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| BPL > SEC Filings for BPL > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
Overview
Buckeye Partners, L.P. ("Buckeye") is a publicly traded (NYSE: BPL) master limited partnership organized in 1986 under the laws of the state of Delaware. Buckeye GP LLC ("Buckeye GP") is the general partner of Buckeye. Buckeye GP is a wholly-owned subsidiary of Buckeye GP Holdings L.P. ("BGH"), a Delaware limited partnership that is also publicly traded (NYSE: BGH).
The following discussion provides an analysis of the results for each of Buckeye's operating segments and an overview of Buckeye's liquidity and capital resources and certain other items related to Buckeye. The following discussion and analysis should be read in conjunction with (i) the accompanying interim condensed consolidated financial statements and related notes and (ii) Buckeye's consolidated financial statements, related notes, and management's discussion and analysis of financial condition and results of operations included in Buckeye's Annual Report on Form 10-K for the year ended December 31, 2007.
Buckeye owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered. Buckeye owns and operates approximately 5,400 miles of pipeline and 64 active products terminals, with aggregate storage capacity of approximately 24.7 million barrels. In addition, Buckeye operates and maintains approximately 2,200 miles of other pipelines under agreements with major oil and chemical companies. Through the recent acquisitions of Lodi Gas Storage, L.L.C. ("Lodi Gas") and Farm & Home Oil Company LLC ("Farm & Home") in the first quarter of 2008, Buckeye now owns and operates two major natural gas storage facilities in northern California and markets refined petroleum products in certain areas 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 substantially expand its operations on the West Coast. In addition, in October 2008, Lodi Gas successfully began natural gas injection into an expansion of its natural gas storage reservoir known as Kirby Hills Phase II. The Kirby Hills Phase II storage expansion, when fully operational, will add an estimated 11 bcf of natural gas storage capacity. The Kirby Hills Phase II expansion project is expected to be fully operational in February 2009. 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.
When Farm & Home was acquired, it sold refined petroleum products on a wholesale basis, principally in eastern and central Pennsylvania, and it also had retail operations. Buckeye sold Farm & Home's retail 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). On July 31, 2008, Farm & Home was merged with and into its wholly owned subsidiary, Buckeye Energy Services LLC ("BES"), with BES continuing as the surviving entity.
Buckeye's pipeline and terminal customers are 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. BES's wholesale customers are primarily product wholesalers and major commercial users of refined petroleum products.
The acquisitions of Lodi Gas and Farm & Home added two additional reportable segments, Natural Gas Storage and Energy Services. Effective in the first quarter of 2008, Buckeye conducted business in five reportable operating segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations. See Note 17 to the condensed consolidated financial statements for a more detailed discussion of Buckeye's operating segments.
Results of Operations
Summary operating results for Buckeye were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(In thousands, except per unit amounts)
Revenues $ 496,170 $ 125,653 $ 1,368,994 $ 375,548
Costs and expenses 431,719 78,122 1,187,744 231,487
Operating income 64,451 47,531 181,250 144,061
Other (expenses) (17,673 ) (11,151 ) (52,209 ) (35,402 )
Income from continuing operations 46,778 36,380 129,041 108,659
(Loss) income from discontinued
operations (176 ) - 1,230 -
Net income $ 46,602 $ 36,380 $ 130,271 $ 108,659
Allocation of net income:
Net income allocated to general
partner:
Income from continuing operations $ 8,651 $ 6,116 $ 22,822 $ 18,734
(Loss) income from discontinued
operations $ (53 ) $ - $ 370 $ -
Net income allocated to limited
partners:
Income from continuing operations $ 38,127 $ 30,264 $ 106,219 $ 89,925
Income from discontinued
operations $ (123 ) $ - $ 860 $ -
Earnings per limited partner
unit-diluted:
Income from continuing operations $ 0.79 $ 0.71 $ 2.23 $ 2.18
Income from discontinued
operations - - 0.02 -
Earnings per limited partner
unit-diluted $ 0.79 $ 0.71 $ 2.25 $ 2.18
Weighted average number of limited
partner units outstanding:
Basic 48,372 42,676 47,538 41,286
Diluted 48,378 42,719 47,558 41,333
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EBITDA
The following table summarizes EBITDA for Buckeye for the three and nine months ended September 30, 2008 and 2007. EBITDA, a measure not defined under generally accepted accounting principles ("GAAP"), is defined by Buckeye as income from continuing operations before interest expense (including amortization and write-off of deferred debt financing costs), income taxes, depreciation, and amortization. EBITDA should not be considered an alternative to net income, operating income, cash flow from operations or any other measure of financial performance presented in accordance with GAAP.
Because EBITDA excludes some items that affect income from continuing operations, and these items might vary among other companies, the EBITDA data presented might not be comparable to similarly titled measures at other companies. Buckeye's management uses EBITDA as a performance measure to assist in the analysis and assessment of Buckeye's operations, to evaluate the viability of proposed projects and to determine overall rates of return on alternative investment opportunities.
Buckeye believes that investors benefit from having access to the same financial measures used by Buckeye's management.
The table below presents EBITDA for the three and nine months ended September 30, 2008 and 2007 and a reconciliation of EBITDA to income from continuing operations, which is the most comparable GAAP financial measure.
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(In thousands)
Income from continuing operations $ 46,778 $ 36,380 $ 129,041 $ 108,659
Interest and debt expense 19,053 12,391 55,008 38,651
Income tax expense 9 277 435 715
Depreciation and amortization 15,457 11,520 41,415 33,425
Total EBITDA $ 81,297 $ 60,568 $ 225,899 $ 181,450
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Net income and EBITDA in 2008 include two recurring non-cash charges. First, the accounting rules for leases require in certain instances that base rent payments be combined with future rent increases and the resulting total be expensed on a straight-line basis over the lease term. Accordingly, Lodi Gas recorded non-cash rental expense with respect to its land leases in excess of cash payments of $1.8 million and $3.1 million for the three and nine months ended September 30, 2008, respectively. Second, in connection with the acquisition of Lodi Gas, MainLine Management LLC, the general partner of BGH, agreed to forego the senior administrative charge beginning June 25, 2007 and ending March 31, 2009. While no cash payment is required, Buckeye has included an expense of $0.5 million and $1.4 million for the three and nine months ended September 30, 2008, respectively, related to the senior administrative charge. The expense for that foregone senior administrative charge has been reflected as a reduction in the purchase price of Lodi Gas.
Revenues, operating income, total costs and expenses, and depreciation and amortization by operating segment were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(In thousands)
Revenue:
Pipeline Operations $ 91,439 $ 92,067 $ 286,716 $ 278,244
Terminalling and Storage 33,003 24,843 87,749 72,379
Natural Gas Storage 16,762 - 43,412 -
Energy Services 344,494 - 926,809 -
Other Operations 12,011 8,743 33,637 24,925
Intersegment eliminations (1,539 ) - (9,329 ) -
Total $ 496,170 $ 125,653 $ 1,368,994 $ 375,548
Operating income:
Pipeline Operations $ 33,087 $ 36,122 $ 108,795 $ 109,077
Terminalling and Storage 17,027 9,324 40,294 28,243
Natural Gas Storage 8,914 - 21,474 -
Energy Services 3,810 - 5,239 -
Other Operations 1,613 2,085 5,448 6,741
Total $ 64,451 $ 47,531 $ 181,250 $ 144,061
Total costs and expenses (including depreciation and
amortization):
Pipeline Operations $ 58,352 $ 55,945 $ 177,921 $ 169,167
Terminalling and Storage 15,976 15,519 47,455 44,136
Natural Gas Storage 7,848 - 21,938 -
Energy Services 340,684 - 921,570 -
Other Operations 10,398 6,658 28,189 18,184
Intersegment eliminations (1,539 ) - (9,329 ) -
Total $ 431,719 $ 78,122 $ 1,187,744 $ 231,487
Depreciation and amortization:
Pipeline Operations $ 10,092 $ 9,630 $ 28,704 $ 28,035
Terminalling and Storage 1,600 1,455 4,604 4,193
Natural Gas Storage 982 - 3,732 -
Energy Services 2,336 - 3,070 -
Other Operations 447 435 1,305 1,197
Total $ 15,457 $ 11,520 $ 41,415 $ 33,425
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Third Quarter of 2008 compared to Third Quarter of 2007
Total revenues for the quarter ended September 30, 2008 were $496.2 million, approximately $370.5 million greater than revenue for the same period in 2007. Of the $370.5 million increase in revenue in the third quarter of 2008, $16.8 million resulted from the addition of Lodi Gas's operations and $344.5 million resulted from the addition of Farm & Home's legacy wholesale operations. The results of Lodi Gas and Farm & Home's legacy wholesale operations are included below in the Natural Gas Storage and Energy Services segments, respectively. The balance of the revenue improvement of approximately $9.2 million was attributable to the remaining reporting segments as discussed below.
Pipeline Operations:
Revenues from Pipeline Operations of $91.4 million in the third quarter of 2008 slightly declined when compared to revenues from Pipeline Operations in the third quarter of 2007. The decrease of $0.6 million or 0.1% was primarily the result of:
† Transportation revenue being flat in the third quarter of 2008 compared to the third quarter of 2007 as the benefit of the tariff increases implemented on July 1, 2008 did not fully offset reduced product volumes in the third quarter of 2008 as compared to the third quarter of 2007. Management believes the reduced volumes in 2008 were caused primarily by reduced demand for gasoline resulting from higher retail gasoline prices, the continued introduction of ethanol into retail gasoline products as well as reduced demand for distillates resulting from higher retail distillate prices and adverse changes in the U.S. economy. Total product volumes declined by 4.6% in the third quarter of 2008 compared to the third quarter of 2007;
† An approximate $2.7 million reduction in revenue representing the settlement of overages and shortages on product deliveries; and
† A net increase in incidental revenues of $2.1 million, which was principally related to an increase in revenue of $1.9 million for contract service activities at customer facilities connected to Buckeye's refined products pipelines.
During 2007 and continuing into 2008, Buckeye experienced measurement shortages in connection with its pipeline product deliveries in excess of historical variances. Based on 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 generally corrected, although monitoring and evaluation of product measurement issues is continuing. Additionally, the cost of product downgrades which result from the interface of different products in the pipeline has increased as a result of the significant increases in the volatility of product prices. Buckeye has implemented a number of measures to mitigate the effects of these issues, including tariff adjustments to allow for the equitable allocation of operational effects of transportation.
Product volumes transported in Pipelines Operations for the quarter ended September 30, 2008 and 2007 were as follows:
Average Barrels Per Day
Three Months Ended September 30,
Product 2008 2007
Gasoline 682,500 730,100
Distillate 263,100 274,000
Jet Fuel 363,600 376,100
LPG's 18,800 18,600
NGL's 21,000 21,100
Other 11,400 5,700
Total 1,360,400 1,425,600
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On May 1, 2008 and July 1, 2008, certain of Buckeye's operating subsidiaries in the Pipeline Operations segment filed pipeline tariffs reflecting increased rates on average of approximately 4.8%. These tariff rate increases are expected to generate approximately $16.4 million in additional revenue on an annualized basis.
Terminalling and Storage:
Revenues from the Terminalling and Storage segment were $33.0 million in the third quarter of 2008, which is an increase of $8.2 million, or 33%, compared to the third quarter of 2007. The revenue increase was primarily the result of:
† An approximate $4.2 million increase in revenue primarily related to increases in blending fees for product additives and product recoveries from vapor recovery units, which were offset by an approximately 6.2% decline in terminal throughput volumes in the third quarter of 2008 compared to the third quarter of 2007;
† Incremental revenue of $1.2 million in 2008 due to the acquisitions of the Niles, Michigan, Ferrysburg, Michigan, and Albany, New York terminals as more fully described in Note 3 to the accompanying condensed consolidated financial statements; and
† $2.8 million from the settlement, net of receivable, of contractual product handling charges with a customer.
Average daily throughput for the products terminals for the quarters ended September 30, 2008 and 2007 were as follows:
Average Barrels Per Day Three Months Ended September 30, 2008 2007
Products throughput 539,200 575,100
Natural Gas Storage:
Revenue from the Natural Gas Storage segment was $16.8 million in the third quarter of 2008. Approximately 63.0% of this revenue represented firm storage revenues and 37.0% represented hub services revenues.
Energy Services:
Revenue from the Energy Services segment was $344.5 million in the third quarter of 2008. Revenue from the Energy Services segment was derived from Farm & Home's legacy wholesale operations, which Buckeye acquired on February 8, 2008. Farm & Home's retail operations were sold on April 15, 2008, and are treated as discontinued operations for all periods presented in 2008. During the third quarter of 2008, approximately 105.9 million gallons of product were sold. 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 $12.0 million in the third quarter of 2008, which is an increase of $3.3 million, or 37.9% compared to the third quarter of 2007. The revenue increase was primarily the result of:
† A reduction of $1.1 million in pipeline operation and maintenance revenue related to the expiration of several maintenance contracts in 2008; and
† An increase of $4.3 million in construction management revenue related to new construction contracts. These construction activities are principally conducted on a time and material basis.
Operating Expenses:
Costs and expenses for the three months ended September 30, 2008 and 2007 were
as follows:
Costs and Expenses
Three Months Ended September 30,
2008 2007
(In thousands)
Cost of product sales $ 334,959 $ 1,278
Payroll and payroll benefit 26,559 22,419
Depreciation and amortization 15,457 11,520
Outside services 10,089 10,645
Operating power 7,837 7,743
Property and other taxes 5,987 5,322
Insurance and casualty losses 4,566 3,267
Construction management 7,567 1,609
Supplies 1,562 2,356
Rentals 5,642 2,989
All other 11,494 8,974
Total $ 431,719 $ 78,122
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Cost of product sales was $335.0 million in the third quarter of 2008, which is an increase over the third quarter of 2007 of $333.7 million. Approximately $333.4 million of the increase was attributable to product sold by the Energy Services segment, which consists primarily of the operations of Farm & Home's legacy wholesale operations. The remaining increase is principally associated with fuel purchases related to a product supply arrangement in Buckeye's Pipeline Operations segment.
Payroll and payroll benefits were $26.6 million in the third quarter of 2008, an increase of $4.1 million compared to the third quarter of 2007. The operations of the Natural Gas Storage and the Energy Services segments added $1.0 million and $1.9 million of payroll and payroll benefits expense for the period, respectfully. In addition, increases in salaries, wages, and incentive compensation added $1.5 million for the period. The increases in salaries, wages, and incentive compensation were primarily the result of an increase in the number of employees due to Buckeye's expansion of its operations.
Depreciation and amortization expense was $15.5 million in the third quarter of 2008, which is an increase of $3.9 million over the third quarter of 2007. The operations of the Natural Gas Storage and the Energy Services segments added $1.0 million and $2.3 million of depreciation and amortization expense in the three months ended September 30, 2008, respectively. The remaining increase in depreciation and amortization expense resulted from Buckeye's ongoing maintenance and expansion capital program.
Outside services costs were $10.1 million in the third quarter of 2008, which is a decrease of $0.5 million over the third quarter of 2007. The operations of the Natural Gas Storage and the Energy Services segments added $1.0 million and $0.2 million of outside services costs in the three months ended September 30, 2008, respectively. These increases were offset by a decrease in maintenance and pipeline integrity projects in the third quarter of 2008 as compared to the third quarter of 2007. Outside services costs consist principally of third-party contract services for pipeline and terminal maintenance activities.
Operating power costs were $7.8 million for the three months ended September 30, 2008, and were consistent with operating power costs the three months ended September 30, 2007. Operating power consists primarily of electricity required to operate pipeline pumping facilities.
Property and other taxes were $6.0 million in the third quarter of 2008, an increase of $0.7 million compared to the third quarter of 2007, which was primarily due to the operations of the Natural Gas Storage segment.
Insurance and casualty losses were $4.6 million for the three months ended September 30, 2008, which is an increase of $1.3 million from the three months ended September 30, 2007. Casualty losses increased by $1.2 million due to an increase of $0.6 million in the costs of remediating environmental incidents and $0.6 million in expenses relating to a product contamination incident. Insurance costs increased by $0.1 million, which is primarily due to the inclusion of the Natural Gas Storage and Energy Services operations.
Construction management costs were $7.6 million in the third quarter of 2008, which is an increase of $6.0 million from the third quarter of 2007. In the third quarter of 2008, Buckeye started three significant construction contracts which are expected to be completed in the fourth quarter of 2008.
Supplies expense was $1.6 million for the three months ended September 30, 2008, which is a decrease of $0.8 million from the three months ended September 30, 2007. The decrease is primarily due to a decrease in terminal additive purchases at terminals owned by Buckeye.
Rental expense was $5.6 million in the third quarter of 2008, which is an increase of $2.6 million over the third quarter of 2007. The operations of the Natural Gas Storage and the Energy Services segments added $2.3 million and $0.2 million of rental expense in the three months ended September 30, 2008, respectively.
All other costs were $11.5 million in the three months ended September 30, 2008, an increase of $2.5 million compared to the same period in 2007. The operations of Lodi Gas and the Energy Services segment operations added $1.6 million and $0.8 million of other costs, respectively, in the three months ended September 30, 2008. The remainder of the increases related to various other pipeline operating costs.
Other income (expense) for the three months ended September 30, 2008 and 2007 was as follows:
Other Income (Expenses)
Three Months Ended September 30,
2008 2007
(In thousands)
Investment and equity income $ 2,616 $ 2,560
Interest and debt expense (19,053 ) (12,391 )
Minority interests and other (1,236 ) (1,320 )
Total $ (17,673 ) $ (11,151 )
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Investment and equity income was $2.6 million for the three months ended September 30, 2008, which is consistent with investment and equity income earned in the three months ended September 30, 2007.
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