Huge Pipeline Delivers Bonanza to Towns on Route

Cost Overruns, Gas-Market Shifts Likely to Dent REX's Returns, but Work Provided a Mini-Stimulus From Colorado to Ohio By ANN DAVIS ZANESVILLE, Ohio -- To the energy industry, REX is the king of pipelines. For this town's struggling work force, REX is the king of jobs. The last leg of one of the largest natural-gas pipelines built in 25 years -- stretching 1,679 miles from Colorado to Ohio -- is being laid, welded and buried under fields just east of here. Kinder Morgan Energy Partners LP's Rockies Express, or REX -- nicknamed the King of Pipelines by a federal regulator -- will link the vast but remote stores of fossil fuel buried under the Rocky Mountains with the power-hungry markets of the Midwest and Northeast. The four-year project, scheduled for completion Nov. 1, cost $6.7 billion, 50% more than expected. It is the biggest bet yet by Houston multibillionaire Richard Kinder, the company's founder and chief executive, who hopes the project will further cement his leading hold on America's energy tollways. The project has already amounted to a mini-stimulus plan for towns along the pipeline's path, stretching from Rio Blanco County, Colo., to this recession-struck region of Ohio. About 1,500 workers known as "pipeliners" work in rural towns for months at a time. About half are out-of-towners, who rent apartments and RV lots, and fill local restaurants. The push to build REX came from Rockies gas producers in late 2005. Pipeline capacity there was so limited that producers couldn't get fuel to market. Gas there sold at a discount of as much as 30% compared with prices in the East. "Everybody really needed the pipe," said Steven Kean, Kinder's president of natural-gas pipelines and chief operating officer. "The question was: Who was going to build it?" Mounting the project was a massive undertaking. Kinder paid more for contractors in the midst of a pipeline-construction boom and runaway raw-materials market in 2007 and 2008. The company used 1.4 million tons of steel and welded 110,814 sections of 42-inch pipe. Kinder negotiated with 6,530 landowners for rights of way and reviewed the project at nearly 300 public meetings. To avoid disturbing the endangered Indiana bat, crews in Ohio had to clear trees in the dark and in warm weather when bats wouldn't roost. Biologists monitored their every move. As the recession took hold, the project became popular in the region for injecting money into struggling local economies. REX has consumed over 27 million man hours and created 10,000 jobs ranging from welder, pipe bender and road borers to the "straw boss," who oversees seeding of grass once pipes are buried. "The employment outlook here was really grim," said Rich Davis, an electrician at REX's new $35 million compressor station in Philo, Ohio, which helps increase pipe pressure to push gas down the line. "The boost to the economy has been astronomical." South of Cambridge, Ohio, tractors recently pulled a school bus full of workers up dusty clay hills on a roadless right of way. The traveling laborers keep local merchants and building-supply vendors busy. Dry cleaners are starching uniforms for welders so sparks will bounce off their clothes and not burn holes. Tim Longstreth a co-owner of two local Comfort Inns, said pipeliners booking rooms for multimonth stays have boosted his occupancy rate by 10% this year. Hotel stays nationwide are down 10% to 15%. Randy Cackler, a chief inspector at a REX meter station, pumped money into the economy with his purchase of a new pickup truck at a Ford dealer in Cambridge. REX has already begun to level natural-gas prices across the U.S. Research firm Bentek Energy cites the opening of a portion of REX earlier this year as a significant factor in reducing the premium Eastern regions pay over the West to 17 cents per million British thermal units in September from $2.77 last year. REX has been so popular with gas producers that shipping capacity on the pipeline sold out more than three years ago. At the time, gas in the East frequently traded above $10 per million BTUs, well above today's range of $3, helping Kinder lock in higher transportation rates and a steady flow of cash for 10 years. But some analysts believe the recent cost overruns and a major shift in U.S. gas production will substantially clip REX's long-term return for Kinder Morgan, operator and 50% owner, and minority owners Sempra Energy and ConocoPhillips. A few years after REX was planned, prolific gas reserves were discovered in the eastern U.S. Today, piping gas from the Rockies looks less necessary. Standard & Poor's has kept Kinder Morgan Energy Partners' debt on a "negative" outlook since October. Mark Reichman, energy analyst with SMH Capital in Houston, said REX's expected returns have dropped from the low to mid-teens to the high single digits. Kinder and its partners don't dispute that costs have dented returns but say the pipeline network connects to multiple markets and can earn even more from expansions as demand for gas grows. Analyst Mark Easterbrook with RBC Capital Markets credits Kinder for launching the much-needed pipeline years before other companies saw the need. "The project's still been beneficial to Kinder unit holders," he said. Write to Ann Davis at ann.davis@wsj.com