Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2008 or

 

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

 

For the transition period from                          to                           

 

Commission file number 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, Pennsylvania

 

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 “small 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 July 24, 2008, there were 27,769,647 Common Units and 530,353 Management Units outstanding.

 

 

 



Table of Contents

 

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 and six months ended June 30, 2008 and 2007

 

1

 

 

 

 

 

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

 

2

 

 

 

 

 

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

 

3

 

 

 

 

 

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

 

42

 

 

 

 

Item 4.

Controls and Procedures

 

44

 

 

 

 

PART II- OTHER INFORMATION

 

45

 

 

 

Item 1.

Legal Proceedings

 

45

 

 

 

 

Item 1A.

Risk Factors

 

45

 

 

 

 

Item 6.

Exhibits

 

48

 

 



Table of Contents

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales

 

$

346,436

 

$

1,035

 

$

587,482

 

$

5,950

 

Transportation and other

 

146,112

 

123,916

 

285,342

 

243,945

 

Total revenue

 

492,548

 

124,951

 

872,824

 

249,895

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

341,591

 

1,032

 

578,203

 

5,876

 

Operating expenses

 

69,991

 

62,577

 

136,282

 

118,032

 

Depreciation and amortization

 

12,342

 

10,001

 

23,725

 

19,708

 

General and administrative

 

11,638

 

7,127

 

21,534

 

13,431

 

Total costs and expenses

 

435,562

 

80,737

 

759,744

 

157,047

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

56,986

 

44,214

 

113,080

 

92,848

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Investment income

 

237

 

334

 

851

 

634

 

Interest and debt expense

 

(18,270

)

(13,104

)

(36,448

)

(26,980

)

 

 

 

 

 

 

 

 

 

 

Total other (expense)

 

(18,033

)

(12,770

)

(35,597

)

(26,346

)

 

 

 

 

 

 

 

 

 

 

Income before equity income and non-controlling interest expense

 

38,953

 

31,444

 

77,483

 

66,502

 

 

 

 

 

 

 

 

 

 

 

Equity income

 

1,344

 

2,258

 

3,399

 

4,044

 

Non-controlling interest expense

 

(34,980

)

(29,571

)

(69,716

)

(60,476

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,317

 

$

4,131

 

$

11,166

 

$

10,070

 

 

 

 

 

 

 

 

 

 

 

Net income per partnership unit:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.15

 

$

0.39

 

$

0.36

 

Diluted

 

$

0.19

 

$

0.15

 

$

0.39

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

28,300

 

28,073

 

28,300

 

27,983

 

Diluted

 

28,300

 

28,300

 

28,300

 

28,300

 

 

See Notes to condensed consolidated financial statements.

 

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Table of Contents

 

 Buckeye GP Holdings L.P.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

  Cash and cash equivalents

 

$

45,572

 

$

94,486

 

  Trade receivables

 

100,879

 

47,598

 

  Construction and pipeline relocation receivables

 

12,776

 

12,571

 

  Inventories

 

127,985

 

15,149

 

  Prepaid and other current assets

 

69,757

 

32,708

 

  Total current assets

 

356,969

 

202,512

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,149,704

 

1,806,720

 

 

 

 

 

 

 

Goodwill

 

449,717

 

234,603

 

Other non-current assets

 

115,528

 

110,491

 

  Total assets

 

$

3,071,918

 

$

2,354,326

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

  Line of credit

 

$

72,718

 

$

 

  Current portion of long-term debt

 

6,349

 

6,289

 

  Accounts payable

 

59,891

 

20,368

 

  Accrued and other current liabilities

 

126,360

 

78,902

 

  Total current liabilities

 

265,318

 

105,559

 

 

 

 

 

 

 

  Long-term debt

 

1,315,167

 

863,174

 

  Other non-current liabilities

 

87,589

 

81,120

 

  Non-controlling interest

 

1,169,997

 

1,066,143

 

  Total liabilities

 

2,838,071

 

2,115,996

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

General Partner- Common Units

 

7

 

7

 

Limited Partners- Common Units

 

228,323

 

232,928

 

Management Units

 

3,066

 

3,156

 

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

 

2,451

 

2,239

 

  Total partners’ capital

 

233,847

 

238,330

 

  Total liabilities and partners’ capital

 

$

3,071,918

 

$

2,354,326

 

 

See Notes to condensed consolidated financial statements.

 

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Table of Contents

 

Buckeye GP Holdings L.P.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

11,166

 

$

10,070

 

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

 

 

 

 

 

Non-cash expense for unit-based compensation

 

695

 

1,179

 

Value of ESOP shares released

 

1,671

 

2,355

 

Depreciation and amortization

 

23,725

 

19,708

 

Non-controlling interest expense

 

69,716

 

60,476

 

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

 

(3,399

)

(4,044

)

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

 

2,306

 

3,589

 

Amortization of debt discount and option grants

 

820

 

247

 

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

 

 

 

 

 

Trade receivables

 

14,059

 

8,372

 

Construction and pipeline relocation receivables

 

(205

)

236

 

Inventories

 

(19,505

)

227

 

Prepaid and other current assets

 

(30,394

)

1,828

 

Accounts payables

 

8,431

 

(4,770

)

Accrued and other current liabilities

 

27,955

 

3,393

 

Other non-current assets

 

(95

)

2,727

 

Other non-current liabilities

 

1,533

 

(1,882

)

Total adjustments from operating activities

 

97,313

 

93,641

 

Net cash provided by continuing operations

 

108,479

 

103,711

 

Net cash provided by discontinued operations

 

572

 

 

Net cash provided by continuing and discontinued operations

 

109,051

 

103,711

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(32,501

)

(36,966

)

Acquisitions and equity investments

 

(610,616

)

(39,320

)

Net expenditures for disposal of property, plant and equipment

 

(103

)

(167

)

Proceeds from sale of discontinued operations

 

52,584

 

 

Net cash used in investing activities

 

(590,636

)

(76,453

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Debt issuance costs

 

(1,886

)

 

Net proceeds from issuance of Buckeye LP Units

 

113,148

 

82,171

 

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

 

278

 

1,895

 

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

 

(77,338

)

(61,302

)

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

 

611,050

 

86,300

 

Repayment of long-term debt

 

(186,387

)

(119,331

)

Settlement of hedge

 

(9,638

)

 

Distributions to Limited Partners

 

(16,556

)

(13,160

)

Net cash provided by (used in) financing activities

 

432,671

 

(23,427

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(48,914

)

3,831

 

Cash and cash equivalents —Beginning of year

 

94,486

 

20,220

 

Cash and cash equivalents—End of period

 

$

45,572

 

$

24,051

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

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

 

$

26,942

 

$

26,117

 

Capitalized interest

 

$

620

 

$

902

 

Cash paid during the period for income tax

 

$

531

 

$

587

 

 

 

 

 

 

 

Non-cash changes in assets and liabilities:

 

 

 

 

 

Equity gains on issuance of Buckeye LP Units

 

$

212

 

$

235

 

Hedge accounting

 

$

6,751

 

$

(118

)

 

See Notes to condensed consolidated financial statements.

 

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Buckeye GP Holdings L.P.

Condensed Consolidated Statement of Partners’ Capital

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

General

 

Limited

 

 

 

Gains on

 

 

 

 

 

Partner

 

Partners

 

 

 

Issuance of

 

 

 

 

 

Common

 

Common

 

Management

 

Buckeye LP

 

 

 

 

 

Units

 

Units

 

Units

 

Units

 

Total

 

Partners’ capital- January 1, 2008

 

$

7

 

$

232,928

 

$

3,156

 

$

2,239

 

$

238,330

 

Net income*

 

 

 

10,957

 

209

 

 

 

11,166

 

Distributions to Limited Partner - Common Units

 

 

 

(16,246

)

(310

)

 

 

(16,556

)

Recognition of unit-based compensation charges

 

 

 

684

 

11

 

 

 

695

 

Equity gains on issuance of Buckeye LP Units

 

 

 

 

 

 

 

212

 

212

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital- June 30, 2008

 

$

7

 

$

228,323

 

$

3,066

 

$

2,451

 

$

233,847

 

 


* Comprehensive income equals net income.

 

See Notes to condensed consolidated financial statements.

 

4



Table of Contents

 

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 of Buckeye GP.  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 June 30, 2008, Buckeye GP owned an approximate 0.5% general partner interest in Buckeye.

 

Buckeye, through its subsidiaries, owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, with approximately 5,400 miles of pipeline serving 17 states, and operates an approximate 2,200 miles of pipeline under agreements with major oil and chemical companies. Buckeye also owns 63 refined petroleum products terminals with aggregate storage capacity of approximately 22.9 million barrels in 13 states.

 

On January 18, 2008, Buckeye acquired Lodi Gas Storage, L.L.C. (“Lodi Gas”).  Lodi Gas owns and operates two natural gas storage facilities near Lodi, California.  Together, these facilities provide approximately 22 billion cubic feet (“bcf”) of gas capacity and are connected to Pacific Gas and Electric’s intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas (see Note 3 for a further discussion).

 

On February 8, 2008, Buckeye acquired Farm & Home Oil Company LLC (“Farm & Home”).  Farm & Home sells refined petroleum products on a wholesale basis, principally in eastern and central Pennsylvania.  When Farm & Home was acquired, it also had retail operations, but Buckeye sold those operations to a wholly owned subsidiary of Inergy, L.P. on April 15, 2008.  The assets and liabilities and results of operations of Farm & Home’s retail operations were determined to be discontinued operations effective on the Farm & Home acquisition date of February 8, 2008 (see Note 3 for a further discussion).

 

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 June 30, 2008.

 

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

 

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.

 

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Table of Contents

 

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

 

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

 

Pursuant to the rules and regulations of the Securities and Exchange Commission, the condensed consolidated financial statements do not include all of the information and notes normally included with financial statements 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.

 

Environmental Contingencies

 

In accordance with its accounting policy, Buckeye recorded operating expenses of $2.7 million and $1.8 million for the three months ended June 30, 2008 and 2007, respectively, and $4.6 million and $4.0 million for the six months ended June 30, 2008 and 2007, respectively, related to environmental contingencies unrelated to claims and proceedings.

 

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3.               BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS

 

Lodi Gas

 

On January 18, 2008, Buckeye acquired all of the member interests in Lodi Gas from Lodi Holdings, L.L.C. The cost of Lodi Gas was approximately $442.3 million in cash and consisted of the following (in thousands):

 

Contractual purchase price

 

$

440,000

 

Working capital adjustments and fees

 

2,306

 

 

 

 

 

Total purchase price

 

$

442,306

 

 

 

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

 

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

 

 

 

January 18,

 

 

 

2008

 

Current assets

 

$

7,519

 

Property, plant and equipment

 

276,879

 

Goodwill

 

170,005

 

Current liabilities

 

(10,274

)

Other liabilities

 

(1,823

)

 

 

 

 

Allocated purchase price

 

$

442,306

 

 

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

 

Farm & Home

 

On February 8, 2008, Buckeye acquired all of the member interests of Farm & Home for approximately $146.0 million.  On April 15, 2008, Buckeye completed the sale of the retail operations of Farm & Home to a wholly owned subsidiary of Inergy, L.P. for approximately $52.6 million. The retail assets sold consisted primarily of property, plant and equipment as well as inventory and receivables.  Buckeye recorded no gain or loss on the sale of Farm & Home’s retail operations.  The retail operations of Farm & Home were not an integral part of Buckeye’s core operations and strategy, and the related retail assets and liabilities were determined to be discontinued operations on the date of Buckeye’s acquisition of Farm & Home because Buckeye decided to dispose of them as of that date.  Revenues from discontinued operations for the period February 8, 2008 to April 15, 2008 were approximately $19.0 million.

 

Buckeye acquired Farm & Home because Buckeye’s management believes that the wholesale distribution operations of Farm & Home represent an attractive opportunity to further Buckeye’s strategy of improving overall profitability by increasing the utilization of Buckeye’s existing pipeline and terminal system infrastructure by marketing refined petroleum

 

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

 

 

 

February 8,

 

 

 

2008

 

Cash

 

$

2,816

 

Trade receivables

 

67,340

 

Inventory

 

91,654

 

Prepaid and other current assets

 

9,746

 

Property, plant and equipment

 

29,660

 

Goodwill

 

45,109

 

Other non-current assets

 

1,844

 

Assets held for sale

 

51,750

 

Debt

 

(100,000

)

Accounts payable

 

(31,097

)

Accrued expenses

 

(22,833

)

 

 

 

 

Allocated purchase price

 

$

145,989

 

 

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

 

Proforma Unaudited Financial Results

 

The following unaudited summarized pro forma consolidated income statement information for the three months ended June 30, 2007 and the six months ended June 30, 2008 and 2007 assumes that the acquisitions of Lodi Gas and Farm & Home had occurred as of the beginning of the periods presented.  The pro forma presentation below assumes that equity offerings by Buckeye that were used in part to fund the acquisition of Lodi Gas occurred effective January 1, 2007.  In the 2008 pro forma presentation, approximately $2.6 million of disposition-related expenses incurred by Lodi Gas in the period from January 1, 2008 to January 17, 2008 (prior to Buckeye’s ownership) have been excluded because the inclusion of these expenses would have distorted the financial results.  For Farm & Home, the results of the retail operations have been excluded from both periods presented. These pro forma unaudited financial results were prepared for comparative purposes only and are not indicative of actual results that would have occurred if Buckeye had completed these acquisitions as of the beginning of the periods presented or the results that will be attained in the future (in thousands, except per unit amounts):

 

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Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2008

 

2007

 

Revenues:

 

 

 

 

 

 

 

As reported

 

$

124,951

 

$

872,824

 

$

249,895

 

Pro forma adjustments

 

257,277

 

174,724

 

574,403

 

 

 

 

 

 

 

 

 

Pro forma revenue

 

$

382,228

 

$

1,047,548

 

$

824,298

 

 

 

 

 

 

 

 

 

Net Income:

 

 

 

 

 

 

 

As reported

 

$

4,131

 

$

11,166

 

$

10,070

 

Pro forma adjustments

 

1,187

 

(365

)

2,031

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

5,318

 

$

10,801

 

$

12,101

 

 

 

 

 

 

 

 

 

Pro forma net income per common unit:

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.38

 

$

0.43

 

Diluted

 

$

0.19

 

$

0.38

 

$

0.43

 

 

 

 

 

 

 

 

 

Pro forma weighted average number of units outstanding:

 

 

 

 

 

 

 

Basic

 

28,073

 

28,300

 

27,983

 

Diluted

 

28,300

 

28,300

 

28,300

 

 

Other Acquisitions

 

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

 

 

 

February 19,

 

 

 

2008

 

Land

 

$

1,119

 

Buildings

 

2,233

 

Machinery, equipment, and office furnishings

 

10,502

 

Total

 

$

13,854

 

 

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

 

Effective May 1, 2008, Buckeye purchased the remaining 50% member interest in Wespac Pipe Lines - San Diego LLC from Kealine LLC not already owned by Buckeye for $9.3 million.  Buckeye is in the process of allocating the cost of the acquisition to the various tangible assets acquired, principally property, plant and equipment.

 

On June 20, 2008, Buckeye acquired a refined petroleum products terminal in Wethersfield, Connecticut from Hess Corporation for approximately $5.5 million.  Buckeye determined that the acquisition of the Wethersfield, Connecticut terminal should be accounted for as an acquisition of assets rather than an acquisition of a business as defined in SFAS

 

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No. 141.  Accordingly, Buckeye is in the process of allocating the cost of the acquisition to the various tangible assets acquired, principally property, plant and equipment.

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Prepaid insurance

 

$

2,599

 

$

7,456

 

Insurance receivables

 

7,378

 

7,707

 

Ammonia receivable

 

29,162

 

7,505

 

Derivative Asset

 

9,943

 

 

Other

 

20,675

 

10,040

 

Total

 

$

69,757

 

$

32,708

 

 

5.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

Taxes - other than income

 

$

15,341

 

$

8,026

 

Accrued employee benefit liability

 

2,183

 

2,183

 

Environmental liabilities

 

9,005

 

8,023

 

Interest

 

25,333

 

16,485

 

Retainage

 

1,862

 

1,572

 

Payable for ammonia purchase

 

12,207

 

6,988

 

Compensation and vacation

 

10,260

 

11,939

 

Hedge liability

 

11,855

 

7,187

 

Unearned revenue

 

10,678

 

1,439

 

Margin deposits

 

4,894

 

 

Other

 

22,742

 

15,060

 

Total

 

$

126,360

 

$

78,902

 

 

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6. DEBT AND CREDIT FACILITIES

 

Long - term debt consists of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(In thousands)

 

BGH:

 

 

 

 

 

Revolving Line of Credit

 

$

 

$

 

Services Company:

 

 

 

 

 

3.60% ESOP Notes due March 28, 2011

 

17,561

 

20,804

 

Retirement premium

 

(377

)

(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

 

157,000

 

 

Total

 

1,324,184

 

870,286

 

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

 

(2,668

)

(823

)

Subtotal

 

1,321,516

 

869,463

 

Less: current maturities

 

(6,349

)

(6,289

)

Total long-term debt

 

$

1,315,167

 

$

863,174

 

 


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

 

(1) The June 30, 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 ($3.8) million and ($2.1) million, respectively, in unamortized discounts.

 

The fair value of debt was estimated to be $1,363.1 million at June 30, 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 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 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 BGH.  BGH did not have amounts outstanding under the BGH Credit Agreement at June 30, 2008 and 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

 

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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 the consolidated EBITDA, as defined in the 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 June 30, 2008, BGH’s funded debt coverage ratio was 4.59 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 June 30, 2008, BGH was not aware of any instances of noncompliance with the covenants under the BGH Credit Agreement.

 

Services Company

 

Services Company had total debt outstanding of $17.2 million and $20.3 million at June 30, 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 Buckeye’s 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 Buckeye’s 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 Buckeye’s LP Units owned by Services Company returns to an amount that exceeds the 125% minimum. At June 30, 2008, the value of Buckeye’s LP Units owned by Services Company exceeded the 125% requirement.

 

Buckeye Note

 

On January 11, 2008, Buckeye sold $300.0 million aggregate principal amount of 6.05% Notes due 2018 (the “6.05% Notes”) in an underwritten public offering.  Proceeds from this offering, after underwriters’ fees and expenses, were approximately $298.0 million and were used to partially pre-fund the Lodi Gas acquisition.  In connection with this debt offering, Buckeye settled the two forward-starting interest rates swaps discussed in Note 7 below, which resulted in a settlement payment by Buckeye of $9.6 million that is being amortized as interest expense over the ten year term of the 6.05% Notes.

 

Buckeye 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 June 30, 2008, Buckeye had $157.0 million in borrowings outstanding under the Credit Facility.  At December 31, 2007, Buckeye did not have any amounts outstanding under the Credit Facility.  At June 30, 2008 and December 31, 2007, Buckeye had committed $1.3 million and $1.5 million in support of letters of credit, respectively.  The obligations for letters of credit are not reflected as debt on Buckeye’s consolidated balance sheet.

 

The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to 1.00 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA, which is defined in the Credit Facility as earnings before interest, taxes, depreciation, depletion and amortization, in each case excluding the income of

 

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certain majority-owned subsidiaries of Buckeye and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).  As discussed below, the Credit Facility was amended in January 2008 to, among other things, change the definition of consolidated debt.  At June 30, 2008, Buckeye’s Funded Debt Ratio was 4.28 to 1.00.  As provided for in the Credit Facility, the entire balance of Farm & Home’s line of credit, or $72.7 million, was excluded from the calculation of consolidated debt and the Funded Debt Ratio.

 

In addition, the Credit Facility contains other covenants including, but not limited to, covenants limiting Buckeye’s ability to incur additional indebtedness, to create or incur liens on its property, to dispose of property material to its operations, and to consolidate, merge or transfer assets.  At June 30, 2008, Buckeye was not aware of any instances of noncompliance with the covenants under its Credit Facility.

 

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

 

Buckeye Energy Services Credit Agreement

 

On May 20, 2008, Farm & Home and BES (the “Borrowers”) entered into a Credit Agreement, which was subsequently amended on July 18, 2008 (the “BES Credit Agreement”). The BES Credit Agreement, as amended, is with BNP Paribas, as Administrative Agent, Collateral Agent, and Lead Arranger and, the lenders named therein.  The BES Credit Agreement, as amended, provides for borrowings of up to $160.0 million, which amount may be increased to $250.0 million subject to customary conditions, including procurement of the requisite lender commitments.  Under the BES Credit Agreement, borrowings accrue interest at the Borrowers’ election at (i) the Administrative Agent’s Cost of Funds (as defined in the BES Credit Agreement) plus 1.75%, (ii) the Eurodollar Rate (as defined in the BES Credit Agreement) plus 1.75% or (iii) the Base Rate (as defined in the BES Credit Agreement) plus 0.25%.  The BES Credit Agreement also permits Daylight Overdraft Loans (as defined in the BES Credit Agreement), Swingline Loans (as defined in the BES Credit Agreement) and letters of credit.  Such alternative extensions of credit are subject to certain conditions as defined in the BES Credit Agreement.  The BES Credit Agreement is secured by liens on certain assets of the Borrowers, including their inventory, cash deposits (other than certain accounts), investments and hedging accounts, receivables and intangibles.

 

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

 

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

 

 

 

Minimum

 

Minimum

 

Maximum

 

Maximum

 

Consolidated Tangible

 

Consolidated Net

 

Consolidated

 

Sub-Limit

 

Net Worth

 

Working Capital

 

Leverage Ratio

 

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

 

$

50,000,000

 

$

40,000,000

 

7.0 to 1.0

 

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

 

60,000,000

 

50,000,000

 

7.0 to 1.0

 

 

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

 

In addition, the BES Credit Agreement contains other covenants, including, but not limited to, covenants limiting the Borrowers’ ability to incur additional indebtedness, to create or incur certain liens on property, to consolidate, merge or

 

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transfer assets, to make dividends or distributions, to dispose of property, to make investments, to modify their risk management policy, or to engage in business activities materially different from those presently conducted.  At June 30, 2008, the Borrowers were not aware of any instances of noncompliance with the covenants under the BES Credit Agreement.

 

7.  DERIVATIVES

 

Commodity Derivatives

 

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

 

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

 

 

 

June 30,

 

 

 

2008

 

 

 

(In thousands)

 

Asset:

 

 

 

Futures contracts

 

$

9,943

 

 

 

 

 

Total

 

$

9,943

 

 

 

 

 

Liabilities:

 

 

 

Fixed price sales contracts

 

$

(10,568

)

Inventory hedges

 

(1,287

)

 

 

 

 

Total

 

$

(11,855

)

 

Substantially all of the liability noted above for unrealized losses of $1.3 million related to inventory hedges will be realized in the third quarter of 2008 as the related inventory is sold.  Gains recorded in the second quarter on inventory hedges that were ineffective were approximately $0.2 million.  As of June 30, 2008, open petroleum derivative contracts varied in duration, but did not extend beyond August 2009.

 

Finance Derivatives

 

In January 2008, Buckeye terminated two forward-starting interest rate swap agreements associated with the 6.05% Notes and made a payment of $9.6 million in connection with the termination.  In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), Buckeye has recorded the amount in other comprehensive income and will amortize the amount of the payment into interest expense over the ten-year term of the 6.05% Notes.  Interest expense increased by $0.2 million and $0.4 million for the three and six months ended June 30, 2008, respectively, as a result of the amortization of the termination payment.

 

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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 and liabilities that are subject to SFAS No. 157 as of June 30, 2008:

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Significant

 

Significant

 

 

 

Quoted Prices

 

Other Observable

 

Unobservable

 

 

 

in Active Markets

 

Inputs

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

Futures contracts

 

$

9,943

 

$

 

$

 

Asset held in trust

 

3,609

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Fixed price sales contracts

 

 

(10,568

)

 

Inventory hedges

 

(1,287

)

 

 

Total

 

$

12,265

 

$

(10,568

)

$

 

 

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

 

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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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Average common units outstanding

 

27,770

 

27,215

 

27,770

 

27,077

 

Average management units outstanding

 

530

 

858

 

530

 

906

 

 

 

 

 

 

 

 

 

 

 

Average units for basic

 

28,300

 

28,073

 

28,300

 

27,983

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Units used for basic calculation

 

28,300

 

28,073

 

28,300

 

27,983

 

Dilutive effect of additional management units

 

 

227

 

 

317

 

 

 

 

 

 

 

 

 

 

 

Average units for diluted

 

28,300

 

28,300

 

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 July 29, 2008, MainLine Management declared a quarterly cash distribution of $0.31 per unit payable on August 29, 2008, to unitholders of record on August 8, 2008.  The total cash distribution to BGH unitholders will be approximately $8.8 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 SFAS No. 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 and six months ended June 30, 2008 was $0.4 million and $0.7 million, respectively, and has recorded such amounts as compensation expense and a capital contribution.  BGH is not a party to this plan and has no liabilities with respect to it.

 

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 June 30, 2008 (in thousands except per unit amounts):

 

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Table of Contents

 

 

 

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 June 30, 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

 

$

3,521

 

$

2,081

 

$

5,608

 

$

11,210

 

Less: Expense recorded from plan inception to June 30, 2008

 

 

 

(1,286

)

(1,286

)

Potential future compensation costs at June 30, 2008

 

$

3,521

 

$

2,081

 

$

4,322

 

$

9,924

 

 


 

 

Value A

 

Value B

 

Operating

 

 

 

*2008 Wtd Avg Fair Value per unit

 

$

2.22

 

$

1.56

 

$

2.97

 

 

 

 

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 initial valuation date of June 25, 2007 to the exit event. The assumptions used to value the 2008 unit awards were as follow:

 

·

 

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

 

 

 

·

 

Expected Life of 5.0 years based on the historical average holding period for similar investments;

 

 

 

·

 

Risk Free Rate of 3.14% based on the US constant maturity treasury rate for a term corresponding to the expected life of 5.0 years;

 

 

 

·

 

Volatility of 36%. 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 5.0 year equity volatility of other firms in the same industry as Buckeye; and

 

 

 

·

 

Because the likelihood of an interim distribution is not probable due to the rigorous performance criteria, dividends of zero were assumed.

 

Compensation expense related to the Operating Units of approximately $1.4 million per year will be recognized in 2008, 2009 and 2010.  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.

 

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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 six months of 2008 and 2007 is based on the grant date fair value estimated by using the Black-Scholes option pricing model.  Buckeye recognizes compensation expense for awards granted on a straight-line basis over the requisite service period.

 

For the retirement eligibility provisions of the Option Plan, Buckeye follows the non-substantive vesting method and recognizes compensation expense immediately for options granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved. Unit-based compensation expense recognized in earnings for the three and six months ended June 30, 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 three and six months ended June 30, 2007, BGH expensed approximately $1.0 million and $1.1 million, respectively, 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.

 

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.

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands )

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

352

 

$

248

 

$

233

 

$

100

 

Interest cost

 

478

 

252

 

694

 

508

 

Expected return on plan assets

 

(468

)

(205

)

 

 

Amortization of prior service benefit

 

(218

)

(114

)

(1,124

)

(860

)

Amortization of unrecognized losses

 

155

 

144

 

410

 

381

 

Net periodic benefit costs

 

$

299

 

$

325

 

$

213

 

$

129

 

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

Retiree Medical

 

 

 

RIGP

 

Plan

 

 

 

(In thousands )

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

705

 

$

495

 

$

465

 

$

200

 

Interest cost

 

956

 

505

 

1,387

 

1,016

 

Expected return on plan assets

 

(936

)

(410

)

 

 

Amortization of prior service benefit

 

(436

)

(227

)

(2,248

)

(1,719

)

Amortization of unrecognized losses

 

311

 

287

 

821

 

762

 

Net periodic benefit costs

 

$

600

 

$

650

 

$

425

 

$

259

 

 

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

 

14.  SEGMENT INFORMATION

 

With the acquisitions of Lodi Gas and Farm & Home, BGH determined that it has two additional reportable segments: Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, BGH conducts business 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 17 states. This segment also has three refined petroleum products terminals with aggregate storage capacity of approximately 0.5 million barrels in three states.

 

Terminalling and Storage:

 

The Terminalling and Storage segment provides bulk storage and terminal throughput services.  This segment has 55 refined petroleum products terminals with aggregate storage capacity of approximately 21.4 million barrels in ten states.

 

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Table of Contents

 

Natural Gas Storage:

 

The Natural Gas Storage segment provides natural gas storage services through the two natural gas storage facilities near Lodi, California that are owned and operated by Lodi Gas.  Together, these facilities provide approximately 22 bcf of gas capacity and are connected to Pacific Gas and Electric’s intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas. The segment has approximately twenty-five customers.

 

The Natural Gas Storage segment’s revenues consist of lease revenues and hub services revenues.  Lease revenues consist of demand charges for the reservation of storage space under firm storage agreements. The demand charge entitles the customer to a fixed amount of storage space and certain injection and withdrawal rights. Title to the stored gas remains with the customer. Lease revenues are recognized as revenue over the term of the related storage agreement.  Hub service revenues consist of a variety of other storage services under interruptible storage agreements. These principally include park and loan transactions.  Parks occur when gas from a customer is injected and stored for a specified period. The customer then has the right to withdraw its stored gas at a future date. Title to the gas remains with the customer.  Park revenues are recognized ratably over the term of the agreement.  Loans occur when gas is delivered to a customer in a specified period. The customer then has the obligation to redeliver gas at a future date. Loan revenues are recognized ratably over the term of the agreement.

 

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

 

Energy Services:

 

The Energy Services segment sells refined petroleum products on a wholesale basis principally in eastern and central Pennsylvania. The segment records revenues after products are delivered. The segment’s products include gasoline, propane and petroleum distillates such as heating oil, diesel fuel, and kerosene.  The segment also has five terminals with aggregate storage capacity of approximately 1.0 million barrels.  The segment has approximately one thousand customers which consist principally of product wholesalers as well as major commercial users of these products.

 

Other Operations:

 

The Other Operations segment consists primarily of Buckeye’s contract operation of approximately 2,200 miles of third-party pipeline systems, which are owned primarily by major oil and chemical companies and are located primarily in Texas and Louisiana.  This segment also performs pipeline construction management services, typically for cost plus a fixed fee, for these same customers.  The Other Operations segment also includes Buckeye’s ownership and operation of an ammonia pipeline and its majority ownership of the Sabina Pipeline in Texas.

 

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

 

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Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

98,887

 

$

92,427

 

$

195,277

 

$

186,178

 

Terminalling and Storage

 

27,114

 

23,948

 

54,746

 

47,536

 

Natural Gas Storage

 

15,186

 

 

26,650

 

 

Energy Services

 

347,768

 

 

582,315

 

 

Other Operations

 

10,757

 

8,576

 

21,626

 

16,181

 

Intersegment

 

(7,164

)

 

(7,790

)

 

Total

 

$

492,548

 

$

124,951

 

$

872,824

 

$

249,895

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

38,037

 

$

33,923

 

$

73,567

 

$

70,913

 

Terminalling and Storage

 

9,910

 

8,136

 

22,495

 

17,760

 

Natural Gas Storage

 

7,638

 

 

12,382

 

 

Energy Services

 

(313

)

 

1,343

 

 

Other Operations

 

1,714

 

2,155

 

3,293

 

4,175

 

Total

 

$

56,986

 

$

44,214

 

$

113,080

 

$

92,848

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

8,587

 

$

8,220

 

$

17,010

 

$

16,207

 

Terminalling and Storage

 

1,390

 

1,434

 

2,745

 

2,739

 

Natural Gas Storage

 

1,561

 

 

2,515

 

 

Energy Services

 

407

 

 

671

 

 

Other Operations

 

397

 

347

 

784

 

762

 

Total

 

$

 12,342

 

$

 10,001

 

$

 23,725

 

$

 19,708

 

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

13,844

 

$

29,375

 

 

 

 

 

Terminalling and Storage

 

7,217

 

6,075

 

 

 

 

 

Natural Gas Storage

 

10,020

 

 

 

 

 

 

Energy Services

 

1,420

 

 

 

 

 

 

Other Operations

 

 

1,516

 

 

 

 

 

Total

 

$

32,501

 

$

36,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

 

Pipeline Operations

 

$

9,264

 

$

860

 

 

 

 

 

Terminalling and Storage

 

19,461

 

38,460

 

 

 

 

 

Natural Gas Storage

 

438,765

 

 

 

 

 

 

Energy Services

 

143,126

 

 

 

 

 

 

Total

 

$

610,616

 

$

39,320

 

 

 

 

 

 

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Table of Contents

 

 

 

Assets

 

Goodwill

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Pipeline Operations*

 

$

1,625,159

 

$

1,673,744

 

$

198,632

 

$

198,632

 

Terminalling and Storage

 

397,321

 

385,446

 

22,789

 

22,789

 

Natural Gas Storage

 

466,091

 

 

170,005

 

 

Energy Services

 

267,675

 

 

45,109

 

 

Other Operations

 

91,274

 

74,462

 

13,182

 

13,182

 

Consolidated- level

 

224,398

 

220,674

 

 

 

Total

 

$

3,071,918

 

$

2,354,326

 

$

449,717

 

$

234,603

 

 


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

 

15. RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  This statement clarified 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.

 

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 portion 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.

 

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Table of Contents

 

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.

 

16. SUBSEQUENT EVENTS

 

On July 16, 2008, Buckeye entered into a definitive agreement to purchase an ethanol and petroleum products terminal in Albany, New York from LogiBio Albany Terminal, LLC.  The purchase price for the terminal will be $45.0 million, with an additional $1.5 million payable if LogiBio Albany Terminal, LLC is successful in modifying certain long term contractual commitments related to the terminal and another $1.5 million payable if the terminal operations meet certain performance goals over the next three years.  The terminal has an active storage capacity of 1.8 million barrels.  The transaction is subject to customary closing conditions.  Buckeye expects to complete the purchase of the terminal in late August 2008.  This terminal will be reported in the Terminalling and Storage segment.

 

On July 31, 2008, Farm & Home was merged with and into its wholly owned subsidiary, BES, with BES continuing as the surviving entity.  This merger will not impact the operations of the Energy Services segment.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and 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 (i) the accompanying interim condensed consolidated financial statements and related notes and (ii) BGH’s consolidated financial statements, related notes, and management’s discussion and analysis of financial condition and results of operations included in 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 Buckeye’s 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 (“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.

 

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The following table summarizes BGH’s cash received for the three and six months ended June 30, 2008 and 2007 as a result of its partnership interests in Buckeye:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

Incentive distributions from Buckeye

 

$

9,731

 

$

7,338

 

$

18,657

 

$

14,141

 

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

 

207

 

195

 

412

 

387

 

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

 

224

 

237

 

349

 

618

 

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

 

68

 

64

 

135

 

127

 

 

 

$

10,230

 

$

7,834

 

$

19,553

 

$

15,273

 

 

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 63 active refined petroleum products terminals, with aggregate storage capacity of approximately 22.9 million barrels. In addition, Buckeye operates and maintains approximately 2,200 miles of other pipelines under agreements with major oil and chemical companies. Through recent acquisitions of Lodi Gas Storage, L.L.C. (“Lodi Gas”) and Farm & Home Oil Company LLC (“Farm & Home”) in the first quarter of 2008, Buckeye now owns and operates two major natural gas storage facilities in northern California and markets refined petroleum products in certain areas served by Buckeye’s pipelines and terminals.

 

Lodi Gas owns and operates two natural gas storage facilities near Lodi, California.  Together, these facilities provide approximately 22 billion cubic feet (“bcf”) of 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’s 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 basis, principally in eastern and central Pennsylvania.  When Farm & Home was acquired, it also had retail operations, but Buckeye sold those operations to a wholly owned subsidiary of Inergy, L.P. on April 15, 2008.  The assets and liabilities and results of operations of Farm & Home’s retail operations were determined to be discontinued operations effective on the Farm & Home acquisition date of February 8, 2008 (see Note 3 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.  On July 31, 2008, Farm & Home was merged with and into its wholly owned subsidiary, Buckeye Energy Services LLC, with Buckeye Energy Services LLC continuing as the surviving entity.

 

Buckeye’s pipeline and terminal 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 and natural gas marketing and distribution companies.  Farm & Home’s wholesale customers are primarily product wholesalers and major commercial users of refined petroleum products.

 

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With the acquisitions of Lodi Gas and Farm & Home, BGH determined that it had two additional reportable segments, Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, BGH conducted 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.

 

Pending Acquisition

 

On July 16, 2008, Buckeye entered into a definitive agreement to purchase an ethanol and petroleum products terminal in Albany, New York from LogiBio Albany Terminal, LLC.  The purchase price for the terminal will be $45.0 million, with an additional $1.5 million payable if LogiBio Albany Terminal, LLC is successful in modifying certain long term contractual commitments related to the terminal and another $1.5 million payable if the terminal operations meet certain performance goals over the next three years.  The terminal has an active storage capacity of 1.8 million barrels.  The transaction is subject to customary closing conditions.  This terminal will be reported in the Terminalling and Storage segment.  Buckeye expects to complete the purchase of the terminal in late August 2008 and fund the purchase with available cash and borrowings under Buckeye’s revolving credit agreement described under “Liquidity and Capital Resources” as discussed below.

 

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 among Buckeye and its consolidated subsidiaries, BGH, and Services Company are reflected in Buckeye’s consolidated financial statements but are eliminated in BGH’s consolidated financial statements.

 

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Summary operating results for BGH were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(In thousands)

 

Revenue

 

$

492,548

 

$

124,951

 

$

872,824

 

$

249,895

 

Costs and expenses

 

435,562

 

80,737

 

759,744

 

157,047

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

56,986

 

44,214

 

113,080

 

92,848

 

Other (expenses)

 

(18,033

)

(12,770

)

(35,597

)

(26,346

)

Income before equity income and non-controlling interest

 

38,953

 

31,444

 

77,483

 

66,502

 

 

 

 

 

 

 

 

 

 

 

Equity income

 

1,344

 

2,258

 

3,399

 

4,044

 

Non-controlling interest expense

 

(34,980

)

(29,571

)

(69,716

)

(60,476

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,317

 

$

4,131

 

$

11,166

 

$

10,070

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended