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Boardwalk Pipeline: Electricity Generation Key Growth Area

Avi Feinberg

Avi Feinberg: Hi. I am Avi Feinberg, Equity Analyst with Morningstar covering oil and gas pipeline companies, and I am pleased to be joined today by Jamie Buskill, Chief Financial Officer of Boardwalk Pipeline Partners.

Jamie, thanks for joining me.

Jamie Buskill: Glad to be here.

Feinberg: One thing we really like about Boardwalk is that you guys have very stable cash flows. You've been able to raise your distribution every quarter since your 2005 IPO. Can you talk a little bit about your contract mix and then how that factors into those cash flows?

Buskill: Sure. If you look at our business, we're in the business of transporting and storing other people's gas. Our contracts are made up primarily of firm contracts where people pay us rent for capacity on these pipeline systems or in storage.

If you look at the last 12 months, we made just under $1.1 billion in revenues, and 92% of those revenues are tied to those firm agreements with the majority of that being from the rent that we charge for that capacity. The other 8% is from the interruptible type markets, which is subject more to the day-to-day volatility of natural gas prices.

So, the reason we've been able to grow that is we've also during this timeframe since going public in 2005 embarked on a pretty ambitious growth project. The projects totaled just about $5 billion and we're wrapping that up and you're starting to see that benefit over the last two years run through the income statement.

Feinberg: And so natural gas prices seems like have pretty little impact on your cash flow, at least on a short-term basis. Maybe there is a little bit of impact long-term or what about that and what about also basis spreads between different hubs?

Buskill: You hit right on it. The bigger issue for us is not the price of the commodity, it's the basis spread. And when we talk about basis spreads, we're basically saying the difference in the price of gas where it enters our pipeline system versus the price of the gas where it exists our pipeline system.

If you go back prior to the expansion projects, we really saw that basis spreads at historic levels. It was really large and that was being brought about because of all the unconventional gas supply mainly shale gas that was being discovered and starting to be produced.

So we embarked on these projects to add the infrastructure that was needed and as that was done, the basis spreads came in. If you look at these projects today, even though gas prices are at fairly low levels compared to where they were a few years ago, we're seeing high utilization on those expansion projects generally running 80% to 100% utilization.

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Feinberg: When I look at your network of pipelines, your three systems seem to be pretty centrally located in terms of emerging sources of supply. Can you talk a little bit about how that factors into your future volume flows?

Buskill: Sure. We really like our footprint. We are proud of it. Because our three systems, our Gulf Crossing, Gulf South and Texas Gas systems, the assets complement each other. By the way they interrelate, we can quickly move and change supply or change flows to meet the supply and demand changes, and that has allowed us to – now that we've got these major expansion projects in we've been able to go and find opportunities to grow the system with smaller projects.

An example is our Haynesville project we just brought on in October this year. That project came in at about $110 million, and it basically created just under 600 million a day or a little over 0.5 Bcf of capacity, and we did that by adding compression. So, we were able to leverage that footprint to add a nice project to the system. We think there will be other opportunities on our system to do something similar to that.

Feinberg: So, your footprint really helps you capture some of that supply. If we take a look at the demand side, how do you see that panning out and who are some of your customers?

Buskill: The good thing on the demand side is we have first of all a diverse set of customers. We have producers, traditional local distribution companies; in fact we have over 300 local distribution companies on our system.

The one area of growth that we were starting to see is in the power generation market. We currently have over 40 power generation plants where they use natural gas to make electricity, and if you look at our system, we have just under 100 coal-fired turbines within 20 miles of our system that are over 40 years old. A lot of these operators are starting to ask as I look to renew my infrastructure, I either have to clean up my coal or I can go to natural gas.

The good thing about natural gas today is because of all the discovery of these unconventional supply areas, we now have what most experts say over a 100 year domestic supply of this fuel. So, that's no longer a problem as far as availability of supply. The other thing is the fossil fuels natural gas is environmentally the best fuel to use. And so when you add those two factors and the fact as you pointed out, natural gas prices have come down quite a bit, those add up to a compelling reason to look at natural gas as a way to shift to creating electricity. And it will be interesting. I think, there will be other areas too that will also explore that.

Feinberg: Boardwalk is just coming off of a $5 billion expansion program that you guys completed about three years worth of spending and kind of looking forward, where do you see growth opportunities and how do you anticipate leveraging this footprint of large diameter pipeline that you have built up now?

Buskill: Well, if you look at those $5 billion projects, I really think that was a unique time in history because you had all this new supply that came on that you basically re-plan the infrastructure of this country to the new supply sources. I think, a lot of that has been accomplished.

So, looking forward, I think your opportunities will be more regional in nature. As some of the areas we're looking at is – there is supply in the Eagle Ford which is in the southeastern part of Texas. And what's interesting about that supply area, the gas is considered wet gas. Producers like that because they can extract the liquids and the liquids tend to have a fairly high value. We already have some assets in that area, so we're exploring opportunities to again expand our footprint to participate more in that area.

Another area of interest, we think is the Cana area. It's in Oklahoma, it's got some interesting characteristics. And then on the market side, we think the Florida market, and you look that part of the country is interesting. Again, the need of natural gas particularly as people look to use natural gas to create electricity, there is going to be these regional opportunities and we're trying to explore them all and only time will tell as how that develops.

Feinberg: Well, again, I appreciate you joining me, Jamie.

Buskill: Appreciate it.

Feinberg: I am Avi Feinberg from Morningstar. Thank you for watching.