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BPL > SEC Filings for BPL > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for BUCKEYE PARTNERS, L.P.

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


1-Nov-2013

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, 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 approximately 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. Beginning in late 2012, we began to provide fuel oil supply and distribution services to third parties in the Caribbean. 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 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.


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Recent Developments

Execution of Purchase and Sale Agreement to Acquire Hess Terminals

In October 2013, we signed a definitive agreement with Hess Corporation to acquire 20 liquid petroleum products terminals with total storage capacity of approximately 39 million barrels for $850 million (the "Hess Terminals Acquisition"). The 19 domestic terminals are located primarily in major metropolitan locations along the U.S. East Coast and have approximately 29 million barrels of aggregate liquid petroleum products storage capacity, including approximately 15 million barrels of capacity strategically located in New York Harbor. These terminals have access to products supplied by marine vessels and barges as wells as pipelines. The terminal on St. Lucia in the Caribbean has approximately 10 million barrels of crude oil and refined petroleum products storage capacity and has deep-water access. This acquisition, which is subject to regulatory approvals and customary closing conditions, is expected to close in the fourth quarter of 2013.

Equity Offerings

In October 2013, we completed a public offering of 7.5 million LP Units pursuant to an effective shelf registration statement, which priced at $62.61 per unit. The underwriters also exercised an option to purchase 1.1 million additional LP Units, resulting in total gross proceeds of approximately $540.0 million before deducting underwriting fees and estimated offering expenses of approximately $18.9 million. We intend to use the net proceeds from this offering to fund indirectly a portion of the purchase price for the Hess Terminals Acquisition. Pending such use, we used the net proceeds to reduce the indebtedness outstanding under our $1.25 billion revolving credit facility dated September 26, 2011 (the "Credit Facility") with SunTrust Bank.

In January 2013, we completed a public offering of 6.0 million LP Units pursuant to an effective shelf registration statement, which priced at $52.54 per unit. The underwriters also exercised an option to purchase 0.9 million additional LP Units, resulting in total gross proceeds of approximately $362.5 million before deducting underwriting fees and estimated offering expenses of approximately $13.3 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility.

Conversion of Class B Units

In September 2013, approximately 8.5 million Class B Units representing limited partner interests in Buckeye, which represented all of our Class B Units outstanding as of September 1, 2013, converted into LP Units on a one-for-one basis. The conversion was required by our agreement of limited partnership and was triggered in connection with over 4.0 million barrels of incremental storage capacity being placed in service since acquisition at our BORCO facility effective September 1, 2013. As a result, there were no outstanding Class B Units at September 30, 2013.

Notes Offering

In June 2013, we issued $500.0 million of 4.150% Notes due July 1, 2023 (the "4.150% Notes") in an underwritten public offering at 99.81% of their principal amount. Total proceeds from this offering, after underwriting fees, expenses and debt issuance costs of $3.3 million, were approximately $495.8 million. We used the net proceeds from this offering for general partnership purposes and to repay amounts due under our Credit Facility, a portion of which was subsequently reborrowed in July 2013 in order to repay in full the 4.625% Notes and related accrued interest (as discussed above). We also settled all interest rate swaps relating to the 4.150% Notes for approximately $62.0 million during June 2013.

At-the-Market Offering Program

In May 2013, we entered into four separate equity distribution agreements (each an "Equity Distribution Agreement" and collectively the "Equity Distribution Agreements") with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC. Under the terms of the Equity Distribution Agreements, we may offer and sell up to $300.0 million in aggregate gross sales proceeds of LP Units from time to time through such firms, acting as agents of the Partnership or as principals, subject in each case to the terms and conditions set forth in the applicable Equity Distribution Agreement. Sales of LP Units, if any, may be made by means of ordinary brokers' transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms. During the nine months ended September 30, 2013, we sold 0.5 million LP Units in aggregate under the Equity Distribution Agreements and received approximately $33.1 million in net proceeds after deducting commissions and other related expenses. During the three and nine months ended September 30, 2013, we paid approximately $0.1 million and $0.4 million, respectively, of compensation in aggregate to the agents under the Equity Distribution Agreements.


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Acquisition of Additional Interest in WesPac Pipelines - Memphis LLC

In April 2013, our operating subsidiary, Buckeye Pipe Line Holdings, L.P. ("BPH"), purchased an additional 10% ownership interest in WesPac Pipelines - Memphis LLC ("WesPac Memphis") from Kealine LLC for $9.7 million and, as a result of the acquisition, our ownership interest in WesPac Memphis increased from 70% to 80%. Since BPH retains controlling interest in WesPac Memphis, this acquisition was accounted for as an equity transaction.

Overview of Operating Results

Net income attributable to our unitholders was $243.0 million for the nine months ended September 30, 2013, which was an increase of $51.5 million, or 26.9% from $191.5 million for the corresponding period in 2012. Operating income was $336.2 million for the nine months ended September 30, 2013, which is an increase of $59.5 million, or 21.5% from $276.7 million for the corresponding period in 2012. Our results for the nine months ended September 30, 2013 includes year-over-year improvement in our Pipelines & Terminals, International Operations and Energy Services segments, while our Natural Gas Storage segment experienced challenges associated with a decline in storage rates compared to the corresponding period in 2012. Continued excess supply of natural gas, minimal volatility in natural gas prices and compressed seasonal spreads could cause further reduction in Adjusted EBITDA and a reduction of our estimates of future cash flows related to our Natural Gas Storage segment. Accordingly, we continue to monitor the effect of any adverse economic conditions on the carrying value of the long-lived assets related to this segment.

The increase in net income attributable to our unitholders was primarily the result of increased revenue in our Pipelines & Terminals segment, as well as increased contributions from our International Operations and Energy Services segments. Terminalling volumes for the first nine months of 2013 increased over the prior year period in our Pipelines & Terminals segment as recent growth capital projects became operational in the latter half of 2012, including our propylene and storage project at our Chicago complex and transformation of our Albany terminal to add the ability to provide crude-handling services. Furthermore, our expanded capabilities for butane blending represent further product diversification for Buckeye as we were able to leverage our existing assets to provide a broader array of services to our customers. In September, our International Operations segment completed and placed in service the last phase of our expansion activities at our BORCO facility. In addition to the storage revenue contribution from the expansion capacity, higher ancillary revenues, including berthing and heating revenue, were generated due to increased customer utilization of our facilities. Additionally, our Energy Services segment benefited from improved rack margins, largely the result of renewable identification number ("RIN") sales. Our Energy Services segment generates RINs through its ethanol blending and bio-blended diesel activities. The market for RINs, which are legislatively required to be purchased by refiners, experienced a substantial increase in value during the first half of the year. In the third quarter of 2013, the value of RINs declined as the U.S. Environmental Protection Agency lowered the required blend volumes for renewable fuels, which had an adverse impact on earnings during the period. In addition, our sales volumes declined year over year in the Energy Services segment as we continue to focus on fewer, more strategic locations in which to transact business.


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Results of Operations



Consolidated Summary



Our summary operating results were as follows for the periods indicated (in
thousands, except per unit amounts):



                                         Three Months Ended          Nine Months Ended
                                            September 30,              September 30,
                                          2013         2012         2013          2012
Revenue                                $ 1,088,758   $ 965,970   $ 3,439,098   $ 3,208,049
Costs and expenses                         977,348     852,106     3,102,888     2,931,305
Operating income                           111,410     113,864       336,210       276,744
Other expense, net                         (32,964 )   (28,094 )     (89,569 )     (80,815 )
Income before taxes                         78,446      85,770       246,641       195,929
Income tax expense                            (195 )      (511 )        (521 )      (1,177 )
Net income                                  78,251      85,259       246,120       194,752
Less: Net income attributable to
noncontrolling interests                      (997 )      (143 )      (3,095 )      (3,298 )
Net income attributable to Buckeye
Partners, L.P.                         $    77,254   $  85,116   $   243,025   $   191,454
Earnings per unit - diluted            $      0.72   $    0.87   $      2.30   $      1.97

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.


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The following table presents Adjusted EBITDA by segment and on a consolidated basis, distributable cash flow and a reconciliation of net income, 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,
                                          2013        2012        2013        2012

Adjusted EBITDA:
Pipelines & Terminals                  $  114,412   $ 112,879   $ 339,041   $ 290,709
International Operations                   40,475      33,548     112,921      95,805
Natural Gas Storage                        (2,759 )     1,357     (10,343 )      (299 )
Energy Services                            (2,220 )     1,619       9,744      (7,759 )
Development & Logistics                     3,934       3,168       9,819       9,034
Total Adjusted EBITDA                  $  153,842   $ 152,571   $ 461,182   $ 387,490

Reconciliation of Net Income to
Adjusted EBITDA and Distributable
Cash Flow:
Net income                             $   78,251   $  85,259   $ 246,120   $ 194,752
Less: Net income attributable to
noncontrolling interests                     (997 )      (143 )    (3,095 )    (3,298 )
Net income attributable to Buckeye
Partners, L.P.                             77,254      85,116     243,025     191,454
Add: Interest and debt expense             34,341      28,737      94,827      85,159
Income tax expense                            195         511         521       1,177
Depreciation and amortization              38,755      37,134     115,798     104,486
Non-cash deferred lease expense               944         975       2,828       2,925
Non-cash unit-based compensation
expense                                     5,111       2,846      12,438      10,534
Less: Amortization of unfavorable
storage contracts (1)                      (2,758 )    (2,748 )    (8,255 )    (8,245 )
Adjusted EBITDA                        $  153,842   $ 152,571   $ 461,182   $ 387,490
Less: Interest and debt expense,
excluding amortization of deferred
financing costs, debt discounts and
other                                     (31,267 )   (27,868 )   (89,154 )   (82,552 )
Income tax expense                           (195 )      (511 )      (521 )    (1,177 )
Maintenance capital expenditures          (26,102 )   (11,889 )   (44,304 )   (35,764 )
Distributable cash flow                $   96,278   $ 112,303   $ 327,203   $ 267,997



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


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The following table presents product volumes and average tariff rates 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,
                                      2013         2012         2013         2012

Pipelines & Terminals (average
bpd in thousands):
Pipelines:
Gasoline                                723.2        729.7        720.4        705.9
Jet fuel                                343.1        352.7        334.1        342.7
Middle distillates (1)                  302.9        299.8        330.5        310.4
Other products (2)                       29.4         25.0         29.2         27.7
Total pipelines throughput            1,398.6      1,407.2      1,414.2      1,386.7

Terminals:
Products throughput                     969.1        931.4        980.6        909.5

Pipeline Average Tariff
(cents/bbl)                              84.1         84.5         81.8         82.1

Energy Services (in millions of
gallons):
Sales volumes                           242.5        233.4        779.8        836.7



(1) Includes diesel fuel and heating oil.

(2) Includes liquefied petroleum gas ("LPG"), intermediate petroleum products and crude oil.

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Consolidated

Adjusted EBITDA was $153.8 million for the three months ended September 30, 2013, which is an increase of $1.2 million, or 0.8%, from $152.6 million for the corresponding period in 2012. The increase in Adjusted EBITDA was primarily related to increased storage capacity and customer utilization of our BORCO facility in our International Operations segment and positive contributions from growth capital spending in the Pipelines & Terminals segment. These increases in Adjusted EBITDA were offset by compressed seasonal spreads and minimal volatility in natural gas prices in our Natural Gas Storage segment and decreased earnings as a result of lower margins in the Energy Services segment. Adjusted EBITDA for the three months ended September 30, 2012 reflects a one-time favorable settlement of $10.6 million.

Revenue was $1,088.8 million for the three months ended September 30, 2013, which is an increase of $122.8 million, or 12.7%, from $966.0 million for the corresponding period in 2012. The increase in revenue was primarily related to new fuel oil supply and distribution services in the Caribbean, as well as the full benefit of the completed expansion capacity brought online at our BORCO facility in the International Operations segment. In addition, increased product sales volume in our Energy Services segment contributed to the overall increase in revenue. These increases in revenue were offset by decreased seasonal spreads and lower firm lease rates in our Natural Gas Storage segment.

Operating income was $111.4 million for the three months ended September 30, 2013, which is a decrease of $2.5 million, or 2.2%, from $113.9 million for the corresponding period in 2012. The decrease in operating income was primarily related to decreased seasonal spreads in our Natural Gas Storage segment and decreased contribution from our Energy Services segment as a result of lower margins. These increases were offset by the full benefit of the completed expansion capacity brought online at our BORCO facility in the International Operations segment.


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Distributable cash flow was $96.3 million for the three months ended September 30, 2013, which is a decrease of $16.0 million, or 14.3%, from $112.3 million for the corresponding period in 2012. The decrease in distributable cash flow was primarily related to an increase of $14.2 million in maintenance capital expenditures relating to pipeline and tank integrity work performed in the Pipelines & Terminals segment. This increase was primarily due to pipeline and tank integrity work being performed in the third quarter that was originally scheduled for the first half of the year.

Adjusted EBITDA by Segment

Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $114.4 million for the three months ended September 30, 2013, which is an increase of $1.5 million, or 1.4%, from $112.9 million for the corresponding period in 2012. The positive factors impacting Adjusted EBITDA were primarily related to $9.5 million of incremental revenue from capital investments in internal growth and diversification initiatives, including expanded butane blending capabilities, crude-handling services, as well as storage and throughput of other hydrocarbons, a $0.8 million increase in earnings from equity investments due to lower environmental remediation costs and a $0.6 million increase in rental revenue primarily resulting from newly executed lease arrangements.

The negative factors impacting Adjusted EBITDA reflected $4.9 million in less favorable settlement experience primarily due to the successful resolution of a $10.6 million product settlement allocation matter in 2012, a $2.1 million increase in operating expenses primarily related to outside services for asset-maintenance activities, a $1.1 million decrease in revenue due to lower average pipeline tariff rates resulting from shorter-haul shipments, a $0.9 million decrease in earnings reflecting a non-recurring benefit associated with the purchase of an additional 20% interest in Wes Pac Memphis in 2012 and a $0.4 million decrease in revenue due to lower pipeline volumes.

Pipeline volumes slightly decreased by 0.6% primarily due to changes in regional production and supply, as well as the idling of a portion of our NORCO pipeline system in early 2013. Terminalling volumes increased by 4.0% due to higher demand for gasoline, distillates, and other hydrocarbons resulting from new customer contracts and service offerings at select locations, effective commercialization of acquired assets, continued positive contribution from our recently completed internal growth projects and favorable market conditions.

International Operations. Adjusted EBITDA from the International Operations segment was $40.5 million for the three months ended September 30, 2013, which is an increase of $7.0 million, or 20.6%, from $33.5 million for the corresponding period in 2012. The positive factors impacting Adjusted EBITDA were a $4.6 million increase in storage revenue primarily as a result of realizing the full benefit of our completed expansion capacity brought online at our BORCO facility in early September, a $1.1 million increase in ancillary revenues, including berthing of ships at our jetties, and heating services due to increased customer utilization of our facilities and a $2.1 million increase from new service offerings providing fuel oil supply and distribution services in the Caribbean ($97.2 million in revenue and $95.1 million in cost of product sales and related overhead expenses). The increase in revenue was offset by a $1.0 million increase in operating expenses primarily due to increased costs necessary to operate the expanded capabilities of the BORCO facility.

Natural Gas Storage. Adjusted EBITDA from the Natural Gas Storage segment was a loss of $2.8 million for the three months ended September 30, 2013, which is a decrease of $4.2 million from earnings of $1.4 million for the corresponding period in 2012. The decrease in Adjusted EBITDA was primarily the result of a $4.6 million decrease in revenue for hub service activities related to decreased seasonal spreads and a $0.7 million decrease in storage revenue due to lower rates and capacity utilization when compared to the corresponding period in 2012.

These decreases in Adjusted EBITDA were partially offset by a $0.7 million decrease in operating expenses which primarily related to a decline in the number of well workovers performed during 2013 as compared to the 2012 period and a $0.4 million decrease in costs of natural gas storage services, which . . .

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