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 March 31, 2008 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

 

 

(Address of principal executive

 

18031

offices)

 

(Zip Code)

 

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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 April 23, 2008

Limited Partnership Units

 

48,366,746 Units

 

 



 

BUCKEYE PARTNERS, L.P.

INDEX

 

 

 

Page

PART I- FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2008 and 2007

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007

5

 

 

 

 

Condensed Consolidated Statement of Changes in Partners’ Capital for the three months ended March 31, 2008

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

PART II- OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 6.

Exhibits

39

 



 

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

 

 

 

March 31,

 

 

 

2008

 

2007

 

Revenues:

 

 

 

 

 

Product sales

 

$

241,046

 

$

4,915

 

Transportation and other

 

139,229

 

120,029

 

Total revenue

 

380,275

 

124,944

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of product sales

 

236,611

 

4,844

 

Operating expenses

 

65,328

 

53,866

 

Depreciation and amortization

 

12,498

 

10,807

 

General and administrative

 

7,706

 

5,154

 

Total costs and expenses

 

322,143

 

74,671

 

 

 

 

 

 

 

Operating income

 

58,132

 

50,273

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Investment and equity income

 

2,640

 

2,066

 

Interest and debt expense

 

(17,934

)

(13,487

)

Minority interests and other

 

(1,434

)

(1,118

)

Total other (expense)

 

(16,728

)

(12,539

)

 

 

 

 

 

 

Income from continuing operations

 

41,404

 

37,734

 

 

 

 

 

 

 

Income from discontinued operations

 

1,413

 

 

 

 

 

 

 

 

Net income

 

$

42,817

 

$

37,734

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

Net income allocated to general partner:

 

 

 

 

 

Income from continuing operations

 

$

7,302

 

$

6,817

 

Income from discontinued operations

 

$

425

 

$

 

 

 

 

 

 

 

Net income allocated to limited partners:

 

 

 

 

 

Income from continuing operations

 

$

34,102

 

$

30,917

 

Income from discontinued operations

 

$

988

 

$

 

 

 

 

 

 

 

Earnings per limited partner unit-basic:

 

 

 

 

 

Income from continuing operations

 

$

0.74

 

$

0.77

 

Income from discontinued operations

 

0.02

 

 

Earnings per limited partner unit-basic

 

$

0.76

 

$

0.77

 

 

 

 

 

 

 

Earnings per limited partner unit-diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.74

 

$

0.77

 

Income from discontinued operations

 

0.02

 

 

Earnings per limited partner unit-diluted

 

$

0.76

 

$

0.77

 

 

 

 

 

 

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

Basic

 

45,893

 

39,950

 

Diluted

 

45,923

 

39,995

 

 

See Notes to condensed consolidated financial statements.

 

3



 

Buckeye Partners, L.P.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

28,136

 

$

93,198

 

Trade receivables

 

114,880

 

47,598

 

Construction and pipeline relocation receivables

 

9,755

 

12,571

 

Inventories

 

102,664

 

15,149

 

Prepaid and other current assets

 

43,307

 

31,822

 

Assets of discontinued operations

 

51,572

 

 

Total current assets

 

350,314

 

200,338

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,126,122

 

1,796,196

 

Goodwill

 

227,887

 

11,355

 

Other non-current assets

 

126,538

 

125,763

 

Total assets

 

$

2,830,861

 

$

2,133,652

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

96,772

 

$

 

Accounts payable

 

51,647

 

19,822

 

Accrued and other current liabilities

 

91,256

 

72,672

 

Liabilities of discontinued operations

 

648

 

 

Total current liabilities

 

240,323

 

92,494

 

 

 

 

 

 

 

Long-term debt

 

1,287,272

 

849,177

 

Other non-current liabilities

 

83,188

 

80,341

 

Minority interests

 

21,913

 

21,468

 

Total liabilities

 

1,632,696

 

1,043,480

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ (deficit) capital:

 

 

 

 

 

General Partner

 

(2,408

)

(1,005

)

Limited Partners

 

1,210,487

 

1,100,346

 

Accumulated other comprehensive loss

 

(9,914

)

(9,169

)

Total partners’ capital

 

1,198,165

 

1,090,172

 

Total liabilities and partners’ capital

 

$

2,830,861

 

$

2,133,652

 

 

See Notes to condensed consolidated financial statements.

 

4



 

Buckeye Partners, L.P.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Income from continuing operations

 

$

41,404

 

$

37,734

 

Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:

 

 

 

 

 

Depreciation and amortization

 

12,498

 

10,807

 

Minority interest

 

1,452

 

1,068

 

Equity earnings

 

(2,055

)

(1,786

)

Distributions from equity investments

 

500

 

1,276

 

Amortization of debt discount and option grants

 

325

 

146

 

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

 

 

 

 

 

Trade receivables

 

58

 

10,478

 

Construction and pipeline relocation receivables

 

2,816

 

3,130

 

Inventories

 

5,041

 

(214

)

Prepaid and other current assets

 

(3,936

)

1,757

 

Accounts payable

 

728

 

(11,538

)

Accrued and other current liabilities

 

(396

)

(3,423

)

Other non-current assets

 

1,998

 

379

 

Other non-current liabilities

 

248

 

(423

)

Total adjustments from operating activities

 

19,277

 

11,657

 

 

 

 

 

 

 

Net cash provided by continuing operations

 

60,681

 

49,391

 

Net cash used in discontinued operations

 

(274

)

 

Net cash from continuing and discontinued operations

 

60,407

 

49,391

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(14,792

)

(17,373

)

Acquisitions and equity investments, net of cash acquired

 

(600,309

)

(38,468

)

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

 

(33

)

(72

)

Net cash used in investing activities

 

(615,134

)

(55,913

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Debt issuance costs

 

(351

)

 

Net proceeds from issuance of limited partnership units

 

113,259

 

82,404

 

Proceeds from exercise of units options

 

 

1,016

 

Distributions to minority interests

 

(1,007

)

(941

)

Proceeds from issuance of long-term debt

 

576,050

 

70,000

 

Payment of debt, net

 

(141,229

)

(105,000

)

Settlement payment of hedge

 

(9,638

)

 

Distributions to unitholders

 

(47,419

)

(38,078

)

Net cash provided by financing activities

 

489,665

 

9,401

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(65,062

)

2,879

 

Cash and cash equivalents —Beginning of year

 

93,198

 

18,946

 

Cash and cash equivalents—End of period

 

$

28,136

 

$

21,825

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest (net of amount capitalized)

 

$

17,500

 

$

17,132

 

Capitalized interest

 

$

336

 

$

415

 

Cash paid for income tax

 

$

178

 

$

332

 

 

 

 

 

 

 

Non-cash changes in assets and liabilities:

 

 

 

 

 

Hedge accounting

 

$

1,043

 

$

(59

)

 

See Notes to condensed consolidated financial statements.

 

5



 

Buckeye  Partners, L.P.

Condensed Consolidated Statement of Partners’ Capital

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

General

 

Limited

 

Comprehensive

 

 

 

 

 

Partner

 

Partners

 

(Loss) Income

 

Total

 

Partners (deficit) capital- January 1, 2008

 

$

(1,005

)

$

1,100,346

 

$

(9,169

)

$

1,090,172

 

Net income

 

7,727

 

35,090

 

 

42,817

 

Termination of Buckeye’s interest rate swaps

 

 

 

(2,451

)

 

 

Amortization of Buckeye’s interest rate swaps

 

 

 

 

 

200

 

 

 

Change in value of Energy Service’s cash flow hedge

 

 

 

2,282

 

 

 

Amortization of RIGP and Retiree Medical Plan Costs

 

 

 

(776

)

 

 

Other comprehensive income

 

 

 

 

 

(745

)

(745

)

Total Comprehensive income

 

 

 

 

 

 

 

42,072

 

Distributions

 

(9,130

)

(38,289

)

 

(47,419

)

Net proceeds from the issuance of limited partner units

 

 

113,259

 

 

113,259

 

Amortization of unit options

 

 

81

 

 

81

 

Partners (deficit) capital- March 31, 2008

 

$

(2,408

)

$

1,210,487

 

$

(9,914

)

$

1,198,165

 

 

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. (“Buckeye”) is a publicly traded (NYSE:BPL) master limited partnership organized in 1986 under the laws of the state of Delaware.  Buckeye GP LLC (“Buckeye GP”) is the general partner of Buckeye.  Buckeye GP is a wholly owned subsidiary of Buckeye GP Holdings L.P. (“BGH”), a Delaware limited partnership that is also publicly traded (NYSE: BGH).

 

Buckeye, through its subsidiaries, 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 with major oil and chemical companies. Buckeye also owns over 60 refined petroleum products terminals with aggregate storage capacity of approximately 22.6 million barrels in 12 states.

 

On January 18, 2008, Buckeye acquired Lodi Gas Storage, L.L.C. (“Lodi Gas”).  Lodi Gas owns and operates two natural gas storage facilities near Lodi, California.  Together, these 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 (see Note 3 for a further discussion).

 

On February 8, 2008, Buckeye acquired Farm & Home Oil Company LLC (“Farm & Home”).  Farm & Home sells refined petroleum products on a wholesale and, until April 15, 2008, a retail basis, principally in eastern and central Pennsylvania.  On March 4, 2008, Buckeye agreed to sell Farm & Home’s retail operations to a wholly owned subsidiary of Inergy, L.P. The transaction was completed on April 15, 2008 and, thereafter, Farm & Home will operate only the acquired wholesale operations on a going-forward basis.  The assets and liabilities and results of operations of Farm & Home’s retail operations were determined to be discontinued operations effective on the acquisition date of February 8, 2008 (see Note 3 for a further discussion).

 

With the acquisitions of Lodi Gas and Farm & Home, Buckeye determined that it had two additional reportable segments: Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, Buckeye now conducts business in five reportable operating segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 14 for a more detailed discussion of Buckeye’s operating segments.

 

Buckeye Pipe Line Services Company (“Services Company”) employs approximately 900 employees who provide services to the operating subsidiaries through which Buckeye conducts its operations.  These employees represent the majority of the employees who work for Buckeye.  Approximately 100 employees are employed directly by Lodi Gas and the wholesale operations of Farm & Home.  Under a services agreement entered into in December 2004 (the “Services Agreement”), the operating subsidiaries directly reimburse Services Company for the cost of the services provided by the employees employed by Services Company.  Under the Services Agreement and an Executive Employment Agreement, certain executive compensation costs and related benefits for Buckeye GP’s four highest paid officers are not reimbursed by Buckeye or its subsidiaries, but are reimbursed to Services Company by BGH.  At March 31, 2008, Services Company owned an approximate 4.5% limited partner interest in Buckeye.

 

In the opinion of management, the condensed consolidated financial statements of Buckeye, which are unaudited except that the balance sheet as of December 31, 2007 is derived from audited financial statements, include all adjustments necessary to present fairly Buckeye’s financial position as of March 31, 2008 along with the results of Buckeye’s operations for the three months ended March 31, 2008 and 2007 and Buckeye’s cash flows for the three months ended March 31, 2008 and 2007.  The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

 

Certain prior year amounts have been reclassified to conform to current year presentations.

 

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

 

7



 

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, 2007 contained in Buckeye’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 28, 2008.

 

2. CONTINGENCIES

 

Claims and Proceedings

 

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

 

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, Buckeye recorded operating expenses of $2.0 million and $2.2 million for the three months ended March 31, 2008 and 2007, respectively, related to environmental contingencies unrelated to claims and proceedings.

 

3.  BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS

 

Lodi Gas

 

On January 18, 2008, Buckeye acquired all of the member interests in Lodi Gas from Lodi Holdings, L.L.C. The cost of Lodi Gas was approximately $447.1 million in cash and consisted of the following (in thousands):

 

Contractual purchase price

 

$

440,000

 

Preliminary working capital adjustment

 

4,262

 

Transaction fees

 

2,794

 

 

 

 

 

Total cash purchase price

 

$

447,056

 

 

Of the contractual purchase price, $428.0 million was paid at closing and an additional $12.0 million was paid on March 6, 2008 upon receipt of approval from the California Public Utilities Commission for an expansion project known as Kirby Hills Phase II.  Buckeye acquired Lodi Gas because Buckeye’s management believes Lodi Gas represents an attractive opportunity to expand and diversify Buckeye’s operations into a new geographic area, as well as commodity, and will be able to provide Buckeye a platform for growth in the natural gas storage industry.

 

8



 

Buckeye has determined that the acquisition represented a business combination under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141 (“SFAS No. 141”).   The application of SFAS No. 141 requires that the total purchase price be allocated to the fair value of the assets acquired and the liabilities assumed based on their fair values at the acquisition date, with amounts exceeding the fair values being recorded as goodwill. The purchase price of approximately $447.1 million has been allocated, on a preliminary basis, to the tangible and intangible assets acquired, including goodwill, as follows (in thousands):

 

 

 

January 18,

 

 

 

2008

 

Cash

 

$

2,516

 

Other current assets

 

2,326

 

Property, plant and equipment

 

282,709

 

Goodwill

 

170,754

 

Current liabilities

 

(9,426

)

Other liabilities

 

(1,823

)

 

 

 

 

Allocated purchase price

 

$

447,056

 

 

Buckeye is in the process of finalizing the purchase price allocation based on the valuations of plant, property and equipment and goodwill.  The final purchase price allocation will likely adjust the preliminary amounts shown above.  Such changes may be material.  As discussed above, the activities of Lodi Gas are reported in a new operating segment called Natural Gas Storage.

 

Farm & Home

 

On February 8, 2008, Buckeye acquired all of the member interests of Farm & Home for $145.5 million in cash.  Buckeye acquired Farm & Home because Buckeye’s management believes that the wholesale distribution operations of Farm & Home represent an attractive opportunity to further Buckeye’s strategy of improving overall profitability by increasing the utilization of Buckeye’s existing pipeline and terminal system infrastructure.  Buckeye has determined that the acquisition represented a business combination under the provisions of SFAS No. 141.  The application of SFAS No. 141 requires that the total purchase price be allocated to the fair value of the assets acquired and the liabilities assumed based on their fair values at the acquisition date, with amounts exceeding the fair values being recorded as goodwill.  The purchase price has been allocated, on a preliminary basis, to the tangible and intangible assets acquired, including goodwill, as follows (in thousands):

 

 

 

February 8,

 

 

 

2008

 

Cash

 

$

2,816

 

Trade receivables

 

75,025

 

Inventory

 

94,113

 

Prepaid and other current assets

 

6,214

 

Property, plant and equipment

 

50,770

 

Goodwill

 

64,378

 

Other non-current assets

 

3,297

 

Debt

 

(100,000

)

Accounts payable

 

(31,097

)

Accrued expenses

 

(19,711

)

 

 

 

 

Allocated purchase price

 

$

145,805

 

 

9



 

Buckeye is in the process of finalizing the purchase price allocation and will likely adjust the preliminary amounts shown above.  Such changes may be material.  The final allocation may include amounts related to identifiable intangible assets such as trade names, customer relationships and covenants not-to-compete.  As discussed above, the operations of the Farm & Home assets and liabilities that were retained by Buckeye are reported in a new operating segment called Energy Services.

 

On March 4, 2008, Buckeye entered into an agreement to sell the retail operations of Farm & Home to a wholly owned subsidiary of Inergy, L.P. for $42.0 million plus a customary working capital adjustment that is expected to be approximately $9.0 million.  The retail operations were not an integral part of Buckeye’s core operations and financial results.  Buckeye completed the sale of the retail operations on April 15, 2008. Effective on February 8, 2008, in connection with Buckeye’s decision to sell Farm & Home’s retail operations, the assets and related liabilities of the retail operations of Farm & Home were determined to be discontinued operations. The preliminary fair values of the discontinued assets and liabilities are as follows (in thousands):

 

 

 

March 31,

 

 

 

2008

 

Discontinued assets:

 

 

 

Trade receivables

 

$

9,035

 

Inventory

 

2,978

 

Prepaid and other current assets

 

58

 

Property, plant and equipment

 

20,901

 

Goodwill

 

18,600

 

Total discontinued assets

 

$

51,572

 

 

 

 

 

Discontinued liabilities:

 

 

 

Obligations under contracts

 

$

(648

)

 

Revenues from discontinued operations for the period February 8 to March 31, 2008 were $15.6 million.

 

The following unaudited summarized pro forma consolidated income statement information for the quarters ended March 31, 2008 and 2007 assumes that the acquisitions of Lodi Gas and Farm & Home had occurred as of the beginning of the period presented.  For Farm & Home, the results of the retail operations have been excluded from both periods presented. These pro forma unaudited financial results were prepared for comparative purposes only and are not indicative of actual results that would have occurred if Buckeye had completed these acquisitions as of the beginning of the period presented or the results that will be attained in the future (in thousands):

 

10



 

 

 

(Unaudited)

 

 

 

March 31,

 

 

 

2008

 

2007

 

Revenues:

 

 

 

 

 

As reported

 

$

380,275

 

$

124,944

 

Pro forma adjustments

 

174,723

 

317,126

 

 

 

 

 

 

 

Pro forma revenue

 

$

554,998

 

$

442,070

 

 

 

 

 

 

 

Income from continuing operations:

 

 

 

 

 

As reported

 

$

41,404

 

$

37,734

 

Pro forma adjustments

 

(1,493

)

4,065

 

 

 

 

 

 

 

Pro forma income from continuing operations

 

$

39,911

 

$

41,799

 

 

 

 

 

 

 

Allocation of pro forma income from continuing operations:

 

 

 

 

 

Allocated to general partner

 

$

7,039

 

$

7,551

 

Allocated to limited partners

 

$

32,872

 

$

34,248

 

 

 

 

 

 

 

Pro forma earnings from continuing operations per limited partner unit:

 

 

 

 

 

Basic

 

$

0.72

 

$

0.79

 

Diluted

 

$

0.72

 

$

0.79

 

 

 

 

 

 

 

Pro forma weighted average number of limited partner units outstanding:

 

 

 

 

 

Basic

 

45,893

 

43,450

 

Diluted

 

45,923

 

43,495

 

 

11



 

Asset acquisition

 

On February 19, 2008, Buckeye acquired a refined products terminal in Niles, Michigan and a 50% ownership interest in a refined products terminal in Ferrysburg, Michigan from an affiliate of ExxonMobil Corporation for approximately $13.9 million.  Buckeye determined that the acquisition of the Niles, Michigan terminal and the 50% interest in the Ferrysburg, Michigan terminal should be accounted for as acquisitions of assets rather than an acquisition of a business as defined in SFAS No. 141.  Accordingly, Buckeye has allocated, on a preliminary basis, the cost of each acquisition to the various tangible assets acquired, principally property, plant and equipment as follows (in thousands):

 

 

 

February 19,

 

 

 

2008

 

Land

 

$

1,119

 

Buildings

 

2,233

 

Machinery, equipment, and office furnishings

 

10,502

 

Total

 

$

13,854

 

 

Buckeye is in the process of finalizing the purchase price allocation and will likely adjust the preliminary amounts shown above and such changes may be material.

 

4. PREPAIDS AND OTHER CURRENT ASSETS

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Prepaid insurance

 

$

4,785

 

$

6,812

 

Insurance receivables

 

8,503

 

7,707

 

Ammonia receivable

 

11,055

 

7,505

 

Derivative asset

 

3,614

 

 

Other

 

15,350

 

9,798

 

Total

 

$

43,307

 

$

31,822

 

 

5. ACCRUED AND OTHER CURRENT LIABILITIES

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Taxes - other than income

 

$

15,574

 

$

7,941

 

Accrued charges due General Partner

 

2,884

 

2,807

 

Accrued charges due Services Company

 

3,500

 

5,963

 

Accrued employee benefit liability

 

2,183

 

2,183

 

Environmental liabilities

 

8,671

 

8,023

 

Interest

 

16,850

 

16,476

 

Retainage

 

1,805

 

1,572

 

Payable for ammonia purchase

 

11,259

 

6,988

 

Hedge liabilities

 

557

 

7,187

 

Unearned revenue

 

4,943

 

1,439

 

Other

 

23,030

 

12,093

 

Total

 

$

91,256

 

$

72,672

 

 

12



 

6.     DEBT AND CREDIT FACILITIES

 

Long-term debt consists of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(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

 

6.050% Notes due January 15, 2018

 

300,000

 

 

Borrowings under Revolving Credit Facility

 

140,000

 

 

Less: Unamortized discount

 

(3,963

)

(2,117

)

Adjustment to fair value associated with hedge of fair value

 

1,235

 

1,294

 

 

 

$

1,287,272

 

$

849,177

 

 

The fair value of Buckeye’s aggregate debt was estimated to be $1,382.7 million at March 31, 2008 and $828.7 million at December 31, 2007.  The values at March 31, 2008 and December 31, 2007 were based on approximate market value on the respective dates.

 

On January 11, 2008, Buckeye sold $300.0 million aggregate principal amount of 6.050% Notes due 2018 in an underwritten public offering.  Proceeds from this offering, after underwriters’ fees and expenses, were approximately $298.0 million and were used to reduce amounts outstanding under Buckeye’s credit facility that had been drawn to partially pre-fund the Lodi Gas acquisition.  In connection with this debt offering, Buckeye settled the two forward-starting interest rates swaps discussed in Note 7 below, which resulted in a settlement payment by Buckeye of $9.6 million that is being amortized as interest expense over the ten year term of this Note.

 

Credit Facility

 

Buckeye has a borrowing capacity of $600.0 million under an unsecured revolving credit agreement (the “Credit Facility”), which may be expanded up to $800.0 million subject to certain conditions and upon the further approval of the lenders.   The Credit Facility’s maturity date is August 24, 2012, which may be extended by Buckeye for up to two additional one-year periods. Borrowings under the Credit Facility bear interest under one of two rate options, selected by Buckeye, 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) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin. The applicable margin is determined based on the current utilization level of the Credit Facility and ratings assigned by Standard & Poor’s and Moody’s Investor Services for Buckeye’s senior unsecured non-credit enhanced long-term debt.  At March 31, 2008, Buckeye had $140.0 million in borrowings outstanding under the Credit Facility.  At December 31, 2007, Buckeye did not have any amounts outstanding under the Credit Facility.  At March 31, 2008 and December 31, 2007, Buckeye had committed $1.3 million and $1.5 million in support of letters of credit, respectively.  The obligations for letters of credit are not reflected as debt on Buckeye’s consolidated balance sheet.

 

The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to 1.00 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA as defined in the Credit Facility.  As discussed below, the Credit Facility was amended in January 2008 to, among other things, exclude from consolidated debt the lesser of amounts outstanding under Farm & Home’s line of credit was amended in January 2008 to, among other things, change the definition of consolidated debt.  The Credit Facility defines EBITDA as earnings before interest, taxes, depreciation, depletion and amortization, in each case excluding the income of certain majority-owned subsidiaries and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).  At March 31, 2008, Buckeye’s Funded Debt Ratio was 4.20 to 1.00.

 

13



 

As provided for in the Credit Facility, the entire balance of Farm & Home’s line of credit, or $96.8 million, was excluded from the calculation of consolidated debt and the Funded Debt Ratio.

 

In addition, the Credit Facility contains other covenants including, but not limited to, limiting Buckeye’s ability to incur additional indebtedness, to create or incur certain liens on its property, to dispose of property material to its operations, and to consolidate, merge or transfer assets.  At March 31, 2008, Buckeye was in compliance with the covenants under its Credit Facility.

 

On January 28, 2008, Buckeye entered into an amendment to the Credit Facility which permits Farm & Home and certain other Buckeye subsidiaries to incur up to $250.0 million of secured indebtedness related to working capital financing.  The amendment also permits these subsidiaries to: (i) issue performance bonds not to exceed $50.0 million, (ii) incur $5.0 million of equipment lease obligations and liens on equipment, (iii) incur up to $5.0 million of indebtedness owing to major oil companies, and (iv) loan or advance up to $5.0 million to retail distributors of transportation fuels.  Finally, the amendment states that the lesser of the amount of this debt or the sum of 90% of qualified inventory and 70% of qualified accounts receivable held by Farm & Home at the balance sheet date may be excluded when calculating Buckeye’s Funded Debt Ratio as discussed above.

 

Farm & Home Line of Credit

 

Farm & Home is party to a Loan and Security Agreement, dated December 16, 2004, as amended, with a syndicate of banks (the “Farm & Home Agreement”).  On February 8, 2008, in connection with Buckeye’s acquisition of Farm & Home, Farm & Home entered into the Seventh Amendment to the Farm & Home Agreement, which permitted, among other things, Farm & Home to be acquired by Buckeye.  The Farm & Home Agreement provides for a working capital line of credit of up to $100 million ($140 million until April 30, 2008) with interest at Farm & Home’s election at either (i) the prime rate (as defined in the Farm & Home Agreement) minus 0.5% or (ii) LIBOR plus 1.35% on the first $50 million of borrowings and LIBOR plus 1.65% for borrowings in excess of $50 million.  The Farm & Home Agreement also permits letters of credit up to $3.5 million.  The Farm & Home Agreement is secured by liens on substantially all of the assets of Farm & Home.

 

The balance outstanding under the Farm & Home Agreement was approximately $96.8 million at March 31, 2008, all of which was classified as a current liability.  The Farm & Home Agreement requires Farm & Home to maintain a tangible net worth, defined generally as the amount by which Farm & Home’s assets (excluding intangible assets and accumulated other comprehensive income or loss) exceed its liabilities, equal to the greater of $33.7 million for the period June 30, 2007 through June 29, 2008 and thereafter equal to prior periods’ tangible net worth plus 50% of Farm & Home’s net income for the fiscal year then ended.  At March 31, 2008, Farm & Home’s tangible net worth was $59.5 million.  Farm & Home also must maintain a ratio of the sum of all indebtedness of Farm & Home to tangible net worth of not greater than 2.50 to 1.00.  At March 31, 2008, Farm & Home’s debt to tangible net worth ratio was 1.63 to 1.00.  In addition, Farm & Home is required to maintain a ratio of pre-tax income to interest expense of not less than 1.25 to 1.00.  At March 31, 2008, Farm & Home’s pre-tax income to interest expense ratio was 1.33 to 1.00.

 

The Farm & Home Agreement also contains various negative covenants, including covenants restricting Farm & Home’s ability to merge or consolidate with another entity, acquire other businesses, change its legal organization or engage in a business or activities materially different than its existing business.  On April 15, 2008, Farm & Home received a waiver from the lending banks which permitted the sale of the retail operations and released the banks’ liens on the assets of the retail operations.  At March 31, 2008, Farm & Home was in compliance with the covenants under the Farm & Home Agreement.

 

7.  DERIVATIVES

 

Energy Services Derivatives

 

Buckeye uses petroleum derivative contracts with respect to the operations of Farm & Home to manage the effect of changing market prices on future inventory purchases required to meet future fixed price sales commitments (“Firm Commitments”) and on future sales of products held in inventory (“Spot Inventory”).  All of Buckeye’s petroleum derivative contracts are entered into for hedging purposes; that is, they are specifically matched in volume and maturity with the various sales commitments of the business.  Derivative contracts entered to hedge Firm

 

14



 

Commitments are classified as Cash Flow Hedges.  Derivative contracts entered into hedge firm commitments on Spot Inventory positions are classified as Fair Value Hedges.  Gains and losses on petroleum derivative contracts are recognized in earnings in the cost of product sales as product is delivered or commitments are performed under fixed price contracts.

 

All derivatives are recognized on the balance sheets at their fair value.  On the date a derivative contract is entered into, Buckeye designates the derivative as (1) a hedge of a recognized asset or liability or of an unrecognized firm commitment (“Fair Value Hedge”), or (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“Cash Flow Hedge”).  Changes in the fair value of a derivative that qualifies as a Fair Value Hedge are recorded in current period earnings along with the related gain or loss on the hedged asset or liability.  Changes in the fair value of a derivative that qualifies as a Cash Flow Hedge are recorded in other comprehensive income (loss) until earnings are affected by the related variability of cash flows.  Cash flow hedge ineffectiveness, defined as the extent to which the changes in the fair value of the derivative exceed the variability of cash flows of the forecasted transaction, is recorded in earnings.

 

As of March 31, 2008, Buckeye had outstanding derivative contracts used to hedge the variability of market prices of petroleum products.  The following table presents unrealized gains on such derivatives as of March 31, 2008:

 

 

 

March 31,

 

 

 

2008

 

 

 

(In thousands)

 

Petroleum derivatives used as Cash Flow Hedges

 

$

2,839

 

Petroleum derivatives used as Fair Value Hedges

 

775

 

Total

 

$

3,614

 

 

Substantially all of the gains noted above will be recorded in income over the next twelve months.

 

Gains or losses on hedges that were ineffective were not material for the quarter ended March 31, 2008.  As of March 31, 2008, open petroleum derivative contracts varied in duration, but did not extend beyond May 2009.

 

Finance Derivatives

 

In January 2008, Buckeye terminated two forward-starting interest rate swap agreements associated with the 6.05% Notes and made a payment of $9.6 million in connection with the termination.  In accordance with SFAS No. 133 – “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), Buckeye has recorded the amount in other comprehensive income and will amortize the amount of the payment into interest expense over the ten-year term of the 6.05% Notes.  Interest expense increased by $0.2 million for the three months ended March 31, 2008 as a result of the amortization of the termination payment.

 

In December 2004, Buckeye terminated an interest rate swap agreement associated with the 4.625% Notes due July 15, 2013 and received proceeds of $2.0 million.  In accordance with SFAS No. 133, Buckeye deferred the $2.0 million gain as an adjustment to the fair value of the hedged portion of Buckeye’s debt and is amortizing the gain as a reduction of interest expense over the remaining term of the hedged debt.  Interest expense was reduced by $0.1 million during the three months ended March 31, 2008 and 2007 related to the amortization of the gain on the interest rate swap.

 

8. FAIR VALUE MEASURMENTS

 

In September 2006, the Financial Accounting Standards Board (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 was effective for fiscal years beginning after November 15, 2007 and interim periods within that year.  Buckeye adopted SFAS No. 157 on January 1, 2008.

 

Pursuant to SFAS No. 157, fair value measurements are characterized in one of three levels based upon the input used to arrive at the measurement.  The three levels include:

 

15



 

Level 1:  Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2:  Level 2 inputs include the following:

 

·                  Quoted prices in active markets for similar assets or liabilities.

·                  Quoted prices in markets that are not active for identical or similar assets or liabilities.

·                  Inputs other than quoted prices, that are observable for the asset or liability.

·                  Inputs that are derived primarily from or corroborated by observable market data by correlation or other means.

 

Level 3:  Level 3 inputs are unobservable inputs for the asset or liability.

 

The following table sets forth the fair value measurement of Buckeye’s assets that are subject to SFAS No. 157 as of March 31, 2008.

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Significant

 

Significant

 

 

 

Quoted Prices

 

Other Observable

 

Unobservable

 

 

 

in Active Markets

 

Inputs

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

Derivative assets

 

$

3,614

 

$

 

$

 

Total

 

$

3,614

 

$

 

$

 

 

Buckeye has determined that its assets subject to SFAS No. 157 are all “level one inputs” which means that such assets and liabilities are measured based on market participant assumptions developed using market data obtained from sources independent of Buckeye.

 

The value of the derivative assets shown above was determined by obtaining the prices of the underlying contracts as traded on the New York Mercantile Exchange.

 

9. EARNINGS PER LIMITED PARTNERSHIP 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 of Buckeye’s net income for the period was distributed, and not on the basis of actual cash distributions for the period.  The application of EITF 03-06 may have an impact on Buckeye’s earnings per limited partnership unit (“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 15 for a discussion of recent accounting pronouncements affecting earnings per LP Unit.

 

The following table is a reconciliation of the number of LP Units used in the basic and diluted earnings per LP Unit calculations for the three months ended March 31, 2008 and 2007:

 

16



 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Basic:

 

 

 

 

 

Average units outstanding

 

45,893

 

39,950

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Average units outstanding

 

45,893

 

39,950

 

 

 

 

 

 

 

Dilutive effect of unit options granted

 

30

 

45

 

 

 

45,923

 

39,995

 

 

The following table displays the detail in Accumulated Other Comprehensive (Loss) Income on the balance sheet:

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Accumulated Other Comprehensive (Loss) Income:

 

 

 

 

 

Adjustments to funded status of RIGP and Reitree Medical Plans

 

$

(53

)

$

(53

)

Buckeye’s terminated interest rate swaps

 

(9,438

)

(7,187

)

Accumulated amortization of RIGP and Retiree Medical Plans

 

(2,705

)

(1,929

)

Value of Energy Service’s cash flow hedges

 

2,282

 

 

Total

 

$

(9,914

)

$

(9,169

)

 

10.  CASH DISTRIBUTIONS

 

Buckeye 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 April 29, 2008, Buckeye declared a cash distribution of $0.85 per LP Unit payable on May 30, 2008 to unitholders of record on May 9, 2008. The total cash distribution to unitholders will amount to approximately $50.9 million, which includes an incentive distribution of approximately $9.7 million payable to Buckeye GP.

 

11. RELATED PARTY TRANSACTIONS

 

Buckeye is managed by Buckeye GP, which is a wholly owned subsidiary of BGH.  BGH is in turn controlled by its general partner, MainLine Management LLC (“MainLine Management”). MainLine Management is a wholly owned subsidiary of BGH GP Holdings, LLC (“BGH Holdings”).  Affiliates of each of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”) and Lehman Brothers Holdings, Inc. (“Lehman Brothers”), along with certain members of Buckeye’s senior management, own BGH Holdings.  In addition to owning MainLine Management, BGH Holdings owns an approximate 61.9% limited partner interest in BGH.

 

Under certain partnership agreements, management agreements and a services agreement, Buckeye is obligated to reimburse Services Company and Buckeye GP for substantially all direct and indirect costs related to the business activities of Buckeye and its subsidiaries except for certain executive compensation and related benefits costs that are reimbursed to Services Company by BGH.  Costs incurred by Buckeye and its subsidiaries pursuant to these agreements totaled $24.9 million and $22.4 million for the three months ended March 31, 2008 and 2007, respectively.  The reimbursable costs include insurance, general and administrative costs, compensation and benefits

 

17



 

payable to employees of Services Company, tax information and reporting costs, legal and audit fees and an allocable portion of overhead expenses.

 

Services Company, which is beneficially owned by Buckeye Pipe Line Services Company Employee Stock Ownership Plan (the “ESOP”), owned 2.2 million of LP Units, or approximately 4.5% of the LP Units outstanding, as of March 31, 2008.  Distributions received by Services Company from Buckeye on such LP Units are used to fund obligations of the ESOP. Distributions paid to Services Company totaled $1.8 million for the three months ended March 31, 2008 and 2007. In three months ended March 31, 2008 and 2007, ESOP costs were reduced by $0.1 million and $0.5 million, respectively, as estimates of future shortfalls between the distributions that Services Company receives on the LP Units that it owns and amounts currently due under the ESOP’s senior notes (for which Buckeye is responsible) were reduced to reflect higher distributions on the LP Units than was previously anticipated.

 

Buckeye pays MainLine Management a senior administrative charge for certain management functions performed by affiliates of MainLine Management. Buckeye incurred a senior administrative charge of $0.5 million and $0.5 million for the three months ended March 31, 2008 and 2007, respectively.  In connection with the Lodi Gas acquisition, MainLine Management agreed to forego payment of the senior administrative charge effective June 25, 2007 through March 31, 2009.  This foregone payment will be reflected in the purchase price allocation of the Lodi Gas acquisition.  The independent directors of Buckeye GP approve the amount of the senior administrative charge on an annual basis.

 

Buckeye GP receives incentive distributions from Buckeye pursuant to its partnership agreement and an incentive compensation agreement. Incentive distributions are based on the level of quarterly cash distributions paid per LP Unit.  Incentive compensation payments totaled $8.9 million and $6.8 million in the three months ended March 31, 2008 and 2007, respectively.

 

As discussed in Note 3, on January 18, 2008, Buckeye acquired all the member interests of Lodi Gas. The Lodi Gas acquisition was a related party transaction because Lodi Gas was indirectly owned by affiliates of ArcLight.  Due to ArcLight’s indirect ownership interest in Buckeye GP, the Audit Committee of Buckeye GP made up of independent directors and represented by independent legal counsel and financial advisors, reviewed and approved the terms of the Lodi Gas acquisition, including the purchase price, as fair and reasonable to Buckeye in accordance with Buckeye’s partnership agreement.

 

Lehman Brothers, which owns an interest in BGH Holdings, and its affiliates have provided, directly or indirectly, investment and commercial banking and financial advisory services to Buckeye, 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 Buckeye of amounts outstanding under the Credit Facility.  Lehman Brothers acted as Buckeye’s financial advisor in connection with the Lodi Gas and Farm & Home acquisitions.  An affiliate of Lehman Brothers also is a customer of Lodi Gas.

 

12. UNIT OPTION AND DISTRIBUTION EQUIVALENT PLAN

 

Buckeye sponsors the Unit Option and Distribution Equivalent Plan (the “Option Plan”), pursuant to which it grants to employees 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, Buckeye issues new LP Units. Buckeye has not historically repurchased, and does not expect to repurchase in 2008, any of its LP Units.

 

Effective January 1, 2006, Buckeye adopted the fair value measurement and recognition provisions of SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). Generally, unit-based compensation expense recognized in the first quarters of 2007 and 2008 is based on the grant date fair value estimated by using the Black-Scholes option pricing model.  Buckeye recognizes compensation expense for awards granted on a straight-line basis over the requisite service period.

 

For the retirement eligibility provisions of the Option Plan, Buckeye 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 months ended March 31, 2008 and 2007 is based on options ultimately expected to vest. In accordance with SFAS No. 123R, forfeitures have been estimated at the

 

18



 

time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience.

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

 

 

 

 

 

 

Operating expenses

 

$

53

 

$

103

 

General and adminstrative expenses

 

28

 

31

 

Total unit-based compensation expenses

 

$

81

 

$

134

 

 

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 three months ended March 31, 2008 and 2007, respectively:

 

 

 

2008

 

2007

 

Expected dividend yield

 

6.31

%

6.60

%

Expected unit price volatility

 

15.98

%

19.60

%

Risk-free interest rate

 

2.73

%

4.70

%

Expected life (in years)

 

4.8

 

6.5

 

Weighted-average fair value at grant date

 

$

2.89

 

$

5.07

 

 

The dividend yield is based on 4.8 years of historic yields of LP Units.  The expected volatility is based upon 4.8 years of historical volatility of Buckeye’s LP Units.  In accordance with SFAS No. 123R, in 2006 and 2007 Buckeye used the simplified method to calculate the expected life, which was the option vesting period of three years plus the option term of ten years divided by two.  In compliance with SFAS No. 123R, effective January 1, 2008, Buckeye now uses its employees’ actual historical experience in determining the expected life assumption used to value its options.  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 three months ended March 31, 2008:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Options

 

Price

 

Life

 

Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 1, 2008

 

337,100

 

$

44.46

 

 

 

 

 

Granted

 

138,500

 

49.47

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

Outstanding, March 31, 2008

 

475,600

 

$

45.94

 

7.9

 

$

77,285

 

Exercisable, March 31, 2008

 

102,300

 

$

38.14

 

4.7

 

$

813,834

 

 

As of January 1, 2008, there were 234,800 unvested options outstanding.  During the first three months of 2008, no 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 March 31, 2008. Intrinsic value is determined by calculating the difference between Buckeye’s closing price of the LP Units on the last trading day of the first quarter of 2008 and the exercise price, multiplied by the number of LP Units subject to

 

19



 

such options.  Because no unit options were exercised during the first quarter of 2008, the total intrinsic value of options exercised during the three months ended March 31, 2008 was $0. The total number of in-the-money options exercisable as of March 31, 2008 was 102,300. As of March 31, 2008, total unrecognized compensation cost related to unvested options was $353,000. The cost is expected to be recognized over a weighted average period of 0.9 years.  At March 31, 2008, 338,000 LP Units were available for grant under with the Option Plan.

 

13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

Services Company, which employs the majority of Buckeye’s workforce, sponsors a retirement income guarantee plan (the “RIGP”), which is a defined benefit plan, that 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 meet at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974.

 

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

 

For the three months ended March 31, 2008 and 2007, the components of the net periodic benefit cost recognized by Buckeye for the RIGP and Retiree Medical Plan were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

353

 

$

248

 

$

232

 

$

100

 

Interest cost

 

478

 

253

 

694

 

508

 

Expected return on plan assets

 

(468

)

(205

)

 

 

Amortization of prior service benefit

 

(218

)

(114

)

(1,124

)

(860

)

Amortization of unrecognized losses

 

156

 

143

 

410

 

381

 

Total net periodic benefit costs

 

$

301

 

$

325

 

$

212

 

$

129

 

 

A minimum funding contribution is not required to be made to the RIGP during 2008.  However, on April 15, 2008, Buckeye contributed $0.3 million to the RIGP voluntarily.

 

14.  SEGMENT INFORMATION

 

With the acquisitions of Lodi Gas and Farm & Home, Buckeye determined that it has two additional reportable segments: Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, Buckeye now conducts business in five reportable operating segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.

 

Pipeline Operations:

 

The Pipeline Operations segment receives petroleum products 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 16 states. This segment also has three refined petroleum products terminals with aggregate storage capacity of approximately 0.5 million barrels in three states.

 

Terminalling and Storage:

 

The Terminalling and Storage segment provides bulk storage and terminal throughput services.  This segment has approximately 60 refined petroleum products terminals with aggregate storage capacity of approximately 22.1 million barrels in nine states.

 

20



 

Natural Gas Storage:

 

The Natural Gas Storage segment provides natural gas storage services through the two natural gas storage facilities near Lodi, California that are owned and operated by Lodi Gas.  Together, these facilities provide approximately 22 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. The segment has approximately twenty-five customers.

 

The Natural Gas Storage segment has the following revenue sources:

 

Lease Revenues which consist of demand charges for the reservation of storage space under firm storage agreements. The demand charge entitles the customer to a fixed amount of storage space and certain injection and withdrawal rights. Title to the stored gas remains with the customer. Lease revenues are recognized as revenue over the term of the related storage agreement.

 

Hub Service Revenues which consist of a variety of other storage services under interruptible storage agreements. These principally include park and loan transactions.  Parks occur when gas from a customer is injected and stored for a specified period. The customer then has the right to withdraw its stored gas at a future date. Title to the gas remains with the customer.  Park revenues are recognized ratably over the term of the agreement.  Loans occur when gas is delivered to a customer in a specified period. The customer then has the obligation to redeliver gas at a future date. Loans revenues are recognized ratably over the term of the agreement.

 

The Natural Gas Storage segment does not trade or market natural gas.

 

Energy Services:

 

The Energy Services segment sells refined petroleum products on a wholesale basis principally in eastern and central Pennsylvania. The segment records revenues after products are delivered. The segment’s products include gasoline, propane and petroleum distillates such as heating oil, diesel fuel, and kerosene.  The segment has approximately one thousand customers which consist principally of product wholesalers as well as major commercial users of these products.

 

Other Operations:

 

The Other Operations segment consists primarily of Buckeye’s contract operation of approximately 2,700 miles of third-party pipeline systems, 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 Buckeye’s ownership and operation of an ammonia pipeline 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 Buckeye’s condensed consolidated financial statements. All inter-segment revenues, operating income and assets have been eliminated.  All periods are presented on a consistent basis.

 

21



 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

Pipeline Operations

 

$

96,389

 

$

93,750

 

Terminalling and Storage

 

27,632

 

23,589

 

Natural Gas Storage

 

11,464

 

 

Energy Services

 

234,547

 

 

Other Operations

 

10,869

 

7,605

 

Intersegment eliminations

 

(626

)

 

Total

 

$

380,275

 

$

124,944

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

Pipeline Operations

 

$

36,688

 

$

37,910

 

Terminalling and Storage

 

12,970

 

10,145

 

Natural Gas Storage

 

4,869

 

 

Energy Services

 

1,726

 

 

Other Operations

 

1,879

 

2,218

 

Total

 

$

58,132

 

$

50,273

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

Pipeline Operations

 

$

9,248

 

$

9,088

 

Terminalling and Storage

 

1,488

 

1,305

 

Natural Gas Storage

 

1,048

 

 

Energy Services

 

290

 

 

Other Operations

 

424

 

414

 

Total

 

$

12,498

 

$

10,807

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

Pipeline Operations

 

$

6,820

 

$

15,519

 

Terminalling and Storage

 

2,959

 

840

 

Natural Gas Storage

 

3,249

 

 

Energy Services

 

685

 

 

Other Operations

 

1,079

 

1,014

 

Total

 

$

14,792

 

$

17,373

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

Terminalling and Storage

 

$

13,854

 

$

38,468

 

Natural Gas Storage

 

443,515

 

 

Energy Services

 

142,940

 

 

Total

 

$

600,309

 

$

38,468

 

 

22



 

 

 

Assets

 

Goodwill

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

(In thousands)

 

Pipeline Operations*

 

$

1,605,935

 

$

1,673,744

 

$

 

$

 

Terminalling and Storage

 

389,214

 

385,446

 

11,355

 

11,355

 

Natural Gas Storage

 

468,619

 

 

170,754

 

 

Energy Services

 

237,239

 

 

45,778

 

 

Other Operations

 

78,282

 

74,462

 

 

 

Assets from discontinued operations**

 

51,572

 

 

18,600

 

 

Total

 

$

2,830,861

 

$

2,133,652

 

$

246,487

 

$

11,355

 

 


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

 

** The goodwill amount of $18.6 million is included in assets of discontinued operations on the condensed consolidated balance sheet.

 

15. RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.  This statement clarified the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. This statement does not require any new fair value measurements. SFAS No. 157 was effective for fiscal years beginning after November 15, 2007 and interim periods within that year.

 

On February 12, 2008, the FASB issued Financial Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157.” This Staff Position delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow the FASB’s constituents additional time to consider the effect of the various implementation issues that have arisen, or that may arise, from the application of SFAS No. 157.  Buckeye adopted the non-delayed portions of SFAS No. 157 on January 1, 2008.  See Note 8 for a further discussion.

 

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“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.  Effective on January 1, 2008, Buckeye adopted SFAS No. 159 and elected not to apply the fair value option under this standard.  As a result, SFAS No. 159 did not have an impact on Buckeye’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS No. 160”), which will be effective for fiscal years beginning after December 15, 2008.  SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  Buckeye currently is assessing the impact the adoption of this pronouncement will have on its consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS No. 141 (R)”), which will be effective for fiscal years beginning after December 15, 2008.  SFAS No. 141 (R) requires an acquiring entity in a business combination to (i) recognize all (and only) the assets acquired and the liabilities assumed in the transaction, (ii) establish an acquisition-date fair value as the measurement objective for all assets acquired and the liabilities assumed, (iii) disclose to investors and other users of the financial statements all of the

 

23



 

information they will need to evaluate and understand the nature of, and the financial effect of, the business combination, and (iv) recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase.  Buckeye currently is assessing the impact the adoption of this pronouncement will have on its consolidated financial statements.

 

In March 2008, the EITF of the FASB reached a consensus on Issue No. 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships.”  The consensus 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 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 partner interests when applying the two-class method under FASB Statement No. 128 “Earnings per Share.” Buckeye is currently evaluating the impact this standard may have on its consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), which will be effective for fiscal years beginning after November 15, 2008.   SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedging items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  Buckeye currently is assessing the impact the adoption of this pronouncement will have on its consolidated financial statements.

 

24



 

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

 

RESULTS OF OPERATIONS

 

Overview

 

Buckeye Partners, L.P. (“Buckeye”) is a publicly traded (NYSE: BPL) master limited partnership organized in 1986 under the laws of the state of Delaware.  Buckeye GP LLC (“Buckeye GP”) is the general partner of Buckeye.  Buckeye GP is a wholly-owned subsidiary of Buckeye GP Holdings L.P. (“BGH”), a Delaware limited partnership that is also publicly traded (NYSE: BGH).

 

The following discussion provides an analysis of the results for each of Buckeye’s operating segments, and an overview of Buckeye’s liquidity and capital resources and certain other items related to Buckeye. The following discussion and analysis should be read in conjunction with (i) the accompanying interim condensed consolidated financial statements and related notes and (ii) Buckeye’s consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in Buckeye’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

Buckeye owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered. Buckeye owns and operates approximately 5,400 miles of pipeline and more than 60 active refined petroleum products terminals, with aggregate storage capacity of approximately 22.6 million barrels. In addition, Buckeye operates and maintains approximately 2,700 miles of other pipelines under agreements with major oil and chemical companies. Through the recent acquisitions of Lodi Gas Storage, L.L.C. (“Lodi Gas”) and Farm & Home Oil Company LLC (“Farm & Home”) in the first quarter of 2008, Buckeye now owns and operates two major natural gas storage facilities in northern California and markets refined petroleum products in certain areas already served by Buckeye’s pipelines and terminals.

 

Lodi Gas owns and operates two natural gas storage facilities near Lodi, California.  Together, these 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 (see Note 3 to the condensed consolidated financial statements for a further discussion).  The Lodi Gas acquisition has allowed Buckeye to expand its operations on the West Coast substantially.  Lodi Gas’ revenues are generated by fee-based storage contracts, the majority of which are comprised of firm storage agreements for specified levels of injection and withdrawal service.  Additional revenues are earned through interruptible services, called hub services, for which Lodi Gas earns fees for storing a customer’s gas or loaning gas to a customer on an interruptible basis around Lodi Gas’s firm storage commitments. Lodi Gas does not take title to the natural gas that it stores.

 

Farm & Home sells refined petroleum products on a wholesale and, until April 15, 2008, on a retail basis, principally in eastern and central Pennsylvania.  On March 4, 2008, Buckeye agreed to sell Farm & Home’s retail operations and will retain and operate only the acquired wholesale operations.  The assets and liabilities and results of operations of Farm & Home’s retail operations were determined to be discontinued operations effective on the acquisition date of February 8, 2008 (see Note 3 to the condensed consolidated financial statements for a further discussion).  The Farm & Home acquisition will help to advance Buckeye’s strategy of building a marketing business in areas served by Buckeye’s existing logistics assets.

 

Buckeye’s pipeline and terminals customers are U.S.-based major integrated oil companies, large refined petroleum products marketing companies, major end users of petroleum products, and chemical and utility companies.  Lodi Gas’s customers are major natural gas utility companies as well as natural gas marketing and distribution companies.  Farm & Home’s wholesale customers are primarily product wholesalers as well as major commercial users of refined petroleum products

 

With the acquisitions of Lodi Gas and Farm & Home, Buckeye determined that it had two additional reportable segments, Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, Buckeye now conducts business in five reportable operating segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 14 to the condensed consolidated financial statements for a more detailed discussion of Buckeye’s operating segments.

 

25



 

Results of Operations

 

Summary operating results for Buckeye were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands, except per unit amounts)

 

Revenues

 

$

380,275

 

$

124,944

 

Costs and expenses

 

322,143

 

74,671

 

 

 

 

 

 

 

Operating income

 

58,132

 

50,273

 

 

 

 

 

 

 

Other income (expenses)

 

(16,728

)

(12,539

)

 

 

 

 

 

 

Income from continuing operations

 

41,404

 

37,734

 

Income from discontinued operations

 

1,413

 

 

Net income

 

$

42,817

 

$

37,734

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

Net income allocated to general partner:

 

 

 

 

 

Income from continuing operations

 

$

7,302

 

$

6,817

 

Income from discontinued operations

 

$

425

 

$

 

 

 

 

 

 

 

Net income allocated to limited partners:

 

 

 

 

 

Income from continuing operations

 

$

34,102

 

$

30,917

 

Income from discontinued operations

 

$

988

 

$

 

 

 

 

 

 

 

Earnings per limited partner unit-diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.74

 

$

0.77

 

Income from discontinued operations

 

0.02

 

 

Earnings per limited partner unit-diluted

 

$

0.76

 

$

0.77

 

 

 

 

 

 

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

Basic

 

45,893

 

39,950

 

Diluted

 

45,923

 

39,995

 

 

EBITDA

 

The following table summarizes EBITDA for Buckeye for the three months ended March 31, 2008 and 2007, respectively.  EBITDA, a measure not defined under generally accepted accounting principles (“GAAP”), is defined by Buckeye as income from continuing operations before interest expense (including amortization and write-off of deferred debt financing costs), income taxes, depreciation and amortization.  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.

 

Because EBITDA excludes some items that affect income from continuing operations, and these items might vary among other companies, the EBITDA data presented might not be comparable to similarly titled measures at other companies.  Buckeye’s management uses EBITDA as a performance measure to assist in the analysis and assessment of Buckeye’s operations, to evaluate the viability of proposed projects and to determine overall rates of return on alternative investment opportunities.

 

26



 

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

 

The table below presents EBITDA for the three months ended March 31, 2008 and 2007 and a reconciliation of EBITDA to income from continuing operations, which is the most comparable GAAP financial measure.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Income from continuing operations

 

$

41,404

 

$

37,734

 

Interest and debt expense

 

17,934

 

13,487

 

Income tax expense

 

228

 

203

 

Depreciation and amortization

 

12,498

 

10,807

 

Total EBITDA

 

$

72,064

 

$

62,231

 

 

27



 

Revenues, operating income, total costs and expenses, and depreciation and amortization by operating segment were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

Pipeline Operations

 

$

96,389

 

$

93,750

 

Terminalling and Storage

 

27,632

 

23,589

 

Natural Gas Storage

 

11,464

 

 

Energy Services

 

234,547

 

 

Other Operations

 

10,869

 

7,605

 

Intersegment eliminations

 

(626

)

 

Total

 

$

380,275

 

$

124,944

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

Pipeline Operations

 

$

36,688

 

$

37,910

 

Terminalling and Storage

 

12,970

 

10,145

 

Natural Gas Storage

 

4,869

 

 

Energy Services

 

1,726

 

 

Other Operations

 

1,879

 

2,218

 

Total

 

$

58,132

 

$

50,273

 

 

 

 

 

 

 

Total costs and expenses (including depreciation and amortization):

 

 

 

Pipeline Operations

 

$

59,701

 

$

55,840

 

Terminalling and Storage

 

14,662

 

13,444

 

Natural Gas Storage

 

6,595

 

 

Energy Services

 

232,821

 

 

Other Operations

 

8,990

 

5,387

 

Intersegment eliminations

 

(626

)

 

 

Total

 

$

322,143

 

$

74,671

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

Pipeline Operations

 

$

9,248

 

$

9,088

 

Terminalling and Storage

 

1,488

 

1,305

 

Natural Gas Storage

 

1,048

 

 

Energy Services

 

290

 

 

Other Operations

 

424

 

414

 

Total

 

$

12,498

 

$

10,807

 

 

28



 

First Quarter of 2008 compared to First Quarter of 2007

 

Total revenues for the quarter ended March 31, 2008 were $380.3 million, approximately $255.4 million greater than revenue of $124.9 million for the same period in 2007.  Of the $255.4 million increase in revenue in the first quarter of 2008, $11.5 million resulted from the acquisition of Lodi Gas and $234.5 million resulted from the acquisition of Farm & Home.  The results of Lodi Gas and Farm & Home are included below in the Natural Gas Storage and Energy Services segments, respectively. The balance of the revenue improvement of approximately $9.4 million was attributable to the remaining reporting segments as discussed below.

 

Pipeline Operations:

 

Revenue from Pipeline Operations was $96.4 million in the first quarter of 2008 compared to $93.8 million in the first quarter of 2007, resulting in an increase of $2.6 million.  This increase was primarily the result of:

 

·                  Base transportation revenues being essentially unchanged compared to 2007 as the benefit of tariff increases implemented in the spring of 2007 were almost entirely offset by reduced product volumes in the first quarter of 2008.  Management believes the reduced volumes in 2008 were caused primarily by reduced demand for gasoline resulting from higher retail gasoline and distillate prices, reduced production at ConocoPhillips Wood River Refinery due to maintenance activities, as well as the continued introduction of ethanol into retail gasoline products.  Product volumes declined by 4.9% in the first quarter of 2008 compared to the first quarter of 2007; and

 

·                  A net increase in incidental revenues of $1.5 million which was principally related to a product supply arrangement, as well as increased revenues of $0.8 million related to contract services activities at customer facilities connected to Buckeye’s refined products pipelines.

 

During 2007, Buckeye experienced measurement shortages in connection with its pipeline product deliveries in excess of historical variances.  Based upon an investigation of these measurement issues, certain corrective actions have been taken.  Buckeye believes the measurement issues have, to a large extent, been isolated and corrected, although continuing monitoring and evaluation of product measurement issues will be required.  Net pipeline overages and shortages were not material in the first quarter of 2008.

 

Product volumes transported in Pipelines Operations for the first quarter ended March 31, 2008 and 2007 were as follows:

 

 

 

Average Barrels Per Day

 

 

 

Three Months Ended March 31,

 

Product

 

2008

 

2007

 

Gasoline

 

641,500

 

687,100

 

Distillate

 

337,500

 

365,100

 

Jet Fuel

 

356,400

 

352,300

 

LPG’s

 

15,300

 

20,100

 

NGL

 

21,100

 

20,000

 

Other

 

11,700

 

10,100

 

Total

 

1,383,500

 

1,454,700

 

 

In the third quarter of 2007, certain of Buckeye’s subsidiaries filed pipeline tariffs reflecting increased rates on average of approximately 4.5%.

 

Terminalling and Storage:

 

Revenue from the Terminalling and Storage segment was $27.6 million in the first quarter of 2008 compared to $23.6 million in the first quarter of 2007. The revenue increase in the first quarter of 2008 compared to the first quarter of 2007 of $4.0 million or
16.9 % was primarily the result of:

 

·                  An approximate $1.4 million increase in base revenue primarily related to increases in blending fees for product additives and product recoveries from vapor recovery units, which were offset by an approximately 3% decline in throughput volumes in the first quarter of 2008 compared to the first quarter of 2007; and

 

29



 

·                  Incremental revenue of $2.6 million due to the acquisition of an additional terminal and a 50% interest in a second  terminal, in the first quarter of 2008, as more fully described in Note 3 to the accompanying condensed consolidated financial statements, as well as the inclusion for a full quarter of six terminals acquired in the first quarter of 2007.

 

Average daily throughput for the refined products terminals for the quarters ended March 31, 2008 and 2007 were as follows:

 

 

 

Average Barrels Per Day

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Refined products throughput

 

522,300

 

536,000

 

 

Natural Gas Storage:

 

Revenue from the Natural Gas Storage segment was $11.5 million since the acquisition of Lodi Gas on January 18, 2008. Approximately 79% of this revenue represented firm storage revenues and 21% hub services revenues.

 

Energy Services:

 

Revenue from the Energy Services segment was $234.5 million.  Substantially all of this revenue was derived from the continuing wholesale operations of Farm & Home from its acquisition on February 8, 2008.  During the period, the wholesale operations of Farm & Home sold approximately 83.4 million gallons of product.  Products sold include gasoline, propane, and petroleum distillates such as heating oil, diesel fuel, and kerosene.

 

Other Operations:

 

Revenue from the Other Operations segment was $10.9 million in the first quarter of 2008 compared to $7.6 million in the first quarter of 2007.  The revenue increase in the first quarter of 2008 of $3.3 million was primarily the result of:

 

·                  An increase of $1.2 million in pipeline maintenance and operating revenue related to additional operating contracts signed in the latter part of 2007; and

 

·                  An increase of $2.2 million in construction management revenue related to these operating contracts.

 

Operating Expenses:

 

Costs and expenses for the three months ended March 31, 2008 and 2007 were as follows:

 

 

 

Costs and Expenses

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Cost of product sales

 

$

236,611

 

$

4,844

 

Payroll and payroll benefit

 

25,705

 

20,936

 

Depreciation and amortization

 

12,498

 

10,807

 

Outside services

 

10,817

 

6,071

 

Operating power

 

7,486

 

7,318

 

Property and other taxes

 

5,957

 

6,119

 

Insurance and casualty losses

 

3,636

 

3,895

 

Construction management

 

3,021

 

1,695

 

Supplies

 

2,569

 

2,969

 

Rentals

 

4,054

 

2,611

 

All other

 

9,789

 

7,406

 

Total

 

$

322,143

 

$

74,671

 

 

30



 

Cost of product sales was $236.6 million in the first quarter of 2008, which is an increase over the first quarter of 2007 of $231.8 million.  Approximately $229.5 million of the increase was attributable to product sold by Farm & Home.  The remaining increase is principally associated with fuel purchases related to a product-supply arrangement.

 

Payroll and payroll benefits were $25.7 million in the first quarter of 2008, an increase of $4.8 million compared to the first quarter of 2007.  The Lodi Gas and Farm & Home operations added $0.9 million and $0.7 million of payroll and payroll benefits expense in the three months ended March 31, 2008, respectively.  In the first quarter of 2007, Buckeye experienced a decrease in payroll benefit expense of approximately $0.4 million as a result of a reduction of the fair value of Buckeye’s “top-up” liability under a services agreement with Buckeye Pipe Line Services Company (“Services Company”), which required Buckeye 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.  Increases in salaries and wages of $1.5 million in the first quarter of 2008 resulted primarily from an increase in the number of employees due to Buckeye’s expanded operations.

 

Depreciation and amortization expense was $12.5 million in the first quarter of 2008, which is an increase of $1.7 million over the first quarter of 2007. The Lodi Gas and Farm & Home operations added $1.0 million and $0.3 million of depreciation and amortization expense in the three months ended March 31, 2008, respectively.  The remaining increase in depreciation and amortization expense resulted from Buckeye’s ongoing maintenance and expansion capital program.

 

Outside services costs were $10.8 million in the first quarter of 2008, which is an increase of $4.7 million over the first quarter of 2007.  The Lodi Gas and Farm & Home operations added $1.7 million and $0.1 million of outside services costs in the three months ended March 31, 2008, respectively.  Lodi Gas incurred approximately $1.4 million of outside services expense related to well work-over costs as a result of the heavy withdrawal season in the first quarter.  Another approximately $1.4 million is due to increases in activity on operations and maintenance contracts.  The remainder of the increase is due to an increase in pipeline and terminal maintenance activities. Outside services costs consist principally of third-party contract services for pipeline and terminal maintenance activities.

 

Operating power costs were $7.5 million for the three months ended March 31, 2008, which was consistent with operating power costs in the three months ended March 31, 2007.  Buckeye experienced an increase in power rates, which was offset by a decrease in operating power usage due to a decrease in pipeline volumes in the first quarter of 2008.  Operating power consists primarily of electricity required to operate pipeline pumping facilities.

 

Property and other taxes were $6.0 million in the first quarter of 2008, a decrease of $0.1 million compared to the first quarter of 2007.  In the first quarter of 2007, Buckeye expensed $0.6 million of excise taxes that did not recur in the first quarter of 2008.  This decrease was offset by additional property taxes from the Lodi Gas and Farm & Home operations, which added $0.4 million and $0.1 million, respectively, in the three months ended March 31, 2008.

 

Insurance and casualty losses were $3.6 million for the three months ended March 31, 2008, which is a decrease of $0.3 million from the three months ended March 31, 2007.  Casualty losses decreased by $0.5 million due the absence of any significant product release incidents in the first quarter of 2008.  Insurance costs increased by $0.4 million which is primarily due to the inclusion of the Lodi Gas and Farm & Home operations.

 

Construction management costs were $3.0 million in the first quarter of 2008, which is an increase of $1.3 million over the first quarter of 2007.  The increase is a result of an increase in construction activity in the first quarter of 2008.

 

Supplies expense was $2.6 million for the three months ended March 31, 2008, which is a decrease of $0.4 million over the three months ended March 31, 2007.  The decrease is primarily due to a decrease in terminal additives purchases at Buckeye’s terminals.

 

Rental expense was $4.1 million in the first quarter of 2008, which is an increase of $1.5 million over the first quarter of 2007.  The inclusion of the Lodi Gas and Farm & Home operations added $1.1 million and $0.1 million of rental expense in the three months ended March 31, 2008, respectively.

 

31



 

All other costs were $9.8 million in the three months ended March 31, 2008, an increase of $2.4 million compared to $7.4 million in the same period in 2007.  The inclusion of Lodi Gas and Farm & Home operations added $0.5 million and $1.0 million of other costs, respectively, in the three months ended March 31, 2008.  The remainder of the increases related to various other pipeline operating costs.

 

Other income (expense) for the three months ended March 31, 2008 and 2007 was as follows:

 

 

 

Other Income (Expenses)

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Investment and equity income

 

$

2,640

 

$

2,066

 

Interest and debt expense

 

(17,934

)

(13,487

)

Minority interests and other

 

(1,434

)

(1,118

)

Total

 

$

(16,728

)

$

(12,539

)

 

Investment and equity income was $2.6 million for the three months ended March 31, 2008, which is an increase of $0.6 million from the three months ended March 31, 2007.  The increase is primarily due to increases in interest income on cash balances and equity income earned from Buckeye’s approximate 25% interest in West Shore Pipe Line Company and 20% interest in West Texas LPG Pipeline Limited Partnership.

 

Interest and debt expense was $17.9 million for the three months ended March 31, 2008, which is an increase of $4.4 million from the three months ended March 31, 2007.  Approximately $4.1 million of the increase was attributable to Buckeye’s $300.0 million in aggregate principal amount of notes due January 15, 2018, which were issued in January 2008.  The remainder of the increase is due to interest expense on the debt of Farm & Home that remained outstanding after the acquisition.

 

Minority interests and other expense increased by $0.3 million for the three months ended March 31, 2008.  The increase was primarily due to an increase in income from the pipeline and terminal at the Memphis International Airport.

 

32



 

LIQUIDITY AND CAPITAL RESOURCES

 

Buckeye’s financial condition at March 31, 2008 and December 31, 2007 is highlighted in the following comparative summary:

 

Liquidity and Capital Indicators

 

 

 

As of

 

 

 

March 31, 2008

 

December 31, 2007

 

 

 

 

 

 

 

Current ratio (1)

 

1.5 to 1

 

2.2 to 1

 

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

 

0.6 to 1

 

1.5 to 1

 

Working capital (in thousands) (2)

 

$

109,991

 

$

107,844

 

Ratio of  long-term debt to total capital (3)

 

0.52 to 1