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Boardwalk Pipeline Partners, LP (BWP)

October 17, 2011 11:00 am ET

Executives

Jonathan E. Nathanson - Senior Vice President of Corporate Development

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

Allison McLean - Director of Investor Relations

Stanley C. Horton - Chief Executive Officer, President and Director

Analysts

James Jampel - HITE

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Unknown Analyst -

Yves Siegel - Crédit Suisse AG, Research Division

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Boardwalk Growth Project Development Conference Call. My name is Shanae, 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, Mrs. Allison McLean, Director of Investor Relations. Please proceed, ma'am.

Allison McLean

Thank you. Good morning, everyone. I'm Allison McLean. I'm pleased to be joined today by Mr. Stanley Horton, our President and CEO; Mr. Jamie Buskill, our CFO; and Mr. Jonathan Nathanson, our Senior Vice President of Corporate Development.

The purpose of the call today is to discuss recent growth project developments. During today's call, we will be referencing a slide presentation, which can be downloaded from our website, www.bwpmlp.com.

Recent press releases associated with the Petal and Hattiesburg acquisition, and the Marcellus gathering pipeline project can be found on our website as well.

Following our prepared remarks today, we will turn the call over for your question.

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 expectation. Actual results achieved by the company, may differ materially from those projected in any forward-looking statement. The company expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

Now, I'd like to turn the call over to Mr. Stan Horton.

Stanley C. Horton

Thank you, Allison. Good morning, and thank you for joining us. Today, I'd like to update you on some recent developments on our strategy. And then Jonathan, Jamie and I will be available to answer your questions about these developments.

Please note that the purpose of today's call is strictly to discuss the Petal and Hattiesburg acquisition, and 2 of our field services projects. Earnings call is scheduled for October 31, where we will discuss our third quarter results and any other questions you may have after our presentation.

Our first slide contains our standard forward-looking statement disclosure.

Looking at Slide 2 of the presentation, here are Boardwalk's growth strategies that were discussed on our second quarter earnings call and at various investor conferences. The first bullet states that pipelines and storage will remain our core business. And the second bullet states that we intend to offer a greater array of services to our producer customers through Boardwalk Field Services.

As we go through this presentation today, you will see that the Petal and Hattiesburg Storage acquisition supports the first bullet, while the Marcellus and Eagle Ford projects are firmly aligned with the second bullet.

On Slide 3, we begin [ph] to discuss the acquisition of the Petal and Hattiesburg Storage Companies. This slide summarizes the newly formed joint venture between Boardwalk [ph], an affiliate of its general partner, Boardwalk Pipeline Holding Company, which is a wholly-owned subsidiary of Loews.

As we announced on our press release this morning, the joint venture has entered into a definitive agreement to acquire the Petal and Hattiesburg Gas Storage Companies from Enterprise for $550 million.

The joint venture will [indiscernible] acquisition with proceeds from a $200 million 5-year bank loan and equity contributions from Boardwalk BPHC. BPHC will own 80% and contribute $280 million, Boardwalk [indiscernible] own 20% and contribute $70 million. Boardwalk will fund the $70 million with available liquidity.

The Boardwalk subsidiary will operate these assets on behalf of the joint venture. We expect to close on this transaction in the fourth quarter, and we anticipate our 20% equity investment will be immediately accretive.

A Boardwalk subsidiary. You may ask why did we structure this acquisition as a joint venture. I can tell you that we have -- would have preferred to do the whole thing within Boardwalk Pipeline. However, we are not happy with our current unit price right now, and so the JV structure made the most sense at this time.

However, if it makes economic sense for both parties in the future, the assets may be dropped down to Boardwalk at a later date.

Slide 4 shows the map of the storage assets in Mississippi acquired by the joint venture, and Boardwalk's footprint. Petal and Hattiesburg have 7 operating, high deliverability, salt dome storage caverns with approximately 19 Bcf of working gas capacity, approximately 100 miles of pipeline and 69,000 horsepower of compression.

There is also undeveloped land, which may provide up to 6 additional caverns, one of which is expected to be in service in 2013. Petal and Hattiesburg already interconnect with Boardwalk subsidiary, Gulf South Pipeline, in addition to other major natural gas pipelines and including SESH, Tennessee, Transco, Sonat, Destin and Southcross.

The interconnectivity with major long-haul pipelines is just one of the key strengths of these assets. A whole host of other benefits are shown in Slide 5.

Customers of these facilities typically contract for fixed-fee, long-term capacity and pay monthly demand fees. All of the current operating capacity is subscribed on a firm basis with a weighted average remaining contract life of approximately 7 years.

Therefore, although intrinsic seasonal gas spreads are currently depressed at this time, they are not very relevant to these storage assets.

The existing customer base for these assets is comprised of 80% electric and gas utilities. Utilities value the high turn service of salt dome storage and are driven by reliability and flexibility of service.

The weighted average credit rating of the current customers is an A. We anticipate identifying and creating operational efficiencies as we operate these assets in conjunction with our assets.

For example, we expect that we will be able to utilize future capacity on these storage systems in a way that will help remove bottlenecks on our existing systems.

In addition, our subsidiaries, Texas Gas and Gulf South are already committed to serving the needs of our growing power-generation customer base.

Boardwalk has developed several tear-up services that help meet power generators' unique needs, and I am confident that storage will play an integral role in supporting these customers' needs in the future.

As I mentioned earlier, both Petal and Hattiesburg already interconnect with our subsidiary, Gulf South Pipeline. Plus, we are planning to connect them to the Gulf South, 42-inch, Southeast expansion in order to more fully integrate Boardwalk's footprint in these areas.

The facilities include approximately 80 acres of owned, undeveloped land, which can provide for the development of up to 6 additional caverns that we believe can be done at a relatively competitive price. Three of the 6 expansion caverns have already been permitted by the Federal Energy Regulatory Commission.

One is expected to go into service in 2013. For that particular cavern, Boardwalk is able to supply the required base gas out of inventory with no additional cash outlay.

Due to its high turn service, salt dome storage is ideal for serving gas-fired power generation load growth, which is not as uniform as other type of pipeline deliveries.

The principal advantage of salt caverns is their higher average deliverability rates compared to reservoir facilities. While our reservoir storage facility typically turns once or twice a year, a salt cavern can turn much more frequently, which is well suited for power plant demand. The location of these assets in the Southeast is very desirable for 2 reasons: one, there are very few storage facilities in the Southeast; and two, natural gas demand due to gas-fired power generation is expected to grow dramatically in the next decade.

Slide 6 does a good job of illustrating how few gas storage facilities are located in the Southeast due to its geology. It also shows that depleted reservoirs make up the vast majority of storage capacity in the U.S.

Salt dome caverns only comprise 7% of total U.S. working-gas storage capacity, and Southeast salt dome caverns only comprise 2% of the total U.S. working-gas capacity.

Slide 7 helps articulate the dramatic natural gas demand growth anticipated from the Southeast region. ICF in their study, forecasted approximately 5 billion cubic feet per day of incremental natural gas demand growth in the Southeast region over the next decade with the vast majority of the growth coming from power generation sector as older, less-efficient coal plants are expected to be retired and be replaced by gas-fired power generation.

Now moving on to our field services business in Slide 8. Our Marcellus gathering project was announced on October 10. The gathering system is expected to cost approximately $90 million and will be comprised of approximately 26 miles of 12-inch, high pressure gas pipeline and will interconnect with Tennessee Gas Pipeline Company in Susquehanna County, Pennsylvania.

This project is anchored by a fee-based, 15-year agreement with Southwestern. The system will be built out over several years, and is expected to have a delivery capacity of 275,000 dekatherms a day when fully constructed.

We anticipate funding this project through our current liquidity. I am pleased to announce that this is our first major field services project. And we were able to leverage a relationship with a very valuable existing customer, Southwestern, provide service to them closer to the well head and do it in a way that did not increase the overall risk profile for Boardwalk, all of which is in line with the growth strategy we laid out a few months ago.

We are very excited about the opportunity to diversify in this geographic area. We anticipate that the Marcellus play will become a very significant supply basin for the United States, and we anticipate identifying and executing on additional opportunities in the Marcellus area in the future.

Also, I wanted to give an update on our Eagle Ford pipeline project. We have received FERC approval on August 26 to transfer some under-utilized assets on Gulf South to Boardwalk Field Services and turn those assets into a rich-gas system in order to transport liquids-rich Eagle Ford volumes.

We have not announced any long-term agreements on this system yet; however, we anticipate the transfer over to Field Services will be finalized by the fourth quarter of this year.

This concludes my overview. And we're now going to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mr. Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Jamie, either on a trailing 12-month or forward basis, what EBITDA and cash flow are you expecting from the Petal and Hattiesburg assets? And on a fully funded basis, secondly, can you just quantify the accretion that you alluded to?

Jamie L. Buskill

Yes, Darren, we're not going to talk specific numbers. We did buy this with a -- in the low-teen multiple when looking at EBITDA. However, that doesn't include the synergies and growth that we expect from these projects.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Okay. Is it possible at this point to kind of quantify at least roughly what you're thinking the synergies are going to be over the next couple of years, as you guys move a lot of the [indiscernible]?

Jamie L. Buskill

Not at this time. And remember, Darren, we're starting out with a minority interest. It will be just 20% owned by Boardwalk. So this is, at this point, relatively small.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Okay. And then to Stan's point, when he was talking about the 6 additional caverns on those 40 acres, what's the associated cost of the cavern that's coming out in 2013 and more importantly, of your ability to develop the 3 that have already been permitted by the FERC?

Jamie L. Buskill

Darren, we're -- again, we're not going to get into specifics on the numbers. That's something that as we work out our plan, we'll provide that with our capital commitments. But again, remember, this is, at this point, not a consolidated sub [ph] of Boardwalk, it's just an investment, where we'll have equity and earnings in it. So to the extent it becomes more dropped down into Boardwalk, we'll provide that detail then.

Operator

Your next question comes from the line of Gabe Moreen with BAML.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Stan, just a question on the 2013 expansion. Is the capacity spoken for and contracted for in that one cavern coming online at 2013?

Stanley C. Horton

Yes, it is.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Okay. And have you talked about also the expiration? Just on the contracts here, I know you said an average contract life of 7 years, but you may give me a sense -- us a sense for just I guess, how that’s spread out? And then do you face any near-term, I guess, renegotiations on your contract or anything, capacity renegotiations?

Stanley C. Horton

There really are not any near-term contract negotiations that have to do on that for any real appreciable volumes. As we said, the average tenure is about 7 years. And we are fully contracted out, or basically fully contracted out, you're never actually 100%, but pretty fully contracted out through 2013 with some renewal starting in the 2014 area.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. And then, Jamie, I know you talked about -- maybe giving some CapEx figures later on, but if I could ask maybe on the Eagle Ford rich-gas line project, is that something that you had laid out CapEx for previously?

Jamie L. Buskill

No, not on the Eagle Ford. There's not anything appreciable there. We -- when we laid out for total Boardwalk, we said pre announcement of these projects that we were looking at total expansion projects of under $100 million, which included some work in the Eagle Ford area.

Operator

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

Yves Siegel - Crédit Suisse AG, Research Division

Stan or Jamie or Jonathan, can you talk about the genesis of the transaction with Enterprise? Are these assets that you targeted or were Enterprise shopping them around?

Stanley C. Horton

The best way to say that is that we engaged in a conversation with them that they wanted to sell these assets and we wanted to buy these assets. So I mean, it was a conversation that took place between the 2 companies and it's best to just leave it at that.

Yves Siegel - Crédit Suisse AG, Research Division

I guess where I'm going with that question is -- are there specific assets that you folks are also targeting that just makes a lot of sense that to be part of the system because of the synergies?

Stanley C. Horton

I think we laid it out in our investor presentation that pipelines and storage were some pretty key assets. We also laid it out in our last analyst conversation that we were looking at facilities at both ends of the pipe. We would like to attach additional gas supply to the system, but we recognize the system is long gas supply, and we want to get closer to the end-user market. These facilities allow us to do that. And so I think it's pretty consistent with what we have laid out in the analyst presentation that we’re looking for expansion opportunities, growth opportunities at both ends of our pipe. And this happened to be a great opportunity for us to acquire some assets on the east end of our system, closer to the marketplace and with some end-use customers now attached to the system. And I think whenever you can get closer to the customer, the better off you are.

Yves Siegel - Crédit Suisse AG, Research Division

And then my last question, the arrangement that you have with Loews, any details as to the timing or any contractual commitments on how the remaining 80% might eventually be transferred to Boardwalk?

Stanley C. Horton

I can tell you there are not any contractual commitments between BPHC and Boardwalk Pipeline Company on any other future dropdowns. Those dropdowns will occur when it makes economic sense to both parties. But again, there are no contractual obligations on the part of either party here.

Operator

Your next question comes from the line of James Jampel with Hite.

James Jampel - HITE

Yes, can you talk a little bit about how your use of the Petal and Hattiesburg assets will be different from the way Enterprise is using them now?

Stanley C. Horton

I think just the fact that these assets are attached to our pipeline system, to the Gulf South Pipeline system, allows us to implement and enhance some of the services that Gulf South now provides. Gulf South Pipeline Company has a no-notice service, an enhanced service for electric generation customers. And having these assets in the Boardwalk Pipeline family just allows us some synergy values in how we put together service for customers through the fact that we have both the pipe and the storage facility in one family. So that's probably the best explanation of why it may be different in the way that Enterprise did it. We're looking at this as kind of an enhanced service for both the pipelines -- combining both the pipelines and the storage.

James Jampel - HITE

Were you contracted with Enterprise to be utilizing these assets before this transaction?

Stanley C. Horton

No, we weren't. We had some storage of our own. But this was an opportunity for us to utilize these assets and combine them with the Gulf South system. We interconnected with them, but we did not have any direct storage service between Boardwalk and these assets before now.

Operator

Your next question comes from the line of Mr. Charles Ash [ph] with Bark Investment [ph].

Unknown Analyst -

On the Marcellus transaction, was that part of a negotiated transaction or a bid process? And could you also comment about potential other opportunities with Southwestern?

Stanley C. Horton

Yes, I'm going to let Jonathan take that one.

Jonathan E. Nathanson

This is a deal that came out of a very close customer relationship that Boardwalk has had with Southwestern on the transmission side. We were able to pursue the opportunity to do a gathering deal with them and very pleased to get it done. And certainly interested in doing more.

Operator

I would now like to turn the call over to Mrs. 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. 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 good day.

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