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 REX as a "significant" asset long term because of its potential role in moving natural gas bidirectionally from the developing parts of the Utica and Marcellus shales.
Sempra senior executives made this point several times in fielding questions from financial analysts last Thursday when they announced a $179 million noncash, after-tax impairment charge on Sempra's REX investment for 2Q2012, dropping earnings for the quarter to $62 million (25 cents/share), compared with $503 million ($2.09/share) for the same period last year.
Majority REX owner Kinder Morgan Energy Partners LP's plans to sell its interest in the pipeline as part of its merger with El Paso Corp. (see Daily GPI, April 20), along with "weak market conditions," led Sempra to determine an impairment charge at this time, said CEO Debra Reed, who emphasized that all of Sempra's other businesses are "performing well."
"How gas flows change in the region, what happens to LNG exports and what happens to Canadian gas exports all add up to a real opportunity [at REX]," Reed said.
Noting that Sempra has completed a great deal of modeling of future natural gas prices and operating developments through the current REX contracts, which expire in 2019, both Reed and Sempra President Mark Snell said they are optimistic that REX still carries a lot of opportunities, although Snell said they may not be as profitable as they have been in the recent 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."
Snell emphasized the continued importance of the pipeline to Sempra and the fact that its future revenues are uncertain. Sempra will fully recover its investment in REX before 2019, he 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."
In response to other questions, CFO Joe Householder said Sempra doesn't think the eventual sale of Kinder Morgan's portion of REX will cause it to change the Sempra evaluation of the market value of its investment.
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