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Boardwalk Slashes Distribution 81%; Units Plunge 46%

Boardwalk Pipeline Partners LP on Monday slashed its quarterly distribution by 81% in order to reduce debt and fund projects following a fourth quarter that saw net income fall 78% from a year ago. Net income for 2013 was down 17% from the prior year.

The move prompted analysts at Tudor, Pickering, Holt & Co. to write that "even bears will be shocked by the draconian" reduction, and speculate that general partner Loews Corp. could be considering a sale. Credit Suisse Monday downgraded Boardwalk to "underperform" from "neutral," and credit ratings agencies painted a darker outlook as well.

Investors clamored, driving partnership units down 46% to close at $13.03 Monday after touching a new 52-week low of $12.82 earlier in the day. Volume was more than 62 times the norm.

The shale gale has been a cruel wind for Boardwalk. Pipeline capacity recontracting remains a challenge (see Daily GPI, Oct. 28, 2013); minimal price volatility has eroded the value of storage, and hopes are dimming for its big shale-focused project -- Bluegrass Pipeline -- which has yet to nail down customers.

Compared with the fourth quarter of 2012, the partnership's results were impacted by lower transportation revenues of $13.3 million primarily due to contract expirations and contract renewals, the company said. Parking and lending and storage revenues were lower by $3.6 million due to decreased parking opportunities from a reduction in the level of, and volatility in, natural gas price spreads between time periods. Operating expenses were negatively impacted by a goodwill impairment charge of $51.5 million.

Growth in gas production from the Marcellus and Utica shales is seen by nearly everyone as a good thing. However, the shifting matrix of U.S. gas supply basins has devalued Boardwalk's existing pipes greatly. During an earnings conference call Monday. CEO Stan Horton talked of growing Northeast production -- which he said could exceed 25 Bcf/d by 2020 -- as something of a curse rather than a blessing.

"Unfortunately, these pipes were put in the ground a long time ago, and you can't dig them up and just repurpose them," Horton said.

During its previous earnings report, the company said recontracting headwinds would result in a $40 million annualized hit to revenues this year. Distributable cash flow (DCF) is forecast to be about $400 million this year, down from about $560 million last year. This year, about $75 million worth of transportation contracts are coming up for renewal.

“Some of those contracts, where we’re seeing the [new] rates, we’re just not going to enter into long-term contracts at those rates,” said CFO Jamie Buskill. “We’re going to be selling a good portion of that capacity in the short-term or interruptible markets for now, and that’s what’s driving the $40 million [annualized revenue reduction].”

Bluegrass, a project Boardwalk has cooked up with Williams to move Northeast natural gas liquids (NGL) down to the Gulf Coast, in part using repurposed pipeline already in the ground (see Shale Daily, March 7, 2013), has struggled to secure customers. On Monday analysts were curious about its prospects. Horton's response was that talks are continuing with interested prospective customers.

He said the decision to cut the distribution was not influenced by the fortunes of Bluegrass. On the bright side, the partnership's Southeast Market Expansion project is proceeding as planned, Horton said, and projects to connect new gas-fired power generation load to the Boardwalk network are under way. Boardwalk recently concluded an open season for its Ohio to Louisiana Access project on Texas Interstate Gas, which would entail the reversal of flow on some existing pipeline.

Boardwalk recently repurposed about 400 miles of pipeline in South Texas. If Bluegrass comes to fruition, it would repurpose another 600 miles. However, the Boardwalk network is about 14,000 miles of pipeline.

“Any way that we can figure out how to best use these pipelines given that you’ve got a changing flow of the way natural gas is moving in the interstate market; we’re doing that and we’re continuing to do that,” Horton said.

In the near term, Horton said, announced growth projects are not expected to offset declining revenues. Despite this, there are no plans to issue additional equity. "We remain bullish on boardwalk's long-term prospects for growth..." Horton said. "Actions taken today will strengthen the balance sheet."

The decrease in the value of storage spreads has accelerated of late. Fewer gas marketers are contracting for storage capacity as an arbitrage play. The future of the value of storage depends greatly on the weather, of course, and Horton said the company isn't parking gas right now but rather lending it out of storage. "So that's been kind of a complete reversal of what we've seen in the last couple years," he said.

After the severe winter weather of late settles down, Horton said Boardwalk will see whether the currently backwardated forward market returns to its traditional contango. "There's a lot of forecasts out there; we'll just see what the market does for us," he told analysts.

General partner Loews has offered up another $300 million of subordinated debt should it be needed, Horton said.

If Bluegrass goes forward, Loews has previously offered to help with the financing of the project, and Horton said if Bluegrass found "an acquisition that made sense to us," it could even go to Loews for potential funding of that. However, "...just flat-out subsidy from a general partner, I think, doesn't add value."

Loews is having its own tough times, posting a fourth quarter net loss of $198 million, up from a loss of $32 million during the year-ago period. A goodwill charge at its HighMount Exploration & Production LLC due to low natural gas and NGL prices was partly blamed. Loews was also dragged down by Boardwalk’s bad news, its shares closing down more than 4% Monday.

Boardwalk operating revenues of $312.9 million for the quarter and $1,205.6 million for the year represent a 4% decrease and 2% increase from $325.7 million and $1.19 billion in the comparable 2012 periods. Net income of $19.5 million for the quarter and $253.7 million for the year represent a 78% and 17% decrease from $90.1 million and $306 million in the 2012 periods.

Adjusted earnings of $129.6 million for the quarter and $688.7 million for the year were a 34% and 5% decrease from $197.8 million and $726.5 million, respectively, one year ago.

DCF of $138.9 million for the quarter and $558.6 million for the year represent a 3% decrease and 12% increase from $142.7 million and $497.4 million in the comparable 2012 periods.

Standard & Poor's Ratings Services (S&P) Monday lowered its corporate credit rating on Boardwalk and its Gulf South Pipeline Co. LP and Texas Gas Transmission LLC to "BBB-" from "BBB" and the issue-rating on Boardwalk's structurally subordinated debt to "BB+" from BBB-." It also lowered the issue-level ratings on Gulf South and Texas Gas Transmission to "BBB-" from "BBB." The outlook is "negative," S&P said, adding that at year-end Boardwalk had total balance sheet debt of about $3.4 billion.

S&P cited recontracting and other issues faced by Boardwalk.

"We believe that these negative underlying trends more than offset the benefits of Boardwalk's decision to drastically cut its distribution rate to 40 cents per unit from $2.13 per unit," said S&P credit analyst Michael Llanos.

"In our opinion, while Boardwalk's decision will undoubtedly impair its ability to access the equity markets, it preserves liquidity and removes the need for the partnership to access the capital markets to fund future organic growth. Absent the distribution cut and continued support from parent Loews Corp., the ratings could have been pressured further.

S&P said its rating reflects the expectation that Boardwak's ratio of adjusted debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) will be 5.3x this year and 5.4x next year, "and that there is limited headroom based on our target for a downgrade of 5.5x adjusted leverage. We could lower the ratings if cash flow from Boardwalk's core transportation and storage business worsens such that total debt to EBITDA is above 5.5x or if the partnership is unable to de-lever to below 5x by 2016."

Moody's Investors Service cut its ratings outlook for Boardwalk, Gulf South and Texas Gas to "negative" from "stable," affirming Boardwalk's "Baa2" senior unsecured ratings and Gulf South's and Texas Gas' "Baa1" senior unsecured ratings. "The large distribution cut greatly enhances the partnership's financial flexibility for capital reinvestment or debt reduction. This credit friendly response combined with Loews' ongoing financial support buttresses Boardwalk's ratings," said Pete Speer, Moody's vice president.

Although the distribution cut was "traumatic" for Boardwalk equity investors, it will provide flexibility for the partnership to address its earnings challenges, Moody's said. "This was a favorable response from a credit perspective to the re-contracting headwinds in its pipelines and storage operations," it said.

However, Boardwalk's spending plans this year leave little room for debt reduction, the ratings agency said. "Consequently, the decline in EBITDA for 2014 and natural lag in earnings response from invested capital results in debt/EBITDA likely increasing above 5x in 2014. The partnership has reaffirmed its target leverage of 4x, but it may take an extended period of time to achieve this depending on the amount of capital spending versus debt reduction in 2015 and beyond."

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