SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 1-9356
BUCKEYE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 23-2432497
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5 Radnor Corporate Center, Suite 500
100 Matsonford Road
Radnor, PA 19087
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 610-254-4600
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report).
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
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at October 19, 1999
Limited Partnership Units 26,791,006 Units
<PAGE>
<TABLE>
<CAPTION>
BUCKEYE PARTNERS, L.P.
INDEX
Page No.
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income 1
for the three months and nine months ended
September 30, 1999 and 1998
Consolidated Balance Sheets 2
September 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows 3
for the nine months ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis 10-13
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures 13
about Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
Buckeye Partners, L.P.
Consolidated Statements of Income
(In thousands, except per Unit amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<C> <C> <S> <C> <C>
Revenue
$48,966 $47,716 Transportation $146,308 $137,798
36,314 - Refining 69,161 -
- ------- ------- -------- --------
85,280 47,716 Total Revenue 215,469 137,798
- ------- ------- -------- --------
Costs and expenses
33,035 - Cost of refined products sold 60,804 -
22,340 20,440 Operating expenses 54,949 59,353
3,773 4,123 Depreciation and amortization 13,020 12,307
3,260 3,065 General and administrative expenses 11,895 10,826
- ------- ------- -------- --------
62,408 27,628 Total costs and expenses 140,668 82,486
- ------- ------- -------- --------
22,872 20,088 Operating income 74,801 55,312
- ------- ------- -------- --------
Other income (expenses)
160 56 Interest income 215 209
(4,352) (3,942) Interest and debt expense (12,626) (11,760)
(2,055) (1,766) Minority interests and other (5,961) (4,963)
- ------- ------- -------- --------
(6,247) (5,652) Total other income (expenses) (18,372) (16,514)
- ------- ------- -------- --------
$16,625 $14,436 Net income $ 56,429 $ 38,798
======= ======= ======== ========
Net income allocated to General
$ 150 $ 131 Partner $ 510 $ 351
Net income allocated to Limited
$16,475 $14,305 Partners $ 55,919 $ 38,447
Earnings per Partnership Unit:
Net income allocated to General and
$ 0.62 $ 0.53 Limited Partners per Partnership Unit $ 2.09 $ 1.44
Earnings per Partnership Unit -
assuming dilution:
Net income allocated to General and
$ 0.61 $ 0.53 Limited Partners per Partnership Unit $ 2.08 $ 1.43
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Buckeye Partners, L.P.
Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 14,095 $ 8,341
Trade receivables 11,901 7,578
Inventories 17,383 2,988
Prepaid and other current assets 5,642 5,320
-------- --------
Total current assets 49,021 24,227
Property, plant and equipment, net 551,105 532,696
Other non-current assets 60,842 61,176
-------- --------
Total assets $660,968 $618,099
======== ========
Liabilities and partners' capital
Current liabilities
Accounts payable $ 11,862 $ 4,369
Accrued and other current liabilities 20,238 26,124
-------- --------
Total current liabilities 32,100 30,493
Long-term debt 266,000 240,000
Minority interests 2,711 2,501
Other non-current liabilities 48,368 46,620
Commitments and contingent liabilities - -
-------- --------
Total liabilities 349,179 319,614
-------- --------
Partners' capital
General Partner 2,504 2,390
Limited Partners 309,285 296,095
-------- --------
Total partners' capital 311,789 298,485
-------- --------
Total liabilities and partners' capital $660,968 $618,099
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Buckeye Partners, L.P.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $56,429 $38,798
------- -------
Adjustments to reconcile income to net cash
provided by operating activities:
Gain on sale of property, plant and
equipment - (196)
Depreciation and amortization 13,020 12,307
Minority interests 707 442
Distributions to minority interests (497) (468)
Changes in assets and liabilities:
Temporary investments - 2,854
Trade receivables (3,468) 1,268
Inventories (10,293) (747)
Prepaid and other current assets (322) (1,109)
Accounts payable 7,493 (757)
Accrued and other current liabilities (5,886) 5,362
Other non-current assets 291 (365)
Other non-current liabilities 1,708 1,014
------- -------
Total adjustments 2,753 19,605
------- -------
Net cash provided by operating activities 59,182 58,403
------- -------
Cash flows from investing activities:
Capital expenditures (17,562) (17,231)
Acquisitions (18,740) -
Expenditures for disposal of property,
plant and equipment, net (1) (360)
------- -------
Net cash used in investing activities (36,303) (17,591)
------- -------
Cash flows from financing activities:
Proceeds from exercise of unit options 762 359
Borrowings 26,000 -
Distributions to unitholders (43,887) (42,497)
------- -------
Net cash used in financing activities (17,125) (42,138)
------- -------
Net increase (decrease) in cash and cash
equivalents 5,754 (1,326)
Cash and cash equivalents at beginning of period 8,341 7,349
------- -------
Cash and cash equivalents at end of period $14,095 $ 6,023
======= =======
Supplemental cash flow information:
Cash paid during the period for interest
(net of amount capitalized) $12,423 $11,795
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying financial statements of Buckeye
Partners, L.P. (the "Partnership"), which are unaudited except that the
Balance Sheet as of December 31, 1998 is derived from audited financial
statements, include all adjustments necessary to present fairly the
Partnership's financial position as of September 30, 1999 and the results of
operations for the three month periods ended September 30, 1999 and 1998 and
cash flows for the three month and nine month periods ended September 30, 1999
and 1998. The results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year ending December 31, 1999.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the financial statements do not include all of the information and
notes normally included with financial statements prepared in accordance with
generally accepted accounting principles. These financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1998.
2. ACQUISITIONS
On March 4, 1999, the Partnership acquired the fuels division of American
Refining Group, Inc. ("ARG") for a total purchase price of $12,990,000. The
assets acquired included a refined petroleum products terminal and a transmix
processing facility located in Indianola, Pennsylvania, a transmix processing
facility located in Hartford, Illinois, and related assets, which included
trade receivables and inventory valued at net realizable value. The
acquisition was recorded under the purchase method of accounting and,
accordingly, the results of operations of the acquired operations are included
in the financial statements of the Partnership beginning on March 4, 1999.
The Partnership operates the former ARG processing business under the name of
Buckeye Refining Company, LLC ("BRC"). The initial purchase price has been
allocated on a preliminary basis, pending a final determination, to assets
acquired based on estimated fair value. The initial allocated fair value of
assets acquired is summarized as follows:
<TABLE>
<S> <C>
Trade receivables $ 815,000
Petroleum products inventory 4,102,000
Property, plant and equipment 8,073,000
-----------
Total $12,990,000
===========
</TABLE>
In connection with the acquisition of the ARG assets, the Partnership is
obligated to pay additional consideration, not to exceed $5,000,000 in the
aggregate over a six-year period, if BRC's gross profits and cash flows,
calculated on an annual basis, exceed certain levels.
On March 31, 1999, the Partnership acquired certain assets from Seagull
Products Pipeline Corporation and Seagull Energy Corporation ("Seagull") for a
total purchase price of $5,750,000. The assets acquired consist primarily of
six pipeline operating agreements for major chemical companies in the Gulf
Coast area, a 16-mile pipeline (a portion of which is leased to a chemical
company), and related assets. The acquisition was recorded under the purchase
method of accounting and, accordingly, the results of operations of the
acquired operations are included in the financial statements of the
Partnership beginning on March 31, 1999. The Partnership operates the former
Seagull pipeline assets under the name of Buckeye Gulf Coast Pipe Lines, LLC
("BGC"). The initial purchase price has been allocated on a preliminary
basis, pending a final determination, to assets acquired based on estimated
fair value. The initial allocated fair value of assets acquired is summarized
as follows:
<TABLE>
<S> <C>
Property, plant and equipment $2,150,000
Other non-current assets 3,600,000
----------
Net cost of acquisition $5,750,000
==========
</TABLE>
Pro forma results of operations for the Partnership, assuming the acquisition
of the ARG and Seagull assets had occurred at the beginning of the periods
indicated below, are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
In thousands,except
per Unit amounts)
<S> <C> <C>
Revenue $226,268 $204,978
Net income $ 55,751 $ 39,410
Earnings per Unit $ 2.06 $ 1.46
</TABLE>
The unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the combinations been in effect at the
beginning of each period presented, or of future results of operations of the
entities.
3. SEGMENT INFORMATION
The Partnership has two reportable segments, the transportation segment and
the refining segment, which are organized on the basis of products and
service. The transportation segment derives its revenues from the
transportation of refined petroleum products that it receives from refineries,
connecting pipelines and marine terminals. The refining segment derives its
revenues from the refining of transmix and the marketing of the resulting
product to others for distribution to consumers. Transmix generally consists
of various grades and types of refined petroleum products that are commingled
during handling or transportation by a pipeline system. In addition, the
refining segment owns equipment and operates four retail service stations in
the Pittsburgh, Pennsylvania area.
The Partnership evaluates its performance on the basis of operating income
before interest income, interest expense, minority interests and other. The
Partnership accounts for intersegment sales and transfers as if the sales or
transfers were to third parties at current market prices. Such intersegment
sales and transfers are eliminated in consolidation.
The Partnership's reportable segments are distinct business enterprises that
offer different products or services. Revenues from the transportation
segment are generally subject to regulation or are under contract and tend to
be less variable than revenues from the refining segment. The refining
segment's revenues, to a large extent, are dependent on the market price of
refined petroleum products that, for the most part, are beyond the control of
management. The segments also require different technology, marketing and risk
management strategies.
The following is a summary of each reportable segment's profit and loss and
the segment's assets as of and for the period ended September 30, 1999. The
refining segment's results of operations include the period from the March 4,
1999 (date of acquisition) through September 30, 1999. The transportation
segment results of operations include BGC's results of operations for the
period March 31, 1999 through September 30, 1999.
<TABLE>
<CAPTION>
Trans- Inter-
portation Refining company Total
--------- -------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Revenues from external
customers $148,268 $69,161 $(1,960) $215,469
Intersegment revenues 1,960 - - 1,960
Operating income 71,579 3,222 - 74,801
Segment assets 641,024 29,406 (9,462) 660,968
Expenditures for property,
plant and equipment 17,392 170 - 17,562
</TABLE>
All revenues are from sources within the United States.
4. CONTINGENCIES
The Partnership and its subsidiaries (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.
Buckeye Pipe Line Company (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 results of operations.
Environmental
Certain Operating Partnerships (or their predecessors) have been named as a
defendant in lawsuits or have been notified by federal or state authorities
that they are a potentially responsible party ("PRP") under federal laws or a
respondent under state laws relating to the generation, disposal, or release
of hazardous substances into the environment. These proceedings generally
relate to potential liability for clean-up costs. The total potential
remediation costs relating to these clean-up sites cannot be reasonably
estimated.
With respect to each site, however, the Operating Partnership involved is one
of several or as many as several hundred PRPs that would share in the total
costs of clean-up under the principle of joint and several liability. The
General Partner believes that the generation, handling and disposal of
hazardous substances by the Operating Partnerships and their predecessors have
been in material compliance with applicable environmental and regulatory
requirements. Additional claims for the cost of cleaning up releases of
hazardous substances and for damage to the environment resulting from the
activities of the Operating Partnerships or their predecessors may be asserted
in the future under various federal and state laws.
5. INVENTORIES
As a result of the BRC acquisition, inventories now consist of transmix, fuel
oils, gasoline and other specialty products, as well as pipeline materials and
supplies which includes pipe, valves, pumps, electrical/electronic components,
drag reducing agent and other miscellaneous items. Inventories are valued at
the lower of cost or market on the first-in first-out method. Inventories
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In thousands)
<S> <C> <C>
Raw materials $ 9,994 $ -
Finished goods 3,404 -
Additives and other supplies 12 -
Pipeline materials and supplies 3,973 2,988
------- ------
Total $17,383 $2,988
======= ======
</TABLE>
The Partnership uses derivative financial instruments to manage price risk
associated with the market price of refined petroleum products. At September
30, 1999 the Partnership had hedged approximately 56 percent of its petroleum
product inventory and had approximately $0.1 million of unrealized gains
related to futures contracts held. BRC's operating income of $3.2 million for
the nine months ended September 30, 1999 includes approximately $4.0 million
in realized losses related to investments in futures contracts. However, this
loss was offset by gains in refined product sales by BRC. Of the $4.0 million
in realized losses, $2.9 million is related to investments in futures
contracts during the third quarter of 1999.
6. LONG-TERM DEBT
As of September 30, 1999, the Partnership had $240.0 million of Senior Notes
outstanding. The Senior Notes are scheduled to mature in the period 2020 to
2024 and bear interest from 6.89 percent to 6.98 percent. In addition, the
Partnership borrowed $26.0 million under its $100 million Credit Agreement
during the first quarter 1999 which was used to finance acquisitions of $18.7
million and for working capital purposes. The weighted average interest rate
for the $26.0 million debt was 6.07 percent at September 30, 1999.
7. PARTNERS' CAPITAL
Partners' capital consists of the following:
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
(In thousands)
<S> <C> <C> <C>
Partners' Capital - 1/1/99 $2,390 $296,095 $298,485
Net Income 510 55,919 56,429
Distributions (396) (43,491) (43,887)
Exercise of unit options - 762 762
------ -------- --------
Partners' Capital - 9/30/99 $2,504 $309,285 $311,789
====== ======== ========
</TABLE>
The following is a reconciliation of basic and dilutive income per Partnership
Unit for the three month and nine month periods ended September 30:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------
1999 1998
--------------------- ---------------------
Income Units Per Income Units Per
(Numer- (Denomi- Unit (Numer- (Denomi- Unit
ator) nator) Amount ator) nator) Amount
------- -------- ------ ------- -------- ------
(in thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income $16,625 $14,436
------- -------
Basic earnings per
Partnership Unit 16,625 27,024 $0.62 14,436 26,986 $0.53
Effect of dilutive
securities - options - 82 (0.01) - 97 -
------- ------ ----- ------ ------ -----
Diluted earnings per
Partnership Unit $16,625 27,106 $0.61 $14,436 27,083 $0.53
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------
1999 1998
--------------------- ---------------------
Income Units Per Income Units Per
(Numer- (Denomi- Unit (Numer- (Denomi- Unit
ator) nator) Amount ator) nator) Amount
------- -------- ------ ------- -------- ------
(in thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income $56,429 $38,798
------- -------
Basic earnings per
Partnership Unit 56,429 27,007 $2.09 38,798 26,981 $1.44
Effect of dilutive
securities - options - 91 (0.01) - 100 (0.01)
------- ------ ----- ------ ------ -----
Diluted earnings per
Partnership Unit $56,429 27,098 $2.08 $38,798 27,081 $1.43
======= ====== ===== ======= ====== =====
</TABLE>
Options reported as dilutive securities are related to unexercised options
outstanding under the Partnership's Unit Option Plan.
8. CASH DISTRIBUTIONS
The Partnership will generally make quarterly cash distributions 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.
The Partnership has declared a cash distribution of $0.55 per unit payable on
November 30, 1999 to unitholders of record on November 3, 1999. The total
distribution will amount to approximately $14,869,000.
9. PROPERTY TAX SETTLEMENT
In February 1999, the General Partner entered into a stipulation and order of
settlement with the New York State Office of Real Property Services and the
City of New York settling various real property tax certiorari proceedings.
The Partnership had challenged its real property tax assessments for a number
of past tax years on that portion of its pipeline that is located in public
right-of-way in New York City. The settlement agreement resulted in a
reduction of operating expenses of approximately $11.0 million, including a
cash refund of $6.0 million, for the Partnership in the second quarter of
1999.
10. ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of Effective Date of FASB Statement No. 133." This statement defers the
effective date of FASB Statement No. 133 to fiscal quarters and fiscal years
beginning after June 15, 2000. The impact of this statement is not expected
to have a material adverse effect on the Partnership's results of operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Amounts in the following discussion and analysis of financial condition and
results of operations relate to continuing operations unless otherwise
indicated.
RESULTS OF OPERATIONS
Third Quarter
Revenue from the transportation of refined petroleum products for the third
quarter 1999 was $49.0 million or 2.7 percent greater than revenue of $47.7
million for the third quarter 1998. Volumes for the third quarter 1999 were
1,035,900 barrels per day, 6,700 barrels per day or 0.6 percent less than
volumes of 1,042,600 barrels per day for the third quarter 1998. Longer haul
movements at higher tariff rates during the third quarter of 1999 than during
the third quarter of 1998 resulted in increased revenues. The average revenue
per barrel was 50.4 cents per barrel during the third quarter 1999 as compared
to 48.8 cents per barrel during the third quarter 1998. In addition, the
acquisition of BGC added $1.2 million to transportation revenue for the
quarter. Gasoline volumes were 4.9 percent greater during the third quarter
1999 than the third quarter 1998. In the East, volumes were strong to both the
Pittsburgh, Pennsylvania market area, as a result of a new connection, and to
the upstate New York market area. Volumes also increased on the Long Island
system as a result of increased deliveries to the Inwood, New York area.
Gasoline volumes declined in the Midwest where demand was generally weak with
the exception of the Toledo and Cleveland, Ohio and Bay City, Michigan areas.
Distillate volumes during the third quarter 1999 declined by 6.3 percent from
third quarter 1998 levels. Deliveries were down to most areas served by the
Partnership with the largest decline occurring at Toledo, Ohio. Turbine fuel
volumes were 2.7 percent greater during the third quarter 1999 than the third
quarter 1998. Most of this increase was related to deliveries to Dearborn,
Michigan in the Midwest and to J.F.K. and Newark airports in the East. These
increases in turbine fuel deliveries were offset by a decline in demand at
Miami International Airport.
Refining operation revenue for third quarter 1999 was $36.3 million. The
Partnership began refining operations on March 4, 1999 with the acquisition of
the fuels division of American Refining Group, Inc. Revenue during the third
quarter 1999 was derived from the sale of 29.2 million gallons of gasoline and
31.1 million gallons of distillate products. Revenue from the sale of gasoline
during the third quarter 1999 was $18.8 million while revenue from the sale of
distillate products was $17.5 million.
Costs and expenses for the third quarter 1999 were $62.4 million including
$35.0 million in expenses related to the refining operations of BRC and $0.5
million in expenses related to BGC's operations. Excluding the expenses of
BRC and BGC, costs and expenses were $26.9 million, $0.7 million or 2.5
percent below costs and expenses of $27.6 million incurred during the third
quarter 1998. Declines in payroll, outside services and professional fee
expense were partially offset by increased operating power, payroll overhead
and casualty loss expense.
Other expenses totaled $6.2 million during the third quarter 1999 as compared
to $5.7 million during the third quarter 1998. Interest expense increased due
to additional borrowings during the first quarter 1999 used to finance
acquisitions. In addition, incentive compensation payments to the General
Partner due to an increase in the level of cash distributions paid to limited
partners were greater during the third quarter 1999 as compared to the third
quarter 1998.
First Nine Months
Revenue from the transportation of refined petroleum products for the first
nine months of 1999 was $146.3 million or 6.2 percent greater than revenue of
$137.8 million for the first nine months of 1998. BGC's operations added $2.5
million to revenue during the period. Volumes for the first nine months of
1999 were 1,046,900 barrels per day, 18,500 barrels per day or 1.8 percent
greater than volumes of 1,028,400 barrels per day for the first nine months of
1998. Gasoline volumes were 2.7 percent greater during the first nine months
of 1999 than the first nine months of 1998. In the East, business increased
primarily to the upstate New York and Pittsburgh, Pennsylvania areas. In the
Midwest, gasoline volume declines at Cleveland and Columbus, Ohio and Detroit,
Michigan more than offset increased deliveries into the Toledo, Ohio area.
Gasoline deliveries on the Long Island and Jet Lines systems were up over 1998
levels on strong demand. Distillate volumes were 2.0 percent greater during
the first nine months of 1999 than the first nine months of 1998. In the East,
volumes were higher throughout most market areas as degree days were 17
percent higher during the first quarter of 1999 than the first quarter of
1998. Demand was particularly strong in the upstate New York and Pittsburgh,
Pennsylvania areas. In the Midwest, revenues were essentially flat despite
volume declines as an incentive tariff related to inter-refinery distillate
movements expired. The Long Island and Jet Lines systems experienced modest
growth for the year. Turbine fuel volumes increased by 2.7 percent during the
first nine months of 1999 as compared to the first nine months of 1998. The
increase in volumes was related to growth at the Newark Airport in the East
and increased demand at Detroit, Michigan and Toledo, Ohio in the Midwest.
Refining operation revenue from March 4, 1999 (date of acquisition) was $69.2
million. Revenue was derived from the sale of 61.0 million gallons of gasoline
and 69.5 million gallons of distillate products. Revenue from the sale of
gasoline was $35.0 million while revenue from the sale of distillate products
was $34.2 million.
Costs and expenses for the first nine months of 1999 were $140.7 million
including $65.1 million in expenses related to the refining operations of BRC
and $2.1 million in expenses related to BGC's operations. Excluding the
expenses of BRC and BGC, operating expenses were $73.5 million, $9.0 million
or 10.9 percent below costs and expenses of $82.5 million incurred during
1998. During the first nine months of 1999, the Partnership settled a real
property tax dispute with the City and State of New York, which resulted in a
property tax expense reduction of $11.0 million. Payroll costs also declined
as a result of previous staff reduction programs. Increases in operating
power, payroll benefit and casualty loss expense offset reductions in property
tax, payroll and outside service expense.
Other expenses totaled $18.4 million during the first nine months of 1999 as
compared to $16.5 million during the first nine months of 1998. Interest
expense increased due to additional borrowings used to finance acquisitions.
In addition, incentive compensation payments to the General Partner that are
based on the level of Partnership distributions were approximately $0.5
million greater during the first nine months of 1999 than the first nine
months of 1998.
Competition and Other Business Conditions
The Partnership's refining segment is subject to competition from other
refiners and marketers of refined petroleum products and subject to market
price risks representing the difference between the purchase cost of transmix
and the market price of refined petroleum products at the time of resale. In
order to reduce the level of market price risk the General Partner has adopted
a policy of hedging a substantial portion of BRC's refined product sales
through the sale of gasoline and heating oil contracts on the New York
Mercantile Exchange.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at September 30, 1999 is highlighted in
the following comparative summary:
Liquidity and Capital Indicators
<TABLE>
<CAPTION>
As of
------------------------
9/30/99 12/31/98
------- --------
<S> <C> <C>
Current ratio 1.5 to 1 0.8 to 1
Ratio of cash and cash equivalents,
and trade receivables to
current liabilities 0.8 to 1 0.5 to 1
Working capital/(deficit)-in thousands $16,921 $(6,266)
Ratio of total debt to total capital .46 to 1 .44 to 1
Book value (per Unit) $11.54 $11.06
</TABLE>
Following the acquisition of BRC, the current ratio and working capital
increased primarily as the result of additional working capital required to
support BRC's inventories. In addition, cash balances have increased from year
end 1998 levels.
The Partnership's cash flows from operations are generally sufficient to meet
current working capital requirements. In addition, the Partnership has a $100
million credit agreement (the "Credit Agreement") which expires on December
16, 2003. At September 30, 1999 there was $26.0 million borrowed under the
Credit Agreement.
Cash Provided by Operations
For the nine months ended September 30, 1999, cash provided by operations of
$59.2 million was derived principally from $69.4 million of income before
depreciation and amortization. Changes in current assets and current
liabilities resulted in a net cash use of $12.5 million. Increases in
inventories and trade receivables are attributable to the acquisition of BRC
and were partially offset by a corresponding increase in BRC's accounts
payable. Cash provided by operations was used to pay distributions to
Unitholders of $43.9 million. During the period the Partnership borrowed $26.0
million under its Credit Agreement which was used to finance acquisitions of
$18.7 million and for working capital purposes. Changes in non-current assets
and liabilities resulted in a net cash source of $2.0 million.
Debt Obligation and Credit Facilities
At September 30, 1999, the Partnership had $266.0 million in outstanding long-
term debt representing $240.0 million of Senior Notes and $26.0 million of
borrowings under the Credit Facility.
The indenture pursuant to which the Senior Notes were issued (the "Senior Note
Indenture") contains covenants which affect Buckeye Pipe Line Company, L.P.
("Buckeye"), Laurel Pipe Line Company, L.P. and Buckeye Pipe Line Company of
Michigan, L.P. (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.
The Credit Agreement permits borrowings of up to $100 million and contains
covenants that affect Buckeye and the Partnership. Generally, the Credit
Agreement (a) limits outstanding indebtedness of Buckeye based upon certain
financial ratios contained in the Credit Agreement, (b) prohibits Buckeye from
creating or incurring certain liens on its property, (c) prohibits the
Partnership or Buckeye from disposing of property which is material to its
operations, and (d) limits consolidation, merger and asset transfers by
Buckeye and the Partnership.
At September 30, 1999, the ratio of total debt to total capital was 46
percent. For purposes of the calculation of this ratio, total capital
consists of long-term debt, minority interests in subsidiaries and partners'
capital.
Capital Expenditures
At September 30, 1999, approximately 83 percent of total consolidated assets
consisted of property, plant and equipment.
Capital expenditures during the nine months ended September 30, 1999 totaled
$17.6 and were $0.4 million greater than capital expenditures for the nine
months ended September 30, 1998. The Partnership continues to make capital
expenditures in connection with the automation of its pipeline facilities and
improvements to its facilities in order to increase capacity, reliability,
integrity and efficiency. Estimated total capital expenditures for 1999, net
of acquisitions, amount to $27.6 million.
During the third quarter, the Partnership commenced an expansion of its
pipeline from East Chicago, Indiana to Lima, Ohio. The expansion will require
capital investment of approximately $6 million and is expected to be completed
in the third quarter of 2000. The capacity expansion will enable the
Partnership to transport additional petroleum products anticipated to be
shipped in connection with a major pipeline project under construction by a
third party. In addition, during the third quarter, the Partnership completed
an expansion of its pipeline serving Newark Airport. This capacity expansion
will enable the Partnership to serve growing demand at the airport. Finally,
the Partnership is also actively engaged in expanding capacity on its Laurel
pipeline system to meet increased demand across Pennsylvania.
Property Tax Settlement
In February 1999, the General Partner entered into a stipulation and order of
settlement with the New York State Office of Real Property Services and the
City of New York settling various real property tax certiorari proceedings.
The Partnership had challenged its real property tax assessments for a number
of past tax years on that portion of its pipeline that is located in public
right-of-way in New York City. The settlement agreement resulted in an expense
reduction of approximately $11.0 million, including a cash refund of $6.0
million, for the Partnership in the second quarter of 1999.
Debt and Equity Shelf Registration
On July 2, 1999, Buckeye Partners, L.P. filed with the Securities and Exchange
Commission a shelf registration statement (Form S-3) for up to $300 million of
limited partnership units or debt securities. The proceeds from the sale of
these securities would be used for, but not limited to, general business
purposes, debt repayment, acquisitions, capital expenditures and/or working
capital. At the present time there is no plan to issue securities under this
registration statement.
OTHER MATTERS
Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of Effective Date of FASB Statement No. 133." This statement defers the
effective date of FASB Statement No. 133 to fiscal quarters and fiscal years
beginning after June 15, 2000. The impact of this statement is not expected
to have a material adverse effect on the Partnership's results of operations.
Information Systems-Year 2000 Compliance
In 1998, the Partnership established a comprehensive plan to assess the impact
of the Year 2000 issue on the software and hardware utilized by the
Partnership's internal operations and pipeline control systems. As part of
that assessment, a team has reviewed and documented the status of the
Partnership's systems for Year 2000 compliance. The key information systems
reviewed included financial systems, pipeline operating systems, and the
Partnership's SCADA (Supervisory Control and Data Acquisition) system. In
connection with each of these areas, consideration has been given to hardware,
operating systems, applications, database management, system interfaces,
electronic transmission and outside vendors.
The Partnership relies on third-party suppliers for certain systems, products
and services including telecommunications. The Partnership has received
information concerning Year 2000 status from a group of critical suppliers and
vendors, and anticipates receiving additional information that will assist the
Partnership in determining the extent to which the Partnership may be
vulnerable to those third parties' failure to remedy their Year 2000 issues.
At this time, the Partnership believes that the total cost for known or
anticipated remediation of its information systems to make them Year 2000
compliant will not be material. Management of the Partnership believes it has
an effective program in place to resolve the Year 2000 issue in a timely
manner. Testing of replacement or modified systems continued during the third
quarter of 1999 and will be completed prior to Year 2000. Nevertheless, since
it is not possible to anticipate all possible future outcomes, especially when
third parties are involved, there could be circumstances in which the
Partnership would be unable to take customer orders, ship petroleum products,
invoice customers or collect payments. The effect on the Partnership's
liabilities and revenues due to a failure of its systems or a third-party
system cannot be predicted and could be material.
The Company has contingency plans for pipeline critical applications,
involving manual operations, and is working on additional contingency plans to
address unavoided or unavoidable risks associated with Year 2000 issues. The
Company's plan presently includes a controlled shut-down and re-start of the
Partnership's pipeline system during the December 31, 1999 to January 1, 2000
time period.
Forward Looking Statements
This SEC Form 10-Q includes forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although the General Partner believes that its
expectations are based on reasonable assumptions, it can give no assurance
that such assumptions will materialize. For instance, cost savings to be
realized in connection with the automation of pipeline facilities depend upon,
among other things, the field automation projects being implemented
effectively and on time. Similarly, increased revenues anticipated to be
realized in connection with pipeline expansion projects are dependent upon,
among other things, the expansion projects being implemented effectively and
on time, and the use of the increased capacity by shippers on the pipeline
systems.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
The Partnership uses derivative financial instruments to manage price risk
associated with the market price of refined petroleum products. The derivative
instruments that the Partnership selects are negatively correlated to the
market price of petroleum products. The intent is to protect operating
margins and the overall profitability of the refining segment from adverse
changes in refined petroleum product prices. At September 30, 1999 the
Partnership had hedged approximately 56 percent of its petroleum product
inventory and had approximately $0.1 million of unrealized gains related to
futures contracts held. BRC's operating income of $3.2 million for the nine
months ended September 30, 1999 includes approximately $4.0 million in
realized losses related to investments in futures contracts. However, this
loss was offset by gains in refined product sales by BRC.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements 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 Pipe Line Company,
as General Partner
Dated: October 19, 1999 By: /s/ Steven C. Ramsey
------------------------------
Steven C. Ramsey
Senior Vice President, Finance
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
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