The headlines and analysts’ comments at the time were shrill. Words such as “fiasco” were thrown around. Tudor, Pickering, Holt & Co. opined that “even bears will be shocked” at Boardwalk Pipeline Partners’ announcement in February 2014 of an 81% cut to its unit distribution. It was no surprise when the MLP’s unit price dropped 46% in one day.

Boardwalk’s Texas Gas Transmission system had been set up after World War II to move natural gas from North Louisiana and the Gulf to the Midwest to serve markets in the Midwest. Texas Gas also was designed to deliver gas to thirdparty pipelines that served the Northeast—a market now supplied by the nearby Marcellus and Utica shales. It appeared the changing midstream was challenging Boardwalk’s Texas Gas system.

Maybe not.

That difficult move, viewed a year later, looks shrewd. The cut has allowed one of the industry’s largest operators to launch a new—and so far successful—organic growth strategy that could pay off for years to come. The decision altered Boardwalk’s investor mix as it created an opportunity for long-term value creation—even in the currently difficult commodity price environment.

Its two senior executives took time to discuss with Midstream Business what happened, the opportunities gained and how they are paying off for unitholders.

MIDSTREAM: Boardwalk has been called a turnaround story. How did you do it?

HORTON: I do not know whether “turnaround” is the right word, because things were not as bleak as some people may have thought. At the time we made the difficult decision to reduce the distribution, the question was not whether to reduce the distribution, it was by how much. We took a disciplined approach in making that decision.

When we announced the distribution reduction, we deviated from our historical practice of not providing financial guidance, because we wanted investors to understand the rationale for reducing the distribution. We gave limited guidance that our distributable cash flow would be approximately $400 million in 2014, lower than in 2013 for reasons we explained at the time of the announcement. Dividing that estimated $400 million by the units outstanding at that time, and assuming a distribution coverage ratio of 1X, indicated an annual cash distribution of around $1.60. It was clear that $400 million in estimated distributable cash flow would not support the $2.13 per unit annualized distribution that we had paid over the previous four quarters.

When you are paying distributions to unitholders that exceed distributable cash flow, there is only one way to make up the difference—you have to finance it, and that did not make any sense to us. We have had a stated goal of strengthening our balance sheet and achieving a 4X debt-to-EBITDA ratio. So financing the difference by issuing debt would increase leverage, contrary to our goal. It also did not make sense to finance the distributions by selling equity.

The decision to reduce the distribution was not made lightly, and we approached it in a disciplined manner where all of our options were analyzed. As we worked through the process we began having discussions with our board of directors. It was clear that if we just cut the distribution to a 1X distribution coverage ratio, we were doing nothing to help de-leverage our balance sheet, which we believe is an important step in increasing Boardwalk’s longterm value to our unitholders.

Our goal is to maintain our investment-grade credit rating in order to keep our cost-of-capital down. Reducing the distribution to the level we did provided the opportunity to de-leverage the balance sheet and use internally generated cash to fund growth projects. That is the approach we announced to the market.

I suppose it has been a turnaround in that, since we reduced the quarterly distribution, we have brought in about $1.5 billion of new projects secured by long-term precedent agreements. We were also able to make a $300 million acquisition of the Evangeline ethylene pipeline system in 2014. I think the combination of that acquisition, along with announcing the organic growth projects, all within a year of announcing the distribution reduction, have made the story what it is.

Some refer to it as a turnaround. To me, we are restructuring the company, and these growth initiatives are a big part of it.

MIDSTREAM: How important were transactions such as the Evangeline purchase to the company’s renewed outlook?

HORTON: The Evangeline acquisition was important but it was not any more important than some of the organic growth projects that we have announced. The Coastal Bend Header project, where we will build a header system on our Gulf South Pipeline into the Freeport (Texas) LNG plant, is an important project for Boardwalk. We will invest approximately $720 million to upgrade the Gulf South legacy system and build the new 65-mile header pipeline. All of the growth projects that we have announced, including the Texas Gas Transmission North-to-South projects, are very important for us to grow the company.

Evangeline is important to Boardwalk because it gives us vertical integration with Boardwalk Louisiana Midstream [BLM], our liquids transportation and storage business. Most of the ethylene that BLM transports and stores has come from the Evangeline system. So the acquisition is an important vertical integration play for our BLM operations.

Evangeline is the third acquisition that we have done since I joined Boardwalk and was one of the important pieces of the portfolio of growth initiatives that we accomplished in 2014.

BUSKILL: When Stan joined Boardwalk in 2011, one of the key strategies that he recommended and we incorporated was to diversify the company’s logistical opportunities outside of our traditional natural gas sector, including into liquids transportation and storage, if the right opportunities were available. But we wanted to diversify in a way that preserved the fee-based nature of our revenue stream.

Our 2012 acquisition of BLM was a key step in diversifying into liquids transportation and storage, and the Evangeline acquisition is important to us as it provides vertical integration with our BLM assets.

MIDSTREAM: Part of what makes an MLP appealing to investors is a regular cash distribution. What sorts of concerns were you discussing before the cut? Was there a Plan B?

HORTON: When we reviewed the analytical work that Jamie and his group prepared and discussed the options, it became clear that the decision that we ultimately came to, and recommended to the board, was the one that would improve the company’s financial strength and create long-term value for our unitholders. As I stated earlier, we studied this decision very carefully and presented the options to the board.

We realized that there was going to be an adjustment in the unit price and that investors who are yield-oriented could trade out of the units and that value investors could be interested in purchasing units. Our belief is if you have a long-term focus—and keep that long-term focus—then things like this are the right thing to do.

MIDSTREAM: Inside of a year, Boardwalk’s unit prices ranged from $11.99 to $20.51—a pretty wide spread. What price range do you expect this year?

BUSKILL: There was a lot of trading out of, and into, the stock, and we have seen a transition in our investor base. If I categorized our investors today, I would say we have more unitholders who are value-type investors and not as many traditional, MLP yield-type investors as we had prior to the reduction in the distribution. I cannot speculate on what the stock price may do in the future.

MIDSTREAM: Boardwalk recently was been added back to the Alerian MLP Index. What does that say about Boardwalk’s perception among industry insiders?

HORTON: We meet with investors at least once a quarter so we are usually not surprised by their perceptions. They ask questions about our projects. They also have questions about the distribution—and when we are going to reinstate distribution growth. We do not speculate on the level of the distribution, because the board makes a decision on the level of the distribution every quarter.

I think people are starting to recognize our progress. They are starting to look at the backlog of projects. They see that the company could have a nice trajectory of growth. I think that is why we were added back to the Alerian MLP Index. It was a surprise to us when the announcement came out. Investing in the Alerian gives people another way to invest in Boardwalk, without a direct investment, to the extent that they want to.

MIDSTREAM: Boardwalk’s debt-to-EBITDA was about 5.4X at the end of the fourth quarter—35% above your peer average of almost 4.0X. What are your plans for lowering the debt ratio and improving the balance sheet in the near term?

BUSKILL: Stan really laid it out when he was discussing the rationale for reducing the distribution. There are really only two ways to reduce the debt-to-EBITDA ratio. You can either reduce debt—or increase EBITDA.

With the abundant supply of natural gas that we now have in this country, we projected that demand growth would eventually occur. Last year we saw natural gas demand start to respond and, over the course of one year, we announced about $1.5 billion in organic growth projects.

We have been focused on reducing our debt-to-EBITDA ratio by growing EBITDA, which we can do when these projects go into service. But keep in mind, it is going to take time to get these projects constructed and placed in service. In other words, it will be some time before we start seeing the full EBITDA contribution from that $1.5 billion of capex. But, importantly, the revenues associated with these projects will be fee-based, providing predictability of the cash flows once the projects are placed in service.

MIDSTREAM: How do you plan to finance debt that will mature during the next few years?

BUSKILL: I will not discuss projected financing plans, but if you look, historically, we have been able to refinance our debt at attractive rates. Bondholders tend to like the types of assets Boardwalk has because of the fee-based nature of the revenue stream. Also when you look at the $1.5 billion in organic growth projects, the weighted average contract life is approximately 18 years. So they are very long-lived contracts, which is something else that bondholders like.

This past November, we issued $350 million of bonds at Boardwalk at a coupon rate of 4.95%. The primary reason for the issuance was to refinance the $275 million of bonds at our Gulf South Pipeline that matured in February. Basically, we were pre-funding the payoff of those Gulf South bonds and have subsequently done so. In March of this year, we completed a reopener of our November issuance and issued an additional $250 million of senior notes, the proceeds of which will be used to retire Texas Gas bonds that mature in June.

MIDSTREAM: How has commodity price volatility impacted Boardwalk?

HORTON: It has actually helped us a little bit. We have seen both price volatility and a return in seasonal and 12-month price spreads. The fundamentals for our financial storage, or park and lend, business are better than they were last year, when we were in a backwarded market, where the prompt month value of gas was greater than the future price of gas.

When there are price spreads—especially when the prompt-month price drops below the future prices or back to a contango market—we see spreads that support customers parking gas in our storage facilities.

We have also had opportunities over the last two winters to lend gas from our storage systems when there was extreme cold weather or occasional disruptions in supply.

Price volatility helps us—primarily in our park-and-lend storage service.

As Jamie said previously, we are basically a fee-based MLP, which tends to insulate us from movements in commodity prices. We do not have commodity risk except for the financial part of our storage, which is not a huge part of our business.

Of course, we worry about trends. For example, how long is the supply bubble going to last? What kind of dislocations will there be? If drilling really slows down for a long period of time, could it start impacting throughput?

Usually when natural gas prices stay relatively low, you wind up picking up electric generation load, particularly as gas-fired generation competes against coal, as well as additional throughput to industrials.

MIDSTREAM: Boardwalk’s business is primarily long-haul natural gas transportation and storage services. Consequently, a downturn there can significantly hamper business. What is Boardwalk’s position on diversifying? What assets might complement Boardwalk’s current business but add flexibility to its revenue stream?

HORTON: When I joined Boardwalk in 2011, we were a natural gas interstate pipeline and storage company—100%. Shortly thereafter we laid out our diversification strategy that Jamie mentioned. We stated that we were looking for investments in energy assets that had a similar risk profile to that of our interstate natural gas pipelines—assets supported by fee-based contracts, with limited or no commodity-price risk. Since announcing that diversification strategy, we have begun gathering and processing natural gas and transporting and storing liquids. Let me tell you about those diversification efforts.

We started up a company called Boardwalk Field Services (BFS). This involved converting the south end of Gulf South in Texas from a dry-gas system to a wet-gas system, building gathering lines to connect our customers’ Eagle Ford production to the converted wet-gas system, and building a cryogenic gas processing plant to process that Eagle Ford production after it has been gathered and transported on our BFS system to the plant.

The BFS assets were placed into service in June 2013, and this project has provided diversification into the gathering and processing business and better utilization of the converted Gulf South assets. So we are engaged in gathering and processing, and we would like to grow that business.

As Jamie mentioned, in 2012 we bought the BLM assets that are basically fee-based transportation and storage of liquids in two hubs around Lake Charles and Baton Rouge, La. Since that acquisition, we have placed into service expansion projects at both hubs and announced a project to provide transportation and storage service to a planned ethane cracker along the Gulf Coast. Last year we bought the Evangeline pipeline, which is an interstate ethylene transportation system that is also supported by fee-based contracts and is vertically integrated with our BLM assets. We recognized when we acquired the BLM assets the potential for growth of that business.

MIDSTREAM: Where are the best growth opportunities for Boardwalk and other pipeline and storage operators?

HORTON: For the last couple of years, I have been telling people that what we have seen in the natural gas business is a tremendous supply response, basically due to technology gains in the business. That technology has unleashed a vast amount of natural gas reserves and, correspondingly, production.

While we have seen some demand growth, we have not seen a big increase in demand. Typically, the demand response will lag the supply response by some period of time. That’s what has happened.

But within the next 12 months, you are going to start seeing deliveries into the first LNG export facility. An LNG export facility is now under construction in Freeport, Texas, and another one is in Cameron, La. I think we are going to start seeing these LNG export facilities coming on every year or two. There are more in the regulatory approval process at both DOE [U.S. Department of Energy] and FERC [Federal Energy Regulatory Commission]. As these plants come online you will see demand continually increase.

You are also seeing more demand in the industrial sector, as well as in the electric generation sector because of the new EPA [U.S. Environmental Protection Agency] regulations. I think we are just starting to see the first wave of that big demand response in the industrial and electric generation markets.

A lot of the pipeline expansions that have been announced over the last couple years have been supply-based projects. Even the turnaround of our Texas Gas Transmission system is more of a response to supply needing to get out of a basin to a market.

The Gulf Crossing Pipeline expansion that we did in 2008 and 2009 was to take new supplies of natural gas and connect them to the national pipeline grid. Projects being proposed in the Northeast today are basically responses to the need to move gas out of the basins and transport it to markets.

I think the next wave of pipeline expansions are going to be more demand driven because we are going to need new pipeline capacity to serve new power plants, industrial load and LNG export facilities. Our Coastal Bend Header project is a great example of how Boardwalk’s capacity will be used to serve a new LNG plant.

I think the demand growth is going to fuel a lot of pipeline projects going forward and this demand growth is going to be bullish for storage, especially in the Gulf Coast area that is the heart of a growing demand market for LNG exports and power generation and industrial loads. I think that storage is going to become more valuable over time as the demand grows, and those markets need storage to help balance swings in demand.

MIDSTREAM: You seem to have had strong shipper interest in your plan to make your Texas Gas Transmission system bi-directional. Do you foresee challenges from FERC to the project?

HORTON: No, I think these are good projects. All that these projects involve is compression and some re-piping of our compressor stations, which will have minimal landowner and environmental impact. These are not projects that will involve constructing a pipeline where pipelines do not exist today. The Texas Gas projects are backed by long-term contracts. For these reasons, I do not anticipate any regulatory problems getting these projects certificated by FERC.

MIDSTREAM: Do you expect the proposed Bluegrass NGL Pipeline project to be revived at a future date?

HORTON: No, we have terminated the joint venture with The Williams Cos. The 600-mile segment of Texas Gas Transmission that we were going to convert from natural gas service to liquids service and make part of the Bluegrass Pipeline is now needed for natural gas service. So the line is no longer available for conversion to NGL use.

MIDSTREAM: Some midstream companies have been forced to cut workforce numbers. Where does Boardwalk stand on adding, or cutting, its workforce, coupling lower commodity prices with the company’s need to grow?

HORTON: Well naturally, as you add new load to the system and expand the system, you are going to need additional employees. So if anything, we see our employee base growing, not declining.

We are very fortunate that we have an outstanding group of employees here at Boardwalk. We have approximately 1,200 employees, about 240 here in the Houston office, about 210 in our Owensboro, Ky., office, about 90 that run our liquids business and about 660 who are primarily field employees dispersed along our assets. They are an outstanding group. If anything, I would see us adding to the employee base, not subtracting from it, to support the development and operations of our organic growth projects.

BUSKILL: Over the last four or five years, we have been very disciplined on the administrative side of the business. We have, as Stan mentioned, done several acquisitions and several organic growth projects and have successfully absorbed most of the back-office functions without adding to our back-office headcount.

HORTON: We are actually operating more assets today with roughly the same amount of the people as we were three or four years ago. So everyone’s fully employed.

MIDSTREAM: What is your relation with your general partner, Loews Corp.?

HORTON: We have a very good relationship with our general partner. They are exceptional people to work with and they have been very supportive of Boardwalk.

Loews has helped us finance acquisitions and growth projects in the past, which has given us flexibility to move very quickly on opportunities. For example, we have partnered with a Loews subsidiary to finance two acquisitions, subsequently dropping down the general partner’s ownership interest to us over a period of time. When Boardwalk reduced the distribution, Loews made sure that investors knew that we had access to capital and were able to get projects financed by offering us subordinated debt.

They’ve just been a very supportive general partner.

BUSKILL: I agree; Loews is a great partner to have. As Stan mentioned, they have helped from a financial aspect. When we had the Bluegrass project, they partnered with us to take some of that risk off of Boardwalk as we were pursuing that opportunity. Another example of their financial support, they have provided subordinated debt in the past, and we currently have a $300 million sub-debt option we can use if needed. Loews is extremely supportive.

HORTON: And [Loews CEO] Jim Tisch is very knowledgeable of what is going on in the energy business. Boardwalk is not Loews’s only energy investment. They own a majority share in Diamond Offshore, which is also a publicly traded company.

Paul Hart can be reached at pdhart@hartenergy.com or 713-260-6427.

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