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

Q4 2009 Earnings Call Transcript

February 5, 2009 11:00 am ET

Executives

Forrest Wylie – Chairman & CEO

Bill Schmidt – VP, General Counsel and Secretary

Keith St. Clair – CFO and SVP

Clark Smith – President and COO

Bob Malecky – VP, Marketing

Todd Johnson – VP, Commercial Operations

Analysts

Ross Payne – Wells Fargo

Michael Blum – Wells Fargo

Adam Rothenberg – Zimmer Lucas Partners

Selman Akyol – Stifel Nicolaus

Michael Cerasoli – Goldman Sachs

Ethan Bellamy – Wunderlich Securities

Brian Zarahn – Barclays Capital

Operator

Good morning, everyone and welcome to the Buckeye Partners and Buckeye GP Holdings fourth quarter and full year 2009 financial results conference call. As a reminder, today's conference call is being recorded.

At this time, I'd like to turn the call over to Forrest E. Wylie, Chairman and Chief Executive Officer for introductory remarks.

Forrest Wylie

Thank you, Joe and thanks, everyone and welcome to the Buckeye Partners LP and Buckeye GP Holdings LP fourth quarter and full year 2009 analyst conference call. Speaking on the call today are Keith St. Clair, our Senior Vice President and Chief Financial Officer; and Clark Smith, our President and Chief Operating Officer.

Keith is going to review the financial results for both Buckeye Partners and Buckeye GP Holdings LP, which we will refer to as BGH, and Clark will discuss our operating highlights for the quarter.

Also in the call today are Khalid Muslih, President of Buckeye Development and Logistics and Vice President of Corporate Development; Todd Johnson, Vice President of Commercial Operations; Bob Malecky, Vice President of Customer Services; Jeff Beson [ph], our Vice President and Controller; Bill Schmidt, our Vice President and General Counsel; and Mark Stockard, our Director of Investor Relations.

Following our prepared remarks, we will open the call to questions. But first, I'd like Bill to read the forward-looking statement.

Bill Schmidt

Thanks, Forrest. Before we begin, I'd like to remind everyone that we may make statements on the call that could be considered as forward-looking statements as defined by the SEC. Future results are subject to numerous contingencies, many of which are outside our control and forward-looking statements – and any forward-looking statements we make are qualified by the risk factors and other information set forth in our Form 10-K and Form 10-Qs most recently filed with the SEC.

In addition, during the call we will be discussing Buckeye Partners' adjusted EBITDA, net income attributable to Buckeye's unitholders before special items and distributable cash flow, all of which are non-GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in the press release that we issued earlier this morning and is posted on the Investor Center section of Buckeye Partners' website at www.buckeye.com. Also, unless we indicate otherwise, all financial results we discuss on today's call will be those of Buckeye Partners LP.

With that, I'll turn the call back over to Forrest.

Forrest Wylie

Thanks, Bill. So let me begin by saying we had a very solid fourth quarter. We generated substantial improvements in virtually all of our key financial metrics. This performance demonstrates that our transition of Buckeye, which didn’t go into full force until the second half of the 2009, is working. This transition strategy is really very simple. The key, perhaps not surprisingly, is execution and I'm very proud of the progress that the entire organization is making.

We remain on target with our previously forecasted annual savings of approximately $18 million per year related to our best practices restructuring in July and have achieved about $6.6 million of savings in 2009. Our primary operational objective is also simple, to be the best-in-class asset manager. That means achieving the highest utilization at the lowest cost per unit without compromising our commitment to safe and environmentally responsible operations.

Now, I can't stress enough that we are not just merely cutting cost. That's not always productive. We are focused on true productivity improvement through higher and more efficient utilization of our pipeline, storage, terminal, and natural gas assets. This is the mindset that our newly decentralized structure is creating in our workforce and we are seeing the mindset take hold.

So what specifically have we done to execute this strategy? First, we have looked for geographic diversity. Historically, our results have been disproportionately dependent upon the economic cycles and weather patterns of the North Eastern United States. Clearly, we can reduce that volatility by expanding our network in other areas of the country. The 2008 Lodi acquisition, which is located in California, as well as the purchase of the Midwestern assets from ConocoPhillips in the fourth quarter represented good examples of the geographic diversity we are trying to bring to Buckeye.

Second, we have been seeking product diversity, moving away from only refined products. Our diversification into the natural gas is an excellent example. The third element of our plan is becoming more commercial as an overall enterprise. Our Buckeye Energy Service marketing division is a good example of this strategy. BES drives marketing margins, as well as improves our asset utilization. This is the part – this is part of the reason we've been expanding our profitability even while transporting and terminalling volumes have been declining over the past two-and-a-half years.

The other major change that we made this year was create a more commercial culture and decentralize our operating structure to encourage accountability and entrepreneurship throughout the organization.

Our asset teams have the local authority to make decisions to improve productivity and customer service in their operating areas. This accountability is being encouraged with a gain sharing program that incentivizes employees to make positive changes to improve their businesses. Although only in place this July, this gain sharing program has already generated improvements that we expect will achieve an annualized earnings improvement of over $8 million in 2010.

Financially, we had an excellent fourth quarter and full year in terms of adjusted EBITDA, our primary measure of financial success. We generated $105.7 million in adjusted EBITDA this past quarter, an increase of 18% over the fourth quarter of 2008. Keith will provide more details on these results in just a few minutes.

Looking ahead, the real unknown as you appreciate is the underlying economic health of the U.S. This will drive overall demand for fuels in the refined product market, as you know, has been decreasing also since the third quarter of 2007.

So for 2010, we are expecting volumes to stabilize. We also expect less help from rate increases in 2010 because inflation has been so low, in fact, negative for 2009. So our growth must come primarily from better utilization rates of our assets and other productivity improvements. In addition, we will continue to search for opportunistic acquisitions that fit well with our business model.

Clark will provide a more detailed look at our operational initiatives and projects. But first, let me turn the call over to Keith St. Clair for a more in-depth review of our fourth quarter and full year financial results. Keith?

Keith St. Clair

Thank you, Forrest and good morning, everyone. Before I begin a review of the financial results, I just want to remind everyone that unless I indicate otherwise, the financial results I'm discussing are those of Buckeye Partners LP.

As Forrest mentioned, Buckeye Partners had a strong financial performance in the fourth quarter of 2009. Our adjusted EBITDA for the quarter was $105.7 million or $16.4 million higher than in the fourth quarter of 2008. Each of our operating exceptions – each of our operating segments, with the exception of other operations, contributed to this adjusted EBITDA growth.

Additionally, distributable cash flow increased from $55.6 million in 2008 to $73.1 million in 2009 and our distribution coverage improved to 1.2 times for the quarter compared to 1.04 times last year.

Net income attributable to Buckeye unitholders before special items for the fourth quarter of 2009 was $67.8 million or $1.03 per LP unit. This compares to $54.1 million or $0.89 per LP unit in the prior year. Buckeye recorded a net benefit of $9.9 million in the fourth quarter of 2009, primarily as a result of adjusting the carrying value of our NGL line to its fair value of $22 million. This benefit was partially offset by restructuring expenses related to our reorganization announced earlier this year.

Consolidated revenue increased $51.2 million or 10% in the fourth quarter of 2009 when compared to the same period in 2008. This was due primarily to increased volumes marketed in the energy services segment and higher natural gas storage and terminalling revenues. This solid financial performance has allowed us to increase our quarterly distribution to $0.9375 per unit, which represents an increase of $0.20 per unit on an annualized basis compared to the distribution paid in February of last year.

Now, I'd like to review our segment results, beginning with pipeline operations, which is our largest contributor to earnings. The pipeline operations segment generated adjusted EBITDA of $61.1 million, an increase of $5.6 million compared to $55.5 million in the fourth quarter of 2008. A year-over-year volume decrease of 8% was offset by increased tariff, improved net settlement experience, and a favorable property tax settlement in the fourth quarter of 2009, which reduced operating expenses.

The terminalling and storage segment produced $24.6 million of adjusted EBITDA, an increase of $9.2 million from the $15.4 million earned in the fourth quarter of 2008. The year-over-year volume decrease of 7% was offset by increased storage and blending revenues, attributable to the acquisition of three terminals from ConocoPhillips in the fourth quarter of 2009 and favorable product settlements during the quarter. These revenue increases were partially offset by higher integrity and maintenance expenses, as well as operating costs related to the new terminals that we acquired in the quarter.

The natural gas segment contributed $14.5 million of adjusted EBITDA, a 3% increase from $14 million in the fourth quarter of last year. Sequentially, however, we saw a 42% increase from the third quarter, partially attributable to Kirby Hills II expansion.

In our energy services segment, year-over-year adjusted EBITDA grew to $4.4 million from $1.4 million in the fourth quarter of 2008, driven by higher volumes, as well as improved margins. It is important to note that the benefits of this segment go beyond its direct earnings contribution. Our energy services business also helps increase utilization rate in our pipeline and terminal assets. For the full year of 2009, energy services has contributed in excess of $23 million of revenue to our pipes and terminals.

Closing out the discussion of segment results, our contract operations and engineering services for third parties, which we report in Other Operations, realized $1.1 million of adjusted EBITDA, down from $3 million last year. It's important to note that our 2008 results were actually favorably impacted by earnings from the completion of a construction project that we had managed for a third party.

From a balance sheet and liquidity perspective, we ended the quarter with $34.6 million in cash and long-term debt of $1.5 billion. At December 31, our ratio of net long-term debt to adjusted EBITDA was 3.95 times on an LTM basis and our adjusted EBITDA to interest coverage was 4.96 times. Both of these metrics represent improvements from the prior year.

We ended the year with $78 million drawn on our revolving credit facility, which has a committed capacity of $580 million. We have no maturities on long-term debt until the third quarter of 2012 when our revolving credit facility is due. For the full year of 2009, our distribution coverage increased to 1.5 – 1.15 times from 1.03 times for the full year of 2008.

You can see from our financial performance for the quarter and the year and the improvement in our liquidity and coverage metrics that even in a year with a very challenging economic climate, Buckeye further strengthened its financial position.

Now, let me move to the financial result for Buckeye GP LP or BGH for the fourth quarter of 2009. Since BGH drives all of its cash flows from the performance of Buckeye, there is no need to repeat the detailed business review. I'll just give you the following relevant financial statistics.

During the fourth quarter of 2009, BGH received $12.9 million in distributions from Buckeye Partners. This compares to distributions of $10.9 million in the fourth quarter of 2008. Expenses specifically attributable to BGH totaled $1.8 million for the fourth quarter of 2009 compared with $3.2 million in the prior year. Prior-year expenses were impacted by costs associated with a tender offer.

Based on these results, the Board of Directors of BGH approved an increase in the quarterly distribution to $0.41 per common unit. This represents an increase of 5.1% compared with the most recent distribution paid in November 2009 and on annualized basis, an increase of $0.32 per unit or 24.2% over the quarterly distribution rate of $0.33 per unit paid in February last year.

Now, Clark Smith, our President and COO will provide some additional insight regarding our fourth quarter operating results for Buckeye Partners.

Clark Smith

Thanks, Keith. Buckeye's businesses continue to show steady improvement. Buckeye Energy Services had a very strong fourth quarter with volumes up

39% and adjusted EBITDA more than tripled over the 2008 performance. Although total pipeline and terminal volumes were down in the fourth quarter of 2009, Buckeye's pipeline tariff program, our asset expansion, operating improvements in the integration of the Blue Gold acquisition, all contributed to offsetting the volume decline. This led Buckeye to a great quarter and capped a very successful year for the Partnership.

One example of our commercial success in the fourth quarter is the increased storage revenues for refined products. These revenues have grown substantially over the prior year through a combination of acquisitions, expansion, higher storage values, and effective marketing strategies. We are confident that we will continue to identify more storage opportunities that fit our business, both through acquisitions and organic growth.

Our pipeline and terminal assets continue to expand. We substantially completed the clean energy pipeline, a 4.3 mile fuel pipeline, serving a new power generation facility in Connecticut. We are also completing terminal expansion in Illinois, Indiana, and Pennsylvania to add ethanol and bio-diesel blending, more storage capacity, and improved technology.

We are also having success with our ethanol bulk storage business. Buckeye is very well positioned to continue to grow our ethanol volumes including exports to international markets from our Albany terminal.

The integration of the Blue Gold Pipelines and terminal assets purchase in the fourth quarter has gone very well. These assets are a great fit with our Midwest network. We are in the process of connecting our East Chicago terminal to the Hammond and Hartsdale, Indiana terminals, creating a 6 million barrel market hub for Buckeye's customers. These facilities also an important outlet for the ConocoPhillips Wood River refinery, which has a 60,000 barrel expansion underway.

Turning to operational improvements, as Forrest mentioned, we are making good progress with our business transformation. This is a company-wide best practices initiative to transition Buckeye to a stronger, better managed, and more productive enterprise. A primary goal of the best practices initiative is to aggressively identify opportunities to improve performance. This means more than just cutting costs. It really focuses on optimizing every asset. As we experienced in 2009, small improvements can add up quickly.

Our new employee gain sharing program has been very successful. This program is mobilizing our entire workforce to uncover revenue enhancing and cost reduction opportunities and to allow our employees to sharing these benefits. The increased utilization of Buckeye storage assets is one example of the benefits to Buckeye and its unitholders and reflects the success of our transition to a more commercially focused company.

We are also doing a number of things to help employees succeed with their best practice ideas. In addition to the initiatives I mentioned on the call last quarter, we established Buckeye University, which is an internal training center where employees can enhance their skill in areas such as leadership, team work and project management. We have pledged to Buckeye's employees that we will devote more resources to training and skills development. This commitment should produce a higher performance standard at Buckeye is expected to add value for our unitholders.

Another important focus for Buckeye related to best practices is quality assurance and reliability throughout our system. We continually strive to enhance safety and improve how we maintain our assets. We recently introduced a program that utilizes new technology and risk analysis to better deploy our maintenance dollars.

As pipeline infrastructure ages, this discipline review of our facilities will help improve the safety of our assets, ensure environmental excellence and maintain the reliability of service that our customers require.

That concludes my remarks. Let's now open the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). There will be a brief pause while participants register for questions and we thank you for your patience. The first question will be from Ross Payne from Wells Fargo. Please go ahead.

Ross Payne – Wells Fargo

First question is, can you give us a few more details around the volumes for the quarter and any expectations for 2010 as well?

Forrest Wylie

Keith, can you give him the quarterly information?

Keith St. Clair

Pipeline throughput on a barrels per day basis was 1.265 million for the quarter. That compares to 1.379 million in the prior year. On the terminals, we had throughput of 443,000 barrels per day compared to 474,000 last year.

Ross Payne – Wells Fargo

Do you have a breakout for gasoline and diesel and jet by chance on the products?

Forrest Wylie

Yes, we do.

Keith St. Clair

Yes, we do.

Ross Payne – Wells Fargo

Just percentages would be fine.

Keith St. Clair

Yes. Gasoline represented about half of that volume in the fourth quarter. Diesel represented about a – turbine fuel represented a quarter of that volume, and distillates, both diesel and heating oil, represented about a quarter of that volume as well. So it's our – sort of our typical breakdown. Gasoline was about 50%, jet fuel about 25%, and heating oil and diesel about 25%.

Operator

Thank you. The next question will be from Michael Blum from Wells Fargo. Please go ahead.

Michael Blum – Wells Fargo

Thanks. Good morning, guys. First question, just can you talk a little bit about the sale of your NGL pipeline? Can you remind us what you paid to purchase it back in '05 or '06? What EBITDA that was generating on a trailing 12 months basis and maybe what the value was on your books?

Forrest Wylie

Yes. Michael, I wasn't here. We paid $87 million for it. I think it was bought from BP. The run rate cash flow was probably $8 million to $9 million.

Keith St. Clair

Yes, I think looking at it on an LTM basis, I think it was between $7 million and $8 million.

Forrest Wylie

Yes. I think at the time that it was purchased, it was $8 million to $9 million was kind of the expectation. We had already started seeing some volumetric declines before the customer shifted over to the new Front Range project. So we wrote it down substantially after the customer switched over and we then went through a process of finding the best logical buyer for the asset and we felt – at the end of the day, we sold it to DCP for $22 million.

So – I mean, you can do the math, pretty straightforward there. So it was bought in '05 – '06 I'm sorry – '06 for $87 million, about $8 million to $9 million run rate, about $7 million in 2009 was the run rate. Of course, it dropped off after September when the customer switched over and then we sold it for $22 million to DCP.

Michael Blum – Wells Fargo

Okay. Thank you, Forrest. The other question I had was, you talked about you think pipeline volumes for '10 will stabilize. Does that mean that you think basically flat with '09 or is that flat with the fourth quarter run rate or is that flat for the full year? How should we think about that?

Forrest Wylie

The way we are seeing it this year – and again, as I said in the opening comments, I mean, the biggest risk is the economy. The way – but the way we see it, it's really more intuitive than data-driven, is that at the end of 2010 we will be about flat with the volumes we experienced in 2009. Now, we shaped it a little bit, because we feel that the performance will be a little bit skewed towards the latter half of the year, but overall, flat to 2009 volumes.

Michael Blum – Wells Fargo

Okay. And then you have an – a budget or an estimate for 2010 growth capital, what do you think you'll spend?

Keith St. Clair

For 2010 growth capital, we would expect that to be somewhere between $70 million and $80 million.

Michael Blum – Wells Fargo

And what about maintenance?

Keith St. Clair

Around $30 million.

Michael Blum – Wells Fargo

$30 million? Okay. Thank you very much, guys.

Forrest Wylie

You bet, Michael.

Operator

Thank you. The next question will be from Adam Rothenberg from Zimmer Lucas Partners. Please go ahead.

Adam Rothenberg – Zimmer Lucas Partners

Hi, good morning, guys.

Forrest Wylie

Good morning.

Adam Rothenberg – Zimmer Lucas Partners

So for Q4, in the pipeline segment, there is a favorable property tax settlement, how much was that?

Keith St. Clair

Was around $7 million.

Adam Rothenberg – Zimmer Lucas Partners

$7 million? And then the settlements, that acts as a contra OpEx, right?

Keith St. Clair

No, it does not.

Forrest Wylie

The revenue –

Keith St. Clair

Not a contra OpEx.

Adam Rothenberg – Zimmer Lucas Partners

Okay.

Keith St. Clair

We include it to revenue.

Adam Rothenberg – Zimmer Lucas Partners

Okay. And what were the settlements for the quarter?

Keith St. Clair

I don't have the specific number for the settlements in front of me at this point, Adam. But it did – it did make a favorable contribution. What we see there are movements from period to period and it also varies depending upon, obviously, product prices and time of the year is also going to have an impact on that.

Adam Rothenberg – Zimmer Lucas Partners

Right.

Forrest Wylie

And – but directionally, our settlements were better than we expected or budgeted for 2009. And that wasn't necessarily because of price. It was because we didn’t experience the volumetric losses that we had been experiencing since I got here in the third quarter of 2007.

Adam Rothenberg – Zimmer Lucas Partners

Okay. So then – I'm trying to get an understanding of what sort of your OpEx run rate is going forward. So if I add back that favorable property tax settlement, I get to a run rate for 2009 of about $281 million. Is that a good run rate going into next year?

Keith St. Clair

$280 million. In the fourth quarter, we also had some higher than – year-over-year, we had some high – higher integrity and maintenance spending levels that frankly, largely offset the benefit of the property tax settlement. So I don't think just subtracting the property tax settlement and then extrapolating that result gives you the right answer, because we did have some incremental expenses there. Again, that more effectively offset the benefit that we realized, plus there were some higher G&A expenses in the quarter than we would expect to see on a go-forward basis. So I think doing that simple extrapolation probably gets you a number that's too low.

Adam Rothenberg – Zimmer Lucas Partners

Too high?

Keith St. Clair

Too high, I'm sorry.

Adam Rothenberg – Zimmer Lucas Partners

Okay. So then maybe sort of your actual level is the correct level. And then the annualized costs savings of $18 million and then you said there is an annualized earnings improvement from a gain sharing of $8 million?

Keith St. Clair

Correct.

Forrest Wylie

Right.

Adam Rothenberg – Zimmer Lucas Partners

So $26 million all together and have you realized all of that in that – again, that $274 million?

Forrest Wylie

Yes, Adam, you do – this is also misunderstood by our Board. It's not an $18 million increase from 2009. It's – $7 million of that $18 million was actually found and came through in 2009. So it's really $11 million or $12 million versus the 2009 numbers for the best practices. The gain sharing is really mostly focused a little bit in the fourth quarter, but mostly in 2010.

Adam Rothenberg – Zimmer Lucas Partners

Okay.

Forrest Wylie

That increase that we talked about.

Adam Rothenberg – Zimmer Lucas Partners

Okay.

Forrest Wylie

Some of the fourth quarter, but mostly in 2010.

Adam Rothenberg – Zimmer Lucas Partners

Okay. And then, if I could, just on the RPP [ph] volumes, your RPP volumes were down about 8.5% and it looks like compared to some of your competitors, Kinder was down more like 4%, Magellan more like 2%. What is actually driving your RPP volumes going down more than competitors?

Forrest Wylie

A turnaround of two specific refiners. I'll let Bob Malecky talk about that.

Bob Malecky

Yes. We had two significant turnarounds in the Husky Lima refinery. And Lima, Ohio had a significant turnaround and small fire at the facility that reduced production runs for a period of time there in the fourth quarter. And the ConocoPhillips Wood River refinery also had a significant turnaround in the beginning of the quarter. Both of those disproportionately affected our volumes there in this period.

Adam Rothenberg – Zimmer Lucas Partners

Okay. All right, great. Thanks, guys.

Operator

Thank you. The next question will be from Selman Akyol from Stifel Nicolaus. Please go ahead.

Selman Akyol – Stifel Nicolaus

Thank you. In terms of looking at the terminalling and storage results, I know you said commercial played into it in terms of profitability, but can you say how much more you could see going – you are getting out of there going into 2010?

Forrest Wylie

I think in 2007, we talked about the fact that we saw an opportunity to really improve both pricing and then quantities in the storage and terminalling business, primarily storage, but also in terminalling through our ethanol blending and bio-diesel blending. 2010 again looks like we still have a lot of opportunity to improve not only our investment in terminals and in terminal blending ethanol and biodiesel, but we also are finding opportunities for more storage revenues throughout our system, either tanks that are underutilized or we can put back in service or tanks that we think the valuation of what their worth is a little bit north of where they are currently contracted.

So – I can't give you a percentage, but since 2007, we've been actively focused on it. And if you look at the terminal performance line over those two-and-a-half years, you can see it has materially increased. So we don't think we are done yet, we think there is opportunity and we are going to continue to focus on that. I can't give you a percent.

Selman Akyol – Stifel Nicolaus

Okay. Let me just ask this one other question then. In terms of that – how much of our contracts renew in 2010?

Keith St. Clair

For storage?

Selman Akyol – Stifel Nicolaus

Yes.

Keith St. Clair

Yes, probably north of 75%.

Forrest Wylie

Yes.

Selman Akyol – Stifel Nicolaus

Okay. And then in terms of restructuring expense, should we expect anymore or have you guys completed that?

Keith St. Clair

We believe that the vast majority of the restructuring expenses are now behind us.

Selman Akyol – Stifel Nicolaus

Okay, great.

Keith St. Clair

There were some items that carried over into the fourth quarter related to some inventory monetization, et cetera, but we believe the lion share of those expenses have been recorded now.

Selman Akyol – Stifel Nicolaus

Okay. And then a last question. Any distribution growth goals for 2010?

Forrest Wylie

I know we get that question every quarter. When we – we have been focused on getting our debt-to-EBITDA in line with what we think a solid investment-grade company needs to have. We have been focused on getting coverage to be north of 1 time and now we are at a run rate of 1.15 times. We are approaching the debt levels that we think we are comfortable with and the rating agencies are comfortable with.

And so as we drive our distribution coverage higher, then we evaluate every quarter with our Board – and it's not my decision, it's the Board's decision, about what our plans should be for the growth rate in our distribution. So – I mean, I'm just – I'm not going to tell you what – if we are going to change it, but just look at our financial metrics and you can appreciate what the Board is looking at when they make their distribution decisions.

Selman Akyol – Stifel Nicolaus

All right. Thank you very much.

Forrest Wylie

You bet.

Operator

Thank you. The next question will be from Michael Cerasoli from Goldman Sachs. Please go ahead.

Michael Cerasoli – Goldman Sachs

Thanks and good morning. On Kirby, is this asset pretty much performing as you expect it would or is there some more – is there incremental near-term opportunities that you can get on that?

Forrest Wylie

It's not performing yet as we want it to. We think that there is – we came up a little bit short with the capacity that we expected. And so we are looking at some different well completion techniques to improve that capacity, as well as potentially drilling some additional wells to reach part of the reservoir that we now know has a fault running through it, which means the gas is not migrating to it.

So we think that with work and – Bill Schmidt is here, who is now also the President of that group, as well as being our General Counsel. We have a – not a robust capital plan, but a good capital plan to improve the performance of both Lodi, which was the original facility, but especially Kirby Hills II. So there is more work to be done. We are optimistic that we'll get the capacities that we are expecting and 2010 is the prove-it year.

Michael Cerasoli – Goldman Sachs

Great. Assuming the demand is shrunk, can you just talk a little about the contract renewals on the natural gas storage?

Forrest Wylie

Yes, we are seeing – I mean, we are 90% contracted for the 2010, 2011 storage season. Contract rates are flat to a little bit less than last year. So it's – we've got more capacity, the rates are slightly lower – not materially lower, but slightly lower, and 2010, hopefully we'll have more capacity.

Michael Cerasoli – Goldman Sachs

Great. Is the – and then changing gears here, is the culture transition on track with your expectations and how lumpy do you believe the rest of the transition will be?

Forrest Wylie

I'll let Clark. He spends a lot of time with that.

Clark Smith

Yes, I think it's more than exceeded our expectations, Michael. We've – we spend a lot of time reinforcing what we are doing and I think the commercial side of the business is where we are seeing the real big early wins, but the leadership has done a great job. We run the company with a lot more candor and a lot more open communication and so the idea generation is faster, the problem solving is quicker and we are modernizing the company across every – every aspect of our company is getting a review and we are trying to improve it.

So I think it's been a great success story and I think there is a lot more value in this best practices going forward. I think it's – we've always looked at it as an 18 months to 24-month process and we are about the third inning of the game and we expect a lot more benefit coming out of it.

Michael Cerasoli – Goldman Sachs

In a lumpy way or kind of a gradual – I mean, are there big initiatives that will kind of make it lumpy or is it just a little bit here and there?

Forrest Wylie

I think it's accumulation of a thousand tiny lights.

Michael Cerasoli – Goldman Sachs

Okay.

Forrest Wylie

So – I mean, because we went after the lumpy stuff out of the box and I think – Keith mentioned we had write-down of inventory in the fourth quarter at the pipelines and terminal group and – so best practices said we didn’t need to carry all that inventory and so we are selling the excess and when you sell excess inventory, you are going to take a loss on it.

So that's an initiative we've already addressed. But going forward, we are going to be carrying less inventory. As far as the number of people that we have in the organization, I think we are right, spot on and we've got really good people leading these different asset teams.

We have great division managers teaching and then helping these OMs lead the teams. We are – got tech services which Joe Sauger runs, which is spot on focus of being the service provider to the field. Jerry Ashcroft is doing an excellent job of transitioning the team. Bob Malecky and his crew are out there turning over every single rock, looking for growth opportunities. Khalid and his group are looking at acquisitions all the time and the BS guys, Cory and Todd are kicking it. So we are going to think – we expect to see a thousand little lights of opportunity over the next year.

Michael Cerasoli – Goldman Sachs

Okay.

Clark Smith

But my opinion, Michael, is it will be more linear than choppy, the benefits we'll see.

Michael Cerasoli – Goldman Sachs

Okay.

Clark Smith

Okay.

Michael Cerasoli – Goldman Sachs

And then just finally on maintenance, the $30 million that I think you just spoke to in 2010, now, is that – it seems with the reorganization that it is a – that it's like a bit high, but is that just because the 2009 capital spend was a little bit lower and is this more of a normal run rate or – can you just talk a little bit more about that spend?

Forrest Wylie

Sure. I'll hit the first piece and then Clark can kind of walk you through what we've done with maintenance capital over the past year and a half. The $30 million – if you go back a couple of years, you can see it was $35 million was kind of the run rate we were at. But we felt we could improve the maintenance policies and approaches. We've gone from a failure rate to a risk-based preemptive failure of maintenance policy. It took a lot of work, Clark can explain it more. But I think $30 million is a good number on a forward run rate. And I'll let Clark talk about how we changed our policy.

Clark Smith

Yes. And I do think the $30 million is a number that makes sense based on what we've seen. We instilled a new asset maintenance policy this year, Michael, that puts a lot more rigor and discipline into evaluating the maintenances required for our system and it centers around risk ranking every asset, every opportunity and looking at them from a discretionary, non-discretionary basis and that – then we do a basically zero base buildup of what has to be done and then the flexibility to do projects that we have that are more discretionary and it leads into a new project management system that has a lot more discipline, lot more transparency and cost tracking in it.

So we think this part of our business, again from a best practice standpoint, there was a lot of room for improvement and we think we are putting in a really good system to maintain the system properly, but also make sure we do it in a responsible fashion from a cost standpoint.

Michael Cerasoli – Goldman Sachs

Thanks. I appreciate your time.

Clark Smith

You bet.

Operator

Thank you. The next question will be from Ethan Bellamy from Wunderlich Securities. Please go ahead.

Ethan Bellamy – Wunderlich Securities

Hi, guys. Could you walk us through the pipeline system outage mid-January? Tell us what happened to the data center and how you addressed it and then tell us if that's going to negatively impact the first quarter.

Forrest Wylie

You heard about that, did you?

Ethan Bellamy – Wunderlich Securities

I saw the news. Yes.

Forrest Wylie

Yes – yes. I'll tell you. In general, we – our response was a perfect incident control response. We lost all communications, basically the pipeline was flying blind. We had the unfortunate happening that our backup data communication line was also destroyed. And what happened was a car hit a telephone pole, telephone pole hit the switch box and because of some maneuvering around in the last five of six years, our backup line had been moved through that same switch box.

Our satellite systems kicked in, but you can only use them for kind of a limited service, because they don't have the capacity to carry the data in a timely manner the way the fiber optics do. So we shut down the system orderly and while we were shutting down, they were starting a startup process on how to get it back up and running. I think we had a four-hour window where we – six hour, I'm sorry, six-hour window where it and so it was six hours before it started back up.

We think the costs are – cost and/or revenue losses were negligible. It was really just a testament to – we got 6,000 miles (inaudible) 400 miles of pipe and it shut the system down all the way to Chicago. We had refiners talking to us on an hourly basis about when we were going to be able to take away because they have limited tankage at the refineries and – so it was as eye-opener, handled it extremely well and I think we'll have very limited revenue or expense impact. When I say limited, I mean, we are talking $0.5 million or less.

Clark Smith

And we have worked with our third-party vendor that provides our wide area network, both primary and redundant backup system and they are re-architecting this even as we speak to ensure that we don't have that issue. As Forrest had indicated, what has happened is it was architect that initially with the backbone that was separate from our primary and then secondary data center. Over time, they had rerouted some of these lines and there was a 15-mile stretch of essentially cable where there was an overlap. That just happened to be where the accident was.

So it's being addressed now. We are working closely with a third-party vendor, who is also very responsive as well.

Ethan Bellamy – Wunderlich Securities

Okay.

Forrest Wylie

But not a lot of fun. The people reacted tremendously and from an expense or a revenue perspective, it's not even going to be noticeable.

Ethan Bellamy – Wunderlich Securities

Okay. That's good to hear. One more question. Forrest, which of any of the ArcLight assets are attractive to you and would any fit into the asset base well and are you in conversations with them about those assets?

Forrest Wylie

I think I've said this before on the quarterly conference calls and so I'll just kind of repeat it. There are many assets, not just owned by ArcLight that are very attractive to us. There are assets that ArcLight owns that are attractive to us. I mean, you look at the website and you can see where the refined product gas storage assets, the – would of course be attractive to us.

Every quarter, every six months, the depending upon the workload with outside acquisitions we review with ArcLight our interest in their assets and of course we can't control when they decide they want to exit, but it's just not ArcLight that has the assets, although they do have some. I mean, we are focused as long as every other MLP out there, the divestitures coming from the majors, as well as opportunities that are more opportunistic. So that's about as much as I'd give you. I can't speak for ArcLight, Ethan. That's why I can't tell you specifically.

Ethan Bellamy – Wunderlich Securities

Okay. Thanks, guys. I appreciate it.

Forrest Wylie

Yes.

Operator

Thank you. The next question will be from Brian Zarahn from Barclays Capital. Please go ahead.

Brian Zarahn – Barclays Capital

Good morning.

Forrest Wylie

Good morning, Brian.

Keith St. Clair

Good morning.

Brian Zarahn – Barclays Capital

Colder weather in the quarter so far. Are you seeing any favorable impact in your energy services and pipeline volumes?

Forrest Wylie

It's interesting. November was warmer than normal, a lot warmer than normal. December came out, what do you think Todd, about normal?

Todd Johnson

A little colder, but pretty normal.

Forrest Wylie

Yes, because you got those two weeks of really cold and then it kind of fell back to a little bit above, so a little bit colder than normal. January started out warmer than normal, now, we are going to – it ended kind of colder than normal. And February, it is kind of too early to tell, but looks like it's going to be colder than normal overall for February.

So our fourth quarter – actually, we saw lower heating movement than we would have expected. Part of that was people; there is so much carrying heat that people prepositioned their inventories. And in January, I mean, I feel like we saw a little bit better than we expected.

So again, it's because of the cold weather burning off the prepositioned inventories and then they have to start filling the tanks back up and we got a cold February, and then people could see those long-range forecast and so they started moving through the pipe. So January, a little bit better than we expected and mostly, February.

As far as the volumes with BES, I mean, they had record volumes in December. How many gallons?

Todd Johnson

84 million.

Forrest Wylie

They moved 84 million gallons of product in December and that's gasoline, diesel ultra low, and heating oil. No jet fuel. And so from a volume perspective for BES, absolutely, they had a record year and this was – they're very active in trying to grow those volumes only on assets that we can't get third parties to use. So we are looking at the Midwest this year as an opportunity set where we have underutilized pipeline and terminal assets. And they are really focusing on the Midwest for 2010. So – again, growth there not just from cold, but from the fact that they are really focusing on more and more asset sets where they're underutilized.

Brian Zarahn – Barclays Capital

And turning to the PPI index, with the decline in July, how are your market base rates due in the second half of the year?

Forrest Wylie

Yes. I'll tell you – this is the first time in the pipeline industry, I think, that you had a PPI that was negative. So negative that it even went the through the 1.3% adder, right. So there is one time where it was negative, but it didn’t go through the adder. So – yes, all the – all of the grandfather pipes are going to have a tariff reduction in 2010, believe it or not.

The market base pipes. Dependent upon where you are positioned, market base pipes can make up for some of that. And I think overall for the year, we are about flattish to up a little bit on the tariffs, overall.

Brian Zarahn – Barclays Capital

Okay. And finally, in terms of M&A, do you see a greater opportunity set in storage or pipeline?

Forrest Wylie

We see both. I mean, acquisition opportunities, is that what you said?

Brian Zarahn – Barclays Capital

Yes.

Forrest Wylie

Yes. I mean, the majors have all come out and we, like every other MLP, has been trying to get them to not do it through the big auction process. I think when the big majors get into selling big packages of assets, they always go to these auctions. They haven't come out with them yet, but I mean, there are rumors flying around about the stuff that's going to be in. I mean, the refined products, the term – I mean, pipes, there is terminals.

Gas storage is not really a big issue with the majors, they don't have tons and tons of it. But there is little pieces out there in the gas storage side of the business from the majors. There is a lot of gas storage still held up in private equity hands, which – you know the life cycle of a private equity fund and so there should be a rationalization or liquidation from equities to long-term holders and operators. When that happens – again, we can't control the private equity firms, but there is still a lot held in private equity hands.

So – that's just the majors. So I see opportunity on the refined product pipe, refined product terminals from the majors, as well as gas storage, a little bit from the majors, but really from the assets held in the private equity funds.

Brian Zarahn – Barclays Capital

I appreciate the color.

Forrest Wylie

Yes.

Operator

Thank you. The next question will be from Ross Payne of Wells Fargo. Please go ahead.

Ross Payne – Wells Fargo

Yes. Just a quick follow-up. You said that tariffs next year I think are going to be flat to slightly up. Is that for 2010 or were you referring to 2009?

Forrest Wylie

2010.

Ross Payne – Wells Fargo

Second of all, you had an asset impairment adjustment during the quarter. What segment was that in? And just explain that add-back.

Keith St. Clair

It was in the pipeline segment. It was the – what it was is it was simply the adjustment of the NGL line, adjustment up to its fair value because we had determined – we have had essentially reached an agreement to sell that asset for $22 million and this just represented essentially adjusting our previously recorded impairment expense. So we reflect that asset at its fair value at the end of the year.

Forrest Wylie

We wrote it down too much when we recognized the fact that the volumes were going away. And then we had a contractor sell that for $22 million, we just wrote it back to $22 million. It's all that happened there.

Keith St. Clair

Right.

Ross Payne – Wells Fargo

Okay, that makes sense. And finally, could you give us what gasoline volumes and diesel volumes did year-over-year, I mean, this quarter rather versus a year ago?

Keith St. Clair

This quarter versus a year-ago quarter?

Ross Payne – Wells Fargo

Right. Just percentage wise.

Keith St. Clair

Yes. Gas was down quarter-to-quarter 9% to 8%, about 8%. Jet fuel was down about 2.5% and distillates were down about 6% to 7%.

Operator

Thank you. And there are no further questions at this time. So I'll return the meeting back to you, Mr. Wylie.

Forrest Wylie

Thanks, Joe. Again, thank you for joining us today for our – and for your continued interest in Buckeye and BGH.

While there is no question that 2009 was a very difficult business environment to operate in, especially as a refined product line and terminal operator, I believe we can look back with pride in our accomplishments during this deep recession. It is during such difficult times that a good team must come together and step up to the challenges and I am very pleased with the way our entire Buckeye performed over the past year.

We executed well and continue to grow our distributions to unitholders, as well as improve all of our financial metrics including unitholder coverage. While we continue to face challenges, we are making substantial progress in our objective making Buckeye the best-in-class asset manager, which means achieving the highest asset utilization at the lowest cost per unit while remaining a safe, environmentally responsible, and reliable operator and hopefully, a very good place to work.

So I look forward to speaking with everyone next quarter. Thank you.

Operator

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time. We thank you very much for your participation.

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Source: Buckeye Partners, L.P. Q4 2009 Earnings Call Transcript
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