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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 1997
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
(IRS EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
5 RADNOR CORPORATE CENTER
100 MATSONFORD ROAD
RADNOR, PENNSYLVANIA 19087
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 770-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
LP Units representing limited
partnership interests.................. New York Stock Exchange
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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 10, 1998, the aggregate market value of the registrant's LP Units
held by non-affiliates was approximately $698 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 10, 1998: 26,735,506
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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 3,103 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 for
purposes of the 1986 Acquisition and succeeded to the operations of
predecessor companies owned by American Financial, including Buckeye Pipe Line
Company, an Ohio corporation, and its subsidiaries ("Pipe Line"), in November
1986. Laurel was formed in October 1992 and succeeded to the operations of
Laurel Pipe Line Company, an Ohio corporation, which was a majority owned
corporate subsidiary of the Partnership until the minority interest was
acquired in December 1991.
Buckeye Management Company (the "General Partner"), a Delaware corporation
organized in 1986, owns approximately a 1 percent general partnership interest
in, and serves as sole general partner of, the Partnership. A corporate
subsidiary of the General Partner, Buckeye Pipe Line Company, a Delaware
corporation (the "Manager"), owns a 1 percent general partnership interest in,
and serves as sole general partner and manager of, each Operating Partnership.
During March 1996, BMC Acquisition Company ("BAC"), a Delaware corporation
organized in 1996, acquired all of the common stock of the General Partner 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 members of senior management
of the General Partner or trusts for the benefit of their families and certain
director-level employees of Buckeye Pipe Line Services Company, a Pennsylvania
corporation ("Services Company"). Glenmoor currently provides management
services to the General Partner, the Manager 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 Manager'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 the General Partner and
the Manager to provide services to the Partnership and the Operating
Partnerships for a 13.5 year term. Services Company is reimbursed by the
General Partner or the Manager for its direct and indirect expenses. The
General Partner and the Manager are in turn reimbursed by the Partnership
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and the Operating Partnerships for such expenses other than certain executive
compensation and fringe benefit costs. See "Certain Relationships and Related
Transactions."
REFINED PRODUCTS BUSINESS
The Partnership receives petroleum products from refineries, connecting
pipelines and marine terminals, and transports those products to other
locations. In 1997, refined petroleum products accounted for substantially all
of the Partnership's consolidated revenues and consolidated operating income.
The Partnership transported an average of approximately 1,024,000 barrels
per day of refined products in 1997. 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)
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YEAR ENDED DECEMBER 31,
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1997 1996 1995
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VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gasoline........................ 507.8 50% 497.9 49% 507.1 50%
Jet Fuels....................... 255.4 25 244.5 24 243.9 24
Middle Distillates(2)........... 238.8 23 238.7 24 235.2 24
Other Products.................. 22.0 2 26.0 3 23.6 2
------- --- ------- --- ------- ---
Total........................... 1,024.0 100% 1,007.1 100% 1,009.8 100%
======= === ======= === ======= ===
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(1) Excludes local product transfers.
(2) Includes diesel fuel, heating oil, kerosene and other middle distillates.
The Partnership provides service in the following states: Pennsylvania, New
York, New Jersey, Indiana, Ohio, Michigan, Illinois, Connecticut,
Massachusetts and Florida.
Pennsylvania--New York--New Jersey
Buckeye serves major population centers in the states of Pennsylvania, New
York and New Jersey through 1,003 miles of pipeline. Refined 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.
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
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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 111 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 or other customers.
COMPETITION AND OTHER BUSINESS CONSIDERATIONS
The Operating Partnerships do business without the benefit of exclusive
franchises from government entities. In addition, the Operating Partnerships
generally operate as common carriers, providing transportation services at
posted tariffs and without long-term contracts. 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.
In 1997, the Operating Partnerships had approximately 103 customers, most of
which were either major integrated oil companies or large refined product
marketing companies. The largest two customers accounted for 9.1 percent and
7.0 percent, respectively, of consolidated revenues, while the 20 largest
customers accounted for 76.1 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
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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.
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 fuels.
Overall, operations have been only moderately seasonal, with somewhat lower
than average volume being transported during March, April and May as compared
to the rest of the year.
Neither the Partnership nor any of the Operating Partnerships have any
employees. All of the operations of the Operating Partnerships are managed and
operated by employees of Services Company. In addition, Glenmoor provides
certain management services to the General Partner, the Manager and Services
Company. At December 31, 1997, Services Company had a total of 543 full-time
employees, 157 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.
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 1997, total capital
expenditures were $19.8 million. Projected capital expenditures for 1998
amount to approximately $20.6 million and are expected to be funded from cash
generated by operations. Planned capital expenditures in 1998 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
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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 GDP implicit price deflator since the date on which the
individual rate was last increased, plus 2 percent. Individual rate decreases
will be presumptively valid upon a showing that the proposed rate exceeds
marginal costs. In markets where Buckeye was found to have significant market
power and in certain markets where no market power finding was made: (i)
individual rate increases cannot exceed the volume weighted average rate
increase in markets where Buckeye does not have significant market power since
the date on which the individual rate was last increased, and (ii) any volume
weighted average rate decrease in markets where Buckeye does not have
significant market power must be accompanied by a corresponding decrease in
all of Buckeye's rates in markets where it does have significant market power.
Shippers retain the right to file complaints or protests following notice of a
rate increase, but are required to show that the proposed rates violate or
have not been adequately justified under the market-based rate regulation
program, that the proposed rates are unduly discriminatory, or that Buckeye
has acquired significant market power in markets previously found to be
competitive.
The Buckeye program is an exception to the generic oil pipeline regulations
issued under the Energy Policy Act of 1992. The generic rules rely primarily
on an index methodology, whereby a pipeline would be allowed to change its
rates in accordance with an index that FERC believes reflects cost changes
appropriate for application to pipeline rates. In the alternative, a pipeline
is allowed to charge market-based rates if the pipeline establishes that it
does not possess significant market power in a particular market. In addition,
the 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,
anticipated to occur by July 2000.
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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 and state laws and
regulations relating to the protection of the environment. Although the
General Partner believes that the operations of the Operating Partnerships
comply in all material respects with applicable environmental regulations,
risks of substantial liabilities are inherent in pipeline operations, and
there can be no assurance that material environmental liabilities will not be
incurred. Moreover, it is possible that other developments, such as
increasingly rigorous environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property or persons resulting from the
operations of the Operating Partnerships, could result in substantial costs
and liabilities to the Partnership. See "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Environmental Matters."
The Oil Pollution Act of 1990 ("OPA") amends certain provisions of the
federal Water Pollution Control Act of 1972, commonly referred to as the Clean
Water Act ("CWA"), and other statutes as they pertain to the prevention of and
response to oil spills into navigable waters. The OPA subjects owners of
facilities to strict joint and several liability for all containment and
clean-up costs and certain other damages arising from a spill. The CWA
provides penalties for any discharges of petroleum products in reportable
quantities and imposes substantial liability for the costs of removing a
spill. State laws for the control of water pollution also provide varying
civil and criminal penalties and liabilities in the case of releases of
petroleum or its derivatives into surface waters or into the ground.
Regulations are currently being developed under OPA and state laws which may
impose additional regulatory burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products are not unusual in the petroleum pipeline industry. The Partnership's
pipelines cross numerous navigable rivers and streams. Although the General
Partner believes that the Operating Partnerships comply in all 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 substance." Disposal of a hazardous substance, whether
on or off-site, may subject the generator of that substance to liability under
CERCLA for the costs of clean-up and other remedial action. Pipeline
maintenance and other activities in the ordinary course of business could
subject the Operating Partnerships to the requirements of these statutes. As a
result, to the extent hydrocarbons or other petroleum waste may have been
released or disposed of in the past, the Operating Partnerships may in the
future be required to remedy contaminated property. Governmental authorities
such as the Environmental Protection Agency, and in some instances third
parties, are authorized under CERCLA to seek to recover remediation and other
costs from responsible persons, without regard to
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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 require states to develop permitting programs over the next
several years to comply with new federal programs. Existing operating and air-
emission permits like those held by the Operating Partnerships are being
reviewed and submitted to appropriate state agencies to comply with the new
programs. It is possible that new or more stringent controls will be imposed
upon the Operating Partnerships through this permit review process or in
connection with the renewal of such permits in the future.
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 obtained an
Administrative Consent Order ("ACO") from the New Jersey Department of
Environmental Protection and Energy under the New Jersey Environmental Cleanup
Responsibility Act of 1983 ("ECRA") for all six of Pipe Line's facilities in
New Jersey. The ACO permitted the 1986 Acquisition to be completed prior to
full compliance with ECRA, but required Pipe Line to conduct in a timely
manner a sampling plan for environmental contamination at the New Jersey
facilities and to implement any required clean-up plan. Sampling continues in
an effort to identify areas of contamination at the New Jersey facilities,
while clean-up operations have begun and have been completed at certain of the
sites. The obligations of Pipe Line were not assumed by the Partnership or by
BAC in the Acquisition, and the costs of compliance have been and will
continue to be paid by American Financial. Through December 1997, 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 Manager has initiated drug and alcohol testing
programs to comply with the regulations promulgated by the Office of Pipeline
Safety and DOT.
HLPSA requires, among other things, that the Secretary of Transportation
consider the need for the protection of the environment in issuing federal
safety standards for the transportation of hazardous liquids by pipeline. The
legislation also requires the Secretary of Transportation to issue regulations
concerning, among other things, the identification by pipeline operators of
environmentally sensitive areas; the circumstances under which emergency flow
restricting devices should be required on pipelines; training and
qualification standards for personnel involved in maintenance and operation of
pipelines; and the periodic integrity testing of pipelines in environmentally
sensitive and high-density population areas by internal inspection devices or
by hydrostatic testing. Significant expenses would be incurred if, for
instance, additional valves were required, if leak detection standards were
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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
ADVISORS 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." 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.
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.
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,
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dividends or royalties or gain from the sale of property that produces
portfolio income. Credits from passive activities are also limited to the tax
attributable to any income from passive activities. The passive activity loss
rules are applied after other applicable limitations on deductions, such as
the at-risk rules and the basis limitation. Certain closely held corporations
are subject to slightly different rules which can also limit their ability to
offset passive losses against certain types of income.
Under the Code, net income from publicly traded partnerships is not treated
as passive income for purposes of the passive loss rule, but is treated as
non-passive income. Net losses and credits attributable to an interest in a
publicly traded partnership are not allowed to offset a partner's other
income. Thus, a Unitholder's proportionate share of the Partnership's net
losses may be used to offset only Partnership net income from its trade or
business in succeeding taxable years or, upon a complete disposition of a
Unitholder's interest in the Partnership to an unrelated person in a fully
taxable transaction, may be used to (i) offset gain recognized upon the
disposition, and (ii) then against all other income of the Unitholder. In
effect, net losses are suspended and carried forward indefinitely until
utilized to offset net income of the Partnership from its trade or business or
allowed upon the complete disposition to an unrelated person in a fully
taxable transaction of 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 Expenses
The Code generally provides that investment interest expense is deductible
only to the extent of a non-corporate taxpayer's net investment income. In
general, net investment income for purposes of this limitation includes gross
income from property held for investment, gain attributable to the disposition
of property held for investment (except for net capital gains for which the
taxpayer has elected to be taxed at special capital gains rates) and portfolio
income (determined pursuant to the passive loss rules) reduced by certain
expenses (other than interest) which are directly connected with the
production of such income. Property subject to the passive loss rules is not
treated as property held for investment. However, the IRS has issued a Notice
which provides that net income from a publicly traded partnership (not
otherwise treated as a corporation) may be included in net investment income
for purposes of the limitation on the deductibility of investment interest. A
Unitholder's investment income attributable to its interest in the Partnership
will include both its allocable share of the Partnership's portfolio income
and trade or business income. A Unitholder's investment interest expense will
include its allocable share of the Partnership's interest expense attributable
to portfolio investments.
Unrelated Business Taxable Income
Certain entities otherwise exempt from federal income taxes (such as
individual retirement accounts, pension plans and charitable organizations)
are nevertheless subject to federal income tax on net unrelated business
taxable income and each such entity must file a tax return for each year in
which it has more than $1,000 of gross income from unrelated business
activities. The General Partner believes that substantially all of the
Partnership's gross income will be treated as derived from an unrelated trade
or business and taxable to such entities. The tax-exempt entity's share of the
Partnership's deductions directly connected with carrying on such unrelated
trade or business are allowed in computing the entity's taxable unrelated
business income. ACCORDINGLY, INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT
ENTITIES SUCH AS INDIVIDUAL RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE
TRUSTS MAY NOT BE ADVISABLE.
9
<PAGE>
State Tax Treatment
During 1997, 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. UNITHOLDERS
SHOULD CONSULT THEIR STATE AND LOCAL INCOME TAX ADVISORS.
ITEM 2. PROPERTIES
As of December 31, 1997, the principal facilities of the Operating
Partnerships included 3,485 miles of 6-inch to 24-inch diameter pipeline, 33
pumping stations, 82 delivery points and various sized tanks having an
aggregate capacity of approximately 9.2 million barrels. 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.
As 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 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.
FREEPORT LANDSLIDE
On March 30, 1990, a landslide near Freeport, Pennsylvania caused a rupture
to one of the Partnership's pipelines which resulted in the release of
approximately 58,000 gallons of petroleum
10
<PAGE>
area and flowed into Knapp Run and eventually into the Allegheny River.
Buckeye promptly conducted extensive emergency response and remediation
efforts.
Following the pipeline release in April and May 1990, eight civil class
actions against the Partnership, Buckeye and certain affiliates were filed in
four Pennsylvania counties. Plaintiffs in these lawsuits sought both
injunctive and monetary relief, including punitive damages and attorneys'
fees, based on a number of legal theories. In June 1991, these actions were
consolidated in a single class action (In re Buckeye Pipe Line Litigation)
before the Court of Common Pleas for Allegheny County, Pennsylvania.
On May 30, 1997, counsel for the parties entered into a stipulation of
settlement that provided that Buckeye would establish a settlement fund of up
to a maximum of $1.3 million to be paid to members of the class who submitted
claims. The proposed class consists of those residents and business entities
which on March 30, 1990 drew their drinking, industrial or commercial water
through the facilities of the Harrison Township or Breckenridge Township,
Pennsylvania water authorities, and which suffered a loss of water or a total
suspension of water service. To the extent the settlement fund exceeds the
value of the claims submitted, the excess amount of the settlement fund will
revert to Buckeye's insurance carrier.
On January 6, 1998, the Court entered an Opinion and Final Order and
Judgment certifying the settlement class and approving the settlement of the
litigation (the "Order"). The Order dismissed Buckeye from the proceeding, and
provided that the members of the class, except for those who opted out of the
settlement, were barred from asserting any further claims against Buckeye
arising from the pipeline release. No member of the class opted out of the
settlement. The Court also approved plaintiffs' request for $375,000 in
attorney's fees and costs to be paid out of the settlement fund.
Buckeye's insurance carriers have reimbursed Buckeye for all covered claims
arising from the Freeport pipeline release. The insurance carriers have funded
the settlement fund and have agreed to pay all fees and expenses associated
with the settlement except for certain costs of notice to the class. It is
anticipated, therefore, that the settlement will not have a material adverse
effect on the financial condition of Buckeye.
OTHER PROCEEDINGS
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.
11
<PAGE>
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. Mediation of this litigation is scheduled to
commence in April 1998.
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.
Additional claims for the cost of cleaning up releases of hazardous
substances and for damage to the environment resulting from the activities of
the Operating Partnerships or their predecessors may be asserted in the future
under various federal and state laws, but the amount of such claims or the
potential liability, if any, cannot be estimated. See "Business--Regulation--
Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of LP Units during the
fourth quarter of the fiscal year ended December 31, 1997.
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. On January 20, 1998 the General Partner approved a two-
for-one unit split to holders of record on January 29, 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 1997 and 1996, as reported on the New York Stock Exchange Composite
Tape, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
QUARTER HIGH LOW HIGH LOW
- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
First........................................... 24.9385 20.1250 19.8750 17.1250
Second.......................................... 22.6250 21.2500 19.4375 18.6250
Third........................................... 26.7500 22.5625 19.8125 18.8125
Fourth.......................................... 30.0000 24.6875 21.4375 19.1875
</TABLE>
During the months of December 1997 and January 1998, 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 17,500.
Cash distributions paid during 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
RECORD DATE PAYMENT DATE AMOUNT PER UNIT
- ----------- ----------------- ---------------
<S> <C> <C>
February 20, 1996............................. February 29, 1996 $0.375
May 6, 1996................................... May 31, 1996 $0.375
August 6, 1996................................ August 30, 1996 $0.375
November 6, 1996.............................. November 29, 1996 $0.375
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
</TABLE>
12
<PAGE>
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 5, 1998, the Partnership announced a quarterly distribution of
$0.525 per LP Unit payable on February 27, 1998.
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, 1997, 1996, 1995, 1994 and 1993. The tables should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue......................... $184,981 $182,955 $183,462 $186,338 $175,495
Depreciation and amortization
(1)............................ 13,177 11,333 11,202 11,203 11,002
Operating income................ 72,075 68,784 71,504 72,481 66,851
Interest and debt expense....... 21,187 21,854 21,710 24,931 25,871
Income from continuing
operations before extraordinary
loss........................... 48,807 49,337 49,840 48,086 41,654
Net income...................... 6,383 49,337 49,840 45,817 39,366
Income per unit from continuing
operations before extraordinary
loss........................... 1.92 2.03 2.05 1.98 1.72
Net income per unit............. 0.25 2.03 2.05 1.89 1.62
Distributions per unit.......... 1.72 1.50 1.40 1.40 1.30
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.................... $615,062 $567,837 $552,646 $534,765 $543,493
Long-term debt.................. 240,000 202,100 214,000 214,000 224,000
General Partner's capital....... 2,432 2,760 2,622 2,460 2,338
Limited Partners' capital....... 300,346 273,219 259,563 243,516 231,357
</TABLE>
- --------
(1) Depreciation and amortization for 1997 includes $1,806,000 amortization of
a deferred charge related to the ESOP Restructuring.
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
13
<PAGE>
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."
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 is 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
continues to grow at a steady rate, while at Detroit the increases are
attributable primarily to the installation of new facilities and the
attraction of a new shipper. Gasoline volumes also increased over 1996 levels.
The increase in gasoline volumes is 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, has declined slightly due to the loss of longer-haul, higher
tariff volumes particularly to the upstate New York 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 since 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 the
General Partner 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.
1996 Compared With 1995
Revenue for the year ended December 31, 1996 was $183.0 million, $0.5
million or 0.3 percent less than revenue of $183.5 million for 1995. Volume
delivered during 1996 averaged 1,007,100 barrels per day, 2,700 barrels per
day or 0.3 percent less than volume of 1,009,800 barrels per day delivered in
1995. The decline in 1996 revenue was related to decreases in gasoline
deliveries, offset somewhat by increases in distillate, turbine fuel,
liquefied petroleum gas and other petroleum product deliveries. Tariff rate
increases implemented in 1996 and 1995 also had a favorable impact on
revenues. See "Tariff Changes." Declines in gasoline deliveries were related
in part to severe winter storms,
14
<PAGE>
particularly in the Northeast, where ground traffic was curtailed during
January and February. Increased Canadian imports and the loss of business to
other competing pipeline systems also reduced gasoline volumes transported by
the Partnership. Continued market growth in Pennsylvania offset these volume
declines to some extent. Distillate volumes rose in 1996 compared with 1995
primarily as the result of the colder winter in 1996 and heating oil inventory
restocking occurring during the fourth quarter. Turbine fuel volumes were
higher than 1995 on increased deliveries to Newark, J. F. Kennedy and Miami
airports. Some turbine fuel volumes were lost to additional barging at
Pittsburgh and a decline in demand at LaGuardia airport.
Costs and expenses during 1996 were $114.2 million, $2.2 million or 2.0
percent greater than costs and expenses of $112.0 million during 1995. During
the second quarter 1996, the Partnership recorded a one-time expense of $2.5
million related to an employee early retirement and termination program. In
addition, increases in payroll overheads and professional fees related to the
ESOP were offset by declines in payroll, taxes, power, supplies and travel.
Other income (expenses) consist of interest income, interest and debt
expense, and minority interests and other. Total other expenses declined $2.2
million in 1996 as compared to 1995. This favorable variance is primarily
related to a $2.9 million gain on the sale of land no longer needed for the
Partnership's operations.
Tariff Changes
The Operating Partnerships did not increase tariff rates during 1997.
However, effective January 1, 1998 certain of the Operating Partnerships
implemented tariff increases that are expected to generate approximately $2.5
million in additional revenue per year.
In the years 1996 and 1995, certain tariffs were increased that, at the time
of filing, were projected to generate approximately $2.9 million and $4.0
million in additional revenue per year, respectively.
Competition and Other Business Conditions
BP America ("BP") has announced that it plans to shut down its Lima, Ohio
refinery in 1998 and supply its marginal refined petroleum product
requirements via pipeline from sources outside Ohio. BP's decision regarding
replacement supply and distribution has the potential to increase or decrease
Buckeye's Midwest volumes and revenue. Based on information currently
available, it is not possible to predict the timing or financial impact to the
Partnership of the shutdown of BP's Lima refinery. However, the General
Partner does not believe that a shutdown of the BP refinery will have a
material adverse effect on the Partnership's results of operations or
financial condition.
Several major refiners and marketers of petroleum products have announced
strategic alliances or mergers in 1997. These alliances or mergers have the
potential to alter refined product supply and distribution patterns within the
Operating Partnerships' market area. Based on information currently available,
it is not possible to predict the impact, if any, 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.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at December 31, 1997, 1996 and 1995 is
highlighted in the following comparative summary:
Liquidity and Capital Indicators
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current ratio...................................... 1.2 to 1 1.3 to 1 1.7 to 1
Ratio of cash and temporary investments and trade
receivables to current liabilities................ 0.8 to 1 1.1 to 1 1.3 to 1
Working capital (in thousands)..................... $5,045 $13,660 $16,814
Ratio of total debt to total capital............... .44 to 1 .43 to 1 .45 to 1
Book value (per Unit).............................. $11.23 $11.33 $ 10.79
</TABLE>
Cash Provided by Operations
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. At current distribution
levels, cash distributions to Unitholders are expected to increase to $56.2
million in 1998 and capital expenditures are expected to be $20.6 million. The
General Partner expects the Partnership to satisfy these cash requirements from
cash generated by operations.
Cash provided from the issuance of $240 million of Senior Notes and an
additional $4.5 million provided from operations were 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
sale of property included in net income and changes in other non-current
assets and liabilities.
During 1995, cash provided by operations of $61.8 million was derived
principally from $61.0 million of income from operations before depreciation.
Changes in current assets and current liabilities resulted in a net cash use
of $0.9 million. Increases in prepaid and other current assets and declines in
temporary investments and trade receivables account for the majority of the
change. Remaining cash sources, totaling $1.7 million, were primarily related
to increases in other non-current liabilities.
Debt Obligations and Credit Facilities
During December 1997, Buckeye issued $240.0 million of Senior Notes (Series
1997A through 1997D) (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, Buckeye was required
to pay to the holders of the First Mortgage Notes a prepayment premium equal to
the difference between the present value of the cash flows under the
16
<PAGE>
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 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.
At December 31, 1996, the Partnership had $214.0 million in outstanding
current and long-term debt, all of which was represented by First Mortgage
Notes of Buckeye. This amount excludes $5.0 million of First Mortgage Notes
scheduled to mature after December 31, 1996 which had previously been retired
by in-substance defeasance. The First Mortgage Notes were collateralized by
substantially all of Buckeye's currently existing and after-acquired property,
plant and equipment. During 1996, the Partnership did not make any payments of
principal on the First Mortgage Notes since no payments were required due to
prior in-substance defeasances.
At December 31, 1995, the Partnership had $214.0 million in outstanding
current and long-term debt, all of which was represented by First Mortgage
Notes of Buckeye. This amount excludes $25.0 million of First Mortgage Notes
scheduled to mature after December 31, 1995 which had previously been retired
by in-substance defeasance. The First Mortgage Notes were collateralized by
substantially all of Buckeye's currently existing and after-acquired property,
plant and equipment. During 1995, the Partnership did not make any payments of
principal on the First Mortgage Notes as no payments were required due to
prior in-substance defeasances.
Buckeye has a $10 million short-term line of credit secured by accounts
receivable. At December 31, 1997, there were no outstanding borrowings under
this facility.
In addition to the financial covenants contained in the Indenture, the
Amended and Restated Limited Partnership Agreement of the Partnership (the
"Partnership Agreement") provides that without the approval of the holders of
two-thirds of the LP Units, neither the Partnership nor the Operating
Partnerships will incur any indebtedness for borrowed money except the Senior
Notes, any additional debt permitted by the Indenture, intercompany indebtedness
among the Partnership, the Operating Partnerships and their respective
subsidiaries and other debt not in excess of an aggregate amount of $25 million
plus the proceeds from the sale of additional limited partnership interests.
The ratio of total debt to total capital was 44 percent, 43 percent, and 45
percent at December 31, 1997, 1996 and 1995, respectively. For purposes of the
calculation of this ratio, total capital consists of current and long-term
debt, minority interests and partners' capital.
Capital Expenditures
At December 31, 1997, property, plant and equipment was approximately 85
percent of total consolidated assets. This compares to 90 percent and 92
percent for the years ended December 31, 1996 and 1995, 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 $19.8 million, $14.9 million
and $17.4 million for 1997, 1996 and 1995, respectively. Projected capital
expenditures for 1998 are approximately $20.6 million and are expected to be
funded from cash generated by operations. 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 this higher 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.
The Partnership Agreement further provides that the consolidated capital
expenditures of the Partnership and the Operating Partnerships in any calendar
year may not exceed an amount equal to 20 percent of the sum of consolidated
operating income and depreciation and amortization for such calendar year
unless, in the good faith opinion of the General Partner, capital expenditures
in excess of such amount are required to sustain or improve the existing
pipeline operations of the Operating Partnerships. If capital expenditures in
excess of the 20 percent limit are incurred, the General Partner will use its
best efforts to finance the amount of such excess within six months after its
incurrence through additional permitted indebtedness, the sale of additional
partnership interests, or both. This provision may be waived by a majority of
the holders of limited partnership interests as to particular capital
expenditures.
17
<PAGE>
Environmental Matters
The Operating Partnerships are subject to federal and state laws and
regulations relating to the protection of the environment. These regulations,
as well as the Partnership's own standards relating to protection of the
environment, cause the Operating Partnerships to incur current and ongoing
operating and capital expenditures. During 1997, the Operating Partnerships
incurred operating expenses of $2.7 million and capital expenditures of $3.1
million for environmental matters. Capital expenditures of $2.3 million for
environmental related projects are included in the Partnership's plans for
1998. 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 the General Partner, the Manager and Glenmoor Partners, LLP. The
General Partner borrowed $63 million pursuant to a 15-year term loan from a
third-party lender. The General Partner then loaned $63 million to the ESOP,
which used the loan proceeds to purchase $63 million of 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 the General Partner approved a
restructuring of the ESOP (the "ESOP Restructuring"). The ESOP Restructuring
was approved by a majority of the holders of the LP Units at a special meeting
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 the
General Partner 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 the
General Partner and certain of its affiliates.
Total ESOP related costs charged to earnings through August 12, 1997, the date
of the ESOP Restructuring, was $5.0 which included $2.8 million of interest
expense with respect to the ESOP loan, $2.0 million based upon the value of
1,976
18
<PAGE>
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 were $0.1 million
in administrative costs and an additional $0.4 million for a top-up provision
representing the estimated difference between distributions to be paid on the LP
Units and the total debt service requirements under the ESOP loan. 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.
At current distribution levels, the amount of additional cash payable by
the Partnership in respect of the LP Units beneficially owned by the ESOP
through Services Company will amount to approximately $5.4 million per year. In
addition, a top-up reserve representing the estimated difference between
distributions to be paid on the LP Units and the total debt service requirements
under the ESOP loan is expected to be reimbursed by the Partnership commencing
in 2001. The distributions on the LP Units beneficially owned by the ESOP and
the top-up provision are expected to be substantially offset by reductions in
executive compensation costs and incentive compensation and the elimination of
other ESOP related payments.
Total ESOP related costs charged to earnings 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.
Subsequent to August 12, 1997, 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
Reporting Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997. This statement establishes standards for the reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. The impact of
this new standard is not expected to have a material effect on the
Partnership's financial statements.
Disclosures about Segments of an Enterprise and Related Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The impact of this new
standard is not expected to have a material effect on the Partnership's
financial statements.
Employers' Disclosures about Pensions and Other Postretirement Benefits
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," is effective for fiscal years beginning after December
15, 1997. This statement revises employers' disclosures about pension and other
postretirement plans but does not change the measurement or recognition of those
plans. The impact of this new standard is not expected to have a material
effect on the Partnership's financial statements.
INFORMATION SYSTEMS--YEAR 2000 COMPLIANCE
The Partnership has developed preliminary plans to address possible
exposures related to the impact on its computer systems of the year 2000. Key
financial, information and operational systems are being assessed and detailed
plans developed to address systems modifications required by December 31,
1999. The financial impact of making the required systems changes is not
expected to be material to the Partnership's results of operations or
financial condition.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BUCKEYE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Financial Statements and Independent Auditors' Report:
Independent Auditors' Report..................................... 21
Consolidated Statements of Income--For the years ended December
31, 1997, 1996 and 1995......................................... 22
Consolidated Balance Sheets--December 31, 1997 and 1996.......... 23
Consolidated Statements of Cash Flows--For the years ended Decem-
ber 31, 1997, 1996 and 1995..................................... 24
Notes to Consolidated Financial Statements....................... 25
Financial Statement Schedules and Independent Auditors' Report:
Independent Auditors' Report..................................... S-1
Schedule I--Registrant's Condensed Financial Statements.......... S-2
</TABLE>
Schedules other than those listed above are omitted because they are either
not applicable or not required or the information required is included in the
consolidated financial statements or notes thereto.
20
<PAGE>
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,
1997 and 1996, and the related consolidated statements of income and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 21, the accompanying 1997 balance sheet has been restated.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 23, 1998 (May 13, 1998 as to Note 21)
21
<PAGE>
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
NOTES 1997 1996 1995
----- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................... 2 $184,981 $182,955 $183,462
-------- -------- --------
Costs and expenses
Operating expenses...................... 3,16 86,833 87,855 89,156
Depreciation and amortization........... 2,5,6 13,177 11,333 11,202
General and administrative expenses..... 16 12,896 14,983 11,600
-------- -------- --------
Total costs and expenses.............. 112,906 114,171 111,958
-------- -------- --------
Operating income.......................... 72,075 68,784 71,504
-------- -------- --------
Other income (expenses)
Interest income......................... 2,046 1,589 1,037
Interest and debt expense............... (21,187) (21,854) (21,710)
Minority interests and other............ (4,127) 818 (991)
-------- -------- --------
Total other income (expenses)......... (23,268) (19,447) (21,664)
-------- -------- --------
Income before extraordinary loss.......... 48,807 49,337 49,840
Extraordinary loss on early extinguishment
of debt.................................. 14 (42,424) -- --
-------- -------- --------
Net income................................ $ 6,383 $ 49,337 $ 49,840
======== ======== ========
Net income allocated to General Partner... 17 $ 85 $ 493 $ 498
Net income allocated to Limited Partners.. 17 $ 6,298 $ 48,844 $ 49,342
EARNINGS PER PARTNERSHIP UNIT
Income allocated to General and Limited
Partners per Partnership Unit:
Income before extraordinary loss........ $ 1.92 $ 2.03 $ 2.05
Extraordinary loss on early
extinguishment of debt................. (1.67) -- --
-------- -------- --------
Net income................................ $ 0.25 $ 2.03 $ 2.05
======== ======== ========
EARNINGS PER PARTNERSHIP UNIT--ASSUMING
DILUTION
Income allocated to General and Limited
Partners per Partnership Unit:
Income before extraordinary loss........ $ 1.91 $ 2.02 $ 2.05
Extraordinary loss on early
extinguishment of debt................. (1.66) -- --
-------- -------- --------
Net income................................ $ 0.25 $ 2.02 $ 2.05
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
BUCKEYE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
NOTES 1997 1996
------------- -------- --------
<S> <C> <C> <C>
(As Restated-
see Note 21)
Assets
Current assets
Cash and cash equivalents................... 2 $ 7,349 $ 17,416
Temporary investments....................... 2 2,854 14,528
Trade receivables........................... 2 10,195 12,536
Inventories................................. 2 2,087 1,732
Prepaid and other current assets............ 4 7,297 7,715
-------- --------
Total current assets...................... 29,782 53,927
Property, plant and equipment, net............ 2, 5 520,941 511,646
Other non-current assets...................... 6, 13 64,339 2,264
-------- --------
Total assets.............................. $615,062 $567,837
======== ========
Liabilities and partners' capital
Current liabilities
Current portion of long-term debt........... $ -- $ 11,900
Accounts payable............................ 3,664 4,279
Accrued and other current liabilities....... 3, 7, 16 21,073 24,088
-------- --------
Total current liabilities................. 24,737 40,267
Long-term debt................................ 8, 14 240,000 202,100
Minority interests............................ 2,535 2,913
Other non-current liabilities................. 9, 10, 11, 16 45,012 46,578
Commitments and contingent liabilities........ 3 -- --
-------- --------
Total liabilities......................... 312,284 291,858
-------- --------
Partners' capital............................... 17
General Partner............................... 2,432 2,760
Limited Partners.............................. 300,346 273,219
-------- --------
Total partners' capital................... 302,778 275,979
-------- --------
Total liabilities and partners' capital... $615,062 $567,837
======== ========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
NOTES 1997 1996 1995
----- --------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Income before extraordinary loss......... $ 48,807 $ 49,337 $ 49,840
--------- -------- --------
Adjustments to reconcile income to net
cash provided by operating activities:
Extraordinary loss on early extinguish-
ment of debt........................... 14 (42,424) -- --
Gain on sale of property, plant and
equipment.............................. (11) (2,651) --
Depreciation and amortization........... 5,6 13,177 11,333 11,202
Minority interests...................... 96 506 510
Distributions to minority interests..... (474) (374) (345)
Change in assets and liabilities:
Temporary investments.................. 11,674 (13,633) 505
Trade receivables...................... 2,341 3,759 762
Inventories............................ (355) (171) (241)
Prepaid and other current assets....... 418 (443) (1,798)
Accounts payable....................... (615) 1,873 81
Accrued and other current liabilities.. (3,015) 1,072 (231)
Other non-current assets(1)............ 319 (1,798) (106)
Other non-current liabilities.......... (1,566) (1,680) 1,657
--------- -------- --------
Total adjustments from operating ac-
tivities............................. (20,435) (2,207) 11,996
--------- -------- --------
Net cash provided by operating activi-
ties................................... 28,372 47,130 61,836
--------- -------- --------
Cash flows from investing activities:
Capital expenditures..................... (19,841) (14,881) (17,407)
Net proceeds from (expenditures for) dis-
posal of property, plant and equipment.. (814) 4,497 (656)
--------- -------- --------
Net cash used in investing activi-
ties................................. (20,655) (10,384) (18,063)
--------- -------- --------
Cash flows from financing activities:
Capital contribution..................... 5 10 4
Proceeds from exercise of unit options... 516 974 374
Proceeds from issuance of long-term
debt.................................... 8,14 240,000 -- --
Payment of long-term debt................ 8,14 (214,000) -- --
Distributions to Unitholders............. 17,18 (44,305) (36,527) (34,009)
--------- -------- --------
Net cash used in financing activi-
ties................................. (17,784) (35,543) (33,631)
--------- -------- --------
Net (decrease) increase in cash and cash
equivalents.............................. 2 (10,067) 1,203 10,142
Cash and cash equivalents at beginning of
year..................................... 2 17,416 16,213 6,071
--------- -------- --------
Cash and cash equivalents at end of year.. $ 7,349 $ 17,416 $ 16,213
========= ======== ========
Supplemental cash flow information:
Cash paid during the year for interest
(net of amount capitalized)............. $ 21,432 $ 21,900 $ 21,656
Non-cash change in financing activities:
Issuance of LP Units in exchange for BAC
stock................................... 13 $ 64,200 -- --
Non-cash change in operating activities:
(1) Deferred charge from issuance of LP
Units .................................. 6,13 $ 64,200 -- --
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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." Laurel owns a 98.01 percent limited partnership
interest in Buckeye Pipe Line Company of Michigan, L.P. ("BPL Michigan") which
discontinued operations in 1993.
Buckeye is one of the largest independent pipeline common carriers of
refined petroleum products in the United States, with 3,103 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 December 1986, the Partnership sold 24,000,000 limited partnership
units ("LP Units") in a public offering representing an aggregate 99 percent
limited partnership interest in the Partnership. Concurrently, the Partnership
sold 242,424 units representing a 1 percent general partnership interest in the
Partnership ("GP Units") to Buckeye Management Company (the "General Partner").
On August 12, 1997, the Partnership issued an additional 2,573,146 units in
connection with the restructuring of the BMC Acquisition Company Employee Stock
Ownership Plan (the "ESOP") (see Note 13). The Partnership has also issued
146,460 limited partnership units and 1,490 general partnership units in
connection with its Unit Option and Distribution Equivalent Plan. At December
31, 1997, there were 26,721,606 limited partnership units and 243,914 general
partnership units outstanding (see Note 12 and Note 17). All unit information
contained in these footnotes, as well as the per unit information contained in
the financial statements, has been restated to adjust for the two-for-one unit
split approved by the General Partner on January 20, 1998.
A subsidiary of the General Partner, Buckeye Pipe Line Company (the
"Manager"), owns a 1 percent general partnership interest in, and serves as
sole general partner and manager of, each Operating Partnership. The Manager
also owns a 1 percent general partnership interest and a 0.99 percent limited
partnership interest in BPL Michigan.
During March 1996, BMC Acquisition Corp. ("BAC"), a corporation organized in
1996 under the laws of the state of Delaware, acquired all of the common stock
of the General Partner from a subsidiary of American Financial Group, Inc.
(the "Acquisition"). BAC, which subsequently changed its name to Glenmoor,
Ltd. ("Glenmoor"), is owned by certain directors, members of senior management
of the General Partner or trusts for the benefit of their families and certain
director-level employees of Buckeye Pipe Line Services Company ("Services
Company").
On August 12, 1997, the Manager'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 Manager and became the
sponsor of all of the employee benefit plans previously maintained by the
Manager. Services Company also entered into a Services Agreement
25
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with the General Partner and the Manager to provide services to the
Partnership and the Operating Partnerships for a 13.5 year term. Services
Company is reimbursed by the General Partner or the Manager 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 16).
The Partnership maintains its accounts in accordance with the Uniform System
of Accounts for Pipeline Companies, as prescribed by the Federal Energy
Regulatory Commission ("FERC"). Reports to FERC differ from the accompanying
consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles, generally in that such reports
calculate depreciation over estimated useful lives of the assets as prescribed
by FERC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The 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
26
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consolidated Partnership's continuing customer base numbers approximately 103,
no customer during 1997 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.
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, 1997 and 1996, the Partnership's reported amount
of net assets for financial reporting purposes exceeded its tax basis by
approximately $253 million and $247 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 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.
27
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pensions
Services Company maintains a defined contribution plan, defined benefit
plans (see Note 10) and an employee stock ownership plan (see Note 13) 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 11). Certain other retired
employees are covered by a health and welfare plan under a union agreement.
Reporting Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997. This statement establishes standards for the reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. The impact of
this new standard is not expected to have a material effect on the
Partnership's financial statements.
Disclosures about Segments of an Enterprise and Related Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The impact of this new
standard is not expected to have a material effect on the Partnership's
financial statements.
3. CONTINGENCIES
The Partnership and the Operating Partnerships in the ordinary course of
business are involved in various claims and legal proceedings, some of which
are covered in whole or in part by insurance. The General Partner is unable to
predict the timing or outcome of these claims and proceedings. Although it is
possible that one or more of these claims or proceedings, if adversely
determined, could, depending on the relative amounts involved, have a material
effect on the Partnership's results of operations for a future period, the
General Partner does not believe that their outcome will have a material
effect on the Partnership's consolidated financial condition or annual results
of operations.
Environmental
In accordance with its accounting policy on environmental expenditures, the
Partnership recorded operating expenses of $2.7 million, $3.1 million and $2.6
million for 1997, 1996 and 1995, respectively, which were related to the
environment. 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 strict
environmental laws and government enforcement policies.
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
28
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Guaranteed Investment Contract
The Buckeye Pipe Line Company Retirement and Savings Plan (the "Plan") held
a guaranteed investment contract ("GIC") issued by Executive Life Insurance
Company ("Executive Life"), which entered conservatorship proceedings in the
state of California in April 1991. The GIC was purchased in July 1989, with an
initial principal investment of $7.4 million earning interest at an effective
rate per annum of 8.98 percent through June 30, 1992. Pursuant to the
Executive Life Plan of Rehabilitation, the Plan has received an interest only
contract from Aurora National Life Assurance Company in substitution for its
Executive Life GIC. The initial value of this contract was $6.8 million on
September 3, 1993. The contract provides for semi-annual interest payments at
a rate of 5.61 percent per annum through September 1998, the maturity date of
the contract. In addition, the Plan has and will receive additional cash
payments through the maturity date of the contract pursuant to the Plan of
Rehabilitation. The Plan has also submitted a claim to the Pennsylvania Life
and Health Insurance Guaranty Association for partial reimbursement of its
loss due to the insolvency. The timing and amount of any additional
reimbursements cannot be estimated accurately at this time. In May 1991, the
General Partner, in order to safeguard the basic retirement and savings
benefits of its employees, announced its intention to enter an arrangement
with the Plan that would guarantee that the Plan would receive at least its
initial principal investment of $7.4 million plus interest at an effective
rate per annum of 5 percent from July 1, 1989. The General Partner's present
intention is to effectuate its commitment no later than September 1998. The
costs and expenses of the employee benefit plans are reimbursable by the
Partnership under the applicable limited partnership and management
agreements. The General Partner believes that an adequate provision has been
made for costs which may be incurred by the Partnership in connection with the
guarantee.
4. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist primarily of receivables from third
parties for pipeline relocations and other work either completed or in-progress.
Prepaid and other current assets also include prepaid insurance, prepaid taxes
and other miscellaneous items.
29
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land...................................................... $ 9,504 $ 9,522
Buildings and leasehold improvements...................... 27,510 26,690
Machinery, equipment and office furnishings............... 524,735 521,945
Construction in progress.................................. 17,484 5,355
-------- --------
579,233 563,512
Less accumulated depreciation........................... 58,292 51,866
-------- --------
Total................................................... $520,941 $511,646
======== ========
</TABLE>
Depreciation expense was $11,371,000, $11,333,000 and $11,202,000 for the
years 1997, 1996 and 1995, respectively.
6. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred charge (see Note 13)................................ $62,394 $ --
Other........................................................ 1,945 2,264
------- ------
Total...................................................... $64,339 $2,264
======= ======
</TABLE>
The $64.2 million market value of the LP Units issued in connection with
the restructuring of the ESOP in August 1997 (the "ESOP Restructuring") was
recorded as a deferred charge and is being amortized on the straight line basis
over 13.5 years (See Note 13). Amortization of the deferred charge related to
the ESOP Restructuring was $1,806,000 for the year ended December 31, 1997.
There was no amortization of the deferred charge related to the ESOP
Restructuring in either 1996 or 1995.
7. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Taxes--other than income.................................... $ 9,157 $ 9,041
Accrued charges due Manager................................. 3,231 5,754
Environmental liabilities................................... 3,141 2,527
Interest.................................................... 732 977
Accrued operating power..................................... 819 869
Accrued outside services.................................... 365 651
Other....................................................... 3,628 4,269
------- -------
Total..................................................... $21,073 $24,088
======= =======
</TABLE>
30
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
First Mortgage Notes:
11.18% Series J due December 15, 2006................... $ -- $152,100
7.11% Series K due December 15, 2007.................... -- 11,000
7.15% Series L due December 15, 2008.................... -- 11,000
7.19% Series M due December 15, 2009.................... -- 13,000
7.93% Series N due December 15, 2010.................... -- 15,000
Senior Notes:
6.98% Series 1997A due December 16, 2024 (subject to
$25.0 million annual sinking fund requirement
commencing December 16, 2020).......................... 125,000 --
6.89% Series 1997B due December 16, 2024 (subject to
$20.0 million annual sinking fund requirement
commencing December 16, 2020).......................... 100,000 --
6.95% Series 1997C due December 16, 2024 (subject to
$2.0 million annual sinking fund requirement commencing
December 16, 2020)..................................... 10,000 --
6.96% Series 1997D due December 16, 2024 (subject to
$1.0 million annual sinking fund requirement commencing
December 16, 2020)..................................... 5,000 --
-------- --------
Total................................................. $240,000 $202,100
======== ========
</TABLE>
At December 31, 1997, there are no scheduled maturities of debt within the
next five year period. A total of $240,000,000 of debt is scheduled to mature
in the period 2020 through 2024.
The fair value of the Partnership's debt is estimated to be $240 million and
$238 million as of December 31, 1997 and 1996, respectively. The values at
December 31, 1997 and 1996 were calculated using interest rates currently
available to the Partnership for issuance of debt with similar terms and
remaining maturities.
The indenture pursuant to which the Senior Notes were issued (the "Senior
Note Indenture") contains covenants which affect Buckeye, Laurel and BPL
Michigan (the "Indenture Parties"). Generally, the Senior Note 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. In
addition, the Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement") contains certain restrictions which limit the
incurrence of debt to (a) any future debt of Buckeye permitted by the Senior
Note Indenture and (b) other debt not in excess of an aggregate principal
amount of $25 million plus the aggregate proceeds from the sale of additional
Partnership Units.
Buckeye has a line of credit from two commercial banks (the "Working Capital
Facility") which permits short-term borrowings of up to $10 million
outstanding at any time. Borrowings under the
31
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Working Capital Facility bear interest at each bank's prime rate and are
secured by the accounts receivable of Buckeye. The Working Capital Facility
contains covenants that require no indebtedness be outstanding under the
Working Capital Facility for a period of 45 consecutive days during any year.
At December 31, 1997, there was no amount outstanding under this facility.
9. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued employee benefit liabilities........................ $36,319 $36,231
Accrued charges due Manager................................. -- 1,807
Accrued non-current taxes................................... 3,183 3,578
Other....................................................... 5,510 4,962
------- -------
Total..................................................... $45,012 $46,578
======= =======
</TABLE>
10. PENSION PLANS
Services Company provides retirement benefits, primarily through
noncontributory pension plans, for substantially all of its regular full-time
employees, except those covered by certain labor contracts, under which
Services Company contributes 5 percent of each covered employee's salary, and
a retirement income guarantee plan (a defined benefit plan) which generally
guarantees employees hired before January 1, 1986, a retirement benefit at
least equal to the benefit they would have received under a previously
terminated defined benefit plan. Services Company's policy is to fund amounts
as are necessary to at least meet the minimum funding requirements of ERISA.
Net pension expense for 1997, 1996 and 1995 for the defined benefit plans
included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................................ $ 291 $ 485 $ 452
Interest cost on projected benefit obligation....... 819 889 933
Actual return on assets............................. (1,086) (664) (1,653)
Net amortization and deferral....................... 393 (193) 838
------- ----- -------
Net pension expense............................... $ 417 $ 517 $ 570
======= ===== =======
</TABLE>
The pension expense for the defined contribution plan included in the
consolidated statements of income approximated $1,558,000, $1,379,000 and
$1,493,000 for 1997, 1996 and 1995, respectively.
32
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status of the Services Company's
defined benefit plans and amounts recognized in the Partnership's consolidated
balance sheets at December 31, 1997 and 1996 related to those plans:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligations............................ $ (5,056) $ (4,730)
======== ========
Accumulated benefit obligations....................... $ (6,041) $ (6,531)
======== ========
Projected benefit obligation.......................... $(15,176) $(12,540)
Plan assets at fair value............................... 6,993 6,305
-------- --------
Projected benefit obligation in excess of plan assets... (8,183) (6,235)
Unrecognized net loss................................... 2,694 814
Unrecognized net asset.................................. (942) (1,102)
-------- --------
Pension liability recognized in the balance sheet....... $ (6,431) $ (6,523)
======== ========
</TABLE>
As of December 31, 1997, approximately 32.0 percent of plan assets were
invested in fixed income securities and 68.0 percent in equity securities.
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.00 percent and 7.50 percent at
December 31, 1997 and 1996, respectively. The rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 5.00 percent and 5.25 percent at December 31,
1997 and 1996, respectively. The expected long-term rate of return on assets
was 8.50 percent as of January 1, 1997 and 1996.
Services Company also participates in a multi-employer retirement income
plan which provides benefits to employees covered by certain labor contracts.
Pension expense for the plan was $129,000, $144,000 and $145,000 for 1997,
1996 and 1995, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Services Company provides postretirement health care and life insurance
benefits to certain of its retirees. To be eligible for these benefits an
employee had to be hired prior to January 1, 1991 and has to meet certain
service requirements. Services Company does not pre-fund this postretirement
benefit obligation.
Net postretirement benefit costs for 1997, 1996 and 1995 included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost....................................... $ 507 $ 500 $ 520
Interest cost on accumulated postretirement benefit
obligation........................................ 1,720 1,651 1,895
Net amortization and deferral...................... (575) (569) (577)
------ ------ ------
Net postretirement expense......................... $1,652 $1,582 $1,838
====== ====== ======
</TABLE>
33
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the amounts related to postretirement benefit
obligations recognized in the Partnership's consolidated balance sheets as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefits
Retirees and dependents............................ $(13,090) $ (12,897)
Employees eligible to retire..................... (3,037) (2,833)
Employees ineligible to retire................... (8,816) (7,832)
-------- ---------
Accumulated postretirement benefit obligation.... (24,943) (23,562)
Unamortized gain due to plan amendment............... (3,478) (4,057)
Unrecognized net loss (gain)......................... (1,467) (2,090)
-------- ---------
Postretirement liability recognized in the balance
sheet............................................... $(29,888) $ (29,709)
======== =========
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation ("APBO") was 7.0 percent and 7.5 percent at
December 31, 1997 and 1996, respectively. The assumed rate for plan cost
increases in 1997 was 9.5 percent and 8.5 percent for non-Medicare eligible
and Medicare eligible retirees, respectively. The assumed annual rates of cost
increase decline each year through 2005 to a rate of 4.0 percent, and remain
at 4.0 percent thereafter for both non-Medicare eligible and Medicare eligible
retirees. The effect of a 1 percent increase in the health care cost trend
rate for each future year would have increased the aggregate of service and
interest cost components by $375,000 in 1997 and the APBO would have increased
by $3,227,000 as of December 31, 1997.
Services Company also contributes to a multi-employer postretirement benefit
plan which provides health care and life insurance benefits to employees
covered by certain labor contracts. The cost of providing these benefits was
approximately $110,000, $133,000 and $137,000 for 1997, 1996 and 1995,
respectively.
12. UNIT OPTION AND DISTRIBUTION EQUIVALENT PLAN
Effective January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which requires expanded disclosures of stock-based compensation
arrangements with employees. SFAS 123 encourages, but does not require,
compensation cost to be measured based on the fair value of the equity
instrument awarded. It allows the Partnership to continue to measure
compensation cost for these plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Partnership has
elected to continue to recognize compensation cost based on the intrinsic
value of the equity instrument awarded as promulgated in APB 25.
The Partnership has a Unit Option and Distribution Equivalent Plan (the
"Option Plan"), which was approved by the Board of Directors of the General
Partner on April 25, 1991 and by holders of the LP Units on October 22, 1991.
The Option Plan authorizes the granting of options (the "Options") to acquire
LP Units to selected key employees (the "Optionees") of Services Company not
to exceed 720,000 LP Units in the aggregate. The price at which each LP Unit
may be purchased pursuant to an Option granted under the Option Plan is
generally equal to the market value on the date of the grant. Options may be
granted with a feature that allows Optionees to apply accrued credit balances
(the "Distribution Equivalents") as an adjustment to the aggregate purchase
price of such Options. The
34
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Distribution Equivalents shall be an amount equal to (i) the Partnership's per
LP Unit regular quarterly distribution, multiplied by (ii) the number of LP
Units subject to such Options that have not vested. Vesting in the Options is
determined by the number of anniversaries the Optionee has remained in the
employ of Services Company following the date of the grant of the Option.
Options become vested in varying amounts beginning generally three years after
the date of grant and remain exercisable for a period of five years. The
Partnership recorded compensation expense related to the Option Plan of
$179,000, $283,000 and $231,000 in 1997, 1996 and 1995, respectively. Had
compensation cost for the Option Plan been determined based on the fair value
at the time of the grant dates for awards consistent with the method of SFAS
123, the Partnership's net income and earnings per share would have been as
indicated by the pro-forma amounts below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------
(IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
Net income
As reported..................................... $ 6,383 $ 49,337 $ 49,840
Pro forma....................................... $ 6,387 $ 49,318 $ 49,795
Basic earnings per unit
As reported and Pro forma....................... $ 0.25 $ 2.03 $ 2.05
Diluted earnings per unit
As reported and Pro forma....................... $ 0.25 $ 2.02 $ 2.05
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. A portion of each option grant vests after
three, four and five years following the date of the grant. The assumptions
used for options granted in 1997, 1996 and 1995 are indicated below. The risk
free interest rate and expected life assumptions relate to the three, four and
five year vesting periods of the grant.
<TABLE>
<CAPTION>
YEAR OF DIVIDEND RISK-FREE EXPECTED
OPTION GRANT YIELD VOLATILITY INTEREST RATE LIFE (YEARS)
------------ -------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
1997 0% 19.6% 6.4%, 6.4%, 6.5% 3.25, 4.25, 5.25
1996 0% 13.0% 6.3%, 6.4%, 6.5% 3.25, 4.25, 5.25
1995 0% 13.0% 7.5%, 7.6%, 7.6% 3.25, 4.25, 5.25
</TABLE>
No dividend yield was assumed as the exercise price of the option is
adjusted downward during the term of the option to take account of the
dividends paid on the underlying stock that the option holder does not
receive.
A summary of the changes in the LP Unit options outstanding under the Option
Plan as of December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
UNITS AVERAGE UNITS AVERAGE UNITS AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 197,340 $15.36 186,240 $14.18 153,080 $13.82
Granted................. 51,900 21.07 72,000 19.00 60,500 17.22
Exercised............... (28,100) 13.74 (60,900) 12.06 (27,340) 9.33
-------- -------- --------
Outstanding at end of
year................... 221,140 15.51 197,340 15.36 186,240 14.18
======== ======== ========
Options exercisable at
year-end............... 20,140 5,040 7,000
Weighted average fair
value of options
granted during the
year................... $ 5.62 $ 4.41 $ 4.44
</TABLE>
35
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information relating to LP Unit options
outstanding under the Option Plan at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
OPTIONS WEIGHTED AVERAGE WEIGHTED OPTIONS WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.00 to $10.00 13,940 5.1 Years $ 7.96 6,340 $ 6.64
$10.01 to $14.00 75,500 6.8 Years 12.81 3,000 10.78
$15.00 to $21.00 131,700 8.6 Years 17.85 10,800 15.42
------- ------
Total 221,140 7.8 Years 15.51 20,140 11.96
======= ======
</TABLE>
At December 31, 1997, there were 350,400 LP Units available for future
grants under the Option Plan.
13. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Acquisition, the ESOP was formed for the benefit of
employees of the General Partner, the Manager and Glenmoor Partners, LLP. The
General Partner borrowed $63 million pursuant to a 15-year term loan from a
third-party lender. The General Partner then loaned $63 million to the ESOP,
which used the loan proceeds to purchase $63 million of 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 the General Partner approved
the ESOP Restructuring, subject to approval of a majority of the holders of LP
Units. The ESOP Restructuring was approved by a majority of the holders of the
LP Units at a special meeting 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 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 the General Partner for certain
executive compensation costs was permanently released, the incentive
compensation paid by the Partnership to the General Partner under the existing
incentive compensation agreement 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 was recorded as a deferred charge
relating to the ESOP Restructuring and is being amortized over 13.5 years. As a
result of the ESOP Restructuring, the $63 million loan from the third party
lender became a direct obligation of the ESOP and is secured by the stock of
Services Company and guaranteed by the General Partner and certain of its
affiliates.
Total ESOP related costs charged to earnings during 1997 were $5,241,000
which included $2,805,000 of interest expense with respect to the ESOP loan,
$1,976,000 based upon the value of 1,976 shares of BAC Preferred Stock
released and allocated to employees accounts through August 12, 1997 and a
$460,000 provision ("top-up provision") representing the estimated difference
between distributions received on the LP Units and the total debt service
requirements under the ESOP loan. The 1,976 shares of BAC Preferred Stock that
were released and allocated to employees' accounts were subsequently exchanged
for 40,354 shares of Services Company stock during 1997.
Total ESOP related costs charged to earnings during 1996 were $5,596,000
which included $3,522,000 of interest expense with respect to the ESOP loan
and $2,074,000 based upon the value of
36
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2,074 shares of BAC Preferred Stock released and allocated to employees'
accounts. The 2,074 shares of BAC Preferred Stock that were released and
allocated to employees' accounts in 1996 were converted to 42,355 shares of
Services Company stock in 1997.
Subsequent to August 12, 1997, 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 and annual taxable income of the LP Units and for routine
administrative costs.
Services Company stock is released to employee accounts in the proportion
that current payments of principal and interest on the ESOP loan bear to the
total of all principal and interest payments due under the ESOP loan.
Individual employees are allocated shares based upon the ratio of their
eligible compensation to total eligible compensation. Eligible compensation
generally includes base salary, overtime payments and certain bonuses.
Allocated Services Company stock receives stock dividends in lieu of cash,
while cash dividends are used to pay principal and interest on the ESOP loan.
14. EARLY EXTINGUISHMENT OF DEBT
In December 1997, Buckeye entered into an agreement to issue $240.0 million
of Senior Notes (Series 1997A through 1997D) bearing interest ranging from
6.89 percent to 6.98 percent (see Note 8). The proceeds from the issuance of
the Senior Notes, plus additional amounts approximating $4.5 million, were
used to extinguish all of the First Mortgage Notes outstanding, totaling
$202.1 million. This debt extinguishment resulted in an extraordinary loss of
$42.4 million in 1997 consisting of $41.4 million of prepayment premium and
$1.0 million in fees and expenses.
15. LEASES AND COMMITMENTS
The Operating Partnerships lease certain land and rights-of-way. Minimum
future lease payments for these leases as of December 31, 1997 are
approximately $2.5 million for each of the next five years. Substantially all
of these lease payments can be canceled at any time should they not be
required for operations.
The Manager leases space in an office building and certain copying equipment
and Buckeye leases certain computing equipment and automobiles. The rent on
such leases is charged to the Operating Partnerships. Future minimum lease
payments under these noncancelable operating leases at December 31, 1997 were
as follows: $1,089,000 for 1998, $596,000 for 1999, $408,000 for 2000,
$371,000 for 2001, $359,000 for 2002 and $1,288,000 thereafter.
Buckeye is party to an energy services agreement in connection with the use
of main line pumping equipment and the natural gas requirements to fuel this
equipment at its Linden, New Jersey facility. Under the energy services
agreement, which is designed to reduce power costs at the Linden facility,
Buckeye is required to pay a minimum of $1,743,000 annually over the next
fourteen years. This minimum payment is based on an annual minimum usage
requirement of the natural gas engines at the rate of $0.049 per kilowatt hour
equivalent. In addition to the annual usage requirement, Buckeye is subject to
minimum usage requirements during peak and off-peak periods.
Rent expense for all operating leases was $6,606,000, $5,276,000 and
$5,161,000 for 1997, 1996 and 1995, respectively.
37
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. RELATED PARTY TRANSACTIONS
The Partnership and the Operating Partnerships are managed by the General
Partner and the Manager. Under certain partnership agreements and management
agreements, the General Partner, the Manager, and certain related parties are
entitled to reimbursement of all direct and indirect costs related to the
business activities of the Partnership and the Operating Partnerships.
In connection with the ESOP Restructuring in 1997, the Manager's employees
were transferred to Services Company. Services Company employs all of the
employees previously employed by the Manager and has become the sponsor of all
of the employee benefit plans previously maintained by the Manager. Services
Company also entered into a Services Agreement with the General Partner and
the Manager to provide services to the Partnership and the Operating
Partnerships over a 13.5 year term. Services Company is reimbursed by the
General Partner or the Manager for its direct and indirect expenses, other
than as described below with respect to certain executive compensation, the
General Partner and the Manager are reimbursed by the Partnership and the
Operating Partnerships. Costs reimbursed to the General Partner, the Manager
or Services Company by the Partnership and the Operating Partnerships totaled
$57.2 million, $61.1 million and $55.4 million in 1997, 1996 and 1995,
respectively. The reimbursable costs include insurance, general and
administrative costs, compensation and benefits payable to officers and
employees of the General Partner, the Manager and Services Company, tax
information and reporting costs, legal and audit fees and an allocable portion
of overhead expenses. Compensation and benefit costs of the executive officers
of the General Partner were not charged to the Partnership after August 12,
1997 pursuant to the Exchange Agreement entered into among the General
Partner, the Partnership and the Operating Partnerships. Services Company,
which is beneficially owned by the ESOP, owns 2,573,146 LP Units
(approximately 9.6 percent of the LP Units outstanding). Distributions
received on such LP Units are used to fund obligations of the ESOP. From
August 12, 1997 through December 31, 1997 distributions paid to Services
Company totaled $2,483,000.
In 1986, Buckeye's predecessor ("Pipe Line") (then owned by a subsidiary of
American Financial) obtained an Administrative Consent Order ("ACO") from the
New Jersey Department of Environmental Protection and Energy under the New
Jersey Environmental Cleanup Responsibility Act of 1983 ("ECRA") for all six
of its facilities in New Jersey. The ACO required Pipe Line to conduct in a
timely manner a sampling plan for environmental contamination at the New
Jersey facilities and to implement any required clean-up plan. Sampling
continues in an effort to identify areas of contamination at the New Jersey
facilities, while clean-up operations have begun at certain of the sites. The
obligations of Pipe Line were not assumed by the Partnership or by BAC in
connection with the Acquisition and the costs of compliance have been and will
continue to be paid by American Financial. Through December 1997, Buckeye's
costs of approximately $2,546,000 have been funded by American Financial.
On July 18, 1995, the General Partner amended the Partnership Agreement to
reflect its agreement to continue to act as general partner of the Partnership
until December 23, 2006, a ten-year extension of its current term. In
connection therewith, the General Partner, the Partnership and American
Financial amended the Distribution Support Incentive Compensation and APU
Redemption Agreement dated December 23, 1986, which provides for incentive
compensation payable to the General Partner in the event quarterly or special
distributions to Unitholders exceed specified targets. Both amendments were
approved on behalf of the Partnership by a special committee of disinterested
directors of the General Partner.
In connection with the Acquisition in March 1996, the General Partner
amended the Partnership Agreement to (a) extend the period under which the
General Partner would agree to act as general
38
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
partner of the Partnership until the later of (i) December 23, 2011 or (ii)
the date the ESOP loan is paid in full, (b) clarify that fair market value of
the GP Units includes the value of the right to receive incentive compensation
for purposes of determining the amount required to be paid to the General
Partner by any successor general partner of the Partnership, and (c) reduce
the threshold for payment of Restricted Payments by the General Partner or the
Manager from $23,000,000 to $5,000,000. The Partnership received an opinion of
counsel that the execution of the amendment to the Partnership Agreement would
not (a) result in the loss of limited liability of any Limited Partner or (b)
result in the Partnership or any Operating Partnership being treated as an
association taxable as a corporation for federal income tax purposes. The
amendment to the Partnership Agreement and related opinion of counsel were
approved on behalf of the Partnership by a special committee of disinterested
directors of the Partnership.
Also in March 1996, the General Partner amended and restated the Incentive
Compensation Agreement to delete American Financial as a party to the
agreement and clarify that the amended Incentive Compensation Agreement
terminates if the General Partner is removed as general partner of the
Partnership. The amended Incentive Compensation Agreement was approved on
behalf of the Partnership by a special committee of disinterested directors of
the Partnership.
In connection with the ESOP Restructuring in August 1997, the Unitholders
approved an amendment to the Partnership Agreement to (i) relieve the General
Partner of any obligation to make an additional capital contribution to the
Partnership upon the issuance of additional LP Units if the General Partner
receives a legal opinion that such additional capital contribution is not
required for the Partnership or any of its Operating Partnerships to avoid
being treated as an association taxable as a corporation for federal income
tax purposes and (ii) obligated any successor general partner, upon removal
and replacement of the General Partner by the holders of the LP Units, to the
obligations of the General Partner and its affiliates under the Exchange
Agreement and to consider this obligation in determining the value of the
general partnership interest which must be acquired by a successor general
partner.
Also in August 1997, the Partnership and the General Partner amended the
Amended and Restated Incentive Compensation Agreement to exclude the LP Units
held by Services Company from the incentive compensation calculation and to
reduce the amount of incentive compensation payable to the General Partner by
at least $121,000 per year at annual distribution levels below $2.10 and to
increase incentive compensation at annual distribution levels above $2.20.
Incentive compensation payments were $3.0 million, $1.3 million and $0.5
million in 1997, 1996 and 1995, respectively.
The management agreements between the Manager and the Operating Partnerships
were amended in August 1997 to include the provisions of the Exchange
Agreement dated August 12, 1997 among the Partnership, the Manager and certain
of their affiliates. The amended and restated agreements of limited
partnership of each of the Operating Partnerships were also amended as of
August 12, 1997 to exclude from the definition of reimbursable costs, any cost
or expense for which the General Partner and its affiliates are not entitled
to be reimbursed pursuant to the terms of the Exchange Agreement.
39
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. PARTNERS' CAPITAL
Changes in partners' capital for the years ended December 31, 1995, 1996,
and 1997 were as follows:
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------------------- -----------
(IN THOUSANDS, EXCEPT FOR UNITS)
<S> <C> <C> <C>
Partners' capital at January 1, 1995... $ 2,460 $ 243,516 $ 245,976
Net income............................. 498 49,342 49,840
Distributions.......................... (340) (33,669) (34,009)
Proceeds from exercise of unit options
and capital contributions............. 4 374 378
--------- ----------- -----------
Partners' capital at December 31,
1995.................................. 2,622 259,563 262,185
Net income............................. 493 48,844 49,337
Distributions.......................... (365) (36,162) (36,527)
Proceeds from exercise of unit options
and capital contributions............. 10 974 984
--------- ----------- -----------
Partners' capital at December 31,
1996.................................. 2,760 273,219 275,979
Net income............................. 85 6,298 6,383
Distributions.......................... (418) (43,887) (44,305)
Value of Units issued in connection
with ESOP Restructuring....... ....... -- 64,200 64,200
Proceeds from exercise of unit options
and capital contributions............. 5 516 521
--------- ----------- -----------
Partners' capital at December 31,
1997.................................. $ 2,432 $ 300,346 $ 302,778
========= =========== ===========
Units outstanding at January 1, 1995... 242,748 24,032,120 24,274,868
Units issued pursuant to the unit
option and distribution equivalent
plan and capital contributions........ 276 27,340 27,616
--------- ----------- -----------
Units outstanding at December 31,
1995.................................. 243,024 24,059,460 24,302,484
Units issued pursuant to the unit
option and distribution equivalent
plan and capital contributions........ 616 60,900 61,516
--------- ----------- -----------
Units outstanding at December 31,
1996.................................. 243,640 24,120,360 24,364,000
Units issued in connection with ESOP
Restructuring......................... -- 2,573,146 2,573,146
Units issued pursuant to the unit
option and distribution equivalent
plan and capital contributions........ 274 28,100 28,374
--------- ----------- -----------
Units outstanding at December 31,
1997.................................. 243,914 26,721,606 26,965,520
========= =========== ===========
</TABLE>
Historical Partnership Unit information has been restated to reflect two-
for-one unit split approved by the General Partner on January 20, 1998.
The net income per unit for 1997, 1996 and 1995 was calculated using the
weighted average outstanding units of 25,385,042, 24,346,706 and 24,292,248,
respectively.
40
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Partnership Agreement provides that without prior approval of limited
partners of the Partnership holding an aggregate of at least two-thirds of the
outstanding LP Units, the Partnership cannot issue more than 9,600,000
additional LP Units, or issue any additional LP Units of a class or series
having preferences or other special or senior rights over the LP Units. At
December 31, 1997, the Partnership had the ability to issue up to 6,878,394
additional LP Units without prior approval of the Limited Partners of the
Partnership.
18. CASH DISTRIBUTIONS
The Partnership makes quarterly cash distributions to Unitholders of
substantially all of its available cash, generally defined as consolidated
cash receipts less consolidated cash expenditures and such retentions for
working capital, anticipated cash expenditures and contingencies as the
General Partner deems appropriate. In 1997, quarterly distributions of $0.375
in February and May, $0.44 in August and $0.525 in November were paid per GP
and LP Unit. In 1996, quarterly distributions of $0.375 per GP and LP Unit
were paid in February, May, August and November. In 1995, quarterly
distributions of $0.35 per GP and LP Unit were paid in February, May, August
and November. All such distributions were paid on the then outstanding GP and
LP Units. Cash distributions aggregated $44,305,000 in 1997, $36,527,000 in
1996 and $34,009,000 in 1995.
On February 5, 1998, the General Partner announced a quarterly distribution
of $0.525 per GP and LP Unit payable on February 27, 1998.
19. QUARTERLY FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
Summarized quarterly financial data for 1997 and 1996 are set forth below.
Quarterly results were influenced by seasonal factors inherent in the
Partnership's business.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
--------------- --------------- --------------- ---------------- -----------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $43,815 $46,269 $46,398 $44,633 $47,333 $45,083 $47,435 $46,970 $184,981 $182,955
Operating income........ 16,844 17,330 16,646 12,979 18,593 17,621 19,992 20,854 72,075 68,784
Income before
extraordinary loss..... 11,526 11,658 11,381 10,259 12,730 12,017 13,170 15,403 48,807 49,337
Net income.............. 11,526 11,658 11,381 10,259 12,730 12,017 (29,254) 15,403 6,383 49,337
Earnings per Partnership
Unit:
Income before extraordi-
nary loss.............. 0.47 0.48 0.47 0.42 0.49 0.49 0.49 0.63 1.92 2.03
Net income.............. 0.47 0.48 0.47 0.42 0.49 0.49 (1.08) 0.63 0.25 2.03
Earnings per Partnership
Unit-assuming dilution:
Income before
extraordinary loss..... 0.47 0.48 0.47 0.42 0.49 0.49 0.49 0.63 1.91 2.02
Net income.............. 0.47 0.48 0.47 0.42 0.49 0.49 (1.08) 0.63 0.25 2.02
</TABLE>
The earnings per Partnership Unit presented above reflect a two-for-one unit
split approved by the General Partner on January 20, 1998.
41
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. EARNINGS PER SHARE
The following is a reconciliation of basic and dilutive income before
extraordinary loss per Partnership Unit for the years ended December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
INCOME UNITS PER INCOME UNITS PER INCOME UNITS PER
(NUMER- (DENOMI- UNIT (NUMER- (DENOMI- UNIT (NUMER- (DENOMI- UNIT
ATOR) NATOR) AMOUNT ATOR) NATOR) AMOUNT ATOR) NATOR) AMOUNT
------- -------- ------ ------- -------- ------ ------- -------- ------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before
extraordinary loss..... $48,807 $49,337 $49,840
------- ------- -------
Basic earnings per
Partnership Unit....... 48,807 25,385 $1.92 49,337 24,347 $2.03 49,840 24,292 $2.05
===== ===== =====
Effect of dilutive
securities--options.... -- 107 -- 62 -- 41
------- ------ ------- ------ ------- ------
Diluted earnings per
Partnership Unit....... $48,807 25,492 $1.91 $49,337 24,409 $2.02 $49,840 24,333 $2.05
======= ====== ===== ======= ====== ===== ======= ====== =====
</TABLE>
Options reported as dilutive securities are related to unexercised options
outstanding under the Option Plan (see Note 12).
21. RESTATEMENT
Subsequent to the issuance of the 1997 consolidated financial statements,
management determined that the portion of the deferred charge related to the
ESOP Restructuring that had been classified as prepaid and other current assets
at December 31, 1997, totaling $4,698,000, should be reclassified to other non-
current assets. Accordingly, the accompanying December 31, 1997 balance sheet
has been restated to reflect the reclassification.
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have directors or officers. The executive officers
of the General Partner and the Manager perform all management functions for
the Partnership and the Operating Partnerships in their capacities as officers
and directors of the General Partner, the Manager and Services Company.
Directors and officers of the General Partner and the Manager are selected by
Glenmoor. See "Certain Relationships and Related Transactions."
DIRECTORS OF THE GENERAL PARTNER
Set forth below is certain information concerning the directors of the
General Partner.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING
POSITION WITH GENERAL PARTNER PAST FIVE YEARS
- ----------------------------- --------------------------
<S> <C>
Alfred W. Martinelli, 70 Mr. Martinelli has been Chairman of the Board and
Chairman of the Board, Chief Executive Officer of the General Partner for
Chief Executive Officer more than five years. He has been a director of the
and Director* General Partner since October 1986. Mr. Martinelli
served as President of the General Partner from
February 1991 to February 1992. He was Chairman and
Chief Executive Officer of Penn Central Energy
Management Company ("PCEM"), for more than five
years, until his resignation in March 1996. Mr.
Martinelli was also Vice Chairman and a director of
American Financial and a director of American
Annuity Group, Inc., for more than five years, until
his resignation in March 1996.
C. Richard Wilson, 53 Mr. Wilson has been a director of the General
President, Chief Operat- Partner since February 1995. He was elected
ing Officer and Direc- President of the General Partner in March 1996 and
tor* was elected Chief Operating Officer in January 1997.
Mr. Wilson was elected Chairman of the Board of the
Manager in February 1995. He has been President and
Chief Operating Officer of the Manager since
February 1991.
Brian F. Billings, 59 Mr. Billings has been a director of the General
Director Partner since October 1986. He served as Chairman of
the Manager until February 1995. Mr. Billings was
President of PCEM from December 1986 to 1995.
Neil M. Hahl, 49 Mr. Hahl has been a director of the General Partner
Director* since September 1997. He is President of The
Weitling Group, a business consulting firm and a
director of American Capital Strategies, Ltd., a
specialty finance firm. Mr. Hahl was previously a
director of the Company from February, 1989 until
March, 1996 and served as President of the Company
from February, 1992 until March 1996. From January
1993 to August 1996, he was a Senior Vice President
of American Financial Group and its predecessor, The
Penn Central Corporation.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING
POSITION WITH GENERAL PARTNER PAST FIVE YEARS
- ----------------------------- ----------------------------------------------------
<S> <C>
Edward F. Kosnik, 53 Mr. Kosnik has been a director of the General
Director Partner since October 1986. Since June 1997, he has
been President of Berwind Corporation, a diversified
company. Mr. Kosnik was Senior Executive Vice
President and Chief Operating Officer of Alexander &
Alexander Services, Inc. from May 1996 until January
1997. He was Executive Vice President and Chief
Financial Officer of Alexander & Alexander Services,
Inc. from August 1994 to April 1996. Mr. Kosnik was
Chairman of the Board, President and Chief Executive
Officer of JWP, Inc. from May 1993 through April
1994. He was Executive Vice President and Chief
Financial Officer of JWP, Inc. from December 1992 to
April 1993.
Jonathan O'Herron, 68 Mr. O'Herron has been a director of the General
Director Partner since September 1997. Since January 1993, he
has been Managing Director of Lazard Freres &
Company, LLC.
William C. Pierce, 57 Mr. Pierce has been a director of the General
Director Partner since February 1987. He was Executive Vice
President and Group Executive of Chemical Bank and
Chemical Banking Corporation from November 1992
until his retirement in July 1994.
Ernest R. Varalli, 67 Mr. Varalli has been a director of the General
Director* Partner since July 1987. He was Executive Vice
President, Chief Financial Officer and Treasurer for
more than five years until 1996. Mr. Varalli served
as Executive Vice President, Chief Financial Officer
and Treasurer of PCEM until his resignation in March
1996. Mr. Varalli had been a consultant to American
Financial, for more than five years, until March
1996.
Robert H. Young, 76 Mr. Young has been a director of the General Partner
Director since July 1987. Since October 1991, he has been
Counsel to the law firm of Morgan, Lewis & Bockius
LLP. Mr. Young is also Chairman of the Board of
Directors of Independence Blue Cross.
</TABLE>
- --------
* Also a director of the Manager and Services Company.
The General Partner has an Audit Committee, which currently consists of four
directors: Brian F. Billings, Neil M. Hahl, William C. Pierce and Robert H.
Young. Messrs. Billings, Hahl, Pierce and Young are neither officers nor
employees of the General Partner or any of its affiliates.
In addition, the General Partner has a Finance Committee, which currently
consists of five directors: Neil M. Hahl, Edward F. Kosnik, Jonathan O'Herron,
Ernest R. Varalli and C. Richard Wilson. The Finance Committee provides
oversight and advice with respect to the capital structure of the Partnership.
44
<PAGE>
EXECUTIVE OFFICERS OF THE MANAGER
The executive officers of the General Partner also serve as the executive
officers of the Manager and Services Company. Set forth below is certain
information concerning the executive officers of the General Partner, the
Manager and Services Company who, other than Mr. Wilson, are not also
directors of the General Partner, the Manager or Services Company.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING
POSITION WITH GENERAL PARTNER PAST FIVE YEARS
- ----------------------------- --------------------------
<S> <C>
C. Richard Wilson, 53 Mr. Wilson has been President and Chief Operating
President, Chief Operat- Officer of the General Partner since March 1996 and
ing Officer and Director a director of the General Partner since February
1995. He has been President and Chief Operating
Officer of the Manager since February 1991. Mr.
Wilson has been a director of the Manager since
October 1986. He was named President and Chief
Operating Officer of Services Company in September
1997.
William H. Shea, Jr., 43 Mr. Shea was named Executive Vice President of the
Executive Vice President General Partner and Manager in September 1997. He
served as Vice President of Marketing and Business
Development of the General Partner and Manager from
March 1996 to September 1997. Mr. Shea was Vice
President--West Central Region of Laidlaw
Environmental Services from 1994 until 1995. He was
Vice President--Sales and Eastern Region Operations
of USPCI, Inc. (a subsidiary of Union Pacific
Corporation) from 1993 until 1994. Mr. Shea was Vice
President--Operations of USPCI, Inc. from 1989 until
1993. He was named Executive Vice President of
Services Company in September 1997. Mr. Shea is the
son-in-law of Mr. Alfred W. Martinelli.
Michael P. Epperly, 54 Mr. Epperly has been Senior Vice President--
Senior Vice President-- Operations of the General Partner since June 1996.
Operations He has been Senior Vice President of Operations of
the Manager since 1990. Mr. Epperly was named Senior
Vice President--Operations of Services Company in
September 1997.
Stephen C. Muther, 48 Mr. Muther has been Senior Vice President--
Senior Vice President-- Administration, General Counsel and Secretary of the
Administration, General General Partner since June 1996. He has been Senior
Counsel and Secretary* Vice President--Administration, General Counsel and
Secretary of the Manager since February 1995. Mr.
Muther served as General Counsel, Vice President--
Administration and Secretary of the Manager from May
1990 to February 1995. He was named Senior Vice
President--Administration, General Counsel and
Secretary of Services Company in September 1997.
Steven C. Ramsey, 43 Mr. Ramsey has been Senior Vice President--Finance
Senior Vice President-- and Chief Financial Officer of the General Partner
Finance and Chief Finan- and Manager since June 1996. He served as Vice
cial Officer President--Finance and Treasurer of the Manager from
February 1995 to June 1996. Mr. Ramsey served as
Vice President and Treasurer of the Manager from
February 1991 to February 1995. He was named Senior
Vice President--Finance and Chief Financial Officer
of Services Company in September 1997.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING
POSITION WITH GENERAL PARTNER PAST FIVE YEARS
- ----------------------------- --------------------------
<S> <C>
David J. Martinelli, 37 Mr. Martinelli was named Vice President and
Vice President and Trea- Treasurer of the General Partner and Manager in
surer March 1997. He served as Treasurer of the General
Partner and Manager from June 1996 to March 1997.
Mr. Martinelli served as Assistant Treasurer of the
Manager from March 1996 to June 1996. He was
employed in a corporate financial position with
Salomon Brothers Inc. from 1993 until 1996. Mr.
Martinelli was named Vice President and Treasurer of
Services Company in September 1997. He is the son of
Mr. Alfred W. Martinelli.
</TABLE>
- --------
* Also Secretary of the General Partner since February 1992.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
The fee schedule for directors of the General Partner is as follows: annual
fee, $15,000; attendance fee for each Board of Directors meeting, $1,000; and
attendance fee for each committee meeting, $750. Messrs. Martinelli, Varalli
and Wilson do not receive any additional compensation with respect to their
services as directors. Directors' fees paid by the General Partner in 1997 to
its directors amounted to $157,000. In connection with the ESOP Restructuring,
Mr. Pierce received an additional payment of $25,000 for serving as Chairman
of the Special Committee of the Board that reviewed the ESOP Restructuring;
Mr. Hahl received $120,300 for consulting services rendered to the
Partnership; and Mr. Varalli was paid a consulting fee in the amount of
$50,000. Each of these payments were reimbursed by the Partnership.
Members of the Board of Directors of the Manager and Services Company were
not compensated for their services as directors of these companies.
EXECUTIVE COMPENSATION
Prior to the consummation of the ESOP Restructuring on August 12, 1997,
executive officers of the General Partner and the Manager and other employees
of the Manager received compensation and benefits from the Manager which were
reimbursed by the Partnership and the Operating Partnerships. As part of the
ESOP Restructuring, the Partnership and the Operating Partnerships were
permanently released from their obligation to reimburse the General Partner or
the Manager for certain compensation and fringe benefit costs for executive
level duties performed by the General Partner and the Manager with respect to
operations, finance, legal, marketing and business development, and treasury,
as well as the President of the General Partner and the Manager. During 1997,
the Partnership or the Operating Partnerships reimbursed the General Partner
or the Manager an aggregate of $1.5 million for compensation and benefits with
respect to the executive officers of the General Partner and the Manager for
the period prior to August 12, 1997. See "Certain Relationships and Related
Transactions."
EXECUTIVE OFFICER SEVERANCE AGREEMENTS
Each of Messrs. Wilson, Ramsey, Muther and Epperly entered into severance
agreements with the General Partner, Services Company and Glenmoor providing
for the payment of severance compensation equal to the amount of base salary
and incentive compensation being paid to such individuals as of August 12,
1997 (the "Severance Compensation Amount"). The severance agreements provide
for payment of 1.5 times the Severance Compensation Amount upon termination of
such
46
<PAGE>
individual's employment without "cause" under certain circumstances not
involving a "change of control" of the Partnership, and 2.99 times such
individual's Severance Compensation Amount (subject to certain limitations)
following a "change of control". For purposes of the severance agreements, a
"change of control" is defined as the acquisition (other than by the General
Partner and its affiliates) of 80 percent or more of the LP Units of the
Partnership.
DIRECTOR RECOGNITION PROGRAM
The General Partner instituted a Director Recognition Program (the
"Recognition Program") in September 1997. The Recognition Program provides
that, upon retirement or death and subject to certain conditions, directors
receive a recognition benefit of up to three times their annual director's
fees (excluding attendance and committee fees) based upon their years of
service as a member of the Board of Directors of the General Partner. A
minimum of three full years of service as a member of the Board of Directors
of the General Partner is required for eligibility under the Recognition
Program. Members of the Board of Directors who are concurrently serving as an
officer or employee of the General Partner or its affiliates are not eligible
for the Recognition Program.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Services Company owns approximately 9.6 percent of the outstanding LP Units
as of February 17, 1998. No other person or group is known to be the
beneficial owner of more than 5 percent of the LP Units as of February 17,
1998.
The following table sets forth certain information, as of February 17, 1998,
concerning the beneficial ownership of LP Units by each director of the
General Partner, the Chief Executive Officer of the General Partner, certain
executive officers of the General Partner and the Manager and by all directors
and executive officers of the General Partner and the Manager as a group. Such
information is based on data furnished by the persons named. Based on
information furnished to the General Partner by such persons, no director or
executive officer of the General Partner or the Manager owned beneficially, as
of February 17, 1998, more than 1 percent of any class of equity securities of
the Partnership or any of its subsidiaries outstanding at that date.
<TABLE>
<CAPTION>
NAME NUMBER OF LP UNITS(1)
---- ---------------------
<S> <C>
Brian F. Billings..................................... 15,000(2)
Michael P. Epperly.................................... 80(2)
Neil M. Hahl.......................................... 2,000(2)
Edward F. Kosnik...................................... 10,000(2)
Alfred W. Martinelli.................................. 9,000(2)
Stephen C. Muther..................................... 9,400
Jonathan O'Herron..................................... 14,800
William C. Pierce..................................... 1,600(2)
Steven C. Ramsey...................................... 1,600(2)
William H. Shea, Jr................................... 4,200(2)
Ernest R. Varalli..................................... 13,000(2)
C. Richard Wilson..................................... 5,000
Robert H. Young....................................... 5,000
All directors and executive officers as a group
(consisting of 14 persons, including those named
above)............................................... 90,680
</TABLE>
- --------
(1) Unless otherwise indicated, the persons named above have sole voting and
investment power over the LP Units reported.
(2) The LP Units owned by the persons indicated have shared voting and
investment power with their respective spouses.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership and the Operating Partnerships are managed by the General
Partner and the Manager, respectively, pursuant to the Amended and Restated
Agreement of Limited Partnership
47
<PAGE>
(the "Partnership Agreement"), the several Amended and Restated Agreements of
Limited Partnership of the Operating Partnerships (the "Operating Partnership
Agreements") and the several Management Agreements between the Manager and the
Operating Partnerships (the "Management Agreements").
Under the Partnership Agreement and the Operating Partnership Agreements, as
well as the Management Agreements, the General Partner, the Manager and
certain related parties are entitled to reimbursement of all direct and
indirect costs and expenses related to the business activities of the
Partnership and the Operating Partnerships, except as otherwise provided by
the Exchange Agreement (as discussed below). These costs and expenses include
insurance fees, consulting fees, general and administrative costs,
compensation and benefits payable to employees of the General Partner and
Manager (other than certain executive officers), tax information and reporting
costs, legal and audit fees and an allocable portion of overhead expenses.
Such reimbursed amounts constitute a substantial portion of the revenues of
the General Partner and the Manager.
On March 22, 1996, BAC, now Glenmoor, acquired all of the common stock of
the General Partner from a subsidiary of American Financial for $63 million.
At that time, BAC was owned by Glenmoor Partners, LLP ("Old Glenmoor"), the
ESOP and certain director level employees of the Manager. Effective January 1,
1998, Old Glenmoor dissolved and BAC changed its name to Glenmoor, Ltd.
Glenmoor is owned by certain directors and members of senior management of the
General Partner or trusts for the benefit of their families and certain
director-level employees of Services Company.
In connection with the Acquisition, the General Partner borrowed $63 million
pursuant to a 15-year term loan from a third-party lender. The General Partner
then loaned $63 million to the ESOP, which used the proceeds to purchase the
BAC Preferred Stock.
On August 12, 1997, with approval of a majority interest of Unitholders at a
special meeting held on August 11, 1997, the Partnership restructured the ESOP
by replacing the ESOP's investment in BMC Acquisition Company Series A
convertible Preferred Stock stated value $1,000 per share (the "BAC Preferred
Stock"), with a beneficial ownership interest in LP Units (the "ESOP
Restructuring"). Pursuant to the LP Unit Subscription Agreement, dated August
12, 1997 (the "LP Unit Subscription Agreement"), the Partnership issued
2,573,146 LP Units to Services Company in exchange for the 63,000 shares of
BAC Preferred Stock owned by the ESOP. The BAC Preferred Stock received by the
Partnership in exchange for the issuance of LP Units to Services Company
(after being converted to BMC Acquisition Company Common Stock) was exchanged
for among other things (i) the permanent release of the Partnership's
obligation to reimburse the General Partner, and its affiliates for certain
senior executive compensation costs, and (ii) the reduction of the General
Partner's incentive compensation formula under the Incentive Compensation
Agreement (as discussed below).
In connection with the ESOP Restructuring, the ESOP Loan was also
restructured. The amount, term and interest rate applicable to the ESOP Loan
were not changed, but the ESOP became the direct borrower under the ESOP Loan
rather than the General Partner. The ESOP secured the ESOP Loan with, among
other things, a pledge of the LP Units held by Services Company. The ESOP Loan
is guaranteed by Glenmoor, the Manager, the General Partner and Services
Company. The distributions on the LP Units held by the ESOP will be used to
pay the principal and interest on the ESOP Loan. The General Partner will make
an additional contribution to the ESOP (the "top-up contribution"), if
necessary, to pay any balance due under the ESOP Loan. The top-up contribution
will be reimbursed by the Partnership to the extent it exceeds certain
reserves established by the General Partner for that purpose under the
Exchange Agreement.
The Partnership Agreement was amended as part of the ESOP Restructuring to,
among other things, (i) relieve the General Partner of any obligation to make
an additional capital contribution to the Partnership upon the issuance of
additional LP Units if the General Partner receives a legal
48
<PAGE>
opinion that such additional capital contribution is not required for the
Partnership or any of its Operating Partnerships to avoid being treated as an
association taxable as a corporation for federal income tax purposes, and (ii)
to bind any successor general partner, upon removal and replacement of the
General Partner by the Unitholders, to the obligations of the General Partner
and its affiliates under the Exchange Agreement and to consider this
obligation in determining the value of the general partnership interest which
must be acquired by a successor general partner.
In connection with the ESOP Restructuring the Manager's employees were
transferred to Services Company. Services Company employs all of the employees
previously employed by the Manager and has become the sponsor of all of the
employee benefit plans previously maintained by the Manager. Services Company
also entered into a Services Agreement with the General Partner and the
Manager to provide services to the Partnership and the Operating Partnerships
over a 13.5 year term. Services Company is reimbursed by the General Partner
or the Manager for its direct and indirect expenses. Costs reimbursed to the
General Partner, the Manager or Services Company by the Partnership and the
Operating Partnerships totaled $57.2 million and $61.1 million in 1997 and
1996, respectively. Reimbursements for 1997 included $3.1 million in Old
Glenmoor management fees (discussed below) while reimbursed costs for 1996
included $3.3 million in Old Glenmoor management fees and $341,000 of American
Financial allocated expenses. Compensation and benefit costs of certain
executive officers of the General Partner were not charged to the Partnership
after August 12, 1997 pursuant to the Exchange Agreement.
On March 22, 1996, the General Partner entered into the Glenmoor Management
Agreement pursuant to which Old Glenmoor agreed to provide certain management
functions to the General Partner and the Manager. Old Glenmoor received an
annual management fee, which was approved each year by the disinterested
directors of the General Partner. The management fee included a Senior
Administrative Charge of not less than $975,000, reimbursement for certain
compensation costs and expenses and participation of Old Glenmoor employees in
the Manager's employee benefit plans, including the ESOP. Amounts paid in 1997
to Old Glenmoor for management fees equaled $3.1 million, including $1.0
million for the Senior Administrative Charge and $2.1 million of reimbursed
expenses. Following the dissolution of Old Glenmoor at the end of fiscal 1997,
Glenmoor now receives the Senior Administrative Charge and is reimbursed for
its expenses for services rendered under the Glenmoor Management Agreement.
On August 12, 1997, as part of the ESOP Restructuring, the Incentive
Compensation Agreement was amended to change the target and payment
thresholds. The General Partner also agreed not to receive any incentive
compensation in respect of distributions on the LP Units issued pursuant to
the ESOP Restructuring. The Incentive Compensation Agreement, as subsequently
amended to reflect the two-for-one LP Unit split effective on January 29,
1998, provides that, subject to certain limitations and adjustments, if a
quarterly cash distribution exceeds a target of $0.325 per LP Unit, the
Partnership will pay the General Partner, in respect of each outstanding LP
Unit, incentive compensation equal to (i) 15 percent of that portion of the
distribution per LP Unit which exceeds the target quarterly amount of $0.325
but is not more than $0.35, plus (ii) 25 percent of the amount, if any, by
which the quarterly distribution per LP Unit exceeds $0.35 but is not more
than $0.375, plus (iii) 35 percent of the amount, if any, by which the
quarterly distribution per LP Unit exceeds $0.375 but is not more than $0.425,
plus (iv) 40 percent of the amount, if any, by which the quarterly
distribution per LP Unit exceeds $0.425 but is not more than $0.525, plus (v)
45 percent of the amount, if any, by which the quarterly distribution per LP
Unit exceeds $0.525. The General Partner is also entitled to incentive
compensation, under a comparable formula, in respect of special cash
distributions exceeding a target special distribution amount per LP Unit. The
target special distribution amount generally means the amount which, together
with all amounts distributed per LP Unit prior to the special distribution
compounded quarterly at 13 percent per annum, would equal $10.00 (the initial
public offering price of the LP Units split two-for-one) compounded quarterly
at 13 percent per annum from
49
<PAGE>
the date of the closing of the initial public offering in December 1986.
Incentive compensation paid by the Partnership to the General Partner for
quarterly cash distributions totaled $3,042,000 and $1,326,000 in 1997 and
1996 respectively. No special cash distributions have ever been paid by the
Partnership.
On February 5, 1998, the General Partner announced a quarterly distribution
of $0.525 per GP and LP Unit payable on February 27, 1998. As such
distribution exceeds a target of $0.325 per LP Unit, the Partnership will pay
the General Partner incentive compensation aggregating $1.6 million as a
result of this distribution.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) and (2) Financial Statements and Financial Statement Schedule--see
Index to Financial Statements and Financial Statement Schedule appearing on
page 20.
(3) Exhibits, including those incorporated by reference. The following is
a list of exhibits filed as part of this Annual Report on Form 10-K. Where
so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.
<TABLE>
<CAPTION>
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)
---------------
<C> <S>
3.1 --Amended and Restated Agreement of Limited Partnership of the
Partnership, dated as of February 25, 1998.
3.2 --Amended and Restated Certificate of Limited Partnership of
the Partnership, dated as of February 4, 1998.
4.1 --Amended and Restated Indenture of Mortgage and Deed of Trust
and Security Agreement, dated as of December 16, 1997, by
Buckeye to PNC Bank, National Association, as Trustee.
4.2 --Note Agreement, dated as of December 16, 1997, between
Buckeye and The Prudential Insurance Company of America.
4.3 --Defeasance Trust Agreement, dated as of December 16, 1997,
between and among PNC Bank, National Association, and Douglas
A. Wilson, as Trustees.
4.4 --Certain instruments with respect to long-term debt of the
Operating Partnerships which relate to debt that does not
exceed 10 percent of the total assets of the Partnership and
its consolidated subsidiaries are omitted pursuant to Item
601(b) (4) (iii) (A) of Regulation S-K, 17 C.F.R. (S)229.601.
The Partnership hereby agrees to furnish supplementally to
the Securities and Exchange Commission a copy of each such
instrument upon request.
10.1 --Amended and Restated Agreement of Limited Partnership of
Buckeye, dated as of December 23, 1986.(1)(2) (Exhibit 10.1)
10.2 --Amendment No. 1 to the Amended and Restated Agreement of
Limited Partnership of Buckeye, dated as of August 12, 1997.
10.3 --Management Agreement, dated November 18, 1986, between the
Manager and Buckeye.(1)(3) (Exhibit 10.4)
10.4 --Management Agreement, dated November 18, 1986 between the
General Partner, Buckeye and Glenmoor.(7) (Exhibit 10.2).
10.5 --Amendment to Management Agreement dated as of August 12,
1997 between the General Partner, Buckeye and Glenmoor.
10.6 --Amended and Restated Incentive Compensation Agreement, dated
as of March 22, 1996, between the General Partner and the
Partnership.(7) (Exhibit 10.4)
10.7 --Amendment No. 1 to Amended and Restated Incentive
Compensation Agreement dated as of August 12, 1997 between
the General Partner and the Partnership.
10.8 --Amendment No. 2 to Amended and Restated Incentive
Compensation Agreement dated as of January 20, 1998 between
the General Partner and the Partnership.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)
---------------
<C> <S>
10.9 --Services Agreement, dated as of August 12, 1997, among the
General Partner, the Manager and Services Company.
10.10 --Exchange Agreement, dated as of August 12, 1997, among the
General Partner, the Manager the Partnership and the
Operating Partnerships.
10.11 --Unit Option and Distribution Equivalent Plan of Buckeye
Partners, L.P.(4)(5) (Exhibit 10.10)
10.12 --Buckeye Management Company Unit Option Loan Program.(4)(5)
(Exhibit 10.11)
10.13 --Form of Executive Officer Severance Agreement
21.1 --List of subsidiaries of the Partnership.(7) (Exhibit 21.1)
*27 --Financial Data Schedule
</TABLE>
- --------
(1) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Annual Report on Form 10-K for the
year 1986.
(2) The Amended and Restated Agreements of Limited Partnership of the other
Operating Partnerships are not filed because they are identical to Exhibit
10.1 except for the identity of the partnership.
(3) The Management Agreements of the other Operating Partnerships are not
filed because they are identical to Exhibit 10.4 except for the identity
of the partnership.
(4) Represents management contract or compensatory plan or arrangement.
(5) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Quarterly Report on Form 10-Q for
the quarter ended September 30, 1991.
(6) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995.
(7) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Annual Report on Form 10-K for the
year 1995.
* Filed herewith
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997:
None
52
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Buckeye Partners, L.P.
(Registrant)
By: Buckeye Management Company,
as General Partner
/s/ Alfred W. Martinelli
Dated: May 12, 1998 By: _________________________________
Alfred W. Martinelli
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ Brian F. Billings
Dated: May 12, 1998 By: _________________________________
Brian F. Billings
Director
/s/ Neil M. Hahl
Dated: May 12, 1998 By: _________________________________
Neil M. Hahl
Director
/s/ Edward F. Kosnik
Dated: May 12, 1998 By: _________________________________
Edward F. Kosnik
Director
/s/ Jonathan O'Herron
Dated: May 12, 1998 By: _________________________________
Jonathan O'Herron
Director
/s/ Alfred W. Martinelli
Dated: May 12, 1998 By: _________________________________
Alfred W. Martinelli
Chairman of the Board and
Director(Principal Executive
Officer)
/s/ William C. Pierce
Dated: May 12, 1998 By: _________________________________
William C. Pierce
Director
/s/ Ernest R. Varalli
Dated: May 12, 1998 By: _________________________________
Ernest R Varalli
Director
/s/ C. Richard Wilson
Dated: May 12, 1998 By: _________________________________
C. Richard Wilson
President, Chief Operating
Officer and Director
/s/ Robert H. Young
Dated: May 12, 1998 By: _________________________________
Robert H. Young
Director
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Buckeye Partners, L.P.:
We have audited the consolidated financial statements of Buckeye Partners,
L.P. and its subsidiaries as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated January 23, 1998; such report is included elsewhere in
this Form 10-K. Our audits also included the consolidated financial statement
schedule of Buckeye Partners, L.P. and subsidiaries referred to in Item 14.
This consolidated financial statement schedule is the responsibility of the
Partnership's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 23, 1998
S-1
<PAGE>
SCHEDULE 1
BUCKEYE PARTNERS, L.P.
REGISTRANT'S CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents.................................. $ 469 $ 1,210
Temporary investments...................................... 740 5,273
Other current assets....................................... 554 73
-------- --------
Total current assets...................................... 1,763 6,556
Investments in and advances to subsidiaries (at equity).... 302,265 275,620
-------- --------
Total assets.............................................. $304,028 $282,176
======== ========
Liabilities and partners' capital
Current liabilities......................................... $ 1,250 $ 6,197
-------- --------
Partners' capital
General Partner............................................ 2,432 2,760
Limited Partner............................................ 300,346 273,219
-------- --------
Total partners' capital................................... 302,778 275,979
-------- --------
Total liabilities and partners' capital................... $304,028 $282,176
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Equity in income of subsidiaries.................... $ 9,418 $50,674 $50,388
Operating credits (expenses)........................ 17 (8) (29)
Interest income..................................... 48 55 20
Interest and debt expense........................... (58) (58) (58)
Incentive compensation to General Partner........... (3,042) (1,326) (481)
------- ------- -------
Net income...................................... $ 6,383 $49,337 $49,840
======= ======= =======
STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 6,383 $49,337 $49,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in investment in subsidiar-
ies............................................. 37,555 (13,590) (16,341)
Change in assets and liabilities:
Temporary investments........................... 4,533 (4,378) 1,360
Other current assets............................ (481) (29) (14)
Current liabilities............................. (4,947) 1,204 2,954
------- ------- -------
Net cash provided by operating activities....... 43,043 32,544 37,799
Cash flows from financing activities:
Capital contributions............................. 5 10 4
Proceeds from exercise of unit options............ 516 974 374
Distributions to Unitholders...................... (44,305) (36,527) (34,009)
------- ------- -------
Net (decrease) increase in cash and cash equiva-
lents............................................ (741) (2,999) 4,168
Cash and cash equivalents at beginning of period.. 1,210 4,209 41
------- ------- -------
Cash and cash equivalents at end of period........ $ 469 $ 1,210 $ 4,209
======= ======= =======
Supplemental cash flow information:
Non-cash change from issuance of LP Units........ $64,200 -- --
Non-cash change in investments in subsidiaries... $64,200 -- --
</TABLE>
See footnotes to consolidated financial statements of Buckeye Partners, L.P.
S-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,349
<SECURITIES> 2,854
<RECEIVABLES> 10,195
<ALLOWANCES> 0
<INVENTORY> 2,087
<CURRENT-ASSETS> 29,782
<PP&E> 579,233
<DEPRECIATION> 58,292
<TOTAL-ASSETS> 615,062
<CURRENT-LIABILITIES> 24,737
<BONDS> 240,000
0
0
<COMMON> 0
<OTHER-SE> 302,778
<TOTAL-LIABILITY-AND-EQUITY> 615,062
<SALES> 0
<TOTAL-REVENUES> 184,981
<CGS> 0
<TOTAL-COSTS> 112,906
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,187
<INCOME-PRETAX> 48,807
<INCOME-TAX> 0
<INCOME-CONTINUING> 48,807
<DISCONTINUED> 0
<EXTRAORDINARY> 42,424
<CHANGES> 0
<NET-INCOME> 6,383
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
