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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, 1996
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 24, 1997, the aggregate market value of the registrant's LP Units
held by non-affiliates was $505 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 24, 1997: 12,067,180
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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......................... 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S LP UNITS AND RELATED UNITHOLDER MATTERS......... 13
ITEM 6. SELECTED FINANCIAL DATA..................................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 20
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...................................................... 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............ 53
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 by the Partnership. (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 3,105 miles of pipeline
serving 10 states. Laurel owns a 345-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
257,000 barrels of refined petroleum products.
The Partnership acquired its interests in the Operating Partnerships from
The Penn Central Corporation, now American Financial Group, Inc. ("American
Financial"), on December 23, 1986 (the "1986 Acquisition"). The Operating
Partnerships (other than Laurel) had been organized by American Financial for
purposes of the 1986 Acquisition and succeeded to the operations of
predecessor companies owned by American Financial, 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 corporation organized
in 1986 under the laws of the state of Delaware, 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.
During March 1996, BMC Acquisition Company ("BAC"), a corporation organized
in 1996 under the laws of the state of Delaware, acquired all of the common
stock of the General Partner for $63 million in cash from a subsidiary of
American Financial (the "Acquisition"). BAC is owned by Glenmoor Partners, LLP
("Glenmoor"), an investment group comprised of Alfred W. Martinelli, Chairman
of the Board and Chief Executive Officer of the General Partner, and by all of
the members of senior management of the General Partner, certain manager-level
employees of the Manager and by the BMC Acquisition Company Employee Stock
Ownership Plan (the "ESOP"). Pursuant to a Management Agreement dated March
22, 1996, among Glenmoor, the General Partner and the Manager (the "Glenmoor
Management Agreement"), Glenmoor hired all of the executive officers of the
General Partner and the Manager and certain manager-level employees of the
Manager. Glenmoor currently provides management services to the General
Partner and the Manager. See "Certain Relationships and Related Transactions."
Since the Acquisition, the General Partner has had an opportunity to
consider various issues relating to the structure of the ESOP. As a result of
this analysis, the General Partner has developed
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a proposal to restructure the ESOP (the "ESOP Restructuring"). The goals of
the ESOP Restructuring are to provide financial and other benefits to the
Partnership, increase cash available for distribution to the holders of
limited partnership units ("LP Units"), increase incentives for management and
improve the ESOP as a benefit plan for employee participants. Under the
proposed ESOP Restructuring, which is subject to approval by the limited
partners of the Partnership (the "Unitholders"), the ESOP's current investment
in Series A Convertible Preferred Stock of BAC ("BAC Preferred Stock") would
be replaced with a beneficial ownership interest in additional LP Units to be
issued by the Partnership. The LP Units would be owned by Buckeye Pipe Line
Services Company, a newly formed corporation under the laws of Pennsylvania,
which will become the sponsor of the ESOP. In consideration for the issuance
of approximately 1.6 million additional LP Units, the Partnership's obligation
to reimburse the General Partner, the Manager and Glenmoor for certain
executive compensation costs would be permanently released, the incentive
compensation to be paid by the Partnership to the General Partner under the
existing incentive compensation agreement would be reduced, and other changes
would be implemented to make the ESOP a less expensive fringe benefit for the
Partnership. A proxy statement describing the ESOP Restructuring is expected
to be sent to the LP Unitholders in April 1997. See "Certain Relationships and
Related Transactions."
REFINED PRODUCTS BUSINESS
The Partnership receives petroleum products from refineries, connecting
pipelines and marine terminals, and transports those products to other
locations. In 1996, refined products accounted for substantially all of the
Partnership's consolidated revenues and consolidated operating income.
The Partnership transported an average of approximately 1,007,100 barrels
per day of refined products in 1996. The following table shows the volume and
percentage of refined products transported over the last three years.
VOLUME AND PERCENTAGE OF REFINED PRODUCTS TRANSPORTED (1)
(VOLUME IN THOUSANDS OF BARRELS PER DAY)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT
------- ------- ------- ------- ------- -------
Gasoline....................... 497.9 49% 507.1 50% 526.0 51%
Jet Fuels...................... 244.5 24 243.9 24 235.5 23
Middle Distillates (2)......... 238.7 24 235.2 24 246.1 24
Other Products................. 26.0 3 23.6 2 21.2 2
------- --- ------- --- ------- ---
Total.......................... 1,007.1 100% 1,009.8 100% 1,028.8 100%
======= === ======= === ======= ===
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(1) Excludes local product transfers.
(2) 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 and Florida.
Pennsylvania--New York--New Jersey
Buckeye serves major population centers in the states of Pennsylvania, New
York and New Jersey through 1,003 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
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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 345-mile pipeline extending
westward from five refineries in the Philadelphia area to Pittsburgh,
Pennsylvania.
Indiana--Ohio--Michigan--Illinois
Buckeye transports refined products through 1,990 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 refinery and other pipeline connection points near
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.
Everglades carries primarily jet fuel on a 37-mile pipeline from Port
Everglades, Florida to Hollywood-Ft. Lauderdale International Airport and
Miami International Airport.
OTHER BUSINESS ACTIVITIES
BTT provides bulk storage services through leased facilities located in
Pittsburgh, Pennsylvania which have the capacity to store up to an aggregate
of approximately 257,000 barrels of refined petroleum products. The facility,
which is served by Buckeye and Laurel, 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
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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 1996, the Operating Partnerships had approximately 104 customers, most of
which were either major integrated oil companies or smaller marketing
companies. The largest two customers accounted for 8.6 percent and 6.1
percent, respectively, of consolidated revenues, while the 20 largest
customers accounted for 77.4 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.
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 shutdowns has affected the Operating Partnerships' volumes
favorably, as these shutdowns 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 shutdown of any particular refinery would have a material
adverse effect on the Partnership. However, the General Partner is unable to
determine whether additional shutdowns will occur or what their specific
effects could 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 and
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the partners and employees of Glenmoor which provides certain management
services to the General Partner and the Manager. At December 31, 1996, the
Manager and Glenmoor had a total of 552 full-time employees, 167 of whom were
represented by two labor unions. The collective bargaining agreement with one
of these unions expired on April 30, 1996 and is currently being renegotiated.
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 1996, total capital
expenditures were $14.9 million. Projected capital expenditures for 1997
amount to approximately $17.0 million. Planned capital expenditures in 1997
include, among other things, renewal and replacement of several tank floors,
roofs and seals, upgrades to field instrumentation and cathodic protection
systems, installation and replacement of mainline pipe and valves, facility
automation and various facility improvements that facilitate increased
pipeline volumes. Capital expenditures are expected to increase over time
primarily in response to increasingly rigorous governmental safety and
environmental requirements as well as industry standards and the General
Partner's plan to automate certain facilities in order to more effectively
control operating costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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
5
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
to promulgate a rule establishing a simplified and generally applicable
ratemaking methodology for oil pipelines. 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. The final rule became effective on January 1, 1995.
On October 26, 1994, Buckeye filed a motion that requested FERC to permit
Buckeye to continue its existing "experimental" 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
6
liabilities in the case of releases of petroleum or its derivatives into
surface waters or into the ground. Regulations are currently being developed
under OPA and state laws which may impose additional regulatory burdens on the
Partnership.
Contamination resulting from spills or releases of refined petroleum
products are not unusual in the petroleum pipeline industry. The Partnership's
pipelines cross numerous navigable rivers and streams. Although the General
Partner believes that the Operating Partnerships comply in all material
respects with the spill prevention, control and countermeasure requirements of
federal laws, any spill or other release of petroleum products into navigable
waters may result in material costs and liabilities to the Partnership.
The Resource Conservation and Recovery Act ("RCRA"), as amended, establishes
a comprehensive program of regulation of "hazardous wastes." Hazardous waste
generators, transporters, and owners or operators of treatment, storage and
disposal facilities must comply with regulations designed to ensure detailed
tracking, handling and monitoring of these wastes. RCRA also regulates the
disposal of certain non-hazardous wastes. As a result of recently issued
regulations, many previously non-hazardous wastes generated by pipeline
operations have become "hazardous wastes" which are subject to more rigorous
and costly disposal requirements.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), also known as "Superfund," governs the release or threat of
release of a "hazardous substance." Disposal of a hazardous substance, whether
on or off-site, may subject the generator of that substance to liability under
CERCLA for the costs of clean-up and other remedial action. Pipeline
maintenance and other activities in the ordinary course of business could
subject the Operating Partnerships to the requirements of these statutes. As a
result, to the extent hydrocarbons or other petroleum waste may have been
released or disposed of in the past, the Operating Partnerships may in the
future be required to 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.
7
In connection with the 1986 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 1986 Acquisition to be
completed prior to full compliance with ECRA, but required Pipe Line to
conduct in a timely manner a sampling plan for environmental contamination at
the New Jersey facilities and to implement any required clean-up plan.
Sampling continues in an effort to identify areas of contamination at the New
Jersey facilities, while clean-up operations have begun and have been
completed at certain of the sites. The obligations of Pipe Line were not
assumed by the Partnership, and the costs of compliance have been and will
continue to be paid by American Financial. Through December 1996, Buckeye's
costs of approximately $2,546,000 have been paid by American Financial.
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. The Manager has initiated drug and alcohol testing
programs to comply with the regulations promulgated by the Office of Pipeline
Safety and DOT.
HLPSA requires, among other things, that the Secretary of Transportation
consider the need for the protection of the environment in issuing federal
safety standards for the transportation of hazardous liquids by pipeline. The
legislation also requires the Secretary of Transportation to issue regulations
concerning, among other things, the identification by pipeline operators of
environmentally sensitive areas; the circumstances under which emergency flow
restricting devices should be required on pipelines; training and
qualification standards for personnel involved in maintenance and operation of
pipelines; and the periodic integrity testing of pipelines in 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.
8
TAX TREATMENT OF PUBLICLY TRADED PARTNERSHIPS UNDER THE INTERNAL REVENUE CODE
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
limitations on the current deductibility of losses attributable to investments
in publicly traded partnerships and treats certain publicly traded
partnerships as corporations for federal income tax purposes. The following
discussion briefly describes certain aspects of the Code that apply to
individuals who are citizens or residents of the United States without
commenting on all of the federal income tax matters affecting the Partnership
or the 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
9
losses generated by other passive activities. In addition, a Unitholder's
proportionate share of the Partnership's portfolio income, including portfolio
income arising from the investment of the Partnership's working capital, is
not treated as income from a passive activity and may not be offset by such
Unitholder's share of net losses of the Partnership.
Deductibility of Interest Expense
The Code generally provides that investment interest expense is deductible
only to the extent of a non-corporate taxpayer's net investment income. In
general, net investment income for purposes of this limitation includes gross
income from property held for investment, gain attributable to the disposition
of property held for investment (except for net capital gains for which the
taxpayer has elected to be taxed at a maximum rate of 28 percent) and
portfolio income (determined pursuant to the passive loss rules) reduced by
certain expenses (other than interest) which are directly connected with the
production of such income. Property subject to the passive loss rules is not
treated as property held for investment. However, the IRS has issued a Notice
which provides that net income from a publicly traded partnership (not
otherwise treated as a corporation) may be included in net investment income
for purposes of the limitation on the deductibility of investment interest. A
Unitholder's investment income attributable to its interest in the Partnership
will include both its allocable share of the Partnership's portfolio income
and trade or business income. A Unitholder's investment interest expense will
include its allocable share of the Partnership's interest expense attributable
to portfolio investments.
Unrelated Business Taxable Income
Certain entities otherwise exempt from federal income taxes (such as
individual retirement accounts, pension plans and charitable organizations)
are nevertheless subject to federal income tax on net unrelated business
taxable income and each such entity must file a tax return for each year in
which it has more than $1,000 of gross income from unrelated business
activities. The General Partner believes that substantially all of the
Partnership's gross income will be treated as derived from an unrelated trade
or business and taxable to such entities. The tax-exempt entity's share of the
Partnership's deductions directly connected with carrying on such unrelated
trade or business are allowed in computing the entity's taxable unrelated
business income. ACCORDINGLY, INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT
ENTITIES SUCH AS INDIVIDUAL RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE
TRUSTS MAY NOT BE ADVISABLE.
State Tax Treatment
During 1996, the Partnership owned property or conducted 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, 1996, the principal facilities of the Operating
Partnerships included 3,487 miles of 6-inch to 24-inch diameter pipeline, 33
pumping stations, 82 delivery points and various sized tanks having an
aggregate capacity of approximately 9.2 million barrels.
10
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 6 to Consolidated Financial Statements of
Buckeye Partners, L.P. In addition, certain portions of Buckeye's pipeline in
Connecticut and Massachusetts are subject to security interests in favor of
the owners of the right-of-way to secure future lease payments.
In general, the Operating Partnerships' pipelines are located on land owned
by others pursuant to rights granted under easements, leases, licenses and
permits from railroads, utilities, governmental entities and private parties.
Like other pipelines, certain of the Operating Partnerships' rights are
revocable at the election of the grantor or are subject to renewal at various
intervals, and some require periodic payments. The Operating Partnerships have
not experienced any revocations or lapses of such rights which were material
to its business or operations, and the General Partner has no reason to expect
any such revocation or lapse in the foreseeable future. Most pumping stations
and terminal facilities are located on land owned by the Operating
Partnerships.
The General Partner believes that the Operating Partnerships have sufficient
title to their material assets and properties, possess all material
authorizations and franchises from state and local governmental and regulatory
authorities and have all other material rights necessary to conduct their
business substantially in accordance with past practice. Although in certain
cases the Operating Partnerships' title to assets and properties or their
other rights, including their rights to occupy the land of others under
easements, leases, licenses and permits, may be subject to encumbrances,
restrictions and other imperfections, none of such imperfections are expected
by the General Partner to interfere materially with the conduct of the
Operating Partnerships' businesses.
ITEM 3. LEGAL PROCEEDINGS
The Partnership, in the ordinary course of business, is involved in various
claims and legal proceedings, some of which are covered in whole or in part by
insurance. The General Partner is unable to predict the timing or outcome of
these claims and proceedings. Although it is possible that one or more of
these claims or proceedings, if adversely determined, could, depending on the
relative amounts involved, have a material effect on the Partnership's results
of operations for a future period, the General Partner does not believe that
their outcome will have a material effect on the Partnership's consolidated
financial condition.
FREEPORT LANDSLIDE
On March 30, 1990, a landslide near Freeport, Pennsylvania caused a rupture
to one of the Partnership's pipelines which resulted in the release of
approximately 58,000 gallons of petroleum products. Undetermined amounts of
petroleum products saturated the soils surrounding the landslide area and
flowed into Knapp Run and eventually into the Allegheny River. Buckeye
promptly conducted extensive emergency response and remediation efforts.
Following the pipeline release in April and May 1990, 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. In June 1991, these actions were consolidated in a
single class action (In re Buckeye Pipe Line Litigation) which is pending in
the Court of Common Pleas for Allegheny County, Pennsylvania. The proposed
class has not 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. The consolidated class action is the only remaining proceeding arising
from the pipeline rupture. Buckeye believes that it has meritorious defense to
the consolidated class action complaint but its potential liability, if any,
related to this matter cannot be estimated at this time.
11
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 carriers are
reimbursing Buckeye for covered claims arising from the Freeport incident
subject to the terms of the policy.
OTHER PROCEEDINGS
With respect to 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.
In July 1994, Buckeye was named as a defendant in an action filed by the
Michigan Department of Natural Resources 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. The litigation is
presently in the discovery phase. Although the cost of the ultimate
remediation 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."
In connection with the ESOP Restructuring, a putative class action complaint
(Shakerdge v. Martinelli, et. al.) was filed on December 30, 1996 in the
Delaware Court of Chancery against the Partnership, the General Partner, BAC,
Glenmoor and the directors of the General Partner. The lawsuit alleges that
the proposed ESOP Restructuring transaction is unfair; that the defendants
have engaged in conduct constituting self-dealing; and that the defendants
have breached their fiduciary and other common law duties to the plaintiff.
Plaintiff seeks, among other things, an injunction prohibiting the
consummation of the transaction on the terms proposed; requiring defendants to
take all steps to ensure that the transaction reflects an arms length
transaction; and requiring full disclosure of all material facts. The General
Partner and the other defendants believe that the suit is without merit.
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, 1996.
12
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 1996 and
1995, as reported on the New York Stock Exchange Composite Tape, were as
follows:
1996 1995
------------- -------------
QUARTER HIGH LOW HIGH LOW
- ------- ------ ------ ------ ------
First............................................... 39 3/4 34 1/4 37 32
Second.............................................. 38 7/8 37 1/4 36 30
Third............................................... 39 5/8 37 5/8 36 1/4 33 7/8
Fourth.............................................. 42 7/8 38 3/8 36 3/4 33 5/8
During the months of December 1996 and January 1997, 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 1995 and 1996 were as follows:
RECORD DATE PAYMENT DATE AMOUNT PER UNIT
- ----------- ------------ ---------------
February 10, 1995............................. February 28, 1995 $0.70
May 8, 1995................................... May 31, 1995 $0.70
August 4, 1995................................ August 31, 1995 $0.70
November 10, 1995............................. November 30, 1995 $0.70
February 20, 1996............................. February 29, 1996 $0.75
May 6, 1996................................... May 31, 1996 $0.75
August 6, 1996................................ August 30, 1996 $0.75
November 6, 1996.............................. November 29, 1996 $0.75
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 12, 1997, the Partnership announced a quarterly distribution of
$0.75 per LP Unit payable on February 28, 1997. Based in part on the savings
available to the Partnership from the ESOP Restructuring, the Board of
Directors of the General Partner announced its intention to increase the
regular quarterly cash distribution by $.10, to $.85, per LP Unit, provided
that the ESOP Restructuring is approved by Unitholders and there has been no
material change in the business of the Partnership.
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, 1996, 1995, 1994, 1993 and 1992. The tables should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Report.
13
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Income Statement Data:
Revenue......................... $182,955 $183,462 $186,338 $175,495 $163,064
Depreciation and amortization... 11,333 11,202 11,203 11,002 10,745
Operating income................ 68,784 71,504 72,481 66,851 63,236
Interest and debt expense....... 21,854 21,710 24,931 25,871 27,452
Income from continuing
operations before extraordinary
charge and cumulative effect of
change in accounting
principle...................... 49,337 49,840 48,086 41,654 34,546
Net income...................... 49,337 49,840 45,817 39,366 9,002
Income per unit from continuing
operations before extraordinary
charge and cumulative effect of
change in accounting
principle...................... 4.05 4.10 3.96 3.44 2.85
Net income per unit............. 4.05 4.10 3.77 3.25 0.74
Distributions per unit.......... 3.00 2.80 2.80 2.60 2.60
DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Total assets..................... $567,837 $552,646 $534,765 $543,493 $533,143
Long-term debt................... 202,100 214,000 214,000 224,000 225,000
General Partner's capital........ 2,760 2,622 2,460 2,338 2,259
Limited Partners' capital........ 273,219 259,563 243,516 231,357 223,585
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the liquidity and capital resources and the
results of operations of the Partnership for the periods indicated below. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto, which are included elsewhere in this Report.
RESULTS OF OPERATIONS
Through its Operating Partnerships, 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."
1996 Compared With 1995
Revenue for the year ended December 31, 1996 was $183.0 million, $0.5
million or 0.3 percent less than revenue of $183.5 million for 1995. Volume
delivered during 1996 averaged 1,007,100 barrels per day, 2,700 barrels per
day or 0.3 percent less than volume of 1,009,800 barrels per day delivered in
1995. The decline in 1996 revenue was related to decreases in gasoline
deliveries, offset somewhat by increases in distillate, turbine fuel,
liquefied petroleum gas and other petroleum product deliveries. Tariff rate
increases implemented in 1996 and 1995 also had a favorable impact on
revenues.
14
See "Tariff Changes." Declines in gasoline deliveries were related in part to
severe winter storms, particularly in the Northeast, where ground traffic was
curtailed during January and February. Increased Canadian imports and the loss
of business to other competing pipeline systems also reduced gasoline volumes
transported by the Partnership. Continued market growth in Pennsylvania offset
these volume declines to some extent. Distillate volumes rose in 1996 compared
with 1995 primarily as the result of the colder winter in 1996 and heating oil
inventory restocking occurring during the fourth quarter. Turbine fuel volumes
were higher than last year on increased deliveries to Newark, J.F.K. and Miami
airports. Some turbine fuel volumes were lost to additional barging at
Pittsburgh and a decline in demand at LaGuardia airports.
Costs and expenses during 1996 were $114.2 million, $2.2 million or 2.0
percent greater than costs and expenses of $112.0 million during 1995. During
the second quarter 1996, the Partnership recorded a one-time expense of $2.5
million related to an employee early retirement and termination program. In
addition, increases in payroll overheads and professional fees related to the
ESOP were offset by declines in payroll, taxes, power, supplies and travel.
Other income (expenses) consist of interest income, interest and debt
expense, and minority interests and other. Total other expenses declined $2.2
million in 1996 as compared to 1995. This favorable variance is primarily
related to a $2.9 million gain on the sale of land no longer needed for the
Partnership's operations.
1995 Compared With 1994
Revenue for the year ended December 31, 1995 was $183.5 million, $2.8
million or 1.5 percent less than revenue of $186.3 million for 1994. Volume
delivered during 1995 averaged 1,009,800 barrels per day, 19,000 barrels per
day or 1.8 percent less than volume of 1,028,800 barrels per day delivered in
1994. The decline in 1995 revenue was related to decreases in gasoline and
distillate deliveries, offset somewhat by increases in turbine fuel deliveries
and the effect of tariff rate increases. See "Tariff Changes." Gasoline
volumes declined as several competitive pipeline systems marginally expanded
their capacity in 1995 resulting in some volume shifting to these systems. In
addition, a Midwest refinery shutdown contributed to the decline. These
declines in gasoline volume were somewhat offset by increased market share in
Pennsylvania through the addition of a significant new customer during 1995.
The distillate volume decline was primarily related to warmer weather
throughout the Northeast in the first quarter of 1995. Marketers also opted to
keep inventories at low levels, unlike the prior year when extensive summer
inventory building occurred. The Midwest refinery closure also contributed to
the decline in distillate volumes. Meanwhile, turbine fuel deliveries
increased as both airline passenger and cargo traffic improved in the
Partnership's market areas during 1995. Volume increases occurred at several
major airport locations.
Costs and expenses during 1995 were $112.0 million, $1.9 million or 1.7
percent less than costs and expenses of $113.9 million during 1994. Declines
in the use of outside services and power, along with declines in casualty loss
expense, were partially offset by increases in payroll and employee benefit
expenses.
Other income (expenses) consist of interest income, interest and debt
expense, and minority interests and other. The partial repayment and
refinancing of debt at lower interest rates in 1994 resulted in an interest
expense decline of $3.2 million in 1995.
Tariff Changes
In each of the years 1996, 1995 and 1994, certain of the Operating
Partnerships filed increases in certain tariff rates. The increases, at the
time of filing, were projected to generate approximately $2.9 million, $4.0
million and $0.4 million in additional revenue per year, respectively. Tariff
increases filed in 1996 became effective on August 1, 1996.
15
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at December 31, 1996, 1995 and 1994 is
highlighted in the following comparative summary:
Liquidity and Capital Indicators
AS OF DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
Current ratio...................................... 1.3 to 1 1.7 to 1 1.2 to 1
Ratio of cash and temporary investments and trade
receivables to current liabilities................ 1.1 to 1 1.3 to 1 1.0 to 1
Working capital (in thousands)..................... $ 13,660 $ 16,814 $ 5,750
Ratio of total debt to total capital............... .43 to 1 .45 to 1 .46 to 1
Book value (per Unit).............................. $ 22.65 $ 21.58 $ 20.27
Cash Provided by Operations
During 1996, cash provided by operations of $47.1 million was derived
principally from $60.7 million of income from operations before depreciation.
Changes in current assets and current liabilities resulted in a net cash use
of $7.5 million. This amount is primarily comprised of a $13.6 million use of
cash to increase temporary investments offset by sources of cash from declines
in outstanding trade receivables and increases in accounts payable and accrued
and other current liabilities. During the third quarter 1996, the Partnership
began billing on a weekly rather than monthly basis thereby decreasing trade
receivables. Remaining changes in cash provided by operations, totaling $6.1
million in uses, resulted from the deduction of a $2.7 million gain on the
sale of property included in net income and changes in other non-current
assets and liabilities.
During 1995, cash provided by operations of $61.8 million was derived
principally from $61.0 million of income from operations before depreciation.
Changes in current assets and current liabilities resulted in a net cash use
of $0.9 million. Increases in prepaid and other current assets and declines in
temporary investments and trade receivables account for the majority of the
change. Remaining cash sources, totaling $1.7 million, were primarily related
to increases in other non-current liabilities.
During 1994, cash provided by operations of $58.1 million was derived
principally from $59.3 million of income from continuing operations before an
extraordinary charge and before depreciation. Changes in current assets and
current liabilities resulted in a net cash use of $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.
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, 1996, the Partnership had $214.0 million in outstanding
current and long-term debt. The debt represents the First Mortgage Notes of
Buckeye. This amount excludes $5.0 million of First Mortgage Notes scheduled
to mature after December 31, 1996 which had previously been retired by in-
substance defeasance. The First Mortgage Notes are collateralized by
substantially all of
16
Buckeye's currently existing and after acquired property, plant and equipment.
During 1996, the Partnership did not make any payments of principal on the
First Mortgage Notes as no payments were required due to prior in-substance
defeasances.
At December 31, 1995, the Partnership had $214.0 million in outstanding
current and long-term debt. The debt represents the First Mortgage Notes of
Buckeye. This amount excludes $25.0 million of First Mortgage Notes scheduled
to mature after December 31, 1995 which had previously 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. During 1995, the Partnership did not make any payments of
principal on the First Mortgage Notes as no payments were required due to
prior in-substance defeasances.
At December 31, 1994, the Partnership had $214.0 million in outstanding
current and long-term debt represented by the First Mortgage Notes of Buckeye.
This amount does not include $45.0 million in First Mortgage Notes which have
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.
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. At December 31, 1996, there were no outstanding borrowings under
these facilities.
The ratio of total debt to total capital was 43 percent, 45 percent, and 46
percent at December 31, 1996, 1995 and 1994, 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 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, 1996 amounted to $25.1 million. The Partnership is also entitled to
receive cash distributions from Everglades, BTT and Laurel.
Capital Expenditures
At December 31, 1996, property, plant and equipment was approximately 90
percent of total consolidated assets. This compares to 92 percent and 94
percent for the years ended December 31, 1995 and 1994, respectively. Capital
expenditures are generally for expansion of the Operating Partnerships'
service capabilities and sustaining the Operating Partnerships' existing
operations.
17
Capital expenditures by the Partnership were $14.9 million, $17.4 million
and $15.4 million for 1996, 1995 and 1994, respectively. Projected capital
expenditures for 1997 are approximately $17.0 million. Planned capital
expenditures include, among other things, renewal and replacement of several
tank floors, roofs and seals, upgrades to field instrumentation and cathodic
protection systems, installation and replacement of mainline pipe and valves,
facility automation and various facility improvements that facilitate
increased pipeline volumes. Capital expenditures are expected to increase
primarily in response to increasingly rigorous governmental safety and
environmental requirements as well as industry standards and the General
Partner's plan to automate certain facilities in order to more effectively
control operating costs.
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 1996, the Operating Partnerships
incurred operating expenses of $3.1 million and capital expenditures of $3.0
million for environmental matters. Capital expenditures of $2.4 million for
environmental related projects are included in the Partnership's plans for
1997. Expenditures, both capital and operating, relating to environmental
matters are expected to continue and may be somewhat higher than in past years
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.
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 1996, Buckeye paid minimal claims
and other charges related to this incident. Total claims paid as a result of
this incident have amounted to $14.1 million. Of this amount, $11.9 million
has been reimbursed by Buckeye's insurance carriers. Buckeye is unable to
estimate the total amount of future 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."
18
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, the ESOP was formed for the benefit of
employees of the General Partner, the Manager and Glenmoor. The General
Partner borrowed $63 million pursuant to a 15-year term loan from a third-
party lender. The General Partner then loaned $63 million to the ESOP, which
used the loan proceeds to purchase $63 million of BAC Preferred Stock. Total
compensation costs associated with the ESOP in 1996 were $5.6 million which
included $3.5 million in interest expense and $2.1 million based upon the
value of shares of BAC Preferred Stock released to employee accounts. The
General Partner implemented an expense reduction plan including, among other
things, an early retirement and termination program, a freeze on salaried
employee pay as well as fringe benefit reductions and eliminations. This
expense reduction plan, which was implemented in the second quarter of 1996,
is projected by the General Partner to save more than $8.0 million of
annualized costs going forward.
During December 1996, the Board of Directors of the General Partner approved
a proposed restructuring of the ESOP. Generally, the restructuring calls for
the issuance of approximately 1.6 million LP Units by the Partnership in
exchange for a reduction in future expenses charged to the Partnership. The LP
Units would be held by a newly formed company whose common stock would be
exchanged for the BAC Preferred Stock held by the ESOP. Certain aspects of the
restructuring are subject to approval by the Unitholders. See "Business--
Introduction."
ACCOUNTING STATEMENTS NOT YET ADOPTED
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," is effective for fiscal years beginning after December 31, 1996.
This statement provides consistent standards for determining if transfers of
financial assets are sales or secured borrowings and prospectively revises the
accounting rules for liabilities extinguished by an in-substance defeasance.
The impact of this new standard is not expected to have a material effect on
the Partnership's financial position or results of operations.
Environmental Remediation Liabilities
Statement of Position 96-1, "Environmental Remediation Liabilities," is
effective for fiscal years beginning after December 15, 1996. This statement
clarifies the accounting for environmental remediation liabilities. The impact
of this new statement is not expected to have a material effect on the
Partnership's financial position or results of operations.
19
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..................................... 21
Consolidated Statements of Income--For the years ended December
31, 1996, 1995 and 1994......................................... 22
Consolidated Balance Sheets--December 31, 1996 and 1995.......... 23
Consolidated Statements of Cash Flows--For the years ended Decem-
ber 31, 1996, 1995 and 1994..................................... 24
Notes to Consolidated Financial Statements....................... 25
Financial Statement Schedules and Independent Auditors' Report:
Independent Auditors' Report..................................... S-1
Schedule I--Registrant's Condensed Financial Statements.......... S-2
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.
20
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,
1996 and 1995, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 23, 1997
21
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------
NOTES 1996 1995 1994
----- -------- -------- --------
Revenue................................... 2 $182,955 $183,462 $186,338
-------- -------- --------
Costs and expenses
Operating expenses...................... 3,14 87,855 89,156 92,097
Depreciation and amortization........... 2 11,333 11,202 11,203
General and administrative expenses..... 14 14,983 11,600 10,557
-------- -------- --------
Total costs and expenses.............. 114,171 111,958 113,857
-------- -------- --------
Operating income.......................... 68,784 71,504 72,481
-------- -------- --------
Other income (expenses)
Interest income......................... 1,589 1,037 1,465
Interest and debt expense............... (21,854) (21,710) (24,931)
Minority interests and other............ 818 (991) (929)
-------- -------- --------
Total other income (expenses)......... (19,447) (21,664) (24,395)
-------- -------- --------
Income before extraordinary charge........ 49,337 49,840 48,086
Extraordinary charge on early extinguish-
ment of debt............................. 12 -- -- (2,269)
-------- -------- --------
Net income................................ $ 49,337 $ 49,840 $ 45,817
======== ======== ========
Net income allocated to General Partner... 15 $ 493 $ 498 $ 458
Net income allocated to Limited Partners.. 15 $ 48,844 $ 49,342 $ 45,359
Income allocated to General and Limited
Partners per Partnership Unit:
Income before extraordinary charge...... $ 4.05 $ 4.10 $ 3.96
Extraordinary charge on early extin-
guishment of debt...................... -- -- (.19)
-------- -------- --------
Net income................................ $ 4.05 $ 4.10 $ 3.77
======== ======== ========
See notes to consolidated financial statements.
22
BUCKEYE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------
NOTES 1996 1995
---------- -------- --------
Assets
Current assets
Cash and cash equivalents...................... 2 $ 17,416 $ 16,213
Temporary investments.......................... 2 14,528 895
Trade receivables.............................. 2 12,536 16,295
Inventories.................................... 2 1,732 1,561
Prepaid and other current assets............... 7,715 7,272
-------- --------
Total current assets......................... 53,927 42,236
Property, plant and equipment, net............... 2,4 511,646 509,944
Other non-current assets......................... 2,264 466
-------- --------
Total assets................................. $567,837 $552,646
======== ========
Liabilities and partners' capital
Current liabilities
Current portion of long-term debt.............. $ 11,900 $ --
Accounts payable............................... 4,279 2,406
Accrued and other current liabilities.......... 3,5,8,9,14 24,088 23,016
-------- --------
Total current liabilities.................... 40,267 25,422
Long-term debt................................... 6,12 202,100 214,000
Minority interests............................... 2,913 2,781
Other non-current liabilities.................... 3,7,8,9,14 46,578 48,258
Commitments and contingent liabilities........... 3 -- --
-------- --------
Total liabilities............................ 291,858 290,461
-------- --------
Partners' capital 15
General Partner.................................. 2,760 2,622
Limited Partners................................. 273,219 259,563
-------- --------
Total partners' capital...................... 275,979 262,185
-------- --------
Total liabilities and partners' capital...... $567,837 $552,646
======== ========
See notes to consolidated financial statements.
23
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
NOTES 1996 1995 1994
------ -------- -------- -------
Cash flows from operating activities:
Income before extraordinary charge........ $ 49,337 $ 49,840 $48,086
-------- -------- -------
Adjustments to reconcile income to net
cash provided by operating activities:
Extraordinary charge on early extinguish-
ment of debt............................ -- -- (2,269)
Gain on sale of property, plant and
equipment............................... (2,651) -- --
Depreciation and amortization............ 11,333 11,202 11,203
Minority interests....................... 506 510 469
Distributions to minority interests...... (374) (345) (345)
Change in assets and liabilities:
Temporary investments................... (13,633) 505 (1,150)
Trade receivables....................... 3,759 762 (1,716)
Inventories............................. (171) (241) (146)
Prepaid and other current assets........ (443) (1,798) (1,029)
Accounts payable........................ 1,873 81 (237)
Accrued and other current liabilities... 1,072 (231) 3,560
Other non-current assets................ (1,798) (106) 100
Other non-current liabilities........... (1,680) 1,657 1,544
-------- -------- -------
Total adjustments from operating activ-
ities................................. (2,207) 11,996 9,984
-------- -------- -------
Net cash provided by operating activi-
ties.................................... 47,130 61,836 58,070
-------- -------- -------
Cash flows from investing activities:
Capital expenditures...................... (14,881) (17,407) (15,364)
Net proceeds from (expenditures for) dis-
posal of property, plant and equipment... 4,497 (656) 153
-------- -------- -------
Net cash used in investing activities.. (10,384) (18,063) (15,211)
-------- -------- -------
Cash flows from financing activities:
Capital contribution...................... 10 4 4
Proceeds from exercise of unit options.... 974 374 428
Proceeds from issuance of long-term debt.. 6 -- -- 15,000
Payment of long-term debt................. 6 -- -- (41,000)
Distributions to Unitholders.............. 15, 16 (36,527) (34,009) (33,968)
-------- -------- -------
Net cash used in financing activities.. (35,543) (33,631) (59,536)
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents............................... 2 1,203 10,142 (16,677)
Cash and cash equivalents at beginning of
year...................................... 2 16,213 6,071 22,748
-------- -------- -------
Cash and cash equivalents at end of year... $ 17,416 $ 16,213 $ 6,071
======== ======== =======
Supplemental cash flow information:
Cash paid during the year for interest
(net of amount capitalized).............. $ 21,900 $ 21,656 $24,947
See notes to consolidated financial statements.
24
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
Buckeye is one of the largest independent pipeline common carriers of
refined petroleum products in the United States, with 3,105 miles of pipeline
serving 10 states. Laurel owns a 345-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
257,000 barrels of refined petroleum products.
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 Financial Group, Inc.
("American Financial"), formerly American Premier Underwriters, Inc. The
Partnership used the proceeds from such sales to purchase from subsidiaries of
American Financial 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. The Partnership has issued an
additional 60,180 limited partnership units and 608 general partnership units
under its Unit Option and Distribution Equivalent Plan. At December 31, 1996,
there were 12,060,180 limited partnership units and 121,820 general
partnership units outstanding (see Note 10 and Note 15).
During March 1996, BMC Acquisition Corp. ("BAC"), a corporation organized in
1996 under the laws of the state of Delaware, acquired all of the common stock
of the General Partner from a subsidiary of American Financial (the
"Acquisition"). BAC is owned by Glenmoor Partners, LLP ("Glenmoor"), an
investment group comprised of Alfred W. Martinelli, Chairman of the Board and
Chief Executive Officer of the General Partner, and all of the members of
senior management of the General Partner, certain manager-level employees of
the Manager and by the BMC Acquisition Company Employee Stock Ownership Plan
(the "ESOP") (see Note 11).
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
25
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 financial statements include the accounts of the Operating Partnerships
on a consolidated basis. All significant intercompany transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of the Partnership's consolidated financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions. These estimates and assumptions,
which may differ from actual results, will affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenue and expense during the reporting period.
Financial Instruments
The fair values of financial instruments are 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 6).
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
The Partnership's temporary investments that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities. Trading securities are recorded at fair value as current assets on
the balance sheet, with the change in fair value during the period included in
earnings.
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 include major integrated oil
companies, major refiners and large regional marketing companies. While the
consolidated Partnership's continuing customer base numbers approximately 104,
no customer during 1996 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.
26
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Long-Lived Assets
The Partnership regularly assesses the recoverability of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
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. As of December 31, 1996 and 1995, the Partnership's reported amount
of net assets for financial reporting purposes exceeded its tax basis by
approximately $247 million and $211 million, respectively.
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 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, a defined benefit plan
(see Note 8) and an employee stock ownership plan (see Note 11) 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 (see Note 9). Certain other retired employees are
covered by a health and welfare plan under a union agreement.
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," is effective for fiscal years beginning after December 31, 1996.
This statement provides consistent standards for determining if transfers of
financial assets are sales or secured borrowings and prospectively revises the
accounting rules for
27
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liabilities extinguished by an in-substance defeasance. The impact of this new
standard is not expected to have a material effect on the Partnership's
financial position or results of operations.
Environmental Remediation Liabilities
Statement of Position 96-1, "Environmental Remediation Liabilities," is
effective for fiscal years beginning after December 15, 1996. This statement
clarifies the accounting for environmental remediation liabilities. The impact
of this new statement is not expected to have a material effect on the
Partnership's financial position or results of operations.
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 or annual results
of operations.
Environmental
In accordance with its accounting policy on environmental expenditures, the
Partnership recorded expenses of $3.1 million, $2.6 million and $5.9 million
for 1996, 1995 and 1994, respectively, which were related to the environment.
Expenditures, both capital and operating, relating to environmental matters
are expected to be somewhat higher than in past years 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 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.
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
28
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Pursuant to the Executive Life 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 through the maturity date of the contract pursuant to
the Plan of Rehabilitation. The timing and amount of these additional cash
payments cannot be estimated accurately at this time. 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 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.
4.PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
Land...................................................... $ 9,522 $ 10,186
Buildings and leasehold improvements...................... 26,690 26,211
Machinery, equipment and office furnishings............... 521,945 519,548
Construction in progress.................................. 5,355 2,335
-------- --------
563,512 558,280
Less accumulated depreciation........................... 51,866 48,336
-------- --------
Total................................................... $511,646 $509,944
======== ========
Depreciation expense was $11,333,000, $11,202,000 and $11,203,000 for the
years 1996, 1995 and 1994, respectively.
5.ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
Taxes--other than income.................................... $ 9,041 $ 8,258
Accrued charges due Manager................................. 5,754 6,436
Environmental liabilities................................... 2,527 2,409
Interest.................................................... 977 1,023
Accrued operating power..................................... 869 910
Accrued outside services.................................... 651 660
Other....................................................... 4,269 3,320
------- -------
Total..................................................... $24,088 $23,016
======= =======
29
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6.LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following:
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
First Mortgage Notes
11.18% Series J due December 15, 2006 (subject to $16.9
million annual sinking fund requirement commencing
December 15, 1997)..................................... $152,100 $164,000
7.11% Series K due December 15, 2007.................... 11,000 11,000
7.15% Series L due December 15, 2008.................... 11,000 11,000
7.19% Series M due December 15, 2009.................... 13,000 13,000
7.93% Series N due December 15, 2010.................... 15,000 15,000
-------- --------
Total................................................. $202,100 $214,000
======== ========
Maturities of debt outstanding at December 31, 1996 are as follows:
$11,900,000 in 1997; $16,900,000 in 1998; $16,900,000 in 1999; $16,900,000 in
2000; $16,900,000 in 2001 and a total of $134,500,000 in the period 2002
through 2010.
The fair value of the Partnership's debt is estimated to be $238 million and
$250 million as of December 31, 1996 and 1995, respectively. These values were
calculated using interest rates currently available to the Partnership for
issuance of debt with similar terms and remaining maturities.
The First Mortgage Notes are collateralized by a mortgage on and a security
interest in substantially all of the currently existing and after-acquired
property, plant and equipment (the "Mortgaged Property") of Buckeye.
The indenture pursuant to which the First Mortgage Notes were issued (the
"Mortgage Note Indenture"), as amended by Supplemental Indentures, contains
covenants which generally (a) limit the outstanding indebtedness of Buckeye
under the Mortgage Note Indenture at any time to $275 million plus up to $15
million of short-term borrowings for working capital purposes, (b) prohibit
Buckeye from creating or incurring additional liens on its property, (c)
prohibit Buckeye from disposing of substantially all of its property or
business to another party and (d) prohibit Buckeye from disposing of any part
of the Mortgaged Property unless the proceeds in excess of $1 million in a
fiscal year are available for reinvestment in assets subject to the lien of
the Mortgage Note Indenture.
In December 1993, Buckeye entered into an agreement to issue $35 million of
additional First Mortgage Notes in accordance with provisions under a Third
Supplemental Indenture and as permitted under the Mortgage Note Indenture.
These additional First Mortgage Notes, which were issued on January 7, 1994,
mature from 2007 to 2009 and bear interest at rates ranging from 7.11 percent
to 7.19 percent. A portion of the proceeds of these notes was used to complete
an in-substance defeasance of principal and interest with respect to Buckeye's
$20 million, 9.50 percent First Mortgage Notes (Series H) due December 1995
(see Note 12). Remaining proceeds of the additional notes were used for
working capital purposes. In addition, Buckeye entered into an agreement with
the purchaser of the $35 million of additional First Mortgage Notes which
permitted Buckeye, under certain circumstances, to issue up to $40 million of
additional First Mortgage Notes to such purchaser (the "Mortgage Note
Facility").
30
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During March 1994, Buckeye entered into an agreement with such purchaser to
issue $15 million of additional First Mortgage Notes under the Mortgage Note
Facility and in accordance with provisions under a Fourth and Fifth
Supplemental Indenture and the Mortgage Note Indenture. These additional First
Mortgage Notes mature in 2010 and bear interest at 7.93 percent. The proceeds
of these notes, plus additional cash of $1.6 million, were used to complete an
in-substance defeasance of principal and interest with respect to $15 million
of 9.72 percent First Mortgage Notes (Series I) due December 1996. In
addition, in December 1994, Buckeye completed an in-substance defeasance of $5
million of Buckeye's 9.72 percent Series I First Mortgage Notes and $5 million
of Buckeye's 11.18 percent Series J First Mortgage Notes (see Note 12). On
January 7, 1996, the Mortgage Note Facility expired.
The Partnership Agreement contains certain restrictions which limit the
incurrence of any debt by the Partnership or any Operating Partnership to the
First Mortgage Notes, any additional debt of Buckeye permitted by the Mortgage
Note Indenture and other debt not in excess of an aggregate consolidated
principal amount of $25 million plus the aggregate proceeds from the sale of
additional partnership interests.
The Partnership maintains a $15 million unsecured revolving credit facility
with a commercial bank which is available to the Partnership for general
purposes, including capital expenditures and working capital. Interest on any
borrowings under this facility is calculated on the bank's Alternate Base Rate
("ABR") or LIBOR plus one percent. ABR is defined as the highest of the bank's
prime rate, the three month secondary CD rate plus one percent, and the
Federal Funds Rate plus one-half of one percent. At December 31, 1996, there
was no amount outstanding under this facility.
Buckeye has a line of credit from two commercial banks (the "Working Capital
Facility") which permits short-term borrowings of up to $10 million
outstanding at any time. Borrowings under the Working Capital Facility bear
inte