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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, 2002
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)
5002 BUCKEYE ROAD
P. O. BOX 368
EMMAUS, PENNSYLVANIA 18049
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (484) 232-4000
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act 12b-2). Yes [X] No [ ]
At June 28, 2002, the aggregate market value of the registrant's LP
Units held by non-affiliates was $888 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 13, 2003: 28,702,346
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS................................................................................... 3
ITEM 2. PROPERTIES................................................................................. 13
ITEM 3. LEGAL PROCEEDINGS.......................................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S LP UNITS AND RELATED UNITHOLDER MATTERS........................ 14
ITEM 6. SELECTED FINANCIAL DATA ................................................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................................... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................................................... 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 54
ITEM 11. EXECUTIVE COMPENSATION .................................................................... 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 59
ITEM 14. CONTROLS & PROCEDURES...................................................................... 60
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K........................... 61
PART I
ITEM 1. BUSINESS
INTRODUCTION
Buckeye Partners, L.P. (the "Partnership"), the Registrant, is a master
limited partnership organized in 1986 under the laws of the state of Delaware.
The Partnership's principal line of business is the transportation, terminalling
and storage of refined petroleum products for major integrated oil companies,
large refined product marketing companies and major end users of petroleum
products on a fee basis through facilities owned and operated by the
Partnership. The Partnership also operates pipelines owned by third parties
under contracts with major integrated oil and chemical companies.
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 Pipe Line Holdings, L.P. ("BPH"). (Each of Buckeye,
Laurel, Everglades and BPH is referred to individually as an "Operating
Partnership" and collectively as the "Operating Partnerships"). The Partnership
owns approximately a 99 percent interest in each of the Operating Partnerships.
BPH owns directly, or indirectly, a 100 percent interest in each of Buckeye
Terminals, LLC ("BT"), Norco Pipe Line Company, LLC ("Norco") and Buckeye Gulf
Coast Pipe Lines, L.P. ("BGC"). BPH also owns a 75 percent interest in WesPac
Pipeline-Reno Ltd., WesPac Pipeline-San Diego, Ltd. and related WesPac entities
(collectively known as "WesPac") and an 18.52 percent interest in West Shore
Pipe Line Company.
Buckeye Pipe Line Company (the "General Partner") serves as the general
partner to the Partnership. As of December 31, 2002, the General Partner owned
approximately a 1 percent general partnership interest in the Partnership and
approximately a 1 percent general partnership interest in each Operating
Partnership, for an effective 2 percent interest in the Partnership. The General
Partner is a wholly-owned subsidiary of Buckeye Management Company ("BMC"). BMC
is a wholly-owned subsidiary of Glenmoor, Ltd. ("Glenmoor"). Glenmoor is owned
by certain directors and members of senior management of the General Partner and
trusts for the benefit of their families and by certain other management
employees of Buckeye Pipe Line Services Company ("Services Company").
Services Company employs a significant portion of the employees that work
for the Operating Partnerships. At December 31, 2002, Services Company had 506
full-time employees. Services Company entered into a Services Agreement with BMC
and the General Partner in August 1997 to provide services to the Partnership
and the Operating Partnerships through March 2011. Services Company is
reimbursed by BMC or the General Partner for its direct and indirect expenses,
which in turn are reimbursed by the Partnership, except for certain executive
compensation costs. BT, Norco and BGC directly employed 115 full-time employees
at December 31, 2002.
Buckeye is one of the largest independent pipeline common carriers of
refined petroleum products in the United States, with 2,909 miles of pipeline
serving 9 states. Laurel owns a 345-mile common carrier refined products
pipeline located principally in Pennsylvania. Norco owns a 482-mile pipeline in
Indiana, Illinois and Ohio. Everglades owns 37 miles of refined petroleum
products pipeline in Florida. Buckeye, Laurel, Norco and Everglades conduct the
Partnership's refined products pipeline business. BPH, through facilities it
owns in Taylor, Michigan, provides bulk storage service with an aggregate
capacity of 260,000 barrels of refined petroleum products. BT, with facilities
located in New York, Pennsylvania, Ohio, Indiana and Illinois provides bulk
storage services with an aggregate capacity of 4,848,000 barrels of refined
petroleum products. BGC owns and operates petrochemical pipelines in the Gulf
Coast area. BGC also provides engineering and construction management services
to major chemical companies in the Gulf Coast area. WesPac provides turbine fuel
transportation services to the Reno/Tahoe International Airport through a
3.0-mile pipeline and to the San Diego International Airport through a 4.3-mile
pipeline.
In March 1999, the Partnership acquired the fuels division of American
Refining Group, Inc. ("ARG") for approximately $13.7 million. The Partnership
operated the former ARG processing business under the name of Buckeye Refining
Company, LLC ("BRC"). BRC was sold to Kinder Morgan Energy Partners, L.P.
("Kinder Morgan") on October 25, 2000 for approximately $45.7 million. BRC
processed transmix at its Indianola,
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Pennsylvania and Hartford, Illinois refineries. Transmix represents refined
petroleum products, primarily fuel oil and gasoline that becomes commingled
during normal pipeline operations. The refining process produced separate
quantities of fuel oil, kerosene and gasoline that BRC then marketed at the
wholesale level.
In March 1999, the Partnership also acquired pipeline operating contracts
and a 16-mile pipeline from Seagull Products Pipeline Corporation and Seagull
Energy Corporation ("Seagull") for approximately $5.8 million. The Partnership
operates the assets acquired from Seagull under the name of Buckeye Gulf Coast
Pipe Lines, LLC. BGC is an owner and contract operator of pipelines owned by
major chemical companies in the Gulf Coast area. BGC leases its 16-mile pipeline
to a major chemical company.
In June 2000, the Partnership also acquired six petroleum products
terminals from Agway Energy Products LLC ("Agway") for approximately $20.7
million. The terminals acquired had an aggregate capacity of approximately 1.8
million barrels and are located in Brewerton, Geneva, Marcy, Rochester and
Vestal, New York and Macungie, Pennsylvania. The Partnership operates the assets
acquired from Agway under the name of Buckeye Terminals, LLC.
On July 31, 2001, the Partnership acquired a refined products pipeline
system and related terminals from affiliates of TransMontaigne Inc. for
approximately $62.3 million. The assets included a 482-mile refined petroleum
products pipeline that runs from Hartsdale, Indiana west to Fort Madison, Iowa
and east to Toledo, Ohio, with an 11-mile pipeline connection between major
storage terminals in Hartsdale and East Chicago, Indiana. These assets are
operated by the Partnership under the name of Norco Pipe Line Company, LLC. The
acquired assets also included 3.2 million barrels of pipeline storage and
trans-shipment facilities in Hartsdale and East Chicago, Indiana and Toledo,
Ohio; and four petroleum products terminals located in Bryan, Ohio; South Bend
and Indianapolis, Indiana; and Peoria, Illinois. The storage and terminal assets
are operated by Buckeye Terminals, LLC.
On October 29, 2001, the Partnership acquired 6,805 shares of common stock
of West Shore Pipe Line Company ("West Shore") from TransMontaigne Pipeline Inc.
for approximately $23.3 million. The common stock represents an 18.52 percent
interest in West Shore. West Shore owns and operates a pipeline system that
originates in the Chicago, Illinois area and extends north to Green Bay,
Wisconsin and west and then north to Madison, Wisconsin. The pipeline system
transports refined petroleum products to users in northern Illinois and
Wisconsin. The other stockholders of West Shore are major oil companies. The
pipeline is operated under contract by Citgo Pipeline Company.
REFINED PRODUCTS TRANSPORTATION
The Partnership receives petroleum products from refineries, connecting
pipelines and marine terminals, and transports those products to other
locations. In 2002, refined petroleum products transportation accounted for
approximately 86% of the Partnership's consolidated revenues.
The Partnership transported an average of approximately 1,101,400 barrels
per day of refined products in 2002. The following table shows the volume and
percentage of refined petroleum products transported over the last three years.
VOLUME AND PERCENTAGE OF REFINED PETROLEUM PRODUCTS TRANSPORTED (1)
(VOLUME IN THOUSANDS OF BARRELS PER DAY)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT
------- ------- ------- ------- ------- -------
Gasoline ............. 556.4 50.5% 540.7 49.6% 526.7 49.6%
Jet Fuels ............ 250.9 22.8 260.0 23.8 270.9 25.5
Middle Distillates (2) 265.4 24.1 266.8 24.5 248.6 23.4
Other Products ....... 28.7 2.6 22.9 2.1 15.3 1.5
------- ------- ------- ------- ------- -------
Total ................ 1,101.4 100.0% 1,090.4 100.0% 1,061.5 100.0%
======= ======= ======= ======= ======= =======
- -----
(1) Excludes local product transfers.
(2) Includes diesel fuel, heating oil, kerosene and other middle distillates.
4
The Partnership provides refined product pipeline service in the following
states: Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois,
Connecticut, Massachusetts, Nevada, California and Florida.
Pennsylvania -- New York -- New Jersey
Buckeye serves major population centers in the states of Pennsylvania, New
York and New Jersey through 943 miles of pipeline. Refined petroleum products
are received at Linden, New Jersey from approximately 17 major source points,
including 2 refineries, 6 connecting pipelines and 9 storage and terminalling
facilities. Products are then transported through two lines from Linden, New
Jersey to Allentown, Pennsylvania. From Allentown, the pipeline continues west,
through a connection with Laurel, to Pittsburgh, Pennsylvania (serving Reading,
Harrisburg, Altoona/Johnstown and Pittsburgh) and north through eastern
Pennsylvania into New York (serving Scranton/Wilkes-Barre, Binghamton, Syracuse,
Utica and Rochester and, via a connecting carrier, Buffalo). Buckeye leases
capacity in one of the pipelines extending from Pennsylvania to upstate New York
to a major oil company. Products received at Linden, New Jersey are also
transported through one line to Newark International Airport and through two
additional lines to J. F. Kennedy International and LaGuardia airports and to
commercial bulk terminals at Long Island City and Inwood, New York. These
pipelines supply J. F. Kennedy, LaGuardia and Newark airports with substantially
all of each airport's jet fuel requirements.
Laurel transports refined petroleum products through a 345-mile pipeline
extending westward from five refineries and a connection to Colonial Pipeline
Company in the Philadelphia area to Reading, Harrisburg, Altoona /Johnstown and
Pittsburgh, Pennsylvania.
Indiana -- Ohio -- Michigan -- Illinois
Buckeye and Norco transport refined petroleum products through 2,336 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 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 refinery and other pipeline connection points near Detroit,
Toledo and Lima. Major market areas served include Peoria, Illinois;
Huntington/Fort Wayne, Indianapolis and South Bend, 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
(the "Jet Lines System") that carry refined products from New Haven, Connecticut
to Hartford, Connecticut and Springfield, Massachusetts.
Everglades transports primarily turbine fuel on a 37-mile pipeline from
Port Everglades, Florida to Hollywood-Ft. Lauderdale International Airport and
Miami International Airport. Everglades supplies Miami International Airport
with substantially all of its turbine fuel requirements.
WesPac Pipeline-Reno Ltd., owns a 3.0-mile pipeline serving the Reno/Tahoe
International Airport. WesPac Pipeline - San Diego Ltd. owns a 4.3-mile pipeline
serving the San Diego International Airport. Both of these pipelines transport
turbine fuel. Each of these WesPac entities is a joint venture between BPH and
Kealine Partners in which BPH owns a 75 percent ownership interest. The
Partnership also provides $8.9 million in debt financing to WesPac entities.
OTHER BUSINESS ACTIVITIES
BPH provides bulk storage services through facilities located in Taylor,
Michigan that have the capacity to store an aggregate of approximately 260,000
barrels of refined petroleum products. BT, a wholly-owned subsidiary of BPH,
operates 14 terminals located in New York, Pennsylvania, Ohio, Indiana and
Illinois that provide bulk storage and throughput services and have the capacity
to store an aggregate of approximately 4,848,000 barrels of refined petroleum
products. Together, these terminalling and storage activities provided
approximately 8% of the Partnership's revenue in 2002. BPH also owns an 18.52
percent stock interest in West Shore Pipe Line Company.
5
West Shore owns and operates a pipeline system that originates in the Chicago,
Illinois area and extends north to Green Bay, Wisconsin and west and then north
to Madison, Wisconsin. The pipeline system transports refined petroleum products
to users in northern Illinois and Wisconsin. The other stockholders of West
Shore are major oil companies. West Shore is operated under contract by Citgo
Pipeline Company.
BGC, a wholly-owned subsidiary of BPH, is a contract operator of pipelines
owned by major chemical companies in the state of Texas. BGC currently has seven
operations and maintenance contracts in place. In addition, BGC owns a 16-mile
pipeline located in the state of Texas that it leases to a third-party chemical
company. A subsidiary of BGC also owns approximately 63 percent of a crude
butadiene pipeline between Deer Park, Texas and Port Arthur, Texas that was
completed in March 2003. In 2002, BGC's contract operations provided
approximately 6% of the Partnership's revenue. BGC also provides engineering and
construction management services to major chemical companies in the Gulf Coast
area.
COMPETITION AND OTHER BUSINESS CONSIDERATIONS
The Operating Partnerships conduct business without the benefit of
exclusive franchises from government entities. In addition, the Operating
Partnerships pipeline operations generally operate as common carriers, providing
transportation services at posted tariffs and without long-term contracts. The
Operating Partnerships do not own the products they transport. Demand for the
services provided by the Operating Partnerships derives from demand for
petroleum products in the regions served and the ability and willingness of
refiners, marketers and end-users to supply such demand by deliveries through
the Operating Partnerships' pipelines. Demand for refined petroleum products is
primarily a function of price, prevailing general economic conditions and
weather. The Operating Partnerships' businesses are, therefore, subject to a
variety of factors partially or entirely beyond their control. Multiple sources
of pipeline entry and multiple points of delivery, however, have historically
helped maintain stable total volumes even when volumes at particular source or
destination points have changed.
The Partnership's business may in the future be affected by changing oil
prices or other factors affecting demand for oil and other fuels. The
Partnership's business may also be impacted by energy conservation, changing
sources of supply, structural changes in the oil industry and new energy
technologies. The General Partner is unable to predict the effect of such
factors.
Changes in transportation and travel patterns in the areas served by the
Partnership's pipelines as well as further improvements in average fuel
efficiency could adversely affect the Partnership's results of operations and
financial condition.
In 2002, the pipeline transportation business had approximately 110
customers, most of which were either major integrated oil companies or large
refined product marketing companies. The largest two customers accounted for 6.5
percent and 6.3 percent, respectively, of consolidated transportation revenues,
while the 20 largest customers accounted for 64.3 percent of consolidated
transportation revenues.
Generally, pipelines are the lowest cost method for long-haul overland
movement of refined petroleum products. Therefore, the Operating Partnerships'
most significant competitors for large volume shipments are other pipelines,
many of which are owned and operated by major integrated oil companies. Although
it is unlikely that a pipeline system comparable in size and scope to the
Operating Partnerships' pipeline system will be built in the foreseeable future,
new pipelines (including pipeline segments that connect with existing pipeline
systems) could be built to effectively compete with the Operating Partnerships
in particular locations. In the Midwest, several petroleum product pipeline
expansions and two new petroleum product pipeline construction projects are in
various stages of completion. Generally, these projects will increase the
capacity to bring additional refined products into the Partnership's service
area. Because the Operating Partnerships own multiple pipelines throughout the
Partnership's service area and these projects do not impact local petroleum
product supply and demand, the General Partner believes that the completion of
these pipeline projects may result in volumes shifting from one Operating
Partnership pipeline segment to another, but will not, in the aggregate, have a
material adverse effect on the Operating Partnership's results of operations or
financial condition.
The Operating Partnerships compete with marine transportation in some
areas. Tankers and barges on the Great Lakes account for some of the volume to
certain Michigan, Ohio and upstate New York locations during the
6
approximately eight non-winter months of the year. Barges are presently a
competitive factor for deliveries to the New York City area, the Pittsburgh
area, Connecticut and Ohio.
Trucks competitively deliver product in a number of areas served by the
Operating Partnerships. While their costs may not be competitive for longer
hauls or large volume shipments, trucks compete effectively for incremental and
marginal volumes in many areas served by the Operating Partnerships. The
availability of truck transportation places a significant competitive constraint
on the ability of the Operating Partnerships to increase their tariff rates.
Privately arranged exchanges of product between marketers in different
locations are an increasing but non-quantified form of competition. Generally,
such exchanges reduce both parties' costs by eliminating or reducing
transportation charges. In addition, consolidation among refiners and marketers
that has accelerated in recent years has altered distribution patterns, reducing
demand for transportation services in some markets and increasing them in other
markets.
Distribution of refined petroleum products depends to a large extent upon
the location and capacity of refineries. However, because the Partnership's
business is largely driven by the consumption of fuel in its delivery areas and
the Operating Partnerships' pipelines have numerous source points, the General
Partner does not believe that the expansion or shutdown of any particular
refinery would have a material effect on the business of the Partnership. The
General Partner is unable to determine whether refinery expansions or shutdowns
will occur or what their specific effect would be. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward-Looking
Information - Competition and Other Business Conditions."
The Operating Partnerships' mix of products transported tends to vary
seasonally. Declines in demand for heating oil during the summer months are, to
a certain extent, offset by increased demand for gasoline and jet fuel. Overall,
operations have been only moderately seasonal, with somewhat lower than average
volume being transported during March, April and May and somewhat higher than
average volume being transported in November, December and January.
Neither the Partnership nor any of the Operating Partnerships, other than
BPH's subsidiaries, has any employees. The Operating Partnerships are managed
and operated by employees of Services Company, BGC, Norco and BT. In addition,
Glenmoor provides certain management services to BMC, the General Partner and
Services Company. At December 31, 2002, Services Company had a total of 506
full-time employees, 145 of whom were represented by two labor unions. At
December 31, 2002, BGC had a total of 63 full-time, non-union employees, Norco
had a total of 30 full-time, non-union employees and BT had a total of 22
full-time, non-union employees. The Operating Partnerships (and their
predecessors) have never experienced any significant work stoppages or other
significant labor problems.
CAPITAL EXPENDITURES
The Partnership incurs capital expenditures in order to maintain and
enhance the safety and integrity of its pipelines and related assets, to expand
the reach or capacity of its pipelines, to improve the efficiency of its
operations or to pursue new business opportunities. During 2002 the Partnership
incurred $71.6 million of capital expenditures, of which $28.2 million related
to maintenance and integrity, $6.6 million related to expansion or cost
reduction projects and $36.8 million related to the construction of a 90-mile
crude butadiene pipeline. Financing for the Partnership's capital expenditures
was provided by cash from operations, borrowings under the Partnership's
revolving credit facilities and, with respect to the crude butadiene pipeline,
$14.2 million from advances provided by two petrochemical companies involved in
the project. The crude butadiene pipeline was completed in March 2003.
In 2003, the Partnership anticipates capital expenditures of approximately
$40 million, of which approximately $25 million is expected to relate to
maintenance and integrity projects and approximately $15 million is expected to
relate to expansion and cost reduction projects. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
7
REGULATION
General
Buckeye and Norco are interstate common carriers 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, Norco and the other Operating
Partnerships are subject to the jurisdiction of certain other federal agencies
with respect to environmental and pipeline safety matters.
The Operating Partnerships are also subject to the jurisdiction of various
state and local agencies, including, in some states, public utility commissions
which have jurisdiction over, among other things, intrastate tariffs, the
issuance of debt and equity securities, transfers of assets and pipeline safety.
FERC Rate Regulation
Buckeye's rates are governed by a market-based rate regulation program
initially approved by FERC in March 1991 and subsequently extended. Under this
program, in markets where Buckeye does not have significant market power,
individual rate increases: (a) will not exceed a real (i.e., exclusive of
inflation) increase of 15 percent over any two-year period (the "rate cap"), and
(b) will be allowed to become effective without suspension or investigation if
they do not exceed a "trigger" equal to the change in the Gross Domestic Product
implicit price deflator since the date on which the individual rate was last
increased, plus 2 percent. Individual rate decreases will be presumptively valid
upon a showing that the proposed rate exceeds marginal costs. In markets where
Buckeye was found to have significant market power and in certain markets where
no market power finding was made: (i) individual rate increases cannot exceed
the volume-weighted average rate increase in markets where Buckeye does not have
significant market power since the date on which the individual rate was last
increased, and (ii) any volume-weighted average rate decrease in markets where
Buckeye does not have significant market power must be accompanied by a
corresponding decrease in all of Buckeye's rates in markets where it does have
significant market power. Shippers retain the right to file complaints or
protests following notice of a rate increase, but are required to show that the
proposed rates violate or have not been adequately justified under the
market-based rate regulation program, that the proposed rates are unduly
discriminatory, or that Buckeye has acquired significant market power in markets
previously found to be competitive.
The Buckeye program is an exception to the generic oil pipeline regulations
issued under the Energy Policy Act of 1992. The generic rules rely primarily on
an index methodology, whereby a pipeline is allowed to change its rates in
accordance with an index (currently the Producer Price Index) that FERC believes
reflects cost changes appropriate for application to pipeline rates.
Alternatively, a pipeline is allowed to charge market-based rates if the
pipeline establishes that it does not possess significant market power in a
particular market. In addition, the rules provide for the rights of both
pipelines and shippers to demonstrate that the index should not apply to an
individual pipeline's rates in light of the pipeline's costs. The final rules
became effective on January 1, 1995.
The Buckeye program was subject to review by FERC in 2000 when FERC
reviewed the index selected in the generic oil pipeline regulations. FERC
decided to continue the generic oil pipeline regulations with no material
changes and did not modify or discontinue Buckeye's program. The General Partner
cannot predict the impact that any change to Buckeye's rate program would have
on Buckeye's operations. Independent of regulatory considerations, it is
expected that tariff rates will continue to be constrained by competition and
other market factors.
Norco's tariff rates are governed by the generic FERC index methodology,
and therefore are subject to change annually according to the index.
ENVIRONMENTAL MATTERS
The Operating Partnerships are subject to federal, state and local laws and
regulations relating to the protection of the environment. Although the General
Partner believes that the operations of the Operating Partnerships comply in all
material respects with applicable environmental laws and regulations, risks of
substantial liabilities are
8
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 injuries to 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") amended certain provisions of the
federal Water Pollution Control Act of 1972, commonly referred to as the Clean
Water Act ("CWA"), and other statutes as they pertain to the prevention of and
response to petroleum product spills into navigable waters. The OPA subjects
owners of facilities to strict joint and several liability for all containment
and clean-up costs and certain other damages arising from a spill. The CWA
provides penalties for any discharges of petroleum products in reportable
quantities and imposes substantial liability for the costs of removing a spill.
State laws for the control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground. Regulations are currently
being developed under OPA and state laws that may impose additional regulatory
burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products is not unusual in the petroleum pipeline industry. The Operating
Partnerships' pipelines cross numerous navigable rivers and streams. Although
the General Partner believes that the Operating Partnerships comply in all
material respects with the spill prevention, control and countermeasure
requirements of federal laws, any spill or other release of petroleum products
into navigable waters may result in material costs and liabilities to the
Partnership.
The Resource Conservation and Recovery Act ("RCRA"), as amended,
establishes a comprehensive program of regulation of "hazardous wastes."
Hazardous waste generators, transporters, and owners or operators of treatment,
storage and disposal facilities must comply with regulations designed to ensure
detailed tracking, handling and monitoring of these wastes. RCRA also regulates
the disposal of certain non-hazardous wastes. As a result of these regulations,
certain wastes typically generated by pipeline operations are considered
"hazardous wastes" which are subject to rigorous disposal requirements.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), also known as "Superfund," governs the release or threat of
release of a "hazardous substance." Releases of a hazardous substance, whether
on or off-site, may subject the generator of that substance to liability under
CERCLA for the costs of clean-up and other remedial action. Pipeline maintenance
and other activities in the ordinary course of business generate "hazardous
substances." As a result, to the extent a hazardous substance generated by the
Operating Partnerships or their predecessors may have been released or disposed
of in the past, the Operating Partnerships may in the future be required to
remedy contaminated property. Governmental authorities such as the Environmental
Protection Agency, and in some instances third parties, are authorized under
CERCLA to seek to recover remediation and other costs from responsible persons,
without regard to fault or the legality of the original disposal. In addition to
its potential liability as a generator of a "hazardous substance," the property
or right-of-way of the Operating Partnerships may be adjacent to or in the
immediate vicinity of Superfund and other hazardous waste sites. Accordingly,
the Operating Partnerships may be responsible under CERCLA for all or part of
the costs required to cleanup such sites, which costs could be material.
The Clean Air Act, amended by the Clean Air Act Amendments of 1990 (the
"Amendments"), imposes controls on the emission of pollutants into the air. The
Amendments required states to develop facility-wide permitting programs over the
past several years to comply with new federal programs. Existing operating and
air-emission requirements like those currently imposed on the Operating
Partnerships are being reviewed by appropriate state agencies in connection with
the new facility-wide permitting program. It is possible that new or more
stringent controls will be imposed upon the Operating Partnerships through this
permit review process.
The Operating Partnerships are also subject to environmental laws and
regulations adopted by the various states in which they operate. In certain
instances, the regulatory standards adopted by the states are more stringent
than applicable federal laws.
9
In 1986, certain predecessor companies acquired by the Partnership, namely
Buckeye Pipe Line Company and its subsidiaries ("Pipe Line"), entered into an
Administrative Consent Order ("ACO") with the New Jersey Department of
Environmental Protection and Energy under the New Jersey Environmental Cleanup
Responsibility Act of 1983 ("ECRA") relating to all six of Pipe Line's
facilities in New Jersey. The ACO permitted the 1986 acquisition of Pipe Line to
be completed prior to full compliance with ECRA, but required Pipe Line to
conduct in a timely manner a sampling plan for environmental conditions at the
New Jersey facilities and to implement any required clean-up plan. Sampling
continues in an effort to identify areas of contamination at the New Jersey
facilities, while clean-up operations have begun and have been completed at
certain of the sites. The obligations of Pipe Line were not assumed by the
Partnership and the costs of compliance have been and will continue to be paid
by American Financial Group, Inc.
PIPELINE REGULATION AND 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 that owns or operates pipeline facilities to comply with applicable
safety standards, to establish and maintain a plan of inspection and maintenance
and to comply with such plans.
The Pipeline Safety Reauthorization Act of 1988 requires coordination of
safety regulation between federal and state agencies, testing and certification
of pipeline personnel, and authorization of safety-related feasibility studies.
The General Partner has initiated drug and alcohol testing programs to comply
with the regulations promulgated by the Office of Pipeline Safety and DOT.
HLPSA requires, among other things, that the Secretary of Transportation
consider the need for the protection of the environment in issuing federal
safety standards for the transportation of hazardous liquids by pipeline. The
legislation also requires the Secretary of Transportation to issue regulations
concerning, among other things, the identification by pipeline operators of
environmentally sensitive areas; the circumstances under which emergency flow
restricting devices should be required on pipelines; training and qualification
standards for personnel involved in maintenance and operation of pipelines; and
the periodic integrity testing of pipelines in unusually sensitive and
high-density population areas by internal inspection devices or by hydrostatic
testing. Effective in August 1999, the DOT issued its Operator Qualification
Rule, which required a written program by April 27, 2001, for ensuring operators
are qualified to perform tasks covered by the pipeline safety rules. All persons
performing covered tasks must have been qualified under the program by October
28, 2002. The General Partner has identified the tasks that must be performed to
comply with this rule, has filed its written plan and has qualified its
employees and contractors as required. In addition, on December 1, 2000, DOT
published notice of final rulemaking for Pipeline Integrity Management in High
Consequence Areas (Hazardous Liquid Operators with 500 or more Miles of
Pipeline). This rule sets forth regulations that require pipeline operators to
assess, evaluate, repair and validate the integrity of hazardous liquid pipeline
segments that, in the event of a leak or failure, could affect populated areas,
areas unusually sensitive to environmental damage or commercially navigable
waterways. Under the rule, pipeline operators were required to identify line
segments which could impact high consequence areas by December 31, 2001.
Pipeline operators were required to develop "Baseline Assessment Plans" for
evaluating the integrity of each pipeline segment by March 31, 2002 and to
complete an assessment of the highest risk 50 percent of line segments by
September 30, 2004, with full assessment of the remaining 50 percent by March
31, 2008. Pipeline operators will thereafter be required to re-assess each
affected segment in intervals not to exceed five years.
In December 2002 the Pipeline Safety Improvement Act of 2002 ("PSIA")
became effective. The PSIA imposes additional obligations on pipeline operators,
increases penalties for statutory and regulatory violations, and includes
provisions prohibiting employers from taking adverse employment action against
pipeline employees and contractors who raise concerns about pipeline safety
within the company or with government agencies or the press. Many of the
provisions of the PSIA are subject to regulations to be issued by the Department
of Transportation. While the PSIA imposes additional operating requirements on
pipeline operators, the General Partner does not believe that cost of compliance
with the PSIA is likely to be material in the context of the Partnership's
operations.
The General Partner believes that the Operating Partnerships currently
comply in all material respects with HLPSA and other pipeline safety laws and
regulations. However, the industry, including the Partnership, will, in the
10
future, incur additional pipeline and tank integrity expenditures and the
Partnership is likely to incur increased operating costs based on these and
other government regulations. During 2002, the Partnership's integrity
expenditures increased to approximately $21 million. The General Partner expects
integrity expenditures to continue at this level during 2003 in order to
complete most of its initial assessment and pipeline improvements required by
HLPSA. Once this initial assessment is complete, re-assessments are expected to
cost significantly less and will be expensed. The General Partner believes these
additional capital and operating expenditures with respect to HLSPA requirements
will be offset, to some degree, by a reduced need for other facility
improvements and lower operating expenses associated with improved pipeline
facilities.
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, record- keeping, 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's results of operations or financial condition.
TAX TREATMENT OF PUBLICLY TRADED PARTNERSHIPS UNDER THE INTERNAL REVENUE CODE
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
limitations on the current deductibility of losses attributable to investments
in publicly traded partnerships and treats certain publicly traded partnerships
as corporations for federal income tax purposes. The following discussion
briefly describes certain aspects of the Code that apply to individuals who are
citizens or residents of the United States without commenting on all of the
federal income tax matters affecting the Partnership or the holders of LP units
("Unitholders"), and is qualified in its entirety by reference to the Code.
UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR ABOUT THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PARTNERSHIP.
Characterization of the Partnership for Tax Purposes
The Code treats a publicly traded partnership that existed on December 17,
1987, such as the Partnership, as a corporation for federal income tax purposes,
unless, for each taxable year of the Partnership, under Section 7704(d) of the
Code, 90 percent or more of its gross income consists of "qualifying income."
Qualifying income includes interest, dividends, real property rents, gains from
the sale or disposition of real property, income and gains derived from the
exploration, development, mining or production, processing, refining,
transportation (including pipelines transporting gas, oil or products thereof),
or the marketing of any mineral or natural resource (including fertilizer,
geothermal energy and timber), and gain from the sale or disposition of capital
assets that produce such income. Because the Partnership is engaged primarily in
the refined products pipeline transportation business, the General Partner
believes that 90 percent or more of the Partnership's gross income has been
qualifying income. If this continues to be true and no subsequent legislation
amends that provision, the Partnership will continue to be classified as a
partnership and not as a corporation for federal income tax purposes.
Passive Activity Loss Rules
The Code provides that an individual, estate, trust or personal service
corporation generally may not deduct losses from passive business activities, to
the extent they exceed income from all such passive activities, against other
(active) income. Income that may not be offset by passive activity losses
includes not only salary and active business income, but also portfolio income
such as interest, dividends or royalties or gain from the sale of property that
produces portfolio income. Credits from passive activities are also limited to
the tax attributable to any income from passive activities. The passive activity
loss rules are applied after other applicable limitations on deductions, such as
the at-risk rules and basis limitations. Certain closely held corporations are
subject to slightly different rules that can also limit their ability to offset
passive losses against certain types of income.
11
Under the Code, net income from publicly traded partnerships is not treated
as passive income for purposes of the passive loss rule, but is treated as
non-passive income. Net losses and credits attributable to an interest in a
publicly traded partnership are not allowed to offset a partner's other income.
Thus, a Unitholder's proportionate share of the Partnership's net losses may be
used to offset only Partnership net income from its trade or business in
succeeding taxable years or, upon a complete disposition of a Unitholder's
interest in the Partnership to an unrelated person in a fully taxable
transaction, may be used to (i) offset gain recognized upon the disposition, and
(ii) then against all other income of the Unitholder. In effect, net losses are
suspended and carried forward indefinitely until utilized to offset net income
of the Partnership from its trade or business or allowed upon the complete
disposition to an unrelated person in a fully taxable transaction of the
Unitholder's interest in the Partnership. A Unitholder's share of Partnership
net income may not be offset by passive activity losses generated by other
passive activities. In addition, a Unitholder's proportionate share of the
Partnership's portfolio income, including portfolio income arising from the
investment of the Partnership's working capital, is not treated as income from a
passive activity and may not be offset by such Unitholder's share of net losses
of the Partnership.
Deductibility of Interest Expense
The Code generally provides that investment interest expense is deductible
only to the extent of a non-corporate taxpayer's net investment income. In
general, net investment income for purposes of this limitation includes gross
income from property held for investment, gain attributable to the disposition
of property held for investment (except for net capital gains for which the
taxpayer has elected to be taxed at special capital gains rates) and portfolio
income (determined pursuant to the passive loss rules) reduced by certain
expenses (other than interest) which are directly connected with the production
of such income. Property subject to the passive loss rules is not treated as
property held for investment. However, the IRS has issued a Notice which
provides that net income from a publicly traded partnership (not otherwise
treated as a corporation) may be included in net investment income for purposes
of the limitation on the deductibility of investment interest. A Unitholder's
investment income attributable to its interest in the Partnership will include
both its allocable share of the Partnership's portfolio income and trade or
business income. A Unitholder's investment interest expense will include its
allocable share of the Partnership's interest expense attributable to portfolio
investments.
Unrelated Business Taxable Income
Certain entities otherwise exempt from federal income taxes (such as
individual retirement accounts, pension plans and charitable organizations) are
nevertheless subject to federal income tax on net unrelated business taxable
income and each such entity must file a tax return for each year in which it has
more than $1,000 of gross income from unrelated business activities. The General
Partner believes that substantially all of the Partnership's gross income will
be treated as derived from an unrelated trade or business and taxable to such
entities. The tax-exempt entity's share of the Partnership's deductions directly
connected with carrying on such unrelated trade or business are allowed in
computing the entity's taxable unrelated business income. ACCORDINGLY,
INVESTMENT IN THE PARTNERSHIP BY TAX-EXEMPT ENTITIES SUCH AS INDIVIDUAL
RETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE TRUSTS MAY NOT BE ADVISABLE.
State Tax Treatment
During 2002, the Partnership owned property or conducted business in the
states of Pennsylvania, New York, New Jersey, Indiana, Ohio, Michigan, Illinois,
Connecticut, Massachusetts, Florida, Texas, Nevada and California. 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.
12
Certain Tax Consequences to Unitholders
Upon formation of the Partnership in 1986, the General Partner elected
twelve-year straight-line depreciation for tax purposes. For this reason,
starting in 1999, the amount of depreciation available to the Partnership has
been reduced significantly and taxable income has increased accordingly.
Unitholders, however, will continue to offset Partnership income with individual
LP Unit depreciation under their IRC section 754 election. Each Unitholder's tax
situation will differ depending upon the price paid and when LP Units were
purchased. Generally, those who purchased LP Units within the past few years
will have adequate depreciation to offset a considerable portion of Partnership
income, while those who purchased LP Units more than several years ago will
experience the full increase in taxable income. Unitholders are reminded that,
in spite of the additional taxable income beginning in 1999, the current level
of cash distributions exceed expected tax payments. Furthermore, sale of LP
Units will result in taxable ordinary income as a consequence of depreciation
recapture. UNITHOLDERS ARE ENCOURAGED TO CONSULT THEIR PROFESSIONAL TAX ADVISORS
REGARDING THE TAX IMPLICATIONS TO THEIR INVESTMENT IN LP UNITS.
AVAILABLE INFORMATION
The Partnership files annual, quarterly, and current reports and other
documents with the SEC under the Securities Exchange Act of 1934. The public can
obtain any documents that we file with the SEC at http://www.sec.gov. We also
make available free of charge our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after filing such materials with, or furnishing
such materials to, the SEC, on or through our Internet website, www.buckeye.com.
We are not including the information contained on our Web site as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
As of December 31, 2002, the principal facilities of the Partnership
included 3,761 miles of 6-inch to 24-inch diameter pipeline, 49 pumping
stations, 90 delivery points, various sized tanks having an aggregate capacity
of approximately 14.7 million barrels and 15 bulk storage and terminal
facilities. The Operating Partnerships and their subsidiaries own substantially
all of these facilities.
In general, the Partnership's 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' and their subsidiaries 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 and their subsidiaries have not experienced any revocations or
lapses of such rights which were material to their business or operations, and
the General Partner has no reason to expect any such revocation or lapse in the
foreseeable future. Most delivery points, pumping stations and terminal
facilities are located on land owned by the Operating Partnerships or their
subsidiaries.
The General Partner believes that the Operating Partnerships and their
subsidiaries have sufficient title to their material assets and properties,
possess all material authorizations and revocable consents 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' and their
subsidiaries 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' or their
subsidiaries' 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
13
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
results of operations.
With respect to environmental litigation, certain Operating Partnerships
(or their predecessors) have been named in the past as defendants in lawsuits,
or have been notified by federal or state authorities that they are potentially
responsible parties ("PRPs") under federal laws or a respondent under state laws
relating to the generation, disposal or release of hazardous substances into the
environment. Typically, an Operating Partnership is one of many PRPs for a
particular site and its contribution of total waste at the site is minimal.
However, because CERCLA and similar statutes impose liability without regard to
fault and on a joint and several basis, the liability of an Operating
Partnership in connection with such proceedings could be material.
Although there is no material environmental litigation pending against the
Partnership or the Operating Partnerships at this time, claims may be asserted
in the future under various federal and state laws, and the amount of such
claims or the potential liability, if any, cannot be estimated. See "Business --
Regulation -- Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of LP Units during the
fourth quarter of the fiscal year ended December 31, 2002.
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 2002
and 2001, as reported in the New York Stock Exchange Composite Transactions,
were as follows:
2002 2001
---------------------- --------------------
QUARTER HIGH LOW HIGH LOW
- ------- ------- ------- ------- -------
First........................................................ $40.200 $35.510 $34.990 $28.375
Second....................................................... 40.000 34.000 38.100 31.270
Third........................................................ 38.850 26.500 38.000 28.500
Fourth....................................................... 39.500 33.700 37.640 34.550
During the months of December 2002 and January 2003, 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 24,000.
Cash distributions paid during 2001 and 2002 were as follows:
AMOUNT
RECORD DATE PAYMENT DATE PER UNIT
- ----------- ------------ -------
February 6, 2001............................................................... February 28, 2001 $ 0.600
May 4, 2001.................................................................... May 31, 2001 0.600
August 6, 2001................................................................. August 31, 2001 0.625
November 6, 2001............................................................... November 30, 2001 0.625
February 6, 2002............................................................... February 28, 2002 $ 0.625
May 5, 2002.................................................................... May 31, 2002 0.625
August 6, 2002................................................................. August 30, 2002 0.625
November 6, 2002............................................................... November 29, 2002 0.625
14
In general, the Partnership makes quarterly cash distributions of
substantially all of its available cash less such retentions for working
capital, anticipated expenditures and contingencies as the General Partner deems
appropriate.
On January 23, 2003, the Partnership announced a quarterly distribution of
$0.625 per LP Unit payable on February 28, 2003, to Unitholders of record on
February 6, 2003. The distribution was paid on February 28, 2003.
On February 28, 2003, the Partnership sold 1,750,000 LP units in an
underwritten public offering at a price of $36.01 per LP unit. Proceeds to the
Partnership, net of underwriters' discount of $1.62 per LP unit and estimated
offering expenses, were approximately $59.7 million. Proceeds of the offering
were used to reduce amounts outstanding under the Partnership's revolving credit
facilities (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" below).
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 each of the last
five years. In January 1998, the General Partner approved a two-for-one unit
split that became effective February 13, 1998. All unit and per unit information
contained in this filing, unless otherwise noted, has been adjusted for the two
for one split. The tables should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Income Statement Data:
Transportation revenue .......................... $247,345 $232,397 $208,632 $200,828 $184,477
Depreciation and amortization (1) ............... 20,703 20,002 17,906 16,908 16,432
Operating income (1) (2) ........................ 102,362 98,331 91,475 95,936 74,358
Interest and debt expense ....................... 20,527 18,882 18,690 16,854 15,886
Income from continuing operations before
extraordinary loss and discontinued operations 71,902 69,402 64,467 71,101 52,007
Net income (3) .................................. 71,902 69,402 96,331 76,283 52,007
Income per unit from continuing operations before
extraordinary loss and discontinued operations 2.65 2.56 2.38 2.63 1.93
Net income per unit ............................. 2.65 2.56 3.56 2.82 1.93
Distributions per unit .......................... 2.50 2.45 2.40 2.18 2.10
DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Total assets ...................... $856,171 $807,560 $712,812 $661,078 $618,099
Long-term debt .................... 405,000 373,000 283,000 266,000 240,000
General Partner's capital ......... 2,870 2,834 2,831 2,548 2,390
Limited Partners' capital ......... 355,475 351,057 346,551 314,441 296,095
Receivable from exercise of options 913 995 -- -- --
(1) Depreciation and amortization includes $832,000 and $461,000 in 2001
and 2000 related to goodwill acquired in the 2000 acquisition of six
petroleum products terminals. Goodwill amortization ceased effective
January 1, 2002 with the adoption of Statement of Financial Accounting
Standards. No. 142 - "Goodwill and Other Intangible Assets." See Note
7 to the Partnership's consolidated financial statements.
15
(2) Operating income for 1999 includes a one-time property tax expense
reduction of $11.0 million following the settlement of a real property
tax dispute with the City and State of New York.
(3) Net income includes income from discontinued operations of BRC of
$5,682,000 in 2000 and $5,182,000 in 1999 and, in 2000, the gain of
the sale of BRC of $26,182,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the liquidity and capital resources and
the results of operations of the Partnership for the periods indicated below.
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto, which are included elsewhere in this report.
RESULTS OF OPERATIONS
Through its Operating Partnerships and their subsidiaries, the Partnership
is principally engaged in the pipeline transportation of refined petroleum
products and, between March 1999 and October 25, 2000, the refining of transmix.
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 BPH, BT and BGC, in the
terminalling and storage of petroleum products and in contract operations of
pipelines for third parties. Revenues for each of the three years in the period
ended December 31, 2002 were as follows:
REVENUES
------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Pipeline transportation $214,052 $206,332 $193,845
Terminalling, storage and rentals 18,859 16,353 7,092
Contract operations 14,434 9,712 7,695
-------- -------- --------
Total $247,345 $232,397 $208,632
======== ======== ========
Results of operations are affected by factors that include general economic
conditions, weather, competitive conditions, demand for refined petroleum
products, seasonal factors and regulation. See "Business -- Competition and
Other Business Considerations."
2002 Compared With 2001
Total revenue for the year ended December 31, 2002 was $247.3 million,
$14.9 million or 6.4 percent greater than revenue of $232.4 million in 2001.
Revenue from pipeline transportation was $214.1 million in 2002 compared to
$206.3 million in 2001. Of the $7.8 million increase in pipeline transportation
revenue, $4.3 million is related to a full-year of Norco operations in 2002
compared to five months of Norco operations in 2001. Volumes delivered during
2002 averaged 1,101,400 barrels per day, 11,000 barrels per day or 1.0 percent
greater than volume of 1,090,400 barrels per day delivered in 2001.
Revenue from the transportation of gasoline of $114.1 million increased by
$6.5 million, or 6.0 percent, from 2001 levels. $2.0 million of the increase in
gasoline transportation revenue was related to a full-year of Norco operations.
Total gasoline volumes of 556,400 barrels per day in 2002 were 15,700 barrels
per day, or 2.9 percent greater than 2001 volumes of 540,700 barrels per day.
Norco gasoline volumes for a full-year of operations in 2002 were 17,200 barrels
per day compared to 16,800 barrels per day for five months of operations in
2001. In the East, gasoline volumes of 245,700 barrels per day were
approximately 9,400 barrels per day, or 4.0 percent, greater than 2001 volumes.
The increase was primarily due to greater deliveries to the upstate New York and
Pittsburgh, Pennsylvania areas. In the Midwest, gasoline volumes of 164,000
barrels per day were 6,900 barrels per day, or 4.0
16
percent, less than gasoline volumes delivered during 2001. Demand for gasoline
transportation was generally lower throughout the region with the largest
declines occurring in the Detroit and Bay City, Michigan areas. Long Island
System gasoline volumes of 111,300 barrels per day were up 5,700 barrels per
day, or 5.4 percent, due to additional available capacity on this system
following reductions in turbine fuel demand after September 11, 2001. On the Jet
Lines System, gasoline volumes of 18,200 barrels per day were 2,700 barrels per
day, or 12.8 percent, less than 2001 volumes due to lower transportation demand
in the Hartford, Connecticut area.
Revenue from the transportation of distillate of $57.7 million increased by
$0.4 million, or 0.7 percent, from 2001 levels. Norco's distillate
transportation revenue increased by $1.9 million in 2002 reflecting a full year
of operations. Total volumes of 265,400 barrels per day in 2002 were 1,400
barrels per day, or 0.5 percent less than 2001 distillate volumes of 266,800
barrels per day. Norco distillate volumes for a full-year of operations in 2002
were 12,900 barrels per day compared to 12,800 barrels per for five months of
operations in 2001. In the East, distillate volumes of 145,000 barrels per day
were approximately 5,300 barrels per day, or 3.5 percent, less than 2001
volumes. In the Midwest, distillate volumes of 68,100 barrels per day were 1,200
barrels per day, or 1.8 percent, less than volumes delivered during 2001. Long
Island System distillate volumes of 18,400 barrels per day were down 700 barrels
per day or 3.9 percent less than volumes delivered during 2001. On the Jet Lines
system, distillate volumes of 20,700 barrels per day were 1,800 barrels per day,
or 8.1 percent, less than 2001 volumes. Distillate volumes declined during the
first quarter of 2002 compared to the first quarter 2001 due to milder than
normal winter conditions. During the fourth quarter 2002, distillate volumes
increased over fourth quarter 2001 volumes as winter conditions returned to more
normal levels. The increase, however, did not fully offset the decline that
occurred during the first quarter of the year.
Revenue from the transportation of jet fuel of $36.9 million decreased by
$0.4 million, or 1.0 percent, from 2001 levels. Norco does not transport turbine
fuel. In May, 2001 WesPac commenced turbine fuel deliveries to San Diego
airport. WesPac's turbine fuel revenue was up $0.9 million primarily due to a
full-year of deliveries to San Diego Airport during 2002. Total jet fuel volumes
of 250,900 barrels per day in 2002 were 9,100 barrels per day, or 3.5 percent
less than 2001 jet fuel volumes of 260,000 barrels per day. WesPac's jet fuel
volumes of 11,700 barrels per day were up 3,600 barrels per day due to a full
year of deliveries to San Diego Airport. Deliveries to New York City airports
declined by 9,100 barrels per day, or 6.6 percent. Deliveries to Pittsburgh
Airport declined by 2,100 barrels per day, or 18.0 percent, while deliveries to
Miami airport declined 2,900 barrels per day, or 5.4 percent. Volumes to all
major airports declined as a result of reduced airline travel following the
terrorist attacks on September 11, 2001. Although deliveries to major airports
have improved from the dramatic decline immediately following September 11,
2001, the outlook for further recovery of turbine fuel volumes to pre-September
11, 2001 levels is uncertain due to airline schedule reductions, reduced
consumer air travel and the threat of further terrorist attacks.
Terminalling, storage and rental revenue of $18.9 million increased by $2.5
million in 2002 primarily due to a full year of Norco operations.
Contract operation services revenue of $14.4 million increased by $4.7
million due to additional contracts obtained by BGC during 2002 and 2001.
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 percentage than revenues from pipeline transportation
or terminalling, storage and rentals.
The Partnership's costs and expenses for 2002 were $145.0 million compared
to $134.1 million for 2001. BGC's costs and expenses increased by $4.5 million
over 2001 as a result of additional contract services provided. A full year of
Norco operations resulted in an additional $4.4 million of operating expense.
Other increases of $2.0 million are primarily related to general wage increases,
increases in payroll overhead costs, increases in the use of outside services,
increases in power costs related to additional pipeline volumes and higher
insurance premiums.
Other income and expense for 2002 was a net cost of $30.5 million compared
to $28.9 million in 2001. The increase is primarily due to higher interest
expense on additional borrowings during 2002 and 2001 related to acquisitions
and certain capital expenditures.
17
2001 Compared With 2000
Total revenue for the year ended December 31, 2001 was $232.4 million,
$23.8 million or 11.4 percent greater than revenue of $208.6 million in 2000.
Revenue derived from the pipeline transportation of refined products was $206.3
million in 2001 compared to $193.8 million in 2000. Of the $12.5 million
increase in pipeline transportation revenue, $2.7 million of the increase was
related to the Norco acquisition. Volumes delivered during 2001 averaged
1,090,400 barrels per day, 28,900 barrels per day or 2.7 percent greater than
volume of 1,061,500 barrels per day delivered in 2000. The Norco acquisition
represented 14,700 barrels per day of the volumes transported in 2001.
Revenue from the transportation of gasoline increased by $5.5 million, or
5.4 percent, from 2000 levels, of which $1.2 million was related to the Norco
acquisition. In the East, deliveries to the Pittsburgh, Pennsylvania and upstate
New York areas increased compared to 2000 volumes due to strong demand there. In
the Midwest, volumes and revenue declined compared to 2000 volumes primarily as
the result of decreased deliveries to the Bay City, Michigan area. Deliveries to
Bay City were unusually high in 2000 following the closure of a refinery in that
area.
Revenue from the transportation of distillate volumes increased by $3.8
million, or 7.0 percent, over 2000 levels, of which $1.3 million was related to
the Norco acquisition. Distillate deliveries for the year were up primarily due
to the colder than normal weather experienced during the first and second
quarter of 2001.
Revenue from the transportation of jet fuel decreased by $0.2 million, or
0.6 percent, from 2000 levels. Norco does not transport turbine fuel. In May,
2001 WesPac commenced turbine fuel deliveries to San Diego airport. This new
business added $1.4 million to 2001 revenues. Through September 11, 2001,
turbine fuel revenue was approximately 4 percent above prior year levels.
However, the terrorist attacks of September 11th greatly curtailed air travel
during the balance of September and the fourth quarter of 2001. Turbine fuel
deliveries declined by 18 percent overall during the fourth quarter of 2001.
Turbine fuel volumes improved in December 2001 as air travel began to recover
but was still down by approximately 10 percent overall from December 2000
levels. Deliveries to New York area airports were particularly affected, with a
24 percent decline in October 2000, a 28 percent decline in November 2001 and an
18 percent decline in December 2001 from year earlier volumes. This greater than
average decline reflects the larger percentage of international flights at these
airports as compared to other jet fuel delivery locations.
Revenue from the transportation of liquefied petroleum products ("LPG")
increased by $1.3 million, or 49.3 percent, over 2000 levels. Norco does not
transport LPG product. The increase in LPG revenues is related to primarily to
new business at Lima, Ohio.
Terminalling, storage and rental revenue of $16.4 million increased by $9.3
million in 2001. $3.4 million is due to an increase in terminalling and storage
revenue of which $1.9 million is related to the Norco acquisition with the
balance primarily resulting from a full year of operations related to the Agway
terminal acquisition on June 30, 2000. Rental revenue increased by $5.2 million
during 2001 of which $2.1 million is related to the Norco and Agway
acquisitions.
Contract operation services revenue of $9.7 million increased by $2.0
million due to additional contracts obtained by BGC during 2001 and 2000.
Costs and expenses for 2001 were $134.1 million compared to costs and
expenses of $117.2 million for 2000. BGC's costs and expenses increased by $4.4
million over 2000 as result of additional contract services provided. Another
$4.4 million of the expense increase is related to the Norco and Agway
acquisitions. Other increases of $8.1 million are primarily related to general
wage increases, increased payroll overhead costs, an increase in the use of
outside services, increased power costs related to additional pipeline
deliveries and higher insurance premiums.
Other expenses for 2001 were $28.9 million compared to $27.0 million in
2000. A $1.6 million gain realized on the sale of property in 2000 did not recur
in 2001. In addition, incentive compensation payments to the General Partner
that are based on the level of Partnership distributions were approximately $0.6
million greater during 2001 than 2000 due to an increase in the level of cash
distributions paid to limited partners. Investment income increased primarily as
the result of a $0.6 million gain on the tendering of preferred stock back to
Aerie Networks, Inc.
18
("Aerie"). The preferred stock had been issued by Aerie in exchange for
assisting Aerie with its development of a fiber optics network along the
Partnership's rights-of-way.
Discontinued Operations
In 2000, net income of $5.7 million from the discontinued operations of BRC
resulted from revenues of $172.5 million offset by costs and expenses of $166.8
million. BRC was sold to Kinder Morgan Energy Partners, L.P. for an aggregate
sale price of $45.7 million on October 25, 2000. The sale resulted in a gain of
$26.2 million (see Item 8, "Financial Statements and Supplementary Data").
Tariff Changes
Effective July 1, 2002, certain of the Operating Partnerships implemented
tariff increases that were expected to generate approximately $3.8 million in
additional annual revenue. Effective July 1, 2001, certain of the Operating
Partnerships implemented tariff increases that were expected to generate
approximately $4.1 million in additional revenue per year. Effective July 1,
2000, certain of the Operating Partnerships implemented tariff increases that
were expected to generate approximately $2.0 million in additional revenue per
year.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financial condition at December 31, 2002, 2001, and 2000
is highlighted in the following comparative summary:
Liquidity and Capital Indicators
AS OF DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Current ratio (1).................................................................. 1.4 to 1 1.5 to 1 2.0 to 1
Ratio of cash, cash equivalents and trade receivables to current liabilities....... .9 to 1 .8 to 1 1.5 to 1
Working capital (in thousands) (2)................................................. $13,092 $15,430 $28,749
Ratio of total debt to total capital (3)........................................... .53 to 1 .51 to 1 .45 to 1
Book value (per Unit)(4)........................................................... $13.15 $12.98 $12.91
(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 year-end.
During 2002, 2001 and 2000, the Partnership's principal sources of
liquidity were cash from operations and borrowings under its revolving credit
facilities. Additionally, in 2000, the Partnership received the proceeds from
the sale of BRC. In February 2003 the Partnership issued 1,750,000 LP units. The
Partnership's principal uses of cash are for capital expenditures, investments
and acquisitions and distributions to unitholders. The Partnership anticipates
that cash from operations and amounts available under its revolving credit
facilities will be sufficient to fund its cash requirements for 2003.
Cash Flows from Operations
Cash flows from operations were $93.1 million in 2002 compared to $81.0
million 2001. Income from continuing operations for 2002 was $71.9 million.
Income from continuing operations, before depreciation and amortization of $20.7
million, increased by $3.2 million to $92.6 million in 2002 from $89.4 million
in 2001. Changes in current assets and liabilities resulted in a net source of
cash of $0.6 million in 2002 compared to a net cash use of $5.3 million in 2001.
In 2002, increases in trade receivables and inventories were more than offset by
reductions in prepaid and other assets. In 2001, increases in trade receivables
and inventories were coupled with an increase in prepaid and other assets of
$4.5 million, principally related to operations at BGC. Changes in other
noncurrent assets and liabilities resulted in a net cash use of $1.2 million in
2002 compared to a net cash use of $3.5 million in 2001.
Cash from operations of $81.0 million in 2001 increased by $6.3 million
compared to $74.7 million in 2000. Income from continuing operations for 2001
was $69.4 million. Income from continuing operations, before depreciation and
amortization of $20.0 million, increased by $7.1 million to $89.4 million in
2001 from $82.3 million in 2000. Changes in current assets and liabilities
resulted in a net cash use of $8.4 million in 2000, principally related to
increases in trade receivables, inventory and prepaid expenses. Changes in
noncurrent assets and liabilities resulted in a net source of cash of $1.2
million in 2000.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $72.8 million in 2002
compared to $122.3 million in 2001 and $14.0 million in 2000. Substantially all
of the 2002 investing activities relate to capital expenditures. In 2001, the
Partnership invested $62.3 million in the acquisition of Norco and $23.6 million
for an approximate 18% interest in West Shore. In 2000, the Partnership invested
$20.7 million to acquire six petroleum products terminals from Agway, and
received $45.6 million proceeds from the sale of BRC. The Partnership had no
acquisition or investment expenditures in 2002. Capital expenditures for the
years ended December 31, 2002, 2001 and 2000 are summarized below:
CAPITAL EXPENDITURES
-----------------------
2002 2001 2000
----- ----- -----
(IN MILLIONS)
Sustaining capital expenditures:
Operating infrastructure ............. $ 7.0 $10.1 $ 6.0
Pipeline and tank integrity .......... 21.2 15.8 7.2
----- ----- -----
Total sustaining .................. 28.2 25.9 13.2
Expansion and cost reduction ............ 6.6 10.8 27.1
----- ----- -----
Subtotal ................................ 34.8 36.7 40.3
Investment in Gulf Coast Pipeline Project 36.8 -- --
----- ----- -----
Total ................................... $71.6 $36.7 $40.3
===== ===== =====
The Partnership's 2002 capital expenditures of $34.8 million (excluding
the $36.8 million related to the pipeline project discussed below) declined by
$1.9 million from $36.7 million in 2001. Of this total, $28.2 million related to
sustaining expenditures compared to $25.9 million in 2001 and $13.2 million in
2000. During 2002, the Partnership emphasized its pipeline and tank integrity
projects, including electronic internal inspections, other integrity assessments
and associated repairs, as part of a comprehensive program to meet increased
safety and environmental standards (see Part I, "Business-Environmental Matters"
and "Business-Pipeline Regulation and Safety Matters").
Under an agreement with three major petrochemical companies (the
"Agreement"), BGC has constructed a 90-mile crude butadiene pipeline (the "Gulf
Coast Pipeline Project"). The 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. As of December 31, 2002, the
Partnership had expended $36.8 million to construct the pipeline which is
included in the Partnership's 2002 capital expenditures. In addition, as of
December 31, 2002 two of the petrochemical companies had advanced $14.2 million
to the Partnership based on certain construction milestones. These advances are
included in other non-current liabilities in the financial statements of the
Partnership. As of March 2003, the pipeline was substantially complete and BGC
holds an approximate 63 percent interest in two partnerships (the "Pipeline
Partnerships") which own the pipeline. The two petrochemical companies own the
remaining 37 percent minority interest in the Pipeline Partnerships. Separately,
BGC has entered into an agreement to operate and maintain the pipeline for the
Pipeline Partnerships and the Pipeline Partnerships have entered into a
long-term agreement with Sabina Petrochemicals, LLC to provide pipeline
transportation throughput services.
The Partnership expects to spend approximately $40 million in capital
expenditures in 2003, of which approximately $25 million will relate to
sustaining expenditures and approximately $15 million to expansion and cost
reduction projects. Sustaining capital expenditures, in addition to pipeline
integrity, include renewals and replacements of tank floors and roofs, upgrades
to field instrumentation and cathodic protection systems, and replacement of
mainline pipe and valves. Expansion and cost reduction expenditures include
projects to facilitate
20
increased pipeline volumes, extend the pipeline incrementally to new facilities,
expand terminal facilities or improve the efficiency of operations. Of the
planned 2003 sustaining capital expenditures of $25 million, approximately $15
to $20 million is expected to relate to pipeline and tank integrity projects.
During 2002, 2001 and 2000, the Partnership accelerated its expenditures related
to pipeline and tank integrity projects, and anticipates that such expenditures
will begin to decline commencing in 2004 upon completion of most of the
long-distance pipeline integrity inspections.
As discussed below under Critical Accounting Policies and Estimates, the
Partnership's initial integrity expenditures are capitalized as part of pipeline
cost when such expenditures improve or extend the life of the pipeline or
related assets. Subsequent integrity expenditures are expensed as incurred.
Accordingly, over time, integrity expenditures will shift from capital to
operating expenditures.
Cash Flows from Financing Activities
During 2002, the Partnership increased its borrowings under its revolving
credit facility by $32 million, principally to fund its investment in the Gulf
Coast Pipeline Project as well as a portion of its other capital expenditures.
Additionally, as noted above, the Partnership received $14.2 million in advances
from two of the three petrochemical companies participating in the Gulf Coast
Pipeline Project. During 2001, the Partnership increased its borrowings under
its revolving credit facilities by $90.0 million, principally to fund the Norco
acquisition and the investment in West Shore Pipeline Company as well as a
portion of its capital expenditures. During 2000, the Partnership increased its
borrowings under its revolving credit facilities by $17 million, principally
related to the acquisition of the six petroleum products terminals from Agway.
Distributions to unitholders totaled $67.9 million in 2002 compared to $66.5
million and $65.0 million in 2001 and 2000, respectively.
Debt Obligations, Credit Facilities and Other Financing
At December 31, 2002, the Partnership had $405.0 million in outstanding
long-term debt, consisting of $240.0 million of Senior Notes (Series 1997A
through 1997D) (the "Senior Notes") and $165.0 million outstanding under its
5-year revolving credit facility. The Senior Notes are due in 2024 and accrue
interest at an average rate of 6.94%. At December 31, 2002, borrowings under the
5-year revolving credit facility accrued interest at a weighted average rate of
2.56%.
In 2001, the Partnership entered into a $277.5 million 5-year Revolving
Credit Agreement and a $92.5 million 364-day Revolving Credit Agreement with a
syndicate of banks led by SunTrust Bank. In September 2002, the Partnership
entered into a new 364-day Revolving Credit Agreement with another syndicate of
banks also led by SunTrust Bank and reduced the maximum amount borrowable to
$85.0 million. At that time certain covenants contained in both agreements (the
"Credit Facilities") were amended to eliminate the requirement of an investment
grade rating from either Standard and Poor's or Moody's Investor Services.
Together, the Credit Facilities permit borrowings up to $362.5 million subject
to certain limitations contained in the Credit Facility agreements. Borrowings
bear interest at SunTrust Bank's base rate or at a rate based on the London
Interbank Offered Rate ("LIBOR") at the option of the Partnership. The $362.5
million is available under the Credit Facilities until September 2003 with
$277.5 million available thereafter until September 2006. The Partnership
anticipates renewing the 364-day facility prior to its expiration in September
2003. These Credit Facilities replaced revolving credit agreements which had
previously been established with another bank.
The indenture of the Senior Notes (the "Indenture") and the Credit
Facilities contain similar covenants which together (a) limit outstanding
indebtedness of the Partnership and Buckeye based on certain financial ratios,
(b) prohibit the Partnership from creating or incurring certain liens on its
property, (c) prohibit the Partnership from disposing of property which is
material to its operations and (d) limit consolidation, merger and asset
transfers by the Partnership. Covenants under the Indenture apply to Buckeye,
Laurel and Buckeye Pipe Line Company of Michigan, L.P., whereas the covenants
under the Credit Facilities apply to the Partnership and all of its direct and
substantially all of its indirect subsidiaries. At December 31, 2002, all
parties were in compliance with the covenants in the Credit Facilities and the
Indenture.
At December 31, 2002, the Partnership had approximately $196.8 million
available under the Credit Facilities.
21
In October 2002 the Partnership filed an amended shelf registration
statement for the issuance, from time to time, of up to an aggregate of $300
million of the Partnership's LP units. In January 2003 the Partnership filed a
separate shelf registration statement for the issuance, from time to time, of up
to an aggregate of $300 million of the Partnership's debt securities. In
February 2003 the Partnership issued 1,750,000 LP units at a price of $36.01 per
LP unit. Net proceeds to the Partnership, after underwriters' discount of $1.62
per unit and estimated offering expenses were approximately $59.7 million.
Proceeds from the offering were used to reduce amounts outstanding under the
Credit Facilities.
Operating Leases
The Operating Partnerships lease certain land and rights-of-way. Minimum
future lease payments for these leases as of December 31, 2002 are approximately
$3.4 million for each of the next five years. Substantially all of these lease
payments may be canceled at any time should the leased property no longer be
required for operations.
The General Partner leases space in an office building and certain office
equipment and charges these costs to the Operating Partnerships. Buckeye leases
certain computing equipment and automobiles. Future minimum lease payments under
these noncancelable operating leases at December 31, 2002 were as follows:
$734,000 for 2003, $649,000 for 2004, $657,000 for 2005, $483,000 for 2006,
$59,000 for 2007 and none thereafter.
Buckeye entered into an energy services agreement for certain main line
pumping equipment and the natural gas requirements to fuel this equipment at its
Linden, New Jersey facility. Under the energy services agreement, which is
designed to reduce power costs at the Linden facility, Buckeye is required to
pay a minimum of $1,743,000 annually over the next nine years. This minimum
payment is based on an annual minimum usage requirement of the natural gas
engines at the rate of $0.049 per kilowatt hour equivalent. In addition to the
annual usage requirement, Buckeye is subject to minimum usage requirements
during peak and off-peak periods. Buckeye's use of the natural gas engines has
exceeded the minimum annual requirement in each of the three years ended
December 31, 2002.
Rent expense under operating leases was $7,285,000, $7,700,000 and
$8,855,000 for 2002, 2001 and 2000, respectively. Included in rent expense for
operating leases is $1,191,000 related to discontinued operations for 2000.
Contractual obligations are summarized in the follow table:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
---------------------------------------------------------
Less than
CONTRACTUAL OBLIGATIONS Total 1 year 1-3 years 4-5 years Thereafter
- ---------------------------------- -------- --------- --------- --------- ----------
Long-Term Debt ................... $405,000 $ -- $ -- $165,000 $240,000
Operating Leases ................. 2,582 734 1,306 542 --
Other Long-Term Obligations ...... 15,687 1,743 3,486 3,486 6,972
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $423,269 $ 2,477 $ 4,792 $169,028 $246,972
======== ======== ======== ======== ========
Environmental Matters
The Operating Partnerships are subject to federal, state and local laws
and regulations relating to the protection of the environment. These laws and
regulations, as well as the Partnership's own standards relating to protection
of the environment, cause the Operating Partnerships to incur current and
ongoing operating and capital expenditures. During 2002, the Operating
Partnerships incurred operating expenses of $1.9 million and, at December 31,
2002, had $7.5 million accrued for environmental matters. Expenditures, both
capital and operating, relating to environmental matters are expected to
continue due to the Partnership's commitment to maintain high environmental
standards and to increasingly rigorous environmental laws.
Various claims for the cost of cleaning up releases of hazardous
substances and for damage to the environment resulting from the activities of
the Operating Partnerships or their predecessors have been asserted and may be
asserted in the future under various federal and state laws. The General Partner
believes that the generation, handling
22
and disposal of hazardous substances by the Operating Partnerships and their
predecessors have been in material compliance with applicable environmental and
regulatory requirements. The total potential remediation costs to be borne by
the Operating Partnerships relating to these clean-up sites cannot be reasonably
estimated and could be material. With respect to each site, however, the
Operating Partnership involved is typically one of several or as many as several
hundred PRPs that would share in the total costs of clean-up under the principle
of joint and several liability. Although the Partnership has made a provision
for certain legal expenses relating to these matters, the General Partner is
unable to determine the timing or outcome of any pending proceedings or of any
future claims and proceedings. See "Business -- Regulation -- Environmental
Matters" and "Legal Proceedings."
Competition and Other Business Conditions
Several major refiners and marketers of petroleum products announced
strategic alliances or mergers in recent years. These alliances or mergers have
the potential to alter refined product supply and distribution patterns within
the Operating Partnerships' market area resulting in both gains and losses of
volume and revenue. While the General Partner believes that individual delivery
locations within its market area may have significant gains or losses, it is not
possible to predict the overall impact these alliances or mergers may have on
the Operating Partnerships' business. However, the General Partner does not
believe that these alliances or mergers will have a material adverse effect on
the Partnership's results of operations or financial condition.
In the Midwest, several petroleum product pipeline expansions and two new
petroleum product pipeline construction projects are in various stages of
completion. While these projects have the potential to alter supply sources with
respect to the Partnership's service area, they are not expected to have a
material adverse effect on the Operating Partnership's results of operations or
financial condition.
Certain changes in refined petroleum product specifications are likely to
impact the transportation of refined petroleum products over the next several
years. Methyl-Tertiary-Butyl-Ether ("MTBE"), a gasoline additive used for air
pollution control purposes, is scheduled to be phased out of use in certain
states commencing in 2004. The phase-out of MTBE may result in a reduction in
gasoline volumes delivered in the Partnership's service area. The Partnership is
unable to quantify the amount by which its transportation volumes might be
affected by the phase-out of MTBE. In addition, new requirements for the use of
ultra low-sulfur diesel fuel could require significant capital expenditures at
certain locations in order to permit the Partnership to handle this new product
grade. At this time the Partnership is unable to predict the timing or amount of
capital or operating expenditures that would be required to enable the
Partnership to transport and store ultra low-sulfur diesel fuel.
EMPLOYEE STOCK OWNERSHIP PLAN
Services Company provides an employee stock ownership plan (the "ESOP") to
substantially all of its regular full-time employees, except those covered by
certain labor contracts. The ESOP owns all of the outstanding common stock of
Services Company. At December 31, 2002, the ESOP was directly obligated to a
third-party lender for $47.5 million of 7.24 percent Notes (the "ESOP Notes").
The ESOP Notes are secured by Services Company common stock and are guaranteed
by Glenmoor and certain of its affiliates. The proceeds from the issuance of the
ESOP Notes were used to purchase Services Company common stock. Services Company
stock is released to employee accounts in the proportion that current payments
of principal and interest on the ESOP Notes bear to the total of all principal
and interest payments due under the ESOP Notes. Individual employees are
allocated shares based on the ratio of their eligible compensation to total
eligible compensation. Eligible compensation generally includes base salary,
overtime payments and certain bonuses. Services Company stock allocated to
employees receives stock dividends in lieu of cash, while cash dividends are
used to pay principal and interest on the ESOP Notes.
The Partnership contributed 2,573,146 LP Units to Services Company in
August 1997 in exchange for the elimination of the Partnership's obligation to
reimburse BMC for certain executive compensation costs, a reduction of the
incentive compensation paid by the Partnership to BMC under the existing
incentive compensation agreement, and other changes that made the ESOP a less
expensive fringe benefit for the Partnership. Funding for the ESOP Notes is
provided by distributions that Services Company receives on the LP Units that it
owns and from cash payments from the Partnership, as required to cover any
shortfall between the distributions that Services Company receives on the LP
Units that it owns and amounts currently due under the ESOP Notes (the "top-up"
23
reserve). The Partnership will also incur ESOP-related costs for routine
administrative costs and taxes associated with annual taxable income or the sale
of LP units, if any. Total ESOP related costs charged to earnings were $1.2
million in 2002 and $1.1 million during each of 2001 and 2000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to select appropriate accounting principles from those available, to
apply those principles consistently and to make reasonable estimates and
assumptions that affect revenues and associated costs as well as reported
amounts of assets and liabilities.
Generally, the timing and amount of revenue recognized by an organization
is among the most critical of accounting policies to be adopted. For its
pipeline operations, which constitutes approximately 86% the Partnership's
revenues, the Partnership recognizes revenue as the product is delivered to
customers. Terminalling and storage revenues, representing approximately 8% of
the Partnership's revenues, are recognized as the services are provided.
Revenues from contract pipeline operations, representing approximately 6% of the
Partnership's revenues, are recognized as the services are provided. Revenues
for contract operations include both direct costs to be reimbursed by the
customer under the contract and an operating fee. In all cases, the
Partnership's revenue recognition approximates billings to the customer.
Because the Partnership's customers generally consist of major integrated
oil companies, petroleum refiners and petrochemical companies, collections
experience has historically been good and the Partnership has not required an
allowance for bad debts. Some of the Partnership's customers consist of major
airlines, some of whom have experienced financial difficulties or even
bankruptcy following the events of September 11, 2001. However, the
Partnership's credit monitoring policies, coupled with its ability to require
prepayment of transportation charges, has limited its exposure to losses from
potentially uncollectible accounts. Bad debts, when they occur, are written off
as a charge to revenue.
Approximately 85% of the Partnership's consolidated assets consist of
property, plant and equipment. Property plant and equipment consists of pipeline
and related transportation facilities and equipment, including land,
rights-of-way, buildings and leasehold improvements and machinery and equipment.
Pipeline assets are generally self-constructed, using either contractors or the
Partnership's own employees. Additions and improvement to the pipeline are
capitalized based on the cost of the improvement while repairs and maintenance
are expensed. Pipeline integrity expenditures are capitalized the first time
such expenditures are incurred, when such expenditures improve or extend the
life of the pipeline or related assets. Subsequent integrity expenditures are
expensed as incurred. During 2002, 2001 and 2000, the Partnership capitalized
$21.2 million, $15.8 million and $7.2 million, respectively, of integrity
expenditures. Over the next several years, the Partnership expects integrity
expenditures, both capital and operating, to range between $15 million and $20
million per year. During this time, the portion of expenditures capitalized is
expected to decrease and the portion recorded as expense is expected to
increase.
As discussed under Environmental Matters above, the Operating Partnerships
are subject to federal, state and local laws and regulations relating to the
protection of the environment. Environmental expenditures that relate to current
operations 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. Accrued environmental
remediation related expenses include estimates of direct costs of remediation
and indirect costs related to the remediation effort, such as compensation and
benefits for employees directly involved in the remediation activities and fees
paid to outside engineering, consulting and law firms. The Partnership maintains
insurance which may cover in whole or in part certain environmental
expenditures. During 2002, the Operating Partnerships incurred operating
expenses of $1.2 million and, at December 31, 2002, had $7.5 million accrued for
environmental matters. The environmental accruals are revised as new matters
arise, or as new facts in connection with environmental remediation projects
require a revision of estimates previously made with respect to the probable
cost of such remediation projects.
24
In the event a known environmental liability results in expenditures that
exceed the amount that has been accrued in connection with the matter, the
additional expenditures would result in an increase in expenses and a reduction
in income, in the period when the additional expense is incurred. Based on its
experience, however, the Partnership believes that the amounts it has accrued
for the future costs related to environmental liabilities is reasonable.
RELATED PARTY TRANSACTIONS
With respect to related party transactions see Note 18 to the consolidated
financial statements and Item 13 of Part III included elsewhere in this report.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. The Norco acquisition was accounted for in accordance with
the provisions of SFAS 141. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 with respect to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. As a result of SFAS
142, the Partnership's goodwill of $11,355,000 is no longer subject to
amortization.
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. While the Partnership has not
completed its analysis, the General Partner does not believe that the adoption
of SFAS 143 will have a material impact on the Partnership's financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 was effective for fiscal years beginning after December 15, 2001 and
did not have a material impact on the Partnership's financial statements.
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 is
effective for fiscal years beginning after December 31, 2002. The Partnership
does not expect the adoption of SFAS No. 145 to have a material effect on its
consolidated financial position or results of operations.
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, with earlier application encouraged.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and 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.
25
The Partnership has included the applicable disclosures in its financial
statements and does not anticipate that the accounting provisions of FIN 45 will
have a material impact on its 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 Company
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 disclosures have been included in the Partnership's financial statements
and quarterly disclosures will be 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 beginning after June 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 impact on its financial statements.
FORWARD-LOOKING INFORMATION
Information contained above in this Management's Discussion and Analysis
and elsewhere in this Report on Form 10-K with respect to expected financial
results and future events is forward-looking, based on our estimates and
assumptions and subject to risk and uncertainties. For those statements, the
Partnership and the General Partner claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The following important factors could affect our future results and could
cause those results to differ materially from those expressed in our
forward-looking statements: (1) adverse weather conditions resulting in reduced
demand; (2) changes in laws and regulations, including safety, tax and
accounting matters; (3) competitive pressures from alternative energy sources;
(4) liability for environmental claims; (5) improvements in energy efficiency
and technology resulting in reduced demand; (6) labor relations; (7) changes in
real property tax assessments; (8) regional economic conditions; (9) market
prices of petroleum products and the demand for those products in the
Partnership's service territory; (10) disruptions to the air travel system; (11)
security issues relating to the Partnership' assets; and (12) interest rate
fluctuations and other capital market conditions.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership is exposed to market risks resulting from changes in
interest rates. Market risk represents the risk of loss that may impact the
Partnership's results of operations, the consolidated financial position or
operating cash flows. The Partnership is not exposed to any market risk due to
rate changes on its Senior Notes but is exposed to market risk related to the
interest rate on the Credit Facilities.
Market Risk - Trading Instruments
Prior to the sale of BRC, the Partnership hedged a substantial portion of
its exposure to inventory price fluctuations related to its BRC business with
commodity futures contracts for the sale of gasoline and fuel oil. Losses
related to commodity futures contracts included in earnings from discontinued
operations were $6.7 million for 2000. Currently the Partnership has no
derivative instruments and does not engage in hedging activity.
26
Market Risk - Other than Trading Instruments
The Partnership has market risk exposure on its Credit Facilities due to
its variable rate pricing that is based on the bank's base rate or at a rate
based on LIBOR. At December 31, 2002, the Partnership had $165.0 million in
outstanding debt under its Credit Facilities that was subject to market risk.
Based on the amount outstanding at December 31, 2002, a 1 percent increase or
decrease in the applicable rate under the Credit Facilities will result in an
interest expense fluctuation of approximately $1.65 million. As of December 31,
2001, the Partnership had $133 million in outstanding debt that was subject to
market risk.
27
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 ................................................... 29
Consolidated Statements of Income -- For the years ended December 31, 2002, 2001
and 2000 .................................................................... 30
Consolidated Balance Sheets -- December 31, 2002 and 2001 ...................... 31
Consolidated Statements of Cash Flows -- For the years ended December 31, 2002,
2001 and 2000 ............................................................... 32
Notes to Consolidated Financial Statements ..................................... 33
Financial Statement Schedule and Independent Auditors' Report:
Independent Auditors' Report ................................................... S-1
Schedule I -- Registrant's Condensed Financial Information ..................... 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.
28
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, 2002
and 2001, and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Partnership as of December
31, 2002 and 2001, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 2002, the Partnership changed its method of accounting for goodwill
and other intangible assets to conform to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 19, 2003
29
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------------
NOTES 2002 2001 2000
-------- --------- --------- ---------
Transportation revenue....................................................... 2,4 $ 247,345 $ 232,397 $ 208,632
--------- --------- ---------
Costs and expenses .......................................................... .
Operating expenses .................................................. 6,18 110,670 101,965 87,498
Depreciation and amortization ....................................... 2,7,9,10 20,703 20,002 17,906
General and administrative expenses ................................. 18 13,610 12,099 11,753
--------- --------- ---------
Total costs and expenses ......................................... 144,983 134,066 117,157
--------- --------- ---------
Operating income ............................................................ 102,362 98,331 91,475
--------- --------- ---------
Other income (expenses)
Investment income ................................................... 1,952 1,526 596
Interest and debt expense ........................................... (20,527) (18,882) (18,690)
Minority interests and other ........................................ 18 (11,885) (11,573) (8,914)
--------- --------- ---------
Total other income (expenses) .................................... (30,460) (28,929) (27,008)
--------- --------- ---------
Income from continuing operations ........................................... 71,902 69,402 64,467
--------- --------- ---------
Earnings of discontinued operations ......................................... 5 -- -- 5,682
Gain on sale of discontinued operations ..................................... 5 -- -- 26,182
--------- --------- ---------
Income from discontinued operations ......................................... -- -- 31,864
--------- --------- ---------
Net income .................................................................. $ 71,902 $ 69,402 $ 96,331
========= ========= =========
Net income allocated to General Partner ..................................... 19 $ 646 $ 601 $ 868
Net income allocated to Limited Partners .................................... 19 $ 71,256 $ 68,801 $ 95,463
EARNINGS PER PARTNERSHIP UNIT
Income from continuing operations allocated to General and
Limited Partners per Partnership Unit ..................................... $ 2.65 $ 2.56 $ 2.38
Income from discontinued operations allocated to General and Limited Partners
per Partnership Unit ...................................................... -- -- 1.18
--------- --------- ---------
Earnings per Partnership Unit ............................................... $ 2.65 $ 2.56 $ 3.56
========= ========= =========
Earnings Per Partnership Unit - assuming dilution:
Income from continuing operations allocated to General
and Limited Partners per Partnership Unit ................................. $ 2.64 $ 2.55 $ 2.38
Income from discontinued operations allocated to General and Limited Partners
per Partnership Unit ...................................................... -- -- 1.17
--------- --------- ---------
Earnings per Partnership Unit ............................................... $ 2.64 $ 2.55 $ 3.55
========= ========= =========
See Notes to consolidated financial statements.
30
BUCKEYE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------------
NOTES 2002 2001
-------- --------- ----------
Assets
Current assets
Cash and cash equivalents ............... 2 $ 11,208 $ 12,946
Trade receivables ....................... 2 17,203 13,753
Inventories ............................. 2 8,424 7,591
Prepaid and other current assets ........ 8 7,007 13,441
--------- ----------
Total current assets .................. 43,842 47,731
Property, plant and equipment, net ......... 2,4,9 727,450 670,439
Goodwill ................................... 7 11,355 11,355
Other non-current assets ................... 10,16 73,524 78,035
--------- ----------
Total assets .......................... $ 856,171 $ 807,560
========= ==========
Liabilities and partners' capital
Current liabilities
Accounts payable ........................ $ 8,062 $ 7,416
Accrued and other current liabilities ... 5,11,18 22,688 24,885
--------- ----------
Total current liabilities ............. 30,750 32,301
Long-term debt ............................. 12 405,000 373,000
Minority interests ......................... 3,498 3,307
Other non-current liabilities .............. 13,14,18 59,491 46,056
--------- ----------
Total liabilities ..................... 498,739 454,664
--------- ----------
Commitments and contingent liabilities ......... 6,17 -- --
Partners' capital
General Partner ............................ 19 2,870 2,834
Limited Partner ............................ 19 355,475 351,057
Receivable from exercise of options ........ 19 (913) (995)
--------- ----------
Total partners' capital ............... 357,432 352,896
--------- ----------
Total liabilities and partners' capital $ 856,171 $ 807,560
========= ==========
See Notes to consolidated financial statements.
31
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
NOTES 2002 2001 2000
------ --------- --------- ---------
Cash flows from operating activities:
Net income ....................................................... $ 71,902 $ 69,402 $ 96,331
Income from discontinued operations .............................. -- -- (5,682)
Gain on sale of discontinued operations .......................... -- -- (26,182)
--------- --------- ---------
Income from continuing operations ................................ 71,902 69,402 64,467
--------- --------- ---------
Adjustments to reconcile income to net cash provided by
operating activities:
Gain on sale of property, plant and equipment ............... -- -- (1,582)
Gain on sale of investments ................................. -- (620) --
Depreciation and amortization ............................... 7,9,10 20,703 20,002 17,906
Minority interests .......................................... 1,046 960 1,094
Change in assets and liabilities:
Trade receivables ........................................ (3,450) (2,748) (3,058)
Inventories .............................................. (833) (1,032) (1,159)
Prepaid and other current assets ......................... 6,434 (4,480) (4,227)
Accounts payable ......................................... 646 828 82
Accrued and other current liabilities .................... (2,197) 2,169 (49)
Other non-current assets ................................. (434) (1,515) (838)
Other non-current liabilities ............................ (722) (1,968) 2,059
--------- --------- ---------
Total adjustments from operating activities ........... 21,193 11,596 10,228
--------- --------- ---------
Net cash provided by continuing operations ............ 93,095 80,998 74,695
--------- --------- ---------
Net cash provided by discontinued operations .......... -- -- 3,576
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ............................................. 9 (71,608) (36,667) (40,267)
Acquisitions ..................................................... -- (62,283) (20,693)
Investment in West Shore Pipe Line Company ....................... -- (23,268) --
Net (expenditures for) proceeds from disposal of property, plant
and equipment ............................................... (1,161) (779) 1,261
Proceeds from sale of investments ................................ -- 711 --
Proceeds from sale of discontinued operations .................... -- -- 45,696
--------- --------- ---------
Net cash used in investing activities ................. (72,769) (122,286) (14,003)
--------- --------- ---------
Cash flows from financing activities:
Debt issuance costs .............................................. 12 -- (1,339) --
Proceeds from exercise of unit options ........................... 566 576 1,013
Distributions to minority interests .............................. (855) (755) (845)
Advances related to pipeline project ............................. 9 14,157 -- --
Proceeds from issuance of long-term debt ......................... 12 46,000 210,000 46,000
Payment of long-term debt ........................................ 12 (14,000) (120,000) (29,000)
Distributions to unitholders ..................................... 19,20 (67,932) (66,464) (64,951)
--------- --------- ---------
Net cash (used in) provided by financing activities ... (22,064) 22,018 (47,783)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents .................. (1,738) (19,270) 16,485
Cash and cash equivalents at beginning of year ........................ 12,946 32,216 15,731
--------- --------- ---------
Cash and cash equivalents at end of year .............................. $ 11,208 $ 12,946 $ 32,216
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for interest (net of amount capitalized) $ 20,628 $ 19,053 $ 17,828
Capitalized interest ............................................. $ 2,083 $ 1,102 $ 1,157
See Notes to consolidated financial statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001 AND
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. ORGANIZATION
Buckeye Partners, L.P. (the "Partnership") is a master limited partnership
organized in 1986 under the laws of the state of Delaware. The Partnership's
principal line of business is the transportation of refined petroleum products
for major integrated oil companies, large refined product marketing companies
and major end users of petroleum products on a fee basis through facilities
owned and operated by the Partnership.
The Partnership owns approximately 99 percent limited partnership
interests in Buckeye Pipe Line Company, L.P. ("Buckeye"), Laurel Pipe Line
Company, L.P. ("Laurel"), Everglades Pipe Line Company, L.P. ("Everglades") and
Buckeye Pipe Line Holdings, L.P. ("BPH" formerly Buckeye Tank Terminals Company,
L.P.) These entities are hereinafter referred to as the "Operating
Partnerships." BPH owns directly, or indirectly, a 100 percent interest in each
of Buckeye Terminals, LLC ("BT"), Norco Pipe Line Company, LLC ("Norco"),
Buckeye Gulf Coast Pipe Lines, L.P. ("BGC"). BPH also owns a 75 percent interest
in WesPac Pipeline-Reno Ltd., WesPac Pipeline-San Diego, Ltd. and related WesPac
entities (collectively known as "WesPac") and an 18.52 percent interest in West
Shore Pipe Line Company.
Buckeye Pipe Line Company (the "General Partner") serves as the general
partner to the Partnership. As of December 31, 2002, the General Partner owned
approximately a 1 percent general partnership interest in the Partnership and
approximately a 1 percent general partnership interest in each Operating
Partnership, for an effective 2 percent interest in the Partnership. The General
Partner is a wholly-owned subsidiary of Buckeye Management Company ("BMC"). BMC
is a wholly-owned subsidiary of Glenmoor, Ltd. ("Glenmoor"). Glenmoor is owned
by certain directors and members of senior management of the General Partner and
trusts for the benefit of their families and by certain other management
employees of Buckeye Pipe Line Services Company ("Services Company").
Services Company employs substantially all of the employees that work for
the Operating Partnerships. At December 31, 2002, Services Company had 506
full-time employees. Services Company entered into a Services Agreement with BMC
and the General Partner in August 1997 to provide services to the Partnership
and the Operating Partnerships through March 2011. Services Company is
reimbursed by BMC or the General Partner for its direct and indirect expenses,
which in turn are reimbursed by the Partnership, except for certain executive
compensation costs. (see Note 18). BT, Norco and BGC directly employed 115
full-time employees at December 31, 2002.
Buckeye is one of the largest independent pipeline common carriers of
refined petroleum products in the United States, with 2,909 miles of pipeline
serving 9 states. Laurel owns a 345-mile common carrier refined products
pipeline located principally in Pennsylvania. Norco owns a 482-mile refined
products pipeline system located primarily in Illinois, Indiana and Ohio.
Everglades owns a 37-mile refined products pipeline in Florida. Buckeye, Laurel,
Norco and Everglades conduct the Partnership's refined products pipeline
business. BPH and its subsidiaries provide bulk storage service through
facilities with an aggregate capacity of 5.1 million barrels of refined
petroleum products. BGC is a contract operator of pipelines owned by major
chemical companies in the State of Texas. WesPac provides pipeline
transportation service to Reno/Tahoe International and San Diego International
airports.
On March 4, 1999, the Partnership acquired the fuels division of American
Refining Group, Inc. ("ARG") for approximately $13.7 million. The Partnership
operated the former ARG processing business under the name of Buckeye Refining
Company, LLC ("BRC"). BRC was sold to Kinder Morgan Energy Partners, L.P.
("Kinder Morgan") on October 25, 2000 for approximately $45.7 million. BRC
processed transmix at its Indianola, Pennsylvania and Hartford, Illinois
refineries. Transmix represents refined petroleum products, primarily fuel oil
and gasoline that become commingled during normal pipeline operations. The
refining process produced separate quantities of fuel oil, kerosene and gasoline
that BRC then marketed at the wholesale level (see Note 5).
33
On March 31, 1999, the Partnership acquired pipeline operating contracts
and a 16-mile pipeline from Seagull Products Pipeline Corporation and Seagull
Energy Corporation ("Seagull") for approximately $5.8 million. The Partnership
operates the assets acquired from Seagull under the name of Buckeye Gulf Coast
Pipe Lines, LLC. BGC is an owner and contract operator of pipelines owned by
major chemical companies in the Gulf Coast area. BGC leases its 16-mile pipeline
to a chemical company.
In June 2000, the Partnership also acquired six petroleum products
terminals from Agway Energy Products LLC for approximately $20.7 million. The
terminals acquired had an aggregate capacity of approximately 1.8 million
barrels and are located in Brewerton, Geneva, Marcy, Rochester and Vestal, New
York and Macungie, Pennsylvania. The Partnership operates the assets acquired
from Agway under the name of Buckeye Terminals, LLC.
On July 31, 2001, the Partnership acquired a refined products pipeline
system and related terminals from affiliates of TransMontaigne Inc. for
approximately $62.3 million. The assets included a 482-mile refined petroleum
products pipeline that runs from Hartsdale, Indiana west to Fort Madison, Iowa
and east to Toledo, Ohio, with an 11-mile pipeline connection between major
storage terminals in Hartsdale and East Chicago, Indiana. These assets are
operated by the Partnership under the name of Norco Pipe Line Company, LLC. The
acquired assets also included 3.2 million barrels of pipeline storage and
trans-shipment facilities in Hartsdale and East Chicago, Indiana and Toledo,
Ohio; and four petroleum products terminals located in Bryan, Ohio; South Bend
and Indianapolis, Indiana; and Peoria, Illinois. The storage and terminal assets
are operated by Buckeye Terminals, LLC.
On October 29, 2001, the Partnership acquired 6,805 shares of common stock
of West Shore Pipe Line Company ("West Shore") from TransMontaigne Pipeline Inc.
for approximately $23.3 million. The common stock represents an 18.52 percent
interest in West Shore. West Shore owns and operates a pipeline system that
originates in the Chicago, Illinois area and extends north to Green Bay,
Wisconsin and west and then north to Madison, Wisconsin. The pipeline system
transports refined petroleum products to users in northern Illinois and
Wisconsin. The other stockholders of West Shore are major oil companies. The
pipeline is operated under contract by Citgo Pipeline Company. The investment in
West Shore is accounted for using the cost basis of accounting.
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"). Buckeye and Norco are subject to rate regulation
as promulgated by FERC. Reports to FERC differ from the accompanying
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America
("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 accounting principles generally accepted in the United States of
America 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 and Hedging Activities
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 12). Statement of Financial Accounting Standards No.
133 "Accounting for Financial
34
Instruments and Hedging Activities" ("SFAS 133") was effective January 1, 2001.
The Partnership did not have financial instruments or transactions subject to
the provisions of SFAS 133 during 2002 or 2001, the periods affected by SFAS
133.
Cash and Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three
months or less are classified as cash equivalents.
Revenue Recognition
Revenue from the transportation of refined petroleum products is
recognized as products are delivered to customers. Such customers include major
integrated oil companies, major petroleum refiners, major petrochemical
companies, large regional marketing companies and large commercial airlines. The
consolidated Partnership's customer base was approximately 110 in 2002. No
customer contributed more than 10 percent of total revenue during 2002. The
Partnership does not maintain an allowance for doubtful accounts due to its
favorable collections experience.
The Partnership also derives revenue from terminalling operations, rentals
and contract services for the operation of facilities and pipelines not directly
owned by the Partnership. Revenue from such operations is recognized as the
services are performed. Contract services revenue typically includes costs to be
reimbursed by the customer plus an operator fee.
Inventories
Inventories, consisting of materials and supplies such as: pipe, valves,
pumps, electrical/electronic components, drag reducing agent and other
miscellaneous items are carried at the lower of cost or market based on the
first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment consist primarily of pipeline and related
transportation facilities and equipment. For financial reporting purposes,
depreciation on pipe assets is calculated using the straight-line method over
the estimated useful life of 50 years. Other assets are depreciated on a
straight-line basis over an estimated life of 5 to 50 years. Additions and
betterments are capitalized and maintenance and repairs are charged to income as
incurred. Generally, upon normal retirement or replacement, the cost of property
(less salvage) is charged to the depreciation reserve, which has no effect on
income.
Goodwill
Effective January 1, 2002, the Partnership no longer amortizes goodwill.
In 2001 and 2000, the Partnership amortized goodwill on a straight-line basis
over a period of fifteen years (see Recent Accounting Pronouncements below and
Note 7). The Partnership assesses its goodwill annually for potential impairment
based on the market value of its business compared to its book value.
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. The Partnership assesses
recoverability based on estimated undiscounted future cash flows expected to
result from the use of the asset and its eventual disposal. The measurement is
based on the fair value of the asset.
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
35
tax returns of the individual partners. As of December 31, 2002 and 2001, the
Partnership's reported amount of net assets for financial reporting purposes
exceeded its tax basis by approximately $327 million and $306 million,
respectively.
Environmental Expenditures
Environmental expenditures that relate to current operations 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. Accrued environmental
remediation related expenses include direct costs of remediation and indirect
costs related to the remediation effort, such as compensation and benefits for
employees directly involved in the remediation activities and fees paid to
outside engineering, consulting and law firms. The Partnership maintains
insurance which may cover in whole or in part certain environmental
expenditures.
Pensions
Services Company maintains a defined contribution plan (see Note 14),
defined benefit plans (see Note 14) and an employee stock ownership plan (see
Note 16) which provide retirement benefits to substantially all of its regular
full-time employees, Norco employees, BGC employees and BT employees. Certain
hourly employees of Services Company are covered by a defined contribution plan
under a union agreement (see Note 14).
Postretirement Benefits Other Than Pensions
Services Company provides postretirement health care and life insurance
benefits for certain of its retirees (see Note 14). Certain other retired
employees are covered by a health and welfare plan under a union agreement (see
Note 14).
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.
36
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:
(IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
------------------------
2002 2001 2000
---- ---- ----
Net income as reported $71,902 $69,402 $96,331
Stock-based employee compensation
cost included in net income 1 7 20
Stock-based employee compensation
cost that would have been included in net income under
the fair value method (179) (130) (95)
------- ------- -------
Pro forma net income as if the fair
value method had been applied to all awards $71,724 $69,279 $96,256
======= ======= =======
Basic earnings per unit As reported
and Pro forma $ 2.65 $ 2.56 $ 3.56
Diluted earnings per unit As reported
and Pro forma $ 2.64 $ 2.55 $ 3.55
Comprehensive Income
The Partnership does not have any items of comprehensive income other than
net income. Accordingly, net income and comprehensive income are the same.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
Recent Accounting Pronouncements
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. The Norco acquisition was accounted for in accordance with
the provisions of SFAS 141. SFAS 142 is effective for fiscal years beginning
after December 15, 2001 with respect to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. As a result of SFAS
142, the Partnership's goodwill of $11,355,000 is no longer subject to
amortization.
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. While the Partnership has not
completed its analysis, the General Partner does not believe that the adoption
of SFAS 143 will have a material impact on the Partnership's financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 was effective for fiscal years beginning after December 15, 2001, and
its adoption did not have a material impact on the Partnership's financial
statements.
37
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 is
effective for fiscal years beginning after December 31, 2002. The Partnership
does not expect the adoption of SFAS No. 145 to have a material effect on its
consolidated financial position or results of operations.
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, with earlier application encouraged.
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 Partnership has included the applicable disclosures in its financial
statements and does not anticipate that the accounting provisions of FIN 45 will
have a material impact on its 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 Company
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 disclosures have been included in these financial statements and quarterly
disclosures will be 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 beginning after June 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 impact on its financial statements.
38
3. ACQUISITIONS
Buckeye Terminals, LLC
On June 30, 2000, a subsidiary of the Partnership acquired six petroleum
products terminals from Agway Energy Products LLC ("Agway") for a total purchase
price of $19,000,000. Additional costs incurred in connection with the
acquisition for gasoline and diesel fuel additives and closing adjustments
amounted to $1,693,000. The terminals are operated under the name of Buckeye
Terminals, LLC. The terminals are located in Brewerton, Geneva, Marcy, Rochester
and Vestal, New York and Macungie, Pennsylvania. The terminals have an aggregate
capacity of approximately 1.8 million barrels. The allocated fair value of
assets acquired is summarized as follows:
Fuel additive inventory .............. $ 121,000
Property, plant and equipment......... 7,964,000
Goodwill.............................. 12,608,000
-----------
Total............................... $20,693,000
===========
Norco Pipe Line Company, LLC
On July 31, 2001, a subsidiary of the Partnership acquired a petroleum
products pipeline system and related terminals from affiliates of TransMontaigne
Inc. for a total purchase price of $61,750,000. Additional costs incurred in
connection with the acquisition amounted to $533,000. The assets included a
482-mile refined petroleum products pipeline that runs from Hartsdale, Indiana
west to Fort Madison, Iowa and east to Toledo, Ohio, with an 11-mile pipeline
connection between major storage terminals in Hartsdale and East Chicago,
Indiana. The assets also included 3.2 million barrels of pipeline storage and
trans-shipment facilities in Hartsdale and East Chicago, Indiana and Toledo,
Ohio; and four petroleum products terminals located in Bryan, Ohio; South Bend
and Indianapolis, Indiana; and Peoria, Illinois. The pipeline system is operated
under the name of Norco Pipe Line Co., LLC. The terminal assets became part of
Buckeye Terminals, LLC's operations. The pipeline system and related terminals
are collectively referred to as the "Norco Assets" or "Norco Operations". The
allocated fair value of assets acquired is summarized as follows:
Pipe inventory ....................... $ 688,000
Property, plant and equipment......... 61,595,000
-----------
Total............................... $62,283,000
===========
Pro forma results of operations for the Partnership, assuming the
acquisition of the Agway assets and the Norco Operations' assets had been
acquired at the beginning of 2000, are as follows:
(UNAUDITED)
TWELVE MONTHS ENDED
DECEMBER 31,
------------
2001 2000
---- ----
(IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
Revenue .......................................... $242,138 $227,281
Income from continuing operations ................ $ 71,324 $ 69,966
Net income ....................................... $ 71,324 $101,830
Earnings per Partnership Unit from continuing
operations .................................. $ 2.63 $ 2.59
Earnings per Partnership Unit .................... $ 2.63 $ 3.76
39
The unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the combinations been in effect at the
beginning of each period presented, or of future results of operations of the
entities.
4. SEGMENT INFORMATION
During 2000, the Partnership operated in two business segments, the
transportation segment and the refining segment. Operations in the refining
segment commenced on the acquisition of BRC in March, 1999 and ceased upon the
sale of BRC in October, 2000. As a result of the sale of BRC, the refining
segment is accounted for as a discontinued operation in the accompanying
financial statements. The Partnership's continuing operations consist solely of
its 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. Terminalling and storage operations
are ancillary to the Partnership's pipeline operations. Contract operations of
third-party pipelines are similar to the operations of the Partnership's
pipelines except that the Partnership does not own the facilities being
operated.
5. DISCONTINUED OPERATIONS
On October 25, 2000, the Partnership sold BRC to Kinder Morgan Energy
Partners, L.P. for $45,696,000 in cash. The sale resulted in a gain of
$26,182,000 after provision of $4,217,000 for conditional consideration payable
to ARG by the Partnership pursuant to the acquisition agreement entered into in
March 1999. The conditional consideration was paid to ARG in January 2001.
Proceeds from the sale were used to repay $26,000,000 of debt and for working
capital purposes.
Results of BRC's operations are reported as a discontinued operation for
all periods presented in the accompanying financial statements. BRC operated as
a subsidiary of the Partnership for the period of March 4, 1999 through October
25, 2000. Summarized operating results of BRC were as follows for the period
indicated below (in thousands):
January 1, 2000
through
October 25, 2000
----------------
Refining revenue .............. $172,451
Operating income .............. $ 5,526
Net income .................... $ 5,682
The Partnership hedged a substantial portion of its exposure to inventory
price fluctuations related to its BRC business with commodity futures contracts
for the sale of gasoline and fuel oil. Losses related to commodity futures
contracts included in earnings from discontinued operations in the year 2000
were $6.7 million.
6. 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 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.
40
Environmental
In accordance with its accounting policy on environmental expenditures,
the Partnership recorded operating expenses of $1.9 million, $2.2 million and
$1.5 million for 2002, 2001 and 2000, respectively, which were related to the
environment. Expenditures, both capital and operating, relating to environmental
matters are expected to continue due to the Partnership's commitment to maintain
high environmental standards and to increasingly strict environmental laws and
government enforcement policies.
Various claims for the cost of cleaning up releases of hazardous
substances and for damage to the environment resulting from the activities of
the Operating Partnerships or their predecessors have been asserted and may be
asserted in the future under various federal and state laws. The General Partner
believes that the generation, handling and disposal of hazardous substances by
the Operating Partnerships and their predecessors have been in material
compliance with applicable environmental and regulatory requirements. The total
potential remediation costs to be borne by the Operating Partnerships relating
to these clean-up sites cannot be reasonably estimated and could be material.
With respect to each site, however, the Operating Partnership involved is
typically one of several or as many as several hundred potentially responsible
parties that would share in the total costs of clean-up under the principle of
joint and several liability. Although the Partnership has made a provision for
certain legal expenses relating to these matters, the General Partner is unable
to determine the timing or outcome of any pending proceedings or of any future
claims and proceedings.
7. GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
which establishes financial accounting and reporting for acquired goodwill and
other intangible assets. Under SFAS No. 142, goodwill and indefinite-lived
intangible assets are no longer amortized but are reviewed at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives.
SFAS No. 142 requires that goodwill be tested for impairment at least
annually utilizing a two-step methodology. The initial step requires the
Partnership to determine the fair value of each of its reporting units and
compare it to the carrying value, including goodwill, of such reporting unit. If
the fair value exceeds the carrying value, no impairment loss is recognized.
However, a carrying value that exceeds its fair value may be an indication of
impaired goodwill. The amount, if any, of the impairment would then be measured
and an impairment loss would be recognized.
The Partnership has completed the transitional impairment test required
upon adoption of SFAS No. 142. The transitional test, which involved the use of
estimates related to the fair market value of the business operations associated
with the goodwill, did not result in an impairment loss. The Partnership will
continue to evaluate its goodwill, at least annually, and will reflect the
impairment of goodwill, if any, in operating income in the income statement.
41
The following represents pro-forma information for 2001 and 2000 as if
SFAS No. 142 had been adopted at the beginning of the year and that goodwill
amortization had been eliminated. The impact on net income, and basic and
diluted earnings per share for the periods indicated below are as follows:
(UNAUDITED)
DECEMBER 31,
------------
2001 2000
---- ----
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Reported net income .......................... $69,402 $96,331
Adjustment for amortization of goodwill ...... 832 461
------- -------
Adjusted net income .......................... $70,234 $96,792
======= =======
Reported basic earnings per Unit ............. $ 2.56 $ 3.56
Adjustment for amortization of goodwill ...... 0.03 0.02
------- -------
Adjusted basic earnings per Unit ............. $ 2.59 $ 3.58
======= =======
Reported diluted earnings per Unit ........... $ 2.55 $ 3.55
Adjustment for amortization of goodwill ...... 0.03 0.02
------- -------
Adjusted diluted earnings per Unit ........... $ 2.58 $ 3.57
======= =======
The Partnership's amortizable intangible assets consist of pipeline
rights-of-way and contracts. The contracts were acquired in connection with the
acquisition of Buckeye Gulf Coast Pipe Lines, LLC in March 1999. At December 31,
2002, the gross carrying amount of the pipeline rights-of-way was $25,328,000
and accumulated amortization was $3,909,000. Pipeline rights-of-way are included
in property, plant and equipment in the accompanying balance sheet. At December
31, 2002, the gross carrying amount of the contracts was $3,600,000 and
accumulated amortization was $900,000. For the years 2002, 2001 and 2000,
amortization expense related to amortizable intangible assets was $749,000, and
$727,000 and $712,000 respectively. Aggregate amortization expense related to
amortizable intangible assets is estimated to be $747,000 per year for each of
the next five years.
The Partnership's only intangible asset not subject to amortization is
goodwill that was recorded in connection with the acquisition of Buckeye
Terminals, LLC in June 2000. The carrying amount of the goodwill was $11,355,000
at December 31, 2002. During the reporting periods 2001 and 2000, goodwill was
amortized on a straight-line basis over a period of fifteen years. Goodwill
amortization expense related to continuing operations was $832,000 and $420,000
in 2001 and 2000, respectively. Goodwill amortization expense included in income
from discontinued operations was $41,000 in 2000.
8. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist primarily of receivables from
third parties for pipeline relocations and other work either completed or
in-progress. Prepaid and other current assets also include prepaid insurance,
prepaid taxes and other miscellaneous items.
42
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
------------
2002 2001
---- ----
(IN THOUSANDS)
Land ............................................. $ 16,993 $ 16,904
Rights-of-way .................................... 25,328 25,402
Buildings and leasehold improvements ............. 37,112 36,294
Machinery, equipment and office furnishings ...... 673,917 645,751
Construction in progress ......................... 57,186 25,017
-------- --------
810,536 749,368
Less accumulated depreciation .................... 83,086 78,929
-------- --------
Total ...................................... $727,450 $670,439
======== ========
Construction in progress at December 31, 2002 includes $36,793,000 related
to a 90-mile crude butadiene pipeline. At December 31, 2002, the Partnership had
received advances totaling $14,157,000 from two petrochemical companies involved
in the project based on construction milestones. These advances are included in
other non-current liabilities in the accompanying financial statements (see Note
13). As of March 2003, the pipeline was substantially complete and a subsidiary
of BGC owns a 63 percent interest in the pipeline with the two petrochemical
companies owning the remaining interest.
Depreciation expense was $15,765,000, $14,232,000 and $12,548,000 for the
years 2002, 2001 and 2000, respectively. Depreciation expense related to
discontinued operations was $434,000 in 2000.
10. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS)
Deferred charge (see Note 16) ...................... $38,906 $43,604
Contracts acquired from acquisitions ............... 2,700 2,940
Investment in West Shore Pipe Line Company ......... 23,268 23,268
Other .............................................. 8,650 8,223
------- -------
Total ........................................... $73,524 $78,035
======= =======
The $64.2 million market value of limited partnership units ("LP Units")
issued in connection with the restructuring of the ESOP in August 1997 (the
"ESOP Restructuring") was recorded as a deferred charge and is being amortized
on the straight-line basis over 164 months (see Note 16). Amortization of the
deferred charge related to the ESOP Restructuring was $4,698,000 in 2002, 2001
and 2000. Amortization expense related to the contracts acquired from
acquisition was $240,000 in each of 2002 and 2001.
43
11. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
DECEMBER 31,
------------
2002 2001
---- ----
(IN THOUSANDS)
Taxes -- other than income..................... $ 3,330 $ 4,727
Accrued charges due General Partner............ 4,478 6,552
Environmental liabilities...................... 2,637 3,148
Interest....................................... 1,345 1,447
Accrued operating power........................ 856 1,091
Deposits....................................... 3 1,333
Accrued top-up reserve (see Note 16)........... 1,295 1,295
Retainage...................................... 1,236 34
Other 7,508 5,258
------- -------
Total.................................... $22,688 $24,885
======= =======
12. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following:
DECEMBER 31,
------------
2002 2001
---- ----
(IN THOUSANDS)
Senior Notes:
6.98% Series 1997A due December 16, 2024
(subject to $25.0 million annual sinking fund
requirement commencing December 16, 2020) ...... $125,000 $125,000
6.89% Series 1997B due December 16, 2024
(subject to $20.0 million annual sinking fund
requirement commencing December 16, 2020) ...... 100,000 100,000
6.95% Series 1997C due December 16, 2024
(subject to $2.0 million annual sinking fund
requirement commencing December 16, 2020) ...... 10,000 10,000
6.96% Series 1997D due December 16, 2024
(subject to $1.0 million annual sinking fund
requirement commencing December 16, 2020) ...... 5,000 5,000
Credit Facility due September 5, 2006
(variable rates; average weighted rate
at December 31, 2002 was 2.56% and
at December 31, 2001 was 3.05%) ................. 165,000 133,000
-------- --------
Total ........................................ $405,000 $373,000
======== ========
At December 31, 2002, a total of $165.0 million of debt was scheduled to
mature in September 2006. A total of $240.0 million of debt is scheduled to
mature in the period 2020 through 2024.
The fair value of the Partnership's debt is estimated to be $429 million
and $372 million as of December 31, 2002 and 2001, respectively. The values at
December 31, 2002 and 2001 were calculated using interest rates currently
available to the Partnership for issuance of debt with similar terms and
remaining maturities.
In December 1997, Buckeye entered into an agreement to issue $240.0
million of Senior Notes (Series 1997A through 1997D) bearing interest ranging
from 6.89 percent to 6.98 percent. The indenture, as amended in connection with
the issuance of the Senior Notes (the "Indenture"), contains covenants that
affect Buckeye, Laurel and Buckeye Pipe Line Company of Michigan, L.P. (the
"Indenture Parties"). Generally, the Indenture (a) limits
44
outstanding indebtedness of Buckeye based upon certain financial ratios of the
Indenture Parties, (b) prohibits the Indenture Parties from creating or
incurring certain liens on their property, (c) prohibits the Indenture Parties
from disposing of property which is material to their operations, and (d) limits
consolidation, merger and asset transfers of the Indenture Parties. At December
31, 2002, the Indenture Parties were in compliance with the covenants contained
in the Senior Notes.
During September and October 2001, the Partnership entered into a $277.5
million 5-year Revolving Credit Agreement and a $92.5 million 364-day Revolving
Credit Agreement (the "Credit Facilities") with a syndicate of banks led by
SunTrust Bank. In September 2002 the Partnership entered into a new 364-day
Agreement with another syndicate of banks also led by SunTrust Bank and reduced
the maximum amount borrowable to $85.0 million. Certain covenants in both
agreements were amended to eliminate the requirement of at least one investment
grade rating from either Standard and Poor's or Moody's Investor Services.
Together, these Credit Facilities permit borrowings of up to $362.5 million
subject to certain limitations contained in the Credit Facilities. Borrowings
bear interest at Sun Trust Bank's base rate or at a rate based on the London
Interbank Offered Rate ("LIBOR") at the option of the Partnership. At December
31, 2002, the Partnership had borrowed $165 million under the 5-year Revolving
Credit Agreement at an average weighted LIBOR pricing option rate of 2.56
percent.
The Credit Facilities contain certain covenants that affect the
Partnership. Generally, the Credit Facilities (a) limit outstanding indebtedness
of the Partnership based upon 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 which
is material to its operations and (d) limit consolidations, mergers and asset
transfers by the Partnership. At December 31, 2002, the Partnership was in
compliance with the covenants contained in the Credit Facilities. Concurrent
with the 2001 execution of the Credit Facilities, Buckeye repaid all borrowings
outstanding under its then existing $100 million Credit Agreement with First
Union National Bank ("First Union") and its $30 million Loan Agreement with
First Union. Those agreements were terminated with the repayment of the
borrowings.
13. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following:
DECEMBER 31,
------------
2002 2001
---- ----
(IN THOUSANDS)
Accrued employee benefit liabilities (see Note 14).......... $36,891 $36,188
Accrued environmental liabilities........................... 4,857 6,125
Accrued top-up reserve (see Note 16)........................ 3,321 3,484
Advances related to pipeline project (see Note 9)........... 14,157 -
Other....................................................... 265 259
------- -------
Total................................................. $59,491 $46,056
======= =======
14. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Services Company sponsors a retirement income guarantee plan (a defined
benefit plan) which generally guarantees employees hired before January 1, 1986,
a retirement benefit at least equal to the benefit they would have received
under a previously terminated defined benefit plan. Services Company's policy is
to fund amounts necessary to at least meet the minimum funding requirements of
ERISA.
Services Company also provides postretirement health care and life
insurance benefits to certain of its retirees. To be eligible for these benefits
an employee had to be hired prior to January 1, 1991 and meet certain service
requirements. Services Company does not pre-fund this postretirement benefit
obligation.
45
A reconciliation of the beginning and ending balances of the benefit
obligations under the retirement income guarantee plan and the postretirement
health care and life insurance plan is as follows:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ....... $11,097 $ 9,921 $32,718 $28,037
Service cost .................................. 539 641 654 486
Interest cost ................................. 838 941 2,358 2,181
Actuarial loss................................. 5,432 3,269 5,014 3,765
Change in assumptions.......................... (969) (386) - -
Amendment(1)................................... 394 (2,218) - -
Benefit payments .............................. (861) (1,071) (1,671) (1,751)
------- ------- ------- -------
Benefit obligation at end of year ............. $16,470 $11,097 $39,073 $32,718
======= ======= ======= =======
- --------------
(1) During 2001, the retirement income guaranty plan was amended to (i)
exclude bonus payments, beginning with bonuses payable in 2003 and
thereafter, from the definition of compensation used to calculate benefits
under the plan, and (ii) provide that the annuity equivalent of the 5
percent company contribution, used as an offset to benefits payable under
the plan, will be calculated using a 7.5 percent discount rate in lieu of
the 30-year Treasury Bond rate. The 7.5 percent discount rate in lieu of
the 30-year Treasury Bond rate was lowered to 7.25 percent in 2002.
A reconciliation of the beginning and ending balances of the fair value of
plan assets under the retirement income guarantee plan and the postretirement
health care and life insurance plan is as follows:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year ...... $ 6,855 $ 7,293 $ - $ -
Actuarial return on plan assets ..................... (206) 300 - -
Employer contribution ............................... 659 333 1,671 1,751
Benefits paid........................................ (861) (1,071) (1,671) (1,751)
--------- ------- -------- --------
Fair value of plan assets at end of year ............ $ 6,447 $ 6,855 $ - $ -
======== ======= ======== ========
Funded status ....................................... $(10,023) $(4,242) $(39,073) $(32,718)
Unrecognized prior service benefit................... (3,907) (2,671) (579) (1,159)
Unrecognized actuarial loss ......................... 8,578 1,694 7,550 2,573
Unrecognized net asset at transition ................ (139) (303) - -
-------- ------- -------- --------
Accrued benefit cost ................................ $ (5,491) $(5,522) $(32,102) $(31,304)
======== ======= ========= ========
46
The weighted average assumptions used in accounting for the retirement
income guarantee plan and the postretirement health care and life insurance plan
were as follows:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------
2002 2001 2002 2001
---- ---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate................................... 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets.................. 8.50% 8.50% N/A N/A
Rate of compensation increase................... 4.00% 4.50% N/A N/A
The assumed rate of cost increase in the postretirement health care and
life insurance plan in 2002 was 10 percent for both non-Medicare eligible and
Medicare eligible retirees. The assumed annual rates of cost increase decline
each year through 2009 to a rate of 4.75 percent, and remain at 4.75 percent
thereafter for both non-Medicare eligible and Medicare eligible retirees.
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. The effect of a 1 percent change in
the health care cost trend rate for each future year would have had the
following effects on 2002 results:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
Effect on total service cost and interest cost components........ $ 540 $ (454)
Effect on postretirement benefit obligation...................... $ 6,068 $(5,229)
The components of the net periodic benefit cost recognized for the
retirement income guarantee plan and the postretirement health care and life
insurance plan were as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
2002 2001 2000 2002 2000 2000
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost ................................... $ 539 $ 641 $ 519 $ 654 $ 486 $ 518
Interest cost .................................. 838 941 726 2,358 2,181 1,983
Expected return on plan assets ................. (558) (578) (676) - - -
Amortization of unrecognized transition asset .. (163) (160) (160) - - -
Amortization of prior service benefit .......... (572) (116) (96) (580) (580) (580)
Amortization of unrecognized (gains)/losses .... 382 70 (149) 37 34 21
----- ----- ----- ------ ------ ------
Net periodic benefit cost ...................... $ 466 $ 798 $ 164 $2,469 $2,121 $1,942
===== ===== ===== ====== ====== ======
Services Company sponsors a retirement and savings plan (the "Retirement
Plan") through which it provides retirement benefits to substantially all of its
regular full-time employees, except those covered by certain labor contracts.
Norco, BGC and BT also participate in the Retirement Plan and substantially all
of their regular full-time employees are covered by the Retirement Plan.
Pursuant to the terms of the retirement plan, each participating company
contributes 5 percent of each eligible employee's covered salary to an
employee's separate account maintained in the Retirement Plan. In addition,
Norco, BGC and BT make a matching contribution of up to 6 percent of an
employee's contributions to the Retirement Plan. Total costs of the Retirement
Plan were approximately $2,222,000 in 2002, $2,024,000 in 2001 and $1,752,000 in
2000.
47
Services Company also participates in a multi-employer retirement income
plan that provides benefits to employees covered by certain labor contracts.
Pension expense for the plan was $146,000, $170,000 and $119,000 for 2002, 2001
and 2000, respectively.
In addition, Services Company contributes to a multi-employer
postretirement benefit plan that provides health care and life insurance
benefits to employees covered by certain labor contracts. The cost of providing
these benefits was approximately $101,000, $98,000 and $95,000 for 2002, 2001
and 2000, respectively.
15. UNIT OPTION AND DISTRIBUTION EQUIVALENT PLAN
The Partnership has a Unit Option and Distribution Equivalent Plan (the
"Option Plan"), which was approved by the Board of Directors of the General
Partner on April 25, 1991 and by holders of the LP Units on October 22, 1991.
The Option Plan was amended and restated on July 14, 1998. On April 24, 2002,
the Board approved an Amended and Restated Unit Option and Distribution
Equivalent Plan to extend the term thereof for an additional ten years and to
make certain administrative changes in the Plan, the Unit Option Loan Program of
the General Partner and related documents. The Option Plan authorizes the
granting of options (the "Options") to acquire LP Units to selected key
employees (the "Optionees") not to exceed 720,000 LP Units in the aggregate. The
price at which each LP Unit may be purchased pursuant to an Option granted under
the Option Plan is generally equal to the market value on the date of the grant.
Options granted prior to 1998 were granted with a feature that allowed Optionees
to apply accrued credit balances (the "Distribution Equivalents") as an
adjustment to the aggregate purchase price of such Options. The Distribution
Equivalents are an amount equal to (i) the Partnership's per LP Unit regular
quarterly distribution, multiplied by (ii) the number of LP Units subject to
such Options that have not vested. With respect to options granted after 1997,
Distribution Equivalents are paid as independent cash bonuses on the date
Options vest dependent upon the percentage attainment of 3-year distributable
cash flow targets.
Vesting in the Options is determined by the number of anniversaries the
Optionee has remained in the employ of Services Company or affiliates of the
Partnership following the date of the grant of the Option. Options granted prior
to 1998 vested in varying amounts beginning generally three years after the date
of grant. Options granted after 1997 vest completely in three years after the
date of the grant. Options granted after 1997 are exercisable for a period of
seven years following the date on which they vest. Options granted prior to 1998
are exercisable for a period of five years following the date on which they
vest. The Partnership recorded compensation expense related to the Option Plan
of $1,000 in 2002, $7,000 in 2001 and $20,000 in 2000. Compensation and benefit
costs of executive officers were not charged to the Partnership after August 12,
1997 (see Note 18).
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. A portion of each option granted prior to
1998 vests after three, four and five years following the date of the grant. The
assumptions used for options granted in 2002, 2001 and 2000 are indicated below.
RISK-FREE INTEREST RATE EXPECTED LIFE (YEARS)
----------------------- ---------------------
YEAR OF DIVIDEND VESTING PERIOD VESTING PERIOD
OPTION GRANT YIELD VOLATILITY 3 YEARS 3 YEARS
------------ ----- ---------- -------- --------
2002 6.8% 31.8% 3.6% 3.50
2001 7.4% 28.7% 4.7% 3.50
2000 9.3% 19.4% 6.5% 3.50
48
A summary of the changes in the LP Unit options outstanding under the
Option Plan as of December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
---- ---- ----
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..... 163,100 $25.17 199,740 $20.17 204,040 $17.86
Granted.............................. 47,400 36.56 42,600 33.90 45,900 25.75
Exercised............................ (18,300) 23.28 (73,940) 16.20 (50,200) 14.09
Forfeitures.......................... (3,000) 29.38 (5,300) 27.45 - -
------- ------- -------
Outstanding at end of year........... 189,200 28.10 163,100 25.17 199,740 20.17
======= ======= =======
Options exercisable at year-end...... 65,300 45,700 78,740
Weighted average fair value of
options granted during the year.... $5.65 $4.72 $2.03
The following table summarizes information relating to LP Unit options
outstanding under the Option Plan at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ------------------------------
OPTIONS WEIGHTED AVERAGE WEIGHTED OPTIONS WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 8.00 to $10.00 4,000 2.1 Years $ 8.30 4,000 $ 8.30
$10.01 to $15.00 21,400 1.9 Years 12.77 21,400 12.77
$15.01 to $20.00 13,000 2.1 Years 15.80 13,000 15.80
$20.01 to $30.00 61,800 6.8 Years 26.89 25,400 28.52
$30.01 to $35.00 89,000 8.7 Years 35.32 1,500 33.90
------- ------
Total 189,200 6.7 Years 28.10 65,300 19.71
======= ======
At December 31, 2002, there were 165,100 LP Units available for future
grants under the Option Plan.
The Partnership also offers a unit option loan program whereby Optionees
may borrow, at market rates, up to 95 percent of the purchase price of the LP
Units and up to 100 percent of the applicable income tax withholding obligation
in connection with such exercise. At December 31, 2002, 10 employees had
outstanding loans under the unit option loan program. The aggregate borrowings
outstanding at December 31, 2002 and 2001 were $1,430,000 and $1,408,000,
respectively, of which $913,000 and $995,000, respectively, were related to the
purchase price of the LP Units.
16. EMPLOYEE STOCK OWNERSHIP PLAN
Services Company provides an employee stock ownership plan (the "ESOP") to
substantially all of its regular full-time employees, except those covered by
certain labor contracts. The ESOP owns all of the outstanding common stock of
Services Company. At December 31, 2002, the ESOP was directly obligated to a
third-party lender for $47.5 million of 7.24 percent notes ( the "ESOP Notes").
The ESOP Notes are secured by Services Company common stock and are guaranteed
by Glenmoor and certain of its affiliates. The proceeds from the issuance of the
ESOP Notes were used to purchase Services Company common stock. Services Company
stock is released to employee accounts in the proportion that current payments
of principal and interest on the ESOP Notes bear to the total of all principal
and interest payments due under the ESOP Notes. Individual employees are
allocated shares based upon the ratio of their eligible compensation to total
eligible compensation. Eligible compensation generally includes base salary,
overtime payments and certain bonuses. Services Company stock allocated to
employees receives stock dividends in lieu of cash, while cash dividends are
used to pay principal and interest on the ESOP Notes.
49
The Partnership contributed 2,573,146 LP Units to Services Company in
August 1997 in exchange for the elimination of the Partnership's obligation to
reimburse BMC for certain executive compensation costs, a reduction of the
incentive compensation paid by the Partnership to BMC under the existing
incentive compensation agreement, and other changes that made the ESOP a less
expensive fringe benefit for the Partnership. Funding for the ESOP Notes is
provided by distributions that Services Company receives on the LP Units that it
owns and from cash payments from the Partnership, as required to cover any
shortfall between the distributions that Services Company receives on the LP
Units that it owns and amounts currently due under the ESOP Notes (the "top-up
reserve"). The Partnership will also incur ESOP-related costs for taxes
associated with the sale and annual taxable income of the LP Units and for
routine administrative costs. Total ESOP related costs charged to earnings were
$1,162,000 in 2002 and $1,100,000 in each of 2001 and 2000.
17. LEASES AND COMMITMENTS
The Operating Partnerships lease certain land and rights-of-way. Minimum
future lease payments for these leases as of December 31, 2002 are approximately
$3.4 million for each of the next five years. Substantially all of these lease
payments can be canceled at any time should they not be required for operations.
The General Partner leases space in an office building and certain copying
equipment and charges these costs to the Operating Partnerships. Buckeye leases
certain computing equipment and automobiles. Future minimum lease payments under
these noncancelable operating leases at December 31, 2002 were as follows:
$734,000 for 2003, $649,000 for 2004, $657,000 for 2005, $483,000 for 2006,
$59,000 for 2007 and none thereafter.
Buckeye entered into an energy services agreement for certain main line
pumping equipment and the natural gas requirements to fuel this equipment at its
Linden, New Jersey facility. Under the energy services agreement, which is
designed to reduce power costs at the Linden facility, Buckeye is required to
pay a minimum of $1,743,000 annually over the next nine years. This minimum
payment is based on an annual minimum usage requirement of the natural gas
engines at the rate of $0.049 per kilowatt hour equivalent. In addition to the
annual usage requirement, Buckeye is subject to minimum usage requirements
during peak and off-peak periods. Buckeye's use of the natural gas engines has
exceeded the minimum requirement in 2000, 2001 and 2002.
Rent expense under operating leases was $7,285,000, $7,700,000, and
$8,855,000 for 2002, 2001 and 2000, respectively. Included in rent expense for
operating leases is $1,191,000 related to discontinued operations for 2000.
18. RELATED PARTY TRANSACTIONS
The Partnership and the Operating Partnerships are managed by the General
Partner. Under certain partnership agreements and management agreements, BMC,
the General Partner, Services Company and certain related parties are entitled
to reimbursement of substantially all direct and indirect costs related to the
business activities of the Partnership and the Operating Partnerships.
On May 1, 2002, an Amended and Restated Exchange Agreement (the "Amended
Exchange Agreement"), among the Partnership, the Operating Partnerships, the
General Partner, BMC and Glenmoor was approved in accordance with the terms of
the Partnership's Limited Partnership Agreement. The Amended Exchange Agreement,
which is designed to better align the interests of the General Partner and the
Partnership, was approved by the Board of Directors of Buckeye Pipe Line Company
based upon a recommendation of a special committee of disinterested directors of
the Board. The principal change reflected in the Amended Exchange Agreement was
the elimination of the forfeiture payment provision contained in the original
Exchange Agreement. The Amended Exchange Agreement also includes certain
definitional and other minor changes.
As a condition of entering into the Amended Exchange Agreement, Glenmoor
and the Partnership entered into an Acknowledgement and Agreement under which
Glenmoor acknowledged and agreed that any tax liabilities of Glenmoor resulting
from the Amended Exchange Agreement were the responsibility of Glenmoor and its
subsidiaries and not the Partnership and that any funds borrowed by Glenmoor
from third party lenders to pay those tax liabilities would be the
responsibility of Glenmoor and its subsidiaries and not the Partnership.
50
Services Company employs a significant portion of the employees that work
for the Operating Partnerships. Services Company entered into a Services
Agreement with BMC and the General Partner in August 1997 to provide services to
the Partnership and the Operating Partnerships through March 2011. Services
Company is reimbursed by BMC or the General Partner for its direct and indirect
expenses, other than with respect to certain executive compensation. BMC and the
General Partner are then reimbursed by the Partnership and the Operating
Partnerships. Costs reimbursed to BMC, the General Partner or Services Company
by the Partnership and the Operating Partnerships totaled $60.5 million, $58.4
million and $53.6 million in 2002, 2001 and 2000, respectively. The reimbursable
costs include insurance, general and administrative costs, compensation and
benefits payable to employees of Services Company, tax information and reporting
costs, legal and audit fees and an allocable portion of overhead expenses.
Services Company, which is beneficially owned by the ESOP, owns 2,465,320
LP Units (approximately 9.2 percent of the LP Units outstanding). Distributions
received by Services Company on such LP Units are used to fund obligations of
the ESOP. Distributions paid to Services Company totaled $6,188,000, $6,121,000
and $6,050,000 in 2002, 2001 and 2000, respectively. In addition, the
Partnership recorded ESOP-related costs of $1,162,000, $1,100,000 and $1,099,000
in 2002, 2001 and 2000, respectively (see Note 16).
Glenmoor and BMC are entitled to receive an annual management fee for
certain management functions they provide to the General Partner pursuant to a
Management Agreement among Glenmoor, BMC and the General Partner. The
disinterested directors of the General Partner approve the amount on a periodic
basis. The management fee includes a Senior Administrative Charge of not less
than $975,000 and reimbursement for certain costs and expenses. Amounts paid to
Glenmoor and BMC in 2002 amounted to $1,906,000, including $975,000 for the
Senior Administrative Charge and $931,000 of reimbursed expenses. Amounts paid
to Glenmoor and BMC in each of the years 2001 and 2000 for management fees were
$1,984,000 and $2,220,000, respectively, including $975,000 for the Senior
Administrative Charge and $1,009,000 and $1,245,000, respectively of reimbursed
expenses. The Senior Administration charge and reimbursed expenses are charged
to the Partnership.
The General Partner receives incentive compensation payments from the
Partnership pursuant to an incentive compensation agreement based upon the level
of quarterly cash distributions paid per LP Unit. Incentive compensation
payments totaled $10,838,000, $10,272,000 and $9,698,000 and in 2002, 2001 and
2000, respectively. The incentive compensation payments are included in
"minority interests and other" expense on the Consolidated Statements of Income.
In April 2001, in order to better align the interests of the Partnership and the
General Partner, the Partnership and the General Partner entered into the Second
Amended and Restated Incentive Compensation Agreement ("Incentive Compensation
Agreement"). The principal change reflected in the Incentive Compensation
Agreement was the elimination prospectively of a cap on aggregate incentive
compensation payments to the General Partner effective December 31, 2005, or
earlier if distributions on LP Units equal or exceed $.6375 per LP Unit for four
consecutive quarterly periods ($2.55 annually). The amendment was approved in
accordance with the Partnership Agreement by the Board of Directors of the
General Partner based upon a recommendation of a special committee of
disinterested members of the Board.
51
19. PARTNERS' CAPITAL
Changes in partners' capital for the years ended December 31, 2000, 2001,
and 2002 were as follows:
RECEIVABLE
GENERAL LIMITED FROM EXERCISE OF
PARTNER PARTNERS OPTIONS TOTAL
------- -------- ------- -----
(IN THOUSANDS, EXCEPT FOR UNITS)
Partners' capital at January 1, 2000 ....................... $ 2,548 $ 314,441 $ - $ 316,989
Net income ................................................. 868 95,463 - 96,331
Distributions .............................................. (585) (64,366) - (64,951)
Exercise of unit options ................................... - 1,013 - 1,013
-------- ----------- ----- -----------
Partners' capital at December 31, 2000 ..................... 2,831 346,551 - 349,382
Net income ................................................. 601 68,801 - 69,402
Distributions .............................................. (598) (65,866) - (66,464)
Exercise of unit options ................................... - 1,571 - 1,571
Receivable from exercise of options - - (995) (995)
-------- ----------- ----- -----------
Partners' capital December 31, 2001 ........................ 2,834 351,057 (995) 352,896
Net income ................................................. 646 71,256 71,902
Distributions .............................................. (610) (67,322) (67,932)
Exercise of unit options ................................... - 484 484
Net change in receivable from exercise of options .......... - - 82 82
-------- ----------- ----- -----------
Partners' capital December 31, 2002 ........................ $ 2,870 $ 355,475 $(913) $ 357,432
======== =========== ===== ===========
Units outstanding at January 1, 2000 ....................... 243,914 26,796,406 27,040,320
Units issued pursuant to the unit option and
distribution equivalent plan and capital contributions .. - 50,200 50,200
------- ---------- ----------
Units outstanding at December 31, 2000 ..................... 243,914 26,846,606 27,090,520
Units issued pursuant to the unit option and distribution
equivalent plan ......................................... - 73,940 73,940
------- ---------- ----------
Units outstanding at December 31, 2001 ..................... 243,914 26,920,546 27,164,460
Units issued pursuant to the unit option and distribution
equivalent plan ......................................... - 18,300 18,300
------- ---------- ----------
Units outstanding at December 31, 2002 ..................... 243,914 26,938,846 27,182,760
======= ========== ==========
Net income per unit was calculated using the weighted average outstanding
LP Units of 27,172,752 in 2002, 27,131,286 in 2001, and 27,062,809 in 2000.
The Partnership Agreement provides that without prior approval of limited
partners of the Partnership holding an aggregate of at least two-thirds of the
outstanding LP Units, the Partnership cannot issue any additional LP Units of a
class or series having preferences or other special or senior rights over the LP
Units.
The receivable from the exercise of options is due from Services Company
for notes issued under the unit option loan program (see Note 15). The notes are
full recourse promissory notes due from Optionees, bearing market rates of
interest.
On February 28, 2003, the Partnership sold 1,750,000 LP units in an
underwritten public offering at a price of $36.01 per LP unit. Proceeds to the
Partnership, net of underwriters' discount of $1.62 per LP unit and estimated
offering expenses, were approximately $59.7 million.
20. CASH DISTRIBUTIONS
The Partnership makes quarterly cash distributions to Unitholders of
substantially all of its available cash, generally defined as consolidated cash
receipts less consolidated cash expenditures and such retentions for working
capital, anticipated cash expenditures and contingencies as the General Partner
deems appropriate. In 2002, quarterly
52
distributions of $0.625 per GP and LP Unit were paid in February, May, August
and November. In 2001, quarterly distributions of $0.60 per GP and LP Unit were
paid in February and May, and $0.625 per GP and LP Unit were paid in August and
November. In 2000, quarterly distributions of $0.60 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 $67,932,000 in
2002, $66,464,000 in 2001 and $64,951,000 in 2000.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 2002 and 2001 are set forth below.
Quarterly results were influenced by seasonal and other factors inherent in the
Partnership's business.
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ----------- ----------- ----------- -----
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Transportation revenue.......... $56,891 $54,417 $61,061 $56,867 $63,582 $58,650 $65,811 $62,463 $247,345 $232,397
Operating income................ 22,047 21,853 24,664 23,012 27,298 24,570 28,353 28,896 102,362 98,331
Net income...................... 14,425 14,923 16,509 16,050 20,034 16,706 20,934 21,723 71,902 69,402
Earnings per Partnership Unit:
Net income per Unit........... 0.53 0.55 0.61 0.59 0.74 0.62 0.77 0.80 2.65 2.56
Earnings per Partnership Unit:
assuming dilution:
Net income per Unit........... 0.53 0.55 0.61 0.59 0.74 0.61 0.76 0.80 2.64 2.55
22. EARNINGS PER UNIT
The following is a reconciliation of basic and dilutive income from
continuing operations per LP Unit for the years ended December 31, 2002, 2001
and 2000:
2002 2001 2000
------------------------------------- -------------------------------- ---------------------------------
PER PER
INCOME UNITS PER INCOME UNITS UNIT INCOME UNITS UNIT
(NUMERATOR) (DENOMINATOR) UNIT AMT. (NUMERATOR) (DENOMINATOR) AMT. (NUMERATOR) (DENOMINATOR) AMT.
----------- ------------- --------- ----------- ------------- ---- ----------- ------------- ----
Income from continuing
operations ........ $71,902 $69,402 $64,467
======= ======= =======
Basic earnings per
Partnership Unit ... 71,902 27,173 $2.65 69,402 27,131 $2.56 64,467 27,063 $2.38
===== ===== =====
Effect of dilutive
securities - options - 55 - 62 - 75
------- ------ ------- ------ ------- ------
Diluted earnings per
Partnership Unit .. $71,902 27,228 $2.64 $69,402 27,193 $2.55 $64,467 27,138 $2.38
======= ====== ===== ======= ====== ===== ======= ====== =====
Options reported as dilutive securities are related to unexercised options
outstanding under the Option Plan (see Note 15).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership does not have directors or officers. The executive
officers of the General Partner perform all management functions for the
Partnership and the Operating Partnerships in their capacities as officers and
directors of the General Partner and Services Company. Directors and officers of
the General Partner are selected by BMC. See "Certain Relationships and Related
Transactions."
DIRECTORS OF THE GENERAL PARTNER
Set forth below is certain information concerning the directors of the
General Partner.
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING
POSITION WITH GENERAL PARTNER PAST FIVE YEARS
----------------------------- ---------------
Alfred W. Martinelli, 75 Mr. Martinelli has been Chairman of the Board of the General
Chairman of the Board* Partner and BMC since April 1987. He was Chief Executive
Officer of the General Partner and BMC from April 1987 to
September 2000. Mr. Martinelli has been a Director of the
General Partner and BMC since October 1986.
William H. Shea, Jr., 48 Mr. Shea was named President and Chief Executive Officer and a
President and Chief Executive Officer director of the General Partner on September 27, 2000. He
and Director* served as President and Chief Operating Officer of the General
Partner from July 1998 to September 2000. Mr. Shea had been
named Executive Vice President of the General Partner in
September 1997 and previously served as Vice President of
Marketing and Business Development of the General Partner from
March 1996 to September 1997. He is the son-in-law of Mr.
Alfred W. Martinelli.
Brian F. Billings, 64 Mr. Billings became a director of the General Partner on
Director December 31, 1998. Mr. Billings was a director of BMC from
October 1986 to December 1998.
Edward F. Kosnik, 58 Mr. Kosnik became a director of the General Partner on
Director December 31, 1998. He was a director of BMC from October 1986
to December 1998. Mr. Kosnik was President and Chief Executive
Officer of Berwind Corporation, a diversified industrial real
estate and financial services company, from December 1999
until February 2001 and was President and Chief Operating
Officer of Berwind Corporation from June 1997 to December
1999. He was Senior Executive Vice President and Chief
Operating Officer of Alexander & Alexander Services, Inc. from
May 1996 until January 1997.
Jonathan O'Herron, 73 Mr. O'Herron became a director of the General Partner on
Director December 31, 1998. Mr. O'Herron was a director of BMC from
September 1997 to December 1998. He has been Managing Director
of Lazard Freres & Company, LLC for more than five years.
54
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING
POSITION WITH GENERAL PARTNER PAST FIVE YEARS
----------------------------- ---------------
Joseph A. LaSala, Jr., 48 Mr. LaSala became a director of the General Partner on April 23, 2001. He has served
Director as Vice President, General Counsel and Secretary of Novell, Inc. since July 11, 2001.
Mr. LaSala served as Vice President, General Counsel and Secretary of Cambridge
Technology Partners from March 2000 to July 2001. He had been Vice President, General
Counsel and Secretary of Union Pacific Resources, Inc. from January 1997 to February
2000.
David J. Martinelli, 42 Mr. Martinelli became a director of the General Partner on September 27, 2000. He was
Senior Vice President -- named Senior Vice President - Corporate Development and Treasurer of the General
Corporate Development and Treasurer Partner in December 1999. Mr. Martinelli served as Senior Vice President and
and Director* Treasurer of the General Partner from July 1998 to December 1999 and previously served
as Vice President and Treasurer of the General Partner from June 1996. He is the son
of Mr. Alfred W. Martinelli.
Frank S. Sowinski, 46 Mr. Sowinski became a director of the General Partner on February 22, 2001. He served
Director as Executive Vice President and Chief Financial Officer of PWC Consulting, a systems
integrator company, from May 2002 to October 2002. Mr. Sowinski was a Senior Vice
President and Chief Financial Officer of the Dun & Bradstreet Corporation from October
2000 to April 2001. He served as President of the Dun & Bradstreet operating company
from September 1999 to October 2000. Mr. Sowinski had been Senior Vice President and
Chief Financial Officer of the Dun & Bradstreet Corporation from November 1996 to
September 1999.
Ernest R. Varalli, 72 Mr. Varalli has been a director of the General Partner and BMC since July 1987.
Director*
* Also a director of Services Company.
The General Partner has an Audit Committee, which currently consists of
four directors: Brian F. Billings, Edward F. Kosnik, Jonathan O'Herron and Frank
S. Sowinski. Messrs. Billings, Kosnik, O'Herron and Sowinski are neither
officers nor employees of the General Partner or any of its affiliates.
In addition, the General Partner has a Finance Committee, which currently
consists of three directors: Edward F. Kosnik, Jonathan O'Herron and Ernest R.
Varalli. The Finance Committee provides oversight and advice with respect to the
capital structure of the Partnership.
55
EXECUTIVE OFFICERS OF THE GENERAL PARTNER
Set forth below is certain information concerning the executive officers
of the General Partner who also serve in similar positions in BMC and Services
Company.
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING
POSITION PAST FIVE YEARS
-------- ---------------
Stephen C. Muther, 53 Mr. Muther has been Senior Vice President - Administration, General Counsel and
Senior Vice President -- Secretary of the General Partner for more than five years.
Administration, General Counsel
and Secretary
Steven C. Ramsey, 48 Mr. Ramsey has been Senior Vice President - Finance and Chief Financial Officer of the
Senior Vice President -- Finance General Partner for more than five years.
and Chief Financial Officer
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 (a) of the Exchange Act, the Company's executive
officers and directors, and persons beneficially owning more than 10 percent of
the Partnership's LP Units, are required to file with the Commission reports of
their initial ownership and changes in ownership of common shares. The Company
believes that for 2002, its executive officers and directors who were required
to file reports under Section 16 (a) complied with such requirements in all
material respects.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
The fee schedule for directors of the General Partner is as follows:
annual fee, $25,000; attendance fee for each Board of Directors meeting, $1,000;
and attendance fee for each committee meeting, $750. Messrs. Alfred and David
Martinelli, Shea, and Varalli do not receive any fees as directors. Directors'
fees paid by the General Partner in 2002 to its directors amounted to $234,000.
The directors' fees were reimbursed by the Partnership. Members of the Board of
Directors of BMC and Services Company are not separately compensated for their
services as directors.
EXECUTIVE COMPENSATION
As part of a restructuring of the ESOP in 1997, the Partnership and the
Operating Partnerships were permanently released from their obligation to
reimburse the General Partner for certain compensation and fringe benefit costs
for executive level duties performed by the General Partner with respect to
operations, finance, legal, marketing and business development, and treasury, as
well as the President of the General Partner.
EXECUTIVE OFFICER SEVERANCE AGREEMENTS
BMC, Services Company and Glenmoor have entered into severance agreements
with Stephen C. Muther, Senior Vice President - Administration, General Counsel
and Secretary and Steven C. Ramsey, Senior Vice President - Finance and Chief
Financial Officer. The severance agreements provide for 1.5 times the officer's
annual base salary and incentive compensation as of May 1997 (the "Severance
Compensation Amount") upon termination of such individual's employment without
"cause" under certain circumstances not involving a "change of control" of the
Partnership, and 2.99 times such individual's Severance Compensation Amount
(subject to certain limitations) following a "change of control." For purposes
of the severance agreements, a "change of control" is defined as the acquisition
(other than by the General Partner and its affiliates) of 80 percent or more of
the LP Units of the Partnership, 51 percent or more of the general partnership
interests owned by the General Partner or 50 percent or more of the voting
equity interest of the Partnership and the General Partner on a combined basis.
Certain costs incurred under the severance agreements are to be reimbursed by
the Partnership.
56
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of December 31, 2002 with
respect to compensation plans under which equity securities of the Partnership
are authorized for issuance.
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES TO NUMBER OF SECURITIES
BE ISSUED WEIGHTED-AVERAGE REMAINING
UPON EXERCISE PRICE OF AVAILABLE FOR
EXERCISE OF OUTSTANDING FUTURE ISSUANCE
OUTSTANDING OPTIONS, WARRANTS UNDER EQUITY
OPTIONS, AND RIGHTS COMPENSATION
WARRANTS AND PLANS
PLAN CATEGORY RIGHTS (EXCLUDING
SECURITIES
REFLECTED IN
COLUMN (A))
(A) (B) (C)
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS (1) 189,200 $28.10 165,100
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 189,200 $28.10 165,100
- ---------------------------------------------------------------------------------------------------------------------------------
(1) This plan is the Amended and Restated Unit Option and Distribution
Equivalent Plan of the Partnership.
DIRECTOR RECOGNITION PROGRAM
The General Partner has adopted the Director Recognition Program (the
"Recognition Program") that had been instituted by BMC in September 1997. The
Recognition Program provides that, upon retirement or death and subject to
certain conditions, directors receive a recognition benefit of up to three times
their annual director's fees (excluding attendance and committee fees) based
upon their years of service as a member of the Board of Directors of the General
Partner or BMC. A minimum of three full years of service as a member of the
Board of Directors is required for eligibility under the Recognition Program.
Members of the Board of Directors who are concurrently serving as an officer or
employee of the General Partner or its affiliates are not eligible for the
Recognition Program. No expenses were recorded under this program during 2002
and 2001. In 2000, expenses recorded under the program were $210,000. Mr. Hahl,
who resigned from the Board of Directors in April 2001, was paid $75,000 under
the Recognition Program at the time of his resignation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Services Company owns approximately 8.6 percent of the outstanding LP
Units as of March 15, 2003. No other person or group is known to be the
beneficial owner of more than 5 percent of the LP Units as of March 15, 2003.
The following table sets forth certain information, as of March 15, 2003,
concerning the beneficial ownership of LP Units by each director of the General
Partner, the Chief Executive Officer of the General Partner, the four most
highly compensated officers of the General Partner and by all directors and
executive officers of the General Partner as a group. Such information is based
on data furnished by the persons named. Based on information furnished to the
General Partner by such persons, no director or executive officer of the General
Partner owned beneficially, as of March 15, 2003, more than 1 percent of any
class of equity securities of the Partnership or any of its subsidiaries
outstanding at that date.
57
NAME NUMBER OF LP UNITS (1)
---- ----------------------
Brian F. Billings............................................................... 16,000 (2)
Edward F. Kosnik................................................................ 14,000 (2)
Joseph A. LaSala, Jr............................................................ 0
Alfred W. Martinelli............................................................ 9,000 (2)
David J. Martinelli............................................................. 9,000
Stephen C. Muther............................................................... 25,600
Jonathan O'Herron............................................................... 14,800
Steven C. Ramsey................................................................ 23,200 (3)
William H. Shea, Jr............................................................. 20,200 (2)
Frank S. Sowinski............................................................... 5,500
Ernest R. Varalli............................................................... 13,500 (2)
All directors and executive officers as a group (consisting of 11 persons)...... 150,800
(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.
(3) 3,200 of the LP Units have shared voting and investment power with his
spouse.
58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership and the Operating Partnerships are managed by the General
Partner pursuant to the Amended and Restated Agreement of Limited Partnership
(the "Partnership Agreement"), the several Amended and Restated Agreements of
Limited Partnership of the Operating Partnerships (the "Operating Partnership
Agreements") and the several Management Agreements between the General Partner
and the Operating Partnerships (the "Management Agreements"). BMC, which had
been general partner of the Partnership, contributed its general partnership
interest and certain other assets to the General Partner effective December 31,
1998. The General Partner is a wholly-owned subsidiary of BMC.
Under the Partnership Agreement and the Operating Partnership Agreements,
as well as the Management Agreements, the General Partner and certain related
parties are entitled to reimbursement of all direct and indirect costs and
expenses related to the business activities of the Partnership and the Operating
Partnerships, except as otherwise provided by the Exchange Agreement (as
discussed below). These costs and expenses include insurance fees, consulting
fees, general and administrative costs, compensation and benefits payable to
employees of the General Partner (other than certain executive officers), tax
information and reporting costs, legal and audit fees and an allocable portion
of overhead expenses. Such reimbursed amounts constitute a substantial portion
of the revenues of the General Partner.
Glenmoor owns all of the common stock of BMC. Glenmoor is owned by certain
directors and members of senior management of the General Partner or trusts for
the benefit of their families and certain director-level employees of Services
Company.
Glenmoor and BMC are entitled to receive an annual management fee for
certain management functions they provide to the General Partner pursuant to a
Management Agreement among Glenmoor, BMC and the General Partner. The
disinterested directors of the General Partner approve the amount on a periodic
basis. The management fee includes a Senior Administrative Charge of not less
than $975,000 and reimbursement for certain costs and expenses. Amounts paid to
Glenmoor and BMC in 2002 amounted to $1.9 million, including $975,000 for the
Senior Administrative Charge and $0.9 million of reimbursed expenses. Amounts
paid to Glenmoor and BMC in the years 2001 and 2000 for management fees equaled
$2.0 million and $2.3 million, respectively, including $975,000 for the
Senior Administrative Charge in each year. The management fee also included $1.0
million and $1.3 million, respectively of reimbursed expenses in years 2001 and
2000.
The General Partner receives incentive compensation payments from the
Partnership pursuant to an incentive compensation agreement. In April 2001, the
Partnership and the General Partner entered into the Second Amended and Restated
Incentive Compensation Agreement (the "Incentive Compensation Agreement"). The
Incentive Compensation Agreement provides that, subject to certain limitations
and adjustments, if a quarterly cash distribution exceeds a target of $0.325 per
LP Unit, the Partnership will pay the General Partner, in respect of each
outstanding LP Unit, incentive compensation equal to (i) 15 percent of that
portion of the distribution per LP Unit which exceeds the target quarterly
amount of $0.325 but is not more than $0.35, plus (ii) 25 percent of the amount,
if any, by which the quarterly distribution per LP Unit exceeds $0.35 but is not
more than $0.375, plus (iii) 30 percent of the amount, if any, by which the
quarterly distribution per LP Unit exceeds $0.375 but is not more than $0.40,
plus (iv) 35 percent of the amount, if any, by which the quarterly distribution
per LP Unit exceeds $0.40 but is not more than $0.425, plus (v) 40 percent of
the amount, if any, by which the quarterly distribution per LP Unit exceeds
$0.425 but is not more than $0.525, plus (vi) 45 percent of the amount, if any,
by which the quarterly distribution per LP Unit exceeds $0.525. The General
Partner is also entitled to incentive compensation, under a comparable formula,
in respect of special cash distributions exceeding a target special distribution
amount per LP Unit. The target special distribution amount generally means the
amount which, together with all amounts distributed per LP Unit prior to the
special distribution compounded quarterly at 13 percent per annum, would equal
$10.00 (the initial public offering price of the LP Units split two-for-one)
compounded quarterly at 13 percent per annum from the date of the closing of the
initial public offering in December 1986. The principal change reflected in the
Incentive Compensation Agreement was the elimination prospectively of a cap on
aggregate incentive compensation payments to the General Partner effective
December 31, 2005, or earlier if distributions on LP Units equal or exceed
$.6375 per LP Unit for four consecutive quarterly periods ($2.55 annually). The
amendments, which were designed to more closely align the interests of the
General Partner and the Partnership, were approved by the Board of Directors
59
of the General Partner based on a recommendation of a special committee of
disinterested members of the Board. Incentive compensation paid by the
Partnership for quarterly cash distributions totaled $10,838,000, $10,272,000
and $9,698,000 in 2002, 2001 and 2000, respectively. No special cash
distributions have ever been paid by the Partnership.
On January 23, 2003, the General Partner announced a quarterly
distribution of $0.625 per GP and LP Unit payable on February 28, 2003, to the
Unitholders of record on February 6, 2003. The Partnership paid the General
Partner incentive compensation of $2.7 million as a result of this distribution.
The following chart depicts the ownership relationships among the
Partnership, the General Partner and various other parties:
CHART OF BUCKEYE-RELATED ORGANIZATIONS
[CHART]
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The General Partner's principal executive officer and its principal
financial officer, after evaluating the effectiveness of the Partnership's
disclosure controls and procedures (as defined in Exchange Act Rules 13a -
14 and 15d - 14) as of a date within 90 days prior to the filing of this
report (the "Evaluation Date"), have concluded that, as of the Evaluation
Date, the Partnership's disclosure controls and procedures were adequate
60
and effective to ensure that material information relating to the
Partnership and its consolidate subsidiaries would be made known to them
by others within those entities.
(b) Changes in internal controls.
There were no significant changes in the Partnership's internal controls
or in other factors that could significantly affect the Partnership's
disclosure controls and procedures subsequent to the date of their
valuation, nor were there any significant deficiencies or material
weaknesses in the Partnership's internal controls. As a result, no
corrective actions were required or undertaken.
PART IV
ITEM 15. 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 28.
(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 April 24, 2002. (1) (Exhibit 3.1)
3.2 -- Certificate of Amendment to Amended and Restated Certificate of
Limited Partnership of the Partnership, dated as of April 26, 2002.
(1) (Exhibit 3.2)
4.1 -- Amended and Restated Indenture of Mortgage and Deed of Trust and
Security Agreement, dated as of December 16, 1997, by Buckeye to PNC
Bank, National Association, as Trustee. (5) (Exhibit 4.1)
4.2 -- Note Agreement, dated as of December 16, 1997, between Buckeye and
The Prudential Insurance Company of America. (5) (Exhibit 4.2)
4.3 -- Defeasance Trust Agreement, dated as of December 16, 1997, between
and among PNC Bank, National Association, and Douglas A. Wilson, as
Trustees. (5) (Exhibit 4.3)
4.4 -- Certain instruments with respect to long-term debt of the Operating
Partnerships which relate to debt that does not exceed 10 percent of
the total assets of the Partnership and its consolidated
subsidiaries are omitted pursuant to Item 601(b) (4) (iii) (A) of
Regulation S-K, 17 C.F.R.Section 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 March 25,2002. (1)(2) (Exhibit 10.1)
10.2 -- Amended and Restated Management Agreement, dated October 4, 2001,
between the General Partner and Buckeye. (1)(3) (Exhibit 10.2)
10.3 -- Services Agreement, dated as of August 12, 1997, among the General
Partner, the Manager and Services Company. (5) (Exhibit 10.9)
61
10.4 -- Amended and Restated Exchange Agreement, dated as of May 6, 2002,
among the Partnership, the Operating Partnerships, the General
Partner, Buckeye Management Company and Glenmoor Ltd. (5) (Exhibit
10.4)
10.5 -- Acknowledgement and Agreement, dated as of May 6, 2002, between the
Partnership and Glenmoor, Ltd. (1) (Exhibit 10.5)
10.6 -- Form of Executive Officer Severance Agreement. (5) (Exhibit 10.13)
10.7 -- Form of Amendment No. 1 to Executive Officer Severance Agreement. (7)
(Exhibit 10.18)
10.8 -- Contribution, Assignment and Assumption Agreement, dated as of
December 31, 1998, between Buckeye Management Company and Buckeye
Pipe Line Company. (6) (Exhibit 10.14)
10.9 -- Director Recognition Program of the General Partner. (4) (6) (Exhibit 10.15)
10.10 -- Management Agreement, dated as of January 1, 1998, among BMC, the
General Partner and Glenmoor. (9) (Exhibit 10.11)
10.11 -- Amended and Restated Unit Option and Distribution Equivalent Plan of
the Partnership, dated as of April 24, 2002. (1) (4) (Exhibit 10.12)
10.12 -- Amended and Restated Unit Option Loan Program of Buckeye Pipe Line
Company dated as of April 24, 2002. (1) (4) (Exhibit 10.13)
10.13 -- Second Amended and Restated Incentive Compensation Agreement, dated
April 22, 2001, between the General Partner and the Partnership. (8)
(Exhibit 10.7)
10.14 -- Credit Agreement, dated as of September 5, 2001, among the
Partnership, SunTrust Bank and the other signatories thereto. (9)
(Exhibit 10.15)
10.15 -- Credit Agreement, dated as of September 4, 2002, among the
Partnership, SunTrust Bank and the other signatories thereto.*
21.1 -- List of subsidiaries of the Partnership.*
23.1 -- Consent of Deloitte & Touche LLP.*
99.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
99.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
___________________
* filed herewith
(1) 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, 2002.
(2) The Amended and Restated Agreements of Limited Partnership of the other
Operating Partnerships are not filed because they are identical to Exhibit
10.1 except for the identity of the partnership.
(3) The Management Agreements of the other Operating Partnerships are not
filed because they are identical to Exhibit 10.2 except for the identity
of the partnership.
(4) Represents management contract or compensatory plan or arrangement.
(5) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Annual Report on Form 10-K for the
year 1997.
62
(6) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Annual Report on Form 10-K for the
year 1998.
(7) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Annual Report on Form 10-K for the
year 1999.
(8) 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, 2001.
(9) Previously filed with the Securities and Exchange Commission as the
Exhibit to the Buckeye Partners, L.P. Annual Report on Form 10-K for the
year 2001.
(b) Reports on Form 8-K during the quarter ended December 31, 2002.
(1) On October 3, 2002, the Partnership filed a current report on Form 8-K
announcing its proposed purchase of an approximate 18 percent interest in
Colonial Pipeline Company.
(2) On October 15, 2002, the Partnership filed a current report on Form 8-K
amending the financial statements included in its annual report on Form 10-K for
the year ended December 31, 2001 filed with the Commission on March 28, 2002.
The purpose of the amendment was to add an additional Note 24 to the financial
statements. Note 24 contains certain pro forma results for the years ended
December 31, 2001, 2000 and 1999, as if the non-amortization provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," which the Registrant adopted on January 1, 2002, had been
applied. These pro forma results were not required to be included in the
Registrant's financial statements at the time the original Form 10-K was filed.
(3) On November 1, 2002, the Partnership filed a current report on Form 8-K
announcing the termination of its proposed purchase of an approximate 18 percent
interest in Colonial Pipeline Company.
63
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Buckeye Partners, L.P.
(Registrant)
By: Buckeye Pipe Line Company,
as General Partner
Dated: March 24, 2003 By: /s/ William H. Shea, Jr.
------------------------------------------
William H. Shea, Jr.
(Principal Executive Officer)
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 24, 2003 By: /s/ Brian F. Billings
------------------------------------------
Brian F. Billings
Director
Dated: March 24, 2003 By: /s/ Edward F. Kosnik
------------------------------------------
Edward F. Kosnik
Director
Dated: March 24, 2003 By: /s/ Joseph A. LaSala, Jr.
------------------------------------------
Joseph A. LaSala, Jr.
Director
Dated: March 24, 2003 By: /s/ Alfred W. Martinelli
------------------------------------------
Alfred W. Martinelli
Chairman of the Board and Director
Dated: March 24, 2003 By: /s/ David J. Martinelli
------------------------------------------
David J. Martinelli
Director
Dated: March 24, 2003 By: /s/ Jonathan O'Herron
------------------------------------------
Jonathan O'Herron
Director
Dated: March 24, 2003 By: /s/ Steven C. Ramsey
------------------------------------------
Steven C. Ramsey
(Principal Financial Officer and
Principal Accounting Officer)
Dated: March 24, 2003 By: /s/ William H. Shea, Jr.
------------------------------------------
William H. Shea, Jr.
Director
Dated: March 24, 2003 By: /s/ Frank S. Sowinski
------------------------------------------
Frank S. Sowinski
Director
Dated: March 24, 2003 By: /s/ Ernest R. Varalli
------------------------------------------
Ernest R Varalli
Director
64
CERTIFICATIONS
I, William H. Shea, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of Buckeye Partners, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003 /s/ William H. Shea, Jr.
------------------------
William H. Shea, Jr.
President and Chief Executive Officer
Buckeye Pipe Line Company
as General Partner of Buckeye Partners, L.P.
65
I, Steven C. Ramsey certify that:
1. I have reviewed this annual report on Form 10-K of Buckeye Partners, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors.
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003 /s/ Steven C. Ramsey
--------------------
Steven C. Ramsey
Senior Vice President, Finance
and Chief Financial Officer
Buckeye Pipe Line Company
as General Partner of Buckeye Partners, L.P.
66
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 (the "Partnership") as of December 31, 2002 and 2001,
and for each of the three years in the period ended December 31, 2002, and have
issued our report thereon dated March 19, 2003, which expresses an unqualified
opinion and includes an explanatory paragraph as to the Partnership's change in
method of accounting for goodwill and other intangible assets to conform to
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002; such report is included elsewhere
in this Form 10-K. Our audits also included the condensed financial information
(Parent Only) of Buckeye Partners, L.P. listed in Item 15. This condensed
financial information is the responsibility of the Partnership's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such condensed financial information, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 19, 2003
S-1
SCHEDULE I
BUCKEYE PARTNERS, L.P.
REGISTRANT'S CONDENSED FINANCIAL INFORMATION (PARENT ONLY)
(IN THOUSANDS)
BALANCE SHEETS
DECEMBER 31,
------------
2002 2001
---- ----
Assets
Current assets
Cash and cash equivalents................................... $ 28 $ 26
Other current assets........................................ 157,788 131,066
-------- --------
Total current assets.................................. 157,816 131,092
Other non-current assets.................................... 1,045 1,252
Investments in and advances to subsidiaries (at equity)..... 365,538 354,882
-------- --------
Total assets.......................................... $524,399 $487,226
======== ========
Liabilities and partners' capital
Current liabilities............................................... $ 1,967 $ 1,330
-------- --------
Long-term debt.................................................... 165,000 133,000
Commitments and contingent liabilities............................ -- --
Partners' capital
General Partner............................................. 2,870 2,834
Limited Partners............................................ 355,475 351,057
Receivable from exercise of options......................... (913) (995)
-------- --------
Total partners' capital............................... 357,432 352,896
-------- --------
Total liabilities and partners' capital............... $524,399 $487,226
======== ========
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Equity in income of subsidiaries................ $ 89,001 $ 80,973 $106,087
Operating expenses.............................. (432) 293 (59)
Investment income 4 - 1
Interest and debt expense....................... (5,833) (1,592) -
Incentive compensation to General Partner....... (10,838) (10,272) (9,698)
-------- -------- --------
Net income.................... $ 71,902 $ 69,402 $ 96,331
======== ======== ========
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 71,902 $ 69,402 $ 96,331
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in investment in subsidiaries.............................. (10,656) (6,181) (31,584)
Change in assets and liabilities:
Other current assets.......................................... (26,722) (130,046) (885)
Current liabilities........................................... 637 918 (22)
Other non-current assets...................................... 207 87 -
-------- --------- --------
Net cash (used by) provided by operating activities......... 35,368 (65,820) 63,840
Cash flows from financing activities:
Proceeds from exercise of unit options.................................... 566 576 1,013
Debt issuance costs....................................................... - (1,339) -
Proceeds from issuance of long-term debt.................................. 32,000 133,000 -
Distributions to Unitholders.............................................. (67,932) (66,464) (64,951)
-------- --------- --------
Net (decrease) increase in cash and cash equivalents................... 2 (47) (98)
Cash and cash equivalents at beginning of period.......................... 26 73 171
-------- --------- --------
Cash and cash equivalents at end of period................................ $ 28 $ 26 $ 73
======== ========= ========
See footnotes to consolidated financial statements of Buckeye Partners, L.P.
S-2