Boardwalk Pipeline Partners (BWP) 10-Q2021 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 2021

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Emerging Growth Company ☐

TABLE OF CONTENTS

FORM 10-Q

June 30, 2021

BOARDWALK PIPELINE PARTNERS, LP

BOARDWALK PIPELINE PARTNERS, LP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BOARDWALK PIPELINE PARTNERS, LP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BOARDWALK PIPELINE PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Millions)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BOARDWALK PIPELINE PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Millions)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BOARDWALK PIPELINE PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BOARDWALK PIPELINE PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

(Millions)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BOARDWALK PIPELINE PARTNERS, LP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

(Millions)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BOARDWALK PIPELINE PARTNERS, LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Boardwalk Pipeline Partners, LP (the Company) is a Delaware limited partnership formed in 2005 to own and operate the business conducted by its primary subsidiary Boardwalk Pipelines, LP (Boardwalk Pipelines) and its operating subsidiaries, which consists of integrated natural gas and natural gas liquids and other hydrocarbons (herein referred to together as NGLs) pipeline and storage systems. As of June 30, 2021, Boardwalk Pipelines Holding Corp. (BPHC), a wholly owned subsidiary of Loews Corporation (Loews), owned directly or indirectly, 100% of the Company’s capital.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's financial position as of June 30, 2021, and December 31, 2020, its results of operations, comprehensive income and changes in partners' capital for the three and six months ended June 30, 2021 and 2020, and its changes in cash flows for the six months ended June 30, 2021 and 2020. Reference is made to the Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Annual Report on Form 10-K), which should be read in conjunction with these unaudited condensed consolidated financial statements. The accounting policies described in Note 2 of Part II, Item 8. of the Company's 2020 Annual Report on Form 10-K are the same policies that were used in preparing the accompanying unaudited condensed consolidated financial statements. Net income for interim periods may not necessarily be indicative of results for the full year.

    

The Company operates in 1 reportable segment and contracts directly with end-use customers, including local distribution companies, electric power generators, exporters of liquefied natural gas and industrial users, with producers and marketers of natural gas, and with interstate and intrastate pipelines, who, in turn, provide transportation and storage services for end-users. The following table presents the Company's revenues disaggregated by type of service for the three and six months ended June 30, 2021 and 2020 (in millions):

As of June 30, 2021, contract liabilities are expected to be recognized through 2040. Significant changes in the contract liabilities balances during the six months ended June 30, 2021, are as follows (in millions):

Significant changes in the contract liabilities balances during the six months ended June 30, 2020, are as follows (in millions):

The following table includes estimated operating revenues expected to be recognized in the future related to agreements that contain performance obligations that were unsatisfied as of June 30, 2021. The amounts presented primarily consist of fixed fees or MVCs which are typically recognized over time as the performance obligation is satisfied, in accordance with firm service contracts. Additionally, for the Company’s customers that are charged maximum tariff rates related to its Federal Energy Regulatory Commission regulated operating subsidiaries, the amounts below reflect the current tariff rate for such services for the term of the agreements; however, the tariff rates may be subject to future adjustment. The Company has elected to exclude the following from the table: (a) unsatisfied performance obligations from usage fees associated with its firm services because of the stand-ready nature of such services; (b) consideration in contracts that are recognized in revenue as invoiced, such as for interruptible services; and (c) consideration that was received prior to June 30, 2021, that will be recognized in future periods, such as recorded in contract liabilities. The estimated revenues reflected in the table may include estimated revenues that are anticipated under executed precedent transportation agreements for projects that are subject to regulatory approvals.

The operating subsidiaries of the Company provide storage services whereby they store natural gas or NGLs on behalf of customers and also periodically hold customer gas under parking and lending (PAL) services. Since the customers retain title to the gas held by the Company in providing these services, the Company does not record the related gas on its balance sheet.

The operating subsidiaries of the Company also periodically lend gas to customers under PAL and certain firm services, and gas or NGLs may be owed to the operating subsidiaries as a result of transportation imbalances. As of June 30, 2021, the amount of gas owed to the Company's operating subsidiaries due to gas imbalances and gas loaned under PAL and certain firm service agreements was approximately 14.9 trillion British thermal units (TBtu). Assuming an average market price during June 2021 of $3.17 per million British thermal unit (MMBtu), the market value of that gas was approximately $47.2 million. As of December 31, 2020, the amount of gas owed to the Company's operating subsidiaries due to gas imbalances and gas loaned under PAL and certain firm service agreements was approximately 11.2 TBtu. Assuming an average market price during December 2020 of $2.45 per MMBtu, the market value of that gas was approximately $27.4 million. As of June 30, 2021, and December 31, 2020, there were 0 outstanding NGL imbalances owed to the Company's operating subsidiaries. If any significant customer should have credit or financial problems resulting in a delay or failure to repay the gas owed to the operating subsidiaries, it could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The methods and assumptions used in estimating the fair value amounts included in the disclosures for financial assets and liabilities are consistent with those disclosed in the 2020 Annual Report on Form 10-K.

    

The carrying amounts and estimated fair values of the Company's financial assets and liabilities which were not recorded at fair value on the Condensed Consolidated Balance Sheets as of June 30, 2021, and December 31, 2020, were as follows (in millions):

The Company and its subsidiaries are parties to various legal actions arising in the normal course of business. Management believes the disposition of these outstanding legal actions, including the legal actions identified below, will not have a material impact on the Company's financial condition, results of operations or cash flows.

On May 25, 2018, plaintiffs Tsemach Mishal and Paul Berger (on behalf of themselves and the purported class, Plaintiffs) initiated a purported class action in the Court of Chancery of the State of Delaware (the Court) against the following defendants: the Company, Boardwalk GP, LP (Boardwalk GP), Boardwalk GP, LLC and BPHC (together, Defendants), regarding the potential exercise by Boardwalk GP of its right to purchase the issued and outstanding common units of the Company not already owned by Boardwalk GP or its affiliates (Purchase Right).

On June 25, 2018, Plaintiffs and Defendants entered into a Stipulation and Agreement of Compromise and Settlement, subject to the approval of the Court (the Proposed Settlement). Under the terms of the Proposed Settlement, the lawsuit would be dismissed, and related claims against the Defendants would be released by the Plaintiffs, if BPHC, the sole member of the general partner of Boardwalk GP, elected to cause Boardwalk GP to exercise its Purchase Right for a cash purchase price, as determined by the Company's Third Amended and Restated Agreement of Limited Partnership, as amended (the Limited Partnership Agreement), and gave notice of such election as provided in the Limited Partnership Agreement within a period specified by the Proposed Settlement. On June 29, 2018, Boardwalk GP elected to exercise the Purchase Right and gave notice within the period specified by the Proposed Settlement. On July 18, 2018, Boardwalk GP completed the purchase of the Company's common units pursuant to the Purchase Right.

On September 28, 2018, the Court denied approval of the Proposed Settlement. On February 11, 2019, a substitute verified class action complaint was filed in this proceeding. The Defendants filed a motion to dismiss, which was heard by the Court in July 2019. In October 2019, the Court ruled on the motion and granted a partial dismissal, with certain aspects of the case proceeding to trial. A trial was held the week of February 22, 2021, and post-trial oral arguments were held on July 14, 2021.

The Company’s future capital commitments are comprised of binding commitments under purchase orders for materials ordered but not received and firm commitments under binding construction service agreements. The commitments as of June 30, 2021, were approximately $143.6 million, all of which are expected to be settled within the next twelve months.

There were no substantial changes to the Company’s commitments under pipeline capacity agreements disclosed in Note 5 of Part II, Item 8. of the Company’s 2020 Annual Report on Form 10-K.

As of June 30, 2021, and December 31, 2020, the Company had principal amounts of notes and debentures outstanding of $3.4 billion, with a weighted-average interest rate of 4.84%. The indentures governing the notes and debentures have restrictive covenants which provide that, with certain exceptions, neither the Company nor any of its subsidiaries may create, assume or suffer to exist any lien upon any property to secure any indebtedness unless the debentures and notes shall be equally and ratably secured. All of the Company's debt obligations are unsecured. As of June 30, 2021, Boardwalk Pipelines and its operating subsidiaries were in compliance with their debt covenants.

As of June 30, 2021, the Company had 0 outstanding borrowings under its revolving credit facility and had the full borrowing capacity of $1.0 billion available. Outstanding borrowings under the Company's revolving credit facility as of December 31, 2020, were $130.0 million, with a weighted-average borrowing rate of 1.39%. The Company and its subsidiaries were in compliance with all covenant requirements under the revolving credit facility as of June 30, 2021.

On May 27, 2021, the Company entered into a Master Assignment and Amendment No. 3 to Third Amended and Restated Revolving Credit Agreement (the Amendment), which amended the Third Amended and Restated Revolving Credit Agreement, dated May 26, 2015 (as amended and modified, the Credit Agreement). The Amendment, among other things, amended the Credit Agreement to (i) decrease the borrowing capacity from $1.5 billion to $1.0 billion, (ii) extend the maturity date to May 27, 2026, although the maturity date may be further extended for two one-year extensions at the Company’s election, and (iii) provide for a transition from interest rates based on the Eurodollar Rate, currently considered the London Interbank Offered Rate, to interest rates based on variants of the Secured Overnight Financing Rate as needed. The remaining significant terms and conditions of the revolving credit facility agreement did not change.

Components of net periodic benefit cost for both the Retirement Plans and PBOP for the three months ended June 30, 2021 and 2020, were as follows (in millions):

Components of net periodic benefit cost for both the Retirement Plans and PBOP for the six months ended June 30, 2021 and 2020, were as follows (in millions):

During the six months ended June 30, 2021, the Company made $2.2 million in contributions to the defined benefit pension plan and expects to fund an additional $2.3 million in the remainder of 2021.

Texas Gas Transmission, LLC employees hired on or after November 1, 2006, and all other employees of the Company are provided retirement benefits under a defined contribution plan, which also provides 401(k) plan benefits to its participants. Costs related to the Company’s defined contribution plan were $3.1 million and $2.9 million for the three months ended June 30, 2021 and 2020, and $6.2 million and $5.8 million for the six months ended June 30, 2021 and 2020.

Loews provides a variety of corporate services to the Company under service agreements, including information technology, tax, risk management, internal audit and corporate development services and charges the Company for allocated overheads. The Company incurred charges related to these services of $1.3 million and $1.4 million for the three months ended June 30, 2021 and 2020, and $2.7 million and $2.8 million for the six months ended June 30, 2021 and 2020.

We operate in the midstream portion of the natural gas and natural gas liquids and other hydrocarbons industry, providing transportation and storage for those commodities.

    

Our net income for the six months ended June 30, 2021, increased $40.7 million, or 28%, to $184.3 million compared to $143.6 million for the six months ended June 30, 2020, primarily due to the factors discussed below.

Operating revenues for the six months ended June 30, 2021, increased $45.1 million, or 7%, to $679.9 million, compared to $634.8 million for the six months ended June 30, 2020. Including fuel and transportation expense, net operating revenues increased $42.5 million, or 7%. The increase was driven primarily by our recently completed growth projects and higher system utilization from colder winter weather experienced during the first quarter of 2021, partially offset by higher fuel and transportation expense.

Operating costs and expenses for the six months ended June 30, 2021, increased $9.5 million, or 2%, to $419.6 million, compared to $410.1 million for the six months ended June 30, 2020. Excluding fuel and transportation expense which was offset with operating revenues, operating costs and expenses increased $6.9 million or 2% when compared to 2020 primarily due to an increased asset base from recently completed growth projects.

Total other deductions for the six months ended June 30, 2021, decreased $5.2 million, or 6%, to $75.7 million compared to $80.9 million for the six months ended June 30, 2020, primarily due to lower average interest rates, lower average outstanding long-term debt and lower costs related to the Texas Gas Transmission, LLC (Texas Gas) pension plan.

We anticipate that our existing capital resources, including our revolving credit facility and our cash flows from operating activities, will be adequate to fund our operations and capital expenditures for 2021. We have an effective shelf registration statement on file with the Securities and Exchange Commission under which we may publicly issue debt securities, warrants or rights from time to time. In the second quarter 2021, our revolving credit facility was amended, to among other things, reduce the borrowing capacity from $1.5 billion to $1.0 billion and extend the maturity date to May 27, 2026. Refer to Note 6 in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

Our debt is primarily issued at Boardwalk Pipelines, LP (Boardwalk Pipelines), our wholly owned subsidiary, although we have historically also issued debt at our operating subsidiaries. As of June 30, 2021, all of the outstanding notes issued by Boardwalk Pipelines (Subsidiary Issuer) and the full amount of the revolving credit facility, are guaranteed by us (Parent Guarantor). The purpose of the guarantees is to help simplify our reporting and capital structure.

We guarantee the amounts borrowed under the revolving credit facility, but those amounts are not subject to the reporting requirements of Rule 13-01 of Regulation S-X. As of June 30, 2021, there were no outstanding borrowings under the

revolving credit facility. The below table identifies our principal amounts outstanding for the debt that is subject to the disclosure rules of Rule 13-01 of Regulation S-X (in millions):

(2) This represents principal amounts of outstanding debt at Gulf South Pipeline Company, LLC and Texas Gas.

(3) As of June 30, 2021, this represents the amounts related to a finance lease and unamortized debt discount and issuance costs.

The Guaranteed Notes are fully and unconditionally guaranteed by the Parent Guarantor on a senior unsecured basis. The guarantees of the Guaranteed Notes rank equally with all of our existing and future senior debt, including our guarantee of indebtedness under our revolving credit facility. The guarantees will be effectively subordinated in right of payment to all of our future secured debt to the extent of the value of the assets securing such debt. There are no restrictions on the Subsidiary Issuer’s ability to pay dividends or make loans to the Parent Guarantor. The guarantee obligations will be terminated with respect to any series of notes if that series has been discharged or defeased.

Our operating assets, operating liabilities, operating revenues, expenses and other comprehensive income either exist at or are generated by our operating subsidiaries. The Parent Guarantor and the Subsidiary Issuer have no material assets, liabilities or operations independent of their respective financing activities, including the Guaranteed Notes and advances to and from each other and the operating subsidiaries as a result of the cash management program described in Note 2 of Part II, Item 8. of our 2020 Annual Report on Form 10-K, and their investments in the operating subsidiaries. For these reasons, we meet the criteria in Rule 13-01 of Regulation S-X to omit the summarized financial information from our disclosures.

    

Maintenance capital expenditures for the six months ended June 30, 2021 and 2020, were $52.2 million and $64.5 million. Growth capital expenditures were $86.2 million and $162.5 million for the six months ended June 30, 2021 and 2020. During the six months ended June 30, 2020, we purchased the remaining undivided interest in the Bistineau storage facility that we did not previously own for $18.8 million.

 

Our principal payments associated with our outstanding debt obligations as of June 30, 2021, and December 31, 2020, were $3.4 billion and $3.5 billion. Refer to Note 6 in Part I, Item 1. of this Quarterly Report on Form 10-Q and Note 11 in Part II, Item 8. of our 2020 Annual Report on Form 10-K for more information on our financing activities and debt obligations.

Net cash provided by operating activities increased $25.7 million to $358.1 million for the six months ended June 30, 2021, compared to $332.4 million for the comparable 2020 period primarily due to the change in net income.

Net cash used in investing activities decreased $109.5 million to $139.8 million for the six months ended June 30, 2021, compared to $249.3 million for the comparable 2020 period. The decrease was primarily driven by a decrease of $107.4 million in capital spending.

 

Net cash used in financing activities increased $57.9 million to $142.3 million for the six months ended June 30, 2021, compared to $84.4 million for the comparable 2020 period primarily from the repayment of borrowings under the revolving credit facility in 2021 due to lower capital spending in 2021 compared to 2020.

 

At June 30, 2021, we had no guarantees of off-balance sheet debt to third parties, no debt obligations that contain provisions requiring accelerated payment of the related obligations in the event of specified levels of declines in credit ratings and no other off-balance sheet arrangements.

Certain amounts included in or affecting our unaudited condensed consolidated financial statements and related disclosures must be estimated, requiring us to make certain judgments and assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. These estimates and judgments affect the reported amounts for assets, liabilities, revenues, expenses and our disclosure of contingent assets and liabilities in our financial statements. We evaluate these estimates and judgments on an ongoing basis, utilizing historical experience, consultation with third parties and other methods we consider reasonable. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the periods in which the facts that give rise to the revisions become known.

    

During 2021, there have been no significant changes to our critical accounting policies, judgments or estimates disclosed in our 2020 Annual Report on Form 10-K.

Certain statements contained in this Quarterly Report on Form 10-Q, as well as some statements in periodic press releases and some oral statements made by our officials and our subsidiaries during presentations about us, are “forward-looking.” Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance, intentions or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will likely result” and similar expressions. In addition, any statement made by our management concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible actions by us or our subsidiaries, are also forward-looking statements.

Forward-looking statements are based on current expectations and projections about future events and their potential impact on us. While management believes that these forward-looking statements are reasonable as and when made, there is no assurance that future events affecting us will be those that we anticipate. All forward-looking statements are inherently subject to a variety of risks and uncertainties, many of which are beyond our control which could cause actual results to differ materially from those anticipated or projected. These include, among others, risks and uncertainties related to the impacts of volatility in energy prices and the coronavirus disease 2019, the impacts of changes to laws and regulations or the implementation thereof, the costs of maintaining and ensuring the integrity and reliability of our pipeline systems, our ability to maintain or replace expiring gas transportation and storage contracts, our ability to complete projects that we have commenced or will commence, successful negotiation, consummation and completion of contemplated transactions, projects and agreements, and our ability to contract and sell short-term capacity on our pipelines. Developments in any of these areas could cause our results to differ materially from results that have been or may be anticipated or projected. Forward-looking statements speak only as of the date they are made and we expressly disclaim any obligation or undertaking to update these statements to reflect any change in our expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.

    

Refer to Part II, Item 7A. of our 2020 Annual Report on Form 10-K, for discussion of our market risk.

    

 

 

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (Exchange Act), we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to allow timely decisions regarding required disclosure and to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2021, at the reasonable assurance level.

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2021, that have materially affected or that are reasonably likely to materially affect our internal control over financial reporting. 

For a discussion of certain of our current legal proceedings, please see Note 5 in Part I, Item 1. of this Quarterly Report on Form 10-Q.

There have been no material changes from the risk factors previously discussed in Part I, Item 1A. of our 2020 Annual Report on Form 10-K.

Item 6.  Exhibits

The following documents are filed or furnished as exhibits to this report:

SIGNATURE

    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.