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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9356
BUCKEYE PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2432497
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
5002 BUCKEYE ROAD
P. O. BOX 368
EMMAUS, PENNSYLVANIA 18049
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (484) 232-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
LP Units representing limited partnership interests......................... New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(TITLE OF CLASS)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act 12b-2). Yes [X] No [ ]
At June 28, 2002, the aggregate market value of the registrant's LP
Units held by non-affiliates was $888 million. The calculation of such market
value should not be construed as an admission or conclusion by the registrant
that any person is in fact an affiliate of the registrant.
LP Units outstanding as of March 13, 2003: 28,702,346
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS................................................................................... 3
ITEM 2. PROPERTIES................................................................................. 13
ITEM 3. LEGAL PROCEEDINGS.......................................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S LP UNITS AND RELATED UNITHOLDER MATTERS........................ 14
ITEM 6. SELECTED FINANCIAL DATA ................................................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................................... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................................................... 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 54
ITEM 11. EXECUTIVE COMPENSATION .................................................................... 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 59
ITEM 14. CONTROLS & PROCEDURES...................................................................... 60
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K........................... 61
PART I
ITEM 1. BUSINESS
INTRODUCTION
Buckeye Partners, L.P. (the "Partnership"), the Registrant, is a master
limited partnership organized in 1986 under the laws of the state of Delaware.
The Partnership's principal line of business is the transportation, terminalling
and storage of refined petroleum products for major integrated oil companies,
large refined product marketing companies and major end users of petroleum
products on a fee basis through facilities owned and operated by the
Partnership. The Partnership also operates pipelines owned by third parties
under contracts with major integrated oil and chemical companies.
The Partnership conducts all its operations through subsidiary entities.
These operating subsidiaries are Buckeye Pipe Line Company, L.P. ("Buckeye"),
Laurel Pipe Line Company, L.P. ("Laurel"), Everglades Pipe Line Company, L.P.
("Everglades") and Buckeye Pipe Line Holdings, L.P. ("BPH"). (Each of Buckeye,
Laurel, Everglades and BPH is referred to individually as an "Operating
Partnership" and collectively as the "Operating Partnerships"). The Partnership
owns approximately a 99 percent interest in each of the Operating Partnerships.
BPH owns directly, or indirectly, a 100 percent interest in each of Buckeye
Terminals, LLC ("BT"), Norco Pipe Line Company, LLC ("Norco") and Buckeye Gulf
Coast Pipe Lines, L.P. ("BGC"). BPH also owns a 75 percent interest in WesPac
Pipeline-Reno Ltd., WesPac Pipeline-San Diego, Ltd. and related WesPac entities
(collectively known as "WesPac") and an 18.52 percent interest in West Shore
Pipe Line Company.
Buckeye Pipe Line Company (the "General Partner") serves as the general
partner to the Partnership. As of December 31, 2002, the General Partner owned
approximately a 1 percent general partnership interest in the Partnership and
approximately a 1 percent general partnership interest in each Operating
Partnership, for an effective 2 percent interest in the Partnership. The General
Partner is a wholly-owned subsidiary of Buckeye Management Company ("BMC"). BMC
is a wholly-owned subsidiary of Glenmoor, Ltd. ("Glenmoor"). Glenmoor is owned
by certain directors and members of senior management of the General Partner and
trusts for the benefit of their families and by certain other management
employees of Buckeye Pipe Line Services Company ("Services Company").
Services Company employs a significant portion of the employees that work
for the Operating Partnerships. At December 31, 2002, Services Company had 506
full-time employees. Services Company entered into a Services Agreement with BMC
and the General Partner in August 1997 to provide services to the Partnership
and the Operating Partnerships through March 2011. Services Company is
reimbursed by BMC or the General Partner for its direct and indirect expenses,
which in turn are reimbursed by the Partnership, except for certain executive
compensation costs. BT, Norco and BGC directly employed 115 full-time employees
at December 31, 2002.
Buckeye is one of the largest independent pipeline common carriers of
refined petroleum products in the United States, with 2,909 miles of pipeline
serving 9 states. Laurel owns a 345-mile common carrier refined products
pipeline located principally in Pennsylvania. Norco owns a 482-mile pipeline in
Indiana, Illinois and Ohio. Everglades owns 37 miles of refined petroleum
products pipeline in Florida. Buckeye, Laurel, Norco and Everglades conduct the
Partnership's refined products pipeline business. BPH, through facilities it
owns in Taylor, Michigan, provides bulk storage service with an aggregate
capacity of 260,000 barrels of refined petroleum products. BT, with facilities
located in New York, Pennsylvania, Ohio, Indiana and Illinois provides bulk
storage services with an aggregate capacity of 4,848,000 barrels of refined
petroleum products. BGC owns and operates petrochemical pipelines in the Gulf
Coast area. BGC also provides engineering and construction management services
to major chemical companies in the Gulf Coast area. WesPac provides turbine fuel
transportation services to the Reno/Tahoe International Airport through a
3.0-mile pipeline and to the San Diego International Airport through a 4.3-mile
pipeline.
In March 1999, the Partnership acquired the fuels division of American
Refining Group, Inc. ("ARG") for approximately $13.7 million. The Partnership
operated the former ARG processing business under the name of Buckeye Refining
Company, LLC ("BRC"). BRC was sold to Kinder Morgan Energy Partners, L.P.
("Kinder Morgan") on October 25, 2000 for approximately $45.7 million. BRC
processed transmix at its Indianola,
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Pennsylvania and Hartford, Illinois refineries. Transmix represents refined
petroleum products, primarily fuel oil and gasoline that becomes commingled
during normal pipeline operations. The refining process produced separate
quantities of fuel oil, kerosene and gasoline that BRC then marketed at the
wholesale level.
In March 1999, the Partnership also acquired pipeline operating contracts
and a 16-mile pipeline from Seagull Products Pipeline Corporation and Seagull
Energy Corporation ("Seagull") for approximately $5.8 million. The Partnership
operates the assets acquired from Seagull under the name of Buckeye Gulf Coast
Pipe Lines, LLC. BGC is an owner and contract operator of pipelines owned by
major chemical companies in the Gulf Coast area. BGC leases its 16-mile pipeline
to a major chemical company.
In June 2000, the Partnership also acquired six petroleum products
terminals from Agway Energy Products LLC ("Agway") for approximately $20.7
million. The terminals acquired had an aggregate capacity of approximately 1.8
million barrels and are located in Brewerton, Geneva, Marcy, Rochester and
Vestal, New York and Macungie, Pennsylvania. The Partnership operates the assets
acquired from Agway under the name of Buckeye Terminals, LLC.
On July 31, 2001, the Partnership acquired a refined products pipeline
system and related terminals from affiliates of TransMontaigne Inc. for
approximately $62.3 million. The assets included a 482-mile refined petroleum
products pipeline that runs from Hartsdale, Indiana west to Fort Madison, Iowa
and east to Toledo, Ohio, with an 11-mile pipeline connection between major
storage terminals in Hartsdale and East Chicago, Indiana. These assets are
operated by the Partnership under the name of Norco Pipe Line Company, LLC. The
acquired assets also included 3.2 million barrels of pipeline storage and
trans-shipment facilities in Hartsdale and East Chicago, Indiana and Toledo,
Ohio; and four petroleum products terminals located in Bryan, Ohio; South Bend
and Indianapolis, Indiana; and Peoria, Illinois. The storage and terminal assets
are operated by Buckeye Terminals, LLC.
On October 29, 2001, the Partnership acquired 6,805 shares of common stock
of West Shore Pipe Line Company ("West Shore") from TransMontaigne Pipeline Inc.
for approximately $23.3 million. The common stock represents an 18.52 percent
interest in West Shore. West Shore owns and operates a pipeline system that
originates in the Chicago, Illinois area and extends north to Green Bay,
Wisconsin and west and then north to Madison, Wisconsin. The pipeline system
transports refined petroleum products to users in northern Illinois and
Wisconsin. The other stockholders of West Shore are major oil companies. The
pipeline is operated under contract by Citgo Pipeline Company.
REFINED PRODUCTS TRANSPORTATION
The Partnership receives petroleum products from refineries, connecting
pipelines and marine terminals, and transports those products to other
locations. In 2002, refined petroleum products transportation accounted for
approximately 86% of the Partnership's consolidated revenues.
The Partnership transported an average of approximately 1,101,400 barrels
per day of refined products in 2002. The following table shows the volume and
percentage of refined petroleum products transported over the last three years.
VOLUME AND PERCENTAGE OF REFINED PETROLEUM PRODUCTS TRANSPORTED (1)
(VOLUME IN THOUSANDS OF BARRELS PER DAY)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT
------- ------- ------- ------- ------- -------
Gasoline ............. 556.4 50.5% 540.7 49.6% 526.7 49.6%
Jet Fuels ............ 250.9 22.8 260.0 23.8 270.9 25.5
Middle Distillates (2) 265.4 24.1 266.8 24.5 248.6 23.4
Other Products ....... 28.7 2.6 22.9 2.1 15.3 1.5
------- ------- ------- ------- ------- -------
Total ................ 1,101.4 100.0% 1,090.4 100.0% 1,061.5 100.0%
======= ======= ======= ======= ======= =======
- -----
(1) Excludes local product transfers.
(2) Includes diesel fuel, heating oil, kerosene and other middle distillates.
4
The Partnership provides refined product pipeline service in the following
states: Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois,
Connecticut, Massachusetts, Nevada, California and Florida.
Pennsylvania -- New York -- New Jersey
Buckeye serves major population centers in the states of Pennsylvania, New
York and New Jersey through 943 miles of pipeline. Refined petroleum products
are received at Linden, New Jersey from approximately 17 major source points,
including 2 refineries, 6 connecting pipelines and 9 storage and terminalling
facilities. Products are then transported through two lines from Linden, New
Jersey to Allentown, Pennsylvania. From Allentown, the pipeline continues west,
through a connection with Laurel, to Pittsburgh, Pennsylvania (serving Reading,
Harrisburg, Altoona/Johnstown and Pittsburgh) and north through eastern
Pennsylvania into New York (serving Scranton/Wilkes-Barre, Binghamton, Syracuse,
Utica and Rochester and, via a connecting carrier, Buffalo). Buckeye leases
capacity in one of the pipelines extending from Pennsylvania to upstate New York
to a major oil company. Products received at Linden, New Jersey are also
transported through one line to Newark International Airport and through two
additional lines to J. F. Kennedy International and LaGuardia airports and to
commercial bulk terminals at Long Island City and Inwood, New York. These
pipelines supply J. F. Kennedy, LaGuardia and Newark airports with substantially
all of each airport's jet fuel requirements.
Laurel transports refined petroleum products through a 345-mile pipeline
extending westward from five refineries and a connection to Colonial Pipeline
Company in the Philadelphia area to Reading, Harrisburg, Altoona /Johnstown and
Pittsburgh, Pennsylvania.
Indiana -- Ohio -- Michigan -- Illinois
Buckeye and Norco transport refined petroleum products through 2,336 miles
of pipeline (of which 246 miles are jointly owned with other pipeline companies)
in southern Illinois, central Indiana, eastern Michigan, western and northern
Ohio and western Pennsylvania. A number of receiving and delivery lines connect
to a central corridor which runs from Lima, Ohio, through Toledo, Ohio to
Detroit, Michigan. Products are received at East Chicago, Indiana; Robinson,
Illinois and at refinery and other pipeline connection points near Detroit,
Toledo and Lima. 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.
Other Refined Products Pipelines
Buckeye serves Connecticut and Massachusetts through 112 miles of pipeline
(the "Jet Lines System") that carry refined products from New Haven, Connecticut
to Hartford, Connecticut and Springfield, Massachusetts.
Everglades transports primarily turbine fuel on a 37-mile pipeline from
Port Everglades, Florida to Hollywood-Ft. Lauderdale International Airport and
Miami International Airport. Everglades supplies Miami International Airport
with substantially all of its turbine fuel requirements.
WesPac Pipeline-Reno Ltd., owns a 3.0-mile pipeline serving the Reno/Tahoe
International Airport. WesPac Pipeline - San Diego Ltd. owns a 4.3-mile pipeline
serving the San Diego International Airport. Both of these pipelines transport
turbine fuel. Each of these WesPac entities is a joint venture between BPH and
Kealine Partners in which BPH owns a 75 percent ownership interest. The
Partnership also provides $8.9 million in debt financing to WesPac entities.
OTHER BUSINESS ACTIVITIES
BPH provides bulk storage services through facilities located in Taylor,
Michigan that have the capacity to store an aggregate of approximately 260,000
barrels of refined petroleum products. BT, a wholly-owned subsidiary of BPH,
operates 14 terminals located in New York, Pennsylvania, Ohio, Indiana and
Illinois that provide bulk storage and throughput services and have the capacity
to store an aggregate of approximately 4,848,000 barrels of refined petroleum
products. Together, these terminalling and storage activities provided
approximately 8% of the Partnership's revenue in 2002. BPH also owns an 18.52
percent stock interest in West Shore Pipe Line Company.
5
West Shore owns and operates a pipeline system that originates in the Chicago,
Illinois area and extends north to Green Bay, Wisconsin and west and then north
to Madison, Wisconsin. The pipeline system transports refined petroleum products
to users in northern Illinois and Wisconsin. The other stockholders of West
Shore are major oil companies. West Shore is operated under contract by Citgo
Pipeline Company.
BGC, a wholly-owned subsidiary of BPH, is a contract operator of pipelines
owned by major chemical companies in the state of Texas. BGC currently has seven
operations and maintenance contracts in place. In addition, BGC owns a 16-mile
pipeline located in the state of Texas that it leases to a third-party chemical
company. A subsidiary of BGC also owns approximately 63 percent of a crude
butadiene pipeline between Deer Park, Texas and Port Arthur, Texas that was
completed in March 2003. In 2002, BGC's contract operations provided
approximately 6% of the Partnership's revenue. BGC also provides engineering and
construction management services to major chemical companies in the Gulf Coast
area.
COMPETITION AND OTHER BUSINESS CONSIDERATIONS
The Operating Partnerships conduct business without the benefit of
exclusive franchises from government entities. In addition, the Operating
Partnerships pipeline operations generally operate as common carriers, providing
transportation services at posted tariffs and without long-term contracts. The
Operating Partnerships do not own the products they transport. Demand for the
services provided by the Operating Partnerships derives from demand for
petroleum products in the regions served and the ability and willingness of
refiners, marketers and end-users to supply such demand by deliveries through
the Operating Partnerships' pipelines. Demand for refined petroleum products is
primarily a function of price, prevailing general economic conditions and
weather. The Operating Partnerships' businesses are, therefore, subject to a
variety of factors partially or entirely beyond their control. Multiple sources
of pipeline entry and multiple points of delivery, however, have historically
helped maintain stable total volumes even when volumes at particular source or
destination points have changed.
The Partnership's business may in the future be affected by changing oil
prices or other factors affecting demand for oil and other fuels. The
Partnership's business may also be impacted by energy conservation, changing
sources of supply, structural changes in the oil industry and new energy
technologies. The General Partner is unable to predict the effect of such
factors.
Changes in transportation and travel patterns in the areas served by the
Partnership's pipelines as well as further improvements in average fuel
efficiency could adversely affect the Partnership's results of operations and
financial condition.
In 2002, the pipeline transportation business had approximately 110
customers, most of which were either major integrated oil companies or large
refined product marketing companies. The largest two customers accounted for 6.5
percent and 6.3 percent, respectively, of consolidated transportation revenues,
while the 20 largest customers accounted for 64.3 percent of consolidated
transportation revenues.
Generally, pipelines are the lowest cost method for long-haul overland
movement of refined petroleum products. Therefore, the Operating Partnerships'
most significant competitors for large volume shipments are other pipelines,
many of which are owned and operated by major integrated oil companies. Although
it is unlikely that a pipeline system comparable in size and scope to the
Operating Partnerships' pipeline system 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 Operating Partnerships
in particular locations. In the Midwest, several petroleum product pipeline
expansions and two new petroleum product pipeline construction projects are in
various stages of completion. Generally, these projects will increase the
capacity to bring additional refined products into the Partnership's service
area. Because the Operating Partnerships own multiple pipelines throughout the
Partnership's service area and these projects do not impact local petroleum
product supply and demand, the General Partner believes that the completion of
these pipeline projects may result in volumes shifting from one Operating
Partnership pipeline segment to another, but will not, in the aggregate, have a
material adverse effect on the Operating Partnership's results of operations or
financial condition.
The Operating Partnerships compete 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
6
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 Ohio.
Trucks competitively deliver product in a number of areas served by the
Operating Partnerships. While their costs may not be competitive for longer
hauls or large volume shipments, trucks compete effectively for incremental and
marginal volumes in many areas served by the Operating Partnerships. The
availability of truck transportation places a significant competitive constraint
on the ability of the Operating Partnerships to increase their tariff rates.
Privately arranged exchanges of product between marketers in different
locations are an increasing but non-quantified 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.
Distribution of refined petroleum products depends to a large extent upon
the location and capacity of refineries. However, because the Partnership's
business is largely driven by the consumption of fuel in its delivery areas and
the Operating Partnerships' pipelines have numerous source points, the General
Partner does not believe that the expansion or shutdown of any particular
refinery would have a material effect on the business of the Partnership. The
General Partner is unable to determine whether refinery expansions or shutdowns
will occur or what their specific effect would be. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward-Looking
Information - Competition and Other Business Conditions."
The Operating Partnerships' mix of products transported tends to vary
seasonally. Declines in demand for heating oil during the summer months are, to
a certain extent, offset by increased demand for gasoline and jet fuel. Overall,
operations have been only moderately seasonal, with somewhat lower than average
volume being transported during March, April and May and somewhat higher than
average volume being transported in November, December and January.
Neither the Partnership nor any of the Operating Partnerships, other than
BPH's subsidiaries, has any employees. The Operating Partnerships are managed
and operated by employees of Services Company, BGC, Norco and BT. In addition,
Glenmoor provides certain management services to BMC, the General Partner and
Services Company. At December 31, 2002, Services Company had a total of 506
full-time employees, 145 of whom were represented by two labor unions. At
December 31, 2002, BGC had a total of 63 full-time, non-union employees, Norco
had a total of 30 full-time, non-union employees and BT had a total of 22
full-time, non-union employees. The Operating Partnerships (and their
predecessors) have never experienced any significant work stoppages or other
significant labor problems.
CAPITAL EXPENDITURES
The Partnership incurs capital expenditures in order to maintain and
enhance the safety and integrity of its pipelines and related assets, to expand
the reach or capacity of its pipelines, to improve the efficiency of its
operations or to pursue new business opportunities. During 2002 the Partnership
incurred $71.6 million of capital expenditures, of which $28.2 million related
to maintenance and integrity, $6.6 million related to expansion or cost
reduction projects and $36.8 million related to the construction of a 90-mile
crude butadiene pipeline. Financing for the Partnership's capital expenditures
was provided by cash from operations, borrowings under the Partnership's
revolving credit facilities and, with respect to the crude butadiene pipeline,
$14.2 million from advances provided by two petrochemical companies involved in
the project. The crude butadiene pipeline was completed in March 2003.
In 2003, the Partnership anticipates capital expenditures of approximately
$40 million, of which approximately $25 million is expected to relate to
maintenance and integrity projects and approximately $15 million is expected to
relate to expansion and cost reduction projects. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
7
REGULATION
General
Buckeye and Norco are interstate common carriers subject to the regulatory
jurisdiction of the Federal Energy Regulatory Commission ("FERC") under the
Interstate Commerce Act and the Department of Energy Organization Act. FERC
regulation requires that interstate oil pipeline rates be posted publicly and
that these rates be "just and reasonable" and non-discriminatory. FERC
regulation also enforces common carrier obligations and specifies a uniform
system of accounts. In addition, Buckeye, Norco and the other Operating
Partnerships are subject to the jurisdiction of certain other federal agencies
with respect to environmental and pipeline safety matters.
The Operating Partnerships are also subject to the jurisdiction of various
state and local agencies, including, in some states, public utility commissions
which have jurisdiction over, among other things, intrastate tariffs, the
issuance of debt and equity securities, transfers of assets and pipeline safety.
FERC Rate Regulation
Buckeye's rates are governed by a market-based rate regulation program
initially approved by FERC in March 1991 and subsequently extended. Under this
program, in markets where Buckeye does not have significant market power,
individual rate increases: (a) will not exceed a real (i.e., exclusive of
inflation) increase of 15 percent over any two-year period (the "rate cap"), and
(b) will be allowed to become effective without suspension or investigation if
they do not exceed a "trigger" equal to the change in the Gross Domestic Product
implicit price deflator since the date on which the individual rate was last
increased, plus 2 percent. Individual rate decreases will be presumptively valid
upon a showing that the proposed rate exceeds marginal costs. In markets where
Buckeye was found to have significant market power and in certain markets where
no market power finding was made: (i) individual rate increases cannot exceed
the volume-weighted average rate increase in markets where Buckeye does not have
significant market power since the date on which the individual rate was last
increased, and (ii) any volume-weighted average rate decrease in markets where
Buckeye does not have significant market power must be accompanied by a
corresponding decrease in all of Buckeye's rates in markets where it does have
significant market power. Shippers retain the right to file complaints or
protests following notice of a rate increase, but are required to show that the
proposed rates violate or have not been adequately justified under the
market-based rate regulation program, that the proposed rates are unduly
discriminatory, or that Buckeye has acquired significant market power in markets
previously found to be competitive.
The Buckeye program is an exception to the generic oil pipeline regulations
issued under the Energy Policy Act of 1992. The generic rules rely primarily on
an index methodology, whereby a pipeline is allowed to change its rates in
accordance with an index (currently the Producer Price Index) that FERC believes
reflects cost changes appropriate for application to pipeline rates.
Alternatively, a pipeline is allowed to charge market-based rates if the
pipeline establishes that it does not possess significant market power in a
particular market. In addition, the rules provide for the rights of both
pipelines and shippers to demonstrate that the index should not apply to an
individual pipeline's rates in light of the pipeline's costs. The final rules
became effective on January 1, 1995.
The Buckeye program was subject to review by FERC in 2000 when FERC
reviewed the index selected in the generic oil pipeline regulations. FERC
decided to continue the generic oil pipeline regulations with no material
changes and did not modify or discontinue Buckeye's program. The General Partner
cannot predict the impact that any change to Buckeye's rate program would have
on Buckeye's operations. Independent of regulatory considerations, it is
expected that tariff rates will continue to be constrained by competition and
other market factors.
Norco's tariff rates are governed by the generic FERC index methodology,
and therefore are subject to change annually according to the index.
ENVIRONMENTAL MATTERS
The Operating Partnerships are subject to federal, state and local laws and
regulations relating to the protection of the environment. Although the General
Partner believes that the operations of the Operating Partnerships comply in all
material respects with applicable environmental laws and regulations, risks of
substantial liabilities are
8
inherent in pipeline operations, and there can be no assurance that material
environmental liabilities will not be incurred. Moreover, it is possible that
other developments, such as increasingly rigorous environmental laws,
regulations and enforcement policies thereunder, and claims for damages to
property or injuries to persons resulting from the operations of the Operating
Partnerships, could result in substantial costs and liabilities to the
Partnership. See "Legal Proceedings" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Environmental Matters."
The Oil Pollution Act of 1990 ("OPA") amended certain provisions of the
federal Water Pollution Control Act of 1972, commonly referred to as the Clean
Water Act ("CWA"), and other statutes as they pertain to the prevention of and
response to petroleum product spills into navigable waters. The OPA subjects
owners of facilities to strict joint and several liability for all containment
and clean-up costs and certain other damages arising from a spill. The CWA
provides penalties for any discharges of petroleum products in reportable
quantities and imposes substantial liability for the costs of removing a spill.
State laws for the control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground. Regulations are currently
being developed under OPA and state laws that may impose additional regulatory
burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products is not unusual in the petroleum pipeline industry. The Operating
Partnerships' pipelines cross numerous navigable rivers and streams. Although
the General Partner believes that the Operating Partnerships comply in all
material respects with the spill prevention, control and countermeasure
requirements of federal laws, any spill or other release of petroleum products
into navigable waters may result in material costs and liabilities to the
Partnership.
The Resource Conservation and Recovery Act ("RCRA"), as amended,
establishes a comprehensive program of regulation of "hazardous wastes."
Hazardous waste generators, transporters, and owners or operators of treatment,
storage and disposal facilities must comply with regulations designed to ensure
detailed tracking, handling and monitoring of these wastes. RCRA also regulates
the disposal of certain non-hazardous wastes. As a result of these regulations,
certain wastes typically generated by pipeline operations are considered
"hazardous wastes" which are subject to rigorous disposal requirements.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), also known as "Superfund," governs the release or threat of
release of a "hazardous substance." Releases of a hazardous substance, whether
on or off-site, may subject the generator of that substance to liability under
CERCLA for the costs of clean-up and other remedial action. Pipeline maintenance
and other activities in the ordinary course of business generate "hazardous
substances." As a result, to the extent a hazardous substance generated by the
Operating Partnerships or their predecessors may have been released or disposed
of in the past, the Operating Partnerships may in the future be required to
remedy contaminated property. Governmental authorities such as the Environmental
Protection Agency, and in some instances third parties, are authorized under
CERCLA to seek to recover remediation and other costs from responsible persons,
without regard to fault or the legality of the original disposal. In addition to
its potential liability as a generator of a "hazardous substance," the property
or right-of-way of the Operating Partnerships may be adjacent to or in the
immediate vicinity of Superfund and other hazardous waste sites. Accordingly,
the Operating Partnerships may be responsible under CERCLA for all or part of
the costs required to cleanup such sites, which costs could be material.
The Clean Air Act, amended by the Clean Air Act Amendments of 1990 (the
"Amendments"), imposes controls on the emission of pollutants into the air. The
Amendments required states to develop facility-wide permitting programs over the
past several years to comply with new federal programs. Existing operating and
air-emission requirements like those currently imposed on the Operating
Partnerships are being reviewed by appropriate state agencies in connection with
the new facility-wide permitting program. It is possible that new or more
stringent controls will be imposed upon the Operating Partnerships through this
permit review process.
The Operating Partnerships are also subject to environmental laws and
regulations adopted by the various states in which they operate. In certain
instances, the regulatory standards adopted by the states are more stringent
than applicable federal laws.
9
In 1986, certain predecessor companies acquired by the Partnership, namely
Buckeye Pipe Line Company and its subsidiaries ("Pipe Line"), entered into an
Administrative Consent Order ("ACO") with the New Jersey Department of
Environmental Protection and Energy under the New Jersey Environmental Cleanup
Responsibility Act of 1983 ("ECRA") relating to all six of Pipe Line's
facilities in New Jersey. The ACO permitted the 1986 acquisition of Pipe Line to
be completed prior to full compliance with ECRA, but required Pipe Line to
conduct in a timely manner a sampling plan for environmental conditions at the
New Jersey facilities and to implement any required clean-up plan. Sampling
continues in an effort to identify areas of contamination at the New Jersey
facilities, while clean-up operations have begun and have been completed at
certain of the sites. The obligations of Pipe Line were not assumed by the
Partnership and the costs of compliance have been and will continue to be paid
by American Financial Group, Inc.
PIPELINE REGULATION AND SAFETY MATTERS
The Operating Partnerships are subject to regulation by the United States
Department of Transportation ("DOT") under the Hazardous Liquid Pipeline Safety
Act of 1979 ("HLPSA") relating to the design, installation, testing,
construction, operation, replacement and management of their pipeline
facilities. HLPSA covers petroleum and petroleum products and requires any
entity that owns or operates pipeline facilities to comply with applicable
safety standards, to establish and maintain a plan of inspection and maintenance
and to comply with such plans.
The Pipeline Safety Reauthorization Act of 1988 requires coordination of
safety regulation between federal and state agencies, testing and certification
of pipeline personnel, and authorization of safety-related feasibility studies.
The General Partner has initiated drug and alcohol testing programs to comply
with the regulations promulgated by the Office of Pipeline Safety and DOT.
HLPSA requires, among other things, that the Secretary of Transportation
consider the need for the protection of the environment in issuing federal
safety standards for the transportation of hazardous liquids by pipeline. The
legislation also requires the Secretary of Transportation to issue regulations
concerning, among other things, the identification by pipeline operators of
environmentally sensitive areas; the circumstances under which emergency flow
restricting devices should be required on pipelines; training and qualification
standards for personnel involved in maintenance and operation of pipelines; and
the periodic integrity testing of pipelines in unusually sensitive and
high-density population areas by internal inspection devices or by hydrostatic
testing. Effective in August 1999, the DOT issued its Operator Qualification
Rule, which required a written program by April 27, 2001, for ensuring operators
are qualified to perform tasks covered by the pipeline safety rules. All persons
performing covered tasks must have been qualified under the program by October
28, 2002. The General Partner has identified the tasks that must be performed to
comply with this rule, has filed its written plan and has qualified its
employees and contractors as required. In addition, on December 1, 2000, DOT
published notice of final rulemaking for Pipeline Integrity Management in High
Consequence Areas (Hazardous Liquid Operators with 500 or more Miles of
Pipeline). This rule sets forth regulations that require pipeline operators to
assess, evaluate, repair and validate the integrity of hazardous liquid pipeline
segments that, in the event of a leak or failure, could affect populated areas,
areas unusually sensitive to environmental damage or commercially navigable
waterways. Under the rule, pipeline operators were required to identify line
segments which could impact high consequence areas by December 31, 2001.
Pipeline operators were required to develop "Baseline Assessment Plans" for
evaluating the integrity of each pipeline segment by March 31, 2002 and to
complete an assessment of the highest risk 50 percent of line segments by
September 30, 2004, with full assessment of the remaining 50 percent by March
31, 2008. Pipeline operators will thereafter be required to re-assess each
affected segment in intervals not to exceed five years.
In December 2002 the Pipeline Safety Improvement Act of 2002 ("PSIA")
became effective. The PSIA imposes additional obligations on pipeline operators,
increases penalties for statutory and regulatory violations, and includes
provisions prohibiting employers from taking adverse employment action against
pipeline employees and contractors who raise concerns about pipeline safety
within the company or with government agencies or the press. Many of the
provisions of the PSIA are subject to regulations to be issued by the Department
of Transportation. While the PSIA imposes additional operating requirements on
pipeline operators, the General Partner does not believe that cost of compliance
with the PSIA is likely to be material in the context of the Partnership's
operations.
The General Partner believes that the Operating Partnerships currently
comply in all material respects with HLPSA and other pipeline safety laws and
regulations. However, the industry, including the Partnership, will, in the
10
future, incur additional pipeline and tank integrity expenditures and the
Partnership is likely to incur increased operating costs based on these and
other government regulations. During 2002, the Partnership's integrity
expenditures increased to approximately $21 million. The General Partner expects
integrity expenditures to continue at this level during 2003 in order to
complete most of its initial assessment and pipeline improvements required by
HLPSA. Once this initial assessment is complete, re-assessments are expected to
cost significantly less and will be expensed. The General Partner believes these
additional capital and operating expenditures with respect to HLSPA requirements
will be offset, to some degree, by a reduced need for other facility
improvements and lower operating expenses associated with improved pipeline
facilities.
The Operating Partnerships are also subject to the requirements of the
Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes. The General Partner believes that the Operating Partnerships'
operations comply in all material respects with OSHA requirements, including
general industry standards, record- keeping, hazard communication requirements
and monitoring of occupational exposure to benzene and other regulated
substances.
The General Partner cannot predict whether or in what form any new
legislation or regulatory requirements might be enacted or adopted or the costs
of compliance. In general, any such new regulations would increase operating
costs and impose additional capital expenditure requirements on the Partnership,
but the General Partner does not presently expect that such costs or capital
expenditure requirements would have a material adverse effect on the
Partnership's results of operations or financial condition.
TAX TREATMENT OF PUBLICLY TRADED PARTNERSHIPS UNDER THE INTERNAL REVENUE CODE
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
limitations on the current deductibility of losses attributable to investments
in publicly traded partnerships and treats certain publicly traded partnerships
as corporations for federal income tax purposes. The following discussion
briefly describes certain aspects of the Code that apply to individuals who are
citizens or residents of the United States without commenting on all of the
federal income tax matters affecting the Partnership or the holders of LP units
("Unitholders"), and is qualified in its entirety by reference to the Code.
UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR ABOUT THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PARTNERSHIP.
Characterization of the Partnership for Tax Purposes
The Code treats a publicly traded partnership that existed on December 17,
1987, such as the Partnership, as a corporation for federal income tax purposes,
unless, for each taxable year of the Partnership, under Section 7704(d) of the
Code, 90 percent or more of its gross income consists of "qualifying income."
Qualifying income includes interest, dividends, real property rents, gains from
the sale or disposition of real property, income and gains derived from the
exploration, development, mining or production, processing, refining,
transportation (including pipelines transporting gas, oil or products thereof),
or the marketing of any mineral or natural resource (including fertilizer,
geothermal energy and timber), and gain from the sale or disposition of capital
assets that produce such income. Because the Partnership is engaged primarily in
the refined products pipeline transportation business, the General Partner
believes that 90 percent or more of the Partnership's gross income has been
qualifying income. If this continues to be true and no subsequent legislation
amends that provision, the Partnership will continue to be classified as a
partnership and not as a corporation for federal income tax purposes.
Passive Activity Loss Rules
The Code provides that an individual, estate, trust or personal service
corporation generally may not deduct losses from passive business activities, to
the extent they exceed income from all such passive activities, against other
(active) income. Income that may not be offset by passive activity losses
includes not only salary and active business income, but also portfolio income
such as interest, dividends or royalties or gain from the sale of property that
produces portfolio income. Credits from passive activities are also limited to
the tax attributable to any income from passive activities. The passive activity
loss rules are applied after other applicable limitations on deductions, such as
the at-risk rules and basis limitations. Certain closely held corporations are
subject to slightly different rules that can also limit their ability to offset
passive losses against certain types of income.
11
Under the Code, net income from publicly traded partnerships is not treated
as passive income for purposes of the passive loss rule, but is treated as
non-passive income. Net losses and credits attributable to an interest in a
publicly traded partnership are not allowed to offset a partner's other income.
Thus, a Unitholder's proportionate share of the Partnership's net losses may be
used to offset only Partnership net income from its trade or business in
succeeding taxable years or, upon a complete disposition of a Unitholder's
interest in the Partnership to an unrelated person in a fully taxable
transaction, may be used to (i) offset gain recognized upon the disposition, and
(ii) then against all other income of the Unitholder. In effect, net losses are
suspended and carried forward indefinitely until utilized to offset net income
of the Partnership from its trade or business or allowed upon the complete
disposition to an unrelated person in a fully taxable transaction of the
Unitholder's interest in the Partnership. A Unitholder's share of Partnership
net income may not be offset by passive activity losses generated by other
passive activities. In addition, a Unitholder's proportionate share of the
Partnership's portfolio income, including portfolio income arising from the
investment of the Partnership's working capital, is not treated as income from a
passive activity and may not be offset by such Unitholder's share of net losses
of the Partnership.
Deductibility of Interest Expense
The Code generally provides that investment interest expense is deductible
only to the extent of a non-corporate taxpayer's net investment income. In
general, net investment income for purposes of this limitation includes gross
income from property held for investment, gain attributable to the disposition
of property held for investment (except for net capital gains for which the
taxpayer has elected to be taxed at special capital gains rates) and portfolio
income (determined pursuant to the passive loss rules) reduced by certain
expenses (other than interest) which are directly connected with the production
of such income. Property subject to the passive loss rules is not treated as
property held for investment. However, the IRS has issued a Notice which
provides that net income from a publicly traded partnership (not otherwise
treated as a corporation) may be included in net investment income for purposes
of the limitation on the deductibility of investment interest. A Unitholder's
investment income attributable to its interest in the Partnership will include
both its allocable share of the Partnership's portfolio income and trade or
business income. A Unitholder's investment interest expense will include its
allocable share of the Partnership's interest expense attributable to portfolio
investments.
Unrelated Business Taxable Income
Certain entities otherwise exempt from federal income taxes (such as
individual retirement accounts, pension plans and charitable organizations) are
nevertheless subject to federal income tax on net unrelated business taxable
income and each such entity must file a tax return for each year in which it has
more than $1,000 of gross income from unrelated business activities. The General
Partner believes that substantially all of the Partnership's gross income will
be treated as derived from an unrelated trade or business and taxable to such
entities. The tax-exempt entity's share of the Partnership's deductions directly
connected with carrying on such unrelated trade or business are allowed in
computing the entity's taxable unrelated business income. ACCORDINGLY,
INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT ENTITIES SUCH AS INDIVIDUAL
RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE TRUSTS MAY NOT BE ADVISABLE.
State Tax Treatment
During 2002, the Partnership owned property or conducted business in the
states of Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois,
Connecticut, Massachusetts, Florida, Texas, Nevada and California. A Unitholder
will likely be required to file state income tax returns and to pay applicable
state income taxes in many of these states and may be subject to penalties for
failure to comply with such requirements. Some of the states have proposed that
the Partnership withhold a percentage of income attributable to Partnership
operations within the state for Unitholders who are non-residents of the state.
In the event that amounts are required to be withheld (which may be greater or
less than a particular Unitholder's income tax liability to the state), such
withholding would generally not relieve the non-resident Unitholder from the
obligation to file a state income tax return.
12
Certain Tax Consequences to Unitholders
Upon formation of the Partnership in 1986, the General Partner elected
twelve-year straight-line depreciation for tax purposes. For this reason,
starting in 1999, the amount of depreciation available to the Partnership has
been reduced significantly and taxable income has increased accordingly.
Unitholders, however, will continue to offset Partnership income with individual
LP Unit depreciation under their IRC section 754 election. Each Unitholder's tax
situation will differ depending upon the price paid and when LP Units were
purchased. Generally, those who purchased LP Units within the past few years
will have adequate depreciation to offset a considerable portion of Partnership
income, while those who purchased LP Units more than several years ago will
experience the full increase in taxable income. Unitholders are reminded that,
in spite of the additional taxable income beginning in 1999, the current level
of cash distributions exceed expected tax payments. Furthermore, sale of LP
Units will result in taxable ordinary income as a consequence of depreciation
recapture. UNITHOLDERS ARE ENCOURAGED TO CONSULT THEIR PROFESSIONAL TAX ADVISORS
REGARDING THE TAX IMPLICATIONS TO THEIR INVESTMENT IN LP UNITS.
AVAILABLE INFORMATION
The Partnership files annual, quarterly, and current reports and other
documents with the SEC under the Securities Exchange Act of 1934. The public can
obtain any documents that we file with the SEC at http://www.sec.gov. We also
make available free of charge our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after filing such materials with, or furnishing
such materials to, the SEC, on or through our Internet website, www.buckeye.com.
We are not including the information contained on our Web site as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
As of December 31, 2002, the principal facilities of the Partnership
included 3,761 miles of 6-inch to 24-inch diameter pipeline, 49 pumping
stations, 90 delivery points, various sized tanks having an aggregate capacity
of approximately 14.7 million barrels and 15 bulk storage and terminal
facilities. The Operating Partnerships and their subsidiaries own substantially
all of these facilities.
In general, the Partnership's pipelines are located on land owned by others
pursuant to rights granted under easements, leases, licenses and permits from
railroads, utilities, governmental entities and private parties. Like other
pipelines, certain of the Operating Partnerships' and their subsidiaries rights
are revocable at the election of the grantor or are subject to renewal at
various intervals, and some require periodic payments. The Operating
Partnerships and their subsidiaries have not experienced any revocations or
lapses of such rights which were material to their business or operations, and
the General Partner has no reason to expect any such revocation or lapse in the
foreseeable future. Most delivery points, pumping stations and terminal
facilities are located on land owned by the Operating Partnerships or their
subsidiaries.
The General Partner believes that the Operating Partnerships and their
subsidiaries have sufficient title to their material assets and properties,
possess all material authorizations and revocable consents from state and local
governmental and regulatory authorities and have all other material rights
necessary to conduct their business substantially in accordance with past
practice. Although in certain cases the Operating Partnerships' and their
subsidiaries title to assets and properties or their other rights, including
their rights to occupy the land of others under easements, leases, licenses and
permits, may be subject to encumbrances, restrictions and other imperfections,
none of such imperfections are expected by the General Partner to interfere
materially with the conduct of the Operating Partnerships' or their
subsidiaries' businesses.
ITEM 3. LEGAL PROCEEDINGS
The Partnership, in the ordinary course of business, is involved in various
claims and legal proceedings, some of which are covered in whole or in part by
insurance. The General Partner is unable to predict the timing or outcome
13
of these claims and proceedings. Although it is possible that one or more of
these claims or proceedings, if adversely determined, could, depending on the
relative amounts involved, have a material effect on the Partnership for a
future period, the General Partner does not believe that their outcome will have
a material effect on the Partnership's consolidated financial condition or
results of operations.
With respect to environmental litigation, certain Operating Partnerships
(or their predecessors) have been named in the past as defendants in lawsuits,
or have been notified by federal or state authorities that they are potentially
responsible parties ("PRPs") under federal laws or a respondent under state laws
relating to the generation, disposal or release of hazardous substances into the
environment. Typically, an Operating Partnership is one of many PRPs for a
particular site and its contribution of total waste at the site is minimal.
However, because CERCLA and similar statutes impose liability without regard to
fault and on a joint and several basis, the liability of an Operating
Partnership in connection with such proceedings could be material.
Although there is no material environmental litigation pending against the
Partnership or the Operating Partnerships at this time, claims may be asserted
in the future under various federal and state laws, and the amount of such
claims or the potential liability, if any, cannot be estimated. See "Business --
Regulation -- Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of LP Units during the
fourth quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S LP UNITS AND RELATED UNITHOLDER MATTERS
The LP Units of the Partnership are listed and traded principally on the
New York Stock Exchange. The high and low sales prices of the LP Units in 2002
and 2001, as reported in the New York Stock Exchange Composite Transactions,
were as follows:
2002 2001
---------------------- --------------------
QUARTER HIGH LOW HIGH LOW
- ------- ------- ------- ------- -------
First........................................................ $40.200 $35.510 $34.990 $28.375
Second....................................................... 40.000 34.000 38.100 31.270
Third........................................................ 38.850 26.500 38.000 28.500
Fourth....................................................... 39.500 33.700 37.640 34.550
During the months of December 2002 and January 2003, the Partnership
gathered tax information from its known LP Unitholders and from
brokers/nominees. Based on the information collected, the Partnership estimates
its number of beneficial LP Unitholders to be approximately 24,000.
Cash distributions paid during 2001 and 2002 were as follows:
AMOUNT
RECORD DATE PAYMENT DATE PER UNIT
- ----------- ------------ -------
February 6, 2001............................................................... February 28, 2001 $ 0.600
May 4, 2001.................................................................... May 31, 2001 0.600
August 6, 2001................................................................. August 31, 2001 0.625
November 6, 2001............................................................... November 30, 2001 0.625
February 6, 2002............................................................... February 28, 2002 $ 0.625
May 5, 2002.................................................................... May 31, 2002 0.625
August 6, 2002................................................................. August 30, 2002 0.625
November 6, 2002............................................................... November 29, 2002 0.625
14
In general, the Partnership makes quarterly cash distributions of
substantially all of its available cash less such retentions for working
capital, anticipated expenditures and contingencies as the General Partner deems
appropriate.
On January 23, 2003, the Partnership announced a quarterly distribution of
$0.625 per LP Unit payable on February 28, 2003, to Unitholders of record on
February 6, 2003. The distribution was paid on February 28, 2003.
On February 28, 2003, the Partnership sold 1,750,000 LP units in an
underwritten public offering at a price of $36.01 per LP unit. Proceeds to the
Partnership, net of underwriters' discount of $1.62 per LP unit and estimated
offering expenses, were approximately $59.7 million. Proceeds of the offering
were used to reduce amounts outstanding under the Partnership's revolving credit
facilities (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" below).
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth, for the period and at the dates indicated,
the Partnership's income statement and balance sheet data for each of the last
five years. In January 1998, the General Partner approved a two-for-one unit
split that became effective February 13, 1998. All unit and per unit information
contained in this filing, unless otherwise noted, has been adjusted for the two
for one split. The tables should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Income Statement Data:
Transportation revenue .......................... $247,345 $232,397 $208,632 $200,828 $184,477
Depreciation and amortization (1) ............... 20,703 20,002 17,906 16,908 16,432
Operating income (1) (2) ........................ 102,362 98,331 91,475 95,936 74,358
Interest and debt expense ....................... 20,527 18,882 18,690 16,854 15,886
Income from continuing operations before
extraordinary loss and discontinued operations 71,902 69,402 64,467 71,101 52,007
Net income (3) .................................. 71,902 69,402 96,331 76,283 52,007
Income per unit from continuing operations before
extraordinary loss and discontinued operations 2.65 2.56 2.38 2.63 1.93
Net income per unit ............................. 2.65 2.56 3.56 2.82 1.93
Distributions per unit .......................... 2.50 2.45 2.40 2.18 2.10
DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Total assets ...................... $856,171 $807,560 $712,812 $661,078 $618,099
Long-term debt .................... 405,000 373,000 283,000 266,000 240,000
General Partner's capital ......... 2,870 2,834 2,831 2,548 2,390
Limited Partners' capital ......... 355,475 351,057 346,551 314,441 296,095
Receivable from exercise of options 913 995 -- -- --
(1) Depreciation and amortization includes $832,000 and $461,000 in 2001
and 2000 related to goodwill acquired in the 2000 acquisition of six
petroleum products terminals. Goodwill amortization ceased effective
January 1, 2002 with the adoption of Statement of Financial Accounting
Standards. No. 142 - "Goodwill and Other Intangible Assets." See Note
7 to the Partnership's consolidated financial statements.
15
(2) Operating income for 1999 includes a one-time property tax expense
reduction of $11.0 million following the settlement of a real property
tax dispute with the City and State of New York.
(3) Net income includes income from discontinued operations of BRC of
$5,682,000 in 2000 and $5,182,000 in 1999 and, in 2000, the gain of
the sale of BRC of $26,182,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the liquidity and capital resources and
the results of operations of the Partnership for the periods indicated below.
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto, which are included elsewhere in this report.
RESULTS OF OPERATIONS
Through its Operating Partnerships and their subsidiaries, the Partnership
is principally engaged in the pipeline transportation of refined petroleum
products and, between March 1999 and October 25, 2000, the refining of transmix.
Products transported via pipeline include gasoline, jet fuel, diesel fuel,
heating oil, kerosene and liquid propane gases ("LPGs"). The Partnership's
revenues derived from the transportation of refined petroleum products are
principally a function of the volumes of refined petroleum products transported
by the Partnership, which are in turn a function of the demand for refined
petroleum products in the regions served by the Partnership's pipelines, and the
tariffs or transportation fees charged for such transportation.
The Partnership is also engaged, through BPH, BT and BGC, in the
terminalling and storage of petroleum products and in contract operations of
pipelines for third parties. Revenues for each of the three years in the period
ended December 31, 2002 were as follows:
REVENUES
------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Pipeline transportation $214,052 $206,332 $193,845
Terminalling, storage and rentals 18,859 16,353 7,092
Contract operations 14,434 9,712 7,695
-------- -------- --------
Total $247,345 $232,397 $208,632
======== ======== ========
Results of operations are affected by factors that include general economic
conditions, weather, competitive conditions, demand for refined petroleum
products, seasonal factors and regulation. See "Business -- Competition and
Other Business Considerations."
2002 Compared With 2001
Total revenue for the year ended December 31, 2002 was $247.3 million,
$14.9 million or 6.4 percent greater than revenue of $232.4 million in 2001.
Revenue from pipeline transportation was $214.1 million in 2002 compared to
$206.3 million in 2001. Of the $7.8 million increase in pipeline transportation
revenue, $4.3 million is related to a full-year of Norco operations in 2002
compared to five months of Norco operations in 2001. Volumes delivered during
2002 averaged 1,101,400 barrels per day, 11,000 barrels per day or 1.0 percent
greater than volume of 1,090,400 barrels per day delivered in 2001.
Revenue from the transportation of gasoline of $114.1 million increased by
$6.5 million, or 6.0 percent, from 2001 levels. $2.0 million of the increase in
gasoline transportation revenue was related to a full-year of Norco operations.
Total gasoline volumes of 556,400 barrels per day in 2002 were 15,700 barrels
per day, or 2.9 percent greater than 2001 volumes of 540,700 barrels per day.
Norco gasoline volumes for a full-year of operations in 2002 were 17,200 barrels
per day compared to 16,800 barrels per day for five months of operations in
2001. In the East, gasoline volumes of 245,700 barrels per day were
approximately 9,400 barrels per day, or 4.0 percent, greater than 2001 volumes.
The increase was primarily due to greater deliveries to the upstate New York and
Pittsburgh, Pennsylvania areas. In the Midwest, gasoline volumes of 164,000
barrels per day were 6,900 barrels per day, or 4.0
16
percent, less than gasoline volumes delivered during 2001. Demand for gasoline
transportation was generally lower throughout the region with the largest
declines occurring in the Detroit and Bay City, Michigan areas. Long Island
System gasoline volumes of 111,300 barrels per day were up 5,700 barrels per
day, or 5.4 percent, due to additional available capacity on this system
following reductions in turbine fuel demand after September 11, 2001. On the Jet
Lines System, gasoline volumes of 18,200 barrels per day were 2,700 barrels per
day, or 12.8 percent, less than 2001 volumes due to lower transportation demand
in the Hartford, Connecticut area.
Revenue from the transportation of distillate of $57.7 million increased by
$0.4 million, or 0.7 percent, from 2001 levels. Norco's distillate
transportation revenue increased by $1.9 million in 2002 reflecting a full year
of operations. Total volumes of 265,400 barrels per day in 2002 were 1,400
barrels per day, or 0.5 percent less than 2001 distillate volumes of 266,800
barrels per day. Norco distillate volumes for a full-year of operations in 2002
were 12,900 barrels per day compared to 12,800 barrels per for five months of
operations in 2001. In the East, distillate volumes of 145,000 barrels per day
were approximately 5,300 barrels per day, or 3.5 percent, less than 2001
volumes. In the Midwest, distillate volumes of 68,100 barrels per day were 1,200
barrels per day, or 1.8 percent, less than volumes delivered during 2001. Long
Island System distillate volumes of 18,400 barrels per day were down 700 barrels
per day or 3.9 percent less than volumes delivered during 2001. On the Jet Lines
system, distillate volumes of 20,700 barrels per day were 1,800 barrels per day,
or 8.1 percent, less than 2001 volumes. Distillate volumes declined during the
first quarter of 2002 compared to the first quarter 2001 due to milder than
normal winter conditions. During the fourth quarter 2002, distillate volumes
increased over fourth quarter 2001 volumes as winter conditions returned to more
normal levels. The increase, however, did not fully offset the decline that
occurred during the first quarter of the year.
Revenue from the transportation of jet fuel of $36.9 million decreased by
$0.4 million, or 1.0 percent, from 2001 levels. Norco does not transport turbine
fuel. In May, 2001 WesPac commenced turbine fuel deliveries to San Diego
airport. WesPac's turbine fuel revenue was up $0.9 million primarily due to a
full-year of deliveries to San Diego Airport during 2002. Total jet fuel volumes
of 250,900 barrels per day in 2002 were 9,100 barrels per day, or 3.5 percent
less than 2001 jet fuel volumes of 260,000 barrels per day. WesPac's jet fuel
volumes of 11,700 barrels per day were up 3,600 barrels per day due to a full
year of deliveries to San Diego Airport. Deliveries to New York City airports
declined by 9,100 barrels per day, or 6.6 percent. Deliveries to Pittsburgh
Airport declined by 2,100 barrels per day, or 18.0 percent, while deliveries to
Miami airport declined 2,900 barrels per day, or 5.4 percent. Volumes to all
major airports declined as a result of reduced airline travel following the
terrorist attacks on September 11, 2001. Although deliveries to major airports
have improved from the dramatic decline immediately following September 11,
2001, the outlook for further recovery of turbine fuel volumes to pre-September
11, 2001 levels is uncertain due to airline schedule reductions, reduced
consumer air travel and the threat of further terrorist attacks.
Terminalling, storage and rental revenue of $18.9 million increased by $2.5
million in 2002 primarily due to a full year of Norco operations.
Contract operation services revenue of $14.4 million increased by $4.7
million due to additional contracts obtained by BGC during 2002 and 2001.
Contract operations revenues typically consist of costs reimbursable under the
contracts plus an operator's fee. Accordingly, revenues from these operations
carry a lower gross profit percentage than revenues from pipeline transportation
or terminalling, storage and rentals.
The Partnership's costs and expenses for 2002 were $145.0 million compared
to $134.1 million for 2001. BGC's costs and expenses increased by $4.5 million
over 2001 as a result of additional contract services provided. A full year of
Norco operations resulted in an additional $4.4 million of operating expense.
Other increases of $2.0 million are primarily related to general wage increases,
increases in payroll overhead costs, increases in the use of outside services,
increases in power costs related to additional pipeline volumes and higher
insurance premiums.
Other income and expense for 2002 was a net cost of $30.5 million compared
to $28.9 million in 2001. The increase is primarily due to higher interest
expense on additional borrowings during 2002 and 2001 related to acquisitions
and certain capital expenditures.
17
2001 Compared With 2000
Total revenue for the year ended December 31, 2001 was $232.4 million,
$23.8 million or 11.4 percent greater than revenue of $208.6 million in 2000.
Revenue derived from the pipeline transportation of refined products was $206.3
million in 2001 compared to $193.8 million in 2000. Of the $12.5 million
increase in pipeline transportation revenue, $2.7 million of the increase was
related to the Norco acquisition. Volumes delivered during 2001 averaged
1,090,400 barrels per day, 28,900 barrels per day or 2.7 percent greater than
volume of 1,061,500 barrels per day delivered in 2000. The Norco acquisition
represented 14,700 barrels per day of the volumes transported in 2001.
Revenue from the transportation of gasoline increased by $5.5 million, or
5.4 percent, from 2000 levels, of which $1.2 million was related to the Norco
acquisition. In the East, deliveries to the Pittsburgh, Pennsylvania and upstate
New York areas increased compared to 2000 volumes due to strong demand there. In
the Midwest, volumes and revenue declined compared to 2000 volumes primarily as
the result of decreased deliveries to the Bay City, Michigan area. Deliveries to
Bay City were unusually high in 2000 following the closure of a refinery in that
area.
Revenue from the transportation of distillate volumes increased by $3.8
million, or 7.0 percent, over 2000 levels, of which $1.3 million was related to
the Norco acquisition. Distillate deliveries for the year were up primarily due
to the colder than normal weather experienced during the first and second
quarter of 2001.
Revenue from the transportation of jet fuel decreased by $0.2 million, or
0.6 percent, from 2000 levels. Norco does not transport turbine fuel. In May,
2001 WesPac commenced turbine fuel deliveries to San Diego airport. This new
business added $1.4 million to 2001 revenues. Through September 11, 2001,
turbine fuel revenue was approximately 4 percent above prior year levels.
However, the terrorist attacks of September 11th greatly curtailed air travel
during the balance of September and the fourth quarter of 2001. Turbine fuel
deliveries declined by 18 percent overall during the fourth quarter of 2001.
Turbine fuel volumes improved in December 2001 as air travel began to recover
but was still down by approximately 10 percent overall from December 2000
levels. Deliveries to New York area airports were particularly affected, with a
24 percent decline in October 2000, a 28 percent decline in November 2001 and an
18 percent decline in December 2001 from year earlier volumes. This greater than
average decline reflects the larger percentage of international flights at these
airports as compared to other jet fuel delivery locations.
Revenue from the transportation of liquefied petroleum products ("LPG")
increased by $1.3 million, or 49.3 percent, over 2000 levels. Norco does not
transport LPG product. The increase in LPG revenues is related to primarily to
new business at Lima, Ohio.
Terminalling, storage and rental revenue of $16.4 million increased by $9.3
million in 2001. $3.4 million is due to an increase in terminalling and storage
revenue of which $1.9 million is related to the Norco acquisition with the
balance primarily resulting from a full year of operations related to the Agway
terminal acquisition on June 30, 2000. Rental revenue increased by $5.2 million
during 2001 of which $2.1 million is related to the Norco and Agway
acquisitions.
Contract operation services revenue of $9.7 million increased by $2.0
million due to additional contracts obtained by BGC during 2001 and 2000.
Costs and expenses for 2001 were $134.1 million compared to costs and
expenses of $117.2 million for 2000. BGC's costs and expenses increased by $4.4
million over 2000 as result of additional contract services provided. Another
$4.4 million of the expense increase is related to the Norco and Agway
acquisitions. Other increases of $8.1 million are primarily related to general
wage increases, increased payroll overhead costs, an increase in the use of
outside services, increased power costs related to additional pipeline
deliveries and higher insurance premiums.
Other expenses for 2001 were $28.9 million compared to $27.0 million in
2000. A $1.6 million gain realized on the sale of property in 2000 did not recur
in 2001. In addition, incentive compensation payments to the General Partner
that are based on the level of Partnership distributions were approximately $0.6
million greater during 2001 than 2000 due to an increase in the level of cash
distributions paid to limited partners. Investment income increased primarily as
the result of a $0.6 million gain on the tendering of preferred stock back to
Aerie Networks, Inc.
18
("Aerie"). The preferred stock had been issued by Aerie in exchange for
assisting Aerie with its development of a fiber optics network along the
Partnership's rights-of-way.
Discontinued Operations
In 2000, net income of $5.7 million from the discontinued operations of BRC
resulted from revenues of $172.5 million offset by costs and expenses of $166.8
million. BRC was sold to Kinder Morgan Energy Partners, L.P. for an aggregate
sale price of $45.7 million on October 25, 2000. The sale resulted in a gain of
$26.2 million (see Item 8, "Financial Statements and Supplementary Data").
Tariff Changes
Effective July 1, 2002, certain of the Operating Partnerships implemented
tariff increases that were expected to generate approximately $3.8 million in
additional annual revenue. Effective July 1, 2001, certain of the Operating
Partnerships implemented tariff increases that were expected to generate
approximately $4.1 million in additional revenue per year. Effective July 1,
2000, certain of the Operating Partnerships implemented tariff increases that
were expected to generate approximately $2.0 million in additional revenue per
year.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at December 31, 2002, 2001, and 2000
is highlighted in the following comparative summary:
Liquidity and Capital Indicators
AS OF DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Current ratio (1).................................................................. 1.4 to 1 1.5 to 1 2.0 to 1
Ratio of cash, cash equivalents and trade receivables to current liabilities....... .9 to 1 .8 to 1 1.5 to 1
Working capital (in thousands) (2)................................................. $13,092 $15,430 $28,749
Ratio of total debt to total capital (3)........................................... .53 to 1 .51 to 1 .45 to 1
Book value (per Unit)(4)........................................................... $13.15 $12.98 $12.91
(1) current assets divided by current liabilities
(2) current assets minus current liabilities
(3) long-term debt divided by long-term debt plus total partners' capital
(4) total partners' capital divided by Units outstanding at year-end.
During 2002, 2001 and 2000, the Partnership's principal sources of
liquidity were cash from operations and borrowings under its revolving credit
facilities. Additionally, in 2000, the Partnership received the proceeds from
the sale of BRC. In February 2003 the Partnership issued 1,750,000 LP units. The
Partnership's principal uses of cash are for capital expenditures, investments
and acquisitions and distributions to unitholders. The Partnership anticipates
that cash from operations and amounts available under its revolving credit
facilities will be sufficient to fund its cash requirements for 2003.
Cash Flows from Operations
Cash flows from operations were $93.1 million in 2002 compared to $81.0
million 2001. Income from continuing operations for 2002 was $71.9 million.
Income from continuing operations, before depreciation and amortization of $20.7
million, increased by $3.2 million to $92.6 million in 2002 from $89.4 million
in 2001. Changes in current assets and liabilities resulted in a net source of
cash of $0.6 million in 2002 compared to a net cash use of $5.3 million in 2001.
In 2002, increases in trade receivables and inventories were more than offset by
reductions in prepaid and other assets. In 2001, increases in trade receivables
and inventories were coupled with an increase in prepaid and other assets of
$4.5 million, principally related to operations at BGC. Changes in other
noncurrent assets and liabilities resulted in a net cash use of $1.2 million in
2002 compared to a net cash use of $3.5 million in 2001.
Cash from operations of $81.0 million in 2001 increased by $6.3 million
compared to $74.7 million in 2000. Income from continuing operations for 2001
was $69.4 million. Income from continuing operations, before depreciation and
amortization of $20.0 million, increased by $7.1 million to $89.4 million in
2001 from $82.3 million in 2000. Changes in current assets and liabilities
resulted in a net cash use of $8.4 million in 2000, principally related to
increases in trade receivables, inventory and prepaid expenses. Changes in
noncurrent assets and liabilities resulted in a net source of cash of $1.2
million in 2000.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $72.8 million in 2002
compared to $122.3 million in 2001 and $14.0 million in 2000. Substantially all
of the 2002 investing activities relate to capital expenditures. In 2001, the
Partnership invested $62.3 million in the acquisition of Norco and $23.6 million
for an approximate 18% interest in West Shore. In 2000, the Partnership invested
$20.7 million to acquire six petroleum products terminals from Agway, and
received $45.6 million proceeds from the sale of BRC. The Partnership had no
acquisition or investment expenditures in 2002. Capital expenditures for the
years ended December 31, 2002, 2001 and 2000 are summarized below:
CAPITAL EXPENDITURES
-----------------------
2002 2001 2000
----- ----- -----
(IN MILLIONS)
Sustaining capital expenditures:
Operating infrastructure ............. $ 7.0 $10.1 $ 6.0
Pipeline and tank integrity .......... 21.2 15.8 7.2
----- ----- -----
Total sustaining .................. 28.2 25.9 13.2
Expansion and cost reduction ............ 6.6 10.8 27.1
----- ----- -----
Subtotal ................................ 34.8 36.7 40.3
Investment in Gulf Coast Pipeline Project 36.8 -- --
----- ----- -----
Total ................................... $71.6 $36.7 $40.3
===== ===== =====
The Partnership's 2002 capital expenditures of $34.8 million (excluding
the $36.8 million related to the pipeline project discussed below) declined by
$1.9 million from $36.7 million in 2001. Of this total, $28.2 million related to
sustaining expenditures compared to $25.9 million in 2001 and $13.2 million in
2000. During 2002, the Partnership emphasized its pipeline and tank integrity
projects, including electronic internal inspections, other integrity assessments
and associated repairs, as part of a comprehensive program to meet increased
safety and environmental standards (see Part I, "Business-Environmental Matters"
and "Business-Pipeline Regulation and Safety Matters").
Under an agreement with three major petrochemical companies (the
"Agreement"), BGC has constructed a 90-mile crude butadiene pipeline (the "Gulf
Coast Pipeline Project"). The pipeline originates at a Shell Chemicals, L.P.
facility in Deer Park, Texas and terminates at a chemical plant owned by Sabina
Petrochemicals, LLC in Port Arthur, Texas. As of December 31, 2002, the
Partnership had expended $36.8 million to construct the pipeline which is
included in the Partnership's 2002 capital expenditures. In addition, as of
December 31, 2002 two of the petrochemical companies had advanced $14.2 million
to the Partnership based on certain construction milestones. These advances are
included in other non-current liabilities in the financial statements of the
Partnership. As of March 2003, the pipeline was substantially complete and BGC
holds an approximate 63 percent interest in two partnerships (the "Pipeline
Partnerships") which own the pipeline. The two petrochemical companies own the
remaining 37 percent minority interest in the Pipeline Partnerships. Separately,
BGC has entered into an agreement to operate and maintain the pipeline for the
Pipeline Partnerships and the Pipeline Partnerships have entered into a
long-term agreement with Sabina Petrochemicals, LLC to provide pipeline
transportation throughput services.
The Partnership expects to spend approximately $40 million in capital
expenditures in 2003, of which approximately $25 million will relate to
sustaining expenditures and approximately $15 million to expansion and cost
reduction projects. Sustaining capital expenditures, in addition to pipeline
integrity, include renewals and replacements of tank floors and roofs, upgrades
to field instrumentation and cathodic protection systems, and replacement of
mainline pipe and valves. Expansion and cost reduction expenditures include
projects to facilitate
20
increased pipeline volumes, extend the pipeline incrementally to new facilities,
expand terminal facilities or improve the efficiency of operations. Of the
planned 2003 sustaining capital expenditures of $25 million, approximately $15
to $20 million is expected to relate to pipeline and tank integrity projects.
During 2002, 2001 and 2000, the Partnership accelerated its expenditures related
to pipeline and tank integrity projects, and anticipates that such expenditures
will begin to decline commencing in 2004 upon completion of most of the
long-distance pipeline integrity inspections.
As discussed below under Critical Accounting Policies and Estimates, the
Partnership's initial integrity expenditures are capitalized as part of pipeline
cost when such expenditures improve or extend the life of the pipeline or
related assets. Subsequent integrity expenditures are expensed as incurred.
Accordingly, over time, integrity expenditures will shift from capital to
operating expenditures.
Cash Flows from Financing Activities
During 2002, the Partnership increased its borrowings under its revolving
credit facility by $32 million, principally to fund its investment in the Gulf
Coast Pipeline Project as well as a portion of its other capital expenditures.
Additionally, as noted above, the Partnership received $14.2 million in advances
from two of the three petrochemical companies participating in the Gulf Coast
Pipeline Project. During 2001, the Partnership increased its borrowings under
its revolving credit facilities by $90.0 million, principally to fund the Norco
acquisition and the investment in West Shore Pipeline Company as well as a
portion of its capital expenditures. During 2000, the Partnership increased its
borrowings under its revolving credit facilities by $17 million, principally
related to the acquisition of the six petroleum products terminals from Agway.
Distributions to unitholders totaled $67.9 million in 2002 compared to $66.5
million and $65.0 million in 2001 and 2000, respectively.
Debt Obligations, Credit Facilities and Other Financing
At December 31, 2002, the Partnership had $405.0 million in outstanding
long-term debt, consisting of $240.0 million of Senior Notes (Series 1997A
through 1997D) (the "Senior Notes") and $165.0 million outstanding under its
5-year revolving credit facility. The Senior Notes are due in 2024 and accrue
interest at an average rate of 6.94%. At December 31, 2002, borrowings under the
5-year revolving credit facility accrued interest at a weighted average rate of
2.56%.
In 2001, the Partnership entered into a $277.5 million 5-year Revolving
Credit Agreement and a $92.5 million 364-day Revolving Credit Agreement with a
syndicate of banks led by SunTrust Bank. In September 2002, the Partnership
entered into a new 364-day Revolving Credit Agreement with another syndicate of
banks also led by SunTrust Bank and reduced the maximum amount borrowable to
$85.0 million. At that time certain covenants contained in both agreements (the
"Credit Facilities") were amended to eliminate the requirement of an investment
grade rating from either Standard and Poor's or Moody's Investor Services.
Together, the Credit Facilities permit borrowings up to $362.5 million subject
to certain limitations contained in the Credit Facility agreements. Borrowings
bear interest at SunTrust Bank's base rate or at a rate based on the London
Interbank Offered Rate ("LIBOR") at the option of the Partnership. The $362.5
million is available under the Credit Facilities until September 2003 with
$277.5 million available thereafter until September 2006. The Partnership
anticipates renewing the 364-day facility prior to its expiration in September
2003. These Credit Facilities replaced revolving credit agreements which had
previously been established with another bank.
The indenture of the Senior Notes (the "Indenture") and the Credit
Facilities contain similar covenants which together (a) limit outstanding
indebtedness of the Partnership and Buckeye based on certain financial ratios,
(b) prohibit the Partnership from creating or incurring certain liens on its
property, (c) prohibit the Partnership from disposing of property which is
material to its operations and (d) limit consolidation, merger and asset
transfers by the Partnership. Covenants under the Indenture apply to Buckeye,
Laurel and Buckeye Pipe Line Company of Michigan, L.P., whereas the covenants
under the Credit Facilities apply to the Partnership and all of its direct and
substantially all of its indirect subsidiaries. At December 31, 2002, all
parties were in compliance with the covenants in the Credit Facilities and the
Indenture.
At December 31, 2002, the Partnership had approximately $196.8 million
available under the Credit Facilities.
21
In October 2002 the Partnership filed an amended shelf registration
statement for the issuance, from time to time, of up to an aggregate of $300
million of the Partnership's LP units. In January 2003 the Partnership filed a
separate shelf registration statement for the issuance, from time to time, of up
to an aggregate of $300 million of the Partnership's debt securities. In
February 2003 the Partnership issued 1,750,000 LP units at a price of $36.01 per
LP unit. Net proceeds to the Partnership, after underwriters' discount of $1.62
per unit and estimated offering expenses were approximately $59.7 million.
Proceeds from the offering were used to reduce amounts outstanding under the
Credit Facilities.
Operating Leases
The Operating Partnerships lease certain land and rights-of-way. Minimum
future lease payments for these leases as of December 31, 2002 are approximately
$3.4 million for each of the next five years. Substantially all of these lease
payments may be canceled at any time should the leased property no longer be
required for operations.
The General Partner leases space in an office building and certain office
equipment and charges these costs to the Operating Partnerships. Buckeye leases
certain computing equipment and automobiles. Future minimum lease payments under
these noncancelable operating leases at December 31, 2002 were as follows:
$734,000 for 2003, $649,000 for 2004, $657,000 for 2005, $483,000 for 2006,
$59,000 for 2007 and none thereafter.
Buckeye entered into an energy services agreement for certain main line
pumping equipment and the natural gas requirements to fuel this equipment at its
Linden, New Jersey facility. Under the energy services agreement, which is
designed to reduce power costs at the Linden facility, Buckeye is required to
pay a minimum of $1,743,000 annually over the next nine years. This minimum
payment is based on an annual minimum usage requirement of the natural gas
engines at the rate of $0.049 per kilowatt hour equivalent. In addition to the
annual usage requirement, Buckeye is subject to minimum usage requirements
during peak and off-peak periods. Buckeye's use of the natural gas engines has
exceeded the minimum annual requirement in each of the three years ended
December 31, 2002.
Rent expense under operating leases was $7,285,000, $7,700,000 and
$8,855,000 for 2002, 2001 and 2000, respectively. Included in rent expense for
operating leases is $1,191,000 related to discontinued operations for 2000.
Contractual obligations are summarized in the follow table:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
---------------------------------------------------------
Less than
CONTRACTUAL OBLIGATIONS Total 1 year 1-3 years 4-5 years Thereafter
- ---------------------------------- -------- --------- --------- --------- ----------
Long-Term Debt ................... $405,000 $ -- $ -- $165,000 $240,000
Operating Leases ................. 2,582 734 1,306 542 --
Other Long-Term Obligations ...... 15,687 1,743 3,486 3,486 6,972
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $423,269 $ 2,477 $ 4,792 $169,028 $246,972
======== ======== ======== ======== ========
Environmental Matters
The Operating Partnerships are subject to federal, state and local laws
and regulations relating to the protection of the environment. These laws and
regulations, as well as the Partnership's own standards relating to protection
of the environment, cause the Operating Partnerships to incur current and
ongoing operating and capital expenditures. During 2002, the Operating
Partnerships incurred operating expenses of $1.9 million and, at December 31,
2002, had $7.5 million accrued for environmental matters. Expenditures, both
capital and operating, relating to environmental matters are expected to
continue due to the Partnership's commitment to maintain high environmental
standards and to increasingly rigorous environmental laws.
Various claims for the cost of cleaning up releases of hazardous
substances and for damage to the environment resulting from the activities of
the Operating Partnerships or their predecessors have been asserted and may be
asserted in the future under various federal and state laws. The General Partner
believes that the generation, handling
22
and disposal of hazardous substances by the Operating Partnerships and their
predecessors have been in material compliance with applicable environmental and
regulatory requirements. The total potential remediation costs to be borne by
the Operating Partnerships relating to these clean-up sites cannot be reasonably
estimated and could be material. With respect to each site, however, the
Operating Partnership involved is typically one of several or as many as several
hundred PRPs that would share in the total costs of clean-up under the principle
of joint and several liability. Although the Partnership has made a provision
for certain legal expenses relating to these matters, the General Partner is
unable to determine the timing or outcome of any pending proceedings or of any
future claims and proceedings. See "Business -- Regulation -- Environmental
Matters" and "Legal Proceedings."
Competition and Other Business Conditions
Several major refiners and marketers of petroleum products announced
strategic alliances or mergers in recent years. These alliances or mergers have
the potential to alter refined product supply and distribution patterns within
the Operating Partnerships' market area resulting in both gains and losses of
volume and revenue. While the General Partner believes that individual delivery
locations within its market area may have significant gains or losses, it is not
possible to predict the overall impact these alliances or mergers may have on
the Operating Partnerships' business. However, the General Partner does not
believe that these alliances or mergers will have a material adverse effect on
the Partnership's results of operations or financial condition.
In the Midwest, several petroleum product pipeline expansions and two new
petroleum product pipeline construction projects are in various stages of
completion. While these projects have the potential to alter supply sources with
respect to the Partnership's service area, they are not expected to have a
material adverse effect on the Operating Partnership's results of operations or
financial condition.
Certain changes in refined petroleum product specifications are likely to
impact the transportation of refined petroleum products over the next several
years. Methyl-Tertiary-Butyl-Ether ("MTBE"), a gasoline additive used for air
pollution control purposes, is scheduled to be phased out of use in certain
states commencing in 2004. The phase-out of MTBE may result in a reduction in
gasoline volumes delivered in the Partnership's service area. The Partnership is
unable to quantify the amount by which its transportation volumes might be
affected by the phase-out of MTBE. In addition, new requirements for the use of
ultra low-sulfur diesel fuel could require significant capital expenditures at
certain locations in order to permit the Partnership to handle this new product
grade. At this time the Partnership is unable to predict the timing or amount of
capital or operating expenditures that would be required to enable the
Partnership to transport and store ultra low-sulfur diesel fuel.
EMPLOYEE STOCK OWNERSHIP PLAN
Services Company provides an employee stock ownership plan (the "ESOP") to
substantially all of its regular full-time employees, except those covered by
certain labor contracts. The ESOP owns all of the outstanding common stock of
Services Company. At December 31, 2002, the ESOP was directly obligated to a
third-party lender for $47.5 million of 7.24 percent Notes (the "ESOP Notes").
The ESOP Notes are secured by Services Company common stock and are guaranteed
by Glenmoor and certain of its affiliates. The proceeds from the issuance of the
ESOP Notes were used to purchase Services Company common stock. Services Company
stock is released to employee accounts in the proportion that current payments
of principal and interest on the ESOP Notes bear to the total of all principal
and interest payments due under the ESOP Notes. Individual employees are
allocated shares based on the ratio of their eligible compensation to total
eligible compensation. Eligible compensation generally includes base salary,
overtime payments and certain bonuses. Services Company stock allocated to
employees receives stock dividends in lieu of cash, while cash dividends are
used to pay principal and interest on the ESOP Notes.
The Partnership contributed 2,573,146 LP Units to Services Company in
August 1997 in exchange for the elimination of the Partnership's obligation to
reimburse BMC for certain executive compensation costs, a reduction of the
incentive compensation paid by the Partnership to BMC under the existing
incentive compensation agreement, and other changes that made the ESOP a less
expensive fringe benefit for the Partnership. Funding for the ESOP Notes is
provided by distributions that Services Company receives on the LP Units that it
owns and from cash payments from the Partnership, as required to cover any
shortfall between the distributions that Services Company receives on the LP
Units that it owns and amounts currently due under the ESOP Notes (the "top-up"
23
reserve). The Partnership will also incur ESOP-related costs for routine
administrative costs and taxes associated with annual taxable income or the sale
of LP units, if any. Total ESOP related costs charged to earnings were $1.2
million in 2002 and $1.1 million during each of 2001 and 2000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to select appropriate accounting principles from those available, to
apply those principles consistently and to make reasonable estimates and
assumptions that affect revenues and associated costs as well as reported
amounts of assets and liabilities.
Generally, the timing and amount of revenue recognized by an organization
is among the most critical of accounting policies to be adopted. For its
pipeline operations, which constitutes approximately 86% the Partnership's
revenues, the Partnership recognizes revenue as the product is delivered to
customers. Terminalling and storage revenues, representing approximately 8% of
the Partnership's revenues, are recognized as the services are provided.
Revenues from contract pipeline operations, representing approximately 6% of the
Partnership's revenues, are recognized as the services are provided. Revenues
for contract operations include both direct costs to be reimbursed by the
customer under the contract and an operating fee. In all cases, the
Partnership's revenue recognition approximates billings to the customer.
Because the Partnership's customers generally consist of major integrated
oil companies, petroleum refiners and petrochemical companies, collections
experience has historically been good and the Partnership has not required an
allowance for bad debts. Some of the Partnership's customers consist of major
airlines, some of whom have experienced financial difficulties or even
bankruptcy following the events of September 11, 2001. However, the
Partnership's credit monitoring policies, coupled with its ability to require
prepayment of transportation charges, has limited its exposure to losses from
potentially uncollectible accounts. Bad debts, when they occur, are written off
as a charge to revenue.
Approximately 85% of the Partnership's consolidated assets consist of
property, plant and equipment. Property plant and equipment consists of pipeline
and related transportation facilities and equipment, including land,
rights-of-way, buildings and leasehold improvements and machinery and equipment.
Pipeline assets are generally self-constructed, using either contractors or the
Partnership's own employees. Additions and improvement to the pipeline are
capitalized based on the cost of the improvement while repairs and maintenance
are expensed. Pipeline integrity expenditures are capitalized the first time
such expenditures are incurred, when such expenditures improve or extend the
life of the pipeline or related assets. Subsequent integrity expenditures are
expensed as incurred. During 2002, 2001 and 2000, the Partnership capitalized
$21.2 million, $15.8 million and $7.2 million, respectively, of integrity
expenditures. Over the next several years, the Partnership expects integrity
expenditures, both capital and operating, to range between $15 million and $20
million per year. During this time, the portion of expenditures capitalized is
expected to decrease and the portion recorded as expense is expected to
increase.
As discussed under Environmental Matters above, the Operating Partnerships
are subject to federal, state and local laws and regulations relating to the
protection of the environment. Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and do not contribute to
current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or clean-ups are probable, and the costs can
be reasonably estimated. Generally, the timing of these accruals coincides with
the Partnership's commitment to a formal plan of action. Accrued environmental
remediation related expenses include estimates of direct costs of remediation
and indirect costs related to the remediation effort, such as compensation and
benefits for employees directly involved in the remediation activities and fees
paid to outside engineering, consulting and law firms. The Partnership maintains
insurance which may cover in whole or in part certain environmental
expenditures. During 2002, the Operating Partnerships incurred operating
expenses of $1.2 million and, at December 31, 2002, had $7.5 million accrued for
environmental matters. The environmental accruals are revised as new matters
arise, or as new facts in connection with environmental remediation projects
require a revision of estimates previously made with respect to the probable
cost of such remediation projects.
24
In the event a known environmental liability results in expenditures that
exceed the amount that has been accrued in connection with the matter, the
additional expenditures would result in an increase in expenses and a reduction
in income, in the period when the additional expense is incurred. Based on its
experience, however, the Partnership believes that the amounts it has accrued
for the future costs related to environmental liabilities is reasonable.
RELATED PARTY TRANSACTIONS
With respect to related party transactions see Note 18 to the consolidated
financial statements and Item 13 of Part III included elsewhere in this report.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. The Norco acquisition was accounted for in accordance with
the provisions of SFAS 141. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 with respect to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. As a result of SFAS
142, the Partnership's goodwill of $11,355,000 is no longer subject to
amortization.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143, addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. While the Partnership has not
completed its analysis, the General Partner does not believe that the adoption
of SFAS 143 will have a material impact on the Partnership's financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 was effective for fiscal years beginning after December 15, 2001 and
did not have a material impact on the Partnership's financial statements.
In May 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS 145 rescinds the automatic treatment of gains or losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in APB No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS
No. 145 also requires sale-leaseback accounting for certain lease modifications
that have economic effects similar to a sale-leaseback transaction and makes
various technical corrections to existing pronouncements. SFAS No. 145 is
effective for fiscal years beginning after December 31, 2002. The Partnership
does not expect the adoption of SFAS No. 145 to have a material effect on its
consolidated financial position or results of operations.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the
guidance provided in Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Generally, SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than when
management commits to a plan of exit or disposal as is called for by EITF Issue
No. 94-3. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with earlier application encouraged.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 established
requirements for accounting and disclosure of guarantees issued to third parties
for various transactions. The accounting requirements of FIN 45 are applicable
to guarantees issued after December 31, 2002. The disclosure requirements of FIN
45 are applicable to financial statements issued for periods ending after
December 15, 2002.
25
The Partnership has included the applicable disclosures in its financial
statements and does not anticipate that the accounting provisions of FIN 45 will
have a material impact on its financial statements.
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure", SFAS 148 amended the implementation
provisions of SFAS 123 and required changes in disclosures in financial
statements. The provisions of SFAS 148 were applicable for years ending after
December 15, 2002 except for certain quarterly disclosures, which were
applicable for interim periods beginning after December 15, 2002. The Company
has not changed its method of accounting for stock-based compensation and,
therefore, is subject only to the revised disclosure provisions of SFAS 148.
Such disclosures have been included in the Partnership's financial statements
and quarterly disclosures will be provided commencing in the first quarter of
2003.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 establishes accounting and
disclosure requirements for ownership interests in entities that have certain
financial or ownership characteristics (sometimes known as "Special Purpose
Entities"). FIN 46 is applicable for variable interest entities created after
January 31, 2003 and becomes effective in the first fiscal year or interim
accounting period beginning after June 15, 2003 for variable interest entities
created before February 1, 2003. The Partnership does not anticipate that the
provisions of FIN 46 will have a material impact on its financial statements.
FORWARD-LOOKING INFORMATION
Information contained above in this Management's Discussion and Analysis
and elsewhere in this Report on Form 10-K with respect to expected financial
results and future events is forward-looking, based on our estimates and
assumptions and subject to risk and uncertainties. For those statements, the
Partnership and the General Partner claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The following important factors could affect our future results and could
cause those results to differ materially from those expressed in our
forward-looking statements: (1) adverse weather conditions resulting in reduced
demand; (2) changes in laws and regulations, including safety, tax and
accounting matters; (3) competitive pressures from alternative energy sources;