A Closer Look At Boardwalk Pipeline Partners' Distributable Cash Flow As Of Q2 2013

| About: Boardwalk Pipeline (BWP)
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Boardwalk Pipeline Partners, LP (NYSE:BWP) announced results for the quarter ended 6/30/13 on July 29, 2013. Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses ("EBITDA") for 2Q13, 2Q12 and the trailing 12 months ("TTM") ending 6/30/13 and 6/30/12 are summarized in Table 1:

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

The weighted average number of units outstanding noted in Table 1 includes common units as well as ~22.9 million class B units held by Boardwalk Pipelines Holding Corp. (BPHC), wholly-owned subsidiary of Loews Corporation (NYSE:L) that serves as BWP's general partner. Class B units participated in distributions on a pari passu basis with common units up to $0.30 per quarter, but not above that threshold. However, they are convertible to common units upon demand on a one-to-one basis at any time after June 30, 2013, and I therefore include them in the unit count calculation.

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 2Q13 shown in Table 1 reflects a $24 million contribution from Louisiana Midstream and a $6 million effect of higher natural gas prices. These were offset by lower transportation revenues resulting from a large amount of contracted transportation capacity expiring in 2013. Transportation contracts renewed or entered into in 2013 have been at lower rates than expiring contracts. Remaining available capacity is marketed and sold on a short-term firm or interruptible basis, which is also at lower rates. 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.

The increase in operating expenses was driven by the acquisition of Louisiana Midstream which incurred ~$16 million of operating expenses, and increased fuel costs of ~$8 million due to higher natural gas prices. These were partially offset by the disposition of storage base gas which generated a $17 million gain and could potentially increase revenues by providing capacity for additional storage and parks of customer gas under parking and lending ("PAL") services.

For a brief description of what are firm and interruptible transportation services, as well as PAL see "Glossary of MLP Operational Terms".

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 2Q13 was $149 million or $0.75 per unit (up from $127 million or $0.62 per unit in 2Q12) and $545 million or $2.39 per unit for the TTM ending 6/30/13 (up from $461 million or $2.27 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 2 below:

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 a significant portion of the variances between reported and sustainable DCF in 2Q13 and 2Q12, as shown in Table 2.

In the TTM ending 6/30/13 and 6/30/12, the principal components of items in Table 2 grouped under "Other" are non-cash interest expense. I exclude them from the sustainable category.

Coverage ratios are indicated in Table 3 below:

Table 3($ millions, except coverage ratios)

Distributions are growing very slowly ($0.5000 per unit in 4Q10 vs. $0.5325 in 2Q13, a 6.5% increase in over 2 years) and have been held flat for the past 5 consecutive quarters. Despite that, coverage ratios are thin. Coverage ratios in both 2Q13 and 1Q13 benefited from a particularly low level of maintenance capital expenditures compared to the prior tear period. Despite spending only ~$22 million in the first 6 months of the year (vs. ~$36 million in 1H12), management's estimate of the total amount of such expenditures for 2013 remains at ~$100 million. We can therefore expect an average of ~$40 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

Table 4: Figures in $ Millions

Net cash from operations less maintenance capital expenditures covered distributions in the TTM ending 6/30/13, but did so just barely. However, unlike in the prior year period, distributions in the TTM ending 6/30/13 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 ~$260 million. The bulk of this amount will be 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 and Williams Companies, Inc. (NYSE: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. 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. It will require FERC approval and, assuming that and other hurdles will be overcome, is expected to be placed in service in 2015.

A subsidiary of Loews Corporation has agreed to fund 90% of BWP's 50% share of the Bluegrass Pipeline preconstruction costs (BWP will fund the remaining 10%). BWP's share of these costs is estimated at ~$150 million, of which approximately $110 million is expected to be funded in 2013 (i.e., BWP's capital expenditures for Bluegrass will total ~$11 million in 2013. If the Loews Corporation subsidiary funds 90% of the 50%, it will also own 90% of BWP's share of Bluegrass. The timing, pricing and other parameters of a transaction by which BWP acquires the 90% it does not own are yet to be determined. It is interesting to note the WMB and Lowes will be spending ~$300 million at the preconstruction stage (i.e., prior to obtaining signed contracts from customers). From BWP's perspective, the arrangement lowers its risk because Lowes bears the risk of the project not going through.

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 6/30/13, a multiple of 4.4x EBITDA for the trailing 12-months on that date. This is an improvement over the 5.04x ratio in the prior year period. Nevertheless, leverage remains high.

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

As of 07/31/13:


Quarterly Distribution


Magellan Midstream Partners (NYSE:MMP)




Enterprise Products Partners (NYSE:EPD)




Plains All American Pipeline (NYSE:PAA)




Targa Resources Partners (NYSE:NGLS)




Buckeye Partners (NYSE:BPL)




El Paso Pipeline Partners (NYSE:EPB)




Kinder Morgan Energy Partners (NYSE:KMP)




Regency Energy Partners (NYSE:RGP)




Boardwalk Pipeline Partners




Williams Partners (NYSE:WPZ)




Energy Transfer Partners (NYSE:ETP)




Suburban Propane Partners (NYSE:SPH)




Inergy (NRGY)




Table 5

However, given the minimal distribution growth, thin coverage ratio and relatively high leverage, I conclude that investors willing to add to their positions should consider other MLPs.

Disclosure: I am long EPB, EPD, ETP, PAA, SPH, WPZ, WMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.