Boardwalk Pipeline Partners' (BWP) CEO Stan Horton on Q4 2016 Results - Earnings Call Transcript

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Boardwalk Pipeline Partners LP (NYSE:BWP) Q4 2016 Earnings Conference Call February 6, 2017 9:30 AM ET

Executives

Molly Ladd Whitaker - Director, IR and Corporate Communications

Stan Horton - President and CEO

Jamie Buskill - SVP, Chief Financial and Administrative Officer

Analysts

Christine Cho - Barclays Capital

Jeremy Tonet - JP Morgan

John Edwards - Credit Suisse

Ross Payne - Wells Fargo

Gabe Moreen - Bank of America/Merrill Lynch

Operator

Good day ladies and gentlemen and welcome to the Boardwalk Pipeline Partners Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded.

I would like now like to introduce your host for today's conference, Ms. Molly Whitaker. Ma'am, you may begin.

Molly Ladd Whitaker

Thank you, Kelly. Good morning, everyone and welcome to the fourth quarter 2016 earnings call for Boardwalk Pipeline Partners LP. I am pleased to be joined today by Mr. Stan Horton, our President and CEO; and Mr. Jamie Buskill, our CFO.

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 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 due to a wide range of risks and uncertainties, including those that are set forth in our SEC documents. The company expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

I would 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 would like to turn the call over to Stan Horton.

Stan Horton

Thank you, Molly, and good morning everyone. I hope you had the opportunity to review the press release that we issued this morning. In addition to reporting earnings we announced a quarterly distribution of $0.10 per unit or $0.40 on an annualized basis.

I am going to provide a brief update and then Jamie will provide a summary of our fourth quarter financial results. 2016 was a very good year for Boardwalk. Our 2016 EBITDA of $803 million was the highest EBITDA in our history.

We placed into service four new projects, representing a total of $350 million of budgeted capital spending and these projects were completed on time and collectively under budget. Three of these projects facilities that serve a power plant in South Texas, the southern Indiana lateral and the Western Kentucky lateral represent approximately 470,000 MMBtu a day of demand for new power and industrial end users.

The fourth project, the Ohio to Louisiana Access project provide to Texas Gas the ability to physically flow natural gas on a bidirectional basis. Now approximately half of the project 626,000 MMBtu a day of north to south capacity is providing transportation service through the new Sabine Pass Liquefaction LNG export facility.

In 2017 we will be placing into service the Northern Supply Access project which is designed to increase Texas Gas north to south capacity by another 284,000 MMBtu a day, resulting in a total of 900,000 MMBtu a day of total north to south capacity.

We recently began construction of the Coastal Bend Header project on Gulf South. This project when completed in 2018 is designed to deliver 1.4 billion cubic feet a day to serve the Freeport LNG export facility.

Boardwalk Louisiana Midstream has under construction several projects to expand our ethane and ethylene transportation and storage infrastructure and is developing four new wells for brine supply and related infrastructure.

All of these projects are backed by long-term fixed fee firm contracts with primarily investment grade customers. The average length of these contracts is approximately 17 years.

During the year we added to our project list four new projects totaling $85 million of CapEx. These projects include attaching a new power plant on our Gulf South pipeline, and new projects on Boardwalk Louisiana Midstream to construct new pipelines and storage facilities to serve new petrochemical loads. And we've also taken steps to enhance our financial liquidity as Jamie will address in his comment.

So now I will turn the call over to Jamie for the financial update.

Jamie Buskill

Thank you, Stan, and good morning everyone. For the quarter, we reported revenues net of fuel and transportation expenses of $333 million, an increase of $27 million or 9%. This increase was primarily due to our recently completed growth project and the favorable market condition for storage and parking and lending services. We transported approximately 563 TBtu of natural gas and approximately 17 million barrels of liquids in the fourth quarter 2016.

Excluding fuel and transportation expenses and depreciation, we reported operating expenses of $121 million for the quarter which was comparable to $118 million reported from the fourth quarter of 2015.

Net income was $88 million, an increase of $22 million or 34% from $66 million for the comparable period last year. EBITDA for the quarter was $214 million, an increase of $25 million or 13%. We generated $128 million of distributable cash flow for the quarter compared to $105 million generated in the fourth quarter 2015. Net income, EBITDA and distributable cash flow reflect the increases in operating revenues.

As Stan mentioned for the year, we reported EBITDA of $803 million compared to $722 million last year, an 11% increase and distributable cash flow for the year was $507 million compared to $413 million last year, a 23% increase.

We invested $590 million in capital in 2016 comprised of $469 million in growth capital and $121 million in maintenance capital. For 2017, we are forecasting total capital expenditures of approximately $850 million, $710 million of growth capital and $140 million in maintenance capital.

We ended the quarter with $5 million of cash, the full capacity of $300 million subordinated debt arrangement and 1.3 billion of available borrowing capacity on our revolving credit facility. We continued our progress in maintaining a strong liquidity position.

We retired $550 million in bond, $250 million in November and $300 million last week as those bonds mature. In January we issued 500 million of senior note at a rate of 4.45%. The net proceeds will be used to retire future debt maturities in the long-term and in the short-term we will use proceeds to paydown our credit facility and fund our capital project.

Our debt to EBITDA ratio at the year-end was 4.5 times which is lower than the 4.8 times we reported last year. Our capital expenditures are expected to be higher in 2017 as we continue to buildout our announced growth project. As a result our debt to EBITDA ratio based on the trailing 12-month of EBITDA is expected to increase in 2017 as a result of the negative carry until these growth projects are placed into service and begin generating revenues.

In our 10-K we have previously reported for the current year and two subsequent years the amount of revenues from firm transportation reservation charges contracted as of December 31st as a current reporting year and made no assumption about potential future revenues that could be derived from expiring contracts or open capacity.

In 2015 10-K we reported that for 2016 and 2017 we expected to earn $1.01 billion and $1.03 billion from firm transportation reservation charges under contract as of December 31, 2015. As of December 31, 2016 we actually earned $1.023 billion in contracted firm reservation revenues for 2016, an increase of $30 million from our earlier reported expect revenue and we now expect to earn $1.055 billion for 2017.

The increase in each year is primarily due to contract renewals and new contracts that were entered into during 2016. For 2018, the amount of firm reservation charges under contract is $975 million. Contracted firm transportation reservation charges do not reflect any revenues from contracts that may have been or may be entered into after December 31, 2016. When we file our 2016 10-K in the next couple of weeks I encourage you to read the full disclosure relating to this matter.

In closing, we had another good quarter and year. We're making progress executing our growth strategy and placing growth projects into service and our liquidity position to fund those projects is strong.

That concludes my remarks. I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Christine Cho with Barclays. Your line is open.

Christine Cho

Good morning, everyone.

Stan Horton

Good morning.

Jamie Buskill

Good morning.

Christine Cho

I wanted to start on the gas storage and park-and-loan that seems to have held up well this year. Can you talk about what you are seeing on the natural gas storage side with respect to contract tenor and rate, especially with LNG exports that drive further and gas rig activity picking up in the more southern and southeastern areas of the U.S.?

Stan Horton

Yeah, I would be glad to. I am pretty bullish on natural gas storage. Longer term, I think as more of the LNG plants come online, more power plants come online, more industrial plants come online that the need for operational storage to balance the loads on these facilities is going to be there. I wouldn't say that we've seen so far a tremendous increase in that demand, but you are just now starting to see these plants coming on. So based upon the conversations that we are having with people, just looking at the marketplace, the increase in demand, I think our operational storage is going to be strong in the years ahead.

As it relates to PAL, I mean PAL is largely dictated by what seasonal and yearly spreads are. We can't predict those. We take advantage of the opportunities when they come across, not only to park gas, but to loan gas. We have got very active pricing discounts here that has proven to be a very -- do a very good job for us taking those opportunities and taking advantage of them.

So I think that answers your question. If not, let me know.

Christine Cho

No. That does. Thank you. And then on the natural gas pipeline side, appreciate the updates on what you are expecting for contracted firm revenue. The increase that you saw for 2018 -- or I am sorry -- 2017 from $1.03 billion to $1.055 billion, can you talk about which pipelines you mostly saw the uplift from?

Jamie Buskill

No. We don’t provide the breakout by pipeline. But I remind people the way that they will fit together, those numbers generally go up over time, because again we are not making any assumptions on contract renewals or open capacity. So it’s expected that we will enter the contract between, for example, now and 2017. So you should see that number continue to increase. The only exception to that would be if there is an upset event like a bankruptcy that's really the only way those numbers go down.

Christine Cho

Okay. And then you guys have consistently come in lower on the O&M side throughout 2016 despite putting on more projects. Is that just less compression on your system with the additional gas via the laterals or is there anything else that's driving that?

Jamie Buskill

The O&M expense is lower primarily because a lot of work this year was done on the capital side. And so we had more of our resources dedicated to those capital projects. So it’s really a function of the type of project that were being worked on.

Christine Cho

Okay. So, we should expect that to kind of stay flat in 2017 with -- of the CapEx that you are doing?

Jamie Buskill

Well, we are not going to provide guidance. But I would say this, as you add projects generally you do have an incremental O&M cost that come on, so you would anticipate that you will see additional O&M cost come into play as those projects come into service.

Christine Cho

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Jeremy Tonet with JP Morgan. Your line is open.

Jeremy Tonet

Good morning.

Stan Horton

Good morning.

Jeremy Tonet

Jamie, thank you for the color on the contract rules in 2018. I was just wondering of the known rules that you have going into 2019 would you be able to say directionally it look similar to 2018 or was there more or less happening there?

Jamie Buskill

We are not going to provide guidance on 2019 until we get closer to that timeframe. Again, the way that table is put together if you roll it out for a period of time, it would eventually go to zero because there is no assumption built in. And the further you look out though the less meaningful it becomes, so that's why we really only show the coming two years.

Jeremy Tonet

Okay. And Stan, I was just wondering if you could refresh us to your thoughts as far as distribution philosophy. It seems like leverage has been trending down. It could move up a little bit next year based on the carry as you described.

But just wondering when you are looking at an increase in distribution at some point in the future, whether it would be kind of ratable increases or one-time step up or anything that you could provide as far as your just distribution philosophy would be helpful.

Stan Horton

Yeah, I have got this one down pretty good, because it hasn't changed since February of 2014. The guidance we gave then is that we wanted to get to debt to EBITDA into the low four times, that’s still our goal. It is not a one-shot deal, it needs to be something that is sustainable. So as we talk to the Board and talk to [lows] [ph] and review everything those two premises are still there. We want to get to the low four times. Being investment grade is very important to us, so therefore being able to sustain that low four times is very important to us too.

So it is not a snapshot. It is long-term trend and it's a, you know, financial strategy to keep the balance sheet very, very healthy and to keep us strongly in that investment grade category.

Jeremy Tonet

That's it for me. Thanks.

Operator

Thank you. Our next question comes from the line of John Edwards with Credit Suisse. Your line is open.

John Edwards

Yeah, good morning everybody and congrats on a nice year, nice quarter. Stan, if you could just update us a bit on just -- on some of the perhaps renewal discussions. I know there has been some proposals for taking gas out of the stack scoop that could be of -- that could benefit Boardwalk. And I think there is one or two publicly disclosed proposals there and that could obviously be a big benefit to Boardwalk if that ties into some of your pipes.

So, any color on how discussions are progressing, or anything you could update us with there would be…

Stan Horton

Yeah, let me try to give you some color. Generally, I can't talk any specifics that we are having with customers. You know, we -- first of all, we totally understand the significance of the contract expiration that are tied to the expansion project that we put in place in 2008 and in 2009. We've been very forthcoming that we've got large amount contract expire in the latter part of 2018, mainly in the latter part of 2019, so we have a little bit of ways to go on those contracts.

We are in discussions with numerous parties, and those parties include producers and end-users to contract that capacity. We are talking to producers in new basins. We are talking to people who are developing or want to develop pipelines out of the scoop and stack about interconnects into our pipeline facility. We are talking to end-users that are very interested in diversifying their supply source and not just relying upon Marcellus and Utica Gas coming down. They see the benefits of west to east flows.

So, I don't think that there is anything that we're leaving unturned and the people that we're talking to. So you just have to wait a little bit more time as we get closer to the contract expiration. But we are laser focused on this issue. We understand the significance of it.

John Edwards

Okay. That is really helpful. I mean, could you say that compared to last quarter you are equally optimistic -- a little more optimistic or any kind of color there also would help.

Stan Horton

You know, I am the CEO of the company, so if I am not optimistic something's wrong here. I think we have the right people focused on it. I would say that I am right where we were the last quarter. I liked the discussions that are taking place. I think they are good discussions. We are not putting all of our eggs in one basket here. There are a number of scenarios that need to happen here for us to be successful and more working all of scenarios.

John Edwards

Okay. That is actually really helpful. And then my other questions -- yeah, one other thing, just if maybe you could talk a little bit about the remaining CapEx on Texas Gas for the last bit of un-contracted capacity, I think, it is around 380 million or so. I guess when -- or what -- any clarity you can give us say what is the cost per 100,000 of capacity, is it just compression? Anything you could share there would be really helpful.

Stan Horton

Yeah, I would be glad to do that. I stated previously we have got about 1.3 Bcf a day. Our total capacity that we could add to Texas gas with full compression to move gas bidirectionally north to south. We have contracted about, as I stated in my comments about 900,000 Mmbtu a day. So we have approximately 400,000 Mmbtu a day of additional north to south capacity that we could add with just compression. The capital associated with that is pretty in line with the NSAP project and the capital that we're adding there, with the volumes that we are adding there.

So fairly in line, not exact, but fairly in line. You would be out of line using that is a guidepost. I think the drilling downturn we experienced in 2016 in the Marcellus, Utica hampered our ability to recontract or contract some of that capacity. I think as drilling becomes more robust and some of the demand on the Gulf Coast actually gets added that that capacity will be sold. I think we just need to be patient and wait for the market to come to us and eventually that capacity it will get buildout.

So I see it as being part of our portfolio in the future, and there is no need to do anything, but let the market come to us on that.

John Edwards

Okay. So just to clarify. If we are thinking somewhere around $80 million per 100,000 of capacity, is that an approximate ballpark?

Stan Horton

You are doing your arithmetic faster than mine. But subject to checking with our people, I will agree with that.

John Edwards

Okay. Thank you very much. That is it for me.

Operator

Thank you. Our next question comes from the line of Ross Payne with Wells Fargo. Your line is open.

Ross Payne

Thank you very much. Jamie, just a housekeeping item. Can you let us know roughly where the total debt balance ended the quarter? Thanks.

Jamie Buskill

Sure. The debt at the end of 2016 was $3.558 billion. The equity is $4.531 billion, so this is about 42% debt, 58% equity.

Ross Payne

Perfect. Thanks.

Operator

Thank you. And our next question comes from the line of Gabe Moreen with Bank of America/Merrill Lynch. Your line is open.

Gabe Moreen

Hi. Good morning. Just a quick question for Jamie, in terms of financing. Is it correct maybe that you just feel comfortable funding everything on the revolver? I am just wondering whether you plan to utilize the ATM at all this year and/or the subordinated loan agreement.

Jamie Buskill

Sure. We are not going to provide guidance on how we are going to finance. If you look one of the things that we've been focused on over the last couple of years is adding liquidity to the system and then also adding tools available to add additional liquidity as needed. And I think we've done a good job accomplishing that. The most important thing is we broader debt metrics down, so we can better utilize the tools we have available out there to us.

Gabe Moreen

Got it. And I assume the agencies -- I don't know if you have had discussions with them lately, will probably look through that uptick considering just that a lot of that is just -- all of that is related just to basically expansion projects.

Jamie Buskill

If you look at the rating agency reports and what you see in the report are the same thing you are telling me. They get nervous when the ratio gets in the mid-five to six. We're well below that in the mid-fours right now. And also I think the way -- you got to look at some of this as you -- in construction on a project I think it's fair to assume that you should get to factor in the EBITDA contribution that will be coming from those projects because really the risk is behind you. You have already fully contracted the project. Ones construction risk is behind you there is really not a lot of risk left. So -- and as you think rating agencies when you talk to them, they do give some credit as you approach into the construction cycle.

Gabe Moreen

Thanks, Jamie.

Operator

Thank you. And I am showing no further questions at this time. I would like to turn the call back to Ms Whitaker for closing remarks.

Molly Ladd Whitaker

Once again, we would like to thank you for joining us this morning and for 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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a wonderful day.

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