Document
 
 
 
 
 
 
 
 
 
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
OR 
¨    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
 Commission file number 1-9356 
 
Buckeye Partners, L.P.
(Exact name of registrant as specified in its charter)
 
Delaware
 
23-2432497
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification number)
 
 
 
One Greenway Plaza
 
 
Suite 600
 
 
Houston, TX
 
77046
(Address of principal executive offices)
 
(Zip Code)
 Registrant’s telephone number, including area code: (832) 615-8600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý  No ¨ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
Accelerated filer ¨ 
Non-accelerated filer
¨ 
 
Smaller reporting company ¨ 
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý 
Limited partner units and Class C Units outstanding as of October 26, 2018: 146,949,101 and 6,714,963, respectively.
 
 
 
 
 


Table of Contents

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

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



Table of Contents

PART I.  FINANCIAL INFORMATION 
Item 1.  Financial Statements 
BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited) 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 

 
 

 
 

 
 

Product sales
$
525,426

 
$
517,461

 
$
1,874,463

 
$
1,482,686

Transportation, storage and other services
384,122

 
405,158

 
1,159,029

 
1,219,407

Total revenue
909,548

 
922,619

 
3,033,492

 
2,702,093

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of product sales
514,811

 
506,780

 
1,852,537

 
1,447,408

Operating expenses
159,562

 
157,444

 
470,935

 
480,973

Depreciation and amortization
68,464

 
65,661

 
199,171

 
195,987

General and administrative
21,578

 
23,904

 
66,659

 
69,987

Goodwill impairment (Note 8)
536,964

 

 
536,964

 

Other, net

 
501

 
(16,153
)
 
(3,921
)
Total costs and expenses
1,301,379

 
754,290

 
3,110,113

 
2,190,434

Operating (loss) income
(391,831
)
 
168,329

 
(76,621
)
 
511,659

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

(Loss) earnings from equity investments (Note 7)
(292,387
)
 
9,232

 
(276,633
)
 
22,710

Interest and debt expense
(60,332
)
 
(56,561
)
 
(179,003
)
 
(168,870
)
Other expense
(152
)
 
(328
)
 
(764
)
 
(878
)
Total other expense, net
(352,871
)
 
(47,657
)
 
(456,400
)
 
(147,038
)
 
 
 
 
 
 
 
 
(Loss) income before taxes
(744,702
)
 
120,672

 
(533,021
)
 
364,621

Income tax expense
(634
)
 
(448
)
 
(1,906
)
 
(1,709
)
Net (loss) income
(745,336
)
 
120,224

 
(534,927
)
 
362,912

Less: Net income attributable to noncontrolling interests
(499
)
 
(4,037
)
 
(6,631
)
 
(10,427
)
Net (loss) income attributable to Buckeye Partners, L.P.
$
(745,835
)
 
$
116,187

 
$
(541,558
)
 
$
352,485

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

 
 

 
 

Basic
$
(4.86
)
 
$
0.82

 
$
(3.57
)
 
$
2.50

Diluted
$
(4.86
)
 
$
0.81

 
$
(3.57
)
 
$
2.49

 
 
 
 
 
 
 
 
Weighted average units outstanding:
 

 
 

 
 

 
 

Basic
153,512

 
142,088

 
151,908

 
141,104

Diluted
153,512

 
142,818

 
151,908

 
141,781

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net (loss) income
$
(745,336
)
 
$
120,224

 
$
(534,927
)
 
$
362,912

Other comprehensive income:
 
 
 
 
 

 
 

Unrealized gains (losses) on derivative instruments, net
7,129

 
(5,764
)
 
30,203

 
(11,995
)
Reclassification of derivative losses to net income, net
2,296

 
3,038

 
6,928

 
9,113

Changes in benefit plan assets and benefit obligations

 
50

 

 
66

Other comprehensive (loss) income from equity method investments
(2,325
)
 
11,933

 
(10,082
)
 
39,679

Total other comprehensive income
7,100

 
9,257

 
27,049

 
36,863

Comprehensive (loss) income
(738,236
)
 
129,481

 
(507,878
)
 
399,775

Less: Comprehensive income attributable to noncontrolling interests
(499
)
 
(4,037
)
 
(6,631
)
 
(10,427
)
Comprehensive (loss) income attributable to Buckeye Partners, L.P.
$
(738,735
)
 
$
125,444

 
$
(514,509
)
 
$
389,348

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

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BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
(Unaudited)
 
September 30,
2018
 
December 31,
2017
Assets:
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
661

 
$
2,180

Accounts receivable, net
239,838

 
270,648

Construction and pipeline relocation receivables
14,681

 
11,047

Inventories
197,516

 
301,425

Derivative assets
60,306

 
34,959

Prepaid and other current assets
65,229

 
36,339

Total current assets
578,231

 
656,598

 
 
 
 
Property, plant and equipment
8,312,885

 
7,928,240

Less: Accumulated depreciation
(1,339,481
)
 
(1,192,448
)
Property, plant and equipment, net
6,973,404

 
6,735,792

 
 
 
 
Equity investments
1,166,245

 
1,494,412

Goodwill
470,393

 
1,007,313

 
 
 
 
Intangible assets
615,086

 
615,086

Less: Accumulated amortization
(305,202
)
 
(256,025
)
Intangible assets, net
309,884

 
359,061

 
 
 
 
Other non-current assets
37,713

 
51,483

Total assets
$
9,535,870

 
$
10,304,659

 
 
 
 
Liabilities and partners’ capital:
 

 
 

Current liabilities:
 

 
 

Line of credit
$
178,201

 
$
252,204

Accounts payable
145,025

 
160,777

Derivative liabilities
5,757

 
7,172

Accrued and other current liabilities
273,379

 
265,207

Total current liabilities
602,362

 
685,360

 
 
 
 
Long-term debt
4,985,200

 
4,658,321

Other non-current liabilities
88,249

 
92,656

Total liabilities
5,675,811

 
5,436,337

 
 
 
 
Commitments and contingent liabilities (Note 4)

 

 
 

 
 

Buckeye Partners, L.P. capital:
 

 
 

Limited Partners (146,949,101 and 146,677,459 units outstanding as of September 30, 2018 and December 31, 2017, respectively)
3,536,920

 
4,562,306

Class C Units (6,714,963 and zero units outstanding as of September 30, 2018 and December 31, 2017, respectively)
256,293

 

Accumulated other comprehensive income
55,680

 
28,631

Total Buckeye Partners, L.P. capital
3,848,893

 
4,590,937

Noncontrolling interests
11,166

 
277,385

Total partners’ capital
3,860,059

 
4,868,322

Total liabilities and partners’ capital
$
9,535,870

 
$
10,304,659

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

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BUCKEYE PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net (loss) income
$
(534,927
)
 
$
362,912

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

 
 
Depreciation and amortization
199,171

 
195,987

Amortization of debt issuance costs, discounts and terminated interest rate swaps
11,755

 
13,053

Non-cash unit-based compensation expense
21,710

 
25,935

Gain on asset impairments, disposals and recoveries, net
(15,655
)
 
(4,621
)
Changes in fair value of derivatives, net
3,450

 
(25,421
)
Loss (earnings) from equity investments
276,633

 
(22,710
)
Distributions of earnings from equity investments
19,988

 
25,902

Goodwill impairment
536,964

 

Other non-cash items
1,869

 
1,024

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

 
 
Accounts receivable, net
28,433

 
25,548

Construction and pipeline relocation receivables
(3,634
)
 
2,109

Inventories
103,923

 
123,390

Prepaid and other current assets
(28,900
)
 
18,956

Accounts payable
(32,126
)
 
(30,850
)
Accrued and other current liabilities
(7,563
)
 
(17,045
)
Other non-current assets and liabilities
15,099

 
(6,859
)
Net cash provided by operating activities
596,190

 
687,310

Cash flows from investing activities:
 

 
 

Capital expenditures
(356,987
)
 
(303,689
)
Acquisition of and contribution to equity investments
(31,061
)
 
(1,387,844
)
Distributions from equity investments in excess of earnings
52,303

 
16,951

Acquisition working capital settlement
895

 

Proceeds from property disposals and recoveries
9,388

 
5,050

Net cash used in investing activities
(325,462
)
 
(1,669,532
)
Cash flows from financing activities:
 

 
 

Net proceeds from issuance of Units and exercise of Unit options
261,958

 
346,436

Payment of tax withholding on vesting of LTIP awards
(6,782
)
 
(8,487
)
Proceeds from issuance of long-term debt, net of issuance costs
394,937

 
(29
)
Repayment of long-term debt
(300,000
)
 
(125,000
)
Borrowings under the BPL Credit Facility
1,656,600

 
1,544,972

Repayments under the BPL Credit Facility
(1,428,880
)
 
(1,047,372
)
Net (repayments) borrowings under the BMSC Credit Facility
(74,003
)
 
185,410

Acquisition of noncontrolling interest
(210,000
)
 

Contributions from noncontrolling interests
7,400

 
7,700

Distributions to noncontrolling interests
(15,342
)
 
(24,657
)
Distributions to LP unitholders
(558,135
)
 
(529,169
)
Net cash (used in) provided by financing activities
(272,247
)
 
349,804

Net decrease in cash and cash equivalents
(1,519
)
 
(632,418
)
Cash and cash equivalents — Beginning of period
2,180

 
640,340

Cash and cash equivalents — End of period
$
661

 
$
7,922

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

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

 
$

 
$
28,631

 
$
277,385

 
$
4,868,322

Net (loss) income
(515,016
)
 
(26,542
)
 

 
6,631

 
(534,927
)
Acquisition of noncontrolling interest
54,585

 
2,343

 

 
(266,928
)
 
(210,000
)
Distributions paid to unitholders
(560,155
)
 

 

 
2,020

 
(558,135
)
In-kind distribution to unitholders
(18,490
)
 
18,490

 

 

 

Net proceeds from issuance of Units

 
262,002

 

 

 
262,002

Amortization of unit-based compensation awards
21,710

 

 

 

 
21,710

Payment of tax withholding on vesting of LTIP awards
(6,782
)
 

 

 

 
(6,782
)
Distributions paid to noncontrolling interests

 

 

 
(15,342
)
 
(15,342
)
Contributions from noncontrolling interests

 

 

 
7,400

 
7,400

Other comprehensive income

 

 
27,049

 

 
27,049

Accrual of distribution equivalent rights
(1,194
)
 

 

 

 
(1,194
)
Other
(44
)
 
 
 

 

 
(44
)
Partners’ capital - September 30, 2018
$
3,536,920

 
$
256,293

 
$
55,680

 
$
11,166

 
$
3,860,059

 
 
 
 
 
 
 
 
 
 
Partners’ capital - January 1, 2017
$
4,437,316

 
$

 
$
(25,593
)
 
$
286,700

 
$
4,698,423

Net income
352,485

 

 

 
10,427

 
362,912

Distributions paid to unitholders
(531,351
)
 

 

 
2,182

 
(529,169
)
Net proceeds from issuance of LP Units
345,955

 

 

 

 
345,955

Amortization of unit-based compensation awards
25,935

 

 

 

 
25,935

Net proceeds from exercise of Unit options
481

 

 

 

 
481

Payment of tax withholding on vesting of LTIP awards
(8,487
)
 

 

 

 
(8,487
)
Distributions paid to noncontrolling interests

 

 

 
(24,657
)
 
(24,657
)
Contributions from noncontrolling interests

 

 

 
7,700

 
7,700

Other comprehensive income

 

 
36,863

 

 
36,863

Accrual of distribution equivalent rights
(2,931
)
 

 

 

 
(2,931
)
Other
(141
)
 

 

 
141

 

Partners’ capital - September 30, 2017
$
4,619,262

 
$

 
$
11,270

 
$
282,493

 
$
4,913,025

 
See Notes to Unaudited Condensed Consolidated Financial Statements.


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BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND BASIS OF PRESENTATION
 
Organization
 
Buckeye Partners, L.P. is a publicly traded Delaware master limited partnership (“MLP”), and its limited partner units representing limited partnership interests (“LP Units”) are listed on the New York Stock Exchange under the ticker symbol “BPL.”  Buckeye GP LLC (“Buckeye GP”) is our general partner.  As used in these Notes to Unaudited Condensed Consolidated Financial Statements, “we,” “us,” “our,” the “Partnership” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, include our subsidiaries.
 
We own and operate, or own a significant interest in, a diversified global network of integrated assets providing midstream logistic solutions, primarily consisting of the transportation, storage, processing and marketing of liquid petroleum products.  We are one of the largest independent liquid petroleum products pipeline operators in the United States in terms of volumes delivered, with approximately 6,000 miles of pipeline. We also use our service expertise to operate and/or maintain third-party pipelines and perform certain engineering and construction services for our customers. Our global terminal network, including through our interest in VTTI B.V. (“VTTI”), comprises more than 135 liquid petroleum products terminals with aggregate tank capacity of over 178 million barrels across our portfolio of pipelines, inland terminals and marine terminals located primarily in the East Coast, Midwest and Gulf Coast regions of the United States as well as in the Caribbean, Northwest Europe, the Middle East and Southeast Asia.  Our global network of marine terminals enables us to facilitate global flows of crude oil and refined petroleum products, offering our customers connectivity between supply areas and market centers through some of the world’s most important bulk liquid storage and blending hubs.  Our flagship marine terminal in The Bahamas, Buckeye Bahamas Hub Limited (“BBH”), is one of the largest marine crude oil and refined petroleum products storage facilities in the world and provides an array of logistics and blending services for the global flow of petroleum products. Our Gulf Coast regional hub, Buckeye Texas Partners LLC (“Buckeye Texas”), offers world-class marine terminalling, storage and processing capabilities. Through our 50% equity interest in VTTI, our global terminal network offers premier storage and marine terminalling services for petroleum product logistics in key international energy hubs. We are also a wholesale distributor of refined petroleum products in certain areas served by our pipelines and terminals. As further discussed in the Strategic Review section below, we expect to divest our equity interest in VTTI during the fourth quarter of 2018, subject to normal regulatory approvals.

Strategic Review

Management has completed a comprehensive review of the Partnership’s near and long-term strategy (the “Strategic Review”), with oversight from the Board of Directors of Buckeye GP (the “Board”). The Strategic Review included an evaluation of various alternatives designed to maximize long-term value for our unitholders by:

Maintaining Buckeye’s investment grade credit rating by reducing leverage;
Providing increased financial flexibility, eliminating the need for Buckeye to access the public equity markets to fund annual growth capital; and
Reallocating capital to the higher return growth opportunities across our remaining assets.

As a result, management has taken the following actions to accomplish these objectives:

(i)
On November 1, 2018, we executed a definitive agreement to sell a package of non-integrated domestic pipeline and terminal assets.  These assets include: (i) our jet fuel pipeline from Port Everglades, Florida to Ft. Lauderdale-Hollywood International Airport and Miami International Airport; (ii) our pipelines and terminal facilities serving Reno-Tahoe International Airport, San Diego International Airport, and the Federal Express Corporation terminal at the Memphis International Airport; and (iii) our refined petroleum product terminals in Sacramento, California and Stockton, California.  Upon the closing of this transaction, we expect to generate proceeds of approximately $450.0 million, which would result in an expected gain on the sale of approximately $350.0 million, to be recorded upon closing.  These assets did not meet the criteria to be presented as held for sale in our condensed consolidated balance sheet as of September 30, 2018, because as of that date it was determined that such sale was not probable. We expect this transaction to close during the fourth quarter of 2018, subject to normal regulatory approvals.


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(ii)
On November 1, 2018, we executed a definitive agreement to sell our 50% equity interest in VTTI.  As of September 30, 2018, we have recorded our equity investment in VTTI at its estimated fair value, as determined based upon the expected proceeds of $975.0 million plus a final earnings distribution, resulting in a non-cash loss of $300.3 million, which is reported in (loss) earnings from equity investments, for the three months ended September 30, 2018. We expect this transaction to close during the fourth quarter of 2018, subject to normal regulatory approvals.

(iii)
On November 2, 2018, we announced a quarterly cash distribution of $0.75 per LP Unit, to be paid on November 20, 2018 to unitholders of record on November 13, 2018, which is a reduction from the cash distribution of $1.2625 per LP Unit paid with respect to the prior quarter.

Because our declared quarterly cash distribution amount represents a reduction from the prior quarter, all 6,714,963 Class C Units outstanding as of September 30, 2018, will convert into LP Units on a one-for-one basis on November 5, 2018. Accordingly, the holders of these newly converted LP Units will receive the quarterly cash distribution of $0.75 per LP Unit, instead of an in-kind distribution of additional Class C Units. Based upon outstanding LP Units (including the newly converted LP Units resulting from the Class C Units conversion) and distribution equivalent rights (“DERs”) with respect to certain unit-based compensation awards, the aggregate cash amount to be distributed on November 20, 2018, is estimated to be approximately $116.0 million.

Given the indicators of changes in fair value for certain assets, identified in our Strategic Review, including our investment in VTTI, the Partnership performed a goodwill recoverability assessment as of September 30, 2018.  As a result of this assessment and as further discussed in Note 8, we concluded that the goodwill attributable to one of the two reporting units comprising our Global Marine Terminals segment, which includes operations in the Caribbean and New York Harbor (“NYH”) and our equity investment in VTTI, has been impaired.  Accordingly, we recorded a non-cash goodwill impairment charge of approximately $537.0 million, excluding the non-cash loss of $300.3 million related to the anticipated sale of our equity method investment in VTTI, for the three months ended September 30, 2018 included in (loss) earnings from equity investments.

Basis of Presentation and Principles of Consolidation
 
The unaudited condensed consolidated financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”).  Accordingly, our financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our results of operations for the interim periods.  The unaudited condensed consolidated financial statements include the accounts of our subsidiaries controlled by us and variable interest entities of which we are the primary beneficiary. Intercompany transactions are eliminated in consolidation.

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

We believe that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading.  These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2017.

Recently Adopted Accounting Guidance

Goodwill Impairment.  Effective July 1, 2018, we adopted Accounting Standards Update (“ASU”) ASU 2017-04, which simplifies the accounting for goodwill. 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. An impairment charge is now determined by the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill. The guidance is applied using a prospective approach. We applied this standard to the calculation of the goodwill impairment charge referenced above. See Note 8 for further discussion.

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

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

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

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

Retirement Benefits. Effective January 1, 2018, we adopted ASU 2017-07, which improves the presentation of net periodic pension and postretirement benefit costs. The interest cost, expected return on plan assets, actuarial loss due to settlements, and the amortization of unrecognized loss have been reclassified from operating expenses to other expense, applying the retrospective transition method. We elected to apply the practical expedient which allows us to reclassify amounts disclosed previously in the retirement benefits note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the components of net periodic benefit costs discussed above will not be included in amounts capitalized in property, plant, and equipment. The adoption of this guidance did not have a material impact on our unaudited condensed consolidated financial statements. In connection with the adoption of ASU 2017-07, using the retrospective transition method, we reclassified $0.3 million and $1.0 million of expenses related to our Retirement Income Guarantee Plan and unfunded post-retirement medical benefit plan, originally included in operating expenses for the three and nine months ended September 30, 2017, respectively, to other expense. Such reclassifications had no impact on net income.

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


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

Recent Accounting Guidance Not Yet Adopted

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

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

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

Improvements to Nonemployee Share-Based Payment Accounting.  In May 2018, the FASB issued ASU 2018-07, which conformed the current nonemployee share-based accounting with employee share-based accounting. The new standard is effective as of January 1, 2019 with early adoption permitted. We expect to adopt this standard effective January 1, 2019 and do not believe that our adoption of this guidance will have a material impact on our consolidated financial statements and disclosures.

Derivatives and Hedging. In August 2017, the FASB issued ASU 2017-12, which amends and simplifies existing guidance in order to improve the financial reporting of hedging relationships to better align risk management activities in financial statements and make targeted improvements to simplify the application of current guidance related to the assessment of hedge effectiveness. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early application permitted. The new guidance requires prospective application, with a cumulative effect adjustment to the beginning balance of partners’ capital for existing hedging relationships. We will adopt this standard effective January 1, 2019 and are currently evaluating the impact that it will have on our consolidated financial statements and disclosures.


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

Leases. In February 2016, the FASB issued ASU 2016-02, as amended by subsequent accounting standard updates (collectively, “Topic 842”), requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for leases with lease terms greater than twelve months, in addition to enhanced disclosure requirements. Topic 842, through an alternative transition method, permits an entity to adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with the previous lease guidance in ASC Topic 840 “Leases. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are present. In January 2018, the FASB issued ASU 2018-01, permitting an entity to elect a transition practical expedient to not apply the provisions of ASU 2016-02 to land easements that existed or expired before the effective date of ASU 2016-02 and that were not previously accounted for as leases under the previous lease guidance in ASC Topic 840 “Leases.” In July 2018, the FASB issued update ASU 2018-10 that provides narrow-scope improvements to the new standard including clarification on reassessment, change in reference index or rate, and periods included in the lease term. ASU 2016-02 also provides an election for a package of practical expedients which permits an entity to not reassess whether any expired or existing contracts contain leases, the classification of the lease, and any initial direct costs. We expect to apply these practical expedients as part of our adoption.

Our project team continues to (i) evaluate the provisions of the standard; (ii) assess and implement changes to business processes and controls; and (iii) evaluate the impact the adoption of this guidance will have on our consolidated financial statements, including disclosures. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We will adopt this guidance effective January 1, 2019, and expect the most significant impact of the new standard will be the recognition of right-of-use assets and lease liabilities as part of our consolidated balance sheet upon adoption.

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

Pipeline Transportation

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

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Terminalling and Storage Services

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

Merchant Services

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

Operation and Construction Services

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

Contract Balances

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

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


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The following table provides information about receivables from contracts with customers, contract assets and contract liabilities (in thousands):
 
September 30,
2018
 
December 31, 2017
Receivables from contracts with customers
$
224,690

 
$
245,280

Contract assets
23,942

 
13,999

Contract liabilities
(24,386
)
 
(15,778
)

During the three and nine months ended September 30, 2018, we reclassified approximately $0.1 million and $13.9 million, respectively, of contract assets at the beginning of the period to receivables as a result of the rights to the consideration becoming unconditional and billable. Revenue recognized during the three and nine months ended September 30, 2018 from amounts included in contract liabilities at the beginning of the period was approximately $0.8 million and $7.4 million, respectively.

The following table includes estimated revenue associated with contractual commitments in place related to future performance obligations as of the end of the reporting period, which are expected to be recognized in revenue in the specified periods (in thousands):
 
Estimated Revenue (1)
Remainder of 2018
$
109,664

2019
288,367

2020
187,766

2021
115,247

Thereafter
232,653

Total
$
933,697

                                                      
(1)
Excludes revenue arrangements accounted for as leases in the amount of $52.0 million for the remainder of 2018, $201.8 million for 2019, $194.2 million for 2020, $175.9 million for 2021, and $173.6 million thereafter.

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

3. ACQUISITIONS AND INVESTMENTS
 
South Texas Transactions

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

We acquired our partner’s interest in Buckeye Texas for $210 million, and as a result we now own 100% of Buckeye Texas. The change in our ownership interest was accounted for as an equity transaction, representing the acquisition of a noncontrolling interest.


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The STG Terminal, to be constructed and operated by us, will offer 5.1 million barrels of crude oil tank capacity, a 1.7 million increase over the initial announced design of 3.4 million barrels, connectivity to the Gray Oak pipeline; and two deep-water vessel docks capable of berthing very large crude carrier petroleum tankers as part of the initial scope of construction. The Gray Oak pipeline will provide crude oil transportation from West Texas to destinations in the Corpus Christi and Sweeny/Freeport markets. The initial 3.4 million barrels of crude oil tank capacity, the pipeline, and two deep-water vessel docks are expected to be placed in service by the end of 2019 with the incremental 1.7 million barrels of tankage and additional dock throughput capacity to be placed in service by mid-2020. The STG Terminal is supported by long-term minimum volume throughput commitments from credit-worthy customers, including our joint-venture partners. We own a 50% interest in the STG Terminal, and Phillips 66 Partners and Marathon each own a 25% interest. The total construction costs for the STG Terminal through mid-2020 are estimated on a 100% basis at $413.4 million. During the second quarter of 2018, we contributed an initial $28.4 million and committed to fund our proportionate share of the total construction costs, which is currently estimated at $206.7 million. We account for our interest in STG Terminal, which is included in our Global Marine Terminals segment, using the equity method of accounting.

Business Combination

Duck Island terminal acquisition

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

Property, plant and equipment
18,306

Intangible assets
2,200

Goodwill
2,812

Current liabilities
(3,516
)
Environmental liabilities
(300
)
Allocated purchase price
$
28,491


Adjustments to the preliminary purchase price allocation during the nine months ended September 30, 2018 resulted in nominal decreases to current liabilities, with a corresponding increase to goodwill. We will finalize our purchase price allocation during the fourth quarter of 2018.

Unaudited Pro forma Financial Results for Duck Island terminal acquisition

Our unaudited condensed consolidated statements of operations do not include earnings from the terminalling business prior to December 20, 2017, the closing date of the acquisition. Unaudited pro forma financial information for this acquisition was not prepared because the impact was immaterial to our financial results for the three and nine months ended September 30, 2018 and 2017.

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VTTI Acquisition

During 2017, we acquired an indirect 50% equity interest in VTTI for cash consideration of $1.15 billion (the “VTTI Acquisition”) and made a capital contribution to VTTI, in the amount of $236.8 million, to fund our 50% share of the aggregate cash consideration paid by VTTI to acquire all of the outstanding publicly held units of VTTI Energy Partners LP, formerly a publicly traded master limited partnership. 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 60 million barrels of petroleum products storage across 15 terminals located on five continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the Middle East and Southeast Asia, and offer world-class storage and marine terminalling services for liquid petroleum products. We and VIP Terminals Finance B.V., a subsidiary of Vitol, have equal board representation and voting rights in the VTTI joint venture. We account for this investment using the equity method of accounting. The earnings from our equity investment in VTTI are reported in our Global Marine Terminals segment. In addition, we include our proportionate share of our equity method investments’ OCI in our unaudited condensed consolidated statement of comprehensive income.

As discussed in the Strategic Review section of Note 1, on November 1, 2018, we executed a definitive agreement to sell our 50% equity interest in VTTI. We expect this transaction to close during the fourth quarter of 2018, subject to normal regulatory approvals.

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

Environmental Contingencies
 
At September 30, 2018 and December 31, 2017, we had $45.4 million and $41.0 million, respectively, of environmental remediation liabilities unrelated to claims and legal proceedings.  Costs ultimately incurred may be in excess of our estimates, which may have a material impact on our financial condition, results of operations or cash flows.  At September 30, 2018 and December 31, 2017, we had $4.4 million and $5.3 million, respectively, of receivables related to these environmental remediation liabilities covered by insurance or third-party claims.

5. INVENTORIES
 
Our inventory amounts were as follows at the dates indicated (in thousands):
 
September 30,
2018
 
December 31,
2017
Liquid petroleum products (1)
$
173,659

 
$
280,934

Materials and supplies
23,857

 
20,491

Total inventories
$
197,516

 
$
301,425

                                                      
(1)
Ending inventory was 75.7 million and 142.1 million gallons of liquid petroleum products as of September 30, 2018 and December 31, 2017, respectively.
 
At September 30, 2018 and December 31, 2017, approximately 95% and 85% of our liquid petroleum products inventory volumes were designated in a fair value hedge relationship, respectively.  Because we generally designate inventory as a hedged item upon purchase, hedged inventory is valued at current market prices with the change in value of the inventory being reflected in our unaudited condensed consolidated statements of operations.


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6. PREPAID AND OTHER CURRENT ASSETS
 
Prepaid and other current assets consist of the following at the dates indicated (in thousands):
 
September 30,
2018
 
December 31,
2017
Prepaid insurance
$
11,882

 
$
7,146

Margin deposits
5,254

 
7,989

Contract assets
23,942

 
13,999

Prepaid taxes
7,890

 
2,865

Other
16,261

 
4,340

Total prepaid and other current assets
$
65,229

 
$
36,339


7. EQUITY INVESTMENTS
 
The following table presents earnings (loss) from equity investments for the periods indicated (in thousands):
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Segment
 
2018
 
2017
 
2018
 
2017
VTTI B.V.
Global Marine Terminals
 
$
4,375

 
$
6,396

 
$
13,647

 
$
15,111

Non-cash loss on write-down of investment in VTTI B.V. (1)
Global Marine Terminals
 
(300,280
)
 

 
(300,280
)
 

West Shore Pipe Line Company
Domestic Pipelines & Terminals
 
2,750

 
1,772

 
7,542

 
4,913

Muskegon Pipeline LLC
Domestic Pipelines & Terminals
 
353

 
501

 
1,109

 
1,303

Transport4, LLC
Domestic Pipelines & Terminals
 
164

 
206

 
614

 
650

South Portland Terminal LLC
Domestic Pipelines & Terminals
 
502

 
357

 
1,162

 
733

South Texas Gateway Terminal LLC (2)
Global Marine Terminals
 
(251
)
 

 
(427
)
 

Total (loss) earnings from equity investments
 
 
$
(292,387
)
 
$
9,232

 
$
(276,633
)
 
$
22,710

                                                      
(1)
As discussed in the Strategic Review section of Note 1, we recorded a non-cash loss related to the anticipated sale of our equity investment in VTTI during the three months ended September 30, 2018.
(2)
In April 2018, we formed the STG Terminal joint venture. For additional information, see Note 3.

The non-cash loss related to the anticipated sale of our equity investment in VTTI was the primary factor underlying the decrease in our equity investments balance in the unaudited condensed consolidated balance sheet.

Summarized combined income statement data for our equity method investments are as follows for the periods indicated (amounts represent 100% of investee income statement data in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
145,137

 
$
143,946

 
$
435,827

 
$
403,985

Operating income
42,637

 
52,766

 
132,446

 
138,195

Net income
24,262

 
30,874

 
75,394

 
84,807

Net income attributable to investee
22,748

 
23,565

 
70,877

 
63,347



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8. GOODWILL

Goodwill represents the excess of purchase price over fair value of net assets acquired. Our goodwill amounts are assessed for impairment on an annual basis on October 31st and on an interim basis if circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

Due to the persistence of unfavorable market conditions affecting our segregated storage operations, particularly in the Caribbean region, and considering the near-term outlook and actions resulting from our recently completed Strategic Review as further discussed in Note 1, we performed a goodwill recoverability assessment for each of our reporting units as of September 30, 2018. Subsequent to our annual goodwill impairment test in the fourth quarter of 2017, we have experienced continuing declines in the utilization of our segregated storage assets, as well as reductions in rate and term upon recontracting, and expect this weakness in demand for segregated storage to continue for certain locations through 2019.

Goodwill is tested for impairment at each 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 which consists of: (i) our operations in the Caribbean, New York Harbor, and equity investment in VTTI (collectively “GMT Caribbean and NYH” reporting unit); and (ii) our operations in South Texas, including our equity investment in the STG Terminal (the “GMT South Texas” reporting unit). As noted in Note 1, we adopted ASU 2017-04 which simplified the test for goodwill impairment. Under the new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment is recorded for the amount of the excess up to the amount of goodwill for the respective reporting unit. The estimate of the fair value of the reporting unit is determined using a weighting of an expected present value of future cash flows and a market multiple valuation method, giving more weighting to our estimate of future cash flows.  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. Using this methodology, which qualifies as Level 3 within the fair value hierarchy, we estimated the fair value of each of our reporting units and determined that the fair value of each of our reporting units significantly exceed their respective carrying values, with the exception of the GMT Caribbean and NYH reporting unit. Applying reasonable sensitivities to any or a combination of the above valuation inputs would not have generated a materially different determination of fair value. As a result of the assessment described above, we concluded that the goodwill in our GMT Caribbean and NYH reporting unit was fully impaired and recorded a non-cash goodwill impairment charge of $537.0 million. In conjunction with the goodwill impairment assessment, we considered impairment indicators related to the long-lived assets and investments associated with our GMT Caribbean and NYH reporting unit. Accordingly, we evaluated these assets for impairment and concluded that no impairment of long-lived assets existed as of September 30, 2018; however, we did record an approximately $300.3 million non-cash loss related to the anticipated sale of our equity investment in VTTI as further discussed in Note 1.

The changes in the carrying amount of goodwill by reporting unit are as follows at the dates indicated (in thousands):
 
Domestic Pipelines
& Terminals
 
Merchant Services
 
GMT Caribbean and NYH
 
GMT South Texas
 
Total
December 31, 2017
$
298,471

 
$
4,499

 
$
536,964

 
$
167,379

 
$
1,007,313

Purchase price adjustments
44

 

 

 

 
44

Impairment of goodwill

 

 
(536,964
)
 

 
(536,964
)
September 30, 2018
298,515

 
4,499

 

 
167,379

 
470,393



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9. OTHER NON-CURRENT ASSETS

Other non-current assets consist of the following at the dates indicated (in thousands):
 
September 30,
2018
 
December 31,
2017
Debt issuance costs, net
$
2,418

 
$
3,022

Insurance receivables related to environmental remediation reserves
2,051

 
2,794

BBH jetty-allision insurance receivable

 
7,372

Other
33,244

 
38,295

Total other non-current assets
$
37,713

 
$
51,483


10. LONG-TERM DEBT

Extinguishment of Debt

In January 2018, we repaid in full the $300.0 million principal amount and $9.1 million of accrued interest outstanding under our 6.050% notes, using funds available under our $1.5 billion revolving credit facility with SunTrust Bank (the “Credit Facility”).

Notes Offerings

In January 2018, we issued $400.0 million of junior subordinated notes (“Junior Notes”) maturing on January 22, 2078, which are redeemable at Buckeye’s option, in whole or in part, on or after January 22, 2023. The Junior Notes bear interest at a fixed rate of 6.375% per year up to, but not including, January 22, 2023. From January 22, 2023, the Junior Notes will bear interest at a floating rate based on the Three-Month London Interbank Offered Rate (“LIBOR”) plus 4.02%, reset quarterly. Total proceeds from this offering, after underwriting fees, expenses, and debt issuance costs, were $394.9 million. We used the net proceeds from this offering to reduce indebtedness outstanding under our Credit Facility and for general partnership purposes.

Current Maturities Expected to be Refinanced

We have classified $400.0 million of 2.650% notes due on November 15, 2018, $275.0 million of 5.500% notes due on August 15, 2019, and our $250.0 million variable-rate term loan due on September 30, 2019 (the “Term Loan”) as long-term debt in the unaudited condensed consolidated balance sheet at September 30, 2018 because we have the ability to refinance these obligations on a long-term basis under our Credit Facility. At September 30, 2018, we had $924.3 million of additional borrowing capacity under our Credit Facility. The anticipated proceeds from the asset divestitures discussed in Note 1 are expected to be used to pay down debt, with the specific debt instruments to be determined at that time. In the absence of such proceeds, or if other debt instruments are selected for retirement, management’s intent would be to refinance the maturing obligations on a long-term basis.

Credit Facility

At September 30, 2018, we had a $572.6 million outstanding balance under the Credit Facility. The weighted average interest rate for borrowings under the Credit Facility was 4.6% during the nine months ended September 30, 2018.


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11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to financial market risks, including changes in interest rates and commodity prices, in the course of our normal business operations.  We use derivative instruments to manage such risks.
 
Interest Rate Derivatives

From time to time, we utilize forward-starting interest rate swaps to hedge the variability of the forecasted interest payments on anticipated debt issuances that may result from changes in the benchmark interest rate until the expected debt is issued. When entering into interest rate swap transactions, we become exposed to both credit risk and market risk. We are subject to credit risk when the change in fair value of the swap instrument is positive and the counterparty may fail to perform under the terms of the contract. We are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the swaps. We manage our credit risk by entering into swap transactions only with major financial institutions with investment-grade credit ratings. We manage our market risk by aligning the swap instrument with the existing underlying debt obligation or a specified expected debt issuance, generally associated with the maturity of an existing debt obligation. We designate the swap agreements as cash flow hedges at inception and expect the changes in values to be highly correlated with the changes in value of the underlying borrowings.

During 2016, we entered into eleven forward-starting interest rate swaps with a total aggregate notional amount of $500.0 million, in anticipation of the issuance of debt on or before November 15, 2018 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 for other general partnership purposes.

During the three and nine months ended September 30, 2018, unrealized gains of $7.3 million and $27.7 million, respectively, were recorded in accumulated other comprehensive income (“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 designate as fair value hedges, with changes in fair value of both the futures contracts and physical inventory reflected in earnings. Our Merchant Services segment also uses exchange-traded refined petroleum contracts to hedge expected future transactions related to certain gasoline inventory that we manage on behalf of a third party, which are designated as cash flow hedges, with the effective portion of the hedge reported in OCI and reclassified into earnings when the expected future transaction affects earnings. Any gains or losses incurred on the derivative instruments that are not effective in offsetting changes in fair value or cash flows of the hedged item are recognized immediately in earnings.
Additionally, our Merchant Services segment enters into exchange-traded refined petroleum product futures contracts on behalf of our Domestic Pipelines & Terminals segment to manage the risk of market price volatility on the gasoline-to-butane pricing spreads associated with our butane blending activities managed by a third party. These futures contracts are not designated in a hedge relationship for accounting purposes. Physical forward contracts and futures contracts that have not been designated in a hedge relationship are marked-to-market through earnings.

The following table summarizes the notional volumes of the net long (short) positions of our commodity derivative instruments outstanding at September 30, 2018 (amounts in thousands of gallons):
 
 
Volume
 
 
Derivative Purpose 
 
Current
 
Long-Term
 
 
Derivatives NOT designated as hedging instruments:
 
 

 
 

 
 
Physical fixed-price derivative contracts
 
(19,530
)
 
(82
)
 
 
Physical index derivative contracts
 
13,762

 

 
 
Futures contracts for refined petroleum products
 
8,549

 
168

 
 
 
 
 
 
 
 
Hedge Type
Derivatives designated as hedging instruments:
 
 

 
 

 
 
Futures contracts for refined petroleum products
 
(71,778
)
 

 
Fair Value Hedge


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Our futures contracts designated as fair value hedges relate to our inventory portfolio and extend to the first quarter of 2019. Our futures contracts related to forecasted purchases and sales of refined petroleum products, not designated in a hedging relationship, extend to the fourth quarter of 2019.

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

The following table sets forth the fair value of each classification of derivative instruments and the derivative instruments’ location on our unaudited condensed consolidated balance sheets at the dates indicated (in thousands):
    
September 30, 2018
 
Derivatives NOT Designated as Hedging Instruments
 
Derivatives Designated as Hedging Instruments
 
Derivative Carrying Value
 
Netting Balance Sheet Adjustment (1)
 
Net Total
Physical fixed-price derivative contracts
$
443

 
$

 
$
443

 
$
(28
)
 
$
415

Physical index derivative contracts
170

 

 
170

 
(12
)
 
158

Interest rate derivative contracts

 
59,733

 
59,733

 

 
59,733

Total current derivative assets
613

 
59,733

 
60,346

 
(40
)
 
60,306

Physical fixed-price derivative contracts

 

 

 

 

Total non-current derivative assets

 

 

 

 

Physical fixed-price derivative contracts
(5,778
)
 

 
(5,778
)
 
28

 
(5,750
)
Physical index derivative contracts
(19
)
 

 
(19
)
 
12

 
(7
)
Total current derivative liabilities
(5,797
)
 

 
(5,797
)
 
40

 
(5,757
)
Physical fixed-price derivative contracts
(9
)
 

 
(9
)
 

 
(9
)
Total non-current derivative liabilities
(9
)
 

 
(9
)
 

 
(9
)
Net derivative (liabilities) assets
$
(5,193
)
 
$
59,733

 
$
54,540

 
$

 
$
54,540

 
                                                      
(1)
Amounts represent the netting of physical fixed price and index contracts’ assets and liabilities when a legal right of offset exists. 
 
December 31, 2017
 
Derivatives NOT Designated as Hedging Instruments
 
Derivatives Designated as Hedging Instruments
 
Derivative Carrying Value
 
Netting Balance Sheet Adjustment (1)
 
Net Total
Physical fixed-price derivative contracts
$
2,582

 
$

 
$
2,582

 
$
(63
)
 
$
2,519

Physical index derivative contracts
455

 

 
455

 
(9
)
 
446

Interest rate derivative contracts

 
31,994

 
31,994

 

 
31,994

Total current derivative assets
3,037

 
31,994

 
35,031

 
(72
)
 
34,959

Total non-current derivative assets

 

 

 

 

Physical fixed-price derivative contracts
(7,226
)
 

 
(7,226
)
 
63

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

 
(18
)
 
9

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

 
(7,244
)
 
72

 
(7,172
)
Total non-current derivative liabilities

 

 

 

 

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

 
$
27,787

 
$

 
$
27,787

                                                      
(1)
Amounts represent the netting of physical fixed price and index contracts’ assets and liabilities when a legal right of offset exists. 
 
At September 30, 2018, open refined petroleum product derivative contracts (represented by the physical fixed-price contracts and physical index contracts noted above) varied in duration in the overall portfolio, but did not extend beyond November 2019.  In addition, at September 30, 2018, we had refined petroleum product inventories that we intend to use to satisfy a portion of the physical derivative contracts.
 

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The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated (in thousands):
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Location
 
2018
 
2017
 
2018
 
2017
Derivatives NOT designated as hedging instruments:
 
 
 

 
 

 
 

 
 

Physical fixed-price derivative contracts
Product sales
 
$
(3,887
)
 
$
(7,209
)
 
$
(4,192
)
 
$
(257
)
Physical index derivative contracts
Product sales
 
123

 
57

 
283

 
58

Physical fixed-price derivative contracts
Cost of product sales
 
697

 
1,462

 
644

 
1,380

Physical index derivative contracts
Cost of product sales
 
53

 
115

 
479

 
453

Futures contracts for refined products
Cost of product sales
 
2,493

 
15,861

 
(2,070
)
 
15,061

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Location
 
2018
 
2017
 
2018
 
2017
Derivatives designated as fair value hedging instruments:
 
 
 
 
 

 
 

 
 

Futures contracts for refined products
Cost of product sales
 
$
(8,049
)
 
$
(51,093
)
 
$
(12,355
)
 
$
1,758

Physical inventory - hedged items
Cost of product sales
 
7,214

 
48,236

 
10,754

 
7,536

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Location
 
2018
 
2017
 
2018
 
2017
Ineffectiveness excluding the time value component on fair value hedging instruments:
 
 
 
 
 

 
 

 
 

Fair value hedge ineffectiveness (excluding time value)
Cost of product sales
 
$
1,196

 
$
(3,299
)
 
$
1,000

 
$
(5,929
)
Time value excluded from hedge assessment
Cost of product sales
 
(2,031
)
 
442

 
(2,601
)
 
15,223


The change in value recognized in OCI and the losses reclassified from AOCI to income, attributable to our derivative instruments designated as cash flow hedges, were as follows for the periods indicated (in thousands):
 
Gain (Loss) Recognized in OCI on Derivatives for the
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Derivatives designated as cash flow hedging instruments:
 

 
 

 
 

 
 

Interest rate derivative contracts
$
7,322

 
$
(2,207
)
 
$
27,739

 
$
(12,670
)
Commodity derivatives
(193
)
 
(3,557
)
 
2,464

 
675

Total
$
7,129

 
$
(5,764
)
 
$
30,203

 
$
(11,995
)

 
 
 
Loss Reclassified from AOCI to Income (Effective Portion) for the
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Location
 
2018
 
2017
 
2018
 
2017
Derivatives designated as cash flow hedging instruments:
 
 
 

 
 

 
 

 
 

Interest rate derivative contracts
Interest and debt expense
 
$
(2,296
)
 
$
(3,038
)
 
$
(6,928
)
 
$
(9,113
)
Total
 
 
$
(2,296
)
 
$
(3,038
)
 
$
(6,928
)
 
$
(9,113
)



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Over the next twelve months, we expect to reclassify $4.5 million of net losses attributable to interest rate derivatives from AOCI to earnings as an increase to interest and debt expense. These net losses consist of $11.2 million of amortization of hedge losses on settled forward-starting interest rate swaps, partially offset by $6.7 million of amortization of hedge gains on settled forward-starting interest rate swaps settled in November 2017 and forecasted hedge gains on forward-starting interest rate swaps that we expect to settle in late 2018.

12. FAIR VALUE MEASUREMENTS
 
We categorize our financial assets and liabilities using the three-tier fair value hierarchy as follows:
 
Recurring
 
The following table sets forth financial assets and liabilities measured at fair value on a recurring basis, as of the measurement dates indicated, and the basis for that measurement, by level within the fair value hierarchy (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Financial assets:
 

 
 

 
 

 
 

Physical fixed-price derivative contracts
$

 
$
443

 
$

 
$
2,582

Physical index derivative contracts

 
170

 

 
455

Interest rate derivatives

 
59,733

 

 
31,994

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Physical fixed-price derivative contracts

 
(5,787
)
 

 
(7,226
)
Physical index derivative contracts

 
(19
)
 

 
(18
)
Futures contracts for refined products

 

 

 

Fair value
$

 
$
54,540

 
$

 
$
27,787

 
The values of the Level 1 derivative assets and liabilities were based on quoted market prices obtained from the New York Mercantile Exchange. The values for exchange-settled commodity derivatives are presented in accordance with the CME rulebook, which deems that these instruments are settled daily via variation margin payments. As a result of this rulebook guidance, CME-settled derivatives, primarily comprised of our futures contracts for refined petroleum products, are considered to have no fair value at the balance sheet date for financial reporting purposes; however, the derivatives remain outstanding and subject to future commodity price fluctuations until they are settled in accordance with their contractual terms.

The values of the Level 2 interest rate derivatives were determined using fair value estimates obtained from our counterparties, which are verified using other available market data, including cash flow models which incorporate market inputs including the implied forward LIBOR yield curve for the same period as the future interest rate swap settlements. Credit value adjustments (“CVAs”), which are used to reflect the potential nonperformance risk of our counterparties, are considered in the fair value assessment of interest rate derivatives. We determined that the impact of CVAs is not significant to the overall valuation of interest rate derivatives as of September 30, 2018 and December 31, 2017.

The values of the Level 2 commodity derivative contracts were calculated using market approaches based on observable market data inputs, including published commodity pricing data, which is verified against other available market data, and market interest rate and volatility data.  Level 2 physical fixed-price derivative assets are net of CVAs determined using an expected cash flow model, which incorporates assumptions about the credit risk of the derivative contracts based on the historical and expected payment history of each customer, the amount of product contracted for under the agreement and the customer’s historical and expected purchase performance under each contract.  The Merchant Services segment determined CVAs are appropriate because few of the Merchant Services segment’s customers entering into these derivative contracts are large organizations with nationally recognized credit ratings.  The CVAs were nominal as of September 30, 2018 and December 31, 2017. As of September 30, 2018 and December 31, 2017, the Merchant Services segment did not hold any net liability derivative position containing credit contingent features.
 

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Financial instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets at amounts which approximate fair value due to the relatively short period to maturity of these financial instruments.  The fair values of our fixed-rate debt were estimated by observing market trading prices and by comparing the historic market prices of our publicly issued debt with the market prices of the publicly issued debt of other MLPs with similar credit ratings and terms.  The fair value of our variable-rate debt approximates the carrying amount since the associated interest rates are market-based. The carrying value and fair value of our debt, using Level 2 input values, were as follows at the dates indicated (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Fixed-rate debt
$
3,945,363

 
$
3,862,064

 
$
4,241,963

 
$
4,384,336

Variable-rate debt
1,218,038

 
1,222,621

 
668,562

 
668,904

Total debt
$
5,163,401

 
$
5,084,685

 
$
4,910,525

 
$
5,053,240

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

We recognize transfers between levels within the fair value hierarchy as of the beginning of the reporting period.  We did not have any transfers between Level 1 and Level 2 during the nine months ended September 30, 2018.
 
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 three months ended September 30, 2018, we recorded a $300.3 million non-cash loss related to the anticipated sale of our equity investment in VTTI based on Level 2 inputs and a $537.0 million non-cash goodwill impairment charge related to our GMT Caribbean and NYH reporting unit based on Level 3 inputs. Refer to the Strategic Review section of Note 1, as well as Note 8, for further details on fair value adjustments recorded during the quarter ended September 30, 2018.  

13. UNIT-BASED COMPENSATION PLANS
 
We award unit-based compensation to employees and directors primarily under the 2013 Long Term Incentive Plan of Buckeye Partners, L.P. (the “LTIP”), which was approved by the Partnership’s unitholders in June 2013 and subsequently amended and restated in June 2017. The LTIP replaced the 2009 Long-Term Incentive Plan (the “2009 Plan”), which was merged with and into the LTIP, and no further grants have since been made under the 2009 Plan. We formerly awarded options to acquire LP Units to employees pursuant to the Buckeye Partners, L.P. Unit Option and Distribution Equivalent Plan (the “Option Plan”). 
 
We recognized compensation expense related to awards under the LTIP and the Option Plan of $4.9 million and $8.2 million for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, we recognized compensation expense of $21.7 million and $25.9 million, respectively.

LTIP
 
As of September 30, 2018, there were 2,153,121 LP Units available for issuance under the LTIP.
 
Deferral Plan under the LTIP
 
We also maintain the Buckeye Partners, L.P. Unit Deferral and Incentive Plan, as amended and restated effective December 13, 2016 (the “Deferral Plan”), pursuant to which we issue phantom and matching units under the LTIP to certain employees in lieu of cash compensation at the election of the employee. During the nine months ended September 30, 2018, 149,726 phantom units (including matching units) were granted under this plan. These grants are included as granted in the LTIP activity table below.
 
Awards under the LTIP
 
During the nine months ended September 30, 2018, the Compensation Committee of the Board granted 350,015 phantom units to employees (including the 149,726 phantom units granted pursuant to the Deferral Plan, as discussed above), 18,000 phantom units to independent directors of Buckeye GP and 274,688 performance units to employees.

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The following table sets forth the LTIP activity for the periods indicated (in thousands, except per unit amounts):
 
Number of
LP Units
 
Weighted
Average
Grant Date
Fair Value
per LP Unit (1)
Unvested at January 1, 2018
1,450

 
$
64.04

Granted (2)
643

 
51.47

Performance adjustment (3)
39

 
73.17

Vested
(401
)
 
72.53

Forfeited
(33
)
 
58.98

Unvested at September 30, 2018
1,698

 
$
57.52

                                                      
(1)
Determined by dividing the aggregate grant date fair value of awards by the number of awards issued. The weighted-average grant date fair value per LP Unit for forfeited and vested awards is determined before an allowance for forfeitures.
(2)
Includes both phantom and performance awards. Performance awards are granted at a target amount but, depending on our performance during the vesting period with respect to certain pre-established goals, the number of LP Units issued upon vesting of such performance awards can be greater or less than the target amount.
(3)
Represents the LP Units issued in excess of target amounts for performance awards that vested during the nine months ended September 30, 2018 as a result of our above target performance with respect to applicable performance goals.

At September 30, 2018, $38.8 million of compensation expense related to the unvested LTIP is expected to be recognized over a weighted average remaining period of 1.8 years.
 
We ceased making additional grants under the Option Plan following the adoption of the 2009 Plan, subsequently replaced by the LTIP. At December 31, 2017, there was no unrecognized compensation cost related to unvested options, as all options were vested and exercised as of November 24, 2017. The total intrinsic value of options exercised during each of the nine months ended September 30, 2018 and 2017 were zero and $0.2 million, respectively.

14. PARTNERS’ CAPITAL AND DISTRIBUTIONS

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

Equity Offering

In March 2018, we issued approximately 6.2 million Class C Units in a private placement for aggregate gross proceeds of $265.0 million. The net proceeds were $262.0 million, after deducting issuance costs of approximately $3.0 million. We used the net proceeds from this offering to reduce the indebtedness outstanding under our Credit Facility, to partially fund growth capital expenditures and for general partnership purposes.

Class C Units represent a separate class of our limited partnership interests. The Class C Units are substantially similar in all respects to our existing LP units, except that Buckeye has the option to pay distributions on the Class C Units in cash or by issuing additional Class C Units.

Because our declared quarterly cash distribution amount represents a reduction from the prior quarter, the 6,714,963 Class C Units outstanding as of September 30, 2018, will convert into LP Units on a one-for-one basis on November 5, 2018. Accordingly, the holders of these newly converted LP Units will receive the quarterly cash distribution of $0.75 per LP Unit, instead of an in-kind distribution of additional Class C Units. See Note 1 for additional information.



23

Table of Contents

At-the-Market Offering Program

Our equity distribution agreement (the “Equity Distribution Agreement”) with J.P. Morgan Securities LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, BNP Paribas Securities Corp., Deutsche Bank Securities Inc., Jefferies LLC, Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, and SMBC Nikko Securities America, Inc. (collectively, the “ATM Underwriters”) expired on January 15, 2018. During the nine months ended September 30, 2018, no LP Units were sold under the Equity Distribution Agreement.
 
Summary of Changes in Outstanding Units
 
The following is a summary of changes in Buckeyes outstanding LP Units and Class C Units for the periods indicated (in thousands):
 
LP Units
 
Class C Units (2)
 
Total
Units outstanding at January 1, 2018
146,677

 

 
146,677

LP units issued pursuant to the LTIP (1)
272

 

 
272

Issuance of Class C Units

 
6,221

 
6,221

Issuance of Class C Units in lieu of quarterly cash distributions

 
494

 
494

Units outstanding at September 30, 2018
146,949

 
6,715

 
153,664

                                                      
(1) The number of LP Units issued represents issuance net of tax withholding.
(2) The Class C Units will convert to LP Units on November 5, 2018, as discussed above.
 
Distributions
 
Cash distributions are paid for LP Units and for DERs with respect to certain unit-based compensation awards outstanding as of each respective period. Actual cash distributions on our LP Units totaled $560.2 million ($3.7875 per LP Unit) and $531.4 million ($3.75 per LP Unit) during the nine months ended September 30, 2018 and 2017, respectively. We also made distributions in-kind to our Class C unitholders by issuing approximately 494 thousand Class C Units during the nine months ended September 30, 2018.
 
On November 2, 2018, we announced a quarterly cash distribution of $0.75 per LP Unit that will be paid on November 20, 2018 to unitholders of record on November 13, 2018.  Because the Class C Units are subject to conversion into LP Units on the business day following any declaration of a quarterly cash distribution of less than $1.2625, the 6,714,963 Class C Units outstanding as of September 30, 2018, will convert into LP Units on November 5, 2018 and participate in this and future cash distributions.  Based upon outstanding LP Units (including the newly converted LP Units resulting from the Class C Units conversion) and DERs with respect to certain unit-based compensation awards, the aggregate cash amount to be distributed on November 20, 2018, is estimated to be approximately $116.0 million.
 

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Table of Contents

15. EARNINGS PER UNIT
 
The following tables set forth the calculation of basic and diluted earnings (loss) per unit, attributable to Buckeye’s unitholders (including LP Units and Class C Units), taking into consideration net income allocable to participating securities, as well as the reconciliation of basic weighted average units outstanding to diluted weighted average units outstanding (in thousands, except per unit amounts). During periods of net loss, no allocation is made to participating securities as the participating securities do not share in losses of the Partnership.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net (loss) income attributable to unitholders
$
(745,835
)
 
$
116,187

 
$
(541,558
)
 
$
352,485

 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Weighted average units outstanding - basic
153,512

 
142,088

 
151,908

 
141,104

Earnings (loss) per unit - basic
$
(4.86
)
 
$
0.82

 
$
(3.57
)
 
$
2.50

 
 
 
 
 
 
 
 
Diluted:
 

 
 

 
 

 
 

Weighted average units outstanding - basic
153,512

 
142,088

 
151,908
 
141,104

Effect of dilutive securities

 
730

 

 
677

Weighted average units outstanding - diluted
153,512

 
142,818

 
151,908

 
141,781

Earnings (loss) per unit - diluted
$
(4.86
)
 
$
0.81

 
$
(3.57
)
 
$
2.49


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

 Domestic Pipelines & Terminals
 
The Domestic Pipelines & Terminals segment receives liquid petroleum products from refineries, connecting pipelines, vessels, trains, and bulk and marine terminals, transports those products to other locations for a fee, and provides bulk liquid storage and terminal throughput services.  The segment also has butane blending capabilities and provides crude oil services, including train loading/unloading, storage and throughput. This segment owns and operates pipeline systems and liquid petroleum products terminals in the continental United States, including three terminals owned by the Merchant Services segment but operated by the Domestic Pipelines & Terminals segment, and two underground propane storage caverns.  Additionally, this segment provides turn-key operations and maintenance of third-party pipelines and performs pipeline construction management services typically for cost plus a fixed or variable fee.
 
Global Marine Terminals
 
The Global Marine Terminals segment, including through its interest in VTTI, provides marine accessible bulk storage and blending services, rail and truck rack loading/unloading along with petroleum processing services in the New York Harbor on the East Coast and Corpus Christi, Texas in the Gulf Coast region of the United States, as well as The Bahamas, Puerto Rico and St. Lucia in the Caribbean, Northwest Europe, the Middle East and Southeast Asia.  The segment owns and operates, or owns a significant interest in, 22 liquid petroleum product terminals, located in these key domestic and international energy hubs, that enable us to facilitate global flows of crude and refined petroleum products, offer connectivity between supply areas and market centers, and provide premier storage, marine terminalling, blending, and processing services to a diverse customer base. In addition, the segment is expanding its presence in Corpus Christi, Texas through the South Texas Gateway joint venture. See Note 3 for further details. As discussed in Note 1, we expect to divest our equity investment in VTTI in the fourth quarter of 2018.


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Table of Contents

Merchant Services
 
The Merchant Services segment is a wholesale distributor of refined petroleum products, through bulk and rack sales, in the United States and the Caribbean. The segment’s products include gasoline, natural gas liquids, ethanol, biodiesel and petroleum distillates such as heating oil, diesel fuel, kerosene and fuel oil.  The segment owns three terminals, which are operated by the Domestic Pipelines & Terminals segment.  The segment’s customers consist principally of product wholesalers as well as major commercial users of these refined petroleum products.

Financial Information by Segment

For the three and nine months ended September 30, 2018 and 2017, no customer contributed 10% or more of consolidated revenue.

The following tables provide information about our revenue types by reportable segment for the periods indicated (in thousands). Prior periods have been disaggregated for comparison purposes.
 
Three Months Ended September 30,
 
2018
 
Domestic Pipelines & Terminals
 
Global Marine Terminals
 
Merchant Services
 
Intersegment Eliminations
 
Total
Revenue from contracts with customers
 
 
 
 
 
 
 
 
 
Pipeline transportation
$
127,846

 
$

 
$

 
$
(1,938
)
 
$
125,908

Terminalling and storage services
106,537

 
92,948

 

 
(8,251
)
 
191,234

Product sales

 
5,243

 
433,156

 
(1,699
)
 
436,700

Other services
12,576

 
434

 
1,984