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Sempra Still Touting REX Pipeline's Value

Despite taking a significant hit in its 2Q2012 profits related to its 25% interest in the Rockies Express Pipeline (REX), which is now on the sales block, San Diego-based Sempra Energy executives view the natural gas pipeline as a "significant" asset long term because of its potential role in moving gas bidirectionally from the developing parts of the Utica and Marcellus shales.

Sempra executives fielded questions on REX last Thursday during a quarterly conference call. Sempra recorded a $179 million one-time charge on its REX investment for 2Q2012, dropping earnings for the quarter to $62 million (25 cents/share) from $503 million ($2.09) for the same period last year.

Plans by majority REX owner/operator Kinder Morgan Energy Partners LP to sell its interest in the pipeline, along with "weak market conditions," led Sempra to determine an impairment charge at this time, said CEO Debra Reed. However, the company remains committed to REX. "How gas flows change in the region, what happens to LNG [liquefied natural gas] exports and what happens to Canadian gas exports all add up to a real opportunity [at REX]," she said.

Sempra President Mark Snell and Reed both said REX still carries a lot of opportunities, but perhaps not as profitable as in the past. "A lot of the analysis we did was looking at future flows on the pipeline, and we believe there will be changes over time with the development of Marcellus and Utica," Reed said. "It is just a matter of when those occur and what it does to the REX asset over time."

Sempra will fully recover its investment in REX before 2019, Snell said.

"This is still an important asset, and it is a good system for bringing gas out of the Rockies to the East, but with the development of the Marcellus, we do think that over time after our contracts expire the flow could reverse, and gas could flow from both directions up to Chicago and other markets in the Midwest. Before the end of the contracts, we will have recouped all of our investment -- either in cash or tax benefits -- and from an accounting perspective we will still have basis left. That's an important thing to remember.

"And further, I don't think anyone can say with 100% certainty what the [REX] revenues will be beyond 2019, but we know there is interest in going for both directions, and we know we will have significant revenues, although they might not be as good as they are now as we have indicated by our write down."

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