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BPL > SEC Filings for BPL > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for BUCKEYE PARTNERS, L.P.


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "Report") contains various forward-looking statements and information that are based on our beliefs, as well as assumptions made by us and information currently available to us. When used in this Report, words such as "proposed," "anticipate," "project," "potential," "could," "should," "continue," "estimate," "expect," "may," "believe," "will," "plan," "seek," "outlook" and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we believe that such expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct. Such statements are subject to a variety of risks, uncertainties and assumptions as described in more detail in Part I "Item 1A, Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2011 and Part II "Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Although the expectations in the forward-looking statements are based on our current beliefs and expectations, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.

The following information should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report.

Overview of Business

Buckeye Partners, L.P. is a publicly traded Delaware master limited partnership and its limited partnership units representing limited partner interests ("LP Units") are listed on the New York Stock Exchange ("NYSE") under the ticker symbol "BPL." Buckeye GP LLC ("Buckeye GP") is our general partner. As used in this Report, unless otherwise indicated, "we," "us," "our" and "Buckeye" mean Buckeye Partners, L.P. and, where the context requires, includes our subsidiaries.

We were formed in 1986 and own and operate one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, with over 6,000 miles of pipeline and over 100 active products terminals that provide aggregate storage capacity of approximately 70 million barrels. We also operate and/or maintain third-party pipelines under agreements with major oil and gas, petrochemical and chemical companies, and perform certain engineering and construction management services for third parties. We also own and operate a natural gas storage facility in Northern California, and are a wholesale distributor of refined petroleum products in the United States in areas also served by our pipelines and terminals. Our flagship marine terminal in The Bahamas, Bahamas Oil Refining Company International Limited ("BORCO"), is one of the largest marine crude oil and petroleum products storage facilities in the world, serving the international markets as a premier global logistics hub.

Our primary business objective is to provide stable and sustainable cash distributions to our LP unitholders, while maintaining a relatively low investment risk profile. The key elements of our strategy are to: (i) maximize utilization of our assets at the lowest cost per unit; (ii) maintain stable long-term customer relationships; (iii) operate in a safe and environmentally responsible manner; (iv) optimize, expand and diversify our portfolio of energy assets; and (v) maintain a solid, conservative financial position and our investment-grade credit rating.


Table of Contents

Recent Developments

Acquisitions

In September 2012, our operating subsidiary, Buckeye Pipe Line Holdings, L.P. ("BPH"), purchased an additional 20% ownership interest in WesPac Pipelines - Memphis LLC ("WesPac Memphis") from Kealine LLC for $17.3 million and, as a result of the acquisition, our ownership interest in WesPac Memphis increased from 50% to 70%. Since BPH retains controlling interest in WesPac Memphis, this acquisition was accounted for as an equity transaction.

In July 2012, we acquired a marine terminal facility for liquid petroleum products in New York Harbor (the "Perth Amboy Facility") from Chevron U.S.A. Inc. ("Chevron") for $260.3 million in cash. The facility, which sits on approximately 250 acres on the Arthur Kill tidal strait in Perth Amboy, New Jersey, has over 4.0 million barrels of tankage, four docks, and significant undeveloped land available for potential expansion. The Perth Amboy Facility has water, pipeline, rail, and truck access, and is located six miles from our Linden, New Jersey complex. The facility provides a link between our inland pipelines and terminals and our BORCO facility in The Bahamas and opportunities for improved service offerings to our customers. Concurrent with the acquisition, we entered into multi-year storage, blending, and throughput commitments with Chevron.

Equity Offering

In February 2012, we issued 4,262,575 LP Units to institutional investors in a registered direct offering for aggregate consideration of approximately $250.0 million at a price of $58.65 per LP Unit, before deducting placement agents' fees and estimated offering expenses. We have used the majority of the net proceeds from this offering to reduce the indebtedness outstanding under our Revolving Credit Agreement dated September 26, 2011 (the "Credit Facility") with SunTrust Bank and to fund a portion of the Perth Amboy Facility acquisition as well as certain other growth capital expenditures.

Results of Operations

Non-GAAP Financial Measures

Adjusted EBITDA is the primary measure used by our senior management, including our Chief Executive Officer, to: (i) evaluate our consolidated operating performance and the operating performance of our business segments;
(ii) allocate resources and capital to business segments; (iii) evaluate the viability of proposed projects; and (iv) determine overall rates of return on alternative investment opportunities. Distributable cash flow is another measure used by our senior management to provide a clearer picture of cash available for distribution to its unitholders. Adjusted EBITDA and distributable cash flow eliminate: (i) non-cash expenses, including but not limited to, depreciation and amortization expense resulting from the significant capital investments we make in our businesses and from intangible assets recognized in business combinations; (ii) charges for obligations expected to be settled with the issuance of equity instruments; and (iii) items that are not indicative of our core operating performance results and business outlook.

We believe that investors benefit from having access to the same financial measures that we use and that these measures are useful to investors because they aid in comparing our operating performance with that of other companies with similar operations. The Adjusted EBITDA and distributable cash flow data presented by us may not be comparable to similarly titled measures at other companies because these items may be defined differently by other companies.


Table of Contents

The following table presents Adjusted EBITDA by segment and on a consolidated basis, distributable cash flow and a reconciliation of net income (loss), which is the most comparable GAAP financial measure, to Adjusted EBITDA and distributable cash flow for the periods indicated (in thousands):

                                                Three Months Ended               Nine Months Ended
                                                  September 30,                    September 30,
                                              2012             2011            2012            2011
Adjusted EBITDA:
Pipelines & Terminals                       $ 112,879       $   86,510       $ 290,709       $ 260,743
International Operations                       33,548           30,095          95,805          86,248
Natural Gas Storage                             1,357              426            (299 )           266
Energy Services                                 1,619            6,978          (7,759 )        13,578
Development & Logistics                         3,168            2,519           9,034           5,563

Total Adjusted EBITDA                       $ 152,571       $  126,528       $ 387,490       $ 366,398

Reconciliation of Net Income (Loss) to
Adjusted EBITDA and Distributable Cash
Flow:
Net income (loss)                           $  85,259       $ (108,200 )     $ 194,752       $  53,205
Less: Net income attributable to
noncontrolling interests                         (143 )         (1,500 )        (3,298 )        (4,391 )

Net income (loss) attributable to
Buckeye Partners, L.P.                         85,116         (109,700 )       191,454          48,814
Add: Interest and debt expense                 28,737           33,199          85,159          90,292
Income tax expense (benefit)                      511               -            1,177            (193 )
Depreciation and amortization                  37,134           31,230         104,486          87,227
Non-cash deferred lease expense                   975            1,030           2,925           3,091
Non-cash unit-based compensation expense        2,846            1,694          10,534           6,532
Goodwill impairment expense                        -           169,560              -          169,560
Less: Amortization of unfavorable
storage contracts (1)                          (2,748 )           (485 )        (8,245 )        (4,813 )
Gain on sale of equity investment                  -                -               -          (34,112 )

Adjusted EBITDA                             $ 152,571       $  126,528       $ 387,490       $ 366,398

Less: Interest and debt expense,
excluding amortization of deferred
financing costs and debt discounts            (27,868 )        (28,709 )       (82,552 )       (83,541 )
Income tax (expense) benefit                     (511 )             -           (1,177 )           193
Maintenance capital expenditures              (11,889 )        (16,803 )       (35,764 )       (36,569 )

Distributable cash flow                     $ 112,303       $   81,016       $ 267,997       $ 246,481

(1) Represents amortization of negative fair values allocated to certain unfavorable storage contracts acquired in connection with the BORCO acquisition.


Table of Contents

The following table presents product volumes transported and average daily throughput for the Pipelines & Terminals segment in barrels per day ("bpd") and total volumes sold in gallons for the Energy Services segment for the periods indicated:

                                                      Three Months Ended           Nine Months Ended
                                                         September 30,               September 30,
                                                      2012          2011          2012          2011
Pipelines & Terminals (average bpd in thousands):
Pipelines:
Gasoline                                                729.7         693.4         705.9         658.3
Jet fuel                                                352.7         344.8         342.7         339.8
Middle distillates (1)                                  306.0         298.7         314.6         309.4
Other products (2)                                       18.8          19.6          23.5          24.7

Total pipelines throughput                            1,407.2       1,356.5       1,386.7       1,332.2

Terminals:
Products throughput (3)                                 910.9         879.1         888.3         681.5

Energy Services (in millions of gallons):
Sales volumes                                           233.4         297.4         836.7         960.8

(1) Includes diesel fuel, heating oil and kerosene.

(2) Includes liquefied petroleum gas ("LPG").

(3) Amounts include throughput volumes at terminals acquired from BP Products North America Inc. and its affiliates ("BP") and ExxonMobil Corporation on June 1, 2011 and July 19, 2011, respectively.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Consolidated

Adjusted EBITDA was $152.6 million for the three months ended September 30, 2012, which is an increase of $26.1 million, or 20.6%, from $126.5 million for the corresponding period in 2011. The increase in Adjusted EBITDA was primarily related to additional revenue due to higher pipeline tariff rates and terminalling contract rate escalations, increased pipeline and terminalling volumes and favorable settlement experience in the Pipelines & Terminals segment, as well as an increase in revenue and reduced operating expenses in the International Operations segment. These increases in Adjusted EBITDA were partially offset by reduced earnings in the Energy Services segment as a result of continued market backwardation and declining basis in the Northeast refined petroleum commodity markets that adversely affected our profitability. Backwardation is a market condition in which commodity futures contracts with a delivery month further away in time have lower settlement prices than commodity futures contracts with a delivery month closer in time. Basis is the difference between the physical spot price for a commodity and the prompt contract price for the respective physical commodity.

Revenue was $966.0 million for the three months ended September 30, 2012, which is a decrease of $150.9 million, or 13.5%, from $1,116.9 million for the corresponding period in 2011. The decrease in revenue was primarily related to a decrease in refined petroleum product sales prices and lower product sales volume in the Energy Services segment, which was partially offset by an increase in revenue related to higher pipeline tariff rates and terminalling contract rate escalations, increased pipeline and terminalling volumes and a favorable settlement experience in the Pipelines & Terminals segment.

Operating income was $113.4 million for the three months ended September 30, 2012, which is an increase of $190.7 million, or 246.6%, from a loss of $77.3 million for the corresponding period in 2011. The increase in operating income was primarily related to additional revenue due to higher pipeline tariff rates and terminalling contract rate escalations, increased pipeline and terminalling volumes and a favorable settlement experience in the Pipelines & Terminals segment, as well as a non-cash goodwill impairment charge in the Natural Gas Storage segment in 2011. These increases were partially offset by decreased earnings in the Energy Services segment due to adverse market conditions.


Table of Contents

Distributable cash flow was $112.3 million for the three months ended September 30, 2012, which is an increase of $31.3 million, or 38.6%, from $81.0 million as compared to the corresponding period in 2011. The increase in distributable cash flow was primarily related to an increase of $26.1 million in Adjusted EBITDA as described above and a $4.9 million decrease in maintenance capital expenditures relating to the timing of pipeline and tank integrity work performed in the Pipelines & Terminals segment.

Adjusted EBITDA by Segment

Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $112.9 million for the three months ended September 30, 2012, which is an increase of $26.4 million, or 30.5%, from $86.5 million for the corresponding period in 2011. The positive factors impacting Adjusted EBITDA were primarily related to $13.0 million of favorable settlement experience, $8.0 million in additional revenue due to higher pipeline tariff rates, long-haul shipments and terminalling contract rate escalations, a $5.5 million increase in revenue due to higher pipeline and terminalling volumes, a $4.0 million increase in revenue resulting from the Perth Amboy Facility acquired in 2012, a $1.6 million increase in earnings due to the purchase of an additional 20% ownership interest in WesPac Memphis and a $1.3 million increase in other revenue resulting primarily from higher butane blending capabilities in the Northeast. The favorable settlement experience primarily related to the successful resolution of a $10.6 million product settlement allocation matter related to certain pipeline transportation-related services provided by Buckeye over a period of several years, of which $7.8 million related to services rendered in prior years but, for accounting purposes, was not recognized in revenue until the current period.

The negative factors impacting Adjusted EBITDA were a $1.9 million increase in operating expenses from the Perth Amboy Facility acquired in 2012, a $1.8 million decrease in earnings from equity investments primarily due to higher environmental remediation cost estimates, $1.5 million of fees related to temporary suspension of ethanol offloading capabilities at our Albany facility, a $1.1 million increase in operating expenses primarily related to payroll costs and $0.7 million in fees related to the legal proceedings before the Federal Energy Regulatory Commission ("FERC").

Pipeline volumes increased by 3.7% as a result of higher demand for gasoline and middle distillates, as well as changes in supply patterns resulting from the refinery closures affecting the Philadelphia market in 2012 and extreme weather conditions and related refinery issues in 2011. Terminalling volumes increased by 3.6% due to higher demand for gasoline and distillates resulting from new customer contracts and service offerings at select locations, effective commercialization of acquired assets and continued positive contribution from our recently completed internal growth projects.

International Operations. Adjusted EBITDA from the International Operations segment was $33.5 million for the three months ended September 30, 2012, which is an increase of $3.4 million, or 11.5%, from $30.1 million for the corresponding period in 2011. The positive factors impacting Adjusted EBITDA were primarily related to a $2.1 million decrease in expenses, which included fuel and utilities expenses and professional fees and a $1.3 million increase in revenue as a result of the initial 1.1 million barrels of our BORCO expansion becoming operational as of the beginning of the quarter and the overall lease rate for the period remaining relatively flat.

Natural Gas Storage. Adjusted EBITDA from the Natural Gas Storage segment was $1.4 million for the three months ended September 30, 2012, which is an increase of $1.0 million, or 218.5%, from $0.4 million for the corresponding period in 2011. The increase in Adjusted EBITDA was primarily the result of a $7.0 million increase in fees for hub services activities, partially offset by a $2.5 million increase in costs of natural gas storage services which includes hub services fees paid to customers for hub service activities, a $2.5 million decrease in lease revenue due to lower firm storage rates and a $1.0 million net increase in operating expenses, which included lease expenses and payroll costs. Lease revenue and hub service fees are primarily determined by the difference in natural gas commodity prices for the periods in which natural gas is injected and withdrawn from the storage facility (i.e., time spread).


Table of Contents

Energy Services. Adjusted EBITDA from the Energy Services segment was $1.6 million for the three months ended September 30, 2012, which is a decrease of $5.4 million, or 76.8%, from $7.0 million for the corresponding period in 2011. Despite aggressive management of our inventory levels and reduction of our exposure to market backwardation, adverse market conditions continued to negatively impact the value of our inventory portfolio, which contributed to the unfavorable impact on our overall sales margin. In addition, during 2011, we recognized $1.6 million in biodiesel tax credits as a reduction to cost of sales, but due to legislative changes enacted during 2012, the biodiesel tax credits were disallowed in the current period.

The decrease in Adjusted EBITDA was primarily related to a $202.7 million decrease in revenue, which included a $10.2 million decrease as a result of approximately $0.05 per gallon decrease in refined petroleum product sales price (average sales prices per gallon were $2.96 and $3.01 for the 2012 and 2011 periods, respectively) and a $192.5 million decrease due to 21.5% lower sales volumes.

The decrease in revenue was partially offset by a $196.3 million decrease in cost of product sales, which included a $6.0 million decrease as a result of approximately $0.02 per gallon decrease in refined petroleum product cost price (average cost prices per gallon were $2.95 and $2.97 for the 2012 and 2011 periods, respectively) and a $190.3 million decrease due to 21.5% of lower volumes sold, and a $1.0 million decrease in operating expenses, which primarily related to overhead costs.

Development & Logistics. Adjusted EBITDA from the Development & Logistics segment was $3.2 million for the three months ended September 30, 2012, which is an increase of $0.7 million, or 25.8%, from $2.5 million for the corresponding period in 2011. The increase in Adjusted EBITDA was primarily due to $1.4 million in revenue related to the LPG storage caverns acquired in November 2011 and a $0.2 million decrease in third-party engineering and operations expenses, partially offset by a $0.4 million decrease in third-party engineering and operations revenue, both as a result of reduced construction contract services, and a $0.3 million increase in operating expenses, which primarily related to overhead costs and $0.2 million in operating expenses for the LPG storage caverns.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Consolidated

Adjusted EBITDA was $387.5 million for the nine months ended September 30, 2012, which is an increase of $21.1 million, or 5.8%, from $366.4 million for the corresponding period in 2011. The increase in Adjusted EBITDA was primarily related to positive contribution as a result of a full period of operating activities for 2011 acquisitions in the Pipelines & Terminals segment and International Operations segment, as well as a decrease in expenses in the International Operations segment. These increases were partially offset by losses incurred in the Energy Services segment as a result of declining basis in the Midwest and Northeast refined petroleum commodity markets that adversely affected the value of our inventory portfolio.

Revenue was $3,208.0 million for the nine months ended September 30, 2012, which is a decrease of $238.5 million, or 6.9%, from $3,446.5 million for the corresponding period in 2011. The decrease in revenue was primarily related to a net decrease in revenue in the Energy Services segment, which was partially offset by the revenue generated due to a full period of operations for the 2011 acquisitions in the Pipelines & Terminals segment.

Operating income was $275.6 million for the nine months ended September 30, 2012, which is an increase of $174.4 million, or 172.3%, from $101.2 million for the corresponding period in 2011. The increase in operating income was primarily related to a non-cash goodwill impairment charge in the Natural Gas Storage segment in 2011 and positive contribution as a result of a full period of operating activities for 2011 acquisitions in the Pipelines & Terminals segment and International Operations segment. These increases were partially offset by losses incurred in the Energy Services segment due to adverse market conditions and an increase in depreciation due to the assets acquired in 2011 in the Pipelines & Terminals segment and the upgrades and expansions of the jetty structure in the International Operations segment.


Table of Contents

Distributable cash flow was $268.0 million for the nine months ended September 30, 2012, which is an increase of $21.5 million, or 8.7%, from $246.5 million as compared to the corresponding period in 2011. The increase in distributable cash flow was primarily related to an increase of $21.1 million in Adjusted EBITDA as described above.

Adjusted EBITDA by Segment

Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $290.7 million for the nine months ended September 30, 2012, which is an increase of $30.0 million, or 11.5%, from $260.7 million for the corresponding period in 2011. The positive factors impacting Adjusted EBITDA were related to a $37.3 million increase in revenue due to a full period of operations for the assets acquired in 2011 and the Perth Amboy Facility acquired in 2012, a $27.1 million increase in revenue due to higher pipeline tariff rates and terminalling contract rate escalations on assets owned prior to the 2011 and 2012 acquisitions (which we refer to as our "legacy assets"), $4.9 million of favorable net settlement experience and a $1.4 million increase in other revenue resulting primarily from higher butane blending capabilities in the Northeast. The favorable net settlement experience included the successful resolution of a $10.6 million product settlement allocation matter related to certain pipeline transportation-related services provided by Buckeye over a period of several years, of which $7.8 million related to services rendered in prior years but, for accounting purposes, was not recognized in revenue until the current period.

The negative factors impacting Adjusted EBITDA were a $15.6 million increase in operating expenses related to the full period of operations of the assets acquired in 2011 and the Perth Amboy Facility acquired in 2012, which included acquisition and transition expenses, a $12.1 million increase in operating expenses, which included integrity program expenditures, payroll costs, insurance and environmental remediation expenses, a $5.4 million increase in expenses related to the relocation of certain operations and administrative support functions to our Houston, TX headquarters, a $3.5 million decrease in earnings from equity investments primarily due to higher environmental remediation costs and the sale of our interest in West Texas LPG Pipeline Limited Partnership in 2011, a $1.7 million increase in fees related to the legal proceedings before the FERC, $1.5 million of fees related to the temporary suspension of ethanol offloading capabilities at our Albany facility and a $0.9 million increase in other costs.

Overall pipeline and terminalling volumes increased by 4.1% and 30.3%, respectively, primarily as a result of the assets acquired in 2011. Legacy . . .

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