Attached files
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8-K - FORM 8-K - BUCKEYE PARTNERS, L.P. | h78102e8vk.htm |
EX-99.2 - EX-99.2 - BUCKEYE PARTNERS, L.P. | h78102exv99w2.htm |
Exhibit
99.1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BUCKEYE GP HOLDINGS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Product sales |
$ | 564,044 | $ | 258,188 | $ | 1,633,958 | $ | 728,744 | ||||||||
Transportation and other services |
170,813 | 165,256 | 499,349 | 462,760 | ||||||||||||
Total revenue |
734,857 | 423,444 | 2,133,307 | 1,191,504 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales
and natural gas storage services |
560,248 | 258,507 | 1,628,630 | 702,623 | ||||||||||||
Operating expenses |
68,685 | 66,100 | 204,037 | 208,842 | ||||||||||||
Depreciation and amortization |
15,062 | 13,138 | 44,259 | 40,061 | ||||||||||||
Asset impairment expense |
| | | 72,540 | ||||||||||||
General and administrative |
11,349 | 9,814 | 35,438 | 30,007 | ||||||||||||
Reorganization expense |
| 996 | | 29,109 | ||||||||||||
Total costs and expenses |
655,344 | 348,555 | 1,912,364 | 1,083,182 | ||||||||||||
Operating income |
79,513 | 74,889 | 220,943 | 108,322 | ||||||||||||
Other income (expense): |
||||||||||||||||
Investment income |
140 | 65 | 380 | 359 | ||||||||||||
Interest and debt expense |
(22,082 | ) | (20,391 | ) | (65,088 | ) | (54,030 | ) | ||||||||
Total other expense |
(21,942 | ) | (20,326 | ) | (64,708 | ) | (53,671 | ) | ||||||||
Income before earnings from equity investments |
57,571 | 54,563 | 156,235 | 54,651 | ||||||||||||
Earnings from equity investments |
3,391 | 3,807 | 8,807 | 9,031 | ||||||||||||
Net income |
60,962 | 58,370 | 165,042 | 63,682 | ||||||||||||
Less: net income attributable
to noncontrolling interests |
(49,021 | ) | (47,275 | ) | (130,324 | ) | (32,666 | ) | ||||||||
Net income attributable
to Buckeye GP Holdings L.P. |
$ | 11,941 | $ | 11,095 | $ | 34,718 | $ | 31,016 | ||||||||
Earnings per partnership unit: |
||||||||||||||||
Basic |
$ | 0.42 | $ | 0.39 | $ | 1.23 | $ | 1.10 | ||||||||
Diluted |
$ | 0.42 | $ | 0.39 | $ | 1.23 | $ | 1.10 | ||||||||
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 Notes to Unaudited Condensed Consolidated Financial Statements.
2
BUCKEYE GP HOLDINGS L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
(Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
(Unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,922 | $ | 37,574 | ||||
Trade receivables, net |
133,695 | 124,165 | ||||||
Construction and pipeline relocation receivables |
8,844 | 14,095 | ||||||
Inventories |
267,724 | 310,214 | ||||||
Derivative assets |
2,600 | 4,959 | ||||||
Assets held for sale |
| 22,000 | ||||||
Prepaid and other current assets |
74,484 | 104,251 | ||||||
Total current assets |
503,269 | 617,258 | ||||||
Property, plant and equipment, net |
2,248,866 | 2,238,321 | ||||||
Equity investments |
108,143 | 96,851 | ||||||
Goodwill |
432,124 | 432,124 | ||||||
Intangible assets, net |
41,817 | 45,157 | ||||||
Other non-current assets |
37,732 | 56,860 | ||||||
Total assets |
$ | 3,371,951 | $ | 3,486,571 | ||||
Liabilities and partners capital: |
||||||||
Current liabilities: |
||||||||
Line of credit |
$ | 211,800 | $ | 239,800 | ||||
Current portion of long-term debt |
3,059 | 6,178 | ||||||
Accounts payable |
56,346 | 56,723 | ||||||
Derivative liabilities |
10,978 | 14,665 | ||||||
Accrued and other current liabilities |
115,489 | 113,474 | ||||||
Total current liabilities |
397,672 | 430,840 | ||||||
Long-term debt |
1,441,287 | 1,500,495 | ||||||
Long-term derivative liabilities |
40,910 | | ||||||
Other non-current liabilities |
109,521 | 102,942 | ||||||
Total liabilities |
1,989,390 | 2,034,277 | ||||||
Commitments and contingent liabilities |
| | ||||||
Partners capital: |
||||||||
Buckeye GP Holdings L.P. capital: |
||||||||
General Partner (2,830 common units outstanding
as of September 30, 2010 and December 31, 2009) |
7 | 7 | ||||||
Limited Partners (27,771,186 common units outstanding
as of September 30, 2010 and December 31, 2009) |
232,985 | 236,545 | ||||||
Management (525,984 units outstanding
as of September 30, 2010 and December 31, 2009) |
3,157 | 3,225 | ||||||
Equity gains on issuance of Buckeye Partners, L.P.
limited partner units |
2,557 | 2,557 | ||||||
Total Buckeye GP Holdings L.P. capital |
238,706 | 242,334 | ||||||
Noncontrolling interests |
1,143,855 | 1,209,960 | ||||||
Total partners capital |
1,382,561 | 1,452,294 | ||||||
Total liabilities and partners capital |
$ | 3,371,951 | $ | 3,486,571 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
BUCKEYE GP HOLDINGS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 165,042 | $ | 63,682 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Value of ESOP shares released |
3,480 | 768 | ||||||
Depreciation and amortization |
44,259 | 40,061 | ||||||
Asset impairment expense |
| 72,540 | ||||||
Net changes in fair value of derivatives |
(16,152 | ) | (5,632 | ) | ||||
Non-cash deferred lease expense |
3,176 | 3,375 | ||||||
Earnings from equity investments of Buckeye Partners, L.P. |
(8,807 | ) | (9,031 | ) | ||||
Distributions from equity investments of Buckeye Partners, L.P. |
11,027 | 4,281 | ||||||
Amortization of other non-cash items |
7,552 | 4,765 | ||||||
Change in assets and liabilities: |
||||||||
Trade receivables |
(9,530 | ) | (8,428 | ) | ||||
Construction and pipeline relocation receivables |
5,251 | 9,394 | ||||||
Inventories |
56,657 | (90,579 | ) | |||||
Prepaid and other current assets |
31,289 | (19,804 | ) | |||||
Accounts payable |
(377 | ) | (2,308 | ) | ||||
Accrued and other current liabilities |
(2,367 | ) | 8,196 | |||||
Other non-current assets |
3,059 | (21,069 | ) | |||||
Other non-current liabilities |
2,548 | 14,469 | ||||||
Total adjustments from operating activities |
131,065 | 998 | ||||||
Net cash provided by operating activities |
296,107 | 64,680 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(49,275 | ) | (58,803 | ) | ||||
Acquisition of additional interest in equity investment |
(13,512 | ) | | |||||
Contributions to equity investments |
| (3,870 | ) | |||||
Acquisitions |
(1,269 | ) | (10 | ) | ||||
Net proceeds from disposal of property, plant and equipment |
22,448 | 1,248 | ||||||
Net cash used in investing activities |
(41,608 | ) | (61,435 | ) | ||||
Cash flows from financing activities: |
||||||||
Net proceeds from issuance of Buckeye Partners, L.P. limited partner units |
| 104,633 | ||||||
Proceeds from exercise of Buckeye Partners, L.P. unit options |
4,275 | 1,901 | ||||||
Issuance of long-term debt |
| 273,210 | ||||||
Repayment of long-term debt |
(4,644 | ) | (4,730 | ) | ||||
Borrowings under credit facility |
175,900 | 160,720 | ||||||
Repayments under credit facility |
(233,900 | ) | (458,987 | ) | ||||
Net (repayments) borrowings under BES credit agreement |
(28,000 | ) | 53,600 | |||||
Debt issuance costs |
(3,245 | ) | (2,138 | ) | ||||
Costs associated with agreement and plan of merger |
(4,514 | ) | | |||||
Distributions paid to noncontrolling partners of Buckeye Partners, L.P. |
(145,516 | ) | (133,104 | ) | ||||
Distributions paid to partners |
(36,507 | ) | (29,716 | ) | ||||
Net cash used in financing activities |
(276,151 | ) | (34,611 | ) | ||||
Net decrease in cash and cash equivalents |
(21,652 | ) | (31,366 | ) | ||||
Cash and cash equivalents Beginning of period |
37,574 | 61,281 | ||||||
Cash and cash equivalents End of period |
$ | 15,922 | $ | 29,915 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
BUCKEYE GP HOLDINGS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
(In thousands)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
(In thousands)
(Unaudited)
Buckeye GP Holdings L.P. Unitholders | ||||||||||||||||||||||||
Equity Gains | ||||||||||||||||||||||||
General | Limited | on Issuance | ||||||||||||||||||||||
Partner | Partner | of Buckeyes | ||||||||||||||||||||||
Common | Common | Management | Limited | Noncontrolling | ||||||||||||||||||||
Units | Units | Units | Partner Units | Interests | Total | |||||||||||||||||||
Balance 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 paid to partners |
| (29,159 | ) | (557 | ) | | | (29,716 | ) | |||||||||||||||
Recognition of unit-based compensation charges |
| 972 | 18 | | | 990 | ||||||||||||||||||
Equity gains on issuance of Buckeyes
limited partner units |
| | | 106 | (106 | ) | | |||||||||||||||||
Net proceeds from issuance of 3.0 million of
Buckeyes limited partner units |
| | | | 104,633 | 104,633 | ||||||||||||||||||
Amortization of Buckeyes
unit-based compensation awards |
| | | | 1,210 | 1,210 | ||||||||||||||||||
Exercise of limited partner unit options |
| | | | 1,901 | 1,901 | ||||||||||||||||||
Services Companys non-cash ESOP distributions |
| | | | (4,740 | ) | (4,740 | ) | ||||||||||||||||
Distributions paid to noncontrolling interests |
| | | | (133,104 | ) | (133,104 | ) | ||||||||||||||||
Adjustment to funded status of benefit plans |
| | | | 6,400 | 6,400 | ||||||||||||||||||
Other |
| | | | 3,261 | 3,261 | ||||||||||||||||||
Balance September 30, 2009 |
$ | 7 | $ | 228,812 | $ | 3,080 | $ | 2,557 | $ | 1,178,895 | $ | 1,413,351 | ||||||||||||
Balance January 1, 2010 |
$ | 7 | $ | 236,545 | $ | 3,225 | $ | 2,557 | $ | 1,209,960 | $ | 1,452,294 | ||||||||||||
Net income* |
| 34,068 | 650 | | 130,324 | 165,042 | ||||||||||||||||||
Costs associated with agreement and
plan of merger |
(2,746 | ) | (52 | ) | (4,129 | ) | (6,927 | ) | ||||||||||||||||
Distributions paid to partners |
| (35,823 | ) | (684 | ) | | | (36,507 | ) | |||||||||||||||
Recognition of unit-based compensation charges |
| 941 | 18 | | | 959 | ||||||||||||||||||
Amortization of Buckeyes
unit-based compensation awards |
| | | | 5,159 | 5,159 | ||||||||||||||||||
Exercise of limited partner unit options |
| | | | 4,275 | 4,275 | ||||||||||||||||||
Services Companys non-cash ESOP distributions |
| | | | (2,639 | ) | (2,639 | ) | ||||||||||||||||
Distributions paid to noncontrolling interests |
| | | | (145,516 | ) | (145,516 | ) | ||||||||||||||||
Change in value of derivatives |
| | | | (58,772 | ) | (58,772 | ) | ||||||||||||||||
Investment in Buckeyes limited partner units |
| | | | 4,503 | 4,503 | ||||||||||||||||||
Other |
| | | | 690 | 690 | ||||||||||||||||||
Balance September 30, 2010 |
$ | 7 | $ | 232,985 | $ | 3,157 | $ | 2,557 | $ | 1,143,855 | $ | 1,382,561 | ||||||||||||
* | Comprehensive income equals net income. |
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Partnership Organization
Buckeye GP Holdings L.P. is a publicly traded Delaware master limited partnership (MLP), the
common units (Common Units) of which are listed on the New York Stock Exchange (NYSE) under the
ticker symbol BGH. We were organized on June 15, 2006 and own 100% of Buckeye GP LLC (Buckeye
GP), which is the general partner of Buckeye Partners, L.P. (Buckeye). Buckeye is also a
publicly traded Delaware MLP which was organized in 1986, and its limited partner units (LP
Units) are separately traded on the NYSE under the ticker symbol BPL. Approximately 62% of our
outstanding equity, which includes Common Units and management units (Management 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 our general
partner and is wholly owned by BGH GP. As used in these Notes to Unaudited Condensed Consolidated
Financial Statements, unless the context requires otherwise, references to we, us, our or
"BGH are intended to mean the business and operations of Buckeye GP Holdings L.P. on a
consolidated basis, including those of Buckeye. References to Buckeye mean Buckeye Partners, L.P.
and its consolidated subsidiaries.
Our only business is the ownership of Buckeye GP. Buckeye GPs only business is the
management of Buckeye and its subsidiaries. At September 30, 2010, Buckeye GP owned an approximate
0.5% general partner interest in Buckeye.
Buckeye was formed in 1986 and owns and operates one of the largest independent refined
petroleum products pipeline systems in the United States in terms of volumes delivered with
approximately 5,400 miles of pipeline and 68 active products terminals that provide aggregate
storage capacity of approximately 27.3 million barrels. In addition, Buckeye operates and maintains
approximately 2,400 miles of other pipelines under agreements with major oil and gas, petrochemical
and chemical companies, and performs certain engineering and construction management services for
third parties. Buckeye also owns and operates a major natural gas storage facility in northern
California, and is a wholesale distributor of refined petroleum products in the United States in
areas also served by its pipelines and terminals. We, through Buckeye, operate and report in five
business segments: Pipeline Operations; Terminalling & Storage; Natural Gas Storage; Energy
Services; and Development & Logistics.
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, 2010, Services Company owned approximately 2.9% of Buckeyes LP Units.
Services Company employees provide services to Buckeyes operating subsidiaries. Pursuant to a
services agreement entered into in December 2004 (the Services Agreement), Buckeyes operating
subsidiaries reimburse Services Company for the costs of the services provided by Services Company.
Agreement and Plan of Merger
On August 18, 2010, we and our general partner entered into a First Amended and Restated
Agreement and Plan of Merger (the Merger Agreement) with Buckeye, its general partner and Grand
Ohio, LLC (Merger Sub), Buckeyes subsidiary. Pursuant to the Merger Agreement, Merger Sub will
be merged into BGH, with BGH as the surviving entity (the Merger). In the transaction, the
incentive compensation agreement (also referred to as the incentive distribution rights) held by
Buckeyes general partner will be cancelled, the general partner units held by Buckeyes general
partner (representing an approximate 0.5% general partner interest in Buckeye) will be converted
to a non-economic general partner interest, all of the economic interest in us will be
acquired by BPL and our unitholders will receive aggregate consideration of approximately 20
million of Buckeyes LP Units.
6
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Merger Agreement is subject to, among other things, approval by the affirmative vote of
the holders of a majority of Buckeyes LP Units outstanding and entitled to vote at a meeting of
the holders of Buckeyes LP Units, approval by the (a) affirmative vote of holders of a majority of
our Common Units and (b) affirmative vote of holders of a majority of our Common Units and
management units, voting together as a single class.
The Merger will be accounted for as an equity transaction. Therefore, changes in our
ownership interest as a result of the Merger will not result in gain or loss recognition. We will
be considered the surviving consolidated entity for accounting purposes, while Buckeye will be the
surviving consolidated entity for legal and reporting purposes.
We incurred a total of $2.8 million of costs associated with the Merger during the nine months
ended September 30, 2010, of which $1.3 million has been paid. Together with Buckeye, the aggregate
costs associated with the Merger incurred during the nine months ended September 30, 2010 were $6.9
million, of which $4.5 million has been paid. We charged these costs directly to partners
capital.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect all adjustments
that are, in the opinion of our management, of a normal and recurring nature and necessary for a
fair statement of our financial position as of September 30, 2010, and the results of our
operations and cash flows for the periods presented. The results of operations for the three and
nine months ended September 30, 2010 are not necessarily indicative of results of our operations
for the 2010 fiscal year. The unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission
(SEC). We have eliminated all intercompany transactions in consolidation. The consolidated
financial statements also include the accounts of wholly-owned subsidiaries, as well as the
accounts of Buckeye and Services Company, on a consolidated basis. 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 our
consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for
the year ended December 31, 2009, as filed with the SEC on March 2, 2010.
Reclassifications
Certain prior year amounts have been reclassified in the condensed consolidated statements of
cash flows to conform to the current-year presentation. The reclassification in the condensed
consolidated statements of cash flows is as follows:
| We have separately disclosed cash flows from the issuance of long-term debt and borrowings under our credit facilities for the nine months ended September 30, 2009. These amounts had been included within the same line item in the 2009 period. |
This reclassification had no impact on net income or cash flows from operating, investing or
financing activities.
Recent Accounting Developments
Consolidation of Variable Interest Entities (VIEs). In June 2009, the Financial
Accounting Standards Board (FASB) amended consolidation guidance for VIEs. The objective of this
new guidance is to improve financial reporting by companies involved with VIEs. This guidance
requires each reporting company to perform an analysis to determine whether the companys variable
interest or interests give it a controlling financial interest in a VIE. The new guidance was effective for us on January 1, 2010. The adoption of this guidance did
not have an impact on our consolidated financial statements.
7
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements. In January 2010, the FASB issued guidance that requires new
disclosures related to fair value measurements. The new guidance requires expanded disclosures
related to transfers between Level 1 and 2 activities and a gross presentation for Level 3
activity. The new accounting guidance is effective for fiscal years and interim periods beginning
after December 15, 2009, except for the new disclosures related to Level 3 activities, which are
effective for fiscal years beginning after December 15, 2010 and for interim periods within those
years. The new guidance became effective for us on January 1, 2010, except for the new disclosures
related to Level 3 activities, which will be effective for us on January 1, 2011. We have included
the enhanced disclosure requirements regarding fair value measurements in Note 12.
2. ACQUISITIONS AND DISPOSITION
Refined Petroleum Products Terminals and Pipeline Assets Acquisition
On November 18, 2009, we acquired from ConocoPhillips certain refined petroleum product
terminals and pipeline assets for approximately $47.1 million in cash. In addition, we acquired
certain inventory on hand upon completion of the transaction for additional consideration of $7.3
million. The assets include over 300 miles of active pipeline that provide connectivity between
the East St. Louis, Illinois and East Chicago, Indiana markets and three terminals providing 2.3
million barrels of storage tankage. ConocoPhillips entered into certain commercial contracts with
us concurrent with our acquisition regarding usage of the acquired facilities. We believe the
acquisition of these assets has given us greater access to markets and refinery operations in the
Midwest and increased the commercial value of these assets and certain of our existing assets to
our customers by offering enhanced distribution connectivity and flexible storage capabilities.
The operations of these acquired assets are reported in the Pipeline Operations and Terminalling &
Storage segments. The purchase price has been allocated to the tangible and intangible assets
acquired, as follows (in thousands):
Inventory |
$ | 7,287 | ||
Property, plant and equipment |
44,400 | |||
Intangible assets |
4,580 | |||
Environmental and other liabilities |
(1,834 | ) | ||
Allocated purchase price |
$ | 54,433 | ||
Acquisition of Additional Interest in West Shore Pipe Line Company
On August 2, 2010, in connection with our exercise of a right of first refusal, we completed
the acquisition of additional shares of West Shore Pipe Line Company (West Shore) common stock
from an affiliate of BP plc, resulting in an increase in our ownership interest in West Shore from
24.9% to 34.6%. We paid approximately $13.5 million for this additional interest. We exercised
our right of first refusal to purchase the additional shares because of the favorable economics
associated with the investment opportunity and our desire to increase our ownership in a successful
joint venture pipeline that we currently operate.
Acquisition of Other Pipeline Assets
In August 2010, we acquired pipeline assets in western Pennsylvania for $1.3 million. These
assets have been included in the Pipeline Operations segment.
Sale of Buckeye NGL Pipeline
Effective January 1, 2010, we sold our ownership interest in an approximately 350-mile natural
gas liquids pipeline (the Buckeye NGL Pipeline) that runs from Wattenberg, Colorado to Bushton,
Kansas for $22.0 million. The assets had been classified as Assets held for sale in our
consolidated balance sheet at December 31, 2009 with a carrying amount equal to the proceeds
received. Revenues for Buckeye NGL Pipeline for the three and nine months ended September 30, 2009
were $1.7 million and $8.2 million, respectively.
8
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. COMMITMENTS AND CONTINGENCIES
Claims and Proceedings
In the ordinary course of business, we are involved in various claims and legal proceedings,
some of which are covered by insurance. We are generally unable to predict the timing or outcome
of these claims and proceedings. Based upon our evaluation of existing claims and proceedings and
the probability of losses relating to such contingencies, we have accrued certain amounts relating
to such claims and proceedings, none of which are considered material.
In April 2010, the Pipeline Hazardous Materials Safety Administration (PHMSA) proposed
penalties totaling approximately $0.5 million in connection with a tank overfill incident that
occurred at our facility in East Chicago, Indiana, in May 2005 and other related personnel
qualification issues raised as a result of PHMSAs 2008 Integrity Inspection. We are contesting
the proposed penalty. The timing or outcome of this appeal cannot reasonably be determined at this
time.
On August 24, 2010, the District Court of Harris County, Texas, entered an order consolidating
three previously filed putative class actions (Broadbased Equities v. Forrest E. Wylie, et. al.,
Henry James Steward v. Forrest E. Wylie, et. al., and JR Garrett Trust v. Buckeye GP Holdings L.P.,
et al., each of which were previously described in our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010) under the caption of Broadbased Equities v. Forrest E. Wylie, et al.
and appointing interim co-lead class counsel and interim co-liaison counsel. The plaintiffs
subsequently filed a consolidated amended class action and derivative complaint on September 1,
2010 (the Complaint). The Complaint purports to be a putative class and derivative action
alleging that MainLine Management and its directors breached their fiduciary duties to our public
unitholders in connection with the Merger by, among other things, accepting insufficient
consideration and failing to disclose all material facts in order that our unitholders may cast an
informed vote on the Merger Agreement, and that Buckeye, Buckeye GP, MainLine Management, Merger
Sub, BGH GP, ArcLight and Kelso aided and abetted the breaches of fiduciary duty.
On October 29, 2010, the parties to the litigation entered into a Memorandum of Understanding
(MOU) in connection with a proposed settlement of the class action and the Complaint. The MOU
provides for dismissal with prejudice of the litigation and a release of the defendants from all
present and future claims asserted in the litigation in exchange for, among other things, the
agreement of the defendants to amend the Merger Agreement to reduce the termination fees payable by
us upon termination of the Merger Agreement and to provide our unitholders with supplemental
disclosure to Buckeyes and our joint proxy statement/prospectus, dated September 24, 2010. The
supplemental disclosure is set forth in a joint proxy statement/prospectus supplement, dated
October 29, 2010, that was filed with the SEC on November 1, 2010.
In addition, the MOU provides that, in settlement of the plaintiffs claims (including any
claim against the defendants by the plaintiffs counsel for attorneys fees or expenses related to
the litigation), the defendants (or their insurers) will pay a cash payment of $900,000, subject to
final court approval of the settlement. The proposed settlement is subject to further definitive
documentation and to a number of conditions, including, without limitation, completion of certain
confirmatory discovery by the plaintiffs, the drafting and execution of a formal Stipulation of
Settlement, the consummation of the Merger and court approval of the proposed settlement. There is
no assurance that these conditions will be satisfied.
We and the other defendants vigorously deny all liability with respect to the facts and claims
alleged in the Complaint, and specifically deny that any modifications to the Merger Agreement or
any supplemental disclosure was required or advisable under any applicable rule, statute,
regulation or law. However, to avoid the substantial burden, expense, risk, inconvenience and
distraction of continuing the litigation, and to fully and finally resolve the claims alleged, we
and the other defendants agreed to the proposed settlement described above.
9
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Environmental Contingencies
In accordance with our accounting policy, we recorded operating expenses, net of insurance
recoveries, of $2.2 million and $2.2 million during the three months ended September 30, 2010 and
2009, respectively, and $7.6 million and $8.8 million during the nine months ended September 30,
2010 and 2009, respectively, related to environmental expenditures unrelated to claims and
proceedings.
Ammonia Contract Contingencies
On November 30, 2005, Buckeye Gulf Coast Pipe Lines, L.P. (BGC) 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 a $40.0 million guaranty made by El Paso, which
guaranteed EPMEs 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 Pasos guaranty. To the extent
the unreimbursed shortfalls significantly exceed the $40.0 million cap, the resulting costs
incurred by BGC could adversely affect our 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 Pasos guaranty and believes only BGC may invoke the guaranty.
EPME, however, contends that El Pasos guaranty is the source of payment for the shortfalls, but
has not clarified the extent to which it believes the guaranty has been exhausted. We have been
working with EPME to terminate the ammonia sales contracts and ammonia supply contracts and, at no
out of pocket cost to us, have terminated one of the ammonia sales contracts. Given, however, the
uncertainty of future ammonia prices and EPMEs future actions, we continue to believe we have risk
of loss and, at this time, are unable to estimate the amount of any such losses we might incur in
the future. We are assessing our options in the event that we and EPME are unable to terminate the
remaining contracts or otherwise mitigate the remaining risk, including potential recourse against
EPME and El Paso, with respect to this matter.
Customer Bankruptcy
One of our customers filed for bankruptcy in October 2009 and approximately $4.1 million
remained payable to us from the customer pursuant to a pre-bankruptcy contract with that customer.
In June 2010, we entered into a court approved settlement with the bankrupt customer and its
largest creditor pursuant to which we were to be paid at least $2.0 million in cash, and we were
released from both asserted and unasserted claims. In August 2010, we received a settlement
payment of $2.0 million. As a result of this settlement, our Development & Logistics segment
recognized approximately $2.1 million in expense related to the write-off of a portion of the
outstanding receivable balance during the nine months ended September 30, 2010.
10
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Our inventory amounts were as follows at the dates indicated (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Refined petroleum products (1) |
$ | 257,124 | $ | 299,473 | ||||
Materials and supplies |
10,600 | 10,741 | ||||||
Total inventories |
$ | 267,724 | $ | 310,214 | ||||
(1) | Ending inventory was 115.8 million and 141.7 million gallons of refined petroleum products at September 30, 2010 and December 31, 2009, respectively. |
At September 30, 2010 and December 31, 2009, approximately 93% and 99%, respectively, of our
inventory was hedged. Hedged inventory is valued at current market prices with the change in value
of the inventory reflected in our condensed consolidated statements of operations.
5. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following at the dates indicated (in
thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Prepaid insurance |
$ | 4,750 | $ | 7,088 | ||||
Insurance receivables |
9,942 | 13,544 | ||||||
Ammonia receivable |
1,902 | 7,429 | ||||||
Margin deposits |
11,807 | 21,037 | ||||||
Prepaid services |
24,830 | 21,571 | ||||||
Unbilled revenue |
3,425 | 13,201 | ||||||
Tax receivable |
260 | 7,162 | ||||||
Prepaid taxes |
7,197 | 2,213 | ||||||
Other |
10,371 | 11,006 | ||||||
Total prepaid and other current assets |
$ | 74,484 | $ | 104,251 | ||||
11
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. EQUITY INVESTMENTS
We own interests in related businesses that are accounted for using the equity method of
accounting. The following table presents our equity investments, all included within the Pipeline
Operations segment, at the dates indicated (in thousands):
September 30, | December 31, | |||||||||||
Ownership (1) | 2010 | 2009 | ||||||||||
Muskegon Pipeline LLC |
40.0 | % | $ | 14,536 | $ | 15,273 | ||||||
Transport4, LLC |
25.0 | % | 349 | 379 | ||||||||
West Shore Pipe Line Company (2) |
34.6 | % | 43,500 | 30,320 | ||||||||
West Texas LPG Pipeline Limited
Partnership |
20.0 | % | 49,758 | 50,879 | ||||||||
Total equity investments |
$ | 108,143 | $ | 96,851 | ||||||||
(1) | Represents ownership interest in equity investment at September 30, 2010. | |
(2) | See Note 2 for a discussion of the acquisition of an additional interest in West Shore. |
The following table presents earnings from equity investments for the periods indicated (in
thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Muskegon Pipeline LLC |
$ | 488 | $ | 385 | $ | 1,059 | $ | 923 | ||||||||
Transport4, LLC |
51 | 31 | 120 | 101 | ||||||||||||
West Shore Pipe Line Company |
1,229 | 1,204 | 3,730 | 3,401 | ||||||||||||
West Texas LPG Pipeline Limited Partnership |
1,623 | 2,187 | 3,898 | 4,606 | ||||||||||||
Total earnings from equity investments |
$ | 3,391 | $ | 3,807 | $ | 8,807 | $ | 9,031 | ||||||||
Combined income statement data for the periods indicated for our equity method investments is
summarized below (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
$ | 36,546 | $ | 36,212 | $ | 103,845 | $ | 100,626 | ||||||||
Costs and expenses |
19,690 | 17,351 | 55,934 | 49,964 | ||||||||||||
Non-operating expense |
3,983 | 3,184 | 11,021 | 9,053 | ||||||||||||
Net income |
12,873 | 15,677 | 36,890 | 41,609 |
12
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. INTANGIBLE ASSETS
Intangible assets consist of the following at the dates indicated (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Customer relationships |
$ | 38,300 | $ | 38,300 | ||||
Accumulated amortization |
(7,858 | ) | (5,631 | ) | ||||
Net carrying amount |
30,442 | 32,669 | ||||||
Customer contracts |
16,380 | 16,380 | ||||||
Accumulated amortization |
(5,005 | ) | (3,892 | ) | ||||
Net carrying amount |
11,375 | 12,488 | ||||||
Total intangible assets |
$ | 41,817 | $ | 45,157 | ||||
For the three months ended September 30, 2010 and 2009, amortization expense related to
intangible assets was $1.1 million and $0.9 million, respectively. For the nine months ended
September 30, 2010 and 2009, amortization expense related to intangible assets was $3.3 million and
$2.7 million, respectively. Amortization expense related to intangible assets is expected to be
approximately $4.5 million for each of the next five years.
8. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following at the dates indicated (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Prepaid services |
$ | 8,051 | $ | 11,640 | ||||
Derivative assets |
| 17,204 | ||||||
Debt issuance costs |
11,678 | 11,058 | ||||||
Insurance receivables |
7,109 | 7,265 | ||||||
Other |
10,894 | 9,693 | ||||||
Total other non-current assets |
$ | 37,732 | $ | 56,860 | ||||
13
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following at the dates indicated (in
thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Taxes other than income |
$ | 17,190 | $ | 15,487 | ||||
Accrued employee benefit liability |
3,287 | 3,287 | ||||||
Environmental liabilities |
10,387 | 10,799 | ||||||
Accrued interest |
18,429 | 30,613 | ||||||
Payable for ammonia purchase |
2,215 | 7,015 | ||||||
Deferred revenue |
19,395 | 6,829 | ||||||
Compensation and vacation |
12,910 | 11,385 | ||||||
Accrued capital expenditures |
2,639 | 1,611 | ||||||
Reorganization |
| 2,133 | ||||||
Deferred consideration |
2,010 | 1,675 | ||||||
Other |
27,027 | 22,640 | ||||||
Total accrued and other current liabilities |
$ | 115,489 | $ | 113,474 | ||||
10. DEBT OBLIGATIONS
Long-term debt consists of the following at the dates indicated (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
BGH: |
||||||||
BGH Credit Agreement |
$ | | $ | | ||||
Services Company: |
||||||||
3.60% ESOP Notes due March 28, 2011 |
3,076 | 7,790 | ||||||
Retirement premium |
(17 | ) | (87 | ) | ||||
Buckeye: |
||||||||
4.625% Notes due July 15, 2013 (1) |
300,000 | 300,000 | ||||||
5.300% Notes due October 15, 2014 (1) |
275,000 | 275,000 | ||||||
5.125% Notes due July 1, 2017 (1) |
125,000 | 125,000 | ||||||
6.050% Notes due January 15, 2018 (1) |
300,000 | 300,000 | ||||||
5.500% Notes due August 15, 2019 (1) |
275,000 | 275,000 | ||||||
6.750% Notes due August 15, 2033 (1) |
150,000 | 150,000 | ||||||
Credit Facility |
20,000 | 78,000 | ||||||
BES Credit Agreement |
211,800 | 239,800 | ||||||
Total debt |
1,659,859 | 1,750,503 | ||||||
Other, including unamortized discounts
and fair value hedges |
(3,713 | ) | (4,030 | ) | ||||
Subtotal debt |
1,656,146 | 1,746,473 | ||||||
Less: Current portion of long-term debt |
(214,859 | ) | (245,978 | ) | ||||
Total long-term debt |
$ | 1,441,287 | $ | 1,500,495 | ||||
(1) | We make semi-annual interest payments on these notes based on the rates noted above with the principal balances outstanding to be paid on or before the due dates as shown above. |
14
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair values of our aggregate debt and credit facilities were estimated to be $1,799.8
million and $1,769.8 million at September 30, 2010 and December 31, 2009, respectively. The fair
values of the fixed-rate debt were estimated by observing market trading prices and by comparing
the historic market prices of our publicly-issued debt with the market prices of other MLPs
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 variability of the interest rates.
BGH
We have 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. We have pledged all of the limited
liability company interests in Buckeye GP as security for our obligations under the BGH Credit
Agreement. Borrowings under the BGH Credit Agreement bear interest under one of two rate options,
selected by us, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b)
SunTrust Banks prime commercial lending rate; or (ii) the London Interbank Offered Rate (LIBOR),
plus a margin which can range from 0.40% to 1.40%, based on the ratings assigned by Standard &
Poors Rating Services and Moodys Investor Service to our senior unsecured non-credit enhanced
long-term debt. At September 30, 2010 and December 31, 2009, there were no amounts outstanding
under the BGH Credit Agreement.
The BGH Credit Agreement requires us to maintain leverage and funded debt coverage ratios. The
leverage ratio covenant requires us to maintain, as of the last day of each fiscal quarter, a ratio
of the total funded indebtedness of us and our Restricted Subsidiaries (as defined below), measured
as of the last day of each fiscal quarter, to the aggregate dividends and distributions received by
us and the Restricted Subsidiaries from Buckeye, plus all other cash received by us 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 our wholly
owned subsidiaries. The funded debt coverage ratio covenant requires us to maintain, as of the
last day of each fiscal quarter, a ratio of us and all of our consolidated subsidiaries total
consolidated funded debt to the
consolidated EBITDA, as defined in the BGH Credit Agreement, of us and all of our
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,
2010, our funded debt coverage ratio was 4.32 to 1.00.
The BGH Credit Agreement contains other covenants that prohibit us 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 our 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 us and our
Restricted Subsidiaries business, and entering into a merger, consolidation, or sale of assets.
At September 30, 2010, we were 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 $3.1 million and $7.7 million at September 30,
2010 and December 31, 2009, 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 Companys common stock
and are guaranteed by Services Company. In addition, Buckeye has committed that, in the event that
the value of Buckeyes 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 Buckeyes 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 Buckeyes LP Units owned by Services Company returns to an amount that
exceeds the 125% minimum. At September 30, 2010, the value of Buckeyes LP Units owned by Services
Company exceeded the 125% requirement.
15
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Credit Facility
Buckeye has a borrowing capacity of $580.0 million under an unsecured revolving credit
agreement (the Credit Facility) with SunTrust Bank, as administrative agent, which may be
expanded up to $780.0 million subject to certain conditions and upon the further approval of the
lenders. The Credit Facilitys maturity date is August 24, 2012, which Buckeye may extend 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 Banks 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 & Poors Rating Services and Moodys Investor
Service for Buckeyes senior unsecured non-credit enhanced long-term debt. At September 30, 2010
and December 31, 2009, $20.0 million and $78.0 million, respectively, were outstanding under the
Credit Facility. The weighted average interest rate for borrowings under the Credit Facility was
0.5% at September 30, 2010.
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, in each case excluding the income of
certain of Buckeyes majority-owned subsidiaries and equity investments (but including
distributions from those majority-owned subsidiaries and equity investments). At September 30,
2010, Buckeyes Funded Debt Ratio was approximately 3.77 to 1.00. As permitted by the Credit
Facility, the $211.8 million of borrowings by Buckeye Energy Services LLC (BES) under its
separate credit agreement (discussed below) was excluded from the calculation of the Funded Debt
Ratio.
In addition, the Credit Facility contains other covenants including, but not limited to,
covenants limiting Buckeyes 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, 2010, we were not aware of any instances of noncompliance with
the covenants under Buckeyes Credit Facility.
At September 30, 2010 and December 31, 2009, Buckeye had committed $1.5 million and $1.4
million, respectively, in support of letters of credit. The obligations for letters of credit are
not reflected as debt on our condensed consolidated balance sheets.
BES Credit Agreement
BES had a credit agreement (the BES Credit Agreement) that provided for borrowings of up to
$250.0 million with a maturity date of May 20, 2011. On June 25, 2010, BES amended and restated
the BES Credit Agreement to increase the total commitments for borrowings available to BES up to
$500.0 million. However, the maximum amount available to be borrowed under the amended and
restated BES Credit Agreement is initially limited to $350.0 million. An accordion feature
provides BES the ability to increase the commitments under the BES Credit Agreement to $500.0
million, subject to obtaining the requisite commitments and satisfying other customary conditions.
In addition to the accordion, subject to BESs satisfaction of certain financial covenants as set
forth in the financial covenants table below, BES may, from time to time, elect to increase or
decrease the maximum amount available for borrowing under the BES Credit Agreement in $5.0 million
increments, but in no event below $150.0 million or above $500.0 million. The maturity date of the
BES Credit Agreement is June 25, 2013. BES incurred $3.2 million of debt issuance costs related to
the amendment, which will be amortized into interest expense over the term of the BES Credit
Agreement.
Under the BES Credit Agreement, borrowings accrue interest under one of three rate options, at
BESs election, equal to (i) the Administrative Agents Cost of Funds (as defined in the BES Credit
Agreement) plus 2.25%, (ii) the Eurodollar Rate (as defined in the BES Credit Agreement) plus 2.25%
or (iii) the Prime Rate (as defined in the BES Credit Agreement) plus 1.25%. 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
16
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $211.8 million and
$239.8 million at September 30, 2010 and December 31, 2009, respectively, both of which were
classified as current liabilities in our condensed consolidated balance sheets. 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 | |||||||
Above $250 up to $300 |
$ | 72 | $ | 60 | 7.0 to 1.0 | |||||||
Above $300 up to $350 |
$ | 84 | $ | 70 | 7.0 to 1.0 | |||||||
Above $350 up to $400 |
$ | 96 | $ | 80 | 7.0 to 1.0 | |||||||
Above $400 up to $450 |
$ | 108 | $ | 90 | 7.0 to 1.0 | |||||||
Above $450 up to $500 |
$ | 120 | $ | 100 | 7.0 to 1.0 |
At September 30, 2010, BESs Consolidated Tangible Net Worth and Consolidated Net Working
Capital were $122.8 million and $72.8 million, respectively, and the Consolidated Leverage Ratio
was 2.5 to 1.0. The weighted average interest rate for borrowings outstanding under the BES Credit
Agreement was 2.5% at September 30, 2010.
In addition, the BES Credit Agreement contains other covenants, including, but not limited to,
covenants limiting BESs 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, 2010, we were not aware of any instances of
noncompliance with the covenants under the BES Credit Agreement.
11. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following at the dates indicated (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accrued employee benefit liabilities (see Note 13) |
$ | 45,274 | $ | 45,837 | ||||
Accrued environmental liabilities |
18,447 | 19,053 | ||||||
Deferred consideration |
16,918 | 18,425 | ||||||
Deferred rent |
12,334 | 9,158 | ||||||
Deferred revenue |
7,269 | 1,532 | ||||||
Other |
9,279 | 8,937 | ||||||
Total other non-current liabilities |
$ | 109,521 | $ | 102,942 | ||||
17
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS
We are exposed to certain risks, including changes in interest rates and commodity prices, in
the course of our normal business operations. We use derivative instruments to manage risks
associated with certain identifiable and anticipated transactions. Derivatives are financial
instruments whose fair value is determined by changes in a specified benchmark such as interest
rates or commodity prices. Typical derivative instruments include futures, forward contracts,
swaps and other instruments with similar characteristics. We have no trading derivative
instruments.
Our policy is to formally document all relationships between hedging instruments and hedged
items, as well as our risk management objectives and strategies for undertaking the hedge. This
process includes specific identification of the hedging instrument and the hedged transaction, the
nature of the risk being hedged and how the hedging instruments effectiveness will be assessed.
Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives used
in a transaction are highly effective in offsetting changes in cash flows or the fair value of
hedged items. A discussion of our derivative activities by risk category follows.
Interest Rate Derivatives
Buckeye utilizes forward-starting interest rate swaps to manage interest rate risk related to
forecasted interest payments on anticipated debt issuances. This strategy is a component in
controlling its cost of capital associated with such borrowings. When entering into interest rate
swap transactions, Buckeye becomes exposed to both credit risk and market risk. Buckeye is subject
to credit risk when the value of the swap transaction is positive and the risk exists that the
counterparty will fail to perform under the terms of the contract. Buckeye is subject to market
risk with respect to changes in the underlying benchmark interest rate that impacts the fair value
of the swaps. Buckeye manages its credit risk by only entering into swap transactions with major
financial institutions with investment-grade credit ratings. Buckeye manages its market risk by
associating each swap transaction with an existing debt obligation or a specified expected debt
issuance generally associated with the maturity of an existing debt obligation.
Buckeyes practice with respect to derivative transactions related to interest rate risk has
been to have each transaction in connection with non-routine borrowings authorized by the board of
directors of Buckeye GP. In January 2009, Buckeye GPs board of directors adopted an interest rate
hedging policy which permits Buckeye to enter into certain short-term interest rate swap agreements
to manage its interest rate and cash flow risks associated with its Credit Facility. In addition,
in July 2009 and May 2010, Buckeye GPs board of directors authorized Buckeye to enter into certain
transactions, such as forward-starting interest rate swaps, to manage its interest rate and cash
flow risks related to certain expected debt issuances associated with the maturity of existing debt
obligations.
Buckeye expects 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, although no
assurances can be given that the issuance of fixed-rate debt will be possible on acceptable terms.
During 2009, Buckeye entered into four forward-starting interest rate swaps with a total aggregate
notional amount of $200.0 million related to the anticipated 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 anticipated issuance of debt on or before October 15, 2014. During
the nine months ended September 30, 2010, Buckeye entered into two forward-starting interest rate
swaps with a total aggregate notional amount of $100.0 million related to the anticipated issuance
of debt on or before July 15, 2013 and three forward-starting interest rate swaps with a total
aggregate notional amount of $125.0 million related to the anticipated 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 expected debt is issued. During the three and nine months ended September
30, 2010, unrealized losses of $22.0 million and $58.1 million, respectively, were recorded in
Buckeyes accumulated other comprehensive income (loss) to reflect the change in the fair values of
the forward-starting interest rate swaps. 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.
18
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Over the next twelve months, Buckeye expects to reclassify $1.0 million of accumulated
other comprehensive loss as an increase to interest expense that was generated by forward-starting
interest rate swaps terminated in 2008 associated with its 6.050% Notes.
Commodity Derivatives
Our Energy Services segment primarily uses exchange-traded refined petroleum product futures
contracts to manage the risk of market price volatility on its refined petroleum product
inventories and its physical commodity forward fixed-price purchase and sales contracts. The
derivative contracts used to hedge refined petroleum product inventories are designated as fair
value hedges. Accordingly, our 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
our hedged fuel inventory. Hedge accounting is discontinued when the hedged fuel inventory is sold
or when the related derivative contracts expire. In addition, we periodically enter into
offsetting exchange-traded futures contracts to economically close-out an existing futures contract
based on a near-term expectation to sell a portion of our fuel inventory. These offsetting
derivative contracts are not designated as hedging instruments and any resulting gains or losses
are recognized in earnings during the period. The fair values of futures contracts for inventory
designated as hedging instruments in the following tables have been presented net of these
offsetting futures contracts.
Our Energy Services segment has not used hedge accounting with respect to its fixed-price
contracts. Therefore, our fixed-price contracts and the related futures contracts used to offset
the changes in fair value of the fixed-price sales contracts are all marked-to-market on the
condensed consolidated balance sheets with gains and losses being recognized in earnings during the
period.
In order to hedge the cost of natural gas used to operate our turbine engines at our Linden,
New Jersey location, our 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
(through July 2011). We designated the futures contract as a cash flow hedge at inception.
The following table summarizes our commodity derivative instruments outstanding at September
30, 2010 (amounts in thousands of gallons, except as noted):
Volume (1) | Accounting | |||||||||||
Derivative Purpose | Current | Long-Term (2) | Treatment | |||||||||
Derivatives NOT designated as hedging instruments: |
||||||||||||
Fixed-price contracts |
45,380 | 42 | Mark-to-market | |||||||||
Futures contracts for fixed-price sales contracts |
21,672 | | Mark-to-market | |||||||||
Futures contracts for inventory |
14,448 | | Mark-to-market | |||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Futures contracts for inventory |
107,730 | | Fair Value Hedge | |||||||||
Futures contracts for natural gas (BBtu) (3) |
300 | | Cash Flow Hedge |
(1) | Volume represents absolute value of net notional volume position. | |
(2) | The maximum term for derivatives included in the long-term column is October 2011. | |
(3) | BBtu represents one billion British thermal units. |
19
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the fair value of each classification of derivative instruments
at the dates indicated (in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Derivative | Derivative | |||||||||||||||||||||||
Assets | (Liabilities) | Net Carrying | Assets | (Liabilities) | Net Carrying | |||||||||||||||||||
Fair Value | Fair Value | Value | Fair Value | Fair Value | Value | |||||||||||||||||||
Derivatives NOT designated as
hedging instruments: |
||||||||||||||||||||||||
Fixed-price contracts |
$ | 2,747 | $ | (2,130 | ) | $ | 617 | $ | 4,959 | $ | (3,662 | ) | $ | 1,297 | ||||||||||
Futures contracts for fixed-price sales contracts |
2,808 | (398 | ) | 2,410 | 7,594 | (384 | ) | 7,210 | ||||||||||||||||
Futures contracts for inventory |
25,241 | (24,550 | ) | 691 | | | | |||||||||||||||||
Derivatives designated as
hedging instruments: |
||||||||||||||||||||||||
Futures contracts for inventory |
795 | (12,530 | ) | (11,735 | ) | 1,992 | (20,517 | ) | (18,525 | ) | ||||||||||||||
Futures contracts for natural gas |
| (361 | ) | (361 | ) | 312 | | 312 | ||||||||||||||||
Interest rate contracts |
| (40,910 | ) | (40,910 | ) | 17,204 | | 17,204 | ||||||||||||||||
Total |
$ | (49,288 | ) | $ | 7,498 | |||||||||||||||||||
September 30, | December 31, | |||||||
Balance Sheet Locations: | 2010 | 2009 | ||||||
Derivative assets |
$ | 2,600 | $ | 4,959 | ||||
Other non-current assets |
| 17,204 | ||||||
Derivative liabilities |
(10,978 | ) | (14,665 | ) | ||||
Long-term derivative liabilities |
(40,910 | ) | | |||||
Total |
$ | (49,288 | ) | $ | 7,498 | |||
Our hedged inventory portfolio extends to the first quarter of 2011. The majority of the
unrealized loss of $11.7 million at September 30, 2010 for futures contracts designated as
inventory hedging instruments and unrealized gains in the fair values of the underlying hedged
refined petroleum product inventories will be realized by the fourth quarter of 2010 as the
inventory is sold. A loss of $1.5 million and a gain of $10.0 million were recorded on inventory
hedges that were ineffective for the three months ended September 30, 2010 and 2009, respectively.
For the nine months ended September 30, 2010 and 2009, gains recorded on inventory hedges that were
ineffective were approximately $1.2 million and $17.7 million, respectively. At September 30,
2010, open refined petroleum product derivative contracts (represented by the fixed-price contracts
and futures contracts for fixed-price sales contracts noted above) varied in duration, but did not
extend beyond October 2011. In addition, at September 30, 2010, we had refined petroleum product
inventories which we intend to use to satisfy a portion of the fixed-price contracts.
20
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The gains and losses on our derivative instruments recognized in income were as follows for
the periods indicated (in thousands):
Gain (Loss) Recognized in Income on Derivatives | ||||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||
Location | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Derivatives NOT designated as hedging instruments: | ||||||||||||||||||||
Fixed-price
contracts
|
Product sales | $ | (1,974 | ) | $ | 3,937 | $ | 6,704 | $ | 3,366 | ||||||||||
Futures contracts for fixed-price sales contracts |
Cost
of product sales and natural gas storage services |
3,363 | (3,972 | ) | (103 | ) | 7,489 | |||||||||||||
Futures contracts for inventory |
Cost
of product sales and natural gas storage services |
65 | | 331 | | |||||||||||||||
Derivatives designated as
fair value hedging instruments: |
||||||||||||||||||||
Futures contracts for inventory |
Cost
of product sales and natural gas storage services |
$ | (18,509 | ) | $ | 4,273 | $ | (5,296 | ) | $ | 670 |
The gains and losses reclassified from accumulated other comprehensive income (AOCI) to
income and the change in value recognized in other comprehensive income (OCI) on our derivatives
were as follows for the periods indicated (in thousands):
Gain (Loss) Reclassified from AOCI to Income | ||||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||
Location | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Derivatives designated as cash flow hedging instruments: | ||||||||||||||||||||
Futures contracts for natural gas |
Cost
of product sales and natural gas storage services |
$ | (122 | ) | $ | (192 | ) | $ | (291 | ) | $ | (407 | ) | |||||||
Futures
contracts for refined petroleum products |
Cost
of product sales and natural gas storage services |
| | | (146 | ) | ||||||||||||||
Interest rate contracts |
Interest and debt expense | (241 | ) | (1,393 | ) | (723 | ) | (2,049 | ) |
Change in Value Recognized in OCI on Derivatives | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Derivatives designated as cash flow hedging instruments: |
||||||||||||||||
Futures contracts for natural gas |
$ | (337 | ) | $ | (1 | ) | $ | (949 | ) | $ | 162 | |||||
Interest rate contracts |
(21,957 | ) | (3,849 | ) | (58,114 | ) | (4,006 | ) |
21
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at a specified measurement date.
Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other
market participants would use in pricing an asset or liability, including estimates of risk.
Recognized valuation techniques employ inputs such as product prices, operating costs, discount
factors and business growth rates. These inputs may be either readily observable, corroborated by
market data or generally unobservable. In developing our estimates of fair value, we endeavor to
utilize the best information available and apply market-based data to the extent possible.
Accordingly, we utilize valuation techniques (such as the income or market approach) that maximize
the use of observable inputs and minimize the use of unobservable inputs.
A three-tier hierarchy has been established that classifies fair value amounts recognized or
disclosed in the financial statements based on the observability of inputs used to estimate such
fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and
2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3).
At each balance sheet reporting date, we categorize our financial assets and liabilities using
this hierarchy. The characteristics of fair value amounts classified within each level of the
hierarchy are described as follows:
| Level 1 inputs are based on quoted prices, which are available in active markets for identical assets or liabilities as of the reporting date. Active markets are defined as those in which transactions for identical assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. | ||
| Level 2 inputs are based on pricing inputs other than quoted prices in active markets and are either directly or indirectly observable as of the measurement date. Level 2 fair values include instruments that are valued using financial models or other appropriate valuation methodologies and 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 based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect the reporting entitys own ideas about the assumptions that market participants would use in pricing an asset or liability (including assumptions about risk). Unobservable inputs are based on the best information available in the circumstances, which might include the reporting entitys internally developed data. The reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort. Level 3 inputs are typically used in connection with internally developed valuation methodologies where management makes its best estimate of an instruments fair value. |
22
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2010 and December 31, 2009, and the
basis for that measurement, by level within the fair value hierarchy (in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||
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: |
||||||||||||||||
Fixed-price contracts |
$ | | $ | 2,497 | $ | | $ | 4,959 | ||||||||
Futures contracts for inventory
and fixed-price sales contracts |
103 | | | | ||||||||||||
Asset held in trust |
| | 1,793 | | ||||||||||||
Interest rate derivatives |
| | | 17,204 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Fixed-price contracts |
| (1,880 | ) | | (3,662 | ) | ||||||||||
Futures contracts for inventory
and fixed-price sales contracts |
(8,737 | ) | | (11,003 | ) | | ||||||||||
Futures contracts for natural gas |
(361 | ) | | | | |||||||||||
Interest rate derivatives |
| (40,910 | ) | | | |||||||||||
Total |
$ | (8,995 | ) | $ | (40,293 | ) | $ | (9,210 | ) | $ | 18,501 | |||||
The values of the Level 1 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 values of the Level 2 interest rate derivatives were determined using expected cash flow
models, which incorporated market inputs including the implied forward LIBOR yield curve for the
same period as the future interest swap settlements.
The values of the Level 2 fixed-price contracts assets and liabilities were calculated using
market approaches based on observable market data inputs, including published commodity pricing
data, which is verified against other available market data, and market interest rate and
volatility data. Level 2 fixed-price contracts assets are net of credit value adjustments (CVA)
determined using an expected cash flow model, which incorporates assumptions about the credit risk
of the fixed-price contracts based on the historical and expected payment history of each customer,
the amount of product contracted for under the agreement and the customers historical and expected
purchase performance under each contract. The Energy Services segment determined CVA is
appropriate because few of the Energy Services segments customers entering into these fixed-price
contracts are large organizations with nationally-recognized credit ratings. The Level 2
fixed-price contracts assets of $2.5 million and $5.0 million as of September 30, 2010 and December
31, 2009, respectively, are net of CVA of ($0.3) million and ($0.9) million, respectively.
23
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 of net assets held for sale that was included in prepaid and other current assets at September 30, 2009 (see Note 2). |
As a result of a loss in the customer base utilizing the Buckeye NGL Pipeline, we 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. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Services Company, which employs the majority of our workforce, sponsors a retirement income
guarantee plan (RIGP), which is a defined benefit plan that generally guarantees employees hired
before January 1, 1986 a retirement benefit based on years of service and the employees highest
compensation for any consecutive 5-year period during the last 10 years of service or other
compensation measures as defined under the respective plan provisions. The retirement benefit is
subject to reduction at varying percentages for certain offsetting amounts, including benefits
payable under a retirement and savings plan discussed further below. Services Company funds the
plan through contributions to pension trust assets, generally subject to minimum funding
requirements as provided by applicable law.
Services Company also sponsors an unfunded post-retirement benefit plan (the Retiree Medical
Plan), which provides health care and life insurance benefits to certain of its retirees. To be
eligible for these benefits, an employee must have been hired prior to January 1, 1991 and meet
certain service requirements.
The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as
follows for the three months ended September 30, 2010 and 2009 (in thousands):
RIGP | Retiree Medical Plan | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 66 | $ | (44 | ) | $ | 74 | $ | 37 | |||||||
Interest cost |
226 | 146 | 495 | 419 | ||||||||||||
Expected return on plan assets |
(86 | ) | (47 | ) | | | ||||||||||
Amortization of prior service benefit |
(11 | ) | (47 | ) | (741 | ) | (679 | ) | ||||||||
Amortization of unrecognized losses |
241 | 90 | 223 | 220 | ||||||||||||
Settlement/curtailment charge (1) |
| | | (1,571 | ) | |||||||||||
Net periodic benefit costs |
$ | 436 | $ | 98 | $ | 51 | $ | (1,574 | ) | |||||||
(1) | In connection with Buckeyes reorganization in 2009, $6.4 million of the aggregate amount of $29.1 million of expenses incurred through September 30, 2009 was recorded as an adjustment to the funded status of the RIGP and the Retiree Medical Plan, which represent settlement and curtailment adjustments. |
24
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as
follows for the nine months ended September 30, 2010 and 2009 (in thousands):
RIGP | Retiree Medical Plan | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 199 | $ | 371 | $ | 221 | $ | 247 | ||||||||
Interest cost |
685 | 886 | 1,486 | 1,402 | ||||||||||||
Expected return on plan assets |
(260 | ) | (427 | ) | | | ||||||||||
Amortization of prior service benefit |
(34 | ) | (282 | ) | (2,223 | ) | (2,397 | ) | ||||||||
Amortization of unrecognized losses |
731 | 802 | 670 | 743 | ||||||||||||
Settlement/curtailment charge (1) |
| 7,171 | | (771 | ) | |||||||||||
Net periodic benefit costs |
$ | 1,321 | $ | 8,521 | $ | 154 | $ | (776 | ) | |||||||
(1) | In connection with Buckeyes reorganization in 2009, $6.4 million of the aggregate amount of $29.1 million of expenses incurred through September 30, 2009 was recorded as an adjustment to the funded status of the RIGP and the Retiree Medical Plan, which represent settlement and curtailment adjustments. |
During the nine months ended September 30, 2010, we contributed $2.7 million to the RIGP.
14. UNIT-BASED COMPENSATION PLANS
We have Management Units (see Note 1) and an equity compensation plan (GP Equity Compensation
Plan) for certain members of our and BGH GPs senior management. The GP Equity Compensation Plan
includes both time-based and performance-based participation in the equity of BGH GP (but not ours)
referred to as override units. Compensation expense recorded with respect to the override units
was $0.3 million and $0.3 million for the three months ended September 30, 2010 and 2009,
respectively, and $0.9 million and $1.0 million for the nine months ended September 30, 2010 and
2009, respectively.
Buckeye awards unit-based compensation to employees and directors primarily under the 2009
Long-Term Incentive Plan of Buckeye Partners, L.P. (the LTIP), which became effective in March
2009. Buckeye formerly awarded options to acquire LP Units to employees pursuant to the Buckeye
Partners, L.P. Unit Option and Distribution Equivalent Plan (the Option Plan). We recognized
total unit-based compensation expense related to the LTIP and the Option Plan of $1.3 million and
$0.5 million for the three months ended September 30, 2010 and 2009, respectively, and $3.8 million
and $1.0 million for the nine months ended September 30, 2010 and 2009, respectively.
25
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BGH GPs Override Units
No override units were granted or forfeited during the nine months ended September 30, 2010.
The following is a summary of the activity of the override units as of September 30, 2010 (in
thousands):
Number of Override Units | Total Number | |||||||||||||||
Operating | of Units | |||||||||||||||
Value A Units | Value B Units | Units | Awarded | |||||||||||||
Unvested at December 31, 2009 |
1,699 | 1,699 | 812 | 4,210 | ||||||||||||
Vested |
| | (266 | ) | (266 | ) | ||||||||||
Unvested at September 30, 2010 |
1,699 | 1,699 | 546 | 3,944 | ||||||||||||
Compensation Costs for Override Units | ||||||||||||||||
Operating | ||||||||||||||||
Value A Units | Value B Units | Units | Totals | |||||||||||||
Total fair value of all outstanding override units |
$ | 3,587 | $ | 2,179 | $ | 5,808 | $ | 11,574 | ||||||||
Less: Expense recorded from plan inception to
September 30, 2010 |
| | (4,301 | ) | (4,301 | ) | ||||||||||
Estimated future compensation costs at September
30, 2010 |
$ | 3,587 | $ | 2,179 | $ | 1,507 | $ | 7,273 | ||||||||
Buckeyes Long-Term Incentive Plan
The LTIP provides for the issuance of up to 1,500,000 LP Units, subject to certain
adjustments. After giving effect to the issuance or forfeiture of phantom unit and performance
unit awards through September 30, 2010, awards representing a total of 1,116,268 additional LP
Units could be issued under the LTIP.
On December 16, 2009, the Compensation Committee approved the terms of the Buckeye Partners,
L.P. Unit Deferral and Incentive Plan (Deferral Plan). The Compensation Committee is expressly
authorized to adopt the Deferral Plan under the terms of the LTIP, which grants the Compensation
Committee the authority to establish a program pursuant to which Buckeyes phantom units may be
awarded in lieu of cash compensation at the election of the employee. At December 31, 2009,
eligible employees were allowed to defer up to 50% of their 2009 compensation award under Buckeyes
Annual Incentive Compensation Plan or other discretionary bonus program in exchange for grants of
phantom units equal in value to the amount of their cash award deferral (each such unit, a
Deferral Unit). Participants also receive one matching phantom unit for each Deferral Unit.
Approximately $1.8 million of 2009 compensation awards had been deferred at December 31, 2009, for
which 62,332 phantom units (including matching units) were granted during the three months ended
March 31, 2010. These grants are included as granted in the LTIP activity table below.
Awards under the LTIP
During the nine months ended September 30, 2010, the Compensation Committee granted 123,669
phantom units to employees (including the 62,332 phantom units granted pursuant to the Deferral
Plan discussed above), 12,000 phantom units to independent directors of Buckeye GP and MainLine
Management, and 122,683 performance units to employees. The amount paid with respect to phantom
unit distribution equivalents under the LTIP was $0.4 million for the nine months ended September
30, 2010.
26
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the LTIP activity for the periods indicated (dollars in
thousands):
Weighted | ||||||||||||
Average | ||||||||||||
Grant Date | ||||||||||||
Number of | Fair Value | |||||||||||
LP Units | per LP Unit (1) | Total Value | ||||||||||
Unvested at January 1, 2010 |
140,095 | $ | 39.81 | $ | 5,577 | |||||||
Granted |
258,352 | 56.22 | 14,525 | |||||||||
Vested |
(18,518 | ) | 39.18 | (725 | ) | |||||||
Forfeited |
(15,234 | ) | 49.44 | (753 | ) | |||||||
Unvested at September 30, 2010 |
364,695 | $ | 51.07 | $ | 18,624 | |||||||
(1) | Determined by dividing the aggregate grant date fair value of awards by the number of awards issued. The weighted-average grant date fair value per LP Unit for forfeited and vested awards is determined before an allowance for forfeitures. |
At September 30, 2010, approximately $10.8 million of compensation expense related to the LTIP
is expected to be recognized over a weighted average period of approximately 1.9 years.
Buckeyes Unit Option and Distribution Equivalent Plan
Buckeye also sponsors the Option Plan, pursuant to which it historically granted options to
employees to purchase LP Units at the market price of its 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 2010, any of its LP Units.
The impact of Buckeyes Option Plan is immaterial to our condensed consolidated financial
statements.
15. RELATED PARTY TRANSACTIONS
Approximately 62% of our outstanding equity, which includes Common Units and Management Units,
is owned by BGH GP and approximately 38% by the public. BGH GP is owned by affiliates of ArcLight,
Kelso and certain investment funds along with certain members of senior management of Buckeye GP.
MainLine Management is our general partner and is wholly owned by BGH GP.
Services Company and Buckeye are considered related parties with respect to us. As discussed
in Note 1, our condensed consolidated financial statements include the accounts of Services Company
and Buckeye on a consolidated basis, and all intercompany transactions have been eliminated.
We incurred a senior administrative charge for certain management services performed by
affiliates of Buckeye GP of $0.5 million for the three months ended March 31, 2009. The senior
administrative charge was waived indefinitely on April 1, 2009 as these affiliates are currently
not providing services to us that were contemplated as being covered by the senior administrative
charge. As a result, there were no related charges recorded in the last nine months of 2009 or
during the nine months ended September 30, 2010.
On August 18, 2010, we and our general partner entered into the Merger Agreement with Buckeye,
its general partner and Merger Sub, Buckeyes subsidiary, pursuant to which Merger Sub will be
merged into BGH, with BGH as the surviving entity. The Merger Agreement amends and restates an
original Agreement and Plan of Merger, dated as of June 10, 2010, by and among the parties to the Merger Agreement. See Note 1 for
further information regarding the Merger.
27
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16. CASH DISTRIBUTIONS
We generally make quarterly cash distributions to unitholders of substantially all of our
available cash, generally defined in our partnership agreement as consolidated cash receipts less
consolidated cash expenditures and such retentions for working capital, anticipated cash
expenditures and contingencies as our general partner deems appropriate. Cash distributions
totaled $36.5 million and $29.7 million during the nine months ended September 30, 2010 and 2009,
respectively.
On November 8, 2010, we announced a quarterly distribution of $0.47 per Common Unit that will
be paid on November 30, 2010, to unitholders of record on
November 15, 2010. Total cash
distributed to unitholders on November 30, 2010 will total approximately $13.3 million.
17. EARNINGS PER PARTNERSHIP UNIT
Basic and diluted earnings per partnership unit is calculated by dividing net income, after
deducting the amount allocated to Buckeye, by the weighted-average number of partnership units
outstanding during the period.
The following table is a reconciliation of the weighted average number of Common Units used in
the basic and diluted earnings per unit calculations for the periods indicated (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic: |
||||||||||||||||
Weighted average common units outstanding |
27,774 | 27,770 | 27,774 | 27,770 | ||||||||||||
Weighted average management units outstanding |
526 | 530 | 526 | 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 | ||||||||||||
28
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
18. BUSINESS SEGMENTS
We operate and report in five business segments: Pipeline Operations; Terminalling & Storage;
Natural Gas Storage; Energy Services; and Development & Logistics.
Each segment uses the same accounting policies as those used in the preparation of our
consolidated financial statements. All inter-segment revenues, operating income and assets have
been eliminated. All periods are presented on a consistent basis. All of our operations and
assets are conducted and located in the United States.
Financial information about each segment is presented below for the periods or at the dates
indicated (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue: |
||||||||||||||||
Pipeline Operations |
$ | 103,621 | $ | 96,714 | $ | 299,497 | $ | 294,084 | ||||||||
Terminalling & Storage |
41,900 | 34,036 | 125,039 | 94,108 | ||||||||||||
Natural Gas Storage |
21,663 | 28,576 | 68,318 | 60,325 | ||||||||||||
Energy Services |
566,804 | 258,407 | 1,636,955 | 728,563 | ||||||||||||
Development & Logistics |
9,082 | 7,516 | 27,382 | 25,446 | ||||||||||||
Intersegment |
(8,213 | ) | (1,805 | ) | (23,884 | ) | (11,022 | ) | ||||||||
Total revenue |
$ | 734,857 | $ | 423,444 | $ | 2,133,307 | $ | 1,191,504 | ||||||||
Operating income (loss): |
||||||||||||||||
Pipeline Operations |
$ | 48,991 | $ | 41,846 | $ | 138,891 | $ | 35,208 | ||||||||
Terminalling & Storage |
23,656 | 17,323 | 70,695 | 39,095 | ||||||||||||
Natural Gas Storage |
2,795 | 7,591 | 9,548 | 19,572 | ||||||||||||
Energy Services |
2,581 | 5,620 | (1,287 | ) | 10,404 | |||||||||||
Development & Logistics |
1,490 | 2,509 | 3,096 | 4,043 | ||||||||||||
Total operating income |
$ | 79,513 | $ | 74,889 | $ | 220,943 | $ | 108,322 | ||||||||
Depreciation and amortization: |
||||||||||||||||
Pipeline Operations |
$ | 9,263 | $ | 8,659 | $ | 27,295 | $ | 26,482 | ||||||||
Terminalling & Storage |
2,386 | 1,813 | 7,051 | 5,401 | ||||||||||||
Natural Gas Storage |
1,643 | 1,241 | 4,924 | 3,943 | ||||||||||||
Energy Services |
1,331 | 986 | 3,702 | 2,946 | ||||||||||||
Development & Logistics |
439 | 439 | 1,287 | 1,289 | ||||||||||||
Total depreciation and amortization |
$ | 15,062 | $ | 13,138 | $ | 44,259 | $ | 40,061 | ||||||||
Capital additions, net: (1) |
||||||||||||||||
Pipeline Operations |
$ | 22,013 | $ | 20,813 | ||||||||||||
Terminalling & Storage |
16,116 | 15,186 | ||||||||||||||
Natural Gas Storage |
7,466 | 18,884 | ||||||||||||||
Energy Services |
2,835 | 2,973 | ||||||||||||||
Development & Logistics |
845 | 947 | ||||||||||||||
Total capital additions, net |
$ | 49,275 | $ | 58,803 | ||||||||||||
(1) | Amount excludes $1.0 million and ($2.6) million of non-cash changes in accruals for capital expenditures for the nine months ended September 30, 2010 and 2009, respectively (see Note 19). |
29
BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Total Assets: |
||||||||
Pipeline Operations (1) |
$ | 1,543,935 | $ | 1,592,916 | ||||
Terminalling & Storage |
522,941 | 532,971 | ||||||
Natural Gas Storage |
549,243 | 573,261 | ||||||
Energy Services |
461,146 | 482,025 | ||||||
Development & Logistics |
60,386 | 74,476 | ||||||
Consolidating level |
234,300 | 230,922 | ||||||
Total assets |
$ | 3,371,951 | $ | 3,486,571 | ||||
Goodwill: |
||||||||
Pipeline Operations |
$ | 198,632 | $ | 198,632 | ||||
Terminalling & Storage |
49,618 | 49,618 | ||||||
Natural Gas Storage |
169,560 | 169,560 | ||||||
Energy Services |
1,132 | 1,132 | ||||||
Development & Logistics |
13,182 | 13,182 | ||||||
Total goodwill |
$ | 432,124 | $ | 432,124 | ||||
(1) | All equity investments are included in the assets of the Pipeline Operations segment. |
19. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flows and non-cash transactions were as follows for the periods indicated
(in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash paid for interest (net of capitalized interest) |
$ | 73,230 | $ | 59,101 | ||||
Cash paid for income taxes |
801 | 1,650 | ||||||
Capitalized interest |
1,710 | 2,906 | ||||||
Non-cash changes in assets and liabilities: |
||||||||
Change in capital expenditures in accounts payable |
$ | 1,028 | $ | (2,606 | ) |
20. SUBSEQUENT EVENTS
Terminal Acquisitions
On October 28, 2010, we entered into an agreement to acquire a refined petroleum products
terminal on the southeast coast of Puerto Rico from an affiliate of Royal Dutch Shell plc
(Shell). The terminal, located in Yabucoa, Puerto Rico, includes 44 storage tanks with
approximately 4.6 million barrels of gasoline, jet fuel, diesel, fuel oil and crude oil storage
capacity. Our investment will provide us with long-term fee-based revenues supported by multi-year
commitments from Shell. The acquisition, which is subject to customary closing conditions, is
expected to close in December 2010.
On November 5, 2010, we completed the purchase of a refined petroleum products terminal in
Opelousas, Louisiana from Chevron U.S.A Inc. (Chevron) for $13.0 million in cash. The terminal
includes seven storage tanks with approximately 135,000 barrels of total storage capacity and a
truck rack. In addition, Chevron has agreed to enter into a commercial contract with us that is
associated with the acquired facility.
30