Buckeye Partners, L.P.'s (BPL) CEO Clark Smith on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Buckeye Partners (BPL)

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

Q2 2014 Earnings Call

August 08, 2014 11:00 am ET

Executives

Kevin J. Goodwin - Vice President of Buckeye GP LLC and Treasurer of Buckeye GP LLC

Clark C. Smith - Chief Executive Officer of Buckeye GP LLC, President of Buckeye GP LLC and Director 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

Analysts

Derek Walker - BofA Merrill Lynch, Research Division

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

Faisel Khan - Citigroup Inc, Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Buckeye Partners, L.P. Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Kevin Goodwin, Vice President and Treasurer. Please go ahead.

Kevin J. Goodwin

Thank you, Charlotte. Good morning, everyone. Welcome to the Buckeye Partners second quarter 2014 conference call. The agenda for our call this morning is as follows: Clark Smith, our Chairman and Chief Executive Officer, will first discuss some important highlights for Buckeye this quarter; then Keith St. Clair, our Executive Vice President and Chief Financial Officer, will review our financial results in further detail. Also on the call today are Bob Malecky, President of Pipelines and Terminals; Khalid Muslih, President of Global Marine Terminals; Bill Hollis, President of Buckeye Services; Todd Russo, Senior Vice President and General Counsel; Joe Sauger, Senior Vice President, Engineering and Compliance Services; and Pat Pelton, Vice President and Controller.

Following our prepared remarks, we will open the call to questions. But first, I'd like to remind everyone that we may make statements on this 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, 2013, and our most recent Form 10-Q, each filed with the SEC. We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today's date.

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

With that, I'd like to turn the call over to our Chairman and CEO, Clark Smith.

Clark C. Smith

Thank you, Kevin, and good morning, everyone. Let me start by confirming how disappointed we are with the overall results we reported this morning. The solid quarter-over-quarter performance in 3 of our 4 segments was unfortunately overshadowed by the poor results we posted in Merchant Services. I'll go into more details about our performance in a moment.

First, I would like to reemphasize the importance of our commitment to provide our customers with safe, reliable operations and logistical solutions. To ensure we achieve consistent performance, one of Buckeye's core initiatives is the sharing of safety and operational best practices across all of our asset teams. We believe this sharing of best practices has been instrumental in our continuous efforts to reach our goal of 0 incidents.

Next, I'd like to address the positive announcement we made last week regarding the sale of Lodi. Following our decision in December to divest our Natural Gas Storage business, which we announced following our fourth quarter, we initiated an auction process to facilitate this sale. This process culminated with the successful signing of an agreement for the sale of this business for $105 million. The transaction is expected to close in the fourth quarter of 2014 or the first quarter of 2015. Close is subject to the approval of the California Public Utilities Commission and customary closing conditions. The proceeds from the sale will be used to pay down our revolver, and is expected to be accretive to cash flow, as this business has been generating losses over the past year.

Turning to the second quarter. I want to begin by highlighting the confidence that we and our Board have with Buckeye's future performance and projected growth. As demonstrated by the increase in our quarterly distribution that we announced this morning. Buckeye has increased its quarterly distribution to $1.1125, an almost 5% increase year-over-year. We believe the Merchant energy issues are confined to the second quarter, and our goal remains to accelerate the rate of Buckeye's distribution growth at the appropriate time.

Looking at our second quarter financial performance, Buckeye's adjusted EBITDA was $150.8 million. The decline from the prior-year quarter was a result of a poor performance of our Merchant Services segment. Buckeye's 3 other segments combined to post an increase of almost $28 million over the year-ago quarter.

The contribution from the assets acquired from Hess drove a substantial portion of the year-over-year growth for the second quarter, for both our Pipelines & Terminals and Global Marine Terminals segments. Our integration of the Hess assets is complete, and the contribution from these assets continues to exceed our acquisition economic assumptions. We're also executing on incremental capital investment opportunities that we did not foresee at the time of our Hess acquisition, that we now expect to provide additional contributions.

I will discuss some additional second quarter highlights for each of our segments in a moment. But first, I'd like to address the performance of our Merchant Services segment, which had a particularly disappointing quarter. We generated negative adjusted EBITDA in Merchant Services of $26.2 million for the quarter. The losses experienced were driven by overall weakness in business conditions in the markets we serve, and unfavorable results from the implementation of strategies intended to grow our business, optimize the utilization of Buckeye's assets and mitigate risk.

The business conditions we experienced during the second quarter included basis weakness, declining ethanol prices, and continued backwardation in our fuel markets. We saw a decline in gasoline basis in excess of $0.11 per gallon during the quarter. In addition, ethanol prices fell nearly $2 per gallon during the quarter from the winter peak in the first quarter. Market backwardation also contributed to our losses during the quarter, particularly fuel oil, where we experienced backwardation of $5 per barrel.

We also had a number of initiatives in place during the second quarter that were implemented with the intention of supporting the growth of our business by expanding into new markets and mitigating risk in the overall portfolio. As part of our growth strategy, Merchant Services contracted for a clean product storage position at BORCO that became available in the first quarter. The Initiative was put in place to leverage our handling and blending capabilities at BORCO, to provide gasoline supply to the Southeast and New York Harbor, with the intent to ultimately increase our overall margin and asset utilization at BORCO.

We blended the first 2 cargoes profitably, and then increased our inventory position to support anticipated volume increases. Consistent with our overall strategy, Merchant Services stepped into this position to demonstrate the commercial value of BORCO's handling and blending capabilities, and we intended to exit the storage position upon execution of new agreements with third-party customers.

BORCO's negotiations with third-parties moved at a faster pace than anticipated, and Merchant Services exited the facility to turn the capacity over to a new third-party customer. Given this time constraint, in the weakening basis, we liquidated our inventory positions at the facility and incurred losses. While disappointing from a Merchant Services perspective, this strategy did lead to BORCO entering into a new long-term contract with a third party for the storage capacity previously occupied by Merchant Services. In addition, other strategies were in place during the quarter that were intended to mitigate risks, reduce basis exposure and ensure supply of product, particularly gasoline.

Second quarter, market movements went against us, and these strategies, with losses of approximately $0.05 per gallon were incurred to close out these positions. Needless to say, execution on these strategies was below our expectations and we underestimated the bandwidth of the risk around these strategies. I will say with certainty that these strategies were terminated during the quarter, the resulting losses were captured in the second quarter and we have taken immediate steps to put this business back on the more conservative track we have historically followed.

Another key part of our turnaround this segment is our hiring of Bill Hollis, a 30-year veteran with BP, as our new President of Buckeye Services, effective in early July. Bill is a talented leader and has significant experience in petroleum products, with a strong focus on asset optimization, marketing, supply, logistics and business development. Under Bill's leadership, we are rationalizing the size and scope for the Merchant Services business model. We will focus on optimizing utilization at commercial locations on the Buckeye system, where the commodity risk can be efficiently and effectively limited.

I think it's also important to note that our Merchant Services segment has been and continues to be a strategic catalyst for value creation across Buckeye. Our legacy Merchant Services business has recorded positive adjusted EBITDA in 20 of the 26 quarters of operation, generating cumulative adjusted EBITDA over this time period of over $30 million. This is in addition to the over $175 million of revenue earned by Buckeye's Pipelines & Terminals for Merchant Services as a customer. And not all that asset revenue's incremental, but Merchant Services is a key part of our strategy to maximize the total value of the Buckeye enterprise.

Let me finish on this issue by saying, again, that I believe our core financial performance in Merchant Services is nonrecurring and limited to the second quarter. I'm also pleased to report that for the month of July, we generated positive adjusted EBITDA in Merchant Services and we expect to have a good third quarter in this segment.

I would like to now address some important milestones achieved during the second quarter related to our capital investment program. In the New York Harbor, we completed the pipeline connection from Perth Amboy to our Linden hub. We also added additional connectivity in the harbor that allows us to connect our Perth Amboy and Port Reading terminals to each other, as well as to our Linden hub. We believe this premier connectivity in the New York Harbor provides access for waterborne supply through Linden, to our Eastern product system that delivers to markets in Western Pennsylvania and upstate New York, and to our Long Island system that delivers to the New York City market. A significant storage contract at Perth Amboy with a New York Harbor blender was also initiated, concurrent with the start-up of this pipeline. Volumes began ramping up late in the quarter and we expect an additional contribution in the third quarter from this new pipeline.

We also successfully completed contracting a substantial portion of the recently acquired Port Reading facility on a long-term basis. In addition, we are in advanced discussions with a customer to contract the remaining capacity on a long-term basis as well.

Our crude oil rail project at Perth Amboy is expected to accommodate first shipments in the third quarter, providing the ability to handle a full unit train, store the product on-site, and transport via barge or ship to refiners across the eastern seaboard. In addition, we continue to advance discussions to position the facility to handle heavier crude oil slates and facilitate export of Canadian-sourced crude oil. We believe rail shipment of crude oil will remain an important part of the U.S. logistics chain, and have recently initiated the permitting process for another East Coast crude oil rail facility in one of our Marine terminals.

At our Chicago Complex, we placed in service 2 of the 3 crude oil storage tanks during the quarter that, when all 3 tanks were in service, will provide 1.1 million barrels of storage for a major Midwestern refiner under a long-term contract. The construction of these tanks was under budget, and we completed them on an aggressive project schedule. In fact, Buckeye qualified for an early completion bonus by meeting the aggressive schedule, which is indicative of the capabilities of our engineering and construction team. This team has an extremely successful in managing Buckeye's $1.1 billion of growth capital spending over the past 4 years, completing substantially all of our projects in line with aggressive timelines and cost budgets.

Looking forward, we have potential projects that include pipeline extensions and expansions for transportation into our storage of crude oil, refined products and NGLs in and around our system footprint, particularly in the Midwest. We are in the early stages of negotiations with potential customers and partners, and we look forward to being able to provide an update on these projects in the future. As you are aware, we have historically generated strong returns on our organic growth capital investments, and we expect this trend to continue.

Our pipeline revenues improved for the Pipelines & Terminal segment is an approximate 5% increase in average tariffs over the year-ago quarter, were partially offset by slightly lower volumes reflecting a less than 1% decline. Our Terminal business continues to be a great success story. Our throughput volume increased over 15%, as the terminals acquired from Hess contributed to our growth. Importantly, throughput growth of 3% at our legacy terminals was driven by our commercial teams successfully growing market share in the areas we serve.

Our Global Marine Terminals segment celebrated an important commercial win recently, with the announcement that Buckeye was selected by the Department of Energy to provide gasoline storage in the New York Harbor. The DOE is establishing a strategic gasoline reserve for New York City and their surrounding markets. Buckeye was selected as the winning bidder to provide storage in the New York Harbor, as well as at our Portland, Maine facility. The New York Harbor storage will be provided at our Raritan Bay facility, which creates an incremental boost to the utilization of this terminal.

I believe the significant factor in Buckeye winning this long term strategic reserve contract was our logistics capabilities demonstrated by our successful response to Hurricane Sandy in the New York market back in the fourth quarter of 2012. We were able to quickly and safely bring our operations back online after that storm passed, which I believe gave the DOE the confidence that Buckeye would be best able to supply the Northeast markets in an emergency.

Turning to our Development & Logistics segment. we had a very strong second quarter. BDL is also exploring opportunities to participate in the NGL logistics space and focus on capitalizing on Buckeye's footprint in many of the new shale plays to provide logistics solutions. Potential repurposing projects have already been identified, which we will continue to assess in the coming months. In addition, BDL's pipeline of potential project management contracts is growing, as BDL continues to see good opportunities to provide new services to our customers.

Regarding our ongoing FERC matter filed by 4 airlines challenging Buckeye Pipe Line Company's rates for transporting jet fuel to the 3 New York City airports, as I previously indicated, litigation has recommenced, although the existing settlement process has remained in place. Also Buckeye Pipe Line Company's October 2012 FERC application seeking authority to charge market-based rates for deliveries of refined petroleum products to the New York City market area has also moved forward to litigation.

In closing, we recognize this was a difficult quarter for Merchant Services and Buckeye partners. We believe the poor performance is isolated to the second quarter, and that we made a number of changes, including installing new leadership intended to prevent the reoccurrence of the issues we experienced this quarter. In addition, the remainder of our business segments performed well, despite a quarter that is seasonally the weakest of the year. We expect much stronger results for the second half of the year, as Buckeye's capital investments continue to drive improved earnings contributions.

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

Keith E. St. Clair

Thank you, Clark, and good morning, everyone. I'll now provide additional detail on our second quarter financial results. Our adjusted EBITDA for the quarter was $150.8 million compared to $153.8 million last year. The poor performance of ours Merchant Services segment drove this year-over-year reduction in adjusted EBITDA. The contribution from the remaining segments actually increased $27.9 million, or almost 19%, compared to the second quarter of 2013. The contribution from the newly acquired Hess terminals and from recent capital projects were the primary drivers for this year-over-year increase.

I'll provide additional color regarding the segment results in a moment, but first, I would like to review our consolidated results. Overall, we reported income from continuing operations of $61.9 million for the second quarter of 2014 compared to $85.7 million last year. This decrease was largely related to the loss from our Merchant Services business.

Interest expense increased by $11.8 million related to the long-term debt issuances in 2013, including the debt we issued in the fourth quarter of 2013 to partially fund the Hess transaction. Depreciation and amortization expense increased $5.8 million, also as a result of the assets acquired from Hess. Income from continuing operations attributable to Buckeye's unitholders was $0.53 per diluted unit for the second quarter of 2014, compared to $0.80 per diluted unit for the second quarter of 2013.

The diluted weighted average units outstanding for the second quarter of 2014 was 116.7 million units compared to 106.2 million units in the second quarter of '13. This increase was primarily the result of our 8.6 million unit offering in October of 2013, in conjunction with the announcement of the Hess transaction, and approximately 1.5 million units issued under our ATM equity program in 2013 and 2014.

Consolidated revenues for the quarter totaled $1.8 billion compared with $1 billion in the year-ago quarter. The increase in revenues is directly attributable to an increase in sales volume in our Merchant Services segment, as some of the strategies Clark mentioned drove increased volumes.

Operating expenses for the quarter increased to $133 million from $99.4 million 1 year ago. This increase in operating expenses was primarily the result of incremental operating costs related to the acquisition of the 20 terminals from Hess, as well as an increase in maintenance and integrity expense in the second quarter of 2014 across our pipeline assets.

General and administrative expenses increased $3 million to $20.3 million for the second quarter of 2014 compared to $17.3 million last year. This increase was a result of higher legal expenses in 2014, primarily related to our ongoing FERC litigation matters, and higher compensation expense as a result of headcount additions required to support our growth.

Next, I would like to review in more detail the contribution of each segment to adjusted EBITDA, our primary measure of financial performance. Adjusted EBITDA for our Pipeline & Terminal segment was $115.7 million for the second quarter of 2014, compared to $107.6 million last year. The 17 terminals acquired from Hess that are reported in this segment were the largest contributor to this increase.

Other contributors to this segment's performance in the first quarter where tariff increases put in place in mid-2013 and in March of 2014, and the contribution from completed capital projects included in the crude oil rail offloading facility in our Chicago Complex. Partially offsetting these benefits were increased maintenance and integrity spending, primarily on our pipeline assets.

Aggregate pipeline volumes across our system were down 10,000 barrels per day, or less than 1% for the current quarter compared to the year-ago quarter, but were up 2.5% sequentially from the first quarter of 2014.

Gasoline volumes were down just under 5%, as arbitrage opportunities in the year-ago period drove elevated levels of supply from the New York Harbor in the Western Pennsylvania, as Midwest-supplied barrels were displaced.

In the current quarter, certain refinery maintenance downtime and other issues in the Midwest reduced supply across our system. Distillate volumes increased 2% on incremental movement in the Pittsburgh market, while jet fuel volumes increased 1% based on a strong travel season at some East Coast airports that we supply.

Average pipeline tariffs increase over the year-ago quarter by approximately 5%, due to the March 2014 tariff increases, which averaged 6.5% on our market base pipes, and the July 2013, 4.6% tariff increase on our index pipe. Importantly, we posted a 3.9% increase effective July 1, 2014, of our index pipes that will benefit us going forward.

Domestic terminal volumes increased 15% to 1.14 million barrels per day in the second quarter of 2014, up from just under 1 million barrels per day in the second quarter of 2013. This increase was related to the throughput volumes at terminals acquired from Hess, combined with an increase in throughput volumes of approximately 3% on our legacy terminals. The increase in our legacy assets was driven by incremental crude volumes through our Chicago Complex, as that project was initiated in the fourth quarter of 2013, as well as stronger demand in our Southeastern markets.

Operating expenses increased during the quarter as a result of incremental cost to the acquired terminals. Also, on our legacy pipeline and terminals, we saw elevated spending this quarter, driven by a proactive pipeline inspection program that we expect to continue for the next several quarters until the necessary work is complete. We then expect integrity and related spending to return to near our historical levels.

Now turning to our Global Marine Terminals segment. We recorded adjusted EBITDA of $55.6 million in the second quarter of 2014 compared to $37.8 million in the comparable quarter last year. As you would expect, this improvement is largely the result of the contribution from the St. Lucia, Port Reading and Raritan Bay terminals acquired from Hess. In addition, throughput at Perth Amboy was stronger as a result of activity of the truck rack, which began operations in the fourth quarter of 2013, and the initiation of service on the Perth Amboy to Linden pipeline which also drove additional storage revenues.

Incremental revenue from our crude oil storage expansion at BORCO and increased rates on renewals largely offset overall capacity -- lower overall capacity utilization.

Operating expenses for the segment increased in the second quarter of 2014, primarily due to expenses associated with the terminals acquired from Hess. As Clark described earlier, overall weakness in business conditions and unfavorable results from the implementation strategies intended to grow our business, increase utilization of our logistic's assets and mitigate risk, drove the $26.2 million of negative adjusted EBITDA for the second quarter of 2014 in our Merchant Services segment. It's important to note that nearly $5 million of the loss recognized during the quarter was unrealized as of June 30. Additionally, during the quarter, nearly $9 million was paid to Buckeye's Pipeline & Terminals businesses for storage and throughputting services.

This second quarter loss can be broken down into 3 primary components. Our legacy activities, the BORCO blending position, and our risk mitigation strategies that Clark mentioned earlier. First, looking at our legacy activities, because of overall business conditions, weak basis, and falling ethanol prices, our legacy business generated losses of roughly $6 million including related general and administrative costs. The remainder of the loss was essentially equally split between the BORCO blending position and the other risk mitigation strategies in place during the quarter.

To help frame this, to exit our position and to make storage capacity available for third-parties at BORCO, we incurred losses on the liquidation of inventory of approximately $0.11 per gallon. We also closed out our risk mitigation strategies, which generated losses of approximately $0.05 per gallon in the quarter. We are working very closely with Bill Hollis, the new leader for this segment to ensure continued performance improvement.

We are refocusing on the core Merchant Services functions that provide value to the enterprise. This business provides market insight and transparency to our logistics business it focuses on providing incremental product flow through Buckeye's core assets and lastly, this business can capture optionality and open asset capacity through limited and well understood strategies with the appropriate amount of risk.

Looking forward, we continue to rationalize the business and have already reduced inventory levels by approximately 30% compared to the peak in the second quarter. The impact of these efforts is demonstrated by the positive contribution generated from the month of July.

Wrapping up our segment review, our Development Logistics segment generated $5.7 million of adjusted EBITDA compared to $3.7 million last year. This segment continued to benefit from a strong backlog of projects, contributing to higher utilization rates for its personnel.

Next, I'll move to our discontinued operations. Our Natural Gas Storage business incurred a loss of $38 million during the quarter. This includes an impairment charge of -- a noncash impairment charge of $26 million. Most importantly, we have entered into an agreement to sell this business for $105 million and expect to close the transaction in the fourth quarter of this year or first quarter of 2015. This transaction will be accretive to earnings, and we expect to use the proceeds to pay down our revolver.

In addition, our leverage metric, as calculated by the rating agencies, will further benefit from the elimination of certain long-term leases, which the rating agencies generally reflect as debt in their calculation of Buckeye's leverage.

Looking at our liquidity, we entered the quarter with $22 million in cash and long-term debt of $3.3 billion, including long-term borrowings under our credit facility of $245 million. We also had $400 million borrowed under our credit facility that was reflected as short-term debt, as it supports the working capital requirements of our Merchant Services segment. As a result of our rationalizing this segment, borrowings are now down approximately $125 million from the end of the quarter.

At quarter end, our leverage ratio of long-term debt to adjusted EBITDA, as calculated in accordance with our credit facility, was approximately 4.65x. The increase in our leverage is the result of the poor performance of our Merchant Services segment, as well as capital spending for projects for which we've not yet benefited from the result in cash flows.

In addition, it's important to note that although the results of our Natural Gas Storage business are excluded from our calculation of adjusted EBITDA, as it's a discontinued operation, these results are included in our leverage calculation until the announced sale is closed. We expect improved performance in the second half of the year and on funding of the Lodi sale to substantially reduce our leverage.

Maintenance capital for the quarter was $17.1 million or an increase of $4.1 million compared to last year. This increase in maintenance capital during the quarter is primarily timing related, as we experienced delays in starting projects in the first half of 2013. During the quarter, we also spent $74 million on returning capital projects.

Looking forward, we expect to spend $75 million to $95 million on maintenance capital in 2014, with the increase due to the spending required on terminals acquired from Hess. Spending on our legacy assets is expected to be largely in line with 2013 spending. We also expect to spend $260 million to $290 million on growth capital projects on a consolidated basis in 2014.

Our distribution coverage ratio, based on distributions declared on units outstanding at the end of the quarter was 0.73x. The loss generated by our Merchant Services segment in this quarter negatively impacted coverage by 0.2x. We expect to see improvements in coverage in the second half of the year, although the second quarter loss from Merchant Services segment may cause coverage for the full year to fall slightly below 1x.

In closing, we recognize the negative impact this past quarter's results from our Merchant Services business has had on our coverage and leverage metrics, but we believe we have limited these negative results to the second quarter and we have positive EBITDA in the month of July in this segment. In addition, our Pipeline & Terminals and Global Marine Terminals businesses, as well as Buckeye's Development & Logistics business performed well for the quarter. Looking forward, the Hess transaction and other capital investments are expected to drive period-over-period growth for the remainder of 2014.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will be coming from the line of Gabe Moreen from Bank of America.

Derek Walker - BofA Merrill Lynch, Research Division

This is Derek Walker on for Gabe. I just had a couple of quick ones for me. In no particular order here, but I believe previously, you expressed interest in TransMontaigne Partners, TLP. Can you just give us a sense on how those discussions went? And obviously, NGL came in with a proposal on the merger. But just any color there? Can you give a sense of those discussions?

Clark C. Smith

Yes. We did have an interest in it, and we pursued it. We were approaching it, I guess, with a little different business in mind. We were only going to buy the assets and not the marketing. So, obviously, TransMontaigne or Morgan Stanley decided to sell it in total with the marketing included. And that's when we didn't make the -- we didn't make it work.

Derek Walker - BofA Merrill Lynch, Research Division

Got it. And then on the legacy Hess assets, and congrats on getting that integration complete. But with regards to your commercialization efforts. Now where do we stand today as far as utilization of those assets? And obviously, you got -- made some improvement there on -- made some progress on the commercialization. But how is that strategy going forward? And how should we think about that over the course of this year?

Robert A. Malecky

Gabe (sic) [ Derek ], this is Bob Malecky. I think the way we'd characterize it at this point is we're slightly ahead of our commercial integration plans. From what we set out in the pro forma, we put the integration pieces in, which, really, is a great stepping stone to allow us to commercialize this for the third parties. So I think from where we stand, we're slightly ahead of plan and we're seeing opportunities with it. Supplying the Southeast continues to be somewhat challenged, but with our network, we are still integrating in, in the overall system.

Derek Walker - BofA Merrill Lynch, Research Division

Okay, got it. Just a quick one on the FERC discussions, with the Buckeye Pipe Line Company. I believe you said litigation process is ongoing. Anything that we should be aware of as far as changes there? And do you have a sense around timing on when that would conclude?

Clark C. Smith

No, no changes there. We're working through it right now. And as I mentioned, we are still in the settlement mode, too. So hopefully, we'll reach a conclusion around the settlement. That was the intention all along. But we have no timelines to give you.

Derek Walker - BofA Merrill Lynch, Research Division

Okay, fair enough. And then, last one for me, is just on Merchant Services, I appreciate all the commentary around that. As you're going through and rationalizing that business, I guess, how should we think about that contribution going forward? It sounds like you mitigated to the second quarter, you got some profitability here in July. But I guess, how are you looking at that improvement? What types of markets are you looking at on your existing assets to improve utilization in your logistic assets there?

Clark C. Smith

Well, obviously, we were disappointed with the quarter, let me say that. If you look at it, it's pretty obvious we tried to grow that business a little greater than what we wanted to in terms of the amount of risk we thought we were taking. So we're pulling back. That pullback, we don't think is going to do anything material in terms of impacting utilization. There are third parties out there that they could step into some of this capacity for sure. And we mentioned that BORCO, we've already signed a long-term contract with a third-party. We've got a good track record in this business. And I think we're back on track with a more conservative game plan. Bill Hollis has got 30 years’ experience in optimizing assets around petroleum products. He's going to make a huge impact on our ability to get this thing right. It's obviously going to be much smaller. I know that's a concern of a number of parties is how big should this business be. Well, we had an issue like this about 3 years ago. We got into the Midwest, we found that volatility to be unacceptable, and we got out. And we got back on track and we're going to do the same thing here. So we are very confident that this business is still a key catalyst in our overall enterprise value, and I think we're going to see nothing but positive results going forward, in terms of the game plan that we've had in the past.

Operator

Our next question will be coming from the line of Jeremy Tonet from JPMorgan.

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

Turning to the Hess acquisition, I think you mentioned in your comments, there was some new projects coming into the fold that you had not expected. I was wondering if you might be able to elaborate a little bit more on those.

Robert A. Malecky

Again, Jeremy, this is Bob Malecky. In any of these acquisitions, there are certain opportunities, customer requesting improvements of the various constituent parts that we have at these facilities. I don't think I would like to go into too much detail with them, but they were at several locations, several locations. I mean, one of the -- the one that we probably talk about is part of the DOE contract that we won for the New York Harbor. We're actually going to commercialize a storage facility formerly known as First Reserve, now Raritan Bay, in which we're making improvements to the truck rack facility to throughput gasoline at the facility, which wasn't in our original model. It was initially set to be just a distillate storage facility. So commercializing that, changing some of the uses of the facilities, is part of what we're doing, and I think we're encouraged to see that we have a broad set of singles and doubles that are already arriving and we're implementing at this point.

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

Okay. So it sounds like it's kind of smaller projects around the edges, is that a fair way to think about it?

Robert A. Malecky

That's correct. And when we acquired the 20 terminals, it's those little singles and doubles, that really gets the base runners around the bags.

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

Got you, great. And I was wondering if you might be able to share with us how much the Hess acquisition contributed to the quarter? Is that possible to share that?

Robert A. Malecky

Yes. We really -- maybe the way that -- I guess the way to respond to that, Jeremy, as we have talked about, our expectation was to get to 8x with 2015 results. You kind of understand where we're at from a purchase price, we talked about some small amounts of capital. We certainly are still on track to achieve that. And so I think that can help you sort of do the math to kind of get to a range.

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

Got you. Okay. And then looking at Merchant Services, I was just wondering outside of the BORCO portion of what you're talking about, could you share which markets experienced loss? Was it the Midwest, or was it other markets?

Clark C. Smith

No, it's not the Midwest. It's the -- we had losses from weakening basis across the systems. We had -- but the biggest loss we had was at BORCO, trying to get into that blending business and ramping up those inventories. We had larger inventories and some other products, as we started to position ourselves for the upcoming winter. That certainly aggravated the basis situation, but all that's -- those inventory levels are being brought back down, to more historical levels. And as I said in my comments, Jeremy, we've terminated these strategies. These step outs that we did, we were trying to grow the business. That's what we do. We're supposed to grow the business and that was something I was pushing at this company, and we underestimated the risk around some of the locations that were further way from our base assets. So that's over with, and we're moving forward with a good game plan, and I'm really confident in our ability to get this business back on track. And we already are back on track in the third quarter.

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

Okay. And then just one last question. When was the hiccup of foreign Energy Service? As you referenced in the past, there was losses, the next couple of quarters, as those activities were fully exited. Should we expect kind of a ripple through in the next couple of quarters here? Or is this completely done and contained to this quarter?

Clark C. Smith

It's -- we do not expect losses. Now we still have basis risk in this business as you know, so we can -- and let me say this, for the second quarter, regardless if we had stepped out, we would've lost some money in the second quarter. We don't make money every quarter. We made money 20 out of 26, but we do carry basis risk for the reasons we've explained before, in terms of we can hedge the fixed price of the harbor if we limit the location risk. We don't -- yes, but the answer is we have terminated everything that really contributed to the losses other than the basis risk. And so we still live with the basis risk, but it's a much, much tighter wristband. It will be more in accustomed to what we have seen in the past. So we do not expect any kind of follow-up losses like you saw the last time.

Operator

Our next question comes from the line of Faisel Khan from Citigroup.

Faisel Khan - Citigroup Inc, Research Division

It's Faisel from Citigroup. Just a few questions on the Merchant Services. I just want to make sure I understand. So first of all, have you guys fully liquidated you positions, that sort of cost these losses are you still unwinding from those positions?

Clark C. Smith

Now we fully liquidated the positions at these major strategies that we talked about.

Faisel Khan - Citigroup Inc, Research Division

Okay, understood. And then was -- with the strategies that you talked about, was that also the reason why your revenue and COGS were running at sort of double this year what they were last year?

Clark C. Smith

Yes, we ramped up. We made sure we ramped up in the first quarter, as we started to grow the business, particularly growing it. We have never been in BORCO before, and that was a big position that we took around the blending. So yes, it started ramping up in the first quarter continued in the second quarter, and it certainly is coming down now. You'll see a different picture in the third quarter.

Faisel Khan - Citigroup Inc, Research Division

Is it fair to say that if I go back to the last 3 years, your revenue in COGS and Merchant Services have been relatively stable? Is that the right -- is what you expect to happen going forward?

Clark C. Smith

I think it will -- I don't think the word stable is right, but it certainly will be downsized to the point that it's more in line with our historical numbers. There some is growth in there.

Keith E. St. Clair

Yes, we get some natural uplift, Faisel, as well from Hess. There are some product, certainly, that's being moved through those facilities. And we also have a fuel oil supply business in the Caribbean that we have put in place in the fourth quarter of 2012. But if you go back before that, you won't see that contribution of revenues.

Faisel Khan - Citigroup Inc, Research Division

Okay. And what's the current value of inventory that you guys have tied up with the Merchant Services business? Working capital...

Keith E. St. Clair

Current value of the inventory? I think in the third quarter -- or in the second quarter, we're flipping now to get our inventory level, Faisel, but I think it's important to note, as Clark said on the call, that we've actually seen our working capital volumes go down $125 million. We've seen inventory move about 30%. 30% reduction in inventory from the peaks in the second quarter. So we had a little over $425 million of inventory at the end of the quarter, which has come down substantially since then.

Faisel Khan - Citigroup Inc, Research Division

Oh, it's come down since then?

Keith E. St. Clair

Yes, yes. It's come down since then.

Faisel Khan - Citigroup Inc, Research Division

You're saying 30% since then? Or is it...

Keith E. St. Clair

Yes, yes, it’s come down. The volumes are down roughly 30%. Borrowings are down $125 million in support of this business.

Faisel Khan - Citigroup Inc, Research Division

Okay, understood. And then Lastly, going back to the -- you guys were talking about the strategy you tried to implement at BORCO, was this you trying to capture the basis differential from the Gulf Coast to the Northeast through BORCO, and sort of dealing with Jones Act tankers, non-Jones Act tankers? Was that part of the strategy?

Clark C. Smith

Well, it was -- we're certainly, and we've talked to you about the customs ruling in the past. It was an opportunity we felt like we could create, not only a value uplift around those spreads, but also increased utilization of BORCO. We had -- BORCO had a temporary opening of some excess capacity, that since been closed off obviously from the new customer that came in. And we were trying to prove up to concept. We really weren't going in there with the intent to staying long-term in a blending position in that part of our system. As we told you in the past, BES -- the goal of BES is to increase utilization of underutilized facilities. And there was an opportunity there, and that's why we pursued it.

Faisel Khan - Citigroup Inc, Research Division

Okay. Then last for me, the sale of the Natural Gas Storage business, what's the EBITDA that's sort of tied to that business?

Keith E. St. Clair

It's negative EBITDA, Faisel. Now we're actually generating negative cash flow in conjunction with that business. So we'll actually get a pickup from a standpoint of absolute cash flows, and then we also -- then we also get the benefit of eliminating debt with the proceeds, as well as eliminating some adjustments that we've already made. So it's, one, accretive to earnings, and also deleveraging.

Faisel Khan - Citigroup Inc, Research Division

Okay. And one thing, last one on resources. The liquidation in inventory, you said $0.11 a gallon was what you lost in the inventory, right?

Keith E. St. Clair

That's what we said we lost on the liquidation of inventory at BORCO.

Operator

Our next question comes from the line of Shneur Gershuni from UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. So there's been kind of a lot of questions about Merchant Services business, and I kind of have a few as well, too, but one of the first things I kind of wanted to address is with the Hess transaction, you also picked up the terminals in St. Lucia and kind of the idea was to move some of the base business away from BORCO down there, so that you can take on more of the higher value opportunities. It feels like you stepped out, things didn't quite work out the way they should. Does that mean that, that opportunity is gone? Are we going to get that uplift that was kind of expected out of that part of the transaction?

Clark C. Smith

Let me start, then I'll turn it over to Khalid to talk to you about that. The situation with Merchant Services, if that's what you're referring to, has nothing to do with St. Lucia or any kind of strategies around that crude oil play. So -- and Khalid won't you...

Khalid A. Muslih

Yes, this is Khalid. So I think, when we've commented with regards to the ability to offer our customers, I guess, across the Caribbean, different logistic solutions either at BORCO or St. Lucia, but like Clark mentioned, that really has not changed. We do have substantial interest in the St. Lucia facility. We've actually been successful in increasing the -- presently here, the number of market participants. And we're going to continue to work towards increasing the utilization of that asset. That asset is obviously largely contracted. It's largely in a crude oil transshipment facility. We do have a, I guess, a small clean products position there. But I think with regards specifically to your question, no, there's no connection there.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

And whether the strategies don't place, on how do you use the 2 facilities kind of together basis?

Khalid A. Muslih

Yes, absolutely. I mean, I think we're -- if it is giving us that opportunity. We've looked at the ways that we can try to optimize across the asset base. We're frankly not only just doing that in the Caribbean. I think you've heard, Bob Malecky mention this earlier on the call with regards to New York Harbor, the fact that we have now assets that are interconnected, it gives us the ability to be able to, I guess, provide solutions to the market across facilities. That's exactly what we've done with regards to Raritan Bay, and including Port Reading as well. So those are the things that we'll continue to pursue.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. A couple of follow-ups here. I've been bouncing between calls, I may have missed part of this, but I think Jeremy kind of started to touch on this a little bit. With respect to the Hess transaction, if I remember correctly, you had a 4-year contract in place. And part of the uplift was going to come from securing third-party volumes and so forth. Can you tell us about how those discussions are going? Is that occurring, because ultimately, you could lose the Hess contract in 4 years from now, and so there would need to be something in place? Although -- and I was wondering if you can sort of comment about how that's all progressing, I guess?

Robert A. Malecky

This is Bob Malecky. We feel very good about the Hess contract and the assets that we have to support it. With the regional distribution that we're having and the new potential player associated with it, we have a long affiliation with them. And in most of these locations, we've done the evaluation in terms of what the alternatives are for this, and we still continue to feel very good about throughputting their needs for a substantial period forward.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

And how about the additional third-party volumes? Any discussions underway and so forth? As you've controlled the assets now for 8 months?

Robert A. Malecky

Yes, and we talked about that a little earlier. We are, in fact, exceeding our commercial objectives. We've made the transition complete at this point. And that's important because of the terminal control system that we have in place, it really enables for us to really start beginning to bring a lot of the third-party customers in. And we completed that in the second quarter. And like I think, we started with, we're exceeding our expectations in terms of what we've laid out in our pro forma to date.

Clark C. Smith

Yes. We mentioned on the call, the DOE deal and it's a -- that's a 500,000-barrel contract for 4.5 years at Raritan Bay, which is an incremental utilization of that facility. So there's opportunities out there.

Khalid A. Muslih

Right. And just to follow-up on that comment, with regards to the New York Harbor-related assets, and mainly, I guess, Port Reading and Raritan Bay. We've been able to introduce, obviously, other third parties for those assets, as well as, recontracting a substantial portion of the capacity that is in place there with other third-party customers on a long-term basis.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Okay. And then just one last final question here. As you had made the decision to step out, and clearly, it didn't work out so well and so forth, can you walk us through the risk mitigation strategies that you do to approach this? Because I mean, we wouldn't want you not to step out if you saw an opportunity in the future, and how you sort of think about hedging in general? Do you get bitten by dirty hedges and so forth? Sort of -- if you can sort of walk us through how this is going to happen, as you go forward and potentially acquire and develop new assets and whatnot, and new markets materialize?

Clark C. Smith

Well, I think we have a base business that is tied in to where we hedged the fixed price to the harbor. And we lived with that basis risk, and I think we've managed around that and that level of risk very effectively. A few years ago, we stepped into the Midwest. If you may recall, that the Midwest became extremely volatile due to the refinery expansions and some very aggressive product movements by some of the refiners. And that volatility got too high and we withdrew, and we got our business back on track. I think this is a little bit similar, is that we went into an underutilized opportunity on our system that was pretty far from the harbor. I think we underestimated the risk of the liquidity, in terms of being in that location. We obviously are going to put more rigor around our risk mitigation strategies going forward. But once we get, once -- and we really made a move to get this back to a more conservative business model that we've been using for the last couple of years. I think we're in good shape in terms of the risk and I think the mitigation will work fine in terms of what have been doing in the past. If we -- and I hear what you're saying about you don't want to not develop new opportunities. I think under Bill's leadership those opportunities will be well vetted, in terms of understanding what that risk is. And if we pursue it, it's going to be something we feel very comfortable that the risk and the return ratio or profile is acceptable to Buckeye.

Operator

Our next question will be coming from the line of Michael Blum from Wells Fargo.

Michael J. Blum - Wells Fargo Securities, LLC, Research Division

My questions were answered.

Operator

At this time, I'm not showing any further questions. I would now like to turn the call back over to Clark Smith, for any closing remarks.

Clark C. Smith

All right. Thank you, Charlotte. And thank you, everyone, for your interest today. We expect to have more favorable news to report to you next quarter, and look forward to speaking with you then. Have a good day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Buckeye Partners (NYSE:BPL): Q2 EPS of $0.53 misses by $0.31. Revenue of $1.81B (+1721.8% Y/Y) beats by $280M.