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 September 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 October 19, 2007

Limited Partnership Units

 

43,710,746 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 nine months ended September 30, 2007 and 2006

3

 

 

 

 

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

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006

5

 

 

 

 

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

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II- OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 6.

Exhibits

38



 

 

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

 

 

 

Nine Months Ended

 

September 30,

 

 

 

September 30,

 

2007

 

2006

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

$

 125,653

 

$

116,519

 

Revenues

 

$

375,548

 

$

333,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

60,828

 

54,345

 

Operating expenses

 

181,975

 

157,149

 

11,520

 

11,419

 

Depreciation and amortization

 

33,425

 

32,758

 

5,774

 

4,709

 

General and administrative

 

16,087

 

14,261

 

78,122

 

70,473

 

Total costs and expenses

 

231,487

 

204,168

 

 

 

 

 

 

 

 

 

 

 

47,531

 

46,046

 

Operating income

 

144,061

 

129,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

2,560

 

2,040

 

Investment and equity income

 

7,196

 

5,236

 

(12,391

)

(13,319

)

Interest and debt expense

 

(38,651

)

(38,679

)

 

(6,381

)

General Partner incentive compensation

 

 

(18,277

)

(1,320

)

(1,089

)

Minority interests and other

 

(3,947

)

(3,430

)

(11,151

)

(18,749

)

Total other income (expenses)

 

(35,402

)

(55,150

)

 

 

 

 

 

 

 

 

 

 

$

 36,380

 

$

27,297

 

Net income

 

$

108,659

 

$

74,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

$

 6,116

 

$

168

 

Net income allocated to General Partner

 

$

18,734

 

$

461

 

$

 30,264

 

$

27,129

 

Net income allocated to Limited Partners

 

$

89,925

 

$

73,980

 

$

 0.71

 

$

0.69

 

Earnings per limited partner unit-basic

 

$

2.18

 

$

1.89

 

$

 0.71

 

$

0.69

 

Earnings per limited partner unit-diluted

 

$

2.18

 

$

1.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of limited partner

 

 

 

 

 

 

 

 

 

units outstanding:

 

 

 

 

 

42,676

 

39,432

 

Basic

 

41,286

 

39,071

 

42,719

 

39,456

 

Diluted

 

41,333

 

39,096

 

 

 

See Notes to condensed consolidated financial statements.

 

 

3



 

Buckeye Partners, L.P.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

33,062

 

$

18,946

 

Trade receivables

 

45,802

 

51,030

 

Construction and pipeline relocation receivables

 

10,358

 

12,189

 

Inventories

 

13,878

 

14,286

 

Prepaid and other current assets

 

29,713

 

32,976

 

Total current assets

 

132,813

 

129,427

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,789,446

 

1,727,222

 

Goodwill

 

11,355

 

11,355

 

Other non-current assets

 

125,402

 

127,466

 

Total assets

 

$

2,059,016

 

$

1,995,470

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

14,649

 

$

26,347

 

Accrued and other current liabilities

 

64,941

 

63,202

 

Total current liabilities

 

79,590

 

89,549

 

 

 

 

 

 

 

Long-term debt

 

879,164

 

994,127

 

Other non-current liabilities

 

79,535

 

81,743

 

Minority interests

 

21,202

 

20,169

 

Total liabilities

 

1,059,491

 

1,185,588

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

General Partner

 

(1,587

)

1,964

 

Limited Partners

 

1,003,859

 

807,488

 

Receivable from the exercise of options

 

 

(355

)

Accumulated other comprehensive (loss) income

 

(2,747

)

785

 

Total partners’ capital

 

999,525

 

809,882

 

Total liabilities and partners’ capital

 

$

2,059,016

 

$

1,995,470

 

 

See Notes to condensed consolidated financial statements.

 

 

4



 

Buckeye Partners, L.P.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

108,659

 

$

74,441

 

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

 

 

 

 

 

 

Depreciation and amortization

 

33,425

 

32,758

 

Minority interest

 

3,897

 

3,430

 

Equity earnings

 

(6,266

)

(4,598

)

Distributions from equity investments

 

5,717

 

4,460

 

Amortization of debt discount

 

38

 

38

 

Amortization of option grants

 

303

 

294

 

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

 

 

 

 

 

Trade receivables

 

5,228

 

(1,826

)

Construction and pipeline relocation receivables

 

1,831

 

(1,225

)

Inventories

 

408

 

(317

)

Prepaid and other current assets

 

3,263

 

(11,363

)

Accounts payable

 

(11,698

)

(536

)

Accrued and other current liabilities

 

(389

)

7,861

 

Other non-current assets

 

(304

)

82

 

Other non-current liabilities

 

(3,656

)

225

 

Total adjustments from operating activities

 

31,797

 

29,283

 

Net cash provided by operating activities

 

140,456

 

103,724

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(51,712

)

(62,218

)

Acquisitions and equity investments

 

(40,447

)

(93,330

)

Net (expenditures for) proceeds from disposal of property, plant and equipment

 

(352

)

130

 

Net cash (used in) investing activities

 

(92,511

)

(155,418

)

Cash flows from financing activities:

 

 

 

 

 

Debt issuance costs

 

(178

)

 

Net proceeds from issuance of limited partnership units

 

201,895

 

64,092

 

Proceeds from exercise of units options

 

2,124

 

559

 

Distributions to minority interests

 

(2,864

)

(2,435

)

Proceeds from issuance of long-term debt

 

135,000

 

147,000

 

Payment of long-term debt

 

(250,000

)

(65,000

)

Distributions to unitholders

 

(119,806

)

(88,156

)

Net cash (used in) provided by financing activities

 

(33,829

)

56,060

 

Net increase in cash and cash equivalents

 

14,116

 

4,366

 

Cash and cash equivalents —Beginning of year

 

18,946

 

24,862

 

Cash and cash equivalents—End of period

 

$

33,062

 

$

29,228

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest (net of amount capitalized)

 

$

42,167

 

$

40,964

 

Capitalized interest

 

$

1,159

 

$

1,271

 

Cash paid for income tax

 

$

888

 

$

7

 

Non-cash changes in assets and liabilities:

 

 

 

 

 

Fair value hedge accounting

 

$

(2,261

)

$

(176

)

 

See Notes to condensed consolidated financial statements.

 

 

5



 

Buckeye  Partners, L.P.

Condensed Consolidated Statement of Partners’ Capital

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Receivable

 

Other

 

 

 

 

 

General

 

Limited

 

from Exercise

 

Comprehensive

 

 

 

 

 

Partner

 

Partners

 

of Options

 

(Loss) Income

 

Total

 

Partners’ capital- January 1, 2007

 

$

1,964

 

$

807,488

 

$

(355

)

$

785

 

$

809,882

 

Net income

 

18,734

 

89,925

 

 

 

108,659

 

Change in value of hedge

 

 

 

 

(2,085

)

(2,085

)

Amortization of RIGP and Retiree

 

 

 

 

 

 

 

 

 

 

 

Medical Plan Costs

 

 

 

 

(1,447

)

(1,447

)

Comprehensive income

 

18,734

 

89,925

 

 

(3,532

)

105,127

 

Distributions

 

(22,285

)

(97,521

)

 

 

(119,806

)

Net Proceeds from the issuance of 4,208,600 limited partner units

 

 

201,895

 

 

 

201,895

 

Amortization of unit options

 

 

303

 

 

 

303

 

Exercise of unit options

 

 

1,769

 

 

 

1,769

 

Repayment of receivable from exercise of options

 

 

 

355

 

 

355

 

Partners’ capital- September 30, 2007

 

$

(1,587

)

$

1,003,859

 

$

 

$

(2,747

)

$

999,525

 

 

See Notes to condensed consolidated financial statements.

 

 

6



 

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 an approximate 2,700 miles of pipeline under agreements, serving two states, with major oil and chemical companies. 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 more detailed discussion.

Buckeye GP LLC (“Buckeye GP”) is the general partner of the Partnership and controls the Partnership.  At September 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 (“BGH GP”), 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 certain of Buckeye’s 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 $7.6 million and $21.7 million for the three and nine months ended September 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.

 

 

7



 

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 principally 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 5.1% of the limited partnership units (“LP Units”) of the Partnership at September 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, which is derived from audited financial state­ments, include all adjustments necessary to present fairly Buckeye’s financial position as of September 30, 2007, along with the results of Buckeye’s operations for the three and nine months ended September 30, 2007 and 2006 and Buckeye’s cash flows for the nine months ended September 30, 2007 and 2006.  The results of operations for the three and nine months ended September 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 EVENTS

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.  BGH GP 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 BGH GP of their 61.9% 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.

Effective as of October 25, 2007, the Board of Directors of Buckeye GP elected Mr. Stephen C. Muther as President of Buckeye GP, in place of Mr. Forrest E. Wylie, who will remain Chairman of the Board of Directors and Chief Executive Officer of Buckeye GP.  Mr. Muther was also elected by the Board of Directors of MainLine Management to serve as President of MainLine Management, in place of Mr. Wylie, who will remain Chairman of the Board of Directors and Chief Executive Officer of MainLine Management.

 

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

 

 

8



 

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 negotiated penalty assessment was recorded as an expense in the consolidated financial statements in the fourth quarter of 2006.  In September 2007, the Partnership and the IRS entered into a formal agreement settling and resolving the penalty assessment and, pursuant to that agreement, the Partnership paid the IRS approximately $0.6 million.

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 $2.2 million and $1.5 million for the three months ended September 30, 2007 and 2006, respectively, and $6.2 million and $5.4 million for the nine months ended September 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 $22.2 million, including a deposit of $1.0 million that was paid in 2006. The fair value allocation of the acquired assets is as follows (in thousands):

 

Land

 

$

8,663

 

Buildings

 

3,481

 

Machinery, equipment, and office furnishings

 

10,024

 

 

 

$

22,168

 

 

 

 

9



 

On February 27, 2007, Buckeye acquired a refined petroleum products terminal in Marcy, New York for approximately $2.3 million. The fair value allocation 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.  On a preliminary basis, Buckeye has allocated 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 Limited Partnership to be used for capital expenditures.  In the third quarter of 2007, Buckeye invested approximately $0.8 million in connection with the pending acquisition of the membership interests in Lodi Gas Storage, L.L.C. (“Lodi Gas” and such acquisition being the “Lodi Acquisition”) (see Note 15).

 

5. PREPAIDS AND OTHER CURRENT ASSETS

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Prepaid insurance

 

$

1,819

 

$

7,274

 

Insurance receivables

 

9,528

 

12,093

 

Ammonia receivable

 

6,698

 

6,284

 

Other

 

11,668

 

7,325

 

Total

 

$

29,713

 

$

32,976

 

 

6. ACCRUED AND OTHER CURRENT LIABILITIES

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Taxes - other than income

 

$

8,254

 

$

5,523

 

Accrued charges due General Partner

 

2,760

 

2,264

 

Accrued charges due Services Company

 

3,171

 

1,732

 

Accrued employee benefit liability

 

2,340

 

2,340

 

Environmental liabilities

 

11,565

 

12,498

 

Interest

 

12,530

 

16,950

 

Accrued top-up reserve

 

50

 

230

 

Retainage

 

1,865

 

940

 

Payable for ammonia purchase

 

9,351

 

6,072

 

Other

 

13,055

 

14,653

 

Total

 

$

64,941

 

$

63,202

 

 

 

10



 

7.     LONG-TERM DEBT AND CREDIT FACILITIES

 

        Long-term debt consists of the following:

 

 

 

September 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

 

30,000

 

145,000

 

Less: Unamortized discount

 

(2,190

)

(2,403

)

Adjustment to fair value associated with hedge of fair value

 

1,354

 

1,530

 

 

 

$

879,164

 

$

994,127

 

 

The fair value of the Partnership’s debt was estimated to be $854.3 million as of September 30, 2007 and $964.0 million at December 31, 2006.  The values at September 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 $400.0 million, 5-year revolving credit facility (the “Credit Facility”) with a syndicate of lenders.  On August 24, 2007, the Partnership and the lenders amended the Credit Facility. The most significant amendments to the Credit Facility were as follows:

 

                  The principal amount of the facility was increased from $400.0 million to $600.0 million, and an expansion feature was added to enable the Partnership to, subject to certain conditions and upon the further approval of each lender, increase the Credit Facility to $800.0 million;

 

                  The termination date of the Credit Facility was extended to August 24, 2012, which date may be extended by the Partnership for two additional one year periods, subject to certain conditions and the approval of certain lenders as set forth in the Credit Facility;

 

                  The funded debt ratio covenant was increased to 5.0 to 1.0 (as more fully described below);

 

                  The requirement of a guarantee by Laurel of outstanding indebtedness under the Credit Facility was eliminated;

 

                  Certain subsidiaries designated by the Partnership as restricted subsidiaries were no longer required to guarantee the indebtedness outstanding under the Credit Facility; and

 

                  In connection with the anticipated closing of the Lodi Acquisition (see Note 15), certain secured indebtedness incurred by Lodi Gas and its subsidiaries will be permitted to remain outstanding for 15 business days following the closing of the Lodi Acquisition.

 

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 September 30, 2007 and December 31, 2006, respectively. The weighted average interest rate on amounts outstanding under the Credit Facility at September 30, 2007 was 5.4%.

 

 

11



 

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,” which is defined in the Credit Facility for periods prior to the fourth quarter of 2006 as consolidated net income before interest, taxes, depreciation, depletion, amortization and incentive compensation payments to Buckeye GP, and for periods commencing after October 1, 2006 as consolidated net income before interest, taxes, depreciation, depletion and amortization.

 

The Partnership’s Funded Debt Ratio equals the ratio of total consolidated funded debt of the Partnership and certain of its subsidiaries to consolidated EBITDA measured for the preceding twelve months.  As of the last day of any fiscal quarter, the Funded Debt Ratio may not exceed 5.00 to 1.00, subject to a provision for increases to 5.50 to 1.00 in connection with certain future acquisitions. At September 30, 2007, the Partnership’s Funded Debt Ratio was 3.62 to 1.00.

 

In addition, the Credit Facility provides for a “change of control” event of default that is triggered if (i) BGH GP 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 and (B) any person, entity or group owns and controls a larger percentage of the outstanding equity interests of BGH GP 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.

 

       At September 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 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 September 30, 2007 and 2006, respectively, and $176 thousand for the nine months ended September 30, 2007 and 2006.

 

In August 2007, the Partnership entered into a forward-starting interest rate swap agreement with a financial institution for a $75.0 million notional amount in order to hedge the variability of future interest rates associated with a portion of an anticipated issuance of debt to finance a portion of the Lodi Acquisition (see Note 15).  The debt is expected to be issued on or before March 31, 2008. Under the interest rate swap agreement, the Partnership will receive a payment if the interest rate on the notional amount exceeds 5.594% and will make a payment if the interest rate on the notional amount is below 5.594%.  At September 30, 2007, the Partnership determined the interest rate swap agreement to be an effective cash flow hedge and recorded the change in the fair value of the agreement of $2.1 million.  Similarly, on October 23, 2007, the Partnership entered into another forward-starting interest rate swap agreement with the same financial institution for a notional amount of $50.0 million and an interest rate of 5.115%. Other than the notional amount and the interest rate, the more recent agreement has the same terms as the agreement executed in August 2007.  The transaction executed on October 23, 2007 had no impact on the financial statements.

 

 

12


 


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.  See Note 14 for a discussion of recent accounting pronouncements affecting earnings per unit.

 

        The following table is a reconciliation of the number of LP Units used in the basic and diluted earnings per unit calculations for the three and nine months ended September 30, 2007 and 2006:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Basic:

 

 

 

 

 

 

 

 

 

Average units oustanding

 

42,676

 

39,432

 

41,286

 

39,071

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Average units oustanding

 

42,676

 

39,432

 

41,286

 

39,071

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of unit options granted

 

43

 

24

 

47

 

25

 

 

 

42,719

 

39,456

 

41,333

 

39,096

 

 

 

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 October 25, 2007, the Partnership declared a cash distribution of $0.825 per unit payable on November 30, 2007 to unitholders of record on November 5, 2007. The total cash distribution to unitholders will amount to approximately $44.5 million which includes an incentive distribution of approximately $8.3 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 $23.9 million and $21.4 million and $69.9 million and $64.4 million for the three and nine months ended September 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 September 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 for the three months ended September 30, 2007 and 2006 and $5.4 million and $5.3 million for the nine months ended September 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 the

 

 

13



 

three months ended September 30, 2007 and 2006, respectively, and $1.4 million for the nine months ended September 30, 2007 and 2006, respectively.  In connection with the acquisition described in Note 2, MainLine Management will forego payment of the senior administrative charge effective June 25, 2007 through March 31, 2009.  The disinterested directors of Buckeye GP approve the amount of the senior administrative charge on an annual basis.

 

Buckeye GP receives incentive distributions from the Partnership based on the level of quarterly cash distributions paid per LP Unit.  Incentive distributions totaled $7.6 million and $6.4 million and $21.7 million and $18.3 million for the three and nine months ended September 30, 2007 and 2006, respectively.

 

Lehman Brothers and its affiliates have provided, directly or indirectly, investment and commercial banking or financial advisory services to the Partnership, for which they received customary fees and commissions.  An affiliate of Lehman Brothers is a lender under the Credit Facility and receives its respective share of any repayment by the Partnership of amounts outstanding under the Credit Facility.  Also, an affiliate of Lehman Brothers owns an interest in BGH GP which indirectly controls the Partnership through an ownership interest in Buckeye GP. Finally, Lehman Brothers is acting as the Partnership’s exclusive financial advisor in connection with the Lodi Acquisition (see Note 15).

 

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 the date of grant. As unit options 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 nine months ended September 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 September 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 nine months ended September 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.

 

 

14



 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

$

62

 

$

42

 

$

234

 

$

226

 

General and adminstrative expenses

 

19

 

13

 

69

 

68

 

Total unit-based compensation expenses

 

$

81

 

$

55

 

$

303

 

$

294

 

 

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 nine months ended September 30, 2007 and 2006, respectively:

 

 

 

2007

 

2006

 

Expected dividend yield

 

6.60

%

6.90

%

Expected unit price volatility

 

19.60

%

20.70

%

Risk-Free interest 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 nine months ended September 30, 2007:

 

 

 

 

 

 

 

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, September 30, 2007

 

347,500

 

$

44.36

 

7.5

 

$

1,591,900

 

Exercisable, September 30, 2007

 

111,700

 

$

38.27

 

5.2

 

$

1,191,300

 

 

As of January 1, 2007, there were 205,800 unvested options outstanding.  During the first nine 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 September 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 third quarter of 2007 and the exercise price, multiplied by the number of LP Units. The total intrinsic value of options exercised during the nine months ended September 30, 2007 was $588,900. The total number of in-the-money options exercisable as of September 30, 2007 was 111,700. As of September 30, 2007, total

 

15



 

unrecognized compensation cost related to unvested options was $481,700. The cost is expected to be recognized over a weighted average period of 1.0 years.  At September 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)  (“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 nine months ended September 30, 2007 by approximately $0.9 million and $2.8 million, respectively.

 

For the three months ended September 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:

 

 

 

Three Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

111

 

$

231

 

$

302

 

$

193

 

Interest cost

 

345

 

250

 

505

 

709

 

Expected return on plan assets

 

(238

)

(211

)

 

 

Amortization of prior service benefit

 

(113

)

(113

)

(859

)

(208

)

Amortization of unrecognized losses

 

112

 

152

 

309

 

469

 

Net periodic benefit costs

 

$

217

 

$

309

 

$

257

 

$

1,163

 

 

For the nine months ended September 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:

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

606

 

$

692

 

$

501

 

$

643

 

Interest cost

 

850

 

750

 

1,521

 

2,159

 

Expected return on plan assets

 

(648

)

(634

)

 

 

Amortization of prior service benefit

 

(340

)

(340

)

(2,578

)

(458

)

Amortization of unrecognized losses

 

399

 

458

 

1,072

 

1,019

 

Net periodic benefit costs

 

$

867

 

$

926

 

$

516

 

$

3,363

 

 

16



 

In August 2007, the Partnership made a voluntary contribution of $1.8 million to the RIGP, even though a minimum funding contribution is not required to be made during 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 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.  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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

92,067

 

$

91,188

 

$

278,244

 

$

259,592

 

Terminalling and Storage

 

24,843

 

18,661

 

72,379

 

55,271

 

Other Operations

 

8,743

 

6,670

 

24,925

 

18,896

 

Total

 

$

125,653

 

$

116,519

 

$

375,548

 

$

333,759

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

36,122

 

$

39,286

 

$

109,077

 

$

106,380

 

Terminalling and Storage

 

9,324

 

4,691

 

28,243

 

18,088

 

Other Operations

 

2,085

 

2,069

 

6,741

 

5,123

 

Total

 

$

47,531

 

$

46,046

 

$

144,061

 

$

129,591

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

9,630

 

$

9,462

 

$

28,035

 

$

27,767

 

Terminalling and Storage

 

1,455

 

1,528

 

4,193

 

3,774

 

Other Operations

 

435

 

429

 

1,197

 

1,217

 

Total

 

$

11,520

 

$

11,419

 

$

33,425

 

$

32,758

 

 

 

17



 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Capital expenditures:

 

 

 

 

 

Pipeline Operations

 

$

36,933

 

$

48,425

 

Terminalling and Storage

 

12,053

 

11,038

 

Other Operations

 

2,726

 

2,755

 

Total

 

$

51,712

 

$

62,218

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

Pipeline Operations

 

$

860

 

$

79,826

 

Terminalling and Storage

 

39,587

 

13,504

 

Total

 

$

40,447

 

$

93,330

 

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Assets*:

 

 

 

 

 

Pipeline Operations

 

$

1,616,206

 

$

1,608,243

 

Terminalling and Storage

 

371,508

 

318,917

 

Other Operations

 

71,302

 

68,310

 

Total

 

$

2,059,016

 

$

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.

 

In September 2007, the Emerging Issues Task Force (“EITF”) of the FASB reached a tentative conclusion on Issue No. 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships” (“Issue No. 07-4”).  This tentative conclusion reached by the EITF affects how a master limited partnership (“MLP”) allocates income between its general partner, which typically holds incentive distribution rights (“IDRs”) along with the general partner interest, and the limited partners.  It is not uncommon for MLPs to experience timing differences

 

18



 

between the recognition of income and partnership distributions.  The amount of incentive distribution is typically calculated based on the amount of distributions paid to the MLP’s partners.  The issue is whether current period earnings of an MLP should be allocated to the holders of IDRs as well as the holders of the general and limited partnership interests when applying the two-class method under FASB Statement No. 128 — “Earnings per Share.”

 

The tentative conclusion reached by the EITF in Issue No. 07-4 is that when current period earnings are in excess of cash distributions, the undistributed earnings should be allocated to the holders of the general partner interest and the holders of IDRs on one hand, and the holders of the limited partner interest on the other hand, as if the undistributed earnings were available in cash. Conversely, when cash distributions are in excess of earnings, net income allocable to the holders of the limited partner interest would be reduced by the actual distributions to the holders of the general partner interest and the holders of IDRs. The remaining net income would be allocated to the holders of the limited partner interest based on their respective sharing of income as specified in the partnership agreement.

 

Issue No. 07-4 will be effective for fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. The accounting treatment shall be effective for all financial statements presented. The Partnership is considering the impact of the adoption of Issue 07-4 on the Partnership’s financial statements.

 

15. LODI TRANSACTION

 

On July 24, 2007, the Partnership announced that it had entered into a definitive agreement to acquire the membership interests in Lodi Gas from an affiliate of ArcLight.  Lodi Gas owns and operates a natural gas storage facility 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 estimated 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 or the first quarter of 2008.

 

 

19



 

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 16 states, and operates an approximate 2,700 miles of pipeline under agreements, serving two states, with major oil and chemical companies. 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 to the Partnership's consolidated financial statements for a more detailed discussion.

Buckeye GP LLC (“Buckeye GP”) is the general partner of the Partnership and controls the Partnership.  At September 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 (“BGH GP”), certain members of the Partnership’s senior management and the public. The controlling interest in BGH was sold effective June 25, 2007.  See Significant Events for further information.  BGH has no operating assets other than its general partner ownership interest in Buckeye and certain of Buckeye’s 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

 

20



 

than an expense resulted in an increase in reported net income of $7.6 million and $21.7 million for the three and nine months ended September 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 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 Events

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.  BGH GP 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 BGH GP of their 61.9% 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.

On July 24, 2007, the Partnership announced that it had entered into a definitive agreement to acquire the membership interests in Lodi Gas, L.L.C. ("Lodi Gas") from an affiliate of ArcLight (the “Lodi Acquisition”).  Lodi Gas owns and operates a natural gas storage facility 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 estimated 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 or the first quarter of 2008.

Effective as of October 25, 2007, the Board of Directors of Buckeye GP elected Mr. Stephen C. Muther as President of Buckeye GP, in place of Mr. Forrest E. Wylie, who will remain Chairman of the Board of Directors and Chief Executive Officer of Buckeye GP.  Mr. Muther was also elected by the Board of Directors of MainLine Management to serve as President of MainLine Management, in place of Mr. Wylie, who will remain Chairman of the Board of Directors and Chief Executive Officer of MainLine Management.

 

21



 

Results of Operations

 

        Summary operating results for the Partnership were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands, except per unit amounts)

 

Revenue

 

$

125,653

 

$

116,519

 

$

375,548

 

$

333,759

 

Costs and expenses

 

78,122

 

70,473

 

231,487

 

204,168

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

47,531

 

46,046

 

144,061

 

129,591

 

Other income (expenses)

 

(11,151

)

(18,749

)

(35,402

)

(55,150

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,380

 

$

27,297

 

$

108,659

 

$

74,441

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

 

 

 

 

Net income allocated to General Partner

 

$

6,116

 

$

168

 

$

18,734

 

$

461

 

Net income allocated to Limited Partners

 

$

30,264

 

$

27,129

 

$

89,925

 

$

73,980

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit-basic

 

$

0.71

 

$

0.69

 

$

2.18

 

$

1.89

 

Earnings per limited partner unit-diluted

 

$

0.71

 

$

0.69

 

$

2.18

 

$

1.89

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

42,676

 

39,432

 

41,286

 

39,071

 

Diluted

 

42,719

 

39,456

 

41,333

 

39,096

 

 

EBITDA and Adjusted EBITDA

 

The following table summarizes EBITDA and adjusted EBITDA for the Partnership for the three and nine months ended September 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 nine months of 2006, General Partner incentive compensation expense was not recorded in the first nine 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.

 

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

 

22



 

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Net income per GAAP

 

$

36,380

 

$

27,297

 

$

108,659

 

$

74,441

 

Interest and debt expense

 

12,391

 

13,319

 

38,651

 

38,679

 

Income tax expense

 

277

 

168

 

715

 

322

 

Depreciation and amortization

 

11,520

 

11,419

 

33,425

 

32,758

 

EBITDA

 

60,568

 

52,203

 

181,450

 

146,200

 

 

 

 

 

 

 

 

 

 

 

General Partner incentive compensation

 

 

6,381

 

 

18,277

 

Adjusted EBITDA

 

$

60,568

 

$

58,584

 

$

181,450

 

$

164,477

 

 

Revenues and operating income by operating segment were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In thousands)

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

92,067

 

$

91,188

 

$

278,244

 

$

259,592

 

Terminalling and Storage

 

24,843

 

18,661

 

72,379

 

55,271

 

Other Operations

 

8,743

 

6,670

 

24,925

 

18,896

 

Total

 

$

125,653

 

$

116,519

 

$

375,548

 

$

333,759

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

36,122

 

$

39,286

 

$

109,077

 

$

106,380

 

Terminalling and Storage

 

9,324

 

4,691

 

28,243

 

18,088

 

Other Operations

 

2,085

 

2,069

 

6,741

 

5,123

 

Total

 

$

47,531

 

$

46,046

 

$

144,061

 

$

129,591

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses (including depreciation and amortization):

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

55,945

 

$

51,902

 

$

169,167

 

$

153,212

 

Terminalling and Storage

 

15,519

 

13,970

 

44,137

 

37,183

 

Other Operations

 

6,658

 

4,601

 

18,183

 

13,773

 

Total

 

$

78,122

 

$

70,473

 

$

231,487

 

$

204,168

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

9,630

 

$

9,462

 

$

28,035

 

$

27,767

 

Terminalling and Storage

 

1,455

 

1,528

 

4,193

 

3,774

 

Other Operations

 

435

 

429

 

1,197

 

1,217

 

Total

 

$

11,520

 

$

11,419

 

$

33,425

 

$

32,758

 

 

 

Third Quarter of 2007 compared to Third Quarter of 2006

 

        Total revenues for the quarter ended September 30, 2007 were $125.7 million, $9.2 million or 7.9% greater than revenue of $116.5 million for the same period in 2006. This improvement in revenue in the third quarter of 2007 resulted primarily from increased revenues in the Terminalling and Storage segment as discussed below.

 

23


 


Pipeline Operations:

 

        Revenue from Pipeline Operations was $92.1 million in the third quarter of 2007 compared to $91.2 million in the third quarter of 2006. The revenue increase in Pipeline Operations revenue in the third quarter of 2007 of $0.9 million or 1.0% was primarily the result of:

 

                  An approximate $3.3 million increase in base transportation revenue caused primarily by an indexed-based tariff increase of approximately 6.1% implemented on July 1, 2007 and a market-based tariff increase of approximately 4.5% implemented on May 1, 2007.  Product volumes (as shown below) declined by 2.2% in the third quarter of 2007 as compared to the third quarter of 2006;

 

                  An approximate $1.7 million reduction in revenue representing the settlement of overages and shortages on product deliveries; and

 

                  An approximate $0.7 million reduction in construction management revenue due to the reduced activity associated with a construction contract performed by WesPac Pipelines — Memphis LLC (“WesPac Memphis”) for a third party.

 

The Partnership has experienced shortages on its pipeline product deliveries during 2007 and the latter part of 2006 in excess of historical variances.  Partnership personnel are actively investigating measurement equipment issues that may be the cause of the increased shortages.

 

Product deliveries for the third quarter ended September 30, 2007 and 2006 were as follows:

 

 

 

Average Barrels Per Day

 

 

 

Three Months Ended September 30,

 

Product

 

2007

 

2006

 

Gasoline

 

730,100

 

742,700

 

Distillate

 

274,000

 

295,700

 

Jet Fuel

 

376,100

 

361,500

 

LPG’s

 

18,600

 

27,200

 

NGL’s

 

21,100

 

21,300

 

Other

 

5,700

 

8,700

 

Total

 

1,425,600

 

1,457,100

 

 

In the third 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 $24.8 million in the third quarter of 2007 compared to $18.7 million in the third quarter of 2006. The revenue increase in the third quarter of 2007 compared to the third quarter of 2006 of $6.1 million or 32.6% was primarily the result of:

 

                  An approximate $4.8 million increase in base revenue primarily related to increases in throughput volumes and charges for product additives in the third quarter of 2007 compared to the third quarter of 2006; and

 

                  Incremental revenue of $1.6 million due to the acquisition of six terminals in 2007, as more fully described in Note 4 to the accompanying condensed consolidated financial statements.

 

24



 

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

 

 

 

Average Barrels Per Day

 

 

 

Three Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Refined products throughput (bpd)

 

575,100

 

498,900

 

 

Other Operations:

 

        Revenue from the Other Operations segment was $8.7 million in the third quarter of 2007 compared to $6.7 million in the third quarter of 2006. The revenue increase in the third quarter of 2007 of $2.0 million or 29.9% 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; and

 

                  An increase of $0.8 million in construction management revenue related to the additional contracts noted above.

 

Operating Expenses:

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

 

 

Costs and Expenses

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Payroll and payroll benefit

 

$

22,419

 

$

18,292

 

Depreciation and amortization

 

11,520

 

11,419

 

Operating power

 

7,744

 

7,605

 

Outside services

 

10,645

 

10,467

 

Property and other taxes

 

5,322

 

5,128

 

Construction management

 

1,609

 

1,909

 

All other

 

18,863

 

15,653

 

Total

 

$

78,122

 

$

70,473

 

 

Payroll and payroll benefits were $22.4 million in the third quarter of 2007, an increase of $4.1 million compared to the third quarter of 2006.  In the third quarter of 2006, the Partnership experienced a decrease in payroll benefit expense of approximately $1.7 million as a result of a reduction of the fair value of the Partnership’s “top-up” liability under a services agreement with Buckeye Pipe Line Services Company (“Services Company”), which required 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 a Note Agreement.  The decrease in payroll and payroll benefit related to the “top-up” liability was not repeated in the third quarter of 2007.  In addition, increases in salaries and wages of $1.5 million in the third quarter of 2007 resulted from an increase in the number of employees and overtime pay due to the Partnership’s expanded operations and higher wage rates.  In the third quarter of 2007, the Partnership experienced also an increase of $1.0 million in employee incentive compensation expense. In the third quarter of 2006, the Partnership reversed $0.9 million of employee incentive compensation expense.  Payroll benefits increased by $0.4 million due to higher medical costs, increases in wages and increased employee headcount, of which approximately $0.3 million is related to recent acquisitions.  This increase was offset by a decrease of $0.9 million in payroll benefits 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 $11.5 million in the third quarter of 2007, which was consistent with depreciation and amortization expense in the third quarter of 2006.

 

25



 

Operating power costs were $7.7 million in the three months ended September 30, 2007, which was consistent with operating power costs in the three months ended September 30, 2006.  The Partnership experienced an increase in power rates and power supply additive expense, which was offset by a decrease in operating power usage due to a decrease in pipeline volumes in the third quarter of 2007.  Operating power consists primarily of electricity required to operate pipeline pumping facilities.

 

Outside services costs were $10.6 million in the third quarter of 2007, which is consistent with outside services costs in the third quarter of 2006.  The level of maintenance activity in the third quarter of 2007 was similar to the level of activity in the third quarter of 2006. Outside services costs consist principally of third-party contract services for pipeline and terminal maintenance activities.

 

Property and other taxes were $5.3 million in the third quarter of 2007, an increase of $0.2 million compared to the third quarter of 2006.  Property and other taxes related to recent acquisitions resulted in an increase of $0.1 million.  The remaining increase was caused primarily by higher real property tax assessments in several states.

 

Construction management costs were $1.6 million in the third quarter of 2007, which is consistent with construction activity in the third quarter of 2006.

 

All other costs were $18.9 million in the three months ended September 30, 2007, an increase of $3.2 million compared to $15.7 million in the same period in 2006.  Insurance costs increased by $1.0 million over the third quarter of 2006, which is primarily due to an increase in insurance premiums.  Supply expenses increased by $0.5 million which is primarily a result of an increase of terminal additives used in terminal activity.  The remainder of the increases related to various other pipeline operating costs.

 

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

 

 

 

Other Income (Expenses)

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Investment and equity income

 

$

2,560

 

$

2,040

 

Interest and debt expense

 

(12,391

)

(13,319

)

General Partner incentive compensation

 

 

(6,381

)

Minority interests and other

 

(1,320

)

(1,089

)

Total

 

$

(11,151

)

$

(18,749

)

 

Investment and equity income was $2.6 million for the three months ended September 30, 2007 which is an increase of $0.6 million from the three months ended September 30, 2006.  The increase is primarily due to an increase in equity income earned from the Partnership’s approximate 40% interest in Muskegon Pipeline LLC (“Muskegon”) and 20% interest in West Texas LPG Pipeline Limited Partnership (“WTP”).

 

Interest and debt expense was $12.4 million in the three months ended September 30, 2007, which is a decrease of $0.9 million from the three months ended September 30, 2006.  The decrease is due to a decrease in amounts outstanding under the Partnership’s revolving credit facility during the three months ended September 30, 2007 compared to the three months ended September 30, 2006.

 

General Partner incentive compensation was recorded as an expense of $6.4 million in the third quarter of 2006.  As discussed above, the Partnership’s Incentive Compensation Agreement and Limited 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 third quarter of 2007.

 

Nine Months of 2007 compared to Nine Months of 2006

 

Total revenue for the nine months ended September 30, 2007 was $375.5 million, $41.7 million or 12.5% greater than revenue of $333.8 million for the same period in 2006. This improvement was driven by increased revenues in all segments as discussed below.

 

26



 

Pipeline Operations:

 

Revenue from Pipeline Operations was $278.2 million for the nine months ended September 30, 2007 compared to $259.6 million for the nine months ended September 30, 2006. The revenue increase in Pipeline Operations revenue in the first nine months of 2007 of $18.6 million or 7.2% was primarily the result of:

 

                  An approximate $17.0 million increase in base transportation revenue caused primarily by an indexed-based tariff increase of approximately 6.1% implemented on July 1, 2007 and a market-based tariff increase of 4.5% implemented on May 1, 2007;

 

                  Incremental revenue of $1.8 million in 2007 compared to 2006 resulting from the commissioning of the terminal and pipeline at the Memphis International Airport by WesPac Memphis in April 2006;

                  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;

 

                  An approximate $1.4 million increase in construction management revenue due to a construction contract performed by WesPac Memphis to construct a pipeline connection for a third party;

 

                  Incremental revenue of $1.2 million in the first nine months of 2007 related to nine months of revenue from Buckeye NGL in 2007 as compared to eight months of revenue in 2006 as Buckeye NGL was acquired by the Partnership on January 31, 2006; and

 

                  An approximate $4.7 million reduction in revenue representing the settlement of overages and shortages on product deliveries.

 

The Partnership has experienced shortages on its pipeline product deliveries during 2007 and the latter part of 2006 in excess of historical variances.  Partnership personnel are actively investigating measurement equipment issues that may be the cause of the increased shortages.

 

Product deliveries for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

 

Average Barrels Per Day

 

 

 

Nine Months Ended September 30,

 

Product

 

2007

 

2006

 

Gasoline

 

720,200

 

722,900

 

Distillate

 

309,700

 

314,600

 

Jet Fuel

 

364,000

 

351,200

 

LPG’s

 

20,300

 

24,900

 

NGL’s

 

20,200

 

19,000

 

Other

 

6,800

 

9,900

 

Total

 

1,441,200

 

1,442,500

 

 

Terminalling and Storage:

 

Revenue from Terminalling and Storage was $72.4 million for the nine months ended September 30, 2007 compared to $55.3 million for the nine months ended September 30, 2006.  The net increase in Terminalling and Storage revenue in the first nine months of 2007 of $17.1 million or 30.9% was primarily the result of:

 

                  An approximate $9.9 million increase in base revenue primarily related to increases in throughput volumes and charges for product additives in the first nine months of 2007 compared to the first nine months of 2006;

 

                  Additional revenue of $4.1 million in the first nine months of 2007 compared to the first nine 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

 

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                  Additional revenue of $1.5 million in the first nine months of 2007 compared to the first nine months of 2006 due to the commencement of certain butane blending agreements in the latter part of 2006.

 

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

 

 

 

Average Barrels Per Day

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Refined products throughput (bpd)

 

565,100

 

490,800

 

 

Other Operations:

 

Revenue from Other Operations was $24.9 million in the first nine months of 2007 compared to $18.9 million in the first nine months of 2006. The increase in Other Operations revenue in the first nine months of 2007 of $6.0 million or 31.7% was primarily the result of:

 

                  An increase of $3.5 million in pipeline maintenance and operating revenue related to additional operating contracts signed in the latter part of 2006;

 

                  An increase of $1.9 million in construction management revenue primarily related to  the additional contracts noted above; and

 

                  An increase of $0.4 million in incidental revenue due to the sale of miscellaneous equipment in the second quarter of 2007.

 

Operating Expenses:

 

Costs and expenses for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

 

Costs and Expenses

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Payroll and payroll benefit

 

$

65,468

 

$

57,759

 

Depreciation and amortization

 

33,425

 

32,758

 

Operating power

 

23,157

 

21,742

 

Outside services

 

27,318

 

23,631

 

Property and other taxes

 

16,640

 

14,207

 

Construction management

 

6,313

 

3,895

 

All other

 

59,166

 

50,176

 

Total

 

$

231,487

 

$

204,168

 

 

Payroll and payroll benefits were $65.5 million in the first nine months of 2007, an increase of $7.7 million compared to the first nine months of 2006.  Increases in salaries and wages of $4.8 million resulted from an increase in the number of employees and overtime pay due to the Partnership’s expanded operations and higher wage rates.  During the nine months ended September 30, 2006, the Partnership experienced a decrease in payroll benefit expense of approximately $1.7 million as a result of a reduction of the fair value of the Partnership’s “top-up” liability under a services agreement with Services Company, which required 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 a Note Agreement. This increase in payroll and payroll benefit expense was offset by another reduction of the fair value of the Partnership’s “top-up” liability of $0.5 million in the first quarter of 2007.  Payroll benefits increased by $1.3 million due to higher medical costs, increases in wages and increased employee headcount.  Payroll and payroll benefits also increased due to a decrease in capitalized payroll of $1.2 million.  In 2007, the Partnership experienced an increase of $1.0 million in employee incentive compensation expense.  In the third quarter of 2006, the Partnership reversed $0.9 million in employee incentive compensation expense.  Approximately $0.8 million of payroll and payroll benefit expense is related to recent acquisitions.  This increase was offset by a decrease of $2.9 million in payroll benefits due to lower employee benefits costs resulting from an amendment to Services Company’s postretirement health care and life insurance benefits plan.

 

 

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Depreciation and amortization expense was $33.4 million for the first nine months ended September 30, 2007, an increase of $0.7 million from the nine months ended September 30, 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.

 

Operating power costs of $23.2 million in the first nine months of 2007 were $1.4 million higher than the same period in 2006. Recent acquisitions and first quarter operations at WesPac Memphis caused $0.2 million of the increase.  The remainder of the increase is primarily due to power rate increases and higher power supply additive expense offset by a slight reduction in pipeline volumes.  Operating power consists primarily of electricity required to operate pipeline pumping facilities.

 

Outside services costs were $27.3 million in the first nine months of 2007, or $3.7 million greater than the same period in 2006.  Approximately $0.3 million of the increase is related 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 nine months of 2007.

 

Property and other taxes increased by $2.4 million from $14.2 million in the first nine months of 2007 to $16.6 million for the same period in 2006.  Approximately $0.4 million of the increase is related to recent acquisitions.  The remainder of the increase is due to higher real property assessments over the same period in 2006.

 

Construction management costs were $6.3 million in the first nine months of 2007, which is an increase of $2.4 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 $59.2 million, an increase of $9.0 million in the first nine months of 2007 compared to the first nine months of 2006.   Insurance expense increased by $2.6 million over the comparable period of 2006 due to an increase in insurance premiums.  Supply expenses increased by $2.8 million which is primarily due to an increase in terminal additives and expenses for technical services.  Other costs related to recent acquisitions were $1.1 million.  The increase reflects $0.6 million of costs associated with fuel purchases by WesPac Pipelines — Reno LLC related to a product-supply arrangement.  These increases were offset by a decrease in casualty losses of $0.6 million. The remainder of the increases related to various other pipeline operating costs resulting from Buckeye’s expanded operations.

 

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

 

 

 

Other Income (Expenses)

 

 

 

2007

 

2006

 

 

 

(In thousands)

 

Investment and equity income

 

$

7,196

 

$

5,236

 

Interest and debt expense

 

(38,651

)

(38,679

)

General Partner incentive compensation

 

 

(18,277

)

Minority interests and other