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Buckeye Partners 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. 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 June 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 “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 July 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 six months ended June 30, 2008 and 2007

3

 

 

 

 

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

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007

5

 

 

 

 

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

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

PART II- OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 6.

Exhibits

46

 



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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales

 

$

346,436

 

$

1,035

 

$

587,482

 

$

5,950

 

Transportation and other

 

146,112

 

123,916

 

285,342

 

243,945

 

Total revenue

 

492,548

 

124,951

 

872,824

 

249,895

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

341,591

 

1,032

 

578,203

 

5,876

 

Operating expenses

 

69,112

 

61,405

 

134,440

 

115,271

 

Depreciation and amortization

 

13,460

 

11,098

 

25,958

 

21,905

 

General and administrative

 

9,717

 

5,159

 

17,423

 

10,313

 

Total costs and expenses

 

433,880

 

78,694

 

756,024

 

153,365

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

58,668

 

46,257

 

116,800

 

96,530

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Investment and equity income

 

1,573

 

2,570

 

4,213

 

4,636

 

Interest and debt expense

 

(18,021

)

(12,773

)

(35,955

)

(26,260

)

Minority interests and other

 

(1,360

)

(1,509

)

(2,794

)

(2,627

)

Total other (expense)

 

(17,808

)

(11,712

)

(34,536

)

(24,251

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

40,860

 

34,545

 

82,264

 

72,279

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

(8

)

 

1,405

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

40,852

 

$

34,545

 

$

83,669

 

$

72,279

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income:

 

 

 

 

 

 

 

 

 

Net income allocated to general partner:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

6,869

 

$

5,801

 

$

14,171

 

$

12,618

 

(Loss) income from discontinued operations

 

$

(2

)

$

 

$

423

 

$

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to limited partners:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

33,991

 

$

28,744

 

$

68,093

 

$

59,661

 

(Loss) income from discontinued operations

 

$

(6

)

$

 

$

982

 

$

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit-basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.70

 

$

0.70

 

$

1.45

 

$

1.47

 

Income from discontinued operations

 

 

 

0.02

 

 

Earnings per limited partner unit-basic

 

$

0.70

 

$

0.70

 

$

1.47

 

$

1.47

 

 

 

 

 

 

 

 

 

 

 

Earnings per limited partner unit-diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.70

 

$

0.70

 

$

1.44

 

$

1.47

 

Income from discontinued operations

 

 

 

0.02

 

 

Earnings per limited partner unit-diluted

 

$

0.70

 

$

0.70

 

$

1.46

 

$

1.47

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

48,368

 

41,201

 

47,116

 

40,579

 

Diluted

 

48,394

 

41,253

 

47,144

 

40,634

 

 

See Notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Buckeye Partners, L.P.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

42,831

 

$

93,198

 

Trade receivables

 

100,879

 

47,598

 

Construction and pipeline relocation receivables

 

12,776

 

12,571

 

Inventories

 

127,985

 

15,149

 

Prepaid and other current assets

 

68,830

 

31,822

 

Total current assets

 

353,301

 

200,338

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,139,296

 

1,796,196

 

Goodwill

 

226,469

 

11,355

 

Other non-current assets

 

128,454

 

125,763

 

Total assets

 

$

2,847,520

 

$

2,133,652

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

72,718

 

$

 

Accounts payable

 

59,494

 

19,822

 

Accrued and other current liabilities

 

118,082

 

72,672

 

Total current liabilities

 

250,294

 

92,494

 

 

 

 

 

 

 

Long-term debt

 

1,304,333

 

849,177

 

Other non-current liabilities

 

86,728

 

80,341

 

Minority interests

 

20,659

 

21,468

 

Total liabilities

 

1,662,014

 

1,043,480

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ (deficit) capital:

 

 

 

 

 

General Partner

 

(5,480

)

(1,005

)

Limited Partners

 

1,203,719

 

1,100,346

 

Accumulated other comprehensive loss

 

(12,733

)

(9,169

)

Total partners’ capital

 

1,185,506

 

1,090,172

 

Total liabilities and partners’ capital

 

$

2,847,520

 

$

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)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Income from continuing operations

 

$

82,264

 

$

72,279

 

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

 

 

 

 

 

Depreciation and amortization

 

25,958

 

21,905

 

Minority interest

 

2,831

 

2,576

 

Equity earnings

 

(3,399

)

(4,044

)

Distributions from equity investments

 

2,306

 

3,589

 

Amortization of debt discount and option grants

 

820

 

247

 

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

 

 

 

 

 

Trade receivables

 

14,059

 

8,372

 

Construction and pipeline relocation receivables

 

(205

)

236

 

Inventories

 

(19,505

)

227

 

Prepaid and other current assets

 

(30,353

)

1,664

 

Accounts payable

 

8,575

 

(4,936

)

Accrued and other current liabilities

 

25,907

 

4,151

 

Other non-current assets

 

(1,668

)

1,612

 

Other non-current liabilities

 

3,011

 

(1,461

)

Total adjustments from operating activities

 

28,337

 

34,138

 

 

 

 

 

 

 

Net cash provided by continuing operations

 

110,601

 

106,417

 

Net cash provided by discontinued operations

 

572

 

 

Net cash provided by continuing and discontinued operations

 

111,173

 

106,417

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(32,501

)

(36,966

)

Acquisitions and equity investments, net of cash acquired

 

(610,616

)

(39,320

)

Net expenditures for disposal of property, plant and equipment

 

(103

)

(167

)

Proceeds from the sale of discontinued operations

 

52,584

 

 

Net cash used in investing activities

 

(590,636

)

(76,453

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Debt issuance costs

 

(1,886

)

 

Net proceeds from issuance of limited partnership units

 

113,148

 

82,171

 

Proceeds from exercise of unit options

 

278

 

1,895

 

Distributions to minority interests

 

(2,101

)

(1,606

)

Proceeds from issuance of long-term debt and borrowings under credit facilities

 

611,050

 

85,000

 

Payment of debt, net

 

(183,284

)

(115,000

)

Settlement payment of hedge

 

(9,638

)

 

Distributions to unitholders

 

(98,471

)

(78,568

)

Net cash provided by (used in) financing activities

 

429,096

 

(26,108

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(50,367

)

3,856

 

Cash and cash equivalents —Beginning of year

 

93,198

 

18,946

 

Cash and cash equivalents—End of period

 

$

42,831

 

$

22,802

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest (net of amount capitalized)

 

$

26,443

 

$

25,437

 

Capitalized interest

 

$

620

 

$

902

 

Cash paid for income tax

 

$

525

 

$

575

 

Non-cash changes in assets and liabilities:

 

 

 

 

 

Hedge accounting

 

$

6,751

 

$

118

 

 

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

 

14,594

 

69,075

 

 

 

83,669

 

Termination of Buckeye’s interest rate swaps

 

 

 

 

 

(2,451

)

 

 

Amortization of Buckeye’s interest rate swaps

 

 

 

 

 

439

 

 

 

Amortization of RIGP and Retiree Medical Plan Costs

 

 

 

 

 

(1,552

)

 

 

Other comprehensive income

 

 

 

 

 

(3,564

)

(3,564

)

Total Comprehensive income

 

 

 

 

 

 

 

80,105

 

Distributions

 

(19,069

)

(79,402

)

 

 

(98,471

)

Net proceeds from the issuance of limited partner units

 

 

 

113,148

 

 

 

113,148

 

Amortization of unit options

 

 

 

274

 

 

 

274

 

Exercise of unit options

 

 

 

278

 

 

 

278

 

Partners (deficit) capital- June 30, 2008

 

$

(5,480

)

$

1,203,719

 

$

(12,733

)

$

1,185,506

 

 

See Notes to condensed consolidated financial statements.

 

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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 63 refined petroleum products terminals with aggregate storage capacity of approximately 22.9 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”).  Farm & Home sells 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).

 

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

 

Certain prior year amounts for product sales and the cost of product sales have been reclassified in the statement of income to conform to the current-year presentation.

 

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



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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 $2.7 million and $1.8 million for the three months ended June 30, 2008 and 2007, respectively, and $4.6 million and $4.0 million for the six months ended June 30, 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 $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, and will provide Buckeye a platform for growth in the natural gas storage industry.

 

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Table of Contents

 

Buckeye has determined that the acquisition represented a business combination under the provisions of Statement of Financial Accounting Standards (“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 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

 

$

7,519

 

Property, plant and equipment

 

276,879

 

Goodwill

 

170,005

 

Current liabilities

 

(10,274

)

Other liabilities

 

(1,823

)

 

 

 

 

Allocated purchase price

 

$

442,306

 

 

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 approximately $146.0 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.

 

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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):

 

 

 

February 8,

 

 

 

2008

 

Cash

 

$

2,816

 

Trade receivables

 

67,340

 

Inventory

 

91,654

 

Prepaid and other current assets

 

9,746

 

Property, plant and equipment

 

29,660

 

Goodwill

 

45,109

 

Other non-current assets

 

1,844

 

Assets held for sale

 

51,750

 

Debt

 

(100,000

)

Accounts payable

 

(31,097

)

Accrued expenses

 

(22,833

)

 

 

 

 

Allocated purchase price

 

$

145,989

 

 

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 Farm & Home that were retained by Buckeye are reported in a new operating segment called Energy Services.

 

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Proforma Unaudited Financial Results

 

The following unaudited summarized pro forma consolidated income statement information for the three months ended June 30, 2007 and the six months ended June 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 the inclusion of these expenses would have distorted the financial results.  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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2008

 

2007

 

Revenues:

 

 

 

 

 

 

 

As reported

 

$124,951

 

$872,824

 

$249,895

 

Pro forma adjustments

 

257,277

 

174,724

 

574,403

 

 

 

 

 

 

 

 

 

Pro forma revenue

 

$382,228

 

$1,047,548

 

$824,298

 

 

 

 

 

 

 

 

 

Income from continuing operations:

 

 

 

 

 

 

 

As reported

 

$34,545

 

$82,264

 

$72,279

 

Pro forma adjustments

 

5,299

 

1,092

 

9,364

 

 

 

 

 

 

 

 

 

Pro forma income from continuing operations

 

$39,844

 

$83,356

 

$81,643

 

 

 

 

 

 

 

 

 

Allocation of pro forma income from continuing operations:

 

 

 

 

 

 

 

Allocated to general partner

 

$6,691

 

$14,359

 

$14,253

 

Allocated to limited partners

 

$33,153

 

$68,997

 

$67,390

 

 

 

 

 

 

 

 

 

Pro forma earnings from continuing operations per limited partner unit:

 

 

 

 

 

 

 

Basic

 

$0.74

 

$1.43

 

$1.53

 

Diluted

 

$0.74

 

$1.43

 

$1.53

 

 

 

 

 

 

 

 

 

Pro forma weighted average number of limited partner units outstanding:

 

 

 

 

 

 

 

Basic

 

44,701

 

48,366

 

44,079

 

Diluted

 

44,753

 

48,393

 

44,134

 

 

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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.  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.  Such changes may be material.

 

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.  Buckeye is in the process of allocating the cost of the acquisition to the various tangible assets acquired, principally 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.  Accordingly, Buckeye is in the process of allocating the cost of the acquisition to the various tangible assets acquired, principally property, plant and equipment.

 

4. PREPAIDS AND OTHER CURRENT ASSETS

 

Prepaids and other current assets consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Prepaid insurance

 

$

2,473

 

$

6,812

 

Insurance receivables

 

7,378

 

7,707

 

Ammonia receivable

 

29,162

 

7,505

 

Derivative asset

 

9,943

 

 

Other

 

19,874

 

9,798

 

Total

 

$

68,830

 

$

31,822

 

 

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5. ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Taxes - other than income

 

$

13,987

 

$

7,941

 

Accrued charges due Buckeye GP

 

1,713

 

2,807

 

Accrued charges due Services Company

 

4,178

 

5,963

 

Accrued employee benefit liability

 

2,183

 

2,183

 

Environmental liabilities

 

9,005

 

8,023

 

Interest

 

25,329

 

16,476

 

Retainage

 

1,862

 

1,572

 

Payable for ammonia purchase

 

12,207

 

6,988

 

Derivative liabilities

 

11,855

 

7,187

 

Unearned revenue

 

10,678

 

1,439

 

Margin deposits

 

4,894

 

 

Other

 

20,191

 

12,093

 

Total

 

$

118,082

 

$

72,672

 

 

6.     DEBT AND CREDIT FACILITIES

 

Long-term debt consists of the following:

 

 

 

June 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

 

157,000

 

 

Less: Unamortized discount

 

(3,844

)

(2,117

)

Adjustment to fair value associated with hedge of fair value

 

1,177

 

1,294

 

 

 

$

1,304,333

 

$

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 $1,346.0 million at June 30, 2008 and $828.7 million at December 31, 2007.  The values at June 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 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 the 6.05% Notes.

 

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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 June 30, 2008, Buckeye had $157.0 million in borrowings outstanding under the Credit Facility.  At December 31, 2007, Buckeye did not have any amounts outstanding under the Credit Facility.  At June 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, 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 June 30, 2008, Buckeye’s Funded Debt Ratio was 4.28 to 1.00.  As provided for in the Credit Facility, the entire balance of Farm & Home’s line of credit, or $72.7 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 June 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 which permits Farm & Home and its wholly owned subsidiary, Buckeye Energy Services LLC (“BES”), to incur up to $250.0 million of secured indebtedness related to working capital financing.  The Credit Facility, as amended, 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.

 

Buckeye Energy Services Credit Agreement

 

On May 20, 2008, Farm & Home and BES (the “Borrowers”) entered into a Credit Agreement (the “BES Credit Agreement”) with BNP Paribas, as Administrative Agent, Collateral Agent, and Lead Arranger and, on July 18, 2008, amended the BES Credit Agreement.  The BES Credit Agreement, as amended, provides for borrowings of up to $160.0 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 the Borrowers’ 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 the Borrowers, including their

 

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inventory, cash deposits (other than certain accounts), investments and hedging accounts, receivables and intangibles.

 

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

 

The balance outstanding under the BES Credit Agreement was approximately $72.7 million at June 30, 2008, all of which was classified as a current liability.  The BES Credit Agreement requires the Borrowers to meet certain financial covenants, which are summarized below:

 

 

 

Minimum

 

Minimum

 

Maximum

 

Maximum

 

Consolidated Tangible

 

Consolidated Net

 

Consolidated

 

Sub-Limit

 

Net Worth

 

Working Capital

 

Leverage Ratio

 

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 June 30, 2008, the Borrowers’ Consolidated Tangible Net Worth (as defined in the BES Credit Agreement) and Consolidated Net Working Capital (as defined in the BES Credit Agreement) were $85.9 million and $51.1 million, respectively, and the Maximum Consolidated Leverage Ratio (as defined in the BES Credit Agreement) was 1.53 to 1.0.

 

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

 

7.  DERIVATIVES

 

Commodity Derivatives

 

The Energy Services segment primarily uses exchange-traded petroleum futures contracts to manage the risk of market price volatility on its petroleum product inventories and its fixed price sales contracts. The derivative contracts used to hedge 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 sales contracts are all marked-to-market on the balance sheet with gains and losses being recognized in earnings during the period.

 

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

 

 

 

2008

 

 

 

(In thousands)

 

Asset:

 

 

 

Futures contracts

 

$

9,943

 

 

 

 

 

Total

 

$

9,943

 

 

 

 

 

Liabilities:

 

 

 

Fixed price sales contracts

 

$

(10,568

)

Inventory hedges

 

(1,287

)

 

 

 

 

Total

 

$

(11,855

)

 

Substantially all of the liability noted above for unrealized losses of $1.3 million related to inventory hedges will be realized in the third quarter of 2008 as the related inventory is sold.  Gains recorded in the second quarter on inventory hedges that were ineffective were approximately $0.2 million.  As of June 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 $0.4 million for the three and six months ended June 30, 2008, respectively, as a result of the amortization of the termination payment.

 

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:

 

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 June 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:

 

 

 

 

 

 

 

Futures contracts

 

$

9,943

 

$

 

$

 

Asset held in trust

 

3,609

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Fixed price sales contracts

 

 

 

(10,568

)

 

Inventory hedges

 

(1,287

)

 

 

 

 

Total

 

$

12,265

 

$

(10,568

)

$

 

 

The value of the Level 1 futures contracts and the inventory hedges 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 contract liability was based on observable market data related to the obligation to provide petroleum products.

 

9. 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 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 16 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 six months ended June 30, 2008 and 2007:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

(In thousands)

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average units oustanding

 

48,368

 

41,201

 

47,116

 

40,579

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average units oustanding

 

48,368

 

41,201

 

47,116

 

40,579

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of unit options granted

 

26

 

52

 

28

 

55

 

 

 

48,394

 

41,253

 

47,144

 

40,634

 

 

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10.  ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Accumulated Other Comprehensive (Loss) Income:

 

 

 

 

 

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

 

$

(53

)

$

(53

)

Buckeye’s terminated interest rate swaps

 

(9,199

)

(7,187

)

Accumulated amortization of RIGP and Retiree Medical Plan

 

(3,481

)

(1,929

)

Total

 

$

(12,733

)

$

(9,169

)

 

11.  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 July 29, 2008, Buckeye declared a cash distribution of $0.8625 per LP Unit payable on August 29, 2008 to unitholders of record on August 8, 2008. The total cash distribution to unitholders will amount to approximately $51.9 million, which includes an incentive distribution of approximately $10.0 million payable to Buckeye GP.

 

12. 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 $25.0 million and $20.9 million for the three months ended June 30, 2008 and 2007, respectively, and $49.9 million and $45.8 million for the six months ended June 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 Buckeye Pipe Line Services Company Employee Stock Ownership Plan (the “ESOP”), owned 2.2 million LP Units, or approximately 4.5% of the LP Units outstanding, as of June 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 June 30, 2008 and 2007, and $3.7 million for the six months ended June 30, 2008 and 2007. For the six months ended June 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 June 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 June 30, 2008 and 2007, respectively, and $0.9 million for the six months ended June 30,

 

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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 $9.7 million and $7.3 million for the three months ended June 30, 2008 and 2007, respectively, and $18.7 million and $14.1 million for the six months ended June 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.  An affiliate of Lehman Brothers also is a customer of Lodi Gas.

 

13. 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 six months ended June 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 six months ended June 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

$

158

 

$

69

 

$

211

 

$

172

 

General and adminstrative expenses

 

35

 

20

 

63

 

50

 

Total unit-based compensation expenses

 

$

193

 

$

89

 

$

274

 

$

222

 

 

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 six months ended June 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.

 

The following table summarizes employee unit option activity for the six months ended June 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

 

(7,900

)

35.20

 

 

 

 

 

Forfeited, cancelled or expired

 

 

 

 

 

 

 

 

Outstanding, June 30, 2008

 

467,700

 

$

46.12

 

7.7

 

$

(1,556,258

)

Exercisable, June 30, 2008

 

151,100

 

$

41.20

 

5.3

 

$

237,044

 

 

As of January 1, 2008, there were 234,800 unvested options outstanding.  During the first six months of 2008, 56,700 options vested.  The aggregate intrinsic value in the preceding table represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on June 30, 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 second 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 six months ended June 30, 2008 was $89,000.

 

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The total number of in-the-money options exercisable as of June 30, 2008 was 96,200.  As of June 30, 2008, total unrecognized compensation cost related to unvested options was $589,000. The cost is expected to be recognized over a weighted average period of 0.7 years.  At June 30, 2008, 338,000 LP Units were available for grant under with the Option Plan.

 

14. 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 June 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 June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

352

 

$

248

 

$

233

 

$

100

 

Interest cost

 

478

 

252

 

694

 

508

 

Expected return on plan assets

 

(468

)

(205

)

 

 

Amortization of prior service benefit

 

(218

)

(114

)

(1,124

)

(860

)

Amortization of unrecognized losses

 

155

 

144

 

410

 

381

 

Net periodic benefit costs

 

$

299

 

$

325

 

$

213

 

$

129

 

 

For the six months ended June 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:

 

 

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

705

 

$

495

 

$

465

 

$

200

 

Interest cost

 

956

 

505

 

1,387

 

1,016

 

Expected return on plan assets

 

(936

)

(410

)

 

 

Amortization of prior service benefit

 

(436

)

(227

)

(2,248

)

(1,719

)

Amortization of unrecognized losses

 

311

 

287

 

821

 

762

 

Net periodic benefit costs

 

$

600

 

$

650

 

$

425

 

$

259

 

 

A minimum funding contribution is not required to be made to the RIGP during 2008.  However, Buckeye has contributed $0.6 million to the RIGP voluntarily in 2008.

 

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15.  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 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 17 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 55 refined petroleum products terminals with aggregate storage capacity of approximately 21.4 million barrels in ten states.

 

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 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’s revenues consist of lease revenues and hub services revenues.  Lease revenues 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 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. Loan 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 also has five terminals with aggregate storage capacity of approximately 1.0 million barrels.  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 2,200 miles of third-party pipeline systems, which are owned primarily by major oil and chemical companies and are located primarily 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.

 

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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.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

98,887

 

$

92,427

 

$

195,277

 

$

186,178

 

Terminalling and Storage

 

27,114

 

23,948

 

54,746

 

47,536

 

Natural Gas Storage

 

15,186

 

 

26,650

 

 

Energy Services

 

347,768

 

 

582,315

 

 

Other Operations

 

10,757

 

8,576

 

21,626

 

16,181

 

Intersegment eliminations

 

(7,164

)

 

(7,790

)

 

Total

 

$

492,548

 

$

124,951

 

$

872,824

 

$

249,895

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

38,953

 

$

35,046

 

$

75,641

 

$

72,956

 

Terminalling and Storage

 

10,297

 

8,773