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Executives

Allison McLean - Director of Investor Relations

Arthur Rebell - Chairman of Boardwalk GP LLC

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

James Jampel - HITE

Bernard Colson - Oppenheimer & Co. Inc.

Elvira Scotto - Crédit Suisse AG

Suzanne Hannigan - Janney Montgomery Scott LLC

S. Ross Payne - Wells Fargo Securities, LLC

Stephen Maresca - Morgan Stanley

Darren Horowitz - Raymond James & Associates, Inc.

Boardwalk Pipeline Partners, LP (BWP) Q1 2011 Earnings Call May 2, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2011 Boardwalk Pipeline Partners, LP Earnings Conference Call. My name is Shantale, and I will be your facilitator for today's call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Ms. Allison McLean, Director of Investor Relations. Please proceed.

Allison McLean

Thank you, Shantale. Good morning, everyone, and welcome to the First Quarter 2011 Earnings Call for Boardwalk Pipeline Partners, LP. I’m Allison McLean, and I’m pleased to be joined today by Mr. Arthur Rebell, our Chairman; 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 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 the 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. Arthur Rebell.

Arthur Rebell

Thank you, Allison. As we have previously announced, Rolf told us last year that he looked forward to retirement in the near future. As our press announcement this morning noted, Stan Horton is joining Boardwalk today and will be the new CEO. Many of you know of Stan's distinguished record in the energy area and, hopefully, share our enthusiasm and welcome him as he leads Boardwalk into its future growth.

But I do want to take a moment and acknowledge the important role which Rolf has played in bringing Boardwalk from a small private company to one of America's leading public MLPs.

Rolf will remain an adviser to the company, and we know that he will continue to share his perspectives and advice with Stan and all of us. Rolf, thanks for your efforts and good luck.

And I will now turn the call over to Rolf.

Rolf Gafvert

Thank you, Arthur. Good morning, everyone. For the first quarter, we announced a quarterly distribution to unit holders of $0.5225 per unit. I will provide an update on our business, and then Jamie will discuss our financial performance in greater detail.

During the first quarter, a substantial portion of our pipeline capacity was contracted under firm agreements, and we experienced one of the coldest winters in the past 10 years, which helped us overcome overall weak market fundamentals. However, despite favorable weather conditions, declining price spreads between time periods impacted our storage and parking and lending services. For example, for the first quarter this year, parking and lending revenues were down approximately 65% over the comparable quarter in 2010 due to these unfavorable market conditions.

Should weak market fundamentals continue, our interruptible services, including parking and lending services and possibly firm contract renewals could be negatively impacted for the remainder of the year. These industry conditions led us to increase our distribution by $0.0025 per unit this quarter compared to the $0.005 increase in the previous quarter.

Although a relatively small portion of our overall business, net transportational revenues from power generators increased by more than 50% for the quarter compared to the first quarter of last year, as power providers signed up for firm services during the winter season. We are pursuing opportunities to add additional power generation facilities to our system, as operators review options for replacing older coal-fired power generation facilities.

During 2011, we are also adding compression to our system in order to create additional flexibility to better serve growing demand. In order to focus on expansion and acquisition growth opportunities, I am pleased to announce that during the first quarter, Jonathan Nathanson joined Boardwalk to head up our Corporate Development team.

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 quarter.

Jamie Buskill

Thanks, Rolf, and good morning, everyone. Operating revenues for the first quarter of 2011 were $311 million, an increase of $10 million or 3% from $301 million for the comparable period in 2010. The increase was driven by transportation revenues from our pipeline expansion projects, partially offset by $6 million lower parking and lending revenues due to unfavorable market conditions.

Turning now to operating expenses. We reported operating expenses of $181 million for the quarter, an increase of $8 million or 4% from $173 million for the comparable period in 2010. The increase was driven by expenses related to a fire at our Carthage compressor station that occurred in February. The incident had minimal impact to our gas flows, there were no injuries and we anticipate that insurance will the cover the loss. We expensed $5 million in the first quarter related to this incident, representing the amount of our deductible.

Operating expenses were also impacted by higher depreciation expense associated with our increased asset base and increased maintenance expenses. As we mentioned during last quarter's call, in January of this year, we issued $325 million of 10-year notes at our Texas Gas subsidiary, which carry a coupon rate of 4.5%. A portion of the proceeds were used to redeem $135 million of Texas Gas notes that carried a 5.5% coupon rate, and the remainder was used to pay down $190 million under our credit facility. In the first quarter, we recognized a $7 million loss due to the early redemption of the notes.

EBITDA for the quarter was $187 million, an increase of $6 million or 3% from $181 million for the comparable period in 2010. Net income for the quarter was $83 million, a decrease of $7 million or 8% from $90 million for the comparable period last year. Net income and EBITDA for the quarter were impacted by the revenue and expense drivers previously discussed, and net income was lower due to the early redemption loss of $7 million. We generated $113 million of distributable cash for the quarter. Growth capital expenditures were $16 million in the first quarter, and we expect to spend approximately $78 million for the remaining 3 quarters.

Maintenance capital was $15 million for the quarter compared to only $2 million in the first quarter of 2010. For the full year of 2011, we expect to incur total cost of approximately $250 million to operate and maintain our systems, of which approximately $87 million is expected to be capital. This compares to $213 million for 2010, of which $63 million was capital. The overall increase of $37 million is primarily related to integrity management, reliability and general pipeline maintenance and repair projects. Our reported EPU was $0.42 for the quarter with expenses related to the Carthage incident and the early redemption loss impacting EPU by approximately $0.07 per unit.

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 the line of Darren Horowitz of Raymond James.

Darren Horowitz - Raymond James & Associates, Inc.

And Rolf, we wish you well in your future endeavors.

Rolf Gafvert

Thank you.

Darren Horowitz - Raymond James & Associates, Inc.

My first question is regarding the potential for the Eagle Ford opportunity. Is there any update there on how you're thinking about that? Any progress on discussions with customers regarding a new gas processing plant in Houston? Or possibly the ability to further take natural gas liquids to Bellevue and then on downstream?

Jamie Buskill

Darren, there's really not anything to update there. We continue to look at several projects, some in the Eagle Ford area. And there's just nothing that's been finalized at this point to really discuss.

Darren Horowitz - Raymond James & Associates, Inc.

Okay. Jamie, is it a situation where, from a competitive landscape perspective, other folks are out there and they're kind of filling that need? Or is it a situation where you guys are now thinking about leveraging your position with Gulf South maybe a little bit differently?

Jamie Buskill

Really, Darren, I really don't want to comment on that. When we get a project there that's finalized, we'll go over the details of the project at that time.

Darren Horowitz - Raymond James & Associates, Inc.

Okay. Switching gears a little bit, can you just give us a little bit more insight as to how you guys -- how discussions are going with customers regarding adding more power generation to the system, particularly in the Northeast section of your assets?

Jamie Buskill

We have seen strength from the power generation market. And as we talked before, there's just under 100 of these turbines located mainly on the north end of our system that are over 40 years old, and they're coal-fired plants. So we've been in discussions with power producers as they decide what to do with these facilities. It's something that takes a lot of time because they spend a lot of time and effort in coming to their final decision. We're hopeful that some of those will switch over to natural gas and that we will benefit from that. Again, the existing facilities, we have over 40 power plants currently connected to our systems, and that's really what benefited us in the first quarter of this year. As Rolf mentioned, we were up about 50% on revenues.

Darren Horowitz - Raymond James & Associates, Inc.

I appreciate it, Jamie.

Operator

Your next question comes from the line of Stephen Maresca of Morgan Stanley.

Stephen Maresca - Morgan Stanley

Best wishes, Rolf, in your retirement or whatever you'll be doing. A couple questions. First, on the -- you mentioned, Rolf, in your remarks, parking and lending being down, and I thought you said something about negative contract renewals for the remainder of the year. And I just want to talk about that for a bit. Is that -- are you talking about storage renewals and you're seeing rates lower there? Or is it more on the pipeline side?

Rolf Gafvert

Well, this is on the storage side, primarily, where it's really dependent on time spreads from winter to summer or summer to summer. And what we've seen is given the low gas price, that the market is also lowering the value of storage. So that storage is typically sold in short-term agreements. And so when the market changes, we experience that shortfall quickly. There's also a potential for renewals. It's not baked in yet, but we do see there's a continuing impact on basis between points on our system and when certain contracts renew, we're just cautious as to what rates we'll be able to achieve when those contracts renew.

Stephen Maresca - Morgan Stanley

Do you have an order of magnitude on how soft storage rates are? Is it a down 5%, a down 10%, more?

Rolf Gafvert

I think we said it was down 65% from the prior quarter, first quarter of 2010, which is a significant decrease. But this is a highly volatile part of our business. We've always indicated that, and of course, it's a relatively small part of our business as well. But it's totally driven by the market, and we just get a spread of whatever value is available.

Stephen Maresca - Morgan Stanley

Okay. Quickly on the distribution policy, the lower raise, how should we be thinking about this going forward? Do you think this is more of a blip for you guys? Or is this something until you see some more future opportunities executed, that this may be the type of raise that we should be thinking about over the next couple quarters?

Jamie Buskill

Well, first of all, as in the past, we don't provide any guidance to future distribution policy. But as Rolf mentioned, because of the negative market fundamentals we're seeing right now and even though we're looking at a lot of growth opportunities and we brought in Jonathan and Stan to help in those efforts, we've yet to announce a finalized deal. So we just thought it was prudent that we would increase by $0.0025 this time.

Stephen Maresca - Morgan Stanley

Okay, fair enough. And last question, on the bringing of Jonathan in as the Head of the Corporate Development team, so is this a new team that you guys did not have before? And where -- or why now? And where do you see a lot of the opportunity where he'll focus for you guys? I mean, I guess, where possibly, more organic or acquisition? And what types of asset areas?

Rolf Gafvert

Yes, Jonathan is actually coming in to strengthen our team. We had a team, but Jonathan's expertise is -- we did not have. And he has tremendous experience. And certainly, he'll be focused on acquisitions along with helping us on any kind of organic growth as well. So we're pleased at have him on board.

Operator

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

Elvira Scotto - Crédit Suisse AG

I did have a follow-up question on the park and loan -- park and lend business. So how should we think about the outlook then going forward? I think is this sort of run rate that we saw this quarter how we should think about the rest of the year?

Jamie Buskill

Elvira, this is Jamie. As we've stated, usually, every time after the first quarter, it's such a short-term market. It's hard to predict where the year will end up. Obviously, the first quarter coming in as light as it did on park and lending, it's going to be difficult to get to our historical average, which is anywhere from $25 million to $30 million. But it's too early to figure and try and predict where that ultimate number may end up.

Elvira Scotto - Crédit Suisse AG

Okay. On the -- switching to growth CapEx, I think you said it was $78 million in the remaining 3 quarters. What's left in there? And what comprises that number?

Jamie Buskill

It's really several smaller projects. I think we've talked before about our BG Olla project and we also had some compression projects. Some of those projects -- Olla is -- we have firm agreement. Again, it's fairly small. Some of the other projects are more flexibility-type projects. As we pursue, for example, power generation, your systems have to have more flexibility to handle that type of demand. So we're trying to install that now and be ahead of that as we look for more of that load to come onto our system

Elvira Scotto - Crédit Suisse AG

Okay. And then the final question for me, and this is more of a conceptual, I guess, big-picture question. When you think about the longer-term growth and acquisition multiples or look at multiples on organic growth projects, how do you think about balancing between not overpaying for acquisitions or projects versus missing out on a potential longer-term growth opportunity?

Jamie Buskill

Well, that's a great question. I think that's what most companies have to deal with, is where is that right balance for risk and return. That's why we've always said, ideally, a project we do would complement our existing footprint because you're able to generate synergies from that, that your competitors can't necessarily match. But that is something that -- every deal's going to have unique issues, and we look at those risk and return trade-offs and decide what makes best sense for the long term for Boardwalk.

Operator

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

S. Ross Payne - Wells Fargo Securities, LLC

Jamie, a couple of quick questions here. What was the -- roughly, what was the debt balance and cash balance at quarter end?

Jamie Buskill

Sure. The debt, we were right at $3.27 billion. Equity was right at $3.22 billion, so we're right at that 50-50 split. From a cash standpoint, we ended with about $32 million of cash, and we had about $416 million available on our revolver. So from a liquidity standpoint, we're right at $450 million.

S. Ross Payne - Wells Fargo Securities, LLC

Okay. And second of all, as you look at Texas Gas and Gulf Crossing, and if you can make any comments on kind of where you are seeing re-contracting rates? I know a couple quarters ago, it was down about 15% maybe 18%, something like that. Any kind of update there on what you're currently seeing?

Jamie Buskill

Really, it's too early to tell. And don't forget, last quarter is a little different -- first quarter of last year is a little different than this first quarter. Most of our contract this year, the renewals are toward the end of the year. But also, if you recall last year, not only did we have the renewals, but we had the short-term capacity on our expansions as we were waiting for the firm contract to ramp up. This quarter, that's not the case. The contracts were fully ramped up and also, this quarter, we had, as Rolf mentioned, one of the coldest winters in 10 years. So the first quarter all-in-all, taking out the onetime items, it was a pretty strong quarter. And so when you factor that in with the renewals, we're really at a different position today than we were the first quarter of last year. We'll have to just update as we get toward the end of the year as to where those renewals ultimately play out.

Operator

Your next question comes from the line of Bernie Colson of Oppenheimer.

Bernard Colson - Oppenheimer & Co. Inc.

So can you guys give us -- sorry if I missed this, but your kind of debt-to-EBITDA ratio at the end of the quarter?

Jamie Buskill

Well, you can calculate. I'll tell you what our -- what we said is over the long term, our goal is to maintain in the low 4x. Now as you go through, let's say, organic expansion, you can have negative carry that may temporarily make that a little higher than you'd like to carry on a long-term basis, or you can have negative market conditions that can have an impact there. But our long-term target is still in the low 4x area.

Bernard Colson - Oppenheimer & Co. Inc.

Okay. So I guess I'm just trying to figure out if there are any adjustments we should be making rather than just taking the debt -- total debt balance and dividing it by the yearly EBITDA or...

Jamie Buskill

Well, I think if you look at the EBITDA, the one thing that we mentioned, we had the $5 million related to the fire that's in there. And you are going to see some higher cost this year as we go through some maintenance programs. But generally, the expansion projects, which were the bigger adjustments in prior years, as you were having to factor in the contribution they were ultimately going to make. 2011, you're really seeing most of that come into the income statement. So there's really not any material adjustments on the revenue end at this point.

Bernard Colson - Oppenheimer & Co. Inc.

Okay. And I guess just last question on leverages. Is there any, I guess, discussions going on with the rating agencies? Or how is that dialogue going?

Jamie Buskill

Well, I can just point to the reports I've been issued. I know Moody's just issued a report, I think it was last week, which basically reaffirmed their rating and the stable outlook.

Bernard Colson - Oppenheimer & Co. Inc.

Okay. And then lastly for me, when you -- I guess I'm trying to get a better feel for a project on -- say, you have a coal plant that you're going to convert to -- the owner's going to convert to natural gas. Is there some way to help us kind of frame how much one of those projects would cost to you? I mean, I guess based on maybe number of miles away from your existing pipeline. Just some way to frame the size of those potentially.

Rolf Gafvert

Yes, we've examined the potential sites that electric generators might use, which would typically be a plant that exists today that's coal-fired. And we have a substantial number of those plants that are within 20 miles of our pipeline. So the cost for us to connect would be relatively small. And in some cases, it's actually plants that we are connected to that they might be expanding. So from a cost standpoint, we wouldn't see a tremendous amount of capital required, but immediate generation of revenues. So we're very excited about the long-term outlook for gas generation.

Operator

Your next question comes from the line of James Jampel of HITE.

James Jampel - HITE

Given the business outlook and the relative low level of capital spending, could you talk a little about sort of how you feel about your current level of leverage? And where you see that going over the course of the year?

Jamie Buskill

Again, James, we don't provide projections. I'm not going to talk about what may happen in the future there. As far as the expansion goes and where things look at in the future, a lot depends on the growth and expansion projects we end up bringing in the door. And again, that's where we've been focusing our efforts, and we've intensified that with the 2 announcements Rolf mentioned about with Jonathan and Stan. So I'm not going to try and predict what the ultimate outcome may be on that.

Operator

Your next question comes from the line of Suzanne Hannigan of Janney Montgomery Scott.

Suzanne Hannigan - Janney Montgomery Scott LLC

Again, going back to the negative contract renewals, what portion of your storage contracts would be up for a renewal?

Jamie Buskill

Suzanne, I don't have that number. We look at the firm in total, and part of that has to be -- the storage is actually, in some cases, combined with the transportation and it's a blended service. So we really -- we don't have that number available. We really don't look at it quite that way, quite frankly.

Suzanne Hannigan - Janney Montgomery Scott LLC

Okay. How would you look at it that might help us?

Jamie Buskill

Well, we break our business down between the firm business and really the interruptible. The firm business tends to look at the longer-term fundamentals of the market. The short-term business tends to react to the current market conditions. If you look, as we've grown through these expansion projects, over the last 12 months, we now have about 94% of our revenue coming from these firm agreements. And we have an average contract life there of just under 6 years. The remaining 6% is the interruptible. And where it becomes an issue is when you see dramatic moves like we saw in the first quarter. The park and lending business just basically ceased to exist during that quarter. And so it shows up more on our results. But all-in-all, interruptible-type business is only 6% of the total revenue.

Operator

At this time, there are no further questions in the queue. And I would like to turn the call back over to management for closing.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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