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Boardwalk Pipeline Partners, LP (NYSE:BWP)

Q3 2010 Earnings Call

October 25, 2010 9:00 am ET

Executives

Allison McLean - Director of Investor Relations

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

Rolf Gafvert - Chief Executive Officer of Boardwalk GP LLC, President of Boardwalk GP LLC and Director of Boardwalk GP LLC

Analysts

Barrett Blaschke - RBC Capital Markets

Ross Payne - Wachovia Securities

Bernard Colson - Oppenheimer & Co. Inc.

Jeremy Tonet - UBS

Elvira Scotto - Crédit Suisse AG

Darren Horowitz - Raymond James & Associates

Stephen Maresca - Morgan Stanley

Harry Mateer - Lehman Bothers

Gabriel Moreen - BofA Merrill Lynch

Sharon Lui - Wells Fargo Securities, LLC

Operator

Good day, ladies and gentlemen, and welcome to Q3 2010 Boardwalk Pipeline Partners, LP Earnings Conference Call. My name is Sameetha, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today's call, Ms. Allison McLean, Director of Investor Relations. Please proceed.

Allison McLean

Thank you, Sameetha. Good morning, everyone, and welcome to the Third 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 this earnings call relate 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 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 will 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 a reconciliation to the most comparable GAAP measures.

Now I'd like to turn the call over to Mr. Rolf Gafvert.

Rolf Gafvert

Thank you, Allison. Good morning, everyone, and thank you for joining us today. I hope all of you have had a chance to review the press releases we issued earlier this morning. We announced a quarterly distribution to unitholders of $0.515 per unit, a $0.05 increase over last quarter. Distribution to unitholders have increased each quarter since our initial public offering in 2005. I will now provide an update on our business, and then Jamie will discuss our financial performance in greater detail.

First, I would like to talk about several significant project milestones achieved in the past few months. I am pleased to report that our Haynesville Expansion Project is now in service. This project came in under budget, and Jamie will discuss the capital costs in greater detail in a few minutes.

In addition, we've received FERC approval to proceed with our Clarence Compression Project. This project is proceeding as planned with the late 2011 in-service statement. Earlier this month, we received PHMSA approval to operate our Fayetteville Lateral at a higher operating pressure. By the end of the fourth quarter, we plan to operate this lateral at its full design capacity of 1.3 Bcf per day. With the Fayetteville Lateral in place, I am pleased to announce that all of our major expansion projects have PHMSA approval to operate at their full design capacity.

Now we will provide a brief update on some factors impacting our business. As discussed in prior earnings call, the basis spreads between different supply and market locations on our systems have narrowed, adversely affecting transportation rates we were able to charge on contract renewals and short-term available capacity. However, our expansion projects continue to experience high utilization rates and we continued to see increased production from the shale areas connected to our pipelines.

We are also seeing power plant operators become more interested in long-term firm contracts on our system. As a result of the hot weather this summer, we experienced record deliveries to power plants on three different days during the third quarter. We currently serve approximately 40 power generation facilities in 10 states and recently signed a long-term firm contract with a major power provider.

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 third quarter.

Jamie Buskill

Thanks, Rolf, and good morning, everyone. Operating revenues for the third quarter of 2010 were $258 million, an increase of $53 million or 25% from $205 million for the comparable period in 2009. The increase was driven by transportation revenues from our pipeline expansion projects. Transportation revenues from expansion projects for 2009 were lower than expected due to operating those pipelines at reduced pressures and temporary shutdowns following the discovery and remediation of anomalies in certain joints of pipes.

Turning now to operating expenses. We reported operating expenses of $165 million for the quarter, an increase of $14 million or 9% from $151 million for the comparable period in 2009. The increase was driven by higher operating costs and expenses due to higher depreciation of property taxes resulting from an increase in asset base due to expansion assets having been placed into service, higher operations and maintenance expense and an impairment loss related to a portion of pipe inventory that we expected to sell. The increased expenses were offset by gains on the sale of gas related to the Western Kentucky Storage Expansion.

Net income for the quarter was $56 million, an increase of $37 million or 197% from $19 million for the comparable period last year. EBITDA for the quarter was $147 million, an increase of $40 million or 38% from $107 million for the comparable period in 2009. Net income and EBITDA for the quarter were impacted by the revenue and expense drivers previously discussed.

From a liquidity standpoint, we ended the quarter with approximately $89 million in cash and $247 million available on our revolver. We generated $87 million of distributable cash for the quarter and $331 million year-to-date.

Year-to-date, we have invested $145 million in gross capital expenditures. During the third quarter, we lowered our cost estimate on our growth projects by $75 million due to lower material and labor cost. As you may recall, we reduced our expansion, capital spend forecast by $200 million earlier in the year. So when you combine the current reduction, we have reduced our financing requirements by approximately $275 million. For the remainder of 2010 and for 2011, we now expect to invest approximately $125 million in order to complete our growth projects.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Gabe Moreen from Bank of America.

Gabriel Moreen - BofA Merrill Lynch

Question on expenses. I guess do you feel comfortable with the current quarter and how the expenses came on O&M and fuel and gas transportation? I guess this represents the going run rate, absent some bumps up for expansion projects coming online?

Jamie Buskill

Gabe, this is Jamie. From an O&M standpoint, we are seeing a little higher cost there related to maintenance project. In fact, that's one reason our maintenance capital spend is somewhat lower than what you may have anticipated. The nature of the projects we worked on requires us to call those as expense. So you have a little bit of noise in your O&M number related to that. Fuel costs are up as the projects ramped up. I'm hopeful as we start operating these systems, as intended, we can work to operate that more efficiently.

Gabriel Moreen - BofA Merrill Lynch

And then in terms of that gain on sale from the gas storage expansion, can you just talk about what exactly happened there? Was it less base gas as you may have originally forecast as you needed or what happened?

Jamie Buskill

This is tied to the storage expansion project we put in-service actually November of last year. We were able to defer selling that gas until the third quarter of this year. And to your point, it's basically where we took base gas, and we were able to convert it to working gas. And that represented approximately 3.3 Bcf that we sold.

Gabriel Moreen - BofA Merrill Lynch

My last question, if it's alright, Jamie, in terms of terming out your revolver and increasing issue plus capital needs, any thoughts on coming back to the debt markets, I guess, considering the attractive rates out there for probably for long-term paper?

Jamie Buskill

It's something like we constantly monitor -- the revolver, we approximately -- or $700 million drawn on that. We have plenty of liquidity to finish the remaining capital spend. So it's just a matter of watching the markets and picking the time that we think's right. And revolver, you may recall, we have until middle part of 2012 before that expires.

Operator

And your next question comes from the line of Darren Horowitz from Raymond and James (sic) [Raymond James].

Darren Horowitz - Raymond James & Associates

I'm trying to get a sense of the basis differential impact on future capacity renewals and also your short-term firm services. I think last quarter, you had mentioned that year-to-date, you're attracting just down over $16 million from last year, but I know that when we spoke last quarter, you were saying that somewhere around 25% of the remaining contracts were left to renew in the back half of this year, with more emphasis on 4Q. So could you give just give us a little color as to what you're expecting on these renewals?

Jamie Buskill

To talk first to -- you asked about the interruptible short-term market. Actually, we saw a slight improvement in the third quarter there related to those services, primarily driven by the power generation market. August was an extremely hot month and in fact, we set some record days, as Rolf mentioned, on delivery to those plants. As far as contract renewal, you may recall, we said that the remainder of those renewals are really tied to the fourth quarter. And we'll just have to wait until we finish the fourth quarter before we can update that.

Darren Horowitz - Raymond James & Associates

Is it possible to give us a snapshot for 2011 as to what portion of those contracts is up for renewal? I know that about 90% of your revenues are from firm services, but just so we can get, more or less, a timeline of the magnitude and the timing of those renewals?

Jamie Buskill

You may recall, our average contract life is six years. I think that's key to point out. The reason we pointed out this year is we had really somewhat of an anomaly with the year of number of renewals. We had approximately $100 million to renew this year, and it's sizable enough that we felt like we needed to discuss it. That number goes down if you ignore rollovers from this year to next. That number actually goes down next year, and it has less of an impact.

Darren Horowitz - Raymond James & Associates

Kind of more big picture, as it relates to the modification on your 30-inch Gulf South pipeline in the Eagle Ford, can you just give us a sense for, beyond that modification, how you plan to kind of build, link and lever that footprint such that you become more vertically integrated in the Eagle Ford?

Rolf Gafvert

Yes. We are looking at extending from that 30-inch Gulf South pipe into the Eagle Ford, that is approximately 50 miles of pipe which will need to be built. And then subsequently, we would construct a processing plant up near Houston and attach to liquid lines in that area that can take it to Mount Bellevue and other places. We're just working with a variety of different potential shippers on that project. But that, in a sense, is what the project would entail.

Jamie Buskill

And, Darren, one thing to point out is -- the bigger story there, as Rolf mentioned earlier in his remarks, there's a lot of gas coming out of the Eagle Ford. And so we think call systems are going to benefit because there's so much gas coming out. So longer-term, we think it's positive to the system, even if we don't complete anything at this point.

Operator

And your next question comes from the line of Elvira Scotto from Credit Suisse.

Elvira Scotto - Crédit Suisse AG

Just a quick follow up on the contract rollovers. So you had $100 million this year up for renewal, and I think you said, you had 25% less to be done in the fourth quarter. Have you recontracted any of those in the fourth quarter?

Jamie Buskill

Elvira, we continue to work on those, and we're really not going to comment on the status of those until we complete the quarter.

Elvira Scotto - Crédit Suisse AG

And then, maybe just a follow up, can you remind us how much of your contracts are long-term firm versus short-term and interruptible?

Jamie Buskill

Well, the short-term firm, when we talk about the six-year average contract, that's all firm contracts, short-term and long-term firm. The interruptible, again, the interruptible pipe services represent about 10% of our revenue, the biggest piece of that really being park-and-lend market. So those are really the total numbers we're working with. One thing to point out, as the contracts ramp up and most of the contracts will be ramped up toward the end of this year, that on the expansion project, that really decreases our interruptible capacity because those firm contracts will be coming online.

Elvira Scotto - Crédit Suisse AG

And then just broader picture, can you talk about what you're seeing in some of the areas, specifically in the Fayetteville Shale, we've seen rig counts come down. And then in the Haynesville, we may see production come down as some of these leases, the held by production leases roll. Can you just give us some general thoughts on those areas?

Rolf Gafvert

Well, from what we see, there is a continuing ramp up though in the overall production from the Fayetteville Shale, Haynesville and of course the Eagle Ford as well. So even though drilling may be down, I think overall production continues to ramp up.

Jamie Buskill

In fact, Elvira, we're seeing close to 100% utilization on our Fayetteville Lateral as we stand today.

Elvira Scotto - Crédit Suisse AG

As you think about just growth going forward, do you think that'll come primarily from organic growth opportunities, extensions of your current footprint? Or a mix of organic growth and acquisitions?

Jamie Buskill

Yes. I mean quite frankly, we're looking at all those opportunities. As we stated before, we think we have a great footprint because our assets all work together. So we will continue to look at opportunities to continue to enhance that footprint, whether it be organic growth, acquisitions. We also think there are opportunities on smaller-type growth projects where we go in and either add compression or add small laterals onto the system that will benefit the overall results as well.

Elvira Scotto - Crédit Suisse AG

But all these types would be fee-based projects?

Jamie Buskill

We like fee-based business. You never say always because there's always a chance that, that may not be the case. But we like fee-based business. We mainly like projects, again, that complement the core pipelines we have and feeding in additional volumes to the systems.

Operator

And your next question comes from the line of Jeremy Tonet from UBS.

Jeremy Tonet - UBS

Could you give the number for volumes transported through specific the quarter?

Jamie Buskill

Yes, for the third quarter, we transported 622 TBtu. That's up about 38%. That puts us year-to-date, I believe we're about 1,814 TBtu.

Jeremy Tonet - UBS

And then for maintenance CapEx, can you give us any update or thoughts on where you might be tracking for the year and if that's a good run rate going forward?

Jamie Buskill

We're at $26 million. If you look last year, it's basically, we're at the same number last year. We ended up spending just south of $60 million. I do think that our maintenance capital will come in a little bit lower than what we've guided to earlier. I'd say we're going to be in the $50 million to $60 million range this year. We may see some additional projects that show up on the income statement like we saw in the third quarter, depending on the type of work we work on.

Jeremy Tonet - UBS

And is that $50 million to $60 million range, is that a good way to think about 2011 or...

Jamie Buskill

I think longer term, it's still closer to the $70 million. I mean $70 million was developed based on bringing on all these expansions. Quite frankly, those expansions are all new assets of the amount of maintenance right now to do on those is pretty minimal. But I think the $70 million on the longer-term basis is the number to be looking at.

Operator

And your next question comes from the line of Brettly Alson (sic)[Barrett Blaschke] from RBC.

Barrett Blaschke - RBC Capital Markets

Barrett Blaschke from RBC. Quick question on the fuel and gas transportation, do you see that coming down at all, or are you pretty comfortable with it at this level and it's just kind of tied to all the new assets?

Jamie Buskill

Yes, it's really primarily tied to all the new assets. A good portion of that is offset in revenues as well as you collect that from your customers.

Barrett Blaschke - RBC Capital Markets

And then park-and-loan, can we go on and assume that it's probably going to run fairly low as long as the gas prices stay low which will keep the spreads tight?

Jamie Buskill

Well, we think for the year, we'll come in, of course, at historical average, which is around $30 million. And the spreads have been fairly tight, we'll just have to see how that market responds over the next few months.

Operator

And your next question comes from the line of Bernie Colson from Oppenheimer.

Bernard Colson - Oppenheimer & Co. Inc.

Where did you guys end up for the quarter on debt to EBITDA leverage?

Jamie Buskill

We don't give the actual number, but we're in full compliance with all of our covenants related to that measure.

Bernard Colson - Oppenheimer & Co. Inc.

Okay, so you don't provide that at all?

Jamie Buskill

No.

Bernard Colson - Oppenheimer & Co. Inc.

And then secondly, following up a little bit on Elvira's question in the Fayetteville, specifically, and I got the express pipeline coming on not too long from now. I was wondering if you could give us some color or commentary on how that potentially changes things there?

Rolf Gafvert

Well, we don't think it will. We have long-term contracts for all the capacity on the Fayetteville Lateral. As Jamie said, it is operating at about 100% of capacity and when we increase the pressures to get to 1.3, we fully expect to see that capacity filled as well.

Bernard Colson - Oppenheimer & Co. Inc.

And have you given any guidance about when your next contract will roll over on that pipe?

Jamie Buskill

Basically, those were primarily 10-year contracts. So it will be quite some time before we have to deal with renewals on that system.

Operator

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

Ross Payne - Wachovia Securities

I might've missed it, but was there any contracting that was done Q3?

Jamie Buskill

Really, there was very minimal contracting done. Again, most of it was early on in the year and the remainder was tied to the fourth quarter, primarily, really the latter part of the fourth quarter.

Ross Payne - Wachovia Securities

And, Jamie, what are your thoughts on targeted leverage versus, perhaps, for '11 and beyond?

Jamie Buskill

The guidance we've given there in the past is, and we still hold to that, as these projects ramp up and we start getting the full impact from those somewhere in the low 4x.

Ross Payne - Wachovia Securities

And do you happen to have a rough debt number for the quarter?

Jamie Buskill

We're right at the 50-50 mark. We're about $3.2 billion, $3.3 billion in debt and about $3.3 billion on equity.

Operator

And your next question comes from the line of Harry Mateer from Barclays and Capital.

Harry Mateer - Lehman Bothers

Just following up a little bit on the bank revolver financing question. When you look at the leverage right now, I know you still have some projects ramping up, you're right around the 5x mark or just a bit under. I know the agencies are looking for something in the low fours, so is equity a piece of the pie that you're thinking about when you consider terming out the remaining debt on your revolver?

Jamie Buskill

Well, two things there. One, things like the Haynesville we're just now putting service, and the Fayetteville, we're just now ramping up to the full capacity. So I'm not sure you're seeing yet all the revenue contributions from those projects in the number. As far as financing, the only thing I'll say there is we have all the liquidity we need to handle all the capital expenditures that remain. Where we're at, the capitalization from the debt-to-equity standpoint percentages, we're happy with that. So I'll just leave it at that.

Operator

And your next question comes from the line of Steve Maresca from Morgan Stanley.

Stephen Maresca - Morgan Stanley

When you're looking at basis differentials, are there specific points that you are looking at along the system that you're measuring, good or bad?

Rolf Gafvert

Henry Hub, obviously, from a supply standpoint, along with Carthage, which is in East Texas, and then we primarily look at Lebanon, which is the market off of Texas Gas, as well as Cozzie [ph] the and Transco 85. So those would be the ones that we look at the most.

Operator

And your next question comes from the line of Sharon Lui from Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC

Jamie, it looks that most of your projects have been placed in service, just wondering what the remainder CapEx is related to?

Rolf Gafvert

The remainder is -- we still have some costs for Haynesville that's in service now, that we'll have just the run off and cleanup costs related to that. We have the Clarence Project, which is primarily a 2011 project. The remainder is really clean-up costs and we're going in and doing some optionality to our core expansion projects, and all that should be completed in 2011.

Sharon Lui - Wells Fargo Securities, LLC

And I guess for clarification, your Eagle Ford project, are you building a processing plant or just connecting your system to processing plants?

Rolf Gafvert

Yes, in this case, we would actually construct a new processing plant designed for the Eagle Ford gas quality, if you will. And, yes, so it would be new.

Sharon Lui - Wells Fargo Securities, LLC

Any thoughts in terms of the capacity or what type of contracts you would have there?

Jamie Buskill

Yes, Sharon, on that, that's something that we're looking at. That's not something that's a definite. It's just an example of some of the things that we're pursuing to reach further back into the production areas in the Eagle Ford. Again, the primary goal of all these type of projects would be to get more volumes coming in to your mainline system.

Sharon Lui - Wells Fargo Securities, LLC

But I guess if this project does go in place, are you aiming more towards like fee-based type of contracts or are you…

Jamie Buskill

I think it's too early to start speculating on what types of contracts or exactly how that would be structured. I think Rolf's just giving some color to some of the things we're looking at and pursuing.

Operator

There are no question at this time. I would like now to turn the conference over to Ms. Allison McLean for closing remarks.

Allison 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.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the call. You may now disconnect. Have a great day.

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