Both issues were highlighted as potential risks by Buckeye Partners in the prospectus for its $650 million private placement, a substantial portion of which will be used to finance its $1.36 billion acquisition of BORCO from the First Reserve Corporation private equity fund.

Warning that the Freeport-based oil storage facility “depends on a limited number of customers for substantially all of its revenue”, meaning the loss of any could have a material impact on BORCO’s operations and cash flows, Buckeye Partners said: “Storage revenue represented approximately 80 per cent of BORCO’s total revenue for the nine months ended September 30, 2010.

“Currently, BORCO has a limited number of long-term storage customers, consisting of oil majors, energy companies, physical traders and one national oil company.

“For the nine months ended September 30, 2010, approximately 30 per cent and 69 per cent of storage revenue was derived from the top one and the top three customers, respectively.

“We expect BORCO to continue to derive substantially all of its total revenue from a small number of customers in the future,” Buckeye Partners said. “BORCO may be unsuccessful in renewing its storage contracts with its customers, and those customers may discontinue or reduce contracted storage from BORCO. If any of BORCO’s customers, in particular its top three customers, significantly reduces its contracted storage with BORCO, and if BORCO is unable to find other storage customers on terms substantially similar to the terms under BORCO’s existing storage contracts, our business, results of operations and cash flow could be adversely affected.”

Significantly, Buckeye Partners also noted as a ‘risk’ the uncertainty over whether Freeport’s business licence fee and real property tax exemptions, due to expire in 2015, would be extended following negotiations between the Government and the Grand Bahama Port Authority (GBPA).

The fact that a New York Stock Exchange-listed company would include such a detail in its prospectus indicates that renewing these tax exemptions may be critical to Freeport’s ability to attract foreign – and domestic – investment going forward.

“BORCO is currently exempt from income and property tax in the Bahamas pursuant to concessions granted under the Hawksbill Creek Agreement between the Government of the Bahamas and the Grand Bahama Port Authority,” Buckeye Partners said.

“BORCO’s exemption from Bahamian taxation pursuant to the Hawksbill Creek Agreement is scheduled to expire in 2015. If the Bahamian governmental authorities do not extend the concessions under the Hawksbill Creek Agreement, or BORCO’s tax status in the Bahamas were to otherwise change, such that BORCO has more tax liability than we anticipate, our cash flow could be materially adversely affected.”

Emphasising that it planned to increase BORCO’s storage capacity by 7.5 million barrels over the next two to three years, Buckeye Partners said that if it acquired 100 per cent of the Grand Bahama-based storage facility by buying out the 20 per cent stake held by Vopak, its net indebtedness would rise by $775 million on top of the existing $1.8 billion.

And, if Vopak remained in, Buckeye Partners warned that it would have the ability to “block approval of the annual budget, certain capital expenditure projects and budget modifications, certain incurrences of debt, certain sales and acquisitions, the hiring or removal of the BORCO chief executive/general manager and the entry or termination of certain contracts”.

Proximity

Reiterating BORCO’s attraction for it, Buckeye Partners said: “No other international commercial storage terminal enjoys BORCO’s proximity to the US demand and supply centres, as well as its scale and comprehensive service offerings.

“BORCO’s terminal is a premier marine storage facility with a unique position as a strategic logistics hub.

“The terminal has 21.6 million barrels of storage capacity with deepwater access up to 91 feet, and the ability to berth the largest tankers in the world. Located only 80 miles from southern Florida and 920 miles from New York Harbour, BORCO is strategically located to act as a hub in facilitating international logistics for bulk-build, break-bulk and blending operations.”

And Buckeye Partners added: “We believe that BORCO’s customer demand is well in excess of its currently available capacity. BORCO has received strong indications for contract renewals from current customers, and there is a significant backlog of demand from additional potential customers.

“In addition, BORCO has received significant interest from existing and new customers for the increased storage capacity expected to be constructed at the terminal over the next two to three years.

“We believe the BORCO acquisition will support future regional and international growth opportunities. There are potential synergies with our existing assets in the continental US and our newly acquired refined products terminal in Yabucoa, Puerto Rico, as well as other Caribbean market opportunities.”

BORCO had 80 above ground storage tanks, ranging in capacity from 5,000 to 500,000 barrels, with a total installed capacity of 21.6 million barrels. Some 66 tanks were available to clients, with 14 dedicated for BORCO’s own use.

Buckeye Partners said: “Of the 66 tanks available to serve third parties, 10 are currently used for the storage of crude oil, 43 for the storage of fuel oil, and 13 for the storage of clean petroleum products, such as gasoline, diesel and certain other distillates.

Six of the tanks currently used for crude oil can be converted between crude oil service and fuel oil service.

“BORCO is prepared to undertake a significant expansion project, which we expect will be phased in over the next two to three years, and will add approximately 7.5 million barrels of petroleum product storage, increasing total storage capacity to more than 29 million barrels.

“The new tankage is expected to be constructed with the flexibility to store fuel oil, clean petroleum products or crude oil.

“The facility site also has additional unused land available for future expansions, with room to install approximately 13 million barrels of incremental storage capacity, and there is an opportunity to optimise the configuration of a portion of the existing tank area to add approximately three million barrels of incremental storage capacity.

“When the expansion project is completed, and if additional storage is installed on the unused land, the total facility storage capacity could be increased to as much as 45 million barrels.”