Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Buckeye Partners LP (NYSE:BPL)

Q2 2012 Earnings Call

August 03, 2012 11:00 am ET

Executives

Clark C. Smith - Chief Executive Officer of of Buckeye GP, President of Buckeye GP and Member of The Board of Directors of Buckeye GP LIC

William H. Schmidt - Vice President 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

Mary F. Morgan - Senior Vice President of Buckeye GP LLC and President of International Pipelines & Terminals Business Unit

Analysts

Brian J. Zarahn - Barclays Capital, Research Division

Theodore Durbin - Goldman Sachs Group Inc., Research Division

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

James Jampel

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

Adam Limbach

Operator

Good day, ladies and gentlemen, and welcome to the Buckeye Partners, LP 2012 Second Quarter Results Conference. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Mr. Clark C. Smith, President and Chief Executive Officer for introductory remarks. Sir, you may begin.

Clark C. Smith

Thank you, Ben. Good morning, everyone, and welcome to the Buckeye Partners Second Quarter 2012 Conference Call. Also speaking on the call today will be Keith St. Clair, our Executive Vice President and Chief Financial Officer. After I make some introductory remarks and discuss the operating highlights for the quarter, Keith will review our financial results in further detail. Also on the call today are Bob Malecky, President of Domestic Pipelines & Terminals; Jerry Ashcroft, President of Buckeye Services; Mary Morgan, President of International Pipelines & Terminals; Khal Muslih, Senior Vice President of Corporate Development and Strategic Planning; Jeff Beason, Vice President and Controller; and Bill Schmidt, Vice President and General Counsel.

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

William H. Schmidt

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

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

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

Clark C. Smith

Thank you, Bill. I'd like to begin my comments by discussing Buckeye's safety achievements. I'm pleased to report that Buckeye continued a strong safety performance during the second quarter of 2012, experiencing 0 OSHA recordable injuries. Overall, we've been able to reduce our OSHA recordable incident rate by 58% since 2009, and we have consistently outperformed the industry benchmark for this metric for the past 2 years.

Additionally, we have experienced improvements on our API [ph] motor vehicle incident rate with a 64% reduction since 2009. And our year-to-date performance in 2012 is significantly outperforming the industry benchmark for this metric. Our operating teams across Buckeye are doing a tremendous job of ensuring the safety as our top priority, and this positive safety record reflects that achievement.

Next, I'd like to discuss some important developments for Buckeye since our last call. I'm pleased to announce that Buckeye has completed the construction of 1.1 million barrels of storage capacity and related infrastructure of BORCO on time and on budget. This storage represents the initial phase of our BORCO expansion plans, which ultimately will be adding a total of 4.7 million barrels of storage capacity to the facility. The initial 1.1 million barrels were operational on July 1 and are fully leased.

We continue to see strong customer interest in crude and other product storage at our BORCO facility. We have leased over 65% of the planned 4.7 million expansion barrels, which are expected to be placed in service in phases through the third quarter of 2013.

BORCO is a very strategic growth platform for Buckeye and is the hub of our marine terminal strategy. As part of our marine terminal strategy, on July 26, we completed the purchase of the Perth Amboy marine terminal from Chevron for $260 million. We are excited to be moving forward with our integration and commercialization plans for this facility. This terminal features 4 million barrels of storage, which increases Buckeye's total petroleum product storage capacity by approximately 6% to over 69 million barrels.

In addition, Perth Amboy has 4 docks on the Arthur Kill, as well as pipeline, rail and truck access. Chevron will continue to be a key customer at the terminal under multiyear storage and throughput commitments.

The Perth Amboy terminal provides Buckeye with both security and diversity of product supply. It will directly link our domestic pipeline and terminal network to an owned and operated marine terminal through a pipeline that we plan to build through our Linden complex. This will provide Buckeye with direct access to domestic and international sourced petroleum products, as well as provide our customers with storage at New York Harbor, a highly liquid NYMEX settlement point.

We expect to spend approximately $200 million to $225 million of growth capital at Perth Amboy over the next 3 years to modernize the facility, transform it into a highly efficient multiproduct storage, blending and throughput facility. In particular, we are seeing strong customer interest in storage and throughput solutions at Perth Amboy for heavier crude products, crude oil, fuel oil and asphalt, including the handling of Bakken crude via rail, for which our facility is well-suited. We continue to expect the return from this incremental investment to lower the investment multiple for the entire facility to 7x to 8x adjusted EBITDA.

As is evident by the strategic value that we believe Perth Amboy will provide, it goes without saying that our investment in the facility was not predicated on short-term views on refinery closures. Our strategy of seeking owner facility in New York Harbor has always been to integrate with our system and develop it with the flexibility to prosper regardless of what happens in the New York -- Northeast refineries.

We expect New York Harbor will always remain a very desirable place to own a terminal facility, and we plan to play a significant role in that market. It's also important to remember, PADD I still remains one of the largest product deficits in the world, with demand exceeding supply by almost 3 million barrels per day. And waterborne imports of product should continue to play a vital role in meeting PADD I demand.

Another positive development for Buckeye in the second quarter is what appears to be improving market conditions, both domestic and international. Volumes are on legacy pipelines and terminals increased over the prior year quarter, as well as over the prior sequential quarter. We're also seeing increased customer interest for storage at our international terminals, as evidenced by our commercial team being able to secure new customers and new term commitments at these facilities.

Let me shift now to highlights for each of our operating segments starting first with our Pipelines & Terminals segment. We experienced the increased volumes during the quarter on both our pipe systems and terminals, which we believe is indicative of strengthening underlying business conditions.

Legacy volumes on our pipeline systems were up approximately 0.5% over the prior year quarter and over 3% compared to the first quarter of 2012. Gasoline volumes were the primary driver for the increase in the second quarter over both periods as they increased 2% over the year ago quarter and nearly 10% over the first quarter of 2012. Throughput on our legacy terminals benefited during the quarter as well, as throughput increased almost 4% over the prior year quarter and over 6% sequentially. Keith will provide additional explanation around these volume improvements in a few minutes.

Another item that I'd like to address is what we refer to as our terminal growth franchise. We believe a significant cornerstone of our growth strategy is the acquisition of assets from other petroleum companies. Our business strategy focuses on unlocking significant value through the commercialization of these assets which tend to have been operated as proprietary facilities by the seller. Specifically, we bring in third-party customers to the facilities, introduce new service capabilities and we apply our best practices operating model and quickly and seamlessly integrate these assets into our existing operational structure.

The assets we acquired from BP in June of last year are an excellent example of this business strategy. June 2012 was the first month with a comparable year ago period under our ownership, so we can directly compare the performance of these assets to understand the impact of our commercialization efforts. We are pleased to report that for the month of June, the BP terminals experienced over a 10% increase in revenues, and over a 14% increase in volumes compared to June 2011. In addition, the application of our operating model, where we focus on utilizing best practices around acquired assets, has been completed as of the same quarter, which has improved operations and lowered the cost structure moving forward.

Overall, we have driven a nearly 34% increase in the adjusted EBITDA contribution from these assets in June 2012 as compared to June 2011 as a result of these actions. This is the same strategy we have applied and will continue to apply to all acquisitions including Perth Amboy. This strategy has been very successful for Buckeye.

We also benefit from recently completed internal growth projects in this segment that would begin contributing to our results during the quarter. Incremental capacity provided by the recently completed expansion to Linden to Macungie pipeline allowed additional volumes to flow through this critical gateway to delivery ports in Western Pennsylvania.

Another example is the incremental contribution from our Opelousas, Louisiana Terminal, where our recent capacity expansion was placed in service during quarter. Looking forward, we expect our unit train facility and capacity expansion project in our Chicago complex to be operational late in the second half of the year. This project is intended to increase Buckeye's capacity to handle ethanol in a highly liquid Chicago Board of Trade ethanol contract delivery location.

We've also identified several potential opportunities for Buckeye around the handling and storage of Bakken crude oil, including strong customer interest in our Perth Amboy facility for storage solutions involving importation of Bakken crude via rail. These opportunities are an addition to the Bakken crude contract at our Woodhaven, Michigan facility, where we are currently shipping the Bakken crude to an Ohio refinery.

Buckeye began operations 126 years ago with a crude oil pipeline from the oil fields in Western Pennsylvania to the Ohio refineries, and we're now seeing a return of crude oil to the slate of products Buckeye transports and stores both domestically and internationally.

A major milestone reached recently for the international segment is the completion of construction and leasing of the initial 1.1 million barrels of expansion capacity at BORCO, which I addressed earlier. BORCO is one of the premiere marine terminals in the world. We knew when we purchased BORCO 18 months ago that there would be some lead time before we'd see incremental adjusted EBITDA contribution from the capital dollars we were spending on expanding and modernizing this asset. Beginning in the third quarter, we will begin to see the initial cash flow benefit from these investments. As we were constructing the expansion tankage, we are also upgrading and expanding the infrastructure to give this facility outstanding flexibility and redundant capabilities. Some examples are the completion of the inland dock, providing the ability to berth ships during inclement weather, and the construction of our newest offshore jetty, which doubled our capacity to handle the largest petroleum product tankers in operation.

We also significantly increased pumping rates as part of the infrastructure upgrades. BORCO is capable of supporting berthing and product throughput for incremental storage capacity well in excess of the 4.7 million barrels currently planned. There are sufficient vacant land at BORCO to allow us to double the storage capacity of the terminal if market conditions warrant.

In addition, we are encouraged by the signing of a short-term contract for the storage of crude oil at our Yabucoa terminal with a new customer who has also expressed interest in the BORCO facility.

Moving to Buckeye Services. We continue to explore the potential sale of our Natural Gas Storage segment. As indicated on earlier calls, if we are presented with an option to sell these assets at a valuation that works for us, we may take advantage of that option to strengthen our balance sheet. If not, we will continue to own and operate a business that's benefiting from improved business conditions.

Our Energy Service segment continues to face challenges. We were able to narrow the loss sequentially as we reduced our exposure to basis volatility, but the strong pricing backwardation negatively impacted the quarter. We have also reduced cost as we are rightsizing the infrastructure for the reduced geographic focus and resulting decreased volumes.

It's important to note that our marketing operations continue to be a key catalyst for the increased utilization of our pipeline terminal assets. Over the last 12 months, BES has contributed almost $37 million in revenues through our Pipes & Terminals segment, as well as provided valuable insight on demand and pricing support for our Terminalling & Storage business.

The Development & Logistics segment outperformed our expectations during the quarter as we saw strong margins from our third-party engineering and operations business. The propane storage caverns acquired in the fourth quarter of 2011 are having a strong year. I visited these assets last week and was pleased to see that our new Buckeye team have successfully implemented the Buckeye operating model. These propane storage assets are performing at record throughput levels. The contribution from these assets has far exceeded our own acquisition expectations as increased supply of propane sourced from BP's Whiting Refinery and the Aux Sable pipeline system were driving record volumes.

I will now provide an update of the FERC proceedings since our last earnings call. Buckeye pipeline company filed a response to the FERC's show cause order on May 15, 2012. In that response, we advocated continuation of the Buckeye competitive rate program and provided data demonstrating the benefits of this program. We also filed a request for rehearing with respect to the show cost orders rejection of tariffs that had not been challenged in a protest.

On June 29, 2012, the airline that filed the initial protest filed comments containing that the Buckeye program has not been reasonable and should be discontinued. Three non-airlines also intervened in the proceeding but did not take a position on the merits of the Buckeye program, and 3 airlines in a committee represent jet fuel consumers at an airport filed comments supporting the position of the protesting airline.

On July 16, 2012, Buckeye filed an answer, rebutting the assertions in the protest in airlines June 29th filing. And finally, that airline filed an answer of their own on July 30, 2012. We cannot predict when FERC will issue an order regarding the merits of the proceeding or what FERC may conclude in that order.

Now to our quarterly distribution. This morning, we announced the declaration of a cash distribution of $1.0375 per limited partner unit, payable August 31, 2012. This represents a 2.5% increase over the distribution pay for the second quarter of 2011.

To close my comments, we look forward to improved financial results in the second half of 2012 as we benefit from our growth and expansion investments. We believe that improving business conditions will drive increases in performance and earnings across Buckeye.

This concludes my remarks, and now Keith will review our quarterly financial results. After which, we'll open up the call for questions. Keith?

Keith E. St.Clair

Thank you, Clark, and good morning, everyone. I'll now take a few minutes to review our second quarter financial results in a little more detail. Our adjusted EBITDA increased 2% to $119.9 million compared to $117.6 million a year ago.

Our Pipeline & Terminals, Natural Gas Storage and Development & Logistics segments saw improved quarter-over-quarter performance, and our International Operations segment performance was essentially flat with the prior year quarter.

As Clark mentioned earlier, the Energy Services segment continued to experience challenging market conditions, which resulted in a degradation in performance compared to the year ago quarter. I'll provide some additional color regarding segment results in a moment.

We reported net income attributable to Buckeye unitholders for the second quarter of 2012 of $54.4 million or $0.55 per diluted unit compared to $92 million or $1 per diluted unit in the prior year quarter. The diluted weighted average number of units outstanding in the second quarter of 2012 was $98.1 million compared to $92.1 million in the second quarter of 2011. The increase in the number of units reported for the second quarter of 2012 is a result of our unit offerings in April 2011 and February 2012, as well as the in-kind unit distributions on our Class B units.

The second quarter 2011 results included a $34.1 million gain or $0.37 per unit related to the sale of our equity interest in the West Texas LPG Pipeline Limited Partnership. Consolidated revenues for the second quarter of 2012 totaled $982.6 million compared to $1.08 billion in the prior period.

This decrease in revenues is primarily attributable to lower commodity prices and an 8% decline in sales volumes for our Energy Services segment. This decrease was partially offset by the increase in revenues for our Pipeline & Terminals segment as a result of a full quarter contribution from acquisitions made in 2011.

Operating expenses for the quarter rose to $101.5 million from $89.9 million in 2011, while general and administrative expenses totaled $17.9 million compared with $17.2 million in the year ago quarter. The increase in operating and G&A expenses were largely driven by the June 2011 asset acquisition.

Now I'd like to review in more detail the contribution of each segment to adjusted EBITDA, our primary measure of performance. Adjusted EBITDA for our Pipelines & Terminals segment was $89.6 million for the second quarter of 2012 compared to $84.1 million for the second quarter of 2011. The second quarter of 2012 benefited from higher-average tariffs, driven by rate increases in 2011 and a shift in mix to longer-haul shipments.

Increased volumes and contract escalations at our legacy terminals and the contribution from 2011 acquisitions, which together aggregated to $17 million favorable benefit for the current quarter. This contribution was partially offset by less favorable settlement experience from our Pipelines & Terminals of approximately $4 million during the quarter as a result of lower commodity prices and an operational shift to 3 cycles on our eastern product systems.

Operating expenses for the quarter were impacted by 2 casualty losses. One, the result of a third party damaging our pipeline; and the other, identified as a result of a train derailment. These 2 instances impacted our results by an excess of $2 million. Cost associated with recording the FERC show cause order also incurred $1 million during the quarter and approximately $2.6 million in expenses related to the transition of certain corporate functions from our Pennsylvania offices to Houston.

These items were partially offset by reduced integrity spending reflecting the acceleration of certain integrity and maintenance spending into the first quarter of 2012 due to mild weather. Also impacting the quarterly results was approximately $2.2 million of severance and related costs to implement our best practices model at the assets acquired from BP and Chevron. We believe this is the last quarter we'll incur such costs related to the BP assets.

Earnings from equity investments also declined quarter-over-quarter due primarily to the sale of our investment in West Texas LPG Pipeline in May of 2011. Aggregate pipeline volumes for the quarter increased 5.4% compared to the second quarter of 2011, primarily as a result of additional volumes transported on the pipelines acquired from BP. Volumes on legacy pipelines increased approximately 0.5%, primarily as a result of strength in gasoline volumes, which increased approximately 1.9%, driven by higher volumes in the Midwest.

EIA [ph] data indicate that average crude runs in PADD 2 for the second quarter of 2012 increased approximately 5% over the year ago quarter as refineries in the region benefited from expansion projects coming online, as well as advantage fundamentals compared to refineries in other regions.

Offsetting the increase in gasoline volumes, our legacy systems experienced softness in jet fuel and diesel volumes, which were down approximately 1.5% and 1% respectively compared to the prior year.

Average transportation tariffs for the second quarter of 2012 increased 7% over the year ago quarter, reflecting the 2011 tariff adjustments and the shift in mix to longer-haul shipments.

Our domestic terminal volumes increased from 626,000 barrels per day in the second quarter of 2011 to 901,000 barrels per day in the second quarter of 2012 as a result of throughput at the 33 terminals acquired from BP.

Throughput for the quarter at our legacy terminals increased approximately 3.5% compared to the year ago quarter due primarily to an increase of 6.9% in gasoline volumes. Terminal throughput increases were driven by the same factors impacting our Midwest pipeline volumes, as well as increased gasoline and ethanol volumes at our Albany facility due to some recovery of market share from the competing facility and volume increases as a result of a storage tank expansion at our Opelousas, Louisiana facility which is advantaged by its connection to the colonial pipeline.

Our International Operations segment recorded adjusted EBITDA of $30.6 million for the second quarter of 2012, which is in line with the year ago quarter. Revenue was down approximately $2.6 million as a result of the loss of a customer at our Yabucoa facility of a fuel oil supply contract and lower storage revenues at BORCO as certain out-of-service tanks continue the undergoing maintenance from the first quarter into the second quarter of this year.

Operating expenses declined in the second quarter of 2012 compared to the year ago quarter, primarily related to transition and other transaction cost incurred in 2011. The second half of 2012 will benefit from the leasing of storage tanks that were out of service during the first half of 2012, as well as from 1.9 million barrels of expansion capacity scheduled to be completed.

Yellowfield 1, which includes 1.1 million barrels of storage, was placed in service on July 1, and Bluefield North, which includes 800,000 barrels of storage is expected to be in service early in the fourth quarter. All of this capacity has already been leased.

Adjusted EBITDA for our Natural Gas Storage segment was a negative 400,000 for the quarter compared to a negative 2.6 million a year ago. Although these results reflect a loss for the quarter, they were in line with our expectations and show improvement over the year ago quarter.

The second half of the year is expected to benefit from improved hub services revenues, as the recognition of hub services revenues tends to be back loaded into the third and fourth quarters based on the summer to winter hub service season. The improvement in financial results compared to the year ago quarter is primarily due to improved seasonal spreads captured in our hub book results and partially offset by lower firm lease rates.

In our Energy Services segment, adjusted EBITDA was negative $3.2 million for the second quarter of 2012 compared to a contribution of $3.8 million in the same period last year. We have spoken at length in past earnings calls about the basis risk and extreme volatility we have seen, which combined with market backwardation continues to drive the year-over-year decline in performance.

Revenues decreased by approximately 13.6% from roughly $750 million from roughly $860 million in the year ago quarter. This is attributable to lower commodity prices and an 8% decline in sales volume, partially as a result of our risk mitigation strategy.

Product sales volumes in the second quarter of 2012 totaled 258 million gallons compared with 282 million gallons in the second quarter of 2011. In addition, the Biodiesel blending tax credit, which benefited the year ago quarter, expired in 2012, resulting in a further decrease in revenues in the current quarter.

Looking at the trend in this business for a moment. The loss incurred in the second quarter of 2012 reflects a $3 million improvement over the first quarter of 2012. This loss was narrowed as a result of the execution of our risk mitigation strategy to exit certain markets and substantially reduce inventory levels.

We have also worked during the quarter to reduce operating cost in this segment, including headcount reduction efforts and to reduce borrowing cost as evidenced by the approximately $140 million reduction in borrowings on the BES portion of our credit facility since year end.

It's also important to note that Energy Services contributed $36.6 million in revenues to the Pipelines & Terminals segment over the last 12 months. And as Clark noted, our marketing operations are a key catalyst for incremental utilization of our pipeline and terminal assets.

Wrapping up the segment review, our Development & Logistics segment generated $3.3 million of adjusted EBITDA in the second quarter of 2012 compared to $1.6 million in the second quarter of 2011. This segment benefited from improved margins on its engineering and operations business, as well as better-than-expected contribution from the recently acquired LPG storage facilities.

Now turning to our balance sheet. We ended the quarter with approximately $600,000 in cash and long-term debt of $2.28 billion. At the end of the second quarter of 2012, our ratio of net long-term debt to last 12 months adjusted EBITDA was approximately 4.7x. We have no maturities and long-term debt until the third quarter of 2013, when $300 million and 4% and 5%, 8% notes are due.

At the end of the second quarter, Buckeye had $323 million borrowed under our revolving credit facility, including $210 million reflected as long-term debt. During the quarter, we spent $10.8 million on maintenance capital expenditures, a reduction of $1.5 million over the second quarter of 2011.

But on a year-to-date basis, maintenance CapEx is $4.1 million higher than the prior year. We also spent $62.9 million on revenue generation and cost reduction capital projects in the quarter. There is no change in our expectation for maintenance capital spending for the year. It remains at $50 million to $70 million. Including our newly acquired Perth Amboy facility, return capital spending for the year is expected to be $225 million to $315 million.

Buckeye's distribution coverage ratio based on distributions declared was 0.87x for the quarter. I think it's important to note that this distribution coverage for the quarter was negatively impacted by declared distributions of $4.4 million related to the February 2012 unit issuance that was primarily intended to fund the Perth Amboy transaction, which we closed in the third quarter and did not therefore contribute cash flow to the second quarter.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Brian Zarahn from Barclays.

Brian J. Zarahn - Barclays Capital, Research Division

On expansion CapEx guidance for this year it's a little bit wide range. Is that due to loan uncertainty on the Perth Amboy terminal, or can you give us a little color on the range?

Clark C. Smith

Well, Perth Amboy, we certainly will incur some additional capital expenditures in the last half of the year. We've owned that asset less than a week. We do think that clearly will drive up the CapEx. We would expect to be somewhere really in the middle of that range. What we're going to see in the last half of the year, Brian, is continued expenditure related to our expanded -- expansions at BORCO. That will probably be somewhere in the $70 million to $80 million range. We'll also see some additional expansion in our domestic facilities as there are some opportunities that we're pretty excited about there that's a little premature to talk about. And as a result of not having things concluded, we have a broader range as a result of that. And then Perth, certainly, as we'd indicated, over the next couple of years, we're looking at incremental $200 million to $225 million to spend. Probably the last half of the year, we'll be looking at something that's in the range from $20 million to $40 million.

Brian J. Zarahn - Barclays Capital, Research Division

And in terms of the BORCO expansion, you said you had about 60% of the capacity lease. When do you expect to have the majority of that under contract?

Clark C. Smith

Well we're continuing to work on -- and I mean, basically, Brian, just to sort of recap where we are, we're talking about a 4.7 million barrel expansion, 1.6 million of that is currently not contracted. That relates to the Bluefield South expansion that will come on late Q1, early Q2 of 2013. We are in discussions with different customers at this point in time relative to leasing that capacity, and we continue to work with customers as far as getting that contracted. At this point in time, we remain highly confident that we will have that capacity leased well before it comes online.

Brian J. Zarahn - Barclays Capital, Research Division

Okay. And last one for me. Certainly looking ahead with the BORCO expansion beginning to generate incremental cash flows, you closed the Perth Amboy terminal, assuming sort of normal winter weather, would you expect the distribution to be covered in the fourth quarter and then in 2013 as well?

Clark C. Smith

Well, one of the things I think is important to remember, when you look at our fourth quarter in isolation, I mean typically, Brian, the fourth quarter, just from seasonality, is generally our strongest quarter, okay? So when you think about that, not only will we get the benefit of the incremental cash flow from the expansions, we'll also get some incremental cash flow from Perth. Our Energy Services business, that's typically the strongest quarter for it. Lodi, that has a strong quarter as well because of the timing of recognizing the revenue associated with the parts. And then our legacy system volumes, assuming we have a winter that's different than last year, well there was actually no cold weather, there really was no winter, we would expect to see strong volumes there as well. So we would expect the fourth quarter, clearly for the year, to be our strongest quarter from a coverage standpoint. So we would expect to cover distributions in Q4. Again, let's me say this, that all caveat is based on what might happen with FERC.

Operator

Our next question comes from the line of Ted Durbin from Goldman Sachs.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

You just mentioned the FERC, and that was my first question. I'm just wondering, where are you in terms of thinking about maybe a settlement with maybe some of the intervenors here in the case? Or do you think you will take the [indiscernible] from the full FERC process and fully litigated case?

Clark C. Smith

Well, we're always talking to our customers, Ted. And we certainly prefer that, but we have nothing to report at this time.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Okay. And switching over to the pipelines for the Terminal segment. It looks like the operating expenses have -- they've been running pretty high here the last couple of quarters. I'm just wondering if -- and you went through a bunch of sort of what sounded like onetime items. Can you kind of wrap those altogether? I may have missed some of them. And kind of what's a good run rate here on the OpEx side for that segment?

Keith E. St.Clair

Well, let me talk, and what I tried to do, Ted, was highlight some of the items that I'm not going to say are onetime. But I will tell you that what we saw were higher levels of these expenses or reductions in revenues and we would have expected. Just to recap, year-over-year, our settlement experience was unfavorable by $4 million, that's not something that you would expect to see on a continual basis. We had a couple of releases where we incurred over roughly $2 million of costs associated with a cleanup. Now what I will tell you is, we're -- one of them was caused by a third party. I mean we certainly will aggressively pursue that third party. But yet, at this point in time, we don't have the level of confidence to offset that expense with the receivable, although we are aggressively pursuing it. We did incur $1 million related to the FERC show cause order. That's something that I would like to say would go away, but we're going to see cost certainly in the third quarter as well as we continue to work toward a commercial solution there. And we also had over $2.5 million associated with expenses where we're relocating certain administrative functions, largely the finance and IT functions from our former headquarters in Pennsylvania to Houston. We'll see a little more of that in the third quarter, but we wouldn't expect to see that really in the fourth quarter or at any significant degree. And then we also had some severance cost over $2 million related to implementing our best practices operating model at BP. And while clearly that impacted the quarter results, what we'll see is the favorable benefit from that on a go-forward basis. So the reason that I did try to highlight these items, Ted, is that frankly I think the underlying business in the fundamentals are really stronger than ultimately the results we post largely because we saw expense levels in these areas that is higher than what would be typical.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Okay. That's helpful, Keith. And then the last one for me, you mentioned in the comments in the press release, the basis of volatility here. I guess as the way I understood, I thought you had pretty much unwind a lot of the basis positions that didn't cost a lot of the, let's call it, the losses that you made in the Energy Services business for the last few quarters. Kind of where are we know in terms of the position, and how much more impact did we have from this volatility and basis?

Clark C. Smith

Well, again, to clarify, Ted, we don't put on the [indiscernible]. There's not an over-the-counter market for basis, that's number one. You can't put positions on. So what we did is we reduced our inventory risk around the Midwest region. And to some extent, the East region as we rationalize where wanted to be in the marketing business while at the same time making sure we push utilization on our pipes. So we have reduced that risk. That basis is -- we can hedge the flat price risk, we live with that basis. That basis is still not normalized to the extent we thought it would, but we're optimistic it will. We think we're better positioned. We're in better locations. So we're forecasting much better results in the second half of the year.

Operator

Our next question comes from the line of Ross Payne from Wells Fargo.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

I was wondering if you guys can just talk about the market conditions for BORCO's storage and its expansion programs and how that compared to your original expectations.

Clark C. Smith

I'll tell you what, I'll talk and then I'll let Mary step into this. I think the conditions are good and improving. The interest level and the demand we're seeing for storage at BORCO is certainly ramping up. I think we mentioned to you earlier, Ross, that one of the differences now back to the time we bought it is how much strength there is in the demand for crude oil storage. And we see a lot of opportunity around crude. And of course with that, we get a lot of ancillary service opportunities. So I think it's very bullish. Mary, who's running our international group, I'll let her address it.

Mary F. Morgan

Hi, this is Mary. One thing that I think is really positive that we're seeing is that even before any contracts roll off, we're able to have re-contracted that storage. And I think that's a very positive direction. Again, with the interest that's being expressed for a wide range of products at BORCO, crude oil and fuel and clean product, and specifically driven by the capabilities we have at the terminal. BORCO can offer sophisticated blending segregation. We've increased the pumping rates. We have unmatched marine facilities. It's really a competitive advantage. And this is what is bringing a lot of new customer interest. We're talking to a lot of people that haven't been at BORCO before that are expressing interest. And again, the market has responded very well and that again, we've been able to release any storage that's become available. And I think that the storage will continue to tighten up as we get into 2013.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Are re-contracting rates -- are they at or above or they're below where they were before?

Mary F. Morgan

The re-contracting rates in most recent one we did has actually gone up, and that was in fuel oil. And then again, the rates that we've been able to lease the new storage were certainly in line with expectations at the acquisition.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay. And what is increasing the demand for crude storage, just generally speaking, as you guys see it?

Mary F. Morgan

A lot of production getting ready to come online, increased production in Brazil. Also, there's just continuing demand for building bulk cargoes going to Asia. And what we're seeing in crude oil, as well as fuel oil and clean products, again, is the desire for increased flexibility and the ability to blend whatever the market conditions are anywhere in the world. And that's really what BORCO can offer that no one else can. We're putting in that capability so that people who do business at our terminal can really be watching what's going on all the time and decide what sort of blends they want to use. Also our capability to accommodate any size vessel. And another key thing is that we can accommodate simultaneous operations in all of these different categories. That's something that a lot of other terminals that can't do that, the vessels have a much longer waiting time. And so as we are able to demonstrate and get the word out to the market about the capabilities of BORCO, I think that's just a huge plus.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay. And what do you guys expect the EBITDA pickup would be for these 2 most recent expansions of 1.1 million and 0.8 million?

Keith E. St.Clair

We would expect to see an EBITDA uplift, if you think about the second half of the year, Ross, somewhere in the range between $4.5 million to $7 million. A lot of that is a function of what kind of incremental services that they require, there's berthing, we have blending capabilities, we have transshipment capabilities, heating. So really, a lot of it is a function of the incremental ancillary services. But we would expect to see, like I said, roughly probably a 5% to 7% is a better range.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

And you mentioned the credit for blending biofuel is expiring. What kind of EBITDA impact do you expect from that?

Clark C. Smith

Well, it expired already. So we already experienced that. And frankly, in the comparable quarters, when we look at last year, we actually had some work that needed to be done in order to complete our filings, and we weren't certain that we were going to realize the complete benefit of some of that credit prior to the second quarter of last year. So in the second quarter of last year, we got sort of a cumulative benefit, if you will, that related to some prior periods. So on the last year, part of that benefit was around $3 million. So clearly, that had an impact on our year-over-year performance.

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Okay. And last, can you give us some kind of an idea of what kind of impact the FERC situation may have if they go to something other than competitive market status for a lot of your markets?

Clark C. Smith

No, we're really not in a position to do that, Ross.

Operator

Our next question comes from the line of James Jampel from HITE.

James Jampel

Could you talk a little bit more about the competitive situation in Albany and what you see going on there?

Clark C. Smith

What specific question do you have?

James Jampel

Well, you mentioned that you guys were having particular success in Albany.

Clark C. Smith

We've been able to improve our throughput capabilities at Albany for both the ethanol and the gas [indiscernible] market. It is a dynamic competitive market, but our facilities there with the rail capabilities and barge have both been resonating through with our customers.

James Jampel

I mean, have you been able to increase your share [indiscernible]?

Clark C. Smith

I'm sorry, share? Yes. I think for this quarter, we have. And we think we're doing positive things over the long-term in that market.

Operator

Our next question comes from the line of Michael Blum from Wells Fargo.

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

Just a couple, and apologize if I missed this. Do you have any update on the timing in terms of the FERC case? Just in terms of when you think FERC might rule or just when you think the process will get wrapped up?

Clark C. Smith

No, we don't have any read on that yet, Michael.

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

Okay. And then as it relates to potentially selling your gas storage business, are you in active dialogue with potential buyer right now, or are you just kind of having for sale sign out there?

Clark C. Smith

No, we do. We have dialogue with multiple parties right now. As we've told you before, and as you know, we're interested in selling it at the right price. It's obviously not a core business but at the same time, everyone recognized business conditions are improving, so if we don't see that value, we're going to keep and keep operating it.

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

Okay. And then last question, just I guess a little more detail if you have it, just in terms of you said you're seeing fundamentals improve in terms of your pipeline business and incremental demand for gasoline. To what do you attribute that? Is that a price issue? Is there -- do you think the economy is getting better? I mean, why did you see increased demand?

Clark C. Smith

Some of it is refinery production, particularly in the Midwest. They've expanded those refineries. They're operating at high levels. They're certainly making a lot of money. It's pushed a lot of gasoline on our system. And we're seeing that -- we're seeing this trend continue into July as well. That's -- we're not just looking at, I know you've might looked at the total pipeline volume, it's been up 0.5%. It's certainly up, but it's not -- we're seeing a much larger number for July. So we're up -- we're very optimistic that we'll start to see the economic pick up from the environment up there along with these refinery performances. Now refineries do have turnarounds, and we'll see some of that in the last half of the year but right now, things were much better.

Operator

Our next question comes from the line of Adam Limbach from Allstate.

Adam Limbach

The first thing is, I want to touch on something that was asked earlier. Let's assume for a second that you get the result you want in the FERC case, would you expect to cover your distribution at greater than 1x in 2013?

Clark C. Smith

Adam, we -- you know the process. We look at this every quarter, we look at business conditions, current performance and also the outlook. It's just every quarter we look at it and make the determination with board approval. I can't predict what that will look like. Obviously in the past when we felt comfortable, it had the right coverage ratios, we will increase our distributions. We've done that for running 33 straight quarters. So at this point in time, I would say that it's uncertain in what we're going to do. But FERC is a big issue in making that determination.

Keith E. St.Clair

Adam, let me make sure that I was clear on your question. You were talking about covering or increasing the distribution? Are you talking about covering?

Adam Limbach

Yes, exactly, because there was a question earlier regarding distribution coverage in the fourth quarter and then 2013. So I was just -- I was more just focused on whether you thought you'd be above 1x on a full year 2013 basis.

Clark C. Smith

We believe that given the expansions that we have at BORCO, given the incremental contribution from Perth Amboy, that by the end of 2013 we certainly would expect to be in a position to cover our distribution. But again, that's assuming that we don't see fundamental changes in underlying business condition. And that assumes that we get, as you had said, a favorable outcome from FERC. Also remember that in the second half of 2013 as well, we have pick units that convert from paying in-kind -- will likely convert from paying in-kind to cash, but we still believe that we'll be in a position to cover those distributions in the last half of the year.

Adam Limbach

Okay. The other question that I have this morning, are you contemplating any asset sales other than the natural gas at this point?

Clark C. Smith

We're always looking at opportunities, but there's nothing to discuss at this point.

Operator

And that does conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Clark Smith for any closing remarks.

Clark C. Smith

All right. Thank you, Ben, and thank you to our investors and analysts for joining us today. We continue to focus on executing our strategy every day, and we look forward to being able to share with you our progress on our next earnings call in November. Have a good weekend.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the 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!

Source: Buckeye Partners LP Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts