Kinder Morgan, Inc. (KMI) Q1 2013 Earnings Report, Transcript and Summary

Welcome to the Quarterly Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn today's call over to your host, Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, you may begin.

Thank you, Aerin, and welcome to the Kinder Morgan Analyst Call for the First Quarter of 2013. As usual, we'll be making statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. I'll give an overview of the first quarter. Kim Dang, our Chief Financial Officer, will then take you through the detailed financials. And then our President, Steve Kean, Kim and I will answer any and all questions that you might have. As usual, we'll be talking about Kinder Morgan, Inc., the GP of the Kinder Morgan companies, which I'll refer to as KMI; and also about Kinder Morgan Energy Partners and El Paso Pipeline Partners, which I'll refer to as KMP and EPB. And those are our affiliated Master Limited Partnerships. Together, these companies have an enterprise value of a little over $110 billion. That makes us the largest midstream and third largest energy company in North America. Once again, I'm happy to report that all 3 entities raised their dividends or distributions for the first quarter of 2013. So let me take you through each of the 3 companies. Starting with KMI. We raised our dividend to $0.38, which is $1.52 annualized. That's up 19% from the first quarter of 2012. We had cash available for dividends of $513 million or $0.49 per share, which is an increase of 14% over the $0.43 per share that we had in Q1 of 2012. We're on target with our drop-downs of El Paso assets into KMP and EPB, and we completed the drop-down to KMP in the first quarter of 50% of El Paso Natural Gas and certain midstream assets. And we expect to sell our 50% interest in the Gulf LNG facilities to EPB later this year. We're also on target regarding the expected savings resulting from the El Paso acquisition. We originally projected $350 million in the first full year. We're now in excess of $400 million for that first full year versus that $350 million target. Strong performance at KMI was driven by good results at both KMP and EPB and by good results in the pipeline assets we still retained at KMI. We expect to meet our budget target of $1.57 and declared dividends for 2013. That's a 12% increase from the 2012 declared dividends of $1.40. And if you look out further into the future, we have currently identified well over $12 billion of expansion and JV projects across North America. Now let me turn to Kinder Morgan Energy Partners, or KMP. There, we increased our distribution to $1.30, which is $5.20 annualized. That's up 8% from Q1 of '12. Our segments produced earnings before DD&A of $1.276 billion. That's up 24% from Q1 of '12. And of course, as you know, we like to refer to distributable cash flow per unit. And there, DCF/u pre certain items is $1.46 versus $1.37 for Q1 of 2012. And that's an increase of 7% year-over-year. If you look at the performance of each segment at KMP starting with natural gas, and let me just relate to our overall feelings on natural gas across all of the Kinder Morgan companies. We believe natural gas is clearly the fossil fuel of the future. It's domestic, clean, abundant and reasonably priced. And that makes it a clear winner for this country for decades to come. One of the biggest challenges to this rosy scenario is to overcome the obstacles in midstream infrastructure to ensure that there's adequate capacity to connect the new sources of supply to the markets where the demand is. Now if you look at Kinder Morgan specifically, we have 62,000 miles of gas pipelines. We'll have about 70,000 post the Copano merger. So I think our companies are ideally situated to help meet this challenge of providing the needed infrastructure in North America. Within KMP, this segment was up 78% from its earnings before DD&A in the first quarter of 2012. Of course, this improvement was driven primarily by the drop-downs of Tennessee Gas Pipeline and El Paso Natural Gas, both of which occurred subsequent to the first quarter of 2012 and both of which are performing as expected and, actually, a bit above our plan for Q1 of 2013. Across the KMP Natural Gas segment, transportation volumes were up about 7% versus a year ago. That's as a result of higher Eagle Ford value -- volume, increased deliveries to Mexico on our Texas Intrastate systems and a new supply project in the Northeast on Tennessee. We expect to close on the Copano acquisition in early May. As we've told you previously, we expect that to be modestly accretive to KMP in 2013 and that's not in our present forecast numbers. And we expect it to about $0.10 accretive in 2014 and beyond. We expect that we'll be adding, as I said, about 7,000 miles of gas pipelines, which have 2.7 Bcf a day of natural gas throughput capacity, together with 9 processing plants, which have over 1 Bcf a day of processing capacity and about 315 million a day of treating capacity. Aside from Copano, we have lots of other projects underway in our Natural Gas segment at KMP, mostly at TGP in the Northeast where we have $900 million worth of projects there alone. But we're also finding opportunities to deliver more gas to Mexico to exp and our Texas operations. And we're now in an open season to determine the industry interest in our proposed Freedom Pipeline, which would connect a portion -- which would convert a portion of El Paso Natural Gas from natural gas to crude oil service and would move crude from the Permian Basin in West Texas to the California refineries. Now let me emphasize, as we said before, we won't build this unless we have customer support through binding long-term contracts. Our open season began on April 2 and extends through May 2. Turning to our CO2 segment. The positives there were very good oil production at SACROC. We averaged 30,700 barrels per day in the first quarter. That's up 14% or almost 4,000 barrels from Q1 of 2012. And we also have record NGL production, actually over 20,000 barrels per day gross production at our SACROC processing unit, the Snyder gas plant, and that was up 15% from the first quarter of 2012. We also substantially approved our -- improved our volumes at the Katz Field as that production continues to ramp up quarter-to-quarter. The negatives were a wide Midland-to-Cushing spread on oil prices in January and February. That's now corrected and the forward curve indication will stay corrected for the rest of the year. But that spread in January and February did negatively impact our average oil price per barrel. We also faced lower NGL prices for the quarter compared to a year ago but pretty much on our plan. Even with those 2 negatives, we expect the CO2 segment to be slightly above plan for the full year 2013, although I'll caution that at any time you talk about projecting what's going to happen over the next 9 months, that's always a little dicey this early in the year. But so far, we feel good about our CO2 segment. The big thing here is that the CO2 demand in the Permian Basin remains very strong. We talk about that almost every quarter. Consequently, we're expanding our source fields in Southwest Colorado by adding a significant amount of compression that we believe will boost the total output from Southwest Colorado from about 1.2 Bcf a day that we have today to about 1.4 Bcf a day by 2014. All of that additional CO2 will be sold under long-term contracts. As I said, the demand for CO2 in the Permian is very strong. We're also starting work on the new source field on the Arizona to Mexico border that will add significant additional supply in future years. And we estimate that we will be able to add at least 200 million cubic feet a day as a result of that field. So if you look at it, we're supplying about 1.2 Bcf a day today. With these projects, we expect to get up into the 1.6 Bcf a day, maybe a little better than that in the next few years. And that's a significant additional source of service to our customers and additional source of opportunity for our own bottom line. Today, of course, we're still curtailing customers, including our own oil production activities in the Permian Basin. That's how strong the demand is for CO2 in the Permian. Turning to our Products Pipeline business segment. They had a very good first quarter, led by higher volumes and revenues on our Cochin Pipeline system by increased volumes and margins at our Transmix operations and by the contribution from Kinder Morgan Crude and Condensate line, which was completed in the second quarter of 2012. In this segment, our NGL volumes increased by 32%, over a year ago, our NGL revenues were up 56%. Looking at refined products volumes. We were up 1.4% for the quarter versus the first quarter of '12. And that's contrasted with an EIA national decline of about 1.2%. Our increase was driven largely by volumes on our Plantation system, which in turn was helped -- were helped by a competitor pipeline's allocations during the first quarter. We also had good biodiesel volumes in this segment, which were up by 20% over a year ago. We expect this segment to be slightly above plan for full year 2013. And also in this area, we have a number of significant projects underway. These include a splitter project on the Houston Ship Channel, which will split condensate for us. We've now expanded that planning to 100,000 barrels per day of processing capacity and we've expanded the storage capacity from 1.2 million barrels to 1.9 million barrels. That's all pursuant to long-term contracts with BP. The total cost is now projected at about $360 million. The first phase will come online in '14, the second phase in '15. And we expect that to be a very good project for us and our customers. And in fact, we think there may be opportunity to add even additional volumes on a going-forward basis. In addition, we have significant expansions of our KMCC line, construction of our Parkway Pipeline in Louisiana and Mississippi and the reversal of our Cochin Pipeline to move condensate up to Alberta. These are significant projects and we have a lot more detail on them in our release from this afternoon. Turning to our Terminals segment. Here, we benefited from increased demand for export coal, where our volumes were about 12% above last year. But we continue to see lower domestic coal volumes. We also enjoyed increased revenues in our liquids terminals, particularly in the Northeast and Gulf Coast, due to new and restructured contracts at higher rates. On the negative side, we have lower petcoke volumes due largely to refinery shutdowns during the quarter along the Gulf Coast and we had a decline in steel volumes. We think the average utilization of our steel customers went from around 79% down to about 75% during the quarter. And we also saw a decline in this segment in ethanol volumes, primarily due to a conversion of certain of our ethanol assets to other uses, primarily crude service and some vegetable oil. And we also experienced the impact of higher ethanol barrels being imported on our coastal terminals but actually have higher demand in our terminals that are located on the inland waterways and elsewhere away from the coast. In our Terminals group, we're working on a wide range of improved major projects. We detailed these in our release and they include significant new liquid storage facilities at Edmonton, Alberta, our fifth crude by rail project progress on our 430 million BOSTCO terminal on the Houston Ship Channel, which we now expect to expand beyond the original 6.5 million barrels of capacity together with the expansion of our chemical storage capacity. Turning to Kinder Morgan Canada. Trans Mountain continues to experience very strong demand to move oil sands production to the lower mainland of British Columbia and the Washington State, as well as across our dock in Vancouver. Specifically, the movement of volumes to Washington State were up by 7%. Our volumes across the dock in Vancouver for the quarter were up 18% from a year ago. We also signed a new 3-year toll agreement with our current customers, which was recently approved by the National Energy Board in Canada. During the quarter, we closed on the sale of our 1/3 interest in Express-Platte Pipeline and we received approximately $400 million gross proceeds from that sale. That will mean that the segment, Kinder Morgan Canada, will likely be slightly below plan for the year. But overall, taking into account the use of that cash we received, the transaction will be modestly accretive to the cash flow at KMP as a whole. Most importantly, we continue to make progress on our proposed expansion of the Trans Mountain system from 300,000 barrels a day to 890,000 barrels a day. That's a $5.4 billion potential project, underpinned by long-term contracts on over 700,000 barrels per day. We expect to file our facilities application with the NEB later this year. So that's it on the segments in KMP. Let me spend just a couple of minutes on EPB. There, we raised our distribution to $0.62 a quarter. That's up 22% from the first quarter of '12. On a DCF per unit basis, we had $0.78 per unit versus $0.69 a year ago. That's up 13% year-over-year. We had a strong first quarter resulting from the drop-downs, which occurred in Q2 of '12 and by good results on the SNG system, where we completed an expansion project. Our gas-fired power generation on SNG was up 4% versus a very strong Q1 of 2012. And that's in contrast with the national trend, which was down quarter-over-quarter and, frankly, in contrast to the results at our other Kinder Morgan pipelines where we were down in 2000 -- first quarter of 2013 versus first quarter of 2012 in terms of demand for power generation. Still had good quarters but not as big as the first quarter a year ago. At EPB, we're particularly encouraged by significant LNG export opportunities that we're pursuing. At our Elba Island facility, near Savannah, Georgia, we entered into a new long-term contract with a Shell subsidiary to develop a liquefaction facility that will have capacity of 2.5 million tons per year or 350 million cubic feet a day of throughput under 2 phases of development. The first phase is approximately 210 million cubic feet a day and that is not contingent on any non-FTA approval and on an 8-inch basis, will involve a capital cost of about $1 billion. If we build the second phase, that will be an additional CapEx of about $500 million, 8-inch. We own 51% of the project. Shell owns 49%. And in addition, we're also doing some expansion on related facilities to get the gas to liquefaction facilities. And we also earn a return on those. At Gulf LNG, that's our facility along the Mississippi Gulf Coast, which EPB expects to purchase from KMI later this year, we're working on a larger facility. But again, we're emphasizing customers with demand for export to FTA countries. And we're coming along pretty well with that. We'll just have to see whether we can put it all together. But we're hopeful that we can. EPB is also bidding through SNG on a new pipeline project to Florida to serve the needs of Florida Power & Light under an RFP procedure that's presently underway in Florida. So in summary, 2013 is off to a very good start in the Kinder Morgan companies and we continue to see enormous opportunities for expanding our great midstream footprint across North America. And with that, I'll turn it over to Kim.

Okay. Thanks, Rich. I'm going to start with KMP. Then I'll do EPB financials and finally, KMI. Looking at the first page of the KMP financials, you'll see it's the GAAP income statement. As we say every quarter, we don't find the GAAP income statement overly meaningful. And so I'll move to the second page, which is what we think more accurately portrays the results of the company and our calculation of distributable cash flow, so the cash flow that we produce for -- that's available for distribution. At the bottom of that page, you will see DCF per unit, as Rich said, of $1.46, up 7% versus a year ago. Versus our distribution of $1.30, that translates into coverage of a little over $60 million. As we said at the time of the budget and it still continues to be true, we will have excess coverage in the first quarter. We will have excess coverage in the fourth quarter and we will have excess coverage for the year. But we will have negative coverage in the second and the third quarter. The DCF in total, $550 million in the second quarter. That's $88 million above this first quarter of 2012. Looking at where that growth comes from, the segments in total, $1.276 billion of segment earnings before DD&A in certain items. That's up $247 million or 24%. Of the $247 million, $218 million of that is coming out of natural gas. And as we discussed, that's largely driven by the drop-downs that KMP or the assets at KMP has acquired from KMI, both in August of last year and in March of this year. And that's somewhat offset by reduced income because of the sales, the FTC sales, that we made in the third quarter of -- the fourth quarter of last year. Products Pipelines is up $24 million and that's a result of the good performance on Cochin and Transmix. Looking at each of the segments versus our budget. Natural Gas Pipelines in the quarter was slightly above its budget. But that's largely due to timing on O&M in some of the interstate gas pipelines. For the year, we expect that natural gas will be on its budget. CO2 for the quarter was slightly below its budget. That's a function of the wide Midland-Cushing differential that impacted the price we get on our oil. As Rich discussed, that is now corrected primarily as a result of the Longhorn Pipeline coming online. For the year, we expect CO2 to be slightly above its budget, largely as a function of higher oil prices. Products Pipelines for the quarter was slightly above its budget as a result of strong performance on Cochin and Transmix versus what we expected. And the same will be true for the full year, we expect them to be slightly above their budget for the same reasons. Terminals, for the quarter, was a little bit below its budget, given the lower domestic coal volumes, the lower steel volumes and a terminated contract on our material service handling business. For the year, we also expect them to be slightly below their budget, primarily as a result of the terminated contract and also higher booked taxes. Now realize, booked taxes have an impact on Terminals. But overall, in our calculation of DCF, we add back booked taxes, subtract cash taxes, so this booked tax impact does not have an impact on the overall DCF of KMP. Kinder Morgan Canada was on budget for the quarter. As Rich mentioned, we will be below plan for the year as a result of the Express sale. But overall, the transaction is going to be accretive for KMP as we use the proceeds to reduce the debt we need -- the debt and the equity that we need to issue. Dropping down to the middle of your page, general and administrative expense, $123 million in the quarter. That's up about $15 million from last year, largely as a result of acquisitions. For the quarter, we're on our budget for G&A. For the full year, we expect G&A to come in slightly below our budget as a result of higher capitalized overhead that's resulting from increased expansion CapEx projects. Interest for the quarter was up $48 million over the first quarter of 2012 as a result of higher balance given the acquisitions and expansion projects. For the quarter, we were slightly favorable to our budget. And for the full year, we expect to be favorable to our budget given the reduced debt needs or financing needs as a result of the Express transaction. The sustaining CapEx for the quarter were up about $4 million over last -- the first quarter of 2012. In the first quarter versus our budget, we actually spent less than what we budgeted. So there's a favorable variance. But for the full -- that's just timing. For the full year, we expect the sustaining CapEx will be on budget. The certain items in the quarter, total $137 million benefit, 141 of that is the gain on the sale of Express. And so that really takes you through KMP. As a Rich said, we expect, at this point, to be on our budget for the year. Looking at KMP's balance sheet. The only thing I'll point out to you here is that we had to -- under the accounting rules, we have to recast KMP for the drop-downs. What that means is we have to go back and restate KMP's 12/31 balance sheet to include the assets that were dropped down as of March 1. The primary impact that you're going to see on the balance sheet as a result of that is you're going to see a big negative of about $490 million in partners capital. And that's because we're separating the transaction. You're separating when you put the assets on your balance sheet from when you pay for the assets. And so when you put the assets on the balance sheet now, they're on our balance sheet as of 12/31, there's a big positive. When you pay for them, then you have a negative in partners capital. And so that's what you're seeing in the change in partners capital between December 31 and March 31. Looking at debt to EBITDA, we ended the quarter at 3.9x. That's up. Now what you see on the face of the balance sheet is 4x at the end of December. But again, that's a result of the recast. Where we actually ended December last year was at 3.7x. The debt to EBITDA is up as a result of the acquisitions and we only have 1 month of EPNG and midstream in our -- in our EBITDA. But we've got a -- all of the debt in the total debt outstanding. So we still expect KMP to end the year at 3.7x, consistent with its budget. Total debt, we ended at $7.22 billion. That's up from $15.35 billion at the end of last year. Again, the $15.35 billion is where we really ended. You can see the recast number is $16.5 billion. So the increase in debt from where we actually ended, $1.87 billion increase in debt in the quarter. And just going through the primary uses of that, the acquisitions were $1.1 billion. That was -- $1.655 billion was the acquisition price on the drop-downs. That included $558 million of KMP's allocable share of the EPNG debt. So that's your $1.1 billion of acquisitions. Then as a result of acquiring the other 50% of EPNG, all of EPNG's debt came on to KMP's balance sheet. It was previously an equity investment and that debt was not on KMP's balance sheet. So you have $1.115 billion that came on as a result of that. We had expansion CapEx of about $480 million and we had contributions to equity investments of a little under $90 million. The primary contributions to equity investments was $45 million contribution to midstream to pay off a revolver that was down there. So that's a $2.78 billion use of cash between those items. We generated about $400 million in proceeds from the sale of Express and then we raised about $650 million in equity between the units that were issued to KMI, KMP offering and the KMR dividend. And then we had about $139 million use of cash in the quarter for working capital and other items. That's primarily associated with accrued interest. Most of KMP's interest payments on its bonds occur in the first quarter and in the third quarter. So that's -- and that's KMP. I will now turn to EPB. Again, first page in your package is EPB's GAAP income statement. I will skip over that and focus on the calculation of distributable cash flow. EPB generated DCF per unit in the quarter of $0.78. That's up $0.09 or 13% over a year ago. Based on the distribution that we declared today of $0.62, that's coverage in the quarter of about $30 million. Similar to KMP, EPB generates excess coverage in the first quarter and in the fourth quarter. And we expect it will have negative coverage in the second quarter and the third quarter, but will have coverage consistent with its budget for the full year. DCF in total, $169 million. That's up $26 million from the first quarter a year ago. Looking at the components of that $26 million increase in DCF, the first line on the DCF calculation, earnings before DD&A and certain items, $317 million in the quarter. That's up $34 million versus the first quarter of 2012. In addition, that doesn't tell the whole story, as we've talked about in prior quarters. EPB was acquiring partial interest in assets from El Paso and they -- what happens is from an accounting perspective, they record 100% of the income and then on the piece of that asset they don't own, they will record an expense down below called noncontrolling interest. As a result of acquiring 100% of certain assets, primarily the remaining 14% interest in CIG, there's lower noncontrolling interest in the first quarter of 2013 than there was in the first quarter of 2012. So that's an additional $8 million that the assets generated. So in total, the $34 million plus the $8 million, $42 million increase in the performance of the assets. About $28 million of that is a result of acquisitions and the balance largely is a result of the performance on SNG due to the expansion projects and also to improve or lower O&M. G&A in the quarter, $20 million expense. That's down from $30 million a year ago. So a $10 million improvement. And that's just the cost savings that Rich mentioned that we're achieving of -- that's EPB's portion of the $400 million. Interest is $75 million expense in the quarter. That's a $6 million increase from a year ago, largely as a result of higher balance given the expansions and the acquisitions. Sustaining CapEx is lower by about $3 million and then the GP incentive is higher by about $24 million. That gets you to $25 million of the $26 million. So there's about $1 million in other items. For the year, EPB overall is on track to meet its budget. And there aren't any significant variances in the major line items that we used to calculate DCF. On EPB's balance sheet, EPB ended the quarter at 3.7x debt to EBITDA. That's down a little bit from the 3.9x at year end. That's largely -- that improvement is largely timing. We still expect to end the year at 3.9x, consistent with our budget. EPB's debt in the quarter, we ended at $4.14 billion of debt. That's down about $93 million. Just to reconcile that debt for you, we spent a little over $20 million in expansion CapEx. EPB started an ATM program and issued about $22 million under its ATM program during the quarter. We had about $35 million of coverage and then working capital was a source of cash of about $58 million, largely as a result of the timing on interest payments. So with that, I'll move to KMI and its cash available for -- to pay dividends, the first page of the KMI numbers. The cash available per share, as Rich mentioned, $0.49. That's up $0.07 or 16%. That compares to our dividend of $0.38. So we have over 100 -- we've got about over $115 million of coverage in the quarter. Similar to both KMP and EPB, at KMI, we expect excess coverage in the first quarter and the fourth quarter and excess coverage for the year. The -- actually, we're going to be right on top for the year of coverage in the second and the third quarter, our negative coverage, given the timing of certain tax payments and interest payments. The cash available to pay dividends, $513 million. That's up $210 million or 69% from the first quarter in 2012. Looking at what drove that growth of $210 million, the cash generated from the 2 MLPs up $199 million. The cash generated by -- from KMP, up $94 million. Of that, $81 million was associated with the GP interest. And the balance, $13 million, was associated with our interest in the limited partner unit. EPB, up $105 million as a result of the acquisition that occurred subsequent to the first quarter in 2012. The expenses at G&A, interest and cash taxes, actually, a $23 million benefit when you compare the first quarter of 2012 to the first quarter of 2013. And that's largely a result of some debt that was paid down, some KMI debt that was paid down when it matured with the drop-down proceeds last August. If you look -- cash tax -- G&A expenses, up $8 million quarter-to-quarter. That's a function of the acquisition. Interest expense, I mentioned, is a positive. Cash taxes are also a positive, but that's just timing. As we outlined in our budget, we expect cash taxes in 2013 to be higher than they were in 2012. And then the cash available from other assets, $100 million increase and that's a result of the acquisition. And then you can see that is offset by the debt that we assumed in the El Paso acquisition and the acquisition debt. So that, that -- those assets less the debt that was either assumed or issued was about a $12 million increase in expense between the 2 quarters. That gets you the $210 million increase for the quarter. Turning to KMI's balance sheet. KMI ended the quarter $9.375 billion of debt. KMI's balance sheet, like KMP's balance sheet, has been recast. So you can see the 12/31 debt at $10.23 billion. Actually, where we ended 2012 was at $11.4 billion of debt. We -- basically, we have a little over $2 billion repayment of debt at KMI in the first quarter. Just the major items that drove that. The proceeds from the drop-down were about $988 million. The debt that moves to KMP associated with those drop-downs, as we talked about on KMP, $1.115 billion. We sold the Bolivia-to-Brazil pipeline and got a little under $90 million. We made a contribution to our pension, which was about a $50 million use of cash. We repurchased about $80 million for the warrants and then we had contributions to equity investments of about $48 million. The largest piece of that was a $45 million contribution to midstream to repay its revolver. Then there was about $24 million in other items to get you to the $2.04 billion reduction in debt. So that's all I have.

Okay. Aerin, if you'll come back on, we'll take questions that you may have.

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

I've got a question -- actually, 2 questions about the CO2 business. And this goes back to some of the comments that you made with regard to expanding the source fields in Southwest Colorado. But as you're talking with these Permian producers, you guys obviously have a pretty good sense of the timing of CO2 production as that ramps concurrent with the expectations for crude production growth. And it seems to like that could drive a lot of incremental volume commitments on the Freedom line. So from a source field perspective, is the right way to think about those compression additions that you referenced at Doe Canyon and McElmo Dome still tracking about $500 million in total cost for both and a target in terms of volume ramp maybe around the second and the fourth quarter of 2014, respectively?

Go ahead, Jim Wuerth.

Yes. The costs are right on budget and I think with both of those together, it's about $500 million. We should have expand at Doe, and we should even be getting most of that expansion done in the volumes by the end of this year, in fact, in the fourth quarter and then towards the end of 2014 for the Yellow Jacket facility.

Okay. And then taking that one step further, that new source field on the Arizona-Mexico border, I assume you're talking about expanding St. Johns. And I recognize you're still in the assessment phase there, but is the right way to continue to think about that, roughly a $2 billion project cost that could possibly get to 650 MMcf a day throughput and that would basically feed the Cortez line? Am I thinking about that the right way?

Yes, we reduced the cost quite a bit and looking at a $200 million case and that will start with that. And I think those numbers are around $600 million and we -- yes, we would head into the Cortez Pipeline just south of Albuquerque.

Next, we have Ted Durbin with Goldman Sachs.

Just on the Freedom side here, you've got this number, the 277,000 barrels a day. I guess I'm wondering, it seems like a pretty precise number. How did you get to that number? Is that what you need to get to sort of a certain hurdle rate or your kind of a return that you'd need? And then maybe you can talk about what kind of tariff you'd need to get to the economics you want on that pipeline.

Well, the 277,000 is just what the engineering studies showed would result -- would be the resulting capacity from the way we intend to build it. That's not the number of barrels we would need. We would need fewer barrels than that. I think we've said publicly we need around 200,000 barrels a day to make the thing hunt economically. As far as the tariff, Tom Martin is here. Tom?

Yes. It's in the neighborhood of $5. It's kind of what we've been pitching to the market.

$5. And so again, as I said, we have an open season underway now. And if we get the kind of commitments that we hope to get, this will be a good project. If we don't, we'll, obviously, reassess. We're not building it for our health. We're building it only if we can make money on it. So that's where we stand on it. And we're just in the middle of the open season now, we've got good conversations, but we'll see how that translates into volumes. As I've said before, it would seem to be a marriage made in heaven. You've got certainly trend line toward increasingly excess production in the Permian and you've got the West Coast refineries that are spending hellacious amounts of money on crude supply. And you would think that paying a reasonable amount of money to bridge those 2, the source and the demand, would make sense, but again, that's up to our customers.

Got it. That's helpful. The next one for me is just on the Terminals here. It looks like kind of flat year-over-year results. You're now saying probably below budget. I guess I'm trying to understand, is that just kind of continuation of the trends you saw in the first quarter with the weak coal volumes, petcoke volumes? Or kind of how do you see that shaping up for the rest of the year?

Well, first of all, we had a 12% growth in the Terminals for the year and we'll get very close to that. And so when we say slightly below budget, we're still, for the year, going to have a very nice growth. We have some things coming online later in the year. So certainly, it's not going to be flat to 2012. We're going to have growth. We're just not going to have -- quite chin the bar at that 12% growth that we have in the budget. John Schlosser, you want to add...

The other thing I'd add is the petcoke volume our earnings were off $2.3 million and that was associated with 4 outages at major refineries here in the Gulf Coast. So we don't expect that to recur in the out-quarters.

Great. And then this is a small one -- I think it's a small one for you, but I want to make sure. All this RIN noise, the renewable credits, I guess, is that anything that we should think about as being an impact to you, an opportunity or a cost? Just how do we think about the RINs for you?

Well, it's a positive for us because we generate excess RINs at our Transmix facilities. And then how much of an upside for us is, depends on the price of the RINs. We're pretty definite on how many RINs we're going to -- excess RINs we're going to generate and it's about 700,000 gallons a month.

That's right, it's 700,000.

And so today, those prices are running $0.65, $0.70. So you can multiply that out and that's how much per month we can make from it. But they were as low as $0.10 a few months ago. They've been as high as, I think, $1.08 or $1.10 at one point. So we're just -- we're selling them on a monthly basis to a customer who wants to take all that we have and so we'll just see what it results in. So it will be upside. The question is how much; and that, we don't know. We just play it month by month and that's not in any of the projections that Kim's talking about when she says products is going to slightly exceed. It's a plan for the year. We haven't counted anything on additional RIN sales, although we recognize about $1.9 million, I think, Ron, of sales in the first quarter.

Yeah.

Next, we have Craig Shere with Tuohy Brothers.

A couple of questions. First, on LNG. Is the focus on off-takers that are really interested more on FTA country exports, just natural conservatism? Or do you think that it's just going to be very tough to get incremental DOE non-FTA approvals? And do you see the recent rise in gas prices in the states affecting both the appetite and potential pricing for those long-term contracts?

Well, first of all, I think the answer as to why we're concentrating on FTA is a combination of 2 things. You mentioned that we are conservative about it. And secondly and we're not sure what the non-FTA process is. I mean, just as recently as yesterday at a conference, I guess, the undersecretary, who's in charge with making these decisions, said he didn't know when they would make the decision, that they had to consider a lot of factors. They've had a couple of studies already about which you said we should export. But we don't have a decision yet. So I think in the end and I've said this before, our view is that there will be substantial amounts of non-FTA approved, particularly for those plants that have good contracts with viable, creditworthy companies. But we can't guarantee that, that's going to happen. So we've concentrated on the FTA. And as I said in my remarks, the beauty of the deal with Shell at Elba Island is that whole first phase is not contingent on getting the non-FTA approval. Now at the Gulf, where we have more space, more opportunity there in terms of sizing, we're working with some customers there to do a non-FTA train -- excuse me, an FTA train and we're working with other customers to work on non-FTA volumes, too. But again, our first preference is to get FTA signed up because there, we have projects we can depend on and know that they're going forward. So that's our feeling. As far as the gas price increase, I don't know how much weekly or monthly movement really means. I don't believe anybody thought that the Henry Hub price of supply looking out over the life of an LNG contract was going to stay at $2 or $2.50 where it was this time last year. But certainly, if the perception becomes that gas prices are meaningfully higher, then that will have some impact, I suppose, on how willing players are to enter into contracts. You have to remember, of course, that the disconnect between the landed prices for LNG, particularly in Japan and the rest of Asia to a lesser extent, versus the price of the Henry Hub even when adding in the liquefaction and transportation expenses is still enormous. There's still a big spread there between the landed cost and the cost of the -- landed price and the cost of delivering. So I think there's still money to be made there. But that may well change, may well close. And obviously, we're not betting on that. We're just looking for customers who want to take a swing at those things and make a lot of money and we're happy to just get the minimum return on our little assets that we're going to build for them.

Great. And I just want to follow up on Darren's questions on CO2. Is the CO2 supply more than EOR really driving the expectations for outperformance for the year? And on EOR, do you see production continuing to surprise the upside?

Well, I think first of all, starting with the second question on the EOR side, we were off to a very good start, particularly SACROC, which was hugely above this quarter last year and a good bit above our plan for the first quarter. And these NGL volumes also are running above our plan and at record levels. And we expect those to continue. Now we're going to have -- we have a train down now on the -- that curtails for a couple of weeks some of our NGLs. So we may not have exactly the same numbers we had in the first quarter, but we expect both of those will be very strong for the year. Katz had a very nice increase quarter-over-quarter and we're continuing to see growth over there. We're now running -- in April, for example, we're up to 2,400 barrels -- a little over 2,400 barrels a day there. So that's a nice increase even though we're in the first quarter. So I think all of our EOR activities are all production that looks good for the year. And we expect that to continue. We -- the supply side of it, the CO2 amount, I think it's more of a long-term driver. As Jim Wuerth said, we will have some of that, particularly at Doe, online. We've taken the October, November timeframe, which will help us some. We're curtailing now. And at Doe alone, we think we can take the production up from about 105 a day to 170 a day. So to the extent we can sell 65 million cubic feet a day of CO2 for a couple of months, that will be a nice little driver in the next couple of months. But it's not the major driver. The major driver, I think, in the long run, is getting that production from Southwest Colorado up to the full 1.4 Bcf per day and then that should happen by next year. And then getting the St. Johns field, all in which case, we'll be at 1.6 and maybe a little better. That's where I think the upstream or the supply side becomes a real driver.

[Operator Instructions] Our next one comes from Bradley Olsen with Tudor, Pickering.

On the Cochin project that you guys have discussed going from Illinois to Alberta, you obviously have an Eastern segment of that pipeline, which there's been no reversal plans announced yet. But given the prospect of a lot of condensate basically without a market in Ohio, as the Utica gets ramped up, is that a project that you're continuing to look at? And have you discussed that with potential customers?

Yes, we continue to look at that. There are a couple of interesting alternatives for that Eastern segment. Ron McClain, anything you want to add to that?

We've looked at several opportunities and are actively pursuing it. We don't have a project yet, but we do think it's part of the ultimate solution for some of those projects that's going to come out of that area. So we're working with several people on it.

Great. On the Tennessee Gas asset, you -- the asset runs through a potentially productive area in Northwest Pennsylvania and Northeast Ohio. One of your competitors recently announced a project to provide gathering and processing services in that area. Is that an area where, especially given your past relationships with Petrohawk, given that Halcon is talking about that being a big area for them, is that an area that you expect to potentially use your Tennessee Gas footprint to build out a gathering and processing asset base there?

Tom Martin?

Yes, we are actually -- in our midstream segment, we're actively pursuing, gathering and processing opportunities in the Utica as well as the Marcellus. We're really focusing on the Utica right now. We've been pursuing that for the last several months and really starting to see a little traction that at this point. So it will be both dry gas and rich gas gathering as well as processing and we're pursuing those opportunities right now.

Great. And then just one more housekeeping question. Can you provide utilization rates on the oil and condensate line out of the Eagle Ford? and if you have the numbers available, a breakout of oil versus condensate volumes?

Well, what we have on the Kinder Morgan Crude and Condensate line is it has capacity of 300,000 barrels a day. As we have publicly said, our original contract with Petrohawk, now BHP, was 25,000 barrels a day in the first year and then ramping up to 50,000 barrels a day beginning in the middle of this year, 2013. And that throughput alone was sufficient to make it a very viable project economically. Since then, we've added Phillips 66 as a customer. We publicly announced this. They have taken additional capacity of about 20,000 barrels a day on it. We're very close to adding another customer, in fact, our board approved today the expenditures for it, that will add another 25,000 barrels a day. And we have still another customer that we think is probably another 25,000 to 30,000 barrels a day. So that kind of gives you an idea of the ramp-up in volumes there. We see that as it's going to be an extraordinarily good investment for us because there's just a lot of people, a lot of producers that want to get to the Houston Ship Channel and that's what we provide them. And then sort of as a step out from that, of course, I think that helped us secure the contracts to build the condensate splitter on our Houston Ship Channel property, which is the $360 million project that I referred to earlier. So we've got a long way to go, a lot of upside on KMCC that we'll just see how it plays out in the future.

We have no further questions in queue at this time.

Okay. All right, Aerin, thank you very much. And thanks to all of you. And we're delighted to share our good news with you and have a great evening. Goodbye.

Thank you for your participation on today's call. You may disconnect your lines at this time.