A Closer Look At Buckeye Partners' Distributable Cash Flow As Of 2Q 2012

On August 3, 2012, Buckeye Partners L.P. (BPL) reported results of operations for 2Q 2012. Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses (EBITDA) were as follows:


The decrease in net income primarily reflects a gain of $34.1 million on the sale of a minority equity interest in West Texas LPG Pipeline Limited Partnership recorded in 2Q11. Lower revenues in 2Q12 and 1H12 are primarily attributable to BPL’s Energy Services (“BES”) business, a wholesale distributor of refined petroleum products in the Northeastern and Midwestern United States. Basis volatility and continued market backwardation (see Glossary of Terms) negatively impacted the value of its inventory and its sales margin. BES segment revenues in 2Q12 and 1H12 declined by $117.3 million and $138 million, respectively, compared to the similar prior year periods. BES’ EBITDA dropped significantly, as can be seen in Table 2 below:

Flat or declining operating performance over the past 6 quarters is also evident from Table 3 below:

I discussed the problems facing BPL and its investors several times over the last few months (see article dated December 19, 2011, another article dated February 13, 2012, and a third article dated April 19, 2012. After 32 consecutive quarterly increases in distributions per unit, the 1Q12 amount declared on May 4, 2012, was $1.0375, the same as for 4Q11. This is also the amount declared for 2Q12.

Given quarterly fluctuations in revenues, working capital needs and other items, it makes sense to review trailing 12 months (“TTM”) numbers rather than quarterly numbers for the purpose of analyzing changes in reported and sustainable distributable cash flows. The definition of DCF used by BPL is described in an article titled Distributable Cash Flow (“DCF”). That article also provides, for comparison purposes, definitions used by other master limited partnerships (“MLPs”). Using BPL’s definition, DCF for the TTM ending 6/30/12 was $309 million, up slightly from $300 million in the TTM ending 6/30/11 (per unit comparisons are not meaningful due to the November 19, 2010, merger between BPL, BGH (the general partner) and the general partner of BGH.

The generic reasons why DCF as reported by the MLP may differ from sustainable DCF are reviewed in an article titled Estimating Sustainable DCF-Why and How. Applying the method described there to BPL results through 6/30/12 generates the comparison outlined in the table below:

There is no appreciable difference between reported DCF and what I term sustainable DCF for the TTM ending 3/31/12. Coverage ratios, whether viewed from a 3, 6 or 12 month perspective, are below 1.0 as seen in Table 5 below:

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

Table 6 indicates a $146 million excess amount after deducting maintenance capital expenditures, net income from non-controlling interests and distributions from net cash from operations in the TTM ending 6/30/12 (by contrast, there was a shortfall in the comparable prior year period). This, however, is due to liquidation of working capital (mainly inventory) amounting to $188 million (see Table 4). Absent this non-sustainable source, there would have been a shortfall.

BPL expects to spend a total of ~$270 million on expansion and cost reduction projects in 2012, of which $124 million has been spent in 1H12. Unlike some of the MLPs I have covered, including El Paso Pipeline Partners (EPB), Enterprise Products Partners (EPD), Plains All American Pipeline (PAA), Williams Partners (WPZ) and Targa Resource Partners (NGLS), 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. With essentially zero cash on the balance sheet and long-term debt that, at $2.3 billion, is already at 4.7x Adjusted EBITDA on a TTM basis, BPL is likely to offer additional equity, further diluting current limited partners (in February 2012, it issued 4.3 million units). Sale of the Natural Gas Storage business will reduce the amount of equity required to be raised but it is not possible to predict whether, and at what price, a sale will occur

There are some favorable factors to consider: (i) 2Q12 volumes on legacy pipelines and terminals increased over both 1Q12 and 2Q11; (ii) the initial stage of the BORCO expansion (1.1 million barrels of storage capacity and related infrastructure) was completed on time and on budget and is fully leased; (iii) performance could improve if next winter exhibits normal temperatures; (iv) in June 2012, the first month with a comparable year ago period under BPL ownership, the terminals acquired from BP North America, Inc. (“BP”) experienced over a 10% increase in revenues, and over a 14% increase in volumes compared to June 2011 and thus provided positive indication of the value BPL can extract from its acquisitions; and (v) net income in 2Q12 was negatively impacted by several special items that hopefully will not be repeated, including $2 million for environmental remediation, $2.5 million of relocation expenses and $2 million of severance costs related to BP.

There are also negative factors. BPL missed consensus estimates every single quarter in 2011, an unfavorable trend that continued into the first and second quarters of 2012. Also 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. This is a major issue overhanging this MLP. Consequently, despite the attractive 7.75% yield based on the current price ($53.57 on August 10), I would remain on the sidelines.