UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

x

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended June 30, 2007

 

 

 

or

 

 

 

o

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the transition period from                        to                        

 

Commission file number 1-9356

BUCKEYE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

Delaware

 

23-2432497

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

Five TEK Park

 

 

9999 Hamilton Boulevard

 

 

Breinigsville, PA

 

18031

(Address of principal executive

 

(Zip Code)

offices)

 

 

 

Registrant’s telephone number, including area code:    610-904-4000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x    No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x

 

Accelerated Filer  o

 

Non-Accelerated Filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at July 16, 2007

Limited Partnership Units

 

41,208,746 Units

 

 




 

BUCKEYE PARTNERS, L.P.

INDEX

PART I— FINANCIAL INFORMATION

 

Page

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006

 

1

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statement of Changes in Partners’ Capital for the six months ended June 30, 2007

 

4

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

PART II— OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

Item 6.

 

Exhibits

 

34

 




 

PART I - FINANCIAL INFORMATION

Item1. Condensed Consolidated Financial Statements

Buckeye Partners, L.P.

Condensed Consolidated Statements of Income

(In thousands, except per unit amounts)

(Unaudited)

Three Months Ended

 

 

 

Six Months Ended

 

June 30,

 

 

 

June 30,

 

2007

 

2006

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

$

124,951

 

$

111,495

 

Revenues

 

$

249,895

 

$

217,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

62,437

 

52,542

 

Operating expenses

 

121,147

 

102,804

 

11,098

 

11,147

 

Depreciation and amortization

 

21,905

 

21,339

 

5,159

 

4,753

 

General and administrative

 

10,313

 

9,552

 

78,694

 

68,442

 

Total costs and expenses

 

153,365

 

133,695

 

46,257

 

43,053

 

Operating income

 

96,530

 

83,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

2,570

 

1,604

 

Investment and equity income

 

4,636

 

3,196

 

(12,773)

 

(12,889

)

Interest and debt expense

 

(26,260

)

(25,360

)

 

(6,174

)

General Partner incentive compensation

 

 

(11,896

)

(1,509)

 

(1,428

)

Minority interests and other

 

(2,627

)

(2,341

)

(11,712)

 

(18,887

)

Total other income (expenses)

 

(24,251

)

(36,401

)

 

 

 

 

 

 

 

 

 

 

$

34,545

 

$

24,166

 

Net income

 

$

72,279

 

$

47,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

$

5,801

 

$

148

 

Net income allocated to General Partners

 

$

12,618

 

$

293

 

$

28,744

 

$

24,018

 

Net income allocated to Limited Partners

 

$

59,661

 

$

46,851

 

$

0.70

 

$

0.61

 

Earnings per limited partner unit-basic

 

$

1.47

 

$

1.20

 

$

0.70

 

$

0.61

 

Earnings per limited partner unit-diluted

 

$

1.47

 

$

1.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

41,201

 

39,430

 

Basic

 

40,579

 

38,888

 

41,253

 

39,451

 

Diluted

 

40,634

 

38,912

 

 

See Notes to condensed consolidated financial statements.

1




 

Buckeye Partners, L.P.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

22,802

 

$

18,946

 

Trade receivables

 

42,658

 

51,030

 

Construction and pipeline relocation receivables

 

11,953

 

12,189

 

Inventories

 

14,059

 

14,286

 

Prepaid and other current assets

 

31,312

 

32,976

 

Total current assets

 

122,784

 

129,427

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,783,576

 

1,727,222

 

Goodwill

 

11,355

 

11,355

 

Other non-current assets

 

124,535

 

127,466

 

Total assets

 

$

2,042,250

 

$

1,995,470

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

21,411

 

26,347

 

Accrued and other current liabilities

 

67,385

 

63,202

 

Total current liabilities

 

88,796

 

89,549

 

 

 

 

 

 

 

Long-term debt

 

964,152

 

994,127

 

Other non-current liabilities

 

81,179

 

81,743

 

Minority interests

 

21,139

 

20,169

 

Total liabilities

 

1,155,266

 

1,185,588

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

General Partner

 

53

 

1,964

 

Limited Partners

 

887,272

 

807,488

 

Receivable from the exercise of options

 

(229

)

(355

)

Accumulated other comprehensive income

 

(112

)

785

 

Total partners’ capital

 

886,984

 

809,882

 

Total liabilities and partners’ capital

 

$

2,042,250

 

$

1,995,470

 

 

See Notes to condensed consolidated financial statements.

2




 

Buckeye Partners, L.P.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Six Months Ended

 

 

 

June 30,

 

Cash flows from operating activities:

 

2007

 

2006

 

Net income

 

$

72,279

 

$

47,144

 

Adjustments to reconcile net income to net cash provided by operating activity:

 

 

 

 

 

Depreciation and amortization

 

21,905

 

21,339

 

Minority interest

 

2,576

 

2,341

 

Equity earnings

 

(4,044

)

(2,795

)

Distributions from equity investments

 

3,589

 

3,167

 

Amortization of debt discount

 

25

 

25

 

Amortization of option grants

 

222

 

239

 

Change in assets and liabilities, net of amounts related to acquisitions:

 

 

 

 

 

Trade receivables

 

8,372

 

(1,072

)

Construction and pipeline relocation receivables

 

236

 

(2,421

)

Inventories

 

227

 

(419

)

Prepaid and other current assets

 

1,664

 

(12,003

)

Accounts payable

 

(4,936

)

(3,839

)

Accrued and other current liabilities

 

4,151

 

9,537

 

Other non-current assets

 

1,612

 

(399

)

Other non-current liabilities

 

(1,461

)

2,351

 

Total adjustments from operating activities

 

34,138

 

16,051

 

Net cash provided by operating activities

 

106,417

 

63,195

 

 

 

 

 

 

 

Cash flows from investing activities :

 

 

 

 

 

Capital expenditures

 

(36,966

)

(43,943

)

Acquisitions and equity investments

 

(39,320

)

(92,790

)

Net expenditures for disposal of property, plant and equipment

 

(167

)

(139

)

Net cash used in investing activities

 

(76,453

)

(136,872

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of limited partnership units

 

82,171

 

64,105

 

Proceeds from exercise of units options

 

1,895

 

486

 

Distributions to minority interests

 

(1,606

)

(1,548

)

Proceeds from issuance of long-term debt

 

85,000

 

127,000

 

Payment of long-term debt

 

(115,000

)

(65,000

)

Distributions to unitholders

 

(78,568

)

(57,903

)

Net cash (used in) provided by financing activities

 

(26,108

)

67,140

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

3,856

 

(6,537

)

Cash and cash equivalents —Beginning of year

 

18,946

 

24,862

 

Cash and cash equivalents—End of period

 

$

22,802

 

$

18,325

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest (net of amount capitalized)

 

$

25,437

 

$

27,073

 

Capitalized interest

 

$

902

 

$

1,010

 

Cash paid for income tax

 

$

575

 

$

5

 

 

 

 

 

 

 

Non-cash changes in assets and liabilities:

 

 

 

 

 

Fair value hedge accounting

 

$

118

 

$

118

 

See Notes to condensed consolidated financial statements.

3




 

Buckeye  Partners, L.P.

Condensed Consolidated Statement of Partners’ Capital

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Receivable

 

Other

 

 

 

 

 

General

 

Limited

 

from Exercise

 

Comprehensive

 

 

 

 

 

Partners

 

Partners

 

of Options

 

Income

 

Total

 

Partners’ capital — January 1, 2007

 

$

1,964

 

$

807,488

 

$

(355

)

$

785

 

$

809,882

 

Net income

 

12,618

 

59,661

 

 

 

72,279

 

Amortization of RIGP and Retiree Medical Plan Costs

 

 

 

 

(897

)

(897

)

Comprehensive income

 

12,618

 

59,661

 

 

(897

)

71,382

 

Distributions

 

(14,529

)

(64,039

)

 

 

(78,568

)

Net Proceeds from the issuance of 1,708,600 limited partner units

 

 

82,171

 

 

 

82,171

 

Amortization of unit options

 

 

222

 

 

 

222

 

Exercise of unit options

 

 

1,769

 

 

 

1,769

 

Repayment of Receivable from Exercise of Options

 

 

 

126

 

 

126

 

Partners’ capital-June 30, 2007

 

$

53

 

$

887,272

 

$

(229

)

$

(112

)

$

886,984

 

See Notes to condensed consolidated financial statements.

4




 

BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  BASIS OF PRESENTATION

Buckeye Partners, L.P. (the “Partnership” or “Buckeye”) is a publicly traded (NYSE:BPL) master limited partnership organized in 1986 under the laws of the state of Delaware.

Buckeye owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, with approximately 5,400 miles of pipeline, serving 16 states, and operates another approximately 2,700 miles of pipeline under agreements serving 2 states with major oil and chemical companies. As of June 30, 2007, the Partnership also owns and operates 51 refined petroleum products terminals with aggregate storage capacity of approximately 20 million barrels in Illinois, Indiana, Massachusetts, Michigan, Missouri, New York, Ohio, Pennsylvania and Wisconsin.

Buckeye conducts all of its operations through subsidiary entities.  These operating subsidiaries are Buckeye Pipe Line Company, L.P. (“Buckeye Pipe Line”), Laurel Pipe Line Company, L.P. (“Laurel”), Everglades Pipe Line Company, L.P. (“Everglades”), Buckeye Pipe Line Holdings, L.P. (“BPH”), Wood River Pipe Lines LLC (“Wood River”), Buckeye Pipe Line Transportation LLC (“BPL Transportation”) and Buckeye NGL Pipe Lines LLC (“Buckeye NGL”).  Each of these entities is hereinafter referred to as an “Operating Subsidiary” and they are collectively referred to as the “Operating Subsidiaries.”

The Partnership’s Operating Subsidiaries conduct business in three reportable operating segments:  Pipeline Operations, Terminalling and Storage, and Other Operations.  See Note 13 for a further discussion.

Buckeye GP LLC (“Buckeye GP”) is the general partner of the Partnership and controls the Partnership.  At June 30, 2007, Buckeye GP owned an approximate 0.6% general partner interest in the Partnership.  Buckeye GP also owns 100% of and controls MainLine GP, Inc. which, together with Buckeye GP, owns 100% of and controls MainLine L.P. (the “Operating Subsidiary GP”).  The Operating Subsidiary GP is the general partner of and owns a 1% interest in each of Buckeye Pipe Line, Laurel and Everglades and is the general partner of and owns an approximate 0.5% interest in BPH.

Buckeye GP is a wholly-owned subsidiary of Buckeye GP Holdings L.P. (“BGH”), a Delaware limited partnership that is owned by BGH GP Holdings, LLC, certain members of the Partnership’s senior management and the public. The controlling interest in BGH was sold effective June 25, 2007. See Note 2 for further information.  BGH has no operating assets other than its general partner ownership interest in Buckeye and its operating subsidiaries.  BGH is separately traded on the New York Stock Exchange (NYSE:BGH).

Buckeye GP historically has received incentive compensation payments under an Incentive Compensation Agreement, which were payments based on cash distributions to the limited partners of the Partnership.  As part of a reorganization of Buckeye GP and the Operating Subsidiary GP, the Incentive Compensation Agreement and Buckeye’s Agreement of Limited Partnership were amended to recharacterize the incentive payments received by Buckeye GP as distribution payments rather than compensation payments.  These amendments were effective for Partnership distributions declared after August 9, 2006.  The recording of incentive payments as distributions rather than an expense resulted in an increase in reported net income of $7.3 million and $14.1 million for the three and six months ended June 30, 2007, respectively, compared to net income that would have been reported had these agreements not been amended.

Commencing in the fourth quarter of 2006, in addition to the recharacterization of incentive distributions, the Partnership changed the way it attributes income between Buckeye GP and its limited partners.   Generally, the Partnership now attributes income to Buckeye GP and the limited partners as if the net income of the Partnership were entirely distributed to its unitholders.  The Partnership determines the amount of income allocable to Buckeye GP, which represents the sum of the incentive compensation that would have been payable to Buckeye GP if the total distribution equaled net income, plus Buckeye GP’s proportional share of the remaining income of the Partnership.

5




 

These amendments have not changed the timing or amounts of incentive payments to Buckeye GP or other distributions payable to the limited partners and Buckeye GP.

All of the employees who provide services to BGH, the Partnership and the Partnership’s subsidiaries are employed by Buckeye Pipe Line Services Company (“Services Company”). Pursuant to a services agreement, Services Company is reimbursed by BGH or the Partnership’s subsidiaries for the cost of the employees who provide those services.  BGH is responsible for the total compensation, including benefits, paid to the four highest salaried officers performing duties for the Partnership with respect to the functions of operations, finance, legal, marketing, business development, treasury, or performing the function of president of Buckeye GP, which correspond to Buckeye GP’s named executive officers.  The Partnership is generally responsible for all other employee costs.  Services Company is owned by an employee stock ownership plan (the “ESOP”). Services Company owned approximately 5.4% of the limited partnership units (“LP Units”) of the Partnership at June 30, 2007.

In the opinion of management, the condensed consolidated financial statements of Buckeye, which are unaudited except that the balance sheet as of December 31, 2006 is derived from audited financial state­ments, include all adjustments necessary to present fairly Buckeye’s financial position as of June 30, 2007, along with the results of Buckeye’s operations for the three and six months ended June 30, 2007 and 2006 and Buckeye’s cash flows for the six months ended June 30, 2007 and 2006.  The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007.

Pursuant to the rules and regulations of the Securities and Exchange Commis­sion, the condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of Buckeye and the notes thereto for the year ended December 31, 2006 contained in the Partnership’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 26, 2007.

2. SIGNIFICANT EVENT

On April 3, 2007, Carlyle/Riverstone BPL Holdings II, L.P. (“Carlyle/Riverstone”), certain members of senior management of Buckeye GP and other limited partners (collectively, the “Sellers”) entered into a Purchase Agreement (the “Purchase Agreement”) with BGH GP Holdings, LLC (the “Buyer”).  The Buyer is a limited liability company owned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”) and Lehman Brothers Holdings Inc (“Lehman Brothers”).  The Purchase Agreement provided for the sale by the Sellers to the Buyer of their 62.9% limited partner interest in BGH and Carlyle/Riverstone’s ownership interest in MainLine Management LLC (“MainLine Management”), which is the general partner of BGH.

On June 25, 2007, the Purchase Agreement was amended to provide that the members of management who were parties to the Purchase Agreement would retain a portion of their limited partner interest in BGH. Also on June 25, 2007, the sale transaction closed.  Total consideration paid was $411.6 million.  The transaction constituted a change of control of BGH and, indirectly, Buckeye.

In connection with the closing of the transaction, William H. Shea, Jr. resigned as Chairman of the Board, President and Chief Executive Officer of the general partners of BGH and Buckeye and as a director of each entity.  Forrest E. Wylie was elected as Chairman of the Board, President and Chief Executive Officer of the general partners of BGH and Buckeye and as a director of each entity. Furthermore, in connection with the closing of the transaction, Michael B. Hoffman, E. Bartow Jones and Andrew W. Ward, each of whom is affiliated with Carlyle/Riverstone, resigned from their positions as directors of the general partners of BGH and Buckeye.  Daniel R. Revers and Robb E. Turner, each of whom is affiliated with ArcLight, were appointed to the Board of Directors of the general partners of BGH and Buckeye.  In addition, Frank J. Loverro and Christopher L. Collins, each of whom is affiliated with Kelso, were appointed to the Board of Directors of the general partner of BGH, and Michael B. Goldberg and Irvin K. Culpepper, Jr., each of whom also is affiliated with Kelso, were appointed to the Board of Directors of the general partner of Buckeye.

6




 

3. CONTINGENCIES

Claims and Proceedings

The Partnership and the Operating Subsidiaries in the ordinary course of business are involved in various claims and legal proceedings, some of which are covered by insurance. The Partnership is generally unable to predict the timing or outcome of these claims and proceedings. Based upon its evaluation of existing claims and proceedings and the probability of losses relating to such contingencies, the Partnership has accrued certain amounts relating to such claims and proceedings, none of which are considered material.

In the third quarter of 2006, the Partnership received penalty assessments from the IRS in the aggregate amount of $4.3 million based on a failure to timely file excise tax information returns relating to its terminal operations from January 2005 through February 2006. The Partnership filed the information returns with the IRS on May 10, 2006. In January 2007, the Partnership agreed to pay the IRS approximately $0.6 million to settle and resolve the penalty assessment. The settlement is subject to further administrative review within the IRS and the negotiation and execution of a closing agreement between the Partnership and the IRS. The negotiated penalty assessment was recorded as an expense in the consolidated financial statements in the fourth quarter of 2006.

In March 2007, Buckeye was named as a defendant in an action entitled Madigan v. Buckeye Partners, L.P. filed in the U.S. District Court for the Central District of Illinois. The action was brought by the State of Illinois Attorney General acting on behalf of the Illinois Environmental Protection Agency. The complaint alleges that Buckeye violated various Illinois state environmental laws in connection with a product release from Buckeye’s terminal located in Harristown, Illinois on or about June 11, 2006 and various other product releases from Buckeye’s terminals and pipelines in the State of Illinois during the period of 2001 through 2006. The complaint seeks to recover state oversight costs, damages, and civil penalties and seeks injunctive action requiring Buckeye to remediate the environmental contamination resulting from the product releases. Buckeye believes it has meritorious defenses to the allegations set forth in the complaint.

Environmental Contingencies

In accordance with its accounting policy, the Partnership recorded operating expenses of $1.8 million and $2.2 million for the three months ended June 30, 2007 and 2006, respectively, and $4.0 million and $3.9 million for the six months ended June 30, 2007 and 2006, respectively, related to environmental contingencies unrelated to claims and proceedings.

4.  ACQUISITIONS AND EQUITY INVESTMENTS

The acquisitions discussed below were accounted for as acquisitions of assets rather than the acquisitions of businesses, as defined in Statement of Financial Accounting Standards No. 141 — “Business Combinations.”

On January 16, 2007, Buckeye acquired two refined petroleum products terminals located in Flint and Woodhaven, Michigan for approximately $22.0 million, including a deposit of $1.0 million that was paid in 2006. The preliminary allocated fair value of the acquired assets is as follows (in thousands):

Land

 

$

8,581

 

Buildings

 

2,593

 

Machinery, equipment, and office furnishings

 

10,862

 

 

 

$

22,036

 

 

7




 

On February 27, 2007, Buckeye acquired a refined products terminal in Marcy, New York for approximately $2.3 million. The allocated fair value of the acquired assets is as follows (in thousands):

Land

 

$

505

 

Buildings

 

192

 

Machinery, equipment, and office furnishings

 

1,566

 

 

 

$

2,263

 

 

On March 15, 2007, Buckeye completed the acquisition of two refined petroleum products terminals located in Green Bay and Madison, Wisconsin and the purchase of a fifty percent interest in a third terminal located in Milwaukee, Wisconsin for approximately $15.2 million.  Buckeye has allocated, on a preliminary basis, the cost of the acquisition to the various tangible assets acquired which principally consist of property, plant and equipment.

In the first quarter of 2007, Buckeye invested $0.9 million in West Texas LPG Pipe Line L.P. to be used for capital expenditures.

5. PREPAIDS AND OTHER CURRENT ASSETS

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Prepaid insurance

 

$

3,322

 

$

7,274

 

Insurance receivables

 

10,244

 

12,093

 

Ammonia receivable

 

6,998

 

6,284

 

Other

 

10,748

 

7,325

 

Total

 

$

31,312

 

$

32,976

 

6. ACCRUED AND OTHER CURRENT LIABILITIES

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Taxes - other than income

 

$

8,350

 

$

5,523

 

Accrued charges due General Partner

 

2,342

 

2,264

 

Accrued charges due Services Company

 

2,462

 

1,732

 

Accrued employee benefit liability

 

2,340

 

2,340

 

Environmental liabilities

 

12,347

 

12,498

 

Interest

 

17,170

 

16,950

 

Accrued top-up reserve

 

50

 

230

 

Retainage

 

1,767

 

940

 

Payable for ammonia purchase

 

6,627

 

6,072

 

Other

 

13,930

 

14,653

 

Total

 

$

67,385

 

$

63,202

 

 

8




 

7.  LONG-TERM DEBT AND CREDIT FACILITIES

Long-term debt consists of the following:

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

4.625% Notes due July 15, 2013

 

$

300,000

 

$

300,000

 

6.750% Notes due August 15, 2033

 

150,000

 

150,000

 

5.300% Notes due October 15, 2014

 

275,000

 

275,000

 

5.125% Notes due July 1, 2017

 

125,000

 

125,000

 

Borrowings under Revolving Credit Facility

 

115,000

 

145,000

 

Less: Unamortized discount

 

(2,260

)

(2,403

)

Adjustment to fair value associated with hedge of fair value

 

1,412

 

1,530

 

 

 

$

964,152

 

$

994,127

 

The fair value of the Partnership’s debt was estimated to be $923.0 million as of June 30, 2007 and $964.0 million at December 31, 2006.  The values at June 30, 2007 and December 31, 2006 were based on approximate market value on the respective dates.

On November 13, 2006, the Partnership entered into a new $400.0 million, 5-year revolving credit facility (the “Credit Facility”) with a syndicate of banks. The Credit Facility, which replaced the Partnership’s previous $400.0 million credit facility, contains a one-time expansion feature to $600.0 million subject to certain conditions. Borrowings under the Credit Facility are guaranteed by certain of the Partnership’s subsidiaries. The Credit Facility matures on November 13, 2011, but may be extended for up to two additional 12-month periods under certain circumstances. The weighted average interest rate on amounts outstanding under the Credit Facility at June 30, 2007 was 5.7%.

Borrowings under the Credit Facility bear interest under one of two rate options, selected by the Partnership, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin, or (ii) LIBOR plus an applicable margin. The applicable margin is determined based on the current utilization level of the Credit Facility and on ratings assigned by Standard & Poor’s and Moody’s Investor Services for the Partnership’s senior unsecured non-credit enhanced long-term debt. The Partnership also had committed $1.6 million and $2.1 million of the Credit Facility to support outstanding letters of credit at June 30, 2007 and December 31, 2006, respectively.

The Credit Facility contains covenants and provisions that:

·                  Restrict the Partnership and certain of its subsidiaries’ ability to incur additional indebtedness based on a Funded Debt Ratio described below;

·                  Prohibit the Partnership and certain of its subsidiaries from creating or incurring certain liens on their property;

·                  Prohibit the Partnership and certain of its subsidiaries from disposing of property material to their operations; and

·                  Limit consolidations, mergers and asset transfers by the Partnership and certain of its subsidiaries.

The Credit Facility requires that the Partnership and certain of its subsidiaries maintain a maximum “Funded Debt Ratio” which is calculated using “EBITDA” as defined in the Credit Facility. The Credit Facility defines EBITDA for periods prior to the fourth quarter of 2006 as earnings before interest, taxes, depreciation, depletion, amortization and incentive compensation payments to Buckeye GP, and for periods commencing after October 1,

9




 

2006 as earnings before interest, taxes, depreciation, depletion and amortization, in each case excluding the income of certain majority-owned subsidiaries and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).

The Partnership’s Funded Debt Ratio at the end of any quarterly period equals the ratio of the long-term debt of the Partnership and certain of its subsidiaries (including the current portion, if any) to EBITDA for the previous four fiscal quarters. As of the end of any fiscal quarter, the Funded Debt Ratio may not exceed 4.75 to 1.00, subject to a provision for increases to 5.25 to 1.00 in connection with future acquisitions. At June 30, 2007, the Partnership’s Funded Debt Ratio was 4.01 to 1.00.

In addition, the Credit Facility provides for a “change of control” event of default that is triggered if (i) BGH GP Holdings, LLC ceases to own and control 100% of MainLine Management, (ii) (A) Arclight, Kelso, Lehman Brothers and each of their respective affiliates, individually or collectively, cease to own and control at least 35% of the outstanding equity interests of BGH GP Holdings, LLC, and (B) any person, entity or group owns and controls a larger percentage of the outstanding equity interests of BGH GP Holdings, LLC, than is collectively owned by Arclight, Kelso, Lehman Brothers, and their affiliates,  (iii) BGH ceases to own 100% of Buckeye GP or (iv) Buckeye GP ceases to be the sole general partner of Buckeye.  Buckeye received the consent of the Credit Facility lenders in connection with the sale of Carlyle/Riverstone’s interest in BGH as described in Note 2, and entered into an amendment to the Credit Facility to reflect the change in ownership following the sale.

At June 30, 2007, the Partnership was in compliance with all of the covenants under the Credit Facility.

In December 2004, the Partnership terminated an interest rate swap agreement associated with the 4.625% Notes due June 15, 2013 and received proceeds of $2.0 million.  In accordance with FASB Statement No. 133 — “Accounting for Derivative Instruments and Hedging Activities”, the Partnership has deferred the $2.0 million gain as an adjustment to the fair value of the hedged portion of the Partnership’s debt and is amortizing the gain as a reduction of interest expense over the remaining term of the hedged debt.  Accordingly, interest expense was reduced by $59 thousand for the three months ended June 30, 2007 and 2006, respectively, and $118 thousand for the six months ended June 30, 2007 and 2006.

8.  EARNINGS PER LP UNIT

Emerging Issues Task Force Issue No. 03-06 (“EITF 03-06”) “Participating Securities and the Two-Class Method Under FASB Statement No. 128” addresses the computation of earnings per share by entities that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the entity.  EITF 03-06 provides that Buckeye GP’s interest in net income is to be calculated based on the amount that would be allocated to Buckeye GP if all the net income for the period was distributed, and not on the basis of actual cash distributions for the period.  The Partnership applied EITF 03-06 prospectively beginning in the fourth quarter of 2006.  The application of EITF 03-06 may have an impact on earnings per LP Unit in future periods if there are material differences between net income and actual cash distributions or if other participating securities are issued.

The following table is a reconciliation of the number of limited partner units (“LP Units”) used in the basic and diluted earnings per unit calculations for the three and six month periods ended June 30, 2007 and 2006:

10




 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Basic:

 

 

 

 

 

 

 

 

 

Average units oustanding

 

41,201

 

39,430

 

40,579

 

38,888

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Average units oustanding

 

41,201

 

39,430

 

40,579

 

38,888

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of unit options granted

 

52

 

21

 

55

 

24

 

 

 

41,253

 

39,451

 

40,634

 

38,912

 

9. CASH DISTRIBUTIONS

The Partnership generally makes quarterly cash distributions of substan­tially all of its available cash, generally defined as consolidated cash receipts less consolidated cash expenditures and such retentions for working capital, anticipated cash expenditures and contingencies as Buckeye GP deems appropriate.

On July 26, 2007, the Partnership declared a cash distribution of $0.8125 per unit payable on August 31, 2007 to unitholders of record on August 6, 2007. The total cash distribution to unitholders will amount to approximately $41.2 million which includes an incentive distribution of approximately $7.6 million payable to Buckeye GP.

10. RELATED PARTY TRANSACTIONS

As described in Note 1, Services Company employs all of the employees who work for the Operating Subsidiaries as well as the named executive officers of BGH’s general partner.  Services Company is reimbursed for these expenses.  Costs incurred by the Partnership and the Operating Subsidiaries for the services provided by Services Company totaled $23.4 million and $21.5 million and $46.0 and $43.0 million for three and six month periods ended June 30, 2007 and 2006, respectively.  The reimbursable costs include primarily compensation and benefits for the aforementioned employees.

Services Company owns approximately 2.2 million of the Partnership’s LP Units as of June 30, 2007.  Distributions received by Services Company from the Partnership on such LP Units are used to fund the debt in connection with Service Company’s ESOP.  Distributions paid to Services Company totaled $1.8 million and $1.8 million and $3.6 million and $3.5 million for the three and six month periods ended June 30, 2007 and 2006, respectively.

The Partnership pays MainLine Management a senior administrative charge for certain management functions performed by affiliates of Buckeye GP.  The Partnership incurred an administrative charge of $0.5 million for both three month periods ended on June 30, 2007 and 2006 and $0.9 million for both six month periods ended on June 30, 2007 and 2006.  The disinterested directors of Buckeye GP approve the amount of the senior administrative charge on an annual basis.   In connection with the acquisition described in Note 2, MainLine Management will forego receiving the senior administrative charge effective June 25, 2007 through March 31, 2009.

Buckeye GP receives incentive distributions from the Partnership based on the level of quarterly cash distributions paid per LP Unit.  Incentive distributions totaled $7.3 million and $6.2 million and $14.1 million and $11.9 million for the three and six month periods ended June 30, 2007 and 2006, respectively.

11. UNIT OPTION AND DISTRIBUTION EQUIVALENT PLAN

The Partnership sponsors the Unit Option and Distribution Equivalent Plan (the “Option Plan”), pursuant to which it grants options to purchase LP Units at 100% of the market price of the LP Units on the date of grant. Generally, the options vest three years from the date of grant and expire ten years from date of grant. As unit options

11




 

are exercised, the Partnership issues new LP Units. The Partnership has not historically repurchased, and does not expect to repurchase, any of its LP Units in 2007.

Effective January 1, 2006, the Partnership adopted the fair value measurement and recognition provisions of Statement of Financial Accounting Standards 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), using the modified prospective basis transition method. Under this method, unit-based compensation expense recognized in the three and six months ended June 30, 2006 included: (a) compensation expense for all grants made prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation expense for all grants made on or after January 1, 2006 through June 30, 2006, based on the grant date fair value estimated using the Black-Scholes option pricing model.  The Partnership recognizes compensation expense for awards granted on or after January 1, 2006 on a straight-line basis over the requisite service period.

For the retirement eligibility provisions of the Option Plan, the Partnership follows the non-substantive vesting method and recognizes compensation expense immediately for options granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved. Unit-based compensation expense recognized in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006 is based upon options ultimately expected to vest. In accordance with SFAS No. 123R, forfeitures have been estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience.

The following table summarizes the total unit-based compensation expenses included in the Partnership’s Condensed Consolidated Statements of Income:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

$

69

 

$

52

 

$

172

 

$

184

 

General and adminstrative expenses

 

20

 

15

 

50

 

55

 

Total unit-based compensation Expenses

 

$

89

 

$

67

 

$

222

 

$

239

 

 

The fair value of unit options granted to employees was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for the six months ended June 30, 2007 and 2006, respectively:

 

 

2007

 

2006

 

Expected dividend yield

 

6.60

%

6.90

%

Expected unit price volatility

 

19.60

%

20.70

%

Risk-Free interes t rate

 

4.70

%

4.60

%

Expected life (in years)

 

6.5

 

6.5

 

Weighted-average fair value at

 

 

 

 

 

grant date

 

$

5.07

 

$

4.52

 

 

The dividend yield is based on 6.5 years of historic yields.  The expected volatility is based upon 6.5 years of historical volatility of the Partnership’s LP Units. Effective January 1, 2006, the Partnership elected to use the simplified method for the expected life which is the option vesting period of three years plus the option term of ten years divided by two. The risk-free interest rate is calculated using the U.S. Treasury yield curves in effect at the time of grant, for the periods within the expected life of the options.

The following table summarizes employee unit option activity for the six month period ended June 30, 2007:

12




 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

Number of

 

Average

 

Contractual

 

Aggregate

 

 

 

Options

 

Exercise Price

 

Life

 

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 1, 2007

 

298,400

 

$

41.44

 

 

 

 

 

Granted

 

95,400

 

50.36

 

 

 

 

 

Exercised

 

(46,300

)

38.02

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

Outstanding, June 30, 2007

 

347,500

 

$

44.36

 

7.7

 

$

2,418,900

 

Exercisable, June 30, 2007

 

111,700

 

$

38.27

 

5.5

 

$

1,457,200

 

As of January 1, 2007, there were 205,800 unvested options outstanding.  During the first six months of 2007, 65,400 options vested.  The aggregate intrinsic value in the preceding table represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on June 30, 2007. Intrinsic value is determined by calculating the difference between the Partnership’s closing LP Unit price on the last trading day of the second quarter of 2007 and the exercise price, multiplied by the number of units. The total intrinsic value of options exercised during the six month period ended June 30, 2007 was $588,900. The total number of in-the-money options exercisable as of June 30, 2007 was 111,700. As of June 30, 2007, total unrecognized compensation cost related to unvested options was $562,500. The cost is expected to be recognized over a weighted average period of 1.1 years.  At June 30, 2007, 475,500 LP Units were available for grant in connection with the Option Plan.

12. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Services Company sponsors a retirement income guarantee plan (a defined benefit plan)  (the “RIGP”) which generally guarantees employees hired before January 1, 1986, a retirement benefit at least equal to the benefit they would have received under a previously terminated defined benefit plan. Services Company’s policy is to fund amounts necessary to at least meet the minimum funding requirements of ERISA.

Services Company also provides a post-retirement health care and life insurance plan (the “Retiree Medical Plan”) to certain of its retirees. To be eligible for these benefits an employee had to be hired prior to January 1, 1991 and meet certain service requirements. Services Company does not pre-fund this postretirement benefit obligation.

In December 2006, the Partnership adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”).  SFAS No. 158 requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income in connection with reporting on the funded status of defined benefit pension and other postretirement benefit plans.

In December 2006, Services Company amended the Retiree Medical Plan to freeze amounts payable to Medicare-eligible beneficiaries at $2,500 per year commencing in 2008.  This change had the effect of reducing the postretirement benefit obligation at December 31, 2006 by approximately $20.4 million and reducing the Retiree Medical Plan expense for the three months and six months ended June 30, 2007 by approximately $1.0 million and $1.9 million, respectively.

For the three months ended June 30, 2007 and 2006, the components of the net periodic benefit cost recognized by the Partnership for Services Company’s RIGP and Retiree Medical Plan were as follows:

13




 

 

 

Three Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

Components of net periodic benefit cost:

 

(In thousands)

 

Service cost

 

$

248

 

$

179

 

$

100

 

$

225

 

Interest cost

 

252

 

215

 

508

 

725

 

Expected return on plan assets

 

(205

)

(211

)

 

 

Amortization of prior service benefit

 

(114

)

(115

)

(860

)

(125

)

Amortization of unrecognized losses

 

144

 

111

 

381

 

273

 

Net periodic benefit costs

 

$

325

 

$

179

 

$

129

 

$

1,098

 

For the six months ended June 30, 2007 and 2006, the components of the net periodic benefit cost recognized by the Partnership for Services Company’s RIGP and Retiree Medical Plan were as follows:

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

Components of net periodic benefit cost:

 

(In thousands)

 

Service cost

 

$

495

 

$

461

 

$

200

 

$

450

 

Interest cost

 

505

 

500

 

1,016

 

1,450

 

Expected return on plan assets

 

(410

)

(423

)

 

 

Amortization of prior service benefit

 

(227

)

(227

)

(1,719

)

(250

)

Amortization of unrecognized losses

 

287

 

306

 

762

 

548

 

Net periodic benefit costs

 

$

650

 

$

617

 

$

259

 

$

2,198

 

A minimum funding contribution is not required for 2007.

13.  SEGMENT INFORMATION

The Partnership’s Operating Subsidiaries conduct business in three reportable operating segments: Pipeline Operations, Terminalling and Storage, and Other Operations.

Pipeline Operations:

The Pipeline Operations segment receives petroleum products including gasoline, jet and diesel fuel and other distillates from refineries, connecting pipelines, and bulk and marine terminals and transports those products to other locations for a fee.  This segment owns and operates approximately 5,400 miles of pipeline systems in the following states: California, Colorado, Connecticut, Florida, Illinois, Indiana, Kansas, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New York, Ohio, Pennsylvania and Tennessee.

Terminalling and Storage:

The Terminalling and Storage segment provides bulk storage and terminal throughput services.  This segment owns and operates 51 terminals that have the capacity to store an aggregate of approximately 20 million barrels of refined petroleum products.  The terminals are located in Illinois, Indiana, Massachusetts, Michigan, Missouri, New York, Ohio, Pennsylvania, and Wisconsin.

Other Operations:

The Other Operations segment consists primarily of the Partnership’s contract operation of third-party pipelines, which are owned primarily by major oil and chemical companies and are located in Texas and Louisiana.

14




 

This segment also performs pipeline construction management services, typically for cost plus a fixed fee, for these same customers.  The Other Operations segment also includes the Partnership’s ownership and operation of an ammonia pipeline acquired in November 2005 and its majority ownership of the Sabina Pipeline in Texas.

Financial information about each segment is presented below. Each segment uses the same accounting policies as those used in the preparation of the Partnership’s condensed consolidated financial statements. All inter-segment revenues, operating income and assets have been eliminated.  All periods are presented on a consistent basis.

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

92,427

 

$

86,538

 

$

186,178

 

$

168,405

 

Terminalling and Storage

 

23,948

 

18,441

 

47,536

 

36,609

 

Other Operations

 

8,576

 

6,516

 

16,181

 

12,226

 

Total

 

$

124,951

 

$

111,495

 

$

249,895

 

$

217,240

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

35,046

 

$

35,841

 

$

72,956

 

$

67,091

 

Terminalling and Storage

 

8,773

 

5,532

 

18,919

 

13,397

 

Other Operations

 

2,438

 

1,680

 

4,655

 

3,057

 

Total

 

$

46,257

 

$

43,053

 

$

96,530

 

$

83,545

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

9,316

 

$

9,607

 

$

18,405

 

$

18,306

 

Terminalling and Storage

 

1,434

 

1,142

 

2,739

 

2,246

 

Other Operations

 

348

 

398

 

761

 

787

 

Total

 

$

11,098

 

$

11,147

 

$

21,905

 

$

21,339

 

 

15




 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Capital expenditures:

 

 

 

 

 

Pipeline Operations

 

$

29,375

 

$

31,332

 

Terminalling and Storage

 

6,075

 

9,487

 

Other Operations

 

1,516

 

3,124

 

Total

 

$

36,966

 

$

43,943

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

Pipeline Operations

 

$

860

 

$

79,286

 

Terminalling and Storage

 

38,460

 

13,504

 

Total

 

$

39,320

 

$

92,790

 

 

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Assets*:

 

 

 

 

 

Pipeline Operations

 

$

1,606,938

 

$

1,608,243

 

Terminalling and Storage

 

366,429

 

318,917

 

Other Operations

 

68,883

 

68,310

 

Total

 

$

2,042,250

 

$

1,995,470

 


* All equity investments are included in the assets of Pipeline Operations.

14. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (“FASB”) adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 sets forth a recognition threshold and measurement attribute for financial statement recognition of positions taken or expected to be taken in income tax returns. Only tax positions meeting a “more-likely-than-not” threshold of being sustained should be recognized under FIN 48. FIN 48 also provides guidance on derecognizing, classification of interest and penalties and accounting and disclosures for annual and interim financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect of the changes arising from the initial application of FIN 48 is required to be reported as an adjustment to the opening balance of retained earnings in the period of adoption. The adoption of FIN 48 had no material impact on the financial statements of the Partnership.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within that year.  The Partnership is still determining the impact, if any, of the adoption of SFAS No. 157 on its financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value.   SFAS No. 159 is effective no later than fiscal years beginning after November 15, 2007.  The Partnership does not believe that the adoption of SFAS No. 159 will have a material impact on its financial statements.

15. SUBSEQUENT EVENT

On July 24, 2007, the Partnership announced that it had entered into a definitive agreement to acquire the members interests in Lodi Gas Storage LLC (“Lodi Gas”) from an affiliate of ArcLight.  Lodi Gas owns and operates a natural gas storage cavern near Lodi, California and an expansion facility, known as Kirby Hills, located approximately 45 miles west of the Lodi facility.  The combined Lodi and Kirby Hills facilities provide approximately 22 billion cubic feet

16




 

(“Bcf”) of working gas capacity and are connected to Pacific Gas and Electric’s intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas.  Lodi Gas also has an application pending with the California Public Utilities Commission (the “CPUC”) to permit an expansion of the Kirby Hills facility, which will provide an additional 12 Bcf of working gas capacity following estimated capital expenditures in 2008 of approximately $40.0 million.

The purchase price for Lodi Gas is approximately $440.0 million, of which approximately $428.0 million will be paid at closing and approximately $12.0 million will be paid upon approval of the Kirby Hills facility expansion by the CPUC.  The transaction is subject to customary closing conditions including approval of the Partnership’s purchase by the CPUC.  The Partnership anticipates closing the transaction in the fourth quarter of 2007.

Effective as of July 27, 2007, Mr. Robert B. Wallace resigned his position of Senior Vice President, Finance and Chief Financial Officer, of Buckeye GP and also resigned a similar position at MainLine Management.  The board of directors of Buckeye GP elected Mr. Vance E. Powers as Acting Chief Financial Officer of Buckeye GP, effective upon Mr. Wallace’s resignation.  Mr. Powers was also elected by the board of directors of MainLine Management to serve as Acting Chief Financial Officer of MainLine Management, effective upon Mr. Wallace’s resignation.

17




 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Overview

Buckeye Partners, L.P. (the “Partnership” or “Buckeye”) is a publicly traded (NYSE:BPL) master limited partnership organized in 1986 under the laws of the state of Delaware.  The Partnership’s principal line of business is the transportation, terminalling and storage of petroleum products in the United States for major integrated oil companies, large refined petroleum product marketing companies and major end users of petroleum products on a fee basis through facilities owned and operated by the Partnership. The Partnership also operates pipelines owned by third parties under contracts with major oil and chemical companies, and performs certain construction activities, generally for the owners of those third-party pipelines.

The following discussion provides an analysis of the results for each of the Partnership’s operating segments, an overview of its liquidity and capital resources and other items related to the Partnership. The following discussion and analysis should be read in conjunction with (i) the accompanying interim condensed consolidated financial statements and related notes and (ii) the Partnership’s consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2006.

Buckeye owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, with approximately 5,400 miles of pipeline, serving 17 states, and operates another approximate 2,700 miles of pipeline under agreements with major oil and chemical companies. As of June 30, 2007, the Partnership also owns and operates 51 refined petroleum products terminals with aggregate storage capacity of approximately 20 million barrels in Illinois, Indiana, Massachusetts, Michigan, Missouri, New York, Ohio, Pennsylvania and Wisconsin.

Buckeye conducts all of its operations through subsidiary entities.  These operating subsidiaries are Buckeye Pipe Line Company, L.P. (“Buckeye Pipe Line”), Laurel Pipe Line Company, L.P. (“Laurel”), Everglades Pipe Line Company, L.P. (“Everglades”), Buckeye Pipe Line Holdings, L.P. (“BPH”), Wood River Pipe Lines LLC (“Wood River”), Buckeye Pipe Line Transportation LLC (“BPL Transportation”) and Buckeye NGL Pipe Lines LLC (“Buckeye NGL”).  Each of these entities is hereinafter referred to as an “Operating Subsidiary” and they are collectively referred to as the “Operating Subsidiaries.”

The Partnership’s Operating Subsidiaries conduct business in three reportable operating segments:  Pipeline Operations, Terminalling and Storage, and Other Operations.  See Note 13 for a further discussion.

Buckeye GP LLC (“Buckeye GP”) is the general partner of the Partnership and controls the Partnership.  At June 30, 2007, Buckeye GP owned an approximate 0.6% general partner interest in the Partnership.  Buckeye GP also owns 100% of and controls MainLine GP, Inc. which, together with Buckeye GP, owns 100% of and controls MainLine L.P. (the “Operating Subsidiary GP”).  The Operating Subsidiary GP is the general partner of and owns a 1% interest in each of Buckeye Pipe Line, Laurel and Everglades and is the general partner of and owns an approximate 0.5% interest in BPH.

Buckeye GP is a wholly-owned subsidiary of Buckeye GP Holdings L.P. (“BGH”), a Delaware limited partnership that is owned by BGH GP Holdings, LLC, certain members of the Partnership’s senior management and the public. The controlling interest in BGH was sold effective June 25, 2007.  See Significant Event for further information.  BGH has no operating assets other than its general partner ownership interest in Buckeye and its operating subsidiaries.  BGH is separately traded on the New York Stock Exchange (NYSE: BGH).

Buckeye GP historically has received incentive compensation payments under an Incentive Compensation Agreement, which were payments based on cash distributions to the limited partners of the Partnership.  As part of a reorganization of Buckeye GP and the Operating Subsidiary GP, the Incentive Compensation Agreement and Buckeye’s Agreement of Limited Partnership were amended to recharacterize the incentive payments received by Buckeye GP as distribution payments rather than compensation payments.  These amendments were effective for Partnership distributions declared after August 9, 2006.  The recording of incentive payments as distributions rather than an expense resulted in an increase in reported net income of $7.3 million and $14.1 million for the three and six

18




 

months ended June 30, 2007, respectively, compared to net income that would have been reported had these agreements not been amended.

Commencing in the fourth quarter of 2006, in addition to the re-characterization of incentive distributions, the Partnership changed the way it attributes income between Buckeye GP and its limited partners.   Generally, the Partnership now attributes income to Buckeye GP and the limited partners as if only the net income of the Partnership were entirely distributed to its unitholders.  The Partnership determines the amount of income allocable to Buckeye GP, which represents the sum of the incentive compensation that would have been payable to Buckeye GP if the total distribution equaled net income, plus Buckeye GP’s proportional share of the remaining income of the Partnership.

These amendments have not changed the timing or amounts of incentive payments to Buckeye GP or other distributions payable to the limited partners and Buckeye GP.

Significant Event

On April 3, 2007, Carlyle/Riverstone BPL Holdings II, L.P. (“Carlyle/Riverstone”), certain members of senior management of Buckeye GP and other limited partners (collectively, the “Sellers”) entered into a Purchase Agreement (the “Purchase Agreement”) with BGH GP Holdings, LLC (the “Buyer”).  The Buyer is a limited liability company owned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”) and Lehman Brothers Holdings Inc (“Lehman Brothers”).  The Purchase Agreement provided for the sale by the Sellers to the Buyer of their 62.9% limited partner interest in BGH and Carlyle/Riverstone’s ownership interest in MainLine Management LLC (“MainLine Management”), which is the general partner of BGH.

On June 25, 2007 the Purchase Agreement was amended to provide that the members of management who were parties to the Purchase Agreement would retain a portion of their limited partner interest in BGH. Also on June 25, 2007, the sale transaction closed.  Total consideration paid was $411.6 million.  The transaction constituted a change of control of BGH and, indirectly, Buckeye.

In connection with the closing of the transaction, William H. Shea, Jr. resigned as Chairman of the Board, President and Chief Executive Officer of the general partners of BGH and Buckeye and as a director of each entity.  Forrest E. Wylie was elected as Chairman of the Board, President and Chief Executive Officer of the general partners of BGH and Buckeye and as a director of each entity. Furthermore, in connection with the closing of the transaction, Michael B. Hoffman, E. Bartow Jones and Andrew W. Ward, each of whom is affiliated with Carlyle/Riverstone, resigned from their positions as directors of the general partners of BGH and Buckeye.  Daniel R. Revers and Robb E. Turner, each of whom is affiliated with ArcLight, were appointed to the Board of Directors of the general partners of BGH and Buckeye.  In addition, Frank J. Loverro and Christopher L. Collins, each of whom is affiliated with Kelso, were appointed to the Board of Directors of the general partner of BGH, and Michael B. Goldberg and Irvin K. Culpepper, Jr., each of whom is also affiliated with Kelso, were appointed to the Board of Directors of the general partner of Buckeye.

On July 24, 2007, the Partnership announced that it had entered into a definitive agreement to acquire the members interests in Lodi Gas Storage LLC (“Lodi Gas”) from an affiliate of ArcLight.  Lodi Gas owns and operates a natural gas storage cavern near Lodi, California and an expansion facility, known as Kirby Hills, located approximately 45 miles west of the Lodi facility.  The combined Lodi and Kirby Hills facilities provide approximately 22 billion cubic feet (“Bcf”) of working gas capacity and are connected to Pacific Gas and Electric’s intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas.  Lodi Gas also has an application pending with the California Public Utilities Commission (the “CPUC”) to permit an expansion of the Kirby Hills facility, which will provide an additional 12 Bcf of working gas capacity following estimated capital expenditures in 2008 of approximately $40.0 million.

The purchase price for Lodi Gas is approximately $440.0 million, of which approximately $428.0 million will be paid at closing and approximately $12.0 million will be paid upon approval of the Kirby Hills facility expansion by the CPUC.  The transaction is subject to customary closing conditions including approval of the Partnership’s purchase by the CPUC.  The Partnership anticipates closing the transaction in the fourth quarter of 2007.

Effective as of July 27, 2007, Mr. Robert B. Wallace resigned his position of Senior Vice President, Finance and Chief Financial Officer, of the General Partner and also resigned a similar position at MainLine Management.  The board of directors of the General Partner elected Mr. Vance E. Powers as Acting Chief Financial Officer of the General Partner, effective upon Mr. Wallace’s resignation.  Mr. Powers was also elected by the board of directors of

19




 

MainLine Management to serve as Acting Chief Financial Officer of MainLine Management, effective upon Mr. Wallace’s resignation.

Results of Operations

Summary operating results for the Partnership were as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Revenue

 

$

124,951

 

$

111,495

 

$

249,895

 

$

217,240

 

Costs and expenses

 

78,694

 

68,442

 

153,365

 

133,695

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

46,257

 

43,053

 

96,530

 

83,545

 

Other income (expenses)

 

(11,712

)

(18,887

)

(24,251

)

(36,401

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

34,545

 

$

24,166

 

$

72,279

 

$

47,144

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

 

 

 

 

Net income allocated to General Partner

 

$

5,801

 

$

148

 

$

12,618

 

$

293

 

Net income allocated to Limited Partners

 

$

28,744

 

$

24,018

 

$

59,661

 

$

46,851

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit-basic

 

$

0.70

 

$

0.61

 

$

1.47

 

$

1.20

 

Earnings per limited partner unit-diluted

 

$

0.70

 

$

0.61

 

$

1.47

 

$

1.20

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

41,201

 

39,430

 

40,579

 

38,888

 

Diluted

 

41,253

 

39,451

 

40,634

 

38,912

 

 

EBITDA and Adjusted EBITDA

The following table summarizes EBITDA and adjusted EBITDA for the Partnership for the three and six months ended June 30, 2007 and 2006, respectively.  EBITDA, a measure not defined under generally accepted accounting principles (“GAAP”) is defined by the Partnership as income before interest expense (including amortization and write-off of deferred debt financing costs), income taxes, depreciation and amortization.  Adjusted EBITDA, also a non-GAAP measure, is defined as EBITDA plus the General Partner incentive compensation expense.   EBITDA and Adjusted EBITDA should not be considered an alternative to net income, operating income, cash flow from operations or any other measure of financial performance presented in accordance with GAAP.

Since EBITDA and Adjusted EBITDA exclude some items that affect net income, and these items may vary among other companies, the EBITDA and Adjusted EBITDA data presented may not be comparable to similarly titled measures at other companies.  The Partnership has provided Adjusted EBITDA in addition to EBITDA because, in the fourth quarter of 2006, the Partnership began reporting incentive payments to Buckeye GP as distributions, rather than incentive compensation expense, as reported in periods prior to the fourth quarter of 2006.  See Note 1 to the Partnership’s condensed consolidated financial statements for a further discussion of this change.  Accordingly, unlike the first six months of 2006, General Partner incentive compensation expense was not recorded in the first six months of 2007. Effective in the fourth quarter of 2006, General Partner incentive payments became a distribution from partners’ capital.  The Partnership’s management uses EBITDA and Adjusted EBITDA as performance measures to assist in the analysis and assessment of the Partnership’s operations, to evaluate the viability of proposed projects and to determine overall rates of return on alternative investment opportunities.

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The Partnership believes that investors benefit from having access to the same financial measures used by the Partnership’s management.

EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2007 and 2006 were as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Net income per GAAP

 

$

34,545

 

$

24,166

 

$

72,279

 

$

47,144

 

Interest and debt expense

 

12,773

 

12,889

 

26,260

 

25,360

 

Income tax expense

 

236

 

148

 

438

 

154

 

Depreciation and amortization

 

11,098

 

11,147

 

21,905

 

21,339

 

EBITDA

 

58,652

 

48,350

 

120,882

 

93,997

 

 

 

 

 

 

 

 

 

 

 

General Partner incentive compensation

 

 

6,174

 

 

11,896

 

Adjusted EBITDA

 

$

58,652

 

$

54,524

 

$

120,882

 

$

105,893

 

 

Revenues and operating income by operating segment were as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

92,427

 

$

86,538

 

$

186,178

 

$

168,405

 

Terminalling and Storage

 

23,948

 

18,441

 

47,536

 

36,609

 

Other Operations

 

8,576

 

6,516

 

16,181

 

12,226

 

Total

 

$

124,951

 

$

111,495

 

$

249,895

 

$

217,240

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

35,046

 

$

35,841

 

$

72,956

 

$

67,091

 

Terminalling and Storage

 

8,773

 

5,532

 

18,919

 

13,397

 

Other Operations

 

2,438

 

1,680

 

4,655

 

3,057

 

Total

 

$

46,257

 

$

43,053

 

$

96,530

 

$

83,545

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses (including depreciation and amortization):

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

57,381

 

$

50,697

 

$

113,222

 

$

101,314

 

Terminalling and Storage

 

15,174

 

12,909

 

28,618

 

23,212

 

Other Operations

 

6,139

 

4,836

 

11,525

 

9,169

 

Total

 

$

78,694

 

$

68,442

 

$

153,365

 

$

133,695

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

9,316

 

$

9,607

 

$

18,405

 

$

18,306

 

Terminalling and Storage

 

1,434

 

1,142

 

2,739

 

2,246

 

Other Operations

 

348

 

398

 

761

 

787

 

Total

 

$

11,098

 

$

11,147

 

$

21,905

 

$

21,339

 

 

Second Quarter of 2007 compared to Second Quarter of 2006

Total revenues for the quarter ended June 30, 2007 were $125.0 million, $13.5 million or 12.1% greater than revenue of $111.5 million for the same period in 2006. This improvement in the second quarter of 2007 was driven mainly by increased revenues in the Pipelines Operations segment as discussed below.

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Pipeline Operations:

Revenue from Pipeline Operations was $92.4 million in the second quarter of 2007 compared to $86.5 million in the second quarter of 2006. The net revenue increase in the second quarter of 2007 of $5.9 million or 6.8% was primarily the result of:

·                 An approximate $8.1 million increase in base transportation revenue caused primarily by an indexed-based tariff increase of approximately 6.1% implemented on July 1, 2006 and a market-based tariff increase of approximately 4.5% implemented on May 1, 2007.  Product volumes (as shown below) were flat in the second quarter of 2007 as compared to the second quarter of 2006;

·                 An approximate $2.9 million reduction in revenue representing primarily the settlement of overages and shortages on product deliveries;

·                 An approximate $1.7 million increase in construction management revenue due to a construction contract entered into by WesPac Pipelines – Memphis LLC (“WesPac – Memphis”) to construct a pipeline connection for a third party; and

·                 An approximate $1.0 million reduction in jet fuel revenue from lower volume on a product supply arrangement in connection with WesPac Pipelines - Reno LLC (“WesPac - Reno”).

Product deliveries for the second quarter ended June 30, 2007 and 2006 were as follows:

 

 

Average Barrels Per Day

 

 

 

Three Months Ended June 30,

 

Product

 

2007

 

2006

 

Gasoline

 

743,000

 

734,200

 

Distillate

 

291,100

 

281,700

 

Jet Fuel

 

363,400

 

359,200

 

LPG's

 

22,300

 

33,800

 

NGL's

 

19,800

 

21,900

 

Other

 

4,200

 

10,500

 

Total

 

1,443,800

 

1,441,300

 

 

In the second quarter of 2007, certain of the Partnership’s Operating Subsidiaries filed pipeline tariffs reflecting increased rates on average of approximately 4.5%.  Tariff rate increases were not filed in connection with certain of the Partnership’s pipelines regulated by state regulatory agencies which represent approximately 8% of the Partnership’s pipeline volumes.  These tariff rate increases are expected to generate approximately $14.7 million in additional revenue on an annual basis.

Terminalling and Storage:

Revenue from the Terminalling and Storage segment was $23.9 million in the second quarter of 2007 compared to $18.4 million in the second quarter of 2006. The revenue increase in the second quarter of 2007 of $5.5 million or 29.9% was primarily the result of:

·                 An approximate $3.2 million increase in base revenue primarily related to increases in throughput volumes and charges for product additives in the second quarter of 2007 compared to the second quarter of 2006;

·                 Incremental revenue of $1.7 million in the second quarter of 2007 compared to the second quarter of 2006 primarily due to the acquisition of six terminals in 2007 as more fully described in Note 4 to the accompanying condensed consolidated financial statements; and

·                 Incremental revenue of $0.6 million in the second quarter of 2007 compared to the second quarter of 2006 due to the commencement of certain butane blending agreements in the latter part of 2006.

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Average daily throughput for the refined products terminals for the quarters ended June 30, 2007 and 2006 were as follows:

 

Average Barrels Per Day

 

 

 

Three Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Refined products throughput (bpd)

 

570,100

 

514,700

 

 

Other Operations:

Revenue from the Other Operations segment was $8.6 million in the second quarter of 2007 compared to $6.5 million in the second quarter of 2006. The revenue increase in the second quarter of 2007 of $2.1 million or 32.3% was primarily the result of:

·                 An increase of $1.3 million in pipeline maintenance and operating revenue related to additional operating contracts signed in the latter part of 2006;

·                 An increase of $0.4 million in construction management revenue caused primarily by the additional contracts noted above; and

·                 An increase of $0.4 million in incidental revenue due to the sale of miscellaneous equipment.

Operating Expenses:

Costs and expenses for the three months ended June 30, 2007 and 2006 were as follows:

 

Costs and Expenses

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Payroll and payroll benefit

 

$

22,112

 

$

19,594

 

Depreciation and amortization

 

11,098

 

11,147

 

Operating power

 

8,096

 

7,047

 

Outside service

 

10,602

 

8,104

 

Property and other taxes

 

5,199

 

4,025

 

Construction management

 

3,010

 

1,424

 

All other

 

18,577

 

17,101

 

Total

 

$

78,694

 

$

68,442

 

 

Payroll and payroll benefits were $22.1 million in the second quarter of 2007, an increase of $2.5 million compared to the second quarter of 2006.  Of this increase, approximately $0.2 million is related to recent acquisitions.  Increases in salaries and wages of $1.7 million resulted from an increase in the number of employees and overtime pay due to the Partnership’s expanded operations and higher wage rates.  The Partnership also experienced increases in payroll and payroll benefits due to a decrease in capitalized payroll of $0.8 million.  Payroll benefits increased by $0.7 million due to higher medical costs and increases in salaries and wages and number of employees.  This increase was offset by a decrease of $1.0 million in payroll benefits due to lower employee benefits costs resulting from an amendment to Buckeye Pipe Line Services Company’s (“Services Company”) postretirement health care and life insurance benefits plan.

Depreciation and amortization expense was $11.1 million in the second quarter of 2007, which was consistent with depreciation and amortization expense in the second quarter of 2006.

Operating power costs were $8.1 million in the three months ended June 30, 2007, an increase of $1.0 million from the same period in 2006.  Approximately, $0.9 million of this increase resulted from power rate increases and

23




 

higher power supply additive expense.  Operating power consists primarily of electricity required to operate pipeline pumping facilities.

Outside services costs increased $2.5 million from $8.1 million in the second quarter of 2006 to $10.6 million in the second quarter of 2007.  Of this increase, approximately $0.3 million is due to maintenance on natural gas engines that were purchased in 2006 and $0.3 million is due to an increase in activity on an operations and maintenance contract.  The remainder of the increase is due to an increase in pipeline and terminal maintenance activities. Outside services costs consist principally of third-party contract services for pipeline and terminal maintenance activities.

Property and other taxes were $5.2 million in the second quarter of 2007, an increase of $1.2 million compared to the second quarter of 2006.  Property and other taxes related to recent acquisitions was $0.1 million.  The remaining increase was caused primarily by higher real property tax assessments in several states.

Construction management costs were $3.0 million in the second quarter of 2007, an increase of $1.6 million from the second quarter of 2006.  The increase is due to a construction contract entered into by WesPac – Memphis to construct a pipeline connection for a third party. 

All other costs were $18.6 million in the three months ended June 30, 2007, an increase of $1.5 million compared to $17.1 million in the same period in 2006.  Insurance costs and rental expense increased by $1.6 million over the second quarter of 2006.  Other costs related to recent acquisitions were $0.4 million.  Expenses related to terminal additives increased by $0.4 million which is a result of an increase in terminal activity.  These increases were offset by a decrease of $0.9 million in costs associated with fuel purchases related to a product-supply arrangement and a decrease of $0.6 million in casualty losses. The remainder of the increases related to various other pipeline operating costs.

Other income (expense) for the three months ended June 30, 2007 and 2006 was as follows:

 

Other Income (Expenses)

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Investment and equity income

 

$

2,570

 

$

1,604

 

Interest and debt expense

 

(12,773

)

(12,889

)

General Partner incentive compensation

 

 

(6,174

)

Minority interests and other

 

(1,509

)

(1,428

)

Total

 

$

(11,712

)

$

(18,887

)

Investment and equity income was $2.6 million for the three months ended June 30, 2007 which is an increase of $1.0 million from the three months ended June 30, 2006.  The increase is primarily due to an increase in equity income earned from the Partnership’s approximate 25% interest in West Shore Pipe Line Company and 20% interest in West Texas LPG Pipeline Limited Partnership.

Interest and debt expense was $12.8 million in the three months ended June 30, 2007, which is consistent with interest and debt expense in the three months ended June 30, 2006.

General Partner incentive compensation was recorded as an expense of $6.2 million in the second quarter of 2006.  As discussed above, the Partnership’s Incentive Compensation Agreement and Partnership Agreement were amended in August 2006 to change the incentive payments to distributions rather than compensation payments.  As a result, the Partnership did not record General Partner incentive compensation expense in the second quarter of 2007. 

Six Months of 2007 compared to Six Months of 2006

 

Total revenue for the six months ended June 30, 2007 was $249.9 million, $32.7 million, or 15.1%, greater than revenue of $217.2 million for the same period in 2006. This improvement was driven mainly by increased revenues in the Pipelines Operations segment as discussed below.

Pipeline Operations:

24




 

Revenue from Pipeline Operations was $186.2 million for the six months ended June 30, 2007 compared to $168.4 million for the six months ended June 30, 2006. The net increase in the first six months of 2007 of $17.8 million or 10.6% was primarily the result of:

·                 An approximate $14.5 million increase in base transportation revenue caused primarily by an indexed-based tariff increase of approximately 6.1% implemented on July 1, 2006 and a market-based tariff increase of 4.5% implemented on May 1, 2007.  Product volumes (as shown below) increased by approximately 1% in the first six months of 2007 as compared to the first six months of 2006;

·                 An approximate $3.1 million reduction in revenue representing primarily the settlement of overages and shortages on product deliveries;

·                 Incremental revenue of $2.2 million in the second quarter of 2007 compared to 2006 resulting from the commissioning of the terminal and pipeline at the Memphis International Airport by WesPac — Memphis, in April 2006;

·                 An approximate $2.2 million increase in construction management revenue due to a construction contract entered into by WesPac — Memphis to construct a pipeline connection for a third party;

·                 Recognition and collection of $1.8 million in revenue in the first quarter of 2007 from the resolution of a product measurement issue with a customer;

·                 Incremental revenue of $1.2 million in the first six months of 2007 caused by six months of revenue from Buckeye NGL in 2007 as compared to five months of revenue in 2006 because Buckeye NGL was acquired by the Partnership on January 31, 2006; and

·                 An approximate $1.0 million reduction in jet fuel revenue from lower volume on a product supply arrangement in connection with WesPac - Reno.

Product deliveries for the six months ended June 30, 2007 and 2006 were as follows:

 

Average Barrels Per Day

 

 

 

Six Months Ended June 30,

 

Product

 

2007

 

2006

 

Gasoline

 

715,200

 

712,800

 

Distillate

 

327,900

 

324,200

 

Jet Fuel

 

357,900

 

345,900

 

LPG’s

 

21,200

 

23,800

 

NGL’s

 

19,900

 

17,800

 

Other

 

7,200

 

10,500

 

Total

 

1,449,300

 

1,435,000

 

 

Terminalling and Storage:

Revenue from the Terminalling and Storage segment was $47.5 million for the six months ended June 30, 2007 compared to $36.6 million for the six months ended June 30, 2006.  The net increase in the first six months of 2007 of $10.9 million or 30% was primarily the result of:

·                 An approximate $7.2 million increase in base revenue primarily related to increases in throughput volumes and charges for product additives in the first six months of 2007 compared to the first six months of 2006;

·                 Incremental revenue of $2.3 million in the first six months of 2007 compared to the first six months of 2006 primarily due to the acquisition of six terminals in 2007 as more fully described in Note 4 to the accompanying condensed consolidated financial statements; and

·                 Incremental revenue of $1.4 million in the first six months of 2007 compared to the first six months of 2006 due to the commencement of certain butane blending agreements in the latter part of 2006.

25




 

Average daily throughput for the refined products terminals for the six months ended June 30, 2007 and 2006 was as follows:

 

Average Barrels Per Day

 

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Refined products throughput (bpd)

 

553,100

 

484,200

 

 

Other Operations:

Revenue from the Other Operations segment was $16.2 million in the first six months of 2007 compared to $12.2 million in the first six months of 2006. The net increase in the first six months of 2007 of $4.0 million or 32.8% was primarily the result of:

·                 An increase of $2.2 million in pipeline maintenance and operating revenue related to additional operating contracts signed in the latter part of 2006;

·                 An increase of $1.1 million in construction management revenue caused primarily by the additional contracts noted above; and

·                 An increase of $0.4 million in incidental revenue due to the sale of miscellaneous equipment.

Operating Expenses:

Costs and expenses for the six month period ended June 30, 2007 and 2006 were as follows:

 

Costs and Expenses

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Payroll and payroll benefit

 

$

43,049

 

$

39,467

 

Depreciation and amortization

 

21,905

 

21,339

 

Operating power

 

15,414

 

14,137

 

Outside service

 

16,673

 

13,163

 

Property and other taxes

 

11,318

 

9,079

 

Construction management

 

4,704

 

1,986

 

All other

 

40,302

 

34,524

 

Total

 

$

153,365

 

$

133,695

 

 

Payroll and payroll benefits were $43.0 million in the first six months of 2007, an increase of $3.6 million compared to the first six months of 2006.  Of this increase, approximately $0.4 million related to recent acquisitions.  Increases in salaries and wages of $3.3 million resulted from an increase in the number of employees and overtime pay due to the Partnership’s expanded operations and higher wage rates.  The Partnership also experienced increases in payroll and payroll benefits due to a decrease in capitalized payroll of $1.2 million.  Payroll benefits increased by $0.9 million due to higher medical costs and increases in salaries and wages and number of employees. These increases were partially offset by a decrease of $0.5 million as a result of a reduction of the fair value of the Partnership’s “top-up” liability under the Services Agreement, which requires the Partnership to make cash payments to Services Company in amounts sufficient for Services Company’s Employee Stock Ownership Plan to make payments due under its Note Agreement.  Payroll benefit expenses also decreased by $1.9 million due to lower employee benefits costs resulting from an amendment to Services Company’s postretirement health care and life insurance benefits plan.

Depreciation and amortization expense was $21.9 million for the first six months ended June 30, 2007, an increase of $0.6 million from the comparable period of 2006, which is primarily due to recent acquisitions and first quarter 2007 depreciation expense related to the commissioning of the terminal and pipeline at the Memphis International Airport by WesPac — Memphis in April 2006.

26




 

Operating power costs of $15.4 million in the first six months of 2007 were $1.3 million higher than the same period in 2006. Recent acquisitions caused $0.2 million of the increase.  Approximately $0.9 million of this increase resulted from power rate increases and higher power supply additive expense.  Operating power consists primarily of electricity required to operate pipeline pumping facilities.

Outside services costs were $16.7 million in the first six months of 2007, or $3.5 million greater than the same period in 2006. Of this increase, approximately $0.3 million of the increase is due to maintenance on natural gas engines that were purchased in 2006 and $0.3 million is related to an increase in activity on an operations and maintenance contract.  Approximately, $0.3 million of the increase is related to corporate development initiatives.  The remainder of the increase is due to additional pipeline and tank inspections and maintenance work that occurred during the first half of 2007.

Property and other taxes increased by $2.2 million from $9.1 million in the first six months of 2007 to $11.3 million for the same period in 2006. Of this increase, $0.3 million related to recent acquisitions.  In the first six months of 2007, the Partnership expensed $0.6 million of excise taxes which related to activity at the Partnership’s terminals.  The remainder of the increase is due to higher real property assessments over the same period in 2006.

Construction management costs were $4.7 million in the first six months of 2007, which is an increase of $2.7 million from the same period in 2006. The increase is primarily due to a construction contract entered into by WesPac — Memphis to construct a pipeline connection for a third party.

All other costs were $40.3 million, an increase of $5.8 million in the first six months of 2007 compared to the first six months of 2006. The increase reflects $0.7 million of costs associated with fuel purchases by WesPac — Reno related to a product-supply arrangement.  Other costs related to recent acquisitions were $1.0 million.  Insurance costs increased by $1.6 million over the comparable period of 2006.  Rental expense increased over the first six months of 2006 by $0.8 million.  Expenses related to terminal additives increased by $0.8 million which is a result of an increase in terminal activity.  These increases were offset by a decrease in casualty losses of $0.5 million. The remainder of the increases related to various other pipeline operating costs resulting from Buckeye’s expanded operations.

Other income (expense) for the six month periods ended June 30, 2007 and 2006 was as follows:

 

 

Other Income (Expenses)

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Investment and equity income

 

$

4,636

 

$

3,196

 

Interest and debt expense

 

(26,260

)

(25,360

)

General Partner incentive compensation

 

 

(11,896

)

Minority interests and other

 

(2,627

)

(2,341

)

Total

 

$

(24,251

)

$

(36,401

)

 

Investment and equity income for the six months ended June 30, 2007 was $4.6 million, which is an increase of $1.4 million from the comparable period in 2006.  The increase is a result of equity income earned from the Partnership’s approximate 25% interest in West Shore Pipe Line Company and 20% interest in West Texas LPG Pipeline Limited Partnership.

27




 

Interest and debt expense was $26.3 million in the six months ended June 30, 2007, an increase of $0.9 million from $25.4 million in the six months ended June 30, 2006.  The increase in interest expense resulted from higher average balances outstanding and interest rates on the Partnership’s 5-year revolving credit facility offset by an increase in capitalized interest.

General Partner incentive compensation was recorded as an expense of $11.9 million in the first six months of 2006.  As discussed above, the Partnership’s Incentive Compensation Agreement and Partnership Agreement were amended in August 2006 to change the incentive payments to distributions rather than compensation payments.  As a result, the Partnership did not record General Partner incentive compensation expense in the first six months of 2007.

LIQUIDITY AND CAPITAL RESOURCES

The Partnership’s financial condition at June 30, 2007 and December 31, 2006 is highlighted in the following comparative summary:

Liquidity and Capital Indicators

 

 

As of

 

 

 

June 30, 2007

 

December 31, 2006

 

 

 

 

 

 

 

Current ratio (1)

 

1.4 to 1

 

1.4 to 1

 

Ratio of cash and cash equivalents, and trade receivables to current liabilities

 

0.7 to 1

 

0.8 to 1

 

Working capital— (in thousands) (2)

 

$

33,988

 

$

39,878

 

Ratio of total debt to total capital (3)

 

0.52 to 1

 

0.55 to 1

 

Book Value (per unit) (4)

 

$

21.40

 

$

20.40

 


(1)