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Boardwalk Pipeline Partners, LP (NYSE:BWP)

Q4 2011 Earnings Call

February 06, 2012 9:00 am ET

Executives

Allison McLean -

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

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

Patrick Giroir -

Analysts

Elvira Scotto - RBC Capital Markets, LLC, Research Division

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

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Sharon Lui - Wells Fargo Securities, LLC, Research Division

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Yves Siegel - Crédit Suisse AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Boardwalk Pipeline Partners, LP Earnings Conference Call. My name is Shantaley, and I will be your facilitator for today's call. [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 call, Ms. Allison McLean, Director of Investor Relations. Please proceed.

Allison McLean

Thank you, Shantaley. Good morning, everyone, and welcome to the fourth 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; Mr. Jamie Buskill, our CFO; and Pat Giroir, President of Boardwalk Field Services. If you would 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'd 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 statement.

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 C. Horton

Thank you, Allison. Good morning, everyone. I hope you've had a chance to review the press releases we issued this morning. In addition to reporting earnings this morning, we increased our quarterly distribution to $0.53 per unit or $2.12 annualized, and we announced our Boardwalk Field Services, South Texas, Eagle Ford expansion project.

The Marcellus and Eagle Ford are 2 of the most profitable shale plays in North America. Rigs are still growing in both of these liquid-rich areas, and significant midstream infrastructure is still needed. That is why Boardwalk Field Services has focused its efforts on producer needs in these areas. I'm happy to report that effort is paying off. In addition to the Marcellus gathering project we announced last fall, we now have a significant Eagle Ford project as well.

Today, we announced that we will add 55 miles of gathering pipeline and a cryogenic processing to our South Texas gathering system, which Boardwalk Field Services begin operating on January 1. The existing South Texas gathering system gave us a good starting position in the Eagle Ford, and much of the additional gathering pipeline can be built on existing right of way.

All told when complete, the gathering system will be comprised of approximately 400 miles of pipeline with the capability of gathering in excess of 300 million cubic per day of liquids rich gas in Karnes and Dewitt counties, 2 counties in the heart of the play.

The plant, to be called Flag City Processing Plant, will be located near Edna, Texas and will have a 150 million cubic feet per day capacity. Boardwalk will also provide redelivery of process residue gas to a number of interstate and intrastate pipelines, including Gulf South. The project is estimated to cost approximately $180 million and is expected to go into service in early 2013.

We have executed a fixed price contract with Exterran to design, manufacture and construct the processing plant. We have executed long-term, fee-based gathering and processing agreements with Statoil and Talisman for approximately 50% of the processing capacity, and we are in active negotiations with several producers for the remaining volume.

Now I'll provide you with an update of our Marcellus gathering project. This project is under construction with the majority of the expenditures expected to occur in the next 12 to 24 months. The total project is expected to cost approximately $90 million, and we believe the initial portion of this project will go into service in mid-2012. And we continue to explore other opportunities in the Marcellus area.

In the fourth quarter, our joint venture, BoardWalk HP Storage Company, formed with an affiliate of our general partner, completed the acquisition of Petal and Hattiesburg for $550 million. We currently own a 20% interest in the JV. These assets are very strategic to Boardwalk.

The operating caverns, which have long-term firm contracts with credit worthy customers, are already connected to go south and are ideal for serving gas-fired electric power generation demand, especially demand in the Southeast.

Over 50% of the customer base is power generators, and approximately 30% of the customer base is a combination of industrials and local distribution companies. These types of customers are driven more by reliability of service than seasonal price spreads. This customer mix contrasts nicely with Boardwalk's existing customer base, providing greater access to power generators and other end users.

Many believe, as do I, that the vast majority of demand growth in the next 10 years will come from a combination of electric power generation and industrial load growth. That growth could be as much as 10 billion to 15 billion cubic feet per day in the United States, with a large concentration expected to be in the Southeast.

To put that in perspective, that forecasted incremental demand growth represents approximately 15% to 20% of total current U.S. demand. As demand grows, these assets have room to grow as well. There is a potential of up to 6 additional caverns, one of which is under development and expected to be in service in the first half of 2013, and 2 others are already permitted. The joint venture will invest approximately $35 million in 2012 to complete the development of this storage cavern, which is expected to add 5 billion cubic feet a day of working gas capacity.

Also, as we mentioned previously, this summer, we conducted an open season to determine customer interest and additional delivery capacity on our Gulf South pipeline system within the Baton Rouge/River Corridor area. We plan to expand delivery capacity in that area by approximately 100,000 dekatherm to date. The expansion, which is driven by power generation demand growth, is anchored by a 7-year firm contract, and is subject to our customer receiving the necessary regulatory approvals.

We expect the expansion to cost approximately $20 million and to be in service by mid-2014. So when you consider the HP storage acquisition and the potential for us to acquire the remaining 80% of the JV, and add the salt dome cavern expansion at that site, our Marcellus gathering pipeline project, the River Corridor expansion and now our South Texas Eagle Ford expansion, we have approximately $875 million of new growth and acquisition opportunities.

These projects are consistent with the growth strategy we laid out this summer. To summarize that strategy, we are looking for projects that strengthen our core assets while also seeking to diversify the services we offer and expand our geographic footprint, all without significantly changing the overall risk profile of the company.

I am pleased with the progress we have made to date, and I am very optimistic that our ability to identify additional growth projects going forward. Also, I wanted to briefly mention that on February 1, Boardwalk hired Richard Keyser to be our Senior Vice President of Operations for our pipeline and storage assets. I have worked with Richard in the past. He is a very accomplished leader with a commitment to safety, integrity and compliance.

Adding Pat Giroir and Brian Reese to Boardwalk Field Services and now, Richard Keyser to pipeline and storage operations, all very seasoned and talented individuals, demonstrates our commitment to not only our growth strategies, but also to solid execution of those strategies.

Before turning it over to Jamie, I want to provide a brief market update. The drop in natural gas prices, caused in part -- due to the unusually warm winter weather, has had both positive and negative impacts on Boardwalk.

On the positive side, we've seen more demand for storage services, both park and land and interruptible storage. The prices for these services are currently above the low levels we experienced earlier in 2011.

On the negative side, volumes are down due to lower winter demand, impacting volumetric-driven revenue. For the most part, the positives and negatives have offset each other and are not having a significant impact on us.

Now that concludes my comments, and I will turn the call over to Jamie who will discuss our fourth quarter financial results. Jamie?

Jamie L. Buskill

Thanks, Stan, and good morning, everyone. Operating revenues for the fourth quarter of 2011 were $297 million, a decrease of $5 million or 2% from $302 million for the comparable period in 2010. The decrease was driven by lower operating revenues due to lower throughput impacting volumetric-driven services, mainly from mild winter weather and lower natural gas prices negatively impacting revenues from retained fuel.

Including the effects of fuel and transportation expenses on a net basis, revenues decreased by only $2 million. For the quarter, transportation volumes were down approximately 2%, primarily driven by the unseasonably warm winter. However, transportation volumes were up approximately 7% for the year.

Turning now to operating expenses. We reported operating expenses of $182 million for the quarter, an increase of $7 million or 4% from $175 million for the comparable period in 2010. The increase was driven by higher operating expenses at $3 million from losses and impairments related to the disposal of materials and other assets, and the 2010 period was impacted by a $5 million gain on sale of natural gas associated with the reduction in base gas.

Excluding these 2 items, operating costs were essentially flat when compared to the same period for 2010. In addition to the operating expense cost drivers, we also recognized a $1 million loss associated with the partnerships joint venture, Boardwalk HP Storage Company due to cost associated with the acquisition of Petal and Hattiesburg.

EBITDA for the quarter was $171 million, a decrease of $13 million or 7% from $184 million for the comparable period in 2010. Net income for the quarter was $75 million, a decrease of $14 million or 16% from $89 million for the comparable period last year.

The effects of the impairment charges and losses, the acquisition costs and the 2010 gain on the sale of storage gas reduced net income and EBITDA for the fourth quarter of 2011 compared to the 2010 period by $10 million. We generated $127 million of distributable cash for the quarter, which included $10 million of cash proceeds received from insurance recoveries and settlements.

For 2011, we invested $47 million in growth capital projects, $70 million for the acquisition of our 20% stake in HP Storage and spent $95 million on maintenance capital projects. From a liquidity standpoint, we ended 2011 with $12 million in cash and $459 million borrowed against our $950 million credit facility.

Moving to 2012. We started the year off with an issuance of $8 million of common units, netting the company approximately $218 million in proceeds. Excluding any further drop down of HP Storage into Boardwalk, we anticipate investing approximately $255 million in 2012 for the projects discussed earlier by Stan, as well as some other smaller projects.

We also anticipate investing approximately $91 million in our maintenance capital programs in 2012. Our reported EPU is $0.36 for the quarter. The asset impairments, loss on disposal of assets and acquisition costs mentioned previously impacted EPU by approximately $0.02 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 Elvira Scotto of RBC Capital Markets.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Any commentary on what types of returns we can expect on the Eagle Ford project?

Jamie L. Buskill

Elvira, as we said before, we don't provide guidance or expectations regarding future earnings. So no, we can't really talk to that.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay, no, fair enough. So as you think about growing Field Services, will you also look to M&A to grow?

Stanley C. Horton

Yes. As I've said in the past, we are developed -- our commercial people are sitting here looking for projects, and we have a corporate development group under Jonathan Nathanson that look for strategic acquisitions for us. So if we happen to find an acquisition in that area that's a strategic fit for us, then, naturally, we would look at that. So that's one of the areas that we focus on along with the greenfield projects.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay. And so it sounds like with Field Services, you're kind of focusing on Eagle Ford Shale and Marcellus. Is that correct?

Stanley C. Horton

Well, right now I think that's correct. But also, the Utica area is fairly close to the northern end of the Texas Gas pipeline systems. So that's an area that's has a lot of interest for us as well. So I wouldn't say this. There's no area that we're excluding. But right now, the Eagle Ford, the Marcellus and the Utica are 3 very, very good basins. All are strategic to us. Two of them we have projects in. The third one is a close proximity to our pipeline system. So those 3 make the most sense. But I don't think that there's an area that Pat would exclude if a good project came along.

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Okay, great. And then just maybe over the next couple of years or so, how big would you like to see Field Services grow, and either as a percent of your overall business or in terms of what type of assets, how big an asset base this business could have?

Stanley C. Horton

Well, the company doesn't have anything specific that we're out there counting. I have said it personally, I would be disappointed if at the end of a 4-year period, that Boardwalk Field Services didn't have at least $1 billion worth of assets. And that's what I told Pat when I hired him, that I'd like to get at least $1 billion worth of assets within the first 4 years. So personally, that's a goal of mine. I think that's a very doable goal for us.

Operator

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

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

Stan, a couple questions for you. The first, as it relates to the new processing plant at Flag City. With expansions in and around the Eagle Ford and also on your gathering system, do you think that 150 MMcf a day is going to be enough? And then secondly, how do you think about the incremental capacity out of the tailgate of that plant? I mean how much more exposure do you want as it relates to be vertically integrated into being able to move those y-grade barrels down to a fractionation complex and just kind of how do you think about that specific asset developing over the next couple of years?

Stanley C. Horton

I've I got Pat Giroir with me. So I'm going to let Pat answer that question.

Patrick Giroir

Okay. There's a number of embedded questions there. I'll try to tackle them one by one. In terms of the plants, the pipeline capacity, the pipeline system that was dropped down from Gulf South has capacity for approximately 300 Mcf a day. So we have the ability to utilize that infrastructure to add additional processing capacity as we secure new customers. In terms of the existing plants, we are on active discussions with a number of parties with proposals out there, and our objective is to have that fully secured under similar contract terms by the time that goes into service, we're comfortable with that. In terms of vertically integrating, for the time being, what we're looking to do is make sure we have a number of different options with other third parties on y-grade access to Mont Belvieu in fractionation and working with our customers to secure long-term commitments on that with them or for them depending on the arrangement. But right now, I'm not looking to move into the NGL pipeline segment.

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

Okay. And then last question for me. Of the additional capacity that you're adding at the new gas storage joint venture, how much of that 5 Bcf is contracted?

Stanley C. Horton

At that facility, we don't really contract out capacity on a cavern-by-cavern basis. But I can tell you, on this specific cavern, we do have a contract that takes us into 2014 on that contract. So we are looking right now at negotiations with other customers that would take it past that date.

Operator

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

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

I wanted to see if you can just give us a quick update on how recontracting is going, both on Gulf South and on Texas Eastern. And Jamie, also, if you can give us the year-end debt number.

Stanley C. Horton

I'm going to have Jamie take that one. We don't know how they are on Texas Eastern, but he'll handle it for Texas Gas.

Jamie L. Buskill

Ross, there's really nothing no news there to speak off. It was actually some areas of the markets were stronger for us actually than what was rolling off, and some markets were weaker. I think what it really you can see that showing up is even though we really didn't have a named expansion project coming online in 2011, and as I mentioned earlier, we only spent a little over $40 million on expansion capital. If you look at transportation revenues, we were actually up about $50 million for the year. And that just I think shows that we really haven't seen any negative impact from the renewals overall on the system.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay, and Gulf South?

Jamie L. Buskill

That's really, generally -- I don't talk to individual pipelines. Again, I think that characterization really works for both systems, so...

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay, very good. And the debt number?

Jamie L. Buskill

The debt number, we are right at $3.2 billion at the end of the quarter and equity was $3.2 billion. So right at 50%-50%. That was prior, obviously, of the equity deal we did in January.

Operator

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

Sharon Lui - Wells Fargo Securities, LLC, Research Division

With regards to, I guess, the fourth quarter performance, Jamie, maybe just talk about in terms of the impact on EBITDA, how much was due to, I guess, lower volumes and how much of the decrease was due to the fuel retention revenue decrease?

Jamie L. Buskill

Well, really, when you look at the quarter and take out the unusual items, it was really a flat quarter. We were down a few million dollars overall. And that's really tied to those 2 items. Throughput was down -- if you look at the volumes, we were down about 2%. And then when you look at the net fuel, again, it's misleading because we gross it up on the revenue side, and then you got to take it out on the expense side. But when you look at that for the quarter, that was a little less than $3 million impact on the net fuel.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And then I guess to follow up on Darren's question. In terms of the NGL takeaway and frac capacity, has that been secured, I guess, for the Eagle Ford plants?

Stanley C. Horton

For our customers, so far, yes, it has.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

It has. Okay. And then you mentioned that you do have, I guess, the opportunity to increase storage capacity. Given, I guess, the slight improvement in storage fundamentals, are there any plans to increase capacity?

Stanley C. Horton

As I've said, we're developing one of the caverns now and that would be about 5 Bcf in service date in 2013, and we continue to have discussions with customers on meeting what their storage needs are. But we don't announce project before we have them in the bag. So I'll just leave it at that.

Operator

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

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Jamie, can you give out the total throughput for the quarter? You usually give that number on the call.

Jamie L. Buskill

Sure. For the quarter, it was 669 versus 680, 681 for fourth quarter 2010. For the year, that puts us at to 2,658 versus 2,494.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

2,494 was 2010?

Jamie L. Buskill

Yes.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Okay. And could you also -- the in-service date for the South Texas expansion, I missed that.

Patrick Giroir

John, this is Pat. We're scheduled for first quarter next year.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Okay. And just confirming, you are seeing about 150 million cubic feet a day for the gas processing?

Patrick Giroir

Yes, it is a 150 million cubic feet a day processing plant.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Okay. And that's all I have. My other questions were asked. One other thing, liquidity, where did you end up on liquidity?

Jamie L. Buskill

Well, if you look, the revolver, actually, John, was unchanged from the end of third quarter at the end of the year. And we were able to do that and fund our $70 million for a 20% interest in the storage position. And then from a cash standpoint, we ended about $12 million in cash at the end of the year.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Okay. So I'm sorry, what was -- what's available on the revolver?

Jamie L. Buskill

We had about $458 million borrowed on it roughly. So you got about a little less than $500 million at the end of the year available.

Operator

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

Yves Siegel - Crédit Suisse AG, Research Division

When you think about the processing plant, will that -- how quickly do you think that will ramp up?

Patrick Giroir

Right now, Yves, the plan is that the plant is going to be from the customers we have right now is going to be ramped up pretty much in the first 3 months. And again, it's a fee-based approach to it. And so just to reiterate what Stan said earlier, it's the form of contracts were such that they'll be very similar to the existing mix of contracts that we have as a company.

Yves Siegel - Crédit Suisse AG, Research Division

And what drove that, the contract type? Is that something that you were asking for, or do you find that the producers feel comfortable with entering into fee-based as opposed to percentage of process -- percentage of proceeds?

Patrick Giroir

I think, actually, it's a combination. When I first started looking to this area, prior in another lifetime with another company, it was very much the more standard contracts, but it's really a mix. It fits in really well with the approach that our company likes to take and more of the larger, major players in these resource plays who are really the folks that we're actively targeting are looking for that as well. So it's a great mix. And quite frankly, it's one of the reasons I came here. I thought it was a really good mix between where the market is going and what this company is looking for.

Yves Siegel - Crédit Suisse AG, Research Division

And Pat, thanks for that because that sort of opens up the next question. When you're competing for these projects, what do you think winds day for you?

Patrick Giroir

For us? I think it's the size of the company and the commitment that this company has. Obviously, this is a new area. But having a strong general partner that's willing to back, as you could see with what they did with Petal and the like and then kind of having that commitment to see things through, I think it gives us a lot of credibility. And quite frankly, one of the things we're going to actively do is leverage off the customer relationships that we have with some of the major players to date. I mean, the perfect example of that is the transaction up in the Marcellus with Southwestern Energy.

Yves Siegel - Crédit Suisse AG, Research Division

Got it, okay. And then I think this is my last question. Any thoughts on the pace of how quickly you may drop down the storage assets from the JV into the partnership? What were the considerations that you're thinking about when you look at that?

Patrick Giroir

The only thing I can say is that we are constantly evaluating it, and when we make a decision, we'll announce it. But it's under constant evaluation.

Operator

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

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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