Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and our accompanying notes thereto included in Item 8 of this Report.
Business Overview
We own and operate a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage, processing and marketing of liquid petroleum products. We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, with approximately
6,000
miles of pipeline. We also use our service expertise to operate and/or maintain third-party pipelines and perform certain engineering and construction services for our customers. Additionally, we are one of the largest independent terminalling and storage operators in the United States in terms of capacity available for service. Our terminal network comprises more than
120
liquid petroleum products terminals with aggregate storage capacity of over
115 million
barrels across our portfolio of pipelines, inland terminals and marine terminals located primarily in the East Coast, Midwest and Gulf Coast regions of the United States and in the Caribbean. Our network of marine terminals enables us to facilitate global flows of crude oil and refined petroleum products offering our customers connectivity between supply areas and market centers through some of the world’s most important bulk storage and blending hubs. Our flagship marine terminal in The Bahamas, 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, offers world-class marine terminalling, storage and processing capabilities. Our recent acquisition of an indirect 50% equity interest in VTTI expands our international presence with premier storage and marine terminalling services for petroleum products predominantly located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore. We are also a wholesale distributor of refined petroleum products in areas served by our pipelines and terminals.
Our primary business objective is to provide stable and sustainable cash distributions to our unitholders, while maintaining a relatively low investment risk profile. The key elements of our strategy are to: (i) operate in a safe and environmentally responsible manner; (ii) maximize utilization of our assets at the lowest cost per unit; (iii) maintain stable long-term customer relationships; (iv) optimize, expand and diversify our portfolio of energy assets through accretive acquisitions and organic growth projects; and (v) maintain a solid, conservative financial position and our investment-grade credit rating.
Overview of Operating Results
Net income attributable to our unitholders was
$535.6 million
for the year ended
December 31, 2016
, which was an increase of
$98.4 million
, or
22.5%
, from
$437.2 million
for the corresponding period in
2015
. Operating income was
$733.3 million
for the year ended
December 31, 2016
, which is an increase of
$129.2 million
, or
21.4%
, from
$604.1 million
for the corresponding period in
2015
.
The increase in net income attributable to our unitholders was the result of increased contributions from each of our business segments. Our Global Marine Terminals segment benefited from higher asset utilization due to strong customer demand for our storage, throughput and terminalling services over the prior year, as well as increased available storage capacity as a result of capital investments, including the commissioning of the Buckeye Texas assets during the fourth quarter of 2015. In our Domestic Pipelines & Terminals segment, increases in terminalling storage and throughput revenue, pipeline transportation revenue and product recoveries, as well as $14 million in proceeds from the exercise by a customer of an early buy-out provision in a crude-by-rail contract, were the primary drivers for the increase over the prior year. Additionally, our Merchant Services segment benefited from higher margins due to continued effective inventory management.
These increases in net income attributable to our unitholders were partially offset by increases in depreciation and amortization expense due to the commissioning of the Buckeye Texas assets in our Global Marine Terminals segment during the fourth quarter of 2015 and expansion capital projects placed into service during 2015. In addition, an increase in interest and debt expense, due to lower capitalization of interest as a result of the placement in service of significant asset infrastructure at Buckeye Texas during the fourth quarter of 2015 and interest expense related to the long-term debt issued in the fourth quarter of 2016 to partially fund the VTTI Acquisition, also partially offset the increases to net income attributable to our unitholders.
See the “Results of Operations” section below for further discussion and analysis of our operating segments.
Results of Operations
Consolidated Summary
Our summary operating results were as follows for the periods indicated (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
$
|
3,248,376
|
|
|
$
|
3,453,434
|
|
|
$
|
6,620,247
|
|
Costs and expenses
|
2,515,034
|
|
|
2,849,318
|
|
|
6,124,900
|
|
Operating income
|
733,342
|
|
|
604,116
|
|
|
495,347
|
|
Earnings from equity investments
|
11,536
|
|
|
6,381
|
|
|
11,265
|
|
Interest and debt expense
|
(194,922
|
)
|
|
(171,330
|
)
|
|
(171,235
|
)
|
Other income (expense)
|
179
|
|
|
98
|
|
|
(428
|
)
|
Income from continuing operations before taxes
|
550,135
|
|
|
439,265
|
|
|
334,949
|
|
Income tax expense
|
(1,460
|
)
|
|
(874
|
)
|
|
(451
|
)
|
Income from continuing operations
|
548,675
|
|
|
438,391
|
|
|
334,498
|
|
Loss from discontinued operations (1)
|
—
|
|
|
(857
|
)
|
|
(59,641
|
)
|
Net income
|
548,675
|
|
|
437,534
|
|
|
274,857
|
|
Less: Net income attributable to noncontrolling interests
|
(13,067
|
)
|
|
(311
|
)
|
|
(1,903
|
)
|
Net income attributable to Buckeye Partners, L.P.
|
$
|
535,608
|
|
|
$
|
437,223
|
|
|
$
|
272,954
|
|
Diluted earnings (loss) per unit attributable to Buckeye Partners, L.P.
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
4.03
|
|
|
$
|
3.41
|
|
|
$
|
2.78
|
|
Discontinued operations
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.50
|
)
|
_____________________________
|
|
(1)
|
Represents loss from the operations of our Natural Gas Storage disposal group. See Note 4 in the Notes to Consolidated Financial Statements for more information.
|
Non-GAAP Financial Measures
Adjusted EBITDA and distributable cash flow are measures not defined by accounting principles generally accepted in the United States of America (“GAAP”). We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization, further adjusted to exclude certain non-cash items, such as non-cash compensation expense; transaction and transitions costs associated with acquisitions; 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. We define distributable cash flow as Adjusted EBITDA less cash interest expense, cash income tax expense, and maintenance capital expenditures. Adjusted EBITDA and distributable cash flow are non-GAAP financial measures that are used by our senior management, including our Chief Executive Officer, to assess the operating performance of our business and optimize resource allocation. We use Adjusted EBITDA as a primary measure to: (i) evaluate our consolidated operating performance and the operating performance of our business segments; (ii) allocate resources and capital to business segments; (iii) evaluate the viability of proposed projects; and (iv) determine overall rates of return on alternative investment opportunities. We use distributable cash flow as a performance metric to compare cash-generating performance of Buckeye from period to period and to compare the cash-generating performance for specific periods to the cash distributions (if any) that are expected to be paid to our unitholders. Distributable cash flow is not intended to be a liquidity measure.
We believe that investors benefit from having access to the same financial measures that we use and that these measures are useful to investors because they aid in comparing our operating performance with that of other companies with similar operations. The Adjusted EBITDA and distributable cash flow data presented by us may not be comparable to similarly titled measures at other companies because these items may be defined differently by other companies.
The following table presents Adjusted EBITDA from continuing operations by segment and on a consolidated basis, distributable cash flow and a reconciliation of income from continuing operations, which is the most comparable financial measure under GAAP, to Adjusted EBITDA and distributable cash flow for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Adjusted EBITDA from continuing operations:
|
|
|
|
|
|
|
|
|
Domestic Pipelines & Terminals
|
$
|
568,405
|
|
|
$
|
522,196
|
|
|
$
|
532,071
|
|
Global Marine Terminals
|
427,229
|
|
|
323,840
|
|
|
239,556
|
|
Merchant Services
|
32,372
|
|
|
22,026
|
|
|
(8,059
|
)
|
Adjusted EBITDA from continuing operations
|
$
|
1,028,006
|
|
|
$
|
868,062
|
|
|
$
|
763,568
|
|
|
|
|
|
|
|
|
Reconciliation of Income from continuing operations to
Adjusted EBITDA from continuing operations and Distributable cash flow:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
548,675
|
|
|
$
|
438,391
|
|
|
$
|
334,498
|
|
Less:
|
Net income attributable to noncontrolling interests
|
(13,067
|
)
|
|
(311
|
)
|
|
(1,903
|
)
|
Income from continuing operations attributable to Buckeye Partners, L.P.
|
535,608
|
|
|
438,080
|
|
|
332,595
|
|
Add:
|
Interest and debt expense
|
194,922
|
|
|
171,330
|
|
|
171,235
|
|
|
Income tax expense
|
1,460
|
|
|
874
|
|
|
451
|
|
|
Depreciation and amortization (1)
|
254,659
|
|
|
221,278
|
|
|
196,443
|
|
|
Non-cash unit-based compensation expense
|
33,344
|
|
|
29,215
|
|
|
20,867
|
|
|
Acquisition and transition expense (2)
|
8,196
|
|
|
3,127
|
|
|
13,048
|
|
|
Litigation contingency accrual (3)
|
—
|
|
|
15,229
|
|
|
40,000
|
|
|
Hurricane-related costs (4)
|
16,795
|
|
|
—
|
|
|
—
|
|
Less:
|
Amortization of unfavorable storage contracts (5)
|
(5,979
|
)
|
|
(11,071
|
)
|
|
(11,071
|
)
|
|
Gains on property damage recoveries (6)
|
(5,700
|
)
|
|
—
|
|
|
—
|
|
|
Gain on sale of ammonia pipeline
|
(5,299
|
)
|
|
—
|
|
|
—
|
|
Adjusted EBITDA from continuing operations
|
$
|
1,028,006
|
|
|
$
|
868,062
|
|
|
$
|
763,568
|
|
Less:
|
Interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other
|
(177,996
|
)
|
|
(154,469
|
)
|
|
(156,728
|
)
|
|
Income tax benefit (expense), excluding non-cash taxes
|
276
|
|
|
(1,536
|
)
|
|
(675
|
)
|
|
Maintenance capital expenditures (7)
|
(129,691
|
)
|
|
(99,617
|
)
|
|
(79,388
|
)
|
Add:
|
Hurricane-related maintenance capital expenditures (8)
|
6,054
|
|
|
—
|
|
|
—
|
|
Distributable cash flow from continuing operations
|
$
|
726,649
|
|
|
$
|
612,440
|
|
|
$
|
526,777
|
|
____________________________
|
|
(1)
|
Includes 100% of the depreciation and amortization expense of
$71.7 million
,
$49.3 million
and
$12.3 million
for Buckeye Texas for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
|
|
|
(2)
|
Represents transaction, internal and third-party costs related to asset acquisition and integration.
|
|
|
(3)
|
Represents reductions in revenue related to settlement of a FERC proceeding.
|
|
|
(4)
|
Represents costs incurred at our BBH facility as a result of Hurricane Matthew, which occurred in October 2016, consisting of
$11.0 million
of operating expenses and a
$5.8 million
write-off of damaged long-lived assets for the year ended
December 31, 2016
.
|
|
|
(5)
|
Represents amortization of negative fair value allocated to certain unfavorable storage contracts acquired in connection with the BBH acquisition.
|
|
|
(6)
|
Represents recoveries of property damages caused by third parties, primarily related to an allision with a ship dock at our terminal located in Pennsauken, New Jersey.
|
|
|
(7)
|
Represents expenditures that maintain the operating, safety and/or earnings capacity of our existing assets, including hurricane-related expenditures.
|
|
|
(8)
|
Represents expenditures to repair or replace long-lived assets damaged as a result of Hurricane Matthew.
|
The following table presents product volumes in barrels per day (“bpd”) and average tariff rates in cents per barrel for our Domestic Pipelines & Terminals segment, percent of capacity utilization for our Global Marine Terminals segment and total volumes sold in gallons for the Merchant Services segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Domestic Pipelines & Terminals (average bpd in thousands):
|
|
|
|
|
|
|
|
|
Pipelines:
|
|
|
|
|
|
|
|
|
Gasoline
|
759.6
|
|
|
735.9
|
|
|
702.8
|
|
Jet fuel
|
361.1
|
|
|
358.9
|
|
|
336.0
|
|
Middle distillates (1)
|
289.4
|
|
|
337.4
|
|
|
354.9
|
|
Other products (2)
|
16.9
|
|
|
28.5
|
|
|
36.6
|
|
Total throughput
|
1,427.0
|
|
|
1,460.7
|
|
|
1,430.3
|
|
Terminals:
|
|
|
|
|
|
|
|
|
Throughput (3)
|
1,238.4
|
|
|
1,215.4
|
|
|
1,147.5
|
|
|
|
|
|
|
|
Pipeline average tariff (cents/bbl)
|
85.9
|
|
|
83.7
|
|
|
85.2
|
|
|
|
|
|
|
|
Global Marine Terminals (percent of capacity):
|
|
|
|
|
|
Average capacity utilization rate (4)
|
99
|
%
|
|
96
|
%
|
|
85
|
%
|
|
|
|
|
|
|
Merchant Services (in millions of gallons):
|
|
|
|
|
|
|
|
|
Sales volumes
|
1,179.7
|
|
|
1,215.0
|
|
|
2,009.0
|
|
_____________________________
|
|
(1)
|
Includes diesel fuel and heating oil.
|
|
|
(2)
|
Includes LPG, intermediate petroleum products and crude oil.
|
|
|
(3)
|
Includes throughput of two underground propane storage caverns.
|
|
|
(4)
|
Represents the ratio of contracted capacity to capacity available to be contracted. Based on total capacity (i.e., including out of service capacity), average capacity utilization rates are approximately
92%
,
85%
and
74%
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
|
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Consolidated
Income from continuing operations was
$548.7 million
for the year ended
December 31, 2016
, which was an increase of
$110.3 million
, or
25.2%
, from
$438.4 million
for the corresponding period in
2015
. The increase in income from continuing operations was primarily due to higher storage revenues, reflecting increased capacity utilization, internal growth capital investments and new storage contracts; higher pipeline transportation and terminalling throughput revenues; favorable product recoveries; higher contributions from the Buckeye Texas assets; $14 million in proceeds from the exercise by a customer of an early buy-out provision in a crude-by-rail contract at our Albany, New York terminal; and continued effective inventory management in our Merchant Services segment. The increase in income from continuing operations was partially offset by an increase in depreciation and amortization expense primarily due to the Buckeye Texas assets which were commissioned in the fourth quarter of 2015 and expansion capital projects placed into service during 2015 and 2016, as well as an increase in interest and debt expense due to lower capitalization of interest as a result of the placement in service of significant asset infrastructure at Buckeye Texas during the fourth quarter of 2015 and interest expense related to the long-term debt issued in the fourth quarter of 2016 to partially fund the VTTI Acquisition.
Revenue was
$3,248.4 million
for the year ended
December 31, 2016
, which is
a decrease
of
$205.0 million
, or
5.9%
, from
$3,453.4 million
for the corresponding period in
2015
. The
decrease
in revenue was primarily related to a decline of refined petroleum product prices and a decrease in sales volume in our Merchant Services segment. This
decrease
in revenue was partially offset by higher storage revenues, reflecting increased capacity utilization, internal growth capital investments, and new storage contracts; higher pipeline transportation and terminalling throughput revenues; favorable product recoveries; and higher contributions from the Buckeye Texas assets.
Adjusted EBITDA was
$1,028.0 million
for the year ended
December 31, 2016
, which is
an increase
of
$159.9 million
, or
18.4%
, from
$868.1 million
for the corresponding period in
2015
. The
increase
in Adjusted EBITDA was primarily related to increased contributions from our joint venture interest in Buckeye Texas and higher storage revenues, reflecting increased capacity utilization, internal growth capital investments, and new storage contracts; higher pipeline transportation and terminalling throughput revenues; favorable product recoveries; as well as continued effective inventory management in our Merchant Services segment.
Distributable cash flow was
$726.6 million
for the year ended
December 31, 2016
, which is
an increase
of
$114.2 million
, or
18.6%
, from
$612.4 million
for the corresponding period in
2015
. The
increase
in distributable cash flow was primarily related to
an increase
of
$159.9 million
in Adjusted EBITDA as described above. This increase was partially offset by a
$24.0 million
increase in maintenance capital expenditures, excluding hurricane-related maintenance capital expenditures, primarily resulting from increased tank integrity project costs, marine dock structure upgrades, and upgrades to station and terminalling equipment and a
$23.5 million
increase in interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other. This increase was due to lower capitalization of interest as a result of the placement in service of significant asset infrastructure at Buckeye Texas during the fourth quarter of 2015 and interest expense related to the long-term debt issued in the fourth quarter of 2016 to partially fund the VTTI Acquisition.
Adjusted EBITDA by Segment
Domestic Pipelines & Terminals
. Adjusted EBITDA from the Domestic Pipelines & Terminals segment was
$568.4 million
for the year ended
December 31, 2016
, which is
an increase
of
$46.2 million
, or
8.8%
, from
$522.2 million
for the corresponding period in
2015
. The
increase
in Adjusted EBITDA was primarily due to a
$37.1 million
net increase in revenue, a
$5.2 million
increase in earnings from equity investments, and a
$3.9 million
decrease in operating expenses. The increase in revenue was due to a
$40.1 million
increase in terminalling throughput and product recovery revenue, reflecting new terminalling-services contracts and $14 million in proceeds from the exercise by a customer of an early buy-out provision in a crude-by-rail contract at our Albany, New York terminal, as well as a
$23.4 million
increase in storage revenue, primarily due to storage capacity brought back into service, internal growth capital investments, and new storage contracts. These increases were partially offset by a
$13.6 million
decrease in certain blending activities, a $7.2 million decrease in project management revenues, and $5.6 million decrease in other revenues. The decrease in project management revenues was due to a decrease in project activity.
Pipeline volumes decreased by
2.3%
due to a decline in distillate volumes, reflecting lower industrial activity and warmer weather, which was partially offset by higher gasoline volumes due to increased customer demand. Terminalling volumes increased by
1.9%
due to higher gasoline volumes, reflecting increased customer demand, partially offset by absence of throughput activity and subsequent termination of a crude-by-rail contract at our Albany, New York terminal.
Global Marine Terminals
. Adjusted EBITDA from the Global Marine Terminals segment was
$427.2 million
for the year ended
December 31, 2016
, which was
an increase
of
$103.4 million
, or
31.9%
, from
$323.8 million
for the corresponding period in
2015
. The
increase
in Adjusted EBITDA was primarily due to a $135.0 million net increase in revenue, partially offset by a
$31.6 million
increase in operating expenses. The increase in revenue was due to a
$138.5 million
increase in revenue from storage and terminalling services, reflecting increased contributions from our joint venture interest in Buckeye Texas, as a result of assets commissioned during the fourth quarter of 2015. Our internal growth capital investments since the second quarter of 2015 increased available storage capacity and diversified our asset capabilities at Buckeye Texas and other marine storage terminals. In addition, such capital investments enabled us to achieve an increase in storage and terminalling services revenue in 2016. The average capacity utilization of our marine storage assets was
99%
for the year ended
December 31, 2016
, which was an increase from
96%
in the corresponding period in 2015. These increases in revenue were partially offset by a
$3.5 million
decrease in ancillary revenues, which was principally due to lower berthing activity and other related ancillary services. Operating expenses increased by
$31.6 million
, primarily due to the operation of the Buckeye Texas assets.
Merchant Services
. Adjusted EBITDA from the Merchant Services segment was
$32.4 million
for the year ended
December 31, 2016
, which was
an increase
of
$10.4 million
, or
47.3%
, from
$22.0 million
for the corresponding period in
2015
. Adjusted EBITDA was positively impacted by continued effective inventory management and a decrease in operating expenses.
Adjusted EBITDA was positively impacted by a
$423.8 million
decrease
in cost of product sales, which included a
$58.1 million
decrease
due to
2.9%
lower volumes sold and a
$365.7 million
decrease
in refined petroleum product cost due to lower commodity prices by
$0.31
per gallon (average prices per gallon were
$1.34
and
$1.65
for the
2016
and
2015
periods, respectively) and a
$2.4 million
decrease in operating expenses.
Adjusted EBITDA was negatively impacted by a
$415.8 million
decrease
in revenue, which included a
$59.2 million
decrease
due to
2.9%
lower volumes sold and a
$356.6 million
decrease
in refined petroleum product sales due to lower commodity prices by
$0.31
per gallon (average sales prices per gallon were
$1.37
and
$1.68
for the
2016
and
2015
periods, respectively).
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Consolidated
Income from continuing operations was $438.4 million for the year ended December 31, 2015, which is an increase of $103.9 million, or 31.1%, from $334.5 million for the corresponding period in 2014. The increase in income from continuing operations was primarily related to increased storage revenue due to higher storage utilization and rates at our terminalling facilities in the Global Marine Terminals segment and elimination of certain commercial strategies from 2014 and more effective inventory management in our Merchant Services segment. The increase in income from continuing operations was partially offset by the decrease in revenue related to settlements and butane blending margins in our Domestic Pipelines & Terminals segment, as well as an increase in depreciation and amortization expense primarily due to the Buckeye Texas assets in our Global Marine Terminals segment.
Revenue was $3,453.4 million for the year ended December 31, 2015, which is a decrease of $3,166.8 million, or 47.8%, from $6,620.2 million for the corresponding period in 2014. The decrease in revenue was primarily related to the decrease in sales volume and a decline of refined petroleum product prices in our Merchant Services segment, as well as lower product recoveries from our terminalling throughput activities in our Domestic Pipelines & Terminals segment. The decrease in revenue was partially offset by the revenue increase in our Global Marine Terminals segment primarily due to higher storage utilization and rates at our terminalling facilities and lower FERC litigation accruals recorded as a reduction in revenue in our Domestic Pipelines & Terminals segment.
Adjusted EBITDA was $868.1 million for the year ended December 31, 2015, which is an increase of $104.5 million, or 13.7%, from $763.6 million for the corresponding period in 2014. The increase in Adjusted EBITDA was primarily related to increased storage revenue due to higher storage utilization and rates at our terminalling facilities and positive contributions from the Buckeye Texas assets in our Global Marine Terminals segment and elimination of certain commercial strategies from 2014 and more effective inventory management in our Merchant Services segment. The increase in Adjusted EBITDA was partially offset by a decrease in revenue related to settlements and butane blending margins in our Domestic Pipelines & Terminals segment. Settlement revenues decreased in our Domestic Pipelines & Terminals segment due to lower product recoveries from our terminalling throughput activities and prior year volumetric pipeline settlement gains. In addition, butane blending activities in our Domestic Pipelines & Terminals segment were negatively impacted due to the narrowed spread between butane and gasoline prices.
Distributable cash flow was $612.4 million for the year ended December 31, 2015, which is an increase of $85.7 million, or 16.3%, from $526.8 million as compared to the corresponding period in 2014. The increase in distributable cash flow was primarily related to an increase of $104.5 million in Adjusted EBITDA as described above, partially offset by a $20.2 million increase in maintenance capital expenditures primarily resulting from increased tank integrity projects.
Adjusted EBITDA by Segment
Domestic Pipelines & Terminals
. Adjusted EBITDA from the Domestic Pipelines & Terminals segment was $522.2 million for the year ended December 31, 2015, which is a decrease of $9.9 million, or 1.9%, from $532.1 million for the corresponding period in 2014. The decrease in Adjusted EBITDA is due to a $19.2 million increase in operating expenses, which include higher payroll expense and legal fees related to certain FERC matters, and a $4.9 million decrease in earnings from equity investments primarily due to an increase in integrity spending, which were partially offset by a $14.2 million increase in revenues, excluding the accrual related to certain FERC litigation that was recorded as a reduction in revenue. The increase in revenues is comprised of a $26.3 million increase resulting from higher terminalling throughput volumes and higher storage revenue from new contracts, a $13.2 million increase in revenue from capital investments in internal growth and diversification initiatives, including diluent and crude oil handling services and a $9.5 million increase in revenue resulting from higher pipeline volumes. These increases were partially offset by a $26.8 million decrease in revenue related to lower product recoveries from our terminalling throughput activities, as well as the narrowed spread between butane and gasoline prices, and an $8.0 million decrease in revenue resulting from lower average pipeline tariff rates primarily due to a shift between intra-state and inter-state shipments.
Pipeline volumes increased by 2.1% due to stronger demand for jet fuel and gasoline resulting from growth capital projects placed into service mid-year 2014. Terminalling volumes increased by 5.9% due to higher demand for gasoline, distillates and jet fuel, new customer contracts and service offerings at select locations, including contributions from growth capital spending, which were partially offset by a decrease in crude-by-rail volumes.
Global Marine Terminals
. Adjusted EBITDA from the Global Marine Terminals segment was $323.8 million for the year ended December 31, 2015, which is an increase of $84.2 million, or 35.1%, from $239.6 million for the corresponding period in 2014. The increase in Adjusted EBITDA is primarily due to a $58.4 million increase in storage and terminalling revenue as a result of greater customer utilization and higher service rates and a $39.7 million increase in the contribution from our joint venture interest in Buckeye Texas. The average capacity utilization of our marine storage assets was 96% for the year ended December 31, 2015, which is an increase from 85% in the corresponding period in 2014. The increase in storage revenue resulted from internal growth capital investments which increased available storage capacity and diversified our asset capabilities, as well as improved market conditions which were the result of the development of structure in the crude oil and refined petroleum products markets. This increase in Adjusted EBITDA is partially offset by a $7.5 million increase in operating expenses related to outside services for asset maintenance activities and incremental costs necessary to support the higher utilization of our facilities, as well as a $6.4 million decrease in ancillary revenues primarily due to higher product settlement gains in the prior year.
Merchant Services
. Adjusted EBITDA from the Merchant Services segment was $22.0 million for the year ended December 31, 2015, which is an improvement of $30.1 million from a loss of $8.1 million for the corresponding period in 2014. The positive factors impacting Adjusted EBITDA were primarily related to the elimination of certain commercial strategies from 2014 and more effective inventory management. The elimination of certain commercial strategies included liquidating our physical positions in markets less liquid than our core markets.
Adjusted EBITDA was also positively impacted by a $3,349.9 million decrease in cost of product sales, which included a $2,113.9 million decrease due to 39.5% of lower volumes sold and a $1,236.0 million decrease in refined petroleum product cost due to a price decrease of $1.01 per gallon (average prices per gallon were $1.65 and $2.66 for the 2015 and 2014 periods, respectively) and a $1.1 million decrease in operating expenses, which primarily related to overhead and administrative costs.
Adjusted EBITDA was negatively impacted by a $3,320.9 million decrease in revenue, which included a $2,117.8 million decrease due to 39.5% of lower volumes sold and a $1,203.1 million decrease in refined petroleum product sales due to a price decrease of $0.99 per gallon (average sales prices per gallon were $1.68 and $2.67 for the 2015 and 2014 periods, respectively).
General Outlook for
2017
We expect our year-over-year performance to improve in 2017 based on the strength of our underlying asset portfolio combined with our growth capital investment opportunities. Our acquisition of an indirect 50% equity interest in VTTI, which we closed in early January 2017, is expected to be a key contributor to that improvement. In addition, we expect our successful growth capital projects executed during 2016 across our portfolio of assets to generate incremental cash flow.
The full-year contribution from our equity interest in VTTI is expected to drive improvement in our year-over-year performance. VTTI, one of the largest independent global marine terminal businesses in the world, owns and operates approximately 55 million barrels of crude and petroleum products storage across 14 terminals located on five continents. This transaction expands our world-wide presence and furthers our strategy for diversification to new geographic locations. We expect VTTI to be a key growth engine for Buckeye, as further demonstrated by VTTI's announcement of recent acquisitions and growth initiatives. Importantly, we expect this investment to be immediately accretive in 2017.
We achieved the mechanical completion of the first phase of our Michigan-Ohio pipeline and terminal expansion project in late 2016 and we expect our customers to ramp up throughput volumes in the first quarter of 2017. This project allows us to offer expanded transportation service of refined petroleum products from supply sources in Michigan and western Ohio to destinations in eastern Ohio and western Pennsylvania. Our customers, including Midwestern refiners, have signed up for multi-year commitments to move refined products eastward. This project provides our customers with increased access to these eastern markets to allow them to deliver into arbitrage opportunities between higher East Coast and lower Midwestern refined product market prices.
In late 2016, we successfully completed an open season on a second phase of the Michigan/Ohio project that will further expand Buckeye’s capabilities to move more refined product barrels from Midwestern refineries to Pittsburgh as well as to destinations in central Pennsylvania. This is a significant multi-year project that includes the partial reversal of our existing Laurel pipeline. We are now moving forward with engineering and permitting work, including seeking necessary regulatory approvals, and we currently expect to bring this project on-line in the second half of 2018.
We also continue to make progress on our infrastructure upgrades across our New York Harbor terminals as we work to create an interconnected complex similar to our very successful Chicago Complex. The initiatives are expected to enhance our competitive position through improved interconnectivity, marine handling, blending and pipeline takeaway capabilities. The completion of these various facility improvements is scheduled for late 2017 into early 2018. We also expect to invest further in our Chicago Complex to support the growing needs of major Midwestern refinery customers. We are assessing opportunities to further expand storage capacity, throughput capacity and service capabilities at this key hub.
In addition, we expect to benefit from a full-year contribution of a number of capital investment projects that were completed in 2016. We completed the refurbishment or construction of approximately 5 million barrels of additional storage capacity across our domestic and international terminals. We also increased our butane blending and vapor recovery capabilities and completed a number of additional improvements and debottlenecks across our system in 2016, and we expect a full-year contribution from those projects in 2017.
We expect tariff increases, primarily on our market-based tariff pipelines, to drive throughput revenue growth, although current pricing index projections do not indicate a significant change in FERC index-based tariffs in July 2017. We expect volumes to be positively impacted from projects coming on-line, including the first phase of our Michigan/Ohio project as well as the full-year impact from a pipeline reversal completed in late 2016 that provides Philadelphia-area refiners access to markets in upstate New York and New York Harbor. We expect modest impacts to throughput volumes from continued strength in gasoline and jet fuel demand in the markets we serve. Throughput volumes across our domestic terminals are expected to increase moderately from the completion of growth capital initiatives across our system and customer growth primarily in the Southeast. Additionally, a customer terminated a crude-by-rail contract at our Albany facility during 2016 and, although we are working to secure replacement volumes by introducing new services offerings, we expect a year-over-year decline in contribution from this facility.
Our results in 2016 reflect the benefit of our diversified asset base and limited exposure to commodity price cycles. If we experience higher commodity prices in 2017, we would expect to see improved butane blending and settlement revenues as a result. We anticipate continued tightening of the supply and demand balances to have an impact on the shape of the forward curve and market structure, which could pressure recontracting rates for storage. However, we believe our market position and continually improving asset capabilities positions us well to serve our customers as supply and demand patterns evolve and market structure changes. We believe the geographic and product diversification as well as the service capabilities of our pipeline, terminal, processing and marketing assets are well positioned for success despite potential continued volatility in product prices.
Our Merchant Services segment will continue to focus on driving higher utilization across our system while capturing incremental value when opportunities in the market are present. We expect this approach along with our continued inventory and inventory management efforts to drive stable results in 2017.
We have $125 million of long-term debt maturing in mid-2017. We believe that we have sufficient liquidity available on our $1.5 billion revolving Credit Facility to satisfy this maturity. We plan to access the debt capital market in late 2017 in advance of a $300 million long-term debt maturity in January 2018. We have executed approximately $350 million of forward starting interest rate hedges that mature in late 2017 to partially mitigate the risk of rising interest rates on our expected issuance. We believe our Credit Facility and our ability to utilize our at-the-market equity issuance program will be sufficient to meet our remaining expected capital needs for 2017. Under current market conditions, we believe that we could raise additional capital in both the debt and equity capital markets on acceptable terms to fund appropriate asset or business acquisitions.
We will continue to evaluate opportunities throughout 2017 to acquire or construct assets that are complementary to our businesses and support our long-term growth strategy and will determine the appropriate financing structure on acceptable terms for any opportunity we pursue.
The forward-looking statements contained in this “General Outlook for
2017
” speak only as of the date hereof. 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. All such forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report, including under the captions “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Report and in our future periodic reports filed with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this “General Outlook for
2017
” may not occur.
Liquidity and Capital Resources
General
Our primary cash requirements, in addition to normal operating expenses and debt service, are for working capital, capital expenditures, business acquisitions and distributions to unitholders. Our principal sources of liquidity are cash from operations, borrowings under our
$1.5 billion
revolving Credit Facility and proceeds from the issuance of our LP Units. We will, from time to time, issue debt securities to permanently finance amounts borrowed under our Credit Facility. The BMSC entities fund their working capital needs principally from their own operations and their portion of our Credit Facility. Our financial policy has been to fund maintenance capital expenditures with cash from continuing operations. Expansion and cost reduction capital expenditures, along with acquisitions, have typically been funded from external sources including our Credit Facility, as well as debt and equity offerings. Our goal has been to fund at least half of these expenditures with proceeds from equity offerings in order to maintain our investment-grade credit rating. Based on current market conditions, we believe our borrowing capacity under our Credit Facility, cash flows from continuing operations and access to debt and equity markets, if necessary, will be sufficient to fund our primary cash requirements, including our expansion plans over the next 12 months.
Current Liquidity
As of
December 31, 2016
, we had
$919.3 million
of working capital and
$1.5 billion
of availability under our Credit Facility. However, in early January 2017 we paid $1.15 billion of cash consideration for the VTTI Acquisition, which was partially funded through our Credit Facility.
Capital Structuring Transactions
As part of our ongoing efforts to maintain a capital structure that is closely aligned with the cash-generating potential of our asset-based business, we may explore additional sources of external liquidity, including public or private debt or equity issuances. Matters to be considered will include cash interest expense and maturity profile, all to be balanced with maintaining adequate liquidity. We have a universal shelf registration statement that does not place any dollar limits on the amount of debt and equity securities that we may issue thereunder and a traditional shelf registration statement on file with the SEC that allows us to issue up to an aggregate of $1 billion in equity securities. In March 2016, we entered into an Equity Distribution Agreement, under which we may offer to sell up to $500.0 million in aggregate gross sales proceeds of LP Units from time to time through the ATM Underwriters, acting as agents of the Partnership or as principals, subject in each case to the terms and conditions set forth in the Equity Distribution Agreement. All issuances of equity securities under the Equity Distribution Agreement have been issued pursuant to the traditional shelf registration statement. At
December 31, 2016
, we had
$890.0 million
of unsold securities available under the traditional shelf registration statement.
The timing of any transaction may be impacted by events, such as strategic growth opportunities, legal judgments or regulatory or environmental requirements. The receptiveness of the capital markets to an offering of debt or equity securities cannot be assured and may be negatively impacted by, among other things, our long-term business prospects and other factors beyond our control, including market conditions.
In addition, we periodically evaluate engaging in strategic transactions as a source of capital or may consider divesting non-core assets where our evaluation suggests such a transaction is in the best interest of our business.
Capital Allocation
We continually review our investment options with respect to our capital resources that are not distributed to our unitholders or used to pay down our debt and seek to invest these capital resources in various projects and activities based on their return on investment. Potential investments could include, among others: add-on or other enhancement projects associated with our current assets; greenfield or brownfield development projects; and merger and acquisition activities.
Debt
At
December 31, 2016
, we had the following debt obligations (in thousands):
|
|
|
|
|
5.125% Notes due July 1, 2017
|
$
|
125,000
|
|
6.050% Notes due January 15, 2018
|
300,000
|
|
2.650% Notes due November 15, 2018
|
400,000
|
|
5.500% Notes due August 15, 2019
|
275,000
|
|
4.875% Notes due February 1, 2021
|
650,000
|
|
4.150% Notes due July 1, 2023
|
500,000
|
|
4.350% Notes due October 15, 2024
|
300,000
|
|
3.950% Notes due December 1, 2026
|
600,000
|
|
6.750% Notes due August 15, 2033
|
150,000
|
|
5.850% Notes due November 15, 2043
|
400,000
|
|
5.600% Notes due October 15, 2044
|
300,000
|
|
Term Loan due September 30, 2019
|
250,000
|
|
Total debt
|
$
|
4,250,000
|
|
In November 2016, we issued the
3.950%
Notes in an underwritten public offering at
99.644%
of their principal amount. Total proceeds from this offering, after underwriting fees, expenses and debt issuance costs of
$5.2 million
, were
$592.7 million
. In January 2017, we used the net proceeds from this offering to fund a portion of the purchase price for the VTTI Acquisition.
In September 2016, we entered into our
$250.0 million
Term Loan due September 30, 2019, with an option to extend the term with consenting lenders for up to
two
one
-year periods. We used the proceeds from the Term Loan to reduce the indebtedness outstanding under our Credit Facility. See Note 14 in the Notes to Consolidated Financial Statements for additional information.
In September 2016, Buckeye and its indirect wholly-owned subsidiaries, BMSC, as borrowers, exercised their remaining option with consenting lenders to extend
$1.4 billion
of our existing $1.5 billion revolving Credit Facility by one year to September 30, 2021. At
December 31, 2016
, Buckeye and BMSC collectively had
no
outstanding balance under the Credit Facility.
Equity
In October 2016, we completed a public offering of
7.75 million
LP Units pursuant to an effective shelf registration statement, which priced at
$66.05
per unit. The underwriters also exercised an option to purchase
1.16 million
additional LP Units, resulting in total gross proceeds of
$588.7 million
before deducting underwriting fees and other related expenses of
$8.0 million
. We used the net proceeds from this offering to initially reduce the indebtedness outstanding under our Credit Facility and for general partnership purposes, as well as to subsequently fund a portion of the purchase price for the VTTI Acquisition in January 2017.
During the year ended
December 31, 2016
, we sold
1.6 million
LP Units in aggregate under the Equity Distribution Agreement, received
$108.4 million
in net proceeds after deducting commissions and other related expenses, including
$1.1 million
of compensation paid in aggregate to the agents under the Equity Distribution Agreement. See Note 22 in the Notes to Consolidated Financial Statements for additional information.
Cash Flows from Operating, Investing and Financing Activities
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
$
|
717,917
|
|
|
$
|
710,192
|
|
|
$
|
599,642
|
|
Investing activities
|
(481,702
|
)
|
|
(614,894
|
)
|
|
(1,191,497
|
)
|
Financing activities
|
399,244
|
|
|
(98,625
|
)
|
|
595,113
|
|
Operating Activities
2016
.
Net cash
provided by
operating activities was
$717.9 million
for the year ended
December 31, 2016
, primarily related to
$548.7 million
of net income,
$254.7 million
of depreciation and amortization and a
$103.3 million
net decrease in the fair value of derivatives, which were partially offset by a
$162.3 million
increase in inventory, primarily driven by the change in commodity prices.
2015
.
Net cash provided by operating activities was
$710.2 million
for the year ended
December 31, 2015
, primarily related to $437.5 million of net income, $221.3 million of depreciation and amortization, a $56.8 million decrease in working capital, $29.2 million of non-cash unit-based compensation expense and $12.2 million of amortization of losses on terminated interest rate swaps, which were partially offset by a $52.8 million in litigation settlement payments.
2014
.
Net cash provided by operating activities was
$599.6 million
for the year ended
December 31, 2014
, primarily related to $274.9 million of net income and $196.4 million of depreciation and amortization, a $71.3 million decrease in accounts receivables, and a $70.1 million decrease in inventory, which were partially offset by a $51.5 million settlement to terminate the interest rate swap agreements related to the forecasted refinancing of the $5.300% Notes.
Future Operating Cash Flows
. Our future operating cash flows will vary based on a number of factors, many of which are beyond our control, including demand for our services, the cost of commodities, the effectiveness of our strategy, legal, environmental and regulatory requirements and our ability to capture value associated with commodity price volatility.
Investing Activities
2016
. Net cash
used in
investing activities of
$481.7 million
for the year ended
December 31, 2016
primarily related to
$486.3 million
of capital expenditures and
$26.0 million
related to the acquisition of the Indianola terminalling facility, which were partially offset by
$19.9 million
in refunded escrow deposits.
2015
. Net cash used in investing activities of
$614.9 million
for the year ended
December 31, 2015
primarily related to $594.5 million of capital expenditures and $21.4 million in escrow deposits, which were partially offset by $10.3 million of proceeds from the sale and disposition of assets, primarily due to the disposition of an ammonia pipeline in Texas.
2014
. Net cash used in investing activities of
$1,191.5 million
for the year ended
December 31, 2014
primarily related to $472.1 million of capital expenditures and $824.7 million of acquisition costs, primarily related to the Buckeye Texas Partners Transaction, which were partially offset by $103.4 million cash proceeds from the sale of our Natural Gas Storage disposal group.
See below for a discussion of capital spending. For further discussion on our acquisitions, see Note 3 in the Notes to Consolidated Financial Statements.
We have capital expenditures, which we define as “maintenance capital expenditures,” in order to maintain and enhance the safety and integrity of our pipelines, terminals, storage and processing facilities and related assets, and “expansion and cost reduction capital expenditures” to expand the reach or capacity of those assets, to improve the efficiency of our operations and to pursue new business opportunities. Capital expenditures, excluding non-cash changes in accruals for capital expenditures, were as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Maintenance capital expenditures (1)
|
$
|
129,691
|
|
|
$
|
99,617
|
|
|
$
|
80,141
|
|
Expansion and cost reduction (2)
|
356,625
|
|
|
494,903
|
|
|
392,008
|
|
Total capital expenditures, net
|
$
|
486,316
|
|
|
$
|
594,520
|
|
|
$
|
472,149
|
|
_____________________________
|
|
(1)
|
Includes maintenance capital expenditures of
$6.1 million
related to the BBH facility as a result of Hurricane Matthew for the year ended
December 31, 2016
and $0.8 million related to the Natural Gas Storage disposal group for the year ended
December 31, 2014
.
|
|
|
(2)
|
Amounts exclude accruals for capital expenditures. Expansion and cost reduction amounts including accruals for capital expenditures were
$327.7 million
,
$516.5 million
and
$340.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
|
Total capital expenditures decreased for the year ended
December 31, 2016
, as compared to the corresponding period in
2015
primarily due to decreases in expansion and cost reduction capital expenditures. Our expansion and cost reduction capital expenditures were
$356.6 million
for the year ended
December 31, 2016
, which is a
decrease
of
$138.3 million
, or
27.9%
, from
$494.9 million
for the corresponding period in
2015
. Year-to-year fluctuations in our expansion and cost reduction capital expenditures were primarily driven by the completion of major organic growth capital projects associated with the initial build-out of our facilities at Buckeye Texas, including the significant completion of a deep-water marine terminal, two condensate splitters, an LPG storage complex and three crude oil and condensate gathering facilities in 2015. Our most significant organic growth capital expenditures for the year ended December 31, 2016 included cost reduction and revenue generating projects related to enhancements across our portfolio of terminalling assets, butane blending capabilities, completion of rail unloading facilities, crude oil storage/transportation/processing and a pipeline integrity enhancement program that improved the operational efficiencies in our pipeline systems. Our maintenance capital expenditures were
$129.7 million
for the year ended
December 31, 2016
, which is an
increase
of
$30.1 million
, or
30.2%
, from
$99.6 million
for the corresponding period in
2015
. Year-to-year fluctuations in our maintenance capital expenditures were primarily driven by the increased asset integrity and facility infrastructure projects. Our most significant maintenance capital expenditures for the year ended
December 31, 2016
included tank integrity work necessary to maintain operating capacity, repairs to our BBH facility as a result of Hurricane Matthew, marine dock structure upgrades and upgrades to station and terminalling equipment.
Capital expenditures increased for the year ended December 31, 2015, as compared to the corresponding period in 2014 primarily due to increases in expansion and cost reduction capital expenditures. Our expansion and cost reduction capital expenditures were $494.9 million for the year ended December 31, 2015, which is an increase of $102.9 million, or 26.2%, from $392.0 million for the corresponding period in 2014. Year-to-year fluctuations in our expansion and cost reduction capital expenditures are primarily driven by spending on our major organic growth capital projects. Our most significant organic growth capital expenditures for the year ended December 31, 2015 included cost reduction and revenue generating projects related to enhancements across our portfolio of terminalling assets, butane blending capabilities, completion of rail unloading facilities, crude oil storage/transportation/processing and a pipeline integrity enhancement program that improved the operational efficiencies in our pipeline systems, and the significant completion of a deep-water, marine terminal, two condensate splitters, an LPG storage complex and three crude oil and condensate gathering facilities in South Texas. The build-out of the facilities in South Texas was funded through additional partnership contributions by us and Trafigura based on our respective ownership interests in Buckeye Texas. Our maintenance capital expenditures were $99.6 million for the year ended December 31, 2015, which is an increase of $19.5 million, or 24.3%, from $80.1 million for the corresponding period in 2014. Year-to-year fluctuations in our maintenance capital expenditures are primarily driven by the timing and cost of asset integrity and facility infrastructure projects. Our most significant maintenance capital expenditures for the year ended December 31, 2015 included truck rack upgrades, pump replacements and pipeline and tank integrity work necessary to maintain the operating capacity and equipment reliability of our existing infrastructure, as well as to address environmental regulations.
We estimate our capital expenditures for the period indicated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
Low
|
|
High
|
Domestic Pipelines & Terminals:
|
|
|
|
|
|
Maintenance capital expenditures
|
$
|
70,000
|
|
|
$
|
80,000
|
|
Expansion and cost reduction
|
190,000
|
|
|
220,000
|
|
Total capital expenditures
|
$
|
260,000
|
|
|
$
|
300,000
|
|
|
|
|
|
Global Marine Terminals:
|
|
|
|
|
|
Maintenance capital expenditures
|
$
|
40,000
|
|
|
$
|
50,000
|
|
Expansion and cost reduction
|
90,000
|
|
|
110,000
|
|
Total capital expenditures (1)
|
$
|
130,000
|
|
|
$
|
160,000
|
|
|
|
|
|
Overall:
|
|
|
|
|
|
Maintenance capital expenditures
|
$
|
110,000
|
|
|
$
|
130,000
|
|
Expansion and cost reduction
|
280,000
|
|
|
330,000
|
|
Total capital expenditures
|
$
|
390,000
|
|
|
$
|
460,000
|
|
_____________________________
|
|
(1)
|
Includes 100% of Buckeye Texas’ capital expenditures.
|
Estimated maintenance capital expenditures include tank refurbishments and upgrades to station and terminalling equipment, pipeline integrity, field instrumentation and cathodic protection systems and exclude capital expenditures expected to be incurred in response to Hurricane Matthew. Estimated major expansion and cost reduction expenditures include the capacity expansion of our pipeline system and terminalling capacity in the Midwest, various tank construction and conversion projects in our Global Marine Terminals and Domestic Pipelines & Terminals segments, as well as an expansion of facilities in the New York Harbor.
Financing Activities
2016
. Net cash flows
provided by
financing activities of
$399.2 million
for the year ended
December 31, 2016
primarily related to
$689.1 million
of net proceeds from the issuance of an aggregate 10.5 million LP Units,
$597.9 million
of proceeds from the issuance of the 3.950% Notes due December 1, 2026, and
$250.0 million
of borrowings on our Term Loan, partially offset by
$641.7 million
of cash distributions paid to unitholders (
$4.825
per LP Unit) and
$472.5 million
of net repayments under the Credit Facility.
2015
. Net cash flows used in financing activities of
$98.6 million
for the year ended
December 31, 2015
primarily related to $591.0 million of cash distributions paid to unitholders ($4.625 per LP Unit), partially offset by $306.5 million of net borrowings under the Credit Facility and $161.5 million of net proceeds from the issuance of 2.2 million LP Units under the Equity Distribution Agreements.
2014
. Net cash flows provided by financing activities of
$595.1 million
for the year ended
December 31, 2014
primarily related to $899.7 million of net proceeds from the issuance of an aggregate 11.8 million LP Units, and $599.1 million of proceeds from the issuance of the 4.350% and 5.600% Notes due October 15, 2024 and October 15, 2044, respectively, partially offset by $527.2 million of cash distributions paid to our unitholders ($4.425 per LP Unit), $275.0 million related to the repayment of the 5.300% Notes and $89.0 million of net repayments under the Credit Facility.
For further discussion on our equity offerings, see Note 22 in the Notes to Consolidated Financial Statements.
Contractual Obligations
The following table summarizes our contractual obligations as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Total
|
|
Less than 1
year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
Long-term debt (1)
|
$
|
4,250,000
|
|
|
$
|
125,000
|
|
|
$
|
1,225,000
|
|
|
$
|
650,000
|
|
|
$
|
2,250,000
|
|
Interest payments (2)
|
1,960,007
|
|
|
191,321
|
|
|
321,747
|
|
|
250,029
|
|
|
1,196,910
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
Office space and other
|
16,173
|
|
|
3,930
|
|
|
5,944
|
|
|
5,543
|
|
|
756
|
|
Equipment (3)
|
92,855
|
|
|
9,919
|
|
|
17,970
|
|
|
18,474
|
|
|
46,492
|
|
Land leases (4)
|
99,247
|
|
|
2,648
|
|
|
5,296
|
|
|
4,796
|
|
|
86,507
|
|
Purchase obligations (5)
|
113,505
|
|
|
113,505
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual obligations
|
$
|
6,531,787
|
|
|
$
|
446,323
|
|
|
$
|
1,575,957
|
|
|
$
|
928,842
|
|
|
$
|
3,580,665
|
|
_____________________________
|
|
(1)
|
Includes long-term debt portion borrowed under our Credit Facility. See Note 14 in the Notes to Consolidated Financial Statements for additional information regarding our debt obligations.
|
|
|
(2)
|
Includes amounts due on our notes and amounts and commitment fees due on our Credit Facility. The interest amount calculated on the Credit Facility is based on the assumption that the amount outstanding and the interest rate charged both remain at their current levels.
|
|
|
(3)
|
Includes leases for tugboats and a barge in our Global Marine Terminals segment.
|
|
|
(4)
|
Includes leases for properties in connection with both the jetty and inland dock operations in our Global Marine Terminals segment.
|
|
|
(5)
|
Includes short-term purchase obligations for products and services with third-party suppliers and payment obligations relating to capital projects. The prices that we are obligated to pay under these contracts approximate current market prices.
|
For the year ended December 31,
2017
, our rights-of-way payments are expected to be
$7.3 million
, which include an estimated amount for annual escalation.
In addition, our obligations related to our pension and postretirement benefit plans are discussed in Note 19 in the Notes to Consolidated Financial Statements.
Employee Stock Ownership Plan
Services Company provides the Employee Stock Ownership Plan (“ESOP”) to the majority of its employees hired before September 16, 2004. Employees hired by Services Company after September 15, 2004 and certain employees covered by a union multiemployer pension plan do not participate in the ESOP. The ESOP owns all of the outstanding common stock of Services Company.
The ESOP was frozen with respect to benefits effective March 27, 2011 (the “Freeze Date”). No Services Company contributions have been or will be made on behalf of current participants in the ESOP on and after the Freeze Date. Even though contributions under the ESOP are no longer being made, each eligible participant’s ESOP account will continue to be credited with its share of any stock dividends or other stock distributions associated with Services Company stock.
All Services Company stock has been allocated to ESOP participants. See Note 19 in the Notes to Consolidated Financial Statements for further information.
Off-Balance Sheet Arrangements
At
December 31, 2016
and
2015
, we had no off-balance sheet debt or arrangements.
Critical Accounting Policies and Estimates
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. See Note 2 in the Notes to Consolidated Financial Statements for our significant accounting policies. The following describes significant estimates and assumptions affecting the application of these policies:
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of our subsidiaries controlled by us and variable interest entities (“VIEs”), of which we are the primary beneficiary. A VIE is required to be consolidated by its primary beneficiary, which is generally defined as the party who has (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits that could potentially be significant to the VIE. We evaluate our relationships with our VIEs, which include Buckeye Texas and Sabina Pipeline, on an ongoing basis to determine whether we continue to be the primary beneficiary. Third party or affiliate ownership interests in our consolidated VIEs are presented as noncontrolling interests. All intercompany transactions are eliminated in consolidation.
Business Combinations
We allocate the total purchase price of a business combination to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, with the excess purchase price recorded as goodwill. An income, market or cost valuation method may be utilized to estimate the fair value of the assets acquired or liabilities assumed in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition, reduced for depreciation of the asset.
Valuation of Goodwill
Goodwill represents the excess of purchase price over fair value of net assets acquired. Our goodwill amounts are assessed for impairment: (i) on an annual basis on October 31st of each year; or (ii) on an interim basis if circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value.
For our annual goodwill impairment test as of October 31,
2016
, we performed quantitative assessments to determine the fair value of each of our reporting units. The estimate of the fair value of the reporting unit is determined using a combination of an expected present value of future cash flows and a market multiple valuation method. The present value of future cash flows is estimated using: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) an appropriate discount rate. The market multiple valuation method uses appropriate market multiples from comparable companies on the reporting unit’s earnings before interest, tax, depreciation and amortization. We evaluate industry and market conditions for purposes of weighting the income and market valuation approach. Based on such calculations, each reporting unit’s fair value was in excess of its carrying value. We did not record any goodwill impairment charges during the years ended
December 31, 2016
,
2015
or
2014
.
Valuation of Long-Lived Assets and Equity Method Investments
We assess the recoverability of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If events or circumstances are identified, the carrying amount of the asset is compared to the estimated discounted future cash flows to determine if an impairment exists. Estimates of undiscounted future cash flows include: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) estimates of useful lives of the assets. The identification of impairment indicators and the estimates of future undiscounted cash flows are highly subjective and are based on numerous assumptions about future operations and market conditions.
In December 2013, the Board approved a plan to divest the natural gas storage facility and related assets that our former subsidiary, Lodi, owned and operated in Northern California. We refer to this group of assets as our Natural Gas Storage disposal group. In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage disposal group. As a result of the execution of the purchase and sale agreement, subsequent changes in the carrying value of the net assets of our Natural Gas Storage disposal group, and the completed sale in December 2014, we recorded non-cash asset impairment charges of
$23.4 million
during the year ended December 31, 2014. We recorded these asset impairment charges within “Loss from discontinued operations” on our consolidated statements of operations for the year ended December 31, 2014. See Notes 4 and 5 in the Notes to Consolidated Financial Statements for further discussion.
We evaluate equity method investments for impairment whenever events or changes in circumstances indicate that there is an “other than temporary” loss in value of the investment. Estimates of future cash flows include: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) probabilities assigned to different cash flow scenarios. There were no impairments of our equity investments during the years ended
December 31, 2016
,
2015
or
2014
.
Reserves for Environmental Matters
We record environmental liabilities at a specific site when environmental assessments occur or remediation efforts are probable, and the costs can be reasonably estimated based upon past experience, discussion with operating personnel, advice of outside engineering and consulting firms, discussion with legal counsel, or current facts and circumstances. The estimates related to environmental matters are uncertain because: (i) estimated future expenditures are subject to cost fluctuations and change in estimated remediation period; (ii) unanticipated liabilities may arise; and (iii) changes in federal, state and local environmental laws and regulations may significantly change the extent of remediation.
Valuation of Derivatives
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 these risks.
Our Merchant Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its physical derivative contracts, which we designated as fair value hedges, with changes in fair value of both the futures contracts and physical inventory reflected in earnings. Our Merchant Services segment also uses exchange-traded refined petroleum contracts to hedge expected future transactions related to certain gasoline inventory that we manage on behalf of a third party, which are designated as cash flow hedges, with the effective portion of the hedge reported in other comprehensive income and reclassified into earnings when the expected future transaction affects earnings. Any gains or losses incurred on the derivative instruments that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings.
Additionally, our Merchant Services segment enters into exchange-traded refined petroleum product futures contracts on behalf of our Domestic Pipelines & Terminals segment to manage the risk of market price volatility on the narrowing gasoline-to-butane pricing spreads associated with our butane blending activities managed by a third party. These futures contracts are not designated in a hedge relationship for accounting purposes. Physical forward contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market.
Futures contracts are valued using quoted market prices obtained from the NYMEX. Physical derivative contracts are valued 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, and are net of credit value adjustments.
The fixed-price and index purchase contracts are typically executed with credit worthy counterparties and are short-term in nature, thus evaluated for credit risk in the same manner as the fixed-price sales contracts. However, because the fixed-price sales contracts are privately negotiated with customers of the Merchant Services segment who are generally smaller, private companies that may not have established credit ratings, the determination of an adjustment to fair value to reflect counterparty credit risk (a “credit valuation adjustment”) requires significant management judgment.
Each customer is evaluated for performance under the terms and conditions of their contracts; therefore, we evaluate: (i) the historical payment patterns of the customer; (ii) the current outstanding receivables balances for each customer and contract; and (iii) the level of performance of each customer with respect to volumes called for in the contract. We then evaluated the specific risks and expected outcomes of nonpayment or nonperformance by each customer and contract. We continue to monitor and evaluate performance and collections with respect to these fixed-price contracts.
Additionally, we utilize forward-starting interest rate swaps to manage interest rate risk related to forecasted interest payments on anticipated debt issuances. When entering into interest rate swap transactions, we are exposed to both credit risk and market risk. 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. The fair value of the swap instruments are calculated by discounting the future cash flows of both the fixed rate and variable rate interest payments using appropriate discount rates with consideration given to our non-performance risk.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk — Trading Instruments
We have no trading derivative instruments.
Market Risk — Non-Trading Instruments
We are exposed to financial market risks, including changes in commodity prices and interest rates. The primary factors affecting our market risk and the fair value of our derivative portfolio at any point in time are the volume of open derivative positions, changing refined petroleum commodity prices, and prevailing interest rates for our interest rate swaps. We are also susceptible to basis risk created when we enter into financial hedges that are priced at a certain location, but the sales or exchanges of the underlying commodity are at another location where prices and price changes might differ from the prices and price changes at the location upon which the hedging instrument is based. Since prices for refined petroleum products and interest rates are volatile, there may be material changes in the fair value of our derivatives over time, driven both by price volatility and the changes in volume of open derivative transactions.
The following is a summary of changes in fair value of our derivative instruments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Instruments
|
|
Interest Rate Swaps
|
|
Total
|
Fair value of contracts outstanding at January 1, 2016
|
$
|
78,129
|
|
|
$
|
—
|
|
|
$
|
78,129
|
|
Items recognized or settled during the period
|
(51,658
|
)
|
|
—
|
|
|
(51,658
|
)
|
Fair value attributable to new deals
|
(16,249
|
)
|
|
62,609
|
|
|
46,360
|
|
Change in fair value attributable to price movements
|
(39,269
|
)
|
|
—
|
|
|
(39,269
|
)
|
Change in fair value attributable to non-performance risk
|
246
|
|
|
—
|
|
|
246
|
|
Fair value of contracts outstanding at December 31, 2016
|
$
|
(28,801
|
)
|
|
$
|
62,609
|
|
|
$
|
33,808
|
|
Commodity Price Risk
Our Merchant Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its physical derivative contracts. 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. Additionally, our Merchant Services segment enters into exchange-traded refined petroleum product futures contracts on behalf of our Domestic Pipelines & Terminals segment to manage the risk of market price volatility on the narrowing gasoline-to-butane pricing spreads associated with our butane blending activities managed by a third party. Based on a hypothetical
10%
movement in the underlying quoted market prices of the futures contracts and observable market data from third-party pricing publications for physical derivative contracts related to designated hedged refined petroleum products inventories outstanding and physical derivative contracts at
December 31, 2016
, the estimated fair value would be as follows (in thousands):
|
|
|
|
|
|
|
|
Scenario
|
|
Resulting
Classification
|
|
Fair Value
|
Fair value assuming no change in underlying commodity prices (as is)
|
|
Asset
|
|
$
|
308,622
|
|
Fair value assuming 10% increase in underlying commodity prices
|
|
Asset
|
|
$
|
314,092
|
|
Fair value assuming 10% decrease in underlying commodity prices
|
|
Asset
|
|
$
|
303,152
|
|
Interest Rate Risk
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 are exposed to both credit risk and market risk. We manage our credit risk by entering into swap transactions only with major financial institutions with investment-grade credit ratings. We are subject to credit risk when the change in fair value of the swap instruments 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 impact the fair value of swaps. 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.
Our practice with respect to derivative transactions related to interest rate risk has been to have each transaction in connection with non-routine borrowings authorized by the Board. In February 2009, the Board adopted an interest rate hedging policy which permits us to enter into certain short-term interest rate swap agreements to manage our interest rate and cash flow risks associated with a credit facility. In addition, in August 2016, the Board authorized us to enter into forward-starting interest rate swaps to manage our interest rate and cash flow risks related to certain expected debt issuances associated with the maturity of existing debt obligations. Based on a hypothetical 10% movement in the underlying interest rates at
December 31, 2016
, the estimated fair value of the interest rate derivative contracts would be as follows (in thousands):
|
|
|
|
|
|
|
|
Scenario
|
|
Resulting
Classification
|
|
Fair Value
|
Fair value assuming no change in underlying interest rates (as is)
|
|
Asset
|
|
$
|
62,609
|
|
Fair value assuming 10% increase in underlying interest rates
|
|
Asset
|
|
$
|
56,348
|
|
Fair value assuming 10% decrease in underlying interest rates
|
|
Asset
|
|
$
|
68,870
|
|
See Note 17 in the Notes to Consolidated Financial Statements for additional discussion related to derivative instruments and hedging activities.
At
December 31, 2016
, we had total fixed-rate debt obligations under various public notes at an aggregate carrying value of
$4.0 billion
. Based on a hypothetical
1%
movement in the underlying interest rates at
December 31, 2016
, the estimated fair value of these debt obligations would be as follows (in millions):
|
|
|
|
|
|
Scenario
|
|
Fair Value of
Fixed-Rate Debt
|
Fair value assuming no change in underlying interest rates (as is)
|
|
$
|
4,083.5
|
|
Fair value assuming 1% increase in underlying interest rates
|
|
$
|
3,848.1
|
|
Fair value assuming 1% decrease in underlying interest rates
|
|
$
|
4,350.7
|
|
At
December 31, 2016
, our variable-rate obligations were
$250.0 million
. Based on the balance outstanding at
December 31, 2016
, we estimate that a 1% increase or decrease in underlying interest rates would increase or decrease annual interest expense by
$2.5 million
.
Foreign Currency Risk
Puerto Rico is a commonwealth territory under the U.S., and thus uses the U.S. dollar as its official currency. BBH’s functional currency is the U.S. dollar and it is equivalent in value to the Bahamian dollar. St. Lucia is a sovereign island country in the Caribbean and its official currency is the Eastern Caribbean dollar, which is pegged to the U.S. dollar and has remained fixed for many years. The functional currency for our operations in St. Lucia is the U.S. dollar. Foreign exchange gains and losses arising from transactions denominated in a currency other than the U.S. dollar relate to a nominal amount of supply purchases and are included in “Other income (expense)” within our consolidated statements of operations. The effects of foreign currency transactions were not considered to be material for the years ended
December 31, 2016
,
2015
and
2014
.
Item 8.
Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Buckeye GP LLC, as general partner of Buckeye Partners, L.P. (“Buckeye”), is responsible for establishing and maintaining adequate internal control over financial reporting of Buckeye. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated the internal control over financial reporting of Buckeye as of
December 31, 2016
. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control—Integrated Framework
(2013) (“COSO”). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of
December 31, 2016
, the internal control over financial reporting of Buckeye was effective.
Buckeye’s independent registered public accounting firm, Deloitte & Touche LLP, has audited the internal control over financial reporting of Buckeye. Their opinion on the effectiveness of internal control over financial reporting of Buckeye appears herein.
|
|
|
/s/ CLARK C. SMITH
|
/s/ KEITH E. ST.CLAIR
|
Clark C. Smith
|
Keith E. St.Clair
|
Chief Executive Officer, President and
|
Executive Vice President and
|
Chairman of the Board
|
Chief Financial Officer
|
|
|
February 24, 2017
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Buckeye GP LLC and the
Partners of Buckeye Partners, L.P.
We have audited the internal control over financial reporting of Buckeye Partners, L.P. and subsidiaries (“Buckeye”) as of
December 31, 2016
, based on criteria established in
Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Buckeye’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Buckeye’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Buckeye maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016
, based on the criteria established in
Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended
December 31, 2016
of Buckeye and our report dated
February 24, 2017
expressed an unqualified opinion on those consolidated financial statements.
|
|
/s/ DELOITTE & TOUCHE LLP
|
|
Houston, Texas
|
February 24, 2017
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Buckeye GP LLC and the
Partners of Buckeye Partners, L.P.
We have audited the accompanying consolidated balance sheets of Buckeye Partners, L.P. and subsidiaries (“Buckeye”) as of
December 31, 2016
and
2015
, and the related consolidated statements of operations, comprehensive income, cash flows, and partners’ capital for each of the three years in the period ended
December 31, 2016
. These financial statements are the responsibility of Buckeye’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Buckeye as of
December 31, 2016
and
2015
, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016
, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Buckeye’s internal control over financial reporting as of
December 31, 2016
, based on the criteria established in
Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 24, 2017
expressed an unqualified opinion on Buckeye’s internal control over financial reporting.
|
|
/s/ DELOITTE & TOUCHE LLP
|
|
Houston, Texas
|
February 24, 2017
|
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
1,594,240
|
|
|
$
|
2,028,323
|
|
|
$
|
5,348,532
|
|
Transportation, storage and other services
|
1,654,136
|
|
|
1,425,111
|
|
|
1,271,715
|
|
Total revenue
|
3,248,376
|
|
|
3,453,434
|
|
|
6,620,247
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of product sales
|
1,549,522
|
|
|
1,965,844
|
|
|
5,311,552
|
|
Operating expenses
|
629,942
|
|
|
573,368
|
|
|
537,705
|
|
Depreciation and amortization
|
254,659
|
|
|
221,278
|
|
|
196,443
|
|
General and administrative
|
86,098
|
|
|
88,828
|
|
|
79,200
|
|
Other operating income, net
|
(5,187
|
)
|
|
—
|
|
|
—
|
|
Total costs and expenses
|
2,515,034
|
|
|
2,849,318
|
|
|
6,124,900
|
|
Operating income
|
733,342
|
|
|
604,116
|
|
|
495,347
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Earnings from equity investments
|
11,536
|
|
|
6,381
|
|
|
11,265
|
|
Interest and debt expense
|
(194,922
|
)
|
|
(171,330
|
)
|
|
(171,235
|
)
|
Other income (expense)
|
179
|
|
|
98
|
|
|
(428
|
)
|
Total other expense, net
|
(183,207
|
)
|
|
(164,851
|
)
|
|
(160,398
|
)
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
550,135
|
|
|
439,265
|
|
|
334,949
|
|
Income tax expense
|
(1,460
|
)
|
|
(874
|
)
|
|
(451
|
)
|
Income from continuing operations
|
548,675
|
|
|
438,391
|
|
|
334,498
|
|
Loss from discontinued operations (Note 4)
|
—
|
|
|
(857
|
)
|
|
(59,641
|
)
|
Net income
|
548,675
|
|
|
437,534
|
|
|
274,857
|
|
Less: Net income attributable to noncontrolling interests
|
(13,067
|
)
|
|
(311
|
)
|
|
(1,903
|
)
|
Net income attributable to Buckeye Partners, L.P.
|
$
|
535,608
|
|
|
$
|
437,223
|
|
|
$
|
272,954
|
|
|
|
|
|
|
|
Basic earnings (loss) per unit attributable to Buckeye Partners, L.P.:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
4.05
|
|
|
$
|
3.42
|
|
|
$
|
2.79
|
|
Discontinued operations
|
—
|
|
|
(0.01
|
)
|
|
(0.50
|
)
|
Total
|
$
|
4.05
|
|
|
$
|
3.41
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
Diluted earnings (loss) per unit attributable to Buckeye Partners, L.P.:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
4.03
|
|
|
$
|
3.41
|
|
|
$
|
2.78
|
|
Discontinued operations
|
—
|
|
|
(0.01
|
)
|
|
(0.50
|
)
|
Total
|
$
|
4.03
|
|
|
$
|
3.40
|
|
|
$
|
2.28
|
|
|
|
|
|
|
|
Weighted average units outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
132,242
|
|
|
128,084
|
|
|
119,323
|
|
Diluted
|
132,927
|
|
|
128,617
|
|
|
119,899
|
|
See Notes to Consolidated Financial Statements
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net income
|
$
|
548,675
|
|
|
$
|
437,534
|
|
|
$
|
274,857
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivative instruments
|
60,281
|
|
|
1,266
|
|
|
(21,424
|
)
|
Reclassification of derivative losses to net income
|
10,884
|
|
|
12,151
|
|
|
9,753
|
|
Recognition of costs related to benefit plans to net income
|
1,886
|
|
|
1,510
|
|
|
698
|
|
Adjustments to recognize the funded status of benefit plans
|
(803
|
)
|
|
2,520
|
|
|
(763
|
)
|
Total other comprehensive income (loss)
|
72,248
|
|
|
17,447
|
|
|
(11,736
|
)
|
Comprehensive income
|
620,923
|
|
|
454,981
|
|
|
263,121
|
|
Less: Comprehensive income attributable to noncontrolling interests
|
(13,067
|
)
|
|
(311
|
)
|
|
(1,903
|
)
|
Comprehensive income attributable to Buckeye Partners, L.P.
|
$
|
607,856
|
|
|
$
|
454,670
|
|
|
$
|
261,218
|
|
See Notes to Consolidated Financial Statements
BUCKEYE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Assets:
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
640,340
|
|
|
$
|
4,881
|
|
Accounts receivable, net
|
236,416
|
|
|
213,830
|
|
Construction and pipeline relocation receivables
|
17,276
|
|
|
13,491
|
|
Inventories
|
356,803
|
|
|
192,992
|
|
Derivative assets
|
1,526
|
|
|
78,285
|
|
Prepaid and other current assets
|
66,536
|
|
|
48,071
|
|
Total current assets
|
1,318,897
|
|
|
551,550
|
|
|
|
|
|
Property, plant and equipment
|
7,523,774
|
|
|
7,076,901
|
|
Less: Accumulated depreciation
|
(1,040,492
|
)
|
|
(874,820
|
)
|
Property, plant and equipment, net
|
6,483,282
|
|
|
6,202,081
|
|
|
|
|
|
Equity investments
|
89,564
|
|
|
84,128
|
|
Goodwill
|
1,004,545
|
|
|
998,748
|
|
|
|
|
|
Intangible assets
|
616,286
|
|
|
627,310
|
|
Less: Accumulated amortization
|
(192,983
|
)
|
|
(135,938
|
)
|
Intangible assets, net
|
423,303
|
|
|
491,372
|
|
|
|
|
|
Other non-current assets
|
101,512
|
|
|
41,402
|
|
Total assets
|
$
|
9,421,103
|
|
|
$
|
8,369,281
|
|
|
|
|
|
Liabilities and partners’ capital:
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Line of credit
|
$
|
—
|
|
|
$
|
111,488
|
|
Accounts payable
|
107,383
|
|
|
82,691
|
|
Derivative liabilities
|
26,272
|
|
|
510
|
|
Accrued and other current liabilities
|
265,893
|
|
|
309,620
|
|
Total current liabilities
|
399,548
|
|
|
504,309
|
|
|
|
|
|
Long-term debt
|
4,217,695
|
|
|
3,732,824
|
|
Other non-current liabilities
|
105,437
|
|
|
115,407
|
|
Total liabilities
|
4,722,680
|
|
|
4,352,540
|
|
|
|
|
|
Commitments and contingent liabilities (Note 6)
|
—
|
|
|
—
|
|
|
|
|
|
Partners’ capital:
|
|
|
|
|
|
Buckeye Partners, L.P. capital:
|
|
|
|
|
|
Limited Partners (140,263,787 and 129,523,703 units outstanding as of December 31, 2016 and 2015, respectively)
|
4,437,316
|
|
|
3,833,230
|
|
Accumulated other comprehensive loss
|
(25,593
|
)
|
|
(97,841
|
)
|
Total Buckeye Partners, L.P. capital
|
4,411,723
|
|
|
3,735,389
|
|
Noncontrolling interests
|
286,700
|
|
|
281,352
|
|
Total partners’ capital
|
4,698,423
|
|
|
4,016,741
|
|
Total liabilities and partners’ capital
|
$
|
9,421,103
|
|
|
$
|
8,369,281
|
|
See Notes to Consolidated Financial Statements
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
548,675
|
|
|
$
|
437,534
|
|
|
$
|
274,857
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Settlement of terminated interest rate swap agreements
|
—
|
|
|
—
|
|
|
(51,469
|
)
|
Depreciation and amortization
|
254,659
|
|
|
221,278
|
|
|
196,443
|
|
Amortization of debt issuance costs and discounts
|
4,776
|
|
|
4,710
|
|
|
4,754
|
|
Amortization of losses on terminated interest rate swaps
|
12,150
|
|
|
12,151
|
|
|
9,753
|
|
Non-cash unit-based compensation expense
|
33,482
|
|
|
29,215
|
|
|
20,867
|
|
Litigation contingency accrual
|
—
|
|
|
15,229
|
|
|
40,000
|
|
Litigation settlement
|
—
|
|
|
(52,839
|
)
|
|
—
|
|
Gains on property damage recoveries
|
(5,700
|
)
|
|
—
|
|
|
—
|
|
Hurricane-related damaged asset write-off
|
5,812
|
|
|
—
|
|
|
—
|
|
Gain on sale of ammonia pipeline
|
(5,299
|
)
|
|
—
|
|
|
—
|
|
Impairment of assets of discontinued operations
|
—
|
|
|
—
|
|
|
23,365
|
|
Net changes in fair value of derivatives
|
103,336
|
|
|
(9,177
|
)
|
|
(77,901
|
)
|
Non-cash deferred lease expense
|
—
|
|
|
—
|
|
|
3,637
|
|
Amortization of unfavorable storage contracts
|
(5,979
|
)
|
|
(11,071
|
)
|
|
(11,071
|
)
|
Earnings from equity investments
|
(11,536
|
)
|
|
(6,381
|
)
|
|
(11,265
|
)
|
Distributions from equity investments
|
3,280
|
|
|
5,108
|
|
|
470
|
|
Other non-cash items
|
7,162
|
|
|
7,593
|
|
|
107
|
|
Change in assets and liabilities, net of amounts related to acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(23,646
|
)
|
|
48,006
|
|
|
71,299
|
|
Construction and pipeline relocation receivables
|
(4,961
|
)
|
|
7,051
|
|
|
(5,424
|
)
|
Inventories
|
(162,257
|
)
|
|
52,775
|
|
|
70,068
|
|
Prepaid and other current assets
|
(41,224
|
)
|
|
(3,523
|
)
|
|
34,956
|
|
Accounts payable
|
25,983
|
|
|
(65,239
|
)
|
|
27,860
|
|
Accrued and other current liabilities
|
(7,347
|
)
|
|
16,759
|
|
|
3,119
|
|
Other non-current assets
|
32
|
|
|
22,423
|
|
|
(19,706
|
)
|
Other non-current liabilities
|
(13,481
|
)
|
|
(21,410
|
)
|
|
(5,077
|
)
|
Net cash provided by operating activities
|
717,917
|
|
|
710,192
|
|
|
599,642
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(486,316
|
)
|
|
(594,520
|
)
|
|
(472,149
|
)
|
Contribution to equity investments
|
—
|
|
|
(300
|
)
|
|
—
|
|
Acquisitions, net of working capital settlements
|
(26,025
|
)
|
|
(8,118
|
)
|
|
(824,719
|
)
|
Net proceeds from insurance settlement
|
—
|
|
|
—
|
|
|
737
|
|
Proceeds from sale and disposition of assets
|
2,563
|
|
|
10,261
|
|
|
1,227
|
|
Escrow deposits
|
19,850
|
|
|
(21,360
|
)
|
|
—
|
|
Proceeds from sale of discontinued operations
|
—
|
|
|
(857
|
)
|
|
103,407
|
|
Recoveries on property damages
|
5,700
|
|
|
—
|
|
|
—
|
|
Distributions from equity investments
|
2,526
|
|
|
—
|
|
|
—
|
|
Net cash used in investing activities
|
(481,702
|
)
|
|
(614,894
|
)
|
|
(1,191,497
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of LP Units
|
689,128
|
|
|
161,474
|
|
|
899,710
|
|
Net proceeds from exercise of Unit options
|
300
|
|
|
215
|
|
|
849
|
|
Payment of tax withholding on issuance of LTIP awards
|
(6,711
|
)
|
|
(7,700
|
)
|
|
(6,234
|
)
|
Issuance of long-term debt
|
597,864
|
|
|
—
|
|
|
599,103
|
|
Repayment of long term-debt
|
—
|
|
|
—
|
|
|
(275,000
|
)
|
Debt issuance costs
|
(6,413
|
)
|
|
(1,115
|
)
|
|
(7,414
|
)
|
Borrowings under BPL Credit Facility
|
1,007,200
|
|
|
1,627,450
|
|
|
1,856,031
|
|
Repayments under BPL Credit Facility
|
(1,368,200
|
)
|
|
(1,266,450
|
)
|
|
(1,885,031
|
)
|
Net repayments under BMSC Credit Facility
|
(111,488
|
)
|
|
(54,512
|
)
|
|
(60,000
|
)
|
Acquisition of additional interest in Buckeye Memphis
|
—
|
|
|
(10,044
|
)
|
|
(9,510
|
)
|
Borrowings under Term Loan
|
250,000
|
|
|
—
|
|
|
—
|
|
Contributions from noncontrolling interests
|
5,000
|
|
|
57,000
|
|
|
16,400
|
|
Distributions paid to noncontrolling interests
|
(15,750
|
)
|
|
(13,972
|
)
|
|
(6,593
|
)
|
Distributions paid to unitholders
|
(641,686
|
)
|
|
(590,971
|
)
|
|
(527,198
|
)
|
Net cash provided by (used in) financing activities
|
399,244
|
|
|
(98,625
|
)
|
|
595,113
|
|
Net increase (decrease) in cash and cash equivalents
|
635,459
|
|
|
(3,327
|
)
|
|
3,258
|
|
Cash and cash equivalents — Beginning of year
|
4,881
|
|
|
8,208
|
|
|
4,950
|
|
Cash and cash equivalents — End of year
|
$
|
640,340
|
|
|
$
|
4,881
|
|
|
$
|
8,208
|
|
See Notes to Consolidated Financial Statements
BUCKEYE PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited
Partners
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Noncontrolling
Interests
|
|
Total
|
Partners' capital - January 1, 2014
|
$
|
3,169,217
|
|
|
$
|
(103,552
|
)
|
|
$
|
15,171
|
|
|
$
|
3,080,836
|
|
Net income
|
272,954
|
|
|
—
|
|
|
1,903
|
|
|
274,857
|
|
Acquisition of additional interest in Buckeye Memphis
|
(7,933
|
)
|
|
—
|
|
|
(1,577
|
)
|
|
(9,510
|
)
|
Noncontrolling equity in acquisition (Note 3)
|
—
|
|
|
—
|
|
|
208,998
|
|
|
208,998
|
|
Distributions paid to unitholders
|
(530,376
|
)
|
|
—
|
|
|
3,178
|
|
|
(527,198
|
)
|
Contributions from noncontrolling interests (Note 3)
|
—
|
|
|
—
|
|
|
16,400
|
|
|
16,400
|
|
Net proceeds from issuance of LP Units
|
899,710
|
|
|
—
|
|
|
—
|
|
|
899,710
|
|
Amortization of unit-based compensation awards
|
21,499
|
|
|
—
|
|
|
—
|
|
|
21,499
|
|
Net proceeds from exercise of Unit options
|
849
|
|
|
—
|
|
|
—
|
|
|
849
|
|
Payment of tax withholding on issuance of LTIP awards
|
(6,234
|
)
|
|
—
|
|
|
—
|
|
|
(6,234
|
)
|
Distributions paid to noncontrolling interests
|
—
|
|
|
—
|
|
|
(6,593
|
)
|
|
(6,593
|
)
|
Other comprehensive loss
|
—
|
|
|
(11,736
|
)
|
|
—
|
|
|
(11,736
|
)
|
Noncash accrual for distribution equivalent rights
|
(1,619
|
)
|
|
—
|
|
|
—
|
|
|
(1,619
|
)
|
Other
|
(151
|
)
|
|
—
|
|
|
488
|
|
|
337
|
|
Partners' capital - December 31, 2014
|
3,817,916
|
|
|
(115,288
|
)
|
|
237,968
|
|
|
3,940,596
|
|
Net income
|
437,223
|
|
|
—
|
|
|
311
|
|
|
437,534
|
|
Acquisition of additional interest in Buckeye Memphis
|
(8,276
|
)
|
|
—
|
|
|
(1,768
|
)
|
|
(10,044
|
)
|
Adjusted value of noncontrolling interest in acquisition
(Note 3)
|
—
|
|
|
—
|
|
|
(1,220
|
)
|
|
(1,220
|
)
|
Distributions paid to unitholders
|
(594,132
|
)
|
|
—
|
|
|
3,161
|
|
|
(590,971
|
)
|
Contributions from noncontrolling interests (Note 3)
|
—
|
|
|
—
|
|
|
57,000
|
|
|
57,000
|
|
Net proceeds from issuance of LP Units
|
161,474
|
|
|
—
|
|
|
—
|
|
|
161,474
|
|
Amortization of unit-based compensation awards
|
29,332
|
|
|
—
|
|
|
—
|
|
|
29,332
|
|
Net proceeds from exercise of Unit options
|
215
|
|
|
—
|
|
|
—
|
|
|
215
|
|
Payment of tax withholding on issuance of LTIP awards
|
(7,700
|
)
|
|
—
|
|
|
—
|
|
|
(7,700
|
)
|
Distributions paid to noncontrolling interests
|
—
|
|
|
—
|
|
|
(13,972
|
)
|
|
(13,972
|
)
|
Other comprehensive income
|
—
|
|
|
17,447
|
|
|
—
|
|
|
17,447
|
|
Noncash accrual for distribution equivalent rights
|
(3,085
|
)
|
|
—
|
|
|
—
|
|
|
(3,085
|
)
|
Other
|
263
|
|
|
—
|
|
|
(128
|
)
|
|
135
|
|
Partners' capital - December 31, 2015
|
3,833,230
|
|
|
(97,841
|
)
|
|
281,352
|
|
|
4,016,741
|
|
Net income
|
535,608
|
|
|
—
|
|
|
13,067
|
|
|
548,675
|
|
Distributions paid to unitholders
|
(644,729
|
)
|
|
—
|
|
|
3,043
|
|
|
(641,686
|
)
|
Net proceeds from issuance of LP Units
|
689,128
|
|
|
—
|
|
|
—
|
|
|
689,128
|
|
Amortization of unit-based compensation awards
|
33,482
|
|
|
—
|
|
|
—
|
|
|
33,482
|
|
Net proceeds from exercise of Unit options
|
300
|
|
|
—
|
|
|
—
|
|
|
300
|
|
Payment of tax withholding on issuance of LTIP awards
|
(6,711
|
)
|
|
—
|
|
|
—
|
|
|
(6,711
|
)
|
Distributions paid to noncontrolling interests
|
—
|
|
|
—
|
|
|
(15,750
|
)
|
|
(15,750
|
)
|
Contributions from noncontrolling interests (Note 3)
|
—
|
|
|
—
|
|
|
5,000
|
|
|
5,000
|
|
Other comprehensive income
|
—
|
|
|
72,248
|
|
|
—
|
|
|
72,248
|
|
Noncash accrual for distribution equivalent rights
|
(3,004
|
)
|
|
—
|
|
|
—
|
|
|
(3,004
|
)
|
Other
|
12
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
Partners' capital - December 31, 2016
|
$
|
4,437,316
|
|
|
$
|
(25,593
|
)
|
|
$
|
286,700
|
|
|
$
|
4,698,423
|
|
See Notes to Consolidated Financial Statements
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Buckeye Partners, L.P. is a publicly traded Delaware master limited partnership (“MLP”), and its limited partnership units representing limited partner interests (“LP Units”) are listed on the New York Stock Exchange under the ticker symbol “BPL.” Buckeye GP LLC (“Buckeye GP”) is our general partner. As used in these Notes to Consolidated Financial Statements, “
we
,” “
us
,” “
our
” and “
Buckeye
” mean Buckeye Partners, L.P. and, where the context requires, includes our subsidiaries.
We were formed in 1986 and own and operate a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage, processing and marketing of liquid petroleum products. We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, with approximately
6,000
miles of pipeline. We also use our service expertise to operate and/or maintain third-party pipelines and perform certain engineering and construction services for our customers. Additionally, we are one of the largest independent terminalling and storage operators in the United States in terms of capacity available for service. Our terminal network comprises more than
120
liquid petroleum products terminals with aggregate storage capacity of over
115 million
barrels across our portfolio of pipelines, inland terminals and marine terminals located primarily in the East Coast, Midwest and Gulf Coast regions of the United States and in the Caribbean. Our network of marine terminals enables us to facilitate global flows of crude oil and refined petroleum products, offering our customers connectivity between supply areas and market centers through some of the world’s most important bulk storage and blending hubs. Our flagship marine terminal in The Bahamas, Buckeye Bahamas Hub Limited (“BBH”), formerly known as Bahamas Oil Refining Company International Limited (“BORCO”), is one of the largest marine crude oil and refined petroleum products storage facilities in the world and provides an array of logistics and blending services for the global flow of petroleum products. Our Gulf Coast regional hub, Buckeye Texas Partners LLC (“Buckeye Texas”), offers world-class marine terminalling, storage and processing capabilities. Our recent acquisition of an indirect
50%
equity interest in VTTI B.V. (“VTTI”) expands our international presence with premier storage and marine terminalling services for petroleum products predominantly located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore. We are also a wholesale distributor of refined petroleum products in areas served by our pipelines and terminals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We adhere to the following significant accounting policies in the preparation of our consolidated financial statements:
Basis of Presentation and Principles of Consolidation
The 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”). The consolidated financial statements include the accounts of our subsidiaries controlled by us and variable interest entities (“VIEs”) of which we are the primary beneficiary. A VIE is required to be consolidated by its primary beneficiary which is generally defined as the party who has (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits that could potentially be significant to the VIE. We evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary. Third party or affiliate ownership interests in our subsidiaries and consolidated VIEs are presented as noncontrolling interests. All intercompany transactions are eliminated in consolidation.
Asset Retirement Obligations
We regularly assess our legal obligations with respect to estimated retirements of certain of our long-lived assets to determine if an asset retirement obligation (“ARO”) exists. The fair value of a liability related to the retirement of long-lived assets is recorded at the time a regulatory or contractual obligation is incurred, including obligations to perform an asset retirement activity in which the timing or method of settlement are conditional on a future event that may or may not be within the control of the entity. If an ARO is identified and a liability is recorded, a corresponding asset is recorded concurrently and is depreciated over the remaining useful life of the asset. After the initial measurement, the liability is periodically adjusted for costs incurred or settled, accretion expense, and any revisions made to the assumptions related to the retirement costs. Generally, the fair value of the liability is determined based on estimates and assumptions related to: (i) future retirement costs; (ii) future inflation rates; and (iii) credit-adjusted risk-free interest rates.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our assets generally consist of terminals that we own and underground liquid petroleum products pipelines installed along rights-of-way acquired from land owners and related above-ground facilities. The significant majority of our rights-of-way agreements do not require the dismantling and removal of the pipelines and reclamation of the rights-of-way upon permanent removal of the pipelines from service. In addition, we assume substantially all of our common carrier properties operate indefinitely, as these assets generally serve in high-population and high-demand markets. Accordingly, other than with respect to facilities that are expected to be taken out of service, we have recorded no liabilities, or corresponding assets because the future dismantlement and removal dates of the majority of our assets, and the amount of any associated costs, are indeterminable. The ARO liability represents our best estimate of the costs to be incurred with information currently available and is based on certain assumptions, including: (i) timing of retirement of assets; (ii) methods of abandonment to be employed; and (iii) if applicable, our requirements under right-of-way agreements; therefore, it is likely that the ultimate costs to settle this liability will be different and such differences could be material.
The following table presents information regarding our AROs (in thousands):
|
|
|
|
|
ARO liability balance, January 1, 2015
|
$
|
3,663
|
|
Increase in ARO liability (1)
|
4,200
|
|
ARO settlements
|
(1,040
|
)
|
ARO liability balance, December 31, 2015 (2)
|
6,823
|
|
Decrease in ARO liability (3)
|
(117
|
)
|
ARO settlements
|
(723
|
)
|
ARO liability balance, December 31, 2016 (2)
|
$
|
5,983
|
|
____________________________
|
|
(1)
|
In
2015
, we recorded an ARO of
$4.2 million
in connection with the acquisition of a pipeline in Springfield, Massachusetts. See Note 3 for further information.
|
|
|
(2)
|
Amount includes
$2.6 million
and
$1.4 million
within “Accrued and other current liabilities” and
$3.4 million
and
$5.4 million
within “Other non-current liabilities” in the accompanying consolidated balance sheets as of
December 31, 2016
and
2015
, respectively.
|
|
|
(3)
|
Amount includes the net impact of revised estimated costs of abandonment for our Springfield and NORCO pipeline systems, as well as an ARO of
$1.1 million
recorded in connection with the removal of previously idled lines that run under the Delaware River.
|
Business Combinations
We allocate the total purchase price of a business combination to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, with the excess purchase price recorded as goodwill. For all material acquisitions, we engage an independent valuation specialist to assist us in determining the fair value of the assets acquired and liabilities assumed, including goodwill, based on recognized business valuation methodology. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than
one year
from the acquisition date, we will record any material adjustments to the initial estimate in the reporting period in which the adjustment amounts are determined based on new information obtained about facts and circumstances that existed as of the acquisition date. An income, market or cost valuation method may be utilized to estimate the fair value of the assets acquired or liabilities assumed in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset. Also, we expense any acquisition-related costs as incurred in connection with each business combination.
Business Segments
We operate and report in
three
business segments: (i) Domestic Pipelines & Terminals; (ii) Global Marine Terminals; and (iii) Merchant Services. See Note 25 for discussion of our business segments.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalization of Interest
Interest on borrowed funds is capitalized on projects during construction based on the approximate average interest rate of our debt. Interest capitalized for the years ended
December 31, 2016
,
2015
and
2014
was
$4.4 million
,
$21.3 million
and
$9.9 million
, respectively. The weighted average rates used to capitalize interest on borrowed funds was
4.6%
,
4.8%
and
4.9%
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Cash and Cash Equivalents
Cash equivalents represent all highly marketable securities with original maturities of three months or less. The carrying value of cash equivalents approximates fair value because of the short-term nature of these investments.
Comprehensive Income
Our comprehensive income is determined based on net income adjusted for unrealized gains and losses on derivative instruments for our cash flow hedging transactions, reclassification of derivative gains and losses to net income, recognition of costs related to our pension and post-retirement benefit plans and adjustments to the funded status of our pension and post-retirement benefit plans.
Concentration of Credit Risk and
Trade Receivables
Trade receivables of
$228.5 million
and
$199.5 million
as of
December 31, 2016
and
2015
, respectively, are primarily due from major oil and natural gas companies, national oil companies, refiners, marketing and trading companies, and commercial airlines. These concentrations of customers may affect our overall credit risk as these customers may be similarly affected by changes in economic, regulatory or other factors. We extend credit to customers and manage our credit risks through credit analysis and monitoring procedures, including credit approvals, credit limits and right of offset. Also, we manage our risk using collateral, such as letters of credit, prepayments, liens on customer assets and guarantees.
Trade receivables represent valid claims against non-affiliated customers and are recognized when products are sold or services are rendered. We record an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We review the adequacy of the allowance for doubtful accounts monthly by making judgments regarding future events and trends based on the: (i) customers’ historical relationship with us; (ii) customers’ current financial condition; and (iii) current and projected economic conditions.
The following table presents activity in the allowance for doubtful accounts at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of period
|
$
|
8,380
|
|
|
$
|
5,784
|
|
|
$
|
2,019
|
|
Charged to expense
|
2,143
|
|
|
2,983
|
|
|
3,985
|
|
Write-offs, net of recoveries
|
(2,563
|
)
|
|
(387
|
)
|
|
(220
|
)
|
Balance at end of period
|
$
|
7,960
|
|
|
$
|
8,380
|
|
|
$
|
5,784
|
|
Construction and Pipeline Relocation Receivables
Construction and pipeline relocation receivables represent valid claims against non-affiliated customers for services rendered in constructing or relocating pipelines and are recognized when services are rendered.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
Certain conditions may exist as of the date our consolidated financial statements are issued that may result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur. Our management, with input from legal counsel, assesses such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in proceedings, our management, with input from legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a loss has been incurred and the amount of liability can be estimated, then the estimated liability is accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. Actual results could vary from these estimates and judgments.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Cost of Product Sales
Cost of product sales relates to sales of refined petroleum products, consisting primarily of gasoline, propane, ethanol, biodiesel and middle distillates, such as heating oil, diesel fuel and kerosene, and fuel oil, as well as the effects of hedges of refined petroleum product acquisition costs and hedges of fixed-price contracts.
Debt Issuance Costs
Costs incurred upon the issuance of our debt instruments are capitalized and amortized over the life of the associated debt instrument on a straight-line basis, which approximates the effective interest method. If the debt instrument is retired before its scheduled maturity date, any remaining issuance costs associated with that debt instrument are expensed in the same period. Debt issuance costs related to our existing
$1.5 billion
revolving credit facility with SunTrust Bank, as administrative agent, and other lenders dated September 30, 2014 (the “Credit Facility”), are reported in “Other non-current assets”. Debt issuance costs related to our outstanding notes and our
$250.0 million
variable-rate term loan with SunTrust Bank, as administrative agent, and other lenders due September 30, 2019 (the “Term Loan”) are reported in “Long-term debt” as a direct deduction from the carrying amount of our outstanding notes.
Derivative Instruments
Derivatives are financial and physical instruments whose fair value is determined by changes in a specified benchmark such as interest rates or commodity prices. We use derivative instruments such as forwards, futures, swaps and other contracts to manage market price risks associated with inventories, firm commitments, interest rates and certain forecasted transactions. We do not engage in speculative trading activities.
We recognize these transactions on our consolidated balance sheets as assets and liabilities based on the instrument’s fair value. Changes in fair value of derivative instrument contracts are recognized in the current period in earnings unless specific hedge accounting criteria are met. If the derivative instrument is designated as a hedging instrument in a fair value hedge, gains and losses incurred on the instrument will be recorded in earnings to offset corresponding losses and gains on the hedged item. If the derivative instrument is designated as a hedging instrument in a cash flow hedge, gains and losses incurred on the instrument are recorded in other comprehensive income. Any gains or losses incurred on the derivative instrument that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings. Gains and losses on cash flow hedges are reclassified from accumulated other comprehensive income (“AOCI”) to earnings when the forecasted transaction occurs and affects net income or, as appropriate, over the economic life of the underlying asset or liability. Gains and losses related to a derivative instrument designated as a hedge of a forecasted transaction that is no longer likely to occur is immediately recognized in earnings. Physical forward contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To qualify as a hedge, the item to be hedged must expose us to risk and we must have an expectation that the related hedging instrument will be effective at reducing or mitigating that exposure. In accordance with the hedging requirements, we document all hedging relationships at inception and include a description of the risk management objective and strategy for undertaking the hedge, identification of the hedging instrument, the hedged item, the nature of the risk being hedged, the method for assessing effectiveness of the hedging instrument in offsetting the hedged risk and the method of measuring any ineffectiveness. We link all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on our consolidated balance sheets or to specific firm commitments or forecasted transactions. When an event or transaction occurs, such as the sale of hedged fuel inventory or the expiration of derivative contracts, we discontinue hedge accounting. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used in designated hedging relationships are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative instrument is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively. We measure ineffectiveness by comparing the change in fair value of the hedge instrument to the change in fair value of the hedged item. The time value component is excluded from our hedge assessment and reported directly in earnings.
Discontinued Operations
In December 2013, the Board of Directors of Buckeye GP (the “Board”) approved a plan to divest the natural gas storage facility and related assets that our former subsidiary, Lodi Gas Storage, L.L.C. (“Lodi”), owned and operated in Northern California. We refer to this group of assets as our Natural Gas Storage disposal group. The results of operations for our Natural Gas Storage disposal group have been segregated and presented as discontinued operations for all periods presented in these financial statements. On December 31, 2014, we completed the sale of our Natural Gas Storage disposal group and have reported the final working capital adjustments as discontinued operations in the first quarter of 2015. See Note 4 and Note 5 for additional information.
Earnings per Unit
Basic earnings per unit from continuing operations, which includes LP Units, is determined by dividing our income from continuing operations, after deducting the amount allocated to noncontrolling interests, by the weighted average units outstanding for the period. Diluted earnings per unit from continuing operations is calculated using the same methodology, except the weighted average units outstanding includes any dilutive effect of LP Unit option grants or grants under the 2013 Long-Term Incentive Plan of Buckeye Partners, L.P. (the “LTIP”). A similar calculation is performed for basic and diluted earnings per unit from discontinued operations, except loss from discontinued operations is divided by the weighted average units outstanding for the period.
Environmental Expenditures
We are subject to federal, state and local laws and regulations relating to the protection of the environment, which require us to remove or remedy the effect of the disposal or release of specified substances at our operating sites. We record environmental liabilities at a specific site when environmental assessments indicate remediation efforts are probable, and costs can be reasonably estimated based upon past experience, discussions with operating personnel, advice of outside engineering and consulting firms, discussion with legal counsel or current facts and circumstances. The estimates related to environmental matters are uncertain because: (i) estimated future expenditures are subject to cost fluctuations and change in estimated remediation period; (ii) unanticipated liabilities may arise; and (iii) changes in federal, state and local environmental laws and regulations may significantly change the extent of remediation.
Our estimated environmental remediation liabilities are not discounted to present value since the ultimate amount and timing of cash payments for such liabilities are not readily determinable. Expenditures to mitigate or prevent future environmental contamination are capitalized. We monitor the environmental liabilities regularly and record adjustments to our initial estimates, from time to time, to reflect changing circumstances and estimates based upon additional developments or information obtained in subsequent periods. We maintain insurance which may cover certain environmental expenditures. Recoveries of environmental remediation expenses from other parties are recorded when their receipt is deemed probable.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Investments
We account for investments in entities in which we do not exercise control, but have significant influence, 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. Excess investment is the amount by which the total investment exceeds the proportionate share of the book value of the net assets of the investment. Such excess investment not related to any specific accounts of the investee are treated as goodwill and not amortized. Amounts associated with specific accounts of the investee are amortized. We evaluate equity method investments for impairment whenever events or changes in circumstances indicate that there is an “other than temporary” loss in value of the investment. In the event that the loss in value of an investment is “other than temporary”, we record a charge to earnings to adjust the carrying value to fair value. Estimates of future cash flows that would be used to determine fair value include: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) probabilities assigned to different cash flow scenarios. A significant change in these underlying assumptions could result in an impairment charge. There were
no
impairments of our equity investments for the years ended
December 31, 2016
,
2015
or
2014
.
Estimates
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.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Our fair value estimates are based on either: (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. Recognized valuation techniques employ inputs such as product prices, operating costs, discount factors and business growth rates. These inputs may be either readily observable, corroborated by market data or generally unobservable. In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the extent possible. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements based on the observability of inputs used to estimate such fair values. The characteristics of fair value amounts classified within each level of the hierarchy are described as follows:
|
|
•
|
Level 1 inputs — unadjusted quoted prices which are available in active markets for identical, unrestricted assets or liabilities as of the reporting date;
|
|
|
•
|
Level 2 inputs — quoted market prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
|
|
|
•
|
Level 3 inputs — prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. These inputs are typically used in connection with internally developed valuation methodologies where management makes its best estimate of an instrument’s fair value.
|
We categorize our financial assets and liabilities using this hierarchy at each balance sheet reporting date.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency
Puerto Rico is a commonwealth country under the U.S., and thus uses the U.S. dollar as its official currency. The functional currency of our operations in BBH and St. Lucia is the U.S. dollar. Foreign exchange gains and losses arising from transactions denominated in a currency other than the U.S. dollar relate to a nominal amount of supply purchases and are included in “Other income (expense)” within the consolidated statements of operations. The effects of foreign currency transactions were not considered to be material for the years ended
December 31, 2016
,
2015
and
2014
.
Goodwill
Goodwill represents the excess of purchase price over fair value of net assets acquired. Our goodwill amounts are assessed for impairment: (i) on an annual basis on October 31st each year or (ii) on an interim basis if circumstances indicate it is more likely than not the fair value of a reporting unit is less than its fair value.
Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. A reporting unit is a business segment or one level below a business segment for which discrete financial information is available and regularly reviewed by segment management. Our reporting units are our business segments, with the exception of our Global Marine Terminals segment. Our reporting units to which goodwill has been allocated in our Global Marine Terminals segment consist of the following: (i) our operations in the Caribbean and New York Harbor; and (ii) our operations in Buckeye Texas.
We may perform a qualitative assessment to determine whether the fair value of our reporting units are more likely than not less than the carrying amount. If we believe the fair value is less than the carrying amount, we will perform step one of the two-step goodwill impairment test. The first step of the goodwill impairment test determines whether an impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment is indicated and the second step of the test is performed to measure the amount of impairment by comparing the implied fair value of the reporting unit goodwill to the carrying amount of that goodwill. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The estimate of the fair value of the reporting unit is determined using a combination of an expected present value of future cash flows and a market multiple valuation method. The present value of future cash flows is estimated using: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market multiple valuation method uses appropriate market multiples from comparable companies on the reporting unit’s earnings before interest, tax, depreciation and amortization. We evaluate industry and market conditions for purposes of weighting the income and market valuation approach.
Income Taxes
For U.S. federal income tax purposes, we and each of our subsidiaries, except for Buckeye Development & Logistics I LLC (“BDL”), are not taxable entities. Accordingly, our taxable income, except for BDL, is generally includable in the U.S. federal income tax returns of our individual partners and may differ significantly from taxable income reportable to our unitholders as a result of differences between the tax basis and financial reporting basis of certain assets and liabilities and other factors. In certain states in which we operate, our operating subsidiaries directly incur income-based state taxes, which are subject to examination by state taxing authorities.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, outside the continental U.S., our operations at BBH and St. Lucia are exempt from income taxes. Our operations at BBH are tax exempt by the Bahamian government pursuant to concessions granted under the Hawksbill Creek Agreement between the Government of The Bahamas and the Grand Bahama Port Authority. These concessions expired in May 2016 but have been extended through May 2036 by the Grand Bahama Investment Incentives Act, subject to an application process that must be completed by March 2017. Our operations in St. Lucia are exempt from income taxes and duties pursuant to concessions granted under the terms of a tax concession agreement effective in 2007 and in effect for a minimum of
50 years
. Our operations at the Yabucoa terminal are subject to income taxes within the Commonwealth of Puerto Rico. Buckeye Caribbean Terminals LLC (“Buckeye Caribbean”) files annual income tax returns with the Puerto Rico Treasury Department and in 2002, was granted partial exemption under the Tax Incentives Act of 1998 (the “Act”). Under the current terms of the grant, Buckeye Caribbean is subject to an income tax rate of
4%
to
7%
on industrial development income. The grant also provides additional exemptions as follows: (i)
90%
exempt from real and personal property taxes; (ii)
60%
exempt from municipal taxes on industrial development income; and (iii)
100%
exempt from excise taxes imposed under Subtitle C of the Puerto Rico Internal Revenue Code, to the extent provided in Section 6(c) of the Act. This favorable tax rate is scheduled to expire in 2022.
We recognize deferred tax assets and liabilities for temporary differences between the amounts of assets and liabilities measured for financial reporting purposes and federal income tax purposes. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective. We evaluate the need for a valuation allowance and consider all available positive and negative evidence, including projected operating income or losses for the foreseeable future, to determine the likelihood of realizing the benefits of deferred tax assets. If the value of the deferred tax assets exceeds the estimated future benefit, we record a valuation allowance to reduce our deferred tax assets to the amount of future benefit that is more likely than not to be realized. In the future, if the realization of the deferred tax assets should occur, a reduction to the valuation allowance related to the deferred tax assets would increase net income in the period such determination is made.
Our current and deferred income tax expense (benefit) was
$(0.2) million
and
$1.7 million
, respectively, for the year ended
December 31, 2016
,
$1.6 million
and
$(0.7) million
, respectively, for the year ended
December 31, 2015
and
$0.7 million
and
($0.2) million
, respectively, for the year ended
December 31, 2014
. We have
no
unrecognized tax benefits related to uncertain tax positions.
Intangible Assets
Intangible assets with finite useful lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets that have finite useful lives are amortized over their useful lives. Intangible assets include contracts and customer relationships. The fair values of these intangibles are based on the present value of cash flows attributable to the customer relationship or contract, which includes management’s estimates of revenue and operating expenses and costs relating to utilization of other assets to fulfill such contracts. The customer contracts are being amortized over their contractual lives with a range of
1
to
10 years
. For the customer relationships, we determine the recovery period based on historical customer attrition rates and management’s assumptions on future events, including customer demand, contract renewal, useful lives of related assets and market conditions. The customer relationships are being amortized over the estimated recovery period of
12
to
20 years
. When necessary, intangible assets’ useful lives are revised and the impact on amortization is reflected on a prospective basis.
Inventories
We generally maintain
two
types of inventory. Our Merchant Services segment principally maintains refined petroleum products inventory, consisting of gasoline, propane, ethanol, biodiesel and middle distillates, such as heating oil, diesel fuel and kerosene. Inventory is valued at the lower of weighted average cost or net realizable value, unless such inventories are hedged. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Hedged inventory is adjusted for the effects of applying fair value hedge accounting.
We also maintain, principally within our Domestic Pipelines & Terminals segment, an inventory of materials and supplies such as pipes, valves, pumps, electrical/electronic components, drag reducing agent and other miscellaneous items that are valued at the lower of weighted average cost or net realizable value.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Lived Assets
We assess the recoverability of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We determine the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the estimated undiscounted future cash flows exceeds the carrying amount, no impairment is necessary. If the carrying amount exceeds the sum of the undiscounted cash flows, an impairment charge is recognized based on the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell. Estimates of undiscounted future cash flows include: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) estimates of useful lives of the assets. Such estimates of future undiscounted net cash flows are highly subjective and are based on numerous assumptions about future operations and market conditions.
Net Income Allocation
We allocate the net income attributable to Buckeye to the LP Unitholders based on the weighted average LP Units outstanding during the period.
Noncontrolling Interests
The consolidated balance sheets and statements of operations include noncontrolling interests that relate primarily to Buckeye Texas, Buckeye Pipe Line Services Company (“Services Company”) and the Sabina crude butadiene pipeline (the “Sabina Pipeline”) that are not owned by Buckeye. In April 2015, our operating subsidiary, Buckeye Pipe Line Holdings, L.P. (“BPH”), purchased from Kealine LLC the remaining
10%
ownership interest in Buckeye Aviation (Memphis) LLC, formerly known as WesPac Pipelines - Memphis LLC. As a result of the acquisition, we now own
100%
of Buckeye Aviation (Memphis) LLC. See Note 3 for further information.
Pensions and Postretirement Benefits
Services Company sponsors a defined contribution plan, a defined benefit plan and the Employee Stock Ownership Plan (“ESOP”) that provide retirement benefits to certain regular full-time employees. Services Company also sponsors an unfunded post-retirement plan that provides health care and life insurance benefits for certain of its retirees. We develop pension and postretirement health care and life insurance benefits costs from actuarial valuations. The measurement of expenses and liabilities related to these plans is based on management’s assumptions related to future events, including discount rate, expected return on plan assets, rate of compensation increase, and health care cost trend rates. The actuarial assumptions that we use may differ from actual results due to changing market rates or other factors. These differences could affect the amount of pension and postretirement health care and life insurance benefit expense we have recorded or may record.
Property, Plant and Equipment
We record property, plant and equipment at its original acquisition cost. Property, plant and equipment consist primarily of pipelines, terminals, storage and processing facilities, jetties, subsea pipelines and docks, and pumping and station equipment. Generally, we depreciate property, plant and equipment based on the straight-line method over the estimated useful lives, except for land. See Note 9 for the depreciation life of our assets.
Additions to property, plant and equipment, including maintenance and expansion and cost reduction capital expenditures, are recorded at cost. Maintenance capital expenditures maintain and enhance the safety and integrity of our pipelines, terminals, storage and processing facilities, and related assets, and expansion and cost reduction capital expenditures expand the reach or capacity of those assets, to improve the efficiency of our operations and to pursue new business opportunities. We charge repairs to expense in the period incurred. The cost of property, plant and equipment sold or retired and the related depreciation, except for certain pipeline system assets, are removed from our consolidated balance sheet in the period of sale or disposition, and any resulting gain or loss is included in earnings. For our pipeline system assets, we generally charge the original cost of property sold or retired to accumulated depreciation and amortization, net of salvage and cost of removal. When a separately identifiable group of assets, such as a stand-alone pipeline system is sold, we will recognize a gain or loss in our consolidated statements of operations for the difference between the cash received and the net book value of the assets sold.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Developments
Goodwill Impairment
.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance 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 fair value of a reporting unit exceeds its carrying amount. 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.
Business Combinations
. In January 2017, the FASB issued guidance clarifying 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. The guidance must be applied using a prospective approach and is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, with early adoption permitted for specific transactions. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
Statement of Cash Flows
. In August 2016, the FASB issued guidance to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows, with the objective of reducing existing diversity in practice with respect to these items. The guidance must be applied retrospectively, and it is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
Equity-Based Compensation
. In March 2016, the FASB issued guidance to simplify several aspects of the accounting for employee equity-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows and classification of awards as liabilities or equity. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. Amendments related to the timing of when excess tax benefits are recognized, statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. Amendments related to the presentation of excess tax benefits on the statement of cash flows may be applied using either a prospective transition method or a retrospective transition method. We do not believe our adoption of this guidance will have a material impact on our consolidated financial statements or on our disclosures.
Leases
. In February 2016, the FASB issued guidance requiring lessees to recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. This update also requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The guidance must be applied using a modified retrospective approach and is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from Contracts with Customers
. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which amended existing accounting standards for revenue recognition, including industry-specific requirements, and provides entities with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue from contracts with customers when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Furthermore, additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The two permitted transition methods under ASU 2014-09 are the full retrospective method, which would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which the cumulative effect of applying the standard would be recognized at the date of initial application. In July 2015, the FASB deferred the effective date of ASU 2014-09 and is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted for annual and interim periods beginning after December 15, 2016. In 2016, the FASB issued accounting standards updates that amended several aspects of ASU 2014-09. We are currently evaluating the provisions of the standard and have formed an implementation work team consisting of representatives from across all of our business segments to evaluate and implement changes to business processes, systems and controls. In addition, we have implemented training on the new standard's revenue recognition model and are continuing our contract review and documentation. We expect to adopt this guidance on January 1, 2018, and we are currently evaluating the impact and the transition alternatives it will have on our consolidated financial statements.
Revenue Recognition
Domestic Pipelines & Terminals segment
.
Revenue from pipeline operations is comprised of tariffs and fees associated with the transportation of liquid petroleum products or crude oil at published tariffs as well as revenue associated with line leases for committed capacity on a particular system. 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 line leases is recognized ratably over the respective lease terms, regardless of whether the capacity is actually utilized, and is subject to take-or-pay arrangements. All pipeline tariff and fee revenue is based upon actual volumes and rates. As is common in the industry, our tariffs incorporate loss allocation or loss allowance factors that are intended to, among other things, offset losses due to evaporation, measurement and other product losses in transit. We value the variance of allowance volumes to actual losses at the estimated net realizable value at the time the variance occurred, and the result is recorded as either an increase or decrease to transportation and other service revenue. In addition, we have certain agreements that require counterparties to ship a minimum volume over an agreed-upon period. Revenue pursuant to such agreements is recognized at the earlier of when the volume is shipped or when the counterparty’s ability to meet the minimum volume commitment has expired.
Revenue from terminalling and storage operations is recognized as services are performed. Storage and terminalling revenue include storage fees, which are generated when we provide storage capacity, and terminalling or throughput fees, which are generated when we receive liquid petroleum products from one connecting pipeline and redeliver such products to another connecting carrier or to customers through a truck-loading rack. We generate revenue through a combination of month-to-month and multi-year storage capacity and terminalling service arrangements. Storage fees resulting from short-term and long-term contracts are typically recognized in revenue ratably over the term of the contract, regardless of the actual storage capacity utilized. Terminalling fees are recognized as the refined petroleum product or crude oil exits the terminal and is delivered to a connecting carrier, third-party terminal or a customer through a truck-loading rack. 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 exits the terminal or when the counterparty’s ability to meet the minimum volume commitment has expired. Butane blending revenues are recognized as blending activities are completed and include the change in the fair value of financial derivative instruments used to manage the commodity price risk associated with narrowing gasoline-to-butane pricing spreads.
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.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Global Marine Terminals segment
.
Revenue from terminalling and storage operations is recognized as the services are performed. Storage and terminalling revenue includes storage fees, which are generated when we provide storage capacity, and terminalling or throughput fees, which are generated when we receive liquid petroleum products from sea going vessels, pipelines, trucks, or rail and redeliver such products to customers through marine applications, truck-loading racks, and pipelines. We generate revenue through a combination of storage capacity, terminalling and tolling service arrangements. Storage fees resulting from short-term and long-term contracts are typically recognized in revenue ratably over the term of the contract, regardless of the actual storage capacity utilized. Terminalling fees are recognized as the liquid petroleum product exits the terminal and is delivered to a connecting carrier, third-party terminal or a customer through a truck-loading rack or vessel. Tolling agreement fees are recognized ratably over the term of the contract and are based on minimum volume and product specification requirements. In addition, we have 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 exits the terminal or when the counterparty’s ability to meet the minimum volume has expired. Revenue from other ancillary services is recognized in the accounting period in which the services are rendered.
Merchant Services segment
. Revenue from the sale of petroleum products, including fuel oil, 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. We enter into exchange contracts and matching buy/sell arrangements whereby we agree to deliver a particular quantity and quality of crude oil or refined products at a specified location and date to a particular counterparty and to receive from the same counterparty the same or similar commodity at a specified location on the same or another specified date. The exchange receipts and deliveries are nonmonetary transactions, with the exception of associated grade or location differentials that are settled in cash. The matching buy/sell purchase and sale transactions are settled in cash. Both exchange and matching buy/sell transactions are accounted for as exchanges of inventory, and pricing differentials are recorded in “Product sales” revenues. The exchange transactions are recognized at the carrying amount of the inventory transferred.
Unit-Based Compensation
We award unit-based compensation to employees and directors primarily under the LTIP. All unit-based payments to employees under the LTIP, including grants of phantom units and performance units, are recognized in our consolidated statements of operations based on their fair values. The fair values of both the performance unit and phantom unit grants are based on the average market price of our LP Units on the date of grant as adjusted for certain market-based conditions. Compensation expense equal to the fair value of those performance unit and phantom unit awards that are expected to vest is estimated and recorded over the period the grants are earned, which is the vesting period. Compensation expense estimates are updated periodically. The vesting of the performance unit awards is also contingent upon the attainment of predetermined performance goals. Depending on the estimated probability of attainment of those performance goals, the compensation expense recognized related to the awards could increase or decrease over the remaining vesting period.
Variable Interest Entities
We evaluate our financial interests in business enterprises to determine if they represent VIEs of which we are the primary beneficiary. If such criteria are met (as discussed above in “Basis of Presentation and Principles of Consolidation”), we reflect these entities as consolidated subsidiaries. There were no changes to the entities consolidated for the year ended
December 31, 2016
.
Buckeye Texas and Sabina Pipeline are VIEs of which we are the primary beneficiary. We own an
80%
interest in Buckeye Texas (see Note 3 for more information) and also own a
63%
interest in Sabina Pipeline. Third party or affiliate ownership interests in our consolidated VIEs are presented as noncontrolling interests.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND DISPOSITION
Business Combinations
2016 Transaction
Indianola terminalling facility acquisition
In August 2016, we acquired a liquid petroleum products terminalling facility in Indianola, Pennsylvania from Kinder Morgan Transmix Company, LLC for
$26.0 million
. The operations of these assets are reported in our Domestic Pipelines & Terminals segment. The acquisition cost has been allocated on a preliminary basis to assets acquired based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represent expected synergies from combining the acquired assets with our existing operations. Fair values have been developed using recognized business valuation techniques. The estimates of fair value reflected as of
December 31, 2016
are subject to change pending final valuation analysis. The purchase price has been allocated to tangible and intangible assets acquired as follows (in thousands):
|
|
|
|
|
Inventories
|
$
|
1,554
|
|
Property, plant and equipment
|
16,713
|
|
Goodwill
|
7,758
|
|
Allocated purchase price
|
$
|
26,025
|
|
Adjustments to the preliminary purchase price allocation during the fourth quarter of 2016 resulted in a decrease to property, plant and equipment of
$3.5 million
, an increase to inventories of
$0.3 million
, an increase to goodwill of
$3.4 million
, and an increase to the overall purchase price of
$0.1 million
. These adjustments resulted in a
$0.2 million
increase to operating expenses as well as a nominal decrease to depreciation expense and accumulated depreciation.
Unaudited Pro forma Financial Results for the Indianola terminalling facility acquisition
Our consolidated statements of operations do not include earnings from the terminalling facility prior to August 4, 2016, the effective acquisition date of these assets. The preparation of unaudited pro forma financial information for the terminalling facility is impracticable due to the fact that meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the year ended
December 31, 2016
.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2015 Transactions
Pennsauken pipeline acquisition
In December 2015, we acquired a pipeline and associated tanks and other infrastructure in Pennsauken, New Jersey for
$5.3 million
. The operations of these assets are reported in our Domestic Pipelines & Terminals segment. The acquisition cost has been allocated to assets acquired 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. The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):
|
|
|
|
|
Property, plant and equipment
|
7,159
|
|
Goodwill
|
500
|
|
Environmental liabilities
|
(2,372
|
)
|
Allocated purchase price
|
$
|
5,287
|
|
We finalized the purchase price allocation during the third quarter of 2016. Adjustments to the preliminary purchase price allocation resulted in an increase to property, plant and equipment of
$1.9 million
, with a corresponding decrease to goodwill. The change to the preliminary amount resulted in a nominal increase to depreciation expense and accumulated depreciation.
Unaudited Pro forma Financial Results for the Pennsauken pipeline acquisition
Our consolidated statements of operations do not include earnings from the pipeline and associated tanks and other infrastructure prior to December 10, 2015, the effective acquisition date of these assets. The preparation of unaudited pro forma financial information for the pipeline and associated tanks and other infrastructure is impracticable due to the fact that meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the year ended December 31, 2015.
Springfield pipeline and terminal acquisitions
In March and May 2015, we acquired a terminal and pipeline in Springfield, Massachusetts from ExxonMobil Oil Corporation (“ExxonMobil”) for an aggregate
$7.7 million
. The operations of these assets are reported in our Domestic Pipelines & Terminals segment. The acquisition cost has been allocated to assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represents both expected synergies from combining the acquired assets with our existing operations and the economic value attributable to optimizing, modernizing and commercializing the asset from this acquisition. Fair values have been developed using recognized business valuation techniques. We finalized the purchase price allocation during the first quarter of 2016. The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):
|
|
|
|
|
Property, plant and equipment
|
$
|
4,040
|
|
Goodwill
|
8,165
|
|
Asset retirement obligation
|
(4,200
|
)
|
Environmental liabilities
|
(293
|
)
|
Allocated purchase price
|
$
|
7,712
|
|
Unaudited Pro forma Financial Results for the Springfield pipeline and terminal acquisition
Our consolidated statements of operations do not include earnings from the pipeline and terminal acquired from ExxonMobil prior to March 31, 2015 and May 5, 2015, the effective acquisition dates of the terminal and pipeline acquired from ExxonMobil, respectively. The preparation of unaudited pro forma financial information for the terminal and pipeline acquired from ExxonMobil is impracticable due to the fact that ExxonMobil historically operated the assets as part of its integrated distribution network and, therefore, meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the year ended December 31, 2015.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014 Transaction
Buckeye Texas Partners Transaction
In September 2014, we acquired an
80%
interest in Buckeye Texas, a newly-formed entity, for
$816.1 million
, net of cash acquired of
$15.0 million
and working capital and capital expenditure adjustments of
$4.9 million
required by the contribution agreement with Trafigura Corpus Christi Holdings Inc. (the “Buckeye Texas Partners Transaction”). Buckeye Texas and its subsidiaries, which are owned jointly with Trafigura Trading LLC, formerly known as Trafigura AG (“Trafigura”), own and operate a vertically integrated system of midstream assets, which include
five
vessel berths, including
three
deep-water docks,
two
25,000
barrels per day condensate splitters and approximately
6.7 million
barrels of liquid petroleum products storage capacity, including a refrigerated and compressed liquefied petroleum gas (“LPG”) storage complex, along with rail and truck loading/unloading capabilities. The platform also comprises
three
field gathering facilities with associated storage in the Eagle Ford play and pipeline connectivity that allow Buckeye Texas to move Eagle Ford play crude oil and condensate production directly to the terminalling complex in Corpus Christi. These assets form an integrated system with connectivity from the production in the field to the marine terminal infrastructure and the processing complex in Corpus Christi. At the time of acquisition most of the significant assets mentioned were under construction. Construction of the significant assets and commissioning activities were completed in late November 2015. The initial build-out of these facilities was funded through additional partnership contributions by us and Trafigura based on our respective ownership interests. Concurrent with this acquisition, we entered into multi-year storage and throughput commitments with Trafigura that support substantially all the capacity and cash flows expected from these assets. At the time of acquisition, we concluded Buckeye Texas is a VIE of which we are the primary beneficiary. In making this conclusion, we evaluated the activities that significantly impact the economics of the VIE, including our role to perform all services reasonably required to construct, operate and maintain the assets. We consolidated Buckeye Texas due to our conclusion that Buckeye Texas is a VIE of which we are the primary beneficiary. The operations of these assets are reported in the Global Marine Terminals segment.
The acquisition cost has been allocated to assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with amounts exceeding the fair value recorded as goodwill, which represents both expected synergies from combining the Buckeye Texas operations with our existing operations and the economic value attributable to future expansion projects resulting from this acquisition. Fair values have been developed using recognized business valuation techniques. The purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed as follows (in thousands):
|
|
|
|
|
Current assets
|
$
|
23,061
|
|
Property, plant and equipment
|
527,390
|
|
Intangible assets
|
376,000
|
|
Goodwill
|
167,379
|
|
Current liabilities
|
(54,943
|
)
|
Noncontrolling interests
|
(207,778
|
)
|
Allocated purchase price
|
$
|
831,109
|
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro forma Financial Results for the Buckeye Texas Partners Transaction
Our consolidated statements of operations do not include earnings from the assets acquired from Trafigura prior to September 16, 2014, the effective acquisition date of the Buckeye Texas Partners Transaction. The preparation of unaudited pro forma financial information for the Buckeye Texas Partners Transaction is impracticable due to the fact that the construction of significant assets and commissioning activities were completed in late November 2015, therefore, meaningful historical revenue information is not available. The revenues and earnings impact of this acquisition was not significant to our financial results for the year ended December 31, 2014, as significant assets were still under construction.
Equity Transactions
VTTI Acquisition
In January 2017, we acquired an indirect
50%
equity interest in VTTI for cash consideration of
$1.15 billion
(the “VTTI Acquisition”). VTTI will be owned jointly with Vitol S.A. (“Vitol”). VTTI is one of the largest independent global marine terminal businesses that, through its subsidiaries and partnership interests, owns and operates approximately
57 million
barrels of petroleum products storage across
14
terminals located on
five
continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore, and offer world-class storage and marine terminalling services for refined petroleum products, liquid petroleum gas and crude oil. We and VIP Terminals Finance B.V., a subsidiary of Vitol, have equal board representation and voting rights in the VTTI joint venture.
Acquisition of Remaining Interest in WesPac Pipelines - Memphis LLC
In April 2015, our operating subsidiary, BPH, purchased from Kealine LLC for
$10.0 million
the remaining
10%
ownership interest in Buckeye Aviation (Memphis) LLC, formerly known as WesPac Pipelines - Memphis LLC (“Buckeye Memphis”), which was accounted for as an equity transaction. As a result of the acquisition, we now own
100%
of Buckeye Memphis. Previously, in April 2014, BPH had purchased an additional
10%
ownership interest in Buckeye Memphis for
$9.5 million
, increasing our ownership interest in Buckeye Memphis from
80%
to
90%
. The acquisitions were accounted for as equity transactions since BPH retained controlling interest in Buckeye Memphis.
Disposition
In December 2014, we completed the sale of all of the outstanding limited liability company interests in Lodi, our Natural Gas Storage business, to Brookfield Infrastructure and its institutional partners (“Brookfield”) for
$102.6 million
in cash, net of expenses and working capital adjustments of
$2.4 million
. Refer to Note 4 and Note 5 for further information.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS
In December 2013, the Board approved a plan to divest our Natural Gas Storage disposal group. In December 2014, we completed the sale of our Natural Gas Storage disposal group for
$102.6 million
in cash, net of expenses and working capital adjustments of
$2.4 million
. We reported the final working capital adjustments recorded in the first quarter of 2015 as discontinued operations for the year ended December 31, 2015 and we have reported the results of operations for the disposal group as discontinued operations for the year ended December 31, 2014. We recorded asset impairment charges of
$23.4 million
within “Loss from discontinued operations” on our consolidated statements of operations for the year ended December 31, 2014. See Note 5 and Note 18 for further discussion.
The following table summarizes the results from discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2014
|
Revenue
|
$
|
—
|
|
|
$
|
25,862
|
|
Loss from discontinued operations
|
(857
|
)
|
|
(59,641
|
)
|
5. ASSET IMPAIRMENTS
Natural Gas Storage Disposal Group
In July 2014, we signed a purchase and sale agreement to sell our Natural Gas Storage disposal group. As a result of the execution of the purchase and sale agreement, subsequent changes in the carrying value of the net assets of our Natural Gas Storage disposal group, and the completed sale in December 2014 (as discussed in Note 4), we recorded non-cash asset impairment charges of
$23.4 million
during the year ended December 31, 2014. We recorded these asset impairment charges within “Loss from discontinued operations” on our consolidated statements of operations for the year ended December 31, 2014. Refer to Note 18 for further discussion.
6. COMMITMENTS AND CONTINGENCIES
Claims and Legal Proceedings
In the ordinary course of business, we are involved in various claims and legal proceedings, some of which are covered by insurance. We are generally unable to predict the timing or outcome of these claims and proceedings. Based upon our evaluation of existing claims and proceedings and the probability of losses relating to such contingencies, we have accrued certain amounts relating to such claims and proceedings, none of which are considered material.
Environmental Contingencies
We recorded operating expenses, net of recoveries, of
$8.2 million
,
$6.2 million
and
$3.0 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively, related to environmental remediation liabilities unrelated to claims and legal proceedings. As of
December 31, 2016
and
2015
, we recorded environmental remediation liabilities of
$44.3 million
and
$48.0 million
, respectively. See Notes 13 and 15 for further information. 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
December 31, 2016
and
2015
, we had
$7.2 million
and
$10.9 million
, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third-party claims.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases —Where We are Lessee
We lease certain property, plant and equipment under noncancelable and cancelable operating leases. Rental expense is charged to operating expenses on a straight-line basis over the period of expected benefit. Contingent rental payments are expensed as incurred. Total rental expense for the years ended
December 31, 2016
,
2015
and
2014
was
$32.8 million
,
$31.0 million
and
$26.9 million
, respectively. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Space
and Other
|
|
Equipment (1)
|
|
Land
Leases (2)
|
|
Total
|
2017
|
$
|
3,930
|
|
|
$
|
9,919
|
|
|
$
|
2,648
|
|
|
$
|
16,497
|
|
2018
|
3,075
|
|
|
9,027
|
|
|
2,648
|
|
|
14,750
|
|
2019
|
2,869
|
|
|
8,943
|
|
|
2,648
|
|
|
14,460
|
|
2020
|
2,947
|
|
|
9,135
|
|
|
2,398
|
|
|
14,480
|
|
2021
|
2,596
|
|
|
9,339
|
|
|
2,398
|
|
|
14,333
|
|
Thereafter
|
756
|
|
|
46,492
|
|
|
86,507
|
|
|
133,755
|
|
Total
|
$
|
16,173
|
|
|
$
|
92,855
|
|
|
$
|
99,247
|
|
|
$
|
208,275
|
|
____________________________
|
|
(1)
|
Includes BBH facility leases for tugboats and a barge in our Global Marine Terminals segment.
|
|
|
(2)
|
Includes leases for properties in connection with both the jetty and inland dock operations in the Global Marine Terminals segment.
|
Additionally, our rights-of-way payments for the years ended
December 31, 2016
,
2015
and
2014
were
$7.1 million
,
$7.0 million
and
$6.5 million
, respectively; and are subject to an annual escalation for the remaining life of all pipelines and terminals.
7. INVENTORIES
Our inventory amounts were as follows at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Liquid petroleum products (1)
|
$
|
337,424
|
|
|
$
|
174,232
|
|
Materials and supplies
|
19,379
|
|
|
18,760
|
|
Total inventories
|
$
|
356,803
|
|
|
$
|
192,992
|
|
____________________________
|
|
(1)
|
Ending inventory was
198.2 million
and
153.3 million
gallons of liquid petroleum products at
December 31, 2016
and
2015
, respectively.
|
At
December 31, 2016
and
2015
, approximately
88%
and
89%
of our liquid petroleum products inventory volumes were designated in a fair value hedge relationship, respectively. Because we generally designate inventory as a hedged item upon purchase, hedged inventory is valued at current market prices with the change in value of the inventory reflected in our consolidated statements of operations. Our inventory volumes that are not designated as the hedged item in a fair value hedge relationship are economically hedged to reduce our commodity price exposure. Inventory not accounted for as a fair value hedge is accounted for at the lower of weighted average cost method or net realizable value.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Prepaid insurance
|
$
|
7,609
|
|
|
$
|
12,779
|
|
Margin deposits
|
43,912
|
|
|
—
|
|
Unbilled revenue
|
1,615
|
|
|
4,047
|
|
Prepaid taxes
|
7,357
|
|
|
4,842
|
|
Vendor prepayments
|
1,863
|
|
|
97
|
|
Escrow deposits
|
10
|
|
|
21,360
|
|
Other
|
4,170
|
|
|
4,946
|
|
Total prepaid and other current assets
|
$
|
66,536
|
|
|
$
|
48,071
|
|
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful
Lives (Years)
|
|
December 31,
|
|
|
2016
|
|
2015
|
Land
|
N/A
|
|
$
|
670,437
|
|
|
$
|
669,130
|
|
Rights-of-way
|
(1)
|
|
107,448
|
|
|
107,293
|
|
Buildings and leasehold improvements
|
13-50
|
|
254,421
|
|
|
235,872
|
|
Jetties, subsea pipeline and docks
|
20-50
|
|
629,316
|
|
|
629,677
|
|
Gas storage facility
|
25-50
|
|
2,349
|
|
|
2,349
|
|
Pipelines and terminals
|
7-50
|
|
4,968,574
|
|
|
4,616,080
|
|
Vehicles, equipment and office furnishings
|
3-20
|
|
130,247
|
|
|
117,494
|
|
Processing facilities
|
30-50
|
|
598,837
|
|
|
557,853
|
|
Construction in progress
|
N/A
|
|
162,145
|
|
|
141,153
|
|
Total property, plant and equipment
|
|
|
7,523,774
|
|
|
7,076,901
|
|
Less: Accumulated depreciation
|
|
|
(1,040,492
|
)
|
|
(874,820
|
)
|
Total property, plant and equipment, net
|
|
|
$
|
6,483,282
|
|
|
$
|
6,202,081
|
|
____________________________
|
|
(1)
|
Rights-of-way assets are depreciated over the useful life of the related pipeline assets.
|
Depreciation expense was
$186.6 million
,
$158.7 million
and
$148.4 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EQUITY INVESTMENTS
The following table presents our equity investments, all included within the Domestic Pipelines & Terminals segment, at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Ownership
|
|
2016
|
|
2015
|
West Shore Pipe Line Company
|
34.6%
|
|
$
|
66,065
|
|
|
$
|
60,441
|
|
Muskegon Pipeline LLC
|
40.0%
|
|
13,523
|
|
|
13,599
|
|
Transport4, LLC
|
25.0%
|
|
474
|
|
|
459
|
|
South Portland Terminal LLC
|
50.0%
|
|
9,502
|
|
|
9,629
|
|
Total equity investments
|
|
|
$
|
89,564
|
|
|
$
|
84,128
|
|
The following table presents earnings from equity investments for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
West Shore Pipe Line Company
|
$
|
7,647
|
|
|
$
|
7,070
|
|
|
$
|
8,621
|
|
Muskegon Pipeline LLC
|
2,002
|
|
|
(2,876
|
)
|
|
1,059
|
|
Transport4, LLC
|
765
|
|
|
606
|
|
|
470
|
|
South Portland Terminal LLC
|
1,122
|
|
|
1,581
|
|
|
1,115
|
|
Total earnings from equity investments
|
$
|
11,536
|
|
|
$
|
6,381
|
|
|
$
|
11,265
|
|
Summarized combined financial information for our equity method investments are as follows for the periods indicated (amounts represent
100%
of investee financial information in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
BALANCE SHEET DATA:
|
|
|
|
|
|
Current assets
|
$
|
39,214
|
|
|
$
|
26,910
|
|
Noncurrent assets
|
134,937
|
|
|
126,456
|
|
Total assets
|
$
|
174,151
|
|
|
$
|
153,366
|
|
|
|
|
|
Current liabilities
|
$
|
15,790
|
|
|
$
|
11,474
|
|
Other liabilities
|
44,224
|
|
|
43,344
|
|
Combined equity
|
114,137
|
|
|
98,548
|
|
Total liabilities and combined equity
|
$
|
174,151
|
|
|
$
|
153,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
INCOME STATEMENT DATA:
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
87,434
|
|
|
$
|
92,501
|
|
|
$
|
88,417
|
|
Costs and expenses
|
(41,502
|
)
|
|
(56,906
|
)
|
|
(48,563
|
)
|
Non-operating expense
|
(14,990
|
)
|
|
(15,903
|
)
|
|
(13,826
|
)
|
Net income
|
$
|
30,942
|
|
|
$
|
19,692
|
|
|
$
|
26,028
|
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill by segment are as follows at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Pipelines
& Terminals
|
|
Global
Marine
Terminals
|
|
Merchant
Services
|
|
Total
|
January 1, 2015
|
$
|
279,280
|
|
|
$
|
709,596
|
|
|
$
|
4,499
|
|
|
$
|
993,375
|
|
Acquisition (1)
|
10,626
|
|
|
—
|
|
|
—
|
|
|
10,626
|
|
Purchase price adjustments (2)
|
—
|
|
|
(5,253
|
)
|
|
—
|
|
|
(5,253
|
)
|
December 31, 2015
|
289,906
|
|
|
704,343
|
|
|
4,499
|
|
|
998,748
|
|
Acquisition (1)
|
7,758
|
|
|
—
|
|
|
—
|
|
|
7,758
|
|
Purchase price adjustments (2)
|
(1,961
|
)
|
|
—
|
|
|
—
|
|
|
(1,961
|
)
|
December 31, 2016
|
$
|
295,703
|
|
|
$
|
704,343
|
|
|
$
|
4,499
|
|
|
$
|
1,004,545
|
|
____________________________
|
|
(1)
|
See Note 3 for discussion of our acquisitions.
|
|
|
(2)
|
Goodwill is recorded at the acquisition date based on preliminary fair value information. Subsequent to the acquisition but not to exceed
one year
from the acquisition date, we record any material adjustments to the initial estimate in the reporting period in which the adjustment amounts are determined based on new information obtained about facts and circumstances that existed as of the acquisition date. During 2015, we recorded adjustments to the purchase price allocations for the Buckeye Texas Partners Transaction. During 2016, we recorded adjustments to the purchase price allocations for the Pennsauken pipeline acquisition and Springfield pipeline and terminal acquisitions. See Note 3 for discussion of our acquisitions.
|
For our annual goodwill impairment tests as of October 31,
2016
and
2015
, we performed quantitative assessments to determine the fair value of each of our reporting units. Based on such calculations, each reporting unit’s fair value was in excess of its carrying value. Therefore, we did not record any goodwill impairment for the years ended
December 31, 2016
or
2015
.
Intangible Assets
Intangible assets consist of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Customer relationships
|
$
|
231,620
|
|
|
$
|
231,620
|
|
Accumulated amortization
|
(83,187
|
)
|
|
(70,349
|
)
|
Net carrying amount
|
148,433
|
|
|
161,271
|
|
|
|
|
|
Customer contracts
|
384,666
|
|
|
395,690
|
|
Accumulated amortization
|
(109,796
|
)
|
|
(65,589
|
)
|
Net carrying amount
|
274,870
|
|
|
330,101
|
|
Total intangible assets, net
|
$
|
423,303
|
|
|
$
|
491,372
|
|
For the years ended
December 31, 2016
,
2015
and
2014
, amortization expense related to intangible assets was
$68.1 million
,
$62.6 million
and
$47.4 million
, respectively. Amortization expense related to intangible assets is expected to be
$66.3 million
for
2017
,
$65.4 million
for
2018
,
$64.6 million
for
2019
,
$64.9 million
for
2020
and
$61.1 million
for
2021
.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Debt issuance costs, net
|
$
|
3,794
|
|
|
$
|
4,150
|
|
Insurance receivables related to environmental remediation reserves
|
3,635
|
|
|
4,554
|
|
BBH jetty insurance receivable
|
6,827
|
|
|
6,433
|
|
Derivative assets
|
62,768
|
|
|
1,057
|
|
Other
|
24,488
|
|
|
25,208
|
|
Total other non-current assets
|
$
|
101,512
|
|
|
$
|
41,402
|
|
13. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Taxes - other than income
|
$
|
34,052
|
|
|
$
|
28,183
|
|
Accrued employee benefit liabilities
|
6,849
|
|
|
6,710
|
|
Accrued environmental remediation liabilities
|
8,410
|
|
|
9,164
|
|
Interest payable
|
59,508
|
|
|
56,066
|
|
Unearned revenue
|
32,183
|
|
|
27,365
|
|
Compensation and vacation
|
31,693
|
|
|
28,942
|
|
Accrued capital expenditures
|
45,664
|
|
|
79,060
|
|
Margin deposits
|
—
|
|
|
36,108
|
|
Unfavorable storage contracts (1)
|
—
|
|
|
5,979
|
|
ARO
|
2,543
|
|
|
1,360
|
|
Litigation contingency accrual (2)
|
858
|
|
|
2,390
|
|
Expense accruals - other
|
20,764
|
|
|
7,429
|
|
Other
|
23,369
|
|
|
20,864
|
|
Total accrued and other current liabilities
|
$
|
265,893
|
|
|
$
|
309,620
|
|
____________________________
|
|
(1)
|
Amounts relate to the unfavorable storage contracts acquired in connection with the BBH acquisition in 2011. We recognized
$6.0 million
and
$11.1 million
of revenue during the years ended
December 31, 2016
and
2015
, respectively.
|
|
|
(2)
|
Amount relates to a contingent liability associated with the Federal Energy Regulatory Commission (“FERC”) litigation accrual.
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LONG-TERM DEBT
Long-term debt consists of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
5.125% Notes due July 1, 2017 (1)
|
$
|
125,000
|
|
|
$
|
125,000
|
|
6.050% Notes due January 15, 2018 (1)
|
300,000
|
|
|
300,000
|
|
2.650% Notes due November 15, 2018 (1)
|
400,000
|
|
|
400,000
|
|
5.500% Notes due August 15, 2019 (1)
|
275,000
|
|
|
275,000
|
|
4.875% Notes due February 1, 2021 (1)
|
650,000
|
|
|
650,000
|
|
4.150% Notes due July 1, 2023 (1)
|
500,000
|
|
|
500,000
|
|
4.350% Notes due October 15, 2024 (1)
|
300,000
|
|
|
300,000
|
|
3.950% Notes due December 1, 2026 (1)
|
600,000
|
|
|
—
|
|
6.750% Notes due August 15, 2033 (1)
|
150,000
|
|
|
150,000
|
|
5.850% Notes due November 15, 2043 (1)
|
400,000
|
|
|
400,000
|
|
5.600% Notes due October 15, 2044 (1)
|
300,000
|
|
|
300,000
|
|
Term Loan due September 30, 2019
|
250,000
|
|
|
—
|
|
Credit Facility due September 30, 2021
|
—
|
|
|
472,488
|
|
Unamortized discounts and debt issuance costs
|
(32,305
|
)
|
|
(28,176
|
)
|
Total debt
|
4,217,695
|
|
|
3,844,312
|
|
Less: Current portion of line of credit (2)
|
—
|
|
|
(111,488
|
)
|
Total long-term debt
|
$
|
4,217,695
|
|
|
$
|
3,732,824
|
|
____________________________
|
|
(1)
|
We make semi-annual interest payments on these notes based on the rates noted above with the principal balances outstanding to be paid on or before the due dates as shown above.
|
|
|
(2)
|
The line of credit is classified as a current liability in our consolidated balance sheets as related funds are used to finance the Buckeye Merchant Service Companies’ current working capital needs.
|
The following table presents the scheduled maturities of principal amounts of our debt obligations for the next
five years
and in total thereafter (in thousands):
|
|
|
|
|
|
Years Ending
|
|
December 31,
|
2017
|
$
|
125,000
|
|
2018
|
700,000
|
|
2019
|
525,000
|
|
2020
|
—
|
|
2021
|
650,000
|
|
Thereafter
|
2,250,000
|
|
Total
|
$
|
4,250,000
|
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Facility
In September 2014, Buckeye and its indirect wholly-owned subsidiaries, Buckeye Energy Services LLC (“BES”), Buckeye West Indies Holdings LP (“BWI”) and Buckeye Caribbean Terminals LLC (“BCT”), as borrowers, modified and extended (through a new credit agreement) our existing revolving Credit Facility with SunTrust Bank, as administrative agent, and other lenders to provide a total borrowing capacity of
$1.5 billion
, dated September 30, 2014 of which BES, BWI and BCT, collectively the Buckeye Merchant Service Companies (“BMSC”), share a sublimit of
$500.0 million
. The Credit Facility's maturity date was September 30, 2019, with an option to extend the term for up to
two
one
-year periods and a
$500.0 million
accordion option to increase the commitments, with the consent of the lenders.
In December 2015, the Credit Facility's maturity date was extended by
one year
to September 30, 2020, resulting in a remaining option to extend the term for
one
additional year. At the time of the transaction, we had
$3.4 million
of remaining unamortized deferred financing costs, and we incurred additional debt issuance costs of
$0.8 million
in connection with the extension of the Credit Facility.
In September 2016, Buckeye and BMSC exercised their remaining option with consenting lenders to extend
$1.4 billion
of our existing
$1.5 billion
revolving credit facility with SunTrust Bank by
one year
to September 30, 2021. At the time of the transaction, we had
$3.4 million
of remaining unamortized deferred financing costs, and we incurred additional debt issuance costs of
$0.7 million
in connection with the extension of the Credit Facility. These amounts are included in “Other non-current assets” and are being amortized over the revised term of the agreement.
Under the Credit Facility, interest accrues on advances at the London Interbank Offered Rate (“LIBOR”) rate or a base rate plus an applicable margin based on the election of the applicable borrower for each interest period. The issuing fees for all letters of credit are also based on an applicable margin. The applicable margin used in connection with interest rates and fees is based on the credit ratings assigned to our senior unsecured long-term debt securities. The applicable margin for LIBOR rate loans, swing line loans, and letter of credit fees ranges from
1.0%
to
1.75%
and the applicable margin for base rate loans ranges from
0%
to
0.75%
. Buckeye and BMSC will also pay a fee based on our credit ratings on the actual daily unused amount of the aggregate commitments.
At
December 31, 2016
, Buckeye and BMSC collectively had
no
outstanding balance under the Credit Facility. In October 2016, we completed a public equity offering and used a portion of the net proceeds from the offering to reduce the indebtedness outstanding under our Credit Facility. See Note 22 for additional information. The weighted average interest rate for borrowings under the Credit Facility was
2.0%
at
December 31, 2016
. The Credit Facility includes covenants limiting, as of the last day of each fiscal quarter, the ratio of consolidated funded debt to consolidated EBITDA (“Funded Debt Ratio”), as defined in the Credit Facility, measured for the preceding
twelve months
, to not more than
5.0
to
1.0
. This requirement is subject to a provision for increases to
5.5
to
1.0
in connection with certain future acquisitions. The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA, which is defined in the Credit Facility as earnings before interest, taxes, depreciation, and amortization determined on a consolidated basis. At
December 31, 2016
, our Funded Debt Ratio was
3.55
to
1.00
. At
December 31, 2016
, we were in compliance with the covenants under our Credit Facility.
At both
December 31, 2016
and
2015
, we had committed
$1.2 million
in support of letters of credit. The obligations for letters of credit are not reflected as debt on our consolidated balance sheets.
Term Loan
In September 2016, we entered into our
$250.0 million
Term Loan due September 30, 2019, with an option to extend the term with consenting lenders for up to
two
one
-year periods. At the time of the transaction, we incurred debt issuance costs of
$0.5 million
related to the Term Loan. We used the proceeds from the Term Loan to reduce the indebtedness outstanding under our Credit Facility. Under the Term Loan, interest accrues at the LIBOR rate or a base rate plus an applicable margin based on the election of the borrower. The applicable margin used in connection with interest rates and fees is based on the credit ratings assigned to our senior unsecured long-term debt securities. The applicable margin for LIBOR rate loans ranges from
1.0%
to
1.6%
and the applicable margin for base rate loans ranges from
0%
to
0.6%
.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Term Loan includes covenants limiting the Funded Debt Ratio, as defined in the Term Loan, measured for the preceding twelve months, to not more than
5.0
to 1.0 as of the last day of each fiscal quarter. This requirement is subject to a provision for increases to
5.5
to 1.0 in connection with certain future acquisitions. The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA, which is defined in the Term Loan as earnings before interest, taxes, depreciation, and amortization determined on a consolidated basis. At
December 31, 2016
, we were in compliance with the covenants under the Term Loan.
Note Offering
In November 2016, we issued
$600.0 million
of senior unsecured
3.950%
notes maturing on December 1, 2026 in an underwritten public offering at
99.644%
of their principal amount. Total proceeds from this offering, after underwriting fees, expenses and debt issuance costs of
$5.2 million
, were
$592.7 million
. In January 2017, we used the net proceeds from this offering to fund a portion of the purchase price for the VTTI Acquisition (see Note 3).
Current Maturities Expected to be Refinanced
It is our intent to refinance the
$125.0 million
of
5.125%
Notes maturing on July 1, 2017 using our Credit Facility. At
December 31, 2016
, we had
$1.5 billion
of availability under our Credit Facility. Therefore, we have classified these notes as long-term debt in the consolidated balance sheet at
December 31, 2016
.
15. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Accrued employee benefit liabilities
|
$
|
37,795
|
|
|
$
|
42,643
|
|
Accrued environmental remediation liabilities
|
35,878
|
|
|
38,832
|
|
Deferred consideration
|
19,126
|
|
|
23,392
|
|
ARO
|
3,439
|
|
|
5,463
|
|
Derivative liabilities
|
4,214
|
|
|
703
|
|
Other
|
4,985
|
|
|
4,374
|
|
Total other non-current liabilities
|
$
|
105,437
|
|
|
$
|
115,407
|
|
16.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consists of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Unrealized gains on derivative instruments
|
$
|
60,281
|
|
|
$
|
1,266
|
|
Net loss on settlement of interest rate swaps, net of amortization
|
(79,864
|
)
|
|
(92,014
|
)
|
Adjustments to funded status of benefit plans
|
(6,010
|
)
|
|
(7,093
|
)
|
Total accumulated other comprehensive loss
|
$
|
(25,593
|
)
|
|
$
|
(97,841
|
)
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to financial market risks, including changes in interest rates and commodity prices, in the course of our normal business operations. We use derivative instruments to manage risks.
Interest Rate Derivatives
From time to time, we utilize forward-starting interest rate swaps to hedge the variability of the forecasted interest payments on anticipated debt issuances that may result from changes in the benchmark interest rate until the expected debt is issued. When entering into interest rate swap transactions, we become exposed to both credit risk and market risk. We are subject to credit risk when the change in fair value of the swap instrument is positive and the counterparty may fail to perform under the terms of the contract. We are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the swaps. We manage our credit risk by entering into swap transactions only with major financial institutions with investment-grade credit ratings. We manage our market risk by aligning the swap instrument with the existing underlying debt obligation or a specified expected debt issuance, generally associated with the maturity of an existing debt obligation. We designate the swap agreements as cash flow hedges at inception and expect the changes in values to be highly correlated with the changes in value of the underlying borrowings.
During 2016, we entered into
seven
forward-starting interest rate swaps with a total aggregate notional amount of
$350.0 million
, which we entered into in anticipation of the issuance of debt on or before January 15, 2018, and
eleven
forward-starting interest rate swaps with a total aggregate notional amount of
$500.0 million
, which we entered into in anticipation of the issuance of debt on or before November 15, 2018. We expect to issue new fixed-rate debt on or before January 15, 2018 to repay the
$300.0 million
of
6.050%
Notes that are due on January 15, 2018, and on or before November 15, 2018 to repay the
$400.0 million
of
2.650%
Notes that are due on November 15, 2018, as well as to fund capital expenditures and other general partnership purposes, although no assurances can be given that the issuance of fixed-rate debt will be possible on acceptable terms.
In September 2014, we issued
$300.0 million
of senior unsecured notes and also settled
six
related forward-starting interest rate swaps with a total aggregate notional amount of
$300.0 million
for
$51.5 million
. As a result of the interest rate swap settlement, we recognized
$1.1 million
hedge ineffectiveness in interest and debt expense attributable to the timing difference between when the swaps were settled and when they were forecasted to settle.
In June 2013, we issued
$500.0 million
of the
4.150%
Notes and also settled
six
related forward-starting interest rate swaps with a total aggregate notional amount of
$275.0 million
for
$62.0 million
. As a result of the interest rate swap settlement, we recognized
$0.9 million
hedge ineffectiveness in interest and debt expense attributable to the timing difference between when the swaps were settled and when they were forecasted to settle.
During the year ended
December 31, 2016
, unrealized
gains
of
$62.6 million
were recorded in AOCI to reflect the change in the fair values of the forward-starting interest rate swaps.
Commodity Derivatives
Our Merchant Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its physical derivative contracts, which we designated as fair value hedges, with changes in fair value of both the futures contracts and physical inventory reflected in earnings. Our Merchant Services segment also uses exchange-traded refined petroleum contracts to hedge expected future transactions related to certain gasoline inventory that we manage on behalf of a third party, which are designated as cash flow hedges, with the effective portion of the hedge reported in other comprehensive income (“OCI”) and reclassified into earnings when the expected future transaction affects earnings. Any gains or losses incurred on the derivative instruments that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings.
Additionally, our Merchant Services segment enters into exchange-traded refined petroleum product futures contracts on behalf of our Domestic Pipelines & Terminals segment to manage the risk of market price volatility on the narrowing gasoline-to-butane pricing spreads associated with our butane blending activities managed by a third party. These futures contracts are not designated in a hedge relationship for accounting purposes. Physical forward contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes our commodity derivative instruments outstanding at
December 31, 2016
(amounts in thousands of gallons):
|
|
|
|
|
|
|
|
|
|
|
|
Volume (1)
|
|
Accounting
|
Derivative Purpose
|
|
Current
|
|
Long-Term
|
|
Treatment
|
Derivatives NOT designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Physical fixed price derivative contracts
|
|
2,335
|
|
|
1,453
|
|
|
Mark-to-market
|
Physical index derivative contracts
|
|
24,012
|
|
|
16,507
|
|
|
Mark-to-market
|
Futures contracts for refined petroleum products
|
|
2,055
|
|
|
2,142
|
|
|
Mark-to-market
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Physical fixed price derivative contracts
|
|
174,006
|
|
|
—
|
|
|
Fair Value Hedge
|
Futures contracts for refined petroleum products
|
|
9,828
|
|
|
—
|
|
|
Cash Flow Hedge
|
____________________________
|
|
(1)
|
Volume represents absolute value of net notional volume position.
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the fair value of each classification of derivative instruments and the locations of the derivative instruments on our consolidated balance sheets at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Derivatives
NOT Designated
as Hedging
Instruments
|
|
Derivatives
Designated
as Hedging
Instruments
|
|
Derivative
Carrying
Value
|
|
Netting
Balance
Sheet
Adjustment (1)
|
|
Total
|
Physical fixed price derivative contracts
|
$
|
1,499
|
|
|
$
|
—
|
|
|
$
|
1,499
|
|
|
$
|
(306
|
)
|
|
$
|
1,193
|
|
Physical index derivative contracts
|
334
|
|
|
—
|
|
|
334
|
|
|
(1
|
)
|
|
333
|
|
Futures contracts for refined products
|
51,431
|
|
|
21
|
|
|
51,452
|
|
|
(51,452
|
)
|
|
—
|
|
Total current derivative assets
|
53,264
|
|
|
21
|
|
|
53,285
|
|
|
(51,759
|
)
|
|
1,526
|
|
Physical fixed price derivative contracts
|
164
|
|
|
—
|
|
|
164
|
|
|
(5
|
)
|
|
159
|
|
Futures contracts for refined products
|
226
|
|
|
—
|
|
|
226
|
|
|
(226
|
)
|
|
—
|
|
Interest rates derivatives
|
—
|
|
|
62,609
|
|
|
62,609
|
|
|
—
|
|
|
62,609
|
|
Total non-current derivative assets
|
390
|
|
|
62,609
|
|
|
62,999
|
|
|
(231
|
)
|
|
62,768
|
|
Physical fixed price derivative contracts
|
(4,517
|
)
|
|
—
|
|
|
(4,517
|
)
|
|
306
|
|
|
(4,211
|
)
|
Physical index derivative contracts
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
Futures contracts for refined products
|
(57,828
|
)
|
|
(15,685
|
)
|
|
(73,513
|
)
|
|
51,452
|
|
|
(22,061
|
)
|
Total current derivative liabilities
|
(62,346
|
)
|
|
(15,685
|
)
|
|
(78,031
|
)
|
|
51,759
|
|
|
(26,272
|
)
|
Physical fixed price derivative contracts
|
(61
|
)
|
|
—
|
|
|
(61
|
)
|
|
5
|
|
|
(56
|
)
|
Futures contracts for refined products
|
(4,384
|
)
|
|
—
|
|
|
(4,384
|
)
|
|
226
|
|
|
(4,158
|
)
|
Total non-current derivative liabilities
|
(4,445
|
)
|
|
—
|
|
|
(4,445
|
)
|
|
231
|
|
|
(4,214
|
)
|
Net derivative (liabilities) assets
|
$
|
(13,137
|
)
|
|
$
|
46,945
|
|
|
$
|
33,808
|
|
|
$
|
—
|
|
|
$
|
33,808
|
|
____________________________
|
|
(1)
|
Amounts represent the netting of physical fixed and index contracts’ assets and liabilities when a legal right of offset exists. Futures contracts are subject to settlement through margin requirements and are additionally presented on a net basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Derivatives
NOT Designated
as Hedging
Instruments
|
|
Derivatives
Designated
as Hedging
Instruments
|
|
Derivative
Carrying
Value
|
|
Netting
Balance
Sheet
Adjustment (1)
|
|
Total
|
Physical fixed price derivative contracts
|
$
|
26,698
|
|
|
$
|
—
|
|
|
$
|
26,698
|
|
|
$
|
(79
|
)
|
|
$
|
26,619
|
|
Physical index derivative contracts
|
87
|
|
|
—
|
|
|
87
|
|
|
(62
|
)
|
|
25
|
|
Futures contracts for refined products
|
136,131
|
|
|
36,834
|
|
|
172,965
|
|
|
(121,324
|
)
|
|
51,641
|
|
Total current derivative assets
|
162,916
|
|
|
36,834
|
|
|
199,750
|
|
|
(121,465
|
)
|
|
78,285
|
|
Physical fixed price derivative contracts
|
1,057
|
|
|
—
|
|
|
1,057
|
|
|
—
|
|
|
1,057
|
|
Total non-current derivative assets
|
1,057
|
|
|
—
|
|
|
1,057
|
|
|
—
|
|
|
1,057
|
|
Physical fixed price derivative contracts
|
(535
|
)
|
|
—
|
|
|
(535
|
)
|
|
79
|
|
|
(456
|
)
|
Physical index derivative contracts
|
(116
|
)
|
|
—
|
|
|
(116
|
)
|
|
62
|
|
|
(54
|
)
|
Futures contracts for refined products
|
(119,506
|
)
|
|
(1,818
|
)
|
|
(121,324
|
)
|
|
121,324
|
|
|
—
|
|
Total current derivative liabilities
|
(120,157
|
)
|
|
(1,818
|
)
|
|
(121,975
|
)
|
|
121,465
|
|
|
(510
|
)
|
Futures contracts for refined products
|
(703
|
)
|
|
—
|
|
|
(703
|
)
|
|
—
|
|
|
(703
|
)
|
Total non-current derivative liabilities
|
(703
|
)
|
|
—
|
|
|
(703
|
)
|
|
—
|
|
|
(703
|
)
|
Net derivative assets
|
$
|
43,113
|
|
|
$
|
35,016
|
|
|
$
|
78,129
|
|
|
$
|
—
|
|
|
$
|
78,129
|
|
____________________________
|
|
(1)
|
Amounts represent the netting of physical fixed and index contracts’ assets and liabilities when a legal right of offset exists. Futures contracts are subject to settlement through margin requirements and are additionally presented on a net basis.
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our futures contracts designated as fair value hedges related to our inventory portfolio and our futures contracts designated as cash flow hedges related to refined petroleum products extend to the second quarter of 2017. The unrealized loss at
December 31, 2016
for fair value hedges of inventory and cash flow hedges related to refined petroleum products represented by futures contracts of
$13.4 million
and
$2.3 million
, respectively, will be realized by the second quarter of 2017. At
December 31, 2016
, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts, physical index contracts, and futures contracts for refined products contracts noted above) varied in duration in the overall portfolio, but did not extend beyond December 2018. In addition, at
December 31, 2016
, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.
The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Location
|
|
2016
|
|
2015
|
Derivatives NOT designated as hedging instruments:
|
|
|
|
|
|
|
|
Physical fixed price derivative contracts
|
Product sales
|
|
$
|
(11,161
|
)
|
|
$
|
35,667
|
|
Physical index derivative contracts
|
Product sales
|
|
349
|
|
|
(268
|
)
|
Physical fixed price derivative contracts
|
Cost of product sales
|
|
8,790
|
|
|
12,489
|
|
Physical index derivative contracts
|
Cost of product sales
|
|
308
|
|
|
101
|
|
Futures contracts for refined products
|
Cost of product sales
|
|
4,463
|
|
|
(6,559
|
)
|
|
|
|
|
|
|
Derivatives designated as fair value hedging instruments:
|
|
|
|
|
|
|
|
Futures contracts for refined products
|
Cost of product sales
|
|
$
|
(55,693
|
)
|
|
$
|
75,974
|
|
Physical inventory - hedged items
|
Cost of product sales
|
|
77,555
|
|
|
(83,703
|
)
|
|
|
|
|
|
|
Ineffectiveness excluding the time value component on
fair value hedging instruments:
|
|
|
|
|
|
|
|
Fair value hedge ineffectiveness (excluding time value)
|
Cost of product sales
|
|
$
|
(1,410
|
)
|
|
$
|
2,162
|
|
Time value excluded from hedge assessment
|
Cost of product sales
|
|
23,272
|
|
|
(9,891
|
)
|
Net gain (loss) in income
|
|
|
$
|
21,862
|
|
|
$
|
(7,729
|
)
|
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 Recognized
in OCI on Derivatives for the
Year Ended December 31,
|
|
2016
|
|
2015
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
Interest rate contracts
|
$
|
62,609
|
|
|
$
|
—
|
|
Commodity derivatives
|
(2,328
|
)
|
|
1,266
|
|
|
$
|
60,281
|
|
|
$
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Reclassified
From AOCI to Income for the
Year Ended December 31,
|
|
Location
|
|
2016
|
|
2015
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
Interest rate contracts
|
Interest and debt expense
|
|
$
|
(12,150
|
)
|
|
$
|
(12,151
|
)
|
Commodity derivatives
|
Product sales
|
|
1,266
|
|
|
—
|
|
|
|
|
$
|
(10,884
|
)
|
|
$
|
(12,151
|
)
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Over the next twelve months, we expect to reclassify
$11.9 million
of net losses attributable to interest rate derivatives from AOCI to earnings as an increase to interest and debt expense. The net losses consist of
$12.2 million
of amortization of hedge losses related to our settled forward-starting interest rate swaps and
$0.3 million
of estimated amortization of forecasted hedge gains on our forward-starting interest rate swaps that we expect to settle in late
2017
. Additionally, the unrealized losses at
December 31, 2016
for refined petroleum products designated as cash flow hedges of
$2.3 million
will be realized and reclassified from AOCI to product sales during
2017
. The ineffective portion of the change in fair value of cash flow hedges was not material for the year ended
December 31, 2016
or
2015
.
18. FAIR VALUE MEASUREMENTS
We categorize our financial assets and liabilities using the three-tier hierarchy as follows:
Recurring
The following table sets forth financial assets and liabilities, measured at fair value on a recurring basis, as of the measurement dates indicated, and the basis for that measurement, by level within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 1
|
|
Level 2
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Physical fixed price derivative contracts
|
$
|
—
|
|
|
$
|
1,352
|
|
|
$
|
—
|
|
|
$
|
27,676
|
|
Physical index derivative contracts
|
—
|
|
|
333
|
|
|
—
|
|
|
25
|
|
Futures contracts for refined products
|
—
|
|
|
—
|
|
|
51,641
|
|
|
—
|
|
Interest rate derivatives
|
—
|
|
|
62,609
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Physical fixed price derivative contracts
|
—
|
|
|
(4,267
|
)
|
|
—
|
|
|
(456
|
)
|
Physical index derivative contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
(54
|
)
|
Futures contracts for refined products
|
(26,219
|
)
|
|
—
|
|
|
(703
|
)
|
|
—
|
|
Fair value
|
$
|
(26,219
|
)
|
|
$
|
60,027
|
|
|
$
|
50,938
|
|
|
$
|
27,191
|
|
The values of the Level 1 derivative assets and liabilities were based on quoted market prices obtained from the New York Mercantile Exchange.
The values of the Level 2 interest rate derivatives were determined using fair value estimates obtained from our counterparties, which are verified using other available market data, including cash flow models which incorporate market inputs including the implied forward LIBOR yield curve for the same period as the future interest rate swap settlements.
Credit value adjustments (“CVAs”), which are used to reflect the potential nonperformance risk of our counterparties, are considered in the fair value assessment of interest rate derivatives. We determined that the impact of CVAs is not significant to the overall valuation of interest rate derivatives.
The values of the Level 2 commodity derivative contracts were calculated using market approaches based on observable market data inputs, including published commodity pricing data, which is verified against other available market data, and market interest rate and volatility data. Level 2 physical fixed price derivative assets are net of CVAs determined using an expected cash flow model, which incorporates assumptions about the credit risk of the derivative contracts based on the historical and expected payment history of each customer, the amount of product contracted for under the agreement and the customer’s historical and expected purchase performance under each contract. The Merchant Services segment determined CVAs are appropriate because few of the Merchant Services segment’s customers entering into these derivative contracts are large organizations with nationally recognized credit ratings. The CVAs were nominal as of
December 31, 2016
and
2015
. As of
December 31, 2016
and
2015
, the Merchant Services segment did not hold any net liability derivative position containing credit contingent features.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments included in current assets and current liabilities are reported in the 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 MLP’s with similar credit ratings and terms. The fair values of our variable-rate debt are their carrying amounts, as the carrying amount reasonably approximates fair value due to the variability of the interest rates. The carrying value and fair value, using Level 2 input values, of our debt were as follows at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Fixed-rate debt
|
$
|
3,967,695
|
|
|
$
|
4,083,488
|
|
|
$
|
3,371,824
|
|
|
$
|
3,057,945
|
|
Variable-rate debt
|
250,000
|
|
|
250,000
|
|
|
472,488
|
|
|
472,488
|
|
Total debt
|
$
|
4,217,695
|
|
|
$
|
4,333,488
|
|
|
$
|
3,844,312
|
|
|
$
|
3,530,433
|
|
In addition, our pension plan assets are measured at fair value on a recurring basis, based on Level 1 and Level 3 inputs. See Note 19 for additional information.
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 years ended
December 31, 2016
and
2015
.
Non-Recurring
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. During the year ended December 31, 2014, we recorded a net non-cash asset impairment charge of
$23.4 million
related to our Natural Gas Storage disposal group as a result of the execution of a purchase and sale agreement in July 2014 to sell the business, subsequent changes in the carrying value of the net assets of the business and the completed sale in December 2014. See Note 4 and Note 5 for additional information.
19. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
RIGP and Retiree Medical Plan
Services Company, which employs the majority of our workforce, sponsors a Retirement Income Guarantee Plan (“RIGP”), which is a defined benefit plan that generally guarantees employees hired before January 1, 1986 a retirement benefit based on years of service and the employee’s highest compensation for any consecutive
5
-year period during the last
10 years
of service or other compensation measures as defined under the respective plan provisions. The retirement benefit is subject to reduction at varying percentages for certain offsetting amounts, including benefits payable under a retirement and savings plan discussed further below. Services Company funds this benefit plan through contributions to pension trust assets, generally subject to minimum funding requirements as provided by applicable law.
Services Company also sponsors an unfunded post-retirement benefit plan (the “Retiree Medical Plan”), which provides health care and life insurance benefits to certain of its retirees. To be eligible for the health care benefits, an employee must have been hired prior to January 1, 1991 and meet certain age and service requirements. To be eligible for the life insurance benefits, an employee must have been hired prior to January 1, 2002 and meet certain service requirements.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of projected benefit obligations and plan assets, and the funded status of the RIGP and the Retiree Medical Plan (“the Plans”) were as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
Retiree Medical Plan
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
17,405
|
|
|
$
|
17,988
|
|
|
$
|
33,730
|
|
|
$
|
36,117
|
|
Service cost
|
(34
|
)
|
|
11
|
|
|
323
|
|
|
365
|
|
Interest cost
|
421
|
|
|
551
|
|
|
1,309
|
|
|
1,334
|
|
Plan participants’ contributions
|
—
|
|
|
—
|
|
|
474
|
|
|
510
|
|
Actuarial (gain) loss
|
(555
|
)
|
|
346
|
|
|
2,871
|
|
|
(3,573
|
)
|
Plan curtailment
|
(1,513
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
(598
|
)
|
|
(469
|
)
|
|
—
|
|
|
—
|
|
Benefit payments
|
(1,948
|
)
|
|
(1,022
|
)
|
|
(6,749
|
)
|
|
(1,023
|
)
|
Benefit obligation at end of year
|
$
|
13,178
|
|
|
$
|
17,405
|
|
|
$
|
31,958
|
|
|
$
|
33,730
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
5,544
|
|
|
$
|
6,743
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
256
|
|
|
(373
|
)
|
|
—
|
|
|
—
|
|
Plan participants’ contributions
|
—
|
|
|
—
|
|
|
474
|
|
|
510
|
|
Employer contributions
|
1,270
|
|
|
665
|
|
|
6,275
|
|
|
513
|
|
Settlements
|
(598
|
)
|
|
(469
|
)
|
|
—
|
|
|
—
|
|
Benefit payments
|
(1,948
|
)
|
|
(1,022
|
)
|
|
(6,749
|
)
|
|
(1,023
|
)
|
Fair value of plan assets at end of year
|
$
|
4,524
|
|
|
$
|
5,544
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
$
|
(8,654
|
)
|
|
$
|
(11,861
|
)
|
|
$
|
(31,958
|
)
|
|
$
|
(33,730
|
)
|
Amounts recognized in our consolidated balance sheets for the Plans consist of the following at the dates indicated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
Retiree Medical Plan
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued employee benefit liabilities - current
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,817
|
)
|
|
$
|
(2,948
|
)
|
Accrued employee benefit liabilities - noncurrent
|
(8,654
|
)
|
|
(11,861
|
)
|
|
(29,141
|
)
|
|
(30,782
|
)
|
Total
|
$
|
(8,654
|
)
|
|
$
|
(11,861
|
)
|
|
$
|
(31,958
|
)
|
|
$
|
(33,730
|
)
|
|
|
|
|
|
|
|
|
AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
2,616
|
|
|
$
|
5,804
|
|
|
$
|
3,394
|
|
|
$
|
1,289
|
|
Total
|
$
|
2,616
|
|
|
$
|
5,804
|
|
|
$
|
3,394
|
|
|
$
|
1,289
|
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the accumulated benefit obligation in excess of plan assets for the RIGP is as follows at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
December 31,
|
|
2016
|
|
2015
|
Projected benefit obligation
|
$
|
13,178
|
|
|
$
|
17,405
|
|
Accumulated benefit obligation (1)
|
11,590
|
|
|
13,357
|
|
Fair value of plan assets
|
4,524
|
|
|
5,544
|
|
____________________________
|
|
(1)
|
The accumulated benefit obligation does not include an assumption for future compensation increases.
|
The weighted average assumptions used in determining net periodic benefit cost for the Plans were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
Retiree Medical Plan
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Discount rate
|
3.0
|
%
|
|
3.3
|
%
|
|
3.5
|
%
|
|
4.1
|
%
|
|
3.9
|
%
|
|
4.4
|
%
|
Expected return on plan assets
|
5.8
|
%
|
|
5.8
|
%
|
|
5.8
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
The assumptions used in determining benefit obligations for the Plans were as follows at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
Retiree Medical Plan
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Discount rate
|
3.3
|
%
|
|
3.5
|
%
|
|
4.0
|
%
|
|
4.1
|
%
|
Rate of compensation increase
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
The discount rate reflects the rate at which benefits could be effectively settled on the measurement date. For the years ended
December 31, 2016
,
2015
, and
2014
, the discount rate was determined based on a projection of expected cash flows from the Plans using relevant economic benchmarks available as of each year end. The expected return on plan assets was determined based on projected long-term market returns for each asset class in which the Plans are invested, weighted by the target asset class allocations. The rate of compensation increase represents the long-term assumption for future increases to salaries.
The assumed annual rate of increase in the per capita cost of covered health care benefits as of
December 31, 2016
in the Retiree Medical Plan was
5.5%
for
2017
, grading down to
4.5%
in 2021, and thereafter. The assumed health care cost trend rates may have a significant effect on the amounts reported for the Retiree Medical Plan. Based on a hypothetical
1%
movement in the assumed health care cost trend rates, the change in costs would have had the following effects on the
December 31, 2016
results (in thousands):
|
|
|
|
|
|
|
|
|
|
1%
Increase
|
|
1%
(Decrease)
|
Effect on total service cost and interest cost components
|
$
|
49
|
|
|
$
|
(44
|
)
|
Effect on postretirement benefit obligation
|
679
|
|
|
(614
|
)
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net periodic benefit cost and other changes recognized in OCI for the Plans were as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
Retiree Medical Plan
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
(34
|
)
|
|
$
|
11
|
|
|
$
|
94
|
|
|
$
|
323
|
|
|
$
|
365
|
|
|
$
|
345
|
|
Interest cost
|
421
|
|
|
551
|
|
|
553
|
|
|
1,309
|
|
|
1,334
|
|
|
1,420
|
|
Expected return on plan assets
|
(256
|
)
|
|
(334
|
)
|
|
(333
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Actuarial loss due to settlements
|
598
|
|
|
469
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized loss
|
522
|
|
|
842
|
|
|
667
|
|
|
766
|
|
|
199
|
|
|
31
|
|
Net periodic benefit cost
|
$
|
1,251
|
|
|
$
|
1,539
|
|
|
$
|
981
|
|
|
$
|
2,398
|
|
|
$
|
1,898
|
|
|
$
|
1,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations recognized in OCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
(2,068
|
)
|
|
$
|
1,053
|
|
|
$
|
951
|
|
|
$
|
2,871
|
|
|
$
|
(3,573
|
)
|
|
(188
|
)
|
Amortization of unrecognized loss
|
(522
|
)
|
|
(842
|
)
|
|
(667
|
)
|
|
(766
|
)
|
|
(199
|
)
|
|
(31
|
)
|
Actuarial loss due to settlements
|
(598
|
)
|
|
(469
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in OCI
|
$
|
(3,188
|
)
|
|
$
|
(258
|
)
|
|
$
|
284
|
|
|
$
|
2,105
|
|
|
$
|
(3,772
|
)
|
|
$
|
(219
|
)
|
Total recognized in net period benefit cost and OCI
|
$
|
(1,937
|
)
|
|
$
|
1,281
|
|
|
$
|
1,265
|
|
|
$
|
4,503
|
|
|
$
|
(1,874
|
)
|
|
$
|
1,577
|
|
We expect that the following amounts, currently included in OCI, for the Plans will be recognized in our consolidated statement of operations during the year ending December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
Retiree
Medical
Plan
|
Amortization of unrecognized loss
|
$
|
351
|
|
|
$
|
32
|
|
We estimate the following benefit payments, which reflect expected future service, as appropriate, will be paid for the Plans in the years indicated below as such (in thousands):
|
|
|
|
|
|
|
|
|
|
RIGP
|
|
Retiree
Medical
Plan
|
2017
|
$
|
1,920
|
|
|
$
|
2,874
|
|
2018
|
1,486
|
|
|
2,848
|
|
2019
|
1,373
|
|
|
2,806
|
|
2020
|
1,336
|
|
|
2,729
|
|
2021
|
1,307
|
|
|
2,628
|
|
Thereafter
|
3,631
|
|
|
10,946
|
|
We expect to contribute
$4.1 million
to our benefit plans in 2017. Funding requirements for subsequent years are uncertain and will depend on whether there are any changes in the actuarial assumptions used to calculate plan funding levels, the actual return on plan assets and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes, we may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We do not fund the Retiree Medical Plan and, accordingly, no assets are invested in the plan. A summary of investments in the RIGP are as follows at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Level 1
|
|
Level 3
|
|
Level 1
|
|
Level 3
|
Mutual fund - fixed-income securities
|
$
|
2,305
|
|
|
$
|
—
|
|
|
$
|
2,759
|
|
|
$
|
—
|
|
Mutual fund - money market
|
212
|
|
|
—
|
|
|
465
|
|
|
—
|
|
Coal lease
|
—
|
|
|
2,007
|
|
|
—
|
|
|
2,320
|
|
Fair value of plan assets
|
$
|
2,517
|
|
|
$
|
2,007
|
|
|
$
|
3,224
|
|
|
$
|
2,320
|
|
The values of the Level 1 mutual funds were based on quoted market prices in active markets for identical assets. The mutual fund — fixed-income securities generally seeks long-term growth of capital and income and invests in a portfolio consisting primarily of fixed-income securities.
The values of the Level 3 coal lease were determined using an expected present value of future cash flows valuation model. This investment relates to a
20.8%
interest in a coal lease, which derives value from specified minimum royalty payments received from CONSOL Energy Inc. related to coal reserves mined from
two
Pennsylvania mines owned by the lessor. The coal lease extends through 2023.
The following table summarizes the activity in our Level 3 pension assets for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2016
|
|
2015
|
Beginning balance, January 1
|
$
|
2,320
|
|
|
$
|
2,976
|
|
Lease payments received
|
369
|
|
|
393
|
|
Unrealized loss
|
(313
|
)
|
|
(656
|
)
|
Transfers out of Level 3
|
(369
|
)
|
|
(393
|
)
|
Ending balance, December 31
|
$
|
2,007
|
|
|
$
|
2,320
|
|
The RIGP investment policy does not target specific asset classes, but seeks to balance the preservation and growth of capital in the plan’s mutual funds with the income derived with proceeds from the coal lease. While no significant changes in the asset class allocation of the plan are expected during the upcoming year, Services Company may make changes at any time.
Retirement and Savings Plans
Services Company also sponsors the Retirement and Savings Plan (“RASP”) through which it provides retirement benefits for substantially all of its regular full-time employees located in the continental United States, except those covered by certain labor contracts. The RASP consists of
two
components. Under the first component, Services Company contributes
5%
of each eligible employee’s covered salary to an employee’s separate account maintained in the RASP. Under the second component, Services Company makes a matching contribution into the employee’s separate account for
100%
of an employee’s contribution to the RASP up to
5%
(or
6%
if an employee has over
20 years
of service) of an employee’s eligible covered salary. Total costs of the RASP were
$16.4 million
,
$15.2 million
and
$14 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Services Company also participates in a multi-employer retirement income plan and a multi-employer postretirement benefit plan, both of which provide retirement and health care and life insurance benefits to employees covered by certain labor contracts. We do not administer these plans and contribute to them in accordance with the provisions of negotiated labor contracts. The costs of providing these benefits, in aggregate, were
$1.4 million
,
$1.4 million
and
$1.0 million
during the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Additionally, certain of our wholly owned subsidiaries provide a savings and retirement plan to employees. The costs of providing these benefits, which primarily relates to BBH, were
$1.4 million
for all years ended
December 31, 2016
,
2015
and
2014
.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan
Services Company provides the ESOP to the majority of its employees hired before September 16, 2004. Employees hired by Services Company after September 15, 2004 and certain employees covered by a union multiemployer pension plan do not participate in the ESOP. The ESOP owns all of the outstanding common stock of Services Company. Buckeye, as primary beneficiary, consolidates Services Company.
The ESOP was frozen with respect to benefits effective March 27, 2011 (the “Freeze Date”). No Services Company contributions (other than dividend equivalent payments) have been made on behalf of current participants in the Plan after the Freeze Date. Even though contributions under the ESOP are no longer being made, each eligible participant’s ESOP account continues to be credited with its share of any stock dividends or other stock distributions associated with Services Company stock.
Individual employees were allocated shares based upon the ratio of their eligible compensation to total eligible compensation. Eligible compensation generally included base salary, overtime payments and certain bonuses. All Services Company stock has been released to ESOP participants. Total ESOP related costs charged to earnings were nominal for each of the years ended
December 31, 2016
,
2015
, and
2014
.
20. UNIT-BASED COMPENSATION PLANS
We award unit-based compensation to employees and directors primarily under the LTIP, which was approved by the Partnership’s unitholders in June 2013. The LTIP replaced the 2009 Long-Term Incentive Plan (the “2009 Plan”), which was merged with and into the LTIP, and no further grants will be 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 the LTIP, which includes awards under the 2009 Plan, and the Option Plan of
$33.5 million
,
$29.3 million
and
$21.5 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
LTIP
The LTIP, which is overseen by the Compensation Committee of the Board of Directors of Buckeye GP (the “Compensation Committee”), provides for the grant of phantom units, performance units and in certain cases, distribution equivalent rights (“DERs”), which provide the participant a right to receive payments based on distributions we make on our LP Units. Phantom units are notional LP Units whose vesting is subject to service-based restrictions or other conditions established by the Compensation Committee in its discretion. Phantom units entitle a participant to receive an LP Unit without payment of an exercise price upon vesting. Performance units are notional LP Units whose vesting is subject to the attainment of one or more performance goals, and which entitle a participant to receive LP Units without payment of an exercise price upon vesting. DERs are rights to receive a cash payment per phantom unit or performance unit, as applicable, equal to the per unit cash distribution we pay on our LP Units. The number of LP Units that may be granted to any one individual in a calendar year will not exceed
100,000
. If awards are forfeited, terminated or otherwise not paid in full, the LP Units underlying such awards will again be available for purposes of the LTIP. Persons eligible to receive grants under the LTIP are (i) officers and employees of Buckeye GP and any of our affiliates who provide services to us and (ii) independent members of the Board of Directors of Buckeye GP. Phantom units or performance units may be granted to participants at any time as determined by the Compensation Committee.
After giving effect to the issuance or forfeiture of phantom unit and performance unit awards through the year end, awards representing a total of
2,071,509
LP Units were available for issuance under the LTIP as of
December 31, 2016
.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferral Plan under the LTIP
On December 16, 2009, the Compensation Committee approved the terms of the Buckeye Partners, L.P. Unit Deferral and Incentive Plan (“Deferral Plan”). The Compensation Committee is expressly authorized to adopt the Deferral Plan under the terms of the LTIP, which grants the Compensation Committee the authority to establish a program pursuant to which our phantom units may be awarded in lieu of cash compensation at the election of the employee. At
December 31, 2016
,
2015
and
2014
, eligible employees were allowed to defer up to
50%
of their
2016
,
2015
and
2014
compensation awards under our Annual Incentive Compensation Plan or other discretionary bonus program in exchange for grants of phantom units equal in value to the amount of their cash award deferral (each such unit, a “Deferral Unit”). Participants also receive
one
matching phantom unit for each Deferral Unit. Deferral Units and their matching phantom units vest on December 15 of the second year after the year in which such units are granted. At
December 31, 2016
,
$4.4 million
of
2016
compensation awards had been deferred, for which phantom units will be granted in
2017
. At
December 31, 2015
,
$3.1 million
of
2015
compensation awards had been deferred, for which
139,526
phantom units (including matching units) were granted during
2016
. At
December 31, 2014
,
$1.7 million
of
2014
compensation awards had been deferred, for which
54,592
phantom units (including matching units) were granted during
2015
. These grants are included as granted in the LTIP activity table below.
Awards under the LTIP
During the year ended
December 31, 2016
, the Compensation Committee granted
342,572
phantom units to employees (including the
139,526
phantom units granted pursuant to the Deferral Plan discussed above),
20,000
phantom units to independent directors of Buckeye GP and
274,896
performance units to employees. The vesting criteria for the performance units are the attainment of certain performance goals during the third year of a three-year period and remaining employed by us throughout such
three
-year period.
Phantom unit grantees will be paid quarterly distributions on DERs associated with phantom units over their respective vesting periods of
one
-year or
three
-years in the same amounts per phantom unit as distributions paid on our LP Units over those same
one
-year or
three
-year periods. The amount paid with respect to phantom unit distributions was
$3.6 million
and
$2.6 million
for the years ended
December 31, 2016
and
2015
, respectively. Distributions may be paid on performance units at the end of the three-year vesting period. In such case, DERs will be paid on the number of LP Units for which the performance units will be settled. Quarterly distributions related to DERs associated with phantom and performance units are recorded as a reduction of our Limited Partners’ Capital on our consolidated balance sheets.
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, 2015
|
906
|
|
|
$
|
63.56
|
|
Granted
|
435
|
|
|
73.45
|
|
Vested
|
(312
|
)
|
|
62.08
|
|
Forfeited
|
(18
|
)
|
|
67.32
|
|
Unvested at December 31, 2015
|
1,011
|
|
|
$
|
68.20
|
|
Granted
|
637
|
|
|
53.47
|
|
Vested
|
(333
|
)
|
|
58.89
|
|
Forfeited
|
(19
|
)
|
|
60.76
|
|
Unvested at December 31, 2016
|
1,296
|
|
|
$
|
63.54
|
|
____________________________
|
|
(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.
|
At
December 31, 2016
, we expect to recognize
$31.1 million
of compensation expense related to the LTIP over a weighted average period of
1.7 years
.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unit Option and Distribution Equivalent Plan
We also sponsor the Option Plan pursuant to which we historically granted options to employees to purchase LP Units at the market price of our LP Units on the date of grant. Generally, the options vest
three years
from the date of grant and expire
ten years
from the date of grant. As unit options are exercised, we issue new LP Units to the holder. We have not historically repurchased, and do not expect to repurchase in
2017
, any of our LP Units. Following the adoption of the 2009 Plan effective March 20, 2009, we ceased making additional grants under the Option Plan.
The following is a summary of the changes in the options outstanding (all of which are vested) under the Option Plan for the periods indicated (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
LP Units
|
|
Weighted-
Average
Strike Price
($/LP Unit)
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value (1)
|
Outstanding at January 1, 2015
|
26
|
|
|
$
|
48.18
|
|
|
1.6
|
|
$
|
703
|
|
Exercised
|
(5
|
)
|
|
47.38
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
(4
|
)
|
|
$
|
46.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
17
|
|
|
$
|
48.71
|
|
|
0.9
|
|
$
|
300
|
|
Exercised
|
(6
|
)
|
|
47.17
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
(1
|
)
|
|
44.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
10
|
|
|
$
|
50.36
|
|
|
0.1
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
10
|
|
|
$
|
50.36
|
|
|
0.1
|
|
$
|
151
|
|
____________________________
|
|
(1)
|
Aggregate intrinsic value reflects fully vested LP Unit options at the date indicated. Intrinsic value is determined by calculating the difference between our closing LP Unit price on the last trading day in
2016
and the exercise price, multiplied by the number of exercisable, in-the-money options.
|
The total intrinsic value of options exercised during the years ended
December 31, 2016
,
2015
and
2014
was
$0.1 million
,
$0.1 million
and
$0.5 million
, respectively. At
December 31, 2016
and
2015
, there was no unrecognized compensation cost related to unvested options, as all options were vested as of November 24, 2011. At
December 31, 2016
,
333,000
LP Units were available for grant in connection with the Option Plan. The fair value of options vested was
zero
for each of the years ended
December 31, 2016
,
2015
and
2014
, respectively.
21. RELATED PARTY TRANSACTIONS
We are managed by Buckeye GP, our general partner. Services Company is considered a related party with respect to us. Services Company employees provide services to the majority of our operating subsidiaries. Pursuant to a services agreement entered into in December 2004, our operating subsidiaries reimburse Services Company for the costs of the services provided by Services Company. As Services Company is consolidated, these amounts eliminate in consolidation. Services Company, which is beneficially owned by the ESOP, owned
0.6 million
of our LP Units (
0.4%
of our LP Units outstanding) as of
December 31, 2016
. Distributions received by Services Company from us on such LP Units are distributed to ESOP participants for investment pursuant to the terms of the ESOP. Distributions paid to Services Company totaled
$3.0 million
,
$3.2 million
and
$3.2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Total distributions paid to Services Company decrease over time as Services Company sells LP Units to fund benefits payable to ESOP participants who exit the ESOP or otherwise choose to diversify their holdings.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARTNERS’ CAPITAL AND DISTRIBUTIONS
Our LP Units represent limited partner interests, which give the holders thereof the right to participate in distributions and to exercise the other rights and privileges available to them under our partnership agreement. The partnership agreement provides that, without prior approval of our limited partners holding an aggregate of at least two-thirds of the outstanding LP Units, we cannot issue any LP Units of a class or series having preferences or other special or senior rights over the LP Units.
At-the-Market Offering Program
In March 2016, we entered into an equity distribution agreement (the “Equity Distribution Agreement”) with J.P. Morgan Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, BNP Paribas Securities Corp., Deutsche Bank Securities Inc., Jefferies LLC, Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, and SMBC Nikko Securities America, Inc. (collectively, the “ATM Underwriters”). Under the terms of the Equity Distribution Agreement, we may offer and sell up to
$500.0 million
in aggregate gross sales proceeds of LP Units from time to time through the ATM Underwriters, acting as agents of Buckeye or as principals, subject in each case to the terms and conditions set forth in the Equity Distribution Agreement. This agreement replaced our prior
four
separate equity distribution agreements with each of Wells Fargo Securities, LLC, Barclays Capital Inc., SunTrust Robinson Humphrey, Inc. and UBS Securities LLC, which we entered into in May 2013 and, under the terms of which, we could sell up to
$300.0 million
in aggregate gross sales proceeds of LP Units from time to time. Sales of LP Units, if any, may be made by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices or as otherwise agreed with any of such firms. During the years ended
December 31, 2016
,
2015
and
2014
, we sold
1.6 million
,
2.2 million
and
1.0 million
LP Units in aggregate under their active equity distribution agreements and received
$108.4 million
,
$161.5 million
and
$74.5 million
in net proceeds after deducting commissions and other related expenses, including
$1.1 million
,
$1.6 million
and
$0.8 million
of compensation paid in aggregate to the agents under their active equity distribution agreements, respectively.
Equity Offerings
In October 2016, we completed a public offering of
7.75 million
LP Units pursuant to an effective shelf registration statement, which priced at
$66.05
per unit. The underwriters also exercised an option to purchase
1.16 million
additional LP Units, resulting in total gross proceeds of
$588.7 million
before deducting underwriting fees and other related expenses of
$8.0 million
. We used the net proceeds from this offering to initially reduce the indebtedness outstanding under our Credit Facility and for general partnership purposes, as well as to subsequently fund a portion of the purchase price for the VTTI Acquisition in January 2017.
In September 2014, we completed a public offering of
6.75 million
LP Units pursuant to an effective shelf registration statement, which priced at
$80.00
per unit. In October 2014, the underwriters exercised an option to purchase up to an additional
1.0 million
LP Units, resulting in total gross proceeds of
$621.0 million
before deducting estimated underwriting fees and offering expenses of
$22.0 million
. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility, to fund a portion of the Buckeye Texas Partners Transaction and for general partnership purposes.
In August 2014, we completed a public offering of
2.6 million
LP Units pursuant to an effective shelf registration statement, which priced at
$76.60
per unit. The underwriters also exercised an option to purchase
0.4 million
additional LP Units, resulting in total gross proceeds of
$229.0 million
before deducting estimated underwriting fees and offering expenses of
$2.4 million
. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility and for general partnership purposes.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Changes in Outstanding Units
The following is a summary of changes in Buckeye’s outstanding units for the periods indicated (in thousands):
|
|
|
|
|
Limited
Partners
|
Units outstanding at January 1, 2014
|
115,064
|
|
LP Units issued pursuant to the Option Plan (1)
|
18
|
|
LP Units issued pursuant to the LTIP (1)
|
198
|
|
Issuance of units to institutional investors
|
10,752
|
|
Issuance of units through equity distribution agreements
|
1,011
|
|
Units outstanding at December 31, 2014
|
127,043
|
|
LP Units issued pursuant to the Option Plan (1)
|
5
|
|
LP Units issued pursuant to the LTIP (1)
|
229
|
|
Issuance of units through equity distribution agreements
|
2,247
|
|
Units outstanding at December 31, 2015
|
129,524
|
|
LP Units issued pursuant to the Option Plan (1)
|
6
|
|
LP Units issued pursuant to the LTIP (1)
|
254
|
|
Issuance of units to institutional investors
|
8,913
|
|
Issuance of units through Equity Distribution Agreement
|
1,567
|
|
Units outstanding at December 31, 2016
|
140,264
|
|
____________________________
|
|
(1)
|
The number of units issued represents issuance net of tax withholding.
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 paid to unitholders of Buckeye for the periods indicated were as follows (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Per
|
|
Total Cash
|
Record Date
|
|
Payment Date
|
|
LP Unit
|
|
Distributions
|
February 18, 2014
|
|
February 25, 2014
|
|
$
|
1.0875
|
|
|
$
|
125,806
|
|
May 12, 2014
|
|
May 19, 2014
|
|
1.1000
|
|
|
128,042
|
|
August 18, 2014
|
|
August 25, 2014
|
|
1.1125
|
|
|
133,142
|
|
November 18, 2014
|
|
November 25, 2014
|
|
1.1250
|
|
|
143,386
|
|
Total
|
|
|
|
|
|
|
$
|
530,376
|
|
|
|
|
|
|
|
|
February 17, 2015
|
|
February 24, 2015
|
|
$
|
1.1375
|
|
|
$
|
145,382
|
|
May 11, 2015
|
|
May 18, 2015
|
|
1.1500
|
|
|
147,085
|
|
August 10, 2015
|
|
August 17, 2015
|
|
1.1625
|
|
|
149,490
|
|
November 9, 2015
|
|
November 17, 2015
|
|
1.1750
|
|
|
152,175
|
|
Total
|
|
|
|
|
|
|
$
|
594,132
|
|
|
|
|
|
|
|
|
February 23, 2016
|
|
March 1, 2016
|
|
$
|
1.1875
|
|
|
$
|
154,928
|
|
May 16, 2016
|
|
May 23, 2016
|
|
1.2000
|
|
|
157,247
|
|
August 15, 2016
|
|
August 22, 2016
|
|
1.2125
|
|
|
159,881
|
|
November 15, 2016
|
|
November 22, 2016
|
|
1.2250
|
|
|
172,673
|
|
Total
|
|
|
|
|
|
|
$
|
644,729
|
|
On
February 10, 2017
, we announced a quarterly distribution of
$1.2375
per LP Unit that will be paid on
February 28, 2017
, to unitholders of record on
February 21, 2017
. Based on the LP Units outstanding as of
December 31, 2016
, cash distributed to LP unitholders on
February 28, 2017
will total
$174.4 million
.
23. INCOME TAXES
As of
December 31, 2016
and
2015
, we had net deferred tax assets of
$0.4 million
and
$1.2 million
, respectively, for BDL. As of December 31, 2016, we had provided a full valuation allowance against the net deferred tax assets based on the available evidence of projected future operating losses. As of December 31, 2015, BDL’s net operating loss carryforwards had been fully utilized, primarily due to taxable income generated by the disposition of an ammonia pipeline in Texas, and therefore, we released the valuation allowance against the net deferred tax assets based on our assessment of projected future book and taxable income.
As of
December 31, 2016
and
2015
, we had net deferred tax assets of
$42.1 million
and
$42.3 million
related to Buckeye Caribbean. As of
December 31, 2016
,
$18.1 million
of the deferred tax assets related to net operating loss carryforwards, and unless utilized, the tax benefits of the net operating loss carryforwards will expire between 2020 and 2022. Based on available evidence, we had recorded a full valuation allowance against the net deferred tax assets upon our acquisition of Buckeye Caribbean during the year ended December 31, 2010. However, based on our assessment at
December 31, 2016
and
2015
, we concluded that sufficient positive evidence exists, including the realization of book and taxable income and a forecast of future book and taxable income, to realize
$1.5 million
and
$1.3 million
of these deferred tax assets, respectively, at
December 31, 2016
and
2015
.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of significant items comprising our net deferred tax assets and liabilities at
December 31, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax asset:
|
|
|
|
|
|
Net operating loss carryforward
|
$
|
18,909
|
|
|
$
|
18,236
|
|
Property, plant and equipment - refinery
|
22,333
|
|
|
23,447
|
|
Other
|
2,608
|
|
|
3,016
|
|
Total deferred tax asset
|
$
|
43,850
|
|
|
$
|
44,699
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
Property, plant and equipment - terminals
|
$
|
1,224
|
|
|
$
|
1,189
|
|
Other
|
123
|
|
|
—
|
|
Total deferred tax liability
|
1,347
|
|
|
1,189
|
|
Net deferred tax asset
|
42,503
|
|
|
43,510
|
|
Less: Valuation allowance
|
(40,972
|
)
|
|
(41,056
|
)
|
Deferred taxes, net
|
$
|
1,531
|
|
|
$
|
2,454
|
|
We are currently not under any income tax audits or examinations. As of
December 31, 2016
, BDL’s tax years from 2013 to 2016 and Buckeye Caribbean’s tax years from 2012 through 2016 were open to examination by the Internal Revenue Service and Puerto Rico Treasury Department, respectively.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. EARNINGS PER UNIT
Basic and diluted earnings per LP Unit is calculated by dividing net income, after deducting the amount allocated to noncontrolling interests, by the weighted-average number of LP Units outstanding during the period.
The following table is a reconciliation of the weighted average units outstanding used in computing the basic and diluted earnings per unit for the periods indicated (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net income attributable to Buckeye Partners, L.P.
|
$
|
535,608
|
|
|
$
|
437,223
|
|
|
$
|
272,954
|
|
Basic:
|
|
|
|
|
|
|
|
|
Weighted average units outstanding - basic
|
132,242
|
|
|
128,084
|
|
|
119,323
|
|
Earnings per unit - basic
|
$
|
4.05
|
|
|
$
|
3.41
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average units outstanding - basic
|
132,242
|
|
|
128,084
|
|
|
119,323
|
|
Dilutive effect of LP Unit options and LTIP awards granted
|
685
|
|
|
533
|
|
|
576
|
|
Weighted average units outstanding - diluted
|
132,927
|
|
|
128,617
|
|
|
119,899
|
|
Earnings per unit - diluted
|
$
|
4.03
|
|
|
$
|
3.40
|
|
|
$
|
2.28
|
|
25. BUSINESS SEGMENTS
We operate and report in
three
business segments: (i) Domestic Pipelines & Terminals; (ii) Global Marine Terminals; and (iii) Merchant Services. Each segment uses the same accounting policies as those used in the preparation of our consolidated financial statements. All inter-segment revenues, operating income and assets have been eliminated.
Domestic Pipelines & Terminals
The Domestic Pipelines & Terminals segment receives liquid petroleum products from refineries, connecting pipelines, vessels, and bulk and marine terminals, transports those products to other locations for a fee, and provides bulk storage and terminal throughput services. The segment also has butane blending capabilities and provides crude oil services, including train loading/unloading, storage and throughput. This segment owns and operates pipeline systems and liquid petroleum products terminals in the continental United States, including
three
terminals owned by the Merchant Services segment but operated by the Domestic Pipelines & Terminals segment, and
two
underground propane storage caverns. Additionally, this segment provides turn-key operations and maintenance of third-party pipelines and performs pipeline construction management services typically for cost plus a fixed fee.
Global Marine Terminals
The Global Marine Terminals segment provides marine accessible bulk storage and blending services, rail and truck rack loading/unloading along with petroleum processing services in the East Coast and Gulf Coast regions of the United States and in the Caribbean. The segment has
seven
liquid petroleum product terminals located in The Bahamas, Puerto Rico and St. Lucia in the Caribbean, as well as the New York Harbor and Corpus Christi, Texas in the United States.
Buckeye Texas owns storage and marine terminalling facilities that sit along the Corpus Christi Ship Channel in Texas. The Corpus Christi facilities have
five
vessel berths, including
three
deep-water docks,
two
25,000
barrels per day condensate splitters and approximately
6.7 million
barrels of liquid petroleum products storage capacity, including a refrigerated and compressed LPG storage complex, along with rail and truck loading/unloading capabilities. The facilities have
three
field gathering facilities with associated storage in the Eagle Ford play and pipeline connectivity that allows Buckeye Texas to move Eagle Ford play crude oil and condensate production directly to the terminalling complex in Corpus Christi. These assets form an integrated system with connectivity from the production in the field to the marine terminal infrastructure and the processing complex in Corpus Christi.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Merchant Services
The Merchant Services segment is a wholesale distributor of refined petroleum products in the United States and in the Caribbean. This segment recognizes revenues when products are delivered. The segment’s products include gasoline, natural gas liquids, ethanol, biodiesel and petroleum distillates such as heating oil, diesel fuel, kerosene and fuel oil. The segment owns
three
terminals, which are operated by the Domestic Pipelines & Terminals segment. The segment’s customers consist principally of product wholesalers as well as major commercial users of these refined petroleum products.
Natural Gas Storage Disposal Group
In December 2014, we completed the sale of our Natural Gas Storage disposal group for
$102.6 million
in cash, net of expenses and working capital adjustments of
$2.4 million
. We reported the final working capital adjustments as discontinued operations in the first quarter of 2015. We have reported the results of operations for the disposal group as discontinued operations for the years ended
December 31, 2014
. See Note 4 and Note 5 for further information.
Financial Information by Segment
The following tables summarize our financial information by each segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
|
|
|
Domestic Pipelines & Terminals
|
$
|
1,011,696
|
|
|
$
|
966,749
|
|
|
$
|
938,036
|
|
Global Marine Terminals
|
671,465
|
|
|
514,301
|
|
|
395,306
|
|
Merchant Services
|
1,621,915
|
|
|
2,037,664
|
|
|
5,358,626
|
|
Intersegment
|
(56,700
|
)
|
|
(65,280
|
)
|
|
(71,721
|
)
|
Total revenue
|
$
|
3,248,376
|
|
|
$
|
3,453,434
|
|
|
$
|
6,620,247
|
|
For the years ended
December 31, 2016
,
2015
and
2014
,
no
customer contributed
10%
or more of consolidated revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Capital expenditures, net:
(1)
|
|
|
|
|
|
|
|
|
Domestic Pipelines & Terminals
|
$
|
294,849
|
|
|
$
|
218,283
|
|
|
$
|
221,850
|
|
Global Marine Terminals
|
191,422
|
|
|
375,267
|
|
|
248,905
|
|
Merchant Services
|
45
|
|
|
970
|
|
|
614
|
|
Total segment capital expenditures, net
|
486,316
|
|
|
594,520
|
|
|
471,369
|
|
Natural Gas Storage disposal group (2)
|
—
|
|
|
—
|
|
|
780
|
|
Total capital expenditures, net
|
$
|
486,316
|
|
|
$
|
594,520
|
|
|
$
|
472,149
|
|
____________________________
|
|
(1)
|
Amounts exclude the impact of accruals. See Note 26 for supplemental cash flow information.
|
|
|
(2)
|
In December 2014, we sold our Natural Gas Storage segment and its related assets. See Note 4 for further information.
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Total Assets:
|
|
|
|
|
|
Domestic Pipelines & Terminals (1)
|
$
|
4,412,464
|
|
|
$
|
3,498,883
|
|
Global Marine Terminals (2)
|
4,494,995
|
|
|
4,500,705
|
|
Merchant Services
|
513,644
|
|
|
369,693
|
|
Total assets
|
$
|
9,421,103
|
|
|
$
|
8,369,281
|
|
____________________________
|
|
(1)
|
All equity investments are included in the assets of the Domestic Pipelines & Terminals segment.
|
|
|
(2)
|
The Global Marine Terminals segment’s long-lived assets consist of property, plant and equipment, goodwill, intangible assets and other non-current assets. Total tangible long-lived assets located in our international locations were
$1.5 billion
for both years ended
December 31, 2016
and
2015
.
|
The following tables summarize our financial information for continuing operations, by major geographic area, for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
$
|
2,915,619
|
|
|
$
|
3,115,450
|
|
|
$
|
6,279,142
|
|
International
|
332,757
|
|
|
337,984
|
|
|
341,105
|
|
Total revenue
|
$
|
3,248,376
|
|
|
$
|
3,453,434
|
|
|
$
|
6,620,247
|
|
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 and transitions costs associated with acquisitions; 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. We define distributable cash flow as Adjusted EBITDA less cash interest expense, cash income tax expense, and maintenance capital expenditures. Adjusted EBITDA and distributable cash flow are non-GAAP financial measures that are used by our senior management, including our Chief Executive Officer, to assess the operating performance of our business and optimize resource allocation. We use Adjusted EBITDA as a primary measure to: (i) evaluate our consolidated operating performance and the operating performance of our business segments; (ii) allocate resources and capital to business segments; (iii) evaluate the viability of proposed projects; and (iv) determine overall rates of return on alternative investment opportunities. We use distributable cash flow as a performance metric to compare cash-generating performance of Buckeye from period to period and to compare the cash-generating performance for specific periods to the cash distributions (if any) that are expected to be paid to our unitholders. Distributable cash flow is not intended to be a liquidity measure.
We believe that investors benefit from having access to the same financial measures that we use and that these measures are useful to investors because they aid in comparing our operating performance with that of other companies with similar operations. The Adjusted EBITDA 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.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present Adjusted EBITDA from continuing operations by segment and on a consolidated basis and a reconciliation of income from continuing operations to Adjusted EBITDA for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Adjusted EBITDA from continuing operations:
|
|
|
|
|
|
|
|
|
Domestic Pipelines & Terminals
|
$
|
568,405
|
|
|
$
|
522,196
|
|
|
$
|
532,071
|
|
Global Marine Terminals
|
427,229
|
|
|
323,840
|
|
|
239,556
|
|
Merchant Services
|
32,372
|
|
|
22,026
|
|
|
(8,059
|
)
|
Adjusted EBITDA from continuing operations
|
$
|
1,028,006
|
|
|
$
|
868,062
|
|
|
$
|
763,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Income from continuing operations to
Adjusted EBITDA from continuing operations:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
548,675
|
|
|
$
|
438,391
|
|
|
$
|
334,498
|
|
Less:
|
Net income attributable to noncontrolling interests
|
(13,067
|
)
|
|
(311
|
)
|
|
(1,903
|
)
|
Income from continuing operations attributable to Buckeye Partners, L.P.
|
535,608
|
|
|
438,080
|
|
|
332,595
|
|
Add:
|
Interest and debt expense
|
194,922
|
|
|
171,330
|
|
|
171,235
|
|
|
Income tax expense
|
1,460
|
|
|
874
|
|
|
451
|
|
|
Depreciation and amortization (1)
|
254,659
|
|
|
221,278
|
|
|
196,443
|
|
|
Non-cash unit-based compensation expense
|
33,344
|
|
|
29,215
|
|
|
20,867
|
|
|
Acquisition and transition expense (2)
|
8,196
|
|
|
3,127
|
|
|
13,048
|
|
|
Litigation contingency accrual (3)
|
—
|
|
|
15,229
|
|
|
40,000
|
|
|
Hurricane-related costs (4)
|
16,795
|
|
|
—
|
|
|
—
|
|
Less:
|
Amortization of unfavorable storage contracts (5)
|
(5,979
|
)
|
|
(11,071
|
)
|
|
(11,071
|
)
|
|
Gains on property damage recoveries (6)
|
(5,700
|
)
|
|
—
|
|
|
—
|
|
|
Gain on sale of ammonia pipeline
|
(5,299
|
)
|
|
—
|
|
|
—
|
|
Adjusted EBITDA from continuing operations
|
$
|
1,028,006
|
|
|
$
|
868,062
|
|
|
$
|
763,568
|
|
____________________________
|
|
(1)
|
Includes
100%
of the depreciation and amortization expense of
$71.7 million
,
$49.3 million
and
$12.3 million
for Buckeye Texas for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
|
|
|
(2)
|
Represents transaction, internal and third-party costs related to asset acquisition and integration.
|
|
|
(3)
|
Represents reductions in revenue related to settlement of a FERC proceeding.
|
|
|
(4)
|
Represents costs incurred at our BBH facility as a result of Hurricane Matthew, which occurred in October 2016, consisting of
$11.0 million
of operating expenses and a
$5.8 million
write-off of damaged long-lived assets for the year ended
December 31, 2016
.
|
|
|
(5)
|
Represents amortization of negative fair value allocated to certain unfavorable storage contracts acquired in connection with the BBH acquisition.
|
|
|
(6)
|
Represents recoveries of property damages caused by third parties, primarily related to an allision with a ship dock at our terminal located in Pennsauken, New Jersey.
|
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash paid for interest (net of capitalized interest)
|
$
|
174,555
|
|
|
$
|
156,654
|
|
|
$
|
152,201
|
|
Cash paid for income taxes
|
812
|
|
|
1,705
|
|
|
663
|
|
Capitalized interest
|
4,371
|
|
|
21,257
|
|
|
9,903
|
|
Liabilities related to capital projects outstanding at
December 31, 2016
,
2015
, and
2014
of
$59.1 million
,
$87.9 million
, and
$60.4 million
, respectively, are not included under “Capital expenditures” within the consolidated statement of cash flows.
BUCKEYE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the periods indicated is set forth below (in thousands, except per unit amounts). Quarterly results were influenced by seasonal and other factors inherent in our business. The results of operations of the Natural Gas Storage disposal group have been reported as discontinued operations for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
780,594
|
|
|
$
|
777,122
|
|
|
$
|
766,605
|
|
|
$
|
924,055
|
|
|
$
|
3,248,376
|
|
Operating income
|
180,207
|
|
|
189,944
|
|
|
206,227
|
|
|
156,964
|
|
|
733,342
|
|
Net income
|
134,977
|
|
|
144,499
|
|
|
160,270
|
|
|
108,929
|
|
|
548,675
|
|
Net income attributable to Buckeye Partners, L.P.
|
131,113
|
|
|
140,456
|
|
|
156,374
|
|
|
107,665
|
|
|
535,608
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit - basic
|
$
|
1.01
|
|
|
$
|
1.08
|
|
|
$
|
1.19
|
|
|
$
|
0.78
|
|
|
$
|
4.05
|
|
Earnings per unit - diluted
|
$
|
1.01
|
|
|
$
|
1.07
|
|
|
$
|
1.19
|
|
|
$
|
0.78
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (1)
|
$
|
1,088,100
|
|
|
$
|
796,783
|
|
|
$
|
728,384
|
|
|
$
|
840,167
|
|
|
$
|
3,453,434
|
|
Operating income (1)
|
151,802
|
|
|
131,019
|
|
|
143,560
|
|
|
177,735
|
|
|
604,116
|
|
Income from continuing operations (1)
|
112,021
|
|
|
91,326
|
|
|
99,947
|
|
|
135,097
|
|
|
438,391
|
|
Loss from discontinued operations (2)
|
(857
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(857
|
)
|
Net income (1)
|
111,164
|
|
|
91,326
|
|
|
99,947
|
|
|
135,097
|
|
|
437,534
|
|
Net income attributable to Buckeye Partners, L.P. (1)
|
111,611
|
|
|
91,580
|
|
|
100,040
|
|
|
133,992
|
|
|
437,223
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per unit - basic
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.89
|
|
|
$
|
0.72
|
|
|
$
|
0.78
|
|
|
$
|
1.04
|
|
|
$
|
3.42
|
|
Discontinued operations
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
Total
|
$
|
0.88
|
|
|
$
|
0.72
|
|
|
$
|
0.78
|
|
|
$
|
1.04
|
|
|
$
|
3.41
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per unit - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.88
|
|
|
$
|
0.71
|
|
|
$
|
0.78
|
|
|
$
|
1.03
|
|
|
$
|
3.41
|
|
Discontinued operations
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
Total
|
$
|
0.87
|
|
|
$
|
0.71
|
|
|
$
|
0.78
|
|
|
$
|
1.03
|
|
|
$
|
3.40
|
|
____________________________
|
|
(1)
|
During the second quarter of 2015 and third quarter of 2015, we recorded reductions in revenue of
$13.5 million
and
$1.7 million
, respectively, related to settlement of a FERC proceeding.
|
|
|
(2)
|
We reported the final working capital adjustments related to the December 2014 completed sale of our Natural Gas Storage disposal group as discontinued operations in the first quarter of 2015 (see Note 4).
|