-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q2tPW0MipcZ4J2JRW+3kp+p0MqRqzqeZxpwurZ152n6PwHfk2nxR7sKbsUI1UltT /1JyBiXkkcncAzJsQ99WoA== 0000950116-00-000589.txt : 20000323 0000950116-00-000589.hdr.sgml : 20000323 ACCESSION NUMBER: 0000950116-00-000589 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUCKEYE PARTNERS L P CENTRAL INDEX KEY: 0000805022 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 232432497 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09356 FILM NUMBER: 575476 BUSINESS ADDRESS: STREET 1: 3900 HAMILTON BLVD CITY: ALLENTOWN STATE: PA ZIP: 18103 BUSINESS PHONE: 6107704700 MAIL ADDRESS: STREET 1: 3900 HAMILTON BLVD CITY: ALLENTOWN STATE: PA ZIP: 18103 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Wsahington, D.C. 20549 FORM 10-K (Mark One) /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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 number) 5 Radnor Corporate Center 100 Matsonford Road Radnor, Pennsylvania 19087 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 770-4000 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class which registered - ------------------- ------------------------ LP Units representing limited partnership interests ......... New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / At March 17, 2000, the aggregate market value of the registrant's LP Units held by non-affiliates was $621 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 17, 2000: 26,799,906 ================================================================================ TABLE OF CONTENTS
Page ---- PART I Item 1. Business .................................................................. 2 Item 2. Properties ................................................................ 13 Item 3. Legal Proceedings ......................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders ....................... 14 PART II Item 5. Market for the Registrant's LP Units and Related Unitholder Matters. 15 Item 6. Selected Financial Data ................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................... 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................ 23 Item 8. Financial Statements and Supplementary Data ............................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................................... 49 PART III Item 10. Directors and Executive Officers of the Registrant ........................ 49 Item 11. Executive Compensation .................................................... 51 Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 53 Item 13. Certain Relationships and Related Transactions ............................ 53 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 57
1 PART I Item 1. Business Introduction Buckeye Partners, L.P. (the "Partnership"), the Registrant, is a limited partnership organized in 1986 under the laws of the state of Delaware. The Partnership conducts all its operations through subsidiary entities. These operating subsidiaries are Buckeye Pipe Line Company, L.P. ("Buckeye"), Laurel Pipe Line Company, L.P. ("Laurel"), Everglades Pipe Line Company, L.P. ("Everglades") and Buckeye Tank Terminals Company, L.P. ("BTT"). (Each of Buckeye, Laurel, Everglades and BTT is referred to individually as an "Operating Partnership" and collectively as the "Operating Partnerships"). The Partnership owns approximately a 99 percent interest in each of the Operating Partnerships. BTT owns a 100 percent interest in each of Buckeye Refining Company, LLC ("BRC") and Buckeye Gulf Coast Pipelines, LLC ("BGC") and also owns a 75 percent interest in WesPac Pipelines-Reno Ltd. and related WesPac entities. Buckeye is one of the largest independent pipeline common carriers of refined petroleum products in the United States, with 2,970 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. BRC refines transmix at its Indianola, Pennsylvania and Hartford, Illinois refineries. BGC is a contract operator of pipelines owned by major chemical companies in the Gulf Coast area. 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) were organized by American Financial in November 1986 and succeeded to the operations of predecessor companies owned by American Financial, including Buckeye Pipe Line Company, an Ohio corporation, and its subsidiaries ("Pipe Line"). Laurel was formed in October 1992 and succeeded to the operations of Laurel Pipe Line Company, an Ohio corporation, which was a majority owned corporate subsidiary of the Partnership until the minority interest was acquired in December 1991. In March 1999, the Partnership acquired the fuels division of American Refining Group, Inc. ("ARG"). The Partnership operates the former ARG processing business as BRC. On March 31, 1999, the Partnership acquired certain assets from Seagull Products Pipeline Corporation and Seagull Energy Corporation ("Seagull"). The Partnership operates the assets acquired from Seagull as BGC. See Item 8, "Financial Statements and Supplementary Data," for the Partnership's financial segment information. During March 1996, BMC Acquisition Company ("BAC"), a Delaware corporation organized in 1996, acquired all of the common stock of Buckeye Management Company ("BMC") for $63 million in cash from a subsidiary of American Financial (the "Acquisition"). At the time of the Acquisition, BMC served as general partner of the Partnership. BAC, which subsequently changed its name to Glenmoor, Ltd. ("Glenmoor"), is owned by certain directors and officers of BMC and trusts for the benefit of their families and certain employees of Buckeye Pipe Line Services Company, a Pennsylvania corporation ("Services Company"). Glenmoor currently provides management services to BMC, Buckeye Pipe Line Company (the "General Partner") and Services Company. See "Certain Relationships and Related Transactions." On August 12, 1997, as part of a restructuring (the "ESOP Restructuring") of the BMC Acquisition Company Employee Stock Ownership Plan (the "ESOP"), all of the General Partner's employees were transferred to Services Company, which is wholly owned by the ESOP. See 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Employee Stock Ownership Plan." Services Company also entered into a Services Agreement with BMC and the General Partner to provide services to the Partnership and the Operating Partnerships for a 13.5 year term. Under the terms of the Service Agreement, Services Company is reimbursed by BMC or the General Partner for its direct and indirect expenses. BMC and the General Partner are in turn reimbursed by the Partnership and the Operating Partnerships for such expenses other than certain executive compensation and fringe benefit costs. See "Certain Relationships and Related Transactions." In connection with an internal restructuring, effective December 31, 1998, BMC transferred its general partnership interest in the Partnership, as well as certain other assets and liabilities, to its wholly-owned subsidiary, Buckeye Pipe Line Company. Buckeye Pipe Line Company currently serves as sole general partner of the Partnership and as sole general partner of each Operating Partnership. As of December 31, 1999, the General Partner owned approximately a 1 percent general partnership interest in the Partnership and approximately a 1 percent general partnership interest in each Operating Partnership. Effective for the December 31, 1998 financial statements, the Partnership adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." In 1999, the Partnership had two segments, the refined products transportation segment and the refining segment. Prior to 1999 the Partnership had only one segment, namely, the refined products transportation segment. Refined Products Transportation Segment The Partnership receives petroleum products from refineries, connecting pipelines and marine terminals, and transports those products to other locations. In 1999, refined petroleum products transportation accounted for approximately 65 percent of the Partnership's consolidated revenues and approximately 95 percent of consolidated operating income. See Item 8, "Financial Statements and Supplementary Data," for the Partnership's financial segment information. The Partnership transported an average of approximately 1,056,100 barrels per day of refined products in 1999. The following table shows the volume and percentage of refined petroleum products transported over the last three years. Volume and Percentage of Refined Petroleum Products Transported (1) (Volume in thousands of barrels per day)
Year ended December 31, ----------------------------------------------------------------------- 1999 1998 1997 ---------------------- ---------------------- --------------------- Volume Percent Volume Percent Volume Percent ---------- --------- ---------- --------- ---------- -------- Gasoline ....................... 531.9 50% 518.8 50% 507.8 50% Jet Fuels ...................... 265.9 25 257.2 25 255.4 25 Middle Distillates (2) ......... 240.2 23 230.3 23 238.8 23 Other Products ................. 18.1 2 24.9 2 22.0 2 ------- -- ------- -- ------- -- Total .......................... 1,056.1 100% 1,031.2 100% 1,024.0 100% ======= === ======= === ======= ===
- --------------- (1) Excludes local product transfers. (2) Includes diesel fuel, heating oil, kerosene and other middle distillates. The Partnership provides service in the following states: Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois, Connecticut, Massachusetts and Florida. 3 Pennsylvania--New York--New Jersey Buckeye serves major population centers in the states of Pennsylvania, New York and New Jersey through 1,004 miles of pipeline. Refined petroleum products are received at Linden, New Jersey. Products are then transported through two lines from Linden, New Jersey to Allentown, Pennsylvania. From Allentown, the pipeline continues west, through a connection with Laurel, to Pittsburgh, Pennsylvania (serving Reading, Harrisburg, Altoona/Johnstown and Pittsburgh) and north through eastern Pennsylvania into New York (serving Scranton/Wilkes-Barre, Binghamton, Syracuse, Utica and Rochester and, via a connecting carrier, Buffalo). Products received at Linden, New Jersey are also transported through one line to Newark International Airport and through two additional lines to J. F. Kennedy International and LaGuardia airports and to commercial bulk terminals at Long Island City and Inwood, New York. These pipelines presently supply J. F. Kennedy, LaGuardia and Newark airports with substantially all of each airport's jet 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 1,854 miles of pipeline (of which 246 miles are jointly owned with other pipeline companies) in southern Illinois, central Indiana, eastern Michigan, western and northern Ohio and western Pennsylvania. A number of receiving lines and delivery lines connect to a central corridor which runs from Lima, Ohio, through Toledo, Ohio to Detroit, Michigan. Products are received at East Chicago, Indiana; Robinson, Illinois and at the refinery and other pipeline connection points near Detroit, Toledo and Lima. Major market areas served include Huntington/Fort Wayne, Indiana; Bay City, Detroit and Flint, Michigan; Cleveland, Columbus, Lima and Toledo, Ohio; and Pittsburgh, Pennsylvania. Other Refined Products Pipelines Buckeye serves Connecticut and Massachusetts through 112 miles of pipeline that carry refined products from New Haven, Connecticut to Hartford, Connecticut and Springfield, Massachusetts. Everglades carries primarily jet fuel on a 37-mile pipeline from Port Everglades, Florida to Hollywood-Ft. Lauderdale International Airport and Miami International Airport. Everglades presently supplies Miami International Airport with substantially all of its jet fuel requirements. Other Business Activities--Transportation BTT provides bulk storage services through leased facilities located in Pittsburgh, Pennsylvania which have the capacity to store up to an aggregate of approximately 257,000 barrels of refined petroleum products. This facility, which is served by Buckeye and Laurel, provides bulk storage and loading facilities for shippers and other customers. BGC is a contract operator of pipelines owned by major chemical companies in the state of Texas. BGC currently has six contracts in place, each with different chemical companies. BGC also owns a 16-mile pipeline located in the state of Texas that it leases to a third-party chemical company. WesPac Pipelines-Reno Ltd., a joint venture between BTT and Kealine Partners, completed a 2.5-mile pipeline in November 1999 serving the Reno/Tahoe International Airport. BTT has a 75 percent interest in the joint venture. Competition and Other Business Considerations--Transportation The Operating Partnerships conduct 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 4 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 is 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 1999, the transportation business had approximately 90 customers, most of which were either major integrated oil companies or large refined product marketing companies. The largest two customers accounted for 4.8 percent and 4.7 percent, respectively, of transportation revenues, while the 20 largest customers accounted for 45.4 percent of consolidated transportation revenues. Generally, pipelines are the lowest cost method for long-haul overland movement of refined petroleum products. Therefore, the Operating Partnerships' most significant competitors for large volume shipments are other pipelines, many of which are owned and operated by major integrated oil companies. Although it is unlikely that a pipeline system comparable in size and scope to the Operating Partnerships' pipeline system will be built in the foreseeable future, new pipelines (including pipeline segments that connect with existing pipeline systems) could be built to effectively compete with the Operating Partnerships in particular locations. The Operating Partnerships compete with marine transportation in some areas. Tankers and barges on the Great Lakes account for some of the volume to certain Michigan, Ohio and upstate New York locations during the approximately eight non-winter months of the year. Barges are presently a competitive factor for deliveries to the New York City area, the Pittsburgh area, Connecticut and Ohio. Trucks competitively deliver product in a number of areas served by the Operating Partnerships. While their costs may not be competitive for longer hauls or large volume shipments, trucks compete effectively for incremental and marginal volumes in many areas served by the Operating Partnerships. The availability of truck transportation places a significant competitive constraint on the ability of the Operating Partnerships to increase their tariff rates. Privately arranged exchanges of product between marketers in different locations are an increasing but unquantified form of competition. Generally, such exchanges reduce both parties' costs by eliminating or reducing transportation charges. In addition, consolidation among refiners and marketers that has accelerated in recent years has altered distribution patterns, reducing demand for transportation services in some markets and increasing them in other markets. Distribution of refined petroleum products depends to a large extent upon the location and capacity of refineries. In recent years, domestic refining capacity has both increased and decreased as a result of refinery expansions and shutdowns. Because the Partnership's business is largely driven by the consumption of fuel in its delivery areas and the Operating Partnerships' pipelines have numerous source points, the General Partner does not believe that the expansion or shutdown 5 of any particular refinery would have a material effect on the business of the Partnership. However, the General Partner is unable to determine whether additional expansions or shutdowns will occur or what their specific effect would be. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Competition and Other Business Conditions." The Operating Partnerships' mix of products transported tends to vary seasonally. Declines in demand for heating oil during the summer months are, to a certain extent, offset by increased demand for gasoline and jet fuel. Overall, operations have been only moderately seasonal, with somewhat lower than average volume being transported during March, April and May as compared to the rest of the year. Neither the Partnership nor any of the Operating Partnerships, other than BTT's subsidiaries, have any employees. The Operating Partnerships' transportation segment operations are managed and operated by employees of Services Company and BGC. In addition, Glenmoor provides certain management services to BMC, the General Partner and Services Company. At December 31, 1999, Services Company had a total of 492 full-time employees, 12 of whom were represented by two labor unions. At December 31, 1999, BGC had a total on 28 full-time, non-union employees. The Operating Partnerships (and their predecessors) have never experienced any significant work stoppages or other significant labor problems. Capital Expenditures--Transportation 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 1999, total capital expenditures related to the transportation business were $26.7 million. Projected capital expenditures for the transportation business in 2000 amount to approximately $35.5 million and are expected to be funded from cash generated by operations and Buckeye's existing credit facility. Planned capital expenditures in 2000 include, among other things, various facility improvements that facilitate increased pipeline volumes, facility automation, renewal and replacement of several tank roofs, upgrades to field instrumentation and cathodic protection systems, installation and replacement of mainline pipe and valves and construction of additional office space. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Capital Expenditures." Regulation--Transportation 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. 6 FERC Rate Regulation Buckeye's rates are governed by a market-based rate regulation program initially approved by FERC in March 1991 for three years and subsequently extended. Under this program, in markets where Buckeye does not have significant market power, individual rate increases: (a) will not exceed a real (i.e., exclusive of inflation) increase of 15 percent over any two-year period (the "rate cap"), and (b) will be allowed to become effective without suspension or investigation if they do not exceed a "trigger" equal to the change in the Gross Domestic Product implicit price deflator since the date on which the individual rate was last increased, plus 2 percent. Individual rate decreases will be presumptively valid upon a showing that the proposed rate exceeds marginal costs. In markets where Buckeye was found to have significant market power and in certain markets where no market power finding was made: (i) individual rate increases cannot exceed the volume weighted average rate increase in markets where Buckeye does not have significant market power since the date on which the individual rate was last increased, and (ii) any volume weighted average rate decrease in markets where Buckeye does not have significant market power must be accompanied by a corresponding decrease in all of Buckeye's rates in markets where it does have significant market power. Shippers retain the right to file complaints or protests following notice of a rate increase, but are required to show that the proposed rates violate or have not been adequately justified under the market-based rate regulation program, that the proposed rates are unduly discriminatory, or that Buckeye has acquired significant market power in markets previously found to be competitive. The Buckeye program is an exception to the generic oil pipeline regulations issued under the Energy Policy Act of 1992. The generic rules rely primarily on an index methodology, whereby a pipeline is allowed to change its rates in accordance with an index that FERC believes reflects cost changes appropriate for application to pipeline rates. In the alternative, a pipeline is allowed to charge market-based rates if the pipeline establishes that it does not possess significant market power in a particular market. In addition, the rules provide for the rights of both pipelines and shippers to demonstrate that the index should not apply to an individual pipeline's rates in light of the pipeline's costs. The final rules became effective on January 1, 1995. The Buckeye program will be subject to reevaluation at the same time FERC reviews the index selected in the generic oil pipeline regulations, which is anticipated to occur by July 2000. At this time, the General Partner cannot predict the impact, if any, that a change to Buckeye's rate program would have on Buckeye's operations. Independent of regulatory considerations, it is expected that tariff rates will continue to be constrained by competition and other market factors. 7 Refining Segment BTT, through its subsidiary BRC, owns and operates two transmix processing refineries. The refineries are located in Indianola, Pennsylvania and Hartford, Illinois. These facilities refine pipeline transmix, which represents the commingling of refined petroleum products, primarily fuel oil and gasoline, that occurs as a result of pipeline operations. Separate quantities of fuel oil, kerosene and gasoline are produced from the refining process. In some instances, BRC blends purchased product with the processed refined products in order to meet minimum specifications. The refined products are marketed at the wholesale level. In November 1999, BRC entered into a contract with a major integrated oil company that requires BRC to sell all of the refined product produced at its Indionala refinery to such company. The selling price of the refined product under the terms of the contract is based on a formula that is related to market indices. The initial term of the contract is for five years. BRC's Indianola, Pennsylvania facilities include the refinery and a truck loading terminal. The maximum processing capability of the refinery is approximately 11,500 barrels per day of transmix. The products produced are fuel oil, kerosene and gasoline. BRC's Indianola refinery receives its supply of transmix from pipelines, barges and trucks. For the 10 months ended December 31, 1999, the Indianola refinery processed approximately 2.4 million barrels of transmix from which it produced 1.54 million barrels of fuel oil, 0.03 million barrels of kerosene and 0.83 million barrels of gasoline. BRC's Hartford, Illinois refinery has maximum processing capability of approximately 5,000 barrels per day of transmix. The products produced are fuel oil, kerosene and gasoline. BRC's Hartford refinery receives its supply of transmix from pipelines. For the 10 months ended December 31, 1999, the Hartford refinery processed approximately 1.0 million barrels of transmix from which it produced 0.7 million barrels of fuel oil and 0.3 million barrels of gasoline. Competition and Other Business Considerations--Refining In 1999, the refining business had approximately 95 customers. The largest customer was Marathon Ashland Petroleum who accounted for 30.1 percent of consolidated refining revenue. The second largest customer accounted for 6.6 percent of consolidated refining revenue while the 10 largest customers accounted for 60.3 percent of consolidated refining revenue. The profitability of the refining business is affected by the cost of the transmix, the cost to refine the transmix and the market price at which the refined transmix products can be sold. In order to reduce the market price risk, BRC hedges a substantial portion of its exposure with gasoline and fuel oil futures contracts. In addition, BRC has entered into a processing arrangement at Hartford, Illinois with a major petroleum pipeline and a wholesale marketing agreement at Indianola, Pennsylvania with a major integrated oil company each of which reduces the impact of market price fluctuation. See Item 8, "Financial Statements and Supplementary Data," for the Partnership's financial data. At December 31, 1999, BRC had a total of 34 full-time employees, 19 of whom were represented by a labor union. Capital Expenditures--Refining The General Partner anticipates that the Partnership will continue to make ongoing capital expenditures to maintain and enhance its refining assets and properties, including improvements to meet customers' needs and those required to satisfy new environmental and safety standards. In 1999, total capital expenditures related to the refining segment were $0.3 million. Projected capital expenditures for 2000 amount to approximately $0.8 million and are expected to be funded from cash generated by operations. Planned capital expenditures in 2000 include, among other things, a truck rack and terminal expansion and a heat exchange upgrade. 8 Environmental Matters The Operating Partnerships are subject to federal, state and local laws and regulations relating to the protection of the environment. Although the General Partner believes that the operations of the Operating Partnerships comply in all material respects with applicable environmental laws and regulations, risks of substantial liabilities are inherent in pipeline operations, and there can be no assurance that material environmental liabilities will not be incurred. Moreover, it is possible that other developments, such as increasingly rigorous environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Operating Partnerships, could result in substantial costs and liabilities to the Partnership. See "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources--Environmental Matters." As a refiner of petroleum products, BRC is subject to the Environmental Protection Agency regulations. The Clean Air Act requires refiners to change the composition of refined products in order to reduce the amount of pollutants released into the environment. To date, such regulations have not had a material adverse effect on the refining business. It is possible, however, that new or more stringent environmental controls could have a material impact on the refining business and the products it produces. The Oil Pollution Act of 1990 ("OPA") amended certain provisions of the federal Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes as they pertain to the prevention of and response to oil spills into navigable waters. The OPA subjects owners of facilities to strict joint and several liability for all containment and clean-up costs and certain other damages arising from a spill. The CWA provides penalties for any discharges of petroleum products in reportable quantities and imposes substantial liability for the costs of removing a spill. State laws for the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of releases of petroleum or its derivatives into surface waters or into the ground. Regulations are currently being developed under OPA and state laws that may impose additional regulatory burdens on the Partnership. Contamination resulting from spills or releases of refined petroleum products is 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 generate "hazardous substances." As a result, to the extent a hazardous substance generated by the Operating Partnerships or their predecessors may have been released or disposed of in the past, the Operating Partnerships may in the future be required to remedy contaminated property. Governmental authorities such as the Environmental Protection Agency, and in some instances third parties, are 9 authorized under CERCLA to seek to recover remediation and other costs from responsible persons, without regard to fault or the legality of the original disposal. In addition to its potential liability as a generator of a "hazardous substance," the property or right-of-way of the Operating Partnerships may be adjacent to or in the immediate vicinity of Superfund and other hazardous waste sites. Accordingly, the Operating Partnerships may be responsible under CERCLA for all or part of the costs required to cleanup such sites, which costs could be material. The Clean Air Act, amended by the Clean Air Act Amendments of 1990 (the "Amendments"), imposes controls on the emission of pollutants into the air. The Amendments required states to develop facility-wide permitting programs over the past several years to comply with new federal programs. Existing operating and air-emission requirements like those currently imposed on the Operating Partnerships are being reviewed by appropriate state agencies in connection with the new facility-wide permitting program. It is possible that new or more stringent controls will be imposed upon the Operating Partnerships through this permit review process. The Operating Partnerships are also subject to environmental laws and regulations adopted by the various states in which they operate. In certain instances, the regulatory standards adopted by the states are more stringent than applicable federal laws. In connection with the 1986 Acquisition, Pipe Line entered into an Administrative Consent Order ("ACO") with the New Jersey Department of Environmental Protection and Energy under the New Jersey Environmental Cleanup Responsibility Act of 1983 ("ECRA") relating to all six of Pipe Line's facilities in New Jersey. The ACO permitted the 1986 Acquisition to be completed prior to full compliance with ECRA, but required Pipe Line to conduct in a timely manner a sampling plan for environmental conditions at the New Jersey facilities and to implement any required clean-up plan. Sampling continues in an effort to identify areas of contamination at the New Jersey facilities, while clean-up operations have begun and have been completed at certain of the sites. The obligations of Pipe Line were not assumed by the Partnership or by BAC in the Acquisition, and the costs of compliance have been and will continue to be paid by American Financial. Through December 1999, Buckeye's costs of approximately $2,546,000 have been paid by American Financial. Safety Matters The Operating Partnerships are subject to regulation by the United States Department of Transportation ("DOT") under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA") relating to the design, installation, testing, construction, operation, replacement and management of their pipeline facilities. HLPSA covers petroleum and petroleum products and requires any entity which owns or operates pipeline facilities to comply with applicable safety standards, to establish and maintain a plan of inspection and maintenance and to comply with such plans. The Pipeline Safety Reauthorization Act of 1988 requires coordination of safety regulation between federal and state agencies, testing and certification of pipeline personnel, and authorization of safety-related feasibility studies. The General Partner has initiated drug and alcohol testing programs to comply with the regulations promulgated by the Office of Pipeline Safety and DOT. HLPSA requires, among other things, that the Secretary of Transportation consider the need for the protection of the environment in issuing federal safety standards for the transportation of hazardous liquids by pipeline. The legislation also requires the Secretary of Transportation to issue regulations concerning, among other things, the identification by pipeline operators of environmentally sensitive areas; the circumstances under which emergency flow restricting devices should be required on pipelines; training and qualification standards for personnel involved in maintenance and operation of pipelines; and the periodic integrity testing of pipelines in environmentally sensitive and high-density population areas by internal inspection devices or by hydrostatic testing. Significant expenses would be incurred if, for instance, additional valves were required, if leak detection standards were amended to exceed the current control system capabilities 10 of the Operating Partnerships or additional integrity testing of pipeline facilities were to be required. The General Partner believes that the Operating Partnerships' operations comply in all material respects with HLPSA. However, the industry, including the Partnership, could be required to incur substantial additional capital expenditures and increased operating costs depending upon the requirements of final regulations issued by DOT pursuant to HLPSA, as amended. The Operating Partnerships are also subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The General Partner believes that the Operating Partnerships' operations comply in all material respects with OSHA requirements, including general industry standards, recordkeeping, hazard communication requirements and monitoring of occupational exposure to benzene and other regulated substances. The General Partner cannot predict whether or in what form any new legislation or regulatory requirements might be enacted or adopted or the costs of compliance. In general, any such new regulations would increase operating costs and impose additional capital expenditure requirements on the Partnership, but the General Partner does not presently expect that such costs or capital expenditure requirements would have a material adverse effect on the Partnership. Tax Treatment of Publicly Traded Partnerships under the Internal Revenue Code The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain limitations on the current deductibility of losses attributable to investments in publicly traded partnerships and treats certain publicly traded partnerships as corporations for federal income tax purposes. The following discussion briefly describes certain aspects of the Code that apply to individuals who are citizens or residents of the United States without commenting on all of the federal income tax matters affecting the Partnership or the holders of LP units ("Unitholders"), and is qualified in its entirety by reference to the Code. UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PARTNERSHIP. Characterization of the Partnership for Tax Purposes The Code treats a publicly traded partnership that existed on December 17, 1987, such as the Partnership, as a corporation for federal income tax purposes, unless, for each taxable year of the Partnership, under Section 7704(d) of the Code, 90 percent or more of its gross income consists of "qualifying income." Qualifying income includes interest, dividends, real property rents, gains from the sale or disposition of real property, income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy and timber), and gain from the sale or disposition of capital assets that produce such income. Because the Partnership is engaged primarily in the refined products pipeline transportation business, the General Partner believes that 90 percent or more of the Partnership's gross income has been qualifying income. If this continues to be true and no subsequent legislation amends that provision, the Partnership will continue to be classified as a partnership and not as a corporation for federal income tax purposes. 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 that may not be offset by passive activity losses includes not only salary and active business income, but also portfolio income such as interest, dividends or royalties or gain from the sale of property that produces portfolio income. Credits from passive activities are also limited to the tax attributable to any income from passive 11 activities. The passive activity loss rules are applied after other applicable limitations on deductions, such as the at-risk rules and basis limitations. Certain closely held corporations are subject to slightly different rules that can also limit their ability to offset passive losses against certain types of income. Under the Code, net income from publicly traded partnerships is not treated as passive income for purposes of the passive loss rule, but is treated as non-passive income. Net losses and credits attributable to an interest in a publicly traded partnership are not allowed to offset a partner's other income. Thus, a Unitholder's proportionate share of the Partnership's net losses may be used to offset only Partnership net income from its trade or business in succeeding taxable years or, upon a complete disposition of a Unitholder's interest in the Partnership to an unrelated person in a fully taxable transaction, may be used to (i) offset gain recognized upon the disposition, and (ii) then against all other income of the Unitholder. In effect, net losses are suspended and carried forward indefinitely until utilized to offset net income of the Partnership from its trade or business or allowed upon the complete disposition to an unrelated person in a fully taxable transaction of the Unitholder's interest in the Partnership. A Unitholder's share of Partnership net income may not be offset by passive activity losses generated by other passive activities. In addition, a Unitholder's proportionate share of the Partnership's portfolio income, including portfolio income arising from the investment of the Partnership's working capital, is not treated as income from a passive activity and may not be offset by such Unitholder's share of net losses of the Partnership. Deductibility of Interest Expense The Code generally provides that investment interest expense is deductible only to the extent of a non- corporate taxpayer's net investment income. In general, net investment income for purposes of this limitation includes gross income from property held for investment, gain attributable to the disposition of property held for investment (except for net capital gains for which the taxpayer has elected to be taxed at special capital gains rates) and portfolio income (determined pursuant to the passive loss rules) reduced by certain expenses (other than interest) which are directly connected with the production of such income. Property subject to the passive loss rules is not treated as property held for investment. However, the IRS has issued a Notice which provides that net income from a publicly traded partnership (not otherwise treated as a corporation) may be included in net investment income for purposes of the limitation on the deductibility of investment interest. A Unitholder's investment income attributable to its interest in the Partnership will include both its allocable share of the Partnership's portfolio income and trade or business income. A Unitholder's investment interest expense will include its allocable share of the Partnership's interest expense attributable to portfolio investments. Unrelated Business Taxable Income Certain entities otherwise exempt from federal income taxes (such as individual retirement accounts, pension plans and charitable organizations) are nevertheless subject to federal income tax on net unrelated business taxable income and each such entity must file a tax return for each year in which it has more than $1,000 of gross income from unrelated business activities. The General Partner believes that substantially all of the Partnership's gross income will be treated as derived from an unrelated trade or business and taxable to such entities. The tax-exempt entity's share of the Partnership's deductions directly connected with carrying on such unrelated trade or business are allowed in computing the entity's taxable unrelated business income. ACCORDINGLY, INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT ENTITIES SUCH AS INDIVIDUAL RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE TRUSTS MAY NOT BE ADVISABLE. State Tax Treatment During 1999, the Partnership owned property or conducted business in the states of Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois, Connecticut, Massachusetts, 12 Florida, Texas and Nevada. A Unitholder will likely be required to file state income tax returns and to pay applicable state income taxes in many of these states and may be subject to penalties for failure to comply with such requirements. Some of the states have proposed that the Partnership withhold a percentage of income attributable to Partnership operations within the state for Unitholders who are non-residents of the state. In the event that amounts are required to be withheld (which may be greater or less than a particular Unitholder's income tax liability to the state), such withholding would generally not relieve the non-resident Unitholder from the obligation to file a state income tax return. Certain Tax Consequences to Unitholders Upon formation of the Partnership in 1986, the General Partner elected twelve-year straight-line depreciation for tax purposes. For this reason, starting in 1999, the amount of depreciation available to the Partnership has been reduced significantly and taxable income has increased accordingly. Unitholders, however, will continue to offset Partnership income with individual LP Unit depreciation under their IRC section 754 election. Each Unitholder's tax situation will differ depending upon the price paid and when LP Units were purchased. Generally, those who purchased LP Units in the past few years will have adequate depreciation to offset a considerable portion of Partnership income, while those who purchased LP Units more than several years ago will experience the full increase in taxable income. Unitholders are reminded that, in spite of the additional taxable income beginning in 1999, the current level of cash distributions exceed expected tax payments. Furthermore, sale of LP Units will result in taxable ordinary income recapture. UNITHOLDERS ARE ENCOURAGED TO CONSULT THEIR PROFESSIONAL TAX ADVISORS REGARDING THE TAX IMPLICATIONS TO THEIR INVESTMENT IN LP UNITS. Item 2. Properties As of December 31, 1999, the principal facilities of the Operating Partnership's transportation segment included 3,368 miles of 6-inch to 24-inch diameter pipeline, 34 pumping stations, 84 delivery points and various sized tanks having an aggregate capacity of approximately 9.2 million barrels. At December 31, 1999, the principal facilities of the Operating Partnership's refining segment included a transmix refinery located in Indianola, Pennsylvania with a maximum processing capacity of 11,500 barrels per day and a transmix refinery located in Hartford, Illinois with a maximum processing capacity of 5,000 barrels per day. The Operating Partnerships own substantially all of their facilities. In general, the Operating Partnerships' pipelines are located on land owned by others pursuant to rights granted under easements, leases, licenses and permits from railroads, utilities, governmental entities and private parties. Like other pipelines, certain of the Operating Partnerships' rights are revocable at the election of the grantor or are subject to renewal at various intervals, and some require periodic payments. Certain portions of Buckeye's pipeline in Connecticut and 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. 13 Item 3. Legal Proceedings The Partnership, in the ordinary course of business, is involved in various claims and legal proceedings, some of which are covered in whole or in part by insurance. The General Partner is unable to predict the timing or outcome of these claims and proceedings. Although it is possible that one or more of these claims or proceedings, if adversely determined, could, depending on the relative amounts involved, have a material effect on the Partnership's results of operations for a future period, the General Partner does not believe that their outcome will have a material effect on the Partnership's consolidated financial condition. With respect to environmental litigation, certain Operating Partnerships (or their predecessors) have been named as defendants in several lawsuits or have been notified by federal or state authorities that they are a potentially responsible party ("PRP") under federal laws or a respondent under state laws relating to the generation, disposal or release of hazardous substances into the environment. Typically, an Operating Partnership is one of many PRPs for a particular site and its contribution of total waste at the site is minimal. However, because CERCLA and similar statutes impose liability without regard to fault and on a joint and several basis, the liability of an Operating Partnership in connection with such proceedings could be material. In July 1994, Buckeye was named as a defendant in an action filed by the Michigan Department of Natural Resources ("MDNR") in Circuit Court, Oakland County, Michigan. The complaint also names three individuals and three other corporations as defendants. The complaint alleges that under the Michigan Environmental Response Act, the Michigan Water Resource Commission Act and the Leaking Underground Storage Tank Act, the defendants are liable to the state of Michigan for remediation expenses in connection with alleged groundwater contamination in the vicinity of Sable Road, Oakland County, Michigan. The complaint asserts that contaminated groundwater has infiltrated drinking water wells in the area. The complaint seeks past response costs in the amount of approximately $2.0 million and a declaratory judgment that the defendants are liable for future response costs and remedial activities at the site. In October, 1999, the parties reached a settlement agreement. The defendants agreed to pay the state of Michigan $1.1 million for past costs incurred in connection with site activities, and to conduct certain investigation and remediation activities in the future. The Partnership's share of the settlement payment will be less than $0.4 million. The parties are in the process of negotiating a Consent Decree to be entered by the Court to confirm the settlement. In addition, the defendants are in the process of negotiating a Site Participation Agreement to confirm the agreed upon funding arrangements among the defendants for future costs at the site. Although the cost of the future remediation costs to be undertaken by the defendants cannot be determined at this time, Buckeye expects that its portion of any such liability will not be material. Additional claims for the cost of cleaning up releases of hazardous substances and for damage to the environment resulting from the activities of the Operating Partnerships or their predecessors may be asserted in the future under various federal and state laws, but the amount of such claims or the potential liability, if any, cannot be estimated. See "Business--Regulation--Environmental Matters." In 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 a public right-of-way in New York City. The settlement agreement resulted in a one-time property tax reduction of $11.0 million for the Partnership in the second quarter of 1999. 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, 1999. 14 PART II Item 5. Market for the Registrant's LP Units and Related Unitholder Matters The LP Units of the Partnership are listed and traded principally on the New York Stock Exchange. In January 1998, the General Partner approved a two-for-one unit split that became effective February 13, 1998. All unit and per unit information contained in this filing, unless otherwise noted, has been adjusted for the two for one split. The high and low sales prices of the LP Units in 1999 and 1998, as reported on the New York Stock Exchange Composite Tape, were as follows: 1999 1998 Quarter High Low High Low - ------- ---- --- ---- --- First .......... 29.2500 25.7500 30.0625 27.5000 Second ......... 29.3750 25.2500 29.8750 27.0000 Third .......... 29.5000 26.5000 30.2500 26.0000 Fourth ......... 28.3750 25.0000 31.1250 26.0625 During the months of December 1999 and January 2000, the Partnership gathered tax information from its known LP Unitholders and from brokers/nominees. Based on the information collected, the Partnership estimates its number of beneficial LP Unitholders to be approximately 18,000. Cash distributions paid during 1998 and 1999 were as follows: Amount Record Date Payment Date Per Unit - ----------- ------------ -------- February 23, 1998 ......... February 27, 1998 $ 0.525 May 6, 1998 ............... May 29, 1998 $ 0.525 August 5, 1998 ............ August 31, 1998 $ 0.525 November 4, 1998 .......... November 30, 1998 $ 0.525 February 16, 1999 ......... February 26, 1999 $ 0.525 May 5, 1999 ............... May 28, 1999 $ 0.550 August 4, 1999 ............ August 31, 1999 $ 0.550 November 1, 1999 .......... November 30, 1999 $ 0.550 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 January 20, 2000, the Partnership announced a quarterly distribution of $0.60 per LP Unit payable on February 29, 2000 to Unitholders of record on February 4, 2000. 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, 1999, 1998, 1997, 1996 and 1995. The tables should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Report. 15
Year Ended December 31, ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- (In thousands, except per unit amounts) Income Statement Data: Revenue: Transportation (1) ....................... $ 198,297 $ 184,477 $ 184,981 $ 182,955 $ 183,462 Refining (2) ............................. 107,489 -- -- -- -- Total revenue (1)(2) ...................... 305,786 184,477 184,981 182,955 183,462 Depreciation and amortization (3) ......... 17,475 16,432 13,177 11,333 11,202 Operating income (1)(2) ................... 101,029 74,358 72,075 68,784 71,504 Interest and debt expense (4)(5) .......... 16,854 15,886 21,187 21,854 21,710 Income from continuing operations before extraordinary loss ....................... 76,283 52,007 48,807 49,337 49,840 Net income ................................ 76,283 52,007 6,383 49,337 49,840 Income per unit from continuing opera- tions before extraordinary loss .......... 2.82 1.93 1.92 2.03 2.05 Net income per unit ....................... 2.82 1.93 0.25 2.03 2.05 Distributions per unit .................... 2.18 2.10 1.72 1.50 1.40
December 31, ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (In thousands) Balance Sheet Data: Total assets .............................. $674,285 $618,099 $615,062 $567,837 $552,646 Long-term debt (4) ........................ 266,000 240,000 240,000 202,100 214,000 General Partner's capital ................. 2,548 2,390 2,432 2,760 2,622 Limited Partners' capital ................. 314,441 296,095 300,346 273,219 259,563
(1) Transportation revenue and operating income for 1999 include BGC revenue of $3,715,000 and operating income of $488,000 for the period March 31, 1999 through December 31, 1999. (2) Refining revenue and operating income for 1999 include BRC revenue of $107,489,000 and operating income of $5,093,000 for the period March 4, 1999 through December 31, 1999. (3) Depreciation and amortization includes $4,698,000 in each of 1999 and 1998 and $1,806,000 in 1997 for amortization of a deferred charge related to the ESOP Restructuring. (4) In December 1997 Buckeye issued $240,000,000 of Senior Notes bearing interest ranging from 6.39 percent to 6.98 percent. Concurrently with the issuance of the Senior Notes, Buckeye extinguished $202,100,000 of First Mortgage Notes bearing interest ranging from 7.11 percent to 11.18 percent. (5) In February and March 1999, Buckeye borrowed a total of $26,000,000 under a Credit Agreement. Borrowings under the Credit Agreement bear interest at the bank's base rate or at a rate based on the London interbank rate. 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 and their subsidiaries, the Partnership is principally engaged in the pipeline transportation of refined petroleum products and the refining of transmix. 16 Products transported via pipeline include gasoline, jet fuel, diesel fuel, heating oil and kerosene. The Partnership's revenues derived from the transportation of refined petroleum products are principally a function of the volumes of refined petroleum products transported by the Partnership, which are in turn a function of the demand for refined petroleum products in the regions served by the Partnership's pipelines, and the tariffs or transportation fees charged for such transportation. The Partnership's revenues derived from the refining of transmix are principally a function of the wholesale market price of the refined products produced and the number of barrels of refined products sold. Results of operations are affected by factors that include general economic conditions, weather, competitive conditions, demand for refined petroleum products, seasonal factors and regulation. See "Business--Competition and Other Business Considerations." 1999 Compared With 1998 Revenue from the transportation of refined petroleum products for the year ended December 31, 1999 was $198.3 million, $13.8 million or 7.5 percent greater than revenue of $184.5 million in 1998. Volumes delivered during 1999 averaged 1,056,100 barrels per day, 24,900 barrels per day or 2.4 percent greater than volume of 1,031,200 barrels per day delivered in 1998. Revenue from the transportation of gasoline increased by $4.7 million, or 4.8 percent, over 1998 levels. The revenue increase is primarily related to gasoline volume increases of 13,100 barrels per day, or 2.5 percent more than 1998 volumes. Deliveries to the upstate New York area, which are longer haul and at higher tariff rates, were the primary cause of the increased gasoline revenue and volumes. Demand in the Pittsburgh, Pennsylvania, Toledo, Ohio and Inwood, New York areas also increased over 1998 levels. Offsetting these increases were declines in volume to eastern and central Ohio locations. Revenue from the transportation of distillate volumes increased by $4.3 million, or 9.1 percent, over 1998 levels. The revenue increase is primarily related to distillate volume increases of 9,900 barrels per day, or 4.3 percent more than 1998 volumes. 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. In the Midwest, distillate revenues were up slightly despite declines in volumes due to the expiration of an incentive tariff early in the year. The Long Island, Connecticut and Massachusetts markets experienced modest growth in distillate revenues and volumes during 1999. Revenue from the transportation of jet fuel volumes increased by $1.3 million, or 3.8 percent, over 1998 levels. The revenue increase is primarily related to jet fuel volume increases of 8,700 barrels per day, which were 3.4 percent greater than 1998 volumes. These increases are related to increased demand at Pittsburgh, Pennsylvania, J.F. Kennedy, New York and Newark, New Jersey airports in the East and at Detroit, Michigan airport in the Midwest. In addition, new jet fuel business at Huntington, Indiana added to the favorable variance. Revenue from the transportation of LPG volumes and other petroleum products declined by $0.6 million, or 15.9 percent, from 1998 levels with most of the decline occurring at Toledo, Ohio. Transportation revenue from BGC's operations beginning March 31, 1999 (date of acquisition) through December 31, 1999 amounted to $3.7 million. Refining revenue beginning March 4, 1999 (date of acquisition) through December 31, 1999 was $107.5 million. Revenue was derived from the sale of 85.8 million gallons of gasoline and 102.1 million gallons of distillate products. Revenue from the sale of gasoline was $51.6 million while revenue from the sale of distillate products was $55.9 million. Costs and expenses for 1999 were $204.8 million and included $102.4 million in expenses related to the refining operations of BRC and $3.2 million in expenses related to BGC's operations. Excluding the expenses of BRC and BGC, operating expenses were $99.2 million, $10.9 million or 9.9 percent below costs and expenses of $110.1 million incurred during 1998. During 1999, the Partnership settled a real property tax dispute with the City and State of New York, which resulted in a one-time property tax expense reduction of $11.0 million. Payroll costs also declined as severance related provisions and costs associated with the realignment of senior management occurring in 1998 did not recur in 1999. Outside service costs and maintenance material expense also declined in 1999. Offsetting these decreases were increases in provisions for environmental costs and increased power costs associated with the higher level of volumes delivered. 17 Other expenses for 1999 were $24.7 million compared to $22.4 million in 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 $0.8 million greater during 1999 than 1998. 1998 Compared With 1997 Revenue for the year ended December 31, 1998 was $184.5 million, $0.5 million or 0.3 percent less than revenue of $185.0 million for 1997. Volumes delivered during 1998 averaged 1,031,200 barrels per day, 7,200 barrels per day or 0.7 percent greater than volume of 1,024,000 barrels per day delivered in 1997. The combination of higher volumes and lower revenues in 1998 as compared to 1997 is the result of several factors. In 1998, the Partnership experienced a slight shift in deliveries from longer-haul, higher tariff movements to shorter-haul, lower tariff movements. In addition, certain tariffs designed to recover capital costs expired in 1998 and were replaced by lower tariffs. The Partnership also had greater costs associated with product downgrades resulting from normal operating activities. Gasoline volumes and revenue increased over 1997 levels. New business was gained at Midland, Pennsylvania as a result of a new connection, and market share throughout Pennsylvania continued to grow in 1998. In addition, increased volumes in the Detroit and Flint, Michigan areas added to the favorable variance. Offsetting these increases were declines in volume to the upstate New York area. Distillate volumes and revenue declined over 1997 levels. Demand was weak throughout most areas due to abnormally warm weather primarily during the first quarter of 1998. Jet fuel volume increased slightly over 1997 levels although overall revenue declined. Demand was strong at Newark Airport but was offset by declines at Pittsburgh due to reductions in both military and commercial airline activity. LPG volumes and revenue increased over 1997 levels due to the capture of new business in Ohio. Tariff rate increases implemented in 1998 also had a favorable impact on 1998 revenues. See "Tariff Changes." Costs and expenses during 1998 were $110.1 million, $2.8 million or 2.5 percent less than costs and expenses of $112.9 million during 1997. During 1998, as part of a restructuring, the Partnership incurred severance and related expenses of $2.1 million and an additional $1.3 million expense associated with the realignment of senior management. Payroll overhead expenses declined as a result of the ESOP Restructuring in 1997 and a full year effect of the elimination of certain executive compensation costs formerly charged to the Partnership. Such senior executive compensation costs have not been charged to the Partnership since August 12, 1997. See "Executive Compensation." The Partnership also realized cost reductions in outside service expense and incurred less power expense during 1998. Partially offsetting these reductions was the full year effect of amortization of the deferred charge related to the issuance of LP Units under the ESOP restructuring. Other income (expenses) consist of interest income, interest and debt expense, minority interests and other. Total other expenses decreased by $0.9 million. Interest expense declined by $5.3 million due to the early extinguishment of higher interest rate debt with the proceeds of lower interest rate debt during December 1997. Partially offsetting these declines in expenses were increased incentive compensation payments to BMC as a result of greater cash distributions to Unitholders (see "Certain Relationships and Related Transactions") and an increase in minority interest expense related to greater net income. Income from invested cash also declined from 1997 levels. Tariff Changes Effective January 1, 1998 certain of the Operating Partnerships implemented tariff increases that were expected to generate approximately $2.5 million in additional revenue per year. The Operating Partnerships did not file any general tariff rate increases that became effective during 1999 or 1997. 18 Competition and Other Business Conditions Several major refiners and marketers of petroleum products announced strategic alliances or mergers in recent years. These alliances or mergers have the potential to alter refined product supply and distribution patterns within the Operating Partnerships' market area resulting in both gains and losses of volume and revenue. While the General Partner believes that individual delivery locations within its market area may have significant gains or losses, it is not possible to predict the overall impact these alliances or mergers would have on the Operating Partnerships' business. However, the General Partner does not believe that these alliances or mergers will have a material adverse effect on the Partnership's results of operations or financial condition. Liquidity and Capital Resources The Partnership's financial condition at December 31, 1999, 1998 and 1997 is highlighted in the following comparative summary: Liquidity and Capital Indicators
As of December 31, -------------------------------------------- 1999 1998 1997 ------------- ------------ ------------- Current ratio .................................... 1.3 to 1 0.8 to 1 1.2 to 1 Ratio of cash and temporary investments and trade receivables to current liabilities ............. 0.7 to 1 0.5 to 1 0.8 to 1 Working capital (deficit) (in thousands) ......... $13,149 ($ 6,266) $5,045 Ratio of total debt to total capital ............. .45 to 1 .44 to 1 .44 to 1 Book value (per Unit) ............................ $ 11.72 $ 11.06 $ 11.23
Cash Provided by Operations During 1999, cash provided by operations of $91.5 million was derived principally from $93.8 million of income before depreciation and amortization. Changes in current assets and current liabilities resulted in a net cash use of $0.8 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. During the year the Partnership borrowed $26.0 million under its Credit Agreement which was used to finance acquisitions of $19.5 million and for working capital purposes. Changes in non-current assets and liabilities resulted in a net cash use of $1.8 million. Distributions paid to Unitholders in 1999 amounted to $58.8 million, an increase of $2.1 million over 1998, and capital expenditures were $27.0 million, an increase of $4.2 million over 1998. During 1998, cash provided by operations of $80.6 million was derived principally from $68.4 million of net income before depreciation and amortization. Depreciation and amortization increased by $3.3 million as a result of the amortization for a full year of a deferred charge associated with the ESOP Restructuring and depreciation related to capital additions. Changes in current assets and current liabilities resulted in a net cash source of $12.3 million. The cash source from the change in current assets and liabilities resulted primarily from maturities of temporary investments, continued improvement in the collection of trade receivables, a reduction in prepaid and other current assets and an increase in current liabilities payable to the General Partner. Distributions paid to Unitholders in 1998 amounted to $56.7 million, an increase of $12.4 million over 1997, and capital expenditures were $22.8 million, an increase of $3.0 million over 1997. During 1997, cash provided by operations of $28.4 million was derived principally from $62.0 million of income before extraordinary loss and depreciation and amortization reduced by an extraordinary loss of $42.4 million on the early extinguishment of debt. Depreciation and amortization increased by $1.8 million as a result of the amortization of a deferred charge associated 19 with the ESOP Restructuring. Changes in current assets and current liabilities resulted in a net cash source of $10.4 million, resulting primarily from the elimination of the current portion of long term debt and continued improvement in the collection of trade receivables, offset by the net payment of $3.0 million of accrued and other current liabilities. Cash and cash equivalents declined by $10.1 million and temporary investments declined by $11.7 million during the year. Distributions paid to Unitholders in 1997 amounted to $44.3 million, an increase of $7.8 million over 1996, and capital expenditures were $19.8 million, an increase of $5.0 million from 1996. Also, during 1997, cash provided from the issuance of $240 million of Senior Notes and an additional $4.5 million provided from operations was used to pay the remaining $202.1 million due under the First Mortgage Notes and $42.4 million in prepayment penalty and related refinancing costs. Changes in non-current assets and liabilities resulted in a net use of cash of $1.6 million, including a decline of minority interests of $0.4 million. Debt Obligations and Credit Facilities At December 31, 1999, the Partnership had $266.0 million in outstanding long-term debt representing $240.0 million of Senior Notes (Series 1997A through 1997D) (the "Senior Notes") and $26.0 million of borrowings under the Credit Agreement. During December 1997, Buckeye issued the Senior Notes, which are due 2024 and accrue interest at an average annual rate of 6.94 percent. The proceeds from the issuance of the Senior Notes, plus $4.5 million of additional cash, were used to purchase and retire all of Buckeye's outstanding First Mortgage Notes (the "First Mortgage Notes") which accrued interest at an average annual rate of 10.3 percent. In connection with the purchase of the First Mortgage Notes in 1997, Buckeye was required to pay to the holders of the First Mortgage Notes a prepayment premium equal to the difference between the cash flows under the First Mortgage Notes, discounted at current U. S. Treasury rates, and the book value of the principal due under the First Mortgage Notes. The prepayment premium amounted to $41.4 million. In addition, debt refinancing costs totaling $1.0 million were incurred. The total costs of $42.4 million were recorded on the 1997 income statement as an extraordinary loss. In connection with the issuance of the Senior Notes, the indenture (the "Indenture") pursuant to which the First Mortgage Notes were issued was amended and restated in its entirety to eliminate the collateral requirements and to impose certain financial covenants. The Indenture, as amended in connection with the issuance of the Senior Notes, contains covenants, which affect Buckeye, Laurel and Buckeye Pipe Line Company of Michigan, L.P. (the "Indenture Parties"). Generally, the Indenture (a) limits outstanding indebtedness of Buckeye based upon certain financial ratios of the Indenture Parties, (b) prohibits the Indenture Parties from creating or incurring certain liens on their property, (c) prohibits the Indenture Parties from disposing of property which is material to their operations, and (d) limits consolidation, merger and asset transfers of the Indenture Parties. During December 1998, Buckeye established a line of credit from commercial banks (the "Credit Agreement") which permits borrowings of up to $100 million subject to certain limitations contained in the Credit Agreement. Borrowings bear interest at the bank's base rate or at a rate based on the London interbank rate (LIBOR) at the option of Buckeye. The Credit Agreement expires December 16, 2003. At December 31, 1999 there were $26.0 million of borrowings outstanding under the Credit Agreement. Of the $26.0 million in borrowings, $3.0 million occurred in February 1999 and $23.0 million occurred in March 1999. Proceeds from the borrowings were used to finance the purchase of BRC and BGC and for working capital purposes. The Credit Agreement 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. 20 The ratio of total debt to total capital was 45 percent at December 31, 1999 and 44 percent at December 31, 1998 and 1997. 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, 1999, property, plant and equipment was approximately 83 percent of total consolidated assets. This compares to 86 percent and 85 percent for the years ended December 31, 1998 and 1997, 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 $27.0 million, $22.8 million and $19.8 million for 1999, 1998 and 1997, respectively. Projected capital expenditures for 2000 of approximately $36.3 million, including approximately $12.4 million of maintenance capital and $23.9 million of expansion capital, are expected to be funded from cash generated by operations and Buckeye's bank line of credit. Planned capital expenditures of $35.5 million related to the transportation segment include, among other things, various facility improvements that facilitate increased pipeline volumes, facility automation, renewal and replacement of several tank roofs, upgrades to field instrumentation and cathodic protection systems, installation and replacement of mainline pipe and valves and construction of additional office space. Planned capital expenditures of $0.8 million related to the refining segment include, among other things, a truck rack and terminal expansion and a heat exchange upgrade. Environmental Matters The Operating Partnerships are subject to federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations, as well as the Partnership's own standards relating to protection of the environment, cause the Operating Partnerships to incur current and ongoing operating and capital expenditures. During 1999, the Operating Partnerships incurred operating expenses of $3.2 and capital expenditures of $1.4 million for environmental matters. Capital expenditures of $1.9 million for environmental related projects are included in the Partnership's plans for 2000. Expenditures, both capital and operating, relating to environmental matters are expected to continue due to the Partnership's commitment to maintain high environmental standards and to increasingly rigorous environmental laws. Various claims for the cost of cleaning up releases of hazardous substances and for damage to the environment resulting from the activities of the Operating Partnerships or their predecessors have been asserted and may be asserted in the future under various federal and state laws. The General Partner believes that the generation, handling and disposal of hazardous substances by the Operating Partnerships and their predecessors have been in material compliance with applicable environmental and regulatory requirements. The total potential remediation costs to be borne by the Operating Partnerships relating to these clean-up sites cannot be reasonably estimated and could be material. With respect to each site, however, the Operating Partnership involved is one of several or as many as several hundred PRPs that would share in the total costs of clean-up under the principle of joint and several liability. Although the Partnership has made a provision for certain legal expenses relating to these matters, the General Partner is unable to determine the timing or outcome of any pending proceedings or of any future claims and proceedings. See "Business--Regulation--Environmental Matters" and "Legal Proceedings." Employee Stock Ownership Plan In connection with the Acquisition, the ESOP was formed for the benefit of employees of BMC, the General Partner and the shareholders of BMC. BMC borrowed $63 million pursuant to a 15-year term loan from a third-party lender. BMC then loaned $63 million to the ESOP, which used the loan proceeds to purchase $63 million of Series A Convertible Preferred Stock of BAC ("BAC Preferred Stock"). 21 In December 1996, the Board of Directors of BMC approved the ESOP Restructuring. The ESOP Restructuring was approved by the required majority of 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 BMC for certain executive compensation costs was permanently released, the incentive compensation formula was reduced, and other changes were implemented to make the ESOP a less expensive fringe benefit for the Partnership. The $64.2 million market value of the LP Units issued to Services Company was recorded as a deferred charge relating to the ESOP Restructuring and is being amortized over 13.5 years. As part of the ESOP Restructuring, the $63 million loan from the third party lender became a direct obligation of the ESOP which is secured by the stock of Services Company and guaranteed by BMC and certain of its affiliates. Total ESOP related costs charged to earnings were $1.3 million in 1999 and $1.2 million in 1998. The ESOP costs represent a non-cash accrual of the estimated difference between distributions to be paid on the LP Units and the total debt service requirements under the ESOP loan (the "top-up provision"). Total ESOP related costs charged to earnings through August 12, 1997, the date of the ESOP Restructuring, were $5.0 million, which included $2.8 million of interest expense with respect to the ESOP loan, $2.0 million based upon the value of 1,976 shares of BAC Preferred Stock released and allocated to employees accounts through August 12, 1997, and administrative costs of $0.2 million. Subsequent to August 12, 1997, ESOP related costs charged to the Partnership in 1997 were $0.1 million in administrative costs and an additional $0.4 million for a top-up provision. The 1,976 shares of BAC Preferred Stock that were released and allocated to employees' accounts were exchanged for 40,354 shares of Services Company stock during 1997. As a result of the ESOP Restructuring, the Partnership will not incur any additional charges related to interest expense and shares released to employees' accounts under the ESOP. The Partnership will, however, incur ESOP-related costs to the extent that required contributions to the ESOP are in excess of distributions received on the LP Units owned by Services Company, for taxes associated with the sale of the LP Units and for routine administrative costs. Accounting Statements Not Yet Adopted Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. 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 of fiscal years beginning after June 15, 2000. Management has not completed its evaluation of the effect of this statement on the Partnership financial statements. Year 2000 Compliance 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. The Partnership also had in place contingency plans, involving manual operation, for 22 critical pipeline applications. The Partnership also tried to assess the preparedness of critical suppliers and vendors in dealing with the Year 2000 issue. The total cost related to the investigation, research and update of critical areas related to the Year 2000 issue was not material. The Partnership has not experienced any material problems or incurred any significant losses related to the Year 2000 issue from its own operations, nor has it experienced any material problems or incurred any significant losses as the result of third-party operations. Forward-Looking Statements Information contained above in this Management's Discussion and Analysis and elsewhere in this Report on Form 10-K with respect to expected financial results and future events is forward-looking, based on our estimates and assumptions and subject to risk and uncertainties. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors could affect our future results and could cause those results to differ materially from those expressed in our forward-looking statements: (1) adverse weather conditions resulting in reduced demand; (2) changes in laws and regulations, including safety, tax and accounting matters; (3) competitive pressures from alternative energy sources; (4) liability for environmental claims; (5) improvements in energy efficiency and technology resulting in reduced demand; (6) labor relations; (7) changes in real property tax assessments, (8) regional economic conditions; (9) market prices of petroleum products and the demand for those products in the Partnership's service territory; and (10) interest rate fluctuations and other capital market conditions. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. We undertake no obligation to update publicly any forward-looking statement whether as a result of new information or future events. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Partnership is exposed to market risks resulting from changes in interest rates and commodity prices. Market risk represents the risk of loss that may impact the Partnership's results of operations, the consolidated financial position or operating cash flows. The Partnership is not exposed to any market risk due to rate changes on its Senior Notes but is exposed to market risk related to the interest rate on its Credit Agreement. The Partnership is also exposed to market risk on commodity futures contracts that it holds for the sale of gasoline and fuel oil. Market Risk--Other than Trading Instruments The Partnership has market risk exposure on its Credit Agreement due to its variable rate pricing that is based on the bank's base rate or at a rate based on LIBOR. As of December 31, 1999, a 1 percent increase or decrease in the applicable rate under the Credit Agreement will result in an interest expense fluctuation of approximately $0.3 million. As of December 31, 1998, the Partnership did not have any debt outstanding that was subject to variable rate pricing. Market Risk--Trading Instruments The Partnership hedges a substantial portion of its exposure to inventory price fluctuations with commodity futures contracts for the sale of gasoline and fuel oil. At December 31, 1999, the Partnership had hedged approximately 56 percent of BRC's inventory and held commodity futures contracts for the sale of 6.3 million gallons of gasoline and 6.7 million gallons of fuel oil. A $0.01 per gallon increase in the market price of gasoline and fuel oil would result in a loss of approximately $130,000 in the futures contracts. A $0.01 per gallon decrease in the market price of gasoline and fuel oil would result in a gain of approximately $130,000 in the futures contracts. 23 Item 8. Financial Statements and Supplementary Data BUCKEYE PARTNERS, L.P. Index to Financial Statements and Financial Statement Schedules
Page Number ----------- Financial Statements and Independent Auditors' Report: Independent Auditors' Report ...................................... 25 Consolidated Statements of Income--For the years ended December 31, 1999, 1998 and 1997 .............................................. 26 Consolidated Balance Sheets--December 31, 1999 and 1998 ........... 27 Consolidated Statements of Cash Flows--For the years ended Decem- ber 31, 1999, 1998 and 1997 ...................................... 28 Notes to Consolidated Financial Statements ........................ 29 Financial Statement Schedules and Independent Auditors' Report: Independent Auditors' Report ...................................... S-1 Schedule I--Registrant's Condensed Financial Statements ........... S-2
Schedules other than those listed above are omitted because they are either not applicable or not required or the information required is included in the consolidated financial statements or notes thereto. 24 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, 1999 and 1998, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania January 28, 2000 25 BUCKEYE PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per unit amounts)
Year Ended December 31, ------------------------------------------ Notes 1999 1998 1997 ------- ------------ ------------ ------------ Revenue Transportation ........................................... 2,4 $ 198,297 $ 184,477 $ 184,981 Refining ................................................. 2,4 107,489 -- -- --------- --------- --------- Total Revenue ........................................... 305,786 184,477 184,981 --------- --------- --------- Costs and expenses Cost of product sold ..................................... 2 94,702 -- -- Operating expenses ....................................... 5,17 77,611 79,439 86,833 Depreciation and amortization ............................ 2,8,9 17,475 16,432 13,177 General and administrative expenses ...................... 17 14,969 14,248 12,896 --------- --------- --------- Total costs and expenses ................................ 204,757 110,119 112,906 --------- --------- --------- Operating income ........................................... 101,029 74,358 72,075 --------- --------- --------- Other income (expenses) Investment income ........................................ 140 251 2,046 Interest and debt expense ................................ (16,854) (15,886) (21,187) Minority interests and other ............................. 17 (8,032) (6,716) (4,127) --------- --------- --------- Total other income (expenses) ........................... (24,746) (22,351) (23,268) --------- --------- --------- Income before extraordinary loss ........................... 76,283 52,007 48,807 Extraordinary loss on early extinguishment of debt ......... 11 -- -- (42,424) --------- --------- --------- Net income ................................................. $ 76,283 $ 52,007 $ 6,383 ========= ========= ========= Net income allocated to General Partner .................... 18 $ 689 $ 470 $ 85 Net income allocated to Limited Partners ................... 18 $ 75,594 $ 51,537 $ 6,298 Earnings per Partnership Unit Income allocated to General and Limited Partners per Partnership Unit: Income before extraordinary loss ........................ $ 2.82 $ 1.93 $ 1.92 Extraordinary loss on early extinguishment of debt .................................................. -- -- ( 1.67) --------- --------- --------- Net income ................................................. $ 2.82 $ 1.93 $ 0.25 ========= ========= ========= Earnings per Partnership Unit -- assuming dilution Income allocated to General and Limited Partners per Partnership Unit: Income before extraordinary loss ........................ $ 2.81 $ 1.92 $ 1.91 Extraordinary loss on early extinguishment of debt .................................................. -- -- ( 1.66) --------- --------- --------- Net income ................................................. $ 2.81 $ 1.92 $ 0.25 ========= ========= =========
See notes to consolidated financial statements. 26 BUCKEYE PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, -------------------------- Notes 1999 1998 ---------- ----------- ------------ Assets Current assets Cash and cash equivalents ......................... 2 $ 22,003 $ 8,341 Trade receivables ................................. 2 9,718 7,578 Inventories ....................................... 2,6 18,397 2,988 Prepaid and other current assets .................. 7 5,509 5,320 --------- --------- Total current assets ............................ 55,627 24,227 Property, plant and equipment, net ................. 2,4,8 556,904 532,696 Other non-current assets ........................... 9,15 61,754 61,176 --------- --------- Total assets .................................... $ 674,285 $ 618,099 ========= ========= Liabilities and partners' capital Current liabilities Accounts payable .................................. $ 18,961 $ 4,369 Accrued and other current liabilities ............. 5,10,17 23,517 26,124 --------- --------- Total current liabilities ....................... 42,478 30,493 Long-term debt .................................... 11 266,000 240,000 Minority interests ................................ 2,853 2,501 Other non-current liabilities ..................... 12,13,17 45,965 46,620 Commitments and contingent liabilities ............ 5 -- -- --------- --------- Total liabilities ............................... 357,296 319,614 --------- --------- Partners' capital General Partner .................................... 18 2,548 2,390 Limited Partner .................................... 18 314,441 296,095 --------- --------- Total partners' capital ......................... 316,989 298,485 --------- --------- Total liabilities and partners' capital ......... $ 674,285 $ 618,099 ========= =========
See notes to consolidated financial statements. 27 BUCKEYE PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (In thousands)
Year Ended December 31, ----------------------------------------- Notes 1999 1998 1997 ------- ----------- ----------- ------------- Cash flows from operating activities: Income before extraordinary loss ....................... $ 76,283 $ 52,007 $ 48,807 --------- --------- ---------- Adjustments to reconcile income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt ................................................ 11 -- -- (42,424) Gain on sale of property, plant and equipment ......... -- (195) (11) Depreciation and amortization ......................... 8,9 17,475 16,432 13,177 Minority interests .................................... 1,011 594 96 Distributions to minority interests ................... (659) (628) (474) Change in assets and liabilities: Temporary investments ............................... -- 2,854 11,674 Trade receivables ................................... (1,285) 2,617 2,341 Inventories ......................................... (11,307) (901) (355) Prepaid and other current assets .................... (189) 1,977 418 Accounts payable .................................... 14,592 705 (615) Accrued and other current liabilities ............... (2,647) 5,051 (3,015) Other non-current assets ............................ (1,150) (1,535) 319 Other non-current liabilities ....................... (655) 1,608 (1,566) --------- --------- ---------- Total adjustments from operating activities ........ 15,186 28,579 (20,435) --------- --------- ---------- Net cash provided by operating activities .......... 91,469 80,586 28,372 --------- --------- ---------- Cash flows from investing activities: Capital expenditures ................................... (27,018) (22,750) (19,841) Acquisitions ........................................... (19,487) -- -- Net proceeds from (expenditures for) disposal of property, plant and equipment ......................... 477 (544) (814) --------- --------- ---------- Net cash used in investing activities .............. (46,028) (23,294) (20,655) --------- --------- ---------- Cash flows from financing activities: Capital contribution ................................... -- -- 5 Proceeds from exercise of unit options ................. 978 366 516 Proceeds from issuance of long-term debt ............... 11 26,000 -- 240,000 Payment of long-term debt .............................. 11 -- -- (214,000) Distributions to Unitholders ........................... 18,19 (58,757) (56,666) (44,305) --------- --------- ---------- Net cash used in financing activities .............. (31,779) (56,300) (17,784) --------- --------- ---------- Net increase (decrease) in cash and cash equivalents ..... 13,662 992 (10,067) Cash and cash equivalents at beginning of year ........... 8,341 7,349 17,416 --------- --------- ---------- Cash and cash equivalents at end of year ................. $ 22,003 $ 8,341 $ 7,349 ========= ========= ========== Supplemental cash flow information: Cash paid during the year for interest (net of amount capitalized) ................................... $ 16,912 $ 15,918 $ 21,432 Non-cash change in financing activities: Issuance of LP Units in exchange for BAC stock ......... -- -- $ 64,200 Non-cash change in operating activities: Deferred charge from issuance of LP Units .............. -- -- $ 64,200
See notes to consolidated financial statements. 28 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 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." BTT owns a 100 percent interest in each of Buckeye Refining Company, LLC and Buckeye Gulf Coast Pipelines, LLC and also owns a 75 percent interest in WesPac Pipelines-Reno Ltd. and related WesPac entities. In connection with an internal restructuring, effective December 31, 1998, Buckeye Management Company ("BMC") transferred its general partnership interest in the Partnership, as well as certain other assets and liabilities, to its wholly-owned subsidiary, Buckeye Pipe Line Company (the "General Partner"). Buckeye Pipe Line Company serves as sole general partner of the Partnership and as the sole general partner of each Operating Partnership. As of December 31, 1998, the General Partner owned approximately a 1 percent general partnership interest in the Partnership and approximately a 1 percent general partnership interest in each Operating Partnership, for an effective 2 percent interest in the Partnership. Buckeye is one of the largest independent pipeline common carriers of refined petroleum products in the United States, with 2,970 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. On March 4, 1999, the Partnership acquired the fuels division of American Refining Group, Inc. ("ARG"). The Partnership operates the former ARG processing business under the name of Buckeye Refining Company, LLC ("BRC"). BRC re-refines transmix at its Indianola, Pennsylvania and Hartford, Illinois refineries. Transmix represents refined petroleum products, primarily fuel oil and gasoline, that become commingled during normal pipeline operations. The refining process produces separate quantities of fuel oil, kerosene and gasoline that BRC then markets at the wholesale level. On March 31, 1999, the Partnership acquired pipeline operating contracts and a 16-mile pipeline from Seagull Products Pipeline Corporation and Seagull Energy Corporation ("Seagull"). The Partnership operates the assets acquired from Seagull under the name of Buckeye Gulf Coast Pipe Lines, LLC ("BGC"). BGC is an owner and contract operator of pipelines owned by major chemical companies in the Gulf Coast area. BGC also leases the 16- mile pipeline to a chemical company. During March 1996, BMC Acquisition Corp. ("BAC"), a corporation organized in 1996 under the laws of the state of Delaware, acquired all of the common stock of BMC from a subsidiary of American Financial Group, Inc. ("American Financial") (the "Acquisition"). BAC, which subsequently changed its name to Glenmoor, Ltd. ("Glenmoor"), is owned by certain directors and members of senior management of the General Partner and trusts for the benefit of their families and by certain other management employees of Buckeye Pipe Line Services Company ("Services Company"). On August 12, 1997, the General Partner's employees were transferred to Services Company, a newly formed corporation wholly owned by the ESOP. Services Company employs all of the employees previously employed by the General Partner and became the sponsor of all of the employee benefit plans previously maintained by the General Partner. Services Company also 29 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) entered into a Services Agreement with BMC and the General Partner to provide services to the Partnership and the Operating Partnerships for a 13.5 year term. Services Company is reimbursed by BMC or the General Partner for its direct and indirect expenses, which in turn are reimbursed by the Partnership, except for certain executive compensation costs which after August 12, 1997 are no longer reimbursed (See Note 17). 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 11). 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 and the sale of re-refined transmix products at the wholesale level. Such revenue is recognized as products are delivered to customers. Such customers include major integrated oil companies, major refiners and large regional marketing companies. The consolidated Partnership's customer base was approximately 170 in 1999. During 1999, sales of $46.6 million to one customer 30 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) represented approximately 15% of consolidated revenue. Of the $46.6 million in sales, $32.3 million was related to the refining segment and $14.3 million was related to the transportation segment. The Partnership does not maintain an allowance for doubtful accounts. Inventories Inventories, consisting of petroleum products, materials and supplies, are carried at the lower of cost or market based on the first-in first-out method. 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. Goodwill The Partnership amortizes goodwill on the straight-line basis over a period of fifteen years. 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, 1999 and 1998, the Partnership's reported amount of net assets for financial reporting purposes exceeded its tax basis by approximately $290 million and $285 million, respectively. Environmental Expenditures Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the Partnership's commitment to a formal plan of action. In 1997, the Partnership adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 prescribes that accrued environmental remediation related expenses include direct costs of remediation and indirect costs related to the remediation effort. Although the Partnership previously accrued for direct costs of remediation and certain indirect costs, additional indirect costs were required to be accrued by the Partnership at the time of adopting SOP 96-1, such as compensation and benefits for employees directly involved in the remediation activities and fees paid to outside engineering, consulting and law firms. The effect of initially applying the provisions of SOP 96-1 has been treated as a change in accounting estimate and is not material to the accompanying financial statements. 31 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Pensions Services Company maintains a defined contribution plan, defined benefit plans (see Note 13) and an employee stock ownership plan (see Note 15) 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 13). Certain other retired employees are covered by a health and welfare plan under a union agreement. Comprehensive Income The Partnership has not reported comprehensive income due to the absence of items of other comprehensive income in any period presented. Segment Reporting and Related Information Effective for the December 31, 1998 financial statements, the Partnership adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Partnership has two reportable segments, transportation of refined petroleum products and refining of petroleum products. Accounting for Derivative Instruments and Hedging Activities The Partnership hedges a substantial portion of its exposure to inventory price fluctuations with commodity futures contracts in gasoline and fuel oil. To qualify for hedge accounting, the contracts must meet defined correlation and effectiveness criteria, be designated as hedges and result in cash flows and financial statement effects which substantially offset those of the position being hedged. Amounts receivable or payable under such contracts are reported on the consolidated balance sheet as current receivables or liabilities. Realized gains and losses arising from such hedging transactions are recorded in cost of goods sold when the hedged inventory is sold. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. 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 of fiscal years beginning after June 15, 2000. Management has not completed its evaluation of the effect of this statement on the Partnership financial statements. 3. ACQUISITIONS On March 4, 1999, the Partnership acquired the fuels division of American Refining Group, Inc. for an initial purchase price of $12,990,000. In December 1999, the Partnership accrued an additional payment of $747,000 pursuant to a contingent payment agreement. The assets acquired included a refined petroleum products terminal and a transmix processing facility located in Indianola, 32 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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. The purchase price has been allocated to assets acquired based on estimated fair value. The allocated fair value of assets acquired is summarized as follows: Trade receivables ..................... $ 815,000 Petroleum products inventory .......... 4,102,000 Property, plant and equipment ......... 8,073,000 Goodwill .............................. 747,000 ----------- Total ................................. $13,737,000 =========== 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 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 pipeline assets acquired from Seagull under the name of Buckeye Gulf Coast Pipe Lines, LLC. The purchase price has been allocated to assets acquired based on estimated fair value. The allocated fair value of assets acquired is summarized as follows: Property, plant and equipment ......... $2,150,000 Goodwill .............................. 3,600,000 ---------- Total ................................. $5,750,000 ========== 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: Twelve Months Ended December 31, ----------------------------- 1999 1998 ------------- ------------- (In thousands, except per Unit amounts) Revenue ................... $ 316,585 $ 276,414 Net income ................ $ 75,585 $ 51,614 Earnings per Unit ......... $ 2.80 $ 1.91 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. 33 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 4. SEGMENT INFORMATION The Partnership has two reportable segments, the transportation segment and the refining segment, which are organized on the basis of products and services. 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 pipeline transmix and the wholesale marketing of the resulting products 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. Management evaluates segment performance on the basis of operating income. 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 December 31, 1999. The refining segment's results of operations include the period from the March 4, 1999 (date of acquisition) through December 31, 1999. The transportation segment results of operations include BGC's results of operations for the period March 31, 1999 through December 31, 1999.
Trans- Inter- portation Refining company Total ----------- ---------- ------------ ----------- (In thousands) Revenues from external customers ......... $200,828 $107,489 $ (2,531) $305,786 Intersegment revenues .................... 2,531 -- -- 2,531 Operating income ......................... 95,936 5,093 -- 101,029 Segment assets ........................... 647,519 30,615 (3,849) 674,285 Expenditures for property, plant and equipment .............................. 26,731 287 -- 27,018
All revenues are from sources within the United States. 5. 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. 34 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Environmental In accordance with its accounting policy on environmental expenditures, the Partnership recorded operating expenses of $3.2 million, $1.8 million and $2.7 million for 1999, 1998 and 1997, 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 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 potentially responsible parties 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 received an interest only contract from Aurora National Life Assurance Company (the "Aurora GIC") in substitution for its Executive Life GIC. The Aurora GIC provided 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 received certain additional cash payments through the maturity date of the contract as a result of the liquidation of the Executive Life assets. The Plan also received a payment of approximately $2 million in March, 1998, from the Pennsylvania Life and Health Insurance Guaranty Association for partial reimbursement of losses of Plan participants who were Pennsylvania residents on December 6, 1991. In May 1991, in order to safeguard the basic retirement and savings benefits of its employees, BMC (as General Partner) entered into an arrangement with the Plan that would guarantee 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. On September 3, 1998, the Aurora GIC matured and BMC has met its guaranty obligation to the Plan. Total costs incurred in connection with the guaranty obligation were approximately $0.4 million and were reimbursed by the Partnership. 6. 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. 35 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Inventories are valued at the lower of cost or market on the first-in first-out method. Inventories consisted of the following: December 31, --------------------- 1999 1998 ---------- -------- (In thousands) Transmix ................................... $12,319 $ -- Gasoline, distillates and jet fuel ......... 1,664 -- Pipeline materials and supplies ............ 4,414 2,988 ------- ------ Total ..................................... $18,397 $2,988 ======= ====== The Partnership uses derivative financial instruments to manage price risk associated with the market price of refined petroleum products. At December 31, 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 $5.1 million for the 10 months ended December 31, 1999 is net of $4.4 million in realized losses related to investments in futures contracts. 7. 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. 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
December 31, 1999 1998 ----------- ----------- (In thousands) Land ................................................ $ 9,846 $ 9,498 Buildings and leasehold improvements ................ 29,892 27,569 Machinery, equipment and office furnishings ......... 545,355 533,063 Construction in progress ............................ 51,985 30,676 -------- -------- 637,078 600,806 Less accumulated depreciation ..................... 80,174 68,110 -------- -------- Total ............................................. $556,904 $532,696 ======== ========
Depreciation expense was $12,556,000, $11,734,000 and $11,371,000 for the years 1999, 1998 and 1997, respectively. 9. OTHER NON-CURRENT ASSETS Other non-current assets consist of the following: December 31, ----------------------- 1999 1998 ---------- ---------- (In thousands) Deferred charge (see Note 15) ......... $52,999 $57,696 Goodwill .............................. 4,126 -- Other ................................. 4,629 3,480 ------- ------- Total ................................ $61,754 $61,176 ======= ======= 36 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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 15). Amortization of the deferred charge related to the ESOP Restructuring was $4,698,000 in 1999 and 1998. Goodwill is amortized on a straight-line basis over a period of fifteen years. Amortization of goodwill was $221,000 in 1999. 10. ACCRUED AND OTHER CURRENT LIABILITIES Accrued and other current liabilities consist of the following: December 31, --------------------- 1999 1998 --------- --------- (In thousands) Taxes--other than income .................... $ 5,483 $ 8,729 Accrued charges due General Partner ......... 6,690 8,724 Environmental liabilities ................... 3,588 2,121 Interest .................................... 756 699 Accrued operating power ..................... 1,242 1,080 Other ....................................... 5,758 4,771 ------- ------- Total ...................................... $23,517 $26,124 ======= ======= 11. LONG-TERM DEBT AND CREDIT FACILITIES Long-term debt consists of the following:
December 31, ------------------------- 1999 1998 ----------- ----------- (In thousands) 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 $125,000 6.89% Series 1997B due December 16, 2024 (subject to $20.0 million annual sinking fund requirement commencing December 16, 2020) .......................... 100,000 100,000 6.95% Series 1997C due December 16, 2024 (subject to $2.0 million annual sinking fund requirement commencing December 16, 2020) .......................... 10,000 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 5,000 Credit Agreement due December 16, 2003 (variable rates; average weighted rate at December 31, 1999 was 6.32%) ................................................. 26,000 -- -------- -------- Total ................................................ $266,000 $240,000 ======== ========
At December 31, 1999, a total of $26.0 million of debt was scheduled to mature in December 2003. 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 $234 million and $241 million as of December 31, 1999 and 1998, respectively. The values at December 31, 1999 and 1998 were calculated using interest rates currently available to the Partnership for issuance of debt with similar terms and remaining maturities. 37 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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. 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 bearing interest ranging from 7.11 percent to 11.18 percent. 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. The indenture, as amended in connection with the issuance of the Senior Notes (the "Indenture") contains covenants that affect Buckeye, Laurel and Buckeye Pipe Line Company of Michigan, L.P. (the "Indenture Parties"). Generally, the Indenture (a) limits outstanding indebtedness of Buckeye based upon certain financial ratios of the Indenture Parties, (b) prohibits the Indenture Parties from creating or incurring certain liens on their property, (c) prohibits the Indenture Parties from disposing of property which is material to their operations, and (d) limits consolidation, merger and asset transfers of the Indenture Parties. During December 1998, Buckeye established a line of credit from commercial banks (the "Credit Agreement") that permits borrowings of up to $100 million subject to certain limitations contained in the Credit Agreement. Borrowings bear interest at the bank's base rate or at a rate based on the London interbank rate at the option of Buckeye. The Credit Agreement expires December 16, 2003. At December 31, 1999 a total of $26.0 million in borrowings, at a weighted average rate of 6.32 percent, was outstanding under the Credit Agreement. The Credit Agreement contains certain 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. 12. OTHER NON-CURRENT LIABILITIES Other non-current liabilities consist of the following: December 31, ----------------------- 1999 1998 ---------- ---------- (In thousands) Accrued employee benefit liabilities ......... $36,491 $36,919 Accrued top-up reserve ....................... 2,998 1,656 Accrued non-current taxes .................... 91 2,450 Other ........................................ 6,385 5,595 ------- ------- Total ....................................... $45,965 $46,620 ======= ======= 13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS 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. Services Company also sponsors 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. 38 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Services Company also 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. A reconciliation of the beginning and ending balances of the benefit obligations under the noncontributory pension plans and the postretirement health care and life insurance plan is as follows:
Postretirement Pension Benefits Benefits ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands) Change in benefit obligation Benefit obligation at beginning of year ................................. $ 15,122 $ 14,469 $ 29,393 $ 24,943 Service cost .......................... 492 511 509 540 Interest cost ......................... 742 888 1,688 1,707 Actuarial (gain) loss ................. (466) (1,353) (3,732) 3,317 Change in assumptions ................. (171) 1,229 -- -- Adjusted benefit payments ............. (3,424) (622) (1,510) (1,114) -------- -------- -------- -------- Benefit obligation at end of year ..... $ 12,295 $ 15,122 $ 26,348 $ 29,393 ======== ======== ======== ========
A reconciliation of the beginning and ending balances of the fair value of plan assets under the noncontributory pension plans and the postretirement health care and life insurance plan is as follows:
Postretirement Pension Benefits Benefits -------------------------- ----------------------------- 1999 1998 1999 1998 ----------- ------------ ------------- ------------- (In thousands) Change in plan assets Fair value of plan assets at beginning of year .................. $ 8,864 $ 6,993 $ -- $ -- Actuarial return on plan assets ..... 1,713 1,264 -- -- Revaluation of asset ................ -- 951 -- -- Employer contribution ............... 1,184 270 1,510 1,114 Benefits paid ....................... (3,424) (614) (1,510) (1,114) -------- -------- --------- --------- Fair value of plan assets at end of year ............................ $ 8,337 $ 8,864 $ -- $ -- ======== ======== ========= ========= Funded status ....................... $ (3,958) $ (6,258) $ (26,348) $ (29,393) Unrecognized prior service cost ..... (665) (751) (2,318) (2,898) Unrecognized actuarial (gain) loss ............................... (1,007) 945 (1,927) 1,832 Unrecognized net asset at transition ......................... (623) (782) -- -- -------- -------- --------- --------- Accrued benefit cost ................ $ (6,253) $ (6,846) $ (30,593) $ (30,459) ======== ======== ========= =========
39 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The weighted average assumptions used in accounting for the noncontributory pension plans and the postretirement health care and life insurance plan were as follows:
Postretirement Pension Benefits Benefits ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands) Weighted-average assumptions as of December 31 Discount rate ...................... 7.75% 6.50% 7.75% 6.50% Expected return on plan assets ..... 8.50% 8.50% N/A N/A Rate of compensation increase ...... 5.25% 4.50% N/A N/A
The assumed rate of cost increase in the postretirement health care and life insurance plan in 1999 was 7.0 percent and 7.75 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 5.5 percent, and remain at 5.5 percent thereafter for both non-Medicare eligible and Medicare eligible retirees. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. The effect of a 1 percent change in the health care cost trend rate for each future year would have had the following effects on 1999 results:
1-Percentage 1-Percentage Point Increase Point Decrease ---------------- --------------- (In thousands) Effect on total service cost and interest cost components ........................................ $ 377 $ (320) Effect on postretirement benefit obligation ......... $4,086 $ (3,520)
The components of the net periodic benefit cost recognized for the noncontributory pension plans and the postretirement health care and life insurance plan were as follows:
Pension Benefits Postretirement Benefits ------------------------------- --------------------------------- 1999 1998 1997 1999 1998 1997 --------- --------- --------- ---------- ---------- --------- (In thousands) Components of net periodic benefit cost Service cost ..................... $ 492 $ 511 $ 291 $ 509 $ 540 $ 507 Interest cost .................... 742 888 819 1,688 1,707 1,720 Expected return on plan assets ... (655) (656) (531) -- -- -- Amortization of unrecognized transition asset ................ (160) (160) (160) -- -- -- Amortization of prior service cost ............................ (86) (86) (70) (580) (580) (580) Amortization of unrecognized losses .......................... 258 189 68 26 18 5 ------ ------ ------ ------ ------ ------ Net periodic benefit cost ........ $ 591 $ 686 $ 417 $1,643 $1,685 $1,652 ====== ====== ====== ====== ====== ======
Services Company also participates in a multi-employer retirement income plan that provides benefits to employees covered by certain labor contracts. Pension expense for the plan was $140,000, $126,000 and $129,000 for 1999, 1998 and 1997, respectively. 40 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) In addition, Services Company contributes to a multi-employer postretirement benefit plan that provides health care and life insurance benefits to employees covered by certain labor contracts. The cost of providing these benefits was approximately $103,000, $106,000 and $110,000 for 1999, 1998 and 1997, respectively. 14. 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 was amended and restated on July 14, 1998. 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 granted prior to 1998 were 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 Distribution Equivalents are 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. Options granted after 1997 do not have a Distribution Equivalent feature. 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 granted prior to 1998 vested in varying amounts beginning generally three years after the date of grant. Options granted after 1997 vest in three years. Options granted in 1998 are exercisable for a period of seven years following the date on which they vest. Options granted prior to 1998 are exercisable for a period of five years following the date on which they vest. The Partnership recorded compensation expense related to the Option Plan of $33,000 in 1999, $34,000 in 1998 and $179,000 in 1997. Compensation and benefit costs of executive officers were not charged to the Partnership after August 12, 1997 (See Note 17). If compensation cost for the Option Plan had been determined based on the fair value at the time of the grant dates for awards consistent with SFAS 123, the Partnership's net income and earnings per share would have been as indicated by the proforma amounts below:
1999 1998 1997 ------------ ------------ ----------- (In thousands except per Unit amounts) Net income As reported ....................... $ 76,283 $ 52,007 $ 6,383 Pro forma ......................... $ 76,258 $ 52,006 $ 6,387 Basic earnings per unit As reported and Pro forma ......... $ 2.82 $ 1.93 $ 0.25 Diluted earnings per unit As reported and Pro forma ......... $ 2.81 $ 1.92 $ 0.25
41 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Options granted in 1999 and 1998 vest after 3 years following the date of the grant. 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 granted prior to 1998 vests after three, four and five years following the date of the grant. The assumptions used for options granted in 1999, 1998 and 1997 are indicated below.
Risk-free Interest Rate Expected Life (Years) ------------------------------- ------------------------------ Year of Dividend Vesting Period Vesting Period Option Grant Yield Volatility 3 Years 4 Years 5 Years 3 Years 4 Years 5 Years - -------------- ---------- ------------ --------- --------- --------- --------- --------- -------- 1999 7.7% 20.1% 5.6% N/A N/A 3.50 N/A N/A 1998 7.1% 24.7% 5.5% N/A N/A 3.50 N/A N/A 1997 0.0% 19.6% 6.4% 6.4% 6.5% 3.25 4.25 5.25
Options granted in 1999 and 1998 assume a dividend yield of 7.7 percent and 7.1 percent, respectively. No dividend yield was assumed on options granted prior to 1998 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 LP units. A summary of the changes in the LP Unit options outstanding under the Option Plan as of December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ------------------------ ------------------------ ------------------------- Weighted Weighted Weighted Units Average Units Average Units Average Under Exercise Under Exercise Under Exercise Option Price Option Price Option Price ------------ ---------- ------------ ---------- ------------ ----------- Outstanding at beginning of year ...... 220,440 $ 15.71 221,140 $ 15.51 197,340 $ 15.36 Granted ............................... 37,400 28.50 20,300 29.50 51,900 21.07 Exercised ............................. (53,800) 12.53 (21,000) 11.78 (28,100) 13.74 ------- ------- ------- Outstanding at end of year ............ 204,040 17.86 220,440 15.71 221,140 15.51 ======= ======= ======= Options exercisable at year-end ....... 68,240 49,540 20,140 Weighted average fair value of options granted during the year ..... $ 2.66 $ 3.75 $ 5.62
The following table summarizes information relating to LP Unit options outstanding under the Option Plan at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------ ------------------------- Weighted Average Weighted Weighted Range of Options Remaining Average Options Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/99 Life Price at 12/31/99 Price - ------------------ ------------- ------------- ---------- ------------- --------- $6.00 to $10.00 10,140 4.8 Years $ 8.40 1,340 $ 9.06 $10.01 to $15.00 79,000 4.4 Years 12.57 55,200 12.71 $15.01 to $20.00 57,200 5.9 Years 15.75 11,700 15.59 $20.01 to $30.00 57,700 9.2 Years 28.85 -- -- ------- ------ Total 204,040 6.2 Years 17.86 68,240 13.13 ======= ======
At December 31, 1999, there were 292,700 LP Units available for future grants under the Option Plan. 42 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 15. EMPLOYEE STOCK OWNERSHIP PLAN In connection with the Acquisition, the ESOP was formed for the benefit of employees of BMC, the General Partner and shareholders of BMC. BMC borrowed $63 million pursuant to a 15-year term loan from a third-party lender. BMC then loaned $63 million to the ESOP, which used the loan proceeds to purchase $63 million of Series A Convertible Preferred Stock of BAC ("BAC Preferred Stock"). The BAC Preferred Stock had a 7.5% cumulative dividend rate and a conversion rate of approximately 7.7 shares of BAC common stock per share of BAC Preferred Stock. In December 1996, the Board of Directors of BMC approved 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 that are beneficially owned by the ESOP through Services Company. The market value of the LP Units issued to Services Company was approximately $64.2 million. As a result of the Partnership's issuance of the LP Units, the Partnership's obligation to reimburse BMC for certain executive compensation costs was permanently released, the incentive compensation paid by the Partnership to BMC 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 BMC and certain of its affiliates. Total ESOP related costs charged to earnings were $1,341,000 during 1999 and $1,196,000 during 1998, representing a non-cash accrual of the current year's portion of the estimated difference between the total distributions to be received on the LP Units and the total debt service requirements under the ESOP loan (the "top- up provision"). Total ESOP related costs charged to earnings 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 employee accounts through August 12, 1997 and the accrual of a $460,000 top-up provision. 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. As a result of the ESOP Restructuring the Partnership will not incur any additional charges related to interest expense and shares released to employee 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. Services Company stock allocated to employees receives stock dividends in lieu of cash, while cash dividends are used to pay principal and interest on the ESOP loan. 43 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 16. LEASES AND COMMITMENTS The Operating Partnerships lease certain land and rights-of-way. Minimum future lease payments for these leases as of December 31, 1999 are approximately $2.9 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 General Partner leases space in an office building and certain copying equipment and charges these costs to the Operating Partnerships. Buckeye leases certain computing equipment and automobiles. BRC leases tanks. Future minimum lease payments under these noncancelable operating leases at December 31, 1999 were as follows: $1,519,000 for 2000, $1,497,000 for 2001, $1,357,000 for 2002, $1,239,000 for 2003, $1,253,000 for 2004 and $2,187,000 thereafter. Buckeye entered into an energy services agreement for certain 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 twelve 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. Buckeye's use of the natural gas engines has exceeded the minimum requirement in 1998 and 1999. Rent expense for all operating leases was $8,448,000, $7,192,000 and $6,606,000 for 1999, 1998 and 1997, respectively. 17. RELATED PARTY TRANSACTIONS The Partnership and the Operating Partnerships are managed by the General Partner. Under certain partnership agreements and management agreements, BMC, the General Partner, Services Company 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 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) obligate 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 connection with the ESOP Restructuring, the General Partner's employees were transferred to Services Company. Services Company employs all of the employees previously employed by the General Partner and has become the sponsor of all of the employee benefit plans previously maintained by the General Partner. Services Company also entered into a Services Agreement with BMC and the General Partner to provide services to the Partnership and the Operating Partnerships over a 13.5 year term. Services Company is reimbursed by BMC or the General Partner for its direct and indirect expenses, other than as described below with respect to certain executive compensation. BMC and the General Partner are reimbursed by the Partnership and the Operating Partnerships. Costs reimbursed to BMC, the General Partner or Services Company 44 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) by the Partnership and the Operating Partnerships totaled $54.3 million, $54.4 million and $57.2 million in 1999, 1998 and 1997, respectively. The reimbursable costs include insurance, general and administrative costs, compensation and benefits payable to officers and employees of BMC, the General Partner 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 BMC were not charged to the Partnership after August 12, 1997 pursuant to the Exchange Agreement entered into among BMC, the Partnership and the Operating Partnerships. Services Company, which is beneficially owned by the ESOP, owns 2,534,157 LP Units (approximately 9.5 percent of the LP Units outstanding). Distributions received by Services Company on such LP Units are used to fund obligations of the ESOP. Distributions paid to Services Company totaled $5,533,000 during 1999, $5,390,000 during 1998 and $2,483,000 for the period August 12, 1997 through December 31, 1997. In August 1997, the Incentive Compensation Agreement was further amended 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. Included in minority interests and other expenses are incentive compensation payments of $7.2 million, $6.4 million and $3.0 million in 1999, 1998 and 1997, respectively. The management agreements between the General Partner 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 General Partner 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 BMC and its affiliates are not entitled to be reimbursed pursuant to the terms of the Exchange Agreement. In July 1998, through a consent solicitation approved by more than two-thirds of the LP Unitholders, amendments to the Partnership Agreement were adopted to (i) remove the limitation on the number of limited partnership units of the Partnership that may be issued without the approval of the Unitholders; (ii) eliminate the restrictions on the amount of debt that can be incurred by the Partnership or its Operating Partnerships; and (iii) remove the limitations on the amount of capital expenditures that can be made by the Partnership or the Operating Partnerships in any calendar year. In December 1998, the Partnership Agreement was amended and restated to reflect the transfer of the general partnership interest in the Partnership from BMC to the General Partner. 45 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 18. PARTNERS' CAPITAL Changes in partners' capital for the years ended December 31, 1997, 1998, and 1999 were as follows:
General Limited Partner Partners Total ----------- -------------- -------------- (In thousands, except for Units) Partners' capital at January 1, 1997 ........... $ 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 Net income ..................................... 470 51,537 52,007 Distributions .................................. (512) (56,154) (56,666) Proceeds from exercise of unit options ......... -- 366 366 -------- ----------- ----------- Partners' capital December 31, 1998 ............ 2,390 296,095 298,485 Net income ..................................... 689 75,594 76,283 Distributions .................................. (531) (58,226) (58,757) Proceeds from exercise of unit options ......... -- 978 978 -------- ----------- ----------- Partners' capital December 31, 1999 ............ $ 2,548 $ 314,441 $ 316,989 ======== =========== =========== Units outstanding at January 1, 1997 ........... 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 Units issued pursuant to the unit option and distribution equivalent plan ................. -- 21,000 21,000 -------- ----------- ----------- Units outstanding at December 31, 1998 ......... 243,914 26,742,606 26,986,520 Units issued pursuant to the unit option and distribution equivalent plan ................. -- 53,800 53,800 -------- ----------- ----------- Units outstanding at December 31, 1999 ......... 243,914 26,796,406 27,040,320 ======== =========== ===========
Historical LP Unit information has been restated to reflect a two-for-one unit split approved effective February 13, 1998. The net income per unit for 1999, 1998 and 1997 was calculated using the weighted average outstanding LP Units of 27,014,429, 26,982,099 and 25,385,402, respectively. 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 any additional LP Units of a class or series having preferences or other special or senior rights over the LP Units. 46 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 19. 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 1999, quarterly distributions of $0.525 per GP and LP Unit were paid in February and $0.55 per GP and LP Unit were paid in May, August and November. In 1998, quarterly distributions of $0.525 per GP and LP Unit were paid in February, May, August and November. 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. All such distributions were paid on the then outstanding GP and LP Units. Cash distributions aggregated $58,757,000 in 1999, $56,666,000 in 1998 and $44,305,000 in 1997. 20. QUARTERLY FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT) Summarized quarterly financial data for 1999 and 1998 are set forth below. Quarterly results were influenced by seasonal factors inherent in the Partnership's business.
1st 2nd 3rd Quarter Quarter Quarter -------------------------- -------------------------- -------------------------- 1999 1998 1999 1998 1999 1998 ------------ ------------ ------------ ------------ ------------ ------------ (In thousands, except per unit amounts) Revenue: Transportation .......... $ 46,881 $ 43,048 $ 50,461 $ 47,034 $ 48,966 $ 47,716 Refining* ............... 6,741 -- 26,106 -- 36,314 -- -------- -------- -------- -------- -------- -------- Total revenue .......... 53,622 43,048 76,567 47,034 85,280 47,716 Operating income ......... 19,813 16,361 32,116 18,863 22,872 20,088 Net income ............... 14,007 10,916 25,797 13,446 16,625 14,436 Earnings per Partner- ship Unit: Net income per Unit...... 0.52 0.40 0.96 0.50 0.62 0.53 Earnings per Partner- ship Unit: assuming dilution: Net income per Unit ................. 0.52 0.40 0.95 0.50 0.61 0.53 4th Quarter Total -------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------- ------------- (In thousands, except per unit amounts) Revenue: Transportation .......... $ 51,989 $ 46,679 $ 198,297 $ 184,477 Refining* ............... 38,328 -- 107,489 -- -------- -------- --------- --------- Total revenue .......... 90,317 46,679 305,786 184,477 Operating income ......... 26,228 19,046 101,029 74,358 Net income ............... 19,854 13,209 76,283 52,007 Earnings per Partner- ship Unit: Net income per Unit...... 0.73 0.49 2.82 1.93 Earnings per Partner- ship Unit: assuming dilution: Net income per Unit ................. 0.73 0.49 2.81 1.92
The earnings per LP Unit presented above reflect a two-for-one unit split effective February 13, 1998. * Operations acquired in March 1999. 47 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 21. EARNINGS PER UNIT The following is a reconciliation of basic and dilutive income before extraordinary loss per LP Unit for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 -------------------------------- -------------------------------- -------------------------------- Income Units Per Income Units Per Income Units Per (Numer- (Denom- Unit (Numer- (Denom- Unit (Numer- (Denom- Unit ator inator) Amt. ator) inator) Amt. ator) inator) Amt. --------- --------- ---------- --------- --------- ---------- --------- --------- ---------- Income before extraordinary loss ...... $76,283 $52,007 $48,807 ------- ------- ------- Basic earnings per Partnership Unit ........ 76,283 27,014 $ 2.82 52,007 26,982 $ 1.93 $48,807 25,385 $ 1.92 ====== ====== ====== Effect of dilutive securities--options ..... -- 85 -- 104 -- 107 ------- ------ ------- ------ ------- ------ Diluted earnings per Partnership Unit ........ $76,283 27,099 $ 2.81 $52,007 27,086 $ 1.92 $48,807 25,492 $ 1.91 ======= ====== ====== ======= ====== ====== ======= ====== ======
Options reported as dilutive securities are related to unexercised options outstanding under the Option Plan (see Note 14). 22. PROPERTY TAX SETTLEMENT In February 1999, the Partnership 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 a public right-of-way in New York City. The settlement agreement resulted in a one-time reduction of operating expenses of $11.0 million, including a cash refund of $6.0 million, for the Partnership in the second quarter of 1999. 48 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 perform all management functions for the Partnership and the Operating Partnerships in their capacities as officers and directors of the General Partner and Services Company. Directors and officers of the General Partner are selected by BMC. See "Certain Relationships and Related Transactions." Directors of the General Partner Set forth below is certain information concerning the directors of the General Partner.
Name, Age and Present Business Experience During Position with General Partner Past Five Years - ------------------------------- -------------------------- Alfred W. Martinelli, 72 Mr. Martinelli has been Chairman of the Board and Chief Chairman of the Board, Executive Officer of the General Partner and BMC since April Chief Executive Officer 1987. He has been a Director of the General Partner and BMC and Director* since October 1986. Mr. Martinelli was Chairman and Chief Executive Officer of Penn Central Energy Management Com- pany ("PCEM") from April 1987 until his resignation in March 1996. He 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, 55 Mr. Wilson became Vice Chairman of the Board of the General Vice Chairman Partner on December 31, 1998. He has been a director of the and Director* General Partner since October 1986. Mr. Wilson was Chief Oper- ating Officer of the General Partner from January 1987 until July 1998 and President from February 1991 until July 1998. He was elected Vice Chairman of the Board of BMC in July 1998. Mr. Wilson served as Chief Operating Officer of BMC from January 1997 until July 1998 and as President of BMC from March 1996 until July 1998. He has been a director of BMC since February 1995. Brian F. Billings, 61 Mr. Billings became a director of the General Partner on Director December 31, 1998. Mr. Billings was a director of BMC from October 1986 to December 1998. He served as Chairman of the General Partner from February 1991 until February 1995. Mr. Billings was President of PCEM from December 1986 to 1995.
49
Name, Age and Present Business Experience During Position with General Partner Past Five Years - ------------------------------- -------------------------- Neil M. Hahl, 51 Mr. Hahl became a director of the General Partner and BMC in Director* September 1997. He is President of The Weitling Group, a busi- ness consulting firm and a director of American Capital Strate- gies, Ltd., a specialty finance firm. Mr. Hahl was previously a director of BMC from February 1989 until March, 1996 and served as President of BMC 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. Edward F. Kosnik, 55 Mr. Kosnik became a director of the General Partner on Decem- Director ber 31, 1998. Mr. Kosnik was a director of BMC from October 1986 to December 1998. Since December 1999, he has been President and Chief Executive Officer of Berwind Corporation, a diversified company. Mr. Kosnik was President and Chief Operating Officer of Berwind Corporation from June 1997 to December 1999. He was Senior Executive Vice President and Chief Operating Officer of Alexander & Alexander Services, Inc. from May 1996 until January 1997. Mr. Kosnik was Executive Vice President and Chief Financial Officer of Alexander & Alex- ander Services, Inc. from August 1994 to April 1996. Jonathan O'Herron, 70 Mr. O'Herron became a director of the General Partner on Director December 31, 1998. Mr. O'Herron was a director of BMC from September 1997 to December 1998. He has been Managing Director of Lazard Freres & Company, LLC for more than five years. Ernest R. Varalli, 69 Mr. Varalli has been a director of the General Partner and BMC Director* since July 1987. He was Executive Vice President, Chief Finan- cial Officer and Treasurer for more than five years until 1996. Mr. Varalli also served as Executive Vice President, Chief Finan- cial Officer and Treasurer of PCEM for more than five years until his resignation in March 1996. He had been a consultant to American Financial from September 1986 until March 1996.
- --------------- * Also a director of Services Company. The General Partner has an Audit Committee, which currently consists of three directors: Brian F. Billings, Neil M. Hahl and Edward F. Kosnik. Messrs. Billings, Hahl and Kosnik 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. 50 Executive Officers of the General Partner Set forth below is certain information concerning the executive officers of the General Partner who also serve in similar positions in BMC and Services Company.
Name, Age and Present Business Experience During Position Past Five Years --------------------- -------------------------- William H. Shea, Jr., 45 Mr. Shea was named President and Chief Operating Officer of President and Chief the General Partner in July 1998. Mr. Shea had been named Operating Officer Executive Vice President of the General Partner in September 1997 and previously served as Vice President of Marketing and Business Development of the General Partner from March 1996 to September 1997. Mr. Shea was Vice President--West Central Region of Laidlaw Environmental Services from 1994 until 1995. Mr. Shea is the son-in-law of Mr. Alfred W. Martinelli. Stephen C. Muther, 50 Mr. Muther has been Senior Vice President--Administration, Senior Vice President- General Counsel and Secretary of the General Partner since Administration, February 1995. Mr. Muther served as General Counsel, Vice General Counsel President--Administration and Secretary of the General Part- and Secretary ner from May 1990 to February 1995. Steven C. Ramsey, 45 Mr. Ramsey has been Senior Vice President--Finance and Chief Senior Vice President-Finance Financial Officer of the General Partner since February 1995. and Chief Financial Officer Mr. Ramsey served as Vice President and Treasurer of the Gen- eral Partner from February 1991 to February 1995. David J. Martinelli, 39 Mr. Martinelli was named Senior Vice President--Corporate Senior Vice President- Development and Treasurer of the General Partner in Decem- Corporate Development ber 1999. He served as Senior Vice President and Treasurer of and Treasurer the General Partner from July 1998 to December 1999 and pre- viously served as Vice President and Treasurer of the General Partner from June 1996. Mr. Martinelli served as Assistant Trea- surer of the General Partner from March 1996 to June 1996. He was employed in a corporate financial position with Salomon Brothers Inc from 1993 until 1996. He is the son of Mr. Alfred W. Martinelli.
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 fees as directors. Directors' fees paid by General Partner in 1999 to its directors amounted to $114,500. In addition, Mr. Hahl received $69,400 for consulting services. Each of these payments were reimbursed by the Partnership. Members of the Board of Directors of BMC and Services Company are not compensated for their services as directors. Executive Compensation Prior to the consummation of the ESOP Restructuring on August 12, 1997, executive officers of the General Partner and other employees of the General Partner received compensation and benefits 51 that 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 for certain compensation and fringe benefit costs for executive level duties performed by the General Partner with respect to operations, finance, legal, marketing and business development, and treasury, as well as the President of the General Partner. See "Certain Relationships and Related Transactions." Executive Officer Severance Agreements BMC, Services Company and Glenmoor entered into severance agreements in May 1997 with four executive officers of the General Partner providing for the payment of severance compensation equal to the amount of annual base salary and incentive compensation then being paid to such individuals (the "Severance Compensation Amount"). Such officers were C. Richard Wilson, then President and Chief Operating Officer; Michael P. Epperly, then Senior Vice President--Operations; Steven C. Ramsey, Senior Vice President--Finance; and Stephen C. Muther, Senior Vice President--Administration, General Counsel and Secretary. The severance agreements provide for 1.5 times the Severance Compensation Amount upon termination of such 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. Any costs incurred under the severance agreements was to be reimbursed by the Partnership. In April 1998, in connection with the realignment of senior management, Mr. Wilson was named Vice Chairman and was succeeded as President and Chief Operating Officer of the General Partner by William H. Shea, Jr. Mr. Epperly's position was eliminated, and his responsibilities were assigned to other officers. The General Partner entered into agreements with each of Messrs. Wilson and Epperly under which they would receive the equivalent of the Severance Compensation Amount and certain additional compensation pending their retirement. Thereafter, each of Messrs. Wilson and Epperly agreed to provide certain consulting services to the General Partner for a period of 60 months for a fixed annual fee. Total costs incurred in 1999 and 1998 under Messrs. Wilson's and Epperly's severance agreements amounted to $0.1 million and $0.9 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." In December 1999, the severance agreements for Messrs. Muther and Ramsey were amended to modify the definition of "change of control" to include the acquisition (other than by the General Partner and its affiliates) of 80 percent or more of the LP Units, 51 percent or more of the general partnership interests owned by the General Partner, or 50 percent or more of the voting equity interests of the Partnership and the General Partner on a combined basis. Director Recognition Program The General Partner has adopted the Director Recognition Program (the "Recognition Program") that had been instituted by BMC 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 or BMC. A minimum of three full years of service as a member of the Board of Directors 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 52 for the Recognition Program. In 1999, the Partnership recorded expenses of $180,000 under the Recognition Program. Mr. William C. Pierce and Mr. Robert H. Young, former members of the Board of Directors who resigned in July 1999, were paid $45,000 each in 1999 under the Recognition Program. Item 12. Security Ownership of Certain Beneficial Owners and Management Services Company owns approximately 9.5 percent of the outstanding LP Units as of March 15, 2000. No other person or group is known to be the beneficial owner of more than 5 percent of the LP Units as of March 15, 2000. The following table sets forth certain information, as of March 15, 2000, concerning the beneficial ownership of LP Units by each director of the General Partner, the Chief Executive Officer of the General Partner, the four most highly compensated officers of the General Partner and by all directors and executive officers of the General Partner 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 owned beneficially, as of March 15, 2000, more than 1 percent of any class of equity securities of the Partnership or any of its subsidiaries outstanding at that date.
Name Number of LP Units (1) ---- ---------------------- Brian F. Billings ............................................... 15,000(2) Neil M. Hahl .................................................... 2,000(2) Edward F. Kosnik ................................................ 10,000(2) Alfred W. Martinelli ............................................ 9,000(2) David J. Martinelli ............................................. 1,800 Stephen C. Muther ............................................... 17,500 Jonathan O'Herron ............................................... 14,800 Steven C. Ramsey ................................................ 19,400 William H. Shea, Jr. ............................................ 9,600(2) Ernest R. Varalli ............................................... 13,000(2) C. Richard Wilson ............................................... 5,000 All directors and executive officers as a group (consisting of 11 persons named above ........................................... 117,100
- --------------- (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 pursuant to the Amended and Restated Agreement of Limited Partnership (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 General Partner and the Operating Partnerships (the "Management Agreements"). BMC, which had been general partner of the Partnership, contributed its general partnership interest and certain other assets to the General Partner effective December 31, 1998. The General Partner is a wholly-owned subsidiary of BMC. Under the Partnership Agreement and the Operating Partnership Agreements, as well as the Management Agreements, the General Partner and certain related parties are entitled to 53 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 (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. On March 22, 1996, BAC, now Glenmoor, acquired all of the common stock of BMC from a subsidiary of American Financial for $63 million. The purchase price was financed in part through the ESOP. 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. Glenmoor and BMC are entitled to receive an annual management fee for certain management functions it provides to the General Partner pursuant to a Management Agreement among Glenmoor, BMC and the General Partner. The amount is approved each year by the disinterested directors of the General Partner. The management fee includes a Senior Administrative Charge of not less than $975,000 and reimbursement for certain costs and expenses. Amounts paid to Glenmoor and BMC in 1999 for management fees equaled $2.3 million, including $1.0 million for the Senior Administrative Charge and $1.3 million of reimbursed expenses. Amounts paid to Glenmoor and BMC in 1998 for management fees equaled $2.1 million, including $1.0 million for the Senior Administrative Charge and $1.1 million of reimbursed expenses. Amounts paid to Glenmoor and BMC in 1997 for management fees equaled $3.1 million, including $1.0 million for the Senior Administrative Charge and $2.1 million of reimbursed expenses. 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 BAC with a beneficial ownership interest in LP Units. The Partnership issued 2,573,146 LP Units to Services Company in consideration 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. 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, BMC, 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 provision"), 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. In connection with the ESOP Restructuring, the General Partner's employees were transferred to Services Company. Services Company employs all of the employees previously employed by the General Partner and has become the sponsor of all of the employee benefit plans previously maintained by the General Partner. Services Company also entered into a Services Agreement with BMC and the General Partner to provide services to the Partnership and the Operating Partnerships over a 13.5 year term. Services Company is reimbursed by BMC or the General Partner for its direct and indirect expenses which in turn are reimbursed by the Operating Partnerships other than certain executive compensation and fringe benefit costs. Costs reimbursed to BMC, the General Partner or Services Company by the Partnership and the Operating Partnerships totaled $54.3 million, $54.4 million and $57.2 million in 1999, 1998 and 1997, respectively. Compensation and benefit costs of certain executive officers of BMC or the General Partner were not charged to the Partnership after August 12, 1997 pursuant to the Exchange Agreement. 54 The following chart depicts the ownership relationships among the Partnership, the General Partner and various other parties: ____________ ____________ _____________________ | | | | | | | Public | | | | | |Unitholders | | ESOP | | Glenmoor, Ltd. | |____________| |____________| |_____________________| | | | | | 100% | 100% | | | | ____________ _____________________ | | | | | | | Buckeye | | Buckeye | | | Pipe Line | | Management | | | Services | | Company | | |____________| |_____________________| | | | 90% | | 9% | 100% | | | | ______________ _____________________ | | | | | | | | 1% | Buckeye | |______________________| Buckeye |___ | Pipe Line Co. |_____| |Partners, L.P.| | (General Partner) | | |______________| |_____________________| | | | | | 99% | 1% | | | | _______________________________________________________________ | | | | | | | | | | | _______________ _______________ _________________ __________________ | | | | | | | | | | | Buckey | | Buckeye | | Everglades | | Buckeye | | | Pipe Line | | Tank | | Pipe Line | | Pipe Line Co. | | | Company, L.P. | |Terminals, L.P.| | Company, L.P. | |(General Partner) | |2% |_______________| |_______________| |_________________| |__________________| | | | | | | | ________________________________________ | | | | | | | | 100% | 100% | 75% | 98% | _______________ _______________ _________________ __________________ | | | | | | | | | | |Buckey Refining| | Buckeye | |WesPac Pipelines-| | Buckeye | | | Company, L.P. | | Gulf Coast | | Reno Ltd. and | | Pipe Line Company|_| | | |Pipelines, LLC | | related entities| | of Michigan, L.P.| |_______________| |_______________| |_________________| |__________________| As part of the ESOP Restructuring, the Incentive Compensation Agreement was amended to change the target and payment thresholds, and 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 February 13, 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) 30 percent of the amount, if any, by which the quarterly distribution per LP Unit exceeds $0.375 but is not more than $0.40, plus (iv) 35 percent of the amount, if any, by which the quarterly distribution per LP Unit exceeds $0.40 but is not more than $0.425, plus (v) 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 (vi) 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 55 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 the date of the closing of the initial public offering in December 1986. Incentive compensation paid by the Partnership for quarterly cash distributions totaled $7,229,000, $6,405,000 and $3,042,000 in 1999, 1998 and 1997, respectively. No special cash distributions have ever been paid by the Partnership. On December 31, 1998, BMC transferred its general partnership interest and certain other assets relating to the Partnership to the General Partner, and the General Partner assumed certain liabilities and obligations of BMC, including the liabilities and obligations of BMC under the Exchange Agreement, the Services Agreement and the Incentive Compensation Agreement. On January 20, 2000, the General Partner announced a quarterly distribution of $0.60 per GP and LP Unit payable on February 29, 2000. As such distribution exceeds a target of $0.325 per LP Unit, the Partnership will pay the General Partner incentive compensation aggregating $2.4 million as a result of this distribution. 56 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 24. (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.
Exhibit Number (Referenced to Item 601 of Regulation S-K) - ---------------- 3.1 -- Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of December 31, 1998.(9) (Exhibit 3.1) 3.2 -- Certificate of Amendment to Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of December 31, 1998. (9) (Exhibit 3.2) 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. (8) (Exhibit 4.1) 4.2 -- Note Agreement, dated as of December 16, 1997, between Buckeye and The Prudential Insurance Company of America. (8) (Exhibit 4.2) 4.3 -- Defeasance Trust Agreement, dated as of December 16, 1997, between and among PNC Bank, National Association, and Douglas A. Wilson, as Trustees. (8) (Exhibit 4.3) 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. ss.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. (8) (Exhibit 10.2) 10.3 -- Management Agreement, dated November 18, 1986, between the Manager and Buckeye. (1)(3) (Exhibit 10.4) 10.4 -- Amended and Restated Management Agreement, dated November 18, 1986, between the General Partner, Buckeye and Glenmoor. (7) (Exhibit 10.2)
57
Exhibit Number (Referenced to Item 601 of Regulation S-K) - ------------------ 10.5 -- Amendment to Management Agreement dated as of August 12, 1997, between the General Partner, Buckeye and Glenmoor. (8) (Exhibit 10.5) 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 March 22, 1997 between the General Partner and the Partnership. (8) (Exhibit 10.7) 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. (8) (Exhibit 10.8) 10.9 -- Services Agreement, dated as of August 12, 1997, among the General Partner, the Manager and Services Company. (8) (Exhibit 10.9) 10.10 -- Exchange Agreement, dated as of August 12, 1997, among the General Partner, the Manager the Partnership and the Operating Partnership. (8) (Exhibit 10.10) 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. (8) (Exhibit 10.13) 10.14 -- Contribution, Assignment and Assumption Agreement, dated as of December 31, 1998, between Buckeye Management Company and Buckeye Pipe Line Company. (9) (Exhibit 10.14) 10.15 -- Director Recognition Program of the General Partner. (4) (9) (Exhibit 10.15) 10.16 -- Credit Agreement dated as of December 16, 1998 among Buckeye Pipe Line Company, L.P., Buckeye Partners, L.P., First Union National Bank as Agent, The First National Bank of Chicago as Documentation Agent and the Lenders party thereto. (9) (Exhibit 10.16) 10.17 -- Guaranty Agreement dated December 16, 1998 by Buckeye Partners, L.P. in favor of First Union National Bank, as agent for the lenders that are or become parties to the Credit Agreement dated as of December 16, 1998 among Buckeye Pipe Line Company, L.P., Buckeye Partners, L.P. First Union National Bank as Agent, The First National Bank of Chicago as Documentation Agent and the Lenders party thereto. (9) (Exhibit 10.17) *10.18 -- Form of Amendment No. 1 to Executive Officer Severance Agreement. (Exhibit 10.18)
58
Exhibit Number (Referenced to Item 601 of Regulation S-K) - ---------------- 21.1 -- List of subsidiaries of the Partnership. (7) (Exhibit 21.1) *27 -- Financial Data Schedule.
- --------------- (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. (8) 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 1997. (9) 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 1998. * Filed herewith (b) Reports on Form 8-K filed during the quarter ended December 31, 1999: Buckeye Partners, L.P. filed a Current Report on Form 8-K on November 12, 1999 announcing that, effective with the fourth quarter 1999 distribution to be paid in February 2000, it had increased the annual distribution by $0.20 per LP Unit ($0.05 per quarter) to an indicated annual distribution of $2.40. 59 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 Pipe Line Company, as General Partner Dated: March 15, 2000 By: /s/ ALFRED W. MARTINELLI ------------------------------------- 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. Dated: March 15, 2000 By: /s/ BRIAN F. BILLINGS ------------------------------------- Brian F. Billings Director Dated: March 15, 2000 By: /s/ NEIL M. HAHL ------------------------------------- Neil M. Hahl Director Dated: March 15, 2000 By: /s/ EDWARD F. KOSNIK ------------------------------------ Edward F. Kosnik Director Dated: March 15, 2000 By: /s/ ALFRED W. MARTINELLI ------------------------------------- Alfred W. Martinelli Chairman of the Board and Director (Principal Executive Officer) Dated: March 15, 2000 By: /s/ JONATHAN O'HERRON ------------------------------------- Jonathan O'Herron Director Dated: March 15, 2000 By: /s/ STEVEN C. RAMSEY ------------------------------------- Steven C. Ramsey (Principal Financial Officer and Principal Accounting Officer) Dated: March 15, 2000 By: /s/ ERNEST R. VARALLI ------------------------------------- Ernest R Varalli Director Dated: March 15, 2000 By: /s/ C. RICHARD WILSON ------------------------------------- C. Richard Wilson Director 60 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, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated January 28, 2000; 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 28, 2000 S-1 SCHEDULE I BUCKEYE PARTNERS, L.P. Registrant's Condensed Financial Statements (In thousands) BALANCE SHEETS
December 31, --------------------------- 1999 1998 ------------ ------------ Assets Curent assets Cash and cash equivalents ....................................... $ 171 $ 30 Other current assets ............................................ 135 44 --------- --------- Total current assets .......................................... 306 74 Investments in and advances to subsidiaries (at equity) ......... 317,117 298,566 --------- --------- Total assets .................................................. $ 317,423 $ 298,640 ========= ========= Liabilities and partners' capital Current liabilities .............................................. $ 434 $ 155 --------- --------- Partners' capital General Partner ................................................. 2,548 2,390 Limited Partners ................................................ 314,441 296,095 --------- --------- Total partners' capital ....................................... 316,989 298,485 --------- --------- Total liabilities and partners' capital ....................... $ 317,423 $ 298,640 ========= =========
STATEMENTS OF INCOME
Year Ended December 31, ----------------------------------------- 1999 1998 1997 ----------- -------------- ---------- Equity in income of subsidiaries .................. $ 83,791 $ 58,415 $ 9,418 Operating (expenses) credits ...................... (301) (6) 17 Interest income ................................... -- 3 48 Interest and debt expense ......................... 22 -- (58) Incentive compensation to General Partner ......... (7,229) (6,405) (3,042) -------- --------- -------- Net income .................................. $ 76,283 $ 52,007 $ 6,383 ======== ========= ========
STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------- 1999 1998 1997 ----------- ----------- ------------ Cash flows from operating activities: Net income ................................................. $ 76,283 $ 52,007 $ 6,383 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in investment in subsidiaries ......... (18,551) 3,699 37,555 Change in assets and liabilities: Temporary investments ................................... -- 740 4,533 Other current assets .................................... (91) 510 (481) Current liabilities ..................................... 279 (1,095) (4,947) --------- --------- --------- Net cash provided by operating activities ............... 57,920 55,861 43,043 Cash flows from financing activities: Capital contributions ...................................... -- -- 5 Proceeds from exercise of unit options ..................... 978 366 516 Distributions to Unitholders ............................... (58,757) (56,666) (44,305) --------- --------- --------- Net decrease in cash and cash equivalents .................. 141 (439) (741) Cash and cash equivalents at beginning of period ........... 30 469 1,210 --------- --------- --------- Cash and cash equivalents at end of period ................. $ 171 $ 30 $ 469 ========= ========= ========= Supplemental cash flow information: Non-cash change from issuance of LP Units ................. -- -- $ 64,200 Non-cash change in investments in subsidiaries ............ -- -- $ 64,200
See footnotes to consolidated financial statements of Buckeye Partners, L.P. S-2 EX-10.8 2 EXHIBIT 10.8 EXHIBIT 10.18 AMENDMENT NO. 1 TO SEVERANCE AGREEMENT (This Amendment was signed in its final form by Stephen C. Muther and Steven C. Ramsey.) This Amendment No. 1 (this "Amendment") to the Severance Agreement (the "Severance Agreement"), dated as of December 8, 1997, among Buckeye Pipe Line Company, a Delaware corporation ("BPL"), as the assignee of Buckeye Management Company, a Delaware corporation ("BMC"), Buckeye Pipe Line Services Company, a Delaware corporation ("BPLSC") (BPL, BMC and BPLSC are hereinafter collectively referred to as the "Company"), Glenmoor, Ltd., a Delaware corporation formerly known as BMC Acquisition Company and the owner of BMC ("Glenmoor"), and ___________ ("__________"), is dated as of December __, 1999. WHEREAS, BMC has transferred its general partnership interest in BPLP to BPL (the "General Partner"); WHEREAS, _________ serves in an executive capacity for the General Partner; and WHEREAS, the parties believe that a change of control of the General Partner implicates the same issues as a change of control of BPLP and desire to amend the Severance Agreement to provide for severance payments to _________ under certain circumstances following a change of control of the General Partner. NOW, THEREFORE, intending to be legally bound, the Severance Agreement is hereby amended as follows: 1. All terms used in this Amendment but not otherwise defined in this Amendment shall have the meaning set forth for such terms in the Severance Agreement. 2. Section 1(c) of the Severance Agreement is hereby amended and restated in its entirety to read as follows: (c) "Change of Control" shall be deemed to have taken place upon the occurrence of any of the following events: (i) any Person, except the Company or any employee benefit plan of the Company (or of any Affiliate or Associate, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the Beneficial Owner, or the holder of proxies, in the aggregate of 80% or more of the limited partnership units (the "Units") of BPLP then outstanding; provided, however, that no "Change of Control" shall be deemed to occur for purposes of clause (i) hereof during any period in which any such Person, and its Affiliates and Associates, are bound by the terms of a standstill agreement under which such parties have agreed not to acquire more than 79% of the Units then outstanding or to solicit proxies; or (ii) any Person, except one or more of the stockholders of Glenmoor as of the date hereof or any employee benefit plan of the Company (or of any Affiliate or Associate or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the Beneficial Owner, or the holder of proxies, in the aggregate of 51% or more of the general partnership interests of BPLP; or (iii) if BPLP and the General Partner are combined into a single entity (the "Successor"), any Person, except one or more of the stockholders of Glenmoor as of the date hereof or any employee benefit plan of the Company (or of any Affiliate or Associate or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the Beneficial Owner, or the holder of proxies, in the aggregate of 50% or more of the voting equity interests of the Successor then outstanding; provided, however, that no "Change of Control" shall be deemed to occur for purposes of clause (iii) hereof during any period in which any such Person, and its Affiliates and Associates, are bound by the terms of a standstill agreement under which such parties have agreed not to acquire more than 49% of the voting equity interests of the Successor then outstanding or to solicit proxies. For purposes of this Agreement, the term "Person" shall have the same meaning as in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); the terms "Affiliate" and "Associate" are used as defined in Rule 12b-2 of the Exchange Act. 3. All references in the Severance Agreement to BAC are hereby amended to refer to Glenmoor and all references to the Company in the Severance Agreement shall be deemed to include BPL, as well as BMC and BPLP. -2- 4. Any provision of the Severance Agreement which is inconsistent with the provisions of this Amendment shall be deemed amended to effectuate the intention expressed herein. Except as hereby amended, the Severance Agreement shall remain unchanged and in full force and effect. 5. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof. IN WITNESS WHEREOF, this Amendment has been executed as of the day and year first above written. BUCKEYE PIPE LINE SERVICES COMPANY By --------------------------------------- Name: Title: GLENMOOR, LTD. By --------------------------------------- Name: Title: BUCKEYE MANAGEMENT COMPANY By --------------------------------------- Name: Title: BUCKEYE PIPE LINE COMPANY By --------------------------------------- Name: Title: -3- EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 DEC-31-1999 22,003 0 9,718 0 18,397 55,627 637,078 80,174 674,285 42,478 266,000 0 0 0 316,989 674,285 107,489 305,786 94,702 204,757 0 0 16,854 76,283 0 76,283 0 0 0 76,283 2.82 2.81
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