Attached files

file filename
EX-31.2 - EX-31.2 - BUCKEYE PARTNERS, L.P.a14-19607_1ex31d2.htm
EX-32.2 - EX-32.2 - BUCKEYE PARTNERS, L.P.a14-19607_1ex32d2.htm
EX-32.1 - EX-32.1 - BUCKEYE PARTNERS, L.P.a14-19607_1ex32d1.htm
EX-31.1 - EX-31.1 - BUCKEYE PARTNERS, L.P.a14-19607_1ex31d1.htm
EXCEL - IDEA: XBRL DOCUMENT - BUCKEYE PARTNERS, L.P.Financial_Report.xls

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 September 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 October 31, 2014, there were 127,022,640 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 Nine Months Ended September 30, 2014 and 2013 (Unaudited)

2

 

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

3

 

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

4

 

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

5

 

 Condensed Consolidated Statements of Partners’ Capital for the Nine Months Ended September 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

10

 

4.

Commitments and Contingencies

11

 

5.

Inventories

13

 

6.

Equity Investments

14

 

7.

Intangible Assets

14

 

8.

Long-Term Debt

15

 

9.

Derivative Instruments and Hedging Activities

15

 

10.

Fair Value Measurements

19

 

11.

Pensions and Other Postretirement Benefits

21

 

12.

Unit-Based Compensation Plans

21

 

13.

Partners’ Capital and Distributions

23

 

14.

Earnings Per Unit

24

 

15.

Business Segments

25

 

16.

Supplemental Cash Flow Information

29

 

17.

Subsequent Events

29

 

 

 

Item 2.

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

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

47

 

 

 

Item 6.

Exhibits

47

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Product sales

 

$

1,241,696

 

$

805,281

 

$

4,412,135

 

$

2,608,894

 

Transportation, storage and other services

 

331,777

 

268,570

 

962,118

 

789,623

 

Total revenue

 

1,573,473

 

1,073,851

 

5,374,253

 

3,398,517

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

1,218,471

 

801,854

 

4,393,893

 

2,590,452

 

Operating expenses

 

138,906

 

101,142

 

396,753

 

292,930

 

Depreciation and amortization

 

45,406

 

36,842

 

131,791

 

110,092

 

General and administrative

 

21,749

 

17,236

 

59,436

 

50,819

 

Total costs and expenses

 

1,424,532

 

957,074

 

4,981,873

 

3,044,293

 

Operating income

 

148,941

 

116,777

 

392,380

 

354,224

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Earnings from equity investments

 

2,523

 

1,389

 

5,959

 

4,971

 

Interest and debt expense

 

(43,838

)

(34,341

)

(127,063

)

(94,827

)

Other income (expense)

 

(375

)

(12

)

(471

)

287

 

Total other expense, net

 

(41,690

)

(32,964

)

(121,575

)

(89,569

)

Income from continuing operations before taxes

 

107,251

 

83,813

 

270,805

 

264,655

 

Income tax expense

 

(243

)

(195

)

(319

)

(521

)

Income from continuing operations

 

107,008

 

83,618

 

270,486

 

264,134

 

Loss from discontinued operations

 

(3,280

)

(5,367

)

(51,508

)

(18,014

)

Net income

 

103,728

 

78,251

 

218,978

 

246,120

 

Less: Net income attributable to noncontrolling interests

 

(785

)

(997

)

(2,547

)

(3,095

)

Net income attributable to Buckeye Partners, L.P.

 

$

102,943

 

$

77,254

 

$

216,431

 

$

243,025

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.90

 

$

0.78

 

$

2.29

 

$

2.48

 

Discontinued operations

 

(0.03

)

(0.05

)

(0.44

)

(0.17

)

Total

 

$

0.87

 

$

0.73

 

$

1.85

 

$

2.31

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.89

 

$

0.77

 

$

2.29

 

$

2.47

 

Discontinued operations

 

(0.03

)

(0.05

)

(0.44

)

(0.17

)

Total

 

$

0.86

 

$

0.72

 

$

1.85

 

$

2.30

 

 

 

 

 

 

 

 

 

 

 

Weighted average units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

118,804

 

106,223

 

116,747

 

105,068

 

Diluted

 

119,429

 

106,774

 

117,305

 

105,516

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

103,728

 

$

78,251

 

$

218,978

 

$

246,120

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on derivative instruments

 

(2,612

)

(80

)

(21,424

)

32,446

 

Reclassification of derivative gains and losses to net income

 

3,159

 

1,778

 

6,716

 

3,099

 

Recognition of costs related to benefit plans to net income

 

394

 

881

 

1,181

 

1,284

 

Adjustments to recognize the funded status of benefit plans

 

 

(727

)

 

(727

)

Total other comprehensive income (loss)

 

941

 

1,852

 

(13,527

)

36,102

 

Comprehensive income

 

104,669

 

80,103

 

205,451

 

282,222

 

Less: Comprehensive income attributable to noncontrolling interests

 

(785

)

(997

)

(2,547

)

(3,095

)

Comprehensive income attributable to Buckeye Partners, L.P.

 

$

103,884

 

$

79,106

 

$

202,904

 

$

279,127

 

 

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)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,497

 

$

4,950

 

Trade receivables, net

 

404,207

 

326,243

 

Construction and pipeline relocation receivables

 

26,596

 

23,135

 

Inventories

 

428,163

 

312,135

 

Derivative assets

 

24,646

 

4,412

 

Prepaid and other current assets

 

61,277

 

48,503

 

Assets held for sale (Note 3)

 

141,852

 

181,708

 

Total current assets

 

1,093,238

 

901,086

 

 

 

 

 

 

 

Property, plant and equipment, net

 

5,635,565

 

4,925,294

 

 

 

 

 

 

 

Equity investments

 

77,867

 

72,349

 

Goodwill

 

1,102,598

 

821,500

 

Intangible assets, net

 

457,350

 

225,364

 

Other non-current assets

 

76,046

 

59,970

 

Total assets

 

$

8,442,664

 

$

7,005,563

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

182,000

 

$

226,000

 

Accounts payable

 

253,485

 

149,520

 

Derivative liabilities

 

3,061

 

44,672

 

Accrued and other current liabilities

 

241,651

 

227,084

 

Liabilities held for sale (Note 3)

 

38,852

 

37,767

 

Total current liabilities

 

719,049

 

685,043

 

 

 

 

 

 

 

Long-term debt

 

3,663,690

 

3,092,711

 

Other non-current liabilities

 

133,638

 

146,973

 

Total liabilities

 

4,516,377

 

3,924,727

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Buckeye Partners, L.P. capital:

 

 

 

 

 

Limited Partners (125,999,350 and 115,063,617 units outstanding as of September 30, 2014 and December 31, 2013 respectively)

 

3,820,596

 

3,169,217

 

Accumulated other comprehensive loss

 

(117,079

)

(103,552

)

Total Buckeye Partners, L.P. capital

 

3,703,517

 

3,065,665

 

Noncontrolling interests

 

222,770

 

15,171

 

Total partners’ capital

 

3,926,287

 

3,080,836

 

Total liabilities and partners’ capital

 

$

8,442,664

 

$

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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

218,978

 

$

246,120

 

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

 

 

 

 

 

Settlement of terminated interest rate swap agreement

 

(51,469

)

(62,009

)

Depreciation and amortization

 

131,791

 

115,798

 

Asset impairment expense

 

20,875

 

 

Net changes in fair value of derivatives

 

(32,017

)

(16,608

)

Non-cash deferred lease expense

 

2,728

 

2,828

 

Amortization of unfavorable storage contracts

 

(8,303

)

(8,255

)

Earnings from equity investments

 

(5,959

)

(4,971

)

Distributions from equity investments

 

220

 

275

 

Other non-cash items

 

22,114

 

17,804

 

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

 

 

 

 

 

Trade receivables

 

(73,240

)

16,722

 

Construction and pipeline relocation receivables

 

(3,461

)

(6,352

)

Inventories

 

(114,620

)

(57,569

)

Prepaid and other current assets

 

8,906

 

24,863

 

Accounts payable

 

102,125

 

35,397

 

Accrued and other current liabilities

 

(18,254

)

(14,557

)

Other non-current assets

 

(12,454

)

964

 

Other non-current liabilities

 

(5,609

)

(5,046

)

Net cash provided by operating activities

 

182,351

 

285,404

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(300,831

)

(257,008

)

Deposit in anticipation of sale (Note 3)

 

5,250

 

 

Acquisitions, net of cash acquired

 

(824,736

)

 

Net proceeds from insurance settlement

 

737

 

 

Proceeds from disposal of property, plant and equipment

 

1,203

 

433

 

Net cash used in investing activities

 

(1,118,377

)

(256,575

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of LP Units

 

821,944

 

382,319

 

Net proceeds from exercise of unit options

 

698

 

1,201

 

Payment of tax withholding on issuance of LTIP awards

 

(5,244

)

(3,741

)

Issuance of long-term debt

 

599,103

 

499,050

 

Repayment of long term-debt

 

 

(300,000

)

Debt issuance costs

 

(6,783

)

(4,552

)

Borrowings under BPL Credit Facility

 

1,476,000

 

1,380,000

 

Repayments under BPL Credit Facility

 

(1,505,000

)

(1,637,900

)

Net borrowings (repayments) under BMSC Credit Facility (Note 8)

 

(44,000

)

(26,100

)

Acquisition of additional interest in WesPac Memphis

 

(9,510

)

(9,727

)

Distributions paid to noncontrolling interests

 

(5,217

)

(5,629

)

Distributions paid to unitholders

 

(384,418

)

(305,544

)

Net cash provided by (used in) financing activities

 

937,573

 

(30,623

)

Net increase (decrease) in cash and cash equivalents

 

1,547

 

(1,794

)

Cash and cash equivalents — Beginning of period

 

4,950

 

6,776

 

Cash and cash equivalents — End of period

 

$

6,497

 

$

4,982

 

 

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

 

216,431

 

 

 

2,547

 

218,978

 

Acquisition of additional interest in WesPac Memphis

 

(7,933

)

 

 

(1,577

)

(9,510

)

Noncontrolling equity in acquisition (Note 2)

 

 

 

 

208,998

 

208,998

 

Distributions paid to unitholders

 

(386,990

)

 

 

2,572

 

(384,418

)

Net proceeds from issuance of LP Units

 

821,944

 

 

 

 

821,944

 

Amortization of unit-based compensation awards

 

13,549

 

 

 

 

13,549

 

Net proceeds from exercise of unit options

 

698

 

 

 

 

698

 

Payment of tax withholding on issuance of LTIP awards

 

(5,244

)

 

 

 

(5,244

)

Distributions paid to noncontrolling interests

 

 

 

 

(5,217

)

(5,217

)

Other comprehensive loss

 

 

 

(13,527

)

 

(13,527

)

Noncash accrual for distribution equivalent rights

 

(1,136

)

 

 

 

(1,136

)

Other

 

60

 

 

 

276

 

336

 

Partners’ capital - September 30, 2014

 

$

3,820,596

 

$

 

$

(117,079

)

$

222,770

 

$

3,926,287

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital - January 1, 2013

 

$

2,117,788

 

$

413,304

 

$

(158,779

)

$

16,527

 

$

2,388,840

 

Net income

 

226,306

 

16,719

 

 

3,095

 

246,120

 

Acquisition of additional interest in WesPac Memphis

 

(8,232

)

 

 

(1,495

)

(9,727

)

Distributions paid to unitholders

 

(308,459

)

 

 

2,915

 

(305,544

)

Conversion of Class B Units to LP Units

 

430,023

 

(430,023

)

 

 

 

Net proceeds from issuance of LP Units

 

382,319

 

 

 

 

382,319

 

Amortization of unit-based compensation awards

 

12,438

 

 

 

 

12,438

 

Net proceeds from exercise of unit options

 

1,201

 

 

 

 

1,201

 

Payment of tax withholding on issuance of LTIP awards

 

(3,741

)

 

 

 

(3,741

)

Distributions paid to noncontrolling interests

 

 

 

 

(5,629

)

(5,629

)

Other comprehensive income

 

 

 

36,102

 

 

36,102

 

Noncash accrual for distribution equivalent rights Other

 

(1,437

)

 

 

 

(1,437

)

 

 

(85

)

 

 

66

 

(19

)

Partners’ capital - September 30, 2013

 

$

2,848,121

 

$

 

$

(122,677

)

$

15,479

 

$

2,740,923

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

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

 

Buckeye owns and operates a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage and marketing of liquid petroleum products.  We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, miles of pipeline and active products terminals across our portfolio of pipelines, inland terminals and an integrated network of 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 a company with assets located in Corpus Christi, Texas and the Eagle Ford Shale.  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 September 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 $105.0 million.  The transaction is expected to close in the first quarter of 2015, subject to regulatory approvals and customary closing conditions.  See Note 3 for additional information.

 

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 15 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.

 

7



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recent Accounting Developments

 

Going Concern.  In August 2014, the Financial Accounting Standards Board (“FASB”) issued guidance requiring management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  The standard also provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements.  An entity must provide certain disclosures if there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern.  Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued.  The new guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.  We do not expect that the adoption of this guidance will have an impact on our consolidated financial statements or disclosures.

 

Revenue from Contracts with Customers.  In May 2014, the FASB 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/or 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

 

Business Combinations

 

2014 Transaction

 

In September 2014, we acquired an 80% interest in a newly-formed entity, Buckeye Texas Partners LLC (“Buckeye Texas”), for $821.0 million, net of cash acquired of $15.0 million and working capital and capital expenditure adjustments 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 AG (“Trafigura”), will own and operate 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 (“LPG”) storage complex in Corpus Christi, and three crude oil and condensate gathering facilities in the Eagle Ford Shale.  Upon completion of the initial build-out, the assets will form an integrated system with connectivity from the production in the field to the marine terminal infrastructure and the refining complex in Corpus Christi.  The Corpus Christi facilities have five vessel berths, including three deep-water docks, and upon completion of the initial build-out, they will offer approximately 5.6 million barrels of liquid petroleum products storage capacity along with rail and truck loading/unloading capability. In addition, three field gathering facilities with associated storage and pipeline connectivity will allow Buckeye Texas to move Eagle Ford crude oil and condensate production directly to the terminalling complex in Corpus Christi. Concurrent with this acquisition, we entered into multi-year storage and throughput commitments with Trafigura.  We reflected the acquisition of Buckeye Texas as a consolidated subsidiary based on the application of the variable interest model.  Buckeye Texas does not have sufficient resources to carry on its activities without financial support of its joint owners; therefore, we determined it to be a variable interest entity (“VIE”) of which we were the primary beneficiary.  In making this determination, 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 acquired assets.  The operations of these assets are reported in the Global Marine Terminals segment.

 

8



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 30, 2014 are subject to change pending final valuation analysis, and due to timing of available preliminary valuation information, such changes, particularly to intangible assets and goodwill, could be material.  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):

 

Current assets

 

$

24,640

 

Property, plant and equipment

 

527,390

 

Intangible assets

 

260,000

 

Goodwill

 

280,695

 

Current liabilities

 

(47,737

)

Noncontrolling interests

 

(208,998

)

Allocated purchase price

 

$

835,990

 

 

The pro forma impact of this acquisition was not significant to our results for the three and nine months ended September 30, 2014 or 2013.

 

2013 Transaction

 

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 purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):

 

Current assets

 

$

16,533

 

Property, plant and equipment

 

801,870

 

Intangible assets

 

30,520

 

Goodwill

 

9,606

 

Current liabilities

 

(882

)

Environmental liabilities

 

(1,270

)

Allocated purchase price

 

$

856,377

 

 

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 Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

Revenue

 

$

297,104

 

$

971,672

 

Net income (1)

 

17,745

 

44,515

 

 


(1)         Includes transition expenses of $1.2 million and $6.9 million for the three and nine months ended September 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.

 

9



Table of Contents

 

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.  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 September 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 $105.0 million.  The transaction is expected to close in 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 six months ended June 30, 2014.  During the three months ended September 30, 2014, we reduced the non-cash asset impairment charge by $5.4 million due to changes in the carrying value of the net assets of our Natural Gas Storage disposal group.  The changes in the carrying value of the net assets consist primarily of the net loss experienced during the three months ended September 30, 2014.  See Note 10 and Note 15 for further discussion.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,997

 

$

14,907

 

$

21,766

 

$

40,581

 

Loss from discontinued operations

 

(3,280

)

(5,367

)

(51,508

)

(18,014

)

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

138,534

 

$

157,261

 

Other current assets

 

3,282

 

24,443

 

Other non-current assets

 

36

 

4

 

Assets held for sale

 

$

141,852

 

$

181,708

 

 

 

 

 

 

 

Accounts payable

 

$

872

 

$

2,182

 

Accrued liabilities and other current liabilities

 

8,505

 

8,947

 

Other non-current liabilities

 

29,475

 

26,638

 

Liabilities held for sale

 

$

38,852

 

$

37,767

 

 

10



Table of Contents

 

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.

 

Pennsauken Allisions.  Our terminal located in Pennsauken, New Jersey suffered two allisions in August and October of 2014.  On August 2, 2014, a vessel, allided with our terminal’s dock.  We are currently investigating the extent of the damage from the allisions.  We also incurred and will continue to incur damages for loss of use, which are still in the process of being quantified. Full security for our claim has been provided by the vessel owner’s insurers, reserving all of their defenses.  We have commenced litigation against the vessel and her owner and are optimistic that we can recover all provable damages.  On October 5, 2014, a second vessel struck and caused damage to a second dock operated at the facility.  We have put the vessel owners on notice of our intent to pursue them for reimbursement.  Repair estimates are in the range of $5-$10 million for each incident, but they are preliminary.  Investigations of the incidents as well as our rights to recover our losses from responsible third parties are ongoing.  We are insured for all losses with respect to the allisions, subject to a $10.0 million deductible for property insurance per incident.

 

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 and an initial decision by August 2015.  The timing or outcome of final resolution of this matter cannot reasonably be determined at this time.

 

11



Table of Contents

 

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 RatesOn 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.  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.

 

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 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 filed a motion for leave to appeal that decision to the Privy Council, which was granted.  We can express no view on whether the Bahamas Court of Appeals decision ultimately will be affirmed or reversed.

 

12



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 30, 2014, we had a $6.0 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 cash proceeds of $16.0 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 September 30, 2014, 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 interests filed a third-party complaint against a BORCO subsidiary, Borco Towing Company Limited, alleging negligence by the pilots and the 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 vigorously defend ourselves and pursue our claims against the vessel interests.

 

Environmental Contingencies

 

We recorded operating expenses, net of insurance recoveries, of $2.0 million and $1.4 million during the three months ended September 30, 2014 and 2013, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  For the nine months ended September 30, 2014 and 2013, we recorded operating expenses, net of recoveries, of $4.2 million and $4.4 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 September 30, 2014 and December 31, 2013, we recorded environmental remediation liabilities of $56.0 million and $57.2 million, respectively.  At September 30, 2014 and December 31, 2013, we had $13.3 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):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Liquid petroleum products (1)

 

$

410,615

 

$

290,718

 

Materials and supplies

 

17,548

 

21,417

 

Total inventories

 

$

428,163

 

$

312,135

 

 


(1)         Ending inventory was 162.8 million and 102.1 million gallons of liquid petroleum products at September 30, 2014 and December 31, 2013, respectively.

 

At September 30, 2014 and December 31, 2013, approximately 91% 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.

 

13



Table of Contents

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

West Shore Pipe Line Company

 

$

1,551

 

$

1,569

 

$

3,734

 

$

4,142

 

Muskegon Pipeline LLC

 

470

 

(377

)

1,041

 

254

 

Transport4, LLC

 

109

 

90

 

362

 

286

 

South Portland Terminal LLC

 

393

 

107

 

822

 

289

 

Total earnings from equity investments

 

$

2,523

 

$

1,389

 

$

5,959

 

$

4,971

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

23,872

 

$

22,218

 

$

65,337

 

$

58,534

 

Costs and expenses

 

(14,168

)

(15,563

)

(38,813

)

(34,776

)

Non-operating expenses

 

(3,261

)

(3,145

)

(8,841

)

(9,265

)

Net income

 

$

6,443

 

$

3,510

 

$

17,683

 

$

14,493

 

 

7.  INTANGIBLE ASSETS

 

Intangible assets include customer relationships and contracts.  These intangible assets have finite lives and are being amortized on a straight-line basis over their estimated useful lives, ranging from 1 to 20 years.  In connection with the Buckeye Texas Partners Transaction, (see Note 2), we acquired intangible assets of $260.0 million with contractual lives ranging from 7 to 10 years.  This represents an estimate of fair value as of September 30, 2014 subject to change pending final valuation analysis.  Due to timing of available preliminary valuation information, such change could be material.

 

Intangible assets consist of the following at the dates indicated (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Customer relationships

 

$

231,620

 

$

231,620

 

Accumulated amortization

 

(53,971

)

(44,144

)

Net carrying amount

 

177,649

 

187,476

 

 

 

 

 

 

 

Customer contracts

 

330,233

 

70,233

 

Accumulated amortization

 

(50,532

)

(32,345

)

Net carrying amount

 

279,701

 

37,888

 

Total intangible assets, net

 

$

457,350

 

$

225,364

 

 

14



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three months ended September 30, 2014 and 2013, amortization expense related to intangible assets was $9.3 million and $5.2 million, respectively.  For the nine months ended September 30, 2014 and 2013, amortization expense related to intangible assets was $28.0 million and $19.0 million, respectively.  Amortization expense related to intangible assets is expected to be $18.4 million for the remainder of 2014 (October 1st through December 31st), $56.9 million for 2015, $51.7 million for 2016, $50.2 million for 2017 and $49.4 million for 2018.

 

8.  LONG-TERM DEBT

 

Credit Facility

 

In September 2014, Buckeye and its indirect wholly-owned subsidiaries, Buckeye Energy Services LLC (“BES”), Buckeye West Indies Holdings LP (“BWI”) and Buckeye Caribbean Terminals LLC (“BCT”), as borrowers, modified (through a new credit agreement) the revolving credit facility with SunTrust Bank (the “Credit Facility”) to provide an increase in borrowing capacity of $250.0 million, resulting in a total borrowing capacity of $1.5 billion, of which BES, BWI and BCT, collectively the Buckeye Merchant Service Companies (“BMSC”), share a sublimit of $500.0 million.  The Credit Facility’s maturity date is September 30, 2019, with an option to extend the term for up to two one-year periods and a $500.0 million accordion option to increase the commitments.  We incurred debt issuance costs of $2.1 million in connection with this transaction.  At September 30, 2014, we had $2.7 million of remaining unamortized deferred financing costs related to the Credit Facility.  These amounts are included in other non-current assets and are being amortized over the new term of the agreement.  At September 30, 2014, BMSC had $182.0 million outstanding under the Credit Facility, all of which was classified as current liabilities in our unaudited condensed consolidated balance sheets, as related funds were used to finance current working capital needs.

 

Notes Offering

 

In September 2014, we issued an aggregate of $600.0 million of senior unsecured notes in an underwritten public offering, including the $300.0 million of 4.350% Notes due on October 15, 2024 (the “4.350% Notes”) and the $300.0 million of 5.600% Notes due on October 15, 2044 (the “5.600% Notes”), at 99.825% and 99.876%, respectively, of their principal amounts.  Total proceeds from this offering, after underwriting fees, expenses and debt issuance costs of $4.7 million, were $594.5 million.  We used the net proceeds from this offering to fund a portion of the Buckeye Texas Partners Transaction (see Note 2), to settle all interest rate swaps relating to the 5.300% Notes due on October 15, 2014 (the “5.300% Notes”) for $51.5 million (see Note 9) and for general partnership purposes.  We also used the net proceeds to reduce the indebtedness outstanding under our Credit Facility.  At September 30, 2014, we had $1,318.0 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 as of September 30, 2014.

 

9.  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 designate 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 borrowings.

 

15



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.  In September 2014, we issued $300.0 million of senior unsecured notes (see Note 8 for further discussion) and also settled the related six forward-starting interest rate swaps for $51.5 million.  As a result of the interest rate swap settlement, we recognized $1.1 million hedge ineffectiveness in interest and debt expense attributable to the timing difference between when the swaps were settled and when they were forecasted to settle during the three and nine months ended September 30, 2014.

 

During the three months ended September 30, 2014 and 2013, unrealized losses of $2.6 million and unrealized losses of $0.1 million, respectively, were recorded in accumulated other comprehensive loss to reflect the change in the fair values of the forward-starting interest rate swaps.  For the nine months ended September 30, 2014 and 2013, unrealized losses of $21.4 million and unrealized gains of $32.5 million, respectively, were recorded in accumulated other comprehensive loss.  Additionally, 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 loss consists primarily of the amortization of our settled forward-starting interest rate swaps.

 

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 September 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

 

47,152

 

2,604

 

Mark-to-market

 

Physical index derivative contracts

 

56,414

 

 

Mark-to-market

 

Futures contracts for refined petroleum products

 

24,071

 

2,520

 

Mark-to-market

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined petroleum products

 

148,260

 

 

Fair Value Hedge

 

 


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

 

16



Table of Contents

 

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):

 

 

 

September 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

 

$

16,676

 

$

 

$

16,676

 

$

(514

)

$

16,162

 

Physical index derivative contracts

 

99

 

 

99

 

(34

)

65

 

Futures contracts for refined products

 

76,469

 

22,371

 

98,840

 

(90,421

)

8,419

 

Total current derivative assets

 

93,244

 

22,371

 

115,615

 

(90,969

)

24,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

441

 

 

441

 

 

441

 

Futures contracts for refined products

 

1

 

 

1

 

 

1

 

Total non-current derivative assets

 

442

 

 

442

 

 

442

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(3,379

)

 

(3,379

)

514

 

(2,865

)

Physical index derivative contracts

 

(230

)

 

(230

)

34

 

(196

)

Futures contracts for refined products

 

(89,294

)

(1,127

)

(90,421

)

90,421

 

 

Total current derivative liabilities

 

(92,903

)

(1,127

)

(94,030

)

90,969

 

(3,061

)

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

(225

)

 

(225

)

 

(225

)

Total non-current derivative liabilities

 

(225

)

 

(225

)

 

(225

)

Net derivative assets (liabilities)

 

$

558

 

$

21,244

 

$

21,802

 

$

 

$

21,802

 

 


(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.

 

Our hedged inventory portfolio extends to the first quarter of 2015.  The majority of the unrealized gain at September 30, 2014 for inventory hedges represented by futures contracts of $21.2 million will be realized by the fourth quarter of 2014 as the related inventory is sold.  At September 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 April 2016.  In addition, at September 30, 2014, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.

 

17



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

Location

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

Product sales

 

$

16,065

 

$

(6,851

)

$

5,413

 

$

(3,475

)

Physical index derivative contracts

 

Product sales

 

(37

)

(13

)

(110

)

1,096

 

Physical fixed price derivative contracts

 

Cost of product sales

 

(1,442

)

4,736

 

7,179

 

4,291

 

Physical index derivative contracts

 

Cost of product sales

 

207

 

(113

)

(506

)

(657

)

Futures contracts for refined products

 

Cost of product sales

 

(997

)

(1,190

)

(810

)

4,607

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as fair value hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

Cost of product sales

 

35,717

 

(1,689

)

23,264

 

7,246

 

Physical inventory - hedged items

 

Cost of product sales

 

(34,041

)

2,114

 

(32,312

)

(7,326

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Fair value hedge ineffectiveness (excluding time value)

 

Cost of product sales

 

2,914

 

2,902

 

6,524

 

(725

)

Time value excluded from hedge assessment

 

Cost of product sales

 

(1,238

)

(2,477

)

(15,572

)

645

 

Net gain (loss) in income

 

 

 

$

1,676

 

$

425

 

$

(9,048

)

$

(80

)

 

18



Table of Contents

 

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

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

Location

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest and debt expense

 

$

(3,159

)

$

(1,778

)

$

(6,716

)

$

(3,099

)

 

 

 

 

 

(Loss) Gain Recognized in OCI on Derivatives for the

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

$

(2,612

)

$

(80

)

$

(21,424

)

$

32,446

 

 

10.  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):

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

 

$

16,603

 

$

 

$

4,384

 

Physical index derivative contracts

 

 

65

 

 

28

 

Futures contracts for refined products

 

8,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

 

(2,865

)

 

(6,247

)

Physical index derivative contracts

 

 

(196

)

 

(310

)

Futures contracts for refined products

 

(225

)

 

(8,070

)

 

Interest rate derivatives

 

 

 

 

(30,045