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Boardwalk Pipeline Partners (NYSE: BWP) has pretty much been in recovery mode since 2014, when it cut its payout by a whopping 80%. The company's goal during this recovery has been to update its pipeline system to the new reality of natural gas in the U.S. without breaking the bank with new debt. This quarter's earnings showed that the company is slowly making progress on this front, but not enough to raise its payout yet.
Let's take a quick look at last quarter's results and when we might expect the company to transition back to growing its payout.
By the numbers
|Results (in millions, except per share data)||Q2 2016||Q1 2016||Q2 2015|
|Distributable cash flow||$128.9||$160.1||$92.3|
Data source: Boardwalk Pipeline Partners earnings release.
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One thing to keep in mind when comparing quarterly results for Boardwalk -- or any other natural gas pipeline company, for that matter -- is that natural gas demand is very seasonal. Typically, first quarters are the strongest quarters for them because of high gas demand for heating in the winter. So, it's better to look at results on a year-over-year basis.
Based on that, Boardwalk's results were pretty solid. The company saw decent gains where it counts: EBITDA and distributable cash flow. Management attributed these gains to the restart of its Evangeline pipeline system as well as the start-up of a few smaller connector pipes that feed power plants and industrial manufacturers.
Ever since Boardwalk's management cut its distribution in 2014, management's major priority has been to fund its development projects and improve its balance sheet. This quarter, we saw the company continue on these efforts. Even though its distributable cash flow levels increased to $128 million for the quarter, management kept its quarterly distribution at $0.10 per quarter. At this rate, the company is covering its payout by more than 4 times, which gives it a decent amount of cash each quarter to fund its growth.
What's more important is that these increased levels of profitability coupled with little new debt issuances have lowered Boardwalk's net debt to EBITDA level to 4.59 times. That's a major improvement compared to 2014, when debt to EBITDA levels were around 5.7 times. While its not a set-in-stone rule, typically, master limited partnerships that have a debt to EBITDA ratio less than 4.5 times can expect an investment grade rating from credit ratings agencies.All of this will be very important as Boardwalk starts to work on some of its larger projects in 2017 and 2018 that will likely require it to tap the debt markets to meet its funding needs.
- On June 1st, the company completed its Ohio to Louisiana Access Project. This natural gas pipeline will allow Boardwalk's Texas Gas line to be completely bi-directional. This is important for the future of the company because the development of the Marcellus and Utica shale formations made the initial Texas Gas line almost obsolete. Now that the line can also flow north to south, the company can deliver Marcellus gas to the Gulf Coast, where it can be used for chemical manufacturing, or possibly export.
- Management estimates that three lateral lines from its Texas Gas system to various power plants and industrial users will be up and running in the third quarter.
- The company received the go-ahead from the Federal Energy Regulatory Commission on its Coastal Bend Header Project. The $720 million project is by far the company's largest capital project on the books, and it will be a major growth engine when it's up and running in 2018.
- After not receiving enough firm commitments for its Northern Supply Access pipeline, Boardwalk decided to downscale the size of the pipe by 100,000 MMBtu to 284,000 MMBtu. The reduction in size will reduce the project cost from $310 million to $230 million.
From the mouth of management
For CEO Stan Horton, this quarter was very much a "steady as she goes" type of quarter as it wraps up work on a few smaller projects and starts on its next big wave of growth:
[W]e continue to make progress in executing our growth strategy, including the recent completion of projects placed into service, all on time and within budget. We have invested approximately $400 million in our current slate of growth projects, and our project backlog now stands at approximately $1.2 billion, including the newly announced growth projects discussed today.
What a Fool believes
Now that Boardwalk Pipeline Partners has adjusted its pipeline assets to accommodate the new ways in which natural gas flows in the U.S. -- and it has been prudent about addressing its financial situation -- Boardwalk looks to be in much better shape than it did just a year ago. Even though the company appears to have plenty of room to raise its distribution from current levels, it would not be surprising if it decided to wait until a decent chunk of its Coastal Bend Header pipeline is constructed and paid for.
Any investor looking for income growth today should probably shy away from Boardwalk, and even those who see today's 2.4% yield and a price to tangible book value of only 1.0 times should remember that the company is still in "fund growth and manage finances" mode. Until it starts to signal that it's ready to raise its payout, I think it's reasonable to sit this one out for a bit.
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