Flying J Bankruptcy Update

Magellan Midstream Partners to purchase Longhorn Pipeline

OGDEN, Utah -- Continuing the bankruptcy-induced dismantling of the Flying J Inc. empire, the purchase by Magellan Midstream Partners LP of substantially all of the assets of Flying J subsidiary Longhorn Partners Pipeline LP has been approved by the bankruptcy court. Closing is set for July 29, with no additional approvals required. The purchase price for the pipeline system is $250 million plus the fair market value of line fill, which is currently estimated at approximately $100 million. Management intends to finance the acquisition with debt.

On Dec. 22, 2008, driven [image-nocss] by the precipitous decline in oil prices coupled with the disruption in the credit markets, Flying J and certain of its subsidiaries, including Longhorn Pipeline Holdings, filed voluntary petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in Delaware. As part of its efforts to maximize value for creditors, Flying J pursued the sale of Longhorn Pipeline.

All of Ogden, Utah-based Flying J's operations, including approximately 250 travel plazas and fuel stops, have remained open and have been serving customers in the normal course of business. The bankruptcy filing included Flying J's Big West refining and Longhorn Pipeline subsidiaries, which also have continued to operate. No other subsidiaries or affiliates, including the company's Canadian operations, were included in the filing or are subject to the reorganization proceedings.

In mid-July, Flying J and Pilot Travel Centers LLC entered into a preliminary merger agreement that will provide a framework for Flying J's core travel plaza business to emerge from Chapter 11 bankruptcy protection. The pre-merger agreement with Knoxville, Tenn.-based Pilot, which operates 305 travel centers nationally, would allow Pilot to acquire the travel centers owned by Flying J in return for $300 million to $500 million and an equity stake in Pilot.

The 700-mile Longhorn common carrier pipeline system transports refined petroleum products from Houston to El Paso, Texas. A terminal in El Paso, comprised of a five-bay truck loading rack and more than 900,000 barrels of storage, was included in the purchase. This terminal serves local petroleum products demand and distributes product to connecting third-party pipelines for ultimate delivery to markets in Arizona, New Mexico and, in the future, Northern Mexico.

"The Longhorn system is an excellent fit with our existing asset portfolio and our stated intent to grow our presence in the Texas market," said Don Wellendorf, CEO. "Magellan is quite knowledgeable of this system because we have served as its operator for the past several years. We feel confident that our business model as an independent pipeline company will attract customers interested in transporting petroleum products to the Southwestern area of the country and are already in discussions with a number of potential customers."

Following closing of the acquisition, Magellan intends to connect this pipeline system to the partnership's existing terminal at East Houston to provide additional supply options for current and potential customers to transport petroleum products to Southwestern markets. Further, Magellan will complete construction of an additional 400,000 barrels of storage that is currently underway at the El Paso terminal. Both projects should be complete by mid-2010 at an estimated cost of $25 million.

Because this asset had minimal commercial activity following the former owner's bankruptcy filing last year, Magellan anticipates a ramp-up of operations during the first one to two years of ownership as a customer base is built for this pipeline system. Following this ramp-up period, the partnership expects this acquisition to generate financial results in line with its typical targeted return for expansion capital projects of six to eight times earnings before interest, taxes and depreciation (EBITDA).

Magellan Midstream Partners, Tulsa, Okla., is a publicly traded partnership formed to own, operate and acquire a diversified portfolio of energy assets. The partnership primarily transports, stores and distributes refined petroleum products. MMP's general partner interest and related incentive distribution rights are owned by Magellan Midstream Holdings LP.

Click herefor previous CSP Daily News coverage of Flying J's bankruptcy.