Boardwalk Pipeline Partners, LP Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.11.13 | About: Boardwalk Pipeline (BWP)

Boardwalk Pipeline Partners, LP (NYSE:BWP)

Q4 2012 Earnings Call

February 11, 2013 9:00 am ET

Executives

Molly Ladd Whitaker

Stanley C. Horton - Chief Executive Officer of Boardwalk GP LLC, President of Boardwalk GP LLC and Director of Boardwalk GP LLC

Jamie L. Buskill - Chief Financial Officer of Boardwalk GP LLC, Senior Vice President of Boardwalk GP LLC and Treasurer of Boardwalk GP LLC

Analysts

Mark L. Reichman - Simmons & Company International, Research Division

John Edwards - Crédit Suisse AG, Research Division

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Paul Jacob

Yves Siegel

Operator

Good day, ladies and gentlemen, welcome to the Quarter 4 2012 Boardwalk Pipeline Partners, LP Earnings Conference Call. My name is Mo, and I'll be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Molly Ladd Whitaker, Director of Investor Relations and Corporate Communications. Please proceed.

Molly Ladd Whitaker

Thank you, Mo. Good morning, everyone, and welcome to the fourth quarter 2012 earnings call for Boardwalk Pipeline Partners, LP. I'm pleased to be joined today by Mr. Stan Horton, our President and CEO; and Mr. Jamie Buskill, our CFO.

If you would like a copy of the earnings release associated with this call, please download it from our website at www.bwpmlp.com. Following our prepared remarks this morning, we will turn the call over for your questions.

We would like to remind you that this conference call will include the statements that are forward-looking in nature. Statements in this earnings call related to matters that are not historical facts are forward-looking statements. These statements are based on management's beliefs and assumptions using currently available information and expectations. Actual results achieved by the company may differ materially from those projected in any forward-looking statement. The company expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

I'd also like to remind you that during this call today, we may discuss certain non-GAAP financial measures, such as EBITDA and distributable cash flow. With regard to such financial measures, please refer to our earnings release for reconciliation to the most comparable GAAP measures.

Now I'd like to turn the call over to Stan Horton.

Stanley C. Horton

Thank you, Molly, and good morning, everyone. I hope you've had a chance to review the earnings press release that we issued this morning. In addition to reporting earnings, we also announced a quarterly distribution of $0.5325 per unit or $2.13 annualized. Jamie will review the results of the quarter shortly.

In the fourth quarter, we continued to make progress implementing our 3 strategic goals of: one, adding new end-use markets to our pipeline and storage systems; two, diversifying into other areas of the midstream sector; and three, emphasizing the need to control our cost structure to achieve greater efficiencies. With regards to the first goal of adding new end-use markets to our existing pipeline and storage systems, HP Storage salt cavern expansion at Petal is on schedule for gas injections to begin in the second quarter of 2013. When complete, the cavern will add approximately 5 billion cubic feet of working gas capacity. This incremental capacity has been fully contracted for the first year that this cavern will be in service.

We are also moving forward with our Southeast Market Expansion project, which will allow us to transport an additional 450 million cubic feet of natural gas into the growing areas of demand in the southeast region of the United States, including the markets in Mississippi, Alabama and Florida. This $300 million project is supported by 10-year firm agreements of primarily electric generation and industrial customers. We anticipate beginning construction in early 2014. The targeted and service date of the project remains late in 2014.

We are also making progress on attaching new power loads and are pleased to have recently executed a long-term contract with Kentucky Utilities to serve their Cane Run combined cycle power plant that is scheduled to be placed into service in late 2014. This project is in addition to the previously announced gas-fired power generation projects in Texas and Louisiana, the Southeast Market Expansion project and the other firm contracts that were executed with power producers in 2012. In aggregate, these projects represent an average of approximately 765,000 MMbtu a day once all of the projects are in service, and much of this new power generation load will utilize existing pipeline capacity that will be up for renewal over the next 2 years. The new flexible services that FERC has recently approved on our pipelines are being used to support some of this load.

During the last several earnings calls, we have spoken about how compressed basis differentials are negatively impacting our business. Simply put, when firm transportation contracts come up for renewal, the change in market fundamentals from the time the contract was originally executed resulted either the contract being renewed at a reduced rate or the capacity being termed back and remarketed to another customer. Some of the capacity being termed back is used to meet the new electric load I just discussed. But those loads will not come on stream until the projects are completed. In the interim, the capacity is marketed by our pricing desk and in the short-term market, which we think will continue to experience very low rates during 2013, due to the narrow basis spreads.

The contracts that are being renewed are being renewed at lower rates because the current basis spreads do impact the pricing of longer-term contracts. In 2013, some of the contracts associated with the major expansion projects we put in service a few years ago are up for renewal.

The annual revenues associated with contracts expiring in 2013 are approximately $125 million. At this time, our best estimate is that the combination of lower rates on contract renewals and the remarketing of turn-back capacity will result in an annual revenue reduction of approximately $40 million.

Turning to our second goal of diversifying into other areas of the midstream segment. In October, we completed both the acquisition and drop down of Boardwalk Louisiana Midstream. And since our last call, we have successfully integrated Boardwalk Louisiana Midstream with Boardwalk.

In January of 2013, Boardwalk Louisiana Midstream's 13 million brine handling upgrade construction projects at the Choctaw Hub was completed and commenced commercial operations. This 1-million-barrel brine pond is supported by a 7-year fixed-fee contract that has allowed the company to expand its brine sales, transportation and storage capabilities.

Also at the Choctaw Hub, Boardwalk Louisiana Midstream's 50-million brine sales and transportation project is proceeding on track and is scheduled to be placed into service in the third quarter of this year. This project involves construction of a 26-mile 12-inch pipeline from Boardwalk Louisiana Midstream's Choctaw facilities into our customers petrochemical plant that is supported by a 20-year contract with minimum volume requirements and expansion options.

Construction of Boardwalk Field Services' South Texas Eagle Ford Expansion project is proceeding as planned. We are on budget and the project expected to go into service in April. Construction on the pipeline facilities is substantially complete, and we are nearing completion of the Flag City Processing Plant with commissioning expected next month.

Our third goal of controlling our cost structure has been an ongoing focus. And during 2012, we were able to reduce cost by both streamlining personnel and reducing the use of outside services. These initiatives represent an approximately 10% to 15% reduction in G&A cost on an annual run rate basis.

In summary, the fourth quarter capped off an eventful year in executing our long-term growth strategy, including approximately $900 million in acquisitions due to the drop-down of the remaining interest in HP Storage and the acquisition of Boardwalk Louisiana Midstream and investing approximately another $145 million in our other announced growth projects.

In 2013 and beyond, we will continue to strive to maximize long-term unit holder value through a combination of adding new end-use markets to our pipeline and storage systems that will utilize the capacity that is coming up for renewal, diversifying into other areas of the midstream sector and controlling our cost structure to achieve greater efficiencies.

Now that concludes my comments, I will turn the call over to Jamie Buskill.

Jamie L. Buskill

Thank you, Stan, and good morning, everyone. As a result of the drop-down of HP Storage earlier this year, the historical amounts for the fourth quarter of 2011 have been recast as though we have fully consolidated HP Storage from the date of acquisition, which was December 1, 2011.

Operating revenues for the fourth quarter were $326 million, which is $25 million higher than the comparable period in 2011. Net of fuel and transportation expense, revenues for the quarter were $298 million, an increase of $21 million or 8% from $277 million for the comparable period in 2011. The increase was driven by the revenues associated with the acquisitions of HP Storage and Boardwalk Louisiana Midstream, which contributed $25 million in net revenues for the quarter.

For the full year 2012, operating revenues, net of fuel and transportation expense, were $1,106,000,000, an increase of $66 million or 6% from $1,040,000,000 for the full year 2011. Our acquisitions contributed $61 million of the increase during the year. Throughput for the quarter was 622 TBtu, bringing our full year throughput to 2,513 TBtu.

Turning now to operating expenses. We reported operating expenses of $196 million for the quarter, an increase of $7 million or 3% from $189 million for the comparable period in 2011. The primary driver for the increase was $15 million from operating expenses associated with the acquisition of HP Storage and Boardwalk Louisiana Midstream. Excluding the impacts from acquisitions, operating expenses were favorable by $8 million, primarily due to lower administrative and general and operation and maintenance expenses of $10 million related to cost management activities.

Stan mentioned that one area that the company is focusing on is cost efficiencies. We made significant process -- progress in reducing our A&G year-over-year and on a run rate basis, despite the addition of our acquisitions.

EBITDA for the quarter was $198 million, an increase of $28 million or 16% from $170 million for the comparable period in 2011. EBITDA for the quarter was primarily impacted by the revenue and expense drivers previously discussed.

Net income for the quarter was $90 million, an increase of $18 million or 26% from $72 million for the comparable period last year. We generated $143 million of distributable cash for the quarter. This compares to $140 million generated in the fourth quarter 2011, an increase of 2%.

Previously, Stan mentioned that we invested just over $1 billion in acquisitions and growth projects in 2012. In addition to the growth capital expenditures, we retired approximately $525 million in debt during the year, consisting of $200 million variable-rate term loan at HP Storage, $225 million of 5.8% notes at Gulf South and $100 million of 8% subordinated debt. We financed these activities by issuing $866 million in equity, $300 million in 3.375% notes at Boardwalk, $300 million of 4% notes at Gulf South and a $225 million variable term late loan at Boardwalk Louisiana Midstream.

As of December 31, outstanding borrowings under our credit facility were $302 million with an available borrowing capacity of $698 million. In 2013, we anticipate growth capital expenditures related to previously announced projects will be approximately $250 million.

That concludes my remarks. So I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] So your first question is from Mark Reichman, Simmons.

Mark L. Reichman - Simmons & Company International, Research Division

Just wanted to find out if you can just provide an update on the major projects that you've outlined in recent investor presentations. Have there been any changes to the amount of capital investment estimated, or any changes to the in-service dates? Like for example, on the gas-fired electric power generation projects, I think the capital investment was estimated to be $50 million. Does this new contract increase that amount at all? And then the second question is, and I may have missed it, what do you forecast maintenance CapEx to be in 2013?

Stanley C. Horton

Mark, I'll take the first part and let Jamie take the second part. The $50 million that was quoted in previous presentations related to one power project in Texas and a second power project in Louisiana, and those capital expenses have not changed. The power load that we just picked up with Kentucky Utilities at Cane Run, there's almost no capital that has to be spent on that project, just the installation of a meter station. The other capital forecast that we've given you for Southeast Expansion and the cavern at Petal 12a [ph], none of those capital costs have changed appreciably at all.

Mark L. Reichman - Simmons & Company International, Research Division

And also, the service dates are still intact?

Stanley C. Horton

Yes.

Jamie L. Buskill

Yes. Now one thing, Mark, you may be a little confused by as we said, we would spend $200 million on expansion capital in 2012 and we came in right below $150 million, where we thought we were going to spend $200 million in '13, we're going to spend $250 million. That's just the carryover, the $50 million, and it's just fact that the cost are going to come in the first part of the year rather than end of 2012.

Mark L. Reichman - Simmons & Company International, Research Division

Okay, great. And then maintenance CapEx for '13?

Jamie L. Buskill

Maintenance CapEx, at this point, it's probably going to be similar to our 2011 rate, which we had about $95 million in 2011. And that's roughly what we've anticipate with 2013.

Mark L. Reichman - Simmons & Company International, Research Division

Okay. Even with the acquisition of Louisiana Midstream?

Jamie L. Buskill

Yes, yes.

Operator

Your next question is from John Edwards, Credit Suisse.

John Edwards - Crédit Suisse AG, Research Division

Just, Stan, I think you had mentioned about a $40 million annual decline from capacity remarketing. You have contract roll-offs, et cetera. Is that something you think will continue for several years beyond this year? Or is that just a 2013 number we should we be thinking about?

Stanley C. Horton

No, that's just a 2013 number that you ought to be thinking about. You go back and look at 2012, we pretty much offset with new contracts, some of the contract turn backs. So each year is a little different. It's tough to forecast out. But the numbers that I quoted you for -- were for 2013.

John Edwards - Crédit Suisse AG, Research Division

Then how much capacity is rolling off this year? And if you can give some idea how much is rolling off in 2014.

Jamie L. Buskill

For this year, the dollar amount Stan mentioned was $125 million. When you get beyond that, if you look at '14, it's really hard to say what that number ultimately will be because as you deal with some of the contracts in the current year, they may just roll a year which adds to it, But looking ahead, '14 looks to be more of a comparable year, which we said all along is roughly $100 million a year in transportation contract.

John Edwards - Crédit Suisse AG, Research Division

Okay. Okay. And then on the growth CapEx, I think you said you're coming in about $250 million for 2013?

Jamie L. Buskill

Yes, $250 million.

John Edwards - Crédit Suisse AG, Research Division

And then can you give us any kind of granularity on how that's being allocated?

Jamie L. Buskill

Not by project. I mean, the big projects are the wrap-up, the Eagle Ford Expansion that we have going on and then the brine expansion that Stan mentioned. Those are really the 2 primary drivers. We'll start incurring some cost with our Southeast Market Expansion, but the bulk of those costs will be in 2014.

John Edwards - Crédit Suisse AG, Research Division

Okay. Then can you just remind us of about what's the project cost on that Southeast Market Expansion?

Jamie L. Buskill

It's approximately $300 million.

Operator

Your next question is from the line of Ross Payne, Wells Fargo.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Jamie, you just answered my questions.

Operator

Okay, your next question from Jeremy Tonet, JPMorgan.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

I was wondering if you could provide us an update as far as the average contract duration for your portfolio of contracts. And also, the strategy this year when it comes to contract renewals, are you looking to do more shorter-dated contracts with the anticipation that this is kind of troughable rates and you don't want to lock yourself up long term at these rates? Or how are you thinking about the whole contract renewal process?

Jamie L. Buskill

Yes, the contract term is still basically unchanged. We're approximately 6-years-weighted-average contract life. And then on the contracts that Stan mentioned, some of the contracts we are doing short term, but that's more of a function of the expansions with all the power utilities that we have contracts with. A lot of those come on in the latter part of 2014. So that's why those -- that capacity may be sold on a short-term basis.

Operator

There are no further questions at the moment. [Operator Instructions] Okay. So your next question from the line of Paul Jacob, Raymond James.

Paul Jacob

Just curious if you could give us an update on the Marcellus gathering system. What types of volumes are you seeing there? And if you strip those out, how would our gas transportation look this quarter?

Stanley C. Horton

On the Marcellus project, the volumes that are moving are approximately 30 million a day. That project, the producer is not drilling in that area right now due to gas prices. We expect those volumes to hold around that. There are no additional capital costs being spent on that project. And the way that, that contract is structured, we have no real risk of loss on anything like that because we built to support the volumes that the producer is moving. It probably is going to be several years before that project is completely built out.

Paul Jacob

Okay. And then are there any remaining cost savings that you think you can extrapolate into 2013 from that $10 million to $15 million that you mentioned earlier?

Stanley C. Horton

Yes, I think that we have captured the largest part. For those who know me, we are constantly looking for ways to reduce cost. So I don't want to say that there aren't any more. But I would say that last year, we had a concerted effort to restructure the company, reporting relationships and everything else to weed out as much cost as we possibly can. We will continue to look for those opportunities. But I think the big amounts have already materialized.

Paul Jacob

Okay. And then I guess, the last question for me is given that you've got $40 million that you think is coming off this year in revenue, how do you counterbalanced that with other expenditures, like maintenance CapEx and so forth? I know you've given some guidance there. But would it be -- do you have some flexibility, I guess, to take maintenance CapEx and reliability spending down if you need to do that? Can you cover it?

Stanley C. Horton

No, actually not. I mean, maintenance CapEx and maintenance expense, now those are the things that you do for the long-term integrity of your pipeline system. A lot of them are mandated by regulatory fiat. There are things that we have to do. One of the things that we aren't going to do is to sacrifice the safety or the integrity of our pipeline system for some short-term benefit. So we don't even look at pipeline expense and pipeline capital as a way to try to offset revenue loss. What we're trying to do, and it's a longer-term strategy, has to be a longer-term strategy, is to build up more end-use markets. And if we build up more end-use markets, we'll take care of the recontracting problem. But it's probably going to take us a couple of years to get that done. But as I said, we've hooked up over 750 million cubic feet a day of new electric load in the last 12 to 15 months. And we will continue to try to do that. If we're successful, then hopefully, in a couple of years, we won't have to be talking about recontracting risk.

Operator

Your next question from the line of Yves Siegel, Neuberger Berman.

Yves Siegel

Just a couple of questions. One is can you comment on the progress that you're making with the midstream effort and what sort of outlook do you have there?

Stanley C. Horton

And I assume what you're talking about there is the gathering processing.

Yves Siegel

Louisiana Midstream. Yes, sir.

Stanley C. Horton

On the gathering processing, our entire focus right now is on getting the first train in-service and flowing volumes, which we said will happen in the first -- beginning of the first quarter or beginning of the second quarter. So we are in active negotiations with producers to fill up that plant at that site. There is room for a second and third train. We continue to talk with producers about additional processing volumes at that site. Certainly, last year when gas prices got as low as they did and you started seeing liquids prices coming down, you started seeing shifting and drilling into the more oily place, so therefore, some of the volumes that we thought were going to be coming on, didn't come on as quickly. But in our discussions with producers, we continue to believe that there's going to be more need for processing capability. And we think, eventually, we will do a second train at our site.

Yves Siegel

Great. And then just you have a couple -- do you have any other pipelines that can be repurposed or are you contemplating?

Stanley C. Horton

We continually look for areas that we might be able to repurpose pipelines for a lot of other services. And when we find those opportunities, when they're small, we take advantage of them. And we will continue to do that.

Yves Siegel

Okay. And then my last question is, as you look out into the horizon, what's the acquisition landscape look for you? And could you also maybe benchmark how large the capital budget could actually -- based on some of these projects that you're chasing, how large a capital budget could we be looking at potentially or how big could that backlog potentially be?

Stanley C. Horton

Well, I'll answer the first question. I can tell you that Jonathan Nathanson stays very, very busy looking at acquisitions. There appear to be not a shortage of opportunities. We don't chase just anyone. We look for the right one. We've been very selective. We will continue to do that. So we're encouraged. I'll let Jamie answer the second question about the CapEx.

Jamie L. Buskill

Yves, if you look over the last 12, 18 months, we've announced $2 billion worth of projects and acquisitions. And during that timeframe, we've been able to utilize help from our parent as we drop those down and try to time the markets as to when we thought it was appropriate time to drop those down. And what it's allowed us to do is not only grow the company, but we've also bettered our capitalization. We, if you kind of look on the run-rate basis, we're probably more in the middle 4x on the debt-to-EBITDA right now compared to where we were 1 year ago. So it really depends on the opportunity and I can't speak for our parent. But as in the past, they've helped us if there was a big opportunity that came available.

Operator

There are no further questions. So I'd like to turn the call over to Molly Ladd Whitaker for closing remarks.

Molly Ladd Whitaker

Thank you, Mo. Once again, we'd like to thank you for joining us this morning and for your continued interest in Boardwalk Pipeline Partners, LP. As a reminder, an online replay of this call is available on our website at www.bwpmlp.com. This concludes today's conference call. Thank you, and have a great day.

Operator

Thank you. Thanks for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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