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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, 1993
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)
3900 HAMILTON BOULEVARD
ALLENTOWN, PENNSYLVANIA 18103
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 820-8300
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 in-
terests................ 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
---- ----
At March 3, 1994, the aggregate market value of the registrant's LP Units
held by non-affiliates was $460 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 3, 1994: 12,000,000
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................................... 1
ITEM 2. PROPERTIES.................................................................. 11
ITEM 3. LEGAL PROCEEDINGS........................................................... 11
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 .................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................. 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 38
ITEM 11. EXECUTIVE COMPENSATION ..................................................... 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............ 48
PART I
ITEM 1. BUSINESS
INTRODUCTION
Buckeye Partners, L.P. (the "Partnership"), the Registrant, is a limited
partnership organized in 1986 under the laws of the State of Delaware.
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 Tank Terminals Company, L.P. ("BTT"), each of which
is 99 percent owned. (Each of Buckeye, Laurel, Everglades and BTT is referred
to as an "Operating Partnership" and collectively as the "Operating
Partnerships"). Through Laurel, the Partnership owns a 98.01 percent limited
partnership interest in Buckeye Pipe Line Company of Michigan, L.P. ("BPL
Michigan"), which discontinued operations in 1993. See "--Other Business
Activities" below.
Buckeye is one of the largest independent pipeline common carriers of refined
petroleum products in the United States, with 3,387 miles of pipeline serving
10 states. Laurel owns a 346-mile common carrier refined products pipeline
located principally in Pennsylvania. Everglades owns 37 miles of refined
products pipeline in Florida. Buckeye, Laurel and Everglades conduct the
Partnership's refined products pipeline business. BTT provides bulk storage
service through leased facilities with an aggregate capacity of 305,000 barrels
of refined petroleum products.
The Partnership acquired its interests in the Operating Partnerships from The
Penn Central Corporation ("Penn Central") on December 23, 1986 (the
"Acquisition"). The Operating Partnerships (other than Laurel) had been
organized by Penn Central for purposes of the Acquisition and succeeded to the
operations of predecessor companies owned by Penn Central, including Buckeye
Pipe Line Company (an Ohio corporation) and its subsidiaries ("Pipe Line"), in
November 1986. Laurel was formed in October 1992 and succeeded to the
operations of Laurel Pipe Line Company ("Laurel Corp") (an Ohio corporation)
which was a majority owned corporate subsidiary of the Partnership until the
minority interest was acquired in December 1991.
Buckeye Management Company (the "General Partner"), a wholly owned subsidiary
of Penn Central formed in 1986, owns a 1 percent general partnership interest
in, and serves as sole general partner of, the Partnership. A corporate
subsidiary of the General Partner, Buckeye Pipe Line Company (a Delaware
corporation) (the "Manager"), owns a 1 percent general partnership interest in,
and serves as sole general partner and manager of, each Operating Partnership.
REFINED PRODUCTS BUSINESS
The Partnership receives petroleum products from refineries, connecting
pipelines and marine terminals, and transports those products to other
locations. In 1993, refined products accounted for substantially all of the
Partnership's consolidated revenues, consolidated operating income and
consolidated property, plant and equipment.
The Partnership transported an average of approximately 981,100 barrels per
day of refined products in 1993. The following table shows the volume and
percentage of refined products transported over the last three years.
1
VOLUME AND PERCENTAGE OF REFINED PRODUCTS TRANSPORTED(1)(2)
(VOLUME IN THOUSANDS OF BARRELS PER DAY)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1992 1991
-------------- -------------- --------------
VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT
------ ------- ------ ------- ------ -------
Gasoline........................... 503.6 51% 458.0 50% 442.7 51%
Jet Fuels.......................... 234.1 24 227.7 25 218.6 25
Middle Distillates (3)............. 223.0 23 205.4 23 192.6 22
Other Products..................... 20.4 2 21.4 2 17.1 2
----- --- ----- --- ----- ---
Total.............................. 981.1 100% 912.5 100% 871.0 100%
===== === ===== === ===== ===
- --------
(1) Excludes crude oil volumes of 2.2 and 0.7 thousand barrels per day for the
years ended December 31, 1991 and 1992, respectively. No crude oil volumes
were transported during 1993.
(2) Excludes local product transfers.
(3) Includes diesel fuel, heating oil, kerosene and other middle distillates.
The Partnership provides service in the following states: Pennsylvania, New
York, New Jersey, Indiana, Ohio, Michigan, Illinois, Connecticut,
Massachusetts, Washington and Florida.
Pennsylvania--New York--New Jersey
Buckeye serves major population centers in the states of Pennsylvania, New
York and New Jersey through 1,170 miles of pipeline. Refined products are
received at Linden, New Jersey. Products are then transported through two lines
from Linden, New Jersey to Allentown, Pennsylvania. From Allentown, the
pipeline continues west to Pittsburgh, Pennsylvania (serving Reading,
Harrisburg, Altoona/Johnstown and Pittsburgh) and north through eastern
Pennsylvania into New York State (serving Scranton/Wilkes-Barre, Binghamton,
Syracuse, Utica and Rochester and, via a connecting carrier, Buffalo). Products
received at Linden, New Jersey are also transported through two lines to John
F. Kennedy International and LaGuardia Airports and to commercial bulk
terminals at Long Island City and Inwood, New York. The pipeline presently
supplies Kennedy, LaGuardia and Newark International airports with
substantially all of each airport's jet fuel requirements.
Laurel transports refined products through a 346-mile pipeline extending
westward from five refineries in the Philadelphia area to Pittsburgh,
Pennsylvania.
Indiana--Ohio--Michigan--Illinois
Buckeye transports refined products through 2,092 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 lines 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 the corridor connection points of Detroit, Toledo and Lima. Major areas
served include Huntington/Fort Wayne, 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 111 miles of pipeline
that carry refined products from New Haven, Connecticut to Hartford,
Connecticut and Springfield, Massachusetts.
2
Everglades carries primarily jet fuel on a 37-mile pipeline from Port
Everglades, Florida to Hollywood-Ft. Lauderdale International Airport and Miami
International Airport.
Buckeye carries jet fuel on a 14-mile pipeline from Tacoma, Washington to
McChord Air Force Base.
OTHER BUSINESS ACTIVITIES
Crude oil transportation services provided by BPL Michigan using 126 miles of
16-inch pipeline between Marysville (Port Huron), Michigan and Toledo, Ohio
terminated on February 1, 1993 upon the sale of this pipeline to Sun Pipe Line
Company. The remaining 38 miles of pipeline and all remaining property, plant
and equipment which had been owned by BPL Michigan was transferred to Buckeye
on June 1, 1993. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Discontinued Operations."
BTT provides bulk storage services through leased facilities located in
Pittsburgh, Pennsylvania and Bay City, Michigan, which have the capacity to
store up to an aggregate of approximately 305,000 barrels of refined petroleum
products. Each facility is served by Buckeye and provides bulk storage and
loading facilities for shippers or other customers.
COMPETITION AND OTHER BUSINESS CONSIDERATIONS
The Operating Partnerships do business without the benefit of exclusive
franchises from government entities. In addition, the Operating Partnerships
generally operate as common carriers, providing transportation services at
posted tariffs and without long-term contracts. As providers of such service,
the Operating Partnerships do not own the products they transport. Demand for
such service arises, ultimately, 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 Partnership's pipelines.
Demand for refined petroleum products is primarily a function of price,
prevailing 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 prices
or demand for oil and for other fuels. The Partnership may also be affected 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.
A substantial portion of the refined petroleum products transported by the
Partnership's pipelines are ultimately used as fuel for motor vehicles and
aircraft. Changes in transportation and travel patterns in the areas served by
the Partnership's pipelines could adversely affect the Partnership's results of
operations.
In 1993, the Operating Partnerships had approximately 120 customers, most of
which were either major integrated oil companies or smaller marketing
companies. The largest two customers accounted for 7.2 percent and 6.5 percent,
respectively, of consolidated revenues, while the 20 largest customers
accounted for 74.2 percent of consolidated revenues.
Generally, pipelines are the lowest cost method for long-haul overland
movement of refined petroleum products. Therefore, the Operating Partnership's
most significant competitors for large
3
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 Partnership's 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 some areas, the Operating Partnerships compete with marine transportation.
Tankers and barges on the Great Lakes account for some of the volume to certain
Michigan, Ohio and upstate New York locations during the approximately eight
non-winter months of the year. Barges are presently a competitive factor for
deliveries to the New York City area, the Pittsburgh area, Connecticut and
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 with the Operating
Partnerships in many areas. 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 unquantified form of competition. Generally,
such exchanges reduce both parties' costs by eliminating or reducing
transportation charges.
In recent years, a large quantity of domestic refining capacity has been
temporarily or permanently shut down. To date, the aggregate impact of these
shut-downs has affected the Operating Partnerships' volumes favorably, as these
shut-downs have resulted in the transportation of product over longer distances
to certain locations. Because the Operating Partnerships' pipelines have
numerous source points, the General Partner does not believe that the shut-down
of any particular refinery would have a material adverse effect on the
Partnership. However, the General Partner is unable to determine whether
additional shut-downs will occur or what their effects might be.
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 fuels.
Overall, operations have been only moderately seasonal, with somewhat lower
than average volume being transported during March, April and May as compared
to the rest of the year.
Neither the Partnership nor any of the Operating Partnerships have any
employees. All of the operations of the Operating Partnerships are managed and
operated by employees of the Manager. At December 31, 1993, the Manager had 611
full-time employees, 161 of whom were represented by two labor unions. The
collective bargaining agreement with each of these unions is subject to renewal
in 1996. The Operating Partnerships (and their predecessors) have never
experienced any significant work stoppages or other significant labor problems.
CAPITAL EXPENDITURES
The General Partner anticipates that the Partnership will continue to make
ongoing capital expenditures to maintain and enhance its assets and properties,
including improvements to meet customers' needs and those required to satisfy
new environmental and safety standards. In 1993, total capital expenditures
were $13.3 million. Projected capital expenditures for 1994 amount to $12.8
million. Planned capital expenditures in 1994 include, among other things,
renewal and replacement
4
of pipe, construction of containment facilities, new valves, metering systems,
field instrumentation, communications facilities and testing equipment. Capital
expenditures are expected to increase over time primarily in response to
increasingly rigorous governmental safety and environmental requirements as
well as industry standards. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
REGULATION
General
Two of the Operating Partnerships (Buckeye and Laurel) are interstate common
carriers (the "FERC 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,
the FERC Carriers are subject to the jurisdiction of certain other federal
agencies with respect to environmental and pipeline safety matters.
The Interstate Commerce Act permits challenges to proposed new or changed
rates and to rates that are already effective by protest or complaint by an
interested party or upon FERC's own motion, and upon an appropriate showing, a
complainant may obtain reparations for damages sustained for a period of up to
two years prior to the filing of a complaint and a reduction of rates in the
future.
The FERC Carriers 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.
Tariffs
FERC has jurisdiction over the FERC Carriers' interstate tariffs. In July
1988, in the midst of a rate proceeding involving Buckeye, FERC issued an order
that provided Buckeye with the opportunity to qualify for an unspecified
alternative form of "light-handed" rate regulation if Buckeye could establish
that it lacked significant market power. On December 31, 1990, after extensive
testimony and hearings, FERC issued an opinion which found that in most of its
relevant market areas, Buckeye operated in a competitive environment in which
it could not exercise significant market power and that Buckeye's tariff rates
in those markets were just and reasonable. Based on these findings, FERC
permitted Buckeye to implement a "light-handed" rate regulation program on an
experimental basis for three years beginning in March 1991. Under the 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 GNP 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
5
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 experimental 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 "light-handed" rate regulation program is subject to review by
FERC after three years of operation, which will be in early 1994. On February
22, 1994, Buckeye filed a tariff seeking to continue its rate regulation
program on a permanent basis. The filing is presently under consideration by
FERC. At this time, the General Partner cannot predict whether the program will
be extended, modified or terminated, or the effect of any such action on the
Partnership.
In October 1992, the Energy Policy Act of 1992 (the "Policy Act") was
enacted. Title XVIII of the Policy Act, "Oil Pipeline Regulatory Reform,"
provides, among other things, that certain tariff rates that were in effect on
October 25, 1991 are deemed "just and reasonable, " and that FERC is directed
by October 24, 1993 to promulgate a rule establishing a simplified and
generally applicable ratemaking methodology for oil pipelines. FERC was also
directed to issue a rule streamlining certain procedural aspects of its
proceedings.
On October 22, 1993, FERC issued a final rule pursuant to the Policy Act with
respect to rate regulation of oil pipelines. The rule relies primarily on an
index methodology, whereby a pipeline would be allowed to change its rates in
accordance with an index that FERC believes reflects cost changes appropriate
for application to pipeline rates. In the alternative, 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 rule provides
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. Requests for rehearing of the rule are pending with FERC. Subject to any
modifications resulting from the requests for rehearing, the final rule will
become effective on January 1, 1995. Concurrently, with the promulgation of the
final rule, FERC also commenced an inquiry into its market-based rate policy,
seeking comments on whether market-based rates should be allowed and how they
should be implemented and supported. FERC intends to issue a new rule in this
regard by January 1, 1995.
At this time, the General Partner cannot predict the impact, if any, that any
new rule promulgated by FERC may have on Buckeye's current "light-handed"
regulatory program or on Buckeye's tariff rates generally. Independent of
regulatory considerations, it is expected that tariff rates will continue to be
constrained by competition and other market factors.
In June 1993, Buckeye filed changes in certain FERC tariff rates applying the
principles of the experimental "light-handed" rate regulation program. Such
changes represented an average increase of 1.4 percent for the rates involved
and were projected to generate approximately $1.5 million in additional
revenues per year. The new tariff rates became effective on August 1, 1993,
without investigation or suspension.
Environmental Matters
The Operating Partnerships are subject to federal and state 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 regulations, risks of
substantial liabilities are 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
6
policies thereunder, and claims for damages to property or 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") amends 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 oil 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 which may
impose additional regulatory burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products are not unusual in the petroleum pipeline industry. The Partnership's
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 recently issued
regulations, many previously non-hazardous wastes generated by pipeline
operations have become "hazardous wastes" which are subject to more rigorous
and costly 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." Disposal 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 could
subject the Operating Partnerships to the requirements of these statutes. As a
result, to the extent hydrocarbons or other petroleum waste may have been
released or disposed of in the past, the Operating Partnerships may in the
future be required to remediate contaminated property. Governmental
authorities such as the Environmental Protection Agency ("EPA"), 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 Operating Partnerships may be affected in several ways by the Amendments,
including required changes in operating procedures and increased capital
expenditures. The Amendments require states to develop permitting programs
over the next several years to comply with new federal programs. Existing
operating and air-emission permits like
7
those held by the Operating Partnerships will have to be reviewed to determine
compliance with the new programs. It is possible that new or more stringent
controls will be imposed upon the Operating Partnerships through this permit
review. In addition, the Amendments impose new requirements on the composition
of fuels transported by the Operating Partnerships. While the principal impact
of these new requirements will be on refiners and marketers of such fuels, the
Operating Partnerships may have to institute additional quality control
procedures and provide additional tankage in order to satisfy customer needs
for segregated storage of these reformulated fuels.
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.
In connection with the Acquisition, Pipe Line obtained an Administrative
Consent Order ("ACO") from the New Jersey Department of Environmental
Protection and Energy ("NJDEPE") under the New Jersey Environmental Cleanup
Responsibility Act of 1983 ("ECRA") for all six of Pipe Line's facilities in
New Jersey. The ACO permitted the Acquisition to be completed prior to full
compliance with ECRA, but required Pipe Line to conduct in a timely manner a
sampling plan for environmental contamination 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 at certain of the sites. The obligations of Pipe Line
were not assumed by the Partnership, and the costs of compliance will be paid
by Penn Central. Through December 1993, Buckeye's costs of approximately
$2,286,000 have been funded by Penn Central.
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 which 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 required increased
coordination of safety regulation between federal and state agencies, testing
and certification of pipeline personnel, and authorization of safety-related
feasibility studies. During 1990, the Manager initiated a random drug testing
program to comply with the regulations promulgated by the Office of Pipeline
Safety, DOT. Federal legislation enacted in October 1991 contained a provision
requiring alcohol testing for workers with certain safety-sensitive duties in
various transportation industries. Regulations issued pursuant to the
legislation, effective January 1, 1995, provide that pipeline personnel, in
certain circumstances, will be subject to alcohol testing requirements. The
regulations also require alcohol testing, in certain circumstances, of
pipeline personnel who maintain commercial drivers' licenses. The Manager
intends to institute an alcohol testing program for covered employees in
accordance with the regulations.
In October 1992, HLPSA was amended by the Pipeline Safety Act of 1992 to
provide, among other things, that the Secretary of Transportation shall
consider the need for the protection of the environment in issuing federal
safety standards for the transportation of hazardous liquids by pipeline. The
amended 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
8
pipelines; training and qualification standards for personnel involved in
maintenance and operation of pipelines; and the periodic integrity testing of
pipelines in environmentally sensitive and high-density population areas by
internal inspection devices or by hydrostatic testing. Significant expenses
would be incurred if, for instance, additional valves were required or if leak
detection standards exceeded the current control system capabilities of the
Operating Partnerships. The General Partner believes that the Operating
Partnerships' operations comply in all material respects with HLPSA, but the
industry, including the Partnership, could be required to incur substantial
additional capital expenditures and increased operating costs depending upon
the requirements of final regulations issued by DOT pursuant to HLPSA, as
amended.
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, recordkeeping, 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.
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 its unitholders (the
"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
beginning in the earlier of (i) 1998 or (ii) the year in which it adds a
substantial new line of business unless, for each taxable year of the
Partnership beginning in the earlier of such years, 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 produced 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 this provision, the Partnership
would continue to be classified as a partnership and not as a corporation for
federal income tax purposes.
9
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 income. Income which 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 the basis limitation. Certain closely
held corporations are subject to slightly different rules, which can also limit
their ability to offset passive losses against certain types of income.
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
portfolio 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 a
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 a maximum rate of 28 percent) 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 in excess of $1,000, and each such entity must file a tax return for
each year in which it has more than $1,000 of gross income included in
computing unrelated business taxable income. 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
10
entities. The tax-exempt entity's share of the Partnership's deductions 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
The Partnership owns property or does business in the states of Pennsylvania,
New York, New Jersey, Indiana, Ohio, Michigan, Illinois, Connecticut,
Massachusetts, Washington and Florida. 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.
ITEM 2. PROPERTIES
As of December 31, 1993, the principal facilities of the Operating
Partnerships included 3,770 miles of 6-inch to 24-inch diameter pipeline, 44
pumping stations, 104 delivery points and various sized tanks having an
aggregate capacity of approximately 10.1 million barrels.
The Operating Partnerships own substantially all of their facilities subject,
in the case of Buckeye, to a mortgage and security interest granted to secure
payment of the outstanding balance of Buckeye's First Mortgage Notes due
serially through 2009. See Note 7 to Consolidated Financial Statements of
Buckeye Partners, L.P. In addition, certain portions of Buckeye's pipeline in
Connecticut and Massachusetts are subject to security interests in favor of the
owners of the right-of-way to secure future lease payments.
In general, the Operating Partnerships' 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' 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 have
not experienced any revocations or lapses of such rights which were material to
its business or operations, and the General Partner has no reason to expect any
such revocation or lapse in the foreseeable future. Most pumping stations and
terminal facilities are located on land owned by the Operating Partnerships.
The General Partner believes that the Operating Partnerships have sufficient
title to their material assets and properties, possess all material
authorizations and franchises 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' 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'
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 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
11
amounts involved, have a material effect on the Partnership's results of
operations 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.
FREEPORT LANDSLIDE
On March 30, 1990, a landslide near Freeport, Pennsylvania caused a rupture
to one of the Partnership's pipelines which resulted in the release of
approximately 58,000 gallons of petroleum products. Undetermined amounts of
petroleum products saturated the soils surrounding the landslide area and
flowed into Knapp Run and eventually into the Allegheny River. Buckeye promptly
conducted extensive emergency response and remediation efforts.
Following the release, various agencies and departments of both the federal
and state governments, including the United States Department of Justice, the
Pennsylvania Office of Attorney General, the Pennsylvania Department of
Environmental Resources ("DER"), the Pennsylvania Department of Transportation,
EPA, the National Transportation Safety Board, and DOT, commenced
investigations into the circumstances of the pipeline rupture. The U.S. Justice
Department and the Pennsylvania Attorney General's Office have instituted
criminal investigations, but Buckeye has not been formally advised that it is a
target of those investigations. The other investigations are civil in nature.
As a result of the foregoing investigations, Buckeye may be subject to claims
or charges seeking civil or criminal fines, penalties or assessments from one
or more governmental agencies. At this time, Buckeye has not been charged with
any violations of federal or state law, and it is impossible to predict whether
there will be any such actions brought against Buckeye, the amount of any
fines, penalties or assessments sought to be imposed or the outcome of any such
actions.
After the emergency phase of the clean-up was complete, Buckeye and DER
reached an agreement on remediation and erosion and sedimentation control at
the site. Under this agreement, Buckeye is collecting and treating surface
runoff water from the site and has instituted further erosion and sedimentation
control measures under a DER-approved plan.
In addition to the above governmental investigations, eight civil class
actions against the Partnership, Buckeye and certain affiliates were filed in
four Pennsylvania counties. Plaintiffs in these lawsuits seek both injunctive
and monetary relief, including punitive damages and attorneys' fees, based on a
number of legal theories. The parties have consolidated these actions in a
single class action in the Court of Common Pleas for Allegheny County,
Pennsylvania, but the proposed class has not yet been certified and there has
been no significant activity in the case. At this time, it is not possible to
predict the likely outcome of such actions.
Buckeye maintains insurance in amounts believed by the General Partner to be
adequate covering certain liabilities and claims arising out of pipeline
accidents above a self-insured retention amount. The insurance is written
generally on an indemnity basis, which requires Buckeye to seek reimbursement
from its carriers for covered claims after paying such claims directly. Various
entities that allegedly incurred costs or damages as a result of this incident
have filed claims with Buckeye's insurance adjusters. Certain claims have been
paid by Buckeye and other claims remain outstanding. The insurance carriers are
reimbursing Buckeye for covered claims subject to the terms of the policy.
For the reasons set forth above, Buckeye is unable to estimate the total
amount of environmental clean-up and other costs and liabilities that may be
incurred in connection with this incident. However, based on information
currently available to it, Buckeye believes that its net expense after
insurance recoveries will not be material to its financial condition or results
of operations.
12
OTHER ENVIRONMENTAL PROCEEDINGS
With respect to other environmental litigation, certain Operating
Partnerships (or their predecessors) have been named as a defendant in several
lawsuits or have been notified by federal or state authorities that they are a
potentially responsible party ("PRP") 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 the
Operating Partnerships in connection with these proceedings could be material.
Potentially material proceedings affecting the Operating Partnerships are
described below.
In July 1986, Buckeye was named as one of several PRPs for the Whitmoyer
Laboratories site in Myerstown, Pennsylvania. Buckeye previously owned part of
the site and sold it to a purchaser now believed to be primarily responsible
for the reported substantial chemical contamination at the site. Without
knowledge of the contamination, Buckeye subsequently repurchased a small
portion of the site on which it constructed a pumping station. After completion
of a remedial investigation and feasibility study and consideration of proposed
remediation plans, EPA issued two Records of Decision in December 1990
proposing a clean-up estimated to cost approximately $125 million. In 1992, EPA
entered into an agreement with the estate of one of the PRPs to recover a
portion of EPA's past costs. In addition, EPA entered into a Consent Decree
with the two PRPs that were former owners of Whitmoyer Laboratories. These PRPs
agreed to assume the cost of clean-up at the site, and to reimburse EPA for
future response costs and a portion of its past response costs. These two PRPs
have instituted suit against each other to determine their relative
responsibility for the Whitmoyer Laboratories site clean-up. One of the PRPs
served a third-party complaint against Buckeye for the stated purpose of
tolling the statute of limitations to preserve its rights, if any, against
Buckeye. Buckeye subsequently settled the third-party complaint that had been
filed against it. In consideration of mutual releases and the PRP's agreement
to cleanup Buckeye's portion of the site, Buckeye agreed to remove its booster
pump station, to reroute its pipeline around the site and to reimburse the PRP
for the cost of removing the original pipeline, if such removal is required by
EPA. Buckeye estimates at this time that the costs of complying with the terms
of the settlement agreement will be between $1 million and $2 million. Buckeye
has not entered into any agreements with the EPA or the other PRP involved at
the site, and Buckeye has not waived any rights to recover for any claim
arising out of the PRP's activities at the site or any claims brought by any
governmental agency or third party based upon environmental conditions at the
site. In the event that claims were asserted by any party in connection with
the site, Buckeye believes that it would have meritorious defenses, but its
potential liability, if any, related to such claims, cannot be estimated at
this time.
In July 1987, the NJDEPE ordered Buckeye and 27 other parties to provide site
security and conduct a preliminary clean-up at the Borne Chemical site located
in Elizabeth, New Jersey. Twenty of the parties (including Buckeye) agreed to
provide security and to remove certain materials from the site. Buckeye agreed
to pay approximately $64,000 of the $4 million estimated cost of this activity.
This removal work has been completed. The NJDEPE is requiring that all parties
(including Buckeye) which are alleged to have contributed hazardous substances
to the site, conduct a remedial investigation/feasibility study to determine
the scope of additional contamination, if any, that may exist at the site.
Buckeye's involvement with this site is based on allegations that a small
amount of Buckeye's waste was stored at this site pending its ultimate disposal
elsewhere. Buckeye believes that it has meritorious defenses, but its potential
liability, if any, for future costs cannot be estimated at this time.
In March 1989, the NJDEPE issued a directive to Buckeye and 113 other parties
demanding payment of approximately $9.2 million in remediation costs incurred
by NJDEPE at the Bridgeport Rental & Oil Services Site in Logan Township, New
Jersey. This site is subject to a remediation being
13
conducted by EPA under CERCLA. In March 1992, an action was commenced by
Rollins Environmental Services (NJ), Inc., and others, against the United
States of America and certain additional private parties seeking reimbursement
for remediation expenses incurred by plaintiffs in connection with the site.
In June 1992, the United States of America brought an action against Rollins
Environmental Services (NJ), Inc., and additional private parties, seeking
reimbursement of approximately $29 million for response costs incurred by EPA
at the site. Buckeye has not been designated by EPA as a PRP with respect to
the site, and has not been named as a defendant in any litigation connected
with the site. Buckeye believes that it is, at most, a de minimis contributor
of waste to this site. Although EPA has estimated remediation costs at the
site to be over $100 million, Buckeye expects that its liability, if any, will
not be material.
In May 1993, Buckeye was notified by EPA that EPA had reason to believe that
Buckeye was a PRP under CERCLA regarding certain hazardous substances located
at a former waste processing/management facility located in Niagara Falls, New
York known as the Frontier Chemical Superfund Site. Buckeye is one of several
hundred parties that have been informed by EPA that they are potential PRPs in
connection with the site. In its notification letter, EPA requested the PRPs
to refund approximately $376,000 in costs already incurred by EPA in
connection with the management of the site, and to fund the clean-up and
removal of certain alleged hazardous materials contained in drums and liquid
waste holding tanks at the site. The estimated cost of the removal activity
has been estimated by EPA at approximately $4,700,000. In addition, EPA noted
that certain subsequent clean-up activities may be required at the site, but
that such work would be the subject of a future letter to the PRPs and would
be addressed under a separate administrative order. Buckeye has entered into a
PRP Group Participation Agreement with other PRPs in order to facilitate a
joint approach to EPA and to the clean-up of the site. Buckeye believes that
it is, at most, a de minimis contributor of waste to the site. Although the
cost of the ultimate remediation of the site cannot be determined at this
time, Buckeye expects that its liability, if any, will not be material.
Additional 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 may be asserted in the future
under various federal and state laws, but 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, 1993.
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 1993 and
1992, as reported on the New York Stock Exchange Composite Tape, were as
follows:
1993 1992
------------- -------------
QUARTER HIGH LOW HIGH LOW
- ------- ------ ------ ------ ------
First............................................... 35 1/2 28 3/4 28 7/8 25 7/8
Second.............................................. 36 7/8 32 1/4 28 1/2 26 7/8
Third............................................... 38 33 1/8 32 1/8 28
Fourth.............................................. 41 5/8 36 1/2 31 5/8 28
During the months of December 1993 and January 1994, 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 18,000.
14
Cash distributions paid quarterly during 1992 and 1993 were as follows:
RECORD DATE PAYMENT DATE AMOUNT PER UNIT
- ----------- ------------ ---------------
February 7, 1992............................. February 28, 1992 $0.65
May 8, 1992.................................. May 29, 1992 $0.65
August 7, 1992............................... August 31, 1992 $0.65
November 6, 1992............................. November 30, 1992 $0.65
February 23, 1993............................ February 26, 1993 $0.65
May 7, 1993.................................. May 28, 1993 $0.65
August 6, 1993............................... August 31, 1993 $0.65
November 8, 1993............................. November 30, 1993 $0.65
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 28, 1994, the Partnership announced a quarterly distribution of
$0.70 per LP Unit payable on February 28, 1994.
15
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 the years ended
December 31, 1993, 1992, 1991, 1990 and 1989. Income statement and balance
sheet data for the year ended December 31, 1989 has been restated to reflect
results of continuing operations. The tables should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Income Statement Data:
Revenue......................... $175,495 $163,064 $151,828 $159,253 $158,094
Depreciation and amortization... 11,002 10,745 10,092 9,971 10,187
Operating income................ 66,851 63,236 58,452 63,863 66,602
Interest and debt expense....... 25,871 27,452 27,502 28,767 29,448
Income from continuing opera-
tions before extraordinary
charge and cumulative effect of
change in accounting principle. 41,654 34,546 30,465 34,312 36,178
Net income...................... 39,366 9,002 30,465 15,200 35,580
Income per Unit from continuing
operations before extraordinary
charge and cumulative effect of
change in accounting principle. 3.44 2.85 2.51 2.83 2.99
Net income per Unit............. 3.25 0.74 2.51 1.25 2.94
Distributions per Unit.......... 2.60 2.60 2.60 2.60 2.45
DECEMBER 31,
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Total assets..................... $543,493 $533,143 $545,281 $551,888 $577,696
Long-term debt................... 224,000 225,000 242,500 260,000 275,000
General Partner's capital........ 2,338 2,259 2,521 2,531 2,694
Limited Partners' capital........ 231,357 223,585 249,533 250,573 266,725
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.
Amounts in the Management's Discussion and Analysis of Financial Condition and
Results of Operations relate to continuing operations unless otherwise
indicated. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto, which are included elsewhere in this
Report.
Change in Accounting Principle
In December 1992, the Partnership adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" ("SFAS 106") effective as of January 1, 1992. As a result, the
Partnership recorded a one-time, non-cash charge of $25.5 million as of the
first quarter of 1992 to reflect the cumulative effect of the change in
accounting principle for periods prior to 1992. In addition, quarterly results
for 1992 were restated to reflect an additional $1.5 million, or approximately
$0.4 million per quarter, in related operating expenses throughout the year.
16
RESULTS OF OPERATIONS
Through its Operating Partnerships, the Partnership is principally engaged in
the transportation of refined petroleum products including gasoline, jet fuel,
diesel fuel, heating oil and kerosene. The Partnership's revenues 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. Results of
operations are affected by factors which include competitive conditions, demand
for products transported, seasonality and regulation. See "Business--
Competition and Other Business Considerations."
1993 Compared With 1992
Revenue for the year ended December 31, 1993 was $175.5 million, $12.5
million, or 7.7 percent greater than revenue of $163.0 million for 1992. Volume
delivered during 1993 averaged 981,100 barrels per day, 67,900 barrels per day
or 7.4 percent greater than volume of 913,200 barrels per day delivered in
1992. Greater revenue in 1993 was related to increased gasoline, distillate and
turbine fuel deliveries and to the effect of tariff rate increases implemented
in July 1992 and August 1993. Gasoline and distillate volume increases were due
primarily to higher end-use demand in response to moderate economic recovery
and a return to normal winter temperatures. In addition, 1993 volume improved
as a result of new business captured from barge and other pipelines, a decline
in Canadian imports to upstate New York and extended refinery maintenance
activities that required transportation of additional refined products into the
Partnership's service areas. Increased turbine fuel volume was due to a
moderate improvement in domestic and international air travel and continued
growth in air cargo business.
Costs and expenses during 1993 were $108.6 million, $8.8 million or 8.8
percent greater than costs and expenses of $99.8 million during 1992.
Categories of increased expenses included payroll and employee benefits,
maintenance services and power and supplies. A significant portion of these
increased expenses were directly related to the transportation of additional
volume and related maintenance activities.
Other income (expenses) consist of interest income, interest and debt
expense, and minority interests and other. Interest and debt expense of $25.9
million in 1993 was $1.6 million less than interest and debt expense of $27.5
million in 1992 reflecting lower debt outstanding following payment of $16.3
million of Series E First Mortgage Notes in December 1992.
1992 Compared With 1991
Revenue for the year ended December 31, 1992 was $163.0 million, $11.2
million, or 7.4 percent greater than revenue of $151.8 million for 1991. Volume
delivered during 1992 averaged 913,200 barrels per day, 40,000 barrels per day
or 4.6 percent greater than volume of 873,200 barrels per day delivered in
1991. Volume increased in all of the Partnership's product grades. Increased
gasoline volume was primarily related to new business from a reactivated
Midwest refinery and shifts from barge and truck to pipeline delivery following
capital investment during 1991 and early 1992. Distillate volume improved due
to increased heating oil demand resulting from colder weather in the Northeast
compared to 1991. Turbine fuel volume improved in response to increased air
travel, expanding air cargo business and new business due to shifts from barge
to pipeline delivery. Greater revenue in 1992 was also attributable to tariff
rate increases which were implemented in July of 1991 and 1992.
Costs and expenses during 1992 were $99.8 million, $6.4 million or 6.9
percent greater than costs and expenses of $93.4 million during 1991. Greater
costs and expenses during 1992 were primarily
17
due to property and other taxes which increased compared to 1991 due to the
effect of favorable settlements recorded in 1991. Cost and expenses in 1992
were also affected by increased power, supplies and maintenance costs
reflecting improved volume. Depreciation charges increased during 1992
principally due to net additions to Partnership's property, plant and
equipment. Costs and expenses were favorably impacted by reduced rents,
employee benefits and environmental related expenses.
Interest income of $1.0 million during 1992 was $0.9 million less than
interest income during 1991 due to continuing lower interest rates and lower
average invested balances. Interest and debt expense of $27.5 million in 1992
was nearly equal to interest and debt expense in 1991. Lower capitalized
interest and additional commitment and other fees associated with a credit
facility largely offset a reduction in interest following debt repayments.
Minority interests and other was lower in 1992 primarily due to the acquisition
of the remaining stock interest in Laurel Corp in December 1991 and the impact
on minority interest upon adoption of SFAS 106.
Tariff Changes
In July 1993, June 1992 and June 1991, Buckeye filed proposed changes in
certain tariff rates that represented, on average, increases of 1.4 percent,
3.0 percent and 3.7 percent for the rates involved, respectively. The July
1993, June 1992 and June 1991 changes were projected to generate approximately
$1.5 million, $4.0 million and $5.0 million in additional revenue per year,
respectively. Each of these proposed changes became effective during the month
after they were filed.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at December 31, 1993, 1992 and 1991 is
highlighted in the following comparative summary:
Liquidity and Capital Indicators
AS OF DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- --------
Current ratio..................................... 1.1 to 1 0.9 to 1 0.9 to 1
Ratio of cash and temporary investments and trade
receivables to current liabilities............... 1.0 to 1 0.8 to 1 0.7 to 1
Working capital (deficiency) (in thousands)....... $ 5,709 $ (4,548) $ (2,877)
Ratio of total debt to total capital.............. .50 to 1 .51 to 1 .50 to 1
Book value (per Unit)............................. $ 19.28 $ 18.63 $ 20.79
Cash Provided by Operations
During 1993, cash provided by operations of $53.2 million was derived
principally from income from continuing operations before an extraordinary
charge of $41.7 million, depreciation of $11.0 million and operating working
capital changes of $3.9 million. Operating working capital changes relate to a
decrease in trade receivables and an increase in accrued and other current
liabilities. Remaining cash uses, totaling $3.4 million, were related to
extraordinary charges on early extinguishment of debt of $2.2 million and
distributions to minority interests and changes in other non-current
liabilities.
During 1992, cash provided by operations of $52.2 million was derived
principally from income from continuing operations before the cumulative effect
of a change in accounting principle of $34.5 million, depreciation of $10.7
million and changes in operating working capital of $3.5 million. Other
18
net cash sources, totaling $3.5 million, were largely provided by discontinued
operations and an increase in other non-current liabilities.
During 1991, cash provided by operations of $42.2 million was derived
principally from income from continuing operations of $30.5 million and
depreciation of $10.1 million. Other net cash sources, totaling $1.6 million,
were provided by discontinued operations and an increase in non-current
liabilities which were offset by changes in operating working capital. The
decrease in working capital during 1991 was primarily due to the increase in
the current portion of long-term debt and a decrease in cash position resulting
from lower earnings from continuing operations and the acquisition of a
minority interest.
Debt Obligation and Credit Facilities
At December 31, 1993, the Partnership had $240.0 million in outstanding
current and long-term debt representing the First Mortgage Notes of Buckeye.
The First Mortgage Notes are collateralized by substantially all of Buckeye's
property, plant and equipment. The $240.0 million of debt outstanding at 1993
year end includes $35 million of additional First Mortgage Notes (Series K, L
and M) bearing interest rates from 7.11 percent to 7.19 percent which were
issued on January 7, 1994 in accordance with an agreement entered into on
December 31, 1993 and excludes $20 million of 9.50 percent First Mortgage Notes
(Series H) due December 1995 that were defeased in-substance with a portion of
the proceeds from such additional First Mortgage Notes. During 1993, the
Partnership paid $17.5 million of principal on the First Mortgage Notes (Series
F) that became due in December 1993. In addition, Buckeye entered into an
agreement with the purchaser of the $35 million of additional First Mortgage
Notes which permits Buckeye, under certain circumstances, to issue up to $40
million of additional First Mortgage Notes to such purchaser. Any issuance of
the additional First Mortgage Notes will require the prior approval by the
holders of the First Mortgage Notes to an amendment to the Mortgage Note
Indenture. Buckeye is currently in the process of seeking such approval.
At December 31, 1992, the Partnership had $242.5 million in outstanding
current and long-term debt representing the First Mortgage Notes of Buckeye.
During 1992, the Partnership paid $16.2 million of remaining principal on the
First Mortgage Notes (Series E) that became due in December 1992. At December
31, 1991, the Partnership had $258.8 million in outstanding current and long-
term debt representing the First Mortgage Notes. During 1991, the Partnership
paid $5.0 million of remaining principal on the First Mortgage Notes (Series D)
that became due in December 1991 and irrevocably deposited $1.3 million in
partial payment of principal on the $17.5 million First Mortgage Notes (Series
E) that became due in December 1992.
The Partnership maintains a $15 million unsecured revolving credit facility
with a commercial bank. This facility, which has options to extend borrowings
up to six years, is available to the Partnership for general purposes including
capital expenditures and working capital. In addition, Buckeye has a $10
million short-term line of credit secured by accounts receivable. Laurel has an
unsecured $1 million line of credit. At December 31, 1993, 1992 and 1991, there
were no outstanding borrowings under these facilities.
The ratio of total debt to total capital was 50 percent, 51 percent, and 50
percent at December 31, 1993, 1992 and 1991, respectively. For purposes of the
calculation of this ratio, total capital consists of current and long-term
debt, minority interests and partners' capital.
Capital Expenditures
At December 31, 1993, property, plant and equipment was approximately 92
percent of total consolidated assets. This compares to 93 percent and 91
percent for the years ended December 31, 1992 and 1991, respectively. Capital
expenditures are generally for expansion of the Operating Partnerships' service
capabilities and sustaining the Operating Partnerships' existing assets.
19
Capital expenditures by the Partnership were $13.3 million, $10.8 million and
$10.9 million for 1993, 1992 and 1991, respectively. Projected capital
expenditures for 1994 amount to $12.8 million. Planned capital expenditures
include, among other things, renewal and replacement of pipe, construction of
containment facilities, new valves, metering systems, field instrumentation,
communication facilities and testing equipment. Capital expenditures are
expected to increase over time primarily in response to increasingly rigorous
governmental safety and environmental requirements as well as industry
standards.
Discontinued Operations
In the fourth quarter of 1990, the Partnership recorded a non-cash charge to
earnings of $19.1 million, net of estimated earnings during phase-out, relating
to the Partnership's decision to discontinue its 16-inch crude oil pipeline and
a refined products terminal. The Partnership closed the sale of the 16-inch
crude oil pipeline, together with associated real and personal property to Sun
Pipe Line Company on February 1, 1993. Proceeds from the sale amounted to $9.2
million. Remaining discontinued operations consisting of petroleum facilities
at a refined products terminal were dismantled and removed during the first
quarter 1993. Disposal of these discontinued operations resulted in a loss of
$127,000.
Environmental Matters
The Operating Partnerships are subject to federal and state laws and
regulations relating to the protection of the environment. These 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 1993, the Operating Partnerships
incurred operating expenses of $3.0 million and capital expenditures of $4.5
million related to environmental matters. Capital expenditures of $3.2 million
for environmental related projects are included in the Partnership's plans for
1994. Expenditures, both capital and operating, relating to environmental
matters are expected to increase due to the Partnership's commitment to
maintain high environmental standards and to increasingly rigorous
environmental laws.
Certain Operating Partnerships (or their predecessors) have been named as a
defendant in lawsuits or have been notified by federal or state authorities
that they are a PRP under federal laws or a respondent under state laws
relating to the generation, disposal, or release of hazardous substances into
the environment. These proceedings generally relate to potential liability for
clean-up costs. 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 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. The General Partner believes that the generation,
handling and disposal of hazardous substances by the Operating Partnerships and
their predecessors have been in material compliance with applicable
environmental and regulatory requirements.
At the Whitmoyer Laboratories site in Myerstown, Pennsylvania, Buckeye is one
of several PRPs for a clean-up estimated to cost approximately $125 million.
However, in 1992, EPA entered into an agreement with the estate of one of the
PRPs to recover a portion of EPA's past costs and a Consent Decree with the two
PRPs that were former owners of Whitmoyer Laboratories to assume the cost of
clean-up at the site and to reimburse EPA for future response costs and a
portion of its past response costs. These two PRPs have instituted suit against
each other to determine their relative responsibility for the Whitmoyer
Laboratories site clean-up. One of the PRPs served a third-party complaint
against Buckeye for the stated purpose of tolling the statute of limitations to
preserve its rights, if any, against Buckeye. Buckeye subsequently settled the
third-party complaint that had been filed against it. In consideration of
mutual releases and the PRP's agreement to
20
cleanup Buckeye's portion of the site, Buckeye agreed to remove its booster
pump station, to reroute its pipeline around the site and to reimburse the PRP
for the cost of removing the original pipeline, if such removal is required by
EPA. Buckeye has not entered into any agreements with the EPA or the other PRP
involved at the site, and Buckeye has not waived any rights to recover for any
claim arising out of the PRP's activities at the site or any claims brought by
any governmental agency or third party based upon environmental conditions at
the site. Although the exact costs of the settlement are not known, Buckeye
estimates at this time that the costs of complying with the terms of the
settlement agreement will be between $1 million and $2 million.
As previously reported, in March 1990, a landslide near Freeport,
Pennsylvania caused a rupture to one of Buckeye's pipelines which resulted in
the release of approximately 58,000 gallons of petroleum products. During 1993,
Buckeye paid claims and other charges related to this incident in the amount of
$0.3 million. Substantially all of this amount has been reimbursed by Buckeye's
insurance carriers. Buckeye is unable to estimate the total amount of
environmental clean-up and other costs and liabilities that may be incurred in
connection with this incident. However, based on information currently
available to it, Buckeye believes that its net expense after insurance
recoveries will not be material to its financial condition or results of
operations. See "Legal Proceedings--Freeport Landslide".
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. 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".
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BUCKEYE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER
-----------
Financial Statements and Independent Auditors' Report:
Independent Auditors' Report..................................... 23
Consolidated Statements of Income--For the years ended December
31, 1993, 1992 and 1991......................................... 24
Consolidated Balance Sheets--December 31, 1993 and 1992.......... 25
Consolidated Statements of Cash Flows--For the years ended Decem-
ber 31, 1993, 1992 and 1991..................................... 26
Notes to Consolidated Financial Statements....................... 27
Financial Statement Schedules and Independent Auditors' Report:
Independent Auditors' Report..................................... S-1
Schedule II--Amounts Receivable from Related Parties and Under-
writers, Promoters and Employees other than Related Parties..... S-2
Schedule III--Registrant's Condensed Financial Statements........ S-3
Schedule V--Consolidated Property, Plant and Equipment--For the
years ended December 31, 1993, 1992 and 1991.................... S-4
Schedule VI--Consolidated Accumulated Depreciation and Amortiza-
tion of Property, Plant and Equipment--For the years ended De-
cember 31, 1993, 1992 and 1991.................................. S-5
Schedule VIII--Valuation and Qualifying Accounts--For the years
ended December 31, 1993, 1992 and 1991.......................... S-6
Schedule X--Supplementary Consolidated Income Statement Informa-
tion--For the years ended December 31, 1993, 1992 and 1991...... S-7
Schedules other than those listed above are omitted because they are either
not applicable or not required or the information required is included in the
consolidated financial statements or notes thereto.
22
INDEPENDENT AUDITORS' REPORT
To the Partners of Buckeye Partners, L.P.:
We have audited the accompanying consolidated balance sheets of Buckeye
Partners, L.P. and its subsidiaries (the "Partnership") as of December 31, 1993
and 1992, and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Partnership as of December 31, 1993 and 1992, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1993 in conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, in 1992 the
Partnership changed its method of accounting for postretirement benefits other
than pensions to conform with Statement of Financial Accounting Standards
Number 106.
Deloitte & Touche
Philadelphia, Pennsylvania
February 14, 1994
23
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------
NOTES 1993 1992 1991
----- -------- -------- --------
Revenue.................................... 2 $175,495 $163,064 $151,828
-------- -------- --------
Costs and expenses
Operating expenses....................... 3,13 87,029 79,111 72,955
Depreciation and amortization............ 2 11,002 10,745 10,092
General and administrative expenses...... 13 10,613 9,972 10,329
-------- -------- --------
Total costs and expenses............... 108,644 99,828 93,376
-------- -------- --------
Operating income........................... 66,851 63,236 58,452
-------- -------- --------
Other income (expenses)
Interest income.......................... 919 960 1,891
Interest and debt expense................ (25,871) (27,452) (27,502)
Minority interests and other............. (245) (129) (1,107)
-------- -------- --------
Total other income (expenses).......... (25,197) (26,621) (26,718)
-------- -------- --------
Income from continuing operations before
income taxes.............................. 41,654 36,615 31,734
Provision for income taxes................. 2 -- (2,069) (1,269)
-------- -------- --------
Income from continuing operations before
extraordinary charge and cumulative effect
of change in accounting principle......... 41,654 34,546 30,465
Loss from discontinued operations.......... 5 (127) -- --
Extraordinary charge on early
extinguishment of debt.................... 11 (2,161) -- --
Cumulative effect of change in accounting
principle................................. 10 -- (25,544) --
-------- -------- --------
Net income................................. $ 39,366 $ 9,002 $ 30,465
======== ======== ========
Net income allocated to General Partner.... 14 $ 394 $ 90 $ 305
Net income allocated to Limited Partners... 14 $ 38,972 $ 8,912 $ 30,160
Income allocated to General and Limited
Partners per Partnership Unit:
Income from continuing operations
before extraordinary charge and
cumulative effect of change in
accounting principle.................. $ 3.44 $ 2.85 $ 2.51
Loss from discontinued operations...... (.01) -- --
Extraordinary charge on early
extinguishment of debt................ (.18) -- --
Cumulative effect of change in
accounting principle.................. -- (2.11) --
-------- -------- --------
Net income............................. $ 3.25 $ 0.74 $ 2.51
======== ======== ========
See notes to consolidated financial statements.
24
BUCKEYE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------
NOTES 1993 1992
----- -------- --------
Assets
Current assets
Cash and cash equivalents..................... 2 $ 22,748 $ 9,753
Temporary investments......................... 250 --
Trade receivables............................. 2 15,341 16,838
Inventories................................... 2 1,174 1,021
Prepaids and other current assets............. 4,445 3,256
-------- --------
Total current assets........................ 43,958 30,868
Property, plant and equipment, net.............. 2,4 499,075 495,541
Other non-current assets........................ 460 460
Net assets of discontinued operations........... 2,5 -- 6,274
-------- --------
Total assets................................ $543,493 $533,143
======== ========
Liabilities and partners' capital
Current liabilities
Current portion of long-term debt............. 7 $ 16,000 $ 17,500
Accounts payable.............................. 2,562 1,184
Income taxes payable.......................... 219 977
Accrued and other current liabilities......... 3,6,9,10,13 19,468 15,755
-------- --------
Total current liabilities................... 38,249 35,416
Long-term debt.................................. 7,11 224,000 225,000
Minority interests.............................. 2,492 2,879
Other non-current liabilities................... 3,8,9,10,13 45,057 44,004
Commitments and contingent liabilities.......... 3 -- --
-------- --------
Total liabilities........................... 309,798 307,299
-------- --------
Partners' capital................................. 14
General Partner................................. 2,338 2,259
Limited Partners................................ 231,357 223,585
-------- --------
Total partners' capital..................... 233,695 225,844
-------- --------
Total liabilities and partners' capital..... $543,493 $533,143
======== ========
See notes to consolidated financial statements.
25
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
NOTES 1993 1992 1991
----- -------- -------- --------
Cash flows from operating activities:
Income from continuing operations before
extraordinary charge and cumulative ef-
fect of change in accounting principle... $ 41,654 $ 34,546 $ 30,465
-------- -------- --------
Adjustments to reconcile income to net
cash provided by operating activities:
Extraordinary charge on early extin-
guishment of debt...................... (2,161) -- --
Depreciation and amortization........... 11,002 10,745 10,092
Minority interests...................... 145 29 657
Distributions to minority interests..... (532) (345) (755)
Change in assets and liabilities:
Trade receivables...................... 1,497 (1,834) 134
Inventories............................ (153) 333 (43)
Prepaids and other current assets...... (1,189) 2,894 (2,328)
Accounts payable....................... 1,378 203 (1,064)
Income taxes payable (a)............... (242) (1,076) (594)
Accrued and other current liabilities
(b)................................... 2,636 2,939 2,376
Other non-current assets............... -- (200) --
Other non-current liabilities (b)...... (1,043) 1,313 758
-------- -------- --------
Total adjustments provided by
continuing operating activities....... 11,338 15,001 9,233
-------- -------- --------
Net cash provided by continuing operat-
ing activities......................... 52,992 49,547 39,698
Net cash provided by discontinued opera-
tions (c).............................. 5 206 2,660 2,471
-------- -------- --------
Net cash provided by operating activi-
ties.................................. 53,198 52,207 42,169
-------- -------- --------
Cash flows from investing activities:
Capital expenditures...................... (13,328) (10,789) (10,853)
Acquisitions.............................. -- -- (4,850)
Proceeds from sale of net assets of dis-
continued operations..................... 5 9,200 -- --
Net proceeds from (expenditures for) dis-
posal of property, plant and equipment... (1,810) 713 24
Sales (purchases) of temporary invest-
ments.................................... (250) -- 10,364
Other, net................................ -- -- 92
-------- -------- --------
Net cash used in investing activities.. (6,188) (10,076) (5,223)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.. 7 35,000 -- --
Payment of long-term debt................. 7 (37,500) (16,250) (6,250)
Distributions to Unitholders.............. 14,15 (31,515) (31,515) (31,515)
Increase in minority interests............ -- 555 264
-------- -------- --------
Net cash used in financing activities.. (34,015) (47,210) (37,501)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... 2 12,995 (5,079) (555)
Cash and cash equivalents at beginning of
year...................................... 2 9,753 14,832 15,387
-------- -------- --------
Cash and cash equivalents at end of year... $ 22,748 $ 9,753 $ 14,832
======== ======== ========
Supplemental cash flow information:
Cash paid during year for:
Interest (net of amount capitalized)..... $ 26,169 $ 27,398 $ 27,541
Income taxes............................. 242 2,632 1,965
Non-cash effect of change in accounting
principle................................ 10 -- 25,544 --
Non-cash changes in property, plant and
equipment................................ 602 -- --
(a) Non-cash changes in income taxes pay-
able...................................... 516 1,160 --
(b) Non-cash changes in accrued and other
liabilities............................... 2,657 9,277 --
(c) Non-cash changes in discontinued opera-
tions..................................... 3,259 2,537 --
See notes to consolidated financial statements.
26
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1993 AND 1992 AND
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1. ORGANIZATION
Buckeye Partners, L.P. (the "Partnership") is a limited partnership organized
in 1986 under the laws of the state of Delaware. The Partnership owns 99
percent limited partnership interests in Buckeye Pipe Line Company, L.P.
("Buckeye"), Laurel Pipe Line Company, L.P. ("Laurel"), Everglades Pipe Line
Company, L.P. ("Everglades") and Buckeye Tank Terminals Company, L.P. ("BTT").
The foregoing entities are hereinafter referred to as the "Operating
Partnerships." Laurel owns a 98.01 percent limited partnership interest in
Buckeye Pipe Line Company of Michigan, L.P. ("BPL Michigan") which discontinued
operations in 1993 (see Note 5).
During December 1986, the Partnership sold 12,000,000 limited partnership
units ("LP Units") in a public offering representing an aggregate 99 percent
limited partnership interest in the Partnership. Concurrently, the Partnership
sold 121,212 units representing a 1 percent general partnership interest in the
Partnership ("GP Units") to Buckeye Management Company (the "General Partner"),
a wholly owned subsidiary of The Penn Central Corporation ("Penn Central"). The
Partnership used the proceeds from such sales to purchase from subsidiaries of
Penn Central the 99 percent limited partnership interests in the then existing
Operating Partnerships and an 83 percent stock interest in Laurel Pipe Line
Company ("Laurel Corp"). In December 1991, the Partnership acquired the
minority interest in Laurel Corp. Laurel was formed in October 1992 and
succeeded to the operations of Laurel Corp.
A subsidiary of the General Partner, Buckeye Pipe Line Company (the
"Manager"), owns a 1 percent general partnership interest in, and serves as
sole general partner and manager of, each Operating Partnership. The Manager
also owns a 1 percent general partnership interest and a 0.99 percent limited
partnership interest in BPL Michigan.
The Partnership maintains its accounts in accordance with the Uniform System
of Accounts for Pipeline Companies, as prescribed by the Federal Energy
Regulatory Commission ("FERC"). Reports to FERC differ from the accompanying
consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles, generally in that such reports
calculate depreciation over estimated useful lives of the assets as prescribed
by FERC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements of the Partnership have been prepared
using the purchase method of accounting. An allocation of the purchase price to
the net assets acquired was made on their relative fair market values as
appraised. The financial statements include the accounts of the Operating
Partnerships on a consolidated basis. All significant intercompany transactions
have been eliminated in consolidation.
Financial Instruments
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. Unless otherwise
disclosed, the fair values of financial instruments approximate their recorded
values.
27
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three months
or less are classified as cash equivalents.
Revenue Recognition
Substantially all revenue is derived from interstate and intrastate
transportation of petroleum products. Such revenue is recognized as products
are delivered to customers. Such customers are major integrated oil companies,
major refiners and large regional marketing companies. While the consolidated
Partnership's continuing customer base numbers approximately 120, no customer
during 1993 contributed more than 10 percent of total revenue. The Partnership
does not maintain an allowance for doubtful accounts.
Inventories
Inventories, consisting of materials and supplies, are carried at cost which
does not exceed realizable value.
Property, Plant and Equipment
Property, plant and equipment consist primarily of pipeline and related
transportation facilities and equipment. For financial reporting purposes,
depreciation is calculated primarily using the straight-line method over the
estimated useful life of 50 years. Additions and betterments are capitalized
and maintenance and repairs are charged to income as incurred. Generally, upon
normal retirement or replacement, the cost of property (less salvage) is
charged to the depreciation reserve, which has no effect on income.
Net Assets of Discontinued Operations
Net assets of discontinued operations represented certain assets less
liabilities of operations which were divested by the Partnership and consisted
primarily of property, plant and equipment.
Income Taxes
For federal and state income tax purposes, the Partnership and Operating
Partnerships are not taxable entities. Accordingly, the taxable income or loss
of the Partnership and Operating Partnerships, which may vary substantially
from income or loss reported for financial reporting purposes, is generally
includable in the federal and state income tax returns of the individual
partners. In October 1992 (see Note 1), Laurel Corp and its parent LE Holdings,
Inc. ("LEH") were merged into Laurel. Laurel Corp and its parent, LEH, as
corporations, had been separate taxpaying entities whose taxable income was
included in a consolidated federal income tax return. As a result of the
reorganization, the then existing deferred income taxes of $3,697,000 were
charged directly to the Partnership's capital accounts. The provision for
federal income taxes on operations of Laurel Corp and LEH prior to the
reorganization approximates the statutory tax rate applied to the pretax
accounting income.
Environmental Expenditures
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past
28
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Pensions
The Manager maintains a defined contribution plan and a defined benefit plan
(see Note 9) which provide retirement benefits to substantially all of its
regular full-time employees. Certain hourly employees of the Manager are
covered by a defined contribution plan under a union agreement.
Postretirement Benefits Other Than Pensions
The Manager provides postretirement health care and life insurance benefits
for certain of its retirees. In 1992, the Manager adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106") (see Note 10) to
account for the cost of these plans. Certain other retired employees are
covered by a health and welfare plan under a union agreement.
3. CONTINGENCIES
The Partnership, and the Operating Partnerships, in the ordinary course of
business, are 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 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's results of operations 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.
Environmental
In accordance with its accounting policy on environmental expenditures, the
Partnership recorded expenses of $3.0 million, $3.1 million and $4.2 million
for 1993, 1992 and 1991, respectively, which were related to the environment.
Expenditures, both capital and operating, relating to environmental matters are
expected to increase due to the Partnership's commitment to maintain high
environmental standards and to increasingly strict environmental laws and
government enforcement policies.
In addition, certain Operating Partnerships (or their predecessors) have been
named as a defendant in lawsuits or have been notified by federal or state
authorities that they are a potentially responsible party ("PRP") under federal
laws or a respondent under state laws relating to the generation, disposal, or
release of hazardous substances into the environment. These proceedings
generally relate to potential liability for clean-up costs. The total potential
remediation costs relating to these clean-up sites cannot be reasonably
estimated. With respect to each site, however, the Operating Partnership
involved is 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. The General Partner believes that the generation, handling and
disposal of hazardous substances by the Operating Partnerships and their
predecessors have been in material compliance with applicable environmental and
regulatory requirements. Additional claims for the cost of cleaning up releases
of hazardous substances and for damage to the environment resulting from the
activities of the
29
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Operating Partnerships or their predecessors may be asserted in the future
under various federal and state laws. 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.
Guaranteed Investment Contract
The Buckeye Pipe Line Company Retirement and Savings Plan (the "Plan") holds
a guaranteed investment contract ("GIC") issued by Executive Life Insurance
Company ("Executive Life"), which entered conservatorship proceedings in the
State of California in April 1991. The GIC was purchased in July 1989, with an
initial principal investment of $7.4 million earning interest at an effective
rate per annum of 8.98 percent through June 30, 1992. As a result of the
conservatorship proceedings, no payment of principal or interest was made on
the maturity date. A Plan of Rehabilitation was approved by the Superior Court
of the State of California, and the Rehabilitation Plan was consummated on
September 3, 1993. Various policy holders and creditors have, however, appealed
certain aspects of the Plan of Rehabilitation, including the priority status of
entities such as the Plan which purchased GICs subsequent to January 1, 1989.
Pursuant to the Plan of Rehabilitation, the Plan will receive an interest only
contract from Aurora National Life Assurance Company in substitution for its
Executive Life GIC. The contract provides for semi-annual interest payments
through the date of maturity of the contract which will be September 1998. In
addition, the Plan is to receive certain additional cash payments, the amounts
of which cannot be accurately estimated at this time, over the next five years
pursuant to the Plan of Rehabilitation. The timing and amount of payment with
respect to the GIC is dependent upon the outcome of the pending appeals as well
as clarification of various provisions of the Rehabilitation Plan. In May 1991,
the General Partner, in order to safeguard the basic retirement and savings
benefits of its employees, announced its intention to enter an arrangement with
the Plan that would guarantee that the Plan would receive at least its initial
principal investment of $7.4 million plus interest at an effective rate per
annum of 5 percent from July 1, 1989. The General Partner intends to effectuate
its commitment through an agreement with the Plan that would provide, under
certain circumstances and subject to Department of Labor approval, for its
purchase of the Plan's rights with respect to the GIC. The costs and expenses
of the General Partner's employee benefit plans are reimbursable by the
Partnership under the applicable limited partnership and management agreements.
The General Partner believes that an adequate provision has been made for costs
which may be incurred by the Partnership in connection with the above mentioned
guarantee.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
-----------------
1993 1992
-------- --------
(IN THOUSANDS)
Land...................................................... $ 9,978 $ 10,018
Buildings and leasehold improvements...................... 23,667 23,279
Machinery, equipment and office furnishings............... 511,590 500,389
Construction in progress.................................. 2,735 3,185
-------- --------
547,970 536,871
Less accumulated depreciation........................... 48,895 41,330
-------- --------
Total................................................... $499,075 $495,541
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30
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DISCONTINUED OPERATIONS
In the fourth quarter of 1990, the Partnership recorded a non-cash charge to
earnings of $19.1 million, net of estimated earnings during phase-out, relating
to the Partnership's decision to discontinue its 16-inch crude oil pipeline and
a refined products terminal. The Partnership closed the sale of the 16-inch
crude oil pipeline, together with associated real and personal property to Sun
Pipe Line Company on February 1, 1993. Proceeds from the sale amounted to $9.2
million. Remaining discontinued operations consisting of petroleum facilities
at the refined products terminal were dismantled and removed during the first
quarter 1993. Disposal of these discontinued operations resulted in a loss of
$127,000.
6. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
DECEMBER 31,
---------------
1993 1992
------- -------
(IN THOUSANDS)
Taxes -- other than income.................................. $ 7,011 $ 6,793
Accrued charges due Manager................................. 6,037 2,987
Environmental liabilities................................... 2,069 1,719
Interest.................................................... 958 1,256
Other....................................................... 3,393 3,000
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Total..................................................... $19,468 $15,755
======= =======
7. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt (excluding current maturities) consists of the following:
DECEMBER 31,
-----------------
1993 1992
-------- --------
(IN THO