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EX-32.2 - EXHIBIT 32.2 - BUCKEYE PARTNERS, L.P.exhibit322-bplq12018.htm
EX-32.1 - EXHIBIT 32.1 - BUCKEYE PARTNERS, L.P.exhibit321-bplq12018.htm
EX-31.2 - EXHIBIT 31.2 - BUCKEYE PARTNERS, L.P.exhibit312-bplq12018.htm
EX-31.1 - EXHIBIT 31.1 - BUCKEYE PARTNERS, L.P.exhibit311-bplq12018.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, 2018
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 
Limited partner units and Class C Units outstanding as of April 27, 2018: 146,936,380 and 6,220,658, respectively.
 
 
 
 
 



TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 
 
7.

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




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,
 
2018
 
2017
Revenue:
 

 
 

Product sales
$
792,187

 
$
565,420

Transportation, storage and other services
390,918

 
403,853

Total revenue
1,183,105

 
969,273

 
 
 
 
Costs and expenses:
 

 
 

Cost of product sales
785,327

 
548,050

Operating expenses
154,868

 
161,422

Depreciation and amortization
64,138

 
65,488

General and administrative
23,289

 
21,737

Other, net
(14,030
)
 

Total costs and expenses
1,013,592

 
796,697

Operating income
169,513

 
172,576

 
 
 
 
Other income (expense):
 

 
 

Earnings from equity investments
7,489

 
10,358

Interest and debt expense
(59,105
)
 
(55,885
)
Other expense
(315
)
 
(518
)
Total other expense, net
(51,931
)
 
(46,045
)
 
 
 
 
Income before taxes
117,582

 
126,531

Income tax expense
(490
)
 
(222
)
Net income
117,092

 
126,309

Less: Net income attributable to noncontrolling interests
(4,719
)
 
(2,733
)
Net income attributable to Buckeye Partners, L.P.
$
112,373

 
$
123,576

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

Basic
$
0.75

 
$
0.88

Diluted
$
0.74

 
$
0.88

 
 
 
 
Weighted average units outstanding:
 

 
 

Basic
148,904

 
140,377

Diluted
149,532

 
140,998

 
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,
 
2018
 
2017
Net income
$
117,092

 
$
126,309

Other comprehensive income:
 
 
 
Unrealized gains on derivative instruments, net
14,138

 
2,985

Reclassification of derivative losses to net income, net
2,337

 
3,038

Changes in benefit plan assets and benefit obligations
18

 
177

Other comprehensive income from equity method investments
13,963

 
2,891

Total other comprehensive income
30,456

 
9,091

Comprehensive income
147,548

 
135,400

Less: Comprehensive income attributable to noncontrolling interests
(4,719
)
 
(2,733
)
Comprehensive income attributable to Buckeye Partners, L.P.
$
142,829

 
$
132,667

 
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,
2018
 
December 31,
2017
Assets:
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
6,607

 
$
2,180

Accounts receivable, net
255,554

 
270,648

Construction and pipeline relocation receivables
10,636

 
11,047

Inventories
158,193

 
301,425

Derivative assets
47,411

 
34,959

Prepaid and other current assets
41,595

 
36,339

Total current assets
519,996

 
656,598

 
 
 
 
Property, plant and equipment
8,046,476

 
7,928,240

Less: Accumulated depreciation
(1,240,246
)
 
(1,192,448
)
Property, plant and equipment, net
6,806,230

 
6,735,792

 
 
 
 
Equity investments
1,496,552

 
1,494,412

Goodwill
1,007,341

 
1,007,313

 
 
 
 
Intangible assets
615,086

 
615,086

Less: Accumulated amortization
(272,237
)
 
(256,025
)
Intangible assets, net
342,849

 
359,061

 
 
 
 
Other non-current assets
42,543

 
51,483

Total assets
$
10,215,511

 
$
10,304,659

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Current liabilities:
 

 
 

Line of credit
$
115,200

 
$
252,204

Accounts payable
92,884

 
160,777

Derivative liabilities
5,232

 
7,172

Accrued and other current liabilities
232,872

 
265,207

Total current liabilities
446,188

 
685,360

 
 
 
 
Long-term debt
4,587,949

 
4,658,321

Other non-current liabilities
92,186

 
92,656

Total liabilities
5,126,323

 
5,436,337

 
 
 
 
Commitments and contingent liabilities (Note 4)

 

 
 
 
 
 
 

 
 

Buckeye Partners, L.P. capital:
 

 
 

Limited Partners (146,934,972 and 146,677,459 units outstanding as of March 31, 2018 and December 31, 2017, respectively)
4,487,030

 
4,562,306

Class C Units (6,220,658 and zero units outstanding as of March 31, 2018 and December 31, 2017, respectively)
263,631

 

Accumulated other comprehensive income
59,087

 
28,631

Total Buckeye Partners, L.P. capital
4,809,748

 
4,590,937

Noncontrolling interests
279,440

 
277,385

Total partners’ capital
5,089,188

 
4,868,322

Total liabilities and partners’ capital
$
10,215,511

 
$
10,304,659

 
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,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
117,092

 
$
126,309

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

 
 
Depreciation and amortization
64,138

 
65,488

Amortization of debt issuance costs, discounts and terminated interest rate swaps
3,900

 
4,361

Non-cash unit-based compensation expense
8,764

 
8,715

Gain on asset impairments, disposals and recoveries, net
(13,982
)
 

Changes in fair value of derivatives, net
(233
)
 
(26,394
)
Earnings from equity investments
(7,489
)
 
(10,358
)
Distributions of earnings from equity investments

 
1,728

Other non-cash items
20

 
103

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

 
 
Accounts receivable, net
14,267

 
30,722

Construction and pipeline relocation receivables
411

 
(4,464
)
Inventories
143,246

 
51,676

Prepaid and other current assets
(5,266
)
 
26,253

Accounts payable
(71,100
)
 
(53,814
)
Accrued and other current liabilities
(32,650
)
 
(24,412
)
Other non-current assets and liabilities
15,073

 
(2,869
)
Net cash provided by operating activities
236,191

 
193,044

Cash flows from investing activities:
 

 
 

Capital expenditures
(116,916
)
 
(98,252
)
Acquisition of equity investment

 
(1,150,000
)
Distributions from equity investments in excess of earnings
19,238

 
672

Acquisition working capital settlement
895

 

Proceeds from property disposals and recoveries
7,715

 
402

Net cash used in investing activities
(89,068
)
 
(1,247,178
)
Cash flows from financing activities:
 

 
 

Net proceeds from issuance of Units and exercise of Unit options
262,066

 
3,693

Payment of tax withholding on vesting of LTIP awards
(6,596
)
 
(8,175
)
Net proceeds from issuance of long-term debt
394,966

 

Repayment of long-term debt
(300,000
)
 

Borrowings under the BPL Credit Facility
612,600

 
597,290

Repayments under the BPL Credit Facility
(779,300
)
 
(255,077
)
Net (repayments) borrowings under the BMSC Credit Facility
(137,004
)
 
258,310

Contributions from noncontrolling interests
4,400

 
3,600

Distributions to noncontrolling interests
(7,759
)
 
(6,825
)
Distributions to unitholders
(186,069
)
 
(174,149
)
Net cash (used in) provided by financing activities
(142,696
)
 
418,667

Net increase (decrease) in cash and cash equivalents
4,427

 
(635,467
)
Cash and cash equivalents — Beginning of period
2,180

 
640,340

Cash and cash equivalents — End of period
$
6,607

 
$
4,873

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

4


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(In thousands)
(Unaudited)
 
 
Limited
 Partners
 
Class C
 Units
 
Accumulated
 Other Comprehensive
 Income (Loss)
 
Noncontrolling
 Interests
 
Total
Partners’ capital - January 1, 2018
$
4,562,306

 
$

 
$
28,631

 
277,385
 
$
4,868,322

Net income
110,808

 
1,565

 

 
4,719

 
117,092

Distributions paid to unitholders
(186,764
)
 

 

 
695

 
(186,069
)
Net proceeds from issuance of Units

 
262,066

 

 

 
262,066

Amortization of unit-based compensation awards
8,764

 

 

 

 
8,764

Payment of tax withholding on vesting of LTIP awards
(6,596
)
 

 

 

 
(6,596
)
Distributions paid to noncontrolling interests

 

 

 
(7,759
)
 
(7,759
)
Contributions from noncontrolling interests

 

 

 
4,400

 
4,400

Other comprehensive income

 

 
30,456

 

 
30,456

Accrual of distribution equivalent rights
(1,488
)
 

 

 

 
(1,488
)
Partners’ capital - March 31, 2018
$
4,487,030

 
$
263,631

 
$
59,087

 
$
279,440

 
$
5,089,188

 
 
 
 
 
 
 
 
 
 
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 vesting 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

Accrual of 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

 
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 partner units representing limited partnership interests (“LP Units”) are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “BPL.”  Buckeye GP LLC (“Buckeye GP”) is our general partner.  As used in these Notes to Unaudited Condensed Consolidated Financial Statements, “we,” “us,” “our,” the “Partnership” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, include our subsidiaries.
 
We own and operate, or own a significant interest in, a diversified global 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. Our global terminal network, including through our interest in VTTI B.V. (“VTTI”), comprises more than 135 liquid petroleum products terminals with aggregate tank capacity of over 176 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 as well as in the Caribbean, Northwest Europe, the Middle East and Southeast Asia.  Our global 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 liquid 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. Through our 50% equity interest in VTTI, our global terminal network offers premier storage and marine terminalling services for petroleum product logistics in key international energy hubs. 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 accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”).  Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our results of operations for the interim periods.  The unaudited condensed consolidated financial statements include the accounts of our subsidiaries controlled by us and variable interest entities of which we are the primary beneficiary. Intercompany transactions are eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates and assumptions about future events and their effects cannot be made with certainty.  Estimates may change as new events occur, when additional information becomes available and if our operating environment changes. Actual results could differ from our estimates.

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, 2017.

6



Recently Adopted Accounting Guidance

Revenue from Contracts with Customers. Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), applying the modified retrospective transition method, which required us to apply the new standard to (i) all new revenue contracts entered into after January 1, 2018, and (ii) revenue contracts which were not completed as of January 1, 2018. ASC 606 replaces existing revenue recognition requirements in GAAP and requires entities to recognize revenue at an amount that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. ASC 606 also requires certain disclosures regarding qualitative and quantitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of ASC 606 did not result in a transition adjustment nor did it have a material impact on the timing or amount of our revenue recognition. Please see Note 2 for additional information.

Recognition and Measurement of Financial Assets and Liabilities. Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2016-01, and it will be applied prospectively. This ASU issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in this standard is the requirement for changes in the fair value of marketable equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). Under the standard, marketable equity investments that do not have a readily determinable fair value are eligible for the measurement alternative. Using the measurement alternative, investments without readily determinable fair values will be valued at cost, with adjustments to fair value for changes in price or impairments reflected through net income. The adoption of this guidance did not have an impact on our unaudited condensed consolidated financial statements.

Classification of Certain Cash Receipts and Cash Payments. Effective January 1, 2018, we adopted ASU 2016-15 applying the retrospective transition method. This ASU requires changes in the presentation of certain items, including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. The adoption of this guidance did not have a material impact on our unaudited condensed consolidated financial statements.

Business Combinations. Effective January 1, 2018, we adopted ASU 2017-01, and it will be applied prospectively to future business combinations. This ASU clarifies the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions/disposals of assets or businesses. The guidance provides a screen to help entities determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. If the threshold of the screen is not met, the guidance further clarifies that the set of assets is not a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output.

Retirement Benefits. Effective January 1, 2018, we adopted ASU 2017-07, which improves the presentation of net periodic pension and postretirement benefit costs. The interest cost, expected return on plan assets, actuarial loss due to settlements, and the amortization of unrecognized loss have been reclassified from operating expenses to other expense, applying the retrospective transition method. We elected to apply the practical expedient which allows us to reclassify amounts disclosed previously in the retirement benefits note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the components of net periodic benefit costs discussed above will not be included in amounts capitalized in property, plant, and equipment. The adoption of this guidance did not have a material impact on our unaudited condensed consolidated financial statements. In connection with the adoption of ASU 2017-07 using the retrospective transition method, we reclassified $0.5 million of expenses related to our Retirement Income Guarantee Plan and unfunded post-retirement benefit plan, originally included in Operating expenses as of March 31, 2017, to Other expense. Such reclassifications had no impact on net income.

Modifications to Share-Based Payment Awards. Effective January 1, 2018, we adopted ASU 2017-09, and it will be applied prospectively to future modifications of our unit-based awards, if any. This guidance clarifies when changes in the terms or conditions of share-based payment awards must be accounted for as modifications under existing guidance. The guidance requires that entities apply modification accounting unless the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change.


7


Tax Cuts and Jobs Act. In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was passed into law. The Tax Act makes changes to the U.S. tax code including, but not limited to (i) reducing the U.S. federal corporate income tax rate from a top rate of 35% to 21% effective January 1, 2018, (ii) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may electively be paid over eight years, and (iii) accelerated first-year expensing of certain capital expenditures.
    
Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which an entity acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with SAB 118, the entity must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete. With the exception of federal and state income taxes from Buckeye Development & Logistics I LLC (“BDL”), the Partnership’s federal and certain state income taxes are the responsibility of the partners and are not reflected in these consolidated financial statements. Accordingly, the Tax Act did not have a material impact on our unaudited condensed consolidated financial statements or on our disclosures. We continue to evaluate certain aspects of the Tax Act and have recorded certain adjustments to our deferred taxes.

Recent Accounting Guidance Not Yet Adopted

Derivatives and Hedging. In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12 which amends and simplifies existing guidance in order to improve the financial reporting of hedging relationships to better align risk management activities in financial statements and make targeted improvements to simplify the application of current guidance related to the assessment of hedge effectiveness. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early application permitted. The new guidance requires prospective application, with a cumulative effect adjustment to the beginning balance of partners’ capital for existing hedging relationships. 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 ASU 2016-02 requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for leases with lease terms greater than twelve months. 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. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We expect to adopt this guidance on January 1, 2019. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

Goodwill Impairment.  In January 2017, the FASB issued ASU 2017-04 simplifying the test for goodwill impairment. The guidance eliminates Step 2 from the goodwill impairment test, which required entities to calculate the implied fair value of a reporting unit’s goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under the new guidance, entities will recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value. The guidance must be applied using a prospective approach and is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We do not believe our adoption of this guidance will have a material impact on our consolidated financial statements or on our disclosures.

Measurement of Credit Losses on Financial Instruments.  In June 2016, the FASB issued ASU 2016-13 which replaces the current incurred loss impairment method with a method that reflects expected credit losses on financial instruments. The new standard is effective as of January 1, 2020, and early adoption is permitted as of January 1, 2019. We expect to adopt this standard on January 1, 2020. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.


8


2. REVENUE FROM CONTRACTS WITH CUSTOMERS

The majority of our service-based revenue is derived from fee-based transportation, terminalling, and storage services that we provide to our customers. We also generate revenue from the marketing and sale of petroleum products. We recognize revenues from customer fees for services rendered or by selling petroleum products. Under ASC 606, we recognize revenue over time or at a point in time, depending on the nature of the performance obligations contained in the respective contract with our customer. A performance obligation is a promise in a contract to transfer goods or services to the customer. The contract transaction price is allocated to each performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In certain situations, we recognize revenue pursuant to guidance of the Accounting Standards Codification other than ASC 606. These situations primarily relate to leases and derivatives. The adoption of ASC 606 did not have a material impact on the timing or amount of our revenue recognition. The following is an overview of our significant revenue streams, including a description of the respective performance obligation and related method of revenue recognition.

Pipeline Transportation

Revenue from pipeline operations is comprised of tariffs and fees associated with the transportation of liquid petroleum products generally at published tariffs, and in certain instances, revenue for committed capacity contracts at negotiated rates. Tariff revenue is recognized either at the point of delivery or at the point of receipt, pursuant to specifications outlined in the respective tariffs. Revenue associated with capacity reservation is recognized ratably over the respective term, regardless of whether the capacity is actually utilized. Our tariffs generally include product loss allowance factors intended to, among other things, compensate for losses due to evaporation, measurement and other product losses in transit. We value the difference of allowance volumes to actual losses at the estimated net realizable value in the period the variance occurred, and the result is recorded as an adjustment to transportation, storage and other service revenue. The majority of our contracts have a single performance obligation to provide pipeline transportation service, and the performance obligation is primarily satisfied over time as transportation services are provided, whereby progress is generally measured based on the volume of product transported. Our services are typically billed on a weekly basis and we generally do not offer extended payment terms. In addition, we have certain agreements that require counterparties to throughput a minimum volume over an agreed-upon period. Revenue pursuant to such agreements is recognized at the earlier of when the volume is throughput or proportionally if we determine the customer is not expected to meet its commitment.

Terminalling and Storage Services

Revenue from storage and terminalling operations is recognized as services are performed. Storage and terminalling revenue include storage fees, which are generated as we provide storage capacity, and terminalling or throughput fees, which are generated when we receive liquid petroleum products from pipelines, sea-going vessels, trucks, or rail-car and redeliver such products to pipelines, sea-going vessels, railroads, or truck-loading racks. We generate revenue through a combination of month-to-month and multi-year storage capacity and terminalling service arrangements. The majority of our contracts have a single performance obligation to provide storage and terminalling services that is primarily satisfied over time as these services are provided. Storage fees for contract capacity are typically recognized in revenue ratably over the term of the contract, regardless of the amount of the contracted storage capacity utilized by the customer. Terminalling fees, as applicable, are recognized as the liquid petroleum product is delivered to a connecting carrier or to a customer’s designated mode of transport, which could include a pipeline, truck, marine vessel, or rail-car or, in certain situations, as product is received based on the volume of product handled. As discussed above with respect to transportation services, progress in performing terminalling services is generally measured based upon the volume of product handled. We have certain contracts containing tiered pricing or volume based discounts, which are recognized in revenue as an optional purchase to acquire additional services in the period the services are performed. In addition, we have certain agreements that require counterparties to throughput a minimum volume over an agreed-upon period. Revenue pursuant to such agreements is recognized at the earlier of when the volume is throughput or proportionally if we determine the customer is not expected to meet its commitment. Revenue from other ancillary services is recognized as services are rendered. Our services are typically billed on a monthly basis and we generally do not offer extended payment terms.

Merchant Services

Revenue from the sale of petroleum products, which are sold on a wholesale basis, is recognized at the time title to the product sold transfers to the purchaser, which occurs upon delivery of the product to the purchaser or its designee. Our contracts contain a single performance obligation to sell a particular petroleum product, which is generally satisfied as quantities are delivered to our customer. Our commodity sales are typically billed at the time product is delivered and do not offer extended payment terms.


9


Operation and Construction Services

Revenue from contract operation and construction services of facilities and pipelines not directly owned by us is recognized as the services are performed. Contract and construction services revenue typically includes costs to be reimbursed by the customer plus an operator fee. Our contracts have a single performance obligation to provide operation and construction services which is satisfied over time as services are provided. Revenue is generally recognized utilizing costs incurred to measure our progress in fulfilling our performance obligation. Our services are typically billed on a monthly basis and we generally do not offer extended payment terms.

Contract Balances

Contract assets primarily relate to our rights to consideration for completed performance obligations but not billable at the reporting date. We recognize contract assets in situations where revenue recognition occurs prior to billing the customer based on our rights under the contract. Contract assets are transferred to accounts receivable when the rights become unconditional, which is generally upon billing.

Contract liabilities primarily relate to consideration received from customers in advance of completing the performance obligation. We recognize contract liabilities under these arrangements as revenue once all contingencies or potential performance obligations have either been satisfied by the (i) transportation of volumes, (ii) performance of terminalling and storage services, or (iii) expiration of the customer’s rights under the contract. We also recognize contract liabilities in revenue to the extent it is determined that an amount of volume associated with a minimum volume commitment payment will not be shipped by the customer in a future period.

The following table provides information about receivables from contracts with customers, contract assets and contract liabilities from contracts with customers (in thousands):
 
March 31,
2018
 
December 31, 2017
Receivables from contracts with customers
$
223,327

 
$
245,280

Contract assets
21,094

 
13,999

Contract liabilities
(29,528
)
 
(15,778
)

During the three months ended March 31, 2018, we reclassified approximately $13.6 million of contract assets at the beginning of the period to receivables as a result of the rights to the consideration becoming unconditional and billable. Revenue recognized during the three months ended March 31, 2018 from amounts included in contract liabilities at the beginning of the period was approximately $5.4 million.

The following table includes estimated revenue associated with contractual commitments in place, which are expected to be recognized in revenue in the specified period related to future performance obligations as of the end of the reporting period (in thousands):
 
Estimated Revenue (1)
Remainder of 2018
$
303,306

2019
252,813

2020
179,797

2021
110,346

Thereafter
229,115

Total
$
1,075,377

                                                      
(1) Excludes revenue arrangements accounted for as leases in the amount of $146.0 million for the remainder of 2018, $190.1 million for 2019, $188.3 million for 2020, $170.9 million for 2021, and $162.1 million thereafter.


10


Our contractually committed revenue, for purposes of the tabular presentation above, excludes estimates of variable rate escalation clauses in our contracts with customers and is generally limited to contracts which have fixed pricing and minimum volume terms and conditions. Our contractually committed revenue amounts generally exclude remaining performance obligations for contracts with index-based pricing or variable volume attributes in which such variable consideration relates to the remaining performance obligation.

3. ACQUISITIONS
 
Business Combination

2017 Transaction

Duck Island terminal acquisition

In December 2017, we acquired Duck Island Terminal LLC, a liquid petroleum products terminalling business in Trenton, New Jersey, for approximately $26.1 million, net of cash acquired of $2.4 million and the final working capital settlement of $0.9 million received in the first quarter of 2018. The assets of this entity are reported in our Domestic Pipelines & Terminals segment. The purchase price has been allocated on a preliminary basis to assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represent expected synergies from combining the acquired assets with our existing operations. Fair values have been developed using recognized business valuation techniques, with inputs classified as Level 3 within the fair value hierarchy.  The purchase price has been allocated to tangible and intangible assets acquired as follows (in thousands):
Current assets, including cash acquired of $2,444
$
8,989

Property, plant and equipment
18,306

Intangible assets
2,200

Goodwill
2,796

Current liabilities
(3,501
)
Environmental liabilities
(299
)
Allocated purchase price
$
28,491


Adjustments to the preliminary purchase price allocation during the quarter resulted in nominal decreases to current assets and current liabilities, with a corresponding increase to goodwill.

Unaudited Pro forma Financial Results for Duck Island terminal acquisition

Our unaudited condensed consolidated statements of operations do not include earnings from the terminalling business prior to December 20, 2017, the closing date of the acquisition. Unaudited pro forma financial information for this acquisition was not prepared because the impact was immaterial to our financial results for the three months ended March 31, 2018.

Equity Investment 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 58 million barrels of petroleum products storage across 15 terminals located on five continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the Middle East and Southeast Asia, and offer world-class storage and marine terminalling services for liquid petroleum products. 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 OCI in our unaudited condensed consolidated financial statements.
 

11


The fair values used to calculate the excess net investment in VTTI were primarily developed using an income approach, with inputs classified as Level 3 within the fair value hierarchy. The excess net investment was $584.4 million at the acquisition date and was comprised of the following components: (i) $240.7 million related to the excess of the fair values of identifiable property, plant and equipment and intangible assets over their carrying values, which is being amortized on a straight-line basis over the estimated useful lives of these underlying assets of approximately 28 years; and (ii) $343.7 million of implied goodwill, which is not subject to amortization. The amortization of the excess net investment is included in earnings from equity investments on our unaudited condensed consolidated statements of operations.

In September 2017, VTTI acquired all of the outstanding publicly held units of VTTI Energy Partners LP, formerly a publicly traded master limited partnership (“VTTI MLP”), for an aggregate cash consideration of $473.6 million (the “VTTI Merger”). In connection with the VTTI Merger, VTTI MLP merged with and into a direct wholly owned subsidiary of VTTI. We funded our 50% share of the aggregate cash consideration, in the amount of $236.8 million, excluding transaction costs, through a capital contribution to VTTI, using borrowings under our $1.5 billion revolving credit facility with SunTrust Bank (the “Credit Facility”).

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

Environmental Contingencies
 
At March 31, 2018 and December 31, 2017, we had $40.4 million and $41.0 million, respectively, of environmental remediation liabilities unrelated to claims and legal proceedings.  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, 2018 and December 31, 2017, we had $5.0 million and $5.3 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third-party claims.


12


5. INVENTORIES
 
Our inventory amounts were as follows at the dates indicated (in thousands):
 
March 31,
2018
 
December 31,
2017
Liquid petroleum products (1)
$
136,693

 
$
280,934

Materials and supplies
21,500

 
20,491

Total inventories
$
158,193

 
$
301,425

                                                      
(1)
Ending inventory was 69.7 million and 142.1 million gallons of liquid petroleum products as of March 31, 2018 and December 31, 2017, respectively.
 
At March 31, 2018 and December 31, 2017, approximately 91% and 85% 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. 

6. PREPAID AND OTHER CURRENT ASSETS
 
Prepaid and other current assets consist of the following at the dates indicated (in thousands):
 
March 31,
2018
 
December 31,
2017
Prepaid insurance
$
2,754

 
$
7,146

Margin deposits
4,825

 
7,989

Contract assets
21,094

 
13,999

Prepaid taxes
5,778

 
2,865

Other
7,144

 
4,340

Total prepaid and other current assets
$
41,595

 
$
36,339


7. EQUITY INVESTMENTS
 
The following table presents earnings from equity investments for the periods indicated (in thousands): 
 
 
 
Three Months Ended March 31,
 
Segment
 
2018
 
2017
VTTI B.V.
Global Marine Terminals
 
$
4,390

 
$
8,389

West Shore Pipe Line Company
Domestic Pipelines & Terminals
 
2,326

 
1,342

Muskegon Pipeline LLC
Domestic Pipelines & Terminals
 
325

 
334

Transport4, LLC
Domestic Pipelines & Terminals
 
229

 
173

South Portland Terminal LLC
Domestic Pipelines & Terminals
 
219

 
120

Total earnings from equity investments
 
 
$
7,489

 
$
10,358


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,
 
2018
 
2017
Revenue
$
145,068

 
$
126,684

Operating income
49,782

 
45,645

Net income
24,750

 
30,112

Net income attributable to investee
22,959

 
23,987



13


8. LONG-TERM DEBT

Extinguishment of Debt

In January 2018, we repaid in full the $300.0 million principal amount and $9.1 million of accrued interest outstanding under our 6.050% notes, using funds available under our Credit Facility.

Notes Offerings

In January 2018, we issued $400.0 million of junior subordinated notes (“Junior Notes”) maturing on January 22, 2078, which are redeemable at Buckeye’s option, in whole or in part, on or after January 22, 2023. The Junior Notes bear interest at a fixed rate of 6.375% per year up to, but not including, January 22, 2023. From January 22, 2023, the Junior Notes will bear interest at a floating rate based on the Three-Month London Interbank Offered Rate (“LIBOR”) plus 4.02%, reset quarterly. Total proceeds from this offering, after underwriting fees, expenses, and debt issuance costs, were $395.0 million. We used the net proceeds from this offering to reduce indebtedness outstanding under our Credit Facility and for general partnership purposes.

Current Maturities Expected to be Refinanced

We have classified $400.0 million of 2.650% notes due on November 15, 2018 as long-term debt in the unaudited condensed consolidated balance sheet at March 31, 2018 because we have the intent and the ability to refinance these obligations on a long-term basis under our Credit Facility. At March 31, 2018, we had $1,382.4 million of additional borrowing capacity under our Credit Facility.

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to financial market risks, including changes in interest rates and commodity prices, in the course of our normal business operations.  We use derivative instruments to manage 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 eleven forward-starting interest rate swaps with a total aggregate notional amount of $500.0 million, in anticipation of the issuance of debt on or before November 15, 2018. We expect to issue new fixed-rate debt 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, 2018, unrealized gains of $14.8 million were recorded in accumulated other comprehensive income (“AOCI”) to reflect the change in the fair values of the forward-starting interest rate swaps.

14



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 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 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 through earnings.
The following table summarizes our commodity derivative instruments outstanding at March 31, 2018 (amounts in thousands of gallons):
 
 
Volume (1)
 
 
Derivative Purpose 
 
Current
 
Long-Term
 
 
Derivatives NOT designated as hedging instruments:
 
 

 
 

 
 
Physical fixed-price derivative contracts
 
9,592

 
535

 
 
Physical index derivative contracts
 
41,892

 

 
 
Futures contracts for refined petroleum products
 
9,505

 
924

 
 
 
 
 
 
 
 
Hedge Type
Derivatives designated as hedging instruments:
 
 

 
 

 
 
Cash flow hedge futures contracts
 
1,974

 

 
Cash Flow Hedge
Futures contracts for refined petroleum products
 
63,420

 

 
Fair Value Hedge
                                                     
(1)
Volume represents absolute value of net notional volume position. All volumes represent net short positions.

Our futures contracts designated as fair value hedges relate to our inventory portfolio and extend to the fourth quarter of 2018. Our futures contracts relate to forecasted purchases and sales of refined petroleum products and extend to the third quarter of 2019.


15


In accordance with the Chicago Mercantile Exchange (“CME”) rulebook, variation margin transfers are considered settlement payments, thereby reducing the corresponding derivative asset and liability balances for our exchange-settled derivative contracts. These settlement payments result in realized gains and losses on derivatives.

The following table sets forth the fair value of each classification of derivative instruments and the derivative instruments’ location on our unaudited condensed consolidated balance sheets at the dates indicated (in thousands):
    
March 31, 2018
 
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
$
414

 
$

 
$
414

 
$
(48
)
 
$
366

Physical index derivative contracts
306

 

 
306

 
(15
)
 
291

Interest rate derivative contracts

 
46,754

 
46,754

 

 
46,754

Total current derivative assets
720

 
46,754

 
47,474

 
(63
)
 
47,411

Physical fixed-price derivative contracts
1

 

 
1

 

 
1

Total non-current derivative assets
1

 

 
1

 

 
1

Physical fixed-price derivative contracts
(2,272
)
 
(3,008
)
 
(5,280
)
 
48

 
(5,232
)
Physical index derivative contracts
(15
)
 

 
(15
)
 
15

 

Total current derivative liabilities
(2,287
)
 
(3,008
)
 
(5,295
)
 
63

 
(5,232
)
Physical fixed-price derivative contracts
(22
)
 

 
(22
)
 

 
(22
)
Total non-current derivative liabilities
(22
)
 

 
(22
)
 

 
(22
)
Net derivative (liabilities) assets
$
(1,588
)
 
$
43,746

 
$
42,158

 
$

 
$
42,158

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

 
December 31, 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
$
2,582

 
$

 
$
2,582

 
$
(63
)
 
$
2,519

Physical index derivative contracts
455

 

 
455

 
(9
)
 
446

Interest rate derivative contracts

 
31,994

 
31,994

 

 
31,994

Total current derivative assets
3,037

 
31,994

 
35,031

 
(72
)
 
34,959

Total non-current derivative assets

 

 

 

 

Physical fixed-price derivative contracts
(7,226
)
 

 
(7,226
)
 
63

 
(7,163
)
Physical index derivative contracts
(18
)
 

 
(18
)
 
9

 
(9
)
Total current derivative liabilities
(7,244
)
 

 
(7,244
)
 
72

 
(7,172
)
Total non-current derivative liabilities

 

 

 

 

Net derivative (liabilities) assets
$
(4,207
)
 
$
31,994

 
$
27,787

 
$

 
$
27,787

                                                      
(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, 2018, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, and physical index contracts noted above) varied in duration in the overall portfolio, but did not extend beyond September 2019.  In addition, at March 31, 2018, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.
 

16


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
 
2018
 
2017
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

Physical fixed-price derivative contracts
Product sales
 
$
1,354

 
$
2,487

Physical index derivative contracts
Product sales
 
177

 
(16
)
Physical fixed-price derivative contracts
Cost of product sales
 
(605
)
 
467

Physical index derivative contracts
Cost of product sales
 
2

 
163

Futures contracts for refined products
Cost of product sales
 
(2,298
)
 
(90
)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
Location
 
2018
 
2017
Derivatives designated as fair value hedging instruments:
 
 
 
 
 

Futures contracts for refined products
Cost of product sales
 
$
5,707

 
$
33,577

Physical inventory - hedged items
Cost of product sales
 
(5,990
)
 
(20,351
)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
Location
 
2018
 
2017
Ineffectiveness excluding the time value component on fair value hedging instruments:
 
 
 
 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
(82
)
 
$
(959
)
Time value excluded from hedge assessment
Cost of product sales
 
(201
)
 
14,185


The change in value recognized in 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 (Loss) Recognized in OCI on Derivatives for the
 
Three Months Ended March 31,
 
2018
 
2017
Derivatives designated as cash flow hedging instruments:
 

 
 

Interest rate derivative contracts
$
14,761

 
$
1,710

Commodity derivatives
(623
)
 
1,275

Total
$
14,138

 
$
2,985


 
 
 
Loss Reclassified from AOCI to Income (Effective Portion) for the
 
 
 
Three Months Ended March 31,
 
Location
 
2018
 
2017
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

Interest rate derivative contracts
Interest and debt expense
 
$
(2,337
)
 
$
(3,038
)
Commodity derivatives
Product Sales
 

 

Total
 
 
$
(2,337
)
 
$
(3,038
)



17


Over the next twelve months, we expect to reclassify $6.7 million of net losses attributable to interest rate derivatives from AOCI to earnings as an increase to interest and debt expense. These net losses consist of $11.2 million of amortization of hedge losses on settled forward-starting interest rate swaps, partially offset by $4.5 million of amortization of hedge gains on settled forward-starting interest rate swaps settled in November 2017 and forecasted hedge gains on forward-starting interest rate swaps that we expect to settle in late 2018. Additionally, the unrealized gains and losses for refined petroleum products designated as cash flow hedges at March 31, 2018, of $0.6 million, are estimated to be realized and reclassified from AOCI to product sales over the next twelve months. The ineffective portion of the change in fair value of cash flow hedges was not material for the three months ended March 31, 2018 and 2017.

10. FAIR VALUE MEASUREMENTS
 
We categorize our financial assets and liabilities using the three-tier fair value 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, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Financial assets:
 

 
 

 
 

 
 

Physical fixed-price derivative contracts
$

 
$
415

 
$

 
$
2,582

Physical index derivative contracts

 
306

 

 
455

Interest rate derivatives

 
46,754

 

 
31,994

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Physical fixed-price derivative contracts

 
(5,302
)
 

 
(7,226
)
Physical index derivative contracts

 
(15
)
 

 
(18
)
Futures contracts for refined products

 

 

 

Fair value
$

 
$
42,158

 
$

 
$
27,787

 
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 for exchange-settled commodity derivatives at March 31, 2018 are presented in accordance with the CME rulebook, which deems that these instruments are settled daily via variation margin payments. As a result of this rulebook guidance, CME-settled derivatives, primarily comprised of our futures contracts for refined petroleum products, are considered to have no fair value at the balance sheet date for financial reporting purposes; however, the derivatives remain outstanding and subject to future commodity price fluctuations until they are settled in accordance with their contractual terms.

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 as of March 31, 2018 and December 31, 2017.

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, 2018 and December 31, 2017. As of March 31, 2018 and December 31, 2017, the Merchant Services segment did not hold any net liability derivative position containing credit contingent features.
 

18


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 approximates the carrying amount since the associated interest rates are market-based. 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, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Fixed-rate debt
$
3,938,242

 
$
3,973,115

 
$
4,241,963

 
$
4,384,336

Variable-rate debt
764,907

 
765,200

 
668,562

 
668,904

Total debt
$
4,703,149

 
$
4,738,315

 
$
4,910,525

 
$
5,053,240

 
In addition, our pension plan assets are measured at fair value on a recurring basis, based on Level 1 and Level 3 inputs.

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, 2018 and 2017, 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, 2018 and 2017, there were no significant fair value adjustments related to such assets or liabilities reflected in our unaudited condensed consolidated financial statements.

11. UNIT-BASED COMPENSATION PLANS
 
We award unit-based compensation to employees and directors primarily under the 2013 Long Term Incentive Plan of Buckeye Partners, L.P. (the “LTIP”), which was approved by the Partnership’s unitholders in June 2013 and subsequently amended and restated in June 2017. The LTIP replaced the 2009 Long-Term Incentive Plan (the “2009 Plan”), which was merged with and into the LTIP, and no further grants have since been made under the 2009 Plan. 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”). 
 
We recognized compensation expense related to awards under the LTIP and the Option Plan of $8.8 million and $8.7 million for the three months ended March 31, 2018 and 2017, respectively.

LTIP
 
As of March 31, 2018, there were 2,135,404 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 December 13, 2016 (the “Deferral Plan”), pursuant to which we issue phantom and matching units under the LTIP to certain employees in lieu of cash compensation at the election of the employee. During the three months ended March 31, 2018, 149,726 phantom units (including matching units) were granted under this plan. These grants are included as granted in the LTIP activity table below.
 
Awards under the LTIP
 
During the three months ended March 31, 2018, the Compensation Committee of the board of directors of Buckeye GP (the “Board”) granted 345,899 phantom units to employees (including the 149,726 phantom units granted pursuant to the Deferral Plan, as discussed above), 18,000 phantom units to independent directors of Buckeye GP and 272,518 performance units to employees.


19


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, 2018
1,450

 
$
64.04

Granted (2)
636

 
51.60

Performance adjustment (3)
39

 
73.17

Vested
(384
)
 
72.83

Forfeited
(12
)
 
58.02

Unvested at March 31, 2018
1,729

 
$
57.71

                                                      
(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 issued in excess of target amounts for performance awards that vested during the three months ended March 31, 2018 as a result of our above target performance with respect to applicable performance goals.

At March 31, 2018, $58.2 million of compensation expense related to the unvested LTIP is expected to be recognized over a weighted average remaining period of 2.2 years.
 
We ceased making additional grants under the Option Plan following the adoption of the 2009 Plan. At December 31, 2017, there was no unrecognized compensation cost related to unvested options, as all options were vested and exercised as of November 24, 2017. The total intrinsic value of options exercised during each of the three months ended March 31, 2018 and 2017 were zero and $0.2 million, respectively.

12. PARTNERS’ CAPITAL AND DISTRIBUTIONS

Our LP Units and Class C Units represent limited partnership 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 and Class C Units (voting together as a single class), we cannot issue any limited partnership interests of a class or series having preferences or other special or senior rights over the LP Units and Class C Units.

Equity Offering

In March 2018, we issued approximately 6.2 million Class C Units in a private placement for aggregate gross proceeds of $265.0 million. The net proceeds were $262.1 million, after deducting issuance costs of approximately $2.9 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility, to pre-fund the equity portion of our remaining 2018 and 2019 growth capital expenditure program and for general partnership purposes.

Class C Units represent a separate class of our limited partnership interests. The Class C Units are substantially similar in all respects to our existing LP Units, except that Buckeye has the option to pay distributions on the Class C Units in cash or by issuing additional Class C Units, with the number of Class C Units issued based upon the volume-weighted average price per LP Unit, less a discount of 12.5%, for the 10 trading days immediately preceding the date the distributions are declared.

The Class C Units will convert into LP Units on a one-for-one basis at the earliest of (i) March 2, 2020, (ii) the date on which the Partnership delivers notice to the holders of the Class C Units that the Class C Units have converted, (iii) the date on which a change of control of the Partnership occurs, (iv) the business day following any notice or press release from the Partnership of a cash distribution for any quarterly period in an amount less than $1.2625 per LP Unit and (v) the date on which the Partnership issues any class or series of LP Units having preferences or senior rights over the LP Units and Class C Units.
 

20


At-the-Market Offering Program

Our 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”) expired on January 15, 2018. During the three months ended March 31, 2018, no LP Units were sold under the Equity Distribution Agreement.
 
Summary of Changes in Outstanding Units
 
The following is a summary of changes in Buckeyes outstanding LP Units and Class C Units for the periods indicated (in thousands):
 
LP Units
 
Class C Units
 
Total
Units outstanding at January 1, 2018
146,677

 

 
146,677

LP units issued pursuant to the LTIP (1)
258

 

 
258

Issuance of Class C units

 
6,221

 
6,221

Units outstanding at March 31, 2018
146,935

 
6,221

 
153,156

                                                      
(1) The number of LP Units issued represents issuance net of tax withholding.
 
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. Cash distributions are paid for LP Units and for distribution equivalent rights (“DERs”) with respect to certain unit-based compensation awards outstanding as of each respective period. Actual cash distributions on our LP Units totaled $186.8 million ($1.2625 per LP Unit) and $174.9 million ($1.2375 per LP Unit) during the three months ended March 31, 2018 and 2017, respectively.
 
On May 4, 2018, we announced a quarterly distribution of $1.2625 per LP Unit that will be paid on May 21, 2018 to unitholders of record on May 14, 2018.  Based on the LP Units and DERs with respect to certain unit-based compensation awards outstanding as of March 31, 2018, cash expected to be distributed to LP unitholders on May 21, 2018 is estimated to be approximately $186.8 million. We also expect to issue approximately 218,673 Class C Units to our Class C unitholders in lieu of cash distributions on May 21, 2018.
 

21


13. EARNINGS PER UNIT
 
The following tables set forth the calculation of basic and diluted earnings per unit, attributable to Buckeye’s unitholders (including LP Units and Class C Units), taking into consideration net income allocable to participating securities, as well as the reconciliation of basic weighted average units outstanding to diluted weighted average units outstanding (in thousands, except per unit amounts):
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
Net income attributable to unitholders
$
111,120

 
$
123,576

 
 
 
 
Basic:
 
 
 
Weighted average units outstanding - basic
148,904

 
140,377

Earnings per unit - basic
$
0.75

 
$
0.88

 
 
 
 
Diluted:
 

 
 

Weighted average units outstanding - basic
148,904

 
140,377

Effect of dilutive securities
628

 
621

Weighted average units outstanding - diluted
149,532

 
140,998

Earnings per unit - diluted
$
0.74

 
$
0.88


14. BUSINESS SEGMENTS
 
We operate and report in three business segments: (i) Domestic Pipelines & Terminals; (ii) Global Marine Terminals; and (iii) Merchant Services.  All inter-segment revenues, expenses, operating income, assets and liabilities have been eliminated. 

 Domestic Pipelines & Terminals
 
The Domestic Pipelines & Terminals segment receives liquid petroleum products from refineries, connecting pipelines, vessels, trains, and bulk and marine terminals, transports those products to other locations for a fee, and provides bulk liquid 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 or variable fee.
 
Global Marine Terminals
 
The Global Marine Terminals segment, including through its interest in VTTI, provides marine accessible bulk storage and blending services, rail and truck rack loading/unloading along with petroleum processing services in the New York Harbor on the East Coast and Corpus Christi, Texas in the Gulf Coast region of the United States, as well as The Bahamas, Puerto Rico and St Lucia in the Caribbean, Northwest Europe, the Middle East and Southeast Asia.  The segment owns and operates, or owns a significant interest in, 22 liquid petroleum product terminals, located in these key domestic and international energy hubs, that enable us to facilitate global flows of crude and refined petroleum products, offer connectivity between supply areas and market centers, and provide premier storage, marine terminalling, blending, and processing services to a diverse customer base.


22


Merchant Services
 
The Merchant Services segment is a wholesale distributor of refined petroleum products in the United States and the Caribbean. 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

For the three months ended March 31, 2018 and 2017, no customer contributed 10% or more of consolidated revenue.

The following tables provide information about our revenue types by reportable segment for the periods indicated (in thousands). Prior periods have been disaggregated for comparison purposes.
 
Three Months Ended March 31,
 
2018
 
Domestic Pipelines & Terminals
 
Global Marine Terminals
 
Merchant Services
 
Intersegment Eliminations
 
Total
Revenue from contracts with customers
 
 
 
 
 
 
 
 
 
Pipeline transportation
$
121,470

 
$

 
$

 
$
(3,639
)
 
$
117,831

Terminalling and storage services
115,976

 
101,218

 

 
(8,593
)
 
208,601

Product sales

 
13

 
643,508

 
(3,354
)
 
640,167

Other services
12,089

 
21

 
2,900

 
(1,347
)
 
13,663

Total revenue from contracts with customers
249,535

 
101,252

 
646,408

 
(16,933
)
 
980,262

Revenue from leases
7,990

 
42,833

 

 

 
50,823

Revenue from derivatives
(2,090
)
 

 
152,020

 
2,090

 
152,020

Total revenue
$
255,435

 
$
144,085

 
$
798,428

 
$
(14,843
)
 
$
1,183,105


 
Three Months Ended March 31,
 
2017
 
Domestic Pipelines & Terminals
 
Global Marine Terminals
 
Merchant Services
 
Intersegment Eliminations
 
Total
Revenue from contracts with customers
 
 
 
 
 
 
 
 
 
Pipeline transportation
$
115,937

 
$

 
$

 
$
(2,983
)
 
$
112,954

Terminalling and storage services
109,586

 
125,732

 

 
(7,579
)
 
227,739

Product sales

 
11

 
444,134

 
(3,725
)
 
440,420

Other services
12,991

 
102

 
1,992

 
(1,683
)
 
13,402

Total revenue from contracts with customers
238,514

 
125,845

 
446,126

 
(15,970
)
 
794,515

Revenue from leases
11,127

 
38,631

 

 

 
49,758

Revenue from derivatives
3,871

 

 
125,000

 
(3,871
)
 
125,000

Total revenue
$
253,512

 
$
164,476

 
$
571,126

 
$
(19,841
)
 
$
969,273


The following table summarizes revenue by major geographic area for the periods indicated (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Revenue:
 

 
 

United States
$
1,122,220

 
$
887,862

International
60,885

 
81,411

Total revenue
$
1,183,105

 
$
969,273


23


 
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; certain gains and losses on foreign currency transactions and foreign currency derivative financial instruments, as applicable; 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.
 

24


The following table presents net income on a consolidated basis and a reconciliation of net income, which is the most comparable financial measure under GAAP, to Adjusted EBITDA, as well as Adjusted EBITDA by segment for the periods indicated (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Reconciliation of Net Income to Adjusted EBITDA:
 
 
 
Net income
$
117,092

 
$
126,309

Less: Net income attributable to noncontrolling interests
(4,719
)
 
(2,733
)
Net income attributable to Buckeye Partners, L.P.
112,373

 
123,576

Add: Interest and debt expense
59,105

 
55,885

Income tax expense
490

 
222

 Depreciation and amortization (1)
64,138

 
65,488

 Non-cash unit-based compensation expense
8,690

 
8,678

 Acquisition and transition expense (2)
282

 
1,029

 Hurricane-related costs (3)
581

 
2,403

 Proportionate share of Adjusted EBITDA for the equity
 method investment in VTTI (4)
34,540

 
28,617

Less: Gains on property damage recoveries (5)
(14,085
)
 

 Earnings from the equity method investment in VTTI (4)
(4,390
)
 
(8,389
)
Adjusted EBITDA
$
261,724

 
$
277,509

 
 
 
 
Adjusted EBITDA:
 

 
 

Domestic Pipelines & Terminals
$
140,651

 
$
139,443

Global Marine Terminals
117,418

 
130,631

Merchant Services
3,655

 
7,435

Adjusted EBITDA
$
261,724

 
$
277,509

                                                      
(1)
Includes 100% of the depreciation and amortization expense of $17.8 million and $17.5 million for Buckeye Texas for the three months ended March 31, 2018 and 2017, respectively.
(2)
Represents transaction, internal and third-party costs related to asset acquisition and integration.
(3)
Represents costs incurred at our BBH facility in the Bahamas, Yabucoa Terminal in Puerto Rico, Corpus Christi facilities in Texas, and certain terminals in Florida, as a result of hurricanes which occurred in 2017 and 2016, consisting of operating expenses and write-offs of damaged long-lived assets, net of insurance recoveries.
(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 gains on recoveries, which settled property damages caused by a third party, primarily related to vessel allision with a jetty at our BBH facility in the Bahamas, which occurred in May 2012.


25


15. 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,
 
2018
 
2017
Cash paid for interest (net of capitalized interest)
$
52,329

 
$
54,539

Cash paid for income taxes
159

 
180

Capitalized interest
1,788

 
1,029

  
Liabilities related to capital projects outstanding at March 31, 2018 and 2017 of $64.7 million and $49.6 million, respectively, are not included under capital expenditures within the unaudited condensed consolidated statements of cash flows.


26


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, 2017.  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 partner units representing limited partnership interests (“LP Units”) are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “BPL.”  Buckeye GP LLC (“Buckeye GP”) is our general partner.  As used in this Report, unless otherwise indicated, “we,” “us,” “our,” the “Partnership” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, include our subsidiaries.
 
We own and operate, or own a significant interest in, a diversified global 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. Our global terminal network, including through our interest in VTTI B.V. (“VTTI”), comprises more than 135 liquid petroleum products terminals with aggregate tank capacity of over 176 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 as well as in the Caribbean, Northwest Europe, the Middle East and Southeast Asia.  Our global 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. Through our 50% equity interest in VTTI, our global terminal network offers premier storage and marine terminalling services for petroleum product logistics in key international energy hubs. We are also a wholesale distributor of refined petroleum products in certain 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, regulatory compliant 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.
 

27


Recent Developments

Class C Units Issuance

In March 2018, we issued approximately 6.2 million Class C Units in a private placement for aggregate gross proceeds of $265.0 million. The Class C Units are substantially similar in all respects to our existing LP Units, except that Buckeye may elect to pay distributions in respect of the Class C Units through the issuance of additional Class C Units rather than cash. The Class C Units will convert into LP Units on a one-for-one basis no later than March 2, 2020. We used the net proceeds from this offering to reduce the indebtedness outstanding under our $1.5 billion revolving credit facility with SunTrust Bank (the “Credit Facility”), to pre-fund the equity portion of our remaining 2018 and 2019 growth capital expenditure program and for general partnership purposes.

Notes Issuance and Repayments

In January 2018, we issued $400.0 million of junior subordinated notes (“Junior Notes”) maturing on January 22, 2078, which are redeemable at Buckeye’s option, in whole or in part, on or after January 22, 2023. The Junior Notes bear interest at a fixed rate of 6.375% per year up to, but not including, January 22, 2023. From January 22, 2023, the Junior Notes will bear interest at a floating rate based on the Three-Month London Interbank Offered Rate (“LIBOR”) plus 4.02%, reset quarterly. Total proceeds from this offering, after underwriting fees, expenses and debt issuance costs, were $395.0 million. We used the net proceeds from this offering for general partnership purposes and to reduce the indebtedness outstanding under our Credit Facility.

In January 2018, we repaid in full the $300.0 million of 6.050% notes due on January 15, 2018 and $9.1 million of related accrued interest, using funds available under our Credit Facility.






28


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,
 
2018
 
2017
Revenue
$
1,183,105

 
$
969,273

Costs and expenses
1,013,592

 
796,697

Operating income
169,513

 
172,576

Other expense, net
(51,931
)
 
(46,045
)
Income before taxes
117,582

 
126,531

Income tax expense
(490
)
 
(222
)
Net income
117,092

 
126,309

Less: Net income attributable to noncontrolling interests
(4,719
)
 
(2,733
)
Net income attributable to Buckeye Partners, L.P.
$
112,373

 
$
123,576

 
Non-GAAP Financial Measures
 
Adjusted EBITDA and distributable cash flow are not measures 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; certain unrealized gains and losses on foreign currency transactions and foreign currency derivative financial instruments, as applicable; 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 incurred to maintain the operating, safety, and/or earnings capacity of our existing assets, plus or minus realized gains or losses on certain foreign currency derivative financial instruments, as applicable. 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. These adjustments include gains and losses on foreign currency derivative financial instruments used to hedge VTTI’s United States dollar denominated distributions which are excluded from Adjusted EBITDA and included in distributable cash flow when realized. 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 the 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.


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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,
 
2018
 
2017
Adjusted EBITDA:
 

 
 

Domestic Pipelines & Terminals
$
140,651

 
$
139,443

Global Marine Terminals
117,418

 
130,631

Merchant Services
3,655

 
7,435

Total Adjusted EBITDA
$
261,724

 
$
277,509

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

 
 

Net income
$
117,092

 
$
126,309

Less: Net income attributable to noncontrolling interests
(4,719
)
 
(2,733
)
Net income attributable to Buckeye Partners, L.P.
112,373

 
123,576

Add: Interest and debt expense
59,105

 
55,885

Income tax expense
490

 
222

 Depreciation and amortization (1)
64,138

 
65,488

 Non-cash unit-based compensation expense
8,690

 
8,678

 Acquisition and transition expense (2)
282

 
1,029

 Hurricane-related costs (3)
581

 
2,403

 Proportionate share of Adjusted EBITDA for the equity
method investment in VTTI
(4)
34,540

 
28,617

Less: Gains on property damage recoveries (5)
(14,085
)
 

           Earnings from the equity method investment in VTTI (4)
(4,390
)
 
(8,389
)
Adjusted EBITDA
$
261,724

 
$
277,509

Less: Interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other
(55,205
)
 
(51,524
)
Income tax expense, excluding non-cash taxes
(401
)
 
(222
)
Maintenance capital expenditures
(28,200
)
 
(32,586
)
Proportionate share of VTTI’s interest expense, current income tax expense, realized foreign currency derivative gains and losses, and maintenance capital expenditures (4)
(10,836
)
 
(8,018
)
Add: Hurricane-related maintenance capital expenditures
2,098

 
5,550

Distributable cash flow
$
169,180

 
$
190,709

_________________________
(1)
Includes 100% of the depreciation and amortization expense of $17.8 million and $17.5 million for Buckeye Texas for the three months ended March 31, 2018 and 2017, respectively.
(2)
Represents transaction, internal and third-party costs related to asset acquisition and integration.