UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2008 or

 

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

 

For the transition period from                                to

 

Commission file number 001-32963

 

BUCKEYE GP HOLDINGS L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

11-3776228

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

Five TEK Park

 

 

9999 Hamilton Boulevard

 

 

Breinigsville, PA

 

18031

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Not Applicable

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

 

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

Yes   x      No  o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

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

 

As of May 5, 2008, there were 27,769,647 Common Units and 530,353 Management Units outstanding.

 

 



 

BUCKEYE GP HOLDINGS L.P.

INDEX

 

Page

PART I- FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

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

1

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

PART II- OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

Item 6.

Exhibits

41

 



 

PART I - FINANCIAL INFORMATION

 

Item1. Condensed Consolidated Financial Statements

 

 

Buckeye GP Holdings L.P.

Condensed Consolidated Statements of Income

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

Revenues:

 

 

 

 

 

Product sales

 

$

241,046

 

$

4,915

 

Transportation and other

 

139,229

 

120,029

 

Total revenue

 

380,275

 

124,944

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of product sales

 

236,611

 

4,844

 

Operating expenses

 

66,291

 

55,455

 

Depreciation and amortization

 

11,383

 

9,707

 

General and administrative

 

9,896

 

6,304

 

Total costs and expenses

 

324,181

 

76,310

 

 

 

 

 

 

 

Operating income

 

56,094

 

48,634

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Investment income

 

614

 

300

 

Interest and debt expense

 

(18,178

)

(13,876

)

 

 

 

 

 

 

Total other (expense)

 

(17,564

)

(13,576

)

 

 

 

 

 

 

Income before equity income and non-controlling interest expense

 

38,530

 

35,058

 

 

 

 

 

 

 

Equity income

 

2,055

 

1,786

 

Non-controlling interest expense

 

(34,736

)

(30,905

)

 

 

 

 

 

 

Net income

 

$

5,849

 

$

5,939

 

 

 

 

 

 

 

Net income per partnership unit:

 

 

 

 

 

Basic

 

$

0.21

 

$

0.21

 

Diluted

 

$

0.21

 

$

0.21

 

 

 

 

 

 

 

Weighted average number of units outstanding:

 

 

 

 

 

Basic

 

28,300

 

27,891

 

Diluted

 

28,300

 

28,300

 

 

See Notes to condensed consolidated financial statements.

 

1



 

 Buckeye GP Holdings L.P.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

30,698

 

$

94,486

 

Trade receivables

 

114,880

 

47,598

 

Construction and pipeline relocation receivables

 

9,755

 

12,571

 

Inventories

 

102,664

 

15,149

 

Prepaid and other current assets

 

45,087

 

32,708

 

Assets held for sale

 

51,572

 

 

Total current assets

 

354,656

 

202,512

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,136,588

 

1,806,720

 

 

 

 

 

 

 

Goodwill

 

451,135

 

234,603

 

Other non-current assets

 

112,438

 

110,491

 

Total assets

 

$

3,054,817

 

$

2,354,326

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

96,772

 

$

 

Current portion of long-term debt

 

6,381

 

6,289

 

Accounts payable

 

52,862

 

20,368

 

Accrued and other current liabilities

 

99,507

 

78,902

 

Liabilities of assets held for sale

 

648

 

 

Total current liabilities

 

256,170

 

105,559

 

 

 

 

 

 

 

Long-term debt

 

1,299,682

 

863,174

 

Other non-current liabilities

 

84,070

 

81,120

 

Non-controlling interest

 

1,178,217

 

1,066,143

 

Total liabilities

 

2,818,139

 

2,115,996

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

General Partner- Common Units

 

7

 

7

 

Limited Partners- Common Units

 

231,099

 

232,928

 

Management Units

 

3,121

 

3,156

 

Equity gains on issuance of

 

 

 

 

 

Buckeye Partners, L.P. limited partnership units

 

2,451

 

2,239

 

Total partners’ capital

 

236,678

 

238,330

 

Total liabilities and partners’ capital

 

$

3,054,817

 

$

2,354,326

 

 

See Notes to condensed consolidated financial statements.

 

2



 

Buckeye GP Holdings L.P.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Threee Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

5,849

 

$

5,939

 

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

 

 

 

 

 

Non-cash expense for unit-based compensation

 

353

 

127

 

Value of ESOP shares released

 

817

 

1,148

 

Depreciation and amortization

 

11,383

 

9,707

 

Non-controlling interest

 

34,736

 

30,905

 

Equity earnings from equity investments of Buckeye Partners, L.P.

 

(2,055

)

(1,786

)

Distributions from equity investments of Buckeye Partners, L.P.

 

500

 

1,276

 

Amortization of debt discount

 

245

 

12

 

Amortization of option grants

 

81

 

134

 

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

 

 

 

 

 

Trade receivables

 

58

 

10,478

 

Construction and pipeline relocation receivables

 

2,816

 

3,130

 

Inventories

 

5,041

 

(214

)

Prepaid and other current assets

 

(5,104

)

816

 

Accounts payable

 

1,397

 

(11,126

)

Accrued and other current liabilities

 

1,619

 

(2,827

)

Other non-current assets

 

2,774

 

157

 

Other non-current liabilities

 

(427

)

297

 

Total adjustments from operating activities

 

54,234

 

42,234

 

Net cash provided by operations

 

60,083

 

48,173

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(14,792

)

(17,373

)

Acquisitions and equity investments

 

(600,309

)

(38,468

)

Net expenditures for disposal of property, plant and equipment

 

(33

)

(72

)

Net cash used in investing activities

 

(615,134

)

(55,913

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Debt issuance costs

 

(351

)

 

Net proceeds from issuance of Buckeye Partners, L.P. limited partnership units

 

113,259

 

82,404

 

Proceeds from exercise of Buckeye Partners, L.P. unit options

 

 

1,016

 

Distributions to non-controlling partners of Buckeye Partners, L.P.

 

(37,267

)

(29,778

)

Repayment of short-term debt

 

(3,229

)

 

Proceeds from issuance of long-term debt

 

576,050

 

70,600

 

Repayment of long-term debt

 

(139,495

)

(107,121

)

Settlement of hedge

 

(9,638

)

 

Distributions to Limited Partners

 

(8,066

)

(6,368

)

Net cash provided by financing activities

 

491,263

 

10,753

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(63,788

)

3,013

 

Cash and cash equivalents —Beginning of year

 

94,486

 

20,220

 

Cash and cash equivalents—End of period

 

$

30,698

 

$

23,233

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid during the period for interest (net of amount capitalized)

 

$

17,770

 

$

17,470

 

Capitalized interest

 

$

336

 

$

415

 

Cash paid during the period for income tax

 

$

180

 

$

332

 

 

 

 

 

 

 

Non-cash changes in assets and liabilities:

 

 

 

 

 

Equity gains on issuance of Buckeye Partners, L.P. units

 

$

212

 

$

235

 

Hedge accounting

 

$

1,043

 

$

(59

)

 

See Notes to condensed consolidated financial statements.

 

3



 

Buckeye GP Holdings L.P.

Condensed Consolidated Statement of Partners’ Capital

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

Gains on

 

 

 

 

 

General

 

Limited

 

 

 

Issuance of

 

 

 

 

 

Partner

 

Partners

 

 

 

Buckeye

 

 

 

 

 

Common

 

Common

 

Management

 

Partners, L.P.

 

 

 

 

 

Units

 

Units

 

Units

 

Units

 

Total

 

Partners’ capital- January 1, 2008

 

$

7

 

$

232,928

 

$

3,156

 

$

2,239

 

$

238,330

 

Net income*

 

 

5,739

 

110

 

 

5,849

 

Distributions to Limited Partner - Common Units

 

 

(7,915

)

(151

)

 

(8,066

)

Recognition of unit-based compensation charges

 

 

347

 

6

 

 

353

 

Equity gains on issuance of Buckeye Partners, L.P. units

 

 

 

 

212

 

212

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital- March 31, 2008

 

$

7

 

$

231,099

 

$

3,121

 

$

2,451

 

$

236,678

 

 


* Comprehensive income equals net income.

 

See Notes to condensed consolidated financial statements.

 

4



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.               BASIS OF PRESENTATION

 

Buckeye GP Holdings L.P. (“BGH”) is a publicly traded (NYSE: BGH) master limited partnership organized on June 15, 2006 under the laws of the state of Delaware.  BGH owns 100% of Buckeye GP LLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”).  Buckeye is also a publicly traded (NYSE: BPL) master limited partnership which was organized in 1986 under the laws of the state of Delaware.  BGH’s limited partner units are owned approximately 62% by BGH GP Holdings, LLC (“BGH GP”), approximately 1% by certain members of senior management and approximately 37% by the public.  BGH GP is owned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”), Lehman Brothers Holdings Inc. (“Lehman Brothers”), and certain members of senior management.  MainLine Management LLC, a Delaware limited liability company (“MainLine Management”), is the general partner of BGH, and is wholly owned by BGH GP.  BGH’s only business is the ownership of Buckeye GP.  Buckeye GP’s only business is the management of Buckeye and its subsidiaries.  At March 31, 2008, Buckeye GP owned an approximate 0.5% general partner interest in Buckeye.

 

Buckeye owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, with approximately 5,400 miles of pipeline serving 16 states, and operates an approximate 2,700 miles of pipeline under agreements with major oil and chemical companies. Buckeye also owns over 60 refined petroleum products terminals with aggregate storage capacity of approximately 22.6 million barrels in 12 states. Through its acquisitions of Lodi Gas Storage, L.L.C. (“Lodi Gas”) and Farm & Home Oil Company LLC (“Farm & Home”) in the first quarter of 2008, Buckeye added a major natural gas storage facility and a refined petroleum products marketing operation to its business.

 

Lodi Gas owns and operates two natural gas storage facilities near Lodi, California.  Together, these facilities provide approximately 22 billion cubic feet (“bcf”) of working gas capacity and are connected to Pacific Gas and Electric’s intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas (see Note 3 for a further discussion).  A substantial portion of Lodi Gas’ is revenues are generated by fee-based storage contracts.

 

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 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).

 

The majority of the employees who provide services to BGH, Buckeye and its subsidiaries are employed by Buckeye Pipe Line Services Company (“Services Company”). Services Company is reimbursed by BGH or Buckeye’s subsidiaries for the cost of the employees who provide those services.  BGH is responsible for the total compensation, including benefits, paid to the four highest salaried officers performing duties for Buckeye GP with respect to the functions of operations, finance, legal, marketing, business development, treasury, or performing the function of president of Buckeye GP.  Buckeye is generally responsible for all other employee costs.  Services Company is owned by an employee stock ownership plan (the “ESOP”). Services Company owned approximately 4.5% of the publicly traded limited partner units of Buckeye (the “LP Units”) at March 31, 2008.

 

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

 

5



 

In June 2005, the Emerging Issues Task Force (the “EITF”) of the Financial Accounting Standards Board (“FASB”) issued EITF Consensus 04-05 which requires general partners of a limited partnership to consolidate the limited partnership if the general partner is deemed to control the limited partnership. Using criteria established in EITF Consensus 04-05, BGH has determined that consolidation of Buckeye into BGH’s financial statements is appropriate.

 

BGH has determined that Services Company is a variable interest entity under the provisions of FASB Interpretation No. 46R — Consolidation of Variable Interest Entities (“FIN No. 46R”). Using criteria established in FIN No. 46R, BGH has determined that Buckeye GP is the primary beneficiary of Services Company, although 100% of the equity interest of Services Company is owned by the ESOP. Accordingly, as required by FIN No. 46R, Services Company has been consolidated in the financial statements of BGH.

 

BGH’s condensed consolidated balance sheet includes a non-controlling interest liability that reflects the portion of Buckeye owned by its partners other than BGH and Services Company.  Similarly, BGH’s condensed consolidated income statements include non-controlling interest expense that reflects the portion of the earnings due to Buckeye’s partners other than BGH and Services Company.

 

In the opinion of management, the condensed consolidated financial statements of BGH, 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 BGH’s financial position as of March 31, 2008, along with the results of operations for the three months ended March 31, 2008 and 2007 and cash flows for the three months ended March 31, 2008 and 2007.  The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

 

Certain prior year amounts for product sales and the cost of product sales have been reclassified in the income statement 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 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 BGH and the notes thereto for the year ended December 31, 2007 contained in BGH’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 14, 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.

 

6



 

Environmental Contingencies

 

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

 

3.               BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS

 

Lodi Gas

 

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

 

Contractual purchase price

 

$

440,000

 

Preliminary working capital adjustment

 

4,262

 

Transaction fees

 

2,794

 

 

 

 

 

Total cash purchase price

 

$

447,056

 

 

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

 

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

 

 

 

January 18,

 

 

 

2008

 

Cash

 

$

2,516

 

Other current assets

 

2,326

 

Property, plant and equipment

 

282,709

 

Goodwill

 

170,754

 

Current liabilities

 

(9,426

)

Other liabilities

 

(1,823

)

 

 

 

 

Allocated purchase price

 

$

447,056

 

 

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

 

Farm & Home

 

On February 8, 2008, Buckeye acquired all of the member interests of Farm & Home for $145.5 million in cash.  Buckeye acquired Farm & Home because Buckeye’s management believes that the wholesale distribution operations of Farm & Home represent an attractive opportunity to further Buckeye’s strategy of improving overall profitability by

 

7



 

increasing the utilization of Buckeye’s existing pipeline and terminal system infrastructure.  Buckeye has determined that the acquisition represented a business combination under the provisions of SFAS No. 141.  The application of SFAS No. 141 requires that the total purchase price be allocated to the fair value of the assets acquired and the liabilities assumed based on their fair values at the acquisition date, with amounts exceeding the fair values being recorded as goodwill.  The purchase price has been allocated, on a preliminary basis, to the tangible and intangible assets acquired, including goodwill, as follows (in thousands):

 

 

 

February 8,

 

 

 

2008

 

Cash

 

$

2,816

 

Trade receivables

 

75,025

 

Inventory

 

94,113

 

Prepaid and other current assets

 

6,214

 

Property, plant and equipment

 

50,770

 

Goodwill

 

64,378

 

Other non-current assets

 

3,297

 

Debt

 

(100,000

)

Accounts payable

 

(31,097

)

Accrued expenses

 

(19,711

)

 

 

 

 

Allocated purchase price

 

$

145,805

 

 

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

 

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

 

 

 

March 31,

 

 

 

2008

 

Assets held for sale:

 

 

 

Trade receivables

 

$

9,035

 

Inventory

 

2,978

 

Prepaid and other current assets

 

58

 

Property, plant and equipment

 

20,901

 

Goodwill

 

18,600

 

Total discontinued assets

 

$

51,572

 

 

 

 

 

Liabilities of assets held for sale:

 

 

 

Obligations under contracts

 

$

(648

)

 

Revenues and net income from the retail operations for the period February 8 to March 31, 2008 were $15.6 million and $1.4 million, respectively.

 

8



 

Due to the immaterial effect that Buckeye’s discontinued operations had with respect to BGH’s results of operations, the results from Buckeye’s discontinued operations were recorded in non-controlling interest expense in BGH’s condensed consolidated statement of income for the period ending March 31, 2008.

 

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

 

 

 

(Unaudited)

 

 

 

March 31,

 

 

 

2008

 

2007

 

Revenues:

 

 

 

 

 

As reported

 

$

380,275

 

$

124,944

 

Pro forma adjustments

 

174,723

 

317,126

 

 

 

 

 

 

 

Pro forma revenue

 

$

554,998

 

$

442,070

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

As reported

 

$

5,849

 

$

5,939

 

Pro forma adjustments

 

(874

)

868

 

 

 

 

 

 

 

Pro forma net income

 

$

4,975

 

$

6,807

 

 

 

 

 

 

 

Pro forma net income per unit:

 

 

 

 

 

Basic

 

$

0.18

 

$

0.24

 

Diluted

 

$

0.18

 

$

0.24

 

 

 

 

 

 

 

Pro forma weighted average number of units oustanding:

 

 

 

 

 

Basic

 

28,300

 

27,891

 

Diluted

 

28,300

 

28,300

 

 

Asset acquisition

 

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

 

9



 

 

 

February 19,

 

 

 

2008

 

Land

 

$

1,119

 

Buildings

 

2,233

 

Machinery, equipment, and office furnishings

 

10,502

 

Total

 

$

13,854

 

 

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

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Prepaid insurance

 

$

5,016

 

$

7,456

 

Insurance receivables

 

8,503

 

7,707

 

Ammonia receivable

 

11,055

 

7,505

 

Derivative asset

 

3,614

 

 

Other

 

16,899

 

10,040

 

Total

 

$

45,087

 

$

32,708

 

 

5.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Taxes - other than income

 

$

15,735

 

$

8,026

 

Accrued employee benefit liability

 

2,183

 

2,183

 

Environmental liabilities

 

8,671

 

8,023

 

Interest

 

16,850

 

16,485

 

Retainage

 

1,805

 

1,572

 

Payable for ammonia purchase

 

11,259

 

6,988

 

Compensation and vacation

 

9,893

 

11,939

 

Hedge liabilities

 

557

 

7,187

 

Unearned revenue

 

4,943

 

1,439

 

Other

 

27,611

 

15,060

 

Total

 

$

99,507

 

$

78,902

 

 

10



 

6. DEBT AND CREDIT FACILITIES

 

Long- term debt consists of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

BGH:

 

 

 

 

 

Revolving Line of Credit

 

$

 

$

 

Services Company:

 

 

 

 

 

3.60% ESOP Notes due March 28, 2011

 

19,236

 

20,804

 

Retirement premium

 

(445

)

(518

)

Buckeye:

 

 

 

 

 

4.625% Notes due July 15, 2013

 

300,000

 

300,000

 

6.750% Notes due August 15, 2033

 

150,000

 

150,000

 

5.300% Notes due October 15, 2014

 

275,000

 

275,000

 

5.125% Notes due July 1, 2017

 

125,000

 

125,000

 

6.050% Notes due January 15, 2018

 

300,000

 

 

Borrowings under Revolving Credit Facility

 

140,000

 

 

Total

 

1,308,791

 

870,286

 

Other, including unamortized discounts and fair value hedges (1)

 

(2,728

)

(823

)

Subtotal

 

1,306,063

 

869,463

 

Less: current maturities

 

(6,381

)

(6,289

)

Total long-term debt

 

$

1,299,682

 

$

863,174

 

 


(1) The March 31, 2008 and December 31, 2007 amounts include $1.2 million and $1.3 million, respectively, related to an adjustment to fair value associated with a hedge of fair value and ($3.9 million) and ($2.1 million), respectively, in unamortized discounts.

 

The fair value of debt was estimated to be $1,401.5 million at March 31, 2008 and $848.8 million at December 31, 2007.  The value of the consolidated debt was calculated using interest rates currently available to BGH, Buckeye, and Services Company for the issuance of debt with similar terms and remaining maturities and approximate market values on the respective dates.

 

BGH

 

BGH is a party to a five-year, $10.0 million unsecured revolving credit facility with SunTrust Bank, as both administrative agent and lender (the “BGH Credit Agreement”). The revolving credit facility may be used for working capital and other partnership purposes. BGH has pledged all of the limited liability company interests in Buckeye GP as security for its obligations under the BGH Credit Agreement.   Borrowings under the BGH Credit Agreement bear interest under one of two rate options, selected by BGH, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime commercial lending rate; or (ii) the London Interbank Official Rate (“LIBOR”), plus a margin which can range from 0.40% to 1.40%, based on the ratings assigned by Standard & Poor’s Rating Services and Moody’s Investor Services to the senior unsecured non-credit enhanced long-term debt of Buckeye.  BGH did not have amounts outstanding under the BGH Credit Agreement at March 31, 2008 or December 31, 2007.

 

The BGH Credit Agreement requires BGH to maintain leverage and funded debt coverage ratios. The leverage ratio covenant requires BGH to maintain, as of the last day of each fiscal quarter, a ratio of the total funded indebtedness of BGH and its Restricted Subsidiaries (as defined below), measured as of the last day of each fiscal quarter, to the aggregate dividends and distributions received by BGH and its Restricted Subsidiaries from Buckeye, plus all other cash received by BGH and the Restricted Subsidiaries, measured for the preceding twelve months, less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “Restricted Subsidiaries” as certain of BGH’s wholly owned subsidiaries.  The funded debt coverage ratio covenant requires BGH to maintain, as of the last day of each fiscal quarter, a ratio of total consolidated funded debt of BGH and all of its subsidiaries to consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as defined in the

 

11



 

BGH Credit Agreement, of BGH and all of its subsidiaries, measured for the preceding twelve months, of not more than 5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 in connection with future acquisitions. At March 31, 2008, BGH’s funded debt coverage ratio was 4.6 to 1.00.

 

The BGH Credit Agreement contains other covenants that prohibit BGH from taking certain actions including, but not limited to, declaring dividends or distributions if any default or event of default has occurred or would result from such a declaration and limiting BGH’s ability to incur additional indebtedness, creating negative pledges and granting certain liens, making certain loans, acquisitions and investments, making material changes to the nature of BGH and its Restricted Subsidiaries’ business, and entering into a merger, consolidation, or sale of assets.  At March 31, 2008, BGH was in compliance with the covenants under the BGH Credit Agreement.

 

Services Company

 

Services Company had total debt outstanding of $18.8 million and $20.3 million at March 31, 2008 and December 31, 2007, respectively, consisting of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-party lender. The 3.60% ESOP Notes were issued on May 4, 2004.  The 3.60% ESOP Notes are collateralized by Services Company’s common stock and are guaranteed by Services Company. In addition, Buckeye has committed that, in the event that the value of the LP Units owned by Services Company falls below 125% of the balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficient assets to bring the value of the total collateral (the value of the LP Units owned by Services Company and the escrow account) up to the 125% minimum. Amounts deposited in the escrow account are returned to Buckeye when the value of the LP Units owned by Services Company returns to an amount that exceeds the 125% minimum. At March 31, 2008, the value of the LP Units owned by Services Company exceeded the 125% requirement.

 

Buckeye

 

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

 

As with all of Buckeye’s notes set forth above, Buckeye makes semi-annual interest payments with the principal balances outstanding to be paid on or before the due dates as shown above.

 

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) LIBOR plus an applicable margin. The applicable margin is determined based on the current utilization level of the Credit Facility and ratings assigned by Standard & Poor’s and Moody’s Investor Services for Buckeye’s senior unsecured non-credit enhanced long-term debt.  At March 31, 2008, Buckeye had $140.0 million in borrowings outstanding under the Credit Facility.  At December 31, 2007, Buckeye did not have any amounts outstanding under the Credit Facility.  At March 31, 2008 and December 31, 2007, Buckeye had committed $1.3 million and $1.5 million in support of letters of credit, respectively.  The obligations for letters of credit are not reflected as debt on Buckeye’s consolidated balance sheet.

 

The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to 1.00 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA as defined in the Credit Facility.  As discussed below, the Credit Facility was amended in January 2008.

 

12



 

The Credit Facility defines EBITDA as earnings before interest, taxes, depreciation, depletion and amortization, in each case excluding the income of certain majority-owned subsidiaries and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).  At March 31, 2008, Buckeye’s Funded Debt Ratio was 4.20 to 1.00.  As provided for in the Credit Facility, the entire balance of Farm & Home’s line of credit, or $96.8 million, was excluded from the calculation of consolidated debt and the Funded Debt Ratio.

 

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

 

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

 

Farm & Home Line of Credit

 

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

 

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

 

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

 

13



 

7.  DERIVATIVES

 

Energy Services Derivatives

 

Buckeye uses petroleum derivative contracts with respect to the operations of Farm & Home to manage the effect of changing market prices on future inventory purchases required to meet future fixed price sales commitments (“Firm Commitments”) and on future sales of products held in inventory (“Spot Inventory”).  All of Buckeye’s petroleum derivative contracts are entered into for hedging purposes; that is, they are specifically matched in volume and maturity with the various sales commitments of the business.  Derivative contracts entered to hedge Firm Commitments are classified as Cash Flow Hedges.  Derivative contracts entered into to hedge firm commitments on Spot Inventory positions are classified as Fair Value Hedges.  Gains and losses on petroleum derivative contracts are recognized in earnings in the cost of product sales as product is delivered or commitments are performed under fixed price contracts.

 

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

 

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

 

 

 

March 31,

 

 

 

2008

 

 

 

(In thousands)

 

Petroleum derivatives used as Cash Flow Hedges

 

$

2,839

 

Petroleum derivatives used as Fair Value Hedges

 

775

 

Total

 

$

3,614

 

 

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

 

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

 

Finance Derivatives

 

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

 

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

 

14



 

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.  BGH 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.

 

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

 

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

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Significant

 

Significant

 

 

 

Quoted Prices

 

Other Observable

 

Unobservable

 

 

 

in Active Markets

 

Inputs

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

Derivative assets

 

$

3,614

 

$

 

$

 

Total

 

$

3,614

 

$

 

$

 

 

BGH has determined that its assets subject to SFAS No. 157 are all “level one inputs”. The value of the derivative assets shown above was determined by obtaining the prices of the underlying contracts as traded on the New York Mercantile Exchange.

 

15



 

9.  EARNINGS PER UNIT

 

The following table is a reconciliation of the weighted average number of units used in the basic and diluted earnings per unit calculations (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Average common units outstanding

 

27,770

 

26,938

 

Average management units outstanding

 

530

 

953

 

 

 

 

 

 

 

Average units for basic

 

28,300

 

27,891

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Units used for basic calculation

 

28,300

 

27,891

 

Dilutive effect of additional management units

 

 

409

 

 

 

 

 

 

 

Average units for diluted

 

28,300

 

28,300

 

 

10. CASH DISTRIBUTIONS

 

BGH 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 MainLine Management deems appropriate.

 

On April 29, 2008, MainLine Management declared a quarterly cash distribution of $0.30 per unit payable on May 30, 2008 to unitholders of record on May 9, 2008.  The total cash distribution to BGH unitholders will be approximately $8.5 million.

 

11. UNIT-BASED COMPENSATION

 

BGH GP Override Units

 

Effective on June 25, 2007, BGH GP instituted an equity incentive plan for certain members of senior management of BGH GP and BGH.  This equity incentive plan includes both time-based and performance-based participation in the equity of BGH GP (but not in BGH) referred to as “Override Units”.  BGH determined that, under the requirements of  provisions of Statement of Financial Accounting Standards 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), BGH is required to reflect, as a compensation charge and corresponding contribution to common unitholders’ equity, the fair value of this compensation.  BGH GP determined that the estimated fair value of such compensation for the three months ended March 31, 2008 was $0.4 million, and has recorded such amount as compensation expense and a capital contribution for the quarter ended March 31, 2008. BGH is not a party to this plan and has no liabilities with respect to it.

 

16



 

 

The Override Units consist of three equal tranches of units: Value A Units; Value B Units; and Operating Units. The Override Units are subject to vesting restrictions and conditions precedent to participation in distributions which restrictions and conditions may be waived by the Board of BGH GP. In addition, the Override Units are subject to forfeiture if a grantee resigns or is terminated for cause.

 

The following is a summary of the activity of the Override Units as of March 31, 2008 (in thousands except per unit amounts):

 

 

 

Override Units

 

Total
Number of

 

 

 

Value A
Units

 

Value B
Units

 

Operating
Units

 

Units
Awarded

 

Available for grant at January 1, 2008

 

744

 

744

 

744

 

2,232

 

Granted

 

(298

)

(298

)

(298

)

(894

)

Vested

 

 

 

 

 

Forfeited or cancelled

 

 

 

 

 

Available for grant at March 31, 2008

 

446

 

446

 

446

 

1,338

 

 

 

 

Compensation Cost for Override Units

 

 

 

 

 

Value A
Units

 

Value B
Units

 

Operating
Units

 

Totals

 

Total fair value of outstanding grants

 

$

3,476

 

$

1,965

 

$

5,742

 

$

11,183

 

Less: Expense recorded from plan inception to March 31, 2008

 

 

 

943

 

943

 

Potential future compensation costs at March 31, 2008

 

$

3,476

 

$

1,965

 

$

4,799

 

$

10,240

 

 


 

 

Value A

 

Value B

 

Operating

 

 

 

Fair Value per unit

 

$

2.07

 

$

1.17

 

$

3.42

 

 

 

 

The Override Units were valued using the Monte Carlo simulation method that incorporated the market-based vesting condition into the grant date fair value of the unit awards as required by SFAS 123R.  The Monte Carlo simulation estimates the future equity value from the time of the valuation date of June 25, 2007 to the exit event using the following assumptions:

 

·                  Current Equity Value of $10.00 per unit or total equity of $439.0 million, based on the initial capital contribution made by the initial equity investors into BGH GP;

 

·                  Expected Life of 5.5 years based on the historical average holding period for similar investments;

 

·                  Risk Free Rate of 4.92% based on the U.S. constant maturity treasury rate for a term corresponding to the expected life of 5.5 years;

 

·                  Volatility of 26%.  Since BGH GP’s primary assets are its ownership interest in BGH, volatility was estimated by using the volatility of BGH, along with comparisons to the 5.5 year equity volatility of other firms in the same industry as Buckeye; and

 

17



 

·                  Dividends of zero were assumed as the likelihood of an interim distribution is not probable due to the rigorous performance criteria.

 

Compensation expense related to the Operating Units of approximately $1.3 million per year will be recognized in 2008, 2009, 2010 and 2011.  The vesting of the Value A and Value B Units is contingent on a performance condition, namely the completion of the exit event as discussed above.  Accordingly, no compensation expense for the Value A and Value B Units will be recorded until an exit event occurs.

 

Buckeye’s Unit Option and Distribution Equivalent Plan

 

Buckeye sponsors a Unit Option and Distribution Equivalent Plan (the “Option Plan”), pursuant to which it grants options to purchase LP Units at 100% of the market price of the LP Units on the date of grant to key employees of Services Company.  The options vest three years from the date of grant and expire ten years from the date of grant. As 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. 123R.  Generally, unit-based compensation expense recognized in the first quarters of 2007 and 2008 is based on the grant date fair value estimated by using the Black-Scholes option pricing model.  Buckeye recognizes compensation expense for awards granted on a straight-line basis over the requisite service period.

 

For the retirement eligibility provisions of the Option Plan, Buckeye follows the non-substantive vesting method and recognizes compensation expense immediately for options granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved. Unit-based compensation expense recognized in earnings for the three months ended March 31, 2008 and 2007 is based upon options ultimately expected to vest. In accordance with SFAS No. 123R, forfeitures have been estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience.

 

The impact of Buckeye’s Option Plan is immaterial to BGH’s consolidated financial statements.

 

BGH Management Units

 

Prior to BGH’s initial public offering of its Common Units on August 9, 2006, the general partner was owned by MainLine, a privately held limited partnership. In May 2004, MainLine instituted a Unit Compensation Plan and issued 16,216,668 Class B Units to certain members of senior management.

 

Coincident with BGH’s initial public offering on August 9, 2006, the equity interests of MainLine were exchanged for the equity interests of BGH.  The Class B Units of MainLine were exchanged for 1,362,000 Management Units of BGH.  Pursuant to the terms of the exchange, 70%, or 953,400 Management Units became vested immediately upon their exchange and the remaining 30%, or 408,600 Management Units, were expected to vest over a three year period. However, coincident with the sale of Carlyle/ Riverstone BPL Holdings II, L.P.’s interests in BGH to BGH GP in June of 2007, all the remaining unvested Management Units became vested and were expensed.  There are no additional Management Units available for issue.  In the first quarter of 2007, BGH expensed approximately $0.1 million related to the Management Units.

 

12. RELATED PARTY TRANSACTIONS

 

Lehman Brothers, which owns an interest in BGH GP, 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.

 

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.

 

18



 

Services Company and Buckeye are considered related parties of BGH.  As discussed in Note 1, the condensed consolidated financial statements for BGH include the accounts of Services Company and Buckeye on a consolidated basis and all intercompany transactions have been eliminated.

 

13.       PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

Services Company, which employs the majority of Buckeye’s workforce, sponsors a retirement income guarantee plan  (the “RIGP”), which is a defined benefit plan, that generally guarantees employees hired before January 1, 1986 a retirement benefit at least equal to the benefit they would have received under a previously terminated defined benefit plan. Services Company’s policy is to fund amounts necessary to meet at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974.

 

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

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

353

 

$

248

 

$

232

 

$

100

 

Interest cost

 

478

 

253

 

694

 

508

 

Expected return on plan assets

 

(468

)

(205

)

 

 

Amortization of prior service benefit

 

(218

)

(114

)

(1,124

)

(860

)

Amortization of unrecognized losses

 

156

 

143

 

410

 

381

 

Net periodic benefit costs

 

$

301

 

$

325

 

$

212

 

$

129

 

 

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

 

14.  SEGMENT INFORMATION

 

With the acquisitions of Lodi Gas and Farm & Home, BGH has two additional reportable segments: Natural Gas Storage and Energy Services.  Based on the financial information provided to senior management, BGH has determined that its operations are appropriately presented in five reportable operating segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.  BGH also has certain consolidated-level assets, principally consisting of goodwill, which are not allocable to the individual reporting segments because they are not used by the chief operating decision maker to make operating decisions or to allocate resources.

 

Pipeline Operations:

 

The Pipeline Operations segment receives petroleum products from refineries, connecting pipelines, and bulk and marine terminals and transports those products to other locations for a fee.  This segment owns and operates approximately 5,400 miles of pipeline systems in 16 states. This segment also has three refined petroleum products terminals with aggregate storage capacity of approximately 0.5 million barrels in three states.

 

19



 

Terminalling and Storage:

 

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

 

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 billion cubic feet of working gas storage capacity and are connected to Pacific Gas and Electric’s intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas. The segment has approximately twenty-five customers.

 

The Natural Gas Storage segment has the following revenue sources:

 

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

 

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

 

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

 

Energy Services:

 

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

 

Other Operations:

 

The Other Operations segment consists primarily of Buckeye’s contract operation of approximately 2,700 miles of third-party pipeline systems, which are owned primarily by major oil and chemical companies and are located in Texas and Louisiana.  This segment also performs pipeline construction management services, typically for cost plus a fixed fee, for these same customers.  The Other Operations segment also includes Buckeye’s ownership and operation of an ammonia pipeline and its majority ownership of the Sabina Pipeline in Texas.

 

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

 

20



 

 

 

Three Months Ended
March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

Pipeline Operations

 

$

96,389

 

$

93,750

 

Terminalling and Storage

 

27,632

 

23,589

 

Natural Gas Storage

 

11,464

 

 

Energy Services

 

234,547

 

 

Other Operations

 

10,869

 

7,605

 

Intersegment

 

(626

)

 

Total

 

$

380,275

 

$

124,944

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

Pipeline Operations

 

$

35,529

 

$

36,988

 

Terminalling and Storage

 

12,585

 

9,625

 

Natural Gas Storage

 

4,744

 

 

Energy Services

 

1,656

 

 

Other Operations

 

1,580

 

2,021

 

Total

 

$

56,094

 

$

48,634

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

Pipeline Operations

 

$

8,423

 

$

7,988

 

Terminalling and Storage

 

1,355

 

1,305

 

Natural Gas Storage

 

954

 

 

Energy Services

 

264

 

 

Other Operations

 

387

 

414

 

Total

 

$

11,383

 

$

9,707

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

Pipeline Operations

 

$

6,820

 

$

15,519

 

Terminalling and Storage

 

2,959

 

840

 

Natural Gas Storage

 

3,249

 

 

Energy Services

 

685

 

 

Other Operations

 

1,079

 

1,014

 

Total

 

$

14,792

 

$

17,373

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

Terminalling and Storage

 

$

13,854

 

$

38,468

 

Natural Gas Storage

 

443,515

 

 

Energy Services

 

142,940

 

 

Total

 

$

600,309

 

$

38,468

 

 

21



 

 

 

Assets

 

Goodwill

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Pipeline Operations*

 

$

1,605,935

 

$

1,673,744

 

$

198,632

 

$

198,632

 

Terminalling and Storage

 

389,214

 

385,446

 

22,789

 

22,789

 

Natural Gas Storage

 

468,718

 

 

170,754

 

 

Energy Services

 

237,239

 

 

45,778

 

 

Other Operations

 

78,282

 

74,462

 

13,182

 

13,182

 

Consolidated- level

 

223,857

 

220,674

 

 

 

Assets held for sale**

 

51,572

 

 

18,600

 

 

Total

 

$

3,054,817

 

$

2,354,326

 

$

469,735

 

$

234,603

 

 


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

** Goodwill in the amount of $18.6 million is included in the assets held for sale on the condensed consolidated balance sheet.

 

15. RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

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

 

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value.   SFAS No. 159 is effective no later than fiscal years beginning after November 15, 2007.  Effective on January 1, 2008, BGH adopted SFAS No. 159 and elected not to apply the fair value option under this standard.  As a result, SFAS No. 159 did not have an impact on BGH’s consolidated financial statements.

 

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

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS No. 141 (R)”) which will be effective for fiscal years beginning after December 15, 2008.  SFAS No. 141 (R) requires an acquiring entity in a business combination to (i) recognize all (and only) the assets acquired and the liabilities assumed in the transaction, (ii) establish an acquisition-date fair value as the measurement objective for all assets acquired and the liabilities assumed, (iii) disclose to investors and other users of the financial statements all of the information they will need to evaluate and understand the nature of, and the financial effect of, the business combination, and (iv) recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase.  BGH currently is assessing the impact the adoption of this pronouncement will have on its consolidated financial statements.

 

22



 

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

 

23



 

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

 

RESULTS OF OPERATIONS

 

Overview

 

The following discussion provides an analysis of the financial condition and results of operations for Buckeye GP Holdings L.P. (“BGH”) and each of BGH’s operating segments, including an overview of BGH’s liquidity and capital resources and other related matters.  The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included in this report and BGH’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

Buckeye GP Holdings L.P.

 

BGH’s limited partner units are owned approximately 62% by BGH GP Holdings, LLC (“BGH GP”), approximately 1% by certain members of senior management and approximately 37% by the public.  BGH owns and controls Buckeye GP LLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”), a publicly traded Delaware limited partnership.  BGH is managed by its general partner, MainLine Management LLC (“MainLine Management”).  BGH’s only cash-generating assets are its partnership interests in Buckeye, comprised primarily of the following:

 

·                  the incentive distribution rights in Buckeye;

 

·                  the general partner interests in Buckeye (representing 243,914 general partner units (the “GP Units”), or an approximate 0.5% interest in  Buckeye);

 

·                  the indirect ownership of the general partner interests in certain of Buckeye’s operating subsidiaries (representing an approximate 1% interest in each of such operating subsidiaries ); and

 

·                  80,000 Buckeye limited partner units (the “LP Units”).

 

The incentive distribution rights noted above entitle BGH to receive amounts equal to specified percentages of the incremental amount of cash distributed by Buckeye to the holders of the LP Units (each, a “unitholder”) when target distribution levels for each quarter are exceeded. The 2,573,146 LP Units originally issued to Buckeye’s Employee Stock Ownership Plan (the “ESOP”) are excluded for the purpose of calculating incentive distributions. The target distribution levels begin at $0.325 and increase in steps to the highest target distribution level of $0.525 per eligible LP Unit. When Buckeye makes quarterly distributions above this level, the incentive distributions include an amount equal to 45% of the incremental cash distributed to each eligible unitholder for the quarter, or approximately 29.5% of total incremental cash distributed by Buckeye above $0.525 per LP Unit.

 

BGH’s earnings and cash flows are, therefore, directly dependent upon the ability of Buckeye and its operating subsidiaries to make cash distributions to Buckeye’s unitholders. The actual amount of cash that Buckeye will have available for distribution will depend primarily on Buckeye’s ability to generate earnings and cash flows beyond its working capital requirements.

 

24



 

The following table summarizes BGH’s cash received for the three months ended March 31, 2008 and 2007 as a result of its partnership interests in Buckeye:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Incentive distributions from Buckeye

 

$

8,926

 

$

6,803

 

Distributions from the ownership of 243,914 of Buckeye’s GP Units

 

204

 

192

 

Distributions from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries

 

125

 

381

 

Distributions from the ownership of 80,000 of Buckeye’s LP Units

 

67

 

63

 

 

 

$

9,322

 

$

7,439

 

 

Buckeye Partners, L.P.

 

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

 

Lodi Gas owns and operates two natural gas storage facilities near Lodi, California.  Together, these facilities provide approximately 22 billion cubic feet of working gas capacity and are connected to Pacific Gas and Electric’s intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas (see Note 3 to the condensed consolidated financial statements for a further discussion).  The Lodi Gas acquisition has allowed Buckeye to expand its operations on the West Coast substantially.  Lodi Gas’ revenues are generated by fee-based storage contracts, the majority of which are comprised of firm storage agreements for specified levels of injection and withdrawal service.  Additional revenues are earned through interruptible services, called hub services, for which Lodi Gas earns fees for storing a customer’s gas or loaning gas to a customer on an interruptible basis around Lodi Gas’s firm storage commitments. Lodi Gas does not take title to the natural gas that it stores.

 

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

 

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

 

25



 

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

 

Results of Operations

 

The results of operations discussed below principally reflect the activities of Buckeye. Since the accompanying condensed consolidated financial statements of BGH include the consolidated results of Buckeye, BGH’s consolidated statements are substantially similar to Buckeye’s except as noted below:

 

·                  Interest of non-controlling partners in Buckeye — BGH’s condensed consolidated balance sheet includes a non-controlling interest liability that reflects the proportion of Buckeye owned by its partners other than BGH. Similarly, the ownership interests in Buckeye held by its partners other than BGH are reflected in BGH’s condensed consolidated income statement as non-controlling interest expense. These non-controlling interest liabilities and expenses are not reflected in Buckeye’s condensed consolidated financial statements.

 

·                  BGH’s capital structure—In addition to incorporating the assets and liabilities of Buckeye, BGH’s condensed consolidated balance sheet includes BGH’s own indebtedness and related debt placement costs, and the partners’ capital on BGH’s balance sheet represents BGH’s partners’ capital as opposed to the capital reflected in Buckeye’s balance sheet, which reflects the ownership interest of all its partners, including its owners other than BGH. Consequently, BGH’s income statement reflects additional interest expense, interest income and debt amortization expense that is not reflected in Buckeye’s financial statements.

 

·                  Inclusion of Buckeye Pipe Line Services Company—The financial statements of Buckeye Pipe Line Services Company (“Services Company”), which employs the employees who manage and operate the assets of Buckeye, are consolidated into BGH’s financial statements. The financial statements of Buckeye do not include the financial statements of Services Company.

 

·                  BGH’s general and administrative expenses—BGH incurs general and administrative expenses that are independent from Buckeye’s operations and are not reflected in Buckeye’s condensed consolidated financial statements.

 

·                  Elimination of Intercompany Transactions—Intercompany obligations and payments between Buckeye, its consolidated subsidiaries and BGH and Services Company are reflected in Buckeye’s consolidated financial statements but are eliminated in BGH’s consolidated financial statements.

 

26



 

Summary operating results for BGH were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Revenue

 

$

380,275

 

$

124,944

 

Costs and expenses

 

324,181

 

76,310

 

 

 

 

 

 

 

Operating income

 

56,094

 

48,634

 

Other (expense)

 

(17,564

)

(13,576

)

Income before equity income and non-controlling interest

 

38,530

 

35,058

 

Equity income

 

2,055

 

1,786

 

Non-controlling interest expense

 

(34,736

)

(30,905

)

 

 

 

 

 

 

Net income

 

$

5,849

 

$

5,939

 

 

27



 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

Pipeline Operations

 

$

96,389

 

$

93,750

 

Terminalling and Storage

 

27,632

 

23,589

 

Natural Gas Storage

 

11,464

 

 

Energy Services

 

234,547

 

 

Other Operations

 

10,869

 

7,605

 

Intersegment

 

(626

)

 

Total

 

$

380,275

 

$

124,944

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

Pipeline Operations

 

$

35,529

 

$

36,988

 

Terminalling and Storage

 

12,585

 

9,625

 

Natural Gas Storage

 

4,744

 

 

Energy Services

 

1,656

 

 

Other Operations

 

1,580

 

2,021

 

Total

 

$

56,094

 

$

48,634

 

 

 

 

 

 

 

Total costs and expenses (including depreciation
and amortization):

 

Pipeline Operations

 

$

60,860

 

$

56,762

 

Terminalling and Storage

 

15,047

 

13,964

 

Natural Gas Storage

 

6,720

 

 

Energy Services

 

232,891

 

 

Other Operations

 

9,289

 

5,584

 

Intersegment

 

(626

)

 

Total

 

$

324,181

 

$

76,310

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

Pipeline Operations

 

$

8,423

 

$

7,988

 

Terminalling and Storage

 

1,355

 

1,305

 

Natural Gas Storage

 

954

 

 

Energy Services

 

264

 

 

Other Operations

 

387

 

414

 

Total

 

$

11,383

 

$

9,707

 

 

First Quarter of 2008 compared to First Quarter of 2007

 

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

 

Pipeline Operations:

 

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

 

28



 

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

 

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

 

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

 

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

 

 

 

Average Barrels Per Day

 

 

 

Three Months Ended March 31,

 

Product

 

2008

 

2007

 

Gasoline

 

641,500

 

687,100

 

Distillate

 

337,500

 

365,100

 

Jet Fuel

 

356,400

 

352,300

 

LPG’s

 

15,300

 

20,100

 

NGL

 

21,100

 

20,000

 

Other

 

11,700

 

10,100

 

Total

 

1,383,500

 

1,454,700

 

 

Terminalling and Storage:

 

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

 

·                  An approximate $1.4 million increase in base revenue primarily related to increases in blending fees for product additives and product recoveries from vapor recovery units, which were offset by an approximately 2.6% decline in throughput volumes in the first quarter of 2008 compared to the first quarter of 2007; and

 

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

 

29



 

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

 

 

 

Average Barrels Per Day

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Refined products throughput

 

522,300

 

536,000

 

 

Natural Gas Storage:

 

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

 

Energy Services:

 

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

 

Other Operations:

 

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

 

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

 

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

 

Operating Expenses:

 

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

 

 

 

Costs and Expenses

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Cost of product sales

 

$

236,611

 

$

4,844

 

Payroll and payroll benefit

 

28,003

 

23,168

 

Depreciation and amortization

 

11,383

 

9,707

 

Outside services

 

10,831

 

6,077

 

Operating power

 

7,486

 

7,318

 

Property and other taxes

 

6,022

 

6,183

 

Insurance and casualty losses

 

3,719

 

3,983

 

Construction management

 

3,021

 

1,695

 

Supplies

 

2,569

 

2,969

 

Rentals

 

4,054

 

2,611

 

All other

 

10,482

 

7,755

 

Total

 

$

324,181

 

$

76,310

 

 

30



 

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

 

Payroll and payroll benefits were $28.0 million in the first quarter of 2008, an increase of $4.8 million compared to the first quarter of 2007.  The Lodi Gas and Farm & Home operations added $0.9 million and $0.7 million of payroll and payroll benefits expense in the three months ended March 31, 2008, respectively.  Increases in salaries and wages of $1.5 million in the first quarter of 2008 resulted primarily from an increase in the number of employees due to Buckeye’s expanded operations and higher wage rates.  BGH’s payroll expense also increased by $0.7 million due to an accrual related to executive compensation and charges for BGH GP’s equity incentive plan

 

Depreciation and amortization expense was $11.4 million in the first quarter of 2008, which is an increase of $1.7 million over the first quarter of 2007. The Lodi Gas and Farm & Home operations added $1.0 million and $0.3 million of depreciation and amortization expense in the three months ended March 31, 2008, respectively.  The remaining increase in depreciation and amortization expense resulted from Buckeye’s ongoing maintenance and expansion capital program.

 

Outside services costs were $10.8 million in the first quarter of 2008, which is an increase of $4.8 million over the first quarter of 2007.  The Lodi Gas and Farm & Home operations added $1.7 million and $0.1 million of outside services costs in the three months ended March 31, 2008, respectively.  Lodi Gas incurred approximately $1.4 million of outside services expense related to well work-over costs as a result of the heavy withdrawal season in the first quarter.  Another approximately $1.4 million is due to increases in activity on operations and maintenance contracts.  The remainder of the increase is due to an increase in pipeline and terminal maintenance activities. Outside services costs consist principally of third-party contract services for pipeline and terminal maintenance activities.

 

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

 

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

 

Insurance and casualty losses were $3.7 million for the three months ended March 31, 2008, which is a decrease of $0.3 million from the three months ended March 31, 2007.  Casualty losses decreased by $0.5 million due to the absence of any significant product release incidents in the first quarter of 2008.  Insurance costs increased by $0.4 million which is primarily due to the inclusion of the Lodi Gas and Farm & Home operations.

 

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

 

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

 

Rental expense was $4.1 million in the first quarter of 2008, which is an increase of $1.4 million over the first quarter of 2007.  The inclusion of the Lodi Gas and Farm & Home operations added $1.1 million and $0.1 million of rental expense in the three months ended March 31, 2008, respectively.

 

All other costs were $10.5 million in the three months ended March 31, 2008, an increase of $2.7 million compared to $7.8 million in the same period in 2007.  The inclusion of the Lodi Gas and Farm & Home operations added $0.5 million and $1.0 million of other costs, respectively, in the three months ended March 31, 2008.  The remainder of the increases related to various other pipeline operating costs.

 

31



 

Costs and expenses attributable to Buckeye, Services Company and BGH were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Total cost and expenses:

 

 

 

 

 

Attributable to Buckeye

 

$

322,143

 

$

74,671

 

Elimination of Buckeye deferred charge

 

(1,174

)

(1,174

)

Net effect of ESOP charges

 

965

 

1,606

 

Attributable to BGH

 

2,247

 

1,207

 

Total

 

$

324,181

 

$

76,310

 

 

Amounts attributable to BGH consist of the following:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Attributable to BGH:

 

 

 

 

 

Payroll and benefits

 

$

1,334

 

$

626

 

Professional fees

 

583

 

198

 

Other

 

330

 

383

 

Total

 

$

2,247

 

$

1,207

 

 

Payroll and payroll benefits costs include salaries and benefits for the four highest paid executives performing services on behalf of Buckeye as well as allocations of the cost of Buckeye personnel performing administrative services directly for BGH. BGH’s payroll expense also increased by $0.7 million due to an accrual related to executive compensation and charges for BGH GP’s equity incentive plan.  Other costs include certain state franchise taxes, insurance costs, depreciation and miscellaneous other expenses.

 

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

 

 

 

Other Income (Expense)

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Investment income

 

$

614

 

$

300

 

Interest and debt expense

 

(18,178

)

(13,876

)

Total

 

$

(17,564

)

$

(13,576

)

 

 

 

 

 

 

Equity income

 

$

2,055

 

$

1,786

 

 

Other income (expense) was a net expense of $17.6 million in the first quarter of 2008, compared to a net expense of $13.6 million during the first quarter of 2007.  Investment income for the three months ended March 31, 2008 was consistent with investment income generated during the three months ended March 31, 2007.

 

Interest and debt expense was $18.2 million in the three months ended March 31, 2008, an increase of $4.3 million from the three months ended March 31, 2007.  Approximately $4.1 million of the increase was attributable to Buckeye’s $300.0 million in aggregate principal amount of notes due on January 15, 2018 which were issued in January 2008.  The remainder of the increase is due to interest expense on the debt of Farm & Home that remained outstanding after the acquisition.

 

32



 

Equity income increased by $0.3 million in the first quarter of 2008 compared to the first quarter of 2007.  The increase is primarily due to increases in equity income earned from Buckeye’s approximate 25% interest in West Shore Pipe Line Company and 20% interest in West Texas LPG Pipeline Limited Partnership.

 

LIQUIDITY AND CAPITAL RESOURCES

 

BGH’s currently has no capital requirements apart from Buckeye’s capital requirements. Buckeye’s capital requirements consist of maintenance and capital expenditures, expenditures for acquisitions and debt service requirements.

 

As noted in “Overview” above, BGH’s only cash-generating asset is its partnership interests in Buckeye.  BGH’s cash flow is, therefore, directly dependent upon the ability of Buckeye and its operating subsidiaries to make cash distributions to Buckeye’s partners. The actual amount of cash that Buckeye will have available for distribution depends primarily on Buckeye’s ability to generate cash beyond its working capital requirements.  Buckeye’s primary sources of liquidity are operating cash flow, proceeds from borrowings under Buckeye’s revolving credit facility and proceeds from the issuance of the LP Units or public debt.

 

BGH’s principal use of cash is the payment of its operating expenses and distributions to its unitholders.  BGH 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 MainLine Management deems appropriate.  In the first three months of 2008 and 2007, BGH paid cash distributions of $0.285 per unit on February 29, 2008 and $0.225 per unit on February 28, 2007, respectively.  Total cash distributed to BGH unitholders in the first three months of 2008 was approximately $8.1 million. On April 29, 2008, MainLine Management declared a distribution of $0.30 per unit to be paid on May 30, 2008 to unitholders of record as of May 9, 2008. This distribution is expected to be approximately $8.5 million.

 

Debt

 

BGH

 

BGH is a party to a five-year, $10.0 million revolving credit facility with SunTrust Bank, as both administrative agent and lender (the “BGH Credit Agreement”).  See Note 6 to BGH’s condensed consolidated financial statements for a description of the terms of the BGH Credit Agreement.

 

Services Company

 

Services Company had total debt outstanding of $18.8 million and $20.3 million at March 31, 2008 and December 31, 2007, respectively, consisting of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-party lender. See Note 6 to BGH’s condensed consolidated financial statements for a description of the terms of the 3.60% ESOP Notes.

 

Buckeye Notes

 

On January 11, 2008, Buckeye sold $300.0 million aggregate principal amount of 6.05% Notes due 2018 in an underwritten public offering.  Proceeds from this offering, after underwriters’ fees and expenses, were approximately $298.0 million and were used to reduce amounts outstanding under Buckeye’s credit facility that were drawn to partially pre-fund the Lodi Gas acquisition.

 

At March 31, 2008, Buckeye had an aggregate amount of $1,386.8 million of debt, which consisted of $300.0 million of Buckeye’s 4.625% Notes due 2013, $275.0 million of Buckeye’s 5.300% Notes due 2014, $150.0 million of Buckeye’s 6.75% Notes due 2033, $125.0 million of Buckeye’s 5.125% Notes due 2017, $300.0 million of Buckeye’s 6.05% Notes due 2018, $140.0 million outstanding under Buckeye’s unsecured revolving credit agreement (the “Credit Facility”) and $96.8 million outstanding under Farm & Home’s working capital facility.

 

33



 

Buckeye Credit Facility

 

The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.0 to 1.0 subject to a provision that allows for increases to 5.5 to 1.0 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA as defined in the Credit Facility.  The Credit Facility defines EBITDA as earnings before interest, taxes, depreciation, depletion and amortization, in each case excluding the income of certain majority-owned subsidiaries and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).  At March 31, 2008, Buckeye’s Funded Debt Ratio was 4.2 to 1.0.

 

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

 

See Note 6 to the condensed consolidated financial statements for more information about the terms of the Credit Facility.

 

Farm & Home Line of Credit

 

Farm & Home is party to a Loan and Security Agreement, dated as of December 16, 2004, as amended, with a syndicate of banks (the “Farm & Home Agreement”). The balance outstanding under the Farm & Home Agreement was approximately $96.8 million at March 31, 2008, all of which was classified as a current liability.  The Farm & Home Agreement requires Farm & Home to maintain a tangible net worth, defined generally as the amount by which Farm & Home’s assets (excluding intangible assets and accumulated other comprehensive income or loss) exceed its liabilities, equal to $33.7 million for the period June 30, 2007 through June 29, 2008 and thereafter equal to prior periods’ required tangible net worth plus 50% of Farm & Home’s net income, if positive, for the fiscal year then ended.  At March 31, 2008, Farm & Home’s tangible net worth was $59.5 million.  Farm & Home also must maintain a ratio of the sum of all indebtedness of Farm & Home to tangible net worth of not greater than 2.50 to 1.00.  At March 31, 2008, Farm & Home’s indebtedness to tangible net worth ratio was 1.63 to 1.00.  In addition, Farm & Home is required to maintain a ratio of pre-tax income to interest expense of not less than 1.25 to 1.00.  At March 31, 2008, Farm & Home’s pre-tax income to interest expense ratio was 1.33 to 1.00.

 

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

 

See Note 6 to the condensed consolidated financial statements for more information about the terms of the Farm & Home Agreement.

 

34



 

Cash Flows from Operations

 

The components of cash flows from operations for the three months ended March 31, 2008 and 2007 were as follows:

 

 

 

Cash Flow from Operations

 

 

 

For the Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Net income

 

$

5,849

 

$

5,939

 

Value of ESOP shares released

 

817

 

1,148

 

Depreciation and amortization

 

11,383

 

9,707

 

Non-controlling interest

 

34,736

 

30,905

 

Changes in current assets and current liabilities