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, 2015

 

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 27, 2015, there were 127,285,323 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, 2015 and 2014 (Unaudited)

 2

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 3

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (Unaudited)

 4

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 5

 

Condensed Consolidated Statements of Partners’ Capital for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 6

 

Notes to Unaudited Condensed Consolidated Financial Statements:

 

 

1.    Organization and Basis of Presentation

7

 

2.    Acquisition

8

 

3.    Commitments and Contingencies

9

 

4.    Inventories

12

 

5.    Prepaid and Other Current Assets

12

 

6.    Equity Investments

13

 

7.    Derivative Instruments and Hedging Activities

13

 

8.    Fair Value Measurements

17

 

9.    Pensions and Other Postretirement Benefits

19

 

10.  Unit-Based Compensation Plans

19

 

11.  Partners’ Capital and Distributions

21

 

12.  Earnings Per Unit

21

 

13.  Business Segments

22

 

14.  Supplemental Cash Flow Information

25

 

 

 

Item 2.

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

 26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1A.

Risk Factors

38

 

 

 

Item 6.

Exhibits

39

 

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,

 

 

 

2015

 

2014

 

Revenue:

 

 

 

 

 

Product sales

 

$

740,218

 

$

1,677,742

 

Transportation, storage and other services

 

347,882

 

314,087

 

Total revenue

 

1,088,100

 

1,991,829

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of product sales

 

717,539

 

1,665,379

 

Operating expenses

 

142,365

 

124,829

 

Depreciation and amortization

 

53,776

 

42,991

 

General and administrative

 

22,618

 

17,357

 

Total costs and expenses

 

936,298

 

1,850,556

 

Operating income

 

151,802

 

141,273

 

Other income (expense):

 

 

 

 

 

Earnings from equity investments

 

2,134

 

1,266

 

Interest and debt expense

 

(41,709

)

(41,213

)

Other income

 

33

 

136

 

Total other expense, net

 

(39,542

)

(39,811

)

 

 

 

 

 

 

Income from continuing operations before taxes

 

112,260

 

101,462

 

Income tax (expense) benefit

 

(239

)

77

 

Income from continuing operations

 

112,021

 

101,539

 

Loss from discontinued operations

 

(857

)

(10,042

)

Net income

 

111,164

 

91,497

 

Less: Net loss (income) attributable to noncontrolling interests

 

447

 

(1,029

)

Net income attributable to Buckeye Partners, L.P.

 

$

111,611

 

$

90,468

 

 

 

 

 

 

 

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

 

 

 

 

 

Continuing operations

 

$

0.89

 

$

0.87

 

Discontinued operations

 

(0.01

)

(0.09

)

Total

 

$

0.88

 

$

0.78

 

 

 

 

 

 

 

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

 

 

 

 

 

Continuing operations

 

$

0.88

 

$

0.87

 

Discontinued operations

 

(0.01

)

(0.09

)

Total

 

$

0.87

 

$

0.78

 

 

 

 

 

 

 

Weighted average units outstanding:

 

 

 

 

 

Basic

 

127,175

 

115,319

 

Diluted

 

127,607

 

115,796

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Net income

 

$

111,164

 

$

91,497

 

Other comprehensive income (loss):

 

 

 

 

 

Unrealized losses on derivative instruments

 

 

(9,604

)

Reclassification of derivative losses to net income

 

3,037

 

1,779

 

Recognition of costs related to benefit plans to net income

 

261

 

393

 

Total other comprehensive income (loss)

 

3,298

 

(7,432

)

Comprehensive income

 

114,462

 

84,065

 

Less: Comprehensive loss (income) attributable to noncontrolling interests

 

447

 

(1,029

)

Comprehensive income attributable to Buckeye Partners, L.P.

 

$

114,909

 

$

83,036

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit amounts)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,203

 

$

8,208

 

Accounts receivable, net

 

270,433

 

265,830

 

Construction and pipeline relocation receivables

 

16,646

 

20,542

 

Inventories

 

156,070

 

243,475

 

Derivative assets

 

21,734

 

69,189

 

Prepaid and other current assets

 

39,812

 

25,055

 

Total current assets

 

506,898

 

632,299

 

 

 

 

 

 

 

Property, plant and equipment, net

 

5,843,592

 

5,735,787

 

 

 

 

 

 

 

Equity investments

 

84,409

 

82,849

 

Goodwill

 

988,062

 

993,375

 

Intangible assets, net

 

537,344

 

553,924

 

Other non-current assets

 

88,188

 

87,854

 

 

 

 

 

 

 

Total assets

 

$

8,048,493

 

$

8,086,088

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

95,800

 

$

166,000

 

Accounts payable

 

152,089

 

159,129

 

Derivative liabilities

 

8,219

 

1,802

 

Accrued and other current liabilities

 

253,099

 

295,024

 

Total current liabilities

 

509,207

 

621,955

 

 

 

 

 

 

 

Long-term debt

 

3,489,268

 

3,388,986

 

Other non-current liabilities

 

128,012

 

134,551

 

Total liabilities

 

4,126,487

 

4,145,492

 

 

 

 

 

 

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Buckeye Partners, L.P. capital:

 

 

 

 

 

Limited Partners (127,285,171 and 127,043,317 units outstanding as of March 31, 2015 and December 31, 2014 respectively)

 

3,786,317

 

3,817,916

 

Accumulated other comprehensive loss

 

(111,990

)

(115,288

)

Total Buckeye Partners, L.P. capital

 

3,674,327

 

3,702,628

 

Noncontrolling interests

 

247,679

 

237,968

 

Total partners’ capital

 

3,922,006

 

3,940,596

 

 

 

 

 

 

 

Total liabilities and partners’ capital

 

$

8,048,493

 

$

8,086,088

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

111,164

 

$

91,497

 

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

 

 

 

 

 

Depreciation and amortization

 

53,776

 

42,991

 

Net changes in fair value of derivatives

 

54,387

 

(12,684

)

Non-cash deferred lease expense

 

 

909

 

Amortization of unfavorable storage contracts

 

(2,768

)

(2,768

)

Earnings from equity investments

 

(2,134

)

(1,266

)

Distributions from equity investments

 

500

 

125

 

Other non-cash items

 

12,463

 

6,585

 

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

 

 

 

 

 

Accounts receivable

 

(7,477

)

(91,810

)

Construction and pipeline relocation receivables

 

3,539

 

1,219

 

Inventories

 

87,405

 

(104,980

)

Prepaid and other current assets

 

(14,752

)

2,071

 

Accounts payable

 

(12,638

)

60,777

 

Accrued and other current liabilities

 

(41,891

)

(36,867

)

Other non-current assets

 

(1,898

)

1,141

 

Other non-current liabilities

 

(2,053

)

(4,558

)

Net cash provided by (used in) operating activities

 

237,623

 

(47,618

)

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(134,024

)

(109,864

)

Acquisitions, net of working capital settlement

 

(2,812

)

 

Proceeds from disposal of property, plant and equipment

 

17

 

21

 

Net cash used in investing activities

 

(136,819

)

(109,843

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of LP Units

 

3,682

 

52,217

 

Net proceeds from exercise of Unit options

 

136

 

269

 

Payment of tax withholding on issuance of LTIP awards

 

(6,465

)

(4,744

)

Debt issuance costs

 

(360

)

(10

)

Borrowings under BPL Credit Facility

 

392,000

 

405,000

 

Repayments under BPL Credit Facility

 

(292,000

)

(264,000

)

Net (repayments) borrowings under BMSC Credit Facility

 

(70,200

)

122,000

 

Contributions from noncontrolling interests

 

12,600

 

 

Distributions paid to noncontrolling interests

 

(1,908

)

(1,953

)

Distributions paid to unitholders

 

(144,294

)

(124,954

)

Net cash (used in) provided by financing activities

 

(106,809

)

183,825

 

Net (decrease) increase in cash and cash equivalents

 

(6,005

)

26,364

 

Cash and cash equivalents — Beginning of period

 

8,208

 

4,950

 

Cash and cash equivalents — End of period

 

$

2,203

 

$

31,314

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Limited

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

Partners

 

Income (Loss)

 

Interests

 

Total

 

Partners’ capital - January 1, 2015

 

$

3,817,916

 

$

(115,288

)

$

237,968

 

$

3,940,596

 

Net income

 

111,611

 

 

(447

)

111,164

 

Adjustment to value of noncontrolling equity interest in acquisition

 

 

 

(1,220

)

(1,220

)

Distributions paid to unitholders

 

(145,382

)

 

1,088

 

(144,294

)

Net proceeds from issuance of LP Units

 

3,682

 

 

 

3,682

 

Amortization of unit-based compensation awards

 

5,213

 

 

 

5,213

 

Net proceeds from exercise of Unit options

 

136

 

 

 

136

 

Payment of tax withholding on issuance of LTIP awards

 

(6,465

)

 

 

(6,465

)

Distributions paid to noncontrolling interests

 

 

 

(1,908

)

(1,908

)

Contributions from noncontrolling interests

 

 

 

12,600

 

12,600

 

Other comprehensive income

 

 

3,298

 

 

3,298

 

Noncash accrual for distribution equivalent rights

 

(794

)

 

 

(794

)

Other

 

400

 

 

(402

)

(2

)

Partners’ capital - March 31, 2015

 

$

3,786,317

 

$

(111,990

)

$

247,679

 

$

3,922,006

 

 

 

 

 

 

 

 

 

 

 

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

 

Net 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

 

 

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 marine terminals located primarily in the East Coast and Gulf Coast regions of the United States 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 refined petroleum products storage facilities in the world and provides an array of logistics and blending services for 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.  In September 2014, we expanded our network of marine midstream assets by acquiring a controlling interest in a company with assets located in Corpus Christi and the Eagle Ford play in Texas.  We are also a wholesale distributor of refined petroleum products in certain 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.

 

On December 31, 2014, we completed the sale of our Natural Gas Storage disposal group and have reported the final working capital adjustments as discontinued operations for the three months ended March 31, 2015.  For additional information, see our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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 and the rules of the U.S. Securities and Exchange Commission.  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 (“VIE”) 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, 2014.

 

Recent Accounting Developments

 

Debt Issuance Costs.  In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance to simplify the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidations.  In February 2015, the FASB issued guidance changing the criteria for reporting entities that are required to evaluate whether they should consolidate certain legal entities. The amendments require additional testing to determine if a legal entity qualifies as a VIE and whether the entity should be consolidated. These provisions are effective prospectively for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

 

2.  ACQUISITION

 

In September 2014, we acquired an 80% interest in Buckeye Texas LLC (“Buckeye Texas”), a newly-formed entity, for $816.1 million, net of cash acquired of $15.0 million and settlement of working capital and capital expenditure adjustments of $4.9 million required by the contribution agreement with Trafigura Corpus Christi Holdings, Inc. (the “Buckeye Texas Partners Transaction”).  Buckeye Texas and its subsidiaries, which are owned jointly with Trafigura Trading LLC, formerly known as Trafigura AG (“Trafigura”), are constructing a vertically integrated system of midstream assets, including a deep-water, high volume marine terminal located on the Corpus Christi Ship Channel, a condensate splitter and liquefied petroleum gas storage complex in Corpus Christi, Texas and three crude oil and condensate gathering facilities in the Eagle Ford play.  The initial build-out of these facilities has been and continues to be funded through additional partnership contributions by us and Trafigura based on our respective ownership interests. Concurrent with this acquisition, we entered into multi-year storage and throughput commitments with Trafigura that support substantially all the capacity and cash flows expected from these assets. Buckeye Texas does not have sufficient resources to complete its initial build-out and activities without financial support of its joint owners. Accordingly, we concluded Buckeye Texas is a VIE of which we are the primary beneficiary. In making this conclusion, we evaluated the activities that significantly impact the economics of the VIE, including our role to perform all services reasonably required to construct, operate and maintain the assets. We consolidated Buckeye Texas due to our conclusion that Buckeye Texas is a VIE of which we are the primary beneficiary. The operations of these assets are reported in the Global Marine Terminals segment.

 

The acquisition cost has been allocated on a preliminary basis 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 the Buckeye Texas operations 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.  The estimates of fair value reflected as of March 31, 2015 are subject to change pending final valuation analysis.  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):

 

Current assets

 

$

23,461

 

Property, plant and equipment

 

527,390

 

Intangible assets

 

376,000

 

Goodwill

 

167,319

 

Current liabilities

 

(55,283

)

Noncontrolling interests

 

(207,778

)

Allocated purchase price

 

$

831,109

 

 

The pro forma impact of this acquisition was not significant to our results for the three months ended March 31, 2015 or 2014, as significant assets are still under construction.

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.  COMMITMENTS AND CONTINGENCIES

 

Claims and Legal Proceedings

 

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

 

Pennsauken Allisions.  Our terminal located in Pennsauken, New Jersey suffered two allisions in the second half of 2014.  The first occurred on August 5, 2014, when a vessel allided with our terminal’s ship dock.  Repairs and rebuild have commenced and are expected to cost between $5 million and $10 million.  Security for our claim has been provided by the vessel owner’s insurers, in the amount of $17 million, reserving all of their defenses.  We have commenced litigation against the vessel and her owner.  They have stipulated to liability, so the only issue is the amount of Buckeye’s damages.  The second incident occurred on October 5, 2014, when a tug and barge struck and damaged a second dock operated at the Pennsauken facility.  The tug and barge owners have commenced proceedings to limit their liability to $1 million and $5 million, respectively.  We have put the tug and barge owners on notice of our intent to pursue them for reimbursement.  Repairs are expected to cost between $10 million and $12 million for the October incident.  We also are suffering loss-of-use damages as a result of the above allisions as the two incidents together have impacted the ability of vessels to call at the terminal.  We are in the process of making modifications to two other berths, which we expect to cost between $4 million and $5 million, to offset the loss of revenue impact of the allisions on access to the terminal.  Investigations of the incidents as well as our rights to recover our losses are ongoing.  We are insured for all property damage losses with respect to the allisions, subject to a $10.0 million deductible per occurrence.  We also are insured for loss of use, subject to a 30 day deductible.  The loss of use insurers are involved in the recovery efforts.  As of March 31, 2015 we had a $6.0 million receivable included in “Other non-current assets” in our unaudited condensed consolidated balance sheet, representing expected reimbursement of third party expenses.

 

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 $5.0 million deductible.  On May 26, 2012, we commenced legal proceedings in The Bahamas against the vessel’s owner and the vessel to obtain security for the cost of repairs and other losses incurred as a result of the incident.  Full security for our claim has been provided by the vessel owner’s insurers, reserving all of their defenses.  We also have notified the customer on whose behalf the vessel was at the BORCO facility that we intend to hold them responsible for all damages and losses resulting from the incident pursuant to the terms of an agreement between the parties.  Any disputes between us and our customer on this matter are subject to arbitration in Houston, Texas.

 

The vessel owner has claimed that it is entitled to limit its liability to $17.0 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 owner appealed, and The Bahamas Court of Appeals reversed, holding that the vessel owner may limit its liability.  Our application for leave to appeal the Court of Appeals’ decision to the Privy Council was granted, and the appeal has been filed.  We can express no view on whether The Bahamas 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 and reconstruction of the damaged sections are complete.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The aggregate cost to repair and reconstruct the damaged portions of the jetty and pursue recovery in court has been $23.0 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, 2015, we had a $6.2 million receivable included in “Other non-current assets” in our unaudited condensed consolidated balance sheet, representing reimbursement of the deductible and other third party expenses.  Additionally, we have received insurance reimbursements of $16.0 million, 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.  Our insurers have paid most of the claim and are now parties in The Bahamas litigation.  As of March 31, 2015, no gain had been recognized; however, we recorded a $14.1 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 owner filed a third-party complaint against BORCO and a BORCO subsidiary, Borco Towing Company Limited, alleging negligence by the pilots and tugs that assisted the Cape Bari berth.  We are investigating those allegations, but, at this time, we believe that we have defenses and intend to defend ourselves and pursue our claims against the vessel owner.  BORCO and Borco Towing Company Limited are insured for the alleged liability, subject to an applicable deductible, and the liability insurers are participating in the defense.

 

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.  In May 2014, a procedural schedule was established for this matter, providing for a hearing in March 2015, which occurred, and an initial decision by August 2015.  The hearing was conducted on April 1, 2015, and the parties are proceeding with briefing.  As a result of developments in ongoing settlement talks regarding Dkt. Nos. OR12-28-000, OR13-3-000 (discussed below) and OR 14-41-000 (discussed below), we recorded an accrual and a corresponding reduction in revenue in the amount of $40.0 million in the quarter ended December 31, 2014 in our Pipelines & Terminals segment.  While we continue to pursue settlement of this matter, we are not able to predict with certainty the timing or final outcome of the proceeding, should it be carried through to its conclusion, or whether we can reach a satisfactory settlement and, if so, whether or not it will be on more or less favorable terms.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

FERC Docket No. OR14-41-000 — American Airlines Complaint against BPLC New York City Jet Fuel Rates.  On September 17, 2014, a complaint was filed with FERC by American Airlines.  It is similar to the Dkt. No. OR12-28-000 complaint (see above) in that it challenges BPLC’s rates for transportation of jet fuel from New Jersey to the three New York City airports, is 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’s allegations are virtually identical to those in the other airline complaint proceeding.  On October 7, 2014, BPLC filed its answer to the complaint, contesting the airline’s allegations and presenting certain legal defenses to relief sought by the airline.  On December 18, 2014, FERC issued an order setting the complaint 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 airline 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.

 

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’ Dkt. No. 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 ALJ 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 Dkt. No. 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.

 

Environmental Contingencies

 

We recorded operating expenses, net of insurance recoveries, of $1.4 million and $0.6 million during the three months ended March 31, 2015 and 2014, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  As of each of March 31, 2015 and December 31, 2014, we recorded environmental remediation liabilities of $52.3 million.  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.  At March 31, 2015 and December 31, 2014, we had $18.5 million and $13.6 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third party claims.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4.  INVENTORIES

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Liquid petroleum products (1)

 

$

139,267

 

$

226,898

 

Materials and supplies

 

16,803

 

16,577

 

Total inventories

 

$

156,070

 

$

243,475

 


(1)         Ending inventory was 85.4 million and 140.3 million gallons of liquid petroleum products at March 31, 2015 and December 31, 2014, respectively.

 

At March 31, 2015 and at December 31, 2014, approximately 90% of our liquid petroleum products inventory volumes were designated in a fair value hedge relationship.  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.

 

5.  PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consist of the following at the dates indicated (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Prepaid insurance

 

$

4,574

 

$

9,918

 

Margin deposits

 

15,281

 

 

Unbilled revenue

 

3,385

 

3,556

 

Prepaid taxes

 

2,050

 

2,492

 

Vendor prepayments

 

84

 

136

 

Other

 

14,438

 

8,953

 

Total prepaid and other current assets

 

$

39,812

 

$

25,055

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6.  EQUITY INVESTMENTS

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Muskegon Pipeline LLC

 

$

87

 

$

249

 

Transport4, LLC

 

(32

)

67

 

West Shore Pipe Line Company

 

1,778

 

660

 

South Portland Terminal LLC

 

301

 

290

 

Total earnings from equity investments

 

$

2,134

 

$

1,266

 

 

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,

 

 

 

2015

 

2014

 

Revenue

 

$

21,472

 

$

19,694

 

Costs and expenses

 

(9,738

)

(11,422

)

Non-operating expense

 

(4,296

)

(2,721

)

Net income

 

$

7,438

 

$

5,551

 

 

7.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

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

 

Interest Rate Derivatives

 

From time to time, 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.  During 2014, we settled our remaining interest rate swaps relating to the forecasted refinancing of the $275.0 million of 5.300% Notes due on October 15, 2014.  The losses resulting from the settlement of interest rate swaps designated and effective as hedges are deferred and amortized into interest expense over the remaining term of the debt covered by the interest rate swaps.  Over the next twelve months, we expect to reclassify $12.2 million of net losses from accumulated other comprehensive loss to interest and debt expense.  The losses consist of settled forward-starting interest rate swaps, partially offset by a gain attributable to the settlement of a treasury lock agreement.

 

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.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes our commodity derivative instruments outstanding at March 31, 2015 (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

 

4,058

 

2,759

 

Mark-to-market

 

Physical index derivative contracts

 

43,300

 

 

Mark-to-market

 

Futures contracts for refined petroleum products

 

6,952

 

4,704

 

Mark-to-market

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Futures contracts for refined petroleum products

 

76,670

 

 

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, 2015

 

 

 

Derivatives

 

Derivatives

 

 

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

Net Total

 

Physical fixed price derivative contracts

 

$

20,628

 

$

 

$

20,628

 

$

1,066

 

$

21,694

 

Physical index derivative contracts

 

95

 

 

95

 

(55

)

40

 

Futures contracts for refined products

 

44,463

 

1,630

 

46,093

 

(46,093

)

 

Total current derivative assets

 

65,186

 

1,630

 

66,816

 

(45,082

)

21,734

 

Physical fixed price derivative contracts

 

621

 

 

621

 

(32

)

589

 

Futures contracts for refined products

 

26

 

 

26

 

(26

)

 

Total non-current derivative assets

 

647

 

 

647

 

(58

)

589

 

Physical fixed price derivative contracts

 

(2,319

)

 

(2,319

)

(1,066

)

(3,385

)

Physical index derivative contracts

 

(107

)

 

(107

)

55

 

(52

)

Futures contracts for refined products

 

(50,870

)

(5

)

(50,875

)

46,093

 

(4,782

)

Total current derivative liabilities

 

(53,296

)

(5

)

(53,301

)

45,082

 

(8,219

)

Physical fixed price derivative contracts

 

(34

)

 

(34

)

32

 

(2

)

Futures contracts for refined products

 

(829

)

 

(829

)

26

 

(803

)

Total non-current derivative liabilities

 

(863

)

 

(863

)

58

 

(805

)

Net derivative assets

 

$

11,674

 

$

1,625

 

$

13,299

 

$

 

$

13,299

 

 


(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, 2014

 

 

 

Derivatives

 

Derivatives

 

 

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

Net Total

 

Physical fixed price derivative contracts

 

$

42,005

 

$

 

$

42,005

 

$

(12

)

$

41,993

 

Physical index derivative contracts

 

112

 

 

112

 

(59

)

53

 

Futures contracts for refined products

 

150,352

 

30,702

 

181,054

 

(153,911

)

27,143

 

Total current derivative assets

 

192,469

 

30,702

 

223,171

 

(153,982

)

69,189

 

Physical fixed price derivative contracts

 

2,919

 

 

2,919

 

 

2,919

 

Total non-current derivative assets

 

2,919

 

 

2,919

 

 

2,919

 

Physical fixed price derivative contracts

 

(1,502

)

 

(1,502

)

12

 

(1,490

)

Physical index derivative contracts

 

(371

)

 

(371

)

59

 

(312

)

Futures contracts for refined products

 

(153,911

)

 

(153,911

)

153,911

 

 

Total current derivative liabilities

 

(155,784

)

 

(155,784

)

153,982

 

(1,802

)

Physical fixed price derivative contracts

 

(5

)

 

(5

)

 

(5

)

Futures contracts for refined products

 

(2,615

)

 

(2,615

)

 

(2,615

)

Total non-current derivative liabilities

 

(2,620

)

 

(2,620

)

 

(2,620

)

Net derivative assets

 

$

36,984

 

$

30,702

 

$

67,686

 

$

 

$

67,686

 

 


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

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Our hedged inventory portfolio extends to the fourth quarter of 2015.  The majority of the unrealized gain at March 31, 2015 for inventory hedges represented by futures contracts of $1.6 million will be realized by the second quarter of 2015 as the related inventory is sold.  At March 31, 2015, 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 September 2016.  In addition, at March 31, 2015, 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

 

 

 

 

 

March 31,

 

 

 

Location

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

Product sales

 

$

7,055

 

$

(3,372

)

Physical index derivative contracts

 

Product sales

 

(5

)

6

 

Physical fixed price derivative contracts

 

Cost of product sales

 

2,639

 

1,411

 

Physical index derivative contracts

 

Cost of product sales

 

(156

)

(192

)

Futures contracts for refined products

 

Cost of product sales

 

8,705

 

6,488

 

 

 

 

 

 

 

 

 

Derivatives designated as fair value hedging instruments:

 

 

 

 

 

 

 

Futures contracts for refined products

 

Cost of product sales

 

(17,847

)

1,279

 

Physical inventory - hedged items

 

Cost of product sales

 

9,424

 

(6,225

)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Fair value hedge ineffectiveness (excluding time value)

 

Cost of product sales

 

$

1,066

 

$

4,732

 

Time value excluded from hedge assessment

 

Cost of product sales

 

(9,489

)

(9,678

)

Net loss in income

 

 

 

$

(8,423

)

$

(4,946

)

 

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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

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

Interest and debt expense

 

$

(3,037

)

$

(1,779

)

 

 

 

Loss Recognized

 

 

 

in OCI on Derivatives for the

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

Interest rate contracts

 

$

 

$

(9,604

)

 

8.  FAIR VALUE MEASUREMENTS

 

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

 

Recurring

 

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

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

 

$

22,283

 

$

 

$

44,912

 

Physical index derivative contracts

 

 

40

 

 

53

 

Futures contracts for refined products

 

 

 

27,143

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

 

(3,387

)

 

(1,495

)

Physical index derivative contracts

 

 

(52

)

 

(312

)

Futures contracts for refined products

 

(5,585

)

 

(2,615

)

 

Fair value

 

$

(5,585

)

$

18,884

 

$

24,528

 

$

43,158

 

 

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 rate 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 $22.3 million and $44.9 million as of March 31, 2015 and December 31, 2014, respectively, are net of CVAs of ($0.1) million for both periods, respectively.  As of March 31, 2015, 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, 2015

 

December 31, 2014

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

3,389,268

 

$

3,510,848

 

$

3,388,986

 

$

3,465,973

 

Variable-rate debt

 

195,800

 

195,800

 

166,000

 

166,000

 

Total debt

 

$

3,585,068

 

$

3,706,648

 

$

3,554,986

 

$

3,631,973

 

 

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, 2015 and 2014, 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, 2015 and 2014, there were no fair value adjustments related to such assets or liabilities reflected in our unaudited condensed consolidated financial statements.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9.              PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

Buckeye Pipe Line Services Company, 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, 2015 and 2014 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

3

 

$

54

 

$

91

 

$

108

 

Interest cost

 

138

 

134

 

333

 

352

 

Expected return on plan assets

 

(84

)

(98

)

 

 

Amortization of prior service credit

 

 

 

 

(406

)

Amortization of unrecognized losses

 

211

 

308

 

50

 

298

 

Actuarial loss due to settlements

 

 

193

 

 

 

Net periodic benefit cost

 

$

268

 

$

591

 

$

474

 

$

352

 

 

During the three months ended March 31, 2015 and 2014, we contributed $0.2 million and $0.9 million, respectively, in aggregate to the RIGP and Retiree Medical Plan.

 

10.  UNIT-BASED COMPENSATION PLANS

 

We award unit-based compensation to employees and directors primarily under the Buckeye Partners, L.P. 2013 Long-Term Incentive Plan (the “LTIP”).  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 and the Option Plan of $5.2 million and $3.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

LTIP

 

As of March 31, 2015, there were 2,591,300 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 February 4, 2015 (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, 2014 and 2013, actual compensation awards deferred under the Deferral Plan were $1.7 million and $2.7 million, for which 54,592 and 75,870 phantom units (including matching units) were granted during the three months ended March 31, 2015, and the year ended 2014, 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, 2015, the Compensation Committee of the Board granted 194,441 phantom units to employees (including the 54,592 phantom units granted pursuant to the Deferral Plan, as discussed above), 22,001 phantom units to independent directors of Buckeye GP and 201,874 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, 2015

 

906

 

$

63.56

 

Granted

 

418

 

73.33

 

Vested

 

(251

)

63.59

 

Forfeited

 

(4

)

67.27

 

Unvested at March 31, 2015

 

1,069

 

$

67.33

 

 

At March 31, 2015, $46.7 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of 2.2 years.

 

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, 2015

 

26

 

$

48.18

 

1.6

 

$

703

 

Exercised

 

(2

)

45.88

 

 

 

 

 

Outstanding at March 31, 2015

 

24

 

48.36

 

1.4

 

$

647

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2015

 

24

 

$

48.36

 

1.4

 

$

647

 

 


(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 2015 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 during each of the three months ended March 31, 2015 and 2014.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11.  PARTNERS’ CAPITAL AND DISTRIBUTIONS

 

During the three months ended March 31, 2015, we sold approximately 49,000 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 $3.7 million in net proceeds after deducting commissions and other related expenses and paid $0.1 million of compensation in aggregate to the agents under the Equity Distribution Agreements.

 

Summary of Changes in Outstanding Units

 

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

 

Outstanding at January 1, 2015

 

127,043

 

LP Units issued pursuant to the Option Plan (1)

 

2

 

LP Units issued pursuant to the LTIP (1)

 

191

 

Issuance of LP Units through Equity Distribution Agreements

 

49

 

Outstanding at March 31, 2015

 

127,285

 

 


(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 $145.4 million and $125.8 million during the three months ended March 31, 2015 and 2014, respectively.

 

On May 1, 2015, we announced a quarterly distribution of $1.15 per LP Unit that will be paid on May 18, 2015, to unitholders of record on May 11, 2015.  Based on the LP Units outstanding as of March 31, 2015, cash distributed to unitholders on May 18, 2015 will total $147.0 million.

 

12.  EARNINGS PER UNIT

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Net income attributable to Buckeye Partners, L.P.

 

$

111,611

 

$

90,468

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Weighted average units outstanding - basic

 

127,175

 

115,319

 

Earnings per unit - basic

 

$

0.88

 

$

0.78

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Weighted average units outstanding - basic

 

127,175

 

115,319

 

Dilutive effect of LP Unit options and LTIP awards granted

 

432

 

477

 

Weighted average units outstanding - diluted

 

127,607

 

115,796

 

Earnings per unit - diluted

 

$

0.87

 

$

0.78

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13.  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.

 

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.  In addition, the segment has butane blending capabilities and 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 in the East Coast and Gulf Coast regions of the United States and in the Caribbean.  The segment has liquid petroleum product terminals located in The Bahamas, Puerto Rico and St. Lucia in the Caribbean, Corpus Christi and the New York Harbor.

 

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.

 

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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,

 

 

 

2015

 

2014

 

Revenue:

 

 

 

 

 

Pipelines & Terminals

 

$

225,256

 

$

218,539

 

Global Marine Terminals

 

120,984

 

88,769

 

Merchant Services

 

740,160

 

1,678,302

 

Development & Logistics

 

18,849

 

16,832

 

Intersegment

 

(17,149

)

(10,613

)

Total revenue

 

$

1,088,100

 

$

1,991,829

 

 

For the three months ended March 31, 2015 and 2014, 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,

 

 

 

2015

 

2014

 

Revenue:

 

 

 

 

 

United States

 

$

1,005,061

 

$

1,907,352

 

International

 

83,039

 

84,477

 

Total revenue

 

$

1,088,100

 

$

1,991,829

 

 

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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Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables present Adjusted EBITDA from continuing operations 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,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Adjusted EBITDA from continuing operations:

 

 

 

 

 

Pipelines & Terminals

 

$

125,551

 

$

126,720

 

Global Marine Terminals

 

74,418

 

53,703

 

Merchant Services

 

8,442

 

3,133

 

Development & Logistics

 

4,499

 

5,068

 

Total Adjusted EBITDA from continuing operations

 

$

212,910

 

$

188,624

 

 

 

 

 

 

 

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

 

 

 

 

 

Income from continuing operations

 

$

112,021

 

$

101,539

 

Less: Net loss (income) attributable to noncontrolling interests

 

447

 

(1,029

)

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

 

112,468

 

100,510

 

Add:    Interest and debt expense

 

41,709

 

41,213

 

Income tax expense (benefit)

 

239

 

(77

)

Depreciation and amortization (1)

 

53,776

 

42,991

 

Non-cash unit-based compensation expense

 

5,086

 

3,122

 

Acquisition and transition expense

 

2,400

 

3,633

 

Less:   Amortization of unfavorable storage contracts (2)

 

(2,768

)

(2,768

)

Adjusted EBITDA from continuing operations

 

$

212,910

 

$

188,624

 

 


(1)   Includes 100% of the depreciation and amortization expense of $11.7 million for Buckeye Texas for the three months ended March 31, 2015.

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

 

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Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14.  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,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash paid for interest (net of capitalized interest)

 

$

46,316

 

$

52,703

 

Cash paid for income taxes

 

232

 

127

 

Capitalized interest

 

5,924

 

2,042

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Increase (decrease) in accounts payable and accrued and other current liabilities related to capital expenditures

 

$

4,353

 

$

(20,741

)

 

25



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, 2014.  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.  Our terminal network comprises more than 120 liquid petroleum products terminals with aggregate storage capacity of over 110 million barrels across our portfolio of pipelines, inland terminals and marine terminals located primarily in the East Coast and Gulf Coast regions of the United States 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.  In September 2014, we expanded our network of marine midstream assets by acquiring a controlling interest in Buckeye Texas Partners LLC (“Buckeye Texas”), which has assets located in Corpus Christi and the Eagle Ford play.  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.

 

On December 31, 2014, we completed the sale of our Natural Gas Storage disposal group and have reported the final working capital adjustments as discontinued operations for the three months ended March 31, 2015.  For additional information, see our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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Table of Contents

 

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 through accretive acquisitions and organic growth projects; and (v) maintain a solid, conservative financial position and our investment-grade credit rating.

 

Overview of Operating Results

 

Net income attributable to our unitholders was $111.6 million for the three months ended March 31, 2015, which was an increase of $21.1 million, or 23.3%, from $90.5 million for the corresponding period in 2014. Operating income was $151.8 million for the three months ended March 31, 2015, which is an increase of $10.5 million, or 7.4%, from $141.3 million for the corresponding period in 2014.  Our results for the three months ended March 31, 2015 include year-over-year improvement in our Global Marine Terminals and Merchant Services segments, while our Pipelines & Terminals and Development & Logistics segments experienced slightly reduced earnings.

 

The increase in net income attributable to our unitholders was primarily the result of increased storage and other services revenue in our Global Marine Terminals segment as well as increased contribution from our Merchant Services segment as a result of more effective inventory management and continued strength in rack margins.  Through effective commercialization of our assets, we were able to capitalize on strong customer demand, which translated into higher utilization, higher rates and, in some instances, the execution of longer term contracts.  In addition, we experienced more favorable market conditions, particularly in crude oil but also in refined petroleum products, which drove strong interest for storage from our customers in the Global Marine Terminals segment and increased asset optimization in our Merchant Services segment.  Conversely, the lower commodity pricing environment negatively impacted our settlement revenues and butane blending spreads in our Pipelines & Terminals segment.  Settlement revenues were negatively impacted due to lower product settlement volumes and a decline in commodity prices, while butane blending activities were also negatively impacted due to the narrowed spread between butane and gasoline prices.  These negative factors were partially offset by increases in storage, terminalling and throughput revenues.  The increase in net income attributable to our unitholders was also partially offset by an increase in depreciation and amortization expense due to the Buckeye Texas assets acquired in September 2014.

 

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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

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Revenue

 

$

1,088,100

 

$

1,991,829

 

Costs and expenses

 

936,298

 

1,850,556

 

Operating income

 

151,802

 

141,273

 

Other expense, net

 

(39,542

)

(39,811

)

Income from continuing operations, before taxes

 

112,260

 

101,462

 

Income tax (expense) benefit

 

(239

)

77

 

Income from continuing operations

 

112,021

 

101,539

 

Loss from discontinued operations

 

(857

)

(10,042

)

Net income

 

111,164

 

91,497

 

Less: Net loss (income) attributable to noncontrolling interests

 

447

 

(1,029

)

Net income attributable to Buckeye Partners, L.P.

 

$

111,611

 

$

90,468

 

 

Non-GAAP Financial Measures

 

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.  Distributable cash flow is another measure used by our senior management to provide a clearer picture of cash available for distribution to its unitholders.  Adjusted EBITDA and distributable cash flow eliminate: (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 and distributable cash flow 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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Table of Contents

 

The following table presents Adjusted EBITDA from continuing operations by segment and on a consolidated basis, distributable cash flow and a reconciliation of income from continuing operations, which is the most comparable GAAP financial measure, to Adjusted EBITDA and distributable cash flow for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Adjusted EBITDA from continuing operations:

 

 

 

 

 

Pipelines & Terminals

 

$

125,551

 

$

126,720

 

Global Marine Terminals

 

74,418

 

53,703

 

Merchant Services

 

8,442

 

3,133

 

Development & Logistics

 

4,499

 

5,068

 

Adjusted EBITDA from continuing operations

 

$

212,910

 

$

188,624

 

 

 

 

 

 

 

Reconciliation of Income from continuing operations to Adjusted EBITDA and Distributable Cash Flow:

 

 

 

 

 

Income from continuing operations

 

$

112,021

 

$

101,539

 

Less: Net loss (income) attributable to noncontrolling interests

 

447

 

(1,029

)

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

 

112,468

 

100,510

 

Add: Interest and debt expense

 

41,709

 

41,213

 

Income tax expense (benefit)

 

239

 

(77

)

Depreciation and amortization (1)

 

53,776

 

42,991

 

Non-cash unit-based compensation expense

 

5,086

 

3,122

 

Acquisition and transition expense

 

2,400

 

3,633

 

Less: Amortization of unfavorable storage contracts (2)

 

(2,768

)

(2,768

)

Adjusted EBITDA from continuing operations

 

212,910

 

188,624

 

Less: Interest and de