-----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, Hm8X5O19ZToLXRePQN2QR3BdvtNfZ8zUO6QzZ+T+S67swVGgNTIFVcM7xOS6zL9o xYNyjZMu68Kf4XlsvWk8Wg== 0000950109-97-002458.txt : 19970327 0000950109-97-002458.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950109-97-002458 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-09356 FILM NUMBER: 97563526 BUSINESS ADDRESS: STREET 1: P O BOX 368 CITY: EMMAUS STATE: PA ZIP: 18049 BUSINESS PHONE: 6107704000 MAIL ADDRESS: STREET 1: 3900 HAMILTON BLVD CITY: ALLENTOWN STATE: PA ZIP: 18103 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-9356 BUCKEYE PARTNERS, L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 23-2432497 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 3900 HAMILTON BOULEVARD ALLENTOWN, PENNSYLVANIA 18103 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 770-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ LP Units representing limited partnership interests....................................... New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None (TITLE OF CLASS) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] At March 24, 1997, the aggregate market value of the registrant's LP Units held by non-affiliates was $505 million. The calculation of such market value should not be construed as an admission or conclusion by the registrant that any person is in fact an affiliate of the registrant. LP Units outstanding as of March 24, 1997: 12,067,180 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS.................................................................... 1 ITEM 2. PROPERTIES.................................................................. 10 ITEM 3. LEGAL PROCEEDINGS........................................................... 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S LP UNITS AND RELATED UNITHOLDER MATTERS......... 13 ITEM 6. SELECTED FINANCIAL DATA..................................................... 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................................. 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 40 ITEM 11. EXECUTIVE COMPENSATION...................................................... 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............ 53
PART I ITEM 1. BUSINESS INTRODUCTION Buckeye Partners, L.P. (the "Partnership"), the Registrant, is a limited partnership organized in 1986 under the laws of the state of Delaware. The Partnership conducts all its operations through subsidiary entities. These operating subsidiaries are Buckeye Pipe Line Company, L.P. ("Buckeye"), Laurel Pipe Line Company, L.P. ("Laurel"), Everglades Pipe Line Company, L.P. ("Everglades") and Buckeye Tank Terminals Company, L.P. ("BTT"), each of which is 99 percent owned by the Partnership. (Each of Buckeye, Laurel, Everglades and BTT is referred to as an "Operating Partnership" and collectively as the "Operating Partnerships"). Buckeye is one of the largest independent pipeline common carriers of refined petroleum products in the United States, with 3,105 miles of pipeline serving 10 states. Laurel owns a 345-mile common carrier refined products pipeline located principally in Pennsylvania. Everglades owns 37 miles of refined products pipeline in Florida. Buckeye, Laurel and Everglades conduct the Partnership's refined products pipeline business. BTT provides bulk storage service through leased facilities with an aggregate capacity of 257,000 barrels of refined petroleum products. The Partnership acquired its interests in the Operating Partnerships from The Penn Central Corporation, now American Financial Group, Inc. ("American Financial"), on December 23, 1986 (the "1986 Acquisition"). The Operating Partnerships (other than Laurel) had been organized by American Financial for purposes of the 1986 Acquisition and succeeded to the operations of predecessor companies owned by American Financial, including Buckeye Pipe Line Company (an Ohio corporation) and its subsidiaries ("Pipe Line"), in November 1986. Laurel was formed in October 1992 and succeeded to the operations of Laurel Pipe Line Company ("Laurel Corp") (an Ohio corporation) which was a majority owned corporate subsidiary of the Partnership until the minority interest was acquired in December 1991. Buckeye Management Company (the "General Partner"), a corporation organized in 1986 under the laws of the state of Delaware, owns a 1 percent general partnership interest in, and serves as sole general partner of, the Partnership. A corporate subsidiary of the General Partner, Buckeye Pipe Line Company (a Delaware corporation) (the "Manager"), owns a 1 percent general partnership interest in, and serves as sole general partner and manager of, each Operating Partnership. During March 1996, BMC Acquisition Company ("BAC"), a corporation organized in 1996 under the laws of the state of Delaware, acquired all of the common stock of the General Partner for $63 million in cash from a subsidiary of American Financial (the "Acquisition"). BAC is owned by Glenmoor Partners, LLP ("Glenmoor"), an investment group comprised of Alfred W. Martinelli, Chairman of the Board and Chief Executive Officer of the General Partner, and by all of the members of senior management of the General Partner, certain manager-level employees of the Manager and by the BMC Acquisition Company Employee Stock Ownership Plan (the "ESOP"). Pursuant to a Management Agreement dated March 22, 1996, among Glenmoor, the General Partner and the Manager (the "Glenmoor Management Agreement"), Glenmoor hired all of the executive officers of the General Partner and the Manager and certain manager-level employees of the Manager. Glenmoor currently provides management services to the General Partner and the Manager. See "Certain Relationships and Related Transactions." Since the Acquisition, the General Partner has had an opportunity to consider various issues relating to the structure of the ESOP. As a result of this analysis, the General Partner has developed 1 a proposal to restructure the ESOP (the "ESOP Restructuring"). The goals of the ESOP Restructuring are to provide financial and other benefits to the Partnership, increase cash available for distribution to the holders of limited partnership units ("LP Units"), increase incentives for management and improve the ESOP as a benefit plan for employee participants. Under the proposed ESOP Restructuring, which is subject to approval by the limited partners of the Partnership (the "Unitholders"), the ESOP's current investment in Series A Convertible Preferred Stock of BAC ("BAC Preferred Stock") would be replaced with a beneficial ownership interest in additional LP Units to be issued by the Partnership. The LP Units would be owned by Buckeye Pipe Line Services Company, a newly formed corporation under the laws of Pennsylvania, which will become the sponsor of the ESOP. In consideration for the issuance of approximately 1.6 million additional LP Units, the Partnership's obligation to reimburse the General Partner, the Manager and Glenmoor for certain executive compensation costs would be permanently released, the incentive compensation to be paid by the Partnership to the General Partner under the existing incentive compensation agreement would be reduced, and other changes would be implemented to make the ESOP a less expensive fringe benefit for the Partnership. A proxy statement describing the ESOP Restructuring is expected to be sent to the LP Unitholders in April 1997. See "Certain Relationships and Related Transactions." REFINED PRODUCTS BUSINESS The Partnership receives petroleum products from refineries, connecting pipelines and marine terminals, and transports those products to other locations. In 1996, refined products accounted for substantially all of the Partnership's consolidated revenues and consolidated operating income. The Partnership transported an average of approximately 1,007,100 barrels per day of refined products in 1996. The following table shows the volume and percentage of refined products transported over the last three years. VOLUME AND PERCENTAGE OF REFINED PRODUCTS TRANSPORTED (1) (VOLUME IN THOUSANDS OF BARRELS PER DAY)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT ------- ------- ------- ------- ------- ------- Gasoline....................... 497.9 49% 507.1 50% 526.0 51% Jet Fuels...................... 244.5 24 243.9 24 235.5 23 Middle Distillates (2)......... 238.7 24 235.2 24 246.1 24 Other Products................. 26.0 3 23.6 2 21.2 2 ------- --- ------- --- ------- --- Total.......................... 1,007.1 100% 1,009.8 100% 1,028.8 100% ======= === ======= === ======= ===
- -------- (1) Excludes local product transfers. (2) Includes diesel fuel, heating oil, kerosene and other middle distillates. The Partnership provides service in the following states: Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois, Connecticut, Massachusetts and Florida. Pennsylvania--New York--New Jersey Buckeye serves major population centers in the states of Pennsylvania, New York and New Jersey through 1,003 miles of pipeline. Refined products are received at Linden, New Jersey. Products are then transported through two lines from Linden, New Jersey to Allentown, Pennsylvania. From 2 Allentown, the pipeline continues west, through a connection with Laurel, to Pittsburgh, Pennsylvania (serving Reading, Harrisburg, Altoona/Johnstown and Pittsburgh) and north through eastern Pennsylvania into New York State (serving Scranton/Wilkes-Barre, Binghamton, Syracuse, Utica and Rochester and, via a connecting carrier, Buffalo). Products received at Linden, New Jersey are also transported through two lines to John F. Kennedy International and LaGuardia Airports and to commercial bulk terminals at Long Island City and Inwood, New York. The pipeline presently supplies Kennedy, LaGuardia and Newark International airports with substantially all of each airport's jet fuel requirements. Laurel transports refined products through a 345-mile pipeline extending westward from five refineries in the Philadelphia area to Pittsburgh, Pennsylvania. Indiana--Ohio--Michigan--Illinois Buckeye transports refined products through 1,990 miles of pipeline (of which 246 miles are jointly owned with other pipeline companies) in southern Illinois, central Indiana, eastern Michigan, western and northern Ohio and western Pennsylvania. A number of receiving lines and delivery lines connect to a central corridor which runs from Lima, Ohio, through Toledo, Ohio to Detroit, Michigan. Products are received at East Chicago, Indiana; Robinson, Illinois and at the refinery and other pipeline connection points near Detroit, Toledo and Lima. Major areas served include Huntington/Fort Wayne, Indiana; Bay City, Detroit and Flint, Michigan; Cleveland, Columbus, Lima and Toledo, Ohio; and Pittsburgh, Pennsylvania. Other Refined Products Pipelines Buckeye serves Connecticut and Massachusetts through 112 miles of pipeline that carry refined products from New Haven, Connecticut to Hartford, Connecticut and Springfield, Massachusetts. Everglades carries primarily jet fuel on a 37-mile pipeline from Port Everglades, Florida to Hollywood-Ft. Lauderdale International Airport and Miami International Airport. OTHER BUSINESS ACTIVITIES BTT provides bulk storage services through leased facilities located in Pittsburgh, Pennsylvania which have the capacity to store up to an aggregate of approximately 257,000 barrels of refined petroleum products. The facility, which is served by Buckeye and Laurel, provides bulk storage and loading facilities for shippers or other customers. COMPETITION AND OTHER BUSINESS CONSIDERATIONS The Operating Partnerships do business without the benefit of exclusive franchises from government entities. In addition, the Operating Partnerships generally operate as common carriers, providing transportation services at posted tariffs and without long-term contracts. As providers of such service, the Operating Partnerships do not own the products they transport. Demand for such service arises, ultimately, from demand for petroleum products in the regions served and the ability and willingness of refiners, marketers and end- users to supply such demand by deliveries through the Partnership's pipelines. Demand for refined petroleum products is primarily a function of price, prevailing economic conditions and weather. The Operating Partnerships' businesses are, therefore, subject to a variety of factors partially or entirely beyond their control. Multiple sources of pipeline entry and multiple points of delivery, however, have historically helped maintain stable total volumes even when volumes at particular source or destination points have changed. The Partnership's business may in the future be affected by changing prices or demand for oil and for other fuels. The Partnership may also be affected by energy conservation, changing sources of 3 supply, structural changes in the oil industry and new energy technologies. The General Partner is unable to predict the effect of such factors. A substantial portion of the refined petroleum products transported by the Partnership's pipelines are ultimately used as fuel for motor vehicles and aircraft. Changes in transportation and travel patterns in the areas served by the Partnership's pipelines could adversely affect the Partnership's results of operations. In 1996, the Operating Partnerships had approximately 104 customers, most of which were either major integrated oil companies or smaller marketing companies. The largest two customers accounted for 8.6 percent and 6.1 percent, respectively, of consolidated revenues, while the 20 largest customers accounted for 77.4 percent of consolidated revenues. Generally, pipelines are the lowest cost method for long-haul overland movement of refined petroleum products. Therefore, the Operating Partnership's most significant competitors for large volume shipments are other pipelines, many of which are owned and operated by major integrated oil companies. Although it is unlikely that a pipeline system comparable in size and scope to the Operating Partnership's will be built in the foreseeable future, new pipelines (including pipeline segments that connect with existing pipeline systems) could be built to effectively compete with the Operating Partnerships in particular locations. In some areas, the Operating Partnerships compete with marine transportation. Tankers and barges on the Great Lakes account for some of the volume to certain Michigan, Ohio and upstate New York locations during the approximately eight non-winter months of the year. Barges are presently a competitive factor for deliveries to the New York City area, the Pittsburgh area, Connecticut and Ohio. Trucks competitively deliver product in a number of areas served by the Operating Partnerships. While their costs may not be competitive for longer hauls or large volume shipments, trucks compete effectively with the Operating Partnerships in many areas. The availability of truck transportation places a significant competitive constraint on the ability of the Operating Partnerships to increase their tariff rates. Privately arranged exchanges of product between marketers in different locations are an increasing but unquantified form of competition. Generally, such exchanges reduce both parties' costs by eliminating or reducing transportation charges. Distribution of refined petroleum products depends to a large extent upon the location and capacity of refineries. In past years, a significant quantity of domestic refining capacity has been shut down. To date, the aggregate impact of these shutdowns has affected the Operating Partnerships' volumes favorably, as these shutdowns have resulted in the transportation of product over longer distances to certain locations. Because the Operating Partnerships' pipelines have numerous source points, the General Partner does not believe that the shutdown of any particular refinery would have a material adverse effect on the Partnership. However, the General Partner is unable to determine whether additional shutdowns will occur or what their specific effects could be. The Operating Partnerships' mix of products transported tends to vary seasonally. Declines in demand for heating oil during the summer months are, to a certain extent, offset by increased demand for gasoline and jet fuels. Overall, operations have been only moderately seasonal, with somewhat lower than average volume being transported during March, April and May as compared to the rest of the year. Neither the Partnership nor any of the Operating Partnerships have any employees. All of the operations of the Operating Partnerships are managed and operated by employees of the Manager and 4 the partners and employees of Glenmoor which provides certain management services to the General Partner and the Manager. At December 31, 1996, the Manager and Glenmoor had a total of 552 full-time employees, 167 of whom were represented by two labor unions. The collective bargaining agreement with one of these unions expired on April 30, 1996 and is currently being renegotiated. The Operating Partnerships (and their predecessors) have never experienced any significant work stoppages or other significant labor problems. CAPITAL EXPENDITURES The General Partner anticipates that the Partnership will continue to make ongoing capital expenditures to maintain and enhance its assets and properties, including improvements to meet customers' needs and those required to satisfy new environmental and safety standards. In 1996, total capital expenditures were $14.9 million. Projected capital expenditures for 1997 amount to approximately $17.0 million. Planned capital expenditures in 1997 include, among other things, renewal and replacement of several tank floors, roofs and seals, upgrades to field instrumentation and cathodic protection systems, installation and replacement of mainline pipe and valves, facility automation and various facility improvements that facilitate increased pipeline volumes. Capital expenditures are expected to increase over time primarily in response to increasingly rigorous governmental safety and environmental requirements as well as industry standards and the General Partner's plan to automate certain facilities in order to more effectively control operating costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." REGULATION General Buckeye is an interstate common carrier subject to the regulatory jurisdiction of the Federal Energy Regulatory Commission ("FERC") under the Interstate Commerce Act and the Department of Energy Organization Act. FERC regulation requires that interstate oil pipeline rates be posted publicly and that these rates be "just and reasonable" and non-discriminatory. FERC regulation also enforces common carrier obligations and specifies a uniform system of accounts. In addition, Buckeye, and the other Operating Partnerships, are subject to the jurisdiction of certain other federal agencies with respect to environmental and pipeline safety matters. The Operating Partnerships are also subject to the jurisdiction of various state and local agencies, including, in some states, public utility commissions which have jurisdiction over, among other things, intrastate tariffs, the issuance of debt and equity securities, transfers of assets and pipeline safety. Tariffs FERC has jurisdiction over Buckeye's interstate tariffs. In July 1988, in the midst of a rate proceeding involving Buckeye, FERC issued an order that provided Buckeye with the opportunity to qualify for an unspecified alternative form of "light-handed" rate regulation if Buckeye could establish that it lacked significant market power. On December 31, 1990, after extensive testimony and hearings, FERC issued an opinion which found that in most of its relevant market areas, Buckeye operated in a competitive environment in which it could not exercise significant market power and that Buckeye's tariff rates in those markets were just and reasonable. Based on these findings, FERC permitted Buckeye to implement a "light-handed" rate regulation program on an experimental basis for three years beginning in March 1991. Under the program, in markets where Buckeye does not have significant market power, individual rate increases: (a) will not exceed a real (i.e., exclusive of inflation) increase of 15 percent over any two-year period (the "rate cap"), and (b) will be allowed to become effective without suspension or investigation if they do not exceed a "trigger" equal to the change in the GDP implicit price deflator since the date on which the individual rate was last increased, plus 5 2 percent. Individual rate decreases will be presumptively valid upon a showing that the proposed rate exceeds marginal costs. In markets where Buckeye was found to have significant market power and in certain markets where no market power finding was made: (i) individual rate increases cannot exceed the volume weighted average rate increase in markets where Buckeye does not have significant market power since the date on which the individual rate was last increased, and (ii) any volume weighted average rate decrease in markets where Buckeye does not have significant market power must be accompanied by a corresponding decrease in all of Buckeye's rates in markets where it does have significant market power. Shippers retain the right to file complaints or protests following notice of a rate increase, but are required to show that the proposed rates violate or have not been adequately justified under the experimental program, that the proposed rates are unduly discriminatory, or that Buckeye has acquired significant market power in markets previously found to be competitive. In October 1992, the Energy Policy Act of 1992 (the "Policy Act") was enacted. Title XVIII of the Policy Act, "Oil Pipeline Regulatory Reform," provided, among other things, that certain tariff rates that were in effect on October 25, 1991 were deemed "just and reasonable," and that FERC was directed to promulgate a rule establishing a simplified and generally applicable ratemaking methodology for oil pipelines. On October 22, 1993, FERC issued a final rule pursuant to the Policy Act with respect to rate regulation of oil pipelines. The rule relies primarily on an index methodology, whereby a pipeline would be allowed to change its rates in accordance with an index that FERC believes reflects cost changes appropriate for application to pipeline rates. In the alternative, a pipeline is allowed to charge market-based rates if the pipeline establishes that it does not possess significant market power in a particular market. The final rule became effective on January 1, 1995. On October 26, 1994, Buckeye filed a motion that requested FERC to permit Buckeye to continue its existing "experimental" rate program indefinitely, as an exception to the generic oil pipeline rate regulations. On December 6, 1994, FERC issued an order granting that motion and extended the operation of Buckeye's rate program indefinitely, commencing January 1, 1995. The Buckeye rate program will be subject to reevaluation at the same time FERC reviews the index selected in the generic oil pipeline regulations, currently scheduled to occur five years after the effective date of the generic rules. Independent of regulatory considerations, it is expected that tariff rates will continue to be constrained by competition and other market factors. Environmental Matters The Operating Partnerships are subject to federal and state laws and regulations relating to the protection of the environment. Although the General Partner believes that the operations of the Operating Partnerships comply in all material respects with applicable environmental regulations, risks of substantial liabilities are inherent in pipeline operations, and there can be no assurance that material environmental liabilities will not be incurred. Moreover, it is possible that other developments, such as increasingly rigorous environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Operating Partnerships, could result in substantial costs and liabilities to the Partnership. See "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources--Environmental Matters." The Oil Pollution Act of 1990 ("OPA") amends certain provisions of the federal Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act ("CWA"), and other statutes as they pertain to the prevention of and response to oil spills into navigable waters. The OPA subjects owners of facilities to strict joint and several liability for all containment and clean-up costs and certain other damages arising from a spill. The CWA provides penalties for any discharges of petroleum products in reportable quantities and imposes substantial liability for the costs of removing a spill. State laws for the control of water pollution also provide varying civil and criminal penalties and 6 liabilities in the case of releases of petroleum or its derivatives into surface waters or into the ground. Regulations are currently being developed under OPA and state laws which may impose additional regulatory burdens on the Partnership. Contamination resulting from spills or releases of refined petroleum products are not unusual in the petroleum pipeline industry. The Partnership's pipelines cross numerous navigable rivers and streams. Although the General Partner believes that the Operating Partnerships comply in all material respects with the spill prevention, control and countermeasure requirements of federal laws, any spill or other release of petroleum products into navigable waters may result in material costs and liabilities to the Partnership. The Resource Conservation and Recovery Act ("RCRA"), as amended, establishes a comprehensive program of regulation of "hazardous wastes." Hazardous waste generators, transporters, and owners or operators of treatment, storage and disposal facilities must comply with regulations designed to ensure detailed tracking, handling and monitoring of these wastes. RCRA also regulates the disposal of certain non-hazardous wastes. As a result of recently issued regulations, many previously non-hazardous wastes generated by pipeline operations have become "hazardous wastes" which are subject to more rigorous and costly disposal requirements. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also known as "Superfund," governs the release or threat of release of a "hazardous substance." Disposal of a hazardous substance, whether on or off-site, may subject the generator of that substance to liability under CERCLA for the costs of clean-up and other remedial action. Pipeline maintenance and other activities in the ordinary course of business could subject the Operating Partnerships to the requirements of these statutes. As a result, to the extent hydrocarbons or other petroleum waste may have been released or disposed of in the past, the Operating Partnerships may in the future be required to remedy contaminated property. Governmental authorities such as the Environmental Protection Agency ("EPA"), and in some instances third parties, are authorized under CERCLA to seek to recover remediation and other costs from responsible persons, without regard to fault or the legality of the original disposal. In addition to its potential liability as a generator of a "hazardous substance," the property or right-of-way of the Operating Partnerships may be adjacent to or in the immediate vicinity of Superfund and other hazardous waste sites. Accordingly, the Operating Partnerships may be responsible under CERCLA for all or part of the costs required to cleanup such sites, which costs could be material. The Clean Air Act, amended by the Clean Air Act Amendments of 1990 (the "Amendments"), imposes controls on the emission of pollutants into the air. The Operating Partnerships may be affected in several ways by the Amendments, including required changes in operating procedures and increased capital expenditures. The Amendments require states to develop permitting programs over the next several years to comply with new federal programs. Existing operating and air-emission permits like those held by the Operating Partnerships will have to be reviewed to determine compliance with the new programs. It is possible that new or more stringent controls will be imposed upon the Operating Partnerships through this permit review. In addition, the Amendments impose new requirements on the composition of fuels transported by the Operating Partnerships. While the principal impact of these new requirements will be on refiners and marketers of such fuels, the Operating Partnerships may have to institute additional quality control procedures and provide additional tankage in order to satisfy customer needs for segregated storage of these reformulated fuels. The Operating Partnerships are also subject to environmental laws and regulations adopted by the various states in which they operate. In certain instances, the regulatory standards adopted by the states are more stringent than applicable federal laws. 7 In connection with the 1986 Acquisition, Pipe Line obtained an Administrative Consent Order ("ACO") from the New Jersey Department of Environmental Protection and Energy ("NJDEPE") under the New Jersey Environmental Cleanup Responsibility Act of 1983 ("ECRA") for all six of Pipe Line's facilities in New Jersey. The ACO permitted the 1986 Acquisition to be completed prior to full compliance with ECRA, but required Pipe Line to conduct in a timely manner a sampling plan for environmental contamination at the New Jersey facilities and to implement any required clean-up plan. Sampling continues in an effort to identify areas of contamination at the New Jersey facilities, while clean-up operations have begun and have been completed at certain of the sites. The obligations of Pipe Line were not assumed by the Partnership, and the costs of compliance have been and will continue to be paid by American Financial. Through December 1996, Buckeye's costs of approximately $2,546,000 have been paid by American Financial. Safety Matters The Operating Partnerships are subject to regulation by the United States Department of Transportation ("DOT") under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA") relating to the design, installation, testing, construction, operation, replacement and management of their pipeline facilities. HLPSA covers petroleum and petroleum products and requires any entity which owns or operates pipeline facilities to comply with applicable safety standards, to establish and maintain a plan of inspection and maintenance and to comply with such plans. The Pipeline Safety Reauthorization Act of 1988 required increased coordination of safety regulation between federal and state agencies, testing and certification of pipeline personnel, and authorization of safety-related feasibility studies. The Manager has initiated drug and alcohol testing programs to comply with the regulations promulgated by the Office of Pipeline Safety and DOT. HLPSA requires, among other things, that the Secretary of Transportation consider the need for the protection of the environment in issuing federal safety standards for the transportation of hazardous liquids by pipeline. The legislation also requires the Secretary of Transportation to issue regulations concerning, among other things, the identification by pipeline operators of environmentally sensitive areas; the circumstances under which emergency flow restricting devices should be required on pipelines; training and qualification standards for personnel involved in maintenance and operation of pipelines; and the periodic integrity testing of pipelines in environmentally sensitive and high-density population areas by internal inspection devices or by hydrostatic testing. Significant expenses would be incurred if, for instance, additional valves were required, if leak detection standards were amended to exceed the current control system capabilities of the Operating Partnerships or additional integrity testing of pipeline facilities were to be required. The General Partner believes that the Operating Partnerships' operations comply in all material respects with HLPSA. However, the industry, including the Partnership, could be required to incur substantial additional capital expenditures and increased operating costs depending upon the requirements of final regulations issued by DOT pursuant to HLPSA, as amended. The Operating Partnerships are also subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The General Partner believes that the Operating Partnerships' operations comply in all material respects with OSHA requirements, including general industry standards, recordkeeping, hazard communication requirements and monitoring of occupational exposure to benzene and other regulated substances. The General Partner cannot predict whether or in what form any new legislation or regulatory requirements might be enacted or adopted or the costs of compliance. In general, any such new regulations would increase operating costs and impose additional capital expenditure requirements on the Partnership, but the General Partner does not presently expect that such costs or capital expenditure requirements would have a material adverse effect on the Partnership. 8 TAX TREATMENT OF PUBLICLY TRADED PARTNERSHIPS UNDER THE INTERNAL REVENUE CODE The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain limitations on the current deductibility of losses attributable to investments in publicly traded partnerships and treats certain publicly traded partnerships as corporations for federal income tax purposes. The following discussion briefly describes certain aspects of the Code that apply to individuals who are citizens or residents of the United States without commenting on all of the federal income tax matters affecting the Partnership or the Unitholders, and is qualified in its entirety by reference to the Code. UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PARTNERSHIP. Characterization of the Partnership for Tax Purposes The Code treats a publicly traded partnership that existed on December 17, 1987, such as the Partnership, as a corporation for federal income tax purposes beginning in the earlier of (i) 1998 or (ii) the year in which it adds a substantial new line of business unless, for each taxable year of the Partnership beginning in the earlier of such years, 90 percent or more of its gross income consists of qualifying income. Qualifying income includes interest, dividends, real property rents, gains from the sale or disposition of real property, income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy and timber), and gain from the sale or disposition of capital assets that produced such income. Because the Partnership is engaged primarily in the refined products pipeline transportation business, the General Partner believes that 90 percent or more of the Partnership's gross income has been qualifying income. If this continues to be true and no subsequent legislation amends this provision, the Partnership would continue to be classified as a partnership and not as a corporation for federal income tax purposes. Passive Activity Loss Rules The Code provides that an individual, estate, trust or personal service corporation generally may not deduct losses from passive business activities, to the extent they exceed income from all such passive activities, against other income. Income which may not be offset by passive activity "losses" includes not only salary and active business income, but also portfolio income such as interest, dividends or royalties or gain from the sale of property that produces portfolio income. Credits from passive activities are also limited to the tax attributable to any income from passive activities. The passive activity loss rules are applied after other applicable limitations on deductions, such as the at-risk rules and the basis limitation. Certain closely held corporations are subject to slightly different rules, which can also limit their ability to offset passive losses against certain types of income. Under the Code, net income from publicly traded partnerships is not treated as passive income for purposes of the passive loss rule, but is treated as non-passive income. Net losses and credits attributable to an interest in a publicly traded partnership are not allowed to offset a partner's other income. Thus, a Unitholder's proportionate share of the Partnership's net losses may be used to offset only Partnership net income from its trade or business in succeeding taxable years or, upon a complete disposition of a Unitholder's interest in the Partnership to an unrelated person in a fully taxable transaction, may be used to (i) offset gain recognized upon the disposition, and (ii) then against all other income of the Unitholder. In effect, net losses are suspended and carried forward indefinitely until utilized to offset net income of the Partnership from its trade or business or allowed upon the complete disposition to an unrelated person in a fully taxable transaction of a Unitholder's interest in the Partnership. A Unitholder's share of Partnership net income may not be offset by passive activity 9 losses generated by other passive activities. In addition, a Unitholder's proportionate share of the Partnership's portfolio income, including portfolio income arising from the investment of the Partnership's working capital, is not treated as income from a passive activity and may not be offset by such Unitholder's share of net losses of the Partnership. Deductibility of Interest Expense The Code generally provides that investment interest expense is deductible only to the extent of a non-corporate taxpayer's net investment income. In general, net investment income for purposes of this limitation includes gross income from property held for investment, gain attributable to the disposition of property held for investment (except for net capital gains for which the taxpayer has elected to be taxed at a maximum rate of 28 percent) and portfolio income (determined pursuant to the passive loss rules) reduced by certain expenses (other than interest) which are directly connected with the production of such income. Property subject to the passive loss rules is not treated as property held for investment. However, the IRS has issued a Notice which provides that net income from a publicly traded partnership (not otherwise treated as a corporation) may be included in net investment income for purposes of the limitation on the deductibility of investment interest. A Unitholder's investment income attributable to its interest in the Partnership will include both its allocable share of the Partnership's portfolio income and trade or business income. A Unitholder's investment interest expense will include its allocable share of the Partnership's interest expense attributable to portfolio investments. Unrelated Business Taxable Income Certain entities otherwise exempt from federal income taxes (such as individual retirement accounts, pension plans and charitable organizations) are nevertheless subject to federal income tax on net unrelated business taxable income and each such entity must file a tax return for each year in which it has more than $1,000 of gross income from unrelated business activities. The General Partner believes that substantially all of the Partnership's gross income will be treated as derived from an unrelated trade or business and taxable to such entities. The tax-exempt entity's share of the Partnership's deductions directly connected with carrying on such unrelated trade or business are allowed in computing the entity's taxable unrelated business income. ACCORDINGLY, INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT ENTITIES SUCH AS INDIVIDUAL RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE TRUSTS MAY NOT BE ADVISABLE. State Tax Treatment During 1996, the Partnership owned property or conducted business in the states of Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois, Connecticut, Massachusetts, Washington and Florida. A Unitholder will likely be required to file state income tax returns and to pay applicable state income taxes in many of these states and may be subject to penalties for failure to comply with such requirements. Some of the states have proposed that the Partnership withhold a percentage of income attributable to Partnership operations within the state for Unitholders who are non-residents of the state. In the event that amounts are required to be withheld (which may be greater or less than a particular Unitholder's income tax liability to the state), such withholding would generally not relieve the non-resident Unitholder from the obligation to file a state income tax return. ITEM 2. PROPERTIES As of December 31, 1996, the principal facilities of the Operating Partnerships included 3,487 miles of 6-inch to 24-inch diameter pipeline, 33 pumping stations, 82 delivery points and various sized tanks having an aggregate capacity of approximately 9.2 million barrels. 10 The Operating Partnerships own substantially all of their facilities subject, in the case of Buckeye, to a mortgage and security interest granted to secure payment of the outstanding balance of Buckeye's First Mortgage Notes due serially through 2010. See Note 6 to Consolidated Financial Statements of Buckeye Partners, L.P. In addition, certain portions of Buckeye's pipeline in Connecticut and Massachusetts are subject to security interests in favor of the owners of the right-of-way to secure future lease payments. In general, the Operating Partnerships' pipelines are located on land owned by others pursuant to rights granted under easements, leases, licenses and permits from railroads, utilities, governmental entities and private parties. Like other pipelines, certain of the Operating Partnerships' rights are revocable at the election of the grantor or are subject to renewal at various intervals, and some require periodic payments. The Operating Partnerships have not experienced any revocations or lapses of such rights which were material to its business or operations, and the General Partner has no reason to expect any such revocation or lapse in the foreseeable future. Most pumping stations and terminal facilities are located on land owned by the Operating Partnerships. The General Partner believes that the Operating Partnerships have sufficient title to their material assets and properties, possess all material authorizations and franchises from state and local governmental and regulatory authorities and have all other material rights necessary to conduct their business substantially in accordance with past practice. Although in certain cases the Operating Partnerships' title to assets and properties or their other rights, including their rights to occupy the land of others under easements, leases, licenses and permits, may be subject to encumbrances, restrictions and other imperfections, none of such imperfections are expected by the General Partner to interfere materially with the conduct of the Operating Partnerships' businesses. ITEM 3. LEGAL PROCEEDINGS The Partnership, in the ordinary course of business, is involved in various claims and legal proceedings, some of which are covered in whole or in part by insurance. The General Partner is unable to predict the timing or outcome of these claims and proceedings. Although it is possible that one or more of these claims or proceedings, if adversely determined, could, depending on the relative amounts involved, have a material effect on the Partnership's results of operations for a future period, the General Partner does not believe that their outcome will have a material effect on the Partnership's consolidated financial condition. FREEPORT LANDSLIDE On March 30, 1990, a landslide near Freeport, Pennsylvania caused a rupture to one of the Partnership's pipelines which resulted in the release of approximately 58,000 gallons of petroleum products. Undetermined amounts of petroleum products saturated the soils surrounding the landslide area and flowed into Knapp Run and eventually into the Allegheny River. Buckeye promptly conducted extensive emergency response and remediation efforts. Following the pipeline release in April and May 1990, eight civil class actions against the Partnership, Buckeye and certain affiliates were filed in four Pennsylvania counties. Plaintiffs in these lawsuits seek both injunctive and monetary relief, including punitive damages and attorneys' fees, based on a number of legal theories. In June 1991, these actions were consolidated in a single class action (In re Buckeye Pipe Line Litigation) which is pending in the Court of Common Pleas for Allegheny County, Pennsylvania. The proposed class has not been certified and there has been no significant activity in the case. At this time, it is not possible to predict the likely outcome of such case. The consolidated class action is the only remaining proceeding arising from the pipeline rupture. Buckeye believes that it has meritorious defense to the consolidated class action complaint but its potential liability, if any, related to this matter cannot be estimated at this time. 11 Buckeye maintains insurance in amounts believed by the General Partner to be adequate covering certain liabilities and claims arising out of pipeline accidents above a self-insured retention amount. The insurance carriers are reimbursing Buckeye for covered claims arising from the Freeport incident subject to the terms of the policy. OTHER PROCEEDINGS With respect to environmental litigation, certain Operating Partnerships (or their predecessors) have been named as a defendant in several lawsuits or have been notified by federal or state authorities that they are a potentially responsible party ("PRP") under federal laws or a respondent under state laws relating to the generation, disposal or release of hazardous substances into the environment. Typically, an Operating Partnership is one of many PRPs for a particular site and its contribution of total waste at the site is minimal. However, because CERCLA and similar statutes impose liability without regard to fault and on a joint and several basis, the liability of the Operating Partnerships in connection with these proceedings could be material. In July 1994, Buckeye was named as a defendant in an action filed by the Michigan Department of Natural Resources in Circuit Court, Oakland County, Michigan. The complaint also names three individuals and three other corporations as defendants. The complaint alleges that under the Michigan Environmental Response Act, the Michigan Water Resource Commission Act and the Leaking Underground Storage Tank Act, the defendants are liable to the state of Michigan for remediation expenses in connection with alleged groundwater contamination in the vicinity of Sable Road, Oakland County, Michigan. The complaint asserts that contaminated groundwater has infiltrated drinking water wells in the area. The complaint seeks past response costs in the amount of approximately $1.2 million and a declaratory judgment that the defendants are liable for future response costs and remedial activities at the site. Buckeye believes that its pipeline in the vicinity of the contaminated groundwater has not been a source of the contaminants and that Buckeye has no responsibility with respect to past or future clean-up costs at the site. The litigation is presently in the discovery phase. Although the cost of the ultimate remediation cannot be determined at this time, Buckeye expects that its liability, if any, will not be material. Additional claims for the cost of cleaning up releases of hazardous substances and for damage to the environment resulting from the activities of the Operating Partnerships or their predecessors may be asserted in the future under various federal and state laws, but the amount of such claims or the potential liability, if any, cannot be estimated. See "Business--Regulation-- Environmental Matters." In connection with the ESOP Restructuring, a putative class action complaint (Shakerdge v. Martinelli, et. al.) was filed on December 30, 1996 in the Delaware Court of Chancery against the Partnership, the General Partner, BAC, Glenmoor and the directors of the General Partner. The lawsuit alleges that the proposed ESOP Restructuring transaction is unfair; that the defendants have engaged in conduct constituting self-dealing; and that the defendants have breached their fiduciary and other common law duties to the plaintiff. Plaintiff seeks, among other things, an injunction prohibiting the consummation of the transaction on the terms proposed; requiring defendants to take all steps to ensure that the transaction reflects an arms length transaction; and requiring full disclosure of all material facts. The General Partner and the other defendants believe that the suit is without merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the holders of LP Units during the fourth quarter of the fiscal year ended December 31, 1996. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S LP UNITS AND RELATED UNITHOLDER MATTERS The LP Units of the Partnership are listed and traded principally on the New York Stock Exchange. The high and low sales prices of the LP Units in 1996 and 1995, as reported on the New York Stock Exchange Composite Tape, were as follows:
1996 1995 ------------- ------------- QUARTER HIGH LOW HIGH LOW - ------- ------ ------ ------ ------ First............................................... 39 3/4 34 1/4 37 32 Second.............................................. 38 7/8 37 1/4 36 30 Third............................................... 39 5/8 37 5/8 36 1/4 33 7/8 Fourth.............................................. 42 7/8 38 3/8 36 3/4 33 5/8
During the months of December 1996 and January 1997, the Partnership gathered tax information from its known LP Unitholders and from brokers/nominees. Based on the information collected, the Partnership estimates its number of beneficial LP Unitholders to be approximately 18,000. Cash distributions paid quarterly during 1995 and 1996 were as follows:
RECORD DATE PAYMENT DATE AMOUNT PER UNIT - ----------- ------------ --------------- February 10, 1995............................. February 28, 1995 $0.70 May 8, 1995................................... May 31, 1995 $0.70 August 4, 1995................................ August 31, 1995 $0.70 November 10, 1995............................. November 30, 1995 $0.70 February 20, 1996............................. February 29, 1996 $0.75 May 6, 1996................................... May 31, 1996 $0.75 August 6, 1996................................ August 30, 1996 $0.75 November 6, 1996.............................. November 29, 1996 $0.75
In general, the Partnership makes quarterly cash distributions of substantially all of its available cash less such retentions for working capital, anticipated expenditures and contingencies as the General Partner deems appropriate. On February 12, 1997, the Partnership announced a quarterly distribution of $0.75 per LP Unit payable on February 28, 1997. Based in part on the savings available to the Partnership from the ESOP Restructuring, the Board of Directors of the General Partner announced its intention to increase the regular quarterly cash distribution by $.10, to $.85, per LP Unit, provided that the ESOP Restructuring is approved by Unitholders and there has been no material change in the business of the Partnership. ITEM 6. SELECTED FINANCIAL DATA The following tables set forth, for the period and at the dates indicated, the Partnership's income statement and balance sheet data for the years ended December 31, 1996, 1995, 1994, 1993 and 1992. The tables should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Report. 13
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) Income Statement Data: Revenue......................... $182,955 $183,462 $186,338 $175,495 $163,064 Depreciation and amortization... 11,333 11,202 11,203 11,002 10,745 Operating income................ 68,784 71,504 72,481 66,851 63,236 Interest and debt expense....... 21,854 21,710 24,931 25,871 27,452 Income from continuing operations before extraordinary charge and cumulative effect of change in accounting principle...................... 49,337 49,840 48,086 41,654 34,546 Net income...................... 49,337 49,840 45,817 39,366 9,002 Income per unit from continuing operations before extraordinary charge and cumulative effect of change in accounting principle...................... 4.05 4.10 3.96 3.44 2.85 Net income per unit............. 4.05 4.10 3.77 3.25 0.74 Distributions per unit.......... 3.00 2.80 2.80 2.60 2.60
DECEMBER 31, -------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (IN THOUSANDS) Balance Sheet Data: Total assets..................... $567,837 $552,646 $534,765 $543,493 $533,143 Long-term debt................... 202,100 214,000 214,000 224,000 225,000 General Partner's capital........ 2,760 2,622 2,460 2,338 2,259 Limited Partners' capital........ 273,219 259,563 243,516 231,357 223,585
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the liquidity and capital resources and the results of operations of the Partnership for the periods indicated below. This discussion should be read in conjunction with the consolidated financial statements and notes thereto, which are included elsewhere in this Report. RESULTS OF OPERATIONS Through its Operating Partnerships, the Partnership is principally engaged in the transportation of refined petroleum products including gasoline, jet fuel, diesel fuel, heating oil and kerosene. The Partnership's revenues are principally a function of the volumes of refined petroleum products transported by the Partnership, which are in turn a function of the demand for refined petroleum products in the regions served by the Partnership's pipelines and the tariffs or transportation fees charged for such transportation. Results of operations are affected by factors which include competitive conditions, demand for products transported, seasonality and regulation. See "Business--Competition and Other Business Considerations." 1996 Compared With 1995 Revenue for the year ended December 31, 1996 was $183.0 million, $0.5 million or 0.3 percent less than revenue of $183.5 million for 1995. Volume delivered during 1996 averaged 1,007,100 barrels per day, 2,700 barrels per day or 0.3 percent less than volume of 1,009,800 barrels per day delivered in 1995. The decline in 1996 revenue was related to decreases in gasoline deliveries, offset somewhat by increases in distillate, turbine fuel, liquefied petroleum gas and other petroleum product deliveries. Tariff rate increases implemented in 1996 and 1995 also had a favorable impact on revenues. 14 See "Tariff Changes." Declines in gasoline deliveries were related in part to severe winter storms, particularly in the Northeast, where ground traffic was curtailed during January and February. Increased Canadian imports and the loss of business to other competing pipeline systems also reduced gasoline volumes transported by the Partnership. Continued market growth in Pennsylvania offset these volume declines to some extent. Distillate volumes rose in 1996 compared with 1995 primarily as the result of the colder winter in 1996 and heating oil inventory restocking occurring during the fourth quarter. Turbine fuel volumes were higher than last year on increased deliveries to Newark, J.F.K. and Miami airports. Some turbine fuel volumes were lost to additional barging at Pittsburgh and a decline in demand at LaGuardia airports. Costs and expenses during 1996 were $114.2 million, $2.2 million or 2.0 percent greater than costs and expenses of $112.0 million during 1995. During the second quarter 1996, the Partnership recorded a one-time expense of $2.5 million related to an employee early retirement and termination program. In addition, increases in payroll overheads and professional fees related to the ESOP were offset by declines in payroll, taxes, power, supplies and travel. Other income (expenses) consist of interest income, interest and debt expense, and minority interests and other. Total other expenses declined $2.2 million in 1996 as compared to 1995. This favorable variance is primarily related to a $2.9 million gain on the sale of land no longer needed for the Partnership's operations. 1995 Compared With 1994 Revenue for the year ended December 31, 1995 was $183.5 million, $2.8 million or 1.5 percent less than revenue of $186.3 million for 1994. Volume delivered during 1995 averaged 1,009,800 barrels per day, 19,000 barrels per day or 1.8 percent less than volume of 1,028,800 barrels per day delivered in 1994. The decline in 1995 revenue was related to decreases in gasoline and distillate deliveries, offset somewhat by increases in turbine fuel deliveries and the effect of tariff rate increases. See "Tariff Changes." Gasoline volumes declined as several competitive pipeline systems marginally expanded their capacity in 1995 resulting in some volume shifting to these systems. In addition, a Midwest refinery shutdown contributed to the decline. These declines in gasoline volume were somewhat offset by increased market share in Pennsylvania through the addition of a significant new customer during 1995. The distillate volume decline was primarily related to warmer weather throughout the Northeast in the first quarter of 1995. Marketers also opted to keep inventories at low levels, unlike the prior year when extensive summer inventory building occurred. The Midwest refinery closure also contributed to the decline in distillate volumes. Meanwhile, turbine fuel deliveries increased as both airline passenger and cargo traffic improved in the Partnership's market areas during 1995. Volume increases occurred at several major airport locations. Costs and expenses during 1995 were $112.0 million, $1.9 million or 1.7 percent less than costs and expenses of $113.9 million during 1994. Declines in the use of outside services and power, along with declines in casualty loss expense, were partially offset by increases in payroll and employee benefit expenses. Other income (expenses) consist of interest income, interest and debt expense, and minority interests and other. The partial repayment and refinancing of debt at lower interest rates in 1994 resulted in an interest expense decline of $3.2 million in 1995. Tariff Changes In each of the years 1996, 1995 and 1994, certain of the Operating Partnerships filed increases in certain tariff rates. The increases, at the time of filing, were projected to generate approximately $2.9 million, $4.0 million and $0.4 million in additional revenue per year, respectively. Tariff increases filed in 1996 became effective on August 1, 1996. 15 LIQUIDITY AND CAPITAL RESOURCES The Partnership's financial condition at December 31, 1996, 1995 and 1994 is highlighted in the following comparative summary: Liquidity and Capital Indicators
AS OF DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- Current ratio...................................... 1.3 to 1 1.7 to 1 1.2 to 1 Ratio of cash and temporary investments and trade receivables to current liabilities................ 1.1 to 1 1.3 to 1 1.0 to 1 Working capital (in thousands)..................... $ 13,660 $ 16,814 $ 5,750 Ratio of total debt to total capital............... .43 to 1 .45 to 1 .46 to 1 Book value (per Unit).............................. $ 22.65 $ 21.58 $ 20.27
Cash Provided by Operations During 1996, cash provided by operations of $47.1 million was derived principally from $60.7 million of income from operations before depreciation. Changes in current assets and current liabilities resulted in a net cash use of $7.5 million. This amount is primarily comprised of a $13.6 million use of cash to increase temporary investments offset by sources of cash from declines in outstanding trade receivables and increases in accounts payable and accrued and other current liabilities. During the third quarter 1996, the Partnership began billing on a weekly rather than monthly basis thereby decreasing trade receivables. Remaining changes in cash provided by operations, totaling $6.1 million in uses, resulted from the deduction of a $2.7 million gain on the sale of property included in net income and changes in other non-current assets and liabilities. During 1995, cash provided by operations of $61.8 million was derived principally from $61.0 million of income from operations before depreciation. Changes in current assets and current liabilities resulted in a net cash use of $0.9 million. Increases in prepaid and other current assets and declines in temporary investments and trade receivables account for the majority of the change. Remaining cash sources, totaling $1.7 million, were primarily related to increases in other non-current liabilities. During 1994, cash provided by operations of $58.1 million was derived principally from $59.3 million of income from continuing operations before an extraordinary charge and before depreciation. Changes in current assets and current liabilities resulted in a net cash use of $0.7 million. Increases in accrued and other current liabilities, trade receivables, temporary investments and prepaid and other current assets account for the majority of the change. Remaining cash uses, totaling $0.5 million, were related to an extraordinary charge on early extinguishment of debt of $2.3 million, changes in minority interests and changes in other non-current liabilities. Debt Obligation and Credit Facilities The indenture pursuant to which the First Mortgage Notes were issued (the "Mortgage Note Indenture") was amended in March 1994 by a Fourth Supplemental Indenture to permit Buckeye to issue additional First Mortgage Notes from time to time under certain circumstances so long as the aggregate principal amount of First Mortgage Notes outstanding after any such issuance does not exceed $275 million. At December 31, 1996, the Partnership had $214.0 million in outstanding current and long-term debt. The debt represents the First Mortgage Notes of Buckeye. This amount excludes $5.0 million of First Mortgage Notes scheduled to mature after December 31, 1996 which had previously been retired by in- substance defeasance. The First Mortgage Notes are collateralized by substantially all of 16 Buckeye's currently existing and after acquired property, plant and equipment. During 1996, the Partnership did not make any payments of principal on the First Mortgage Notes as no payments were required due to prior in-substance defeasances. At December 31, 1995, the Partnership had $214.0 million in outstanding current and long-term debt. The debt represents the First Mortgage Notes of Buckeye. This amount excludes $25.0 million of First Mortgage Notes scheduled to mature after December 31, 1995 which had previously been retired by in- substance defeasance. The First Mortgage Notes are collateralized by substantially all of Buckeye's currently existing and after acquired property, plant and equipment. During 1995, the Partnership did not make any payments of principal on the First Mortgage Notes as no payments were required due to prior in-substance defeasances. At December 31, 1994, the Partnership had $214.0 million in outstanding current and long-term debt represented by the First Mortgage Notes of Buckeye. This amount does not include $45.0 million in First Mortgage Notes which have been retired by in-substance defeasance. The First Mortgage Notes are collateralized by substantially all of Buckeye's currently existing and after acquired property, plant and equipment. Debt outstanding at December 31, 1994 includes $15 million of additional First Mortgage Notes, Series N, bearing interest at a rate of 7.93 percent. The First Mortgage Notes, Series N, were issued on April 11, 1994 and are due December 2010. Current and long-term debt excludes $20 million of 9.72 percent First Mortgage Notes, Series I, due December 1996, which were retired by an in-substance defeasance with the proceeds of the Series N First Mortgage Notes and an additional defeasance of $5 million in December 1994. Also excluded from long-term debt is $5 million of 11.18 percent First Mortgage Notes, Series J, which were retired by an in- substance defeasance in December 1994. Total debt due beyond 1994 that was retired by an in-substance defeasance during 1994 amounted to $25 million with total new debt issued during 1994 of $15.0 million. During 1994, the Partnership also paid $16 million of principal on the First Mortgage Notes, Series G, that became due in December 1994. The Partnership has a $15 million unsecured short-term revolving credit facility with a commercial bank. This facility, which has options to extend borrowings through September 1999, is available to the Partnership for general purposes, including capital expenditures and working capital. In addition, Buckeye has a $10 million short-term line of credit secured by accounts receivable. At December 31, 1996, there were no outstanding borrowings under these facilities. The ratio of total debt to total capital was 43 percent, 45 percent, and 46 percent at December 31, 1996, 1995 and 1994, respectively. For purposes of the calculation of this ratio, total capital consists of current and long-term debt, minority interests and partners' capital. Cash Distributions Pursuant to the Mortgage Note Indenture, cash distributions by Buckeye to the Partnership cannot exceed Net Cash Available to Partners (generally defined to equal net income plus depreciation and amortization less (a) capital expenditures funded from operating cash flows, (b) payments of principal of debt and (c) certain other amounts, all on a cumulative basis since the formation of the Partnership). The maximum amount available for distribution by Buckeye to the Partnership under the formula as of December 31, 1996 amounted to $25.1 million. The Partnership is also entitled to receive cash distributions from Everglades, BTT and Laurel. Capital Expenditures At December 31, 1996, property, plant and equipment was approximately 90 percent of total consolidated assets. This compares to 92 percent and 94 percent for the years ended December 31, 1995 and 1994, respectively. Capital expenditures are generally for expansion of the Operating Partnerships' service capabilities and sustaining the Operating Partnerships' existing operations. 17 Capital expenditures by the Partnership were $14.9 million, $17.4 million and $15.4 million for 1996, 1995 and 1994, respectively. Projected capital expenditures for 1997 are approximately $17.0 million. Planned capital expenditures include, among other things, renewal and replacement of several tank floors, roofs and seals, upgrades to field instrumentation and cathodic protection systems, installation and replacement of mainline pipe and valves, facility automation and various facility improvements that facilitate increased pipeline volumes. Capital expenditures are expected to increase primarily in response to increasingly rigorous governmental safety and environmental requirements as well as industry standards and the General Partner's plan to automate certain facilities in order to more effectively control operating costs. Environmental Matters The Operating Partnerships are subject to federal and state laws and regulations relating to the protection of the environment. These regulations, as well as the Partnership's own standards relating to protection of the environment, cause the Operating Partnerships to incur current and ongoing operating and capital expenditures. During 1996, the Operating Partnerships incurred operating expenses of $3.1 million and capital expenditures of $3.0 million for environmental matters. Capital expenditures of $2.4 million for environmental related projects are included in the Partnership's plans for 1997. Expenditures, both capital and operating, relating to environmental matters are expected to continue and may be somewhat higher than in past years due to the Partnership's commitment to maintain high environmental standards and to increasingly rigorous environmental laws. Certain Operating Partnerships (or their predecessors) have been named as a defendant in lawsuits or have been notified by federal or state authorities that they are a PRP under federal laws or a respondent under state laws relating to the generation, disposal, or release of hazardous substances into the environment. These proceedings generally relate to potential liability for clean-up costs. The total potential remediation costs to be borne by the Operating Partnerships relating to these clean-up sites cannot be reasonably estimated and could be material. With respect to each site, however, the Operating Partnership involved is one of several or as many as several hundred PRPs that would share in the total costs of clean-up under the principle of joint and several liability. The General Partner believes that the generation, handling and disposal of hazardous substances by the Operating Partnerships and their predecessors have been in material compliance with applicable environmental and regulatory requirements. In March 1990, a landslide near Freeport, Pennsylvania caused a rupture to one of Buckeye's pipelines which resulted in the release of approximately 58,000 gallons of petroleum products. During 1996, Buckeye paid minimal claims and other charges related to this incident. Total claims paid as a result of this incident have amounted to $14.1 million. Of this amount, $11.9 million has been reimbursed by Buckeye's insurance carriers. Buckeye is unable to estimate the total amount of future environmental clean-up and other costs and liabilities that may be incurred in connection with this incident. However, based on information currently available to it, Buckeye believes that its net expense after insurance recoveries will not be material to its financial condition or results of operations. See "Legal Proceedings--Freeport Landslide." Various claims for the cost of cleaning up releases of hazardous substances and for damage to the environment resulting from the activities of the Operating Partnerships or their predecessors have been asserted and may be asserted in the future under various federal and state laws. Although the Partnership has made a provision for certain legal expenses relating to these matters, the General Partner is unable to determine the timing or outcome of any pending proceedings or of any future claims and proceedings. See "Business--Regulation--Environmental Matters" and "Legal Proceedings." 18 EMPLOYEE STOCK OWNERSHIP PLAN In connection with the Acquisition, the ESOP was formed for the benefit of employees of the General Partner, the Manager and Glenmoor. The General Partner borrowed $63 million pursuant to a 15-year term loan from a third- party lender. The General Partner then loaned $63 million to the ESOP, which used the loan proceeds to purchase $63 million of BAC Preferred Stock. Total compensation costs associated with the ESOP in 1996 were $5.6 million which included $3.5 million in interest expense and $2.1 million based upon the value of shares of BAC Preferred Stock released to employee accounts. The General Partner implemented an expense reduction plan including, among other things, an early retirement and termination program, a freeze on salaried employee pay as well as fringe benefit reductions and eliminations. This expense reduction plan, which was implemented in the second quarter of 1996, is projected by the General Partner to save more than $8.0 million of annualized costs going forward. During December 1996, the Board of Directors of the General Partner approved a proposed restructuring of the ESOP. Generally, the restructuring calls for the issuance of approximately 1.6 million LP Units by the Partnership in exchange for a reduction in future expenses charged to the Partnership. The LP Units would be held by a newly formed company whose common stock would be exchanged for the BAC Preferred Stock held by the ESOP. Certain aspects of the restructuring are subject to approval by the Unitholders. See "Business-- Introduction." ACCOUNTING STATEMENTS NOT YET ADOPTED Transfers and Servicing of Financial Assets and Extinguishment of Liabilities Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," is effective for fiscal years beginning after December 31, 1996. This statement provides consistent standards for determining if transfers of financial assets are sales or secured borrowings and prospectively revises the accounting rules for liabilities extinguished by an in-substance defeasance. The impact of this new standard is not expected to have a material effect on the Partnership's financial position or results of operations. Environmental Remediation Liabilities Statement of Position 96-1, "Environmental Remediation Liabilities," is effective for fiscal years beginning after December 15, 1996. This statement clarifies the accounting for environmental remediation liabilities. The impact of this new statement is not expected to have a material effect on the Partnership's financial position or results of operations. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BUCKEYE PARTNERS, L.P. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER ----------- Financial Statements and Independent Auditors' Report: Independent Auditors' Report..................................... 21 Consolidated Statements of Income--For the years ended December 31, 1996, 1995 and 1994......................................... 22 Consolidated Balance Sheets--December 31, 1996 and 1995.......... 23 Consolidated Statements of Cash Flows--For the years ended Decem- ber 31, 1996, 1995 and 1994..................................... 24 Notes to Consolidated Financial Statements....................... 25 Financial Statement Schedules and Independent Auditors' Report: Independent Auditors' Report..................................... S-1 Schedule I--Registrant's Condensed Financial Statements.......... S-2
Schedules other than those listed above are omitted because they are either not applicable or not required or the information required is included in the consolidated financial statements or notes thereto. 20 INDEPENDENT AUDITORS' REPORT To the Partners of Buckeye Partners, L.P.: We have audited the accompanying consolidated balance sheets of Buckeye Partners, L.P. and its subsidiaries (the "Partnership") as of December 31, 1996 and 1995, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 1996 and 1995, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Philadelphia, Pennsylvania January 23, 1997 21 BUCKEYE PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------- NOTES 1996 1995 1994 ----- -------- -------- -------- Revenue................................... 2 $182,955 $183,462 $186,338 -------- -------- -------- Costs and expenses Operating expenses...................... 3,14 87,855 89,156 92,097 Depreciation and amortization........... 2 11,333 11,202 11,203 General and administrative expenses..... 14 14,983 11,600 10,557 -------- -------- -------- Total costs and expenses.............. 114,171 111,958 113,857 -------- -------- -------- Operating income.......................... 68,784 71,504 72,481 -------- -------- -------- Other income (expenses) Interest income......................... 1,589 1,037 1,465 Interest and debt expense............... (21,854) (21,710) (24,931) Minority interests and other............ 818 (991) (929) -------- -------- -------- Total other income (expenses)......... (19,447) (21,664) (24,395) -------- -------- -------- Income before extraordinary charge........ 49,337 49,840 48,086 Extraordinary charge on early extinguish- ment of debt............................. 12 -- -- (2,269) -------- -------- -------- Net income................................ $ 49,337 $ 49,840 $ 45,817 ======== ======== ======== Net income allocated to General Partner... 15 $ 493 $ 498 $ 458 Net income allocated to Limited Partners.. 15 $ 48,844 $ 49,342 $ 45,359 Income allocated to General and Limited Partners per Partnership Unit: Income before extraordinary charge...... $ 4.05 $ 4.10 $ 3.96 Extraordinary charge on early extin- guishment of debt...................... -- -- (.19) -------- -------- -------- Net income................................ $ 4.05 $ 4.10 $ 3.77 ======== ======== ========
See notes to consolidated financial statements. 22 BUCKEYE PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ----------------- NOTES 1996 1995 ---------- -------- -------- Assets Current assets Cash and cash equivalents...................... 2 $ 17,416 $ 16,213 Temporary investments.......................... 2 14,528 895 Trade receivables.............................. 2 12,536 16,295 Inventories.................................... 2 1,732 1,561 Prepaid and other current assets............... 7,715 7,272 -------- -------- Total current assets......................... 53,927 42,236 Property, plant and equipment, net............... 2,4 511,646 509,944 Other non-current assets......................... 2,264 466 -------- -------- Total assets................................. $567,837 $552,646 ======== ======== Liabilities and partners' capital Current liabilities Current portion of long-term debt.............. $ 11,900 $ -- Accounts payable............................... 4,279 2,406 Accrued and other current liabilities.......... 3,5,8,9,14 24,088 23,016 -------- -------- Total current liabilities.................... 40,267 25,422 Long-term debt................................... 6,12 202,100 214,000 Minority interests............................... 2,913 2,781 Other non-current liabilities.................... 3,7,8,9,14 46,578 48,258 Commitments and contingent liabilities........... 3 -- -- -------- -------- Total liabilities............................ 291,858 290,461 -------- -------- Partners' capital 15 General Partner.................................. 2,760 2,622 Limited Partners................................. 273,219 259,563 -------- -------- Total partners' capital...................... 275,979 262,185 -------- -------- Total liabilities and partners' capital...... $567,837 $552,646 ======== ========
See notes to consolidated financial statements. 23 BUCKEYE PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- NOTES 1996 1995 1994 ------ -------- -------- ------- Cash flows from operating activities: Income before extraordinary charge........ $ 49,337 $ 49,840 $48,086 -------- -------- ------- Adjustments to reconcile income to net cash provided by operating activities: Extraordinary charge on early extinguish- ment of debt............................ -- -- (2,269) Gain on sale of property, plant and equipment............................... (2,651) -- -- Depreciation and amortization............ 11,333 11,202 11,203 Minority interests....................... 506 510 469 Distributions to minority interests...... (374) (345) (345) Change in assets and liabilities: Temporary investments................... (13,633) 505 (1,150) Trade receivables....................... 3,759 762 (1,716) Inventories............................. (171) (241) (146) Prepaid and other current assets........ (443) (1,798) (1,029) Accounts payable........................ 1,873 81 (237) Accrued and other current liabilities... 1,072 (231) 3,560 Other non-current assets................ (1,798) (106) 100 Other non-current liabilities........... (1,680) 1,657 1,544 -------- -------- ------- Total adjustments from operating activ- ities................................. (2,207) 11,996 9,984 -------- -------- ------- Net cash provided by operating activi- ties.................................... 47,130 61,836 58,070 -------- -------- ------- Cash flows from investing activities: Capital expenditures...................... (14,881) (17,407) (15,364) Net proceeds from (expenditures for) dis- posal of property, plant and equipment... 4,497 (656) 153 -------- -------- ------- Net cash used in investing activities.. (10,384) (18,063) (15,211) -------- -------- ------- Cash flows from financing activities: Capital contribution...................... 10 4 4 Proceeds from exercise of unit options.... 974 374 428 Proceeds from issuance of long-term debt.. 6 -- -- 15,000 Payment of long-term debt................. 6 -- -- (41,000) Distributions to Unitholders.............. 15, 16 (36,527) (34,009) (33,968) -------- -------- ------- Net cash used in financing activities.. (35,543) (33,631) (59,536) -------- -------- ------- Net increase (decrease) in cash and cash equivalents............................... 2 1,203 10,142 (16,677) Cash and cash equivalents at beginning of year...................................... 2 16,213 6,071 22,748 -------- -------- ------- Cash and cash equivalents at end of year... $ 17,416 $ 16,213 $ 6,071 ======== ======== ======= Supplemental cash flow information: Cash paid during the year for interest (net of amount capitalized).............. $ 21,900 $ 21,656 $24,947
See notes to consolidated financial statements. 24 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1.ORGANIZATION Buckeye Partners, L.P. (the "Partnership") is a limited partnership organized in 1986 under the laws of the state of Delaware. The Partnership owns 99 percent limited partnership interests in Buckeye Pipe Line Company, L.P. ("Buckeye"), Laurel Pipe Line Company, L.P. ("Laurel"), Everglades Pipe Line Company, L.P. ("Everglades") and Buckeye Tank Terminals Company, L.P. ("BTT"). The foregoing entities are hereinafter referred to as the "Operating Partnerships." Laurel owns a 98.01 percent limited partnership interest in Buckeye Pipe Line Company of Michigan, L.P. ("BPL Michigan") which discontinued operations in 1993. Buckeye is one of the largest independent pipeline common carriers of refined petroleum products in the United States, with 3,105 miles of pipeline serving 10 states. Laurel owns a 345-mile common carrier refined products pipeline located principally in Pennsylvania. Everglades owns 37 miles of refined products pipeline in Florida. Buckeye, Laurel and Everglades conduct the Partnership's refined products pipeline business. BTT provides bulk storage service through leased facilities with an aggregate capacity of 257,000 barrels of refined petroleum products. During December 1986, the Partnership sold 12,000,000 limited partnership units ("LP Units") in a public offering representing an aggregate 99 percent limited partnership interest in the Partnership. Concurrently, the Partnership sold 121,212 units representing a 1 percent general partnership interest in the Partnership ("GP Units") to Buckeye Management Company (the "General Partner"), a wholly owned subsidiary of American Financial Group, Inc. ("American Financial"), formerly American Premier Underwriters, Inc. The Partnership used the proceeds from such sales to purchase from subsidiaries of American Financial the 99 percent limited partnership interests in the then existing Operating Partnerships and an 83 percent stock interest in Laurel Pipe Line Company ("Laurel Corp"). In December 1991, the Partnership acquired the minority interest in Laurel Corp. Laurel was formed in October 1992 and succeeded to the operations of Laurel Corp. The Partnership has issued an additional 60,180 limited partnership units and 608 general partnership units under its Unit Option and Distribution Equivalent Plan. At December 31, 1996, there were 12,060,180 limited partnership units and 121,820 general partnership units outstanding (see Note 10 and Note 15). During March 1996, BMC Acquisition Corp. ("BAC"), a corporation organized in 1996 under the laws of the state of Delaware, acquired all of the common stock of the General Partner from a subsidiary of American Financial (the "Acquisition"). BAC is owned by Glenmoor Partners, LLP ("Glenmoor"), an investment group comprised of Alfred W. Martinelli, Chairman of the Board and Chief Executive Officer of the General Partner, and all of the members of senior management of the General Partner, certain manager-level employees of the Manager and by the BMC Acquisition Company Employee Stock Ownership Plan (the "ESOP") (see Note 11). A subsidiary of the General Partner, Buckeye Pipe Line Company (the "Manager"), owns a 1 percent general partnership interest in, and serves as sole general partner and manager of, each Operating Partnership. The Manager also owns a 1 percent general partnership interest and a 0.99 percent limited partnership interest in BPL Michigan. The Partnership maintains its accounts in accordance with the Uniform System of Accounts for Pipeline Companies, as prescribed by the Federal Energy Regulatory Commission ("FERC"). Reports 25 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) to FERC differ from the accompanying consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, generally in that such reports calculate depreciation over estimated useful lives of the assets as prescribed by FERC. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements include the accounts of the Operating Partnerships on a consolidated basis. All significant intercompany transactions have been eliminated in consolidation. Use of Estimates The preparation of the Partnership's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions. These estimates and assumptions, which may differ from actual results, will affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expense during the reporting period. Financial Instruments The fair values of financial instruments are determined by reference to various market data and other valuation techniques as appropriate. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values (see Note 6). Cash and Cash Equivalents All highly liquid debt instruments purchased with a maturity of three months or less are classified as cash equivalents. Temporary Investments The Partnership's temporary investments that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value as current assets on the balance sheet, with the change in fair value during the period included in earnings. Revenue Recognition Substantially all revenue is derived from interstate and intrastate transportation of petroleum products. Such revenue is recognized as products are delivered to customers. Such customers include major integrated oil companies, major refiners and large regional marketing companies. While the consolidated Partnership's continuing customer base numbers approximately 104, no customer during 1996 contributed more than 10 percent of total revenue. The Partnership does not maintain an allowance for doubtful accounts. Inventories Inventories, consisting of materials and supplies, are carried at cost which does not exceed realizable value. 26 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Property, Plant and Equipment Property, plant and equipment consist primarily of pipeline and related transportation facilities and equipment. For financial reporting purposes, depreciation is calculated primarily using the straight-line method over the estimated useful life of 50 years. Additions and betterments are capitalized and maintenance and repairs are charged to income as incurred. Generally, upon normal retirement or replacement, the cost of property (less salvage) is charged to the depreciation reserve, which has no effect on income. Long-Lived Assets The Partnership regularly assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Income Taxes For federal and state income tax purposes, the Partnership and Operating Partnerships are not taxable entities. Accordingly, the taxable income or loss of the Partnership and Operating Partnerships, which may vary substantially from income or loss reported for financial reporting purposes, is generally includable in the federal and state income tax returns of the individual partners. As of December 31, 1996 and 1995, the Partnership's reported amount of net assets for financial reporting purposes exceeded its tax basis by approximately $247 million and $211 million, respectively. Environmental Expenditures Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the Partnership's commitment to a formal plan of action. Pensions The Manager maintains a defined contribution plan, a defined benefit plan (see Note 8) and an employee stock ownership plan (see Note 11) which provide retirement benefits to substantially all of its regular full-time employees. Certain hourly employees of the Manager are covered by a defined contribution plan under a union agreement. Postretirement Benefits Other Than Pensions The Manager provides postretirement health care and life insurance benefits for certain of its retirees (see Note 9). Certain other retired employees are covered by a health and welfare plan under a union agreement. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," is effective for fiscal years beginning after December 31, 1996. This statement provides consistent standards for determining if transfers of financial assets are sales or secured borrowings and prospectively revises the accounting rules for 27 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) liabilities extinguished by an in-substance defeasance. The impact of this new standard is not expected to have a material effect on the Partnership's financial position or results of operations. Environmental Remediation Liabilities Statement of Position 96-1, "Environmental Remediation Liabilities," is effective for fiscal years beginning after December 15, 1996. This statement clarifies the accounting for environmental remediation liabilities. The impact of this new statement is not expected to have a material effect on the Partnership's financial position or results of operations. 3.CONTINGENCIES The Partnership and the Operating Partnerships in the ordinary course of business, are involved in various claims and legal proceedings, some of which are covered in whole or in part by insurance. The General Partner is unable to predict the timing or outcome of these claims and proceedings. Although it is possible that one or more of these claims or proceedings, if adversely determined, could, depending on the relative amounts involved, have a material effect on the Partnership's results of operations for a future period, the General Partner does not believe that their outcome will have a material effect on the Partnership's consolidated financial condition or annual results of operations. Environmental In accordance with its accounting policy on environmental expenditures, the Partnership recorded expenses of $3.1 million, $2.6 million and $5.9 million for 1996, 1995 and 1994, respectively, which were related to the environment. Expenditures, both capital and operating, relating to environmental matters are expected to be somewhat higher than in past years due to the Partnership's commitment to maintain high environmental standards and to increasingly strict environmental laws and government enforcement policies. Certain Operating Partnerships (or their predecessors) have been named as a defendant in lawsuits or have been notified by federal or state authorities that they are a potentially responsible party ("PRP") under federal laws or a respondent under state laws relating to the generation, disposal, or release of hazardous substances into the environment. These proceedings generally relate to potential liability for clean-up costs. The total potential remediation costs relating to these clean-up sites cannot be reasonably estimated. With respect to each site, however, the Operating Partnership involved is one of several or as many as several hundred PRPs that would share in the total costs of clean-up under the principle of joint and several liability. The General Partner believes that the generation, handling and disposal of hazardous substances by the Operating Partnerships and their predecessors have been in material compliance with applicable environmental and regulatory requirements. Additional claims for the cost of cleaning up releases of hazardous substances and for damage to the environment resulting from the activities of the Operating Partnerships or their predecessors may be asserted in the future under various federal and state laws. Guaranteed Investment Contract The Buckeye Pipe Line Company Retirement and Savings Plan (the "Plan") held a guaranteed investment contract ("GIC") issued by Executive Life Insurance Company ("Executive Life"), which entered conservatorship proceedings in the state of California in April 1991. The GIC was purchased 28 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) in July 1989, with an initial principal investment of $7.4 million earning interest at an effective rate per annum of 8.98 percent through June 30, 1992. Pursuant to the Executive Life Plan of Rehabilitation, the Plan has received an interest only contract from Aurora National Life Assurance Company in substitution for its Executive Life GIC. The contract provides for semi-annual interest payments at a rate of 5.61 percent per annum through September 1998, the maturity date of the contract. In addition, the Plan is to receive certain additional cash payments through the maturity date of the contract pursuant to the Plan of Rehabilitation. The timing and amount of these additional cash payments cannot be estimated accurately at this time. In May 1991, the General Partner, in order to safeguard the basic retirement and savings benefits of its employees, announced its intention to enter an arrangement with the Plan that would guarantee that the Plan would receive at least its initial principal investment of $7.4 million plus interest at an effective rate per annum of 5 percent from July 1, 1989. The General Partner's present intention is to effectuate its commitment no later than September 1998. The costs and expenses of the General Partner's employee benefit plans are reimbursable by the Partnership under the applicable limited partnership and management agreements. The General Partner believes that an adequate provision has been made for costs which may be incurred by the Partnership in connection with the guarantee. 4.PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, ----------------- 1996 1995 -------- -------- (IN THOUSANDS) Land...................................................... $ 9,522 $ 10,186 Buildings and leasehold improvements...................... 26,690 26,211 Machinery, equipment and office furnishings............... 521,945 519,548 Construction in progress.................................. 5,355 2,335 -------- -------- 563,512 558,280 Less accumulated depreciation........................... 51,866 48,336 -------- -------- Total................................................... $511,646 $509,944 ======== ========
Depreciation expense was $11,333,000, $11,202,000 and $11,203,000 for the years 1996, 1995 and 1994, respectively. 5.ACCRUED AND OTHER CURRENT LIABILITIES Accrued and other current liabilities consist of the following:
DECEMBER 31, --------------- 1996 1995 ------- ------- (IN THOUSANDS) Taxes--other than income.................................... $ 9,041 $ 8,258 Accrued charges due Manager................................. 5,754 6,436 Environmental liabilities................................... 2,527 2,409 Interest.................................................... 977 1,023 Accrued operating power..................................... 869 910 Accrued outside services.................................... 651 660 Other....................................................... 4,269 3,320 ------- ------- Total..................................................... $24,088 $23,016 ======= =======
29 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6.LONG-TERM DEBT AND CREDIT FACILITIES Long-term debt consists of the following:
DECEMBER 31, ----------------- 1996 1995 -------- -------- (IN THOUSANDS) First Mortgage Notes 11.18% Series J due December 15, 2006 (subject to $16.9 million annual sinking fund requirement commencing December 15, 1997)..................................... $152,100 $164,000 7.11% Series K due December 15, 2007.................... 11,000 11,000 7.15% Series L due December 15, 2008.................... 11,000 11,000 7.19% Series M due December 15, 2009.................... 13,000 13,000 7.93% Series N due December 15, 2010.................... 15,000 15,000 -------- -------- Total................................................. $202,100 $214,000 ======== ========
Maturities of debt outstanding at December 31, 1996 are as follows: $11,900,000 in 1997; $16,900,000 in 1998; $16,900,000 in 1999; $16,900,000 in 2000; $16,900,000 in 2001 and a total of $134,500,000 in the period 2002 through 2010. The fair value of the Partnership's debt is estimated to be $238 million and $250 million as of December 31, 1996 and 1995, respectively. These values were calculated using interest rates currently available to the Partnership for issuance of debt with similar terms and remaining maturities. The First Mortgage Notes are collateralized by a mortgage on and a security interest in substantially all of the currently existing and after-acquired property, plant and equipment (the "Mortgaged Property") of Buckeye. The indenture pursuant to which the First Mortgage Notes were issued (the "Mortgage Note Indenture"), as amended by Supplemental Indentures, contains covenants which generally (a) limit the outstanding indebtedness of Buckeye under the Mortgage Note Indenture at any time to $275 million plus up to $15 million of short-term borrowings for working capital purposes, (b) prohibit Buckeye from creating or incurring additional liens on its property, (c) prohibit Buckeye from disposing of substantially all of its property or business to another party and (d) prohibit Buckeye from disposing of any part of the Mortgaged Property unless the proceeds in excess of $1 million in a fiscal year are available for reinvestment in assets subject to the lien of the Mortgage Note Indenture. In December 1993, Buckeye entered into an agreement to issue $35 million of additional First Mortgage Notes in accordance with provisions under a Third Supplemental Indenture and as permitted under the Mortgage Note Indenture. These additional First Mortgage Notes, which were issued on January 7, 1994, mature from 2007 to 2009 and bear interest at rates ranging from 7.11 percent to 7.19 percent. A portion of the proceeds of these notes was used to complete an in-substance defeasance of principal and interest with respect to Buckeye's $20 million, 9.50 percent First Mortgage Notes (Series H) due December 1995 (see Note 12). Remaining proceeds of the additional notes were used for working capital purposes. In addition, Buckeye entered into an agreement with the purchaser of the $35 million of additional First Mortgage Notes which permitted Buckeye, under certain circumstances, to issue up to $40 million of additional First Mortgage Notes to such purchaser (the "Mortgage Note Facility"). 30 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During March 1994, Buckeye entered into an agreement with such purchaser to issue $15 million of additional First Mortgage Notes under the Mortgage Note Facility and in accordance with provisions under a Fourth and Fifth Supplemental Indenture and the Mortgage Note Indenture. These additional First Mortgage Notes mature in 2010 and bear interest at 7.93 percent. The proceeds of these notes, plus additional cash of $1.6 million, were used to complete an in-substance defeasance of principal and interest with respect to $15 million of 9.72 percent First Mortgage Notes (Series I) due December 1996. In addition, in December 1994, Buckeye completed an in-substance defeasance of $5 million of Buckeye's 9.72 percent Series I First Mortgage Notes and $5 million of Buckeye's 11.18 percent Series J First Mortgage Notes (see Note 12). On January 7, 1996, the Mortgage Note Facility expired. The Partnership Agreement contains certain restrictions which limit the incurrence of any debt by the Partnership or any Operating Partnership to the First Mortgage Notes, any additional debt of Buckeye permitted by the Mortgage Note Indenture and other debt not in excess of an aggregate consolidated principal amount of $25 million plus the aggregate proceeds from the sale of additional partnership interests. The Partnership maintains a $15 million unsecured revolving credit facility with a commercial bank which is available to the Partnership for general purposes, including capital expenditures and working capital. Interest on any borrowings under this facility is calculated on the bank's Alternate Base Rate ("ABR") or LIBOR plus one percent. ABR is defined as the highest of the bank's prime rate, the three month secondary CD rate plus one percent, and the Federal Funds Rate plus one-half of one percent. At December 31, 1996, there was no amount outstanding under this facility. Buckeye has a line of credit from two commercial banks (the "Working Capital Facility") which permits short-term borrowings of up to $10 million outstanding at any time. Borrowings under the Working Capital Facility bear interest at each bank's prime rate and are secured by the accounts receivable of Buckeye. The Mortgage Note Indenture contains covenants requiring that, for a period of 45 consecutive days during any year, no indebtedness be outstanding under the Working Capital Facility. At December 31, 1996, there was no amount outstanding under this facility. 7.OTHER NON-CURRENT LIABILITIES Other non-current liabilities consist of the following:
DECEMBER 31, --------------- 1996 1995 ------- ------- (IN THOUSANDS) Accrued employee benefit liabilities........................ $36,231 $35,699 Accrued charges due Manager................................. 1,807 2,607 Accrued non-current taxes................................... 3,578 4,612 Other....................................................... 4,962 5,340 ------- ------- Total..................................................... $46,578 $48,258 ======= =======
8.PENSION PLANS The Manager 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 the Manager contributes 5 percent of each covered employee's salary, and a retirement 31 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. The Manager's policy is to fund amounts as are necessary to at least meet the minimum funding requirements of ERISA. Net pension expense for 1996, 1995 and 1994 for the defined benefit plans included the following components:
1996 1995 1994 ---- ------- ----- (IN THOUSANDS) Service cost........................................... $485 $ 452 $ 448 Interest cost on projected benefit obligation.......... 889 933 785 Actual return on assets................................ (664) (1,653) (31) Net amortization and deferral.......................... (193) 838 (854) ---- ------- ----- Net pension expense.................................. $517 $ 570 $ 348 ==== ======= =====
The pension expense for the defined contribution plan included in the consolidated statements of income approximated $1,379,000, $1,493,000 and $1,471,000 for 1996, 1995 and 1994, respectively. The following table sets forth the funded status of the Manager's defined benefit plans and amounts recognized in the Partnership's consolidated balance sheets at December 31, 1996 and 1995 related to those plans:
DECEMBER 31, ------------------ 1996 1995 -------- -------- (IN THOUSANDS) Actuarial present value of benefit obligations Vested benefit obligations............................ $ (4,730) $ (5,338) ======== ======== Accumulated benefit obligations....................... $ (6,531) $ (6,721) ======== ======== Projected benefit obligation.......................... $(12,540) $(14,311) Plan assets at fair value............................... 6,305 8,521 -------- -------- Projected benefit obligation in excess of plan assets... (6,235) (5,790) Unrecognized net loss................................... 814 476 Unrecognized net asset.................................. (1,102) (1,262) -------- -------- Pension liability recognized in the balance sheet....... $ (6,523) $ (6,576) ======== ========
As of December 31, 1996, approximately 57.2 percent of plan assets were invested in fixed income securities and 42.8 percent in equity securities. The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.50 percent and 7.25 percent at December 31, 1996 and 1995, respectively. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 5.25 percent and 5.0 percent at December 31, 1996 and 1995, respectively. The expected long-term rate of return on assets was 8.5 percent as of January 1, 1996 and 1995. 32 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Manager also participates in a multi-employer retirement income plan which provides benefits to employees covered by certain labor contracts. Pension expense for the plan was $144,000, $145,000 and $152,000 for 1996, 1995 and 1994, respectively. 9.POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Manager 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. The Manager does not pre-fund this postretirement benefit obligation. Net postretirement benefit costs for 1996, 1995 and 1994 included the following components:
1996 1995 1994 ------ ------ ------ Service cost....................................... $ 500 $ 520 $ 583 Interest cost on accumulated postretirement benefit obligation........................................ 1,651 1,895 1,712 Net amortization and deferral...................... (569) (577) (576) ------ ------ ------ Net postretirement expense......................... $1,582 $1,838 $1,719 ====== ====== ======
The following table sets forth the amounts related to postretirement benefit obligations recognized in the Partnership's consolidated balance sheets as of December 31, 1996 and 1995:
DECEMBER 31, ------------------ 1996 1995 -------- -------- (IN THOUSANDS) Actuarial present value of accumulated postretirement benefits Retirees and dependents............................. $(12,897) $(11,886) Employees eligible to retire...................... (2,833) (4,368) Employees ineligible to retire.................... (7,832) (8,431) -------- -------- Accumulated postretirement benefit obligation..... (23,562) (24,685) Unamortized gain due to plan amendment................ (4,057) (4,637) Unrecognized net loss (gain).......................... (2,090) 199 -------- -------- Postretirement liability recognized in the balance sheet................................................ $(29,709) $(29,123) ======== ========
The weighted average discount rate used in determining the accumulated postretirement benefit obligation ("APBO") was 7.5 percent and 7.25 percent at December 31, 1996 and 1995, respectively. The assumed rate for plan cost increases in 1996 was 9.5 percent and 8.5 percent for non-Medicare eligible and Medicare eligible retirees, respectively. The assumed annual rates of cost increase decline each year through 2005 to a rate of 4.5 percent, and remain at 4.5 percent thereafter for both non-Medicare eligible and Medicare eligible retirees. The effect of a 1 percent increase in the health care cost trend rate for each future year would have increased the aggregate of service and interest cost components by $327,500 in 1996 and the APBO would have increased by $3,340,700 as of December 31, 1996. The Manager also contributes to a multi-employer postretirement benefit plan which provides health care and life insurance benefits to employees covered by certain labor contracts. The cost of providing these benefits was approximately $133,000, $137,000 and $130,000 for 1996, 1995 and 1994, respectively. 33 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10.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 disclosure requirements of SFAS 123 relating to pro forma net income, pro forma earnings per share and the fair value of options granted and the assumptions used in determining fair value have been omitted due to the immaterial nature of such information. The Partnership has a Unit Option and Distribution Equivalent Plan (the "Option Plan"), which was approved by the Board of Directors of the General Partner on April 25, 1991 and by holders of the LP Units on October 22, 1991. The Option Plan authorizes the granting of options (the "Options") to acquire LP Units to selected key employees (the "Optionees") of the General Partner or any subsidiary, not to exceed 360,000 LP Units in the aggregate. The price at which each LP Unit may be purchased pursuant to an Option granted under the Option Plan is generally equal to the market value on the date of the grant. Options may be granted with a feature that allows Optionees to apply accrued credit balances (the "Distribution Equivalents") as an adjustment to the aggregate purchase price of such Options. The Distribution Equivalents shall be an amount equal to (i) the Partnership's per LP Unit regular quarterly distribution, multiplied by (ii) the number of LP Units subject to such Options that have not vested. Vesting in the Options is determined by the number of anniversaries the Optionee has remained in the employ of the General Partner or a subsidiary following the date of the grant of the Option. Options become vested in varying amounts beginning generally three years after the date of grant and remain exercisable for a period of five years. The Partnership recorded compensation expense related to the Option Plan of $283,000, $231,000 and $187,000 in 1996, 1995 and 1994, respectively. A summary of the changes in the LP Units outstanding under the Option Plan as of December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ----------------------- ----------------------- ----------------------- UNITS WEIGHTED UNITS WEIGHTED UNITS WEIGHTED UNDER AVERAGE UNDER AVERAGE UNDER AVERAGE OPTION EXERCISE PRICE OPTION EXERCISE PRICE OPTION EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- Outstanding at beginning of year................ 93,120 $28.35 76,540 $27.64 65,850 $24.29 Granted................. 36,000 38.00 30,250 34.44 26,750 39.44 Exercised............... (30,450) 24.11 (13,670) 18.66 (16,060) 19.50 ------- ------- ------- Outstanding at end of year................... 98,670 30.71 93,120 28.35 76,540 27.64 ======= ======= ======= Options exercisable at year-end............... 2,520 3,500 0
34 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes information relating to LP Units outstanding under the Option Plan at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ------------------------------ OPTIONS WEIGHTED AVERAGE WEIGHTED OPTIONS WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE - --------------- ----------- ---------------- -------------- ----------- -------------- $12.00 to $18.00 4,820 4.9 Years $14.08 1,270 $12.78 $21.00 to $29.00 34,600 6.4 Years 27.05 250 24.55 $30.00 to $37.00 59,250 7.0 Years 34.19 1,000 34.34 ------ ----- Total 98,670 6.7 Years 30.71 2,520 22.50 ====== =====
At December 31, 1996, there were 201,150 LP Units available for future grants under the Option Plan. 11.EMPLOYEE STOCK OWNERSHIP PLAN In connection with the Acquisition, the ESOP was formed for the benefit of employees of the General Partner, the Manager and Glenmoor. The General Partner borrowed $63 million pursuant to the 15-year term loan from a third- party lender. The General Partner then loaned $63 million to the ESOP, which used the loan proceeds to purchase $63 million of Series A Convertible Preferred Stock of BAC ("BAC Preferred Stock"). BAC Preferred Stock has 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. BAC Preferred Stock is released to employee accounts in the proportion that current payments of principal and interest on the ESOP loan bear to the total of all principal and interest payments due under the ESOP loan. Individual employees are allocated shares based upon the ratio of their eligible compensation to total eligible compensation. Eligible compensation generally includes base salary, overtime payments and certain bonuses. Allocated BAC Preferred Stock receives stock dividends in lieu of cash, while cash dividends are used to pay principal and interest on the ESOP loan. Total compensation cost charged to earnings during 1996 was $5,596,000, which included $3,522,000 of interest expense with respect to the ESOP loan and $2,074,000 based upon the value of 2,074 shares released to employees' accounts. At December 31, 1996, there were 60,926 shares of unallocated BAC Preferred Stock remaining in the ESOP Trust. BAC is required to repurchase the BAC Preferred Stock allocated to employees' accounts, upon termination of employment, at fair market value. During December 1996, the Board of Directors of the General Partner approved a restructuring of the ESOP. Generally, the restructuring calls for the issuance of approximately 1.6 million LP Units by the Partnership in exchange for a reduction in future expenses charged to the Partnership. The LP Units would be held by a newly formed company to be owned by the ESOP. Certain aspects of the restructuring are subject to approval by the Unitholders at a special meeting to be held in the second quarter of 1997. 12.EARLY EXTINGUISHMENT OF DEBT In March 1994, Buckeye entered into an agreement to issue $15 million of additional First Mortgage Notes (Series N) bearing interest at 7.93 percent (see Note 6). The proceeds from the issuance of these First Mortgage Notes, plus additional amounts approximating $1.6 million, were used 35 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) to purchase U.S. Government securities. These securities were deposited into an irrevocable trust to complete an in-substance defeasance of $15 million of Buckeye's 9.72 percent, Series I, First Mortgage Notes. In addition, during December 1994, Buckeye purchased approximately $10.7 million of U.S. Government securities. These securities were deposited into an irrevocable trust to complete an in-substance defeasance of $5 million of Buckeye's 9.72 percent, Series I, First Mortgage Notes and $5 million of Buckeye's 11.18 percent, Series J, First Mortgage Notes. The funds placed in trust in 1994 will be used solely to satisfy the interest due and principal amounts of $20 million Series I Notes due December 1996 and $5 million Series J Notes due serially through December 2006. Accordingly, these U.S. Government securities, the Series I First Mortgage Notes and $5 million of the Series J First Mortgage Notes have been excluded from the balance sheets. This debt extinguishment resulted in an extraordinary charge of $2,269,000 in 1994. In December 1993, Buckeye entered into an agreement to issue $35 million of additional First Mortgage Notes (Series K, L and M) bearing interest at rates ranging from 7.11 percent to 7.19 percent (see Note 6). A portion of the proceeds from the issuance of these First Mortgage Notes were used to purchase approximately $22.2 million of U.S. Government securities. These securities were deposited into an irrevocable trust to complete an in-substance defeasance of Buckeye's 9.50 percent, Series H, First Mortgage Notes. The funds in the trust were used solely to satisfy the interest due and principal amount of $20 million due at maturity in December 1995. Accordingly, these U.S. Government securities and the Series H First Mortgage Notes have been excluded from the balance sheets. 13.LEASES AND COMMITMENTS The Operating Partnerships lease certain land and rights-of-way. Minimum future lease payments for these leases as of December 31, 1996 are approximately $2.5 million for each of the next five years. Substantially all of these lease payments can be cancelled at any time should they not be required for operations. The Manager leases space in an office building and certain copying equipment and Buckeye leases certain computing equipment and automobiles. The rent on such leases is charged to the Operating Partnerships. Future minimum lease payments under these noncancellable operating leases at December 31, 1996 were as follows: $1,006,000 for 1997, $879,000 for 1998, $442,000 for 1999, $359,000 for 2000, $368,000 for 2001 and $1,647,000 thereafter. Buckeye is committed to pay a minimum of $1,743,000 annually for the next fifteen years under an energy services agreement. The minimum payment is based upon the annual usage requirement of natural gas engines located at its Linden, New Jersey facility. Buckeye is required to pay the difference between actual usage and the minimum required usage at the rate of $0.049 per kilowatt hour equivalent. In addition to the annual usage requirement, Buckeye is subject to minimum usage requirements during peak and off-peak periods. Rent expense for all operating leases was $5,276,000, $5,161,000 and $4,834,000 for 1996, 1995 and 1994, respectively. 14.RELATED PARTY TRANSACTIONS The Partnership and the Operating Partnerships are managed by the General Partner and the Manager. Under certain partnership agreements and management agreements, the General Partner, 36 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the Manager, and certain related parties are entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership and the Operating Partnerships. These costs, which totaled $61.1 million, $55.4 million and $52.5 million in 1996, 1995 and 1994, respectively, include insurance, general and administrative costs, compensation and benefits payable to officers and employees of the General Partner and Manager, tax information and reporting costs, legal and audit fees and an allocable portion of overhead expenses. In 1986, Buckeye's predecessor ("Pipe Line") (then owned by a subsidiary of American Financial) obtained an Administrative Consent Order ("ACO") from the New Jersey Department of Environmental Protection and Energy under the New Jersey Environmental Cleanup Responsibility Act of 1983 ("ECRA") for all six of its facilities in New Jersey. The ACO required Pipe Line to conduct in a timely manner a sampling plan for environmental contamination at the New Jersey facilities and to implement any required clean-up plan. Sampling continues in an effort to identify areas of contamination at the New Jersey facilities, while clean-up operations have begun at certain of the sites. The obligations of Pipe Line were not assumed by the Partnership and the costs of compliance have been and will continue to be paid by American Financial. Through December 1996, Buckeye's costs of approximately $2,546,000 have been funded by American Financial. On July 18, 1995, the General Partner amended the Partnership Agreement to reflect its agreement to continue to act as general partner of the Partnership until December 23, 2006, a ten-year extension of its current term. In connection therewith, the General Partner, the Partnership and American Financial amended the Distribution Support Incentive Compensation and APU Redemption Agreement dated December 23, 1986, which provides for incentive compensation payable to the General Partner in the event quarterly or special distributions to Unitholders exceed specified targets. Both amendments were approved on behalf of the Partnership by a special committee of disinterested directors of the General Partner. On March 22, 1996, the General Partner amended the Partnership Agreement to (a) extend the period under which the General Partner would agree to act as general partner of the Partnership until the later of (i) December 23, 2011 or (ii) the date the ESOP loan is paid in full, (b) clarify that fair market value of the GP Units includes the value of the right to receive incentive compensation for purposes of determining the amount required to be paid to the General Partner by any successor general partner of the Partnership, and (c) reduce the threshold for payment of Restricted Payments by the General Partner or the Manager from $23,000,000 to $5,000,000. The Partnership received an opinion of counsel that the execution of the amendment to the Partnership Agreement would not (a) result in the loss of limited liability of any Limited Partner or (b) result in the Partnership or any Operating Partnership being treated as an association taxable as a corporation for federal income tax purposes. The amendment to the Partnership Agreement and related opinion of counsel were approved on behalf of the Partnership by a special committee of disinterested directors of the Partnership. Also on March 22, 1996, the General Partner amended and restated the Incentive Compensation Agreement to delete American Financial as a party to the agreement and clarify that the Incentive Compensation Agreement terminates if the General Partner is removed as general partner of the Partnership. The Incentive Compensation Agreement was approved on behalf of the Partnership by a special committee of disinterested directors of the Partnership. Incentive compensation payments were $1.3 million, $0.5 million and $0.4 million in 1996, 1995 and 1994, respectively. 37 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15.PARTNERS' CAPITAL Changes in partners' capital for the years ended December 31, 1994, 1995, and 1996 were as follows:
GENERAL LIMITED PARTNER PARTNERS TOTAL ---------------------- ----------- (IN THOUSANDS, EXCEPT FOR UNITS) Partners' capital at January 1, 1994.... $ 2,338 $ 231,357 $ 233,695 Net income.............................. 458 45,359 45,817 Distributions........................... (340) (33,628) (33,968) Proceeds from exercise of unit options and capital contributions.............. 4 428 432 -------- ----------- ----------- Partners' capital at December 31, 1994.. 2,460 243,516 245,976 Net income.............................. 498 49,342 49,840 Distributions........................... (340) (33,669) (34,009) Proceeds from exercise of unit options and capital contributions.............. 4 374 378 -------- ----------- ----------- Partners' capital at December 31, 1995.. 2,622 259,563 262,185 Net income.............................. 493 48,844 49,337 Distributions........................... (365) (36,162) (36,527) Proceeds from exercise of unit options and capital contributions.............. 10 974 984 -------- ----------- ----------- Partners' capital at December 31, 1996.. $ 2,760 $ 273,219 $ 275,979 ======== =========== =========== Units outstanding at January 1, 1994.... 121,212 12,000,000 12,121,212 Units issued pursuant to the unit option and distribution equivalent plan and capital contributions.................. 162 16,060 16,222 -------- ----------- ----------- Units outstanding at December 31, 1994.. 121,374 12,016,060 12,137,434 Units issued pursuant to the unit option and distribution equivalent plan and capital contributions.................. 138 13,670 13,808 -------- ----------- ----------- Units outstanding at December 31, 1995.. 121,512 12,029,730 12,151,242 Units issued pursuant to the unit option and distribution equivalent plan and capital contributions.................. 308 30,450 30,758 -------- ----------- ----------- Units outstanding at December 31, 1996.. 121,820 12,060,180 12,182,000 ======== =========== ===========
The net income per unit for 1996, 1995 and 1994 was calculated using the weighted average outstanding units of 12,173,353, 12,146,124 and 12,131,640, 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 more than 4,800,000 additional LP Units, or issue any additional LP Units of a class or series having preferences or other special or senior rights over the LP Units. At December 31, 1996, the Partnership has the ability to issue up to 4,739,820 additional LP Units without prior approval of the Limited Partners of the Partnership. 38 BUCKEYE PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. CASH DISTRIBUTIONS The Mortgage Note Indenture covenants permit cash distributions by Buckeye to the Partnership so long as no default exists under the Mortgage Note Indenture and provided that such distributions do not exceed Net Cash Available to Partners (generally defined to equal net income plus depreciation and amortization less (a) capital expenditures funded from operating cash flows (b) payments of principal of debt and (c) certain other amounts, all on a cumulative basis since the formation of the Partnership). The maximum amount available for distribution by Buckeye to the Partnership under the formula as of December 31, 1996, amounted to $25.1 million. The Partnership is also entitled to receive cash distributions from Everglades, BTT and Laurel. 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 or as are required by the terms of the Mortgage Note Indenture. In 1996, quarterly distributions of $0.75 per GP and LP Unit were paid in February, May, August and November. In 1995 and 1994, quarterly distributions of $0.70 per GP and LP Unit were paid in February, May, August and November. All such distributions were paid on the then outstanding GP and LP Units. Cash distributions aggregated $36,527,000 in 1996, $34,009,000 in 1995 and $33,968,000 in 1994. On February 12, 1997, the General Partner announced a quarterly distribution of $0.75 per GP and LP Unit payable on February 28, 1997. 17. QUARTERLY FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS' REPORT) Summarized quarterly financial data for 1996 and 1995 are set forth below. Quarterly results were influenced by seasonal factors inherent in the Partnership's business.
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL --------------- --------------- --------------- --------------- ----------------- 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 ------- ------- ------- ------- ------- ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) Revenue................. $46,269 $44,234 $44,633 $46,011 $45,083 $46,195 $46,970 $47,022 $182,955 $183,462 Operating income........ 17,330 16,844 12,979 17,887 17,621 17,852 20,854 18,921 68,784 71,504 Net income.............. 11,658 11,405 10,259 12,535 12,017 12,393 15,403 13,507 49,337 49,840 Net income per Unit..... 0.96 0.94 0.84 1.03 0.99 1.02 1.26 1.11 4.05 4.10
39 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 directors and officers of the General Partner and the Manager perform all management functions. Prior to the Acquisition, directors and officers of the General Partner and the Manager were selected by American Financial. Directors and officers of the General Partner and the Manager will now be selected by BAC. The executive officers of the General Partner and the Manager are currently employed by Glenmoor, which provides management services to the General Partner and the Manager under the Glenmoor Management Agreement. 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, 69 Mr. Martinelli has been Chairman of the Board and Chairman of the Board, Chief Executive Officer of the General Partner for Chief Executive more than five years. He has been a Director of the Officer General Partner since October, 1986. Mr. Martinelli and Director* served as President of the General Partner from Feb- ruary 1991 to February 1992. He was Chairman and Chief Executive Officer of Penn Central Energy Man- agement Company ("PCEM"), for more than five years, until his resignation in March 1996. Mr. Martinelli was also Vice Chairman and a director of American Financial and a director of American Annuity Group, Inc., for more than five years, until his resigna- tion in March 1996. C. Richard Wilson, 52 Mr. Wilson has been a director of the General Part- President, Chief ner since February 1995. He was elected President of Operating Officer the General Partner in March 1996 and was elected and Director* Chief Operating Officer in January 1997. Mr. Wilson was elected Chairman of the Board of the Manager in February 1995. He has been President and Chief Oper- ating Officer of the Manager since February 1991. Ernest R. Varalli, 66 Mr. Varalli has been a director of the General Part- Director* ner since July 1987. He was Executive Vice Presi- dent, Chief Financial Officer and Treasurer for more than five years until 1996. Mr. Varalli served as Executive Vice President, Chief Financial Officer and Treasurer of PCEM until his resignation in March 1996. Mr. Varalli had been a consultant to American Financial, for more than five years, until March 1996.
40
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING POSITION WITH GENERAL PARTNER PAST FIVE YEARS - ----------------------------- -------------------------- Brian F. Billings, 58 Mr. Billings has been a Director of the General Director* Partner since October, 1986. He served as Chairman of the Manager until February 1995. Mr. Billings was President of PCEM from December 1986 to 1995. A. Leon Fergenson, 84 Mr. Fergenson has been a director of the General Director Partner since December 1986. He is also a director of American Annuity Group, Inc., Sequa Corporation and National Benefit Life Insurance Company. Edward F. Kosnik, 52 Mr. Kosnik has been a Director of the General Part- Director ner since October 1986. 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 & Alexander Services, Inc. from August 1994 to April 1996. He was Chairman of the Board, President and Chief Exec- utive Officer of JWP, Inc. from May 1993 through April 1994. Mr. Kosnik was Executive Vice President and Chief Financial Officer of JWP, Inc. from Decem- ber 1992 to April 1993. He was President of Sprague Technologies, Inc. from May 1992 to June 1992 and President and Chief Executive Officer of Sprague Technologies, Inc. from July 1987 to May 1992. William C. Pierce, 56 Mr. Pierce has been a director of the General Part- Director ner since February 1987. He was Executive Vice Pres- ident and Group Executive of Chemical Bank and Chem- ical Banking Corporation from November 1992 until his retirement in July 1994. Mr. Pierce served as Executive Vice President and Chief Risk Policy Offi- cer of Chemical Bank and Chemical Banking Corpora- tion from December 1991 to November 1992. Robert H. Young, 75 Mr. Young has been a director of the General Partner Director since July 1987. He was Secretary of the General Partner from July 1987 through October 1991. Since October 1991, Mr. Young has been Counsel to the law firm of Morgan, Lewis & Bockius. He is also Chairman of the Board of Directors of Independence Blue Cross.
- -------- * Also a director of the Manager. Mr. Neil M. Hahl, the President of the General Partner since February 1992, a director of the General Partner since February 1989 and Senior Vice President of American Financial, resigned as President and director of the General Partner upon the closing of the Acquisition. The General Partner has an Audit Committee, which currently consists of four directors: Brian F. Billings, A. Leon Fergenson, Edward F. Kosnik and William C. Pierce. Messrs. Billings, Fergenson, Kosnik and Pierce are neither officers nor employees of the General Partner or any of its affiliates. 41 The General Partner also has an Organization and Compensation Committee, which currently consists of three directors: Edward F. Kosnik, Ernest R. Varalli and Robert H. Young. The Organization and Compensation Committee is concerned primarily with establishing executive compensation policies for officers of the Manager and administering the Partnership's Option Plan. See "Executive Compensation--Compensation Committee Interlocks and Insider Participation in Compensation Decisions." In addition, the General Partner has a Finance Committee, which currently consists of three directors: Edward F. Kosnik, William C. Pierce and Ernest R. Varalli. The Finance Committee provides oversight and advice with respect to the capital structure of the Partnership. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGER Set forth below is certain information concerning the directors and executive officers of the Manager. The executive officers of the Manager also serve as the executive officers of the General Partner. Messrs. Billings and Martinelli were elected as directors of the Manager in March 1987, and Mr. Varalli was elected as a director of the Manager in July 1987.
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING POSITION WITH THE MANAGER PAST FIVE YEARS ------------------------- -------------------------- C. Richard Wilson, 52 Mr. Wilson was named President and Chief Operating President, Chief Officer in February 1991. He was Executive Vice Operating Officer President and Chief Operating Officer from July 1987 and Director to February 1991. Mr. Wilson has been a director of the Manager since October 1986. He was elected as a Director of the General Partner in February 1995 and as President of the General Partner in March 1996. Michael P. Epperly, 53 Mr. Epperly was named Senior Vice President--Opera- Senior Vice President-- tions in March 1990. Operations David J. Martinelli, 36 Mr. Martinelli was named Vice President--Treasurer Vice President-- in March 1997. He was named Treasurer in June 1996 Treasurer and Assistant Treasurer in March 1996. Mr. Marti- nelli was employed in a corporate financial position with Salomon Brothers Inc from 1993 until 1996. He was a Vice President with Paine Webber International from 1990 until 1991. Mr. Martinelli is the son of Alfred W. Martinelli. Stephen C. Muther, 47 Mr. Muther was named Senior Vice President--Adminis- Senior Vice President-- tration, General Counsel and Secretary in February Administration, General 1995. He served as General Counsel, Vice President-- Counsel and Secretary* Administration and Secretary from May 1990 to Febru- ary 1995. Steven C. Ramsey, 42 Mr. Ramsey was named Senior Vice President--Finance Senior Vice President-- and Chief Financial Officer in June 1996. He was Finance and Chief named Vice President--Finance and Treasurer in Feb- Financial Officer ruary 1995. Mr. Ramsey served as Vice President and Treasurer from February 1991 to February 1995. He was elected Treasurer in June 1989.
- -------- * Also Secretary of the General Partner since February 1992. 42
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING POSITION WITH THE MANAGER PAST FIVE YEARS ------------------------- -------------------------- William H. Shea, Jr., 42 Mr. Shea was named Vice President--Marketing and Vice President-- Business Development in March 1996. He was Vice Marketing and Business President--West Central Region of Laidlaw Environ- Development mental Services from 1994 until 1995. Mr. Shea was Vice President--Sales and Eastern Region Operations of USPCI, Inc. (a subsidiary of Union Pacific Corpo- ration) from 1993 until 1994. He was Vice Presi- dent--Operations of USPCI, Inc. from 1989 until 1993. Mr. Shea is the son-in-law of Mr. Alfred W. Martinelli.
ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the total compensation earned by the Chief Executive Officer of the General Partner and the four most highly compensated executive officers of the General Partner, the Manager and Glenmoor for services rendered to the Partnership, the General Partner or the Manager for the fiscal year ended December 31, 1996, as well as the total compensation earned by such individuals for the two previous fiscal years. Alfred W. Martinelli, Chairman of the Board, Chief Executive Officer and Director of the General Partner, did not receive any cash compensation for serving as an officer of the General Partner in 1996, but received fees for serving as a Director of the General Partner. See "Director Compensation." Executive officers of the Manager, including Messrs. Wilson, Epperly, Muther and Ramsey, were compensated in 1996 by the Manager and Glenmoor and, pursuant to management agreements with each of the Operating Partnerships, such compensation is reimbursed by the Operating Partnerships in accordance with an allocation formula based upon the results of the prior year's operations. Under the terms of the proposed ESOP Restructuring, the Partnership and the Operating Partnerships would be permanently released from the obligation to reimburse the General Partner, the Manager or Glenmoor for certain executive compensation costs. See "Business--Introduction." 43 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION --------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ----------------------------- ---------- ---------- OTHER SECURITIES ANNUAL UNDERLYING LTIP ALL OTHER NAME AND BONUS(1) COMPEN- OPTIONS(2) PAYOUTS(3) COMPEN- PRINCIPAL POSITION YEAR SALARY ($) ($) SATION($) (#) ($) SATION ($) ------------------ ---- ---------- -------- --------- ---------- ---------- ---------- Alfred W. Martinelli.... 1996 0 0 0 0 0 12,500(6) Chairman of the 1995 0 0 0 0 0 30,000(6) Board and Chief 1994 0 0 11,033(4) 0 0 24,500(6) Executive Officer C. Richard Wilson....... 1996 247,500 112,500 (5) 10,000 0 49,262(7) President and Chief 1995 247,500 135,000 (5) 10,000 0 40,425(7) Operating Officer 1994 225,000 120,000 (5) 9,000 13,050 33,938(7) Michael P. Epperly...... 1996 167,500 56,250 (5) 4,500 0 30,971(7) Senior Vice President-- 1995 167,500 67,500 (5) 4,500 0 25,850(7) Operations 1994 155,000 67,500 (5) 4,500 10,875 23,650(7) Stephen C. Muther....... 1996 170,500 62,500 (5) 5,500 0 31,441(7) Senior Vice President-- 1995 170,500 75,000 (5) 5,500 0 23,050(7) Administration, 1994 155,000 60,000 (5) 4,000 0 20,000(7) General Counsel and Secretary Steven C. Ramsey........ 1996 145,800 60,750 (5) 4,500 0 27,198(7) Senior Vice President-- 1995 145,800 67,500 (5) 4,500 0 20,580(7) Finance and Chief 1994 135,000 60,000 (5) 4,000 7,250 18,000(7) Financial Officer
- -------- (1) Represents amounts awarded by the Compensation Committee as cash bonuses earned under the Manager's Annual Incentive Compensation Plan ("AIC Plan"). Under the AIC Plan, individual awards are granted to participants based upon satisfaction of such participant's target award opportunities and such awards are paid to participants as soon as practicable after they are granted. (2) Represents options granted under the Partnership's Unit Option and Distribution Equivalent Plan (the "Option Plan"). See "Long Term Compensation Option Plan." (3) Represents payments received during the applicable year under the Manager's Long-Term Incentive Compensation Plans (the "LTIC Plans"). See "Long-Term Compensation Long-Term Incentive Plans." (4) Represents lease payments made by the Partnership for an automobile used by Mr. Martinelli. (5) During the year indicated, no perquisites or non-cash compensation exceeded the lesser of $50,000 or an amount equal to 10 percent of such person's salary and bonus. (6) Represents director fees which commenced in July 1992. See "Director Compensation." (7) Represents the amount contributed by the Manager to the Manager's defined contribution retirement plan and the Manager's matching contributions under the Manager's savings plan, the value of shares allocated under the ESOP and, for Messrs. Wilson, Epperly, Muther and Ramsey an additional $17,717, $4,250, $4,775 and $3,165, respectively, under the Manager's Benefit Equalization Plan for 1996. Messrs. Wilson, Epperly, Muther and Ramsey received an additional $23,925, $9,350, $8,050 and $5,580, respectively, in 1995 and $18,313, $7,150, $5,000 and $3,000, respectively, in 1994 under the Manager's Benefit Equalization Plan. In addition to participation in the Manager's defined contribution plan, Messrs. Wilson, Epperly and Ramsey are guaranteed certain defined benefits upon retirement under the Manager's retirement income guarantee plan. See "Retirement and Savings Plans." 44 LONG-TERM COMPENSATION Option Plan The following table sets forth additional information regarding options granted under the Option Plan to the Chief Executive Officer of the General Partner and the four most highly compensated executive officers of the General Partner and Manager during 1996. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF LP UNIT PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM ------------------------------------------ -------------------------- PERCENT OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES OR BASE GRANTED (1) IN FISCAL PRICE EXPIRATION NAME (#) YEAR ($/UNIT) DATE 5% ($) (2) 10% ($) (2) ---- ----------- ---------- -------- ---------- ----------- ------------ Alfred W. Martinelli.... 0 -- -- -- -- -- C. Richard Wilson....... 10,000 27.8% 38.000 2/06/2006 239,000 605,600 Michael P. Epperly...... 4,500 12.5% 38.000 2/06/2006 107,500 272,500 Stephen C. Muther....... 5,500 15.3% 38.000 2/06/2006 131,400 333,100 Steven C. Ramsey........ 4,500 12.5% 38.000 2/06/2006 107,500 272,500
- -------- (1) Represents LP Unit options granted under the Option Plan. Options shown in the table were granted with a feature that allows optionees to apply accrued credit balances (the "Distribution Equivalents") as a reduction to the aggregate purchase price of such options. The Distribution Equivalents are equal to (i) the Partnership's per LP Unit regular quarterly distribution as declared from time to time by the Board of Directors of the General Partner, multiplied by (ii) the number of LP Units subject to options that have not vested. Vesting in the options is determined by the number of anniversaries the optionee has remained in the employ of the General Partner or a subsidiary following the date of the grant of the option. Vesting shall be at the rate of 0 percent if the number of anniversaries are less than three, 60 percent if the number of anniversaries are three but less than four, 80 percent if the number of anniversaries are four but less than five and 100 percent if the number of anniversaries are five or more. In addition, the optionee may become fully vested upon death, retirement, disability or a determination by the Board of Directors of the General Partner or the Compensation Committee that acceleration of the vesting in the option would be desirable for the Partnership. Up to 95 percent of the LP Unit purchase price and up to 100 percent of any taxes required to be withheld in connection with the purchase of the LP Units pursuant to such options may be financed through a loan program established by the General Partner. (2) The dollar amounts under these columns are the values of options (not including accrual of any Distribution Equivalents) at the 5 percent and 10 percent rates set by the Securities and Exchange Commission and therefore are not intended to forecast possible future appreciation, if any, of the price of LP Units. No alternative formula for a grant date valuation was used, as the General Partner is not aware of any formula which will determine with reasonable accuracy a present value based on future unknown or volatile factors. 45 The following table sets forth information regarding options exercised in 1996 and values of unexercised options as of December 31, 1996 for the Chief Executive Officer of the General Partner and the four most highly compensated executive officers of the General Partner and the Manager. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT DECEMBER 31, DECEMBER 31, 1996 (#) 1996 ($) (1) LP UNITS ------------- -------------- ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE ---- ------------ ------------ ------------- -------------- Alfred W. Martinelli..... 0 -- 0/0 -- C. Richard Wilson........ 6,000 93,300 1,170/33,500 19,600/162,600 Michael P. Epperly....... 3,750 64,600 0/15,750 0/77,200 Stephen C. Muther........ 3,000 54,400 0/16,800 0/78,600 Steven C. Ramsey......... 4,500 80,100 0/14,500 0/66,900
- -------- (1) The values of the unexercised options do not include any accrual for Distribution Equivalents. Long-Term Incentive Plans Prior to 1991 when the Option Plan went into effect, the Manager created a LTIC Plan each year which permitted the Board of Directors of the General Partner or the Compensation Committee to grant cash awards to certain employees of the Manager for performance during three-year periods. Although cash award payments continued under these LTIC Plans through 1994, no new LTIC plans were established after 1990. In addition to the LTIC Plans, the Manager created a transition plan which grants to each participant an additional cash award in an amount equal to the difference between the target amount under the 1990-1992 LTIC Plan and the sum of (i) amounts received pursuant to LTIC Plans and (ii) the value of Distribution Equivalents vested under the Option Plan for each year from 1992 through 1995. Awards under LTIC Plans were based on achievement of certain long-term financial performance goals for the Partnership and could not exceed 150 percent of the target award opportunity established by the Board of Directors of the General Partner or the Compensation Committee at the beginning of such period (or as soon as practicable thereafter) for such period. A participant's target award opportunity under the LTIC Plans could not exceed 25 percent of such participant's aggregate base salary earned during the three-year period. If the Partnership met or exceeded the interim financial performance goals under the LTIC Plans, cash payments up to the full amount of the target award were made in the following installments: 10 percent in the second year of the award period, 30 percent in the third year of the award period and 60 percent in the first year following the award period. Any cash award in excess of the target award was paid in the second year following the award period with 10 percent simple interest. RETIREMENT AND SAVINGS PLANS Effective December 31, 1985, Pipe Line terminated its defined benefit retirement plan (the "Retirement Plan") and adopted a new defined contribution plan (the "New Retirement Program"). Those employees hired prior to January 1, 1986 are covered by a retirement income guarantee plan (the "RIGP"). These plans were assumed by the Manager. 46 The Operating Partnerships reimburse the Manager for cash costs incurred in connection with the New Retirement Program, the RIGP, the Equalization Plan (described below) and the Savings Plan (described below). Under the New Retirement Program, the Manager makes contributions equal to 5 percent of an employee's covered compensation, which includes base salary plus overtime, annual cash bonuses and any periodic salary continuance payments but does not include extraordinary cash bonuses, deferred awards, other forms of deferred compensation, lump-sum severance pay, fees or any other kind of special or extra compensation. Employees may elect to have the Manager's contributions invested in any of five investment funds. The RIGP generally provides for an additional retirement benefit equal to the amount, if any, by which the aggregate of the annuity equivalent of the employee's accrued benefit under the former Retirement Plan at December 31, 1985 plus the annuity equivalent of the vested portion of employer contributions under the New Retirement Program for the account of such employee (plus or minus aggregate investment gains or losses thereon) is less than the retirement benefit that the employee would have received if the former Retirement Plan had continued. The vesting formula for the New Retirement Program and the RIGP provides for 100 percent vesting after 5 years of service. Service under the former Retirement Plan is carried over to the new plans. The minimum retirement benefit guaranteed under the RIGP is based on the highest average compensation during any five consecutive calendar years of employment within the last ten years of employment preceding retirement ("Highest Average Compensation"). For purposes of the RIGP, compensation is defined to include the same components as under the Retirement Plan. The former Retirement Plan benefit, which the RIGP was established to guarantee, provides for a retirement benefit equal to 1.75 percent per year of service (maximum of 60 percent) of the Highest Average Compensation, reduced by 1.46 percent for each year of service (with a maximum offset of 50 percent) of the estimated primary insurance (social security) amount that an employee is entitled to receive upon retirement, other termination of employment or, if earlier, attainment of age 65 under the Social Security Act. The Manager also assumed Pipe Line's Benefit Equalization Plan (the "Equalization Plan"), which generally makes up the reductions caused by Internal Revenue Code limitations in the annual retirement benefit determined pursuant to the RIGP and in the Manager's contributions on behalf of an employee pursuant to the New Retirement Program and the Savings Plan. Those amounts not payable under the RIGP (or under affiliated company retirement plans and employee transfer policies), the New Retirement Program or the Savings Plan are payable under the Equalization Plan. Estimated annual benefits under the RIGP and the Equalization Plan, calculated under the single life annuity option form of pension, payable to participants at the normal retirement age of 65, are illustrated in the following table.
ESTIMATED ANNUAL RETIREMENT BENEFIT VERAGE OF 5A -------------------------------------------- HGHEST ANNUALI YEARS OF SERVICE OMPENSATIONC -------------------------------------------- LEVELS 15 20 25 30 35 - -------------- -------- -------- -------- -------- -------- $100,000......................... $ 22,765 $ 30,354 $ 37,942 $ 45,531 $ 52,041 150,000......................... 35,890 47,854 59,817 71,781 82,045 200,000......................... 49,015 65,354 81,692 98,031 112,049 250,000......................... 62,140 82,854 103,567 124,281 142,053 300,000......................... 75,265 100,354 125,442 150,531 172,056 350,000......................... 88,390 117,854 147,317 176,781 202,060 400,000......................... 101,515 135,354 169,192 203,031 232,064 450,000......................... 114,640 152,854 191,067 229,281 262,068 500,000......................... 127,765 170,354 212,942 255,531 292,071
47 The amounts shown in the above table have been reduced by the percentage equal to 1.46 percent for each year of service of the estimated maximum annual benefits payable under the Social Security Act in respect of each category. The amounts shown in the table would be further reduced, as described above, by the accrued benefit under the former Retirement Plan as of December 31, 1985, as well as by the aggregate amount of vested employer contributions under the New Retirement Program (plus or minus aggregate investment gains or losses thereon). Messrs. Wilson, Epperly and Ramsey have 22, 31 and 15 full credited years of service with the Manager and its affiliates, respectively, under the New Retirement Program, the RIGP and the Equalization Plan. Each of them is 100 percent vested under such plans. Mr. Muther has six full years of credited service with the Manager. He is not covered under the RIGP and is currently vested under the New Retirement Program. Officers of the Manager are also eligible to participate on a voluntary basis in the Manager's Savings Plan (the "Savings Plan"). An employee may elect to contribute to the Savings Plan annually a specified percentage of his pay, subject to certain limitations. Prior to the formation of the ESOP, the Manager contributed to the Savings Plan, out of its current or accumulated profits, for the benefit of each participating employee, an amount equal to his contributions up to a maximum of 5 percent of his pay (6 percent of pay if the employee has completed 20 or more years of service). Employees could elect to have the Manager's contributions invested in any of four investment funds. The Manager's contributions vested immediately for the first 2 percent of the employee's pay and at the rate of 20 percent per year of service (excluding the first year of service) for the remainder, with 100 percent vesting upon death, disability, retirement or attainment of age 65. Benefits are payable, at the election of the employee, in a lump-sum cash distribution after termination of employment or as an annuity upon retirement or a combination of the two. EMPLOYEE STOCK OWNERSHIP PLAN In connection with the Acquisition, the ESOP was formed for the benefit of employees of the General Partner, the Manager and Glenmoor. The ESOP holds an investment in BAC Preferred Stock. The BAC Preferred Stock is released to employee accounts in the proportion that current payments of principal and interest on the ESOP loan bear to the total of all principal and interest payments due under the ESOP loan. Individual employees are allocated shares based upon the ratio of their eligible compensation to total eligible compensation. Eligible compensation generally includes base salary, overtime payments and certain bonuses. Allocated BAC Preferred Stock receives stock dividends in lieu of cash, while cash dividends are used to pay principal and interest on the ESOP loan. The BAC Preferred Stock vests at the rate of 20 percent per year of service (excluding the first year of service), with 100 percent vesting upon death, disability, retirement or attainment of age 65. In general, benefits are payable, at the election of the employee, in a lump-sum cash distribution after termination of employment or as an annuity upon retirement or a combination of the two. BAC is required to repurchase the BAC Preferred Stock allocated to employees' accounts, upon termination of employment, at fair market value. The General Partner has approved a proposed ESOP Restructuring which is subject to approval by the Unitholders. See "Business--Introduction." DIRECTOR COMPENSATION The fee schedule for directors of the General Partner other than Messrs. Martinelli and Wilson 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. Mr. Varalli was entitled to the annual fee until March 1996. Directors' fees paid by the General Partner in 1996 to such directors amounted to $176,000. Mr. Martinelli, Chairman of the Board, Chief Executive Officer and Director of the General Partner is entitled to receive the following fees as Chairman of the Board of Directors: attendance fee 48 for each Board of Directors meeting, $1,500; and attendance fee for each committee meeting, $1,000 and, until March 1996, an annual fee of $20,000. Director's fees paid by the General Partner in 1996 to Mr. Martinelli, including $5,000 in annual fees, amounted to $12,500. Mr. Wilson, President, Chief Operating Officer and Director of the General Partner and Manager, is compensated by the Partnership for his services to the Manager (see "Summary Compensation Table") and does not receive any additional compensation or other benefits with respect to his services as a director of the General Partner. Members of the Board of Directors of the Manager were not compensated for their services as directors, and it is not currently anticipated that any such compensation will be paid in the future to directors of the Manager who are full-time employees of the Manager or any of its affiliates. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The Organization and Compensation Committee consists of Messrs. Kosnik, Varalli and Young. Mr. Varalli is a former executive officer of the General Partner. Mr. Young is counsel to the law firm of Morgan, Lewis and Bockius, LLP, which provides legal services to the Partnership. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No person or group is known to be the beneficial owner of more than 5 percent of the LP Units as of February 1, 1997. The following table sets forth certain information, as of February 1, 1997, 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 the Manager and by all directors and executive officers of the General Partner and the Manager as a group. Such information is based on data furnished by the persons named. Based on information furnished to the General Partner by such persons, no director or executive officer of the General Partner or the Manager owned beneficially, as of February 1, 1997, 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....................................... 7,500(2) Michael P. Epperly...................................... 140(2) A. Leon Fergenson....................................... 200 Edward F. Kosnik........................................ 5,000(2) Alfred W. Martinelli.................................... 4,500(2) William C. Pierce....................................... 800(2) Steven C. Ramsey........................................ 800(2) Ernest R. Varalli....................................... 6,500(2) C. Richard Wilson....................................... 2,500 Robert H. Young......................................... 2,500 All directors and executive officers as a group (consisting of 13 persons, including those named above)................................................. 32,540
- -------- (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. 49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership and the Operating Partnerships are managed by the General Partner and the Manager, respectively, pursuant to the Partnership Agreement, the several Amended and Restated Agreements of Limited Partnership of the Operating Partnerships (the "Operating Partnership Agreements") and the several Management Agreements between the Manager and the Operating Partnerships (the "Management Agreements"). On March 22, 1996, BAC acquired all of the common stock of the General Partner from a subsidiary of American Financial for $63 million. The common stock of BAC is owned by Glenmoor and certain managers of the Manager. Glenmoor is a limited liability partnership whose partners consist primarily of members of senior management of the General Partner and the Manager, including Alfred W. Martinelli, Chairman of the Board, Chief Executive Officer and Director of the General Partner and Manager; Ernest R. Varalli, Director of the General Partner and Manager; C. Richard Wilson, President, Chief Operating Officer and Director of the General Partner and Manager; Stephen C. Muther, Senior Vice President--Administration, General Counsel and Secretary of the General Partner and Manager; Steven C. Ramsey, Senior Vice President-- Finance and Chief Financial Officer of the General Partner and Manager; and Michael P. Epperly, Senior Vice President--Operations of the General Partner and Manager. All of the outstanding BAC Preferred Stock is owned by the ESOP. In connection with the Acquisition, the General Partner borrowed $63 million pursuant to a 15-year term loan from a third-party lender. The General Partner then loaned $63 million to the ESOP, which used the proceeds to purchase the BAC Preferred Stock. BAC used the $63 million proceeds of the sale of the BAC Preferred Stock to the ESOP, plus $6 million of proceeds from the sale of BAC common stock to Glenmoor and certain managers of the Manager, to pay the Acquisition purchase price, Acquisition-related expenses and to make a capital contribution to the General Partner to maintain adequate net worth. On March 22, 1996, the General Partner amended the Partnership Agreement to (a) extend the period under which the General Partner would agree to act as general partner of the Partnership until the later of (i) December 23, 2011 or (ii) the date the ESOP loan is paid in full, (b) clarify that fair market value of the GP Units includes the value of the right to receive incentive compensation for purposes of determining the amount required to be paid to the General Partner by any successor general partner of the Partnership, and (c) reduce the threshold for payment of Restricted Payments (as defined in the Partnership Agreement) by the General Partner or the Manager from $23,000,000 to $5,000,000. The Partnership received an opinion of counsel that the execution of the amendment to the Partnership Agreement would not (a) result in the loss of limited liability of any Limited Partner or (b) result in the Partnership or any Operating Partnership being treated as an association taxable as a corporation for federal income tax purposes. The amendment to the Partnership Agreement and related opinion of counsel were approved on behalf of the Partnership by a special committee of disinterested directors of the General Partner comprised of William C. Pierce, A. Leon Fergenson and Edward F. Kosnik. Also on March 22, 1996, the General Partner amended and restated the Incentive Compensation Agreement to (a) delete American Financial as a party to the agreement, (b) eliminate certain provisions relating to distribution support obligations which expired in 1991, and (c) clarify that the Incentive Compensation Agreement terminates if the General Partner is removed as general partner of the Partnership. The amended and restated agreement was approved on behalf of the Partnership by a special committee of disinterested directors of the Partnership comprised of William C. Pierce, A. Leon Fergenson and Edward F. Kosnik. Under the Partnership Agreement and the Operating Partnership Agreements, as well as the Management Agreements, the General Partner, the Manager and certain related parties are entitled 50 to reimbursement of all direct and indirect costs and expenses related to the business activities of the Partnership and the Operating Partnerships. These costs and expenses include insurance fees, consulting fees, general and administrative costs, compensation and benefits payable to officers and other employees of the General Partner and Manager, tax information and reporting costs, legal and audit fees and an allocable portion of overhead expenses. Such reimbursed amounts constitute a substantial portion of the revenues of the General Partner and the Manager. These costs and expenses reimbursed by the Partnership in 1996 totaled $61.1 million which includes $3.3 million in Glenmoor management fees and $341,000 of American Financial allocated expenses. Prior to the Acquisition, the Partnership reimbursed the General Partner for a Senior Management Charge from American Financial equaling $1,400,000 per annum, and an Overhead Allocation estimated to be 3% of overall American Financial non-executive administrative overhead or $450,000 per annum. This allocation was intended to cover the services of Messrs. Martinelli, Varalli, Hahl and other senior American Financial officers who from time to time provided advice regarding Partnership matters, as well as treasury, pension, human resources, risk management, claims and litigation services which the Partnership received from time to time from American Financial personnel. Amounts paid in 1996 to American Financial for allocated expenses equaled $341,000. See "Executive Compensation--Summary Compensation and Compensation Committee Interlocks and Insider Participation in Compensation Decisions." On March 22, 1996, the General Partner entered into the Glenmoor Management Agreement pursuant to which Glenmoor agreed to provide certain management functions to the General Partner and the Manager. Glenmoor receives an annual management fee, which 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, reimbursement for certain compensation costs and expenses and participation of Glenmoor employees in the Manager's employee benefit plans, including the ESOP. The aggregate management fee to Glenmoor is expected to be less than the amounts paid by the General Partner and the Manager to American Financial and senior management for similar services. The Glenmoor Management Agreement was approved by a special committee of disinterested directors of the General Partner comprised of William C. Pierce, A. Leon Fergenson and Edward F. Kosnik. Amounts paid in 1996 to Glenmoor for management fees equaled $3.3 million, including $0.8 million for the Senior Administrative Charge and $2.5 million of reimbursed expenses. The Incentive Compensation Agreement, as amended, provides that, subject to certain limitations and adjustments, if a quarterly cash distribution exceeds a target of $0.65 per LP Unit, the Partnership will pay the General Partner, in respect of each outstanding LP Unit, incentive compensation equal to (i) 25 percent of that portion of the distribution per LP Unit which exceeds the target quarterly amount of $0.65 but is not more than $0.70 plus (ii) 30 percent of the amount, if any, by which the quarterly distribution per LP Unit exceeds $0.70 but is not more than $0.80 plus (iii) 40 percent of the amount, if any, by which the quarterly distribution per LP Unit exceeds $0.80 but is not more than $0.90 plus (iv) 50 percent of the amount, if any, by which the quarterly distribution per LP Unit exceeds $0.90. The General Partner is also entitled to incentive compensation, under a comparable formula, in respect of special cash distributions exceeding a target special distribution amount per LP Unit. The target special distribution amount generally means the amount which, together with all amounts distributed per LP Unit prior to the special distribution compounded quarterly at 13 percent per annum, would equal $20.00 (the initial public offering price of the LP Units) compounded quarterly at 13 percent per annum from the date of the closing of the initial public offering. Incentive compensation paid by the Partnership to the General Partner for quarterly cash distributions totaled $1,326,000 in 1996; no special cash distributions have ever been paid by the Partnership. The General Partner has approved a proposed ESOP Restructuring, which is subject to approval by the Unitholders. Under the terms of the proposed ESOP Restructuring, certain of the foregoing 51 agreements, including the Glenmoor Management Agreement and the Incentive Compensation Agreement, would be amended to, among other things, eliminate permanently the obligation of the Partnership and the Operating Partnerships to reimburse the General Partner, the Manager and Glenmoor for certain executive compensation costs and to reduce the amount of incentive compensation to be paid by the Partnership to the General Partner. See "Business--Introduction." On February 12, 1997, the General Partner announced a quarterly distribution of $0.75 per GP and LP Unit payable on February 28, 1997. As such distribution exceeds a target of $0.65 per LP Unit, the Partnership will pay the General Partner incentive compensation aggregating $331,000 as a result of this distribution. Based in part on the savings available to the Partnership from the proposed ESOP Restructuring, the Board of Directors of the General Partner announced its intention to increase the regular quarterly cash distributions by $.10, to $.85, per LP Unit, provided that the ESOP Restructuring is approved by the Unitholders and there has been no material change in the business of the Partnership. 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: (1) and (2) Financial Statements and Financial Statement Schedule--see Index to Financial Statements and Financial Statement Schedule appearing on page 20. (3) Exhibits, including those incorporated by reference. The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.
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 23, 1986.(1) (Exhibit 3.1) 3.2 --Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of the Partnership dated July 18, 1995.(10) (Exhibit 3.1) 3.3 --Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of the Partnership dated March 22, 1996.(11) (Exhibit 3.3) 3.4 --Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of November 18, 1986.(1) (Exhibit 3.1) 4.1 --Indenture of Mortgage and Deed of Trust and Security Agreement, dated as of December 15, 1986, by Buckeye to Pittsburgh National Bank and J. G. Routh, as Trustees.(1) (Exhibit 4.1) 4.2 --Note Purchase Agreement, dated as of December 15, 1986, among Buckeye and the several purchasers named therein relating to $300,000,000 of First Mortgage Notes.(1) (Exhibit 4.2) 4.3 --First Supplemental Indenture of Mortgage and Deed of Trust and Security Agreement, dated as of December 1, 1987, by Buckeye Pipe Line Company, L.P., to Pittsburgh National Bank and J. G. Routh, as Trustees.(2) (Exhibit 4.4) 4.4 --Second Supplemental Indenture and Deed of Trust and Security Agreement, dated as of November 30, 1992 by Buckeye Pipe Line Company, L.P. to Pittsburgh National Bank and J. G. Routh, as Trustees.(3) (Exhibit 4.5) 4.5 --Third Supplemental Indenture and Deed of Trust and Security Agreement, dated as of December 31, 1993, by Buckeye Pipe Line Company, L.P. to Pittsburgh National Bank and J. G. Routh, as Trustees.(8) (Exhibit 4.5) 4.6 --Note Purchase and Private Shelf Agreement, dated as of December 31, 1993 between Buckeye Pipe Line Company, L.P. and The Prudential Insurance Company of America.(8) (Exhibit 4.6) 4.7 --Fourth Supplemental Indenture of Mortgage and Deed of Trust and Security Agreement, dated as of March 15, 1994, by Buckeye Pipe Line Company, L.P., to PNC Bank, National Association and J. G. Routh, as Trustees.(9) (Exhibit 4.8) 4.8 --Fifth Supplemental Indenture of Mortgage and Deed of Trust and Security Agreement, dated as of March 30, 1994, by Buckeye Pipe Line Company, L.P., to PNC Bank, National Association and J. G. Routh, as Trustees.(9) (Exhibit 4.9)
53
EXHIBIT NUMBER (REFERENCED TO ITEM 601 OF REGULATION S-K) --------------- 4.9 --Certain instruments with respect to long-term debt of the Operating Partnerships which relate to debt that does not exceed 10 percent of the total assets of the Partnership and its consolidated subsidiaries are omitted pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, 17 C.F.R. (S)229.601. The Partnership hereby agrees to furnish supplementally to the Securities and Exchange Commission a copy of each such instrument upon request. 10.1 --Amended and Restated Agreement of Limited Partnership of Buckeye, dated as of December 23, 1986.(1)(4) (Exhibit 10.1) 10.2 --Management Agreement, dated March 22, 1996 between the General Partner and Glenmoor.(11) (Exhibit 10.2) 10.3 --Management Agreement, dated November 18, 1986, between the Manager and Buckeye.(1)(5) (Exhibit 10.4) 10.4 --Amended and Restated Incentive Compensation Agreement, dated as of March 22, 1996, between the General Partner and the Partnership.(11) (Exhibit 10.4) 10.5 --Annual Incentive Compensation Plan for key employees of the Manager.(1)(6) (Exhibit 10.8) 10.6 --Form of Long-Term Incentive Compensation Plan for key employees of the Manager.(1)(6) (Exhibit 10.9) 10.7 --Unit Option and Distribution Equivalent Plan of Buckeye Partners, L.P.(6)(7) (Exhibit 10.10) 10.8 --Buckeye Management Company Unit Option Loan Program.(6)(7) (Exhibit 10.11) 10.9 --Buckeye Pipe Line Company Benefit Equalization Plan.(3)(6) (Exhibit 10.10) *11.1 --Computation of earnings per Unit. 21.1 --List of subsidiaries of the Partnership.(11) (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) 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 March 31, 1988. (3) Previously filed with the Securities and Exchange Commission as the Exhibit to Buckeye Partners, L.P. Annual Report on Form 10-K for the year 1992. (4) 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. (5) 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. (6) Represents management contract or compensatory plan or arrangement. (7) 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. (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 1993. 54 (9) 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 March 31, 1994. (10) 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. (11) Previously filed with the Securities and Exchange Commission as the Exhibit to the Buckeye Partners, L.P. Annual Report on Form 10-K for the year 1995. *Filed herewith (b) Reports on Form 8-K filed during the quarter ended December 31, 1996: None 55 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Buckeye Partners, L.P. (Registrant) By: Buckeye Management Company, as General Partner Dated: March 11, 1997 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 11, 1997 By: /s/ Brian F. Billings --------------------------------- Brian F. Billings Director Dated: March 11, 1997 By: /s/ A. Leon Fergenson --------------------------------- A. Leon Fergenson Director Dated: March 11, 1997 By: /s/ Edward F. Kosnik --------------------------------- Edward F. Kosnik Director Dated: March 11, 1997 By: /s/ Alfred W. Martinelli --------------------------------- Alfred W. Martinelli Chairman of the Board and Director (Principal Executive Officer) Dated: March 11, 1997 By: /s/ William C. Pierce --------------------------------- William C. Pierce Director Dated: March 11, 1997 By: /s/ Ernest R. Varalli --------------------------------- Ernest R. Varalli Director Dated: March 11, 1997 By: /s/ C. Richard Wilson --------------------------------- C. Richard Wilson President, Chief Operating Officer and Director Dated: March 11, 1997 By: /s/ Robert H. Young --------------------------------- Robert H. Young Director 56 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, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated January 23, 1997; such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Buckeye Partners, L.P. and subsidiaries referred to in Item 14. This consolidated financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche llp Philadelphia, Pennsylvania January 23, 1997 S-1 SCHEDULE I BUCKEYE PARTNERS, L.P. REGISTRANT'S CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS) BALANCE SHEETS
DECEMBER 31, ----------------- 1996 1995 -------- -------- Assets Current assets Cash and cash equivalents................................. $ 1,210 $ 4,209 Temporary investments..................................... 5,273 895 Other current assets...................................... 73 44 -------- -------- Total current assets.................................... 6,556 5,148 Investments in and advances to subsidiaries (at equity)..... 275,620 262,030 -------- -------- Total assets............................................ $282,176 $267,178 ======== ======== Liabilities and partners' capital Current liabilities......................................... $ 6,197 $ 4,993 -------- -------- Partners' capital General Partner........................................... 2,760 2,622 Limited Partners.......................................... 273,219 259,563 -------- -------- Total partners' capital................................. 275,979 262,185 -------- -------- Total liabilities and partners' capital................. $282,176 $267,178 ======== ========
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Equity in income of subsidiaries................. $ 50,674 $ 50,388 $ 46,250 Operating expenses............................... (8) (29) (16) Interest income.................................. 55 20 -- Interest and debt expense........................ (58) (58) (57) Incentive compensation to General Partner........ (1,326) (481) (360) -------- -------- -------- Net income................................. $ 49,337 $ 49,840 $ 45,817 ======== ======== ======== STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net income..................................... $ 49,337 $ 49,840 $ 45,817 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries....... (13,590) (16,341) (11,982) Change in assets and liabilities: Temporary investments...................... (4,378) 1,360 (2,005) Other current assets....................... (29) (14) (12) Current liabilities........................ 1,204 2,954 347 -------- -------- -------- Net cash provided by operating activities.. 32,544 37,799 32,165 Cash flows from financing activities: Capital contributions.......................... 10 4 4 Proceeds from exercise of unit options......... 974 374 428 Distributions to Unitholders................... (36,527) (34,009) (33,968) -------- -------- -------- Net (decrease) increase in cash and cash equivalents................................... (2,999) 4,168 (1,371) Cash and cash equivalents at beginning of period........................................ 4,209 41 1,412 -------- -------- -------- Cash and cash equivalents at end of period..... $ 1,210 $ 4,209 $ 41 ======== ======== ========
See footnotes to consolidated financial statements of Buckeye Partners, L.P. S-2 EX-11.1 2 COMPUTATIONS OF EARNINGS PER UNIT EXHIBIT 11.1 BUCKEYE PARTNERS, L.P. COMPUTATION OF EARNINGS PER UNIT (IN THOUSANDS, EXCEPT FOR UNITS AND PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- Income from continuing operations before extraordinary charge........................ $ 49,337 $ 49,840 $ 48,086 Extraordinary charge on early extinguishment of debt..................................... -- -- (2,269) ---------- ---------- ---------- Net income................................... $ 49,337 $ 49,840 $ 45,817 ========== ========== ========== Primary earnings per Unit: Income from continuing operations before extraordinary charge...................... $ 4.05 $ 4.10 $ 3.96 Extraordinary charge on early extinguishment of debt.................... -- -- (0.19) ---------- ---------- ---------- Net income................................. $ 4.05 $ 4.10 $ 3.77 ========== ========== ========== Fully-diluted earnings per Unit: Income from continuing operations before extraordinary charge...................... $ 4.04 $ 4.10 $ 3.96 Extraordinary charge on early extinguish- ment of debt.............................. -- -- (0.19) ---------- ---------- ---------- Net income................................. $ 4.04 $ 4.10 $ 3.77 ========== ========== ========== Average number of Units outstanding: Units outstanding at December 31........... 12,173,353 12,146,124 12,131,640 Exercise of Options reduced by the number of Units purchased with proceeds (Primary)................................. 20,141 17,387 20,376 ---------- ---------- ---------- Total Units outstanding--Primary........... 12,193,494 12,163,511 12,152,016 ========== ========== ========== Units outstanding at December 31........... 12,173,353 12,146,124 12,131,640 Exercise of Options reduced by the number of Units purchased with proceeds (Fully- diluted).................................. 30,853 20,563 20,268 ---------- ---------- ---------- Total Units outstanding--Fully-diluted..... 12,204,206 12,166,687 12,151,908 ========== ========== ==========
- -------- Although not required to be presented in the income statement under provisions of APB Opinion No. 15, this calculation is submitted in accordance with Regulations S-K item 601(b)(11). EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 DEC-31-1996 17,416 14,528 12,536 0 1,732 53,927 563,512 51,866 567,837 40,267 202,100 0 0 0 275,979 567,837 0 182,955 0 114,171 0 0 21,854 49,337 0 49,337 0 0 0 49,337 4.05 4.04
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