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BPL > SEC Filings for BPL > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for BUCKEYE PARTNERS, L.P.

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


26-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and our accompanying notes thereto included in Item 8 of this Report.

Business Overview

We own and operate one of the largest independent liquid petroleum products pipeline systems in the United States in terms of volumes delivered, miles of pipeline, and active product terminals. In addition, we 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. Furthermore, we 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, 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.

We also own and operate a natural gas storage facility in Northern California. In December 2013, our Board of Directors approved a plan to divest our Natural Gas Storage segment and its related assets as we no longer believe this business is aligned with our long-term business strategy. In this report, we refer to this group of assets as our Natural Gas Storage disposal group. Accordingly, we have classified the disposal group as "Assets held for sale" and "Liabilities held for sale" in our consolidated balance sheet as of December 31, 2013 and reported the results of operations as discontinued operations for all periods presented in this report. Furthermore, we have excluded the disposal group's financial results from our business segment disclosures for the periods presented in this report. For additional information, see Note 4 in the Notes to Consolidated Financial Statements.

Additionally, in December 2013, we changed our organizational structure to align our strategic business units into four reportable segments: Pipelines & Terminals, Global Marine Terminals, Merchant Services and Development & Logistics. See Note 26 in the Notes to Consolidated Financial Statements for a more detailed discussion of our business segments. We have adjusted our prior period segment information to conform to the current alignment of our continuing business and discontinued operations.

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) operate in a safe and environmentally responsible manner; (ii) maximize utilization of our assets at the lowest cost per unit; (iii) maintain stable long-term customer relationships; (iv) optimize, expand and diversify our portfolio of energy assets; and (v) maintain a solid, conservative financial position and our investment-grade credit rating.

Overview of Operating Results

Net income attributable to our unitholders was $160.3 million for the year ended December 31, 2013, which was a decrease of $66.1 million, or 29% from $226.4 million for the corresponding period in 2012. Operating income was $478.0 million for the year ended December 31, 2013, which is an increase of $133.5 million, or 38.7%%, from $344.5 million the corresponding period in 2012. Our results for the year ended December 31, 2013 includes year-over-year improvement in each of our operating segments. Continued excess supply of natural gas, minimal volatility in natural gas prices and compressed seasonal spreads resulted in a decision by our Board of Directors to approve a plan to divest our Natural Gas Storage business. In the fourth quarter of 2013, we recorded a non-cash asset impairment charge of $169 million.

Revenues for our Pipelines & Terminals segment grew significantly in 2013, primarily from the impact of 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. Pipeline transportation and terminalling throughput volumes increased year-over-year driven by changes in regional production and supply, commodity pricing arbitrage favoring East and Gulf Coast over Midwest supply and an increase in distillate volumes, primarily due to a colder than usual winter in 2013 resulting in higher heating oil movements. The change over prior year was additionally impacted by a non-cash asset impairment charge in the fourth quarter of 2012 of $60 million related to the idling of a portion of Buckeye's NORCO pipeline system.


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Our Global Marine Terminals segment benefited from year-over-year contribution driven by the 4.7 million barrels of expansion capacity at BORCO put in operation since mid-2012. In addition to the storage revenue contribution from the expansion capacity, increased customer utilization of our facilities and the changing product mix at our BORCO facility generated higher ancillary revenues for the period. In 2013, the Global Marine Terminals segment was adversely impacted by certain tankage taken out of service to facilitate projects intended to improve our ability to handle heavy crude volumes sourced from South America and potentially from Canada. We continued to explore the diversification opportunities with our assets and to take advantage of the flexibility of our terminals to offer additional services such as butanization and other crude initiatives. Integration of the terminals acquired from Hess in December 2013 is expected to allow further product diversification for Buckeye, as we will be able to leverage our existing assets to provide a broader array of services to the customers at these new terminals.

Additionally, our Merchant Services segment continued to see benefits from our risk mitigation strategy initiated in 2012, which includes focusing on fewer, more strategic locations in which to transact business, better managing our inventories and reducing the cost structure of the business. Sales volumes increased as we executed this strategy. Furthermore, we benefited from improved rack margins, largely the result of renewable identification number ("RIN") sales. Our Merchant 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 latter half of 2013, the value of RINs declined as the U.S. Environmental Protection Agency lowered the required blend volumes for renewable fuels. Although RIN values have declined considerably since their elevated levels in the first half of the year, RIN sales still made a positive contribution to our Merchant Services segment. Our marketing operations remain a catalyst for incremental utilization of our Pipelines & Terminals assets as the contribution from Merchant Services has been greater than its standalone reported results. Segment revenue also increased as a result of the launch of our fuel oil marketing business in the Caribbean. We supply fuel oil and hedge it in a highly correlated market.

Key contributors to growth for our Development & Logistics segment include our third-party engineering and operations business, which benefited from improved margins and new contract operations opportunities. In addition, contributions from the liquefied petroleum gas ("LPG") storage caverns continue to increase due to the return of recent capital investments and rail capabilities at these facilities.

In 2013, the discontinued operations of our natural gas storage facility declined over 2012 results due to a non-cash asset impairment charge, unfavorable market conditions, including low natural gas prices, compressed seasonal spreads and low volatility.

See the "Results of Operations" section below for further discussion and analysis of our operating segments.


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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):



                                                        Year Ended December 31,
                                                  2013           2012           2011
Revenue                                        $ 5,054,101    $ 4,285,903    $ 4,693,620
Costs and expenses                               4,576,060      3,941,367      4,327,775
Operating income                                   478,041        344,536        365,845
Earnings from equity investments                     5,243          6,100         10,434
Gain on sale of equity investment                        -              -         34,727
Interest and debt expense                         (130,920 )     (114,980 )     (119,561 )
Other income (expense)                                 295           (452 )          190
Income from continuing operations, before
taxes                                              352,659        235,204        291,635
Income tax (expense) benefit                        (1,060 )          675            192
Income from continuing operations                  351,599        235,879        291,827
Loss from discontinued operations (1)             (187,174 )       (5,328 )     (177,163 )
Net income                                         164,425        230,551        114,664
Less: Net income attributable to
noncontrolling interests                            (4,152 )       (4,134 )       (6,163 )
Net income attributable to Buckeye
Partners, L.P.                                 $   160,273    $   226,417    $   108,501
Earnings (loss) per unit - diluted
Continuing operations                          $      3.23    $      2.37    $      3.15
Discontinued operations                        $     (1.74 )  $     (0.05 )  $     (1.95 )



(1) Represents loss from the operations of our Natural Gas Storage disposal group. See Note 4 in the Notes to Consolidated Financial Statements for more information.

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 from continuing operations by segment and on a consolidated basis, distributable cash flow and a reconciliation of income from continuing operations, which is the most comparable financial measure under generally accepted accounting principles ("GAAP"), to Adjusted EBITDA and distributable cash flow for the periods indicated (in thousands):

                                                      Year Ended December 31,
                                                  2013          2012          2011
Adjusted EBITDA from continuing operations:
Pipelines & Terminals                          $  471,091    $  409,541    $  361,018
Global Marine Terminals                           149,740       128,581       112,996
Merchant Services                                  12,616         1,144         1,797
Development & Logistics                            15,367        13,174         7,932
Adjusted EBITDA from continuing operations     $  648,814    $  552,440    $  483,743

Reconciliation of Income from continuing
operations to Adjusted EBITDA and
Distributable Cash Flow:
Income from continuing operations              $  351,599    $  235,879    $  291,827
Less: Net income attributable to
non-controlling interests                          (4,152 )      (4,134 )      (6,163 )
Income from continuing operations
attributable to Buckeye Partners, L.P.            347,447       231,745       285,664
Add: Interest and debt expense                    130,920       114,980       119,561
Income tax expense (benefit)                        1,060          (675 )        (192 )
Depreciation and amortization                     147,591       138,857       112,398
Non-cash unit-based compensation expense           21,013        18,577         8,601
Asset impairment expense                                -        59,950             -
Hess acquisition and transition expense            11,806             -             -
Less: Amortization of unfavorable storage
contracts (1)                                     (11,023 )     (10,994 )      (7,562 )
Gain on sale of equity investment                       -             -       (34,727 )
Adjusted EBITDA from continuing operations        648,814       552,440       483,743
Less: Interest and debt expense, excluding
amortization of deferred financing costs,
debt discounts and other                         (122,471 )    (111,511 )    (111,941 )
Income tax expense, excluding non-cash
taxes                                                (717 )      (1,095 )          (6 )
Maintenance capital expenditures                  (71,476 )     (54,070 )     (57,251 )
Distributable cash flow from continuing
operations                                     $  454,150    $  385,764    $  314,545



(1) Represents the amortization of the 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 transported and average daily throughput for the Pipelines & Terminals segment and total volumes sold for the Merchant Services segment for the periods indicated:

                                                      Year Ended December 31,
                                                     2013      2012      2011
Pipelines & Terminals (average bpd in thousands):
Pipelines:
Gasoline                                              717.8     701.9     668.1
Jet fuel                                              334.4     339.2     340.6
Middle distillates (1)                                345.7     318.6     327.0
Other products (2)                                     28.5      25.9      22.4
Total pipelines throughput                          1,426.4   1,385.6   1,358.1
Terminals:
Products throughput (3)                               975.1     916.7     756.0

Merchant Services (in millions of gallons):
Sales volumes (4)                                   1,371.5   1,125.9   1,337.8



(1) Includes diesel fuel and heating oil.

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

(3) Amounts for 2013, 2012 and 2011 include throughput volumes at terminals acquired from Hess, BP and ExxonMobil on December 11, 2013, June 1, 2011 and July 19, 2011, respectively.

(4) Amounts for 2013 and 2012 include volumes related to fuel oil supply and distribution services which began in late 2012.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Consolidated

Adjusted EBITDA was $648.8 million for the year ended December 31, 2013, which is an increase of $96.4 million, or 17.4%, from $552.4 million for the corresponding period in 2012. The increase in Adjusted EBITDA was primarily related to positive contributions from increased pipeline and terminalling volumes directly attributable to growth capital spending and higher blending capabilities, particularly butane blending, in the Pipelines & Terminals segment and increased storage capacity at and customer utilization of our BORCO facility in the Global Marine Terminals segment. In addition, higher margins in the Merchant Services segment were primarily due to lower product costs resulting from risk management activities and the generation of RINs.

Revenue was $5,054.1 million for the year ended December 31, 2013, which is an increase of $768.2 million, or 17.9%, from $4,285.9 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 and increased product sales volumes in our Merchant Services segment. In addition, revenue in our Pipelines & Terminals segment increased as a result of increased pipeline and terminalling volumes directly attributable to our growth capital spending and higher butane blending capabilities. Our Global Marine Terminals segment benefitted from incremental storage capacity brought online at our BORCO facility.

Operating income was $478.0 million for the year ended December 31, 2013, which is an increase of $133.5 million, or 38.7%%, from $344.5 million the corresponding period in 2012. The increase in operating income was primarily related to increased pipeline and terminalling volumes directly attributable to our growth capital spending and diversification initiatives, as well as a non-cash asset impairment charge in 2012 in the Pipelines & Terminals segment. In addition, higher margins and lower operating costs in our Merchant Services segment contributed to our overall increase in operating income. These increases in operating income were offset by increased operating and depreciation expense largely attributable to the capacity expansion completed and brought online in the Global Marine Terminals segment.


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Distributable cash flow was $454.2 million for the year ended December 31, 2013, which is an increase of $68.4 million, or 17.7%, from $385.8 million for the corresponding period in 2012. The increase in distributable cash flow was primarily related to an increase of $96.4 million in Adjusted EBITDA as described above, partially offset by an increase in maintenance capital expenditures of $17.4 million and increase in interest expense of $11.0 million related to long-term debt issuances in 2013, including the debt issued in the fourth quarter of 2013 to partially fund the Hess Terminals acquisition.

Adjusted EBITDA by Segment

Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $471.1 million for the year ended December 31, 2013, which was an increase of $61.6 million, or 15.0%, from $409.5 million for the corresponding period in 2012. The positive factors impacting Adjusted EBITDA were related to $49.6 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 $17.8 million increase in revenue due to higher pipeline and terminalling volumes on our legacy assets, $6.9 million increase in revenue resulting from an increase in pipeline capacity rentals, terminalling storage contracts and throughput and storage revenue at the terminals acquired from Hess in December 2013, $5.6 million more of favorable settlement experience despite the successful resolution of a $10.6 million product settlement allocation matter in 2012 and a $0.7 million increase in earnings due to the purchase of an additional ownership interest in WesPac Memphis in the second quarter of 2013.

The negative factors impacting Adjusted EBITDA were a $16.9 million increase in operating expenses, primarily related to higher operating costs due to internal growth and pipeline integrity costs, a $1.2 million decrease in revenue due to lower average pipeline tariff rates resulting from shorter-haul shipments and a $0.9 million decrease in earnings from equity investments due to higher maintenance costs.

Pipeline volumes increased by 2.9% due to stronger demand for gasoline and middle distillates resulting from changes in regional production and supply, partially offset by the idling of a portion of our NORCO pipeline system in early 2013. Terminalling volumes increased by 6.4% 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.

Global Marine Terminals. Adjusted EBITDA from the Global Marine Terminals segment was $149.7 million for the year ended December 31, 2013, which was an increase of $21.1 million, or 16.4%, from $128.6 million for the corresponding period in 2012. The positive factors impacting Adjusted EBITDA were a $28.9 million increase in storage revenue primarily as a result of incremental storage capacity brought online at our BORCO facility and assets acquired from Hess in December 2013 and a $5.3 million increase in revenues from ancillary services due to increased customer utilization of our facilities. Ancillary services include the berthing of ships at our jetties and heating services.

The increase in revenue was offset by a $13.1 million increase in operating expenses primarily due to increased costs necessary to operate the expanded capabilities of the BORCO facility, one-time costs related to certain organizational changes in the second quarter of 2013 and costs associated with taking certain tankage out of service for maintenance activities and project work to improve the capabilities for handling anticipated heavy crude volumes.

Merchant Services. Adjusted EBITDA from the Merchant Services segment was $12.6 million for the year ended December 31, 2013, which was an increase of $11.5 million from $1.1 million for the corresponding period in 2012. In 2012, we developed and executed a strategy to mitigate basis risk that included the reduction of refined petroleum product inventories in the Midwest. In 2013, we continued to benefit from the execution of our strategy, which included focusing on fewer, more strategic locations in which to transact business, better managing our inventories and reducing the cost structure of the business. Sales volumes increased as we executed this strategy. In addition, beginning in late 2012, the segment began to provide fuel oil supply and distribution services to third parties in the Caribbean. This activity has also contributed to our increase in sales volumes for the period. Furthermore, we benefited from improved rack margins, largely the result of risk management activities to lower product costs, and the generation of RINs, which are tradable "credits" generated by blending biofuels into finished gasoline or diesel products.


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The increase in Adjusted EBITDA was primarily related to a $651.4 million increase in revenue, which included a $728.4 million increase due to 21.8% of higher sales volumes, offset by a $77.0 million decrease as a result of a $0.06 per gallon decrease in refined petroleum product sales price (average sales prices per gallon were $2.91 and $2.97 for the 2013 and 2012 periods, respectively) and a $0.8 million decrease in operating expenses primarily related to overhead costs.

The increase in revenue was partially offset by a $640.7 million increase in cost of product sales, which included a $725.3 million increase due to 21.8% of higher sales volumes, offset by a $84.6 million decrease as a result of a $0.06 per gallon decrease in refined petroleum product cost price (average cost prices per gallon were $2.89 and $2.95 for the 2013 and 2012 periods, respectively).

Development & Logistics. Adjusted EBITDA from the Development & Logistics segment was $15.4 million for the year ended December 31, 2013, which was an increase of $2.2 million, or 16.6%, from $13.2 million for the corresponding period in 2012. The increase in Adjusted EBITDA was primarily due to an $8.1 million increase in third-party engineering and operations revenue as a result of new contracts and higher fees and a $0.9 million increase in revenue related to the LPG storage caverns, partially offset by a $6.0 million increase in third-party engineering and operations expense and a $0.8 million increase in operating expenses, which primarily related to overhead costs.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Consolidated

Adjusted EBITDA was $552.4 million for the year ended December 31, 2012, which is an increase of $68.7 million, or 14.2%, from $483.7 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, the benefit of contributions from growth capital spending and higher blending capabilities, particularly butane blending, in the Pipelines & Terminals segment, as well as increased storage capacity and customer utilization of our BORCO facility in the Global Marine Terminals segment.

Revenue was $4,285.9 million for the year ended December 31, 2012, which is a decrease of $407.7 million, or 8.7%, from $4,693.6 million for the corresponding period in 2011. The decrease in revenue was primarily related to a net decrease in revenue in the Merchant 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, as well as increased storage revenue as a result of 1.9 million barrels of incremental storage capacity brought online, the Perth Amboy Facility acquisition in 2012 and new service offerings providing fuel oil supply and distribution services in the Global Marine Terminals segment.

Operating income was $344.5 million for the year ended December 31, 2012, which is a decrease of $21.3 million, or 5.8%, from $365.8 million the corresponding . . .

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