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Executives

Richard D. Kinder - Chairman of Kinder Morgan GP Inc and Chief Executive Officer of Kinder Morgan GP Inc

Kimberly A. Dang - Chief Financial Officer of Kinder Morgan GP Inc, Principal Accounting Officer of Kinder Morgan GP Inc and Vice President of Kinder Morgan GP Inc

Richard Tim Bradley - President of Co2 Pipelines for Kinder Morgan GP Inc and Vice President of Kinder Morgan GP Inc

Ian Anderson - President of Kinder Morgan Canada

C. Park Shaper - President of Kinder Morgan GP Inc and Director of Kinder Morgan GP Inc

Analysts

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Brian J. Zarahn - Barclays Capital, Research Division

Jeremy Tonet - JP Morgan Chase & Co, Research Division

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Curt N. Launer - Deutsche Bank AG, Research Division

Kinder Morgan Energy Partners LP (KMP) Q1 2012 Earnings Call April 18, 2012 4:30 PM ET

Operator

Welcome to the Quarterly Earnings Conference Call. [Operator Instructions] Today's conference is also being recorded. If anyone has any objections, you may disconnect at this time. [Operator Instructions] And I'll now turn the call over to Rich Kinder, Chairman and CEO of Kinder Morgan. You may begin, sir.

Richard D. Kinder

Okay. Thank you, Holly, and welcome to the First Quarter Analyst Call. We'll be talking about Kinder Morgan, Inc., or KMI; and Kinder Morgan Energy Partners, or KMP. We'll be talking about first quarter results and the outlook for the rest of the year and beyond. As usual, we'll be making statements within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934. I'll give an overview. Kim Dang, our CFO, will give the detailed financial results and then Park, Steve and I and others in the management team will be available to answer any and all questions that you might have.

Let me start with KMI. And it's a very simple story. It begins and ends with cash flow, and we get 99% of our cash from our GP and LP interest in KMP. We pay our taxes on that. We pay the interest on a relatively low amount of debt that we have, and we distribute the balance to the KMI shareholders in the form of dividends.

The metric that we think is the most important here is cash available to pay dividends, and for the first quarter of 2012, that number was $303 million. That's up 14% from the $267 million in quarter 1 of 2011 and slightly ahead of our budget. We have increased the quarterly dividend to $0.32 a share or $1.28 annualized. By way of comparison, that's an increase of 10% from the $0.29 per share in the first quarter of 2011. As we said previously, we expect to declare dividends of at least $1.35 per share for full year 2012, and that's without the impact of the El Paso merger, which should increase our cash available for dividends on a post-closing basis.

Now let me give you an update on the El Paso acquisition because I know that's a subject that everybody's interested in, and I'll make several points.

First, as we said all along, we expect the acquisition to be nicely accretive to KMI. As a result of that and the normal growth rate that we have, KMI expects its dividends per share to grow at an average annual rate of 12.5% through 2015 from its budgeted 2011 dividend per share of $1.16.

Secondly, one of the things we set out to do early on was to make sure that we are marching along on the integration efforts to put these 2 great companies together. That's proceeded very much on schedule. Enormous effort by lots of people on both the Kinder Morgan and the El Paso side. We are now far enough along that we're very confident that we will meet or exceed the $350 million per year target in cost savings and other synergies that we pegged at the beginning of the process.

Third point is, as you all know, shareholders of both companies have overwhelmingly approved the merger.

Fourth point is that we, as promised at the beginning of the process, have entered into a definitive agreement to sell El Paso's E&P business for approximately $7.15 billion to a group led by Apollo Global Management. We expect to close that transaction at about the same time as the merger closes. And importantly, we expect El Paso's NOL carryforwards to largely offset any taxes from the sale. And therefore, we'll be able to use virtually the entire proceeds to reduce the debt which KMI incurred for the cash portion of the merger consideration.

Next point is that we have, as you know, reached agreement with the FTC staff to divest certain KMP assets as a necessary step to receive regulatory approval of the transaction. Subject to final approval by the commission, we've agreed to sell Kinder Morgan Interstate Gas Transmission, our Trailblazer system, certain Wyoming processing and treating facilities and our 50% interest in the REX pipeline. We expect to close that sale in the third quarter of 2012.

The final point I would make is with regard to dropdowns. We intend to offer or drop down El Paso assets to KMP to replace the divested assets. All those divested assets I mentioned belong to KMP, and we expect to offer to KMP all of Tennessee Gas Pipeline and a portion of El Paso Natural Gas. We hope to close that transaction or drop down contemporaneously with the close of the divestiture of the KMP assets, which again, we believe will occur in the third quarter of this year. We expect the combination of the divestiture and the dropdowns will be neutral to KMP's distribution per unit in 2012 and accretive to KMP's distribution per unit thereafter.

El Paso also has offered to sell the remaining 14% of Colorado Interstate Gas and all those Cheyenne Plains Pipeline to El Paso Pipeline Partners, obviously subject to final approval of both the El Paso and EPB boards. We expect that dropdown to close contemporaneously with the close of the KMI-El Paso transaction, and we expect it to be immediately accretive to the distribution per unit at El Paso Pipeline Partners.

So that's an update on the El Paso situation. Now let me turn to KMP. And clearly, all the numbers at KMP that we're talking about now are pre the El Paso merger. At KMP, as we've said so many times, the real important metric there is distributable cash flow per unit. And for the first quarter of this year, it's $1.37 per unit versus $1.21 a year ago or up 13%. And overall, as I'll go through, I think we had a very nice quarter at KMP. 4 of our 5 business segments outperformed the same quarter in 2011, the only exception to that was the Products Pipeline group, which was down slightly, primarily due to lower tariffs as a result of the prior FERC decision and FERC decision 511-A and settlements with customers that we made since the first quarter of last year. We anticipated this, and actually, this segment is mildly positive to plan for the first quarter.

But turning to that segment, it's pretty apparent to me that refined products volumes are clearly down from 1 year ago, but consistent with the EIA. You'll see from our volume numbers attached to our release for the quarter, overall refined products at Kinder Morgan are down 1.6%. Now that compares to the EIA numbers I recently released of 2.7% negative. But I think you have to adjust our 1.6% to account for the leap year. And if you do that, we're actually at 2.7% also.

Now frankly, I don't expect any measurable increase in volumes in the foreseeable future at our -- in our -- in terms of refined products due to a number of industry-wide factors. The growth in this segment is going to come from 4, 5 other factors that we think are very important, and we have examples of all of these concepts in play right now. The first is we're clearly increasing the amount of biodiesel and ethanol that we're handling and their tremendous increase, off a relatively small base on the biodiesel I might add, in the first quarter of this year.

We also see a lot of opportunities for this segment in the shale plays. Obviously, 2 examples of that are the Kinder Morgan crude and condensate line that will take Eagle Ford volumes from the Eagle Ford Shale play up to the Houston Ship Channel. And once there, another example of what we can do is the fractionator that we now believe will probably start out at around 50,000 barrels per day, and we will build that fractionator to help handle some of the condensate coming out of the Eagle Ford.

Another opportunity for this segment is selected, targeted expansions for particular customers. Probably the best example of that is the Parkway project, about a $220 million pipeline that will connect a refinery in Southern Louisiana to the mainline Plantation system in Southern Mississippi. That's going along on schedule, and that's a good new project for us.

And then finally, we have a lot of associated terminals with our Products Pipeline segment, and a lot of those terminals have expansion capabilities and possibilities. Best example of that, probably, is our Carson 7 project in Los Angeles where we're building 7 new tanks. Two are already online, the rest will come online at the end of 2012 and early 2013. All of those tanks are under long-term agreements with our customers. So while we don't expect the volumes run through our Products Pipeline in terms of refined products to increase, we do expect to still continue to be able to grow that segment due to these other factors.

Now turning to our Natural Gas segment. I think the story here is that, no secret to any of you on this call, there's less activity in the dry gas plays, and there's more activity in the richer plays. So for example, as Kim will take you through the numbers, KinderHawk is not seeing the volumes we would have thought we would have seen in our budget year-to-date. On the other hand, it's still above the acquisition plan numbers that we had when we made this acquisition of the second half in the middle of 2011.

On the other hand, in places like the Eagle Ford, we see activity continuing to ratchet up. For example, in the Eagle Ford, we have our joint venture with BHP. That rig count in drilling activity is increasing rapidly, and we think it will continue to increase throughout 2012 and certainly beyond.

Our Treating business has also performed very well, particularly the part of it that manufacturers facilities for sale, known as the SouthTex operation, which we bought last December. Again, we're benefiting largely from activity in shale plays like the Eagle Ford.

And then finally, we think we're, in the Natural Gas segment, building the infrastructure of the future as we've said so many times, particularly with the El Paso merger. We're handling the product that we think is going to be really the base load fossil fuel product for America for the next several decades. As we said so many times, it's clean, it's cheap and it's domestic.

We think there will be a lot of additional opportunities that will come in play as a result of having the size of network that we certainly will have after the El Paso acquisition. But one opportunity right now that we see, even pre the El Paso merger, is as we see these opportunities for liquefaction facilities to be built along the Gulf Coast, we have extraordinarily good connectivity to those plays that would be providing the natural gas to be liquefied and to the terminals where the liquification would be done, for example, the Cheniere project outside of Lake Charles. So we will make -- take advantage of our interconnecting pipelines if and when these projects get built.

Turning to our CO2 segment. I think the story there in the first quarter, the pluses were high prices from a WTI standpoint and record NGL production during the quarter. If you look at the oil volumes, we had a combination: SACROC was down to last year, as we expected; Yates was a mild positive to our plan, down a bit from last year; Katz, obviously, very positive to last year and ramping up significantly as we go forward. And if you put all that together, we're down about 900 barrels per day from where we were 1 year ago or about 3%. Overall, the segment's about on plan for the quarter in terms of bottom line performance, and we expect it to be on plan for the year.

But the really big story for the future, I think, in our CO2 segment is the growth in additional CO2 sales. And I think one of the most significant stories at Kinder Morgan in the first quarter this year was the fact that our CO2 segment signed contracts for 2.1 trillion cubic feet of new CO2 to be supplied to various customers in the Permian Basin. We think these are done at good prices to us and allow us to earn a decent return on the capital we will invest. And they're all long term with an average life of 16 years. They will peak, if you look at this 2.1 TCF at how it ramps up, it'll peak at an additional 450 million cubic feet a day in the peak years of these contracts. And that's significant when you think that right now, we're at about 1.25 billion cubic feet a day. In order to supply these additional CO2 contracts, and we think we will have additional contracts signed in the future, we're going to work at expanding our source fields to accommodate that increased demand.

We've already approved and talked about before the roughly $250 million that we're spending in Southwest Colorado. We expect, and that's just at the Doe Canyon facility that we have, we expect to spend someplace in the $1 billion to $1.5 billion eventually in expanding our production capabilities and our network capacity if the kind of demand we've experienced now continues for the future, and we think it will. So all put, we're talking about a great growth opportunity here for CO2 that's a very predictable return over a long period of time. And of course, that will involve, as part of this, the development of our new St. Johns field that we just closed on early in the first quarter, which is on the Arizona and New Mexico border. So good future for CO2, particularly in the supply of CO2 to our customers.

On our Terminals side, just had an extraordinary quarter. And you just look at it up and down the line and you have to be, as we are, very pleased with the performance. We had growth on both the liquids side and the bulk side. Just to give you a few numbers, our throughput on the liquids side was up by 9% compared to the first quarter of '11. Our tonnage on the bulk side was up by 6%. Some of the drivers on the bulk side, we had a tremendous ramp-up in demand for export coal. So even though we had a downturn in some of our domestic coal handling, as you would imagine, given the situation across the country and the warm winter, nevertheless, the total coal volumes were up by 5%, driven largely by record export quantities. Our steel volumes were up 16% in the first quarter of '12 compared to '11.

If you look at the future, we've now authorized and have in progress $1.2 billion worth of capital expenditures in our Terminals group. Those are projects that are in progress, have been approved by our board. That number that we also shared with you, those of you who were present at our Analyst Day back in January. At that time, it was $860 million. So we've increased by $350 million or so just in the last 3 months since we had our analyst conference. What's driving a lot of this is the coal export business. And when we finish the projects that we've authorized now, we will have increased our capacity to handle export coal to about 45 million tons per year. When you think that the whole export coal market is someplace between -- there's a lot of differences on this, but most people think it will settle in someplace between 110 million and 150 million tons a year, we're handling -- will be handling a very significant part of that.

Then on the liquids side, the main projects there are the big BOSTCO terminal on the ship channel and our large Edmonton South terminal at the beginning of Trans Mountain in Edmonton, Alberta. So great potential for growth in the Terminals segment for years to come.

Turning to Canada, they have solid performance in the first quarter. We're seeing really good demand from both Washington State and across the dock in Vancouver. We were hampered slightly in the first quarter by pressure restriction on Trans Mountain, and that was lifted on March 16, so that will not be an issue the rest of the year.

But the big news in terms of our Canadian operations is the Trans Mountain expansion. There, we received -- and we released all this earlier, we received binding bids for 660,000 barrels per day for 20-year contracts. So we had originally, as you may recall, thought that we have the potential to upsize Trans Mountain, which currently has a capacity of about 300,000 barrels a day. Our original thought was we could go from 300,000 to 600,000 barrels a day. Given the high volume of nominations that came in, we've decided to upsize the project to go to 850,000 barrels a day or a net increase of 550,000 barrels over the current capacity. That drove an increase in project cost to our current estimate of about $5 billion, up from the $3.8 billion that we had estimated when we were talking about expanding this pipeline to 600,000 barrels per day.

Obviously, we have to get regulatory approval from the NEB. We expect to have this pipeline expansion in service in 2017. We think this is a very important development for our Canadian oil sands producer customers and their customers. We think it services a real need to get more of the oil sands production to the West Coast of Canada, and from there, either go into Washington State or across the water.

So a lot's happening and we think it's a great time to be in the midstream energy business and look forward to a very strong year and look forward to closing the El Paso merger.

And with that, I'll turn it over to Kim.

Kimberly A. Dang

Okay. If you turn to your KMP release or stay in the KMP release, and this is the first page of numbers, which is our GAAP income statement. At the bottom, you could see the declared distribution, $1.20 to the first quarter of '12. That's consistent with our budget and about 5% above what we declared in the first quarter of last year. The only other thing I'll point out on this page is the assets which are subject to the FTC staff agreement have been classified as discontinued operations consistent with GAAP, and so you can see the income from discontinued operation, and then also the noncash loss on remeasurement there of $322 million.

On the -- flip to the next page. I'll just point out that the income from these assets, we have included in our DCF calculation. We do not pull that out of our DCF calculation. As Rich mentioned, we expect to replace these assets with the dropdowns such that KMP, on a coverage basis, or a DCF basis, would be neutral for the year.

Looking at the second page, all the way at the bottom. As Rich mentioned, $1.37 in DCF per unit in the first quarter. That's up $0.16 or 13% versus last year. We are on budget for the quarter and on budget for the full year. Two lines above that, DCF before certain items, which is effectively the total cash available to the limited partners, $462 million in the quarter, that's up $80 million or 21% from -- since last -- versus last year. We are on budget for the quarter and on budget for the year.

Given that, as the DCF per unit available and the declared distribution of $1.20, that gives us coverage of $58 million in the quarter. As we said at the time, at the analyst conference when we presented the budget, we expect to have excess coverage in the first quarter and in the fourth quarter and for the full year, and we would expect to have negative coverage in the second quarter and the third quarter. And so next quarter when we present, we would not expect to have coverage. But again, we will have coverage for the full year.

Looking up at the total segment earnings before DD&A, $1.029 billion in the first quarter of this year, that's up $150 million or 17% versus last year.

On Products Pipelines, as Rich mentioned, we're down $4 million, primarily as a result of regulatory agreements. For the full year -- I mean, for the quarter, we are slightly ahead of our budget primarily because of some better volumes on Cochin. And for the full year, we expect to end -- we expect Product Pipelines to end on budget.

Natural Gas is up $56 million for the quarter or 25%. And that's a function of the KinderHawk acquisition, the higher contractual volumes on FEP and then the treating acquisition and, in addition, better results than we expected from that treating acquisition that we referred to as SouthTex. In the quarter, Natural Gas is about 3% below their budget. And for the full year, we expect them to end about 2% below their budget. As Rich mentioned, as drilling has shifted from the dry basin to the richer areas, we have seen some volume impact on our KinderHawk acquisition, and that is really what is causing natural gas to be below its budget for the year.

On CO2, up $79 million in the quarter or 31%. As Rich mentioned, higher oil price and higher NGL volumes are driving that. They were slightly below planned in the quarter and that was a function of we were a little bit -- we were below budget on SACROC volumes. That was somewhat offset by the help that we got on price, but the help on price is not as much as you would expect. We've outlined our metrics, which is about $6 million in DCF per $1 change in the price of oil. The reason it's not as much as you would expect is because NGL prices got hit. For the full year, we expect that CO2 will be on its budget. We expect that the SACROC volumes will recover and that they will only end a couple of hundred barrels below their budget.

Terminals is up $17 million for the quarter or about 10%. They are on budget for the quarter, and we expect that they will meet or exceed their budget for the full year.

KMC is up $2 million in the quarter. They are on budget for the quarter, and we expect that they will come in slightly below their budget for the full year on an earnings before DD&A basis. But if you look at that on a DCF basis, we would expect that they would meet their budget for the year.

If you drop down to the general and administrative line, which is about -- it's in the middle of your page, $108 million for the quarter. That's $8 million higher than last year. It's a few million dollars higher than our budget, but we actually -- for the quarter, but we actually expect for the full year that we will do a little bit better than our budget, meaning a lower G&A expenses in our budget.

The next line, interest expense, is up $7 million in the quarter. It's actually slightly favorable in the quarter to our budget primarily because our balance at the end of last year came in a little bit lower than what we budgeted for the full year. We expect to be positive on interest expense, and that's more a function of lower rates.

The last thing I'll mention on this page is sustaining CapEx. Sustaining CapEx in the quarter was $44 million, up $8 million versus last year. It is actually a positive versus our budget, and we expect that it'll be a positive 3% or 4% for the full year.

Turning to the balance sheet. Just from a high level, if you look at the balance sheet, you can see there's a decrease in total assets. And basically, what's happening on the asset side of the ledger is that you're seeing that write-off come through there. In addition, we are moving the discontinued operations, again, the assets that are subject to the FTC agreement, to assets held for sale. So you see movements out of PP&E investments and goodwill into other current assets. And then the other thing, as you see every quarter happening on the asset side of the balance sheet, is just the investments that we are making and the spending in CapEx.

On the liability side of the balance sheet, the big movements are really in the debt, which I will reconcile in a minute, and on the value of interest rate swaps, which just moves with the forward curve for interest. We ended the quarter at $12.556 billion of debt. That's up $168 million from the end of the year. And just to reconcile that $168 million, we spent over -- a little bit over $300 million on expansion CapEx; about $30 million on acquisitions, that was our CO2 St. Johns acquisition; about $49 million was contributed to equity investments; and then we issued about $239 million in equity, about $125 million through the KMP at the market and then the KMR dividend was about $114 million; we had coverage of about $58 million, as I mentioned earlier; and then we have working capital items that were about a negative $77 million.

And the 2 big pieces on the working capital were interest with the use of working capital because the most -- our most significant interest payments are in the first quarter and in the third quarter. And then also, we purchased some inventory in our Transmix business as we took over a contract from Shell. Those 2 items were offset by positive sources of working capital on margin and taxes and then AP and AR. So where that leads us in terms of debt to EBITDA for the quarter is at 3.5x, which is an improvement over 12/31 that was at 3.6x.

With that, I'll move to KMI. The first page of the numbers in KMI is the cash available to pay dividends. Rich mentioned we generated $303 million in cash available to pay dividends in the quarter, that is on our budget, and $36 million or 14% above last year. And as you look up at the top, that's driven primarily by the GP interest in KMP, which is up $41 million or 14% from last year. Based on declared dividends of $0.32, we have coverage for the quarter of $76 million similar to KMP. On KMI, we expect that we have coverage in the first quarter and the fourth quarter and for the full year, and that we would have negative coverage in the second quarter and the third quarter. And at KMI, that's primarily a function of the timing on interest and tax payments.

For the full year, we expect to be slightly ahead of our budget of $985 million in cash available to pay dividends. And that $985 million, as we said at budget time, does not include any impact from the acquisition of El Paso.

The income statement, which is our next page at KMI. Similar to KMP, you can see the discontinued operations in the middle of the page. Again, the assets subject to the FTC agreement have been classified as discontinued ops. The loss number is different here because KMI has a different basis in -- or report KMP's assets at a different level than where KMP reports on. That was a function of the purchase accounting that was done at the time of the 2007 MBO, just so that people can understand what's going on.

The -- at KMI, on the balance sheet, again, you see the same thing happening on the asset side of the balance sheet that I just went through with respect to KMP. If you look down at KMI's debt, we ended at $3.21 billion of debt, and that's down $26 million since the end of the year. That change in debt, $26 million, let me reconcile that for you quickly. Our cash available for dividends that I just went over was $303 million. That is based on the dividends declared by KMP, so -- but what was received from KMP during the quarter was about $19 million lower than that. So you take off that $19 million. KMR, we did not choose to sell the KMR shares at this time, so that's a negative $17 million coming out of that $303 million. We made a pension contribution of $20 million, and we paid dividends of $220 million. And that should get you to the $26 million change in the debt. The debt to cash available, we ended at 2.2x, and that obviously, that's an improvement from the end of last year when we ended at 2.3x. That's it.

Richard D. Kinder

Okay. And with that, Holly, we'll go back to you and we'll take any and all questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] The first comes from Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Two quick questions for me, the first on Terminals on the coal side and then on CO2. As it relates to the $1.2 billion in authorized CapEx that you guys are going to be spending, is it fair to assume that, that should materialize somewhere between a 5.5 or 6x EBITDA multiple? Or possibly a better way to think about it, around a 16% or 18% cash-on-cash return?

Richard D. Kinder

Each project is a little bit different, but that's probably within the range.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Okay. And then on the CO2 side, supply and transport. Rich, can you just give us some color on the 2.1 TCF of contracts that you signed? What's the return on capital there? And when do you expect to hit that peak that you referenced? Because I would imagine at that point in time, that's when you're return on investment is going to also reach its peak.

Richard D. Kinder

Yes, and I have Tim Bradley, our CO2 Head, is right here, and he will be happy to answer that question for you.

Richard Tim Bradley

We executed 5 contracts that were on the aggregate 2.1 TCF. One of them was substantially larger than the others, and it starts making deliveries on the order of 300 million cubic feet a day starting in 2016, 2017, if I'm recalling correctly. So that is when the peak would likely occur without having specific detail of all the contracts in front of me. That's a representative estimate as to when that would occur. And the other question on the return on capital, it really is a function of what happens with other supply contracts as well. If contracts that we have that expire over the next 5 years get renewed, that will require incremental investment on our part to grow CO2 production. And if they don't get renewed and these contracts basically come in, in their place, then we would not have to invest significant capital in order to support these contracts.

Richard D. Kinder

Well, then, an additional point on top of that would be that the price for securing under these new contracts are higher as a percentage of oil price than they have ever been historically, and they also got higher price floors. So as these new contracts come in, the returns just get higher.

Operator

Our next question comes from Brian Zarahn with Barclays.

Brian J. Zarahn - Barclays Capital, Research Division

Congratulations on Trans Mountain. I, just have a couple of questions on the project. Obviously, a large project to undertake. It won't be for a couple of years, but could you talk a little bit about your sensitivity to changes in cost estimates and how you expect to lock-in some of those costs?

Richard D. Kinder

Yes, it is a complicated formula that's agreed to, and there will be a sharing of costs with the shippers, and there are certain parameters that get shared. A certain portion gets shared, certain portions don't, and that's the way it will be on a going-forward basis. Ian, you want to add? Ian Anderson, who runs our Canadian operations, is here. Whenever somebody brings forward a $5 billion project, we bring him down to the board meeting, so go ahead.

Ian Anderson

Thanks, Rich. The only thing I think I'd add is that certainly the contracts that we've entered in do have cautionary provisions and reset provisions. When we file the commercial terms of this expansion with the regulator this summer, that information would come out at that time.

Brian J. Zarahn - Barclays Capital, Research Division

Okay. And then in terms of end markets, I'm assuming the majority of those volumes are going overseas. Can you talk a little bit about where you expect those volumes to go? Will anything come to the West Coast of the U.S.?

Ian Anderson

Of the 660,000 barrels a day that has been committed, a portion of that is for the B.C. market, a portion of that's for Washington State market, the bulk of it is for Westridge Dock facility in Vancouver. Once it loads on the tankers, we really don't know where it's going to end up. We know barrels do go into Washington State and California today. I would expect that to continue and to grow. Having said that, we would expect a good portion of the volume is going over the dock to be destined for Asian markets.

Brian J. Zarahn - Barclays Capital, Research Division

Okay. And in terms of -- I know it's early on, but is it reasonable to assume sort of similar historical returns on the expansion as you've had in the KM Canada segment?

C. Park Shaper

Yes. Hey, it's Park, and I'm happy to take that. And I think what we can say about this project is it's clearly very appealing economically to shippers by virtue of the fact that they signed up to 660,000 barrels a day of commitments. And it will also generate a fair return to us as is evidenced by the fact that we're willing to commit $5 billion to it.

Operator

The next question comes from Jeremy Tonet with JPMorgan.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Just a question on the sale of Tennessee Gas replacing the assets that would be divested. It seems like the EBITDA stream there is larger than the assets being divested. So I wonder if you could talk a bit about some of the drivers there as far as the Tennessee Gas being bigger than those other assets being divested and how that comes out as being cash flow neutral.

Richard D. Kinder

Let me be real clear. We had always intended, obviously, to have a dropdown from KMI to KMP of El Paso assets as soon as possible after the merger closes. The difference here is that now, as it turns out, KMP is divesting a chunk of assets. They will have that cash available for them, and then they will have access to the markets that they otherwise would have used to do a purchase absent the divestitures. So yes, it's -- we would be selling all of Tennessee Gas and a substantial portion of El Paso Natural Gas, EPNG, which will be much larger than assets divested, both from a valuation standpoint and from a cash flow standpoint. And what we've said is, to be very clear about it, is that we will make certain that, that combination of the dropdown and the divestitures, which will occur simultaneously, will be neutral to KMP for the year 2012 and accretive in 2013 and thereafter.

C. Park Shaper

And that's on a distributable cash flow per unit basis.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Okay, great. And I was just curious if you guys could comment at all as far as the net operating losses that El Paso has right now. How much of that might be consumed in the E&P sales? How much might be available thereafter, if that's something that you can even talk about?

C. Park Shaper

I think our expectation is, is that there will be excess NOLs beyond what is used in the sale of the E&P business.

Operator

The next question comes from Ross Payne with Wells Fargo.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

The sale of Rockies Express, Trailblazer and Kinder Interstate is coming sooner than I would have thought. Can you help us think about what strategic purchasers might be thinking about the assets and how they may be utilized over time?

Richard D. Kinder

Well, I think you'd have to ask the purchasers. Right now, we have a lot of people who have signed. We've already gone out with confidentiality agreements. Those have been signed. We've already sent the detailed books out to these people, and we will start getting responses to that in the next few weeks, and then we'll know more about exactly what they plan to do. I think it's fair to say that in the people who signed up to get the books, and they are numerous, that there's some strategic players and some financial players, and we would expect a spirited bidding contest, and we'll just see where it heads.

C. Park Shaper

Yes. And the only thing I'd add to that is it's an attractive set of assets. In each of the assets, we would much prefer not to sell. But this is the agreement that we've struck, and as you said, we'll execute on.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

And you are pretty confident on a Q3 closing on those?

Richard D. Kinder

Yes, we feel good about that.

Operator

[Operator Instructions] Curt Launer with Deutsche Bank.

Curt N. Launer - Deutsche Bank AG, Research Division

I wanted to just continue on the same topic a bit of the FTC-mandated sales and ask for either run through the calculation of the discontinued operations. It's confusing to me at this point just looking at the numbers that you've reported, how you end up with a significant loss on the discontinued operations given the nature of what you expect in terms of bidding for those assets going forward.

C. Park Shaper

Well, I mean, the loss on the discontinued operations is just a function of our book value and then where we as -- and then where we mark those assets. And so I think if you remembered, REX cost us about $6.7 billion to bid. So the basis on that asset is relatively high.

Curt N. Launer - Deutsche Bank AG, Research Division

Okay, so that was going to be the next question. Is most of that loss related to REX as opposed to the other assets?

C. Park Shaper

Yes, I mean, I don't think we want to get into a lot of detail on this in terms of...

Richard D. Kinder

Clearly, there were pluses and minuses that got to taking the write-down that we did, Curt.

Curt N. Launer - Deutsche Bank AG, Research Division

Okay. And one more just clarification, just to be sure, you did say that you would project a dividend of $1.35 for all of 2012 at KMI. That is on a pro forma basis for the share count after the deal closes with El Paso, is that correct?

Richard D. Kinder

No. We would say if we were never doing the El Paso deal, we would at least do $1.35, and we might do better than that given the fact that, as we've shown you, if you can multiply 707 million times the $1.35, you get to $956 million or $957 million. And as Kim already said, our budget calls for $985 million absent El Paso. And we're doing -- we project we'll do slightly better than that at KMI. So that's where we are without El Paso. With the El Paso transaction closed, when that closes, we intend to come back around that time and put forward what we always said we would do, which is to adjust that dividend in light of the benefits of the El Paso merger. And we would expect that dividend to be higher than $1.35. We've said that consistently since the time that we announced the merger. And that higher dividend than $1.35 will certainly take into account the additional 300 million plus shares that the we will be putting out. Did I answer your question?

Curt N. Launer - Deutsche Bank AG, Research Division

Yes. Very clearly.

Operator

And I am showing no further questions, sir.

Richard D. Kinder

Okay. Well, we appreciate the questions and appreciate your interest. And if you have further questions, don't hesitate to contact us. Thank you, and have a good evening.

Operator

Thank you. This does conclude the conference. You may disconnect at this time. Have a great day.

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