When a company makes very modest gains from quarter to quarter like Boardwalk Pipeline Partners (NYSE: BWP) has, it might not get noticed. This quarter wasn't much different. The company continued to see modest gains in profits that are helping the company adjust to the rapid change in how natural gas moves in the U.S., but not enough progress to reward shareholders with a distribution increase.
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Let's take a look at this past quarter's results and whether investors in Boardwalk can expect an increase in payout any time soon.
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By the numbers
|Results*||Q3 2016||Q2 2016||Q3 2015|
|Earnings per share||$0.19||$0.26||$0.15|
|Distributable cash flow||$90.0||$128.9||$83.6|
*in millions, except per-share data. Data source: Boardwalk pipeline partners earnings release.
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Boardwalk's results are rather seasonal as a natural gas supplier. Because of this, it's important to remember to look at year-over-year results to get a decent gauge of how the company is performing. In this case, Boardwalk's third quarter looked decent, especially considering the declines in prices that will have an effect on the 10% of the company's business that is sensitive to commodity prices.
What makes it rather difficult to evaluate Boardwalk's results is that management doesn't really break out operating metrics. We know the company brought two projects online in the second quarter, so we can assume they are contributing to that uptick in revenue and earnings. At the same time, though, we can't really tell if those gains are offsetting any losses from its existing system.
Back in 2014, Boardwalk's management was faced with a bit of a conundrum. Its natural gas pipelines were basically moving gas the wrong way as shale gas changed the supply and demand dynamics across the U.S. On top of that, the company's debt load was on the high side, and it was struggling to meet its payout to shareholders. So, it took the bold move of cutting the payout and using all of the excess cash the company generates to fund improvement of its natural gas system and some new growth opportunities.
Slowly but surely, this has been paying off as increasing EBITDA has resulted in its net debt to EBITDA ratio dropping from a high of 5.8 times to 4.6 times today. As a result, Standard & Poor's has raised the company's credit rating from BB+ to BBB-, giving it that investment-grade rating that master limited partnerships covet.
While the company's earnings don't really reflect it, Boardwalk did bring two new assets online in the third quarter. One of those will deliver gas to a power plant in South Texas, which will have a much more consistent rate of demand than some other natural gas customers, where demand varies with the seasons.
What a Fool believes
Now that its balance sheet has been restored to a certain degree, I'm sure some investors are wondering when Boardwalk will raise its distribution again. That's yet to be seen. The company still has another $1.4 billion in capital projects under construction between now and 2018, and management seems to indicate that it doesn't want to rely much on the capital markets to fund it. Once those projects go into service and Boardwalk starts to generate earnings from them, then management might reconsider a payout hike.
For the time being, though, Boardwalk continues to keep its head down and focus on the things that are going to make it a healthier company for the long run. It's going to take a bit longer to get there, but the company continues to make incremental steps that will make it a worthwhile investment further down the road.
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