Boardwalk Pipeline Partners, LP Q1 2010 Earnings Call Transcript

Apr.26.10 | About: Boardwalk Pipeline (BWP)

Boardwalk Pipeline Partners, LP (NYSE:BWP)

Q1 2010 Earnings Call

April 26, 2010 9:00 am ET

Executives

Allison McLean -Director of Investor Relations

Rolf Gafvert – CEO

Jamie Buskill – CFO

Analysts

Elvira Scotto – Credit Suisse

Stephen Maresca – Morgan Stanley

Sharon Lui – Wells Fargo

Ross Payne – Wells Fargo

John Edwards – Morgan Keegan

[James Janthel – Height]

Emily Wang – Raymond James

Harry Mateer – Barclays Capital

Operator

(Operator Instructions) Welcome to the First Quarter 2010 Boardwalk Pipeline Partners LP Earnings Conference Call. I would now like to turn the presentation over to your host for today’s call, Ms. Allison McLean, Director of Investor Relations.

Allison McLean

Welcome to the first quarter 2010 earnings call for Boardwalk Pipeline Partners LP. I’m Allison 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 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 Mr. Rolf Gafvert.

Rolf Gafvert

I hope all of you have had a chance to review the press release we issued earlier this morning. We had a strong first quarter due to the revenue growth from our major expansion projects. Revenues were up 35% and EBITDA was up 44% over the first quarter 2009. Last Thursday we declared a quarterly distribution of 50.5 cents per unit. Distributions to unit holders have increased each quarter since our IPO in 2005.

I will now provide an update on our business and then Jamie will discuss our financial performance in greater detail.

Three new compressor stations were added to our pipeline this quarter. In January we added the Bald Knob compressor station to the Fayetteville lateral, and the Isola compressor station to the Greenville lateral. In March we added the Mira compressor station to our Gulf Crossing pipeline. With these compressors in service we are now currently capable of delivering approximately 1.1 bcf per day on the Fayetteville lateral, 1 bcf per day on the Greenville lateral, and approximately 1.7 bcf per day on Gulf Crossing.

The majority of our operating capacity is under firm contract, with a weighted average contract life of approximately 50 years. Each year a portion of our contract expires and we must focus on new angle of remarketing that. Pricing spreads between different seat and market locations has recently narrowed. We are now starting to see market conditions that may be difficult to capture contract terms, similar to the terms of our expiring contracts. Furthermore, our interruptible and short-term firm remedies have been impacted and could continue to be negatively impacted if current market conditions have not improved.

However, the growth in natural gas supply primarily from shale gas has created new opportunities. Our Haynesville and Clarence Grove projects both driven by supply growth on the Haynesville shale are proceeding as planned and we anticipate these projects will be placed in service on time and within budget.

The Haynesville project has been approved and has a late fourth quarter 2010 anticipated in service date. The Clarence compressor project is subject to further approval and has an anticipated in service date of late 2011. Behind these two projects are estimated to costs $250 million. These projects demonstrate the attractiveness of the Boardwalk footprint and our ability to develop projects that allow us to leverage our existing infrastructure even in challenging market conditions.

We continue to explore opportunities to expand. One area of interest in the Eagle Ford shale an emerging supply source located near our system in [inaudible]. The Eagle Ford shale is viewed by many as a very profitable production area given the high content of crude oil and natural gas liquids that accompany the natural gas production in that region.

Boardwalk is currently exploring opportunities to expand our business by leveraging our existing infrastructure. We’re also exploring opportunities to connect to other supply sources in other geographic regions.

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 first quarter.

Jamie Buskill

Operating revenues for the first quarter 2010 were $301 million an increase of $78 million or 35% from $223 million for the comparable period in 2009. The increase was driven by transportation revenues from increased available capacities and through put from our pipeline expansion projects and higher storage and parking lend revenues which were approximately $4 million above last year due to favorable natural gas price spreads and additional storage capacity made available from the Western Kentucky storage expansion.

Turning now to operating expenses, we reported operating expenses of $173 million for the quarter an increase of $28 million or 20% from $145 million for the comparable period in 2009. The increase was driven by higher operating costs and expenses due to higher depreciation resulting from an increase in asset base due to expansion assets being placed into service and higher administrative and general expenses.

Net income for the quarter was $90 million an increase of $38 million or 74% from $52 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 $11 million resulting from lower capitalized interest associated with expansion projects placed into service and increased debt levels.

EBITDA for the first quarter was $181 million an increase of $56 million or 44% from $125 million for the comparable period in 2009. In the first quarter we invested another $43 million in our expansion projects. With our East Texas pipeline, Southeast expansion, Gulf Crossing project, and our Fayetteville and Greenville laterals essentially complete we anticipate the final cost of these projects will come in approximately $200 million below our prior estimates due to construction contingencies included in our estimates that were not needed.

For the remainder of 2010 and for 2011 we expect to invest under $300 million for growth capital expenditures primarily for Haynesville and Clarence compression projects and for post construction activities related to our major expansion projects already in service.

From a liquidity standpoint we ended the quarter with approximately $121 million in cash and $272 million available on our revolver. Effective this quarter we are now reporting distributable cash flow in our earnings release. For the quarter we generated $134 million as distributable cash a 65% increase from $81 million in the comparable 2009 period.

Generally from a cash generation and earnings standpoint the first quarter tends to be our strongest quarter, although revenues from our expansion projects will reduce some of the seasonality in our revenues, the first quarter is the only quarter with three winter months. In addition, maintenance expense and maintenance capital expenditures tend to be lower in the first quarter because system maintenance programs generally ramp up during the summer period.

I’d like to make our investors aware of an administrative item. Starting with our second quarter earnings release we will announce both our quarterly distribution and our earnings on the same day.

In conclusion, our first quarter results continue to build on the strong financial performance achieved during the fourth quarter of last year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Elvira Scotto – Credit Suisse

Elvira Scotto – Credit Suisse

When I’m thinking about the sustainable revenues and you had mentioned that first quarter is seasonally higher than the rest of the year, can you talk a little bit about the impact in the first quarter from the pricing spreads that you mentioned? Can you talk a little bit about the contract rollovers and a little more color on the discussions that you’re having with your customers?

Jamie Buskill

Let me first talk about the re-contracting efforts. We have approximately $100 million in revenue that’s up for renewal this year on the legacy system. If you look at where we stand today approximately 70% of those contracts have been renewed and we’re seeing about 85% of the terms that we received in the prior contracts. The remainder of those renewals are really more in the fourth quarter of this year.

From a seasonality pricing spread really I think you’re getting to the volatility in revenue. Really looking at it more from a distributable cash standpoint in the first and fourth quarters typically we’ll generate 60% to 70% of our distributable cash in those two quarters. Hopefully that gives a little color of how that seasonality can impact us.

Elvira Scotto – Credit Suisse

On maintenance CapEx, are you still expecting about $70 million for the year?

Jamie Buskill

Right now that’s still what we’re forecasting. I know we came in a little light just over $2 million but that’s still the estimate.

Operator

Your next question comes from Stephen Maresca – Morgan Stanley

Stephen Maresca – Morgan Stanley

A follow up on the pricing spread difference you mentioned getting 85% of contract terms. Is that a linear relationship so the part that’s coming up does that mean you’re going to be getting just 15% less revenues on that part of the contract?

Jamie Buskill

On the remaining contracts to be renewed it’s difficult to say, as we know the market conditions can change fairly quickly so we’re not going to make any projections as to what we think those remaining 30% of those contracts will end up at.

Stephen Maresca – Morgan Stanley

Do you see any change overall in terms of the environment for pricing spreads now or what you’ve seen most recently over the past couple months or views going forward with that?

Rolf Gafvert

I think right now the amount of production from the shale is still ramping up and as the shale plays, Haynesville, Fayetteville, etc. ramp up we could see spreads improving.

Stephen Maresca – Morgan Stanley

Speaking of shale, you had talked about potential opportunities in the Eagle Ford, what are producers looking for in that area from you or others and what do you think that you can provide to producers?

Rolf Gafvert

Certainly they are looking to find a market. The area is somewhat constrained especially where the Eagle Ford is itself. We would look at laying a pipeline into the Eagle Ford Shale connected to our main line and then take it to market. We will look at other fee based opportunities to meet whatever needs producers have in that area.

Stephen Maresca – Morgan Stanley

You talked about $121 million in cash and $272 million on revolver and if I heard correctly roughly less than $300 million of gross spending for this year and next year is that correct?

Jamie Buskill

Yes, total for the two years based on the projects we’ve announced to date we have just under $300 million left to invest which is again approximately $200 million lower than our previous estimates.

Stephen Maresca – Morgan Stanley

How do you plan on financing things going forward with the revolver where it is right now?

Jamie Buskill

Based on our liquidity and where we’re at we have plenty of liquidity to complete what we have. At this point the only financing in our future based on what we have on our plate right now would be just refinancing of the revolver and any future debt that comes due.

Operator

Your next question comes from Sharon Lui – Wells Fargo

Sharon Lui – Wells Fargo

A follow up on the Eagle Ford project, how much CapEx do you think that project could potentially be?

Jamie Buskill

We really don’t have any project announced at this point. What we’re talking about is just to get some insight in areas that we’re exploring for future growth but at this time there’s really now a project to discuss.

Sharon Lui – Wells Fargo

Can you provide the breakout between what you think the total CapEx would be for Gulf Crossing and for the Fayetteville and Greenville laterals?

Jamie Buskill

I don’t have that. We really aren’t looking at it that way any longer. If you look at the remaining expenditures for those projects its mainly clean up costs and a lot of that is you’ll get soil erosion for example in right of ways where you have to go back and deal with that and just clean up type items and it really can apply to any of those projects. At this point forward we’re just going to lump that together.

Sharon Lui – Wells Fargo

Looking at the income statement, I noticed that there’s a $7.5 million difference between interest expense on the income statement versus your cash interest expense for the quarter.

Jamie Buskill

Yes, part of that is the timing. We have several interest payments that are due in the first quarter so that will resolve itself as the year goes through. Just looking at interest for a minute, if you look at 2010 the first quarter we expensed $37.2 million, we had about $1.4 million of capitalized interest in that quarter so the total interest cost from a book standpoint was just under $39 million.

Sharon Lui – Wells Fargo

You debt balance at the end of the quarter?

Jamie Buskill

The debt balance was $3.2 billion it’s comprised of about $2.5 billion of fixed rate debt, $678 million roughly on the revolver and $100 million on sub debt. That’s about under 49% of our capitalization.

Operator

Your next question comes from Ross Payne – Wells Fargo

Ross Payne – Wells Fargo

Just a quick update on the Greenville and Fayetteville in terms of getting FEMSA maximum pressure approval?

Rolf Gafvert

We’re still working with FEMSA to resolve that issue and really don’t have anything to add at this time.

Ross Payne – Wells Fargo

You can meet all your contracts under the standard pressures is that correct?

Jamie Buskill

Yes, if you recall we can meet contract requirements out of the way until the middle part of next year.

Ross Payne – Wells Fargo

Any timeline or thoughts on what the increased pressure approval may come through?

Jamie Buskill

Like Rolf said there’s really nothing to update at this time.

Ross Payne – Wells Fargo

Also, you gave the rollover revenue wise for 2010 roughly what would that look like for 2011?

Jamie Buskill

I don’t have that in front of me. It is lower but I really don’t have that number in front of me, I’ll have to get back with you on that.

Ross Payne – Wells Fargo

Any idea roughly what the percentage of capacity that rolls over typically.

Jamie Buskill

You’re cutting out, I couldn’t hear the question.

Ross Payne – Wells Fargo

Was curious what percentage of your contracts rolls over and I guess I can just do the math on the six year.

Jamie Buskill

I’d have to look. We have a pretty dynamic contract profile and I don’t have anything beyond this current year.

Operator

Your next question comes from John Edwards – Morgan Keegan

John Edwards – Morgan Keegan

Could you repeat in terms of the contract rollover, a follow up how much is rolling this year?

Jamie Buskill

First of all don’t forget our average contract life on the entire system is six years. This year approximately $100 million of contracts are up for renewal. So far 70% of those contracts have been renewed and the terms we’re getting is about 85% of the original contract terms. The remaining contracts, most of those aren’t due to come up for renewal until the fourth quarter this year.

John Edwards – Morgan Keegan

On the duration of the contracts, are they rolling over at six year durations?

Jamie Buskill

It really varies now, I’ll tell you on some of them if we’re not thrilled with the right we may intentionally go with a shorter contract period if we think the market conditions may improve in certain markets.

John Edwards – Morgan Keegan

By 85% of the original terms you basically mean 85% of the original price?

Jamie Buskill

Right.

John Edwards – Morgan Keegan

Can you give out some of the volumes transported?

Jamie Buskill

For the first quarter we transported approximately 640 TBtu and that compares to the first quarter 2009 at 539 so it’s about a 19% increase.

John Edwards – Morgan Keegan

On the basis you indicated you thought prices were improving, can you give us a feel for order of magnitude?

Rolf Gafvert

In terms of prices improving that will really depend on how rapidly these large shale plays ramp up. In terms of the Fayetteville and Haynesville they’re probably not even at half of their ultimate productivity. We will continue to see or would hope that basis would improve as these shale plays get to their full production in the next few years.

John Edwards – Morgan Keegan

You’re saying pricing will improve basically parallel with the production ramp up is that a fair way of putting it?

Rolf Gafvert

Sure, there is some excess capacity I believe on lots of the new systems built. As you know, we’re fairly much sold out, although some of our contracts are under ramps so it’ll take a year or so for all of our capacity to be fully purchased. The other thing I would add is that with all this new shale gas we are seeing other opportunities to move gas in directions that we haven’t moved it before which offset perhaps some of the weakness we may see in some of our historic markets.

It’s a very dynamic market right now and we’re always trying to provide whatever transportation, sometimes they’re so-called backhauls where we’re moving gas against the historic flow but obviously getting revenue from that as well. It’s hard to say its all apples and apples.

John Edwards – Morgan Keegan

Sorry to come back to the renewal issue but you mentioned $100 million of revenues up for renewal, in terms of capacity what does that represent?

Jamie Buskill

I’ll have to get back with you; I don’t have the capacity numbers that go with that. It should be fairly comparable but I’ll have to double check that.

John Edwards – Morgan Keegan

In terms of distribution policy, is it fair to say, I know you generally don’t comment on it that much but I’ll ask anyway in the hopes that you will give us a little color. You increased by $0.005 is it fair to say because of the renewals coming down a little bit in price here that you’re being a little more conservative on the distribution growth?

Jamie Buskill

When it comes to coverage three things I think you need to remember in looking at the coverage. One is again this is first quarter results and as we said we do have seasonality from a distributable cash standpoint, 60% to 70% of our distributable cash typically gets generated in the first and fourth quarters. Second thing is risk. Although we have considerably less risk today then we did a year ago related to our construction projects, we still have some sizable expenditures left to be made.

The final thing is when you look out long term you also have to consider the class B units. Right now those are capped at 4% getting approximately $0.30 or $0.25 distribution, those 22.9 ml somewhere in the future we’ll convert to common and get the common distributions. You really need to look at those three things when thinking about coverage.

Operator

Your next question comes from [James Janthel – Height]

[James Janthel – Height]

Given that you’ve intimated that the financing needs will be light at BWP can you talk a little bit about the Loews Corp perhaps their strategy in holding or divesting of BWP units and the context? It was a bit surprising to see, I thought, a divestiture in February.

Jamie Buskill

You’re talking to the wrong group. I think you need to direct that question to Loews.

Operator

Your next question comes from Emily Wang – Raymond James

Emily Wang – Raymond James

As it relates to the re-contracting could you guys go into more specifics as to which market areas you guys are experiencing some more difficulty re-contracting either from a pricing perspective or a contract perspective?

Jamie Buskill

We’re just talking overall system. We have some fairly complicated contracts, we have many market areas and there are multiple combinations on receipt and delivery locations and to just get into that level detail would take a considerable amount of time and we’d rather just keep it at the macro level.

Emily Wang – Raymond James

In response to John’s question you guys were saying that you’d be willing to take shorter durations because you would think that maybe certain market areas could be improving. Could you talk about that?

Jamie Buskill

We’re not going to talk as far as individual markets but again this is strategy we’ve used in the past and if you look we have a very dynamic system with a lot of different supply sources and a lot of different markets. It’s not unusual to have certain markets where may be weaker conditions than what we’ve seen in the past. When we assess and looked at our projections as to what we think a certain market may do in the future we decide what we’re willing to accept from a length of contract standpoint.

Again, if we’re not happy with what the market is yielding in the form of rates we may elect to go with a shorter term contract and wait for markets to improve.

Emily Wang – Raymond James

Are you guys comfortable with your current leverage ratios? If not, are there plans to retain some more cash flow to pay down some debt?

Jamie Buskill

Right now we’re happy with where we’re at and based on the capital expenditures left to incur we’re happy with where we’re sitting.

Operator

Your next question comes from Harry Mateer – Barclays Capital

Harry Mateer – Barclays Capital

With respect to future growth opportunities what are your thoughts on possibly diversifying into other aspects of the natural gas value chains such as gathering and processing?

Rolf Gafvert

We will look at any opportunity that has the same type of service, typically fee based service. We would shy away from anything that had commodity exposure. If it involves something that we can get a fixed fee for then I think we will be looking to expand into that area.

Harry Mateer – Barclays Capital

Have you guys been looking at, can you just comment on the acquisition market right now, anything you’re seeing, what do multiples look like, is there anything potentially there of interest?

Rolf Gafvert

We don’t comment on activities like that. Again, if you look at our system we are connected to virtually every single major shale play and it would seem like a natural extension of our business to move back towards the well given the system we have.

Operator

This concludes our question and answer session. I would now like to turn the call over to Ms. Allison McLean for closing remarks.

Allison McLean

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.

Operator

Thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect. Have a great day.

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