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Boardwalk Pipeline Partners, LP (BWP) provided its 10-Q report for the quarter ended 3/31/13 on April 29, 2013. The report enables a close look at, and an analysis of, the Distributable Cash Flow ("DCF") generated by this partnership. This article will assess how BWP's reported DCF figures compare with what I call sustainable DCF for the periods being reviewed and whether distributions were funded by additional debt or issuing additional units. Given quarterly fluctuations in revenues, working capital needs and other items, it makes sense to focus more intently on trailing 12 months ("TTM") numbers for the purpose of analyzing changes in reported and sustainable distributable cash flows; however, insights can also be derived from quarterly numbers and I therefore also analyze those.

Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses ("EBITDA") for 1Q13, 1Q12 and the TTM ending 3/31/13 and 3/31/12 are summarized in Table 1:

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Table 1: Figures in $ Millions, except weighted average units outstanding

In October 2012, BWP acquired PL Midstream, LLC (renamed "Louisiana Midstream") from PL Logistics, LLC for ~$620 million in cash. Louisiana Midstream provides transportation and storage services for natural gas and natural gas liquids ("NGLs"), fractionation services for NGLs, and brine supply services for producers and consumers of petrochemicals through two hubs in southern Louisiana. This acquisition represents a major step for BWP in implementing its strategy to diversify from its core business (natural gas pipelines and storage) into the midstream energy businesses.

The increase in operating revenues in 1Q13 shown in Table 1 reflects a $19 million contribution from Louisiana Midstream, a $7.1 million increase due to higher natural gas prices and a $3.4 million increase in parking and lending ("PAL") revenues. These were partially offset by lower transportation revenues resulting, as management previously forewarned, from a large amount of contracted transportation capacity expiring in 2013. In light of current market conditions, management expects transportation contracts renewed or entered into in 2013 will be at lower rates than expiring contracts. Remaining available capacity will be marketed and sold on a short-term firm or interruptible basis, which will also be at lower rates, due to a decrease in basis spreads between locations on the pipelines. Management had warned these circumstances will negatively affect transportation revenues, EBITDA and distributable cash flows in 2013. Annual revenues associated with contracts expiring in 2013 total ~$125 million and management estimates that the combination of lower rates on contract renewals and the remarketing of turn-back capacity will result in an annual revenue reduction of approximately $40 million. For a brief description of what are firm and interruptible transportation services, and of PAL, see "Glossary of MLP Operational Terms".

The increase in operating costs and expenses in 1Q13 vs. 1Q12 was driven primarily by the acquisition of Louisiana Midstream (excluding Louisiana Midstream, operating costs and expenses would have decreased $5.4 million). Increases in operating income and EBITDA in 1Q13 over 1Q12 were also driven by the acquisition of Louisiana Midstream.

BWP's definition of DCF and a comparison to definitions used by other master limited partnerships ("MLPs") are described in a prior article. Using that definition, DCF for 1Q13 was $155 million or $0.75 per unit (up from $127 million or $0.70 per unit in 1Q12) and $526 million or $2.66 per unit for the TTM ending 3/31/13 (up from $420 million or $2.38 per unit in the prior year period).

The generic reasons why DCF as reported by the MLP may differ from sustainable DCF are reviewed in an article titled Estimating Sustainable DCF-Why and How. Applying the method described there to BWP results generates the comparison outlined in Table 2 below:

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Table 2: Figures in $ Millions

Under BWP's definition, reported DCF always excludes working capital changes, whether positive or negative. In contrast, as detailed in my prior articles, I generally do not include working capital generated in the definition of sustainable DCF but I do deduct working capital invested. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the master limited partnerships should, on the one hand, generate enough capital to cover normal working capital needs. On the other hand, cash generated from working capital is not a sustainable source and I therefore ignore it. Over reasonably lengthy measurement periods, working capital generated tends to be offset by needs to invest in working capital. I therefore do not add working capital consumed to net cash provided by operating activities in deriving sustainable DCF. Cash consumed by working capital accounts for the bulk of the variances between reported and sustainable DCF shown in Table 2.

In the TTM ending 3/31/13 and 3/31/12, the principal components of items in Table 2 grouped under "Other" are non-cash interest expense and proceeds from an insurance settlement received associated with the fire at BWP's Carthage compressor station and a legal settlement. I exclude them from the sustainable category.

Coverage ratios are indicated in Table 3 below:

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Table 3($ millions, except coverage ratios)

Distributions are growing very slowly ($0.5000 per unit in 4Q10 vs. $0.5325 in 1Q13, a 6.5% increase in 2 years) and have been held flat for the past 4 consecutive quarters. Despite that, coverage ratios are thin. Coverage ratios in 1Q13 benefited from a particularly low level of maintenance capital expenditures. Management's estimate of the total amount of such expenditures for 2013 remains at ~$100 million; we can therefore expect an average of ~$30 million per quarter for the remainder of the year which will put pressure coverage ratios in the remaining calendar quarters of 2013.

The simplified cash flow statement in Table 4 below nets certain items (e.g., debt incurred vs. repaid), separates cash generation from cash consumption, and gives a clear picture of how distributions have been funded in the last two years.

Simplified Sources and Uses of Funds

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Table 4: Figures in $ Millions

Net cash from operations less maintenance capital expenditures covered distributions in the TTM ending 3/31/13, but did so just barely. However, unlike in the prior year period, distributions in the TTM ending 3/31/13 were not partially financed by issuing debt and/or equity.

In 2012 BWP had projected spending $200 million on growth capital expenditures. The actual number was ~$150 million because $50 million was pushed into the first part of 2013. Consequently, the 2013 budget for growth capital expenditures was increased by that amount and is now estimated at ~$250 million. The bulk of this amount will be invested in the South Texas Eagle Ford Expansion and the Choctaw Brine Supply Expansion Projects.

South Texas Eagle Ford Expansion: this ~ $180 project involves constructing a 55-mile gathering pipeline and a cryogenic processing plant in south Texas. The system will be capable of gathering in excess of 300 million cubic feet (MMcf) per day of liquids-rich gas in the Eagle Ford Shale production area, and of processing up to 150 MMcf per day of liquids-rich gas. The project is supported by long-term fee-based gathering and processing agreements with two customers who have committed to ~50% of the plant's processing capacity. The plant and new pipeline are expected to be placed in service in April 2013.

Choctaw Brine Supply Expansion Projects: these projects will expand Louisiana Midstream's brine supply capabilities. The first project, developing a one million barrel brine pond, was placed into service January 2013. The second project consists of constructing 26 miles of 12-inch pipeline from BWP's facilities to a petrochemical customer's plant. This project is supported by a 20-year contract with minimum volume requirements and expansion options and is expected to be completed in 2013.

Other major expansion projects will only impact results in 2015 and beyond.

The Southeast Market Expansion is a ~$300 million project involves constructing an interconnection between BWP's Gulf South and HP Storage subsidiaries, adding additional compression facilities and constructing approximately 70 miles of 24" and 30" pipeline in southeastern Mississippi. The project is supported by 10-year firm agreements of primarily electric generation and industrial customers. BWP anticipates beginning construction in early 2014 and expected the project to be placed in service by 4Q14.

BWP and Williams Companies, Inc. (WMB) executed a letter of intent on 3/6/13 to form a joint venture that would develop a pipeline project (the "Bluegrass Pipeline") to transport natural gas liquids from the Marcellus and Utica shale plays to the petrochemical and export complex on the U.S. Gulf Coast, as well as the developing petrochemical market in the Northeast U.S. This project will require FERC approval and, assuming that and other hurdles will be overcome, is expected to be placed in service in 2015.

BWP is required to maintain a ratio of consolidated debt to EBITDA of no more than 5:1. BWP's total long-term debt stood at $3.6 billion as of 3/31/13, a multiple of 4.88x EBITDA for the trailing 12-months on that date. While this represents an improvement over the ratio in the prior year period which was in excess of 5x EBITDA, leverage remains high.

BWP's current yield compares favorably with many the other MLPs I follow, as seen in Table 5 below:

As of 5/6/13:

Price

Quarterly Distribution

Yield

Magellan Midstream Partners (MMP)

$51.63

$0.50000

3.87%

Plains All American Pipeline (PAA)

$57.26

$0.56250

3.93%

Enterprise Products Partners (EPD)

$60.64

$0.66000

4.35%

Inergy (NRGY)

$23.75

$0.29000

4.88%

El Paso Pipeline Partners (EPB)

$42.39

$0.61000

5.76%

Targa Resources Partners (NGLS)

$46.28

$0.68000

5.88%

Kinder Morgan Energy Partners (KMP)

$87.45

$1.29000

5.90%

Buckeye Partners (BPL)

$66.62

$1.03750

6.23%

Williams Partners (WPZ)

$51.90

$0.82750

6.38%

Boardwalk Pipeline Partners

$30.68

$0.53250

6.94%

Regency Energy Partners (RGP)

$25.69

$0.46000

7.16%

Suburban Propane Partners (SPH)

$48.82

$0.87500

7.17%

Energy Transfer Partners (ETP)

$47.94

$0.89375

7.46%

Table 5

There has been minimal distribution growth over the past two years, coverage ratio remains thin and I remain concerned about the relatively high leverage. Despite the enticing yield, I still conclude that investors willing to add to their positions should consider other MLPs.

Source: A Closer Look At Boardwalk Pipeline Partners' Distributable Cash Flow As Of Q1 2013