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ifalsei03/31/2020i2020iQ1i0001336047i12/31i—i9i1i21i2022-05-26i2020-05-26iAs
of March 31, 2020, Boardwalk Pipelines and its operating subsidiaries were in compliance with their debt covenants.iThe Company and its subsidiaries were in compliance with all covenant requirements under the revolving credit facility as of March 31, 2020.iBoardwalk
Pipelines (Subsidiary Issuer) has issued securities which have been fully and unconditionally guaranteed by the Company (Parent Guarantor). The Subsidiary Issuer is 100% owned by the Parent Guarantor. The Company's subsidiaries had no significant restrictions on their ability to pay distributions or make loans to the Company except as noted in their debt covenants and had no restricted assets as of March 31, 2020, and December 31, 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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i10-Q
(Mark One)
i☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
iDelaware
i20-3265614
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i9 Greenway Plaza, Suite 2800
iHouston,
iTexas
i77046
i(866)
i913-2122
(Address
and Telephone Number of Registrant’s Principal Executive Office)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
NONE
NONE
NONE
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No o
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.
Large Accelerated Filer o Accelerated Filer o iNon-Accelerated Filerý Smaller
Reporting Company i☐
Emerging Growth Company i☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ý
Boardwalk Pipeline Partners, LP meets
the conditions set forth in General Instructions H(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
The
accompanying notes are an integral part of these condensed consolidated financial statements.
8
BOARDWALK PIPELINE PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: iBasis
of Presentation
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 March 31, 2020, Boardwalk Pipelines Holding Corp. (BPHC), a wholly-owned subsidiary of Loews Corporation (Loews), owned directly or indirectly, i100%
of the Company’s capital.
iThe 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 March 31, 2020, and December 31, 2019, and its results of operations, comprehensive income, changes in cash flows and changes in partners' capital for the three months ended March 31, 2020 and 2019. 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, 2019 (2019 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 2019 Annual Report on Form 10-K are the same policies that were used in preparing the accompanying unaudited condensed consolidated financial statements.
Note 2: iRevenues
The Company operates in ione reportable segment and contracts directly with producers of natural gas, with end-use customers, including local distribution companies, electric power generators, exporters of liquefied natural gas and industrial users, with marketers and with interstate and intrastate
pipelines, who, in turn, provide transportation and storage services for end-users. iThe following table presents the Company's revenues disaggregated by type of service for the three months ended March 31, 2020 and 2019 (in millions):
(1)
Revenues earned from contracts with minimum volume commitments (MVCs) are included in firm service given the stand-ready nature of the performance obligation and the guaranteed nature of the fees over the contract term.
(2) Other operating revenues include certain revenues earned from operating leases, pipeline management fees and other activities that are not considered central and ongoing major business operations of the Company and do not represent revenues earned from contracts with customers.
As of March 31, 2020, and December 31, 2019, the Company had receivables recorded in Trade Receivables from contracts with customers of $i119.8 million and
$i117.2 million, contract assets recorded in Other Assets from contracts with a customer at each date of $ii1.5/
million and contract liabilities recorded in Other Liabilities from contracts with customers of $i15.9 million and $i11.8
million.
As of March 31, 2020, contract liabilities are expected to be recognized through 2040. iSignificant changes in the contract liabilities balances during the three months ended March 31,
2020, are as follows (in millions):
iThe 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 March 31, 2020. The amounts presented primarily consist of fixed fees or MVCs which are typically recognized over time as the performance obligation
is satisfied, as 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 (FERC) 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 March 31, 2020, 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.
(1) The 2020 period is for the nine months ending December 31, 2020. For the three months ended March 31, 2020, the Company recognized $305.5 million of fixed fee revenues for the fulfillment of performance obligations.
Note 3: iGas
and Liquids Stored Underground and Gas and NGLs Receivables and Payables
iThe 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 March 31, 2020, the amount of gas owed to the operating subsidiaries
of the Company due to gas imbalances and gas loaned under PAL and certain firm service agreements was approximately i26.6 trillion British thermal units (TBtu). Assuming an average market price during March 2020 of $i1.60
per million British thermal unit (MMBtu), the market value of that gas was approximately $i42.6 million. As of March 31, 2020, the amount of NGLs owed to the Company's operating subsidiaries due to imbalances was approximately i0.1
million barrels, which had a market value of approximately $i1.3 million. As of December 31, 2019, the amount of gas owed to the operating subsidiaries due to gas imbalances and gas loaned under PAL and certain firm service agreements was approximately i12.8
TBtu. Assuming an average market price during December 2019 of $i2.08 per MMBtu, the market value of that gas was approximately $i26.6 million. As of December 31,
2019, there were ino outstanding NGL imbalances owed to the 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.
Note 4: iFair Value Measurements
Financial Assets and Liabilities
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 2019 Annual Report on Form 10-K.
i
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 March 31,
2020, and December 31, 2019, were as follows (in millions):
(1)
The carrying amount of long-term debt excludes a $i6.8 million long-term finance lease obligation and
$i6.4 million
of unamortized debt issuance costs.
Note 5: iCommitments and Contingencies
Legal Proceedings and Settlements
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.
Mishal and Berger Litigation
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. The case has been set for trial in early 2021.
City of New Orleans Litigation
Gulf South Pipeline Company, LLC, along with several other energy companies operating in Southern Louisiana,
has been named as a defendant in a petition for damages and injunctive relief in state district court for Orleans Parish, Louisiana, (Case No. 19-3466) by the City of New Orleans. The case was filed on March 29, 2019. The lawsuit claims include, among other things, negligence, strict liability, nuisance and breach of contract, alleging that the defendants’ drilling, dredging, pipeline and industrial operations since the 1930s have caused increased storm surge risk, increased flood protection costs and unspecified damages to the City of New Orleans.
Commitments for Construction
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 March 31, 2020, were approximately $i159.8 million, all of which are expected to be settled within the next twelve months.
12
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 2019 Annual Report on Form 10-K.
Purchase of Undivided Interest
In September 2019, the Company entered into an agreement to purchase the approximately i8%
undivided interest that it did not already ownin the Bistineau storage facility in Louisiana for approximately $i19.0 million. The FERC approved the purchase in early 2020 and the transaction closed on April 1, 2020. After this transaction, the Company
owns all of the Bistineau storage facility.
Note 6: iFinancing
As of March 31, 2020, and December 31, 2019, the
Company had total outstanding debt of $i3.5 billion and $i3.6 billion, including amounts outstanding under the
Company’s notes and debentures and its revolving credit facility.
Notes and Debentures
As of March 31, 2020, and December 31, 2019, the Company had notes and debentures outstanding of $ii3.3/
billion with a weighted-average interest rate of ii5.06/%. 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 March 31, 2020, Boardwalk Pipelines and its operating subsidiaries were in compliance with their debt covenants.
iThe
Company has included $i440.0 million of notes which mature in less than one year as long-term debt on its Condensed Consolidated Balance Sheets as of March 31, 2020. The Company has the intent and the ability to refinance the notes through the available borrowing capacity under its revolving credit facility as of March 31, 2020. The
Company expects to retire these notes at their maturity./
Revolving Credit Facility
Outstanding borrowings under the Company’s revolving credit facility as of March 31, 2020, and December 31, 2019, were $i275.0
million and $i295.0 million, with weighted-average borrowing rates of i2.00% and i3.00%.
The Company and its subsidiaries were in compliance with all covenant requirements under the revolving credit facility as of March 31, 2020. The revolving credit facility has a borrowing capacity of $i1.5 billion through May 26, 2020, and a borrowing capacity
of $i1.475 billion from May 27, 2020, to May 26, 2022. As of May 1, 2020, the Company had $i275.0
million of outstanding borrowings and approximately $i1.2 billion of available borrowing capacity under its revolving credit facility.
13
Note 7: iEmployee
Benefits
Defined Benefit Retirement Plans and Postretirement Benefits Other Than Pension (PBOP)
i
Components of net periodic benefit cost for both the Retirement Plans and PBOP for the three months ended March 31, 2020 and 2019, were as follows (in millions):
During
the three months ended March 31, 2020, the Company made $i0.5 million in contributions to the defined benefit pension plan, and expects to fund an additional $i2.5
million in the remainder of 2020.
Defined Contribution Plans
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 $i2.9
million and $i2.8 million for the three months ended March 31, 2020 and 2019.
Note 8: iRelated
Party Transactions
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 also charges the Company for allocated overheads. The Company incurred charges related to these services of $ii1.4/
million for the three months ended March 31, 2020 and 2019.
Distributions paid to BPHC and Boardwalk GP were $i25.6 million for the three months ended March 31, 2019. iNo
distribution was paid for the three months ended March 31, 2020.
Note 9: iiiSupplemental
Disclosure of Cash Flow Information //(in millions):
iBoardwalk
Pipelines (Subsidiary Issuer) has issued securities which have been fully and unconditionally guaranteed by the Company (Parent Guarantor). The Subsidiary Issuer is i100% owned by the Parent Guarantor. The Company's subsidiaries
had iino/ significant restrictions on their ability to pay distributions or make loans to the
Company except as noted in their debt covenants and had iino/ restricted
assets as of March 31, 2020, and December 31, 2019./ Note 6 contains additional information regarding the Company's debt and related covenants.
iThe
Company has provided the following condensed consolidating financial information in accordance with Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.
15
Condensed Consolidating Balance Sheets as of March 31, 2020
Net cash provided by (used in) operating activities
$
i18.8
$
(i44.9)
$
i192.5
$
i—
$
i166.4
INVESTING
ACTIVITIES:
Capital expenditures
i—
i—
(i74.0)
i—
(i74.0)
Proceeds
from sale of operating assets
i—
i—
i0.1
i—
i0.1
Advances to affiliates,
net
i6.6
(i30.2)
(i82.5)
i106.1
i—
Net
cash provided by (used in) investing activities
i6.6
(i30.2)
(i156.4)
i106.1
(i73.9)
FINANCING
ACTIVITIES:
Proceeds from borrowings on revolving credit agreement
i—
i—
i125.0
i—
i125.0
Repayment
of borrowings on revolving credit agreement
i—
i—
(i180.0)
i—
(i180.0)
Principal
payment of finance lease obligation
i—
i—
(i0.2)
i—
(i0.2)
Advances
from affiliates, net
i—
i75.9
i30.2
(i106.1)
i—
Distributions
paid
(i25.6)
i—
i—
i—
(i25.6)
Net
cash (used in) provided by financing activities
(i25.6)
i75.9
(i25.0)
(i106.1)
(i80.8)
(Decrease)
increase in cash and cash equivalents
(i0.2)
i0.8
i11.1
i—
i11.7
Cash
and cash equivalents at beginning of period
i0.3
i1.6
i1.7
i—
i3.6
Cash and cash equivalents at end of
period
$
i0.1
$
i2.4
$
i12.8
$
i—
$
i15.3
23
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying interim condensed consolidated financial statements and related notes, included elsewhere in this report, and prepared in accordance with accounting principles generally accepted in the United States of America and our consolidated financial statements, related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Annual Report on Form 10-K), and our Risk Factors contained in this Quarterly Report on Form 10-Q.
We
operate in the midstream portion of the natural gas and natural gas liquids and other hydrocarbons (herein referred to together as NGLs) industry, providing transportation and storage for those commodities.
Current Events
During the first quarter 2020, the world and the United States experienced the unprecedented impacts of the coronavirus disease 2019 (COVID-19) pandemic along with an excess supply of oil and natural gas. The excess supply of energy products has led to a significant decrease in energy prices and the social distancing and other measures in response to COVID-19 have changed the way that we operate our pipelines and conduct our business. Our operations are considered essential critical infrastructure under current Cybersecurity and Infrastructure Security Agency guidelines, and we have taken
measures to seek to ensure the safety of our employees and operations while maintaining uninterrupted service to our customers.
The following summarizes the material impacts to our business and the material actions we have taken to mitigate the current impacts from both the COVID-19 pandemic and the recent decline in energy prices:
•Our business has not been significantly impacted by the recent change in commodity prices. Some of our customers are directly impacted by changes in commodity prices, which can impact our ability to renew contracts at existing rates or capacities or impact the customers' ability to make payment for the services we provide. The COVID-19 pandemic and decreased energy
prices could cause a disruption of the normal operations of many of our customers, including the temporary closure or reduction of plant operations or shut-in of production. Should energy prices remain at current levels for a sustained period of time, or decline further, we could be exposed to increased credit risk or the increased risk of customers filing for bankruptcy protection. Refer to Part II, Item 1A. Risk Factors for further discussion.
•Through the date of this filing, we have not experienced any significant operational disruptions and our pipeline throughput has remained stable. For example, for the three months ended March 31, 2020, we transported approximately 801.0 trillion cubic feet of natural gas and approximately 23.0 million barrels of NGLs, an increase in excess of 10% from the comparable period
in 2019 for each commodity. Our results of operations for the first quarter 2020, have not been materially impacted as a result of the COVID-19 pandemic or the decline in energy prices, as further discussed below in Results of Operations.
•We did not experience any significant changes in our workforce composition and were able to implement our business continuity plans with no significant impact to our ability to maintain our operations. We continue to maintain strong physical and cybersecurity measures in order to both serve our operational needs with a remote workforce and keep our integrated pipeline and storage systems running to ensure that we provide reliable service to our customers.
•Through the date of this filing, our balance sheet remains strong
- we continue to have sufficient liquidity and we expect to continue to fund our operations through our operating cash flows. We have $1.2 billion of available borrowing capacity under our revolving credit facility and do not have any debt maturities until February 2021. We expect to fund our capital spending from available cash flows as further discussed below.
The safety of our employees and operations while providing uninterrupted service to our customers remains our primary focus. Although it is difficult to reasonably determine the ongoing and future impacts of the COVID-19 pandemic and the decline in energy prices, an extended downturn in the economy and depressed energy prices could negatively affect our customers and their businesses and could in turn have a material adverse effect on our results of operations, financial condition and cash flows.
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Firm
Agreements
A substantial portion of our transportation and storage capacity is contracted for under firm agreements. For the last twelve months ended March 31, 2020, approximately 90% of our revenues were derived from fixed fees under firm agreements. We expect to earn revenues of approximately $9.4 billion from fixed fees under committed firm agreements in place as of March 31, 2020, including agreements for transportation, storage and other services, over the remaining term of those agreements. For the three months ended March 31, 2020, we added approximately $370.0 million from the comparable amount at December 2019, from contracts entered into
during 2020. The table shown under Performance Obligations in Note 2 to the Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, contains more information regarding the revenues we expect to earn from fixed fees under committed firm agreements. For our customers that are charged maximum tariff rates related to our Federal Energy Regulatory Commission regulated operating subsidiaries, the amounts shown in the Note 2 table 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 estimated revenues reflected in the table may also include estimated revenues that are anticipated under executed precedent transportation agreements for projects that are subject to regulatory approvals. The amounts shown in the Note 2 table
do not include additional revenues we have recognized and may recognize under firm agreements based on actual utilization of the contracted pipeline or storage capacity, any expected revenues for periods after the expiration dates of the existing agreements or execution of precedent agreements associated with growth projects or other events that occurred or will occur subsequent to March 31, 2020.
Each year a portion of our firm transportation and storage agreements expire. The rates we are able to charge customers are heavily influenced by market trends (both short and longer term), including the available supply, geographical location of natural
gas production, the competition between producing basins, competition with other pipelines for supply and markets, the demand for gas by end-users such as power plants, petrochemical facilities and liquefied natural gas export facilities and the price differentials between the gas supplies and the market demand for the gas (basis differentials). Our storage rates are additionally impacted by natural gas price differentials between time periods, such as winter to summer (time period price spreads), and the volatility in time period price spreads. Demand for firm service is primarily based on market conditions which can vary across our pipeline systems. Through the date of this filing, while we have not seen a significant change in the demand for our services as a result of the COVID-19 pandemic or the decline in energy prices, if these conditions remain for an extended period of time, we could see a decline in the demand for our services. We focus our marketing efforts
on enhancing the value of the capacity that is up for renewal and work with customers to match gas supplies from various basins to new and existing customers and markets, including aggregating supplies at key locations along our pipelines to provide end-use customers with attractive and diverse supply options. If the market perceives the value of our available capacity to be lower than our long-term view of the capacity, we may seek to shorten contract terms until market perception improves.
Over the past several years, as a result of market conditions, we have renewed some expiring contracts at lower rates or for shorter terms than in the past. In addition to normal contract
expirations, in the 2018 to 2020 timeframe, transportation agreements associated with our significant pipeline expansion projects that were placed into service in the 2007-2009 timeframe, have expired. A substantial portion of the capacity associated with the pipeline expansion projects was renewed or the contracts were restructured, usually at lower rates or lower volumes, which has negatively impacted our operating revenues.
Our net income for the three months ended March 31,
2020, decreased $17.1 million, or 16%, to $91.0 million compared to $108.1 million for the three months ended March 31, 2019, primarily due to the factors discussed below.
Operating revenues for the three months ended March 31, 2020, decreased $6.1 million, or 2%, to $339.8 million, compared to $345.9 million for the three months ended March 31, 2019. Including the effect of the items in fuel and transportation expense, operating revenues decreased $10.0 million, or 3%. The decrease was driven by contract expirations that were recontracted at overall lower average rates as discussed above, partially offset by revenues from our recently completed
growth projects.
Operating costs and expenses for the three months ended March 31, 2020, increased $14.8 million, or 8%, to $207.6 million, compared to $192.8 million for the three months ended March 31, 2019. Excluding items offset in operating revenues,
25
operating costs and expenses increased $10.9 million, or 6%, when compared to 2019. The operating expense increase was primarily due to the timing of maintenance project expenses, an increased asset base from recently completed growth projects and the expiration of property tax abatements.
Total
other deductions for the three months ended March 31, 2020, decreased $3.7 million, or 8%, to $41.1 million compared to $44.8 million for the 2019 period primarily due to lower interest rates from borrowings under our revolving credit facility.
Liquidity and Capital Resources
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 2020. We have an effective shelf registration statement under which we may publicly issue debt securities, warrants or rights from time to time.
We
recently changed our distribution practice from quarterly distribution payments to an annual distribution payment in order to maximize financial flexibility and for administrative ease. As a result of the change, we anticipate making an annual distribution payment in the fourth quarter 2020. The declaration and payment of future distributions will be at the discretion of our general partner and will depend on many factors, including our earnings, financial condition, business needs and regulatory constraints.
Capital Expenditures
Maintenance capital expenditures for the three months ended March 31, 2020 and 2019, were $39.2 million and $19.0 million. Growth capital expenditures were $61.6 million
and $52.1 million for the three months ended March 31, 2020 and 2019. In the first quarter 2019, we purchased $2.9 million of natural gas to be used as base gas for our integrated natural gas pipeline system.
Contractual Obligations
Our principal payments associated with our debt obligations as of March 31, 2020, and December 31, 2019, were $3.6 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 2019 Annual Report on Form 10-K for more information on our financing activities and debt obligations.
Changes
in cash flow from operating activities
Net cash provided by operating activities decreased $18.0 million to $148.4 million for the three months ended March 31, 2020, compared to $166.4 million for the comparable 2019 period primarily due to the change in net income and the timing of receivables and accrued liabilities.
Changes in cash flow from investing activities
Net cash used in investing activities increased $26.6 million to $100.5 million for the three months ended March 31, 2020, compared to $73.9 million for the comparable 2019 period. The increase was primarily driven by an increase of $26.8 million in capital spending.
Changes
in cash flow from financing activities
Net cash used in financing activities decreased $60.6 million to $20.2 million for the three months ended March 31, 2020, compared to $80.8 million for the comparable 2019 period due to the change to our distribution practice from quarterly distribution payments to an expected annual distribution payment and an increase in borrowings under our revolving credit facility.
Off-Balance Sheet Arrangements
At March 31, 2020, 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.
26
Critical Accounting Policies
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 2020, there have been no significant changes to our critical accounting policies, judgments or estimates disclosed in our 2019 Annual Report on Form 10-K.
Forward-Looking Statements
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 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 recent changes in energy prices and the COVID-19 pandemic, 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.
Refer to Part II, Item 1A of this Quarterly Report on Form 10-Q and Part II, Item 7of our 2019 Annual Report on Form 10-K for additional risks and uncertainties regarding our forward-looking statements.
27
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Refer to Part II, Item 7A of our 2019 Annual Report on Form 10-K, for discussion of our market risk.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
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 March 31,
2020, at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
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 March 31, 2020, that have materially affected or that are reasonably likely to materially affect our internal control over financial reporting.
28
PART II – OTHER INFORMATION
Item
1. Legal Proceedings
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.
Item 1A. Risk Factors
Our 2019 Annual Report on Form 10-K includes a detailed discussion of certain risk factors facing us. The information presented below describes additions to, and supplements, such risk factors and should be read in conjunction with the Risk Factors included under Part I, Item 1A of our 2019 Annual Report on Form 10-K.
The outbreak
of COVID-19 could materially adversely affect our business, financial condition and results of operations.
The recent outbreak of COVID-19 is materially negatively impacting worldwide economic and commercial activity and financial markets, as well as global demand for oil and petrochemical products. COVID-19 has also resulted in significant business and operational disruptions, including business closures, supply chains disruptions, travel restrictions, stay-at-home orders and limitations on the availability of workforces. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures or other restrictions in connection with COVID-19, our business could be materially adversely affected. We may also be unable to perform fully on our contracts
and our costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable. It is possible that the continued spread of COVID-19 could also further cause disruption in our customers' business; cause delay, or limit the ability of our customers to perform, including in making timely payments to us; and cause other unpredictable events. The impact of COVID-19 has impacted capital markets, which may impact our customers’ financial position, and recoverability of our receivables from our customers may be at risk. The full impact of COVID-19 is unknown and is rapidly evolving. The extent to which COVID-19 negatively impacts our business and operations will depend on the severity, location and duration of the effects and spread of COVID-19, the actions undertaken by national, regional and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and
normal business and operating conditions resume.
We are exposed to credit risk relating to default or bankruptcy by our customers.
Credit risk relates to the risk of loss resulting from the default by a customer of its contractual obligations or the customer filing bankruptcy. We have credit risk with both our existing customers and those supporting our growth projects. Credit risk exists in relation to our growth projects, both because the expansion customers make long-term firm capacity commitments to us for such projects and certain of those expansion customers agree to provide credit support as construction for such projects progresses. If a customer fails to post the required credit support or defaults during the growth project process, overall returns on the project may be reduced to the extent an
adjustment to the scope of the project occurs or we are unable to replace the defaulting customer with a customer willing to pay similar rates. In 2019, we had an expansion customer declare bankruptcy for which we were able to use the credit support obtained during the growth project process to cover a portion of their remaining long-term commitment. For more information, refer to Note 5 in Part II, Item 8 of our 2019 Annual Report on Form 10-K.
Natural gas producers comprise a significant portion of our revenues and have supported several of our growth projects. For example, as of December 31, 2019, approximately 35% of our projected operating revenues under committed firm agreements will be generated from contracts with natural gas producers. During
the first quarter 2020, the prices of oil and natural gas declined significantly because of worldwide competition in the oil markets and continued increases in domestic oil and gas supplies. Should the prices of natural gas and oil remain at current levels for a sustained period of time, or decline further, we could be exposed to increased credit risk associated with our producer customer group, including the increased risk of customers filing for bankruptcy protection, which could materially adversely impact our business.
Our credit exposure also includes receivables for services provided, future performance under firm agreements and volumes of gas owed by customers for imbalances or gas loaned by us to them under certain no-notice and PAL services.
29
Changes
in energy prices, including natural gas, oil and NGLs, impact the supply of and demand for those commodities, which could impact our business.
Our customers, especially producers and certain plant operators, are directly impacted by changes in commodity prices. The prices of natural gas, oil and NGLs fluctuate in response to changes in both domestic and worldwide supply and demand, market uncertainty and a variety of additional factors, including for natural gas the realization of potential liquefied natural gas exports and demand growth within the power generation market. The declines in the pricing levels of natural gas, oil and NGLs prices experienced during the first quarter 2020 and in recent history have adversely affected the businesses of our producer customers and historically, have reduced the demand for our services, and could result in defaults or the non-renewal of our contracted
capacity when existing contracts expire. The current erosion in commodity prices could affect the operations of certain of our industrial customers, including the temporary closure or reduction of plant operations, resulting in decreased deliveries to those customers. Future increases in the price of natural gas and NGLs could make alternative energy and feedstock sources more competitive and reduce demand for natural gas and NGLs. A reduced level of demand for natural gas and NGLs could reduce the utilization of capacity on our systems and reduce the demand for our services.
Item 6. Exhibits
The
following documents are filed or furnished as exhibits to this report:
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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.
Jamie L. Buskill Senior Vice President, Chief Financial and Administrative Officer and Treasurer (Duly authorized officer and principal financial officer)
31
Dates Referenced Herein and Documents Incorporated by Reference
