Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains various forward-looking statements and information that are based on our beliefs, as well as assumptions made by us and information currently available to us. When used in this Report, words such as
“proposed,” “anticipate,” “project,” “potential,” “could,” “should,” “continue,” “estimate,” “expect,” “may,” “believe,” “will,” “plan,” “seek,” “outlook”
and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we believe that such expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct. Such statements are subject to a variety of risks, uncertainties and assumptions as described in more detail in Part I “Item 1A, Risk Factors” included in our Annual Report on Form 10-K for the year ended
December 31, 2016
. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Although the expectations in the forward-looking statements are based on our current beliefs and expectations, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.
The following information should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Report.
Overview of Business
Buckeye Partners, L.P. is a publicly traded Delaware master limited partnership and its limited partnership units representing limited partner interests (“LP Units”) are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “BPL.” Buckeye GP LLC (“Buckeye GP”) is our general partner. As used in this Report, unless otherwise indicated, “
we
,” “
us
,” “
our
” and “
Buckeye
” mean Buckeye Partners, L.P. and, where the context requires, includes our subsidiaries.
We own and operate a diversified network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage, processing and marketing of liquid petroleum products. We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, with approximately
6,000
miles of pipeline. We also use our service expertise to operate and/or maintain third-party pipelines and perform certain engineering and construction services for our customers. Additionally, we are one of the largest independent terminalling and storage operators in the United States in terms of capacity available for service. Our terminal network comprises more than
120
liquid petroleum products terminals with aggregate storage capacity of over
115 million
barrels across our portfolio of pipelines, inland terminals and marine terminals located primarily in the East Coast, Midwest and Gulf Coast regions of the United States and in the Caribbean. Our network of marine terminals enables us to facilitate global flows of crude oil and refined petroleum products, offering our customers connectivity between supply areas and market centers through some of the world’s most important bulk liquid storage and blending hubs. Our flagship marine terminal in The Bahamas, Buckeye Bahamas Hub Limited (“BBH”), is one of the largest marine crude oil and refined petroleum products storage facilities in the world and provides an array of logistics and blending services for the global flow of petroleum products. Our Gulf Coast regional hub, Buckeye Texas Partners LLC (“Buckeye Texas”), offers world-class marine terminalling, storage and processing capabilities. Our 50% equity interest in VTTI B.V. (“VTTI”) expands our international presence, with premier storage and marine terminalling services for petroleum products in key global energy hubs, primarily in 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.
Recent Developments
Repayment of Debt
In July 2017, we repaid in full the $125.0 million principal amount and $3.2 million of accrued interest outstanding under our 5.125% notes, using funds available under our $1.5 billion revolving credit facility (the “Credit Facility”).
VTTI Acquisition
In January 2017, we acquired an indirect
50%
equity interest in VTTI for cash consideration of
$1.15 billion
(the “VTTI Acquisition”). We own VTTI jointly with Vitol S.A. (“Vitol”). VTTI is one of the largest independent global marine terminal businesses which, through its subsidiaries and partnership interests, owns and operates approximately
57 million
barrels of petroleum products storage across
14
terminals located on
five
continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the United Arab Emirates and Singapore, and offer world-class storage and marine terminalling services for refined petroleum products, liquid petroleum gas and crude oil. We and VIP Terminals Finance B.V., a subsidiary of Vitol, have equal board representation and voting rights in the VTTI joint venture. The earnings from our equity investment in VTTI are reported in our Global Marine Terminals segment.
In May 2017, VTTI entered into a definitive merger agreement with VTTI Energy Partners LP, a publicly traded master limited partnership (“VTTI MLP”), pursuant to which VTTI will acquire, for cash, all of the outstanding publicly held common units of VTTI MLP at a price of $19.50 per common unit, for an aggregate transaction value of approximately $472 million (the “VTTI Merger”). The merger is subject to the satisfaction of certain conditions, including the approval of the merger agreement and the transactions contemplated thereby by at least a majority of the holders of VTTI MLP’s outstanding common units (other than those common units held by VTTI and its affiliates) and subordinated units. If approved, the merger is expected to be completed shortly after the special meeting of VTTI MLP’s unitholders, which is currently scheduled to be held on September 13, 2017. Upon the completion of the merger on the currently expected timetable, we expect to fund our 50% share of the aggregate transaction value of approximately
$236 million
through a capital contribution to VTTI, initially using borrowings under our Credit Facility.
At-the-Market Offering Program
During the
six months ended June 30, 2017
, we sold approximately
0.7 million
LP Units in aggregate under our equity distribution agreement (the “Equity Distribution Agreement”) with J.P. Morgan Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, BNP Paribas Securities Corp., Deutsche Bank Securities Inc., Jefferies LLC, Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, and SMBC Nikko Securities America, Inc. (collectively, the “ATM Underwriters”). We received
$48.4 million
in net proceeds after deducting commissions and other related expenses, including
$0.5 million
of compensation fees paid in aggregate to the ATM Underwriters.
Results of Operations
Consolidated Summary
Our summary operating results were as follows for the periods indicated (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
$
|
810,201
|
|
|
$
|
777,122
|
|
|
$
|
1,779,474
|
|
|
$
|
1,557,716
|
|
Costs and expenses
|
639,560
|
|
|
587,178
|
|
|
1,436,803
|
|
|
1,187,565
|
|
Operating income
|
170,641
|
|
|
189,944
|
|
|
342,671
|
|
|
370,151
|
|
Other expense, net
|
(53,223
|
)
|
|
(45,472
|
)
|
|
(98,722
|
)
|
|
(90,087
|
)
|
Income before taxes
|
117,418
|
|
|
144,472
|
|
|
243,949
|
|
|
280,064
|
|
Income tax (expense) benefit
|
(1,039
|
)
|
|
27
|
|
|
(1,261
|
)
|
|
(588
|
)
|
Net income
|
116,379
|
|
|
144,499
|
|
|
242,688
|
|
|
279,476
|
|
Less: Net income attributable to noncontrolling interests
|
(3,657
|
)
|
|
(4,043
|
)
|
|
(6,390
|
)
|
|
(7,907
|
)
|
Net income attributable to Buckeye Partners, L.P.
|
$
|
112,722
|
|
|
$
|
140,456
|
|
|
$
|
236,298
|
|
|
$
|
271,569
|
|
Non-GAAP Financial Measures
Adjusted EBITDA and distributable cash flow are measures not defined by accounting principles generally accepted in the United States of America (“GAAP”). We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization, further adjusted to exclude certain non-cash items, such as non-cash compensation expense; transaction, transition, and integration costs associated with acquisitions; certain gains and losses on foreign currency transactions and foreign currency derivative financial instruments, as applicable; and certain other operating expense or income items, reflected in net income, that we do not believe are indicative of our core operating performance results and business outlook, such as hurricane-related costs, gains and losses on property damage recoveries, and gains and losses on asset sales. We define distributable cash flow as Adjusted EBITDA less cash interest expense, cash income tax expense, and maintenance capital expenditures, that are incurred to maintain the operating, safety, and/or earnings capacity of our existing assets. These definitions of Adjusted EBITDA and distributable cash flow are also applied to our proportionate share in the Adjusted EBITDA and distributable cash flow of significant equity method investments, such as that in VTTI, and are not applied to our less significant equity method investments. The calculation of our proportionate share of the reconciling items used to derive these VTTI performance metrics is based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which are immaterial. Adjusted EBITDA and distributable cash flow are non-GAAP financial measures that are used by our senior management, including our Chief Executive Officer, to assess the operating performance of our business and optimize resource allocation. We use Adjusted EBITDA as a primary measure to: (i) evaluate our consolidated operating performance and the operating performance of our business segments; (ii) allocate resources and capital to business segments; (iii) evaluate the viability of proposed projects; and (iv) determine overall rates of return on alternative investment opportunities. We use distributable cash flow as a performance metric to compare cash-generating performance of Buckeye from period to period and to compare the cash-generating performance for specific periods to the cash distributions (if any) that are expected to be paid to our unitholders. Distributable cash flow is not intended to be a liquidity measure.
We believe that investors benefit from having access to the same financial measures that we use and that these measures are useful to investors because they aid in comparing our operating performance with that of other companies with similar operations. The Adjusted EBITDA and distributable cash flow data presented by us may not be comparable to similarly titled measures at other companies because these items may be defined differently by other companies.
The following table presents Adjusted EBITDA by segment and on a consolidated basis, distributable cash flow and a reconciliation of net income, which is the most comparable financial measure under generally accepted accounting principles, to Adjusted EBITDA and distributable cash flow for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Pipelines & Terminals
|
$
|
135,387
|
|
|
$
|
141,979
|
|
|
$
|
274,830
|
|
|
$
|
270,460
|
|
Global Marine Terminals
|
131,757
|
|
|
108,382
|
|
|
262,388
|
|
|
215,005
|
|
Merchant Services
|
2,047
|
|
|
6,228
|
|
|
9,482
|
|
|
15,750
|
|
Total Adjusted EBITDA
|
$
|
269,191
|
|
|
$
|
256,589
|
|
|
$
|
546,700
|
|
|
$
|
501,215
|
|
Reconciliation of Net Income to Adjusted EBITDA and Distributable cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
116,379
|
|
|
$
|
144,499
|
|
|
$
|
242,688
|
|
|
$
|
279,476
|
|
Less: Net income attributable to noncontrolling interests
|
(3,657
|
)
|
|
(4,043
|
)
|
|
(6,390
|
)
|
|
(7,907
|
)
|
Net income attributable to Buckeye Partners, L.P.
|
112,722
|
|
|
140,456
|
|
|
236,298
|
|
|
271,569
|
|
Add: Interest and debt expense
|
56,424
|
|
|
47,834
|
|
|
112,309
|
|
|
95,617
|
|
Income tax expense (benefit)
|
1,039
|
|
|
(27
|
)
|
|
1,261
|
|
|
588
|
|
Depreciation and amortization (1)
|
64,838
|
|
|
63,322
|
|
|
130,326
|
|
|
124,748
|
|
Non-cash unit-based compensation expense
|
8,902
|
|
|
7,724
|
|
|
17,580
|
|
|
14,059
|
|
Acquisition and transition expense (2)
|
799
|
|
|
48
|
|
|
1,828
|
|
|
170
|
|
Hurricane-related costs (3)
|
613
|
|
|
—
|
|
|
3,016
|
|
|
—
|
|
Proportionate share of Adjusted EBITDA for the equity
method investment in VTTI (4)
|
28,801
|
|
|
—
|
|
|
57,418
|
|
|
—
|
|
Less: Amortization of unfavorable storage contracts (5)
|
—
|
|
|
(2,768
|
)
|
|
—
|
|
|
(5,536
|
)
|
Gains on property damage recoveries (6)
|
(4,621
|
)
|
|
—
|
|
|
(4,621
|
)
|
|
—
|
|
Earnings from the equity method investment in VTTI (4)
|
(326
|
)
|
|
—
|
|
|
(8,715
|
)
|
|
—
|
|
Adjusted EBITDA
|
$
|
269,191
|
|
|
$
|
256,589
|
|
|
$
|
546,700
|
|
|
$
|
501,215
|
|
Less: Interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other
|
(52,063
|
)
|
|
(43,624
|
)
|
|
(103,587
|
)
|
|
(87,197
|
)
|
Income tax (expense) benefit, excluding non-cash taxes
|
(473
|
)
|
|
29
|
|
|
(695
|
)
|
|
(588
|
)
|
Maintenance capital expenditures
|
(40,494
|
)
|
|
(29,881
|
)
|
|
(73,080
|
)
|
|
(51,447
|
)
|
Proportionate share of VTTI
’
s interest expense, current
income tax expense and maintenance capital expenditures (4)
|
(10,690
|
)
|
|
—
|
|
|
(18,708
|
)
|
|
—
|
|
Add: Hurricane-related maintenance capital expenditures
|
4,879
|
|
|
—
|
|
|
10,429
|
|
|
—
|
|
Distributable cash flow
|
$
|
170,350
|
|
|
$
|
183,113
|
|
|
$
|
361,059
|
|
|
$
|
361,983
|
|
_________________________
|
|
(1)
|
Includes 100% of the depreciation and amortization expense of
$18.5 million
and
$17.2 million
for Buckeye Texas for the
three months ended June 30, 2017
and
2016
, respectively, and
$36.0 million
and
$34.0 million
for the
six months ended June 30, 2017
and
2016
, respectively.
|
|
|
(2)
|
Represents transaction, internal and third-party costs related to asset acquisition and integration.
|
|
|
(3)
|
Represents operating expenses incurred at our BBH facility as a result of Hurricane Matthew, which occurred in October 2016.
|
|
|
(4)
|
Due to the significance of our equity method investment in VTTI, effective January 1, 2017, we applied the definitions of Adjusted EBITDA and distributable cash flow, covered in our description of non-GAAP financial measures, with respect to our proportionate share of VTTI’s Adjusted EBITDA and distributable cash flow. The calculation of our proportionate share of the reconciling items used to derive these VTTI performance metrics is based upon our 50% equity interest in VTTI, prior to adjustments related to noncontrolling interests in several of its subsidiaries and partnerships, which are immaterial.
|
|
|
(5)
|
Represents amortization of negative fair value allocated to certain unfavorable storage contracts acquired in connection with the BBH acquisition.
|
|
|
(6)
|
Represents gains on 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.
|
The following table presents product volumes in barrels per day (“bpd”) and average tariff rates in cents per barrel for our Domestic Pipelines & Terminals segment, percent of capacity utilization for our Global Marine Terminals segment and total volumes sold in gallons for the Merchant Services segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Domestic Pipelines & Terminals
(average bpd in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipelines:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
|
778.4
|
|
|
803.1
|
|
|
741.0
|
|
|
750.2
|
|
Jet fuel
|
|
376.1
|
|
|
366.4
|
|
|
365.6
|
|
|
356.8
|
|
Middle distillates (1)
|
|
276.0
|
|
|
258.9
|
|
|
302.6
|
|
|
286.5
|
|
Other products (2)
|
|
25.4
|
|
|
22.4
|
|
|
23.2
|
|
|
17.3
|
|
Total throughput
|
|
1,455.9
|
|
|
1,450.8
|
|
|
1,432.4
|
|
|
1,410.8
|
|
Terminals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (3)
|
|
1,269.4
|
|
|
1,278.5
|
|
|
1,228.7
|
|
|
1,227.2
|
|
|
|
|
|
|
|
|
|
|
Pipeline average tariff (cents/bbl)
|
|
89.9
|
|
|
86.0
|
|
|
89.9
|
|
|
85.1
|
|
|
|
|
|
|
|
|
|
|
Global Marine Terminals (percent of capacity):
|
|
|
|
|
|
|
|
|
Average capacity utilization rate (4)
|
|
91
|
%
|
|
99
|
%
|
|
95
|
%
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
Merchant Services (in millions of gallons):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales volumes
|
|
253.2
|
|
|
260.9
|
|
|
602.3
|
|
|
613.8
|
|
___________________________
|
|
(1)
|
Includes diesel fuel and heating oil.
|
|
|
(2)
|
Includes liquefied petroleum gas, intermediate petroleum products and crude oil.
|
|
|
(3)
|
Includes throughput of two underground propane storage caverns.
|
|
|
(4)
|
Represents the ratio of contracted capacity to capacity available to be contracted. Based on total capacity (i.e., including out of service capacity), average capacity utilization rates are approximately
87%
and
91%
for the
three months ended June 30, 2017
and
2016
, respectively, and approximately
91%
during each of the
six months ended June 30, 2017
and
2016
.
|
Three Months Ended June 30, 2017
Compared to
Three Months Ended June 30, 2016
Consolidated
Net income was
$116.4 million
for the
three months ended June 30, 2017
, which was
a decrease
of
$28.1 million
, or
19.4%
, from
$144.5 million
for the corresponding period in
2016
. The
decrease
in net income reflected decreased net income contributions from all three of our segments. In our Global Marine Terminals segment, lower storage revenues and higher operating expenses were the primary drivers for the decrease over the prior year quarter. The decrease in contributions from our Merchant Services segment was mainly attributable to lower rack margins and weaker market conditions, primarily in the distillate market. In our Domestic Pipelines & Terminals segment, lower terminal throughput, lower product recoveries and higher operating expenses were the primary drivers for the decrease over the prior year.
Additionally, increases in depreciation and amortization expense due to assets placed into service during 2016, as well as an increase in interest and debt expense, mainly related to the long-term debt issued in the fourth quarter of 2016 to partially fund the VTTI Acquisition, negatively impacted net income attributable to our unitholders.
These decreases in net income attributable to our unitholders were partially offset by higher pipeline revenues, reflecting internal growth capital investments, increases in pipeline tariff rates and longer-haul shipments, in our Domestic Pipelines & Terminals segment.
Revenue was
$810.2 million
for the three months ended
June 30, 2017
, which was
an increase
of
$33.1 million
, or
4.3%
, from
$777.1 million
for the corresponding period in
2016
. The
increase
in revenue was primarily related to (i) an increase in petroleum product prices, partially offset by a decrease in sales volumes, in our Merchant Services segment; and (ii) higher pipeline transportation revenues, reflecting internal growth capital investments, increases in pipeline tariff rates and longer-haul shipments, as well as higher project management revenues in our Domestic Pipelines & Terminals segment. These increases in revenue were partially offset by a decline in storage revenue in our Global Marine Terminals segment, driven by lower capacity utilization in the period, related to the exit of a long-term customer from one of our facilities.
Adjusted EBITDA was
$269.2 million
for the
three months ended June 30, 2017
, which was
an increase
of
$12.6 million
, or
4.9%
, from
$256.6 million
for the corresponding period in
2016
. The
increase
in Adjusted EBITDA was primarily related to the Adjusted EBITDA contribution from our equity investment in VTTI, acquired in January 2017; higher pipeline transportation revenues in our Domestic Pipelines & Terminals segment; and higher ancillary revenues in our Global Marine Terminals segment. These positive factors were partially offset by lower terminal throughput, lower product recoveries, and higher operating expenses in our Domestic Pipelines & Terminals segment; lower storage revenues and higher operating expenses in our Global Marine Terminals segment; and lower rack margins and weaker market conditions in our Merchant Services segment.
Distributable cash flow was
$170.4 million
for the
three months ended June 30, 2017
, which was
a decrease
of
$12.7 million
, or
6.9%
, from
$183.1 million
for the corresponding period in
2016
. The
decrease
in distributable cash flow was primarily related to our proportionate share of VTTI’s interest expense, current income tax expense and maintenance capital expenditures of
$10.7 million
, which partially offset the Adjusted EBITDA contribution from our equity investment in VTTI; an
$8.5 million
increase in interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other, due to the long-term debt issued in the fourth quarter of 2016; and a
$5.7 million
increase in maintenance capital expenditures, excluding hurricane-related maintenance capital expenditures, primarily resulting from increased tank integrity project costs and upgrades to station and terminalling equipment. These decreases in distributable cash flow were partially offset by the
increase
of
$12.6 million
in Adjusted EBITDA, as described above.
Adjusted EBITDA by Segment
Domestic Pipelines & Terminals
. Adjusted EBITDA from the Domestic Pipelines & Terminals segment was
$135.4 million
for the
three months ended June 30, 2017
, which was
a decrease
of
$6.6 million
, or
4.6%
, from
$142.0 million
for the corresponding period in
2016
. The
decrease
in Adjusted EBITDA was primarily due to a $10.5 million increase in operating expenses, partially offset by a $3.6 million net increase in revenue and a $0.3 million increase in earnings from equity investments. The increase in operating expenses primarily reflected higher pipeline integrity and terminalling maintenance expenses, as well as an increase in reimbursable expenses within our project management business due to an increase in project activity. The increase in revenue was due to a $5.6 million increase in pipeline transportation revenues, reflecting returns from internal growth capital investments, increases in average pipeline tariff rates and longer-haul shipments; a $5.7 million increase in project management revenues due to an increase in project activity; a $0.5 million increase in storage revenue, primarily due to storage capacity brought back into service and new storage contracts; and a $0.5 million increase in other revenues. These revenue increases were partially offset by a $4.8 million decrease in terminalling throughput, primarily due to the termination of a crude-by-rail throughput contract at our Albany, New York terminal in the third quarter of 2016 and a $3.9 million decrease in product recoveries.
Pipeline volumes increased by
0.4%
due to strong demand for distillate and jet fuel shipments, which were partially offset by weaker demand for gasoline transportation services. Terminalling volumes decreased by
0.7%
, primarily reflecting favorable business conditions in the second quarter of 2016 at our Chicago Complex, which resulted in unusually high transfers, partially offset by strong customer throughput demand in our Southeast region.
Global Marine Terminals
. Adjusted EBITDA from the Global Marine Terminals segment was
$131.8 million
for the
three months ended June 30, 2017
, which was
an increase
of
$23.4 million
, or
21.6%
, from
$108.4 million
for the corresponding period in
2016
. The increase in Adjusted EBITDA was primarily due to the $28.8 million Adjusted EBITDA contribution from our equity investment in VTTI, acquired in January 2017, partially offset by a $2.8 million increase in operating expenses and a $2.6 million net decrease in revenue. The increase in operating expenses reflected higher property taxes, related to the placement of capital projects into service, as well as incremental business development and general and administrative expenses, related to the growth of the segment. The decrease in revenue was due to a $9.4 million net decrease in revenue from storage services and terminalling revenue, reflecting lower capacity utilization, related to the exit of a long-term customer from one of our facilities; partially offset by a $6.8 million increase in revenue from ancillary services, including tank cleanings, water disposal, berthing, heating and other incidental services. The average capacity utilization of our marine storage assets was
91%
for the
three months ended June 30, 2017
, which was a decrease from
99%
in the corresponding period in
2016
.
Merchant Services
. Adjusted EBITDA from the Merchant Services segment was
$2.0 million
for the
three months ended June 30, 2017
, which was
a decrease
of
$4.2 million
, or
67.7%
, from
$6.2 million
for the corresponding period in
2016
. Adjusted EBITDA was negatively impacted by lower rack margins and weaker market conditions, primarily in the distillate market, partially offset by a decrease in operating expenses.
Adjusted EBITDA was
positively
impacted by a
$31.1
million
increase
in revenue, which included a
$42.0
million
increase
in refined petroleum product sales due to a price
increase
of
$0.16
per gallon (average sales prices per gallon were
$1.58
and
$1.42
for the
2017
and
2016
periods, respectively), which was partially offset by a
$10.9
million
decrease
due to a
3.0%
decrease
in volumes sold, and a $0.7 million decrease in operating expenses.
Adjusted EBITDA was
negatively
impacted by a
$36.0
million
increase
in the cost of product sales, which included a
$46.6
million
increase
in refined petroleum product cost due to a price
increase
of
$0.18
per gallon (average prices per gallon were
$1.56
and
$1.38
for the
2017
and
2016
periods, respectively), partially offset by a
$10.6
million
decrease
due to a
3.0%
decrease
in volumes sold.
Six Months Ended June 30, 2017
Compared to
Six Months Ended June 30, 2016
Consolidated
Net income was
$242.7 million
for the
six months ended June 30, 2017
, which was
a decrease
of
$36.8 million
, or
13.2%
, from
$279.5 million
for the corresponding period in
2016
. The
decrease
in net income was primarily related to decreased contributions from our Global Marine Terminals and Merchant Services segments. In our Global Marine Terminals segment, lower storage revenues due to lower utilization, lower processing revenue at Buckeye Texas, and higher operating expenses, which in total more than offset the earnings from our equity investment in VTTI, acquired in January 2017, were the primary drivers for the decrease over the prior year. The decrease in contributions from our Merchant Services segment was mainly attributable to lower rack margins and weaker market conditions, primarily in the distillate market.
Additionally, increases in depreciation and amortization expense due to assets placed into service during 2016, as well as an increase in interest and debt expense, mainly related to the long-term debt issued in the fourth quarter of 2016 to partially fund the VTTI Acquisition, negatively impacted net income attributable to our unitholders.
These decreases in net income attributable to our unitholders were partially offset by increased contributions from our Domestic Pipelines & Terminals segment. Our Domestic Pipelines & Terminals segment benefited from higher pipeline revenues, reflecting internal growth capital investments, increases in pipeline tariff rates and longer-haul shipments; and higher storage revenue, primarily due to storage capacity brought back into service and new storage contracts.
Revenue was
$1,779.5 million
for the
six months ended June 30, 2017
, which was
an increase
of
$221.8 million
, or
14.2%
, from
$1,557.7 million
for the corresponding period in
2016
. The
increase
in revenue was primarily related to (i) an increase in petroleum product prices, partially offset by a decrease in sales volumes, in our Merchant Services segment; (ii) higher pipeline transportation revenues, reflecting internal growth capital investments, increases in pipeline tariff rates and longer-haul shipments, as well as higher project management revenues in our Domestic Pipelines & Terminals segment; and (iii) higher ancillary revenues in our Global Marine Terminals segment. This increase in revenue was partially offset by a decline in processing services, terminalling, and storage revenues in our Global Marine Terminals segment, driven by lower capacity utilization, related to the exit of a long-term customer from one of our facilities.
Adjusted EBITDA was
$546.7 million
for the
six months ended June 30, 2017
, which was
an increase
of
$45.5 million
, or
9.1%
, from
$501.2 million
for the corresponding period in
2016
. The
increase
in Adjusted EBITDA was primarily related to the Adjusted EBITDA contributions from our equity investment in VTTI, acquired in January 2017 and higher pipeline transportation revenues in our Domestic Pipelines & Terminals segment. These positive factors were partially offset by lower terminal throughput, lower product recoveries, and higher operating expenses in our Domestic Pipelines & Terminals segment; lower storage, processing services, and terminalling revenues and higher operating expenses in our Global Marine Terminals segment; and lower rack margins and weaker market conditions in our Merchant Services segment.
Distributable cash flow was
$361.1 million
for the
six months ended June 30, 2017
, which was
a decrease
of
$0.9 million
, or
0.2%
, from
$362.0 million
as compared to the corresponding period in
2016
. The
decrease
in distributable cash flow was primarily related to our proportionate share of VTTI’s interest expense, current income tax expense and maintenance capital expenditures of
$18.7 million
, which partially offset the Adjusted EBITDA contribution from our equity investment in VTTI; a
$16.4 million
increase in interest and debt expense, excluding amortization of deferred financing costs, debt discounts and other, due to the long-term debt issued in the fourth quarter of 2016; and an
$11.3 million
increase in maintenance capital expenditures, excluding hurricane-related maintenance capital expenditures, primarily resulting from increased tank integrity project costs and upgrades to station and terminalling equipment. These decreases in distributable cash flow were partially offset by
an increase
of
$45.5 million
in Adjusted EBITDA, as described above.
Adjusted EBITDA by Segment
Domestic Pipelines & Terminals
. Adjusted EBITDA from the Domestic Pipelines & Terminals segment was
$274.8 million
for the
six months ended June 30, 2017
, which was an
increase
of
$4.4 million
, or
1.6%
, from
$270.4 million
for the corresponding period in
2016
. The
increase
in Adjusted EBITDA was primarily due to a $19.2 million net increase in revenue, partially offset by a $14.0 million increase in operating expenses and a $0.8 million decrease in earnings from equity investments. The increase in revenue was due to a $15.9 million increase in pipeline transportation revenues, reflecting returns from internal growth capital investments and increases in average pipeline tariff rates and longer-haul shipments; an $11.0 million increase in project management revenues due to an increase in project activity; and a $5.1 million increase in storage revenue, primarily due to storage capacity brought back into service and new storage contracts. These revenue increases were partially offset by a $9.7 million decrease in terminalling throughput, primarily due to the termination of a crude-by-rail throughput contract at our Albany, New York terminal in the third quarter of 2016; a $1.7 million decrease in product recoveries; and a $1.4 million decrease in other revenues. The increase in operating expenses primarily reflected higher pipeline integrity and terminalling maintenance expenses, as well as an increase in reimbursable expenses within our project management business due to an increase in project activity.
Pipeline volumes increased by
1.5%
due to strong demand for distillate and jet fuel shipments, which were partially offset by weaker demand for gasoline transportation services. Terminalling volumes increased by
0.1%
due to higher gasoline volumes, reflecting strong customer throughput demand, particularly in the Southeast, partially offset by lower transfers at our Chicago Complex.
Global Marine Terminals
. Adjusted EBITDA from the Global Marine Terminals segment was
$262.4 million
for the
six months ended June 30, 2017
, which was
an increase
of
$47.4 million
, or
22.0%
, from
$215.0 million
for the corresponding period in
2016
. The
increase
in Adjusted EBITDA was primarily due to the $57.4 million Adjusted EBITDA contribution from our equity investment in VTTI, acquired in January 2017, partially offset by a $4.8 million net decrease in revenue and a $5.2 million increase in operating expenses. The decrease in revenue was due to a $10.3 million net decrease in revenue from storage services and terminalling revenue, reflecting lower capacity utilization, related to the exit of a long-term customer from one of our facilities, and a decrease in processing services revenues at Buckeye Texas; partially offset by a $5.5 million increase in revenue from ancillary services, including tank cleaning, water disposal, berthing, heating and other incidental services. The average capacity utilization of our marine storage assets was
95%
for the
six months ended June 30, 2017
, which was
a decrease
from
99%
in the corresponding period in
2016
. The increase in operating expenses was primarily driven by higher property taxes, reflecting the capitalization of property taxes on assets under construction at Buckeye Texas in the prior period, and overhead general and administrative expenses in our Global Marine Terminals segment.
Merchant Services
. Adjusted EBITDA from the Merchant Services segment was
$9.5 million
for the
six months ended June 30, 2017
, which was a
decrease
of
$6.3 million
, or
39.9%
, from
$15.8 million
for the corresponding period in
2016
. Adjusted EBITDA was negatively impacted by lower rack margins and weaker market conditions, primarily in the distillate market, partially offset by a decrease in operating expenses.
Adjusted EBITDA was
positively
impacted by a
$212.5
million
increase
in revenue, which included a
$226.7
million
increase
in refined petroleum product sales due to a price
increase
of
$0.37
per gallon (average sales prices per gallon were
$1.61
and
$1.24
for the
2017
and
2016
periods, respectively), partially offset by a
$14.2
million
decrease
due to a
1.9%
decrease
in volumes sold and a $0.3 million decrease in operating expenses.
Adjusted EBITDA was
negatively
impacted by a
$219.1
million
increase
in the cost of product sales, which included a
$232.9
million
increase
in refined petroleum product cost due to a price
increase
of
$0.39
per gallon (average prices per gallon were
$1.59
and
$1.20
for the
2017
and
2016
periods, respectively), partially offset by a
$13.8
million
decrease
due to a
1.9%
decrease
in volumes sold.
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 Credit Facility and proceeds from the issuance of our LP Units. We will, from time to time, issue debt securities to refinance amounts borrowed under our Credit Facility on a long-term basis. The Buckeye Merchant Service Companies fund their working capital needs principally from their own operations and their portion of our Credit Facility, which is classified as a current liability on our unaudited condensed consolidated balance sheets. Our financial policy has been to fund maintenance capital expenditures with cash from 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. We target 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 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
June 30, 2017
, we had
working capital
of
$37.1 million
and
$911.5 million
of additional borrowing capacity under our Credit Facility.
Capital Structure 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 U.S. Securities and Exchange Commission (“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
June 30, 2017
, we had
$950.9 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.
Current Maturities Expected to be Refinanced
We have classified $125.0 million of 5.125% notes and $300.0 million of
6.050%
notes due on July 1, 2017 and January 15, 2018, respectively, as long-term debt in the consolidated balance sheet at
June 30, 2017
because we have the intent and ability to refinance these obligations on a long-term basis under our Credit Facility. At
June 30, 2017
, we had
$911.5 million
of additional borrowing capacity under our Credit Facility.
Debt
At
June 30, 2017
, we had total fixed-rate and variable-rate debt obligations of
$3,970.4 million
and
$836.8 million
, respectively, with an aggregate fair value of
$4,983.0 million
. At
June 30, 2017
, we were in compliance with the covenants under our Credit Facility and Term Loan.
In July 2017, we repaid in full the
$125.0 million
principal amount and
$3.2 million
of accrued interest outstanding under our
5.125% notes
, using funds available under our Credit Facility.
As discussed in Recent Developments above, upon completion of the pending VTTI Merger, we expect to fund our 50% share of the aggregate transaction value of approximately
$236 million
through a capital contribution to VTTI, initially using borrowings under our Credit Facility.
Equity
During the
six months ended June 30, 2017
, we sold approximately
0.7 million
LP Units in aggregate under the Equity Distribution Agreement and received
$48.4 million
in net proceeds after deducting commissions and other related expenses, including
$0.5 million
of compensation fees paid in aggregate to the ATM Underwriters.
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):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
436,221
|
|
|
$
|
371,600
|
|
Investing activities
|
|
(1,340,510
|
)
|
|
(202,492
|
)
|
Financing activities
|
|
266,324
|
|
|
(159,227
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(637,965
|
)
|
|
$
|
9,881
|
|
Operating Activities
Net cash provided by operating activities of
$436.2 million
for the
six months ended June 30, 2017
primarily resulted from
$242.7 million
of net income,
$130.3 million
of depreciation and amortization expense and a
$70.3 million
decrease in inventory, partially offset by a
$29.5 million
net increase in fair value of derivatives.
Net cash provided by operating activities of $371.6 million for the six months ended June 30, 2016 primarily resulted from $279.5 million of net income and $124.7 million of depreciation and amortization expense, partially offset by a $54.3 million increase in inventory, primarily driven by the change in commodity prices.
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
Net cash used in investing activities of
$1.34 billion
for the
six months ended June 30, 2017
primarily resulted from
$203.0 million
of capital expenditures and
$1.15 billion
of equity investment acquisition costs related to the VTTI Acquisition.
Net cash used in investing activities of $202.5 million for the six months ended June 30, 2016 primarily resulted from $224.1 million of capital expenditures, partially offset by $19.9 million in refunded escrow deposits. See below for a discussion of capital spending.
Financing Activities
Net cash provided by financing activities of
$266.3 million
for the
six months ended June 30, 2017
primarily resulted from
$587.3 million
of net borrowings under the Credit Facility and
$48.4 million
of net proceeds from the issuance of
0.7 million
LP Units under the Equity Distribution Agreement, which were partially offset by
$350.3 million
of cash distributions paid to our unitholders (
$2.4875
per LP Unit).
Net cash used in financing activities of $159.2 million for the six months ended June 30, 2016 primarily resulted from $310.6 million of cash distributions paid to our unitholders ($2.3875 per LP Unit), which were partially offset by $70.0 million of net borrowings under the Credit Facility and $90.2 million of net proceeds from the issuance of 1.3 million LP Units under the Equity Distribution Agreement.
Capital Expenditures
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):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
Maintenance capital expenditures (1)
|
|
$
|
73,080
|
|
|
$
|
51,447
|
|
Expansion and cost reduction (2)
|
|
129,881
|
|
|
172,670
|
|
Total capital expenditures, net
|
|
$
|
202,961
|
|
|
$
|
224,117
|
|
____________________________
|
|
(1)
|
Includes maintenance capital expenditures of
$10.4 million
related to the BBH facility as a result of Hurricane Matthew for the
six months ended June 30, 2017
.
|
|
|
(2)
|
Amounts exclude accruals for capital expenditures. Expansion and cost reduction amounts, including accruals for capital expenditures, were
$119.2 million
and
$164.2 million
for the
six months ended June 30, 2017
and 2016, respectively.
|
Capital expenditures decreased for the
six months ended June 30, 2017
, as compared to the corresponding period in
2016
, primarily due to decreases in expansion and cost reduction capital projects. Our expansion and cost reduction capital expenditures were
$129.9 million
for the
six months ended June 30, 2017
, which was a
decrease
of
$42.8 million
, or
24.8%
, from
$172.7 million
for the corresponding period in
2016
. The period-over-period fluctuations in our expansion and cost reduction capital expenditures primarily reflected the completion of certain large organic-growth capital projects, including the Michigan/Ohio Pipeline Expansion Project, in 2016. Our maintenance capital expenditures were
$73.1 million
for the
six months ended June 30, 2017
, which was an increase of
$21.6 million
, or
42.0%
, from
$51.4 million
for the corresponding period in
2016
. Period-over-period fluctuations in our maintenance capital expenditures were primarily driven by increased 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.
We have estimated our capital expenditures as follows for the year ending
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
Low
|
|
High
|
Domestic Pipelines & Terminals:
|
|
|
|
|
Maintenance capital expenditures
|
|
$
|
75,000
|
|
|
$
|
85,000
|
|
Expansion and cost reduction
|
|
175,000
|
|
|
195,000
|
|
Total capital expenditures
|
|
$
|
250,000
|
|
|
$
|
280,000
|
|
|
|
|
|
|
Global Marine Terminals:
|
|
|
|
|
Maintenance capital expenditures
|
|
$
|
40,000
|
|
|
$
|
50,000
|
|
Expansion and cost reduction
|
|
120,000
|
|
|
140,000
|
|
Total capital expenditures (1)
|
|
$
|
160,000
|
|
|
$
|
190,000
|
|
|
|
|
|
|
Overall:
|
|
|
|
|
Maintenance capital expenditures
|
|
$
|
115,000
|
|
|
$
|
135,000
|
|
Expansion and cost reduction
|
|
295,000
|
|
|
335,000
|
|
Total capital expenditures
|
|
$
|
410,000
|
|
|
$
|
470,000
|
|
_________________________
(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.
Off-Balance Sheet Arrangements
At
June 30, 2017
, we had no off-balance sheet debt or arrangements.