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Buckeye Partners, L.P. (NYSE:BPL)

Q4 2012 Earnings Call

February 8, 2013 11:00 am ET

Executives

Clark C. Smith – President and Chief Executive Officer

Todd J. Russo – Deputy General Counsel & Secretary

Keith E. St. Clair – Executive Vice President and Chief Financial Officer

Robert A. Malecky – Senior Vice President and President - Domestic Pipelines and Terminals

Khalid A. Muslih – Senior Vice President - Corporate Development and Strategic Planning

Mary F. Morgan – Senior Vice President and President - International Operations

Analysts

Brian J. Zarahn – Barclays Capital

Gabe Moreen – Bank of America Merrill Lynch

Jeremy Tonet – JPMorgan

Michael J. Blum – Wells Fargo Securities, LLC

Ross Payne – Wells Fargo Securities, LLC

Connie Hsu – Morningstar, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Buckeye Partners 2012 Fourth Quarter and Full Year Earnings Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to introduce to your host for today’s conference Mr. Clark C. Smith, President and Chief Executive Officer. Mr. Smith, please proceed.

Clark C. Smith

Thank you, Jenny and good morning everyone, and welcome to the Buckeye Partners fourth quarter 2012 conference call. Also speaking on the call today will be Keith St. Clair, our Executive Vice President and Chief Financial Officer. After I make some introductory remarks and discuss the operating highlights for the quarter, Keith will review our financial results in further detail.

Also on the call today are Bob Malecky, President of Domestic Pipelines & Terminals; Jerry Ashcroft, President of Buckeye Services; Mary Morgan, President of International Pipelines & Terminals; Khalid Muslih, Senior Vice President of Corporate Development & Strategic Planning; Jeff Beason, Vice President and Controller; and Todd Russo, Deputy General Counsel.

Following our prepared remarks, we’ll open the call to questions. But first, I’d like for Todd to provide our forward-looking statements disclaimer.

Todd J. Russo

Thanks, Clark. Before we begin, I’d like to remind everyone that we may make statements on the call today that could be construed as forward-looking statements as defined by the SEC. Future results are subject to numerous contingencies, many of which are outside our control, and any forward-looking statements we make are qualified by the risk factors and other information set forth in our Form 10-K for the year ended December 31, 2011, and our most recent Form 10-Q, each is filed with the SEC.

In addition, during the call, we will be discussing Buckeye’s adjusted EBITDA and certain other non-GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in the press release that we issued earlier this morning, which is posted on the Investor Center section of Buckeye’s website, www.buckeye.com.

With that, I will turn the call back over to Clark.

Clark C. Smith

Thank you, Todd. I’d like to begin my comments by discussing our safety performance, which continues to be outstanding across all of Buckeye’s assets. We continue to perform better than industry average safety benchmarks for OSHA recordable personal injuries and API motor vehicle incidents. We finished 2012 with a 23% and 36% year-on-year reduction respectively for those safety benchmark indictors.

Lodi, our natural gas operation in California reached a milestone of 11 years without a personal injury. BORCO, our largest terminal has celebrated over 3.5 years without a loss time incident. We also recently presented operational excellence awards to 24 asset teams within Buckeye, recognizing their completion of the entire 2012 calendar year without experiencing an OSHA recordable injury and API motor vehicle incident, a reportable product release or an operational incident. Again, 2012 was a very good year for Buckeye’s safety performance.

Now, turning to our operating results, I’m pleased to report that we are able to follow up a strong third quarter with an exceptional fourth quarter. Adjusted EBITDA for the fourth quarter of $172 million is a record for Buckeye and represents a 42% improvement over the year ago quarter and a 13% sequential improvement over the third quarter of 2012.

Distribution coverage improved to 1.32 times for the quarter and our strong performance propelled us to full year coverage of 1.04 times. We benefited from outstanding performances from all of our business segments. Our Domestic Pipes and Terminals and International segments adjusted EBITDA increased 18% and 36% respectively over the prior year quarter. This strong fourth quarter performance is a result of both improved business conditions, as well as the hard work by our Buckeye employees as we were able to recover from some challenges we faced in the first half of 2012.

It’s important to notice we review the fourth quarter that certain seasonal impacts to our business drive and improve performance in the winter months and the current quarter was a beneficiary of that seasonality. Some of the key seasonal benefits experienced in the fourth quarter include the increased contribution from butane blending, which benefits both our terminals and Energy Services businesses.

In addition, Buckeye heat oil volumes improved as a result of a return to a more normal winter. The colder weather benefited both transportation volumes on our domestic system, as well as provided higher margins for our marketing business. In addition, our health services business in Lodi took advantage of some short-term seasonal spreads for which the EBITDA contribution is largely reflected in the fourth quarter.

These seasonal benefits are normal and recurring, but it should be recognized that the third and fourth quarters will continue to be stronger for Buckeye than the first and second quarters of the year. The financial results are negatively impacted by a non-cash impairment charge of $60 million related to the closing of a part of the NORCO system. Keith will provide more details around this charge.

Let me talk briefly about our growing opportunities in crude oil logistics. I updated you last quarter on the execution of our strategic plans around our domestic and international terminals. These terminals and the optionality they provide is an important part of our crude diversification strategy. Buckeye has already demonstrated considerable success in leveraging both our international and domestic terminals to capture opportunities around the revival of North American crude production.

We spoke previously about our Woodhaven, Michigan facility, which offloads Bakken source crude from railcars and back to shipments via pipeline to an Ohio refinery. We also recently announced the repurposing of the Albany terminal, where we are offloading crude railcars and loading ships for transport to the Irving refinery in St. John, Canada.

Another significant opportunity for Buckeye is the development of the rail to pay capabilities at Perth Amboy, which is expected to have the capability to offload up to two unit trains of crude per day and shift to Northeast refiners to ship barge and potentially pipeline.

We are looking ways to leverage other Buckeye assets as well, particularly around our Midwest assets as the Shale play such as the Bakken/Utica continue to change the crude supply landscape Buckeye intends to leverage its assets and people to provide crude oil, logistic solutions from producers and refiners wherever possible.

Let me now shift to highlights for each of our operating segments starting with our Domestic Pipelines & Terminals. One the significant storage for the fourth quarter was Buckeye’s response to Hurricane Sandy. Our emergency response teams performed exceptionally well working round the clock with emergency responders, electrical utility personnel, and governmental agencies to restore services quickly as possible to this essential refined product supply artery. This area supplies diesel, gasoline, and jet fuel in New York City and its Airports.

Our emergency preparation before the storm, including acquiring the staging backup power generators was critical and minimizing the outages in the impacted areas. I’m proud of our performance in response to this unprecedented event, and I’m happy to report our response, we’re seeing numerous accolades from governmental authorities that appreciate the tireless efforts of the Buckeye employees.

Regarding the impact of Buckeye, we estimate that we did lose some revenues. As transportation lines were negatively impacted the affected areas, we also saw some catchup at volume, volume restoration service as inventory for rebuild and commercial activity resume.

For the Pipeline & Terminals segment, we estimate the impact of Hurricane Sandy was approximately $3 million in lost revenue and incremental expense for the quarter. I should add that we are prepared for this latest storm Nemo with a similar emergency procedures and backup power efforts.

BORCO’s terminal volumes were strong for the quarter as we saw an almost 7% increase over the prior year quarter on our legacy terminals driven by distillate volume increases, contribution from crude volumes, as well as a 3% increase for our terminals acquired from BP. These volumes drove an almost 8% increase in terminal throughput to terminal throughout revenues over the fourth quarter of 2011. The terminals benefited from a number of growth projects across the system, including our propylene storage project at our Chicago complex, which is completed and operational in the fourth quarter.

This represents further product diversification to Buckeye as we were able to leverage our asset base and our reputation for customer service provides an incredible service to a major refinery in the region. With regard to Perth Amboy, the fourth quarter was a first full quarter of contribution from this facility. This contribution represents only a fraction of a contribution we believe this facility is capable of once our monetization efforts are complete. We are continuing to more forward with expansion plans in Perth and expect our efforts to yield incremental earnings during the second half of 2013.

We’ve been working closely with governmental agencies in the area and have secured many of the necessary permits and approvals. And I’m happy to report we remain on schedule and on budget to complete the mini plant improvements through the Perth facility.

Turning to the International segment, BORCO benefited from the incremental contribution during the quarter of the 1.9 million barrels of expansion capacity till it is completed in the second half of 2012. It’s important to note that our asset teams were able to keep operating costs flat, even recording a small cost decline despite bringing this additional capacity online. Looking forward an additional 1.6 million barrels of clean products expansion capacity is expected to be placed in service in the first quarter of 2013 and it is fully leased.

The remaining 1.2 million barrels of crude expansion capacity is expected to become operational in the third quarter of 2013, and is also fully contracted. We continue to see interest from major producers with interest at offshore South American crude production for logistics solutions that could require further expansion of the BORCO facility.

All of this success is due to BORCO’s advanced marine infrastructure and service capabilities which give us a competitive advantage over other marine terminals in the region. During the quarter, we also benefited from higher ancillary revenues at BORCO. Its higher customer utilization drove a 29% increase in ships berth over the year ago quarter.

In addition, the changing product mix to heavier products such as BGO drove and improved heating revenues. At Yabucoa, we enjoyed the initial contribution from our fuel oil business, where we secure supply for utility plants in the Caribbean in back to back transactions. We’re in the beginning stages of ramping up this new business. So the contribution to the quarter was small.

However, we are enthusiastic about this growth opportunity and expect an increasing contribution from this business in 2013. Our natural gas storage business experienced significant improvement both sequentially and over the year ago quarter. We did see some improvement in the seasonal spreads, which we’ve been able to take advantage of in small amounts in the fourth quarter.

It’s seasonally the strongest quarter for this business due to the seasonal influences. Prospectively, we continue to see downward pressure on lease rates and do not expect any significant improvements in performance in 2013. Our Energy Services segment results ended the year on a very positive note as we were able to capitalize on certain market conditions and seasonal activity.

BES enjoyed higher margins in the Northeast during the quarter as a result of price volatility around Hurricane Sandy. Butane blending margins, which is a seasonal opportunity where butane is blended into winter grade gasoline, contributes significantly to the fourth quarter results. The retroactive reinstatements of the biofuel tax credit is part of the tax legislation past at year end also contributed positively through the quarter.

Looking at the base business, we have previously indicated, we intended to refocus our marketing efforts on fewer, more strategic locations, and reduce inventory hearing. We’ve been successful in executing our strategy, all those challenges persist as the market remains backward aided, we look forward to continued positive contribution from BES. And as I have indicated before, BES marketing services serves as an important catalyst for the incremental utilization of our facilities.

The Development and Logistics segment continues to deliver increasing quarter-over-quarter results. Current quarter growth was driven by additional lease volumes at our propane caverns assets, as well as continued strong margins from our third-party engineering and operations business. We expect continued strong performance from BDL into 2013.

Now, I would like to provide a brief update regarding FERC matter. FERC’s show cause review of the tariff rate program used by Buckeye Pipeline company remains pending. There have been no new developments in this matter since the update we provided geared our November earnings call.

The complaint filed in September 2012 by 4 airlines challenging Buckeye Pipelines rates for transporting jet fuel to 3 New York City area airports also remains pending other than a response filed by Buckeye Pipeline in November to file and the airlines made in later October, there have been no new developments in this proceeding since our last update.

As I mentioned earlier on November call, both the airlines and Buckeye Pipeline indicated in their filing to FERC, if they are willing to engage and settlement discussions regarding the airlines compliant. We continue to think it’s likely that FERC will initiate a settlement process, although we cannot predict when that might occur or whether the process will be successful.

And then finally, the application that Buckeye Pipeline filed with FERC in October 2012 seeking authority to charge a market-based rates for deliveries of refined petroleum products to the New York City area market, also remains pending. On December 14, 2012, the same airlines had filed a complaint on the protest challenging the market-based rates application.

On January 14, 2013, Buckeye Pipeline filed its response to protest and on January 29, the airlines responded to Buckeye Pipelines answer. No other third parties have filed to intervene in the market-based rates proceeding. And we cannot predict when FERC will issue an order or other wise act regarding any of these matters or what FERC will do. There is no time limit on FERC’s response. We will continue to aggressively defend Buckeye Pipelines tariff rates and to look for opportunities to resolve these matters as expeditiously as possible.

Now to our quarterly distribution; this morning we announced a declaration of a cash distribution of $1 and $3.75 per limited partner unit, payable February 28, 2013. In closing, I’m very pleased that how we were able to respond to a weak first half of 2012 by refocusing our efforts to deliver an exceptional second half resulted in a strong full year performance.

Looking forward, we expect the improved business conditions to continue into 2013 and we expect improved results for the year. This concludes my remarks. Now, Keith will review our quarterly financial results after, which we’ll open the call up for questions. Keith?

Keith E. St. Clair

Thank you, Clark, and good morning, everyone. I’ll now review our fourth quarter financial results in a little more detail. Our quarterly adjusted EBITDA increased 41.5% to $172 million compared to $121.5 million a year ago.

All of our segments reported improved performance compared to the year ago quarter, but the growth was primarily driven by strong performance from our Pipelines & Terminals, International Operations and Energy Services segment. I’ll provide additional color regarding the segment results in a moment.

As most of you recall, Buckeye reported very good results for the third quarter and that momentum carried due to the fourth quarter of 2012. Additionally, while our annual consolidated cash flows are very consistent, we do experience seasonal benefits in the fourth quarter in particular and realize nearly $20 million in incremental cash flow from seasonal activities. Butane blending activity, heating oil deliveries and margins, and revenue recognition related to hub services activity drove this cash flow.

For the fourth quarter, we’ve reported net income attributable to Buckeye’s unit holders of $94.9 million or $0.96 per diluted unit, excluding a non-cash impairment charge of $60 million. This compares to $59.7 million or $0.64 per diluted unit for their prior year quarter.

Including the impairment charge, net income attributable to Buckeye unit holders was $35 million or $0.35 per diluted unit. This charge relates to the ceasing of operations last month of a portion of our NORCO pipeline. We expect the perspective lost revenue from this action to be approximately $5 million per year.

The diluted weighted-average units outstanding in the fourth quarter of 2012 were $98.5 million, compared with $93.6 million units in the fourth quarter of 2011. This increase is primarily the result of the February 2012 unit offering as well as the in-kind unit distributions on our Class B units.

Consolidated revenues for the fourth quarter of 2012 totaled $1.15 billion, compared with $1.3 billion in the prior year period. The decrease in revenues in primarily attributable to a 28.5% decline in sales volumes for our Energy Services segment; this decrease was partially offset by an increase in revenues, when the Pipeline & Terminals segments resulting from higher tariffs and volumes compared to the year ago quarter and for the international operation segment where we benefited from incremental capacity coming online in the second half of 2012 combined with higher ancillary revenues from berthing and heating activities.

It’s also noteworthy that our fuel oil business which is driving an increased contribution from our Yabucoa facility for international operation segment is a high volume business similar to our Energy Services business. This business is a driver for the significant increase in revenues for the fourth quarter and the decline in EBITDA margin for that segment.

Operating expenses for the quarter declined to $97.9 million from $99 million in 2011, while general and administrative expenses totaled $18.8 million compared with $16.4 million in the year ago quarter. The decrease in operating expenses was largely the result of significant transition spending in the year ago quarter combined with reduced run rates from best practices initiatives implemented over the past year.

The largest contributor to the increase in general and administrative expenses continues to be spending related to the FERC matters Clark discussed earlier combined with increased non-cash unit-based compensation expense.

Now, I would like to review in more detail the contribution of each segment to adjusted EBITDA our primary measure of performance. Adjusted EBITDA for our Pipelines & Terminals segment was $118.3 million for the fourth quarter of 2012 compared to $100.3 million for the fourth quarter of 2011.

I should note that seasonal activity such as butane blending and heating oil deliveries contributed approximately $11 million to our fourth quarter results. The fourth quarter of 2012 benefited from strong performance across our portfolio terminals, as terminal throughputs and settlements increased over the year ago quarter; butane blending services, the crude revenue at our Albany and Woodhaven facilities and growth that the terminals acquired from BP, including the offsets in terminals in the Southeast drove the improved performance from our terminal assets.

Performance of our pipelines was negatively impacted by Hurricane Sandy and turnarounds at certain refineries that supply our system, most notably the BP [widening] and Wood River refineries in the Midwest. We also saw some supply shift from the New York harbor to the Philadelphia area with the recent startup of the Delta Airlines owned trainer refinery, which generally means shorter haul tariffs.

Offsetting these items was the benefit of tariff increases on our index pipes, which were effective July 1, 2012, and more favorable settlement experience. Overall, net revenue improvements excluding Perth Amboy yielded an approximate of $11 million benefit compared to the prior year quarter.

This quarter also included an approximate $3.7 million contribution from Perth Amboy, excluding certain Hurricane Sandy related property damages of less than $1 million. Also benefiting the results for this segment were reduced expenses of approximately $5 million during the quarter. And this includes high transition related expenses from the year ago quarter and favorable property and other tax experience partially offset by spending related to the various FERC related matters.

Earnings from equity investments also declined quarter-over-quarter due to continued environmental remediation costs related to two casualty events experienced by West Shore Pipeline where we hold a 35% ownership interest.

Aggregate pipeline volumes for the quarter decreased by 3.7% compared to the fourth quarter of 2011 to just under 1.4 million barrels per day primarily the result of Hurricane Sandy, as well as the refinery maintenance and turnarounds I mentioned earlier.

Average transportation tariffs for the quarter increased 1.6% over the prior year largely as a result of the 2012 tariff adjustments of 8.6% on our pipelines that are subject to the FERC index system.

Domestic terminal volumes increased 5.3% from 877,000 barrels per day in the fourth quarter of 2011 to 924,000 barrels per day in the fourth quarter of 2012. Crude volumes at Albany and Woodhaven drove just under 2% of that growth. The remainder of the growth was from higher gasoline and distillate volumes and was driven by continued success in the commercialization of the terminals acquired from BP and the benefits from recently completed growth capital projects, for example, the expansion of our Opelousas, Louisiana terminal.

Our International Operations segment recorded adjusted EBITDA of $36.3 million in the fourth quarter of 2012, compared to $26.7 million in the comparable quarter last year. Revenue increased approximately $54 million, primarily the result of launching our fuel oil business at Yabucoa, which is our low margin business similar to our domestic marketing business.

It’s important to note that we supply this fuel oil into back-to-back arrangements that are intended to eliminate commodity and basis risk. Revenue also benefited from the 1.9 million barrels of expansion storage bought on line in the second half of 2012, and higher ancillary revenues, including berthing and heating revenues due to increased customer utilization of our facilities and a changing product mix.

For example, heating revenues increased due to customer storage of VGO products, which require more heating to increase viscosity. Including all expansion capacity that came on line in 2012, past utilization of our BORCO facility was at 97% for the fourth quarter, so we had only one tank without a service for maintenance.

Our Yabucoa and marine terminal benefited from the contribution from our new fuel oil business, which are wholesale transactions, which provide a small per gallon margin to Buckeye. Operating expenses decreased in the fourth quarter of 2012 compared to the year ago quarter, as the application of our best practices operating model in the fourth quarter of 2011 reduced the expense run rate.

In addition, the year ago quarter was burdened by transition and other costs associated with implementing this model. Looking forward, the first quarter of 2013 will continue to benefit from the 1.9 million barrels of expansion storage that became operational in 2012, as well as the next 1.6 million barrels of expansion storage that is expected to be brought into service this quarter and is already fully leased.

Adjusted EBITDA for our natural gas storage segment was $6.4 million for the fourth quarter compared to $3.9 million a year ago. The improvement in financial results compared to the year ago quarter is primarily due to improved seasonal spreads captured in our hub services results, which benefited the quarter by approximately $4.6 million. This is partially offset by revenues from lower firm lease rate.

The fourth quarter is typically the strongest quarter for Lodi as the recognition of hub services revenues tends to be back loaded primarily into the fourth quarter based on the summer to winter hub services season.

In our Energy Services segment, adjusted EBITDA was $8.3 million for the quarter, compared to a loss of $11.8 million in the same period last year. The current year quarter benefited from seasonal strength such as strong butane blending volumes and margins and a normal winter with regard to heat in degree days driving improved heating oil volumes and margins that contributed approximately $3 million to adjusted EBITDA.

In addition, the retroactive extension of the biodiesel tax credit for all of 2012 which was part of the recent tax legislation out of Washington provided an approximate $4 million benefit to the quarter. This credit is not expected to benefit us perspectively as the NORCO will likely absorb the majority of any tax credit in the form of lower prices.

Lastly, BES was able to capitalize on its position in the Northeast during Hurricane Sandy as we saw increased margin as a result of supply disruptions with impacted price. Revenues declined by $23.6 million to $824.2 million from $1.1 billion in the year ago quarter. This is attributable to 28.5% decline in sales volume as a result of our decision in early 2012 to exit certain markets to reduce our exposure to bases moves and market backwardation.

Product sales volumes in the fourth quarter of 2012 totaled 269.6 million gallons, compared with 377 million in the fourth quarter of 2011. Again, it’s important to note that Energy Services contributed $25.4 million in revenues to the Pipelines & Terminals segments over the last 12 months and our marketing operations remaining key catalysts for utilization of our Pipeline & Terminal assets.

Wrapping up the segment review, our Development & Logistics segment generated $2.7 million of adjusted EBITDA in the fourth quarter of 2012, compared to $2.4 million in the fourth quarter of 2011. This segment benefited primarily from the better than expected contribution from the LPG storage facility due to increased capacity leased.

Now, turning to our balance sheet; we ended the quarter with $6.8 million in cash and long-term debt of $2.7 billion. At the end of the fourth quarter of 2012, our leverage ratio of net long-term debt to trailing 12 months adjusted EBITDA as calculated in accordance with our credit facility was approximately 4.7 times.

At the end of the fourth quarter, Buckeye had $871 million borrowed under our credit facility, including $665 million reflected as long-term debt. We also completed an equity offering in January of 6.9 million units, which generated net proceeds to Buckeye of approximately $350 million.

These proceeds were used to pay down existing indebtedness on our long-term credit facility, which essentially represents a pre-funding of our anticipated 2013 growth capital spend. Our pro forma leverage would have been 4.1 times assuming the equity offering had occurred at the end of the year.

During the fourth quarter, Buckeye spent $18.7 million on maintenance capital expenditures, a reduction of $2.2 million compared to the fourth quarter of 2011. On a full-year basis, maintenance capital was down approximately $3 million due to the late cancellation of certain anticipated spending related to the narrow idle portion of the NORCO line

We also spent $98.3 million on return capital projects in the quarter. Looking forward to 2013, we estimate maintenance capital spending for the year to be $60 million to $80 million. Including spending at BORCO and Perth Amboy, return capital spend for 2013 is expected to be from $300 million to $360 million.

Our distribution coverage ratio based on distributions declared was 132 times for the quarter and 1.04 times for the full year. Looking forward, 2013 coverage will be impacted as a result of our recent equity offering, as well as the conversion of the Class B units into cash paying LP units, which is expected to occur late in the third quarter of 2013 triggered by the completion of the BORCO crude expansion, which includes the 4 million barrel expansion brought into service. However, we believe the strength of our businesses and contributions from our many growth initiatives will lead to improved coverage in 2014.

That concludes my remarks, and we’ll now open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question comes from Brian Zarahn of Barclays. Please go ahead.

Brian J. Zarahn – Barclays Capital

Good morning.

Clark C. Smith

Good morning, Brian.

Keith E. St. Clair

Good morning, Brian.

Brian J. Zarahn – Barclays Capital

I guess continuing off of Keith’s comments, your distribution coverage has been improving and if it includes the pick even in the last two – in the third and fourth quarter you’ve covered the distribution with, on the growth projects moving forward. It seems like you’re in a position to resume growth in 2013 on the distribution. But can you talk a little bit how the FERC outcome relates to your distribution policy? Would you likely wait until that issue as a result, or is that independent of your distribution decisions?

Clark C. Smith

Well, I think certainly the FERC matter is something that we would like to give resolve. And I think that helps us from a standpoint of gaining greater clarity around what our results will actually be. It does represent certainly some pressure on us just as a result of the uncertainty.

The other thing Brian to think about is, if you go back and look at Buckeye’s results and it’s something that we haven’t spent a lot of time talking about in the past, but clearly our results are more heavily skewed towards the third and fourth quarter.

We have seen strong business conditions continued to the first quarter, but given the fact that we did issue incremental units in January and the expectation that the pick units will convert in the third quarter. We at this point in time are a little challenged to think about distribution increases in the near-term. But again, we will be in a position to assess that on a quarterly basis and there maybe some opportunities to adjust our distribution policy in late 2013 and certainly 2014.

Brian J. Zarahn – Barclays Capital

Okay. I appreciate the color on that. Turning to your terminals, can you talk a little bit about the Perth Amboy crude opportunity and would you seek to contract capacity somewhere to – what you’ve done with you Albany terminal?

Todd J. Russo

Yeah, this is Todd Russo. We’re obviously advancing forward with our strategy on the crude by rail opportunity at Perth Amboy. We think we’ve got by far, the most efficient design where we’ve got to be able to accommodate up to two unit trains per day.

We’re obviously in conversations and in discussions with a multitude of different parties just given the connectivity that we have there in the area. We can obviously accommodate a number of different end users by water and potentially even pipeline. So of course, we’d like to be able to achieve something similar to what we’ve done at Albany on a long-term basis. But I think we see a significant amount of interest in that project. And the expectation is, perhaps any permitting delays et cetera for that particular facility to be in service towards the latter part of the fourth quarter.

Brian J. Zarahn – Barclays Capital

And the last question for me on the Gas Storage business; is there any update on potential divestiture?

Keith E. St. Clair

No, not at this time, Brian.

Brian J. Zarahn – Barclays Capital

Okay. Thank you.

Keith E. St. Clair

Thank you.

Clark C. Smith

Thanks, Brian.

Operator

The next question is from Gabe Moreen of Bank of America/Merrill Lynch. Please go ahead.

Gabe Moreen – Bank of America Merrill Lynch

Hi, good morning, everyone.

Clark C. Smith

Good morning, Gabe.

Gabe Moreen – Bank of America Merrill Lynch

Couple of questions for you, just the announcement that it has made about putting their terminalling assets up on the market, just was curious for your thoughts in terms of how that might change the competitive dynamic for your assets that are in the near harbor, as well as in BORCO? If you see that party being in operated by a third-party presumably other than hash whether that really changes with the competitive dynamic and our customers at all changing their behavior even now in anticipation of that?

Khalid A. Muslih

Yeah, again this is Khalid. I think not to obviously comment on M&A in particular activity, but the comment more or so and whether or not some other third-party would perhaps utilizes assets differently. I think the way that our position, it is, we feel very confident with regards to our position at BORCO, the fact that we’ve invested a significant amount in the infrastructure there, really puts us in a solid flooding I think.

With regards to being able to provide our customers with the type of service offerings that we’re very comfortable with. So we feel like we’ve got a very solid market position and I think we’re absolutely willing to continue to compete. I think with regards to facilities that they have perhaps in the Northeast, again when you think about what we’re looking to do at Perth Amboy with the modernization activities.

We feel like just given our plans. We should have a facility that’s frankly unparallel. And again be able to provide the same type of connectivity into the Buckeye system. So I think what I’m trying to say is we feel very good about our position and I think there is a lot of catch up that a third-party would need to do nor be able to it could be.

Gabe Moreen – Bank of America Merrill Lynch

Okay, thanks Khalid. Todd, a question on rating agencies, I saw this one when obviously the S&P downgrade came out, Moody’s still is in the negative outlook based on kind of the metrics that Keith ran through, particularly pro forma for the recent equity offering would seem that, you’re hopefully adjusting some of their concerns. Can you talk about when you expect to hear from Moody’s or even discussion with on and trying to get that negative outlook removed?

Keith E. St. Clair

Sure, Gabe. We try to have a very consistent dialog with the rating agencies there. One of many constituencies that we spend a lot of time with and meet with him on a quarterly basis, we met with both S&P and Moody’s on January and S&P was up for their annual review cycle. That’s why you saw the report come out in January and frankly the outcome was what we expected, where our metrics are.

BBB minus with a stable outlook was important. We’ve had a conversation with Moody’s and we’ll continue that conversations with them, sort of post the equity offering. When we actually launched the offering, we called them and let them know that we were doing that.

And they certainly appreciate what it does to our balance sheet and how it changes our financial position. And all I can say is we’ll continue to have dialogues with them and I think they’ll see our performance, looking back the fourth quarter and what we expect in 2013, we believe that it should support removal of that negative outlook.

But all we can try to do is sit with them and explain to them what we’re doing with the business. But it’s ultimately their decision. But we feel good about where we are and we’re hopeful that we will see that negative outlook move to stable.

Gabe P. Moreen – Bank of America/Merrill Lynch

Got it, thanks Keith. And then maybe a follow-up for you, if I could, just in terms of all the moving parts within Energy Services for the quarter, year-on-year, it seems like it seems like they’re with butane blending. The bio fuels credit catch up some opportunities from Hurricane Sandy.

Keith E. St. Clair

Right.

Gabe P. Moreen – Bank of America/Merrill Lynch

Is there anyway to quantify any of that? I just also curious whether the $3 million cost, I think that Clark, you stated on cost from Sandy, was that of the opportunities that you saw in Energy Services [in existing] pipeline?

Clark C. Smith

Yeah, Gabe, that $3 million was the impact in the Pipelines & Terminals.

Robert A. Malecky

Gabe, that included a relatively small amount of lost revenues and then some expenses or costs associated with some minor damage that was causes as a result of Sandy. I think maybe a different way to answer your question Gabe, is just thinking about our Energy Services business and what we have done from a standpoint of adjusting our footprint, really trying to effectively manage that risk and continue to provide the catalyst to the Pipes & Terminals.

The fourth quarter was clearly a very exceptional quarter. But on EBITDA level of $8 million that would frankly be something that we think would be more consistent with annual performance as opposed to quarterly performance. Yeah, that’s a business set for us frankly, as long as they continue to provide the catalyst for the Pipes & Terminals, any EBITDA contribution we view is simply incremental to the business.

Gabe Moreen – Bank of America Merrill Lynch

Okay, very helpful. Thanks guys.

Robert A. Malecky

Thanks.

Operator

The next question is from Jeremy Tonet of JPMorgan. Please proceed.

Jeremy Tonet – JPMorgan

Good morning.

Clark C. Smith

Good morning Jeremy.

Todd J. Russo

Good morning Jeremy.

Jeremy Tonet – JPMorgan

I just wanted to pick-up, I think one of the last comments you guys had with regards to distribution coverage in 2013 and if I caught that correctly, you said that there could be improvement over the 2012 coverage being 1.04 times and just want to make sure if I looking at that correctly and also for 2013, when we think about coverage, are we factoring in half year of Class B unit conversion?

Clark C. Smith

Yeah, Jeremy, just to be clear, my comments about distribution coverage for 2013, I just wanted to point that pulls all the impact on our coverage as a result of the incremental equity that we issued to pre-fund, essentially to pre-fund our growth capital requirements for the year. And then also importantly, what will be roughly 8 million to 8.5 million units, pick units that will convert to cash pay in the third quarter of this year. So my expectation is that we will certainly see improved coverage in 2014.

We would expect stronger coverage likely in the last half of 2013, certainly the fourth quarter, given the seasonal nature of our business. We are very much focused on trying to be back in a position where we can increase distributions. We recognize the importance of that to our unit holders.

But we also have to balance that with our financial position and make sure that we’re making the appropriate decisions, so ensuring that we’re reconciling the needs of the balance sheet with the needs of increases from a distribution perspective, and we also have to deal with the uncertainty around FERC. So we need to be at a point where we have a clear line of sight to stronger coverage and then we’ll start looking at adjusting the distribution policy.

Jeremy Tonet – JPMorgan

Okay, great. That’s helpful. And then switching gears over to BORCO, I was just wondering if you guys had available, it seems like it was pretty much all contracted in the fourth quarter and that’s kind of the expectation going forward into 2013 and if you have kind of an average contract duration for your portfolio of contract, that would be helpful. Thank you.

Mary F. Morgan

Hi, this is Mary Morgan. And going forward, other than tanks, we do have scheduled tank maintenance program where we take a limited amount of tankage out of maintenance to continue with our API program. Other than that, everything is contract and we expect that trend to continue. On the term of the contract, about 20 million barrels typically is on about a two year term with the remainder on one-year or shorter-term contracts that will – that’s typical for BORCO.

Jeremy Tonet – JPMorgan

That’s very helpful. Thank you.

Mary F. Morgan

Thank you.

Operator

The next question is from Michael Blum of Wells Fargo. Please go ahead.

Michael J. Blum – Wells Fargo Securities, LLC

Good morning everybody.

Clark C. Smith

Hey, Michael.

Michael J. Blum – Wells Fargo Securities, LLC

Two quick ones for me; one, just thinking about your leverage debt-to-EBITDA level, where do you kind of want to be from a target perspective and when you think about financing 2013 growth CapEx, would you expect debt finance that effectively this year?

Clark C. Smith

Well, where we’d like to be Michael on a longer-term continuum is near four times. Clearly, we’re going to be higher than that in 2013. But that’s really our kind of a long-term objective, recognizing their periods of time and will operate at a level that’s higher than that. What we believe we have done tough, through the equity issuance is that we’ve completed in January – we’ve affectively now funded what our growth capital spend is expected to be in 2013.

Michael J. Blum – Wells Fargo Securities, LLC

Okay, great. And then I was hoping you could just provide a little more detail in terms of NORCO and what the thought process was to take that write-down and put that piece of pipe out of service?

Robert A. Malecky

Yeah, this is Bob Malecky. NORCO system, it’s really a unique asset that we’ve owned for 10 years and had some challenges associated with the long-term sustainability, the economic analyses that really repairs of it with the continuation of the services. A big portion of the business will shift over to some of our other assets and it’s a unique asset that’s at a separate side from the balance of the groups that we have and we should see a right move to this continued service from an integrity perspective.

Michael J. Blum – Wells Fargo Securities, LLC

Great, thank you guys

Clark C. Smith

Thank you, Michael.

Operator

The next question is from Ross Payne of Wells Fargo. Please go ahead.

Ross Payne – Wells Fargo Securities, LLC

How are you doing guys?

Clark C. Smith

How are you doing Ross?

Ross Payne – Wells Fargo Securities, LLC

Good. Clark or Mary, could you just elaborate a little bit more on the improving conditions in the Caribbean? What are you seeing driving that? I mean, obviously South America is probably picking up some activity. But if you can talk a little bit about your facilities versus competing facilities in St. Lucia and other areas and how things are continuing to show some improvement?

Mary F. Morgan

Yes, again, this is Mary. I think the most important drivers are the capabilities in the facility that we have in place at BORCO are berthing facilities superior to anything that any of the other facilities have. We have very reasonable utilization that means we have a lot of spare capacity at our berths.

We have blending and heating capabilities that are just unparalleled with any of our competitors in the area. So again, even though the market has improved somewhat, continuing improvement at our facility with all the things I mentioned as well as, we’ve increased the pumping rates, so that when a ship calls at our berth, they can now load at over 55,000 barrels an hour for certain commodities.

We’ve added capacitates and do simultaneous operations. That’s a key thing. In a lot of terminal, ships have to wait while they do one operation. But we have all the piping and manifolds who have simultaneous operation at the facility.

So what we’ve been able to continue to do is attract the type of customer that wants the sophisticated capabilities. And I think that’s an important driver that is why our terminal and all the new storage is fully leased. And we can think that this trend will continue because of the type of services we’re able to provide.

Ross Payne – Wells Fargo Securities, LLC

And Mary, you think, if these contracts are all over in the next year, they’re going to be put on in higher level soon?

Mary F. Morgan

The contracts that we have recontracted recently, we continue to see improvement in the storage rate and we certainly expect that trend to continue.

Ross Payne – Wells Fargo Securities, LLC

And what kind of percentage increases were you seeing kind of year-over-year right now?

Clark C. Smith

I’d rather not into the exact pricing. It shapes the confidential matter in terms of predator. So Mary’s point is a good one. We’re seeing improvement in the rate, obviously market conditions change all the time. It will dictate how much that will continue to be but they are going up.

Ross Payne – Wells Fargo Securities, LLC

Okay, great. And Keith, have you guys given any kind of guidance for 2013 EBITDA?

Keith E. St. Clair

No, we have not, we have not. Ross, all we’ve done is given guidance on our growth capital spend.

Ross Payne – Wells Fargo Securities, LLC

Okay, great. All right, guys thanks so much.

Keith E. St. Clair

Thanks Ross.

Operator

The next question will be from Connie Hsu of Morningstar. Please go ahead.

Connie Hsu – Morningstar, Inc.

Hi, good morning everyone.

Clark C. Smith

Good morning.

Connie Hsu – Morningstar, Inc.

My question is just on the shift and throughput volumes at Buckeye, especially with the ongoing crude investments at Perth Amboy, at BORCO and the recent conversion of the Albany terminal. Can you estimate the split between crude and refined products currently? And what do you think that mix might look like, to say, three year out?

Clark C. Smith

This is all like the current split. It represents a very small portion of the million barrels a day of terminal volumes that we currently put through the facility. But over time, we expect it to exclude that significantly rather than put a specific number on at this point, I think – we are very focused on expanding that.

Mary F. Morgan

At BORCO, this is Mary, the actual percentage of storage in crude has increased about 14% in 2011 to 24% in 2012, and then we have some additional crude storage that’s coming online in September of 2013.

Connie Hsu – Morningstar, Inc.

Okay, great. Thanks, that’s helpful.

Clark C. Smith

Thanks, Connie.

Operator

The next question is from (inaudible) of Goldman Sachs. Please go ahead.

Unidentified Analyst

Hi, good morning. Just a quick follow-up on Gabe’s question regarding the announcement; do you see the closure of New Jersey refinery having any substantial impact on their operation? I would imagine that it could be an incremental positive, but just wanted to hear your take on it?

Clark C. Smith

I think, quite frankly we don’t think of it as having a material impact positively or negatively.

Unidentified Analyst

Okay, understood. And regarding your Albany terminal, is most of the crude that goes through Albany going up to Canada or is that any coming down to the East Coast?

Clark C. Smith

It gets supply into the East Coast. I would rather not get into the specific actions of an individual customer though.

Unidentified Analyst

And what’s your ability to expand the capacity of the terminal?

Clark C. Smith

We are not out up to our optimal rate at this point. We have opportunities and we’re continuing to invest to reach our optimum capabilities.

Unidentified Analyst

Okay, that’s it from me. Thank you.

Clark C. Smith

Thanks Steve.

Keith E. St. Clair

Thanks.

Operator

I would now like to turn the conference back to Mr. Clark C. Smith for any further remarks.

Clark C. Smith

All right; thank you, Jenny and thank you all for joining us today. 2012 was a successful year for Buckeye and we look forward to continue and execute our strategy in 2013. We look forward to speaking with next quarter regarding our progress. Have good day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.

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