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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 001-32963

 

BUCKEYE GP HOLDINGS L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

11-3776228

(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 o

 

Accelerated filer x

 

 

 

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

 

As of October 30, 2009, there were 27,769,647 Common Units and 530,353 Management Units outstanding.

 

 

 



Table of Contents

 

BUCKEYE GP HOLDINGS L.P.

INDEX

 

 

 

Page

PART I- FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

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’ 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

51

 

 

 

PART II- OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

52

 

 

 

Item 1A.

Risk Factors

52

 

 

 

Item 6

Exhibits

52

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

BUCKEYE GP HOLDINGS 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

 

66,100

 

73,203

 

208,842

 

209,484

 

Depreciation and amortization

 

13,138

 

14,342

 

40,061

 

38,067

 

Asset impairment expense

 

 

 

72,540

 

 

General and administrative

 

9,814

 

10,415

 

30,007

 

31,949

 

Reorganization expense

 

996

 

 

29,109

 

 

Total costs and expenses

 

348,555

 

432,919

 

1,083,182

 

1,192,663

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

74,889

 

63,251

 

108,322

 

176,331

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Investment income

 

65

 

293

 

359

 

1,144

 

Interest and debt expense

 

(20,391

)

(19,243

)

(54,030

)

(55,691

)

Total other expense

 

(20,326

)

(18,950

)

(53,671

)

(54,547

)

 

 

 

 

 

 

 

 

 

 

Income before equity income

 

54,563

 

44,301

 

54,651

 

121,784

 

 

 

 

 

 

 

 

 

 

 

Equity income

 

3,807

 

2,404

 

9,031

 

5,803

 

Net income

 

58,370

 

46,705

 

63,682

 

127,587

 

Less: net income attributable to noncontrolling interest

 

(47,275

)

(39,471

)

(32,666

)

(109,187

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Buckeye GP Holdings L.P.

 

$

11,095

 

$

7,234

 

$

31,016

 

$

18,400

 

 

 

 

 

 

 

 

 

 

 

Net income per partnership unit:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

$

0.26

 

$

1.10

 

$

0.65

 

Diluted

 

$

0.39

 

$

0.26

 

$

1.10

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

28,300

 

28,300

 

28,300

 

28,300

 

Diluted

 

28,300

 

28,300

 

28,300

 

28,300

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

BUCKEYE GP HOLDINGS L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

29,915

 

$

61,281

 

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

 

99,423

 

75,406

 

Total current assets

 

474,658

 

419,761

 

 

 

 

 

 

 

Property , plant and equipment, net

 

2,179,971

 

2,241,612

 

Equity investments

 

98,729

 

90,110

 

Goodwill

 

432,170

 

433,892

 

Intangible assets, net

 

41,461

 

44,114

 

Other non-current assets

 

43,446

 

33,608

 

Total assets

 

$

3,270,435

 

$

3,263,097

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

149,600

 

$

96,000

 

Current portion of long-term debt

 

6,208

 

6,294

 

Accounts payable

 

36,528

 

42,098

 

Derivative liabilities

 

12,173

 

48,623

 

Accrued and other current liabilities

 

123,426

 

116,464

 

Total current liabilities

 

327,935

 

309,479

 

 

 

 

 

 

 

Long-term debt

 

1,423,923

 

1,453,425

 

Other non-current liabilities

 

105,226

 

101,359

 

Total liabilities

 

1,857,084

 

1,864,263

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Buckeye GP Holdings L.P. capital:

 

 

 

 

 

General Partner (2,830 common units outstanding as of September 30, 2009 and December 31, 2008)

 

7

 

7

 

Limited Partners (27,766,817 common units outstanding as of September 30, 2009 and December 31, 2008)

 

228,812

 

226,565

 

Management Units (530,353 units outstanding as of September 30, 2009 and December 31, 2008)

 

3,080

 

3,037

 

Equity gains on issuance of Buckeye Partners, L.P. limited partner units

 

2,557

 

2,451

 

Total Buckeye GP Holdings L.P. capital

 

234,456

 

232,060

 

Noncontrolling interest

 

1,178,895

 

1,166,774

 

Total partners’ capital

 

1,413,351

 

1,398,834

 

Total liabilities and partners’ capital

 

$

3,270,435

 

$

3,263,097

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

BUCKEYE GP HOLDINGS 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

 

$

63,682

 

$

127,587

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Value of ESOP shares released

 

768

 

2,119

 

Depreciation and amortization

 

40,061

 

38,067

 

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 of Buckeye Partners, L.P.

 

(9,031

)

(5,802

)

Distributions from equity investments of Buckeye Partners, L.P.

 

4,281

 

4,120

 

Amortization of other non-cash items

 

4,765

 

4,130

 

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

 

 

 

 

 

Trade receivables

 

(8,428

)

5,556

 

Construction and pipeline relocation receivables

 

9,394

 

(4,537

)

Inventories

 

(90,579

)

(8,288

)

Prepaid and other current assets

 

(19,804

)

(37,104

)

Accounts payable

 

(2,308

)

(1,356

)

Accrued and other current liabilities

 

8,196

 

52,506

 

Other non-current assets

 

(21,069

)

1,380

 

Other non-current liabilities

 

14,469

 

(2,895

)

Total adjustments from operating activities

 

998

 

50,961

 

Net cash provided by operating activities

 

64,680

 

178,548

 

 

 

 

 

 

 

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 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 Buckeye Partners, L.P. limited partner units

 

104,633

 

113,111

 

Proceeds from exercise of Buckeye Partners, L.P. units options

 

1,901

 

316

 

Proceeds from issuance of long-term debt

 

273,210

 

298,050

 

Borrowings under credit facilities

 

348,320

 

502,000

 

Repayments under credit facilities, net

 

(597,717

)

(253,699

)

Debt issuance costs

 

(2,138

)

(1,886

)

Distributions to noncontrolling partners of Buckeye Partners, L.P.

 

(133,104

)

(118,093

)

Settlement payment of interest rate swaps

 

 

(9,638

)

Distributions to limited partners

 

(29,716

)

(25,327

)

Net cash provided by (used in) financing activities

 

(34,611

)

504,834

 

Net increase (decrease) in cash and cash equivalents

 

(31,366

)

7,311

 

Cash and cash equivalents—Beginning of year

 

61,281

 

94,486

 

Cash and cash equivalents—End of period

 

$

29,915

 

$

101,797

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

BUCKEYE GP HOLDINGS L.P.

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

Buckeye GP Holdings L.P. unitholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains on

 

 

 

 

 

 

 

General

 

Limited

 

 

 

Issuance of

 

 

 

 

 

 

 

Partner

 

Partners

 

 

 

Buckeye’s

 

 

 

 

 

 

 

Common

 

Common

 

Management

 

Limited

 

Noncontrolling

 

 

 

 

 

Units

 

Units

 

Units

 

Partner Units

 

Interest

 

Total

 

Partners’ capital - January 1, 2008

 

$

7

 

$

232,928

 

$

3,156

 

$

2,239

 

$

1,066,143

 

$

1,304,473

 

Net income*

 

 

18,056

 

344

 

 

109,187

 

127,587

 

Distributions to Limited Partner - Common Units

 

 

(24,853

)

(474

)

 

 

(25,327

)

Recognition of unit-based compensation charges

 

 

1,026

 

20

 

 

 

1,046

 

Equity gains on issuance of Buckeye’s limited partner units

 

 

 

 

212

 

(212

)

 

Net proceeds from issuance of 2.6 million of Buckeye’s limited partner units

 

 

 

 

 

 

113,111

 

113,111

 

Amortization of Buckeye’s limited partner unit options

 

 

 

 

 

380

 

380

 

Exercise of limited partner unit options

 

 

 

 

 

316

 

316

 

Services Company’s non-cash ESOP distributions

 

 

 

 

 

(4,199

)

(4,199

)

Acquired noncontrolling interest not previously owned

 

 

 

 

 

(1,539

)

(1,539

)

Distributions to noncontrolling interest

 

 

 

 

 

(118,093

)

(118,093

)

Other

 

 

 

 

 

3,923

 

3,923

 

Partners’ capital - September 30, 2008

 

$

7

 

$

227,157

 

$

3,046

 

$

2,451

 

$

1,169,017

 

$

1,401,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital - January 1, 2009

 

$

7

 

$

226,565

 

$

3,037

 

$

2,451

 

$

1,166,774

 

$

1,398,834

 

Net income*

 

 

30,434

 

582

 

 

32,666

 

63,682

 

Distributions to Limited Partner - Common Units

 

 

(29,159

)

(557

)

 

 

(29,716

)

Recognition of unit-based compensation charges

 

 

972

 

18

 

 

 

990

 

Equity gains on issuance of Buckeye’s limited partner units

 

 

 

 

106

 

(106

)

 

Net proceeds from issuance of 3.0 million of Buckeye’s limited partner units

 

 

 

 

 

104,633

 

104,633

 

Amortization of Buckeye’s limited partner unit options

 

 

 

 

 

1,210

 

1,210

 

Exercise of limited partner unit options

 

 

 

 

 

1,901

 

1,901

 

Services Company’s non-cash ESOP distributions

 

 

 

 

 

(4,740

)

(4,740

)

Distributions to noncontrolling interest

 

 

 

 

 

(133,104

)

(133,104

)

Benefit plans settlement/curtailment charge

 

 

 

 

 

6,400

 

6,400

 

Other

 

 

 

 

 

3,261

 

3,261

 

Partners’ capital - September 30, 2009

 

$

7

 

$

228,812

 

$

3,080

 

$

2,557

 

$

1,178,895

 

$

1,413,351

 

 


* Comprehensive income equals net income.

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.     BASIS OF PRESENTATION

 

Buckeye GP Holdings L.P. (“BGH”) is a publicly traded (NYSE: BGH) master limited partnership organized on June 15, 2006 under the laws of the state of Delaware.  BGH owns 100% of Buckeye GP LLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”).  Buckeye is also a publicly traded (NYSE: BPL) master limited partnership that was organized in 1986 under the laws of the state of Delaware.  Approximately 62% of BGH’s limited partner units are owned by BGH GP Holdings, LLC (“BGH GP”) and approximately 38% by the public. BGH GP is owned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”), and certain investment funds along with certain members of senior management of Buckeye GP.  MainLine Management LLC, a Delaware limited liability company (“MainLine Management”), is the general partner of BGH, and is wholly owned by BGH GP. BGH’s only business is the ownership of Buckeye GP.  Buckeye GP’s only business is the management of Buckeye and its subsidiaries. At September 30, 2009, Buckeye GP owned an approximately 0.5% general partner interest in Buckeye. Buckeye operates and reports in five business segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 19 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.

 

BGH has determined that Services Company is a variable interest entity, and Buckeye GP is the primary beneficiary of Services Company, although 100% of the equity interest of Services Company is owned by the ESOP.  Accordingly, Services Company has been consolidated in the financial statements of BGH.

 

BGH’s condensed consolidated balance sheet includes a noncontrolling capital account that reflects the portion of Buckeye owned by its partners other than BGH and Services Company.  Similarly, BGH’s condensed consolidated statements of operations include income attributable to noncontrolling interest that reflects the portion of the earnings due to Buckeye’s partners other than BGH and Services Company. BGH has determined that consolidation of Buckeye into BGH’s financial statements is appropriate, as BGH indirectly controls Buckeye through its ownership of Buckeye GP.

 

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 BGH’s operations for the 2009 fiscal year. BGH has evaluated subsequent events through November 3, 2009, the date the financial statements were issued. 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 BGH’s consolidated financial statements and notes thereto presented in BGH’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 16, 2009.

 

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

 

7



Table of Contents

 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

On January 1, 2009, BGH 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, BGH has reclassified its noncontrolling interest liability into partners’ 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’ capital.

 

On January 1, 2009, BGH 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.

 

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.  The 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.

 

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. BGH is currently evaluating the impact the adoption of SFAS 166 will have on its condensed consolidated financial statements.

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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. BGH is currently evaluating the impact the adoption of SFAS 167 will have on its condensed consolidated financial statements.

 

On July 1, 2009, BGH 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 BGH for the quarter ending December 31, 2009.  BGH 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.

 

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.

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 17) of $6.4 million; and (3) other related costs of $6.0 million.

 

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

 

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

$

1,864

 

$

7,889

 

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

 

19,752

 

16,939

 

Total

 

$

99,423

 

$

75,406

 

 

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.

 

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.

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 GP HOLDINGS 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

 

$

2,860

 

West Texas LPG Pipeline Limited Partnership

 

2,187

 

880

 

4,606

 

1,928

 

Muskegon Pipeline LLC

 

385

 

400

 

923

 

958

 

Investment in Transport4, LLC

 

31

 

 

101

 

57

 

Total

 

$

3,807

 

$

2,404

 

$

9,031

 

$

5,803

 

 

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

 

$

13,243

 

$

14,092

 

Accrued employee benefit liability

 

2,297

 

2,297

 

Environmental liabilities

 

11,477

 

12,337

 

Interest

 

18,086

 

25,551

 

Retainage

 

1,284

 

1,405

 

Payable for ammonia purchase

 

8,347

 

9,373

 

Unearned revenue

 

24,694

 

12,186

 

Compensation and vacation

 

10,582

 

15,642

 

Accrued capital expenditures

 

2,296

 

4,902

 

Reorganization

 

7,805

 

 

Other

 

23,315

 

18,679

 

Total

 

$

123,426

 

$

116,464

 

 

9.  CONTINGENCIES

 

Claims and Proceedings

 

BGH, Buckeye and their respective subsidiaries, in the ordinary course of business, are involved in various claims and legal proceedings, some of which are covered by insurance. BGH 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, BGH 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 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

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 GP HOLDINGS 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

 

BGH:

 

 

 

 

 

BGH Credit Agreement

 

$

 

$

 

Services Company:

 

 

 

 

 

3.60% ESOP Notes due March 28, 2011

 

9,570

 

14,255

 

Retirement premium

 

(304

)

(258

)

Buckeye:

 

 

 

 

 

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

 

 Total term debt

 

$

1,583,866

 

$

1,558,264

 

Other, including unamortized discounts and fair value hedges (1)

 

(4,135

)

(2,545

)

Subtotal long- term debt

 

1,579,731

 

1,555,719

 

Less: current portion of long-term debt

 

(155,808

)

(102,294

)

 

 

 

 

 

 

 Total long-term debt

 

$

1,423,923

 

$

1,453,425

 

 


*                 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 aggregate debt and credit facilities were estimated to be $1,569.8 million at September 30, 2009 and $1,381.2 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.

 

BGH Credit Agreement

 

BGH has a five-year, $10.0 million unsecured revolving credit facility with SunTrust Bank, as both administrative agent and lender (the “BGH Credit Agreement”). The BGH Credit Agreement may be used for working capital and other partnership purposes. BGH has pledged all of the limited liability company interests in Buckeye GP as security for its obligations under the BGH Credit Agreement.  Borrowings under the BGH Credit Agreement bear interest under one of two rate options, selected by BGH, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime commercial lending rate; or (ii) the London Interbank

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Official Rate (“LIBOR”), plus a margin which can range from 0.40% to 1.40%, based on the ratings assigned by Standard & Poor’s Rating Services and Moody’s Investor Services to the senior unsecured non-credit enhanced long-term debt of BGH.  BGH did not have any amounts outstanding under the BGH Credit Agreement at September 30, 2009 and December 31, 2008.

 

The BGH Credit Agreement requires BGH to maintain leverage and funded debt coverage ratios. The leverage ratio covenant requires BGH to maintain, as of the last day of each fiscal quarter, a ratio of the total funded indebtedness of BGH and its Restricted Subsidiaries (as defined below), measured as of the last day of each fiscal quarter, to the aggregate dividends and distributions received by BGH and its Restricted Subsidiaries from Buckeye, plus all other cash received by BGH and the Restricted Subsidiaries, measured for the preceding twelve months, less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “Restricted Subsidiaries” as certain of BGH’s wholly owned subsidiaries.  The funded debt coverage ratio covenant requires BGH to maintain, as of the last day of each fiscal quarter, a ratio of total consolidated funded debt of BGH and all of its subsidiaries to the consolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and all of its subsidiaries, measured for the preceding twelve months, of not more than 5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 in connection with future acquisitions. At September 30, 2009, BGH’s funded debt coverage ratio was approximately 4.9 to 1.00.

 

The BGH Credit Agreement contains other covenants that prohibit BGH from taking certain actions, including but not limited to, declaring dividends or distributions if any default or event of default has occurred or would result from such a declaration and limiting BGH’s ability to incur additional indebtedness, creating negative pledges and granting certain liens, making certain loans, acquisitions, and investments, making material changes to the nature of BGH and its Restricted Subsidiaries’ business, and entering into a merger, consolidation, or sale of assets.  At September 30, 2009, BGH was not aware of any instances of noncompliance with the covenants under the BGH Credit Agreement.

 

Services Company ESOP Notes

 

Services Company had total debt outstanding of $9.3 million and $14.0 million at September 30, 2009 and December 31, 2008, respectively, consisting of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-party lender. The 3.60% ESOP Notes were issued on May 4, 2004.  The 3.60% ESOP Notes are collateralized by Services Company’s common stock and are guaranteed by Services Company. In addition, Buckeye has committed that, in the event that the value of Buckeye’s LP Units owned by Services Company falls below 125% of the balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficient assets to bring the value of the total collateral (the value of Buckeye’s LP Units owned by Services Company and the escrow account) up to the 125% minimum. Amounts deposited in the escrow account are returned to Buckeye when the value of Buckeye’s LP Units owned by Services Company returns to an amount that exceeds the 125% minimum. At September 30, 2009, the value of Buckeye’s LP Units owned by Services Company exceeded the 125% requirement.

 

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) 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 GP HOLDINGS 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 BGH’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 GP HOLDINGS 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 the benchmark interest rate until the debt is issued. Unrealized losses of $2.7 million were recorded in accumulated

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

 

 

Fair value

 

Fair value

 

Value

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

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,

 

 

 

 

 

 

 

2009

 

 

 

 

 

Balance Sheet Locations:

 

 

 

 

 

 

 

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 GP HOLDINGS 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 GP HOLDINGS 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).

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

 

13.  EARNINGS PER UNIT

 

Basic and diluted net income per unit is calculated by dividing net income attributable to BGH by the weighted-average number of partnership units outstanding during the period.

 

The following table is a reconciliation of the weighted average number of units used in the basic and diluted earnings per partnership 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 common units outstanding

 

27,770

 

27,770

 

27,770

 

27,770

 

Weighted average management units outstanding

 

530

 

530

 

530

 

530

 

Units for basic

 

28,300

 

28,300

 

28,300

 

28,300

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Units used for basic calculation

 

28,300

 

28,300

 

28,300

 

28,300

 

Dilutive effect of additional management units

 

 

 

 

 

Units for diluted

 

28,300

 

28,300

 

28,300

 

28,300

 

 

14.  CASH DISTRIBUTIONS

 

BGH 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 MainLine Management deems appropriate.

 

On November 2, 2009, MainLine Management declared a quarterly cash distribution of $0.39 per unit to be paid on November 30, 2009 to unitholders of record on November 12, 2009. This distribution is expected to be approximately $11.0 million.

 

15.  RELATED PARTY TRANSACTIONS

 

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.

 

Services Company and Buckeye are considered related parties of BGH.  As discussed in Note 1, the condensed consolidated financial statements for BGH include the accounts of Services Company and Buckeye on a consolidated basis, and all intercompany transactions have been eliminated.

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

16.  UNIT-BASED COMPENSATION PLANS

 

BGH GP’s Override Units

 

Effective on June 25, 2007, BGH GP instituted an equity incentive plan for certain members of senior management of BGH GP and BGH.  This equity incentive plan includes both time-based and performance-based participation in the equity of BGH GP (but not in BGH) referred to as “Override Units”.  BGH is required to reflect, as compensation expense and a corresponding contribution to unitholders’ equity, the fair value of this compensation.  Compensation expense with respect to the Override Units was $0.3 million and $0.4 million for the three months ended September 30, 2009 and 2008, respectively, and $1.0 million for each of the nine month periods ended September 30, 2009 and 2008.  BGH is not the sponsor of this plan and has no liabilities with respect to it.

 

The Override Units consist of three equal tranches of units consisting of: Value A Units, Value B Units and Operating Units.  The Operating Units vest over four years semi-annually beginning with a one-year cliff vesting. The Value A Units generally vest based on the occurrence of an exit event as discussed below, an investment return of 2.0 times the original investment, and an internal rate of return of at least 10%. The Value B Units generally vest based on the occurrence of an exit event, an investment return of 3.5 times the original investment and an internal rate of return of at least 10% or on a pro-rata basis on an investment return ranging from 2.0 to 3.5 times the original investment and an internal rate of return of at least 10%.

 

The above-noted exit event is generally defined as the sale by ArcLight, Kelso and their affiliates of their interests in BGH GP, the sale of substantially all the assets of BGH GP and its subsidiaries, or any other “extraordinary” transaction that the board of directors of BGH GP determines is an exit event.

 

The investment return is calculated generally as the sum of all the distributions that ArcLight and Kelso have received from BGH GP prior to and through the exit event, divided by the total amount of capital contributions to BGH GP that ArcLight and Kelso have made prior to the exit event.

 

In general, the Override Units are subject to forfeiture if a grantee resigns or is terminated for cause.  Under certain conditions, as declared by the Board of BGH GP, grantees can receive interim distributions on the Override Units.

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

No Override Units were granted in 2009.  The following is a summary of the activity of the Override Units as of September 30, 2009 (in thousands, except per unit amounts):

 

 

 

Number of Override Units

 

Total Number

 

 

 

Value A Units

 

Value B Units

 

Operating
Units

 

of Units
Awarded

 

Outstanding at December 31, 2007

 

1,381

 

1,381

 

1,381

 

4,143

 

Granted in 2008

 

382

 

382

 

382

 

1,146

 

Outstanding at December 31, 2008

 

1,763

 

1,763

 

1,763

 

5,289

 

Forfeited in 2009

 

(276

)

(276

)

(223

)

(775

)

Outstanding at September 30, 2009

 

1,487

 

1,487

 

1,540

 

4,514

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation Costs for Override Units

 

 

 

 

 

Value A Units

 

Value B Units

 

Operating
Units

 

Totals

 

Total fair value of all outstanding Override Units

 

$

3,092

 

$

1,839

 

$

5,098

 

$

10,029

 

Less: Expense recorded from plan inception to September 30, 2009

 

 

 

3,002

 

3,002

 

Estimated future compensation costs at September 30, 2009

 

$

3,092

 

$

1,839

 

$

2,096

 

$

7,027

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

Value A

 

Value B

 

Operating

 

 

 

Weighted average fair value per Override Unit granted

 

$

2.07

 

$

1.17

 

$

3.42

 

 

 

 

The vesting of the Value A and Value B Units is contingent on a performance condition, namely the completion of the exit event as discussed above.  Accordingly, no compensation expense for the Value A and Value B Units will be recorded until an exit event occurs.

 

The Override Units were valued using the Monte Carlo simulation method that incorporated the market-based vesting condition into the grant date fair value of the unit awards.  The Monte Carlo simulation is a procedure to estimate the future equity value from the time of the valuation dates to the exit event.  The following assumptions were used in the 2008 period:

 

 

 

June 30,

 

 

 

2008

 

Current equity value (in millions)

 

$

439.0

 

Expected life in years

 

5.5

 

Risk-free interest rate

 

4.92

%

Volatility

 

26.0

%

Dividends

 

$

0.00

 

 

Buckeye’s Long-Term Incentive Plan

 

On March 20, 2009, Buckeye’s 2009 Long-Term Incentive Plan (the “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 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

 

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BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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’ 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 GP HOLDINGS 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.

 

Buckeye’s Unit 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.

 

17.  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 GP HOLDINGS 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