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Executives

Allison McLean - Director of Investor Relations of of Boardwalk Gp Llc

Stanley C. Horton - Chief Executive Officer of Boardwalk GP LLC, President of Boardwalk GP LLC and Director of Boardwalk GP LLC

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

Analysts

Paul Jacob

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Scott Fogleman - Crédit Suisse AG, Research Division

Boardwalk Pipeline Partners, LP (BWP) Q1 2012 Earnings Call April 30, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2012 Boardwalk Pipeline Partners, LP Earnings Conference Call. My name is Brie, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to your host for today, Ms. Allison McLean, Director of Investor Relations. Please proceed.

Allison McLean

Thank you, Brie. Good morning, everyone, and welcome to the First Quarter 2012 Earnings Call for Boardwalk Pipeline Partners, LP. I'm Allison McLean. 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 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 a 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 release we issued this morning. In addition to reporting earnings, we increased our quarterly distribution to $53.25 per unit or $2.13 per unit annualized. This morning, I'm going to provide a brief industry and commercial update, and then Jamie will review the financial results and provide an update on our financing activities.

As everyone who follows this industry is well aware, natural gas prices are trading in the $2 range, a range we've not seen in more than a decade. These low gas prices are a result of the warmest winter in 80 years, combined with robust gas supply. These conditions have had both a positive and negative impacts to our business.

Our utilization-driven revenues were negatively impacted by lower gas prices and lower throughput due to the warm winter weather. However, like storage operators everywhere, the warm winter has resulted in storage inventory levels that are much higher than normal this time of year. These high storage inventory levels, combined with extremely low gas prices at the front of the NYMEX curve, are currently producing parking and lending spreads that are far more favorable than last year.

Couple of things to note about parking and lending: first, a large portion of these transactions are typically entered into after the withdrawal season is complete; and second, parking and lending revenues are recognized across the entire time frame of the transaction, which can often span a year in duration. Therefore, although parking and lending revenues did not significantly increase in the first quarter, we are encouraged by the spreads we're seeing in the market right now.

As a result of a successful equity offering, which occurred earlier in the year, we were able to purchase the remaining equity ownership interest in Boardwalk HP Storage from an affiliate of our general partner for approximately $285 million. Purchasing the remaining equity interest in the HP Storage was the goal for us this year, and I'm very pleased that we were able to complete this transaction so early in the year. As Jamie will discuss in greater detail, these assets are already contributing to the financial results of the company. We also are developing a new cavern that will increase working gas capacity in HP Storage by approximately 5 billion cubic feet. This new cavern is expected to go into service in the first half of 2013.

Longer term, we are seeing demand respond to ample natural gas supplies in both the industrial and power generation sectors. In addition to the 100,000 MMBtu a day, Baton Rouge/River Corridor expansion that we discussed last quarter, in the first quarter of this year, we obtained a long-term firm commitment to serve an additional proposed combined cycle gas-fired plant. This additional commitment is for 125,000 MMBtu a day and is subject to the customer obtaining the necessary regulatory approvals to proceed with the construction of the plant. Collectively, these commitments will require approximately $50 million in growth capital. We anticipate that service will commence around the 2014 time frame.

For the industrial sector, we are seeing a heightened interest for delivery capacity, especially in the Mississippi River corridor area of Louisiana as industrials, particularly in the petrochemical segment, are beginning to develop or increase production in order to leverage low U.S. gas prices.

We continue to look for new ways to meet the needs of our customers. During the first quarter, we received Federal Energy Regulatory Commission approval to implement several new services on the Texas Gas and Gulf South systems. One of these services enhances the overall value of our systems by establishing a liquid trading point in the Perryville area, while other services enhance our ability to meet the unique needs of our power generation customers.

And now an update on our Boardwalk Field Services activities. During last quarter's earnings call, we announced our Eagle Ford expansion project. At that time, we had executed long-term, fee-based gathering and processing agreements with Statoil and Talisman for approximately half of the processing plants' capacity. We continue to have constructive customer discussions for the remaining processing plant capacity. The construction of the gathering lines and the processing plant are continuing on schedule. We expect that a portion of our Marcellus gathering line will go into service in the very near future, and additional portions of the gathering line will go into service over the next 12 to 24 months.

Now that concludes my comments. And I will now turn the call over to Jamie.

Jamie L. Buskill

Thanks, Stan, and good morning, everyone. As Stan mentioned, we were able to acquire the remaining equity ownership interest in HP Storage from an affiliate of our general partner in February. The transaction was accounted for as a transaction between entities under common control. As a result, we recognized the transaction as if it occurred at the beginning of the reporting period, meaning that our 2012 results contain all 3 months of HP Storage operation.

Operating revenues for the first quarter were $313 million, an increase of $2 million or 1% from $311 million for the comparable period in 2011. Taking into account fuel and transportation expense on a net basis, revenues for the quarter were $294 million, an increase of $7 million or 2% from $287 million for the comparable period in 2011. The increase was driven by the revenues associated with the acquisition of HP Storage, which contributed $12 million in net revenues for the quarter, partially offset by lower revenues as a result of the unseasonably warm winter weather that Stan mentioned previously.

For the quarter, transportation volumes were approximately 674 TBtu, which is approximately 2% lower than the 685 TBtu transported in the first quarter of 2011.

Turning now to operating expenses. We reported operating expenses of $179 million for the quarter, a decrease of $2 million or 1% from $181 million for the comparable period in 2011. Excluding the fuel expenses previously discussed and a $5 million charge in the 2011 period related to a fire at our Carthage compressor station, operating expenses were $9 million higher in the first quarter of 2011, primarily due to the acquisition of HP Storage.

EBITDA for the quarter was $197 million, an increase of $10 million or 5% from $187 million for the comparable period in 2011. EBITDA for the quarter was primarily impacted by the revenue and expense drivers previously discussed.

Net income for the quarter was $93 million, an increase of $10 million or 12% from $83 million for the comparable period last year. In addition to the revenue and expense drivers discussed previously, the 2011 period was negatively impacted by a $7 million loss associated with the early retirement of debt. We generated $127 million of distributable cash for the quarter. This compares to $117 million generated in the first quarter of 2011, an increase of 9%.

Gross capital expenditures were $6 million in the first quarter. We also paid approximately $285 million for the remaining equity ownership interest in HP Storage. Based on our currently announced growth projects, we expect our growth project spending to be approximately $250 million for the remainder of 2012. Maintenance capital was $20 million for the quarter compared to $15 million in the first quarter of 2011. For the full year of 2012, we expect to incur total cost of approximately $260 million to operate and maintain our pipeline systems, of which approximately $91 million is expected to be capital. This level of spending is comparable to 2011 and consistent with what we have previously reported for 2012.

Now for a quick update on financing. As Stan mentioned, we issued 9.2 million units in the first quarter, generating net proceeds of approximately $250 million. Last Friday, April 27, we entered into a new 5-year $1 billion revolving credit facility to replace our previous credit facility that was due to expire in June of this year. The terms and covenants are similar to our previous facility. The interest rate is based on LIBOR and the credit ratings of the individual borrowers. On Friday, our regulated pipelines borrowed $484 million under the new facility at 1.4%. The proceeds were used to retire the old credit facility. We are pleased with the new facility and appreciate those institutions that participated.

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 Paul Jacob, Raymond James Company.

Paul Jacob

On the additional gas-fired contract that you secured this quarter, just wondering if you see further opportunities for something like that this year? And then on the storage side, as contracts come up for renewal, what are you seeing from your customers in that regard?

Stanley C. Horton

Okay. I'll take the electric one, and I'll let Jamie answer the storage one. On the electric side, yes, we continued to see interest from customers on securing additional firm transportation to serve power generation load on the system. So yes, hopefully, there will be another one this year. Based upon the discussions that our commercial group are having, I would certainly expect that we would have one.

Jamie L. Buskill

And to answer on your storage question, if you look at the first quarter, the $12 million of revenues that came from HP Storage, roughly $5 million to $6 million of that was in the transportation line on our income statement. The remaining $6 million to $7 million was on our gas storage line. So if you back that out, you'll see our firm storage was fairly flat on our existing systems. Where you see the more immediate impact is in our park and lend business. And as Stan mentioned, although we're up about $800,000 on the quarter, we've seen much a stronger market and much stronger contracts going in place. So we expect to have a better year related to park and lending this year compared to last year.

Paul Jacob

Okay. And then the last one for me as it relates to your growth CapEx. The $6.3 million that you reported this quarter just seemed a little bit low to me. I was just wondering how you see your capital expenditure outlay playing out for the rest of the year.

Jamie L. Buskill

It was a little low, and some of that has to do simply with the timing of payments. The biggest project we have going on is the processing plant we're building in Eagle Ford area. That's on schedule, and -- as Stan mentioned, and you'll see those costs ramp up in the second quarter and throughout the year. The other project is our gathering system in the Marcellus area, and that's going as scheduled as well. You may recall, that's roughly a $90 million project. A majority of that will be spent by the end of this year, but it will take 2 to 3 years before that's fully ramped up. We're building basically at the pace of our customer.

Operator

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

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Just a quick question in regards to the EBITDA contribution from HP Storage this quarter. It just seemed a bit low given that you're showing, I guess, 100%. Is the $3 million number the number we should be looking at?

Jamie L. Buskill

That's not the EBITDA contribution. The EBITDA contribution is approximately $9 million for the first quarter. In fact, when you look, Sharon, we were up basically $10 million on the quarter. The rest of the business was flat. There's positives and negatives in there, as we discussed. The driver was basically HP Storage, which, again, contributed about $9 million.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

$9 million, okay. Okay. And then in terms of the reconciliation for distributable cash flow, you had an asset impairment for $4 million. Can you just talk about what that relates to?

Jamie L. Buskill

Yes, that's primarily related to an office building that we're in the process of selling in our Owensboro, Kentucky area. That's where we have a lot of our back-office functions. We are in the process of selling that and will be leasing a facility up there. So we went ahead and recognized the impairment on that asset.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And then if you can just mention your debt balances at the end of the quarter?

Jamie L. Buskill

Yes, the debt balance was $3.4 billion. That is really -- the increase was driven by the HP Storage drop down. There's $200 million of debt at that entity. And then our equity was also $3.4 billion. So we're right at the 50-50 mark.

Operator

Your next question comes from the line of Mr. Scott Fogleman from Crédit Suisse.

Scott Fogleman - Crédit Suisse AG, Research Division

Just, Jamie, just a little more color -- did you say that, that was a 5-year term for the new credit facility?

Jamie L. Buskill

Yes, it's a 5-year term. And everything's pretty consistent with our old facility as far as covenants go.

Scott Fogleman - Crédit Suisse AG, Research Division

Great, great. And just on the Eagle Ford project, as you mentioned on the call, I mean, 50% of that capacity, I mean, that was as of the last quarter. What sort of issues are you running into there, as in what -- to contract out the remaining capacity?

Stanley C. Horton

I don't think we're really running into any issues. We've got discussions going on with several producers in the area, and those discussions are proceeding well. So hopefully, pretty soon, we can go ahead and execute another contract that would close out our position in that plant.

Scott Fogleman - Crédit Suisse AG, Research Division

Okay. And lastly, the parking and lending, do you have any -- I mean, you used to do in this particular division, would contribute anywhere up to almost $10 million in revenues a quarter. I mean, are you looking -- are you trending towards that level?

Jamie L. Buskill

Yes, from a historical standpoint, if you look at our averages, it generally trends more in a $25 million to $30 million range as far as what we see on an annual basis. Some years are higher, and last year was a record low for us. But we definitely, as Stan mentioned, expect to see a much stronger market this year.

Operator

And there are no further questions at this time. I would like to turn the call back over to Ms. Allison McLean for closing remarks.

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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