Investors in Boardwalk Pipeline Partners (BWP) must have Tom Petty & the Heartbreakers' "The Waiting (Is the Hardest Part)" running on a constant loop in their heads since the company laid out its strategic plan in 2014. Then, the company announced it was cutting its payout to help fund a slew of new projects and ease its debt burden. This is still the current track of the company today, and investors have been living off its paltry $0.10-per-share distribution ever since.
The hope is that once this transformation plan is complete, it will lead to significant distribution growth. These next several quarters are critical to the success of this plan. Let's take a look at the company's most recent results and why investors should be paying a little closer attention over the next year or so to see if Boardwalk can make good on the finishing touches of this strategic plan.
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By the numbers
| Metric | Q1 2017 | Q4 2016 | Q1 2016 |
|---|---|---|---|
| Revenue | $367.0 million | $352.6 million | $345.0 million |
|
Earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$246.2 million | $213.8 million | $222.7 million |
| Earnings per share | $0.47 | $0.35 | $0.40 |
| Distributable cash flow | $176.1 million | $128.3 million | $160.1 million |
DATA SOURCE: BOARDWALK PIPELINE PARTNERS EARNINGS RELEASE.
Some of Boardwalk's largest customers for its natural gas transportation and storage business are power plants. This means that results for the company can be rather seasonal. So we can pretty much throw away any sequential quarter comparisons and focus on year-over-year results. Based on these numbers, it looks as though the company is making steady progress.
Management at Boardwalk is pretty tight-lipped when it comes to breaking out results, so it's hard to say whether or not these numbers are purely a reflection of the $350 million or so in new assets coming online since last year, or if there has been some variance in results from its existing assets.One thing management did note, though, was that its Northern Supply Access system was complete in March and started commercial service April 1 of this year. So we can expect a decent jump in revenue from that asset coming online in the coming quarter.
For Boardwalk, the next year and a half are going to be transformative years. 2017 is going to be a year with a high rate of capital spending, and 2018 is likely going to see a large jump in earnings. That's because the company's largest project -- its Coastal Bend Header pipeline to supply the Freeport LNG export facility -- is in the middle of construction. Management estimates that this project will lead to an uptick in its debt-to-EBITDA ratio, as it has to commit so much capital to the project, but that should subside once online and the company should finally get to management's original goal of a net-debt-to-EBITDA ratio below 4. Once that goal is reached, then we can expect to see increases in distribution payments again.
What management had to say
CEO Stanley Horton commented on the company's progress on new projects and expectations for the rest of the year:
2017 is off to a good start. We reported first-quarter earnings that were favorably compared with last year, as Jamie will discuss. Our announced growth projects are progressing well. And we're pleased with the opportunities that we're seeing in the marketplace. We placed the Northern Supply Access Project into service on March 2, and commercial service began on April 1. Now this is the second north-to-south project on Texas Gas that we have placed into service over the last year, and it raises our total north-to-south capacity to more than 900,000 MMBtu a day. Texas Gas is now truly a bidirectional system that allows us to maintain gas flows in the traditional south-to-north direction while north-to-south capacity has been added.
We have more than $1 billion in announced growth projects under construction, the largest of which is our Coastal Bend Header project. A tremendous amount of work is occurring on this project that will serve the Freeport LNG facility. We have received all of our regulatory permits and all of the right-of-way has been secured and cleared. Construction of the 66-mile header pipeline and one of the new compressor stations has commenced. The fully contracted 1.4 billion cubic feet a day project is on schedule to be placed into service in 2018.
What a Fool believes
Boardwalk Pipeline Partners was painted into a financial corner in 2014 as it had lots of projects to fund but few options to raise capital, which led to its massive distribution cut. When it is all said and done, it will be more than four years before the company meets its stated debt metric targets at which management will feel comfortable raising its payout. These sorts of transformations take a long time, and investors betting on turnarounds need to be patient.
So far, Boardwalk remains on track to complete its transformation in 2018 when the Coastal Bend Header pipeline comes online. That will likely provide a big boost to EBITDA and significantly lower capital spending. The big question that the completion of this project brings: Where does Boardwalk go from here? Hopefully, we'll start to get answers from management soon.
