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EX-32.1 - EXHIBIT 32.1 - BUCKEYE PARTNERS, L.P.ex321q22015.htm
EX-31.2 - EXHIBIT 31.2 - BUCKEYE PARTNERS, L.P.ex312q22015.htm
EX-32.2 - EXHIBIT 32.2 - BUCKEYE PARTNERS, L.P.ex322q22015.htm
EX-31.1 - EXHIBIT 31.1 - BUCKEYE PARTNERS, L.P.ex311q22015.htm

 
 
 
 
 
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
 
 

(Mark One)
ý      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 ý  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 ý  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
ý
 
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 ý
As of July 27, 2015, there were 128,032,477 limited partner units outstanding.
 
 
 
 
 



TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.

 
 
7.
 
 
 
8.
 
 
 
9.
 
 
 
10.
 
 
 
11.
 
 
 
12.
 
 
 
13.
 
 
 
14.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 

 
 

 
 

 
 

Product sales
$
458,613

 
$
1,492,697

 
$
1,198,831

 
$
3,170,439

Transportation, storage and other services
338,170

 
316,254

 
686,052

 
630,341

Total revenue
796,783

 
1,808,951

 
1,884,883

 
3,800,780

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of product sales
448,534

 
1,510,043

 
1,166,073

 
3,175,422

Operating expenses
141,339

 
133,018

 
283,704

 
257,847

Depreciation and amortization
55,598

 
43,394

 
109,374

 
86,385

General and administrative
20,293

 
20,330

 
42,911

 
37,687

Total costs and expenses
665,764

 
1,706,785

 
1,602,062

 
3,557,341

Operating income
131,019

 
102,166

 
282,821

 
243,439

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

Earnings from equity investments
2,446

 
2,170

 
4,580

 
3,436

Interest and debt expense
(41,975
)
 
(42,012
)
 
(83,684
)
 
(83,225
)
Other income (expense)
77

 
(232
)
 
110

 
(96
)
Total other expense, net
(39,452
)
 
(40,074
)
 
(78,994
)
 
(79,885
)
Income from continuing operations before taxes
91,567

 
62,092

 
203,827

 
163,554

Income tax expense
(241
)
 
(153
)
 
(480
)
 
(76
)
Income from continuing operations
91,326

 
61,939

 
203,347

 
163,478

Loss from discontinued operations

 
(38,186
)
 
(857
)
 
(48,228
)
Net income
91,326

 
23,753

 
202,490

 
115,250

Less: Net loss (income) attributable to noncontrolling interests
254

 
(733
)
 
701

 
(1,762
)
Net income attributable to Buckeye Partners, L.P.
$
91,580

 
$
23,020

 
$
203,191

 
$
113,488

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

 
 

 
 

 
 

Continuing operations
$
0.72

 
$
0.53

 
$
1.60

 
$
1.40

Discontinued operations

 
(0.33
)
 
(0.01
)
 
(0.42
)
Total
$
0.72

 
$
0.20

 
$
1.59

 
$
0.98

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

 
 

 
 

 
 

Continuing operations
$
0.71

 
$
0.53

 
$
1.60

 
$
1.39

Discontinued operations

 
(0.33
)
 
(0.01
)
 
(0.41
)
Total
$
0.71

 
$
0.20

 
$
1.59

 
$
0.98

 
 
 
 
 
 
 
 
Weighted average units outstanding:
 

 
 

 
 

 
 

Basic
127,650

 
116,078

 
127,414

 
115,701

Diluted
128,198

 
116,652

 
127,904

 
116,226

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

3


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
91,326

 
$
23,753

 
$
202,490

 
$
115,250

Other comprehensive income (loss):
 

 
 

 
 

 
 

Unrealized losses on derivative instruments
(3,857
)
 
(9,208
)
 
(3,857
)
 
(18,812
)
Reclassification of derivative losses to net income
3,039

 
1,778

 
6,076

 
3,557

Recognition of costs related to benefit plans to net income
259

 
394

 
520

 
787

Total other comprehensive (loss) income
(559
)
 
(7,036
)
 
2,739

 
(14,468
)
Comprehensive income
90,767

 
16,717

 
205,229

 
100,782

Less: Comprehensive loss (income) attributable to noncontrolling interests
254

 
(733
)
 
701

 
(1,762
)
Comprehensive income attributable to Buckeye Partners, L.P.
$
91,021

 
$
15,984

 
$
205,930

 
$
99,020

 
See Notes to Unaudited Condensed Consolidated Financial Statements.


4


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
(Unaudited)
 
 
June 30,
2015
 
December 31,
2014
Assets:
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
8,577

 
$
8,208

Accounts receivable, net
219,104

 
265,830

Construction and pipeline relocation receivables
12,595

 
20,542

Inventories
284,716

 
243,475

Derivative assets
12,408

 
69,189

Prepaid and other current assets
65,625

 
25,055

Total current assets
603,025

 
632,299

 
 
 
 
Property, plant and equipment, net
5,968,990

 
5,735,787

 
 
 
 
Equity investments
83,024

 
82,849

Goodwill
995,210

 
993,375

Intangible assets, net
521,812

 
553,924

Other non-current assets
79,881

 
87,854

Total assets
$
8,251,942

 
$
8,086,088

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Current liabilities:
 

 
 

Line of credit
$
209,300

 
$
166,000

Accounts payable
95,851

 
159,129

Derivative liabilities
21,952

 
1,802

Accrued and other current liabilities
288,652

 
295,024

Total current liabilities
615,755

 
621,955

 
 
 
 
Long-term debt
3,574,555

 
3,388,986

Other non-current liabilities
125,082

 
134,551

Total liabilities
4,315,392

 
4,145,492

 
 
 
 
Commitments and contingencies (Note 3)

 

 
 
 
 
Partners’ capital:
 

 
 

Buckeye Partners, L.P. capital:
 

 
 

Limited Partners (128,030,831 and 127,043,317 units outstanding as of June 30, 2015 and December 31, 2014 respectively)
3,786,551

 
3,817,916

Accumulated other comprehensive loss
(112,549
)
 
(115,288
)
Total Buckeye Partners, L.P. capital
3,674,002

 
3,702,628

Noncontrolling interests
262,548

 
237,968

Total partners’ capital
3,936,550

 
3,940,596

Total liabilities and partners’ capital
$
8,251,942

 
$
8,086,088

 
See Notes to Unaudited Condensed Consolidated Financial Statements.


5


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
202,490

 
$
115,250

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

 
 

Depreciation and amortization
109,374

 
86,385

Asset impairment expense

 
26,254

Litigation contingency accrual
13,500

 

Net changes in fair value of derivatives
73,238

 
(6,332
)
Non-cash deferred lease expense

 
1,819

Amortization of unfavorable storage contracts
(5,536
)
 
(5,536
)
Earnings from equity investments
(4,580
)
 
(3,436
)
Distributions from equity investments
4,258

 
125

Other non-cash items
22,761

 
12,037

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

 
 

Accounts receivable
43,848

 
(65,718
)
Construction and pipeline relocation receivables
7,947

 
962

Inventories
(38,922
)
 
(131,774
)
Prepaid and other current assets
(43,226
)
 
19,244

Accounts payable
(69,211
)
 
(26,708
)
Accrued and other current liabilities
(21,898
)
 
12,264

Other non-current assets
2,244

 
(5,739
)
Other non-current liabilities
(4,685
)
 
(6,977
)
Net cash provided by operating activities
291,602

 
22,120

Cash flows from investing activities:
 

 
 

Capital expenditures
(298,414
)
 
(201,515
)
Acquisitions, net of working capital settlement
(2,921
)
 

Net proceeds from insurance settlement

 
549

Proceeds from disposal of property, plant and equipment
13

 
691

Net cash used in investing activities
(301,322
)
 
(200,275
)
Cash flows from financing activities:
 

 
 

Net proceeds from issuance of LP Units
62,414

 
74,517

Net proceeds from exercise of Unit options
173

 
615

Payment of tax withholding on issuance of LTIP awards
(6,539
)
 
(4,791
)
Debt issuance costs
(365
)
 

Borrowings under BPL Credit Facility
832,000

 
847,000

Repayments under BPL Credit Facility
(647,000
)
 
(631,000
)
Net borrowings under BMSC Credit Facility
43,300

 
174,000

Acquisition of additional interest in WesPac Memphis
(10,044
)
 
(9,510
)
Contributions from noncontrolling interests
30,000

 

Distributions paid to noncontrolling interests
(3,218
)
 
(3,549
)
Distributions paid to unitholders
(290,632
)
 
(252,171
)
Net cash provided by financing activities
10,089

 
195,111

Net increase in cash and cash equivalents
369

 
16,956

Cash and cash equivalents — Beginning of period
8,208

 
4,950

Cash and cash equivalents — End of period
$
8,577

 
$
21,906

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

6


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 (loss)
203,191

 

 
(701
)
 
202,490

Acquisition of additional interest in WesPac Memphis
(8,276
)
 

 
(1,768
)
 
(10,044
)
Adjustment to value of noncontrolling equity interest in acquisition

 

 
(1,220
)
 
(1,220
)
Distributions paid to unitholders
(292,467
)
 

 
1,835

 
(290,632
)
Net proceeds from issuance of LP Units
62,414

 

 

 
62,414

Amortization of unit-based compensation awards
11,134

 

 

 
11,134

Net proceeds from exercise of Unit options
173

 

 

 
173

Payment of tax withholding on issuance of LTIP awards
(6,539
)
 

 

 
(6,539
)
Distributions paid to noncontrolling interests

 

 
(3,218
)
 
(3,218
)
Contributions from noncontrolling interests

 

 
30,000

 
30,000

Other comprehensive income

 
2,739

 

 
2,739

Noncash accrual for distribution equivalent rights
(1,361
)
 

 

 
(1,361
)
Other
366

 

 
(348
)
 
18

Partners' capital - June 30, 2015
$
3,786,551

 
$
(112,549
)
 
$
262,548

 
$
3,936,550

 
 
 
 
 
 
 
 
Partners’ capital - January 1, 2014
$
3,169,217

 
$
(103,552
)
 
$
15,171

 
$
3,080,836

Net income
113,488

 

 
1,762

 
115,250

Acquisition of additional interest in WesPac Memphis
(7,933
)
 

 
(1,577
)
 
(9,510
)
Distributions paid to unitholders
(253,849
)
 

 
1,678

 
(252,171
)
Net proceeds from issuance of LP Units
74,517

 

 

 
74,517

Amortization of unit-based compensation awards
8,190

 

 

 
8,190

Net proceeds from exercise of Unit options
615

 

 

 
615

Payment of tax withholding on issuance of LTIP awards
(4,791
)
 

 

 
(4,791
)
Distributions paid to noncontrolling interests

 

 
(3,549
)
 
(3,549
)
Other comprehensive loss

 
(14,468
)
 

 
(14,468
)
Noncash accrual for distribution equivalent rights
(666
)
 

 

 
(666
)
Other
20

 

 
(73
)
 
(53
)
Partners' capital - June 30, 2014
$
3,098,808

 
$
(118,020
)
 
$
13,412

 
$
2,994,200

 
See Notes to Unaudited Condensed Consolidated Financial Statements.


7


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 in the first quarter of 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

Revenue from Contracts with Customers. In July 2015, the Financial Accounting Standards Board (“FASB”) deferred the effective date of guidance that was originally issued in May 2014 to clarify principles used to recognize revenue for all entities. The guidance is now effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted for annual and interim periods beginning after December 15, 2016. 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. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

8


 
Debt Issuance Costs. In April 2015, the 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.

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. ACQUISITIONS
 
Business Combinations
 
2015 Transaction
 
In May 2015, we acquired a pipeline in Springfield, Massachusetts from ExxonMobil Oil Corporation ("ExxonMobil") for $5.8 million.  The operations of this asset are reported in the Pipelines & Terminals segment and complement the Springfield terminal also purchased from ExxonMobil for $2.0 million in the first quarter of 2015. We valued these acquisitions as a single portfolio of assets. The acquisition cost has been allocated on a preliminary basis to assets acquired 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 acquired assets with our existing operations and the economic value attributable to optimizing, modernizing and commercializing the asset from this acquisition. Fair values have been developed using recognized business valuation techniques.  The estimates of fair value reflected as of June 30, 2015 are subject to change pending final valuation analysis.  The purchase price has been allocated to tangible and intangible assets acquired as follows (in thousands):

Property, plant and equipment
$
5,541

Goodwill
7,114

Asset retirement obligation
(4,200
)
Environmental liabilities
(653
)
  Allocated purchase price
$
7,802


Unaudited Pro forma Financial Results for the Springfield pipeline and terminal acquisition

Our consolidated statements of operations do not include earnings from the pipeline and terminal acquired from ExxonMobil prior to March 31, 2015 and May 5, 2015, the effective acquisition dates of the terminal and pipeline acquired from ExxonMobil, respectively. The preparation of unaudited pro forma financial information for the terminal and pipeline acquired from ExxonMobil is impracticable due to the fact that ExxonMobil historically operated the assets as part of its integrated distribution network and, therefore, meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the three and six months ended June 30, 2015.


9


2014 Transaction
 
In September 2014, we acquired an 80% interest in Buckeye Texas Partners 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 June 30, 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
$
23,087

Property, plant and equipment
527,390

Intangible assets
376,000

Goodwill
167,353

Current liabilities
(54,943
)
Noncontrolling interests
(207,778
)
Allocated purchase price
$
831,109

 
The pro forma impact of this acquisition was not significant to our financial results for the three and six months ended June 30, 2015 or 2014, as significant assets are still under construction.

Acquisition of Remaining Interest in WesPac Pipelines — Memphis LLC
 
In April 2015, our operating subsidiary, Buckeye Pipe Line Holdings, L.P. (“BPH”), purchased from Kealine LLC for $10.0 million the remaining 10% ownership interest in WesPac Pipelines — Memphis LLC (“WesPac Memphis”), which was accounted for as an equity transaction.  As a result of the acquisition, we now own 100% of WesPac Memphis.

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.
 

10


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.  Reconstruction of the dock has been completed and service has commenced. The aggregate cost to reconstruct the dock was approximately $8.0 million. Security for our claim has been provided by the vessel owner’s insurers, in the amount of $19.0 million, reserving all of their defenses.  We have commenced litigation against the vessel and its 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 $1.0 million and $5.0 million, respectively. We have filed claims in the limitation proceedings for the reconstruction of the second dock and response costs totaling approximately $7.0 million. 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. In order to mitigate these business losses, we have made modifications to two other berths at a cost of $1.3 million. Recovery for both the mitigation costs and business losses is being sought jointly from all of the respective responsible parties. Investigation 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 June 30, 2015 we had $2.7 million included in “Other non-current assets” in our unaudited condensed consolidated balance sheet, representing expected reimbursement from third parties for mitigation costs and the loss of use.

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 will be arbitrated in New York, New York.
 
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.
 
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 June 30, 2015, we had a $6.3 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 June 30, 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 have investigated these allegations and 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.


11


 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 concluded on April 1, 2015. 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.

On June 19, 2015, BPLC and the airlines submitted an Offer of Settlement at the FERC (the “Settlement”) that would, if approved, resolve the complaints set for hearing in Dkt. Nos. OR12-28-000, et al. and OR14-41-000, as well as BPLC’s application in Dkt. No. OR13-3-000. Under the terms of the Settlement, BPLC has agreed to reduce its jet fuel rates prospectively, to make settlement payments to the airlines, to install facilities to increase the flexibility and capacity of its system in shipping jet fuel to John F. Kennedy International Airport, and to resolve its application in Dkt. No. OR13-3-000 as described further below. The timing and outcome of FERC’s review of the Settlement cannot be predicted at this time. As a result of submission of the Settlement, we recorded an additional accrual and corresponding reduction in revenue in the amount of $13.5 million in the quarter ended June 30, 2015 in our Pipelines & Terminals segment, which, together with the previously recorded $40.0 million reduction in revenue, represents anticipated settlement payments and other expenses associated with the Settlement.
 
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. As noted above, a proposed settlement to resolve this complaint is pending before the FERC.
 

12


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 would proceed separately from the Dkt. No. OR12-28-000 proceeding and that the existing settlement procedures would 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. 

As noted above, BPLC and the airlines have submitted an Offer of Settlement to the FERC that would, if approved, resolve the Airlines’ objections to the Application. Under the terms of the Settlement, and in connection with the resolution of challenges to the jet fuel rates by the airlines in the complaint dockets discussed separately above, Buckeye would agree, inter alia, to withdraw the portions of the Application addressing transportation of jet fuel within the New York City market, including transportation of jet fuel to the three airports, while remaining free to pursue market-based rates for transportation of other refined petroleum products to other destinations within the New York City market. The timing and outcome of the FERC’s review of the Settlement cannot be predicted at this time.

Environmental Contingencies
 
We recorded operating expenses, net of insurance recoveries, of $1.3 million and $1.6 million during the three months ended June 30, 2015 and 2014, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  For the six months ended June 30, 2015 and 2014, we recorded operating expenses, net of recoveries, of $2.7 million and $2.2 million, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  As of June 30, 2015 and December 31, 2014, we recorded environmental remediation liabilities of $50.2 million and $52.3 million, respectively.  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 June 30, 2015 and December 31, 2014, we had $14.4 million and $13.6 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third party claims.
 
4. INVENTORIES
 
Our inventory amounts were as follows at the dates indicated (in thousands):
 
June 30,
2015
 
December 31,
2014
Liquid petroleum products (1)
$
268,093

 
$
226,898

Materials and supplies
16,623

 
16,577

Total inventories
$
284,716

 
$
243,475

                                                      
(1)
Ending inventory was 141.6 million and 140.3 million gallons of liquid petroleum products as of June 30, 2015 and December 31, 2014, respectively.
 

13


At June 30, 2015 and December 31, 2014, approximately 92% and 90% 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.

5. PREPAID AND OTHER CURRENT ASSETS
 
Prepaid and other current assets consist of the following at the dates indicated (in thousands):
 
June 30,
2015
 
December 31,
2014
Prepaid insurance
$
12,792

 
$
9,918

Margin deposits
29,727

 

Unbilled revenue
3,385

 
3,556

Prepaid taxes
4,692

 
2,492

Vendor prepayments
150

 
136

Other
14,879

 
8,953

Total prepaid and other current assets
$
65,625

 
$
25,055


6. EQUITY INVESTMENTS
 
The following table presents earnings from equity investments for the periods indicated (in thousands): 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
West Shore Pipe Line Company
$
2,398

 
$
1,523

 
$
4,176

 
$
2,183

Muskegon Pipeline LLC
(671
)
 
322

 
(584
)
 
571

Transport4, LLC
305

 
186

 
273

 
253

South Portland Terminal LLC
414

 
139

 
715

 
429

Total earnings from equity investments
$
2,446

 
$
2,170

 
$
4,580

 
$
3,436

 
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
22,874

 
$
21,771

 
$
44,346

 
$
41,465

Costs and expenses
(16,876
)
 
(13,223
)
 
(26,614
)
 
(24,645
)
Non-operating expenses
(3,361
)
 
(2,859
)
 
(7,657
)
 
(5,580
)
Net income
$
2,637

 
$
5,689

 
$
10,075

 
$
11,240

 

14


7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
We are exposed to financial market risks, including changes in commodity prices, in the course of our normal business operations.  We use derivative instruments such as forwards, futures and other contracts to manage the risk of market price volatility associated with physical commodity inventory and expected future transactions. The majority of our futures contracts are used to hedge refined petroleum product inventories and are designated as fair value hedges with changes in fair value of both the futures contracts and physical inventory reflected in earnings. Other futures contracts are used to hedge certain expected future transactions and are designated as cash flow hedges with the effective portion of the hedge reported in other comprehensive income ("OCI") and reclassified into earnings when the expected future transaction affects earnings. In both cases, any gains or losses incurred on the derivative instrument that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings. Physical forward contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market.
 
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 which we designate as fair value hedges. In the second quarter of 2015, our Pipelines & Terminals segment designated exchange-traded refined petroleum product futures contracts as cash flow hedges. These hedges were executed to manage the risk of market price volatility on the narrowing gasoline-to-butane pricing spreads associated with our butane blending activities managed by a third party.
The following table summarizes our commodity derivative instruments outstanding at June 30, 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
21,517

 
728

 
Mark-to-market
Physical index derivative contracts
47,319

 

 
Mark-to-market
Futures contracts for refined petroleum products
33,171

 
1,428

 
Mark-to-market
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 

 
 

 
 
Futures contracts for refined petroleum products
130,109

 

 
Fair Value Hedge
Futures contracts for refined petroleum products
33,600

 

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



15


The following table sets forth the fair value of each classification of derivative instruments and the locations of the derivative instruments on our unaudited condensed consolidated balance sheets at the dates indicated (in thousands):
 
June 30, 2015
 
Derivatives
NOT Designated
as Hedging
Instruments
 
Derivatives
Designated
as Hedging
Instruments
 
Derivative
Carrying
Value
 
Netting
Balance
Sheet
Adjustment (1)
 
Net Total
Physical fixed price derivative contracts
$
12,574

 
$

 
$
12,574

 
$
(352
)
 
$
12,222

Physical index derivative contracts
237

 

 
237

 
(51
)
 
186

Futures contracts for refined products
24,565

 
6,489

 
31,054

 
(31,054
)
 

Total current derivative assets
37,376

 
6,489

 
43,865

 
(31,457
)
 
12,408

 
 
 
 
 
 
 
 
 
 
Physical fixed price derivative contracts
57

 

 
57

 
(1
)
 
56

Futures contracts for refined products
112

 

 
112

 
(10
)
 
102

Total non-current derivative assets
169

 

 
169

 
(11
)
 
158

 
 
 
 
 
 
 
 
 
 
Physical fixed price derivative contracts
(948
)
 

 
(948
)
 
352

 
(596
)
Physical index derivative contracts
(57
)
 

 
(57
)
 
51

 
(6
)
Futures contracts for refined products
(48,384
)
 
(4,020
)
 
(52,404
)
 
31,054

 
(21,350
)
Total current derivative liabilities
(49,389
)
 
(4,020
)
 
(53,409
)
 
31,457

 
(21,952
)
 
 
 
 
 
 
 
 
 
 
Physical fixed price derivative contracts
(24
)
 

 
(24
)
 
1

 
(23
)
Futures contracts for refined products
(10
)
 

 
(10
)
 
10

 

Total non-current derivative liabilities
(34
)
 

 
(34
)
 
11

 
(23
)
Net derivative assets (liabilities)
$
(11,878
)
 
$
2,469

 
$
(9,409
)
 
$

 
$
(9,409
)
                                                      
(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 NOT Designated
as Hedging
Instruments
 
Derivatives Designated
as Hedging
Instruments
 
Derivative
Carrying
Value
 
Netting
Balance
Sheet
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.

16


 
Our hedged inventory portfolio extends to the first quarter of 2016.  The unrealized gain at June 30, 2015 for inventory hedges represented by futures contracts of $6.5 million will be fully realized by the first quarter of 2016.  At June 30, 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 December 2016.  In addition, at June 30, 2015, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts. The unrealized loss at June 30, 2015 for refined petroleum products designated as cash flow hedges of $4.0 million will be realized by the first quarter of 2016, at the end of the butane blending season.
 
The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated (in thousands):
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Location
 
2015
 
2014
 
2015
 
2014
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

 
 

 
 

Physical fixed price derivative contracts
Product sales
 
$
(3,126
)
 
$
(7,280
)
 
$
3,929

 
$
(10,652
)
Physical index derivative contracts
Product sales
 
(5
)
 
(79
)
 
(10
)
 
(73
)
Physical fixed price derivative contracts
Cost of product sales
 
3,952

 
7,210

 
6,591

 
8,621

Physical index derivative contracts
Cost of product sales
 
220

 
(521
)
 
64

 
(713
)
Futures contracts for refined products
Cost of product sales
 
4,878

 
(6,301
)
 
13,583

 
187

 
 
 
 
 
 
 
 
 
 
Derivatives designated as fair value hedging instruments:
 
 
 

 
 

 
 

 
 

Futures contracts for refined products
Cost of product sales
 
$
(14,708
)
 
$
(13,732
)
 
$
(32,555
)
 
$
(12,453
)
Physical inventory - hedged items
Cost of product sales
 
11,152

 
7,954

 
20,576

 
1,729

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

 
 

 
 

 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
(1,216
)
 
$
(1,122
)
 
$
(150
)
 
$
3,610

Time value excluded from hedge assessment
Cost of product sales
 
(2,340
)
 
(4,656
)
 
(11,829
)
 
(14,334
)
Net loss in income
 
 
$
(3,556
)
 
$
(5,778
)
 
$
(11,979
)
 
$
(10,724
)


17


The change in value recognized in OCI and the losses reclassified from accumulated other comprehensive income (“AOCI”) to income attributable to our derivative instruments designated as cash flow hedges were as follows for the periods indicated (in thousands):
 
Loss Recognized in OCI on Derivatives for the
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Derivatives designated as cash flow hedging instruments:
 

 
 

 
 

 
 

Interest rate contracts
$

 
$
(9,208
)
 
$

 
$
(18,812
)
Commodity derivatives
(3,857
)
 

 
(3,857
)
 

Total
$
(3,857
)
 
$
(9,208
)
 
$
(3,857
)
 
$
(18,812
)

 
 
 
Loss Reclassified from AOCI to Income (Effective Portion) for the
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Location
 
2015
 
2014
 
2015
 
2014
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

 
 

 
 

Interest rate contracts
Interest and debt expense
 
$
(3,039
)
 
$
(1,778
)
 
$
(6,076
)
 
$
(3,557
)
Total
 
 
$
(3,039
)
 
$
(1,778
)
 
$
(6,076
)
 
$
(3,557
)

The ineffective portion of the change in fair value of cash flow hedges was not material for the three and six months ended June 30, 2015. Over the next twelve months, we expect to reclassify $3.9 million of net losses attributable to commodity derivative instruments from AOCI to products sales. Likewise, we expect to reclassify $12.2 million of net losses attributable to interest rate derivative instruments from AOCI to earnings as an increase to interest and debt expense. For additional information on the net losses attributable to interest rate derivative instruments, see our Annual Report on Form 10-K for the year ended December 31, 2014.

8. FAIR VALUE MEASUREMENTS
 
We categorize our financial assets and liabilities using the three-tier hierarchy as follows:
 
Recurring
 
The following table sets forth financial assets and liabilities measured at fair value on a recurring basis, as of the measurement dates indicated, and the basis for that measurement, by level within the fair value hierarchy (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Financial assets:
 

 
 

 
 

 
 

Physical fixed price derivative contracts
$

 
$
12,278

 
$

 
$
44,912

Physical index derivative contracts

 
186

 

 
53

Futures contracts for refined products

 
102

 
27,143

 

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Physical fixed price derivative contracts

 
(619
)
 

 
(1,495
)
Physical index derivative contracts

 
(6
)
 

 
(312
)
Futures contracts for refined products
(21,350
)
 

 
(2,615
)
 

Fair value
$
(21,350
)
 
$
11,941

 
$
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.
 

18


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 $44.9 million as of December 31, 2014 are net of CVAs of ($0.1) million.  As of June 30, 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):
 
June 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Fixed-rate debt
$
3,389,555

 
$
3,425,992

 
$
3,388,986

 
$
3,465,973

Variable-rate debt
394,300

 
394,300

 
166,000

 
166,000

Total debt
$
3,783,855

 
$
3,820,292

 
$
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 six months ended June 30, 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 and six months ended June 30, 2015, there were no fair value adjustments related to such assets or liabilities reflected in our unaudited condensed consolidated financial statements. During the three and six months ended June 30, 2014, we recorded a non-cash impairment charge of $26.3 million related to our Natural Gas Storage disposal group. We estimated fair value based on a market approach supported by a binding purchase and sale agreement for the disposal group. The sale of our Natural Gas Storage disposal group was completed in December 2014. For additional information, see our Annual Report on Form 10-K for the year ended December 31, 2014.

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 RIGP and Retiree Medical Plan are closed and have limited participation. The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as follows for the three months ended June 30, 2015 and 2014 (in thousands):
 
RIGP
 
Retiree Medical Plan
 
Three Months Ended 
 June 30,
 
Three Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
3

 
$
55

 
$
91

 
$
107

Interest cost
138

 
135

 
334

 
352

Expected return on plan assets
(83
)
 
(98
)
 

 

Amortization of prior service credit

 

 

 
(406
)
Amortization of unrecognized losses
210

 
308

 
49

 
298

Actuarial loss due to settlements

 
194

 

 

Net periodic benefit cost
$
268

 
$
594

 
$
474

 
$
351


19


 
The components of the net periodic benefit cost for the RIGP and the Retiree Medical Plan were as follows for the six months ended June 30, 2015 and 2014 (in thousands):
 
 
RIGP
 
Retiree Medical Plan
 
Six Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
6

 
$
109

 
$
182

 
$
215

Interest cost
276

 
269

 
667

 
704

Expected return on plan assets
(167
)
 
(196
)
 

 

Amortization of prior service credit

 

 

 
(812
)
Amortization of unrecognized losses
421

 
616

 
99

 
596

Actuarial loss due to settlements

 
387

 

 

Net periodic benefit cost
$
536

 
$
1,185

 
$
948

 
$
703

 
During the three months ended June 30, 2015 and 2014, we contributed $0.5 million for both periods, respectively, in aggregate to the RIGP and Retiree Medical Plans.  For the six months ended June 30, 2015 and 2014, we contributed $0.7 million and $1.4 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.
 
10. UNIT-BASED COMPENSATION PLANS
 
We award unit-based compensation to employees and directors primarily under the Buckeye Partners, L.P. 2013 Long-Term Incentive Plan (the “LTIP”).  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 $5.9 million and $4.8 million for the three months ended June 30, 2015 and 2014, respectively.  For the six months ended June 30, 2015 and 2014, we recognized compensation expense of $11.0 million and $7.9 million, respectively.

LTIP
 
As of June 30, 2015, there were 2,588,831 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 six months ended June 30, 2015 and the year ended 2014, respectively.  These grants are included as granted in the LTIP activity table below.
 
Awards under the LTIP
 
During the six months ended June 30, 2015, the Compensation Committee of the Board granted 199,832 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 208,150 performance units to employees.


20


The following table sets forth the LTIP activity for the periods indicated (in thousands, except per unit amounts):
 
Number of
LP Units
 
Weighted
Average
Grant Date
Fair Value
per LP Unit
Unvested at January 1, 2015
906

 
$
63.56

Granted
430

 
73.47

Vested
(255
)
 
63.59

Forfeited
(12
)
 
65.71

Unvested at June 30, 2015
1,069

 
$
67.50

 
At June 30, 2015, $41.1 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of 2.1 years.
 
Unit Option Plan
 
The following is a summary of the changes in the options outstanding (all of which are vested) under the Option Plan for the periods indicated (in thousands, except per unit amounts): 
 
Number of
LP Units
 
Weighted
Average
Strike Price
per LP Unit
 
Weighted
Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic
Value (1)
Outstanding at January 1, 2015
26

 
$
48.18

 
1.6
 
$
703

Exercised
(4
)
 
48.12

 
 
 
 

Forfeited, cancelled or expired
(2
)
 
45.88

 
 
 
 
Outstanding at June 30, 2015
20

 
48.44

 
1.3
 
$
507

 
 
 
 
 
 
 
 
Exercisable at June 30, 2015
20

 
$
48.44

 
1.3
 
$
507

                                                      
(1) Aggregate intrinsic value reflects fully vested LP Unit options at the date indicated. Intrinsic value is determined by calculating the difference between our closing LP Unit price on the last trading day in June 2015 and the exercise price, multiplied by the number of exercisable, in-the-money options.
 
The total intrinsic value of options exercised during the six months ended June 30, 2015 and 2014 was $0.1 million and $0.4 million, respectively.
 
11. PARTNERS' CAPITAL AND DISTRIBUTIONS
 
During the six months ended June 30, 2015, we sold approximately 0.8 million LP Units in aggregate under the equity distribution agreements entered into in May 2013 with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC (each an “Equity Distribution Agreement” and collectively the “Equity Distribution Agreements”). We received $62.4 million in net proceeds after deducting commissions and other related expenses and paid $0.6 million of compensation in aggregate to the agents under the Equity Distribution Agreements.
 

21


Summary of Changes in Outstanding Units
 
The following is a summary of changes in LP Units outstanding for the periods indicated (in thousands):
 
Limited
Partners
Outstanding at January 1, 2015
127,043

LP Units issued pursuant to the Option Plan (1)
4

LP Units issued pursuant to the LTIP (1)
192

Issuance of LP Units through Equity Distribution Agreements
792

Outstanding at June 30, 2015
128,031

                                                      
(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 $292.5 million and $253.8 million during the six months ended June 30, 2015 and 2014, respectively.
 
On July 31, 2015, we announced a quarterly distribution of $1.1625 per LP Unit that will be paid on August 17, 2015 to unitholders of record on August 10, 2015.  Based on the LP Units outstanding as of June 30, 2015, cash distributed to unitholders on August 17, 2015 will total $149.5 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income attributable to Buckeye Partners, L.P.
$
91,580

 
$
23,020

 
$
203,191

 
$
113,488

 
 
 
 
 
 
 
 
Basic:
 

 
 

 
 

 
 

Weighted average units outstanding - basic
127,650

 
116,078

 
127,414

 
115,701

 
 
 
 
 
 
 
 
Earnings per unit - basic
$
0.72

 
$
0.20

 
$
1.59

 
$
0.98

 
 
 
 
 
 
 
 
Diluted:
 

 
 

 
 

 
 

Weighted average units outstanding - basic
127,650

 
116,078

 
127,414

 
115,701

Dilutive effect of LP Unit options and LTIP awards granted
548

 
574

 
490

 
525

Weighted average units outstanding - diluted
128,198

 
116,652

 
127,904

 
116,226

 
 
 
 
 
 
 
 
Earnings per unit - diluted
$
0.71

 
$
0.20

 
$
1.59

 
$
0.98



22


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.
  
The following table summarizes revenue by each segment for the periods indicated (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 

 
 

 
 

 
 

Pipelines & Terminals
$
206,980

 
$
218,624

 
$
432,236

 
$
437,163

Global Marine Terminals
124,590

 
90,791

 
245,574

 
179,560

Merchant Services
460,156

 
1,495,441

 
1,200,316

 
3,173,743

Development & Logistics
18,208

 
18,802

 
37,057

 
35,634

Intersegment
(13,151
)
 
(14,707
)
 
(30,300
)
 
(25,320
)
Total revenue
$
796,783

 
$
1,808,951

 
$
1,884,883

 
$
3,800,780

 
For the three months ended June 30, 2015, no customers contributed 10% or more of consolidated revenue. For the three months ended June 30, 2014, one customer contributed 11% of consolidated revenue. For the six months ended June 30, 2015 and 2014, no customers contributed 10% or more of consolidated revenue.
 

23


The following table summarizes revenue for our continuing operations, by major geographic area, for the periods indicated (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 

 
 

 
 

 
 

United States
$
709,115

 
$
1,726,435

 
$
1,714,177

 
$
3,633,787

International
87,668

 
82,516

 
170,706

 
166,993

Total revenue
$
796,783

 
$
1,808,951

 
$
1,884,883

 
$
3,800,780

 
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.
 

24


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Adjusted EBITDA from continuing operations:
 

 
 

 
 

 
 

Pipelines & Terminals
$
120,241

 
$
115,679

 
$
245,792

 
$
242,399

Global Marine Terminals
78,705

 
55,559

 
153,123

 
109,262

Merchant Services
2,763

 
(26,169
)
 
11,205

 
(23,036
)
Development & Logistics
4,772

 
5,719

 
9,271

 
10,787

Adjusted EBITDA from continuing operations
$
206,481

 
$
150,788

 
$
419,391

 
$
339,412

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

 
 

 
 

 
 

Income from continuing operations
$
91,326

 
$
61,939

 
$
203,347

 
$
163,478

Less: Net loss (income) attributable to noncontrolling interests
254

 
(733
)
 
701

 
(1,762
)
Income from continuing operations attributable to Buckeye Partners, L.P.
91,580

 
61,206

 
204,048

 
161,716

Add: Interest and debt expense
41,975

 
42,012

 
83,684

 
83,225

  Income tax expense
241

 
153

 
480

 
76

  Depreciation and amortization (1)
55,598

 
43,394

 
109,374

 
86,385

  Non-cash unit-based compensation expense
5,895

 
4,799

 
10,981

 
7,921

  Acquisition and transition expense (2)
460

 
1,992

 
2,860

 
5,625

  Litigation contingency accrual (3)
13,500

 

 
13,500

 

Less: Amortization of unfavorable storage contracts (4)
(2,768
)
 
(2,768
)
 
(5,536
)
 
(5,536
)
Adjusted EBITDA from continuing operations
$
206,481

 
$
150,788

 
$
419,391

 
$
339,412

                                                      
(1)         Includes 100% of the depreciation and amortization expense of $10.8 million and $22.5 million for Buckeye Texas for the three and six months ended June 30, 2015.
(2)        Acquisition and transition expense consists of transaction costs, costs for transitional employees, and other employee and third party costs related to the integration of the acquired assets that are non-recurring in nature.
(3)        Represents an adjustment to the FERC litigation accrual.
(4)        Represents amortization of negative fair values allocated to certain unfavorable storage contracts acquired in connection with the BORCO acquisition.

14. SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):
 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash paid for interest (net of capitalized interest)
$
77,156

 
$
78,471

Cash paid for income taxes
780

 
399

Capitalized interest
11,975

 
3,774

 
 
 
 
Non-cash investing activities:
 

 
 

Increase (decrease) in accounts payable and accrued and other current liabilities related to capital expenditures
$
6,448

 
$
(24,544
)
  

25


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.

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.
 

26


Recent Developments

 At-the-Market Offering Program
 
During the six months ended June 30, 2015, we sold approximately 0.8 million LP Units in aggregate under the equity distribution agreements entered into in May 2013 with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC (each an “Equity Distribution Agreement” and collectively the “Equity Distribution Agreements”). We received $62.4 million in net proceeds after deducting commissions and other related expenses and paid $0.6 million of compensation in aggregate to the agents under the Equity Distribution Agreements.

Overview of Operating Results
 
Net income attributable to our unitholders was $203.2 million for the six months ended June 30, 2015, which is an increase of $89.7 million, or 79.0% from $113.5 million for the corresponding period in 2014. Operating income was $282.8 million for the six months ended June 30, 2015, which is an increase of $39.4 million, or 16.2% from $243.4 million for the corresponding period in 2014

The increase in net income attributable to our unitholders was primarily the result of increased contribution from our Global Marine Terminals and Merchant Services segments. Excluding the impact of the Federal Energy Regulatory Commission (“FERC”) litigation accrual, our Pipelines & Terminals segment also contributed to the overall increase in net income with increases in storage, terminalling and throughput revenues which reflect contributions from capital investments in internal growth and diversification initiatives. In our Global Marine Terminals segment, strong customer demand for our storage assets and the contribution from our interest in Buckeye Texas were the primary drivers for the increase over prior year. Strong customer demand was driven by more favorable market conditions and internal growth capital investments that further diversified our marine asset portfolio. Our Merchant Services segment benefited from the elimination of certain commercial strategies from 2014 and more effective supply management.

These increases in net income were partially offset by the lower commodity pricing environment that 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. Furthermore, during the current quarter, we submitted to the FERC a settlement that if approved by FERC, would resolve all complaints filed with the FERC by Delta Air Lines, JetBlue Airways, United/Continental Air Lines, and US Airways/American Airlines challenging Buckeye Pipe Line Company, L.P.’s rates for transportation of jet fuel from New Jersey to the three New York City area airports. As a result, we recorded a litigation accrual adjustment of $13.5 million as a reduction to revenue. The increase in net income as discussed above was also partially offset by an increase in depreciation and amortization expense due to the Buckeye Texas assets acquired in September 2014.
 

27


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
796,783

 
$
1,808,951

 
$
1,884,883

 
$
3,800,780

Costs and expenses
665,764

 
1,706,785

 
1,602,062

 
3,557,341

Operating income
131,019

 
102,166

 
282,821

 
243,439

Other expense, net
(39,452
)
 
(40,074
)
 
(78,994
)
 
(79,885
)
Income from continuing operations before taxes
91,567

 
62,092

 
203,827

 
163,554

Income tax expense
(241
)
 
(153
)
 
(480
)
 
(76
)
Income from continuing operations
91,326

 
61,939

 
203,347

 
163,478

Loss from discontinued operations

 
(38,186
)
 
(857
)
 
(48,228
)
Net income
91,326

 
23,753

 
202,490

 
115,250

Less: Net loss (income) attributable to noncontrolling interests
254

 
(733
)
 
701

 
(1,762
)
Net income attributable to Buckeye Partners, L.P.
$
91,580

 
$
23,020

 
$
203,191

 
$
113,488

 
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.


28


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Adjusted EBITDA from continuing operations:
 

 
 

 
 

 
 

Pipelines & Terminals
$
120,241

 
$
115,679

 
$
245,792

 
$
242,399

Global Marine Terminals
78,705

 
55,559

 
153,123

 
109,262

Merchant Services
2,763

 
(26,169
)
 
11,205

 
(23,036
)
Development & Logistics
4,772

 
5,719

 
9,271

 
10,787

Adjusted EBITDA from continuing operations
$
206,481

 
$
150,788

 
$
419,391

 
$
339,412

Reconciliation of Income from continuing operations to Adjusted EBITDA and Distributable cash flow:
 

 
 

 
 

 
 

Income from continuing operations
$
91,326

 
$
61,939

 
$
203,347

 
$
163,478

Less: Net loss (income) attributable to noncontrolling interests
254

 
(733
)
 
701

 
(1,762
)
Income from continuing operations attributable to Buckeye Partners, L.P.
91,580

 
61,206

 
204,048

 
161,716

Add: Interest and debt expense
41,975

 
42,012

 
83,684

 
83,225

  Income tax expense
241

 
153

 
480

 
76

   Depreciation and amortization (1)
55,598

 
43,394

 
109,374

 
86,385

   Non-cash unit-based compensation expense
5,895

 
4,799

 
10,981

 
7,921

   Acquisition and transition expense (2)
460

 
1,992

 
2,860

 
5,625

   Litigation contingency accrual (3)
13,500

 

 
13,500

 

Less: Amortization of unfavorable storage contracts (4)
(2,768
)
 
(2,768
)
 
(5,536
)
 
(5,536
)
Adjusted EBITDA from continuing operations
$
206,481

 
$
150,788

 
$
419,391

 
$
339,412

Less: Interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other
(37,760
)
 
(39,073
)
 
(75,253
)
 
(77,346
)
Income tax expense, excluding non-cash taxes
(241
)
 
(153
)
 
(480
)
 
(76
)
Maintenance capital expenditures (5)
(23,584
)
 
(17,139
)
 
(43,014
)
 
(35,772
)
Distributable cash flow from continuing operations
$
144,896

 
$
94,423

 
$
300,644

 
$
226,218

_________________________
(1)   Includes 100% of the depreciation and amortization expense of $10.8 million and $22.5 million for Buckeye Texas for the three and six months ended June 30, 2015.
(2)   Acquisition and transition expense consists of transaction costs, costs for transitional employees, and other employee and third party costs related to the integration of the acquired assets that are non-recurring in nature.
(3)   Represents an adjustment to the FERC litigation accrual.
(4)   Represents amortization of negative fair values allocated to certain unfavorable storage contracts acquired in connection with the BORCO acquisition.
(5)   Represents expenditures that maintain the operating, safety and/or earnings capacity of our existing assets.





29


The following table presents product volumes and average tariff rates for the Pipelines & Terminals segment in barrels per day (“bpd”), percent of capacity utilization for the Global Marine Terminals segment and total volumes sold in gallons for the Merchant Services segment for the periods indicated:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
 
2015
 
2014
Pipelines & Terminals (average bpd in thousands):
 
 

 
 

 
 

 
 

Pipelines:
 
 

 
 

 
 

 
 

Gasoline
 
764.1

 
721.4

 
729.7

 
679.9

Jet fuel
 
374.0

 
340.4

 
355.5

 
323.1

Middle distillates (1)
 
308.9

 
326.2

 
361.0

 
374.7

Other products (2)
 
40.6

 
45.0

 
34.1

 
38.1

Total pipelines throughput
 
1,487.6

 
1,433.0

 
1,480.3

 
1,415.8

Terminals:
 
 

 
 

 
 

 
 

Products throughput
 
1,255.7

 
1,144.7

 
1,226.0

 
1,126.2

 
 
 
 
 
 
 
 
 
Pipeline Average Tariff (cents/bbl)
 
82.4

 
86.4

 
83.1

 
84.8

 
 
 
 
 
 
 
 
 
Global Marine Terminals (percent of capacity):
 
 
 
 
 
 
 
 
Average capacity utilization rate (3)
 
96
%
 
82
%
 
95
%
 
84
%
 
 
 
 
 
 
 
 
 
Merchant Services (in millions of gallons):
 
 

 
 

 
 

 
 

Sales volumes
 
247.7

 
538.5

 
672.4

 
1,107.5

___________________________
(1)   Includes diesel fuel and heating oil.
(2)   Includes LPG, intermediate petroleum products and crude oil.
(3)   Represents the ratio of contracted capacity to capacity available to be contracted. Based on total capacity (i.e., including out of service capacity), average capacity utilization rates are approximately 84% and 72% for the three months ended
June 30, 2015 and 2014, respectively, and approximately 82% and 72% for the six months ended June 30, 2015 and 2014, respectively.

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014
 
Consolidated
 
Adjusted EBITDA was $206.5 million for the three months ended June 30, 2015, which is an increase of $55.7 million, or 36.9%, from $150.8 million for the corresponding period in 2014.  The increase in Adjusted EBITDA was primarily related to increased terminalling activities in our Pipelines & Terminals segment, increased storage revenue due to higher storage utilization and rates at our terminal facilities in our Global Marine Terminals segment, which includes positive contributions from the Buckeye Texas assets acquired in September 2014, and the elimination of certain commercial strategies from 2014 and more effective supply management in our Merchant Services segment. These increases in Adjusted EBITDA were partially offset by a slight decrease in earnings in our Development & Logistics segment.
 
Revenue was $796.8 million for the three months ended June 30, 2015, which is a decrease of $1,012.2 million, or 56.0%, from $1,809.0 million for the corresponding period in 2014.  The decrease in revenue was primarily related to the decline of refined petroleum product prices and a decrease in sales volumes in our Merchant Services segment, as well as the adjustment to the FERC litigation accrual recorded as a reduction to revenue in our Pipelines & Terminals segment. These decreases were partially offset by increased terminalling revenue in our Pipelines & Terminals segment due to higher volumes and new customer contracts and an increase in our Global Marine Terminals segment primarily due to higher storage utilization and rates at our terminal facilities.
 

30


Operating income was $131.0 million for the three months ended June 30, 2015, which is an increase of $28.8 million, or 28.2%, from $102.2 million for the corresponding period in 2014.  The increase in operating income was primarily related to increased terminalling activities in our Pipelines & Terminals segment, increased storage revenue due to higher storage utilization and rates at our terminal facilities in our Global Marine Terminals segment, which includes positive contributions from the Buckeye Texas assets acquired in September 2014, and the elimination of certain commercial strategies from 2014 and more effective supply management in our Merchant Services segment. These increases were partially offset by the adjustment to the FERC litigation accrual, recorded as a reduction to revenue, in our Pipelines & Terminals segment and an increase in depreciation and amortization expense primarily due to the Buckeye Texas assets acquired in September 2014.

Distributable cash flow was $144.9 million for the three months ended June 30, 2015, which is an increase of $50.5 million, or 53.5%, from $94.4 million for the corresponding period in 2014.  The increase in distributable cash flow was primarily related to an increase of $55.7 million in Adjusted EBITDA as described above, partially offset by a $6.4 million increase in maintenance capital expenditures primarily resulting from increased tank integrity projects.
 
Adjusted EBITDA by Segment
 
Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $120.2 million for the three months ended June 30, 2015, which is an increase of $4.5 million, or 3.9%, from $115.7 million for the corresponding period in 2014.  The increase in Adjusted EBITDA is primarily due to a $2.4 million decrease in operating expenses, primarily the result of a decrease in outside services for asset-maintenance activities, a $1.8 million increase in revenues and a $0.3 million increase in earnings from equity investments. The increase in revenues is comprised of a $5.0 million increase in revenue from higher terminalling throughput volumes and higher storage revenue from new contracts, a $4.4 million increase in revenue from capital investments in internal growth and diversification initiatives, including crude oil handling services and a $4.3 million increase in revenue resulting from higher pipeline volumes. These increases were partially offset by a $6.5 million decrease in revenue related to settlements and butane blending activities, primarily due to lower product settlement volumes and a decline in commodity prices, as well as a $5.4 million decrease in revenue resulting from lower average pipeline tariff rates primarily due to short-haul shipments.
 
Pipeline volumes increased by 3.8% due to stronger demand for jet fuel and gasoline resulting from growth capital projects placed into service at the end of the second quarter of 2014. Terminalling volumes increased by 9.7% primarily due to higher demand for jet fuel and gasoline, new customer contracts and service offerings at select locations, including contributions from growth capital spending.
 
Global Marine Terminals.  Adjusted EBITDA from the Global Marine Terminals segment was $78.7 million for the three months ended June 30, 2015, which is an increase of $23.1 million, or 41.5%, from $55.6 million for the corresponding period in 2014.  The increase in Adjusted EBITDA is primarily due to a $15.2 million increase in storage and terminalling revenue as a result of greater customer utilization and higher rates, a $9.4 million contribution from our joint venture interest in Buckeye Texas and a $0.4 million increase in revenue from ancillary services due to increased customer utilization of our facilities. Ancillary services include the berthing of ships at our jetties, heating services and product settlement gains/losses. The average capacity utilization of our marine storage assets was 96% for the three months ended June 30, 2015, which is an increase of 14% from 82% in the corresponding period in 2014. The increase in storage revenue was primarily the result of successful commercial efforts, internal growth capital investments and favorable market conditions. Our commercial teams capitalized on the demand for our diversified storage services and benefited from improved market conditions which were the result of the development of structure in the crude oil and refined petroleum products markets. The increase in revenue was offset by a $1.9 million increase in operating expenses related to incremental costs necessary to support the higher utilization of our facilities.
 
Merchant Services.  Adjusted EBITDA from the Merchant Services segment was $2.8 million for the three months ended June 30, 2015, which is an improvement of $29.0 million from a loss of $26.2 million for the corresponding period in 2014.  The positive factors impacting Adjusted EBITDA were primarily related to the elimination of certain commercial strategies from 2014 and more effective supply management. The elimination of certain commercial strategies included liquidating our physical positions in markets less liquid than our core markets.
 
Adjusted EBITDA was positively impacted by a $1,064.0 million decrease in cost of product sales, which included a $819.8 million decrease due to 54.0% lower volumes sold and a $244.2 million decrease in refined petroleum product cost due to a price decrease of $0.99 per gallon (average prices per gallon were $1.83 and $2.82 for the 2015 and 2014 periods, respectively) and a $0.2 million decrease in operating expenses, which primarily related to overhead costs.


31


Adjusted EBITDA was negatively impacted by a $1,035.2 million decrease in revenue, which included an $807.5 million decrease due to 54.0% lower volumes sold and a $227.7 million decrease in refined petroleum product sales due to a price decrease of $0.92 per gallon (average sales prices per gallon were $1.86 and $2.78 for the 2015 and 2014 periods, respectively).
 
Development & Logistics.  Adjusted EBITDA from the Development & Logistics segment was $4.8 million for the three months ended June 30, 2015, which is a decrease of $0.9 million, or 15.8%, from $5.7 million for the corresponding period in 2014.  The decrease in Adjusted EBITDA was primarily due to a $0.5 million decrease in revenue related to the LPG storage caverns and a $0.5 million decrease in revenue related to third-party engineering and operations contracts, partially offset by a $0.1 million decrease in operating expenses.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014
 
Consolidated
 
Adjusted EBITDA was $419.4 million for the six months ended June 30, 2015, which is an increase of $80.0 million, or 23.6%, from $339.4 million for the corresponding period in 2014.  The increase in Adjusted EBITDA was primarily related to positive contributions from terminalling activities in our Pipelines & Terminals segment, increased storage revenue due to higher storage utilization and rates at our terminal facilities in the Global Marine Terminals segment, and elimination of certain commercial strategies from 2014 and more effective supply management in our Merchant Services segment. These increases in Adjusted EBITDA were partially offset by a decrease in earnings in our Development & Logistics segment.

Revenue was $1,884.9 million for the six months ended June 30, 2015, which is a decrease of $1,915.9 million, or 50.4%, from $3,800.8 million for the corresponding period in 2014.  The decrease in revenue was primarily related to the decline of refined petroleum product prices and a decrease in sales volume in our Merchant Services segment, as well as the adjustment to the FERC litigation accrual recorded as a reduction to revenue in our Pipelines & Terminals segment. These decreases were partially offset by the revenue increase in our Global Marine Terminals segment primarily due to higher storage utilization and rates at our terminal facilities.
 
Operating income was $282.8 million for the six months ended June 30, 2015, which is an increase of $39.4 million, or 16.2%, from $243.4 million for the corresponding period in 2014.  The increase in operating income was primarily related to positive contributions from terminalling activities in our Pipelines & Terminals segment, increased storage revenue due to higher storage utilization and rates at our terminal facilities in the Global Marine Terminals segment and elimination of certain commercial strategies from 2014 and more effective supply management in our Merchant Services segment. These increases were partially offset by the adjustment to the FERC litigation accrual recorded as a reduction to revenue in our Pipelines & Terminals segment and an increase in depreciation and amortization expense primarily due to the Buckeye Texas assets in our Global Marine Terminals segment, which were acquired in September 2014.
 
Distributable cash flow was $300.6 million for the six months ended June 30, 2015, which is an increase of $74.4 million, or 32.9%, from $226.2 million as compared to the corresponding period in 2014.  The increase in distributable cash flow was primarily related to an increase of $80.0 million in Adjusted EBITDA as described above, partially offset by a $7.2 million increase in maintenance capital expenditures primarily resulting from increased tank integrity projects.

Adjusted EBITDA by Segment
 
Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $245.8 million for the six months ended June 30, 2015, which is an increase of $3.4 million, or 1.4%, from $242.4 million for the corresponding period in 2014.  The increase in Adjusted EBITDA is primarily due to an $8.5 million increase in revenues, a $1.1 million increase in earnings from equity investments, partially offset by a $6.2 million increase in operating expenses, which include higher costs such as payroll and rent expense to support our growth, as well as FERC litigation fees. The increase in revenues is comprised of a $14.7 million increase in revenue resulting from higher terminalling throughput volumes and higher storage revenue from new contracts, a $9.4 million increase in revenue from capital investments in internal growth and diversification initiatives, including crude oil handling services and a $9.9 million increase in revenue resulting from higher pipeline volumes. These increases were partially offset by a $20.9 million decrease in revenue related to settlements and butane blending activities, primarily due to lower product settlement volumes and a decline in commodity prices, as well as a $4.6 million decrease in revenue resulting from lower average pipeline tariff rates primarily due to short-haul shipments.
 

32


Pipeline volumes increased by 4.6% due to stronger demand for jet fuel and gasoline resulting from growth capital projects placed into service at the end of the second quarter of 2014. Terminalling volumes increased by 8.9% due to higher demand for gasoline, distillates and jet fuel, new customer contracts and service offerings at select locations, including contributions from growth capital spending.
 
Global Marine Terminals.  Adjusted EBITDA from the Global Marine Terminals segment was $153.1 million for the six months ended June 30, 2015, which is an increase of $43.8 million, or 40.1%, from $109.3 million for the corresponding period in 2014.  The increase in Adjusted EBITDA is primarily due to a $27.6 million increase in storage and terminalling revenue as a result of greater customer utilization and higher rates, an $18.4 million contribution from our joint venture interest in Buckeye Texas and a $2.8 million increase in revenue from ancillary services due to increased customer utilization of our facilities. Ancillary services include the berthing of ships at our jetties, heating services and product settlement gains/losses. The average capacity utilization of our marine storage assets was 95% for the six months ended June 30, 2015, which is an increase of 11% from 84% in the corresponding period in 2014. The increase in storage revenue was primarily the result of successful commercial efforts, internal growth capital investments and favorable market conditions. Our commercial teams capitalized on the demand for our diversified storage services and benefited from improved market conditions which were the result of the development of structure in the crude oil and refined petroleum products markets. The increase in revenue was offset by a $5.0 million increase in operating expenses related to outside services for asset-maintenance activities and incremental costs necessary to support the higher utilization of our facilities.
 
Merchant Services.  Adjusted EBITDA from the Merchant Services segment was $11.2 million for the six months ended June 30, 2015, which is an improvement of $34.3 million from a loss of $23.1 million for the corresponding period in 2014.  The positive factors impacting Adjusted EBITDA were primarily related to the elimination of certain commercial strategies from 2014 and more effective supply management. The elimination of certain commercial strategies included liquidating our physical positions in markets less liquid than our core markets.
 
Adjusted EBITDA was positively impacted by a $2,010.2 million decrease in cost of product sales, which included a $1,253.0 million decrease due to 39.3% of lower volumes sold and a $757.2 million decrease in refined petroleum product cost due to a price decrease of $1.13 per gallon (average prices per gallon were $1.75 and $2.88 for the 2015 and 2014 periods, respectively).

Adjusted EBITDA was negatively impacted by a $1,973.4 million decrease in revenue, which included a $1,246.8 million decrease due to 39.3% of lower volumes sold and a $726.6 million decrease in refined petroleum product sales due to a price decrease of $1.08 per gallon (average sales prices per gallon were $1.79 and $2.87 for the 2015 and 2014 periods, respectively) and a $2.5 million increase in operating expenses, which primarily related to overhead and administrative costs.

Development & Logistics.  Adjusted EBITDA from the Development & Logistics segment was $9.3 million for the six months ended June 30, 2015, which is a decrease of $1.5 million, or 13.9%, from $10.8 million for the corresponding period in 2014.  The decrease in Adjusted EBITDA was primarily due to a $1.4 million decrease in revenue related to the LPG storage caverns primarily due to a one-time gain recognition of inventory in the prior year and a $0.6 million increase in operating expenses, partially offset by a $0.5 million increase in revenue related to third-party engineering and operations contracts.
 
Liquidity and Capital Resources
 
General
 
Our primary cash requirements, in addition to normal operating expenses and debt service, are for working capital, capital expenditures, business acquisitions and distributions to partners.  Our principal sources of liquidity are cash from operations, borrowings under our $1.5 billion revolving credit facility dated September 30, 2014 (the “Credit Facility”) with SunTrust Bank and proceeds from the issuance of our LP Units.  We will, from time to time, issue debt securities to permanently finance amounts borrowed under our Credit Facility.  Buckeye Energy Services LLC, Buckeye West Indies Holdings LP and Buckeye Caribbean Terminals LLC, collectively the Buckeye Merchant Service Companies (“BMSC”) fund their working capital needs principally from their own operations and their portion of our Credit Facility.  Our financial policy has been to fund maintenance capital expenditures with cash from continuing operations.  Expansion and cost reduction capital expenditures, along with acquisitions, have typically been funded from external sources including our Credit Facility, as well as debt and equity offerings.  Our goal has been to fund at least half of these expenditures with proceeds from equity offerings in order to maintain our investment-grade credit rating.  Based on current market conditions, we believe our borrowing capacity under our Credit Facility, cash flows from continuing operations and access to debt and equity markets, if necessary, will be sufficient to fund our primary cash requirements, including our expansion plans over the next 12 months.
 

33


Current Liquidity
 
As of June 30, 2015, we had a working capital deficit of $12.7 million primarily due to accounts payable and accrued and other current liabilities related to capital expenditures and the FERC litigation accrual. As of June 30, 2015, we had $1,105.7 million of additional borrowing capacity under our Credit Facility and $127.7 million remaining on our At-the-Market Offering Program.
 
Capital Structuring Transactions
 
As part of our ongoing efforts to maintain a capital structure that is closely aligned with the cash-generating potential of our asset-based business, we may explore additional sources of external liquidity, including public or private debt or equity issuances.  Matters to be considered will include cash interest expense and maturity profile, all to be balanced with maintaining adequate liquidity.  We have a universal shelf registration statement that does not place any dollar limits on the amount of debt and equity securities that we may issue thereunder and a traditional shelf registration statement on file with the U.S. Securities and Exchange Commission that, as of June 30, 2015, had $936.7 million of unsold equity securities that we may issue thereunder.  The timing of any transaction may be impacted by events, such as strategic growth opportunities, legal judgments or regulatory or environmental requirements.  The receptiveness of the capital markets to an offering of debt or equity securities cannot be assured and may be negatively impacted by, among other things, our long-term business prospects and other factors beyond our control, including market conditions. 

In addition, we periodically evaluate engaging in strategic transactions as a source of capital or may consider divesting non-core assets where our evaluation suggests such a transaction is in the best interest of Buckeye.

Capital Allocation
 
We continually review our investment options with respect to our capital resources that are not distributed to our unitholders or used to pay down our debt and seek to invest these capital resources in various projects and activities based on their return to Buckeye.  Potential investments could include, among others: add-on or other enhancement projects associated with our current assets; greenfield or brownfield development projects; and merger and acquisition activities.

Debt

At June 30, 2015, we had total fixed-rate and variable-rate debt obligations of $3,389.6 million and $394.3 million, respectively, with an aggregate fair value of $3,820.3 million. At June 30, 2015, we were in compliance with the covenants under our Credit Facility.
 
Equity
 
In May 2013, we entered into four separate Equity Distribution Agreements under which we may offer and sell up to $300 million in aggregate gross sales proceeds of LP Units from time to time through such firms, acting as agents of the Partnership or as principals, subject in each case to the terms and conditions set forth in the applicable Equity Distribution Agreement.  See Note 11 in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.  During the six months ended June 30, 2015, we sold approximately 0.8 million LP Units in aggregate under the Equity Distribution Agreements and received $62.4 million in net proceeds after deducting commissions and other related expenses. During the six months ended June 30, 2015, we paid $0.6 million of compensation in aggregate to the agents under the Equity Distribution Agreements.
 

34


Cash Flows from Operating, Investing and Financing Activities
 
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands): 
 
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
Cash provided by (used in):
 
 

 
 

Operating activities
 
$
291,602

 
$
22,120

Investing activities
 
(301,322
)
 
(200,275
)
Financing activities
 
10,089

 
195,111

Net increase in cash and cash equivalents
 
$
369

 
$
16,956

 
Operating Activities
 
Net cash provided by operating activities of $291.6 million for the six months ended June 30, 2015 primarily resulted from $202.5 million of net income, $109.4 million of depreciation and amortization expense and a $43.8 million decrease in accounts receivable, partially offset by a $38.9 million increase in inventory, primarily due to the seasonal build-up of inventory for the heating season, and a $29.7 million increase in broker margin deposits that were driven by the change in commodity prices.
 
Net cash provided by operating activities of $22.1 million for the six months ended June 30, 2014 primarily resulted from $115.3 million of net income and $86.4 million of depreciation and amortization expense, partially offset by a $131.8 million increase in inventory, primarily due to the seasonal build-up of inventory for the heating season, and a $65.7 million increase in accounts receivable, resulting primarily from the expanding business and the new merchant activities supporting the terminals acquired from Hess in December 2014.
 
Future Operating Cash Flows.  Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including demand for our services, the cost of commodities, the effectiveness of our strategy, legal, environmental and regulatory requirements and our ability to capture value associated with commodity price volatility.

Investing Activities
 
Net cash used in investing activities of $301.3 million for the six months ended June 30, 2015 primarily resulted from $298.4 million of capital expenditures. Net cash used in investing activities of $200.3 million for the six months ended June 30, 2014 primarily resulted from $201.5 million of capital expenditures.  See below for a discussion of capital spending.
 
Financing Activities
 
Net cash provided by financing activities of $10.1 million for the six months ended June 30, 2015 primarily resulted from $228.3 million of net borrowings under the Credit Facility and $62.4 million of net proceeds from the issuance of 0.8 million LP Units under the Equity Distribution Agreements, partially offset by $290.6 million of cash distributions paid to our unitholders ($2.2875 per LP Unit).
 
Net cash provided by financing activities of $195.1 million for the six months ended June 30, 2014 primarily resulted from $390.0 million of net borrowings under the Credit Facility and $74.5 million of net proceeds from the issuance of 1.0 million LP Units under the Equity Distribution Agreements, partially offset by $252.2 million of cash distributions paid to our unitholders ($2.1875 per LP Unit).
 

35


Capital Expenditures
 
We classify our capital expenditures as “maintenance capital expenditures,” which maintain and enhance the safety and integrity of our pipelines, terminals, storage facilities and related assets, and “expansion and cost reduction capital expenditures” which expand the reach or capacity of those assets, improve the efficiency of our operations, reduce costs and pursue new business opportunities.  Capital expenditures, excluding non-cash changes in accruals for capital expenditures, were as follows for the periods indicated (in thousands):
 
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
Maintenance capital expenditures
 
$
43,014

 
$
35,933

Expansion and cost reduction
 
255,400

 
165,582

Total capital expenditures, net
 
$
298,414

 
$
201,515

 
Capital expenditures increased for the six months ended June 30, 2015, as compared to the corresponding period in 2014 primarily due to increases in expansion and cost reduction capital projects. Our expansion and cost reduction capital expenditures were $255.4 million for the six months ended June 30, 2015, which is an increase of $89.8 million, or 54.2%, from $165.6 million for the corresponding period in 2014. The period-over-period fluctuations in our expansion and cost reduction capital expenditures were primarily driven by spending on our major growth capital projects, including the ongoing initial build-out of the Buckeye Texas facilities. Our most significant growth capital expenditures for the six months ended June 30, 2015 included cost reduction and revenue generation projects related to storage tank enhancements across our portfolio of terminalling assets, pipeline connectivity improvements, a pipeline integrity enhancement program that improved the operational efficiencies in our pipeline systems and the ongoing initial build-out of the Buckeye Texas facilities. Our maintenance capital expenditures were $43.0 million for the six months ended June 30, 2015, which is an increase of $7.1 million, or 19.7%, from $35.9 million for the corresponding period in 2014. Period-over-period fluctuations in our maintenance capital expenditures were primarily driven by the timing of tank integrity projects.

We have estimated our capital expenditures as follows for the year ending December 31, 2015 (in thousands):
 
 
 
2015
 
 
Low
 
High
Pipelines & Terminals:
 
 

 
 

Maintenance capital expenditures
 
$
70,000

 
$
80,000

Expansion and cost reduction
 
140,000

 
160,000

Total capital expenditures
 
$
210,000

 
$
240,000

 
 
 
 
 
Global Marine Terminals:
 
 

 
 

Maintenance capital expenditures
 
$
20,000

 
$
30,000

Expansion and cost reduction
 
280,000

 
300,000

Total capital expenditures (1)
 
$
300,000

 
$
330,000

 
 
 
 
 
Overall:
 
 

 
 

Maintenance capital expenditures
 
$
90,000

 
$
110,000

Expansion and cost reduction
 
420,000

 
460,000

Total capital expenditures
 
$
510,000

 
$
570,000

_________________________
(1)   Includes 100% of Buckeye Texas Partners capital expenditures.
 

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Estimated maintenance capital expenditures include tank refurbishments and upgrades to station and terminalling equipment, field instrumentation and cathodic protection systems. Estimated major expansion and cost reduction expenditures include the construction of a deep-water marine terminal, a condensate splitter, an LPG storage complex and three crude oil and condensate gathering facilities at Buckeye Texas, as well as pipeline expansion projects, storage tank enhancement and refurbishment projects across our system and various upgrades and expansions of our butane blending business. The build-out of the facilities at Buckeye Texas is funded through additional partnership contributions by us and Trafigura based on our respective ownership interests.

Off-Balance Sheet Arrangements
 
At June 2015, we had no off-balance sheet debt or arrangements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
The following should be read in conjunction with Quantitative and Qualitative Disclosures About Market Risk included under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2014.  There have been no material changes in that information other than as discussed below.  Also, see Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements for additional discussion related to derivative instruments and hedging activities.

Market Risk — Non-Trading Instruments
 
We are exposed to financial market risks, including changes in commodity prices. The primary factors affecting our market risk and the fair value of our derivative portfolio at any point in time are the volume of open derivative positions and changing refined petroleum commodity prices.  We are also susceptible to basis risk created when we enter into financial hedges that are priced at a certain location, but the sales or exchanges of the underlying commodity are at another location where prices and price changes might differ from the prices and price changes at the location upon which the hedging instrument is based.  Since prices for refined petroleum products are volatile, there may be material changes in the fair value of our derivatives over time, driven both by price volatility and the changes in volume of open derivative transactions.
 
The following is a summary of changes in fair value of our commodity derivative instruments for the periods indicated (in thousands): 
Fair value of contracts outstanding at January 1, 2015
 
$
67,686

Items recognized or settled during the period
 
(64,840
)
Fair value attributable to new deals
 
6,234

Change in fair value attributable to price movements
 
(18,612
)
Change in fair value attributable to non-performance risk
 
123

Fair value of contracts outstanding at June 30, 2015
 
$
(9,409
)
 
Commodity Risk
 
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. In the second quarter of 2015, our Pipelines & Terminals segment entered into exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on the narrowing gasoline-to-butane pricing spreads associated with our butane blending activities managed by a third party. Based on a hypothetical 10% movement in the underlying quoted market prices of the futures contracts and observable market data from third-party pricing publications for physical derivative contracts related to designated hedged refined petroleum products inventories outstanding and physical derivative contracts at June 30, 2015, the estimated fair value would be as follows (in thousands): 
Scenario
Resulting
Classification
Fair Value
Fair value assuming no change in underlying commodity prices (as is)
Asset
$
251,318

Fair value assuming 10% increase in underlying commodity prices
Asset
$
244,856

Fair value assuming 10% decrease in underlying commodity prices
Asset
$
257,780



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Foreign Currency Risk
 
Puerto Rico is a commonwealth country under the U.S., and uses the U.S. dollar as its official currency. BORCO’s functional currency is the U.S. dollar and it is equivalent in value to the Bahamian dollar. St. Lucia is a sovereign island country in the Caribbean and its official currency is the Eastern Caribbean dollar, which is pegged to the U.S. dollar and has remained fixed for many years. The functional currency for our operations in St. Lucia is the U.S. dollar. Foreign exchange gains and losses arising from transactions denominated in a currency other than the U.S. dollar relate to a nominal amount of supply purchases and are included in other income (expense) within the unaudited condensed consolidated statements of operations. The effects of foreign currency transactions were not considered to be material for the three and six months ended June 30, 2015 and 2014.

Item 4.  Controls and Procedures
 
(a)                     Evaluation of Disclosure Controls and Procedures.
 
Our management, with the participation of our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), evaluated the design and effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as of the end of the period covered by this report are designed and operating effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
(b)                     Change in Internal Control Over Financial Reporting.
 
There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) or in other factors during the second quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
  
PART II.  OTHER INFORMATION
 
Item 1.                     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. For information on unresolved legal proceedings not otherwise described below, see Part I, Item 1, Financial Statements, Note 3, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this quarterly report, which is incorporated into this item by reference.

In June 2015, Buckeye received a notice of Clean Water Act administrative penalty complaint from the U.S. Environmental Protection Agency in connection with issues relating to the spill prevention, control and countermeasure plan prepared for our Ludlow, Massachusetts facility. The maximum penalties that could be imposed in connection with the complaint would be approximately $0.4 million .  Buckeye expects to discuss the complaint and to seek a reduction in the proposed penalties due to mitigating factors.  The timing or outcome of this matter cannot reasonably be determined at this time.

Item 1A.            Risk Factors
 
Security holders and potential investors in our securities should carefully consider the risk factors in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 2014. We have identified these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by us or on our behalf.


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Item 6.         Exhibits
 
(a)         Exhibits
 
3.1
Amended and Restated Certificate of Limited Partnership of Buckeye Partners, L.P., dated as of February 4, 1998 (Incorporated by reference to Exhibit 3.2 of Buckeye Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 1997).
 
 
3.2
Certificate of Amendment to Amended and Restated Certificate of Limited Partnership of Buckeye Partners, L.P., dated as of April 26, 2002 (Incorporated by reference to Exhibit 3.2 of Buckeye Partners, L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002).
 
 
3.3
Certificate of Amendment to Amended and Restated Certificate of Limited Partnership of Buckeye Partners, L.P., dated as of June 1, 2004, effective as of June 3, 2004 (Incorporated by reference to Exhibit 3.3 of the Buckeye Partners, L.P.’s Registration Statement on Form S-3 filed June 16, 2004).
 
 
3.4
Certificate of Amendment to Amended and Restated Certificate of Limited Partnership of Buckeye Partners, L.P., dated as of December 15, 2004 (Incorporated by reference to Exhibit 3.5 of Buckeye Partners, L.P.’s Annual Report on Form 10-K for the year ended December 31, 2004).
 
 
3.5
Amended and Restated Agreement of Limited Partnership of Buckeye Partners, L.P., dated as of November 19, 2010 (Incorporated by reference to Exhibit 3.1 of Buckeye Partners, L.P.’s Current Report on Form 8-K filed November 22, 2010).
 
 
3.6
Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Buckeye Partners, L.P., dated as of January 18, 2011 (Incorporated by reference to Exhibit 3.1 of Buckeye Partners, L.P.’s Current Report on Form 8-K filed on January 20, 2011).
 
 
3.7
Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Buckeye Partners, L.P., dated as of February 21, 2013 (Incorporated by reference to Exhibit 3.1 of Buckeye Partners, L.P.’s Current Report on Form 8-K filed on February 25, 2013).
 
 
3.8
Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Buckeye Partners, L.P., dated as of October 1, 2013, (Incorporated by reference to Exhibit 3.1 of Buckeye Partners, L.P.’s Current Report on Form 8-K filed on October 7, 2013).
 
 
3.9
Amendment No. 4 to Amended and Restated Agreement of Limited Partnership of Buckeye Partners, L.P., dated as of September 29, 2014, (Incorporated by reference to Exhibit 3.1 of Buckeye Partners, L.P.’s Current Report on Form 8-K filed on September 29, 2014).
 
 
*31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
*31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
**32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
 
 
**32.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
 
 
*101.INS
XBRL Instance Document.
 
 
*101.SCH
XBRL Taxonomy Extension Schema Document.
 
 

39


*101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
*101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
*101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
*101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
*                 Filed herewith.
**          Furnished herewith.


40


SIGNATURES
 
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
By:
BUCKEYE PARTNERS, L.P.
 
 
 
(Registrant)
 
 
 
 
 
By:
Buckeye GP LLC,
 
 
 
as General Partner
 
 
 
 
 
 
Date:
July 31, 2015
By:
/s/ Keith E. St.Clair
 
 
 
Keith E. St.Clair
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)


41