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Buckeye Partners 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 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, Pennsylvania

 

18031

(Address of principal executive

 

(Zip Code)

offices)

 

 

 

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

 

Not Applicable

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

 

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

Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller 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 October 23, 2008

Limited Partnership Units

 

48,372,346 Units

 

 

 



Table of Contents

 

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 and nine months ended September 30, 2008 and 2007

3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007

5

 

 

 

 

Condensed Consolidated Statement of Changes in Partners’ Capital for the nine months ended September 30, 2008

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

 

 

 

Item 4.

Controls and Procedures

52

 

 

PART II- OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 6.

Exhibits

55

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Buckeye Partners, L.P.

Condensed Consolidated Statements of Income

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales

 

$

345,729

 

$

1,319

 

$

933,211

 

$

7,269

 

Transportation and other

 

150,441

 

124,334

 

435,783

 

368,279

 

Total revenue

 

496,170

 

125,653

 

1,368,994

 

375,548

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

334,959

 

1,278

 

913,163

 

7,154

 

Operating expenses

 

72,684

 

59,550

 

207,124

 

174,821

 

Depreciation and amortization

 

15,457

 

11,520

 

41,415

 

33,425

 

General and administrative

 

8,619

 

5,774

 

26,042

 

16,087

 

Total costs and expenses

 

431,719

 

78,122

 

1,187,744

 

231,487

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

64,451

 

47,531

 

181,250

 

144,061

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Investment and equity income

 

2,616

 

2,560

 

6,829

 

7,196

 

Interest and debt expense

 

(19,053

)

(12,391

)

(55,008

)

(38,651

)

Minority interests and other

 

(1,236

)

(1,320

)

(4,030

)

(3,947

)

Total other (expense)

 

(17,673

)

(11,151

)

(52,209

)

(35,402

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

46,778

 

36,380

 

129,041

 

108,659

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

(176

)

 

1,230

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

46,602

 

$

36,380

 

$

130,271

 

$

108,659

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

 

 

 

 

Net income allocated to general partner:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

8,651

 

$

6,116

 

$

22,822

 

$

18,734

 

(Loss) income from discontinued operations

 

$

(53

)

$

 

$

370

 

$

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to limited partners:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

38,127

 

$

30,264

 

$

106,219

 

$

89,925

 

(Loss) income from discontinued operations

 

$

(123

)

$

 

$

860

 

$

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit-basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.79

 

$

0.71

 

$

2.23

 

$

2.18

 

Income from discontinued operations

 

 

 

0.02

 

 

Earnings per limited partner unit-basic

 

$

0.79

 

$

0.71

 

$

2.25

 

$

2.18

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit-diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.79

 

$

0.71

 

$

2.23

 

$

2.18

 

Income from discontinued operations

 

 

 

0.02

 

 

Earnings per limited partner unit-diluted

 

$

0.79

 

$

0.71

 

$

2.25

 

$

2.18

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

48,372

 

42,676

 

47,538

 

41,286

 

Diluted

 

48,378

 

42,719

 

47,558

 

41,333

 

 

See Notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Buckeye Partners, L.P.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

98,570

 

$

93,198

 

Trade receivables

 

109,382

 

47,598

 

Construction and pipeline relocation receivables

 

17,108

 

12,571

 

Inventories

 

118,447

 

15,149

 

Prepaid and other current assets

 

75,495

 

31,822

 

Total current assets

 

419,002

 

200,338

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,216,987

 

1,796,196

 

Goodwill

 

182,806

 

11,355

 

Customer intangible assets, net

 

44,998

 

9,044

 

Other non-current assets

 

120,622

 

116,719

 

Total assets

 

$

2,984,415

 

$

2,133,652

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

101,000

 

$

 

Accounts payable

 

49,613

 

19,822

 

Accrued and other current liabilities

 

146,068

 

72,672

 

Total current liabilities

 

296,681

 

92,494

 

 

 

 

 

 

 

Long-term debt

 

1,399,394

 

849,177

 

Other non-current liabilities

 

87,593

 

80,341

 

Minority interests

 

20,511

 

21,468

 

Total liabilities

 

1,804,179

 

1,043,480

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ (deficit) capital:

 

 

 

 

 

General Partner

 

(7,081

)

(1,005

)

Limited Partners

 

1,200,111

 

1,100,346

 

Accumulated other comprehensive loss

 

(12,794

)

(9,169

)

Total partners’ capital

 

1,180,236

 

1,090,172

 

Total liabilities and partners’ capital

 

$

2,984,415

 

$

2,133,652

 

 

See Notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Buckeye Partners, L.P.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Income from continuing operations

 

$

129,041

 

$

108,659

 

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

 

 

 

 

 

Depreciation and amortization

 

41,415

 

33,425

 

Minority interest

 

4,087

 

3,897

 

Earnings from equity investments

 

(5,802

)

(6,266

)

Distributions from equity investments

 

4,120

 

5,717

 

Amortization of deferred financing fees and option grants

 

1,230

 

341

 

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

 

 

 

 

 

Trade receivables

 

5,556

 

5,228

 

Construction and pipeline relocation receivables

 

(4,537

)

1,831

 

Inventories

 

(8,288

)

408

 

Prepaid and other current assets

 

(37,052

)

3,263

 

Accounts payable

 

(1,305

)

(11,698

)

Accrued and other current liabilities

 

50,265

 

(389

)

Other non-current assets

 

(482

)

(304

)

Other non-current liabilities

 

3,742

 

(3,656

)

Total adjustments from operating activities

 

52,949

 

31,797

 

 

 

 

 

 

 

Net cash provided by continuing operations

 

181,990

 

140,456

 

Net cash provided by discontinued operations

 

397

 

 

Net cash provided by continuing and discontinued operations

 

182,387

 

140,456

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(67,890

)

(51,712

)

Acquisitions and equity investments, net of cash acquired

 

(660,252

)

(40,447

)

Net expenditures for disposal of property, plant and equipment

 

(513

)

(352

)

Proceeds from the sale of discontinued operations

 

52,584

 

 

Net cash used in investing activities

 

(676,071

)

(92,511

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Debt issuance costs

 

(1,886

)

(178

)

Net proceeds from issuance of limited partnership units

 

113,111

 

201,895

 

Proceeds from exercise of unit options

 

316

 

2,124

 

Distributions to minority interests

 

(3,506

)

(2,864

)

Issuance of long-term debt and borrowings under credit facilities

 

800,050

 

135,000

 

Payment of debt, net

 

(249,000

)

(250,000

)

Settlement payment of hedge

 

(9,638

)

 

Distributions to unitholders

 

(150,391

)

(119,806

)

Net cash provided by (used in) financing activities

 

499,056

 

(33,829

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

5,372

 

14,116

 

 

 

 

 

 

 

Cash and cash equivalents —Beginning of year

 

93,198

 

18,946

 

Cash and cash equivalents—End of period

 

$

98,570

 

$

33,062

 

 

 

 

 

 

 

Non- cash investing and financing activities:

 

 

 

 

 

Capital additions accrued in property, plant and equipment

 

$

4,319

 

$

 

Hedge accounting

 

504

 

(2,261

)

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest (net of amount capitalized)

 

$

53,362

 

$

42,167

 

Capitalized interest

 

1,087

 

1,159

 

Cash paid for income tax

 

859

 

888

 

 

See Notes to condensed consolidated financial statements.

 

5



Table of Contents

 

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

 

23,192

 

107,079

 

 

 

130,271

 

Termination of Buckeye’s interest rate swaps

 

 

 

 

 

(2,451

)

 

 

Amortization of Buckeye’s interest rate swaps

 

 

 

 

 

680

 

 

 

Amortization of RIGP and Retiree

 

 

 

 

 

 

 

 

 

Medical Plan Costs

 

 

 

 

 

(1,854

)

 

 

Other comprehensive income

 

 

 

 

 

(3,625

)

(3,625

)

Total comprehensive income

 

 

 

 

 

 

 

126,646

 

Distributions

 

(29,268

)

(121,123

)

 

 

(150,391

)

Net proceeds from the issuance of limited partner units

 

 

 

113,111

 

 

 

113,111

 

Amortization of limited partnership unit options

 

 

 

382

 

 

 

382

 

Exercise of limited partnership unit options

 

 

 

316

 

 

 

316

 

Partners’ (deficit) capital-September 30, 2008

 

$

(7,081

)

$

1,200,111

 

$

(12,794

)

$

1,180,236

 

 

See Notes to condensed consolidated financial statements.

 

6



Table of Contents

 

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 17 states, and operates an approximate 2,200 miles of pipeline under agreements with major oil and chemical companies. Buckeye also owns 64 active products terminals with aggregate storage capacity of approximately 24.7 million barrels in 13 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 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”), a seller of refined petroleum products on a wholesale basis, principally in eastern and central Pennsylvania.  When Farm & Home was acquired, it also had retail operations, but Buckeye sold those operations to a wholly owned subsidiary of Inergy, L.P. on April 15, 2008.  The assets and liabilities and results of operations of Farm & Home’s retail operations were determined to be discontinued operations effective on the Farm & Home acquisition date of February 8, 2008 (see Note 3 for a further discussion).  On July 31, 2008, Farm & Home was merged with and into its wholly owned subsidiary, Buckeye Energy Services LLC (“BES”), with BES continuing as the surviving entity.  This merger did not impact the operations of Buckeye.

 

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 conducts business in five reportable operating segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 17 for a more detailed discussion of Buckeye’s operating segments.

 

Buckeye Pipe Line Services Company (“Services Company”) was formed in 1996 in connection with the establishment of the Buckeye Pipe Line Services Company Employee Stock Ownership Plan (the “ESOP”).  At September 30, 2008, Services Company owned approximately 4.4% of the publicly traded limited partnership units of Buckeye (the “LP Units”).  Services Company employs approximately 1,000 people who provide services to the operating subsidiaries through which Buckeye conducts its operations.  Approximately 15 employees are employed directly by Lodi Gas and approximately 20 employees are employed by Buckeye Albany Terminal LLC (see Note 3 for a further discussion).  Pursuant to a services agreement entered into in December, 2004 (the “Services Agreement”), the operating subsidiaries reimburse Services Company for the costs of the services provided to the operating subsidiaries by Services Company.  Pursuant to the Services Agreement and an Executive Employment Agreement, executive compensation costs and related benefits paid to Buckeye GP’s four highest salaried officers are not reimbursed by Buckeye or its operating subsidiaries but are reimbursed to Services Company by BGH.  Buckeye and its operating subsidiaries have agreed to pay for all executive compensation and benefits earned by Buckeye GP’s four highest salaried officers after January 1, 2009 in return for an annual fixed payment from BGH.

 

7



Table of Contents

 

Pursuant to the rules and regulations of the Securities and Exchange Commission, the condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of Buckeye and the notes thereto for the year ended December 31, 2007 contained in Buckeye’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 28, 2008.

 

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 September 30, 2008 along with the results of Buckeye’s operations for the three and nine months ended September 30, 2008 and 2007 and Buckeye’s cash flows for the nine months ended September 30, 2008 and 2007.  The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full-year ending December 31, 2008.

 

Due to the acquisition of Farm & Home in 2008 and its related product sales and cost of product sales, certain amounts from 2007 for product sales and cost of product sales have been reclassified in the condensed consolidated statements of income to conform to the current-year presentation.  In addition, at September 30, 2008, Buckeye reclassified $36.4 million to customer relationships, which had previously been classified as goodwill in connection with the acquisition of Farm & Home.  This reclassification resulted from the adjustment of the preliminary purchase price allocation of Farm & Home as described in Note 3.  In order to conform to the current presentation, Buckeye also reclassified $8.6 million and $9.0 million to customer relationships at September 30, 2008 and December 31, 2007, respectively.  The $8.6 million and $9.0 million had previously been included in other noncurrent assets.  See Note 6 for additional discussion.

 

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 $1.9 million and $2.2 million for the three months ended September 30, 2008 and 2007, respectively, and $6.5 million and $6.2 million for the nine months ended September 30, 2008 and 2007, respectively, related to environmental contingencies unrelated to claims and proceedings.

 

8



Table of Contents

 

Ammonia Contract Contingencies

 

On November 30, 2005, Buckeye Gulf Coast Pipe Lines, L.P. (“BGC”), a subsidiary of Buckeye, purchased an ammonia pipeline and other assets from El Paso Merchant Energy-Petroleum Company (“EPME”), a subsidiary of El Paso Corporation (“El Paso”).  As part of the transaction, BGC assumed the obligations of EPME under several contracts involving monthly purchases and sales of ammonia.  EPME and BGC agreed, however, that EPME would retain the economic risks and benefits associated with those contracts until their expiration at the end of 2012.  To effectuate this agreement, BGC passes through to EPME both the cost of purchasing ammonia under a supply contract and the proceeds from selling ammonia under three sales contracts.  For each monthly period since the closing of the pipeline acquisition, the pricing terms of the ammonia contracts have resulted in ammonia costs exceeding ammonia sales proceeds.  The amount of the shortfall generally increases as the market price of ammonia increases.

 

EPME has informed BGC that, notwithstanding the parties’ agreement, it will not continue to pay BGC for shortfalls created by the pass-through of ammonia costs in excess of ammonia revenues.  EPME encouraged BGC to seek payment by invoking the $40.0 million guaranty made by El Paso which guaranteed EPME’s obligations to BGC.  If EPME fails to reimburse BGC for these shortfalls for a significant period during the remainder of the term of the ammonia agreements, then such unreimbursed shortfalls could exceed the $40.0 million cap on El Paso’s guaranty.  To the extent the unreimbursed shortfalls significantly exceed the $40.0 million cap, the resulting costs incurred by BGC could adversely affect Buckeye’s financial position, results of operations, and cash flows.  Given the uncertainty of future ammonia prices and EPME’s future actions, Buckeye is unable to estimate the amount of any such losses.  Accordingly, Buckeye has recorded no provision for losses in the accompanying condensed consolidated financial statements because, using the criteria of Statement of Financial Accounting Standards (“SFAS”) No. 5 –“Accounting for Contingencies,” it is unable to determine whether or not a loss has been incurred or, if a loss has been incurred, a reasonable estimate or range of estimates of the amount of such losses.  Buckeye is currently assessing potential recourse against EPME and El Paso with respect to this matter.

 

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 $442.3 million in cash and consisted of the following (in thousands):

 

Contractual purchase price

 

$

440,000

 

Working capital adjustments and fees

 

2,306

 

 

 

 

 

Total purchase price

 

$

442,306

 

 

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 and a new commodity type (natural gas), and will provide Buckeye a platform for growth in the natural gas storage industry.

 

Buckeye has determined that the acquisition represented a business combination under the provisions of SFAS No. 141, “Business Combinations” (“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

 

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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):

 

 

 

January 18,

 

 

 

2008

 

Current assets

 

$

7,486

 

Property, plant and equipment

 

275,649

 

Goodwill

 

170,425

 

Current liabilities

 

(9,604

)

Other liabilities

 

(1,650

)

 

 

 

 

Allocated purchase price

 

$

442,306

 

 

Buckeye is in the process of finalizing the purchase price allocation based on the valuations of land lease agreements, potential asset retirement obligations, and goodwill. Changes from the preliminary purchase price allocation could 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 approximately $146.1 million.  On April 15, 2008, Buckeye completed the sale of the retail operations of Farm & Home to a wholly owned subsidiary of Inergy, L.P. for approximately $52.6 million. The retail assets sold consisted primarily of property, plant, and equipment as well as inventory and receivables.  Buckeye recorded no gain or loss on the sale of Farm & Home’s retail operations.  The retail operations of Farm & Home were not an integral part of Buckeye’s core operations and strategy, and the related retail assets and liabilities were determined to be discontinued operations on the date of Buckeye’s acquisition of Farm & Home because Buckeye decided to dispose of them as of that date.  Revenues from discontinued operations for the period February 8, 2008 to April 15, 2008 were approximately $19.0 million.

 

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 by marketing refined petroleum products in areas served by that 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):

 

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February 8,

 

 

 

2008

 

Cash

 

$

2,816

 

Trade receivables

 

67,340

 

Inventory

 

93,332

 

Prepaid and other current assets

 

6,166

 

Property, plant and equipment

 

33,880

 

Goodwill

 

1,026

 

Customer relationships

 

38,300

 

Other non-current assets

 

1,844

 

Assets held for sale, net of liability of $0.7 million

 

51,645

 

Debt

 

(100,000

)

Accounts payable

 

(31,097

)

Accrued expenses

 

(19,127

)

 

 

 

 

Allocated purchase price

 

$

146,125

 

 

Buckeye is in the process of finalizing the purchase price allocation and may adjust the preliminary amounts shown above for customer contracts and property, plant and equipment.  Changes from the preliminary purchase price allocation could be material.  As discussed above, the operations of Farm & Home that were retained by Buckeye are reported in a new operating segment called Energy Services.  On July 31, 2008, Farm & Home was merged with and into its wholly owned subsidiary, BES.

 

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Proforma Unaudited Financial Results

 

The following unaudited summarized pro forma consolidated income statement information for the three months ended September 30, 2007 and the nine months ended September 30, 2008 and 2007 assumes that the acquisitions of Lodi Gas and Farm & Home had occurred as of the beginning of the periods presented.  The pro forma presentation below assumes that equity offerings by Buckeye that were used in part to fund the acquisition of Lodi Gas occurred effective January 1, 2007.  In the 2008 pro forma presentation, approximately $2.6 million of disposition-related expenses incurred by Lodi Gas in the period from January 1, 2008 to January 17, 2008 (prior to Buckeye’s ownership) have been excluded because these expenses were a nonrecurring item.  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 periods presented or the results that will be attained in the future (in thousands, except per unit amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2008

 

2007

 

Revenues:

 

 

 

 

 

 

 

As reported

 

$

125,653

 

$

1,368,994

 

$

375,548

 

Pro forma adjustments

 

239,768

 

174,724

 

814,171

 

 

 

 

 

 

 

 

 

Pro forma revenue

 

$

365,421

 

$

1,543,718

 

$

1,189,719

 

 

 

 

 

 

 

 

 

Income from continuing operations:

 

 

 

 

 

 

 

As reported

 

$

36,380

 

$

129,041

 

$

108,659

 

Pro forma adjustments

 

5,164

 

1,092

 

14,528

 

 

 

 

 

 

 

 

 

Pro forma income from continuing operations

 

$

41,544

 

$

130,133

 

$

123,187

 

 

 

 

 

 

 

 

 

Allocation of pro forma income from continuing operations:

 

 

 

 

 

 

 

Allocated to general partner

 

$

6,984

 

$

23,015

 

$

21,239

 

Allocated to limited partners

 

$

34,560

 

$

107,118

 

$

101,948

 

 

 

 

 

 

 

 

 

Pro forma earnings from continuing operations per limited partner unit:

 

 

 

 

 

 

 

Basic

 

$

0.76

 

$

2.21

 

$

2.23

 

Diluted

 

$

0.76

 

$

2.21

 

$

2.23

 

 

 

 

 

 

 

 

 

Pro forma weighted average number of limited partner units outstanding:

 

 

 

 

 

 

 

Basic

 

45,509

 

48,405

 

45,622

 

Diluted

 

45,552

 

48,425

 

45,669

 

 

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Other Acquisitions

 

On February 19, 2008, Buckeye acquired a refined petroleum products terminal in Niles, Michigan and a 50% ownership interest in a refined petroleum 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. The operations of the Niles, Michigan and Ferrysburg, Michigan terminals are reported in the Terminalling and Storage segment. Accordingly, Buckeye has allocated, on a preliminary basis, the purchase price of the acquisition to the various tangible assets acquired, principally property, plant and equipment.

 

Effective May 1, 2008, Buckeye purchased the remaining 50% member interest in WesPac Pipe Lines - San Diego LLC from Kealine LLC not already owned by Buckeye for $9.3 million. The operations of WesPac Pipe Lines – San Diego LLC are reported in the Pipeline Operations segment. The purchase price was allocated principally to property, plant and equipment.

 

On June 20, 2008, Buckeye acquired a refined petroleum products terminal in Wethersfield, Connecticut from Hess Corporation for approximately $5.5 million.  Buckeye determined that the acquisition of the Wethersfield, Connecticut terminal should be accounted for as an acquisition of assets rather than an acquisition of a business as defined in SFAS No. 141. The operations of this terminal are reported in the Terminalling and Storage segment.  The purchase price was allocated principally to property, plant and equipment.

 

On August 28, 2008, Buckeye invested another $2.8 million in West Texas LPG Pipeline Limited Partnership.

 

On August 28, 2008, Buckeye completed the purchase of an ethanol and petroleum products terminal in Albany, New York from LogiBio Albany Terminal, LLC (the ‘‘Albany Terminal”).  The purchase price for the terminal was $46.5 million, with an additional $1.5 million payable if the terminal operations meet certain performance goals over the next three years.  The Albany Terminal has an active storage capacity of 1.8 million barrels. Buckeye acquired the Albany Terminal because Buckeye believes that the Albany Terminal’s operations represent an attractive opportunity to increase Buckeye’s participation in the ethanol services market in the northeast United States.  Buckeye has determined that the acquisition of the Albany Terminal represented a business combination under the provisions of SFAS No. 141 and that the results of operations of the Albany Terminal are immaterial with respect to a pro forma presentation.  The Albany Terminal operations are reported in the Terminalling and Storage segment.  Buckeye is in the process of allocating the purchase price of the acquisition to the various tangible and intangible assets acquired which are expected to be principally property, plant and equipment and customer contracts. Changes to the preliminary purchase price allocation could be material.

 

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4.  PREPAIDS AND OTHER CURRENT ASSETS

 

Prepaids and other current assets consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Prepaid insurance

 

$

976

 

$

6,812

 

Insurance receivables

 

6,844

 

7,707

 

Ammonia receivable

 

7,285

 

7,505

 

Margin deposits

 

11,579

 

 

Derivative assets

 

32,672

 

 

Other

 

16,139

 

9,798

 

Total

 

$

75,495

 

$

31,822

 

 

5.  INVENTORIES

 

The major components of inventories consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Refined petroleum products

 

$

103,864

 

$

333

 

Materials and supplies

 

14,583

 

14,816

 

Total

 

$

118,447

 

$

15,149

 

 

Approximately 90% of the refined petroleum product inventories are hedged (see Note 9) and are valued at market with the change in value of those inventories reflected in the statements of income.  Materials and supplies consists of pipes, valves, pumps, electronic components, drag reducing agent and other miscellaneous items that are carried at the lower of cost or market based on the first-in, first-out method.

 

6.  CUSTOMER INTANGIBLE ASSETS

 

Customer intangible assets include customer relationships and contracts.  These intangible assets have definite lives and are being amortized on a straight-line basis over their estimated useful lives ranging from 12 to 25 years.  The increase in the carrying amount of customer relationships in 2008 resulted from the acquisition of Farm & Home (see Note 3 for a further discussion).  Customer intangibles, net consist of the following:

 

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September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Customer relationships

 

$

38,300

 

$

 

Accumulated amortization

 

(1,920

)

 

Net carrying amount

 

36,380

 

 

 

 

 

 

 

 

Customer contracts

 

11,800

 

11,800

 

Accumulated amortization

 

(3,182

)

(2,756

)

Net carrying amount

 

8,618

 

9,044

 

Total customer intangibles, net

 

$

44,998

 

$

9,044

 

 

7.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Taxes - other than income

 

$

14,482

 

$

7,941

 

Accrued charges due Buckeye GP

 

1,545

 

2,807

 

Accrued charges due Services Company

 

5,324

 

5,963

 

Accrued employee benefit liability

 

2,183

 

2,183

 

Environmental liabilities

 

9,059

 

8,023

 

Interest

 

16,865

 

16,476

 

Retainage

 

1,229

 

1,572

 

Payable for ammonia purchase

 

25,448

 

6,988

 

Derivative liability

 

20,707

 

7,187

 

Unearned revenue

 

12,349

 

1,439

 

Accrued capital expenditures

 

7,264

 

2,945

 

Customer deposits

 

10,000

 

 

Other

 

19,613

 

9,148

 

Total

 

$

146,068

 

$

72,672

 

 

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8.  DEBT AND CREDIT FACILITIES

 

Long-term debt consists of the following:

 

 

 

September 30,

 

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

 

252,000

 

 

Less: Unamortized discount

 

(3,723

)

(2,117

)

Adjustment to fair value associated with hedge of fair value

 

1,117

 

1,294

 

 

 

$

1,399,394

 

$

849,177

 

 


* Buckeye makes semi-annual interest payments on these notes with the principal balances outstanding to be paid on or before the due dates as shown above.

 

The fair value of Buckeye’s aggregate debt was estimated to be $1,277.0 million at September 30, 2008 and $828.7 million at December 31, 2007.  The values at September 30, 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 6.05% Notes due 2018 (the “6.05% Notes”) in an underwritten public offering. Proceeds from this offering, after underwriters’ fees and expenses, were approximately $298.0 million and were used 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 9 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 the 6.05% Notes.

 

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 September 30, 2008, Buckeye had $252.0 million in borrowings outstanding under the Credit Facility.  At December 31, 2007, Buckeye did not have any amounts outstanding under the Credit Facility.  At September 30, 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, which is defined in the Credit Facility as earnings before interest, taxes, depreciation,

 

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depletion and amortization, in each case excluding the income of certain majority-owned subsidiaries of Buckeye and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).  As discussed below, the Credit Facility was amended in January 2008 to, among other things, change the definition of consolidated debt.  At September 30, 2008, Buckeye’s Funded Debt Ratio was 4.51 to 1.00.  As permitted by the Credit Facility, the entire outstanding balance of BES’s line of credit at September 30, 2008, or $101.0 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, covenants limiting Buckeye’s ability to incur additional indebtedness, to create or incur liens on its property, to dispose of property material to its operations, and to consolidate, merge or transfer assets.  At September 30, 2008, Buckeye was not aware of any instances of noncompliance with the covenants under its Credit Facility.

 

On January 28, 2008, Buckeye entered into an amendment to the Credit Facility that permits BES to incur up to $250.0 million of secured indebtedness related to working capital financing.  The Credit Facility, as amended, also permits BES 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 BES at the balance sheet date may be excluded when calculating Buckeye’s Funded Debt Ratio as discussed above.

 

Lehman Brothers Bank, FSB, an affiliate of Lehman Brothers Holdings Inc. (“Lehman Brothers”), has committed, as a lender under the Credit Facility, 3.3%, or $20.0 million, of Buckeye’s $600.0 million borrowing capacity under the Credit Facility but has recently not honored that commitment. Buckeye does not believe that the reduction in capacity under the Credit Facility resulting from the unavailability of Lehman Brothers Bank, FSB’s commitment will have any impact on Buckeye’s ability to meet its liquidity needs.  See Note 14 for a further discussion.

 

Buckeye Energy Services Credit Agreement

 

On May 20, 2008, Farm & Home and BES entered into a Credit Agreement, which was subsequently amended on July 18, 2008 (the “BES Credit Agreement”).  The BES Credit Agreement, is with BNP Paribas, as Administrative Agent, Collateral Agent, and Lead Arranger and the lenders named therein.  On July 31, 2008, Farm & Home was merged with and into BES, leaving BES as the sole borrower under the BES Credit Agreement.  The BES Credit Agreement provides for borrowings of up to $175.0 million, which amount may be increased to $250.0 million subject to customary conditions, including procurement of the requisite lender commitments.  Under the BES Credit Agreement, borrowings accrue interest at BES’s election at (i) the Administrative Agent’s Cost of Funds (as defined in the BES Credit Agreement) plus 1.75%, (ii) the Eurodollar Rate (as defined in the BES Credit Agreement) plus 1.75% or (iii) the Base Rate (as defined in the BES Credit Agreement) plus 0.25%.  The BES Credit Agreement also permits Daylight Overdraft Loans (as defined in the BES Credit Agreement), Swingline Loans (as defined in the BES Credit Agreement) and letters of credit.  Such alternative extensions of credit are subject to certain conditions as defined in the BES Credit Agreement.  The BES Credit Agreement is secured by liens on certain assets of BES, including their inventory, cash deposits (other than certain accounts), investments and hedging accounts, receivables and intangibles.

 

The BES Credit Agreement replaced the credit agreement that Buckeye had assumed upon the acquisition of Farm & Home.

 

The balance outstanding under the BES Credit Agreement was approximately $101.0 million at September 30, 2008, all of which was classified as a current liability.  The BES Credit Agreement requires BES to meet certain financial covenants, which are summarized below:

 

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Minimum

 

Minimum

 

Maximum

 

Maximum

 

Consolidated Tangible

 

Consolidated Net

 

Consolidated

 

Sub-Limit

 

Net Worth

 

Working Capital

 

Leverage Ratio

 

$150,000,000

 

$

40,000,000

 

$

30,000,000

 

7.0 to 1.0

 

Above $150,000,000 up to $200,000,000

 

50,000,000

 

40,000,000

 

7.0 to 1.0

 

Above $200,000,000 up to $250,000,000

 

60,000,000

 

50,000,000

 

7.0 to 1.0

 

 

At September 30, 2008, BES’s Consolidated Tangible Net Worth (as defined in the BES Credit Agreement) and Consolidated Net Working Capital (as defined in the BES Credit Agreement) were $113.7 million and $73.1 million, respectively, and the Consolidated Leverage Ratio (as defined in the BES Credit Agreement) was 1.43 to 1.0.

 

In addition, the BES Credit Agreement contains other covenants, including, but not limited to, covenants limiting BES’s ability to incur additional indebtedness, to create or incur certain liens on its property, to consolidate, merge or transfer its assets, to make dividends or distributions, to dispose of its property, to make investments, to modify its risk management policy, or to engage in business activities materially different from those presently conducted.  At September 30, 2008, BES was not aware of any instances of noncompliance with the covenants under the BES Credit Agreement.

 

9.  DERIVATIVES

 

Commodity Derivatives

 

The Energy Services segment primarily uses exchange-traded petroleum futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its fixed-price sales contracts. The derivative contracts used to hedge refined petroleum product inventories are classified as fair value hedges.  Changes in the fair value of the inventory hedges are recorded in current period earnings along with the related gain or loss on the hedged asset.  Hedge ineffectiveness is measured quarterly based on the correlation of changes in fair value between the derivative contract and the hedged item during the hedge period. The Energy Services segment has elected not to use hedge accounting with respect to its fixed-price sales contracts. Therefore, its fixed-price sales contracts and the related futures contracts used to offset those fixed-price sales contracts are all marked-to-market on the balance sheet with gains and losses being recognized in earnings during the period.

 

As of September 30, 2008, the Energy Services segment had derivative assets and liabilities as follows:

 

 

 

September 30,

 

 

 

2008

 

 

 

(In thousands)

 

Assets:

 

 

 

Fixed-price sales contracts

 

$

21,472

 

Futures contracts for inventory

 

11,200

 

 

 

32,672

 

 

 

 

 

Liability:

 

 

 

Futures contracts for fixed-price sales contracts

 

(20,707

)

 

 

 

 

Total

 

$

11,965

 

 

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Substantially all of the asset noted above for unrealized gains of $11.2 million related to inventory hedges will be realized in the fourth quarter of 2008 as the related inventory is sold.  Losses recorded on inventory hedges that were ineffective were approximately $0.8 million.  As of September 30, 2008, open petroleum derivative contracts varied in duration, but did not extend beyond August 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 and $0.7 million for the three and nine months ended September 30, 2008, respectively, as a result of the amortization of the termination payment.

 

In October 2008, subsequent to the date of the accompanying condensed consolidated financial statements, Buckeye borrowed approximately $50 million under the Credit Facility.  In order to hedge its variable interest rate risk with respect to the amount borrowed, Buckeye concurrently entered into an interest rate swap agreement with a bank for a notional amount of $50 million.  Under the swap agreement, Buckeye will pay a fixed interest rate of 3.15% for 180 days and, in exchange, will receive a series of six monthly payments to be calculated based on the 30-day LIBOR rate in effect at the beginning of each monthly period.  The amounts received by Buckeye will correspond to the 30 day LIBOR rates Buckeye expects to pay on the $50 million borrowed under the Credit Facility. The swap will settle on the maturity date of the last 30-day LIBOR period.  Buckeye has designated the swap agreement as a cash flow hedge at the inception of the agreement and elected to use the short-cut method provided for under SFAS No. 133.

 

10.  FAIR VALUE MEASUREMENTS

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements.  SFAS No. 157 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:

 

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.

 

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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 and liabilities that are subject to SFAS No. 157 as of September 30, 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:

 

 

 

 

 

 

 

Fixed-price sales contracts

 

$

 

$

21,472

 

$

 

Futures contracts for inventory

 

11,200

 

 

 

 

Asset held in trust

 

3,628

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Futures contracts for fixed-price sales contracts

 

(20,707

)

 

 

Total

 

$

(5,879

)

$

21,472

 

$

 

 

The value of the Level 1 futures contracts for inventory and fixed-price sales contracts noted above were based on quoted market prices obtained from the New York Mercantile Exchange.  The value of the Level 1 asset held in trust was obtained from quoted prices from brokers.  The value of the Level 2 fixed-price sales contracts was based on observable market data related to the obligation to provide petroleum products.

 

11.  EARNINGS PER LIMITED PARTNERSHIP UNIT

 

Emerging Issues Task Force (“EITF”) 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 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 18 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 and nine months ended September 30, 2008 and 2007:

 

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Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

(In thousands)

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average LP Units oustanding

 

48,372

 

42,676

 

47,538

 

41,286

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average LP Units oustanding

 

48,372

 

42,676

 

47,538

 

41,286

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of LP Unit options granted

 

6

 

43

 

20

 

47

 

Total

 

48,378

 

42,719

 

47,558

 

41,333

 

 

12.  ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

The following table displays the components of Accumulated Other Comprehensive (Loss) Income on the Condensed Consolidated Balance Sheet:

 

 

 

September 30,

 

December 31,

 

Accumulated Other Comprehensive (Loss) Income:

 

2008

 

2007

 

 

 

(In thousands)

 

Adjustments to funded status of Retirement Income Guarantee Plan (“RIGP”) and Retiree Medical Plan

 

$

(53

)

$

(53

)

Buckeye’s terminated interest rate swaps

 

(8,958

)

(7,187

)

Accumulated amortization of RIGP and Retiree Medical Plan

 

(3,783

)

(1,929

)

Total

 

$

(12,794

)

$

(9,169

)

 

13.  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 October 28, 2008, Buckeye declared a cash distribution of $0.875 per LP Unit payable on November 28, 2008 to unitholders of record on November 7, 2008. The total cash distribution to unitholders will amount to approximately $52.8 million, which includes an incentive distribution of approximately $10.2 million payable to Buckeye GP.

 

14.  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, along with certain members of Buckeye’s senior management, own BGH Holdings.  In addition to owning MainLine Management, BGH Holdings owns an approximate 62% 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

 

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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 $25.8 million and $23.9 million for the three months ended September 30, 2008 and 2007, respectively, and $75.7 million and $73.1 million for the nine months ended September 30, 2008 and 2007, respectively.  The reimbursable costs include insurance, general and administrative costs, compensation and benefits 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 the ESOP, owned 2.1 million LP Units, or approximately 4.4% of the LP Units outstanding, as of September 30, 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 September 30, 2008 and 2007, respectively, and $5.5 million for the nine months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, ESOP costs were reduced by $0.1 million and $0.4 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.  There was no impact on ESOP costs for the three months ended September 30, 2008 and 2007.

 

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 for the three months ended September 30, 2008 and 2007, respectively, and $1.4 million for the nine months ended September 30, 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 has been reflected as a reduction in the purchase price 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 $10.0 million and $7.6 million for the three months ended September 30, 2008 and 2007, respectively, and $28.6 million and $21.7 million for the nine months ended September 30, 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.  Also, an affiliate of Lehman Brothers is a customer of Lodi Gas.

 

Relationships with Lehman Brothers

 

On September 15, 2008, it was reported that Lehman Brothers filed for protection under Chapter 11 of the federal Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York.  As described above, an affiliate of Lehman Brothers owns a direct interest in BGH Holdings, affiliates of Lehman Brothers have provided investment and commercial banking and financial advisory services to Buckeye, an affiliate of Lehman Brothers is a lender under the Credit Facility, and an affiliate of

 

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Lehman Brothers is a customer of Lodi Gas.  Buckeye has considered its relationships with Lehman Brothers and its affiliates and, for the reasons set forth below, believes the Lehman Brothers bankruptcy and the possible resulting effects on affiliates of Lehman Brothers will not have a direct material adverse effect on Buckeye. The BGH Holdings interest owned by an affiliate of Lehman Brothers is a passive investment that does not entitle its holder to any management or other control rights with respect to BGH Holdings, MainLine Management, BGH, Buckeye GP, or Buckeye.  Consequently, Buckeye believes that, if the interest in BGH Holdings is transferred in connection with Lehman Brothers’ bankruptcy, Buckeye will not be adversely impacted.  An affiliate of Barclays PLC has acquired and is operating the investment banking business and certain financial services businesses of Lehman Brothers and its affiliates in North America and, as a result, management does not expect any disruption with respect to these services that Lehman Brothers and its affiliates have provided to Buckeye.  Lehman Brothers Bank, FSB, an affiliate of Lehman Brothers, has committed, as a lender, 3.3%, or $20.0 million, of Buckeye’s $600.0 million borrowing capacity under the Credit Facility but recently has not honored that commitment.  Buckeye does not believe that the reduction in capacity under the Credit Facility resulting from the unavailability of Lehman Brothers Bank, FSB’s commitment will have any impact on Buckeye’s ability to meet its liquidity needs.  Finally, Lehman Brothers has entered into a binding agreement to sell the Lehman Brothers affiliate that is a customer of Lodi Gas to a third party not affiliated with Lehman Brothers.  The terms of that agreement were approved by the bankruptcy court in an order issued on October 17, 2008, but the sale has not yet been consummated.

 

15.  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 No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). Generally, unit-based compensation expense recognized in the three and nine months ended September 30, 2008 and 2007 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 and nine months ended September 30, 2008 and 2007 is based on options ultimately expected to vest. In accordance with SFAS No. 123R, forfeitures have been estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

$

82

 

$

62

 

$

293

 

$

234

 

General and adminstrative expenses

 

24

 

19

 

88

 

69

 

Total unit-based compensation expenses

 

$

106

 

$

81

 

$

381

 

$

303

 

 

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 and nine months ended September 30, 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 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 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.

 

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The following table summarizes employee unit option activity for the nine months ended September 30, 2008:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

Number of

 

Average

 

Contractual

 

Aggregate

 

 

 

Options

 

Exercise Price

 

Life

 

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding, January 1, 2008

 

337,100

 

$

44.46

 

 

 

 

 

Granted

 

138,500

 

49.47

 

 

 

 

 

Exercised

 

(9,200

)

34.40

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

 

Outstanding, September 30, 2008

 

466,400

 

$

46.17

 

7.5

 

$

(4,232,661

)

Exercisable, September 30, 2008

 

149,800

 

$

41.30

 

5.1

 

$

(631,071

)

 

As of January 1, 2008, there were 234,800 unvested options outstanding.  During the first nine months of 2008, 56,700 options vested.  Due to the recent market declines, the aggregate intrinsic value in the preceding table is negative. Intrinsic value is determined by calculating the difference between Buckeye’s closing price of the LP Units on the last trading day of the third quarter of 2008 and the exercise price, multiplied by the number of LP Units subject to such options.  The total intrinsic value of options exercised during the nine months ended September 30, 2008 was $103,000. The total number of in-the-money options exercisable as of September 30, 2008 was 29,000.  As of September 30, 2008, total unrecognized compensation cost related to unvested options was $483,000. The cost is expected to be recognized over a weighted average period of 0.9 years.  At September 30, 2008, 338,000 LP Units were available for grant under with the Option Plan.

 

Due to regulations adopted under Internal Revenue Code Section 409A, holders of unit options granted during 2008 would be subject to certain adverse tax consequences if the terms of the grant are not modified.  As a result, Buckeye is seeking the approval of the holders of the unit options granted in 2008 to modify the terms of the unit option grants to avoid the adverse tax consequences under 409A.  Unit options granted before January 1, 2008 are not impacted by the IRS regulations.  The proposed modifications to the terms of the unit options granted in 2008 are not expected to have a material impact on Buckeye’s financial results.

 

16.  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.

 

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For the three months ended September 30, 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 September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

352

 

$

111

 

$

78

 

$

302

 

Interest cost

 

477

 

345

 

233

 

505

 

Expected return on plan assets

 

(468

)

(238

)

 

 

Amortization of prior service benefit

 

(217

)

(113

)

(379

)

(859

)

Amortization of unrecognized losses

 

156

 

112

 

139

 

309

 

Net periodic benefit costs

 

$

300

 

$

217

 

$

71

 

$

257

 

 

For the nine months ended September 30, 2008 and 2007, the components of the net periodic benefit cost recognized by Buckeye for the RIGP and Retiree Medical Plan were as follows:

 

 

 

Nine Months Ended September 30,