Company Quick10K Filing
Quick10K
Buckeye Partners
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.55 161 $5,230
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-10 Enter Agreement, Exhibits
8-K 2019-05-10 Earnings, Exhibits
8-K 2019-05-10 Other Events, Exhibits
8-K 2019-04-09 Regulation FD, Exhibits
8-K 2019-02-08 Earnings, Exhibits
8-K 2019-01-17 M&A, Exhibits
8-K 2019-01-17 M&A, Exhibits
8-K 2019-01-15 Regulation FD, Exhibits
8-K 2018-11-28 Regulation FD, Exhibits
8-K 2018-11-13 Regulation FD, Exhibits
8-K 2018-11-02 Earnings, Exhibits
8-K 2018-11-01 Enter Agreement, Other Events, Exhibits
8-K 2018-08-03 Earnings, Exhibits
8-K 2018-06-05 Shareholder Vote
8-K 2018-06-05 Regulation FD, Exhibits
8-K 2018-05-21 Regulation FD, Exhibits
8-K 2018-03-02 Sale of Shares, Amend Bylaw, Other Events, Exhibits
8-K 2018-02-27 Regulation FD, Exhibits
8-K 2018-02-23 Sale of Shares, Regulation FD, Exhibits
8-K 2018-02-09 Earnings, Exhibits
8-K 2018-01-22 Other Events, Exhibits
8-K 2018-01-18 Other Events, Exhibits
CVNA Carvana 10,960
EFSC Enterprise Financial Services 1,130
ATLO AMES National 262
AQMS Aqua Metals 115
SDSP South Dakota Soybean Processors 0
WDLF Social Life Network 0
CWGL Crimson Wine Group 0
TMRC Texas Mineral Resources 0
UMED Greenway Technologies 0
AVHI AV Homes 0
BPL 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 exhibit311-bplq12019.htm
EX-31.2 exhibit312-bplq12019.htm
EX-32.1 exhibit321-bplq12019.htm
EX-32.2 exhibit322-bplq12019.htm

Buckeye Partners Earnings 2019-03-31

BPL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 bplq1201910q.htm 10-Q Document
 
 
 
 
 
 
 
 
 
 

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, 2019
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
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Limited partner units representing limited partnership interests
 
BPL
 
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 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 ¨ 
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 outstanding as of May 3, 2019: 153,918,086.
 
 
 
 
 



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

 
 
8.
 
 
 
9.
 
 
 
10.
 
 
 
11.
 
 
 
12.
 
 
 
13.
 
 
 
14.
 
 
 
15.
 
 
 
16.
 
 
 
17.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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,
 
2019
 
2018
Revenue:
 

 
 

Product sales
$
662,996

 
$
792,187

Transportation, storage and other services
365,976

 
390,918

Total revenue
1,028,972

 
1,183,105

 
 
 
 
Costs and expenses:
 

 
 

Cost of product sales
655,107

 
785,327

Operating expenses
152,898

 
154,868

Depreciation and amortization
63,884

 
64,138

General and administrative
21,650

 
23,289

Other, net
1,213

 
(14,030
)
Total costs and expenses
894,752

 
1,013,592

Operating income
134,220

 
169,513

 
 
 
 
Other (expense) income:
 

 
 

Earnings from equity investments
3,345

 
7,489

Interest and debt expense
(52,168
)
 
(59,105
)
Other expense, net
(3,839
)
 
(315
)
Total other expense, net
(52,662
)
 
(51,931
)
 
 
 
 
Income before taxes
81,558

 
117,582

Income tax expense
(298
)
 
(490
)
Net income
81,260

 
117,092

Less: Net income attributable to noncontrolling interests
(498
)
 
(4,719
)
Net income attributable to Buckeye Partners, L.P.
$
80,762

 
$
112,373

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

Basic
$
0.52

 
$
0.75

Diluted
$
0.52

 
$
0.74

 
 
 
 
Weighted average units outstanding:
 

 
 

Basic
153,846

 
148,904

Diluted
154,542

 
149,532

 
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,
 
2019
 
2018
Net income
$
81,260

 
$
117,092

Other comprehensive income (loss):
 
 
 
Unrealized gains on derivative instruments, net
101

 
14,138

Reclassification of derivative losses to net income, net
2,296

 
2,337

Changes in benefit plan assets and benefit obligations
(755
)
 
18

Other comprehensive income from equity method investments

 
13,963

Total other comprehensive income
1,642

 
30,456

Comprehensive income
82,902

 
147,548

Less: Comprehensive income attributable to noncontrolling interests
(498
)
 
(4,719
)
Comprehensive income attributable to Buckeye Partners, L.P.
$
82,404

 
$
142,829

 
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,
2019
 
December 31,
2018
Assets:
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,516

 
$
1,830

Accounts receivable, net
247,434

 
219,751

Construction and pipeline relocation receivables
10,068

 
14,259

Inventories
144,976

 
210,884

Derivative assets
1,465

 
18,019

Prepaid and other current assets
59,669

 
58,894

Total current assets
465,128

 
523,637

 
 
 
 
Property, plant and equipment
8,341,521

 
8,258,694

Less: Accumulated depreciation
(1,391,052
)
 
(1,343,898
)
Property, plant and equipment, net
6,950,469

 
6,914,796

Equity investments
147,990

 
1,111,793

Goodwill
470,875

 
470,875

Intangible assets
610,900

 
610,900

Less: Accumulated amortization
(333,604
)
 
(317,589
)
Intangible assets, net
277,296

 
293,311

Other non-current assets
182,129

 
41,138

Total assets
$
8,493,887

 
$
9,355,550

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Current liabilities:
 

 
 

Line of credit
$
137,552

 
$
177,727

Current portion of long-term debt

 
525,000

Accounts payable
101,318

 
147,525

Derivative liabilities
781

 
1,320

Accrued and other current liabilities
265,647

 
276,193

Total current liabilities
505,298

 
1,127,765

 
 
 
 
Long-term debt
3,683,013

 
4,011,715

Other non-current liabilities
201,180

 
84,900

Total liabilities
4,389,491

 
5,224,380

 
 
 
 
Commitments and contingent liabilities (Note 4 - Commitments and Contingencies)


 


 
 
 
 
Partners’ capital:
 

 
 

Buckeye Partners, L.P. capital:
 

 
 

Limited Partners (153,917,566 and 153,755,031 units outstanding as of
March 31, 2019 and December 31, 2018, respectively)
4,131,798

 
4,160,143

Accumulated other comprehensive loss
(38,419
)
 
(40,061
)
Total Buckeye Partners, L.P. capital
4,093,379

 
4,120,082

Noncontrolling interests
11,017

 
11,088

Total partners’ capital
4,104,396

 
4,131,170

Total liabilities and partners’ capital
$
8,493,887

 
$
9,355,550

 
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,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net income
$
81,260

 
$
117,092

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

 
 
Depreciation and amortization
63,884

 
64,138

Amortization of debt issuance costs, discounts and terminated interest rate swaps
3,997

 
3,900

Non-cash unit-based compensation expense
9,912

 
8,764

Loss (Gain) on asset impairments, disposals and recoveries, net
576

 
(13,982
)
Changes in fair value of derivatives, net
17,163

 
(233
)
Earnings from equity investments
(3,345
)
 
(7,489
)
Distributions of earnings from equity investments
400

 

Other non-cash items
(1,168
)
 
20

Change in assets and liabilities, net of amounts related to acquisitions:
 
 
 
Accounts receivable, net
(27,270
)
 
14,267

Construction and pipeline relocation receivables
4,191

 
411

Inventories
65,544

 
143,246

Prepaid and other current assets
(775
)
 
(5,266
)
Accounts payable
(37,611
)
 
(71,100
)
Accrued and other current liabilities
(19,596
)
 
(32,650
)
Other non-current assets and liabilities
(10,923
)
 
15,073

Net cash provided by operating activities
146,239

 
236,191

Cash flows from investing activities:
 

 
 

Capital expenditures
(103,403
)
 
(116,916
)
Proceeds from sale of VTTI
975,000

 

Contribution to equity investment
(13,076
)
 

Distributions from equity investments in excess of earnings
4,750

 
19,238

Acquisition of business, net of cash acquired

 
895

Proceeds from property disposals and recoveries
8,246

 
7,715

Net cash provided by (used in) investing activities
871,517

 
(89,068
)
Cash flows from financing activities:
 

 
 

Net proceeds from issuance of Units and exercise of Unit options

 
262,066

Payment of tax withholding on vesting of LTIP awards
(2,245
)
 
(6,596
)
Proceeds from issuance of long-term debt, net of issuance costs

 
394,966

Loss on early extinguishment of debt
(3,647
)
 

Repayment of long-term debt
(525,000
)
 
(300,000
)
Borrowings under the BPL Credit Facility
179,760

 
612,600

Repayments under the BPL Credit Facility
(509,961
)
 
(779,300
)
Net repayments under the BMSC Credit Facility
(40,178
)
 
(137,004
)
Contributions from noncontrolling interests

 
4,400

Distributions paid to noncontrolling interests
(947
)
 
(7,759
)
Distributions to LP unitholders
(115,852
)
 
(186,069
)
Net cash used in financing activities
(1,018,070
)
 
(142,696
)
Net (decrease) increase in cash and cash equivalents
(314
)
 
4,427

Cash and cash equivalents — Beginning of period
1,830

 
2,180

Cash and cash equivalents — End of period
$
1,516

 
$
6,607

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

4


BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(In thousands)
(Unaudited)
 
 
Limited
 Partners
 
Accumulated
 Other Comprehensive
 (Loss) Income
 
Noncontrolling
 Interests
 
Total
Partners’ capital - January 1, 2019
$
4,160,143

 
$
(40,061
)
 
$
11,088

 
$
4,131,170

Net income
80,762

 

 
498

 
81,260

Distributions paid to unitholders
(116,230
)
 

 
378

 
(115,852
)
Amortization of unit-based compensation awards
9,912

 

 

 
9,912

Payment of tax withholding on vesting of LTIP awards
(2,245
)
 

 

 
(2,245
)
Distributions paid to noncontrolling interests

 

 
(947
)
 
(947
)
Other comprehensive income

 
1,642

 

 
1,642

Accrual of distribution equivalent rights
(541
)
 

 

 
(541
)
Other
(3
)
 

 

 
(3
)
Partners’ capital - March 31, 2019
$
4,131,798

 
$
(38,419
)
 
$
11,017

 
$
4,104,396

 
 
 
 
 
 
 
 
Partners’ capital - January 1, 2018
$
4,562,306

 
$
28,631

 
$
277,385

 
$
4,868,322

Net income
112,373

 

 
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
$
4,750,661

 
$
59,087

 
$
279,440

 
$
5,089,188

 
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 under the ticker symbol “BPL.”  Buckeye GP LLC (“Buckeye GP”) is our general partner.  As used in these Notes to Unaudited Condensed Consolidated Financial Statements, “we,” “us,” “our” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, include our subsidiaries.
 
We own and operate 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 terminals and perform certain engineering and construction services for our customers. Our global terminal network comprises more than 115 liquid petroleum products terminals with aggregate tank capacity of over 118 million barrels across our portfolio of pipelines, inland terminals and marine terminals located primarily in key petroleum logistics hubs in the East Coast, Midwest and Gulf Coast regions of the United States as well as in the Caribbean.  Our terminal assets 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 wholly-owned 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. We are also a wholesale distributor of refined petroleum products in certain areas served by our pipelines and terminals.

Merger Agreement

On May 10, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hercules Holdings LLC, a Delaware limited liability company and an affiliate of IFM Global Infrastructure Fund (“Parent”), Hercules Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of Parent (“Merger Sub”), Buckeye Pipe Line Services Company, a Pennsylvania corporation (“ServiceCo”), and Buckeye GP. The Merger Agreement, which has been unanimously approved by the board of directors of Buckeye GP on our behalf, provides for the merger of Merger Sub with and into Buckeye (the “Merger”), with Buckeye surviving the Merger as a wholly owned subsidiary of Parent. After the Merger, Buckeye will cease to be publicly traded.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each of our issued and outstanding LP Units (other than LP Units owned immediately prior to the Effective Time by us, by Parent or any of its affiliates or under certain circumstances by ServiceCo), will be converted into the right to receive $41.50 in cash per LP Unit (the “Merger Consideration”), without interest.

Completion of the Merger is subject to customary closing conditions, including the approval of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding LP Units entitled to vote thereon and certain regulatory approvals. We expect the Merger to close during the fourth quarter of 2019.

For more information regarding the Merger and the Merger Agreement, please see our Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on May 10, 2019.
 
 


6


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 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, 2018.

Recently Adopted Accounting Standards

Derivatives and Hedging. Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2017-12, which amends and simplifies the existing standard 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 the current standard related to the assessment of hedge effectiveness. In October 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-16, which includes the Overnight Index Swap Rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposed under Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. The adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements and disclosures.

Leases. Effective January 1, 2019, we adopted ASC Topic 842, Leases (“ASC 842”), applying the modified retrospective transition method. We applied the transition provision for ASC 842 at our adoption date instead of at the earliest comparative period presented in our financial statements and, therefore, we recognized and measured leases existing at January 1, 2019, but without retrospective application. ASC 842 requires lessees to recognize a right-of-use (“ROU”) lease asset and a lease liability on the balance sheet for leases with lease terms greater than twelve months. ASC 842 also requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The most significant impact was the recognition of ROU lease assets and lease liabilities for operating leases on our unaudited condensed consolidated balance sheets along with certain incremental disclosures. No impact was recorded to the income statement or beginning retained earnings upon our adoption of ASC 842. See Note 8 - Leases for further discussion.

Improvements to Nonemployee Share-Based Payment Accounting. Effective January 1, 2019, we adopted ASU 2018-07, which conformed the current nonemployee share-based accounting with employee share-based accounting. The adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements and disclosures.

Recent Accounting Standards Not Yet Adopted

Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, which clarifies whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. The new standard also provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The standard is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The standard should be applied retrospectively to the date of initial application of ASC 606. We expect to adopt this standard effective January 1, 2020 and are currently evaluating the impact that it will have on our consolidated financial statements and disclosures.

7



Targeted Improvements to Related Party Guidance for Variable Interest Entities. In October 2018, the FASB issued ASU 2018-17 that changes the standard for determining whether a decision-making fee is a variable interest. The standard provides that indirect interests held through related parties under common control will be considered on a proportional basis when determining whether certain decision-making fees are variable interests. The standard is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The standard should be applied retrospectively, with a cumulative effect adjustment to retained earnings. We expect to adopt this standard effective January 1, 2020 and are currently evaluating the impact that it will have on our consolidated financial statements and disclosures.

Cloud Computing Arrangements. In August 2018, the FASB issued ASU 2018-15, which aligns a customer’s accounting for capitalizing implementation costs in a cloud computing service arrangement that is hosted by the vendor with the requirements for capitalizing implementation costs incurred to develop or obtain an internal-use software license. The standard is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The standard can be applied prospectively or retrospectively. We expect to adopt this standard effective January 1, 2020 and are currently evaluating the impact that it will have on our consolidated financial statements and disclosures.

Changes to the Disclosure Requirements for Defined Benefit Plans. In August 2018, the FASB issued ASU 2018-14, which amends the existing standard on disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The new standard is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The new standard requires retrospective application. We expect to adopt this standard effective January 1, 2021 and are currently evaluating the impact that it will have on our disclosures.

Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, which amends the existing standard on disclosure requirements for fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The new standard requires prospective application on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty. The effects of other amendments must be applied retrospectively to all periods presented. We expect to adopt this standard effective January 1, 2020 and are currently evaluating the impact that it will have 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. In November 2018, the FASB issued update ASU 2018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13. 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 effective January 1, 2020 and are currently evaluating the impact that the adoption of this standard will have on our consolidated financial statements and disclosures.

2. REVENUE

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 Topic 606, Revenue from Contracts with Customers (“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 accounting standards other than ASC 606. These situations primarily relate to leases and derivatives. We have appropriately applied the guidance in ASC Topic 340-40, Other Assets and Deferred Costs: Contracts with Customers, for determining whether to capitalize costs to fulfill a contract.

8



Contract Balances

The following table provides information about receivables from contracts with customers, contract assets and contract liabilities (in thousands):
 
March 31,
2019
 
December 31, 2018
Receivables from contracts with customers
$
219,195

 
$
199,324

Contract assets
15,400

 
16,989

Contract liabilities
(32,958
)
 
(26,999
)

During the three months ended March 31, 2019, we reclassified approximately $16.9 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, 2019 from amounts included in contract liabilities at the beginning of the period was approximately $11.6 million.

The following table includes estimated revenue associated with contractual commitments in place related to future performance obligations as of the end of the reporting period, which are expected to be recognized in revenue in the specified periods (in thousands):
 
Revenue from Contracts with Customers
 
Revenue from Leases
 
Total
Remainder of 2019
$
288,236

 
$
165,324

 
$
453,560

2020
220,647

 
216,822

 
437,469

2021
141,907

 
196,053

 
337,960

2022
56,065

 
138,541

 
194,606

2023
51,837

 
28,792

 
80,629

Thereafter
174,708

 
24,779

 
199,487

Total
$
933,400

 
$
770,311

 
$
1,703,711


Our contractually committed revenue disclosure, for purposes of the tabular presentation above, excludes estimates of variable rate escalation clauses in our contracts with customers and is generally limited to our contracts with fixed pricing and minimum volume components. Our contractually committed revenue disclosure generally excludes remaining performance obligations on contracts with index-based pricing or variable volume attributes.

Lessor

We account for certain customer contracts for tolling, storage, and pipeline transportation services as leases in which we are the lessor. Accordingly, such revenues are presented separately in the revenue disaggregation tables in Note 16 - Business Segments.

As of March 31, 2019, assets recorded under revenue operating leases were $232.3 million and accumulated depreciation associated with operating leases was $29.1 million. For both the three months ended March 31, 2019 and 2018, depreciation expense was $0.9 million. These assets primarily consist of our pipelines and terminals, docks and processing facilities.

We determined the contracts referenced above contain leases because their commercial provisions convey to the customers the right to effectively control the use of the underlying identified property and equipment assets through the right to obtain substantially all of the economic benefit from the use of the assets and the right to direct the use of these assets, despite our continued operatorship of the assets. Our lessor lease population is classified as revenue operating leases and does not currently have any material sales-type or financing leases. None of these customers are related parties. We have lease contracts with lease and non-lease components, which we account for separately.


9


Our lessor leases do not have variable minimum lease payments; however, the lease payments under these contracts are subject to additional revenues, correlated only to excess product volumes processed, stored, or transported. Certain of our leases include one or more customer options to renew the lease term beyond the initial term of the agreement. Some of our lease terms also include the option for our customers to extend or terminate the lease. Following the end of the lease term, control of the use of these assets reverts to us, and considering our continued ownership of the assets, as well as the assets’ remaining useful lives, we have the ability to seek further commercial opportunities to derive revenue from these assets.

As noted above, we operate these assets for customers’ benefit during the lease period and upon contract expiration, we retain ownership and control of the use of these assets. Accordingly, we have the ability to monitor the residual value of these assets. Generally, the lease period is only a small portion of the economic life of the asset under lease.

3. ACQUISITIONS, INVESTMENTS AND DISPOSITIONS
 
2019 Transaction

VTTI Divestiture

In January 2019, we completed the sale of our 50% equity interest in VTTI for approximately $975.0 million, excluding transaction costs of approximately $4.0 million incurred in 2019.

2018 Transactions

Domestic Asset Divestiture

On December 17, 2018, we sold certain domestic pipeline and terminal assets, which included (i) our jet fuel pipeline from Port Everglades, Florida to Ft. Lauderdale-Hollywood International Airport and Miami International Airport; (ii) our pipelines and terminal facilities serving Reno-Tahoe International Airport, San Diego International Airport, and the Federal Express Corporation terminal at the Memphis International Airport; and (iii) our refined petroleum product terminals in Sacramento, California and Stockton, California.

South Texas Transactions

In April 2018, as part of our strategy to serve the volume growth in crude oil and related products from the Permian Basin, we expanded our marine terminal presence in Corpus Christi, Texas, through the following transactions: (i) acquired our business partner’s 20% interest in our Buckeye Texas consolidated subsidiary for $210 million, which was accounted for as an equity transaction, representing the acquisition of a non-controlling interest, and (ii) formed a joint venture with Phillips 66 Partners LP (“Phillips 66 Partners”) and Gray Oak Gateway Holdings (“Marathon”) to develop a new deep-water, open-access marine terminal in Ingleside, Texas at the mouth of Corpus Christi Bay (“STG Terminal”).

STG Terminal will be constructed and operated by us. We continue to secure additional minimum volume throughput commitments and storage contracts from customers. The initial scope of this project has now increased from 3.4 million barrels of storage to approximately 7.0 million barrels, based on current contracted throughput and storage volumes, and includes two deep-water vessel docks capable of berthing very large crude carrier tankers. Our construction plan also includes connectivity to multiple pipelines delivering volumes into the Corpus Christi market from the growing Permian Basin production and other sources.

STG Terminal is expected to commence and ramp up operations by mid-2020 and is supported by long-term minimum volume throughput commitments and storage contracts from credit-worthy customers, including our joint-venture partners. We own a 50% interest in STG Terminal, and Phillips 66 Partners and Marathon each own a 25% interest. To date, our net investment is $49.0 million, including $8.3 million, net of distributions, for the three months ended March 31, 2019. We account for our interest in STG Terminal, which is included in our Global Marine Terminals segment, using the equity method of accounting.


10


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 resulting from such contingencies, we have accrued certain amounts relating to such claims and proceedings, none of which are considered material.

Environmental Contingencies
 
At March 31, 2019 and December 31, 2018, we had $37.1 million and $39.0 million, respectively, of environmental remediation liabilities.  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, 2019 and December 31, 2018, we had $3.9 million and $4.2 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third-party claims.

5. INVENTORIES
 
Our inventory amounts were as follows at the dates indicated (in thousands):
 
March 31,
2019
 
December 31,
2018
Liquid petroleum products (1)
$
120,408

 
$
186,683

Materials and supplies
24,568

 
24,201

Total inventories
$
144,976

 
$
210,884

                                                      
(1)
Ending inventory was 63.1 million and 114.7 million gallons of liquid petroleum products at March 31, 2019 and December 31, 2018, respectively.
 
At March 31, 2019 and December 31, 2018, approximately 92% and 94% 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.  OTHER NON-CURRENT LIABILITIES
 
Other non-current liabilities consist of the following at the dates indicated (in thousands):
 
March 31,
2019
 
December 31,
2018
Long-term lease liabilities (see Note 8)
$
126,843

 
$

Accrued employee benefit liabilities
27,655

 
28,246

Accrued environmental remediation liabilities
26,326

 
27,358

Deferred consideration
10,881

 
20,232

Asset retirement obligations
4,337

 
4,349

Other
5,138

 
4,715

Total other non-current liabilities
$
201,180

 
$
84,900



11


7. EQUITY INVESTMENTS
 
The following table presents earnings from equity investments for the periods indicated (in thousands):
 
 
 
Three Months Ended
March 31,
 
Segment
 
2019
 
2018
VTTI B.V. (1)
Global Marine Terminals
 
$

 
$
4,390

West Shore Pipe Line Company
Domestic Pipelines & Terminals
 
2,616

 
2,326

Muskegon Pipeline LLC
Domestic Pipelines & Terminals
 
484

 
325

Transport4, LLC
Domestic Pipelines & Terminals
 
267

 
229

South Portland Terminal LLC
Domestic Pipelines & Terminals
 
278

 
219

South Texas Gateway Terminal LLC (2) 
Global Marine Terminals
 
(300
)
 

Total earnings from equity investments
 
 
$
3,345

 
$
7,489

                                                      
(1)
In January 2019, we completed the sale of our 50% equity interest in VTTI. See Note 3 - Acquisitions, Investments and Dispositions for further discussion.
(2)
In April 2018, we formed STG Terminal joint venture. See Note 3 - Acquisitions, Investments and Disposition for further discussion.

Summarized combined income statement data for our equity method investments is as follows for the periods indicated (amounts represent 100% of investee income statement data in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
INCOME STATEMENT DATA:
 
 
 
Revenue
$
23,289

 
$
145,068

Operating income
13,112

 
49,782

Net income
10,130

 
24,750

Net income attributable to investee
10,130

 
22,959


8. LEASES

Lessee

We have entered into certain agreements to use property, plant and equipment, including office space, equipment and land, which qualify as leases. ROU lease assets and liabilities associated with leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating leases are included in Other non-current assets and Other non-current liabilities on our condensed consolidated balance sheets as of March 31, 2019, with the current portion of such liabilities being included in Accrued and other current liabilities. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the expected term of the lease at the commencement date including, as applicable, renewal periods when we have the option to extend and it is reasonably certain we will do so. As most of our leases do not provide an explicit interest rate, we use an applicable implicit incremental borrowing rate, based on the information available at the commencement date, in determining the present value of future payments. We give consideration to our borrowing rates based on our credit rating as well as secured and unsecured debt instruments with similar characteristics when calculating our incremental borrowing rates. We do not currently have any material financing leases. The operating lease ROU asset also includes lease payments made as of the commencement date and excludes lease incentives and initial direct costs. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. At this time, our lease population does not currently have either variable lease payments or residual value guarantees that would materially impact the ROU asset and liability valuation. Additionally, we do not have any sublease arrangements or lease transactions with related parties.

12



We have lessee agreements with lease and non-lease components, which are generally accounted for separately. For certain leases, we account for the lease and non-lease components as a single lease component based on the election of the practical expedient to not separate lease components from non-lease components related to the following classes of assets: (i) buildings and leasehold improvements; (ii) jetties, subsea pipeline and docks; (iii) pipelines and terminals; and (iv) vehicle, equipment and office furnishings. ASC 842 permits the lessee to account for its leases at a portfolio level provided that the resulting accounting would not differ materially from accounting at the individual lease level. We have applied the portfolio approach to certain equipment-type and vehicle leases in accounting for the operating lease ROU assets and liabilities. We also elected the package of practical expedients available upon adoption, including: (i) not to reassess whether any expired or existing contracts contain leases and lease classification for such leases, as well as initial direct costs for any existing leases; (ii) not to apply the provisions of ASU 2016-02 to land easements that existed or expired before adoption and that were not previously accounted for as leases under the previous lease standard in ASC Topic 840 Leases; (iii) to use hindsight in determining the lease term and in assessing impairment of our ROU lease assets; and (iv) not to apply provisions of ASU 2016-02 to short-term leases.

The operating lease costs for the three months ended March 31, 2019 and 2018 were $8.4 million and $8.1 million, respectively, including $2.3 million and $3.0 million of short-term operating lease costs for the respective periods.

Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
Lease Activity
Balance Sheet Location
March 31,
2019
Operating lease right-of-use assets
Other non-current assets
$
151,408

 
 
 
Current portion of operating lease liabilities
Accrued and other current liabilities
24,565

Operating lease liabilities
Other non-current liabilities
126,843

Total operating lease liabilities
 
$
151,408

 
 
 
Weighted average remaining lease term
 
16.2 years

 
 
 
Weighted average discount rate
 
5.70
%

The following table presents minimum lease payment obligations under noncancellable leases for our operating leases with terms in excess of one year as of March 31, 2019 (in thousands):
 
Total
Remainder of 2019
$
19,810

2020
23,375

2021
19,569

2022
18,791

2023
18,462

Thereafter
140,368

Total
240,375

Less: Effect of discounting to net present value
(88,967
)
Total operating lease liabilities
$
151,408


13



Disclosures Related to Periods Prior to Adoption of ASC 842

The following table presents minimum lease payment obligations under our operating leases with terms in excess of one year for the years ending December 31st (in thousands):
 
Total
2019
29,050

2020
26,255

2021
22,215

2022
21,378

2023
21,126

Thereafter
138,466

Total
$
258,490


See Note 17 - Supplemental Cash Flow for discussion related to supplemental cash flow information related to leases.

9. OTHER NON-CURRENT ASSETS

Other non-current assets consist of the following at the dates indicated (in thousands):
 
March 31,
2019
 
December 31,
2018
Right of use lease assets (see Note 8)
$
151,408

 
$

Debt issuance costs
2,015

 
2,216

Insurance receivables related to environmental remediation reserves
1,938

 
2,057

Derivative assets
60

 
1,003

Other
26,708

 
35,862

Total other non-current assets
$
182,129

 
$
41,138


10. LONG-TERM DEBT

Extinguishment of Debt

In January 2018, we repaid in full the $300.0 million principal amount outstanding under our 6.050% notes.

In January 2019, we repaid in full the $250.0 million variable-rate Term Loan due September 30, 2019, using proceeds from the VTTI sale transaction.

In February 2019, we repaid in full the $275.0 million principal amount outstanding under our 5.500% notes, using proceeds from the VTTI sale transaction as well as borrowings under our Credit Facility.

As a result of these retirements, we incurred a $4.0 million loss on early extinguishment of debt, consisting of a $3.6 million make-whole payment related to the 5.500% notes and unamortized financing costs of $0.4 million included in Other expense, net, on our condensed consolidated statements of operations.

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 $394.9 million. We used the net proceeds from this offering to reduce indebtedness outstanding under our $1.5 billion revolving Credit Facility with the SunTrust Bank (the “Credit Facility”) and for general partnership purposes.


14


Credit Facility

At March 31, 2019, we had a $152.0 million outstanding balance under the Credit Facility, $137.6 million of which is classified as current. The weighted average interest rate for borrowings under the Credit Facility was 4.0% during the three months ended March 31, 2019.

11. 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 anticipated interest payments associated with the forecasted borrowings.

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, which are designated as cash flow hedges, with the effective portion of the hedge reported in other comprehensive income (“OCI”) and reclassified into earnings when the expected future transaction affects earnings. Any gains or losses incurred on the derivative instruments that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings.

Additionally, our Merchant Services segment enters into exchange-traded refined petroleum product futures contracts on behalf of our Domestic Pipelines & Terminals segment to manage the risk of market price volatility on the gasoline-to-butane pricing spreads associated with our butane blending activities. 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 the notional volumes of the net long (short) positions of our commodity derivative instruments outstanding at March 31, 2019 (amounts in thousands of gallons):
 
 
Volume
 
 
Derivative Purpose 
 
Current
 
Long-Term
 
 
Derivatives NOT designated as hedging instruments:
 
 

 
 

 
 
Physical fixed-price derivative contracts
 
(14,918
)
 
(1,523
)
 
 
Physical index derivative contracts
 
33,240

 

 
 
Futures contracts for refined petroleum products
 
11,058

 
3,024

 
 
 
 
 
 
 
 
Hedge Type
Derivatives designated as hedging instruments:
 
 

 
 

 
 
Cash flow hedge futures contracts
 
(336
)
 

 
Cash Flow Hedge
Futures contracts for refined petroleum products
 
(57,834
)
 

 
Fair Value Hedge

Our futures contracts designated as fair value hedges relate to our inventory portfolio and extend to the first quarter of 2020. Our futures contracts related to forecasted purchases and sales of refined petroleum products, not designated in a hedging relationship, extend to the first quarter of 2020.

15



In accordance with the Chicago Mercantile Exchange 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, 2019
 
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
$
2,056

 
$

 
$
2,056

 
$
(682
)
 
$
1,374

Physical index derivative contracts
91

 

 
91

 

 
91

Total current derivative assets
2,147

 

 
2,147

 
(682
)
 
1,465

Physical fixed-price derivative contracts
68

 

 
68

 
(8
)
 
60

Total non-current derivative assets
68

 

 
68

 
(8
)
 
60

Physical fixed-price derivative contracts
(1,458
)
 

 
(1,458
)
 
682

 
(776
)
Physical index derivative contracts
(5
)
 

 
(5
)
 

 
(5
)
Total current derivative liabilities
(1,463
)
 

 
(1,463
)
 
682

 
(781
)
Physical fixed-price derivative contracts
(115
)
 

 
(115
)
 
8

 
(107
)
Total non-current derivative liabilities
(115
)
 

 
(115
)
 
8

 
(107
)
Net derivative assets
$
637

 
$

 
$
637

 
$

 
$
637

 
                                                      
(1) Amounts represent the netting of physical fixed price and index contracts’ assets and liabilities when a legal right of offset exists. 
 
December 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
$
17,934

 
$

 
$
17,934

 
$
(84
)
 
$
17,850

Physical index derivative contracts
286

 

 
286

 
(117
)
 
169

Total current derivative assets
18,220

 

 
18,220

 
(201
)
 
18,019

Physical fixed-price derivative contracts
1,003

 

 
1,003

 

 
1,003

Total non-current derivative assets
1,003

 

 
1,003

 

 
1,003

Physical fixed-price derivative contracts
(1,386
)
 

 
(1,386
)
 
84

 
(1,302
)
Physical index derivative contracts
(135
)
 

 
(135
)
 
117

 
(18
)
Total current derivative liabilities
(1,521
)
 

 
(1,521
)
 
201

 
(1,320
)
Physical fixed-price derivative contracts
(3
)
 

 
(3
)
 

 
(3
)
Total non-current derivative liabilities
(3
)
 

 
(3
)
 

 
(3
)
Net derivative assets
$
17,699

 
$

 
$
17,699

 
$

 
$
17,699

                                                      
(1)
Amounts represent the netting of physical fixed price and index contracts’ assets and liabilities when a legal right of offset exists. 
 
At March 31, 2019, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, physical index contracts, and future contracts for refined products contracts noted above) varied in duration in the overall portfolio, but did not extend beyond July 2020.  In addition, at March 31, 2019, 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
 
2019
 
2018
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

Physical fixed price derivative contracts
Product sales
 
$
(10,767
)
 
$
1,354

Physical index derivative contracts
Product sales
 
43

 
177

Physical fixed price derivative contracts
Cost of product sales
 
739

 
(605
)
Physical index derivative contracts
Cost of product sales
 
(55
)
 
2

Futures contracts for refined products
Cost of product sales
 
2,783

 
(2,298
)
 
 
 
 
 
 
 
 
 
Three Months Ended
March 31,
 
Location
 
2019
 
2018
Derivatives designated as fair value hedging instruments:
 
 
 
 
 

Futures contracts for refined products
Cost of product sales
 
$
(28,923
)
 
$
5,707

Physical inventory - hedged items
Cost of product sales
 
29,929

 
(5,990
)
 
 
 
 
 
 
 
 
 
Three Months Ended
March 31,
 
Location
 
2019
 
2018
Ineffectiveness excluding the time value component on fair value hedging instruments:
 
 
 
 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
(1,364
)
 
$
(82
)
Time value excluded from hedge assessment
Cost of product sales
 
2,370

 
(201
)
Net (loss) gain for ineffectiveness in income
 
 
$
1,006

 
$
(283
)

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,
 
2019
 
2018
Derivatives designated as cash flow hedging instruments:
 

 
 

Interest rate contracts
$

 
$
14,761

Commodity derivatives
101

 
(623
)
Total
$
101

 
$
14,138


 
 
 
Loss Reclassified from AOCI to Income (Effective Portion) for the
 
 
 
Three Months Ended
March 31,
 
Location
 
2019
 
2018
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

Interest rate derivative contracts
Interest and debt expense
 
$
(2,296
)
 
$
(2,337
)
Total
 
 
$
(2,296
)
 
$
(2,337
)



17


Over the next twelve months, we expect to reclassify $9.2 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 $2.0 million of amortization of hedge gains on settled forward-starting interest rate swaps settled in November 2017. Additionally, the unrealized gains and losses for refined petroleum products designated as cash flow hedges at March 31, 2019, of $0.1 million, are estimated to be realized and reclassified from AOCI to product sales during 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, 2019 and 2018.

12. 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, 2019
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Financial assets:
 

 
 

 
 

 
 

Physical fixed-price derivative contracts
$

 
$
2,124

 
$

 
$
18,937

Physical index derivative contracts

 
91

 

 
286

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Physical fixed-price derivative contracts

 
(1,573
)
 

 
(1,389
)
Physical index derivative contracts

 
(5
)
 

 
(135
)
Fair value
$

 
$
637

 
$

 
$
17,699

 
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 are settled daily via variation margin payments and as a result are with no net 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 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, 2019 and December 31, 2018. As of March 31, 2019 and December 31, 2018, the Merchant Services segment did not hold any net liability derivative positions 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 value 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, 2019
 
December 31, 2018
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Fixed-rate debt
$
3,272,494

 
$
3,268,532

 
$
3,546,396

 
$
3,364,549

Variable-rate debt
548,071

 
551,952

 
1,168,046

 
1,172,328

Total debt
$
3,820,565

 
$
3,820,484

 
$
4,714,442

 
$
4,536,877

 
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, 2019 and 2018, 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, 2019 and 2018, there was no significant fair value adjustments related to such assets or liabilities reflected in our unaudited condensed consolidated financial statements.

13. 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 our 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 recognized compensation expense related to awards under the LTIP of $9.9 million and $8.8 million for the three months ended March 31, 2019 and 2018, respectively.

LTIP
 
As of March 31, 2019, there were 1,512,574 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, 2019, 158,970 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, 2019, the Compensation Committee of the Board of Directors of Buckeye GP granted 526,669 phantom units to employees (including the 158,970 phantom units granted pursuant to the Deferral Plan, as discussed above), 32,247 phantom units to independent directors of Buckeye GP and 344,883 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, 2019
1,645

 
$
55.52

Granted (2)
904

 
30.95

Vested
(236
)
 
52.00

Forfeited
(228
)
 
50.92

Unvested at March 31, 2019
2,085

 
$
45.77

                                                      
(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.

At March 31, 2019, we expect to recognize $44.7 million of compensation expense related to the unvested LTIP over a weighted average remaining period of 2.1 years.
 
14. PARTNERS’ CAPITAL AND DISTRIBUTIONS

Our LP Units represent limited partner interests, which give the holders thereof the right to participate in distributions and to exercise the other rights and privileges available to them under our partnership agreement. The partnership agreement provides that, without prior approval of our limited partners holding an aggregate of at least two-thirds of the outstanding LP Units, we cannot issue any limited partnership interests of a class or series having preferences or other special or senior rights over the LP 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 $262.0 million, after deducting issuance costs of approximately $3.0 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility, to partially fund growth capital expenditures and for general partnership purposes.

Class C Units represented a separate class of our limited partnership interests. The Class C Units were substantially similar in all respects to our existing LP units, except that Buckeye had the option to pay distributions on the Class C Units in cash or by issuing additional Class C Units. In November 2018, all 6,714,963 Class C Units converted into LP Units on a one-for-one basis.
 
Summary of Changes in Outstanding Units
 
The following is a summary of changes in Buckeyes outstanding units for the periods indicated (in thousands):
 
LP Units
Units outstanding at January 1, 2019
153,755

LP units issued pursuant to the LTIP (1)
163

Units outstanding at March 31, 2019
153,918

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

20


Distributions
 
Cash distributions are paid for LP Units and for distribution equivalent rights with respect to certain unit-based compensation awards outstanding as of each respective period. Actual cash distributions on our LP Units totaled $116.2 million ($0.75 per LP Unit) and $186.8 million ($1.2625 per LP Unit) during the three months ended March 31, 2019 and 2018, respectively.
 
On May 10, 2019, we announced a quarterly distribution of $0.75 per LP Unit that will be paid on May 28, 2019 to unitholders of record on May 20, 2019.  Based on the LP Units and distribution equivalent rights with respect to certain unit-based compensation awards outstanding as of March 31, 2019, cash expected to be distributed to LP unitholders on May 28, 2019 is estimated to be approximately $116.3 million.
 
15. EARNINGS PER UNIT
 
The following tables set forth the calculation of basic and diluted earnings per unit, attributable to Buckeye’s unitholders, 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,
 
2019
 
2018
 
 
 
 
Net income attributable to unitholders
$
79,880

 
$
111,120

 
 
 
 
Basic:
 
 
 
Weighted average units outstanding - basic
153,846

 
148,904

Earnings per unit - basic
$
0.52

 
$
0.75

 
 
 
 
Diluted:
 

 
 

Weighted average units outstanding - basic
153,846

 
148,904

Effect of dilutive securities
696

 
628

Weighted average units outstanding - diluted
154,542

 
149,532

Earnings per unit - diluted
$
0.52

 
$
0.74


16. 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 transactions have been eliminated in consolidation. 

 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.
 

21


Global Marine Terminals
 
The Global Marine Terminals segment provides marine accessible bulk storage and blending services, rail and truck rack loading/unloading along with petroleum processing services across our network of marine terminals located primarily in the East Coast and Gulf Coast regions of the United States, as well as in the Caribbean.  Our operating locations 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.

Merchant Services
 
The Merchant Services segment is a wholesale distributor of refined petroleum products in the continental United States and in 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, 2019 and 2018, 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).
 
Three Months Ended March 31,
 
2019
 
Domestic Pipelines & Terminals
 
Global Marine Terminals
 
Merchant Services
 
Intersegment Eliminations
 
Total
Revenue from contracts with customers
 
 
 
 
 
 
 
 
 
Pipeline transportation
$
122,215

 
$

 
$

 
$
(2,671
)
 
$
119,544

Terminalling and storage services
105,779

 
88,362

 

 
(10,496
)
 
183,645

Product sales

 
257

 
519,064

 
(2,752
)
 
516,569

Other services
7,561

 
435

 
480

 
(15
)
 
8,461

Total revenue from contracts with customers
235,555

 
89,054

 
519,544

 
(15,934
)
 
828,219

Revenue from leases
9,525

 
44,953

 

 
(152
)
 
54,326

Commodity derivative contracts, net
(3,544
)
 

 
149,971

 

 
146,427

Total revenue
$
241,536

 
$
134,007

 
$
669,515

 
$
(16,086
)
 
$
1,028,972

 
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

Commodity derivative contracts, net
(2,090
)
 

 
152,020

 
2,090

 
152,020

Total revenue
$
255,435

 
$
144,085

 
$
798,428

 
$
(14,843
)
 
$
1,183,105


22



The following table summarizes revenue by major geographic area for the periods indicated (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Revenue:
 

 
 

United States
$
977,780

 
$
1,122,220

International
51,192

 
60,885

Total revenue
$
1,028,972

 
$
1,183,105

 
Adjusted EBITDA
 
Adjusted EBITDA is a measure not defined by GAAP. We define Adjusted EBITDA as earnings (losses) 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, non-cash impairment charges, 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, which from January 1, 2017 through September 30, 2018, included 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 was based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which were 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.

 

23


The following table presents a reconciliation of consolidated 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,
 
2019
 
2018
Reconciliation of Net (loss) income to Adjusted EBITDA:
 
 
 
Net income
$
81,260

 
$
117,092

Less: Net income attributable to noncontrolling interests
(498
)
 
(4,719
)
Net income attributable to Buckeye Partners, L.P.
80,762

 
112,373

Add: Interest and debt expense
52,168

 
59,105

Income tax expense
298

 
490

 Depreciation and amortization (1)
63,884

 
64,138

 Non-cash unit-based compensation expense
9,917

 
8,690

 Acquisition, dispositions, and transition expense (2)
4,083

 
282

 Hurricane-related costs, net of recoveries (3)
(929
)
 
581

 Non-cash impairment on disposals of long-lived assets
2,195

 

 Proportionate share of Adjusted EBITDA for equity
 method investment in VTTI (4)

 
34,540

 Earnings from the equity method investment in VTTI (4)

 
(4,390
)
Loss on early extinguishment of debt (5)
4,020

 

Less: Gains on property damage recoveries (6)

 
(14,085
)
Adjusted EBITDA
$
216,398

 
$
261,724

 
 
 
 
Adjusted EBITDA:
 

 
 

Domestic Pipelines & Terminals
$
135,893

 
$
140,651

Global Marine Terminals
75,507

 
117,418

Merchant Services
4,998

 
3,655

Adjusted EBITDA
$
216,398

 
$
261,724

                                                      
(1)
Includes 100% of the depreciation and amortization expense of $17.8 million for Buckeye Texas for the three months ended March 31, 2018.
(2)
Represents transaction, internal and third-party costs related to asset acquisition, dispositions, 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, including 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 through September 30, 2018, 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 was based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which were immaterial.
(5)
Represents the loss on early extinguishment of the $275.0 million principal amount outstanding under our 5.500% notes and $250.0 million variable-rate Term Loan.
(6)
Represents gains on recoveries of property damages caused by third parties, which primarily related to a settlement in connection with a 2012 vessel allision with a jetty at our BBH facility in the Bahamas.


24


17. 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,
 
2019
 
2018
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest (net of capitalized interest)
$
53,375

 
$
52,329

Cash paid for income taxes
658

 
159

Capitalized interest
1,973

 
1,788

Cash paid for lease liabilities
5,467

 
N/A

 
 
 
 
Non-cash activities:
 
 
 
Initial recognition of non-cash ROU assets and operating lease obligations (Note 8)
$
151,408

 
N/A

Capital expenditure accruals
64,252

 
64,662

 


25


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q (this “Report”) contains various forward-looking statements and information that are based on our beliefs, as well as assumptions made by us and information currently available to us.  When used in this Report, words such as “proposed,” “anticipate,” “project,” “potential,” “could,” “should,” “continue,” “estimate,” “expect,” “may,” “believe,” “will,” “plan,” “seek,” “outlook” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we believe that such expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct.  Such statements are subject to a variety of risks, uncertainties and assumptions as described in more detail in Part I “Item 1A, Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018 and in Part II, Item IA below. 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.

Introduction

The following information should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report. This information is intended to provide investors with an understanding of our past performance and current financial condition. Our discussion and analysis includes the following: 

Overview
Recent Developments
Results of Operations
Liquidity and Capital Resources
Off Balance Sheet Arrangements
 

Overview of Business

Business
 
We are a growth-oriented master limited partnership principally engaged in owning and operating a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage, processing and marketing of liquid petroleum products. Our assets include terminals and processing facilities that we own and underground liquid petroleum product pipelines installed along rights-of-way acquired from land owners and related above-ground facilities. 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. Our business activities are conducted through three reportable segments:

Our Domestic Pipelines & Terminals segment, comprised of approximately 6,000 miles of pipeline with 110 terminal locations;
Our Global Marine Terminals segment, consisting of seven liquid petroleum product terminals located in key global energy hubs with 62 million barrels of liquid petroleum product storage capacity; and
Our Merchant Services segment, which markets refined petroleum products primarily in conjunction with the facilities owned by our other segments. 

26



Merger Agreement

On May 10, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hercules Holdings LLC, a Delaware limited liability company and an affiliate of IFM Global Infrastructure Fund (“Parent”), Hercules Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of Parent (“Merger Sub”), Buckeye Pipe Line Services Company, a Pennsylvania corporation (“ServiceCo”), and Buckeye GP. The Merger Agreement, which has been unanimously approved by the board of directors of Buckeye GP on our behalf, provides for the merger of Merger Sub with and into Buckeye (the “Merger”), with Buckeye surviving the Merger as a wholly owned subsidiary of Parent. After the Merger, Buckeye will cease to be publicly traded.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each of our issued and outstanding LP Units (other than LP Units owned immediately prior to the Effective Time by us, by Parent or any of its affiliates or under certain circumstances by ServiceCo), will be converted into the right to receive $41.50 in cash per LP Unit (the “Merger Consideration”), without interest.

Completion of the Merger is subject to customary closing conditions, including the approval of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding LP Units entitled to vote thereon and certain regulatory approvals. We expect the Merger to close during the fourth quarter of 2019.

For more information regarding the Merger and the Merger Agreement, please see our Form 8-K filed with the SEC on May 10, 2019.

Strategy
 
Our primary business objective is to create value by generating stable cash flows that may be distributed to our unitholders or reinvested in the business, while maintaining a relatively low investment risk profile.  The key elements of our strategy are to:
 
Operate in a safe, regulatory compliant, and environmentally responsible manner;
Maximize utilization and efficiency of our assets;
Maintain strong, stable and long-term customer relationships;
Optimize, expand and diversify our portfolio of energy assets through strategic investments;
Maintain a strong financial position including our investment-grade credit rating; and
Retain a portion of our internally generated cash flow and utilize capacity under our $1.5 billion revolving Credit Facility with SunTrust Bank (the “Credit Facility”) to fund our planned growth initiatives without the need to access the public equity markets for the foreseeable future.

We intend to achieve our strategy by:

Building, acquiring and operating high quality, strategically-located assets and continually evaluating potential monetization opportunities related to our current asset portfolio;
Maintaining and enhancing the integrity of our pipelines, terminals and storage assets, and operating them in a safe and environmentally responsible manner;
Seeking to acquire or develop other energy-related assets without compromising our strong financial position that:
Complement our existing footprint;
Provide geographic, product and/or asset class diversity; and
Leverage existing management capabilities and infrastructure;
Valuing the effort, teamwork and innovation of our employees; and
Providing superior customer service.

Recent Developments

VTTI Divestiture

In November 2018, we executed a definitive agreement to sell our 50% equity interest in VTTI for approximately $975.0 million, excluding transaction costs of approximately $4.0 million incurred in 2019, plus a final earnings distribution of $22.6 million received in the fourth quarter of 2018. The sale closed in January 2019.


27


DPTS Asset Package Divestiture

On December 17, 2018, we sold certain domestic pipeline and terminal assets, which included (i) our jet fuel pipeline from Port Everglades, Florida to Ft. Lauderdale-Hollywood International Airport and Miami International Airport; (ii) our pipelines and terminal facilities serving Reno-Tahoe International Airport, San Diego International Airport, and the Federal Express Corporation terminal at the Memphis International Airport; and (iii) our refined petroleum product terminals in Sacramento, California and Stockton, California (collectively, the “DPTS asset package”).
 
South Texas Transactions

South Texas Gateway Terminal LLC (“STG Terminal”) is expected to commence and ramp up operations by mid-2020, and is supported by long-term minimum volume throughput commitments and storage contracts from credit-worthy customers, including our joint-venture partners. We own a 50% interest in STG Terminal, and Phillips 66 Partners LP and Gray Oak Gateway Holdings each own a 25% interest. The total construction cost for STG Terminal is estimated on a 100% basis at $574.0 million, or a net of $287.0 million to our interest. To date, our net investment is $49.0 million, including $8.3 million for the three months ended March 31, 2019. We account for our interest in STG Terminal, which is included in our Global Marine Terminals segment, using the equity method of accounting.

Notes Repayments

In January 2019, we repaid in full the $250.0 million variable-rate Term Loan due September 30, 2019 (the “Term Loan”), using proceeds from the VTTI sale transaction.

In February 2019, we repaid in full the $275.0 million principal amount outstanding under our 5.500% notes, using proceeds from the VTTI sale transaction as well as borrowings under our Credit Facility.

As a result of these retirements, we incurred a $4.0 million loss on early extinguishment of debt, consisting of a $3.6 million make-whole payment related to the 5.500% notes and unamortized financing costs of $0.4 million included in Other expense, net, on our condensed consolidated statements of operations.

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,
 
2019
 
2018
Revenue
$
1,028,972

 
$
1,183,105

Costs and expenses
894,752

 
1,013,592

Operating income
134,220

 
169,513

Other expense, net
(56,007
)
 
(59,420
)
Earnings from equity investments
3,345

 
7,489

Income before taxes
81,558

 
117,582

Income tax expense
(298
)
 
(490
)
Net income
81,260

 
117,092

Less: Net income attributable to noncontrolling interests
(498
)
 
(4,719
)
Net income attributable to Buckeye Partners, L.P.
$
80,762

 
$
112,373

 

28



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 (losses) 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 d