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, 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 August 1, 2014, there were 116,247,887 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 and Six Months Ended June 30, 2014 and 2013 (Unaudited)

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

5

 

Condensed Consolidated Statements of Partners’ Capital for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

6

 

Notes to Unaudited Condensed Consolidated Financial Statements:

 

 

1.              Organization and Basis of Presentation

7

 

2.              Acquisitions

8

 

3.              Discontinued Operations

9

 

4.              Commitments and Contingencies

10

 

5.              Inventories

12

 

6.              Equity Investments

12

 

7.              Long-Term Debt

13

 

8.              Derivative Instruments and Hedging Activities

13

 

9.              Fair Value Measurements

17

 

10.       Pensions and Other Postretirement Benefits

19

 

11.       Unit-Based Compensation Plans

19

 

12.       Partners’ Capital and Distributions

21

 

13.       Earnings Per Unit

22

 

14.       Business Segments

22

 

15.       Supplemental Cash Flow Information

26

 

16.       Subsequent Event

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Product sales

 

$

1,492,697

 

$

734,396

 

$

3,170,439

 

$

1,803,613

 

Transportation, storage and other services

 

316,254

 

259,192

 

630,341

 

521,053

 

Total revenue

 

1,808,951

 

993,588

 

3,800,780

 

2,324,666

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

1,510,043

 

725,300

 

3,175,422

 

1,788,598

 

Operating expenses

 

133,018

 

99,436

 

257,847

 

191,788

 

Depreciation and amortization

 

43,394

 

37,551

 

86,385

 

73,250

 

General and administrative

 

20,330

 

17,330

 

37,687

 

33,583

 

Total costs and expenses

 

1,706,785

 

879,617

 

3,557,341

 

2,087,219

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

102,166

 

113,971

 

243,439

 

237,447

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Earnings from equity investments

 

2,170

 

1,953

 

3,436

 

3,582

 

Interest and debt expense

 

(42,012

)

(30,237

)

(83,225

)

(60,486

)

Other income (expense)

 

(232

)

198

 

(96

)

299

 

Total other expense, net

 

(40,074

)

(28,086

)

(79,885

)

(56,605

)

Income from continuing operations before taxes

 

62,092

 

85,885

 

163,554

 

180,842

 

Income tax expense

 

(153

)

(195

)

(76

)

(326

)

Income from continuing operations

 

61,939

 

85,690

 

163,478

 

180,516

 

Loss from discontinued operations

 

(38,186

)

(8,320

)

(48,228

)

(12,647

)

Net income

 

23,753

 

77,370

 

115,250

 

167,869

 

Less: Net income attributable to noncontrolling interests

 

(733

)

(940

)

(1,762

)

(2,098

)

Net income attributable to Buckeye Partners, L.P.

 

$

23,020

 

$

76,430

 

$

113,488

 

$

165,771

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.53

 

$

0.80

 

$

1.40

 

$

1.71

 

Discontinued operations

 

(0.33

)

(0.08

)

(0.42

)

(0.12

)

Total

 

$

0.20

 

$

0.72

 

$

0.98

 

$

1.59

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.53

 

$

0.80

 

$

1.39

 

$

1.70

 

Discontinued operations

 

(0.33

)

(0.08

)

(0.41

)

(0.12

)

Total

 

$

0.20

 

$

0.72

 

$

0.98

 

$

1.58

 

Weighted average units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

116,078

 

105,701

 

115,701

 

104,481

 

Diluted

 

116,652

 

106,171

 

116,226

 

104,878

 

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,753

 

$

77,370

 

$

115,250

 

$

167,869

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on derivative instruments

 

(9,208

)

23,907

 

(18,812

)

32,526

 

Reclassification of derivative gains and losses to net income

 

1,778

 

1,093

 

3,557

 

1,321

 

Recognition of costs related to benefit plans to net income

 

394

 

89

 

787

 

403

 

Adjustments to recognize the funded status of benefit plans

 

 

338

 

 

 

Total other comprehensive (loss) income

 

(7,036

)

25,427

 

(14,468

)

34,250

 

Comprehensive income

 

16,717

 

102,797

 

100,782

 

202,119

 

Less: Comprehensive income attributable to noncontrolling interests

 

(733

)

(940

)

(1,762

)

(2,098

)

Comprehensive income attributable to Buckeye Partners, L.P.

 

$

15,984

 

$

101,857

 

$

99,020

 

$

200,021

 

 

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,

 

 

 

2014

 

2013

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

21,906

 

$

4,950

 

Trade receivables, net

 

376,478

 

326,243

 

Construction and pipeline relocation receivables

 

22,173

 

23,135

 

Inventories

 

443,909

 

312,135

 

Derivative assets

 

9,201

 

4,412

 

Prepaid and other current assets

 

60,013

 

48,503

 

Assets held for sale (Note 3)

 

138,984

 

181,708

 

Total current assets

 

1,072,664

 

901,086

 

 

 

 

 

 

 

Property, plant and equipment, net

 

5,034,269

 

4,925,294

 

 

 

 

 

 

 

Equity investments

 

75,513

 

72,349

 

Goodwill

 

821,500

 

821,500

 

Intangible assets, net

 

206,647

 

225,364

 

Other non-current assets

 

63,096

 

59,970

 

Total assets

 

$

7,273,689

 

$

7,005,563

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

400,000

 

$

226,000

 

Accounts payable

 

109,863

 

149,520

 

Derivative liabilities

 

61,955

 

44,672

 

Accrued and other current liabilities

 

227,582

 

227,084

 

Liabilities held for sale (Note 3)

 

35,984

 

37,767

 

Total current liabilities

 

835,384

 

685,043

 

 

 

 

 

 

 

Long-term debt

 

3,309,293

 

3,092,711

 

Other non-current liabilities

 

134,812

 

146,973

 

Total liabilities

 

4,279,489

 

3,924,727

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Buckeye Partners, L.P. capital:

 

 

 

 

 

Limited Partners (116,247,624 and 115,063,617 units outstanding as of June 30, 2014 and December 31, 2013 respectively)

 

3,098,808

 

3,169,217

 

Accumulated other comprehensive loss

 

(118,020

)

(103,552

)

Total Buckeye Partners, L.P. capital

 

2,980,788

 

3,065,665

 

Noncontrolling interests

 

13,412

 

15,171

 

Total partners’ capital

 

2,994,200

 

3,080,836

 

Total liabilities and partners’ capital

 

$

7,273,689

 

$

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)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

115,250

 

$

167,869

 

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

 

86,385

 

77,043

 

Asset impairment expense

 

26,254

 

 

Net changes in fair value of derivatives

 

(6,332

)

(12,374

)

Non-cash deferred lease expense

 

1,819

 

1,884

 

Amortization of unfavorable storage contracts

 

(5,536

)

(5,497

)

Earnings from equity investments

 

(3,436

)

(3,582

)

Distributions from equity investments

 

125

 

125

 

Other non-cash items

 

12,037

 

9,805

 

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

 

 

 

 

 

Trade receivables

 

(51,213

)

48,932

 

Construction and pipeline relocation receivables

 

962

 

(1,846

)

Inventories

 

(131,774

)

64,287

 

Prepaid and other current assets

 

4,739

 

11,743

 

Accounts payable

 

(26,708

)

(19,277

)

Accrued and other current liabilities

 

12,264

 

15,508

 

Other non-current assets

 

(5,739

)

2,221

 

Other non-current liabilities

 

(6,977

)

(3,927

)

Net cash provided by operating activities

 

22,120

 

290,905

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(201,515

)

(147,867

)

Net proceeds from insurance settlement

 

549

 

 

Proceeds from disposal of property, plant and equipment

 

691

 

578

 

Net cash used in investing activities

 

(200,275

)

(147,289

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of LP Units

 

74,517

 

372,824

 

Net proceeds from exercise of unit options

 

615

 

980

 

Payment of tax withholding on issuance of LTIP awards

 

(4,791

)

(3,728

)

Issuance of long-term debt

 

 

499,050

 

Debt issuance costs

 

 

(3,250

)

Borrowings under BPL Credit Facility

 

847,000

 

601,000

 

Repayments under BPL Credit Facility

 

(631,000

)

(1,266,000

)

Net borrowings (repayments) under BES Credit Facility

 

174,000

 

(130,200

)

Acquisition of additional interest in WesPac Memphis

 

(9,510

)

(9,727

)

Distributions paid to noncontrolling interests

 

(3,549

)

(5,210

)

Distributions paid to unitholders

 

(252,171

)

(201,242

)

Net cash provided by (used in) financing activities

 

195,111

 

(145,503

)

Net increase (decrease) in cash and cash equivalents

 

16,956

 

(1,887

)

Cash and cash equivalents — Beginning of period

 

4,950

 

6,776

 

Cash and cash equivalents — End of period

 

$

21,906

 

$

4,889

 

 

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

 

113,488

 

 

 

1,762

 

115,250

 

Acquisition of additional interest in WesPac Memphis

 

(7,933

)

 

 

(1,577

)

(9,510

)

Distributions paid to unitholders

 

(253,849

)

 

 

1,678

 

(252,171

)

Net proceeds from issuance of LP Units

 

74,517

 

 

 

 

74,517

 

Amortization of unit-based compensation awards

 

8,190

 

 

 

 

8,190

 

Net proceeds from exercise of unit options

 

615

 

 

 

 

615

 

Payment of tax withholding on issuance of LTIP awards

 

(4,791

)

 

 

 

(4,791

)

Distributions paid to noncontrolling interests

 

 

 

 

(3,549

)

(3,549

)

Other comprehensive loss

 

 

 

(14,468

)

 

(14,468

)

Noncash accrual for distribution equivalent rights

 

(666

)

 

 

 

(666

)

Other

 

20

 

 

 

(73

)

(53

)

Partners’ capital - June 30, 2014

 

$

3,098,808

 

$

 

$

(118,020

)

$

13,412

 

$

2,994,200

 

 

 

 

 

 

 

 

 

 

 

 

 

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 LP Units

 

372,824

 

 

 

 

372,824

 

Amortization of unit-based compensation awards

 

7,327

 

 

 

 

7,327

 

Net 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

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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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 products terminals across our portfolio of pipelines, inland terminals and 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 June 30, 2014 and December 31, 2013 and also reported the results of operations as discontinued operations for all periods presented in this report.  In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage business for $105 million.  The transaction is expected to close in the fourth quarter of 2014 or the first quarter of 2015, subject to regulatory approvals and customary closing conditions.  For additional information, see Note 3 and Note 16 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

 

Recent Accounting Developments

 

Revenue from Contracts with Customers.  In May 2014, the Financial Accounting Standards Board issued guidance to clarify principles used to recognize revenue for all entities.  The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In doing so, entities will need to use more judgment and make more estimates than under current guidance.  These may include identifying performance obligations in the contract, estimating the amount of variable consideration included in the transaction price and allocating the transaction price to each separate performance obligation.  The new guidance is effective for annual and interim periods beginning after December 15, 2016, with no early adoption permitted.  We are currently evaluating the impact, if any, the adoption of this guidance will have on our consolidated financial statements.

 

2.  ACQUISITIONS

 

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 June 30, 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 following table summarizes revenue and net income related to the assets acquired from Hess included in our unaudited condensed consolidated statement of operations for the periods indicated (in thousands):

 

 

 

Three Months

 

Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

Revenue

 

$

325,501

 

$

674,568

 

Net income (1)

 

13,229

 

26,770

 

 


(1)         Includes transition expenses of $2.0 million and $5.6 million for the three and six months ended June 30, 2014, respectively.

 

Acquisition of Additional Interest in WesPac Pipelines — Memphis LLC

 

In April 2014, 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 $9.5 million.  As a result of the acquisition, our ownership interest in WesPac Memphis increased from 80% to 90%.  Since BPH retains controlling interest in WesPac Memphis, this acquisition was accounted for as an equity transaction.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 June 30, 2014 and December 31, 2013.  We have reported the results of operations for the disposal group as discontinued operations for all periods presented in this report.  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.

 

In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage business for $105 million.  The transaction is expected to close in the fourth quarter of 2014 or the first quarter of 2015, subject to regulatory approvals and customary closing conditions.  As a result of the sale, we recorded a non-cash asset impairment charge of $26.3 million within “Loss from discontinued operations” on our unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2014.  See Note 9 and Note 16 for further discussion.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,223

 

$

11,791

 

$

17,769

 

$

25,674

 

Loss from discontinued operations

 

(38,186

)

(8,320

)

(48,228

)

(12,647

)

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

131,174

 

$

157,261

 

Other current assets

 

7,803

 

24,443

 

Other non-current assets

 

7

 

4

 

Assets held for sale

 

$

138,984

 

$

181,708

 

 

 

 

 

 

 

Accounts payable

 

$

1,117

 

$

2,182

 

Accrued liabilities and other current liabilities

 

6,330

 

8,947

 

Other non-current liabilities

 

28,537

 

26,638

 

Liabilities held for sale

 

$

35,984

 

$

37,767

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, Cape Bari, 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.  The Bahamas 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, and the Bahamas Court of Appeals reversed, holding that the vessel interests may limit their liability.  We have filed a motion for leave to appeal that decision to the Privy Council, which motion is pending.  We believe the motion for leave will be granted but can express no view on whether the Court of Appeals decision ultimately 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 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 June 30, 2014, we had a $5.9 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 $15.8 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.  BORCO’s insurers have paid most of the claim and have now appeared in the Bahamas litigation.  As of June 30, 2014, no gain had been recognized; however, we recorded a $13.9 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.

 

On May 12, 2014, the vessel interests filed a third-party complaint against a BORCO subsidiary, Borco Towing Company Limited, which provided pilots and tugs to assist the Cape Bari alleging that Borco Towing was negligent.  We are investigating those allegations, but, at this time, we believe that we have defenses and intend to vigorously defend ourselves and pursue our claims against the vessel interests.

 

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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 $1.6 million and $1.5 million during the three months ended June 30, 2014 and 2013, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  For the six months ended June 30, 2014 and 2013, we recorded operating expenses, net of recoveries, of $2.2 million and $3.0 million, 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 June 30, 2014 and December 31, 2013, we recorded environmental remediation liabilities of $57.2 million for both periods, respectively.  At June 30, 2014 and December 31, 2013, we had $13.5 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):

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Liquid petroleum products (1)

 

$

428,802

 

$

290,718

 

Materials and supplies

 

15,107

 

21,417

 

Total inventories

 

$

443,909

 

$

312,135

 

 


(1)         Ending inventory was 155.5 million and 102.1 million gallons of liquid petroleum products at June 30, 2014 and December 31, 2013, respectively.

 

At June 30, 2014 and December 31, 2013, approximately 83% 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

West Shore Pipe Line Company

 

$

1,523

 

$

1,323

 

$

2,183

 

$

2,573

 

Muskegon Pipeline LLC

 

322

 

390

 

571

 

631

 

Transport4, LLC

 

186

 

140

 

253

 

196

 

South Portland Terminal LLC

 

139

 

100

 

429

 

182

 

Total earnings from equity investments

 

$

2,170

 

$

1,953

 

$

3,436

 

$

3,582

 

 

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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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

21,771

 

$

18,940

 

$

41,465

 

$

36,316

 

Costs and expenses

 

(13,223

)

(9,278

)

(24,645

)

(19,213

)

Non-operating expenses

 

(2,859

)

(3,498

)

(5,580

)

(6,120

)

Net income

 

$

5,689

 

$

6,164

 

$

11,240

 

$

10,983

 

 

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 the latter half of 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 June 30, 2014, we had $605 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 June 30, 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 $48.9 million at June 30, 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.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the three months ended June 30, 2014 and 2013, unrealized losses of $9.2 million and unrealized gains of $23.9 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, 2014 and 2013, unrealized losses of $18.8 million and unrealized gains of $32.5 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 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.

 

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 June 30, 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

 

24,843

 

84

 

Mark-to-market

 

Physical index derivative contracts

 

37,358

 

 

Mark-to-market

 

Futures contracts for refined petroleum products

 

17,808

 

84

 

Mark-to-market

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined petroleum products

 

129,108

 

 

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):

 

 

 

June 30, 2014

 

 

 

Derivatives

 

Derivatives

 

 

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

Total

 

Physical fixed price derivative contracts

 

$

9,354

 

$

 

$

9,354

 

$

(187

)

$

9,167

 

Physical index derivative contracts

 

34

 

 

34

 

 

34

 

Futures contracts for refined products

 

93,845

 

929

 

94,774

 

(94,774

)

 

Total current derivative assets

 

103,233

 

929

 

104,162

 

(94,961

)

9,201

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

8

 

 

8

 

 

8

 

Futures contracts for refined products

 

6

 

 

6

 

 

6

 

Total non-current derivative assets

 

14

 

 

14

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(9,035

)

 

(9,035

)

187

 

(8,848

)

Physical index derivative contracts

 

(274

)

 

(274

)

 

(274

)

Futures contracts for refined products

 

(86,225

)

(12,525

)

(98,750

)

94,774

 

(3,976

)

Interest rate derivatives

 

 

(48,857

)

(48,857

)

 

(48,857

)

Total current derivative liabilities

 

(95,534

)

(61,382

)

(156,916

)

94,961

 

(61,955

)

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative assets (liabilities)

 

$

7,713

 

$

(60,453

)

$

(52,740

)

$

 

$

(52,740

)

 


(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

 

 

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

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.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Our hedged inventory portfolio extends to the first quarter of 2015.  The majority of the unrealized loss at June 30, 2014 for inventory hedges represented by futures contracts of $11.6 million will be realized by the fourth quarter of 2014 as the related inventory is sold.  At June 30, 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 December 2015.  In addition, at June 30, 2014, 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

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

Product sales

 

$

(7,280

)

$

2,795

 

$

(10,652

)

$

3,376

 

Physical index derivative contracts

 

Product sales

 

(79

)

700

 

(73

)

1,109

 

Physical fixed price derivative contracts

 

Cost of product sales

 

7,210

 

(359

)

8,621

 

(445

)

Physical index derivative contracts

 

Cost of product sales

 

(521

)

(541

)

(713

)

(544

)

Futures contracts for refined products

 

Cost of product sales

 

(6,301

)

1,457

 

187

 

5,797

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as fair value hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

Cost of product sales

 

(13,732

)

8,159

 

(12,453

)

8,935

 

Physical inventory - hedged items

 

Cost of product sales

 

7,954

 

(8,959

)

1,729

 

(9,440

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Fair value hedge ineffectiveness (excluding time value)

 

Cost of product sales

 

(1,122

)

(5,212

)

3,610

 

(3,627

)

Time value excluded from hedge assessment

 

Cost of product sales

 

(4,656

)

4,412

 

(14,334

)

3,122

 

Net loss in income

 

 

 

$

(5,778

)

$

(800

)

$

(10,724

)

$

(505

)

 

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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

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

 

 

Location

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest and debt expense

 

$

(1,778

)

$

(1,093

)

$

(3,557

)

$

(1,321

)

 

 

 

 

 

Gain (Loss) Recognized in OCI on Derivatives for the

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

 

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

$

(9,208

)

$

23,907

 

$

(18,812

)

$

32,526

 

 

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):

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

 

$

9,175

 

$

 

$

4,384

 

Physical index derivative contracts

 

 

34

 

 

28

 

Futures contracts for refined products

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

 

(8,848

)

 

(6,247

)

Physical index derivative contracts

 

 

(274

)

 

(310

)

Futures contracts for refined products

 

(3,976

)

 

(8,070

)

 

Interest rate derivatives

 

 

(48,857

)

 

(30,045

)

Fair value

 

$

(3,976

)

$

(48,764

)

$

(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 $9.2 million and $4.4 million as of June 30, 2014 and December 31, 2013, respectively, are net of CVAs of ($0.1) million for both periods, respectively.  As of June 30, 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):

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

3,064,293

 

$

3,301,393

 

$

3,063,711

 

$

3,148,634

 

Variable-rate debt

 

645,000

 

645,000

 

255,000

 

255,000

 

Total debt

 

$

3,709,293

 

$

3,946,393

 

$

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 six months ended June 30, 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.  During the three and six months ended June 30, 2014, we recorded a non-cash asset impairment charge of $26.3 million related to our Natural Gas Storage disposal group since the carrying amount of the disposal group exceeded the estimated fair value less costs to sell the disposal group.  We estimated fair value based on a market approach supported by a binding purchase and sale agreement for the disposal group.  For additional information, see Note 3 and Note 16 in the Notes to 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, 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, 2014 and 2013 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

55

 

$

55

 

$

107

 

$

71

 

Interest cost

 

135

 

187

 

352

 

404

 

Expected return on plan assets

 

(98

)

(103

)

 

 

Amortization of prior service credit

 

 

 

(406

)

(615

)

Amortization of unrecognized losses

 

308

 

308

 

298

 

284

 

Actuarial loss due to settlements

 

194

 

112

 

 

 

Net periodic benefit cost

 

$

594

 

$

559

 

$

351

 

$

144

 

 

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, 2014 and 2013 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

109

 

$

122

 

$

215

 

$

157

 

Interest cost

 

269

 

414

 

704

 

897

 

Expected return on plan assets

 

(196

)

(227

)

 

 

Amortization of prior service credit

 

 

 

(812

)

(1,365

)

Amortization of unrecognized losses

 

616

 

685

 

596

 

630

 

Actuarial loss due to settlements

 

387

 

453

 

 

 

Net periodic benefit cost

 

$

1,185

 

$

1,447

 

$

703

 

$

319

 

 

During the three months ended June 30, 2014 and 2013, we contributed $0.5 million and $0.4 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.  For the six months ended June 30, 2014 and 2013, we contributed $1.4 million and $0.7 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 $4.8 million and $3.8 million for the three months ended June 30, 2014 and 2013, respectively.  For the six months ended June 30, 2014 and 2013, we recognized compensation expense of $7.9 million and $7.1 million, respectively.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 June 30, 2014, there were 2,921,300 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 six months ended June 30, 2014, and the year ended 2013, respectively.  These grants are included as granted in the LTIP activity table below.

 

Awards under the LTIP

 

During the six months ended June 30, 2014, the Compensation Committee of the Board granted 201,409 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 174,221 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

 

392

 

71.37

 

Vested

 

(173

)

63.85

 

Forfeited

 

(63

)

63.77

 

Unvested at June 30, 2014

 

969

 

$

63.11

 

 

At June 30, 2014, $31.5 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of 2 years.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(13

)

45.88

 

 

 

 

 

Forfeited, cancelled or expired

 

(2

)

 

 

 

 

 

 

Outstanding at June 30, 2014