Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

o

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)

 

One Greenway Plaza

 

 

Suite 600

 

 

Houston, TX

 

77046

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (832) 615-8600

 


 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

x

 

Accelerated filer o

Non-accelerated filer

o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

Limited partner units and Class B units outstanding as of July 29, 2013: 97,796,054 and 8,323,992, respectively.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited) June 30, 2013 and 2012 (Unaudited)

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)

5

 

Condensed Consolidated Statements of Partners’ Capital for the Six Months Ended June 30, 2013 and 2012 (Unaudited)

6

 

Notes to Unaudited Condensed Consolidated Financial Statements:

 

 

 

1.

Organization and Basis of Presentation

7

 

 

2.

Acquisitions

8

 

 

3.

Commitments and Contingencies

8

 

 

4.

Inventories

11

 

 

5.

Equity Investments

11

 

 

6

Long-term Debt

12

 

 

7.

Derivative Instruments and Hedging Activities

12

 

 

8.

Fair Value Measurements

16

 

 

9.

Pensions and Other Postretirement Benefits

18

 

 

10.

Unit-Based Compensation Plans

18

 

 

11.

Partners’ Capital and Distributions

20

 

 

12.

Earnings Per Unit

22

 

 

13.

Business Segments

22

 

 

14.

Supplemental Cash Flow Information

25

 

 

15.

Subsequent Events

26

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 6.

Exhibits

43

 

1



Table of Contents

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue:

 

 

 

 

 

 

 

 

 

Product sales

 

$

734,396

 

$

745,863

 

$

1,803,613

 

$

1,773,751

 

Transportation, storage and other services

 

270,983

 

236,777

 

546,727

 

468,328

 

Total revenue

 

1,005,379

 

982,640

 

2,350,340

 

2,242,079

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales and natural gas storage services

 

737,217

 

747,155

 

1,810,910

 

1,778,640

 

Operating expenses

 

104,793

 

101,137

 

202,150

 

198,355

 

Depreciation and amortization

 

39,452

 

34,325

 

77,043

 

67,352

 

General and administrative

 

18,266

 

17,877

 

35,437

 

34,852

 

Total costs and expenses

 

899,728

 

900,494

 

2,125,540

 

2,079,199

 

Operating income

 

105,651

 

82,146

 

224,800

 

162,880

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Earnings from equity investments

 

1,953

 

1,786

 

3,582

 

3,734

 

Interest and debt expense

 

(30,237

)

(27,612

)

(60,486

)

(56,422

)

Other income (expense)

 

198

 

35

 

299

 

(33

)

Total other expense, net

 

(28,086

)

(25,791

)

(56,605

)

(52,721

)

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

77,565

 

56,355

 

168,195

 

110,159

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(195

)

(329

)

(326

)

(666

)

Net income

 

77,370

 

56,026

 

167,869

 

109,493

 

Less: Net income attributable to noncontrolling interests

 

(940

)

(1,647

)

(2,098

)

(3,155

)

Net income attributable to Buckeye Partners, L.P.

 

$

76,430

 

$

54,379

 

$

165,771

 

$

106,338

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.72

 

$

0.56

 

$

1.59

 

$

1.10

 

Diluted

 

$

0.72

 

$

0.55

 

$

1.58

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

Weighted average units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

105,701

 

97,818

 

104,481

 

96,524

 

Diluted

 

106,171

 

98,109

 

104,878

 

96,834

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

77,370

 

$

56,026

 

$

167,869

 

$

109,493

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on derivative instruments

 

25,000

 

(39,907

)

33,847

 

(22,616

)

Adjustment to funded status of benefit plans

 

427

 

(25

)

403

 

(2

)

Total other comprehensive income (loss)

 

25,427

 

(39,932

)

34,250

 

(22,618

)

Comprehensive income

 

102,797

 

16,094

 

202,119

 

86,875

 

Less: Comprehensive income attributable to noncontrolling interests

 

(940

)

(1,647

)

(2,098

)

(3,155

)

Comprehensive income attributable to Buckeye Partners, L.P.

 

$

101,857

 

$

14,447

 

$

200,021

 

$

83,720

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit amounts)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,889

 

$

6,776

 

Trade receivables, net

 

213,091

 

262,023

 

Construction and pipeline relocation receivables

 

14,924

 

13,078

 

Inventories

 

194,876

 

259,163

 

Derivative assets

 

6,466

 

1,719

 

Prepaid and other current assets

 

73,852

 

91,563

 

Total current assets

 

508,098

 

634,322

 

 

 

 

 

 

 

Property, plant and equipment, net

 

4,274,660

 

4,188,648

 

 

 

 

 

 

 

Equity investments

 

72,023

 

68,713

 

Goodwill

 

812,297

 

818,121

 

Intangible assets, net

 

205,493

 

219,247

 

Other non-current assets

 

51,567

 

51,958

 

Total assets

 

$

5,924,138

 

$

5,981,009

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

76,000

 

$

206,200

 

Accounts payable

 

94,519

 

112,792

 

Derivative liabilities

 

2,531

 

82,989

 

Accrued and other current liabilities

 

195,536

 

192,385

 

Total current liabilities

 

368,586

 

594,366

 

 

 

 

 

 

 

Long-term debt

 

2,569,630

 

2,735,244

 

Long-term derivative liabilities

 

35,237

 

57,805

 

Other non-current liabilities

 

199,138

 

204,754

 

Total liabilities

 

3,172,591

 

3,592,169

 

 

 

 

 

 

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Buckeye Partners, L.P. capital:

 

 

 

 

 

Limited Partners (97,794,703 and 90,371,061 units outstanding as of June 30, 2013 and December 31, 2012, respectively)

 

2,434,991

 

2,117,788

 

Class B Units (8,323,992 and 7,974,750 units outstanding as of June 30, 2013 and December 31, 2012, respectively)

 

426,202

 

413,304

 

Accumulated other comprehensive loss

 

(124,529

)

(158,779

)

Total Buckeye Partners, L.P. capital

 

2,736,664

 

2,372,313

 

Noncontrolling interests

 

14,883

 

16,527

 

Total partners’ capital

 

2,751,547

 

2,388,840

 

Total liabilities and partners’ capital

 

$

5,924,138

 

$

5,981,009

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

167,869

 

$

109,493

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Settlement of terminated interest rate swap agreement

 

(62,009

)

 

Depreciation and amortization

 

77,043

 

67,352

 

Net changes in fair value of derivatives

 

(12,374

)

4,480

 

Non-cash deferred lease expense

 

1,884

 

1,950

 

Amortization of unfavorable storage contracts

 

(5,497

)

(5,497

)

Earnings from equity investments

 

(3,582

)

(3,734

)

Distributions from equity investments

 

125

 

3,225

 

Other non-cash items

 

9,805

 

10,471

 

Change in assets and liabilities, net of amounts related to acquisitions:

 

 

 

 

 

Trade receivables

 

48,932

 

13,978

 

Construction and pipeline relocation receivables

 

(1,846

)

(2,600

)

Inventories

 

64,287

 

168,398

 

Prepaid and other current assets

 

11,743

 

11,719

 

Accounts payable

 

(19,277

)

(7,760

)

Accrued and other current liabilities

 

15,508

 

(10,656

)

Other non-current assets

 

2,221

 

(3,842

)

Other non-current liabilities

 

(3,927

)

(9,833

)

Net cash provided by operating activities

 

290,905

 

347,144

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(147,867

)

(148,000

)

Contribution to equity investment

 

 

(350

)

Deposit in anticipation of acquisition

 

 

(14,000

)

Proceeds from disposal of property, plant and equipment

 

578

 

622

 

Net cash used in investing activities

 

(147,289

)

(161,728

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of units

 

372,824

 

246,648

 

Net proceeds from exercise of unit options

 

980

 

999

 

Payment of tax withholding on issuance of LTIP awards

 

(3,728

)

(1,576

)

Issuance of long-term debt

 

499,050

 

 

Debt issuance costs

 

(3,250

)

 

Borrowings under BPL Credit Facility

 

601,000

 

336,500

 

Repayments under BPL Credit Facility

 

(1,266,000

)

(450,500

)

Net borrowings (repayments) under BES Credit Facility

 

(130,200

)

(138,200

)

Acquisition of additional interest in WesPac Memphis

 

(9,727

)

 

Credits associated with agreement and plan of merger

 

 

422

 

Distributions paid to noncontrolling interests

 

(5,210

)

(6,688

)

Distributions paid to unitholders

 

(201,242

)

(185,449

)

Net cash used in financing activities

 

(145,503

)

(197,844

)

Net decrease in cash and cash equivalents

 

(1,887

)

(12,428

)

Cash and cash equivalents — Beginning of period

 

6,776

 

12,986

 

Cash and cash equivalents — End of period

 

$

4,889

 

$

558

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Limited

 

Class B

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

Partners

 

Units

 

Income (Loss)

 

Interests

 

Total

 

Partners’ capital - January 1, 2013

 

$

2,117,788

 

$

413,304

 

$

(158,779

)

$

16,527

 

$

2,388,840

 

Net income

 

152,873

 

12,898

 

 

2,098

 

167,869

 

Acquisition of additional interest in WesPac Memphis

 

(8,232

)

 

 

(1,495

)

(9,727

)

Distributions paid to unitholders

 

(204,164

)

 

 

2,922

 

(201,242

)

Net proceeds from issuance of units

 

372,824

 

 

 

 

372,824

 

Amortization of unit-based compensation awards

 

7,327

 

 

 

 

7,327

 

Proceeds from exercise of unit options

 

980

 

 

 

 

980

 

Payment of tax withholding on issuance of LTIP awards

 

(3,728

)

 

 

 

(3,728

)

Distributions paid to noncontrolling interests

 

 

 

 

(5,210

)

(5,210

)

Other comprehensive income

 

 

 

34,250

 

 

34,250

 

Noncash accrual for distribution equivalent rights

 

(667

)

 

 

 

(667

)

Other

 

(10

)

 

 

41

 

31

 

Partners’ capital - June 30, 2013

 

$

2,434,991

 

$

426,202

 

$

(124,529

)

$

14,883

 

$

2,751,547

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital - January 1, 2012

 

$

2,035,271

 

$

395,639

 

$

(127,741

)

$

20,788

 

$

2,323,957

 

Net income

 

98,155

 

8,183

 

 

3,155

 

109,493

 

Credits associated with agreement and plan of merger

 

422

 

 

 

 

422

 

Distributions paid to unitholders

 

(188,058

)

 

 

2,609

 

(185,449

)

Net proceeds from issuance of units

 

246,648

 

 

 

 

246,648

 

Amortization of unit-based compensation awards

 

7,688

 

 

 

 

7,688

 

Net proceeds from exercise of unit options

 

999

 

 

 

 

999

 

Payment of tax withholding on issuance of LTIP awards

 

(1,576

)

 

 

 

(1,576

)

Distributions paid to noncontrolling interests

 

 

 

 

(6,688

)

(6,688

)

Other comprehensive loss

 

 

 

(22,618

)

 

(22,618

)

Noncash accrual for distribution equivalent rights

 

(433

)

 

 

 

(433

)

Other

 

657

 

 

 

 

657

 

Partners’ capital - June 30, 2012

 

$

2,199,773

 

$

403,822

 

$

(150,359

)

$

19,864

 

$

2,473,100

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Buckeye Partners, L.P. is a publicly traded Delaware master limited partnership and its limited partnership units representing limited partner interests (“LP Units”) are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “BPL.”  Buckeye GP LLC (“Buckeye GP”) is our general partner.  As used in these Notes to Unaudited Condensed Consolidated Financial Statements, “we,” “us,” “our” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, includes our subsidiaries.

 

We were formed in 1986 and own and operate one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, miles of pipeline and active product terminals. In addition, we operate and/or maintain third-party pipelines under agreements with major oil and gas, petrochemical and chemical companies, and perform certain engineering and construction management services for third parties.  We also own and operate a natural gas storage facility in Northern California, and are a wholesale distributor of refined petroleum products in the United States in areas also served by our pipelines and terminals.  Beginning in late 2012, we began to provide fuel oil supply and distribution services to third parties in the Caribbean.  Our flagship marine terminal in The Bahamas, Bahamas Oil Refining Company International Limited (“BORCO”), is one of the largest marine crude oil and petroleum products storage facilities in the world, serving the international markets as a global logistics hub.

 

Basis of Presentation and Principles of Consolidation

 

The unaudited condensed consolidated financial statements and the accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”).  Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our results of operations for the interim periods.  The consolidated financial statements include the accounts of our subsidiaries controlled by us and variable interest entities of which we are the primary beneficiary. We have eliminated all intercompany transactions in consolidation.

 

We believe that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading.  These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Recent Accounting Developments

 

Reclassification Adjustments Out of Accumulated Other Comprehensive Income (“AOCI”).  In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance requiring entities to disclose additional information about reclassification adjustments, including changes in AOCI balances by component and significant items reclassified out of AOCI.  Under the new guidance, an entity would (i) disaggregate the total change of each component of other comprehensive income (“OCI”) and separately present reclassification adjustments and current-period OCI, and (ii) present information about significant items reclassified out of AOCI by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements.  This guidance is effective for interim and annual periods beginning after December 15, 2012.  We adopted this guidance on January 1, 2013, which did not have an impact on our unaudited condensed consolidated financial statements, or a material impact on our disclosures, as there were no significant reclassification adjustments during the three and six months ended June 30, 2013.

 

Balance Sheet: Disclosures about Offsetting Assets and Liabilities.  In December 2011, the FASB issued guidance requiring an entity to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.  In January 2013, the FASB issued an update to this guidance clarifying that the scope of disclosures applied to derivatives accounted for in accordance with FASB Accounting Standards Codification (“ASC”) Topic

 

7



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

815, Derivative and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse purchase agreements and securities lending transactions that are either offset in accordance with FASB ASC Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.  This guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013 and should be applied retrospectively. We adopted this guidance on January 1, 2013, which did not have an impact on our unaudited condensed consolidated financial statements, or a material impact on our disclosures. See Note 7 for information about our netting policy for derivatives.

 

2.  ACQUISITIONS

 

Business Combination

 

In July 2012, we acquired a marine terminal facility for liquid petroleum products in New York Harbor from Chevron U.S.A Inc. for $260.3 million in cash.  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):

 

Current assets

 

$

547

 

Property, plant and equipment

 

198,091

 

Intangible assets

 

13,350

 

Goodwill

 

59,197

 

Environmental liabilities

 

(10,873

)

Allocated purchase price

 

$

260,312

 

 

Acquisition of Additional Interest in WesPac Pipelines — Memphis LLC

 

In April 2013, our operating subsidiary, Buckeye Pipe Line Holdings, L.P. (“BPH”), purchased an additional 10% ownership interest in WesPac Pipelines — Memphis LLC (“WesPac Memphis”) from Kealine LLC for $9.7 million and, as a result of the acquisition, our ownership interest in WesPac Memphis increased from 70% to 80%.  Since BPH retains controlling interest in WesPac Memphis, this acquisition was accounted for as an equity transaction.

 

3.  COMMITMENTS AND CONTINGENCIES

 

Claims and Legal Proceedings

 

In the ordinary course of business, we are involved in various claims and legal proceedings, some of which are covered by insurance.  We are generally unable to predict the timing or outcome of these claims and proceedings.  Based upon our evaluation of existing claims and proceedings and the probability of losses relating to such contingencies, we have accrued certain amounts relating to such claims and proceedings, none of which are considered material.

 

BORCO Jetty.  On May 25, 2012, a ship allided with a jetty at our BORCO facility while berthing, causing damage to portions of the jetty.  The extent of the damage is presently estimated to be approximately $25.0 million.  Buckeye has insurance to cover this loss, subject to a $5.0 million deductible.  On May 26, 2012, we commenced legal proceedings in The Bahamas against the vessel’s owner and the vessel to obtain security for the cost of repairs and other losses incurred as a result of the incident.  Full security for our claim has been provided by the vessel owner’s insurers, reserving all of their defenses.  We also have notified the customer on whose behalf the vessel was at the BORCO facility that we intend to hold them responsible for all damages and losses resulting from the incident pursuant to the terms of an agreement between the parties.  Any disputes between us and our customer on this matter are subject to arbitration in Houston, Texas.  The vessel owner has claimed that it is entitled to limit its liability to approximately $17.0 million, but we are contesting the right of the vessel owner to such limitation.  A hearing in the Bahamas court on the vessel

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

owner’s right to limit its liability was held on July 23, 2013, and we are awaiting a ruling on the issue.  At this time, we have not experienced any material interruption of service at the BORCO facility as a result of the incident, and the repairs of the damaged sections are substantially complete.  We recorded a loss on disposal due to the assets destroyed in the incident and other related costs incurred; however, since we believe recovery of our losses is probable, we recorded a corresponding receivable.  As of June 30, 2013, we have a $5.0 million receivable included in “Other non-current assets” in our unaudited condensed consolidated balance sheet, representing reimbursement of the deductible.  To the extent the proceeds from the recovery of our losses is in excess of the carrying value of the destroyed assets or other costs incurred, we will recognize a gain when such proceeds are received and are not refundable.  As of June 30, 2013, no gain had been recognized; however, we recorded a $2.4 million deferred gain in “Accrued and other current liabilities” in our unaudited condensed consolidated balance sheet, representing excess proceeds received over the loss on disposal and other costs incurred.

 

Federal Energy Regulatory Commission (“FERC”) Proceedings

 

FERC Docket No. IS12-185 — Buckeye Pipe Line Show Cause Proceeding.  On March 30, 2012, FERC issued an order (the “Show Cause Order”) regarding the market-based methodology used by Buckeye Pipe Line Company, L.P. (“BPLC”) to set tariff rates on its pipeline system (the “Buckeye System”).  In 1991, BPLC sought and received FERC permission to determine rate changes on the Buckeye System using a unique methodology that constrains rates in markets not found to be competitive based on rate changes in markets that FERC found to be competitive, as well as certain other limits on rate increases.  FERC ordered the continuation of this methodology for the Buckeye System in 1994, subject to FERC’s authority to cause BPLC to terminate the program in the future.  The Show Cause Order, among other things, stated that FERC would review the continued efficacy of BPLC’s unique program and directed BPLC to show cause why it should not be required to discontinue the program on the Buckeye System and avail itself of the generic ratemaking methodologies used by other oil pipelines.  The Show Cause Order also disallowed proposed rate increases on the Buckeye System that would have become effective April 1, 2012.  The Show Cause Order did not impact any of the pipeline systems or terminals owned by Buckeye’s other operating subsidiaries.  On April 23, 2012, BPLC requested rehearing as to the disallowance of certain rates.  On February 22, 2013, FERC issued an order in Dkt. No. IS12-185-000 et al. discontinuing the BPLC program, and affirming on rehearing its rejection of all rate increases filed in March 2012 (“Ratemaking Methodology Order”).  The Ratemaking Methodology Order permitted Buckeye to retain its currently-filed rates in place, to make future rate changes in under market-based ratemaking authority in markets previously found to be competitive by FERC, and to make future changes in rates in other markets pursuant to the generic FERC ratemaking methods, which would include indexing.  No requests for rehearing or petitions for judicial review were filed with respect to the Ratemaking Methodology Order.  Subsequently, on March 28, 2013, BPLC filed rate increases for services in the markets previously found to be competitive, and on May 30, 2013, BPLC filed rate increases for most transportation services in the markets not previously found to be competitive; both sets of tariff filings became effective and are not subject to any FERC proceedings.

 

FERC Docket No. OR12-28 — Airlines Complaint against BPLC New York City Jet Fuel Rates.  On September 20, 2012, a complaint was filed with FERC by Delta Air Lines, JetBlue Airways, United/Continental Air Lines, and US Airways challenging BPLC’s rates for transportation of jet fuel from New Jersey to three New York City airports.  The complaint was not directed at BPLC’s rates for service to other destinations, and does not involve pipeline systems and terminals owned by Buckeye’s other operating subsidiaries.  The complaint challenges these jet fuel transportation rates as generating revenues in excess of costs and thus being “unjust and unreasonable” under the Interstate Commerce Act.  On October 10, 2012, BPLC filed its answer to the complaint, contending that the airlines’ allegations are based on inappropriate adjustments to the pipeline’s costs and revenues, and that, in any event, any revenue recovery by BPLC in excess of costs would be irrelevant because BPLC’s rates are set under a FERC-approved program that ties rates to competitive levels.  BPLC also sought dismissal of the complaint to the extent it seeks to challenge the portion of BPLC’s rates that were deemed just and reasonable, or “grandfathered,” under Section 1803 of the Energy Policy Act of 1992.  BPLC further contested the airlines’ ability to seek relief as to past charges where the rates are lawful under BPLC’s FERC-approved rate program.  On October 25, 2012, the complainants filed their answer to BPLC’s motion to dismiss and answer.  On November 9, 2012, BPLC filed a response addressing newly raised arguments in the complainants’ October 25th answer.  On February 22, 2013, FERC issued an order setting the airline complaint in Dkt. No. OR12-28-000 for hearing, but holding the

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

hearing in abeyance and setting the dispute for settlement procedures before a settlement judge.  If FERC were to find these challenged rates to be in excess of costs and not otherwise protected by law, it could order BPLC to reduce these rates prospectively and could order repayment to the complaining airlines of any past charges found to be in excess of just and reasonable levels for up to two years prior to the filing date of the complaint. BPLC intends to vigorously defend its rates.  On March 8, 2013, an order was issued consolidating this complaint proceeding with the proceeding regarding BPLC’s application for market-based rates in the New York City market in Dkt. No. OR13-3-00 (discussed below), for settlement purposes, and settlement discussions under the supervision of the FERC settlement judge are ongoing.  The timing or outcome of final resolution of this matter cannot reasonably be determined at this time.

 

FERC Docket No. OR13-3 — Buckeye Pipe Line’s Market-Based Rate Application.  On October 15, 2012, BPLC filed an application with FERC seeking authority to charge market-based rates for deliveries of refined petroleum products to the New York City-area market (the “Application”).  In the Application, BPLC seeks to charge market-based rates from its three origin points in northeastern New Jersey to its five destinations on its Long Island System, including deliveries of jet fuel to the Newark, LaGuardia, and JFK airports.  The jet fuel rates were also the subject of the airlines’ OR12-28 complaint discussed above.  On December 14, 2012, Delta Air Lines, JetBlue Airways, United/Continental Air Lines, and US Airways filed a joint intervention and protest challenging the Application and requesting its rejection.  On January 14, 2013, BPLC filed its answer to the protest and requested summary disposition as to those non-jet-fuel rates that were not challenged in the protest.  On January 29, 2013, the protestants responded to BPLC’s answer, and on February 13, 2013, BPLC filed a further answer to the protestants’ January 29, 2013 pleading.  On February 28, 2013, FERC issued an order setting the Application for hearing, holding the hearing in abeyance and setting the dispute for settlement procedures before a settlement judge.  As discussed above, the Application has been consolidated with the complaint proceeding in Dkt. No. OR12-28-000 for settlement purposes and settlement discussions under the supervision of the FERC settlement judge are ongoing.  If FERC were to approve the Application, BPLC would be permitted prospectively to set these rates in response to competitive forces, and the basis for the airlines’ claim for relief in their OR12-28 complaint as to BPLC’s future rates would be irrelevant prospectively.  The timing or outcome of FERC’s review of the Application cannot reasonably be determined at this time.

 

Environmental Contingencies

 

We recorded operating expenses, net of insurance recoveries, of $1.5 million and $1.4 million during the three months ended June 30, 2013 and 2012, respectively, related to environmental remediation expenditures unrelated to claims and legal proceedings.  For the six months ended June 30, 2013 and 2012, we recorded operating expenses, net of recoveries, of $3.0 million and $2.6 million, respectively, related to environmental remediation expenditures unrelated to claims and legal proceedings.  Costs incurred may be in excess of our estimate, which may have a material impact on our financial condition, results of operations or cash flows.  As of June 30, 2013 and December 31, 2012, we recorded environmental liabilities of $62.4 million and $61.8 million, respectively.  At June 30, 2013 and December 31, 2012, we had $11.9 million and $17.7 million, respectively, of receivables related to these environmental remediation expenditures covered by insurance.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4.  INVENTORIES

 

Our inventory amounts were as follows at the dates indicated (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Refined petroleum products (1)

 

$

180,634

 

$

246,918

 

Materials and supplies

 

14,242

 

12,245

 

Total inventories

 

$

194,876

 

$

259,163

 

 


(1)         Ending inventory was 62.4 million and 80.9 million gallons of refined petroleum products at June 30, 2013 and December 31, 2012, respectively.

 

At June 30, 2013 and December 31, 2012, approximately 74% and 88% of our refined petroleum products inventory volumes were hedged, respectively.  Because we generally designate inventory as a hedged item upon purchase, hedged inventory is valued at current market prices with the change in value of the inventory reflected in our unaudited condensed consolidated statements of operations.  Inventory not accounted for as a fair value hedge is accounted for at the lower of cost or market using the weighted average cost method.

 

5.  EQUITY INVESTMENTS

 

The following table presents earnings from equity investments for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

West Shore Pipe Line Company

 

$

1,323

 

$

1,419

 

$

2,573

 

$

3,104

 

Muskegon Pipeline LLC

 

390

 

156

 

631

 

419

 

Transport4, LLC

 

140

 

78

 

196

 

78

 

South Portland Terminal LLC

 

100

 

133

 

182

 

133

 

Total earnings from equity investments

 

$

1,953

 

$

1,786

 

$

3,582

 

$

3,734

 

 

Summarized combined income statement data for our equity method investments are as follows for the periods indicated (amounts represent 100% of investee income statement data in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

18,940

 

$

17,683

 

$

36,316

 

$

33,982

 

Costs and expenses

 

(9,278

)

(9,348

)

(19,213

)

(17,612

)

Non-operating expense

 

(3,498

)

(2,984

)

(6,120

)

(6,121

)

Net income

 

$

6,164

 

$

5,351

 

$

10,983

 

$

10,249

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6.  LONG-TERM DEBT

 

Notes Offering

 

In June 2013, we issued $500.0 million of 4.150% Notes due July 1, 2023 (the “4.150% Notes”) in an underwritten public offering at 99.81% of their principal amount.  Total proceeds from this offering, after underwriters’ fees, expenses and debt issuance costs of $3.3 million, were approximately $495.8 million.  We used the net proceeds from this offering for general partnership purposes and to repay amounts due under our $1.25 billion revolving credit facility dated September 26, 2011 (the “Credit Facility”) with SunTrust Bank, a portion of which was subsequently reborrowed in July 2013 in order to repay in full the $300.0 million principal amount outstanding under the 4.625% Notes maturing on July 15, 2013 (the “4.625% Notes”), including approximately $6.9 million of related accrued interest.  We also settled all interest rate swaps relating to the 4.150% Notes for approximately $62.0 million during June 2013.

 

Current Maturities Expected to be Refinanced

 

At June 30, 2013, the 4.625% Notes were classified as long-term debt in the unaudited condensed consolidated balance sheet because we had determined that our Credit Facility would be used to refinance this debt.  At June 30, 2013, we had $612.7 million of additional borrowing capacity available under our Credit Facility.  In July 2013, we repaid in full the $300.0 million principal amount outstanding under the 4.625% Notes using funds available under our Credit Facility.

 

7.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

We are exposed to financial market risks, including changes in interest rates and commodity prices, in the course of our normal business operations.  We use derivative instruments to manage risks.

 

Interest Rate Derivatives

 

We utilize forward-starting interest rate swaps to hedge the variability of the forecasted interest payments on anticipated debt issuances that may result from changes in the benchmark interest rate until the expected debt is issued.  When entering into interest rate swap transactions, we become exposed to both credit risk and market risk.  We are subject to credit risk when the change in fair value of the swap instrument is positive and the counterparty may fail to perform under the terms of the contract.  We are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the swaps.  We manage our credit risk by entering into swap transactions only with major financial institutions with investment-grade credit ratings.  We manage our market risk by aligning the swap instrument with the existing underlying debt obligation or a specified expected debt issuance generally associated with the maturity of an existing debt obligation.

 

We entered into six forward-starting interest rate swaps with a total aggregate notional amount of $300.0 million, which we entered into in anticipation of the issuance of debt on or before July 15, 2013, and six forward-starting interest rate swaps with a total aggregate notional amount of $275.0 million, which we entered into in anticipation of the issuance of debt on or before October 15, 2014.  We designated the swap agreements as cash flow hedges at inception and expect the changes in values to be highly correlated with the changes in value of the underlying borrowingsIn June 2013, we issued $500 million of the 4.150% Notes (see Note 6 for further discussion) and also settled the related six forward-starting interest rate swaps for approximately $62.0 million.  As a result of the interest rate swap settlement, we recognized $0.9 million hedge ineffectiveness in interest and debt expense attributable to the timing difference between when the swaps were settled and when they were forecasted to settle.  We expect to issue new fixed-rate debt on or before October 15, 2014 to repay the $275.0 million of 5.300% Notes that are due on October 15, 2014, although no assurances can be given that the issuance of fixed-rate debt will be possible on acceptable terms.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the three months ended June 30, 2013 and 2012, unrealized gains of $23.9 million and unrealized losses of $40.1 million, respectively, were recorded in accumulated other comprehensive loss to reflect the change in the fair values of the forward-starting interest rate swaps.  For the six months ended June 30, 2013 and 2012, unrealized gains of $32.5 million and unrealized losses of $23.1 million, respectively, were recorded in accumulated other comprehensive loss to that effect.  Additionally, over the next twelve months, we expect to reclassify $7.1 million of net losses from accumulated other comprehensive loss to interest and debt expense.  The loss consists of the following: i) the forward-starting interest rate swaps that were settled in 2008 and ii) the forward-starting interest rate swaps settled in June 2013 (as discussed above).  These losses were partially offset by a gain attributable to the settlement of a treasury lock agreement settled in 2011.

 

Commodity Derivatives

 

Our Energy Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its physical derivative contracts.  The futures contracts used to hedge refined petroleum product inventories are designated as fair value hedges with changes in fair value of both the futures contracts and physical inventory reflected in earnings.  Physical contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market.

 

The following table summarizes our commodity derivative instruments outstanding at June 30, 2013 (amounts in thousands of gallons):

 

 

 

Volume (1)

 

Accounting

 

Derivative Purpose 

 

Current

 

Long-Term (2)

 

Treatment

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

46,926

 

 

Mark-to-market

 

Physical index derivative contracts

 

40,337

 

 

Mark-to-market

 

Futures contracts for refined petroleum products

 

27,423

 

 

Mark-to-market

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined petroleum products

 

46,284

 

 

Fair Value Hedge

 

 


(1)         Volume represents absolute value of net notional volume position.

(2)         There were no derivative contracts that extended beyond June 30, 2014.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table sets forth the fair value of each classification of derivative instruments and the locations of the derivative instruments on our condensed consolidated balance sheets at the dates indicated (in thousands):

 

 

 

June 30, 2013

 

 

 

Derivatives

 

Derivatives

 

Gross

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

Net Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

4,396

 

$

 

$

4,396

 

$

(1,330

)

$

3,066

 

Physical index derivative contracts

 

594

 

 

594

 

(30

)

564

 

Futures contracts for refined products

 

60,898

 

386

 

61,284

 

(58,448

)

2,836

 

Total current derivative assets

 

65,888

 

386

 

66,274

 

(59,808

)

6,466

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(3,687

)

 

(3,687

)

1,330

 

(2,357

)

Physical index derivative contracts

 

(204

)

 

(204

)

30

 

(174

)

Futures contracts for refined products

 

(57,003

)

(1,445

)

(58,448

)

58,448

 

 

Total current derivative liabilities

 

(60,894

)

(1,445

)

(62,339

)

59,808

 

(2,531

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

 

(35,237

)

(35,237

)

 

(35,237

)

Total non-current derivative liabilities

 

 

(35,237

)

(35,237

)

 

(35,237

)

Net derivative assets (liabilities)

 

$

4,994

 

$

(36,296

)

$

(31,302

)

$

 

$

(31,302

)

 


(1)  Amounts represent the netting of physical fixed and index contracts’ assets and liabilities when a legal right of offset exists.  Futures contracts are subject to settlement through margin requirements and are additionally presented on a net basis.

 

 

 

December 31, 2012

 

 

 

Derivatives

 

Derivatives

 

Gross

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

Net Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

1,489

 

$

 

$

1,489

 

$

(335

)

$

1,154

 

Physical index derivative contracts

 

724

 

 

724

 

(159

)

565

 

Futures contracts for refined products

 

10,359

 

435

 

10,794

 

(10,794

)

 

Total current derivative assets

 

12,572

 

435

 

13,007

 

(11,288

)

1,719

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(2,377

)

 

(2,377

)

335

 

(2,042

)

Physical index derivative contracts

 

(705

)

 

(705

)

159

 

(546

)

Futures contracts for refined products

 

(15,268

)

(3,096

)

(18,364

)

10,794

 

(7,570

)

Interest rate derivatives

 

 

(72,831

)

(72,831

)

 

(72,831

)

Total current derivative liabilities

 

(18,350

)

(75,927

)

(94,277

)

11,288

 

(82,989

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

 

(57,805

)

(57,805

)

 

(57,805

)

Total non-current derivative liabilities

 

 

(57,805

)

(57,805

)

 

(57,805

)

Net derivative assets (liabilities)

 

$

(5,778

)

$

(133,297

)

$

(139,075

)

$

 

$

(139,075

)

 


(1)  Amounts represent the netting of physical fixed and index contracts’ assets and liabilities when a legal right of offset exists.  Futures contracts are subject to settlement through margin requirements and are additionally presented on a net basis.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Our hedged inventory portfolio extends to the fourth quarter of 2013.  The majority of the unrealized loss at June 30, 2013 for inventory hedges represented by futures contracts of $1.1 million will be realized by the fourth quarter of 2013 as the related inventory is sold.  At June 30, 2013, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, physical index contracts, and futures contracts for fixed-price sales contracts noted above) varied in duration in the overall portfolio, but did not extend beyond May 2014.  In addition, at June 30, 2013, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.

 

The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated (in thousands):

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

 

 

Location

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

Product sales

 

$

2,795

 

$

3,791

 

$

3,376

 

$

2,898

 

Physical index derivative contracts

 

Product sales

 

700

 

258

 

1,109

 

360

 

Physical fixed price derivative contracts

 

Cost of product sales and natural gas storage services

 

(359

)

784

 

(445

)

(603

)

Physical index derivative contracts

 

Cost of product sales and natural gas storage services

 

(541

)

4

 

(544

)

(39

)

Futures contracts for refined products

 

Cost of product sales and natural gas storage services

 

1,457

 

1,960

 

5,797

 

5,331

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as fair value hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

Cost of product sales and natural gas storage services

 

8,159

 

14,536

 

8,935

 

(14,635

)

Physical inventory - hedged items

 

Cost of product sales and natural gas storage services

 

(8,959

)

(17,301

)

(9,440

)

11,157

 

 

 

 

 

 

 

 

 

 

 

 

 

Ineffectiveness excluding the time value component on fair value hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Fair value hedge ineffectiveness (excluding time value)

 

Cost of product sales and natural gas storage services

 

(5,212

)

172

 

(3,627

)

(560

)

Time value excluded from hedge assessment

 

Cost of product sales and natural gas storage services

 

4,412

 

(2,937

)

3,122

 

(2,917

)

Net loss in income

 

 

 

$

(800

)

$

(2,765

)

$

(505

)

$

(3,477

)

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The losses reclassified from AOCI to income and the change in value recognized in OCI on our derivatives were as follows for the periods indicated (in thousands):

 

 

 

 

 

Loss Reclassified from AOCI to Income for the

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

 

 

Location

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest and debt expense

 

$

(1,093

)

$

(229

)

$

(1,321

)

$

(459

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in OCI on Derivatives for the

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

 

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

$

23,907

 

$

(40,136

)

$

32,526

 

$

(23,075

)

 

8.  FAIR VALUE MEASUREMENTS

 

We categorize our financial assets and liabilities using the three-tier hierarchy as follows:

 

Recurring

 

The following table sets forth financial assets and liabilities measured at fair value on a recurring basis, as of the measurement dates indicated, and the basis for that measurement, by level within the fair value hierarchy (in thousands):

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

 

$

3,066

 

$

 

$

1,154

 

Physical index derivative contracts

 

 

564

 

 

565

 

Futures contracts for refined products

 

2,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

 

(2,357

)

 

(2,042

)

Physical index derivative contracts

 

 

(174

)

 

(546

)

Futures contracts for refined products

 

 

 

(7,570

)

 

Interest rate derivatives

 

 

(35,237

)

 

(130,636

)

Fair value

 

$

2,836

 

$

(34,138

)

$

(7,570

)

$

(131,505

)

 

The values of the Level 1 derivative assets and liabilities were based on quoted market prices obtained from the New York Mercantile Exchange.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The values of the Level 2 interest rate derivatives were determined using expected cash flow models, which incorporated market inputs including the implied forward London Interbank Offered Rate yield curve for the same period as the future interest swap settlements.

 

The values of the Level 2 derivative contracts were calculated using market approaches based on observable market data inputs, including published commodity pricing data, which is verified against other available market data, and market interest rate and volatility data.  Level 2 fixed price derivative assets are net of credit value adjustments (“CVAs”) determined using an expected cash flow model, which incorporates assumptions about the credit risk of the derivative contracts based on the historical and expected payment history of each customer, the amount of product contracted for under the agreement and the customer’s historical and expected purchase performance under each contract.  The Energy Services segment determined CVAs are appropriate because few of the Energy Services segment’s customers entering into these derivative contracts are large organizations with nationally-recognized credit ratings.  The Level 2 fixed price derivative assets of $3.1 million and $1.2 million as of June 30, 2013 and December 31, 2012, respectively, are net of CVAs of ($0.1) million for both periods, respectively.  As of June 30, 2013, the Energy Services segment did not hold any net liability derivative position containing credit contingent features.

 

Financial instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets at amounts which approximate fair value due to the relatively short period to maturity of these financial instruments.  The fair values of our fixed-rate debt were estimated by observing market trading prices and by comparing the historic market prices of our publicly issued debt with the market prices of the publicly-issued debt of other master limited partnerships with similar credit ratings and terms.  The fair values of our variable-rate debt are their carrying amounts, as the carrying amount reasonably approximates fair value due to the variability of the interest rates.  The carrying value and fair value, using Level 2 input values, of our debt were as follows at the dates indicated (in thousands):

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

2,569,630

 

$

2,684,646

 

$

2,070,244

 

$

2,203,662

 

Variable-rate debt

 

76,000

 

76,000

 

871,200

 

871,200

 

Total debt

 

$

2,645,630

 

$

2,760,646

 

$

2,941,444

 

$

3,074,862

 

 

We recognize transfers between levels within the fair value hierarchy as of the beginning of the reporting period.  We did not have any transfers between Level 1 and Level 2 during the six months ended June 30, 2013 and 2012, respectively.

 

Non-Recurring

 

Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. For the three and six months ended June 30, 2013 and 2012, there were no fair value adjustments related to such assets or liabilities reflected in our unaudited condensed consolidated financial statements.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9.              PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

Buckeye Pipe Line Services Company (“Services Company”), which employs the majority of our workforce, sponsors a defined benefit plan, the Retirement Income Guarantee Plan (the “RIGP”), and an unfunded post-retirement benefit plan (the “Retiree Medical Plan”).  The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as follows for the three months ended June 30, 2013 and 2012 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

55

 

$

61

 

$

71

 

$

78

 

Interest cost

 

187

 

207

 

404

 

448

 

Expected return on plan assets

 

(103

)

(113

)

 

 

Amortization of prior service cost

 

 

 

(615

)

(683

)

Amortization of unrecognized losses

 

308

 

343

 

284

 

315

 

Actuarial loss due to settlements

 

112

 

 

 

 

Net periodic benefit cost

 

$

559

 

$

498

 

$

144

 

$

158

 

 

The components of the net periodic benefit cost for the RIGP and the Retiree Medical Plan were as follows for the six months ended June 30, 2013 and 2012 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

122

 

$

132

 

$

157

 

$

154

 

Interest cost

 

414

 

414

 

897

 

930

 

Expected return on plan assets

 

(227

)

(200

)

 

 

Amortization of prior service cost

 

 

 

(1,365

)

(1,424

)

Amortization of unrecognized losses

 

685

 

797

 

630

 

626

 

Actuarial loss due to settlements

 

453

 

 

 

 

Net periodic benefit cost

 

$

1,447

 

$

1,143

 

$

319

 

$

286

 

 

During the three months ended June 30, 2013 and 2012, we contributed approximately $0.4 million and $0.2 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.  For the six months ended June 30, 2013 and 2012, we contributed approximately $0.7 million and $2.5 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.

 

10.  UNIT-BASED COMPENSATION PLANS

 

We award unit-based compensation to employees and directors primarily under the Buckeye Partners, L.P. 2013 Long-Term Incentive Plan (the “LTIP”), which was approved by the Partnership’s unitholders in June 2013.  The LTIP replaced the 2009 Long-Term Incentive Plan (the “2009 Plan”), which was merged with and into the LTIP, and no further grants will be made under the 2009 Plan.  We formerly awarded options to acquire LP Units to employees pursuant to the Buckeye Partners, L.P. Unit Option and Distribution Equivalent Plan (the “Option Plan”).

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We recognized compensation expense related to the LTIP, which includes awards under the 2009 Plan, and the Option Plan of $4.0 million and $5.1 million for the three months ended June 30, 2013 and 2012, respectively.  For the six months ended June 30, 2013 and 2012, we recognized compensation expense of $7.3 million and $7.7 million, respectively.  These compensation plans are discussed below.

 

LTIP

 

The LTIP is the successor long-term incentive compensation plan to the 2009 Plan.  Following the approval by unitholders of the LTIP, (i) the 2009 Plan was merged with and into the LTIP, (ii) no further grants will be made under the 2009 Plan, and (iii) LP Units with respect to all grants outstanding under the 2009 Plan will be issued under the LTIP.  As a result of the merger of the 2009 Plan into the LTIP on June 4, 2013, the LTIP provides for the issuance of up to 3,000,000 LP Units, plus 889,491 LP Units subject to outstanding grants under the 2009 Plan and 193,913 LP Units that remained available for issuance under the 2009 Plan.  Therefore, as of June 30, 2013, there were 3,207,094 LP Units available for issuance under the LTIP.

 

Deferral Plan under the LTIP

 

We also maintain the Buckeye Partners, L.P. Unit Deferral and Incentive Plan (the “Deferral Plan”), pursuant to which we issue phantom and matching units under the LTIP to certain employees in lieu of a portion of the cash payments such employees would be entitled to receive under our Annual Incentive Compensation Plan.  At December 31, 2012 and 2011, actual compensation awards deferred under the Deferral Plan were $1.4 million and $0.7 million, for which 51,668 and 23,426 phantom units (including matching units) were granted during the six months ended June 30, 2013, and the year ended 2012, respectively.  These grants are included as granted in the LTIP activity table below.

 

Awards under the LTIP

 

During the six months ended June 30, 2013, the Compensation Committee granted 185,497 phantom units to employees (including the 51,668 phantom units granted as discussed above), 14,000 phantom units to independent directors of Buckeye GP and 169,735 performance units to employees.

 

The following table sets forth the LTIP activity for the periods indicated (in thousands, except per unit amounts):

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Number of

 

Fair Value

 

 

 

LP Units

 

per LP Unit

 

Unvested at January 1, 2013

 

745

 

$

62.08

 

Granted

 

406

 

53.62

 

Vested

 

(222

)

56.90

 

Forfeited

 

(58

)

59.15

 

Unvested at June 30, 2013

 

871

 

$

59.66

 

 

At June 30, 2013, approximately $27.0 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of approximately 2.0 years.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Unit Option and Distribution Equivalent Plan

 

The following is a summary of the changes in the options outstanding (all of which are vested) under the Option Plan for the periods indicated (in thousands, except per unit amounts):

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Strike Price

 

Contractual

 

Intrinsic

 

 

 

LP Units

 

per LP Unit

 

Term (in years)

 

Value (1)

 

Outstanding at January 1, 2013

 

74

 

$

47.19

 

3.3

 

$

35

 

Exercised

 

(22

)

47.56

 

 

 

 

 

Outstanding at June 30, 2013

 

52

 

47.04

 

2.8

 

$

1,207

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2013

 

52

 

$

47.04

 

2.8

 

$

1,207

 

 


(1)         Aggregate intrinsic value reflects fully vested LP Unit options at the date indicated. Intrinsic value is determined by calculating the difference between our closing LP Unit price on the last trading day in June 2013 and the exercise price, multiplied by the number of exercisable, in-the-money options.

 

The total intrinsic value of options exercised was $0.4 million and $0.3 million during the six months ended June 30, 2013 and 2012, respectively.

 

11.  PARTNERS’ CAPITAL AND DISTRIBUTIONS

 

In May 2013, we entered into four separate equity distribution agreements (each an “Equity Distribution Agreement” and collectively the “Equity Distribution Agreements”) with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC.  Under the terms of the Equity Distribution Agreements, we may offer and sell up to $300.0 million in aggregate gross sales proceeds of LP Units from time to time through such firms, acting as agents of the Partnership or as principals, subject in each case to the terms and conditions set forth in the applicable Equity Distribution Agreement.  Sales of LP Units, if any, may be made by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms.  During the three months ended June 30, 2013, we sold 0.4 million LP Units in aggregate under the Equity Distribution Agreements and received approximately $23.6 million in net proceeds after deducting commissions and other related expenses.  During the three months ended June 30, 2013, we paid approximately $0.3 million of compensation in aggregate to the agents under the Equity Distribution Agreements.

 

In January 2013, we completed a public offering of 6.0 million LP Units pursuant to an effective shelf registration statement, which priced at $52.54 per unit.  The underwriters also exercised an option to purchase 0.9 million additional LP Units, resulting in total gross proceeds of approximately $362.5 million before deducting underwriting fees and estimated offering expenses.  We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Summary of Changes in Outstanding Units

 

The following is a summary of changes in units outstanding for the periods indicated (in thousands):

 

 

 

Limited

 

Class B

 

 

 

 

 

Partners

 

Units

 

Total

 

 

 

 

 

 

 

 

 

Units outstanding at January 1, 2013

 

90,371

 

7,975

 

98,346

 

LP Units issued pursuant to the Option Plan (1)

 

21

 

 

21

 

LP Units issued pursuant to the LTIP (1)

 

152

 

 

152

 

Issuance of units to institutional investors

 

6,900

 

 

6,900

 

Issuance of units through Equity Distribution Agreements

 

351

 

 

351

 

Issuance of Class B Units in lieu of quarterly cash distributions

 

 

349

 

349

 

Units outstanding at June 30, 2013

 

97,795

 

8,324

 

106,119

 

 


(1)         The number of units issued represents issuance net of tax withholding.

 

Distributions

 

We generally make quarterly cash distributions to unitholders of substantially all of our available cash, generally defined in our partnership agreement as consolidated cash receipts less consolidated cash expenditures and such retentions for working capital, anticipated cash expenditures and contingencies as our general partner deems appropriate. Actual cash distributions on our LP Units totaled $204.2 million and $188.1 million during the six months ended June 30, 2013 and 2012, respectively.  We also paid distributions in-kind to our Class B unitholders by issuing 349,242 Class B Units during the six months ended June 30, 2013.

 

On August 2, 2013, we announced a quarterly distribution of $1.0625 per LP Unit that will be paid on August 20, 2013, to LP unitholders of record on August 12, 2013.  Based on the LP Units outstanding as of June 30, 2013, cash distributed to LP unitholders on August 20, 2013 will total approximately $104.3 million.  Based on Class B Units outstanding as of June 30, 2013, we also expect to issue approximately 146,000 Class B Units in lieu of cash distributions on August 20, 2013, to Class B unitholders of record on August 12, 2013.  The Class B Units will convert into LP Units on a one-for-one basis on the date on which at least 4 million barrels of incremental storage capacity are placed in service at our BORCO facility, which is expected to occur in the third quarter of 2013.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12.  EARNINGS PER UNIT

 

The following table is a reconciliation of the weighted average units outstanding used in computing the basic and diluted earnings per unit for the periods indicated (in thousands, except per unit amounts):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Buckeye Partners, L.P.

 

$

76,430

 

$

54,379

 

$

165,771

 

$

106,338

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average units outstanding - basic

 

105,701

 

97,818

 

104,481

 

96,524

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit - basic

 

$

0.72

 

$

0.56

 

$

1.59

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

Diluted: