On Monday, June 29, interim service began on REX East, the eastern section of Kinder Morgan Energy Partners' (KMP) 1,679-mile multi-state Rockies Express Pipeline (REX). With a capacity of 1.6 billion cubic feet per day (Bcf/d), natural gas started flowing on the 444-mile segment of the $6.6 billion pipeline that runs from Audrain County, Missouri, to the Lebanon interconnection point in Warren County, Ohio. Earlier, during May last year, the western section of the pipeline (REX West) came online. The 713-mile pipeline runs from the Cheyenne hub in Weld County, Colorado, to a major delivery point in Brown County, Kansas and has a capacity of 1.5 Bcf/d.

The remaining portion of the 639-mile 42-inch diameter Rex East pipeline, which will end in Clarington, Ohio, is expected to be operational by November 1, 2009. When fully completed, the entire 1,679-mile pipeline will be capable of transporting roughly 1.8 Bcf/d of natural gas and is backed by firm commitments from creditworthy shippers for nearly all of the capacity on the pipeline. Kinder Morgan is the operator of the REX project and has a 50% interest, with the other partners being ConocoPhillips (COP) and Sempra Energy (SRE).

REX is a key pipeline asset that will fully integrate the fast growing Rockies natural gas producing region with consuming markets in the Midwestern and Eastern U.S. The lack of adequate take-away capacity in the Rockies has been the bane for natural gas producers in the region due to its negative impact on local natural gas pricing. It is expected that with the completion of this pipeline, the Rockies basis spread (the discount at which Rockies natural gas gets priced relative to other regions in the country) will narrow significantly.

Kinder Morgan is the largest independent owner and operator of petroleum product pipelines in the U.S., transporting nearly 2 million barrels per day of gasoline, jet fuel, diesel fuel, and natural gas liquids. The partnership also has capacity to transport 7 billion cubic feet/day (Bcf/d) of natural gas. It owns or operates more than 26,000 miles of pipeline and approximately 170 terminals.

We currently have a Buy recommendation on the partnership given its focus on stable, fee-based, well-diversified assets, and its strong balance sheet, which allows flexibility when raising capital for acquisitions/expansions. With a number of organic projects expected to come online over the next few years, we see favorable long-term growth profile for Kinder Morgan.