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 March 31, 2014

 

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

 

As of April 30, 2014, there were 115,954,070 limited partner units outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

5

 

Condensed Consolidated Statements of Partners’ Capital for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

6

 

Notes to Unaudited Condensed Consolidated Financial Statements:

 

 

 

1.

Organization and Basis of Presentation

7

 

 

2.

Acquisition

8

 

 

3.

Discontinued Operations

8

 

 

4.

Commitments and Contingencies

9

 

 

5.

Inventories

11

 

 

6.

Equity Investments

11

 

 

7.

Long-Term Debt

12

 

 

8.

Derivative Instruments and Hedging Activities

12

 

 

9.

Fair Value Measurements

16

 

 

10.

Pensions and Other Postretirement Benefits

18

 

 

11.

Unit-Based Compensation Plans

18

 

 

12.

Partners’ Capital and Distributions

19

 

 

13.

Earnings Per Unit

20

 

 

14.

Business Segments

21

 

 

15.

Supplemental Cash Flow Information

24

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

38

 

 

 

Item 5.

Other Information

38

 

 

 

Item 6.

Exhibits

38

 

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

 

 

 

March 31,

 

 

 

2014

 

2013

 

Revenue:

 

 

 

 

 

Product sales

 

$

1,677,742

 

$

1,069,217

 

Transportation, storage and other services

 

314,087

 

261,861

 

Total revenue

 

1,991,829

 

1,331,078

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of product sales

 

1,665,379

 

1,063,298

 

Operating expenses

 

124,829

 

92,352

 

Depreciation and amortization

 

42,991

 

35,699

 

General and administrative

 

17,357

 

16,253

 

Total costs and expenses

 

1,850,556

 

1,207,602

 

Operating income

 

141,273

 

123,476

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Earnings from equity investments

 

1,266

 

1,629

 

Interest and debt expense

 

(41,213

)

(30,249

)

Other income

 

136

 

101

 

Total other expense, net

 

(39,811

)

(28,519

)

 

 

 

 

 

 

Income from continuing operations before taxes

 

101,462

 

94,957

 

Income tax benefit (expense)

 

77

 

(131

)

Income from continuing operations

 

101,539

 

94,826

 

Loss from discontinued operations

 

(10,042

)

(4,327

)

Net income

 

91,497

 

90,499

 

Less: Net income attributable to noncontrolling interests

 

(1,029

)

(1,158

)

Net income attributable to Buckeye Partners, L.P.

 

$

90,468

 

$

89,341

 

 

 

 

 

 

 

Basic earnings (loss) per unit attributable to Buckeye Partners, L.P.:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.87

 

$

0.91

 

Discontinued operations

 

(0.09

)

(0.04

)

Total

 

$

0.78

 

$

0.87

 

 

 

 

 

 

 

Diluted earnings (loss) per unit attributable to Buckeye Partners, L.P.:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.87

 

$

0.90

 

Discontinued operations

 

(0.09

)

(0.04

)

Total

 

$

0.78

 

$

0.86

 

 

 

 

 

 

 

Weighted average units outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

115,319

 

103,247

 

Diluted

 

115,796

 

103,571

 

 

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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

91,497

 

$

90,499

 

Other comprehensive income (loss):

 

 

 

 

 

Unrealized (losses) gains on derivative instruments

 

(9,604

)

8,619

 

Reclassification of derivative losses to net income

 

1,779

 

228

 

Recognition of costs related to benefit plans to net income

 

393

 

314

 

Adjustments to recognize the funded status of benefit plans

 

 

(338

)

Total other comprehensive (loss) income

 

(7,432

)

8,823

 

Comprehensive income

 

84,065

 

99,322

 

Less: Comprehensive income attributable to noncontrolling interests

 

(1,029

)

(1,158

)

Comprehensive income attributable to Buckeye Partners, L.P.

 

$

83,036

 

$

98,164

 

 

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)

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

31,314

 

$

4,950

 

Trade receivables, net

 

416,429

 

326,243

 

Construction and pipeline relocation receivables

 

21,916

 

23,135

 

Inventories

 

417,115

 

312,135

 

Derivative assets

 

11,935

 

4,412

 

Prepaid and other current assets

 

51,951

 

48,503

 

Assets held for sale (Note 3)

 

177,555

 

181,708

 

Total current assets

 

1,128,215

 

901,086

 

 

 

 

 

 

 

Property, plant and equipment, net

 

4,980,920

 

4,925,294

 

 

 

 

 

 

 

Equity investments

 

73,417

 

72,349

 

Goodwill

 

821,500

 

821,500

 

Intangible assets, net

 

215,944

 

225,364

 

Other non-current assets

 

57,941

 

59,970

 

Total assets

 

$

7,277,937

 

$

7,005,563

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

348,000

 

$

226,000

 

Accounts payable

 

197,778

 

149,520

 

Derivative liabilities

 

49,152

 

44,672

 

Accrued and other current liabilities

 

182,759

 

227,084

 

Liabilities held for sale (Note 3)

 

37,964

 

37,767

 

Total current liabilities

 

815,653

 

685,043

 

 

 

 

 

 

 

Long-term debt

 

3,234,002

 

3,092,711

 

Other non-current liabilities

 

139,655

 

146,973

 

Total liabilities

 

4,189,310

 

3,924,727

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Buckeye Partners, L.P. capital:

 

 

 

 

 

Limited Partners (115,946,684 and 115,063,617 units outstanding as of March 31, 2014 and December 31, 2013 respectively)

 

3,184,586

 

3,169,217

 

Accumulated other comprehensive loss

 

(110,984

)

(103,552

)

Total Buckeye Partners, L.P. capital

 

3,073,602

 

3,065,665

 

Noncontrolling interests

 

15,025

 

15,171

 

Total partners’ capital

 

3,088,627

 

3,080,836

 

Total liabilities and partners’ capital

 

$

7,277,937

 

$

7,005,563

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

91,497

 

$

90,499

 

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

 

 

 

 

 

Depreciation and amortization

 

42,991

 

37,591

 

Net changes in fair value of derivatives

 

(12,684

)

291

 

Non-cash deferred lease expense

 

909

 

942

 

Amortization of unfavorable storage contracts

 

(2,768

)

(2,748

)

Earnings from equity investments

 

(1,266

)

(1,629

)

Distributions from equity investments

 

125

 

125

 

Other non-cash items

 

6,585

 

4,356

 

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

 

 

 

 

 

Trade receivables

 

(90,186

)

(13,102

)

Construction and pipeline relocation receivables

 

1,219

 

(740

)

Inventories

 

(104,980

)

66,336

 

Prepaid and other current assets

 

447

 

24,418

 

Accounts payable

 

60,777

 

9,588

 

Accrued and other current liabilities

 

(36,867

)

(30,347

)

Other non-current assets

 

1,141

 

(1,116

)

Other non-current liabilities

 

(4,558

)

(2,047

)

Net cash (used in) provided by operating activities

 

(47,618

)

182,417

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(109,864

)

(67,186

)

Proceeds from disposal of property, plant and equipment

 

21

 

358

 

Net cash used in investing activities

 

(109,843

)

(66,828

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of LP Units

 

52,217

 

349,564

 

Net proceeds from exercise of unit options

 

269

 

 

Payment of tax withholding on issuance of LTIP awards

 

(4,744

)

(3,498

)

Debt issuance costs

 

(10

)

 

Borrowings under BPL Credit Facility

 

405,000

 

339,000

 

Repayments under BPL Credit Facility

 

(264,000

)

(619,000

)

Net borrowings (repayments) under BES Credit Facility

 

122,000

 

(81,300

)

Distributions paid to noncontrolling interests

 

(1,953

)

(2,295

)

Distributions paid to unitholders

 

(124,954

)

(100,272

)

Net cash provided by (used in) financing activities

 

183,825

 

(117,801

)

Net increase (decrease) in cash and cash equivalents

 

26,364

 

(2,212

)

Cash and cash equivalents — Beginning of period

 

4,950

 

6,776

 

Cash and cash equivalents — End of period

 

$

31,314

 

$

4,564

 

 

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, 2014

 

$

3,169,217

 

$

 

$

(103,552

)

$

15,171

 

$

3,080,836

 

Net income

 

90,468

 

 

 

1,029

 

91,497

 

Distributions paid to unitholders

 

(125,806

)

 

 

852

 

(124,954

)

Net proceeds from issuance of LP Units

 

52,217

 

 

 

 

52,217

 

Amortization of unit-based compensation awards

 

3,252

 

 

 

 

3,252

 

Proceeds from exercise of unit options

 

269

 

 

 

 

269

 

Payment of tax withholding on issuance of LTIP awards

 

(4,744

)

 

 

 

(4,744

)

Distributions paid to noncontrolling interests

 

 

 

 

(1,953

)

(1,953

)

Other comprehensive loss

 

 

 

(7,432

)

 

(7,432

)

Noncash accrual for distribution equivalent rights

 

(300

)

 

 

 

(300

)

Other

 

13

 

 

 

(74

)

(61

)

Partners’ capital - March 31, 2014

 

$

3,184,586

 

$

 

$

(110,984

)

$

15,025

 

$

3,088,627

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital - January 1, 2013

 

$

2,117,788

 

$

413,304

 

$

(158,779

)

$

16,527

 

$

2,388,840

 

Net income

 

82,383

 

6,958

 

 

1,158

 

90,499

 

Distributions paid to unitholders

 

(101,475

)

 

 

1,203

 

(100,272

)

Net proceeds from issuance of LP Units

 

349,564

 

 

 

 

349,564

 

Amortization of unit-based compensation awards

 

3,343

 

 

 

 

3,343

 

Payment of tax withholding on issuance of LTIP awards

 

(3,498

)

 

 

 

(3,498

)

Distributions paid to noncontrolling interests

 

 

 

 

(2,295

)

(2,295

)

Other comprehensive income

 

 

 

8,823

 

 

8,823

 

Noncash accrual for distribution equivalent rights

 

(334

)

 

 

 

(334

)

Other

 

16

 

 

 

(11

)

5

 

Partners’ capital - March 31, 2013

 

$

2,447,787

 

$

420,262

 

$

(149,956

)

$

16,582

 

$

2,734,675

 

 

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.

 

Buckeye owns and operates a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage and marketing of liquid petroleum products.  We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, miles of pipeline and active product terminals.  In addition to our pipelines and inland terminals, we own an integrated network of marine terminals located primarily on the U.S. East Coast and 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 and provides an array of logistics and blending services for the global flow of petroleum products.  Our network of marine terminals enables us to facilitate global flows of crude oil, refined petroleum products, and other commodities, and to offer our customers connectivity to some of the world’s most important bulk storage and blending hubs.  We are also a wholesale distributor of refined petroleum products in areas served by our pipelines and terminals.  Finally, Buckeye operates and/or maintains third-party pipelines under agreements with major oil and gas, petrochemical and chemical companies, and performs certain engineering and construction management services for third parties.

 

In December 2013, the Board of Directors of Buckeye GP (the “Board”) approved a plan to divest our Natural Gas Storage segment and its related assets as we no longer believe this business is aligned with our long-term business strategy.  In this report, we refer to this group of assets and related liabilities as our Natural Gas Storage disposal group.  Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our unaudited condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013 and also reported the results of operations as discontinued operations for all periods presented in this report.  For additional information, see Note 3 in the Notes to Unaudited Condensed Consolidated Financial Statements.

 

Additionally, in December 2013, we changed our organizational structure to align our strategic business units into four reportable segments: Pipelines & Terminals, Global Marine Terminals, Merchant Services and Development & Logistics.  See Note 14 for additional information.  We have adjusted our prior period segment information to conform to the current alignment of our continuing business and discontinued operations.

 

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 unaudited condensed 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, 2013.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.  ACQUISITION

 

In December 2013, we acquired certain wholesale distribution contracts and 20 liquid petroleum products terminals with total storage capacity of approximately 39 million barrels from Hess Corporation (“Hess”) for $856.4 million, net of cash acquired (the “Hess Terminals Acquisition”).  The acquisition cost has been allocated to assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represents both expected synergies from combining our operations from the Hess Terminals Acquisition with our existing operations and the economic value attributable to future expansion projects resulting from this acquisition.  Fair values have been developed using recognized business valuation techniques and are subject to change pending final valuation analysis.  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed, on a preliminary basis.

 

As of March 31, 2014, there has been no change to the purchase price allocation reported in our consolidated financial statements for the year ended December 31, 2013.  The total revenue and net income related to the assets acquired from Hess of $332.5 million and $17.8 million, respectively, were included in our unaudited condensed consolidated statement of operations for the three months ended March 31, 2014.

 

3.  DISCONTINUED OPERATIONS

 

In December 2013, the Board approved a plan to divest our Natural Gas Storage segment and its related assets as we no longer believe this business is aligned with our long-term business strategy.  In this report, we refer to this group of assets as our Natural Gas Storage disposal group.  We expect to complete the disposition of these assets in 2014.  Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our accompanying unaudited condensed consolidated balance sheet as of March 31, 2014 and December 31, 2013.  We have reported the results of operations for the disposal group as discontinued operations for the three months ended March 31, 2014 and 2013.  We discontinued depreciation and amortization of the Natural Gas Storage disposal group’s property, plant and equipment upon approval of a plan to sell our Natural Gas Storage business.

 

The following table summarizes the results from discontinued operations (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Revenue

 

$

12,546

 

$

13,883

 

Loss from discontinued operations

 

(10,042

)

(4,327

)

 

8



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The total assets and liabilities held for sale consisted of the following at the dates indicated (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

157,332

 

$

157,261

 

Other current assets

 

20,219

 

24,443

 

Other non-current assets

 

4

 

4

 

Assets held for sale

 

$

177,555

 

$

181,708

 

 

 

 

 

 

 

Accounts payable

 

$

2,205

 

$

2,182

 

Accrued liabilities and other current liabilities

 

8,177

 

8,947

 

Other non-current liabilities

 

27,582

 

26,638

 

Liabilities held for sale

 

$

37,964

 

$

37,767

 

 

4.  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.  Buckeye has insurance to cover this loss, subject to a $5 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 million, but we are contesting the right of the vessel owner to such limitation.  A hearing in The Bahamas court on the vessel owner’s right to limit its liability was held on July 23, 2013, and the court of first instance denied the vessel owner the right to limit its liability for the incident, leaving the vessel owner responsible for all provable damages.  The vessel interests appealed that decision and the appeal was heard on March 27, 2014.  A ruling has not yet been issued, therefore we can express no view on whether the trial court’s decision will be affirmed or reversed.  We experienced no material interruption of service at the BORCO facility as a result of the incident, and the repairs of the damaged sections are complete.  The insurers recently intervened in the litigation and are now parties.

 

The aggregate cost to repair and reconstruct the damaged portions of the jetty and pursue recovery in court has been approximately $23 million.  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 March 31, 2014, we had a $5 million receivable included in “Other non-current assets” in our unaudited condensed consolidated balance sheet, representing reimbursement of the deductible.  Additionally, we have received cash proceeds of $15.3 million related to insurance reimbursements, and to the extent the aggregate 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 March 31, 2014, no gain had been recognized; however, we recorded a $12.7 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.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Federal Energy Regulatory Commission (“FERC”) Proceedings

 

FERC Docket No. OR12-28-000 — Airlines Complaint against Buckeye Pipe Line Company, L.P. (“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 Docket (“Dkt.”) No. OR12-28-000 for hearing, but holding the 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, for settlement purposes, this complaint proceeding with the proceeding regarding BPLC’s application for market-based rates in the New York City market in Dkt. No. OR13-3-000 (discussed below), and settlement discussions under the supervision of the FERC settlement judge continued until April 2014.  On April 1, 2014, the FERC settlement judge issued a status report stating that the parties had been unable to reach a settlement, and recommending that both Dkt. Nos. OR12-28-000 and OR13-3-000 be set for hearing.  The settlement judge further recommended that settlement procedures under the supervision of the settlement judge continue concurrently because the parties hope to continue settlement talks after the commencement of litigation.  On April 17, 2014, the FERC Chief Administrative Law Judge (the “ALJ”) ruled in favor of separate proceedings and of continuing the existing settlement procedures concurrently with litigation.  The timing or outcome of final resolution of this matter cannot reasonably be determined at this time.

 

FERC Docket No. OR13-3-000 — BPLC’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 liquid 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’ OR12-28-000 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 the settlement judge has reported to the FERC and the Chief that the application should be set for hearing.  The settlement judge also recommended that settlement procedures under the supervision of the settlement judge continue concurrently because the parties hope to continue settlement talks after the commencement of litigation.  As noted above, the FERC Chief ALJ ruled that Dkt. No. OR13-3-000 will proceed separately from the Dkt. No. OR12-28-000 proceeding and that the existing settlement procedures will continue concurrently with litigation.  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 OR12-28-000 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.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Environmental Contingencies

 

We recorded operating expenses, net of insurance recoveries, of $0.6 million and $1.5 million during the three months ended March 31, 2014 and 2013, respectively, related to environmental remediation liabilities 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 March 31, 2014 and December 31, 2013, we recorded environmental remediation liabilities of $60.5 million and $57.2 million, respectively.  At March 31, 2014 and December 31, 2013, we had $14.0 million and $10.6 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third party claims.

 

5.  INVENTORIES

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Liquid petroleum products (1)

 

$

396,327

 

$

290,718

 

Materials and supplies

 

20,788

 

21,417

 

Total inventories

 

$

417,115

 

$

312,135

 

 


(1)         Ending inventory was 141.9 million and 102.1 million gallons of liquid petroleum products at March 31, 2014 and December 31, 2013, respectively.

 

At March 31, 2014 and December 31, 2013, approximately 85% and 81% of our liquid petroleum products inventory volumes were designated in a fair value hedge relationship, 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.  Our inventory volumes that are not designated as the hedged item in a fair value hedge relationship are economically hedged to reduce our commodity price exposure.  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.

 

6.  EQUITY INVESTMENTS

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Muskegon Pipeline LLC

 

$

249

 

$

241

 

Transport4, LLC

 

67

 

56

 

West Shore Pipe Line Company

 

660

 

1,250

 

South Portland Terminal LLC

 

290

 

82

 

Total earnings from equity investments

 

$

1,266

 

$

1,629

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Revenue

 

$

19,694

 

$

17,376

 

Costs and expenses

 

(11,422

)

(9,935

)

Non-operating expense

 

(2,721

)

(2,622

)

Net income

 

$

5,551

 

$

4,819

 

 

7.  LONG-TERM DEBT

 

Current Maturities Expected to be Refinanced

 

It is our intent to refinance the $275 million of 5.300% notes maturing on October 15, 2014 (the “5.300% Notes”) in 2014.  If necessary, the 5.300% Notes could be refinanced using our $1.25 billion revolving credit facility dated September 26, 2011 (the “Credit Facility”) with SunTrust Bank.  At March 31, 2014, we had $732 million of additional borrowing capacity under our Credit Facility.  Therefore, we have classified the 5.300% Notes as long-term debt in our unaudited condensed consolidated balance sheet at March 31, 2014.  Additionally, our interest rate swaps that are designated as cash flow hedges related to the refinancing of the 5.300% Notes, which will expire on October 15, 2014, have a financial liability of $39.6 million at March 31, 2014 (see Note 8 below for additional information).

 

8.  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 $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 borrowingsWe 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.

 

During the three months ended March 31, 2014 and 2013, unrealized losses of $9.6 million and unrealized gains of $8.6 million, respectively, were recorded in accumulated other comprehensive loss to reflect the change in the fair values of the forward-starting interest rate swaps.  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 forward-starting interest rate swaps that were settled in 2008 and 2013, partially offset by a gain attributable to the settlement of a treasury lock agreement settled in 2011.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Commodity Derivatives

 

Our Merchant 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 March 31, 2014 (amounts in thousands of gallons):

 

 

 

Volume (1)

 

Accounting

 

Derivative Purpose 

 

Current

 

Long-Term

 

Treatment

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

2,286

 

 

Mark-to-market

 

Physical index derivative contracts

 

177,961

 

 

Mark-to-market

 

Futures contracts for refined petroleum products

 

124,554

 

294

 

Mark-to-market

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined petroleum products

 

120,834

 

 

Fair Value Hedge

 

 


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

 

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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 unaudited condensed consolidated balance sheets at the dates indicated (in thousands):

 

 

 

March 31, 2014

 

 

 

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

 

$

11,872

 

$

 

$

11,872

 

$

(809

)

$

11,063

 

Physical index derivative contracts

 

49

 

 

49

 

(2

)

47

 

Futures contracts for refined products

 

19,782

 

1,815

 

21,597

 

(20,772

)

825

 

Total current derivative assets

 

31,703

 

1,815

 

33,518

 

(21,583

)

11,935

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

45

 

 

45

 

 

45

 

Total non-current derivative assets

 

45

 

 

45

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(9,902

)

 

(9,902

)

809

 

(9,093

)

Physical index derivative contracts

 

(412

)

 

(412

)

2

 

(410

)

Futures contracts for refined products

 

(17,500

)

(3,272

)

(20,772

)

20,772

 

 

Interest rate derivatives

 

 

(39,649

)

(39,649

)

 

(39,649

)

Total current derivative liabilities

 

(27,814

)

(42,921

)

(70,735

)

21,583

 

(49,152

)

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

(8

)

 

(8

)

 

(8

)

Total non-current derivative liabilities

 

(8

)

 

(8

)

 

(8

)

Net derivative assets (liabilities)

 

$

3,926

 

$

(41,106

)

$

(37,180

)

$

 

$

(37,180

)

 


(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, 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

 

$

5,164

 

$

 

$

5,164

 

$

(780

)

$

4,384

 

Physical index derivative contracts

 

48

 

 

48

 

(20

)

28

 

Futures contracts for refined products

 

45,589

 

66

 

45,655

 

(45,655

)

 

Total current derivative assets

 

50,801

 

66

 

50,867

 

(46,455

)

4,412

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(7,027

)

 

(7,027

)

780

 

(6,247

)

Physical index derivative contracts

 

(330

)

 

(330

)

20

 

(310

)

Futures contracts for refined products

 

(52,240

)

(1,485

)

(53,725

)

45,655

 

(8,070

)

Interest rate derivatives

 

 

(30,045

)

(30,045

)

 

(30,045

)

Total current derivative liabilities

 

(59,597

)

(31,530

)

(91,127

)

46,455

 

(44,672

)

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative liabilities

 

$

(8,796

)

$

(31,464

)

$

(40,260

)

$

 

$

(40,260

)

 


(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.

 

Our hedged inventory portfolio extends to the first quarter of 2015.  The majority of the unrealized loss at March 31, 2014 for inventory hedges represented by futures contracts of $1.5 million will be realized by the third quarter of 2014 as the related inventory is sold.  At March 31, 2014, 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 June 2015.  In addition, at March 31, 2014, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

Location

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

Product sales

 

$

(3,372

)

$

581

 

Physical index derivative contracts

 

Product sales

 

6

 

409

 

Physical fixed price derivative contracts

 

Cost of product sales

 

1,411

 

(86

)

Physical index derivative contracts

 

Cost of product sales

 

(192

)

(3

)

Futures contracts for refined products

 

Cost of product sales

 

6,488

 

4,340

 

 

 

 

 

 

 

 

 

Derivatives designated as fair value hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

Cost of product sales

 

1,279

 

776

 

Physical inventory - hedged items

 

Cost of product sales

 

(6,225

)

(481

)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hedge ineffectiveness (excluding time value)

 

Cost of product sales

 

$

4,732

 

$

1,585

 

Time value excluded from hedge assessment

 

Cost of product sales

 

(9,678

)

(1,290

)

Net (loss) gain in income

 

 

 

$

(4,946

)

$

295

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

Loss Reclassified

 

 

 

 

 

from AOCI to Income for the

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

Location

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

Interest and debt expense

 

$

(1,779

)

$

(228

)

 

 

 

(Loss) Gain Recognized

 

 

 

in OCI on Derivatives for the

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

Interest rate contracts

 

$

(9,604

)

$

8,619

 

 

9.  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):

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

 

$

11,108

 

$

 

$

4,384

 

Physical index derivative contracts

 

 

47

 

 

28

 

Futures contracts for refined products

 

825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

 

(9,093

)

 

(6,247

)

Physical index derivative contracts

 

 

(410

)

 

(310

)

Futures contracts for refined products

 

(8

)

 

(8,070

)

 

Interest rate derivatives

 

 

(39,649

)

 

(30,045

)

Fair value

 

$

817

 

$

(37,997

)

$

(8,070

)

$

(32,190

)

 

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 commodity 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 Merchant Services segment determined CVAs are appropriate because few of the Merchant 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 $11.1 million and $4.4 million as of March 31, 2014 and December 31, 2013, respectively, are net of CVAs of ($0.1) million for both periods, respectively.  As of March 31, 2014, the Merchant 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):

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

3,064,002

 

$

3,251,251

 

$

3,063,711

 

$

3,148,634

 

Variable-rate debt

 

518,000

 

518,000

 

255,000

 

255,000

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

$

3,582,002

 

$

3,769,251

 

$

3,318,711

 

$

3,403,634

 

 

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 three months ended March 31, 2014 and 2013, 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 months ended March 31, 2014 and 2013, 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

 

10.       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 March 31, 2014 and 2013 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

54

 

$

67

 

$

108

 

$

86

 

Interest cost

 

134

 

227

 

352

 

493

 

Expected return on plan assets

 

(98

)

(124

)

 

 

Amortization of prior service credit

 

 

 

(406

)

(750

)

Amortization of unrecognized losses

 

308

 

377

 

298

 

346

 

Actuarial loss due to settlements

 

193

 

341

 

 

 

Net periodic benefit cost

 

$

591

 

$

888

 

$

352

 

$

175

 

 

During the three months ended March 31, 2014 and 2013, we contributed $0.9 million and $0.3 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.

 

11.  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”).  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”).  These compensation plans are further discussed below.

 

We recognized compensation expense from continuing operations related to the LTIP, which includes awards under the 2009 Long-Term Incentive Plan (the “2009 Plan”) discussed below and the Option Plan, of $3.1 million and $3.2 million for the three months ended March 31, 2014 and 2013, respectively.

 

LTIP

 

The LTIP is the successor long-term incentive compensation plan to the 2009 Plan.  The LTIP was approved by our unitholders in June 2013, and following such approval, (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 of March 31, 2014, there were 2,926,789 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, as amended and restated effective July 31, 2013 (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 the Buckeye Partners, L.P. Annual Incentive Compensation Plan, as amended and restated, effective January 1, 2012.  At December 31, 2013 and 2012, actual compensation awards deferred under the Deferral Plan were $2.7 million and $1.4 million, for which 75,870 and 51,668 phantom units (including matching units) were granted during the three months ended March 31, 2014, and the year ended 2013, respectively.  These grants are included as granted in the LTIP activity table below.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Awards under the LTIP

 

During the three months ended March 31, 2014, the Compensation Committee of the Board granted 196,247 phantom units to employees (including the 75,870 phantom units granted pursuant to the Deferral Plan, as discussed above), 16,000 phantom units to independent directors of Buckeye GP and 169,059 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, 2014

 

813

 

$

59.36

 

Granted

 

381

 

71.24

 

Vested

 

(171

)

63.85

 

Forfeited

 

(59

)

63.57

 

Unvested at March 31, 2014

 

964

 

$

63.32

 

 

At March 31, 2014, $35.6 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of 2.2 years.

 

Unit Option 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, 2014

 

46

 

$

47.32

 

2.4

 

$

1,080

 

Exercised

 

(6

)

47.20

 

 

 

 

 

Forfeited, cancelled or expired

 

(2

)

 

 

 

 

 

 

Outstanding at March 31, 2014

 

38

 

47.58

 

2.2

 

$

1,046

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2014

 

38

 

$

47.58

 

2.2

 

$

1,046

 

 


(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 March 2014 and the exercise price, multiplied by the number of exercisable, in-the-money options.

 

The total intrinsic value of options exercised was $0.1 million and minimal during the three months ended March 31, 2014 and 2013, respectively.

 

12.  PARTNERS’ CAPITAL AND DISTRIBUTIONS

 

During the three months ended March 31, 2014, we sold 0.7 million LP Units in aggregate under the equity distribution agreements entered into in May 2013 with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC (each an “Equity Distribution Agreement” and collectively the “Equity Distribution Agreements”).  We received $52.2 million in net proceeds after deducting commissions and other related expenses and paid $0.5 million of compensation in aggregate to the agents under the Equity Distribution Agreements.

 

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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 LP Units outstanding for the periods indicated (in thousands):

 

 

 

Limited

 

 

 

Partners

 

 

 

 

 

Outstanding at January 1, 2014

 

115,064

 

LP Units issued pursuant to the Option Plan (1)

 

5

 

LP Units issued pursuant to the LTIP (1)

 

157

 

Issuance of LP Units through Equity Distribution Agreements

 

721

 

Outstanding at March 31, 2014

 

115,947

 

 


(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 $125.8 million and $101.5 million during the three months ended March 31, 2014 and 2013, respectively.

 

On May 2, 2014, we announced a quarterly distribution of $1.10 per LP Unit that will be paid on May 19, 2014 to unitholders of record on May 12, 2014.  Based on the LP Units outstanding as of March 31, 2014 cash distributed to unitholders on May 19, 2014 will total $128 million.

 

13.  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

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income attributable to Buckeye Partners, L.P.

 

$

90,468

 

$

89,341

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Weighted average units outstanding - basic

 

115,319

 

103,247

 

Earnings per unit - basic

 

$

0.78

 

$

0.87

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Weighted average units outstanding - basic

 

115,319

 

103,247

 

Dilutive effect of LP Unit options and LTIP awards granted

 

477

 

324

 

Weighted average units outstanding - diluted

 

115,796

 

103,571

 

Earnings per unit - diluted

 

$

0.78

 

$

0.86

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14.  BUSINESS SEGMENTS

 

We operate and report in four business segments: (i) Pipelines & Terminals; (ii) Global Marine Terminals; (iii) Merchant Services; and (iv) Development & Logistics.  Each segment uses the same accounting policies as those used in the preparation of our unaudited condensed consolidated financial statements.  All inter-segment revenues, operating income and assets have been eliminated.  Reclassifications of prior period amounts were made to operating and general and administrative expenses between our segments. The reclassification impacted adjusted EBITDA by segment and had no impact on our unaudited condensed consolidated net income or partners’ capital.

 

Pipelines & Terminals

 

The Pipelines & Terminals segment receives liquid petroleum products from refineries, connecting pipelines, vessels, and bulk and marine terminals and transports those products to other locations for a fee and provides bulk storage and terminal throughput services in the continental United States.  This segment owns and operates pipeline systems and liquid petroleum products terminals in the continental United States, including five terminals owned by the Merchant Services segment but operated by the Pipelines & Terminals segment and 17 terminals acquired in conjunction with the Hess Terminals Acquisition in December 2013.  In addition, the segment provides crude oil services, including train off-loading, storage and throughput.

 

Global Marine Terminals

 

The Global Marine Terminals segment provides marine bulk storage and marine terminal throughput services along the U.S. East Coast and Caribbean.  The segment has liquid petroleum product terminals located in The Bahamas, Puerto Rico and St. Lucia in the Caribbean, and the New York Harbor.  The Global Marine Terminals segment operates three liquid petroleum products terminals acquired in conjunction with the Hess Terminals Acquisition in December 2013.

 

Merchant Services

 

The Merchant Services segment is a wholesale distributor of refined petroleum products in the United States and in the Caribbean. This segment recognizes revenues when products are delivered.  The segment’s products include gasoline, propane, ethanol, biodiesel and petroleum distillates such as heating oil, diesel fuel, kerosene and fuel oil.  The segment owns five terminals which are operated by the Pipelines & Terminals segment.  The segment’s customers consist principally of product wholesalers as well as major commercial users of these refined petroleum products.

 

Development & Logistics

 

The Development & Logistics segment consists primarily of our contract operations of third-party pipelines, which are owned principally by major oil and gas, petrochemical and chemical companies and are located primarily in Texas and Louisiana.  Additionally, this segment performs pipeline construction management services, typically for cost plus a fixed fee.  This segment also owns and operates two underground propane storage caverns in Indiana and Illinois and an ammonia pipeline, as well as our majority ownership of the Sabina Pipeline, located in Texas.

 

Natural Gas Storage Disposal Group

 

In December 2013, the Board approved a plan to divest the natural gas storage segment facility and related assets that our subsidiary Lodi Gas Storage, L.L.C. owns and operates in Northern California as we no longer believe this business is aligned with our long-term business strategy.  In this report, we refer to this group of assets as our Natural Gas Storage disposal group.  Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our unaudited condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013 and reported the results of operations as discontinued operations for all periods presented in this report.  As such, we have adjusted our prior period segment information to conform to the current alignment of our continuing business and discontinued operations.  For additional information, see Note 3 in the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes revenue by each segment for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014 

 

2013

 

Revenue:

 

 

 

 

 

Pipelines & Terminals

 

$

218,539 

 

$

189,575

 

Global Marine Terminals

 

88,769 

 

61,137

 

Merchant Services

 

1,678,302 

 

1,076,157

 

Development & Logistics

 

16,832 

 

11,912

 

Intersegment

 

(10,613

)

(7,703

)

Total revenue

 

$

1,991,829 

 

$

1,331,078

 

 

For the three months ended March 31, 2014 and 2013, no customer contributed 10% or more of consolidated revenue.

 

The following table summarizes revenue for our continuing operations, by major geographic area, for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

Revenue:

 

 

 

 

 

United States

 

$

1,907,352

 

$

1,278,378

 

International

 

84,477

 

52,700

 

Total revenue

 

$

1,991,829

 

$

1,331,078

 

 

Adjusted EBITDA

 

Adjusted EBITDA is the primary measure used by our senior management, including our Chief Executive Officer, to: (i) evaluate our consolidated operating performance and the operating performance of our business segments; (ii) allocate resources and capital to business segments; (iii) evaluate the viability of proposed projects; and (iv) determine overall rates of return on alternative investment opportunities. Adjusted EBITDA eliminates: (i) non-cash expenses, including but not limited to depreciation and amortization expense resulting from the significant capital investments we make in our businesses and from intangible assets recognized in business combinations; (ii) charges for obligations expected to be settled with the issuance of equity instruments; and (iii) items that are not indicative of our core operating performance results and business outlook.

 

We believe that investors benefit from having access to the same financial measures that we use and that these measures are useful to investors because they aid in comparing our operating performance with that of other companies with similar operations.  The Adjusted EBITDA data presented by us may not be comparable to similarly titled measures at other companies because these items may be defined differently by other companies.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present Adjusted EBITDA by segment and on a consolidated basis and a reconciliation of income from continuing operations to Adjusted EBITDA for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Adjusted EBITDA from continuing operations:

 

 

 

 

 

Pipelines & Terminals

 

$

126,720

 

$

115,385

 

Global Marine Terminals

 

53,703

 

35,479

 

Merchant Services

 

3,133

 

6,194

 

Development & Logistics

 

5,068

 

3,173

 

Adjusted EBITDA from continuing operations

 

$

188,624

 

$

160,231

 

 

 

 

 

 

 

Reconciliation of Income from continuing operations to Adjusted EBITDA from continuing operations:

 

 

 

 

 

Income from continuing operations

 

$

101,539

 

$

94,826

 

Less:  Net income attributable to noncontrolling interests

 

(1,029

)

(1,158

)

Income from continuing operations attributable to Buckeye Partners, L.P.

 

100,510

 

93,668

 

Add:  Interest and debt expense

 

41,213

 

30,249

 

Income tax (benefit) expense

 

(77

)

131

 

Depreciation and amortization

 

42,991

 

35,699

 

Non-cash unit-based compensation expense

 

3,122

 

3,232

 

Hess acquisition and transition expense

 

3,633

 

 

Less:  Amortization of unfavorable storage contracts (1)

 

(2,768

)

(2,748

)

Adjusted EBITDA from continuing operations

 

$

188,624

 

$

160,231

 

 


(1)         Represents amortization of negative fair values allocated to certain unfavorable storage contracts acquired in connection with the BORCO acquisition.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15.  SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash paid for interest (net of capitalized interest)

 

$

52,703

 

$

48,987

 

Cash paid for income taxes

 

127

 

172

 

Capitalized interest

 

2,042

 

1,527

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Decrease in accounts payable and accrued and other current liabilities related to capital expenditures

 

$

(20,741

)

$

(5,621

)

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Issuance of Class B Units in lieu of quarterly cash distribution (1)

 

$

 

$

8,274

 

 


(1)         In September 2013, all of our Class B Units, which represented a separate class of our limited partnership interests, converted into LP Units on a one-for-one basis.  No Class B Units have been issued subsequent to the conversion of Class B Units into LP Units.

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Report”) contains various forward-looking statements and information that are based on our beliefs, as well as assumptions made by us and information currently available to us.  When used in this Report, words such as “proposed,” “anticipate,” “project,” “potential,” “could,” “should,” “continue,” “estimate,” “expect,” “may,” “believe,” “will,” “plan,” “seek,” “outlook” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements.  Although we believe that such expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct.  Such statements are subject to a variety of risks, uncertainties and assumptions as described in more detail in Part I “Item 1A, Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013.  If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected.  Although the expectations in the forward-looking statements are based on our current beliefs and expectations, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date hereof.  Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.

 

The following information should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report.

 

Overview of Business

 

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 this Report, unless otherwise indicated, “we,” “us,” “our” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, includes our subsidiaries.

 

Buckeye owns and operates a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage and marketing of liquid petroleum products.  We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, with approximately 6,000 miles of pipeline and more than 120 liquid petroleum products terminals with aggregate storage capacity of over 110 million barrels.  In addition to our pipelines and inland terminals, we own an integrated network of marine terminals located primarily on the U.S. East Coast and 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 and provides an array of logistics and blending services for the global flow of petroleum products.  Our network of marine terminals enables us to facilitate global flows of crude oil, refined petroleum products, and other commodities, and to offer our customers connectivity to some of the world’s most important bulk storage and blending hubs.  We are also a wholesale distributor of refined petroleum products in areas served by our pipelines and terminals.  Finally, Buckeye operates and/or maintains third-party pipelines under agreements with major oil and gas, petrochemical and chemical companies, and performs certain engineering and construction management services for third parties.

 

In December 2013, the Board approved a plan to divest our Natural Gas Storage segment and its related assets as we no longer believe this business is aligned with our long-term business strategy. In this report, we refer to this group of assets and related liabilities as our Natural Gas Storage disposal group. Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our consolidated balance sheets as of March 31, 2014 and December 31, 2013 and reported the results of operations as discontinued operations for all periods presented in this report.  For additional information, see Note 3 in the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Our primary business objective is to provide stable and sustainable cash distributions to our LP unitholders, while maintaining a relatively low investment risk profile.  The key elements of our strategy are to: (i) operate in a safe and environmentally responsible manner; (ii) maximize utilization of our assets at the lowest cost per unit; (iii) maintain stable long-term customer relationships; (iv) optimize, expand and diversify our portfolio of energy assets; and (v) maintain a solid, conservative financial position and our investment-grade credit rating.

 

Recent Developments

 

At-the-Market Offering Program

 

During the three months ended March 31, 2014, we sold 0.7 million LP Units in aggregate under the equity distribution agreements entered into in May 2013 with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC (each an “Equity Distribution Agreement” and collectively the “Equity Distribution Agreements”).  We received $52.2 million in net proceeds after deducting commissions and other related expenses and paid $0.5 million of compensation in aggregate to the agents under the Equity Distribution Agreements.

 

Overview of Operating Results

 

Net income attributable to our unitholders was $90.5 million for the three months ended March 31, 2014, which was an increase of $1.2 million, or 1.3% from $89.3 million for the corresponding period in 2013. Operating income was $141.3 million for the three months ended March 31, 2014, which is an increase of $17.8 million, or 14.4% from $123.5 million for the corresponding period in 2013.  Our results for the three months ended March 31, 2014 include year-over-year improvement in our Pipelines & Terminals, Global Marine Terminals and Development & Logistics segments, while our Merchant Services segment experienced reduced earnings  primarily due to backwardation in the distillate markets caused by increased demand as a result of the extreme cold weather and a decline from renewable identification number (“RIN”) contributions due to the carryover of 2012 RIN inventory benefiting the first quarter of 2013.  Backwardation is a market condition in which commodity prices for physical or financial contracts with delivery months further away in time have lower settlement prices than contracts settling closer in time to the current month.

 

The increase in net income attributable to our unitholders was primarily the result of increased revenue in our Pipelines & Terminals segments, as well as increased contribution from our Global Marine Terminals segment.  Revenue contributions from the assets acquired from Hess Corporation (“Hess”) in December 2013 benefited both our Pipelines & Terminals and Global Marine Terminals segments as a result of successful and timely integration of the assets into our operations.  Additionally, terminalling volumes for 2014 increased over the prior year period in our Pipelines & Terminals segment, primarily from the impact of capital investments in internal growth and diversification initiatives, which include continuous expansion of our butane blending capabilities as well as crude oil logistic projects centered at our Chicago complex, which serves as our Midwestern hub.  These benefits were partially offset by an increase in interest expense resulting from the long term debt issuances in 2013, including the debt issued to partially fund the assets acquired from Hess, and an increase in depreciation and amortization expense due to the assets acquired from Hess.

 

The loss from discontinued operations of our natural gas storage facility for the three months ended March 31, 2014 of $10 million is $5.7 million less favorable than a loss of $4.3 million for the corresponding period in 2013.  Due to the colder than normal winter, we experienced extreme price volatility when taking certain operative measures to ensure we met the deliverability requirements of our customers during peak times, resulting in costs of approximately $6 million during the period.

 

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Table of Contents

 

Results of Operations

 

Consolidated Summary

 

Our summary operating results were as follows for the periods indicated (in thousands, except per unit amounts):

 

 

 

Three Months Ended