UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

x

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

 

 

For the quarterly period ended June 30, 2009

 

or

 

 

o

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

 

For the transition period from                 to               

 

Commission file number 001-32963

 

BUCKEYE GP HOLDINGS L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

11-3776228

(State or other jurisdiction of

 

IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

One Greenway Plaza

 

 

Suite 600

 

 

Houston, TX

 

77046

(Address of principal executive offices)

 

(Zip Code)

 

(832) 615-8600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of July 29, 2009, there were 27,769,647 Common Units and 530,353 Management Units outstanding.

 

 

 



 

BUCKEYE GP HOLDINGS L.P.

INDEX

 

 

 

Page

PART I- FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008

3

 

 

 

 

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

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008

5

 

 

 

 

Condensed Consolidated Statement of Changes in Partners’ Capital for the Six Months Ended June 30, 2009 and 2008

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

 

 

 

Item 4.

Controls and Procedures

50

 

 

 

PART II- OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

51

 

 

 

Item 1A.

Risk Factors

51

 

 

 

Item 6.

Exhibits

51

 

2



 

PART I - FINANCIAL INFORMATION

 

Item1. Condensed Consolidated Financial Statements

 

BUCKEYE GP HOLDINGS L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Product sales

 

$

201,777

 

$

346,436

 

$

470,556

 

$

587,482

 

Transportation and other

 

149,443

 

146,112

 

297,504

 

285,342

 

Total revenue

 

351,220

 

492,548

 

768,060

 

872,824

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

193,440

 

341,591

 

444,116

 

578,203

 

Operating expenses

 

68,842

 

69,991

 

142,742

 

136,282

 

Depreciation and amortization

 

13,559

 

12,342

 

26,923

 

23,725

 

Asset impairment expense

 

72,540

 

 

72,540

 

 

General and administrative

 

10,158

 

11,638

 

20,193

 

21,534

 

Reorganization expense

 

28,113

 

 

28,113

 

 

Total costs and expenses

 

386,652

 

435,562

 

734,627

 

759,744

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(35,432

)

56,986

 

33,433

 

113,080

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Investment income

 

142

 

237

 

294

 

851

 

Interest and debt expense

 

(16,236

)

(18,270

)

(33,639

)

(36,448

)

Total other expense

 

(16,094

)

(18,033

)

(33,345

)

(35,597

)

 

 

 

 

 

 

 

 

 

 

(Loss) income before equity income

 

(51,526

)

38,953

 

88

 

77,483

 

 

 

 

 

 

 

 

 

 

 

Equity income

 

3,142

 

1,344

 

5,224

 

3,399

 

Net (loss) income

 

(48,384

)

40,297

 

5,312

 

80,882

 

Less: net loss (income) attributable to noncontrolling interest

 

58,156

 

(34,980

)

14,609

 

(69,716

)

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Buckeye GP Holdings L.P.

 

$

9,772

 

$

5,317

 

$

19,921

 

$

11,166

 

 

 

 

 

 

 

 

 

 

 

Net income per partnership unit:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.35

 

$

0.19

 

$

0.70

 

$

0.39

 

Diluted

 

$

0.35

 

$

0.19

 

$

0.70

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

28,300

 

28,300

 

28,300

 

28,300

 

Diluted

 

28,300

 

28,300

 

28,300

 

28,300

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



 

BUCKEYE GP HOLDINGS L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Assets:

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

26,302

 

$

61,281

 

Trade receivables, net

 

82,801

 

79,969

 

Construction and pipeline relocation receivables

 

16,646

 

21,501

 

Inventories

 

166,546

 

84,229

 

Derivative assets

 

19,901

 

97,375

 

Prepaid and other current assets

 

98,787

 

75,406

 

Total current assets

 

410,983

 

419,761

 

 

 

 

 

 

 

Property , plant and equipment, net

 

2,176,140

 

2,241,612

 

Equity investments

 

96,377

 

90,110

 

Goodwill

 

432,170

 

433,892

 

Intangible assets, net

 

42,346

 

44,114

 

Other non-current assets

 

26,409

 

33,608

 

Total assets

 

$

3,184,425

 

$

3,263,097

 

 

 

 

 

 

 

Liabilities and partners’ capital:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Line of credit

 

$

99,000

 

$

96,000

 

Current portion of long-term debt

 

6,236

 

6,294

 

Accounts payable

 

45,050

 

42,098

 

Derivative liabilities

 

27,650

 

48,623

 

Accrued and other current liabilities

 

128,476

 

116,464

 

Total current liabilities

 

306,412

 

309,479

 

 

 

 

 

 

 

Long-term debt

 

1,361,177

 

1,453,425

 

Other non-current liabilities

 

103,955

 

101,359

 

Total liabilities

 

1,771,544

 

1,864,263

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Buckeye GP Holdings L.P. capital:

 

 

 

 

 

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

 

7

 

7

 

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

 

227,947

 

226,565

 

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

 

3,066

 

3,037

 

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

 

2,557

 

2,451

 

Total Buckeye GP Holdings L.P. capital

 

233,577

 

232,060

 

Noncontrolling interest

 

1,179,304

 

1,166,774

 

Total partners’ capital

 

1,412,881

 

1,398,834

 

 

 

 

 

 

 

Total liabilities and partners’ capital

 

$

3,184,425

 

$

3,263,097

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



 

BUCKEYE GP HOLDINGS L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

5,312

 

$

80,882

 

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

 

 

 

 

 

Amortization of debt discount and unit-based compensation

 

2,812

 

1,515

 

Value of ESOP shares released

 

380

 

1,671

 

Depreciation and amortization

 

26,923

 

23,725

 

Asset impairment expense

 

72,540

 

 

Net changes in fair value of derivatives

 

4,672

 

 

Deferred lease expense

 

2,250

 

1,301

 

Reorganization expense

 

28,113

 

 

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

 

(5,224

)

(3,399

)

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

 

2,827

 

2,306

 

Amortization of RIGP and Retiree Medical Plan Costs

 

358

 

1,552

 

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

 

 

 

 

 

Trade receivables

 

(2,832

)

14,059

 

Construction and pipeline relocation receivables

 

4,855

 

(205

)

Inventories

 

(27,742

)

(19,505

)

Prepaid and other current assets

 

(17,692

)

(30,394

)

Accounts payable

 

5,236

 

8,431

 

Accrued and other current liabilities

 

(5,506

)

27,955

 

Other non-current assets

 

(7,069

)

(95

)

Other non-current liabilities

 

9,424

 

(1,320

)

Total adjustments from operating activities

 

94,325

 

27,597

 

Net cash provided by discontinued operations

 

 

572

 

Net cash provided by continuing operations

 

99,637

 

109,051

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(39,819

)

(32,501

)

Acquisitions and equity investments, net of cash acquired

 

(3,880

)

(610,616

)

Net expenditures for disposal of property, plant and equipment

 

21

 

(103

)

Proceeds from sale of discontinued operations

 

 

52,584

 

Net cash used in investing activities

 

(43,678

)

(590,636

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net proceeds from issuance of Buckeye Partners, L.P. limited partner units

 

104,779

 

113,148

 

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

 

38

 

278

 

Proceeds from issuance of long-term debt and borrowings under credit facilities

 

80,333

 

611,050

 

Payment of debt, net

 

(169,762

)

(186,387

)

Debt issuance costs

 

(18

)

(1,886

)

Distributions to non-controlling partners of Buckeye Partners, L.P.

 

(87,064

)

(77,338

)

Settlement payment of interest rate swaps

 

 

(9,638

)

Distributions to Limited Partners

 

(19,244

)

(16,556

)

Net cash (used in) provided by financing activities

 

(90,938

)

432,671

 

Net decrease in cash and cash equivalents

 

(34,979

)

(48,914

)

Cash and cash equivalents—Beginning of year

 

61,281

 

94,486

 

Cash and cash equivalents—End of period

 

$

26,302

 

$

45,572

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest (net of amount capitalized)

 

$

33,349

 

$

26,942

 

Capitalized interest

 

32,231

 

620

 

Cash paid for income tax

 

1,298

 

531

 

Non-cash changes in assets and liabilities:

 

 

 

 

 

Hedge accounting

 

907

 

6,751

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



 

BUCKEYE GP HOLDINGS L.P.

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)

 

 

 

Buckeye GP Holdings L.P. Unitholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

General

 

Limited

 

 

 

Gains on

 

 

 

 

 

 

 

Partner

 

Partners

 

 

 

Issuance of

 

 

 

 

 

 

 

Common

 

Common

 

Management

 

Buckeye’s

 

Noncontrolling

 

 

 

 

 

Units

 

Units

 

Units

 

LP Units

 

Interest

 

Total

 

Partners’ capital- January 1, 2008

 

$

7

 

$

232,928

 

$

3,156

 

$

2,239

 

$

1,066,143

 

$

1,304,473

 

Net income*

 

 

10,957

 

209

 

 

69,716

 

80,882

 

Distributions to Limited Partner - Common Units

 

 

(16,246

)

(310

)

 

 

(16,556

)

Recognition of unit-based compensation charges

 

 

684

 

11

 

 

 

695

 

Equity gains on issuance of Buckeye’s LP Units

 

 

 

 

212

 

(212

)

 

Net proceeds from issuance of 2.6 million of Buckeye’s LP Units

 

 

 

 

 

 

 

 

 

113,148

 

113,148

 

Amortization of Buckeye’s LP Unit options

 

 

 

 

 

274

 

274

 

Exercise of limited partner unit options

 

 

 

 

 

278

 

278

 

Services Company’s non-cash ESOP distributions

 

 

 

 

 

(2,759

)

(2,759

)

Acquired noncontrolling interest not previously owned

 

 

 

 

 

(1,539

)

(1,539

)

Distributions to noncontrolling interest

 

 

 

 

 

(77,338

)

(77,338

)

Other

 

 

 

 

 

2,286

 

2,286

 

Partners’ capital- June 30, 2008

 

$

7

 

$

228,323

 

$

3,066

 

$

2,451

 

$

1,169,997

 

$

1,403,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital-January 1, 2009

 

$

7

 

$

226,565

 

$

3,037

 

$

2,451

 

$

1,166,774

 

$

1,398,834

 

Net income*

 

 

19,547

 

374

 

 

(14,609

)

5,312

 

Distributions to Limited Partner - Common Units

 

 

(18,883

)

(361

)

 

 

(19,244

)

Recognition of unit-based compensation charges

 

 

718

 

16

 

 

 

734

 

Equity gains on issuance of Buckeye’s LP Units

 

 

 

 

 

106

 

(106

)

 

Net proceeds from issuance of 3.0 million of Buckeye’s LP Units

 

 

 

 

 

 

 

 

 

104,779

 

104,779

 

Amortization of Buckeye’s LP Unit options

 

 

 

 

 

477

 

477

 

Exercise of limited partner unit options

 

 

 

 

 

38

 

38

 

Services Company’s non-cash ESOP distributions

 

 

 

 

 

(3,122

)

(3,122

)

Distributions to noncontrolling interest

 

 

 

 

 

(87,064

)

(87,064

)

RIGP and Retiree Medical Plan settlement/curtailment charge

 

 

 

 

 

 

 

 

 

7,971

 

7,971

 

Other

 

 

 

 

 

4,166

 

4,166

 

Partners’ capital-June 30, 2009

 

$

7

 

$

227,947

 

$

3,066

 

$

2,557

 

$

1,179,304

 

$

1,412,881

 

 


*  Comprehensive income equals net income.

 

See accompanying notes to condensed consolidated financial statements.

 

6



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.               BASIS OF PRESENTATION

 

Buckeye GP Holdings L.P. (“BGH”) is a publicly traded (NYSE: BGH) master limited partnership organized on June 15, 2006 under the laws of the state of Delaware.  BGH owns 100% of Buckeye GP LLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”).  Buckeye is also a publicly traded (NYSE: BPL) master limited partnership that was organized in 1986 under the laws of the state of Delaware.  BGH’s limited partner units are owned approximately 62% by BGH GP Holdings, LLC (“BGH GP”), approximately 1% by certain members of senior management and approximately 37% by the public. BGH GP is owned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”), and certain investment funds along with certain members of senior management of Buckeye GP.  MainLine Management LLC, a Delaware limited liability company (“MainLine Management”), is the general partner of BGH, and is wholly owned by BGH GP.

 

BGH’s only business is the ownership of Buckeye GP.  Buckeye GP’s only business is the management of Buckeye and its subsidiaries.  At June 30, 2009, Buckeye GP owned an approximately 0.5% general partner interest in Buckeye.

 

Buckeye has 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 64 active products terminals that provide aggregate storage capacity of approximately 24.7 million barrels. In addition, Buckeye operates and maintains approximately 2,400 miles of other pipelines under agreements with major oil and chemical companies.  Buckeye also owns and operates a major natural gas storage facility in northern California which provides approximately 33 billion cubic feet (“Bcf”) of gas storage capacity and is a wholesale distributor of refined petroleum products in the northeastern and midwestern United States in areas also served by Buckeye’s pipelines and terminals.

 

Buckeye conducts business in five reportable operating segments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 18 for a more detailed discussion of Buckeye’s operating segments.

 

Buckeye Pipe Line Services Company (“Services Company”) was formed in 1996 in connection with the establishment of the Buckeye Pipe Line Services Company Employee Stock Ownership Plan (the “ESOP”).  At June 30, 2009, Services Company owned approximately 4.0% of the publicly traded limited partner units of Buckeye (the “LP Units”).  After the reorganization (as discussed in Note 3), Services Company will employ approximately 850 people who provide services to the operating subsidiaries through which Buckeye conducts its operations.  Approximately 15 people are employed directly by Buckeye’s operating subsidiary, Lodi Gas Storage, L.L.C. (“Lodi Gas”) and another approximately 16 people are employed by Buckeye’s operating subsidiary, Buckeye Albany Terminal LLC.  Pursuant to a services agreement entered into in December 2004 (the “Services Agreement”), the operating subsidiaries reimburse Services Company for the costs of the services it provides.  Pursuant to the Services Agreement and an Executive Employment Agreement, through December 31, 2008 executive compensation costs and related benefits paid to Buckeye GP’s four highest salaried officers were not reimbursed by Buckeye or its operating subsidiaries but were reimbursed to Services Company by BGH.  Effective January 1, 2009, Buckeye and its operating subsidiaries agreed to pay for all executive compensation and benefits earned by Buckeye GP’s four highest salaried officers in return for an annual fixed payment from BGH to Buckeye in the amount of $3.6 million.

 

BGH has determined that Services Company is a variable interest entity under the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN No. 46R”). Using criteria established in FIN No. 46R, BGH has determined that Buckeye GP is the primary beneficiary of Services Company, although 100% of the equity interest of Services Company is owned by the ESOP.  Accordingly, as required by FIN No. 46R, Services Company has been consolidated in the financial statements of BGH.

 

7



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

BGH’s condensed consolidated balance sheet includes a noncontrolling interest capital account that reflects the portion of Buckeye owned by its partners other than BGH and Services Company.  Similarly, BGH’s condensed consolidated statements of operations includes income attributable to noncontrolling interest that reflects the portion of the earnings due to Buckeye’s partners other than BGH and Services Company.

 

In June 2005, the Emerging Issues Task Force (“EITF”) of the FASB issued EITF Consensus 04-05 which requires general partners of a limited partnership to consolidate the limited partnership if the general partner is deemed to control the limited partnership. Using criteria established in EITF Consensus 04-05, BGH has determined that consolidation of Buckeye into BGH’s financial statements is appropriate.

 

In the opinion of management, the condensed consolidated financial statements of BGH, which are unaudited except that the balance sheet as of December 31, 2008 is derived from audited financial statements, include all adjustments, consisting of normal recurring accruals, necessary to present fairly BGH’s financial position as of June 30, 2009 along with the results of BGH’s operations for the three and six months ended June 30, 2009 and 2008 and BGH’s cash flows for the six months ended June 30, 2009 and 2008.  The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.

 

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

 

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of BGH and the notes thereto for the year ended December 31, 2008 contained in BGH’s Annual Report on Form 10-K as filed with the SEC on March 16, 2009.

 

Recently Adopted Accounting Pronouncements

 

On January 1, 2009, BGH adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  These accounting and reporting standards require for-profit entities that prepare consolidated financial statements to: (a) present noncontrolling interests as a component of equity, separate from the parent’s equity; (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the income statement; (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions; (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated; and (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interests of noncontrolling owners.  Accordingly, for periods presented in these condensed consolidated financial statements, BGH has reclassified its noncontrolling interest liability into partners’ capital on the condensed consolidated balance sheets and has separately presented and allocated income attributable to noncontrolling interests on the condensed consolidated statements of operations and condensed consolidated statements of partners’ capital.

 

On January 1, 2009, BGH adopted SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133,” and has included the expanded disclosures required by this statement in Note 11 to these condensed consolidated financial statements.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”).  The objective of SFAS 165 is to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet

 

8



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

date but before financial statements are issued or are available to be issued.  SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  SFAS 165 is effective for interim or annual periods ending after June 15, 2009. BGH implemented SFAS 165 during the quarter ended June 30, 2009 and evaluated for subsequent events through July 30, 2009, the issuance date of its financial statements. There were no subsequent events required to be recognized or disclosed in the financial statements through such date.

 

Recently Issued Accounting Pronouncements

 

In April 2009, the FASB issued FASB Staff Position No. SFAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP 141(R)-1”), to amend SFAS 141 (revised 2007) “Business Combinations.” FSP 141(R)-1 addresses the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met.  FSP 141(R)-1 also requires that a systematic and rational basis for subsequently measuring and accounting for such assets or liabilities be developed depending on their nature. FSP 141(R)-1 will be effective for assets or liabilities arising from contingencies in business combinations for acquisitions that are consummated on or after January 1, 2009 and, therefore, the adoption of FSP 141(R)-1 has no current impact on BGH’s condensed consolidated financial statements.

 

In June 2009, the FASB issued SFAS No.166, “Accounting for Transfers of Financial Assets — an Amendment of FASB Statement No. 140” (“SFAS 166”).  The objective of SFAS 166 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  SFAS 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. BGH is currently evaluating the impact the adoption of SFAS 166 will have on its condensed consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”).  The objective of SFAS 167 is to improve financial reporting by companies involved with variable interest entities.  SFAS 167 will require companies to perform an analysis to determine whether the companies’ variable interest or interests give it a controlling financial interest in a variable interest entity.  SFAS 167 is effective as of the beginning of each reporting company’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited. BGH is currently evaluating the impact the adoption of SFAS 167 will have on its condensed consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (the “Codification”). The Codification will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

 

9



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

Buckeye accounts for long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). This statement requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This statement also requires that long-lived assets and certain intangible assets to be disposed of be reported at the lower of the carrying amount or fair value less cost to sell. Buckeye considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, Buckeye measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimated fair value was based on a probability weighted combination of income and market approaches.

 

Buckeye owns and operates an approximately 350-mile natural gas liquids pipeline (the “Buckeye NGL Pipeline”) that runs from Wattenberg, Colorado to Bushton, Kansas. During the second quarter of 2009, Buckeye received notification that several of its shippers, which were currently using the Buckeye NGL Pipeline, intended to migrate to a competing pipeline, which recently went into service.  This notification was accompanied by a significant decline in shipment volumes as compared to historical averages. This loss in the customer base represented a triggering event pursuant to SFAS 144 and an impairment evaluation resulted in a charge to earnings of $72.5 million against the Pipeline Operations segment.

 

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

 

Net assets held for sale by Buckeye NGL Pipe Lines LLC are presented in Note 4.  The carrying amounts of the major classes of assets and liabilities at June 30, 2009 were as follows (in thousands):

 

Assets:

 

 

 

Inventories

 

$

604

 

Prepaid and other current assets

 

64

 

Property, plant and equipment, net

 

8,639

 

Assets held for sale

 

$

9,307

 

 

 

 

 

Liabilities:

 

 

 

Accounts payable

 

$

2,284

 

Accrued and other current liabilities

 

1,263

 

Liabilities held for sale

 

$

3,547

 

 

 

 

 

Net assets held for sale

 

$

5,760

 

 

Revenues for Buckeye NGL Pipe Lines LLC for the three and six months ended June 30, 2009 were $3.2 million and $6.5 million, respectively.

 

10



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3.  REORGANIZATION

 

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

 

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

 

As of June 30, 2009, Buckeye has recorded a reorganization expense of $28.1 million for the post-employment costs related to these restructuring activities which include: (1) termination benefits pursuant to voluntary and involuntary severance plans of $16.0 million; (2) post-retirement benefits (see note 17) of $8.0 million; and (3) other related costs of $4.1 million.  In connection with this organizational restructuring, Buckeye expects to incur additional expenses in 2009 that are estimated to be between $2.0 to $4.0 million.

 

The expense incurred by segment for both the three and six months ended June 30, 2009 is as follows (in thousands):

 

Pipeline Operations

 

$

23,054

 

Terminalling and Storage

 

2,402

 

Natural Gas Storage

 

291

 

Energy Services

 

944

 

Other Operations

 

1,422

 

Total

 

$

28,113

 

 

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Prepaid insurance

 

$

2,762

 

$

7,889

 

Insurance receivables

 

9,008

 

5,101

 

Ammonia receivable

 

8,554

 

12,058

 

Margin deposits

 

25,654

 

32,345

 

Prepaid services

 

20,853

 

 

Net assets held for sale

 

5,760

 

 

Other

 

26,196

 

18,013

 

Total

 

$

98,787

 

$

75,406

 

 

11



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5.  INVENTORIES

 

Inventories consist of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Refined petroleum products (Ending inventory was 84.0 million and 47.7 million gallons at June 30, 2009 and December 31, 2008, respectively)

 

$

151,754

 

$

69,568

 

Materials and supplies

 

14,792

 

14,661

 

Total

 

$

166,546

 

$

84,229

 

 

Buckeye generally maintains two types of inventory.  Within the Energy Services segment, Buckeye principally maintains refined petroleum products inventory, which consists primarily of gasoline, heating oil, and diesel fuel, which is valued at the lower of cost or market, unless such inventory is hedged.  At June 30, 2009 and December 31, 2008, 89% and 78% of the inventory was hedged, respectively. Hedged inventory is valued at current market prices with the change in value of the inventory reflected in the condensed consolidated statements of operations.  At June 30, 2009 and December 31, 2008, 8% and 17% of the inventory, respectively, was committed against fixed-priced sales contracts, and such inventory was valued at the lower of cost or market, respectively.  The remaining inventory was considered unhedged and represented approximately one day of sales.

 

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

 

6.  INTANGIBLE ASSETS, NET

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Customer relationships

 

$

38,300

 

$

38,300

 

Accumulated amortization

 

(4,146

)

(2,662

)

Net carrying amount

 

34,154

 

35,638

 

 

 

 

 

 

 

Customer contracts

 

11,800

 

11,800

 

Accumulated amortization

 

(3,608

)

(3,324

)

Net carrying amount

 

8,192

 

8,476

 

Total

 

$

42,346

 

$

44,114

 

 

For the three months ended June 30, 2009 and 2008, consolidated amortization expense related to intangible assets was $0.9 million and $0.1 million, respectively.  For the six months ended June 30, 2009 and 2008, consolidated amortization expense related to intangible assets was $1.8 million and $0.3 million, respectively.  Amortization expense related to intangible assets is expected to be approximately $3.8 million for each of the next five years.

 

12



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

7.  EQUITY INVESTMENTS

 

Equity investments consist of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Investment in West Shore Pipe Line Company (24.9% owned)

 

$

30,561

 

$

30,340

 

Investment in West Texas LPG Pipeline Limited Partnership (20.0% owned)

 

50,760

 

44,471

 

Investment in Muskegon Pipeline LLC (40.0% owned)

 

14,704

 

14,967

 

Investment in Transport4, LLC (25.0% owned)

 

352

 

332

 

Total

 

$

96,377

 

$

90,110

 

 

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

 

The following tables present the equity earnings for the unconsolidated affiliates noted above as well as unaudited summarized income statement information (on a 100% basis), for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Equity earnings:

 

 

 

 

 

 

 

 

 

Investment in West Shore Pipe Line Company

 

$

1,094

 

$

823

 

$

2,197

 

$

1,736

 

Investment in West Texas LPG Pipeline Limited Partnership

 

1,835

 

275

 

2,419

 

1,048

 

Investment in Muskegon Pipeline LLC

 

173

 

224

 

538

 

558

 

Total

 

$

3,102

 

$

1,322

 

$

5,154

 

$

3,342

 

 

 

 

 

 

 

 

 

 

 

Summarized income statement information:

 

 

 

 

 

 

 

 

 

Revenue

 

$

32,316

 

$

28,685

 

$

63,364

 

$

58,115

 

Costs and expenses

 

16,139

 

21,507

 

31,852

 

38,758

 

Non-operating expense

 

2,961

 

2,394

 

5,867

 

5,070

 

Net Income

 

13,216

 

4,784

 

25,645

 

14,287

 

 

13



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

8.  ACCRUED AND OTHER CURRENT LIABILITIES

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Taxes - other than income

 

$

15,622

 

$

14,092

 

Accrued employee benefit liability

 

2,297

 

2,297

 

Environmental liabilities

 

10,331

 

12,337

 

Interest

 

24,946

 

25,551

 

Retainage

 

1,718

 

1,405

 

Payable for ammonia purchase

 

2,498

 

9,373

 

Unearned revenue

 

12,520

 

12,186

 

Compensation and vacation

 

11,666

 

15,642

 

Accrued capital expenditures

 

4,037

 

4,902

 

Reorganization

 

18,787

 

 

Other

 

24,054

 

18,679

 

Total

 

$

128,476

 

$

116,464

 

 

9.  CONTINGENCIES

 

Claims and Proceedings

 

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

 

In March 2007, Buckeye was named as a defendant in an action entitled Madigan v. Buckeye Partners, L.P. filed in the U.S. District Court for the Central District of Illinois. The action was brought by the State of Illinois Attorney General acting on behalf of the Illinois Environmental Protection Agency. The complaint alleges that Buckeye violated various Illinois state environmental laws in connection with a product release from Buckeye’s terminal located in Harristown, Illinois on or about June 11, 2006 and various other product releases from Buckeye’s terminals and pipelines in the State of Illinois during the period of 2001 through 2006. The complaint seeks to recover state oversight costs, damages, and civil penalties and seeks injunctive action requiring Buckeye to remediate the environmental contamination resulting from the product releases. Buckeye believes it has meritorious defenses to the allegations set forth in the complaint.

 

Environmental Contingencies

 

In accordance with its accounting policy, Buckeye recorded operating expenses of $1.2 million and $2.7 million for the three months ended June 30, 2009 and 2008, respectively, and $6.6 million and $4.6 million for the six months ended June 30, 2009 and 2008, respectively, related to environmental contingencies unrelated to claims and proceedings.

 

Ammonia Contract Contingencies

 

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

 

14



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

ammonia contracts have resulted in ammonia costs exceeding ammonia sales proceeds.  The amount of the shortfall generally increases as the market price of ammonia increases.

 

EPME has informed BGC that, notwithstanding the parties’ agreement, it will not continue to pay BGC for shortfalls created by the pass-through of ammonia costs in excess of ammonia revenues.  EPME encouraged BGC to seek payment by invoking the $40.0 million guaranty made by El Paso which guaranteed EPME’s obligations to BGC.  If EPME fails to reimburse BGC for these shortfalls for a significant period during the remainder of the term of the ammonia agreements, then such unreimbursed shortfalls could exceed the $40.0 million cap on El Paso’s guaranty.  To the extent the unreimbursed shortfalls significantly exceed the $40.0 million cap, the resulting costs incurred by BGC could adversely affect Buckeye’s financial position, results of operations, and cash flows.  To date, BGC has continued to receive payment for ammonia costs under the contracts at issue. BGC has not called on El Paso’s guaranty and believes only BGC may invoke the guaranty.  EPME, however, contends that El Paso’s guaranty is the source of payment for the shortfalls, but has not clarified the extent to which it believes the guaranty has been exhausted.  Given the uncertainty of future ammonia prices and EPME’s future actions, Buckeye is unable to estimate the amount of any such losses.  Accordingly, Buckeye has recorded no provision for losses in the accompanying condensed consolidated financial statements because it is unable to determine whether or not a loss has been incurred or, if a loss has been incurred, a reasonable estimate or range of estimates of the amount of such losses.  Buckeye is assessing its options, including potential recourse against EPME and El Paso, with respect to this matter.

 

15



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

10.  DEBT AND CREDIT FACILITIES

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

BGH:

 

 

 

 

 

BGH Credit Agreement

 

$

 

$

 

Services Company:

 

 

 

 

 

3.60% ESOP Notes due March 28, 2011

 

11,098

 

14,255

 

Retirement premium

 

(263

)

(258

)

Buckeye:

 

 

 

 

 

4.625% Notes due July 15, 2013*

 

300,000

 

300,000

 

6.750% Notes due August 15, 2033*

 

150,000

 

150,000

 

5.300% Notes due October 15, 2014*

 

275,000

 

275,000

 

5.125% Notes due July 1, 2017*

 

125,000

 

125,000

 

6.050% Notes due January 15, 2018*

 

300,000

 

300,000

 

Borrowings under the Credit Facility

 

209,000

 

298,267

 

Total term debt

 

$

1,369,835

 

$

1,462,264

 

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

 

(2,422

)

(2,545

)

 

 

 

 

 

 

Subtotal long- term debt

 

1,367,413

 

1,459,719

 

Less: current portion of long-term debt

 

(6,236

)

(6,294

)

 

 

 

 

 

 

Total long-term debt

 

$

1,361,177

 

$

1,453,425

 

 


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

(1)          The June 30, 2009 and December 31, 2008 amounts include $0.9 million and $1.1 million, respectively, related to an adjustment to fair value associated with a hedge of fair value and ($3.3) million and ($3.6) million, respectively, in unamortized discounts.

 

The fair value of debt was estimated to be $1,307.1 million at June 30, 2009 and $1,285.2 million at December 31, 2008.  The fair values at June 30, 2009 and December 31, 2008 were estimated primarily by comparing the historic market prices of Buckeye’s publicly issued debt with the market prices of other master limited partnerships’ publicly issued debt with similar credit ratings and terms.

 

BGH Credit Agreement

 

BGH is party to a five-year, $10.0 million unsecured revolving credit facility with SunTrust Bank, as both administrative agent and lender (the “BGH Credit Agreement”). The BGH Credit Agreement may be used for working capital and other partnership purposes. BGH has pledged all of the limited liability company interests in Buckeye GP as security for its obligations under the BGH Credit Agreement.  Borrowings under the BGH Credit Agreement bear interest under one of two rate options, selected by BGH, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime commercial lending rate; or (ii) the London Interbank Official Rate (“LIBOR”), plus a margin which can range from 0.40% to 1.40%, based on the ratings assigned by Standard & Poor’s Rating Services and Moody’s Investor Services to the senior unsecured non-credit enhanced long-term debt of BGH.  BGH did not have amounts outstanding under the BGH Credit Agreement at June 30, 2009 and December 31, 2008.

 

16



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The BGH Credit Agreement requires BGH to maintain leverage and funded debt coverage ratios. The leverage ratio covenant requires BGH to maintain, as of the last day of each fiscal quarter, a ratio of the total funded indebtedness of BGH and its Restricted Subsidiaries (as defined below), measured as of the last day of each fiscal quarter, to the aggregate dividends and distributions received by BGH and its Restricted Subsidiaries from Buckeye, plus all other cash received by BGH and the Restricted Subsidiaries, measured for the preceding twelve months, less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “Restricted Subsidiaries” as certain of BGH’s wholly owned subsidiaries.  The funded debt coverage ratio covenant requires BGH to maintain, as of the last day of each fiscal quarter, a ratio of total consolidated funded debt of BGH and all of its subsidiaries to the consolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and all of its subsidiaries, measured for the preceding twelve months, of not more than 5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 in connection with future acquisitions. At June 30, 2009, BGH’s funded debt coverage ratio was 4.55 to 1.00.

 

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

 

Services Company Notes

 

Services Company had total debt outstanding of $10.8 million and $14.0 million at June 30, 2009 and December 31, 2008, respectively, consisting of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-party lender. The 3.60% ESOP Notes were issued on May 4, 2004.  The 3.60% ESOP Notes are collateralized by Services Company’s common stock and are guaranteed by Services Company. In addition, Buckeye has committed that, in the event that the value of Buckeye’s LP Units owned by Services Company falls below 125% of the balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficient assets to bring the value of the total collateral (the value of Buckeye’s LP Units owned by Services Company and the escrow account) up to the 125% minimum. Amounts deposited in the escrow account are returned to Buckeye when the value of Buckeye’s LP Units owned by Services Company returns to an amount that exceeds the 125% minimum. At June 30, 2009, the value of Buckeye’s LP Units owned by Services Company exceeded the 125% requirement.

 

Credit Facility

 

Buckeye has a borrowing capacity of $600.0 million (including Lehman Brothers Bank, FSB’s $20.0 million commitment as a lender, which is discussed below) under an unsecured revolving credit agreement (the “Credit Facility”), which may be expanded up to $800.0 million subject to certain conditions and upon the further approval of the lenders.   The Credit Facility’s maturity date is August 24, 2012, which may be extended by Buckeye for up to two additional one-year periods. Borrowings under the Credit Facility bear interest under one of two rate options, selected by Buckeye, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin, or (ii) LIBOR plus an applicable margin. The applicable margin is determined based on the current utilization level of the Credit Facility and ratings assigned by Standard & Poor’s and Moody’s Investor Services for Buckeye’s senior unsecured non-credit enhanced long-term debt.  At June 30, 2009 and December 31, 2008, Buckeye had $209.0 million and $298.3 million outstanding under the Credit Facility, respectively.  At June 30, 2009 and December 31, 2008, Buckeye had committed $1.4 million and $1.3 million in support of letters of credit, respectively.  The obligations for letters of credit are not reflected as debt on Buckeye’s condensed consolidated balance sheet.  The weighted average interest rate for borrowings outstanding under the Credit Facility was 0.63% at June 30, 2009.

 

17



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to 1.00 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA, which is defined in the Credit Facility as earnings before interest, taxes, depreciation, depletion and amortization, and other adjustments as defined therein, in each case excluding the income of certain majority-owned subsidiaries of Buckeye and equity investments (but including distributions from those majority-owned subsidiaries and equity investments).  At June 30, 2009, Buckeye’s Funded Debt Ratio was 4.3 to 1.00.  As permitted by the Credit Facility, $99.0 million of borrowings by Buckeye Energy Services LLC (“BES”) under its separate credit agreement (discussed below) and $72.5 million related to the Buckeye NGL Pipeline impairment were excluded from the calculation of the Funded Debt Ratio.

 

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

 

Lehman Brothers Bank, FSB, an affiliate of Lehman Brothers Holdings Inc. (“Lehman Brothers”), has committed, as a lender under the Credit Facility, 3.3%, or $20.0 million, of Buckeye’s $600.0 million borrowing capacity under the Credit Facility but has not honored that commitment since October 2008. Buckeye does not believe that the reduction in capacity under the Credit Facility resulting from the unavailability of Lehman Brothers Bank, FSB’s commitment will impair Buckeye’s ability to meet its liquidity needs.  At June 30, 2009, approximately $4.3 million of the outstanding balance of the Credit Facility related to amounts previously funded by Lehman Brothers Bank, FSB.

 

BES Credit Agreement

 

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

 

The balances outstanding under the BES Credit Agreement were approximately $99.0 million and $96.0 million at June 30, 2009 and December 31, 2008, respectively, all of which were classified as current liabilities.  The BES Credit Agreement requires BES to meet certain financial covenants, which are 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

 

 

18



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

At June 30, 2009, BES’s Consolidated Tangible Net Worth (as defined in the BES Credit Agreement) and Consolidated Net Working Capital (as defined in the BES Credit Agreement) were $118.6 million and $75.5 million, respectively, and the Consolidated Leverage Ratio (as defined in the BES Credit Agreement) was 1.44 to 1.0.  The weighted average interest rate for borrowing outstanding under the BES Credit Agreement was 2.1% at June 30, 2009.

 

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

 

11.  FINANCIAL INSTRUMENTS

 

Commodity Derivatives

 

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

 

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

 

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

 

Finance Derivatives

 

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

 

In October 2008, Buckeye borrowed approximately $50.0 million under the Credit Facility.  In order to hedge its variable interest rate risk with respect to the amount borrowed, Buckeye concurrently entered into an interest rate swap agreement for a notional amount of $50.0 million.  Under the swap agreement, Buckeye paid a fixed rate of interest of 3.15% for 180 days and, in exchange, received a series of six monthly payments based on the 30-day LIBOR rate in effect at the beginning of each monthly period. The amounts received by Buckeye corresponded to the 30-day LIBOR rates that Buckeye paid on the $50.0 million borrowed under the Credit Facility.  The swap settled on April 20, 2009.  Buckeye had designated the swap agreement as a cash flow hedge on December 3, 2008.  Changes in value between the trade date and the designation date were recognized in earnings. On April 21, 2009, Buckeye entered into a new interest rate swap agreement for an additional 180 days on the same terms, except that Buckeye agreed to pay a fixed interest rate of 0.63%.

 

19



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In January 2009, Buckeye entered into an additional interest rate swap agreement to hedge its variable-rate risk on an additional $50.0 million in borrowings under the Credit Facility. Under the swap agreement, Buckeye is paying a fixed interest rate of 0.81% for 180 days and, in exchange, is receiving a series of six monthly payments based on the 30-day LIBOR rate in effect at the beginning of each monthly period. The amounts received by Buckeye correspond to the 30-day LIBOR rates that Buckeye pays on the additional $50.0 million borrowed under the Credit Facility. The swap will settle on the maturity date of the last 30-day LIBOR period. Buckeye designated the swap agreement as a cash flow hedge at inception.

 

For both interest rate swap agreements, Buckeye expects the changes in value of the interest rate swap agreements to be highly correlated with the changes in value of the underlying borrowing.

 

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

 

 

 

June 30, 2009

 

 

 

 

 

 

 

Derivative

 

 

 

Assets

 

(Liabilities)

 

Net Carrying

 

 

 

Fair value

 

Fair value

 

Value

 

 

 

 

 

 

 

 

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

 

 

Fixed-price sales contracts

 

$

17,061

 

$

(4,302

)

$

12,759

 

Futures contracts for fixed-price sales contracts

 

11,073

 

(6,565

)

4,508

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Futures contracts for inventory

 

$

1,515

 

$

(26,155

)

$

(24,640

)

Futures contract for natural gas

 

 

(376

)

(376

)

Interest rate contracts

 

 

(52

)

(52

)

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

(7,801

)

 

 

 

June 30,

 

 

 

2009

 

Balance Sheet Locations:

 

 

 

Derivative assets

 

$

19,901

 

Derivative liabilities

 

(27,650

)

Accrued and other current liabilities

 

(52

)

 

 

 

 

Total

 

$

(7,801

)

 

Substantially all of the unrealized loss of $24.6 million at June 30, 2009 for inventory hedges represented by futures contracts will be realized by the first quarter of 2010 as the related inventory is sold.  Gains recorded on inventory hedges that were ineffective were approximately $3.3 million and $7.6 million for the three and six months ended June 30, 2009, respectively.  As of June 30, 2009, open petroleum derivative contracts (represented by the fixed-price sales contracts and futures contracts for fixed-price sales contracts noted above) varied in duration, but did not extend beyond December 2010.  In addition, at June 30, 2009, Buckeye had refined product inventories which it intends to use to satisfy a portion of the fixed-price sales contracts.

 

20



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

 

 

Gain or (Loss) Recognized in

 

 

 

Income on Derivatives

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2009

 

June 30, 2009

 

Derivatives NOT designated as hedging instruments:

 

 

 

 

 

Product sales *

 

$

13,866

 

$

571

 

 

 

 

 

 

 

Cost of product sales *

 

$

(19,007

)

$

(11,461

)

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Cost of product sales *

 

$

31,251

 

$

27,429

 

Cost of product sales - hedged inventory

 

$

(31,183

)

$

(55,179

)

 


* Commodity contracts

 

12.  FAIR VALUE MEASUREMENTS

 

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

 

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

 

Level 2:  Level 2 inputs include the following:

 

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

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

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

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

 

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

 

21



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

Recurring

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

Significant

 

 

 

Significant

 

 

 

Quoted Prices

 

Other

 

Quoted Prices

 

Other

 

 

 

in Active

 

Observable

 

in Active

 

Observable

 

 

 

Markets

 

Inputs

 

Markets

 

Inputs

 

 

 

(Level 1)

 

(Level 2)

 

(Level 1)

 

(Level 2)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

4,508

 

$

15,769

 

$

25,225

 

$

79,322

 

Asset held in trust

 

1,793

 

 

3,648

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

 

(52

)

 

(333

)

Commodity derivatives

 

(24,640

)

(3,010

)

(50,806

)

(1,045

)

Total

 

$

(18,339

)

$

12,707

 

$

(21,933

)

$

77,944

 

 

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

 

The commodity derivative assets of $15.8 million and $79.3 million as of June 30, 2009 and December 31, 2008, respectively, are net of credit valuation adjustments (“CVA”) of ($0.8) million and ($0.6) million, respectively.  Because few of the Energy Services segment’s customers entering into these fixed-price sales contracts are large organizations with nationally-recognized credit ratings, the Energy Services segment determined that a CVA, which is based on the credit risk of such contracts, is appropriate.  The CVA is based on the historical and expected payment history of each customer, the amount of product contracted for under the agreement, and the customer’s historical and expected purchase performance under each contract.

 

Non-Recurring

 

In addition, the net assets held for sale of $5.8 million, as discussed in Note 2, are Level 3 assets and liabilities and are measured at fair value on a nonrecurring basis and are subject to fair value adjustments only in certain circumstances. The estimated fair value was based on a probability weighted combination of income and market approaches as disclosed in Note 2.

 

13.  EARNINGS PER PARTNERSHIP UNIT

 

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

 

22



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table is a reconciliation of the weighted average number of partnership units used in the basic and diluted earnings per partnership unit calculations for the three and six months ended June 30, 2009 and 2008 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding

 

27,770

 

27,770

 

27,770

 

27,770

 

Weighted average management units outstanding

 

530

 

530

 

530

 

530

 

Units for basic

 

28,300

 

28,300

 

28,300

 

28,300

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Units used for basic calculation

 

28,300

 

28,300

 

28,300

 

28,300

 

Dilutive effect of additional management units

 

 

 

 

 

Units for diluted

 

28,300

 

28,300

 

28,300

 

28,300

 

 

14.  CASH DISTRIBUTIONS

 

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

 

On July 28, 2009, MainLine Management declared a quarterly cash distribution of $0.37 per unit to be paid on August 31, 2009 to unitholders of record on August 7, 2009. This distribution is expected to be approximately $10.5 million.

 

15.  RELATED PARTY TRANSACTIONS

 

Buckeye incurred a senior administrative charge (the “charge”) for certain management services performed by affiliates of Buckeye GP of $0.5 million for the three months ended June 30, 2008, and $0.5 million and $0.9 million for the six months ended June 30, 2009 and 2008, respectively. The charge was waived indefinitely on April 1, 2009.  As a result, there was no charge recorded in the second quarter of 2009.

 

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

 

16.  UNIT-BASED COMPENSATION PLANS

 

BGH GP’s Override Units

 

Effective on June 25, 2007, BGH GP instituted an equity incentive plan for certain members of senior management of BGH GP and BGH.  This equity incentive plan includes both time-based and performance-based participation in the equity of BGH GP (but not in BGH) referred to as “Override Units”.  BGH determined that, under the requirements of SFAS 123R, “Share-Based Payment” (“SFAS 123R”), BGH is required to reflect, as compensation expense and a corresponding contribution to Unitholders’ equity, the fair value of this compensation measured under the provisions of SFAS 123R.  Compensation expense with respect to the Override Units was $0.4 million for both three month periods ended June 30, 2009 and 2008, and $0.7 million for both six month periods ended June 30, 2009 and 2008.  BGH is not the sponsor of this plan and has no liabilities with respect to it.

 

23



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

 

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

 

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

 

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

 

There have been no Override Units granted in 2009.  The following is a summary of the activity of the Override Units as of June 30, 2009 (in thousands, except per unit amounts):

 

 

 

Number of Override Units

 

Total Number

 

 

 

Value A Units

 

Value B Units

 

Operating
Units

 

of Units
Awarded

 

Granted June 25, 2007

 

1,530

 

1,530

 

1,530

 

4,590

 

Forfeited in 2007

 

(149

)

(149

)

(149

)

(447

)

Outstanding at December 31, 2007

 

1,381

 

1,381

 

1,381

 

4,143

 

Granted in the first quarter of 2008

 

297

 

297

 

297

 

891

 

Granted in the third quarter of 2008

 

85

 

85

 

85

 

255

 

Forfeited in the second quarter of 2009

 

(170

)

(170

)

(170

)

(510

)

Outstanding at June 30, 2009

 

1,593

 

1,593

 

1,593

 

4,779

 

 

 

 

Compensation Costs for Override Units

 

 

 

 

 

Value A Units

 

Value B Units

 

Operating
Units

 

Totals

 

Total fair value of all outstanding Override Units

 

$

3,664

 

$

2,163

 

$

5,861

 

$

11,688

 

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

 

 

 

2,746

 

2,746

 

Estimated future compensation costs at June 30, 2009

 

$

3,664

 

$

2,163

 

$

3,115

 

$

8,942

 

 

June 30, 2009

 

Value A

 

Value B

 

Operating

 

Weighted average fair value per Override Unit granted

 

$

2.07

 

$

1.17

 

$

3.42

 

 

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

 

24



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Override Units were valued using the Monte Carlo simulation method that incorporated the market-based vesting condition into the grant date fair value of the unit awards as required by SFAS 123R.  The Monte Carlo simulation is a procedure to estimate the future equity value from the time of the valuation dates to the exit event.  The following assumptions were used in the first six months of 2008:

 

 

 

June 30,

 

 

 

2008

 

Current equity value (in millions)

 

$

439.0

 

Expected life in years

 

5.5

 

Risk-free interest rate

 

4.92

%

Volatility

 

26.0

%

Dividends

 

$

0.00

 

 

Buckeye’s Long-Term Incentive Plan

 

On March 20, 2009, Buckeye’s 2009 Long-Term Incentive Plan (the “LTIP”) became effective.  The LTIP, which is administered by the Compensation Committee of the Board of Directors of Buckeye GP (the “Compensation Committee”), provides for the grant of phantom units (“Phantom Units”), performance units (“Performance Units”) and in certain cases distribution equivalent rights (“DERs”) which provide the participant a right to receive payments based on distributions made by Buckeye on the LP Units. Phantom Units are notional LP Units whose vesting is subject to service-based restrictions or other conditions established by the Compensation Committee in its discretion.  Phantom Units entitle a participant to receive an LP Unit, without payment of an exercise price, upon vesting.  Performance Units are notional LP Units whose vesting is subject to the attainment of one or more performance goals, and which entitle a participant to receive LP Units, without payment of an exercise price, upon vesting. DERs are rights to receive a cash payment per Phantom Unit or Performance Unit, as applicable, equal to the per unit cash distribution paid by Buckeye on its LP Units. Generally, all LTIP awards granted automatically vest upon a change of control, as defined in the LTIP.

 

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

 

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

 

25



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2009 LTIP Awards

 

On April 30, 2009, the Compensation Committee granted 43,755 Phantom Units to employees, 18,000 Phantom Units to independent directors, and 87,520 Performance Units to employees. The vesting period for the Phantom Units is one year or three years of service for grants to directors or employees, respectively.  The vesting criteria for the Performance Units is three years of service and the attainment of a performance goal (by Buckeye), defined in the award agreements as “distributable cash flow”, over the three-year period.

 

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

 

The following table sets forth the LTIP activity for the six months ended June 30, 2009:

 

 

 

LTIP Units

 

 

 

 

 

Outstanding, January 1, 2009

 

 

Granted (1)

 

149,275

 

Vested

 

 

Forfeited

 

 

Outstanding, June 30, 2009 (2)

 

149,275

 

 


(1)          The weighted average price per unit for the 2009 Phantom Unit and Performance Unit awards on the date of grant of April 30, 2009, which is utilized in the calculation of compensation expense, was $39.06.

(2)          The aggregate intrinsic value of all outstanding LTIP units at June 30, 2009 was approximately $6.4 million.

 

At June 30, 2009, Buckeye had approximately $4.9 million of unrecognized compensation expense related to unvested outstanding awards under the LTIP based upon the grant-date fair value of the awards.

 

Buckeye’s Unit Option Plan

 

Buckeye also sponsors the Unit Option and Distribution Equivalent Plan (the “Option Plan”), pursuant to which it historically granted to employees options to purchase LP Units at the market price of the LP Units on the date of grant. Generally, the options vest three years from the date of grant and expire ten years from the date of grant.

 

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

 

26



 

BUCKEYE GP HOLDINGS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

17.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

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

 

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

 

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

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

207

 

$

352

 

$

105

 

$

233

 

Interest cost

 

369

 

478

 

491

 

694

 

Expected return on plan assets

 

(189

)

(468

)

 

 

Amortization of prior service benefit

 

(118

)

(218

)

(859

)

(1,124

)

Amortization of unrecognized losses

 

355

 

155

 

261

 

410

 

Settlement/ curtailment charge (1)

 

7,171

 

 

800

 

 

Net periodic benefit costs

 

$

7,795

 

$

299

 

$

798

 

$

213

 

 

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

 

 

 

RIGP

 

Retiree Medical Plan

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

415

 

$

705