranges from the upper teens to the mid 20s to well in excess of that. And so, that is a leverage return but again most of the returns are mid 20s or higher and some are well in excess of mid 20s.

And that's the return to the unit holder after interest and GP taken everything else?

This is just IOR on the project. So that is...

[indiscernible] so 60 percent equity, 40 percent debt would run all the numbers at KMP and that's the return to the 60 percent equity component.

Got it. Okay, thank you.

Thank you.

Our next question comes from Chris Melendis. You may ask your question.

Hi, I'm from UBS Principle Finance. I have 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 when that -- or is that going to occur. You run by these things before you take action?

Yes, we look to. We have conversations with 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 like -- I guess, what I'm trying to say, do you feel like you're up against your capacity with fair flexibility? I know that you have liquidity in excess of market now that is the stuff, but in terms of what they think of the overall credit? Where you think you guys stand?

No.

No.

I think we've additional capacity, and I think for the right transaction for the right price, the rating agencies understand our business. They understand the asset 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 a track record. Again, we've done over 30 transactions in the last 5.5 years for 6.2 billion. And we've issued about 3.5 billion of equity as we've gone. And every time, we go and tell them, "Here is our financing plan. Here is how we're going to raise equity and debt capital. You know, our transactions like Tejas will put us on massive outlook ending with successful financing of those things. And then when we'll do it, the rating gets results." But I think that, you know, for $1 billion deal, I expect we can do that in exact same process. They'd be likely to put us on an outlook. We want to make sure that we got a long-term financing in place. But, hopefully, we'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 brought us some credibility with the agencies.

Yes. Good. And I agree with all that. One just, sort of, last statement is that it's just a different environment in the utility market than it was even six months or three months ago. And the rating agencies are much more hostile and are giving credits 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, you know, how you evaluate these transactions going forward?

It's still being reviewed, and that is that we are taking that into account. And again, we'd not do -- we would not do a major acquisition obviously without talking it through with the rating agencies, first.

And then, I mean, I think, we're select among the different companies that are having difficulties and that, kind of, run into trouble. You can think about the kinds of businesses that they're in and what had led to their trouble and think about the kinds of businesses that we're in and those businesses that have any of those same issues. I mean, the trend is[indiscernible]. We're not saying that we're focused on and that's the kind of transaction that we expect to do in the future.

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

Thank you.

Thanks, Chris.

Our next question comes from Ron Londe. You may ask your question.

Hi, Ron. How are you doing?

Thank you. It's Ron Londe, AG Edwards. You see, most of my questions have been answered already. But just curious, if you can give us some insight into the $27.6 million 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 in as best you can?

The great bulk of it is Tejas. You know, it's probably around [indiscernible] but around 20.

And, you know, one of the difficulties that we have at this point -- we talked about it last quarter -- if we operate Tejas and Kinder Morgan Texas as a single entity; and so differentiating between Tejas and KMPT at this point is difficult. And it will become increasingly more difficult. But that being said, I think, the number that Mike mentioned -- the $20 million is more or less correct.

Okay. Thank you.

Once again to ask a question, please press "*" "1". Our next question comes from Yves Siegel. You may ask your question.

Okay. Yves, back for more?

I'm back. Yes, we'll see -- anyway.

[indiscernible]. Go ahead.

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, you know, 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 anyhow, to make a long question even longer, are there buy -- are there sellers out there that are interested in taking back stock?

The are sellers. In fact, we -- one is the ones we're looking at right now. And again, we don't have the horse in the crowd. They are interested in taking all units. But again, it depends what type of asset is 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 and these make the pipelines 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.

And they'd be indifferent as to KMP or KMR?

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

Okay. Thank you.

Our next question comes from Steve Valentine. You may ask your question.

Hi Steve. How are you doing?

Hi, good Rich. 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 a sort of a structured way for you to maintain the economics of a larger deal than you might otherwise want to finance?

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

Would typically private equity guys look for 30 percentish kind of returns? I mean, can you keep that up and still make it look economic?

On these kinds of assets, the acceptable returns are lower.

Okay.

These are very stable assets and they recognize that...

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

Yes, I mean we have right numbers on acquisitions, and it works.

Great, thanks.

Our last question comes form Chip Ruvi. You may ask your question.

Hi Chip.

Hey, I got a follow up too. It seems like the same pressures that are sitting on you guys and sitting on the buyers are coming from the rating agencies -- are the same pressures that have made a lot of the companies, the Enrons and everybody else -- except - well, Enron is different. But other players want to sell things and sure up their own balance sheet. So I guess what would -- given that situation is priced on the assets, do you see that? Are you seeing new players come into the market to -- like MidAmerica or somebody like that, keeping the prices up or higher than they normally would be?

You know, it seems a very sort of asset to asset. We certainly have seen some new players come in. MidAmerica is one. On the other hand, we've seen some of the assets that haven't been quite so -- front burner I guess -- on the front runner, not as widely known or -- they -- there does seem to be some reduction in price there. I think there has not been as much reduction in multiples as you would expect given the entrance of -- entry of some new players. But I think this phase has got a long way to play out. There is 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 error 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 spreads to buy an asset. And if we can get it on terms that are acceptable to us and very nicely accretive to 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.

Does that answer you question, Chip?

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.

END