Closer Look: Buckeye Partners
Ron Hiram | Apr 22, 2013 08:44AM ET
Revenues, operating income, net income and earnings before interest, depreciation and amortization and income tax expenses (EBITDA) reported by Buckeye Partners L.P. (BPL) for 4Q12, 4Q11 and for 2010-2012 are summarized in Table 1 below:
The decrease in 2012 revenues is primarily attributable to a $596 million decline in net sales volume for the Energy Services segment, which was partially offset by a significant revenue increase in the Pipelines and Terminals segment, as well as by increased storage revenue as a result of 1.9 million barrels of incremental storage capacity brought online at BORCO in the second half of 2012. Pipelines and terminals benefited primarily from the impact of recent acquisitions, including the assets acquired from BP and ExxonMobil in mid-2011 and the Perth Amboy Facility acquired in the second half of 2012.
The favorable comparison of operating income and net income numbers for 2012 primarily results from a $170 million goodwill impairment charge for the Lodi acquisition in 3Q11. Also, as previously noted, 2012 results include partial contributions from Perth Amboy and the BORCO expansion, which are absent from the 2011 numbers.
Adjusted EBITDA is the primary measure used by BPL’s management to evaluate each business segment, overall performance, resource and capital allocation, and the viability of, and rates of return on, proposed projects. Adjusted EBITDA improved significantly in 2012 compared to 2011. Contributions to Adjusted EBITDA by segment are presented in Table 2 below:
reported 1.32x distribution coverage for 4Q12 and 1.04x for 2012, but as previously noted this ignores having needed to provide $20-43 million of additional working capital. I believe it is more meaningful to look at coverage ratios over longer periods and not to back out of the sustainable DCF calculation investments required to be made in working capital.
I find it helpful to look at a simplified cash flow statement by netting certain items (e.g., acquisitions against dispositions) and by separating cash generation from cash consumption. Here is what I see for BPL:
Simplified Sources and Uses of Funds
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Table 5 indicates $16 million of net cash from operations remained in 2012 after deducting maintenance capital expenditures and distributions. The corresponding figure for 2011 was $11 million. In those periods, BPL did not fund distributions by issuing debt and/or equity. But unlike some of the other MLPs I cover, it has not generated a cash cushion of any meaningful amount.
BPL’s current yield has come down significantly as a result of unit price appreciation since the 4th quarter of 2012. A comparison to some of the other MLPs I follow is shown in Table 6 below:
BPL expects to spend a total of ~$330 million on expansion and cost reduction projects in 2013. As noted, BPL has not been generating excess cash which could help fund these capital expenditures and must therefore fund them with debt, equity or asset sales. It had only ~$7 million cash on the balance sheet and long-term debt that, at $2.7 billion, is already at 5.6x EBITDA and 4.9x Adjusted EBITDA as of 12/31/12. Given that, I believe it is likely BPL will issue additional equity, further diluting current limited partners. Otherwise I don’t see how it can fund expansion projects in 2013. Sale of the Natural Gas Storage business will reduce the amount of equity required to be raised but management reports no progress on this front and it is not possible to predict whether, and at what price, a sale will occur.
Also still of concern is the Federal Energy Regulatory Commission (FERC) order of March 30, 2012, that disallowed proposed rate increases on the Buckeye System that would have become effective April 1, 2012. The proposed rate increases were expected to increase BPL’s annual revenues (and, I presume, EBITDA) by approximately $8 million. But if forced to resort to FERC’s generic rate setting mechanism, the adverse impact goes well beyond forgoing this increase and could have a substantial adverse affect on BPL because it would lower tariffs on pipelines that account for ~70% of BPL’s revenues. Uncertainty remains even post the February 22, 2013 Ratemaking Methodology Order issued by FERC as to the impact on future changes to BPL’s rates in markets outside the New York City market. In addition, the ultimate resolution of the complaint of certain airlines regarding jet fuel rates to the three major New York City area airports could impact rates to those destinations. This is a major issue overhanging BPL.
I held BPL units for many years and eliminated my position in light of the issues highlighted in my prior articles. Thirty two consecutive quarterly increases in distributions per unit ended in 1Q12 with distribution unchanged at $1.0375 per unit. This has been the distribution level for the past 5 consecutive quarters. Despite positives such as a 6.8% yield and the absence of general partner incentive distribution rights, I am not currently considering reestablishing a position because of concerns discussed in this and prior articles. These include low distribution coverage, expensive acquisitions, past and prospective unitholder dilution, as well as the FERC risk.
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