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Boardwalk Pipeline Partners, LP (NYSE:BWP)

Q2 2011 Earnings Call

August 01, 2011 9:00 am ET

Executives

Stanley Horton - Chief Executive Officer, President and Director

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

Analysts

Elvira Scotto - RBC Capital Markets, LLC

Yves Siegel - Crédit Suisse AG

John Edwards - Morgan Keegan & Company, Inc.

Sharon Lui - Wells Fargo Securities, LLC

Darren Horowitz - Raymond James & Associates, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Boardwalk Pipeline Partners, LP Earnings Conference Call. My name is Gina, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Allison McLean, Director of Investor Relations. Please go ahead.

Allison McLean

Thank you, Gina. Good morning, everyone, and welcome to the second quarter 2011 earnings call for Boardwalk Pipeline Partners, LP. I’m Allison McLean, and I’m pleased to be joined today by Mr. Stan Horton, our President and 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 use the -- 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 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. Stan Horton.

Stanley Horton

Thank you, Allison. Good morning, everyone. This is my first earnings call as the President and CEO of Boardwalk Pipeline Partners, and I am very pleased to be here. I would like to take time today to share my general thoughts about Boardwalk and then provide an update for the quarter.

As you well know, there's been an explosive growth of U.S. shale production in North America. Boardwalk has been able to expand and extend its pipeline network over the past several years into many of these shale basins. These expansions have strengthened the value of our pipeline network and resulted in increased earnings and distributions to our investors.

However, this explosive growth has created an overabundance of natural gas, both regionally and nationally. The result has been lower natural gas prices and a reduction in price differentials, both seasonally and between basins. The reduced price differentials result in lower margins for transportation and short-term storage services such as park and lending or PAL services. As Jamie will discuss, this environment has had a negative impact on our 3- and 6-month results.

I believe that increased demand for natural gas will eventually correct the unprecedented current domestic gas glut. The demand response will likely come from the electric power in industrial sectors and perhaps from increased natural gas exports and new uses for natural gas for our transportation needs. We are beginning to see such a demand response in the form of increased deliveries through electric generation plants and industrials on our pipeline systems.

In fact, we just announced an open season to expand our delivery capacity into the Baton Rouge quarter to meet additional demand from end-use customers in that area. Boardwalk's 3 natural gas pipelines are an important conduit to move supplies from major supply centers to major market hubs. We feel good about the long-term strategic value of our pipeline assets despite the current depressed margins for transportation and storage services. Our strategy, going forward, is to strengthen our existing pipeline assets by continuing to attach new supplies and markets to our system via expansion to new projects.

Pipelines are our base business and will continue to be so in the future. However, we recognize the need to become more diverse, both geographically and in new business segments. We have previously mentioned our efforts to diversify further into the midstream sector via gathering and processes.

It is a focus of Boardwalk to offer a great array of new services to our producer customers. These will most likely be gathering and processing opportunities, but we are receptive to looking at opportunities outside of the traditional natural gas sector that could help diversify our business mix. Thus, our vision over the next several years is to strengthen our traditional pipeline business while diversifying the products and services we offer.

Regardless of the opportunity, we will be looking for growth that is accretive, strategic and that does not significantly increase Boardwalk's overall risk profile. For example, I don't envision getting into the E&P business. As a matter of policy, however, I will not comment on specific projects until they come to fruition.

Now on to the results for the quarter. We increased our distribution to unit holders to $0.525 per unit for the second quarter. As compared with the same period last year, we continue to see revenues grow from our expansion projects, and we continue to see strength in the power generation and industrial markets. We anticipate that weak market fundamentals related to our park and lending business will continue for the remainder of this year, and thus expect power revenues to be significantly lower this year compared to 2010.

Also during the quarter, we continued to execute on our pipeline Integrity program, resulting in higher operating expenses and maintenance capital associated with meeting the federally mandated requirements applicable to all interstate pipelines.

In addition, we reported a noncash write-down of materials and supplies that we have decided to sell. The materials and supplies are deemed to be in excess of our requirements over the next few years, and in some cases, do not match the technical specifications of the projects that we are currently evaluating.

I can tell you that my first 3 months with Boardwalk have been busy. During the quarter, we made a decision to free up capital related to our materials and supplies; we termed out some of our debt at attractive rates; and we issued equity to reduce the amount borrowed on our credit facility. All of these steps strengthened Boardwalk's balance sheet and will provide greater flexibility to pursue new market opportunities.

That concludes my comments, and I will now turn the call over to Jamie to discuss our financial results for the quarter.

Jamie Buskill

Thanks, Stan, and good morning, everyone. Operating revenues for the second quarter of 2011 were $262 million, an increase of $5 million or 2% from $257 million for the comparable period in 2010. As Stan mentioned, the increase was driven by transportation revenues from our pipeline expansion projects, partially offset by $7 million lower parking and lending and storage revenues due to unfavorable market condition.

Turning now to operating expenses. We reported operating expenses of $207 million for the quarter, an increase of $42 million or 26% from $165 million for the comparable period in 2010. The increase was driven by a $29 million noncash write-down of materials and supplies. Given the type of projects that we are likely to pursue under our new growth strategy and the cost to carry and maintain large diameter pipeline supplies, we have decided to dispose of a portion of our materials and supplies, resulting in an asset impairment. And maintenance expense has increased due to pipeline integrity and reliability spending.

EBITDA for the quarter was $111 million, a decrease of $35 million or 24% from $146 million for the comparable period in 2010. Net income for the quarter was $15 million, a decrease of $39 million or 72% from $54 million for the comparable period last year. Net income and EBITDA for the quarter were impacted by the revenue and expense drivers previously discussed. We generated $88 million of distributable cash for the quarter.

As previously mentioned by Stan, during the second quarter, we also completed 2 financing transactions. In May, we issued 6 million common units for net proceeds of approximately $174 million, including the general partner's contribution of $4 million. In June, we raised $116 million from an additional issuance at Texas Gas of 4.5% senior notes due in 2021. We used the proceeds from these offerings to reduce borrowings on our revolver.

We ended the quarter with $269 million borrowed against our revolver and a cash balance of $54 million. In July, we redeemed the remaining $115 million of our Texas Gas 5.5% 2013 notes. We paid a premium to redeem the Texas Gas notes and will record a $6 million loss on the redemption of the notes in the third quarter. Currently, the balance borrowed against the revolver is $359 million, which -- with the increase from June 30, resulting primarily from the borrowings for the redemption.

Year-to-date, growth capital expenditures were $32 million, and we expect to spend approximately $46 million during the second half of the year. Excluding spending related to our Carthage compressor station, maintenance capital was $29 million year-to-date compared to only $10 million for the 6 months ended June 30, 2010. We expect to incur cost of approximately $250 million to operate and maintain our pipeline systems for the entire year, which consists -- with the estimate provided -- which is consistent with the estimate provided last quarter. This compares to $213 million for 2010.

The overall increase of $37 million for the year is primarily related to Integrity management, reliability and general pipeline maintenance and repair projects, which are necessary to comply with regulatory requirements. Of the $250 million we expect to incur in 2011, we now anticipate $82 million will be categorized as capital, which is $5 million lower than our previous estimate. Our reported EPU was $0.07 for the quarter, with the materials and supplies impairments impacting EPU by approximately $0.14 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] And your first question comes from the line of Darren Horowitz from Raymond James.

Darren Horowitz - Raymond James & Associates, Inc.

Jamie, I'm just trying to get a sense of basis differentials and their impact on future capacity renewals and short-term firm services. Can you just give us a sense for how much capacity you have coming up for renewal in the back half of the year?

Jamie Buskill

Well, when we look at that, as we said before, every year, we deal with approximately $100 million of renewals. And really that's been the case since we became a public company. Some years, it's a little more; some years, a little less. As you may recall, last year, with the backdrop of the ramps from our expansions, we brought to the attention that we were seeing about a 80%, 85% renewal rate, as far as the rate we were getting. Our weighted average contract life is still 6 years. We're seeing -- we're dealing with approximately $100 million again this year of renewals. And as we've stated before, we're not going to give specifics on contract renewal efforts until year end and only if it's warranted. But generally speaking, in certain markets, we have seen a slight improvement in rates over last year, while other markets have weakened. Overall, I'd say the environment hasn't really changed significantly from last year. However, when you look at the storage spreads, they are unfavorable this year, as you can see by the financial results for storage, and in particular, park and lending.

Darren Horowitz - Raymond James & Associates, Inc.

Sure. Can you roughly quantify how much of that $100 million you're going to be dealing with for the remaining 6 months of this year?

Jamie Buskill

We're just going to wait and talk to that year end, because, again, it's -- you really have to look at it in a whole -- as a whole.

Darren Horowitz - Raymond James & Associates, Inc.

Okay. To Stan's point, as you guys are looking at levering your existing asset footprint for some of these prolific low-cost plays, has there been any update or any progress made on your opportunity to kind of leverage the Gulf South line, maybe either to get a rather large-scale natural gas processing plant or even the opportunity to take y-grade to Mont Belvieu?

Stanley Horton

Well, as Jamie said, we don't -- and as I said previously, we don't want to talk about any specific projects until we get a chance to actually announce those. I would tell you this, and it's public, that we do have pending, before the Federal Energy Regulatory Commission, an application to take part of our south -- in 30-inch line in Texas and convert that from interstate natural gas service to a ridge line. And so that's going on. We hope to have that done by the end of the year. And then from that, we'll build on that.

Darren Horowitz - Raymond James & Associates, Inc.

Okay. Last question for me, Stan, as you talked about looking at opportunities outside traditional natural gas sector, can you just give us more color there? Would that include maybe the opportunity for crude oil storage and transport? Or just any additional insight would be helpful.

Stanley Horton

I can't really comment on things that we might do in the future. As I said, we're looking and would be receptive to looking at assets that are accretive, strategic and don't change our risk profile from what we're currently looking at. And as opportunities come across, then we'll take a look at those. And that's about all I can say on that.

Operator

Your next question comes from the line of Yves Siegel with Crédit Suisse.

Yves Siegel - Crédit Suisse AG

Just to kick the can down the road here. Stan, how do you view the skill set within Boardwalk to pursue opportunities away from the fairway that you've been on?

Stanley Horton

Well, I don't know how much you know about my background, but I've had the privilege over the last 35 to 40 years to be in an energy business to run a lot of different type energy companies, not only natural gas pipelines, but I've had the opportunity to be CEO of a natural gas processing company. Certainly been in the gathering business, along with processing. I was CEO of an MLP that was involved in the crude oil transportation and storage business, right before I joined Boardwalk, I was on the Board of Directors of another company that was involved in crude oil, transportation and storage. So I've been able to be in a lot of different businesses. And a lot of those businesses are not all that different. They're fee-based businesses involved in the transportation storage or logistical energy businesses. And certainly, as we look across at expanding our footprint, we realize that we may need to augment some of the resources that we have here, but that's not difficult to do. So I feel pretty good about it. I think we've got a very, very good team here, and we can augment whatever we need here with resources. So I'm not all that concerned about it.

Yves Siegel - Crédit Suisse AG

And then just 2 follow-ups. One is how much of a contrarian are you, as it relates to the storage business? And would that be an area that you'd consider expanding?

Stanley Horton

Well, I'm not sure that I'm a contrarian. As I said, I'm pretty bullish about the long-term view of the assets that we've got, both our pipeline and storage. I believe, as you start getting electric generation load increasing, which I think it will, just the nature of electric generators is that they need to pull on your pipeline systems when the loads are there. And that's going to result, I think, in storage being increasingly valuable in the years ahead. So as electric generation in other end users, they just don't have the even low profiles. They don't take gas and don't need to take gas evenly over a 24-hour period. They need -- they have specific 1- and 4- and 12- and 16-hour peak requirements. So anything that you can do to augment your system to be able to meet those requirements put us in a much better position. So I'm pretty bullish about storage, long term. Right now it's a tough market, just because of the glut that I mentioned too. But long-term, I'm pretty bullish on it.

Yves Siegel - Crédit Suisse AG

Great. And then, Jamie, in terms of looking at the O&M expense of $250 million this year versus $213 million a year ago, as you look out to 2012 and beyond, any thoughts on what a reasonable run rate might be?

Jamie Buskill

Well, really, it's -- at this point, we're complying with basically an Integrity act that has to be completed by the end of next year. There's a lot of legislation right now in D.C., looking at pipelines and the energy business, in general, and I'd really -- I'd hate to speculate right now what, if anything, may come out of that legislative effort.

Yves Siegel - Crédit Suisse AG

Is it fair to say then if you look out to 2012 to comply with the current rate sets out there, would you have to have a similar amount of spend in 2012 to complete the program?

Jamie Buskill

Just looking at what we're complying with right now, probably not, just because your initial assessment of going through a compliance exercise is generally more expensive. Once you do that, the routine reviews, generally, you see a lower-cost profile, but that's only looking at the current set of regulations we're dealing with.

Operator

Your next question comes from the line of Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC

Jamie, I guess, with the last equity offering, are you comfortable with where the debt metrics are?

Jamie Buskill

Well, like we said, our goal is to, on a kind of a long run-rate basis, be in the low 4x. That's still our target. We -- right now, I'm happy with the capitalization, where we stand today. I think the deal we did positions us better, as Stan mentioned, to take advantage of any opportunities that come down the road for us related to expansion opportunities.

Sharon Lui - Wells Fargo Securities, LLC

Okay. And I guess, the trailing 12-month coverage ratio was a bit late and below onetime. Can you just comment maybe on, I guess, your outlook for full year 2011 and the decision to continue increasing distributions?

Jamie Buskill

Well, first of all, you know we don't provide projections or any kind of forecast. One thing I will caution you at, in looking at the numbers through the second quarter, the maintenance capital we reported is $41 million. And in my presentation, I talked about $29 million. $12 million of that -- that difference of $12 million relates to our Carthage fire. And we believe those costs will be reimbursed by insurance. So you may want to factor that into your calculation.

Sharon Lui - Wells Fargo Securities, LLC

Okay. And I guess, for full year 2011, for maintenance CapEx, including that Carthage number, are you still targeting around $90 million?

Jamie Buskill

No. The overall maintenance of the system, if you look at our O&M expense line and add in maintenance capital, in total, we're still estimating that to be around $250 million. What we did do is we lowered how much of that estimate will be due to maintenance capital to approximately $81 million. But overall, we're still looking at a $250 million total cost.

Operator

Your next question comes from the line of Elvira Scotto with RBC Capital Markets.

Elvira Scotto - RBC Capital Markets, LLC

It sounds like the partnership is branching out into new growth opportunities. As you look out at these new opportunities, can you talk about how much sort of direct commodity price exposure Boardwalk is willing to consider, especially as you pursue opportunities like gathering and processing?

Stanley Horton

Yes. As I mentioned, we're not looking to change the risk profile of Boardwalk all that much. There's a lot of ways to do gathering and processing where you don't have to change the risk profile all that much. We don't have any specific number or anything on -- that we don't want to go over x on commodity exposure, this, that and the other. As I said, we're not looking to change the risk profile of that much. So that's about the only guidance I can give you. We've -- as I said, we're not announcing any deals or anything like that today. And every deal that we look at, we tend to look at what the risk exposure of that deal is and how it fits into the partnership. And that's what we'll continue to do.

Elvira Scotto - RBC Capital Markets, LLC

Okay. And then on the power generation opportunities, can you talk a little bit more about how you see these opportunities developing over time? Are these sort of several projects that are small in size? Or could you see large projects tied to power generation?

Stanley Horton

Well, it's hard to say. I would say, right now, that what we're probably looking at is a series of smaller projects, somewhat like the one that we're seeking an open season on right now. You're really looking at power producers making individual decisions about what power plants that they may want to build, which power plants that they may want to expand. So they tend to be individual decisions that would require us to look at pipeline assets in a particular area. So it could be a combination of the 2, but my guess is it's more of the smaller expansions to take care of specific loads. If we saw a tremendous amount occurring all at once, it could be a vigorous thing [ph]. So it's just hard to tell. But right now, I would say that there are smaller expansions to serve specific load requirements of specific plants that are either new plants or expansions of existing plants.

Operator

Your last question in queue is from the line of John Edwards with Morgan Keegan.

John Edwards - Morgan Keegan & Company, Inc.

Jamie, do you have the throughput numbers for the quarter?

Jamie Buskill

Sure. For the quarter, we moved 642 TBtus, which sets us at 1,325 for the year-to-date.

John Edwards - Morgan Keegan & Company, Inc.

So year-to-date is what?

Jamie Buskill

1,325. And that compares to -- last year at this time, we were at 1,191.

John Edwards - Morgan Keegan & Company, Inc.

Okay. And then could you -- I think you said it, but I may have missed it. Where do you stand now as far as liquidity goes?

Jamie Buskill

Our liquidity, we have -- from a cash standpoint, we have approximately $54 million in cash. And if you look at July, because we've pulled down on revolver to do the redemption, we have about a little less than $600 million available on the revolver.

John Edwards - Morgan Keegan & Company, Inc.

Okay. So about $650 million in total in liquidity.

Jamie Buskill

Yes, if you count the revolver.

John Edwards - Morgan Keegan & Company, Inc.

Okay. And then just to clarify, I think, it was Sharon's question. So on maintenance CapEx, you're looking for about $81 million for the year, and then total O&M was $250 million. Did I hear that right?

Jamie Buskill

Yes. $81 million, $82 million on the maintenance capital spend, and the remainder of the $250 million would be O&M expense. And again, John, we'll update as we go on. You can have some color coding changes to what's capital and expense as you go through the year, but that's where we stand right now.

John Edwards - Morgan Keegan & Company, Inc.

All right. And so -- and last quarter, you were talking, I think, $94 million in growth CapEx. Did you say you were trimming that back a little bit?

Jamie Buskill

Mainly because the projects we're working on are coming in lower than our estimates, so that's the reason for the reduction.

John Edwards - Morgan Keegan & Company, Inc.

So you're at $80 million -- what are you at now?

Jamie Buskill

The total, the -- we've invested $32 million for the first 6 months, and we anticipate another $46 million for the second half. So that's it. It's about $78 million.

Operator

Ladies and gentlemen, that concludes the Q&A session. And I would like to turn the call back over to Allison McLean for closing statements.

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 the presentation. You may now disconnect. Have a great day.

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