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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

 

x                              Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2009 or

 

o                                 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

 

IRS Employer

incorporation or organization)

 

Identification No.)

 

One Greenway Plaza

 

 

Suite 600

 

 

Houston, TX

 

77046

(Address of principal executive offices)

 

(Zip Code)

 

(832) 615-8600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 x     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 30, 2009

Limited Partnership Units

 

51,409,146 Units

 

 

 



Table of Contents

 

BUCKEYE PARTNERS, L.P.

INDEX

 

 

 

Page

PART I- FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

5

 

 

 

 

Condensed Consolidated Statement of Changes in Partners’ (Deficit) Capital for the Nine Months Ended September 30, 2009 and 2008

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

 

 

 

Item 4.

Controls and Procedures

52

 

 

 

PART II- OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

52

 

 

 

Item 1A.

Risk Factors

52

 

 

 

Item 6.

Exhibits

53

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales

 

$

258,188

 

$

345,729

 

$

728,744

 

$

933,211

 

Transportation and other services

 

165,256

 

150,441

 

462,760

 

435,783

 

Total revenue

 

423,444

 

496,170

 

1,191,504

 

1,368,994

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales and natural gas storage services

 

258,507

 

334,959

 

702,623

 

913,163

 

Operating expenses

 

65,537

 

72,684

 

207,639

 

207,124

 

Depreciation and amortization

 

14,253

 

15,457

 

43,408

 

41,415

 

Asset impairment expense

 

 

 

72,540

 

 

General and administrative

 

8,186

 

8,619

 

24,625

 

26,042

 

Reorganization expense

 

996

 

 

29,109

 

 

Total costs and expenses

 

347,479

 

431,719

 

1,079,944

 

1,187,744

 

Operating income

 

75,965

 

64,451

 

111,560

 

181,250

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Investment and equity income

 

3,870

 

2,616

 

9,381

 

6,829

 

Interest and debt expense

 

(20,543

)

(19,053

)

(53,780

)

(55,008

)

Other income

 

301

 

20

 

281

 

57

 

Total other expense

 

(16,372

)

(16,417

)

(44,118

)

(48,122

)

Income from continuing operations

 

59,593

 

48,034

 

67,442

 

133,128

 

Income (loss) from discontinued operations

 

 

(176

)

 

1,230

 

Net income

 

59,593

 

47,858

 

67,442

 

134,358

 

Less: net income attributable to noncontrolling interest

 

(1,704

)

(1,256

)

(4,164

)

(4,087

)

Net income attributable to Buckeye Partners, L.P.

 

$

57,889

 

$

46,602

 

$

63,278

 

$

130,271

 

Amounts attributable to Buckeye Partners, L.P.:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

57,889

 

$

46,778

 

$

63,278

 

$

129,041

 

Income (loss) from discontinued operations

 

 

(176

)

 

1,230

 

Total

 

$

57,889

 

$

46,602

 

$

63,278

 

$

130,271

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income attributable to Buckeye Partners, L.P.:

 

 

 

 

 

 

 

 

 

Net income (loss) allocated to general partner:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

12,242

 

$

8,651

 

$

35,363

 

$

22,822

 

Income (loss) from discontinued operations

 

$

 

$

(53

)

$

 

$

370

 

Net income (loss) allocated to limited partners:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

45,647

 

$

38,127

 

$

27,915

 

$

106,219

 

Income (loss) from discontinued operations

 

$

 

$

(123

)

$

 

$

860

 

Earnings per limited partner unit-basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.89

 

$

0.75

 

$

0.55

 

$

2.07

 

Income from discontinued operations

 

 

 

 

0.03

 

Earnings per limited partner unit-basic

 

$

0.89

 

$

0.75

 

$

0.55

 

$

2.10

 

Earnings per limited partner unit-diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.89

 

$

0.75

 

$

0.55

 

$

2.07

 

Income from discontinued operations

 

 

 

 

0.03

 

Earnings per limited partner unit-diluted

 

$

0.89

 

$

0.75

 

$

0.55

 

$

2.10

 

Weighted average number of limited partner units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,374

 

48,372

 

50,351

 

47,538

 

Diluted

 

51,538

 

48,378

 

50,516

 

47,558

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

27,179

 

$

58,843

 

Trade receivables, net

 

88,397

 

79,969

 

Construction and pipeline relocation receivables

 

12,107

 

21,501

 

Inventories

 

227,414

 

84,229

 

Derivative assets

 

17,402

 

97,375

 

Prepaid and other current assets

 

98,123

 

72,111

 

Total current assets

 

470,622

 

414,028

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,169,856

 

2,231,321

 

 

 

 

 

 

 

Equity investments

 

98,729

 

90,110

 

Goodwill

 

208,922

 

210,644

 

Intangible assets, net

 

41,461

 

44,114

 

Other non-current assets

 

50,515

 

44,193

 

 

 

 

 

 

 

Total assets

 

$

3,040,105

 

$

3,034,410

 

 

 

 

 

 

 

Liabilities and partners’ (deficit) capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

149,600

 

$

96,000

 

Accounts payable

 

36,312

 

41,301

 

Derivative liabilities

 

12,173

 

48,623

 

Accrued and other current liabilities

 

115,312

 

105,790

 

Total current liabilities

 

313,397

 

291,714

 

 

 

 

 

 

 

Long-term debt

 

1,420,864

 

1,445,722

 

Other non-current liabilities

 

105,120

 

100,702

 

Total liabilities

 

1,839,381

 

1,838,138

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Partners’ (deficit) capital:

 

 

 

 

 

Buckeye Partners, L.P. unitholders’ (deficit) capital:

 

 

 

 

 

General Partner (243,914 units outstanding as of September 30, 2009 and December 31, 2008)

 

(5,689

)

(6,680

)

Limited Partners (51,409,071 and 48,372,346 units outstanding as of September 30, 2009 and December 31, 2008, respectively)

 

1,200,769

 

1,201,144

 

Accumulated other comprehensive loss

 

(14,943

)

(18,967

)

Total Buckeye Partners, L.P. unitholders’ (deficit) capital

 

1,180,137

 

1,175,497

 

Noncontrolling interest

 

20,587

 

20,775

 

Total partners’ (deficit) capital

 

1,200,724

 

1,196,272

 

 

 

 

 

 

 

Total liabilities and partners’ (deficit) capital

 

$

3,040,105

 

$

3,034,410

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

67,442

 

$

134,358

 

Income from discontinued operations

 

 

(1,230

)

Income from continuing operations

 

67,442

 

133,128

 

Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:

 

 

 

 

 

Depreciation and amortization

 

43,408

 

41,415

 

Asset impairment expense

 

72,540

 

 

Net changes in fair value of derivatives

 

(5,632

)

 

Non-cash deferred lease expense

 

3,375

 

3,065

 

Earnings from equity investments

 

(9,031

)

(5,802

)

Distributions from equity investments

 

4,281

 

4,120

 

Amortization of other non-cash items

 

3,776

 

3,084

 

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

 

 

 

 

 

Trade receivables, net

 

(8,428

)

5,556

 

Construction and pipeline relocation receivables

 

9,394

 

(4,537

)

Inventories

 

(90,579

)

(8,288

)

Prepaid and other current assets

 

(21,718

)

(37,052

)

Accounts payable

 

(1,727

)

(1,305

)

Accrued and other current liabilities

 

10,682

 

50,265

 

Other non-current assets

 

(15,819

)

(482

)

Other non-current liabilities

 

9,626

 

(1,177

)

Total adjustments from operating activities

 

4,148

 

48,862

 

Net cash provided by continuing operations

 

71,590

 

181,990

 

Net cash provided by discontinued operations

 

 

397

 

Net cash provided by operating activities

 

71,590

 

182,387

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(58,803

)

(67,890

)

Acquisitions and equity investments, net of cash acquired

 

(3,880

)

(660,252

)

Net proceeds (expenditures) for disposal of property, plant and equipment

 

1,248

 

(513

)

Proceeds from the sale of discontinued operations

 

 

52,584

 

Net cash used in investing activities

 

(61,435

)

(676,071

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of limited partner units

 

104,633

 

113,111

 

Proceeds from exercise of limited partner unit options

 

1,901

 

316

 

Issuance of long-term debt

 

273,210

 

298,050

 

Borrowings under credit facilities

 

348,320

 

502,000

 

Repayments under credit facilities, net

 

(592,987

)

(249,000

)

Debt issuance costs

 

(2,138

)

(1,886

)

Distributions to noncontrolling interests

 

(4,352

)

(3,506

)

Settlement payment of interest rate swaps

 

 

(9,638

)

Distributions to unitholders

 

(170,406

)

(150,391

)

Net cash provided by (used in) financing activities

 

(41,819

)

499,056

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(31,664

)

5,372

 

Cash and cash equivalents—Beginning of year

 

58,843

 

93,198

 

Cash and cash equivalents—End of period

 

$

27,179

 

$

98,570

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

BUCKEYE PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ (DEFICIT) CAPITAL

(In thousands)

(Unaudited)

 

 

 

Buckeye Partners, L.P. Unitholders

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

General

 

Limited

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

Partner

 

Partners

 

(Loss) Income

 

Interest

 

Total

 

Partners’ (deficit) capital-January 1, 2008

 

$

(1,005

)

$

1,100,346

 

$

(9,169

)

$

21,468

 

$

1,111,640

 

Net income

 

23,192

 

107,079

 

 

4,087

 

134,358

 

Change in value of interest rate swaps

 

 

 

(2,451

)

 

 

 

Amortization of interest rate swaps

 

 

 

680

 

 

 

 

Amortization of benefit plans costs

 

 

 

(1,854

)

 

 

 

Other comprehensive loss

 

 

 

 

 

(3,625

)

 

 

(3,625

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

130,733

 

Distributions to unitholders

 

(29,268

)

(121,123

)

 

 

(150,391

)

Distributions to noncontrolling interest

 

 

 

 

(3,506

)

(3,506

)

Net proceeds from the issuance of 2.6 million limited partner units

 

 

113,111

 

 

 

113,111

 

Amortization of unit-based compensation awards

 

 

382

 

 

 

382

 

Exercise of limited partner unit options

 

 

316

 

 

 

316

 

Acquired noncontrolling interest not previously owned

 

 

 

 

(1,539

)

(1,539

)

Partners’ (deficit) capital - September 30, 2008

 

$

(7,081

)

$

1,200,111

 

$

(12,794

)

$

20,510

 

$

1,200,746

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ (deficit) capital-January 1, 2009

 

$

(6,680

)

$

1,201,144

 

$

(18,967

)

$

20,775

 

$

1,196,272

 

Net income

 

35,363

 

27,915

 

 

4,164

 

67,442

 

Change in value of derivatives

 

 

 

(1,962

)

 

 

 

Amortization of interest rate swaps

 

 

 

720

 

 

 

 

Adjustment to funded status of benefit plans

 

 

 

6,400

 

 

 

 

Amortization of benefit plans costs

 

 

 

(1,134

)

 

 

 

Other comprehensive income

 

 

 

 

 

4,024

 

 

 

4,024

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

71,466

 

Distributions to unitholders

 

(34,372

)

(136,034

)

 

 

(170,406

)

Distributions to noncontrolling interest

 

 

 

 

(4,352

)

(4,352

)

Net proceeds from the issuance of 3.0 million limited partner units

 

 

104,633

 

 

 

104,633

 

Amortization of unit-based compensation awards

 

 

1,210

 

 

 

1,210

 

Exercise of limited partner unit options

 

 

1,901

 

 

 

1,901

 

Partners’ (deficit) capital - September 30, 2009

 

$

(5,689

)

$

1,200,769

 

$

(14,943

)

$

20,587

 

$

1,200,724

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.  BASIS OF PRESENTATION

 

Buckeye Partners, L.P. (“Buckeye”) is a publicly traded (NYSE:BPL) master limited partnership organized in 1986 under the laws of the state of Delaware. Buckeye GP LLC (“Buckeye GP”) is the general partner of Buckeye.  Buckeye GP is a wholly owned subsidiary of Buckeye GP Holdings L.P. (“BGH”), a Delaware limited partnership that is also publicly traded (NYSE:BGH).  Buckeye operates and reports in five business segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 20 for a more detailed discussion of Buckeye’s business segments.

 

Buckeye Pipe Line Services Company (“Services Company”) was formed in 1996 in connection with the establishment of the Buckeye Pipe Line Services Company Employee Stock Ownership Plan (the “ESOP”). At September 30, 2009, Services Company owned approximately 3.5% of the publicly traded limited partner units of Buckeye (the “LP Units”). Services Company employees provide services to the operating subsidiaries through which Buckeye conducts its operations. Pursuant to a services agreement entered into in December 2004 (the “Services Agreement”), the operating subsidiaries reimburse Services Company for the costs of the services it provides.  Pursuant to the Services Agreement and an executive employment agreement, through December 31, 2008, executive compensation costs and related benefits paid to Buckeye GP’s four highest salaried officers were not reimbursed by Buckeye or its operating subsidiaries but were reimbursed to Services Company by BGH.  Effective January 1, 2009, Buckeye and its operating subsidiaries agreed to pay for all executive compensation and benefits earned by Buckeye GP’s four highest salaried officers in return for an annual fixed payment from BGH to Buckeye of $3.6 million.

 

The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of its financial position as of September 30, 2009, and the results of its operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of results of Buckeye’s operations for the 2009 fiscal year. Buckeye has evaluated subsequent events through November 3, 2009, the date the financial statements were issued (see Note 21). The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with Buckeye’s consolidated financial statements and notes thereto presented in Buckeye’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 2, 2009.

 

Certain prior year amounts have been reclassified in the statement of cash flows to conform to the current-year presentation.

 

Recent Accounting Developments

 

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) that has been codified under FASB ASC Topic 105, “Generally Accepted Accounting Principles,” as the single source for authoritative nongovernmental GAAP. The ASC replaces other sources of authoritative GAAP with the exception of rules and interpretive releases of the SEC, which will continue to be authoritative. The issuance of this guidance is not intended to significantly change GAAP, but it requires ASC citations in place of references to previous authoritative accounting literature, except when such literature has not yet been incorporated into the ASC. Following the issuance of the ASC, the FASB announced that it will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it is FASB’s intent to issue Accounting Standards Updates (“ASU”). The FASB does not consider ASUs as authoritative in their own rights. ASUs will serve only to update the ASC, provide background information about the guidance and provide the bases for conclusions on the change(s) in the ASC.

 

7



Table of Contents

 

BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On January 1, 2009, Buckeye adopted the guidance that has been codified under FASB ASC Topic 260, “Earnings Per Share,” regarding the calculation of earnings per LP Unit as it relates to master limited partnerships.  Buckeye’s former practice was to calculate earnings per LP Unit based solely upon the net income available to the limited partners after deducting the general partner’s interest in net income.  The general partner’s interest includes incentive distribution rights.  Under this guidance, the difference between net income and distributions is allocated to the limited partners and general partner before earnings per LP Unit is calculated.  The effect of adopting this guidance is: (i) for periods when net income exceeds distributions, Buckeye’s reported earnings per LP Unit will be the same as under Buckeye’s former accounting practice and (ii) for periods when distributions exceed net income, Buckeye’s reported earnings per LP Unit will be lower than under Buckeye’s former practice. These differences will be material for those periods where there are significant differences between Buckeye’s net income and the distributions it pays. This guidance was required to be applied retrospectively; therefore, Buckeye has restated earnings per LP Unit for the three and nine months ended September 30, 2008.

 

On January 1, 2009, Buckeye adopted the guidance that has been codified under FASB ASC Topic 810, “Consolidations,” which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  These accounting and reporting standards require for-profit entities that prepare consolidated financial statements to: (a) present noncontrolling interests as a component of equity, separate from the parent’s equity; (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the income statement; (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions; (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated; and (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interests of noncontrolling owners.  Accordingly, for periods presented in these condensed consolidated financial statements, Buckeye has reclassified its noncontrolling interest liability into partners’ (deficit) capital on the condensed consolidated balance sheets and has separately presented and allocated income attributable to noncontrolling interests on the condensed consolidated statements of operations and condensed consolidated statements of partners’ (deficit) capital.

 

On January 1, 2009, Buckeye adopted the guidance that has been codified under FASB ASC Topic 815, “Derivatives and Hedging,” and has included the required enhanced qualitative and quantitative disclosure requirements regarding derivative instruments in Note 11.

 

On January 1, 2009, Buckeye adopted the guidance that has been codified under FASB ASC Topic 260, “Earnings Per Share,” as it applies to the calculation of earnings per unit (“EPU”) for unit-based payment awards with rights to dividends or dividend equivalents. It states that unvested unit-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPU pursuant to the two-class method. Phantom unit awards issuable under Buckeye’s 2009 Long-Term Incentive Plan (the “LTIP”, see Note 17), provide participants with non-forfeitable rights to distribution equivalents of Buckeye LP Unit distributions whether vested or not.  As such, this guidance provides that the net income utilized in the calculation of net income per LP Unit must be after the allocation of income to the phantom units on a pro-rata basis.  This guidance requires entities to retroactively adjust all prior period EPU computations. The adoption of this guidance did not have a material effect on Buckeye’s condensed consolidated financial statements.

 

In April 2009, the FASB addressed the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and required that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met.  This guidance, codified under FASB ASC Topic 805, “Business Combinations,” also required that a systematic and rational basis for subsequently measuring and accounting for such assets or liabilities be developed depending on their nature. This guidance is effective for assets or liabilities arising from contingencies in business combinations for acquisitions that are consummated on or after January 1, 2009.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.166, “Accounting for Transfers of Financial Assets — an Amendment of FASB Statement No. 140” (“SFAS 166”) (not yet integrated into the ASC).  The objective of SFAS 166 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  SFAS 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Buckeye is currently evaluating the impact the adoption of SFAS 166 will have on its condensed consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”) (not yet integrated into the ASC).  The objective of SFAS 167 is to improve financial reporting by companies involved with variable interest entities.  SFAS 167 will require companies to perform an analysis to determine whether the companies’ variable interest or interests give it a controlling financial interest in a variable interest entity.  SFAS 167 is effective as of the beginning of each reporting company’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited. Buckeye is currently evaluating the impact the adoption of SFAS 167 will have on its condensed consolidated financial statements.

 

On July 1, 2009, Buckeye adopted the guidance that has been codified under FASB ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

 

In August 2009, the FASB issued new guidance in the form of an ASU that has been codified under FASB ASC 820, “Fair Value Measurements and Disclosures,” that applies to the measurement of liabilities at fair value.  This new guidance provides clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, companies are required to measure fair value of the liability using one or both of the following techniques:  (i) a valuation technique that uses the quoted price of an identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) a valuation technique consistent with the fair value measurements guidance, such as an income approach or a market approach.  This new guidance also clarifies that when estimating the fair value of a liability, companies are not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability.  Additionally, this new guidance clarifies that both a quoted price in an active market for an identical liability at the measurement date and the quoted price for an identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  This new guidance is effective for Buckeye for the quarter ending December 31, 2009.  Buckeye is currently evaluating the impact this new guidance will have on its condensed consolidated financial statements and disclosures.

 

2.  IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR SALE

 

Buckeye owns and operates an approximately 350-mile natural gas liquids pipeline (the “Buckeye NGL Pipeline”) that runs from Wattenberg, Colorado to Bushton, Kansas. During the second quarter of 2009, Buckeye received notification that several of its shippers, which were currently using the Buckeye NGL Pipeline, intended to migrate to a competing pipeline, which recently went into service.  This notification was accompanied by a significant decline in shipment volumes as compared to historical averages. This loss in the customer base represented a triggering event, and an impairment evaluation resulted in a charge to earnings of $72.5 million against the Pipeline Operations segment.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In June 2009, Buckeye’s board of directors authorized management to pursue the sale of the Buckeye NGL Pipeline. Accordingly, Buckeye ceased depreciation of the assets as of July 1, 2009 and has reclassified the net assets and liabilities of the Buckeye NGL Pipeline to “Prepaid and other current assets” on the September 30, 2009 condensed consolidated balance sheet, as shown in Note 4.

 

The carrying amounts of the major classes of assets and liabilities held for sale by Buckeye NGL Pipe Lines LLC (“Buckeye NGL”) at September 30, 2009 were as follows (in thousands):

 

Assets:

 

 

 

Inventories

 

$

610

 

Prepaid and other current assets

 

1,581

 

Property, plant and equipment, net

 

8,639

 

Assets held for sale

 

10,830

 

 

 

 

 

Liabilities:

 

 

 

Accounts payable

 

3,261

 

Accrued and other current liabilities

 

1,694

 

Liabilities held for sale

 

4,955

 

 

 

 

 

Net assets held for sale

 

$

5,875

 

 

Revenues for Buckeye NGL for the three and nine months ended September 30, 2009 were $1.7 million and $8.2 million, respectively.

 

3.  REORGANIZATION

 

On July 20, 2009, Buckeye announced the completion of a company-wide, “best practices” review.  During the period ended June 30, 2009, Buckeye commenced a restructuring of its operations as a result of this review, including a reorganization of its field operations to combine five of its original pipeline and terminal districts into three districts, as well as a restructuring of certain corporate functions and related corporate support functions.  These efforts redefined the roles and responsibilities of certain positions and called for the elimination of resources devoted to such activities.  Approximately 260 positions are affected as a result of these restructuring activities.

 

As part of the restructuring efforts, Buckeye executed a reduction in force comprised of a Voluntary Early Retirement Plan (the “VERP”) and an involuntary plan.  The terms of the VERP were agreed to by approximately 80 employees during the period ended June 30, 2009. An additional group of approximately 180 employees are being impacted by the involuntary reduction in workforce under Buckeye’s ongoing severance plan. Affected employees receive severance benefits, post-employment benefits including extended medical and dental coverage, and other services including retirement counseling and outplacement services.  Most terminations were effective as of July 20, 2009.

 

For the nine months ended September 30, 2009, Buckeye recorded reorganization expense of $29.1 million for post-employment costs related to these restructuring activities which include: (1) termination benefits pursuant to voluntary and involuntary severance plans of $16.7 million; (2) post-retirement benefits (see Note 18) of $6.4 million; and (3) other related costs of $6.0 million.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The expense incurred by segment, including certain allocated amounts, for the three and nine months ended September 30, 2009 is as follows (in thousands):

 

 

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2009

 

Pipeline Operations

 

$

518

 

$

23,572

 

Terminalling and Storage

 

163

 

2,565

 

Natural Gas Storage

 

91

 

382

 

Energy Services

 

206

 

1,150

 

Other Operations

 

18

 

1,440

 

Total

 

$

996

 

$

29,109

 

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consist of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Prepaid insurance

 

$

1,287

 

$

7,112

 

Insurance receivables

 

10,526

 

5,101

 

Ammonia receivable

 

11,242

 

12,058

 

Margin deposits

 

5,882

 

32,345

 

Prepaid services

 

35,411

 

 

Unbilled revenue

 

8,871

 

1,074

 

Net assets held for sale

 

5,875

 

 

Other

 

19,029

 

14,421

 

Total

 

$

98,123

 

$

72,111

 

 

5.  INVENTORIES

 

Inventories consist of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Refined petroleum products (1)

 

$

212,380

 

$

69,568

 

Materials and supplies

 

15,034

 

14,661

 

Total

 

$

227,414

 

$

84,229

 


(1)          Ending inventory was 114.4 million and 47.7 million gallons of refined petroleum products at September 30, 2009 and December 31, 2008, respectively.

 

Buckeye generally maintains two types of inventory.  Within the Energy Services segment, Buckeye principally maintains refined petroleum products inventory, which consists primarily of gasoline, heating oil and diesel fuel, which is valued at the lower of cost or market, unless such inventory is hedged.  At September 30, 2009 and December 31, 2008, 86% and 78% of the inventory was hedged, respectively. Hedged inventory is valued at current market prices with the change in value of the inventory reflected in the condensed consolidated statements of operations.  At September 30, 2009 and December 31, 2008, 11% and 17% of the inventory, respectively, was committed against fixed-priced sales contracts, and such inventory was valued at the lower of cost or market.  The remaining inventory was considered unhedged and represented approximately one day of sales.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Buckeye also maintains, principally within its Pipeline Operations segment, an inventory of materials and supplies such as pipes, valves, pumps, electrical/electronic components, drag-reducing agent and other miscellaneous items that are valued at the lower of cost or market based on the first-in, first-out method.

 

6.  INTANGIBLE ASSETS, NET

 

Intangible assets, net consist of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Customer relationships

 

$

 38,300

 

$

 38,300

 

Accumulated amortization

 

(4,889

)

(2,662

)

Net carrying amount

 

33,411

 

35,638

 

 

 

 

 

 

 

Customer contracts

 

11,800

 

11,800

 

Accumulated amortization

 

(3,750

)

(3,324

)

Net carrying amount

 

8,050

 

8,476

 

 

 

 

 

 

 

Total

 

$

 41,461

 

$

 44,114

 

 

For the three months ended September 30, 2009 and 2008, amortization expense related to intangible assets was $0.9 million and $0.1 million, respectively.  For the nine months ended September 30, 2009 and 2008, amortization expense related to intangible assets was $2.7 million and $0.4 million, respectively.  Amortization expense related to intangible assets is expected to be approximately $3.8 million for each of the next five years.

 

7.  EQUITY INVESTMENTS

 

Equity investments consist of the following (in thousands):

 

 

 

 

 

September 30,

 

December 31,

 

 

 

Ownership

 

2009

 

2008

 

 

 

 

 

 

 

 

 

West Shore Pipe Line Company

 

24.9

%

$

 30,640

 

$

 30,340

 

West Texas LPG Pipeline Limited Partnership

 

20.0

%

52,947

 

44,471

 

Muskegon Pipeline LLC

 

40.0

%

14,759

 

14,967

 

Transport4, LLC

 

25.0

%

383

 

332

 

Total

 

 

 

$

 98,729

 

$

 90,110

 

 

In the first nine months of 2009, Buckeye invested an additional $3.9 million in West Texas LPG Pipeline Limited Partnership (“WT LPG”) as Buckeye’s pro rata contribution for an expansion project that was required to meet increased pipeline demand caused by increased product production in the Fort Worth basin and East Texas regions. The expansion project consists of the construction of 39 miles of 12-inch pipeline and the installation of multiple booster stations. The WT LPG expansion pipeline became operational in April 2009.  WT LPG is owned 80% by Chevron Pipe Line Co. and 20% by Buckeye.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table presents equity earnings for unconsolidated affiliates for the three and nine months ended September 30, 2009 and 2008 (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

West Shore Pipe Line Company

 

$

 1,204

 

$

 1,124

 

$

 3,401

 

$

 2,859

 

West Texas LPG Pipeline Limited Partnership

 

2,187

 

880

 

4,606

 

1,928

 

Muskegon Pipeline LLC

 

385

 

400

 

923

 

958

 

Transport4, LLC

 

31

 

 

101

 

57

 

Total

 

$

 3,807

 

$

 2,404

 

$

 9,031

 

$

 5,802

 

 

8.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Taxes - other than income

 

$

 13,038

 

$

 13,555

 

Accrued charges due Buckeye GP

 

1,000

 

1,493

 

Accrued charges due Services Company

 

7,778

 

4,028

 

Accrued employee benefit liability

 

2,297

 

2,297

 

Environmental liabilities

 

11,477

 

12,337

 

Interest payable

 

18,055

 

25,547

 

Retainage

 

1,284

 

1,405

 

Payable for ammonia purchase

 

8,347

 

9,373

 

Unearned revenue

 

24,694

 

12,186

 

Accrued capital expenditures

 

2,296

 

4,902

 

Reorganization

 

7,805

 

 

Other

 

17,241

 

18,667

 

Total

 

$

 115,312

 

$

 105,790

 

 

9.  CONTINGENCIES

 

Claims and Proceedings

 

Buckeye and its subsidiaries, in the ordinary course of business, are involved in various claims and legal proceedings, some of which are covered by insurance. Buckeye is generally unable to predict the timing or outcome of these claims and proceedings. Based upon its evaluation of existing claims and proceedings including the probability of losses which may result from such contingencies, Buckeye has accrued certain amounts relating to such claims and proceedings, none of which are considered material.

 

In March 2007, Buckeye was named as a defendant in an action entitled Madigan v. Buckeye Partners, L.P. filed in the U.S. District Court for the Central District of Illinois. The action was brought by the State of Illinois Attorney General acting on behalf of the Illinois Environmental Protection Agency. The complaint alleged that Buckeye violated various Illinois state environmental laws in connection with a product release from Buckeye’s terminal located in Harristown, Illinois on or about June 11, 2006 and various other product releases from Buckeye’s terminals and pipelines in the State of Illinois during the period of 2001 through 2006. Pursuant to a Consent Decree that was filed with the U.S. District Court for the Central District of Illinois on October 7, 2009, Buckeye agreed to

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

settle and compromise the disputed claims without admitting any of the allegations set forth in the complaint. Under the terms of the Consent Decree, Buckeye paid approximately $0.4 million in October 2009 to the Illinois Environmental Protection Agency and agreed to continue to perform monitoring and certain remediation activities at the sites involved, and the State of Illinois agreed to release Buckeye from any further liability with respect to the claims involved.

 

Environmental Contingencies

 

In accordance with its accounting policy, Buckeye recorded operating expenses of $2.2 million and $1.9 million for the three months ended September 30, 2009 and 2008, respectively, and $8.8 million and $6.5 million for the nine months ended September 30, 2009 and 2008, respectively, related to environmental contingencies unrelated to claims and proceedings.

 

Ammonia Contract Contingencies

 

On November 30, 2005, Buckeye Gulf Coast Pipe Lines, L.P. (“BGC”), an operating subsidiary of Buckeye, purchased an ammonia pipeline and other assets from El Paso Merchant Energy-Petroleum Company (“EPME”), a subsidiary of El Paso Corporation (“El Paso”).  As part of the transaction, BGC assumed the obligations of EPME under several contracts involving monthly purchases and sales of ammonia.  EPME and BGC agreed, however, that EPME would retain the economic risks and benefits associated with those contracts until their expiration at the end of 2012.  To effectuate this agreement, BGC passes through to EPME both the cost of purchasing ammonia under a supply contract and the proceeds from selling ammonia under three sales contracts.  For the vast majority of monthly periods since the closing of the pipeline acquisition, the pricing terms of the ammonia contracts have resulted in ammonia costs exceeding ammonia sales proceeds.  The amount of the shortfall generally increases as the market price of ammonia increases.

 

EPME has informed BGC that, notwithstanding the parties’ agreement, it will not continue to pay BGC for shortfalls created by the pass-through of ammonia costs in excess of ammonia revenues.  EPME encouraged BGC to seek payment by invoking the $40.0 million guaranty made by El Paso which guaranteed EPME’s obligations to BGC.  If EPME fails to reimburse BGC for these shortfalls for a significant period during the remainder of the term of the ammonia agreements, then such unreimbursed shortfalls could exceed the $40.0 million cap on El Paso’s guaranty.  To the extent the unreimbursed shortfalls significantly exceed the $40.0 million cap, the resulting costs incurred by BGC could adversely affect Buckeye’s financial position, results of operations and cash flows.  To date, BGC has continued to receive payment for ammonia costs under the contracts at issue. BGC has not called on El Paso’s guaranty and believes only BGC may invoke the guaranty.  EPME, however, contends that El Paso’s guaranty is the source of payment for the shortfalls, but has not clarified the extent to which it believes the guaranty has been exhausted.  Given the uncertainty of future ammonia prices and EPME’s future actions, Buckeye is unable to estimate the amount of any such losses it might incur in the future. Buckeye is assessing its options, including potential recourse against EPME and El Paso, with respect to this matter.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

10.  DEBT AND CREDIT FACILITIES

 

Long-term debt consists of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

4.625% Notes due July 15, 2013*

 

$

300,000

 

$

300,000

 

6.750% Notes due August 15, 2033*

 

150,000

 

150,000

 

5.300% Notes due October 15, 2014*

 

275,000

 

275,000

 

5.125% Notes due July 1, 2017*

 

125,000

 

125,000

 

6.050% Notes due January 15, 2018*

 

300,000

 

300,000

 

5.500% Notes due August 15, 2019*

 

275,000

 

 

Credit Facility

 

 

298,267

 

BES Credit Facility

 

149,600

 

96,000

 

Less: Unamortized discount

 

(5,018

)

(3,604

)

Adjustment to fair value associated with hedge of fair value

 

882

 

1,059

 

Subtotal long-term debt

 

1,570,464

 

1,541,722

 

Less: current portion of long-term debt

 

(149,600

)

(96,000

)

Total long-term debt

 

$

1,420,864

 

$

1,445,722

 


*                 Buckeye makes semi-annual interest payments on these notes based on the rates noted above with the principal balances outstanding to be paid on or before the due dates as shown above.

 

The fair values of Buckeye’s aggregate debt and credit facilities were estimated to be $1,560.6 million at September 30, 2009 and $1,367.7 million at December 31, 2008.  The fair values of the fixed-rate debt at September 30, 2009 and December 31, 2008 were estimated primarily by comparing the historic market prices of Buckeye’s publicly-issued debt with the market prices of other master limited partnerships’ publicly-issued debt with similar credit ratings and terms.  The fair values of the variable-rate debt are their carrying amounts as the carrying amount reasonably approximates fair value due to the variable interest rate.

 

On August 18, 2009, Buckeye sold $275.0 million aggregate principal amount of 5.500% Notes due 2019 (the “5.500% Notes”) in an underwritten public offering. The notes were issued at 99.35% of their principal amount. Total proceeds from this offering, after underwriters’ fees, expenses and debt issuance costs of $1.8 million, were approximately $271.4 million, and were used to reduce amounts outstanding under Buckeye’s credit facility and for working capital purposes.

 

Credit Facility

 

Buckeye has a borrowing capacity of $580.0 million under an unsecured revolving credit agreement (the “Credit Facility”), which may be expanded up to $780.0 million subject to certain conditions and upon the further approval of the lenders.   The Credit Facility’s maturity date is August 24, 2012, which may be extended by Buckeye for up to two additional one-year periods. Borrowings under the Credit Facility bear interest under one of two rate options, selected by Buckeye, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin, or (ii) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin. The applicable margin is determined based on the current utilization level of the Credit Facility and ratings assigned by Standard & Poor’s and Moody’s Investor Services for Buckeye’s senior unsecured non-credit enhanced long-term debt.  At September 30, 2009, no amounts were outstanding under the Credit Facility, while at December 31, 2008, $298.3 million was outstanding under this facility.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to 1.00 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA, which is defined in the Credit Facility as earnings before interest, taxes, depreciation, depletion and amortization, and other adjustments as defined therein, in each case excluding the income of certain majority-owned subsidiaries of Buckeye and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).  At September 30, 2009, Buckeye’s Funded Debt Ratio was approximately 4.5 to 1.00.  As permitted by the Credit Facility, $149.6 million of borrowings by Buckeye Energy Services LLC (“BES”) under its separate credit agreement (discussed below) and $72.5 million related to the Buckeye NGL Pipeline impairment (see Note 2) were excluded from the calculation of the Funded Debt Ratio.

 

In addition, the Credit Facility contains other covenants including, but not limited to, covenants limiting Buckeye’s ability to incur additional indebtedness, to create or incur liens on its property, to dispose of property material to its operations, and to consolidate, merge or transfer assets.  At September 30, 2009, Buckeye was not aware of any instances of noncompliance with the covenants under the Credit Facility.

 

On August 21, 2009, Buckeye Energy Holdings LLC (“BEH”), a wholly owned subsidiary of Buckeye, bought the outstanding loans and commitments of Aurora Bank FSB (formerly Lehman Brother Bank, FSB), a lender under the Credit Facility, through a sale and assignment agreement. Concurrent with this transaction, Buckeye repaid the $213.5 million outstanding balance of the Credit Facility, plus accrued interest and fees. The Credit Facility was subsequently amended to remove BEH as a lender by terminating its commitment in full, thus reducing the borrowing capacity of the Credit Facility from $600.0 million to $580.0 million.

 

At September 30, 2009 and December 31, 2008, Buckeye had committed $1.4 million and $1.3 million in support of letters of credit, respectively.  The obligations for letters of credit are not reflected as debt on Buckeye’s condensed consolidated balance sheets.

 

BES Credit Agreement

 

BES has a credit agreement (the “BES Credit Agreement”) that, prior to August 2009, provided for borrowings of up to $175.0 million.  In August 2009, the BES Credit Agreement was amended to provide for total borrowings of up to $250.0 million.  Under the BES Credit Agreement, borrowings accrue interest, at BES’s election, at (i) the Administrative Agent’s Cost of Funds (as defined in the BES Credit Agreement) plus 1.75%, (ii) the Eurodollar Rate (as defined in the BES Credit Agreement) plus 1.75% or (iii) the Base Rate (as defined in the BES Credit Agreement) plus 0.25%.  The BES Credit Agreement also permits Daylight Overdraft Loans (as defined in the BES Credit Agreement), Swingline Loans (as defined in the BES Credit Agreement) and letters of credit.  Such alternative extensions of credit are subject to certain conditions as specified in the BES Credit Agreement.  The BES Credit Agreement is secured by liens on certain assets of BES, including its inventory, cash deposits (other than certain accounts), investments and hedging accounts, receivables and intangibles.

 

The balances outstanding under the BES Credit Agreement were approximately $149.6 million and $96.0 million at September 30, 2009 and December 31, 2008, respectively, all of which were classified as current liabilities.  The BES Credit Agreement requires BES to meet certain financial covenants, which are defined in the BES Credit Agreement and summarized below (in millions, except for the leverage ratio):

 

Borrowings

 

Minimum

 

Minimum

 

Maximum

 

Outstanding on

 

Consolidated Tangible

 

Consolidated Net

 

Consolidated

 

BES Credit Agreement

 

Net Worth

 

Working Capital

 

Leverage Ratio

 

$150

 

$40  

 

$30  

 

7.0 to 1.0

 

Above $150 up to $200

 

50

 

40

 

7.0 to 1.0

 

Above $200 up to $250

 

60

 

50

 

7.0 to 1.0

 

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

At September 30, 2009, BES’s Consolidated Tangible Net Worth and Consolidated Net Working Capital were $124.0 million and $79.7 million, respectively, and the Consolidated Leverage Ratio was 1.65 to 1.0.  The weighted average interest rate for borrowings outstanding under the BES Credit Agreement was 2.0% at September 30, 2009.

 

In addition, the BES Credit Agreement contains other covenants, including, but not limited to, covenants limiting BES’s ability to incur additional indebtedness, to create or incur certain liens on its property, to consolidate, merge or transfer its assets, to make dividends or distributions, to dispose of its property, to make investments, to modify its risk management policy, or to engage in business activities materially different from those presently conducted.  At September 30, 2009, Buckeye was not aware of any instances of noncompliance with the covenants under the BES Credit Agreement.

 

11.  FINANCIAL INSTRUMENTS

 

Commodity Derivatives

 

The Energy Services segment primarily uses exchange-traded petroleum futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its fixed-price sales contracts. The derivative contracts used to hedge refined petroleum product inventories are designated as fair value hedges.  Accordingly, Buckeye’s method of measuring ineffectiveness compares the change in the fair value of New York Mercantile Exchange (“NYMEX”) futures contracts to the change in fair value of Buckeye’s hedged fuel inventory.

 

The Energy Services segment has elected not to use hedge accounting with respect to its fixed-price sales contracts. Therefore, its fixed-price sales contracts and the related futures contracts used to offset those fixed-price sales contracts are all marked-to-market on the balance sheet with gains and losses being recognized in earnings during the period.

 

In order to hedge the cost of natural gas used to operate Buckeye’s turbine engines at its Linden, New Jersey location, the Pipeline Operations segment bought natural gas futures contracts in March 2009 with terms that coincide with the remaining term of an ongoing natural gas supply contract (April 2009 through August 2011) for a price of $5.47 per million British thermal units (“MMBtu”).  The aggregate notional quantity is approximately 900,000 MMBtus.  This transaction was designated as a cash flow hedge at inception.

 

Finance Derivatives

 

Buckeye manages a portion of its interest rate exposure by utilizing interest rate swaps to effectively convert a portion of its variable-rate debt into fixed-rate debt.  Generally, Buckeye utilizes interest rate swaps for specifically identified transactions.

 

On April 21, 2009, Buckeye entered into an interest rate swap agreement to hedge its variable interest rate risk on $50.0 million in borrowings under the Credit Facility. Under the swap agreement, Buckeye paid a fixed rate of interest of 0.63% for 180 days and, in exchange, received a series of six monthly payments based on the 30-day LIBOR rate in effect at the beginning of each monthly period. The amounts received by Buckeye corresponded to the 30-day LIBOR rates that Buckeye paid on the $50.0 million borrowed under the Credit Facility.  On August 27, 2009, in conjunction with the repayment of the outstanding balance under the Credit Facility, the swap was terminated.  Buckeye had designated the swap agreement as a cash flow hedge at inception.

 

Buckeye plans to issue new fixed-rate debt (i) on or before July 15, 2013, to repay the $300.0 million of 4.625 % Notes that are due on July 15, 2013, and (ii) on or before October 15, 2014, to repay the $275.0 million of 5.300% Notes that are due on October 15, 2014.  During the third quarter of 2009, Buckeye entered into three forward starting interest rate swaps with a total aggregate notional amount of $150.0 million related to the issuance of debt on or before July 15, 2013 and three forward starting interest rate swaps with a total aggregate notional amount of $150.0 million related to the issuance of debt on or before October 15, 2014.  The purpose of these swaps is to hedge the variability of the forecasted interest payments on these expected debt issuances that may result from changes in

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

the benchmark interest rate until the debt is issued. Unrealized losses of $2.7 million were recorded in accumulated other comprehensive loss to reflect the change in the fair values of the forward starting interest rate swaps as of September 30, 2009. Buckeye designated the swap agreements as cash flow hedges at inception and expects the changes in values to be highly correlated with the changes in value of the underlying borrowings.

 

In October 2009, Buckeye entered into another forward starting interest rate swap with a total notional amount of $50.0 million related to the issuance of fixed-rate debt on or before July 15, 2013.

 

The following table sets forth the fair value of each classification of derivative instruments as of September 30, 2009 (in thousands):

 

 

 

September 30, 2009

 

 

 

 

 

 

 

Derivative

 

 

 

Assets

 

(Liabilities)

 

Net Carrying

 

Derivatives NOT designated as hedging instruments:

 

Fair value

 

Fair value

 

Value

 

 

 

 

 

 

 

 

 

Fixed-price sales contracts

 

$

13,668

 

$

(2,687

)

$

10,981

 

Futures contracts for fixed-price sales contracts

 

8,684

 

(5,426

)

3,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Futures contracts for inventory

 

$

4,180

 

$

(13,752

)

$

(9,572

)

Futures contract for natural gas

 

590

 

 

590

 

Interest rate contracts

 

 

(3,777

)

(3,777

)

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

1,480

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

Balance Sheet Locations:

 

2009

 

 

 

 

 

Derivative assets

 

$

17,402

 

 

 

 

 

 

Other non-current assets

 

28

 

 

 

 

 

 

Derivative liabilities

 

(12,173

)

 

 

 

 

 

Other non-current liabilities

 

(3,777

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,480

 

 

 

 

 

 

 

Substantially all of the unrealized loss of $9.6 million at September 30, 2009 for inventory hedges represented by futures contracts will be realized by the second quarter of 2010 as the related inventory is sold.  Gains recorded on inventory hedges that were ineffective were approximately $10.0 million and $17.7 million for the three and nine months ended September 30, 2009, respectively.  As of September 30, 2009, open petroleum derivative contracts (represented by the fixed-price sales contracts and futures contracts for fixed-price sales contracts noted above) varied in duration, but did not extend beyond December 2010.  In addition, at September 30, 2009, Buckeye had refined product inventories which it intends to use to satisfy a portion of the fixed-price sales contracts.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The gains and losses on Buckeye’s derivative instruments for the three and nine months ended September 30, 2009 were as follows (in thousands):

 

 

 

 

 

Gain (Loss) Recognized in

 

 

 

 

 

Income on Derivatives

 

 

 

 

 

Three Months

 

Nine Months

 

 

 

 

 

Ended

 

Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2009

 

2009

 

Derivatives NOT designated as hedging instruments

 

Location

 

 

 

 

 

Fixed-price sales contracts

 

Product sales

 

$

(3,937

)

$

(3,367

)

Futures contracts fixed-price sales contracts

 

Cost of product sales and natural gas storage services

 

3,972

 

(7,489

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

Location

 

 

 

 

 

Futures contracts for inventory

 

Cost of product sales and natural gas storage services

 

$

(4,273

)

$

23,157

 

Futures contract for natural gas

 

Cost of product sales and natural gas storage services

 

1,963

 

(53,216

)

Interest rate contracts

 

Interest and debt expense

 

(1,132

)

(1,274

)

 

12.  FAIR VALUE MEASUREMENTS

 

Fair value measurements are characterized in one of three levels based upon the input used to arrive at the measurement.  The three levels include:

 

·                  Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

·                  Level 2 inputs include the following:

 

·                  Quoted prices in active markets for similar assets or liabilities.

·                  Quoted prices in markets that are not active for identical or similar assets or liabilities.

·                  Inputs other than quoted prices that are observable for the asset or liability.

·                  Inputs that are derived primarily from or corroborated by observable market data by correlation or other means.

 

·                  Level 3 inputs are unobservable inputs for the asset or liability.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recurring

 

The following table sets forth financial assets and liabilities, measured at fair value on a recurring basis, as of the measurement dates, September 30, 2009 and December 31, 2008, and the basis for that measurement, by level within the fair value hierarchy (in thousands):

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

 

 

Significant

 

 

 

Significant

 

 

 

Quoted Prices

 

Other

 

Quoted Prices

 

Other

 

 

 

in Active

 

Observable

 

in Active

 

Observable

 

 

 

Markets

 

Inputs

 

Markets

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 1)

 

(Level 2)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

4,590

 

$

12,840

 

$

25,225

 

$

79,322

 

Asset held in trust

 

1,793

 

 

3,648

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

 

(3,777

)

 

(333

)

Commodity derivatives

 

(10,314

)

(1,859

)

(50,806

)

(1,045

)

Total

 

$

(3,931

)

$

7,204

 

$

(21,933

)

$

77,944

 

 

The value of the Level 1 commodity derivative assets and liabilities were based on quoted market prices obtained from the NYMEX.  The value of the Level 1 asset held in trust was obtained from quoted market prices.  The value of the Level 2 commodity derivative assets and liabilities were based on observable market data related to the obligations to provide petroleum products. The value of the Level 2 interest rate derivative was based on observable market data related to similar obligations.

 

The commodity derivative assets of $12.8 million and $79.3 million as of September 30, 2009 and December 31, 2008, respectively, are both net of a credit valuation adjustment (“CVA”) of ($0.6) million.  Because few of the Energy Services segment’s customers entering into these fixed-price sales contracts are large organizations with nationally-recognized credit ratings, the Energy Services segment determined that a CVA, which is based on the credit risk of such contracts, is appropriate.  The CVA is 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.

 

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.  The following table presents the fair value of an asset carried on the condensed consolidated balance sheet by asset classification and by level within the valuation hierarchy (as described above) at the date indicated for which a nonrecurring change in fair value has been recorded during the nine months ended September 30, 2009 (in thousands):

 

 

 

September 30,

 

 

 

 

 

 

 

Total

 

 

 

2009

 

Level 1

 

Level 2

 

Level 3

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid and other current assets (1)

 

$

8,639

 

$

 

$

 

$

8,639

 

$

72,540

 


(1)          Represents the property, plant and equipment included in net assets held for sale (see Note 2).

 

As a result of a loss in the customer base utilizing the Buckeye NGL Pipeline, Buckeye recorded a non-cash impairment charge of $72.5 million during the nine months ended September 30, 2009.  The estimated fair value was based on a probability-weighted combination of income and market approaches.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

13.  EARNINGS PER LIMITED PARTNERSHIP UNIT

 

Basic and diluted net income per LP Unit is calculated by dividing net income, after deducting the amount allocated to Buckeye GP, by the weighted-average number of LP Units outstanding during the period.

 

The following table is a reconciliation of the weighted average number of LP Units used in the basic and diluted earnings per LP Unit calculations for the three and nine months ended September 30, 2009 and 2008 (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average LP Units outstanding

 

51,374

 

48,372

 

50,351

 

47,538

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average LP Units outstanding

 

51,374

 

48,372

 

50,351

 

47,538

 

Dilutive effect of unit-based grants

 

164

 

6

 

165

 

20

 

Total

 

51,538

 

48,378

 

50,516

 

47,558

 

 

14.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table displays the components of Accumulated Other Comprehensive Loss on the condensed consolidated balance sheets (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Adjustments to funded status of retirement income guarantee plan and retiree medical plan

 

$

870

 

$

(5,530

)

Derivative instruments

 

(10,177

)

(8,935

)

Accumulated amortization of retirement income guarantee plan and retiree medical plan

 

(5,636

)

(4,502

)

 

 

 

 

 

 

Total

 

$

(14,943

)

$

(18,967

)

 

In connection with Buckeye’s reorganization, $6.4 million of the aggregate expense of $29.1 million has been recorded as an adjustment to the funded status of the retirement income guarantee plan and the retiree medical plan (see Note 3).

 

15.  CASH DISTRIBUTIONS

 

Buckeye generally makes quarterly cash distributions of substantially all of its available cash, generally defined as consolidated cash receipts less consolidated cash expenditures and such retentions for working capital, anticipated cash expenditures and contingencies as Buckeye GP deems appropriate.

 

On November 2, 2009, Buckeye declared a quarterly cash distribution of $0.925 per LP Unit payable on November 30, 2009 to unitholders of record on November 12, 2009.  The total cash distribution to unitholders will amount to approximately $59.8 million, which includes an incentive distribution of approximately $12.0 million payable to Buckeye GP.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

16.  RELATED PARTY TRANSACTIONS

 

Buckeye is managed by Buckeye GP, which is a wholly owned subsidiary of BGH.  BGH is managed by its general partner, MainLine Management LLC (“MainLine Management”). MainLine Management is a wholly owned subsidiary of BGH GP Holdings, LLC (“BGH Holdings”).  Affiliates of each of ArcLight Capital Partners, LLC and Kelso & Company, along with certain members of Buckeye’s senior management, own the majority of the outstanding equity interests of BGH Holdings.  In addition to owning MainLine Management, BGH Holdings owns approximately 62% of BGH’s common units.

 

Under certain agreements, Buckeye is obligated to reimburse Services Company for substantially all direct and indirect costs related to the business activities of Buckeye and its subsidiaries. Services Company is reimbursed for insurance-related expenses, general and administrative costs, compensation and benefits payable to employees of Services Company, tax information and reporting costs, legal and audit fees and an allocable portion of overhead expenses. BGH previously reimbursed Services Company for the executive compensation costs and related benefits paid to Buckeye GP’s four highest salaried employees.  Effective January 1, 2009, Buckeye and its operating subsidiaries have agreed to pay for all executive compensation and related benefits earned by Buckeye GP’s four highest salaried officers in exchange for an annual fixed payment from BGH of $3.6 million.  Total costs incurred by Buckeye for the above services totaled $25.6 million and $25.8 million for the three months ended September 30, 2009 and 2008, respectively, and $106.9 million and $75.7 million for the nine months ended September 30, 2009 and 2008, respectively.  These costs were reimbursed to Services Company by Buckeye.   BGH paid Buckeye $0.9 million in the three months ended September 30, 2009 and $2.7 million in the nine months ended September 30, 2009, which represents three-fourths of the $3.6 million annual fixed payment described above.

 

Services Company, which is beneficially owned by the ESOP, owned 1.8 million of Buckeye’s LP Units (approximately 3.5% of the LP Units outstanding) as of September 30, 2009.  Distributions received by Services Company from Buckeye on such LP Units are used to fund obligations of the ESOP. Distributions paid to Services Company totaled $1.9 million and $1.8 million for the three months ended September 30, 2009 and 2008, respectively, and $5.7 million and $5.5 million for the nine months ended September 30, 2009 and 2008, respectively.

 

Buckeye incurred a senior administrative charge for certain management services performed by affiliates of Buckeye GP of $0.5 million for the three months ended September 30, 2008, and $0.5 million and $1.4 million for the nine months ended September 30, 2009 and 2008, respectively. The senior administrative charge was waived indefinitely on April 1, 2009.  As a result, there were no related charges recorded in the second and third quarters of 2009.

 

Buckeye GP receives incentive distributions from Buckeye pursuant to its partnership agreement and incentive compensation agreement. Incentive distributions are based on the level of quarterly cash distributions paid per LP Unit.  Incentive distribution payments totaled $11.7 million and $10.0 million for the three months ended September 30, 2009 and 2008, respectively, and $33.7 million and $28.6 million for the nine months ended September 30, 2009 and 2008, respectively.

 

17.  UNIT-BASED COMPENSATION PLANS

 

Long-Term Incentive Plan

 

On March 20, 2009, Buckeye’s 2009 LTIP became effective.  The LTIP, which is administered by the Compensation Committee of the Board of Directors of Buckeye GP (the “Compensation Committee”), provides for the grant of phantom units (“Phantom Units”), performance units (“Performance Units”) and in certain cases, distribution equivalent rights (“DERs”) which provide the participant a right to receive payments based on distributions made by Buckeye on its LP Units. Phantom Units are notional LP Units whose vesting is subject to service-based restrictions or other conditions established by the Compensation Committee in its discretion.  Phantom Units entitle a participant to receive an LP Unit, without payment of an exercise price, upon vesting. Performance

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Units are notional LP Units whose vesting is subject to the attainment of one or more performance goals, and which entitle a participant to receive LP Units, without payment of an exercise price, upon vesting. DERs are rights to receive a cash payment per Phantom Unit or Performance Unit, as applicable, equal to the per unit cash distribution paid by Buckeye on its LP Units. Generally, LTIP awards granted automatically vest upon a change of control, as defined in the LTIP.

 

The number of LP Units that may be granted under the LTIP may not exceed 1,500,000, subject to certain adjustments.   The number of LP Units that may be granted to any one individual in a calendar year will not exceed 100,000.  If awards are forfeited, terminated or otherwise not paid in full, the LP Units underlying such awards will again be available for purposes of the LTIP.  Persons eligible to receive grants under the LTIP are (i) officers and employees of Buckeye, Buckeye GP and any of their affiliates and (ii) independent members of the Board of Directors of Buckeye GP or of MainLine Management.  Phantom Units or Performance Units may be granted to participants at any time as determined by the Compensation Committee.

 

The fair values of both the Performance Unit and Phantom Unit grants are based on the average market price of Buckeye’s LP Units on the date of grant adjusted for an estimated forfeiture rate as appropriate. Compensation expense equal to the fair value of those Performance Unit and Phantom Unit awards that actually vest is estimated and recorded over the period the grants are earned, which is the vesting period. Compensation expense estimates are updated periodically. The vesting of the Performance Unit awards is also contingent upon the attainment of predetermined performance goals, which, depending on the level of attainment, could increase or decrease the value of the awards at settlement. Quarterly distributions paid on DERs associated with Phantom Units are recorded as a reduction of Limited Partners’ (Deficit) Capital on Buckeye’s condensed consolidated balance sheets.

 

2009 LTIP Awards

 

During the nine months ended September 30, 2009, the Compensation Committee granted 45,778 Phantom Units to employees, 18,000 Phantom Units to independent directors, and 91,872 Performance Units to employees. The vesting period for the Phantom Units is one year or three years of service for grants to directors or employees, respectively.  The vesting criteria for the Performance Units are the attainment of a performance goal (by Buckeye), defined in the award agreements as “distributable cash flow per unit”, over a three-year period and remaining employed by Buckeye throughout such period.

 

Phantom Unit grantees will be paid quarterly distributions on DERs associated with Phantom Units over their respective vesting periods of one year or three years in the same amounts per Phantom Unit as distributions paid on Buckeye’s LP Units over those same one-year or three-year periods. The amount paid with respect to Phantom Unit distributions was $0.05 million and $0.1 million for the three and nine months ended September 30, 2009, respectively.  Distributions may be paid on Performance Units at the end of the three year vesting period. In such case, DERs will be paid on the number of LP Units for which the Performance Units will be settled.

 

The following table sets forth the LTIP activity for the nine months ended September 30, 2009:

 

 

 

LTIP Units

 

Outstanding, January 1, 2009

 

 

Granted (1)

 

155,650

 

Vested

 

(2,703

)

Forfeited

 

(14,197

)

Outstanding, September 30, 2009 (2)

 

138,750

 


(1)          The weighted average fair value per unit for the 2009 Phantom Unit and Performance Unit awards on the date of grant was $39.29.

(2)          The aggregate intrinsic value of all outstanding LTIP units at September 30, 2009 was approximately $6.7 million.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

At September 30, 2009, approximately $4.1 million of compensation expense, based upon the fair value of the awards on the date of grant related to unvested outstanding awards expected to vest under the LTIP, has not yet been recognized by Buckeye.

 

Option Plan

 

Buckeye also sponsors the Unit Option and Distribution Equivalent Plan (the “Option Plan”), pursuant to which it historically granted to employees options to purchase LP Units at the market price of the LP Units on the date of grant. Generally, the options vest three years from the date of grant and expire ten years from the date of grant. As unit options are exercised, Buckeye issues new LP Units to the holder. Buckeye has not historically repurchased, and does not expect to repurchase in 2009, any of its LP Units.

 

Generally, compensation expense is recognized based on the fair value on the date of grant estimated using a Black-Scholes option pricing model.  Buckeye recognizes compensation expense for these awards granted on a straight-line basis over the requisite service period.

 

Buckeye recognizes compensation expense immediately for options granted to retirement-eligible employees, or over the period from the date of grant to the date retirement eligibility is achieved. Compensation expense is based on options ultimately expected to vest by estimating forfeitures at the date of grant based upon historical experience and revising those estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Due to regulations adopted under Internal Revenue Code Section 409A, holders of options granted during 2008 would have been subject to certain adverse tax consequences if the terms of the grant were not modified. Buckeye received the approval of the holders of options granted in 2008 to shorten the term of those options to avoid the adverse tax consequences under Section 409A.  Options granted before January 1, 2008 were not impacted by the IRS regulations.  This modification did not have a material impact on Buckeye’s financial results.  Following the adoption of the LTIP on March 20, 2009, Buckeye ceased making additional grants under the Option Plan.

 

Buckeye recorded $0.5 million and $0.1 million in compensation expense related to outstanding options for the three months ended September 30, 2009 and 2008, respectively, and $1.0 million and $0.4 million for the nine months ended September 30, 2009 and 2008, respectively.

 

18.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

Services Company, which employs the majority of Buckeye’s workforce, sponsors a retirement income guarantee plan  (the “RIGP”), which is a defined benefit plan, that generally guarantees employees hired before January 1, 1986 a retirement benefit at least equal to the benefit they would have received under a previously terminated defined benefit plan. Services Company’s policy is to fund amounts necessary to meet at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974.

 

Services Company also provides post-retirement health care and life insurance benefits to certain of its retirees (the “Retiree Medical Plan”). To be eligible for these benefits an employee must have been hired prior to January 1, 1991 and meet certain service requirements. Services Company does not pre-fund its post-retirement benefit obligation.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

For the three months ended September 30, 2009 and 2008, the components of the net periodic benefit cost recognized by Buckeye for the RIGP and Retiree Medical Plan were as follows (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

(44

)

$

352

 

$

37

 

$

78

 

Interest cost

 

146

 

477

 

419

 

233

 

Expected return on plan assets

 

(47

)

(468

)

 

 

Amortization of prior service benefit

 

(47

)

(217

)

(679

)

(379

)

Amortization of unrecognized losses

 

90

 

156

 

220

 

139

 

Settlement/curtailment gain (1)

 

 

 

(1,571

)

 

Net periodic benefit costs

 

$

98

 

$

300

 

$

(1,574

)

$

71

 

 

For the nine months ended September 30, 2009 and 2008, the components of the net periodic benefit cost recognized by Buckeye for the RIGP and Retiree Medical Plan were as follows (in thousands):

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

371

 

$

1,057

 

$

247

 

$

543

 

Interest cost

 

886

 

1,433

 

1,402

 

1,621

 

Expected return on plan assets

 

(427

)

(1,404

)

 

 

Amortization of prior service benefit

 

(282

)

(653

)

(2,397

)

(2,627

)

Amortization of unrecognized losses

 

802

 

467

 

743

 

959

 

Settlement/curtailment charge (gain) (1)

 

7,171

 

 

(771

)

 

Net periodic benefit costs

 

$

8,521

 

$

900

 

$

(776

)

$

496

 


(1)          In connection with Buckeye’s reorganization, $6.4 million of the aggregate amount of $29.1 million of expenses incurred has been recorded as an adjustment to the funded status of the RIGP and the Retiree Medical Plan, which represent settlement and curtailment adjustments (see Note 3).

 

Buckeye voluntarily contributed $3.5 million and $3.8 million to the RIGP for the three and nine months ended September 30, 2009, respectively.

 

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BUCKEYE PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

19.  OTHER SUPPLEMENTAL INFORMATION

 

Supplemental cash flows and non-cash transactions were as follows (in thousands):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Cash paid for interest (net of capitalized interest)

 

$

58,598

 

$

53,362

 

Cash paid for income taxes

 

1,641

 

859

 

Capitalized interest

 

2,906

 

1,087

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

Hedge accounting

 

1,266

 

504

 

Change in capital expenditures in accounts payable

 

(2,606

)

4,319

 

 

20.  SEGMENT INFORMATION

 

Buckeye reports and operates in five business segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.

 

Pipeline Operations

 

The Pipeline Operations segment receives refined petroleum products from refineries, connecting pipelines, and bulk and marine terminals and transports those products to other locations for a fee.  T