Buckeye Partners, L.P. Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Buckeye Partners (BPL)

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

Q4 2013 Earnings Call

February 07, 2014 11:00 am ET


Clark C. Smith - Chief Executive Officer of Buckeye Gp, President of Buckeye Gp and Director of Buckeye Gp Llc

Todd J. Russo - Vice President of Buckeye Gp Llc, Secretary of Buckeye Gp Llc and General Counsel of Buckeye Gp Llc

Keith E. St. Clair - Chief Financial Officer of Buckeye GP LLC and Executive Vice President of Buckeye GP LLC

Robert A. Malecky - Senior Vice President of Buckeye GP LLC and President of Domestic Pipelines & Terminals Business Unit

Khalid A. Muslih - President of International Pipelines & Terminals Business Unit of Buckeye GP LLC


Brian J. Zarahn - Barclays Capital, Research Division

Stephen J. Maresca - Morgan Stanley, Research Division

Steven C. Sherowski - Goldman Sachs Group Inc., Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Jeremy B. Tonet - JP Morgan Chase & Co, Research Division


Good day, ladies and gentlemen, and welcome to the Buckeye Partners LP 2013 Fourth Quarter Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

I'd now like to introduce your host for today's conference, Clark Smith, CEO and President. You may begin.

Clark C. Smith

Thank you, Amanda. Good morning, everyone, and welcome to the Buckeye Partners Fourth Quarter 2013 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 some very important highlights for the quarter, Keith will review our financial results in further detail.

Also on the call today are Bob Malecky, President of Domestic Pipes and Terminals; Khalid Muslih, President of Global Marine Terminals; Jerry Ashcroft, President of Buckeye Services; Jeff Beason, Vice President and Controller; and Todd Russo, Vice President and General Counsel.

Following our prepared remarks, we'll open the call to questions. But first, I'd like 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 of our control. 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, 2012, 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, as well as our October 9 press release announcing the Hess transaction, both of which are posted on the Investor Center section of Buckeye's website, www.buckeye.com

With that, I turn it back over to Clark.

Clark C. Smith

All right. Thank you, Todd, and again, good morning. Buckeye had a terrific year in 2013, both financially and operationally. We expect this trend to continue with our 2014 performance. We always start by talking about safety, the highest priority here at Buckeye. We are committed to the safety of our employees, contractors, customers and neighbors.

I'm happy to report that Buckeye had a very good year in terms of safe and reliable operations. 2013 marked the fourth consecutive year that Buckeye outperformed its industry peers in the number of OSHA recordable incidents, and the third year we were better than industry peers in motor vehicle incidents. This is a very favorable trend, although our goal each and every day is 0 incidents.

I'd like to now address some operating and other highlights for the quarter. In October, we announced the acquisition of a premier network of 20 petroleum product terminals from Hess Corporation for $850 million. On December 10, all the pre-closing conditions were met and we closed this transaction. We've been working diligently since then to seamlessly integrate these assets into our existing operations. Although work remains to complete the full integration, we are extremely pleased with the results of our efforts so far.

From a financial standpoint, the 21 days of Buckeye ownership during the fourth quarter met our expectations as the Hess assets contributed $6 million to our results, excluding the impact of transaction and transition-related costs. We continue to believe this acquisition is a great opportunity for us to create value for Buckeye by overlaying our commercial and operating model to a very strategic platform of assets that are complementary to our existing facilities.

As you know, Buckeye's terminal growth strategy is to commercialize our facilities by expanding services and capabilities, combined with a focus on improved customer service, to grow our third-party business. We have seen strong customer interest in many of the markets served by these new terminals, and we believe our commercial efforts are on track. At the same time, we are working to overlay our operating model, establishing multi-skilled entrepreneurial operating teams and incorporating those teams into a decentralized structure. These teams are closest to the assets, are empowered to make decisions to best manage and maximize the value of the terminals.

We have hosted team meetings with the new Buckeye employees that joined us, as a result of the Hess transaction, to discuss our plans for these facilities, and these employees are excited to be joining our team and have already begun submitting ideas on how we can improve our service offerings or eliminate inefficiencies at these terminals.

We also believe the Hess assets are complementary to the existing Buckeye terminals, both domestically and in the Caribbean, and expand our footprint into several high-growth areas in the Southeast, including Florida. We continue to believe we will be successful in executing our commercial and operating strategies at these assets, and we still expect to be able to achieve an acquisition multiple of approximately 8x adjusted EBITDA in 2015.

It should be noted that Hess will remain an anchor tenant at the domestic terminals, with storage and throughput commitments that range from 1 to 4 years and include a minimum revenue commitment. This commitment would survive any successful sale by Hess of their retail assets.

As announced in our earnings release this morning, effective with the fourth quarter, we have changed our operating and reporting structure to better align our businesses with our long-term growth strategies. As we focused on integrating the terminals we acquired from Hess, we took the opportunity to reassess our existing business unit classifications. We realigned our business units to optimize the growth opportunities by leveraging the synergies related to our management, commercial, operating and financial reporting activities.

Beginning with the new Global Marine Terminals. This segment includes our assets that primarily facilitate global flows of crude oil, refined petroleum products in other commodities, offering our customers connectivity to some of the world's most important bulk storage and blending hubs. This segment features the flexibility of large volume, multiproduct segregated tankage and offers heating, blending and marine services, while enabling synergies among the different facilities.

These terminals established for Buckeye a platform for growth opportunities in the global marine markets. This segment includes key hubs in the Caribbean at our BORCO facility, the Yabucoa terminal and the newly acquired St. Lucia terminal. In addition, certain of the New York harbor facilities are now part of the Global Marine segment, including our legacy Perth Amboy facility and 2 facilities acquired from Hess, the Port Reading and Raritan Bay terminals.

Khalid Muslih, former President of International, will serve as President of the new Global Marine Terminals business unit.

Our Merchant Services segment centralizes all existing and new merchant activities to leverage common mid- and back-office support. This segment includes the legacy Energy Services segment, the Caribbean fuel oil supply and distribution business and the new merchant activity supporting the terminals acquired from Hess. Jerry Ashcroft continues as President of the Buckeye Services business unit, which includes the new Merchant Services, as well as the existing Development & Logistics segment.

Buckeye's Domestic Pipelines & Terminals segment is comprised of the remaining legacy Pipelines & Terminals, combined with the domestic terminals acquired from Hess in Upstate New York, the middle Atlantic, the Southeast, which includes Florida and the New York harbor, excluding the Port Reading and Raritan Bay terminals. This business unit, which remains our largest, continues under the leadership of its President, Bob Malecky.

In addition to the change in our segments, we are now reporting our Natural Gas Storage business as discontinued operations effective with the fourth quarter. Our Board of Directors approved the plan in December to divest this non-core business. We have initiated a formal process to market this business and expect to complete its disposition during 2014.

As a result of this decision, the assets were adjusted to their fair value on our balance sheet, resulting in an impairment charge of $169 million for the discontinuation of this business. The financial results, including the non-cash impairment charge, have been classified as discontinued operations.

Shifting now to our financial results. It should be noted that the financial measures, such as adjusted EBITDA and coverage that Keith and I will discuss on this call, are generally related to Buckeye's continuing operations, excluding the discontinued Natural Gas Storage, unless we indicate otherwise.

We are very pleased with our fourth quarter when we reported this morning as adjusted EBITDA from continuing operations of $178.6 million is another record quarter for Buckeye. Strong performance from our Pipelines & Terminals segment was the primary contributor to these results as strengthening business conditions and the contribution from our growth capital investments combined to drive improved results.

Looking at the full year results, 2013 was an exceptional year. Adjusted EBITDA year-over-year grew by over $96 million to $648.8 million. This represents a 17% increase above 2012. On these calls and in our other interactions with investors, we continue to point to the substantial growth capital investment opportunities our commercial and operating teams have been able to identify. This growth was made possible by the high return growth capital projects that these teams were able to successfully deliver.

In our Domestic Pipes & Terminals segment, growth capital projects, including the benefit of diversification beyond refined products, drove an almost $62 million improvement in 2013. Crude logistics projects were a significant contributor as Buckeye capitalized on the rapidly expanding U.S. shale production. We realized a full year benefit from our Albany crude rail-to-marine project that became operational in the fourth quarter of 2012; service at our Chicago complex crude pipeline-to-rail project was initiated in the fourth quarter of 2013 and quickly ramped up. Both of these projects are supported by multi-year contracts with volume commitments.

While maximizing the use of existing equipment and leveraging the optionality of our infrastructure at Albany and in the Chicago complex, we've been able to achieve very low multiples on these capital investments. Other capital projects that drove improvement for this segment include a full year contribution from propylene storage and increasing contribution from Diluent transshipment. Both of these projects are also centered at the Chicago complex, which serves as our Midwestern hub.

We also further expanded our butane blending capacity for the past 2 winter blending seasons and have seen strong contributions from blending as a result. The common theme with these investments is that our commercial and operating teams have been able to identify underutilized assets and optionality to our existing system to drive high returns from these investments.

Turning to Global Marine Terminals. Year-over-year growth of $21 million in this segment was driven by the 4.7 million barrels of expansion capacity, put in operation since mid-2012 at our BORCO terminal in the Bahamas. Since our acquisition of this facility in 2011, we have invested over $350 million to increase the storage capacity over 20%, while also adding additional deepwater and inclement-weather berthing capabilities that we believe far exceeds the capabilities of our competition.

We also increased pumping rates, improved inter-tank connectivity and flow rates. We expect to see the full year run rate cash flows from these investments in 2014.

Some additional 2013 highlights for Buckeye include the resolution of a significant portion of the FERC matter, allowing us to resume our tariff increases midyear. With respect to the complaint regarding transportation of jet fuel to the New York City airports, the parties have engaged in settlement discussions but have not reached a settlement to date. As I've indicated before, we will continue to aggressively defend Buckeye pipeline's tariff rates, but we'll look for opportunities to resolve these matters as expeditiously as possible.

We saw substantial improvement in our balance sheet and related leverage and metrics, which is recognized by the rating agencies, and through the improvement of our credit ratings in early 2013. These improved metrics were a benefit as we tapped the debt and equity markets during the year and offerings that were substantially oversubscribed, demonstrating the strong interest in the Buckeye story.

Most importantly, all of these factors contribute to the strong unit price performance in 2013. Buckeye's unit price increased from $45 to $71 a unit during 2013. When you add in the 2013 distributions, Buckeye generated an approximate 67% total shareholder return for our investors.

We also resumed distribution increases in 2013 and are pleased to declare the fourth quarter distribution of $1.0875 per limited partner unit, which represents an almost 5% increase over the year ago quarter. We are very proud of what our more than 1,600 Buckeye employees were able to accomplish in 2013.

Let me briefly talk about the fourth quarter highlights for each of the operating segments, starting with our Pipelines & Terminals. As I indicated earlier, butane blending continues to be a strong contributor to our financial results for this segment. We continue to see favorable butane-to-gasoline margins during the quarter. Buckeye expanded its blending capabilities to 2 additional sites prior to this winter's blending season, including the large capacity installations at our Toledo terminal. We expect butane to continue to be a strong earnings contributor for Buckeye as we do not foresee any significant disruptions in the margin opportunities for butane, and we are continuing to build new butane-blending operations on both our domestic system, as well as at BORCO.

Moving to our Global Marine Terminals segment. We are confident this business represents a significant growth opportunity for Buckeye. We have both broadened and strategically improved our position in providing an array of logistics and blending services for the global flow of petroleum products.

The Perth Amboy transformation project continues on pace. During the fourth quarter, the newly refurbished 4-bay truck rack at Perth was completed, providing local jobbers with additional gasoline and distillate supply for local retail markets, while also providing customers an additional commercial element.

We have a significant customer whose committed truck rack volumes has began shifting volumes to Perth, and we expect those volumes to continue to grow.

Construction on the critical Perth Amboy-Linden pipeline connection continues to progress and is expected to be completed early in the second quarter. We're also making progress on our crude rail facility at Perth and are in advanced negotiations with a significant shipper for their use of this facility when it becomes operational, which is expected toward the end of the second quarter.

Tank work and manifold upgrades are also nearing completion to service the needs of Chevron, as well as a major New York harbor gasoline blender that I previously announced signed up for a multi-year storage agreement at Perth beginning in April.

Moving to our Buckeye Services business unit. Our Merchant Services segment continued to fight bases weakness and backwardation in the gasoline and distillate markets in the fourth quarter. The colder winter provided some benefit due to higher volumes of heating oil, which is generally a higher-margin product. But we are experiencing more of the benefit from this cold weather in the first quarter of 2014 as consumers and suppliers rebuild heating oil inventories following this cold spell. We are still in the early stages of supporting the newly acquired Hess terminals and expect to continue to ramp up the merchant activities around these assets in the first half of 2014.

Development & Logistics segment continues to see a strong project backload -- backlog. Petrochemicals had provided some growth recently as BDL provides engineering, procurement, construction and support for that industry. In a recent win, BDL began operating an Eagle Ford crude gathering pipeline, giving it a foothold in that important shale play.

In closing, we are pleased with our outstanding 2013 performance, both financially and operationally. Looking forward, we believe the over $1.7 billion in capital we have invested over the past 2 years has positioned Buckeye for additional growth for the future. Numerous projects that came online in 2013 are expected to reach full run rate in 2014.

We believe there are even more opportunities for additional investments at attractive multiples that we expect to contribute to 2014 and beyond.

I am pleased to report that 2014 financial results are starting on a very positive note for all business segments at Buckeye. And as business conditions warrant, our board could consider an accelerated rate of distribution increases in 2014.

This concludes my remarks and now, Keith will review our quarterly financial results in more detail, after which, we'll take questions from the callers.


Keith E. St. Clair

Thank you, Clark, and good morning, everyone. I will now provide some more detail on our fourth quarter financial results.

As Clark mentioned, unless otherwise noted, the information I discuss is for our continuing operations, which excludes the impact of our discontinued Natural Gas Storage business. My discussion also reflects our results recast to show a revised segment structure. In connection with the change in our reporting segments and the discontinued operations, certain expenses have also been realigned to correspond with the new operating model.

In all cases, historical information has been restated to reflect these changes, so the information is comparable. Restated historical quarterly data for 2013 and 2012 is also provided in our earnings release.

Our quarterly adjusted EBITDA for the fourth quarter of 2013 increased 8% to $178.6 million compared to $165.4 million for the year ago quarter. Our Pipelines & Terminals segment experienced strong growth compared to 1 year ago on increased volumes and the contribution from recent capital projects. The Global Marine Terminals segment saw year-over-year growth as a result of capacity expansions of 2.8 million barrels completed in 2013.

These 2 segments combined comprise approximately 97% of our adjusted EBITDA, and together, improved by over $19 million or 12% from the year ago quarter. I'll provide additional color regarding the segment results in a moment.

Overall, we reported income from continuing operations of $88.5 million for the fourth quarter of 2013 compared to $32.5 million in 2012. The 2012 results included an impairment charge of $60 million related to the idling of a pipeline in the fourth quarter of 2012.

The 2013 results include approximately $11.8 million of transaction and transition-related costs associated with the Hess acquisition. In addition, interest expense increased by $6.3 million primarily related to long-term debt issuances in 2013, including the debt issued in the fourth quarter of 2013 to partially fund the Hess transaction.

Income from continuing operations attributable to Buckeye's unitholders was $0.75 per diluted unit for the fourth quarter of 2013 compared to $0.32 per diluted unit for the fourth quarter of 2012. The diluted weighted average units outstanding for the fourth quarter of 2013 was 114.1 million units compared to 98.5 million in the fourth quarter of '12. This increase in units was a result of our 8.6 million unit offering in October of 2013 in conjunction with the Hess transaction; our 6.9 million unit offering in January of 2013; the incremental units issued as in-kind distributions related to our Class B units; and the approximate 0.5 million units issued under our ATM equity program during 2013.

Consolidated revenues for the quarter of 2013 totaled $1.7 billion compared with $1.1 billion in the prior year. The increase in revenues is primarily attributable to an increase in sales volumes in our Merchant Services segment as they moved into markets around the new marine terminals acquired from Hess. In addition, the fuel oil supply business contributed a full quarter of revenue in 2013 compared to a partial quarter in the prior year as this business was launched in the fourth quarter of 2012.

Operating expenses for the quarter increased approximately 31% to $120.6 million from $91.9 million in the year ago quarter. The increase in operating expenses was primarily the result of increased maintenance spend, higher personnel costs and transition and transaction costs, as well as incremental operating cost related to the acquisition of the 20 terminals from Hess.

General and administrative expenses increased $2 million to $19.6 million for the fourth quarter of '13 compared with $17.6 million in 2012. This increase was a result of higher legal expenses in '13 related to the ongoing FERC settlement discussions and higher compensation expense.

Now, I'd like to review in more detail the contribution of each segment to adjusted EBITDA, our primary measure of financial performance. Adjusted EBITDA for our Pipelines & Terminals segment was $132.2 million for the fourth quarter of 2013 compared with $116.7 million in the year ago quarter. The contribution from various capital projects that have come online since the third quarter of 2012, including crude rail projects, propylene storage, Diluent blending and transshipment and butane blending expansion, have combined with higher volumes to contribute to the sizable increase in adjusted EBITDA.

Aggregate pipeline volumes across our system increased approximately 80,000 barrels a day, which is an increase of almost 6% to 1.46 million barrels per day for the fourth quarter of '13. Middle distillates volumes, which include diesel and heating oil, were up almost 14% for the quarter, and gasoline and jet fuel volumes were up 3% and 2%, respectively. The incremental volumes are primarily the result of an increase in Buckeye deliveries to Western Pennsylvania sourced from both Philadelphia area refineries and our Linden facility. In addition, volumes in the prior year quarter were negatively impacted by Hurricane Sandy and refinery turnarounds, primarily in the Midwest.

Pipeline average tariffs increased approximately 4% during the quarter as we benefited from May 2013 tariff increases on our market-based systems and July 2013 tariff increases on the index systems.

Domestic terminal volumes increased nearly 7% to over 1 million barrels per day in the fourth quarter of 2013, up from 940,000 barrels per day in the fourth quarter of 2012. Excluding the incremental volumes related to the terminals acquired from Hess, throughput volumes were up over 3% on our terminals. Crude oil volumes at our Albany terminal and the Chicago complex both contributed to this growth, as did Chicago complex propylene and Diluent volumes.

The Pipelines & Terminals segment also enjoyed an increased contribution from butane blending during the quarter. As Clark mentioned, we expanded the number of locations with butane blending capabilities. In addition, butane margins were higher, and we saw an approximate 15% increase in butane blending volumes at our existing blending locations, driven by higher gasoline throughput volumes at these sites, as well as higher blend opportunities as a percentage of gasoline volumes.

Expenses increased during the quarter as a result of the incremental cost of the acquired terminals. In addition, certain project maintenance activity that was deferred in the first half of the year was completed in the third and fourth quarters.

Now, turning to our Global Marine Terminals segment, we recorded adjusted EBITDA of $40.5 million in the fourth quarter of '13 compared to $36.9 million in the comparable quarter last year. This improvement is largely the result of the 2.8 million barrels of expansion storage brought online at BORCO since the fourth quarter of 2012, combined with the contribution from the St. Lucia, Port Reading and Raritan Bay terminals for 21 days.

Partially offsetting these increases was the impact of tankage taken out of service during the quarter related to maintenance activities and project work to improve the capabilities for handling anticipated heavy crude volumes. While adversely impacting Q4 results, these products -- these projects better position the facility to meet the long-term requirements of our customers.

Ancillary revenues, including berthing and heating revenues, were also lower as a result of these out-of-service tanks.

Operating expenses for this segment declined in the fourth quarter of 2013 due primarily to lower casualty experienced than the fourth quarter of 2012, which was impacted by Superstorm Sandy.

Our Merchant Services segment reported adjusted EBITDA of $1.8 million for the fourth quarter of 2013 compared to $8.8 million for the comparable quarter of 2012. The year ago quarter benefited from the retroactive extension of the biodiesel tax credit, as well as supply disruptions due to Hurricane Sandy, which elevated margins during the quarter.

Revenues in this segment increased by 57% to $1.4 billion from $870 million in the year ago quarter as product volume increased 60% to 462 million gallons compared with 289 million gallons in the fourth quarter of 2012. This increase in revenue was the result of increased activities to support the domestic terminals acquired from Hess. In addition, the Caribbean fuel oil supply business was formed late in the fourth quarter of 2012, which compares to a full quarter of revenues in 2013.

Importantly, the Merchant Services segment contributed almost $23 million in revenues to our Pipelines & Terminals segment over the last 12 months.

Wrapping up the segment review, our Development & Logistics segment generated $4.1 million of adjusted EBITDA compared to $3 million last year. This segment continued the benefit from the increased contribution from the LPG storage facilities due to the return of some recent capital investments and rail capabilities at these facilities. In addition, a strong backlog of projects, contributing to higher utilization rates, drove incremental cash flow.

Moving to Natural Gas Storage. Continued excess supply of natural gas, minimal volatility in natural gas prices and compressed seasonal spreads have continued to negatively impact this business. As Clark mentioned, in December, our board approved a plan to divest our Natural Gas Storage business as we no longer believe this business is aligned with our long-term strategy.

Pursuant to our current accounting principles, we reclassified and reported the Natural Gas Storage business financial results as discontinued operations for the current and historical periods. In addition, the related assets and liabilities have been adjusted to their estimated fair value, resulting in an impairment charge of $169 million, and will be reflected as held for sale on our balance sheet.

Now, looking at our liquidity, we ended the quarter with $5 million in cash and long-term debt of $3.1 billion, including long-term borrowings under our credit facility of $29 million. We also had $226 million borrowed under our credit facility that was reflected as short term as this supports the working capital requirements of our Merchant Services segment.

At the end of the quarter, our leverage ratio of long-term debt to LTM adjusted EBITDA, as calculated in accordance with our credit facility, was approximately 4.2x, down from 4.7x for the year ago quarter. Our leverage has decreased substantially due to our improved 2013 financial results, combined with our 2013 equity issuances.

Our effort to strengthen our balance sheet has been positively received by the rating agencies, as demonstrated by our stable outlook from all 3 of the agencies. Maintaining a strong balance sheet continues to be a key objective for Buckeye.

During the quarter, maintenance capital was $27.3 million, or an increase of approximately $8.8 million compared to the fourth quarter of 2012. This increase in maintenance capital in the current quarter is primarily timing-related as we experienced some delays in starting projects in the first half of 2013.

Full year maintenance capital expenditures totaled $71.5 million compared to $54.1 million for 2012. 2012 spending was lower due to the cancellation of certain project work that had been planned on a line that was idle late in the fourth quarter of 2012.

During the quarter, we spent approximately $77 million on return capital projects.

Looking forward to 2014. We estimate maintenance capital spending to increase to $80 million to $100 million as a result of spending required on the newly acquired terminals from Hess. Spending in our legacy assets is expected to be in line with 2013 spending.

We also currently expect to spend $280 million to $310 million on growth capital projects in 2014.

Our distribution coverage ratio, based on distributions declared on units outstanding at the end of the quarter, was 0.94x for the quarter and 0.99x for the year. However, adjusting the coverage ratio to match the distributions paid with the operating cash flows from the assets acquired for Hess yields an adjusted coverage ratio of 1x for the quarter and 1.03x for the year.

In closing, 2013 was an exceptional year for Buckeye. We were able to deliver on aggressive growth plans and we experienced strong growth in the many capital investment opportunities our employees were able to identify and complete.

Looking forward, we have a strong backlog of growth capital projects that we expect to drive continued growth. We look forward to completing some key milestones in the transformation of our Perth Amboy facility that should drive significant incremental cash flow, and to completing integration efforts at the terminals acquired from Hess that should allow us to fully realize the benefit from this accretive acquisition.

That concludes my remarks, and now we'll open the call for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Brian Zarahn from Barclays.

Brian J. Zarahn - Barclays Capital, Research Division

Clark, following up on your comment about potential acceleration distribution growth, can you talk a little bit about some of the potential catalysts that could lead to that development?

Clark C. Smith

Yes. It's these growth capital investments as they hit full run rate in 2014, Brian. We think later in '14, we're going to be in a position, and obviously, this is a board decision. But looking back and looking forward, that our distribution coverage ratio will be strong enough that we'll feel comfortable increasing that distribution coverage. And I think we've told you in the past, that is one of our key goals, is to make that happen.

Brian J. Zarahn - Barclays Capital, Research Division

And I guess, how much of that -- those growth projects relate to the Hess terminal acquisition?

Clark C. Smith

There's not many related to Hess. Remember, the Hess acquisition was a little different than the BORCO and Perth in that the growth capital is only, what, Keith, about...

Keith E. St. Clair

$25 million to $30 million of growth capital, Brian, that we'll expend over the next kind of 12 to 18 months.

Clark C. Smith

But it is related to the Hess acquisition that we get the full -- obviously, the full run rate on in 2014.

Brian J. Zarahn - Barclays Capital, Research Division

Okay. And just turning to pipeline volumes, given the cold weather, how do you expect distillate pipeline volumes in the first quarter relative to the fourth quarter of 2013?

Robert A. Malecky

This is Bob Malecky, Brian. The volumes are somewhat affected by the snowfall in January. There are some temporary interruptions on gasoline demand, but distillates, distillates remain strong as a function of the cold weather as well. We expect probably some slight moderation, but nothing of significance note.

Brian J. Zarahn - Barclays Capital, Research Division

Okay. And then turning to the gas storage sale, I know you've, in the past, you tried to divest and even thought about converting it to other uses. And maybe can you give a little color as to your expectations that you will be able to divest that in 2014?

Clark C. Smith

Yes. Our plan is to sell it in 2014. As we've indicated in past calls, Brian, it's a non-core asset, it has been for some time. We have looked at it from the standpoint of developing it to a compressed air storage project, and we've advanced some discussions with some parties. So we expect some of the interested parties in Bai [ph] and Lodi will target that as an opportunity, at least part of the facility. So I think that adds value to the facility. And, yes, we do expect to get rid -- to sell it in 2014.

Brian J. Zarahn - Barclays Capital, Research Division

And last one for me, just to clarify for maintenance CapEx for 2014. Is that $80 million to $100 million, is that your total?

Keith E. St. Clair

Yes. That's correct, Brian. That's correct. I mean, again, what that does, when we talked about acquiring the Hess assets, we had indicated that we'd spend $16 million to $17 million a year expected on maintenance CapEx. So you take kind of where we were in 2013, our legacy assets, add that, that gets you within that $80 million to $100 million range.


And our next question comes from Stephen Maresca from Morgan Stanley.

Stephen J. Maresca - Morgan Stanley, Research Division

A couple of quick ones. On Hess, you mentioned, Clark, in team meetings, the new people have discussed kind of some new ideas. I guess, one, can you share some of these -- what some of these new ideas are around Hess? And then, two, just overall discussion, where you are progressing on improving utilization of the asset.

Clark C. Smith

Well, obviously, some of the information will be confidential from a competitive standpoint. Bob, do you have anything you want to share on that?

Robert A. Malecky

Well, I think, as far as the utilization improvement, I think we're well along on the integration aspects of it, kind of converting it over from some of the legacy Hess operations into Buckeye's operations, increasing the utilization. We continue to have strong interest from our customers and certainly expect, in the first 6 months of the year, to implement all the plans that we expect. And things continue to move along the lines of what we expected under the pro forma acquisition model.

Stephen J. Maresca - Morgan Stanley, Research Division

Okay. And Hess is expected to remain a long-term customer beyond its current contract?

Robert A. Malecky


Stephen J. Maresca - Morgan Stanley, Research Division

Okay. Great. Just moving briefly into rail, you're expanding your capabilities there. And then, Clark, just your thoughts on the current environment on rails, respective economics of it now and the potential for increased regulatory scrutiny and how you think this impacts these assets or investments going forward.

Clark C. Smith

I do think, obviously, there'll be more regulation around rail. I don't think it's going to prevent rail from playing a big role in moving crude oil. I think it's got a good position in terms of providing logistics solutions, and we're happy with our participation in that. Will there be safer measures taken around moving this rail and identifying the product that's in the railcars, I think that's certainly coming. In terms of the economics, the economics are going to be a little volatile. We talked about that the last year. Those spreads have come in, they widen back out. We think the trend is that it's going to be wide enough to -- and the supply demand fundamentals are going to be strong enough that rail's going to be a very viable option, certainly, in our facilities. So we expect to see growth in that business.

Stephen J. Maresca - Morgan Stanley, Research Division

Okay. And then final one for me. Keith, I think you mentioned, ballpark, it was, what, $300 million of growth CapEx for 2014?

Keith E. St. Clair

That's right. $300 million to $310 million.

Stephen J. Maresca - Morgan Stanley, Research Division

Okay. Can you just discuss or remind us what some of the bigger project makeup is in that?

Keith E. St. Clair

Yes. A couple of the large ones as we continue to transform Perth, we've still got more spending related to the direct pipeline connection between Perth and Linden. We've also got some significant spending related to the bringing on the rail capabilities there, and we continue to complete refurbishment of tanks. There's also the Chicago complex where we're adding incremental storage capacity for a Midwest refiner. And there are a number of additional butane blending projects that while individually aren't large, when you aggregate them, they become more meaningful and will ultimately drive incremental cash flows in Q4.

Stephen J. Maresca - Morgan Stanley, Research Division

And just one follow-up. If you had -- if you just give a ballpark of what sort of returns overall we're looking at on that $300 million.

Keith E. St. Clair

Yes, well -- again, Stephen, what we always talked about is internal growth capital, typically a range of 4x to 6x. There may, on occasion, be some projects that are actually inside the lower end of that range when you're talking about re-purposing particular assets. But generally, it's in the 4x to 6x.


And our next question comes from Steve Sherowski from Goldman Sachs.

Steven C. Sherowski - Goldman Sachs Group Inc., Research Division

Just on the last point. On your $300 million of project spending this year, is any of that associated with projects that won't come online or into service until next year?

Keith E. St. Clair

Most of that spend will support projects that will come online, although some of it may come online late in the year. But for the most part, Steve, we'll be looking at some contribution in 2014. But certainly, we won't get the run rate benefit of the $300 million in 2015.

Steven C. Sherowski - Goldman Sachs Group Inc., Research Division

No. Okay, understood. And, I guess, just looking at your project backlog beyond 2014, where do you see the most opportunities and just in terms of geography and asset type?

Keith E. St. Clair

I think what we'll do is we'll continue to look at our Chicago complex as an example. We believe that's really a key location. It's sort of a nexus point for a number of different types of product movement. So we think we'll be able to continue to invest and grow there. Certainly, in the Global Marine business, we'll look at opportunities to increase capabilities. And I think, frankly, as we look at the Hess assets that we've acquired and the fact that we're -- we have marine access, there may be some things that we can do there that will make sense to make some capital investment to increase the optionality associated with those facilities.

Steven C. Sherowski - Goldman Sachs Group Inc., Research Division

Okay, I understood. And I know this may be premature since you just closed your Hess transaction, but just on the M&A front, it seems like there's a lot of assets for sale right now which could complement or fit well into your footprint. Just any general comments you could make on the M&A market?

Clark C. Smith

No, but you're right. We are looking and are going to participate in some of these acquisition opportunities. And that's something that's part of our game plan.

Keith E. St. Clair

Yes, one of the things I should say as well, Steve, to kind of add to my comments earlier, I mean, we continue to look at more and more opportunities where we can get exposure to crude logistics, and that's becoming a continually more important piece of our business. As you can see, from 2012 to 2013, we're realizing benefits from the Albany facility, we'll begin to realize benefits from the Chicago complex. So that's certainly an area of focus for us as well.

Steven C. Sherowski - Goldman Sachs Group Inc., Research Division

On the M&A side or organic growth speaking?

Keith E. St. Clair

Really, organic growth, but certainly, from an M&A perspective, that'd be something we'd entertain. But we're, obviously, talking about specifically as it relates to the $300 million.


Our next question comes from Shneur Gershuni from UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

A lot of my questions have been asked and answered, but I just wanted to try and expand on a couple of things that you guys have said. Starting with the discontinued ops, you sort of expressed a degree of confidence that will be taken care of this year. I was wondering if you can sort of provide us with a little color, what gives you some of that confidence, maybe I misread that. Is it the spike in natural gas volatility recently? I was just wondering if you can give us a little bit of color with respect to that.

Clark C. Smith

Yes, I would say it's a combination of things, Shneur. It's, one, is the fact that people know this facility very well, and they've been knocking on our door quite a bit anyway. And this is really the first time we formalized the process, so we know there's going to be a lot of participation. Second, I think the Natural Gas Storage, the value of Natural Gas Storage increased given what's going on in the last few months in the natural gas business. I think the fundamentals around Natural Gas Storage, from a trend standpoint, are starting to improve. So all those factors, I think, are going to bring in buyers, and I think this facility -- this facility has a great operating record. It's been in operation 12 years and has never had a lost time incident. It's really, a first-class operating business. So I think we'll have lots of interest. I think we'll get something done this year.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Great. Just a couple of follow-ups. When you closed the -- or so when you first announced the Hess acquisition, you talked about the facility being not fully -- not running at an ideal run rate and so forth. I realized you've closed and you've operated it just for a couple of weeks at this point right now. When do you kind of expect that we'll be able to see some of the economic impact of the increased utilization, the increased blending activity? Is it something we'd see in the third and fourth quarter of this year? Is it something we should be thinking about for next year? Just wondering if you can sort of give us a little bit of path on how to think about that.

Keith E. St. Clair

Yes, I think we'll start to see those benefits in the last half of the year. But also, it's important to remember is when we modeled this acquisition, we modeled utilization rates that really neared largely what Hess was experiencing, both from a storage perspective, as well as from throughput-ing. So to the extent that we're able to drive higher utilization rates, we should see that with -- we should see that translate into an uplift in EBITDA, Shneur.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. And then just switching to the Caribbean terminals, when you piece or stitch all that together and so forth, is there a material uplift in, I guess, in higher-margin business that you're able to capture as a result of being able to stitch the assets together? Is it kind of like a 1 plus 1 equals greater than 2 scenario? I was wondering if you can sort of expand on that if that's the case.

Khalid A. Muslih

Yes, this is Khalid Muslih. No, we certainly believe that. I mean, that's part of the reason why we formed this platform, and it really does give us the opportunity to not only kind of bifurcate the market with the different customers to suit their needs at the various locations that we have, but I mean, I think just with regards to the Caribbean and, I guess, just focusing on St. Lucia in particular, the facility is very well contracted out. But just with the limited time that we've owned the asset, we've been able to identify a significant number of opportunities. And we're down the path of capitalizing on then. So yes, I mean, I think we should be able to extract synergies moving forward.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Great. And one last question. You mentioned accelerated distribution increases is a potential if everything shows up. Is there kind of a targeted coverage ratio that we should be thinking about to go along with that?

Keith E. St. Clair

Well, Shneur, one of the things that we've communicated, I think, consistently, we'd like to see our coverage between 105 and 110. And again, that's really -- a lot of it is also less about what the trailing coverage is and more about what our expected coverage is. So we feel good about 2014. We feel good about the projects that will deliver incremental cash flows. We're very optimistic about Hess and its contribution. So frankly, our expectation is that we should be in a position to sit down and revisit that at some point during this year because I think we'll naturally see coverage improve in 2014. And don't -- and the point I made earlier about the impact of the equity issuances for Hess and kind of the mismatch and the timing, so if you think about where we really ended the year, if you kind of normalize that for matching up equity and timing of closing, I mean, we're over 1x. We're 1.03x for 2013. And that's really more reflective of kind of what you would expect the run rate to be.


And our next question comes from Jeremy Tonet from JPMorgan.

Jeremy B. Tonet - JP Morgan Chase & Co, Research Division

Just a follow-up on some of the questions that you answered before with regards to the organic growth opportunity set. The $280 million to $310 million of spending this year, does that represent kind of a peak in organic growth opportunities? Or do you see that level of spending carrying on in 2015 and beyond?

Keith E. St. Clair

Well, if you go back, Jeremy, you look at 2012 and 2013, in the aggregate there, it's about $600 million of growth capital. So we're not in a position to sit here and project where we think '15 spend is going to be or '16 spend. But if you just look back over the last 2 years and then what we're communicating now, there's clearly a trend.

Jeremy B. Tonet - JP Morgan Chase & Co, Research Division

Okay, great. And then I was just wondering if you could comment on the Mariner East project and how that has been -- if there's been impact on your systems from some of that re-purposing.

Robert A. Malecky

And yes, Jeremy, this is Bob Malecky. It's been a very positive impact for us. Obviously, it's a line that ran in a similar corridor to our pipeline system in Pennsylvania, and we had all the connections and capabilities to continue to service that market. So a number of those barrels did fold into an existing infrastructure across our system. And we've been able to meet their needs with no modifications to our system at all.

Jeremy B. Tonet - JP Morgan Chase & Co, Research Division

Would it be possible at all to quantify the impact, if it's minor or maybe something a little bit more?

Robert A. Malecky

I'd probably characterize it modest.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. And then just one last one for me as far as the Natural Gas Storage assets. After this impairment, is the carrying value, is that around $200 million? Or where does that sit now?

Keith E. St. Clair

No, it'll be closer to $150 million, between $140 million to $150 million.


That is all the time we have for questions. I would like to turn the conference back to Clark Smith.

Clark C. Smith

All right. Thank you, Amanda. We are pleased with Buckeye's strong performance for 2013, and we believe we are very well positioned for continued growth going forward. Thank you for joining us this morning and have a good day.


Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.

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