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Boardwalk Pipeline Partners LP (NYSE:BWP)

Q3 2009 Earnings Call

October 26, 2009 9:00 am ET

Executives

Alison McLean – Director, Investor Relations

Rolf Gafvert – Chief Executive Officer

Jamie Buskill – Chief Financial Officer

Analysts

Stephen Maresca – Morgan Stanley

Elvira Scotto – Credit Suisse

Darren Horowitz – Raymond James

Sharon Lui – Wells Fargo

Noah Lerner – Hartz Capital

Ross Payne – Wells Fargo

John Edwards – Morgan Keegan

Jeff [Ataca] – [Young Investments]

Operator

Welcome to the third quarter 2009 Boardwalk Pipeline Partners LP earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Alison McLean, Director of Investor Relations. Please proceed.

Alison McLean

Thank you. Good morning everyone and welcome to the third quarter 2009 earnings call for Boardwalk Pipeline Partners LP. I am Alison McLean and I'm pleased to be joined today by Mr. Rolf Gafvert, our 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 use of statements that are forward-looking in nature. Statements in this earnings call related to matters that are not historical fact 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 statements. The company expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

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

Now, I would like to turn the call over to Mr. Rolf Gafvert.

Rolf Gafvert

Thank you Alison and good morning everyone. I hope all of you have had a chance to review the press release we issued this morning. We are pleased to announce that all of our expansion projects are now operating at normal operating pressures and we are able to meet all of our current contractual obligations. In addition, our base business continues to perform as expected.

Last Thursday we declared a third quarter distribution of $0.495 per unit. We have increased our distribution each quarter since our initial public offering in 2005. As we discussed during last quarter’s call, net income has been negatively impacted by top line anomalies which we discovered while undergoing testing necessary to operate certain expansion pipelines at higher than normal operating pressure of 0.8 of SMYS.

Our third quarter transportation revenue from these projects excluding fuel were approximately $47 million lower than expected due to operating our expansion pipelines at lower than normal pressures before anomaly remediation and due to temporary pipeline shutdowns that occurred during the remediation.

PHMSA, the Pipeline Hazardous Material Safety Administration, retains the discretion as to whether to grant or maintain in force the authority to operate any of our expansion pipelines at normal operating pressures or at higher operating pressures. We have recently submitted a filing with PHMSA requesting a special permit to operate our 42 inch projects which includes Gulf Crossing, East Texas and Southeast at higher than normal operating pressures.

For the Fayetteville lateral we have begun the testing that is required before we can seek approval from PHMSA to operate at higher operating pressures. We believe this testing could take several months. Based on the anomaly repairs just completed we expect that our estimated capital expenditures for all expansion projects will come in below our previously reported cost estimates. Jamie Buskill, our CFO, will discuss our capital spending in greater detail in a few minutes.

I will now provide an update on our 2010 compression projects. We have received FERC approval for the Gulf Crossing and Fayetteville Greenville compression projects. We expect t complete these projects in the first quarter of 2010. By adding compression we expect to increase our peak day delivery capacity to 1.7 BcF per day for Gulf Crossing and 1.3 BcF per day for the Fayetteville lateral, both subject to PHMSA approval. We also expect to increase the peak day capacity for the Greenville lateral to 1 BcF per day which does not require a special permit from PHMSA.

We filed the first applications for our Haynesville projects in May and anticipate receiving final FERC approval in the first quarter of 2010. We expect this project to be in service by late 2010. If we are granted the authority by PHMSA to operate at higher operating pressures on the East Texas pipeline, then an additional 150 million cubic feet of capacity per day will be available for sale from this project.

These compression projects are a great example of how we can leverage our newly expanded program. As always we continue to focus on ways to optimize our system. Finally, I would like to provide an update on our storage, parking and lending business. As discussed last quarter we continue to see favorable pricing spreads between the spot price of natural gas and the futures market. As a result, we are experiencing higher parking and lending revenues in 2009 when compared to 2008.

In addition we placed the remaining portion of our Western Kentucky stores expansion in service effective October 1, 2009. The additional capacity, approximately 3 BcF, went into service one month early and the project came in well under budget.

This concludes my overview for Boardwalk. I would now like to turn the call over to Jamie who will share with you the financial results for the quarter.

Jamie Buskill

Thanks Rolf. Operating revenues for the third quarter 2009 were $205 million which is an increase of $13 million or 7% from $192 million for the comparable period in 2008. The increase was driven by transportation revenues from our pipeline expansion projects and higher storage and parking and lending revenues which were approximately $7 million above last year due to favorable natural gas spreads in the Western Kentucky storage expansion.

Revenues were $21 million lower in the 2009 period for retained fuel. However, this was offset by lower fuel expense. As Rolf mentioned, excluding fuel transportation revenues from our expansion projects were approximately $47 million lower than expected as a result of operating the project at reduced pressure and shutdowns for pipeline remediation. For the year, revenues were lower than expected by approximately $117 million due to these issues except for a portion of October when the Fayetteville Greenville laterals were shut down for remediation, the fourth quarter should better reflect our expectations for revenues from our expansion projects given our current level of contractual commitments.

As our contractual commitments increase in 2010 and 2011, revenues from the expansion projects will continue to increase as the compression projects come online subject to PHMSA approval to operate at higher operating pressures.

Operating expenses for the third quarter of 2009 were $151 million, an increase of $48 million or 47% from $103 million for the comparable period in 2008. The 2008 quarter was favorably impacted by gains of $36 million from gas sales related to our Western Kentucky storage expansion and the disposition of full reserves. Higher depreciation and property tax expenses resulting from the expansion projects primarily drove the remainder of the increase.

Net income for the third quarter 2009 was $19 million, a decrease of $55 million or 74% from $74 million in the comparable period last year. The decrease was driven by the revenue and expense drivers previously discussed and higher interest expense resulting from lower capitalized interest associated with pipeline expansion projects in service and increased debt levels in 2009.

In the third quarter we invested another $142 million in our expansion projects including $25 million for pipeline remediation, bringing our total investment to $3.4 billion. As Rolf communicated earlier, we expect that the estimated capital expenditures for our expansion projects will come in below our previously reported cost estimates.

Also in the third quarter we successfully issued both debt and equity. In August we issued 8.1 million common units at $23 per unit for net proceeds of approximately $183 million including the general partners’ contribution of $4 million. Also in August we raised $350 million in senior notes due in 2019 at 5.75% fixed coupon rate. We used a portion of these proceeds to pay down $100 million of the subordinated debt with our sponsors.

We ended the quarter with $479 million borrowed against our revolver with available commitments of $471 million and a cash balance of $123 million. I am happy to say we now have enough liquidity in place to complete all of our announced expansion projects.

In conclusion the third quarter was a very important quarter for Boardwalk. We are operating all of our expansion projects at normal operating pressures and we are meeting all current contractual requirements. We completed our Western Kentucky storage project ahead of schedule and under budget. We continue to work with PHMSA in order to obtain approval to operate certain projects at higher than normal operating pressure. Construction on our compression projects is going well and we have completed all the necessary financing allowing us to finish all of our announced expansion projects.

Although we still face risks and I point you to our SEC filings to review those risks, we now look forward to leveraging what we believe is one of the best footprints in the industry. That concludes my remarks. I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Stephen Maresca – Morgan Stanley.

Stephen Maresca – Morgan Stanley

You talked about filing the permit to get the higher operating pressure with PHMSA. Is there any guideline in terms of how long this can possibly take before you get that approval?

Rolf Gafvert

There is no date certain but we feel pretty confident we will receive that authority prior to the compression going into phase in early January.

Jamie Buskill

To give you an idea of why it is really more important with the compression let’s use Gulf Crossing as an example. Currently we can deliver just over 1.3 BcF per day at normal operating pressures. Even if we had the higher operating pressure allowance right now it would take us to 1.4 so it is less than 100 million a day of added capacity. When you look at compression being added, with compression at normal operating pressures we can move just under 1.5, about 1.47 BcF. With the higher pressure that goes to 1.7. So you can see it is obviously a bigger issue with compression than it is [inaudible].

Stephen Maresca – Morgan Stanley

How much is left to spend? You said you obviously have enough liquidity with the revolver and cash available. How much is left to spend on the growth projects and is it costing more to get that compression online? What is that cost?

Jamie Buskill

If you look at our total projects, I am going to add in East Texas; basically it is a $5 billion expansion project when you add in Haynesville. So add in $5 billion we have invested, about $4.4 billion on those projects, so we have about $600 million to spend. Again, we think that we are going to come in below that. From a compression project standpoint those are going extremely well and everything is on pace, on time and hopefully under budget.

Stephen Maresca – Morgan Stanley

On that Haynesville project you talked about it I think getting approval first quarter next year and coming on line late 2010. What are the commitments on that if you could remind us, and the terms?

Jamie Buskill

It is basically 400 million a day that has been sold over 10 years. As Rolf mentioned there is an additional 150 that we can sell assuming we get the higher pressure permit.

Operator

The next question comes from the line of Elvira Scotto – Credit Suisse.

Elvira Scotto – Credit Suisse

Just as a clarification, the $47 million loss revenue if you will, or lower than anticipated revenues, is that based on a 72% SMYS or 80% SMYS?

Jamie Buskill

That is based on the contracts we have in place now, which we are currently meeting all of those requirements. So we are meeting all of our current contractual requirements with the normal operating pressure or 0.72 SMYS. So that is what that relates to. That is down, like second quarter we reported about $58 million in revenue loss. This quarter it was $47 million and again the fourth quarter there should be very little noise to this because we just had the Fayetteville/Greenville down for a couple of weeks for remediation.

Elvira Scotto – Credit Suisse

In terms of the Fayetteville Greenville what is involved in terms of getting those back before you can actually submit for approval to get the 80% SMYS?

Rolf Gafvert

There are a series of tests we have to do on the pipes that we have taken out of the ground. There are probably thousands of tests that have to be done and basically those tests will be taken over the next several months and then we will submit the data and information to PHMSA and request the authority to go to higher output.

Elvira Scotto – Credit Suisse

Do you have a sense for what maintenance CapEx could shake out for this year?

Jamie Buskill

We are right now just under $30 million on maintenance capital spend through the nine months. We will see that ramp up in the fourth quarter. It is probably going to come in at $60 million or slightly below that.

Elvira Scotto – Credit Suisse

Any thoughts on CapEx for 2010?

Jamie Buskill

Other than the expansion projects, as Rolf mentioned really the compression is being worked on right now. Most of that is going to be in place by the end of the first quarter next year. Haynesville is slotted to come on at the end of 2010. From a maintenance capital standpoint we are saying the run rate will be around $65-70 million.

Operator

The next question comes from the line of Darren Horowitz – Raymond James.

Darren Horowitz – Raymond James

A couple of housekeeping questions for you. I am trying to get a feel for your normalized expense run rate. Now that you have the pipe anomalies and the associated costs behind you, should O&M costs run about 50-60% of revenues going forward? Secondly, on a percentage basis for fuel and gas transport should that be about 5-6% normalized?

Jamie Buskill

Let’s first look at O&M. Really the only noise you have in O&M right now is we spent approximately $7 million this year on remediation work that could not be capitalized. Now roughly half of that is on the gain and loss of disposal of asset line. The other half is in O&M. Most of the operating expenses like depreciation and the [inaudible] taxes are being incurred right now because we are operating the system. So you are not going to see a big ramp up in O&M expenses.

Fuel, really what is driving fuel right now is the price of the commodities in it. It is really what is resulting in lower revenues is offset by lower expense and the rate you are seeing there is a pretty good run rate.

Operator

The next question comes from the line of Sharon Lui – Wells Fargo.

Sharon Lui – Wells Fargo

I was wondering if you could give some more color on the magnitude for the lost revenue in the quarter. It just seems like most of your projects were operating at standard pressure?

Jamie Buskill

No. If you recall when we had the second quarter earnings call late in July, at that time we did not have permission to take the 42 inch projects to normal operating pressure. That actually came I believe on July 27th. What happened was that was so late in the month we really didn’t have time to give adequate notice to our shippers so we actually had some noise in the August numbers on those pipelines because we had to give them some time to get their systems ramped up. So you really had some impact there. Then on Fayetteville Greenville we were operating those at lower pressures and then we took the systems down on September 1. They were down for the entire month of September.

So as we said in the second quarter we expected the third quarter to still be ugly; not quite as ugly as the second and that is the way it turned out.

Sharon Lui – Wells Fargo

Can you also maybe talk about pipeline volumes going into Lebanon and whether you experienced any displacement of gas?

Jamie Buskill

Looking at Lebanon we are basically sold out at Lebanon through fourth quarter 2010 and we will have some contracts that come up for renewal which is basically every year we have contracts that come up for renewal. I think it is a little early to say what impact [REX] is going to have at Lebanon because it just came on a few months ago. The next few weeks or months it is supposed to go on to Clarington. So we will have to see what impact that has.

I think the important thing to remember is the bad news is we have a big system now so we have a lot of receipt points and a lot of delivery points so in all likelihood there is always going to be some point on the system that market conditions may be a little tougher than others.

The good news is we have a big system so we have a lot of diversity for receipt and delivery points. So whereas Lebanon might have been a big issue to us a few years ago it is not nearly the issue as it is today.

Operator

The next question comes from the line of Noah Lerner – Hartz Capital.

Noah Lerner – Hartz Capital

I am hoping you can clarify some confusion in my head. You keep mentioning we are meeting all the contractual obligations and that we are running at normal 72 compression but yet we are fully sold out and we are going higher on some of them to 0.80 and then we have compression added. Is it correct to make the statement that the contractual obligations with the shippers are staged and as different parts of the project come online and gear up?

Rolf Gafvert

That is correct. Yes.

Noah Lerner – Hartz Capital

What percentage of the current available capacity are we collecting revenue on? Is that 100? Because of the availability right now is at the 0.72 level?

Jamie Buskill

If you look on the 42 inch projects that is a true statement. We are basically collecting on virtually 100% of the capacity there. Fayetteville Greenville the ramp ups are a little different on that. Fayetteville is closer to 100%. Greenville we have a little bit of capacity there that could be sold.

Noah Lerner – Hartz Capital

Taking it from 0.72 to 0.8, that differential, that additional capacity has already been sold out so once you get the approvals and ramp up is taken care of that will be running close to if not 100% of capacity?

Jamie Buskill

That is true for both getting the higher pressures and the compression. Again, remember compression drives most of the additional capacity going forward. Both of those taken in tandem have been sold out. Again, with the exception of Greenville. You have some capacity there that could be sold.

Noah Lerner – Hartz Capital

Based on earlier comments in the conversation, where some items being placed in service the first quarter and the balance by the end of the year, I think compression was later on and increase in capacity was the first quarter. Looking forward is it fair to say barring any unforeseen events entering into 2011 other than the Greenville lateral at this time, the entire system will be fully sold out and collecting revenue on all available capacity? Again, excluding probably Greenville?

Jamie Buskill

That is true but we also will potentially have 150 per day of capacity at Haynesville we could sell with a higher operating pressure. Now on the Fayetteville project we do have contract ramps. There is some additional ramping that takes place in 2011 but for the most part 2011 will be a…

Noah Lerner – Hartz Capital

Full year?

Jamie Buskill

Yes.

Operator

The next question comes from the line of Ross Payne – Wells Fargo.

Ross Payne – Wells Fargo

When do you expect all of the 600 to be spent to get you to your CapEx number? Is that a 2010 event or does some of it go into 2011?

Jamie Buskill

Right now we still have some of the run off costs related to the anomaly repairs we just completed that will be spent in the fourth quarter. The work has been done. It is just getting the invoices in. Your compression, again between compression and your anomaly repairs that is roughly 400 of the 600 remaining. Most of that should be spent by the end of the first quarter. Again, we are hopeful we will come in less than that. The $185 million related to Haynesville, most of that is going to be spent throughout the year in 2010.

Ross Payne – Wells Fargo

What was the debt number at the end of the quarter in Q3?

Jamie Buskill

Approximately, we spent about $200 million more in the third quarter so roughly at 4.1 or 4.2 in total out of the $5 billion. You are right now about 4.4.

Ross Payne – Wells Fargo

What is the actual dollar figure in the quarter? I’m sorry.

Jamie Buskill

You spend about 4.4 when you add in East Texas. At the end of the second quarter I believe you were around 4.1 to 4.2.

Ross Payne – Wells Fargo

What I was asking for was the total debt number for the end of the quarter.

Jamie Buskill

Debt?

Ross Payne – Wells Fargo

Yes.

Jamie Buskill

I’m sorry. The debt number at the end of this quarter is $3 billion. I will have to get back to you. I think we were around that same number at the end of the second quarter but I will get back to you. We used the proceeds basically for these offerings to pay down the revolver and we will pull down on the revolver as we need to finish the capital spend.

Ross Payne – Wells Fargo

So you think at the end of September you were around $3 billion which is similar to what you were at the end of the second?

Jamie Buskill

At the end of September you are at $3 billion which is 47% of your capitalization.

Ross Payne – Wells Fargo

Once all of these projects are up and running what is your target debt to EBITDA?

Jamie Buskill

We said once everything is up and running being in the low four times range.

Ross Payne – Wells Fargo

You are fully up and running during the quarter at designed capacity of 72% on these new projects. What was the date you were at that level?

Jamie Buskill

From the 42 inch projects because there was still some noise in the August numbers. Really the first of September was the first clean month I would say you were meeting your requirements. On Fayetteville Greenville we just brought that system up two weeks ago so October is going to have noise in it. November will be the first full month of operating with the current contractual requirements.

Ross Payne – Wells Fargo

Any estimates on what the noise might be for the fourth quarter?

Jamie Buskill

I’m not going to provide any guidance there but it should be considerably less than what you saw in the third.

Operator

The next question comes from the line of John Edwards – Morgan Keegan.

John Edwards – Morgan Keegan

Along the lines of what Ross was asking, do you have any volume data as far as what the gas transportation volumes were that you can provide?

Jamie Buskill

For the third quarter 2009 approximately 451 TBTU and year-to-date puts us at 1,513 BTU.

John Edwards – Morgan Keegan

1,500?

Jamie Buskill

Yes. 1,513. 1,513 compares to 1,062 for the 2008 time period so we are up about 42%.

John Edwards – Morgan Keegan

Is there any way you can break that out by system or are you going to wait for the Q for that?

Jamie Buskill

We really don’t provide volume by system. It really gets complicated because if you look at the projects they are interrelated so the way the volumes flow it is hard to really dissect and understand that. So we will probably just supply in total.

John Edwards – Morgan Keegan

So the revenue shortfall this was primarily volumetric, it was not necessarily based on the margins you were earning on your system?

Jamie Buskill

It is really demand charges we couldn’t charge because the systems were down for repairs. That was really the driver.

John Edwards – Morgan Keegan

I missed the number. What is your liquidity now that you have available?

Jamie Buskill

Liquidity at the end of the quarter was roughly $600 million. We have $123 million in cash and just under $500 million available on our revolver.

Operator

The next question comes from the line of Jeff [Ataca] – [Young Investments].

Jeff [Ataca] – [Young Investments]

In reading your press release I noticed your revenues were up, your net income was down and you raised money by selling more shares. What I am wondering is how you are able to increase the dividend when your earnings were lower and there were more shares outstanding.

Jamie Buskill

In looking at the system and the anomalies, the anomalies are we view as kind of a start up issue. That is not a permanent impairment to the system. The revenue contribution these systems are going to provide we are comfortable in that rate of distribution.

Jeff [Ataca] – [Young Investments]

Even considering the additional shares and everything?

Jamie Buskill

Yes.

Operator

There are no further questions in the queue at this time. I would like to turn the presentation over to Ms. Alison McLean for any closing remarks.

Alison McLean

Once again I would like to thank everyone for joining us this morning. We appreciate 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 for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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