Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from             to             

 

Commission file number 1-9356

 


 

Buckeye Partners, L.P.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

23-2432497

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification number)

 

 

 

One Greenway Plaza

 

 

Suite 600

 

 

Houston, TX

 

77046

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (832) 615-8600

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

x

 

 

Accelerated filer o

Non-accelerated filer

o

 

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

 

As of October 31, 2014, there were 127,022,640 limited partner units outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

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

2

 

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

3

 

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

4

 

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

5

 

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

6

 

 Notes to Unaudited Condensed Consolidated Financial Statements:

 

 

1.

Organization and Basis of Presentation

7

 

2.

Acquisitions

8

 

3.

Discontinued Operations

10

 

4.

Commitments and Contingencies

11

 

5.

Inventories

13

 

6.

Equity Investments

14

 

7.

Intangible Assets

14

 

8.

Long-Term Debt

15

 

9.

Derivative Instruments and Hedging Activities

15

 

10.

Fair Value Measurements

19

 

11.

Pensions and Other Postretirement Benefits

21

 

12.

Unit-Based Compensation Plans

21

 

13.

Partners’ Capital and Distributions

23

 

14.

Earnings Per Unit

24

 

15.

Business Segments

25

 

16.

Supplemental Cash Flow Information

29

 

17.

Subsequent Events

29

 

 

 

Item 2.

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

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

47

 

 

 

Item 6.

Exhibits

47

 

1



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Product sales

 

$

1,241,696

 

$

805,281

 

$

4,412,135

 

$

2,608,894

 

Transportation, storage and other services

 

331,777

 

268,570

 

962,118

 

789,623

 

Total revenue

 

1,573,473

 

1,073,851

 

5,374,253

 

3,398,517

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

1,218,471

 

801,854

 

4,393,893

 

2,590,452

 

Operating expenses

 

138,906

 

101,142

 

396,753

 

292,930

 

Depreciation and amortization

 

45,406

 

36,842

 

131,791

 

110,092

 

General and administrative

 

21,749

 

17,236

 

59,436

 

50,819

 

Total costs and expenses

 

1,424,532

 

957,074

 

4,981,873

 

3,044,293

 

Operating income

 

148,941

 

116,777

 

392,380

 

354,224

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Earnings from equity investments

 

2,523

 

1,389

 

5,959

 

4,971

 

Interest and debt expense

 

(43,838

)

(34,341

)

(127,063

)

(94,827

)

Other income (expense)

 

(375

)

(12

)

(471

)

287

 

Total other expense, net

 

(41,690

)

(32,964

)

(121,575

)

(89,569

)

Income from continuing operations before taxes

 

107,251

 

83,813

 

270,805

 

264,655

 

Income tax expense

 

(243

)

(195

)

(319

)

(521

)

Income from continuing operations

 

107,008

 

83,618

 

270,486

 

264,134

 

Loss from discontinued operations

 

(3,280

)

(5,367

)

(51,508

)

(18,014

)

Net income

 

103,728

 

78,251

 

218,978

 

246,120

 

Less: Net income attributable to noncontrolling interests

 

(785

)

(997

)

(2,547

)

(3,095

)

Net income attributable to Buckeye Partners, L.P.

 

$

102,943

 

$

77,254

 

$

216,431

 

$

243,025

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.90

 

$

0.78

 

$

2.29

 

$

2.48

 

Discontinued operations

 

(0.03

)

(0.05

)

(0.44

)

(0.17

)

Total

 

$

0.87

 

$

0.73

 

$

1.85

 

$

2.31

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.89

 

$

0.77

 

$

2.29

 

$

2.47

 

Discontinued operations

 

(0.03

)

(0.05

)

(0.44

)

(0.17

)

Total

 

$

0.86

 

$

0.72

 

$

1.85

 

$

2.30

 

 

 

 

 

 

 

 

 

 

 

Weighted average units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

118,804

 

106,223

 

116,747

 

105,068

 

Diluted

 

119,429

 

106,774

 

117,305

 

105,516

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

103,728

 

$

78,251

 

$

218,978

 

$

246,120

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on derivative instruments

 

(2,612

)

(80

)

(21,424

)

32,446

 

Reclassification of derivative gains and losses to net income

 

3,159

 

1,778

 

6,716

 

3,099

 

Recognition of costs related to benefit plans to net income

 

394

 

881

 

1,181

 

1,284

 

Adjustments to recognize the funded status of benefit plans

 

 

(727

)

 

(727

)

Total other comprehensive income (loss)

 

941

 

1,852

 

(13,527

)

36,102

 

Comprehensive income

 

104,669

 

80,103

 

205,451

 

282,222

 

Less: Comprehensive income attributable to noncontrolling interests

 

(785

)

(997

)

(2,547

)

(3,095

)

Comprehensive income attributable to Buckeye Partners, L.P.

 

$

103,884

 

$

79,106

 

$

202,904

 

$

279,127

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

6,497

 

$

4,950

 

Trade receivables, net

 

404,207

 

326,243

 

Construction and pipeline relocation receivables

 

26,596

 

23,135

 

Inventories

 

428,163

 

312,135

 

Derivative assets

 

24,646

 

4,412

 

Prepaid and other current assets

 

61,277

 

48,503

 

Assets held for sale (Note 3)

 

141,852

 

181,708

 

Total current assets

 

1,093,238

 

901,086

 

 

 

 

 

 

 

Property, plant and equipment, net

 

5,635,565

 

4,925,294

 

 

 

 

 

 

 

Equity investments

 

77,867

 

72,349

 

Goodwill

 

1,102,598

 

821,500

 

Intangible assets, net

 

457,350

 

225,364

 

Other non-current assets

 

76,046

 

59,970

 

Total assets

 

$

8,442,664

 

$

7,005,563

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

182,000

 

$

226,000

 

Accounts payable

 

253,485

 

149,520

 

Derivative liabilities

 

3,061

 

44,672

 

Accrued and other current liabilities

 

241,651

 

227,084

 

Liabilities held for sale (Note 3)

 

38,852

 

37,767

 

Total current liabilities

 

719,049

 

685,043

 

 

 

 

 

 

 

Long-term debt

 

3,663,690

 

3,092,711

 

Other non-current liabilities

 

133,638

 

146,973

 

Total liabilities

 

4,516,377

 

3,924,727

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Buckeye Partners, L.P. capital:

 

 

 

 

 

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

 

3,820,596

 

3,169,217

 

Accumulated other comprehensive loss

 

(117,079

)

(103,552

)

Total Buckeye Partners, L.P. capital

 

3,703,517

 

3,065,665

 

Noncontrolling interests

 

222,770

 

15,171

 

Total partners’ capital

 

3,926,287

 

3,080,836

 

Total liabilities and partners’ capital

 

$

8,442,664

 

$

7,005,563

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

218,978

 

$

246,120

 

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

 

 

 

 

 

Settlement of terminated interest rate swap agreement

 

(51,469

)

(62,009

)

Depreciation and amortization

 

131,791

 

115,798

 

Asset impairment expense

 

20,875

 

 

Net changes in fair value of derivatives

 

(32,017

)

(16,608

)

Non-cash deferred lease expense

 

2,728

 

2,828

 

Amortization of unfavorable storage contracts

 

(8,303

)

(8,255

)

Earnings from equity investments

 

(5,959

)

(4,971

)

Distributions from equity investments

 

220

 

275

 

Other non-cash items

 

22,114

 

17,804

 

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

 

 

 

 

 

Trade receivables

 

(73,240

)

16,722

 

Construction and pipeline relocation receivables

 

(3,461

)

(6,352

)

Inventories

 

(114,620

)

(57,569

)

Prepaid and other current assets

 

8,906

 

24,863

 

Accounts payable

 

102,125

 

35,397

 

Accrued and other current liabilities

 

(18,254

)

(14,557

)

Other non-current assets

 

(12,454

)

964

 

Other non-current liabilities

 

(5,609

)

(5,046

)

Net cash provided by operating activities

 

182,351

 

285,404

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(300,831

)

(257,008

)

Deposit in anticipation of sale (Note 3)

 

5,250

 

 

Acquisitions, net of cash acquired

 

(824,736

)

 

Net proceeds from insurance settlement

 

737

 

 

Proceeds from disposal of property, plant and equipment

 

1,203

 

433

 

Net cash used in investing activities

 

(1,118,377

)

(256,575

)

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of LP Units

 

821,944

 

382,319

 

Net proceeds from exercise of unit options

 

698

 

1,201

 

Payment of tax withholding on issuance of LTIP awards

 

(5,244

)

(3,741

)

Issuance of long-term debt

 

599,103

 

499,050

 

Repayment of long term-debt

 

 

(300,000

)

Debt issuance costs

 

(6,783

)

(4,552

)

Borrowings under BPL Credit Facility

 

1,476,000

 

1,380,000

 

Repayments under BPL Credit Facility

 

(1,505,000

)

(1,637,900

)

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

 

(44,000

)

(26,100

)

Acquisition of additional interest in WesPac Memphis

 

(9,510

)

(9,727

)

Distributions paid to noncontrolling interests

 

(5,217

)

(5,629

)

Distributions paid to unitholders

 

(384,418

)

(305,544

)

Net cash provided by (used in) financing activities

 

937,573

 

(30,623

)

Net increase (decrease) in cash and cash equivalents

 

1,547

 

(1,794

)

Cash and cash equivalents — Beginning of period

 

4,950

 

6,776

 

Cash and cash equivalents — End of period

 

$

6,497

 

$

4,982

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Limited

 

Class B

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

Partners

 

Units

 

Income (Loss)

 

Interests

 

Total

 

Partners’ capital - January 1, 2014

 

$

3,169,217

 

$

 

$

(103,552

)

$

15,171

 

$

3,080,836

 

Net income

 

216,431

 

 

 

2,547

 

218,978

 

Acquisition of additional interest in WesPac Memphis

 

(7,933

)

 

 

(1,577

)

(9,510

)

Noncontrolling equity in acquisition (Note 2)

 

 

 

 

208,998

 

208,998

 

Distributions paid to unitholders

 

(386,990

)

 

 

2,572

 

(384,418

)

Net proceeds from issuance of LP Units

 

821,944

 

 

 

 

821,944

 

Amortization of unit-based compensation awards

 

13,549

 

 

 

 

13,549

 

Net proceeds from exercise of unit options

 

698

 

 

 

 

698

 

Payment of tax withholding on issuance of LTIP awards

 

(5,244

)

 

 

 

(5,244

)

Distributions paid to noncontrolling interests

 

 

 

 

(5,217

)

(5,217

)

Other comprehensive loss

 

 

 

(13,527

)

 

(13,527

)

Noncash accrual for distribution equivalent rights

 

(1,136

)

 

 

 

(1,136

)

Other

 

60

 

 

 

276

 

336

 

Partners’ capital - September 30, 2014

 

$

3,820,596

 

$

 

$

(117,079

)

$

222,770

 

$

3,926,287

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital - January 1, 2013

 

$

2,117,788

 

$

413,304

 

$

(158,779

)

$

16,527

 

$

2,388,840

 

Net income

 

226,306

 

16,719

 

 

3,095

 

246,120

 

Acquisition of additional interest in WesPac Memphis

 

(8,232

)

 

 

(1,495

)

(9,727

)

Distributions paid to unitholders

 

(308,459

)

 

 

2,915

 

(305,544

)

Conversion of Class B Units to LP Units

 

430,023

 

(430,023

)

 

 

 

Net proceeds from issuance of LP Units

 

382,319

 

 

 

 

382,319

 

Amortization of unit-based compensation awards

 

12,438

 

 

 

 

12,438

 

Net proceeds from exercise of unit options

 

1,201

 

 

 

 

1,201

 

Payment of tax withholding on issuance of LTIP awards

 

(3,741

)

 

 

 

(3,741

)

Distributions paid to noncontrolling interests

 

 

 

 

(5,629

)

(5,629

)

Other comprehensive income

 

 

 

36,102

 

 

36,102

 

Noncash accrual for distribution equivalent rights Other

 

(1,437

)

 

 

 

(1,437

)

 

 

(85

)

 

 

66

 

(19

)

Partners’ capital - September 30, 2013

 

$

2,848,121

 

$

 

$

(122,677

)

$

15,479

 

$

2,740,923

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

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

 

Buckeye owns and operates a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage and marketing of liquid petroleum products.  We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, miles of pipeline and active products terminals across our portfolio of pipelines, inland terminals and an integrated network of marine terminals located primarily in the East Coast and Gulf Coast regions of the United States and in the Caribbean.  Our flagship marine terminal in The Bahamas, Bahamas Oil Refining Company International Limited (“BORCO”), is one of the largest marine crude oil and petroleum products storage facilities in the world and provides an array of logistics and blending services for the global flow of petroleum products.  Our network of marine terminals enables us to facilitate global flows of crude oil, refined petroleum products, and other commodities, and to offer our customers connectivity to some of the world’s most important bulk storage and blending hubs.  In September 2014, we expanded our network of marine midstream assets by acquiring a controlling interest in a company with assets located in Corpus Christi, Texas and the Eagle Ford Shale.  We are also a wholesale distributor of refined petroleum products in areas served by our pipelines and terminals.  Finally, Buckeye operates and/or maintains third-party pipelines under agreements with major oil and gas, petrochemical and chemical companies, and performs certain engineering and construction management services for third parties.

 

In December 2013, the Board of Directors of Buckeye GP (the “Board”) approved a plan to divest our Natural Gas Storage segment and its related assets as we no longer believe this business is aligned with our long-term business strategy.  In this report, we refer to this group of assets and related liabilities as our Natural Gas Storage disposal group.  Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our unaudited condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 and also reported the results of operations as discontinued operations for all periods presented in this report.  In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage business for $105.0 million.  The transaction is expected to close in the first quarter of 2015, subject to regulatory approvals and customary closing conditions.  See Note 3 for additional information.

 

Additionally, in December 2013, we changed our organizational structure to align our strategic business units into four reportable segments: Pipelines & Terminals, Global Marine Terminals, Merchant Services and Development & Logistics.  See Note 15 for additional information.  We have adjusted our prior period segment information to conform to the current alignment of our continuing business and discontinued operations.

 

Basis of Presentation and Principles of Consolidation

 

The unaudited condensed consolidated financial statements and the accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”).  Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our results of operations for the interim periods.  The unaudited condensed consolidated financial statements include the accounts of our subsidiaries controlled by us and variable interest entities of which we are the primary beneficiary. We have eliminated all intercompany transactions in consolidation.

 

We believe that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading.  These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recent Accounting Developments

 

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

 

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

 

2.  ACQUISITIONS

 

Business Combinations

 

2014 Transaction

 

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

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The acquisition cost has been allocated on a preliminary basis to assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represents both expected synergies from combining the Buckeye Texas operations with our existing operations and the economic value attributable to future expansion projects resulting from this acquisition. Fair values have been developed using recognized business valuation techniques.  The estimates of fair value reflected as of September 30, 2014 are subject to change pending final valuation analysis, and due to timing of available preliminary valuation information, such changes, particularly to intangible assets and goodwill, could be material.  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):

 

Current assets

 

$

24,640

 

Property, plant and equipment

 

527,390

 

Intangible assets

 

260,000

 

Goodwill

 

280,695

 

Current liabilities

 

(47,737

)

Noncontrolling interests

 

(208,998

)

Allocated purchase price

 

$

835,990

 

 

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

 

2013 Transaction

 

In December 2013, we acquired certain wholesale distribution contracts and 20 liquid petroleum products terminals with total storage capacity of approximately 39 million barrels from Hess Corporation (“Hess”) for $856.4 million, net of cash acquired (the “Hess Terminals Acquisition”).  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):

 

Current assets

 

$

16,533

 

Property, plant and equipment

 

801,870

 

Intangible assets

 

30,520

 

Goodwill

 

9,606

 

Current liabilities

 

(882

)

Environmental liabilities

 

(1,270

)

Allocated purchase price

 

$

856,377

 

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

Revenue

 

$

297,104

 

$

971,672

 

Net income (1)

 

17,745

 

44,515

 

 


(1)         Includes transition expenses of $1.2 million and $6.9 million for the three and nine months ended September 30, 2014, respectively.

 

Acquisition of Additional Interest in WesPac Pipelines — Memphis LLC

 

In April 2014, our operating subsidiary, Buckeye Pipe Line Holdings, L.P. (“BPH”), purchased an additional 10% ownership interest in WesPac Pipelines — Memphis LLC (“WesPac Memphis”) from Kealine LLC for $9.5 million.  As a result of the acquisition, our ownership interest in WesPac Memphis increased from 80% to 90%.  Since BPH retains controlling interest in WesPac Memphis, this acquisition was accounted for as an equity transaction.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.  DISCONTINUED OPERATIONS

 

In December 2013, the Board approved a plan to divest our Natural Gas Storage segment and its related assets as we no longer believe this business is aligned with our long-term business strategy.  In this report, we refer to this group of assets as our Natural Gas Storage disposal group.  Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our accompanying unaudited condensed consolidated balance sheet as of September 30, 2014 and December 31, 2013.  We have reported the results of operations for the disposal group as discontinued operations for all periods presented in this report.  We discontinued depreciation and amortization of the Natural Gas Storage disposal group’s property, plant and equipment upon approval of a plan to sell our Natural Gas Storage business.

 

In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage business for $105.0 million.  The transaction is expected to close in the first quarter of 2015, subject to regulatory approvals and customary closing conditions.  As a result of the sale, we recorded a non-cash asset impairment charge of $26.3 million within “Loss from discontinued operations” on our unaudited condensed consolidated statement of operations for the six months ended June 30, 2014.  During the three months ended September 30, 2014, we reduced the non-cash asset impairment charge by $5.4 million due to changes in the carrying value of the net assets of our Natural Gas Storage disposal group.  The changes in the carrying value of the net assets consist primarily of the net loss experienced during the three months ended September 30, 2014.  See Note 10 and Note 15 for further discussion.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,997

 

$

14,907

 

$

21,766

 

$

40,581

 

Loss from discontinued operations

 

(3,280

)

(5,367

)

(51,508

)

(18,014

)

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

138,534

 

$

157,261

 

Other current assets

 

3,282

 

24,443

 

Other non-current assets

 

36

 

4

 

Assets held for sale

 

$

141,852

 

$

181,708

 

 

 

 

 

 

 

Accounts payable

 

$

872

 

$

2,182

 

Accrued liabilities and other current liabilities

 

8,505

 

8,947

 

Other non-current liabilities

 

29,475

 

26,638

 

Liabilities held for sale

 

$

38,852

 

$

37,767

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4.  COMMITMENTS AND CONTINGENCIES

 

Claims and Legal Proceedings

 

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

 

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

 

Federal Energy Regulatory Commission (“FERC”) Proceedings

 

FERC Docket No. OR12-28-000 Airlines Complaint against Buckeye Pipe Line Company, L.P. (“BPLC”) New York City Jet Fuel Rates.  On September 20, 2012, a complaint was filed with FERC by Delta Air Lines, JetBlue Airways, United/Continental Air Lines, and US Airways challenging BPLC’s rates for transportation of jet fuel from New Jersey to three New York City airports.  The complaint was not directed at BPLC’s rates for service to other destinations and does not involve pipeline systems and terminals owned by Buckeye’s other operating subsidiaries.  The complaint challenges these jet fuel transportation rates as generating revenues in excess of costs and thus being “unjust and unreasonable” under the Interstate Commerce Act.  On October 10, 2012, BPLC filed its answer to the complaint, contending that the airlines’ allegations are based on inappropriate adjustments to the pipeline’s costs and revenues, and that, in any event, any revenue recovery by BPLC in excess of costs would be irrelevant because BPLC’s rates are set under a FERC-approved program that ties rates to competitive levels.  BPLC also sought dismissal of the complaint to the extent it seeks to challenge the portion of BPLC’s rates that were deemed just and reasonable, or “grandfathered,” under Section 1803 of the Energy Policy Act of 1992.  BPLC further contested the airlines’ ability to seek relief as to past charges where the rates are lawful under BPLC’s FERC-approved rate program.  On October 25, 2012, the complainants filed their answer to BPLC’s motion to dismiss and answer.  On November 9, 2012, BPLC filed a response addressing newly raised arguments in the complainants’ October 25th answer.  On February 22, 2013, FERC issued an order setting the airline complaint in Docket (“Dkt.”) No. OR12-28-000 for hearing, but holding the hearing in abeyance and setting the dispute for settlement procedures before a settlement judge.  If FERC were to find these challenged rates to be in excess of costs and not otherwise protected by law, it could order BPLC to reduce these rates prospectively and could order repayment to the complaining airlines of any past charges found to be in excess of just and reasonable levels for up to two years prior to the filing date of the complaint.  BPLC intends to vigorously defend its rates.  On March 8, 2013, an order was issued consolidating, for settlement purposes, this complaint proceeding with the proceeding regarding BPLC’s application for market-based rates in the New York City market in Dkt. No. OR13-3-000 (discussed below), and settlement discussions under the supervision of the FERC settlement judge continued until April 2014.  On April 1, 2014, the FERC settlement judge issued a status report stating that the parties had been unable to reach a settlement, and recommending that both Dkt. Nos. OR12-28-000 and OR13-3-000 be set for hearing.  The settlement judge further recommended that settlement procedures under the supervision of the settlement judge continue concurrently because the parties hope to continue settlement talks after the commencement of litigation.  On April 17, 2014, the FERC Chief Administrative Law Judge (the “ALJ”) ruled in favor of separate proceedings and of continuing the existing settlement procedures concurrently with litigation.  In May 2014, a procedural schedule was established for this matter, providing for a hearing in March 2015 and an initial decision by August 2015.  The timing or outcome of final resolution of this matter cannot reasonably be determined at this time.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

FERC Docket No. OR14-41-000 — American Airlines Complaint against BPLC New York City Jet Fuel RatesOn September 17, 2014, a complaint was filed with FERC by American Airlines.  It is similar to the Dkt. No. OR12-28-000 complaint (see above) in that it challenges BPLC’s rates for transportation of jet fuel from New Jersey to the three New York City airports, is not directed at BPLC’s rates for service to other destinations, and does not involve pipeline systems and terminals owned by Buckeye’s other operating subsidiaries.  The complaint’s allegations are virtually identical to those in the other airline complaint proceeding.  On October 7, 2014, BPLC filed its answer to the complaint, contesting the airline’s allegations and presenting certain legal defenses to relief sought by the airline.  If FERC were to find these challenged rates to be in excess of costs and not otherwise protected by law, it could order BPLC to reduce these rates prospectively and could order repayment to the complaining airline of any past charges found to be in excess of just and reasonable levels for up to two years prior to the filing date of the complaint.  BPLC intends to vigorously defend its rates.

 

FERC Docket No. OR13-3-000 — BPLC’s Market-Based Rate Application.  On October 15, 2012, BPLC filed an application with FERC seeking authority to charge market-based rates for deliveries of liquid petroleum products to the New York City-area market (the “Application”).  In the Application, BPLC seeks to charge market-based rates from its three origin points in northeastern New Jersey to its five destinations on its Long Island System, including deliveries of jet fuel to the Newark, LaGuardia, and JFK airports.  The jet fuel rates were also the subject of the airlines’ Dkt. No. OR12-28-000 complaint discussed above.  On December 14, 2012, Delta Air Lines, JetBlue Airways, United/Continental Air Lines, and US Airways filed a joint intervention and protest challenging the Application and requesting its rejection.  On January 14, 2013, BPLC filed its answer to the protest and requested summary disposition as to those non-jet-fuel rates that were not challenged in the protest.  On January 29, 2013, the protestants responded to BPLC’s answer, and on February 13, 2013, BPLC filed a further answer to the protestants’ January 29, 2013 pleading.  On February 28, 2013, FERC issued an order setting the Application for hearing, holding the hearing in abeyance and setting the dispute for settlement procedures before a settlement judge.  As discussed above, the Application has been consolidated with the complaint proceeding in Dkt. No. OR12-28-000 for settlement purposes and the settlement judge has reported to the FERC and the Chief ALJ that the application should be set for hearing.  The settlement judge also recommended that settlement procedures under the supervision of the settlement judge continue concurrently because the parties hope to continue settlement talks after the commencement of litigation.  As noted above, the FERC Chief ALJ ruled that Dkt. No. OR13-3-000 will proceed separately from the Dkt. No. OR12-28-000 proceeding and that the existing settlement procedures will continue concurrently with litigation.  If FERC were to approve the Application, BPLC would be permitted prospectively to set these rates in response to competitive forces, and the basis for the airlines’ claim for relief in their Dkt. No. OR12-28-000 complaint as to BPLC’s future rates would be irrelevant prospectively.  The timing or outcome of FERC’s review of the Application cannot reasonably be determined at this time.

 

BORCO Jetty.  On May 25, 2012, a ship, Cape Bari, allided with a jetty at our BORCO facility while berthing, causing damage to portions of the jetty.  Buckeye has insurance to cover this loss, subject to a $5.0 million deductible.  On May 26, 2012, we commenced legal proceedings in The Bahamas against the vessel’s owner and the vessel to obtain security for the cost of repairs and other losses incurred as a result of the incident.  Full security for our claim has been provided by the vessel owner’s insurers, reserving all of their defenses.  We also have notified the customer on whose behalf the vessel was at the BORCO facility that we intend to hold them responsible for all damages and losses resulting from the incident pursuant to the terms of an agreement between the parties.  Any disputes between us and our customer on this matter are subject to arbitration in Houston, Texas.

 

The vessel owner has claimed that it is entitled to limit its liability to approximately $17 million, but we are contesting the right of the vessel owner to such limitation.  The Bahamas court of first instance denied the vessel owner the right to limit its liability for the incident, leaving the vessel owner responsible for all provable damages.  The vessel interests appealed, and the Bahamas Court of Appeals reversed, holding that the vessel interests may limit their liability.  We filed a motion for leave to appeal that decision to the Privy Council, which was granted.  We can express no view on whether the Bahamas Court of Appeals decision ultimately will be affirmed or reversed.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We experienced no material interruption of service at the BORCO facility as a result of the incident, and the repairs of the damaged sections are complete.

 

The aggregate cost to repair and reconstruct the damaged portions of the jetty and pursue recovery in court has been approximately $23 million.  We recorded a loss on disposal due to the assets destroyed in the incident and other related costs incurred; however, since we believe recovery of our losses is probable, we recorded a corresponding receivable.  As of September 30, 2014, we had a $6.0 million receivable included in “Other non-current assets” in our unaudited condensed consolidated balance sheet, representing reimbursement of the deductible and other third party expenses.  Additionally, we have received cash proceeds of $16.0 million related to insurance reimbursements, and to the extent the aggregate proceeds from the recovery of our losses is in excess of the carrying value of the destroyed assets or other costs incurred, we will recognize a gain when such proceeds are received and are not refundable.  BORCO’s insurers have paid most of the claim and have now appeared in the Bahamas litigation.  As of September 30, 2014, no gain had been recognized; however, we recorded a $14.1 million deferred gain in “Accrued and other current liabilities” in our unaudited condensed consolidated balance sheet, representing excess proceeds received over the loss on disposal and other costs incurred.

 

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

 

Environmental Contingencies

 

We recorded operating expenses, net of insurance recoveries, of $2.0 million and $1.4 million during the three months ended September 30, 2014 and 2013, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  For the nine months ended September 30, 2014 and 2013, we recorded operating expenses, net of recoveries, of $4.2 million and $4.4 million, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  Costs incurred may be in excess of our estimate, which may have a material impact on our financial condition, results of operations or cash flows.  As of September 30, 2014 and December 31, 2013, we recorded environmental remediation liabilities of $56.0 million and $57.2 million, respectively.  At September 30, 2014 and December 31, 2013, we had $13.3 million and $10.6 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third party claims.

 

5.  INVENTORIES

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Liquid petroleum products (1)

 

$

410,615

 

$

290,718

 

Materials and supplies

 

17,548

 

21,417

 

Total inventories

 

$

428,163

 

$

312,135

 

 


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

 

At September 30, 2014 and December 31, 2013, approximately 91% and 81% of our liquid petroleum products inventory volumes were designated in a fair value hedge relationship, respectively.  Because we generally designate inventory as a hedged item upon purchase, hedged inventory is valued at current market prices with the change in value of the inventory reflected in our unaudited condensed consolidated statements of operations.  Our inventory volumes that are not designated as the hedged item in a fair value hedge relationship are economically hedged to reduce our commodity price exposure.  Inventory not accounted for as a fair value hedge is accounted for at the lower of cost or market using the weighted average cost method.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6.  EQUITY INVESTMENTS

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

West Shore Pipe Line Company

 

$

1,551

 

$

1,569

 

$

3,734

 

$

4,142

 

Muskegon Pipeline LLC

 

470

 

(377

)

1,041

 

254

 

Transport4, LLC

 

109

 

90

 

362

 

286

 

South Portland Terminal LLC

 

393

 

107

 

822

 

289

 

Total earnings from equity investments

 

$

2,523

 

$

1,389

 

$

5,959

 

$

4,971

 

 

Summarized combined income statement data for our equity method investments are as follows for the periods indicated (amounts represent 100% of investee income statement data in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

23,872

 

$

22,218

 

$

65,337

 

$

58,534

 

Costs and expenses

 

(14,168

)

(15,563

)

(38,813

)

(34,776

)

Non-operating expenses

 

(3,261

)

(3,145

)

(8,841

)

(9,265

)

Net income

 

$

6,443

 

$

3,510

 

$

17,683

 

$

14,493

 

 

7.  INTANGIBLE ASSETS

 

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

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Customer relationships

 

$

231,620

 

$

231,620

 

Accumulated amortization

 

(53,971

)

(44,144

)

Net carrying amount

 

177,649

 

187,476

 

 

 

 

 

 

 

Customer contracts

 

330,233

 

70,233

 

Accumulated amortization

 

(50,532

)

(32,345

)

Net carrying amount

 

279,701

 

37,888

 

Total intangible assets, net

 

$

457,350

 

$

225,364

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

8.  LONG-TERM DEBT

 

Credit Facility

 

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

 

Notes Offering

 

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

 

9.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

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

 

Interest Rate Derivatives

 

We utilize forward-starting interest rate swaps to hedge the variability of the forecasted interest payments on anticipated debt issuances that may result from changes in the benchmark interest rate until the expected debt is issued.  When entering into interest rate swap transactions, we become exposed to both credit risk and market risk.  We are subject to credit risk when the change in fair value of the swap instrument is positive and the counterparty may fail to perform under the terms of the contract.  We are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the swaps.  We manage our credit risk by entering into swap transactions only with major financial institutions with investment-grade credit ratings.  We manage our market risk by aligning the swap instrument with the existing underlying debt obligation or a specified expected debt issuance generally associated with the maturity of an existing debt obligation.  We designate the swap agreements as cash flow hedges at inception and expect the changes in values to be highly correlated with the changes in value of the underlying borrowings.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We entered into six forward-starting interest rate swaps with a total aggregate notional amount of $275.0 million, which we entered into in anticipation of the issuance of debt on or before October 15, 2014.  In September 2014, we issued $300.0 million of senior unsecured notes (see Note 8 for further discussion) and also settled the related six forward-starting interest rate swaps for $51.5 million.  As a result of the interest rate swap settlement, we recognized $1.1 million hedge ineffectiveness in interest and debt expense attributable to the timing difference between when the swaps were settled and when they were forecasted to settle during the three and nine months ended September 30, 2014.

 

During the three months ended September 30, 2014 and 2013, unrealized losses of $2.6 million and unrealized losses of $0.1 million, respectively, were recorded in accumulated other comprehensive loss to reflect the change in the fair values of the forward-starting interest rate swaps.  For the nine months ended September 30, 2014 and 2013, unrealized losses of $21.4 million and unrealized gains of $32.5 million, respectively, were recorded in accumulated other comprehensive loss.  Additionally, over the next twelve months, we expect to reclassify $12.2 million of net losses from accumulated other comprehensive loss to interest and debt expense.  The loss consists primarily of the amortization of our settled forward-starting interest rate swaps.

 

Commodity Derivatives

 

Our Merchant Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its physical derivative contracts.  The futures contracts used to hedge refined petroleum product inventories are designated as fair value hedges with changes in fair value of both the futures contracts and physical inventory reflected in earnings.  Physical contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market.

 

The following table summarizes our commodity derivative instruments outstanding at September 30, 2014 (amounts in thousands of gallons):

 

 

 

Volume (1)

 

Accounting

 

Derivative Purpose 

 

Current

 

Long-Term

 

Treatment

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

47,152

 

2,604

 

Mark-to-market

 

Physical index derivative contracts

 

56,414

 

 

Mark-to-market

 

Futures contracts for refined petroleum products

 

24,071

 

2,520

 

Mark-to-market

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined petroleum products

 

148,260

 

 

Fair Value Hedge

 

 


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

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table sets forth the fair value of each classification of derivative instruments and the locations of the derivative instruments on our unaudited condensed consolidated balance sheets at the dates indicated (in thousands):

 

 

 

September 30, 2014

 

 

 

Derivatives

 

Derivatives

 

 

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

Total

 

Physical fixed price derivative contracts

 

$

16,676

 

$

 

$

16,676

 

$

(514

)

$

16,162

 

Physical index derivative contracts

 

99

 

 

99

 

(34

)

65

 

Futures contracts for refined products

 

76,469

 

22,371

 

98,840

 

(90,421

)

8,419

 

Total current derivative assets

 

93,244

 

22,371

 

115,615

 

(90,969

)

24,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

441

 

 

441

 

 

441

 

Futures contracts for refined products

 

1

 

 

1

 

 

1

 

Total non-current derivative assets

 

442

 

 

442

 

 

442

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(3,379

)

 

(3,379

)

514

 

(2,865

)

Physical index derivative contracts

 

(230

)

 

(230

)

34

 

(196

)

Futures contracts for refined products

 

(89,294

)

(1,127

)

(90,421

)

90,421

 

 

Total current derivative liabilities

 

(92,903

)

(1,127

)

(94,030

)

90,969

 

(3,061

)

 

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

(225

)

 

(225

)

 

(225

)

Total non-current derivative liabilities

 

(225

)

 

(225

)

 

(225

)

Net derivative assets (liabilities)

 

$

558

 

$

21,244

 

$

21,802

 

$

 

$

21,802

 

 


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

 

 

 

December 31, 2013

 

 

 

Derivatives

 

Derivatives

 

 

 

Netting

 

 

 

 

 

NOT Designated

 

Designated

 

Derivative

 

Balance

 

 

 

 

 

as Hedging

 

as Hedging

 

Carrying

 

Sheet

 

 

 

 

 

Instruments

 

Instruments

 

Value

 

Adjustment (1)

 

Total

 

Physical fixed price derivative contracts

 

$

5,164

 

$

 

$

5,164

 

$

(780

)

$

4,384

 

Physical index derivative contracts

 

48

 

 

48

 

(20

)

28

 

Futures contracts for refined products

 

45,589

 

66

 

45,655

 

(45,655

)

 

Total current derivative assets

 

50,801

 

66

 

50,867

 

(46,455

)

4,412

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

(7,027

)

 

(7,027

)

780

 

(6,247

)

Physical index derivative contracts

 

(330

)

 

(330

)

20

 

(310

)

Futures contracts for refined products

 

(52,240

)

(1,485

)

(53,725

)

45,655

 

(8,070

)

Interest rate derivatives

 

 

(30,045

)

(30,045

)

 

(30,045

)

Total current derivative liabilities

 

(59,597

)

(31,530

)

(91,127

)

46,455

 

(44,672

)

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative liabilities

 

$

(8,796

)

$

(31,464

)

$

(40,260

)

$

 

$

(40,260

)

 


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

 

Our hedged inventory portfolio extends to the first quarter of 2015.  The majority of the unrealized gain at September 30, 2014 for inventory hedges represented by futures contracts of $21.2 million will be realized by the fourth quarter of 2014 as the related inventory is sold.  At September 30, 2014, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, physical index contracts, and futures contracts for fixed-price sales contracts noted above) varied in duration in the overall portfolio, but did not extend beyond April 2016.  In addition, at September 30, 2014, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

Location

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

Product sales

 

$

16,065

 

$

(6,851

)

$

5,413

 

$

(3,475

)

Physical index derivative contracts

 

Product sales

 

(37

)

(13

)

(110

)

1,096

 

Physical fixed price derivative contracts

 

Cost of product sales

 

(1,442

)

4,736

 

7,179

 

4,291

 

Physical index derivative contracts

 

Cost of product sales

 

207

 

(113

)

(506

)

(657

)

Futures contracts for refined products

 

Cost of product sales

 

(997

)

(1,190

)

(810

)

4,607

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as fair value hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Futures contracts for refined products

 

Cost of product sales

 

35,717

 

(1,689

)

23,264

 

7,246

 

Physical inventory - hedged items

 

Cost of product sales

 

(34,041

)

2,114

 

(32,312

)

(7,326

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Fair value hedge ineffectiveness (excluding time value)

 

Cost of product sales

 

2,914

 

2,902

 

6,524

 

(725

)

Time value excluded from hedge assessment

 

Cost of product sales

 

(1,238

)

(2,477

)

(15,572

)

645

 

Net gain (loss) in income

 

 

 

$

1,676

 

$

425

 

$

(9,048

)

$

(80

)

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

Loss Reclassified from AOCI to Income for the

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

Location

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest and debt expense

 

$

(3,159

)

$

(1,778

)

$

(6,716

)

$

(3,099

)

 

 

 

 

 

(Loss) Gain Recognized in OCI on Derivatives for the

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

$

(2,612

)

$

(80

)

$

(21,424

)

$

32,446

 

 

10.  FAIR VALUE MEASUREMENTS

 

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

 

Recurring

 

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

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 1

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

$

 

$

16,603

 

$

 

$

4,384

 

Physical index derivative contracts

 

 

65

 

 

28

 

Futures contracts for refined products

 

8,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Physical fixed price derivative contracts

 

 

(2,865

)

 

(6,247

)

Physical index derivative contracts

 

 

(196

)

 

(310

)

Futures contracts for refined products

 

(225

)

 

(8,070

)

 

Interest rate derivatives

 

 

 

 

(30,045

)

Fair value

 

$

8,195

 

$

13,607

 

$

(8,070

)

$

(32,190

)

 

The values of the Level 1 derivative assets and liabilities were based on quoted market prices obtained from the New York Mercantile Exchange.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The values of the Level 2 interest rate derivatives were determined using expected cash flow models, which incorporated market inputs including the implied forward London Interbank Offered Rate yield curve for the same period as the future interest rate swap settlements.

 

The values of the Level 2 commodity derivative contracts were calculated using market approaches based on observable market data inputs, including published commodity pricing data, which is verified against other available market data, and market interest rate and volatility data.  Level 2 fixed price derivative assets are net of credit value adjustments (“CVAs”) determined using an expected cash flow model, which incorporates assumptions about the credit risk of the derivative contracts based on the historical and expected payment history of each customer, the amount of product contracted for under the agreement and the customer’s historical and expected purchase performance under each contract.  The Merchant Services segment determined CVAs are appropriate because few of the Merchant Services segment’s customers entering into these derivative contracts are large organizations with nationally-recognized credit ratings.  The Level 2 fixed price derivative assets of $16.6 million and $4.4 million as of September 30, 2014 and December 31, 2013, respectively, are net of CVAs of ($0.1) million for both periods, respectively.  As of September 30, 2014, the Merchant Services segment did not hold any net liability derivative position containing credit contingent features.

 

Financial instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets at amounts which approximate fair value due to the relatively short period to maturity of these financial instruments.  The fair values of our fixed-rate debt were estimated by observing market trading prices and by comparing the historic market prices of our publicly issued debt with the market prices of the publicly-issued debt of other master limited partnerships with similar credit ratings and terms.  The fair values of our variable-rate debt are their carrying amounts, as the carrying amount reasonably approximates fair value due to the variability of the interest rates.  The carrying value and fair value, using Level 2 input values, of our debt were as follows at the dates indicated (in thousands):

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

$

3,663,690

 

$

3,831,993

 

$

3,063,711

 

$

3,148,634

 

Variable-rate debt

 

182,000

 

182,000

 

255,000

 

255,000

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

$

3,845,690

 

$

4,013,993

 

$

3,318,711

 

$

3,403,634

 

 

We recognize transfers between levels within the fair value hierarchy as of the beginning of the reporting period.  We did not have any transfers between Level 1 and Level 2 during the nine months ended September 30, 2014 and 2013, respectively.

 

Non-Recurring

 

Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.  During the six months ended June 30, 2014, we recorded a non-cash asset impairment charge of $26.3 million related to our Natural Gas Storage disposal group since the carrying amount of the disposal group exceeded the estimated fair value less costs to sell the disposal group.   During the three months ended September 30, 2014, we reduced the non-cash asset impairment charge by $5.4 million due to changes in the carrying value of the net assets of our Natural Gas Storage disposal group.  The changes in the carrying value of the net assets consist primarily of the net loss experienced during the three months ended September 30, 2014.  We estimated fair value based on a market approach supported by a binding purchase and sale agreement for the disposal group.  See Note 3 for additional information.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

Buckeye Pipe Line Services Company, which employs the majority of our workforce, sponsors a defined benefit plan, the Retirement Income Guarantee Plan (the “RIGP”), and an unfunded post-retirement benefit plan (the “Retiree Medical Plan”).  The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as follows for the three months ended September 30, 2014 and 2013 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

54

 

$

41

 

$

108

 

$

166

 

Interest cost

 

134

 

(11

)

352

 

159

 

Expected return on plan assets

 

(98

)

(67

)

 

 

Amortization of prior service credit

 

 

 

(406

)

147

 

Amortization of unrecognized losses

 

308

 

239

 

299

 

265

 

Actuarial loss due to settlements

 

193

 

230

 

 

 

Net periodic benefit cost

 

$

591

 

$

432

 

$

353

 

$

737

 

 

The components of the net periodic benefit cost for the RIGP and the Retiree Medical Plan were as follows for the nine months ended September 30, 2014 and 2013 (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

163

 

$

163

 

$

323

 

$

323

 

Interest cost

 

403

 

403

 

1,056

 

1,056

 

Expected return on plan assets

 

(294

)

(294

)

 

 

Amortization of prior service credit

 

 

 

(1,218

)

(1,218

)

Amortization of unrecognized losses

 

924

 

924

 

895

 

895

 

Actuarial loss due to settlements

 

580

 

683

 

 

 

Net periodic benefit cost

 

$

1,776

 

$

1,879

 

$

1,056

 

$

1,056

 

 

During the three months ended September 30, 2014 and 2013, we contributed $0.7 million and $0.3 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.  For the nine months ended September 30, 2014 and 2013, we contributed $2.1 million and $1.0 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.

 

12.  UNIT-BASED COMPENSATION PLANS

 

We award unit-based compensation to employees and directors primarily under the Buckeye Partners, L.P. 2013 Long-Term Incentive Plan (the “LTIP”).  We formerly awarded options to acquire LP Units to employees pursuant to the Buckeye Partners, L.P. Unit Option and Distribution Equivalent Plan (the “Option Plan”).  These compensation plans are further discussed below.

 

We recognized compensation expense from continuing operations related to the LTIP, which includes awards under the 2009 Long-Term Incentive Plan (the “2009 Plan”), discussed below, and the Option Plan, of $5.2 million and $4.9 million for the three months ended September 30, 2014 and 2013, respectively.  For the nine months ended September 30, 2014 and 2013, we recognized compensation expense of $13.1 million and $12.0 million, respectively.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

LTIP

 

The LTIP is the successor long-term incentive compensation plan to the 2009 Plan.  The LTIP was approved by our unitholders in June 2013, and following such approval, (i) the 2009 Plan was merged with and into the LTIP, (ii) no further grants will be made under the 2009 Plan, and (iii) LP Units with respect to all grants outstanding under the 2009 Plan will be issued under the LTIP.  As of September 30, 2014, there were 2,924,151 LP Units available for issuance under the LTIP.

 

Deferral Plan under the LTIP

 

We also maintain the Buckeye Partners, L.P. Unit Deferral and Incentive Plan, as amended and restated effective July 31, 2013 (the “Deferral Plan”), pursuant to which we issue phantom and matching units under the LTIP to certain employees in lieu of a portion of the cash payments such employees would be entitled to receive under the Buckeye Partners, L.P. Annual Incentive Compensation Plan, as amended and restated, effective January 1, 2012.  At December 31, 2013 and 2012, actual compensation awards deferred under the Deferral Plan were $2.7 million and $1.4 million, for which 75,870 and 51,668 phantom units (including matching units) were granted during the nine months ended September 30, 2014 and the year ended 2013, respectively.  These grants are included as granted in the LTIP activity table below.

 

Awards under the LTIP

 

During the nine months ended September 30, 2014, the Compensation Committee of the Board granted 209,100 phantom units to employees (including the 75,870 phantom units granted pursuant to the Deferral Plan, as discussed above), 16,000 phantom units to independent directors of Buckeye GP and 183,562 performance units to employees.

 

The following table sets forth the LTIP activity for the periods indicated (in thousands, except per unit amounts):

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Number of

 

Fair Value

 

 

 

LP Units

 

per LP Unit

 

Unvested at January 1, 2014

 

813

 

$

59.36

 

Granted

 

409

 

71.68

 

Vested

 

(191

)

63.68

 

Forfeited

 

(77

)

63.87

 

Unvested at September 30, 2014

 

954

 

$

63.35

 

 

At September 30, 2014, $26.9 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of 1.9 years.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Unit Option Plan

 

The following is a summary of the changes in the options outstanding (all of which are vested) under the Option Plan for the periods indicated (in thousands, except per unit amounts):

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Strike Price

 

Contractual

 

Intrinsic

 

 

 

LP Units

 

per LP Unit

 

Term (in years)

 

Value (1)

 

Outstanding at January 1, 2014

 

46

 

$

47.32

 

2.4

 

$

1,080

 

Exercised

 

(15

)

45.88

 

 

 

 

 

Forfeited, cancelled or expired

 

(2

)

 

 

 

 

 

 

Outstanding at September 30, 2014

 

29

 

48.41

 

1.9

 

$

893

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2014

 

29

 

$

48.41

 

1.9

 

$

893

 

 


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

 

The total intrinsic value of options exercised was $0.4 million and $0.5 million during the nine months ended September 30, 2014 and 2013, respectively.

 

13.  PARTNERS’ CAPITAL AND DISTRIBUTIONS

 

During the nine months ended September 30, 2014, we sold 1.0 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”) and received $74.5 million in net proceeds after deducting commissions and other related expenses.  During the nine months ended September 30, 2014, we paid $0.8 million of compensation in aggregate to the agents under the Equity Distribution Agreements.  During the three months ended September 30, 2014, we did not sell any LP Units under the Equity Distribution Agreements.

 

In September 2014, we completed a public offering of 6.75 million LP Units pursuant to an effective shelf registration statement, which priced at $80.00 per unit, resulting in total gross proceeds of $540.0 million before deducting underwriting fees and estimated offering expenses of $19.2 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility, to fund a portion of the Buckeye Texas Partners Transaction and for general partnership purposes.  Pursuant to the underwriting agreement, the underwriters had an option to purchase up to an additional 1.0 million LP Units, which they exercised in October 2014.  These additional proceeds will be recognized in the fourth quarter of 2014.  See Note 17 for further discussion.

 

In August 2014, we completed a public offering of 2.6 million LP Units pursuant to an effective shelf registration statement, which priced at $76.60 per unit.  The underwriters also exercised an option to purchase 0.4 million additional LP Units, resulting in total gross proceeds of $229.0 million before deducting underwriting fees and estimated offering expenses of $2.4 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility and for general partnership purposes.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Summary of Changes in Outstanding Units

 

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

 

 

 

Limited

 

 

 

Partners

 

 

 

 

 

Outstanding at January 1, 2014

 

115,064

 

LP Units issued pursuant to the Option Plan (1)

 

15

 

LP Units issued pursuant to the LTIP (1)

 

168

 

Issuance of LP Units to institutional investors

 

9,740

 

Issuance of LP Units through Equity Distribution Agreements

 

1,012

 

Outstanding at September 30, 2014

 

125,999

 

 


(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 $387.0 million and $308.5 million during the nine months ended September 30, 2014 and 2013, respectively.

 

On November 7, 2014, we announced a quarterly distribution of $1.125 per LP Unit that will be paid on November 25, 2014 to unitholders of record on November 18, 2014.  Based on the LP Units outstanding as of September 30, 2014 and the 1.0 million LP Units issued in connection with the additional shares exercised in October 2014, as discussed above, cash distributed to unitholders on November 25, 2014 will total $143.4 million.

 

14.  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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Buckeye Partners, L.P.

 

$

102,943

 

$

77,254

 

$

216,431

 

$

243,025

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average units outstanding - basic

 

118,804

 

106,223

 

116,747

 

105,068

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit - basic

 

$

0.87

 

$

0.73

 

$

1.85

 

$

2.31

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average units outstanding - basic

 

118,804

 

106,223

 

116,747

 

105,068

 

Dilutive effect of LP Unit options and LTIP awards granted

 

625

 

551

 

558

 

448

 

Weighted average units outstanding - diluted

 

119,429

 

106,774

 

117,305

 

105,516

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit - diluted

 

$

0.86

 

$

0.72

 

$

1.85

 

$

2.30

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15.  BUSINESS SEGMENTS

 

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

 

Pipelines & Terminals

 

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

 

Global Marine Terminals

 

The Global Marine Terminals segment provides marine bulk storage and marine terminal throughput services 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.  The Global Marine Terminals segment operates three liquid petroleum products terminals acquired in conjunction with the Hess Terminals Acquisition in December 2013.

 

In September 2014, we acquired an 80% interest in a newly-formed entity, Buckeye Texas, for $821.0 million, net of cash acquired of $15.0 million and working capital and capital expenditure adjustments required by the contribution agreement with Trafigura Corpus Christi Holdings Inc.  Buckeye Texas and its subsidiaries will own and operate a vertically integrated system of midstream assets including a deep-water, high volume marine terminal located on the Corpus Christi Ship Channel, a condensate splitter and LPG storage complex in Corpus Christi and three crude oil and condensate gathering facilities in the Eagle Ford Shale.  Upon completion of the initial build-out, the assets will form an integrated system with connectivity from the production in the field to the marine terminal infrastructure and the refining complex in Corpus Christi. The Corpus Christi facilities have five vessel berths, including three deep-water docks, and upon completion of the initial build-out, they will offer approximately 5.6 million barrels of liquid petroleum products storage capacity along with rail and truck loading/unloading capability. In addition, three field gathering facilities with associated storage and pipeline connectivity will allow Buckeye Texas to move Eagle Ford crude oil and condensate production directly to the terminalling complex in Corpus Christi.  As we acquired a controlling financial interest in Buckeye Texas, we reflected the acquisition as a consolidated subsidiary.  See Note 2 for further discussion.

 

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, natural gas liquids, 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.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Development & Logistics

 

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

 

Natural Gas Storage Disposal Group

 

In December 2013, the Board approved a plan to divest the natural gas storage segment facility and related assets that our subsidiary Lodi Gas Storage, L.L.C. owns and operates in Northern California as we no longer believe this business is aligned with our long-term business strategy.  In this report, we refer to this group of assets as our Natural Gas Storage disposal group.  Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our unaudited condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 and reported the results of operations as discontinued operations for all periods presented in this report.  As such, we have adjusted our prior period segment information to conform to the current alignment of our continuing business and discontinued operations.  In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage business for $105.0 million.  The transaction is expected to close in the first quarter of 2015, subject to regulatory approvals and customary closing conditions.  As a result of the sale, we recorded a non-cash asset impairment charge of $26.3 million within “Loss from discontinued operations” on our unaudited condensed consolidated statement of operations for the six months ended June 30, 2014.  During the three months ended September 30, 2014, we reduced the non-cash asset impairment charge by $5.4 million due to changes in the carrying value of the net assets of our Natural Gas Storage disposal group.  The changes in the carrying value of the net assets consist primarily of the net loss experienced during the three months ended September 30, 2014.  Please see Note 3 for additional information.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Pipelines & Terminals

 

$

228,466

 

$

194,582

 

$

665,629

 

$

568,872

 

Global Marine Terminals

 

104,522

 

61,133

 

284,082

 

186,416

 

Merchant Services

 

1,246,462

 

815,095

 

4,420,205

 

2,627,718

 

Development & Logistics

 

21,003

 

16,439

 

56,637

 

42,048

 

Intersegment

 

(26,980

)

(13,398

)

(52,300

)

(26,537

)

Total revenue

 

$

1,573,473

 

$

1,073,851

 

$

5,374,253

 

$

3,398,517

 

 

For the three and nine months ended September 30, 2014 and 2013, no customers contributed 10% or more of consolidated revenue.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

1,482,363

 

$

1,020,438

 

$

5,116,151

 

$

3,238,275

 

International

 

91,110

 

53,413

 

258,102

 

160,242

 

Total revenue

 

$

1,573,473

 

$

1,073,851

 

$

5,374,253

 

$

3,398,517

 

 

Adjusted EBITDA

 

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

 

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

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from continuing operations:

 

 

 

 

 

 

 

 

 

Pipelines & Terminals

 

$

128,171

 

$

115,876

 

$

370,570

 

$

338,896

 

Global Marine Terminals

 

57,270

 

35,964

 

166,532

 

109,246

 

Merchant Services

 

10,468

 

(74

)

(12,568

)

10,844

 

Development & Logistics

 

4,713

 

4,407

 

15,500

 

11,247

 

Adjusted EBITDA from continuing operations

 

$

200,622

 

$

156,173

 

$

540,034

 

$

470,233

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

107,008

 

$

83,618

 

$

270,486

 

$

264,134

 

Less: Net income attributable to noncontrolling interests

 

(785

)

(997

)

(2,547

)

(3,095

)

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

 

106,223

 

82,621

 

267,939

 

261,039

 

Add: Interest and debt expense

 

43,838

 

34,341

 

127,063

 

94,827

 

Income tax expense

 

243

 

195

 

319

 

521

 

Depreciation and amortization (1)

 

45,406

 

36,842

 

131,791

 

110,092

 

Non-cash unit-based compensation expense

 

5,228

 

4,932

 

13,149

 

12,009

 

Acquisition and transition expense (2)

 

2,451

 

 

8,076

 

 

Less: Amortization of unfavorable storage contracts (3)

 

(2,767

)

(2,758

)

(8,303

)

(8,255

)

Adjusted EBITDA from continuing operations

 

$

200,622

 

$

156,173

 

$

540,034

 

$

470,233

 

 


(1)         Includes depreciation and amortization of noncontrolling interests.

(2)         Represents acquisition and transition expense related to the Hess Terminals Acquisition in December 2013 and the Buckeye Texas Partners Transaction in September 2014.

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

 

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BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16.  SUPPLEMENTAL CASH FLOW INFORMATION

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash paid for interest (net of capitalized interest)

 

$

130,323

 

$

105,876

 

Cash paid for income taxes

 

620

 

719

 

Capitalized interest

 

5,641

 

5,255

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

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

 

$

(25,860

)

$

7,140

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

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

 

$

 

$

25,687

 

 


(1)         In September 2013, all of our Class B units, which represented a separate class of our limited partnership interests, converted into LP Units on a one-for-one basis.  No Class B units have been issued subsequent to the conversion of Class B units into LP Units.  See our Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion.

 

17.  SUBSEQUENT EVENTS

 

Repayment of Debt

 

In October 2014, we repaid in full the $275.0 million principal amount outstanding under the 5.300% Notes and $7.3 million of related accrued interest using funds available under our Credit Facility.

 

Equity Offering

 

In October 2014, the underwriters for our September 2014 public offering of 6.75 million LP Units exercised an option to purchase 1.0 million additional LP Units pursuant to the underwriting agreement, resulting in gross proceeds of $81.0 million before deducting underwriting fees and expenses of $2.8 million.  We used the new proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility.

 

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

 

Cautionary Note Regarding Forward-Looking Statements

 

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

 

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

 

Overview of Business

 

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

 

Buckeye owns and operates a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage and marketing of liquid petroleum products.  We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, with approximately 6,000 miles of pipeline and more than 120 liquid petroleum products terminals with aggregate storage capacity of over 110 million barrels across our portfolio of pipelines, inland terminals and an integrated network of marine terminals located primarily in the East Coast and Gulf Coast regions of the United States and in the Caribbean.  Our flagship marine terminal in The Bahamas, Bahamas Oil Refining Company International Limited (“BORCO”), is one of the largest marine crude oil and petroleum products storage facilities in the world and provides an array of logistics and blending services for the global flow of petroleum products.  Our network of marine terminals enables us to facilitate global flows of crude oil, refined petroleum products, and other commodities, and to offer our customers connectivity to some of the world’s most important bulk storage and blending hubs.  In September 2014, we expanded our network of marine midstream assets by acquiring a controlling interest in a company with assets located in Corpus Christi, Texas and the Eagle Ford Shale.  We are also a wholesale distributor of refined petroleum products in areas served by our pipelines and terminals.  Finally, Buckeye operates and/or maintains third-party pipelines under agreements with major oil and gas, petrochemical and chemical companies, and performs certain engineering and construction management services for third parties.

 

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In December 2013, the Board approved a plan to divest our Natural Gas Storage segment and its related assets as we no longer believe this business is aligned with our long-term business strategy. In this report, we refer to this group of assets and related liabilities as our Natural Gas Storage disposal group. Accordingly, we have classified the disposal group as “Assets held for sale” and “Liabilities held for sale” in our consolidated balance sheets as of September 30, 2014 and December 31, 2013 and reported the results of operations as discontinued operations for all periods presented in this report.  In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage business for $105.0 million.  The transaction is expected to close in the first quarter of 2015, subject to regulatory approvals and customary closing conditions. For additional information, see Note 3 and Note 15 in the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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

 

Recent Developments

 

Business Combination

 

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

 

Equity Offerings

 

In September 2014, we completed a public offering of 6.75 million LP Units pursuant to an effective shelf registration statement, which priced at $80.00 per unit, resulting in total gross proceeds of $540.0 million before deducting underwriting fees and estimated offering expenses of $19.2 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility, to fund a portion of the Buckeye Texas Partners Transaction and for general partnership purposes.  Pursuant to the underwriting agreement, the underwriters had an option to purchase up to an additional 1.0 million LP Units, which they exercised in October 2014.  These additional proceeds will be recognized in the fourth quarter of 2014.  See Note 17 in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.

 

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In August 2014, we completed a public offering of 2.6 million LP Units pursuant to an effective shelf registration statement, which priced at $76.60 per unit.  The underwriters also exercised an option to purchase 0.4 million additional LP Units, resulting in total gross proceeds of $229.0 million before deducting underwriting fees and estimated offering expenses of $2.4 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility and for general partnership purposes.

 

Credit Facility

 

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

 

Notes Offering

 

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

 

Repayment of Debt

 

In October 2014, we repaid in full the $275.0 million principal amount outstanding under the 5.300% Notes and $7.3 million of related accrued interest using funds available under our Credit Facility.  See Note 17 in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.

 

At-the-Market Offering Program

 

During the nine months ended September 30, 2014, we sold 1.0 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”) and received $74.5 million in net proceeds after deducting commissions and other related expenses.  During the nine months ended September 30, 2014, we paid $0.8 million of compensation in aggregate to the agents under the Equity Distribution Agreements.  During the three months ended September 30, 2014, we did not sell any LP Units under the Equity Distribution Agreements.

 

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Overview of Operating Results

 

Net income attributable to our unitholders was $216.4 million for the nine months ended September 30, 2014, which was a decrease of $26.6 million, or 10.9% from $243.0 million for the corresponding period in 2013. Operating income was $392.4 million for the nine months ended September 30, 2014, which is an increase of $38.2 million, or 10.8% from $354.2 million for the corresponding period in 2013.  Our results for the nine months ended September 30, 2014 include year-over-year improvement in our Pipelines & Terminals, Global Marine Terminals and Development & Logistics segments, while our Merchant Services segment experienced a loss as a result of weaker business conditions in the various refined petroleum markets in which we serve, and unfavorable results from implementing strategies during the second quarter of 2014 intended to increase the utilization of our physical assets, grow our marketing business and mitigate risk.  These losses were attributed to (i) costs associated with entering into new markets to grow our marketing business and support the optimization of our underlying physical assets, (ii) losses on the liquidation of physical positions in markets less liquid than in our core markets, (iii) losses resulting from the timing of activity intended to mitigate risk on gasoline and distillates for the summer driving season and upcoming heating season, and (iv) a significant decline in the value of ethanol which is carried in inventory to support our gasoline business.  These losses were partially offset by increased earnings as a result of higher rack margins.

 

We will continue to align our risk management activities with our long-term strategic initiatives, which may result in the exiting of markets that are either illiquid or exposed to price volatility that cannot be adequately hedged.  We are focused on targeting refined petroleum markets within our existing asset footprint with attractive competitive dynamics and liquidity that align with our current risk profile.

 

The decrease in net income attributable to our unitholders was primarily the result of the loss from discontinued operations of our natural gas storage facility.  The loss from discontinued operations of our natural gas storage facility for the nine months ended September 30, 2014 of $51.5 million is $33.5 million more unfavorable than a loss of $18.0 million for the corresponding period in 2013.  The loss increase is primarily due to a $20.9 million non-cash impairment charge and losses due to the extreme price volatility we experienced when taking certain operative measures to ensure we met the deliverability requirements of our customers during peak times, resulting in costs of approximately $7 million during the period.  For additional information see Note 3, Note 10 and Note 15 in the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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

 

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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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,573,473

 

$

1,073,851

 

$

5,374,253

 

$

3,398,517

 

Costs and expenses

 

1,424,532

 

957,074

 

4,981,873

 

3,044,293

 

Operating income

 

148,941

 

116,777

 

392,380

 

354,224

 

Other expense, net

 

(41,690

)

(32,964

)

(121,575

)

(89,569

)

Income from continuing operations before taxes

 

107,251

 

83,813

 

270,805

 

264,655

 

Income tax expense

 

(243

)

(195

)

(319

)

(521

)

Income from continuing operations

 

107,008

 

83,618

 

270,486

 

264,134

 

Loss from discontinued operations

 

(3,280

)

(5,367

)

(51,508

)

(18,014

)

Net income

 

103,728

 

78,251

 

218,978

 

246,120

 

Less: Net income attributable to noncontrolling interests

 

(785

)

(997

)

(2,547

)

(3,095

)

Net income attributable to Buckeye Partners, L.P.

 

$

102,943

 

$

77,254

 

$

216,431

 

$

243,025

 

 

Non-GAAP Financial Measures

 

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

 

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

 

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The following table presents Adjusted EBITDA 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from continuing operations:

 

 

 

 

 

 

 

 

 

Pipelines & Terminals

 

$

128,171

 

$

115,876

 

$

370,570

 

$

338,896

 

Global Marine Terminals

 

57,270

 

35,964

 

166,532

 

109,246

 

Merchant Services

 

10,468

 

(74

)

(12,568

)

10,844

 

Development & Logistics

 

4,713

 

4,407

 

15,500

 

11,247

 

Adjusted EBITDA from continuing operations

 

$

200,622

 

$

156,173

 

$

540,034

 

$

470,233

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

107,008

 

$

83,618

 

$

270,486

 

$

264,134

 

Less: Net income attributable to noncontrolling interests

 

(785

)

(997

)

(2,547

)

(3,095

)

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

 

106,223

 

82,621

 

267,939

 

261,039

 

Add:

Interest and debt expense

 

43,838

 

34,341

 

127,063

 

94,827

 

 

Income tax expense

 

243

 

195

 

319

 

521

 

 

Depreciation and amortization (1)

 

45,406

 

36,842

 

131,791

 

110,092

 

 

Non-cash unit-based compensation expense

 

5,228

 

4,932

 

13,149

 

12,009

 

 

Acquisition and transition expense (2)

 

2,451

 

 

8,076

 

 

Less:

Amortization of unfavorable storage contracts (3)

 

(2,767

)

(2,758

)

(8,303

)

(8,255

)

Adjusted EBITDA from continuing operations

 

$

200,622

 

$

156,173

 

$

540,034

 

$

470,233

 

Less: Interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other

 

(39,496

)

(31,267

)

(116,842

)

(89,154

)

Income tax expense

 

(243

)

(195

)

(319

)

(521

)

Maintenance capital expenditures

 

(20,433

)

(26,086

)

(56,205

)

(44,226

)

Distributable cash flow from continuing operations

 

$

140,450

 

$

98,625

 

$

366,668

 

$

336,332

 

 


(1)         Includes depreciation and amortization of noncontrolling interests.

(2)         Represents acquisition and transition expense related to the Hess Terminals Acquisition in December 2013 and the Buckeye Texas Partners Transaction in September 2014.

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

 

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The following table presents product volumes and average tariff rates for the Pipelines & Terminals segment in barrels per day (“bpd”) and total volumes sold in gallons for the Merchant Services segment for the periods indicated:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Pipelines & Terminals (average bpd in thousands):

 

 

 

 

 

 

 

 

 

Pipelines:

 

 

 

 

 

 

 

 

 

Gasoline

 

721.9

 

723.2

 

700.3

 

720.4

 

Jet fuel

 

349.8

 

343.1

 

332.1

 

334.1

 

Middle distillates (1)

 

321.8

 

302.9

 

350.7

 

330.5

 

Other products (2)

 

34.9

 

29.4

 

37.0

 

29.2

 

Total pipelines throughput

 

1,428.4

 

1,398.6

 

1,420.1

 

1,414.2

 

 

 

 

 

 

 

 

 

 

 

Terminals:

 

 

 

 

 

 

 

 

 

Products throughput

 

1,133.5

 

949.5

 

1,128.7

 

965.5

 

 

 

 

 

 

 

 

 

 

 

Pipeline Average Tariff (cents/bbl)

 

86.8

 

84.1

 

85.5

 

81.8

 

 

 

 

 

 

 

 

 

 

 

Merchant Services (in millions of gallons):

 

 

 

 

 

 

 

 

 

Sales volumes

 

464.1

 

285.6

 

1,571.6

 

909.8

 

 


(1)         Includes diesel fuel and heating oil.

(2)         Includes LPG, intermediate petroleum products and crude oil.

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

 

Consolidated

 

Adjusted EBITDA was $200.6 million for the three months ended September 30, 2014, which is an increase of $44.4 million, or 28.5%, from $156.2 million for the corresponding period in 2013.  The increase in Adjusted EBITDA was primarily related to positive contribution from the assets acquired from Hess in December 2013 in the Pipelines & Terminals and Global Marine Terminals segments and benefit of contributions from growth capital spending in the Pipelines & Terminals segment, as well as increased earnings as a result of higher margins in the Merchant Services segment.

 

Revenue was $1,573.5 million for the three months ended September 30, 2014, which is an increase of $499.6 million, or 46.5%, from $1,073.9 million for the corresponding period in 2013.  The increase in revenue was primarily related to increased product sales volumes and an increase in the fuel oil supply and distribution services in the Caribbean in our Merchant Services segment, as well as the benefit of the terminals acquired from Hess in December 2013 in both our Pipelines & Terminals and Global Marine Terminals segments.

 

Operating income was $148.9 million for the three months ended September 30, 2014, which is an increase of $32.1 million, or 27.5%, from $116.8 million for the corresponding period in 2013.  The increase in operating income was primarily related to benefit of the terminals acquired from Hess in December 2013 in both our Pipelines & Terminals and Global Marine Terminals segments and increased contribution from our Merchant Services segment as a result of higher margins.  These increases were offset by an increase in depreciation and amortization expense primarily due to the assets acquired from Hess in December 2013.

 

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Distributable cash flow was $140.5 million for the three months ended September 30, 2014, which is an increase of $41.9 million, or 42.5%, from $98.6 million for the corresponding period in 2013.  The increase in distributable cash flow was primarily related to an increase of $44.4 million in Adjusted EBITDA as described above, partially offset by an $8.3 million increase in interest expense, excluding amortization of deferred financing costs, debt discounts and other, primarily resulting from the long-term debt issuances in 2013, including the debt issued to partially fund the assets acquired from Hess in December 2013.

 

Adjusted EBITDA by Segment

 

Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $128.2 million for the three months ended September 30, 2014, which is an increase of $12.3 million, or 10.6%, from $115.9 million for the corresponding period in 2013.  The positive factors impacting Adjusted EBITDA were primarily related to a $18.5 million increase in revenue resulting from an increase in terminalling throughput and storage contracts, including those associated with the assets acquired from Hess in December 2013, $11.8 million incremental revenue from capital investments in internal growth and diversification initiatives, including butane blending capabilities and crude oil handling services, a $5.3 million increase in revenue due to increases in average pipeline tariff rates and longer-haul shipments, a $1.2 million increase in other revenue, including an increase in revenue due to higher pipeline volumes.

 

The negative factors impacting Adjusted EBITDA were a $21.5 million increase in operating expenses, primarily related to outside services for asset-maintenance activities and incremental costs necessary to operate the terminals acquired from Hess in December 2013 and $3.0 million in less favorable product net settlement experience.

 

Pipeline volumes increased by 2% due to stronger demand for middle distillates resulting from changes in regional production and supply.  Overall terminalling volumes increased by 19.4% primarily due to effective commercialization and integration of the terminals acquired from Hess in December 2013.  Legacy terminalling volumes increased by 7.3% due to higher demand for gasoline, distillates and jet fuel, new customer contracts and service offerings at select locations, including the benefit of contributions from growth capital spending.

 

Global Marine Terminals.  Adjusted EBITDA from the Global Marine Terminals segment was $57.3 million for the three months ended September 30, 2014, which is an increase of $21.3 million, or 59.2%, from $36.0 million for the corresponding period in 2013.  The positive factors impacting Adjusted EBITDA were a $17.7 million increase in storage revenue primarily as a result of the assets acquired from Hess in December 2013 and a $14.3 million increase in revenue from ancillary services.  Ancillary services include the berthing of ships at our jetties, heating services and settlement gains/losses.  The increase in revenue was offset by an $10.7 million increase in operating expenses primarily related to incremental costs necessary to operate the assets acquired from Hess in December 2013.

 

Merchant Services.  Adjusted EBITDA from the Merchant Services segment was $10.5 million for the three months ended September 30, 2014, which is an improvement of $10.6 million from a loss of $0.1 million for the corresponding period in 2013.  The positive factors impacting Adjusted EBITDA were primarily related to higher rack margins associated with lower product costs and favorable basis moves impacting our inventory portfolio.

 

Adjusted EBITDA was positively impacted by a $431.4 million increase in revenue, which included a $509.4 million increase due to 62.5% higher volumes sold, offset by a $78.0 million decrease in refined petroleum product sales due to a price decrease of $0.16 per gallon (average sales prices per gallon were $2.69 and $2.85 for the 2014 and 2013 periods, respectively).

 

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Adjusted EBITDA was negatively impacted by a $419.2 million increase in cost of product sales, which included a $507.3 million increase due to 62.5% higher volumes sold, offset by a $88.1 million decrease in refined petroleum product cost due to a price decrease of $0.19 per gallon (average cost prices per gallon were $2.65 and $2.84 for the 2014 and 2013 periods, respectively) and $1.6 million increase in operating expenses, which primarily related to overhead and administrative costs.

 

Development & Logistics.  Adjusted EBITDA from the Development & Logistics segment was $4.7 million for the three months ended September 30, 2014, which is an increase of $0.3 million, or 6.9%, from $4.4 million for the corresponding period in 2013.  The increase in Adjusted EBITDA was primarily due to a $4.1 million increase in third-party engineering and operations revenue primarily due to increased project activity and a $0.5 million increase in revenue related to the LPG storage caverns, partially offset by a $4.3 million increase in engineering and operations expenses.

 

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

 

Consolidated

 

Adjusted EBITDA was $540.0 million for the nine months ended September 30, 2014, which is an increase of $69.8 million, or 14.8%, from $470.2 million for the corresponding period in 2013.  The increase in Adjusted EBITDA was primarily related to positive contribution from the assets acquired from Hess in December 2013 in the Pipelines & Terminals and Global Marine Terminals segments and benefit of contributions from growth capital spending in the Pipelines & Terminals segment.  These increases in Adjusted EBITDA were offset by the loss in the Merchant Services segment as a result of weaker business conditions in the various refined petroleum markets in which we serve, and unfavorable results from implementing strategies during the second quarter of 2014 intended to increase the utilization of our physical assets, grow our marketing business and mitigate risk.  These losses were attributed to (i) costs associated with entering into new markets to grow our marketing business and support the optimization of our underlying physical assets, (ii) losses on the liquidation of physical positions in markets less liquid than in our core markets, (iii) losses resulting from the timing of activity intended to mitigate risk on gasoline and distillates for the summer driving season and upcoming heating season, and (iv) a significant decline in the value of ethanol which is carried in inventory to support our gasoline business.

 

Revenue was $5,374.3 million for the nine months ended September 30, 2014, which is an increase of $1,975.8 million, or 58.1%, from $3,398.5 million for the corresponding period in 2013.  The increase in revenue was primarily related to increased product sales volumes and an increase in the fuel oil supply and distribution services in the Caribbean in our Merchant Services segment, as well as the benefit of the terminals acquired from Hess in December 2013 in both our Pipelines & Terminals and Global Marine Terminals segments.

 

Operating income was $392.4 million for the nine months ended September 30, 2014, which is an increase of $38.2 million, or 10.8%, from $354.2 million for the corresponding period in 2013.  The increase in operating income was primarily related to the benefit of the terminals acquired from Hess in December 2013 in both our Pipelines & Terminals and Global Marine Terminals segments.  These increases were offset by the increase in depreciation and amortization expense primarily due to the assets acquired from Hess in December 2013 and the loss in the Merchant Services segment as discussed above.

 

Distributable cash flow was $366.7 million for the nine months ended September 30, 2014, which is an increase of $30.4 million, or 9.0%, from $336.3 million as compared to the corresponding period in 2013.  The increase in distributable cash flow was primarily related to an increase of $69.8 million in Adjusted EBITDA as described above, partially offset by a $27.7 million increase in interest expense, excluding amortization of deferred financing costs, debt discounts and other, primarily resulting from the long-term debt issuances in 2013, including the debt issued to partially fund the assets acquired from Hess in December 2013, and a $12.0 million increase in maintenance capital expenditures relating to a concerted effort to more timely perform pipeline and tank integrity work throughout the year in the Pipelines & Terminals segment.

 

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Adjusted EBITDA by Segment

 

Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $370.6 million for the nine months ended September 30, 2014, which is an increase of $31.7 million, or 9.3%, from $338.9 million for the corresponding period in 2013.  The positive factors impacting Adjusted EBITDA were related to a $53.3 million increase in revenue resulting from an increase in terminalling throughput and storage contracts, including those associated with the assets acquired from Hess in December 2013, $25.0 million incremental revenue from capital investments in internal growth and diversification initiatives, including butane blending capabilities, crude oil handling services and the ability to store and throughput other hydrocarbons, a $16.1 million increase in revenue due to increases in average pipeline tariff rates and longer-haul shipments, and $3.2 million in more favorable net settlement experience and a $1.7 million increase in other revenue, including an increase in revenue due to higher pipeline volumes.

 

The negative factors impacting Adjusted EBITDA were a $67.6 million increase in operating expenses, primarily related to outside services for asset-maintenance activities and incremental costs necessary to operate the terminals acquired from Hess in December 2013.

 

Pipeline volumes slightly increased despite weaker gasoline and jet fuel shipments resulting from extreme weather conditions in early 2014.  Overall terminalling volumes increased by 16.9% due to effective commercialization and integration of the terminals acquired from Hess in December 2013.  Legacy terminalling volumes increased by 3.6% due to higher demand for gasoline, distillates and jet fuel, new customer contracts and service offerings at select locations, including the benefit of contributions from growth capital spending.

 

Global Marine Terminals.  Adjusted EBITDA from the Global Marine Terminals segment was $166.5 million for the nine months ended September 30, 2014, which is an increase of $57.3 million, or 52.4%, from $109.2 million for the corresponding period in 2013.  The positive factors impacting Adjusted EBITDA were $53.7 million increase in storage revenue primarily as a result of the assets acquired from Hess in December 2013 and a $27.6 million increase in revenue from ancillary services.  Ancillary services include the berthing of ships at our jetties, heating services and settlement gains/losses.  The increase in revenue was offset by a $24.0 million increase in operating expenses primarily related to incremental costs necessary to operate the assets acquired from Hess in December 2013.

 

Merchant Services.  Adjusted EBITDA from the Merchant Services segment was a loss of $12.6 million for the nine months ended September 30, 2014, which is a decrease of $23.4 million from earnings of $10.8 million for the corresponding period in 2013.  The loss experienced during the period is primarily attributed to losses in the second quarter described above, partially offset by strong domestic rack margins.

 

Adjusted EBITDA was positively impacted by a $1,792.5 million increase in revenue, which included a $1,911.4 million increase due to 72.7% of higher volumes sold, partially offset by a $118.9 million decrease in refined petroleum product sales due to a price decrease of $0.08 per gallon (average sales prices per gallon were $2.81 and $2.89 for the 2014 and 2013 periods, respectively).

 

Adjusted EBITDA was negatively impacted by a $1,812.9 million increase in cost of product sales, which included a $1,896.7 million increase due to 72.7% of higher volumes sold, offset by a $83.8 million decrease in refined petroleum product cost due to a price decrease of $0.06 per gallon (average cost prices per gallon were $2.81 and $2.87 for the 2014 and 2013 periods, respectively) and a $3.0 million increase in operating expenses, which primarily related to overhead and administrative costs.

 

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Development & Logistics.  Adjusted EBITDA from the Development & Logistics segment was $15.5 million for the nine months ended September 30, 2014, which is an increase of $4.3 million, or 37.8%, from $11.2 million for the corresponding period in 2013.  The increase in Adjusted EBITDA was primarily due to a $11.5 million increase in third-party engineering and operations revenue primarily due to increased project activity and $3.1 million increase in revenue related to the LPG storage caverns primarily due to the favorable seasonal impact of the depletion of inventory and a one-time gain recognition of inventory, partially offset by a $10.3 million increase in engineering and operations expenses.

 

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 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.  The Buckeye Merchant Service Companies 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.

 

Current Liquidity

 

As of September 30, 2014, we had $374.2 million of working capital (including net assets held for sale of $103.0 million) and $1,318.0 million of additional borrowing capacity under our Credit Facility.

 

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 (“SEC”) that, as of September 30, 2014, had $674.5 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 assets where such evaluation suggests such a transaction is in the best interest of Buckeye.

 

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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 September 30, 2014, we had total fixed-rate and variable-rate debt obligations of $3,663.7 million and $182.0 million, respectively, with an aggregate fair value of $4,014.0 million.  At September 30, 2014, we were in compliance with the covenants under our Credit Facility.

 

In September 2014, the Credit Facility was modified (through a new credit agreement) to provide for an increased borrowing capacity of $1.5 billion. The Credit Facility’s maturity date is September 30, 2019, with an option to extend the term for up to two one-year periods and a $500.0 million accordion option to increase the commitments.  At September 30, 2014, BMSC had $182.0 million collectively outstanding under the Credit Facility, all of which was classified as current liabilities in our unaudited condensed consolidated balance sheets, as related funds were used to finance current working capital needs.  See Note 8 in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.

 

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

 

In October 2014, we used our Credit Facility to repay in full the 5.300% Notes and related accrued interest.  See Note 17 in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.

 

Equity

 

In September 2014, we completed a public offering of 6.75 million LP Units pursuant to an effective shelf registration statement, which priced at $80.00 per unit, resulting in total gross proceeds of $540.0 million before deducting underwriting fees and estimated offering expenses of $19.2 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility, to fund a portion of the Buckeye Texas Partners Transaction and for general partnership purposes.  Pursuant to the underwriting agreement, the underwriters had an option to purchase up to an additional 1.0 million LP Units, which they exercised in October 2014.  These additional proceeds will be recognized in the fourth quarter of 2014.  See Note 17 in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.

 

In August 2014, we completed a public offering of 2.6 million LP Units pursuant to an effective shelf registration statement, which priced at $76.60 per unit.  The underwriter also exercised an option to purchase 0.4 million additional LP Units, resulting in total gross proceeds of $229.0 million before deducting underwriting fees and estimated offering expenses of $2.4 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility and for general partnership purposes.

 

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In May 2013, we entered into four separate Equity Distribution Agreements under which we may offer and sell up to $300.0 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 13 in the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.  During the nine months ended September 30, 2014, we sold 1.0 million LP Units in aggregate under the Equity Distribution Agreements, received $74.5 million in net proceeds after deducting commissions and other related expenses. During the nine months ended September 30, 2014, we paid $0.8 million of compensation in aggregate to the agents under the Equity Distribution Agreements.  During the three months ended September 30, 2014, we did not sell any LP Units under the Equity Distribution Agreements.

 

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):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

182,351

 

$

285,404

 

Investing activities

 

(1,118,377

)

(256,575

)

Financing activities

 

937,573

 

(30,623

)

Net increase (decrease) in cash and cash equivalents

 

$

1,547

 

$

(1,794

)

 

Operating Activities

 

Net cash provided by operating activities of $182.4 million for the nine months ended September 30, 2014 primarily related to $219.0 million of net income and $131.8 million of depreciation and amortization expense, offset by a $114.6 million increase in inventory, primarily due to the seasonal build-up of inventory for the heating season, a $73.2 million increase in trade receivables resulting primarily from the expanding business and the new merchant activities supporting the terminals acquired from Hess in December 2013 and a $51.5 million settlement to terminate the interest swap agreements related to the 5.300% Notes.

 

Net cash provided by operating activities of $285.4 million for the nine months ended September 30, 2013 primarily related to $246.1 million of net income and $115.8 million of depreciation and amortization expense, partially offset by an increase in inventory of $57.6 million and a $62.0 million settlement to terminate the interest swap agreements related to the 4.150% Notes.

 

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.

 

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Investing Activities

 

Net cash used in investing activities of $1,118.4 million for the nine months ended September 30, 2014 primarily related to $300.8 million of capital expenditures and $824.7 million primarily related to the Buckeye Texas Partners Transaction. Net cash used in investing activities of $256.6 million for the nine months ended September 30, 2013 primarily related to $257.0 million of capital expenditures.  See below for a discussion of capital spending.  For further discussion on the Buckeye Texas Partners Transaction, see Note 2 in the Notes to Consolidated Financial Statements.

 

Financing Activities

 

Net cash provided by financing activities of $937.6 million for the nine months ended September 30, 2014 primarily related to $73.0 million of net repayments under the Credit Facility, $599.1 million of proceeds from the issuance of the 4.350% and 5.600% Notes due on October 15, 2024 and October 15, 2044, respectively, $747.4 million of net proceeds from the issuance of an aggregate 9.7 million LP Units and $74.5 million of net proceeds from the issuance of 1 million LP Units under the Equity Distribution Agreements, partially offset by $384.4 million of cash distributions paid to our unitholders ($3.30 per LP Unit).

 

Net cash used in financing activities of $30.6 million for the nine months ended September 30, 2013 primarily related to $284.0 million of net repayments under the Credit Facility, $300.0 million related to the repayment of the 4.625% Notes and $305.5 million of cash distributions paid to our unitholders ($3.15 per LP Unit), partially offset by $499.1 million of proceeds from the issuance of the 4.150% Notes due on July 1, 2023, $349.2 million of net proceeds from the issuance of 6.9 million LP Units and $33.1 million of net proceeds from the issuance of 0.5 million LP Units under the Equity Distribution Agreements.

 

Capital Expenditures

 

We have capital expenditures, which we define as “maintenance capital expenditures,” in order to maintain and enhance the safety and integrity of our pipelines, terminals, storage facilities and related assets, and “expansion and cost reduction capital expenditures” to expand the reach or capacity of those assets, to improve the efficiency of our operations, reduce costs and to pursue new business opportunities.  Capital expenditures, excluding non-cash changes in accruals for capital expenditures, were as follows for the periods indicated (in thousands):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Maintenance capital expenditures

 

$

56,366

 

$

44,304

 

Expansion and cost reduction

 

244,465

 

212,704

 

Total capital expenditures, net

 

$

300,831

 

$

257,008

 

 

In the nine months ended September 30, 2014, maintenance capital expenditures included pump replacements and truck rack infrastructure upgrades, as well as pipeline and tank integrity work.  Expansion and cost reduction capital expenditures included investments in storage tank enhancements at BORCO and Perth Amboy and completion of rail off-loading facilities, butane blending, crude oil storage/transportation and various other cost reduction and revenue generating projects.  In the nine months ended September 30, 2013, maintenance capital expenditures included pump replacements and truck rack infrastructure upgrades, as well as pipeline and tank integrity work.  Expansion and cost reduction capital expenditures included investments in storage tank enhancements at BORCO and Perth Amboy, butane blending, rail off-loading facilities, crude oil storage/transportation and various other cost reduction and revenue generating projects.

 

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We have estimated our capital expenditures as follows for the year ending December 31, 2014 (in thousands):

 

 

 

2014

 

 

 

Low

 

High

 

Pipelines & Terminals:

 

 

 

 

 

Maintenance capital expenditures

 

$

60,000

 

$

65,000

 

Expansion and cost reduction

 

150,000

 

155,000

 

Total capital expenditures

 

$

210,000

 

$

220,000

 

 

 

 

 

 

 

Global Marine Terminals:

 

 

 

 

 

Maintenance capital expenditures

 

$

15,000

 

$

20,000

 

Expansion and cost reduction

 

200,000

 

215,000

 

Total capital expenditures

 

$

215,000

 

$

235,000

 

 

 

 

 

 

 

Overall:

 

 

 

 

 

Maintenance capital expenditures

 

$

75,000

 

$

85,000

 

Expansion and cost reduction

 

350,000

 

370,000

 

Total capital expenditures

 

$

425,000

 

$

455,000

 

 

Estimated maintenance capital expenditures include replacement of tank floors and tank roofs and upgrades to station and terminalling equipment, field instrumentation and cathodic protection systems. Estimated major expansion and cost reduction expenditures include storage tank enhancement and refurbishment projects across our system; various upgrades and expansions of our butane blending business; and construction of a deep-water, marine terminal, a condensate splitter, an LPG storage complex and three crude oil and condensate gathering facilities at locations associated with the Buckeye Texas Partners Transaction.

 

Off-Balance Sheet Arrangements

 

At September 30, 2014, 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, 2013.  There have been no material changes in that information other than as discussed below.  Also, see Note 9 in the Notes to Unaudited Condensed Consolidated Financial Statements for additional discussion related to derivative instruments and hedging activities.

 

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Market Risk — Non-Trading Instruments

 

We are exposed to financial market risks, including changes in commodity prices and interest rates. 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, changing refined petroleum commodity prices, and prevailing interest rates for our interest rate swaps.  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 and interest rates 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 derivative instruments for the periods indicated (in thousands):

 

 

 

Commodity

 

Interest

 

 

 

 

 

Instruments

 

Rate Swaps (1)

 

Total

 

Fair value of contracts outstanding at January 1, 2014

 

$

(10,215

)

$

(30,045

)

$

(40,260

)

Items recognized or settled during the period

 

(2,413

)

51,469

 

49,056

 

Fair value attributable to new deals

 

9,256

 

 

9,256

 

Change in fair value attributable to price movements

 

25,199

 

(21,424

)

3,775

 

Change in fair value attributable to non-performance risk

 

(25

)

 

(25

)

Fair value of contracts outstanding at September 30, 2014

 

$

21,802

 

$

 

$

21,802

 

 


(1)         In September 2014, we settled the remaining six forward-starting interest rate swaps for $51.5 million.  See Note 9 in the Notes to Unaudited Condensed Consolidated Financial Statements for additional discussion related to derivative instruments and hedging activities.

 

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.  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 September 30, 2014, the estimated fair value would be as follows (in thousands):

 

 

 

Resulting

 

 

 

Scenario

 

Classification

 

Fair Value

 

 

 

 

 

 

 

Fair value assuming no change in underlying commodity prices (as is)

 

Asset

 

$

436,207

 

Fair value assuming 10% increase in underlying commodity prices

 

Asset

 

$

438,909

 

Fair value assuming 10% decrease in underlying commodity prices

 

Asset

 

$

433,505

 

 

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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 nine months ended September 30, 2014 and 2013.

 

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 third quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued an updated version of its Internal Control — Integrated Framework (the “2013 Framework”).  Originally issued in 1992 (the “1992 Framework”), the framework helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application.  The 1992 Framework remains available during the transition period, which extends to December 15, 2014, after which time COSO will consider it as superseded by the 2013 Framework.  As of September 30, 2014, the Partnership continues to utilize the 1992 Framework during its transition to the 2013 Framework by the end of 2014.

 

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 4, “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 September 2014, Buckeye received a penalty from the Pipeline Hazardous Materials Safety Administration totaling $0.3 million in connection with certain procedural issues related to a product release that occurred in Macungie, Pennsylvania in June 2012.  We determined not to contest the penalty and paid it in full.

 

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On December 3, 2012, a complaint was filed in the Circuit Court for Washington County, Wisconsin by Chad Altschafl, et al., as plaintiffs, naming Buckeye, Buckeye Pipe Line Services Company (“Services Company”), Buckeye Pipe Line Holdings, L.P. (“BPH”), Buckeye Pipe Line Company, L.P. (“BPLC”) and West Shore Pipe Line Company (“West Shore”) as defendants, which complaint was amended by the plaintiffs on April 18, 2013, August 1, 2013 and again on September 23, 2013.  The second amended complaint filed on August 1, 2013 named Zurich American Insurance Co. (“Zurich”) as an additional defendant.  The plaintiffs are owners of 216 properties located in and around the Town of Jackson, Wisconsin.  The complaint attempts to allege various emotional distress and property damage claims under Wisconsin law arising out of a release of gasoline from a pipeline owned by West Shore in the Town of Jackson, Wisconsin on July 17, 2012.  On January 21, 2013, we filed an answer to the complaint, denying plaintiffs’ claims and asserting affirmative defenses.  No dollar amount of damages is stated in the complaint, but the plaintiffs seek damages to reimburse them for, among other things, alleged costs of restoring their properties, of installing a permanent supply of potable water, and the alleged diminution in value of their properties.  The plaintiffs also seek punitive damages.  On February 7, 2014, the plaintiffs filed a stipulation to voluntarily dismiss Zurich without prejudice and on February 19, 2014, the court entered an order dismissing Zurich.  Pursuant to the proposed scheduling order jointly submitted by the parties, a trial is scheduled to begin in August 2015.  The timing or outcome of final resolution of this matter cannot reasonably be determined at this time.  Buckeye, Services Company, BPH and BPLC are entitled to certain indemnifications by West Shore pursuant to an agreement between BPLC and West Shore, which we believe would result in West Shore indemnifying us for any losses stemming from this litigation.  In addition, West Shore has insurance that we believe should cover such losses, subject to a $3 million deductible.  West Shore is pursuing that insurance coverage.

 

Item 1A.            Risk Factors

 

Security holders and potential investors in our securities should carefully consider the risk factors set forth below and in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013. 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.

 

Item 6.         Exhibits

 

(a)         Exhibits

 

2.1

 

Purchase and Sale Agreement, dated July 25, 2014, between Buckeye Gas Storage LLC and BIF II CalGas (Delaware) LLC (Incorporated by reference to Exhibit 2.1 to Buckeye Partners, L.P.’s Current Report on Form 8-K filed on July 29, 2014).

 

 

 

2.2

 

Contribution Agreement, dated as of September 2, 2014, by and between Trafigura Corpus Christi Holdings Inc. and Buckeye Partners, L.P. (Incorporated by reference to Exhibit 2.1 of Buckeye Partners, L.P.’s Current Report on Form 8-K filed on September 2, 2014).

 

 

 

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).

 

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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).

 

 

 

4.1

 

Tenth Supplemental Indenture, dated September 12, 2014, between Buckeye Partners, L.P. and U.S. Bank National Association (successor-in-interest to SunTrust Bank), as trustee (Incorporated by reference to Exhibit 4.1 of Buckeye Partners, L.P.’s Current Report on Form 8-K filed on September 12, 2014).

 

 

 

10.1

 

Revolving Credit Agreement, dated September 30, 2014, by and among Buckeye Partners, L.P., Buckeye Energy Services LLC, Buckeye Caribbean Terminals LLC, Buckeye West Indies Holdings LP, SunTrust Bank and other lenders party thereto (Incorporated by reference to Exhibit 10.1 to Buckeye Partners, L.P.’s Current Report on Form 8-K filed on October 6, 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.

 

 

 

*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.

 

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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: November 7, 2014

By:

/s/ Keith E. St.Clair

 

 

Keith E. St.Clair

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

49