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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, 1998
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)
5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
(Address of principal executive offies) (Zip Code)
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 15, 1999, the aggregate market value of the registrant's LP Units
held by non-affiliates was $667 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 15, 1999: 26,757,206
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business .................................................................. 2
Item 2. Properties ................................................................ 11
Item 3. Legal Proceedings ......................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ....................... 13
PART II
Item 5. Market for the Registrant's LP Units and Related Unitholder Matters........ 14
Item 6. Selected Financial Data ................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 15
Item 8. Financial Statements and Supplementary Data ............................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ..................................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant ........................ 45
Item 11. Executive Compensation .................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 48
Item 13. Certain Relationships and Related Transactions ............................ 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 52
1
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
Buckeye, Laurel, Everglades and BTT is referred to as an "Operating
Partnership" and collectively as the "Operating Partnerships"). The Partnership
owns approximately a 99 percent interest in each of 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 9 states. Laurel owns a 345-mile common carrier refined products
pipeline located principally in Pennsylvania. Everglades owns 37 miles of
refined petroleum 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 in
November 1986 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"). Laurel was formed in October 1992 and
succeeded to the operations of Laurel Pipe Line Company, an Ohio corporation,
which was a majority owned corporate subsidiary of the Partnership until the
minority interest was acquired in December 1991.
During March 1996, BMC Acquisition Company ("BAC"), a Delaware corporation
organized in 1996, acquired all of the common stock of BMC for $63 million in
cash from a subsidiary of American Financial (the "Acquisition"). BAC, which
subsequently changed its name to Glenmoor, Ltd. ("Glenmoor"), is owned by
certain directors and officers of BMC and trusts for the benefit of their
families and members of senior management of Buckeye Pipe Line Services
Company, a Pennsylvania corporation ("Services Company"). Glenmoor currently
provides management services to BMC, the General Partner and Services Company.
See "Certain Relationships and Related Transactions."
On August 12, 1997, as part of a restructuring (the "ESOP Restructuring")
of the BMC Acquisition Company Employee Stock Ownership Plan (the "ESOP"), all
of the General Partner's employees were transferred to Services Company, which
is wholly owned by the ESOP. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Employee Stock Ownership Plan."
Services Company also entered into a Services Agreement with BMC and the
General Partner to provide services to the Partnership and the Operating
Partnerships for a 13.5 year term. Services Company is reimbursed by BMC or the
General Partner for its direct and indirect expenses. BMC and the General
Partner are in turn reimbursed by the Partnership and the Operating
Partnerships for such expenses other than certain executive compensation and
fringe benefit costs. See "Certain Relationships and Related Transactions."
In connection with an internal restructuring, effective December 31, 1998,
Buckeye Management Company ("BMC"), transferred its general partnership
interest in the Partnership, as well as certain other assets and liabilities,
to its wholly-owned subsidiary, Buckeye Pipe Line
2
Company (the "General Partner"). Buckeye Pipe Line Company will serve as sole
general partner of the Partnership and will continue to serve as sole general
partner of each Operating Partnership. As of December 31, 1998, the General
Partner owned approximately a 1 percent general partnership interest in the
Partnership and approximately a 1 percent general partner interest in each
Operating Partnership.
Refined Products Business
The Partnership receives petroleum products from refineries, connecting
pipelines and marine terminals, and transports those products to other
locations. In 1998, refined petroleum products transportation accounted for
substantially all of the Partnership's consolidated revenues and consolidated
operating income.
Effective for the December 31, 1998 financial statements, the Partnership
adopted Financial Accounting Standards Board Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Partnership has
one segment, transportation of refined petroleum products.
The Partnership transported an average of approximately 1,031,200 barrels
per day of refined products in 1998. The following table shows the volume and
percentage of refined petroleum products transported over the last three years.
Volume and Percentage of Refined Petroleum Products Transported (1)
(Volume in thousands of barrels per day)
Year ended December 31,
-----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ---------------------
Volume Percent Volume Percent Volume Percent
---------- --------- ---------- --------- ---------- --------
Gasoline ....................... 518.8 50% 507.8 50% 497.9 49%
Jet Fuels ...................... 257.2 25 255.4 25 244.5 24
Middle Distillates (2) ......... 230.3 23 238.8 23 238.7 24
Other Products ................. 24.9 2 22.0 2 26.0 3
------- -- ------- -- ------- --
Total .......................... 1,031.2 100% 1,024.0 100% 1,007.1 100%
======= === ======= === ======= ===
- ----------
(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 1,004 miles of pipeline. Refined petroleum products
are received at Linden, New Jersey. Products are then transported through two
lines from Linden, New Jersey to Allentown, Pennsylvania. From Allentown, the
pipeline continues west, through a connection with Laurel, to Pittsburgh,
Pennsylvania (serving Reading, Harrisburg, Altoona/Johnstown and Pittsburgh)
and north through eastern Pennsylvania into New York (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 one line to Newark International Airport and through two
additional lines to J. F. Kennedy International and LaGuardia airports and to
commercial bulk terminals at Long Island City and Inwood, New York. These
pipelines presently supply J. F. Kennedy, LaGuardia and Newark airports with
substantially all of each airport's turbine fuel requirements.
3
Laurel transports refined petroleum 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 petroleum products through 1,989 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 market 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 turbine 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. This facility,
which is served by Buckeye and Laurel, provides bulk storage and loading
facilities for shippers and 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. The Operating Partnerships do
not own the products they transport. Demand for the service provided by the
Operating Partnerships derives from demand for petroleum products in the
regions served and the ability and willingness of refiners, marketers and
end-users to supply such demand by deliveries through the Operating
Partnerships' pipelines. Demand for refined petroleum products is primarily a
function of price, prevailing general economic conditions and weather. The
Operating Partnerships' businesses are, therefore, subject to a variety of
factors partially or entirely beyond their control. Multiple sources of
pipeline entry and multiple points of delivery, however, have historically
helped maintain stable total volumes even when volumes at particular source or
destination points have changed.
The Partnership's business may in the future be affected by changing oil
prices or other factors affecting demand for oil and other fuels. The
Partnership's business may also be affected by energy conservation, changing
sources of supply, structural changes in the oil industry and new energy
technologies. The General Partner is unable to predict the effect of such
factors.
A substantial portion of the refined petroleum products transported by the
Partnership's pipelines are ultimately used as fuel for motor vehicles and
aircraft. Changes in transportation and travel patterns in the areas served by
the Partnership's pipelines could adversely affect the Partnership's results of
operations and financial condition.
4
In 1998, the Operating Partnerships had approximately 97 customers, most
of which were either major integrated oil companies or large refined product
marketing companies. The largest two customers accounted for 8.1 percent and
6.8 percent, respectively, of consolidated revenues, while the 20 largest
customers accounted for 76.2 percent of consolidated revenues.
Generally, pipelines are the lowest cost method for long-haul overland
movement of refined petroleum products. Therefore, the Operating Partnerships'
most significant competitors for large volume shipments are other pipelines,
many of which are owned and operated by major integrated oil companies.
Although it is unlikely that a pipeline system comparable in size and scope to
the Operating Partnerships' pipeline system will be built in the foreseeable
future, new pipelines (including pipeline segments that connect with existing
pipeline systems) could be built to effectively compete with the Operating
Partnerships in particular locations.
The Operating Partnerships compete with marine transportation in some
areas. Tankers and barges on the Great Lakes account for some of the volume to
certain Michigan, Ohio and upstate New York locations during the approximately
eight non-winter months of the year. Barges are presently a competitive factor
for deliveries to the New York City area, the Pittsburgh area, Connecticut and
Ohio.
Trucks competitively deliver product in a number of areas served by the
Operating Partnerships. While their costs may not be competitive for longer
hauls or large volume shipments, trucks compete effectively for incremental and
marginal volumes in many areas served by the Operating Partnerships. The
availability of truck transportation places a significant competitive
constraint on the ability of the Operating Partnerships to increase their
tariff rates.
Privately arranged exchanges of product between marketers in different
locations are an increasing but unquantified form of competition. Generally,
such exchanges reduce both parties' costs by eliminating or reducing
transportation charges. In addition, consolidation among refiners and marketers
that has accelerated in recent years has altered distribution patterns,
reducing demand for transportation services in some markets and increasing them
in other markets.
Distribution of refined petroleum products depends to a large extent upon
the location and capacity of refineries. In recent years, domestic refining
capacity has both increased and decreased as a result of refinery expansions
and shutdowns. Because the Partnership's business is largely driven by the
consumption of fuel in its delivery areas and the Operating Partnerships'
pipelines have numerous source points, the General Partner does not believe
that the expansion or shutdown of any particular refinery would have a material
effect on the business of the Partnership. However, the General Partner is
unable to determine whether additional expansions or shutdowns will occur or
what their specific effect would be. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of
Operations--Competition and Other Business Conditions."
The Operating Partnerships' mix of products transported tends to vary
seasonally. Declines in demand for heating oil during the summer months are, to
a certain extent, offset by increased demand for gasoline and jet fuel.
Overall, operations have been only moderately seasonal, with somewhat lower
than average volume being transported during March, April and May 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 Services Company. In addition, Glenmoor provides
certain management services to BMC, the General Partner and Services Company.
At December 31, 1998, Services Company had a total of 517 full-time employees,
150 of whom were represented by two labor unions. The Operating Partnerships
(and their predecessors) have never experienced any significant work stoppages
or other significant labor problems.
5
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 1998, total capital expenditures
were $22.8 million. Projected capital expenditures for 1999 amount to
approximately $22.3 million and are expected to be funded from cash generated
by operations and Buckeye's bank line of credit. Planned capital expenditures
in 1999 include, among other things, installation of transmix tanks, renewal
and replacement of several tank roofs and seals, upgrades to field
instrumentation and cathodic protection systems, installation and replacement
of mainline pipe and valves, facility automation and various improvements that
facilitate increased pipeline volumes. Capital expenditures are expected to
remain approximately at this level for the next few years as a result of 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-Capital Expenditures."
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.
FERC Rate Regulation
Buckeye's rates are governed by a market-based rate regulation program
initially approved by FERC in March 1991 for three years and subsequently
extended. Under this program, in markets where Buckeye does not have
significant market power, individual rate increases: (a) will not exceed a real
(i.e., exclusive of inflation) increase of 15 percent over any two-year period
(the "rate cap"), and (b) will be allowed to become effective without
suspension or investigation if they do not exceed a "trigger" equal to the
change in the Gross Domestic Product implicit price deflator since the date on
which the individual rate was last increased, plus 2 percent. Individual rate
decreases will be presumptively valid upon a showing that the proposed rate
exceeds marginal costs. In markets where Buckeye was found to have significant
market power and in certain markets where no market power finding was made: (i)
individual rate increases cannot exceed the volume weighted average rate
increase in markets where Buckeye does not have significant market power since
the date on which the individual rate was last increased, and (ii) any volume
weighted average rate decrease in markets where Buckeye does not have
significant market power must be accompanied by a corresponding decrease in all
of Buckeye's rates in markets where it does have significant market power.
Shippers retain the right to file complaints or protests following notice of a
rate increase, but are required to show that the proposed rates violate or have
not been adequately justified under the market-based rate regulation program,
that the proposed rates are unduly discriminatory, or that Buckeye has acquired
significant market power in markets previously found to be competitive.
6
The Buckeye program is an exception to the generic oil pipeline
regulations issued under the Energy Policy Act of 1992. The generic rules rely
primarily on an index methodology, whereby a pipeline is allowed to change its
rates in accordance with an index that FERC believes reflects cost changes
appropriate for application to pipeline rates. In the alternative, a pipeline
is allowed to charge market-based rates if the pipeline establishes that it
does not possess significant market power in a particular market. In addition,
the rules provide for the rights of both pipelines and shippers to demonstrate
that the index should not apply to an individual pipeline's rates in light of
the pipeline's costs. The final rules became effective on January 1, 1995.
The Buckeye program will be subject to reevaluation at the same time FERC
reviews the index selected in the generic oil pipeline regulations, which is
anticipated to occur by July 2000. At this time, the General Partner cannot
predict the impact, if any, that a change to Buckeye's rate program would have
on Buckeye's operations. Independent of regulatory considerations, it is
expected that tariff rates will continue to be constrained by competition and
other market factors.
Environmental Matters
The Operating Partnerships are subject to federal, state and local laws
and regulations relating to the protection of the environment. Although the
General Partner believes that the operations of the Operating Partnerships
comply in all material respects with applicable environmental laws and
regulations, risks of substantial liabilities are 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") amended certain provisions of the
federal Water Pollution Control Act of 1972, commonly referred to as the Clean
Water Act ("CWA"), and other statutes as they pertain to the prevention of and
response to oil spills into navigable waters. The OPA subjects owners of
facilities to strict joint and several liability for all containment and
clean-up costs and certain other damages arising from a spill. The CWA provides
penalties for any discharges of petroleum products in reportable quantities and
imposes substantial liability for the costs of removing a spill. State laws for
the control of water pollution also provide varying civil and criminal
penalties and liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground. Regulations are currently
being developed under OPA and state laws which may impose additional regulatory
burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products are not unusual in the petroleum pipeline industry. The Partnership's
pipelines cross numerous navigable rivers and streams. Although the General
Partner believes that the Operating Partnerships comply in all material
respects with the spill prevention, control and countermeasure requirements of
federal laws, any spill or other release of petroleum products into navigable
waters may result in material costs and liabilities to the Partnership.
The Resource Conservation and Recovery Act ("RCRA"), as amended,
establishes a comprehensive program of regulation of "hazardous wastes."
Hazardous waste generators, transporters, and owners or operators of treatment,
storage and disposal facilities must comply with regulations designed to ensure
detailed tracking, handling and monitoring of these wastes. RCRA also regulates
the disposal of certain non-hazardous wastes. As a result of these regulations,
certain wastes previously generated by pipeline operations are considered
"hazardous wastes" which are subject to rigorous disposal requirements.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), also known as "Superfund," governs the release or threat of
release of a "hazardous
7
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 generate "hazardous substances".
As a result, to the extent a hazardous substance generated by the Operating
Partnerships or their predecessors may have been released or disposed of in the
past, the Operating Partnerships may in the future be required to remedy
contaminated property. Governmental authorities such as the Environmental
Protection Agency, and in some instances third parties, are authorized under
CERCLA to seek to recover remediation and other costs from responsible persons,
without regard to fault or the legality of the original disposal. In addition
to its potential liability as a generator of a "hazardous substance," the
property or right-of-way of the Operating Partnerships may be adjacent to or in
the immediate vicinity of Superfund and other hazardous waste sites.
Accordingly, the Operating Partnerships may be responsible under CERCLA for all
or part of the costs required to cleanup such sites, which costs could be
material.
The Clean Air Act, amended by the Clean Air Act Amendments of 1990 (the
"Amendments"), imposes controls on the emission of pollutants into the air. The
Amendments required states to develop facility-wide permitting programs over
the past several years to comply with new federal programs. Existing operating
and air-emission requirements like those currently imposed on the Operating
Partnerships are being reviewed by appropriate state agencies in connection
with the new facility-wide permitting program. It is possible that new or more
stringent controls will be imposed upon the Operating Partnerships through this
permit review process.
The Operating Partnerships are also subject to environmental laws and
regulations adopted by the various states in which they operate. In certain
instances, the regulatory standards adopted by the states are more stringent
than applicable federal laws.
In connection with the 1986 Acquisition, Pipe Line entered into an
Administrative Consent Order ("ACO") with the New Jersey Department of
Environmental Protection and Energy under the New Jersey Environmental Cleanup
Responsibility Act of 1983 ("ECRA") relating to all six of Pipe Line's
facilities in New Jersey. The ACO permitted the 1986 Acquisition to be
completed prior to full compliance with ECRA, but required Pipe Line to conduct
in a timely manner a sampling plan for environmental conditions at the New
Jersey facilities and to implement any required clean-up plan. Sampling
continues in an effort to identify areas of contamination at the New Jersey
facilities, while clean-up operations have begun and have been completed at
certain of the sites. The obligations of Pipe Line were not assumed by the
Partnership or by BAC in the Acquisition, and the costs of compliance have been
and will continue to be paid by American Financial. Through December 1998,
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 requires coordination of
safety regulation between federal and state agencies, testing and certification
of pipeline personnel, and authorization of safety-related feasibility studies.
The General Partner has initiated drug and alcohol testing programs to comply
with the regulations promulgated by the Office of Pipeline Safety and DOT.
HLPSA requires, among other things, that the Secretary of Transportation
consider the need for the protection of the environment in issuing federal
safety standards for the transportation of hazardous liquids by pipeline. The
legislation also requires the Secretary of Transportation to issue regulations
concerning, among other things, the identification by pipeline operators of
8
environmentally sensitive areas; the circumstances under which emergency flow
restricting devices should be required on pipelines; training and qualification
standards for personnel involved in maintenance and operation of pipelines; and
the periodic integrity testing of pipelines in environmentally sensitive and
high-density population areas by internal inspection devices or by hydrostatic
testing. Significant expenses would be incurred if, for instance, additional
valves were required, if leak detection standards were amended to exceed the
current control system capabilities of the Operating Partnerships or additional
integrity testing of pipeline facilities were to be required. The General
Partner believes that the Operating Partnerships' operations comply in all
material respects with HLPSA. However, the industry, including the Partnership,
could be required to incur substantial additional capital expenditures and
increased operating costs depending upon the requirements of final regulations
issued by DOT pursuant to HLPSA, as amended.
The Operating Partnerships are also subject to the requirements of the
Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes. The General Partner believes that the Operating Partnerships'
operations comply in all material respects with OSHA requirements, including
general industry standards, recordkeeping, hazard communication requirements
and monitoring of occupational exposure to benzene and other regulated
substances.
The General Partner cannot predict whether or in what form any new
legislation or regulatory requirements might be enacted or adopted or the costs
of compliance. In general, any such new regulations would increase operating
costs and impose additional capital expenditure requirements on the
Partnership, but the General Partner does not presently expect that such costs
or capital expenditure requirements would have a material adverse effect on the
Partnership.
Tax Treatment of Publicly Traded Partnerships under the Internal Revenue Code
The Internal Revenue Code of 1986, as amended (the "Code"), imposes
certain limitations on the current deductibility of losses attributable to
investments in publicly traded partnerships and treats certain publicly traded
partnerships as corporations for federal income tax purposes. The following
discussion briefly describes certain aspects of the Code that apply to
individuals who are citizens or residents of the United States without
commenting on all of the federal income tax matters affecting the Partnership
or the holders of LP units ("Unitholders"), and is qualified in its entirety by
reference to the Code. UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR
ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE PARTNERSHIP.
Characterization of the Partnership for Tax Purposes
The Code treats a publicly traded partnership that existed on December 17,
1987, such as the Partnership, as a corporation for federal income tax
purposes, unless, for each taxable year of the Partnership, under Section
7704(d) of the Code, 90 percent or more of its gross income consists of
"qualifying income." Qualifying income includes interest, dividends, real
property rents, gains from the sale or disposition of real property, income and
gains derived from the exploration, development, mining or production,
processing, refining, transportation (including pipelines transporting gas, oil
or products thereof), or the marketing of any mineral or natural resource
(including fertilizer, geothermal energy and timber), and gain from the sale or
disposition of capital assets that produce such income. Because the Partnership
is engaged primarily in the refined products pipeline transportation business,
the General Partner believes that 90 percent or more of the Partnership's gross
income has been qualifying income. If this continues to be true and no
subsequent legislation amends that provision, the Partnership will continue to
be classified as a partnership and not as a corporation for federal income tax
purposes.
9
Passive Activity Loss Rules
The Code provides that an individual, estate, trust or personal service
corporation generally may not deduct losses from passive business activities,
to the extent they exceed income from all such passive activities, against
other (active) 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 basis limitations. 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
the Unitholder's interest in the Partnership. A Unitholder's share of
Partnership net income may not be offset by passive activity losses generated
by other passive activities. In addition, a Unitholder's proportionate share of
the Partnership's portfolio income, including portfolio income arising from the
investment of the Partnership's working capital, is not treated as income from
a passive activity and may not be offset by such Unitholder's share of net
losses of the Partnership.
Deductibility of Interest Expense
The Code generally provides that investment interest expense is deductible
only to the extent of a non-corporate taxpayer's net investment income. In
general, net investment income for purposes of this limitation includes gross
income from property held for investment, gain attributable to the disposition
of property held for investment (except for net capital gains for which the
taxpayer has elected to be taxed at special capital gains rates) and portfolio
income (determined pursuant to the passive loss rules) reduced by certain
expenses (other than interest) which are directly connected with the production
of such income. Property subject to the passive loss rules is not treated as
property held for investment. However, the IRS has issued a Notice which
provides that net income from a publicly traded partnership (not otherwise
treated as a corporation) may be included in net investment income for purposes
of the limitation on the deductibility of investment interest. A Unitholder's
investment income attributable to its interest in the Partnership will include
both its allocable share of the Partnership's portfolio income and trade or
business income. A Unitholder's investment interest expense will include its
allocable share of the Partnership's interest expense attributable to portfolio
investments.
Unrelated Business Taxable Income
Certain entities otherwise exempt from federal income taxes (such as
individual retirement accounts, pension plans and charitable organizations) are
nevertheless subject to federal income tax on net unrelated business taxable
income and each such entity must file a tax return for each year in which it
has more than $1,000 of gross income from unrelated business activities. The
General Partner believes that substantially all of the Partnership's gross
income will be treated as derived from an unrelated trade or business and
taxable to such entities. The tax-exempt entity's share of the Partnership's
deductions directly connected with carrying on such unrelated trade or business
10
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 1998, the Partnership owned property or conducted business in the
states of Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan,
Illinois, Connecticut, Massachusetts 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.
Certain Tax Consequences to Unitholders
Upon formation of the Partnership in 1986, the General Partner elected
twelve-year straight-line depreciation for tax purposes. For this reason,
starting in 1999, the amount of depreciation available to the Partnership will
be reduced significantly and taxable income will increase accordingly.
Unitholders, however, will continue to offset Partnership income with
individual LP Unit depreciation under their IRC section 754 election. Each
Unitholder's tax situation will differ depending upon the price paid and when
LP Units were purchased. Generally, those who purchased LP Units in the past
few years will have adequate depreciation to offset a considerable portion of
Partnership income, while those who purchased LP Units more than several years
ago will experience the full increase in taxable income. Unitholders are
reminded that, in spite of the additional taxable income beginning in 1999, the
current level of cash distributions exceed expected tax payments. Furthermore,
sale of LP Units will result in ordinary income tax recapture. UNITHOLDERS ARE
ENCOURAGED TO CONSULT THEIR PROFESSIONAL TAX ADVISORS REGARDING THE TAX
IMPLICATIONS TO THEIR INVESTMENT IN LP UNITS.
Certain Amendments to the Partnership Agreement
In July 1998, through a consent solicitation approved by more than
two-thirds of the LP Unitholders, amendments to the Partnership Agreement were
adopted to (i) remove the limitation on the number of LP Units that may be
issued without the approval of the Unitholders; (ii) eliminate the restrictions
on the amount of debt that can be incurred by the Partnership or its Operating
Partnerships and (iii) remove the limitations on the amount of capital
expenditures that can be made by the Partnership or the Operating Partnerships
in any calendar year.
Item 2. Properties
As of December 31, 1998, the principal facilities of the Operating
Partnerships included 3,487 miles of 6-inch to 24-inch diameter pipeline, 34
pumping stations, 84 delivery points and various sized tanks having an
aggregate capacity of approximately 9.2 million barrels. The Operating
Partnerships own substantially all of their facilities.
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. Certain portions of
Buckeye's pipeline in Connecticut and
11
Massachusetts are subject to security interests in favor of the owners of the
right-of-way to secure future lease 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.
With respect to environmental litigation, certain Operating Partnerships
(or their predecessors) have been named as defendants 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 an Operating
Partnership in connection with such proceedings could be material.
In July 1994, Buckeye was named as a defendant in an action filed by the
Michigan Department of Natural Resources ("MDNR") in Circuit Court, Oakland
County, Michigan. The complaint also names three individuals and three other
corporations as defendants. The complaint alleges that under the Michigan
Environmental Response Act, the Michigan Water Resource Commission Act and the
Leaking Underground Storage Tank Act, the defendants are liable to the state of
Michigan for remediation expenses in connection with alleged groundwater
contamination in the vicinity of Sable Road, Oakland County, Michigan. The
complaint asserts that contaminated groundwater has infiltrated drinking water
wells in the area. The complaint seeks past response costs in the amount of
approximately $2.0 million and a declaratory judgment that the defendants are
liable for future response costs and remedial activities at the site.
The litigation is presently in the discovery phase. In November 1997,
plaintiff, MDNR, filed a motion for summary judgment against all defendants,
including Buckeye. In addition, one of Buckeye's co-defendants filed a
cross-motion for summary judgment against Buckeye in response to the MDNR
summary judgment motion. At a hearing on January 28, 1998, plaintiff's motion
for summary judgment was denied. The co-defendant's cross-motion against
Buckeye is pending with the Court.
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 for past or future clean-up costs at the site. Although the cost
of the ultimate remediation cannot be determined at this time, Buckeye expects
that its liability, if any, will not be material.
12
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 February 1999, the General Partner entered into a stipulation and order
of settlement with the New York State Office of Real Property Services and the
City of New York settling various real property tax certiorari proceedings. The
Partnership had challenged its real property tax assessments for a number of
past tax years on that portion of its pipeline that is located in public
right-of-way in New York City. The settlement agreement is expected to result
in a gain of approximately $11.0 million for the Partnership in the second
quarter of 1999. In addition, based upon the settlement, the Partnership
expects that its real property tax expense will be reduced by approximately
$1.0 million in 1999, with continued tax savings realized in the years 2000
through 2003. The settlement is contingent upon various conditions set forth in
the stipulation and order of settlement.
In June 1998, a putative class action complaint (Shakeredge v. Martinelli,
et al) was filed in the Delaware Court of Chancery against the Partnership,
BMC, Glenmoor and the directors of BMC alleging that the Consent Solicitation
Statement relating to various Partnership Agreement amendments was materially
false and misleading, because it failed to disclose that the incentive payments
made to the General Partner by the Partnership may be affected by an increase
in the number of LP Units outstanding; that the elimination of the restrictions
contained in the Partnership Agreement will remove the checks and balances
imposed on the Partnership and the General Partner; and whether the defendants
were planning or considering any specific transactions that would be affected
by the removal of the restrictions at the time of the Consent Solicitation
Statement. The complaint seeks, among other things, an injunction prohibiting
the consummation of the consent solicitation or giving effect to any other
proposed amendments to the Partnership Agreement. An answer was filed by the
General Partner and the other defendants in July 1998. No other filings or
proceedings have occurred in the case. BMC and the other defendants believe
that the Consent Solicitation Statement disclosed all material information to
the Unitholders and that the complaint 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, 1998.
13
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. In January 1998, the General Partner approved a
two-for-one unit split that became effective February 13, 1998. All unit and
per unit information contained in this filing, unless otherwise noted, has been
adjusted for the two for one split. The high and low sales prices of the LP
Units in 1998 and 1997, as reported on the New York Stock Exchange Composite
Tape, were as follows:
1998 1997
-------------------------- --------------------------
Quarter High Low High Low
- ---------------- ----------- ----------- ----------- -----------
First .......... 30.0625 27.5000 24.9385 20.1250
Second ......... 29.8750 27.0000 22.6250 21.2500
Third .......... 30.2500 26.0000 26.7500 22.5625
Fourth ......... 31.1250 26.0625 30.0000 24.6875
During the months of December 1998 and January 1999, 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 during 1997 and 1998 were as follows:
Amount
Record Date Payment Date Per Unit
- --------------------------- ------------------- -----------
February 21, 1997 ......... February 28, 1997 $ 0.375
May 6, 1997 ............... May 30, 1997 $ 0.375
August 22,1997 ............ August 29, 1997 $ 0.440
November 5, 1997 .......... November 28, 1997 $ 0.525
February 23, 1998 ......... February 27, 1998 $ 0.525
May 6, 1998 ............... May 29, 1998 $ 0.525
August 5, 1998 ............ August 31, 1998 $ 0.525
November 4, 1998 .......... November 30, 1998 $ 0.525
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 4, 1999, the Partnership announced a quarterly distribution of
$0.525 per LP Unit payable on February 26, 1999 to Unitholders of record on
February 16, 1999.
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, 1998, 1997, 1996, 1995 and 1994. The tables should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Report.
14
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(In thousands, except per unit amounts)
Income Statement Data:
Revenue ................................... $ 184,477 $ 184,981 $ 182,955 $ 183,462 $ 186,338
Depreciation and amortization (1) ......... 16,432 13,177 11,333 11,202 11,203
Operating income .......................... 74,358 72,075 68,784 71,504 72,481
Interest and debt expense (2) ............. 15,886 21,187 21,854 21,710 24,931
Income from continuing operations before
extraordinary loss ....................... 52,007 48,807 49,337 49,840 48,086
Net income ................................ 52,007 6,383 49,337 49,840 45,817
Income per unit from continuing opera-
tions before extraordinary loss .......... 1.93 1.92 2.03 2.05 1.98
Net income per unit ....................... 1.93 0.25 2.03 2.05 1.89
Distributions per unit .................... 2.10 1.72 1.50 1.40 1.40
December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(In thousands)
Balance Sheet Data:
Total assets .............................. $ 618,099 $ 615,062 $ 567,837 $ 552,646 $ 534,765
Long-term debt ............................ 240,000 240,000 202,100 214,000 214,000
General Partner's capital ................. 2,390 2,432 2,760 2,622 2,460
Limited Partners' capital ................. 296,095 300,346 273,219 259,563 243,516
- ---------------
(1) Depreciation and amortization includes $4,698,000 in 1998 and $1,806,000 in
1997 for amortization of a deferred charge related to the ESOP
Restructuring.
(2) In December 1997 Buckeye issued $240,000,000 of Senior Notes bearing
interest ranging from 6.39 percent to 6.98 percent. Concurrently with the
issuance of the Senior Notes, Buckeye extinguished $202,100,000 of First
Mortgage Notes bearing interest ranging from 7.11 percent to 11.18
percent.
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,
aviation turbine 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
general economic conditions, weather, competitive conditions, demand for
products transported, seasonality and regulation. See "Business--Competition
and Other Business Considerations."
15
1998 Compared With 1997
Revenue for the year ended December 31, 1998 was $184.5 million, $0.5
million or 0.3 percent less than revenue of $185.0 million for 1997. Volumes
delivered during 1998 averaged 1,031,200 barrels per day, 7,200 barrels per day
or 0.7 percent greater than volume of 1,024,000 barrels per day delivered in
1997. The combination of higher volumes and lower revenues in 1998 as compared
to 1997 is the result of several factors. In 1998, the Partnership experienced
a slight shift in deliveries from longer-haul, higher tariff movements to
shorter-haul, lower tariff movements. In addition, certain tariffs designed to
recover capital costs expired in 1998 and were replaced by lower tariffs. The
Partnership also had greater costs associated with product downgrades resulting
from normal operating activities. Gasoline volumes and revenue increased over
1997 levels. New business was gained at Midland, Pennsylvania as a result of a
new connection, and market share throughout Pennsylvania continued to grow in
1998. In addition, increased volumes in the Detroit and Flint, Michigan areas
added to the favorable variance. Offsetting these increases were declines in
volume to the upstate New York area. Distillate volumes and revenue declined
over 1997 levels. Demand was weak throughout most areas due to abnormally warm
weather primarily during the first quarter of 1998. Turbine fuel volumes
increased slightly over 1997 levels although overall revenue declined. Demand
was strong at Newark Airport but was offset by declines at Pittsburgh due to
reductions in both military and commercial airline activity. LPG volumes and
revenue increased over 1997 levels due to the capture of new business in Ohio.
Tariff rate increases implemented in 1998 also had a favorable impact on 1998
revenues. See "Tariff Changes".
Costs and expenses during 1998 were $110.1 million, $2.8 million or 2.5
percent less than costs and expenses of $112.9 million during 1997. During
1998, as part of a restructuring, the Partnership incurred severance and
related expenses of $2.1 million and an additional $1.3 million expense
associated with the realignment of senior management. Payroll overhead expenses
declined as a result of the ESOP Restructuring in 1997 and a full year effect
of the elimination of certain executive compensation costs formerly charged to
the Partnership. Such senior executive compensation costs have not been charged
to the Partnership since August 12, 1997. See "Executive Compensation". The
Partnership also realized cost reductions in outside service expense and
incurred less power expense during 1998. Partially offsetting these reductions
was the full year effect of amortization of the deferred charge related to the
issuance of LP Units under the ESOP restructuring.
Other income (expenses) consist of interest income, interest and debt
expense, minority interests and other. Total other expenses decreased by $0.9
million. Interest expense declined by $5.3 million due to the early
extinguishment of higher interest rate debt with the proceeds of lower interest
rate debt during December 1997. Partially offsetting these declines in expenses
were increased incentive compensation payments to BMC as a result of greater
cash distributions to Unitholders (see "Certain Relationships and Related
Transactions") and an increase in minority interest expense related to greater
net income. Income from invested cash also declined from 1997 levels.
1997 Compared With 1996
Revenue for the year ended December 31, 1997 was $185.0 million, $2.0
million or 1.1 percent greater than revenue of $183.0 million for 1996. Volumes
delivered during 1997 averaged 1,024,000 barrels per day, 16,900 barrels per
day or 1.7 percent greater than volume of 1,007,100 barrels per day delivered
in 1996. The major portion of this increase was related to increased turbine
fuel deliveries to Newark, J. F. Kennedy, Miami and Detroit airports. At
Newark, J. F. Kennedy and Miami airports, turbine fuel demand continued to grow
at a steady rate, while at Detroit the increases were attributable primarily to
the installation of new facilities and the addition of a new shipper. Gasoline
volumes also increased over 1996 levels. The increase in gasoline volumes were
attributable primarily to market share growth throughout Pennsylvania. The
filing of tariff incentives has also led to increased volumes and revenue at
various locations. Gasoline revenue overall, however, declined slightly due to
the loss of longer-haul, higher tariff volumes particularly to the upstate New
York
16
area and certain Midwest locations that are being supplied with shorter-haul,
lower tariff volumes. Distillate volumes and revenues in 1997 were comparable
to 1996 volumes, while liquefied petroleum gas and other product volumes
declined resulting in lower revenues. Tariff rate increases implemented in 1996
also had a favorable impact on 1997 revenues. See "Tariff Changes."
Costs and expenses during 1997 were $112.9 million, $1.3 million or 1.1
percent less than costs and expenses of $114.2 million during 1996. Payroll
expenses declined as the result of a staff reduction program implemented in
1996 and the non-recurrence of the $2.5 million charge recorded in connection
with that program. Payroll and payroll overhead expenses were also lower since
certain senior executive compensation costs have not been charged to the
Partnership following August 12, 1997, in accordance with the terms of the ESOP
Restructuring. Professional fee expenses also declined due to reduced expenses
associated with the ESOP Restructuring. Offsetting these decreases to some
extent were increases in rental expense and the amortization of deferred
charges related to the issuance of LP Units under the ESOP Restructuring.
Other income (expenses) consist of interest income, interest and debt
expense, and minority interests and other. Total other expenses increased by
$3.8 million. A $2.7 million gain on the sale of property in 1996 did not recur
in 1997. In addition, increased incentive compensation payments to BMC as a
result of greater cash distributions to Unitholders, and the settlement of a
lawsuit brought in connection with the ESOP Restructuring, increased expenses.
See "Certain Relationships and Related Transactions." Offsetting these
increases, to some extent, was a decline in minority interest expense related
to the decline in net income.
Tariff Changes
Effective January 1, 1998 certain of the Operating Partnerships
implemented tariff increases that were expected to generate approximately $2.5
million in additional revenue per year. The Operating Partnerships did not
increase tariff rates during 1997.
In 1996, certain tariffs were increased that, at the time of filing, were
expected to generate approximately $2.9 million in additional revenue per year.
Competition and Other Business Conditions
Several major refiners and marketers of petroleum products announced
strategic alliances or mergers in 1997 and 1998. These alliances or mergers
have the potential to alter refined product supply and distribution patterns
within the Operating Partnerships' market area resulting in both gains and
losses of volume and revenue. While the General Partner believes that
individual delivery locations within its market area may have significant gains
or losses, it is not possible to predict the overall impact these alliances or
mergers would have on the Operating Partnerships' business. However, the
General Partner does not believe that these alliances or mergers will have a
material adverse effect on the Partnership's results of operations or financial
condition.
17
Liquidity and Capital Resources
The Partnership's financial condition at December 31, 1998, 1997 and 1996
is highlighted in the following comparative summary:
Liquidity and Capital Indicators
As of December 31,
--------------------------------------------
1998 1997 1996
------------ ------------- -------------
Current ratio .................................... 0.8 to 1 1.2 to 1 1.3 to 1
Ratio of cash and temporary investments and trade
receivables to current liabilities ............. 0.5 to 1 0.8 to 1 1.1 to 1
Working capital (deficit) (in thousands) ......... ($ 6,266) $5,045 $13,660
Ratio of total debt to total capital ............. .44 to 1 .44 to 1 .43 to 1
Book value (per Unit) ............................ $ 11.06 $ 11.23 $ 11.33
Cash Provided by Operations
During 1998, cash provided by operations of $80.6 million was derived
principally from $68.4 million of net income before depreciation and
amortization. Depreciation and amortization increased by $3.3 million as a
result of the amortization for a full year of a deferred charge associated with
the ESOP Restructuring and depreciation related to capital additions. Changes
in current assets and current liabilities resulted in a net cash source of
$12.3 million. The cash source from the change in current assets and
liabilities resulted primarily from maturities of temporary investments, the
continued improvement in the collection of trade receivables, a reduction in
prepaid and other current assets and an increase in current liabilities payable
to the General Partner. Distributions paid to Unitholders in 1998 amounted to
$56.2 million, an increase of $12.3 million over 1997, and capital expenditures
were $22.8 million, an increase of $3.0 million over 1997.
During 1997, cash provided by operations of $28.4 million was derived
principally from $62.0 million of income before extraordinary loss and
depreciation and amortization reduced by an extraordinary loss of $42.4 million
on the early extinguishment of debt. Depreciation and amortization increased by
$1.8 million as a result of the amortization of a deferred charge associated
with the ESOP Restructuring. Changes in current assets and current liabilities
resulted in a net cash source of $10.4 million, resulting primarily from the
elimination of the current portion of long term debt and continued improvement
in the collection of trade receivables, offset by the net payment of $3.0
million of accrued and other current liabilities. Cash and cash equivalents
declined by $10.1 million and temporary investments declined by $11.7 million
during the year. Distributions paid to Unitholders in 1997 amounted to $44.3
million, an increase of $7.8 million over 1996, and capital expenditures were
$19.8 million, an increase of $5.0 million from 1996.
Also, during 1997, cash provided from the issuance of $240 million of
Senior Notes and an additional $4.5 million provided from operations was used
to pay the remaining $202.1 million due under the First Mortgage Notes and
$42.4 million in prepayment penalty and related refinancing costs. Changes in
non-current assets and liabilities resulted in a net use of cash of $1.6
million, including a decline of minority interests of $0.4 million.
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 comprised primarily 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
18
sale of property included in net income and changes in other non-current assets
and liabilities. Distributions paid to Unitholders in 1996 amounted to $36.5
million, an increase of $2.5 million over 1995, and capital expenditures were
$14.9 million, a decrease of $2.5 million from 1995.
Debt Obligations and Credit Facilities
At December 31, 1998, the Partnership had $240.0 million in outstanding
long-term debt, all of which was represented by Senior Notes (Series 1997A
through 1997D) (the "Senior Notes").
During December 1997, Buckeye issued the Senior Notes which are due 2024
and accrue interest at an average annual rate of 6.94 percent. The proceeds
from the issuance of the Senior Notes, plus $4.5 million of additional cash,
were used to purchase and retire all of Buckeye's outstanding First Mortgage
Notes (the "First Mortgage Notes") which accrued interest at an average annual
rate of 10.3 percent. In connection with the purchase of the First Mortgage
Notes in 1997, Buckeye was required to pay to the holders of the First Mortgage
Notes a prepayment premium equal to the difference between the cash flows under
the First Mortgage Notes, discounted at current U. S. Treasury rates, and the
book value of the principal due under the First Mortgage Notes. The prepayment
premium amounted to $41.4 million. In addition, debt refinancing costs totaling
$1.0 million were incurred. The total costs of $42.4 million were recorded on
the 1997 income statement as an extraordinary loss. In connection with the
issuance of the Senior Notes, the indenture (the "Indenture") pursuant to which
the First Mortgage Notes were issued was amended and restated in its entirety
to eliminate the collateral requirements and to impose certain financial
covenants.
The Senior Notes represent all of the Partnership's outstanding long-term
debt at December 31, 1997. Prior to the issuance of the Senior Notes, Buckeye
paid $11.9 million of principal on its First Mortgage Notes, Series J, that
became due in December 1997. The remaining principal of $202.1 million due
under the First Mortgage Notes was paid from the proceeds of the Senior Notes.
The Indenture, as amended in connection with the issuance of the Senior
Notes, contains covenants which affect Buckeye, Laurel and Buckeye Pipe Line
Company of Michigan, L.P. (the "Indenture Parties"). Generally, the Indenture
(a) limits outstanding indebtedness of Buckeye based upon certain financial
ratios of the Indenture Parties, (b) prohibits the Indenture Parties from
creating or incurring certain liens on their property, (c) prohibits the
Indenture Parties from disposing of property which is material to their
operations, and (d) limits consolidation, merger and asset transfers of the
Indenture Parties.
During December 1998, Buckeye established a line of credit from commercial
banks (the "Credit Agreement") which permits borrowings of up to $100 million
subject to certain limitations contained in the Credit Agreement. Borrowings
bear interest at the bank's base rate or at a rate based on the London
interbank rate at the option of Buckeye. The Credit Agreement expires December
16, 2003. At December 31, 1998 there were no borrowings outstanding under the
Credit Agreement.
The Credit Agreement contains covenants which affect Buckeye and the
Partnership. Generally, the Credit Agreement (a) limits outstanding
indebtedness of Buckeye based upon certain financial ratios contained in the
Credit Agreement, (b) prohibits Buckeye from creating or incurring certain
liens on its property, (c) prohibits the Partnership or Buckeye from disposing
of property which is material to its operations, and (d) limits consolidation,
merger and asset transfers by Buckeye and the Partnership.
The ratio of total debt to total capital was 44 percent at December 31,
1998 and 1997 and 43 percent at December 31, 1996. For purposes of the
calculation of this ratio, total capital consists of current and long-term
debt, minority interests and partners' capital.
19
Capital Expenditures
At December 31, 1998, property, plant and equipment was approximately 86
percent of total consolidated assets. This compares to 85 percent and 90
percent for the years ended December 31, 1997 and 1996, respectively. Capital
expenditures are generally for expansion of the Operating Partnerships' service
capabilities and sustaining the Operating Partnerships' existing operations.
Capital expenditures by the Partnership were $22.8 million, $19.8 million
and $14.9 million for 1998, 1997 and 1996, respectively. Projected capital
expenditures for 1999 are approximately $22.3 million and are expected to be
funded from cash generated by operations and Buckeye's bank line of credit. See
"Business--Capital Expenditures." Planned capital expenditures include, among
other things, installation of transmix tanks, renewal and replacement of
several tank 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 remain at approximately
this level for the next few years as a result of 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, state and local laws
and regulations relating to the protection of the environment. These laws and
regulations, as well as the Partnership's own standards relating to protection
of the environment, cause the Operating Partnerships to incur current and
ongoing operating and capital expenditures. During 1998, the Operating
Partnerships incurred operating expenses of $1.8 and capital expenditures of
$1.7 million for environmental matters. Capital expenditures of $1.2 million
for environmental related projects are included in the Partnership's plans for
1999. Expenditures, both capital and operating, relating to environmental
matters are expected to continue due to the Partnership's commitment to
maintain high environmental standards and to increasingly rigorous
environmental laws.
Various claims for the cost of cleaning up releases of hazardous
substances and for damage to the environment resulting from the activities of
the Operating Partnerships or their predecessors have been asserted and may be
asserted in the future under various federal and state laws. The General
Partner believes that the generation, handling and disposal of hazardous
substances by the Operating Partnerships and their predecessors have been in
material compliance with applicable environmental and regulatory requirements.
The total potential remediation costs to be borne by the Operating Partnerships
relating to these clean-up sites cannot be reasonably estimated and could be
material. With respect to each site, however, the Operating Partnership
involved is one of several or as many as several hundred PRPs that would share
in the total costs of clean-up under the principle of joint and several
liability. Although the Partnership has made a provision for certain legal
expenses relating to these matters, the General Partner is unable to determine
the timing or outcome of any pending proceedings or of any future claims and
proceedings. See "Business--Regulation--Environmental Matters" and "Legal
Proceedings."
Employee Stock Ownership Plan
In connection with the Acquisition, the ESOP was formed for the benefit of
employees of BMC, the General Partner and the shareholders of BMC. BMC borrowed
$63 million pursuant to a 15-year term loan from a third-party lender. BMC then
loaned $63 million to the ESOP, which used the loan proceeds to purchase $63
million of Series A Convertible Preferred Stock of BAC ("BAC Preferred Stock").
The BAC Preferred Stock had a 7.5% cumulative dividend rate and a conversion
rate of approximately 7.7 shares of BAC common stock per share of BAC Preferred
Stock.
In December 1996, the Board of Directors of BMC approved the ESOP
Restructuring. The ESOP Restructuring was approved by a majority of the holders
of the LP Units at a special meeting
20
held on August 11, 1997. On August 12, 1997, in connection with the ESOP
Restructuring, the Partnership issued an additional 2,573,146 LP Units
(adjusted for a two-for-one split) which are beneficially owned by the ESOP
through Services Company. The market value of the LP Units issued to Services
Company was approximately $64.2 million. As a result of the Partnership's
issuance of the LP Units, the Partnership's obligation to reimburse BMC for
certain executive compensation costs was permanently released, the incentive
compensation formula was reduced, and other changes were implemented to make
the ESOP a less expensive fringe benefit for the Partnership. The $64.2 million
market value of the LP Units issued to Services Company was recorded as a
deferred charge relating to the ESOP Restructuring and is being amortized over
13.5 years. As part of the ESOP Restructuring, the $63 million loan from the
third party lender became a direct obligation of the ESOP which is secured by
the stock of Services Company and guaranteed by BMC and certain of its
affiliates.
Total ESOP related costs charged to earnings during 1998 were $1.2
million, representing a non-cash accrual of the estimated difference between
distributions to be paid on the LP Units and the total debt service
requirements under the ESOP loan (the "top-up provision").
Total ESOP related costs charged to earnings through August 12, 1997, the
date of the ESOP Restructuring, were $5.0 million, which included $2.8 million
of interest expense with respect to the ESOP loan, $2.0 million based upon the
value of 1,976 shares of BAC Preferred Stock released and allocated to
employees accounts through August 12, 1997, and administrative costs of $0.2
million. Subsequent to August 12, 1997, ESOP related costs charged to the
Partnership in 1997 were $0.1 million in administrative costs and an additional
$0.4 million for a top-up provision. The 1,976 shares of BAC Preferred Stock
that were released and allocated to employees' accounts were exchanged for
40,354 shares of Services Company stock during 1997.
Total ESOP related costs charged to earning during 1996 were $5.6 million,
which included $3.5 million of interest expense with respect to the ESOP loan
and $2.1 million based upon the value of 2,074 shares of BAC Preferred Stock
released to employees' accounts. The 2,074 shares of BAC Preferred Stock that
were released to employees' accounts in 1996 were exchanged for 42,355 shares
of Services Company stock in 1997.
As a result of the ESOP Restructuring, the Partnership will not incur any
additional charges related to interest expense and shares released to
employees' accounts under the ESOP. The Partnership will, however, incur
ESOP-related costs to the extent that required contributions to the ESOP are in
excess of distributions received on the LP Units owned by Services Company, for
taxes associated with the sale of the LP Units and for routine administrative
costs.
Accounting Statements Not Yet Adopted
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as "derivatives") and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This standard will be effective for the
Partnership's financial statements in the year 2000. The General Partner has
not yet assessed the impact of this new standard on the Partnership's financial
statements.
Information Systems--Year 2000 Compliance
In 1998, the Partnership established a comprehensive plan to assess the
impact of the Year 2000 issue on the software and hardware utilized by the
Partnership's internal operations and
21
pipeline control systems. As part of that assessment, a team is in the process
of reviewing and documenting the status of the Partnership's systems for Year
2000 compliance. The key information systems under review include financial
systems, pipeline operating systems, and the Partnership's SCADA (Supervisory
Control and Data Acquisition) system. In connection with each of these areas,
consideration is being given to hardware, operating systems, applications,
database management, system interfaces, electronic transmission and outside
vendors.
The Partnership relies on third-party suppliers for certain systems,
products and services including telecommunications. The Partnership has
received certain information concerning Year 2000 status from a group of
critical suppliers and vendors, and anticipates receiving additional
information in the near future that will assist the Partnership in determining
the extent to which the Partnership may be vulnerable to those third parties'
failure to remediate their year 2000 issues.
At this time, the Partnership believes that the total cost for known or
anticipated remediation of its information systems to make them Year 2000
compliant will not be material. Management of the Partnership believes it has
an effective program in place to resolve the Year 2000 issue in a timely
manner. Completion of the plan and testing of replacement or modified systems
is anticipated for the third quarter of 1999. Nevertheless, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be circumstances in which the Partnership
would be unable to take customer orders, ship petroleum products, invoice
customers or collect payments. The effect on the Partnership's liabilities and
revenues due to a failure of its systems or a third-party system cannot be
predicted.
The Company has contingency plans for some pipeline critical applications,
involving manual operations, and is working on additional contingency plans to
address unavoided or unavoidable risks associated with Year 2000 issues.
Forward-Looking Statements
Information contained above in this Management's Discussion and Analysis
and elsewhere in this Report on Form 10-K with respect to expected financial
results and future events is forward-looking, based on our estimates and
assumptions and subject to risk and uncertainties. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect our future results and could
cause those results to differ materially from those expressed in our
forward-looking statements: (1) adverse weather conditions resulting in reduced
demand; (2) changes in laws and regulations, including safety, tax and
accounting matters; (3) competitive pressures from alternative energy sources;
(4) liability for environmental claims; (5) improvements in energy efficiency
and technology resulting in reduced demand; (6) labor relations; (7) changes in
real property tax assessments, (8) regional economic conditions; (9) the
success of the Partnership and its suppliers in achieving Year 2000 compliance;
and (10) interest rate fluctuations and other capital market conditions.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events.
22
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 ...................................... 24
Consolidated Statements of Income--For the years ended December 31,
1998, 1997 and 1996 .............................................. 25
Consolidated Balance Sheets--December 31, 1998 and 1997 ........... 26
Consolidated Statements of Cash Flows--For the years ended December
31, 1998, 1997 and 1996 .......................................... 27
Notes to Consolidated Financial Statements ........................ 28
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.
23
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, 1998
and 1997, and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 28, 1999 (March 5, 1999 as to Note 19)
24
BUCKEYE PARTNERS, LP
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
Year Ended December 31,
---------------------------------------
Notes 1998 1997 1996
------- ----------- ----------- -----------
Revenue .................................................... 2 $ 184,477 $ 184,981 $ 182,955
--------- --------- ---------
Costs and expenses
Operating expenses ...................................... 3,14 79,439 86,833 87,855
Depreciation and amortization ........................... 2,5,6 16,432 13,177 11,333
General and administrative expenses ..................... 14 14,248 12,896 14,983
--------- --------- ---------
Total costs and expenses ...................... ........ 110,119 112,906 114,171
--------- --------- ---------
Operating income ........................................... 74,358 72,075 68,784
--------- --------- ---------
Other income (expenses)
Interest income ......................................... 251 2,046 1,589
Interest and debt expense ............................... (15,886) (21,187) (21,854)
Minority interests and other ............................ 14 (6,716) (4,127) 818
--------- --------- ---------
Total other income (expenses) ................. ........ (22,351) (23,268) (19,447)
--------- --------- ---------
Income before extraordinary loss ........................... 52,007 48,807 49,337
Extraordinary loss on early extinguishment of debt ......... 8 -- (42,424) --
--------- --------- ---------
Net income ................................................. $ 52,007 $ 6,383 $ 49,337
========= ========= =========
Net income allocated to General Partner .................... 15 $ 470 $ 85 $ 493
Net income allocated to Limited Partners ................... 15 $ 51,537 $ 6,298 $ 48,844
Earnings per Partnership Unit
Income allocated to General and Limited Partners per
Partnership Unit:
Income before extraordinary loss ........................ $ 1.93 $ 1.92 $ 2.03
Extraordinary loss on early extinguishment of
debt .................................................. -- (1.67) --
--------- --------- ---------
Net income ................................................. $ 1.93 $ 0.25 $ 2.03
========= ========= =========
Earnings per Partnership Unit--assuming dilution
Income allocated to General and Limited Partners per
Partnership Unit:
Income before extraordinary loss ........................ $ 1.92 $ 1.91 $ 2.02
Extraordinary loss on early extinguishment of
debt .................................................. -- (1.66) --
--------- --------- ---------
Net income ................................................. $ 1.92 $ 0.25 $ 2.02
========= ========= =========
See notes to consolidated financial statements.
25
BUCKEYE PARTNERS, LP
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
-------------------------
Notes 1998 1997
----------- ----------- -----------
Assets
Current assets
Cash and cash equivalents .......................... 2 $ 8,341 $ 7,349
Temporary investments .............................. 2 -- 2,854
Trade receivables .................................. 2 7,578 10,195
Inventories ........................................ 2 2,988 2,087
Prepaid and other current assets ................... 4 5,320 7,297
-------- --------
Total current assets ............................ 24,227 29,782
Property, plant and equipment, net .................. 2, 5 532,696 520,941
Other non-current assets ............................ 6, 12 61,176 64,339
-------- --------
Total assets .................................... $618,099 $615,062
======== ========
Liabilities and partners' capital
Current liabilities
Accounts payable ................................... $ 4,369 $ 3,664
Accrued and other current liabilities .............. 3, 7, 15 26,124 21,073
-------- --------
Total current liabilities ....................... 30,493 24,737
Long-term debt ..................................... 8 240,000 240,000
Minority interests ................................. 2,501 2,535
Other non-current liabilities ...................... 9, 10, 14 46,620 45,012
Commitments and contingent liabilities ............. 3 -- --
-------- --------
Total liabilities ............................... 319,614 312,284
-------- --------
Partners' capital ..................................... 15
General Partner .................................... 2,390 2,432
Limited Partners ................................... 296,095 300,346
-------- --------
Total partners' capital ......................... 298,485 302,778
-------- --------
Total liabilities and partners' capital ......... $618,099 $615,062
======== ========
See notes to consolidated financial statements.
26
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
Year Ended December 31,
------------------------------------------
Notes 1998 1997 1996
------- ------------ ------------ ------------
Cash flows from operating activities:
Income before extraordinary loss ...................... $ 52,007 $ 48,807 $ 49,337
--------- ---------- ---------
Adjustments to reconcile income to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of
debt ............................................... 8 -- (42,424) --
Gain on sale of property, plant and equipment ........ (195) (11) (2,651)
Depreciation and amortization ........................ 5,6 16,432 13,177 11,333
Minority interests ................................... 594 96 506
Distributions to minority interests .................. (628) (474) (374)
Change in assets and liabilities:
Temporary investments .............................. 2,854 11,674 (13,633)
Trade receivables .................................. 2,617 2,341 3,759
Inventories ........................................ (901) (355) (171)
Prepaid and other current assets ................... 1,977 418 (443)
Accounts payable ................................... 705 (615) 1,873
Accrued and other current liabilities .............. 5,051 (3,015) 1,072
Other non-current assets (1) ....................... (1,535) 319 (1,798)
Other non-current liabilities ...................... 1,608 (1,566) (1,680)
--------- ---------- ---------
Total adjustments from operating activities ....... 28,579 (20,435) (2,207)
--------- ---------- ---------
Net cash provided by operating activities ......... 80,586 28,372 47,130
--------- ---------- ---------
Cash flows from investing activities:
Capital expenditures .................................. (22,750) (19,841) (14,881)
Net proceeds from (expenditures for) disposal of
property, plant and equipment ........................ (544) (814) 4,497
--------- ---------- ---------
Net cash used in investing activities ............. (23,294) (20,655) (10,384)
--------- ---------- ---------
Cash flows from financing activities:
Capital contribution .................................. -- 5 10
Proceeds from exercise of unit options ................ 366 516 974
Proceeds from issuance of long-term debt .............. 8 -- 240,000 --
Payment of long-term debt ............................. 8 -- (214,000) --
Distributions to Unitholders .......................... 15,16 (56,666) (44,305) (36,527)
--------- ---------- ---------
Net cash used in financing activities ............. (56,300) (17,784) (35,543)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents..... 2 992 (10,067) 1,203
Cash and cash equivalents at beginning of year .......... 2 7,349 17,416 16,213
--------- ---------- ---------
Cash and cash equivalents at end of year ................ $ 8,341 $ 7,349 $ 17,416
========= ========== =========
Supplemental cash flow information:
Cash paid during the year for interest (net of
amount capitalized) .................................. $ 15,918 $ 21,432 $ 21,900
Non-cash change in financing activities:
Issuance of LP Units in exchange for BAC stock ........ 12 -- $ 64,200 --
Non-cash change in operating activities:
(1) Deferred charge from issuance of LP Units ......... 6,12 -- $ 64,200 --
See notes to consolidated financial statements.
27
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 AND
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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
approximately 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"). These entities are hereinafter referred to as the
"Operating Partnerships."
In connection with an internal restructuring, effective December 31, 1998,
Buckeye Management Company ("BMC") transferred its general partnership interest
in the Partnership, as well as certain other assets and liabilities, to its
wholly-owned subsidiary, Buckeye Pipe Line Company (the "General Partner").
Buckeye Pipe Line Company will now serve as sole general partner of the
Partnership and will continue to serve as sole general partner of each
Operating Partnership. As of December 31, 1998, the General Partner owned
approximately a 1 percent general partnership interest in the Partnership and
approximately a 1 percent general partnership interest in each Operating
Partnership, for an effective 2 percent interest in the Partnership.
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 9 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 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 BMC from a subsidiary of American Financial Group, Inc. ("American
Financial") (the "Acquisition"). BAC, which subsequently changed its name to
Glenmoor, Ltd. ("Glenmoor"), is owned by certain directors and members of
senior management of the General Partner and trusts for the benefit of their
families and by certain director-level employees of Buckeye Pipe Line Services
Company ("Services Company").
On August 12, 1997, the General Partner's employees were transferred to
Services Company, a newly formed corporation wholly owned by the ESOP. Services
Company employs all of the employees previously employed by the General Partner
and became the sponsor of all of the employee benefit plans previously
maintained by the General Partner. Services Company also entered into a
Services Agreement with BMC and the General Partner to provide services to the
Partnership and the Operating Partnerships for a 13.5 year term. Services
Company is reimbursed by BMC or the General Partner for its direct and indirect
expenses, which in turn are reimbursed by the Partnership, except for certain
executive compensation costs which after August 12, 1997 are no longer
reimbursed (See Note 14).
The Partnership maintains its accounts in accordance with the Uniform
System of Accounts for Pipeline Companies, as prescribed by the Federal Energy
Regulatory Commission ("FERC"). Reports to FERC differ from the accompanying
consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles, generally in that such reports
calculate depreciation over estimated useful lives of the assets as prescribed
by FERC.
28
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 8).
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 97,
no customer during 1998 contributed more than 10 percent of total revenue. The
Partnership does not maintain an allowance for doubtful accounts.
Inventories
Inventories, consisting of materials and supplies, are carried at cost
which does not exceed realizable value.
Property, Plant and Equipment
Property, plant and equipment consist primarily of pipeline and related
transportation facilities and equipment. For financial reporting purposes,
depreciation is calculated primarily using the straight-line method over the
estimated useful life of 50 years. Additions and betterments are capitalized
and maintenance and repairs are charged to income as incurred. Generally, upon
normal retirement or replacement, the cost of property (less salvage) is
charged to the depreciation reserve, which has no effect on income.
29
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, 1998 and 1997, the Partnership's reported amount
of net assets for financial reporting purposes exceeded its tax basis by
approximately $285 million and $253 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. In 1997, the Partnership
adopted the American Institute of Certified Public Accountants Statement of
Position ("SOP") 96-1, "Environmental Remediation Liabilities". SOP 96-1
prescribes that accrued environmental remediation related expenses include
direct costs of remediation and indirect costs related to the remediation
effort. Although the Partnership previously accrued for direct costs of
remediation and certain indirect costs, additional indirect costs were required
to be accrued by the Partnership at the time of adopting SOP 96-1, such as
compensation and benefits for employees directly involved in the remediation
activities and fees paid to outside engineering, consulting and law firms. The
effect of initially applying the provisions of SOP 96-1 has been treated as a
change in accounting estimate and is not material to the accompanying financial
statements.
Pensions
Services Company maintains a defined contribution plan, defined benefit
plans (see Note 10) and an employee stock ownership plan (see Note 12) which
provide retirement benefits to substantially all of its regular full-time
employees. Certain hourly employees of Services Company are covered by a
defined contribution plan under a union agreement.
Postretirement Benefits Other Than Pensions
Services Company provides postretirement health care and life insurance
benefits for certain of its retirees (see Note 10). Certain other retired
employees are covered by a health and welfare plan under a union agreement.
Comprehensive Income
The Partnership has not reported comprehensive income due to the absence
of items of other comprehensive income in any period presented.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
established accounting and reporting
30
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives"), and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This standard will be effective for the
Partnership's financial statements in the year 2000. The General Partner has
not yet assessed the impact of this new standard on the Partnership's financial
statements.
Segment Reporting and Related Information
Effective for the December 31, 1998 financial statements, the Partnership
adopt