Boardwalk Pipeline Partners LP has been feeling the impact of shifting market fundamentals as shrinking basis differentials make recontracting capacity on some of its pipelines more challenging. However, more demand from new power generators is waiting in the wings to take up the slack.

During an earnings conference call Monday, CEO Stan Horton told again how compressed basis differentials are impacting Boardwalk's pipelines in the Gulf Coast region.

"Simply put, when firm transportation contracts come up for renewal, the change in market fundamentals from the time the contract was originally executed results in either the contract being renewed at a reduced rate or the capacity being turned back and re-marketed to another customer," he said.

Helping matters has been the development of more gas-fired power generation in the region, a market Boardwalk has been aggressively pursuing. However, Horton said that additional gas demand won't materialize until the power generation projects come online. "In the interim, the capacity is marketed by our pricing desk in the short-term market, which we think will continue to experience very low rates during 2013 due to the narrow basis spreads," he said.

Contracts that are being renewed are fetching lower rates due to the shrunken basis spreads, Horton said. This year, some contracts associated with major Boardwalk pipeline expansions from a few years ago are up for renewal. "The annual revenues associated with contracts expiring in 2013 are approximately $125 million," Horton said. "At this time, our best estimate is that the combination of lower rates on contract renewals and the remarketing of turned back capacity will result in an annual revenue reduction of approximately $40 million."

That's just for 2013. Last year saw contract turnbacks "pretty much offset" by new contracts, Horton said. "Each year is a little different; it's tough to forecast out."

For 2014, CFO Jamie Buskill said Boardwalk should see about $100 million worth of capacity turnbacks, which is more in line with the norm of late.

Boardwalk's contracts still run about six years on a weighted average basis; however, some capacity that will eventually serve power generation load beginning in the latter part of 2014 is for now being sold on a short-term basis, Buskill said.

Horton told financial analysts on the conference call that Boardwalk has been "making progress" in attaching new power generation load to its system. It recently struck a long-term contract with Kentucky Utilities to serve a new combined-cycle plant slated to come online in late 2014, he said.

This is in addition to other firm contracts struck with power producers last year that represent in aggregate an average of about 765,000 MMBtu/d in demand once all the projects are in service. "...[M]uch of this new power generation load will utilize existing pipeline capacity that will be up for renewal over the next two years," Horton said.

And Boardwalk is tweaking its system to make it easier to do business with power generators with enhanced nominations service on its Gulf South Pipeline (see Daily GPI, Nov. 21, 2012) and streamlined trading at the Perryville Hub in Louisiana (see Daily GPI, July 16, 2012).

Boardwalk reported operating revenues of $325.7 million for the fourth quarter and $1.19 billion for 2012, an 8% and 4% increase from $301 million and $1.14 billion in the comparable 2011 periods. Net income was $90.1 million for the quarter and $306 million for 2012, a 26% and 41% increase from $71.6 million and $217 million in the comparable 2011 periods.

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