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Kinder Morgan Energy Partners LP (NYSE:KMP)

Q1 2011 Earnings Call

April 20, 2011 4:30 pm ET

Executives

C. Shaper - President of Kinder Morgan G P Inc and Director of Kinder Morgan G P Inc

David Kinder - Head of Investor Relations, Vice President of Corporate Development - Kinder Morgan GP Inc and Treasurer of Kinder Morgan G P Inc

Thomas Martin - President of Natural Gas Pipelines for Kinder Morgan G P Inc and Vice President of Kinder Morgan GP Inc

Kimberly Dang - Chief Financial Officer of Kinder Morgan G P Inc, Principal Accounting Officer of Kinder Morgan G P Inc and Vice President of Kinder Morgan G P Inc

Richard Kinder - Chairman of Kinder Morgan G P Inc and Chief Executive Officer of Kinder Morgan G P Inc

Richard Bradley - President of CO2 Pipelines for Kinder Morgan G P Inc and Vice President of Kinder Morgan G P Inc

Jeffrey Armstrong - President of Terminals for Kinder Morgan G P Inc and Vice President of Kinder Morgan G P Inc

Analysts

Brian Zarahn - Barclays Capital

Theodore Durbin - Goldman Sachs Group Inc.

Yves Siegel - Crédit Suisse AG

John Edwards - Morgan Keegan & Company, Inc.

Stephen Maresca - Morgan Stanley

Darren Horowitz - Raymond James & Associates, Inc.

Operator

Welcome to the quarterly earnings conference call. [Operator Instructions] Now I will turn the meeting over to Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, you may begin.

Richard Kinder

All right. Thank you, Brandon, and welcome to our quarterly earnings call. As usual, we'll be making statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. We'll be discussing the first quarter results of Kinder Morgan Energy Partners, which is one of the largest MLPs in America, and at Kinder Morgan Inc., which owns a general partner of KMP and significant limited partner interest.

98% of the distribution is going up to KMI come from KMP, the other 2% comes from our 20% ownership of natural gas pipeline of America. Combined, the Kinder Morgan companies now have a combined enterprise value in excess of $55 billion.

Let me start with an overview of what happened in the first quarter and some strategic thoughts then I'll turn it over to Park Shaper, our President, who will go through the financials in detail, and then we'll take any and all questions that you may have.

Let me begin by discussing KMP Kinder Morgan Energy Partners. Today, we increased our quarterly cash distribution per unit to $1.14 or $4.56 annualized. That's a 7% increase over the first quarter of 2010 and it's the 40th distribution increase since we took over this company in February of 1997 and it's the fifth quarter in a row that we've raised the distribution. Our first quarter distributable cash flow before certain items was a little over $382 million, that was up 8% from the first quarter a year ago. Our distributable cash flow per unit, which we think is the most effective way of judging and comparing earnings in operations, was $1.21 this quarter compared to $1.18 for the first quarter last year.

We're all five of our businesses produced stronger first quarter results than in the comparable period last year, our total segment earnings before DD&A were about $880 million. That's up 6% from the first quarter of 2010. Given our solid asset performance, along with the current oil prices and interest rates, we're now on pace to generate excess cash flow of almost $100 million for 2011 versus our annual budget target of $37 million of excess cash flow. Now we previously announced that we expected to declare cash distributions of $4.60 per unit for 2011, which would be a 4.5% increase over 2010. We now expect to meet or exceed that target. We'll continue to monitor, in light of these developments and our increased performance. And if we stay at this level, we will look at increasing the distributions from KMP later this year.

Now let me turn to each of the segments. The products pipeline business had a strong performance in the first quarter. About 2/3 of the growth was driven by good results from the Cochin pipeline system in our Pacific operations. For the first quarter, our total refined products volumes increased 4.4% compared to the same period last year. Gasoline volumes were up 2.3%; diesel volumes, up 11.3%; and jet fuel volumes up 3.2%.

Before you get too excited about that, we published the details on these volumes on our volume page, that's an attachment. And as you'll see, the strong growth here came from the plantation pipeline volumes, so we would not expect this size of growth and volumes to continue throughout the year.

On the NGL side, the volumes were up 12.4% versus the first quarter of 2010 due to the strong performance of our Cochin NGL pipeline. Our natural gas pipeline segment was also had strong performance in the quarter and the growth there was driven by contributions from the recently completed Fayetteville Express Pipeline, from the KinderHawk joint venture in the Haynesville Shale, from our Midcontinent Express Pipeline expansion and from good results from our Casper-Douglas processing assets and the Texas intrastate pipeline system.

On the negative side, in the natural gas pipeline segment, we had lower volumes and transportation revenues at Kinder Morgan interstate gas transmission and we have lower results at Rockies Express solely due to a contractual agreement regarding fuel recoveries.

Looking ahead, we continue to see tremendous opportunities in the shale plays that will help drive future growth in this segment. The overall segment transport volumes were up 9% due largely to Fayetteville Express coming online and the force majeure that impacted Rockies Express for a portion of the first quarter in 2010. At the Texas Intrastates sales volumes were up 1% in the first quarter.

Turning to CO2 business, growth in the first quarter was attributable to higher oil prices and higher NGL prices on our unhedged volumes. These higher oil prices more than offset the expected lower production in the first quarter as our average WTI crude oil price was about $8 per barrel higher for our quarter 1 of 2011 than it was in the comparable period a year ago.

Turning to oil production. Oil production is lower at the SACROC unit for the first quarter of 2010, running about 28,900 barrels per day versus 30,000 barrels per day in the first quarter of 2010, but basically flat to plan in this first quarter of 2011. At the Yates Field production was down compared to the same period last year, but just slightly below plan due primarily to some weather issues in February that cost us about $5 million and several thousand barrels of production.

At the Katz Field, we're now getting results from our recently initiated enhanced oil recovery activities, but the production response is slower than we anticipated, which I might say, actually, could be positive for the project longer term, i.e. more unit form flow through the formation of maybe what we're seeing now. We now expect for 2011 to realize an incremental 600 barrels of additional oil production at Katz compared to 2010, down from 1,000 incremental barrels that we targeted in our budget for 2011.

In the Terminals business, we produced very nice fourth quarter segment earnings, up 13% year-to-year. About 80% of that increase was driven by organic growth. That organic growth came from strong results at our liquids terminals on the Houston Ship Channel, reflecting customer demand and higher rates on contract renewals, and we had a significant increase in bulk tonnage. For example, total bulk tonnage was up almost 11% for the quarter. We had a record coal volumes at our Pier IX facility in Virginia and we had a 21% increase in steel volumes across the segment compared to the first quarter of 2010. Acquisitions accounted for the other 20% of the strong growth in terminals is due primarily to the Slay and Watco transactions.

With regard to ethanol handling, in this segment was basically flat with the first quarter of 2010 at 15.7 million barrels. Combined, the terminals and products pipelines segments handled about 23 million barrels of ethanol in the quarter, up slightly from the same period a year ago, and we continue to handle about 30% of all the ethanol used in the United States.

At Kinder Morgan Canada, the growth for the quarter was driven by increased deliveries in the Washington state on the Trans Mountain pipeline system, and our mainline throughput on Trans Mountain was up about 12% compared to the first quarter of 2010.

Now let me discuss some of our other developments across KMP which are really important to future growth of both KMP and KMI. I'll start with the products pipeline segment. In this segment, our expansion of the Carson Terminal in California is running ahead of schedule. That's a $77 million project. It had 560,000 barrels of additional storage for refined products in Carson, California Two of those tanks are now expected to be in service in November this year, that's about 8 months sooner than planned. The project is still running on budget in so far as costs are concerned.

At our expansion project at Travis Air Force Base in Northern California, which is a $48 million project, we're also running ahead of schedule and on budget. We now expect to have two of the 350,000 barrels storage tanks in service in December of this year, three months earlier than planned. International gas pipeline segments, a lot of things going on there. We continue to take advantage of tremendous opportunity for new infrastructure in the shale plays. For those of you who attended or listened in on our Analyst Conference earlier this year, we talked a lot about this. All of those opportunities we talked about at that time still remain in place now. In fact, we're even a little more enthusiastic about our opportunities.

Starting with the Eagle Ford Gathering, that's a joint venture between ourselves and Copano Energy. Since we last talked, we've entered into a long-term agreement with Anadarko. And now, including funding our 50% interest in this joint venture, we've committed about $166 million to expansion projects in the Eagle Ford shale play. This system will result -- this investment will result in system of about 400 miles of existing and newly constructed pipelines. When they're fully powered with compression, these pipelines will have the capacity to gather over 700 million cubic feet per day of natural gas. We expect all of that 700 million cubic feet per day of capacity to be fully subscribed during calendar year 2011. And we're looking to pursue additional opportunities in the Eagle Ford shale play in the coming weeks and months.

As I mentioned earlier, our Fayetteville Express Pipeline is now fully in service. At KinderHawk Field Services, that's a natural gas gathering and treating joint venture between KMP and Petrohawk in the Haynesville Shale in Louisiana. We continued to experience growth in volume. We now have about 400 miles of pipeline with over two Bcf a day of capacity and our throughput is now approximately 940 million cubic feet a day. The throughput is expected to reach 1.2 Bcf a day by year end 2011.

Also, on the natural gas group, KMI reached a settlement in principle with FERC staff and our customers in the first quarter on the Section 5 rate case. Pending approval, the settlement will have a full year impact on KMP of less than $10 million. The 2011 impact will be even less than that because the settlement will only be effective for a portion of 2011.

Now turning to our CO2 segment. The main development there is, one, we also discussed at the analyst conference, mainly that the fact that we are experiencing very nice growth in demand for CO2 in the Permian Basin, and that's led us to continue to see real opportunities to expand our production of CO2 in Southwest Colorado and expand the pipeline infrastructure that transports that CO2 to our customers in the Permian Basin. And in fact, today, our board authorized expenditures for the preliminary engineering work on the expansion in Southwest Colorado, so we are beginning to kick that project off. On the Terminals side, as detailed in our recent conference, tremendous increase in demand for coal exports and this will be a driver of future growth for our Terminals segment. We've entered into two significant contracts with customers to handle coal and we're actively pursuing a number of additional coal export opportunities. Specifically, we now have a 15-year agreement with Massey to handle up to 6 million tons of coal annually through our IMT Terminal in Myrtle Grove, Louisiana on the lower Mississippi River. We'll be investing about $70 million to expand that terminal. We expect that expansion to be completed and the tons begin to move in 2012.

In addition, we've entered into an agreement with a large western coal producer to handle up to 2.2 million tons of Colorado coal annually at our Houston bulk terminal on the Houston Ship Channel. To accommodate this tonnage, we'll invest about $18 million in expanding the facility.

This will be the first time that the western coal has been exported from the Port of Houston, and again, we see great opportunities to further expand our handling of export coal on both the East Coast and the Gulf Coast. On another matter in our Terminals group, KMP formed a the crude oil joint venture with Deeprock Energy Resources and Mercuria Energy Trading in Cushing, Oklahoma. We're investing about $25 million for a 50% stake in the existing crude oil tank farm that has storage capacity of 1 million barrels and for the construction of three new storage tanks that will have an incremental storage capacity of 750,000 barrels. These new tanks are expected to be in service by the third quarter of this year. We also have an option to participate in additional expansion of Deeprock's remaining undeveloped land in the Cushing area which is extensive.

We've also completed construction on Deer Park Rail Terminal in the Houston Ship Channel area and related ethanol handling assets. That $19 million project include building a new ethanol unit train facility. We now have space for multiple unit trains, and that project is supported by long-term customer contracts and the first trains have already arrived this month.

Finally, on the Terminals group, on our Watco Companies joint venture, we continue to pursue new opportunities with the rail company. We anticipate making additional investments with and in Watco during 2011 to complement our existing terminal network and provide the customers additional transportation services, particularly with regard to moving crude oil by unit trains from shale plays both in Texas and elsewhere.

Now turning to KMI, again, today, we reported the first quarter cash available for dividends of $251 million in the quarter. We're on target to meet or exceed our previously disclosed annual budget of $820 million in cash available to pay dividends. We declared a dividend for the first quarter of $0.14 per share. The additional dividend is prorated to February 16, 2011. That's the date that KMI closed its IPO. Based on a full quarter, the dividend would be $0.29 per share or $1.16 annualized just as we promised in our S-1 and our roadshow for the KMI IPO. If present trends continue and we are able to increase the distribution at KMP, we will pass those increases on to the KMI shareholders by increasing the dividend above the $1.16 target.

In short, our strategy at Kinder Morgan is pretty simple and it applies to both KMP and KMI, we have a great set of stable assets, we have growing cash flow coming out of those assets. We're going to do our best to grow that cash flow and then distribute it out both in terms of distributions to our unit holders at KMP and KMR and in dividends to our shareholders at KMI. And with that, I'll turn it over to Park.

C. Shaper

All right. Thanks, Rich. I'm going to go over the numbers. I'll start with KMP. And so the first financial page that's distributed along with the earnings release is the pace of the income statement. Now this does include the impact of certain items. We don't think it's overly meaningful, but you can see down towards the bottom that distribution per unit of $1.14, up from $1.07 a year go, as Rich mentioned, that's 7% growth year-over-year.

Now [ph] I'm going to turn into second page in the release and really start towards the bottom. You'll see the Dcf per unit, $1.21, up from $1.18 a year ago and actually ahead of our budget of $1.16 for the quarter. So a very strong performance in the quarter. Our excess coverage was $21 million. That's $1.21 compared to the distribution of $1.14.

Jumping up above that, you'll see the Dcf for before certain items are, I guess, right above that is the net income. We think Dcf per unit is more meaningful and a better measure of the distributions that we're going to be able to pay. But net income per unit before certain items is $0.435. Dcf before certain items, as Rich mentioned, $382 million. It's up almost $29 million from a year ago, up over 80% and actually above our budget for the quarter. One of the main reasons why it was above is directly above that. The sustaining capital expenditures, $36 million for the quarter above last year which was $33 million. But it's actually below our budget for the quarter and so we had a hiccup relative to budget on the sustaining CapEx side. That being said, our annual budget is about $225 million and we do expect that we will come in right about that annual budget. So large part of this is just a shift from first quarter to later quarters.

Above that, you have the contributions from some joint ventures. Essentially, this is backing out equity earnings and adding in distributions. And you can see in the first quarter of '11, the distributions exceeded the equity earnings by about $3 million. Book cash taxes, again, there, we're backing out book taxes adding in cash taxes, but cash taxes were lower than book taxes for the quarter on excess positive $10 million. And then above that, DD&A is up a little bit from a year ago. And then there's limited partners' net income before certain items, which is up about 8% also from a year ago.

To see what's driving the net income, I'll jump up to the top and talk about the segment earnings before DD&A. Starting with products pipelines. It's up about 10% from a year ago, actually up nicely relative to its budget. Relative to budget, the pickup was driven primarily by Cochin and then also by Southeast terminals. Now for the year, on products pipelines, we expect them to come in right about their budget. On the natural gas pipeline side, up slightly from a year ago, a little bit under its budget, the reason why we were under budget was largely related to KMI and Rockies Express, as Rich mentioned. When we look at natural gas pipelines for the year, we expect them to come in right around their budget.

One thing to point out on the natural gas pipeline side is, this does not, the segment earnings before DD&A, does not include all of the DD&A from our joint ventures. That gets added in down below. Actually, it was in the $267 million that I pointed out. But if you wanted to see the real earning power of the natural gas pipelines, you would add that DD&A back. And I'll talk about that number in total in a minute when I talk about the full year expectations.

On the CO2 side, up over $10 million from a year ago. A hair under budget for the quarter, although, almost all of the reduction from budgets was a function of the extended cold weather that we had during February that really caused a little bit of production loss at Yates and a little bit of losses or reduction on some of our other assets. Absent that effect, actually, CO2 would have been on budget. And as Rich mentioned, CO2 is favorable due to price and then volumes are pretty close to plan at SACROC, a little bit below at Yates and a little bit below at Katz, and then on budget to a little bit above on the natural gas liquids side.

When you look at CO2 for the full year, clearly with the forward curve, your oil prices where it is right now. We expect CO2 to come in well above its budget, actually, by about $35 million. And so, again, very nice opportunity there in the CO2 segment driven by high oil prices.

On the Terminal side, on budget, up about $19 million or almost 13% for the quarter, dead on budget for the quarter and we also expected to be on budget for the year.

And then at Kinder Morgan Canada, nicely above last year by about $3 million, a little bit above budget. We do expect Kinder Morgan Canada to be above budget for the year. It takes you to a little under $880 million of segment earnings before DD&A compared to $827 million a year ago or an increase of over $50 million or about 6%.

And then I gave you kind of the highlights for this forecast relative to budget for the segment. But if add them all together, we expect the segments to be above budget by about $35 million. That would take us to about $3.67 billion of segment earnings before DD&A, or if you added in the DD&A associated with the joint ventures, it would take us to right about $3.85 billion of segment earnings before DD&A. So, again, expect the segments as we look at it right now to be above budget for the year.

G&A, showing a drop down to under the segment earnings contribution, you'll see about $101 million, up from about $99 million a year ago. It was a little bit above our budget for the quarter, about $5 million above our budget but most of that is timing. As we look at the forecast right now, we expect the G&A will come in right about budget for the year.

Interest. A little under $132 million for the quarter, up from $116 million a year ago, but actually favorable to budget by about $7 million. The increase relative to a year ago is largely a result of an increase in balance which is a function of the investing that we've done in the last year and then a little bit as a result of an increase in average rates. As we look at it for the year we actually expect current rate and interest will come in under budget by about $23 million. That's a function of the current forward curve for interest rates, the refinancing that we did in the first quarter, and so that's driving again that savings in interest. Net income before certain items, a little under $424 million, up a little over $40 million from the first quarter of 2010 or about a 10.5% growth year-on-year.

Let me talk about the certain items and really one in particular, but starting with the first one, allocated non-cash long-term compensation. This is the same item that has shown up here since 2007 when the MBO transaction closed and it is an accounting expense related to compensation that KMP will never have to pay for. And in truth, the public shareholders at KMI will never pay for this. But the accounting rules require that we allocate this expense out, so it shows up there.

And in truth, the big item, which is the line right beneath that, is very similar. So that $83 million is related to $100 million special bonus that will be paid to non-senior management employees here at Kinder Morgan in late May. That $100 million will be funded by a reduction in dividends to certain of the investor shareholders, so the non-public shareholders of KMI, and it's completely funded by that reduction in dividends.

KMP will never pay $0.01 of that. KMI will never pay $0.01 of that. But for accounting purposes, it has to be represented here. And so, again, the expense has to be recognized on the income statement and that's why it's showing up here and part of it gets allocated down to KMP. So this is KMP's portion. Once again, an expense that KMP will never be responsible for, will never have to pay $0.01 for.

The rest of the certain items are small and essentially cancel each other out. So essentially almost all of the net certain items for the quarter are that one large charge, which, again, KMP is not responsible for.

So that's really the summary on the performance for the quarter. Just going back one page and looking at the income statement I said as I'd skipped over it, that it was distorted by the certain items, and really the biggest item is that $100 million special bonus. So if you look at G&A on the first page, you'll see it's up by $88 million. Well, that is all that special bonus coming through. So, again, it's just not meaningful on that page. Similarly, income taxes are impacted by that special bonus. They're up by about $6 million. Again, that's being driven by that certain items. So I think it's much easier to understand what's going on with the business when you look at the second page.

One other thing to point out, as Rich mentioned, and I'll jump back and just talk about the full year forecast. I talked about the segments being up by about $35 million as we look at the current year, G&A essentially being flat, interest being favorable by about $23 million. And when you drop all that down, it's about $57 million, $58 million as we look at our improvement in terms of distributable cash flow. That takes our expected excess coverage to $90 million to $100 million. And as Rich said, we'll continue to monitor that and as we get later in the year, than we may increase the distribution, if that holds.

One of the things to think about there, it actually takes -- so if you look at our current forecast for distributable cash flow per unit, it's almost $4.89, which is $0.28, $0.29 above our current distribution, our expected targeted distribution of $4.60. It's also, if you look at that, it's really $4.885, if you look at that compared to the $4.43 that we generated in distributor cash flow per unit in 2010, it's over 10% growth, which, again, I think, is just showing the strength of the set of assets that we own.

Now one thing I do want to point out. Well, that distributable cash flow per unit, again, based on our current forecast, is up 10%. It doesn't mean that we can increase the distribution by 10%, because as you increase the distribution, the distributable cash flows per unit actually comes down as a result of what goes to the general partner or another way to say it is the distributable cash flow per unit is just per limited partner unit. What it does mean, though, is if we actually came in at that level and we wanted to have no excess coverage, which I don't believe is where we'll end up, but just so you understand where we are, it does mean that we can increase the distribution by 7.5% from where we were a year ago.

Now again, that's just walking through the current forecast, so that you understand the significance of the numbers. As Rich said, and I said a few minutes ago, excess coverage $90 million to $100 million right now, we'll continue to monitor that, and later in the year, we'll figure out if we want to take the distribution up beyond our budgeted target of $4.60 per unit.

And then the third page are the volumes, and a couple of comments there. Rich mentioned that but it is new on the volume page this quarter. We have broken out plantation from some of the other products pipeline so that you can see by product the volumes at Pacific, CALNEV and Central Florida and then you can see by product the volume change at plantation and then we give you a total. So again, you can see here that a lot of the growth this quarter came from plantation, again, driven by some refinery expansions and by allocations on a competing pipeline.

And one other thing to mention there and this is in the text of the press release but just to provide a little bit more explanation. We present NGL sales volumes in the CO2 section as our net amount. And our net amount actually declined versus a year ago while gross production at the plant actually went up, and again, that was in the press release. The reason why our net share declined was a contractual relationship that really had increased our share through the end of 2010. And so this was expected, it was in our budget. But really, we're happy with the plant performance. The plant is performing very well. So operationally, things are going very well. with just a contractual reduction. And in truth, that contractual reduction is offset somewhat by some other contractual rights we have to net profit interest in the plant and tell them from a true dollar perspective, the impact isn't as significant as this reduction implies.

With that, I'll go to the balance sheet, should be the last financial page on the KMP release. And walking down this fairly quickly. Cash and cash flow was up a little bit but this is comparing the end of the first quarter to the beginning of the year. Other current assets are down about $100 million. Restricted deposits and accounts receivable really constitute that reduction. PP&E is up and really that's a function of expansion CapEx less depreciation for the quarter.

The investment is -- the one acquisition we did in the quarter was the Deeprock assets, as Rich mentioned. That is a minority interest and so we equity account for that. So that shows up on this line. We also invested some more in our Eagle Ford joint venture and the Watco investment really closed this quarter. And so that was another increase offset by a, really, reduction here in Rockies Express which is just a function of distribution.

Deferred charges and other assets is down a little bit. That's just a function of the mark-to-market of hedges. Total assets, $21.8 billion, basically flat with where we were at the beginning of the year. On the liability side, notes payable and current maturities of long-term debt. That $1.3 billion, we actually did have a maturity that we paid off in the first quarter of '10 and then we had a couple of future maturities that became current.

So the makeup of the $1.3 billion commercial paper at the end of the quarter was about $340 million and then we have a maturity in mid-March of 2012 for about $450 million. And then we have another $500 million which can be put to us at the beginning of February of 2012 and because it can be put to us, then it shows up in current maturity. That being said, the coupon on this debt is 9%. It's the debt that we issued in December of 2008 when nobody could access the capital markets and we did it essentially to show that we could. We would love for that to be put to us. We would love to not pay 9% on that debt. I don't think it's going to happen unless any of you are holders and you want to put it to us, then please do. We'll be happy to pay that down. But what's likely to happen there is it'll stay in current maturity until a year from now until the first quarter of 2012 when people are very unlikely to put it to us, and then it will go back into long-term debt. And it's actually due in February of '19.

Other current liabilities, essentially unchanged. Long-term debt, I'll talk about that when I talk about total debt in a minute. Value of interest rate swap, that just fluctuates with the forward curve on interest rates. And then other long-term liabilities, this is primarily changes in the mark-to-market of the hedges. Partners' capital accumulated other comprehensive loss that's to mark-to-market of the hedges, and then other partners capital, that's net income plus any equity issuance less distributions.

And so really that takes us down to the total debt, $11.6 billion compared to $11.4 billion at the beginning of the year. The total debt has gone up by $160 million, and I'll walk you through what caused that in a minute. But first, let's look at debt to EBITDA. EBITDA is about $3.2 billion for the last 12 months. It's up from about $3.1 billion for 2010. And so our debt-to-EBITDA ratio is now just a hair over 3.6. When before, it was actually about 3.66, it did round to 3.7. But anyway, debt to EBITDA has come down. That's consistent with our expectations. We think it shows a very strong balance sheet and we fully expect to maintain a very strong balance sheet. So the changes in that for the quarter $160 million. The uses of cash, CapEx was about $216 million. Acquisitions were about $16 million, again, that was Deeprock. Contributions to joint ventures, $22 million and in the Chevron settlement, which was the last big piece of the FERC settlement was $63 million, and that did go out during the quarter.

Sources of cash, we issued equity through the ATM program, generated about $83 million and then KMR distributions resulted in the retention of cash of about $104 million, and then for working capital and other items, they were a use of cash of about $30 million. And here's how that $30 million breaks down. AR and AP were a source of cash of about $60 million. Accrued interest was the use of cash of almost $150 million. And so really, all that is, is the first quarter and the third quarter are the quarters when we have large interest payments. We'd pay on our long-term debt. We pay semi-annually and they're just heavily concentrated in the first quarter and the third quarter. And so really, this reflects the payment that went out in the first quarter, a lot less cash will go out in the second quarter and that accrual will go back up. Other current assets and other current liabilities were a source of cash of about $14 million. We had excess coverage of about $21 million and then we had some other CapEx timing and distributions in excess of equity earnings plus DD&A and some other items of about $22 million. So those all total to use of cash of about $30 million, but it is really accrued interest was the primary use, everything else was offsetting that.

Now I mentioned CapEx, about $216 million and contributions to joint ventures of $22 million. I'll give you a little bit of detail there. Products expansion CapEx was about $17 million in the quarter spread across a variety of smaller projects including the Travis Air Force Base and the Carson projects. Natural gas is about $15 million, again, it's spread across a number of smaller projects or finishing up other projects. CO2 was about $112 million. SACROC is clearly the biggest piece of that, although, Katz is a piece of that as well. From the terminal side, about $56 million. Tank expansion at Carteret in New Jersey. The completion of the Deer Park Rail Terminal, continued expansion at Vancouver Wharves and a number of smaller projects, and then Kinder Morgan Canada was about $2 million. And then the equity contribution was, again, about $22 million, about $14 million went to the Eagle Ford joint venture and about $8 million went to Red Cedar. And that is it for KMP.

And so with that, I will turn to the KMI financials. I think the main things to remember about KMI is it is very simple and very straightforward. And it's all laid out for you on the first page, the first financial page of KMI. And really, what we're tracking is the cash available to pay dividends. You can see it sum to $250 million. That is up from $230 million a year ago. That's about 9% growth. But main thing is, we're on track to generate $820 million or a little bit more of cash available to pay dividends. There are some things that impact some quarters and not others and I'm going to walk through that so that you kind of understand, seasonality is probably the long term, but just how those things play out across the year. But again, I think the main thing is we're on track to generate $820 million of cash available to pay dividends.

Primary source of that cash were distributions from KMP that you can see from the general partner, $285 million and then $24 million on the KMP unit, $15 million on the KMR shares, and then NGPL about a $4 million distribution in the quarter.

And then G&A was about $2 million and interest expense is about $75 million. This is cash interest here. And then cash available to pay dividend before cash taxes is the $251 million. And so cash taxes are zero during the quarter. And that's just because we typically have very small payments in the first quarter of the year. Now what happens is the second quarter gets doubled up on cash tax payments because we make one in April and one in June, and I'll talk about a little bit more about that later. But again, I think this is really all you need to know about KMI, is getting tremendous distributions out of KMP, some minor additional distributions from NGPL and let's say a little bit of G&A, have to pay some interest and the rest of the cash and intrastate cash taxes, the rest of the cash is available to pay dividends.

That being said, because this is the first time that we're going to talk about KMI since its IPO, the next page is the page of the KMI income statement. And so I'm going to walk through this page and the page that follows that reconciles the cash available to pay dividends to the income statement, and it's all going to sound very complicated. But the main thing to remember is, it is not the business nor the fundamentals that are complicated, it's the accounting that's complicated. And so I'm going to walk through this to help you understand it, but really, what's relevant is the first page which is very simple.

So looking at the second page, again, this is the page of the income statement, so the things that complicate this. KMP is consolidated here. It also includes certain items, both the KMP certain items and the KMI certain items. But we don't think this page is overly meaningful. Those certain items, the KMP in this quarter includes a special bonus, the $83 million that I went through and this $87 million on a pretax basis. In KMI, you also have an impact from that special bonus. You also have, at KMI, a receipt from a settlement from the insurance company related to shareholder litigation of $46 million of cash, or on an after book tax basis, $29 million. That is impacting this number. That receipt of cash, which we did receive in the first quarter, is not in our $251 million nor is it in our $820 million because that's a one-time item. That's not recurring, so we're not counting it towards our cash available to pay dividends. What we're doing is paying down debt with it and when we get to the balance sheet, I'm going to show you that.

Now the other stuff that's included in here are all of the purchase accounting items that KMI had until May, all of those entries it had in May at the time of the MBO in 2007. I think Tim went through a little bit of this and actually much better than I can at the conference, but just to remind you high level what those items include, one, KMI had to write up the carrying value of assets at KMP on KMI's books. What that means is that KMI carries KMP's assets at its different valuation than where KMP carries its assets. Now that's really a balance sheet item and I'm going to show you those distortions on the balance sheet. But it does impact depreciation, which does impact net income, another reason why net income doesn't get real meaningful.

So basically, what you have here is depreciation at KMI for KMP's assets that's even greater than what KMP recognizes. In addition to that, as the time of the MBO, KMI, I mean again, none of this is impacting KMP, KMI had to take our existing hedges and mark them to the forward curve at that point in time and only recognizes differences, only recognizes income based upon the differences of the transactions and that mark-to-market forward curve at the time of the close of the MBO. Really, what we're saying there is, for any transaction that's been hedged, KMI realizes different income on its income statement than KMP does. So again, just another distortion.

And then the third thing that is fairly significant on the first accounting side is really escaping me right now. I can't remember what else I was going to mention. The debt at KMI also had to be mark-to-market in essence at that point in time, which means that KMP, KMI booked interest expense doesn't really reflect what it's paying in interest.

And so the income statements there, we'll always show it to you and so that you can see that but we don't believe it's meaningful. What we'll also show to you is the next page which is basically going from income from continuing operations, which you can see on the income statement of $201 million to our cash available to pay dividends which is $250 million.

Now again I'm just going to walk through kind of how this reconciliation works at high level to help you understand it. I don't believe that this is overly meaningful. In subsequent quarters, I don't expect to spend much time on it, but we will present the information for you.

So at the top, you start with income from continuing operations, and that in the next three lines all come from the income statement. So from the prior page, and essentially, we add back to income from continuing operations DD&A and amortization of excess cost of investments. So that's just adding back non-cash items because we're trying to get to a cash number. And then what we do is we take out income from equity investments because we're going to, again, try to go from income to cash. And so that comes directly from the income statement. Right below that, we add back distributions from equity investments. And so we are taking out equity income, adding in distributions because we're talking about a cash number here, we're trying to convert from income to cash. The distributions from equity investments are split on the two lines because most of that comes from KMP and then where you can find this on KMP's financial statements is in the cash flow statements, and in the cash flow statement, we have to split those between operating cash flows and investing cash flows. And so we split it here to make it a little bit easier to track back to KMP. But realize that this includes KMI as well, and I should have that at the beginning.

All of these line items to this point and almost all the way down includes both KMI and KMP and then we'll back out the portion of KMP that KMI does not own down below. So really when you look at these distributions from equity investments, you're not going to be able to find those exact numbers on KMP's cash flow statements

Then we take out the certain items, the KMP certain items that's really the pretax number, so 88 versus the 83.6 that we were looking out on KMP, but those are the same numbers. And then the KMI purchase accounting, now again this is the pretax number and this doesn't include the purchased accounting impact on DD&A nor does it include the purchase accounting impact on interest, but it's just what remains.

The difference between cash and book taxes, and again this is both for KMI and KMP, and then the difference between cash and book interest expense for KMI is shown there. For KMP, when we do our distributable cash flow calculation, we just use book interest expense and so that's why we're not including any change for KMP.

Sustaining capital expenditures, now you'll see this number 36 is really all KMP. KMI has very little sustaining capital expenditures. And so all of that, again, all the way down to the second to last line, that includes impacts for both KMI and KMP. And so our number right now still includes both KMI and KMP. We have to back out the portion of KMP that KMI does now own really does not have access to.

I mean, so the first thing that we do is really split between these two lines. But the first line is the declared distribution on a limited partner unit owned by the public or not owned by KMI, and this includes both KMP units and KMR shares. Now some of you all, if you all dig into this, you may be digging in and you may think, well, wait, we're going for cash here and the KMR shares -- the distributions on those are paid in shares and not in cash and that cash is retained. Well, that's true. It is retained, but it's retained by KMP, and what we're following[ph]for here is the cash available to KMI for dividends. KMI has no access to any cash that's retained by KMP. Even though KMI must consolidate KMP for accounting purposes, KMI has no legal access to KMP's assets or to its cash. Again, accounting is not the same as the law. And KMI has no legal access to that cash. That is KMP's cash.

So again the cash that comes from KMR shares, that's KMP, also when you get to the next line, any excess cash flow that KMP generates is retained at KMP. KMI has no access to that. And so that's backed out on the other line. The other things that you get on the other line are any remaining KMI certain items and also some timing affects. Because the income statement is done on a declared basis and our cash available for dividends is done on pay basis then there are some timing impact that flow through that line. So again, high level, those are the items that reconcile income from continuing operations to cash available for dividends.

Now with that, I'll go to the balance sheet. And you'll see on the balance sheet, we've tried split it between, again, KMI consolidates KMP. We've tried to split the line items between KMI and KMP. One thing on the cash and cash equivalents for KMI, down significantly from the beginning of the year, but you may remember that we had a debt issuance that was due early January that we refinanced with debt issuance that went out in December of 2010. That just meant we had excess cash on our balance sheet at the end of the year. It was used to pay down, to retire that debt in January. And so that's why the debt balance went down so much.

Other current assets, again that's both KMI and KMP, and then you'll see a PP&E split between KMI and KMP. Now here and in a number of these lines, the KMI lines include the purchase accounting impacts. So the KMP line, is meant to represent essentially the true carrying value for those assets at KMP. And then the KMI line includes the purchase accounting impact. Same thing goes for investments and for goodwill.

And so really, I don't think there's a whole lot of meaning in looking at those items on the balance sheet. I think the main thing is down here in short-term debt and long-term debt, we'll aggregate that down below. For KMI the main component of short-term debt is just KMI's outstanding borrowings under its credit facility. But really let's just drop all the way down to KMI's debt net of its cash and cash equivalents.

You'll see it at the end of the quarter about $3.17 billion. That's down about $25 million from really a little under $3.2 billion at the beginning of the year. And then if you look at it kind of comparable to debt-to-EBITDA ratio, if you look at the distributions received at KMI, it's about $1.26 billion for the last 12 months, up from $1.24 billion, and so the ratio of debt to distribution received is about 2.5x, down from 2.6x. And again, representing that KMI has a very strong balance sheet.

Now if we look forward at KMI's level, we expect that we'll end the year a little bit under $3.15 billion, and so it will be down from the beginning of the year by, call it, $50 million. Now that is assuming that we actually sell KMR shares during the year, that our equivalent to the distributions that we received during the year, there's a decent chance that we won't sell any KMR this year and what that will mean is that this debt number will go up by $45 million. And so in that case, we'll end up right around $3.2 billion, right around where we started the year.

Now one of the thing I'll walk through, as I've said, debt went down by about $25 million. And this will give you a sense of some the things that happened in the first quarter that may not recur going forward or some of the things that'll happen in the second quarter. Cash generated in the quarter, $250 million. Now the dividends paid in the quarter, we paid a normal dividend for the fourth quarter of 2010, that was $205 million. We also paid the dividend, it essentially kind of separated for the first half of the first quarter of '11 during which we were not public. Now that dividend would've been $105 million, but $64 million of it was not paid out in order to fund the $100 million special bonus that goes out in May of this year.

So, again, what happened is, it would have been $105 million. It was reduced by $64 million. $64 million is the after-tax impact of that $100 million payment to, again, the non-senior management employees. And so the net amount is an incremental dividend of $41 million. Now we also received in the quarter about $46 million from the insurance settlement and then we had IPO expenses which are one-time items of about $14 million. And then we had working capital and other items that were a use of cash of about $12 million. And so those things gets you to the reduction in debt of about $25 million. That other thing to think about is, we paid a bigger dividend in the first quarter than we normally would, but we also got the insurance settlement in the first quarter, so those kind of offset.

As we look at the second quarter, a few things to keep in mind, one, we will have two cash tax payments in the second quarter. So one in April and one in June. So cash taxes in the second quarter will be unusually large, just like in the first quarter, they were usually small, they were zero. The other thing that will happen is, we will pay a lower dividend than we normally would in the second quarter. It will be $99 million and the normal quarterly dividend is $205 million. So pay a lower dividend, but then we will also payout the $100 million. Now, again, remember, we've essentially already retained the cash or held back the cash that will fund that, but that $100 million will go out in the second quarter. And so really, all I'm doing is preparing you for when I walk through this reconciliation three months from now. I'll be talking about those items. But the main thing to keep in mind at KMI, strong performance in line with our expectations maybe a little bit above, we will generate $820 million of cash. We will pay out about $820 million of cash and dividends and our debt will come down by $50 million or if we don't sell the KMR shares, we'll essentially remain flat. And really, that was a long explanation of KMI. I expect in future quarters it will be much shorter, because KMI really is very simple. With that, I'll give it back to Rich.

Richard Kinder

All right. Good job, Park. Brandon, if you'll come back on, we'll take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James & Associates, Inc.

A couple of quick questions. First, on the Eagle Ford JV. Beyond the capital, you guys are spending to enhance your gathering scale. How are you thinking about capturing the opportunities for condensate and crude oil takeaway capacity? You've obviously got the asset leverage there given your products pipes and intrastate footprints, so I'm just curious how you're thinking longer term?

Richard Kinder

Yes. We think that's a very good opportunity for us and we think we will be capturing a lot of that volume, but we don't believe in making announcements until the horses are in the corral. And so when we get to that point, we will have -- we'll make those announcements. But we're very bullish on the opportunities for our condensate down there. And it's not just our products pipeline experience, it's also the fact, as we said many times, we have an awful lot of natural gas infrastructure down there and some of that can be converted and used for our condensate purposes, so we feel very good about the opportunities there.

C. Shaper

And one clarification I'll make, Darren, because you kind of introduced the question around the Eagle Ford joint venture. There are a lot of opportunities for us Copano within the joint venture. There are also a lot of opportunities for us outside of the joint venture, and we'll be pursuing both of those.

Richard Kinder

Yes, sure. And the condensate line would be 100% Kinder Morgan venture.

Darren Horowitz - Raymond James & Associates, Inc.

Has there been any update on the ability to leverage that Cochin line throughout Marcellus, NGLs or Bakken crude?

Richard Kinder

The Cochin, we're working on Bakken crude opportunities now with the major producer in the Bakken, and we'll just have to see whether and if the producer can make arrangements with end users off of the Cochin system, other words, interconnecting with either other pipes or with refineries that are near the Cochin system. So that's the update on that. We continue to look at the Marcellus situation but we will not move that project forward unless and until we have shipper commitments to support it. And we don't have those at this point, so we'll just see what develops there. We also, on the Cochin line, as we said before, we expect to have the contracts to move additional EP mix further east on the Cochin line. Cochin, of course, as Park said, had a really very good first quarter which was driven by a lot of cold weather up in that area, but also by more movements to the eastern part of the system. So Cochin's off to a good start this year and we expect to be able to continue to grow the uses of that pipeline.

Darren Horowitz - Raymond James & Associates, Inc.

Last question for me on the terminal side. I'm just trying to get my arms around the magnitude of that coal export opportunity that you see. So if you were to include the tonnage related to the two contracts you spoke of, can you roughly quantify how much of an opportunity this could be for you? And also, is it too premature for you to put a price tag out there as it could relate to incremental capital spend?

Richard Kinder

Well, first of all, if you add up the two projects that we've disclosed at IMT and at our Houston Ship Channel facility, those total about $90 million of expenditures, $70 million on one and $18 million on the other. And that will be moving up to 8.2 million tons of coal which is obviously a lot of coal. That's 6 million max at IMT and 2.2 million. on the Houston Ship Channel. So that's kind of where we are today but as we said at the Analyst Conference, the encouraging thing is that this demand for export coal capacity remains very large and we have other opportunities at other terminals on both the East Coast and the Gulf Coast to handle additional volumes and that would require additional capital expenditure. We estimated that it could be as much as 28 million to 30 million tons of additional coal export capacity on top of this 8.2 million that we've already locked in on. And I don't know, Jeff is in the room, I don't have any idea on what the capital would be...

Jeffrey Armstrong

$175 million...

Richard Bradley

About $175 million of additional expenditures to handle that additional 28 million to 30 million tons of coal. That would be in several different terminals and we're certainly not saying we're there yet. We have strong interest on the number of shippers, but again, it's dependent on them locking in their long-term contracts. Because obviously, we're not going to do these deals unless, like we have at IMT and the Houston, unless we have long-term contracts. Now of course, we've already ramped up significantly our throughput and our capacity at our Newport News facility Pier IX where we're now this year going to move about 12 million tons of export coal through that facility.

Darren Horowitz - Raymond James & Associates, Inc.

I appreciate the color, Rich. Thank you.

Richard Bradley

Okay, next question.

Operator

Our next question is from Steve Maresca with Morgan Stanley.

Stephen Maresca - Morgan Stanley

Three quick things, if I could, to touch on. And the first thing is, you opened and talked about a little bit of the excess cash flow being, on a run rate basis, $100 million. And it seemed like you sort of hinted that the possibility of it stay [ph] this way, raising above your expectations at KMP. I guess, my question is, with the production, slight issues at Katz and Yate, what's your thought on not just increasing coverage as opposed to paying it out?

Richard Kinder

Well, as we said, we have not made any decisions on when to pay it out. We'll just continue to watch for the rest of the year. Actually, the numbers Park was sharing with you for upside were done a few days ago and we've actually had additional run-up in WTI prices, so that number may go even higher. But it's a balancing process and I think Park was very clear in saying that we're certainly not talking about taking all of this excess and taking it in increase in distribution. We want to preserve excess coverage. At this point, we're off to very good start for the year and we will consider on a going-forward basis whether and by how much to increase the distribution.

Stephen Maresca - Morgan Stanley

Okay, fair enough. Thank you. And then on the oil hedges side. Is there any update on where you are? Were there any changes, I guess, from the Investor Conference based on 82% and 56% that you were for '11 and '12?

Richard Kinder

Yes, we are right now, if you are talking about -- Kim, do you have that?

Kimberly Dang

I think it's about 61% in 2000 and...

Richard Kinder

87%, I believe.

Kimberly Dang

61% and $88 in 2012 and...

Stephen Maresca - Morgan Stanley

Okay. And do you say 87% for this year?

Richard Bradley

Yes. 87% for the...

Kimberly Dang

87% for this...

Richard Kinder

And that's including, and that's with NGLs. Without NGLs, 7% hedged. So were about -- so 87% hedged including the NGLs, 61% next year at a price that is $88, about $17 above the hedged price for 2011.

Stephen Maresca - Morgan Stanley

Okay. And then finally, you mentioned obviously the abundance of shale opportunity out there when you've spoken about the Eagle Ford. Are you looking at other -- seeing a lot of other opportunities similar to your KinderHawk with joint ventures with producers or producers are looking to do more joint ventures?

Richard Kinder

Yes, we are. We're seeing good interest in that and the important thing, I think, is for us, again, to only do it if we feel it makes economic sense obviously and if we can satisfy that producers needs. And what I mean by that is, that clearly, these producers, on the one hand, are very interested in raising cash from taking in a partner or selling outright their systems in these shale plays. But they want to make certain that as they ramp up in those shale plays, they have plenty of ability to connect the new wells. And so it's a balancing process and that has to be very carefully done. But yes, I think, they're -- send this every quarter. We continue to look at those. I think they're are a very good opportunities, the whole shale play, very good opportunities and the Eagle Ford is the top of the list, certainly, but there are other opportunities also.

Stephen Maresca - Morgan Stanley

Okay. Thanks a lot.

Richard Kinder

All right, Steve.

Operator

Our next question is from Ted Durbin with Goldman Sachs.

Theodore Durbin - Goldman Sachs Group Inc.

Maybe could you give us a little bit more detail on the Katz Field and your comments that the production response looks slower than anticipated but it's actually a positive for the long-term production maybe, just how does the production profile look differently now?

Richard Kinder

Sure, I've got the experts sitting right here, Tim?

Richard Bradley

When he put the budget together last fall we had a production growth expectation beginning in the first quarter which was an average of early response that we saw in Analog fields in the Panhandle of Oklahoma and the other reservoir studies that we had done. It looks as though it's going to be the later end of the window of what we had forecasted the budget time. In fact, we've already started to see an initial production uptick in late March, early April. Three of our patterns, smaller ones, in fact, are beginning to show an initial production response. Three wells are showing a little bit of CO2 production, so it's lagging a little bit, maybe like about three months or so from what we put in the budget. But the early indication that we're seeing now is that it ought to start ramping up at this point in time for the balance of the year. Of course, we're going to watch it very closely and see how it actually behaves but the comment that Rich made about a late response, as long as it's not too late, could be a positive, in that an early response is certainly a negative because it's usually an indicator that a small field [ph] zone has flooded very quickly, thereby, leaving it to drop CO2 from uniformly sweeping for the rest of the reservoir for the remainder of its life. So we're encouraged at this point in time that we haven't seen anything negative in that respect and hopefully the suite efficiency will continue to be uniform, much more uniform than SACROC and therefore, this will minimize operating costs and recycle CO2 long term. So again, it's very early in the game. We don't see any reason to be concerned about it. In fact, I think it's well within the range of expectations that we have for this project

going into it.

David Kinder

That answers your question Ted?

Theodore Durbin - Goldman Sachs Group Inc.

Yes, that's actually very helpful.

Richard Kinder

[indiscernible] of CO2 operations.

Theodore Durbin - Goldman Sachs Group Inc.

And then if I could just ask about the gas pipeline segment. You're tracking below budget there. Is that just sort of the KMI maybe not coming in as strong or KinderHawk coming in as strong? What's kind of driving that and how do you see that shifting as we go forward in the year?

Richard Kinder

Well, I think as Park said, for the year, we expect the gas pipeline segment to be right at its plan for the year. What happened in the first quarter was that we had a contractual on the Rockies Express. This is a line where we pass through our fuel cost to customers, but in one case, we had one of our shippers add a fuel cap on it and we had to troop [ph] that up, the volumes of the cost for the latter part of 2010 and 2011 and that hit in the first quarter on Rockies Express. On KMI, we are a little bit below the margin differential between the basis differential between the Rockies and the areas in the Midwest that KMI serves had not been very good. And so KMI, on some of its programs, [indiscernible] program have not done as well as we expected. No, KinderHawk is on target and we're actually getting very good performance in that segment from our processing assets out in Wyoming. They're not large, but they are performing very well. So overall, everything pretty well balances out, we think, for the year.

C. Shaper

Yes. And I'll just give you a little bit more detail but as Rich said, KMI for the forecast for the year, a little bit under budget because of what we saw in the first quarter flood impact from the rate case. We're actually a little bit under budget, operationally performing fine because of the contractual issue on the fuel cap. The intrastates are right about their budget and then that is offset by TransColorado, Casper-Douglas, Red Cedar Fayetteville Express and KinderHawk are all projected to be above budget. So again the TransColorado, Red Cedar, Casper-Douglas, Fayetteville Express and KinderHawk, all expected to be above budget. And so overall, I think the segment is doing very well.

Theodore Durbin - Goldman Sachs Group Inc.

Okay, great. And then just if I could do one more. You sort of -- the integration of the -- or getting into the Watco and the rail business, are you seeing more opportunities where you'd like to expand into more rail transactions whether it's through Watco or in other ways?

Richard Kinder

I'll have -- Jeff Armstrong who runs our Terminals Group is here, and I'll just let him answer that directly.

Jeffrey Armstrong

Absolutely. One of the things that we've seen as a benefit is Watco, was one of the early movers of doing crude by rail out of the Bakken for some producers and what we're seeing is, in addition to the equity investment we made in Watco, is forming another venture with them to provide the third-party facilities to really unit train opportunities and I think the first one that we'll see, Watco owns the short line very close to Cushing and looking at some opportunities around there that will probably develop here in the very near future.

Richard Kinder

We're very positive on this and then we've talked about this on before. If you look at it from 30,000 feet, what's happening is some of these plays, there's two things: Number one, there's a lot of oil coming to market, coming faster that pipelines can be built to handle it. And secondly, you have this tremendous price differential. Everybody looks at CNBC or whatever. It sees a difference between WTI and Brent. But there's also, if you look closely, there's a way -- almost as much difference between WTI and St. James, for example, in Louisiana. So there's a tremendous need not just to get crude out sometimes before pipelines are built but also a need to be able to be selective about where you're going move that crude, and that's where unit train operations handling oil with the trains is very important and that's one of the big reasons why we did made our investment preferred stock in Watco and why we're now encouraging and working towards these joint ventures. And I think you'll see us probably in this quarter on some specific projects there.

Theodore Durbin - Goldman Sachs Group Inc.

Okay. Thanks very much, guys. I appreciate it.

Operator

Our next question is from Yves Siegel with Credit Suisse.

Yves Siegel - Crédit Suisse AG

Just following up on the last statement. Rich, what are the contract terms on the unit trains in terms of duration?

Richard Kinder

Jeff?

Jeffrey Armstrong

We're looking at, from a unit train basis that are out there, most of these contracts are five-years plus. As Rich said, I think the key is getting them up and operating on a quick basis, take advantage of these orbs [ph] that are out there. But we're certainly making sure any of our contracts more than cover any of the capital costs associated with these investments.

Yves Siegel - Crédit Suisse AG

Okay. And then when you're looking at the expansion on the coal export facilities, how quick a turnaround is there? I guess, where I'm going with this is that you make $175 million investment, but I would think that you'd turn that investment into cash flow pretty quickly.

Richard Kinder

Very much so. Again, I think if I'm following these, for example, in the two projects we've talked about on the ship channel because we already had the land there, we have to do some additional work. We expect to be operational in July of this year on the project in Louisiana. We expect to be in operation midyear 2012. So these things can be built out pretty quickly. So I think you get a good return, you get it pretty quickly.

Yves Siegel - Crédit Suisse AG

So it took like 12 months for a project then?

Richard Kinder

Jeff?

Jeffrey Armstrong

It really, I guess, is more market specific but I think 12 months is probably a good rule of thumb that's out there with regard to the expansion. Some of the smaller drips in the -- smaller incremental kind of expansions were beyond quicker than that and some of the larger megaprojects may be a little bit longer.

Richard Bradley

And there will be air permitting, right, Jeff? And that can be a variable depending upon where you are and what permits you already have.

Yves Siegel - Crédit Suisse AG

And if I could just two quick ones. The first I characterize perhaps to being naive. Rich, you said that the board approves to go ahead with engineering on the CO2 pipeline.

Richard Kinder

Yes.

Yves Siegel - Crédit Suisse AG

Why do you need board approval for the engineering? And how big a project could we be talking about?

Richard Kinder

Well, we just shared with the board what we thought the outline of the overall project would be and got their approval to spend around $10 million on two different parts of the project just to get the thing kicked off. And there's no question that there's going to be additional demand there and there's no question that we're going to ramp up our production in Southwest Colorado. The question is how much, and the beauty of it is, that we can do it on an incremental basis and that's what some of these engineering dollars are going to go for. So we're just starting to crawl before you walk and walk before you run on that, but there's clearly tremendous demand for additional CO2, and we're very intent on meeting that demand.

Yves Siegel - Crédit Suisse AG

And then finally, have you updated the CapEx budget for this year?

Richard Kinder

We updated CapEx budget, yes, on a regular basis, right.

Yves Siegel - Crédit Suisse AG

But that was a bad question. What is the latest and greatest for the CapEx budget for '11?

Kimberly Dang

It's pretty consistent with what I talked about at the Analyst Conference, Yves.

Operator

Our next question comes from John Edwards with Morgan Keegan.

John Edwards - Morgan Keegan & Company, Inc.

Just one question, Rich. Any update on -- you had talked at earlier quarters on proposed projects coming out of Marcellus. What's the latest and greatest there? I think you mentioned there was some volumes coming out of it at the Analyst Meeting.

Richard Kinder

Yes. I think we've mentioned -- I think we've said for some time now that clearly we're not going to build a project of that size and capital costs unless we have long-term throughput commitments from shippers either producers in the Marcellus or aggregators in the Marcellus or users up in Sarnia. And until and unless we get those commitments, we're not going to build anything. So that's what we stand right now. We're still looking at the situation, but unless until we get the contract, we're not doing it. As I said earlier, we are having better results on using Cochin to move ethane, EP mix and propane from the west to the east across the line. And those look pretty promising, and that's where we're rolling in on now. And then on the batch-line basis also using it to move oil as I indicated in response to a previous question. So there's really no -- nothing new on the Marcellus efforts at this point in time, but we continue to look at a lot of different ways to use Cochin. It's really a great opportunity for us.

Operator

Our next question is from Brian Zarahn with Barclays Capital.

Brian Zarahn - Barclays Capital

On the excess cash flow, I'll ask the same question in different way. What would be your range of distribution coverage ratio you'd be comfortable with? Would it be similar to your guidance or your budget of about 1.03x or what would be the upper end of that range you'd be comfortable with for 2011?

Richard Kinder

Well, of course, we previously, I think, our budgets speak for itself. Our budget had $37 million of coverage. And now we're saying that $37 million has perhaps morphed into $100 million or so. But we haven't made any exact determination. We'll just make that as we go forward during the rest of the year.

C. Shaper

Yes, and I think I'd say, Brian, that depends on the circumstances based on what's generating the excess coverage, what's going on with our assets, what's going on with the overall economy and environment, I think we'll just make that decision as we go.

Richard Kinder

Put it this way, it's a nice problem to have and we hope that, that nice problem continues for the next quarter or two.

Brian Zarahn - Barclays Capital

Fair enough. With Clear Lake gas storage facility, any update on the contract renewal process?

Richard Kinder

Tom Martin?

Thomas Martin

I mean, not really. I mean, it comes up for renewal first quarter next year. We're in discussions with them and if we can get a deal that's satisfactory for us and for them that works renewing, we'll do it, otherwise, we're certainly are looking at other ways to get much better value out of that asset as we move into to 2012.

Richard Kinder

Let's put it this way. It'll be a positive for us. Either we will get better terms with the present user or we will take it over ourselves. And we can do better with this because this is contracted in a different time, so that's going to be a plus for us in 2012 or beyond.

Brian Zarahn - Barclays Capital

Okay. And then final question on KMI. Is there any change to your budget on cash taxes?

C. Shaper

Yes. It's a slightly favorable, but I mean, it's so small. It's essentially a budget number.

Brian Zarahn - Barclays Capital

Okay. Thanks, Park.

Operator

We have no further questions at this time.

Richard Kinder

Okay. Well, thank you, and thanks to all of you for listening in. I know it took a long time to get through some of this. I think in the future, the KMI portion of it will be a little shorter. But we appreciate your attention. We think we had a very quarter, and we're looking forward to a very good year. Thank you.

Operator

This now concludes today's conference. You may disconnect at this time.

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