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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, 1994
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) 770-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
LP Units representing
limited partnership interests................ New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(TITLE OF CLASS)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At March 7, 1995, the aggregate market value of the registrant's LP Units
held by non-affiliates was $409 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 7, 1995: 12,018,760.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................................... 1
ITEM 2. PROPERTIES.................................................................. 10
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................................................................. 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 40
ITEM 11. EXECUTIVE COMPENSATION ..................................................... 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............ 51
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").
Buckeye is one of the largest independent pipeline common carriers of refined
petroleum products in the United States, with 3,291 miles of pipeline serving
10 states. Laurel owns a 344-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 235,000 barrels
of refined petroleum products.
The Partnership acquired its interests in the Operating Partnerships from
American Premier Underwriters, Inc. ("American Premier"), formerly The Penn
Central Corporation, on December 23, 1986 (the "Acquisition"). The Operating
Partnerships (other than Laurel) had been organized by American Premier for
purposes of the Acquisition and succeeded to the operations of predecessor
companies owned by American Premier, 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 American Premier 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 1994, 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 1,028,800 barrels per
day of refined products in 1994. 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,
---------------------------------------------
1994 1993 1992
--------------- -------------- --------------
VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT
------- ------- ------ ------- ------ -------
Gasoline.......................... 526.0 51% 503.6 51% 458.0 50%
Jet Fuels......................... 235.5 23 234.1 24 227.7 25
Middle Distillates (3)............ 246.1 24 223.0 23 205.4 23
Other Products.................... 21.2 2 20.4 2 21.4 2
------- --- ----- --- ----- ---
Total............................. 1,028.8 100% 981.1 100% 912.5 100%
======= === ===== === ===== ===
- - --------
(1) Excludes crude oil volumes of 0.7 thousand barrels per day for the year
ended December 31, 1992. No crude oil volumes were transported during 1993
or 1994.
(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 1,171 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, through a connection with Laurel, 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 344-mile pipeline extending
westward from five refineries in the Philadelphia area to Pittsburgh,
Pennsylvania.
Indiana--Ohio--Michigan--Illinois
Buckeye transports refined products through 1,994 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 112 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
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 235,000 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 1994, 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 7.1 percent and 6.6 percent,
respectively, of consolidated revenues, while the 20 largest customers
accounted for 74.4 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 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.
3
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.
Distribution of refined petroleum products depends to a large extent upon the
location and capacity of refineries. In past years, a significant quantity of
domestic refining capacity has been 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, 1994, the Manager had 607
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 1994, total capital expenditures
were $15.4 million. Projected capital expenditures for 1995 amount to $14.9
million. Planned capital expenditures in 1995 include, among other things,
tanks to accommodate specific new business opportunities, renewal and
replacement of pipe, 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."
4
REGULATION
General
Buckeye is an interstate common carrier subject to the regulatory
jurisdiction of the Federal Energy Regulatory Commission ("FERC") under the
Interstate Commerce Act and the Department of Energy Organization Act. FERC
regulation requires that interstate oil pipeline rates be posted publicly and
that these rates be "just and reasonable" and non-discriminatory. FERC
regulation also enforces common carrier obligations and specifies a uniform
system of accounts. In addition, Buckeye, and the other Operating Partnerships,
are subject to the jurisdiction of certain other federal agencies with respect
to environmental and pipeline safety matters.
The Operating Partnerships are also subject to the jurisdiction of various
state and local agencies, including, in some states, public utility commissions
which have jurisdiction over, among other things, intrastate tariffs, the
issuance of debt and equity securities, transfers of assets and pipeline
safety.
Tariffs
FERC has jurisdiction over Buckeye's 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 GDP implicit price deflator
since the date on which the individual rate was last increased, plus 2 percent.
Individual rate decreases will be presumptively valid upon a showing that the
proposed rate exceeds marginal costs. In markets where Buckeye was found to
have significant market power and in certain markets where no market power
finding was made: (i) individual rate increases cannot exceed the volume
weighted average rate increase in markets where Buckeye does not have
significant market power since the date on which the individual rate was last
increased, and (ii) any volume weighted average rate decrease in markets where
Buckeye does not have significant market power must be accompanied by a
corresponding decrease in all of Buckeye's rates in markets where it does have
significant market power. Shippers retain the right to file complaints or
protests following notice of a rate increase, but are required to show that the
proposed rates violate or have not been adequately justified under the
experimental program, that the proposed rates are unduly discriminatory, or
that Buckeye has acquired significant market power in markets previously found
to be competitive.
In October 1992, the Energy Policy Act of 1992 (the "Policy Act") was
enacted. Title XVIII of the Policy Act, "Oil Pipeline Regulatory Reform,"
provided, among other things, that certain tariff rates that were in effect on
October 25, 1991 were deemed "just and reasonable, " and that FERC was 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.
5
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. The final rule became effective on January 1, 1995.
On February 22, 1994, Buckeye filed a tariff and justification material to
extend its "experimental" rate regulation program for an indefinite period. No
protests or interventions were filed and, on March 24, 1994, FERC found that
the program should be extended but that Buckeye would be subject to the generic
regulations on oil pipeline rates as of January 1, 1995. On October 26, 1994,
Buckeye filed a motion that requested FERC to permit Buckeye to continue its
existing rate program indefinitely, as an exception to the generic oil pipeline
rate regulations. On December 6, 1994, FERC issued an order granting that
motion and extended the operation of Buckeye's rate program indefinitely,
commencing January 1, 1995. The Buckeye rate program will be subject to
reevaluation at the same time FERC reviews the index selected in the generic
oil pipeline regulations, currently scheduled to occur five years after the
effective date of the generic rules. Independent of regulatory considerations,
it is expected that tariff rates will continue to be constrained by competition
and other market factors.
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 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
6
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 remedy 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 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
7
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 American Premier. Through December 1994, Buckeye's costs of approximately
$2,353,000 have been funded by American Premier.
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. In 1990, the Manager initiated a random drug testing
program to comply with the regulations promulgated by the Office of Pipeline
Safety, DOT, and in January 1995, the Manager instituted a program to comply
with new DOT regulations that require alcohol testing of certain pipeline
personnel.
HLPSA requires, among other things, that the Secretary of Transportation
consider the need for the protection of the environment in issuing federal
safety standards for the transportation of hazardous liquids by pipeline. The
legislation also requires the Secretary of Transportation to issue regulations
concerning, among other things, the identification by pipeline operators of
environmentally sensitive areas; the circumstances under which emergency flow
restricting devices should be required on pipelines; training and qualification
standards for personnel involved in maintenance and operation of pipelines; and
the periodic integrity testing of pipelines in 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, if leak detection standards were amended to exceed the
current control system capabilities of the Operating Partnerships or additional
integrity testing of pipeline facilities were to be required. The General
Partner believes that the Operating Partnerships' operations comply in all
material respects with HLPSA. However, 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
8
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.
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 non-
passive income. Net losses and credits attributable to an interest in a
publicly traded partnership are not allowed to offset a partner's other income.
Thus, a Unitholder's proportionate share of the Partnership's net losses may be
used to offset only Partnership net income from its trade or business in
succeeding taxable years or, upon a complete disposition of a Unitholder's
interest in the Partnership to an unrelated person in a fully taxable
transaction, may be used to (i) offset gain recognized upon the disposition,
and (ii) then against all other income of the Unitholder. In effect, net losses
are suspended and carried forward indefinitely until utilized to offset net
income of the Partnership from its trade or business or allowed upon the
complete disposition to an unrelated person in a fully taxable transaction of 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.
9
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 and each such entity must file a tax return for each year in which it
has more than $1,000 of gross income from unrelated business activities. The
General Partner believes that substantially all of the Partnership's gross
income will be treated as derived from an unrelated trade or business and
taxable to such entities. The tax-exempt entity's share of the Partnership's
deductions directly connected with carrying on such unrelated trade or business
are allowed in computing the entity's taxable unrelated business income.
ACCORDINGLY, INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT ENTITIES SUCH AS
INDIVIDUAL RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE TRUSTS MAY NOT BE
ADVISABLE.
State Tax Treatment
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, 1994, the principal facilities of the Operating
Partnerships included 3,672 miles of 6-inch to 24-inch diameter pipeline, 44
pumping stations, 105 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 2010. 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.
10
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 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.
After the emergency phase of the clean-up was complete, Buckeye and the
Pennsylvania Department of Environmental Resources ("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.
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, DER, the Pennsylvania Department of
Transportation, EPA, the National Transportation Safety Board, and DOT,
commenced investigations into the circumstances of the pipeline rupture. In May
1994, Buckeye began discussions with DER and other state agencies concerning
potential settlement of natural resource damage claims and civil penalties that
the state agencies indicated they might assert against Buckeye. In January
1995, DER filed a complaint for civil penalties with the Commonwealth of
Pennsylvania Environmental Hearing Board based on alleged violations by Buckeye
of various state strict liability environmental laws. Buckeye's negotiations
with DER and other state agencies concerning the alleged civil penalties, as
well as potential natural resource damage claims, are continuing. In addition,
in January 1995, a complaint was filed against Buckeye
11
in the United States District Court for the Western District of Pennsylvania
by the United States of America. The complaint charges Buckeye with two
criminal misdemeanor violations of environmental laws. One count of the
complaint alleges a violation of the strict liability provisions of the Rivers
and Harbors Act, and the other count alleges negligence in violation of the
Clean Water Act. Buckeye is actively engaged in discussions with the
government seeking disposition of these charges.
In addition to the above governmental proceedings, 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 case.
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.
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 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
12
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 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
13
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.
In July 1994, Buckeye was named as a defendant in an action filed by the
Michigan Department of Natural Resources ("MDNR") in Circuit Court, Oakland
County, Michigan. The complaint also names three individuals and three other
corporations as defendants. The complaint alleges that under the Michigan
Environmental Response Act, the Michigan Water Resource Commission Act and the
Leaking Underground Storage Tank Act, the defendants are liable to the state of
Michigan for remediation expenses in connection with alleged groundwater
contamination in the vicinity of Sable Road, Oakland County, Michigan. The
complaint asserts that contaminated groundwater has infiltrated drinking water
wells in the area. The complaint seeks past response costs in the amount of
approximately $1.2 million and a declaratory judgment that the defendants are
liable for future response costs and remedial activities at the site. Buckeye
believes that its pipeline in the vicinity of the contaminated groundwater has
not been a source of the contaminants and that Buckeye has no responsibility
with respect to past or future clean-up costs at the site. Buckeye's liability,
if any, cannot be estimated at this time.
In July 1994, Buckeye was named as a defendant in an action entitled Waste
Management Inc., et. al. v. Aerospace America, Inc., et. al. filed in the
United States District Court for the Eastern District of Michigan. One of the
plaintiffs, SCA Services, Inc. ("SCA"), entered into a consent order with the
state of Michigan in 1980, pursuant to which SCA agreed to remedy a portion of
a Superfund site known as the Hartley & Hartley landfill located in Kawkawlin,
Bay County, Michigan. In the pending action, plaintiffs are seeking
contributions from Buckeye and over 100 other defendants of approximately $5.7
million in response costs alleged to have been incurred to date and for future
response and remediation costs that may be incurred in connection with future
remediation at the site. Plaintiffs' claim against Buckeye is purportedly
brought pursuant to the provisions of CERCLA. Buckeye believes that it is, at
most, a de minimis contributor of wastes 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, 1994.
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 1994 and
1993, as reported on the New York Stock Exchange Composite Tape, were as
follows:
1994 1993
------------- -------------
QUARTER HIGH LOW HIGH LOW
- - ------- ------ ------ ------ ------
First............................................... 41 35 1/2 35 1/2 28 3/4
Second.............................................. 39 1/4 35 1/4 36 7/8 32 1/4
Third............................................... 37 3/4 35 1/2 38 33 1/8
Fourth.............................................. 37 1/2 30 7/8 41 5/8 36 1/2
14
During the months of December 1994 and January 1995, 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.
Cash distributions paid quarterly during 1993 and 1994 were as follows:
RECORD DATE PAYMENT DATE AMOUNT PER UNIT
- - ----------- ------------ ---------------
February 8, 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
February 8, 1994............................. February 28, 1994 $0.70
May 6, 1994.................................. May 31, 1994 $0.70
August 8, 1994............................... August 31, 1994 $0.70
November 8, 1994............................. November 30, 1994 $0.70
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 February 1, 1995, the Partnership announced a quarterly distribution of
$0.70 per LP Unit payable on February 28, 1995.
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, 1994, 1993, 1992, 1991 and 1990. The tables should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Income Statement Data:
Revenue......................... $186,338 $175,495 $163,064 $151,828 $159,253
Depreciation and amortization... 11,203 11,002 10,745 10,092 9,971
Operating income................ 72,481 66,851 63,236 58,452 63,863
Interest and debt expense....... 24,931 25,871 27,452 27,502 28,767
Income from continuing opera-
tions before extraordinary
charge and cumulative effect of
change in accounting principle. 48,086 41,654 34,546 30,465 34,312
Net income...................... 45,817 39,366 9,002 30,465 15,200
Income per Unit from continuing
operations before extraordinary
charge and cumulative effect of
change in accounting principle. 3.96 3.44 2.85 2.51 2.83
Net income per Unit............. 3.77 3.25 0.74 2.51 1.25
Distributions per Unit.......... 2.80 2.60 2.60 2.60 2.60
DECEMBER 31,
--------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Total assets..................... $534,765 $543,493 $533,143 $545,281 $551,888
Long-term debt................... 214,000 224,000 225,000 242,500 260,000
General Partner's capital........ 2,460 2,338 2,259 2,521 2,531
Limited Partners' capital........ 243,516 231,357 223,585 249,533 250,573
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.
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."
16
1994 Compared With 1993
Revenue for the year ended December 31, 1994 was $186.3 million, $10.8
million, or 6.2 percent greater than revenue of $175.5 million for 1993. Volume
delivered during 1994 averaged 1,028,800 barrels per day, 47,700 barrels per
day or 4.9 percent greater than volume of 981,100 barrels per day delivered in
1993. Greater revenue in 1994 was related to increased gasoline and distillate
deliveries and to the effect of tariff rate increases (see "Tariff Changes"
below). Gasoline volumes increased primarily due to higher end-use demand in
response to continued economic recovery and moderate growth in market share.
Higher distillate shipments were the result of increased demand due to colder
weather early in the year and the effect of carrying two distillate
inventories, both high and low sulfur product, as required by Clean Air Act
regulations that became effective in October 1993. Turbine fuel shipments
increased slightly due to market demand growth at major airports.
Costs and expenses during 1994 were $113.9 million, $5.3 million or 4.9
percent greater than costs and expenses of $108.6 million during 1993.
Categories of increased expenses included payroll and employee benefits,
maintenance services, power, supplies and casualty loss. A significant portion
of these increased expenses were directly related to the transportation of
additional volume. In addition, costs incurred in connection with environmental
remediation activities were $2.9 million greater than the prior year. See
"Environmental Matters."
Other income (expenses) consist of interest income, interest and debt
expense, and minority interests and other. Net reductions in debt, plus
refinancing of debt at lower interest rates, resulted in a decline in interest
expense of $0.9 million from 1993 levels.
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, 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.
Tariff Changes
In November 1994, July 1993 and June 1992, Buckeye filed proposed changes in
certain tariff rates that represented, on average, increases of 0.4 percent,
1.4 percent and 3.0 percent, respectively.
17
The November 1994, July 1993 and June 1992 changes were projected to generate
approximately $0.4 million, $1.5 million and $4.0 million in additional revenue
per year, respectively. Each of these proposed changes became effective during
the month after they were filed.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at December 31, 1994, 1993 and 1992 is
highlighted in the following comparative summary:
Liquidity and Capital Indicators
AS OF DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
Current ratio...................................... 1.2 to 1 1.1 to 1 0.9 to 1
Ratio of cash and temporary investments and trade
receivables to current liabilities................ 1.0 to 1 1.0 to 1 0.8 to 1
Working capital (deficiency) (in thousands)........ $ 5,750 $ 5,709 $ (4,548)
Ratio of total debt to total capital............... .46 to 1 .50 to 1 .51 to 1
Book value (per Unit).............................. $ 20.27 $ 19.28 $ 18.63
Cash Provided by Operations
During 1994, cash provided by operations of $58.1 million was derived
principally from $48.1 million of income from continuing operations before an
extraordinary charge and $11.2 million of depreciation. Operating working
capital decreased by $0.7 million. Increases in accrued and other current
liabilities, trade receivables, temporary investments and prepaid and other
current assets account for the majority of the change. Remaining cash uses,
totaling $0.5 million, were related to an extraordinary charge on early
extinguishment of debt of $2.3 million, changes in minority interests and
changes in other non-current liabilities.
During 1993, cash provided by operations of $52.9 million was derived
principally from $41.7 million of income from continuing operations before an
extraordinary charge, $11.0 million of depreciation and $3.7 million of
operating working capital changes. Operating working capital changes relate to
a decrease in trade receivables and an increase in accrued and other current
liabilities. Remaining cash uses, totaling $3.5 million, were related to an
extraordinary charge on early extinguishment of debt of $2.2 million and
changes in minority interests and other non-current liabilities.
During 1992, cash provided by operations of $52.2 million was derived
principally from $34.5 million of income from continuing operations before the
cumulative effect of a change in accounting principle, $10.7 million of
depreciation and $3.5 million of changes in operating working capital. Other
net cash sources, totaling $3.5 million, were largely provided by discontinued
operations and an increase in other non-current liabilities.
18
Debt Obligation and Credit Facilities
The indenture pursuant to which the First Mortgage Notes were issued (the
"Mortgage Note Indenture") was amended in March 1994 by a Fourth Supplemental
Indenture to permit Buckeye to issue additional First Mortgage Notes from time
to time under certain circumstances; so long as the aggregate principal amount
of First Mortgage Notes outstanding after any such issuance does not exceed
$275 million.
At December 31, 1994, the Partnership had $214.0 million in outstanding
current and long-term debt representing the First Mortgage Notes of Buckeye
which does not include $45.0 million in First Mortgage Notes which had been
retired by in-substance defeasance. The First Mortgage Notes are collateralized
by substantially all of Buckeye's currently existing and after acquired
property, plant and equipment. Debt outstanding at December 31, 1994 includes
$15 million of additional First Mortgage Notes, Series N, bearing interest at a
rate of 7.93 percent. The First Mortgage Notes, Series N, were issued on April
11, 1994 and are due December 2010. Current and long-term debt excludes $20
million of 9.72 percent First Mortgage Notes, Series I, due December 1996,
which were retired by an in-substance defeasance with the proceeds of the
Series N First Mortgage Notes and an additional defeasance of $5 million in
December 1994. Also excluded from long-term debt is $5 million of 11.18 percent
First Mortgage Notes, Series J, which were retired by an in-substance
defeasance in December 1994. Total debt due beyond 1994 that was retired by an
in-substance defeasance during 1994 amounted to $25 million with total new debt
issued during 1994 of $15.0 million. During 1994, the Partnership also paid $16
million of principal on the First Mortgage Notes, Series G, that became due in
December 1994.
At December 31, 1993, the Partnership had $240.0 million in outstanding
current and long-term debt representing the First Mortgage Notes of Buckeye
which does not include $20.0 million in First Mortgage Notes which had been
retired by in-substance defeasance. Debt outstanding at 1993 year end included
$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
excluded $20 million of 9.50 percent First Mortgage Notes, Series H, due
December 1995 that were retired by an in-substance defeasance 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 December 1993, 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.At December 31,
1994, Buckeye has the capacity to borrow up to $25.0 million of additional
First Mortgage Notes under this agreement.
The Partnership has a $15 million unsecured short-term revolving credit
facility with a commercial bank. This facility, which has options to extend
borrowings through September 1999, 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,
1994, there were no outstanding borrowings under these facilities.
The ratio of total debt to total capital was 46 percent, 50 percent, and 51
percent at December 31, 1994, 1993 and 1992, respectively. For purposes of the
calculation of this ratio, total capital consists of current and long-term
debt, minority interests and partners' capital.
Cash Distributions
Pursuant to the Mortgage Note Indenture, cash distributions by Buckeye to the
Partnership cannot exceed Net Cash Available to Partners (generally defined to
equal net income plus
19
depreciation and amortization less (a) capital expenditures funded from
operating cash flows, (b) payments of principal of debt and (c) certain other
amounts, all on a cumulative basis since the formation of the Partnership). The
maximum amount available for distribution by Buckeye to the Partnership under
the formula as of December 31, 1994 amounted to $11.0 million. The Partnership
is also entitled to receive cash distributions from Everglades, BTT and Laurel.
Capital Expenditures
At December 31, 1994, property, plant and equipment was approximately 94
percent of total consolidated assets. This compares to 92 percent and 93
percent for the years ended December 31, 1993 and 1992, respectively. Capital
expenditures are generally for expansion of the Operating Partnerships' service
capabilities and sustaining the Operating Partnerships' existing operations.
Capital expenditures by the Partnership were $15.4 million, $13.3 million and
$10.8 million for 1994, 1993 and 1992, respectively. Projected capital
expenditures for 1995 amount to $14.9 million. Planned capital expenditures
include, among other things, tanks to accommodate specific new business
opportunities, renewal and replacement of pipe and station 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.
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 1994, the Operating Partnerships
incurred operating expenses of $5.9 million and capital expenditures of $4.3
million related to environmental matters. Capital expenditures of $4.5 million
for environmental related projects are included in the Partnership's plans for
1995. 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
20
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 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.
Buckeye has worked with the U.S. Coast Guard and other federal, state and
local agencies since October 15, 1994 to remedy the environmental consequences
of a pipeline release in New Haven, Connecticut. Product released from one of
Buckeye's pipelines contaminated the groundwater in the area and, for a short
period of time, discharged into the Quinnipiac River. Buckeye replaced
approximately 2,000 feet of pipe in the area of the release site and presently
has in place facilities to remedy groundwater contamination associated with the
release. Although it is possible that costs related to this incident could
increase to a level which would materially effect the Partnership's results of
operations for a future period, the General Partner does not believe, based
upon information currently available, that costs arising out of this event will
have a material adverse effect on the Partnership's consolidated financial
condition or annual results of operations. During 1994, Buckeye paid claims and
other charges in the amount of $1.4 million and made capital expenditures of
$0.5 million related to this incident.
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 1994, 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."
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 in 1993.
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, 1994, 1993 and 1992......................................... 24
Consolidated Balance Sheets--December 31, 1994 and 1993.......... 25
Consolidated Statements of Cash Flows--For the years ended Decem-
ber 31, 1994, 1993 and 1992..................................... 26
Notes to Consolidated Financial Statements....................... 27
Financial Statement Schedules and Independent Auditors' Report:
Independent Auditors' Report..................................... S-1
Schedule I--Registrant's Condensed Financial Statements.......... S-2
Schedule II--Valuation and Qualifying Accounts--For the years
ended December 31, 1994, 1993 and 1992.......................... S-3
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, 1994
and 1993, and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1994 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
January 27, 1995
23
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------
NOTES 1994 1993 1992
----- -------- -------- --------
Revenue.................................... 2 $186,338 $175,495 $163,064
-------- -------- --------
Costs and expenses
Operating expenses....................... 3,13 92,097 87,029 79,111
Depreciation and amortization............ 2 11,203 11,002 10,745
General and administrative expenses...... 13 10,557 10,613 9,972
-------- -------- --------
Total costs and expenses............... 113,857 108,644 99,828
-------- -------- --------
Operating income........................... 72,481 66,851 63,236
-------- -------- --------
Other income (expenses)
Interest income.......................... 1,465 919 960
Interest and debt expense................ (24,931) (25,871) (27,452)
Minority interests and other............. (929) (245) (129)
-------- -------- --------
Total other income (expenses).......... (24,395) (25,197) (26,621)
-------- -------- --------
Income from continuing operations before
income taxes.............................. 48,086 41,654 36,615
Provision for income taxes................. 2 -- -- (2,069)
-------- -------- --------
Income from continuing operations before
extraordinary charge and cumulative effect
of change in accounting principle......... 48,086 41,654 34,546
Loss from discontinued operations.......... 5 -- (127) --
Extraordinary charge on early
extinguishment of debt.................... 11 (2,269) (2,161) --
Cumulative effect of change in accounting
principle................................. 10 -- -- (25,544)
-------- -------- --------
Net income................................. $ 45,817 $ 39,366 $ 9,002
======== ======== ========
Net income allocated to General Partner.... 14 $ 458 $ 394 $ 90
Net income allocated to Limited Partners... 14 $ 45,359 $ 38,972 $ 8,912
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............................... $ 3.96 $ 3.44 $ 2.85
Loss from discontinued operations........ -- (.01) --
Extraordinary charge on early extinguish-
ment of debt............................ (.19) (.18) --
Cumulative effect of change in accounting
principle............................... -- -- (2.11)
-------- -------- --------
Net income............................... $ 3.77 $ 3.25 $ 0.74
======== ======== ========
See notes to consolidated financial statements.
24
BUCKEYE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------
NOTES 1994 1993
----------- -------- --------
Assets
Current assets
Cash and cash equivalents..................... 2 $ 6,071 $ 22,748
Temporary investments......................... 2 1,400 250
Trade receivables............................. 2 17,057 15,341
Inventories................................... 2 1,320 1,174
Prepaid and other current assets.............. 5,474 4,445
-------- --------
Total current assets........................ 31,322 43,958
Property, plant and equipment, net.............. 2,4 503,083 499,075
Other non-current assets........................ 360 460
-------- --------
Total assets................................ $534,765 $543,493
======== ========
Liabilities and partners' capital
Current liabilities
Current portion of long-term debt............. 7 $ -- $ 16,000
Accounts payable.............................. 2,325 2,562
Accrued and other current liabilities......... 3,6,9,10,13 23,247 19,687
-------- --------
Total current liabilities................... 25,572 38,249
Long-term debt.................................. 7,11 214,000 224,000
Minority interests.............................. 2,616 2,492
Other non-current liabilities................... 3,8,9,10,13 46,601 45,057
Commitments and contingent liabilities.......... 3 -- --
-------- --------
Total liabilities........................... 288,789 309,798
Partners' capital................................. 14
General Partner................................. 2,460 2,338
Limited Partners................................ 243,516 231,357
-------- --------
Total partners' capital..................... 245,976 233,695
-------- --------
Total liabilities and partners' capital..... $534,765 $543,493
======== ========
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 1994 1993 1992
----- -------- -------- --------
Cash flows from operating activities:
Income from continuing operations before
extraordinary charge and cumulative
effect of change in accounting principle. $ 48,086 $ 41,654 $ 34,546
-------- -------- --------
Adjustments to reconcile income to net
cash provided by operating activities:
Extraordinary charge on early
extinguishment of debt................. (2,269) (2,161) --
Depreciation and amortization........... 11,203 11,002 10,745
Minority interests...................... 469 145 29
Distributions to minority interests..... (345) (532) (345)
Change in assets and liabilities:
Temporary investments.................. (1,150) (250) --
Trade receivables...................... (1,716) 1,497 (1,834)
Inventories............................ (146) (153) 333
Prepaid and other current assets....... (1,029) (1,189) 2,894
Accounts payable....................... (237) 1,378 203
Accrued and other current liabilities
(a)................................... 3,560 2,394 1,863
Other non-current assets............... 100 -- (200)
Other non-current liabilities (a)...... 1,544 (1,043) 1,313
-------- -------- --------
Total adjustments from continuing
operating activities.................. 9,984 11,088 15,001
-------- -------- --------
Net cash provided by continuing
operating activities................... 58,070 52,742 49,547
Net cash provided by discontinued
operations (b)......................... 5 -- 206 2,660
-------- -------- --------
Net cash provided by operating
activities............................ 58,070 52,948 52,207
-------- -------- --------
Cash flows from investing activities:
Capital expenditures...................... (15,364) (13,328) (10,789)
Proceeds from sale of net assets of
discontinued operations.................. 5 -- 9,200 --
Net proceeds from (expenditures for)
disposal of property, plant and
equipment................................ 153 (1,810) 713
-------- -------- --------
Net cash used in investing activities.. (15,211) (5,938) (10,076)
-------- -------- --------
Cash flows from financing activities:
Capital contribution...................... 4 -- --
Proceeds from exercise of unit options.... 428 -- --
Proceeds from issuance of long-term debt.. 7 15,000 35,000 --
Payment of long-term debt................. 7 (41,000) (37,500) (16,250)
Distributions to Unitholders.............. 14,15 (33,968) (31,515) (31,515)
Increase in minority interests............ -- -- 555
-------- -------- --------
Net cash used in financing activities.. (59,536) (34,015) (47,210)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents............................... 2 (16,677) 12,995 (5,079)
Cash and cash equivalents at beginning of
year...................................... 2 22,748 9,753 14,832
-------- -------- --------
Cash and cash equivalents at end of year... $ 6,071 $ 22,748 $ 9,753
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for interest
(net of amount capitalized).............. $ 24,947 $ 26,169 $ 27,398
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 accrued and other
liabilities............................... -- 3,173 10,437
(b) Non-cash changes in discontinued
operations................................ -- 3,259 2,537
See notes to consolidated financial statements.
26
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994 AND 1993 AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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 American Premier Underwriters, Inc. ("American
Premier"), formerly The Penn Central Corporation. The Partnership used the
proceeds from such sales to purchase from subsidiaries of American Premier 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. During 1994, the Partnership issued an additional
16,060 limited partnership units and 162 general partnership units under its
Unit Option and Distribution Equivalent Plan. At December 31, 1994, there were
12,016,060 limited partnership units and 121,374 general partnership units
outstanding (see Note 14 and Note 16).
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 (see Note 7).
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.
Temporary Investments
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," all
temporary investments are considered to be trading securities. The aggregate
market value of temporary investments approximates cost as of December 31,
1994. The adoption of SFAS 115 did not have a material effect on the
Partnership's net income for the year ended December 31, 1994.
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 1994 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.
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
merger, 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 merger
approximates the statutory tax rate applied to the pretax accounting income. As
of December 31, 1994, the Partnership's reported amount of net assets for
financial reporting purposes exceeded its tax basis by approximately $179
million.
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 operations, and do not contribute to current or future
revenue generation, are expensed. Liabilities
28
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Reclassifications
Certain amounts in the consolidated financial statements for the periods
prior to 1994 have been reclassified to conform to the current presentation.
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 $5.9 million, $3.0 million and $3.1 million
for 1994, 1993 and 1992, 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.
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
29
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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") held 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 has received 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 at
a rate of 5.61 percent per annum through September 1998, the maturity date of
the contract. 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 four 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's present intention is to effectuate its commitment no
later than September 1998, the maturity date of the Aurora contract. 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
guarantee.
30
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
-----------------
1994 1993
-------- --------
(IN THOUSANDS)
Land...................................................... $ 10,189 $ 9,978
Buildings and leasehold improvements...................... 23,887 23,667
Machinery, equipment and office furnishings............... 514,287 511,590
Construction in progress.................................. 8,576 2,735
-------- --------
556,939 547,970
Less accumulated depreciation........................... 53,856 48,895
-------- --------
Total................................................... $503,083 $499,075
======== ========
Depreciation expense was $11,203,000, $11,002,000 and $10,745,000 for the