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EX-32.2 - EXHIBIT 32.2 - BUCKEYE PARTNERS, L.P.ex322-3q2016.htm
EX-32.1 - EXHIBIT 32.1 - BUCKEYE PARTNERS, L.P.ex321-3q2016.htm
EX-31.2 - EXHIBIT 31.2 - BUCKEYE PARTNERS, L.P.ex312-3q2016.htm
EX-31.1 - EXHIBIT 31.1 - BUCKEYE PARTNERS, L.P.ex311-3q2016.htm

 
 
 
 
 
 
 
 
 
 

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

 
FORM 10-Q
 
 

(Mark One)
ý    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
OR 
¨    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
 Commission file number 1-9356 
 
Buckeye Partners, L.P.
(Exact name of registrant as specified in its charter)
 
Delaware
 
23-2432497
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification number)
 
 
 
One Greenway Plaza
 
 
Suite 600
 
 
Houston, TX
 
77046
(Address of principal executive offices)
 
(Zip Code)
 Registrant’s telephone number, including area code: (832) 615-8600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No ¨ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
Accelerated filer ¨ 
Non-accelerated filer
¨ 
 
Smaller reporting company ¨ 
(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 ¨  No ý 
As of October 28, 2016, there were 140,222,340 limited partner units outstanding.
 
 
 
 
 



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

 
 
7.
 
 
 
8.
 
 
 
9.
 
 
 
10.
 
 
 
11.
 
 
 
12.
 
 
 
13.
 
 
 
14.
 
 
 
15.
 
 
 
16.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 

 
 

 
 

 
 

Product sales
$
337,092

 
$
382,624

 
$
1,086,180

 
$
1,581,455

Transportation, storage and other services
429,513

 
345,760

 
1,238,141

 
1,031,812

Total revenue
766,605

 
728,384

 
2,324,321

 
2,613,267

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of product sales
326,718

 
366,319

 
1,049,315

 
1,532,392

Operating expenses
149,867

 
141,790

 
446,671

 
425,494

Depreciation and amortization
63,472

 
54,830

 
188,220

 
164,204

General and administrative
20,321

 
21,885

 
63,737

 
64,796

Total costs and expenses
560,378

 
584,824

 
1,747,943

 
2,186,886

Operating income
206,227

 
143,560

 
576,378

 
426,381

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

Earnings (loss) from equity investments
2,901

 
(30
)
 
8,459

 
4,550

Interest and debt expense
(48,476
)
 
(43,413
)
 
(144,093
)
 
(127,097
)
Other (expense) income
(74
)
 
70

 
(102
)
 
180

Total other expense, net
(45,649
)
 
(43,373
)
 
(135,736
)
 
(122,367
)
Income from continuing operations before taxes
160,578

 
100,187

 
440,642

 
304,014

Income tax expense
(308
)
 
(240
)
 
(896
)
 
(720
)
Income from continuing operations
160,270

 
99,947

 
439,746

 
303,294

Loss from discontinued operations

 

 

 
(857
)
Net income
160,270

 
99,947

 
439,746

 
302,437

Less: Net (income) loss attributable to noncontrolling interests
(3,896
)
 
93

 
(11,803
)
 
794

Net income attributable to Buckeye Partners, L.P.
$
156,374

 
$
100,040

 
$
427,943

 
$
303,231

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

 
 

 
 

Continuing operations
$
1.19

 
$
0.78

 
$
3.28

 
$
2.38

Discontinued operations

 

 

 
(0.01
)
Total
$
1.19

 
$
0.78

 
$
3.28

 
$
2.37

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

 
 

 
 

Continuing operations
$
1.19

 
$
0.78

 
$
3.26

 
$
2.37

Discontinued operations

 

 

 
(0.01
)
Total
$
1.19

 
$
0.78

 
$
3.26

 
$
2.36

 
 
 
 
 
 
 
 
Weighted average units outstanding:
 

 
 

 
 

 
 

Basic
131,113

 
128,329

 
130,439

 
127,722

Diluted
131,940

 
128,906

 
131,076

 
128,241

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

1


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
160,270

 
$
99,947

 
$
439,746

 
$
302,437

Other comprehensive income:
 

 
 

 
 

 
 

Unrealized gains on derivative instruments
1,052

 
11,168

 
1,052

 
7,311

Reclassification of derivative losses to net income
3,037

 
3,037

 
7,846

 
9,113

Recognition of costs related to benefit plans to net income
252

 
712

 
756

 
1,232

Total other comprehensive income
4,341

 
14,917

 
9,654

 
17,656

Comprehensive income
164,611

 
114,864

 
449,400

 
320,093

Less: Comprehensive (income) loss attributable to noncontrolling interests
(3,896
)
 
93

 
(11,803
)
 
794

Comprehensive income attributable to Buckeye Partners, L.P.
$
160,715

 
$
114,957

 
$
437,597

 
$
320,887

 
See Notes to Unaudited Condensed Consolidated Financial Statements.


2


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
(Unaudited)
 
September 30,
2016
 
December 31,
2015
Assets:
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
2

 
$
4,881

Accounts receivable, net
253,019

 
213,830

Construction and pipeline relocation receivables
17,825

 
13,491

Inventories
295,307

 
192,992

Derivative assets
3,674

 
78,285

Prepaid and other current assets
71,153

 
48,071

Total current assets
640,980

 
551,550

 
 
 
 
Property, plant and equipment
7,430,036

 
7,076,901

Less: Accumulated depreciation
(1,008,061
)
 
(874,820
)
Property, plant and equipment, net
6,421,975

 
6,202,081

 
 
 
 
Equity investments
89,948

 
84,128

Goodwill
1,001,190

 
998,748

 
 
 
 
Intangible assets
618,370

 
627,310

Less: Accumulated amortization
(178,091
)
 
(135,938
)
Intangible assets, net
440,279

 
491,372

 
 
 
 
Other non-current assets
42,660

 
41,402

Total assets
$
8,637,032

 
$
8,369,281

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Current liabilities:
 

 
 

Line of credit
$
218,340

 
$
111,488

Accounts payable
91,884

 
82,691

Derivative liabilities
22,036

 
510

Accrued and other current liabilities
253,162

 
309,620

Total current liabilities
585,422

 
504,309

 
 
 
 
Long-term debt
3,826,860

 
3,732,824

Other non-current liabilities
111,816

 
115,407

Total liabilities
4,524,098

 
4,352,540

 
 
 
 
Commitments and contingencies (Note 3)

 

 
 
 
 
Partners’ capital:
 

 
 

Buckeye Partners, L.P. capital:
 

 
 

Limited Partners (131,309,840 and 129,523,703 units outstanding as of September 30, 2016 and December 31, 2015, respectively)
3,913,401

 
3,833,230

Accumulated other comprehensive loss
(88,187
)
 
(97,841
)
Total Buckeye Partners, L.P. capital
3,825,214

 
3,735,389

Noncontrolling interests
287,720

 
281,352

Total partners’ capital
4,112,934

 
4,016,741

Total liabilities and partners’ capital
$
8,637,032

 
$
8,369,281

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

3


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended 
 September 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
439,746

 
$
302,437

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

 
 

Depreciation and amortization
188,220

 
164,204

Litigation contingency accrual

 
15,229

Gains on property damage recoveries
(5,700
)
 

Net changes in fair value of derivatives
98,917

 
25,632

Amortization of unfavorable storage contracts
(5,979
)
 
(8,303
)
Earnings from equity investments
(8,459
)
 
(4,550
)
Distributions from equity investments
2,418

 
4,258

Other non-cash items
39,393

 
34,319

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

 
 

Accounts receivable
(40,109
)
 
39,435

Construction and pipeline relocation receivables
(4,334
)
 
6,570

Inventories
(101,016
)
 
9,599

Prepaid and other current assets
(45,841
)
 
(11,513
)
Accounts payable
9,332

 
(54,820
)
Accrued and other current liabilities
(10,088
)
 
(18,881
)
Other non-current assets
138

 
3,820

Other non-current liabilities
(6,865
)
 
(5,005
)
Net cash provided by operating activities
549,773

 
502,431

Cash flows from investing activities:
 

 
 

Capital expenditures
(380,072
)
 
(433,152
)
Acquisitions, net of working capital settlement
(25,941
)
 
(2,921
)
Proceeds from sale and disposition of assets
2,235

 
10,074

Escrow deposits
19,850

 

Recoveries on property damages
5,700

 

Net cash used in investing activities
(378,228
)
 
(425,999
)
Cash flows from financing activities:
 

 
 

Net proceeds from issuance of LP Units
108,422

 
117,820

Net proceeds from exercise of LP Unit options
300

 
173

Payment of tax withholding on issuance of LTIP awards
(5,123
)
 
(6,667
)
Debt issuance costs
(1,240
)
 
(365
)
Borrowings under BPL Credit Facility
978,700

 
1,087,000

Repayments under BPL Credit Facility
(1,136,800
)
 
(844,000
)
Net borrowings (repayments) under BMSC Credit Facility
106,852

 
(17,550
)
Acquisition of additional interest in Buckeye Memphis

 
(10,044
)
Borrowings under $250M Term Loan
250,000

 

Contributions from noncontrolling interests
3,760

 
44,000

Distributions paid to noncontrolling interests
(11,531
)
 
(8,348
)
Distributions paid to unitholders
(469,764
)
 
(439,578
)
Net cash used in financing activities
(176,424
)
 
(77,559
)
Net decrease in cash and cash equivalents
(4,879
)
 
(1,127
)
Cash and cash equivalents — Beginning of period
4,881

 
8,208

Cash and cash equivalents — End of period
$
2

 
$
7,081

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

4


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(In thousands)
(Unaudited)
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Other
 
 
 
 
 
Limited
 
Comprehensive
 
Noncontrolling
 
 
 
Partners
 
Income (Loss)
 
Interests
 
Total
Partners’ capital - January 1, 2016
$
3,833,230

 
$
(97,841
)
 
$
281,352

 
$
4,016,741

Net income
427,943

 

 
11,803

 
439,746

Distributions paid to unitholders
(472,056
)
 

 
2,292

 
(469,764
)
Net proceeds from issuance of LP Units
108,422

 

 

 
108,422

Amortization of unit-based compensation awards
22,977

 

 

 
22,977

Net proceeds from exercise of LP Unit options
300

 

 

 
300

Payment of tax withholding on issuance of LTIP awards
(5,123
)
 

 

 
(5,123
)
Distributions paid to noncontrolling interests

 

 
(11,531
)
 
(11,531
)
Contributions from noncontrolling interests

 

 
3,760

 
3,760

Other comprehensive income

 
9,654

 

 
9,654

Noncash accrual for distribution equivalent rights
(2,248
)
 

 

 
(2,248
)
Other
(44
)
 

 
44

 

Partners' capital - September 30, 2016
$
3,913,401

 
$
(88,187
)
 
$
287,720

 
$
4,112,934

 
 
 
 
 
 
 
 
Partners’ capital - January 1, 2015
$
3,817,916

 
$
(115,288
)
 
$
237,968

 
$
3,940,596

Net income (loss)
303,231

 

 
(794
)
 
302,437

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

 
(1,768
)
 
(10,044
)
Adjusted value of noncontrolling interest in acquisition

 

 
(1,220
)
 
(1,220
)
Distributions paid to unitholders
(441,957
)
 

 
2,379

 
(439,578
)
Net proceeds from issuance of LP Units
117,820

 

 

 
117,820

Amortization of unit-based compensation awards
17,764

 

 

 
17,764

Net proceeds from exercise of LP Unit options
173

 

 

 
173

Payment of tax withholding on issuance of LTIP awards
(6,667
)
 

 

 
(6,667
)
Distributions paid to noncontrolling interests

 

 
(8,348
)
 
(8,348
)
Contributions from noncontrolling interests

 

 
44,000

 
44,000

Other comprehensive income

 
17,656

 

 
17,656

Noncash accrual for distribution equivalent rights
(1,944
)
 

 

 
(1,944
)
Other
162

 

 
(106
)
 
56

Partners' capital - September 30, 2015
$
3,798,222

 
$
(97,632
)
 
$
272,111

 
$
3,972,701

 
See Notes to Unaudited Condensed Consolidated Financial Statements.


5


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 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” or “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 and miles of pipeline. In addition, we own and operate one of the largest networks of active products terminals across our portfolio of pipelines, inland terminals and marine terminals located primarily in the East Coast and Gulf Coast regions of the United States and in the Caribbean.  Our network of marine terminals enables us to facilitate global flows of crude oil and refined petroleum products, offering our customers connectivity between supply areas and market centers through some of the world’s most important bulk storage and blending hubs.  Our flagship marine terminal in The Bahamas, Buckeye Bahamas Hub Limited (“BBH”), formerly known as Bahamas Oil Refining Company International Limited (“BORCO”), is one of the largest marine crude oil and refined petroleum products storage facilities in the world and provides an array of logistics and blending services for the global flow of petroleum products. Our expansion into the Gulf Coast has added another regional hub, Buckeye Texas Partners LLC (“Buckeye Texas”), with world-class marine terminalling, storage and processing capabilities. We are also a wholesale distributor of refined petroleum products in certain areas served by our pipelines and terminals. 
 
Basis of Presentation and Principles of Consolidation
 
The unaudited condensed consolidated financial statements and the accompanying notes are prepared in accordance with U.S. generally accepted accounting principles and the rules of the U.S. Securities and Exchange Commission.  Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our results of operations for the interim periods.  The unaudited condensed consolidated financial statements include the accounts of our subsidiaries controlled by us and variable interest entities 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, 2015.

Recent Accounting Developments

Statement of Cash Flows. In August 2016, the Financial Accounting Standards Board (“FASB”) issued guidance to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows, with the objective of reducing existing diversity in practice with respect to these items. The guidance must be applied retrospectively, and it is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.


6


Equity-Based Compensation. In March 2016, the FASB issued guidance to simplify several aspects of the accounting for employee equity-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows and classification of awards as liabilities or equity. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. Amendments related to the timing of when excess tax benefits are recognized, statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied using either a prospective transition method or a retrospective transition method. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

Leases. In February 2016, the FASB issued guidance requiring lessees to recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. This update also requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The guidance must be applied using a modified retrospective approach and is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
 
2. ACQUISITIONS
 
Business Combinations

2016 Transaction

Indianola terminalling facility acquisition
 
In August 2016, we acquired a liquid petroleum products terminalling facility in Indianola, Pennsylvania from Kinder Morgan Transmix Company, LLC for $25.9 million. The operations of these assets are reported in our Domestic Pipelines & Terminals segment. The acquisition cost has been allocated on a preliminary basis to assets acquired based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represent expected synergies from combining the acquired assets with our existing operations. Fair values have been developed using recognized business valuation techniques.  The estimates of fair value reflected as of September 30, 2016 are subject to change pending final valuation analysis.  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):
Inventories
$
1,299

Property, plant and equipment
20,239

Goodwill
4,403

Allocated purchase price
$
25,941

 
Unaudited Pro forma Financial Results for the Indianola terminalling facility acquisition

Our consolidated statements of operations do not include earnings from the terminalling facility prior to August 4, 2016, the effective acquisition date of these assets. The preparation of unaudited pro forma financial information for the terminalling facility is impracticable due to the fact that meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the three and nine months ended September 30, 2016.


7


2015 Transactions

 Pennsauken pipeline acquisition
 
In December 2015, we acquired a pipeline and associated tanks and other infrastructure in Pennsauken, New Jersey for $5.3 million. The operations of these assets are reported in our Domestic Pipelines & Terminals segment. The acquisition cost has been allocated to assets acquired based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represent expected synergies from combining the acquired assets with our existing operations. Fair values have been developed using recognized business valuation techniques.  The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):
Property, plant and equipment
$
7,159

Goodwill
500

Environmental liabilities
(2,372
)
Allocated purchase price
$
5,287


We finalized the purchase price allocation during the third quarter of 2016. Adjustments to the preliminary purchase price allocation resulted in an increase to property, plant and equipment of $1.9 million, with a corresponding decrease to goodwill. The change to the preliminary amount resulted in a nominal increase to depreciation expense and accumulated depreciation.
 
Unaudited Pro forma Financial Results for the Pennsauken pipeline acquisition

Our consolidated statements of operations do not include earnings from the pipeline and associated tanks and other infrastructure prior to December 10, 2015, the effective acquisition date of these assets. The preparation of unaudited pro forma financial information for the pipeline and associated tanks and other infrastructure is impracticable due to the fact that meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the three and nine months ended September 30, 2016.

Springfield pipeline and terminal acquisitions

In March and May 2015, we acquired a terminal and pipeline, respectively, in Springfield, Massachusetts from ExxonMobil Oil Corporation (“ExxonMobil”) for an aggregate $7.7 million.  The operations of these assets are reported in our Domestic Pipelines & Terminals segment. The acquisition cost has been allocated to assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represents both expected synergies from combining the acquired assets with our existing operations and the economic value attributable to optimizing, modernizing and commercializing the asset from this acquisition. Fair values have been developed using recognized business valuation techniques.  We finalized the purchase price allocation during the first quarter of 2016. The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):
Property, plant and equipment
$
4,040

Goodwill
8,165

Asset retirement obligation
(4,200
)
Environmental liabilities
(293
)
Allocated purchase price
$
7,712


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

Our consolidated statements of operations do not include earnings from the terminal acquired from ExxonMobil prior to March 31, 2015, nor earnings from the pipeline acquired from ExxonMobil prior to May 5, 2015, which were the respective acquisition dates of the assets. The preparation of unaudited pro forma financial information for the terminal and pipeline acquired from ExxonMobil is impracticable due to the fact that ExxonMobil historically operated the assets as part of its integrated distribution network and, therefore, meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the three and nine months ended September 30, 2016 or 2015.


8


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

Environmental Contingencies
 
We recorded operating expenses, net of insurance recoveries, of $1.8 million and $1.7 million during the three months ended September 30, 2016 and 2015, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  For the nine months ended September 30, 2016 and 2015, we recorded operating expenses, net of insurance recoveries, of $6.0 million and $4.5 million, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings. As of September 30, 2016 and December 31, 2015, we recorded environmental remediation liabilities of $46.3 million and $48.0 million, respectively.  Costs incurred may be in excess of our estimate, which may have a material impact on our financial condition, results of operations or cash flows.  At September 30, 2016 and December 31, 2015, we had $7.0 million and $10.9 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third-party claims.

4. INVENTORIES
 
Our inventory amounts were as follows at the dates indicated (in thousands):
 
September 30,
2016
 
December 31,
2015
Liquid petroleum products (1)
$
275,853

 
$
174,232

Materials and supplies
19,454

 
18,760

Total inventories
$
295,307

 
$
192,992

                                                      
(1)
Ending inventory was 178.8 million and 153.3 million gallons of liquid petroleum products as of September 30, 2016 and December 31, 2015, respectively.
 
At September 30, 2016 and December 31, 2015, approximately 92% and 89% 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 weighted average cost method or net realizable value.

5. PREPAID AND OTHER CURRENT ASSETS
 
Prepaid and other current assets consist of the following at the dates indicated (in thousands):
 
September 30,
2016
 
December 31,
2015
Prepaid insurance
$
13,050

 
$
12,779

Margin deposits
35,950

 

Unbilled revenue
2,383

 
4,047

Prepaid taxes
9,396

 
4,842

Escrow deposits
10

 
21,360

Other
10,364

 
5,043

Total prepaid and other current assets
$
71,153

 
$
48,071



9


6. EQUITY INVESTMENTS
 
The following table presents earnings (losses) from equity investments for the periods indicated (in thousands): 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
West Shore Pipe Line Company
$
1,784

 
$
2,033

 
$
5,680

 
$
6,209

Muskegon Pipeline LLC
544

 
(2,761
)
 
1,340

 
(3,345
)
Transport4, LLC
204

 
183

 
577

 
456

South Portland Terminal LLC
369

 
515

 
862

 
1,230

Total earnings (loss) from equity investments
$
2,901

 
$
(30
)
 
$
8,459

 
$
4,550

 
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
22,831

 
$
24,440

 
$
65,877

 
$
68,786

Costs and expenses
(10,026
)
 
(16,642
)
 
(30,466
)
 
(43,256
)
Non-operating expenses
(4,142
)
 
(4,033
)
 
(11,425
)
 
(11,690
)
Net income
$
8,663

 
$
3,765

 
$
23,986

 
$
13,840


7. LONG-TERM DEBT

Credit Facility

In September 2016, Buckeye and its indirect wholly-owned subsidiaries, Buckeye Energy Services LLC, Buckeye West Indies Holdings LP and Buckeye Caribbean Terminals LLC, collectively the Buckeye Merchant Service Companies (“BMSC”), as borrowers, exercised their remaining option with consenting lenders to extend $1.4 billion of our existing $1.5 billion revolving credit facility with SunTrust Bank, as administrative agent, and other lenders (the “Credit Facility”) by one year to September 30, 2021. At the time of the transaction, we had $3.4 million of remaining unamortized deferred financing costs, and we incurred additional debt issuance costs of $0.7 million in connection with the extension of the Credit Facility.

Term Loan
 
In September 2016, we entered into a credit agreement with SunTrust Bank, as administrative agent, and other lenders for a $250.0 million variable-rate term loan due September 30, 2019 (the “Term Loan”), with an option to extend the term for up to two one-year periods. We incurred debt issuance costs of $0.5 million related to the Term Loan. Under the Term Loan, interest accrues at the London Interbank Offered Rate (“LIBOR”) rate or a base rate plus an applicable margin based on the election of the borrower. The applicable margin used in connection with interest rates and fees is based on the credit ratings assigned to our senior unsecured long-term debt securities. The applicable margin for LIBOR rate loans ranges from 1.0% to 1.6% and the applicable margin for base rate loans ranges from 0% to 0.6%.

The Term Loan includes covenants limiting, as of the last day of each fiscal quarter, the ratio of consolidated funded debt (“Funded Debt Ratio”) to consolidated EBITDA, as defined in the Term Loan, measured for the preceding twelve months, to not more than 5.0 to 1.0.  This requirement is subject to a provision for increases to 5.5 to 1.0 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA, which is defined in the Term Loan as earnings before interest, taxes, depreciation, depletion and amortization determined on a consolidated basis. At September 30, 2016, we were in compliance with the covenants under the Term Loan.

At September 30, 2016, we had $250.0 million outstanding under the Term Loan. We used the proceeds from the Term Loan to reduce the indebtedness outstanding under our Credit Facility.


10


Current Maturities Expected to be Refinanced

It is our intent to refinance the $125.0 million of 5.125% Notes maturing on July 1, 2017 using our Credit Facility. At September 30, 2016, we had $1,078.8 million of additional borrowing capacity under our Credit Facility. Therefore, we have classified these notes as long-term debt in the unaudited condensed consolidated balance sheet at September 30, 2016.

8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

From time to time, we utilize forward-starting interest rate swaps to hedge the variability of the forecasted interest payments on anticipated debt issuances that may result from changes in the benchmark interest rate until the expected debt is issued. 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.

During the third quarter of 2016, we entered into four forward-starting interest rate swaps with a total aggregate notional amount of $200.0 million, which we entered into in anticipation of the issuance of debt on or before January 15, 2018, and six forward-starting interest rate swaps with a total aggregate notional amount of $300.0 million, which we entered into in anticipation of the issuance of debt on or before November 15, 2018. We expect to issue new fixed-rate debt on or before January 15, 2018 to repay the $300.0 million of 6.050% Notes that are due on January 15, 2018, and on or before November 15, 2018 to repay the $400.0 million of 2.650% Notes that are due on November 15, 2018, although no assurances can be given that the issuance of fixed-rate debt will be possible on acceptable terms.

During the three and nine months ended September 30, 2016, unrealized gains of $1.1 million were recorded in accumulated other comprehensive income (“AOCI”) to reflect the change in the fair values of the forward-starting interest rate swaps.

11



Commodity Derivatives

Our Merchant Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its physical derivative contracts which we designated as fair value hedges with changes in fair value of both the futures contracts and physical inventory reflected in earnings.  Physical forward 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, 2016 (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
 
8,504

 
1,073

 
Mark-to-market
Physical index derivative contracts
 
31,274

 

 
Mark-to-market
Futures contracts for refined petroleum products
 
24,819

 
16,926

 
Mark-to-market
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 

 
 

 
 
Physical fixed price derivative contracts
 
1,176

 

 
Fair Value Hedge
Futures contracts for refined petroleum products
 
163,800

 

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

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, 2016
 
Derivatives NOT Designated as Hedging Instruments
 
Derivatives Designated as Hedging Instruments
 
Derivative Carrying Value
 
Netting Balance Sheet Adjustment (1)
 
Net Total
Physical fixed price derivative contracts
$
4,046

 
$
67

 
$
4,113

 
$
(505
)
 
$
3,608

Physical index derivative contracts
67

 

 
67

 
(1
)
 
66

Futures contracts for refined products
20,655

 
1,005

 
21,660

 
(21,660
)
 

Total current derivative assets
24,768

 
1,072

 
25,840

 
(22,166
)
 
3,674

Physical fixed price derivative contracts
293

 

 
293

 
(8
)
 
285

Futures contracts for refined products
84

 

 
84

 
(84
)
 

Interest rates derivatives

 
1,052

 
1,052

 

 
1,052

Total non-current derivative assets
377

 
1,052

 
1,429

 
(92
)
 
1,337

Physical fixed price derivative contracts
(2,673
)
 

 
(2,673
)
 
505

 
(2,168
)
Physical index derivative contracts
(41
)
 

 
(41
)
 
1

 
(40
)
Futures contracts for refined products
(29,231
)
 
(12,257
)
 
(41,488
)
 
21,660

 
(19,828
)
Total current derivative liabilities
(31,945
)
 
(12,257
)
 
(44,202
)
 
22,166

 
(22,036
)
Physical fixed price derivative contracts
(27
)
 

 
(27
)
 
8

 
(19
)
Futures contracts for refined products
(4,042
)
 

 
(4,042
)
 
84

 
(3,958
)
Total non-current derivative liabilities
(4,069
)
 

 
(4,069
)
 
92

 
(3,977
)
Net derivative liabilities
$
(10,869
)
 
$
(10,133
)
 
$
(21,002
)
 
$

 
$
(21,002
)
                                                      
(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. 

12


 
December 31, 2015
 
Derivatives NOT Designated as Hedging Instruments
 
Derivatives Designated as Hedging Instruments
 
Derivative Carrying Value
 
Netting Balance Sheet Adjustment (1)
 
Net Total
Physical fixed price derivative contracts
$
26,698

 
$

 
$
26,698

 
$
(79
)
 
$
26,619

Physical index derivative contracts
87

 

 
87

 
(62
)
 
25

Futures contracts for refined products
136,131

 
36,834

 
172,965

 
(121,324
)
 
51,641

Total current derivative assets
162,916

 
36,834

 
199,750

 
(121,465
)
 
78,285

Physical fixed price derivative contracts
1,057

 

 
1,057

 

 
1,057

Total non-current derivative assets
1,057

 

 
1,057

 

 
1,057

Physical fixed price derivative contracts
(535
)
 

 
(535
)
 
79

 
(456
)
Physical index derivative contracts
(116
)
 

 
(116
)
 
62

 
(54
)
Futures contracts for refined products
(119,506
)
 
(1,818
)
 
(121,324
)
 
121,324

 

Total current derivative liabilities
(120,157
)
 
(1,818
)
 
(121,975
)
 
121,465

 
(510
)
Futures contracts for refined products
(703
)
 

 
(703
)
 

 
(703
)
Total non-current derivative liabilities
(703
)
 

 
(703
)
 

 
(703
)
Net derivative assets
$
43,113

 
$
35,016

 
$
78,129

 
$

 
$
78,129

                                                      
(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 futures contracts designated as fair value hedges related to our inventory portfolio extend to the second quarter of 2017.  The unrealized loss at September 30, 2016 for fair value hedges of inventory represented by future contracts of $11.3 million will be realized by the second quarter of 2017.  At September 30, 2016, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, physical index contracts, and futures contracts for refined products contracts noted above) varied in duration in the overall portfolio, but did not extend beyond December 2018.  In addition, at September 30, 2016, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.
 

13


The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated (in thousands):
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
Location
 
2016
 
2015
 
2016
 
2015
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

 
 

 
 

Physical fixed price derivative contracts
Product sales
 
$
301

 
$
15,731

 
$
(7,263
)
 
$
19,660

Physical index derivative contracts
Product sales
 
142

 
(299
)
 
130

 
(309
)
Physical fixed price derivative contracts
Cost of product sales
 
479

 
3,600

 
7,965

 
10,191

Physical index derivative contracts
Cost of product sales
 
30

 
(288
)
 
193

 
(224
)
Futures contracts for refined products
Cost of product sales
 
(307
)
 
(10,992
)
 
4,326

 
2,591

 
 
 
 
 
 
 
 
 
 
Derivatives designated as fair value hedging instruments:
 
 
 

 
 

 
 

 
 

Futures contracts for refined products
Cost of product sales
 
$
(635
)
 
$
54,514

 
$
(27,590
)
 
$
21,959

Physical inventory - hedged items
Cost of product sales
 
3,620

 
(55,424
)
 
43,627

 
(34,848
)
 
 
 
 
 
 
 
 
 
 
Ineffectiveness excluding the time value component on fair value hedging instruments:
 
 
 

 
 

 
 

 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
(4,262
)
 
$
2,626

 
$
(4,275
)
 
$
2,476

Time value excluded from hedge assessment
Cost of product sales
 
7,247

 
(3,536
)
 
20,312

 
(15,365
)
Net gain (loss) in income
 
 
$
2,985

 
$
(910
)
 
$
16,037

 
$
(12,889
)

The change in value recognized in other comprehensive income (“OCI”) and the losses reclassified from AOCI to income attributable to our derivative instruments designated as cash flow hedges were as follows for the periods indicated (in thousands):

 
Gain Recognized in OCI on Derivatives for the
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Derivatives designated as cash flow hedging instruments:
 

 
 

 
 

 
 

Interest rate contracts
$
1,052

 
$

 
$
1,052

 
$

Commodity derivatives

 
11,168

 

 
7,311

Total
$
1,052

 
$
11,168

 
$
1,052

 
$
7,311


 
 
 
(Loss) Gain Reclassified from AOCI to Income (Effective Portion) for the
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
Location
 
2016
 
2015
 
2016
 
2015
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

 
 

 
 

Interest rate contracts
Interest and debt expense
 
$
(3,037
)
 
$
(3,037
)
 
$
(9,112
)
 
$
(9,113
)
Commodity derivatives
Product Sales
 

 

 
1,266

 

Total
 
 
$
(3,037
)
 
$
(3,037
)
 
$
(7,846
)
 
$
(9,113
)

Over the next twelve months, we expect to reclassify $12.2 million of net losses attributable to interest rate derivative instruments from AOCI to earnings as an increase to interest and debt expense. For additional information on the net losses attributable to interest rate derivative instruments, see our Annual Report on Form 10-K for the year ended December 31, 2015.


14


9. FAIR VALUE MEASUREMENTS
 
We categorize our financial assets and liabilities using the three-tier hierarchy as follows:
 
Recurring
 
The following table sets forth financial assets and liabilities measured at fair value on a recurring basis, as of the measurement dates indicated, and the basis for that measurement, by level within the fair value hierarchy (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Financial assets:
 

 
 

 
 

 
 

Physical fixed price derivative contracts
$

 
$
3,893

 
$

 
$
27,676

Physical index derivative contracts

 
66

 

 
25

Futures contracts for refined products

 

 
51,641

 

Interest rate derivatives

 
1,052

 

 

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Physical fixed price derivative contracts

 
(2,187
)
 

 
(456
)
Physical index derivative contracts

 
(40
)
 

 
(54
)
Futures contracts for refined products
(23,786
)
 

 
(703
)
 

Fair value
$
(23,786
)
 
$
2,784

 
$
50,938

 
$
27,191

 
The values of the Level 1 derivative assets and liabilities were based on quoted market prices obtained from the New York Mercantile Exchange.
 
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 physical 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 CVAs were nominal as of September 30, 2016 and December 31, 2015. As of September 30, 2016 and December 31, 2015, the Merchant Services segment did not hold any net liability derivative position containing credit contingent features.
 
Financial instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets at amounts which approximate fair value due to the relatively short period to maturity of these financial instruments.  The fair values of our fixed-rate debt were estimated by observing market trading prices and by comparing the historic market prices of our publicly issued debt with the market prices of the publicly issued debt of other master limited partnerships with similar credit ratings and terms.  The fair values of our variable-rate debt are their carrying amounts, as the carrying amount reasonably approximates fair value due to the variability of the interest rates.  The carrying value and fair value, using Level 2 input values, of our debt were as follows at the dates indicated (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Fixed-rate debt
$
3,623,960

 
$
3,795,826

 
$
3,371,824

 
$
3,057,945

Variable-rate debt
421,240

 
421,240

 
472,488

 
472,488

Total debt
$
4,045,200

 
$
4,217,066

 
$
3,844,312

 
$
3,530,433

 
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, 2016 and 2015, respectively.
 

15


Non-Recurring
 
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.  For the three and nine months ended September 30, 2016 and 2015, there were no fair value adjustments related to such assets or liabilities reflected in our unaudited condensed consolidated financial statements.

10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
 
Buckeye Pipe Line Services Company, which employs the majority of our workforce, sponsors a defined benefit plan, the Retirement Income Guarantee Plan (the “RIGP”), and an unfunded post-retirement benefit plan (the “Retiree Medical Plan”).  The RIGP and Retiree Medical Plan are closed and have limited participation. The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as follows for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
RIGP
 
Retiree Medical Plan
 
Three Months Ended 
 September 30,
 
Three Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
(9
)
 
$
3

 
$
81

 
$
92

Interest cost
106

 
137

 
327

 
333

Expected return on plan assets
(64
)
 
(84
)
 

 

Amortization of unrecognized losses
130

 
211

 

 
50

Actuarial loss due to settlements
122

 
451

 

 

Net periodic benefit cost
$
285

 
$
718

 
$
408

 
$
475

 
 
RIGP
 
Retiree Medical Plan
 
Nine Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
(26
)
 
$
9

 
$
242

 
$
274

Interest cost
316

 
413

 
982

 
1,000

Expected return on plan assets
(192
)
 
(251
)
 

 

Amortization of unrecognized losses
391

 
632

 

 
149

Actuarial loss due to settlements
365

 
451

 

 

Net periodic benefit cost
$
854

 
$
1,254

 
$
1,224

 
$
1,423

 
During the three months ended September 30, 2016 and 2015, we contributed $0.3 million and $0.5 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.  For the nine months ended September 30, 2016 and 2015, we contributed $1.3 million and $1.2 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.
 
11. UNIT-BASED COMPENSATION PLANS
 
We award unit-based compensation to employees and directors primarily under the Buckeye Partners, L.P. 2013 Long-Term Incentive Plan (the “LTIP”).  We formerly awarded options to acquire LP Units to employees pursuant to the Buckeye Partners, L.P. Unit Option and Distribution Equivalent Plan (the “Option Plan”).  These compensation plans are further discussed below.
 
We recognized compensation expense from continuing operations related to the LTIP and the Option Plan, of $8.9 million and $6.6 million for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, we recognized compensation expense of $23.0 million and $17.6 million, respectively.

LTIP
 
As of September 30, 2016, there were 2,036,228 LP Units available for issuance under the LTIP.
 

16


Deferral Plan under the LTIP
 
We also maintain the Buckeye Partners, L.P. Unit Deferral and Incentive Plan, as amended and restated effective February 4, 2015 (the “Deferral Plan”), pursuant to which we issue phantom and matching units under the LTIP to certain employees in lieu of a portion of the cash payments such employees would be entitled to receive under the Buckeye Partners, L.P. Annual Incentive Compensation Plan, as amended and restated, effective January 1, 2012.  At December 31, 2015 and 2014, actual compensation awards deferred under the Deferral Plan were $3.1 million and $1.7 million, for which 139,526 and 54,592 phantom units (including matching units) were granted during the nine months ended September 30, 2016 and the year ended 2015, respectively.  These grants are included as granted in the LTIP activity table below.
 
Awards under the LTIP
 
During the nine months ended September 30, 2016, the Compensation Committee of the Board granted 342,572 phantom units to employees (including the 139,526 phantom units granted pursuant to the Deferral Plan, as discussed above), 20,000 phantom units to independent directors of Buckeye GP and 274,896 performance units to employees.

The following table sets forth the LTIP activity for the periods indicated (in thousands, except per unit amounts):
 
Number of
LP Units
 
Weighted
Average
Grant Date
Fair Value
per LP Unit
Unvested at January 1, 2016
1,011

 
$
68.20

Granted
637

 
53.48

Vested
(267
)
 
55.28

Forfeited
(8
)
 
64.53

Unvested at September 30, 2016
1,373

 
$
64.00

 
At September 30, 2016, $39.1 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of 1.8 years.
 
Unit Option Plan
 
The following is a summary of the changes in the options outstanding (all of which are vested) under the Option Plan for the periods indicated (in thousands, except per unit amounts): 
 
Number of
LP Units
 
Weighted
Average
Strike Price
per LP Unit
 
Weighted
Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic
Value (1)
Outstanding at January 1, 2016
17

 
$
48.71

 
0.9
 
$
300

Exercised
(6
)
 
47.17

 
 
 
 

Forfeited, cancelled or expired
(1
)
 
44.73

 
 
 
 
Outstanding at September 30, 2016
10

 
50.36

 
0.4
 
$
203

 
 
 
 
 
 
 
 
Exercisable at September 30, 2016
10

 
$
50.36

 
0.4
 
$
203

                                                      
(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 2016 and the exercise price, multiplied by the number of exercisable, in-the-money options.
 
The total intrinsic value of options exercised during each of the nine months ended September 30, 2016 and 2015 was $0.1 million.

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12. PARTNERS' CAPITAL AND DISTRIBUTIONS
 
In March 2016, we entered into an equity distribution agreement (the “Equity Distribution Agreement”) with J.P. Morgan Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, BNP Paribas Securities Corp., Deutsche Bank Securities Inc., Jefferies LLC, Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, and SMBC Nikko Securities America, Inc. Under the terms of the Equity Distribution Agreement, we may offer and sell up to $500.0 million in aggregate gross sales proceeds of LP Units from time to time through such firms, acting as agents of Buckeye or as principals, subject in each case to the terms and conditions set forth in the Equity Distribution Agreement. This agreement replaced our prior four separate equity distribution agreements with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC, which we entered into in May 2013 and, under the terms of which, we could sell up to $300.0 million in aggregate gross sales proceeds of LP Units from time to time through such firms.

During the nine months ended September 30, 2016, we sold approximately 1.6 million LP Units under the Equity Distribution Agreement and received $108.4 million in net proceeds after deducting commissions and other related expenses, including $1.1 million of compensation paid in aggregate to the agents under the Equity Distribution Agreement.
 
Summary of Changes in Outstanding LP Units
 
The following is a summary of changes in Buckeye's outstanding LP Units for the periods indicated (in thousands):
 
Limited
Partners
LP Units outstanding at January 1, 2016
129,524

LP Units issued pursuant to the Option Plan (1)
6

LP Units issued pursuant to the LTIP (1)
212

Issuance of LP Units through Equity Distribution Agreements
1,568

LP Units outstanding at September 30, 2016
131,310

                                                      
(1) The number of LP 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 $472.1 million ($3.60 per LP Unit) and $442.0 million ($3.45 per LP Unit) during the nine months ended September 30, 2016 and 2015, respectively.
 
On October 24, 2016, we announced a quarterly distribution of $1.2250 per LP Unit that will be paid on November 22, 2016 to unitholders of record on November 15, 2016.  Based on the LP Units outstanding as of September 30, 2016, estimated cash distributed to unitholders on November 22, 2016 will total $161.8 million.
 

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13. 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net income attributable to Buckeye Partners, L.P.
$
156,374

 
$
100,040

 
$
427,943

 
$
303,231

 
 
 
 
 
 
 
 
Basic:
 

 
 

 
 

 
 

    Weighted average units outstanding - basic
131,113

 
128,329

 
130,439

 
127,722

 
 
 
 
 
 
 
 
Earnings per unit - basic
$
1.19

 
$
0.78

 
$
3.28

 
$
2.37

 
 
 
 
 
 
 
 
Diluted:
 

 
 

 
 

 
 

Weighted average units outstanding - basic
131,113

 
128,329

 
130,439

 
127,722

Dilutive effect of LP Unit options and LTIP awards granted
827

 
577

 
637

 
519

    Weighted average units outstanding - diluted
131,940

 
128,906

 
131,076

 
128,241

 
 
 
 
 
 
 
 
Earnings per unit - diluted
$
1.19

 
$
0.78

 
$
3.26

 
$
2.36


14. BUSINESS SEGMENTS
 
We operate and report in three business segments: (i) Domestic Pipelines & Terminals; (ii) Global Marine Terminals; and (iii) Merchant Services.  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. 

 Domestic Pipelines & Terminals
 
The Domestic Pipelines & Terminals segment receives liquid petroleum products from refineries, connecting pipelines, vessels, and bulk and marine terminals, transports those products to other locations for a fee, and provides bulk storage and terminal throughput services.  The segment also has butane blending capabilities and provides crude oil services, including train loading/unloading, storage and throughput. 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 Domestic Pipelines & Terminals segment, and two underground propane storage caverns.  Additionally, this segment provides turn-key operations and maintenance of third-party pipelines and performs pipeline construction management services typically for cost plus a fixed fee.
 
Global Marine Terminals
 
The Global Marine Terminals segment provides marine accessible bulk storage and blending services, rail and truck rack loading/unloading along with petroleum processing services in the East Coast and Gulf Coast regions of the United States and in the Caribbean.  The segment has seven liquid petroleum product terminals located in The Bahamas, Puerto Rico and St. Lucia in the Caribbean, as well as the New York Harbor and Corpus Christi, Texas in the United States. 
 
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 Domestic 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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The following table summarizes revenue by each segment for the periods indicated (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 

 
 

 
 

 
 

Domestic Pipelines & Terminals
$
265,036

 
$
236,080