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Boardwalk Pipeline Partners, LP (NYSE:BWP)

Q4 2010 Earnings Call

February 07, 2011 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

Ross Haberman - Harberman Funds

Xin Liu - JP Morgan Chase & Co

John Tysseland - Citigroup Inc

Darren Horowitz - Raymond James & Associates

John Edwards - Morgan Keegan & Company, Inc.

Garland Buchanan - Babson Capital

Barrett Blaschke - RBC Capital Markets, LLC

Operator

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

Allison McLean

Thank you, Alicia. Good morning, everyone, and welcome to the Fourth 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'll 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 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 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

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 release we issued this morning. For the fourth quarter, our distributable cash flow increased 19% over comparable quarter last year, and we also announced a quarterly distribution to unit holders of $0.52 per unit, a $0.005 increase over last quarter.

I will now provide an update on our business and then Jamie will discuss our financial performance in greater detail. First, I'd like to provide an update on the remaining portion of our firm capacity that was up for renewal in the fourth quarter. I'm pleased to announce that our systems are essentially sold out this winter season, primarily due to two contracts with power generators.

Power generators located on the northern end of our Texas gas system purchase firm services to meet their winter demand. These customers utilize capacity that had historically been used to make deliveries to Lebanon. In addition, we saw some improvement in basis spreads from what we experienced earlier in 2010. We ended 2010 with a weighted average life for our firm transportation contracts remaining unchanged from previous years at approximately six years.

Each year, Boardwalk, like other pipelines, will have a certain number of expiring contracts. As a result of re-contracting, risk will continue exist just as it had previously, but we believe the location, integration and flexibility of our pipeline systems provides our customers with the services and markets they want, including a growing power generation market.

Boardwalk's system currently serves approximately 40 power generation facilities and we are optimistic about our opportunities to serve this market. In the short term, many industry experts are forecasting increased natural gas utilization for power generation, as operators switch from coal to gas in order to take advantage of favorable natural gas pricing caused by abundant natural gas supply.

And over the next five years, we believe that the location of our pipeline footprint provides us an opportunity to capture additional power generation load as operators look to replace older coal fired facilities. As we have pointed out before, there are approximately 100 coal fired electric generation units that are over 40 years old located within 20 miles of our pipeline systems.

Turning to our expansion projects. We ended 2010 with all of our major expansions in service and operating at their designed capacity. The Haynesville expansion went into service this quarter, adding approximately 0.6 Bcf a day of capacity to our system.

Looking forward, we continue to pursue opportunities to leverage our existing assets. In addition to the power generation opportunities I've just discussed, we continue to explore opportunities to capitalize on the development of new production areas. For example, we are pursuing opportunities, such as gathering and processing, that complement our business strategy.

Finally, we believe storage presents further growth opportunities. Boardwalk has completed several storage expansion projects over the last few years and we are continuing to explore new opportunities. Additional storage capacity located near our footprint can help support integrated transportation and storage services that are utilized by power generation companies and local distribution companies in order to meet peak demand.

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. Operating revenues for the fourth quarter of 2010 were $302 million, an increase of $23 million or 8% from $279 million for the comparable period in 2009. The increase was driven by transportation revenues from our pipeline expansion projects.

Turning now to operating expenses. We reported operating expenses of $175 million for the quarter, an increase of $4 million or 2% from $171 million for the comparable period in 2009. The increase was driven by higher operating costs and expenses due to higher operations and maintenance, depreciation and property tax expense associated with our increased asset base. The increased expenses were offset by gains on the sale of gas associated with a reduction in storage gas needed to support no-notice services.

Net income for the quarter was $89 million, an increase of $17 million or 24% from $72 million for the comparable period last year. EBITDA for the quarter was $184 million, an increase of $23 million or 14% from $161 million for the comparable period in 2009. Net income and EBITDA for the quarter were impacted by the revenue and expense drivers previously discussed. We generated $118 million of distributable cash for the quarter and $449 million year-to-date.

In 2010, we invested $161 million in growth expenditures. As we wrap up our major growth projects in 2010, we are reducing our overall capital cost estimates again this quarter, bringing the total reduction to $350 million for the year.

In January of 2011, we issued $325 million of 10-year notes at our Texas Gas subsidiary, which carry a coupon rate of 4.5%. We also notified the existing holders of Texas Gas' $250 million 5.5% notes due in 2013 that we intend to redeem $135 million of those notes with a portion of the proceeds received from the Texas Gas debt issuance. The redemption is expected to close on February 23. We used the remaining proceeds from the new 10-year notes to pay down $190 million of the credit facility. We expect available borrowing capacity on our revolving credit facility will be $431 million after the redemption of the Texas Gas notes.

So in closing, we accomplished many things in 2010. We completed the Gulf Crossing, Fayetteville and Greenville compressor projects earlier in the year, which increased capacity. We completed the Haynesville project early in the fourth quarter, which added approximately 0.6 Bcf a day of capacity. We lowered our capital cost estimates and, ultimately, our financing needs by $350 million. We received authority to operate all of our major expansion projects at their full design capacity. And finally, we started 2011 with an offering which allowed us to refinance debt maturing in the next two years at attractive rates.

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 Barrett Blaschke from RBC Capital Markets.

Barrett Blaschke - RBC Capital Markets, LLC

One, what ended up happening with the contracts that were rolling off towards the end of the year last year? And second, could you expand a little bit on the gathering and processing opportunities that Rolf mentioned?

Rolf Gafvert

Well, on the first, I think we've said that all of the contracts that were coming up at the end of the year were sold to power generators on the Texas Gas system, and so that will take us through the winter of '11. With regards to gathering and processing, we are focused right now in the Eagle Ford area. Although, if you look at our pipeline assets, we have significant assets in many of the shale plays and we see gathering opportunities really across all of those shale plays, but we're currently focused on the Eagle Ford.

Operator

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

Darren Horowitz - Raymond James & Associates

If you think about kind of building beyond just the gathering and processing footprint, would it be possible to maybe construct a processing plant in and around the Houston area with the expectation to kind of take liquids and move them kind of through the Mount Bellevue downstream distribution area? Is that the ultimate goal of where you'd like to be?

Rolf Gafvert

Yes. We're looking at an opportunity to bring rich natural gas into our system out of the Corpus area up to near Houston, construct the processing plant at that location and then work with others to provide liquid solutions for the processed liquids and then re-transport the gas to other markets.

Darren Horowitz - Raymond James & Associates

Rolf, do you have any idea of the scale or scope of that project as you're talking to customers now?

Rolf Gafvert

Yes. We have roughly 350 million cubic feet a day of capacity on the pipeline that we're looking at converting to rich service, so that can kind of give you an idea of the scope of the project.

Darren Horowitz - Raymond James & Associates

And any preliminary estimate as to cost?

Jamie Buskill

Yes, one thing I think we need to say is when we're talking about this, these are things we're looking at; that, along with several other projects. So we do not have anything at this point that's concrete enough to announce as an official project. And so Rolf's really just giving you some ideas of some of the areas we're looking at.

Operator

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

John Edwards - Morgan Keegan & Company, Inc.

What was the volumes for the quarter?

Jamie Buskill

For the quarter, 681 TBtu. That's up about 21% from the fourth quarter of last year. For the year, John, that puts us just under 2,500 TBtu for the year, which is about a 38% increase in overall throughput.

John Edwards - Morgan Keegan & Company, Inc.

And then following the refi, what's going to be your available liquidity?

Jamie Buskill

If you look on the revolver, we will have approximately $500 million on the revolver, and then we will have -- we ended the year with about $55 million in cash, so we have about $550 million. And from a capital spend standpoint, we're now under $100 million left on projects. So we have plenty to work with.

John Edwards - Morgan Keegan & Company, Inc.

So for 2011, so your growth capital is expected to be something below $100 million. Is that right?

Jamie Buskill

Based on projects we've talked about and some smaller projects we're doing, yes. With the reduction we announced this quarter on the capital cost for the core project, as I mentioned, that's a total of $350 million we reduced our projected spend by. So now we're under $100 million remaining.

John Edwards - Morgan Keegan & Company, Inc.

And then what's the maintenance CapEx you're expecting for 2011?

Jamie Buskill

The maintenance, again, we think the mid-$60 million to $70 million range on capital. Now one thing, John, you may recall, we've talked about in the past, our maintenance program runs approximately $100 million a year on these systems and that's a split between what hits the O&M expense line and what hits maintenance capital. Some years, it may be a little more capital versus expense and vice versa. But overall, our maintenance programs run about the $100 million mark.

John Edwards - Morgan Keegan & Company, Inc.

And then the $5 million gain that you reported this quarter, what was that?

Jamie Buskill

That was basically some storage gas. We have a bundled service on one of our systems, where we bundle the transportation and storage together. And with that service, we actually own the gas. We were able to sell that capacity, but we sold it in pieces. Someone bought the firm transport, and someone bought just the storage. So we no longer have the need for the gas we were holding, so we sold it.

John Edwards - Morgan Keegan & Company, Inc.

And that figured in with your -- that was part of your EBITDA and DCF for the quarter.

Jamie Buskill

It is. From earnings per unit, I think we're $0.45 in total. That puts us around $0.43, if you strip that out.

Operator

Your next question comes from the line of Xin Liu from JP Morgan.

Xin Liu - JP Morgan Chase & Co

For the contracts that you renewed, can you give some color on what kind of rate you have versus what you had before?

Jamie Buskill

Yes. Overall, we saw a little bit of strengthening in rates towards the end of the year. But we ended up around the 85% range as far as the rates we were getting from that. And as Rolf mentioned, a lot of that went to power producers. Now we saw some very long-term contracts, some 10 years in length and some short-term contracts. Overall, our average contract life on the system ended up at the same spot, six years.

Xin Liu - JP Morgan Chase & Co

And can you give some color on your outlook for the parking and lending?

Jamie Buskill

The parking and lending, it's early in the year. And as we say every year about this time, we stay with our historical average of $25 million to $30 million. I'll tell you that year's starting off a little slow there. But again, it's still early, and it doesn't take much to create the opportunities there. But again, we stay with the $25 million to $30 million internally.

Operator

Your next question comes from the line of Ross Haberman from Haberman Management.

Ross Haberman - Harberman Funds

What was the total amount of long- and short-term debt at the end of the calendar year?

Jamie Buskill

Total debt's $3.2 billion. It's all long term. We do not have any debt that's due until the middle part of 2012.

Ross Haberman - Harberman Funds

$3.2 billion, I'm sorry, you say?

Jamie Buskill

Yes. $3.2 billion and...

Ross Haberman - Harberman Funds

And that includes the refinancing you've talked about earlier.

Jamie Buskill

Well, the refinancing, because we're using all of the proceeds to pay off existing debt, we're going to end up in the same spot, basically.

Ross Haberman - Harberman Funds

And any financing activities expected over the coming year?

Jamie Buskill

We're not going to comment on what we may or may not do. There's nothing that we're required to do in 2011 on our credit facility; that, again, is down and around the $430 million is where it's going to end up after the recent refinancing. That matures the middle part of 2012. So that'll be the first refinancing issue we'll have to deal with.

Ross Haberman - Harberman Funds

Any cash or a bunch of cash on the books at calendar end?

Jamie Buskill

We ended up with $55 million of cash at the end of the year.

Operator

Your next question comes from the line of Garland Buchanan from Babson Capital.

Garland Buchanan - Babson Capital

Just to clarify the CapEx, if I understand it correctly, it's $100 million for the year with around, looks like $65 million at the midpoint for maintenance and the remainder is growth CapEx.

Jamie Buskill

No. In total, the expansion capital is going to be under $100 million for the year based on what we have right now that we're working on. In addition to that, we will have maintenance capital, and the maintenance capital we stated on these systems generally runs $65 million to $70 million range. But again, some of that could end up being expense versus capital. Overall, maintenance program is about $100 million.

Garland Buchanan - Babson Capital

And then just on the re-contracting rates. It seems like this 85% has been a trend throughout the year. Why is that taking place? What's driving the rates lower?

Jamie Buskill

Well, we saw basis spreads come in considerably early in the year and the majority of our contracts had been done earlier in the year, came up for renewal and that's where the 85% came in. We actually saw rates strengthen towards the end of the year. Now only time will tell, but I'm sure weather had something to do with that. As people in the Northeast will attest, it's been a cold and snowy winter, so we saw some improvements there. But because so much of the renewals have been done prior to the end of the year, it didn't move the overall rate that much.

Garland Buchanan - Babson Capital

Given that a lot of your customers are on the demand side, is it easy for these customers to switch over to other providers? Or are they pretty much hardwired into your infrastructure?

Jamie Buskill

Well, really, that's -- to your question, one of the benefits of our system is we have a diverse system and we serve many different customers. We serve producers and to your point, end users. So when you look at the end user market, you do have competition virtually in all of your markets, either with other pipelines or either with other fuel sources. So it's a very rare case where you're the only game in town.

Operator

Your next question comes from the line of John Tysseland from Citigroup.

John Tysseland - Citigroup Inc

What percentage of Boardwalk's overall capacity would be sold under FT contracts this summer versus last? And average duration of your firm commitments now versus last year as well, if you have that available.

Jamie Buskill

Well, as Rolf mentioned, we are sold out right now. And we're not going to speculate where the summer may be, but right now we're sold out. Average contract life is basically unchanged from where we were last time, last year this time. It's approximately six years.

John Tysseland - Citigroup Inc

And then, I guess, you're saying the amount of capacity you had sold this summer, you're completely sold out.

Jamie Buskill

We're sold out going into the winter season. And in that number, John, this has always been the case, you have long-term contracts and short-term contracts. And it really depends on what those short-term contracts end up doing and what your renewals for the current year end up being. I think the one thing that's different this year from where we're at versus last year this time is in addition to our annual renewal efforts, which again, we have every year, we also had the issue of our expansion projects. Some of those firm contracts were ramping up throughout the last year. So in addition to our normal renewals, we had this short-term capacity on expansion projects that we had to sell either on interruptible or short-term basis. And because the basis spreads have narrowed so much, we just didn't get the rates that we had anticipated we would get. Throughout last year, those contracts came into play and now our expansion projects are basically, all those firm contracts are operating as they were designed. So we don't have quite the same issue this year as we had last year.

John Tysseland - Citigroup Inc

And then any contracts on storage that are rolling off this year? And what the average duration is there.

Jamie Buskill

I don't have that, John, because we look at our firm contracts in total because as I mentioned earlier, we have some services where the storage and transportation's combined, so we really don't delineate between the two, so it's part of the overall number. I don't have that break out with me.

John Tysseland - Citigroup Inc

And then lastly on the SG&A line, what came in a lot better than expected? Are there some initiatives there? And what should we expect for run rate for '11?

Jamie Buskill

Well, if you look for the year, though, actually, we're a little bit higher than last year. So some of this is timing of when cost came in. We had some expenditures on some issues and then we got recoveries of those expenditures toward the end of the year. So I think you really need to look at it on an annual basis.

Operator

Your next question is a follow-up question from the line of Garland Buchanan from Babson Capital.

Garland Buchanan - Babson Capital

Very quickly, are you still confident in hitting sub-4 1/2x leverage in 2011?

Jamie Buskill

As we stated before, I'm not sure we gave a specific date, but our target has been in the low 4x coverage, and that's still what we're working toward.

Operator

There are no further questions in the queue. This does conclude the question-and-answer portion of the call. I will now turn the call back over to Allison McLean for closing remarks. Please proceed.

Allison McLean

I would like to thank everyone for joining us this morning. We appreciate your continued interest in Boardwalk Pipeline Partners. 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, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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