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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003 or
_____ Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 1-9356
BUCKEYE PARTNERS, L.P.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2432497
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5002 Buckeye Rd.
P. O. Box 368
Emmaus, Pennsylvania 18049
- --------------------------------- ----------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 484-232-4000
Not Applicable
- -----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report).
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accel-
erated filer (as defined in Exchange Act 12b-2). Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at October 20, 2003
- ------------------------- -------------------------------
Limited Partnership Units 28,712,646 Units
BUCKEYE PARTNERS, L.P.
INDEX
Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income 1
(unaudited) for the three months and nine months
ended September 30, 2003 and 2002
Condensed Consolidated Balance Sheets (unaudited) 2
September 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Cash Flows 3
(unaudited) for the three months and nine months
ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 4-10
Item 2. Management's Discussion and Analysis 11-21
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures 21
about Market Risk
Item 4. Controls and Procedures 22
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Buckeye Partners, L.P.
Condensed Consolidated Statements of Income
(In thousands, except per Unit amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------ -------------------
2003 2002 2003 2002
---- ---- ---- ----
$ 69,990 $63,582 Revenue $202,814 $181,534
- -------- ------- -------- --------
Costs and expenses
32,223 28,083 Operating expenses 96,990 82,040
5,935 5,136 Depreciation and amortization 16,913 15,419
2,863 3,065 General and administrative expenses 9,674 10,066
- -------- ------- -------- --------
41,021 36,284 Total costs and expenses 123,577 107,525
- -------- ------- -------- --------
28,969 27,298 Operating income 79,237 74,009
- -------- ------- -------- --------
Other income (expenses)
1,311 876 Investment income 2,443 1,565
(7,082) (5,132) Interest and debt expense (17,178) (15,709)
Premium paid on retirement of
(45,464) - long-term debt (45,464) -
(3,597) (3,008) Minority interests and other (10,616) (8,897)
- -------- ------- -------- --------
(54,832) (7,264) Total other income (expenses) (70,815) (23,041)
- -------- ------- -------- --------
$(25,863) $20,034 Net income (loss) $ 8,422 $ 50,968
======== ======= ======== ========
Net income (loss) allocated to
$ (237) $ 180 General Partner $ 58 $ 458
Net income (loss) allocated to
$(25,626) $19,854 Limited Partners $ 8,364 $ 50,510
Earnings (loss) per Partnership Unit
- basic:
Net income (loss) allocated to
General and Limited Partners per
$ (0.89) $ 0.74 Partnership Unit $ 0.29 $ 1.88
======= ======= ======= =======
Earnings (loss) per Partnership Unit
- assuming dilution:
Net income (loss) allocated to
General and Limited Partners per
$ (0.89) $ 0.74 Partnership Unit $ 0.29 $ 1.87
======== ======= ======== ========
See notes to consolidated financial statements.
Buckeye Partners, L.P.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, December 31,
2003 2002
---- ----
Assets
Current assets
Cash and cash equivalents $ 19,447 $ 11,208
Trade receivables 14,307 17,203
Inventories 9,905 8,424
Prepaid and other current assets 11,582 7,007
-------- --------
Total current assets 55,241 43,842
Property, plant and equipment, net 742,504 727,450
Goodwill 11,355 11,355
Other non-current assets 110,705 73,524
-------- --------
Total assets $919,805 $856,171
======== ========
Liabilities and partners' capital
Current liabilities
Accounts payable $ 6,073 $ 8,062
Accrued and other current liabilities 25,917 22,688
-------- --------
Total current liabilities 31,990 30,750
Long-term debt 450,000 405,000
Minority interests 17,693 3,498
Other non-current liabilities 46,368 59,491
-------- --------
Total liabilities 546,051 498,739
-------- --------
Commitments and contingent liabilities - -
Partners' capital
General Partner 2,465 2,870
Limited Partners 372,669 355,475
Receivable from exercise of options (1,028) (913)
Accumulated other comprehensive income (352) -
-------- --------
Total partners' capital 373,754 357,432
-------- --------
Total liabilities and partners'
capital $919,805 $856,171
======== ========
See notes to condensed consolidated financial statements.
Buckeye Partners, L.P.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 8,422 $ 50,968
-------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Premium on retirement of long term-debt 45,464 -
Depreciation and amortization 16,913 15,419
Minority interests 2,008 715
Change in assets and liabilities,
net of acquisitions:
Trade receivables 2,896 (836)
Inventories (1,481) (640)
Prepaid and other current assets (4,575) (8,840)
Accounts payable (1,989) (1,866)
Accrued and other current liabilities 3,229 (2,387)
Other non-current assets 830 (948)
Other non-current liabilities 1,079 159
-------- --------
Total adjustments from operating
activities 64,374 776
-------- --------
Net cash provided by operating activities 72,796 51,744
-------- --------
Cash flows from investing activities:
Capital expenditures (27,866) (23,419)
Investment in West Texas LPG Pipeline,
Limited Partnership (28,500) -
Investment in West Shore Pipe Line Company (7,488) -
Net expenditures for disposal
of property, plant and equipment (393) (651)
-------- --------
Net cash used in investing activities (64,247) (24,070)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of Partnership Units 59,936 -
Proceeds from exercise of unit options 490 387
Distributions to minority interests (2,367) (596)
Proceeds from issuance of long-term debt 474,000 34,000
Payment of long-term debt (429,000) -
Premium paid on retirement of long-term debt (45,464) -
Payment of debt issuance fees (5,731) -
Paid-in capital related to pipeline project 1,736 -
Distributions to Unitholders (53,910) (50,945)
-------- --------
Net cash used in financing activities (310) (17,154)
-------- --------
Net increase in cash and cash equivalents 8,239 10,520
Cash and cash equivalents at beginning of period 11,208 12,946
-------- --------
Cash and cash equivalents at end of period $ 19,447 $ 23,466
======== ========
Supplemental cash flow information:
Cash paid during the period for interest
(net of amount capitalized) $ 14,269 $ 15,624
Capitalized interest $ 301 $ 725
Non cash change in assets and liabilities:
Minimum pension liability $ (352) $ -
See notes to consolidated financial statements.
BUCKEYE PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements of Buckeye Partners, L.P. (the "Partnership"), which are
unaudited except that the Balance Sheet as of December 31, 2002 is derived
from audited financial state ments, include all adjustments necessary to
present fairly the Partnership's financial position as of September 30, 2003,
the results of operations for the three and nine month periods ended September
30, 2003 and 2002 and cash flows for the nine month periods ended September
30, 2003 and 2002. The results of operations for the three and nine months
ended September 30, 2003 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2003.
Buckeye Pipe Line Company, L.P., Laurel Pipe Line Company, L.P, Everglades
Pipe Line Company, L.P. and Buckeye Pipe Line Holdings, L.P. (formerly Buckeye
Tank Terminals, L.P.) are referred to collectively as the "Operating
Partnerships."
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the condensed consolidated financial statements do not include all
of the information and notes normally included with financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2002.
2. SEGMENT INFORMATION
During the three and nine month periods ended September 30, 2003 and 2002, the
Partnership had one business segment, the transportation segment. The
transportation segment derives its revenues primarily from the transportation
of refined petroleum products that it receives from refineries, connecting
pipelines and marine terminals. Other transportation segment revenues are
received from storage and terminal throughput services of refined petroleum
products and contract operation of third-party pipelines. Revenues from the
transportation segment are, for the most part, subject to regulation by the
Federal Energy Regulatory Commission or are under contract.
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. Buckeye Pipe Line Company, the
general partner of the Partnership, (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 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
Various claims for the cost of cleaning up releases of hazardous substances
and for damage to the environment resulting from the activities of the
Operating Partnerships or their predecessors have been asserted and may be
asserted in the future under various federal and state laws. The General
Partner believes that the generation, handling and disposal of hazardous
substances by the Operating Partnerships and their predecessors have been in
material compliance with applicable environmental and regulatory requirements.
The total potential remediation costs to be borne by the Operating
Partnerships relating to these clean-up sites cannot be reasonably estimated
and could be material. With respect to certain sites, however, the Operating
Partnership involved is one of several or as many as several hundred
potentially responsible parties that would share in the total costs of clean-
up under the principle of joint and several liability. The General Partner is
unable to determine the timing or outcome of pending proceedings.
4. DEBT
During the three months ended September 30, 2003, the Partnership concluded
several financing transactions. On July 7, 2003, the Partnership sold $300
million aggregate principal of its 4 5/8% Notes due 2013 in an underwritten
public offering. Proceeds from the note offering, after underwriters' fees
and expenses, were approximately $296.1 million.
On August 14, 2003, the Partnership sold $150 million aggregate principal of
its 6 3/4% Notes due 2033 in a Rule 144A offering. Proceeds from the note
offering, after underwriters' fees and expenses were approximately $147.6
million. Proceeds from these offerings were used in part to repay all amounts
outstanding under the Partnership's 5-year Revolving Credit Agreement ($117
million at June 30, 2003) and to repay the Buckeye Pipe Line Company, L.P.
$240 million Senior Notes, which were scheduled to mature in 2024. The
amounts outstanding under the 5-year Revolving Credit Agreement were repaid on
July 10, 2003 and the $240 Senior Notes were repaid on August 19, 2003.
In connection with the repayment of the $240 million Senior Notes, Buckeye
Pipe Line Company, L.P. was required to pay a yield maintenance premium of
$45.5 million to the holders of the Senior Notes. The yield maintenance
premium has been charged to expense in the accompanying financial statements.
The Partnership has a $277.5 million Revolving Credit Agreement with a
syndicate of banks led by SunTrust Bank that expires in September 2006. In
September 2003, the Partnership entered into a 364-day Revolving Credit
Agreement for $100 million with another syndicate of banks also led by
SunTrust Bank. The new agreement replaces the Partnership's $85 million 364-
day agreement which was set to expire in September 2003. Together, the $277.5
million and $100 million agreements are referred to as the "Credit
Facilities." At September 30, 2003, the Partnership had no amounts outstanding
under the Credit Facilities.
The Credit Facilities contain certain covenants that affect the Partnership.
Generally, the Credit Facilities (a) limit outstanding indebtedness of the
Partnership based on certain financial ratios contained in the Credit
Facilities, (b) prohibit the Partnership from creating or incurring certain
liens on its property (c) prohibit the Partnership from disposing of property
that is material to its operations (d) limit consolidations, mergers and asset
transfers by the Partnership. At September 30, 2003, the Partnership was in
compliance with the covenants contained in the Credit Facilities.
The fair value of the Partnership's debt is estimated to be $437 million and
$429 million as of September 30, 2003 and December 31, 2002, respectively.
The values at September 30, 2003 and December 31, 2002 were calculated using
interest rates currently available to the Partnership for issuance of debt
with similar terms and remaining maturities.
5. PARTNERS' CAPITAL AND EARNINGS PER PARTNERSHIP UNIT
Partners' capital consists of the following:
Receivable Accumulated
from Other
General Limited Exercise Comprehensive
Partner Partners of Options Income Total
------- -------- ---------- ------------- -----
(In thousands)
Partners' Capital - 1/1/03 $2,870 $355,475 $ (913) $ - $357,432
Net income 58 8,364 - - 8,422
Distributions (463) (53,447) - - (53,910)
Net proceeds from
issuance of 1,750,000
Limited Partnership Units - 59,936 - - 59,936
Paid-in capital related to
pipeline project - 1,736 - - 1,736
Net change in receivable
from exercise of options - - (115) - (115)
Exercise of unit options - 605 - - 605
Minimum pension liability - - - (352) (352)
------ -------- ------- ----- --------
Partners' Capital - 9/30/03 $2,465 $372,669 $(1,028) $(352) $373,754
====== ======== ======= ===== ========
The following is a reconciliation of basic and diluted net income per
Partnership Unit for the three month and nine month periods ended
September 30:
Three Months Ended September 30,
-------------------------------------------------
2003 2002
--------------------- ---------------------
Income Units Per Income Units Per
(Numer- (Denomi- Unit (Numer- (Denomi- Unit
ator) nator) Amount ator) nator) Amount
------- -------- ------ ------- -------- ------
(in thousands, except per unit amounts)
Income (loss) from
continuing operations $(25,863) $20,034
-------- -------
Basic earnings per
Partnership Unit (25,863) 28,953 $(0.89) 20,034 27,176 $0.74
Effect of dilutive
securities - options - - - - 48 -
-------- ------ ------ ------ ------ -----
Diluted earnings per
Partnership Unit $(25,863) 28,953 $(0.89) $20,034 27,224 $0.74
======== ====== ====== ======= ====== =====
Nine months Ended September 30,
-------------------------------------------------
2003 2002
--------------------- ---------------------
Income Units Per Income Units Per
(Numer- (Denomi- Unit (Numer- (Denomi- Unit
ator) nator) Amount ator) nator) Amount
------- -------- ------ ------- -------- ------
(in thousands, except per unit amounts)
Income from continuing
operations $ 8,422 $50,968
------- -------
Basic earnings per
Partnership Unit 8,422 28,576 $0.29 50,968 27,171 $ 1.88
Effect of dilutive
securities - options - 55 - - 54 (0.01)
------- ------ ----- ------ ------ ------
Diluted earnings per
Partnership Unit $ 8,422 28,631 $0.29 $50,968 27,225 $ 1.87
======= ====== ===== ======= ====== ======
Options reported as dilutive securities are related to unexercised options
outstanding under the Partnership's Unit Option Plan. Options were not
included in calculating the Partnership's diluted loss per unit for the three
months ended September 30, 2003 because the effect of the options would have
been antidilutive.
6. CASH DISTRIBUTIONS
The Partnership will generally make quarterly cash distributions of
substantially all of its available cash, generally defined as consolidated
cash receipts less consolidated cash expenditures and such retentions for
working capital, anticipated cash expenditures and contingencies as the
General Partner deems appropriate.
On October 23, 2003, the Partnership declared a cash distribution of $0.6375
per unit payable on November 28, 2003 to Unitholders of record on November 5,
2003. The total distribution will amount to approximately $18,460,000.
7. RELATED PARTY ACCRUED CHARGES
Accrued and other current liabilities include $4,118,000 and $4,478,000 due to
the General Partner for payroll and other reimbursable costs at September 30,
2003 and December 31, 2002, respectively.
8. UNIT OPTION AND DISTRIBUTION EQUIVALENT PLAN
The Partnership has 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.
If compensation cost had been determined based on the fair value at the time
of the grant dates for awards consistent with SFAS 123, the Partnership's net
income and earnings per share would have been as indicated by the proforma
amounts below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per unit amounts)
Net income (loss) as reported $(25,863) $20,034 $ 8,422 $50,968
Stock-based employee
compensation cost
included in net income - - - 2
Stock-based employee
compensation cost that
would have been included
in net income under the
fair value method (68) (54) (182) (146)
-------- ------- ------- -------
Pro forma net income
as if the fair value
method had been applied
to all awards $(25,931) $19,980 $ 8,240 $50,824
======== ======= ======= =======
Basic earnings per unit:
As reported $(0.89) $0.74 $0.29 $1.88
Pro forma $(0.90) $0.74 $0.29 $1.87
Diluted earnings per unit:
As reported $(0.89) $0.74 $0.29 $1.87
Pro forma $(0.90) $0.73 $0.29 $1.87
9. ACQUISITIONS
On August 8, 2003, the Partnership acquired a 20 percent interest in West
Texas LPG Pipeline, Limited Partnership ("WTP") for approximately $28.5
million. WTP owns and operates a pipeline system that delivers natural gas
liquids to Mont Belvieu, Texas for fractionation. The natural gas liquids are
delivered to the WTP pipeline system from the Rocky Mountain area via
connecting pipelines and from gathering fields located in West and Central
Texas. The majority owner and operator of WTP are affiliates of Chevron
Texaco, Inc. The Partnership accounts for its interest in WTP using the
equity method of accounting.
On September 30, 2003 the Partnership also invested $7.5 million to acquire an
additional 2,340 shares, or 6.4 percent, of West Shore Pipe Line Company. The
Partnership's ownership interest in West Shore now totals approximately 25
percent. The Partnership has determined that the equity method of accounting
for its investment in West Shore is now appropriate, instead of the cost
method previously used. The change from the cost to the equity method did not
have a material effect on the financial statements of the Partnership.
10. ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The adoption of SFAS No. 143 did not
have a material effect on the Partnership's consolidated financial position or
results of operations.
In May 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds the automatic treatment of gains or losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in APB No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
SFAS No. 145 also requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to a sale-leaseback
transaction and makes various technical corrections to existing
pronouncements. SFAS No. 145 was effective for fiscal years beginning after
December 31, 2002. As a result of the adoption of SFAS No. 145, the yield
maintenance premium of $45.5 million paid in the third quarter 2003 has been
recorded as other income (expense) in the accompanying financial statements
rather than as an extraordinary item.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies the guidance
provided in Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." Generally,
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, rather than
when management commits to a plan of exit or disposal as is called for by EITF
Issue No. 94-3. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146 did
not have a material effect on the Partnership's financial statements.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 established
requirements for accounting and disclosure of guarantees issued to third
parties for various transactions. The accounting requirements of FIN 45 are
applicable to guarantees issued after December 31, 2002. The disclosure
requirements of FIN 45 are applicable to financial statements issued for
periods ending after December 15, 2002. The adoption of FIN 45 did not have a
material effect on the Partnership's financial statements.
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure", SFAS 148 amended the implementation
provisions of SFAS 123 and required changes in disclosures in financial
statements. The provisions of SFAS 148 were applicable for years ending after
December 15, 2002 except for certain quarterly disclosures, which were
applicable for interim periods beginning after December 15, 2002. The
Partnership has not changed its method of accounting for stock-based
compensation and, therefore, is subject only to the revised disclosure
provisions of SFAS 148. Such quarterly disclosures have been provided
commencing in the first quarter of 2003.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 establishes accounting and
disclosure requirements for ownership interests in entities that have certain
financial or ownership characteristics (sometimes known as Special Purpose
Entities). FIN 46 is applicable for variable interest entities created after
January 31, 2003 and becomes effective in the first fiscal year or interim
accounting period ending after December 15, 2003 for variable interest
entities created before February 1, 2003. The Partnership does not anticipate
that the provisions of FIN 46 will have a material effect on its financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activity". SFAS No. 149 amends certain
provisions related to Statement No. 133, and is generally effective for
transactions entered into after June 30, 2003. The adoption of SFAS No. 149
did not have a material effect on the Partnership's consolidated financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 affects how an entity measures and reports financial instruments that have
characteristics of both liabilities and equity, and is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after June
15, 2003. The FASB continues to address certain implementation issues
associated with the application of SFAS No. 150, including those related to
mandatory redeemable financial instruments representing non-controlling
interests in subsidiaries' consolidated financial statements. The Partnership
will continue to monitor the actions of the FASB and assess the impact, if
any, on its consolidated financial statements. The effective provisions of
SFAS No. 150 did not have a material impact on the Partnership's consolidated
financial position or results of operations.
In May 2003 the Emerging Issues Task Force (EITF) of the FASB issued Consensus
No. 01-8 "Determining Whether an Arrangement Contains a Lease." Consensus No.
01-8 establishes criteria for determining when certain contracts, or portions
of contracts, should be subject to the provisions of SFAS No. 13 - "Accounting
for Leases" and related pronouncements. EITF Consensus No. 01-8 generally is
effective for arrangements entered into or modified in the first quarter
beginning after May 28, 2003. The adoption of EITF Consensus No. 01-8 did not
have a material effect on the Partnership's financial condition or results of
operations.
11. SUBSEQUENT EVENT
On October 28, 2003, the Partnership entered into an interest rate swap
agreement with a financial institution with respect to $100 million principal
amount (the "notional amount") of its 4 5/8% Notes due 2013 (the "Notes").
The contract calls for the Partnership to receive fixed payments from the
financial institution at a rate of 4 5/8% of the notional amount in exchange
for floating rate payments from the Partnership based on the notional amount
using a rate equal to the six-month LIBOR (determined in arrears) minus 0.28%.
The Partnership entered into the agreement in order to hedge its fair value
risk associated with a portion of the Notes. The agreement terminates on the
maturity date of the Notes and interest amounts under the agreement are
payable semiannually on the same date as interest payments on the Notes. At
the inception of the agreement, the Partnership designated the agreement as a
fair value hedge and determined that no ineffectiveness will result from the
use of the hedge.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Overview
During the third quarter of 2003 the Partnership completed several financing
transactions designed to improve its financial structure and expand its
ability to grow through acquisitions and capital projects. These transactions
improved the Partnership's financial profile by (1) reducing the Partnership's
average cost of debt, (2) removing certain covenants contained in the $240
million Senior Notes which limited the Partnership's flexibility in expanding
its business and (3) removing debt outstanding at the Operating Partnership
level. Previously, the Partnership's debt obligations were effectively junior
to the $240 million Senior Notes which were obligations of Buckeye Pipe Line
Company, L.P., a subsidiary operating partnership.
On July 7, 2003, the Partnership sold $300 million aggregate principal of its
4 5/8% Notes due 2013 in an underwritten public offering. Proceeds from the
note offering after underwriters' fees and expenses were approximately $296.1
million.
On August 14, 2003, the Partnership sold $150 million aggregate principal of
its 6 3/4% Notes due 2033 in a Rule 144A offering. Proceeds from the note
offering after fees and expenses were approximately $147.6 million. Proceeds
from these offerings were used in part to repay all amounts outstanding under
its 5-year Revolving Credit Agreement ($117 million at June 30, 2003) and to
repay the Buckeye Pipe Line Company, L.P. $240 million Senior Notes, which
were scheduled to mature in 2024.
In connection with the repayment of the $240 million Senior Notes, Buckeye
Pipe Line Company, L.P. was required to pay a yield maintenance premium of
$45.5 million to the holders of the Senior Notes. The yield maintenance
premium has been charged to expense in the Partnership's consolidated
financial statements.
In September 2003, the Partnership entered into 364-day Revolving Credit
Agreement for $100 million with a syndicate of banks led by SunTrust Bank.
The new agreement replaces the Partnership's $85 million 364-day agreement
which was set to expire in September 2003. The 364-day facility, together
with the Partnership's existing $277.5 million Revolving Credit Agreement
expiring September 2005 (together, the "Credit Facilities") provide for up to
$377.5 million of credit available to the Partnership.
On October 28, 2003, the Partnership entered into an interest rate swap
agreement with a financial institution with respect to $100 million principal
amount (the "notional amount") of its 4 5/8% Notes due 2013 (the "Notes").
The contract calls for the Partnership to receive fixed payments from the
financial institution at a rate of 4 5/8% of the notional amount in exchange
for floating rate payments from the Partnership based on the notional amount
using a rate equal to the six-month LIBOR (determined in arrears) minus 0.28%.
The Partnership entered into the agreement in order to hedge its fair value
risk associated with a portion of the Notes. The agreement terminates on the
maturity date of the Notes and interest amounts under the agreement are
payable semiannually on the same date as interest payments on the Notes. At
the inception of the agreement, the Partnership designated the agreement as a
fair value hedge and determined that no ineffectiveness will result from the
use of the hedge. Based on LIBOR at the time of the transaction the
Partnership will save $3.69 million per year compared to interest expense the
Partnership would have incurred had the Partnership not entered into this
transaction. Changes in LIBOR, however, will impact the interest rate expense
incurred in connection with the interest rate swap.
During the three months ended September 30, 2003, the Partnership also
invested approximately $36 million to acquire a 20 percent interest in West
Texas LPG Pipe Line, L.P. and an additional 2,304 shares of West Shore Pipe
Line Company. At September 30, 2003, the Partnership owns approximately 25
percent of the shares of West Shore.
After the $45.5 million charge relating to the payment of the yield
maintenance premium associated with the $240 million Senior Notes, the
Partnership had a net loss of $25.9 million, or $0.89 per unit, for the third
quarter of 2003. The Partnership's net income before the yield maintenance
premium was $19.6 million, or $0.68 per unit, compared to net income of $20.0
million, or $0.74 per unit, last year. For the nine months ended September
30, 2003, the Partnership had net income of $8.4 million, or $0.29 per unit.
The Partnership's net income before the yield maintenance premium for the nine
months ended September 30, 2003 was $53.9 million, or $1.89 per unit compared
to $51.0 million, or $1.88 per unit, in the nine months ended September 30,
2002.
To supplement its financial statements presented in accordance with generally
accepted accounting principles ("GAAP"), the Partnership has presented the
measure of "net income before the yield maintenance premium" to enhance the
user's overall understanding of the Partnership's current financial
performance. Specifically, the Partnership believes that the presentation of
net income before the yield maintenance premium provides useful information to
both management and investors by allowing a meaningful comparison of the
Partnership's current operating results (which were impacted by the payment of
the $45.5 million yield maintenance premium) and the operating results of
prior periods (which were not impacted by the yield maintenance premium). The
presentation of this additional information is not meant to be considered in
isolation or as a substitute for results prepared in accordance with
accounting principles generally accepted in the United States.
Third Quarter
Through its Operating Partnerships and their subsidiaries, the Partnership is
principally engaged in the pipeline transportation of refined petroleum
products. Products transported via pipeline include gasoline, jet fuel, diesel
fuel, heating oil, kerosene and liquid propane gases ("LPGs"). The
Partnership's revenues derived from the transportation of refined petroleum
products are principally a function of the volumes of refined petroleum
products transported by the Partnership, which are in turn a function of the
demand for refined petroleum products in the regions served by the
Partnership's pipelines, and the tariffs or transportation fees charged for
such transportation.
The Partnership is also engaged, through Buckeye Pipe Line Holdings, L.P.
("BPH"), Buckeye Terminals, LLC ("BT") and Buckeye Gulf Coast Pipe Lines, L.P.
("BGC"), in the terminalling and storage of petroleum products and in the
lease and contract operation of pipelines for third parties.
Revenues for the quarters ended September 30, 2003 and 2002 were as follows:
Revenues
(in thousands)
Three Months Ended
September 30,
------------------
2003 2002
---- ----
Pipeline transportation $58,809 $54,870
Terminalling, storage and rentals 6,728 4,597
Contract operations 4,453 4,115
------- -------
Total $69,990 $63,582
======= =======
Results of operations are affected by factors that include general economic
conditions, weather, competitive conditions, demand for refined petroleum
products, seasonal factors and regulation.
Total revenue for the quarter ended September 30, 2003 was $70.0 million, $6.4
million, or 10.1 percent, greater than revenue of $63.6 million in the same
period of 2002. Revenue from pipeline transportation was $58.8 million for the
three months ended September 30, 2003 compared to $54.9 million for the three
months ended September 30, 2002. The $3.9 million increase in pipeline
transportation revenue is primarily due to increased distillate and gasoline
shipments and higher average tariff rates as a result of a tariff rate
adjustment instituted on May 1, 2003. Volumes delivered during the third
quarter 2003 averaged 1,161,600 barrels per day, 55,400 barrels per day, or
5.0 percent, greater than volumes of 1,106,200 barrels per day delivered
during the third quarter of 2002. During the third quarter 2002, revenue was
negatively impacted by approximately $0.7 million due to billing adjustments
to certain customers for tariffs that were applied during the first six months
of 2002. Refunds or, in some cases, additional billings, were issued in the
third quarter of 2002 to adjust for the incorrect tariffs. None of the tariff
adjustments related to periods prior to January 1, 2002.
Revenue from the transportation of gasoline of $33.2 million increased by $2.4
million, or 7.8 percent, from the third quarter of 2002. Total gasoline
volumes of 620,440 barrels per day for the third quarter of 2003 were 41,600
barrels per day, or 7.2 percent, greater than third quarter 2002 volumes of
578,800 barrels per day. In the East, gasoline volumes of 279,800 barrels per
day were approximately 15,100 barrels per day, or 5.7 percent, greater than
third quarter 2002 volumes. The increase was primarily due to greater
deliveries to the upstate New York and the Pittsburgh and Sinking Spring,
Pennsylvania areas. In the Midwest, gasoline volumes of 183,500 barrels per
day were 16,700 barrels per day, or 10.0 percent, greater than gasoline
volumes delivered during the third quarter of 2002. Increases in deliveries
to the Detroit, Michigan area doubled while deliveries to the Cleveland, Ohio
area increased by 38.2 percent. The increases were partially offset by
declines in demand in the Bay City and Flint, Michigan areas. Long Island
System gasoline volumes of 116,100 barrels per day increased by 3,600 barrels
per day, or 3.2 percent, from deliveries in the third quarter of 2002. On the
Jet Lines system, gasoline volumes of 18,300 barrels per day were 1,900
barrels per day, or 11.8 percent, greater than volumes in the third quarter of
2002. On the Norco Pipe Line Company, LLC ("Norco") system, gasoline volumes
of 22,600 barrels per day were 4,300 barrels per day, or 23.3 percent, greater
than volumes delivered during the third quarter 2002.
Revenue from the transportation of distillate of $14.5 million increased by
$1.6 million, or 12.1 percent, from third quarter 2002 levels. Total volumes
of 255,000 barrels per day for the three months ended September 30, 2003 were
24,000 barrels per day, or 10.4 percent, greater than third quarter 2002
distillate volumes of 231,000 barrels per day. In the East, distillate volumes
of 149,700 barrels per day were approximately 14,200 barrels per day, or 10.5
percent, greater than third quarter 2002 volumes. Demand for distillate was
strong throughout the entire eastern products system area. In the Midwest,
distillate volumes of 68,200 barrels per day were 5,100 barrels per day, or
8.1 percent, greater than volumes delivered during the third quarter of 2002.
Long Island System distillate volumes of 11,800 barrels per day were 1,200
barrels per day, or 11.3 percent, greater than volumes delivered during the
third quarter of 2002. On the Jet Lines system, distillate volumes of 14,900
barrels per day were 3,300 barrels per day, or 28.0 percent, greater than
third quarter 2002 volumes. Norco distillate volumes were 600 barrels per day,
or 5.7 percent, greater than third quarter 2002 volumes.
Revenue from the transportation of jet fuel of $9.7 million decreased by $0.2
million, or 1.4 percent, from third quarter 2002 levels. Total jet fuel
volumes of 254,000 barrels per day for the three months ended September 30,
2003 were 7,700 barrels per day, or 2.9 percent, less than third quarter 2002
jet fuel volumes of 261,700 barrels per day. Deliveries to the New York City
airports (LaGuardia, JFK and Newark) decreased by 3,200 barrels per day, or
2.4 percent. Deliveries to Pittsburgh International Airport were 2,400
barrels per day, or 23.7 percent, less than third quarter 2002 deliveries due
to schedule reductions by U.S. Airways. Deliveries to Miami International
Airport were 2,800 barrels per day, or 5.6 percent, less than third quarter
2002 levels. WesPac's jet fuel volumes of 11,400 barrels per day approximated
2002 levels.
Terminalling, storage and rental revenues of $6.7 million for the three months
ended September 30, 2003 increased by $2.1 million or 46.4 percent from the
comparable period in 2002. Approximately $1.5 million of this increase
reflects lease revenue received with respect to a 90-mile crude butadiene
pipeline that was completed in March 2003. Approximately $569,000 of this
lease revenue was distributed to our minority partners in the pipeline project
during the third quarter 2003. Although the pipeline was completed in March
2003 and neither the pipeline nor the chemical plant that it serves are
currently in operation, lease payments commenced as of January 1, 2003. The
crude butadiene pipeline originates at a Shell Chemicals, L.P. facility in
Deer Park, Texas and terminates at a chemical plant owned by Sabina
Petrochemicals, LLC in Port Arthur, Texas. Subsidiaries of BGC hold an
approximate 63 percent interest in two partnerships (the "Pipeline
Partnerships") that own the pipeline. Two petrochemical companies own the
remaining 37 percent minority interest in the Pipeline Partnerships.
Concurrent with the completion of the pipeline, advances from the two minority
interest partners were reclassified from noncurrent liabilities on the
Partnership's balance sheet to minority interest. The Pipeline Partnerships
have entered into a long-term agreement with Sabina Petrochemicals, LLC to
provide pipeline transportation throughput services. Separately, BGC entered
into an agreement to operate and maintain the pipeline for the Pipeline
Partnerships.
Contract operations services revenues of $4.5 million for the three months
ended September 30, 2003 increased by $0.4 million, or 8 percent, compared to
the third quarter of 2002. The increase in contract services revenues was due
to increased operations services provided by BGC as a result of additional
contracts obtained during 2002, as well as the commencement of the crude
butadiene pipeline operation and maintenance agreement as of January 1, 2003.
Contract operations revenues typically consist of costs reimbursable under the
contracts plus an operator's fee. Accordingly, revenues from these operations
carry a lower gross profit margin than revenues from pipeline transportation
or terminalling, storage and rentals.
The Partnership's costs and expenses for the third quarter of 2003 were $41.0
million compared to $36.3 million for the third quarter of 2002. BGC's costs
and expenses increased by $0.6 million over third quarter 2002 as a result of
additional contract services provided. Other increases of $4.1 million are
primarily related to increases in power costs, increases in property taxes and
insurance, additional casualty losses, and general wage and employee benefit
cost increases. In addition, a favorable $1.1 million property tax settlement
that occurred in the third quarter of 2002 did not recur in the third quarter
of 2003.
Other income and expense for the third quarter of 2003 was a net cost of $54.8
million compared to $7.3 million for the third quarter of 2002. The increase
reflects $45.5 million of expense relating to the yield maintenance premium
paid in connection with the repayment of the Buckeye Pipe Line Company, L.P.
$240.0 million Senior Notes. The yield maintenance premium represented the
excess of the discounted present value of the remaining payments due under the
Senior Notes over the amount of principal repaid. The discount rate was the
current reinvestment rate at the time of retiring the Senior Notes. In
addition, interest expense increased by $1.9 million principally due to the
timing of the new borrowings compared to the repayment of the 5-year Revolving
Credit agreement and the $240 million Senior Notes. Minority interest and
other expense increased due to incentive payments to the general partner and
additional minority interest expense related to the 90-mile crude butadiene
pipeline. These increases were partially offset by an increase in investment
income, principally related to $0.5 million of equity income from WTP.
First Nine Months
Revenues for the nine months ended September 30, 2003 and 2002 were as
follows:
Revenues
(in thousands)
Nine Months Ended
September 30,
-----------------
2003 2002
---- ----
Pipeline transportation $170,015 $157,894
Terminalling, storage and rentals 20,065 14,212
Contract operations 12,734 9,428
-------- --------
Total $202,814 $181,534
======== ========
Total revenue for the nine months ended September 30, 2003 was $202.8 million,
$21.3 million, or 11.7 percent, greater than revenue of $181.5 million in the
same period of 2002. Revenue from pipeline transportation was $170.0 million
in the first nine months of 2003 compared to $157.9 million in the first nine
months of 2002. The $12.1 million increase in pipeline transportation revenue
is primarily due to increased gasoline, distillate and turbine fuel shipments.
In addition, average tariff rates were higher as a result of tariff rate
adjustments instituted on July 1, 2002 and May 1, 2003. Volumes delivered
during the first nine months 2003 averaged 1,128,300 barrels per day, 38,700
barrels per day, or 3.6 percent, greater than volumes of 1,089,600 barrels per
day delivered during the first nine months of 2002.
Revenue from the transportation of gasoline of $91.7 million increased by $5.8
million, or 6.8 percent, from the first nine months of 2002. Total gasoline
volumes of 583,600 barrels per day in the first nine months of 2003 were
25,700 barrels per day, or 4.6 percent, greater than first nine months 2002
volumes of 557,900 barrels per day. In the East, gasoline volumes of 264,400
barrels per day were approximately 16,500 barrels per day, or 6.6 percent,
greater than first nine months 2002 volumes. The increase was primarily due
to greater deliveries to the upstate New York and Pittsburgh and Sinking
Spring, Pennsylvania areas. In the Midwest, gasoline volumes of 167,900
barrels per day were 5,200 barrels per day, or 3.2 percent, greater than
gasoline volumes delivered during the first nine months of 2002. Deliveries
increased throughout most of the system with the exception of deliveries to
Bay City, Michigan and Brecksville, Ohio. In addition, approximately 2,500
barrels per day that were delivered to the Pittsburgh, Pennsylvania area from
the Midwest in the first nine months of 2002 were supplied from the East in
the first nine months of 2003. Long Island System gasoline volumes of 114,000
barrels per day were up 3,000 barrels per day, or 2.7 percent, from deliveries
in the first nine months of 2002. On the Jet Lines system, gasoline volumes
of 17,000 barrels per day were 1,500 barrels per day, or 8.0 percent, less
than volumes in the first nine months of 2002 due to lower gasoline
transportation demand in the Hartford, Connecticut area. On the Norco system,
gasoline volumes of 20,400 barrels per day were 2,500 barrels per day, or 14.0
percent, greater than volumes delivered during the first nine months 2002.
Revenue from the transportation of distillate of $44.3 million increased by
$3.5 million, or 8.5 percent, from first nine months 2002 levels. Total
volumes of 269,200 barrels per day in the first nine months of 2003 were
16,500 barrels per day, or 6.5 percent, greater than first nine months 2002
distillate volumes of 252,700 barrels per day. In the East, distillate volumes
of 147,200 barrels per day were approximately 10,100 barrels per day, or 7.4
percent, greater than first nine months 2002 volumes. In the Midwest,
distillate volumes of 72,000 barrels per day were 5,800 barrels per day, or
8.8 percent, greater than volumes delivered during the first nine months of
2002. Long Island System distillate volumes of 18,900 barrels per day were
1,600 barrels per day, or 9.2 percent, greater than volumes delivered during
the first nine months of 2002. On the Jet Lines system, distillate volumes of
22,300 barrels per day were 3,800 barrels per day, or 20.5 percent, greater
than first nine months 2002 volumes. Norco distillate volumes were 8,900
barrels per day, or 33.7 percent, less than the first nine months 2002 volumes
due to the loss of a pipeline customer that entered into a product exchange
with a local refiner. With the exception of Norco, distillate volume increases
are due to greater heating fuel requirements in response to significantly
colder winter temperatures during the first quarter of 2003 and an increase in
demand experienced during the third quarter of 2003.
Revenue from the transportation of jet fuel of $28.6 million increased by $1.2
million, or 4.2 percent, from the first nine months 2002 levels. Total jet
fuel volumes of 248,800 barrels per day in the first nine months of 2003 were
100 barrels per day, or 0.1 percent, greater than first nine months 2002 jet
fuel volumes of 248,700 barrels per day. Deliveries to the New York City
airports (LaGuardia, JFK and Newark) decreased by 700 barrels per day, or 0.6
percent due declines in deliveries to Newark airport. Deliveries to
Pittsburgh International Airport were 1,900 barrels per day, or 19.2 percent,
less than first nine months 2002 deliveries due to schedule reductions by U.S.
Airways. Deliveries to Miami International Airport were 1,900 barrels per day,
or 3.8 percent, less than first nine months 2002 levels. Turbine fuel
deliveries to the Detroit area increased by 4,000 barrels per day, or 22.4
percent, over 2002 levels due to delivery problems at a competing pipeline
carrier. WesPac's jet fuel volumes of 11,900 barrels per day approximated
first nine months 2002 levels.
Terminalling, storage and rental revenues of $20.1 million for the nine months
ended September 30, 2003 increased by $5.9 million from the comparable period
in 2002. Approximately $4.5 million of this increase reflects lease revenue
received with respect to the 90-mile crude butadiene pipeline that was
completed in March 2003. Approximately $1,623,000 of this lease revenue was
distributed to our minority partners in the pipeline project during the first
nine months 2003.
Contract operations services revenues of $12.7 million for the nine months
ended September 30, 2003 increased by $3.3 million compared to the first nine
months of 2002. The increase in contract services revenues was due to
increased operations services provided by BGC as a result of additional
contracts obtained during 2002, as well as the commencement of the crude
butadiene pipeline operation and maintenance agreement as of January 1, 2003.
The Partnership's costs and expenses for the first nine months of 2003 were
$123.6 million compared to $107.5 million for the first nine months of 2002.
BGC's costs and expenses increased by $3.0 million over first nine months 2002
as a result of additional contract services provided. Other increases of $13.1
million are primarily related to increases in power costs, the increased use
of outside services, increases in property taxes and insurance, and general
wage and employee benefit cost increases. Additionally, a casualty loss
recovery payment of approximately $0.5 million received in the first quarter
of 2002 and a favorable property tax settlement during the third quarter of
2002 did not recur in 2003.
Other income and expense for the first nine months of 2003 was a net cost of
$70.8 million compared to $23.0 million for the first nine months of 2002. The
increase reflects $45.5 million of expense relating to the yield maintenance
premium paid in connection with the repayment of the Buckeye Pipe Line Company
L.P. $240 million Senior Notes. In addition, interest expense increased by
$1.5 million principally due to the timing of the new borrowings compared to
the repayment of the 5-year Revolving Credit agreement and the $240 million
Senior Notes. During the first six months of 2003, interest expense had
declined as a result of lower interest rates and reduced borrowings. Minority
interest and other expense increased due to increased incentive payments to
the general partner and additional minority interest expense related to the
90-mile crude butadiene pipeline. These increases were partially offset by an
increase in investment income principally associated with $0.5 million of
equity income from WTP.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at September 30, 2003 and December 31,
2002 is highlighted in the following comparative summary:
Liquidity and Capital Indicators
As of
-----------------------
9/30/03 12/31/02
------- --------
Current ratio (1) 1.7 to 1 1.4 to 1
Ratio of cash and cash equivalents,
and trade receivables to
current liabilities 1.1 to 1 0.9 to 1
Working capital - in thousands (2) $23,251 $13,092
Ratio of total debt to total capital (3) .55 to 1 .53 to 1
Book value (per Unit) (4) $12.91 $13.15
(1) current assets divided by current liabilities
(2) current assets minus current liabilities
(3) long-term debt divided by long-term debt plus total
partners' capital
(4) total partners' capital divided by Units outstanding at the
end of the period.
During the first nine months of 2003, the Partnership's principal sources of
liquidity typically were cash from operations and proceeds from capital
markets transactions. The Partnership's principal uses of cash are capital
expenditures, investments and acquisitions, operating expenses and
distributions to Unitholders.
Cash Flows from Operations
Cash flows from operations were $72.8 million for the first nine months of
2003 compared to $51.7 million for the first nine months of 2002. Net income
for the first nine months of 2003 and 2002 was $8.4 million and $51.0 million,
respectively . In 2003, the Partnership recorded a $45.5 charge relating to
the premium incurred in connection with the repayment of the Buckeye Pipe Line
Company, L.P. $240.0 million Senior Notes. Changes in current assets and
liabilities resulted in a net use of cash of $1.9 million for the first nine
months of 2003 compared to a net cash use of $14.6 million for the first nine
months of 2002. For the first nine months of 2003, cash uses for prepaid and
other current assets, accounts payable and accrued and other current
liabilities were partially offset by collections of trade receivables and a
decline in inventories. For the first nine months of 2002, cash uses for
inventories, prepaid and other current assets, accounts payable and accrued
and other current liabilities were coupled with increases in accounts
receivable. Changes in other non-current assets and liabilities resulted in a
net cash source of $1.9 million for the first nine months of 2003 compared to
a net cash use of $0.8 million for the first nine months of 2002.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $64.2 million in the first nine
months of 2003 compared to $24.1 million in the comparable period last year.
Capital expenditures were $4.4 higher during the first nine months of 2003
compared to the same period in 2002. Capital expenditures in 2003 have
included the Partnership's purchase of a terminal in Utica, New York for
approximately $1.1 million. In addition, as noted in "Overview" above, the
Partnership invested approximately $36.0 million in WTP and West Shore.
Cash Flows from Financing Activities
On February 28, 2003, the Partnership sold 1,750,000 LP units in an
underwritten public offering. Net proceeds to the Partnership, after
underwriters' discount of $1.62 per LP unit and offering costs were,
approximately $59.9 million. The net proceeds from the offering were used to
reduce amounts outstanding under the Partnership's 5-year Revolving Credit
Agreement.
For a discussion of the Partnership's sale of its 4 5/8% Notes due 2013 and
its 6 3/4% Notes due 2033, as well as its new credit facilities, see "Overview"
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
OTHER MATTERS
Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The adoption of SFAS No. 143 did not
have a material effect on the Partnership's consolidated financial position or
results of operations.
In May 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds the automatic treatment of gains or losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in APB No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
SFAS No. 145 also requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to a sale-leaseback
transaction and makes various technical corrections to existing
pronouncements. SFAS No. 145 was effective for fiscal years beginning after
December 31, 2002. As a result of the adoption of SFAS No. 145, the yield
maintenance premium of $45.5 million paid in the third quarter 2003 has been
recorded as other income (expense) in the accompanying financial statements
rather than as an extraordinary item.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies the guidance
provided in Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." Generally,
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, rather than
when management commits to a plan of exit or disposal as is called for by EITF
Issue No. 94-3. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146 did
not have a material effect on the Partnership's financial statements.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 established
requirements for accounting and disclosure of guarantees issued to third
parties for various transactions. The accounting requirements of FIN 45 are
applicable to guarantees issued after December 31, 2002. The disclosure
requirements of FIN 45 are applicable to financial statements issued for
periods ending after December 15, 2002. The adoption of FIN 45 did not have a
material effect on the Partnership's financial statements.
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure", SFAS 148 amended the implementation
provisions of SFAS 123 and required changes in disclosures in financial
statements. The provisions of SFAS 148 were applicable for years ending after
December 15, 2002 except for certain quarterly disclosures, which were
applicable for interim periods beginning after December 15, 2002. The
Partnership has not changed its method of accounting for stock-based
compensation and, therefore, is subject only to the revised disclosure
provisions of SFAS 148. Such quarterly disclosures have been provided
commencing in the first quarter of 2003.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 establishes accounting and
disclosure requirements for ownership interests in entities that have certain
financial or ownership characteristics (sometimes known as Special Purpose
Entities). FIN 46 is applicable for variable interest entities created after
January 31, 2003 and becomes effective in the first fiscal year or interim
accounting period ending after December 15, 2003 for variable interest
entities created before February 1, 2003. The Partnership does not anticipate
that the provisions of FIN 46 will have a material effect on its financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activity". SFAS No. 149 amends certain
provisions related to Statement No. 133, and is generally effective for
transactions entered into after June 30, 2003. The adoption of SFAS No. 149
did not have a material effect on the Partnership's consolidated financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 affects how an entity measures and reports financial instruments that have
characteristics of both liabilities and equity, and is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after June
15, 2003. The FASB continues to address certain implementation issues
associated with the application of SFAS No. 150, including those related to
mandatory redeemable financial instruments representing non-controlling
interests in subsidiaries' consolidated financial statements. The Partnership
will continue to monitor the actions of the FASB and assess the impact, if
any, on its consolidated financial statements. The effective provisions of
SFAS No. 150 did not have a material impact on the Partnership's consolidated
financial position or results of operations.
In May 2003, the Emerging Issues Task Force (EITF) of the FASB issued
Consensus No. 01-8 "Determining Whether an Arrangement Contains a Lease."
Consensus No. 01-8 establishes criteria for determining when certain
contracts, or portions of contracts, should be subject to the provisions of
SFAS No. 13 - "Accounting for Leases" and related pronouncements. EITF
Consensus No. 01-8 generally is effective for arrangements entered into or
modified in the first quarter beginning after May 28, 2003. The adoption of
EITF Consensus No. 01-8 did not have a material effect on the Partnership's
financial condition.
Forward Looking Statements
The information contained above in this Management's Discussion and Analysis
and elsewhere in this Report on Form 10-Q includes "forward-looking,
statements," within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements use forward-looking words such as "anticipate,"
"continue," "estimate," "expect," "may," `will," or other similar words,
although some forward-looking statements are expressed differently. These
statements discuss future expectations or contain projections. Specific
factors which could cause actual results to differ from those in the forward-
looking statements include: (1) price trends and overall demand for refined
petroleum products in the United States in general and in our service areas in
particular (economic activity, weather, alternative energy sources,
conservation and technological advances may affect price trends and demands);
(2) changes, if any, in laws and regulations, including, among others, safety,
tax and accounting matters or Federal Energy Regulatory Commission regulation
of our tariff rates; (3) liability for environmental claims; (4) security
issues affecting our assets, including, among others, potential damage to our
assets caused by acts of war or terrorism; (5) unanticipated capital
expenditures and operating expenses to repair or replace our assets; (6)
availability and cost of insurance on our assets and operations; (7) our
ability to successfully identify and complete strategic acquisitions and make
cost saving changes in operations; (8) expansion in the operations of our
competitors; (9) our ability to integrate any acquired operations into our
existing operations; (10) shut-downs or cutbacks at major refineries that use
our services; (11) deterioration in our labor relations; (12) change sin real
property tax assessments; (13) disruptions to the air travel system; and (14)
interest rate fluctuations and other capital market conditions.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. Although the expectations in
the forward-looking statements are based on our current beliefs and
expectations, we do not assume responsibility for the accuracy and
completeness of such statements. Further, we undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Operating Partnerships generate revenue primarily from the transportation
of refined petroleum products for third-party customers. Other than certain
amounts of off-specification product generated in the ordinary course of
pipeline operations, the Operating Partnerships do not own the product they
transport, and, therefore, the Partnership is not exposed to fluctuation in
commodity prices. As a result, the Partnership does not engage in hedge
transactions to manage commodity price risk.
The Partnership is exposed to interest rate risk resulting from changes in
interest rates on its Credit Facilities as well as fair value risk related to
changes in the fair value of its fixed-rate debt. At September 30, 2003, the
Partnership had no amounts outstanding under its Credit Facilities. At
September 30, 2003, the fair value of the Partnership's fixed-rate debt was
$437 million.
On October 28, 2003, the Partnership entered into an interest rate swap
agreement for a notional amount of $100 million. The contract calls for the
Partnership to receive fixed payments at a rate of 4 5/8% of the notional
amount in exchange for floating rate payments based on the notional amount
using six-month LIBOR (determined in arrears) minus 0.28%. The Partnership
entered into the agreement in order to hedge its fair value risk associated
with a portion of its $300 million Notes due 2013(the "Notes"). The agreement
terminates on the maturity date of the Notes and interest amounts under the
agreement are payable semiannually on the same date as interest payments on
the Notes. At the inception of the agreement, the Partnership designated the
agreement as a fair value hedge and determined that no ineffectiveness will
result from the use of the hedge. A 1% (100 basis points)increase or decrease
in LIBOR will result in an interest expense fluctuation of approximately $1.0
million.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The General Partner's principal executive officer and its principal
financial officer, evaluated the effectiveness of the Partnership's
disclosure controls and procedures as of the end of the period covered by
this report, Based on that evaluation, such principal executive officer and
principal financial officer concluded that, the Partnership's disclosure
controls and procedures as of the end of the period covered by this report
have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Partnership
in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. The General Partner and the Partnership believe
that a controls system, no matter how well designed and operated, can not
provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
(b) Change in Internal Control over Financial Reporting.
No change in the Partnership's internal control over financial reporting
occurred during the Partnership's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect the
Partnership's internal control over financial reporting.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture, dated as of July 10, 2003, between Buckeye
Partners, L.P. and SunTrust Bank, as Trustee. (1) (Exhibit 4.1)
4.2 First Supplemental Indenture, dated as of July 10, 2003,
between Buckeye Partners, L.P. and SunTrust Bank, as Trustee.
(1) (Exhibit 4.2)
4.3 Second Supplemental Indenture, dated as of August 19, 2003,
between Buckeye Partners, L.P. and SunTrust Bank, as Trustee.
(1) (Exhibit 4.3)
10.1 Amendment No.1, dated as of September 4, 2002, Amendment No. 2,
dated as of June 12, 2003, Amendment No. 3, dated as of June 27,
2003, and Amendment No. 4, dated as of September 3, 2003,
each to the Credit Agreement, dated as of September 5, 2001,
among Buckeye Partners, L.P., SunTrust Bank and the other
signatories thereto.
10.2 Credit Agreement, dated as of September 3, 2003, among the
Partnership, SunTrust Bank and the other signatories thereto.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14 (a) under the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350.
(1) Previously filed as an exhibit to the registrant's
Registration Statement on Form S-4 (Registration No. 333-108969)
filed on September 19, 2003 and incorporated by reference herein.
(b) Reports on Form 8-K
On July 8, 2003, the Partnership filed a Current Report on
Form 8-K for the purpose of filing the Underwriting
Agreement and Form of Indenture related to the offering of
$300,000,000 aggregate principal amount of 4 5/8% Notes due 2013.
On July 28, 2003, the Partnership filed a Current Report on
Form 8-K for the purpose of furnishing the press release
announcing its earnings for the second quarter 2003.
On August 15, 2003, the Partnership filed a Current Report on
Form 8-K for the purpose of filing the press release
announcing it had priced $150 million of its 6 3/4% Notes due
2033 in a Rule 144A offering.
On August 20, 2003, the Partnership filed a Current Report on
Form 8-K for the purpose of furnishing the press release
announcing it had closed on the previously announced sale of
$150 million of 6 3/4% 30-year senior unsecured notes
in a Rule 144A offering.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BUCKEYE PARTNERS, L.P.
(Registrant)
By: Buckeye Pipe Line Company,
as General Partner
Date: October 31, 2003 By: STEVEN C. RAMSEY
Steven C. Ramsey
Senior Vice President, Finance
and Chief Financial Officer
(Principal Accounting and
Financial Officer)