Management at Boardwalk Pipeline Partners (BWP +0.00%) has really taken the story of "The Tortoise and the Hare" to heart because the quarterly results it has posted recently absolutely scream the idea that slow and steady wins the race. Incremental changes to its existing assets and expansion through a few smaller capital projects all have led to modest gains.
Let's take a quick look at the numbers for this most recent quarter. Also, let's look at what management has in line for the next year or two, and if those plans will lead to raising its distribution any time soon.
Image source: Boardwalk Pipeline Partners investor presentation.
By the numbers
| Results* | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Revenue | $352.6 | $303.3 | $326.8 |
| EBITDA | $213.8 | $176.2 | $189.1 |
| Earnings per share | $0.35 | $0.19 | $0.26 |
| Distributable cash flow | $128.3 | $90.0 | $105.1 |
*in millions, except per-share data. Source: Boardwalk Pipeline Partners earnings release.
One thing to always keep in mind when looking at Boardwalk's results is that the company's results are very seasonal, so looking at the sequential quarter doesn't really reflect how the company is doing. Looking year over year, though, we can see some definite progress. The increase on both the top and bottom line came from several assets that were brought online in 2016, most notably its $115 million Ohio-to-Louisiana Access pipeline that came online in 2016.
All told, the company brought $350 million in new assets online in 2016, all of which were in service by the fourth quarter. Since the company doesn't break out its earnings based on business segments or individual assets, we can only assume that these assets were the reason for the gains, although there could have been some minor changes at its existing assets. After all, there's a small part of the business that isn't under completely fee-based contracts.
The highlights
It's looking like 2017 and 2018 are going to be big years for Boardwalk as it finally meets the targets it set out to achieve back in 2014 when it cut its distribution. Since that time, it has significantly reduced its debt load and received an upgrade to an investment-grade credit rating.
According to management, we're going to see a small reversal of this debt trend in 2017, but it's not necessarily a bad thing. This year's capital-spending budget is increasing from $590 million in 2016 to $890 million. The large uptick in spending is from its $720 million Coastal Bend Header pipeline.
The new natural gas pipeline is designed to deliver to the Freeport LNG export terminal by 2018. This project and several others total $1.2 billion in projects slated for the next few years, which, for Boardwalk, is a pretty large development portfolio.
With all that new construction, though, we're going to see an increase in debt levels. Management expects that it will be able to maintain its investment-grade credit rating during this time since many of these projects are fully subscribed, but investors should be ready for an uptick in debt through 2017 while it works through this large backlog.
What management had to say
One thing that investors always want to know when it comes to Boardwalk is when the company foresees the ability to increase its distribution again. After all, the company has significantly reduced its debt load and is generating more-than-enough cash to support a distribution raise. According to CEO Stanley Hordton, we're going to have to wait for a little while longer
I've got this one down pretty good because [the response] hasn't changed since February of 2014. The guidance we gave then is that we wanted to get to a debt-to-EBITDA into the low 4x. That's still our goal. It's not a one-shot deal. It needs to be something that is sustainable. So as we talk to the board and talk lows and review everything, those 2 premises are still there. We want to get to the low 4x. Being investment grade is very important to us so, therefore, being able to sustain that low 4x is very important to us, too. So it's not a snapshot. It's a long-term trend, and it's a financial strategy to keep the balance sheet very, very healthy and to keep us strongly in that investment-grade category.
The reason that is important is that the company expects its debt levels to increase, so now we're talking about a completion of this construction cycle and a subsequent reduction in debt before a distribution hike.
What a Fool Believes
If you're looking for a company with a solid financial footing and little risk of a payout cut anytime soon, then Boardwalk Pipeline Partners is worth a look. There is a trade-off for those qualities, though, and it's that you shouldn't expect much in terms of payout growth for at least a couple of years.
In all honesty, investors shouldn't feel the need to rush into this stock. Based on the plan for the next couple of years and management's steadfast decision to keep its payout low until projects are completed and debt levels improve, not much is going to change for the next couple of years. There isn't a need to buy now for better times ahead.
