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Executives

Alison McLean – Director, Investor Relations

Rolf Gafvert – Chief Executive Officer

Jamie Buskill – Chief Financial Officer

Analysts

Darren Horowitz – Raymond James

Sharon Lui – Wells Fargo

Ross Payne – Wells Fargo

John Edwards – Morgan Keegan

[Robert Schwain – Brim Securities]

Barrett Blaschke – RBC Capital Markets

Elvira Scotto – Credit Suisse

Boardwalk Pipeline Partners LP (BWP) Q4 2009 Earnings Call February 8, 2010 9:00 AM ET

Operator

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

Alison McLean

Good morning everyone and welcome to the fourth quarter 2009 earnings call for Boardwalk Pipeline Partners LP. I’m Alison McLean and I’m pleased to be joined today by Mr. Rolf Gafvert, our CEO and Mr. Jamie Buskill, our CFO.

If you’d 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 the earnings call related to matters that are 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 statements.

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. With regard to such financial measures, please refer to our earnings release for reconciliations with the most comparable GAAP measures.

Now I’d 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 closed out the year with a strong fourth quarter, both in terms of progress made on our expansion projects and the positive impacts these expansion projects are having on our cash flow.

Last Friday we declared a fourth quarter distribution of $0.50 per unit. We have increased our distribution each quarter since our initial public offering in 2005. I will discuss our expansion and growth projects, and then Jamie will discuss our financial performance in greater detail.

First, an update on our 42 inch projects, East Texas, Southeast and Gulf Crossing; on December 16, we announced that we received approval from the Pipeline and Hazardous Material Safety Administration, or PHMSA, or operate our 42 inch pipeline projects at their full designed capacity.

Our 42 inch systems represent a significant portion of our expansion capacity. Operating at full design capacity will allow us to maximize the benefit of our Gulf Crossing Mira compression station which is expected to be placed in service in late March.

Since mid October, we have been operating at standard operating pressures on our 36 inch projects, Fayetteville and Greenville laterals. Both the Isola and Ball Knob compressors were placed into service in January 2010.

With these compressor stations in service, and operating at normal pressures, we are currently capable of delivering 1.1 bcf per day on our Fayetteville lateral and the maximum design capacity of 1.0 bcf per day on our Greenville lateral.

On the Fayetteville lateral we will be able to meet all of our customer requirements until mid 2011 at the 1.1 bcf per day level. We are working to obtain approval from PHMSA to operate the Fayetteville lateral at its full design capacity which would allow us to increase capacity on that system to 1.3 bcf per day.

Now I would like to comment on our Park and Landing business. In 2009 we saw favorable pricing spreads between the spot price and natural gas in the futures market and as a result we more than doubled our parking and landing revenues when compared to 2008.

Finally, some comments on our future growth prospects. In December we announced the sale of 156 million cubic feet per day of firm transportation capacity under a 15 year agreement on our Haynesville project. With this agreement in place, the total contracted capacity for our Haynesville project is 556 million cubic feet per day with a weighted average contract life of 12 years.

We recently received approval and this project is proceeding as planned. We still anticipate a late fourth quarter 2010 in service day.

We continue to see strong demand for pipeline capacity from the Haynesville shale production area, and we’re pleased to announce our clearance compression project. This project will receive natural gas from the Haynesville area on our new 42 inch pipeline and will redeliver to markets on our Legacy system. The project is expected to cost approximately $30 million.

Subject to Perk approval, this project will involve the addition of a new compression station and clearance in Louisiana and we anticipate a late 2011 in service date. The shipper has contracted for a maximum of 134 million cubic feet a day of capacity under a long term firm agreement.

For both the Haynesville and the Clarence projects I just mentioned, we are simply adding transportation capacity by adding compression facilities to our existing footprint. These projects are great examples of how we can grow our business by optimizing our newly expanded footprint.

That 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 fourth quarter.

Jamie Buskill

Thanks Rolf and good morning everyone. Our expansion systems met firm customer commitments throughout the fourth quarter except for a portion of October when the Fayetteville and Greenville laterals were shut down for repairs.

These shut downs caused our fourth quarter revenues to be approximately $5 million lower than expected. Given our current level of customer commitments the fourth quarter better reflected our expectations for revenues from our expansion project.

Operating revenues for the fourth quarter of 2009 were $279 million, an increase of $73 million or 36% from $206 million for the comparable period in 2008. The increase was driven by transportation revenues from our pipeline expansion project and higher storage and parking and landing revenues which were approximately $8 million above last year due to favorable natural gas price spreads and the Western Kentucky storage expansion.

Turning now to operating expenses, for the fourth quarter 2009 we reported operating expenses of $171 million, an increase of $41 million or 32% from $130 million for the comparable period in 2008. The increase was driven by higher depreciation and property tax expenses resulting from an increased asset base and the 2008 quarter was favorably impacted by $7 million related to the reversal of liabilities associated with the change in employee paid time off benefits.

Net income for the fourth quarter 2009 was $72 million, an increase of $4 million or 6% from $68 million for the comparable period last year. Net income for the quarter was impacted by the revenue and expense drivers previously discussed as well as increased interest expense of $25 million resulting from lower capitalized interest associated with expansion projects placed into service and increased debt levels.

EBITDA for the fourth quarter 2009 was $161 million, an increase of $49 million or 44% from $112 million for the comparable period in 2008. For the entire year, EBITDA was $498 million, an increase of $23 million or 5% from $475 million for the previous year.

2009 EBITDA was unfavorably impacted by approximately $130 million due to lower than anticipated revenues and additional expenses related to pipeline shutdowns, pressure reduction and repairs related to pipe anomalies.

In addition, 2008 EBITDA was favorably impacted by gains of $72 million from gas sales related to our Western Kentucky storage expansion, this disposition of coal reserves, a contract settlement gain, the reversal of liabilities related to a change in employee paid time off benefits, a contractual release related to an inactive investment.

Turning now to cash; in the fourth quarter we invested another $122 million in our expansion project including $47 million for pipeline remediation, bringing our total investment to $3.5 billion. We continue to believe that our estimated capital expenditures for all expansion projects will come in below our previously reported cost estimates.

We ended the year with cash balances of $46 million and $554 million borrowed against our revolver. We have subsequently borrowed an additional $75 million against our revolver, leaving us a current available borrowing capacity of $321 million.

We have enough liquidity in place to complete all of our announced projects including our new Clarence project.

In conclusion, reflecting back on 2009 and the first month of 2010, we have achieved many significant milestones. All of our major expansion projects are in service. We announced two growth projects; our Haynesville and Clarence projects. We completed our Western Kentucky storage project ahead of schedule and under budget.

We obtained approval to operate all our 42 inch projects at .80. We’ve completed all the necessary financing needed to complete our expansion projects and in 2010 our Bald Knob and Isola compressor stations were placed into service in January, and we expect the Myra compressor station to be placed into service by the end of the first quarter.

Although we still face risk, and I point you to our SEC filings to review those risks, we look forward to leveraging our expanded footprint in the years ahead.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Darren Horowitz – Raymond James.

Darren Horowitz – Raymond James

A couple of quick questions around the Haynesville project in addition to your Clarence initiative, as you look to move gas further east how can you better optimize that system going forward?

Jamie Buskill

That’s a good question and I think these two projects show what we can do. If you look at our system, the thing I think it brings to the marketplace is optionality. All of assets are inter-related so we have the flexibility to change gas flows, add compression and really optimize where the market needs optimization.

So it’s really impossible to answer that question because in the end, it’s going to be what the market dictates, and that’s where we stand ready to meet those opportunities.

Darren Horowitz – Raymond James

On the operating expense line, now that the anomalies used in associated costs are behind you, with everything firing on all cylinders, is this kind of the base line for OpEx that we should model for 2010?

Jamie Buskill

Let me clarify one thing. We’re still working with PHMSA to get the permit on the Fayetteville and as Rolf explained in his presentation, that’s something that we can meet all of our current contractual requirements through mid 2011, but we still need to get that.

But to your question on operating expenses, with the exception of the items I talked about related to the cost of this, and obviously fuel can go up or down, but its offset generally in revenues. This represents more of what you could expect.

Operator

Your next question comes from Sharon Lui – Wells Fargo.

Sharon Lui – Wells Fargo

I’m wondering if there is a difference in the bottleneck at Lebanon since the last leg was placed in service.

Rolf Gafvert

At this point, all of our contracts at Lebanon go through the end of 2010 and while we expect there to be some pricing pressure, we have found that these other projects we’re doing and the way the flows are moving on our systems that net net, the impact from Rex is probably minimized.

Sharon Lui – Wells Fargo

For the remediation costs, you previously disclosed $130 million and you spent about $80 million in 2009. Is there additional costs in the first quarter that you anticipate?

Jamie Buskill

Most of those costs incurred to date are in and really we’re just waiting to get the approval on our Fayetteville before we have the final numbers, so we’re going to stay with $130 million until that’s completed.

Operator

Your next question comes from Ross Payne – Wells Fargo.

Ross Payne – Wells Fargo

Jamie, on that remediation, you expected to be at or below that level at the end of the day correct?

Jamie Buskill

Really we look at our total expansion costs in aggregate and as we’ve said, we expect that we’ll come in below those estimates, but again, we’re just going to wait until these get wrapped up.

Ross Payne – Wells Fargo

Thanks for giving us the revolver level. I’ve got pretty much what your term debt looks like but can you give me an exact debt number at the end of quarter?

Jamie Buskill

We ended the year at $3.1 billion debt. Equity was just under $3.4 billion so we’re slightly below 48% debt, a little more than 52% equity.

Operator

Your next question comes from John Edwards – Morgan Keegan.

John Edwards – Morgan Keegan

As far as your leverage ration that desire going forward and how that’s going to impact, I’m just curious where do you desire to be around 3.5 times or so or if you can give me a little color on that.

Jamie Buskill

What we said in the past, and we’re still staying with that is we target the low four times from a debt to EBITDA ratio.

John Edwards – Morgan Keegan

What do you expect in terms of annual capital expenditures going forward?

Jamie Buskill

If you look, there are really two pieces to that. There is the maintenance capital which we think will be around the $70 million a year range going forward. From an expansion standpoint, basically all the projects with the exception of Clarence should be completed this year. Clarence is a $30 million project roughly. We anticipate probably half of that will be invested in 2010 and the other half probably in 2011.

Operator

Your next question comes from [Robert Schwain – Brim Securities]

[Robert Schwain – Brim Securities]

You mentioned that you expect to have additional footprint expansion in the years ahead. One, will be hearing more about that during calendar 2010 and second, might we expect that the returns on these types of projects will be heavily higher because they’re significantly higher because they’re add on’s to base operations.

Jamie Buskill

We couldn’t hear everything you said but I’ll try to answer what I believe I heard. We are looking at all areas that are close to our pipeline. We continue to see increased production in Texas. We see increased production in South Texas from the Eagleford shale. We continue to see market demand needing to be increased on the more eastern part of our system.

So we have a very big, very efficient system. We have the only 42 inch pipe that goes all the way to transit 85 and we believe that we have the economies of scale moving gas further east and of course we would anticipate that the returns on those projects would be better.

[Robert Schwain – Brim Securities]

Do you expect to announce anything definitive before the end of 2010?

Rolf Gafvert

I don’t think we can say at this point, but we can see that there are trends if you will of where gas is and where gas needs to be that we hope will allow us to make an announcement on a project at some point.

Operator

Your next question comes from Barrett Blaschke – RBC Capital Markets.

Barrett Blaschke – RBC Capital Markets

One thing, are there any other pipes that you could add compression to at this point now that everything is running at .8? Is there an opportunity anywhere?

Rolf Gafvert

There is always an opportunity to continue that compression. At some point the cost of fuel to run the compressors becomes the limiting factor, but we can also look at looping our existing systems and those also allows us to make an increase that doesn’t require a whole new pipeline to be built.

So we can stage in increasing capacity where others would have to build a brand new pipe for example. So it gives us timing advantage and it gives us scale advantage. So I think the pipe are never really at any maximum capacity. You can always increase them.

Barrett Blaschke – RBC Capital Markets

If you were to look at your existing system and where you see need, is it more pushing further east or pushing west and bringing more gas back east from that, or where do you see the most opportunity for you at this point?

Rolf Gafvert

To some extent, both. As I mentioned, we continue to see the shale plays ramping up all across Texas and the Haynesville which now extends into Texas and we feel that opportunities exist to reinforce and build back to those shale plays and to add more capacity if the market needs it going east. So we’re monitoring both ends of the pipe very closely.

Operator

Your next question comes from Elvira Scotto – Credit Suisse.

Elvira Scotto – Credit Suisse

A quick follow up on the growth opportunities, when you think about growth over the next couple of years, should we think about the types of projects like Clarence or do you think you’ll see the need for larger scale projects over the next couple of years?

Rolf Gafvert

Hopefully both. We see opportunities to bring gas out of the Eagleford. Those may be medium sized or smaller sized, more of an optimization. But again, given all the gas that’s coming into the Perryville, Louisiana area from additional expansions, additional pipes that won’t really be coming online until later this year and next year, that we would expect that there’s an opportunity to expand our footprint adding capacity going east.

And that’s where I think it’s important to note that we do have the largest pipe running all the way to Transco 85 in Alabama and looping that is certainly an option we’ll be looking at.

Operator

We have no more questions. I’d like to turn the call over to Alison McLean for closing remarks.

Alison McLean

Once again I’d 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.

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Source: Boardwalk Pipeline Partners LP Q4 2009 Earnings Call Transcript
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