Favorable growth opportunities and improved basis differentials are likely to emerge from the Rockies as the western leg of Rockies Express Pipeline LLC (REX-West) prepares to start commercial operations in March, according to Questar CEO Keith Rattie, who spoke glowingly about his company's links to the new pipeline as a part of a conference call.

Questar reported 8% profit growth in 4Q2007 and 15% growth for 2007 last week. Net income in the final quarter was $130.8 million, compared with $121.5 million in 4Q2006. For the year Questar reported 14% profit growth to $507.4 million from $444.1 million in 2006.

Noting that calendar year 2008 price quotes Tuesday showed a $1.38 basis between New York Mercantile Exchange and Northwest Pipeline prices for wholesale natural gas, and widening in 2009 and 2010, Rattie said the natural gas wholesale market is "looking at very strong growth in production in the Rockies." And he sees this as translating in to additional opportunities for his Salt Lake City-based production, pipeline and distribution utility company.

At the end of January about 8 Bcf/d of production was flowing out of what he called the "relevant part" of the Rockies, according to Rattie.

The 8 Bcf/d coming out of the Rockies most recently is "probably an all-time record," Rattie said. "Producers are drilling away, anticipating more favorable price basis in the next several years, and our view remains based on the growth projections that [Rockies] producers are making to their shareholders. We think we will see basis get wide again in 2011, and we'll need another export pipeline out of the region."

Questar sees at least five and maybe six added interstate pipeline proposals bidding to fill that future need, assuming one of them gets the necessary shipper support.

On hedging, Questar plans to continue what it is doing and will add hedges for its newly acquired Louisiana properties when that deal closes later in the year. Rattie said that when REX-West goes into service there will be increased pressure on Mid-continent basis.

"We would expect that REX will take volumes off some of the other pipes out of the Rockies and force to the east gas that traditionally flowed out of the Midcontinent area north to the Chicago-area market," Rattie said.

In response to a question from an analyst, Rattie said Questar has had discussions with many of the sponsors of the proposed additional Rockies pipeline projects. "They are, of course, keen to secure producer commitments and are looking for our help in making the case with other producers in the region as well as our own producer-affiliates.

"We think the best way for Questar to add value is through a low-cost expansion of Overthrust Pipeline, which connects the major supply hub in the Rockies [Opal, WY] to the supply hub coming out of the Picance [Basin]. Our pipeline runs right through the heart of where the supply growth is going to be in the next several years, and we can offer low-cost expansion capacity to support one of the export pipe projects as we did with REX."

Eventually, Questar's recently completed 77-mile Overthrust pipeline connecting with Rockies Express (REX) could be used to create a master limited partnership (MLP) that would help fund subsequent new interstate pipelines taking Rockies supplies east during the next six years, Rattie said.

During the conference call, he offered his current thinking about Overthrust, which began commercial operations two weeks ahead of schedule on Dec. 15. "We think Overthrust is an ideal asset for the launch of an MLP," Rattie said. "Overthrust has recently been completed, so there is modest to minimal tax leakage associated with the transaction. We are looking at the MLP, not as a strategy, but as part of a way of funding a build-up of our pipeline business.

"We've talked to some other parties on a very preliminary basis about the possibility of contributing Overthrust to an existing MLP for a meaningful interest in some GP [general partnership] as well as some partnership units. If we have an opportunity to participate as an equity owner in one of the two major export pipelines that we think are going to be needed between now and 2014, one way, and an attractive way, to fund our participation is through the formation of a MLP."

Rattie reiterated that Questar would not be looking at MLP formation as a strategy, but rather as a vehicle for financing a bigger project that helps launch a major export pipeline, which from a corporate strategy standpoint would help protect Questar's increased capital investments in exploration and production in the Rockies.

"Overthrust provides a way to get production from the southwest part of the state to the REX pipeline at Wamsutter and Wyoming Interstate Co. at Kanda/Rock Springs," Questar emphasizes on its website description of the new pipeline, which it said was initially subscribed for 750,000 Dth/d.

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