18. UNIT-BASED COMPENSATION PLANS

BGH GP Holding LLC (“BGH GP”) has an Equity Compensation Plan for certain members of BGH GP’s senior management, who also serve as our senior management. Compensation expense recorded with respect to the override units, prior to the modification discussed below, was $0 million, $1.2 million and $1.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. On December 31, 2010, BGH GP modified the override unit plan, which resulted in the recognition of $21.1 million of additional compensation expense.

We award unit-based compensation to employees and directors primarily under the LTIP, which became effective in March 2009. We formerly awarded options to acquire LP Units to employees pursuant to the Option Plan. We recognized compensation expense related to the LTIP and the Option Plan of $9.2 million, $7.7 million and $3.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. These compensation plans are discussed below.

Management Units

Prior to BGH’s initial public offering of its common units (the “IPO”) on August 9, 2006, our general partner was owned by MainLine, L.P. (“MainLine”), a privately held limited partnership. In May 2004, MainLine instituted a Unit Compensation Plan and issued 16,216,668 Class B Units to certain members of senior management.

Coincident with BGH’s IPO on August 9, 2006, the equity interests of MainLine were exchanged for BGH’s equity interests. The Class B Units of MainLine were exchanged for 1,362,000 of BGH’s management units. Pursuant to the terms of the exchange, 70%, or 953,400 management units, became vested immediately upon their exchange, and the remaining 30%, or 408,600 of the management units, were subject to vesting over a three year period. However, coincident with the sale of Carlyle/Riverstone BPL Holdings II, L.P.’s interests in BGH in June of 2007, all the remaining unvested management units immediately vested and were expensed. There were no additional management units available for issue.

We recognized deferred compensation in 2006 for the management units for which both (i) vesting was accelerated compared to the MainLine Class B Units, and (ii) were now deemed probable of vesting compared to our previous estimates. We determined that these criteria applied to 272,400 management units, the market value of which was $17.00 per unit or approximately $4.6 million in total at August 9, 2006. Of the total equity compensation charge of $4.6 million, we expensed approximately $3.5 million in 2006. The balance of $1.1 million was recorded as compensation expense in the first half of 2007. In connection with the Merger, the outstanding management units were converted into common units and then exchanged for LP Units using a ratio of 0.705 LP Units per common unit. At December 31, 2011 and 2010, no management units were outstanding.

BGH GP’s Override Units

Effective on June 25, 2007, BGH GP instituted an Equity Compensation Plan for certain members of BGH GP’s senior management. This Equity Compensation Plan included both time-based and performance-based participation in the equity of BGH GP (but not ours) referred to as override units. We were required to reflect, as compensation expense and a corresponding contribution to partners’ capital, the fair value of the compensation. We are not the sponsor of this plan and have no obligations with respect to it. Compensation expense recorded with respect to the override units, prior to the modification, was $0 million, $1.2 million and $1.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. On December 31, 2010, BGH GP modified the override unit plan, which resulted in the recognition of $21.1 million of additional compensation expense.

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

On December 31, 2010, the override unit plan was modified. All outstanding unvested Value A and Operating Units were immediately vested and those vested units were exchanged for LP Units. The vesting terms of the Value B Units remained unchanged. As a result of the modification, we recognized $21.1 million of additional compensation expense during the year ended December 31, 2010 related to the Value A and Operating Units. The equity plan modification expense related to the Operating Units was measured as the sum of the remaining unamortized compensation expense based on the grant-date fair values and the incremental value of the LP Units received over the calculated fair value of the Operating Units immediately prior to the modification. The fair value of the Operating Units immediately prior to the modification was calculated using a Monte Carlo simulation method that incorporated the market-based vesting condition that existed prior to the modification. The Monte Carlo simulation is a procedure to estimate the future equity value from the time of the valuation date to the exit event. The assumptions used for this estimate include an equity value of BGH GP of $822.2 million, an expected life of 1 year, a risk-free interest rate of 0.29%, volatility of 25% and dividends of zero. The equity plan modification expense related to the Value A Units was measured as the fair value of the LP Units received in exchange. There were no Value A, Value B or Operating units granted during the year ended December 31, 2011 or 2010. On December 31, 2011 and 2010, Value B Units remained outstanding.

The vesting of the Value B Units is contingent on a performance condition, namely the completion of the exit event discussed above, an investment return of 3.5 times the original investment and an internal rate of return of at least 10% or on a pro-rata basis on an investment return ranging from 2.0 to 3.5 times the original investment and an internal rate of return of at least 10%, Accordingly, no compensation expense for the Value B Units will be recorded until an exit event and other requirements to vest occur.

On January 27, 2011, BGH GP established and granted new override units in BGH GP to a member of senior management, which consisted of Value N-1 and Value N-2 Units. The Value N-1 Units will participate in distributions by BGH GP based on the occurrence of an exit event and an investment return of 2.0 times the original investment up to aggregate distributions of $3.0 million. The Value N-2 Units will participate in distributions by BGH GP based on the occurrence of an exit event and an investment return of 2.5 times the original investment or on a pro-rata basis on an investment return ranging from 2.0 to 2.5 times the original investment up to aggregate distributions of $5.0 million.

The above-noted exit event for Value B Units, Value N-1 Units and Value N-2 Units is generally defined as the sale by ArcLight Capital Partners (“ArcLight”), Kelso & Company (“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.

The cumulative grant date fair values of the Value-B, Value N-1 and Value N-2 Units that remained unvested as of December 31, 2011 are $2.2 million, $0.9 million and $1.1 million, respectively. The vesting of the override units that remain unvested is contingent on a performance condition, namely the completion of the exit event, and a market condition, primarily relating to the receipt of an investment return at a specified multiple and internal rate of return, where applicable. Accordingly, no compensation expense for these override units will be recorded until, and if, an exit event and other requirements occur.

At the grant date, the override units were valued using the Monte Carlo simulation method that incorporated the market-based vesting condition into the grant date fair value of the unit awards. The following assumptions were used for grants during the period:


	Year Ended December 31,
	2011 (1)			2010 (2)		2009 (3)
Current equity value (in millions)	$	410.70		$	—	$	439.06
Expected life in years		1.0			—		3.4
Risk-free interest rate		0.3	%		—		1.8	%
Volatility		0.25			—		0.45

(1)	The assumptions were used for grants of the Value N-1 and N-2 Units during the period.

(2)	There were no override units granted during the year ended December 31, 2010.

(3)	The assumptions were used for grants of the Value A, Value B, and Operating Units during the period.

LTIP

On March 20, 2009, 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, performance units and in certain cases, distribution equivalent rights (“DERs”) which provide the participant a right to receive payments based on distributions we make on our 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 we pay on our LP Units.

The LTIP provides for the issuance of up to 1,500,000 LP Units, 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 GP and any of our affiliates who provide services to us and (ii) independent members of the Board of Directors of Buckeye GP or of MainLine Management. Phantom units or performance units may be granted to participants at any time as determined by the Compensation Committee. After giving effect to the issuance or forfeiture of phantom unit and performance unit awards through December 31, 2011, awards representing a total of 877,969 additional LP Units could be issued under the LTIP.

On December 16, 2009, the Compensation Committee approved the terms of the Buckeye Partners, L.P. Unit Deferral and Incentive Plan (“Deferral Plan”). The Compensation Committee is expressly authorized to adopt the Deferral Plan under the terms of the LTIP, which grants the Compensation Committee the authority to establish a program pursuant to which our phantom units may be awarded in lieu of cash compensation at the election of the employee. At December 31, 2011, 2010 and 2009, eligible employees were allowed to defer up to 50% of their 2011, 2010, and 2009 compensation award under our Annual Incentive Compensation Plan or other discretionary bonus program in exchange for grants of phantom units equal in value to the amount of their cash award deferral (each such unit, a “Deferral Unit”). Participants also receive one matching phantom unit for each Deferral Unit. Approximately $0.7 million of 2011 compensation awards had been deferred at December 31, 2011 for which phantom units will be granted in 2012. Approximately $1.6 million of 2010 compensation awards had been deferred at December 31, 2010, for which 50,660 phantom units (including matching units) were granted during 2011. These grants are included as granted in the LTIP activity table below.

Awards under the LTIP

During the year ended December 31, 2011, the Compensation Committee granted 112,257 phantom units to employees (including the 50,660 phantom units granted pursuant to the Deferral Plan discussed above), 14,000 phantom units to non-employee directors of Buckeye GP, and 124,927 performance units to employees. The vesting criteria for the performance units are the attainment of a performance goal, defined in the award agreements as “distributable cash flow per unit”, during the third year of a three-year period and remaining employed by us throughout such 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 our LP Units over those same one-year or three-year periods. The amount paid with respect to phantom unit distributions was $1.2 million and $0.6 million for the years ended December 31, 2011 and 2010, respectively. Distributions may be paid on performance units at the end of the three-year vesting period. In such case, DERs will be paid on the number of LP Units for which the performance units will be settled. Quarterly distributions related to DERs associated with phantom and performance units are recorded as a reduction of our Limited Partners’ Capital on the consolidated balance sheets.

The following table sets forth the LTIP activity for the periods indicated (dollars in thousands):


	Number of LP Units			Weighted Average Grant Date Fair Value per LP Unit (1)		Total Value
Unvested at January 1, 2010		140,095		$	39.81	$	5,577
Granted		259,336			56.26		14,590
Vested		(18,642	)		39.20		(731	)
Forfeited		(15,876	)		49.50		(786	)

Unvested at December 31, 2010		364,913		$	51.11	$	18,650

Granted		251,184		$	64.88	$	16,296
Vested		(17,553	)		55.53		(975	)
Forfeited		(13,227	)		57.03		(754	)

Unvested at December 31, 2011		585,317		$	56.75	$	33,217

(1)	Determined by dividing the aggregate grant date fair value of awards by the number of awards issued. The weighted-average grant date fair value per LP Unit for forfeited and vested awards is determined before an allowance for forfeitures.

At December 31, 2011, approximately $13.7 million of compensation expense related to the LTIP is expected to be recognized over a weighted average period of approximately 1.2 years.

Unit Option and Distribution Equivalent Plan

We also sponsor the Option Plan pursuant to which we historically granted options to employees to purchase LP Units at the market price of our LP Units on the date of grant. Generally, the options vest three years from the date of grant and expire ten years from the date of grant. As unit options are exercised, we issue new LP Units to the holder. We have not historically repurchased, and do not expect to repurchase in 2012, any of our LP Units.

For the retirement eligibility provisions of the Option Plan, we follow the non-substantive vesting method and recognize compensation expense immediately for options granted to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved. Unit-based compensation expense recognized in the consolidated statements of operations for the year ended December 31, 2011 is based upon options ultimately expected to vest. Forfeitures have been estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience.

Generally, compensation expense is recognized based on the fair value on the date of grant estimated using a Black-Scholes option pricing model. We recognize compensation expense for these awards granted on a straight-line basis over the requisite service period. Compensation expense is based on options ultimately expected to vest by estimating forfeitures at the date of grant based upon historical experience and revising those estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Following the adoption of the LTIP on March 20, 2009, we ceased making additional grants under the Option Plan. There were no option grants during 2010 or 2011.

The following is a summary of the changes in the options outstanding (all of which are vested) under the Option Plan for the periods indicated (dollars in thousands):


	Number of LP Units			Weighted- Average Strike Price ($/LP Unit)		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (1)
Outstanding at January 1, 2010		349,400		$	46.25
Exercised		(107,900	)		44.41
Forfeited, cancelled or expired		300			58.96

Outstanding at December 31, 2010		241,800			47.04		5.8	$	4,785
Exercised		(144,800	)		47.10

Outstanding at December 31, 2011		97,000			46.81		4.2	$	1,666


Exercisable at December 31, 2011		97,000		$	46.81		4.2	$	1,666

(1)	Aggregate intrinsic value reflects fully vested LP Unit options at the date indicated. Intrinsic value is determined by calculating the difference between our closing LP Unit price on the last trading day in 2011 and the exercise price, multiplied by the number of exercisable, in-the-money options.

The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $2.5 million, $1.7 million and $0.5 million, respectively. At December 31, 2011, total unrecognized compensation cost related to unvested options was $0 as all options were vested as of November 24, 2011. At December 31, 2011, 333,000 LP Units were available for grant in connection with the Option Plan. However, with the adoption and utilization of the LTIP, we do not expect to make any future grants pursuant to the Option Plan. The fair value of options vested was $0.2 million, $0.4 million and $0.4 million during the years ended December 31, 2011, 2010 and 2009, respectively.