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Edited Transcript of BPL earnings conference call or presentation 10-May-19 3:00pm GMT

Q1 2019 Buckeye Partners LP Earnings Call

HOUSTON May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Buckeye Partners LP earnings conference call or presentation Friday, May 10, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clark C. Smith

Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC

* Keith E. St. Clair

Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC

* Kevin J. Goodwin

Buckeye Partners, L.P. - VP & Treasurer

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Conference Call Participants

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* Adam Benjamin Breit

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Sunil K. Sibal

Seaport Global Securities LLC, Research Division - MD

* Theresa Chen

Barclays Bank PLC, Research Division - Research Analyst

* Tristan James Richardson

SunTrust Robinson Humphrey, Inc., Research Division - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Buckeye Partners 2019 First Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Goodwin, Vice President and Treasurer. Mr. Goodwin, you may begin.

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Kevin J. Goodwin, Buckeye Partners, L.P. - VP & Treasurer [2]

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Thank you, Josh, and good morning, everyone. Welcome to Buckeye's financial results conference Call for the first quarter of 2019. On this morning's conference call, Clark Smith, our Chairman, President and Chief Executive Officer, will provide additional information on the transaction with IFM Investors that we announced this morning. Following Clark's comments, Keith St. Clair, Executive Vice President and Chief Financial Officer, will review our financial results for the quarter. Also on the call this morning are Bob Malecky, Executive Vice President and President of Domestic Pipelines & Terminal; Khalid Muslih, Executive Vice President and President of Global Marine Terminals; Bill Hollis, Senior Vice President and President of Buckeye Services; Todd Russo, Senior Vice President and General Counsel; and Gary Bohnsack, Vice President and Chief Accounting Officer. After our prepared remarks, we will take your questions.

We would like to remind everyone that we may make comments on the call that could be construed as forward-looking statements as defined by the SEC, including statements regarding our target leverage and coverage ratios and the transaction with IFM Investors. 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, 2018, which is filed with the SEC and available on the Buckeye website at www.buckeye.com. We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today.

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 their most directly comparable GAAP measures are included in the press release issued this morning, which is available on the Investor Center section of Buckeye's website.

With that, I will turn the call over to our Chairman, President and CEO, Clark Smith.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [3]

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Thank you, Kevin, and good morning, everyone. We appreciate you joining our call today. As Kevin mentioned, we're very excited to be announcing that we have agreed to be acquired by entities affiliated with IFM, a Melbourne, Australia-based investor-owned fund manager for $41.50 per unit. The all-cash transaction is valued at $10.3 billion enterprise value and $6.5 billion equity value. IFM is one of the leading and largest global infrastructure investors with $90 billion of assets under management. They represent more than 15 million pension fund members and have considerable expertise in global infrastructure, including several energy investments in the U.S.

Before we talk more specifically about our transaction, I'd like to take this opportunity to announce that we will publish our first annual Environmental Social Governance, or ESG, report next month. This report will provide insight into Buckeye's ongoing commitment and approach to sustainable, responsible and ethical practices. It will provide additional information about who we are, how we operate, our focus on safety and environmental stewardship and how we give back to our communities. The report will also highlight our commitment to minimizing our environmental impact and maintaining the integrity of our assets with industry-leading maintenance processes and technology. We look forward to sharing this report with you in conjunction with our Annual Unitholder Meeting in June.

Turning now to this morning's announcement, we believe that this offer provides both attractive and immediate value for unitholders. Our proposed transaction with IFM is a culmination of a comprehensive strategic review of our asset portfolio and financial strategy that we launched in 2018. This review resulted in the sale of a package of domestic refined product pipeline and terminal assets as well as our VTTI equity interest. The goal of this review was to enhance the stability of our business to drive long-term returns for our unitholders, and we are confident that the actions we took were definitive steps in the right direction to meet those objectives. IFM's offer represents a significant premium of 31.9% since November 1, 2018, which was the last trading day prior to our announcement of certain strategic actions being taken as a result of this review, and a premium of 27.5% over yesterday's closing price.

We believe that the trends toward more stability and self-funding in the public equity markets has weakened public company multiples and resulted in an undervaluation of Buckeye's assets. On the other hand, there has been strong interest from private equity and infrastructure funds in midstream asset, which has resulted in attractive multiples on many recent private transactions. We benefited from that interest ourselves last year as reflected in the premium multiples we were able to achieve on our asset sales. The dislocation between private market assets and public valuations continues to grow in the midstream space, and the transaction with IFM will allow our unitholders to take advantage of that disconnect.

We are continuously evaluating options to maximize the value for our unitholders. Following a detailed review of IFM's offer and our position in the public markets, our Board and senior leadership team unanimously concluded that IFM's offer is in the best interest of Buckeye.

To summarize, this offer delivers immediate and enhanced value for our unitholders at an attractive premium over both our unit price prior to the announcement of our strategic actions in November 2018 as well as our current unit price. We believe this offer more appropriately reflects the fair value of our underlying assets compared to our public market valuation. Providing that all-cash offer to our unitholders mitigates the risk and exposure to the uncertainty of public valuations of MLPs. Unitholders will continue to be entitled to receive regular quarterly cash distributions declared by the Buckeye Board that are paid on a date prior to the closing of the transaction but not thereafter.

We believe that partnering with IFM, this transaction leaves Buckeye well positioned to continue to operate over the long term for the benefit of our partners as well as for our customers, our employees and our communities. We look forward to partnering with IFM on the next stage of Buckeye's growth.

In terms of next steps, we expect to file a proxy statement in the coming weeks and will then hold a unitholder vote on the transaction. The transaction is subject to unitholder and regulatory approvals as well as other customary closing conditions and is expected to close in the fourth quarter of 2019.

Before we get to your questions about our transaction, I'll ask Keith to discuss our first quarter results.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [4]

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Thank you, Clark, and good morning, everyone. I'll now discuss the details of our financial results. I'm pleased to report that for the first quarter of 2019, that was another strong quarter for Buckeye, our financial results once again demonstrated the stability of our diversified asset portfolio. Overall, we exceeded our plan for the quarter and saw solid growth across a number of our locations.

For the first quarter, we reported net income attributable to Buckeye of $80.8 million compared to $112.4 million for the first quarter of 2018. Net income attributable to Buckeye unitholders was $0.52 per diluted unit for the first quarter of 2019 compared to $0.74 per diluted unit for the same period last year. The diluted weighted average number of units outstanding during the quarter was 154.5 million compared to 149.5 million last year. This increase is primarily due to the January 2018 issuance of Class C PIK units, which converted to common units during the third quarter of 2018.

On a consolidated basis, we reported first quarter 2019 adjusted EBITDA, which is our primary measure of financial performance, of $216.4 million compared to $261.7 million for the first quarter of '18. It is important to note that the 2018 results included a contribution of $43.6 million from assets divested in the fourth quarter of 2018 and the first quarter of 2019.

The adjusted EBITDA for our Domestic Pipelines & Terminals segment totaled $135.9 million for the quarter, a reduction of $4.7 million compared to the prior year. After adjusting for the impact of the divested assets, adjusted EBITDA was up approximately $4.4 million year-over-year. This segment benefited from a FERC index rate increase granted in July of 2018 and from increases applied to our market-based and settlement-based pipelines effective in January of 2019. These drove increased revenue on many of our systems.

We also benefited from higher butane blending volumes compared to the first quarter of 2018 and lower operating expenses during the quarter compared to last year. This segment did see lower storage revenues during the quarter, due primarily to weaker refined product storage market conditions during the period.

Our average pipeline transportation volumes stood at 1.36 million barrels per day or an increase of 1.2% compared to an average of 1.34 million barrels per day in the first quarter of 2018. The first quarter of 2018 has been adjusted to exclude the volumes associated with the domestic asset package divested as part of our strategic review.

Pipeline volumes were stronger across many of our systems, particularly in the Northeast, where demand for distillate grew meaningfully and demand for jet fuel volumes remained strong. Gasoline volumes also increased year-over-year due to strong demand in the markets served by our systems.

Excluding the volumes associated with the divested assets, average terminal throughput volumes grew by 1.5% during the quarter, totaling 1.28 million barrels per day across our portfolio. This increase was primarily driven by strong demand for distillate and crude volumes, particularly in our Midwest and Southeast regions.

Turning now to our Global Marine segment. It produced adjusted EBITDA of $75.5 million for the quarter compared to $117.4 million last year. This decrease was primarily due to the sale of our equity interest in VTTI, which contributed adjusted EBITDA of $34.5 million to the 2018 first quarter results. This segment also continued to face challenging market conditions in segregated storage in the Caribbean and the New York harbor.

Average utilization across all of our marine storage assets based on total capacity was 75% for the first quarter of 2019 compared to 83% for the same period last year. The favorable contribution from Buckeye Texas Partners year-over-year reflects consistent operating performance, annual fee escalations and a full quarter's contribution from the 20% minority interest we acquired in April 2018.

Our Merchant Services segment reported adjusted EBITDA of $5 million for the first quarter of 2019 compared to $3.7 million last year. This increase was driven by favorable spreads, particularly in the distillate market partially offset by lower rack margins. The Merchant Services segment continues to drive incremental throughput and utilization across Buckeye's asset base and again achieved a record quarterly contribution to the overall Buckeye umbrella of just over $14.5 million.

Now turning to our balance sheet. In January of 2019, we utilized the $975 million of proceeds from the VTTI sale to repay outstanding borrowings, including the $250 million term loan and borrowings outstanding on our revolving credit facility.

In addition, in February of 2019, we repaid the $275 million principal outstanding under our 5.5% senior notes using proceeds from this sale as well as funds available under our credit facility. As a result of this retirement, we incurred a $4 million loss primarily consisting of a make-whole payment and unamortized financing costs.

At the end of the first quarter of 2019, we had $1.5 million in cash and cash equivalents and approximately $3.7 billion in long-term debt. We also had $152 million outstanding on our credit facility, of which $137.6 million is reflected as short-term debt as it supports our Merchant Services segment's working capital requirements.

We had $1.35 billion of incremental liquidity available on our revolving credit facility, and our total debt to trailing 12-month adjusted EBITDA based on our credit facility calculation was 3.65x.

Distributable cash flow for the first quarter of 2019 was $144.5 million compared to $169.2 million last year. The decrease in distributable cash flow was driven by the reduced EBITDA contribution from our business segments, including the impact of the asset divestitures partially offset by lower interest and debt expense as a result of the recent debt repayment as well as decreases in maintenance capital expenditures year-over-year.

The first quarter distribution to unitholders will be $0.75 per unit, and our distribution coverage ratio based on distributions declared on units outstanding at the end of the quarter was 1.24x. Buckeye's maintenance capital spending for the first quarter of 2019 totaled $23.4 million compared to $28.2 million last year. We would expect maintenance capital for the year to be within the range of $110 million to $125 million.

Return capital spending for the quarter was $80.1 million, and we anticipate our total 2019 spend on return capital projects to be between approximately $310 million and $345 million. This includes estimated capital contributions to fund our 50% share of the capital investment in the South Texas Gateway joint venture.

The increase from our prior quarter estimate in growth capital is primarily driven by customer -- continued customer interest and commitments that we've seen at our South Texas Gateway project, which has resulted in further expansion of the facility's capacity as well as the growing backlog of growth capital investment opportunities that we've seen across our portfolio of assets.

That concludes my comments on the quarter, and we'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Shneur Gershuni of UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [2]

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Good news today. I was just wondering if you can sort of talk about the process a little bit. You've mentioned it was robust, but were there any other offers? Was it a competitive process? And if you can share your thoughts on why sell now versus your comments in the past about a recovery in the second half of this year and growth into 2020 in terms of getting the right valuation for the company.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [3]

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Yes, Shneur. This is Clark. We're going to explain more about the process in the proxy that will be filed in a couple of weeks, so I'm going to refer to that for any in-depth analysis or discussion. But the process really began with our strategic review last year. We looked at, as you know, a comprehensive set of options for the company, which included all opportunities to improve value for our unitholders. We just think when you see -- what you're going to see in the proxy in terms of the value, we're receiving upfront a significant premium against our outlook going forward, we feel like this is the best option for our company.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [4]

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Okay. Fair enough. Kind of a few technical questions here. Are there any limits on your distributions that are being declared until the merger closes? Could we see 1, 2 or 3 distributions? Just wondering if you can sort of talk about any limitations that you have on it.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [5]

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Well, the only limitations I mentioned in my remarks is we're going to be paying the distribution its ordinary course until, absolutely, the deal closes and that will cease. So you'll see ordinary-course distributions made until the closeout.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [6]

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Okay. Great. And then from a ratings perspective, do you expect that -- will you remain investment-grade as part of this new company or is that subject to review?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [7]

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That will depend largely, Shneur, on how ultimately Buckeye's capital -- capitalized on a go-forward basis. So I really don't have any comments on that because that's -- again, it's going to be dependent upon the acquirer and how they elect to capitalize the business.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [8]

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Great. And one final question. I recognize you're absolutely focused on this transaction and where you go from there. But in the event you continue as a stand-alone, what's your view on CapEx or where you see it for 2019 and for 2020? Has anything changed in terms of things that you wanted to add to the backlog and so forth?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [9]

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Well, we just communicated in my remarks, we said $310 million to $345 million for 2019, and that includes any contributions that we would make here to the South Texas Gateway joint venture. And I think it'd be reasonable to assume that for 2020 sort of consistent with kind of past practice, we'd be looking at that growth capital spend somewhere in the neighborhood of $300 million to $400 million.

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Operator [10]

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And our next question comes from Theresa Chen of Barclays.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [11]

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Congratulations on the announcement today. So related to the distributions, just to be crystal clear, if the fourth quarter transaction close time line remains intact, does that mean you will definitely be paying the August distribution, and then the November distribution will be TBT -- TBD depending on when exactly the transaction closes in the fourth quarter?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [12]

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Just to make sure we understand the question, Theresa, you're saying if we have a fourth quarter close, will we pay the August distribution? Is that your question?

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [13]

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So -- well, you'll be definitely paying the August distribution. And the fourth -- or the fourth quarter to be paid -- the distribution to be paid in the fourth quarter for the third quarter, will it be dependent on exactly when the transaction closes either October, November or December?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [14]

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Yes. The August distribution will be paid assuming a fourth quarter close, and then the payment of the fourth quarter distribution would be dependent on the timing of the close.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [15]

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Great. And in terms of the regulatory approval time line, can you outline what kind of hurdles you're looking to pass and when and if there's anything unique we should consider for the transaction given the buyer?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [16]

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No. It's customary regulatory approvals. We're going to need approval from the Pennsylvania PUC, Bahamian authorities.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [17]

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So we'll have HSR, we'll also have CFIUS approval, will be required.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [18]

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We'll seek the CFIUS approval. There's still a question on whether that's required or not.

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Unidentified Company Representative, [19]

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It's customary closing regulations and regulatory approvals, Theresa, nothing out of the extraordinary here.

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Operator [20]

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And our next question comes from Jeremy Tonet of JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [21]

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Just want to start it off, Clark, Keith and team, congratulations on this transaction.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [22]

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Thanks, Jeremy.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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I want to just touch a little bit more on the details and if you could disclose if there's a breakup fee involved if the deal were to not happen for some reason.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [24]

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There is a break fee, Jeremy. It's a 2% break fee.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [25]

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We'll file the merger agreement after the close of the market today and it'll address the break fee.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [26]

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Yes. And it's 2% of equity, just to be clear.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [27]

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There's not a go-shop.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [28]

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Okay. Got it. And I don't know if you're able to touch on this, but as far as how IFM is able to deliver this cash, do they have the funds there? Or do they need to go out and raise funds in the credit markets? Or is there anything that you can say on that end as far as visibility to that payment?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [29]

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What I will say is this Jeremy, there are no financing contingencies. Let's just leave it at that.

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Operator [30]

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And our next question comes from Sunil Sibal of Seaport Global.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [31]

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Congratulations on the transaction. Yes, I just wanted to touch upon something which some of the other midstream players have talked about, especially in terms of attracting new business. Investment-grade ratings have been kind of talked about a fair bit in that regard. And I think when you did your strategic review, you also kind of highlighted that, not just from a cost of capital perspective but beyond that. I was wondering if you could touch upon that, especially as your business mix has changed with the acquisitions that -- so far that you've done. Do you think an investment-grade rating is important from a new business perspective, too? And any color you can provide there would be helpful.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [32]

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Again, as far as maintaining the investment-grade credit rating, that's going to be contingent upon how the new owner elects to capitalize the business. Certainly, as we continue to operate on a stand-alone basis, that's something we certainly want to maintain and is very important to us. As a publicly traded MLP, it will be up to our new owners to determine, again, how they're going to capitalize the company going forward and the implications of that on the investment-grade rating.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [33]

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Okay. And then are there any change of control provisions in any of your debt securities that are outstanding, including the perps?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [34]

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There are no -- the only issue that we would have relative to a change in control would be our revolving credit facility. All of the bonds would remain outstanding.

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Operator [35]

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(Operator Instructions) Our next question comes from Tristan Richardson with SunTrust.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [36]

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Just a quick question on thinking about large global infrastructure buyers and incentives and -- do you think that -- you guys mentioned that this started with the strategic review last year. Do you think that your actions in the strategic review enhanced discussions or made discussions more positive with the range of potential acquirers throughout the process?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [37]

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Yes. I think the discussions, Tristan, did help. I think the actions we took that we announced in the third quarter also showed the company was -- repositioned itself to be a more stable and could fit under a self-funding umbrella. But at the same time, we are always looking to try and maximize the value to the unitholders, and this opportunity turned out to be one that we thought was extremely positive.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [38]

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Absolutely. Last one for me. Can we expect to see you in Las Vegas next week?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [39]

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No. We can't do that. We won't be there.

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Operator [40]

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Our next question comes from Adam Breit of SunTrust.

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Adam Benjamin Breit, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [41]

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Just a real quick one. Was this deal previewed at all at the rating agencies either by you or by IFM? And who's kind of interfacing with the rating agencies going forward here while this deal is being closed?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [42]

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I can't really make any comments that we -- regarding any conversations that we or the acquirer have with the rating agencies, not at this point.

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Operator [43]

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

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [44]

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Thanks, Josh, and thanks again, everyone, for joining us today. We are confident that our go-private deal with IFM is the right transaction at the right time with the right partner and at an attractive price for our unitholders. For now until close, it's business as usual at Buckeye with a continued focus on safety and compliance, project execution and capital discipline. Have a great weekend.

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Operator [45]

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