Operator: Good day, ladies and gentlemen. Welcome to the Quarter Four 2012 Boardwalk Pipeline Partners, LP Earnings Conference Call. My name is Moe and I will be your operator today. At this time, all participants are in a listen only mode. We will conduct a question-and-answer session towards the end of the conference. As a reminder, this call is being recorded for replay purposes.
I'd now like to turn the call over to Molly Ladd Whitaker, Director of Investor Relations and Corporate Communications. Please proceed.
Molly Ladd Whitaker - Director of IR and Corporate Communications: Thank you, Moe. Good morning, everyone, and welcome to the fourth quarter 2012 earnings call for Boardwalk Pipeline Partners, LP. I'm 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. 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 Stan Horton.
Stanley C. Horton - President and CEO: Thank you, Molly, and good morning, everyone. I hope you've had a chance to review the earnings press release that we issued this morning. In addition, to reporting earnings we also announced a quarterly distribution of $0.5325 per unit or $2.13 annualized. Jamie will review the results of the quarter shortly.
In the fourth quarter we continued to make progress, implementing our three strategic goals; one, adding new end used markets to our pipeline and storage systems; two, diversifying into other areas of the midstream sector; and three, emphasizing the need to control our cost structure to achieve greater efficiencies.
With regards to the first goal of adding new end used markets to our existing pipeline and storage systems, the HP Storage salt cavern expansion at Petal is on schedule for gas injections to begin in the second quarter of 2013. When complete, the cavern will add approximately 5 billion cubic feet of working gas capacity. This incremental capacity has been fully contracted for the first year that this cavern will be in service.
We are also moving forward with our Southeast Market Expansion project which will allow us to transport an additional 450 million cubic feet of natural gas into the growing areas of demand in the Southeast region of the United States, including the markets in Mississippi, Alabama, and Florida. This $300 million project is supported by 10-year firm agreement with primarily electric generation and industrial customers. We anticipate beginning construction in early 2014; the targeted in-service date of the project remains late in 2014.
We are also making progress on attaching new power loads and are pleased to have recently executed a long-term contract with Kentucky Utilities to serve their Cane Run combined cycle power plant that is scheduled to be placed into service in late 2014. This project is in addition to the previously announced gas-fired power generation project in Texas and Louisiana, the Southeast Market Expansion project, and the other firm contracts that were executed with power producers in 2012.
In aggregate, these projects represent an average of approximately 765,000 MMBtu a today once all of the project are in service, and much of this new power generation load will utilize existing pipeline capacity that will be up for renewal over the next two years. The new flexible services that FERC has recently approved on our pipeline are being used to support some of this load.
During the last several earnings calls, we have spoken about how compressed basis differentials are negatively impacting our business. Simply put, when firm transportation contracts come up for renewal the change in market fundamentals from the time the contract was originally executed results in either the contract being renewed at a reduced rate or the capacity being turned back and remarketed to another customer.
Some of the capacity being turned back is used to meet the new electric load I just discussed, but those loads will not come on stream until the projects are completed. In the interim, the capacity is marketed by our pricing desk in the short-term market which we think will continue to experience very low rates during 2013 due to the narrow basis spreads. The contracts that are being renewed are being renewed at lower rates because the current basis spreads do impact the pricing of longer-term contract. In 2013 some of the contracts associated with the major expansion projects we put in service a few years ago are up for renewal. The annual revenues associated with contracts expiring in 2013 are approximately $125 million.
At this time, our best estimate is that the combination of lower rates on contract renewals and the remarketing the term back capacity will result in an annual revenue reduction of approximately $40 million.
Turning to our second goal of diversifying it to other areas of the Midstream segment, in October, we completed both acquisition and dropdown of Boardwalk Louisiana Midstream and since our last call we have successfully integrated Boardwalk Louisiana Midstream with Boardwalk. In January of 2013 Boardwalk Louisiana Midstream's 13 million brine handling upgrade construction project at the Choctaw hub was completed and commenced commercial operations. This 1 million barrel brine pond is supported by a seven-year fixed fee contracts that has allowed the Company to expand its brine sales, transportation and storage capability. Also, at the Choctaw hub Boardwalk Louisiana Midstream's 50 million brine sales and transportation project is proceeding on track and is scheduled to be placed into service in the third quarter of this year. This project involves construction of a 26-mile 12-inch pipeline from Boardwalk Louisiana Midstream's Choctaw facilities into our customer's petrochemical plant that is supported by 20-year contract with minimum volume requirement and expansion options.
Construction of Boardwalk Field Services South Texas Eagle Ford expansion project is proceeding as planned. We are on budget and the project expected to go into service in April. Construction of the pipeline facilities is substantially complete and we are nearing completion of the Flag City processing plant with commissioning expected next month.
Our third goal of controlling our cost structure has been an ongoing focus, and during 2012, we were able to reduce cost by both streamlining personnel and reducing the use of outside services. These initiatives represent an approximately 10% to 15% reduction in G&A cost on an annual run rate basis.
In summary, the fourth quarter capped off an eventful year in executing our long-term growth strategy, including approximately $900 million in acquisitions through the drop-down of the remaining interest in HP Storage and the acquisition of Boardwalk Louisiana Midstream, and investing approximately another $145 million in our other announced growth projects.
In 2013 and beyond, we will continue to strive to maximize long-term unitholder value through a combination of adding new end used markets to our pipeline and storage systems that will utilize the capacity that is coming up for renewal, diversifying into other areas of the midstream sector, and controlling our cost structure to achieve greater efficiencies.
Now that concludes my comments and I will turn the call over to Jamie Buskill.
Jamie L. Buskill - CFO, SVP and Treasurer: Thank you, Stan and good morning, everyone. As a result of the drop-down of HP Storage earlier this year, the historical amounts for the fourth quarter of 2011 had been recast as though we have fully consolidated HP Storage from the date of acquisition which was December 1, 2011.
Operating revenues for the fourth quarter were $326 million which is $25 million higher than the comparable period in 2011. Net of fuel and transportation expense, revenues for the quarter were $298 million, an increase of $21 million or 8% from $277 million for the comparable period in 2011.
The increase was driven by the revenues associated with the acquisitions of HP Storage and Boardwalk Louisiana Midstream which contributed $25 million in net revenues for the quarter. For the full year 2012, operating revenues, net of fuel and transportation expense, were $1.106 billion, an increase of $66 million or 6% from $1.40 billion for the full year 2011. Our acquisitions contributed $61 million of the increase during the year.
Throughput for the quarter was 622 TBtu, bringing our full year throughput to 2,513 TBtu.
Turning now to operating expenses, we reported operating expenses of $196 million for the quarter, an increase of $7 million or 3% from $189 million for the comparable period in 2011. The primary driver for the increase was $15 million from operating expenses associated with the acquisition of HP Storage and Boardwalk Louisiana Midstream. Excluding the impacts from acquisitions, operating expenses were favorable by $8 million, primarily due to lower administrative and general and operation and maintenance expenses of $10 million related to cost management activities.
Stan mentioned one area that the Company is focusing on is cost efficiency. We made significant progress in reducing our (ANG) year-over-year and on a run rate basis despite the addition of our acquisition. EBITDA for the quarter was $198 million, an increase of $28 million or 16% from $170 million for the comparable period in 2011. EBITDA for the quarter was primarily impacted by the revenue and drivers previously discussed. Net income for the quarter was $90 million, an increase of $18 million or 26% from $72 million for the comparable period last year. We generated $143 million of distributed cash for the quarter. This compares to $140 million generated in the fourth quarter of 2011, an increase of 2%.
Previously, Stan mentioned that we invested just over $1 billion in acquisitions and growth projects in 2012. In addition to the growth capital expenditures we retired approximately $525 million in debt during the year consisting of $200 million variable rate term loan HP Storage, $225 million of 5.8% notes at Gulf South, and $100 million of 8% subordinated debt. We financed these activities by issuing $866 million in equity, $300 million in 3.375% notes at Boardwalk, $300 million of 4% notes at Gulf South and a $225 million in variable term rate loan at Boardwalk Louisiana Midstream. As of December 31, outstanding borrowings under our credit facility were $302 million with an available borrowing capacity of $698 million. In 2013, we anticipate growth capital expenditures related to previously announced projects will be approximately $250 million.
That concludes my remarks. So, I will now turn the call over to the operator for questions.
Operator: Mark Reichman, Simmons.
Mark Reichman - Simmons: Just wanted to find out if can just provide an update on the major projects that you've outlined in recent investor presentations. Have there been any changes to the amount of capital investment estimated or any changes to the in-service dates, like, for example, on the gas-fired electric power generation projects, I think the capital investment was estimated to be $50 million. Does this new contract increase that amount at all? And then the second question is, and I may have missed it, what do you forecast maintenance CapEx to be in 2013?
Stanley C. Horton - President and CEO: I'll take the first part and let Jamie take the second part. The $50 million that was quoted in previous presentations related to the one power project in Texas and a second power project in Louisiana, and those capital expenses have not changed. The power load that we just picked up with Kentucky Utilities at Cane Run, there's almost no capital that has to be spent on that project, just the installation of a meter station. The other capital forecast that we've given you for Southeast Expansion and the cavern at Petal 12A, none of those capital costs have changed appreciably at all.
Mark Reichman - Simmons: And then also the in-service dates are still intact?
Stanley C. Horton - President and CEO: Yes.
Jamie L. Buskill - CFO, SVP and Treasurer: Yes. Now, one thing, Mark, you may be a little confused by is we say we would spend $200 million capital in 2012 and we came in right below $150 million, and where we thought we were going to spend $200 million in '13, we're going to spend $250 million. That's just the carryover the $50 million and it's just fact that the costs are going to come in, in the first part of the year rather than end of 2012.
Mark Reichman - Simmons: And then maintenance CapEx for '13?
Jamie L. Buskill - CFO, SVP and Treasurer: Maintenance CapEx at this point; it's probably going to be similar to our 2011 rate which we had about $95 million in 2011 and that's roughly what we anticipate with 2013.
Mark Reichman - Simmons: Even with the acquisition of Louisiana Midstream?
Jamie L. Buskill - CFO, SVP and Treasurer: Yes.
Operator: John Edwards, Credit Suisse.
John Edwards - Credit Suisse: Just, Stan, I think you had mentioned about $40 million annual decline from capacity remarketing, contract rollups, et cetera. Is that something you think will continue for several years beyond this year or is that just a 2013 number we should be thinking about.
Stanley C. Horton - President and CEO: That's just a 2013 number that you ought to be thinking about. If you go back and look at 2012, we pretty much offset with new contracts, some of the contract term backs. So, each year is a little different. It's tough to forecast out. But the numbers that I quoted you were for 2013.
John Edwards - Credit Suisse: Then how much capacity is rolling off this year and then if you could give us an idea of how much is rolling off in 2014?
Jamie L. Buskill - CFO, SVP and Treasurer: For this year, the dollar amount that Stan mentioned was $125 million. When you get beyond that – if you look at '14, it's really hard to say what that number ultimately will be because as you deal with some of the contracts in the current year, they may just roll a year which adds to it. But looking ahead, '14 looks to be more of a comparable year which we've all along is roughly $100 million a year in transportation contracts.
John Edwards - Credit Suisse: Then on the growth CapEx, I think you said you're coming in about $250 million for 2013 and then can you give us any kind of granularity on how that's being allocated?
Jamie L. Buskill - CFO, SVP and Treasurer: Not by project. I mean, the big projects are the ramp-up, the Eagle Ford expansion that we have going on and then the brine expansion that Stan mentioned. Those are really the two primary drivers. We'll start incurring some costs with our Southeast Market Expansion, but the bulk of those costs will be in 2014.
John Edwards - Credit Suisse: Can you just remind us about what's the project cost in that Southeast Market Expansion?
Jamie L. Buskill - CFO, SVP and Treasurer: It's approximately $300 million.
Operator: Jeremy Tonet, JP Morgan.
Jeremy Tonet - JP Morgan: I was wondering if you could provide us an update as far as the average contract duration for your portfolio of contracts and also the strategy this year when it comes to contract renewals. Are you looking to do more shorter data contracts with the anticipation that this is a kind of (toss up) rates you don't want to lock yourself up long-term at these rates or how are you thinking about the whole contract renewal process?
Jamie L. Buskill - CFO, SVP and Treasurer: The contract term is still basically unchanged. We are approximately six years weighted average contract life. Then on the contracts, as Stan mentioned, some of the contracts we are doing short-term, but that's more of a function of the expansions with all of the power utilities that we have contracts with, a lot of those come on in the latter part of 2014, so that's why those – that capacity maybe sold on a short-term basis.
Operator: (Paul Jacob), Raymond James.
Paul Jacob - Raymond James: Just curious if you could give us an update on the Marcellus gathering system; what types of volumes are you seeing there, and if you strip those out, how would gas transportation look this quarter?
Stanley C. Horton - President and CEO: On the Marcellus project, the volumes that are moving are approximately 30 million day. That project – the producer is not drilling in that area right now due to gas prices. We expect those volumes to hold around that. There are no additional capital costs being spent on that project, and the way that that contract is structured, we have no real risk of loss on anything like that, because we've built to support the volumes that the producer is moving. It probably is going to be several years before that project is completely built out.
Paul Jacob - Raymond James: And then, are there remaining cost savings that you think you can extrapolate into 2013 from that $10 million to $15 million that you mentioned earlier?
Stanley C. Horton - President and CEO: I think that we have captured the largest part. For those who know me, we are constantly looking for ways to reduce cost. So, I don't want to say that there aren't any more, but I would say that last year we had a concerted effort to restructure the company, reporting relationship and everything else to weed out as much cost as we possibly can. We will continue to look for those opportunities, but I think the big amounts have already materialized.
Paul Jacob - Raymond James: Then I guess the last question from me is, given that you've $40 million that you think is coming off this year in revenue. How do you counter balance that with other expenditures like maintenance CapEx and so forth. I know you've given some guidance there, but would it be – do you have some flexibility I guess to take maintenance and reliability spending down if you need to do that? Can you cover it?
Stanley C. Horton - President and CEO: No, actually not. I mean, maintenance CapEx and maintenance expense, those are things that you do for the long-term integrity of your pipeline system. A lot of them are mandated by regulatory fiat. There are things that we have to do. One of the things that we aren't going to do is to sacrifice safety or the integrity of our pipeline system for short-term benefits. So, we don't even look at pipeline expansion, pipeline capital as a way to try to offset revenue loss. But we are trying to do and it's a longer strategy, has to be a longer-term strategy is to build up more end used markets and if we build up more end used markets, we'll take care of the recontracting problem. But it's probably going to take us a couple of years to get that done. But as we've said, we've hooked up over 750 million cubic feet a day of new electric load in the last 12 to 15 months and we will continue to try to do that. If we're successful then hopefully in the couple of years we won't have to be talking about recontracting risk.
Operator: Yves Siegel, Neuberger Berman.
Yves Siegel - Neuberger Berman: Just a couple of questions. One is, can you comment on progress that you're making with the midstream effort and what would sort of outlook do you have there?
Stanley C. Horton - President and CEO: And I'm assuming what you are talking about there is our gathering/processing.
Yves Siegel - Neuberger Berman: Louisiana Midstream. Yes sir.
Stanley C. Horton - President and CEO: On the gathering/processing, our entire focus right now is on getting the first train in service and flowing volumes which we said will happen in the first – beginning of first quarter or beginning of the second quarter. So, we are in active negotiations with producers to fill up that plant. At that site, there is room for a second and third train. We continue to talk with producers about additional processing volumes at that site. Certainly, last year when gas prices got as well as they did and you started seeing liquids prices coming down, you started seeing shifting in drilling into the more oily plays. So, therefore, some of the volumes that we thought were going to coming on didn't come on as quickly. But in our discussions with producers, we continue to believe that there's going to be more need for processing capability, and we think eventually we will do a second train at our site.
Yves Siegel - Neuberger Berman: Then just the other couple of – do you have any other pipelines that can be repurposed or are you contemplating?
Stanley C. Horton - President and CEO: We continually look for areas that we might be able to repurpose pipelines for a lot of other services, and when we find those opportunities; when they're small, we take advantage of them and we will continue to do that.
Yves Siegel - Neuberger Berman: And then my last question is, as you look out into the horizon, what's the acquisition landscape look for you, and could you also maybe benchmark how large the capital budget could actually – based on some of these projects that you're chasing, how large a capital budget could we be looking at potentially, or how big could that backlog potentially be?
Stanley C. Horton - President and CEO: Well, I'll answer the first question. I can tell you that Jonathan Nathanson stays very, very busy looking at acquisitions. There appear to be not a shortage of opportunities. We don't chase just any one; we look for the right one. We've been very selective. We will continue to do that. So, we're encouraged. I'll let Jamie answer the second question about the CapEx.
Jamie L. Buskill - CFO, SVP and Treasurer: If you look over the last 12 to 18 months, we've announced $2 billion worth of projects and acquisitions, and they're not timeframe. We've been able to utilize help from our parent as we drop those down and try to (ton) the markets as to when we thought it was appropriate time to drop those down. And what it allowed us to do is not only grow the Company, but we've also bettered our capitalization. If you kind of look on a run rate basis, we're probably more in the middle 4 times on the debt-to-EBITDA right now compared to where we were a year ago. So, it really depends on opportunity and I can't speak for our parent, but as in the past, they've helped us if there was a big opportunity that became available.
Operator: Thank you. There are no further questions. So, I'd like to turn the call over to Molly Ladd Whitaker for closing remarks.
Molly Ladd Whitaker - Director of IR and Corporate Communications: Thank you, Moe. Once again, we'd like to thank you for joining us this morning and for 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. Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day.