Back at the beginning of March, I took a look at Boardwalk Pipeline Partners LP (NYSE: BWP ) , just after the company had shocked the market by announcing that it was going to slash its quarterly unit distribution from $0.53 to $0.10. For investors, this move came as a surprise and removed one of the main attractions of Boardwalk's MLP structure: the previously promised 8.8% dividend yield.
In the original article, I concluded that the case for Boardwalk as a value investment is simple: The company was trading at a discount to peers, and the lower distribution allowed for more fiscal security in the future. Since writing my first article, Boardwalk's unit price has risen by approximately 30%. Is the company now overpriced, or is there further to go?
Results show progress
Thanks to the completion of a number of growth projects throughout 2013, Boardwalk's first-quarter earnings showed that the company continues to grow. Operating revenues were up 9% year on year. Net income also rose 9%, and distributable cash flow increased by 4%. Unfortunately, distributable cash flow growth was constricted, as both interest costs and maintenance capital expenditures expanded 11% and 113%, respectively, during the period.
Additionally, Boardwalk took a $10 million impairment charge as it postponed the Bluegrass pipeline project, citing the fact that the company, and its Bluegrass partner, The Williams Companies, had not obtained sufficient customer commitments for the project. Is Boardwalk meeting its self-imposed goals of lowering debt, the reason behind the distribution cut?
Boardwalk's management has stated that the company's debt-to-EBITDA target is 4:1. Adjusted EBITDA came in at $220.4 million for the first quarter, $881.6 million if annualized. The company reported net debt of approximately $3.36 billion for the quarter, down from $3.4 billion during the same period of 2013. This works out to a debt-to-EBITDA ratio of 3.8, although I must stress these are very ball-park figures.
Still, it appears as if Boardwalk is making progress paying down debt and expanding earnings. What's more, looking at the numbers, it seems as if Boardwalk's new lower payout is much better for growth.
For example, as mentioned above, capital spending and interest costs both increased throughout the period, but the company was easily able to cover these cost increases from cash flow, as the total distribution to partners only totaled around $110 million. The rest of the income was reinvested, reducing the need for borrowing.
Ultimately, as Boardwalk uses cash from operations to finance expenditure rather than debt, the company's interest costs should start to fall. Currently, they consume around 25% of EBITDA.
All in all, based on first-quarter numbers, it would appear that Boardwalk is meeting some of the targets management set out for the company last year and rising revenues are always a good sign. However, one key question remains: Is Boardwalk still undervalued, or is the company now expensive?
What about valuation
When I covered Boardwalk after the initial distribution yield cut, the company was trading at a trailing 12-month enterprise value to earnings before interest, tax, amortization, and depreciation, or EV/EBITDA, figure of 9.3x. In comparison, peers, Energy Transfer Partners (NYSE: ETP ) and Kinder Morgan Energy (NYSE: KMP ) were trading at EV/EBITDA ratios of 10.7x and 11.6x, respectively.
At present, Boardwalk trades at a EV/EBITDA value of 11.8x compared to Enterprise's ratio of 16.6x, and Kinder Morgan's 11.9x. So, it would appear that Boardwalk is still undervalued in comparison to its peers, although the lower distribution yield is an issue. Boardwalk yields 2.5%, while Kinder and Enterprise yield 7.3% and 3.8%, respectively.
One thing that is often overlooked with partnerships such as Boardwalk, Kinder, and Enterprise is the fact that they issue additional partnership units to fund growth alongside debt, which erodes per-share fundamentals and shareholder equity. This is the strategy that Boardwalk has followed in the past, increasing the number of units in issue by 16.2% during the past four years. Still, this pales in comparison to the number of units Energy Transfer has issued (125%) and Kinder Morgan (43%) from the end of 2009 to the end of the third quarter last year.
Boardwalk's management has stated that no units will need to be issued this year. So, Boardwalk is now relying on its cash flow to fund expansion and reduce debt, good news for unit holders who won't see their equity eroded.
Overall, based on Boardwalk's valuation in relation to that of its close peers, the partnership still appears undervalued. For this reason, it is reasonable to assume that the company's unit price can move higher.
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