8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 8-K/A
(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  November 23, 2005


KINDER MORGAN, INC.
(Exact name of registrant as specified in its charter)

Kansas
(State or other jurisdiction
of incorporation)
1-06446
(Commission
File Number)
48-0290000
(I.R.S. Employer
Identification No.)

500 Dallas Street, Suite 1000
Houston, Texas 77002
(Address of principal executive offices, including zip code)

713-369-9000
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01  Completion of an Acquisition or Disposition of Assets.

As previously disclosed in a Current Report on Form 8-K filed on November 30, 2005, on November 30, 2005, Kinder Morgan, Inc. completed the acquisition of all of the stock of Terasen Inc., a corporation existing under the laws of British Columbia ("Terasen"), pursuant to a Combination Agreement among Kinder Morgan, Inc., one of its wholly-owned subsidiaries, and Terasen.  

This Form 8-K/A amends the Current Report on Form 8-K referred to above to include the consolidated financial statements and pro forma financial information required by Items 9.01(a) and (b) of Form 8-K.  Audited consolidated financial statements of Terasen are attached hereto as Exhibit 99.1.  Unaudited consolidated financial statements of Terasen are attached hereto as Exhibit 99.2.  Supplemental Information of Terasen, including a reconciliation of financial statements with United States generally accepted accounting principles and conversion to United States dollars, is attached hereto as Exhibit 99.3.  Unaudited Pro Forma Condensed Combined Financial Statements, derived from the historical consolidated financial statements of Kinder Morgan, Inc. and Terasen and adjusted to reflect the material effects directly attributable to Kinder Morgan, Inc.’s acquisition of Terase n, are attached hereto as Exhibit 99.4.  Each of these exhibits is incorporated herein by reference.   

In addition, certain risk factors relevant to Kinder Morgan, Inc. and its business, as updated to reflect the acquisition of Terasen, are attached hereto as Exhibit 99.5, which exhibit is incorporated herein by reference.

Item 9.01.  Financial Statements and Exhibits.

(a)

Financial Statements of Businesses Acquired.

Audited Consolidated Financial Statements of Terasen Inc. as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 are attached hereto as Exhibit 99.1.  Unaudited Consolidated Financial Statements of Terasen Inc. as of September 30, 2005 and for the nine months ended September 30, 2005 and 2004 are attached hereto as Exhibit 99.2.  Terasen Inc. Supplemental Information – Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars – Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003 is attached  hereto as Exhibit 99.3.  Each of these exhibits is incorporated herein by reference.

(b)

Pro Forma Financial Information.

Unaudited Pro Forma Condensed Combined Financial Statements of Kinder Morgan, Inc. and Terasen Inc. as of September 30, 2005 and for the year ended December 31, 2004 and the nine months ended September 30, 2005 are attached hereto as Exhibit 99.4 and are incorporated herein by reference.

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(c)

Exhibits.

23.1

Consent of KPMG LLP, independent auditors for Terasen Inc.

99.1

Audited Consolidated Financial Statements of Terasen Inc. as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002.

99.2

Unaudited Consolidated Financial Statements of Terasen Inc. as of September 30, 2005 and for the nine months ended September 30, 2005 and 2004.

99.3

Terasen Inc. Supplemental Information – Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars – Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003.

99.4

Unaudited Pro Forma Condensed Combined Financial Statements of Kinder Morgan, Inc. and Terasen Inc. as of September 30, 2005 and for the year ended December 31, 2004 and the nine months ended September 30, 2005.

99.5

Risk Factors.

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S I G N A T U R E

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

KINDER MORGAN, INC.

Dated:  December 5, 2005

By: /s/ Joseph Listengart

Joseph Listengart

Vice President, General Counsel and

Secretary

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EXHIBIT INDEX

Exhibit Number	Description
23.1	Consent of KPMG LLP, independent auditors for Terasen Inc.
99.1	Audited Consolidated Financial Statements of Terasen Inc. as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002.
99.2	Unaudited Consolidated Financial Statements of Terasen Inc. as of September 30, 2005 and for the nine months ended September 30, 2005 and 2004.
99.3	Terasen Inc. Supplemental Information – Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars – Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003.
99.4	Unaudited Pro Forma Condensed Combined Financial Statements of Kinder Morgan, Inc. and Terasen Inc. as of September 30, 2005 and for the year ended December 31, 2004 and the nine months ended September 30, 2005.
99.5	Risk Factors.

EX-23.1

Exhibit 23.1

Consent of Independent Auditor

We consent to the incorporation by reference in the Registration Statements on (i) Form S-16 (Nos. 2-51894, 2-55664, 2-63470 and 2-75654), (ii) Form S-8 (Nos. 2-77752, 33-10747, 33-24934, 33-33018, 33-54403, 33-54443, 33-54555, 333-08059, 333-08087, 333-60839, 333-42178, 333-53908, 333-74864, 33-46999, 333-122345, and 333-104264), (iii) Form S-3 (Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-54317, 33-69432, 333-04385, 333-40869, 333-44421, 333-55921, 333-68257, 333-54896, 333-55866, 333-91257, 333-91316-02, 333-102963, 333-102962-02, 333-122555-01, 333-123408-01 and 333-129033-01) and (iv) Form S-4 (No. 333-102873) of Kinder Morgan, Inc. of our report dated February 2, 2005, except as to notes 2 and 20(b), which are as of September 20, 2005, which report appears in the Current Report on Form 8-K/A (Amendment No. 1) of Kinder Morgan, Inc. dated November 23, 2005. Our report refers t o a change in the method of accounting for capital securities.

We also consent to the incorporation by reference in the Registration Statements of Kinder Morgan, Inc. described above of our report dated February 2, 2005, except as to note (a), which is as of September 20, 2005 with respect to the related supplemental information of Terasen Inc. entitled “Reconciliation With United States Generally Accepted Accounting Principles and Conversion to United States Dollars” as at December 31, 2004 and 2003 and for the years then ended, which report appears in the Current Report on Form 8-K/A (Amendment No. 1) of Kinder Morgan, Inc. dated November 23, 2005. Our report refers to a change in the method of accounting for capital securities.

Yours very truly

/s/ KPMG LLP            

Chartered Accountants

Vancouver, Canada

November 29, 2005

EX-99.1

Exhibit 99.1

Consolidated Financial

Statements of

Terasen Inc.

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

REPORT OF INDEPENDENT AUDITOR

To the Directors of Terasen Inc.

We have audited the accompanying consolidated statements of financial position of Terasen Inc. as of December 31, 2004 and 2003 and the consolidated statements of earnings, retained earnings and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basi s for our audit opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Terasen Inc. as of December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in accordance with Canadian generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company retroactively changed its method of accounting for capital securities in 2005.

KPMG LLP

Chartered Accountants

Vancouver, Canada

February 2, 2005, except as to notes 2 and 20(b) which are as of September 20, 2005

Terasen Inc.

Consolidated Statements of Earnings

In millions of Canadian dollars (restated as per Note 2) Years ended December 31	2004	2003	2002
Revenues
Natural gas distribution	$ 1,494.1	$ 1,497.9	$ 1,402.7
Petroleum transportation	225.5	200.0	136.0
Water and utility services	201.6	152.5	123.1
Other activities	35.8	26.2	45.4
	1,957.0	1,876.6	1,707.2
Expenses
Cost of natural gas	885.4	889.7	807.2
Cost of revenues from water and utility services and other activities	174.3	132.4	120.2
Operation and maintenance	302.9	284.8	261.6
Depreciation and amortization	147.1	133.4	115.6
Property and other taxes	70.1	69.9	66.1
	1,579.8	1,510.2	1,370.7
Operating Income	377.2	366.4	336.5
Financing costs (note 15)	176.6	186.0	170.8
Earnings before share of earnings of Express System and income taxes	200.6	180.4	165.7
Share of earnings of Express System (note 4)	15.0	8.0	-
Earnings before income taxes	215.6	188.4	165.7
Income taxes (note 16)	65.8	55.7	59.9
NET EARNINGS	$ 149.8	$ 132.7	$ 105.8
Common shares - weighted average (millions)	104.7	103.8	86.4
BASIC EARNINGS PER COMMON SHARE (note 12)	$ 1.43	$ 1.28	$ 1.22
DILUTED EARNINGS PER COMMON SHARE (note 12)	$ 1.42	$ 1.27	$ 1.21

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Terasen Inc.

Consolidated Statements of Retained Earnings

In millions of Canadian dollars (restated as per Note 2) Years ended December 31	2004	2003	2002
Retained earnings, beginning of year	$ 355.5	$ 302.2	$ 271.0
Net earnings	149.8	132.7	105.8
	505.3	434.9	376.8
Dividends on common shares	86.4	79.4	59.8
Share issue costs, net of income taxes (note 12)	-	-	13.8
Share options purchased (note 13)	-	-	1.0
	86.4	79.4	74.6
Retained earnings, end of year	$ 418.9	$ 355.5	$ 302.2

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Terasen Inc.

 Consolidated Statements of Financial Position

In millions of Canadian dollars (restated as per Note 2) As at December 31	2004	2003
Assets
Current assets
Cash and short-term investments	$ 20.0	$ 1.5
Accounts receivable	348.6	404.3
Inventories of gas in storage and supplies	189.2	142.4
Prepaid expenses	11.2	13.4
Current portion of rate stabilization accounts (note 8)	27.1	21.6
	596.1	583.2
Property, plant and equipment (note 7)	3,892.5	3,882.4
Investment in Express System (note 4)	218.9	204.6
Goodwill	128.0	101.9
Rate stabilization accounts (note 8)	60.6	75.7
Other assets (note 9)	74.5	73.5
	$ 4,970.6	$ 4,921.3
Liabilities and shareholders’ equity
Current liabilities
Short-term notes	$ 248.0	$ 553.9
Accounts payable and accrued liabilities	369.8	369.6
Income and other taxes payable	36.4	43.9
Current portion of rate stabilization accounts (note 8)	27.6	6.2
Current portion of long-term debt (note 10)	416.7	51.8
	1,098.5	1,025.4
Long-term debt (notes 2 and 10)	2,291.6	2,426.1
Other long-term liabilities and deferred credits (note 11)	140.7	99.8
Future income taxes (note 16)	68.7	67.5
	3,599.5	3,618.8
Shareholders' equity
Common shares (note 12)	883.4	868.7
Contributed surplus (note 13)	132.5	131.4
Retained earnings	418.9	355.5
Cumulative currency translation adjustment	(12.7)	(2.1)
	1,422.1	1,353.5
Less cost of common shares held by Terasen Pipelines (Trans Mountain) Inc.	51.0	51.0
	1,371.1	1,302.5
	$ 4,970.6	$ 4,921.3

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Terasen Inc.

Consolidated Statements of Cash Flows

In millions of Canadian dollars (restated as per Note 2) Years ended December 31	2004	2003	2002
Cash flows provided by (used for)
Operating activities
Net earnings	$ 149.8	$ 132.7	$ 105.8
Adjustments for non-cash items
Depreciation and amortization	147.1	133.4	115.6
Share of earnings from Express System, net of (in excess of) cash distributions	(14.3)	2.1	-
Future income taxes	(0.5)	9.4	10.6
Other	7.6	5.0	5.3
	289.7	282.6	237.3
Decrease in rate stabilization accounts	31.0	50.7	66.9
Changes in non-cash working capital	14.7	(70.2)	7.2
	335.4	263.1	311.4
Investing activities
Property, plant and equipment	(154.4)	(222.9)	(395.7)
Acquisition of water and utility services businesses (note 4)	(57.9)	-	-
Acquisition of Express System (note 4)	-	(206.7)	-
Acquisition of Terasen Gas (Vancouver Island) Inc. (note 4)	-	-	(305.2)
Proceeds on sale of natural gas distribution assets (note 11)	64.6	-	23.8
Proceeds on sale of other property, plant and equipment	0.9	-	-
Other assets	(13.4)	(2.3)	(33.8)
	(160.2)	(431.9)	(710.9)
Financing activities
Increase (decrease) in short-term notes	(305.9)	113.9	135.0
Increase in long-term debt	339.1	461.4	84.5
Reduction of long-term debt	(118.2)	(340.8)	(231.4)
Issue of common shares, net of issue costs (note 12)	14.7	10.1	475.2
Dividends on common shares	(86.4)	(79.4)	(59.8)
Share options purchased (note 13)	-	-	(1.0)
	(156.7)	165.2	402.5
Net increase (decrease) in cash	18.5	(3.6)	3.0
Cash at beginning of year	1.5	5.1	2.1
Cash at end of year	$ 20.0	$ 1.5	$ 5.1
Supplemental cash flow information
Interest paid in the year	$ 172.7	$ 194.7	$ 190.8
Income taxes paid in the year	78.1	47.9	19.7
Cash is defined as cash or bank indebtedness.

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Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

Terasen Inc. (“Terasen” or the “Company”) provides energy transportation and utility asset management services. Terasen operates in three primary business segments which are separately managed to assess operational performance.

(a)

Natural gas distribution operations involve the transmission and distribution of natural gas and propane for residential, commercial, institutional, and industrial customers in British Columbia. The operations are conducted through Terasen Gas Inc. (“Terasen Gas”), serving the Lower Mainland and interior of British Columbia, Terasen Gas (Vancouver Island) Inc. (“TGVI”), serving Vancouver Island and the Sunshine Coast, Terasen Gas (Whistler) Inc., and Terasen Gas (Squamish) Inc.

(b)

Petroleum transportation operations are carried out through Terasen Pipelines (Trans Mountain) Inc. (“Trans Mountain”), which owns and operates a common carrier pipeline system for crude and refined petroleum products transported from Edmonton, Alberta to Vancouver, British Columbia and Washington State, Terasen Pipelines (Corridor) Inc. (“Corridor”), a pipeline in northern Alberta transporting diluted bitumen, and the one-third owned entities Express Pipeline LP and Express US Holdings LP (“the Express System”). The Express System transports crude oil from Hardisty, Alberta, through the Rocky Mountain region of the United States and on to Wood River, Illinois.

(c)

Water and utility services operations includes providing water and wastewater treatment services, water distribution and wastewater collection, meter reading, meter fleet management and installation services as well as product sales related to the water, sewer and irrigation markets. These operations are provided through Terasen Waterworks (Supply) Inc., Terasen Utility Services Inc., Terasen Utility Services (U.S.) Inc. (collectively “Terasen Water and Utility Services”), the Company’s 50% interest in Fairbanks Sewer and Water Inc. (“FSW”) and the Company’s 30% interest in CustomerWorks LP (“CWLP”).

(d)

Other activities include international consulting activities, the Company’s 45% (2003 – 44%; 2002 – 44%) proportionate interest in Clean Energy Fuels Corp. (“Clean Energy”) and corporate financing costs and administration charges.  

The Company operates in Canada and the United States, but at the present time the United States operations are not of sufficient size to be reportable as either operating or geographic segments.

On April 25, 2003, the Company changed its name from BC Gas Inc. to Terasen Inc.

1.

SIGNIFICANT ACCOUNTING POLICIES

The preparation of these consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

In the opinion of management, these consolidated financial statements have been properly prepared within reasonable limits of materiality and reflect the following summary of significant accounting policies.

Page 5

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(a)

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company, its subsidiaries, and its proportionate share of the accounts of jointly-controlled entities. Investments in entities which are not subsidiaries or joint ventures, but over which the Company exercises significant influence, are accounted for using the equity method.

Certain of the prior year comparative figures have been reclassified to conform with the current year’s presentation.

(b)

FOREIGN CURRENCY TRANSLATION

The Company translates its self-sustaining US dollar denominated water and utility service businesses’ and Clean Energy’s financial statements into Canadian dollars using the current rate method of foreign currency translation. Under this method, assets and liabilities are translated at the rate of exchange in effect at the balance sheet date, revenue and expense items are translated at average rates of exchange for the period, and the exchange gains and losses arising on the translation of the financial statements are recorded in the cumulative currency translation adjustment account in Shareholders’ equity.

The Company’s US-based petroleum transportation operations are integrated and are translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet date, with the exception of certain long-term debt in the Express System, which is considered to be a hedge of U.S. dollar denominated revenues in the Express Sytem. Non-monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect on the dates the assets were acquired or liabilities assumed. Revenues and expenses are translated at the average rates of exchange prevailing during the month the transactions occurred. Under this method, exchange gains and losses on translation are reflected in income when incurred.

(c)

REGULATION

The natural gas distribution companies are subject to the regulation of the British Columbia Utilities Commission (“the BCUC”). The Trans Mountain and Express System operations are governed by contractual arrangements with shippers and are regulated in Canada by the National Energy Board and, in the United States, tariff matters are regulated by the Federal Energy Regulatory Commission. Corridor’s operations are governed by contractual arrangements with shippers and are subject to regulation by the Alberta Energy and Utilities Board (“the AEUB”). FSW is regulated by the Regulatory Commission of Alaska.

These regulatory authorities exercise statutory authority over such matters as rates of return, construction and operation of facilities, accounting practices, rates and tolls, and contractual agreements with customers.

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Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In order to recognize the economic effects of regulation, the timing of recognition of certain revenues and expenses in these operations may differ from that otherwise expected under generally accepted accounting principles for non-regulated businesses.

(d)

INVENTORIES

Inventories of gas in storage are valued at weighted-average cost. Supplies and other inventories are valued at the lower of cost and net realizable value.

(e)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost less accumulated depreciation and unamortized contributions in aid of construction. Cost includes all direct expenditures for system expansions, betterments and replacements, an allocation of overhead costs and an allowance for funds used during construction. When allowed by the regulators, regulated operations capitalize an allowance for equity funds used during construction at approved rates.

Depreciation of regulated assets is recorded on a straight-line basis over their useful lives. Depreciation rates for regulated assets are approved by the respective regulator, and for non-regulated assets requires the use of management estimates of the useful lives of assets. Depreciation of non-regulated equipment is recorded using the declining balance method.

The cost of regulated depreciable property retired, together with removal costs less salvage, is charged to accumulated depreciation, as is any gain or loss incurred on disposal.

(f)

IMPAIRMENT OF LONG-LIVED ASSETS

On January 1, 2004, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”) standard for recognizing, measuring and disclosing impairment of long-lived assets held for use. A long-lived asset is tested for recoverability when events or changes in circumstances indicate that its carrying amount may not be recoverable. The new standard has had no impact on the Company’s financial results.

Page 7

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(g)

ASSET RETIREMENT OBLIGATIONS

On January 1, 2004, the Company adopted the new CICA standard for the recognition, measurement and disclosure of liabilities for asset retirement obligations and the associated asset retirement costs. Under the new standard the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value is added to the carrying amount of the associated long-lived asset, which is then expensed over the asset’s estimated useful life. The liability is accreted over the useful life of the asset through charges to expenses.

As the fair value of future removal and site restoration costs are not currently determinable, the adoption of the policy does not result in the recording of an asset retirement liability and therefore the financial statements have not been impacted by the new standard. In addition, for regulated operations there is a reasonable expectation that asset retirement costs would be recoverable through future rates or tolls.

(h)

RATE STABILIZATION ACCOUNTS

TGVI maintains a BCUC approved Revenue Deficiency Deferral Account (“RDDA”) to accumulate unrecovered costs of providing service to customers or to drawdown such costs where earnings exceed an allowed return as set by the BCUC. The RDDA has accumulated the allowed earnings in excess of achieved earnings prior to 2003 and is to be recovered through future rates. During the years ended December 31, 2004 and 2003, the RDDA has decreased as achieved earnings have exceeded the allowed return.

Terasen Gas is authorized by the BCUC to maintain rate stabilization accounts to mitigate the effect on its earnings of unpredictable and uncontrollable factors, namely volume volatility caused principally by weather and natural gas cost volatility. The Revenue Stabilization Adjustment Mechanism (“RSAM”) accumulates the margin impact of variations in the actual versus forecast volume use for residential and commercial customers.

In 2004, the Gas Cost Reconciliation Account (“GCRA”), which accumulates differences between actual natural gas costs and forecast natural gas costs as recovered in base rates, was replaced by the Commodity Cost Reconciliation Account (“CCRA”) and the Midstream Cost Reconciliation Account (“MCRA”). The two new accounts were approved by the BCUC to segregate costs that are allocable to all sales customers (MCRA) and all residential customers and certain commercial and industrial customers for whom Terasen Gas acquires gas supply (CCRA).

All rate stabilization account balances for both TGVI and Terasen Gas are amortized and recovered through rates as approved by the BCUC.

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Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(i)

DEFERRED CHARGES

The Company defers certain costs which the regulatory authorities or contractual arrangements require or permit to be recovered through future rates or tolls. Deferred charges are amortized over various periods as approved by the regulator and depending on the nature of the costs.

Deferred charges include long-term debt issue costs which are amortized over the term of the related debt.

Deferred charges not subject to regulation relate to projects which may benefit future periods and will be capitalized on completion, expensed on project abandonment, or are being amortized on a straight-line basis over their useful lives.

(j)

GOODWILL

Goodwill represents the excess of an investment over the fair value of the net assets acquired. Goodwill is not amortized and is tested annually for impairment by comparing the book value with the fair value of the goodwill of the reporting unit to which the goodwill is attributable. Any deficiency in the book value compared to the fair value will be recognized as an impairment loss.

(k)

REVENUE RECOGNITION

The Company recognizes revenues when products have been delivered or services have been performed.

The natural gas distribution utilities record revenues from natural gas sales on the basis of regular meter readings and estimates of customer usage since the last meter reading date to the end of the year and adjusted for the Revenue Stabilization Adjustment Mechanism and other BCUC approved orders.

For the petroleum transportation operations, revenues are recorded when products are delivered and adjusted according to terms prescribed by toll settlements with the shippers and approved by the respective regulator.

For the water and utility services operations revenues are recorded when services have been performed or products have been delivered.

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Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l)

DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes derivatives and other financial instruments to manage its exposure to changes in foreign currency exchange, interest rates and energy commodity prices.

A derivative must be designated and effective to be accounted for as a hedge. The Company designates each derivative instrument as a hedge of specific assets or liabilities on the balance sheet, specific firm commitments or anticipated transactions. The Company also assesses, both at inception and on an ongoing basis, whether the derivative instruments that are used in each hedging transaction are highly effective in offsetting changes in fair values or cash flows of the hedged items.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.

As approved by the regulator, derivatives are used to manage natural gas commodity price risk in the natural gas distribution operations. The majority of natural gas supply contracts have floating, rather than fixed prices. The Company uses natural gas price swap contracts to fix the effective purchase price. Any differences between the effective cost of natural gas purchased and the price of natural gas included in rates are recorded in deferral accounts (CCRA and MCRA), and subject to regulatory approval, are passed through in future rates to customers.

The Company’s short-term borrowings and variable rate long-term debt are exposed to interest rate risk. The Company manages interest rate risk through the use of interest rate derivatives with payments and receipts under interest rate swap contracts being recognized as adjustments to financing costs.

Foreign currency risk in natural gas distribution operations relates mainly to purchases and sales of natural gas denominated in U.S. dollars, and is thereby managed through regulatory deferral accounts. Certain foreign currency risks in the natural gas distribution operations are managed on behalf of customers through the use of foreign currency derivatives.

The Company’s earnings from the U.S. portion of Trans Mountain’s crude oil pipeline system and the Company’s investment in the Express System are subject to foreign currency risk. The Company’s earnings are also subject to translation risk associated with certain Express System assets and liabilities. The Company manages some of these foreign currency exposures through the use of foreign currency derivatives.

Page 10

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Unless otherwise approved by regulation, if a derivative instrument is terminated or ceases to be effective prior to maturity, the gain or loss at that date is deferred and recognized in income concurrently with the hedged item. Any subsequent changes in the value of the derivative instrument are reflected in income.

Non-hedge derivatives are marked to market at the balance sheet date with fluctuations in value charged to earnings.

(m)

POST-EMPLOYMENT BENEFIT PLANS

The Company sponsors a number of employee benefits plans. These plans include both defined benefit and defined contribution pension plans, and various other post-retirement benefit plans.

The cost of pensions and other post-retirement benefits earned by employees is actuarially determined as the employee provides service, except when the regulator requires costs to be expensed as paid. The Company uses the projected benefit method based on years of service and management’s best estimates of expected returns on plan assets, salary escalation, retirement age of employees, mortality and expected future health-care costs. The discount rate used to value liabilities is based on AA Corporate bond yields. The Company accrues the cost of defined benefit pensions and post-employment benefits as the employee provides services, except when the regulator requires costs to be expensed as paid.

The expected return on plan assets is based on management’s estimate of the long-term expected rate of return on plan assets and a market-related value of plan assets. The market-related value of assets as of December 31, 2004 is calculated as the average of the market value of invested assets at December 31, 2004 and two actuarially determined extrapolated market values of invested assets at December 31, 2004. The two extrapolated market values are calculated by using the market value of invested assets at December 31, 2002 rolled forward to December 31, 2004 using 2003 and 2004 net contributions and assumed investment returns, and the market value of invested assets at December 31, 2003 rolled forward to December 31, 2004 using 2004 net contributions and assumed investment returns. These three amounts are then averaged to determine the market-related value of plan assets used in calculating net benefit exp ense.

Adjustments, in excess of 10% of the greater of the accrued benefit obligation and plan asset fair value, that result from plan amendments, changes in assumptions and experience gains and losses are amortized over the expected average remaining service life of the employee group covered by the plan. Experience will often deviate from the actuarial assumptions resulting in actuarial gains and losses.

Defined contribution plan costs are expensed by the Company as contributions are payable.

Page 11

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(n)

INCOME TAXES

The Company’s regulated gas and petroleum operations account for and recover income tax expense in rates as prescribed by their respective regulators. This includes accounting for income taxes by the taxes payable method and accounting for certain deferral and rate stabilization accounts on a net of realized tax basis. Therefore, future income taxes related to temporary differences are not recorded.  The taxes payable method is followed as there is a reasonable expectation that all future income taxes will be recovered in rates when they become payable.

The Company’s non-regulated operations and FSW follow the asset and liability method of accounting for income taxes. Future income tax assets and liabilities are determined based on temporary differences between the tax bases of assets and liabilities and their carrying values for accounting purposes. Future income tax assets and liabilities are measured at the tax rate that is expected to apply when the temporary differences reverse.

(o)

STOCK-BASED COMPENSATION

The Company has a Share Option Plan whereby officers, directors and certain key employees may be granted options to purchase common shares. The Company uses the fair value based method for valuing stock options granted on or after January 1, 2003. Under the fair value based method, compensation cost is measured at the fair value at the date of grant and is expensed over the award’s vesting period.

Prior to January 1, 2003, the Company used the settlement method of accounting for stock options, whereby any consideration paid by employees on the exercise of stock options was credited to common shares and no compensation expense was recognized. As required, pro forma earnings and earnings per share disclosures were made for the impact of the fair value based method of accounting for stock options granted prior to January 1, 2003.

The Company has issued Deferred Share Units (“DSU’s”) to senior management and Board members under long-term compensation programs and also as an optional form of compensation to Board members. The DSU’s are marked-to-market at the end of each quarter and gains or losses are recognized in earnings. The DSU’s notionally earn dividends that are reinvested as additional DSU’s when dividends are paid, and are paid out in cash only on retirement or termination of the individual receiving them.

Page 12

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

2.

CHANGE IN ACCOUNTING POLICY

In accordance with recent changes to the CICA Handbook Section 3860 “Financial Instruments – Disclosures and Presentation”, the Company’s $125.0 million 8% Capital Securities have been reclassified from shareholders’ equity to liabilities because the Capital Securities can be settled by issuing equity at a variable price dependent upon the market value of the Company’s common shares at the settlement date. As a result of the change, distributions associated with the Capital Securities are now recorded as financing costs and the related income-tax benefits are recorded within income tax expense. Previously, the distributions were recorded on an after-tax basis as a deduction from net earnings to determine earnings applicable to common shares. There is no impact to earnings applicable to common shares or earnings per share. The changes have been applied retroactively and have increased long-term debt and decreased shareholders’ equity, both by $125.0 million, compared to the amounts previously reported as at December 31, 2004 and 2003. The restatement has also increased financing costs by $10.0 million for each of the years ended December 31, 2004, 2003 and 2002, decreased income tax expense by $3.4 million for the year ended December 31, 2004 (2003 and 2002 - $3.3 million) and capital securities distributions by $6.6 million for the year ended December 31, 2004 (2003 and 2002 - $6.7 million), all compared to the amounts previously reported.

3.

SEGMENT DISCLOSURES

2004
	Natural gas distribution	Petroleum transportation	Water and utility services	Other activities	Total
Revenues	$ 1,494.1	$ 225.5	$ 201.6	$ 35.8	$ 1,957.0
Cost of natural gas	885.4	-	-	-	885.4
Cost of revenues from water and utility services and other activities	-	-	152.4	21.9	174.3
Operation and maintenance	190.5	66.0	28.3	18.1	302.9
Depreciation and amortization	98.7	35.9	9.3	3.2	147.1
Property and other taxes	47.1	22.5	0.2	0.3	70.1
	1,221.7	124.4	190.2	43.5	1,579.8
Operating income	272.4	101.1	11.4	(7.7)	377.2
Financing costs	126.2	22.5	1.0	26.9	176.6
Share of (earnings) of Express System	-	(15.0)	-	-	(15.0)
Income taxes (recovery) on earnings	50.3	22.7	3.8	(11.0)	65.8
Net earnings (loss)	95.9	70.9	6.6	(23.6)	149.8
Earnings (loss) per common share	0.92	0.68	0.06	(0.23)	1.43
Total assets	3,375.0	1,350.4	186.7	58.5	4,970.6
Goodwill	76.5	-	40.8	10.7	128.0
Capital expenditures	112.3	31.0	7.8	3.3	154.4

Page 13

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

3.

SEGMENTED DISCLOSURES (CONTINUED)

2003
	Natural gas distribution	Petroleum transportation	Water and utility services	Other activities	Total
Revenues	$ 1,497.9	$ 200.0	$ 152.5	$ 26.2	$ 1,876.6
Cost of natural gas	889.7	-	-	-	889.7
Cost of revenues from water and utility services and other activities	-	-	115.4	17.0	132.4
Operation and maintenance	189.4	57.0	21.4	17.0	284.8
Depreciation and amortization	92.5	30.0	8.0	2.9	133.4
Property and other taxes	48.6	21.0	0.1	0.2	69.9
	1,220.2	108.0	144.9	37.1	1,510.2
Operating income	277.7	92.0	7.6	(10.9)	366.4
Financing costs	135.5	23.2	0.9	26.4	186.0
Share of (earnings) of Express System	-	(8.0)	-	-	(8.0)
Income taxes (recovery) on earnings	46.8	20.6	2.6	(14.3)	55.7
Net earnings (loss)	95.4	56.2	4.1	(23.0)	132.7
Earnings (loss) per common share	0.92	0.54	0.04	(0.22)	1.28
Total assets	3,422.6	1,337.6	115.7	45.4	4,921.3
Goodwill	76.5	-	12.0	13.4	101.9
Capital expenditures	135.1	77.2	10.1	0.5	222.9

2002
	Natural gas distribution	Petroleum transportation	Water and utility services	Other activities	Total
Revenues	$ 1,402.7	$ 136.0	$ 123.1	$ 45.4	$ 1,707.2
Cost of natural gas	807.2	-	-	-	807.2
Cost of revenues from water and utility services and other activities	-	-	94.8	25.4	120.2
Operation and maintenance	179.3	43.8	22.7	15.8	261.6
Depreciation and amortization	92.6	17.1	4.1	1.8	115.6
Property and other taxes	46.9	18.7	0.2	0.3	66.1
	1,126.0	79.6	121.8	43.3	1,370.7
Operating income	276.7	56.4	1.3	2.1	336.5
Financing costs	136.8	9.5	-	24.5	170.8
Income taxes (recovery) on earnings	47.5	17.6	0.4	(5.6)	59.9
Net earnings (loss)	92.4	29.3	0.9	(16.8)	105.8
Earnings (loss) per common share	1.07	0.34	0.01	(0.20)	1.22
Total assets	3,282.5	1,078.6	97.2	64.1	4,522.4
Goodwill	76.5	-	9.1	15.4	101.0
Capital expenditures	130.2	246.3	13.4	5.8	395.7

Page 14

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

4.

ACQUISITIONS AND RELATED FINANCINGS

Water And Utility Services Acquisitions

On July 31, 2004, the Company acquired a 50 per cent interest in FSW. FSW provides water and wastewater treatment and water distribution and wastewater collection services to Fairbanks, Alaska. The Company paid $40.8 million for its 50 per cent interest after working capital adjustments. The Company has accounted for the acquisition of FSW using the purchase method and has proportionately consolidated its 50% of operations since the date of acquisition.

The Company and the other owners of FSW each have the option to have Terasen acquire the remaining 50 per cent interest in FSW at fair market value in 2009.

During 2004, the Company also acquired 100% of two businesses and increased its investment in two other businesses that provide meter reading, meter fleet management and installation services in Canada and the United States. The Company paid $17.1 million for the interest in these businesses after working capital adjustments. The earnings of these acquired businesses have been included in the statement of earnings from the date of acquisition.

The following table provides the allocation of the purchase price over the assets and liabilities acquired:

	FSW	Other	Total
Working capital	$ 2.2	$ 7.1	$ 9.3
Property, plant and equipment	27.0	1.6	28.6
Goodwill	24.0	8.0	32.0
Other assets	0.5	0.4	0.9
Future income taxes	(2.0)	-	(2.0)
Long-term debt assumed	(10.9)	-	(10.9)
Total cash paid	$ 40.8	$ 17.1	$ 57.9

Page 15

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

4.

ACQUISITIONS AND RELATED FINANCINGS (CONTINUED)

Express System

On January 9, 2003 a consortium including the Company, Borealis Infrastructure Management Inc. and the Ontario Teachers’ Pension Plan Board acquired the Express Group of companies, which includes Express Pipeline LP. and Express Holdings (U.S.A.) LP. from EnCana Corporation. Each of the three consortium members owns an equal interest in the Express System. The total purchase price was $1,203.5 million, including assumed debt of $578.8 million. The Company’s share of the purchase price was $206.7 million.

The December 2002 issue of common shares, which yielded gross proceeds of $301.4 million, was completed in part to finance the purchase of the Company’s share of the Express System.

The Company exercises significant influence over the Express System and, accordingly, accounts for its one-third investment in the Express System using the equity method. Under the equity method the investment has been initially recorded at cost, and is subsequently adjusted to recognize the Company’s share of earnings of the Express System and is reduced by distributions.

Terasen Gas (Vancouver Island) Inc.

The Company acquired all of the outstanding shares and inter-corporate debt of Terasen Gas (Vancouver Island) Inc. and Terasen Gas (Whistler) Inc., formerly Centra Gas British Columbia Inc. and Centra Gas Whistler Inc. (collectively “TGVI”) effective January 1, 2002. The results of TGVI's operations have been included in the consolidated financial statements since that date.

The aggregate purchase price was $333.4 million, including $305.2 million paid in cash and a $52.0 million deferred payment with a present value of $28.2 million at the acquisition date. The deferred payment is payable on December 31, 2011 or sooner if TGVI realizes revenues from transportation contracts to serve power generating plants which may be constructed in TGVI’s service area. If any part of the deferred payment is paid prior to December 31, 2011, the difference between the payment and the carrying value of the debt will be treated as contingent consideration and added to the cost of the purchase at that time.

Page 16

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

4.

ACQUISITIONS AND RELATED FINANCINGS (CONTINUED)

The following table summarizes the fair value assigned to the assets acquired and liabilities assumed at January 1, 2002.

Current assets	$ 34.3
Property, plant and equipment	432.9
Rate stabilization account	61.0
Goodwill	75.9
Deferred charges	8.4
Future income taxes	3.0
Total assets acquired	615.5
Current liabilities	(44.2)
Long-term debt	(224.1)
Other long-term liabilities	(13.8)
Total liabilities assumed	(282.1)
Net assets acquired	$ 333.4

The acquisition was financed by the issuance of 10,416,000 common shares with gross proceeds of $188.3 million and by debt of $145.1 million. The common shares were issued pursuant to an agreement whereby, on November 20, 2001, the Company issued 10,416,000 subscription receipts at a price of $18.08 per subscription receipt. Proceeds from the sale were held in escrow by a trustee until the closing of the acquisition, when each subscription receipt was converted into one common share of the Company.

5.

RESTRUCTURING

During the year ended December 31, 2003, the Company’s natural gas distribution operations undertook a management and administrative restructuring and integration. The initiative was undertaken to generate efficiencies and harmonize processes and systems between Terasen Gas and TGVI. As a result of the restructuring, natural gas distribution operations recorded a charge of $3.4 million in 2003 and $0.7 million in 2004, net of previously recorded accruals, tax and the deferral of an amount for future recovery from customers through rates. The pre-tax charges have been included in operations and maintenance expense.

Page 17

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

6.

INVESTMENTS IN JOINTLY-CONTROLLED ENTITIES

The Company has a 50% interest in FSW, a 45% interest in Clean Energy and a 30% interest in CWLP for which it uses the proportionate consolidation method of accounting. The Company’s proportionate share of assets and liabilities related to these entities is summarized as follows:

	2004	2003
Current assets	$ 27.1	$ 20.4
Long-term assets (including property, plant and equipment and goodwill)	121.0	80.6
Current liabilities	41.3	29.8
Long-term liabilities	20.4	8.7

The Company’s proportionate share of revenues, expenses, and cash flows related to these entities is summarized as follows:

	2004	2003	2002
Revenues	$      77.7	$      60.7	$      37.1
Expenses (including financing costs and income tax)	71.8	58.7	34.3
Net income	5.9	2.0	2.8
Cash flows from operating activities	7.8	26.7	16.1
Cash flows from investing activities	(7.5)	(7.6)	(12.3)
Cash flows from financing activities	0.2	(1.8)	-

Page 18

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

7.

PROPERTY, PLANT AND EQUIPMENT

2004
	Weighted average depreciation rate	Cost	Accumulated depreciation	Net book Value
Natural gas distribution systems	2.40%	$ 3,009.6	$ 542.5	$ 2,467.1
Petroleum pipeline systems	2.51%	1,295.0	295.9	999.1
Water and utility plant and distribution systems	3.71%	34.0	1.8	32.2
Plant, buildings and equipment	8.98%	404.4	160.3	244.1
Land and land rights	0.25%	152.6	2.6	150.0
		$ 4,895.6	$ 1,003.1	$ 3,892.5

2003
	Weighted average depreciation rate	Cost	Accumulated depreciation	Net book Value
Natural gas distribution systems	2.36%	$ 2,979.2	$ 486.7	$ 2,492.5
Petroleum pipeline systems	2.54%	1,260.0	265.6	994.4
Water and utility plant and distribution systems	6.01%	5.2	1.0	4.2
Plant, buildings and equipment	8.47%	404.6	153.2	251.4
Land and land rights	0.23%	141.8	1.9	139.9
		$ 4,790.8	$ 908.4	$ 3,882.4

8.

RATE STABILIZATION ACCOUNTS

	2004	2003
Current Assets
RDDA	$ 12.9	$ 12.8
RSAM	11.1	8.8
CCRA	2.7	-
Gas Cost Variance Account (TGVI)	0.4	-
	27.1	21.6
Long-Term Assets
RDDA	32.7	43.5
RSAM	27.9	32.2
	60.6	75.7
Current Liabilities
MCRA	(27.6)	-
GCRA	-	(2.5)
Gas Cost Variance Account (TGVI)	-	(3.7)
	(27.6)	(6.2)
Net rate stabilization accounts	$  60.1	$  91.1

Page 19

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

8. RATE STABILIZATION ACCOUNTS (CONTINUED)

The current portion of the rate stabilization accounts represents the amounts expected to be recovered in rates over the next twelve months. Actual recoveries will vary depending on actual natural gas consumption and recovery amounts approved by the BCUC.

The RSAM account is anticipated to be recovered in rates over three years. Recovery of the RSAM balance is dependent upon annually approved rates and actual gas consumption volumes. The MCRA and CCRA accounts, which succeeded the GCRA account in 2004, are anticipated to be fully recovered or paid within the next fiscal year.

9.

OTHER ASSETS

	2004	2003
Deferred charges
Regulated	$ 46.2	$ 47.9
Non-regulated	13.7	13.8
Investments	1.3	2.6
Long-term receivables	13.3	9.2
	$ 74.5	$ 73.5

Page 20

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

10.

LONG-TERM DEBT

	2004	2003
Terasen Inc.
(a) Medium Term Note Debentures:
6.30% Series 1, due December 1, 2008 4.85% Series 2, due May 8, 2006 5.56% Series 3, due September 15, 2014	$ 200.0 100.0 125.0	$ 200.0 100.0 -
	425.0	300.0
(b) 8.00% Capital Securities due April 19, 2040	125.0	125.0
Terasen Gas Inc.
(c) Purchase Money Mortgages:
11.80% Series A, due September 30, 2015	74.9	74.9
10.30% Series B, due September 30, 2016	200.0	200.0
(d) Debentures and Medium Term Note Debentures:
9.75% Series D, due December 17, 2006 10.75% Series E, due June 8, 2009	20.0 59.9	20.0 59.9
6.20% Series 9, due June 2, 2008 6.95% Series 11, due September 21, 2029 6.50% Series 12, due July 20, 2005 6.50% Series 13, due October 16, 2007 6.15% Series 16, due July 31, 2006	188.0 150.0 200.0 100.0 100.0	188.0 150.0 200.0 100.0 100.0
Floating Rate Series 17, interest rate of 2.93% (2003 – 3.02%)      due September 26, 2005 6.50% Series 18, due May 1, 2034	150.0    150.0	150.0   -
Various series, weighted average interest rate of 9.63% (2003 –      9.63%) due in 2005	45.0	45.0
Obligations under capital leases, at 6.23% (2003 – 6.20%)	10.8	11.7
	1,448.6	1,299.5
Terasen Gas (Vancouver Island) Inc.
(e) Syndicated credit facility at short-term floating rates, weighted average interest rate of 3.35% (2003 – 3.51%) with annual repayments of $5.4 million in 2005 and maturities of $176.5 million in 2006 and $33.0 million in 2009	214.9	220.4
Terasen Pipelines (Trans Mountain) Inc.
(f) Debentures:
10.75% Series B, due November 22, 2004 11.50% Series C, due June 20, 2010	- 35.0	30.0 35.0
	35.0	65.0
Terasen Pipelines (Corridor) Inc.
(g)   Commercial Paper at short-term floating rates, weighted average interest rate of 2.51% (2003 – 2.69%)	446.0	464.0
Other long-term debt	13.8	4.0
Total long-term debt	2,708.3	2,477.9
Less: current portion of long-term debt	416.7	51.8
	$ 2,291.6	$ 2,426.1

Page 21

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

10.

LONG-TERM DEBT (CONTINUED)

(a)

TERASEN INC. MEDIUM TERM NOTE DEBENTURES:

The Company’s Medium Term Note Debentures are unsecured obligations but are subject to the restrictions of the Trust Indenture dated November 21, 2001.

(b)

TERASEN INC. CAPITAL SECURITIES

On April 19, 2000, the Company issued $125.0 million of 8.0% Capital Securities with a term to maturity of 40 years for gross proceeds of $123.7 million. The Company may elect to defer payments on these securities and settle such deferred payments in either cash or common shares, and has the option to settle principal at maturity through the issuance of common shares. The securities are exchangeable at the option of the holder on or after April 19, 2010 for common shares of the Company at 90% of the market price, subject to the right of the Company to redeem the securities for cash. Distributions on these securities, net of related income taxes, are deducted from net earnings for the purposes of calculating earnings applicable to common shares.

(c)

TERASEN GAS INC. PURCHASE MONEY MORTGAGES:

The Series A and Series B Purchase Money Mortgages are secured equally and rateably by a first fixed and specific mortgage and charge on Terasen Gas’ Coastal Division assets, and are subject to the restrictions of the Trust Indenture dated December 3, 1990. The aggregate principal amount of Purchase Money Mortgages that may be issued under the Trust Indenture is limited to $425 million.

(d)

TERASEN GAS INC. DEBENTURES AND MEDIUM TERM NOTE DEBENTURES:

Terasen Gas’ debentures are unsecured obligations but are subject to the restrictions of the Trust Indenture dated November 1, 1977, as amended and supplemented.

(e)

TERASEN GAS (VANCOUVER ISLAND) INC. BANK SYNDICATE:

The credit facility from the syndicate of banks is secured by a first floating charge over all of the assets of TGVI, assignment of certain material contracts, and assignment of royalty revenue and interruptible incentive payments.

(f)

TERASEN PIPELINES (TRANS MOUNTAIN) INC. DEBENTURES:

The Trans Mountain debentures are unsecured obligations but are subject to the restrictions of the Trust Indenture dated February 18, 1987, as amended and supplemented.

(g)

TERASEN PIPELINES (CORRIDOR) INC. COMMERCIAL PAPER:

The commercial paper program to finance the Corridor pipeline is supported by a syndicated bank credit facility that is committed until November 21, 2006.

Page 22

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

10.

LONG-TERM DEBT (CONTINUED)

The Company’s Series 1 and Series 3 Medium Term Note Debentures, Terasen Gas’ Series B Purchase Money Mortgages, Series E Debentures, and Series 11, Series 13, Series 16 and Series 18 Medium Term Note Debentures, and Trans Mountain’s Series C Debentures are redeemable in whole or in part at the option of the Company at a price equal to the greater of the Canada Yield Price, as defined in the applicable Trust Indenture, and the principal amount of the debt to be redeemed, plus accrued and unpaid interest to the date specified for redemption. The Canada Yield Price is calculated as an amount that provides a yield slightly above the yield on an equivalent maturity Government of Canada bond.

Required principal repayments over the next five years are as follows:

2005 2006 2007 2008 2009 $   416.7 834.4 102.5 390.5 95.5

Required principal repayments in 2006 include $446.0 in repayments with respect to Corridor which has been refinanced subsequent to year end as described in Note 20.

11.

OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS

	2004	2003
Pension and other post-employment benefit liabilities	$ 30.8	$ 20.5
Deferred gains for sale of natural gas distribution assets	60.3	30.2
Deferred payment	33.9	31.9
Other deferred credits/liabilities	15.7	17.2
	$ 140.7	$ 99.8

The deferred gains on sale of natural gas distribution assets occurred upon the sale and leaseback of pipeline assets to certain municipalities in 2001, 2002 and 2004. The pre-tax gains of $66.5 million on combined cash proceeds of $135.9 million are being amortized over the 17-year terms of the operating leases that commenced at the time of the sale transactions. These operating lease commitments are included in the table in Note 18.

Page 23

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

11.

OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS (CONTINUED)

The deferred payment resulted from the Company’s acquisition of TGVI effective January 1, 2002. The deferred payment has a face value of $52.0 million but was discounted at January 1, 2002 to a present value of $28.2 million. The payment is due on December 31, 2011 or sooner if TGVI realizes revenues from transportation revenue contracts to serve power-generating plants which may be constructed in TGVI’s service area. If any part of the deferred payment is paid prior to December 31, 2011, the difference between the payment and the carrying value of the debt will be treated as contingent consideration for the acquisition of TGVI and will be added to the cost of the purchase at that time.

Other deferred credits/liabilities includes amounts resulting from the Company’s acquisition of TGVI effective January 1, 2002.

12.

SHARE CAPITAL

Authorized Share Capital

The Company is authorized to issue 750,000,000 common shares, 100,000,000 first preference shares and 100,000,000 second preference shares, all without par value.

Stock Split

On June 14, 2004 the Company carried out a two-for-one stock split effected by paying a stock dividend of one additional common share for each common share held as of June 7, 2004.

All equity-based benefit plans have been amended to reflect the additional shares or options resulting from the stock split. All share and per share data has been amended for comparative and current periods to reflect the stock split.

Common Shares

Changes in the issued and outstanding common shares are as follows:

	2004		2003		2002
	Number	Amount	Number	Amount	Number	Amount
Outstanding, beginning of year	113,338,942	$ 868.7	112,548,010	$ 858.6	85,872,118	$ 364.3
Issued under:
Public and private placements	-	-	-	-	15,863,200	301.4
Conversion of subscription receipts	-	-	-	-	10,416,000	188.3
Share option plan	1,009,761	14.5	781,802	9.9	392,754	4.5
Employee share purchase plan	6,962	0.2	9,130	0.2	3,938	0.1
	114,355,665	$ 883.4	113,338,942	$ 868.7	112,548,010	$ 858.6
Less common shares held by Trans Mountain	9,184,188		9,184,188		9,184,188
Outstanding, end of year	105,171,477		104,154,754		103,363,822

Page 24

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

12.

SHARE CAPITAL (CONTINUED)

In March 2002, the Company issued 10,416,000 common shares for gross proceeds of $188.3 million through the conversion of subscription receipts, and in December 2002, the Company issued 15,863,200 common shares in concurrent public and private placements for gross proceeds of $301.4 million. Costs associated with the issuance of these shares of $13.8 million, net of current and future income taxes, have been recorded against retained earnings.

As at December 31, 2004, Trans Mountain owned 8.0% (2003 – 8.1%) of the common shares of Terasen Inc. The cost of these shares is shown as a deduction from shareholders' equity.

Reserved for Issue

At December 31, 2004 the number of common shares reserved for issue to meet rights outstanding is as follows:

Under share option plan	5,166,617
Under dividend reinvestment and share purchase plan	4,125,152
Under payroll deduction employee share purchase plan	808,994
	10,100,763

Earnings Per Share

Earnings per share are based on the weighted average number of common shares outstanding during the year. Diluted earnings per share are based on the weighted average number of common shares and dilutive stock options outstanding at the beginning of or granted during the year. The Company's performance based share options are considered to be contingently issuable shares and have been included in the treasury stock method calculation only if all performance criteria of the options have been satisfied. The possible exchange of the $125.0 million Capital Securities into common shares has not been included in the treasury stock method calculation since similar obligations in the past have been paid wholly in cash.

	2004		2003		2002
	Weighted average shares	Earnings	Weighted average shares	Earnings	Weighted average shares	Earnings
Earnings applicable to common shares		$ 149.8		$ 132.7		$ 105.8
Weighted average common shares	104.7		103.8		86.4
Add:  weighted-average number of shares that would be issued under treasury stock method	1.0		1.0		0.8
	105.7	$ 149.8	104.8	$ 132.7	87.2	$ 105.8
Earnings per share		$ 1.43		$ 1.28		$ 1.22
Diluted earnings per share		$ 1.42		$ 1.27		$ 1.21

Page 25

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

12.

SHARE CAPITAL (CONTINUED)

Shareholder Rights Plan

The Company established a Shareholder Rights Plan in 2003 that is designed to encourage the fair treatment of shareholders in connection with any takeover offer for the Company. Rights issued under the plan become exercisable when a person or party acquires or announces the intention to acquire 20% or more of the Company’s outstanding common shares without complying with certain provisions set out in the plan or without approval of the Board of Directors of the Company. Each common share outstanding is entitled to one right, which entitles the rights holder, other than the acquiring person or party, the right to purchase common shares of the Company at 50% of the then market price.

13.

SHARE OPTION PLAN AND STOCK-BASED COMPENSATION

Share Option Plan

The Company has a Share Option Plan whereby officers and certain key employees may be granted options to purchase a maximum of 12,600,000 unissued common shares with terms up to ten years. There are two categories of options which have been issued under the Share Option Plan, Regular Share Options and Performance Based Share Options. The option exercise price is the closing sale price of the common shares on the Toronto Stock Exchange on the trading day prior to the date the option is granted.

In 2002, the Company exercised its right under the Plan to require participants to determine whether or not to exercise the option for unissued common shares, thereby removing the cash settlement of vested options. Prior to the removal of the cash settlement option, share options to purchase 194,642 common shares were purchased in 2002 for $1.0 million, net of income tax benefits, which was charged to retained earnings.

Regular Share Options

Since 2000, the Company has granted options with eight-year terms which are exercisable on a cumulative basis and vest at one-third per year on the anniversary of the option grant date. Prior to 2000, the Company granted options with ten-year terms which are exercisable on a cumulative basis at 20% per year.

Page 26

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

13.

SHARE OPTION PLAN AND STOCK-BASED COMPENSATION (CONTINUED)

Regular Share Options Outstanding

	2004		2003		2002
	Shares under option	Weighted- average exercise price	Shares under option	Weighted- average exercise price	Shares  under  option	Weighted- average exercise price
Outstanding,  beginning of  year	1,118,822	$ 14.31	1,518,792	$ 13.68	1,373,014	$ 11.58
Options granted during the year	24,800	23.93	127,144	14.28	533,660	16.91
Options exercised	(537,716)	13.39	(497,716)	12.21	(219,238)	10.88
Options forfeited and expired	(40,038)	17.46	(29,398)	16.98	(9,102)	14.18
Options purchased	-	-	-	-	(159,542)	10.13
Outstanding, end of year	565,868	$ 15.40	1,118,822	$ 14.31	1,518,792	$ 13.68
Options exercisable, end of year	348,857	$ 13.25	710,354	$ 12.28	826,062	$ 11.31

	Options outstanding			Options exercisable
Exercise price range	Shares under option	Weighted- average exercise price	Weighted- average remaining contractual life	Number exercisable at year-end	Weighted- average exercise price
$6.94 - $13.33	180,780	$  11.07	2.1	180,780	$  11.07
$14.13 - $15.50	130,648	14.71	3.6	130,648	14.71
$17.56 - $24.00	254,440	18.82	5.6	37,429	18.68
	565,868	$ 15.40	4.0	348,857	$ 13.25

During 2004 the Company identified a number of regular share options that had been granted in 1994 and 1995 that had not been reflected in the outstanding balances upon the conversion of share option records to the external transfer agent in 1997. These 151,316 share options with a weighted average exercise price of $7.05 have been included in the continuity table above as an adjustment to the January 1, 2002 balance previously reported.

Performance Based Share Options

The Company has granted performance based share options with eight-year terms. The options vest at one-third per year on the anniversary of the option grant dates, subject to the market price of the Company’s common shares reaching 125% of the option’s exercise price for at least 10 out of 15 consecutive trading days within four years of the option grant date. If the market price requirement is not attained within four years of grant date, the participant is still eligible to exercise two-thirds of the granted options if the common share price reaches 125% of the option’s exercise price for at least 10 out of 15 consecutive trading days during the subsequent four years.

Page 27

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

13.

SHARE OPTION PLAN AND STOCK-BASED COMPENSATION (CONTINUED)

Performance Based Share Options Outstanding

	2004		2003		2002
	Shares under option	Weighted- average exercise price	Shares under option	Weighted- average exercise price	Shares   under    option	Weighted- average exercise price
Outstanding, beginning of  year	2,304,398	$ 17.08	1,892,184	$ 15.53	1,354,550	$ 13.83
Options granted during the year	716,600	23.88	744,200	19.82	772,800	17.61
Options exercised	(472,045)	15.53	(284,086)	13.57	(173,516)	12.28
Options purchased	-	-	-	-	(26,550)	13.00
Options forfeited and expired	(209,334)	19.68	(47,900)	19.26	(35,100)	13.55
Outstanding, end of year	2,339,619	$ 19.24	2,304,398	$ 17.08	1,892,184	$ 15.53
Options exercisable, end of year	1,020,508	$ 16.27	909,598	$ 12.79	649,818	$ 13.66

	Options outstanding			Options exercisable
Exercise price range	Shares under option	Weighted- average exercise price	Weighted-     average     remaining     contractual life	Number exercisable at year-end	Weighted- average exercise price
$11.25 - $13.63	264,950	$  12.77	2.8	264,950	$  12.77
$15.50 - $17.56	795,134	16.97	4.8	567,534	16.75
$19.60 - $23.88	1,279,535	21.99	6.6	188,024	19.73
	2,339,619	$ 19.24	5.6	1,020,508	$ 16.27

Page 28

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

13.

SHARE OPTION PLAN AND STOCK-BASED COMPENSATION (CONTINUED)

Stock-Based Compensation

In 2004, 741,400 stock options were granted (2003 – 871,344; 2002 – 1,306,460) at an average exercise price of $23.88 (2003 - $19.01; 2002 - $17.32) under the Company’s Share Option Plan. The Company has applied the fair value based method of accounting for stock options granted after January 1, 2003. Reported earnings for 2004 include a compensation charge of $1.2 million (2003 - $0.6 million; 2002 - nil) representing the fair value of options granted in 2003 and 2004 amortized over their respective vesting periods, with a corresponding increase to contributed surplus. Had the Company used the fair value based method to account for stock options granted during 2002, pro forma earnings and earnings per share would have been as follows:

		2004	2003	2002
Net earnings	As reported	$ 149.8 million	$ 132.7 million	$ 105.8 million
	Pro forma	$ 148.6 million	$ 131.5 million	$ 104.5 million
Basic earnings per common share	As reported	$ 1.43	$ 1.28	$ 1.22
	Pro forma	$ 1.42	$ 1.27	$ 1.21
Diluted earnings per common share	As reported	$ 1.42	$ 1.27	$ 1.21
	Pro forma	$ 1.41	$ 1.26	$ 1.20

A Black-Scholes model was used to calculate stock option fair values.  The weighted average fair value of options granted in 2004 was $2.40 (2003 - $2.77; 2002 - $2.95).  Significant assumptions in valuing the options are as follows:

	2004		2003		2002
	Regular Options	Performance Based	Regular Options	Performance Based	Regular Options	Performance Based
Interest rate	3.5 – 3.7%	3.5%	3.8 – 4.2%	4.3 – 4.4%	4.7%	4.3 – 5.1%
Expected volatility	15.1 – 15.4%	15.4%	16.8 – 17.8%	16.2 – 17.8%	22.5%	22.5%
Expected life	5 years	6 years	5 years	6 years	5 years	6 years

Deferred Share Units

The Company has issued Deferred Share Units (“DSU’s”) to certain senior employees and directors as compensation. At December 31, 2004, there were 52,859 (2003 – 22,104) DSU’s outstanding, which had a fair value and carrying value of $1.5 million (2003 - $0.5 million). The liability is included in other long-term liabilities and deferred credits.

Page 29

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

14.

EMPLOYEE BENEFIT PLANS

The Company is a sponsor of pension plans for eligible employees. The plans include registered defined benefit pension plans, supplemental unfunded arrangements, which provide pension benefits in excess of statutory limits, and defined contributory plans. The Company also provides post-employment benefits other than pensions for retired employees. The following is a summary of each type of plan:

Defined Benefit Plans

Retirement benefits under the defined benefit plans are based on employees’ years of credited service and remuneration. Company contributions to the plan are based upon independent actuarial valuations. The most recent actuarial valuations of the defined benefit pension plans for funding purposes were at December 31, 2002 and December 31, 2001 and the date of the next required valuations are December 31, 2005 and December 31, 2004. The December 31, 2004 valuation will not be completed until the second quarter of 2005. The expected weighted average remaining service life of employees covered by the defined benefit pension plans is 11.8 years (2003 and 2002 - 11.8 years).

Defined Contribution Plan

Effective in 2000 for Terasen Gas and 2003 for petroleum transportation operations, all new non-union employees become members of defined contribution pension plans. Company contributions to the plan are based upon employee age and pensionable earnings for employees of the natural gas distribution operations and pensionable earnings for employees of the petroleum transportation operation.

Supplemental Plans

Certain employees are eligible to receive supplemental benefits under both the defined benefit and defined contribution plans. The supplemental plans provide pension benefits in excess of statutory limits. The supplemental plans are unfunded and are secured by letters of credit.

Other Post-Employment Benefits

The Company provides retired employees with other post-employment benefits that include, depending on circumstances, supplemental health, dental and life insurance coverage. Post-employment benefits are unfunded and annual expense is recorded on an accrual basis based on independent actuarial determinations, considering among other factors, health care cost escalation.  The most recent actuarial valuations were completed as at December 31, 2002. The expected weighted average remaining service life of employees covered by these benefit plans is 9.9 years (2003 and 2002 - 9.9 years).

Page 30

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

14.

EMPLOYEE BENEFIT PLANS (CONTINUED)

The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 each year. The financial positions of the employee defined benefit pension plans and other benefit plans are presented in aggregate in the tables below:

	Pension benefit plans		Other benefit  plans
	2004	2003	2004	2003
Plan assets
Fair value, beginning of year	$ 255.3	$ 221.2	$ -	$ -
Acquisition of Express System	-	1.9	-	-
Actual return on plan assets	26.7	31.1	-	-
Employers’ contributions	5.5	10.2	1.5	1.2
Employees’ contributions	2.9	3.0	-	-
Benefits and settlements paid	(15.2)	(11.4)	(1.4)	(1.1)
Other	(0.7)	(0.7)	(0.1)	(0.1)
Fair value, end of year	274.5	255.3	-	-
Accrued benefit obligation
Obligation, beginning of year	276.7	250.8	61.0	49.9
Acquisition of Express System	-	1.4	-	0.6
Current service cost	8.1	7.9	1.3	1.5
Interest cost	17.2	16.6	3.9	3.4
Employees’ contributions	2.9	3.0	-	-
Benefits and settlements paid	(15.2)	(11.4)	(1.4)	(1.1)
Change in discount rate	7.8	8.3	2.5	2.4
Actuarial (gain) loss	-	(1.4)	-	11.5
Past service cost and other	0.5	1.5	-	(7.2)
Balance, end of year	298.0	276.7	67.3	61.0
Funded status - plan deficit	(23.5)	(21.4)	(67.3)	(61.0)
Unamortized transitional obligation (benefit)	(27.2)	(31.0)	6.2	7.8
Unamortized actuarial loss	43.2	47.8	32.0	32.1
Unamortized past service costs	9.0	8.7	(3.2)	(3.5)
Accrued benefit asset (liability)	$ 1.5	$ 4.1	$ (32.3)	$ (24.6)

The net accrued benefit liability is included in other long-term liabilities and deferred credits (Note 11).

Page 31

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

14.

EMPLOYEE BENEFIT PLANS (CONTINUED)

Included in the accrued benefit obligation and fair value of the plan assets at year-end are the following amounts in respect of plans with accrued benefit obligations in excess of fair value of assets:

	Pension benefit plans		Other benefit plans
	2004	2003	2004	2003
Accrued benefit obligations:
Unfunded plans	$ 28.0	$ 25.3	$ 67.3	$ 61.0
Funded plans	156.5	142.7	-	-
	184.5	168.0	67.3	61.0
Fair value of plan assets	151.9	135.1	-	-
Funded status deficit	$ (32.6)	$ (32.9)	$ (67.3)	$ (61.0)

The accrued benefit obligations for unfunded pension benefit plans are secured by letters of credit.

The net benefit plan expense is as follows:

	Pension benefit plans			Other benefit plans
	2004	2003	2002	2004	2003	2002
Current service cost	$ 8.1	$ 7.9	$ 7.5	$ 1.3	$ 1.5	$ 1.1
Interest cost on projected benefit obligations	17.2	16.6	15.6	3.9	3.4	2.5
Actual return on plan assets	(26.7)	(31.1)	(17.8)	-	-	-
Net actuarial losses	7.8	6.9	-	2.5	14.0	-
Past service costs	0.5	0.3	-	-	(8.6)	-
Net benefit plan expense before adjustments	6.9	0.6	5.3	7.7	10.3	3.6
Adjustments to recognize the long-term nature of employee future benefit costs:
Difference between actual and expected return on plan assets	7.7	13.0	-	-	-	-
Difference between actual and recognized actuarial gains (losses) in year	(5.2)	(6.1)	-	0.1	(13.0)	-
Difference between actual and recognized past service costs in year	0.1	0.3	-	(0.3)	8.7	-
Amortization of transitional obligation (benefit)	(3.4)	(3.4)	(3.4)	1.6	2.7	2.7
Other	1.5	0.6	1.1	-	-	0.3
Net benefit plan expense	$ 7.6	$ 5.0	$ 3.0	$ 9.1	$ 8.7	$ 6.6
Defined contribution plan expense	$ 2.3	$ 1.6	$ 1.2
	$ 9.9	$ 6.6	$ 4.2

Page 32

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

14.

EMPLOYEE BENEFIT PLANS (CONTINUED)

Benefit Plan Assets

The weighted-average asset allocation by asset category of the Company’s funded defined benefit pension plans is as follows:

	Pension benefit plans
	2004	2003
Equity securities	55%	58%
Fixed income securities	40%	36%
Other assets	5%	6%
Total assets	100%	100%

The investment policy for benefit plan assets is to optimize the risk-return using a portfolio of various asset classes. The Company’s primary investment objectives are to secure registered pension plans, and maximize investment returns in a cost-effective manner while not compromising the security of the respective plans. The pension plans utilize external investment managers to manage the investment policy. Assets in the plan are held in trust by independent third parties.

The pension plans do not directly hold any shares of the Company.

Significant Assumptions

The discount rate assumption used in determining pension and post-retirement benefit obligations and net benefit expense reflects the market yields, as of the measurement date, on high-quality debt instruments. The expected rate of return on plan assets assumption is reviewed annually by management, in conjunction with actuaries. The assumption is based on the expected returns for the various asset classes, weighted by the portfolio allocation.

Page 33

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

14.

EMPLOYEE BENEFIT PLANS (CONTINUED)

The weighted average significant actuarial assumptions used to determine the accrued benefit obligation and the benefit plan expense are as follows:

	Pension benefit plans			Other benefit plans
	2004	2003	2002	2004	2003	2002
Accrued benefit obligation
Discount rate at December 31, based on AA Corporate bonds	6.00%	6.25%	6.25%	6.00%	6.25%	6.25%
Rate of compensation increase	3.50%	3.39%	3.39%	-	-	-
Net benefit plan expense
Discount rate at January 1, based on AA Corporate bonds	6.25%	6.25%	6.56%	6.25%	6.25%	6.50%
Expected rate of return on plan assets	7.50%	7.50%	7.50%	-	-	-

The assumed health-care cost trend rates for other post-employment benefit plans are as follows:  

	2004	2003	2002
Extended health benefits
Initial health care cost trend rate	9.0%	10.0%	11.0%
Annual rate of decline in trend rate	1.0%	1.0%	1.0%
Ultimate health care cost trend rate	5.0%	5.0%	5.0%
Year that the rate reaches the ultimate trend rate	2008	2008	2008
Medical Services Plan Benefits Premium trend rate	4.0%	4.0%	4.0%

A one percentage-point change in assumed health-care cost trend rates would have the following effects:

2004	One percentage- point increase	One percentage- point decrease
Effect on the total of the service cost and interest cost components of the benefit plan expense	$ 1.1	$ (1.0)
Effect on accrued benefit obligation	13.1	(10.8)

Page 34

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

14.

EMPLOYEE BENEFIT PLANS (CONTINUED)

Cash Flows

Total cash contributions for employee benefit plans consist of:

	Employee benefit plans
	2004	2003	2002
Funded plans	$ 4.3	$ 9.4	$ 3.5
Beneficiaries of unfunded plans	2.7	2.0	1.7
Defined contribution plans	2.3	1.6	1.2
Total	$ 9.3	$ 13.0	$ 6.4

The contributions for 2005 are anticipated to be approximately the same as 2004 for both the defined pension benefit plans and other benefit plans.

Benefit Changes

Effective January 1, 2004, the Company modified its post-employment benefit program for non-union active employees in order to provide future retirees with more choice of coverage and to reduce the Company’s exposure to future health and group life cost increases. The new plan is predominantly a defined contribution plan incorporating a Company-paid health spending account, a security health plan and life insurance. Provincial medical services plan premiums will now be paid by the retiree.

All plan members who have retired on or before December 31, 2004 receive benefits under the plans that were in effect when they retired, which includes the payment of provincial medical services plan premiums by the Company. Employees electing to retire during 2005 will have a choice between the new and old plan, and employees retiring after December 31, 2005 will participate in the new plan.

These assumptions, including the post-employment benefit plan changes, were included in the calculation of the accrued benefit obligation at December 31, 2003 and 2004.

15.

FINANCING COSTS

	2004	2003	2002
Interest and expense on long-term debt	$ 151.6	$ 165.6	$ 178.9
Interest on short-term debt	26.1	29.0	10.8
Interest capitalized	(1.1)	(8.6)	(18.9)
	$ 176.6	$ 186.0	$ 170.8

Page 35

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

16.

INCOME TAXES

Provision For Income Taxes

	2004	2003	2002
Current income taxes	$ 66.3	$ 46.3	$ 49.3
Future income taxes	(0.5)	9.4	10.6
	$ 65.8	$ 55.7	$ 59.9

Variation In Effective Income Tax Rate

Consolidated income taxes vary from the amount that would be computed by applying the Canadian and United States Federal, British Columbia and Alberta combined statutory income tax rate of 34.52% (2003 – 36.47%; 2002 – 38.04%) to earnings before income taxes as shown in the following table:

	2004	2003	2002
Earnings before income taxes	$ 215.6	$ 188.4	$ 165.7
Combined statutory income tax rate	34.52%	36.47%	38.04%
Combined income taxes at statutory rate	$ 74.4	$ 68.7	$ 63.0
Increase (decrease) in income taxes resulting from: Capital cost allowance and other deductions claimed for income tax purposes over amounts recorded for accounting purposes	(14.7)	(19.4)	(12.4)
Large Corporations Tax in excess of surtax	6.6	7.8	6.7
Non-deductible expenses and non-taxable income	5.5	7.5	1.3
Benefit of tax rate changes on losses	(0.4)	(3.3)	(1.0)
Equity income not subject to tax	(3.3)	(2.6)	-
Other	(2.3)	(3.0)	2.3
Actual consolidated income taxes Effective income tax rate	$ 65.8 30.52%	$ 55.7 29.56%	$ 59.9 36.15%

Page 36

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

16.

INCOME TAXES (CONTINUED)

Future Income Taxes

The net future income tax liability of the Company of $68.7 million (2003 - $67.5 million) relates primarily to the tax effect of temporary differences on non-regulated property, plant and equipment balances.

As a result of the Company accounting for income taxes following the taxes payable method for its natural gas distribution and petroleum transportation regulated operations, the Company has not recognized net future income tax liabilities amounting to $278.7 million at December 31, 2004 (2003 – $263.5 million) and has not recognized a future income tax expense of $15.2 million for the year ended December 31, 2004 (2003 – $17.9 million; 2002 - $10.3 million), all of which were calculated using the asset and liability method, excluding the impact of regulatory accounting.

17.

FINANCIAL INSTRUMENTS

Fair Value Estimates

The carrying values of cash and short-term investments, accounts receivable, short-term notes and accounts payable and accrued liabilities approximate their fair values due to the relatively short period to maturity of the instruments.

The fair value of the Company’s investment in the Express System is estimated to approximate its carrying value.

The fair value of the Company’s long-term debt, calculated by discounting the future cash flow of each debt issue at the estimated yield to maturity for the same or similar issues at December 31, 2004, or by using available quoted market prices, is estimated at $2,818.2 million (2003 - $2,565.3 million). The majority of the Company’s long-term debt relates to regulated operations which enables the Company to recover the existing financing charges through rates or tolls.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates cannot be determined with precision as they are subjective in nature and involve uncertainties and matters of judgment.

Page 37

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

17.

FINANCIAL INSTRUMENTS (CONTINUED)

Derivative Instruments

The Company uses derivative instruments to hedge its exposures to fluctuations in natural gas prices, interest rates and foreign currency exchange rates.

Asset (Liability)			2004		2003
December 31 (in millions)	Number of swaps	Term to maturity (years)	Carrying Value	Fair Value	Carrying Value	Fair Value
Interest Rate Swaps
Terasen Inc.	2	1 – 4	$ 0.4	$ 5.4	$ 0.4	$ 5.3
TGVI	4	1 – 4	(0.5)	(3.2)	(1.5)	(4.8)
Natural Gas Commodity Swaps
TGI and TGVI	139	Up to 2	1.9	(8.3)	(7.8)	6.3
Clean Energy	7	Up to 5	6.5	6.5	-	-
Foreign Currency Swaps
Terasen Inc.	2	1	(0.6)	(0.6)	0.8	0.8
TGI	-	-	-	-	-	(0.9)

The natural gas derivatives fair value reflects only the value of the natural gas derivatives and not the offsetting change in value of the underlying future purchases of natural gas. These fair values reflect the estimated amounts the Company would receive or pay to terminate the contracts at the stated dates.

Clean Energy, an entity in which the Company holds a 45% interest, has purchased gas forward contract positions to offset future commodity supply contracts. Since these contracts have not been specifically designated as hedges, these positions are marked-to-market at each balance sheet date and gains or losses are reported in the statement of earnings as cost of revenues from other activities. During the year ended December 31, 2004 the Company has included in earnings an amount of $3.3 million (2003 and 2002 – nil) net of tax and estimated selling expenses pertaining to the Company’s proportionate share of Clean Energy’s gas forward contracts.

The derivatives entered into by TGVI relate to regulated operations and any resulting gains or losses are recorded in a deferral account (RDDA), subject to regulatory approval, and passed through to customers in future rates.

As at December 31, 2004, the Company had two U.S. dollar foreign currency derivatives outstanding which are being used to mitigate foreign currency exposure in the investment in the Express System and Terasen International Inc. The change in fair value of the derivative to mitigate foreign currency exposure in the Express System of $0.6 million loss (2003 - $0.8 million income; 2002 - nil) has been included in the earnings of the Express System.

The Company is exposed to credit risk in the event of non-performance by counterparties to derivative instruments. Because it deals with high credit quality institutions in accordance with established credit approval practices, the Company does not expect any counterparties to fail to meet their obligations.

Page 38

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

18.

COMMITMENTS & CONTINGENCIES

The Company’s subsidiaries and proportionately consolidated entities have entered into operating leases for certain building space and natural gas distribution assets. In addition, Terasen Gas and TGVI have entered into gas purchase contracts and Trans Mountain has entered into a contract to purchase power at fixed rates that expires in 2005, which cumulatively represent future purchase obligations.

The following table sets forth the Company’s operating lease and gas and power purchase obligations due in the years indicated:

	Operating leases	Purchase obligations	Total
2005	$ 24.1	$ 766.8	$ 790.9
2006	23.0	324.5	347.5
2007	21.3	70.6	91.9
2008	21.4	20.1	41.5
2009	19.8	15.9	35.7
2010 and later	143.2	-	143.2
	$ 252.8	$ 1,197.9	$ 1,450.7

Gas purchase contract commitments are based on market prices that vary with gas commodity indices. The amounts disclosed reflect index prices that were in effect at December 31, 2004.

On January 4, 2005 Terasen Gas terminated an operating lease for a certain building and paid $49.4 million to acquire the related building. Accordingly, payments related to this operating lease are not included in the above table. Effective January 4, 2005 the building is included in property, plant and equipment and has been included in Terasen Gas’ rate base revenue requirement for 2005.

In prior years, TGVI received non-interest bearing, repayable loans from the Federal and Provincial governments of $50 million and $25 million respectively, in connection with the construction and operation of the Vancouver Island natural gas pipeline. The government loans are repayable in any fiscal year after 2002 and prior to 2012 under certain circumstances and subject to the ability of TGVI to obtain non-government subordinated debt financing on reasonable commercial terms. As approved by the BCUC, these loans have been recorded as a government grant and have reduced the amounts reported for property, plant and equipment. The Company anticipates that all of the repayment criteria may be met in 2005 and, if met, will result in an estimated repayment of $5.8 million of these loans in 2005. As the loans are repaid and replaced with non-governmental loans, plant and equipment and long-term debt will increase in accordance with the approved capital structure, as will the rate base used in determining rates. The amounts are not included in the obligations in the table above as the amounts and timing of repayments is dependent upon the approved RDDA recovery each year and the ability to replace the loans with non-government subordinated debt financing on reasonable commercial terms.

Page 39

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions of Canadian dollars, except where stated otherwise, restated as per Note 2)

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

18.

COMMITMENTS & CONTINGENCIES (CONTINUED)

A number of claims and lawsuits seeking damages and other relief are pending against the Company. Management is of the opinion, based upon information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would be material in relation to the Company’s consolidated financial statements.

19.

GUARANTEES

The Company has, for a fee, arranged for the issuance of a letter of credit in the amount of US$13.4 million on behalf of co-investors in the Express System to fund the Debt Service Reserve Account required under the Express System’s trust indenture. The letter of credit is subject to annual renewal. If the letter of credit is drawn upon, the Company will have recourse to the co-investors, major Canadian pension funds.

The Company has, for a fee, provided indemnities with respect to performance bonds issued on behalf of Clean Energy in the amount of US$7.2 million. These performance bonds secure construction projects undertaken by Clean Energy, and have expiry dates of one year from the date of issue.

20.

SUBSEQUENT EVENT

(a)

On February 1, 2005, Corridor issued $150 million principal amount of unsecured debentures, Series A, maturing February 2, 2010 at an interest rate of 4.24%, and $150 million principal amount of unsecured debentures, Series B, maturing February 2, 2015 at an interest rate of 5.033%. The proceeds were used to repay a portion of Corridor's outstanding commercial paper. Concurrently with this financing, Corridor replaced its credit facility due November 21, 2006 with a new credit facility with annual renewal provisions. Corridor's commercial paper will accordingly be classified as short-term debt prospectively.

(b)

On August 1, 2005, the Company announced an agreement with Kinder Morgan, Inc. (“KMI”) for the acquisition by KMI of all of the outstanding shares of the Company. The transaction is subject to various regulatory approvals and the approval of the Company’s shareholders. The transaction is expected to close by the end of 2005 and would result in the Company becoming a wholly-owned subsidiary of KMI pursuant to a statutory plan of arrangement.

Page 40

EX-99.2

Exhibit 99.2

TERASEN INC.

Consolidated Financial Statements

for the nine months ended September 30, 2005

(Unaudited)

TERASEN INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

In millions of Canadian dollars, except per share amounts Nine months ended September 30	2005		2004 (RESTATED)
Revenues
Natural gas distribution	$	1,065.8	$	998.4
Petroleum transportation		163.0		167.0
Water and utility services		187.3		150.3
Other activities		2.8		24.9
		1,418.9		1,340.6
Expenses
Cost of natural gas		637.2		573.0
Cost of revenues from water and utility services and other activities		139.8		124.8
Operation and maintenance		226.1		221.5
Depreciation and amortization		109.0		110.5
Property and other taxes		54.1		52.7
		1,166.2		1,082.5
Operating income		252.7		258.1
Financing costs		133.8		129.8
Earnings before share of equity earnings and income taxes		118.9		128.3
Equity earnings from Clean Energy, net of disposition costs (note 9)		2.2		-
Share of equity earnings from Express System		13.7		10.4
Earnings before income taxes		134.8		138.7
Income taxes		35.0		42.8
Net earnings	$	99.8	$	95.9
Common shares – weighted average  (millions)		105.5		104.6
Basic earnings per common share  (note 8)	$	0.95	$	0.92
Diluted earnings per common share (note 8)	$	0.94	$	0.91

Page 1

TERASEN INC.

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

(UNAUDITED)

In millions of Canadian dollars Nine months ended September 30	2005		2004 (RESTATED)
Retained earnings, beginning of period	$	418.9	$	355.5
Net earnings		99.8		95.9
		518.7		451.4
Dividends on common shares		71.2		64.3
Retained earnings, end of period	$	447.5	$	387.1

Page 2

TERASEN INC.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

In millions of Canadian dollars	September 30 2005 (UNAUDITED)			December 31 2004 (RESTATED)
Assets
Current assets
Cash and short-term investments	$	33.2		$	20.0
Accounts receivable		269.9			348.6
Inventories of gas in storage and supplies		259.9			189.2
Income and other taxes recoverable		9.9			-
Prepaid expenses		10.7			9.5
Current portion of rate stabilization accounts		24.9			27.1
		608.5			594.4
Property, plant and equipment		3,939.9			3,892.5
Investments in Express System and Clean Energy (notes 2(b) and 9)		273.1			218.9
Goodwill		120.4			128.0
Rate stabilization accounts		60.4			60.6
Other assets		89.5			87.4
	$	5,091.8		$	4,981.8
Liabilities and Shareholders’ Equity
Current liabilities
Short-term notes	$	743.5		$	248.0
Accounts payable and accrued liabilities		361.1			379.8
Income and other taxes payable		-			36.4
Current portion of rate stabilization accounts		27.2			27.6
Current portion of long-term debt		378.9			416.7
		1,510.7			1,108.5
Long-term debt		1,928.4			2,291.6
Other long-term liabilities and deferred credits		149.1			141.9
Future income taxes		88.8			68.7
		3,677.0			3,610.7
Shareholders' equity
Common shares		892.1			883.4
Contributed surplus (note 7)		134.1			132.5
Retained earnings		447.5			418.9
Cumulative currency translation adjustment		(7.9	)		(12.7	)
		1,465.8			1,422.1
Less cost of common shares held by Terasen Pipelines (Trans Mountain) Inc.		51.0			51.0
		1,414.8			1,371.1
	$	5,091.8		$	4,981.8

Page 3

TERASEN INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

In millions of Canadian dollars Nine months ended September 30	2005			2004 (RESTATED)
Cash flows provided by (used for)
Operating activities
Net earnings	$	99.8		$	95.9
Adjustments for non-cash items
Depreciation and amortization		109.0			110.5
Share of equity earnings from long-term             investments, net of cash distributions		(14.1	)		(9.8	)
Future income taxes		1.5			5.2
Other		11.5			9.4
		207.7			211.2
Change in rate stabilization accounts		2.0			4.0
Changes in non-cash working capital		(49.0	)		8.7
		160.7			223.9
Investing activities
Property, plant and equipment		(170.3	)		(104.8	)
Acquisition of water and utility services businesses		-			(57.9	)
Proceeds on the sale of natural gas distribution       assets		-			7.6
Other assets		(12.6	)		(27.6	)
		(182.9	)		(182.7	)
Financing activities
Increase (decrease) in short-term notes		495.5			(170.9	)
Increase in long-term debt		450.5			337.6
Reduction of long-term debt		(848.1	)		(58.2	)
Issue of common shares, net of issue costs		8.7			10.8
Dividends on common shares		(71.2	)		(64.3	)
		35.4			55.0
Net increase in cash		13.2			96.2
Cash at beginning of period		20.0			1.5
Cash at end of period	$	33.2		$	97.7
Supplemental cash flow information
Interest paid in the period	$	135.3		$	124.0
Income taxes paid in the period		48.0			70.7
Cash is defined as cash or bank indebtedness.

Page 4

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in Canadian dollars)

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

1.

BASIS OF PRESENTATION

The accounting policies and methods of application used in the preparation of these interim consolidated financial statements are in accordance with Canadian generally accepted accounting principles consistent with the accounting policies used in the Company's year end audited consolidated financial statements of December 31, 2004, except as set out in note 2.  These consolidated financial statements do not include all disclosures required for annual financial statements, and therefore these statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, as set out in the 2004 Annual Report.  Certain comparative figures have been restated to conform with the current period presentation.

Quarterly net earnings (loss) from Terasen Gas have been restated to adjust for changes in the method of accounting for quarterly income tax expense. Previously, Terasen Gas’ estimated annual tax expense had been allocated and expensed in the quarterly interim financial statements based on income tax estimated to be collected in rates in each of the four quarters. Beginning in the fourth quarter of 2004, Terasen Gas’ income tax expense is determined by applying the effective annual tax rate to the pre-tax income in the quarter.  The change affects income tax expense and net earnings for each of the quarters but has no impact on annual income tax expense and net earnings.

As a result of this change in accounting for income taxes, income tax expense and income and other taxes payable have decreased by $6.1 million for the nine months ended and as at September 30, 2004 as compared to the amounts previously reported.

2.

SIGNIFICANT ACCOUNTING POLICIES

a)

LIABILITIES AND EQUITY

In accordance with recent changes to the CICA Handbook Section 3860 “Financial Instruments – Disclosures and Presentation”, the Company’s $125 million 8% Capital Securities have been reclassified from shareholders’ equity to liabilities because the Capital Securities can be settled by issuing equity at a variable price dependent upon the market value of the Company’s common shares at the settlement date.  As a result of the change, distributions associated with the Capital Securities are now recorded as financing costs and the related income-tax benefits are recorded within income tax expense.  Previously, the distributions were recorded on an after-tax basis as a deduction from net earnings to determine earnings applicable to common shares.  There is no impact to earnings applicable to common shares or earnings per share.  The changes have been applied retroactively and have increased l ong-term debt and decreased shareholders’ equity, both by $125.0 million, compared to the amounts previously reported as at December 31, 2004.  The restatement has also increased financing costs by $7.5 million, decreased income tax expense by $2.6 million and capital securities distributions by $4.9 million compared to the amounts previously reported for the nine months ended September 30, 2004.

Page 5

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in Canadian dollars)

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

b)

EQUITY ACCOUNTING FOR INVESTMENT IN CLEAN ENERGY

Due to restructuring and amendments to voting arrangements of the Board of Directors of Clean Energy Fuels Corp. (“Clean Energy”) during the three months ended March 31, 2005, the Company no longer exercises joint control of Clean Energy.  The Company has, accordingly, changed its method of accounting for its investment in Clean Energy to the equity basis, rather than on the proportionately-consolidated basis.  For the nine months ending September 30, 2005, earnings have been included in equity earnings from Clean Energy as disclosed in note 9.

c)

VARIABLE INTEREST ENTITIES

In January 2005, the Company adopted the CICA Handbook Accounting Guideline 15 “Consolidation of Variable Interest Entities”.  The Company has performed a review of the entities with whom it conducts business and determined that under the definitions in the Guideline the Company’s investment in Express US Holdings LP, part of the Express System (the “Express System”), is deemed to be a variable interest entity.  As the Company has not been identified as the primary beneficiary of Express US Holdings LP, the Company continues to account for its investment in the Express System on an equity basis as described in the Company’s 2004 Annual Report. The Company’s future exposure to loss regarding its investment is represented by the carrying value of the investment.

The Express System includes the entities Express Pipeline LP and Express US Holdings LP. The Express System transports crude oil from Hardisty, Alberta, through the Rocky Mountain region of the United States and on to Wood River, Illinois.  The Company has owned a one-third equal interest in the Express System with two other independent partners since January 9, 2003.

3.

FAIRBANKS SEWER & WATER INC.

On July 31, 2004, the Company acquired a 50 per cent interest in Fairbanks Sewer and Water Inc. (“FSW”).  FSW provides water and wastewater treatment and water distribution and wastewater collection services to Fairbanks, Alaska.  The Company paid $40.8 million for its 50 per cent interest after working capital adjustments.  The Company has accounted for the acquisition of FSW using the purchase method and has proportionately consolidated its 50% of operations since the date of acquisition.  FSW is regulated by the Regulatory Commission of Alaska.

The Company and the other owners each have the option to have Terasen acquire the remaining 50 per cent interest in FSW at fair market value in 2009.  

During the nine months ending September 30, 2004, the Company also acquired 100% of two businesses and increased our investment in two other businesses that provide meter reading, meter fleet management and installation services in Canada and the United States. The Company paid $17.1 million for the interest in these businesses after working capital adjustments.

Page 6

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in Canadian dollars)

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

The following table provides the allocation of the purchase price over the assets and liabilities acquired:

(in millions of dollars)	FSW	Other	Total
Working capital	$ 2.2	$ 7.1	$ 9.3
Property, plant and equipment	27.0	1.6	28.6
Goodwill	24.0	8.0	32.0
Other assets	0.5	0.4	0.9
Future income taxes	(2.0)	-	(2.0)
Long-term debt assumed	(10.9)	-	(10.9)
Total cash paid	$ 40.8	$ 17.1	$ 57.9

The earnings of the acquired businesses have been included in the statement of earnings from the date of acquisition.

4.

SEGMENT DISCLOSURES

Nine months ended September 30 (in millions of dollars)

2005	Natural gas  distribution	Petroleum  transportation	Water & utility  services	Other  activities	Total
Revenues	$ 1,065.8	$   163.0	$ 187.3	$ 2.8	$ 1,418.9
Net earnings (loss)	59.8	50.8	9.9	(20.7)	99.8
Total assets	3,428.3	1,364.5	214.6	84.4	5,091.8
2004
Revenues	$ 998.4	$ 167.0	$ 150.3	$ 24.9	$ 1,340.6
Net earnings (loss)	53.3	51.0	5.9	(14.3)	95.9
Total assets	3,303.3	1,358.1	211.5	121.4	4,994.3

5.

SEASONAL OPERATIONS

Due to the seasonal nature of the Company’s natural gas distribution and water and utility services operations, quarterly earnings statements are not indicative of earnings on an annual basis.

6.

EMPLOYEE BENEFIT PLANS

The Company and its subsidiaries have defined benefit pension plans and defined contribution pension plans for employees. The Company also provides post-employment benefits other than pensions for retired employees.  Additional information about these benefit plans can be found in the Company’s 2004 Annual Report.  The Company’s estimated contributions to defined benefit pension plans for 2005 are anticipated to be $6.3 million (2004 actual $5.5 million).

Page 7

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in Canadian dollars)

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

Costs recognized in the periods are presented in the following table:

Nine months ended September 30

(in millions of dollars)	Pension benefit plans		Other benefit plans
	2005	2004	2005	2004
Current service cost	$ 6.6	$ 6.0	$ 1.2	$ 0.9
Interest cost on projected benefit obligations	13.5	12.9	3.0	3.0
Expected return on plan assets	(14.4)	(20.1)	-	-
Net actuarial losses	-	6.0	-	1.8
Plan amendments	0.6	-	0.3	-
Past service costs	-	0.2	-	-
Net benefit plan expense before adjustments of employee benefit costs:	6.3	5.0	4.5	5.7
Difference between actual and expected return on plan assets	0.3	6.0	-	-
Difference between actual and recognized actuarial gains (losses) in the year	1.8	(3.9)	0.9	-
Difference between actual and recognized past service	-	-	0.6	-
Amortization of transitional obligation (benefit)	(2.4)	(2.7)	1.2	1.2
Other	-	1.2	-	-
Net benefit plan expense	$ 6.0	$ 5.6	$ 7.2	$ 6.9
Defined contribution plan expense	$ 1.4	$ 1.7
	$ 7.4	$ 7.3

7.

STOCK-BASED COMPENSATION

In the first nine months of 2005, 855,200 stock options were granted (2004 – 741,400) at an average exercise price of $29.45 (2004 - $23.88) under the Company’s Share Option Plan.  The Company has applied the fair value based method of accounting for stock options granted after January 1, 2003.  Reported earnings for the nine months ended September 30, 2005 include a compensation charge of $1.6 million (2004 - $0.8 million) representing the fair value of options granted in 2003, 2004 and 2005 amortized over the vesting period, with a corresponding increase to contributed surplus.  Had the Company used the fair value based method to account for stock options granted during 2002, pro forma earnings and earnings per share for the nine months ended September 30, 2004 would have been as follows:

In millions of dollars, except per share amounts		Nine months ended  September 30, 2004
Net earnings	As reported	$ 95.9
	Pro forma	$ 95.0
Basic earnings per common share	As reported	$ 0.92
	Pro forma	$ 0.91
Diluted earnings per common share	As reported	$ 0.91
	Pro forma	$ 0.90

The Black-Scholes option pricing model was used to calculate the stock option fair values.  

Page 8

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in Canadian dollars)

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

The weighted average fair value of options granted in the nine months ended September 30, 2005 was $4.33 (nine months ended September 30, 2004 - $2.39).  Significant assumptions in valuing the options are as follows:

Nine months ended September 30	2005		2004
	Regular Options	Performance Based Options	Regular Options	Performance Based Options
Interest rate	3.6%	3.7%	3.5 – 3.7%	3.5%
Expected volatility	16.5%	16.5%	15.1 – 15.4%	15.4%
Expected life	5 years	6 years	5 years	6 years

The following table provides information about options outstanding and options exercisable at September 30, 2005:

Regular Share Options	Options outstanding			Options exercisable
Exercise price range	Shares under option	Weighted average exercise price	Weighted average remaining contractual life	Number exercisable	Weighted average exercise price
$10.60 – $14.90	125,280	$ 13.32	2.3	125,280	$ 13.32
$15.50 – $19.75	193,465	$ 17.81	4.5	181,803	$ 17.69
$21.92 – $29.45	37,400	$ 24.08	6.3	11,266	$ 22.81
	356,145	$ 16.89	3.9	318,349	$ 16.15

Performance-based Options	Options outstanding			Options exercisable
Exercise price range	Shares under option	Weighted average exercise price	Weighted average remaining contractual life	Number exercisable	Weighted average exercise price
$11.25 – $13.63	89,600	$ 12.42	2.0	89,600	$ 12.42
$15.50 – $19.75	952,875	$ 18.39	5.0	785,214	$ 18.10
$23.87 – $29.45	1,494,899	$ 27.01	7.0	211,609	$ 23.88
	2,537,374	$ 23.26	5.9	1,086,423	$ 18.76

Page 9

Terasen Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in Canadian dollars)

NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

8.

EARNINGS PER SHARE

Basic earnings per share are based on the weighted average number of common shares outstanding during the period.  Diluted earnings per share are based on the weighted average number of common shares and dilutive stock options outstanding at the beginning of or granted during the period.  The Company's performance-based share options are considered to be contingently issuable shares and have been included in the treasury stock method calculation only if all performance criteria of the options have been satisfied.  The possible exchange of the $125.0 million Capital Securities into common shares has not been included in the treasury stock method calculation, since similar obligations in the past have been paid wholly in cash.

Nine months ended September 30, 2005 In millions, except per share amounts	Net Earnings	Weighted Average Shares	Earnings Per Share
Basic earnings per share (2004 - $0.92)	$ 99.8	105.5	$ 0.95
Add:  weighted-average number of dilutive shares that would be issued under treasury stock method (2004 – 0.7 million)		0.8
Diluted earnings per share (2004 - $0.91)	$ 99.8	106.3	$ 0.94

9.

DISPOSAL OF EQUITY INVESTMENT

On October 31, 2005, the Company sold its 40.38% ownership in Clean Energy for proceeds of approximately U.S. $35.9 million.  The sale, together with equity earnings of Clean Energy for the nine months ended September 30, 2005, has resulted in a gain of approximately $2.2 million, including the recognition of all unrealized gas forward contract gains of Clean Energy in 2005 totalling $10.9 million and the recognition of currency translation losses included in Shareholders’ Equity totalling $8.7 million.

10.

PENDING DISPOSITION OF THE COMPANY

On August 1, 2005, the Company announced an agreement with Kinder Morgan, Inc. (“KMI”) for the acquisition by KMI of all of the outstanding shares of the Company.  The transaction is subject to various regulatory approvals.  The transaction is expected to close by the end of November 2005 and would result in the Company becoming a wholly-owned subsidiary of KMI pursuant to a statutory plan of arrangement.  The Company has recorded approximately $4.0 million of after-tax costs associated with the transaction in earnings for the nine months ending September 30, 2005.  The Company expects to incur additional after-tax costs of approximately $15.0 million prior to the transaction closing date.  The additional costs include an estimated $3.4 million charge for stock compensation expense related to the accelerated vesting of all remaining stock options which will occur under the statutory plan of arrangement .  

Page 10

11.

SUBSEQUENT EVENTS

On October 5, 2005, the British Columbia Utilities Commission issued a decision that denied recovery of approximately $5.4 million of costs that Terasen Gas Inc., a wholly owned subsidiary of the Company, incurred to develop the Inland Pacific Connector pipeline project that is planned to bring new gas transmission capacity to the Lower Mainland of British Columbia when economic conditions make the project viable.  Terasen Gas Inc. still believes that the project is viable and intends to keep all existing permits and land right approvals in place that have already been granted.  As Terasen Gas Inc. will be filing an application to have the decision reconsidered, a $3.6 million after tax charge will continue to be deferred until such time as the application has been reconsidered and a decision is received.

On September 27, 2005 the Company approved the redemption of the $35.0 million Terasen Pipelines (Trans Mountain) Inc. Series C debentures on November 1, 2005.  The early redemption will cause a premium of approximately $11.0 million before tax, or $7.3 million after-tax, to be paid and expensed at the redemption date.

On October 24, 2005, Terasen Gas Inc. issued $150.0 million of Series 20 Medium Term Note Debentures for net proceeds of $149.7 million at a floating rate of 3.35571% with quarterly rate resets.  The Debentures will mature on October 24, 2007.

Page 11

EX-99.3

Exhibit 99.3

REPORT OF INDEPENDENT AUDITOR

To the Directors of Terasen Inc.

Under date of February 2, 2005, except as to notes 2 and 20(b), which are as of September 20, 2005, we reported on the consolidated statements of financial position of Terasen Inc. (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of earnings and retained earnings and cash flows for each of the years in the three-year period ended December 31, 2004, which are included, together with our report thereon, in the Kinder Morgan, Inc. Current Report on Form 8-K/A (Amendment No. 1).  In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related Supplemental Information entitled “Reconciliation With United States Generally Accepted Accounting Principles and Conversion to United States Dollars” as at December 31, 2004 and 2003 and for the years then ended.  This Supplemental Information is the responsibility of the Company’s management.  Our responsibility is to express an opinion on this Supplemental Information based on our audits.

In our opinion, such Supplemental Information as at December 31, 2004 and 2003 and for the years then ended, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company retroactively changed its method of accounting for capital securities in 2005.

KPMG LLP

Chartered Accountants

Vancouver, Canada

February 2, 2005, except as to note (a), which is as of September 20, 2005

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Terasen Inc. (the “Company”) prepares its statutory financial statements in accordance with generally accepted accounting principles in Canada (“Canadian GAAP") which are different in some respects from those applicable in the United States (“U.S. GAAP") and from practices prescribed by the United States Securities and Exchange Commission (“SEC”).  The significant measurement differences between Canadian GAAP and U.S. GAAP with respect to the Company’s consolidated financial statements as at September 30, 2005, December 31, 2004 and December 31, 2003 and for the nine months ended September 30, 2005 and 2004 and for the years ended December 31, 2004 and 2003 are set out below. The financial information as at September 30, 2005 and for the nine months ended September 30, 2005 and 2004 is unaudited; however, such financial information reflects all ad justments, consisting solely of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial results for the period presented.  In addition, the U.S. GAAP supplemental information has been converted to U.S. dollars (note n).

Consolidated Statements of Financial Position

As at September 30, 2005 (unaudited)

		Canadian GAAP Cdn $			Adjustments Cdn $			U.S. GAAP Cdn $			U.S. GAAP U.S.$
		(In millions)
Assets
Current assets:
	Cash and short-term investments (f)	$	33.2		$	(10.3	)	$	22.9		$	19.7
	Accounts receivable (b) (f)		269.9			197.7			467.6			402.2
	Inventory of gas in storage and supplies (f)		259.9			(0.8	)		259.1			222.8
	Income and other taxes recoverable (b) (f) (g)		9.9			(4.4	)		5.5			4.7
	Prepaid expenses (f)		10.7			(0.2	)		10.5			9.0
	Current portion of rate stabilization accounts (g)		24.9			13.3			38.2			32.8
			608.5			195.3			803.8			691.2
Property, plant and equipment (f) (g) (h)			3,939.9			32.7			3,972.6			3,416.7
Long term investments (b) (f) (j)			273.1			135.5			408.6			351.4
Goodwill (f)			120.4			(20.7	)		99.7			85.8
Rate stabilization accounts (g)			60.4			32.0			92.4			79.5
Other assets (b) (c) (e) (f) (g) (h) (j)			89.5			556.4			645.9			555.7
		$	5,091.8		$	931.2		$	6,023.0		$	5,180.3
Liabilities and Shareholders' Equity
Current liabilities:
	Short-term notes	$	743.5		$	-		$	743.5		$	639.5
	Accounts payable and accrued liabilities (b) (c) (f)		361.1			3.9			365.0			313.9
	Current portion of rate stabilization accounts (b) (g)		27.2			214.6			241.8			208.0
	Current portion of long-term debt		378.9			-			378.9			325.9
			1,510.7			218.5			1,729.2			1,487.3
Long-term debt (a) (f)			1,928.4			(22.3	)		1,906.1			1,639.3
Other long-term liabilities and deferred credits (b) (e) (h)			149.1			119.3			268.4			230.8
Future income taxes (a) (b) (e) (f) (g) (h) (j)			88.8			559.9			648.7			557.9
			3,677.0			875.4			4,552.4			3,915.3
Shareholders' equity:
	Common shares		892.1			-			892.1			569.9
	Contributed surplus (a) (d)		134.1			17.5			151.6			96.6
	Retained earnings (a) (b) (d) (e) (h) (j)		447.5			43.4			490.9			333.9
	Cumulative currency translation adjustment (l)		(7.9	)		7.9			-			-
	Accumulated other comprehensive income (loss) (b) (e) (l)		-			(13.0	)		(13.0	)		296.9
			1,465.8			55.8			1,521.6			1,297.3
	Cost of common shares held by Terasen Pipelines       (Trans Mountain) Inc.		(51.0	)		-			(51.0	)		(32.3	)
			1,414.8			55.8			1,470.6			1,265.0
		$	5,091.8		$	931.2		$	6,023.0		$	5,180.3

1

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Financial Position

As at December 31, 2004

		Canadian GAAP Cdn $			Adjustments Cdn $			U.S. GAAP Cdn $			U.S. GAAP U.S.$
		(In millions)
Assets
Current assets:
	Cash and short-term investments (f)	$	20.0		$	(1.0	)	$	19.0		$	15.8
	Accounts receivable (b) (f) (i)		348.6			(25.1	)		323.5			269.1
	Inventory of gas in storage and supplies (f)		189.2			(1.5	)		187.7			156.1
	Prepaid expenses (f)		11.2			(0.7	)		10.5			8.7
	Current portion of rate stabilization accounts (b) (g)		27.1			27.0			54.1			45.0
			596.1			(1.3	)		594.8			494.7
Property, plant and equipment (f) (g) (h) (i)			3,892.5			71.3			3,963.8			3,297.6
Long term investments (b) (f) (j)			218.9			169.1			388.0			322.8
Goodwill (f)			128.0			(32.2	)		95.8			79.7
Rate stabilization accounts (g)			60.6			32.1			92.7			77.1
Other assets (b) (c) (e) (f) (g) (h) (i) (j)			74.5			469.5			544.0			452.6
		$	4,970.6		$	708.5		$	5,679.1		$	4,724.5
Liabilities and Shareholders' Equity
Current liabilities:
	Short-term notes	$	248.0		$	-		$	248.0		$	206.3
	Accounts payable and accrued liabilities (b) (c) (f)		369.8			26.2			396.0			329.4
	Income and other taxes payable (b) (f)		36.4			5.4			41.8			34.8
	Current portion of rate stabilization accounts (b) (g)		27.6			14.6			42.2			35.1
	Current portion of long-term debt (f)		416.7			(1.0	)		415.7			345.9
			1,098.5			45.2			1,143.7			951.5
Long-term debt (a) (f) (i)			2,291.6			24.4			2,316.0			1,926.8
Other long-term liabilities and deferred credits (b) (e) (f) (h)			140.7			120.3			261.0			217.0
Future income taxes (a) (b) (e) (f) (g) (h) (i) (j)			68.7			470.6			539.3			448.7
			3,599.5			660.5			4,260.0			3,544.0
Shareholders' equity:
	Common shares		883.4			-			883.4			562.7
	Contributed surplus (a) (d)		132.5			17.5			150.0			95.5
	Retained earnings (a) (b) (d) (e) (h) (j)		418.9			36.0			454.9			304.5
	Cumulative currency translation adjustment (l)		(12.7	)		12.7			-			-
	Accumulated other comprehensive income (loss) (b) (e) (l)		-			(18.2	)		(18.2	)		250.1
			1,422.1			48.0			1,470.1			1,212.8
	Cost of common shares held by Terasen Pipelines       (Trans Mountain) Inc.		(51.0	)		-			(51.0	)		(32.3	)
			1,371.1			48.0			1,419.1			1,180.5
		$	4,970.6		$	708.5		$	5,679.1		$	4,724.5

2

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Financial Position

As at December 31, 2003

		Canadian GAAP Cdn $			Adjustments Cdn $			U.S. GAAP Cdn $			U.S. GAAP U.S.$
		(In millions)
Assets
Current assets:
	Cash and short-term investments	$	1.5		$	-		$	1.5		$	1.2
	Accounts receivable (b) (f) (i)		404.3			(10.7	)		393.6			303.6
	Inventory of gas in storage and supplies (f)		142.4			(0.7	)		141.7			109.3
	Prepaid expenses (f)		13.4			(0.7	)		12.7			9.8
	Current portion of rate stabilization accounts (b) (g)		21.6			14.8			36.4			28.1
			583.2			2.7			585.9			452.0
Property, plant and equipment (f) (g) (h) (i)			3,882.4			61.8			3,944.2			3,042.2
Long term investments (b) (f) (j)			204.6			123.2			327.8			252.8
Goodwill (f)			101.9			(13.5	)		88.4			68.2
Rate stabilization accounts (g)			75.7			41.7			117.4			90.6
Other assets (b) (c) (e) (f) (g) (h) (i) (j) (k)			73.5			454.8			528.3			407.5
		$	4,921.3		$	670.7		$	5,592.0		$	4,313.3
Liabilities and Shareholders' Equity
Current liabilities:
	Short-term notes	$	553.9		$	-		$	553.9		$	427.3
	Bank indebtedness (f)		-			4.0			4.0			3.1
	Accounts payable and accrued liabilities (b) (c) (f)		369.6			23.6			393.2			303.3
	Income and other taxes payable (b)		43.9			4.1			48.0			37.0
	Current portion of rate stabilization accounts (b) (g)		6.2			3.3			9.5			7.3
	Current portion of long-term debt (f)		51.8			(1.0	)		50.8			39.2
			1,025.4			34.0			1,059.4			817.2
Long-term debt (a) (f) (i)			2,426.1			36.2			2,462.3			1,899.2
Other long-term liabilities and deferred credits (e) (f) (h)			99.8			80.5			180.3			139.1
Future income taxes (a) (b) (e) (f) (g) (h) (i) (j) (k)			67.5			480.5			548.0			422.7
			3,618.8			631.2			4,250.0			3,278.2
Shareholders' equity:
	Common shares		868.7			-			868.7			551.4
	Contributed surplus (a) (d)		131.4			16.8			148.2			94.2
	Retained earnings (a) (b) (d) (e) (h) (j)		355.5			29.2			384.7			250.5
	Cumulative currency translation adjustment (l)		(2.1	)		2.1			-			-
	Accumulated other comprehensive income       (loss) (b) (e) (k) (l)		-			(8.6	)		(8.6	)		171.3
			1,353.5			39.5			1,393.0			1,067.4
	Cost of common shares held by Terasen Pipelines       (Trans Mountain) Inc.		(51.0	)		-			(51.0	)		(32.3	)
			1,302.5			39.5			1,342.0			1,035.1
		$	4,921.3		$	670.7		$	5,592.0		$	4,313.3

3

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Earnings and Retained Earnings

Nine months ended September 30, 2005 (unaudited)

		Canadian GAAP Cdn $			Adjustments Cdn $			U.S. GAAP Cdn $			U.S. GAAP U.S.$
		(In millions, except per share amounts)
Revenue:
	Natural gas distribution (h)	$	1,065.8		$	3.1		$	1,068.9		$	873.2
	Petroleum transportation		163.0			-			163.0			133.2
	Water and utility services (f)		187.3			(41.8	)		145.5			118.8
	Other activities (f)		2.8			-			2.8			2.3
			1,418.9			(38.7	)		1,380.2			1,127.5
Expenses:
	Cost of natural gas		637.2			-			637.2			520.6
	Cost of revenue from water and utility services and     other activities (f)		139.8			(23.7	)		116.1			94.8
	Operation and maintenance (d) (f)		226.1			(4.9	)		221.2			180.7
	Depreciation and amortization (f) (h) (j)		109.0			(0.9	)		108.1			44.0
	Property and other taxes (f)		54.1			(0.3	)		53.8			88.3
			1,166.2			(29.8	)		1,136.4			928.4
Operating income			252.7			(8.9	)		243.8			199.1
Financing costs (b) (f)			133.8			(1.2	)		132.6			108.3
Earnings before share of equity earnings and income taxes			118.9			(7.7	)		111.2			90.8
Equity earnings from Clean Energy, net of disposition costs			2.2			-			2.2			1.8
Share of equity earnings from long-term investments (b) (f) (j)			13.7			14.0			27.7			22.7
Earnings before income taxes			134.8			6.3			141.1			115.3
Income taxes (b) (f) (g) (j)			35.0			(1.1	)		33.9			27.7
Net earnings			99.8			7.4			107.2			87.6
Retained earnings, beginning of period			418.9			36.0			454.9			304.5
Dividends on common shares			(71.2	)		-			(71.2	)		(58.2	)
Retained earnings, end of period		$	447.5		$	43.4		$	490.9		$	333.9
Common shares - weighted average (millions)			105.5			-			105.5			105.5
Basic earnings per common share		$	0.95		$	0.07		$	1.02		$	0.83
Diluted earnings per common share		$	0.94		$	0.07		$	1.01		$	0.82

4

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Earnings and Retained Earnings

Nine months ended September 30, 2004 (unaudited)

		Canadian GAAP Cdn $			Adjustments Cdn $			U.S. GAAP Cdn $			U.S. GAAP U.S.$
		(In millions, except per share amounts)
Revenue:
	Natural gas distribution (h)	$	998.4		$	1.6		$	1,000.0		$	752.9
	Petroleum transportation		167.0			-			167.0			125.8
	Water and utility services (f)		150.3			(34.5	)		115.8			87.2
	Other activities (f)		24.9			(21.1	)		3.8			2.9
			1,340.6			(54.0	)		1,286.6			968.8
Expenses:
	Cost of natural gas		573.0			-			573.0			431.5
	Cost of revenue from water and utility services and     other activities (f)		124.8			(33.0	)		91.8			69.1
	Operation and maintenance (d) (f)		221.5			(11.6	)		209.9			158.0
	Depreciation and amortization (f) (h) (j)		110.5			(2.0	)		108.5			81.7
	Property and other taxes		52.7			(0.1	)		52.6			39.6
			1,082.5			(46.7	)		1,035.8			779.9
Operating income			258.1			(7.3	)		250.8			188.9
Financing costs (b) (f)			129.8			3.2			133.0			100.1
Earnings before share of equity earnings and income taxes			128.3			(10.5	)		117.8			88.8
Share of equity earnings from long-term investments (b) (f) (j)			10.4			8.4			18.8			14.2
Earnings before income taxes			138.7			(2.1	)		136.6			103.0
Income taxes (b) (f) (j)			42.8			(2.9	)		39.9			30.1
Net earnings			95.9			0.8			96.7			72.9
Retained earnings, beginning of period			355.5			29.2			384.7			250.5
Dividends on common shares			(64.3	)		-			(64.3	)		(48.5	)
Retained earnings, end of period		$	387.1		$	30.0		$	417.1		$	274.9
Common shares - weighted average (millions)			104.6			-			104.6			104.6
Basic earnings per common share		$	0.92		$	-		$	0.92		$	0.70
Diluted earnings per common share		$	0.91		$	0.01		$	0.92		$	0.69

5

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Earnings and Retained Earnings

Year ended December 31, 2004

		Canadian GAAP Cdn $			Adjustments Cdn $			U.S. GAAP Cdn $			U.S. GAAP U.S.$
		(In millions, except per share amounts)
Revenue:
	Natural gas distribution (h)	$	1,494.1		$	2.7		$	1,496.8		$	1,150.0
	Petroleum transportation		225.5			-			225.5			173.3
	Water and utility services (f)		201.6			(47.5	)		154.1			118.4
	Other activities (f)		35.8			(30.2	)		5.6			4.3
			1,957.0			(75.0	)		1,882.0			1,446.0
Expenses:
	Cost of natural gas		885.4			-			885.4			680.2
	Cost of revenue from water and utility services and     other activities (f)		174.3			(50.3	)		124.0			95.3
	Operation and maintenance (d) (f)		302.9			(16.0	)		286.9			220.4
	Depreciation and amortization (f) (h) (j)		147.1			(2.8	)		144.3			110.9
	Property and other taxes (f)		70.1			(0.2	)		69.9			53.7
			1,579.8			(69.3	)		1,510.5			1,160.5
Operating income			377.2			(5.7	)		371.5			285.5
Financing costs (a) (b) (f)			176.6			2.9			179.5			137.9
Earnings before share of equity earnings and income taxes			200.6			(8.6	)		192.0			147.6
Share of equity earnings from long-term investments (b) (f) (j)			15.0			14.8			29.8			22.9
Earnings before income taxes			215.6			6.2			221.8			170.5
Income taxes (a) (b) (f) (j)			65.8			(0.6	)		65.2			50.1
Net earnings			149.8			6.8			156.6			120.4
Retained earnings, beginning of period			355.5			29.2			384.7			250.5
Dividends on common shares			(86.4	)		-			(86.4	)		(66.4	)
Retained earnings, end of period		$	418.9		$	36.0		$	454.9		$	304.5
Common shares - weighted average (millions)			104.7			-			104.7			104.7
Basic earnings per common share		$	1.43		$	0.07		$	1.50		$	1.15
Diluted earnings per common share		$	1.42		$	0.07		$	1.49		$	1.14

6

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Earnings and Retained Earnings

Year ended December 31, 2003

		Canadian GAAP Cdn $			Adjustments Cdn $			U.S. GAAP Cdn $			U.S. GAAP U.S.$
		(In millions, except per share amounts)
Revenue:
	Natural gas distribution (h)	$	1,497.9		$	2.3		$	1,500.2		$	1,070.4
	Petroleum transportation		200.0			-			200.0			142.7
	Water and utility services (f)		152.5			(39.0	)		113.5			81.0
	Other activities (f)		26.2			(22.4	)		3.8			2.7
			1,876.6			(59.1	)		1,817.5			1,296.8
Expenses:
	Cost of natural gas		889.7			-			889.7			634.8
	Cost of revenues from water and utility services and     other activities (f)		132.4			(43.4	)		89.0			63.5
	Operation and maintenance (d) (f)		284.8			(12.1	)		272.7			194.6
	Depreciation and amortization (f) (h) (j)		133.4			(1.6	)		131.8			94.0
	Property and other taxes		69.9			-			69.9			49.9
			1,510.2			(57.1	)		1,453.1			1,036.8
Operating income			366.4			(2.0	)		364.4			260.0
Financing costs (a) (b) (f)			186.0			1.7			187.7			133.9
Earnings before share of equity earnings and income taxes			180.4			(3.7	)		176.7			126.1
Share of equity earnings from long-term investments (b) (f) (j)			8.0			39.4			47.4			33.8
Earnings before income taxes			188.4			35.7			224.1			159.9
Income taxes (a) (b) (f) (j)			55.7			5.3			61.0			43.5
Net earnings			132.7			30.4			163.1			116.4
Retained earnings, beginning of period (a) (b) (d) (e) (h) (i)			302.2			(1.2	)		301.0			190.8
Dividends on common shares			(79.4	)		-			(79.4	)		(56.7	)
Retained earnings, end of period		$	355.5		$	29.2		$	384.7		$	250.5
Common shares - weighted average (millions)			103.8			-			103.8			103.8
Basic earnings per common share		$	1.28		$	0.29		$	1.57		$	1.12
Diluted earnings per common share		$	1.27		$	0.29		$	1.56		$	1.11

7

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Comprehensive Income

Nine months ended September 30,                   Year ended December 31,
			2005			2004				2004				2003
	U.S. GAAP			U.S. GAAP				U.S. GAAP				U.S. GAAP
In millions of Canadian dollars	(unaudited)
Net earnings	$	107.2		$	96.7			$	156.6			$	163.1
Other comprehensive income (loss),   net of income tax:
Reclassification of losses on available for sale           marketable securities to statement of earnings		-			0.1				0.1				1.8
Write-down of available for sale market securities           to fair value		-			-				-				(0.5		)
Change in minimum benefit liability		-			-				(1.2		)		3.8
Change in currency translation adjustment account		5.2			(4.3		)		(8.5		)		(4.8		)
Comprehensive income	$	112.4		$	92.5			$	147.0			$	163.4

Consolidated Statements of Comprehensive Income

Nine months ended September 30,                   Year ended December 31,
			2005			2004			2004				2003
	U.S. GAAP			U.S. GAAP			U.S. GAAP				U.S. GAAP
In millions of U.S. dollars	(unaudited)
Net earnings	$	87.6		$	72.9		$	120.4			$	116.4
Other comprehensive income (loss),   net of income tax:
Reclassification of losses on available for sale           marketable securities to statement of earnings		-			0.1			0.1				1.3
Write-down of available for sale market securities           to fair value		-			-			-				(0.4		)
Change in minimum benefit liability		-			-			(0.9		)		2.7
Change in currency translation adjustment account		46.8			16.6			79.6				173.3
Comprehensive income	$	134.4		$	89.6		$	199.2			$	293.3

8

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

Consolidated Statements of Accumulated Other Comprehensive Income (Loss)

Nine months ended September 30,                  Year ended December 31,
			2005				2004				2004				2003
	U.S. GAAP				U.S. GAAP				U.S. GAAP				U.S. GAAP
In millions of Canadian dollars	(unaudited)
Accumulated other comprehensive income (loss),  beginning of period	$	(18.2		)	$	(8.6		)	$	(8.6		)	$	(8.9		)
Other comprehensive income (loss)		5.2				(4.2		)		(9.6		)		0.3
Accumulated other comprehensive income (loss),  end of period	$	(13.0		)	$	(12.8		)	$	(18.2		)	$	(8.6		)

Consolidated Statements of Accumulated Other Comprehensive Income (Loss)

Nine months ended September 30,                 Year ended December 31,
			2005			2004			2004			2003
	U.S. GAAP			U.S. GAAP			U.S. GAAP			U.S. GAAP
In millions of U.S dollars	(unaudited)
Accumulated other comprehensive income (loss),  beginning of period	$	250.1		$	171.3		$	171.3		$	(5.6		)
Other comprehensive income (loss)		46.8			16.7			78.8			176.9
Accumulated other comprehensive income (loss),  end of period	$	296.9		$	188.0		$	250.1		$	171.3

9

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

a.

Change in accounting policy and Capital Securities:

In accordance with recent changes to the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3860, “Financial Instruments – Disclosures and Presentation”, pursuant to Canadian GAAP the Company’s $125.0 million 8% Capital Securities have been reclassified from shareholders’ equity to liabilities effective January 1, 2005 as the Capital Securities can be settled by issuing equity at a variable price dependent upon the market value of the Company’s common shares at the settlement date.  As a result of the change, distributions associated with the Capital Securities are now recorded as financing costs and the related income tax benefits are recorded within income tax expense. Previously, the distributions were recorded on an after tax basis as a deduction from net earnings applicable to common shares. There has been no impact to earnings applicable to common shares or to earnings per share.  The changes have been applied retroactively and have increased long-term debt and decreased shareholders’ equity for Canadian GAAP purposes at December 31, 2004 and 2003, both by $125.0 million, compared to the amounts previously reported.  The restatement has also for Canadian GAAP purposes increased financing costs for the year ended December 31, 2004 by $10.0 million (2003-$10.0 million), decreased income tax expense by $3.4 million (2003-$3.3 million) and capital securities distributions by $6.6 million (2003-$6.7 million) compared to amounts previously reported.  These changes have been applied retroactively into the 2004 and 2003 annual financial information and have been reflected in each of the Canadian GAAP columns included in this Supplemental Information.  The September 30, 2005 and 2004 financial information previously presented reflects this change in Canadian GAAP on a retroactive basis.

For  U.S. GAAP purposes a beneficial conversion option is considered to have been provided to the holders of the Capital Securities.  The value of the beneficial conversion option ($12.5 million) is initially recorded as equity rather than debt. The debt component of the Capital Securities is then accreted up to its face value over the term of the Capital Securities by way of an increase to financing costs.  The deemed discount on the liability component is a temporary difference for purposes of deferred income tax calculations.

The effect of this adjustment to U.S. GAAP for Capital Securities for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)		December 31, 2004		December 31, 2003
Total assets		$             -		$             -		$             -
Total liabilities		(8.2	)	(8.2	)	(8.2	)
Shareholders’ equity		8.2		8.2		8.2
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)		December 31, 2004		December 31, 2003
Net income	$             -	$             -		$             -		$             -

b.

Derivative instruments, hedging activities and written option:

(i)

The Company applies hedge accounting to substantially all of its derivatives for Canadian GAAP. Canadian GAAP does not require the recognition of derivative instruments on the consolidated statement of financial position at fair value unless the derivative instrument does not qualify for hedge accounting under the CICA Accounting Guideline 13, “Hedging Relationships”.  Non-qualifying derivatives are adjusted to fair value through earnings each period.

Certain gas purchase contracts of the Company are considered derivatives for U.S. GAAP purposes but are not considered derivatives for Canadian GAAP purposes and, accordingly, are not recorded in the Company’s financial statements until the period the gas is delivered.

Under U.S. GAAP, all derivative instruments are recognized on the consolidated statements of financial position at their fair value at each period end.  The Company has not applied hedge accounting to any of its derivatives for U.S. GAAP purposes.  Changes in the fair value of derivatives are recorded to earnings in the period of change, except where such derivatives are entered into on behalf of regulated customers, in which case the change in fair value is recorded in a regulatory deferral account.

10

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

(ii)

For Canadian GAAP purposes, certain equity investees of the Company have designated future U.S. dollar revenues as a hedge of the foreign currency risk associated with U.S. dollar debt.  The investees defer the exchange gains and losses on the U.S. dollar long-term debt and recognize an adjustment to the related revenues at the time the revenue is earned.  These arrangements do not qualify for hedge accounting under U.S. GAAP.  Accordingly, the Company has adjusted its equity earnings in the investees to reflect the amounts as if the investees had translated the long-term debt at the period end exchange rates and recognized the resulting foreign exchange gains or losses in the period incurred.

(iii)

On July 31, 2004, the Company acquired a 50 per cent interest in Fairbanks Sewer and Water Inc. (“FSW”).  The Company and the other owners of FSW each have the option to require the Company to acquire the remaining 50 per cent in FSW commencing in 2009 at a price determinable at that time.  For U.S. GAAP purposes, this written option has been recorded at its estimated fair value with an offsetting increase to the equity investment amount.  Changes in the fair value of this option are recognized in earnings.

The effect of the adjustments for derivative instruments and hedging activities for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)	December 31, 2004	December 31, 2003
Total assets		$          271.9	$            72.8	$            58.8
Total liabilities		222.6	29.0	22.9
Shareholders’ equity		49.3	43.8	35.9
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)	December 31, 2004	December 31, 2003
Net income	$             5.1	$             0.5	$              5.8	$            34.0

c.

Regulatory deferral accounts:

For Canadian GAAP purposes, certain regulatory deferral accounts are aggregated on a net basis in the consolidated statements of financial position.  For U.S. GAAP purposes, the asset and liability accounts are presented separately and not on a net basis.

The effect of this adjustment for regulatory deferral accounts for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)	December 31, 2004	December 31, 2003
Total assets		$              6.4	$            17.8	$            29.8
Total liabilities		6.4	17.8	29.8
Shareholders’ equity		-	-	-
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)	December 31, 2004	December 31, 2003
Net income	$              -	$              -	$              -	$              -

d.

Stock-based compensation:

Effective January 1, 2003, the Company elected to prospectively apply the amended recommendations of the CICA Handbook related to the accounting for stock-based compensation at fair value for stock option grants made on or after January 1, 2003.  Accordingly, the Company uses the fair value method of valuing stock options granted on or after January 1, 2003.  Under the fair value based method, compensation cost is measured at the fair value at the date of grant and is expensed over the award’s vesting period.

11

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

For U.S. GAAP purposes, the Company has also adopted the fair value method of accounting for employee stock options granted on or after January 1, 2003 on a prospective basis.   Accordingly, there are no differences between Canadian GAAP and U.S. GAAP for option grants made on or after January 1, 2003.

Prior to January 1, 2003, no compensation expense was recognized under Canadian GAAP related to stock options granted.    For U.S. GAAP purposes, options granted prior to January 1, 2003 are accounted for pursuant to APB No. 25, “Accounting for Stocks Issued to Employees”  (“APB 25”), under which the measurement date for calculating stock based compensation is the date that both the number of shares the grantee is eligible to receive and the option or exercise price are known.  Compensation cost is then valued based on the difference between the market price of the stock and the option exercise price at the measurement date. Certain of the Company’s granted options prior to 2003 were accounted for under the variable plan method of APB 25 as the measurement date had not been reached.  As such options include performance based options f or which full vesting has not occurred at September 30, 2005, an adjustment has been made for additional compensation cost in the periods presented. The compensation cost is recognized based on the vesting period, by the attribution method presented in FIN 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option of Award Plans”.

The effect of this adjustment for stock-based compensation for each of the periods presented is as follows (increase(decrease)):

As at			September 30, 2005 (unaudited)		December 31, 2004		December 31, 2003
Total assets			$              -		$              -		$              -
Total liabilities			-		-		-
Shareholders’ equity			-		-		-
Period ended	September 30, 2005 (unaudited)		September 30, 2004 (unaudited)		December 31, 2004		December 31, 2003
Net income	$            (0.1	)	$            (0.6	)	$            (0.6	)	$            (3.5	)

e.

Pensions and post-retirement benefits other than pensions:

Effective January 1, 2000, accounting for pension and post-retirement benefits other than pensions under Canadian GAAP was modified to become similar to the then existing requirements under U.S. GAAP.  Adjustments for purposes of this U.S. GAAP reconciliation arise due to differences in the amortization periods of the net transitional obligation under Canadian GAAP and U.S. GAAP and the policies of the SEC and due to the requirement for recognition of an additional minimum pension liability for U.S. GAAP purposes.

The effect of this adjustment for pensions and post-retirement benefits other than pensions for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)		December 31, 2004		December 31, 2003
Total assets		$            40.1		$            43.8		$            47.0
Total liabilities		45.6		49.3		51.3
Shareholders’ equity		(5.5	)	(5.5	)	(4.3	)
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)		December 31, 2004		December 31, 2003
Net income	$              -	$              -		$              -		$              -

f.

Interest in joint ventures:

Under Canadian GAAP, the Company’s interests in joint ventures are accounted for using the proportionate consolidation method. Under U.S. GAAP, these investments are accounted for using the equity method.

12

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

The equity method is a basis of accounting for investments whereby the investment is initially recorded at cost and the carrying value is adjusted thereafter to include the Company's pro rata share of post-acquisition earnings of the investee. The amount of the adjustment is included in the determination of net income by the investor, and the investment account of the investor is also increased or decreased to reflect the investor's share of capital transactions (including amounts recognized in other comprehensive income) and changes in accounting policies.  Profit distributions received or receivable from an investee reduce the carrying value of the investment.

Excluding the impact of other U.S. GAAP adjustments within the financial statements of the investee, the effect of which adjustments are described elsewhere in this Supplemental Information, the use of the equity method of accounting results in the same net income and shareholders’ equity as the proportionate consolidation method of accounting for joint ventures.

The effect of this adjustment for interests in joint ventures for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)		December 31, 2004		December 31, 2003
Total assets		$          (24.3	)	$          (25.9	)	$            (9.3	)
Total liabilities		(24.3	)	(25.9	)	(9.3	)
Shareholders’ equity		-		-		-
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)		December 31, 2004		December 31, 2003
Net income	$              -	$              -		$              -		$              -

g.

Income tax accounting:

Under Canadian GAAP, the Company’s regulated gas and petroleum businesses account for and recover income tax expense in rates as prescribed by their respective regulators.  This includes accounting for income taxes by the taxes payable method and accounting for certain deferral and rate stabilization accounts on a net of tax basis. Therefore, future income taxes related to temporary differences are not recorded for these components of the Company’s business.   The taxes payable method is followed as there is a reasonable expectation that all future income taxes will be recovered in rates when the taxes become payable.  For these businesses, U.S. GAAP requires the recognition of deferred income tax assets and liabilities related to temporary differences and the corresponding deferred charges which are to be collected from regulated customers in future years.  In addition, the accounting for deferral and rate stabilization accounts on a net of tax basis is not allowed under U.S. GAAP.  Accordingly, for U.S. GAAP purposes, these accounts and the respective deferred income tax asset or liability have been adjusted to their gross amounts.

For Canadian GAAP purposes, income tax assets and liabilities are measured using income tax rates that, at the balance sheet date, have been enacted, or substantively enacted where there has been an announced, but not adopted, change in income tax rates that the government is able and committed to enacting in the foreseeable future and the Company expects to be assessed based on the announced tax rates or tax laws. Under U.S. GAAP, income tax assets and liabilities are measured using the income tax rates that have been enacted at the balance sheet date. Accordingly, for U.S. GAAP purposes, as at September 30, 2005 and for the nine months then ended, income tax assets and liabilities have been measured using the enacted tax rate rather than the substantively enacted tax rate used for Canadian GAAP purposes.

13

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

The effect of this adjustment for income tax accounting for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)	December 31, 2004	December 31, 2003
Total assets		$         571.5	$         511.4	$         487.3
Total liabilities		570.7	511.4	487.3
Shareholders’ equity		0.8	-	-
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)	December 31, 2004	December 31, 2003
Net income	$              0.8	$              -	$              -	$              -

h.

Lease-in/lease-out arrangements:

During 2001, 2002 and 2004, the Company entered into arrangements whereby certain natural gas distribution assets were leased to certain municipalities and then leased back by the Company from the municipalities.  For Canadian GAAP purposes, the lease of the assets to the municipalities has been accounted for as a sales-type lease and the lease back of the assets as an operating lease.  Gains recorded on the lease out of the assets are deferred and amortized over the term of the lease back.

For U.S. GAAP purposes, the gas distribution assets are considered to be integral equipment to real estate assets and, as such, the lease out of the assets to the municipalities is an operating lease.  Under operating lease accounting, the assets continue to be recognized on the statement of financial position at their historical cost and are depreciated over their estimated useful life.  The proceeds received on the lease out are initially recorded as a deferred credit and then amortized, together with proceeds to be received in future periods, on an interest yield basis. The deferred gain and amortization thereon recorded for Canadian GAAP purposes are not recognized for U.S. GAAP purposes.

The effect of this adjustment for the lease-in/lease-out arrangements for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)	December 31, 2004	December 31, 2003
Total assets		$            67.4	$            68.5	$            36.5
Total liabilities		63.0	65.3	34.5
Shareholders’ equity		4.4	3.2	2.0
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)	December 31, 2004	December 31, 2003
Net income	$              1.2	$              0.5	$              1.1	$              1.0

i.

Leasing arrangement:

In 2000, the Company entered into a leasing arrangement with a syndicate of banks and the BCG Coastal Facilities Trust, a special-purpose entity, to finance new building facilities to be used by the Company in the Greater Vancouver area. On January 4, 2005, the Company purchased the building facilities and the BCG Coastal Facilities Trust was unwound.  The Coastal Facilities leasing arrangement has been accounted for as an operating lease under Canadian GAAP prior to January 4, 2005. Commencing January 4, 2005, the cost of the building facilities is included in the consolidated statement of financial position.

Under U.S. GAAP, the BCG Coastal Facilities Trust would have been consolidated by the Company since inception.

14

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

The effect of this adjustment for the leasing arrangement for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)	December 31, 2004	December 31, 2003
Total assets		$              -	$            22.4	$            23.7
Total liabilities		-	22.4	23.7
Shareholders’ equity		-	-	-
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)	December 31, 2004	December 31, 2003
Net income	$              -	$              -	$              -	$              -

j.

Deferred charges and costs of start-up activities:

Under Canadian GAAP, start-up activities and certain other costs have been deferred and amortized over their expected period of benefit. For U.S. GAAP purposes, such costs are expensed as incurred.

The effect of this adjustment for deferred charges and costs of start-up activities for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)		December 31, 2004		December 31, 2003
Total assets		$            (1.8	)	$            (2.3	)	$            (3.0	)
Total liabilities		(0.4	)	(0.6	)	(0.8	)
Shareholders’ equity		(1.4	)	(1.7	)	(2.2	)
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)		December 31, 2004		December 31, 2003
Net income	$              0.4	$              0.4		$              0.5		$            (1.1	)

k.

Unrealized holding losses on marketable securities:

Under U.S. GAAP, SFAS 115, “Accounting for Investments in Debt and Equity Securities” (“FAS 115”) requires that the Company’s marketable securities be classified as available-for-sale securities and be recorded at market value with unrealized gains or losses excluded from earnings recorded as a component of shareholders’ equity.  No similar requirement exists under Canadian GAAP.

The effect of this adjustment for unrealized holding losses on marketable securities for each of the periods presented is as follows (increase(decrease)):

As at		September 30, 2005 (unaudited)	December 31, 2004	December 31, 2003
Total assets		$              -	$              -	$            (0.1	)
Total liabilities		-	-	-
Shareholders’ equity		-	-	(0.1	)
Period ended	September 30, 2005 (unaudited)	September 30, 2004 (unaudited)	December 31, 2004	December 31, 2003
Net income	$              -	$              -	$              -	$              -

l.

Reporting comprehensive income:

SFAS 130, “Reporting Comprehensive Income” (“FAS 130”), establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements.  Comprehensive income

15

TERASEN INC.

Supplemental Information

Reconciliation with United States Generally Accepted Accounting Principles and Conversion to United States Dollars

Nine-month periods ended September 30, 2005 and 2004 and years ended December 31, 2004 and 2003

(All dollar amounts are expressed in millions of Canadian dollars, except where otherwise indicated)

equals net income for the period as adjusted for non-owner changes in shareholders’ equity.  FAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement.

Changes during each reporting period in the cumulative foreign currency translation adjustment account for foreign investees are reported as a component of comprehensive income under U.S. GAAP.  The minimum benefit liability related to pension plans under U.S. GAAP is reported as a component of comprehensive income to the extent that the additional minimum liability recognized exceeds the unrecognized prior service cost. Unrealized holding losses on marketable securities classified as “available for sale” securities are reported as a component of comprehensive income under U.S. GAAP. All amounts are presented on a net of tax basis.

m.

Impact of recently issued U.S. accounting pronouncements:

 (i)

Financial Interpretation No. 46 (“FIN 46R”), “Consideration of Variable Interest Entities”, which addresses the requirements to consolidate related entities if a company is determined to be the primary beneficiary as a result of variable economic interests, became effective for the Company for U.S. GAAP purposes in 2004.  In 2004, the application of FIN 46R was the guidance that resulted in the consolidation of the BCG Coastal Facilities Trust (note i).

(ii)

In December 2004, the Financial Accounting Standards Board issued revised FAS No. 123(R), “Share-Based Payment”, which replaces FAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB 25, “Accounting for Stock Issued to Employees”.  This statement, which requires the cost of all share-based payments to be recognized in the financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value measurement method in accounting for share-based payment transactions.  The statement is effective for the Company for annual periods that begin after June 15, 2005.   As indicated in note (d), the Company currently applies a fair value method to the measurement of stock-based compensation for Canadian GAAP and U.S. GAAP purposes.  The Company has not completed its evaluation of the impact of adopting this standard.

(iii)

In March 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”).  FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations”, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity.  FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.  FIN 47 is effective for the Company as at December 31, 2005. The Company has not completed its evaluation of the impact of adopting this standard.

n.

Conversion to United States dollars:

For information purposes, assets and liabilities have been converted to U.S. dollars at each period end based on the exchange rate in effect at that date. Shareholders’ equity balances as at January 1, 2003 have been translated to U.S. dollars based on the exchange rate in effect at that date. Subsequent changes in shareholders’ equity have been translated to U.S. dollars based on the exchange rate in effect during that period.  Revenues and expenses have been converted to U.S. dollars based on the average exchange rate during the period.  Exchange gains and losses arising on translation have been recognized in comprehensive income through the cumulative translation account and are included in accumulated other comprehensive income (loss) in shareholders’ equity on the consolidated statements of financial position.

16

EX-99.4

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements (the “Unaudited Pro Forma Statements”) give effect to the Arrangement, as defined below and discussed in the Notes to Unaudited Pro Forma Condensed Combined Financial Statements, under the purchase method of accounting. The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to the Arrangement as if it had occurred on September 30, 2005. The Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 2005 and for the year ended December 31, 2004 give effect to the Arrangement as if it was completed January 1, 2004.

These Unaudited Pro Forma Statements are presented for illustrative purposes only. The pro forma adjustments are based upon available information and assumptions described in the Notes to Unaudited Pro Forma Condensed Combined Financial Statements. The Unaudited Pro Forma Statements are not necessarily indicative of what the actual results of operations or financial position of Kinder Morgan, Inc. would have been if the Arrangement had in fact occurred on the dates or for the periods indicated, nor do they purport to project the results of operations or financial position of Kinder Morgan, Inc. for any future periods or as of any date. The Unaudited Pro Forma Statements do not give effect to any cost savings, operating synergies, and revenue enhancements expected to result from the Arrangement or the costs to achieve these cost savings, operating synergies, and revenue enhancements.

The Unaudited Pro Forma Statements should be read in conjunction with the Terasen Supplemental Information (the “Supplemental Information”), filed as Exhibit 99.3 to Kinder Morgan, Inc.’s Current Report on Form 8-K/A (Amendment No. 1) dated November 23, 2005 (the “Form 8-K/A”), the historical annual and interim consolidated financial statements and the related notes of Terasen Inc., filed as Exhibits 99.1 and 99.2 to the Form 8-K/A, and the historical annual and interim consolidated financial statements and the related notes of Kinder Morgan, Inc. filed with the Securities and Exchange Commission.

GLOSSARY OF TERMS

Unless the context otherwise requires, when used in the Unaudited Pro Forma Statements the following terms shall have the meanings set forth below.

“Arrangement” means the arrangement under section 288 of the BCBCA on the terms and subject to the conditions set out in the Plan of Arrangement, subject to any amendments or variations made in accordance with Section 7.1 of the Combination Agreement or Article 6 of the Plan of Arrangement, or made at the direction of the Court in the Final Order. Under the terms of the Arrangement, which was completed on November 30, 2005, Kinder effectively acquired Terasen;

“BCBCA” means the Business Corporations Act (British Columbia) as now in effect and includes, where applicable, the Company Act (British Columbia) prior to the enactment of the BCBCA;

“BCUC” means the British Columbia Utilities Commission;

“Combination Agreement” means the agreement dated as of August 1, 2005 between Kinder, Subco and Terasen, as amended, supplemented and/or restated prior to the Effective Date, providing for, among other things, the Arrangement;

“Court” means the Supreme Court of British Columbia;

“Effective Date” means the date upon which all of the conditions to completion of the Arrangement set out in the Combination Agreement have been satisfied or waived and all documents required to be delivered by Terasen to Kinder and by Kinder to Terasen have been delivered to the satisfaction of the recipient, acting reasonably;

“Final Order” means the final order of the Court approving the Arrangement;

“Kinder” means Kinder Morgan, Inc., a Kansas corporation;

“Kinder Common Shares” means the shares of common stock in the capital of Kinder;

“Plan of Arrangement” means the plan of arrangement under section 288 of the BCBCA, as amended or varied in accordance with its terms or the terms of the Combination Agreement or at the direction of the Court in the Final Order;

“Share Option Plan” means the option plan of Terasen pursuant to which the Terasen Options were issued;

“Subco” means 0731297 B.C. Ltd., a wholly-owned subsidiary of Kinder;

“Terasen” means Terasen Inc., a corporation existing under the laws of British Columbia;

“Terasen Common Shares” means the issued and outstanding common shares in the capital of Terasen;

“Terasen Options” means the Terasen Common Share purchase options granted under the Share Option Plan; and

“Terasen Shareholder” means a holder of Terasen Common Shares.

KINDER MORGAN, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2004

(In US$ millions, except shares and per share information)

	Historical															Pro Forma
	Kinder			Terasen (U.S. GAAP)			Pro Forma Adjustments			Pro Forma Combined			Disposal Adjustments(r)			Combined as Adjusted
Operating revenues	$	1,164.9		$	1,446.0		$	-		$	2,610.9		$	(118.4	)	$	2,492.5
Operating costs and expenses:
Gas purchases and other costs of sales		349.6			775.5			-			1,125.1			(92.1	)		1,033.0
Other operating expenses		417.4			385.0			2.8	(n)		805.2			(22.4	)		782.8
Total operating costs and expenses		767.0			1,160.5			2.8			1,930.3			(114.5	)		1,815.8
Operating income		397.9			285.5			(2.8	)		680.6			(3.9	)		676.7
Other income and (expenses):
Equity in earnings of Kinder Morgan Energy Partners, L.P.		558.1			-			-			558.1			-			558.1
Equity in earnings of other equity investments		10.2			22.9			-			33.1			-			33.1
Interest expense, net		(155.1	)		(137.9	)		(85.7	)(o)		(372.1	)		1.6			(370.5	)
								6.6	(p)
Other, net		(55.9	)		-			-			(55.9	)		-			(55.9	)
Total other income and (expenses):		357.3			(115.0	)		(79.1	)		163.2			1.6			164.8
Income from continuing operations before income taxes		755.2			170.5			(81.9	)		843.8			(2.3	)		841.5
Income taxes		226.7			50.1			(60.1	)(q)		216.7			(0.8	)		215.9
Income from continuing operations	$	528.5		$	120.4		$	(21.8)		$	627.1		$	(1.5	)	$	625.6
Basic earnings per common share from continuing operations	$	4.27								$	4.60					$	4.59
Number of shares used in computing basic earnings per common share (thousands)		123,778						12,480	(a)		136,258						136,258
Diluted earnings per common share from continuing operations	$	4.23								$	4.56					$	4.55
Number of shares used in computing diluted earnings per common share (thousands)		124,938						12,480	(a)		137,418						137,418

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

KINDER MORGAN, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

(In US$ millions, except shares and per share information)

	Historical														Pro Forma
	Kinder			Terasen (U.S.GAAP)			Pro Forma Adjustments			Pro Forma Combined		Disposal Adjustments(r)			Combined as Adjusted
											;
Operating revenues	$	922.7		$	1,127.5		$	-		$	2,050.2	$	(118.8	)	$	1,931.4
Operating costs and expenses:
Gas purchases and other costs of sales		325.2			615.4			-			940.6		(93.2	)		847.4
Other operating expenses		298.5			313.0			2.1	(n)		613.6		(20.7	)		592.9
Total operating costs and expenses		623.7			928.4			2.1			1,554.2		(113.9	)		1,440.3
Operating income		299.0			199.1			(2.1	)		496.0		(4.9	)		491.1
Other income and (expenses):
Equity in earnings of Kinder Morgan Energy Partners, L.P.		480.4			-			-			480.4		-			480.4
Equity in earnings of other equity investments		10.3			24.5			-			34.8		-			34.8
Interest expense, net		(130.5	)		(108.3	)		(64.3	)(o)		(298.2)		1.4			(296.8	)
								4.9	(p)
Other, net		(25.3	)		-			-			(25.3)		-			(25.3	)
Total other income and (expenses):		334.9			(83.8	)		(59.4	)		191.7		1.4			193.1
Income from continuing operations before income taxes		633.9			115.3			(61.5	)		687.7		(3.5	)		684.2
Income taxes		258.1			27.7			(45.1	) (q)		240.7		(1.2	)		239.5
Income from continuing operations	$	375.8		$	87.6		$	(16.4	)	$	447.0	$	(2.3	)	$	444.7
Basic earnings per common share from continuing operations	$	3.06								$	3.31				$	3.29
Number of shares used in computing basic earnings per common share (thousands)		122,568						12,480	(a)		135,048					135,048
Diluted earnings per common share from continuing operations	$	3.04								$	3.28				$	3.26
Number of shares used in computing diluted earnings per common share (thousands)		123,754						12,480	(a)		136,234					136,234

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

KINDER MORGAN, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2005

(In US$ millions)

	Historical												Pro Forma
	Kinder		Terasen (U.S. GAAP)		Pro Forma Adjustments			Pro Forma Combined		Disposal Adjustments(r)			Combined as Adjusted
ASSETS
Current assets	$	595.0	$	691.2	$	3.2	(g)	$	1,289.4	$	(53.9	)	$	1,235.5
Discontinued Operations		-		-		-			-		114.0			114.0
Goodwill		893.2		85.8		2,096.2	(b)		2,989.4		-			2,989.4
						(85.8	)(b)
Investment in Kinder Morgan Energy Partners, L.P.		2,157.4		-		-			2,157.4		-			2,157.4
Other investments		180.5		351.4		-			531.9		(33.4	)		498.5
Property, plant and equipment, net		5,847.2		3,416.7		86.0	(h)		9,349.9		(22.9	)		9,327.0
Deferred charges and other assets		395.4		635.2		6.7	(m)		1,037.3		(3.8	)		1,033.5
Total assets	$	10,068.7	$	5,180.3	$	2,106.3		$	17,355.3	$	-		$	17,355.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes Payable	$	269.3	$	639.5	$	2,141.6	(c)	$	3,050.4	$	-		$	3,050.4
Other Current Liabilities		410.5		847.8		(1.2	)(i)		1,279.9		(21.7	)		1,258.2
						9.3	(j)
						13.5	(k)
Discontinued Operations		-		-		-			-		23.6			23.6
Deferred income taxes		2,518.8		557.9		16.7	(l)		3,093.4		-			3,093.4
Other liabilities and deferred credits		136.0		230.8		13.4	(m)		380.2		(1.9)			378.3
Long-term debt		2,848.9		1,639.3		31.0	(d)		4,519.2		-			4,519.2
Minority interests in equity of subsidiaries		1,137.2		-		-			1,137.2		-			1,137.2
Stockholders’ equity		2,748.0		1,265.0		(1,265.0	)(e)		3,895.0		-			3,895.0
						1,147.0	(f)
Total liabilities and stockholders’ equity		10,068.7	$	5,180.3	$	2,106.3		$	17,355.3	$	-		$	17,355.3

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

NOTES TO UNAUDITED PRO FORMA CONDENSED

COMBINED FINANCIAL STATEMENTS

1.

Basis of Presentation

The unaudited pro forma condensed combined financial statements (the “Unaudited Pro Forma Statements”) give effect to the Arrangement under the purchase method of accounting. The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to the Arrangement as if it had occurred on September 30, 2005. The Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 2005 and for the year ended December 31, 2004 give effect to the Arrangement as if it had occurred on January 1, 2004. These Unaudited Pro Forma Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), in U.S. dollars. The historical income statements on which the Unaudited Pro Forma Statements are based report only the income of Kinder and Terasen attributed to continuing operations.

These Unaudited Pro Forma Statements are presented for illustrative purposes only. The pro forma adjustments are based upon available information and assumptions described below. The Unaudited Pro Forma Statements are not necessarily indicative of what the actual results of operations or financial position of Kinder would have been if the Arrangement had in fact occurred on the dates or for the periods indicated, nor do they purport to project the results of operations or financial position of Kinder for any future periods or as of any date. The Unaudited Pro Forma Statements do not give effect to any cost savings, operating synergies, and revenue enhancements expected to result from the Arrangement or the costs to achieve these cost savings, operating synergies, and revenue enhancements.

The Unaudited Pro Forma Statements should be read in conjunction with the historical annual and interim consolidated financial statements and the related notes of Kinder filed with the Securities and Exchange Commission and the historical annual and interim consolidated financial statements and the related notes of Terasen filed as Exhibit 99.1 and 99.2 to the Form 8-K/A. The historical consolidated financial statements of Kinder have been prepared in accordance with U.S. GAAP (in U.S. dollars). The historical consolidated financial statements of Terasen have been prepared in accordance with generally accepted accounting principles in Canada (in Canadian dollars) and have been reconciled to U.S. GAAP (converted to U.S. dollars) as presented in the Supplemental Information filed as Exhibit 99.3 to the Form 8-K/A.

2.

Acquisition

(a)

On November 30, 2005, Kinder completed the acquisition of all of the stock of Terasen pursuant to a Combination Agreement dated as of August 1, 2005, among Kinder, one of its wholly-owned subsidiaries, and Terasen (the “Combination Agreement”). Terasen shareholders were able to elect, for each Terasen share held, either (i) Cdn$35.75 in cash, (ii) 0.3331 shares of Kinder common stock, or (iii) Cdn$23.25 in cash plus 0.1165 shares of Kinder common stock. In the aggregate, Kinder issued approximately 12.48 million shares of its common stock and paid approximately Cdn$2.49 billion in cash to Terasen securityholders. The number of shares of Kinder common stock actually delivered may decrease slightly because cash will be paid in lieu of fractional shares.

The total assumed purchase price of US$3,302.1 million was calculated as follows:

Total Kinder common shares issued		12,480,000
Average market price of a Kinder common share — US$(1)	$	91.91
Total market value of Kinder common shares issued — US$ millions	$	1,147.0
Total cash paid for Terasen common shares and stock options — Cdn$ millions	$	2,490.0
Exchange rate(2)		0.8601
Total cash paid for Terasen common shares and stock options — US$ millions	$	2,141.6
Estimated transaction expenses — US$ millions	$	13.5
Estimated purchase price in US$ millions (excluding debt assumed)	$	3,302.1

__________________

(1) Average closing price of Kinder common shares for two trading days prior and two trading days subsequent to the August 1, 2005 announcement of the Arrangement.

(2) Bank of Canada closing spot rate on September 30, 2005, expressed as U.S. dollars per Canadian dollar exchanged.

(b)

Under the purchase method of accounting, tangible and identifiable intangible assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price, including estimated fees and expenses related to the transaction, over the preliminary estimated fair value of net assets acquired is classified as goodwill on the accompanying Unaudited Pro Forma Condensed Combined Balance Sheet. Such goodwill is not amortized but evaluated for impairment on, at least, an annual basis. The estimated fair values and useful lives of assets acquired and liabilities assumed are based on preliminary management estimates and are subject to final valuation adjustments which may cause some of the amounts recorded as goodwill to be different from those shown on the Unaudited Pro Forma Condensed Combined Balance Sheet. Kinder intends to undertake a valuation study to determine the allocation of the total purchase price t o the various assets acquired and liabilities assumed. The pro forma adjustment of US$85.8 million to goodwill represents the elimination of the historical goodwill balance of Terasen.

The preliminary allocation of the purchase price is as follows (US$ millions):

Current assets	$	694.4
Goodwill		2,096.2
Investments		351.4
Property, plant and equipment, net		3,502.7
Deferred charges and other assets		641.9
Current liabilities		(1,495.4	)
Deferred income taxes		(574.6	)
Other deferred credits		(244.2	)
Long-term debt		(1,670.3	)
Total	$	3,302.1

Upon finalization of the valuation, additional adjustments may be necessary to certain accounts, primarily property, plant and equipment and equity method investments. Any additional adjustment would depend upon, among other things, the extent to which the acquisition adjustments related to regulated operations are allowable for rate-making purposes. Management estimates that for every US$120 million of the purchase price that is allocated to property, plant and equipment, assuming a 30-year remaining life of the depreciable assets, annual depreciation expense will increase by approximately US$4 million and net income would decrease by US$2.6 million. Further, allocations of the excess purchase price to property, plant and equipment would result in additional deferred tax liabilities. Management estimates that for every US$30 million of the purchase price that is allocated to investments, and the allocation relates to the underlying depre ciable assets of the equity-method investees, assuming a 30-year remaining life, the effect on equity in earnings of other equity investments would be a reduction of US$0.7 million, net of taxes.

(c)

Issuance of short-term notes under a 364-day bridge facility to fund the cash portion of the purchase price, see Note (a). It is Kinder’s intention to issue fixed-rate long-term debt within a reasonable period after completion of the Arrangement, with the proceeds used to retire the short-term notes issued under the bridge facility. It is anticipated that the long-term debt will have a variety of maturities and an average interest rate of approximately 5.1%, see Note (o).

(d)

To adjust the US$1,639.3 million carrying value of Terasen long-term debt securities to reflect market value of US$1,670.3 million. Adjustments were made to the carrying value of Terasen Inc. and Terasen Pipelines (Trans Mountain) Inc. debt securities, which had maturity dates ranging from 2006 to 2014. No adjustment was made to the carrying value of Terasen Gas Inc. debt securities due to the rate-regulated nature of Terasen Gas Inc.’s business in which recovery in rates of the costs related to these debt securities is subject to the regulation of the BCUC. The Terasen Pipelines (Trans Mountain) Inc. debt securities were repaid on November 1, 2005, and the fair value assigned to them for these pro forma statements is equal to the redemption value on that date.

(e)

Elimination of the historical stockholders’ equity balances of Terasen.

(f)

Market value of Kinder Common Shares issued, see Note (a).

(g)

Current deferred income tax asset, recorded in conjunction with the pro forma adjustment for estimated severance costs, see Note (j), using an income tax rate of 34.5%.

(h)

Preliminary fair value adjustment for property, plant and equipment based on management’s best estimate of expected future cash flows from the Trans Mountain pipeline. No adjustment was made to the carrying value of Terasen Inc.’s natural gas distribution companies’ property, plant and equipment, which approximates US$2.4 billion as of September 30, 2005, due to the rate-regulated nature of the businesses, which are subject to the regulation of the BCUC.

(i)

Current income tax benefit related to merger transaction expenses, see Note (k).

(j)

Estimated known severance costs related to involuntary employee termination costs based on a preliminary plan identifying certain employees that will be involuntarily terminated. The assessment of this plan will be completed as soon as possible and such actions will be finalized within a reasonable period of time upon finalization of the plan. Additional severance costs are likely, however, the amount of these costs is not known.

(k)

Estimated merger transaction costs, primarily related to investment banker and legal fees, see Note (a). As required by U.S. GAAP, estimated merger transaction costs of approximately US$17 million (Cdn$20 million) incurred by Terasen have not been reflected in these Unaudited Pro Forma Statements.

(l)

The pro forma balance sheet adjustment to deferred income taxes of US$16.7 million results from the tax effects of the pro forma adjustments described herein to the long-term assets acquired and liabilities assumed, using an income tax rate of 34.5%.

(m)

Represents an adjustment to reflect a liability for the excess of the projected benefit obligation related to pension plans and of the accumulated postretirement benefit obligation for postretirement benefits other than pensions over the fair value of the respective plan assets. An asset has been recorded for certain pension plans where the fair value of plan assets is in excess of the related projected benefit obligation.

(n)

Amortization of the preliminary fair value adjustment for property, plant and equipment, see Note (h), amortized over a period of 30 years, the estimated remaining useful life of the assets.

(o)

Incremental interest expense calculated on the short-term notes issued under the bridge facility, at an interest cost of approximately 4%, to fund the cash portion of the purchase price, see Note (c). It is Kinder’s intention to issue fixed-rate long-term debt within a reasonable period after completion of the Arrangement, with the proceeds used to retire the short-term notes issued under the bridge facility. It is expected that the incremental long-term debt will have a variety of maturities at current market rates and spreads, with a portion swapped to floating rates in order to attain a 50% fixed/50% floating debt ratio, with an average annual interest cost of approximately 5.1%. The expected long-term financing would result in an increase in annual interest expense, including amortization of debt issuance costs, of approximately US$24.6 million over the annual interest expense of the bridge facility. The increase in interest expe nse would result in a decrease in annual income from continuing operations of approximately US$7.3 million. A change of 0.125% in the effective interest rate on the incremental debt would cause a change in annual interest expense of US$0.8 million, net of income tax.

(p)

Amortization of the adjustment to the fair value of Terasen debt securities calculated using the effective interest method, see Note (d).

(q)

Pro forma adjustment to income tax expense, calculated utilizing estimated income tax rates of 34.5% for Canada and 37.2% for the U.S.

(r)

Adjustments to classify Terasen’s Water and Utility Services business segment as discontinued operations. It is management’s intention to dispose of this business segment and therefore, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of this segment have been excluded from the Unaudited Pro Forma Condensed Combined Statements of Operations, as Adjusted, for the periods presented because these statements present results from continuing operations only. In addition, the assets and liabilities to be disposed of have been presented separately in the Unaudited Pro Forma Condensed Combined Balance Sheet.

EX-99.5

Exhibit 99.5

RISK FACTORS

You should carefully consider the risks described below, in addition to the other information contained in Kinder Morgan, Inc.'s filings with the Securities and Exchange Commission. Specifically, please see “Risk Factors” included in Kinder Morgan, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of risk factors that may affect its business. In addition, please see the risks described in Terasen Inc.’s Management’s Discussion and Analysis for the year ended December 31, 2004, which is publicly available on the website established by the Canadian Securities Administrators for electronic filing at www.sedar.com. Realization of any of those or the following risks could have a material adverse effect on KMI’s business, financial condition, cash flows and results of operations. Unless the context requires otherwise, “KMI” means Kinder Morgan, Inc. and includes Terasen Inc. after the acquisition on November 30, 2005.

KMI’s substantially increased debt as a result of the Terasen acquisition could adversely affect its financial health and make it more vulnerable to adverse economic conditions.

As a result of its acquisition of Terasen, KMI will have significantly more debt outstanding and significantly higher debt service requirements than in the recent past. As of September 30, 2005, on a pro forma basis after giving effect to the acquisition, KMI would have had outstanding approximately $7.90 billion of consolidated debt, of which approximately $2.64 billion would have been debt of KMI’s subsidiaries. As of September 30, 2005, KMI had the ability to borrow up to approximately $442.0 million under its revolving credit facility.

KMI’s increased level of debt could have important consequences, such as:

Ÿ

limiting its ability to obtain additional financing to fund its working capital, capital expenditures, debt service requirements, potential growth or other purposes;

Ÿ

limiting its ability to use operating cash flow in other areas of its business because it must dedicate a substantial portion of these funds to make payments on its debt;

Ÿ

placing it at a competitive disadvantage compared to competitors with less debt; and

Ÿ

increasing its vulnerability to adverse economic and industry conditions.

Each of these factors is to a large extent dependent on economic, financial, competitive and other factors beyond KMI’s control.

KMI’s large amount of floating rate debt makes KMI vulnerable to increases in interest rates.

As of September 30, 2005, on a pro forma basis after giving effect to the acquisition of Terasen, KMI would have had outstanding approximately $7.90 billion of consolidated debt. Of this amount, excluding debt related to assets for which interest expense is passed through in KMI’s tariffs and rates, approximately 50% would have been subject to floating interest rates, either as short-term commercial paper or as long-term fixed-rate debt converted to floating rates through the use of interest rate swaps. Should interest rates increase significantly, KMI’s cash available to service its debt would be adversely affected. See note 14 of the notes to consolidated financial statements (unaudited) included in KMI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, and the unaudited pro

1

forma financial statements included in KMI’s Current Report on Form 8-K/A filed on December 6, 2005, for additional information.

KMI is dependent upon the earnings and distributions of Kinder Morgan Energy Partners.

For the nine months ended September 30, 2005, approximately 52% (39% on a pro forma basis after giving effect to KMI’s acquisition of Terasen) of KMI’s total segment earnings plus earnings attributable to its investment in Kinder Morgan Energy Partners was attributable to its general and limited partner interests in Kinder Morgan Energy Partners. A significant decline in Kinder Morgan Energy Partners’ earnings and/or cash distributions would have a corresponding negative impact on KMI.

Competition could ultimately lead to lower levels of profits and adversely impact KMI’s ability to recontract for expiring transportation capacity at favorable rates.

For the nine months ended September 30, 2005, Natural Gas Pipeline Company of America, or NGPL, represented approximately 41% (31% on a pro forma basis after giving effect to KMI’s acquisition of Terasen) of KMI’s total segment earnings plus earnings attributable to its investment in Kinder Morgan Energy Partners. NGPL is an interstate natural gas pipeline that is a major supplier to the Chicago, Illinois area. In the past, interstate pipeline competitors of NGPL have constructed or expanded pipeline capacity into the Chicago area. To the extent that an excess of supply into this market area is created and persists, NGPL’s ability to recontract for expiring transportation capacity at favorable rates could be impaired. Contracts representing approximately 6.4% of NGPL’s total long-haul, contracted firm transport capacity as of November 30, 2005 have not been renewed and are scheduled to expire before the end of 2006.

Terasen's Trans Mountain subsidiary’s pipeline to the West Coast of North America and the Express System, in which Terasen owns an interest, to the U.S. Rocky Mountains and Midwest are two of several pipeline alternatives for Western Canadian petroleum production. Throughput on these pipelines may decline if tolls become uncompetitive compared to alternatives. Terasen’s oil transportation business competes against other pipeline companies who could be in a position to offer different tolling structures, which may provide a competitive advantage in new pipeline development.

Terasen’s Trans Mountain subsidiary’s tolling arrangement with shippers is expiring and must be extended or renewed.

In November 2000, Terasen’s Trans Mountain subsidiary and shipper representatives reached a negotiated Incentive Toll Settlement, or ITS, to determine Trans Mountain’s tolls for the period 2001-2005 for use of the Trans Mountain pipeline network. This agreement was approved by the Canadian National Energy Board on March 22, 2001 to take effect as of January 1, 2001. Trans Mountain has initiated discussions with shipper representatives to extend or renew the 2001-2005 ITS. There is no certainty as to whether a new toll settlement will be entered into, or what the terms of a new toll settlement might be. KMI’s earnings could be negatively impacted in 2006 depending on the final tolling arrangements with shippers.

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The rates (which include reservation, commodity, surcharges, fuel and gas lost and unaccounted for) KMI charges shippers on its pipeline systems and the rates its natural gas distribution operations can charge are subject to regulatory approval and oversight.

While there are currently no material proceedings challenging the rates on any of KMI’s natural gas pipeline systems, regulators and shippers on these pipelines do have rights to challenge the rates they are charged under certain circumstances prescribed by applicable regulations. KMI can provide no assurance that it will not face challenges to the rates it receives on its pipeline systems in the future. Any successful challenge could adversely affect future earnings and cash flows.

As part of the establishment of the rates which gas distribution operations can charge their customers, utility regulators, including the British Columbia Utility Commission, or BCUC, generally establish a rate base and a reasonable and fair return for the utility upon that rate base. The allowed rates of return on KMI’s gas distribution operations are calculated differently and vary in amount in different jurisdictions. In British Columbia, the allowed rates of return on equity are determined annually by the BCUC based on a formula that applies a risk premium to a forecast of long-term Government of Canada bond yields. The allowed returns on equity for Terasen Gas and Terasen Gas (Vancouver Island), or TGVI, are determined by formulae that result in lower allowed returns on equity if long-term Government of Canada bond yields decline. Most rates in British Columbia are established using a future test year which has forecasts of the volume of gas that will be sold and transported and the costs, including the rate of return, that the utility will incur with cost and revenue tracking and sharing mechanisms that result in annual rate adjustments. Terasen Gas and TGVI have performance-based rate agreements expiring in 2007. There can be no assurance that new rate agreements will be entered into or that the regulatory process in which rates are determined will always produce rates that will result in full recovery of KMI’s British Columbia gas distribution operation’s costs.

Sustained periods of weather inconsistent with normal in areas served by KMI’s natural gas distribution operations can create volatility in its earnings.

KMI’s operating results may fluctuate on a seasonal basis. Weather-related factors such as temperature and rainfall at certain times of the year affect KMI’s earnings, principally in its retail natural gas distribution business. Sustained periods of temperatures and rainfall that differ from normal can create volatility in KMI’s earnings. In many areas, natural gas consumption patterns peak in the winter, especially for KMI’s retail natural gas distribution operations. Those operations normally generate higher net earnings in the first and fourth quarters, which are offset to some extent by lower earnings or net losses in the second and third quarters.

Proposed rulemaking by the FERC, the BCUC or other regulatory agencies having jurisdiction could adversely impact KMI’s income and operations.

Generally speaking, new laws or regulations or different interpretations of existing laws or regulations applicable to KMI’s assets could have a negative impact on its business, financial condition and results of operations.

Environmental regulation and liabilities could result in increased operating and capital costs.

KMI’s business operations are subject to federal, state, provincial and local laws and regulations relating to environmental protection, pollution and human health and safety in the United

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States and Canada. For example, if an accidental leak or spill occurs at or from KMI’s pipelines, or at or from its storage or other facilities, it may experience significant operational disruptions and it may have to pay a significant amount to clean up the leak or spill, pay for government penalties, address natural resource damages, compensate for human exposure, install costly pollution control equipment, or a combination of these and other measures. The resulting costs and liabilities could negatively affect KMI’s level of earnings and cash flow. In addition, emission controls required under federal, state and provincial environmental laws could require significant capital expenditures at KMI’s facilities. The impact of environmental standards or future environmental measures could increase KMI’s costs significantly. Since the costs of environmental regulation are already significant, additional or stricter regu lation or enforcement could negatively affect KMI’s business.

KMI owns or operates numerous properties that have been used for many years in connection with its business activities. While KMI has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other hazardous substances may have been released at or from properties owned, operated or used by KMI or its predecessors, or at or from properties where their wastes have been taken for disposal. In addition, many of these properties have been owned and/or operated by third parties whose management, use and disposal of hydrocarbons or other hazardous substances were not under KMI’s control. These properties and the hazardous substances released and wastes disposed thereon may be subject to laws in the United States such as the Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or the Superfund law, which impose joint and several liability without reg ard to fault or the legality of the original conduct. Under the regulatory schemes of the various provinces, such as British Columbia’s Environmental Management Act, Canada has similar laws with respect to properties owned, operated or used by KMI or its predecessors. Under such laws and implementing regulations, KMI could be required to remove or remediate previously disposed wastes or property contamination, including groundwater contamination caused by prior owners or operators. Imposition of such liability schemes could have a material adverse impact on KMI’s operations and financial position.

Current or future distressed financial condition of customers could have an adverse impact on KMI’s operations in the event these customers are unable to pay KMI for the products or services it provides.

Some of KMI’s customers are experiencing severe financial problems, and other customers may experience severe financial problems in the future. The bankruptcy of one or more of them, or some other similar proceeding or liquidity constraint, might make it unlikely that KMI would be able to collect all or a significant portion of amounts owed by the distressed entity or entities. In addition, such events might force such customers to reduce or curtail their future use of KMI’s products and services, which could have a material adverse effect on its operations and financial condition.

Increased regulatory requirements relating to the integrity of KMI’s pipelines will require KMI to spend additional money to comply with these requirements.

Through its regulated pipeline subsidiaries, KMI is subject to extensive laws and regulations related to pipeline integrity. There are, for example, federal guidelines for the U.S. Department of Transportation and pipeline companies in the areas of testing, education, training and communication. KMI has increased and expects to significantly increase its capital expenditures to address these matters. Additional laws and regulations that may be enacted in the future could significantly increase the amount of these expenditures.

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The failure to successfully integrate Terasen’s operations with those of KMI could adversely impact KMI’s results of operations. This would also be true for any other significant acquisition.

The integration of Terasen and other companies that have previously operated separately involves a number of risks, including:

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demands on management related to the increase in size after the acquisition,

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the diversion of management’s attention from the management of daily operations, difficulties in implementing or unanticipated costs of accounting, estimating, reporting and other systems,

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difficulties in the assimilation and retention of necessary employees, and

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potential adverse effects on results of operations.

KMI regularly considers and enters into discussions regarding potential acquisitions and is currently contemplating potential acquisitions. While there are currently no unannounced purchase agreements for the acquisition of any material business or assets, such transactions can be effected quickly, may occur at any time and may be significant in size relative to KMI’s existing assets or operations.

Future business development of KMI’s products pipelines is dependent on the supply of, and demand for, crude oil and other liquid hydrocarbons, particularly from the Alberta oilsands.

KMI’s pipelines depend on production of natural gas, oil and other products in the areas serviced by its pipelines. Without reserve additions, production will decline over time as reserves are depleted and production costs may rise. Producers may shut down production at lower product prices or higher production costs, especially where the existing cost of production exceeds other extraction methodologies, such as at the Alberta oilsands. Producers in areas serviced by KMI may not be successful in exploring for and developing additional reserves, and the gas plants and the pipelines may not be able to maintain existing volumes of throughput. Commodity prices may not remain at a level which encourages producers to explore for and develop additional reserves, produce existing marginal reserves or renew transportation contracts as they expire.

Changes in the business environment, such as a decline in crude oil prices, an increase in production costs from higher feedstock prices, supply disruptions, or higher development costs, could result in a slowing of supply from the Alberta oilsands. In addition, changes in the regulatory environment or governmental policies, such as the Kyoto Protocol, may have an impact on the supply of crude oil. Each of these factors impact KMI customers shipping through its pipelines, which in turn could impact the prospects of new transportation contracts or renewals of existing contracts.

Throughput on KMI’s products pipelines may also decline as a result of changes in business conditions. Over the long term, business will depend, in part, on the level of demand for oil and natural gas in the geographic areas in which deliveries are made by pipelines and the ability and willingness of shippers having access or rights to utilize the pipelines to supply such demand. The implementation of new regulations or the modification of existing regulations affecting the oil and gas industry could reduce demand for natural gas and crude oil, increase KMI’s costs and may have a material adverse

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effect on KMI’s results of operations and financial condition. KMI cannot predict the impact of future economic conditions, fuel conservation measures, alternative fuel requirements, governmental regulation or technological advances in fuel economy and energy generation devices, all of which could reduce the demand for natural gas and oil.

KMI is subject to U.S. dollar/Canadian dollar exchange rate fluctuations.

As a result of KMI’s acquisition of Terasen, a significant portion of KMI’s assets, liabilities, revenues and expenses will be denominated in Canadian dollars. KMI is a U.S. dollar reporting company. Fluctuations in the exchange rate between United States and Canadian dollars could expose KMI to reductions in the U.S. dollar value of its earnings and cash flows and a reduction in stockholders’ equity under applicable accounting rules.

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