Boardwalk Pipeline Partners (BWP) shocked many investors earlier this year when it slashed its quarterly distribution from $0.5325 per unit all the way down to $0.10 per unit. Frustrated investors promptly headed for the exit, sending units into free fall.
Boardwalk Pipeline Partners made such a dramatic reduction in its distribution to investors because it saw danger ahead. In a press release announcing fourth-quarter results for 2013, the company forecast that its full-year distributable cash flow would drop by over $150 million to about $400 million in 2014. This was because the company saw "continued, unfavorable market fundamentals negatively impacting the Partnership's existing natural gas transportation and storage revenues."
While the company's distribution cut should have put its payout on solid ground, it's important to double check to make sure that danger isn't still lurking at Boardwalk Pipeline Partners.
Drilling down into distributable cash flow
The following chart details the company's distribution history over the past year and a half.
|
Distributable Cash Flow |
DCF per Unit |
Distributions declared |
Coverage ratio | |
|---|---|---|---|---|
|
2q14 |
$124,100,000.00 |
$0.51 |
$0.10 |
5.10 |
|
1q14 |
$161,800,000.00 |
$0.67 |
$0.10 |
6.65 |
|
4q13 |
$138,900,000.00 |
$0.57 |
$0.53 |
1.07 |
|
3q13* |
$109,730,000.00 |
$0.50 |
$0.53 |
0.93 |
|
2q13* |
$135,830,000.00 |
$0.65 |
$0.53 |
1.23 |
|
1q13* |
$148,030,000.00 |
$0.71 |
$0.53 |
1.34 |
|
4q12* |
$135,830,000.00 |
$0.65 |
$0.53 |
1.23 |
(*Denotes that distributable cash flow as reduced to reflect payment of distribution on class B units) Source: Boardwalk Pipeline Partners press releases.
As we can see in the above chart, Boardwalk Pipeline Partners' distribution coverage ratio really started to weaken in the third quarter of 2013, when the company paid out 7% more than it made. While Boardwalk made that up in the next quarter, it was a clear signal to the company that the payout was on shaky ground.
The coming cliff
That shaky ground was just a few steps away from the looming cliff Boardwalk saw in its distributable cash flow. Its outlook for $400 million in distributable cash flow this year suggests the company only expects to earn about $114 million in the third and fourth quarters combined, which is less than what it earned in the second quarter alone. That would bring its distributable cash flow per unit down to about $0.23 per unit.
The good news is that the company would still have a coverage ratio of about 2.34 times, which is nearly double where it conservatively needs to be at its current payout rate. So, at least for the rest of this year, the distribution appears to be more than adequately covered. Furthermore, the company has been using its excess cash to pay down debt and fund growth projects, meaning the cash is being put to good use. These actions should strengthen and grow distributable cash flow in the future.
There no longer appears to be any danger lurking at Boardwalk Pipeline Partners after the company drastically cut the distribution earlier this year. At its current rate the payout is more than adequately covered through the end of the year. As long as its cash flow doesn't keep dropping, Boardwalk should be able to more than adequately maintain its payout for the foreseeable future.
