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Ron Hiram, Wise Analysis (216 clicks)
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Boardwalk Pipeline Partners, LP (BWP) announced results for the quarter ended 9/30/13 on October 28, 2013. Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses ("EBITDA") for 3Q13, 3Q12 and the trailing 12 months ("TTM") ending 9/30/13 and 9/30/12 are summarized in Table 1:

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

Note that operating expenses in 3Q13 were reduced by a $12.5 million gain recognized on the sale of storage gas, absent which operating income for the period would have been down significantly from the prior year.

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).

The modest increase in operating revenues in 3Q13 was primarily driven by a $19 million contribution from Louisiana Midstream, offset primarily by a reduction in BWP's transportation revenues related to contract renewals and lower utilization driven by unfavorable market conditions. There have been small increases in operating income and operating revenues over the past several quarters, but these have been accompanied by substantial increases in the number of units outstanding. This has led to flat or declining EBITDA per unit for the most recent 5 consecutive quarters and for the TTM ended 9/30/13 (compared to the same periods in the prior year). This can be seen in Table 2 below:

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Table 2: Figures in $ Millions, except weighted average units outstanding & $ per unit

Lower transportation revenues present a significant challenge for BWP, as indicated by Table 3 below:

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Table 3: Figures in $ Millions, except weighted average units outstanding & $ per unit

Large amounts of contracted transportation capacity expire in 2013 and 2014. At the same time, we are seeing increased production in the Marcellus and Utica shale formations and this means there is less demand for gas to be transported to the Northeast on BWP's Texas Gas system. Therefore, some of BWP's transportation contracts are not being renewed, while others are being renewed at lower rates. Remaining available capacity is marketed and sold on a short-term firm or interruptible basis, which is also at lower rates.

Declining basis differentials across BWP's pipeline system is another factor driving down transportation revenues because less value can be derived from transporting natural gas from one location to another. The same factor also negatively affected Parking and Lending ("PAL") and storage revenues because less value can be derived from moving natural gas delivery dates between time periods. For a brief description of what are firm and interruptible transportation services, as well as PAL see "Glossary of MLP Operational Terms".

Management had warned these circumstances would negatively affect transportation revenues, EBITDA and distributable cash flows in 2013. Annual revenues associated with contracts expiring in 2013 total ~$125 million and management estimated 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 in each of 2013 and 2014.

BWP's definition of Distributable Cash Flow ("DCF") and a comparison to definitions used by other master limited partnerships ("MLPs") are described in a prior article. Using that definition, DCF for 3Q13 was $117 million or $0.48 per unit (up from $100 million or $0.46 per unit in 3Q12) and $564 million or $2.40 per unit for the TTM ending 9/30/13 (unchanged from $497 million or $2.40 per unit in the prior year period).

As always, I first attempt to assess how these DCF figures compare with what I call sustainable DCF for these periods 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 review TTM numbers rather than quarterly numbers for the purpose of analyzing changes in reported and sustainable distributable cash flows.

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 4 below:

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Table 4: 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, as shown in Table 4.

Proceeds from asset sales or from disposal of liabilities are not, in my view, sources of sustainable cash flow. I therefore exclude them from the sustainable category. I also do not add back non-cash interest expense, the principal component of items in Table 4 grouped under "Other" for the TTM ending 9/30/13 and 9/30/12. Coverage ratios as reported, and as I calculate them to be on a sustainable basis, are indicated in Table 5 below:

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Table 5 ($ millions, except coverage ratios)

Coverage ratios in 2Q13 and 1Q13, and to a lesser extent in 3Q13, benefited from a particularly low level of maintenance capital expenditures compared to the prior year period. Despite spending only ~$37 million in the first 9 months of the year (vs. ~$51 million in the first 9 months of 2012), management's estimate of the total amount of such expenditures for 2013 remains at ~$100 million. We can therefore expect a significant outlay in 4Q13 and this will exert downward pressure on the coverage ratio in that quarter.

The simplified cash flow statement in Table 6 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 6: Figures in $ Millions

Net cash from operations less maintenance capital expenditures did not cover distributions in the TTM ending 9/30/13 and 9/30/12. Distributions in those periods were partially financed by issuing debt and/or equity.

Growth capital expenditures in 2013 are now estimated at ~$230 million, of which ~$177 million were incurred through 9/30/13. The bulk of this amount is being invested in the South Texas Eagle Ford Expansion and the Choctaw Brine Supply Expansion Projects. See a prior article for a description of these projects.

BWP currently distributes $0.5325 per unit per quarter. There has been no growth in distributions for 6 consecutive quarters. The project with the greatest potential to power growth in BWP's distributions is a 50/50 joint venture with Williams Companies, Inc. (WMB) that would develop a pipeline project (the "Bluegrass Pipeline") to transport natural gas liquids ("NGL") from the Marcellus and Utica shale formations to the petrochemical and export complex on the U.S. Gulf Coast.

In addition to constructing a new pipeline, the proposed project would include a new large-scale fractionation plant and related liquids storage and transport facilities. An open season soliciting binding shipper commitments is being run. Upon its conclusion on December 16, 2013, BWP and its investors will have a better sense of whether this project will move ahead and how it will be financed. If it does move ahead, it will require approval by the Federal Energy Regulatory Commission. Assuming that and other hurdles will be overcome, WMB and BWP expect Bluegrass to be placed in service in 2015.

The total Bluegrass project cost has not been disclosed, but we know that ~$300 million will be spent at the pre-construction stage (i.e., prior to obtaining signed contracts from customers). Loews Corporation has agreed to fund 90% of BWP's 50% share Bluegrass costs and BWP will fund the remaining 10%. The timing, pricing and other parameters of a transaction by which BWP acquires the 90% of the 50% of Bluegrass held by Lowes are yet to be determined.

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 $3.3 billion as of 9/30/13, a multiple of 4.4x EBITDA for the trailing 12-months on that date. This is a slight improvement over the 4.5 ratio in the prior year period. Nevertheless, leverage remains high.

BWP's current yield is almost 7% and compares favorably with some of the other MLPs I follow, as seen in Table 7 below. However, as previously noted, a portion of that is funded by non-sustainable sources:

As of 10/30/13:

Price

Quarterly Distribution

Yield

Magellan Midstream Partners (MMP)

$59.85

$0.55750

3.73%

Enterprise Products Partners (EPD)

$63.39

$0.69000

4.35%

Plains All American Pipeline (PAA)

$51.37

$0.60000

4.67%

Targa Resources Partners (NGLS)

$51.49

$0.73250

5.69%

Buckeye Partners (BPL)

$67.63

$1.06250

6.28%

El Paso Pipeline Partners (EPB)

$40.45

$0.65000

6.43%

Williams Partners (WPZ)

$52.81

$0.87750

6.65%

Kinder Morgan Energy Partners (KMP)

$81.03

$1.35000

6.66%

Energy Transfer Partners (ETP)

$54.17

$0.90500

6.68%

Boardwalk Pipeline Partners

$30.52

$0.53250

6.98%

Regency Energy Partners (RGP)

$26.11

$0.47000

7.20%

Suburban Propane Partners (SPH)

$47.92

$0.87500

7.30%

Table 7

Given the minimal distribution growth, thin coverage ratio, relatively high leverage and uncertain growth prospects, my conclusion is unchanged: investors should consider other MLPs.

Source: A Closer Look At Boardwalk Pipeline Partners' Distributable Cash Flow As Of Q3 2013