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1 Key Boardwalk Pipeline Partners, LP Number You Must Know

By Matthew DiLallo - Apr 1, 2016 at 9:45AM

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Slightly more than 90% of the company’s revenue is from fixed-fee, take-or-pay contracts.

The commodity price volatility over the past couple of years has had a deep and likely lasting impact on the oil and gas industry. Companies have learned the hard way that exposure to commodity prices plus loads of leverage could be the undoing of a company. That's why a most midstream companies have focused their attention on bolstering their fee-based asset base. That has certainly been a focus of Boardwalk Pipeline Partners (BWP), which has been investing heavily to boost its portfolio of fee-based assets. These assets now support more than 90% of its revenue, with even greater support on the way.

Drilling down into this number
Boardwalk Pipeline Partners actually has a pretty strong history of deriving the bulk of its revenue from fee-based assets. As the slide below notes, roughly 80% of its revenue has come from take-or-pay contracts while another 10% has come from utilization charges keeping the fee-based average at well over 90% for the past five years:

Image source: Boardwalk Pipeline Partners Investor Presentation.

Where the company has run into a little bit of trouble is when its fee-based contracts have come up for renewal, with the company having to take lower rates on some pipelines a couple years back just to keep the capacity from dropping to much. That came at the wrong time for Boardwalk, which was in the middle of a multibillion-dollar expansion program and needed all the cash it could get to fund that program without going too deeply in debt. That's one reason why it significantly reduced its dividend, using that cash flow to help support the construction of its next wave of fee-based projects. 

The remaining projects, which were alluded to on the above slide, will cost the company $1.6 billion. However, they're backed by a weighted-average contract life of about 18 years. That will help extend the weighted-average contract life of the company's current fee-based portfolio, which at the moment averages just five years.

This is important because these fee-based contracts basically lock in the bulk of the company's revenue for the next few years. In a sense, it puts a firm floor underneath revenue, with that floor slowly growing as new assets are placed into service. As this next slide shows, that floor is expected to grow from $940 million last year to $1.03 billion by 2017:

Image source: Boardwalk Pipeline Partners Investor Presentation. 

What this means is that the company can bank on this revenue no matter what commodity prices or volumes do over the next few years.

When commodity prices hit
We saw just what commodity price volatility could do to the earnings of the company's peers last year. Energy Transfer Partners' (NYSE: ETP) midstream segment, for example, has come under a lot of pressure due to weakening commodity prices. As the chart below shows, its midstream segment's earnings last quarter were down substantially year over year:

Data source: Energy Transfer Partners. 

Energy Transfer Partners attributed the decline to lower natural gas and NGL prices, which resulted in lower non-fee based margins. That roughly $100 million year-over-year decline in segment earnings worked out to a 6% impact on the company's overall segment earnings. It was also a major factor pushing Energy Transfer Partners' distribution coverage ratio in 2015 down to a very concerning 0.99 times, meaning it paid out all of its cash flow and then some.

Meanwhile, midstream peers Williams Companies (WMB 0.16%) and its MLP Williams Partners (NYSE: WPZ) also both experienced a similar impact from commodity price volatility last year. While Williams Partners noted that its adjusted EBITDA rose $848 million, or by 26% to $4.09 billion, that was a much smaller increase than the company's fee-based revenue, which surged 36% or by $1.376 billion due to fee-based projects going into service. Offsetting this surge in fee-based revenue was a $229 million hit from lower NGL margins after NGL prices remained at a 13-year low. That impact resulted in Williams Partners non-adjusted distribution coverage ratio averaging a worrisome 0.97 times last year with its general partner Williams Companies also seeing a concerning 0.99 times coverage ratio last year.

Investor takeaway
Fee-based revenue that's backed by long-term contracts really matters for midstream companies. That's why Boardwalk Pipeline Partners' investors need to keep an eye on this number. Right now, it's not only well over 90% but poised to head higher given its investments to build additional fee-based assets. However, if Boardwalk were to start building or buying assets that are exposed to commodity prices, it has the potential to push that number down. That could have a big impact on cash flow and a company's ability to comfortably maintain its distribution and fund growth projects during troubling times.


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