Buckeye Partners, L.P.

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Buckeye Partners, L.P.

5002 Buckeye Road
Emmaus, Pennsylvania 18049-5347
U.S.A. Telephone: (484) 232-4000
Fax: (484) 232-4543
Web site: http://www.buckeye.com

Public Company
Incorporated: 1986
Employees: 620
Sales: $272.9 million (2003)
Stock Exchanges: New York
Ticker Symbol: BPL
NAIC: 486910 Pipeline Transportation of Refined Petroleum Products

Buckeye Partners, L.P., based in Emmaus, Pennsylvania, is a master limited partnership trading on the New York Stock Exchange. The company's main business, conducted through subsidiary Buckeye Pipe Line Company L.P., is a network of pipelines, terminals, and storage facilities serving major oil companies, refineries, and end users of petroleum products. All told, the company owns and operates 4,500 miles of pipelines and more than 100 delivery locations in a ten-state area, as well as operating another 1,200 miles of pipelines on a contract basis. Bulk storage terminals, capable of holding approximately five million barrels of refined petroleum, are located in Illinois, Indiana, Michigan, New York, Ohio, and Pennsylvania. The types of refined products Buckeye transports include gasoline, jet fuel, diesel fuel, heating oil, and kerosene. Since 1996 Buckeye has been majority-owned by management and employees.

Heritage Linked to 1800s Standard Oil

Buckeye was once part of the 19th-century industrial behemoth, Standard Oil Company. The company was launched in 1863 when John D. Rockefeller and a pair of partners bought a Cleveland refinery, at a time when the oil industry was in its infancy, western Pennsylvania fields were center stage, and the major petroleum product was kerosene, used as an illuminant. Rockefeller recognized that Cleveland, because of its links to railroads and Great Lakes shipping and proximity to Pennsylvania crude, was ideally situated to become a major hub for oil refining. In 1870 the business was incorporated and Rockefeller set out to consolidate, if not conquer, the industry—in the process displaying a keen business acumen as well as ruthlessness in getting his way. By the end of the decade Rockefeller and his partner, Henry Flagler, controlled almost all of the oil refining in the United States, but they were not content with Standard Oil as a horizontal monopoly, dominating one aspect of the oil industry. Instead, they began to expand the company's interests to include drilling as well as the sale of petroleum products, transforming Standard Oil into a vertical monopoly as well. In 1882 all of the assets were housed under the first trust in the United States. The Standard Oil Trust controlled 80 percent of the country's oil refineries and 90 percent of the oil pipelines, and was also a dominant player overseas.

By the mid-1880s the only major petroleum deposits were to be found in Pennsylvania and Russia, and with the Pennsylvania fields beginning to play out there was concern at Standard Oil that the company might be little more than a flash in the pan. Then in May 1885 oil was discovered near Lima in northwestern Ohio, a deposit that stretched into Indiana, and within months hundreds of derricks were erected in the area and began pumping crude. But there was one complication: The Ohio crude contained less kerosene than the Pennsylvania deposits, and what kerosene there was contained far too many impurities to make a commercial product. Despite the risk of investing in the Ohio area, Rockefeller forged ahead, putting up money out of his own pocket to finance the business in defiance of the Standard Oil Company board. Thus in March 1886 Standard Oil formed Buckeye Pipe Line Company to transport crude from independent wells through a network of pipelines to storage facilities or railroad terminals. At first Standard Oil sold the Ohio oil as a heating fuel, but it was only after a company scientist found a way to refine the Ohio crude into a marketable kerosene that Rockefeller knew his gamble paid off. It was in Ohio that Standard Oil first became involved in production in a major way, as the company quickly gained complete control of the Lima field, and the trust took a major step in its move toward becoming a vertical monopoly. Because the Ohio deposits would be the dominant American play until superseded by discoveries in Kansas and Texas in the early 1900s, Standard Oil was an unchallenged force in the U.S. oil industry for the rest of the 1800s. Although the transport of Ohio crude would not be as important after the Kansas and Texas discoveries, Buckeye Pipe Line remained a viable business because there was still a need to bring crude to the major refining operations established in Lima.

Standard Oil launched the era of the trusts, becoming just one of a number of industry monopolies. The U.S. Congress, fearful of the power these firms wielded, passed the Sherman Anti-Trust Act in 1892. Two years later the Ohio Supreme Court ordered the breakup of Standard Oil, but the firm found a way to skirt the ruling by fleeing to New Jersey, where it was able to reform under a consolidated corporate structure as Standard Oil of New Jersey and continued to operate as a trust. The federal government sued Standard Oil and in 1906 it was declared a monopoly and ordered to dissolve. After the company appealed the decision, the matter was eventually taken up by the U.S. Supreme Court, which in 1911 ruled against Standard Oil and forced its breakup. As a result, Standard Oil was split into several "Baby Standards," and another two dozen smaller subsidiaries also were spun off, including Buckeye Pipe Line, which emerged as an independent, public company.

Moving Toward Refined Products After World War II

Through the end of World War II in 1945, Buckeye was primarily involved in crude oil transportation. Management now decided to expand its ability to move refined products, which were more stable than crude and thus a safer investment. In the 1940s Buckeye established its Midwest Products System, a pipeline that ran from Toledo to Lima, Ohio, and from Indianapolis to southeastern Illinois. Next, Buckeye launched its Eastern Products System in 1952. This unit built pipelines from the New York harbor refining and distribution complex, connecting New Jersey refineries to New York and Pennsylvania marketers. The system became operational in 1954. In the meantime, Buckeye continued to build up its Midwest assets, in 1954 completing construction on an eight-inch refined products pipeline that extended from Lima to Columbus refineries. A year later a link to Toledo's Wolverine Pipe Line Co. was completed as well as a number of other spurs. In addition, some of the crude oil lines were converted to refined products, although the transportation of crude products remained an important part of Buckeye's business. As a result of these changes, Buckeye enjoyed steady growth, improving revenues from $7 million in 1946 to $17 million in 1954.

In 1964 the Pennsylvania Railroad acquired Buckeye, many of whose pipelines paralleled the railroad's right-of-way. Under Penn Central's ownership, Buckeye expanded its New York City operations, constructing the first pipeline system beneath city streets to serve commercial customers and the area's three major airports: La Guardia, JFK, and Newark. Starting in the mid-1970s Buckeye launched a major capital improvement program, making sizable investments to improve existing service through the addition of modern pumps, control systems, and new storage tanks. The company also extended its pipeline system to new markets. In 1977 Buckeye moved into the New England market by acquiring Jet Lines, Inc., a pipeline network serving the region.

Buckeye's corporate parent in the meantime underwent a number of changes. In 1968 the Pennsylvania Railroad merged with the New York Central Railroad, the largest merger in U.S. history, resulting in the Penn Central Railroad Company. Less than three years later, however, Penn Central was forced into bankruptcy, the largest corporate bankruptcy in history. With the railroad operations turned over to Conrail and Amtrak, the company emerged from bankruptcy in October 1978 as Penn Central Corporation, which had assets in real estate, hotels, oil companies, and pipelines.

To raise cash, Penn Central spun off Buckeye in December 1986. Buckeye Partners, L.P. was incorporated in Delaware as a master limited partnership, and with Goldman Sachs & Co. acting as lead underwriter, 12 million partnership units were then sold at $20 each, raising $240 million. This money, along with $300 million from a private placement of partnership debt securities, was used to purchase Penn Central's interest in Buckeye Pipe Line Co. Penn Central retained a 19 percent stake in Buckeye Partners and also owned another corporation, Buckeye Management Company (BMC), which was formed in 1986 to serve as the general partner of Buckeye Partners. BMC owned a 1 percent interest in Buckeye Partners. Also of note in 1986, Buckeye acquired a controlling interest in Laurel Pipe Line Company, which served Pennsylvania markets from a Philadelphia terminal. The remaining 17 percent interest was then bought in December 1992.

Penn Central sold its 19 percent interest in Buckeye Partners in 1993, but held onto BMC for another three years. Then, in March 1996, Penn Central sold its interests to BMC Acquisition Company, a Delaware corporation created by a management team to acquire BMC. BMC was owned by Glenmoor Partners, an investment group headed by BMC's chairman and CEO Alfred W. Martinelli and including other members of senior management. Also a participating entity in Glenmoor was the BMC Acquisition Company Employees Stock Ownership Plan. The ESOP was funded by a $63 million loan from Glenmoor, which in turn borrowed the money from Prudential Life Insurance Company of America. This $63 million along with $6 million contributed by Glenmoor was used to acquire Penn Central's interest in BMC. It took over the management of a company that in 1995 generated $183.5 million in revenues and posted net income of nearly $50 million.

Company Perspectives:

Buckeye is committed to providing quality transportation service to its customers by continuing to grow and diversify its service offerings.

Late 1990s Expansion

Buckeye Partners, despite its long history, remained little known. To increase its profile with investors, BMC instituted a 2-for-1 split of the partnership's publicly traded units in February 1998. As a result, the unit price was lower, making it more attractive to individual investors. Buckeye Partners then gained additional recognition by becoming more aggressive in its efforts to expand its operations. In early 1999 it paid $12.6 million to acquire the fuels division of American Refining Group, Inc. (AMG), adding a refined petroleum products terminal and transmix processing plant located in Indianola, Pennsylvania, as well as another transmix processing facility in Hartford, Illinois. Because pipelines carry a variety of products, a certain amount of blending of dissimilar fuels is bound to occur. An undesirable blending of products caused during transport is known as transmix, requiring processing after the product has completed its pipeline journey. The AMG fuels division had been working with Buckeye for a number of years, and with Buckeye's backing it was hoped that the operation, already one of the largest transmix refining operations in the country, could grow even further. Later in 1999 Buckeye also acquired selected assets of Seagull Products Corporation and Seagull Energy Corporation at a cost of $5.75 million. Buckeye added a presence in the Gulf Coast area picking up a 16-mile pipeline, partially leased by a chemical company, as well as six pipeline operating agreements with chemical firms in the area, thereby expanding Buckeye's business in operating pipeline assets for third parties. To house these assets, subsidiary Buckeye Gulf Coast Pipe Piles, LLC was formed. The 1999 acquisition provided an immediate contribution to Buckeye's balance sheet. For the year, revenues totaled $305.8 million, a significant improvement over the $184.5 million recorded the prior year. The addition of refining revenue, accounting for $107.5 million, provided most of the difference. Transportation revenue also grew by nearly $15 million.

Buckeye continued to build on its network in 2000. From BP Amoco it added to its ability to serve the Detroit market by acquiring an area terminal capable of holding 280,000 barrels of petroleum product. Later in the year Buckeye bought another six petroleum product terminals from Agway Energy Products, LLC. Providing a combined capacity of two million barrels of petroleum product, the terminals were located in Macungie, Pennsylvania, and Brewerton, Geneva, Marcy, Rochester, and Vestal, New York. Buckeye also sold some assets in 2000, electing to leave refining operations to others and to concentrate on pipelines and terminals. Kinder Morgan Energy Partners LP bought Buckeye Refining Company, LLC for $37.3 million in cash and $8.3 million in net working capital, taking over Buckeye's transmix processing plants in Indianola, Pennsylvania, and Hartford, Illinois. Buckeye used the money to pay down debt and provide some operational cash. In 2000 Buckeye also forged an unusual alliance for a pipeline company. It agreed to provide right-of-way access to PetroNet, a fiber-optic network serving 22 northeastern and midwestern cities, in exchange for a stake in PetroNet of nearly 50 percent. Another development of note during 2000 was the appointment of William H. Seas to replace Martinelli as CEO. Martinelli stayed on as chairman. For the year, revenues from continuing operations totaled $208.6 million, and income from continuing operations amounted to $64.5 million.

In 2001 Buckeye completed a pair of deals involving TransMontaigne Pipeline Inc. First, Buckeye bought a 482-mile pipeline and other assets for $62 million. Starting in Hartsdale, Indiana, the pipeline ran east to Toledo, Ohio, and west to Fort Madison, Iowa, plus an 11-mile spur connecting terminals in Hartsdale and East Chicago, Indiana. In addition, Buckeye added the Hartsdale and East Chicago facilities, along with four terminals located in South Bend and Indianapolis, Indiana; Peoria, Illinois; and Bryan, Ohio. The acquisition added significantly to Buckeye's ability to serve the Chicago market while providing flexibility to its Midwest pipeline network. Later in 2001 Buckeye supplemented these assets by acquiring a 18.52 percent stake in West Shore Pipe Line Company, paying TransMontaigne $23.3 million. West Shore owned a pipeline system that originated in the Chicago area and ran to Green Bay, Wisconsin, and Madison, Wisconsin, providing refined petroleum products to markets in northern Illinois and Wisconsin.

The effect of these acquisitions could be readily seen on Buckeye's balance sheet. Revenues increased to $232.4 million in 2001 while income improved to $69.4 million. In 2002 revenues topped $247.3 million and the company recorded net income of $71.9 million. Buckeye completed just one transaction in 2003, paying $28.5 million for a 20 percent interest in West Texas LPG Pipeline Limited Partnership, which owned and operated a 3,000-mile pipeline. But during the course of 2003 Buckeye took steps to raise money to pay off debt, thereby lowering the cost of capital and allowing it to further its growth through acquisitions and capital projects. In February 2003 the Partnership sold 1.75 million units, raising nearly $60 million. Then in July Buckeye netted nearly $300 million through the placement of notes due in 2013. A month later the company raised another $150 million in notes, due in 2033.

Key Dates:

1886:: Buckeye Pipe Line Company is formed by Standard Oil Company.
1911:: The breakup of Standard Oil leads to an independent Buckeye.
1964:: Pennsylvania Railroad acquires the company.
1986:: Buckeye is spun off as a master limited partnership.
1996:: Management and employees gain a majority ownership position.
2004:: Buckeye acquires 25 terminals from Royal Dutch/Shell.

Before Buckeye began to use its new financial flexibility to make acquisitions in 2004, Glenmoor, which owned a controlling stake in Buckeye's managing partner, was sold to a private equity fund: Carlyle/Riverstone Global Energy and Power Fund II. The fund was created by Washington, D.C.-based investment firm The Carlyle Group and Riverstone Holdings LLC of New York. There was no plan, however, to change the way Buckeye was run and the company's management team remained virtually unchanged. A few months later, in July 2004, Buckeye returned to acquisition mode in a big way, agreeing to pay $530 million to a unit of Royal Dutch/Shell for 25 terminals and more than 850 miles of pipeline in the Midwest. Early in 2005 Buckeye bought another 478 miles of pipelines and four more terminals, paying $180 million to affiliates of ExxonMobil Corporation. As major oil companies elected to sell off pipeline assets to concentrate on their core businesses, there was every reason to expect that Buckeye would continue to expand.