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EX-32.1 - EXHIBIT 32.1 - BUCKEYE PARTNERS, L.P.exhibit321-bplq1201710q.htm
EX-32.2 - EXHIBIT 32.2 - BUCKEYE PARTNERS, L.P.exhibit322-bplq1201710q.htm
EX-31.2 - EXHIBIT 31.2 - BUCKEYE PARTNERS, L.P.exhibit312-bplq1201710q.htm
EX-31.1 - EXHIBIT 31.1 - BUCKEYE PARTNERS, L.P.exhibit311-bplq1201710q.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 March 31, 2017
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 incorporation or organization)
 
(IRS Employer 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)
 
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
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 April 28, 2017, there were 140,527,636 limited partner units outstanding.
 
 
 
 
 



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

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




PART I.  FINANCIAL INFORMATION 
Item 1.  Financial Statements 
BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited) 
 
Three Months Ended
March 31,
 
2017
 
2016
Revenue:
 

 
 

Product sales
$
565,420

 
$
384,762

Transportation, storage and other services
403,853

 
395,832

Total revenue
969,273

 
780,594

 
 
 
 
Costs and expenses:
 

 
 

Cost of product sales
548,050

 
368,644

Operating expenses
161,968

 
149,086

Depreciation and amortization
65,488

 
61,426

General and administrative
21,737

 
21,231

Total costs and expenses
797,243

 
600,387

Operating income
172,030

 
180,207

 
 
 
 
Other income (expense):
 

 
 

Earnings from equity investments
10,358

 
3,088

Interest and debt expense
(55,885
)
 
(47,783
)
Other income
28

 
80

Total other expense, net
(45,499
)
 
(44,615
)
Income before taxes
126,531

 
135,592

Income tax expense
(222
)
 
(615
)
Net income
126,309

 
134,977

Less: Net income attributable to noncontrolling interests
(2,733
)
 
(3,864
)
Net income attributable to Buckeye Partners, L.P.
$
123,576

 
$
131,113

 
 
 
 
Earnings per unit attributable to Buckeye Partners, L.P.:
 
 

Basic
$
0.88

 
$
1.01

Diluted
$
0.88

 
$
1.01

 
 
 
 
Weighted average units outstanding:
 

 
 

Basic
140,377

 
129,703

Diluted
140,998

 
130,129

 
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
March 31,
 
2017
 
2016
Net income
$
126,309

 
$
134,977

Other comprehensive income:
 
 
 
Unrealized gains on derivative instruments
2,985

 

Reclassification of derivative losses to net income
3,038

 
1,772

Recognition of costs related to benefit plans to net income
177

 
195

Other comprehensive income from equity method investments
2,891

 

Total other comprehensive income
9,091

 
1,967

Comprehensive income
135,400

 
136,944

Less: Comprehensive income attributable to noncontrolling interests
(2,733
)
 
(3,864
)
Comprehensive income attributable to Buckeye Partners, L.P.
$
132,667

 
$
133,080

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

2


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
(Unaudited)
 
March 31,
2017
 
December 31,
2016
Assets:
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
4,873

 
$
640,340

Accounts receivable, net
205,768

 
236,416

Construction and pipeline relocation receivables
21,740

 
17,276

Inventories
305,127

 
356,803

Derivative assets
27,599

 
1,526

Prepaid and other current assets
40,283

 
66,536

Total current assets
605,390

 
1,318,897

 
 
 
 
Property, plant and equipment
7,602,478

 
7,523,774

Less: Accumulated depreciation
(1,078,276
)
 
(1,040,492
)
Property, plant and equipment, net
6,524,202

 
6,483,282

 
 
 
 
Equity investments
1,249,569

 
89,564

Goodwill
1,004,545

 
1,004,545

 
 
 
 
Intangible assets
616,286

 
616,286

Less: Accumulated amortization
(209,366
)
 
(192,983
)
Intangible assets, net
406,920

 
423,303

 
 
 
 
Other non-current assets
76,219

 
101,512

Total assets
$
9,866,845

 
$
9,421,103

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Current liabilities:
 

 
 

Line of credit
$
258,310

 
$

Accounts payable
55,262

 
107,383

Derivative liabilities
2,685

 
26,272

Accrued and other current liabilities
231,529

 
265,893

Total current liabilities
547,786

 
399,548

 
 
 
 
Long-term debt
4,561,032

 
4,217,695

Other non-current liabilities
98,538

 
105,437

Total liabilities
5,207,356

 
4,722,680

 
 
 
 
Commitments and contingent liabilities (Note 3)

 

 
 
 
 
Partners’ capital:
 

 
 

Buckeye Partners, L.P. capital:
 

 
 

Limited Partners (140,526,615 and 140,263,787 units outstanding as of March 31, 2017 and December 31, 2016, respectively)
4,389,029

 
4,437,316

Accumulated other comprehensive loss
(16,502
)
 
(25,593
)
Total Buckeye Partners, L.P. capital
4,372,527

 
4,411,723

Noncontrolling interests
286,962

 
286,700

Total partners’ capital
4,659,489

 
4,698,423

Total liabilities and partners’ capital
$
9,866,845

 
$
9,421,103

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

3


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Three Months Ended
March 31,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
126,309

 
$
134,977

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

 
 

Depreciation and amortization
65,488

 
61,426

Amortization of debt issuance costs and discount
1,323

 
1,173

Amortization of losses on terminated interest rate swaps
3,038

 
3,037

Non-cash unit-based compensation expense
8,715

 
6,318

Net changes in fair value of derivatives
(26,394
)
 
80,975

Amortization of unfavorable storage contracts

 
(2,768
)
Earnings from equity investments
(10,358
)
 
(3,088
)
Distributions from equity investments
1,728

 
374

Other non-cash items
103

 
674

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

 
 

Accounts receivable
30,722

 
(38,405
)
Construction and pipeline relocation receivables
(4,464
)
 
1,027

Inventories
51,676

 
1,336

Prepaid and other current assets
26,253

 
(19,235
)
Accounts payable
(53,814
)
 
24,723

Accrued and other current liabilities
(24,412
)
 
(41,927
)
Other non-current assets
(184
)
 
(517
)
Other non-current liabilities
(2,685
)
 
(4,054
)
Net cash provided by operating activities
193,044

 
206,046

Cash flows from investing activities:
 

 
 

Capital expenditures
(98,252
)
 
(112,345
)
Equity investment acquisition
(1,150,000
)
 

Proceeds from sale and disposition of assets
402

 
1,500

Escrow deposits

 
19,850

Distributions from equity investments
672

 

Net cash used in investing activities
(1,247,178
)
 
(90,995
)
Cash flows from financing activities:
 

 
 

Net proceeds from issuance of LP Units
3,212

 
37,590

Net proceeds from exercise of Unit options
481

 
161

Payment of tax withholding on issuance of LTIP awards
(8,175
)
 
(4,909
)
Borrowings under BPL Credit Facility
597,290

 
343,500

Repayments under BPL Credit Facility
(255,077
)
 
(375,500
)
Net borrowings under BMSC Credit Facility
258,310

 
38,112

Contributions from noncontrolling interests
3,600

 
2,200

Distributions paid to noncontrolling interests
(6,825
)
 
(1,258
)
Distributions paid to unitholders
(174,149
)
 
(154,147
)
Net cash provided by (used in) financing activities
418,667

 
(114,251
)
Net (decrease) increase in cash and cash equivalents
(635,467
)
 
800

Cash and cash equivalents — Beginning of period
640,340

 
4,881

Cash and cash equivalents — End of period
$
4,873

 
$
5,681

 
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, 2017
$
4,437,316

 
$
(25,593
)
 
$
286,700

 
$
4,698,423

Net income
123,576

 

 
2,733

 
126,309

Distributions paid to unitholders
(174,886
)
 

 
737

 
(174,149
)
Net proceeds from issuance of LP Units
3,212

 

 

 
3,212

Amortization of unit-based compensation awards
8,715

 

 

 
8,715

Net proceeds from exercise of Unit options
481

 

 

 
481

Payment of tax withholding on issuance of LTIP awards
(8,175
)
 

 

 
(8,175
)
Distributions paid to noncontrolling interests

 

 
(6,825
)
 
(6,825
)
Contributions from noncontrolling interests

 

 
3,600

 
3,600

Other comprehensive income

 
9,091

 

 
9,091

Noncash accrual for distribution equivalent rights
(1,193
)
 

 

 
(1,193
)
Other
(17
)
 

 
17

 

Partners’ capital - March 31, 2017
$
4,389,029

 
$
(16,502
)
 
$
286,962

 
$
4,659,489

 
 
 
 
 
 
 
 
Partners’ capital - January 1, 2016
$
3,833,230

 
$
(97,841
)
 
$
281,352

 
$
4,016,741

Net income
131,113

 

 
3,864

 
134,977

Distributions paid to unitholders
(154,928
)
 

 
781

 
(154,147
)
Net proceeds from issuance of LP Units
37,590

 

 

 
37,590

Amortization of unit-based compensation awards
6,342

 

 

 
6,342

Net proceeds from exercise of Unit options
161

 

 

 
161

Payment of tax withholding on issuance of LTIP awards
(4,909
)
 

 

 
(4,909
)
Distributions paid to noncontrolling interests

 

 
(1,258
)
 
(1,258
)
Contributions from noncontrolling interests

 

 
2,200

 
2,200

Other comprehensive income

 
1,967

 

 
1,967

Noncash accrual for distribution equivalent rights
(697
)
 

 

 
(697
)
Other
(48
)
 

 
48

 

Partners’ capital - March 31, 2016
$
3,847,854

 
$
(95,874
)
 
$
286,987

 
$
4,038,967

 
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 (“MLP”), 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” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, includes our subsidiaries.
 
We own and operate a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage, processing 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. We also use our service expertise to operate and/or maintain third-party pipelines and perform certain engineering and construction services for our customers. Additionally, we are one of the largest independent terminalling and storage operators in the United States in terms of capacity available for service. We also 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, Midwest 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”), 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 Gulf Coast regional hub, Buckeye Texas Partners LLC (“Buckeye Texas”), offers world-class marine terminalling, storage and processing capabilities. Our recent acquisition of an indirect 50% equity interest in VTTI B.V. (“VTTI”) expands our international presence with premier storage and marine terminalling services for petroleum products predominantly located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore. We are also a wholesale distributor of refined petroleum products in 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 accounting principles generally accepted in the United States of America (“GAAP”) 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, 2016.

Recent Accounting Developments

Retirement Benefits. In March 2017, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance requires that the service cost component of net periodic pension and postretirement benefit cost be presented in the same income statement line item as other employee compensation costs, while the other components are required to be presented separately within non-operating income. The guidance also allows only the service cost component to be eligible for capitalization when applicable. The amendments are effective for interim and annual periods beginning after December 15, 2017. The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.


6


Revenue from Contracts with Customers. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which amended existing accounting standards for revenue recognition, including industry-specific requirements, and provides entities with a single revenue recognition model for recognizing revenue from contracts with customers.  The core principle of ASU 2014-09 is that an entity should recognize revenue from contracts with customers 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.  Furthermore, additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The two permitted transition methods under ASU 2014-09 are the full retrospective method, which would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which the cumulative effect of applying the standard would be recognized at the date of initial application.  In July 2015, the FASB deferred the effective date of ASU 2014-09 and is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted for annual and interim periods beginning after December 15, 2016.  In 2016, the FASB issued accounting standards updates that amended several aspects of ASU 2014-09.  We are currently evaluating the provisions of the standard and have formed an implementation work team consisting of representatives from across all of our business segments to evaluate and implement changes to business processes, systems and controls. In addition, we have implemented training on the new standard’s revenue recognition model and are continuing our contract review and documentation. We expect to adopt this guidance on January 1, 2018, and we are currently evaluating the impact that it will have on our consolidated financial statements under the elected modified retrospective transition method.

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 was 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 were to 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 were to be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement were to be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows were to be applied using either a prospective transition method or a retrospective transition method. We adopted this guidance as of January 1, 2017 and did not recognize a retrospective transition adjustment. In addition, the adoption of this guidance did not have a material impact on our consolidated financial statements or on our disclosures.
 

7


2. ACQUISITIONS
 
Business Combination

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 $26.0 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 March 31, 2017 are subject to change pending final valuation analysis.  The purchase price has been allocated to tangible and intangible assets acquired as follows (in thousands):
Inventories
$
1,554

Property, plant and equipment
16,713

Goodwill
7,758

Allocated purchase price
$
26,025


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 months ended March 31, 2017.

Equity Transaction

VTTI Acquisition

In January 2017, we acquired an indirect 50% equity interest in VTTI for cash consideration of $1.15 billion (the “VTTI Acquisition”). We own VTTI jointly with Vitol S.A. (“Vitol”). VTTI is one of the largest independent global marine terminal businesses which, through its subsidiaries and partnership interests, owns and operates approximately 57 million barrels of petroleum products storage across 14 terminals located on five continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore, and offer world-class storage and marine terminalling services for refined petroleum products, liquid petroleum gas and crude oil. We and VIP Terminals Finance B.V., a subsidiary of Vitol, have equal board representation and voting rights in the VTTI joint venture. We account for this investment using the equity method of accounting. Under this method, an investment is recorded at acquisition cost plus our equity in undistributed earnings or losses since acquisition, reduced by distributions received and amortization of excess net investment. The earnings from our equity investment in VTTI are reported in our Global Marine Terminals segment. In addition, we include our proportionate share of our equity method investments’ unrealized gains and losses in other comprehensive income in our unaudited condensed consolidated financial statements. We recognized a foreign currency translation gain of $2.9 million in other comprehensive income for the three months ended March 31, 2017 related to our investment in VTTI.
  
The excess net investment in VTTI was $580.8 million at the acquisition date and was comprised of the following components: (i) $225.3 million related to the excess of the fair values of identifiable property, plant and equipment and intangible assets over their carrying values, which is amortized on a straight-line basis over the remaining useful lives of these underlying assets; and (ii) $355.5 million of implied goodwill which is not subject to amortization.


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 recoveries, of $1.5 million and $1.6 million during the three months ended March 31, 2017 and 2016, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings.  As of March 31, 2017 and December 31, 2016, we recorded environmental remediation liabilities of $44.4 million and $44.3 million, respectively.  Costs ultimately incurred may be in excess of our estimates, which may have a material impact on our financial condition, results of operations or cash flows.  At March 31, 2017 and December 31, 2016, we had $6.6 million and $7.2 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):
 
March 31,
2017
 
December 31,
2016
Liquid petroleum products (1)
$
282,960

 
$
337,424

Materials and supplies
22,167

 
19,379

Total inventories
$
305,127

 
$
356,803

                                                      
(1)
Ending inventory was 182.8 million and 198.2 million gallons of liquid petroleum products as of March 31, 2017 and December 31, 2016, respectively.
 
At March 31, 2017 and December 31, 2016, approximately 91% and 88% 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):
 
March 31,
2017
 
December 31,
2016
Prepaid insurance
$
2,021

 
$
7,609

Margin deposits
20,299

 
43,912

Unbilled revenue
2,293

 
1,615

Prepaid taxes
9,284

 
7,357

Vendor prepayments

 
1,863

Other
6,386

 
4,180

Total prepaid and other current assets
$
40,283

 
$
66,536



9


6. EQUITY INVESTMENTS
 
The following table presents earnings from equity investments for the periods indicated (in thousands): 
 
 
 
Three Months Ended
March 31,
 
Segment
 
2017
 
2016
VTTI B.V. (1)
Global Marine Terminals
 
$
8,389

 
$

West Shore Pipe Line Company
Domestic Pipelines & Terminals
 
1,342

 
2,331

Muskegon Pipeline LLC
Domestic Pipelines & Terminals
 
334

 
377

Transport4, LLC
Domestic Pipelines & Terminals
 
173

 
147

South Portland Terminal LLC
Domestic Pipelines & Terminals
 
120

 
233

Total earnings from equity investments
 
 
$
10,358

 
$
3,088

                                                      
(1) We acquired an indirect 50% equity interest in VTTI in January 2017.  For additional information, see Note 2.

Summarized combined income statement data for our equity method investments are as follows for the periods indicated (amounts represent 100% of investee income statement data in thousands): 
 
Three Months Ended
March 31,
 
2017
 
2016
Revenue
$
126,684

 
$
22,211

Operating income
45,645

 
12,533

Net income
30,112

 
8,339

Net income attributable to investees
23,987

 
8,339


7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to financial market risks, including changes in interest rates and commodity prices, in the course of our normal business operations.  We use derivative instruments to manage such 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 2016, we entered into seven forward-starting interest rate swaps with a total aggregate notional amount of $350.0 million, which we entered into in anticipation of the issuance of debt on or before January 15, 2018, and eleven forward-starting interest rate swaps with a total aggregate notional amount of $500.0 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, as well as to fund capital expenditures and other general partnership purposes, although no assurances can be given that the issuance of fixed-rate debt will be possible on acceptable terms.

During the three months ended March 31, 2017, unrealized gains of $1.7 million were recorded in accumulated other comprehensive income (“AOCI”) to reflect the change in the fair values of the forward-starting interest rate swaps.

10



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. Our Merchant Services segment also uses exchange-traded refined petroleum contracts to hedge expected future transactions related to certain gasoline inventory that we manage on behalf of a third party, which are designated as cash flow hedges, with the effective portion of the hedge reported in other comprehensive income (“OCI”) and reclassified into earnings when the expected future transaction affects earnings. Any gains or losses incurred on the derivative instruments that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings.
Additionally, our Merchant Services segment enters into exchange-traded refined petroleum product futures contracts on behalf of our Domestic Pipelines & Terminals segment to manage the risk of market price volatility on the narrowing gasoline-to-butane pricing spreads associated with our butane blending activities managed by a third party. These futures contracts are not designated in a hedge relationship for accounting purposes. 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 March 31, 2017 (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
 
7,712

 
1,574

 
Mark-to-market
Physical index derivative contracts
 
34,667

 

 
Mark-to-market
Futures contracts for refined petroleum products
 
1,431

 
18,690

 
Mark-to-market
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 

 
 

 
 
Physical fixed price derivative contracts
 
8,818

 

 
Cash Flow Hedge
Cash flow hedge contracts
 
9,618

 

 
Cash Flow Hedge
Futures contracts for refined petroleum products
 
150,822

 
15,288

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

Our futures contracts designated as fair value hedges related to our inventory portfolio and our futures contracts designated as cash flow hedges related to refined petroleum products extend to the fourth quarter of 2018.

Effective January, 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral.  These amendments impacted the accounting treatment of our exchange-traded derivatives contracts, primarily comprised of our futures contracts, for which the CME serves as the central clearing party, or exchange-settled derivative traded on the over-the-counter (“OTC”)market. As a result, commencing with the first quarter of 2017, we began reducing the corresponding derivative asset and liability balances for our exchange-settled derivative contracts to reflect the settlement of those positions via the variation margin. The variation margin is now considered partial settlement of the derivative contract and will result in realized gains or losses which prior to January 1, 2017 were classified as unrealized gains or losses on derivatives. In addition, we maintain an initial margin deposit with the broker in an amount sufficient to cover the fair value of our open futures positions. This margin deposit is considered collateral and is included within prepaid and other current assets in our condensed consolidated balance sheets and is not offset against the fair values of our derivative instruments.


11


The following table sets forth the fair value of each classification of derivative instruments and the locations of the derivative instruments on our unaudited condensed consolidated balance sheets at the dates indicated (in thousands):
 
March 31, 2017
 
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
$
1,353

 
$

 
$
1,353

 
$
(236
)
 
$
1,117

Physical index derivative contracts
244

 

 
244

 
(1
)
 
243

Interest rates derivatives

 
26,239

 
26,239

 

 
26,239

Total current derivative assets
1,597

 
26,239

 
27,836

 
(237
)
 
27,599

Physical fixed price derivative contracts
193

 

 
193

 

 
193

Interest rates derivatives

 
38,080

 
38,080

 

 
38,080

Total non-current derivative assets
193

 
38,080

 
38,273

 

 
38,273

Physical fixed price derivative contracts
(1,096
)
 
(1,825
)
 
(2,921
)
 
236

 
(2,685
)
Physical index derivative contracts
(1
)
 

 
(1
)
 
1

 

Total current derivative liabilities
(1,097
)
 
(1,825
)
 
(2,922
)
 
237

 
(2,685
)
Net derivative assets
$
693

 
$
62,494

 
$
63,187

 
$

 
$
63,187

                                                      
(1)
Amounts represent the netting of physical fixed and index contracts’ assets and liabilities when a legal right of offset exists. 
 
December 31, 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
$
1,499

 
$

 
$
1,499

 
$
(306
)
 
$
1,193

Physical index derivative contracts
334

 

 
334

 
(1
)
 
333

Futures contracts for refined products
51,431

 
21

 
51,452

 
(51,452
)
 

Total current derivative assets
53,264

 
21

 
53,285

 
(51,759
)
 
1,526

Physical fixed price derivative contracts
164

 

 
164

 
(5
)
 
159

Futures contracts for refined products
226

 

 
226

 
(226
)
 

Interest rates derivatives

 
62,609

 
62,609

 

 
62,609

Total non-current derivative assets
390

 
62,609

 
62,999

 
(231
)
 
62,768

Physical fixed price derivative contracts
(4,517
)
 

 
(4,517
)
 
306

 
(4,211
)
Physical index derivative contracts
(1
)
 

 
(1
)
 
1

 

Futures contracts for refined products
(57,828
)
 
(15,685
)
 
(73,513
)
 
51,452

 
(22,061
)
Total current derivative liabilities
(62,346
)
 
(15,685
)
 
(78,031
)
 
51,759

 
(26,272
)
Physical fixed price derivative contracts
(61
)
 

 
(61
)
 
5

 
(56
)
Futures contracts for refined products
(4,384
)
 

 
(4,384
)
 
226

 
(4,158
)
Total non-current derivative liabilities
(4,445
)
 

 
(4,445
)
 
231

 
(4,214
)
Net derivative (liabilities) assets
$
(13,137
)
 
$
46,945

 
$
33,808

 
$

 
$
33,808

                                                      
(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.
 
At March 31, 2017, 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 March 31, 2017, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.
 

12


The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated (in thousands):
 
 
 
Three Months Ended
March 31,
 
Location
 
2017
 
2016
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

Physical fixed price derivative contracts
Product sales
 
$
2,487

 
$
(2,255
)
Physical index derivative contracts
Product sales
 
(16
)
 
(27
)
Physical fixed price derivative contracts
Cost of product sales
 
467

 
5,115

Physical index derivative contracts
Cost of product sales
 
163

 
214

Futures contracts for refined products
Cost of product sales
 
(90
)
 
(1,482
)
 
 
 
 
 
 
Derivatives designated as fair value hedging instruments:
 
 
 

 
 

Futures contracts for refined products
Cost of product sales
 
$
33,577

 
$
1,613

Physical inventory - hedged items
Cost of product sales
 
(20,351
)
 
8,326

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

 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
(959
)
 
$
647

Time value excluded from hedge assessment
Cost of product sales
 
14,185

 
9,292

Net gain in income
 
 
$
13,226

 
$
9,939


The change in value recognized in OCI and the gains and 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
March 31,
 
2017
 
2016
Derivatives designated as cash flow hedging instruments:
 

 
 

Interest rate contracts
$
1,710

 
$

Commodity derivatives
1,275

 

Total
$
2,985

 
$


 
 
 
(Loss) Gain Reclassified from AOCI to Income (Effective Portion) for the
 
 
 
Three Months Ended
March 31,
 
Location
 
2017
 
2016
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

Interest rate contracts
Interest and debt expense
 
$
(3,038
)
 
$
(3,038
)
Commodity derivatives
Product Sales
 

 
1,266

Total
 
 
$
(3,038
)
 
$
(1,772
)

Over the next twelve months, we expect to reclassify $11.0 million of net losses attributable to interest rate derivatives from AOCI to earnings as an increase to interest and debt expense. The net losses consist of $11.9 million of amortization of hedge losses related to our settled forward-starting interest rate swaps and $0.9 million of estimated amortization of forecasted hedge gains on our forward-starting interest swaps that we expect to settle in late 2017. The ineffective portion of the change in fair value of cash flow hedges was not material for the three months ended March 31, 2017.


13


8. FAIR VALUE MEASUREMENTS
 
We categorize our financial assets and liabilities using the three-tier hierarchy as follows:
 
Recurring
 
The following table sets forth financial assets and liabilities measured at fair value on a recurring basis, as of the measurement dates indicated, and the basis for that measurement, by level within the fair value hierarchy (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Financial assets:
 

 
 

 
 

 
 

Physical fixed price derivative contracts
$

 
$
1,546

 
$

 
$
1,352

Physical index derivative contracts

 
244

 

 
333

Futures contracts for refined products

 

 

 

Interest rate derivatives

 
64,319

 

 
62,609

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Physical fixed price derivative contracts

 
(2,921
)
 

 
(4,267
)
Physical index derivative contracts

 
(1
)
 

 

Futures contracts for refined products

 

 
(26,219
)
 

Fair value
$

 
$
63,187

 
$
(26,219
)
 
$
60,027

 
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 interest rate derivatives were determined using fair value estimates obtained from our counterparties, which are verified using other available market data, including cash flow models which incorporate market inputs, including the implied forward LIBOR yield curve for the same period as the future interest rate swap settlements. Credit value adjustments (“CVAs”), which are used to reflect the potential nonperformance risk of our counterparties, are considered in the fair value assessment of interest rate derivatives. We determined that the impact of CVAs is not significant to the overall valuation of interest rate derivatives.

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 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 March 31, 2017 and December 31, 2016. As of March 31, 2017 and December 31, 2016, the Merchant Services segment did not hold any net liability derivative position containing credit contingent features.
 

14


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 MLPs 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 of our debt, using Level 2 input values, were as follows at the dates indicated (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Fixed-rate debt
$
3,968,819

 
$
4,114,152

 
$
3,967,695

 
$
4,083,488

Variable-rate debt
850,523

 
850,523

 
250,000

 
250,000

Total debt
$
4,819,342

 
$
4,964,675

 
$
4,217,695

 
$
4,333,488

 
We recognize transfers between levels within the fair value hierarchy as of the beginning of the reporting period.  We did not have any transfers between Level 1 and Level 2 during the three months ended March 31, 2017 and 2016, respectively.
 
Non-Recurring
 
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.  For the three months ended March 31, 2017 and 2016, there were no fair value adjustments related to such assets or liabilities reflected in our unaudited condensed consolidated financial statements.

9. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
 
Buckeye Pipe Line Services Company, which employs the majority of our workforce, sponsors a defined benefit plan, the Retirement Income Guarantee Plan (the “RIGP”), and an unfunded post-retirement benefit plan (the “Retiree Medical Plan”).  The RIGP and Retiree Medical Plan are closed and have limited participation. The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as follows for the three months ended March 31, 2017 and 2016 (in thousands):
 
RIGP
 
Retiree Medical Plan
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Service cost
$
(9
)
 
$
(9
)
 
$
81

 
$
91

Interest cost
105

 
127

 
327

 
333

Expected return on plan assets
(64
)
 
(71
)
 

 

Amortization of unrecognized losses
130

 
145

 
47

 
50

Net periodic benefit cost
$
162

 
$
192

 
$
455

 
$
474

 
During the three months ended March 31, 2017 and 2016, we contributed $1.3 million and $0.8 million, respectively, in aggregate to the RIGP and Retiree Medical Plans.
 

15


10. UNIT-BASED COMPENSATION PLANS
 
We award unit-based compensation to employees and directors primarily under the Buckeye Partners, L.P. 2013 Long-Term Incentive Plan (the “LTIP”).  We formerly awarded options to acquire LP Units to employees pursuant to the Buckeye Partners, L.P. Unit Option and Distribution Equivalent Plan (the “Option Plan”).  These compensation plans are further discussed below.
 
We recognized compensation expense related to the LTIP and the Option Plan of $8.7 million and $6.3 million for the three months ended March 31, 2017 and 2016, respectively.

LTIP
 
As of March 31, 2017, there were 1,656,179 LP Units available for issuance under the LTIP.
 
Deferral Plan under the LTIP
 
We also maintain the Buckeye Partners, L.P. Unit Deferral and Incentive Plan, as amended and restated effective February 4, 2015 (the “Deferral Plan”), pursuant to which we issue phantom and matching units under the LTIP to certain employees in lieu of a portion of the cash payments such employees would be entitled to receive under the Buckeye Partners, L.P. Annual Incentive Compensation Plan, as amended and restated, effective January 1, 2012.  At December 31, 2016 and 2015, actual compensation awards deferred under the Deferral Plan were $4.4 million and $3.1 million, for which 145,138 and 139,526 phantom units (including matching units) were granted during the three months ended March 31, 2017 and the year ended December 31, 2016, respectively.  These grants are included as granted in the LTIP activity table below.
 
Awards under the LTIP
 
During the three months ended March 31, 2017, the Compensation Committee of the Board granted 295,009 phantom units to employees (including the 145,138 phantom units granted pursuant to the Deferral Plan, as discussed above), 18,000 phantom units to independent directors of Buckeye GP and 206,539 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 (1)
Unvested at January 1, 2017
1,296

 
$
63.54

Granted (2)
520

 
70.49

Performance adjustment (3)
32

 
71.50

Vested
(319
)
 
69.95

Forfeited
(20
)
 
63.51

Unvested at March 31, 2017
1,509

 
$
64.47

                                                      
(1)
Determined by dividing the aggregate grant date fair value of awards by the number of awards issued. The weighted-average grant date fair value per LP Unit for forfeited and vested awards is determined before an allowance for forfeitures.
(2)
Includes both phantom and performance awards. Performance awards are granted at a target amount but, depending on our performance during the vesting period with respect to certain pre-established goals, the number of LP Units issued upon vesting of such performance awards can be greater or less than the target amount.
(3)
Represents the LP Units to be issued in excess of target amounts for performance awards that vested during the three months ended March 31, 2017 as a result of our above target performance with respect to applicable performance goals.

At March 31, 2017, $54.8 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of 2.1 years.
 

16


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, 2017
10

 
$
50.36

 
0.1

 
$
151

Exercised
(10
)
 

 
 

 
 

Outstanding at March 31, 2017

 

 

 
$

 
 
 
 
 
 
 
 
Exercisable at March 31, 2017

 
$

 

 
$

                                                      
(1)
Aggregate intrinsic value reflects fully vested LP Unit options at the date indicated. Intrinsic value is determined by calculating the difference between our closing LP Unit price on the last trading day in March 2017 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 three months ended March 31, 2017 and 2016 was $0.2 million and $0.1 million, respectively.

11. PARTNERS’ CAPITAL AND DISTRIBUTIONS

Our LP Units represent limited partner interests, which give the holders thereof the right to participate in distributions and to exercise the other rights and privileges available to them under our partnership agreement. The partnership agreement provides that, without prior approval of our limited partners holding an aggregate of at least two-thirds of the outstanding LP Units, we cannot issue any LP Units of a class or series having preferences or other special or senior rights over the LP Units.

At-the-Market Offering Program

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. (collectively, the “ATM Underwriters”). 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 the ATM Underwriters, acting as agents of Buckeye or as principals, subject in each case to the terms and conditions set forth in the Equity Distribution Agreement. Sales of LP Units, if any, may be made by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms.

During the three months ended March 31, 2017, we sold approximately 50 thousand LP Units under the Equity Distribution Agreement and received $3.2 million in net proceeds after deducting commissions and other related expenses, including nominal compensation fees 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 Buckeyes outstanding LP Units for the periods indicated (in thousands):
 
Limited
Partners
LP Units outstanding at January 1, 2017
140,264

LP Units issued pursuant to the Option Plan (1)
10

LP Units issued pursuant to the LTIP (1)
203

Issuance of LP Units through the Equity Distribution Agreement
50

LP Units outstanding at March 31, 2017
140,527

                                                      
(1) The number of LP Units issued represents issuance net of tax withholding.

17


 
Cash 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 $174.9 million ($1.2375 per LP Unit) and $154.9 million ($1.1875 per LP Unit) during the three months ended March 31, 2017 and 2016, respectively.
 
On May 5, 2017, we announced a quarterly distribution of $1.25 per LP Unit that will be paid on May 22, 2017 to unitholders of record on May 15, 2017.  Based on the LP Units outstanding as of March 31, 2017, estimated cash distributed to unitholders on May 22, 2017 will total $176.7 million.
 
12. EARNINGS PER UNIT
 
The following table is a reconciliation of the weighted average units outstanding used in computing the basic and diluted earnings per unit for the periods indicated (in thousands, except per unit amounts):
 
Three Months Ended
March 31,
 
2017
 
2016
Net income attributable to Buckeye Partners, L.P.
$
123,576

 
$
131,113

 
 
 
 
Basic:
 

 
 

    Weighted average units outstanding - basic
140,377

 
129,703

 
 
 
 
Earnings per unit - basic
$
0.88

 
$
1.01

 
 
 
 
Diluted:
 

 
 

Weighted average units outstanding - basic
140,377

 
129,703

Dilutive effect of LP Unit options and LTIP awards granted
621

 
426

    Weighted average units outstanding - diluted
140,998

 
130,129

 
 
 
 
Earnings per unit - diluted
$
0.88

 
$
1.01


13. 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 three 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.
 

18


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. 
 
The earnings from our equity investment in VTTI, acquired in January 2017, are reported in our Global Marine Terminals segment. VTTI is one of the largest independent global marine terminal businesses that, through its subsidiaries and partnership interests, owns and operates approximately 57 million barrels of petroleum products storage across 14 terminals located on five continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore, and offer world-class storage and marine terminalling services for refined petroleum products, liquid petroleum gas and crude oil.

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 three 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.

Financial Information by Segment

The following table summarizes revenue by each segment for the periods indicated (in thousands):
 
Three Months Ended
March 31,
 
2017
 
2016
Revenue:
 

 
 

Domestic Pipelines & Terminals
$
253,512

 
$
237,953

Global Marine Terminals
164,476

 
170,064

Merchant Services
571,126

 
389,737

Intersegment
(19,841
)
 
(17,160
)
Total revenue
$
969,273

 
$
780,594

 
For the three months ended March 31, 2017 and 2016, no customers contributed 10% or more of consolidated revenue.

The following table summarizes revenue by major geographic area for the periods indicated (in thousands):
 
Three Months Ended
March 31,
 
2017
 
2016
Revenue:
 

 
 

United States
$
887,862

 
$
696,889

International
81,411

 
83,705

Total revenue
$
969,273

 
$
780,594

 

19


Adjusted EBITDA
 
Adjusted EBITDA is a measure not defined by GAAP. We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization, further adjusted to exclude certain non-cash items, such as non-cash compensation expense; transaction, transition, and integration costs associated with acquisitions; gains and losses on foreign currency transactions and foreign currency derivative financial instruments; and certain other operating expense or income items, reflected in net income, that we do not believe are indicative of our core operating performance results and business outlook, such as hurricane-related costs, gains and losses on property damage recoveries, and gains and losses on asset sales. The definition of Adjusted EBITDA is also applied to our proportionate share in the Adjusted EBITDA of significant equity method investments, such as that in VTTI, and is not applied to our less significant equity method investments. The calculation of our proportionate share of the reconciling items used to derive Adjusted EBITDA is based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which are immaterial. Adjusted EBITDA is a non-GAAP financial measure that is used by our senior management, including our Chief Executive Officer, to assess the operating performance of our business and optimize resource allocation. We use Adjusted EBITDA as a primary measure 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. 
 
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.
 

20


The following tables present Adjusted EBITDA by segment and on a consolidated basis and a reconciliation of net income, which is the most comparable financial measure under GAAP, to Adjusted EBITDA for the periods indicated (in thousands):
 
Three Months Ended
March 31,
 
2017
 
2016
Adjusted EBITDA:
 

 
 

Domestic Pipelines & Terminals
$
139,443

 
$
128,481

Global Marine Terminals
130,631

 
106,623

Merchant Services
7,435

 
9,522

Total Adjusted EBITDA
$
277,509

 
$
244,626

 
 
 
 
Reconciliation of Net Income to Adjusted EBITDA:
 

 
 

Net income
$
126,309

 
$
134,977

Less: Net income attributable to noncontrolling interests
(2,733
)
 
(3,864
)
Net income attributable to Buckeye Partners, L.P.
123,576

 
131,113

Add: Interest and debt expense
55,885

 
47,783

Income tax expense
222

 
615

 Depreciation and amortization (1)
65,488

 
61,426

 Non-cash unit-based compensation expense
8,678

 
6,335

 Acquisition and transition expense (2)
1,029

 
122

 Hurricane-related costs (3)
2,403

 

 Proportionate share of Adjusted EBITDA for the equity method investment in VTTI (4)
28,617

 

Less: Amortization of unfavorable storage contracts (5)

 
(2,768
)
 Earnings from the equity method investment in VTTI (4)
(8,389
)
 

Adjusted EBITDA
$
277,509

 
$
244,626

                                                      
(1)
Includes 100% of the depreciation and amortization expense of $17.5 million and $16.8 million for Buckeye Texas for the three months ended March 31, 2017 and 2016, respectively.
(2)
Represents transaction, internal and third-party costs related to asset acquisition and integration.
(3)
Represents operating expenses incurred at our BBH facility as a result of Hurricane Matthew, which occurred in October 2016.
(4)
Due to the significance of our equity method investment in VTTI, effective January 1, 2017, we applied the definition of Adjusted EBITDA, covered in our description of Adjusted EBITDA, with respect to our proportionate share of VTTI’s Adjusted EBITDA. The calculation of our proportionate share of the reconciling items used to derive Adjusted EBITDA is based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which are immaterial.
(5)
Represents amortization of negative fair value allocated to certain unfavorable storage contracts acquired in connection with the BBH acquisition.


21


14. SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):
 
Three Months Ended
March 31,
 
2017
 
2016
Cash paid for interest (net of capitalized interest)
$
54,539

 
$
53,234

Cash paid for income taxes
180

 
1

Capitalized interest
1,029

 
1,011

  
Liabilities related to capital projects outstanding at March 31, 2017 and 2016 of $49.6 million and $76.8 million, respectively, are not included under “Capital expenditures” within the unaudited condensed consolidated statements of cash flows.


22


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, 2016.  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 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.
 
We own and operate a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage, processing 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. We also use our service expertise to operate and/or maintain third-party pipelines and perform certain engineering and construction services for our customers. Additionally, we are one of the largest independent terminalling and storage operators in the United States in terms of capacity available for service. Our terminal network comprises more than 120 liquid petroleum products terminals with aggregate storage capacity of over 115 million barrels across our portfolio of pipelines, inland terminals and marine terminals located primarily in the East Coast, Midwest 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”), 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 Gulf Coast regional hub, Buckeye Texas Partners LLC (“Buckeye Texas”), offers world-class marine terminalling, storage and processing capabilities. Our recent acquisition of an indirect 50% equity interest in VTTI B.V. (“VTTI”) expands our international presence with premier storage and marine terminalling services for petroleum products predominantly located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore. We are also a wholesale distributor of refined petroleum products in areas served by our pipelines and terminals.

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

23


Recent Developments

VTTI Acquisition

In January 2017, we acquired an indirect 50% equity interest in VTTI for cash consideration of $1.15 billion (the “VTTI Acquisition”). We own VTTI jointly with Vitol S.A. (“Vitol”). VTTI is one of the largest independent global marine terminal businesses which, through its subsidiaries and partnership interests, owns and operates approximately 57 million barrels of petroleum products storage across 14 terminals located on five continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore, and offer world-class storage and marine terminalling services for refined petroleum products, liquid petroleum gas and crude oil.  We and VIP Terminals Finance B.V., a subsidiary of Vitol, have equal board representation and voting rights in the VTTI joint venture. The earnings from our equity investment in VTTI are reported in our Global Marine Terminals segment.

At-the-Market Offering Program
 
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. (collectively, the “ATM Underwriters”). 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 the ATM Underwriters, acting as agents of Buckeye or as principals, subject in each case to the terms and conditions set forth in the Equity Distribution Agreement. Sales of LP Units, if any, may be made by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms.

During the three months ended March 31, 2017, we sold approximately 50 thousand LP Units in aggregate under the Equity Distribution Agreement and received $3.2 million in net proceeds after deducting commissions and other related expenses, including nominal compensation fees paid in aggregate to the agents under the Equity Distribution Agreement.

Overview of Operating Results
 
Net income attributable to our unitholders was $123.6 million for the three months ended March 31, 2017, which was a decrease of $7.5 million, or 5.7%, from $131.1 million for the corresponding period in 2016. Operating income was $172.0 million for the three months ended March 31, 2017, which was a decrease of $8.2 million, or 4.6%, from $180.2 million for the corresponding period in 2016

The decrease in net income attributable to our unitholders was primarily the result of decreased contributions from our Global Marine Terminals and Merchant Services segments. In our Global Marine Terminals segment, lower processing revenue at Buckeye Texas, lower ancillary revenues, principally due to lower berthing activity, and higher operating expenses were the primary drivers for the decrease over the prior year quarter. The decrease in contributions from our Merchant Services segment was mainly attributable to lower rack margins in the distillate market.

Additionally, increases in depreciation and amortization expense due to assets placed into service during 2016, as well as an increase in interest and debt expense, mainly related to the long-term debt issued in the fourth quarter of 2016 to partially fund the VTTI Acquisition, negatively impacted net income attributable to our unitholders.

These decreases in net income attributable to our unitholders were partially offset by increased contributions from our Domestic Pipelines & Terminals segment as well as the earnings from our equity investment in VTTI, acquired in January 2017. Our Domestic Pipelines & Terminals segment benefited from higher pipeline revenues, reflecting internal growth capital investments, increases in pipeline tariff rates and longer-haul shipments; higher storage revenue, primarily due to storage capacity brought back into service and new storage contracts; and an increase in product recoveries.
 

24


Results of Operations
 
Consolidated Summary
 
Our summary operating results were as follows for the periods indicated (in thousands, except per unit amounts): 
 
Three Months Ended
March 31,
 
2017
 
2016
Revenue
$
969,273

 
$
780,594

Costs and expenses
797,243

 
600,387

Operating income
172,030

 
180,207

Other expense, net
(45,499
)
 
(44,615
)
Income before taxes
126,531

 
135,592

Income tax expense
(222
)
 
(615
)
Net income
126,309

 
134,977

Less: Net income attributable to noncontrolling interests
(2,733
)
 
(3,864
)
Net income attributable to Buckeye Partners, L.P.
$
123,576

 
$
131,113

 
Non-GAAP Financial Measures
 
Adjusted EBITDA and distributable cash flow are measures not defined by accounting principles generally accepted in the United States of America (“GAAP”). We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization, further adjusted to exclude certain non-cash items, such as non-cash compensation expense; transaction, transition, and integration costs associated with acquisitions; gains and losses on foreign currency transactions and foreign currency derivative financial instruments; and certain other operating expense or income items, reflected in net income, that we do not believe are indicative of our core operating performance results and business outlook, such as hurricane-related costs, gains and losses on property damage recoveries, and gains and losses on asset sales. We define distributable cash flow as Adjusted EBITDA less cash interest expense, cash income tax expense, and maintenance capital expenditures, that are incurred to maintain the operating, safety, and/or earnings capacity of our existing assets. These definitions of Adjusted EBITDA and distributable cash flow are also applied to our proportionate share in the Adjusted EBITDA and distributable cash flow of significant equity method investments, such as that in VTTI, and are not applied to our less significant equity method investments. The calculation of our proportionate share of the reconciling items used to derive these VTTI performance metrics is based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which are immaterial. Adjusted EBITDA and distributable cash flow are non-GAAP financial measures that are used by our senior management, including our Chief Executive Officer, to assess the operating performance of our business and optimize resource allocation. We use Adjusted EBITDA as a primary measure 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.  We use distributable cash flow as a performance metric to compare cash-generating performance of Buckeye from period to period and to compare the cash-generating performance for specific periods to the cash distributions (if any) that are expected to be paid to our unitholders. Distributable cash flow is not intended to be a liquidity measure.
  
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.


25


The following table presents Adjusted EBITDA by segment and on a consolidated basis, distributable cash flow and a reconciliation of net income, which is the most comparable financial measure under generally accepted accounting principles, to Adjusted EBITDA and distributable cash flow for the periods indicated (in thousands): 
 
Three Months Ended
March 31,
 
2017
 
2016
Adjusted EBITDA:
 

 
 

Domestic Pipelines & Terminals
$
139,443

 
$
128,481

Global Marine Terminals
130,631

 
106,623

Merchant Services
7,435

 
9,522

Total Adjusted EBITDA
$
277,509

 
$
244,626

Reconciliation of Net Income to Adjusted EBITDA and Distributable cash flow:
 

 
 

Net income
$
126,309

 
$
134,977

Less: Net income attributable to noncontrolling interests
(2,733
)
 
(3,864
)
Net income attributable to Buckeye Partners, L.P.
123,576

 
131,113

Add: Interest and debt expense
55,885

 
47,783

Income tax expense
222

 
615

 Depreciation and amortization (1)
65,488

 
61,426

 Non-cash unit-based compensation expense
8,678

 
6,335

 Acquisition and transition expense (2)
1,029

 
122

 Hurricane-related costs (3)
2,403

 

 Proportionate share of Adjusted EBITDA for the equity method investment in VTTI (4)
28,617

 

Less: Amortization of unfavorable storage contracts (5)

 
(2,768
)
 Earnings from the equity method investment in VTTI (4)
(8,389
)
 

Adjusted EBITDA
$
277,509

 
$
244,626

Less: Interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other
(51,524
)
 
(43,573
)
Income tax expense, excluding non-cash taxes
(222
)
 
(617
)
Maintenance capital expenditures
(32,586
)
 
(21,566
)
Proportionate share of VTTIs interest expense, current income tax expense and
maintenance capital expenditures (4)
(8,018
)
 

Add: Hurricane-related maintenance capital expenditures
5,550

 

Distributable cash flow
$
190,709

 
$
178,870

_________________________
(1)
Includes 100% of the depreciation and amortization expense of $17.5 million and $16.8 million for Buckeye Texas for the three months ended March 31, 2017 and 2016, respectively.
(2)
Represents transaction, internal and third-party costs related to asset acquisition and integration.
(3)
Represents operating expenses incurred at our BBH facility as a result of Hurricane Matthew, which occurred in October 2016.
(4)
Due to the significance of our equity method investment in VTTI, effective January 1, 2017, we applied the definitions of Adjusted EBITDA and distributable cash flow, covered in our description of non-GAAP financial measures, with respect to our proportionate share of VTTI’s Adjusted EBITDA and distributable cash flow. The calculation of our proportionate share of the reconciling items used to derive these VTTI performance metrics is based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which are immaterial.
(5)
Represents amortization of negative fair value allocated to certain unfavorable storage contracts acquired in connection with the BBH acquisition.






26


The following table presents product volumes in barrels per day (“bpd”) and average tariff rates in cents per barrel for our Domestic Pipelines & Terminals segment, percent of capacity utilization for our Global Marine Terminals segment and total volumes sold in gallons for the Merchant Services segment for the periods indicated:
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Domestic Pipelines & Terminals (average bpd in thousands):
 
 

 
 

Pipelines:
 
 

 
 

Gasoline
 
703.1

 
697.0

Jet fuel
 
355.0

 
347.3

Middle distillates (1)
 
329.4

 
314.2

Other products (2)
 
21.2

 
12.3

Total throughput
 
1,408.7

 
1,370.8

Terminals:
 
 

 
 

Throughput (3)
 
1,183.8

 
1,176.0

 
 
 
 
 
Pipeline average tariff (cents/bbl)
 
90.0

 
84.2

 
 
 
 
 
Global Marine Terminals (percent of capacity):
 
 
 
 
Average capacity utilization rate (4)
 
99
%
 
99
%
 
 
 
 
 
Merchant Services (in millions of gallons):
 
 

 
 

Sales volumes
 
349.1

 
352.9

___________________________
(1)
Includes diesel fuel and heating oil.
(2)
Includes liquefied petroleum gas, intermediate petroleum products and crude oil.
(3)
Includes throughput of two underground propane storage caverns.
(4)
Represents the ratio of contracted capacity to capacity available to be contracted. Based on total capacity (i.e., including out of service capacity), average capacity utilization rates are approximately 96% and 91% for the three months ended March 31, 2017 and 2016, respectively.

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
 
Consolidated
 
Net income was $126.3 million for the three months ended March 31, 2017, which was a decrease of $8.7 million, or 6.4%, from $135.0 million for the corresponding period in 2016.  The decrease in net income was primarily due to decreased contributions from our Global Marine Terminals and Merchant Services segments. In our Global Marine Terminals segment, lower processing revenue at Buckeye Texas, lower ancillary revenues, principally due to lower berthing activity, and higher operating expenses were the primary drivers for the decrease over the prior year quarter. The decrease in contributions from our Merchant Services segment was mainly attributable to lower rack margins in the distillate market.

Additionally, increases in depreciation and amortization expense due to assets placed into service during 2016, as well as an increase in interest and debt expense, mainly related to the long-term debt issued in the fourth quarter of 2016 to partially fund the VTTI Acquisition, negatively impacted net income attributable to our unitholders.

These decreases in net income attributable to our unitholders were partially offset by increased contributions from our Domestic Pipelines & Terminals segment as well as the earnings from our equity investment in VTTI, acquired in January 2017. Our Domestic Pipelines & Terminals segment benefited from higher pipeline revenues, reflecting internal growth capital investments, increases in pipeline tariff rates and longer-haul shipments; higher storage revenue, primarily due to storage capacity brought back into service, and new storage contracts; and an increase in product recoveries.



27


Revenue was $969.3 million for the three months ended March 31, 2017, which was an increase of $188.7 million, or 24.2%, from $780.6 million for the corresponding period in 2016.  The increase in revenue was primarily related to an increase in petroleum product prices, partially offset by a decrease in sales volume, in our Merchant Services segment; an increase in storage revenues, reflecting increased capacity utilization and new storage contracts; higher pipeline transportation revenues, reflecting internal growth capital investments, increases in pipeline tariff rates and longer-haul shipments; higher project management revenues; and favorable product recoveries in our Domestic Pipelines & Terminals segment.  This increase in revenue was partially offset by a decline in ancillary and processing services revenues in our Global Marine Terminals segment.

Adjusted EBITDA was $277.5 million for the three months ended March 31, 2017, which was an increase of $32.9 million, or 13.5%, from $244.6 million for the corresponding period in 2016.  The increase in Adjusted EBITDA was primarily related to the Adjusted EBITDA contribution from our equity investment in VTTI, acquired in January 2017; higher pipeline transportation revenues; favorable product recoveries; and higher storage revenues, reflecting increased capacity utilization, internal growth capital investments, and new storage contracts.
 
Distributable cash flow was $190.7 million for the three months ended March 31, 2017, which was an increase of $11.8 million, or 6.6%, from $178.9 million for the corresponding period in 2016.  The increase in distributable cash flow was primarily related to an increase of $32.9 million in Adjusted EBITDA as described above. This increase was partially offset by the $8 million proportionate share of VTTI’s interest expense, current income tax expense and maintenance capital expenditures; a $7.9 million increase in interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other, due to the long-term debt issued in the fourth quarter of 2016; and a $5.4 million increase in maintenance capital expenditures, excluding hurricane-related maintenance capital expenditures, primarily resulting from increased tank integrity project costs and upgrades to station and terminalling equipment.
 
Adjusted EBITDA by Segment
 
Domestic Pipelines & Terminals. Adjusted EBITDA from the Domestic Pipelines & Terminals segment was $139.5 million for the three months ended March 31, 2017, which was an increase of $11.0 million, or 8.6%, from $128.5 million for the corresponding period in 2016.  The increase in Adjusted EBITDA was primarily due to a $15.5 million net increase in revenue, partially offset by a $3.4 million increase in operating expenses and a $1.1 million decrease in earnings from equity investments. The increase in revenue was due to a $10.2 million increase in pipeline transportation revenues, reflecting returns from internal growth capital investments, increases in average pipeline tariff rates and longer-haul shipments; a $5.3 million increase in project management revenues due to increase in project activity; a $4.6 million increase in storage revenue, primarily due to storage capacity brought back into service and new storage contracts; and a $2.2 million increase in product recoveries. These increases were partially offset by a $4.9 million decrease in terminalling throughput, primarily due to the termination of a crude-by-rail throughput contract at our Albany, New York terminal in the third quarter of 2016 and a $1.9 million decrease in other revenues.

Pipeline volumes increased by 2.8% due to strong demand for distillate volumes, jet fuel, and gasoline. Terminalling volumes increased by 0.7%, primarily due to higher demand for gasoline, partially offset by weaker demand for distillates.
 
Global Marine Terminals.  Adjusted EBITDA from the Global Marine Terminals segment was $130.6 million for the three months ended March 31, 2017, which was an increase of $24.0 million, or 22.5%, from $106.6 million for the corresponding period in 2016.  The increase in Adjusted EBITDA was primarily due to the $28.6 million Adjusted EBITDA contribution from our equity investment in VTTI, acquired in January 2017, partially offset by a $2.4 million increase in operating expenses and a $2.2 million net decrease in revenue. The decrease in revenue reflected a $1.3 million decrease in ancillary revenue, which was principally due to lower berthing activity and other related ancillary services, and a $0.9 million net decrease in revenue from terminalling and storage services revenue, reflecting a decrease in processing services revenues at Buckeye Texas and an increase in storage revenues, primarily due to storage brought back into service which increased available storage capacity. The average capacity utilization of our marine storage assets was 99% for the three months ended March 31, 2017, which was consistent with the 99% in the corresponding period in 2016.
 
Merchant Services.  Adjusted EBITDA from the Merchant Services segment was $7.4 million for the three months ended March 31, 2017, which was a decrease of $2.1 million, or 22.1%, from $9.5 million for the corresponding period in 2016.  Adjusted EBITDA was negatively impacted by lower rack margin in the distillate market and an increase in operating expenses.
 

28


Adjusted EBITDA was positively impacted by a $181.4 million increase in revenue, which included a $185.6 million increase in refined petroleum product sales due to a price increase of $0.54 per gallon (average sales prices per gallon were $1.64 and