Open Letter To the Boards of Directors of Loews Corporation and Boardwalk Partners LP

May 8, 2018
Boards of Directors
Loews Corporation & Boardwalk Partners LP
667 Madison Avenue
New York, NY 10065

Dear Members of the Boards of Directors:
I write to express my outrage at the recent actions of the Loews Corporation, led by the members of the Tisch family who serve on its board, to artificially depress the stock price of Boardwalk Partners LP.  These efforts appear to be a brazen attempt to effect a buyout of the company for a fraction of its fair value and in contravention of terms and intent of the Master Limited Partnership agreement.  As one of Boardwalk’s largest minority unitholders, I am shocked and deeply disappointed at the manner in which Loews and its leadership are treating their fellow shareholders and limited partners, and I call upon them to immediately take action to rectify the situation they have created.

Nearly two months ago, on March 15, the Federal Energy Regulatory Commission issued a series of orders designed to address the allowance for income taxes in cost-of-service rates for natural gas and oil pipeline companies.  These orders are not expected to have any effect on Boardwalk’s existing business, and just four days after they were issued, Boardwalk publicly told unitholders “Boardwalk Does Not Expect FERC's Proposed Policy Revisions To Have A Material Impact On Revenues.” Neither Boardwalk nor Loews disclosed any basis to infer that the FERC orders may trigger a right allowing the General Partner to purchase all outstanding MLP units.

But on April 30, a month and a half after Boardwalk assured the market that the FERC orders would have no effect on its business, Loews abruptly announced that it thought the FERC orders would have a material adverse effect on its businessnot now, but five years from now, in 2023.  Loews further told investors that this revised outlook triggered a contractual right buried in the Boardwalk MLP agreement that allowed Loews CorporationBoardwalk’s majority unitholder and general partnerto buy the company’s minority shares for the average closing price of Boardwalk’s stock over the last 180 trading days.  Loews did not say whether it would actually exercise this rightrather, it said only that Loews was “strongly considering” the option and would make a decision by the end of 2018.

Instead of announcing a buyout, Lowes inserted the possibility of a future buyout as a means to cap the price at which the MLP units could trade, while giving Loews and its leadership an ongoing option to complete the buyout whenever the price of the MLP units declined to an acceptable level.  The reaction from the market was predictable:  in the week after the announcement, Boardwalk’s stock price plunged over 16% (falling from $11.04 to $9.26) as the fear of Loews exercising its call option at some uncertain date at some uncertain price led investors to scramble to get out of the stock.  Meanwhile, as minority unitholders suffer, the crisis that Loews has improperly manufactured has been working to its own benefit.  Every day that Boardwalk’s stock price falls, Loews’s option—which is based on the historical trading price—becomes cheaper to exercise.  By refusing to clarify its intentions, Loews has created a death spiral for Boardwalk’s stock.

The timing of Loews’s announcement is no coincidence.  Boardwalk’s stock has historically traded at over $38 per share, and was trading at over $18 per share in the last year.  Over the last several months, however, Boardwalk’s stock has hovered in the low teens at historic lows.  When Loews announced its position on the effect of FERC orders on April 30, it could have exercised its option to buy minority unitholders out for at a minimum $13.15 per share.

Boardwalk’s stock has been rapidly sinking, such that with each passing day minority unitholders will get less for their shares whenever the call option is ultimately exercised.  By artificially depressing Boardwalk’s stock price in this way, Loews is acting in clear contravention of the MLP agreement, which is designed to protect minority unitholders by ensuring that they receive an unaffected pricebased on the last 180 trading daysfor their units if the call option is exercised.  Loews cannot circumvent this contractual protection by threatening to exercise the option, artificially driving down the stock price, and using the manufactured decline in the stock price to exercise the call on the cheap. Loews’ conduct contravenes the parties’ manifested intent to provide unitholders a payment based on an unaffected price.  At a minimum, Boardwalk and Loews breached both the MLP agreement and the implied covenant of good faith and fair dealing.

I write to you today because there is still time for Loews and the members of the Tisch family who serve on its board to restore their reputations for fair dealing and avoid legal action.  If Loews believes that it has the right to exercise the call option in the MLP agreement, it should immediately commit to doing so at an unaffected price of at a minimum $13.15 per share.  If, however, Loews does not intend to exercise this right, it should promptly commit to not exercising this right in the future to remove the overhang that it has created in Boardwalk’s stock.  Alternatively, it should publicly commit to converting Boardwalk to a C-Corporation to offer certainty that the company is not affected by the FERC orders either now or in the future and to allow all unitholders to benefit from its future prospects.  It is my sincere hope that Loews and its leadership will commit to acting fairly and protecting the interests of all of Boardwalk’s unitholders

I request a response to this letter in the next five calendar days, and reserve all rights to take further action as needed. . In the event an amicable resolution is not feasible, I have retained Bernstein Litowitz Berger & Grossmann LLP as a precaution if needed to protect it’s clients interests. 

Tsachy Mishal
TAM Capital Management
63 Crane Rd North
Stamford, CT 06902
Press contact:
Legal contact:
Mark Lebovitch
Bernstein Litowitz & Grossmann LLP

Looking Through The Boardwalk Recontracting

Looking Through The Boardwalk Recontracting

Boardwalk Pipeline Partners (BWP) trades at a rock bottom valuation due to uncertainties surrounding contracts that are set to expire in the coming years (ie. recontracting). The goal of this write up is to put forth a conservative estimate of where EBITDA will be following the recontracting and establish a value for the shares.

Boardwalk operates natural gas pipelines and storage facilities. The vast majority of Boardwalk’s revenue is from long term contracts and as a result there is typically high visibility on revenue and EBITDA. When a pipeline is built customers typically sign 10 to 20 year contracts guaranteeing revenue for the pipeline regardless of usage.

History Of The Recontracting

Well over a decade ago Boardwalk started planning a pipeline system that would flow gas from the shale fields in the middle and southern part of the country to Southern Texas and Louisiana. After the pipeline system was built more economic shale gas was discovered in other parts of the country, primarily the Utica and Marcellus Shale. This led to less drilling in the areas which Boardwalk’s pipeline system served. Despite the decreased drilling, Boardwalk’s customers were locked in for 10 years and had to continue paying. These contracts will all be up for renewal over the next 3 years and revenue will decline.

In 2014 Boardwalk management recognized the fact that this recontracting was looming. To plan for the recontracting they slashed the dividend and used the vast majority of the cash flow for growth projects to offset the looming revenue losses. Boardwalk has been successful in increasing EBITDA over that period. The table below from Boardwalk’s latest investor presentation shows the growth in EBITDA that resulted from the growth projects

Boardwalk is fortunate that its pipeline system feeds into Southern Texas and Louisiana, the area of the country that is seeing the largest demand growth for natural gas. A large number of LNG export facilities are being built in this area and exports to Mexico leave from this area. In addition, a large number of electrical and petrochemical facilities are being built in this part of the country.

Boardwalk’s largest pipeline system coming up for recontracting is Gulf Crossing. Currently, 70% of the capacity is being utilized even as the vast majority of the pipeline’s capacity is under contract. Cheniere is building a large amount of LNG export capacity and needs natural gas to flow its facilities. In order to facilitate this they are planning a pipeline called Midship that will go from the SCOOP and STACK to Bennington. At Bennington, Midship can connect into Boardwalk’s Gulf Crossing and a competing pipeline. As a result it is likely that Gulf Crossing will be able to recontract close to 100% of its capacity, albeit at a lower price.

Putting A Number On The Recontracting Loss

Most analysts estimate that Boardwalk will lose around $200 million from recontracting from 2017 to 2021. For the purpose of getting a very conservative estimate of the earnings power of Boardwalk I am going to assume they lose $250 million in EBITDA to recontracting between 2017 and 2021. It assumes a poor outcome for all regions coming up for recontracting but also assumes Midship gets built (which seems very likely). My estimate of recontracting losses is far in excess of any analyst I have seen, including Goldman Sachs which has a sell rating on the stock.

Growth Projects

Boardwalk currently has $1.3 billion of growth projects in the pipeline. This should lead to roughly $160 million in EBITDA based on industry returns and past Boardwalk growth projects. Boardwalk has already paid for the majority of this through free cash flow and should earn enough free cash flow over the next year to pay for the rest. These projects will be put into service by 2020 with the majority of the revenue starting during 2019.


In 2017 Boardwalk earned $845.5 million in EBITDA adding back a recontracting loss of $7 million. Over the coming years I estimate they will gain $160 million from growth projects and lose as much as $250 million to recontracting. That leaves them with EBITDA of at least $755 million.
Steady, natural gas pipeline MLPs trade at roughly 12 times EBITDA. Post recontracting Boardwalk will be a high quality natural gas pipeline company, with the vast majority of revenue coming from predictable, long term contracts. Boardwalk’s recent growth projects have an average contract life of 17 years. After recontracting their problematic pipelines will represent a small amount of revenue and be at market rates. A dirty little secret of pipeline companies is that most of them have some recontracting issues but they are not as transparent as Boardwalk has been.

At 12 times $755 million in EBITDA Boardwalk would trade at $21.50. Since Boardwalk still needs another year of cash flow to pay for the growth projects the price target should also be for a year out. Discounting that back to today for a 10% return (including the dividend) works out to roughly $20 of value today.

So how is it possible that I have lower estimates than every analyst and a higher price target? Quite frankly my only major insight is that once the recontracting is resolved there will be no more uncertainty and the stock should be valued like its peers. Even in an adverse outcome that is worse than any analyst is expecting the stock should be higher. Over the next year we should find out the recontracting results for the majority of Boardwalk’s pipelines and the uncertainty should be lifted.

Distributable Cash Flow

At $755 million in EBITDA Boardwalk would have $475 million in distributable cash flow. If Boardwalk wanted to maintain 1.2 times dividend coverage they could pay a 14.3% dividend at today’s price. I believe they would first want to delever before paying out such a large percent of cash flow. Over time the dividend should go much higher although the timing is uncertain.

Boardwalk Management

Boardwalk management gets a bad rap because of the stock price and the dividend. When they planned the pipelines that are being recontracted over a decade there was no way to know that more productive shale fields would be discovered. As Forrest Gump says “Sh*t happens”. This is not the fault of management.

Boardwalk management was transparent and proactive when they realized the problem. They cut the dividend and planned ahead for the coming recontracting. Most MLP managements in a similar situation would just keep paying out a big dividend and drive off the cliff. With Boardwalk management I am comfortable because they are transparent about the problems. With other MLPs one doesn’t know what recontracting issues lie in the future.

Storage Upside

Boardwalk’s storage business has two types of customers, strategic and financial. A strategic customer might be an electrical plant that wants to have some natural gas in storage. A financial customer takes advantage of the natural gas futures curve. In recent years storage revenue has declined mainly because the natural gas curve has been unfavorable.

Management is bullish on strategic customers because of the location of their pipelines. Boardwalk has storage in areas where large amounts of facilities are being built that use natural gas such as LNG export facilities, petrochemical plants etc. These facilities may want to utilize some of Boardwalk’s storage. On the financial side they don’t think the natural gas futures curve could get any worse. This valuation doesn’t include any potential storage upside.

My clients and I are long shares of Boardwalk Pipeline Partners (BWP) at the time of this writing. Positions may change at any time