The original Buckeye Pipe Line Company was founded in 1886 as part of the Standard Oil Company and became a publicly owned, independent company after the dissolution of Standard Oil in 1911. Expansion into petroleum products transportation after World War II and subsequent acquisitions thereafter ultimately led to Buckeye Pipe Line Company becoming a leading independent common carrier pipeline. In 1964, Buckeye Pipe Line Company was acquired by a subsidiary of the Pennsylvania Railroad, which later became the Penn Central Corporation. In 1986, Buckeye Pipe Line Company was reorganized into a master limited partnership (“MLP”), Buckeye Partners, L.P. We are a publicly traded Delaware partnership, and our limited partner units (“LP Units”) are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “BPL.” Buckeye GP LLC (“Buckeye GP”) is our general partner. Buckeye GP is a wholly-owned subsidiary of Buckeye GP Holdings L.P. (“BGH”), a Delaware MLP that is separately traded on the NYSE under the ticker symbol “BGH.” Unless the context requires otherwise, references to “we,” “us,” “our,” the “Partnership” or “Buckeye” are intended to mean the business and operations of Buckeye Partners, L.P. and its consolidated subsidiaries.
We have 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 and 67 active products terminals that provide aggregate storage capacity of approximately 27.2 million barrels. In addition, we operate and maintain approximately 2,400 miles of other pipelines under agreements with major oil and chemical companies. We also own and operate a major natural gas storage facility in northern California, which provides approximately 40 billion cubic feet (“Bcf”) of total natural gas storage capacity (including pad gas), and are a wholesale distributor of refined petroleum products in the United States in areas also served by our pipelines and terminals.
We operate and report in five business segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Development and Logistics. We previously referred to the Development and Logistics segment as the Other Operations segment. We renamed this segment to better describe the business activities conducted within the segment. We conduct all of our operations through our operating subsidiaries, which are referred to herein as our “Operating Subsidiaries”:
Buckeye Pipe Line Company, L.P. (“Buckeye Pipe Line”), which owns an approximately 2,643-mile refined petroleum products pipeline system serving major population centers in eight states. As a part of its service territory, Buckeye Pipe Line is the primary jet fuel transporter to certain airports, including John F. Kennedy International Airport (“JFK Airport”), LaGuardia Airport and Newark Liberty International Airport (“Newark Airport”).
Laurel Pipe Line Company, L.P. (“Laurel”), which owns an approximately 345-mile refined petroleum products pipeline connecting four Philadelphia area refineries to ten delivery points across Pennsylvania.
Wood River Pipe Lines LLC (“Wood River”), which owns eight refined petroleum products pipelines with aggregate mileage of approximately 1,287 miles located in Illinois, Indiana, Missouri and Ohio. Wood River includes two pipelines that we acquired from ConocoPhillips in November 2009. See “2009 Developments” below for further information.
Buckeye Pipe Line Transportation LLC (“BPL Transportation”), which owns a refined petroleum products pipeline system with aggregate mileage of approximately 478 miles located in New Jersey, New York and Pennsylvania.
Everglades Pipe Line Company, L.P. (“Everglades”), which owns an approximately 37-mile refined petroleum products pipeline connecting Port Everglades, Florida to Ft. Lauderdale-Hollywood International Airport and Miami International Airport. Everglades is the primary jet fuel transporter to Miami International Airport.
Buckeye Pipe Line Holdings, L.P. (“BPH”), which, through certain of its subsidiaries, owns (or in certain instances leases from our other Operating Subsidiaries) 62 refined petroleum and other products terminals (of which 59 are included in our Terminalling and Storage segment and three are included in our Pipeline Operations segment) with aggregate storage capacity of approximately 26.2 million barrels and 574 miles of pipelines in the Midwest and West Coast. BPH’s terminal holdings include three terminals that we acquired from ConocoPhillips in November 2009. See “2009 Developments” below for further information. BPH operates, through its subsidiaries, terminals and pipelines for third parties. BPH also holds noncontrolling stock interests in two Midwest refined petroleum products pipelines and a natural gas liquids (“NGLs”) pipeline system.
Buckeye Gas Storage LLC (“Buckeye Gas”), which, through its subsidiary Lodi Gas Storage, L.L.C. (“Lodi Gas”), owns a natural gas storage facility in northern California that provides approximately 40 Bcf of total natural gas storage capacity (including pad gas).
Buckeye Energy Holdings LLC (“Buckeye Energy”), which, through its subsidiary Buckeye Energy Services LLC (“BES”), markets refined petroleum products in areas served by our pipelines and terminals and also owns five refined petroleum product terminals with aggregate storage capacity of 1.0 million barrels located in northeastern and central Pennsylvania.
Our primary business objective is to provide stable and sustainable cash distributions to the holders of our LP Units (“Unitholders”), while maintaining a relatively low investment risk profile. The key elements of our strategy are to:
Generate stable cash flows
Improve operating efficiencies and asset utilization
Generate increased cash distributions to our Unitholders
Grow our portfolio of predictable and stable fee-based businesses combined with opportunistic revenue generating capabilities;
Operate in a safe and environmentally responsible manner
Maintain an investment-grade credit rating
In early 2009, we began a “best practices” review of our business processes and organizational structure to identify improved business practices, operating efficiencies and cost savings in anticipation of changing needs in the energy markets. This review culminated in the approval by the Board of Directors of Buckeye GP of an organizational restructuring.
The organizational restructuring included a workforce reduction of approximately 230 employees, in excess of 20% of our workforce. The program was initiated in the second quarter of 2009 and was substantially complete by the end of 2009. As part of the workforce reduction, we offered certain eligible employees the option of enrolling in a voluntary early retirement program, which approximately 80 employees accepted. The remaining affected positions have been eliminated involuntarily under our ongoing severance plan. Most terminations were effective as of July 20, 2009. The restructuring also included the relocation of some employees consistent with the goals of the reorganization. We have incurred $32.1 million of expenses in connection with this organizational restructuring for the year ended December 31, 2009. See Note 3 in the Notes to Consolidated Financial Statements for further discussion.
Asset Impairment and Subsequent Sale of the Assets
During the second quarter of 2009, we received notification that several of the shippers on the NGL pipeline owned by Buckeye NGL Pipe Lines LLC (“Buckeye NGL”) intended to migrate their business to a competing pipeline that recently went into service. In connection with this notification, there was a significant decline in shipment volumes as compared to historical averages. This significant loss in the customer base utilizing our NGL pipeline, in conjunction with the authorization by the Board of Directors of Buckeye GP to pursue the sale of Buckeye NGL, triggered an evaluation of a potential asset impairment that resulted in a non-cash charge to earnings of $72.5 million in the Pipeline Operations segment in the second quarter of 2009. Effective January 1, 2010, we sold our ownership interest in Buckeye NGL for $22.0 million. The sales proceeds exceeded the previously impaired carrying value of the assets of Buckeye NGL by $12.8 million resulting in the reversal of $12.8 million of the previously recorded asset impairment expense in the fourth quarter of 2009. The impairment and subsequent reversal are reflected within the category “Asset Impairment Expense” on our consolidated statements of operations. See Note 8 in the Notes to Consolidated Financial Statements for further discussion.
Refined Petroleum Product Terminals and Pipeline Assets Acquisition
In November 2009, we acquired from ConocoPhillips certain refined petroleum product terminals and pipeline assets for approximately $47.1 million in cash. In addition, we acquired certain inventory on hand for $7.3 million and entered into certain commercial contracts with ConocoPhillips that are associated with the acquired facilities. The assets that we acquired include over 300 miles of active pipelines that provide connectivity between the East St. Louis, Illinois and East Chicago, Indiana markets and three terminals providing 2.3 million barrels of storage.
We funded the acquisition through cash flows from operations and borrowings under our existing credit facility. See Note 4 in the Notes to Consolidated Financial Statements for further discussion.
Completion of Kirby Hills Phase II Expansion Project
In June 2009, we completed the Kirby Hills Phase II expansion project. The Kirby Hills Phase II expansion project provides approximately 100,000 million cubic feet per day (“MMcf/day”) of additional injection capability and 200,000 MMcf/day of additional withdrawal capability at Lodi Gas’s natural gas storage facility. See “Natural Gas Storage Segment” below for further information.
In August 2009, we sold $275.0 million aggregate principal amount of 5.500% Notes due 2019 (the “5.500% Notes”) in an underwritten public offering. The notes were issued at 99.35% of their principal amount. Total proceeds from this offering, after underwriters’ fees, expenses and debt issuance costs of $1.8 million, were approximately $271.4 million, and were used to reduce amounts outstanding under our credit facility and for general partnership purposes.
In August 2009, we amended the BES credit agreement (“BES Credit Agreement”) to increase the borrowing capacity from $175.0 million to $250.0 million. Our unsecured revolving credit agreement (the “Credit Facility”) was also amended to reduce the borrowing capacity from $600.0 million to $580.0 million. See Note 13 in the Notes to Consolidated Financial Statements for further discussion.
On March 31, 2009, we issued 2.6 million LP Units in an underwritten public offering at $35.08 per LP Unit. On April 29, 2009, the underwriters of the equity offering exercised their option to purchase an additional 390,000 LP Units at $35.08 per LP Unit. Total proceeds from the offering, including the overallotment option and after the underwriter’s discount of $1.17 per LP Unit and offering expenses, were approximately $104.6 million, and were used to reduce amounts outstanding under our Credit Facility.
In March 2009, the 2009 Long-Term Incentive Plan of Buckeye Partners, L.P. (the “2009 LTIP”) became effective after the approval by a majority of our Unitholders. The 2009 LTIP, which is administered by the Compensation Committee of the Board of Directors of Buckeye GP (the “Compensation Committee”), provides for the grant of phantom units, performance units and, in certain cases, distribution equivalent rights (“DERs”), which provide the participant a right to receive payments based on distributions we make on our LP Units. The number of LP Units that may be granted under the 2009 LTIP may not exceed 1,500,000 subject to certain adjustments.
On December 16, 2009, the Compensation Committee approved the terms of the Buckeye Partners, L.P. Unit Deferral and Incentive Plan (“Deferral Plan”). The Compensation Committee is expressly authorized to adopt the Deferral Plan under the terms of the 2009 LTIP, which grants the Compensation Committee the authority to establish a program pursuant to which our phantom units may be awarded in lieu of cash compensation at the election of the employee. At December 31, 2009, eligible employees were allowed to defer up to 50% of their 2009 compensation award under our Annual Incentive Compensation Plan (“AIC Plan”) or other discretionary bonus programs in exchange for grants of phantom units equal in value to the amount of their cash award deferral (each such unit, a “Deferral Unit”). Participants also receive one matching phantom unit for each Deferral Unit. See Note 18 in the Notes to Consolidated Financial Statements for further discussion.
The following discussion describes the business activities of our business segments for 2009, which include Pipeline Operations, Terminalling and Storage, Natural Gas Storage, Energy Services, and Development and Logistics. The Pipeline Operations and Energy Services segments derive a nominal amount of their revenue from U.S. governmental agencies. Otherwise, none of our business segments have contracts or subcontracts with the U.S.
Pipeline Operations Segment
The Pipeline Operations segment owns and operates approximately 5,400 miles of pipeline located primarily in the northeastern and upper midwestern portions of the United States and services approximately 100 delivery locations. This segment transports refined petroleum products, including gasoline, jet fuel, diesel fuel, heating oil and kerosene, from major supply sources to terminals and airports located within end-use markets. The pipelines within this segment also transport other refined petroleum products, such as propane and butane, refinery feedstock and blending components. The segment’s geographical diversity, connections to multiple sources of supply and extensive delivery system help create a stable base business.
The Pipeline Operations segment conducts business without the benefit of exclusive franchises from government entities. In addition, the Pipeline Operations segment generally operates as a common carrier, providing transportation services at posted tariffs and without long-term contracts. Demand for the services provided by the Pipeline Operations segment derives from end users’ demand for refined petroleum products in the regions served and the ability and willingness of refiners and marketers to supply such demand by deliveries through our pipelines. Factors affecting demand for refined petroleum products include price and prevailing general economic conditions. Demand for the services provided by the Pipeline Operations segment is, therefore, subject to a variety of factors partially or entirely beyond our control. Typically, this segment’s pipelines receive refined petroleum products from refineries, connecting pipelines, and bulk and marine terminals and transport those products to other locations for a fee.
We provide pipeline transportation services in the following states: California, Connecticut, Florida, Illinois, Indiana, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New York, Ohio, Pennsylvania, Tennessee and Texas. The geographical location and description of these pipelines is as follows:
Pennsylvania—New York—New Jersey
Buckeye Pipe Line serves major population centers in Pennsylvania, New York and New Jersey through approximately 928 miles of pipeline. Refined petroleum products are received at Linden, New Jersey from 17 major source points, including two refineries, six connecting pipelines and nine storage and terminalling facilities. Products are then transported through two lines from Linden, New Jersey to Macungie, Pennsylvania. From Macungie, the pipeline continues west through a connection with the Laurel pipeline to Pittsburgh, Pennsylvania (serving Reading, Harrisburg, Altoona/Johnstown and Pittsburgh, Pennsylvania) and north through eastern Pennsylvania into New York (serving Scranton/Wilkes-Barre, Pennsylvania and Binghamton, Syracuse, Utica, Rochester and, via a connecting carrier, Buffalo, New York). We lease capacity in one of the pipelines extending from Pennsylvania to upstate New York to a major oil pipeline company. Products received at Linden, New Jersey are also transported through one line to Newark Airport and through two additional lines to JFK Airport and LaGuardia Airport and to commercial refined petroleum products terminals at Long Island City and Inwood, New York. These pipelines supply JFK Airport, LaGuardia Airport and Newark Airport with substantially all of each airport’s jet fuel requirements.
BPL Transportation’s pipeline system delivers refined petroleum products from Valero Energy Corporation’s (“Valero”) refinery located in Paulsboro, New Jersey to destinations in New Jersey, Pennsylvania and New York. A portion of the pipeline system extends from Paulsboro, New Jersey to Malvern, Pennsylvania. From Malvern, a pipeline segment delivers refined petroleum products to locations in upstate New York, while another segment delivers products to central Pennsylvania. Two shorter pipeline segments connect Valero’s refinery to the Colonial pipeline system and the Philadelphia International Airport, respectively.
The Laurel pipeline system transports refined petroleum products through a 345-mile pipeline extending westward from four refineries and a connection to the Colonial pipeline system in the Philadelphia area to Reading, Harrisburg, Altoona/Johnstown and Pittsburgh, Pennsylvania. Illinois—Indiana—Michigan—Missouri—Ohio
Buckeye Pipe Line and NORCO Pipe Line Company, LLC (“NORCO”), a subsidiary of BPH, transport refined petroleum products through 2,025 miles of pipeline in northern Illinois, central Indiana, eastern Michigan, western and northern Ohio, and western Pennsylvania. A number of receiving lines and delivery lines connect to a central corridor which runs from Lima, Ohio through Toledo, Ohio to Detroit, Michigan. Refined petroleum products are received at a refinery and other pipeline connection points near Toledo and Lima, Ohio; Detroit, Michigan; and East Chicago, Indiana. Major market areas served include Peoria, Illinois; Huntington/Fort Wayne, Indianapolis and South Bend, Indiana; Bay City, Detroit and Flint, Michigan; Cleveland, Columbus, Lima and Toledo, Ohio; and Pittsburgh, Pennsylvania.
Wood River owns eight refined petroleum products pipelines with aggregate mileage of approximately 1,287 miles located in the midwestern United States. Refined petroleum products are received from ConocoPhillips’ Wood River refinery in Illinois and transported to the Chicago area, to our terminal in the St. Louis, Missouri area and to the Lambert-St. Louis Airport, to receiving points across Illinois and Indiana and to our pipeline in Lima, Ohio. Petroleum products are also transported from the East St. Louis, Illinois area to the East Chicago, Indiana area with delivery points in Illinois and Indiana, and from the East Chicago, Indiana area to the Kankakee, Illinois area. At our tank farm located in Hartford, Illinois, one of Wood River’s pipelines also receives refined petroleum products from the Explorer pipeline, which are transported to our 1.3 million barrel terminal located on the Ohio River in Mt. Vernon, Indiana. Wood River also owns an approximately 26-mile pipeline that extends from Marathon Pipe Line LLC’s (“Marathon”) Wood River Station in southern Illinois to the East St. Louis, Illinois area.
Competition and Customers
We believe that we have the following competitive strengths:
We operate in a safe and environmentally responsible manner;
We own and operate high quality assets that are strategically located;
We have stable, long-term relationships with our customers;
We own relatively predictable and stable fee-based businesses with opportunistic revenue generating capabilities;
We maintain a conservative financial position with an investment-grade credit rating; and
We have an experienced management team whose interests are aligned with those of our Unitholders.
Pipeline Operations and Terminalling and Storage Segments
Generally, pipelines are the lowest cost method for long-haul overland movement of refined petroleum products. Therefore, the Pipeline Operations segment’s most significant competitors for large volume shipments are other pipelines, some of which are owned or controlled by major integrated oil companies. Although it is unlikely that a pipeline system comparable in size and scope to the Pipeline Operations segment’s pipeline systems will be built in the foreseeable future, new pipelines (including pipeline segments that connect with existing pipeline systems) could be built to effectively compete with the Pipeline Operations segment in particular locations.
The Pipeline Operations segment competes with marine transportation in some areas. Tankers and barges on the Great Lakes account for some of the volume to certain Michigan, Ohio and upstate New York locations during the approximately eight non-winter months of the year. Barges are presently a competitive factor for deliveries to the New York City area, the Pittsburgh area, Connecticut and locations on the Ohio River such as Mt. Vernon, Indiana and Cincinnati, Ohio and locations on the Mississippi River such as St. Louis, Missouri.
Trucks competitively deliver refined petroleum products in a number of areas that the Pipeline Operations segment serves. While their costs may not be competitive for longer hauls or large volume shipments, trucks compete effectively for smaller volumes in many local areas. The availability of truck transportation places a significant competitive constraint on the ability of the Pipeline Operations segment to increase its tariff rates.
Privately arranged exchanges of refined petroleum products between marketers in different locations are another form of competition. Generally, such exchanges reduce both parties’ costs by eliminating or reducing transportation charges. In addition, consolidation among refiners and marketers that has accelerated in recent years has altered distribution patterns, reducing demand for transportation services in some markets and increasing them in other markets.
The production and use of biofuels may be a competitive factor in that, to the extent the usage of biofuels increases, some alternative means of transport that compete with our pipelines may be able to provide transportation services for biofuels that our pipelines cannot because of safety or pipeline integrity issues. In particular, railroads competitively deliver biofuels to a number of areas and, therefore, are a significant competitor of pipelines with respect to biofuels. Biofuel usage may also create opportunities for additional pipeline transportation, if such biofuels can be transported on our pipeline, and additional blending opportunities within our Terminalling and Storage segment, altugh that potential cannot be quantified at present.
Distribution of refined petroleum products depends to a large extent upon the location and capacity of refineries. However, because the Pipeline Operations segment’s business is largely driven by the consumption of fuel in its delivery areas and the Pipeline Operations’ pipelines have numerous source points, we do not believe that the expansion or shutdown of any particular refinery is likely, in most instances, to have a material effect on the business of the Pipeline Operations segment. As discussed in “Item 1A. Risk Factors” below, however, a significant decline in production at the ConocoPhillips Wood River refinery, Valero Paulsboro refinery or Husky Lima refinery could materially impact the business of the Pipeline Operations segment.