UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-9356

Buckeye Partners, L.P.

(Exact name of registrant as specified in its charter)

Delaware		23-2432497
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification number)
One Greenway Plaza
Suite 600
Houston, TX		77046
(Address of principal executive offices)		(Zip Code)

     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 þ 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 þ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     Limited partner units outstanding as of November 2, 2010: 51,554,116

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)			2
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)			3
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)			5
Condensed Consolidated Statements of Partners’ Capital (Deficit) for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)			6
Notes to Unaudited Condensed Consolidated Financial Statements:
1. Organization and Basis of Presentation			7
2. Acquisitions and Disposition			9
3. Commitments and Contingencies			9
4. Inventories			12
5. Prepaid and Other Current Assets			12
6. Equity Investments			13
7. Intangible Assets			13
8. Other Non-Current Assets			14
9. Accrued and Other Current Liabilities			14
10. Debt Obligations			15
11. Other Non-Current Liabilities			17
12. Accumulated Other Comprehensive Income (Loss)			18
13. Derivative Instruments, Hedging Activities and Fair Value Measurements			18
14. Pensions and Other Postretirement Benefits			24
15. Unit-Based Compensation Plans			25
16. Related Party Transactions			27
17. Partners’ Capital and Distributions			28
18. Earnings Per Limited Partner Unit			28
19. Business Segments			30
20. Supplemental Cash Flow Information			33
21. Subsequent Events			33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			54
Item 4. Controls and Procedures			57
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 6. Exhibits			58
EXHIBIT 10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per limited partner 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			67,287				65,537				200,556				207,639
Depreciation and amortization			16,177				14,253				47,607				43,408
Asset impairment expense			—				—				—				72,540
General and administrative			9,549				8,186				30,059				24,625
Reorganization expense			—				996				—				29,109
Total costs and expenses			653,261				347,479				1,906,852				1,079,944
Operating income			81,596				75,965				226,455				111,560
Other income (expense):
Earnings from equity investments			3,391				3,807				8,807				9,031
Interest and debt expense			(22,014	)			(20,543	)			(64,825	)			(53,780	)
Other income			140				364				379				631
Total other expense			(18,483	)			(16,372	)			(55,639	)			(44,118	)
Net income			63,113				59,593				170,816				67,442
Less: net income attributable to noncontrolling interests			(1,950	)			(1,704	)			(5,533	)			(4,164	)
Net income attributable to Buckeye Partners, L.P.		$	61,163			$	57,889			$	165,283			$	63,278
Allocation of net income attributable to Buckeye Partners, L.P.:
Net income allocated to general partner		$	13,113			$	12,242			$	38,405			$	35,363
Net income allocated to limited partners		$	48,050			$	45,647			$	126,878			$	27,915
Earnings Per Limited Partner Unit:
Basic		$	0.93			$	0.89			$	2.45			$	0.55
Diluted		$	0.93			$	0.89			$	2.45			$	0.55
Weighted average number of limited partner units outstanding:
Basic			51,541				51,374				51,508				50,351
Diluted			51,541				51,538				51,508				50,516

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income		$	63,113			$	59,593			$	170,816			$	67,442
Other comprehensive income (loss):
Change in value of derivatives			(22,172	)			(2,505	)			(58,772	)			(1,962	)
Amortization of interest rate swaps			241				240				723				720
Amortization of benefit plan costs			(288	)			(776	)			(856	)			(1,134	)
Adjustment to funded status of benefit plans			—				(1,570	)			—				6,400
Total other comprehensive income (loss)			(22,219	)			(4,611	)			(58,905	)			4,024
Comprehensive income		$	40,894			$	54,982			$	111,911			$	71,466

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except unit amounts)
(Unaudited)

		September 30,				December 31,
		2010				2009
Assets:
Current assets:
Cash and cash equivalents		$	13,302			$	34,599
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			73,436				103,691
Total current assets			499,601				613,723
Property, plant and equipment, net			2,238,985				2,228,265
Equity investments			108,143				96,851
Goodwill			208,876				208,876
Intangible assets, net			41,817				45,157
Other non-current assets			40,229				62,777
Total assets		$	3,137,651			$	3,255,649
Liabilities and partners’ capital:
Current liabilities:
Line of credit		$	211,800			$	239,800
Accounts payable			56,179				56,525
Derivative liabilities			10,978				14,665
Accrued and other current liabilities			104,809				106,743
Total current liabilities			383,766				417,733
Long-term debt			1,441,287				1,498,970
Long-term derivative liabilities			40,910				—
Other non-current liabilities			108,763				102,851
Total liabilities			1,974,726				2,019,554
Commitments and contingent liabilities			—				—
Partners’ capital:
Buckeye Partners, L.P. unitholders’ capital:
General Partner (243,914 units outstanding as of September 30, 2010 and December 31, 2009)			1,754				1,849
Limited Partners (51,553,116 and 51,438,265 units outstanding as of September 30, 2010 and December 31, 2009, respectively)			1,198,319				1,214,136
Accumulated other comprehensive loss			(59,752	)			(847	)
Total Buckeye Partners, L.P. unitholders’ capital			1,140,321				1,215,138
Noncontrolling interests			22,604				20,957
Total partners’ capital			1,162,925				1,236,095
Total liabilities and partners’ capital		$	3,137,651			$	3,255,649

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net income		$	170,816			$	67,442
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			47,607				43,408
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			(8,807	)			(9,031	)
Distributions from equity investments			11,027				4,281
Amortization of other non-cash items			6,593				3,776
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			31,110				(21,718	)
Accounts payable			(346	)			(1,727	)
Accrued and other current liabilities			(4,155	)			10,682
Other non-current assets			2,101				(15,819	)
Other non-current liabilities			2,736				9,626
Total adjustments from operating activities			127,268				4,148
Net cash provided by operating activities			298,084				71,590
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 limited partner units			—				104,633
Proceeds from exercise of limited partner unit options			4,275				1,901
Issuance of long-term debt			—				273,210
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			(3,167	)			—
Distributions paid to noncontrolling interests			(3,886	)			(4,352	)
Distributions paid to partners			(185,750	)			(170,406	)
Net cash used in financing activities			(277,773	)			(41,819	)
Net decrease in cash and cash equivalents			(21,297	)			(31,664	)
Cash and cash equivalents — Beginning of period			34,599				58,843
Cash and cash equivalents — End of period		$	13,302			$	27,179

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL (DEFICIT)
(In thousands)
(Unaudited)

		Buckeye Partners, L.P. Unitholders
										Accumulated
										Other
		General				Limited				Comprehensive				Noncontrolling
		Partner				Partners				Income (Loss)				Interests				Total
Balance — January 1, 2009		$	(6,680	)		$	1,201,144			$	(18,967	)		$	20,775			$	1,196,272
Net income			35,363				27,915				—				4,164				67,442
Change in value of derivatives			—				—				(1,962	)			—				(1,962	)
Amortization of interest rate swaps			—				—				720				—				720
Adjustment to funded status of benefit plans			—				—				6,400				—				6,400
Amortization of benefit plan costs			—				—				(1,134	)			—				(1,134	)
Distributions paid to partners			(34,372	)			(136,034	)			—				—				(170,406	)
Distributions paid to noncontrolling interests			—				—				—				(4,352	)			(4,352	)
Net proceeds from the issuance of limited partner units			—				104,633				—				—				104,633
Amortization of unit-based compensation awards			—				1,210				—				—				1,210
Exercise of limited partner unit options			—				1,901				—				—				1,901
Balance — September 30, 2009		$	(5,689	)		$	1,200,769			$	(14,943	)		$	20,587			$	1,200,724
Balance — January 1, 2010		$	1,849			$	1,214,136			$	(847	)		$	20,957			$	1,236,095
Net income			38,405				126,878				—				5,533				170,816
Costs associated with agreement and plan of merger			—				(4,129	)			—				—				(4,129	)
Change in value of derivatives			—				—				(58,772	)			—				(58,772	)
Amortization of interest rate swaps			—				—				723				—				723
Amortization of benefit plan costs			—				—				(856	)			—				(856	)
Distributions paid to partners			(38,500	)			(147,250	)			—				—				(185,750	)
Distributions paid to noncontrolling interests			—				—				—				(3,886	)			(3,886	)
Non-cash accrual for distribution equivalent rights			—				(744	)			—				—				(744	)
Amortization of unit-based compensation awards			—				5,159				—				—				5,159
Exercise of limited partner unit options			—				4,275				—				—				4,275
Other			—				(6	)			—				—				(6	)
Balance — September 30, 2010		$	1,754			$	1,198,319			$	(59,752	)		$	22,604			$	1,162,925

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Partnership Organization

     Buckeye Partners, L.P. is a publicly traded Delaware master limited partnership (“MLP”), the limited partner units (“LP Units”) of which are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “BPL.” As used in these Notes to Unaudited Condensed Consolidated Financial Statements, “we,” “us,” “our” and “Buckeye” mean Buckeye Partners, L.P. and, where the context requires, includes our subsidiaries.

     We were formed in 1986 and own and operate 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, we operate and maintain approximately 2,400 miles of other pipelines under agreements with major oil and gas, petrochemical and chemical companies, and perform certain engineering and construction management services for third parties. We also own and operate a major natural gas storage facility in northern California, and are a wholesale distributor of refined petroleum products in the United States in areas also served by our pipelines and terminals. We operate and report in five business segments: Pipeline Operations; Terminalling & Storage; Natural Gas Storage; Energy Services; and Development & Logistics.

     Buckeye GP LLC (“Buckeye GP”) is our general partner. Buckeye GP is a wholly owned subsidiary of Buckeye GP Holdings L.P. (“BGH”), a Delaware MLP that is also publicly traded on the NYSE under the ticker symbol “BGH.”

     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 our LP Units. Services Company employees provide services to our operating subsidiaries. Pursuant to a services agreement entered into in December 2004 (the “Services Agreement”), our 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 BGH, its general partner and Grand Ohio, LLC (“Merger Sub”), our 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 our general partner will be cancelled, the general partner units held by our general partner (representing an approximate 0.5% general partner interest in us) will be converted to a non-economic general partner interest, all of the economic interest in BGH will be acquired by us and BGH unitholders will receive aggregate consideration of approximately 20 million of our LP Units.

     The Merger Agreement is subject to, among other things, approval by the affirmative vote of the holders of a majority of our LP Units outstanding and entitled to vote at a meeting of the holders of our LP Units, approval by the (a) affirmative vote of holders of a majority of BGH’s common units and (b) affirmative vote of holders of a majority of BGH’s common units and management units, voting together as a single class.

     The Merger will be accounted for as an equity transaction. Therefore, changes in BGH’s ownership interest as a result of the Merger will not result in gain or loss recognition. BGH will be considered the surviving consolidated entity for accounting purposes, while we will be the surviving consolidated entity for legal and reporting purposes.

     We incurred $4.1 million of costs associated with the Merger during the nine months ended September 30, 2010, of which $3.2 million has been paid. We charged these costs directly to partners’ capital.

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. 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 February 26, 2010.

Reclassifications

     Certain prior year amounts have been reclassified in the condensed consolidated statements of operations and condensed consolidated statements of cash flows to conform to the current-year presentation. The reclassification in the condensed consolidated statements of operations is as follows:

•

Earnings from equity investments are now presented on a separate line item in the condensed consolidated statements of operations for the three and nine months ended September 30, 2009. The other investment income that had previously been included with earnings from equity investments has been reclassified and included in “Other income” in the 2009 period.

     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 facility for the nine months ended September 30, 2009. These amounts had been included within the same line item in the 2009 period.

     These reclassifications 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 company’s 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.

     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 13.

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 PHMSA’s 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 LLC (“MainLine Management”) and its directors breached their fiduciary duties to BGH’s public unitholders in connection with the Merger by, among other things, accepting insufficient consideration and failing to disclose all material facts in order that BGH’s unitholders may cast an informed vote on the Merger Agreement, and that we, Buckeye GP, MainLine Management, Merger Sub, BGH GP Holdings, LLC (“BGH GP”), ArcLight Capital Partners, LLC (“ArcLight”) and Kelso & Company (“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 BGH upon termination of the Merger Agreement and to provide BGH’s unitholders with supplemental disclosure to BGH’s 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.

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.

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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 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 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. 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 EPME’s 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.

BUCKEYE PARTNERS, L.P.
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

     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		$	4,377			$	6,916
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			9,696				10,618
Total prepaid and other current assets		$	73,436			$	103,691

BUCKEYE PARTNERS, L.P.
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

     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

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.

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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
Deferred charge, net (1)		$	2,500			$	6,024
Prepaid services			8,051				11,640
Derivative assets			—				17,204
Debt issuance costs			11,678				11,058
Insurance receivables			7,109				7,265
Other			10,891				9,586
Total other non-current assets		$	40,229			$	62,777

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		$	17,071			$	15,381
Accrued charges due Buckeye GP			464				1,218
Accrued charges due Services Company			5,014				6,104
Accrued employee benefit liability			3,287				3,287
Environmental liabilities			10,387				10,799
Accrued interest			18,425				30,609
Payable for ammonia purchase			2,215				7,015
Deferred revenue			19,395				6,829
Accrued capital expenditures			2,639				1,611
Reorganization			—				2,133
Deferred consideration			2,010				1,675
Other			23,902				20,082
Total accrued and other current liabilities		$	104,809			$	106,743

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. DEBT OBLIGATIONS

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

		September 30,				December 31,
		2010				2009
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			1,656,800				1,742,800
Less: Unamortized discount			(4,360	)			(4,854	)
Adjustment associated with fair value hedges			647				824
Subtotal debt			1,653,087				1,738,770
Less: Current portion of long-term debt			(211,800	)			(239,800	)
Total long-term debt		$	1,441,287			$	1,498,970

     The fair values of our aggregate debt and credit facilities were estimated to be $1,796.7 million and $1,762.1 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.

Credit Facility

     We have 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 Facility’s maturity date is August 24, 2012, which we 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 us, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin, or (ii) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin. The applicable margin is determined based on the current utilization level of the Credit Facility and ratings assigned by Standard & Poor’s Rating Services and Moody’s Investor Service for our 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 us 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 our majority-owned subsidiaries and equity investments (but including distributions from those

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

majority-owned subsidiaries and equity investments). At September 30, 2010, our 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 our ability to incur additional indebtedness, to create or incur liens on our property, to dispose of property material to our 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 our Credit Facility.

     At September 30, 2010 and December 31, 2009, we 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 BES’s 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 BES’s election, equal to (i) the Administrative Agent’s 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 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.

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     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, BES’s 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 BES’s ability to incur additional indebtedness, to create or incur certain liens on its property, to consolidate, merge or transfer its assets, to make dividends or distributions, to dispose of its property, to make investments, to modify its risk management policy, or to engage in business activities materially different from those presently conducted. At September 30, 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 14)		$	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			8,521				8,846
Total other non-current liabilities		$	108,763			$	102,851

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     The following table presents the components of accumulated other comprehensive income (loss) on the condensed consolidated balance sheets at the dates indicated (in thousands):

		September 30,				December 31,
		2010				2009
Adjustments to funded status of retirement income guarantee plan and retiree medical plan		$	(4,453	)		$	(4,453	)
Amortization of interest rate swap			(7,030	)			(7,753	)
Derivative instruments			(41,271	)			17,501
Accumulated amortization of retirement income guarantee plan and retiree medical plan			(6,998	)			(6,142	)
Total accumulated other comprehensive loss		$	(59,752	)		$	(847	)

13. 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 instrument’s 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

     We utilize 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 our cost of capital associated with such borrowings. When entering into interest rate swap transactions, we become exposed to both credit risk and market risk. We are subject to credit risk when the value of the swap transaction is positive and the risk exists that the counterparty will fail to perform under the terms of the contract. We are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the swaps. We manage our credit risk by only entering into swap transactions with major financial institutions with investment-grade credit ratings. We manage our 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.

     Our 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 GP’s board of directors adopted an interest rate hedging policy which permits us to enter into certain short-term interest rate swap agreements to manage our interest rate and cash flow risks associated with the Credit Facility. In addition, in July 2009 and May 2010, Buckeye GP’s board of directors authorized us to enter into certain transactions, such as forward-starting interest rate swaps, to manage our interest rate and cash flow risks related to certain expected debt issuances associated with the maturity of existing debt obligations.

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     We expect 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, we 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, we 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 accumulated other comprehensive income (loss) to reflect the change in the fair values of the forward-starting interest rate swaps. We designated the swap agreements as cash flow hedges at inception and expect the changes in values to be highly correlated with the changes in value of the underlying borrowings.

     Over the next twelve months, we expect 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 our 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.

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     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

     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

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

     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	)

BUCKEYE PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		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	)

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 entity’s 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 entity’s 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 instrument’s fair value.

BUCKEYE PARTNERS, L.P.
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 customer’s historical and expected purchase performance under each contract. The Energy Services segment determined CVA is appropriate because few of the Energy Services segment’s 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.

BUCKEYE PARTNERS, L.P.
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

     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.

14. 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 employee’s 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	)