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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

** **

**(Mark One)**

 

**x**** AnnualReport Pursuant to Section 13 or 15(d) of**

**the Securities Exchange Act of 1934**

 

**For thefiscal year ended December 31, 2008**

 

**OR**

 

** ̈**** TransitionReport 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**

 

**BuckeyeGP Holdings L.P.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                              | ** ** | **11-3776228**          |
|-------------------------------------------|------------|-------------------------|
| (State or other  jurisdiction of          | ** ** | (IRS Employer           |
| incorporation or  organization)           | ** ** | Identification  number) |
| ** **                                |       |                    |
| **Five  TEK Park**                        |       |                    |
| **9999 Hamilton Blvd.**                   | ** ** | ** **              |
| **Breinigsville,  Pennsylvania**          | ** ** | **18031**               |
| (Address of  principal executive offices) | ** ** | (Zip Code)              |

** **

Registrant’stelephone number, including area code: **(610) 904-4000**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title of  each class**                                 | ** ** | **Name of  each exchange on**

**which  registered** |
|----------------------------------------------------------|------------|------------------------------------------------------|
| Common Units  representing limited partnership interests |       | New York Stock  Exchange                             |

 

Securities registeredpursuant to Section 12(g) of the Act:**  None** (Title of class)

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o** **No **x**

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.   Yes****** ̈**** **No **x**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes **x****  **No **o**

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. **x**

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-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.

 

| 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes ** ̈****  **No **x**

 

At June 30, 2008,the aggregate market value of the registrant’s Common Units held by non-affiliateswas $240.3 million. The calculation of such market value should not beconstrued as an admission or conclusion by the registrant that any person is infact an affiliate of the registrant.

 

As of March 9,2009, there were 27,769,647 Common Units and 530,353 Management Unitsoutstanding.

 

 

 

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**TABLE OF CONTENTS**

** **
| ** **        | ** **                                                                                                              | **Page** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   | ** **                                                                                                              |     |
| **Item  1.**      | ***Business***                                                                                                          | 3        |
| **Item 1A.**      | ***Risk Factors***                                                                                                      | 24       |
| **Item 1B.**      | ***Unresolved Staff  Comments***                                                                                        | 39       |
| **Item 2.**       | ***Properties***                                                                                                        | 39       |
| **Item 3.**       | ***Legal Proceedings***                                                                                                 | 40       |
| **Item 4.**       | ***Submission of  Matters to a Vote of Security Holders***                                                              | 40       |
|              | ** **                                                                                                              |     |
| **PART II**  | ** **                                                                                                              |     |
| **Item 5.**       | ***Market for the  Registrant’s Common Units, Related Unitholder Matters, and Issuer Purchases  of Common Units*** | 41       |
| **Item 6.**       | ***Selected Financial  Data***                                                                                          | 41       |
| **Item 7.**       | ***Management’s  Discussion and Analysis of Financial Condition andResults of Operations***                        | 43       |
| **Item 7A.**      | ***Quantitative  and Qualitative Disclosures About Market Risk***                                                       | 64       |
| **Item 8.**       | ***Financial  Statements and Supplementary Data***                                                                      | 66       |
| **Item 9.**       | ***Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure***                        | 108      |
| **Item 9A.**      | ***Controls and  Procedures***                                                                                          | 108      |
| **Item 9B.**      | ***Other Information***                                                                                                 | 108      |
|              | ** **                                                                                                              |     |
| **PART III** | ** **                                                                                                              |     |
| **Item 10.**      | ***Directors,  Executive Officers and Corporate Governance***                                                           | 109      |
| **Item 11.**      | ***Executive  Compensation***                                                                                           | 113      |
| **Item 12.**      | ***Security  Ownership of Certain Beneficial Owners and Management and Related Unitholder  Matters***                   | 129      |
| **Item 13.**      | ***Certain  Relationships and Related Transactions and Director Independence***                                         | 131      |
| **Item 14.**      | ***Principal  Accountant Fees and Services***                                                                           | 134      |
|              | ** **                                                                                                              |     |
| **PART IV**  | ** **                                                                                                              |     |
| **Item 15.**      | ***Exhibits and  Financial Statement Schedule***                                                                        | 135      |

 

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**PART I**

 

**Item 1.        *Business***

 

**Buckeye GP Holdings L.P*.***

 

Buckeye GPHoldings L.P. (“BGH”) is a master limited partnership publicly traded on theNew York Stock Exchange (NYSE symbol: BGH). BGH was organized on June 15, 2006 under the laws of the state ofDelaware.  BGH owns 100% of Buckeye GPLLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”).  Buckeye is a master limited partnership thatwas organized in 1986 under the laws of the state of Delaware and is separatelytraded on the New York Stock Exchange (NYSE symbol: BPL).  BGH’s limited partnership units are ownedapproximately 62% by BGH GP Holdings, LLC (“BGH GP”), approximately 37% by thepublic and approximately 1% by certain members of Buckeye GP’s seniormanagement.  MainLine Management LLC, aDelaware limited liability company (“MainLine Management”), is the generalpartner of BGH.

 

BGH’s onlybusiness is the ownership of Buckeye GP. Buckeye GP’s only business is the management of Buckeye and itssubsidiaries.  At December 31, 2008,Buckeye GP owned an approximate 0.5% interest in Buckeye.

 

BGH’sinitial public offering (“IPO”) occurred on August 9, 2006 and, prior tosuch date, BGH had no activity. The BGH common units sold in the IPO representapproximately 37% of the outstanding equity of BGH, which includes common units(“Common Units”) and management units (“Management Units”).

 

On June 25, 2007,Carlyle/Riverstone BPL Holdings II, L.P. (“Carlyle/Riverstone”), certainmembers of senior management of Buckeye GP and other limited partners sold anapproximate 62% limited partner interest in BGH, and Carlyle/Riverstone soldits member interest in MainLine Management, to BGH GP, a limited liabilitycompany owned primarily by affiliates of ArcLight Capital Partners, LLC (“ArcLight”),Kelso & Company and certain investment funds along with certainmembers of senior management of Buckeye GP, for $411.6 million.  The transaction constituted a change ofcontrol of BGH and, indirectly, Buckeye.

 

BGH’s onlycash-generating asset is its ownership interest in Buckeye GP.   Buckeye GP generates cash and earningsprimarily through its ownership of the general partner interest along withincentive distribution rights in Buckeye, and its approximate one percentgeneral partner interest in certain of Buckeye’s operating subsidiaries.  BGH’s cash flow is, therefore, directlydependent upon the ability of Buckeye and its operating subsidiaries to makecash distributions to its partners. The actual amount of cash that BGH willhave available for distribution will depend primarily on Buckeye’s ability togenerate cash beyond its working capital requirements.

 

**BuckeyePartners, L.P.**

 

Buckeye has one ofthe largest independent refined petroleum products pipeline systems in theUnited States in terms of volumes delivered with approximately 5,400 miles ofpipeline and 64 active products terminals that provide aggregate storagecapacity of approximately 24.7 million barrels. In addition, Buckeye operatesand maintains approximately 2,400 miles of other pipelines under agreementswith major oil and chemical companies. Through the acquisitions of Lodi Gas Storage, L.L.C. (“Lodi Gas”) andFarm & Home Oil Company LLC (“Farm & Home”) in the firstquarter of 2008, Buckeye now owns and operates a major natural gas storagefacility in northern California which provides approximately 33 billion cubicfeet (“Bcf”) of gas capacity (includingcapacity provided pursuant to a nearly completed expansion project) anda leading wholesale distributor of refined petroleum products in the northeastern United States in areasalso served by Buckeye’s pipelines and terminals.

 

Buckeye conductsall of its operations through operating subsidiaries, which are referred toherein as the “Operating Subsidiaries”:

 

·                  *Buckeye Pipe Line Company, L.P.* (“Buckeye Pipe Line”), which owns anapproximately 2,643-mile refined petroleum products pipeline system servingmajor population centers in eight states. It is the primary jet fueltransporter to John F. Kennedy International Airport (“JFK Airport”), LaGuardiaAirport, Newark Liberty International Airport (“Newark Airport”) and certainother airports within its service territory.

 

·                  *Laurel Pipe Line Company, L.P.* (“Laurel”), which owns an approximately345-mile refined petroleum products pipeline connecting five Philadelphia arearefineries to 10 delivery points across Pennsylvania.

 

·                  *Wood River Pipe Lines LLC* (“Wood River”), which owns six refinedpetroleum products pipelines with aggregate mileage of approximately 925 mileslocated in Illinois, Indiana, Missouri and Ohio.

 

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·                  *Buckeye Pipe Line TransportationLLC* (“BPLTransportation”), which owns a refined petroleum products pipeline system withaggregate mileage of approximately 478 miles located in New Jersey, New York,and Pennsylvania.

 

·                  *Everglades Pipe Line Company,L.P.* (“Everglades”),which owns an approximately 37-mile refined petroleum products pipelineconnecting Port Everglades, Florida to Ft. Lauderdale-Hollywood InternationalAirport and Miami International Airport. It is the primary jet fuel transporterto Miami International Airport.

 

·                  *Buckeye NGL Pipe Lines LLC*(“Buckeye NGL”), which owns anapproximately 350-mile natural gas liquids pipeline extending generally fromthe Wattenberg, Colorado area to Bushton, Kansas.

 

·                  *Buckeye Pipe Line Holdings, L.P.* (“BPH”), which owns (or in certaininstances leases from other Operating Subsidiaries) 59 refined petroleum andother products terminals with aggregate storage capacity of approximately 23.7million barrels (of which 56 are included in Buckeye’s Terminalling and Storagesegment and three are included in Buckeye’s Pipeline Operations segment) and574 miles of pipelines in the Midwest, Southwest and West Coast.  BPH operates, through its subsidiary BuckeyeGulf Coast Pipe Lines, L.P. (“BGC”), pipelines in the Gulf Coast region forthird parties.  BPH also holds minoritystock interests in two Midwest refined petroleum products pipelines and anatural gas liquids pipeline system.

 

·                  *Buckeye Gas Storage LLC*(“Buckeye Gas”)*,*which,through its subsidiary Lodi Gas, owns a natural gas storage facility innorthern California.

 

·                  *Buckeye Energy Holdings LLC*(“Buckeye Energy”),**which,through its subsidiary Buckeye Energy Services LLC, markets refined petroleumproducts in areas served by Buckeye’s pipelines and terminals and also owns five refined petroleum product terminalswith aggregate storage capacity of 1.0 million barrels and other distributionassets located in northeastern and central Pennsylvania.

 

**Business Development**

 

Beginning in thefourth quarter of 2004 and continuing into 2008, Buckeye substantially expandedits business operations through acquisitions and equity investments ofapproximately $1.6 billion, the most recent of which are set forth below.

 

***2008Acquisitions and Equity Investments***

 

*LodiGas.*On January 18, 2008, Buckeye acquired all of the member interests inLodi Gas for approximately $442.4 million. Lodi Gas owns and operates a major natural gas storage facility in northern California that currently provides approximately 33 Bcfof natural gas storage capacity (includingcapacity provided pursuant to a nearly completed expansion project) and is connected to Pacific Gas and Electric’sintrastate gas pipelines which service natural gas demand in the San Franciscoand Sacramento areas.

 

*Farm &Home. * On February 8, 2008, Buckeye acquired allof the member interests in Farm & Home for approximately $146.2million and soon thereafter sold all of the acquired retail operations ofFarm & Home, retaining only the wholesale operations.  Farm & Home was amajor regional distributor of refined petroleum products in northeastern andcentral Pennsylvania and surrounding areas.

 

*Nilesand Ferrysburg, Michigan Terminals. *On February 19,2008, Buckeye acquired a terminal in Niles, Michigan and a 50% ownershipinterest in a terminal in Ferrysburg, Michigan from an affiliate of ExxonMobil Corporation for approximately $13.9 million.  The Niles and Ferrysburg terminals have an active storage capacity of 0.3million barrels.

 

*50%Member Interest in**WesPac Pipelines - San Diego LLC. *Effective May 1, 2008,Buckeye purchased the 50% member interest in WesPac Pipelines - San Diego LLC (“WesPacSan Diego”) from Kealine LLC (“Kealine”) not already owned by Buckeye forapproximately $9.3 million.

 

*Wethersfield,Connecticut Terminal. *On June 20,2008, Buckeye acquired a refined petroleum products terminal in Wethersfield,Connecticut from Hess Corporation for approximately $5.5 million. TheWethersfield terminal has an active storage capacity of 0.3 million barrels.

 

*Albany,New York Terminal.* On August 28, 2008, Buckeye acquired an ethanoland petroleum products terminal in Albany, New York from LogiBio AlbanyTerminal, LLC (the ‘‘Albany Terminal”). The purchase price for the terminal was approximately $46.5 million,with an additional $1.5 million payable if the terminal’s operations meetcertain performance goals over the three years following the consummation ofthe acquisition. The Albany Terminal has an active storage capacity of 1.8million barrels.

 

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*West Texas LPG Pipeline Limited Partnership.*  In 2008, Buckeye invested an additional $9.8million in West Texas LPG Pipeline Limited Partnership as Buckeye’s pro-ratacontribution for an expansion project to meet increased pipeline demand causedby increased liquid production in the Fort Worth basin and East Texas regions.

 

The following chartdepicts BGH’s and Buckeye’s ownership structure as of December 31, 2008.

 

 

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**Ownership percentages in thechart are approximate.*

 

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# **Business Activities**

# ** **

The followingdiscussion describes the business activities of BGH’s operating segments for2008, which are the same as Buckeye’s operating segments and include PipelineOperations, Terminalling and Storage, Natural Gas Storage, Energy Services, andOther Operations. The Pipeline Operations and Energy Services segments derive anominal amount of their revenue from U.S. governmental agencies.  Otherwise, none of BGH’s operating segmentshave contracts or subcontracts with the U.S. government.  All of BGH’s assets are located in thecontinental U.S.   Detailed informationregarding revenues, operating income and total assets of each segment can befound in Note 24, Segment Information, to BGH’s consolidated financialstatements.

 

***ConsolidatedRevenue by Segment***

 
| ** **                | ** ** | **Consolidated Revenue and Percentage by Segment** | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                | ** ** | **(Revenue in thousands)**                                        | ** ** |
| ** **                | ** ** | **Year Ended December 31,**                                  | ** ** |
| ** **                | ** ** | **2008**                                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **Revenue**                                                                 | ** ** | **Percent** | ** ** | **Revenue** | ** ** | **Percent** | ** ** | **Revenue** | ** ** | **Percent** | ** ** |
| Pipeline  Operations      |       | $                                                                           | 387,267    |   | 20.4 | % | $ | 379,345 |   | 73.0 | % | $ | 350,909 |   | 76.0 | % |
| Terminalling and  Storage |       | 119,155                                                                     |       | 6.3 | % | 103,782 |   | 20.0 | % | 81,267 |   | 17.6 | % |
| Natural Gas  Storage      |       | 61,791                                                                      |       | 3.3 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Energy Services           |       | 1,295,925                                                                   |       | 68.3 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Other Operations          |       | 43,498                                                                      |       | 2.3 | % | 36,220 |   | 7.0 | % | 29,584 |   | 6.4 | % |
| Intersegment              |       | (10,984                                                                     | )          | -0.6 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Total                     |       | $                                                                           | 1,896,652  |   | 100.0 | % | $ | 519,347 |   | 100.0 | % | $ | 461,760 |   | 100.0 | % |

 

***PipelineOperations Segment***

 

The PipelineOperations segment owns and operates approximately 5,400 miles of pipeline thatare located primarily in the Northeastern and upper Midwestern portions of theUnited States and services approximately 100 delivery locations. This segmenttransports refined petroleum products, including gasoline, jet fuel, dieselfuel, heating oil, kerosene and natural gas liquids, from major supply sourcesto terminals and airports located within end-use markets. The pipelines withinthis segment also transport other refined products, such as propane and butane,refinery feedstock and blending components. The segment’s geographicaldiversity, connections to multiple sources of supply and extensive deliverysystem help create a stable base business.

 

The Pipeline Operations segment conducts business without the benefitof exclusive franchises from government entities. In addition, PipelineOperations generally operates as a common carrier, providing transportationservices at posted tariffs and without long-term contracts.  Demand for the services provided by PipelineOperations derives from end users for refined petroleum products in the regionsserved and the ability and willingness of refiners and marketers to supply suchdemand by deliveries through Pipeline Operations’ pipelines. Factors affectingdemand for refined petroleum products include price and prevailing generaleconomic conditions.  Demand for the servicesprovided by the Pipeline Operations segment is, therefore, subject to a varietyof factors partially or entirely beyond their control.  Typically, this segment’s pipelines receiverefined petroleum products from refineries, connecting pipelines, and bulk andmarine terminals and transport those products to other locations for a fee.

 

Buckeyetransported an average of approximately 1,382,200 barrels of refined petroleumproducts per day in 2008.  The followingtable shows the volume and percentage of refined petroleum products transportedby the Pipelines Operations segment over the last three years:

 
| ** **             | ** ** | **Volume and Percentage of Refined Petroleum Products Transported (1)** | ** ** |
|------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **(Volume in thousands of barrels per day)**                                      | ** ** |
| ** **             | ** ** | **Year Ended December 31,**                                                                      | ** ** |
| ** **             | ** ** | **2008**                                                                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **             | ** ** | **Volume**                                                                                                      | ** ** | **Percent** | ** ** | **Volume** | ** ** | **Percent** | ** ** | **Volume** | ** ** | **Percent** | ** ** |
| Gasoline               |       | 673.5                                                                                                           |       | 48.7 | % | 717.9 |   | 49.6 | % | 722.3 |   | 49.8 | % |
| Jet fuel               |       | 354.7                                                                                                           |       | 25.7 | % | 362.7 |   | 25.1 | % | 351.3 |   | 24.2 | % |
| Middle distillates (2) |       | 304.2                                                                                                           |       | 22.0 | % | 320.1 |   | 22.1 | % | 324.2 |   | 22.4 | % |
| Natural gas  liquids   |       | 20.9                                                                                                            |       | 1.5 | % | 20.4 |   | 1.4 | % | 19.8 |   | 1.4 | % |
| Other products         |       | 28.9                                                                                                            |       | 2.1 | % | 26.3 |   | 1.8 | % | 32.7 |   | 2.2 | % |
| Total                  |       | 1,382.2                                                                                                         |       | 100.0 | % | 1,447.4 |   | 100.0 | % | 1,450.3 |   | 100.0 | % |

 

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(1)          Excludes local product transfers.

(2)          Includes diesel fuel, heating oil,kerosene, and other middle distillates.

 

Buckeye providespipeline transportation service in the following states: California, Colorado,Connecticut, Florida, Illinois, Indiana, Kansas, Massachusetts, Michigan,Missouri, Nevada, New Jersey, New York, Ohio, Pennsylvania, and Tennessee. Thegeographical location and description of these pipelines is as follows:

 

*Pennsylvania—NewYork—New Jersey*

 

Buckeye Pipe Lineserves major population centers in Pennsylvania, New York, and New Jerseythrough approximately 928 miles of pipeline. Refined petroleum products arereceived at Linden, New Jersey from 17 major source points, including tworefineries, six connecting pipelines and nine storage and terminallingfacilities. Products are then transported through two lines from Linden, NewJersey to Macungie, Pennsylvania. From Macungie, the pipeline continues westthrough a connection with the Laurel pipeline to Pittsburgh, Pennsylvania(serving Reading, Harrisburg, Altoona/Johnstown and Pittsburgh, Pennsylvania)and north through eastern Pennsylvania into New York (servingScranton/Wilkes-Barre, Pennsylvania and Binghamton, Syracuse, Utica, Rochesterand, via a connecting carrier, Buffalo, New York). Buckeye leases capacity inone of the pipelines extending from Pennsylvania to upstate New York to a majoroil pipeline company. Products received at Linden, New Jersey are alsotransported through one line to Newark Airport and through two additional linesto JFK Airport and LaGuardia Airport and to commercial refined petroleumproducts terminals at Long Island City and Inwood, New York. These pipelinessupply JFK Airport, LaGuardia Airport and Newark Airport with substantially allof each airport’s jet fuel requirements.

 

BPL Transportation’spipeline system delivers refined petroleum products from Valero EnergyCorporation’s (“Valero”) refinery located in Paulsboro, New Jersey todestinations in New Jersey, Pennsylvania, and New York.  A portion of the pipeline system extends fromPaulsboro, New Jersey to Malvern, Pennsylvania. From Malvern, a pipeline segment delivers refined products to locationsin upstate New York, while another segment delivers products to centralPennsylvania.  Two shorter pipelinesegments connect Valero’s refinery to the Colonial pipeline system and thePhiladelphia International Airport, respectively.

 

The Laurelpipeline system transports refined petroleum products through a 345-milepipeline extending westward from five refineries and a connection to theColonial pipeline system in the Philadelphia area to Reading, Harrisburg,Altoona/Johnstown and Pittsburgh, Pennsylvania.

 

*Illinois—Indiana—Michigan—Missouri—Ohio*

 

Buckeye Pipe Lineand NORCO Pipe Line Company, LLC (“NORCO”), a subsidiary of BPH, transportrefined petroleum products through 2,025 miles of pipeline in northernIllinois, central Indiana, eastern Michigan, western and northern Ohio, andwestern Pennsylvania. A number of receiving lines and delivery lines connect toa central corridor which runs from Lima, Ohio through Toledo, Ohio to Detroit,Michigan. Refined petroleum products are received at a refinery and otherpipeline connection points near Toledo, Lima, Detroit, and East Chicago,Indiana. Major market areas served include Peoria, Illinois; Huntington/FortWayne, Indianapolis, and South Bend, Indiana; Bay City, Detroit, and Flint,Michigan; Cleveland, Columbus, Lima, and Toledo, Ohio; and Pittsburgh,Pennsylvania.

 

Wood River ownssix refined petroleum products pipelines with aggregate mileage ofapproximately 925 miles located in the midwestern United States. Refinedpetroleum products are received at ConocoPhillips Company’s Wood River refineryin Illinois and transported to the Chicago area, to a terminal in the St.Louis, Missouri area, to the Lambert-St. Louis Airport, to receiving pointsacross Illinois and Indiana and to Buckeye Pipe Line’s pipeline in Lima, Ohio.At Buckeye’s tank farm located in Hartford, Illinois, one of Wood River’spipelines also receives refined petroleum products from the Explorer pipeline,which are transported to Buckeye’s 1.3 million barrel terminal located on theOhio River in Mt. Vernon, Indiana.   WoodRiver also owns an approximately 26-mile pipeline that extends from MarathonPipe Line LLC’s (“Marathon”) Wood River Station in southern Illinois to a thirdparty terminal in the East St. Louis, Missouri area.

 

*Colorado—Kansas*

 

Buckeye NGL**transportsnatural gas liquids via an approximately 350-mile pipeline that extendsgenerally from the Wattenberg, Colorado area to Bushton, Kansas.

 

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*OtherRefined Products Pipelines*

 

Buckeye Pipe Lineserves Connecticut and Massachusetts through an approximately 112-mile pipelinethat carries refined petroleum products from New Haven, Connecticut toHartford, Connecticut and Springfield, Massachusetts.  This pipeline also serves BradleyInternational Airport in Windsor Locks, Connecticut.

 

Evergladestransports primarily jet fuel through an approximately 37-mile pipeline fromPort Everglades, Florida to Ft. Lauderdale-Hollywood International Airport andMiami International Airport.  Evergladessupplies Miami International Airport with substantially all of its jet fuelrequirements.

 

WesPac Pipelines — Reno LLC (“WesPac Reno”) owns anapproximately 3.0-mile pipeline serving the Reno/Tahoe InternationalAirport.  WesPac San Diego owns anapproximately 4.3-mile pipeline serving the San Diego InternationalAirport.  WesPac Pipelines — Memphis LLC(“WesPac Memphis”) owns an approximately 11-mile pipeline and a relatedterminal facility that primarily serves Federal Express Corporation at theMemphis International Airport.  WesPacReno, WesPac San Diego and WesPac Memphis have terminal facilities withaggregate storage capacity of 0.5 million barrels.   Each of WesPac Reno, WesPac San Diego andWesPac Memphis was originally created as a joint venture between BPH andKealine.   BPH currently owns 100% ofWesPac Reno and WesPac San Diego.  BPHhas a 75% ownership interest in WesPac Memphis and Kealine owns the remainingportion of WesPac Memphis.  As of December 31,2008, Buckeye had provided $46.7 million in intercompany financing to WesPacMemphis.

 

*EquityInvestments*

 

BPH owns a 25%equity interest in West Shore Pipe Line Company (“West Shore”).  West Shore owns an approximately 652-milepipeline system that originates in the Chicago, Illinois area and extends northto Green Bay, Wisconsin and west and then north to Madison, Wisconsin. Thepipeline system transports refined petroleum products to markets in northernIllinois and Wisconsin. The other equity holders of West Shore are major oilcompanies.  The pipeline had beenoperated under contract by Citgo Pipeline Company, but since January 1,2009 the pipeline is operated under contract by Buckeye.

 

BPH also owns a20% equity interest in WT LPG.   WT LPGowns an approximately 2,295-milepipeline system****thatdelivers raw mix natural gas liquids to Mont Belvieu, Texas forfractionation.   The natural gas liquidsare delivered to the WT LPG pipeline system from the Rocky Mountain region viaconnecting pipelines and from gathering fields and plants located in west,central and east Texas.  The majorityowner and the operator of WT LPG are affiliates of Chevron Corporation.

 

BPH also owns a40% equity interest in Muskegon Pipeline LLC (“Muskegon”).  The majority owner and operator of Muskegonis Marathon.  Muskegon owns anapproximately 170-mile pipeline that delivers petroleum products from Griffith,Indiana to Muskegon, Michigan.

 

Buckeye Pipe Lineowns a 25% equity interest in Transport4, LLC (“Transport4”).  Transport4 provides an internet-based shipperinformation system that allows its customers, including shippers, suppliers,and tankage partners to access nominations, schedules, tickets, inventories,invoices, and bulletins over a secure internet connection.

 

***Terminallingand Storage Segment***

 

The Terminallingand Storage segment owns 56 terminals that provided bulk storage and throughputservices with respect to refined petroleum products and other renewable fuelsand has an aggregate storage capacity of approximately 23.3 million barrels ofproducts.  Of Buckeye’s 56 terminals inthe Terminalling and Storage segment, 42 are connected to Buckeye’s pipelinesand 14 are not.   The property on whichthe terminals are located is owned by one of the Operating Subsidiaries withthe exception of Albany Terminal, which is located on leased property.

 

The Terminallingand Storage segment’s terminals receive products from pipelines and, in certaincases, barges and railroads, and distribute them to third parties, who in turndeliver them to end-users and retail outlets. This segment’s terminals play a key role in moving products to theend-user market by providing efficient product receipt, storage anddistribution capabilities, inventory management, ethanol and biodieselblending, and other ancillary services that include the injection of variousadditives.  Typically, the Terminallingand Storage segment’s terminal facilities consist of multiple storage tanks andare equipped with automated truck loading equipment that is available 24 hoursa day.

 

The segment’sterminals derive most of their revenues from various fees paid bycustomers.  A throughput fee is chargedfor receiving products into the terminal and delivering them to trucks, barges,or pipelines.  In addition to thesethroughput fees, revenues are generated by charging customers fees for blendingwith renewable fuels, injecting additives, and leasing terminal capacity tocustomers on either a short-term or long-term basis.  The terminals also derive revenue fromrecovering and selling vapors emitted during truck loading.

 

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The table belowsets forth the total average daily throughput for the Terminalling and Storagesegment’s products terminals in each of the years presented:

 

| ** **           | ** ** | **Average Barrels Per Day** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **Year Ended December 31,** | ** ** |
| ** **           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                 |       |                                       |       |   |   |   |   |
| Products  throughput |       | 537,700                                    |       | 568,600 |   | 494,300 |   |

 

The followingtable sets forth the number of terminals and storage capacity in barrels bystate for terminals reported in the Terminalling and Storage segment as of December 31,2008:

 

| **State**     | ** ** | **Number of Terminals*** | ** ** | **Storage Capacity**                    | ** ** |
|---------------|------------|------------------------------------|------------|----------------------------------------------|------------|
| ** **    | ** ** | ** **                         | ** ** | **(In thousands of barrels)** | ** ** |
| Connecticut   |       | 1                                  |       | 345                                          |       |
| Illinois      |       | 7                                  |       | 2,779                                        |       |
| Indiana       |       | 9                                  |       | 6,850                                        |       |
| Massachusetts |       | 1                                  |       | 106                                          |       |
| Michigan      |       | 11                                 |       | 3,992                                        |       |
| Missouri      |       | 2                                  |       | 345                                          |       |
| New York      |       | 10                                 |       | 4,111                                        |       |
| Ohio          |       | 8                                  |       | 2,871                                        |       |
| Pennsylvania  |       | 4                                  |       | 1,131                                        |       |
| Wisconsin     |       | 3                                  |       | 734                                          |       |
| Total         |       | 56                                 |       | 23,264                                       |       |

 

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* Additionally, Buckeyehas three terminals which are included in the Pipelines Operations segment forreporting purposes.  There is a terminalin each of California (with storage capacity of 0.1 million barrels), Nevada(with storage capacity of 0.1 million barrels), and Tennessee (with storagecapacity of 0.3 million barrels). Buckeye also has five terminals inPennsylvania with an aggregate storage capacity of approximately 1.0 millionbarrels.  These terminals are included inthe Energy Services segment for reporting purposes (as discussed below).

 

***NaturalGas Storage Segment***

 

Theacquisition of Lodi Gas provided Buckeye with an opportunity to enter into thenatural gas storage industry in northern California.  The operations of Lodi Gas are reported in anew operating segment referred to as Natural Gas Storage. The segment providesnatural gas storage services through a facility located in northern California.Currently, the facility provides approximately 33 Bcf of natural gas storagecapacity (including capacity provided pursuant to a nearly completed expansionproject) and is connected to Pacific Gas and Electric’s intrastate gas pipelinesystem that services natural gas demand in the San Francisco and Sacramento,California areas.

 

The original Lodi Gasfacility is located approximately 20 miles south of Sacramento,California.  Its two storage reservoirshave a working gas capacity of 17 Bcf and daily maximum injection andwithdrawal capability of 400 million cubic feet per day (“MMcf/day”) and 500MMcf/day, respectively, utilizing 15 wells and approximately 31 miles ofpipeline.  Thirty-one miles of pipelinelinks the facility to an interconnect with Pacific Gas and Electric just northof Antioch, California.  The originalLodi Gas facility has been in operation since January 2002.

 

In January 2007,Lodi Gas completed the Kirby Hills Phase I expansion.  Kirby Hills is located approximately 30 mileswest of Lodi in the Montezuma Hills, 9 miles southeast of Fairfield,California.  The Kirby Hills Phase Iexpansion added an additional working gas capacity of 5 Bcf and maximuminjection and withdrawal capability of 50 MMcf/day utilizing 6 wells andapproximately 6 miles of pipeline.  Sixmiles of pipeline links the facility to an interconnect with Pacific Gas andElectric approximately 6 miles west of Rio Vista, California.

 

Buckeye isnear-completion of an expansion of Kirby Hills Phase I called Kirby Hills PhaseII.  Kirby Hills Phase II will add anadditional 11 Bcf of working gas storage capacity and provide an additional100,000 MMcf/day of firm injection and 200,000 MMcf/day of firm withdraw.  Lodi Gas is projecting an in-service date forKirby Hills Phase II of April 2009.

 

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Lodi Gas’s operations aredesigned for an overall high deliverability natural gas storage service andhave a proven track record of safe and reliable operations.  Lodi Gas is regulated by the CaliforniaPublic Utility Commission. All services have been, and will continue to be,contracted under Lodi Gas’s current California Public Utility CommissionTariff.

 

The Natural Gas Storage segment’s revenues consist of lease revenuesand hub services revenues.  Leaserevenues are charges for the reservation of storage space for natural gas.Generally customers inject natural gas in the fall and spring and withdraw itfor winter and summer use.  Title to thestored gas remains with the customer. Hub services revenues consist of avariety of other storage services under interruptible storage agreements. TheNatural Gas Storage segment does not trade or market natural gas.

 

***Energy Services Segment***

 

Theacquisition of Farm & Home’s wholesale operations provided anopportunity for Buckeye to increase the utilization of Buckeye’s existingpipeline and terminal system infrastructure by marketing refined petroleumproducts in areas served by that infrastructure.  The wholesale operations of Farm &Home are reported in a new operating segment called Energy Services.

 

The EnergyServices segment is a leadingwholesale distributor of refined petroleum products in the northeastern United States. The segment’s products include gasoline,propane, and petroleum distillates such as heating oil, diesel fuel, andkerosene.  The segment has five terminalswith aggregate storage capacity of approximately 1.0 million barrels.Each terminal is equipped with multiple storage tanks and automated truckloading equipment that is available 24 hours a day.  Thepipeline connections of these terminals allow the Energy Services segment tohave direct access to the Philadelphia, New York, and Gulf Coast area supplypoints.  The property on which theterminals are located is owned by an Operating Subsidiary.

 

The Energy Services segment’s operations are segregated into threeseparate categories based on the type of fuel delivered and the deliverymethod:

 

·                  Wholesale Rack:liquid fuels and propane gas are delivered to distributors and large commercialcustomers.  These customers take deliveryof the products using the Energy Services segment’s automated truck loading equipment to fill their own trucks.

 

·                  WholesaleDelivered: liquid fuels are delivered to commercial customers, constructioncompanies, school districts, and trucking companies using the Energy Servicessegment’s tractor trailers and third-party carriers.

 

·                  BrandedGasoline: the Energy Services segment delivers gasoline and on-highway dieselfuel to independently owned retail gas stations under many leading gasolinebrands.

 

Since the operations ofthe Energy Services segment expose Buckeye to commodity price risk, the EnergyServices segment enters into derivative instruments to mitigate the effect ofcommodity price fluctuations on the segment’s inventory and fixed-priced salescontracts.  The fair value of Buckeye’sderivative instruments is recorded in Buckeye’s consolidated balance sheet, withthe change in fair value recorded in earnings. The derivative instruments the Energy Services segment uses consistprimarily of futures contracts traded on the New York Mercantile Exchange forthe purposes of hedging the outright price risk of its physical inventory andfixed-priced sales contracts. However, hedge accounting has not been electedfor all of the Energy Services segment’s derivative instruments. In the casesin which hedge accounting has not been elected, changes in the fair values ofthe derivative instrument, which are included in cost of product sales,generally are offset by changes in the values of the fixed-priced salescontracts which are also derivative instruments whose changes in value arerecognized in earnings.  The Energy Services segment recordsrevenues when products are delivered.

 

***OtherOperations Segment***

 

The OtherOperations segment consists primarily of performing pipeline operation andmaintenance services and pipeline construction services for third parties.  The Other Operations segment is a contractoperator of pipelines owned in Louisiana, Ohio, and Texas by major chemicalcompanies.  At December 31, 2008,the Other Operations segment had performance obligations under 15 operationsand maintenance contracts to operate and maintain approximately 2,400 miles ofpipeline.  Further, this segment owns anapproximate 23-mile pipeline located in Texas and leases a portion of thepipeline to a third-party chemical company. The Other Operations segment alsoowns an approximate 63% interest in a crude butadiene pipeline between DeerPark and Port Arthur, Texas and owns and operates an ammonia pipeline locatedin Texas.  In addition, the OtherOperations segment provides engineering and construction management services tomajor chemical companies in the Gulf Coast area.

 

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** **

**Competition and Customers**

 

***Competitive Strengths***

 

Buckeyebelieves that it has the following competitive strengths:

 

·                  Itowns and operates high quality assets that are strategically located;

 

·                  Ithas stable, long-term relationships with its customers;

 

·                  Itowns relatively predictable and stable fee-based businesses with opportunisticrevenue generating capabilities;

 

·                  Itmaintains a conservative financial position with an investment-grade rating;and

 

·                  Ithas an experienced management team whose interests are aligned with those ofBuckeye’s unitholders.

 

***PipelineOperations and Terminalling and Storage Segments***

 

Generally, pipelines are the lowest cost method for long-haul overlandmovement of refined petroleum products. Therefore, the Pipeline Operationssegment’s most significant competitors for large volume shipments are otherpipelines, some of which are owned or controlled by major integrated oilcompanies. Although it is unlikely that a pipeline system comparable in sizeand scope to the Pipeline Operations segment’s pipeline systems will be builtin the foreseeable future, new pipelines (including pipeline segments thatconnect with existing pipeline systems) could be built to effectively competewith the Pipeline Operations segment in particular locations.

 

The PipelineOperations segment competes with marine transportation in some areas. Tankersand barges on the Great Lakes account for some of the volume to certainMichigan, Ohio, and upstate New York locations during the approximately eightnon-winter months of the year. Barges are presently a competitive factor fordeliveries to the New York City area, the Pittsburgh area, Connecticut,locations on the Ohio River such as Mt. Vernon, Indiana and Cincinnati, Ohio,and locations on the Mississippi River such as St. Louis, Missouri.

 

Truckscompetitively deliver refined products in a number of areas served by thePipeline Operations segment. While their costs may not be competitive forlonger hauls or large volume shipments, trucks compete effectively for smallervolumes in many local areas served by the Pipeline Operations segment. Theavailability of truck transportation places a significant competitive constrainton the ability of the Pipeline Operations segment to increase their tariffrates.

 

Privately arrangedexchanges of refined petroleum products between marketers in differentlocations are another form of competition. Generally, such exchanges reduceboth parties’ costs by eliminating or reducing transportation charges. Inaddition, consolidation among refiners and marketers that has accelerated inrecent years has altered distribution patterns, reducing demand fortransportation services in some markets and increasing them in other markets.

 

Distribution of refinedpetroleum products depends to a large extent upon the location and capacity ofrefineries. However, because the Pipeline Operations segment’s business islargely driven by the consumption of fuel in its delivery areas and thePipeline Operations’ pipelines have numerous source points, MainLine Managementdoes not believe that the expansion or shutdown of any particular refinery islikely, in most instances, to have a material effect on the business of thePipeline Operations segment.  Certain ofWood River’s pipelines emanate from a refinery owned by ConocoPhillips andlocated in the vicinity of Wood River, Illinois.  While these pipelines are, in part, suppliedby connecting pipelines, a temporary or permanent closure of the ConocoPhillipsWood River refinery would have a negative impact on volumes delivered throughthese pipelines and the effects of a decline in volumes could have a materialadverse effect on the business of the Pipeline Operations segment.

 

Many of thegeneral competitive factors discussed above, such as demand for refinedpetroleum products and competitive threats from methods of transportation otherthan pipelines, also impact Buckeye’s Terminalling and Storage segment.  In addition, the Terminalling and Storagesegment generally competes with other terminals in the same geographicmarket.   Many competitive terminals areowned by major integrated oil companies. These major oil companies may have the opportunity for product exchangesthat are not available to the Terminalling and Storage segment’sterminals.  While the Terminalling andStorage segment’s terminal throughput fees are not regulated, they are subjectto price competition from competitive terminals and alternate modes oftransporting refined petroleum products to end users such as retail gasstations.

 

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***NaturalGas Storage Segment***

 

The Natural GasStorage segment competes with other storage providers, including localdistribution companies (“LDCs”), utilities and affiliates of LDCs and otherindependent utilities in the northern California natural gas storage market. Certainmajor pipeline companies have existing storage facilities connected to theirsystems that compete with certain of the segment’s facilities. Third-partyconstruction of new capacity, which has been proposed in northern California,could have an adverse impact on the segment’s competitive position.

 

***Energy Services Segment***

 

The EnergyServices segment competes with pipeline companies, the major integrated oilcompanies, their marketing affiliates and independent gatherers, investmentbanks that have established a trading platform, and brokers and marketers ofwidely varying sizes, financial resources and experience.  Some of these competitors have capitalresources greater than the Energy Services segment, and control greatersupplies of refined petroleum products.

 

***OtherOperations***

 

The OtherOperations segment competes with independent pipeline companies, engineeringfirms, major integrated oil companies and chemical companies to operate andmaintain pipelines for third-party owners. In addition, in many instances it is more cost-effective for chemicalcompanies to operate and maintain their own pipelines as opposed to contractingwith the Other Operations segment to complete these tasks.  Numerous engineering and construction firmscompete with the Other Operations segment for pipeline construction business.

 

***Customers***

 

For the year ended December 31,2008, no customer contributed more than 10% of consolidated revenue to Buckeyeand, therefore, to BGH.  However, in 2008affiliates of Shell Oil Products U.S. (“Shell”) contributed 12% of the PipelineOperations and Terminalling and Storage segments’ combined revenue.  Approximately 6% of this revenue wasgenerated by Shell in each of the Pipeline Operations segment and in theTerminalling and Storage segment.  In2007 and 2006, Shell contributed 10% and 11% of consolidated revenue,respectively.  Approximately 3% of 2007consolidated revenue was generated by Shell in the Pipeline Operations segmentand the remaining 7% of consolidated revenue was in the Terminalling andStorage segment.  Approximately 5% of the2006 consolidated revenue was generated by Shell in the Pipeline Operationssegment and the remaining 6% of consolidated revenue was in the Terminallingand Storage segment.

 

**Seasonality**

 

The PipelineOperations and Terminalling and Storage segments’ mix and volume of productstransported and stored tends to vary seasonally. Declines in demand for heatingoil during the summer months are, to a certain extent, offset by increaseddemand for gasoline and jet fuel. Overall, these segments have been onlymoderately seasonal, with somewhat lower than average volumes being transportedand stored during March, April and May and somewhat higher thanaverage volumes being transported and stored in November, December andJanuary.

 

The EnergyServices segment’s mix and volume of product sales tends to vary seasonally,with the fourth and first quarter volumes generally being higher than thesecond and third quarters, primarily due to the increased demand for home heatingoil in the winter months.

 

**Employees**

 

At December 31,2008, BGH did not have any employees. Except as noted below, Buckeye’sOperating Subsidiaries are managed and operated by employees of Buckeye PipeLine Services Company, a Pennsylvania corporation (“Services Company”).  At December 31, 2008, Services Companyhad approximately 1,000 full-time employees, 188 of whom were represented bytwo labor unions.  Approximately 20people are employed directly by Lodi Gas and 20 people are employed directly bya subsidiary of BPH.  Services Company isreimbursed by the Operating Subsidiaries for the cost of providing thoseemployee services pursuant to a services agreement.  Services Company is reimbursed by theOperating Subsidiaries, pursuant to a services agreement, for the cost ofproviding employee services, provided, however, BGH reimburses Services Companyfor the compensation and benefit costs for the four highest salaried officersof Buckeye GP.  The Operating Subsidiarieshave never experienced any work stoppages or other significant laborproblems.

 

**CapitalExpenditures**

 

Buckeye makes capital expenditures in order tomaintain and enhance the safety and integrity of its pipelines, terminals,storage facilities and related assets, to expand the reach or capacity of itspipelines and terminals, to improve the efficiency of its operations 

 

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and to pursue new business opportunities. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations — Liquidity andCapital Resources.”

 

During 2008,Buckeye made approximately $122.4 million of capital expenditures, of which$28.9 million related to sustaining capital projects and $93.5 million relatedto expansion and cost reduction projects.

 

Buckeye expects to spend approximately $75.0 millionto $100.0 million in capital expenditures in 2009, of which approximately $20.0million to $30.0 million is expected to relate to sustaining capitalexpenditures and $55.0 million to $70.0 million is expected to relate toexpansion and cost reduction projects. Sustaining capital expenditures include renewals and replacement ofpipeline sections, tank floors and tank roofs and upgrades to station andterminalling equipment, field instrumentation and cathodic protectionsystems.  Major expansion and costreduction expenditures in 2009 will include the completion of the Kirby HillsPhase II expansion, the completion of the additional product storage tanks atLinden, New Jersey and the construction of a 4.7 mile pipeline in centralConnecticut to connect Buckeye’s pipeline in Connecticut to a third party’selectric generation plant currently under construction.

 

BGH does not makesignificant capital expenditures.

 

**Regulation**

 

***General***

 

The OperatingSubsidiaries are subject to extensive laws and regulations as well asregulatory oversight by numerous federal, state, and local departments andagencies, many of which are authorized by statute to issue rules andregulations binding on the pipeline industry, related businesses and individualparticipants.  In some states, certain ofthe Operating Subsidiaries are subject to the jurisdiction of public utilitycommissions, which have authority over, among other things, intrastate tariffs,the issuance of debt and equity securities, transfers of assets, and pipelinesafety.  The failure to comply with suchlaws and regulations can result in substantial penalties.  The regulatory burden on Buckeye’s operationsincreases the Operating Subsidiaries’ cost of doing business and, consequently,affects Buckeye’s profitability. However, except for certain exemptions that apply to smaller companies,neither MainLine Management nor Buckeye GP believes that the OperatingSubsidiaries are affected in a significantly different manner by these laws andregulations than are Buckeye’s competitors.

 

Following is a discussionof certain laws and regulations affecting the Operating Subsidiaries.  However, you should not rely on suchdiscussion as an exhaustive review of all regulatory considerations affectingthe Operating Subsidiaries operations.

 

***Rate Regulation***

 

Buckeye Pipe Line,Wood River, BPL Transportation, Buckeye NGL and NORCO operate pipelines subjectto the regulatory jurisdiction of the Federal Energy Regulatory Commission (“FERC”)under the Interstate Commerce Act and the Department of Energy OrganizationAct.  FERC regulations require thatinterstate oil pipeline rates be posted publicly and that these rates be “justand reasonable” and not unduly discriminatory. FERC regulations also enforcecommon carrier obligations and specify a uniform system of accounts, amongcertain other obligations.

 

The generic oil pipeline regulations issued under theEnergy Policy Act of 1992 rely primarily on an index methodology that allows apipeline to change its rates in accordance with an index (currently the changein the Producer Price Index (“PPI”) plus 1.3%) that FERC believes reflects costchanges appropriate for application to pipeline rates.  Under FERC’s rules, as one alternative toindexed rates, a pipeline is also allowed to charge market-based rates if thepipeline establishes that it does not possess significant market power in a particularmarket.  The final rules becameeffective on January 1, 1995.

 

The tariff rates of Wood River, BPL Transportation,Buckeye NGL and NORCO are governed by the generic FERC index methodology, andtherefore are subject to change annually according to the index.  If PPI +1.3% were to be negative, then WoodRiver, BPL Transportation, Buckeye NGL and NORCO could be required to reducetheir rates if they exceed the new maximum allowable rate.  For example, at December 31, 2008, PPI+1.3% was calculated to be 7.6%. Shippers may also file complaints against indexed rates as being unjustand unreasonable, subject to the FERC’s standards.

 

Buckeye Pipe Line’srates are governed by an exception to the rules discussedabove, pursuant to specific FERC authorization.** **Buckeye Pipe Line’s market-based rate regulation program wasinitially approved by FERC in March 1991 and was subsequently extended in1994.  Under this program, in marketswhere Buckeye Pipe Line does not have significant market power, individual rateincreases: (a) will not exceed a real (i.e., exclusive of inflation)increase of 15% over any two-year period, and (b) will be allowed tobecome effective without suspension or investigation if they do not exceed a “trigger”equal to the change in the Gross Domestic Product implicit price deflator sincethe date on which the individual rate was last increased, plus 2%.  Individual rate decreases will

 

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be presumptivelyvalid upon a showing that the proposed rate exceeds marginal costs.  In markets where Buckeye Pipe Line was foundto have significant market power and in certain markets where no market powerfinding was made: (i) individual rate increases cannot exceed thevolume-weighted average rate increase in markets where Buckeye Pipe Line doesnot have significant market power since the date on which the individual ratewas last increased, and (ii) any volume-weighted average rate decrease inmarkets where Buckeye Pipe Line does not have significant market power must beaccompanied by a corresponding decrease in all of Buckeye Pipe Line’s rates inmarkets where it does have significant market power.  Shippers retain the right to file complaintsor protests following notice of a rate increase, but are required to show thatthe proposed rates violate or have not been adequately justified under themarket-based rate regulation program, that the proposed rates are undulydiscriminatory, or that Buckeye Pipe Line has acquired significant market powerin markets previously found to be competitive.

 

The Buckeye PipeLine program was subject to review by FERC in 2000 when FERC reviewed the indexselected in the generic oil pipeline regulations.  FERC decided to continue the generic oilpipeline regulations with no material changes and did not modify or discontinueBuckeye Pipe Line’s program.  MainLineManagement cannot predict the impact that any change to Buckeye Pipe Line’srate program would have on Buckeye Pipe Line’s operations.  Independent of regulatory considerations, itis expected that tariff rates will continue to be constrained by competitionand other market factors.

 

#### **Laureloperates a pipeline in intrastate service across Pennsylvania, and its tariffrates are regulated by the Pennsylvania Public Utility Commission.  Wood River operates a pipeline in intrastateservice in Illinois, and tariff rates related to this pipeline are regulated bythe Illinois Commerce Commission.**

#### ** **

Lodi Gas owns andoperates a natural gas storage facility in northern California under aCertificate of Public Convenience and Necessity originally granted by theCalifornia Public Utilities Commission (“CPUC”) in 2000 and expanded in 2006 and2008.  Under the Hinshaw exemption to theNatural Gas Act, Lodi Gas is not subject to FERC rate regulation, but isregulated by the CPUC and other state and local agencies in California.  Consistent with California regulatory policy,however, Lodi Gas is authorized to charge market-based rates and is nototherwise subject to rate regulation.

 

#### ***Environmental Regulation***

#### ** **

The OperatingSubsidiaries are subject to federal, state and local laws and regulationsrelating to the protection of the environment. Although MainLine Managementbelieves that the operations of the Operating Subsidiaries comply in allmaterial respects with applicable environmental laws and regulations, risks ofsubstantial liabilities are inherent in pipeline operations, and there can be noassurance that material environmental liabilities will not be incurred.Moreover, it is possible that other developments, such as increasingly rigorousenvironmental laws, regulations and enforcement policies, and claims fordamages to property or injuries to persons resulting from the operations of theOperating Subsidiaries, could result in substantial costs and liabilities toBuckeye. See “Legal Proceedings” and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and CapitalResources—Environmental Matters.”

 

The Oil PollutionAct of 1990 (“OPA”) amended certain provisions of the federal Water PollutionControl Act of 1972, commonly referred to as the Clean Water Act (“CWA”), andother statutes, as they pertain to the prevention of and response to petroleumproduct spills into navigable waters. The OPA subjects owners of facilities tostrict joint and several liability for all containment and clean-up costs andcertain other damages arising from a spill. The CWA provides penalties for thedischarge of petroleum products in reportable quantities and imposessubstantial liability for the costs of removing a spill. State laws for thecontrol of water pollution also provide varying civil and criminal penalties andliabilities in the case of releases of petroleum or its derivatives intosurface waters or into the ground.

 

Contaminationresulting from spills or releases of refined petroleum products sometimesoccurs in the petroleum pipeline industry. The Operating Subsidiaries’pipelines cross numerous navigable rivers and streams.  Although MainLine Management believes thatthe Operating Subsidiaries comply in all material respects with the spillprevention, control and countermeasure requirements of federal laws, any spillor other release of petroleum products into navigable waters may result inmaterial costs and liabilities to Buckeye.

 

The Resource Conservation and Recovery Act (“RCRA”),as amended, establishes a comprehensive program of regulation of “hazardouswastes.” Hazardous waste generators, transporters, and owners or operators oftreatment, storage and disposal facilities must comply with regulationsdesigned to ensure detailed tracking, handling and monitoring of these wastes.RCRA also regulates the disposal of certain non-hazardous wastes. As a resultof these regulations, certain wastes typically generated by pipeline operationsare considered “hazardous wastes.” Hazardous wastes are subject to more rigorous and costly disposalrequirements than are non-hazardous wastes. Any changes in the regulationscould have a material adverse effect on Buckeye’s maintenance capitalexpenditures and operating expenses.

 

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The Comprehensive Environmental Response, Compensation and LiabilityAct of 1980 (“CERCLA”), also known as “Superfund,” governs the release orthreat of release of a “hazardous substance.” Releases of a hazardoussubstance, whether on or off-site, may subject the generator of that substanceto joint and several liability under CERCLA for the costs of clean-up and otherremedial action. Pipeline maintenance and other activities in the ordinarycourse of business generate “hazardous substances.”  As a result, to the extent a hazardoussubstance generated by the Operating Subsidiaries or their predecessors mayhave been released or disposed of in the past, the Operating Subsidiaries mayin the future be required to remediate contaminated property. Governmentalauthorities such as the Environmental Protection Agency (“EPA”), and in someinstances third parties, are authorized under CERCLA to seek to recoverremediation and other costs from responsible persons, without regard to faultor the legality of the original disposal. In addition to its potentialliability as a generator of a “hazardous substance,” the property orright-of-way of the Operating Subsidiaries may be adjacent to or in theimmediate vicinity of Superfund and other hazardous waste sites.  Accordingly, the Operating Subsidiaries maybe responsible under CERCLA for all or part of the costs required to cleanupsuch sites, which costs could be material.

 

The Clean Air Act,amended by the Clean Air Act Amendments of 1990 (the “Amendments”), imposescontrols on the emission of pollutants into the air.  The Amendments required states to developfacility-wide permitting programs to comply with new federal programs. Existingoperating and air-emission requirements like those currently imposed on theOperating Subsidiaries are being reviewed by appropriate state agencies inconnection with the new facility-wide permitting program. It is possible thatnew or more stringent controls will be imposed on the Operating Subsidiariesthrough this program.

 

The OperatingSubsidiaries are also subject to environmental laws and regulations adopted bythe various states in which they operate. In certain instances, the regulatorystandards adopted by the states are more stringent than applicable federallaws.

 

#### ***Pipeline and Terminal Maintenanceand Safety Regulation***

#### ** **

The pipelinesoperated by the Operating Subsidiaries are subject to regulation by the UnitedStates Department of Transportation (“DOT”) under the Hazardous Liquid PipelineSafety Act of 1979 (“HLPSA”), which governs the design, installation, testing,construction, operation, replacement and management of pipeline facilities.HLPSA covers petroleum and petroleum products pipelines and requires any entitythat owns or operates pipeline facilities to comply with applicable safetystandards, to establish and maintain a plan of inspection and maintenance andto comply with such plans.

 

The PipelineSafety Reauthorization Act of 1988 requires coordination of safety regulationbetween federal and state agencies, testing and certification of pipelinepersonnel, and authorization of safety-related feasibility studies. Buckeye hasa drug and alcohol testing program that complies in all material respects withthe regulations promulgated by the Office of Pipeline Safety and DOT.

 

HLPSA also requires, among other things, that the Secretary ofTransportation consider the need for the protection of the environment inissuing federal safety standards for the transportation of hazardous liquids bypipeline. The legislation also requires the Secretary of Transportation toissue regulations concerning, among other things, the identification bypipeline operators of environmentally sensitive areas; the circumstances underwhich emergency flow restricting devices should be required on pipelines;training and qualification standards for personnel involved in maintenance andoperation of pipelines; and the periodic integrity testing of pipelines inunusually sensitive and high-density population areas by internal inspectiondevices or by hydrostatic testing. Effective in August 1999, the DOT issued its Operator QualificationRule, which required a written program by April 27, 2001, for ensuringoperators are qualified to perform tasks covered by the pipeline safetyrules.  All persons performing coveredtasks were required to be qualified under the program by October 28,2002.  Buckeye filed its written plan andhas qualified its employees and contractors as required and requalified theemployees under its plan in 2005.  On March 31,2001, DOT’s rule for Pipeline Integrity Management in High ConsequenceAreas (Hazardous Liquid Operators with 500 or more Miles of Pipeline) becameeffective.  This rule sets forthregulations that require pipeline operators to assess, evaluate, repair andvalidate the integrity of hazardous liquid pipeline segments that, in the eventof a leak or failure, could affect populated areas, areas unusually sensitiveto environmental damage or commercially navigable waterways.  Under the rule, pipeline operators wererequired to identify line segments which could impact high consequence areas byDecember 31, 2001. Pipeline operators were required to develop “BaselineAssessment Plans” for evaluating the integrity of each pipeline segment by March 31,2002 and to complete an assessment of the highest risk 50% of line segments by September 30,2004, with full assessment of the remaining 50% by March 31, 2008.Pipeline operators are now required to re-assess each affected segment inintervals not to exceed five years. Buckeye has implemented an Integrity Management Program in compliancewith the requirements of this rule.

 

In December 2002, the Pipeline Safety Improvement Act of 2002 (“PSIA”)became effective.  The PSIA imposesadditional obligations on pipeline operators, increases penalties for statutoryand regulatory violations, and includes provisions prohibiting employers fromtaking adverse employment action against pipeline employees and contractors whoraise concerns about pipeline safety within the company or with governmentagencies or the press.  Many of theprovisions of the PSIA are subject to regulations to be issued by theDepartment of Transportation.  The PSIAalso requires public education programs for residents, public officials andemergency responders and a measurement system to ensure the effectiveness ofthe public education program. Buckeye

 

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implemented apublic education program that complies with these requirements and therequirements of the American Petroleum Institute Recommended Practice 1162.

 

The Pipeline Inspection, Protection, Enforcement, and Safety Act of 2006 (“PIPESAct”), which became effective on December 24, 2006, among other things,reauthorized HLPSA, strengthened damage prevention measures designed to protectpipelines from excavation damage, removed the exemption from regulation ofpipelines operating at less than 20 percent of maximum yield strength in ruralareas, and required pipeline operators to manage human factors in pipelinecontrol centers, including controller fatigue. While the PIPES Act imposed additional operating requirements onpipeline operators, MainLine Management does not believe that the costs ofcompliance with the PIPES Act are material, because many of the newrequirements are already met in Buckeye’s existing programs.

 

MainLine Management believes that the Operating Subsidiariescurrently comply in all material respects with HLPSA**,**the PSIA, the PIPES Act and other pipeline safety laws and regulations.However, the industry, including Buckeye, will incur additional pipeline andtank integrity expenditures in the future, and Buckeye is likely to incurincreased operating costs based on these and other government regulations.During 2008, Buckeye’s integrity expenditures for these programs wereapproximately $17.7 million, of which $8.8 million was capitalized and $8.9 millionwas expensed.  Buckeye expects 2009integrity expenditures for these programs to be approximately $28.5 million, ofwhich approximately $10.8 million will be capitalized and $17.7 million will beexpense.

 

The OperatingSubsidiaries are also subject to the requirements of the Occupational Safetyand Health Act (“OSHA”) and comparable state statutes. MainLine Managementbelieves that the Operating Subsidiaries’ operations comply in all materialrespects with OSHA requirements, including general industry standards,record-keeping, hazard communication requirements, training and monitoring ofoccupational exposure to benzene, asbestos and other regulated substances.

 

MainLineManagement cannot predict whether or in what form any new legislation orregulatory requirements might be enacted or adopted or the costs of compliance.In general, any such new regulations could increase operating costs and imposeadditional capital expenditure requirements, but MainLine Management does notpresently expect that such costs or capital expenditure requirements would havea material adverse effect on its results of operations or financial condition.

 

Buckeye Energy Servicesoperates a fleet of trucks to transport refined petroleum products inconnection with the Energy Services segment’s refined petroleum productmarketing activities.  Buckeye EnergyServices is licensed to perform both intrastate and interstate motor carrierservices.  As a motor carrier, BuckeyeEnergy Services is subject to certain safety regulations issued by theDOT.  The trucking regulations cover,among other things, driver operations, maintaining log books, truck manifestpreparations, the placement of safety placards on the trucks and trailervehicles, drug and alcohol testing, safety of operation and equipment, and manyother aspects of truck operations.

 

**TaxConsiderations for Unitholders**

 

This section is a summary of material taxconsiderations that may be relevant to holders (“Unitholders”) of BGH’s CommonUnits.  It is based upon the Internal RevenueCode of 1986, as amended (the “Internal Revenue Code”), regulations promulgatedthereunder and current administrative rulings and court decisions, all of whichare subject to change.  Subsequentchanges in such authorities may cause the tax consequences to varysubstantially from the consequences described below.

 

No attempt has been made in the following discussionto comment on all federal income tax matters affecting BGH or theUnitholders.  Moreover, the discussionfocuses on Unitholders who are individuals and who are citizens or residents ofthe United States and has only limited application to corporations, estates,trusts, non-resident aliens or other Unitholders subject to specialized taxtreatment, such as tax-exempt institutions, foreign persons, individualretirement accounts, REITs or mutual funds.  **UNITHOLDERS ARE URGED TO CONSULT, AND SHOULDDEPEND ON, THEIR OWN TAX ADVISORS IN ANALYZING THE FEDERAL, STATE, LOCAL ANDFOREIGN TAX CONSEQUENCES TO THEM OF THE OWNERSHIP OR DISPOSITION OF COMMONUNITS.**

 

***Characterization of BGH for TaxPurposes***

 

A partnership is not a taxable entity and incurs nofederal income tax liability. Instead, partners are required to take intoaccount their respective allocable share of items of income, gain, loss anddeduction of the partnership in computing their federal income tax liability,regardless of whether distributions are made. Distributions of cash by a partnership to a partner are generally nottaxable unless the amount of cash distributed to a partner is in excess of thepartner’s tax basis in his partnership interest.  Allocable shares of partnership tax items aregenerally determined by a partnership agreement.  However, the IRS may disregard such an agreementin certain instances and re-determine the tax consequences of partnershipoperations to the partners.

 

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Section 7704of the Internal Revenue Code provides that publicly traded partnerships (suchas BGH) will, as a general rule, be taxed as corporations. However, anexception, referred to as the “Qualifying Income Exception,” exists withrespect to publicly traded partnerships of which 90% or more of its grossincome for each taxable year consists of “qualifying income.”  Qualifying income includes interest (otherthan interest generated by a financial or insurance business), dividends, realproperty rents, gains from the sale or disposition of real property, and mostimportantly for Unitholders “income and gains derived from the exploration,development, mining or production, processing, refining, transportation(including pipelines transporting gas, oil or products thereof), or themarketing of any mineral or natural resource (including fertilizer, geothermalenergy and timber),” and gain from the sale or disposition of capital assetsthat produce such income.  BGH’s share ofany such income from Buckeye also would constitute qualifying income to BGH.

 

Buckeye is engagedprimarily in the refined petroleum products transportation business.  BGH believes that at least 90% or more ofBuckeye’s current gross income constitutes, and has constituted, qualifyingincome and, accordingly, that Buckeye will continue to be classified as apartnership and not as a corporation for federal income tax purposes.  BGH’s only cash generating asset is itsownership interest in Buckeye GP, which owns general partner interests andincentive distributions rights in Buckeye and general partner interests incertain of Buckeye’s operating subsidiaries. BGH believes that at least 90% or more of its current gross incomeconstitutes, and has constituted, qualifying income and, accordingly, that BGHwill continue to be classified as a partnership and not as a corporation forfederal income tax purposes.

 

If BGH fails tomeet the Qualifying Income Exception, other than a failure that is determinedby the IRS to be inadvertent and that is cured within a reasonable time afterdiscovery, BGH will be treated as if it had transferred all of its assets,subject to liabilities, to a newly formed corporation, on the first day of theyear in which it fails to meet the Qualifying Income Exception, in return forstock in that corporation, and then distributed that stock to its Unitholdersin liquidation of their interests in BGH. This contribution and liquidationshould be tax-free to Unitholders and BGH so long as BGH, at that time, doesnot have liabilities in excess of the tax basis of its assets. Thereafter, BGHwould be treated as a corporation for federal income tax purposes.

 

If BGH were taxable as a corporation in any taxableyear, either as a result of a failure to meet the Qualifying Income Exceptionor otherwise, BGH’s items of income, gain, loss and deduction would bereflected only on BGH’s tax return rather than being passed through to theUnitholders, and BGH’s net income would be taxed to it at corporate rates.Moreover, if Buckeye were taxable as a corporation in any taxable year, BGH’sshare of Buckeye’s items of income, gain, loss and deduction would not bepassed through to BGH, and Buckeye would pay tax on its income at corporaterates.  If BGH or Buckeye were taxable ascorporations, losses recognized by Buckeye would not flow through to BGH andlosses recognized by BGH would not flow through to BGH’s Unitholders, as thecase may be.  In addition, anydistribution made by BGH to a Unitholder (or by Buckeye to BGH) would betreated as either taxable dividend income, to the extent of current oraccumulated earnings and profits, or, in the absence of earnings and profits, anontaxable return of capital, to the extent of the Unitholder’s tax basis inhis Common Units (or BGH’s tax basis in BGH’s aggregate interest in Buckeye),or taxable capital gain, after the Unitholder’s tax basis in his Common Units(or BGH’s tax basis in BGH’s aggregate interest in Buckeye) is reduced tozero.  Accordingly, taxation of eitherBGH or Buckeye as a corporation would result in a material reduction in a Unitholder’scash flow and after-tax return and thus would likely result in a substantialreduction of the value of the Common Units.

 

***Flow-Through of Taxable Income***

 

BGH will not pay any federal income tax.  Instead, each Unitholder will be required toreport on his income tax return his share of BGH’s income, gains, losses anddeductions without regard to whether corresponding cash distributions arereceived by him.  Consequently, BGH mayallocate income to a Unitholder even if he has not received a cash distribution.  Each Unitholder will be required to includein income his allocable share of BGH’s income, gains, losses and deductions forBGH’s taxable year ending with or within his taxable year.  BGH’s taxable year ends on December 31.

 

***Potential U.S. TaxLegislation Change***

 

Inresponse to recent public offerings of interests in the management operationsof private equity funds and hedge funds, members of Congress have consideredsubstantive changes to the definition of qualifying income under Section 7704(d) ofthe Internal Revenue Code and changing the characterization of certain types ofincome received from partnerships.  Inparticular, one proposal would have recharacterized certain income and gainreceived with respect to “investment services partnership interests” asordinary income for the performance of services, which may not be treated asqualifying income for publicly traded partnerships.  As such proposal is currently interpreted, asignificant portion of BGH’s interests in Buckeye may be viewed as aninvestment services partnership interest. Although MainLine Management is unable to predict whether the recentlyconsidered legislation, or any other proposals, will ultimately be enacted, theenactment of any such legislation could negatively impact the value of BGH’sCommon Units.

 

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***Treatment of BGH’s Distributions***

 

BGH’sdistributionsgenerally will not be taxable to a Unitholder for federal income tax purposesto the extent that the distributions do not exceed the tax basis of aUnitholder’s Common Units immediately before the distribution.  BGH’s cash distributions in excess of aUnitholder’s tax basis generally will be considered to be a gain from the saleor exchange of the Common Units.  Anyreduction in a Unitholder’s share of BGH’s liabilities for which no partner,including MainLine Management, bears the economic risk of loss, known as “nonrecourseliabilities,” will be treated as a distribution of cash to thatUnitholder.  To the extent BGH’sdistributions cause a Unitholder’s “at risk” amount to be less than zero at theend of any taxable year, the Unitholder must recapture any losses deducted inprevious years.

 

A decrease in a Unitholder’s percentage interest inBGH because of BGH’s issuance of additional Common Units will decrease suchUnitholder’s share of BGH’s nonrecourse liabilities, and thus will result in acorresponding deemed distribution of cash. This deemed distribution may constitute a non-pro ratadistribution.  A non-pro ratadistribution of money or property may result in ordinary income to aUnitholder, regardless of his tax basis in his Common Units, if thedistribution reduces the Unitholder’s share of BGH’s “unrealized receivables,”including depreciation recapture, and/or substantially appreciated “inventoryitems,” both as defined in the Internal Revenue Code, and collectively, “Section 751Assets.”  To that extent, the Unitholderwill be treated as having been distributed his proportionate share of the Section 751Assets and having exchanged those assets with us in return for the non-pro rataportion of the actual distribution made to him. This latter deemed exchange will generally result in the Unitholder’srealization of ordinary income, which will equal the excess of (1) thenon-pro rata portion of that distribution over (2) the Unitholder’s taxbasis for the share of Section 751 Assets deemed relinquished in theexchange.

 

***Basis of Common Units***

 

A Unitholder will have an initial tax basis for itsCommon Units equal to the amount paid for the Common Units plus its share ofBGH’s liabilities.  A Unitholder’s taxbasis will be increased by his share of BGH’s income and by any increase in hisshare of BGH’s liabilities.  A Unitholder’sbasis will be decreased, but not below zero, by its share of BGH’sdistributions, by its share of BGH’s losses, by any decrease in its share ofBGH’s liabilities and by its share of BGH’s expenditures that are notdeductible in computing BGH’s taxable income and are not required to becapitalized.

 

***Loss Limitations***

 

The deduction by a Unitholder of his share of BGH’slosses will be limited to the tax basis in his Common Units and, in the case ofan individual Unitholder or a corporate Unitholder, if more than 50% of thevalue of the corporate Unitholder’s stock is owned directly or indirectly byfive or fewer individuals or some tax-exempt organizations, to the amount forwhich the Unitholder is considered to be “at risk” with respect to BGH’sactivities, if that is less than his tax basis. A Unitholder must recapture losses deducted in previous years to theextent that distributions cause his at risk amount to be less than zero at theend of any taxable year.  Lossesdisallowed to a Unitholder or recaptured as a result of these limitations willcarry forward and will be allowable as a deduction to the extent that hisat-risk amount is subsequently increased, provided such losses do not exceedsuch Unitholder’s tax basis in his Common Units.  Upon the taxable disposition of a CommonUnit, any gain recognized by a Unitholder can be offset by losses that werepreviously suspended by the at risk limitation but may not be offset by lossessuspended by the basis limitation.  Anyexcess loss above that gain previously suspended by the at risk or basislimitations is no longer utilizable.

 

In general, a Unitholder will be at risk to the extentof the tax basis of his Common Units, excluding any portion of that basisattributable to his share of BGH’s nonrecourse liabilities, reduced by (i) anyportion of that basis representing amounts otherwise protected against lossbecause of a guarantee, stop loss agreement or other similar arrangement and (ii) anyamount of money he borrows to acquire or hold his Common Units, if the lenderof those borrowed funds owns an interest in BGH, is related to the Unitholderor can look only to the Common Units for repayment.  A Unitholder’s at risk amount will increaseor decrease as the tax basis of the Unitholder’s Common Units increases ordecreases, other than tax basis increases or decreases attributable toincreases or decreases in his share of BGH’s nonrecourse liabilities.

 

The passive loss limitations generally provide that individuals,estates, trusts and some closely-held corporations and personal servicecorporations can deduct losses from passive activities, which are generallycorporate or partnership activities in which the taxpayer does not materiallyparticipate, only to the extent of the taxpayer’s income from thoseactivities.  The passive loss limitationsare applied separately with respect to each publicly traded partnership.  However, the application of the passive losslimitations to tiered publicly traded partnerships is uncertain.  BGH will take the position that any passivelosses BGH generates that are reasonably allocable to BGH’s investment inBuckeye will only be available to offset BGH’s passive income generated in thefuture that is reasonably allocable to BGH’s investment in Buckeye and will notbe available to offset income from other passive activities or investments,including other investments in private businesses or investments BGH may makein other publicly traded partnerships, such as Buckeye, or salary or activebusiness income.  Further, a Unitholder’sshare of BGH’s net income may be offset by any suspended passive losses fromthe Unitholder’s investment in BGH, but may not be offset by the Unitholder’scurrent

 

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or carryoverlosses from other passive activities, including those attributable to otherpublicly traded partnerships.  Passivelosses that are not deductible because they exceed a Unitholder’s share ofincome BGH generates may be deducted in full when he disposes of his entireinvestment in us in a fully taxable transaction with an unrelated party.

 

The IRS could take the position that for purposes ofapplying the passive loss limitation rules to tiered publicly tradedpartnerships, such as Buckeye and BGH, the related entities are treated as onepublicly traded partnership.  In thatcase, any passive losses generated by BGH would be available to offset incomefrom a Unitholder’s investment in Buckeye. However, passive losses that are not deductible because they exceed aUnitholder’s share of income generate by BGH would not be deductible in fulluntil a Unitholder disposes of his entire investment in both BGH and Buckeye ina fully taxable transaction with an unrelated party.

 

The passive loss rules are applied after otherapplicable limitations on deductions, including the at risk rules and thebasis limitation.

 

***Deductibility of Interest Expense***

 

The Internal Revenue Code generally provides thatinvestment interest expense is deductible only to the extent of a non-corporatetaxpayer’s “net investment income.” Investment interest expense includes:

 

·interest on indebtedness properly allocable to property held for investment;

·BGH’s interest expense attributed to portfolio income; and

·the portion of interest expense incurred to purchase or carry an interest in apassive activity to the extent attributable to portfolio income.

 

The computation of a Unitholder’s investment interestexpense will take into account interest on any margin account borrowing orother loan incurred to purchase or carry a unit. Net investment income includesgross income from property held for investment and amounts treated as portfolioincome under the passive loss rules, less deductible expenses, other thaninterest, directly connected with the production of investment income, butgenerally does not include gains attributable to the disposition of propertyheld for investment. The IRS has indicated that net passive income earned by apublicly traded partnership will be treated as investment income to itsUnitholders. In addition, the Unitholder’s share of BGH’s portfolio income willbe treated as investment income.

 

***Entity Level Collections***

 

If BGH is required or elects under applicable law topay any federal, state, local or foreign income tax on behalf of any Unitholderor its general partner or any former Unitholder, BGH is authorized to pay thosetaxes from BGH’s funds. That payment, if made, will be treated as adistribution of cash to the Unitholder on whose behalf the payment was made. Ifthe payment is made on behalf of a person whose identity cannot be determined,BGH is authorized to treat the payment as a distribution to all currentUnitholders.  BGH isauthorized to amend its partnership agreement in themanner necessary to maintain uniformity of intrinsic tax characteristics of theCommon Units and to adjust later distributions, so that after giving effect tothese distributions, the priority and characterization of distributionsotherwise applicable under its partnership agreement is maintained as nearly asis practicable. Payments by BGH as described above could give rise to anoverpayment of tax on behalf of an individual Unitholder in which event theUnitholder would be required to file a claim in order to obtain a credit orrefund.

 

***Allocation of Income, Gain, Loss andDeduction***

 

In general, if BGH has a net profit, its items ofincome, gain, loss and deduction will be allocated among BGH’s Unitholders inaccordance with their percentage interests in BGH.  If BGH has a net loss for the entire year,that loss will be allocated first to the Unitholders in accordance with theirpercentage interests in BGH to the extent of their positive capital accountsand, second, to BGH’s general partner, MainLine Management.

 

Specified items of BGH’s income, gain, loss anddeduction will be allocated to account for the difference between the tax basisand fair market value of BGH’s assets at the time of the initial offering ofits Common Units, referred to in this discussion as “Contributed Property.”  The effect of these allocations to aUnitholder purchasing Common Units will be essentially the same as if the taxbasis of BGH’s assets were equal to their fair market value at the time of theinitial offering of the Common Units.  Inaddition, items of recapture income will be allocated to the extent possible tothe partner who was allocated the deduction giving rise to the treatment ofthat gain as recapture income in order to minimize the recognition of ordinaryincome by some Unitholders.  Finally,although BGH does not expect that its operations will result in the creation ofnegative capital accounts, if negative capital accounts nevertheless result,items of its income and gain will be allocated in an amount and manner toeliminate the negative balance as quickly as possible.

 

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An allocation of items of BGH’s income, gain, loss ordeduction, other than an allocation required by the Internal Revenue Code toeliminate the difference between a partner’s “book” capital account, creditedwith the fair market value of Contributed Property, and “tax” capital account,credited with the tax basis of Contributed Property, referred to in thisdiscussion as the “Book-Tax Disparity,” will generally be given effect forfederal income tax purposes in determining a partner’s share of an item ofincome, gain, loss or deduction only if the allocation has substantial economiceffect. In any other case, a Unitholder’s share of an item will be determinedon the basis of his interest in BGH, which will be determined by taking intoaccount all the facts and circumstances, including:

 

·his relative contributions to BGH;

·the interests of all the Unitholders in profits and losses;

·the interest of all the Unitholders in cash flow; and

·the rights of all the Unitholders to distributions of capital upon liquidation.

 

***Treatment of Short Sales***

 

A Unitholder whose Common Units are loaned to a “shortseller” to cover a short sale of Common Units may be considered as havingdisposed of those Common Units. If so, the Unitholder would no longer betreated for tax purposes as a partner for those Common Units during the periodof the loan and may recognize gain or loss from the disposition. As a result,during this period:

 

·any of BGH’s income, gain, loss or deduction with respect to those units wouldnot be reportable by the Unitholder;

·any cash distributions received by the Unitholder as to those Common Unitswould be fully taxable; and

·all of these distributions would appear to be ordinary income.

 

Unitholders desiring to assure their status aspartners and avoid the risk of gain recognition from a loan to a short sellerare urged to modify any applicable brokerage account agreements to prohibittheir brokers from borrowing their Common Units. The IRS has announced that itis studying issues relating to the tax treatment of short sales of partnershipinterests.

 

***Alternative Minimum Tax***

 

Each Unitholder will be required to take into accounthis distributive share of any items of BGH’s income, gain, loss or deductionfor purposes of the alternative minimum tax. The current minimum tax rate for noncorporate taxpayers is 26% on thefirst $175,000 of alternative minimum taxable income in excess of the exemptionamount and 28% on any additional alternative minimum taxable income.  Unitholders are urged to consult with theirtax advisors as to the impact of an investment in units on their liability forthe alternative minimum tax.

 

***Tax Rates***

 

In general, the highest effective United Statesfederal income tax rate for an individual is currently 35% and the maximumUnited States federal income tax rate for net capital gains of an individual iscurrently 15% (such rate to be increased to 20% for taxable years beginningafter December 31, 2010) if the asset disposed of was held for more than12 months at the time of disposition.

 

***Section 754 Election***

 

BGH has made the election permitted by Section 754of the Internal Revenue Code.  Thiselection is irrevocable without the consent of the IRS.  The election will generally permit BGH toadjust a Common Unit purchaser’s tax basis in BGH’s assets (“inside basis”)under Section 743(b) of the Internal Revenue Code to reflect hispurchase price.  This election does notapply to a person who purchases Common Units directly from us.  The Section 743(b) adjustmentbelongs to the purchaser and not to other Unitholders.  For purposes of this discussion, a Unitholder’sinside basis in BGH’s assets will be considered to have two components: (1) hisshare of BGH’s tax basis in BGH’s assets (“common basis”) and (2) his Section 743(b) adjustmentto that basis.

 

A Section 754 election is advantageous if thetransferee’s tax basis in his Common Units is higher than the Common Units’share of the aggregate tax basis of BGH’s assets immediately prior to thetransfer. In that case, as a result of the election, the transferee would have,among other items, a greater amount of depreciation and depletion deductionsand his share of any gain or loss on a sale of BGH’s assets would be less.  Conversely, a Section 754 election isdisadvantageous if the transferee’s tax basis in his Common Units is lower thanthose Common Units’ share of the aggregate tax basis of BGH’s assetsimmediately prior to the transfer.  A basisadjustment is required regardless of whether a Section 754 election ismade in the case of a transfer of an interest in BGH if BGH has a substantialbuilt-in loss immediately after the transfer, or if BGH distributes propertyand has a substantial basis reduction. Generally a built-in loss or a basis reduction is substantial if itexceeds $250,000.

 

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The calculations involved inthe Section 754 election are complex and will be made on the basis ofassumptions as to the value of BGH’s assets and other matters.  There is no assurance that the determinationsmade by BGH will prevail if challenged by the IRS and that the deductionsresulting from them will not be reduced or disallowed altogether.

 

***Accounting Methodand Taxable Year***

 

BGH uses the year ending December 31as its taxable year and the accrual method of accounting for federal income taxpurposes. Each Unitholder will be required to include in income his share ofBGH’s income, gain, loss and deduction for its taxable year ending within orwith the Unitholder’s taxable year. In addition, a Unitholder who has a taxableyear ending on a date other than December 31 and who disposes of all ofhis Common Units following the close of BGH’s taxable year but before the closeof the Unitholder’s taxable year must include his share of BGH’s income, gain,loss and deduction in income for his taxable year, with the result that he willbe required to include in income for his taxable year his share of more thanone year of BGH’s income, gain, loss and deduction.

 

***Tax Treatment ofOperations***

 

BGH uses the adjusted taxbasis of its various assets for purposes of computing depreciation and costrecovery deductions and gain or loss on any disposition of such assets.  If BGH or Buckeye disposes of depreciableproperty, all or a portion of any gain may be subject to the recapture rules andtaxed as ordinary income rather than capital gain.

 

The costs incurred inselling BGH’s units (i.e., syndication expenses) must be capitalized and cannotbe deducted by BGH currently, ratably or upon BGH’s termination.  Uncertainties exist regarding theclassification of costs as organization expenses, which may be amortized, andas syndication expenses, which may not be amortized, but underwriters’discounts and commissions are treated as syndication costs.

 

***Valuation ofProperties***

 

The federal income taxconsequences of the ownership and disposition of Common Units will depend inpart on BGH’s estimates of the relative fair market values, and the initial taxbases, of BGH’s assets and Buckeye’s assets. Although BGH may from time to time consult with professional appraisersregarding valuation matters, BGH will make many of the relative fair marketvalue estimates itself.  These estimatesand determinations of basis are subject to challenge and will not be binding onthe IRS or the courts.  If the estimatesof fair market value or basis are later found to be incorrect, the characterand amount of items of income, gain, loss or deductions previously reported byUnitholders might change, and Unitholders might be required to adjust their taxliability for prior years and incur interest and penalties with respect tothose adjustments.

 

***Disposition ofCommon Units***

 

A Unitholder will recognizegain or loss on a sale of Common Units equal to the difference between theamount realized and the Unitholder’s tax basis in the Common Units sold.  A Unitholder’s amount realized will bemeasured by the sum of the cash or the fair market value of other propertyreceived by him plus his share of BGH’s nonrecourse liabilities. Because theamount realized includes a Unitholder’s share of BGH’s nonrecourse liabilities,the gain recognized on the sale of Common Units could result in a tax liabilityin excess of any cash received from the sale.

 

Prior distributions from BGHin excess of cumulative net taxable income for a Common Unit that decreased aUnitholder’s tax basis in that Common Unit will, in effect, become taxableincome if the Common Unit is sold at a price greater than the Unitholder’s taxbasis in that Common Unit, even if the price received is less than theUnitholder’s original cost.

 

Except as noted below, gainor loss recognized by a Unitholder, other than a “dealer” in Common Units, onthe sale or exchange of a Common Unit held for more than one year willgenerally be taxable as capital gain or loss. Capital gain recognized by an individual Unitholder on the sale ofCommon Units held for more than 12 months will generally be taxed at a maximumrate of 15% (such rate to be increased to 20% for taxable years beginning afterDecember 31, 2010).  However, aportion of this gain or loss will be separately computed and taxed as ordinaryincome or loss under Section 751 of the Internal Revenue Code to theextent attributable to assets giving rise to depreciation recapture or other “unrealizedreceivables” or to “inventory items” of BGH or Buckeye.  The term “unrealized receivables” includespotential recapture items, including depreciation recapture.  Ordinary income attributable to unrealizedreceivables, inventory items and depreciation recapture may exceed net taxablegain realized upon the sale of a Common Unit and may be recognized even ifthere is a net taxable loss realized on the sale of a Common Unit.  Thus, a Unitholder may recognize bothordinary income and a capital loss upon a sale of Common Units.  Net capital losses may offset

 

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capital gains and no more than $3,000 of ordinary income, in the caseof individuals, and may only be used to offset capital gains in the case ofcorporations.

 

The IRS has ruled that apartner who acquires interests in a partnership in separate transactions mustcombine those interests and maintain a single adjusted tax basis for all thoseinterests.  Upon a sale or otherdisposition of less than all of those interests, a portion of that tax basismust be allocated to the interests sold using an “equitable apportionment”method. Treasury Regulations under Section 1223 of the Internal RevenueCode allow a selling Unitholder who can identify Common Units transferred withan ascertainable holding period to elect to use the actual holding period ofthe Common Units transferred. Thus, according to the ruling, a Unitholder willbe unable to select high or low basis Common Units to sell as would be the casewith corporate stock, but, according to the Treasury Regulations, may designatespecific Common Units sold for purposes of determining the holding period ofunits transferred.  A Unitholder electingto use the actual holding period of Common Units transferred must consistentlyuse that identification method for all subsequent sales or exchanges of CommonUnits.  A Unitholder considering thepurchase of additional Common Units or a sale of Common Units purchased inseparate transactions is urged to consult his tax advisor as to the possibleconsequences of this ruling and application of the Treasury Regulations.

 

Specific provisions of the InternalRevenue Code affect the taxation of some financial products and securities,including partnership interests, by treating a taxpayer as having sold an “appreciated”partnership interest, one in which gain would be recognized if it were sold,assigned or terminated at its fair market value, if the taxpayer or relatedpersons enter(s) into:

 

· a short sale;

· an offsetting notional principalcontract; or

· a futures or forward contract withrespect to the partnership interest or substantially identical property.

 

Moreover, if a taxpayer haspreviously entered into a short sale, an offsetting notional principal contractor a futures or forward contract with respect to the partnership interest, thetaxpayer will be treated as having sold that position if the taxpayer or arelated person then acquires the partnership interest or substantiallyidentical property. The Secretary of the Treasury is also authorized to issueregulations that treat a taxpayer that enters into transactions or positionsthat have substantially the same effect as the preceding transactions as havingconstructively sold the financial position.

 

***AllocationsBetween Transferors and Transferee***

 

In general, BGH’s taxableincome and losses will be determined annually, will be prorated on a monthlybasis and will be subsequently apportioned among the Unitholders in proportionto the number of Common Units owned by each of them as of the opening of theapplicable exchange on the first business day of the month (the “AllocationDate”).  However, gain or loss realizedon a sale or other disposition of BGH’s assets other than in the ordinarycourse of business will be allocated among the Unitholders on the AllocationDate in the month in which that gain or loss is recognized.  As a result, a Unitholder transferring CommonUnits may be allocated income, gain, loss and deduction realized after the dateof transfer.

 

Although simplifyingconventions are contemplated by the Internal Revenue Code and most publiclytraded partnerships use similar simplifying conventions, the use of this methodmay not be permitted under existing Treasury Regulations.  If this method is not allowed under theTreasury Regulations, or only applies to transfers of less than all of the Unitholder’sinterest, BGH’s taxable income or losses might be reallocated among theUnitholders.  BGH is authorized to reviseits method of allocation between Unitholders, as well as Unitholders whoseinterests vary during a taxable year, to conform to a method permitted underfuture Treasury Regulations.

 

A Unitholder who owns CommonUnits at any time during a quarter and who disposes of them prior to the recorddate set for a cash distribution for that quarter will be allocated items ofBGH’s income, gain, loss and deductions attributable to that quarter but willnot be entitled to receive that cash distribution.

 

***NotificationRequirements***

 

A Unitholder who sells anyof its Common Units is generally required to notify BGH in writing of that salewithin 30 days after the sale (or, if earlier, January 15 of the yearfollowing the sale).  A purchaser of suchCommon Units who purchases the Common Units from another Unitholder is alsogenerally required to notify BGH in writing of that purchase within 30 daysafter the purchase.  Upon receiving suchnotifications, BGH is required to notify the IRS of that transaction and tofurnish specified information to the transferor and transferee.  Failure to notify BGH of a purchase may, insome cases, lead to the imposition of penalties.  However, these reporting requirements do notapply to a sale by an individual who is a citizen of the United States and whoeffects the sale or exchange through a broker who will satisfy suchrequirements.

 

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***ConstructiveTermination***

 

BGH****will be considered to have been terminatedfor federal tax purposes if there is a sale or exchange of 50% or more of thetotal interests in BGH’s capital and profits within a twelve-month period.  For purposes of determining whether the 50%threshold has been met, multiple sales of the same unit will be counted onlyonce.  A constructive termination resultsin the closing of BGH’s taxable year for all Unitholders.  In the case of a Unitholder reporting on ataxable year other BGH’s taxable year, the closing of BGH’s taxable year mayresult in more than twelve months of BGH’s taxable income or loss beingincludable in his taxable income for the year of termination.  A constructive termination could result in anincrease in the amount of taxable income to be allocated to BGH’s Unitholdersif the termination results in a termination of Buckeye.  BGH would be required to make new taxelections after a termination, including a new election under Section 754of the Internal Revenue Code, and a termination could result in a deferral ofBGH’s deductions for depreciation.  Atermination could also result in penalties if BGH were unable to determine thatthe termination had occurred.  Moreover,a termination might either accelerate the application of, or subject BGH to,any tax legislation enacted before the termination.

 

***Withholding***

 

IfBGH was required or elected under applicable law to pay any federal, state orlocal income tax on behalf of any Unitholder, BGH is authorized to pay thosetaxes from its funds.  Such payment, ifmade, will be treated as a distribution of cash to the Unitholder on whosebehalf the payment was made.  If thepayment is made on behalf of a person whose identity cannot be determined, BGHis authorized to treat the payment as a distribution to a current Unitholder.

 

***UnrelatedBusiness Taxable Income***

 

Certainentities otherwise exempt from federal income taxes (such as individualretirement accounts, pension plans and charitable organizations) arenevertheless subject to federal income tax on net unrelated business taxableincome and each such entity must file a tax return for each year in which ithas more than $1,000 of gross income from unrelated business activities.  MainLine Management believes thatsubstantially all of BGH’s gross income will be treated as derived from anunrelated trade or business and taxable to such entities. The tax-exempt entity’sshare of BGH’s deductions directly connected with carrying on such unrelatedtrade or business are allowed in computing the entity’s taxable unrelatedbusiness income.   **ACCORDINGLY, TAX-EXEMPT ENTITIES SUCH AS INDIVIDUALRETIREMENT ACCOUNTS, PENSION PLANS AND CHARITABLE TRUSTS ARE ENCOURAGED TOCONSULT THEIR PROFESSIONAL TAX ADVISORS REGARDING THE TAX IMPLICATIONS OF THEIROWNERSHIP OF COMMON UNITS.**

 

***Foreign Unitholders***

 

Non-resident aliens andforeign corporations, trusts or estates that own Common Units will beconsidered to be engaged in business in the United States on account of theownership of Common Units.  As aconsequence, they will be required to file U.S. federal tax returns to reporttheir share of BGH’s income, gain, loss or deduction and pay U.S. federalincome tax at regular rates on their share of BGH’s net income or gain.  Moreover, under rules applicable topublicly traded partnerships, BGH withholds at the highest applicable effectivetax rate from cash distributions made quarterly to foreign Unitholders.  Each foreign Unitholder must obtain ataxpayer identification number from the IRS and submit that number to BGH’stransfer agent on a Form W-8BEN or applicable substitute form in order toobtain credit for these withholding taxes. A change in applicable law may require BGH to change these procedures.

 

In addition, because aforeign corporation that owns Common Units will be treated as engaged in aUnited States trade or business, that corporation may be subject to the UnitedStates branch profits tax at a rate of 30%, in addition to regular federalincome tax, on its share of BGH’s income and gain, as adjusted for changes inthe foreign corporation’s “U.S. net equity,” which are effectively connectedwith the conduct of a United States trade or business.  That tax may be reduced or eliminated by anincome tax treaty between the United States and the country in which theforeign corporate Unitholder is a “qualified resident.”  In addition, this type of Unitholder issubject to special information reporting requirements under Section 6038Cof the Internal Revenue Code.

 

In a published ruling, theIRS has taken the position that gain realized by a foreign partner who sells orotherwise disposes of a limited partner unit will be treated as effectivelyconnected with a United States trade or business of the foreign partner, andthus subject to federal income tax, to the extent that such gain isattributable to appreciated personal property used by the limited partnershipin a United States trade or business. Moreover, a foreign partner is subject to federal income tax on gainrealized on the sale or disposition of a Common Unit to the extent that suchgain is attributable to appreciated United States real property interests;however, a foreign Unitholder will not be subject to federal income tax underthis rule unless such foreign Unitholder has owned more than 5% in valueof BGH’s Common Units during the five-year period ending on the date of thesale or disposition, provided the Common Units are regularly traded on anestablished securities market at the time of the sale or disposition.

 

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***Regulated Investment Companies***

 

A regulated investmentcompany, or “mutual fund,” is required to derive 90% or more of its grossincome from specific sources including interest, dividends and gains from thesale of stocks or securities, foreign currency or specified related sources,and net income derived from the ownership of an interest in a “qualifiedpublicly traded partnership.”  MainLineManagement expects that BGH will meet the definition of a “qualified publiclytraded partnership.”

 

**Available Information**

 

BGHfiles annual, quarterly, and current reports and other documents with theSecurities and Exchange Commission (the “SEC”) under the Securities ExchangeAct of 1934.  The public can obtain anydocuments that BGH files with the SEC at *http://www.sec.gov*.  BGH also makes available free of charge its AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q, Current Reportson Form 8-K, and any amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Exchange Act as soonas reasonably practicable after filing such materials with, or furnishing suchmaterials to, the SEC, on or through BGH’s Internet website, *www.buckeyegp.com*. BGH is not including the information contained on its website as a partof, or incorporating it by reference into, this Annual Report on Form 10-K.

 

Youcan also find information about BGH at the offices of the New York StockExchange (“NYSE”), 20 Broad Street, New York, New York 10005 or at the NYSE’sInternet site at *www.nyse.com*. The NYSE requiresthe chief executive officer of each listed company to certify annually that heis not aware of any violation by the company of the NYSE corporate governancelisting standards as of the date of the certification, qualifying thecertification to the extent necessary. The Chief Executive Officer of MainLineManagement provided such certification to the NYSE in 2008 withoutqualification.  In addition, thecertifications of MainLine Management’s Chief Executive Officer and ChiefFinancial Officer required by Sections 302 and 906 of the Sarbanes-Oxley Acthave been included as exhibits to BGH’s Annual Report on Form 10-K.

 

***Item 1A.    Risk Factors***

 

Inthis Item 1A, references to “we”, “us” and “our” mean Buckeye GPHoldings L.P., and its consolidated subsidiaries. References to “Buckeye”mean Buckeye Partners, L.P. and its consolidated subsidiaries.

 

**Risks Inherent in our Dependence on Distributions fromBuckeye**

 

**Our primary cash-generating assets are our general partnerinterests in Buckeye, which consist primarily of general partner units and theincentive distribution rights in Buckeye. Our cash flow is, therefore, directlydependent upon the ability of Buckeye to make cash distributions to itspartners.**

 

Theamount of cash that Buckeye can distribute to its partners each quarter,including the amount of incentive distributions, principally depends upon theamount of cash Buckeye generates from its operations, which will fluctuate fromquarter to quarter based on, among other things:

 

·                  fluctuations in prices for refined petroleumand natural gas products and overall demand for such products in the UnitedStates in general, and in Buckeye’s service areas in particular (economicactivity, weather, alternative energy sources, conservation and technologicaladvances may affect petroleum product prices and demand);

 

·                  changes in laws and regulations, includingenvironmental, safety and tax laws and regulations and the regulation ofBuckeye’s tariff rates;

 

·                  liability for environmental claims;

 

·                  availability and cost of insurance on Buckeye’sassets and operations;

 

·                  shut-downs or cutbacks at major refineriesthat supply petroleum products transported on Buckeye’s pipelines or stored inBuckeye’s terminals;

 

·                  deterioration in Buckeye’s labor relations;

 

·                  prevailing economic conditions; and

 

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·                  disruptions to the air travel system.

 

Inaddition, the actual amount of cash Buckeye will have available fordistribution will depend on other factors, some of which are beyond itscontrol, including:

 

·                  the level of capital expenditures it makes;

 

·                  the availability, if any, and cost ofacquisitions;

 

·                  debt service requirements;

 

·                  fluctuations in working capital needs;

 

·                  restrictions on distributions contained inBuckeye’s credit facility and senior notes;

 

·                  Buckeye’s ability to borrow under itsrevolving credit facility; and

 

·                  the amount, if any, of cash reservesestablished by Buckeye’s general partner, Buckeye GP, in its discretionfor the proper conduct of Buckeye’s business.

 

Becauseof these factors, Buckeye may not have sufficient available cash each quarterto continue to pay distributions at the level of its most recent quarterlydistribution of $0.8875 per limited partner unit (“LP Units”), or any otheramount. You should also be aware that the amount of cash that Buckeye hasavailable for distribution depends primarily upon its cash flow, including cashflow from financial reserves and working capital borrowings, and is not solelya function of profitability, which will be affected by non-cash items. As aresult, Buckeye may be able to make cash distributions during periods whenBuckeye records losses and may not be able to make cash distributions duringperiods when Buckeye records net income. Please read “Risk Factors—RisksInherent in Buckeye’s Business” for a discussion of risks affecting Buckeye’sability to generate cash flow.

 

**A reduction in Buckeye’s distributions willdisproportionately affect the amount of cash distributions to which we arecurrently entitled.**

 

Ourownership of the incentive distribution rights in Buckeye entitles us toreceive specified percentages of the amount of cash distributions made byBuckeye to its limited partners. Most of the cash we receive from Buckeye isattributable to our ownership of the incentive distribution rights.Accordingly, any reduction in quarterly cash distributions from Buckeye wouldhave the effect of disproportionately reducing the amount of the distributionsthat we receive from Buckeye.

 

**Our right to receive incentive distributions will terminateif Buckeye’s general partner is removed.**

 

Ourright to receive incentive distributions will terminate if Buckeye GP isremoved as general partner of Buckeye, effective upon the date of such removal.

 

**Buckeye may issue additional LP Units or other equitysecurities, which may increase the risk that Buckeye will not have sufficientavailable cash to maintain or increase its cash distribution level per LPUnit.**

 

BecauseBuckeye distributes to its partners most of the cash generated by itsoperations, it relies primarily upon external financing sources, including debtand equity issuances, to fund its acquisitions and expansion capitalexpenditures. Accordingly, Buckeye has wide latitude to issueadditional LP Units on terms and conditions established byBuckeye GP. We receive cash distributions from Buckeye and its subsidiaryoperating partnerships on the general partner interests and incentivedistribution rights that we own. Because most of the cash we receive fromBuckeye is attributable to our ownership of the incentive distribution rights,payment of distributions on additional LP Units may increase the risk thatBuckeye will be unable to maintain or increase its quarterly cash distributionper LP Unit, which in turn may reduce the amount of incentivedistributions we receive and the available cash that we have to distribute toour Unitholders.

 

**In the future, we may not have sufficient cash to maintainthe level of our quarterly distributions.**

 

Becauseour primary source of operating cash flow consists of cash distributions fromBuckeye, the amount of distributions we are able to make to our Unitholders mayfluctuate based on the level of distributions Buckeye makes to its partners,including us.

 

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Buckeyemay not continue to make quarterly distributions at its current level of$0.8875 per LP Unit, or may not distribute any other amount, or increaseits quarterly distributions in the future. In addition, while we would expectto increase or decrease distributions to our Unitholders if Buckeye increasesor decreases distributions to us, the timing and amount of such changes in ourdistributions, if any, will not necessarily be comparable to the timing andamount of any changes in distributions made by Buckeye. Factors such asreserves established by the board of directors of our general partner for ourestimated general and administrative expenses of being a public company as wellas other operating expenses, reserves to satisfy our debt service requirements,if any, and reserves for future distributions by us may affect thedistributions we make to our Unitholders. Prior to making any distributions toour Unitholders, we will reimburse our general partner and its affiliates forall direct and indirect expenses incurred by them on our behalf. Our generalpartner will determine the amount of these reimbursed expenses. Thereimbursement of these expenses, in addition to the other factors listed above,could reduce the amount of available cash that we have to make distributions toour Unitholders.

 

**Buckeye’s practice of distributing all of its available cashmay limit its ability to grow, which could impact distributions to us and theavailable cash that we have to distribute to our Unitholders.**

 

Becauseour primary cash-generating assets are general partner interests in Buckeye,including the incentive distribution rights, our growth will be dependent uponBuckeye’s ability to increase its quarterly cash distributions. Buckeye hashistorically distributed to its partners most of the cash generated by itsoperations. As a result, it relies primarily upon external financing sources,including debt and equity issuances, to fund its acquisitions and expansioncapital expenditures. Accordingly, to the extent Buckeye is unable to financegrowth externally, its ability to grow will be impaired because it distributessubstantially all of its available cash. Also, if Buckeye incurs additionalindebtedness to finance its growth, the increased interest expense associatedwith such indebtedness may reduce the amount of available cash that we candistribute to you.

 

**Restrictions in Buckeye’s credit facility could limit itsability to make distributions to us.**

 

Buckeye’scredit facility contains covenants limiting its ability to incur indebtedness,grant liens, engage in transactions with affiliates and make distributions tous. The facility also contains covenants requiring Buckeye to maintain certainfinancial ratios. Buckeye is prohibited from making any distribution toUnitholders if such distribution would cause an event of default or otherwiseviolate a covenant under this facility. Please read “Management’s Discussionand Analysis of Financial Condition and Results of Operation—Liquidity andCapital Resources” for more information about Buckeye’s credit facility.

 

**Risks Inherent in Buckeye’s Business**

 

Becausewe are directly dependent on the distributions we receive from Buckeye, risksto Buckeye’s operations are also risks to us. We have set forth below risks toBuckeye’s business and operations, the occurrence of which could negativelyimpact Buckeye’s financial performance and decrease the amount of cash it isable to distribute to us.

 

**Changes in refined petroleum products demand and distributionmay adversely affect Buckeye’s business.**

 

Demandfor the services provided by Buckeye’s Operating Subsidiaries depends upon thedemand for refined petroleum products in the regions served. Prevailingeconomic conditions, price and weather affect the demand for refined petroleumproducts. Changes in transportation and travel patterns in the areas served byBuckeye’s pipelines also affect the demand for refined petroleum productsbecause a substantial portion of the refined petroleum products transported byBuckeye’s pipelines and throughput at its terminals is ultimately used as fuelfor motor vehicles and aircraft. If these factors result in a decline in demandfor refined petroleum products, the business of Buckeye’s OperatingSubsidiaries would be particularly susceptible to adverse effects because theyoperate without the benefit of either exclusive franchises from governmententities or long-term contracts.

 

Inaddition, in December 2007, Congress enacted the “Energy Independence andSecurity Act of 2007,” which, among other provisions, mandated annuallyincreasing levels for the use of renewable fuels such as ethanol, commencing in2008 and escalating for 15 years, as well as increasing energy efficiencygoals, including higher fuel economy standards for motor vehicles, among othersteps. These statutory mandates may have the impact over time of offsettingprojected increases or reducing the demand for refined petroleum products incertain markets, particularly gasoline. The increased production and use ofbiofuels may also create opportunities for additional pipeline transportationand additional blending opportunities within the terminals division, althoughthat potential cannot be quantified at present. Other legislative changes maysimilarly alter the expected demand and supply projections for refinedpetroleum products in ways that cannot be predicted.

 

Energyconservation, changing sources of supply, structural changes in the oilindustry and new energy technologies also could adversely affect Buckeye’sbusiness. We cannot predict or control the effect of these factors on Buckeyeor us.

 

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Economicconditions worldwide have from time to time contributed to slowdowns in the oiland gas industry, as well as in the specific segments and markets in whichBuckeye operates, resulting in reduced demand and increased price competitionfor Buckeye’s products and services. Buckeye’s operating results may also beaffected by uncertain or changing economic conditions with certain regions,including the challenges that are currently affecting economic conditions inthe entire United States. If global economic and market conditions (includingvolatility in commodity markets), or economic conditions in the United States,remain uncertain or persist, spread or deteriorate further, Buckeye mayexperience material impacts on its business, financial condition and results ofoperations.

 

**Competition could adversely affect Buckeye’s operatingresults.**

 

Generally,pipelines are the lowest cost method for long-haul overland movement of refinedpetroleum products. Therefore, Buckeye’s most significant competitors for largevolume shipments are other existing pipelines, some of which are owned orcontrolled by major integrated oil companies. In addition, new pipelines(including pipeline segments that connect with existing pipeline systems) couldbe built to effectively compete with Buckeye in particular locations.   For example, Buckeye is aware of a proposedpipeline system in the Rocky Mountain region that would compete directly withBuckeye NGL’s pipeline transportation services. This competition could ultimately reduce the volumes of natural gasliquids that are transported by Buckeye NGL if the proposed pipeline systembecomes operational.

 

Buckeyecompetes with marine transportation in some areas. Tankers and barges on theGreat Lakes account for some of the volume to certain Michigan, Ohio andupstate New York locations during the approximately eight non-winter months ofthe year. Barges are presently a competitive factor for deliveries to the NewYork City area, the Pittsburgh area, Connecticut and locations on the OhioRiver such as Mt. Vernon, Indiana and Cincinnati, Ohio, and locations on theMississippi River such as St. Louis, Missouri.

 

Truckscompetitively deliver refined petroleum products in a number of areas thatBuckeye serves. While their costs may not be competitive for longer hauls orlarge-volume shipments, trucks compete effectively for incremental and marginalvolumes in many areas that Buckeye serves. The availability of trucktransportation places a significant competitive constraint on Buckeye’s abilityto increase its Operating Subsidiaries’ tariff rates.

 

Privatelyarranged exchanges of refined petroleum products between marketers in differentlocations are another form of competition. Generally, these exchanges reduceboth parties’ costs by eliminating or reducing transportation charges. Inaddition, consolidation among refiners and marketers that has accelerated inrecent years has altered distribution patterns, reducing demand fortransportation services in some markets and increasing them in other markets.

 

Additionally,Buckeye’s Lodi natural gas storage facility competes primarily with otherstorage facilities in the storage of natural gas. Some of Buckeye’s competitorsmay have greater financial resources and access to greater supplies of naturalgas than Buckeye’s Lodi facility does. Some of these competitors may expand orconstruct transportation and storage systems that would create additionalcompetition for the services Buckeye provides to its customers. Increasedcompetition could reduce the volumes of natural gas stored by Buckeye and couldadversely affect Buckeye’s ability to renew or replace existing contracts atrates sufficient to maintain current revenues and cash flows.

 

Finally,Buckeye’s Energy Services segment buys and sells refined petroleum products inconnection with its marketing activities, and must compete with the majorintegrated oil companies, their marketing affiliates, and independent brokersand marketers of widely varying sizes, financial resources and experience. Someof these companies have superior access to capital resources, which couldaffect Buckeye’s ability to effectively compete with them.

 

Allof these competitive pressures could have a material adverse effect on Buckeye’sbusiness, financial condition, results of operations, and cash flows, therebyreducing Buckeye’s ability to make distributions to its Unitholders, includingus.

 

**Mergers among Buckeye’s customers and competitors couldresult in lower volumes being shipped on Buckeye’s pipelines and stored inBuckeye’s terminals, thereby reducing the amount of cash Buckeye generates.**

 

Mergersbetween existing Buckeye customers could provide strong economic incentives forthe combined entities to utilize their existing pipeline and terminal systemsinstead of Buckeye’s. As a result, Buckeye could lose some or all of thevolumes and associated revenues from these customers and Buckeye couldexperience difficulty in replacing those lost volumes and revenues. Becausemost of Buckeye’s operating costs are fixed, a reduction in volumes wouldresult in not only a reduction of revenues, but also a decline in net incomeand cash flow of a similar magnitude, which would reduce Buckeye’s ability tomeet its financial obligations and pay cash distributions to us.

 

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**Buckeye may incur liabilities related to assets Buckeye hasacquired. These costs and liabilities may not be covered by indemnificationrights that Buckeye may have against the sellers of the assets.**

 

Someof the assets Buckeye has acquired have been used for many years to distribute,store or transport petroleum products. Releases of petroleum products into theenvironment that require remediation may have occurred prior to Buckeye’sacquisition from terminals or along pipeline rights-of-way. In addition,releases may have occurred in the past that have not yet been discovered, whichcould require costly future remediation. If a significant release or eventoccurred in the past, the liability for which was not retained by the seller orfor which indemnification from the seller is not available, it could adverselyaffect Buckeye’s financial position, results of operations, and cash flows.

 

**A decline in production at the ConocoPhillips Wood Riverrefinery could materially reduce the volume of refined petroleum productsBuckeye transports.**

 

Amajority of the refined petroleum products transported on Wood River’s pipelinesystem is produced at ConocoPhillip’s Wood River refinery. A decline inproduction at the ConocoPhillips Wood River refinery could materially reducethe volume of refined petroleum products Buckeye transports on certain of thepipelines owned by Wood River. As a result, Buckeye’s revenues and, therefore,Buckeye’s ability to pay cash distributions to us could be adversely affected.The ConocoPhillips Wood River refinery could partially or completely shut downits operations, temporarily or permanently, due to factors affecting itsability to produce refined petroleum products such as unscheduled maintenanceor catastrophes, labor difficulties, environmental proceedings or otherlitigation, loss of significant downstream customers, or legislation orregulation that adversely impacts the economics of refinery operations.

 

**Potential future acquisitions and expansions, if any, mayaffect Buckeye’s business by substantially increasing the level of Buckeye’sindebtedness and contingent liabilities and may increase Buckeye’s risks ofbeing unable to effectively integrate these new operations.**

 

Fromtime to time, Buckeye evaluates and acquires assets and businesses that Buckeyebelieves complement its existing assets and businesses. Acquisitions mayrequire substantial capital or the incurrence of substantial indebtedness. If Buckeyeconsummates any future acquisitions, Buckeye’s capitalization and results ofoperations may change significantly.

 

Acquisitionsand business expansions involve numerous risks, including difficulties in theassimilation of the assets and operations of the acquired businesses,inefficiencies and difficulties that arise because of unfamiliarity with newassets and the businesses associated with them and new geographic areas and thediversion of management’s attention from other business concerns. Further,unexpected costs and challenges may arise whenever businesses with differentoperations or management are combined, and Buckeye may experience unanticipateddelays in realizing the benefits of an acquisition. Following an acquisition,Buckeye may discover previously unknown liabilities associated with theacquired business for which Buckeye has no recourse under applicableindemnification provisions.

 

**Certain of Buckeye’s pipeline operations charge tariff rateswhich are subject to regulation and change by FERC.**

 

BuckeyePipe Line, Wood River, BPL Transportation, Buckeye NGL and NORCO are interstatecommon carriers regulated by the FERC under the Interstate Commerce Act and theDepartment of Energy Organization Act. The FERC’s primary ratemaking methodologyis price indexing. In the alternative, a pipeline is allowed to chargemarket-based rates if the pipeline establishes that it does not possesssignificant market power in a particular market.

 

Theindexing methodology is used to establish rates on the pipelines owned by WoodRiver, BPL Transportation, Buckeye NGL and NORCO. The indexing method presentlyallows a pipeline to increase its rates by a percentage equal to the change inthe annual producer price index for finished goods (“PPI”) plus 1.3%.  If the change in PPI +1.3% were to benegative, Buckeye could be required to reduce the rates charged by Wood River,BPL Transportation, Buckeye NGL and NORCO if they exceed the new maximumallowable rate. In addition, changes in the PPI might not fully reflect actualincreases in the costs associated with these pipelines, thus hampering Buckeye’sability to recover its costs. Shippers may also file complaints against indexedrates as being unjust and unreasonable, subject to the FERC’s standards.

 

BuckeyePipe Line presently is authorized to charge rates set by market forces, subjectto limitations, rather than by reference to costs historically incurred by thepipeline, in 15 regions and metropolitan areas. The Buckeye Pipe Line programis an exception to the generic oil pipeline regulations the FERC issued underthe Energy Policy Act of 1992. The generic rules rely primarily on theindex methodology described above.

 

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TheBuckeye Pipe Line rate program was reevaluated by the FERC in July 2000,and was allowed to continue with no material changes. We cannot predict theimpact, if any, that a change in the FERC’s method of regulating Buckeye PipeLine would have on Buckeye’s operations, financial condition, results ofoperations, or cash flows.

 

**Buckeye’s partnership status may be a disadvantage to it incalculating cost of service for rate-making purposes.**

 

Inthe past, the FERC ruled that pass-through entities, like Buckeye, may notclaim an income tax allowance for income attributable to non-corporate limitedpartners in justifying the reasonableness of their rates that are based ontheir cost of service. Further, in a July 2004 decision involving anunrelated pipeline limited partnership, the United States Court of Appeals forthe District of Columbia Circuit overruled a prior FERC decision allowing alimited partnership to claim a partial income tax allowance. On May 4,2005, the FERC adopted a new policy providing that all entities owning publicutility assets—oil and gas pipelines and electric utilities—would be permittedto include an income tax allowance in their cost-of-service rates to reflectthe actual or potential income tax liability attributable to their publicutility income, regardless of the form of ownership. The FERC determined thatany pass-through entity seeking an income tax allowance in a rate proceedingmust establish that its partners have an actual or potential income taxobligation on the entity’s public utility income. The amount of any income taxallowance will be reduced accordingly to the extent that any of the partners donot have an actual or potential income tax obligation. This reduction will bereflected in the weighted income tax liability of the entity’s partners.Whether a pipeline’s ultimate owners have actual or potential income taxliability will be reviewed by the FERC on a case-by-case basis. Although thisnew policy is generally favorable for pipelines that are organized aspass-through entities, it still entails risk due to the case-by-case reviewrequirement. This policy was applied by the FERC in June 2005 with anorder involving an unrelated pipeline limited partnership (“2005 PolicyStatement”). The FERC concluded that the pipeline should be afforded an incometax allowance on all of its partnership interests to the extent that the ownersof those interests had an actual or potential income tax obligation during theperiods at issue. In December 2005, the FERC reaffirmed its new income taxallowance policy as it applied to that pipeline. On May 29, 2007, theUnited States Court of Appeals for the District of Columbia Circuit issued adecision affirming the FERC’s 2005 Policy Statement, and on August 20,2007, denied requests for rehearing. On December 26, 2007, the FERC issuedan order on remand reaffirming and clarifying its 2005 Policy Statement. Inorders concurrently issued, the FERC further found that complaints against oil pipelinerates challenging its income tax policy, as clarified, would not be considered.

 

Ashipper or FERC could cite these decisions in a protest or complaintchallenging indexed rates maintained by certain of Buckeye’s OperatingSubsidiaries. Whether a pipeline’s ultimate owners have actual or potentialincome tax liability will be reviewed by the FERC on a case-by-case basis.Although the new policy is generally favorable for pipelines that are organizedas pass-through entities, it still entails risk due to the case-by-case reviewrequirement. If a challenge were brought and the FERC were to find that some ofthe indexed rates exceed levels justified by the cost of service, the FERCcould order a reduction in the indexed rates and could require reparations. Asa result, Buckeye’s results of operations could be adversely affected.

 

**Environmental regulation may impose significant costsand liabilities on Buckeye.**

 

Buckeye’sOperating Subsidiaries are subject to federal, state and local laws andregulations relating to the protection of the environment. Risks of substantialenvironmental liabilities are inherent in Buckeye’s operations, and Buckeyecannot make any assurances that Buckeye’s Operating Subsidiaries will not incurmaterial environmental liabilities. Additionally, Buckeye’s costs could increasesignificantly and Buckeye could face substantial liabilities, if, among otherdevelopments:

 

·                  environmental laws, regulations andenforcement policies become more rigorous; or

 

·                  claims for property damage or personal injuryresulting from the operations of the Operating Subsidiaries are filed.

 

**Existing or future state or federal government regulationsrelating to certain chemicals or additives in gasoline or diesel fuel couldrequire capital expenditures or result in lower pipeline volumes and therebyadversely affect Buckeye’s results of operations and cash flows, therebyreducing Buckeye’s ability to make distributions to Unitholders, including us.**

 

Changesmade to governmental regulations governing the components of refined petroleumproducts may necessitate changes to Buckeye’s pipelines and terminals which mayrequire significant capital expenditures or result in lower pipeline volumes.For example, the increasing use of ethanol as a fuel additive, which is blendedwith gasoline at product terminals, may lead to reduced pipeline volumes andrevenue which may not be totally offset by increased terminal blending feesBuckeye may receive at its terminals.

 

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**Department of Transportationregulations may impose significant costs and liabilities on Buckeye.**

 

Buckeye’spipeline operations are subject to regulation by the United States Departmentof Transportation. These regulations require, among other things, that pipelineoperators engage in a regular program of pipeline integrity testing to assess,evaluate, repair and validate the integrity of their pipelines, which, in theevent of a leak or failure, could affect populated areas, unusually sensitiveenvironmental areas, or commercially navigable waterways. In response to theseregulations, Buckeye’s Operating Subsidiaries conduct pipeline integrity testson an ongoing and regular basis. Depending on the results of these integritytests, Buckeye’s Operating Subsidiaries could incur significant and unexpectedcapital and operating expenditures, not accounted for in anticipated capital oroperating budgets, in order to repair such pipelines to ensure their continuedsafe and reliable operation.

 

**Buckeye’s business is exposed to credit risk, against whichBuckeye may not be able to adequately protect.**

 

Buckeye’sbusinesses are subject to the risks of nonpayment and nonperformance by itscustomers. Buckeye manages its exposure to credit risk through credit analysisand monitoring procedures, and sometimes use letters of credit, prepayments andguarantees. However, these procedures and policies cannot fully eliminatecustomer credit risk, and to the extent Buckeye’s policies and procedures proveto be inadequate, it could negatively affect Buckeye’s financial condition andresults of operations.  Some of ourcustomers, counterparties and suppliers may be highly leveraged and subject totheir own operating and regulatory risks and, even if our credit review andanalysis mechanisms work properly, we may experience financial losses in ourdealings with such parties.  In addition,volatility in commodity prices might have an impact on many of our customers,which in turn could have a negative impact on their ability to meet theirobligations to us.

 

Themarketing business in Buckeye’s Energy Services segment enters into salescontracts pursuant to which customers agree to buy refined petroleum productsfrom Buckeye at a fixed-price on a future date. Given the recent drop inrefined petroleum product prices, certain of Buckeye’s fixed-price salescontract customers have obligations to purchase refined petroleum products fromBuckeye at prices that are above current market prices. If Buckeye’s customershave not hedged their exposure to reductions in petroleum product prices, thenthey could have a significant loss upon settlement of their fixed-price salescontracts with Buckeye, which could increase the risk of their nonpayment ornonperformance. In addition, Buckeye generally has entered into futurescontracts to hedge its exposure under these fixed-price sales contracts toincreases in petroleum product prices. If current price levels remain lowerthan when Buckeye entered into these futures contracts, then Buckeye will berequired to make payments upon the settlement thereof. Ordinarily, thissettlement payment would be offset by the payment received from the customerpursuant to the associated fixed price sales contract. Buckeye will, however,be required to make the settlement payment under the futures contract even if afixed-price sales contract customer does not perform. Nonperformance underfixed-price sales contracts by a significant number of Buckeye’s customerscould have a material adverse effect on Buckeye’s financial condition andresults of operations.

 

**Terrorist attacks could adversely affect Buckeye’sbusiness.**

 

Sincethe attacks of September 11, 2001, the United States government has issuedwarnings that energy assets, specifically our nation’s pipeline infrastructure,may be the future target of terrorist organizations. These developments havesubjected Buckeye’s operations to increased risks. Any future terrorist attack onBuckeye’s facilities, those of Buckeye’s customers and, in some cases, those ofother pipelines, refineries or terminals, could significantly disrupt Buckeye’soperations, require substantial expenditures for replacement and repair ofpipelines, refineries or terminals or otherwise have a material adverse effecton Buckeye’s business.

 

During2007, the Department of Homeland Security promulgated the Chemical FacilityAnti-Terrorism Standards (“CFATS”) to regulate the security of facilitiesconsidered to have “high risk” chemicals. Buckeye has submitted to the Department of Homeland Security certainrequired information concerning its facilities in compliance with CFATS and, asa result, several of Buckeye’s facilities have been determined to be initiallytiered as “high risk” by the Department of Homeland Security.  Due to this determination, Buckeye isrequired to prepare a security vulnerability assessment and possibly developand implement site security plans required by CFATS.  At this time, BGH does not believe thatcompliance with CFATS will have a material effect on Buckeye’s business.

 

**Buckeye’s operations are subject to operational hazards andunforeseen interruptions for which Buckeye may not be insured.**

 

Buckeye’soperations are subject to operational hazards and unforeseen interruptions suchas natural disasters, adverse weather, accidents, fires, explosions, hazardousmaterials releases, and other events beyond Buckeye’s control. These eventsmight result in a loss of equipment or life, injury, or extensive propertydamage, as well as an interruption in Buckeye’s operations. Buckeye’s OperatingSubsidiaries’ operations are currently covered by property, casualty, workers’compensation and environmental insurance policies. In the future, however,Buckeye may not be able to maintain or obtain insurance of the type and amountdesired

 

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atreasonable rates. As a result of market conditions, premiums and deductiblesfor certain insurance policies have increased substantially, and could escalatefurther. In some instances, certain insurance could become unavailable oravailable only for reduced amounts of coverage. For example, insurance carriersare now requiring broad exclusions for losses due to war risk and terroristacts. If Buckeye were to incur a significant liability for which it was notfully insured, it could have a material adverse effect on Buckeye’s financialposition, thereby reducing Buckeye’s ability to make distributions to itsUnitholders, including us.

 

**Buckeye may not realize the expected benefits from theacquisitions of Lodi Gas and Farm & Home.**

 

Buckeye’sestimates regarding earnings, operating cash flow and capital expendituresresulting from the Lodi Gas or Farm & Home acquisitions may prove tobe incorrect. Additionally, Buckeye may encounter difficulties in theassimilation of the new businesses, Buckeye may experience unanticipated inefficienciesor costs, and Buckeye may lose customers or key employees. In addition, boththe gas storage business of Lodi Gas and the wholesale business of Farm &Home expand Buckeye’s operations and the types of businesses in which Buckeyeengages, posing additional challenges in the integration of these newbusinesses.

 

**Buckeye’s natural gas storage business depends on third partypipelines to transport natural gas.**

 

Buckeyedepends on Pacific Gas and Electric’s intrastate gas pipelines to move its customers’natural gas to and from the Lodi facility. Any interruption of service ordecline in utilization on the pipelines or adverse change in the terms andconditions of service for the pipelines could have a material adverse effect onthe ability of Buckeye’s customers to transport natural gas to and from theLodi facility, and could have a corresponding material adverse effect onBuckeye’s storage revenues. In addition, the rates charged by theinterconnected pipelines for transportation to and from Buckeye’s facilitiescould affect the utilization and value of Buckeye’s storage services.

 

**A significant decrease in the production of natural gas couldhave a significant financial impact on Buckeye’s operations and cash flows.**

 

Buckeye’sprofitability is materially affected by the volume of natural gas stored byBuckeye. A material change in the supply or demand of natural gas could resultin a decline in the volume of natural gas delivered to the Lodi facility forstorage, thereby decreasing Buckeye’s revenues and operating income, and as aresult, reducing Buckeye’s ability to make distributions to its Unitholders.

 

**Buckeye’s results could be adversely affected by volatilityin the price of refined petroleum products and the value of natural gas storageservices.  In addition, Buckeye’s riskmanagement policies cannot eliminate all commodity risk and any noncompliancewith our risk management policies could result in significant financial losses.**

 

Buckeye’sEnergy Services segment buys and sells refined petroleum products in connectionwith its marketing activities. Buckeye’s Natural Gas Storage segment storesnatural gas for, and loans natural gas to, its customers for fixed periods oftime. If the values of refined petroleum products or natural gas storage serviceschange in a direction or manner that Buckeye does not anticipate, Buckeye couldexperience financial losses from these activities. Furthermore, when pricesincrease rapidly and dramatically, Buckeye may be unable to promptly pass itsadditional costs to its customers, resulting in lower margins for Buckeye whichcould adversely affect its results of operations. Although Buckeye’s NaturalGas Storage segment does not purchase or sell natural gas, the value of naturalgas storage services generally changes based on changes in the relative pricesof natural gas over different delivery periods. Buckeye’s Energy Servicessegment follows risk management practices that are designed to minimize itscommodity risk and Buckeye’s Natural Gas Storage segment has adopted riskmanagement policies that are designed to manage the risks associated with itsstorage business. These practices and policies cannot, however, eliminate allprice and price-related risks.

 

Withrespect to Buckeye’s Energy Services segment, it is Buckeye’s practice tomaintain a position that is substantially balanced between commodity purchases,on the one hand, and expected commodity sales or future delivery obligations,on the other hand. Through these transactions, Buckeye seeks to establish amargin for the commodity purchased by selling the same commodity for physicaldelivery to third party users, such as wholesalers or retailers. While Buckeye’shedging policies are designed to minimize commodity risk, some degree ofexposure to unforeseen fluctuations in market conditions remains.  For example, any event that disrupts Buckeye’santicipated physical supply could expose Buckeye to risk of loss resulting fromprice changes if Buckeye is required to obtain alternative supplies to coverthese sales transactions. In addition, Buckeye is also exposed to basis risksin its hedging activities that arise when a commodity, such as ultra low sulfurdiesel, is purchased at one pricing index but must be hedged against anothercommodity type, such as heating oil, because of limitations in the markets forderivative products. Buckeye is also susceptible to basis risk created whenBuckeye hedges a commodity based on prices at a certain location, such as theNew York Harbor, and enters into a sale or exchange of that commodity atanother location, such as Macungie, Pennsylvania,

 

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whereprices and price changes might differ from the prices and price changes at thelocation upon which the hedging instrument is based.

 

Buckeye’snatural gas storage and petroleum product marketing activities also involve therisk of non-compliance with Buckeye’s risk management practices and policies.Buckeye cannot make any assurances that it will detect and prevent allviolations of its risk management practices and policies, particularly ifdeception or other intentional misconduct is involved. Any violations of thesepractices or policies by Buckeye’s employees or agents could result insignificant financial losses.

 

**Risks Inherent in Ownership of Our Common Units**

 

**Cost reimbursements due our general partner, MainLineManagement, may be substantial and will reduce our cash available fordistribution to our Unitholders.**

 

Priorto making any distribution on our units, we will reimburse our general partnerfor expenses it incurs on our behalf. The reimbursement of expenses couldreduce the amount of cash we have to make distributions to our Unitholders. Ourgeneral partner will determine the amount of these expenses. In addition, ourgeneral partner and its affiliates may perform other services for us for whichwe will be charged fees as determined by our general partner.

 

**Our Unitholders do not elect our general partner or vote onour general partner’s directors. An affiliate of our general partner owns asufficient number of Common Units to allow it to block any attempt to removeour general partner.**

 

Unlikethe holders of common stock in a corporation, our Unitholders have only limitedvoting rights on matters affecting our business and, therefore, limited abilityto influence management’s decisions regarding our business. Our publicUnitholders did not elect our general partner or the directors of our generalpartner and will have no right to elect our general partner or the directors ofour general partner on an annual or other continuing basis in the future.

 

Furthermore,if our public Unitholders are dissatisfied with the performance of our generalpartner, they will have little ability to remove our general partner. Ourgeneral partner may not be removed except upon the vote of the holders of atleast 80% of the outstanding common and management units voting together as asingle class. Because affiliates of our general partner own more than 20% ofour outstanding units, our general partner currently cannot be removed withoutthe consent of our general partner and its affiliates.

 

OurUnitholders’ voting rights are further restricted by the provision in ourpartnership agreement providing that any units held by a person that owns 20%or more of any class of units then outstanding, other than our general partnerand its affiliates, cannot be voted on any matter. In addition, our partnershipagreement contains provisions limiting the ability of our Unitholders to callmeetings or to acquire information about our operations, as well as otherprovisions limiting our

 

Unitholders’ability to influence the manner or direction of our management. Additionally,our partnership agreement provides that our general partner, in its solediscretion, may at any time adopt a unitholder rights plan similar to ashareholder rights plan for corporations.

 

Asa result of these provisions, the price at which our Common Units will trademay be lower because of the absence or reduction of a takeover premium in thetrading price.

 

**BGH GP owns a controlling interest in us and owns our generalpartner and can determine the outcome of all matters voted upon by our Unitholders.**

 

BGHGP owns approximately 61.88% of our limited partner interests and owns ourgeneral partner. As a result, BGH GP is able to control the outcome of anymatter that comes before a Unitholder vote.

 

**The control of our general partner may be transferred to athird party, and that party could replace our current management team, in eachcase, without unitholder consent.**

 

Ourgeneral partner may transfer its general partner interest to a third party in amerger or in a sale of all or substantially all of its assets without theconsent of our Unitholders. Furthermore, the owner of our general partner maytransfer its ownership interest in our general partner to a third party. Thenew owner of our general partner would then be in a position to replace theboard of directors and officers of our general partner and to control thedecisions taken by the board of directors and officers.

 

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**Increases in interest rates may cause the market price of ourCommon Units to decline.**

 

Anincrease in interest rates may cause a corresponding decline in demand forequity investments in general, and in particular for yield-based equityinvestments such as our Common Units. Any such increase in interest rates orreduction in demand for our Common Units may cause the trading price of ourCommon Units to decline.

 

**If in the future we cease to manage and control Buckeyethrough our ownership of the general partner interests in Buckeye, we may bedeemed to be an investment company under the Investment Company Act of 1940.**

 

Ifwe cease to manage and control Buckeye and are deemed to be an investmentcompany under the Investment Company Act of 1940, we would either have toregister as an investment company under the Investment Company Act of 1940,obtain exemptive relief from the Securities and Exchange Commission or modifyour organizational structure or our contract rights to fall outside thedefinition of an investment company. Registering as an investment companycould, among other things, materially limit our ability to engage intransactions with affiliates, including the purchase and sale of certainsecurities or other property to or from our affiliates, restrict our ability toborrow funds or engage in other transactions involving leverage and require usto add additional directors who are independent of us and our affiliates, andreduce the price of our Common Units.

 

**You may not have limited liability if a court finds thatUnitholder action constitutes control of our business.**

 

UnderDelaware law, you could be held liable for our obligations to the same extentas a general partner if a court determined that the right or the exercise ofthe right by our Unitholders as a group to remove or replace our generalpartner, to approve some amendments to the partnership agreement or to takeother action under our partnership agreement constituted participation in the “control”of our business. Additionally, the limitations on the liability of holders oflimited partner interests for the liabilities of a limited partnership have notbeen clearly established in many jurisdictions.

 

Ourgeneral partner generally has unlimited liability for our obligations, such asour debts and environmental liabilities, except for those contractualobligations that are expressly made without recourse to our general partner.

 

Inaddition, Section 17-607 of the Delaware Revised Uniform LimitedPartnership Act provides that, under some circumstances, a Unitholder may beliable to us for the amount of a distribution for a period of three years fromthe date of the distribution.

 

**We are directly dependent on Buckeye for our growth. As aresult of the fiduciary obligations of Buckeye’s general partner, which is ourwholly owned subsidiary, to the Unitholders of Buckeye, our ability to pursuebusiness opportunities independently may be limited.**

 

Wecurrently intend to grow primarily through the growth of Buckeye. While we arenot precluded from pursuing business opportunities independent of Buckeye,Buckeye’s general partner, which is our wholly owned subsidiary, has fiduciaryduties to Buckeye’s Unitholders which could make it difficult for us to engagein any business activity that is competitive with Buckeye. Those fiduciaryduties are applicable to us because we control the general partner through ourability to elect all of its directors. Accordingly, we may be unable todiversify our sources of revenue in order to increase cash distributions toyou.

 

**Our credit agreement contains operating and financialrestrictions that may limit our business and financing activities.**

 

Theoperating and financial restrictions and covenants in our credit agreementcould restrict our ability to finance future operations or capital needs or toexpand or pursue our business activities. For example, our credit agreementrestricts our ability to:

 

·                  makedistributions if any default or event of default occurs;

 

·                  incuradditional indebtedness or guarantee other indebtedness;

 

·                  grantliens or make certain negative pledges;

 

·                  makecertain loans or investments;

 

·                  makeany material change to the nature of our business, including consolidations,liquidations and dissolutions; or

 

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·                  enterinto a merger, consolidation, sale and leaseback transaction or sale of assets.

 

Ifwe violate any of the restrictions, covenants, ratios or tests in our creditagreement, a significant portion of our indebtedness may become immediately dueand payable, and our lenders’ commitment to make further loans to us mayterminate. We might not have, or be able to obtain, sufficient funds to makethese accelerated payments. Our member interests in Buckeye GP are pledged tosecure our obligations under our credit agreement. If we default in theperformance of those obligations, our lenders may foreclose upon and takecontrol of our member interests in Buckeye GP.

 

**Risks Related to Conflicts of Interest**

 

**Buckeye GP owes fiduciary duties to Buckeye and Buckeye’sUnitholders, which may conflict with our interests.**

 

Conflictsof interest exist and may arise in the future as a result of the relationshipsbetween us and our affiliates, including Buckeye’s general partner, on onehand, and Buckeye and its limited partners, on the other hand. The directorsand officers of Buckeye GP have fiduciary duties to manage Buckeye in amanner beneficial to us, Buckeye GP’s owner. At the same time,Buckeye GP has a fiduciary duty to manage Buckeye in a manner beneficialto Buckeye and its limited partners. The board of directors of Buckeye GPmay resolve any such conflict of interest and has broad latitude to considerthe interests of all parties to the conflict. The resolution of these conflictsmay not always be in our best interest or that of our Unitholders.

 

Forexample, conflicts of interest may arise in the following situations:

 

·                  theallocation of shared overhead expenses to Buckeye and us;

 

·                  theinterpretation and enforcement of contractual obligations between us and ouraffiliates, on one hand, and Buckeye, on the other hand;

 

·                  thedetermination of the amount of cash to be distributed to Buckeye’s partners andthe amount of cash to be reserved for the future conduct of Buckeye’s business;

 

·                  thedetermination of whether Buckeye should make acquisitions and on what terms;

 

·                  thedetermination of whether Buckeye should use cash on hand, borrow or issueequity to raise cash to finance acquisitions or expansion capital projects,repay indebtedness, meet working capital needs, pay distributions or otherwise;and

 

·                  anydecision we make in the future to engage in business activities independent ofBuckeye.

 

**The fiduciary duties of our general partner may conflict withthe fiduciary duties of Buckeye’s general partner.**

 

Conflictsof interest may arise because of the relationships among Buckeye GP,Buckeye and us. Our general partner has fiduciary duties to manage our businessin a manner beneficial to us and our Unitholders and the owner of our generalpartner. Simultaneously, certain of our general partner’s directors and all ofits officers are also directors and officers of Buckeye GP, which hasfiduciary duties to manage the business of Buckeye in a manner beneficial toBuckeye and Buckeye’s Unitholders. Our partnership agreement contains variousprovisions modifying and restricting the fiduciary duties that might otherwisebe owed by our general partner. The resolution of these conflicts may notalways be in our best interest or that of our Unitholders.

 

**Potential conflicts of interest may arise among our generalpartner, its affiliates and us. Our general partner has limited fiduciaryduties to us and our Unitholders, which may permit it to favor its owninterests to the detriment of us and our Unitholders.**

 

Affiliatesof our general partner, together with the executive officers of our generalpartner, own an approximately 63% limited partner interest in us, representedby common and management units. In addition, BGH GP owns our general partner.Conflicts of interest may arise among our general partner and its affiliates,on the one hand, and us and our Unitholders, on the other hand. As a result ofthese conflicts, our general partner may favor its own interests and theinterests of its affiliates over the interests of our Unitholders. Theseconflicts include, among others, the following situations:

 

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ConflictsRelating to Control:

 

·                  ourgeneral partner is allowed to take into account the interests of parties otherthan us in resolving conflicts of interest, which has the effect of limitingits fiduciary duty to our Unitholders;

 

·                  ourgeneral partner determines whether or not we incur debt and that decision mayaffect our or Buckeye’s credit ratings;

 

·                  ourgeneral partner has limited its liability and has reduced its fiduciary dutiesunder our partnership agreement, while also restricting the remedies availableto our Unitholders for actions that, without these limitations and reductions,might constitute breaches of fiduciary duty. As a result of purchasing units,our Unitholders consent to some actions and conflicts of interest that mightotherwise constitute a breach of fiduciary or other duties under applicablestate law;

 

·                  ourgeneral partner controls the enforcement of obligations owed to us by it andits affiliates;

 

·                  ourgeneral partner decides whether to retain separate counsel, accountants orothers to perform services for us; and

 

·                  ourpartnership agreement gives our general partner broad discretion inestablishing financial reserves for the proper conduct of our business. Thesereserves also will affect the amount of cash available for distribution.

 

Conflictsrelating to costs:

 

·                  ourgeneral partner determines the amount and timing of asset purchases and sales,capital expenditures, borrowings, issuances of additional partnershipsecurities and reserves, each of which can affect the amount of cash that isavailable to be distributed to our Unitholders;

 

·                  ourgeneral partner determines which costs incurred by it and its affiliates arereimbursable by us; and

 

·                  ourpartnership agreement does not restrict our general partner from causing us topay it or its affiliates for any services rendered on terms that are fair andreasonable to us or entering into additional contractual arrangements with anyof these entities on our behalf.

 

**Our reimbursement of expenses of our general partner willlimit our cash available for distribution.**

 

Ourgeneral partner may make expenditures on our behalf for which it will seekreimbursement from us. In addition, under Delaware partnership law, our generalpartner has unlimited liability for our obligations, such as our debts andenvironmental liabilities, except for our contractual obligations that areexpressly made without recourse to our general partner. To the extent ourgeneral partner incurs obligations on our behalf, we are obligated to reimburseor indemnify it. If we are unable or unwilling to reimburse or indemnify ourgeneral partner, our general partner may take actions to cause us to makepayments of these obligations and liabilities. Any such payments could reducethe amount of cash available for distribution to our Unitholders and cause thevalue of our Common Units to decline.

 

**Our partnership agreement contains provisions that reduce theremedies available to Unitholders for actions that might otherwise constitute abreach of fiduciary duty by our general partner. It will be difficult for aUnitholder to challenge a resolution of a conflict of interest by our generalpartner or by its audit committee.**

 

Wheneverour general partner makes a determination or takes or declines to take anyaction in its capacity as our general partner, it will be obligated to act ingood faith, which means it must reasonably believe that the determination orother action is in our best interests. Whenever a potential conflict ofinterest exists between us and our general partner, the board of directors ofour general partner may resolve such conflict of interest. If the board ofdirectors of our general partner determines that its resolution of the conflictof interest is on terms no less favorable to us than those generally beingprovided to or available from unrelated third parties or is fair and reasonableto us, taking into account the totality of the relationships between us and ourgeneral partner, then it shall be presumed that in making this determination,our general partner acted in good faith. A Unitholder seeking to challenge thisresolution of the conflict of interest would bear the burden of overcoming suchpresumption. This is different from the situation of Delaware corporations,where a conflict resolution by an interested party would be presumed to beunfair and the interested party would have the burden of demonstrating that theresolution was fair.

 

Furthermore,if our general partner obtains the approval of its audit committee, theresolution will be conclusively deemed to be fair and reasonable to us and nota breach by our general partner of any duties it may owe to us or ourUnitholders. This is different from the situation of Delaware corporations,where a conflict resolution by a committee consisting solely of independent

 

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directorswould merely shift the burden of demonstrating unfairness to the plaintiff. Asa result, Unitholders will effectively not be able to challenge a decision bythe audit committee.

 

**Our general partner’s affiliates may compete with us.**

 

Ourpartnership agreement provides that our general partner will be restricted fromengaging in any business activities other than acting as our general partnerand those activities incidental to its ownership of interests in us. Affiliatesof our general partner are not prohibited from engaging in other businesses oractivities, including those that might be in direct competition with us. As aresult, Buckeye may compete directly with entities in which BGH GP or itsaffiliates have an interest for acquisition opportunities throughout the UnitedStates and potentially will compete with one or more of these entities for newbusiness or extensions of the existing services provided by Buckeye’s OperatingSubsidiaries, creating actual and potential conflicts of interest betweenBuckeye and our affiliates.

 

**Our executive officers face conflicts in theallocation of their time to our business.**

 

Ourgeneral partner shares administrative personnel with Buckeye’s general partnerto operate both our business and Buckeye’s business. Our general partner’sofficers, who are also the officers of Buckeye’s general partner, haveresponsibility for overseeing the allocation of time spent by administrativepersonnel on our behalf and on behalf of Buckeye. These officers face conflictsregarding these time allocations which may adversely affect our or Buckeye’sresults of operations, cash flows, and financial condition. These allocationsmay not necessarily be the result of arms-length negotiations between Buckeye’sgeneral partner and our general partner.

 

**Our general partner may cause us to issue additional CommonUnits or other equity securities without your approval, which would dilute yourownership interests.**

 

Ourgeneral partner may cause us to issue an unlimited number of additional CommonUnits or other equity securities of equal rank with the Common Units, withoutUnitholder approval. The issuance of additional Common Units or other equitysecurities of equal rank will have the following effects:

 

·                  ourUnitholders’ proportionate ownership interest in us will decrease;

 

·                  theamount of cash available for distribution on each Common Unit may decrease;

 

·                  therelative voting strength of each previously outstanding Common Unit may bediminished; and

 

·                  themarket price of the Common Units may decline.

 

**Our general partner has a call right that may require you tosell your Common Units at an undesirable time or price.**

 

Ifat any time more than 90% of the outstanding Common Units are owned by ourgeneral partner and its affiliates, our general partner will have the right,which it may assign to any of its affiliates or to us, but not the obligation,to acquire all, but not less than all, of the remaining Common Units held byunaffiliated persons at a price equal to the greater of (x) the average ofthe daily closing prices of the Common Units over the 20 trading days precedingthe date three days before notice of exercise of the call right is first mailedand (y) the highest price paid by our general partner or any of itsaffiliates for Common Units during the 90 day period preceding the datesuch notice is first mailed. As a result, you may be required to sell yourCommon Units at an undesirable time or price and may not receive any return onyour investment. You may also incur a tax liability upon a sale of your CommonUnits. Our general partner and its affiliates currently own approximately 63%of the Common and Management Units.

 

**Tax Risks to Common Unitholders**

 

Unitholders are urged to read the section entitled “TaxConsiderations for Unitholders” for a more complete discussion of the expectedmaterial federal income tax consequences of owning and disposing of CommonUnits.

 

**BGH’s and Buckeye’s tax treatment depends on theirstatus as a partnership for federal income tax purposes as well as not beingsubject to a material amount of entity-level taxation by individualstates.  If the IRS were to treat either BGH or Buckeye as a corporationfor federal income tax purposes or they were to become subject to additionalamounts of entity-level taxation for state tax purposes, then BGH’s cashavailable for distribution to you would be substantially reduced.**

 

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Thevalue of our investment in Buckeye depends largely on Buckeye being treated asa partnership for federal income tax purposes, which requires that 90% or moreof Buckeye’s gross income for every taxable year consist of qualifying income,as defined in Section 7704 of the Code. Buckeye may not meet thisrequirement or current law may change so as to cause, in either event, Buckeyeto be treated as a corporation for federal income tax purposes or otherwise besubject to federal income tax. Moreover, the anticipated after-tax economicbenefit of an investment in our Common Units depends largely on BGH beingtreated as a partnership for federal income tax purposes.  BGH has notrequested, and does not plan to request, a ruling from the IRS as to BGH’s orBuckeye’s treatment as a partnership for federal income tax purposes.

 

Despitethe fact that each of BGH and Buckeye is a limited partnership under Delawarelaw, it is possible in certain circumstances for a partnership such as BGH orBuckeye to be treated as a corporation for federal income tax purposes.Although BGH does not believe based upon the current operations of BGH andBuckeye that either BGH or Buckeye is so treated, a change in BGH’s or Buckeye’sbusiness (or a change in current law) could cause them to be treated as acorporation for federal income tax purposes or otherwise subject them totaxation as an entity.

 

Ifeither BGH or Buckeye were treated as a corporation for federal income taxpurposes, they would pay federal income tax on their taxable income at thecorporate tax rate, which is currently a maximum of 35%, and would likely paystate income tax at varying rates.  Distributions to BGH from Buckeyewould generally be taxed again as corporate distributions, and no income,gains, losses, deductions or credits would flow through to BGH.  Further,distributions to you would generally be taxed again as corporate distributionsas well, and no income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon BGH as a corporation, our cash availablefor distribution to you would be substantially reduced.  Therefore,treatment of either BGH or Buckeye as a corporation would result in a materialreduction in the anticipated cash flow and after-tax return to our holders ofCommon Units, likely causing a substantial reduction in the value of our CommonUnits.

 

Currentlaw may change so as to cause BGH or Buckeye to be treated as a corporation forfederal income tax purposes or otherwise subject BGH or Buckeye to entity-leveltaxation.  At the federal level, legislation has been proposed that wouldeliminate partnership tax treatment for certain publicly tradedpartnerships.  Although such legislation would not apply to BGH or Buckeyeas currently proposed, it could be amended prior to enactment in a manner thatdoes apply to BGH or Buckeye.  BGH is unable to predict whether any ofthese changes or other proposals will ultimately be enacted.  Moreover, any modification to the federal income tax laws and interpretationsthereof may or may not be applied retroactively.  Any such changes couldnegatively impact the value of an investment in our Common Units.  At thestate level, because of widespread state budget deficits and other reasons,several states are evaluating ways to subject partnerships to entity-leveltaxation through the imposition of state income, franchise and other forms oftaxation.  For example, Buckeye is required to pay Texas franchise tax ata maximum effective rate of 0.7% of Buckeye’s gross income apportioned to Texasin the prior year.  Imposition of such a tax on BGH or Buckeye by anyother state will reduce the cash available for distribution to you.

 

**If the IRS contests the federal income taxpositions that BGH or Buckeye take, the market for our Common Units may beadversely impacted and the cost of any IRS contest will reduce our cashavailable for distribution to you.**

 

BGHhas not requested a ruling from the IRS with respect to BGH’s treatment as apartnership for federal income tax purposes or certain other matters thataffect BGH.  Moreover, Buckeye has not requested any ruling from the IRSwith respect to its treatment as a partnership for federal income tax purposesor any other matter that affects Buckeye.  It may be necessary to resortto administrative or court proceedings to sustain some or all of the positionstaken by BGH or Buckeye.  A court may not agree with some or all of thepositions BGH or Buckeye take.  Any contest with the IRS may materiallyand adversely impact the market for BGH’s Common Units and Buckeye’s limitedpartnership units and the prices at which they trade.  In addition, thecost of any contest between Buckeye and the IRS will result in a reduction incash available for distribution to BGH and the costs of any contest between BGHand the IRS will be borne indirectly by BGH’s Unitholders and its generalpartner because the costs will reduce BGH’s cash available for distribution.

 

**You will be required to pay taxes on your share ofBGH’s income even if you do not receive any cash distributions from BGH***.*

 

BecauseBGH’s Unitholders will be treated as partners to whom BGH will allocate taxableincome which could be different in amount than the cash BGH distributes, youwill be required to pay any federal income taxes and, in some cases, state andlocal income taxes on your share of BGH’s taxable income even if you receive nocash distributions from BGH.  You may not receive cash distributions fromBGH equal to your share of BGH’s taxable income or even equal to the actual taxliability that results from that income.

 

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**Tax gain or loss on the disposition of our CommonUnits could be more or less than expected.**

 

Ifyou sell your Common Units, you will recognize a gain or loss equal to thedifference between the amount realized and your tax basis in those CommonUnits.  Because distributions in excess of your allocable share of BGH’snet taxable income decrease your tax basis in your Common Units, the amount, ifany, of such prior excess distributions with respect to the Common Units yousell will, in effect, become taxable income to you if you sell such CommonUnits at a price greater than your tax basis in those Common Units, even if theprice you receive is less than your original cost.  Furthermore, asubstantial portion of the amount realized, whether or not representing gain,may be taxed as ordinary income due to potential recapture items, includingdepletion and depreciation recapture.  In addition, because the amountrealized includes a unitholder’s share of BGH’s nonrecourse liabilities, if yousell your Common Units, you may incur a tax liability in excess of the amountof cash you receive from the sale.

 

**Tax-exempt entities and non-U.S. persons faceunique tax issues from owning Common Units that may result in adverse taxconsequences to them.**

 

Investmentin Common Units by tax-exempt entities, such as employee benefit plans andindividual retirement accounts (known as IRAs), and non-U.S. persons raisesissues unique to them.  For example, virtually all of BGH’s incomeallocated to organizations that are exempt from federal income tax, includingIRAs and other retirement plans, will be unrelated business taxable income andwill be taxable to them.  Distributions to non-U.S. persons will bereduced by withholding taxes at the highest applicable effective tax rate, andnon-U.S. persons will be required to file United States federal tax returns andpay tax on their share of our taxable income.  If you are a tax exemptentity or a non-U.S. person, you should consult your tax advisor beforeinvesting in Common Units.

 

**BGH will treat each purchaser of Common Units ashaving the same tax benefits without regard to the actual Common Unitspurchased.  The IRS may challenge this treatment, which could adverselyaffect the value of the Common Units.**

 

BecauseBGH cannot match transferors and transferees of Common Units and because ofother reasons, BGH has adopted depreciation and amortization positions that maynot conform to all aspects of existing Treasury Regulations.  A successfulIRS challenge to those positions could adversely affect the amount of tax benefitsavailable to you.  It also could affect the timing of these tax benefitsor the amount of gain from your sale of Common Units and could have a negativeimpact on the value of Common Units or result in audit adjustments to your taxreturns.

 

**BGH prorates items of income, gain, loss anddeduction between transferors and transferees of Common Units each month basedupon the ownership of Common Units on the first day of each month, instead ofon the basis of the date a particular Common Unit is transferred. The IRS maychallenge this treatment, which could change the allocation of items of income,gain, loss and deduction among BGH Unitholders***.*

 

BGHprorates items of income, gain, loss and deduction between transferors andtransferees of Common Units each month based upon the ownership of Common Unitson the first day of each month, instead of on the basis of the date aparticular Common Unit is transferred. The use of this proration method may notbe permitted under existing Treasury Regulations. If the IRS were to challengethis method or new Treasury Regulations were issued, BGH may be required tochange the allocation of items of income, gain, loss and deduction among BGH’sUnitholders.

 

**A Unitholder whose Common Units are loaned to a “shortseller” to cover a short sale of Common Units may be considered as havingdisposed of those Common Units. If so, the Unitholder would no longer betreated for tax purposes as a partner with respect to those Common Units duringthe period of the loan and may recognize gain or loss from the disposition.**

 

Becausea Unitholder whose Common Units are loaned to a “short seller” to cover a shortsale of Common Units may be considered as having disposed of the loaned CommonUnits, the Unitholder may no longer be treated for tax purposes as a partnerwith respect to those Common Units during the period of the loan to the shortseller and the Unitholder may recognize gain or loss from suchdisposition.  Moreover, during the period of the loan to the short seller,any of BGH’s income, gain, loss or deduction with respect to those Common Unitsmay not be reportable by the Unitholder and any cash distributions received bythe Unitholder as to those Common Units could be fully taxable as ordinaryincome. Unitholders desiring to assure their status as partners and avoid therisk of gain recognition from a loan to a short seller are urged to modify anyapplicable brokerage account agreements to prohibit their brokers fromborrowing their Common Units.

 

**BGH will adopt certain valuation methodologies thatmay result in a shift of income, gain, loss and deduction between the generalpartner and the Unitholders.  The IRS may challenge this treatment, whichcould adversely affect the value of Common Units.**

 

WhenBGH issues additional Common Units or engages in certain other transactions,BGH will determine the fair market value of its assets and allocate anyunrealized gain or loss attributable to BGH’s assets to the capital accounts ofits Unitholders and its general partner.  BGH’s methodology may be viewedas understating the value of BGH’s assets.  In that case, there may be a

 

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shiftof income, gain, loss and deduction between certain Unitholders and the generalpartner, which may be unfavorable to such Unitholders.  Moreover, underBGH’s valuation methods, subsequent purchasers of Common Units may have agreater portion of their Internal Revenue Code Section 743(b) adjustmentallocated to BGH’s tangible assets and a lesser portion allocated to BGH’sintangible assets.  The IRS may challenge BGH’s valuation methods, or BGH’sallocation of the Section 743(b) adjustment attributable to BGH’stangible and intangible assets, and allocations of income, gain, loss anddeduction between the general partner and certain of our Unitholders.  Asuccessful IRS challenge to these methods or allocations could adversely affectthe amount of taxable income or loss being allocated to BGH’sUnitholders.  It also could affect the amount of gain from BGH’sUnitholders’ sale of Common Units and could have a negative impact on the valueof the Common Units or result in audit adjustments to BGH’s Unitholders’ taxreturns without the benefit of additional deductions.

 

**The sale or exchange of 50% or more of BGH’scapital and profits interests during any twelve-month period will result in thetermination of BGH’s partnership for federal income tax purposes***.*

 

BGHwill be considered to have terminated as a partnership for federal income taxpurposes if there is a sale or exchange of 50% or more of the total interestsin BGH’s capital and profits within a twelve-month period.  A terminationwould, among other things, result in the closing of BGH’s taxable year for allUnitholders, which would result in BGH filing two tax returns (and eachUnitholder could receive two Schedules K-1 from BGH) for one fiscal year andcould result in a significant deferral of depreciation deductions allowable incomputing BGH’s taxable income for the year in which the terminationoccurs.  In the case of a Unitholder reporting on a taxable year otherthan a fiscal year ending December 31, the closing of BGH’s taxable yearmay also result in more than twelve months of BGH’s taxable income or lossbeing includable in the Unitholder’s taxable income for the year oftermination.  A termination currently would not affect BGH’sclassification as a partnership for federal income tax purposes, but instead,BGH would be treated as a new partnership for tax purposes.  If treated asa new partnership, BGH must make new tax elections and could be subject topenalties if BGH is unable to determine that a termination occurred.

 

**As a result of investing in Common Units, you maybecome subject to state and local taxes and return filing requirements injurisdictions where Buckeye operates or owns or acquires property.**

 

Inaddition to federal income taxes, you will likely be subject to other taxes,including state and local taxes, unincorporated business taxes and estate,inheritance or intangible taxes that are imposed by the various jurisdictionsin which Buckeye conducts business or owns property now or in the future, evenif you do not live in any of those jurisdictions.  You will likely berequired to file state and local income tax returns and pay state and localincome taxes in some or all of these various jurisdictions.  Further, youmay be subject to penalties for failure to comply with thoserequirements.  Buckeye owns property and conducts business in a number ofstates in the United States.  Most of these states impose an income tax onindividuals, corporations and other entities. As Buckeye makes acquisitions orexpands its business, Buckeye may own assets or conduct business in additionalstates or foreign jurisdictions that impose a personal income tax.  It isyour responsibility to file all United States foreign, federal, state and localtax returns.

 

**Buckeyehas a subsidiary that is treated as a corporation for federal income taxpurposes and subject to corporate-level income taxes.**

 

Buckeyeconducts a portion of our operations through a subsidiary that is a corporationfor federal income tax purposes.  Buckeyemay elect to conduct additional operations in corporate form in thefuture.  The corporate subsidiary will besubject to corporate-level tax, which will reduce the cash available fordistribution to Buckeye and, in turn, impact Buckeye’s cash available fordistribution.  If the IRS were tosuccessfully assert that the corporate subsidiary has more tax liability thanwe anticipate or legislation was enacted that increased the corporate tax rate,Buckeye’s cash available for distribution to its Unitholders, including us,would be further reduced.

 

**Item 1B.         *Unresolved Staff Comments***

 

None.

 

**Item 2.           *Properties***

 

BGH and Buckeye are managed primarily from two leasedcommercial business offices located in Breinigsville, Pennsylvania and Houston,Texas that are approximately 75,000 and 20,000 square feet in size, respectively.

 

In general,Buckeye’s pipelines are located on land owned by others pursuant to rightsgranted under easements, leases, licenses and permits from railroads,utilities, governmental entities and private parties. Like other pipelines,certain of the Operating Subsidiaries’ rights are revocable at the election ofthe grantor or are subject to renewal at various intervals, and some require

 

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periodic payments. TheOperating Subsidiaries have not experienced any revocations or lapses of suchrights which were material to their business or operations, and Buckeye GP hasno reason to expect any such revocation or lapse in the foreseeable future.Most delivery points, pumping stations and terminal facilities are located onland owned by the Operating Subsidiaries. Buckeye has leases for subsurface underground gas storage rights andsurface rights in connection with its operations in the Natural Gas Storagesegment.

 

See Item 1 for adescription of the location and general character of the Operating Subsidiaries’material property.  BGH owns aninsignificant amount of property.

 

MainLineManagement and Buckeye GP believe that the Operating Subsidiaries havesufficient title to their material assets and properties, possess all materialauthorizations and revocable consents from state and local governmental andregulatory authorities and have all other material rights necessary to conducttheir business substantially in accordance with past practice. Although incertain cases the Operating Subsidiaries’ title to assets and properties ortheir other rights, including their rights to occupy the land of others undereasements, leases, licenses and permits, may be subject to encumbrances,restrictions and other imperfections, none of such imperfections are expectedby MainLine Management or Buckeye GP to interfere materially with the conductof the Operating Subsidiaries’ businesses.

 

**Item 3.            *Legal Proceedings***

 

BGH, Buckeye andthe Operating Subsidiaries, in the ordinary course of business, are involved invarious claims and legal proceedings, some of which are covered in whole or inpart by insurance.  Neither MainLineManagement nor Buckeye GP are able to predict the timing or outcome of theseclaims and proceedings.

 

With respect toenvironmental litigation, certain Operating Subsidiaries (or theirpredecessors) have been named in the past as defendants in lawsuits, or havebeen notified by federal or state authorities that they are potentiallyresponsible parties (“PRPs”) under federal laws or a respondent under state lawsrelating to the generation, disposal or release of hazardous substances intothe environment. In connection with actions brought under CERCLA and similarstate statutes, the Operating Subsidiary is usually one of many PRPs for aparticular site and its contribution of total waste at the site is usually deminimis.

 

Although there isno material environmental litigation pending against BGH, Buckeye or theOperating Subsidiaries at this time, claims may be asserted in the future undervarious federal and state laws, and the amount of any potential liabilityassociated with such claims cannot be estimated.

 

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

 

**Item 4.            *Submission of Matters to aVote of Security Holders***

 

Nomatters were submitted to a vote of the holders of Common Units during thefourth quarter of the fiscal year ended December 31, 2008.

 

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**PART II**

 

**Item  5.****                               *****Market for the Registrant’sCommon Units, Related Unitholder Matters, and Issuer Purchases of Common Units***

 

BGH’s Common Units are listed and traded on the NewYork Stock Exchange. The high and low sales prices of the Common Units in 2008and 2007, as reported in the New York Stock Exchange Composite Transactions,were as follows:

 

| ** **  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| **Quarter** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $        | 29.92      |     | $          | 21.65 |   | $ | 21.44 |   | $ | 16.45 |   |
| Second      |       | 26.44    |       | 18.00    |       | 33.37 |   | 20.22 |   |
| Third       |       | 22.70    |       | 13.35    |       | 39.89 |   | 27.45 |   |
| Fourth      |       | 18.72    |       | 9.51     |       | 30.00 |   | 26.10 |   |
|             |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

BGHhas gathered tax information from its known Common and Management Unitholdersand from brokers/nominees and, based on the information collected, BGHestimates its number of beneficial Common and Management Unitholders to beapproximately 2,400 at December 31, 2008.

 

Cash distributions paid to Unitholders during 2007 and2008 were as follows:

 
| **Record Date**  | ** ** | **Payment Date**  | ** ** | **Amount Per Common Unit** | ** ** |
|-----------------------|------------|------------------------|------------|-------------------------------------------|------------|
| February 6, 2007 |       | February 28, 2007 |       | $                                         | 0.225      |   |
| May 7, 2007      |       | May 31, 2007      |       | 0.240                                     |       |
| August 6, 2007   |       | August 31, 2007   |       | 0.250                                     |       |
| November 5, 2007 |       | November 30, 2007 |       | 0.265                                     |       |
|                  |       |                   |       |                                      |       |
| February 5, 2008 |       | February 29, 2008 |       | 0.285                                     |       |
| May 9, 2008      |       | May 30, 2008      |       | 0.300                                     |       |
| August 8, 2008   |       | August 29, 2008   |       | 0.310                                     |       |
| November 7, 2008 |       | November 28, 2008 |       | 0.320                                     |       |
|                       |            |                        |            |                                           |            |  |

 

On February 2,2009, the Board of Directors of MainLine Management approved a quarterlydistribution of $0.33 per Common Unit that was paid on February 27, 2009,to Unitholders of record on February 12, 2009.  Total cash distributed to Unitholders on February 27,2009 was approximately $9.3 million.

 

**Item 6.        *Selected Financial Data***

 

Thefollowing table presents summary historical consolidated financial data for BGHas of December 31, 2008, 2007, 2006, 2005 and 2004 and for the years endedDecember 31, 2008, 2007, 2006 and 2005 and the period from May 4,2004 through December 31, 2004, along with such information for GlenmoorLtd. (“Glenmoor”), as the predecessor of MainLine L.P. (“MainLine”), for theperiod from January 1, 2004 through May 4, 2004.  BGH’s predecessor, MainLine, acquired thegeneral partner interests of Buckeye on May 4, 2004.  Prior to May 4, 2004, Buckeye’s generalpartner interests were owned by Glenmoor. The information in the table for all periods is derived from the auditedfinancial statements of BGH or Glenmoor, as appropriate.

 

BecauseBGH owns and controls the general partner of Buckeye, the statements reflectBGH’s ownership interest in Buckeye on a consolidated basis, which means thatBuckeye’s financial results are consolidated with BGH’s financial results. Thefinancial statements of Services Company, which employs the employees whomanage and operate BGH and Buckeye, are also consolidated into BGH’s financialstatements. BGH has no separate operating activities apart from those conductedby Buckeye, and its cash flows consist primarily of incentive distributionsfrom Buckeye with respect to the partnership interests that BGH owns.Accordingly, the summary historical consolidated financial data set forth inthe following table primarily reflects the operating activities and results ofoperations of Buckeye. The limited partner interests in Buckeye not owned byBGH or its affiliates are reflected as a liability on BGH’s balance sheet andthe non-affiliated partners’ share of income from Buckeye is reflected as anexpense in BGH’s results of operations.

 

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Thesummary historical consolidated financial data for the periods presentedreflects the effect of the asset acquisitions Buckeye made during these periodsfrom the date of each acquisition, but not on a pro forma or full period basis.

*** ***
| ** **                                         | ** ** | **Buckeye GP Holdings L.P.**                          | ** ** | **Glenmoor (1)** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **Year Ended**                                                  | ** ** | **Year Ended**   | ** ** | **Year Ended** | ** ** | **Year Ended** | ** ** | **May 4 to** | ** ** | **January 1** | ** ** |
| ** **                                         | ** ** | **December 31,**                                                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **to May 4,** | ** ** |
| ** **                                         | ** ** | **2008**                                                             | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(In thousands, except per unit amounts)** | ** ** |
| Income Statement  Data:                            |       |                                                                 |       |                  |       |   |   |   |   |   |   |   |   |
| Revenue (2)                                        |       | $                                                                    | 1,896,652  |                  | $          | 519,347 |   | $ | 461,760 |   | $ | 408,446 |   | $ | 226,014 |   | $ | 97,529 |   |
| Depreciation and  amortization                     |       | 50,834                                                               |       | 40,236                |       | 39,629 |   | 32,408 |   | 15,158 |   | 6,388 |   |
| Operating income  (2)                              |       | 246,492                                                              |       | 195,353               |       | 164,873 |   | 155,869 |   | 80,765 |   | 35,088 |   |
| Interest and  debt expense                         |       | 75,410                                                               |       | 51,721                |       | 60,702 |   | 55,366 |   | 28,212 |   | 9,756 |   |
| Premium paid on  retirement of debt (3)            |       | —                                                               |       | —                |       | — |   | — |   | — |   | 3,531 |   |
| Non-controlling  interest expense (2)              |       | 154,146                                                              |       | 129,754               |       | 103,066 |   | 99,704 |   | 55,310 |   | 22,830 |   |
| Net income                                         |       | 26,477                                                               |       | 22,921                |       | 8,734 |   | 6,986 |   | 1,203 |   | 1,124 |   |
| Net income from  Aug. 9 to Dec. 31, 2006 |       | —                                                               |       | —                |       | 2,599 |   | — |   | — |   | — |   |
| Units  outstanding - diluted                       |       | 28,300                                                               |       | 28,300                |       | 28,300 |   | — |   | — |   | — |   |
| Net income per  unit - diluted (4)                 |       | $                                                                    | 0.94       |                  | $          | 0.81 |   | $ | 0.09 |   | — |   | — |   | — |   |
| Distributions  per unit                            |       | $                                                                    | 1.22       |                  | $          | 0.98 |   | $ | 0.13 |   | — |   | — |   | — |   |
|                                                    |            |                                                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                              | ** ** | **Buckeye GP Holdings L.P.** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **December 31,**                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                              | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(In thousands)**                          | ** ** |
| Balance Sheet  Data:                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Total assets (2)                        |       | $                                           | 3,263,097  |   | $ | 2,354,326 |   | $ | 2,212,585 |   | $ | 2,040,832 |   | $ | 1,747,758 |   |
| Total debt,  including current portion  |       | 1,555,719                                   |       | 869,463 |   | 1,020,449 |   | 1,104,660 |   | 1,015,225 |   |
| Total partners’  capital or equity |       | 232,060                                     |       | 238,330 |   | 240,617 |   | 80,442 |   | 67,980 |   |
|                                         |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          BGH’s predecessor,MainLine, acquired the general partner interests of Buckeye, and commencedoperations, on May 4, 2004. Financial information for Glenmoor includesthat of the general partner of Buckeye and its subsidiaries for the periodspresented prior to their acquisition by MainLine.

 

(2)          Substantialincreases in revenue, operating income, non-controlling interest expense, andtotal assets resulted from the acquisitions of Lodi Gas and Farm &Home in 2008.  See Note 3 to BGH’sconsolidated financial statements for a further discussion.

 

(3)          Net income for theperiod of January 1 to May 4, 2004 includes an expense of $3.5million related to a yield maintenance premium paid on the retirement ofGlenmoor’s term loan which was repaid on May 4, 2004.

 

(4)          Net income per unit -diluted is presented only for the period since August 9, 2006, the dateBGH became a public company.

 

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***Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

 

The following discussion provides an analysis of thefinancial condition and results of operations for Buckeye GP Holdings L.P. (“BGH”)and each of BGH’s operating segments, including an overview of itsliquidity and capital resources and other related matters.  This discussion and analysis should be readin conjunction with Item 1 and the consolidated financial statements includedin this Annual Report on Form 10-K for the year ended December 31,2008.

 

BGH owns and controls Buckeye GP LLC (“Buckeye GP”),which is the general partner of Buckeye Partners, L.P. (“Buckeye”), a publicly traded limitedpartnership.  BGH is managed by itsgeneral partner, MainLine Management LLC (“MainLine Management”).  BGH’s only cash-generating assets are itspartnership interests in Buckeye, comprised primarily of the following:

 

·                  theincentive distribution rights in Buckeye;

 

·                  theindirect ownership of the general partner interests in certain of Buckeye’soperating subsidiaries (representing an approximate 1% interest in each of suchoperating subsidiaries );

 

·                  thegeneral partner interests in Buckeye (representing 243,914 general partnerunits (the “GP Units”), or an approximate 0.5% interest in  Buckeye); and

 

·                  80,000Buckeye limited partner units (“LP Units”).

 

The incentive distribution rights noted above entitleBGH to receive amounts equal to specified percentages of the incremental amountof cash distributed by Buckeye to the holders of LP Units (each, a “Unitholder”)when target distribution levels for each quarter are exceeded. The 2,573,146 LPUnits originally issued to Buckeye’s Employee Stock Ownership Plan are excludedfor the purpose of calculating incentive distributions. The target distributionlevels begin at $0.325 and increase in steps to the highest target distributionlevel of $0.525 per eligible LP Unit. When Buckeye makes quarterlydistributions above this level, the incentive distributions include an amountequal to 45% of the incremental cash distributed to each eligible Unitholderfor the quarter, or approximately 29.5% of total incremental cash distributedby Buckeye above $0.525 per LP Unit.

 

BGH’s earnings and cash flows are, therefore, directlydependent upon the ability of Buckeye and its operating subsidiaries to makecash distributions to Buckeye’s Unitholders. The actual amount of cash thatBuckeye will have available for distribution will depend primarily on Buckeye’sability to generate earnings and cash flows beyond its working capitalrequirements.

 

The followingtable summarizes BGH’s cash received for the years ended December 31,2008, 2007 and 2006 as a result of its partnership interests in Buckeye:

 
| ** **                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**                    | ** ** |
| Incentive  payments from Buckeye                                                                  |       | $                                          | 38,895     |   | $ | 29,978 |   | $ | 24,866 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 1,131                                      |       | 1,292 |   | 1,348 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s GP Units                           |       | 835                                        |       | 786 |   | 738 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s LP Units                            |       | 274                                        |       | 258 |   | 242 |   |
|                                                                                              |       | $                                          | 41,135     |   | $ | 32,314 |   | $ | 27,194 |   |

 

On August 9,2006, in connection with BGH’s initial public offering of its common units (“CommonUnits”), Buckeye and Buckeye GP amended and restated their incentivecompensation agreement. On or about the same time, Buckeye GP also entered intoan amended and restated partnership agreement for Buckeye.  These amendments assigned Buckeye’s incentivedistribution payments to Buckeye GP and recharacterized those same payments ascapital distributions from Buckeye rather than incentive distribution expenseto Buckeye.

 

None of thesechanges impaired the amount or timing of cash distributions or incentivedistributions from Buckeye to Buckeye GP. Buckeye’s criteria for determining the amount of cash distributions andits policies regarding the timing of such cash

 

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distributionsremain unchanged.  Commencing with thefourth quarter of 2006, Buckeye ceased recording incentive compensation payableto Buckeye GP as an expense and instead recorded such payments as distributionsfrom partners’ capital.

 

Prior to theseamendments, BGH recognized its share of Buckeye’s income as the sum of (i) theincentive compensation payments received (to which BGH was contractuallyentitled and which were recorded as an expense in Buckeye’s financialstatements), (ii) its proportionate share of Buckeye’s remaining netincome based on its ownership of the general partner interest in Buckeye,80,000 of Buckeye’s LP Units that it owns and its general partner interests incertain of Buckeye’s operating subsidiaries and (iii) the senioradministrative charge.  Commencing withthese amendments, BGH recognizes its share of Buckeye’s income as the sum of (i) theamount of incentive compensation BGH would have received had only Buckeye’s netincome for the period been entirely distributed (which income, commencing withthe fourth quarter of 2006 now includes the incentive compensation payments previouslyrecorded by Buckeye as an expense) and (ii) its proportionate share of theremaining net income of Buckeye and Buckeye’s operating subsidiaries.

 

If these changes had been in effect for all of 2006,the net income for 2006 would have been reduced by approximately $10.8 million.Of this amount, $1.2 million relates to the senior administrative charge and$9.6 million relates to the difference between income recognition for incentivecompensation after the amendments of the incentive compensation agreement andthe partnership agreement compared to the amount that was recognized prior tosuch amendments.

 

*Buckeye Partners, L.P.*

* *

Buckeye’s primary business strategies are togenerate stable cash flows, increase pipeline and terminal throughput and pursuestrategic cash-flow accretive acquisitions that complement Buckeye’s existingasset base, improve operating efficiencies, and allow increased cashdistributions to its unitholders.

 

Buckeye’s principal line of business is the transportation, terminallingand storage of petroleum products in the United States for major integrated oilcompanies, large refined petroleum product marketing companies and major endusers of petroleum products on a fee basis through facilities owned andoperated by Buckeye.  Buckeye alsooperates pipelines owned by third parties under contracts with major integratedoil and chemical companies, and performs certain construction activities,generally for the owners of those third-party pipelines.

 

On January 18, 2008, Buckeye acquired Lodi Gas Storage, L.L.C. (“LodiGas”).  Lodi Gas owns and operates anatural gas storage facility in northern California.  Lodi Gas currently provides approximately 33billion cubic feet (“Bcf”) of natural gas storage capacity (including capacityprovided pursuant to a nearly completed expansion project) and is connected toPacific Gas and Electric’s intrastate gas pipelines that service natural gasdemand in the San Francisco and Sacramento areas.

 

On February 8, 2008, Buckeye acquired Farm & Home Oil CompanyLLC (“Farm & Home”), a seller of refined petroleum products on awholesale basis, principally in eastern and central Pennsylvania.  When Farm & Home was acquired, italso had retail operations, but Buckeye sold those operations to a wholly ownedsubsidiary of Inergy, L.P. on April 15, 2008.  The assets and liabilities and results ofoperations of Farm & Home’s retail operations were determined to bediscontinued operations effective on the Farm & Home acquisition dateof February 8, 2008. On July 31, 2008, Farm & Home wasmerged with and into its wholly owned subsidiary, Buckeye EnergyServices LLC (“BES”), with BEScontinuing as the surviving entity.  Thismerger did not impact the operations of Buckeye.

 

With theacquisitions of Lodi Gas and Farm & Home, Buckeye determined that ithad two additional reportable segments: Natural Gas Storage and EnergyServices.  Effective in the first quarterof 2008, Buckeye conducts business in five reportable operating segments:Pipeline Operations; Terminalling and Storage; Natural Gas Storage; EnergyServices; and Other Operations.  See Note26 for a more detailed discussion of Buckeye’s operating segments.

 

Major items impactingBuckeye’s results and, therefore, BGH’s results in 2008 include:

 

*Income Statement*

 

·                  Contributionsfrom Buckeye’s Lodi Gas and Farm & Home acquisitions in January andFebruary 2008, respectively, as well as five additional terminalacquisitions in the Terminalling and Storage and Pipeline Operations segmentsin 2008.  Buckeye also made threeterminal acquisitions in the Terminalling and Storage segment during 2007;

 

·                  Anincrease in costs and expenses primarily associated with additional operationsresulting from internal growth projects and acquisitions; and

 

·                  Areduction in Pipeline Operations product transportation volumes of 4.5% in 2008as compared to 2007.

 

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*Balance Sheet and Capital Structure*

 

·                  Buckeye’scompletion of the seven acquisitions in 2008 as set forth above for aggregateconsideration of approximately $667.5 million that were financed with acombination of debt and equity;

 

·                  Buckeye’scapital expenditures for internal growth projects of $93.5 million;

 

·                  Buckeye’s saleof $300.0 million aggregate principal amount of 6.05% Notes due 2018 for netproceeds of $298.0 million;

 

·                  Buckeye’ssale of approximately 2.6 million limited partner units in 2008 for netproceeds of approximately $113.1 million; and

 

·                  Buckeye’s replacement of an existingworking capital facility assumed in the Farm & Home acquisition with anew $175.0 million working capital facility that matures in May 2011.

 

**Results of Operations**

 

The results of operations discussed below principallyreflect the activities of Buckeye. Because the accompanying consolidatedfinancial statements of BGH include the consolidated results of Buckeye, BGH’sconsolidated statements are substantially similar to Buckeye’s except as notedbelow:

 

·                  Interest of non-controlling partners in Buckeye—BGH’sconsolidated balance sheet includes a non-controlling interest liability thatreflects the proportion of Buckeye owned by its partners other than BGH.Similarly, the ownership interests in Buckeye held by its partners other thanBGH are reflected in BGH’s consolidated income statement as non-controllinginterest expense. These non-controlling interest liabilities and expenses arenot reflected in Buckeye’s consolidated financial statements.

 

·                  BGH’s capital structure—In addition to incorporatingthe assets and liabilities of Buckeye, BGH’s consolidated balance sheetincludes BGH’s own indebtedness and related debt placement costs, and thepartners’ capital on BGH’s consolidated balance sheet represents BGH’s partners’capital as opposed to the capital reflected in Buckeye’s balance sheet, whichreflects the ownership interest of all its partners, including its owners otherthan BGH. Consequently, BGH’s income statement reflects additional interestexpense, interest income and debt amortization expense that is not reflected inBuckeye’s consolidated  financialstatements.

 

·                  Inclusion of Buckeye Pipe Line Services Company—Thefinancial statements of Services Company are consolidated into BGH’s financialstatements. The consolidated financial statements of Buckeye do not include thefinancial statements of Services Company.

 

·                  BGH’s G&A expenses—BGH incurs general andadministrative expenses that are independent from Buckeye’s operations and arenot reflected in Buckeye’s consolidated financial statements.

 

·                  Elimination of Intercompany Transactions—Intercompanyobligations and payments between Buckeye and its consolidated subsidiaries andBGH and Services Company are reflected in Buckeye’s consolidated financialstatements but are eliminated in BGH’s consolidated financial statements.

 

*Consolidated Summary*

 

BGH’s revenues, operatingincome and net income increased in 2008 compared to 2007, and 2007 compared to2006, primarily due to the expansion of Buckeye’s operations throughacquisitions and to increases in interstate pipeline tariff rates andterminalling throughput fees.  Overallpipeline volumes have declined by 4.5% in 2008 as compared to 2007 and 0.2% in2007 as compared to 2006.

 

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Summary operatingresults for BGH were as follows:

 
| ** **                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                    | ** ** |
| Revenue                                                           |       | $                                          | 1,896,652  |   | $ | 519,347 |   | $ | 461,760 |   |
| Costs and  expenses                                               |       | 1,650,160                                  |       | 323,994 |   | 296,887 |   |
| Operating income                                                  |       | 246,492                                    |       | 195,353 |   | 164,873 |   |
| Other income  (expenses)                                          |       | (73,857                                    | )          | (50,231 | ) | (59,292 | ) |
| Income before  equity income and non-controlling interest expense |       | 172,635                                    |       | 145,122 |   | 105,581 |   |
| Equity income                                                     |       | 7,988                                      |       | 7,553 |   | 6,219 |   |
| Non-controlling  interest expense                                 |       | (154,146                                   | )          | (129,754 | ) | (103,066 | ) |
| Net income                                                        |       | $                                          | 26,477     |   | $ | 22,921 |   | $ | 8,734 |   |

 

*SegmentResults*

 

Revenues,operating income, total costs and expenses and depreciation and amortization byoperating segment for each of the three years ended December 31, 2008,2007 and 2006 were as follows:

 
| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                             | ** ** | **2008**                                   | ** ** | **2007**   | ** ** | **2006**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **(In thousands)**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Revenues:*                                                            |       |                                       |       |       |       |       |       |   |   |   |   |
| Pipeline  Operations                                                   |       | $                                          | 387,267    |       | $          | 379,345    |       | $ | 350,909 |   |   |   |   |   |
| Terminalling and  Storage                                              |       | 119,155                                    |       | 103,782    |       | 81,267     |       |   |   |   |   |
| Natural Gas  Storage                                                   |       | 61,791                                     |       | —     |       | —     |       |   |   |   |   |
| Energy Services                                                        |       | 1,295,925                                  |       | —     |       | —     |       |   |   |   |   |
| Other Operations                                                       |       | 43,498                                     |       | 36,220     |       | 29,584     |       |   |   |   |   |
| Intersegment                                                           |       | (10,984                                    | )          | —     |       | —     |       |   |   |   |   |
| Total                                                                  |       | $                                          | 1,896,652  |       | $          | 519,347    |       | $ | 461,760 |   |   |   |   |   |
|                                                                   |       |                                       |       |       |       |       |       |   |   |   |   |
| *Operating  Income:*                                                   |       |                                       |       |       |       |       |       |   |   |   |   |
| Pipeline  Operations                                                   |       | $                                          | 149,349    |       | $          | 146,878    |       | $ | 133,039 |   |   |   |   |   |
| Terminalling and  Storage                                              |       | 52,133                                     |       | 40,581     |       | 25,879     |       |   |   |   |   |
| Natural Gas  Storage                                                   |       | 32,235                                     |       | —     |       | —     |       |   |   |   |   |
| Energy Services                                                        |       | 5,905                                      |       | —     |       | —     |       |   |   |   |   |
| Other Operations                                                       |       | 6,870                                      |       | 7,894      |       | 5,955      |       |   |   |   |   |
| Total                                                                  |       | $                                          | 246,492    |       | $          | 195,353    |       | $ | 164,873 |   |   |   |   |   |
|                                                                   |       |                                       |       |       |       |       |       |   |   |   |   |
| *Total  costs and expenses (including depreciation and amortization):* |       |                                       |       |       |       |       |       |
| Pipeline  Operations                                                   |       | $                                          | 237,918    |       | $          | 232,468    |       | $ | 217,870 |   |   |   |   |   |
| Terminalling and  Storage                                              |       | 67,022                                     |       | 63,200     |       | 55,388     |       |   |   |   |   |
| Natural Gas  Storage                                                   |       | 29,556                                     |       | —     |       | —     |       |   |   |   |   |
| Energy Services                                                        |       | 1,290,020                                  |       | —     |       | —     |       |   |   |   |   |
| Other Operations                                                       |       | 36,628                                     |       | 28,326     |       | 23,629     |       |   |   |   |   |
| Intersegment                                                           |       | (10,984                                    | )          | —     |       | —     |       |   |   |   |   |
| Total                                                                  |       | $                                          | 1,650,160  |       | $          | 323,994    |       | $ | 296,887 |   |   |   |   |   |
|                                                                   |       |                                       |       |       |       |       |       |   |   |   |   |
| *Deprecation  and amortization:*                                       |       |                                       |       |       |       |       |       |   |   |   |   |
| Pipeline  Operations                                                   |       | $                                          | 35,188     |       | $          | 32,996     |       | $ | 32,809 |   |   |   |   |   |
| Terminalling and  Storage                                              |       | 6,051                                      |       | 5,610      |       | 5,180      |       |   |   |   |   |
| Natural Gas  Storage                                                   |       | 4,599                                      |       | —     |       | —     |       |   |   |   |   |
| Energy Services                                                        |       | 3,386                                      |       | —     |       | —     |       |   |   |   |   |
| Other Operations                                                       |       | 1,610                                      |       | 1,630      |       | 1,640      |       |   |   |   |   |
| Total                                                                  |       | $                                          | 50,834     |       | $          | 40,236     |       | $ | 39,629 |   |   |   |   |   |

 

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***2008Compared to 2007***

 

Totalrevenues for the year ended December 31, 2008 were $1,896.7 million,approximately $1,377.3 million greater than total revenue for the same periodin 2007.  Of the $1,377.3 millionincrease, $61.8 million and $1,295.9 million resulted from the operations ofthe Natural Gas Storage and Energy Services segments, respectively.  The balance of the revenue improvement wasattributable to the remaining reporting segments as discussed below.

 

*Revenues*

 

PipelineOperations:

 

Revenues from PipelineOperations were $387.3 million in 2008, which is an increase of $7.9 million or2.1% from the corresponding period in 2007. This increase was primarily the result of:

 

·                  An increase inincidental revenues of $4.7 million principally related to a product supplyarrangement along with an increase of $1.5 million relating to additionalconstruction management and rental revenues; and

 

·                  Transportationrevenue increased by $1.2 million in 2008 compared to 2007 primarily as aresult of tariff increases implemented on May 1, 2008 and July 1,2008. The benefit of the tariff increases were substantially offset by reducedproduct volumes in 2008 as compared to 2007. Management believes the reduced volumes in the 2008 fiscal year werecaused primarily by reduced demand for gasoline resulting from higher retailgasoline prices, reduced production at ConocoPhillips’ Wood River Refinery dueto maintenance activities, and the continued introduction of ethanol intoretail gasoline products as well as reduced demand for distillates resultingfrom higher retail distillate prices and the slowdown in the U.S. economy.  Total product volumes declined by 4.5% in2008 compared to 2007.

 

Product volumes transportedfor each of the three years ended December 31 were as follows:

 
| ** **           | ** ** | **Average Barrels Per Day** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| **Product**          | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gasoline             |       | 673,500                                    |       | 717,900 |   | 722,300 |   |
| Distillate           |       | 304,200                                    |       | 320,100 |   | 324,200 |   |
| Jet Fuel             |       | 354,700                                    |       | 362,700 |   | 351,300 |   |
| LPG’s           |       | 17,500                                     |       | 19,300 |   | 22,500 |   |
| Natural gas  liquids |       | 20,900                                     |       | 20,400 |   | 19,800 |   |
| Other products       |       | 11,400                                     |       | 7,000 |   | 10,200 |   |
| Total                |       | 1,382,200                                  |       | 1,447,400 |   | 1,450,300 |   |

 

Terminalling and Storage:

 

Revenue from theTerminalling and Storage segment was $119.2 million in 2008, which is anincrease of $15.4 million or 14.8% from the corresponding period in 2007. Thisincrease was primarily the result of:

 

·                  Incrementalrevenue of $6.5 million due to the acquisitions of the Niles, Michigan,Ferrysburg, Michigan, Wethersfield, Connecticut, and Albany, New York terminalsin 2008  (see Note 3 to Buckeye’sconsolidated financial statements), combined with the effect of having a fullyear of revenue in 2008 from the six terminals that were acquired at varioustimes in the first quarter of 2007;

 

·                  An approximate$6.1 million increase in revenue primarily related to increases in blendingfees for product additives and product recoveries from vapor recovery units,which were offset by an approximately 5.4% decline in throughput volumes,caused in part by increased commodity prices, in 2008 compared to 2007; and

 

·                  $2.8 millionfrom the settlement of a dispute with a customer regarding product handlingcharges.

 

Averagedaily throughput for all refined petroleum products terminals for the threeyears ended December 31 was as follows:

 

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| ** **           | ** ** | **Average Barrels Per Day** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **Year Ended December 31,** | ** ** |
| ** **           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                 |       |                                       |       |   |   |   |   |
| Products  throughput |       | 537,700                                    |       | 568,600 |   | 494,300 |   |

 

NaturalGas Storage:

 

Revenue from the Natural Gas Storage segment was $61.8million in 2008.  Approximately 70.2% of this revenue represented firm storage revenuesand 29.8% represented hub services revenues. Substantially all of thisrevenue was derived from Lodi Gas’s operations, which Buckeye acquired on January 18,2008.

 

Energy Services:

 

Revenue from the Energy Services segment was $1,295.9million in 2008.  Substantially all ofthis revenue was derived from Farm & Home’s legacy wholesaleoperations, which Buckeye acquired on February 8, 2008.  During 2008, approximately 13.1 millionbarrels of products were sold.  Productssold include gasoline, propane, and petroleum distillates such as heating oil,diesel fuel, and kerosene.

 

Other Operations:

 

Revenue from the OtherOperations segment was $43.5 million in 2008, which is an increase of $7.3million or 20.1% compared to 2007.  The revenue increase in 2008 wasprimarily the result of an increase of$7.0 million in construction management revenue related to constructioncontracts that were substantially completed at December 31, 2008.  These construction activities are principallyconducted on a time and material basis.

 

*Operating Expenses*

 

Costs and expenses for the years ended December 31,2008, 2007 and 2006 were as follows:

 
| ** **                     | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Cost of product  sales         |       | $                                | 1,274,135  |   | $ | 10,473 |   | $ | 9,637 |   |
| Payroll and  payroll benefits  |       | 110,976                          |       | 97,824 |   | 91,886 |   |
| Depreciation and  amortization |       | 50,834                           |       | 40,236 |   | 39,629 |   |
| Outside services               |       | 44,651                           |       | 39,666 |   | 34,543 |   |
| Operating power                |       | 30,256                           |       | 31,317 |   | 28,967 |   |
| Property and  other taxes      |       | 24,722                           |       | 22,766 |   | 21,251 |   |
| Insurance and  casualty losses |       | 18,042                           |       | 14,396 |   | 11,543 |   |
| Construction  management       |       | 16,725                           |       | 11,007 |   | 8,390 |   |
| Supplies                       |       | 9,939                            |       | 11,099 |   | 7,888 |   |
| Rentals                        |       | 20,170                           |       | 11,730 |   | 10,295 |   |
| All other                      |       | 49,710                           |       | 33,480 |   | 32,858 |   |
| Total                          |       | $                                | 1,650,160  |   | $ | 323,994 |   | $ | 296,887 |   |

 

Cost of productsales was $1,274.1 million in 2008, which is an increase over 2007 of $1,263.7million.  Approximately $1,260.5 million ofthe increase was attributable to products sold by the Energy Servicessegment.  The remaining increase isprincipally associated with fuel purchases related to a product supplyarrangement in Buckeye’s Pipeline Operations segment.

 

Payroll andpayroll benefits were $111.0 million in 2008, an increase of $13.2 millioncompared to 2007.  The Natural GasStorage and Energy Services segments added $4.1 million and $7.3 million ofpayroll and payroll benefits expense in 2008, respectively, and an additional increaseof $0.8 million was due to the acquisitions of certain terminals in 2008.  Increases in salaries, wages, and incentivecompensation of $4.4 million in 2008 resulted primarily from an increase in thenumber of employees due to Buckeye’s expanded operations.  These increases were offset by variousreductions in payroll benefits of approximately $2.5 million.  BGH’s payroll expense increased by $1.0million due to accruals related to executive compensation paid by BGH andcharges for the equity incentive plan of BGH GP Holdings, LLC (“BGH GP”).  ESOP related costs decreased by $2.6 millionin 2008 as compared to 2007.

 

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Depreciation andamortization expense was $50.8 million in 2008, which is an increase of $10.6million over 2007. The operations of the Natural Gas Storage and the EnergyServices segments added $5.0 million and $3.7 million of depreciation and amortizationexpense in 2008, respectively.  Theremaining increase in depreciation and amortization expense resulted fromBuckeye’s ongoing expansion capital program.

 

Outside servicescosts were $44.7 million in 2008, which is an increase of $5.0 million over2007.  The operations of the Natural GasStorage and the Energy Services segments added $4.2 million and $1.1 million ofoutside services costs in 2008, respectively. Of the Natural Gas Storage segment’s $4.2 million of outside servicescosts, approximately $3.2 million related to well work-over costs.  Another approximately $2.4 million is due toincreases in activity on operations and maintenance contracts.  The increase in outside services costs wereoffset by a $2.9 million decrease in pipeline and terminal maintenanceactivities compared to 2007, when Buckeye experienced a particularly largeconcentration of these expenses. Outside services costs consist principally ofthird-party contract services for pipeline and terminal maintenance activities.

 

Operating powercosts were $30.3 million for 2008, which is a decrease of $1.1 million from2007.  The decrease is primarily due tolower volumes transported.  Operatingpower consists primarily of electricity required to operate pipeline pumpingfacilities.

 

Property and othertaxes were $24.7 million in 2008, an increase of $2.0 million compared to2007.  The operations of the Natural GasStorage and the Energy Services segments added $2.4 million and $0.7 million,respectively, in 2008.  These increaseswere offset by a decrease of $0.6 million due to refunds received for propertytax settlements and the phasing out of personal property taxes in Ohio.

 

Insurance andcasualty losses were $18.0 million for 2008, which is an increase of $3.6million from 2007.  Insurance costsincreased by $0.7 million, which is primarily due to the operations of theNatural Gas Storage and Energy Services segments.  Casualty losses increased by $3.0 million in2008, which is due to an increase of $2.5 million in the cost of remediatingenvironmental incidents compared to 2007, as well as $0.5 million related to aproduct contamination incident that occurred in the third quarter of 2008.

 

Constructionmanagement costs were $16.7 million in 2008, which is an increase of $5.7 millionover 2007.  The increase in 2008 wasprimarily the result of an increase inconstruction contracts that were substantially completed at December 31,2008.

 

Supplies expensewas $9.9 million for 2008, which is a decrease of $1.2 million from 2007.  The decrease is primarily due to a decreasein terminal additive expense related to decreased throughput volumes at Buckeye’sterminals.

 

Rental expense was$20.2 million in 2008, which is an increase of $8.4 million from 2007.  The operations of the Natural Gas Storage andEnergy Services segments added $7.3 million and $0.6 million of rental expensein 2008, respectively. Approximately $4.6 million of the 2008 rental expense isa non-cash charge.

 

All other costswere $49.7 million in 2008, an increase of $16.2 million compared to the sameperiod in 2007.  The operations of theNatural Gas Storage and Energy Services segments added $3.6 million and $6.8million of other costs, respectively, in 2008. Professional fees increased by $2.5 million due to corporate expensesassociated with the integration of Buckeye’s acquisitions throughout the 2008fiscal year.  The remainder of theincreases related to various other pipeline operating costs.  Professional fees at BGH increased by $1.6million due to fees incurred in connection with the tender offer for theoutstanding BGH Common Units made by BGH GP in the latter part of 2008, whichtender offer was subsequently withdrawn.

 

Costs and expenses attributable to Buckeye, ServicesCompany and BGH were as follows:

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                    | ** ** |
|                                                 |       |                                       |       |   |   |   |   |
| Attributable to  Buckeye                             |       | $                                          | 1,643,031  |   | $ | 317,267 |   | $ | 284,693 |   |
| Elimination of  Buckeye deferred charge              |       | (4,698                                     | )          | (4,698 | ) | (4,698 | ) |
| Elimination of  Buckeye senior administrative charge |       | —                                     |       | — |   | (1,154 | ) |
| Net effect of  ESOP charges                          |       | 2,517                                      |       | 5,069 |   | 5,997 |   |
| Attributable to  BGH                                 |       | 9,310                                      |       | 6,356 |   | 12,049 |   |
| Total                                                |       | $                                          | 1,650,160  |   | $ | 323,994 |   | $ | 296,887 |   |

 

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Amountsattributable to BGH consist of the following:

 
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(In thousands)**                    | ** ** |
|                          |       |                                       |       |   |   |   |   |
| Payroll and  payroll benefits |       | $                                          | 5,000      |   | $ | 3,975 |   | $ | 7,370 |   |
| Professional  fees            |       | 3,172                                      |       | 1,485 |   | 3,633 |   |
| Other                         |       | 1,138                                      |       | 896 |   | 1,046 |   |
| Total                         |       | $                                          | 9,310      |   | $ | 6,356 |   | $ | 12,049 |   |

 

Payroll andbenefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye, which is theresponsibility of BGH pursuant to an Exchange Agreement, as well as allocationsof the cost of Buckeye personnel performing administrative services directlyfor BGH.  Effective January 1, 2009,Buckeye and its subsidiaries have agreed to pay for all the executivecompensation and benefits of the four highest paid executives in return for anannual fixed payment from BGH in the amount of $3.6 million.  BGH’s payroll expense increased by $1.0million due to accruals related to executive compensation and charges for BGHGP’s equity incentive plan. Non-recurring professional fees in 2008 include approximately $1.6million due to fees incurred in connection with the tender offer foroutstanding BGH Common Units made by BGH GP in the latter part of 2008, whichtender offer was subsequently withdrawn. Other costs include certain state franchise taxes, insurance costs,depreciation and miscellaneous other expenses.

 

Otherincome (expense) for the years ended December 31, 2008, 2007 and 2006 wasas follows:

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands)**                    | ** ** |
| Investment  income         |       | $                                          | 1,553      |   | $ | 1,490 |   | $ | 1,410 |   |
| Interest and  debt expense |       | (75,410                                    | )          | (51,721 | ) | (60,702 | ) |
| Total                      |       | $                                          | (73,857    | ) | $ | (50,231 | ) | $ | (59,292 | ) |

 

Investment incomefor 2008 was consistent with investment income generated during 2007. Interestand debt expense was $75.4 million for 2008, which is an increase of $23.7million from 2007.  Approximately $17.7million of the increase was attributable to expenses associated with Buckeye’s6.05% Notes due 2018 (the “6.05% Notes”) which were issued by Buckeye in January 2008.  The remainder of the increase is due tointerest expense related to working capital requirements of the Energy Servicessegment and amounts outstanding under Buckeye’s Credit Facility, as definedbelow.

 

***2007Compared to 2006***

 

Total revenues forthe year ended December 31, 2007 were $519.3 million, an increase of $57.5million, or 12.5%, as compared to revenue of $461.8 million for the same periodin 2006.  The improvement in revenue in2007 as compared to 2006 resulted from increased revenue in Pipeline Operationsof $28.4 million, or 8.1%, increased revenues in Terminalling and Storage of$22.5 million, or 27.7%, and increased revenues in Other Operations of $6.6 million,or 22.4%.

 

*Revenues*

 

Pipeline Operations:

 

Revenue from Pipeline Operations was $379.3 million in2007 compared to $350.9 million in 2006. The revenue increase in PipelineOperations in 2007 of $28.4 million or 8.1% was primarily the result of:

 

·                  An approximate$21.1 million net increase in base transportation revenue caused primarily byan indexed-based tariff increase of approximately 4.3% implemented on July 1,2007,  a market-based tariff increase ofapproximately 4.5% implemented on May 1, 2007, and an increase of 3.3% injet fuel volumes delivered;

 

·                  Incrementalrevenue of approximately $4.0 million in 2007 compared to 2006 resulting fromthe commissioning of the terminal and pipeline at the Memphis InternationalAirport in April 2006;

 

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·                  An approximate$2.3 million reduction in revenue representing the settlement of overages andshortages on product deliveries;

 

·                  Recognition andcollection of approximately $1.8 million in revenue in the first quarter of2007 from the resolution of a product measurement issue with a customer; and

 

·                  Incrementalrevenue of $1.7 million for the entire 2007 fiscal year from a natural gasliquids pipeline as compared to eleven months of revenue in 2006 from a naturalgas liquids pipeline which was acquired by Buckeye on January 31, 2006.

 

Terminallingand Storage:

 

Revenue from Terminallingand Storage was $103.8 million for the year ended December 31, 2007compared to $81.3 million for the year ended December 31, 2006.  The revenue increase in Terminalling andStorage of $22.5 million or 27.7% was primarily the result of:

 

·                  An approximate$11.4 million increase in base revenue primarily related to increases inthroughput volumes, charges for product additives and product recoveries fromvapor recovery units in 2007 compared to 2006;

 

·                  Additionalrevenue of $6.7 million in 2007 compared to 2006 primarily due to theacquisition of six terminals in 2007, as more fully described in Note 4 to theaccompanying consolidated financial statements; and

 

·                  Additionalrevenue of $2.0 million in 2007 compared to 2006 due to the commencement ofcertain butane blending agreements in the latter part of 2006 that continuedthrough the entire 2007 fiscal year.

 

OtherOperations:

 

Revenue from OtherOperations was $36.2 million for the year ended December 31, 2007 comparedto $29.6 million in 2006. The revenue increase in Other Operations of $6.6million or 22.3% was primarily the result of:

 

·                  An increase of $2.9 million in pipelinemaintenance and operating revenue related to additional operating contractssigned in the latter part of 2006;

 

·                  An increase of $2.8 million in constructionmanagement revenue related to additional services requested by customers during2007; and

 

·                  An increase of $0.9 million in incidentalrevenue due to the sale of miscellaneous equipment in 2007.

 

*OperatingExpenses*

 

Cost of productsales was $10.5 million in 2007, which is an increase over 2006 of $0.8million.  The increase was associatedwith fuel purchases related to a product supply arrangement in Buckeye’sPipeline Operations segment.

 

Payroll andpayroll benefits were $97.8 million for the year ended December 31, 2007,an increase of $5.9 million compared to the same period in 2006.  Increases in salaries and wages of $7.0million were attributed to an increase in the number of employees and overtimepay due to Buckeye’s expanded operations and higher wage rates.  In 2007, Buckeye experienced an increase of$2.4 million in employee incentive compensation expense.  Payroll and payroll benefits also increaseddue to a decrease in capitalized payroll and payroll benefits of $1.3million.  Approximately $1.1 million ofpayroll and payroll benefit expense related to recent acquisitions.  Buckeye experienced an increase of $0.9million in major medical costs in 2007.   In addition, BGH’s payroll expense also increased by $0.6 million due tonon-cash unit based compensation expense related to BGH GP’s compensation plan.  These increases were offset by a decrease of$3.9 million in payroll benefits due to lower employee benefits costs resultingfrom an amendment to Services Company’s postretirement health care and lifeinsurance benefits plan.  Payroll andpayroll benefits costs further decreased by $2.4 million due to a decrease innon-cash unit based compensation due to the vesting of its Management Units inconnection with BGH’s initial public offering of BGH’s Common Units (“IPO”).   BGH expensed $1.1 million and $3.5 millionrelated to its Management Units in 2007 and 2006, respectively.  In 2006, BGH paid one-time bonuses of $2.0million to executives in connection with the completion of BGH’s IPO.

 

Depreciationand amortization expense was $40.2 million in 2007, an increase of $0.6 millionover 2006, which is primarily due to recent acquisitions and depreciationexpense for the entire 2007 fiscal year related to the terminal and pipeline atthe Memphis International Airport in April 2006.

 

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Outsideservices costs were $39.7 million in 2007, or $5.1 million greater than thesame period in 2006.  Approximately $0.7million of the increase is related to recent acquisitions.  Approximately $0.6 million of the increase isrelated to corporate development and investor relations initiatives.  An additional $1.2 million of this increaseis due to an annual senior administrative charge that is paid by Buckeye toaffiliates of its general partner for certain management functions supplied bythose affiliates.  Prior to BGH’s IPO, this senior administrative chargewas recognized as income by BGH.  In connection with the IPO, Buckeye paysthe senior administrative charge directly to BGH’s general partner, MainLineManagement, which resulted in an increase in outside service costs during2007. The remaining increase of approximately $2.6 million is due toadditional pipeline and tank inspections and maintenance work that occurredduring 2007.

 

Operatingpower costs of $31.3 million for the year ended December 31, 2007 were$2.4 million higher than the same period in 2006.  The increase is primarily due to higher powersupply additive expense of $0.9 million. The remaining increase of $1.5 million is due to power rate increasesoffset by a slight reduction in pipeline volumes.  Operating power consists primarily ofelectricity required to operate pipeline pumping facilities.

 

Propertyand other taxes increased by $1.5 million from $21.3 million in 2006 to $22.8million for the same period in 2007. Approximately $0.6 million of the increase is related to recentacquisitions.  The remainder of theincrease is due to higher real property assessments over the same period in2006.

 

Insurancecosts and casualty losses were $14.4 million in 2007, which is an increase of$2.9 million over the comparable period in 2006.  Approximately $2.4 million of the increase isdue to higher insurance premiums.  Recentacquisitions added additional insurance expense of $0.3 million in 2007.

 

Constructionmanagement costs were $11.0 million for the year ended December 31, 2007,which is an increase of $2.6 million from the prior year, which was due to anincrease in construction activity.

 

Suppliesexpense was $11.1 million in 2007, an increase of $3.2 million from 2006.  Approximately $2.2 million of the increase isdue an increase in use of terminal additives as a result of increased activityat Buckeye’s terminals.   The remainderof the increase is due to higher consumption of other supplies needed tooperate Buckeye’s pipelines and terminals in general.

 

Rentalexpense increased by $1.4 million from $10.3 million for the year ended December 31,2006 to $11.7 million for the same period in 2007.  Approximately $0.8 million of the increase isrelated to higher office rent due to Buckeye’s relocation of its corporateoffices in 2006.  The remainder of theincrease is principally due to increases in rights of way expense for Buckeye’spipelines and terminals.

 

Allother costs were $33.5 million, an increase of $0.6 million, in 2007 comparedto 2006.   The increase is primarilyrelated to $1.9 million of various other pipeline operating costs resultingfrom Buckeye’s expanded operations. Approximately $0.9 million of the increase is due to costs related torecent acquisitions of Buckeye.  Theseincreases were offset by $2.1 million of non-recurring professional fees in2006 for legal, accounting and tax fees related to planning for BGH’s IPO in2006.

 

Interestand debt expense was $51.7 million in 2007, a decrease of $9.0 million comparedto 2006.  The decrease is primarily dueto $7.0 million of interest expense associated with BGH’s prior term loan whichwas extinguished in conjunction with the IPO in 2006.  The remainder of the decrease is due to adecrease in interest expense on Buckeye’s credit facility resulting from lowerbalances outstanding in 2007 as compared to 2006.

 

**Liquidity and Capital Resources**

 

Until BGH’s IPO onAugust 9, 2006, BGH’s only capital requirement, apart from Buckeye’scapital requirements, was its debt service under its term loan.  Concurrent with BGH’s IPO, the term loan wasrepaid in full.  Buckeye’s capitalrequirements consist of maintenance and capital expenditures, expenditures foracquisitions and debt service requirements.

 

As noted in “Overview”above, BGH’s only cash-generating asset is its ownership interest in BuckeyeGP.  BGH’s cash flow is, therefore,directly dependent upon the ability of Buckeye and its operating subsidiariesto make cash distributions to Buckeye’s partners. The actual amount of cashthat Buckeye will have available for distribution depends primarily on Buckeye’sability to generate cash beyond its working capital requirements.  Buckeye’s primary future sources of liquidityare operating cash flow, proceeds from borrowings under Buckeye’s revolvingcredit facility and proceeds from the issuance of Buckeye’s LP Units and notes.

 

During 2007 andcontinuing in 2008, the capital markets have been increasingly affected byoverall macroeconomic, liquidity, credit and recessionary concerns.  These concerns culminated in the third andfourth quarters of 2008 with a financial credit crisis, 

 

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with sources of additional external financing eitherunavailable or available only on unfavorable economic terms.  Prior to this credit crisis, Buckeye issuedadditional LP Units, debt securities and made additional borrowings under theCredit Facility in order to fund the Lodi Gas and Farm & Homeacquisitions, make expansion capital expenditures and fund short-term workingcapital needs.  In conjunction with theacquisition of Farm & Home, Buckeye assumed Farm & Home’sexisting working capital facility, but subsequently replaced this facility withthe BES Credit Agreement.  Since thesefinancings, Buckeye has continued to access the Credit Facility to fund itsshort-term working capital needs and to fund expansion capital expenditures,while BES continues to access the BES Credit Agreement in order to fund itsworking capital needs.

 

Because current economicconditions make it more difficult to obtain funding in either the debt orequity markets, and such funding will likely be more expensive, Buckeye hastaken steps to preserve its liquidity position including maintaining increasedcash balances, reducing discretionary capital expenditures and appropriatelymanaging operating and administrative expenditures in order to lower costs andimprove profitability.  As a result ofBuckeye’s actions to minimize external financing requirements and the fact thatno debt facilities mature prior to 2011, BGH believes that availabilities underBuckeye’s credit facilities, coupled with ongoing cash flows from operations,will be sufficient to fund Buckeye’s operations for 2009. Buckeye will continueto evaluate a variety of financing sources, including the debt and equitymarkets, throughout 2009. However, continuing volatility in the debt and equitymarkets will make the timing and cost of any such potential financinguncertain.

 

BGH’s principaluse of cash is the payment of its operating expenses and distributions to itsUnitholders.  BGH generally makesquarterly cash distributions of substantially all of its available cash,generally defined as consolidated cash receipts less consolidated cashexpenditures and such retentions for working capital, anticipated cashexpenditures and contingencies as MainLine Management deems appropriate.  In 2008, BGH paid cash distributions of$0.285 per unit on February 29, 2008, $0.30 per unit per unit on May 30,2008, $0.31 per unit on August 29, 2008 and $0.32 per unit on November 28,2008. Total cash distributed to BGH Unitholders in 2008 was approximately $34.4million.

 

***Debt***

 

*BGH*

 

On August 9, 2006, BGHentered into a five-year, $10.0 million unsecured revolving credit facilitywith SunTrust Bank, as both**administrativeagent and lender (the “BGH Credit Agreement”). The credit facility may be usedfor working capital and other partnership purposes. BGH has pledged all of thelimited liability company interests in Buckeye GP as security for itsobligations under the BGH Credit Agreement.  Borrowings under the BGH Credit Agreement bear interest under one of tworate options, selected by BGH, equal to either (i) the greater of (a) thefederal funds rate plus 0.5% and (b) SunTrust Bank’s prime commerciallending rate; or (ii) LIBOR, plus a margin which can range from 0.40% to1.40%, based on the ratings assigned by Standard & Poor’s RatingServices and Moody’s Investor Services to the senior unsecured non-creditenhanced long-term debt of BGH.  BGH didnot have amounts outstanding under the BGH Credit Agreement at December 31,2008 and 2007.

 

The BGH Credit Agreementrequires BGH to maintain leverage and funded debt coverage ratios. The leverageratio covenant requires BGH to maintain, as of the last day of each fiscalquarter, a ratio of the total funded indebtedness of BGH and its RestrictedSubsidiaries, measured as of the last day of each fiscal quarter, to theaggregate dividends and distributions received by BGH and its RestrictedSubsidiaries from Buckeye, plus all other cash received by BGH and theRestricted Subsidiaries, measured for the preceding twelve months, lessexpenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “RestrictedSubsidiaries” as certain of BGH’s wholly-owned subsidiaries.  The funded debt coverage ratio covenantrequires BGH to maintain, as of the last day of each fiscal quarter, a ratio oftotal consolidated funded debt of BGH and all of its subsidiaries to theconsolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and all ofits subsidiaries, measured for the preceding twelve months, of not more than5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 inconnection with future acquisitions. At December 31, 2008, BGH’s fundeddebt coverage ratio was 4.94 to 1.00.

 

The BGH Credit Agreementcontains other covenants, including but not limited to, prohibiting BGH fromdeclaring dividends or distributions if any default or event of default hasoccurred or would result from such a declaration and limiting BGH’s ability toincur additional indebtedness, to create negative pledges and liens, to makeloans, acquisition and grant liens, to make material changes to the nature ofBGH and its Restricted Subsidiaries’ business and to enter into a merger,consolidation or sale of assets.  At December 31,2008, BGH was not aware of any instances of noncompliance with the covenantsunder the BGH Credit Agreement.

 

*Services Company*

* *

Services Companyhad total debt outstanding of $14.0 million and $20.3 million at December 31,2008 and 2007, respectively, consisting of 3.60% Senior Secured Notes (the “3.60%ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-partylender. The 3.60% ESOP Notes were issued on May 4, 2004.  The 3.60% ESOP Notes are collateralized byServices Company’s common stock and are guaranteed by Services Company. Inaddition, Buckeye has committed that, in the event that the

 

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value of Buckeye’sLP Units owned by Services Company falls below 125% of the balance payableunder the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficientassets to bring the value of the total collateral (the value of Buckeye’s LPUnits 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 valueof Buckeye’s LP Units owned by Services Company’s returns to an amount thatexceeds the 125% minimum. At December 31, 2008, the value of Buckeye’s LPUnits owned by Services Company exceeded the 125% requirement.

 

*Buckeye Note*

 

On January 11, 2008,Buckeye sold $300.0 million aggregate principal amount of 6.05% Notes in anunderwritten public offering.  Proceedsfrom this offering, after underwriters’ fees and expenses, were approximately$298.0 million and were used to partially pre-fund the Lodi Gasacquisition.  In connection with thisdebt offering, Buckeye settled the two forward-starting interest rates swaps,as discussed below, which resulted in a settlement payment by Buckeye of $9.6million that is being amortized as interest expense over the ten year term ofthe 6.05% Notes.

 

*Buckeye Credit Facility*

 

Buckeye has aborrowing capacity of $600.0 million under its unsecured revolving creditagreement (the “Credit Facility”), which may be expanded up to $800.0 millionsubject to certain conditions and upon further approval of the lenders.  The Credit Facility requires Buckeye to maintaina specified ratio (the “Funded DebtRatio”) of no greater than 5.0 to 1.0 subject to a provision that allows forincreases to 5.5 to 1.0 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated bydividing consolidated debt by annualized EBITDA, which is defined in theCredit Facility as earnings before interest, taxes, depreciation, depletion andamortization, in each case excluding the income of certain majority-ownedsubsidiaries and equity investments (but including distributions from thosemajority-owned subsidiaries and equity investments).  At December 31, 2008, Buckeye’s FundedDebt Ratio was 4.6 to 1.0.  At December 31,2008, Buckeye had committed $1.3 million in support of letters of credit.  The obligations for letters of credit are notreflected as debt on Buckeye’s consolidated balance sheet.  The weighted average interest rate forborrowing outstanding under the Credit Facility was 2.4% at December 31,2008.

 

In addition, theCredit Facility contains other covenants including, but not limited to,covenants limiting Buckeye’s ability to incur additional indebtedness, tocreate or incur certain liens on its property, to dispose of property materialto its operations, and to consolidate, merge, or transfer assets.  At December 31, 2008, Buckeye was notaware of any instances of noncompliance with the covenants under its CreditFacility.

 

See Note 13 to BGH’sconsolidated financial statements for more information about the terms of theCredit Facility.

 

Lehman Brothers, FSB, an affiliate of LehmanBrothers, has committed, as a lender, 3.3%, or $20.0 million, of Buckeye’s$600.0 million borrowing capacity under the Credit Facility but recently hasnot honored that commitment.  See belowfor a further discussion of Buckeye’s relationships with Lehman Brothers.

 

*BESCredit Agreement*

 

On May 20,2008, Farm & Home and BES entered into a credit agreement, which wassubsequently amended on July 18, 2008 and September 15, 2008 (the “BESCredit Agreement”).  On July 31,2008, Farm & Home was merged with and into BES, leaving BES as thesole borrower under the BES Credit Agreement. The credit facility provided by the BES Credit Agreement provides forborrowings of up to $175.0 million, which amount may be increased to $250.0million subject to customary conditions, including procurement of the requisitelender commitments.

 

The BES CreditAgreement requires BES to meet certain financial covenants, which aresummarized below (in millions except for 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              |       |

 

At December 31,2008, BES’s Consolidated Tangible Net Worth (as defined in the BES CreditAgreement) and Consolidated Net Working Capital (as defined in the BES CreditAgreement) were $113.5 million and $64.2 million, respectively, and theConsolidated Leverage Ratio (as defined in the BES Credit Agreement) was 1.62to 1.0.  The weighted average interestrate for

 

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borrowing outstandingunder the BES Credit Agreement was 2.6% at December 31, 2008.

 

In addition, the BESCredit Agreement contains other covenants, including, but not limited to,covenants limiting BES’s ability to incur additional indebtedness, to create orincur certain liens on its property, to consolidate, merge or transfer itsassets, to make dividends or distributions, to dispose of its property, to makeinvestments, to modify its risk management policy, or to engage in businessactivities materially different from those presently conducted.  At December 31, 2008, BES was not awareof any instances of noncompliance with the covenants under the BES CreditAgreement.

 

See Note 13 to BGH’sconsolidated financial statements for more information about the terms of theBES Credit Agreement.

 

Derivatives

 

See “Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk — Market Risk — Non Trading Instruments” for a discussion ofcommodity derivatives used by Buckeye’s Energy Services segment.

 

In January 2008, Buckeye terminated twoforward-starting interest rate swap agreements associated with the 6.05% Notesand made a payment of $9.6 million in connection with the termination.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”), Buckeye has recordedsuch amount in other comprehensive income and will amortize the amount of thepayment into interest expense over the ten-year term of the 6.05% Notes.  Interest expense increased by $0.9 millionfor the year ended December 31, 2008 as a result of the amortization ofthe termination payment.

 

In October 2008,Buckeye borrowed approximately $50 million under the Credit Facility.  In order to hedge its variable interest raterisk with respect to the amount borrowed, Buckeye concurrently entered into aninterest rate swap agreement for a notional amount of $50 million.  Under the swap agreement, Buckeye will pay afixed interest rate of interest of 3.15% for 180 days and, in exchange, willreceive a series of six monthly payments to be calculated based on the 30-dayLondon Interbank Offered Rate (“LIBOR”) rate in effect at the beginning of eachmonthly period.  The amounts received byBuckeye will correspond to the 30-day LIBOR rates Buckeye expects to pay on the$50 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 acash flow hedge on December 3, 2008 with changes in value between thetrade date and the designation date recognized in earnings. As of December 31,2008, $0.3 million was recognized in earnings related to the differences in thetrade and designation date and the ineffectiveness for the hedge period.

 

In January 2009,Buckeye entered into an additional interest rate swap agreement to hedge itsvariable rate risk on an additional $50 million in borrowing under the CreditFacility. Under the swap agreement, Buckeye will pay a fixed interest rate of0.81% for 180 days and, in exchange, will receive a series of six monthlypayments to be calculated based on the 30-day LIBOR rate in effect at thebeginning of each monthly period. The amounts received by Buckeye willcorrespond to the 30-day LIBOR rates Buckeye expects to pay on the additional$50 million borrowed under the Credit Facility. The swap will settle on thematurity date of the last 30-day LIBOR period. Buckeye designated the swapagreement as a cash flow hedge at inception.

 

For both interest rateswap agreements, Buckeye expects the changes in value of the interest rate swapagreements to be highly correlated with the changes in value of the underlyingborrowing.

 

Buckeye’sfinancial strategy is to maintain an investment-grade credit rating, whichinvolves, among other things, the issuance of additional LP Units in connectionwith Buckeye’s acquisitions and internal growth activities in order to maintainacceptable financial ratios, including total debt to total capital.  From 2004 through 2008, Buckeye has raisednet proceeds of approximately $853 million from the issuance of its LP Units insupport of its acquisition and growth strategies.  Buckeye may issue additional LP Units in 2009and beyond to partially fund acquisitions and internal growth activities,market conditions permitting.  Buckeye issubject, however, to changes in the equity markets for its LP Units, and therecan be no assurance Buckeye will be able or willing to access the public orprivate markets for its LP Units in the future. If Buckeye were unable to issue additional LP Units, Buckeye would berequired to either restrict potential future acquisitions or pursue other debtfinancing alternatives, some of which could involve higher costs.

 

Relationships withLehman Brothers

 

On September 15,2008, it was reported that Lehman Brothers filed for protection under Chapter11 of the federal Bankruptcy Code in the United States Bankruptcy Court in theSouthern District of New York.  Anaffiliate of Lehman Brothers owned a direct interest in BGH GP, affiliates ofLehman Brothers had provided investment and commercial banking and financialadvisory services to Buckeye, an affiliate of Lehman Brothers was a lenderunder the Credit Facility, and an affiliate of Lehman Brothers was a customerof Lodi Gas.  BGH has considered its relationshipwith Lehman Brothers and its affiliates, and for the reasons set forth below,believe the Lehman Brothers bankruptcy and the possible resulting effects onaffiliates of Lehman Brothers

 

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will not have a directmaterial adverse effect on BGH. The BGH GP interest owned by an affiliate ofLehman Brothers was a passive investment that did not entitle its holder to anymanagement or other control rights with respect to BGH GP, MainLine Management,BGH, Buckeye GP, or Buckeye.  Consequently,BGH believes that if the interest in BGH GP is or has been transferred inconnection with Lehman Brothers’ bankruptcy, such transfer will not adverselyimpact BGH.  An affiliate of Barclays PLChas acquired and is operating the investment banking business and certainfinancial services businesses of Lehman Brothers and its affiliates in NorthAmerica and, as a result, management does not expect any disruption withrespect to these services that Lehman Brothers and its affiliates have providedto Buckeye.  Lehman Brothers, FSB, anaffiliate of Lehman Brothers, has committed, as a lender, 3.3%, or $20.0million, of Buckeye’s $600.0 million borrowing capacity under Buckeye’s CreditFacility, but recently has not honored that commitment.  BGH does not believe that the reduction incapacity under Buckeye’s Credit Facility resulting from the unavailability ofLehman Brothers, FSB’s commitment will have any impact on BGH’s ability to meetits liquidity needs.  Finally, in October 2008,Lehman Brothers sold the Lehman Brothers affiliate that is a customer of LodiGas to a third party not affiliated with Lehman Brothers.

 

Ammonia ContractContingencies

 

On November 30, 2005, Buckeye Gulf Coast PipeLines, L.P. (“BGC”), a subsidiary of Buckeye, purchased an ammonia pipeline andother assets from El Paso Merchant Energy-Petroleum Company (“EPME”), asubsidiary of El Paso Corporation (“El Paso”). As part of the transaction, BGC assumed the obligations of EPME underseveral contracts involving monthly purchases and sales of ammonia.  EPME and BGC agreed, however, that EPME wouldretain the economic risks and benefits associated with those contracts untiltheir expiration at the end of 2012.  Toeffectuate this agreement, BGC passes through to EPME both the cost ofpurchasing ammonia under a supply contract and the proceeds from sellingammonia under three sales contracts.  Forthe vast majority of monthly periods since the closing of the pipeline acquisition,the pricing terms of the ammonia contracts have resulted in ammonia costsexceeding ammonia sales proceeds.  Theamount of the shortfall generally increases as the market price of ammoniaincreases.

 

EPME has informed BGCthat, notwithstanding the parties’ agreement, it will not continue to pay BGCfor shortfalls created by the pass-through of ammonia costs in excess ofammonia revenues.  EPME encouraged BGC toseek payment by invoking the $40.0 million guaranty made by El Paso whichguaranteed EPME’s obligations to BGC.  IfEPME fails to reimburse BGC for these shortfalls for a significant periodduring the remainder of the term of the ammonia agreements, then suchunreimbursed shortfalls could exceed the $40.0 million cap on El Paso’sguaranty.  To the extent the unreimbursedshortfalls significantly exceed the $40.0 million cap, the resulting costsincurred by BGC could adversely affect Buckeye’s financial position, results ofoperations, and cash flows.  Given theuncertainty of future ammonia prices and EPME’s future actions, Buckeye isunable to estimate the amount of any such losses.  Accordingly, Buckeye has recorded noprovision for losses in the accompanying consolidated financial statementsbecause 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 theamount of such losses.   Buckeye iscurrently assessing its options, including potential recourse against EPME andEl Paso, with respect to this matter.

 

***CashFlows from Operations***

 

Thecomponents of cash flows from operations for the years ended December 31,2008, 2007 and 2006 were as follows:

 
| ** **                                     | ** ** | **Cash Flow from Operations** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(In thousands)**                      | ** ** |
| Income from  continuing operations             |       | $                                            | 26,477     |   | $ | 22,921 |   | $ | 8,734 |   |
| Value of ESOP  shares released                 |       | 2,202                                        |       | 4,470 |   | 4,077 |   |
| Depreciation and  amortization                 |       | 50,834                                       |       | 40,236 |   | 39,629 |   |
| Non-controlling  interest                      |       | 154,146                                      |       | 128,926 |   | 103,066 |   |
| Net changes in  fair value of derivatives      |       | (24,228                                      | )          | — |   | — |   |
| Changes in  current assets and liabilities     |       | (6,366                                       | )          | (1,895 | ) | (8,310 | ) |
| Changes in  non-current assets and liabilities |       | (874                                         | )          | (4,984 | ) | 3,568 |   |
| Other                                          |       | 6,366                                        |       | 2,062 |   | 4,428 |   |
| Total                                          |       | $                                            | 208,557    |   | $ | 191,736 |   | $ | 155,192 |   |

 

Cashflows from operations were $208.6 million for 2008, which is an increase of$16.8 million compared to 2007. The primary cause of this increase was theimprovement in net income in 2008 compared to 2007 offset by cash used forworking capital of $6.4 million.

 

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In 2008, cash usedfor working capital resulted primarily from an increase in prepaid and othercurrent assets of $27.7 million, a decrease in accounts payable of $10.6million, an increase in construction and pipeline relocation receivables of$8.9 million, and an increase in inventories of $4.4 million.  These cash uses were offset by a decrease intrade receivables of $36.1 million and an increase in accrued and other currentliabilities of $9.2 million.

 

The increase in prepaidand other current assets is primarily due to an increase in a receivablerelated to ammonia purchases as well as additional margin deposits associatedwith liabilities for derivative instruments.  The decrease in accounts payable is due to activity within the EnergyServices segment since the acquisition of Farm & Home.  The increase in construction and pipelinerelocation receivables is due to an increase in construction activity in the latterpart of 2008.  The increase ininventories was due to inventory purchases within the Energy Services segment.The reduction of trade receivables is due to an increase in collections withinthe Energy Services segment since the acquisition of Farm & Home.  The increase in accrued and other currentliabilities is primarily due to increases in accrued taxes, environmentalliabilities, and interest expense.

 

The net change in fairvalues of derivatives resulted from the significant increase in value relatedto fixed-price sales contracts compared to a lower level of oppositefluctuations in futures contracts purchased to hedge such fluctuations.  Buckeye did not hedge a portion of thefixed-price sales contracts because it had purchased inventory to fulfill aportion of those commitments.

 

Cashflows from operations were $191.7 million in 2007, compared to $155.2 millionin 2006, an increase of $36.5 million. The primary causes of this increase were the increases in BGH’s netincome of $14.2 million and non-controlling interest of $26.7 million in 2007,which were partially offset by an increase in non-current assets andliabilities of $5.0 million and an increase in working capital requirements in2007 as compared to 2006 of $1.9 million

 

In2007, cash used for working capital resulted primarily from a reduction inaccounts payable of $6.3 million which was offset by reductions in tradereceivables of $3.4 million and prepaid and other current assets of $1.5million and an increase in accrued and other current liabilities of $0.7million.  The reduction in accountspayable is due to the timing of the payment of invoices at year end in 2007 ascompared to 2006.  The reduction in tradereceivables is due to improvements in the timing of collections. The reductionin prepaid and other current assets is a result of decreases in insurancereceivables from insurance companies related to environmental remediationexpenditures and prepaid insurance which were partially offset by increases inprepaid taxes and excise tax receivables. The increase in accrued and other current liabilities is due toincreases in accrued taxes and benefit accruals offset by a reduction inenvironmental liabilities.

 

***CashFlows from Investing Activities***

 

Netcash used in investing activities for the years ended December 31, 2008,2007 and 2006, all of which were incurred by Buckeye, were as follows:

 
| ** **                           | ** ** | **Investing Activities** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(In thousands)**       | ** ** |
| Capital  expenditures                |       | $                             | 120.5      |   | $ | 67.9 |   | $ | 92.8 |   |
| Acquisitions and  equity investments |       | 667.5                         |       | 40.7 |   | 94.3 |   |
| Other                                |       | (52.2                         | )          | — |   | (6.6 | ) |
| Total                                |       | $                             | 735.8      |   | $ | 108.6 |   | $ | 180.5 |   |

 

In 2008, Buckeyeexpended $438.8 million for Lodi Gas, $143.3 million for Farm & Home,and an aggregate of $75.6 million for the acquisitions of four terminals inAlbany, New York, Niles and Ferrysburg, Michigan, and Wethersfield, Connecticutand the acquisition of the remaining 50% member interest in Wespac Pipelines -San Diego LLC that Buckeye did not already own. Buckeye also invested anadditional $9.8 million in West Texas LPG Pipeline Limited Partnership.  See Note 3 to BGH’s consolidated financialstatements for a further discussion.

 

In2007, Buckeye expended $39.8 million primarily for the acquisition of sixterminals and related assets and $0.9 million for an additional investment inWest Texas LPG Pipeline Limited Partnership. See Note 3 to BGH’s consolidated financial statements for a furtherdiscussion.

 

In2006, Buckeye paid $94.3 million related to acquisitions, including $79.3million related to the NGL Pipeline, $12.5 million related to the acquisitionof the Niles, Michigan terminal and approximately $2.5 million formiscellaneous asset acquisitions.  Theprimary source of other cash of $6.6 million in 2006 relates to the liquidationof restricted cash of $5.1 million as a result of the repayment of the termloan in conjunction with BGH’s IPO.

 

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Capital expenditures are summarized below:

 
| ** **                        | ** ** | **Capital Expenditures** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In millions)**        | ** ** |
| Sustaining  capital expenditures: |       |                          |       |   |   |   |   |
| Operating  infrastructure         |       | $                             | 20.1       |   | $ | 22.6 |   | $ | 20.6 |   |
| Pipeline and  tank refurbishments |       | 8.8                           |       | 11.2 |   | 9.6 |   |
| Total sustaining                  |       | 28.9                          |       | 33.8 |   | 30.2 |   |
| Expansion and  cost reduction     |       | 93.5                          |       | 34.1 |   | 62.6 |   |
| Total                             |       | $                             | 122.4      |   | $ | 67.9 |   | $ | 92.8 |   |

 

In 2008, Buckeye incurred $28.9 million of sustainingcapital expenditures and $93.5 million of expansion and cost reductionexpenditures. Expansion and cost reduction projects in 2008 included ethanoland butane blending projects at certain of Buckeye’s terminals, theconstruction of three additional product storage tanks with a capacity of 0.4million barrels in Linden, New Jersey, and an expansion project, known as KirbyHills Phase II, at Buckeye’s natural gas storage facility in California.  Construction costs for Kirby Hills Phase IIin 2008 totaled approximately $49.6 million.

 

Buckeye expects to spend approximately $75.0 millionto $100.0 million in capital expenditures in 2009, of which approximately $20.0million to $30.0 million is expected to relate to sustaining capitalexpenditures and $55.0 million to $70.0 million is expected to relate toexpansion and cost reduction projects. Sustaining capital expenditures include renewals and replacement of tankfloors and roofs and upgrades to station and terminalling equipment, fieldinstrumentation and cathodic protection systems.  Major expansion and cost reduction expendituresin 2009 will include the completion of the Kirby Hills Phase II expansion, thecompletion of the additional product storage tanks at Linden, New Jersey andthe construction of a 4.7 mile pipeline in central Connecticut to connectBuckeye’s pipeline in Connecticut to a third party’s electric generation plantcurrently under construction.

 

In 2007, Buckeye incurred $33.8 million of sustainingcapital expenditures and $34.1 million of expansion and cost reductionexpenditures. Expansion and cost reduction projects in 2007 included a capacityexpansion project in Illinois to handle additional liquified petroleum gasvolumes as well as ongoing capacity improvements at facilities serving theMemphis International Airport.

 

In 2006, Buckeye incurred $30.2 million of sustainingcapital expenditures and $62.5 million of expansion and cost reductionexpenditures.  Expansion projects in 2006included $12.4 million to complete an approximate 11-mile pipeline and relatedterminal facilities to serve the Memphis International Airport, $12.1 millionfor the addition of pipelines, tankage and equipment to meet new handlingrequirements for ultra-low sulfur diesel, and $11.9 million for the capacityexpansion project in Illinois to handle additional LPG volumes as referencedabove.  Other expansion projects in 2006included various ethanol-blending and butane-blending projects at pipelinestations and terminals owned by Buckeye, and an expansion of pipeline andterminal infrastructure at the Memphis International Airport to accommodate anew generation of cargo planes for Federal Express Corporation.

 

Until December 31, 2005, Buckeye’s initialpipeline integrity expenditures for internal inspections had been capitalizedas part of pipeline cost when such expenditures improved or extended the lifeof the pipeline or related assets. Subsequent pipeline integrity expenditures for internal inspections havebeen expensed as incurred.  As of January 1,2006, Buckeye began expensing all internal inspections for pipeline integrity,whether or not such expenditures were for the initial or subsequent internalinspection.  In 2008, 2007 and 2006,approximately $8.9 million, $10.9 million and $10.5 million, respectively, ofintegrity costs were expensed. Buckeye expects to charge approximately $13.9million of pipeline integrity expenditures to expense in 2009.

 

***CashFlows from Financing Activities***

 

*EquitySecurities:*

 

As describedabove, BGH raised approximately $168.3 million, net of underwriters’ discountand expenses, in the August 2006 IPO. BGH used the proceeds from the offering, plus available cash fromoperations and the liquidation of MainLine’s interest expense reserve accountand its three derivative instruments, to repay principal and accrued intereston MainLine’s then-outstanding term loan, as well as make distributions of $7.7million to BGH’s pre-IPO equity owners.

 

On March 26, 2008, Buckeye issued 2.6 million LPUnits in an underwritten public offering at $42.86 per LP Unit. Total proceedsfrom the offering, after underwriter’s discount of $1.79 per LP Unit andoffering expenses, were approximately $113.1 million and were used to reduceamounts outstanding under the Credit Facility.

 

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On December 4, 2007,Buckeye issued 2.0 million LP Units in an underwritten public offering at$47.30 per LP Unit. Total proceeds from the offering, after underwriter’sdiscount of $1.00 per LP Unit and offering expenses, were approximately $94.5million, and were used to reduce amounts outstanding under the Credit Facilityand to pre-fund a portion of the amounts required for the acquisition of LodiGas in January 2008.

 

On August 8, 2007,Buckeye issued 2.5 million LP Units in an underwritten public offering at$47.95 per LP Unit.  Total proceeds fromthe offering, after underwriter’s discount of $0.70 per LP Unit and offeringexpenses, were approximately $119.7 million, and were used to reduce amountsoutstanding under the Credit Facility.

 

On March 5, 2007,Buckeye issued 1.5 million LP Units in an underwritten public offering at$48.25 per LP Unit.  On March 14,2007, the underwriters exercised a portion of their overallotment option and,accordingly, Buckeye issued an additional 208,600 LP Units at $48.25 per LPUnit.  Proceeds from the offering,including the overallotment option and after underwriter’s discount of $0.75per LP and offering expenses, were approximately $82.2 million, and were used toreduce amounts outstanding under the Credit Facility.

 

On March 7, 2006,Buckeye issued 1.5 million LP Units in an underwritten public offering at$44.22 per LP Unit.  Proceeds from theoffering, after underwriter’s discount of $1.45 per LP Unit and offeringexpenses, were approximately $64.1 million and were used to reduce amountsoutstanding under the Credit Facility.

 

*Debt Securities:*

 

On January 11, 2008,Buckeye sold $300.0 million in aggregate principal amount of the 6.05% Notes inan underwritten public offering. Proceeds from this offering, after underwriters’ fees and expenses, wereapproximately $298.0 million and were used to partially pre-fund the Lodi Gasacquisition.  In connection with thisdebt offering, Buckeye settled two interest rate swaps associated with the6.05% Notes, which resulted in a settlement payment by Buckeye of $9.6 millionthat is being amortized as interest expense over the ten-year term of the 6.05%Notes.

 

*BankFinancings:*

 

Buckeye borrowed $558.6million, $155.0 million and $177.0 million, and repaid $264.3 million, $300.0million and $82.0 million under the Credit Facility (and its predecessorfacility) in 2008, 2007 and 2006, respectively. Net repayments under the BES Credit Agreement and BES’s previous creditagreement were $4.0 million in 2008.

 

Payments on ServiceCompany’s ESOP loans were $6.3 million in 2008 and $6.0 million in each of 2007and 2006.

 

*Distributions:*

 

Distributions tonon-controlling interests consisting primarily of Buckeye’s distributions to holdersof its LP Units increased to $159.3 million in 2008 compared to $128.8 millionin 2007 and $113.5 million in 2006. Distributions in 2008 increased over 2007 primarily as a result ofincreases in the unit distribution rate and the issuance of the 2.6 million LPUnits in 2008.  Distributions in 2007increased over 2006 primarily as a result of increases in the unit distributionrate and the issuance of the 6.2 million LP Units in 2007.

 

Total distributions byBGH to its Unitholders in 2008 amounted to $34.4 million as compared to $27.7million in 2007 and $3.5 million in 2006. Distributions in 2008 increased over 2007 primarily as a result ofincreases in Buckeye’s unit distribution rate. In 2007, BGH declared four quarterly distributions as compared to 2006,when BGH only declared one quarterly distribution, as a result of BGH’s IPO inthe latter part of 2006.

 

**OtherFinancing**

 

*Operating Leases*

 

Buckeye leasescertain land and rights-of-way in connection with the operations of itspipelines. Minimum future lease payments for these leases as of December 31,2008 are approximately $5.8 million for each of the next five years.Substantially all of these lease payments can be canceled at any time shouldthey not be required for operations.

 

Buckeye leases certainother land and space in office buildings. Future minimum lease payments under these non-cancelable operatingleases at December 31, 2008 are approximately $1.5 million for 2009, $1.5million for 2010, $1.5 million for 2011, $1.4 million for 2012, $1.4 millionfor 2013, and $12.3 million in the aggregate thereafter.

 

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Buckeyehas leases for subsurface underground gas storage rights and surface rights inconnection with its operations in the Natural Gas Storage segment. These leasesmay be cancelled by Buckeye if the storage reservoir is not used forunderground storage of natural gas or the removal or injection thereof for acontinuous period of two consecutive years. Lease payments for the year ended December 31, 2008 were $2.7million.  Lease expense associated withthese leases is being recognized on a straight-line basis over 44 years.For the year ended December 31, 2008, the Natural Gas Storage segment’slease expense was approximately $7.1 million, including $4.6 millionrecorded as an increase in Buckeye’s deferred lease liability.  Buckeye GP estimates that the deferred leaseliability will continue to increase through 2032, at which time Buckeye’sdeferred lease liability is estimated to be approximately $64.7 million.Buckeye’s deferred lease liability will then be reduced over the remaining19 years of the lease, since the expected annual lease payments willexceed the amount of lease expense.

 

       Future minimum leasepayments for subsurface underground gas storage and mineral rights by year asof December 31, 2008, are as follows:

 
| **Years Ending**   |
|-------------------------|
| **December 31,**   |
| **(In thousands)** |
| 2009                    |   | $ | 2,677 |   |
| 2010                    |   | 2,943 |   |
| 2011                    |   | 3,057 |   |
| 2012                    |   | 3,281 |   |
| 2013                    |   | 3,408 |   |
| Thereafter              |   | 298,848 |   |
| Total                   |   | $ | 314,214 |   |

 

Rent expense underoperating leases was $20.2 million, $11.7 million and $10.3 million for 2008,2007 and 2006, respectively.

 

*ContractualObligations*

 

Contractual obligationsare summarized in the following table:

 
| ** **                                            | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                      | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                   | ** ** |
| Long-term debt                                        |       | $                                         | 1,462,264  |   | $ | 6,294 |   | $ | 7,703 |   | $ | 598,267 |   | $ | 850,000 |   |
| Interest payable  on fixed long-term debt obligations |       | 634,311                                   |       | 63,728 |   | 126,558 |   | 126,263 |   | 317,762 |   |
| Operating leases                                      |       | 19,545                                    |       | 1,474 |   | 2,941 |   | 2,868 |   | 12,262 |   |
| Land leases                                           |       | 314,214                                   |       | 2,677 |   | 6,000 |   | 6,689 |   | 298,848 |   |
| Rights-of-way payments                                |       | 29,138                                    |       | 5,828 |   | 11,655 |   | 11,655 |   | — |   |
| Purchase  obligations                                 |       | 47,227                                    |       | 47,227 |   | — |   | — |   | — |   |
| Total  contractual cash obligations                   |       | $                                         | 2,506,699  |   | $ | 127,228 |   | $ | 154,857 |   | $ | 745,742 |   | $ | 1,478,872 |   |

 

Interest payable on fixed long-term debt obligations includessemi-annual payments required for Buckeye’s 4.625% Notes due 2013, its 6.75%Notes due 2033, its 5.30% Notes due 2014, its 5.125% Notes due 2017, and its6.05% Notes, as well as interest due on Services Company’s 3.6% ESOP Notes. Intereston Buckeye’s variable rate obligations (the Credit Facility and the BES CreditAgreement) is not included in the table above because the amounts outstandingand the related interest rates cannot be predicted.  In 2008, Buckeye paid interest ofapproximately $6.1 million on the Credit Facility and $3.7 million on the BESCredit Agreement.  The weighted averageinterest rates for borrowings outstanding under the Credit Facility and the BESCredit Agreement were 2.4% and 2.6%, respectively, at December 31,2008.  At December 31, 2008, BGH did not have any amounts outstandingunder the BGH Credit Agreement.

 

Purchaseobligations generally represent commitments for recurring operating expenses orcapital projects.

 

Inaddition, BGH’s and Buckeye’s obligations related to their pension andpostretirement benefit plans are discussed in Note 17 to BGH’sconsolidated financial statements.

 

### *Environmental Matters*

### * *

Buckeye is subjectto federal, state and local laws and regulations relating to the protection ofthe environment. These laws and regulations, as well as Buckeye’s own standardsrelating to protection of the environment, cause Buckeye to incur current and 

 

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ongoing operating andcapital expenditures.  Environmentalexpenses are incurred in connection with emergency response activitiesassociated with the release of petroleum products to the environment fromBuckeye’s pipelines and terminals, and in connection with longer termenvironmental remediation efforts which may involve, for example, groundwatermonitoring and treatment.  Buckeyeregularly incurs expenses in connection with these environmental remediationactivities.  In 2008, Buckeye incurredoperating expenses of $10.1 million and at December 31, 2008 had $27.0million accrued for environmental matters. At December 31, 2008, Buckeye estimates that approximately $2.9million of environmental expenditures incurred will be covered byinsurance.  These recovery amounts havenot been included in expense in Buckeye’s financial statements.  Buckeye maintains environmental liabilityinsurance covering all of its pipelines and terminals with a per occurrencedeductible in the amount of $3.0 million. Expenditures, both capital andoperating, relating to environmental matters are expected to continue due toBuckeye’s commitment to maintaining high environmental standards and complyingwith increasingly rigorous environmental laws.

 

**Employee Stock Ownership Plan**

 

Services Company providesan employee stock ownership plan (the “ESOP”) to the majority of its employeeshired before September 16, 2004. Effective September 16, 2004, newemployees do not participate in the ESOP, as well as certain employees coveredby a union multiemployer pension plan. The ESOP owns all of the outstandingcommon stock of Services Company.

 

Services Company stock isreleased to employee accounts in the proportion that current payments ofprincipal and interest on the 3.6% ESOP Notes bear to the total of allprincipal and interest payments due under the 3.6% ESOP Notes. Individualemployees are allocated shares based upon the ratio of their eligiblecompensation to total eligible compensation. Eligible compensation generallyincludes base salary, overtime payments and certain bonuses.  Total ESOP related costs charged to earningswere $3.4 million, $5.8 million, and $5.6 million for the years ended December 31,2008, 2007 and 2006, respectively.

 

**Off-Balance Sheet Arrangements**

 

BGH does not have anyoff-balance sheet arrangements except for operating leases. See Note 20 toBGH’s consolidated financial statements for a further discussion.

 

**Critical Accounting Policies**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to selectappropriate accounting principles from those available, to apply thoseprinciples consistently and to make reasonable estimates and assumptions thataffect revenues and associated costs as well as reported amounts of assets andliabilities. The following describes the estimated risks underlying BGH’scritical accounting policies and estimates:

 

*DepreciationMethods and Estimated Useful Lives of Property, Plant and Equipment*

 

Property, plant andequipment is recorded at cost. Approximately 68.7% of BGH’s consolidated assetsconsist of property, plant and equipment such as pipeline and relatedtransportation facilities, land, rights-of-way, buildings, leaseholdimprovements and machinery and equipment. The most significant of these assetsare pipelines and related facilities, which, consistent with industry practice,are generally depreciated on a straight line basis over an estimated useful lifeof 50 years. Depreciation is the systematic and rational allocation of anasset’s cost or fair value, less its residual value (if any), to the periods itbenefits. Straight line depreciation results in depreciation expense beingincurred evenly over the life of an asset.

 

The determination of anasset’s useful life requires assumptions regarding a number of factorsincluding technological change, normal depreciation and actual physical usage.If any of these assumptions subsequently change, the estimated useful life ofthe asset could change and result in an increase or decrease in depreciationexpense that could have a material impact on our financial statements.

 

At December 31, 2008and 2007, the net book value of BGH’s consolidated property plant and equipmentwas $2.2 billion and $1.8 billion, respectively. Depreciation expensewas $47.4 million and $39.6 million for the years ended December 31,2008 and 2007, respectively. BGH does not believe that there is a reasonablelikelihood that there will be a material change in the future estimated usefullife of these assets. In the past, BGH has generally not deemed it necessary tomaterially change the depreciable lives of its assets. However, a 10% reductionin the depreciable life of these assets, for example, from 50 to 45 yearsfor pipelines and related assets, would increase annual depreciation expense,and reduce operating income by approximately $5.0 million annually.

 

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*Reservesfor Environmental Matters*

 

As discussed under“Environmental Matters” above, Buckeye is subject to federal, state and locallaws and regulations relating to the protection of the environment.Environmental expenditures that relate to current operations are expensed orcapitalized as appropriate. Expenditures that relate to existing conditionscaused by past operations, and which do not contribute to current or futurerevenue generation, are expensed. Liabilities are recorded when environmentalassessments and/or clean-ups are probable, and the costs can be reasonablyestimated based upon past experience and advice of outside engineering,consulting and law firms. Generally, the timing of these accruals coincideswith Buckeye’s commitment to a formal plan of action. Accrued environmentalremediation related expenses include estimates of direct costs of remediationand indirect costs related to the remediation effort, such as compensation andbenefits for employees directly involved in the remediation activities and feespaid to outside engineering, consulting and law firms. Historically, Buckeye’sestimates of direct and indirect costs related to remediation efforts havegenerally not required material adjustments. However the accounting estimatesrelative to environmental matters are uncertain because (1) estimatedfuture expenditures related to environmental matters are subject to costfluctuations and can change materially, (2) unanticipated liabilities mayarise in connection with environmental remediation projects and may impact costestimates, and (3) changes in federal, state and local environmentalregulations can significantly increase the cost or potential liabilitiesrelated to environmental matters. Buckeye maintains insurance which may covercertain environmental expenditures. During 2008, 2007 and 2006, Buckeyeincurred environmental related operating expenses, net of insurance recoveries,of $10.1 million, $7.4 million and $6.2 million, respectively. At December 31,2008 and 2007, Buckeye had accrued $27.0 million and $22.7 million,respectively, for environmental matters. The environmental accruals are revised as new matters arise, or as newfacts in connection with environmental remediation projects require a revisionof estimates previously made with respect to the probable cost of suchremediation projects. Changes in estimates of environmental remediation foreach remediation project will affect operating income on a dollar-for-dollarbasis up to Buckeye’s self-insurance limit. Buckeye’s self-insurance limit iscurrently $3.0 million per occurrence.

 

*FairValue of Derivatives and Fixed-Price Sales Contracts*

 

TheEnergy Services segment primarily uses exchange-traded petroleum futurescontracts to manage the risk of market price volatility on its refinedpetroleum product inventories and its fixed-price sales contracts. The EnergyServices segment has elected not to use hedge accounting with respect to itsfixed-price sales contracts. Therefore, its fixed-price sales contracts and therelated futures contracts used to offset those fixed-price sales contracts areall marked-to-market on Buckeye’s balance sheet with gains and losses beingrecognized in earnings during the period. As a result, the valuations associated with these derivativeinstruments, including the fixed-price sales contracts, have a material impacton net income.  At December 31,2008, BUCKEYE included in its financial statements as assets fixed-price salescontracts with values of approximately $78.4 million.  These fair values resulted from theincreasingly large differences between the fixed-prices called for in the salescontracts and current prices available in spot markets. Offsetting the value ofthese fixed-price sales contracts were futures contracts with values ofapproximately $50.8 million which were recognized as liabilities.  Buckeye has determined that theexchange-traded futures contracts represent Level 1 fair value measurements, asdescribed in Statement of Financial Accounting Standards No. 157 — “FairValue Measurements” (“SFAS 157”) because the prices for such futures contractsare established on liquid exchanges with willing buyers and sellers and withprices which are readily available on a daily basis.

 

Buckeyehas determined that the fixed-price sales contracts represent Level 2 fairvalue measurements under SFAS 157 because their value is derived from similarcontracts for similar delivery and settlement terms which are traded onestablished exchanges.  However, becausethe fixed-price sales contracts are privately negotiated with customers of theEnergy Services segment who are generally private companies that do not havecredit ratings established by nationally recognized ratings agencies, thedetermination of an adjustment to fair value to reflect counterparty creditrisk (a “credit valuation adjustment”) requires significant managementjudgment.  At December 31, 2008, dueto a credit valuation adjustment, Buckeye had reduced the fair value of thefixed-price sales contracts by $0.6 million to reflect this counterparty creditrisk.  The delivery periods for thecontracts range from one to 14 months, with the substantial amount ofdeliveries concentrated in the first four months of 2009.

 

Becauselittle or no public credit information is available for the Energy Servicessegment’s customers who have fixed-price sales contracts, Buckeye specificallyanalyzed each customer and contract to evaluate (i) the historical paymentpatterns of the customer, (ii) the current outstanding receivablesbalances for each customer and contract and (iii) the level of performanceof each customer with respect to volumes called for in the contract.  Buckeye then evaluated the specific risks andexpected outcomes of nonpayment or nonperformance by each customer andcontract.  Based on its credit andperformance risk evaluation, Buckeye recorded the credit valuation adjustmentof $0.6 million.  If actual customerperformance under these fixed-price sales contracts deteriorates (eitherthrough nonperformance with respect to contracted volumes or nonpayment ofamounts due), then the fair value of these contracts could be materiallyless.  For example, a one percentshortfall in delivered volumes over the average life of the contracts wouldreduce the fair value of the contracts and, accordingly, net income, by $0.8million.  Buckeye continues to monitorand evaluate performance and collections with respect to these fixed-price salescontracts.

 

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*Accounting for Goodwill andAssessment of Goodwill Impairment*

 

       BGH’s goodwill balance at year-end 2007of $234.6 million related primarily to BGH’s acquisition of the entity thatcontrolled the general partner interests in Buckeye.   The amount of reported goodwill increased to$433.9 million at year-end 2008 substantially as a result of Buckeyes’acquisition of Lodi Gas, Farm & Home and the ethanol and petroleumproducts terminal in Albany, New York. The initial recording of goodwill resulted from management’s allocationof the purchase price of these businesses to the assets acquired andliabilities assumed, as required under Statement of Financial AccountingStandards No. 141 — Business Combinations (“SFAS 141”).  The application of SFAS 141 requires that thetotal purchase price be allocated to the fair value of the assets acquired andthe liabilities assumed based on an assessment of their fair values at theacquisition date, with amounts exceeding the fair values being recorded asgoodwill.

 

           Under Statement of FinancialAccounting Standards No. 142 — “Goodwill and Other Intangible Assets” (“SFAS142”), goodwill and other indefinite-lived intangible assets are not amortizedbut are reviewed annually for impairment. Intangible assets that have finite useful lives are amortized over suchuseful lives.  As a result, significantmanagement judgment is required in the determination of the fair values of theassets acquired and the liabilities assumed, including the determination if anyintangible assets have been acquired and, if so, if such intangible assets havedefinite or indefinite useful lives.  Forintangible assets that are not indefinite, additional judgment is required inassessing such intangible asset’s estimate useful life.

 

           Subsequent to the initial recordingof goodwill, SFAS 142 requires management, at least annually, to assessgoodwill for impairment using a two-step methodology.  The initial step requires management todetermine the fair value of each of its reporting units and compare it to thecarrying value, including goodwill, of the reporting unit.  If the fair value exceeds carrying value, no impairmentloss is recognized.  However, a carryingvalue that exceeds fair value may be an indication of impaired goodwill.  The amount, if any, of the impairment wouldthen be measured and an impairment loss would be recognized.  The impairment testing performed annually on January 1has resulted in the determination that no impairment had been incurred in 2008,2007 or 2006.

 

            The determination of whethergoodwill is impaired is based on management’s estimate of the fair value ofBuckeye’s reporting units at each measurement date compared to their carryingvalues.  In the 2008 impairment test,Buckeye utilized industry-specific multiples of EBITDA to determine theterminal values of each of its reporting units. These multiples require significant management judgment applied to eachreporting unit.  Management used EBITDAmultiples that it believed were reasonable based on its experience in theacquisition of similar assets in the context of current market conditions.   In the determination of estimated usefullives of intangible assets with finite lives, management considered relevantfactors of useful life including, with respect to customer intangibles, thehistorical attrition rates for each customer.

 

# **Related Party Transactions**

# ** **

With respect to relatedparty transactions see Note 21 to BGH’s consolidated financial statements andItem 13 “Certain Relationships and Related Transactions and DirectorIndependence.”

 

#### **Recent Accounting Pronouncements**

#### ** **

See Note 2 to BGH’sconsolidated financial statements for a description of certain new accountingpronouncements issued in the year ended December 31, 2008.

 

# **Forward-Looking Information**

# ** **

The information containedabove in this Management’s Discussion and Analysis and elsewhere in this AnnualReport on Form 10-K includes “forward-looking statements. Such statementsuse forward-looking words such as “anticipate,” “continue,” “estimate,” “expect,”“may,” “believe,” “will,” or other similar words, although some forward-lookingstatements are expressed differently. These statements discuss future expectations and containprojections.  Specific factors that couldcause actual results to differ from those in the forward-looking statementsinclude, but are not limited to: (1) BGH’s ability to pay distributions toits Unitholders; (2) BGH’s expected receipt of distributions and incentivedistributions from Buckeye; (3) anticipated trends in Buckeye’s business; (4) pricetrends and overall demand for refined petroleum products and natural gas in theUnited States in general and in Buckeye’s service areas in particular (economicactivity, weather, alternative energy sources, conservation and technologicaladvances may affect price trends and demands); (5) competitive pressuresfrom other transportation services or alternative fuel sources; (6) changes,if any, in laws and regulations, including, among others, safety,environmental, tax and accounting matters or Federal Energy RegulatoryCommission regulation of Buckeye’s tariff rates; (7) liability forenvironmental claims; (8) nonpayment or nonperformance by Buckeye’scustomers; (9) security issues affecting Buckeye’s assets, including,among others, potential damage to its assets caused by vandalism, acts of waror terrorism; (10) construction costs, unanticipated capital expendituresand operating expenses to repair or replace Buckeye’s assets; (11) availabilityand cost of insurance on BGH’s and Buckeye’s assets and operations; (12)Buckeye’s ability to successfully identify and complete strategic acquisitionsand make cost saving changes in operations; (13) expansion in the operations ofBuckeye’s competitors; (14) Buckeye’s ability to integrate 

 

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any acquired operations into its existing operationsand to realize anticipated cost savings and efficiencies; (15) shut-downs orcutbacks at major refineries that use Buckeye’s services; (16) deterioration inBuckeye’s labor relations; (17) regional economic conditions; (18) changes inreal property tax assessments; (19) disruptions to the air travel system; (20)interest rate fluctuations and other capital market conditions; (21) BGH’sfuture results of operations; (22) BGH’s liquidity and ability to finance itsactivities; (23) market conditions in Buckeye’s industry; (24) conflicts ofinterest between Buckeye, its general partner and BGH; (25) the treatment ofBuckeye or BGH as a corporation for federal income tax purposes or if BGH orBuckeye become subject to entity-level taxation for state tax purposes; and(26) the impact of governmental legislation and regulation on BGH and Buckeye.

 

These factors are notnecessarily all of the important factors that could cause actual results todiffer materially from those expressed in any of our forward-lookingstatements.  Other unknown orunpredictable factors could also have material adverse effects on futureresults.  Although the expectations inthe forward-looking statements are based on our current beliefs andexpectations, we do not assume responsibility for the accuracy and completenessof such statements.  When consideringforward-looking statements, you should keep in mind the risk factors and othercautionary statements in this Report on Form 10-K, including thosedescribed in the “Risk Factors” section of this Report.  Further, we undertake no obligation to updatepublicly any forward-looking statement whether as a result of new informationor future events.

 

**Item 7A.     *Quantitative and Qualitative DisclosuresAbout Market Risk***

 

###### *MarketRisk — Trading Instruments*

###### * *

BGH and Buckeye do not have any trading****derivative instruments and neither engages in hedgingactivity with respect to trading instruments.

 

### *Market Risk — Other than Trading Instruments*

### * *

Buckeye is exposedto financial market risk resulting from changes in commodity prices andinterest rates.  Buckeye does notcurrently have foreign exchange risk.

 

*Commodity Risk*

 

The Energy Servicessegment primarily uses exchange-traded petroleum futures contracts to managethe risk of market price volatility on its refined petroleum productinventories and its fixed-price sales contracts. The derivative contracts usedto hedge refined petroleum product inventories are classified as fair valuehedges.  Accordingly, BGH’s method ofmeasuring ineffectiveness will compare the changes in the fair value of the NewYork Mercantile Exchange futures contracts to the change in fair value ofBuckeye’s hedged fuel inventory.  Any difference between the amounts willbe considered ineffectiveness and recorded in current period earnings.

 

TheEnergy Services segment has elected not to use hedge accounting with respect toits fixed-price sales contracts. Therefore, its fixed-price sales contracts andthe related futures contracts used to offset those fixed-price sales contractsare all marked-to-market on the balance sheet with gains and losses beingrecognized in earnings during the period.

 

As of December 31,2008, the Energy Services segment had derivative assets and liabilities asfollows:

 
| ** **                                         | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2008**                | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **Assets:**                                        |       |                    |       |
| Fixed-price  sales contracts                       |       | $                       | 78,423     |   |
| Futures  contracts for inventory                   |       | 25,225                  |       |
|                                               |       | 103,648                 |       |
| **Liability:**                                     | ** ** | ** **              | ** ** |
| Futures  contracts for fixed-price sales contracts |       | (50,806                 | )          |
|                                               |       |                    |       |
| Total                                              |       | $                       | 52,842     |   |

 

All but$1.2 million of the assets noted above for unrealized gains of $25.2 millionrelated to inventory hedges will be realized in the first quarter of 2009 asthe related inventory is sold.  Gainsrecorded on inventory hedges that were ineffective were approximately $5.7million.  As of December 31, 2008,open petroleum derivative contracts (represented by the fixed-price sales 

 

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contractsand futures contracts for fixed-price sales contracts noted above) varied induration, but did not extend beyond June 2010.  In addition, Buckeye had on hand at December 31,2008 refined product inventories which it intends to use to satisfy a portionof the fixed-price sales contracts.

 

Based ona hypothetical 10% movement in the underlying quoted market prices of thecommodity financial instruments outstanding at December 31, 2008, the estimatedfair value of the portfolio of commodity financial instruments would be asfollows:

 
| ** **                                                            | ** ** | ** **         | ** ** | **Commodity**      | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                            | ** ** | ** **         | ** ** | **Financial**      | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Instrument**     | ** ** |
| ** **                                                            | ** ** | **Resulting**      | ** ** | **Portfolio**      | ** ** |
| **Scenerio**                                                          | ** ** | **Classification** | ** ** | **Fair Value**     | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **(In thousands)** | ** ** |
| Fair value  assuming no change in underlying commodity prices (as is) |       | Asset              |       | $                  | 52,842     |   |
| Fair value  assuming 10% increase in underlying commodity prices      |       | Asset              |       | $                  | 44,977     |   |
| Fair value  assuming 10% decrease in underlying commodity prices      |       | Asset              |       | $                  | 60,708     |   |

 

The value of theopen futures contract positions noted above were based upon quoted marketprices obtained from the New York Mercantile Exchange.  The value of the fixed-price sales contractswas based on observable market data related to the obligation to provide refinedpetroleum products to customers.

 

*InterestRate Risk*

 

From time to time,Buckeye uses interest rate derivatives to hedge interest obligations onspecific debt issuances, including anticipated debt issuances.  Buckeye’s practice with respect to derivativetransactions related to interest rate risk has been to have each transaction inconnection with non-routine borrowings authorized by the Board of Directors ofBuckeye GP.  In January 2009,Buckeye GP’s Board of Directors adopted an interest rate hedging policy whichpermits Buckeye to enter into certain short-term interest rate hedge agreementsto manage its interest rate and cash flow risks associated with the CreditFacility.

 

Buckeye is exposedto fair value risk with respect to its fixed-rate debt obligations and to cashflow risk with respect to its variable-rate obligations.  Fair value risk represents the risk that thevalue of Buckeye’s fixed-rate debt obligations will rise or fall depending onchanges in interest rates.  Cash flowrisk represents the risk that interest expense related to the variable-rateobligations will rise or fall depending on changes in interest rates.

 

At December 31,2008, Buckeye had total fixed-rate debt obligations at face value of $1,150.0million, consisting of $125.0 million of the 5.125% Notes, $275.0 million ofthe 5.30% Notes, $300.0 million of the 4.625% Notes, $150.0 million of the6.75% Notes and $300.0 million of the 6.05% Notes.  Services Company had fixed debt obligationsof approximately $14.3 million.  The fairvalue of these fixed-rate debt obligations at December 31, 2008 wasapproximately $986.5 million.  Buckeyeestimates that a 1% decrease in rates for obligations of similar maturitieswould increase the fair value of its fixed-rate debt obligations by $58.0million.  Buckeye’s variable-rateobligation was $298.3 million under the Credit Facility and $96.0 million underthe BES Credit Agreement at December 31, 2008.  Based on the balances outstanding at December 31,2008, a 1% increase in interest rates would increase annual interest expense by$3.9 million.

 

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**Item  8.       *Financial Statements and Supplementary Data***

*** ***

**MANAGEMENT’SREPORT ON INTERNAL CONTROL**

**OVERFINANCIAL REPORTING**

 

Management of MainLineManagement LLC (“MainLine Management”), as general partner of Buckeye GPHoldings L.P. (“BGH”), is responsible for establishing and maintaining adequateinternal control over financial reporting of BGH.  Internal control over financial reporting isa process designed to provide reasonable, but not absolute, assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with accounting principlesgenerally accepted in the United States of America.  A company’s internal control over financialreporting includes those policies and procedures that  pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and  providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

** **

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.** **Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

Management evaluatedMainLine Management’s internal control over financial reporting of BGH as of December 31,2008.  In making this assessment,management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission in *InternalControl-Integrated Framework* (COSO). As a result of this assessment and based on the criteria in the COSOframework, management has concluded that, as of December 31, 2008,MainLine Management’s internal control over financial reporting of BGH waseffective.

 

BGH’s independentregistered public accounting firm, Deloitte & Touche LLP, has auditedMainLine Management’s internal control over financial reporting of BGH.  Their opinion on the effectiveness ofMainLine Management’s internal control over financial reporting of BGH appearsherein.

 
|   FORREST E. WYLIE |   |   KEITH E. ST.CLAIR |
|------------------------------|--------|-------------------------------|
| Chief Executive Officer      |   | Chief Financial Officer       |
| March 13, 2009          |   |                          |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

** **

To the Partners ofBuckeye GP Holdings L.P.

 

We have audited the internal control over financialreporting of Buckeye GP Holdings L.P. and subsidiaries (“BGH”) as of December 31,2008, based on criteria established in *InternalControl — Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  BGH’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Report On Internal Control OverFinancial Reporting.  Our responsibility is to express an opinion on BGH’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis.  Also,projections of any evaluation of the effectiveness of the internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, BGH maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2008, based on the criteria established in *InternalControl — Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements as of and for the year ended December 31,2008 of BGH and our report dated March 13, 2009 expressed an unqualifiedopinion on those consolidated financial statements.

 

DELOITTE &TOUCHE LLP

 

Philadelphia, PennsylvaniaMarch 13, 2009

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

** **

To the Partners of Buckeye GP Holdings L.P.

 

We have audited the accompanying consolidated balancesheets of Buckeye GP Holdings L.P. and subsidiaries, formerly MainLine L.P. andsubsidiaries, (“BGH”) as of December 31, 2008 and 2007, and the relatedconsolidated statements of income, cash flows, and partners’ capital for eachof the three years in the period ended December 31, 2008.  Thesefinancial statements are the responsibility of BGH’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Buckeye GPHoldings L.P. and subsidiaries as of December 31, 2008 and 2007, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2008, in conformity with accountingprinciples generally accepted in the United States of America.

 

As discussed in Note 17to the consolidated financial statements, BGH adopted the provisions ofStatement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106, and 132(R),” as of December 31,2006.

 

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), BGH’sinternal control over financial reporting as of December 31, 2008, basedon the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 13,2009 expressed an unqualified opinion on BGH’s internal control over financialreporting.

 

DELOITTE &TOUCHE LLP

 

Philadelphia, PennsylvaniaMarch 13, 2009

 

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**BUCKEYEGP HOLDINGS L.P.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Inthousands, except per unit amounts)**

 
| ** **                                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                |       |                                       |       |   |   |   |   |
| **Revenues:**                                                                                       |       |                                       |       |   |   |   |   |
| Product sales                                                                                       |       | $                                          | 1,304,097  |   | $ | 10,680 |   | $ | 9,840 |   |
| Transportation  and other                                                                           |       | 592,555                                    |       | 508,667 |   | 451,920 |   |
| Total revenue                                                                                       |       | 1,896,652                                  |       | 519,347 |   | 461,760 |   |
|                                                                                                |       |                                       |       |   |   |   |   |
| **Costs  and expenses:**                                                                            |       |                                       |       |   |   |   |   |
| Cost of product  sales                                                                              |       | 1,274,135                                  |       | 10,473 |   | 9,637 |   |
| Operating  expenses                                                                                 |       | 281,965                                    |       | 245,271 |   | 217,737 |   |
| Depreciation and  amortization                                                                      |       | 50,834                                     |       | 40,236 |   | 39,629 |   |
| General and  administrative                                                                         |       | 43,226                                     |       | 28,014 |   | 29,884 |   |
| Total costs and  expenses                                                                           |       | 1,650,160                                  |       | 323,994 |   | 296,887 |   |
|                                                                                                |       |                                       |       |   |   |   |   |
| Operating income                                                                                    |       | 246,492                                    |       | 195,353 |   | 164,873 |   |
|                                                                                                |       |                                       |       |   |   |   |   |
| **Other  income (expense):**                                                                        |       |                                       |       |   |   |   |   |
| Investment  income                                                                                  |       | 1,553                                      |       | 1,490 |   | 1,410 |   |
| Interest and  debt expense                                                                          |       | (75,410                                    | )          | (51,721 | ) | (60,702 | ) |
| Total other  expense                                                                                |       | (73,857                                    | )          | (50,231 | ) | (59,292 | ) |
|                                                                                                |       |                                       |       |   |   |   |   |
| Income before  equity income and non-controlling interest expense                                   |       | 172,635                                    |       | 145,122 |   | 105,581 |   |
|                                                                                                |       |                                       |       |   |   |   |   |
| Equity income                                                                                       |       | 7,988                                      |       | 7,553 |   | 6,219 |   |
| Non-controlling  interest expense                                                                   |       | (154,146                                   | )          | (129,754 | ) | (103,066 | ) |
|                                                                                                |       |                                       |       |   |   |   |   |
| **Net  income**                                                                                     |       | $                                          | 26,477     |   | $ | 22,921 |   | $ | 8,734 |   |
|                                                                                                |       |                                       |       |   |   |   |   |
| Less:  Net income prior to initial public offering  on August 9, 2006                     |       |                                       |       |   |   | (6,135 | ) |
| Net income  subsequent to initial public offering on August 9, 2006 to  December 31, 2006 |       |                                       |       |   |   | $ | 2,599 |   |
|                                                                                                |       |                                       |       |   |   |   |   |
| Net income per  partnership unit:                                                                   |       |                                       |       |   |   |   |   |
| Basic                                                                                               |       | $                                          | 0.94       |   | $ | 0.81 |   | $ | 0.09 |   |
| Diluted                                                                                             |       | $                                          | 0.94       |   | $ | 0.81 |   | $ | 0.09 |   |
|                                                                                                |       |                                       |       |   |   |   |   |
| Weighted average  number of limited partner units outstanding:                                      |       |                                       |       |   |   |   |   |
| Basic                                                                                               |       | 28,300                                     |       | 28,142 |   | 27,891 |   |
| Diluted                                                                                             |       | 28,300                                     |       | 28,300 |   | 28,300 |   |

 

See Notes toconsolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

 
| ** **                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Assets:**                                                                                   |       |                  |       |   |   |
| Current assets:                                                                               |       |                  |       |   |   |
| Cash and cash  equivalents                                                                    |       | $                     | 61,281     |   | $ | 94,486 |   |
| Trade  receivables, net                                                                       |       | 79,969                |       | 47,598 |   |
| Construction and  pipeline relocation receivables                                             |       | 21,501                |       | 12,571 |   |
| Inventories                                                                                   |       | 84,229                |       | 15,149 |   |
| Derivative  assets                                                                            |       | 97,375                |       | — |   |
| Prepaid and  other current assets                                                             |       | 75,406                |       | 32,708 |   |
| Total current  assets                                                                         |       | 419,761               |       | 202,512 |   |
|                                                                                          |       |                  |       |   |   |
| Property, plant  and equipment, net                                                           |       | 2,241,612             |       | 1,806,720 |   |
| Equity  investments                                                                           |       | 90,110                |       | 77,354 |   |
| Goodwill                                                                                      |       | 433,892               |       | 234,603 |   |
| Intangible  assets, net                                                                       |       | 44,114                |       | 9,044 |   |
| Other  non-current assets                                                                     |       | 33,608                |       | 24,093 |   |
| Total assets                                                                                  |       | $                     | 3,263,097  |   | $ | 2,354,326 |   |
|                                                                                          |       |                  |       |   |   |
|                                                                                          |       |                  |       |   |   |
| **Liabilities  and partners’ capital:**                                                  |       |                  |       |   |   |
| Current  liabilities:                                                                         |       |                  |       |   |   |
| Line of credit                                                                                |       | $                     | 96,000     |   | $ | — |   |
| Current portion  of long-term debt                                                            |       | 6,294                 |       | 6,289 |   |
| Accounts payable                                                                              |       | 42,098                |       | 20,368 |   |
| Derivative  liabilities                                                                       |       | 48,623                |       | 7,187 |   |
| Accrued and  other current liabilities                                                        |       | 116,464               |       | 71,715 |   |
| Total current  liabilities                                                                    |       | 309,479               |       | 105,559 |   |
|                                                                                          |       |                  |       |   |   |
| Long-term debt                                                                                |       | 1,453,425             |       | 863,174 |   |
| Other  non-current liabilities                                                                |       | 101,359               |       | 81,120 |   |
| Non-controlling  interest                                                                     |       | 1,166,774             |       | 1,066,143 |   |
| Total  liabilities                                                                            |       | 3,031,037             |       | 2,115,996 |   |
|                                                                                          |       |                  |       |   |   |
| Commitments and  contingent liabilities                                                       |       | —                |       | — |   |
|                                                                                          |       |                  |       |   |   |
| **Partners’  capital:**                                                                  |       |                  |       |   |   |
| General Partner (2,830  common units outstanting as of December 31, 2008 and 2007)       |       | 7                     |       | 7 |   |
| Limited Partners  (27,766,817 common units outstanding as of December 31, 2008 and 2007) |       | 226,565               |       | 232,928 |   |
| Management Units  (530,353 units outstanding as of December 31, 2008 and 2007)           |       | 3,037                 |       | 3,156 |   |
| Equity gains on issuance  of Buckeye Partners, L.P. partnership units                         |       | 2,451                 |       | 2,239 |   |
| Total partners’  capital                                                                 |       | 232,060               |       | 238,330 |   |
| Total  liabilities and partners’ capital                                                 |       | $                     | 3,263,097  |   | $ | 2,354,326 |   |

 

See notes to consolidatedfinancial statement.

 

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**BUCKEYE GP HOLDINGS L.P.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

** **
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                          | 26,477     |   | $ | 22,921 |   | $ | 8,734 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Amortization of  debt discount and unit-based compensation                         |       | 4,643                                      |       | 2,197 |   | 3,832 |   |
| Value of ESOP  shares released                                                     |       | 2,202                                      |       | 4,470 |   | 4,077 |   |
| Depreciation and  amortization                                                     |       | 50,834                                     |       | 40,236 |   | 39,629 |   |
| Net changes in  fair value of derivatives                                          |       | (24,228                                    | )          | — |   | — |   |
| Deferred lease  expense                                                            |       | 4,598                                      |       | — |   | — |   |
| Non-controlling  interest                                                          |       | 154,146                                    |       | 128,926 |   | 103,066 |   |
| Earnings from  equity investments of Buckeye Partners, L.P.                        |       | (7,988                                     | )          | (7,553 | ) | (6,219 | ) |
| Distributions  from equity investments of Buckeye Partners, L.P.                   |       | 5,113                                      |       | 7,418 |   | 6,815 |   |
| Change in assets  and liabilities, net of amounts related to acquisitions:         |       |                                       |       |   |   |   |   |
| Trade  receivables                                                                 |       | 36,060                                     |       | 3,432 |   | (12,166 | ) |
| Construction and  pipeline relocation receivables                                  |       | (8,930                                     | )          | (382 | ) | (1,618 | ) |
| Inventories                                                                        |       | (4,362                                     | )          | (863 | ) | (618 | ) |
| Prepaid and  other current assets                                                  |       | (27,823                                    | )          | 1,467 |   | (22,733 | ) |
| Accounts payable                                                                   |       | (10,647                                    | )          | (6,282 | ) | 8,002 |   |
| Accrued and  other current liabilities                                             |       | 9,336                                      |       | 733 |   | 20,823 |   |
| Other  non-current assets                                                          |       | 9,520                                      |       | 1,999 |   | (810 | ) |
| Other  non-current liabilities                                                     |       | (10,394                                    | )          | (6,983 | ) | 4,378 |   |
| Total  adjustments from operating activities                                       |       | 182,080                                    |       | 168,815 |   | 146,458 |   |
| Net cash  provided by operating activities                                         |       | 208,557                                    |       | 191,736 |   | 155,192 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| **Cash  flows from investing activities:**                                         |       |                                       |       |   |   |   |   |
| Capital  expenditures                                                              |       | (120,472                                   | )          | (67,867 | ) | (92,817 | ) |
| Acquisitions and  equity investments, net of cash acquired                         |       | (667,523                                   | )          | (40,726 | ) | (94,253 | ) |
| Net  (expenditures for) proceeds from disposal of property, plant and equipment    |       | (365                                       | )          | (12 | ) | 1,485 |   |
| Proceeds from  the sale of discontinued operations                                 |       | 52,584                                     |       | — |   | — |   |
| Release of  restricted cash                                                        |       | —                                     |       | — |   | 5,117 |   |
| Net cash used in  investing activities                                             |       | (735,776                                   | )          | (108,605 | ) | (180,468 | ) |
|                                                                               |       |                                       |       |   |   |   |   |
| **Cash  flows from financing activities:**                                         |       |                                       |       |   |   |   |   |
| Net proceeds  from issuance of Buckeye GP Holdings L.P. units                      |       | —                                     |       | — |   | 168,324 |   |
| Net proceeds  from issuance of Buckeye Partners, L.P. limited partnership units    |       | 113,111                                    |       | 296,361 |   | 64,092 |   |
| Proceeds from  exercise of Buckeye Partners, L.P. units options                    |       | 316                                        |       | 2,497 |   | 1,360 |   |
| Proceeds from  issuance of long-term debt and borrowings under credit facilities   |       | 856,604                                    |       | 157,500 |   | 177,000 |   |
| Capital  contributions                                                             |       | —                                     |       | — |   | 2 |   |
| Payment of debt,  net                                                              |       | (270,577                                   | )          | (308,536 | ) | (261,261 | ) |
| Debt issuance  costs                                                               |       | (2,111                                     | )          | (178 | ) | (535 | ) |
| Distributions to  non-controlling partners of Buckeye Partners, L.P.               |       | (159,306                                   | )          | (128,775 | ) | (113,480 | ) |
| Settlement  payment of interest rate swaps                                         |       | (9,638                                     | )          | — |   | — |   |
| Distributions to  Limited Partners                                                 |       | (34,385                                    | )          | (27,734 | ) | (18,990 | ) |
| Net cash  provided by (used in) financing activities                               |       | 494,014                                    |       | (8,865 | ) | 16,512 |   |
|                                                                               |       |                                       |       |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                              |       | (33,205                                    | )          | 74,266 |   | (8,764 | ) |
| Cash and cash  equivalents —Beginning of year                                 |       | 94,486                                     |       | 20,220 |   | 28,984 |   |
| Cash and cash  equivalents—End of year                                        |       | $                                          | 61,281     |   | $ | 94,486 |   | $ | 20,220 |   |
| ***Supplemental  cash flow information:***                                         |       |                                       |       |   |   |   |   |
| Cash paid for  interest (net of amount capitalized)                                |       | $                                          | 63,647     |   | $ | 50,956 |   | $ | 56,792 |   |
| Capitalized  interest                                                              |       | $                                          | 2,355      |   | $ | 1,469 |   | $ | 1,845 |   |
| Cash paid for  income tax                                                          |       | $                                          | 1,063      |   | $ | 1,095 |   | $ | 218 |   |
| ***Non-cash  changes in assets and liabilities:***                                 |       |                                       |       |   |   |   |   |
| Capital  additions accrued in property, plant, and equipment                       |       | $                                          | 1,957      |   | $ | 2,377 |   | $ | — |   |
| Hedge accounting                                                                   |       | $                                          | 3,357      |   | $ | 6,951 |   | $ | (235 | ) |

 

See Notes to consolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL**

**(In thousands)**

 
| ** **                                                                                                                       | ** ** | **General  Partners-  Common  Units** | ** ** | **Limited  Partners-  Common  Units** | ** ** | **Manage-  ment  Units** | ** ** | **General  Partner** | ** ** | **Limited  Partners  A Units** | ** ** | **Limited  Partners  B Units** | ** ** | **Equity  Gains on  Issuance of  Buckeye  LP Units** | ** ** | **Accumulated  Other  Compre-  hensive  Income** | ** ** | **Total** |   |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------|--------|
| Partners’  capital- January 1, 2006                                                                                    |       | $                                     | —     |                                  | $          | —                   |       | $                    | —     |                                | $          | 7                                   |       | $                                                                   | 74,132     |                                             | $          | 3,473     |   | $ | 1,316 |   | $ | 1,514 |   | $ | 80,442 |   |
| Net  income through August 8, 2006                                                                                          |       | —                                |       | —                                |       | —                   |       | —               |       | 6,135                               |       | —                              |       | —                                                              |       | —                                           |       | 6,135     |   |
| Net  income August 9 through December 31, 2006                                                                         |       | —                                |       | 2,599                                 |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 2,599     |   |
| Settlement  of interest rate swaps                                                                                               |       | —                                |       | —                                |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | (1,514                                           | )          |      |   |
| Other  comprehensive income                                                                                                      |       |                                  |       |                                  |       |                     |       |                 |       |                                |       |                                |       |                                                                |       | (1,514                                           | )          | (1,514    | )      |
| Total  comprehensive income                                                                                                      |       |                                  |       |                                  |       |                     |       |                 |       |                                |       |                                |       |                                                                |       |                                             |       | 7,220     |   |
| Exchange  of GP units and Limited Partner - A and B Units for General Partner and  Limited Partner - Common and Management Units |       | 7                                     |       | 80,267                                |       | 3,473                    |       | (7                   | )          | (80,267                             | )          | (3,473                              | )          | —                                                              |       | —                                           |       | —    |   |
| Issuance  of Limited Partner - Common Units                                                                                      |       | —                                |       | 168,324                               |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 168,324   |   |
| Recognition  of value of Management Units                                                                                        |       | —                                |       | —                                |       | 3,453                    |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 3,453     |   |
| Distributions  to Limited Partner - Common Units                                                                                 |       | —                                |       | (18,990                               | )          | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | (18,990   | )      |
| Capital  contributions                                                                                                           |       | —                                |       | 2                                     |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 2         |   |
| Equity  gains on issuance of Buckeye LP Units                                                                                    |       | —                                |       | —                                |       | —                   |       | —               |       | —                              |       | —                              |       | 166                                                                 |       | —                                           |       | 166       |   |
| Partners’  capital- December 31, 2006                                                                                  |       | 7                                     |       | 232,202                               |       | 6,926                    |       | —               |       | —                              |       | —                              |       | 1,482                                                               |       | —                                           |       | 240,617   |   |
| Net  income*                                                                                                                     |       | —                                |       | 22,921                                |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 22,921    |   |
| Distributions  to Limited Partner - Common Units                                                                                 |       | —                                |       | (27,734                               | )          | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | (27,734   | )      |
| Recognition  of value of Management Units                                                                                        |       | —                                |       | —                                |       | 1,179                    |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 1,179     |   |
| Conversion  of Management Units                                                                                                  |       | —                                |       | 4,949                                 |       | (4,949                   | )          | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | —    |   |
| Recognition  of unit-based compensation charges                                                                                  |       | —                                |       | 590                                   |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 590       |   |
| Equity  gains on issuance of Buckeye LP Units                                                                                    |       | —                                |       | —                                |       | —                   |       | —               |       | —                              |       | —                              |       | 757                                                                 |       | —                                           |       | 757       |   |
| Partners’  capital- December 31, 2007                                                                                  |       | 7                                     |       | 232,928                               |       | 3,156                    |       | —               |       | —                              |       | —                              |       | 2,239                                                               |       | —                                           |       | 238,330   |   |
| Net  income*                                                                                                                     |       | —                                |       | 25,981                                |       | 496                      |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 26,477    |   |
| Distributions  to Limited Partner - Common Units                                                                                 |       | —                                |       | (33,741                               | )          | (644                     | )          | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | (34,385   | )      |
| Recognition  of unit-based compensation charges                                                                                  |       | —                                |       | 1,397                                 |       | 29                       |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                           |       | 1,426     |   |
| Equity  gains on issuance of Buckeye LP Units                                                                                    |       | —                                |       | —                                |       | —                   |       | —               |       | —                              |       | —                              |       | 212                                                                 |       | —                                           |       | 212       |   |
| Partners’  capital- December 31, 2008                                                                                  |       | $                                     |  7    |                                  | $          | 226,565                  |       | $                    | 3,037      |                                | $          | —                              |       | $                                                                   | —     |                                             | $          | —    |   | $ | 2,451 |   | $ | — |   | $ | 232,060 |   |
|                                                                                                                                  |            |                                       |            |                                       |            |                          |            |                      |            |                                     |            |                                     |            |                                                                     |            |                                                  |            |           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*  Comprehensive income equals net income.

 

See Notes toconsolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

##### **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1****.     ORGANIZATION**

 

Buckeye GPHoldings L.P. (“BGH”) is a master limited partnership organized on June 15,2006 under the laws of the state of Delaware and publicly traded on the NewYork Stock Exchange (NYSE: BGH).  BGHowns 100% of Buckeye GP LLC (“Buckeye GP”), which is the general partner ofBuckeye Partners, L.P. (“Buckeye”). Buckeye is also a master limited partnership which was organized in 1986under the laws of the state of Delaware and is publicly traded on the New YorkStock Exchange (NYSE: BPL).  BGH’slimited partner units are owned approximately 62% by BGH GP Holdings, LLC (“BGHGP”), approximately 1% by certain members of senior management andapproximately 37% by the public. BGH GP is owned by affiliates of ArcLightCapital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”), andcertain investment funds along with certain members of senior management ofBuckeye GP.  MainLine Management LLC, aDelaware limited liability company (“MainLine Management”), is the generalpartner of BGH, and is wholly owned by BGH GP.

 

BGH’s only business isthe ownership of Buckeye GP. Buckeye GP’s only business is the management of Buckeye and itssubsidiaries.  At December 31, 2008,Buckeye GP owned an approximate 0.5% general partner interest in Buckeye.

 

Buckeye, throughits subsidiaries, owns and operates one of the largest independent refinedpetroleum products pipeline systems in the United States in terms of volumesdelivered with approximately 5,400 miles of pipeline and 64 active productsterminals that provide aggregate storage capacity of approximately 24.7 millionbarrels. In addition, Buckeye operates and maintains approximately 2,400 milesof other pipelines under agreements with major oil and chemical companies.

 

On January 18, 2008, Buckeye acquired Lodi Gas Storage, L.L.C. (“LodiGas”).  Lodi Gas owns and operates amajor natural gas storage facility in northern California. This facilitycurrently provides approximately 33 billion cubic feet (“Bcf”) of natural gasstorage capacity (including capacity provided pursuant to a nearly completedexpansion project) and is connected to Pacific Gas and Electric’s intrastategas pipelines that service natural gas demand in the San Francisco andSacramento areas (see Note 3 for a further discussion).

 

On February 8, 2008, Buckeye acquired Farm & Home OilCompany LLC (“Farm & Home”), a seller of refined petroleum products ona wholesale basis, principally in eastern and central Pennsylvania.  When Farm & Home was acquired, italso had retail operations, but Buckeye sold those operations to a wholly ownedsubsidiary of Inergy, L.P. on April 15, 2008.  The assets and liabilities and results ofoperations of Farm & Home’s retail operations were determined to bediscontinued operations effective on the Farm & Home acquisition dateof February 8, 2008 (see Note 3 for a further discussion).  On July 31, 2008, Farm & Homewas merged with and into its wholly owned subsidiary, Buckeye EnergyServices LLC (“BES”), with BEScontinuing as the surviving entity.  Thismerger did not impact the operations of Buckeye.

 

With theacquisitions of Lodi Gas and Farm & Home, BGH determined that it hadtwo additional reportable segments: Natural Gas Storage and EnergyServices.  Effective in the first quarterof 2008, BGH conducts business in five reportable operating segments: PipelineOperations; Terminalling and Storage; Natural Gas Storage; Energy Services; andOther Operations.  See Note 24 for a moredetailed discussion of BGH’s operating segments.

 

Buckeye Pipe LineServices Company (“Services Company”) was formed in 1996 in connection with theestablishment of the Buckeye Pipe Line Services Company Employee StockOwnership Plan (the “ESOP”).  At December 31,2008, Services Company owned approximately 4.4% of the publicly traded limitedpartnership units of Buckeye (the “LP Units”). Services Company employs approximately 1,000 people who provide servicesto the operating subsidiaries through which Buckeye conducts itsoperations.  Approximately 20 employeesare employed directly by Lodi Gas and another approximately 20 people are employedby Buckeye Albany Terminal LLC (see Note 3 for a further discussion).  Pursuant to a services agreement entered intoin December 2004 (the “Services Agreement”), the operating subsidiariesreimburse Services Company for the costs of the services provided to theoperating subsidiaries by Services Company. Pursuant to the Services Agreement and an Executive EmploymentAgreement, through December 31, 2008 executive compensation costs andrelated benefits paid to Buckeye GP’s four highest salaried officers are notreimbursed by Buckeye or its operating subsidiaries but are reimbursed toServices Company by BGH.  Effective January 1,2009, Buckeye and its operating subsidiaries have agreed to pay for allexecutive compensation and benefits earned by Buckeye GP’s four highestsalaried officers in return for an annual fixed payment from BGH in the amountof $3.6 million.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

**2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Basisof Presentation*

 

The consolidatedfinancial statements and the accompanying notes are prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)and the rules of the U.S. Securities and Exchange Commission.

 

The consolidatedfinancial statements include the accounts of BGH and wholly-owned subsidiaries,with Buckeye as well as Services Company, on a consolidated basis.

 

In June 2005, theEmerging Issues Task Force (the “EITF”) of the Financial Accounting StandardsBoard (the “FASB”) issued EITF Consensus 04-05 which requires general partnersof a limited partnership to consolidate the limited partnership if the generalpartner is deemed to control the limited partnership. Using criteriaestablished in EITF Consensus 04-05, BGH has determined that consolidation ofBuckeye into its financial statements is appropriate for all periods presented.

 

BGH has determined thatServices Company is a variable interest entity under the provisions of FASBInterpretation No. 46R “Consolidation of Variable Interest Entities” (“FINNo. 46R”). Using criteria established in FIN No. 46R, BGH hasdetermined 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 beenconsolidated in the financial statements of BGH for all periods presented.

 

Buckeye is subject to theUniform System of Accounts for Pipeline Companies, as prescribed by the FederalEnergy Regulatory Commission (“FERC”). Certain Buckeye operating subsidiariesare subject to rate regulation as promulgated by FERC. Reports to FERC differfrom the accompanying consolidated financial statements, which have beenprepared in accordance with GAAP accounting principles in that such reportscalculate depreciation over estimated useful lives of the assets as prescribedby FERC.

 

All intercompanytransactions have been eliminated in consolidation.

 

*Changesin Incentive Compensation Payments to BGH*

 

Buckeye GP historicallyreceived incentive compensation payments from Buckeye under an incentivecompensation agreement, which payments were based on cash distributions toBuckeye’s limited partners.  Theincentive compensation agreement and the partnership agreement were amended torecharacterize the incentive payments received by Buckeye GP as distributionpayments with respect to its general partner interest rather than compensationpayments.  These amendments wereeffective for payments related to Buckeye distributions declared after August 9,2006.  Accordingly, effective in thefourth quarter of 2006, these payments are characterized as distributionsrather than compensation payments from Buckeye to Buckeye GP.

 

Buckeye pays an annualsenior administrative charge to affiliates of its general partner for certainmanagement functions supplied by those affiliates.  Prior to the amendment, this senioradministrative charge was recognized as income by BGH.  In connection with BGH’s initial publicoffering, Buckeye now pays the senior administrative charge directly to BGH’sgeneral partner, MainLine Management.

 

Prior to the amendments,BGH recognized its share of Buckeye’s income as the sum of (i) theincentive compensation payments received (to which BGH was contractuallyentitled and which were recorded by Buckeye as an expense in Buckeye’sfinancial statements), (ii) its proportionate share of Buckeye’s remainingnet income based on its ownership of the general partner interest in Buckeye,80,000 of Buckeye’s limited partner units (“LP Units”) that it owns and itsgeneral partner interests in certain of Buckeye’s operating subsidiaries; and (iii) the senioradministrative charge.  Commencing withthese amendments, BGH recognizes its share of Buckeye’s income as the sum of (i) theamount of incentive compensation BGH would have received had only Buckeye’s netincome for the period been entirely distributed (which income, commencing withthe fourth quarter of 2006 now includes the incentive compensation paymentspreviously recorded by Buckeye as an expense) and (ii) its proportionateshare of the remaining net income of Buckeye and the operating subsidiaries.

 

If these changes had been in effect for all of 2006,the net income for 2006 would have been reduced by approximately $10.8 million.Of this amount, $1.2 million relates to the senior administrative charge and$9.6 million relates to the difference between income recognition for incentivecompensation after the amendments of the incentive compensation agreement andthe partnership agreement compared to the amount that was recognized prior tosuch amendments.

 

*Useof Estimates*

 

The preparation of BGH’sconsolidated financial statements in conformity with GAAP necessarily requiresmanagement to make estimates and assumptions. These estimates and assumptions,which may differ from actual results, will affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements, as well as the reported amounts ofrevenue and expense during the reporting period.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

*RevenueRecognition*

 

Revenue from thetransportation of petroleum products is recognized as products aredelivered.  Revenues from terminalling,storage and rental operations are recognized as the services are performed.Revenues for contract operation and construction services of facilities andpipelines not directly owned by Buckeye are recognized as the services areperformed.  Contract and constructionservices revenue typically includes costs to be reimbursed by the customer plusan operator fee. Revenues for naturalgas storage, which consist of demand charges for the reservation of storagespace under firm storage agreements, are recognized as revenue over the term ofthe related storage agreement. Revenues for hub services, which consist of avariety of other gas storage services under interruptible storage agreements,are recognized ratably over the term of the agreement.  Revenue from the sale of refined petroleum products, which are sold ona wholesale basis, is recognized when such products are delivered to thecustomer purchasing the products.

 

*Non-ControllingInterest*

 

The consolidated balance sheetsinclude a non-controlling interest liability that reflects the portion ofBuckeye and Services Company that is not owned by BGH. Similarly, theconsolidated income statements include non-controlling interest expense thatreflects amounts not attributable to BGH.

 

*Cashand Cash Equivalents*

 

Cash equivalentsare defined as all highly marketable securities with maturities of three monthsor less when purchased. The carrying value of cash equivalents approximatesfair value because of the short term nature of these investments.

 

*Trade Receivables and**Concentration of Credit Risk*

 

Trade receivablesrepresent valid claims against non-affiliated customers and are recognized whenproducts are sold or services are rendered. Buckeye extends credit terms tocertain customers based on historical dealings and to other customers after afull review of various financial credit indicators, including the customers’credit rating (if available), and verified trade references.  The Energy Services segment has established areserve for doubtful accounts of $2.1 million as of December 31, 2008included in trade receivables in the consolidated balance sheet.

 

The EnergyServices segment’s allowance for doubtful accounts is determined based onspecific identification and estimates of future uncollectible accounts. Itsprocedure for determining the allowance for doubtful accounts is based on (i) historicalexperience with customers, (ii) the perceived financial stability ofcustomers based on its research, and (iii) the levels of credit the EnergyServices segment grants to customers. In addition, the Energy Services segmentmay increase the allowance for doubtful accounts in response to the specificidentification of customers involved in bankruptcy proceedings and similar financialdifficulties. On a routine basis, the Energy Services segment reviews estimatesassociated with the allowance for doubtful accounts to ensure that it hasrecorded sufficient reserves to cover potential losses.

 

Buckeye has aconcentration of trade receivables due from major integrated oil companies andtheir marketing affiliates, major petroleum refiners, major chemical companies,large regional marketing companies and large commercial airlines.  Additionally, with the acquisitions of LodiGas and Farm & Home, Buckeye has trade receivables from gas storageproviders, independent gatherers, investment banks that have established atrading platform, and brokers and marketers. These concentrations of customers may affect Buckeye’s overall creditrisk in that the customers may be similarly affected by changes in economic,regulatory or other factors.

 

For the year ended December 31,2008, no customer contributed more than 10% of consolidated revenue.  However, in 2008 affiliates of Shell OilProducts U.S. (“Shell”) contributed 12% of the Pipeline Operations andTerminalling and Storage segments’ combined revenue.  Approximately 6% of this revenue wasgenerated by Shell in each of the Pipeline Operations segment and in theTerminalling and Storage segment.  In2007 and 2006, Shell contributed 10% and 11% of consolidated revenue,respectively.  Approximately 3% of 2007consolidated revenue was generated by Shell in the Pipeline Operations segmentand the remaining 7% of consolidated revenue was in the Terminalling andStorage segment.  Approximately 5% of the2006 consolidated revenue was generated by Shell in the Pipeline Operationssegment and the remaining 6% of consolidated revenue was in the Terminallingand Storage segment

 

Buckeye managesits exposure to credit risk through credit analysis and monitoring procedures,and sometimes uses letters of credit, prepayments and guarantees.  The Pipeline Operations and Energy Servicessegments bill their customers on a weekly basis, and the Terminalling andStorage, Natural Gas Storage, and Other Operations segments bill on a monthlybasis.  Management believes that thesebilling practices may reduce credit risk.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

*Construction and pipeline relocation receivables*

 

Constructionand pipeline relocation receivables represent valid claims against non-affiliatedcustomers for services rendered in constructing or relocating pipelines and arerecognized when services are rendered.

 

*Inventories*

 

Buckeye generallymaintains two types of inventory.  Withinthe Energy Services segment, Buckeye principally maintains refined petroleumproducts inventory, which consists primarily of gasoline, heating oil, anddiesel fuel, which are valued at the lower of cost or market, unless suchinventories are hedged.  At December 31,2008, 78% of the inventory was hedged. This inventory is valued at currentmarket prices with the change in value of the inventory reflected in theconsolidated statements of income.  At December 31,2008, 17% of the inventory was committed against fixed-priced sales contractsand such inventory was valued at the lower of cost or market.  The remaining inventory was consideredunhedged and represented approximately one day of sales.

 

Buckeye alsomaintains, principally within its Pipeline Operations segment, an inventory ofmaterials and supplies such as pipes, valves, pumps, electrical/electroniccomponents, drag reducing agent and other miscellaneous items that are valuedat the lower of cost or market based on the first-in, first-out method (seeNote 5).

 

*Cost ofProduct Sales*

 

Cost of Product Salesrelates to sales of refined petroleum products, consisting primarily ofgasoline, heating oil and diesel fuel, and includes the direct costs of productacquisition as well as the effects of hedges of such product acquisition costsand hedges of fixed-price sales contracts.

 

*Equity Investments*

 

Investments inentities in which Buckeye does not exercise control, but has significantinfluence, are accounted for using the equity method.  Under this method, an investment is recordedat acquisition cost plus Buckeye’s equity in undistributed earnings or lossessince acquisition, reduced by distributions received and amortization of excessnet investment. Excess investment is the amount by which the initial investmentexceeds the proportionate share of the book value of the net assets of theinvestment. Management evaluates equity method investments for impairmentwhenever events or circumstances indicate that there is a loss in value of theinvestment which is other than temporary. In the event that the loss in value of an investment is other thantemporary, Buckeye records a charge to earnings to adjust the carrying value tofair value. There were no equity investment impairments during 2008, 2007 or2006.

 

*Property,Plant and Equipment*

 

Property, plantand equipment are generally recorded at cost. Property, plant and equipment consist primarily of pipelines, wells,storage and terminal facilities, pad gas and pumping and compression equipment.For financial reporting purposes, depreciation on pipelines and terminals isgenerally calculated using the straight-line method over the estimated usefullives ranging from 44 to 50 years.  Plantand equipment associated with natural gas storage is generally depreciated over44 years, except for pad gas.  TheNatural Gas Storage segment maintainsa level of natural gas in its underground storage facility generally known aspad gas, which is not routinely cycled but, instead, serves the function ofmaintaining the necessary pressure to allow routine injection and withdrawal tomeet demand. The pad gas is considered to be a component of the facility and assuch is not depreciated because it is expected to ultimately be recovered andsold.

 

Other plant and equipment is generally depreciated on a straight linebasis over an estimated life of 5 to 50 years. Additions and betterments are capitalized and maintenance and repairsare charged to income as incurred. Generally, upon normal retirement orreplacement, the cost of property (less salvage) is charged to the depreciationreserve, which has no effect on income.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

Thefollowing table represents the depreciation life for the major asset componentsof BGH’s and Buckeye’s assets:

* *
| ** **                         | ** ** | **Life in years** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| Right of way                       |       | 44-50                       |       |
| Line pipe and  fittings            |       | 44-50                       |       |
| Buildings                          |       | 50                          |       |
| Wells                              |       | 44                          |       |
| Pumping and  compression equipment |       | 44-50                       |       |
| Oil tanks                          |       | 50                          |       |
| Office furniture  and equipment    |       | 18                          |       |
| Vehicles and  other work equipment |       | 11                          |       |
| Servers and  software              |       | 5                           |       |

 

*Goodwill and Intangible Assets*

 

BGH’s goodwill amounts are assessed for impairment at the reportingunit level, which is consistent with BGH’s operating segments, (i) on aroutine annual basis on January 1 or (ii) when impairment indicatorsare present. If such indicators occur (e.g., the loss of a significantcustomer, economic obsolescence of plant assets, etc.), the estimated fairvalue of the reporting unit to which the goodwill is assigned is determined andcompared to its book value. If the fair value of the reporting unit exceeds itsbook value, including associated goodwill amounts, the goodwill is consideredto be unimpaired and no impairment charge is required. If the fair value of thereporting unit is less than its book value, including associated goodwillamounts, a charge to earnings is recorded to reduce the carrying value of thegoodwill to its implied fair value.  BGHhas not recognized any impairment losses related to goodwill for any of theperiods presented.

 

Intangible assets with finite useful lives are reviewed for impairmentwhen events or changes in circumstances indicate that the carrying amount ofsuch assets may not be recoverable. Intangible assets that have finite useful lives are amortized over theiruseful lives.

 

*Long-LivedAssets*

 

BGHregularly assesses the recoverability of its long-lived assets whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable. BGH assesses recoverability based on estimated undiscountedfuture cash flows expected to result from the use of the asset and its eventualdisposal. The measurement of an impairment loss, if recognition of any loss isrequired, is based on the difference between the carrying amount and fair valueof the asset.

 

*AssetRetirement Obligations*

 

BGH regularlyassesses its legal obligations with respect to estimated retirements of certainof its long-lived assets to determine if it has an asset retirement obligation(“ARO”).  GAAP requires that the fairvalue of a liability related to the retirement of long-lived assets be recordedat the time a legal obligation is incurred including obligations to perform anasset retirement activity in which the timing or method of settlement areconditional on a future event that may or may not be within the control of theentity.  If an ARO is identified and aliability is recorded, a corresponding asset is recorded at that time which isthen depreciated over the remaining useful life of the asset.  After the initial measurement, the liabilityis periodically adjusted to reflect changes in the ARO’s fair value. Generally,the fair value of any liability is determined based on estimates andassumptions related to future retirement costs, future inflation rates andcredit-adjusted risk-free interest rates.

 

Other than assetsin the Natural Gas Storage segment, Buckeye’s assets generally consist ofunderground refined petroleum products pipelines installed along rights-of-wayacquired from land owners and related above-ground facilities and terminalsthat are owned by Buckeye.  Buckeye isunable to predict if and when its pipelines, which generally serve high-populationand high-demand markets, will become completely obsolete and requiredecommissioning.  Further, Buckeye’srights-of-way agreements typically do not require the dismantling and removalof the pipelines and reclamation of the rights-of-way upon permanent removal ofthe pipelines from service.  Accordingly,other than with respect to the Natural Gas Storage segment, Buckeye hasrecorded no liability, or corresponding asset because the future dismantlementand removal dates of the majority of Buckeye’s assets, and the amount of anyassociated costs, are indeterminable.

 

The Natural GasStorage segment’s pipelines and surface facilities are located on land that isleased.  An ARO asset and liability wasestablished due to a requirement in the land leases to remove certain assets inthe event that the site is abandoned. The ARO liability will be adjusted prospectively for costs incurred orsettled, accretion expense, and any revisions made to the assumptions relatedto the retirement costs.  The ARO liabilityas of December 31, 2008 of $0.9 million is recorded in non-currentliabilities in the consolidated balance sheet.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

A reconciliationof the ARO liability for the year ended December 31, 2008 is as follows:

 
| ** **                                     | ** ** | **2008**                | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **(In thousands)** | ** ** |
| January 1,                                |       | $                       | —     |   |
| Liabilities  assumed with Lodi Gas acquisition |       | 665                     |       |
| Additional ARO  for Kirby Hills II             |       | 194                     |       |
| Accretion  expense                             |       | 60                      |       |
| December 31,                              |       | $                       | 919        |   |

 

*DebtIssuance Costs*

 

Costs incurred fordebt instruments are capitalized when incurred and amortized on a straight-linebasis over the life of the associated debt instrument.  If the debt instrument is retired before itsscheduled maturity date, any remaining issuance costs associated with that debtinstrument are expensed in the same period. Debt issuance costs were $13.7 million and $11.1 million at December 31,2008 and 2007, respectively.  Theseamounts are net of approximately $4.8 million and $3.2 million of accumulatedamortization at December 31, 2008 and 2007, respectively.

 

*FairValue*

 

At December 31, 2008 and 2007, cash and cash equivalents,trade receivables, construction and pipeline relocation receivables, margindeposits, prepaid and other current assets and all current liabilities arereported in the consolidated balance sheets at amounts which approximate fairvalue due to the relatively short period to maturity of these financialinstruments.  The fair value of BGH’sdebt was calculated using interest rates currently available to BGH forissuance of debt with similar terms and remaining maturities and approximatemarket values on the respective dates. Fair value is generally defined as the amount at which the financialinstrument could be exchanged in a current transaction between willing parties,not in a forced or liquidation sale. Buckeye’s Energy Services segment also has derivative assets andliabilities.  These assets andliabilities consist of exchange—traded futures contracts and fixed-price salescontracts with customers.  These assetsand liabilities are measured and reported at fair values.  Buckeye considers the impact of creditvaluation adjustments with respect to the fixed-price sales contracts.  See Note 16 for a further discussion.

 

*FinancialInstruments*

 

For all hedging relationships, Buckeye formallydocuments at inception the hedging relationship and its risk-managementobjective and strategy for undertaking the hedge, the hedging instrument, theitem, the nature of the risk being hedged, how the hedging instrument’seffectiveness in offsetting the hedged risk will be assessed and the method ofmeasuring ineffectiveness. This process includes linking all derivatives thatare designated as fair value or cash flow hedges to specific assets andliabilities on the balance sheet or to specific firm commitments or forecastedtransactions. Buckeye also formally assesses, both at the hedge’s inception andon an ongoing basis, whether the derivatives that are used in hedgingtransactions are highly effective in offsetting changes in fair values or cashflows of hedged items. If it is determined that a derivative is not highlyeffective as a hedge or that it has ceased to be a highly effective hedge,Buckeye discontinues hedge accounting prospectively.

 

To qualify as a hedge, the item to be hedged mustexpose Buckeye to risk and the related hedging instrument must reduce theexposure and meet the hedging requirements of Statement of Financial AccountingStandards (“SFAS”) 133, “Accounting for Derivative Instruments and HedgingActivities” (as amended and interpreted). Buckeye formally designates the financial instrument as a hedge anddocuments and assesses the effectiveness of the hedge at its inception andthereafter on a quarterly basis. Generally, the documentation defines the hedging instrument, the natureof the risk being hedged, and the method of measuring ineffectiveness. Anyhedge ineffectiveness is immediately recognized in earnings.

 

Buckeye uses financial instruments such as swaps,forward and other contracts to manage price risks associated with inventories,firm commitments, interest rates, and certain anticipated transactions. Buckeyerecognizes these transactions on the balance sheet as assets and liabilitiesbased on the instrument’s fair value. Changes in fair value of financialinstrument contracts are recognized in the current period in earnings unlessspecific hedge accounting criteria are met. If the financial instrument meetsthe criteria of a fair value hedge, gains and losses incurred on the instrumentwill be recorded in earnings to offset corresponding losses and gains on thehedged item. If the financial instrument meets the criteria of a cash flowhedge, gains and losses incurred on the instrument are recorded in othercomprehensive income. Gains and losses on cash flow hedges are reclassifiedfrom other comprehensive income to earnings when the forecasted transactionoccurs or, as appropriate, over the economic life of the underlying asset. Acontract designated as a hedge of an anticipated transaction that is no longerlikely to occur is immediately recognized in earnings.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

*Capitalizationof Interest*

 

Intereston borrowed funds is capitalized on projects during construction based on theapproximate average interest rate of Buckeye’s debt.  The weighted average rates used to capitalizeinterest on borrowed funds was 5.4% for each of the years ended December 31,2008, 2007 and 2006, respectively.

 

*IncomeTaxes*

 

Forfederal and state income tax purposes, BGH and its subsidiaries and Buckeye,except for Buckeye Gulf Coast Pipe Lines, L.P. (“BGC”) a Buckeye operatingsubsidiary, are not taxable entities. Accordingly, the taxable income or lossof BGH, which may vary substantially from income or loss reported for financialreporting purposes, is generally includable in the federal and state income taxreturns of the individual partners of BGH. The aggregate difference in the basis of BGH’s net assets for financialand tax reporting purposes cannot be readily determined because informationregarding each partner’s tax attributes is not available to BGH.

 

Effective August 1,2004, BGC elected to be treated as a taxable corporation for federal income taxpurposes.  Accordingly, it has recognizeddeferred tax assets and liabilities for temporary differences between theamounts of assets and liabilities measured for financial reporting purposes andthe amounts measured for federal income tax purposes.  Changes in tax legislation are included inthe relevant computations in the period in which such changes areeffective.  Deferred tax assets arereduced by a valuation allowance when the amount of any tax benefit is notexpected to be realized.  Buckeyerecorded a deferred tax liability of $0.8 million and $0.6 million as of December 31,2008 and 2007, respectively, which is recorded in non-current liabilities.

 

Total income taxexpense for the years ended December 31, 2008, 2007 and 2006 was $0.8million, $0.8 million and $0.6 million, respectively.  Income tax expense is included in operatingexpenses in the consolidated statements of income.

 

EffectiveJanuary 1, 1999, Services Company elected to be taxed as a Subchapter Scorporation for federal and state income tax purposes. Services Company isgenerally not a taxable entity for federal and state income taxes. Rather,Services Company’s income or loss is includable in the federal and state incometax returns of its shareholder, the ESOP. As a result of the election, ServicesCompany became liable for federal and state income taxes on any gains on thesale of any Buckeye LP Units through December 31, 2008 up to thedifference between the market value and the tax basis of Buckeye’s LP Units on January 1, 1999.   At December 31, 2008 and 2007, ServicesCompany had unrealized built-in gains associated with this election of $20.0million and $20.9 million, respectively.

 

*EnvironmentalExpenditures*

 

Environmentalexpenditures that relate to current operations are expensed or capitalized asappropriate. Expenditures that relate to an existing condition caused by pastoperations, and do not contribute to current or future revenue generation, areexpensed. Liabilities are recorded when environmental assessments and/orclean-ups are probable, and the costs can be reasonably estimated. Generally,the timing of these accruals coincides with Buckeye’s commitment to a formalplan of action.  Accrued environmentalremediation related expenses include direct costs of remediation and indirectcosts related to the remediation effort, such as compensation and benefits foremployees directly involved in the remediation activities and fees estimated tobe paid to outside engineering, consulting and law firms.  Buckeye maintains insurance which may covercertain environmental expenditures.

 

*Pensions*

 

ServicesCompany sponsors a defined contribution plan (see Note 17), defined benefitplans (see Note 17) and an employee stock ownership plan (the “ESOP”) (see Note19) that provide retirement benefits to certain regular full-timeemployees.  Certain hourly employees ofServices Company are covered by a defined contribution plan under a unionagreement (see Note 17).

 

###### *PostretirementBenefits Other Than Pensions*

###### * *

ServicesCompany provides post-retirement health care and life insurance benefits forcertain of its retirees. Certain other retired employees are covered by ahealth and welfare plan under a union agreement (see Note 17).

 

*Equity-BasedCompensation*

 

BGHhas Management Units, BGH GP has Override Units and Buckeye has a Unit Optionand Distribution Equivalent Plan, each of which are accounted for under theprovisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”*). *SFAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values.  See Note 18 for a further discussion of theequity-based compensation plans.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

***Comprehensive Income***

** **

**BGH accounts for comprehensiveincome in accordance with SFAS No. 130, “Reporting Comprehensive Income.”BGH’s comprehensive income is determined based on net income adjusted forchanges in other comprehensive income (loss) from hedging transactions.**

** **

*Earnings per Unit*

 

Earnings per unitis calculated for BGH only from the date of its IPO on August 9,2006.  Basic earnings per unit isdetermined by dividing the net income by the weighted average number of CommonUnits and vested Management Units outstanding for the period of August 9,2006 to December 31, 2006 and the years ended December 31, 2007 and2008.  Diluted earnings per unit iscalculated using the weighted average of all units outstanding, includingCommon Units and Management Units.

 

R*eclassifications*

 

Due to the acquisition ofFarm & Home in the first quarter of 2008 and its related product salesand cost of product sales, certain amounts from 2007 for product sales and costof product sales have been reclassified in the consolidated statements ofincome to conform to the current-year presentation.  In order to conform to the current-yearpresentation, BGH reclassified $9.0 million to customer contracts in theconsolidated balance sheets from noncurrent assets at December 31,2007.  BGH also reclassified $77.4million to equity investments in the consolidated balance sheets from othernoncurrent assets at December 31, 2007 to conform to the current-yearpresentation.   Finally, $7.2 million wasreclassified to derivative liabilities from accrued and other currentliabilities at December 31, 2007 to conform to the current-yearpresentation.

 

*RecentAccounting Pronouncements*

 

In September 2006,FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”).  SFAS 157 clarifies the definition of fairvalue, establishes a framework for measuring fair value, and expands thedisclosures on fair value measurements. SFAS 157 was effective for fiscal yearsbeginning after November 15, 2007 and interim periods within thatyear.  In February 2008, the FASBissued Financial Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157”(“FSP 157-2”).  FSP 157-2 delays theeffective date of SFAS 157 for all non-financial assets and non-financialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually). The delay isintended to allow the FASB’s constituents additional time to consider theeffect of the various implementation issues that have arisen, or that may arise,from the application of SFAS 157.  BGHadopted the non-delayed portion of SFAS 157 on January 1, 2008.  See Note 16 for a further discussion.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141(R)”), which is effective forfiscal years beginning after December 15, 2008.  SFAS 141(R) requires an acquiring entityin a business combination to (i) recognize all (and only) the assetsacquired and the liabilities assumed in the transaction, (ii) establish anacquisition-date fair value as the measurement objective for all assetsacquired and theliabilities assumed, (iii) disclose toinvestors and other users of the financial statements all of the informationthey will need to evaluate and understand the nature of, and the financialeffect of, the business combination, and (iv) recognize and measure thegoodwill acquired in the business combination or a gain from a bargainpurchase.   The more significantchanges to the existing accounting guidance on business combinations made bySFAS 141(R) include the following:

 

·                  Mostof the identifiable assets acquired, liabilities assumed and any noncontrollinginterest in the acquiree shall be measured at their acquisition-date fairvalues in accordance with SFAS 157;

 

·                  Acquisition-relatedcosts incurred by the acquirer shall be expensed in the periods in which thecosts are incurred rather than included in the cost of the acquired entity;

 

·                  Contractualpre-acquisition contingencies are to be recognized at their acquisition datefair values and noncontractual pre-acquisition contingencies are to berecognized at their acquisition date fair values only if it is more likely thannot that the contingency gives rise to an asset or liability, whereas SFAS 141generally permitted the deferred recognition of pre-acquisition contingenciesuntil the recognition criteria of SFAS No. 5, “Accounting forContingencies” are met; and

 

·                  Contingentconsideration shall be recognized at the acquisition date rather than when thecontingency is resolved and consideration is issued or becomes issuable.

 

The impact of adoptingSFAS 141(R) will be dependent on the future business combinations that BGHmay pursue after its effective date.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements-an amendment of ARB No. 51” (“SFAS 160”), which iseffective for fiscal years beginning after December 15, 2008.  SFAS No. 160 establishes accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  This statement amends Accounting ResearchBulletin No. 51, “Consolidated Financial Statements.” Noncontrollinginterest refers to the minority interest portion of the equity of a subsidiarythat is not attributable directly or indirectly to a parent. SFAS 160establishes accounting and reporting standards that require for-profit entitiesthat prepare consolidated financial statements to: (a) presentnoncontrolling interests as a component of equity, separate from the parent’sequity, (b) separately present the amount of consolidated net incomeattributable to noncontrolling interests in the income statement, (c) consistentlyaccount for changes in a parent’s ownership interests in a subsidiary in whichthe parent entity has a controlling financial interest as equity transactions, (d) requirean entity to measure at fair value its remaining interest in a subsidiary thatis deconsolidated, and (e) require an entity to provide sufficientdisclosures that identify and clearly distinguish between interests of theparent and interests of noncontrolling owners. BGH anticipates that theprincipal effect of the adoption of SFAS 160 on January 1, 2009 will bethe reclassification of its noncontrolling interests liability into partners’capital on its consolidated balance sheet.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities” (“SFAS 161”), which is effective for fiscal years beginningafter November 15, 2008.   SFAS 161changes the disclosure requirements for derivative instruments and hedgingactivities.  Entities are required toprovide enhanced disclosures about (i) how and why an entity usesderivative instruments, (ii) how derivative instruments and relatedhedging items are accounted for under SFAS 133 and its related interpretations,and (iii) how derivative instruments and related hedging items affect anentity’s financial position, financial performance, and cash flows.  SFAS 161 will require BGH to prepare enhanceddisclosures about its derivative and hedging activities.

 

On April 25, 2008,the FASB issued FASB Staff Position FSP 142-3 “Determination of the Useful Lifeof Intangible Assets” (“FSP 142-3”).  FSP142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under SFAS No. 142, “Goodwill and Other IntangibleAssets.” FAS 142-3 is effective for financial statements issued for fiscalyears beginning after December 15, 2008, and interim periods within thosefiscal years. Early adoption is prohibited. BGH is currently reviewing theeffects that FAS 142-3 will have on its consolidated financial statements.

 

In December 2008,FASB issued FASB Staff Position FSP 132 (R)-1, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits” (“FSP 132R-1”). FSP 132R-1 requiresenhanced disclosures about the plan assets of a company’s defined benefitpension and other postretirement plans. The enhanced disclosures required bythis FSP are intended to provide users of financial statements with a greaterunderstanding of: (1) how investment allocation decisions are made,including the factors that are pertinent to an understanding of investmentpolicies and strategies; (2) the major categories of plan assets; (3) theinputs and valuation techniques used to measure the fair value of plan assets; (4) theeffect of fair value measurements using significant unobservable inputs onchanges in plan assets for the period; and (5) significant concentrationsof risk within plan assets. FSP 132R-1 is effective for the year ending December 31,2009.   FSP 132R-1 will require BGH toprepare enhanced disclosures regarding its pensions and other postretirementbenefit plans.

 

**3.****     BUCKEYE ACQUISITIONS**

 

2008 Acquisitions

 

*Business Combinations*

 

Buckeye has determined thatthe 2008 acquisitions of Lodi Gas, Farm & Home and a terminal inAlbany, New York (“Albany Terminal”) represented business combinations underthe provisions of SFAS 141.  Theapplication of SFAS 141 requires that the total purchase price be allocated tothe fair value of the assets acquired and the liabilities assumed based on anassessment of their fair values at the acquisition date, with amounts exceedingthe fair values being recorded as goodwill. All goodwill recorded in thesethree business combinations is deductible for tax purposes. The results oftheir operations have been included in Buckeye’s consolidated financialstatements since their respective acquisition dates.

 

*Lodi Gas*

 

On January 18, 2008, Buckeye acquired all of the member interests inLodi Gas from Lodi Holdings, L.L.C. Lodi Holdings, L.L.C. was owned byaffiliates of ArcLight Capital Partners, LLC, which owns an indirect interestin Buckeye’s general partner.  See Note21 for a further discussion.  The cost ofLodi Gas was approximately $442.4 million in cash and consisted of thefollowing (in thousands):

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 
| Contractual  purchase price           |   | $      | 440,000 |   |
|---------------------------------------|--------|--------|---------|--------|
| Working capital  adjustments and fees |   | 2,367  |    |
|                                  |   |   |    |
| Total purchase  price                 |   | $      | 442,367 |   |

 

Of the contractual purchase price, $428.0 million was paid at closing andan additional $12.0 million was paid on March 6, 2008 upon receipt of approvalfrom the California Public Utilities Commission for an expansion project knownas Kirby Hills Phase II.  Buckeyeacquired Lodi Gas because Buckeye’s management believes Lodi Gas represents anattractive opportunity to expand and diversify Buckeye’s storage and throughputoperations into a new geographic area, northern California, and a new commoditytype, natural gas, and will provide Buckeye a platform for growth in thenatural gas storage industry. These advantageous factors resulted in the recognitionof goodwill in the amount that the fair value of the assets acquired and theliabilities assumed at the acquisition date exceeded the total purchaseprice.  The purchase price has beenallocated to the tangible and intangible assets acquired, including goodwill,as follows (in thousands):

 
| ** **                     | ** ** | **January 18,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2008**             | ** ** |
| Current assets                 |       | $                    | 8,240      |   |
| Property, plant  and equipment |       | 274,880              |       |
| Goodwill                       |       | 169,560              |       |
| Current  liabilities           |       | (9,096               | )          |
| Other  liabilities             |       | (1,217               | )          |
|                           |       |                 |       |
| Allocated  purchase price      |       | $                    | 442,367    |   |

 

As discussed above, the activities of Lodi Gas are reported in a newoperating segment called Natural Gas Storage.

 

*Farm & Home*

 

OnFebruary 8, 2008, Buckeye acquired all of the member interests of Farm &Home for approximately $146.2 million. On April 15, 2008, Buckeye completed the sale of the retailoperations of Farm & Home to a wholly-owned subsidiary of Inergy, L.P.for approximately $52.6 million. The retail assets sold consisted primarily ofproperty, plant, and equipment as well as inventory and receivables.  Buckeye recorded no gain or loss on the saleof Farm & Home’s retail operations. The retail operations of Farm & Home were not an integral partof Buckeye’s core operations and strategy, and the related retail assets andliabilities were determined to be discontinued operations on the date ofBuckeye’s acquisition of Farm & Home because Buckeye decided todispose of them as of that date. Revenues from discontinued operations for the period February 8,2008 to April 15, 2008 were approximately $19.0 million.

 

Buckeye acquired Farm & Home because Buckeye’s managementbelieves that the wholesale distribution operations of Farm & Homerepresent an attractive opportunity to further Buckeye’s strategy of improvingoverall profitability by increasing the utilization of Buckeye’s existingpipeline and terminal system infrastructure by marketing refined petroleumproducts in areas served by that infrastructure. These advantageous factorsresulted in the recognition of goodwill in the amount that the fair value ofthe assets acquired and the liabilities assumed at the acquisition dateexceeded the total purchase price.  Thepurchase price has been allocated to the tangible and intangible assetsacquired, including goodwill, as follows (in thousands):

 
| ** **                                              | ** ** | **February 8,** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **2008**             | ** ** |
| Current assets                                          |       | $                    | 79,144     |   |
| Inventory                                               |       | 93,332               |       |
| Property, plant  and equipment                          |       | 33,880               |       |
| Goodwill                                                |       | 1,132                |       |
| Customer  relationships                                 |       | 38,300               |       |
| Other assets                                            |       | 3,688                |       |
| Assets held for  sale, net of liability of $0.7 million |       | 51,645               |       |
| Debt                                                    |       | (100,000             | )          |
| Current  liabilities                                    |       | (53,208              | )          |
| Other  liabilities                                      |       | (1,740               | )          |
|                                                    |       |                 |       |
| Allocated  purchase price                               |       | $                    | 146,173    |   |

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

As discussed above, the wholesale operations of Farm & Home thatwere retained by Buckeye are reported in a new operating segment called EnergyServices.  On July 31, 2008, Farm &Home was merged with and into its wholly owned subsidiary, BES.

 

*Albany Terminal*

 

On August 28, 2008, Buckeye completed the purchase of the AlbanyTerminal, an ethanol and petroleum products terminal in Albany, New York, fromLogiBio Albany Terminal, LLC.  Thepurchase price for the terminal was $46.5 million in cash, with an additional$1.5 million payable if the terminal operations meet certain performance goalsover the next three years. Buckeye also assumed environmental remediation costsfor the Albany Terminal estimated by Buckeye to be $5.6 million.  The Albany Terminal has an active storagecapacity of 1.8 million barrels. Buckeye acquired the Albany Terminal becauseBuckeye believes that the Albany Terminal’s operations represent an attractiveopportunity to increase Buckeye’s participation in the ethanol services marketin the northeast United States. These advantageous factors resulted in therecognition of goodwill in the amount that the fair value of the assetsacquired and the liabilities assumed at the acquisition date exceeded the totalpurchase price.  The purchase price hasbeen allocated to the tangible and intangible assets acquired, includinggoodwill, on a preliminary basis as follows (in thousands):

 
| ** **                            | ** ** | **August 28,** | ** ** |
|---------------------------------------|------------|---------------------|------------|
| ** **                            | ** ** | **2008**            | ** ** |
| Current assets                        |       | $                   | 78         |   |
| Property, plant  and equipment        |       | 23,404              |       |
| Goodwill                              |       | 28,597              |       |
| Other assets                          |       | 1,920               |       |
| Other  liabilities                    |       | (7,144              | )          |
|                                  |       |                |       |
| Preliminary allocated  purchase price |       | $                   | 46,855     |   |

 

Buckeye is in the process of finalizing the purchase price allocationbased on ongoing valuations of property, plant and equipment and goodwill.  Changes to the preliminary purchase priceallocation could be material. The Albany Terminal’s operations are reported inthe Terminalling and Storage segment.

 

*UnauditedProforma Financial Results*

 

The following unaudited summarized pro forma consolidated incomestatement information for the years ended December 31, 2008 and 2007assumes that the acquisitions of Lodi Gas, Farm & Home and the AlbanyTerminal occurred as of the beginning of the years presented.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

The pro forma presentation below assumes that equity offerings by Buckeyethat were used in part to fund the acquisition of Lodi Gas occurred effective January 1,2007.  In the 2008 pro formapresentation, approximately $2.6 million of disposition-related expensesincurred by Lodi Gas in the period from January 1, 2008 to January 17,2008 (prior to Buckeye’s ownership) have been excluded because these expenses werea nonrecurring item.  For Farm &Home, the results of the retail operations have been excluded from both periodspresented. These pro forma unaudited financial results were prepared forcomparative purposes only and are not indicative of actual results that wouldhave occurred if Buckeye had completed these acquisitions as of the beginningof the periods presented or the results that will be attained in the future (inthousands, except per unit amounts):

 
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| **Revenues:**                                                                |       |                                        |       |   |   |   |   |
| As reported                                                                  |       | $                                           | 1,896,652  |   | $ | 519,347 |   |
| Pro forma  adjustments                                                       |       | 180,422                                     |       | 1,155,655 |   |
|                                                                         |       |                                        |       |   |   |
| Pro forma revenue                                                            |       | $                                           | 2,077,074  |   | $ | 1,675,002 |   |
|                                                                         |       |                                        |       |   |   |
| **Net  income:**                                                             |       |                                        |       |   |   |
| As reported                                                                  |       | $                                           | 26,477     |   | $ | 22,921 |   |
| Pro forma  adjustments                                                       |       | 768                                         |       | 6,308 |   |
|                                                                         |       |                                        |       |   |   |
| Pro forma net income                                                         |       | $                                           | 27,245     |   | $ | 29,229 |   |
|                                                                         |       |                                        |       |   |   |
| **Pro  forma net income per unit:**                                          |       |                                        |       |   |   |
| Basic                                                                        |       | $                                           | 0.96       |   | $ | 1.04 |   |
| Diluted                                                                      |       | $                                           | 0.96       |   | $ | 1.03 |   |
|                                                                         |       |                                        |       |   |   |
| **Pro  forma weighted average number of limited partner units outstanding:** |       |                                        |       |   |   |
| Basic                                                                        |       | 28,300                                      |       | 28,142 |   |
| Diluted                                                                      |       | 28,300                                      |       | 28,300 |   |

 

*Asset Acquisitions*

 

Buckeye has determined that the acquisitionsnoted below represented asset acquisitions under the provisions of SFAS 141(R),rather than business combinations. Accordingly, the total purchase price has been allocated to the fairvalue of the assets acquired and the liabilities assumed based on fair valuesat the acquisition date.  Buckeyedetermined that substantially all of the value of these purchases relate to thephysical assets acquired, which are generally depreciated over 50 years.  The acquired pipelines and related assetswere allocated to the Pipeline Operations segment and the acquired terminalsand related assets were allocated to the Terminalling and Storage segment.  Note 24 summarizes the allocation ofacquisitions by segment.

 

On February 19, 2008, Buckeye acquired a refined petroleum productsterminal in Niles, Michigan and a 50% ownership interest in a refined petroleumproducts terminal in Ferrysburg, Michigan from an affiliate of ExxonMobilCorporation for approximately $13.9 million. The approximate fair value allocation of the acquired assets is asfollows (in thousands):

 
| ** **                                    | ** ** | **February 19,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2008**              | ** ** |
| Land                                          |       | $                     | 592        |   |
| Buildings                                     |       | 1,621                 |       |
| Machinery,  equipment, and office furnishings |       | 11,714                |       |
| Total                                         |       | $                     | 13,927     |   |

 

Effective May 1, 2008, Buckeye purchased the 50% member interest inWesPac Pipelines - San Diego LLC not already owned by Buckeye from Kealine LLCfor $9.3 million. The operations of WesPac Pipelines — San Diego LLC arereported in the Pipeline Operations segment. The purchase price was allocated principally to property, plant andequipment.

 

On June 20, 2008, Buckeye acquired a refined petroleum productsterminal in Wethersfield, Connecticut from Hess Corporation for approximately$5.5 million. The purchase price was allocated principally to property, plantand equipment.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

*2007 Asset Acquisitions*

 

On January 16, 2007, Buckeye acquired two refined petroleum productsterminals located in Flint and Woodhaven, Michigan for approximately $22.2 million,including a deposit of $1.0 million that was paid in 2006. The fair valueallocation of the acquired assets is as follows (in thousands):

 
| Land                                          |   | $      | 8,663  |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Buildings                                     |   | 3,481  |   |
| Machinery,  equipment, and office furnishings |   | 10,024 |   |
| Total                                         |   | $      | 22,168 |   |

 

On February 27, 2007, Buckeye acquired a refined petroleum productsterminal in Marcy, New York for approximately $2.3 million. The purchase pricewas allocated principally to property, plant and equipment.

 

On March 15, 2007, Buckeye completed the acquisition of two refinedpetroleum products terminals located in Green Bay and Madison, Wisconsin andthe purchase of a fifty percent interest in a third terminal located inMilwaukee, Wisconsin for approximately $15.2 million.  The fair value allocation of the acquiredassets is as follows (in thousands):

 
| Land                                          |   | $      | 3,400  |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Buildings                                     |   | 1,100  |   |
| Machinery,  equipment, and office furnishings |   | 10,660 |   |
| Total                                         |   | $      | 15,160 |   |

 

*2006 Asset Acquisitions*

 

On January 31, 2006, Buckeye completed the acquisition of a naturalgas liquids pipeline that extends generally from Wattenberg, Colorado toBushton, Kansas from BP Pipelines (North America) Inc. for approximately $87.0million, which included a deposit of $7.7 million paid in December 2005.The fair value allocation of the acquired assets is as follows (in thousands):

 
| Rights-of-way                                |   | $      | 3,003  |   |
|----------------------------------------------|--------|--------|--------|--------|
| Buildings and  leasehold improvements        |   | 1,198  |   |
| Machinery,  equipment and office furnishings |   | 82,799 |   |
| Total                                        |   | $      | 87,000 |   |

 

On January 1, 2006, Buckeye acquired a refined petroleum productsterminal located in Niles, Michigan from Shell for $13.0 million. The purchaseprice was allocated principally to property, plant and equipment.

 

**4.         CONTINGENCIES**

 

*Claims and Proceedings*

 

Buckeye in the ordinary course of business isinvolved in various claims and legal proceedings, some of which are covered byinsurance.  BGH is generally unable topredict the timing or outcome of these claims and proceedings. Based upon itsevaluation of existing claims and proceedings and the probability of losses relatingto such contingencies, BGH has accrued certain amounts relating to such claimsand 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 inthe U.S. District Court for the Central District of Illinois. The action wasbrought by the State of Illinois Attorney General acting on behalf of theIllinois Environmental Protection Agency. The complaint alleges that Buckeyeviolated various Illinois state environmental laws in connection with a productrelease from Buckeye’s terminal located in Harristown, Illinois on or about June 11,2006 and various other product releases from Buckeye’s terminals and pipelinesin the State of Illinois during the period of 2001 through 2006. The complaintseeks to recover state oversight costs, damages, and civil penalties and seeksinjunctive action requiring Buckeye to remediate the environmentalcontamination resulting from the product releases. Buckeye believes it hasmeritorious defenses to the allegations set forth in the complaint.

 

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*Environmental Contingencies*

 

In accordance with its accounting policy onenvironmental expenditures, Buckeye recorded operating expenses, net ofinsurance recoveries, of $10.1 million, $7.4 million and $6.2 million for 2008,2007 and 2006, respectively, which were related to environmental expendituresunrelated to claims and proceedings. Expenditures, both capital and operating, relating to environmentalmatters are expected to continue due to Buckeye’s commitment to maintaininghigh environmental standards and to increasingly strict environmental laws andgovernment enforcement policies. Additional discussions regarding environmental expenditures arecontained in Notes 2 (Summary of Significant Accounting Policies), 12 (Accruedand Other Current Liabilities) and 14 (Other Non-Current Liabilities).

 

*Ammonia Contract Contingencies*

 

On November 30, 2005, BGC purchased an ammoniapipeline 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 theobligations of EPME under several contracts involving monthly purchases andsales of ammonia.  EPME and BGC agreed,however, that EPME would retain the economic risks and benefits associated withthose contracts until their expiration at the end of 2012.  To effectuate this agreement, BGC passesthrough to EPME both the cost of purchasing ammonia under a supply contract andthe proceeds from selling ammonia under three sales contracts.  For the vast majority of monthly periodssince the closing of the pipeline acquisition, the pricing terms of the ammoniacontracts have resulted in ammonia costs exceeding ammonia sales proceeds.  The amount of the shortfall generally increasesas the market price of ammonia increases.

 

EPME has informed BGCthat, notwithstanding the parties’ agreement, it will not continue to pay BGCfor shortfalls created by the pass-through of ammonia costs in excess ofammonia revenues.  EPME encouraged BGC toseek payment by invoking the $40.0 million guaranty made by El Paso whichguaranteed EPME’s obligations to BGC.  IfEPME failed to reimburse BGC for these shortfalls for a significant periodduring the remainder of the term of the ammonia agreements, then suchunreimbursed shortfalls could exceed the $40.0 million cap on El Paso’sguaranty.  To the extent the unreimbursedshortfalls significantly exceed the $40.0 million cap, the resulting costsincurred by BGC could adversely affect Buckeye’s financial position, results ofoperations, and cash flows.  Given theuncertainty of future ammonia prices and EPME’s future actions, Buckeye isunable to estimate the amount of any such losses.  Accordingly, Buckeye has recorded noprovision for losses in the accompanying consolidated financial statementsbecause 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 theamount of such losses.  Buckeye iscurrently assessing its options, including potential recourse against EPME andEl Paso, with respect to this matter.

 

**5.     INVENTORIES**

 

The major components ofinventories consist of the following:

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **                  | ** ** | **(In  thousands)**   | ** ** |
| Refined  petroleum products |       | $                     | 69,568     |   | $ | 333 |   |
| Materials and  supplies     |       | 14,661                |       | 14,816 |   |
| Total                       |       | $                     | 84,229     |   | $ | 15,149 |   |

 

Buckeye generallymaintains two types of inventory.  Withinthe Energy Services segment, Buckeye principally maintains refined petroleumproducts inventory, which consists primarily of gasoline, heating oil, anddiesel fuel, which are valued at the lower of cost or market, unless suchinventories are hedged.  At December 31,2008, 78% of the inventory was hedged. This inventory is valued at currentmarket prices with the change in value of the inventory reflected in theconsolidated statements of income.  At December 31,2008, 17% of the inventory was committed against fixed-priced sales contractsand such inventory was valued at the lower of cost or market.  The remaining inventory was consideredunhedged and represented approximately one day of sales.

 

Buckeye alsomaintains, principally within its Pipeline Operations segment, an inventory ofmaterials and supplies such as pipes, valves, pumps, electrical/electroniccomponents, drag reducing agent and other miscellaneous items that are valuedat the lower of cost or market based on the first-in, first-out method.

 

**6.     PREPAID AND OTHER CURRENT ASSETS**

 

Prepaid and other current assets consist of the following:

 

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| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **             | ** ** | **(In  thousands)**   | ** ** |
| Prepaid  insurance     |       | $                     | 7,889      |   | $ | 7,456 |   |
| Insurance  receivables |       | 5,101                 |       | 7,707 |   |
| Ammonia  receivable    |       | 12,058                |       | 7,505 |   |
| Margin deposits        |       | 32,345                |       | — |   |
| Other                  |       | 18,013                |       | 10,040 |   |
| Total                  |       | $                     | 75,406     |   | $ | 32,708 |   |

 

**7.     PROPERTY, PLANT AND EQUIPMENT**

 

Property, plant andequipment consist of the following:

 
|                                          |   | **December 31,** |       |
|-----------------------------------------------|--------|-----------------------|------------|
|                                          |   | **2008**              | ** ** | **2007** | ** ** |
|                                          |   | **(In  thousands)**   |       |
| Land                                          |   | $                     | 62,139     |   | $ | 55,064 |   |
| Rights-of-way                                 |   | 97,724                |       | 89,393 |   |
| Pad gas                                       |   | 29,346                |       | — |   |
| Buildings and  leasehold improvements         |   | 92,668                |       | 83,544 |   |
| Machinery,  equipment, and office furnishings |   | 2,009,591             |       | 1,599,854 |   |
| Construction in  progress                     |   | 173,691               |       | 164,014 |   |
| Total property,  plant and equipment          |   | 2,465,159             |       | 1,991,869 |   |
| Less:  Accumulated depreciation               |   | (223,547              | )          | (185,149 | ) |
| Property, plant  and equipment, net           |   | $                     | 2,241,612  |   | $ | 1,806,720 |   |

 

Depreciationexpense was $47.4 million, $39.6 million and $39.0 million for the years 2008,2007 and 2006, respectively.

 

**8.     EQUITY INVESTMENTS**

 

Equity investments consist of the following:

 
| ** **                                                               | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                               | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                                                               | ** ** | **(In thousands)** | ** ** |
| Investment in  West Shore Pipe Line Company (24.9% owned)                |       | $                       | 30,340     |   | $ | 30,563 |   |
| Investment in  West Texas LPG Pipeline Limited Partnership (20.0% owned) |       | 44,471                  |       | 31,172 |   |
| Investment in  Muskegon (40.0% owned)                                    |       | 14,967                  |       | 15,257 |   |
| Investment in  Transport4, LLC (25% owned)                               |       | 332                     |       | 362 |   |
| Total                                                                    |       | $                       | 90,110     |   | $ | 77,354 |   |

 

In2008 and 2007 Buckeye invested an additional $9.8 million and $0.9 million,respectively, in WT LPG as Buckeye’s pro-rata contribution for an expansionproject that was required to meet increased pipeline demand caused by increasedproduct production in the Fort Worth basin and East Texas regions. Theexpansion project consists of the construction of 39 miles of 12-inch pipelineand installation of multiple booster stations. WT LPG expects to have the expansion pipeline operational by the middleof 2009.  Eighty percent of WT LPG isowned by Chevron Pipe Line Co. and 20% is owned by Buckeye.

 

**9.     GOODWILL**

 

SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”),establishes financial accounting and reporting guidance for acquired goodwilland other intangible assets.  Under SFAS142, goodwill and indefinite-lived intangible assets are no longer amortizedbut are reviewed at least annually for impairment.  Intangible assets that have finite usefullives will continue to be amortized over their useful lives.

 

SFAS 142 requires that goodwill be tested for impairment at leastannually utilizing a two-step methodology. The initial step requires BGH to determine the fair value of each of itsreporting units and compare it to the carrying value, including goodwill, ofsuch reporting unit.  If the fair valueexceeds the carrying value, no impairment loss is recognized.  However, a carrying value that exceeds its fairvalue may be an indication of impaired goodwill. The amount, if any, of theimpairment would then be measured and an impairment loss would be recognized.BGH’s goodwill balance at year-end 2007 of $234.6 million relates primarily toBGH’s acquisition of the entity that controlled the general partner interestsin Buckeye.  In 2008, additional goodwillin the amounts of $169.6 

 

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million and $1.1million were recorded in the Natural Gas Storage and Energy Services segments,respectively, due to the Lodi Gas and Farm & Home acquisitions.  Also in 2008, another $28.6 million ofgoodwill was recorded on a preliminary basis in the Terminalling and Storagesegment due to the acquisition of the Albany Terminal.

 

The impairment testingperformed each January 1st has determinedthat no impairment had been incurred in 2008, 2007 or 2006.  The determination of whether goodwill isimpaired is based on management’s estimate of the fair value of BGH’s reportingunits as compared to their carrying values. In the 2008 impairment test, BGH utilized industry-specific multiplesapplied to earnings before interest, taxes and depreciation and amortization (“EBITDA”)to determine the fair values of each of its reporting units.  BGH applied these multiples to both actualand projected EBITDA for each of its reporting units.  With respect to Lodi Gas, BGH relied on 2009projected EBITDA, because actual 2008 EBITDA did not include the anticipatedbenefits of the Kirby Hills Phase II expansion. BGH obtained the opportunity to construct this expansion project as partof the acquisition of Lodi Gas.  Thisopportunity was not considered an identifiable intangible asset and thereforewas included in goodwill.  Kirby HillsPhase II is expected to be fully operational in the first half of 2009.

 

Goodwill consistsof the following:

 
| ** **                | ** ** | **December 31,**   | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** |
| Pipeline  Operations      |       | $                       | 198,632    |   | $ | 198,632 |   |
| Terminalling and  Storage |       | 51,386                  |       | 22,789 |   |
| Natural Gas  Storage      |       | 169,560                 |       | — |   |
| Energy Services           |       | 1,132                   |       | — |   |
| Other Operations          |       | 13,182                  |       | 13,182 |   |
| Total                     |       | $                       | 433,892    |   | $ | 234,603 |   |

 

**10.  INTANGIBLE ASSETS**

 

Intangible assets includecustomer relationships and contracts. These intangible assets have definite lives and are being amortized on astraight-line basis over their estimated useful lives ranging from 12 to 25years.  The weighted average useful lifeof intangible assets is 14 years. Buckeye’s amortizable customer contracts are contracts that wereacquired in connection with the acquisition of BGC in March 1999 and theacquisition of the Taylor, Michigan terminal in December 2005.  The customer contracts are being amortizedover their contractual life.  Theincrease in the carrying amount of customer relationships in 2008 resulted fromthe acquisition of Farm & Home (see Note 3 for a further discussion).  It was determined, through an analysis ofhistorical customer attrition rates at Farm & Home, that anappropriate recovery period for customer relationships is approximately 12years. Intangible assets consist of the following:

 
| ** **                       | ** ** | **December 31,**   | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| Customer  relationships          |       | $                       | 38,300     |   | $ | — |   |
| Accumulated  amortization        |       | (2,662                  | )          | — |   |
| Net carrying  amount             |       | 35,638                  |       | — |   |
|                             |       |                    |       |   |   |
| Customer  contracts              |       | 11,800                  |       | 11,800 |   |
| Accumulated  amortization        |       | (3,324                  | )          | (2,756 | ) |
| Net carrying  amount             |       | 8,476                   |       | 9,044 |   |
| Total customer  intangibles, net |       | $                       | 44,114     |   | $ | 9,044 |   |

 

For the years ended 2008, 2007, and 2006, consolidated amortizationexpense related to intangible assets was $3.2 million, $0.5 million, and $0.6million, respectively.  Amortizationexpense related to intangible assets is expected to be approximately $3.8million for each of the next five years.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

**11.  OTHER NON-CURRENT ASSETS**

 

Other non-current assets consist of the following:

 
| ** **                   | ** ** | **December 31,**   | ** ** |
|------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Long-term  derivative assets |       | $                       | 6,273      |   | $ | — |   |
| Debt issuance  costs         |       | 8,944                   |       | 7,896 |   |
| Insurance  receivables       |       | 6,518                   |       | 7,776 |   |
| Other                        |       | 11,873                  |       | 8,421 |   |
| Total                        |       | $                       | 33,608     |   | $ | 24,093 |   |

 

**12.  ACCRUED AND OTHER CURRENT LIABILITIES**

 

Accrued and othercurrent liabilities consist of the following:

 
| ** **                                        | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **2008**                | ** ** | **2007** | ** ** |
|                                              |       | **(In thousands)** |       |
| Taxes - other  than income                        |       | $                       | 14,092     |   | $ | 8,026 |   |
| Accrued employee  benefit liability (see Note 17) |       | 2,297                   |       | 2,183 |   |
| Environmental  liabilities                        |       | 12,337                  |       | 8,023 |   |
| Interest                                          |       | 25,551                  |       | 16,485 |   |
| Retainage                                         |       | 1,405                   |       | 1,572 |   |
| Payable for  ammonia purchase                     |       | 9,373                   |       | 6,988 |   |
| Unearned revenue                                  |       | 12,186                  |       | 1,439 |   |
| Compensation and  vacation                        |       | 15,642                  |       | 11,939 |   |
| Accrued capital  expenditures                     |       | 4,902                   |       | 2,945 |   |
| Other                                             |       | 18,679                  |       | 12,115 |   |
| Total                                             |       | $                       | 116,464    |   | $ | 71,715 |   |

 

**13.  LONG-TERM DEBT AND CREDIT FACILITIES**

 

Long- term debtconsists of the following:

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 
| ** **                                                        | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                        | ** ** | **2008**                | ** ** | **2007** | ** ** |
| * *                                                          | ** ** | **(In thousands)** | ** ** |
| *BGH:*                                                            | ** ** | ** **              | ** ** | ** ** | ** ** |
| BGH Credit  Agreement                                             |       | $                       | —     |   | $ | — |   |
| *Services  Company:*                                              | ** ** | ** **              | ** ** | ** ** | ** ** |
| 3.60% ESOP Notes  due March 28, 2011                         |       | 14,255                  |       | 20,804 |   |
| Retirement  premium                                               |       | (258                    | )          | (518 | ) |
| *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                 |       | — |   |
| Borrowings under  the Credit Facility                             |       | 298,267                 |       | — |   |
| Total term debt                                                   |       | $                       | 1,462,264  |   | $ | 870,286 |   |
| Other, including  unamortized discounts and fair value hedges (1) |       | (2,545                  | )          | (823 | ) |
| Subtotal long-  term debt                                         |       | 1,459,719               |       | 869,463 |   |
| Less: current portion of long-term debt                           |       | (6,294                  | )          | (6,289 | ) |
| Total long-term debt                                              |       | $                       | 1,453,425  |   | $ | 863,174 |   |

 

----

(1)          The December 31,2008 amount includes $1.1 million related to an adjustment to fair valueassociated with a hedge of fair value and ($3.6) million in unamortizeddiscounts.  The December 31, 2007amount includes $1.3 million related to an adjustment to fair value associatedwith a hedge of fair value and ($2.1) million in unamortized discounts.

 

*BGH*

* *

BGHis party to a five-year, $10.0 million unsecured revolving credit facility withSunTrust Bank, as both**administrativeagent and lender (the “BGH Credit Agreement”). The BGH Credit Agreement may beused for working capital and other partnership purposes. BGH has pledged all ofthe limited liability company interests in Buckeye GP as security for itsobligations under the BGH Credit Agreement. Borrowings under the BGH Credit Agreement bear interest under one of tworate options, selected by BGH, equal to either (i) the greater of (a) thefederal funds rate plus 0.5% and (b) SunTrust Bank’s prime commerciallending rate; or (ii) the London Interbank Official Rate (“LIBOR”), plus amargin which can range from 0.40% to 1.40%, based on the ratings assigned byStandard & Poor’s Rating Services and Moody’s Investor Services to thesenior unsecured non-credit enhanced long-term debt of BGH.  BGH did not have amounts outstanding underthe BGH Credit Agreement at December 31, 2008 or 2007.

 

TheBGH Credit Agreement requires BGH to maintain leverage and funded debt coverageratios. The leverage ratio covenant requires BGH to maintain, as of the lastday of each fiscal quarter, a ratio of the total funded indebtedness of BGH andits Restricted Subsidiaries (as defined below), measured as of the last day ofeach fiscal quarter, to the aggregate dividends and distributions received byBGH and its Restricted Subsidiaries from Buckeye, plus all other cash receivedby BGH and the Restricted Subsidiaries, measured for the preceding twelvemonths, less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreementdefines “Restricted Subsidiaries” as certain of BGH’s wholly ownedsubsidiaries.  The funded debt coverageratio covenant requires BGH to maintain, as of the last day of each fiscalquarter, a ratio of total consolidated funded debt of BGH and all of itssubsidiaries to the consolidated EBITDA, as defined in the BGH CreditAgreement, of BGH and all of its subsidiaries, measured for the precedingtwelve months, of not more than 5.25 to 1.00, subject to a provision forincreases to 5.75 to 1.00 in connection with future acquisitions. At December 31,2008, BGH’s funded debt coverage ratio was 4.94 to 1.00.

 

The BGH CreditAgreement contains other covenants that prohibit BGH from taking certainactions, including but not limited to, declaring dividends or distributions ifany default or event of default has occurred or would result from such adeclaration 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 andits Restricted Subsidiaries’ business, and entering into a merger,consolidation, or sale of assets.  At December 31,2008, BGH was not aware of any instances of noncompliance with the covenantsunder the BGH Credit Agreement.

 

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*ServicesCompany*

 

Services Companyhad total debt outstanding of $14.0 million and $20.3 million at December 31,2008 and 2007, respectively, consisting of 3.60% Senior Secured Notes (the “3.60%ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-partylender. The 3.60% ESOP Notes were issued on May 4, 2004.  The 3.60% ESOP Notes are collateralized byServices Company’s common stock and are guaranteed by Services Company. Inaddition, Buckeye has committed that, in the event that the value of Buckeye’sLP Units owned by Services Company falls below 125% of the balance payableunder the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficientassets to bring the value of the total collateral (the value of Buckeye’s LPUnits 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 valueof Buckeye’s LP Units owned by Services Company’s returns to an amount thatexceeds the 125% minimum. At December 31, 2008, the value of Buckeye’s LPUnits owned by Services Company exceeded the 125% requirement.

 

*Buckeye Note*

 

On January 11, 2008,Buckeye sold $300.0 million aggregate principal amount of its 6.05% Notes due2018 (the “6.05% Notes”) in an underwritten public offering. Proceeds from thisoffering, after underwriters’ fees and expenses, were approximately $298.0million and were used to partially pre-fund the Lodi Gas acquisition.  In connection with this debt offering,Buckeye settled the two forward-starting interest rates swaps discussed in Note15 below, which resulted in a settlement payment by Buckeye of $9.6 millionthat is being amortized as interest expense over the ten-year term of the 6.05%Notes.

 

*Credit Facility*

 

Buckeye has aborrowing capacity of $600.0 million under an unsecured revolving creditagreement (the “Credit Facility”), which may be expanded up to $800.0 millionsubject to certain conditions and upon the further approval of thelenders.   The Credit Facility’s maturitydate is August 24, 2012, which may be extended by Buckeye for up to twoadditional one-year periods. Borrowings under the Credit Facility bear interestunder one of two rate options, selected by Buckeye, equal to either (i) thegreater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’sprime rate plus an applicable margin, or (ii) the London Interbank OfferedRate (“LIBOR”) plus an applicable margin. The applicable margin is determinedbased on the current utilization level of the Credit Facility and ratingsassigned by Standard & Poor’s and Moody’s Investor Services forBuckeye’s senior unsecured non-credit enhanced long-term debt.  At December 31, 2008 and December 31,2007, Buckeye had committed $1.3 million and $1.5 million in support of lettersof credit, respectively.  The obligationsfor letters of credit are not reflected as debt on Buckeye’s consolidatedbalance sheet.  The weighted averageinterest rate for borrowing outstanding under the Credit Facility was 2.4% at December 31,2008.

 

The CreditFacility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to aprovision that allows for increases to 5.50 to 1.00 in connection with certainfuture acquisitions.  The Funded DebtRatio 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 ofcertain majority-owned subsidiaries of Buckeye and equity investments (butincluding distributions from those majority-owned subsidiaries and equityinvestments).  As discussed below, theCredit Facility was amended in January 2008 to, among other things, changethe definition of consolidated debt.  At December 31,2008, Buckeye’s Funded Debt Ratio was 4.6 to 1.00.  As permitted by the Credit Facility, $87.9million was excluded from the calculation of the Funded Debt Ratio.

 

In addition, theCredit Facility contains other covenants including, but not limited to,covenants limiting Buckeye’s ability to incur additional indebtedness, tocreate or incur liens on its property, to dispose of property material to itsoperations, and to consolidate, merge or transfer assets.  At December 31, 2008, Buckeye was notaware of any instances of noncompliance with the covenants under the CreditFacility.

 

On January 28,2008, Buckeye entered into an amendment to the Credit Facility that permits BESto incur up to $250.0 million of secured indebtedness related to workingcapital financing.  The Credit Facility,as amended, also permits BES to (i) issue performance bonds not to exceed$50.0 million, (ii) incur $5.0 million of equipment lease obligations andliens on equipment, (iii) incur up to $5.0 million of indebtedness owingto major oil companies, and (iv) loan or advance up to $5.0 million toretail distributors of transportation fuels.  Finally, the amendment states that thelesser of the aggregate amount of this debt or the sum of 90% of qualifiedinventory and 70% of qualified accounts receivable held by BES at the balancesheet date may be excluded when calculating Buckeye’s Funded Debt Ratio asdiscussed above.

 

Lehman Brothers Bank, FSB, an affiliate of LehmanBrothers Holdings Inc. (“Lehman Brothers”), has committed, as a lender underthe Credit Facility, 3.3%, or $20.0 million, of Buckeye’s $600.0 millionborrowing capacity under the Credit Facility but has recently not honored thatcommitment. Buckeye does not believe that the reduction in capacity under theCredit Facility resulting from the unavailability of Lehman Brothers Bank, FSB’scommitment will have any impact on Buckeye’s ability to meet its liquidityneeds.  At December 31, 2008,approximately $8.8 million of the outstanding balance of the Credit Facilityrelated to amounts previously funded by Lehman Brothers Bank, FSB.  See Note 21 for a further discussion.

 

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

*BuckeyeEnergy Services Credit Agreement*

 

On May 20,2008, Farm & Home and BES entered into a Credit Agreement, which wassubsequently amended on July 18, 2008 and September 15, 2008 (the “BESCredit Agreement”).  On July 31,2008, Farm & Home was merged with and into BES, leaving BES as thesole borrower under the BES Credit Agreement. The BES Credit Agreement provides for borrowings of up to $175.0million, which amount may be increased to $250.0 million subject to customaryconditions, including procurement of the requisite lender commitments.  Under the BES Credit Agreement, borrowingsaccrue interest, at BES’s election, at (i) the Administrative Agent’s Costof Funds (as defined in the BES Credit Agreement) plus 1.75%, (ii) theEurodollar Rate (as defined in the BES Credit Agreement) plus 1.75% or (iii) theBase Rate (as defined in the BES Credit Agreement) plus 0.25%.  The BES Credit Agreement also permitsDaylight Overdraft Loans (as defined in the BES Credit Agreement), SwinglineLoans (as defined in the BES Credit Agreement) and letters of credit.  Such alternative extensions of credit aresubject to certain conditions as defined in the BES Credit Agreement.  The BES Credit Agreement is secured by lienson certain assets of BES, including its inventory, cash deposits (other thancertain accounts), investments and hedging accounts, receivables andintangibles.

 

The BES CreditAgreement replaced the credit agreement that Buckeye had assumed upon theacquisition of Farm & Home.

 

The balance outstandingunder the BES Credit Agreement was approximately $96.0 million at December 31,2008, all of which was classified as a current liability.  The BES Credit Agreement requires BES to meetcertain financial covenants, which are summarized below (in millions, exceptfor the leverage ratio):

 
| **Borrowings  outstanding on  BES Credit Agreement** | ** ** | **Minimum  Consolidated Tangible  Net Worth** | ** ** | **Minimum  Consolidated Net  Working Capital** | ** ** | **Maximum  Consolidated  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                                     |       |

 

At December 31,2008, BES’s Consolidated Tangible Net Worth (as defined in the BES CreditAgreement) and Consolidated Net Working Capital (as defined in the BES CreditAgreement) were $113.5 million and $64.2 million, respectively, and theConsolidated Leverage Ratio (as defined in the BES Credit Agreement) was 1.62to 1.0.  The weighted average interestrate for borrowing outstanding under the BES Credit Agreement was 2.6% at December 31,2008.

 

In addition, the BESCredit Agreement contains other covenants, including, but not limited to,covenants limiting BES’s ability to incur additional indebtedness, to create orincur certain liens on its property, to consolidate, merge or transfer itsassets, to make dividends or distributions, to dispose of its property, to makeinvestments, to modify its risk management policy, or to engage in businessactivities materially different from those presently conducted.  At December 31, 2008, BES was not awareof any instances of noncompliance with the covenants under the BES CreditAgreement.

 

*Fair Value*

 

The fair value of theconsolidated debt was estimated to be $1,381.2 million and $848.8 millionat December 31, 2008 and 2007, respectively. The fair value of theconsolidated debt was calculated using interest rates currently available toBGH, Buckeye and Services Company for issuance of debt with similar terms andremaining maturities and approximate market values on the respective dates.

 

*Consolidated Debt Maturity Table*

 

The following table shows scheduled maturities of theprincipal amounts of consolidated debt obligations for the next 5 years and intotal thereafter (in thousands):

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 
| 2009       |   | $       | 6,294     |   |
|------------|--------|---------|-----------|--------|
| 2010       |   | 6,177   |      |
| 2011       |   | 1,526   |      |
| 2012       |   | 298,267 |      |
| 2013       |   | 300,000 |      |
| Thereafter |   | 850,000 |      |
| Total      |   | $       | 1,462,264 |   |

 

**14.  OTHER NON-CURRENT LIABILITIES**

 

Othernon-current liabilities consist of the following:

 
| ** **                                          | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(In thousands)** | ** ** |
| Accrued employee  benefit liabilities (see Note 17) |       | $                       | 49,281     |   | $ | 41,805 |   |
| Accrued  environmental liabilities                  |       | 14,684                  |       | 14,633 |   |
| Deferred  consideration                             |       | 20,100                  |       | 20,100 |   |
| Unearned revenue                                    |       | 4,658                   |       | — |   |
| Long-term  derivative liabilities                   |       | 2,183                   |       | — |   |
| Other                                               |       | 10,453                  |       | 4,582 |   |
| Total                                               |       | $                       | 101,359    |   | $ | 81,120 |   |

 

**15.  DERIVATIVES**

 

*Commodity Derivatives*

 

The Energy Servicessegment primarily uses exchange-traded petroleum futures contracts to managethe risk of market price volatility on its refined petroleum productinventories and its fixed-price sales contracts. The derivative contracts usedto hedge refined petroleum product inventories are classified as fair valuehedges.  Accordingly, Buckeye’s method ofmeasuring ineffectiveness will compare the changes in the fair value of the NewYork Mercantile Exchange futures contracts to the change in fair value ofBuckeye’s hedged fuel inventory.  Any difference between the amounts willbe considered ineffectiveness and recorded in current period earnings.

 

TheEnergy Services segment has elected not to use hedge accounting with respect toits fixed-price sales contracts. Therefore, its fixed-price sales contracts andthe related futures contracts used to offset those fixed-price sales contractsare all marked-to-market on the balance sheet with gains and losses beingrecognized in earnings during the period.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

As of December 31,2008, the Energy Services segment had derivative assets and liabilities asfollows:

 
| ** **                                         | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2008**                | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **Assets:**                                        | ** ** | ** **              | ** ** |
| Fixed-price  sales contracts                       |       | $                       | 78,423     |   |
| Futures  contracts for inventory                   |       | 25,225                  |       |
|                                               |       | 103,648                 |       |
| **Liability:**                                     | ** ** | ** **              | ** ** |
| Futures  contracts for fixed-price sales contracts |       | (50,806                 | )          |
|                                               |       |                    |       |
| Total                                              |       | $                       | 52,842     |   |

 

All but$1.2 million of the assets noted above for unrealized gains of $25.2 millionrelated to inventory hedges will be realized in the first quarter of 2009 asthe related inventory is sold.  Gainsrecorded on inventory hedges that were ineffective were approximately $5.7million.  As of December 31, 2008,open petroleum derivative contracts (represented by the fixed-price salescontracts and futures contracts for fixed-price sales contracts noted above)varied in duration, but did not extend beyond June 2010.  In addition, Buckeye had on hand at December 31,2008 refined product inventories which it intends to use to satisfy a portionof the fixed-price sales contracts.

 

*Finance Derivatives*

 

In 2004, BGH hadpurchased an interest rate cap on a notional amount of $50.0 million for$375,000. Under the interest rate cap, if the variable interest rate BGH paidon a former loan (the “Term Loan”) exceeded 5.0%, the lender would pay BGH thedifference between the variable rate in effect on the $50.0 million notionalamount and the capped rate. BGH did not designate the interest rate cap as acash flow hedge and, accordingly, changes in value of the cap have beenreflected in income. The interest rate cap was terminated in connection withBGH’s IPO.

 

In accordance withrequirements of the Term Loan, BGH entered into two interest rate swapagreements.  BGH designated thesetransactions as hedges of BGH’s cash flow risk associated with the Term Loan.The first agreement, which terminated on December 22, 2005, was for anotional amount of $172.8 million and called for BGH to receive floating ratepayments based on the notional amount times a rate equal to three-month LIBORin exchange for paying a fixed rate based on the notional amount times 3.029%.The interest rate swap was effective December 22, 2004, the date ofclosing of the Term Loan and terminated on December 22, 2005. The three-monthLIBOR reset on dates that coincided with the reset dates for the variableinterest rate of the Term Loan. The second agreement was for a notional amountof $86.0 million and called for BGH to receive floating rate payments based onthe notional amount times a rate equal to three-month LIBOR in exchange forpaying a fixed rate based on the notional amount times 3.853%. The agreementbecame effective on December 22, 2005 and was terminated in connectionwith BGH’s IPO. During 2005, BGH entered into another interest rate swapagreement. This agreement was for a notional amount of $12.0 million and calledfor BGH to receive the floating rate payments based on the notional amounttimes a rate equal to three-month LIBOR in exchange for paying a fixed ratebased on the notional amount times 4.54%. This agreement was terminated inconnection with the IPO.

 

BGHrecorded a gain of approximately $1.9 million upon termination of the interestrate cap and the two outstanding interest rate swap agreements in 2006.

 

Buckeye manages aportion of its interest rate exposure by utilizing interest rate swaps toconvert a portion of its variable rate debt into fixed-rate debt.  Generally, Buckeye utilizes interest rateswaps for specifically identified transactions. When entering into interestrate swap transactions, Buckeye becomes exposed to both credit risk and marketrisk.  Credit risk occurs when the valueof the swap transaction is positive, and Buckeye is subject to the risk thatthe counterparty will fail to perform under the terms of the contract.  Buckeye is subject to market risk withrespect to changes in value of the swap. Buckeye manages its credit risk by only entering into swap transactionswith major financial institutions with investment-grade credit ratings.  Buckeye manages its market risk by associatingeach swap transaction with a debt obligation. Buckeye’s practice had been to have the Board of Directors of Buckeye GPapprove each swap transaction.   In January 2009,Buckeye GP’s Board of Directors adopted an interest rate hedging policy whichpermits Buckeye to enter into certain short-term interest rate hedge agreementsto manage its interest rate and cash flow risks associated with the CreditFacility.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

In October 2008,Buckeye borrowed approximately $50 million under the Credit Facility.  In order to hedge its variable interest raterisk with respect to the amount borrowed, Buckeye concurrently entered into aninterest rate swap agreement for a notional amount of $50 million.  Under the swap agreement, Buckeye will pay afixed interest rate of interest of 3.15% for 180 days and, in exchange, willreceive a series of six monthly payments to be calculated based on the 30-dayLIBOR rate in effect at the beginning of each monthly period.  The amounts received by Buckeye willcorrespond to the 30-day LIBOR rates that Buckeye expects to pay on the $50million borrowed under the Credit Facility. The swap will settle on the maturity date of the last 30-day LIBORperiod.  Buckeye designated the swapagreement as a cash flow hedge on December 3, 2008 with changes in valuebetween the trade date and the designation date recognized in earnings. As of December 31,2008, $0.3 million was recognized in earnings related to the differences in thetrade and designation date and the ineffectiveness for the hedge period.

 

In January 2009,Buckeye entered into an additional interest rate swap agreement to hedge itsvariable rate risk on an additional $50 million in borrowing under the CreditFacility. Under the swap agreement, Buckeye will pay a fixed interest rate of0.81% for 180 days and, in exchange, will receive a series of six monthlypayments to be calculated based on the 30-day LIBOR rate in effect at thebeginning of each monthly period. The amounts received by Buckeye willcorrespond to the 30-day LIBOR rates that Buckeye expects to pay on theadditional $50 million borrowed under the Credit Facility. The swap will settleon the maturity date of the last 30-day LIBOR period. Buckeye designated theswap agreement as a cash flow hedge at inception.

 

For both interest rateswap agreements, Buckeye expects the changes in value of the interest rate swapagreements to be highly correlated with the changes in value of the underlyingborrowing.

 

In January 2008, Buckeye terminated twoforward-starting interest rate swap agreements associated with the 6.05% Notesand made a payment of $9.6 million in connection with the termination.  In accordance with SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”), Buckeye hasrecorded the amount in other comprehensive income and is amortizing the amountof the payment into interest expense over the ten-year term of the 6.05%Notes.  Interest expense increased by$0.9 million for the year ended December 31, 2008 as a result of theamortization of the termination payment.

 

**16. ****FAIR VALUEMEASUREMENTS**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  This statement clarifies the definition offair value, establishes a framework for measuring fair value, and expands thedisclosures on fair value measurements. SFAS 157 was effective for fiscal years beginning after November 15,2007 and interim periods within that year. BGH adopted the non-delayed portion of SFAS 157 on January 1, 2008.

 

Pursuant to SFAS157, fair value measurements are characterized in one of three levels basedupon the input used to arrive at the measurement.  The three levels include:

 

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

 

Level 2:  Level 2 inputs include the following:

 

·       Quoted prices in active markets forsimilar assets or liabilities.

·       Quoted prices in markets that are notactive for identical or similar assets or liabilities.

·       Inputs other than quoted prices, that areobservable for the asset or liability.

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

 

Level 3:  Level 3 inputs are unobservable inputs forthe asset or liability.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

The followingtable sets forth the fair value measurement of Buckeye’s assets and liabilitiesthat are subject to SFAS 157 as of December 31, 2008:

 
| ** **                | ** ** | **Fair Value Measurements Using**    | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|
| ** **                | ** ** | ** **                                          | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                | ** ** | **Quoted Prices  in Active Markets** | ** ** | **Other Observable  Inputs** | ** ** | **Unobservable  Inputs** | ** ** |
| ** **                | ** ** | **(Level 1)**                                  | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                | ** ** | **(In  thousands)**                                 | ** ** |
| **Assets:**               | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commodity  derivatives    |       | $                                                   | 25,225     |   | $ | 79,322 |   | $ | — |   |
| Asset held in  trust      |       | 3,648                                               |       | — |   | — |   |
| **Liabilities:**          |       |                                                |       |   |   |   |   |
| Interest rate  derivative |       | —                                              |       | (333 | ) | — |   |
| Commodity  derivatives    |       | (50,806                                             | )          | (1,045 | ) | — |   |
| Total                     |       | $                                                   | (21,933    | ) | $ | 77,944 |   | $ | — |   |

 

The value of theLevel 1 commodity derivative assets and liabilities were based on quoted marketprices obtained from the New York Mercantile Exchange.  The value of the Level 1 asset held in trustwas obtained from quoted market prices. The value of the Level 2 commodity derivative assets and liabilities werebased on observable market data related to the obligations to provide petroleumproducts. The value of the Level 2 interest rate derivative was based onobservable market data related to similar obligations.

 

The commodity derivativeasset of $79.3 million is net of a $0.6 million credit valuation adjustmentwhich is based on the credit risk associated with such contracts.  Because few of Buckeye’s customers enteringinto fixed-price sales contracts are large organizations withnationally-recognized credit ratings, Buckeye determined that a creditvaluation adjustment should be based on the historical and expected paymenthistory of each customer, the amount of product contracted for under theagreement, and the customer’s historical and expected purchase performanceunder each contract.

 

**17.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS**

 

*RIGP and Retiree Medical Plan*

 

Services Company, which employs substantially all of Buckeye’sworkforce, sponsors a retirement income guarantee plan (a defined benefit plan)  (the “RIGP”) which generally guaranteesemployees hired before January 1, 1986 a retirement benefit at least equalto the benefit they would have received under a previously terminated definedbenefit plan. Services Company’s policy is to fund amounts necessary to atleast meet the minimum funding requirements of ERISA.

 

Services Companyalso provides post-retirement health care and life insurance benefits tocertain of its retirees. To be eligible for these benefits an employee had tobe hired prior to January 1, 1991 and meet certain service requirements.Services Company does not pre-fund its postretirement benefit obligation.

 

In September 2006,the FASB adopted SFAS No. 158 “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106, and 132(R)” (“SFAS 158”). SFAS 158 requires companies to recognize a net liability or assetand an offsetting adjustment to accumulated other comprehensive income inconnection with reporting on the funded status of defined benefit pension andother postretirement benefit plans. SFAS 158 requires prospectiveapplication, and the recognition and disclosure requirements were effective forBuckeye’s fiscal year ending December 31, 2006. Additionally, SFAS 158requires companies to measure plan assets and obligations at their year-endbalance sheet date.

 

Buckeye adoptedthe provisions of SFAS 158 as of December 31, 2006.  In compliance with SFAS 158, Buckeye recordeda decrease in other comprehensive income of approximately $8.1 million in 2008and $2.8 million in 2007 and an increase in other comprehensive income of $0.8million in 2006.

 

Certain employeeswho were eligible for RIGP benefits retired in 2008.  The RIGP provides an option for the retireeto elect a calculated lump sum payment, rather than a retirement annuity, afterthe participant’s retirement date.  TheRIGP recognizes pension settlements when payments exceed the sum of service andinterest cost components of net periodic pension cost for the plan for thefiscal year.  The RIGP settled about 10%of the unrecognized losses related to these lump sum payments which resulted ina one-time charge of $1.4 million.

 

In December 2006,Services Company amended the postretirement health care and life insurancebenefits plan (the “Retiree Medical Plan”) to freeze amounts payable toMedicare-eligible beneficiaries at $2,500 per year commencing in 2008.  This change had the effect of reducing thepostretirement benefit obligation at December 31, 2006 by approximately$20.4 million.  Because the amendment wasadopted in December 2006, the effects of the amendment did not impactBuckeye’s net income in 2006.  In 2008and 

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

2007, Buckeye’s netincome was increased by approximately $4.6 million and $3.9 million,respectively, as a result of this amendment.

 
| ** **                               | ** ** | ** **              | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------|------------|--------------------------|------------|
| ** **                               | ** ** | **RIGP**                | ** ** | **Plan**   | ** ** |
| ** **                               | ** ** | **2008**                | ** ** | **2007**   | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| ** **                               | ** ** | **(In thousands)** | ** ** |
| **Change  in benefit obligation:**       | ** ** | ** **              | ** ** | ** ** | ** ** | ** **               | ** ** | ** ** | ** ** |
| Benefit  obligation at beginning of year |       | $                       | 20,240     |       | $          | 19,298                   |       | $ | 36,663 |   | $ | 35,018 |   |
| Service cost                             |       | 723                     |       | 808        |       | 382                      |       | 669 |   |
| Interest cost                            |       | 1,018                   |       | 1,034      |       | 1,947                    |       | 2,113 |   |
| Actuarial loss  (gain)                   |       | 8,299                   |       | 1,104      |       | (2,669                   | )          | 996 |   |
| Settlements                              |       | (2,990                  | )          | —     |       | —                   |       | — |   |
| Benefit payments                         |       | (156                    | )          | (2,004     | )          | (1,446                   | )          | (2,133 | ) |
| Benefit  obligation at end of year       |       | $                       | 27,134     |       | $          | 20,240                   |       | $ | 34,877 |   | $ | 36,663 |   |

 

A reconciliationof the beginning and ending balances of the fair value of plan assets under theRIGP and the Retiree Medical Plan is as follows:

 
| ** **                                      | ** ** | ** **              | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **RIGP**                | ** ** | **Plan**   | ** ** |
| ** **                                      | ** ** | **2008**                | ** ** | **2007**   | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| **Change  in plan assets:**                     | ** ** | ** **              | ** ** | ** ** | ** ** | ** **               | ** ** | ** ** | ** ** |
| Fair value of  plan assets at beginning of year |       | $                       | 12,915     |       | $          | 11,043                   |       | $ | — |   | $ | — |   |
| Actuarial return  on plan assets                |       | (189                    | )          | 2,126      |       | —                   |       | — |   |
| Employer  contribution                          |       | 853                     |       | 1,750      |       | 1,446                    |       | 2,133 |   |
| Settlements                                     |       | (2,990                  | )          | —     |       | —                   |       | — |   |
| Benefits paid                                   |       | (156                    | )          | (2,004     | )          | (1,446                   | )          | (2,133 | ) |
| Fair value of  plan assets at end of year       |       | $                       | 10,433     |       | $          | 12,915                   |       | $ | — |   | $ | — |   |
|                                            |       |                    |       |       |       |                     |       |   |   |
| Funded status at  end of year                   |       | $                       | (16,701    | )          | $          | (7,325                   | )          | $ | (34,877 | ) | $ | (36,663 | ) |

 

Amountsrecognized in BGH’s balance sheet as liabilities consist of the following:

 
| ** **                                         | ** ** | ** **              | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **RIGP**                | ** ** | **Plan**   | ** ** |
| ** **                                         | ** ** | **2008**                | ** ** | **2007**   | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| Accrued employee  benefit liabilities - current    |       | $                       | —     |       | $          | —                   |       | $ | 2,297 |   | $ | 2,183 |   |
| Accrued employee  benefit liabilities - noncurrent |       | $                       | 16,701     |       | $          | 7,325                    |       | $ | 32,580 |   | $ | 34,480 |   |

 

Amountsrecognized in Buckeye’s accumulated other comprehensive income are shown in thetable below.  However, these SFAS 158adjustments were re-classified to non-controlling interest in BGH’sconsolidated balance sheet.

 
| ** **                   | ** ** | ** **              | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
|------------------------------|------------|-------------------------|------------|------------|------------|--------------------------|------------|
| ** **                   | ** ** | **RIGP**                | ** ** | **Plan**   | ** ** |
| ** **                   | ** ** | **2008**                | ** ** | **2007**   | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Net actuarial  loss (gain)   |       | $                       | 12,437     |       | $          | 4,586                    |       | $ | 13,488 |   | $ | 17,180 |   |
| Prior service  cost (credit) |       | (531                    | )          | (984       | )          | (15,362                  | )          | (18,800 | ) |
| Total                        |       | $                       | 11,906     |       | $          | 3,602                    |       | $ | (1,874 | ) | $ | (1,620 | ) |

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

Informationregarding the accumulated benefit obligation in excess of plan assets for theRIGP is as follows:

 
| ** **                      | ** ** | **RIGP**                | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **2008**                | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Projected  benefit obligation   |       | $                       | 27,134     |   | $ | 20,240 |   |
| Accumulated  benefit obligation |       | $                       | 16,112     |   | $ | 12,018 |   |
| Fair value of  plan assets      |       | $                       | 10,433     |   | $ | 12,915 |   |

 

Theweighted average assumptions used in accounting for the RIGP and the RetireeMedical Plan were as follows:

 
| ** **                                                                     | ** ** | **RIGP** | ** ** | **Retiree Medical Plan** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|------------------------------------|------------|
| ** **                                                                     | ** ** | **2008** | ** ** | **2007**                           | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Weighted  average expense assumption for the years ended December 31,** |       |     |       |                               |       |   |   |   |   |   |   |   |   |
| Discount rate                                                                  |       | 5.5      | %          | 5.7                                | %          | 5.4 | % | 5.8 | % | 6.0 | % | 5.8 | % |
| Expected return  on plan assets                                                |       | 8.5      | %          | 8.5                                | %          | 8.5 | % | N/A |   | N/A |   | N/A |   |
| Rate of  compensation increase                                                 |       | 4.0      | %          | 4.0                                | %          | 4.0 | % | N/A |   | N/A |   | N/A |   |

 
| ** **                                                              | ** ** | **RIGP** | ** ** | **Retiree  Medical Plan** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **2008** | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Weighted  average balance sheet assumptions as of December 31:** |       |     |       |                           |       |   |   |   |   |
| Discount rate                                                           |       | 5.5      | %          | 5.5                            | %          | 5.8 | % | 6.0 | % |
| Rate of  compensation increase                                          |       | 4.0      | %          | 4.0                            | %          | N/A |   | N/A |   |

 

The expectedreturn on plan assets was determined by a review of projected future returnsalong with historical returns of portfolios with similar investments as thosein the plan.

 

The assumed rateof cost increase in the Retiree Medical Plan in 2008 was 9.5% for bothnon-Medicare eligible and Medicare eligible retirees.  The assumed annual rates of cost increasesdeclines each year through 2014 to a rate of 4.5%, and remain at 4.5%thereafter for both non-Medicare eligible and Medicare eligible retirees.

 

Assumed healthcarecost trend rates have a significant effect on the amounts reported for thehealthcare plans.  The effect of a 1.0%change in the health care cost trend rate for each future year would have hadthe following effects on 2008 results:

 
| ** **                                                 | ** ** | **1%**                  | ** ** | **1%**         | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                                                 | ** ** | **Increase**            | ** ** | **(Decrease)** | ** ** |
| ** **                                                 | ** ** | **(In thousands)** | ** ** |
| Effect on total  service cost and interest cost components |       | $                       | 145        |           | $          | (130 | ) |
| Effect on  postretirement benefit obligation               |       | $                       | 1,490      |           | $          | (1,320 | ) |

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

The components ofthe net periodic benefit cost and other amounts recognized in othercomprehensive income for the RIGP and the Retiree Medical Plan were as follows:

 
| ** **                                    | ** ** | **RIGP**                | ** ** | **Retiree Medical Plan** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2008**                | ** ** | **2007**                           | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(In thousands)** | ** ** |
| **Components  of net periodic benefit cost:** |       |                    |       |                               |       |   |   |   |   |   |   |   |   |
| Service cost                                  |       | $                       | 723        |                               | $          | 808 |   | $ | 922 |   | $ | 382 |   | $ | 669 |   | $ | 857 |   |
| Interest cost                                 |       | 1,018                   |       | 1,034                              |       | 1,000 |   | 1,947 |   | 2,113 |   | 2,948 |   |
| Expected return  on plan assets               |       | (1,030                  | )          | (864                               | )          | (860 | ) | — |   | — |   | — |   |
| Amortization of  prior service cost benefit   |       | (454                    | )          | (454                               | )          | (454 | ) | (3,438 | ) | (3,438 | ) | (690 | ) |
| Actuarial loss  due to settlements            |       | 1,371                   |       | —                             |       | — |   | — |   | — |   | — |   |
| Amortization of  unrecognized losses          |       | 296                     |       | 534                                |       | 612 |   | 1,023 |   | 1,429 |   | 1,542 |   |
| Net periodic  benefit costs                   |       | $                       | 1,924      |                               | $          | 1,058 |   | $ | 1,220 |   | $ | (86 | ) | $ | 773 |   | $ | 4,657 |   |

 
| ** **                                                                                           | ** ** | **RIGP**                | ** ** | **Retiree Medical Plan** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                                                                           | ** ** | **2008**                | ** ** | **2007**                           | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                           | ** ** | **(In thousands)** | ** ** |
| **Other  changes in plan assets and benefit obligations recognized in other  comprehensive income:** |       |                    |       |                               |       |   |   |   |   |   |   |   |   |
| Net actuarial  loss (gain)                                                                           |       | $                       | 9,517      |                               | $          | (158 | ) | $ | 5,278 |   | $ | (2,669 | ) | $ | 996 |   | $ | 17,613 |   |
| Prior service  cost (credit)                                                                         |       | —                  |       | —                             |       | (1,438 | ) | — |   | — |   | (22,238 | ) |
| Amortization of  net actuarial loss (gain)                                                           |       | (296                    | )          | (534                               | )          | — |   | (1,023 | ) | (1,429 | ) | — |   |
| Actuarial loss  due to settlements                                                                   |       | (1,371                  | )          | —                             |       | — |   | — |   | — |   | — |   |
| Amortization of  prior service cost (credit)                                                         |       | 454                     |       | 454                                |       | — |   | 3,438 |   | 3,438 |   | — |   |
| Total recognized  in other comprehensive income                                                      |       | $                       | 8,304      |                               | $          | (238 | ) | $ | 3,840 |   | $ | (254 | ) | $ | 3,005 |   | $ | (4,625 | ) |
|                                                                                                 |       |                    |       |                               |       |   |   |   |   |   |   |   |   |
| Total recognized  in net period benefit cost and other comprehensive income                          |       | $                       | 10,228     |                               | $          | 820 |   | $ | 5,060 |   | $ | (340 | ) | $ | 3,778 |   | $ | 32 |   |

 

During2008, Buckeye expects that the following amounts currently included in othercomprehensive income will be recognized in its consolidated statement ofincome:

 
| ** **                                  | ** ** | ** **              | ** ** | **Retiree Medical** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **RIGP**                | ** ** | **Plan**                 | ** ** |
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| Amortization of  unrecognized losses        |       | $                       | 1,405      |                     | $          | 961 |   |
| Amortization of  prior service cost benefit |       | $                       | (454       | )                        | $          | (3,438 | ) |

 

BGHestimates the following benefit payments, which reflect expected futureservice, as appropriate, will be paid in the years indicated:

 
| ** ** | ** ** | ** **              | ** ** | **Retiree Medical** | ** ** |
|------------|------------|-------------------------|------------|--------------------------|------------|
| ** ** | ** ** | **RIGP**                | ** ** | **Plan**                 | ** ** |
| ** ** | ** ** | **(In thousands)** | ** ** |
| 2009       |       | $                       | 2,138      |                     | $          | 2,363 |   |
| 2010       |       | 2,126                   |       | 2,171                    |       |
| 2011       |       | 2,499                   |       | 2,276                    |       |
| 2012       |       | 2,650                   |       | 2,355                    |       |
| 2013       |       | 2,458                   |       | 2,447                    |       |
| Thereafter |       | 12,460                  |       | 13,158                   |       |
|            |            |                         |            |                          |            |  |  |

 

Aminimum funding contribution is not required to be made to the RIGP during2009.  Funding requirements forsubsequent years are uncertain and will depend on whether there are any changesin the actuarial assumptions used to calculate plan funding levels, the actualreturn on plan assets and any legislative or regulatory changes affecting planfunding requirements.  For tax planning, financialplanning, cash flow management or cost reduction purposes, BGH may increase,accelerate, decrease or delay contributions to the plan to the extent permittedby law.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

BGHdoes not fund the Retiree Medical Plan and, accordingly, no assets are investedin the plan.  A summary of investments inthe RIGP are as follows at December 31, 2008 and 2007:

 
| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Mutual funds -  equity securities |       | 26       | %          | 43       | %          |
| Mutual funds -  money market      |       | 32       | %          | 27       | %          |
| Coal lease                        |       | 42       | %          | 30       | %          |
| Total                             |       | 100      | %          | 100      | %          |

 

TheRIGP investment policy does not target specific asset classes, but seeks tobalance the preservation and growth of capital in the plan’s mutual fundinvestments with the income derived with proceeds from the coal lease.  While no significant changes in the assetallocation of the plan are expected during the upcoming year, Services Companymay make changes at any time.

 

*Retirementand Savings Plan*

 

Services Companyalso sponsors a retirement and savings plan (the “Retirement Plan”) throughwhich it provides retirement benefits for substantially all of its regularfull-time employees, except those covered by certain labor contracts.  The Retirement Plan consists of twocomponents.  Under the first component,Services Company contributes 5% of each eligible employee’s covered salary toan employee’s separate account maintained in the Retirement Plan.  Under the second component, for all employeesnot participating in the ESOP, Services Company makes a matching contributioninto the employee’s separate account for 100% of an employee’s contribution tothe Retirement Plan up to 6% of an employee’s eligible covered salary.  For Services Company employees whoparticipate in the ESOP, Services Company does not make a matchingcontribution.  Total costs of theRetirement Plan were approximately $5.6 million in 2008, $4.6 million in 2007and $4.3 million in 2006.

 

Services Companyalso participates in a multi-employer retirement income plan that providesbenefits to employees covered by certain labor contracts. Pension expense forthe plan was $0.2 million for 2008, 2007 and 2006.

 

In addition,Services Company contributes to a multi-employer postretirement benefit planthat provides health care and life insurance benefits to employees covered bycertain labor contracts. The cost of providing these benefits was approximately$0.2 million in 2008, $0.2 million in 2007, and $0.1 million for 2006.

 

**18.      UNIT COMPENSATION PLANS**

 

*BGH’s Management Units*

 

Priorto BGH’s initial public offering of its Common Units (the “IPO”) on August 9,2006, MainLine Management was owned by MainLine L.P., a privately held limitedpartnership. In May 2004, MainLine L.P. instituted a Unit CompensationPlan and issued 16,216,668 Class B Units to certain members of seniormanagement.

 

Coincidentwith BGH’s IPO, the equity interests of MainLine L.P. were exchanged for theequity interests of BGH.  The Class BUnits of MainLine L.P. were exchanged for 1,362,000 Management Units ofBGH.  Pursuant to the terms of theexchange, 70%, or 953,400 Management Units, became vested immediately upontheir exchange, and the remaining 30%, or 408,600 of the Management Units, wereexpected to vest over a three year period. However, coincident with the sale ofCarlyle/Riverstone BPL Holdings II, L.P’s interests in BGH in June of2007, all the remaining unvested Management Units immediately vested and wereexpensed.  There are no additionalManagement Units available for issue.

 

Underthe provisions of SFAS No. 123R, BGH recognized deferred compensation in2006 for the Management Units for which both (i) vesting was acceleratedcompared to the MainLine Class B Units, and (ii) were now deemedprobable of vesting compared to BGH’s previous estimates.  BGH determined that these criteria applied to272,400 Management Units, the market value of which was $17.00 per unit orapproximately $4.6 million in total at August 9, 2006.

 

Ofthe total equity compensation charge of$4.6 million, BGH expensed approximately $3.5 million in 2006.  The balance of $1.1 million was recorded ascompensation expense in the first half of 2007.

 

*BGH GP’sOverride Units*

 

Effective on June 25, 2007,**BGH GP instituted an equityincentive plan for certain members of senior management of BGH GP and BGH.  This equity incentive plan includes bothtime-based and performance-based participation in the equity of BGH GP (but notin BGH) referred to as “Override Units”. BGH determined that, under the requirements of SFAS 123R,  BGH is required to reflect, as compensationexpense and a corresponding contribution to common Unitholders’ equity, the fairvalue of this compensation 

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

measured under the provisions of SFAS 123R.  Compensation expense recorded with respect tothe Override Units for the period June 25 through December 31, 2007was $0.6 million, and for the full-year 2008 was $1.4 million.  BGH is not the sponsor of this plan and hasno liabilities with respect to it.

 

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

 

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

 

The investment return is calculatedgenerally as the sum of all the distributions that ArcLight and Kelso havereceived from BGH GP prior to and through the exit event, divided by the totalamount of capital contributions to BGH GP that ArcLight and Kelso have madeprior to the exit event.

 

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

 

Thefollowing is a summary of the activity of the Override Units as of December 31,2008 (in thousands except per unit amounts):

** **
| ** **                             | ** ** | **Number of Override Units** | ** ** | **Total  Number of**   | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Value A Units**                 | ** ** | **Value B Units** | ** ** | **Operating  Units** | ** ** | **Units  Awarded** | ** ** |
| Granted  June 25, 2007            |       | 1,530                                       |       | 1,530                       |       | 1,530 |   | 4,590 |   |
| Forfeited                              |       | (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 |   |
| Outstanding at  December 31, 2008 |       | 1,763                                       |       | 1,763                       |       | 1,763 |   | 5,289 |   |

 
| ** **                                                            | ** ** | **Compensation costs for Override Units** | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **Value A Units**                                   | ** ** | **Value B Units** | ** ** | **Operating  Units** | ** ** | **Totals** | ** ** |
| Total fair value  of outstanding override units                       |       | $                                                             | 3,664      |                        | $          | 2,163 |   | $ | 5,861 |   | $ | 11,688 |   |
| Less: Expense  recorded from plan inception to December 31, 2008 |       | —                                                        |       | —                      |       | 2,012 |   | 2,012 |   |
| Potential future  compensation costs at December 31, 2008        |       | $                                                             | 3,664      |                        | $          | 2,163 |   | $ | 3,849 |   | $ | 9,676 |   |

 
| ** **                                         | ** ** | **Value A** | ** ** | **Value B** | ** ** | **Operating** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------------|------------|------------------|------------|---------------|------------|------------|------------|
| 2008 Weighted  average fair value per unit granted |       | $                | 2.11       |             | $          | 1.43          |       | $          | 2.98       |   |   |   |
| 2007 Weighted  average fair value per unit granted |       | $                | 2.07       |             | $          | 1.17          |       | $          | 3.42       |   |   |   |

 

Compensation expense related to the Operating Units ofapproximately $1.3 million per year will be recognized in 2009, 2010 and2011.  The vesting of the Value A andValue B Units is contingent on a performance condition, namely the completionof the exit event as discussed above. Accordingly no compensation expense for the Value A and Value B Unitswill be recorded until an exit event occurs.

 

The Override Units were valued using the Monte Carlo simulation method thatincorporated the market-based vesting condition into the grant date fair valueof the unit awards as required by SFAS 123R. The Monte Carlo simulation is a procedure to estimate the future equityvalue from the time of the valuation dates to the exit event.  The following assumptions were used for 2008and 2007:

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 
| ** **              | ** ** | **2008**        | ** ** | **2007**        | ** ** |
|-------------------------|------------|-----------------|------------|-----------------|------------|
| Current equity value    |       | $439.02 million |       | $439.00 million |       |
| Expected life in years  |       | 4.8             |       | 5.5             |       |
| Risk-free interest rate |       | 3.0%            |       | 4.9%            |       |
| Volatility              |       | 35%             |       | 26%             |       |
| Dividends               |       | $0.00           |       | $0.00           |       |

 

*Buckeye’sUnit Option and Distribution Equivalent Plan*

 

Buckeye sponsors aUnit Option and Distribution Equivalent Plan (the “Option Plan”) pursuant towhich it grants options to purchase LP Units at 100% of the market price of theLP Units on the date of grant to key employees of Services Company.  The options vest three years from the date ofgrant and generally expire ten years from the date of grant. As options areexercised, Buckeye issues new LP Units. Buckeye has not historicallyrepurchased, and does not expect to repurchase in 2009, any of its LP Units.

 

Effective January 1,2006, Buckeye adopted the fair value measurement and recognition provisions ofSFAS 123R, using the modified prospective basis transition method. Under thismethod, unit-based compensation expense recognized for the year ended December 31,2008 includes: (a) compensation expense for all grants made prior to, butnot yet vested as of, January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123, and (b) compensationexpense for all grants made on or after January 1, 2006, based on thegrant date fair value estimated using the Black-Scholes option pricingmodel.  Buckeye recognizes compensationexpense for awards granted on or after January 1, 2006, on a straight-linebasis over the requisite service period.

 

For the retirementeligibility provisions of the Option Plan, Buckeye follows the non-substantivevesting method and recognizes compensation expense immediately for optionsgranted to retirement-eligible employees, or over the period from the grantdate to the date retirement eligibility is achieved. Unit-based compensationexpense recognized in the consolidated statements of income for the year ended December 31,2008 is based upon options ultimately expected to vest. In accordance with SFAS123R, forfeitures have been estimated at the time of grant and will be revised,if necessary, in subsequent periods if actual forfeitures differ from thoseestimates. Forfeitures were estimated based upon historical experience.

 

Theimpact of Buckeye’s Option Plan is immaterial to BGH’s consolidated financialstatements.

 

**19.      EMPLOYEE STOCK OWNERSHIP PLAN**

 

ServicesCompany provides the ESOP to the majority of its employees hired before September 16,2004. Effective September 16, 2004, new Services Company employees as wellas certain employees covered by a union multiemployer pension plan do notparticipate in the ESOP. The ESOP owns all of the outstanding common stock ofServices Company.

 

ServicesCompany stock is released to employee accounts in the proportion that currentpayments of principal and interest on the ESOP Notes bear to the total of allprincipal and interest payments due under the ESOP Notes. Individual employeesare allocated shares based upon the ratio of their eligible compensation tototal eligible compensation. Eligible compensation generally includes basesalary, overtime payments and certain bonuses. Total ESOP related costs charged to earnings were $3.4 million, $5.8million and $5.6 million for the years ended December 31, 2008, 2007 and2006.

 

**20.      LEASES AND COMMITMENTS**

 

*Leases – WhereBuckeye is Lessee*

 

Buckeye leasescertain land and rights-of-way in connection with the operations of itspipelines. Minimum future lease payments for these leases as of December 31,2008 are approximately $5.8 million for each of the next five years.Substantially all of these lease payments can be canceled at any time shouldthey not be required for operations.

 

Buckeye leasescertain other land and space in office buildings.  Future minimum lease payments under thesenon-cancelable operating leases at December 31, 2008 are approximately$1.5 million for 2009, $1.5 million for 2010, $1.5 million for 2011, $1.4million for 2012, $1.4 million for 2013, and $12.3 million in the aggregatethereafter.

 

Buckeye has leasesfor subsurface underground gas storage rights and surface rights in connectionwith its operations in the Natural Gas Storage segment. These leases may becancelled by Buckeye if the storage reservoir is not used for undergroundstorage of natural gas or the removal or injection thereof for a continuous periodof two consecutive years.  Lease paymentsfor the year ended December 31, 2008 were $2.7 million.  Lease expense associated with these leases isbeing recognized on a straight-line basis over 44 years. For the yearended December 31, 2008, the Natural Gas Storage segment’s lease expensewas approximately $7.1 million, 

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

including$4.6 million recorded as an increase in Buckeye’s deferred leaseliability.  Buckeye GP estimates that thedeferred lease liability will continue to increase through 2032, at which timeBuckeye’s deferred lease liability is estimated to be approximately$64.7 million. Buckeye’s deferred lease liability will then be reducedover the remaining 19 years of the lease, since the expected annual leasepayments will exceed the amount of lease expense.

 

Future minimumlease payments for subsurface underground gas storage and mineral rights byyear as of December 31, 2008, are as follows:

 
| **Years Ending**   | ** ** |
|-------------------------|------------|
| **December 31,**   | ** ** |
| **(In thousands)** | ** ** |
| 2009                    |       | $ | 2,677 |   |
| 2010                    |       | 2,943 |   |
| 2011                    |       | 3,057 |   |
| 2012                    |       | 3,281 |   |
| 2013                    |       | 3,408 |   |
| Thereafter              |       | 298,848 |   |
| Total                   |       | $ | 314,214 |   |

 

Rent expense underoperating leases was $20.2 million, $11.7 million and $10.3 million for 2008,2007 and 2006, respectively.

 

*Leases –Where Buckeye is Lessor*

 

Buckeye hasentered into capacity leases with remaining terms from 6 to 14 years that areaccounted for as operating leases.  Allof the agreements provide for negotiated extensions.  Future minimum lease payments to be receivedunder such operating leasing arrangements as of December 31, 2008 are $8.8million for the next five years and $55.3 million in the aggregate thereafter.

 

**21.      RELATED PARTY TRANSACTIONS**

 

Buckeyepays MainLine Management a senior administrative charge for certain managementfunctions performed by affiliates of Buckeye GP. Buckeye incurred anadministrative charge of $1.9 million for the years ended December 31, 2008, 2007 and 2006. In connection with the Lodi Gas acquisition, MainLine Management hasforegone payment of the senior administrative charge effective June 25,2007 through March 31, 2009.  Thisforegone payment has been reflected as a reduction in the purchase price of theLodi Gas acquisition.  The independentdirectors of Buckeye GP approve the amount of the senior administrative chargeon an annual basis.

 

Two of MainLine Managementcurrent directors, Robb E. Turner and John F. Erhard, had an indirect ownershipinterest in affiliates of ArcLight, the sellers of Lodi Gas.  As a result of their indirect ownershipinterests in those ArcLight affiliates, Messrs. Turner and Erhard receivedapproximately $7.9 million and $16.7 thousand, respectively, from the sale ofLodi Gas to Buckeye.

 

ServicesCompany and Buckeye are considered related parties with respect to BGH. Asdiscussed in Note 2, the condensed consolidated financial statements for BGHinclude the accounts of Services Company and Buckeye on a consolidated basis,and all intercompany transactions have been eliminated.

 

*Relationshipswith Lehman Brothers*

 

On September 15,2008, it was reported that Lehman Brothers filed for protection under Chapter11 of the federal Bankruptcy Code in the United States Bankruptcy Court in theSouthern District of New York.  Anaffiliate of Lehman Brothers owned a direct interest in BGH GP, affiliates ofLehman Brothers had provided investment and commercial banking and financialadvisory services to Buckeye, an affiliate of Lehman Brothers was a lenderunder the Credit Facility, and an affiliate of Lehman Brothers was a customerof Lodi Gas.  BGH has considered itsrelationships with Lehman Brothers and its affiliates, and for the reasons setforth below, believes the Lehman Brothers bankruptcy and the possible resultingeffects on affiliates of Lehman Brothers will not have a direct materialadverse effect on BGH. The BGH GP interest owned by an affiliate of LehmanBrothers was a passive investment that did not entitle its holder to anymanagement or other control rights with respect to BGH GP, MainLine Management,BGH, Buckeye GP, or Buckeye.  Consequently,BGH believes that if the interest in BGH GP is or has been transferred inconnection with Lehman Brothers’ bankruptcy, such transfer will not adverselyimpact BGH.  An affiliate of Barclays PLChas acquired and is operating the investment banking business and certainfinancial services businesses of Lehman Brothers and its affiliates in NorthAmerica and, as a result, management does not expect any disruption withrespect to these services that Lehman Brothers and its affiliates have providedto Buckeye.  Lehman Brothers, FSB, anaffiliate of Lehman Brothers, has committed, as a lender, 3.3%, or $20.0million, of Buckeye’s $600.0 million borrowing capacity under Buckeye’s CreditFacility, but recently has not honored that commitment.  BGH does not believe that the reduction incapacity under Buckeye’s Credit Facility resulting from the unavailability of 

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

Lehman Brothers, FSB’scommitment will have any impact on BGH’s ability to meet its liquidityneeds.  Finally, in October 2008,Lehman Brothers sold the Lehman Brothers affiliate that is a customer of LodiGas to a third party not affiliated with Lehman Brothers.

 

**22.      EARNINGS PER UNIT**

 

Theearnings per unit calculations for the years ended December 31, 2008,2007, and 2006, reflect only the results since the closing of BGH’s IPO on August 9,2006.  Accordingly, the results from January 1through August 8, 2006 have been excluded from the calculation.  The following table presents the number ofunits used in computing the income per unit and the weighted average number ofunits outstanding:

 
| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| Basic:                                          |       |                    |       |   |   |   |   |
| Weighted average  common units outstanding      |       | 27,770                  |       | 27,424 |   | 26,938 |   |
| Weighted average  management units outstanding  |       | 530                     |       | 718 |   | 953 |   |
| Units for basic                                 |       | 28,300                  |       | 28,142 |   | 27,891 |   |
|                                            |       |                    |       |   |   |   |   |
| Diluted:                                        |       |                    |       |   |   |   |   |
| Units used for  basic calculation               |       | 28,300                  |       | 28,142 |   | 27,891 |   |
| Dilutive effect  of additional management units |       | —                  |       | 158 |   | 409 |   |
| Units for  diluted                              |       | 28,300                  |       | 28,300 |   | 28,300 |   |

 

**23.      CASH DISTRIBUTIONS**

 

BGHgenerally makes quarterly cash distributions of substantially all of itsavailable cash, generally defined as consolidated cash receipts lessconsolidated cash expenditures and such retentions for working capital,anticipated cash expenditures and contingencies as MainLine Management deemsappropriate.   Distributions for theyears ended December 31, 2008, 2007, and 2006 amounted to $34.4 million,$27.7 million, and $3.5 million, respectively. In 2006, BGH also used its available cash remaining after payment of thedistribution to make distributions to its pre-IPO equity owners, and to paycash bonuses of approximately $2.0 million to its named executive officers andcertain other employees of Services Company.

 
| **Record Date**  | ** ** | **Payment Date**  | ** ** | **Amount Per Common Unit** | ** ** |
|-----------------------|------------|------------------------|------------|-------------------------------------------|------------|
| November 6, 2006 |       | November 30, 2006 |       | $                                         | 0.125      |   |
| ** **            | ** ** | ** **             | ** ** | ** **                                | ** ** |
| February 6, 2007 |       | February 28, 2007 |       | 0.225                                     |       |
| May 7, 2007      |       | May 31, 2007      |       | 0.240                                     |       |
| August 6, 2007   |       | August 31, 2007   |       | 0.250                                     |       |
| November 5, 2007 |       | November 30, 2007 |       | 0.265                                     |       |
|                  |       |                   |       |                                      |       |
| February 5, 2008 |       | February 29, 2008 |       | 0.285                                     |       |
| May 9, 2008      |       | May 30, 2008      |       | 0.300                                     |       |
| August 8, 2008   |       | August 29, 2008   |       | 0.310                                     |       |
| November 7, 2008 |       | November 28, 2008 |       | 0.320                                     |       |
|                       |            |                        |            |                                           |            |  |

 

On February 2,2009, MainLine Management announced a quarterly distribution of $0.33 perCommon Unit that was paid on February 27, 2009, to Unitholders of recordon February 12, 2009.  Total cashdistributed to Unitholders on February 27, 2009 was approximately $9.3million.

 

**24.      SEGMENT INFORMATION**

 

Basedon the financial information provided to senior management, BGH has determinedthat its operations are appropriately presented in five reportable operatingsegments: Pipeline Operations, Terminalling and Storage, Natural Gas Storage,Energy

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

Services, and OtherOperations. BGH also has certain consolidated-level assets, principallyconsisting of goodwill, which are not allocable to the individual reportingsegments because they are not used by the chief operating decision maker tomake operating decisions or to allocate resources.

 

*PipelineOperations:*

 

The PipelineOperations segment receives refined petroleum products from refineries,connecting pipelines, and bulk and marine terminals and transports thoseproducts to other locations for a fee. This segment owns and operates approximately 5,400 miles of pipelinesystems in 17 states. This segment also has three refined petroleum productsterminals with aggregate storage capacity of approximately 0.5 million barrelsin three states.

 

*Terminallingand Storage:*

 

The Terminallingand Storage segment provides bulk storage and terminal throughputservices.  This segment has 56 productsterminals with aggregate storage capacity of approximately 23.3 million barrelsin ten states.

 

*NaturalGas Storage:*

 

The Natural Gas Storage segment provides natural gas storage servicesthrough a natural gas storage facility in northern California that is owned andoperated by Lodi Gas.  The facilitycurrently provides approximately 33 Bcf of natural gas storage capacity(including capacity provided pursuant to a nearly completed expansion project)and is connected to Pacific Gas and Electric’s intrastate gas pipelines thatservice natural gas demand in the San Francisco and Sacramento areas.

 

The Natural Gas Storage segment’s revenues consist of lease revenuesand hub services revenues.  Lease revenuesconsist of demand charges for the reservation of storage space under firmstorage agreements. The demand charge entitles the customer to a fixed amountof storage space and certain injection and withdrawal rights. Title to thestored gas remains with the customer. Lease revenues are recognized as revenueover the term of the related storage agreement. Hub services revenues consist of a variety of other storage servicesunder interruptible storage agreements. These services principally include parkand loan transactions.  Parks occur whengas from a customer is injected and stored for a specified period. The customerthen has the right to withdraw its stored gas at a future date. Title to thegas remains with the customer.  Parkrevenues are recognized ratably over the term of the agreement.  Loans occur when gas is delivered to acustomer in a specified period. The customer then has the obligation toredeliver gas at a future date. Loan revenues are recognized ratably over theterm of the agreement.

 

The Natural Gas Storage segment does not trade or market natural gas.

 

*EnergyServices:*

 

The EnergyServices segment is a leadingwholesale distributor of refined petroleum products in the northeastern United States. The segment recognizes revenues afterproducts are delivered. The segment’sproducts include gasoline, propane, and petroleum distillates such as heatingoil, diesel fuel, and kerosene.  Thesegment also has five terminals with aggregate storage capacity ofapproximately 1.0 million barrels.  The segment’s customers consist principallyof product wholesalers as well as major commercial users of these products.

 

*OtherOperations:*

 

The OtherOperations segment consists primarily of Buckeye’s contract operation ofapproximately 2,400 miles of third-party pipeline systems, which are ownedprincipally by major oil and chemical companies and are located primarily inTexas and Louisiana.  This segment alsoperforms pipeline construction management services, typically for cost plus afixed fee, for these same customers.  TheOther Operations segment also includes Buckeye’s ownership and operation of anammonia pipeline and its majority ownership of the Sabina Pipeline in Texas.

 

Financialinformation about each segment is presented below. Each segment uses the sameaccounting policies as those used in the preparation of Buckeye’s consolidatedfinancial statements as described in Note 2 hereto. All inter-segment revenues,operating income, and assets have been eliminated.  All periods are presented on a consistentbasis.  All of Buckeye’s operations andassets are conducted and located in the United Sates.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 
| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **(In thousands)**                    | ** ** |
| Revenue:                        |       |                                       |       |   |   |   |   |
| Pipeline  Operations            |       | $                                          | 387,267    |   | $ | 379,345 |   | $ | 350,909 |   |
| Terminalling and  Storage       |       | 119,155                                    |       | 103,782 |   | 81,267 |   |
| Natural Gas  Storage            |       | 61,791                                     |       | — |   | — |   |
| Energy Services                 |       | 1,295,925                                  |       | — |   | — |   |
| Other Operations                |       | 43,498                                     |       | 36,220 |   | 29,584 |   |
| Intersegment                    |       | (10,984                                    | )          | — |   | — |   |
| Total                           |       | $                                          | 1,896,652  |   | $ | 519,347 |   | $ | 461,760 |   |
|                            |       |                                       |       |   |   |   |   |
| Operating  income:              |       |                                       |       |   |   |   |   |
| Pipeline  Operations            |       | $                                          | 149,349    |   | $ | 146,878 |   | $ | 133,039 |   |
| Terminalling and  Storage       |       | 52,133                                     |       | 40,581 |   | 25,879 |   |
| Natural Gas  Storage            |       | 32,235                                     |       | — |   | — |   |
| Energy Services                 |       | 5,905                                      |       | — |   | — |   |
| Other Operations                |       | 6,870                                      |       | 7,894 |   | 5,955 |   |
| Total                           |       | $                                          | 246,492    |   | $ | 195,353 |   | $ | 164,873 |   |
|                            |       |                                       |       |   |   |   |   |
| Depreciation and  amortization: |       |                                       |       |   |   |   |   |
| Pipeline  Operations            |       | $                                          | 35,188     |   | $ | 32,996 |   | $ | 32,809 |   |
| Terminalling and  Storage       |       | 6,051                                      |       | 5,610 |   | 5,180 |   |
| Natural Gas  Storage            |       | 4,599                                      |       | — |   | — |   |
| Energy Services                 |       | 3,386                                      |       | — |   | — |   |
| Other Operations                |       | 1,610                                      |       | 1,630 |   | 1,640 |   |
| Total                           |       | $                                          | 50,834     |   | $ | 40,236 |   | $ | 39,629 |   |
|                            |       |                                       |       |   |   |   |   |
| Capital  expenditures:          |       |                                       |       |   |   |   |   |
| Pipeline  Operations            |       | $                                          | 38,182     |   | $ | 47,563 |   | $ | 79,521 |   |
| Terminalling and  Storage       |       | 30,245                                     |       | 18,341 |   | 9,852 |   |
| Natural Gas Storage             |       | 49,514                                     |       | — |   | — |   |
| Energy Services                 |       | 4,191                                      |       | — |   | — |   |
| Other Operations                |       | 297                                        |       | 1,963 |   | 3,301 |   |
| Consolidating-level             |       | —                                     |       | — |   | 143 |   |
| Total                           |       | $                                          | 122,429    |   | $ | 67,867 |   | $ | 92,817 |   |
|                            |       |                                       |       |   |   |   |   |
| Acquisitions:                   |       |                                       |       |   |   |   |   |
| Pipeline  Operations            |       | $                                          | 19,169     |   | $ | 1,933 |   | $ | 79,826 |   |
| Terminalling and  Storage       |       | 66,242                                     |       | 38,793 |   | 14,427 |   |
| Natural Gas  Storage            |       | 438,806                                    |       | — |   | — |   |
| Energy Services                 |       | 143,306                                    |       | — |   | — |   |
| Other Operations                |       | —                                     |       | — |   | — |   |
| Total                           |       | $                                          | 667,523    |   | $ | 40,726 |   | $ | 94,253 |   |
|                            |       |                                       |       |   |   |   |   |
| ** **                      |       | **December 31,**                      |       |   |   |
| ** **                      | ** ** | **2008**                                   | ** ** | **2007** |   |   |   |
| ** **                      |       | **(In  thousands)**                        |       |   |   |
| Assets:                         |       |                                       |       |   |   |   |   |
| Pipeline  Operations*           |       | $                                          | 1,630,050  |   | $ | 1,673,744 |   |   |   |
| Terminalling and  Storage       |       | 473,806                                    |       | 385,446 |   |   |   |
| Natural Gas  Storage            |       | 503,278                                    |       | — |   |   |   |
| Energy Services                 |       | 333,967                                    |       | — |   |   |   |
| Other Operations                |       | 93,309                                     |       | 74,462 |   |   |   |
| Consolidating-level             |       | 228,687                                    |       | 220,674 |   |   |   |
| Total                           |       | $                                          | 3,263,097  |   | $ | 2,354,326 |   |   |   |

 

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* All equity investmentsshown in Note 8 are included in the assets of Pipeline Operations.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

 

**25.****                  QUARTERLYFINANCIAL DATA (UNAUDITED)**

 

Summarizedquarterly financial data for 2008 and 2007 is set forth below. Quarterlyresults were influenced by seasonal and other factors inherent in BGH’sbusiness.

 
| ** **                                   | ** ** | **First Quarter**                                               | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                                             | ** ** | **2007**                | ** ** | **2008**               | ** ** | **2007**                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **(In thousands- except per unit amounts)** | ** ** |
| Revenue                                      |       | $                                                                    | 380,275    |                    | $          | 124,944                |       | $                       | 492,548    |                                       | $          | 124,951 |   | $ | 496,170 |   | $ | 125,653 |   | $ | 527,659 |   | $ | 143,799 |   | $ | 1,896,652 |   | $ | 519,347 |   |
| Operating income                             |       | 56,094                                                               |       | 48,634                  |       | 56,986                 |       | 44,214                  |       | 63,251                                     |       | 46,222 |   | 70,161 |   | 56,283 |   | 246,492 |   | 195,353 |   |
| Net income                                   |       | 5,849                                                                |       | 5,939                   |       | 5,317                  |       | 4,131                   |       | 7,234                                      |       | 5,078 |   | 8,077 |   | 7,773 |   | 26,477 |   | 22,921 |   |
| Earnings per  limited partner unit- basic:   |       | $                                                                    | 0.21       |                    | $          | 0.21                   |       | $                       | 0.19       |                                       | $          | 0.15 |   | $ | 0.26 |   | $ | 0.18 |   | $ | 0.29 |   | $ | 0.27 |   | $ | 0.94 |   | $ | 0.81 |   |
| Earnings per  limited partner unit- diluted: |       | $                                                                    | 0.21       |                    | $          | 0.21                   |       | $                       | 0.19       |                                       | $          | 0.15 |   | $ | 0.26 |   | $ | 0.18 |   | $ | 0.29 |   | $ | 0.27 |   | $ | 0.94 |   | $ | 0.81 |   |

 

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**Item 9.****           *****Changes in and Disagreements with Accountants onAccounting and Financial Disclosure***

 

None.

 

**Item 9A.****        *****Controls and Procedures***

 

(a)       Evaluation of Disclosure Controls and Procedures.

 

Themanagement of MainLine Management, with the participation of its ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofits disclosure controls and procedures for BGH as of the end of the period coveredby this report.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat MainLine Management’s disclosure controls and procedures as of the end ofthe period covered by this report are designed and functioning effectively toprovide reasonable assurance that the information required to be disclosed byBGH in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (ii) accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absoluteassurance, however, that the objectives of the controls system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected.

 

(b)       Management’s Report on InternalControl Over Financial Reporting.

 

Management’sreport on internal control over financial reporting is set forth in Item 8 ofthis annual report on Form 10-K and is incorporated by reference herein.

 

(c)       Change in Internal Control OverFinancial Reporting.

 

No change in MainLine Management’s internal control overfinancial reporting for BGH occurred during BGH’s most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect,MainLine Management’s internal control over financial reporting.

 

**Item 9B.*****        ******OtherInformation***

 

None.

 

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##### **PART III**

##### ** **

**Item 10.****    *****Directors, Executive Officers and Corporate Governance***

 

BGH does not havedirectors or officers. The executive officers and directors of MainLineManagement and Services Company perform all management functions for BGH.  The directors of MainLine Management areappointed by BGH GP, as the sole member of MainLine Management.  Officers of MainLine Management are electedby the Board of Directors of MainLine Management.  See “Certain Relationships and RelatedTransactions.”

 

**Directors of MainLine Management**

 

Set forth below iscertain information concerning the directors of MainLine Management.

 
| **Name, Age and Present  Position with General Partner** | ** ** | **Business Experience During Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Forrest E. Wylie, 45*Chairman of the Board, Chief Executive Officer  and Director**    |       | Mr. Wylie was  named Chairman of the Board, Chief Executive Officer and a director of  MainLine Management on June 25, 2007. Mr. Wylie was also named  Chairman of the Board, Chief Executive Officer and a director of Buckeye GP  on June 25, 2007. Mr. Wylie was also the President of MainLine  Management and Buckeye GP from June 25, 2007 until he resigned, solely  from such positions, on October 25, 2007. Prior to his appointment, he  served as Vice Chairman of Pacific Energy Management LLC, an entity  affiliated with Pacific Energy Partners, L.P., a refined product and crude  oil pipeline and terminal partnership, from March 2005 until Pacific  Energy Partners, L.P. merged with Plains All American, L.P. in  November 2006. Mr. Wylie was President and Chief Financial Officer  of NuCoastal Corporation, a midstream energy company, from May 2002  until February 2005. Mr. Wylie currently serves on the Board of  Directors of Eagle Bulk Shipping Inc., Coastal Energy Company and Cross Inc.,  a private company. |
|                                                                                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Christopher L. Collins,  35*Director*                                                  |       | Mr. Collins became  a director of MainLine Management on June 25, 2007. He has been a  transaction professional with Kelso & Company since 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| John F. Erhard, 33*Director*                                                           |       | Mr. Erhard became  a director of MainLine Management on March 20, 2008. He has served  ArcLight Capital Partners, LLC since 2001, initially as an associate and  recently as a principal. He also serves as a director of Buckeye GP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Joseph A.  LaSala, Jr., 54*Director**۷                                      |       | Mr. LaSala became  a director of MainLine Management on July 26, 2007. Prior to such date,  he was a director of Buckeye GP. Since January 2007, he has served as  Senior Executive Vice President, General Counsel and Secretary of Discovery  Communications, LLC. He previously served as Vice President, General Counsel  and Secretary of Novell, Inc. since July 11, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Frank J. Loverro, 39*Director*                                                         |       | Mr. Loverro became  a director of MainLine Management on June 25, 2007. He has been a  principal with Kelso & Company since 1993. Mr. Loverro also  serves as a director of RHI Entertainment, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Oliver G. “Rick”  Richard, III, 56                                      |       | Mr. Richard became  a director of MainLine                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

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| *Director*۷                      |   | Management on  April 29, 2008. He is currently the owner and president of Empire of the  Seed LLC, a private consulting firm in the energy and management industries,  as well as the private investments industry, and is Chairman of  CleanfuelsUSA, an alternative vehicular fuel company. Mr. Richard served  as Chairman, President and Chief Executive Officer of Columbia Energy Group  (“Columbia Energy”) from April 1995 until Columbia Energy was acquired  by NiSource Inc. in November 2000. Mr. Richard was appointed by  President Reagan and confirmed by the United States Senate to the Federal  Energy Regulatory Commission, serving from 1982 to 1985. Mr. Richard  also serves as a director of Buckeye GP. |
|----------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Frank S. Sowinski, 52*Director*۷ |   | Mr. Sowinski  became a director of MainLine Management on August 4, 2006. Prior to  such date, he was a director of Buckeye GP. Since January 2006, he has  been a Management Affiliate of MidOcean Partners, a private equity investor.  He served as Executive Vice President of Liz Claiborne, Inc. from  January 2004 until October 2004. Mr. Sowinski served as  Executive Vice President and Chief Financial Officer of PWC Consulting, a  systems integrator company, from May 2002 to October 2002.                                                                                                                                                                                                                  |
|                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Robb E. Turner, 46*Director*           |   | Mr. Turner became  a director of MainLine Management on June 25, 2007. He also serves as a  director of Buckeye GP. Mr. Turner co-founded ArcLight Capital Partners,  LLC in 2000 and has been a principal since its inception. He has seventeen  years of energy finance, corporate finance, and public and private equity  investment experience.                                                                                                                                                                                                                                                                                                                                                                                                        |

 

----

* Also a director ofServices Company.

۷**Is an independent director of MainLine Management andis not otherwise affiliated with MainLine Management or its parent companies.

 

**Executive Officers of BGH**

 

Set forth below is certain information concerning the executiveofficers of BGH other than Mr. Wylie.

 
| **Name, Age and Present Position**      | ** ** | **Business Experience During Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Robert A. Malecky, 45*Vice President, Marketing*            |       | Mr. Malecky was  named Vice President, Marketing of Services Company on July 1, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Khalid A. Muslih, 37*Vice President, Corporate Development* |       | Mr. Muslih was  named Vice President, Corporate Development of Services Company on  June 25, 2007. Prior to his election, Mr. Muslih served as Vice  President, Corporate Development of Pacific Energy Management LLC, an entity  affiliated with Pacific Energy Partners, L.P., from March 2005 until  Pacific Energy Partners, L.P. merged with Plains All American, L.P. in  November 2006. Mr. Muslih served as Commercial Officer,  Mergers & Acquisitions of NuCoastal Corporation from July 2002  until March 2005. |

 

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| Vance E. Powers, 52*Vice President, Finance and Controller*                      |   | Mr. Powers has  served as Vice President, Finance and Controller for Services Company since  November 2003. Mr. Powers was the Acting Chief Financial Officer of  MainLine Management from July 27, 2007 until November 10, 2008. He  also served in the same capacity for Buckeye GP during such time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| William H.  Schmidt, Jr., 36*Vice President, General Counsel and Secretary* |   | Mr. Schmidt became  Vice President, General Counsel and Secretary of MainLine Management on  November 4, 2007 and has served Buckeye GP in the same capacity since  such time as well. Prior to that date, Mr. Schmidt had served as Vice  President and General Counsel of Services Company since February 1, 2007  and as Associate General Counsel of Services Company since September 13,  2004. Mr. Schmidt practiced law at Chadbourne & Parke LLP, a  New York-based law firm, before joining Buckeye.                                                                                                                                                                                                                                                           |
|                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Clark C. Smith, 54*President and**Chief  Operating Officer*                      |   | Mr. Smith became  President and Chief Operating Officer of MainLine Management on  February 17, 2009 and has served Buckeye GP in the same capacity since  such time as well. From June 2004 through June 2007, Mr. Smith  served as Managing Director of Engage Investments, L.P., a private company  established to provide consulting services to, and to make equity investments  in, energy-related businesses. Mr. Smith was Executive Vice President of  El Paso Corporation and President of El Paso Merchant Energy Group, a  division of El Paso Corporation, from August 2000 until May 2003.  Mr. Smith served on the Board of Directors of Buckeye GP from  October 1, 2007 through February 17, 2009.                                     |
|                                                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Keith E. St.Clair, 52*Senior Vice President and Chief Financial Officer*         |   | Mr. St.Clair  became Senior Vice President and Chief Financial Officer MainLine Management  on November 10, 2008 and has served Buckeye GP in the same capacity  since such time as well. Prior to his appointment, he served as Executive Vice  President and Chief Financial Officer of Magnum Coal Company, one of the  largest coal producers in Central Appalachia, from January 2006 until  its sale to Patriot Coal Corporation in July 2008. Mr. St.Clair was  Senior Vice President and Chief Financial Officer of Trade-Ranger, Inc, a  global business-to-business marketplace for electronic procurement and supply  chain management for the oil and gas industry from March 2002 until its  sale in mid-2005. Mr.  St.Clair is a certified public accountant. |

 

**Section 16(a)   Beneficial Ownership Reporting Compliance**

 

Pursuant to Section 16(a) ofthe Exchange Act, BGH’s officers and directors, and persons beneficially owningmore than 10% of BGH’s Common Units, are required to file with the Commissionreports of their initial ownership and changes in ownership of BGH’s CommonUnits.  BGH’s officers and directors, andpersons beneficially owning more than 10% of BGH’s Common Units are alsorequired by SEC regulations to furnish BGH with copies of all Section 16(a) formsthey file.  Based solely on its review of Forms 3, 4 and 5 furnished to itand written representations from certain persons that no other reports wererequired for those persons, 

 

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MainLine Managementbelieves that for 2008, all officers and directors, and persons beneficiallyowning more than 10% of BGH’s Common Units, who were required to file reportsunder Section 16(a) complied with such requirements.

 

**Committees of the Board of Directors**

 

***AuditCommittee***

 

MainLineManagement has an Audit Committee (the “Audit Committee”) composed of Frank S.Sowinski (Chairman), Joseph A. LaSala, Jr., and Oliver G. “Rick” Richard, III.  The members of the Audit Committee areindependent, non-employee directors of MainLine Management and are notofficers, directors or otherwise affiliated with MainLine Management or itsparent or subsidiary companies, except that Mr. Richard serves on theBoard of Directors and the Audit Committee of Buckeye GP.  MainLine Management’s Board of Directors hasdetermined that no Audit Committee member has a material relationship withMainLine Management.  The Board ofDirectors has also determined that Mr. Sowinski qualifies as an AuditCommittee financial expert as defined in Item 407(d) (5) ofRegulation S-K.

 

The AuditCommittee provides independent oversight with respect to our internal controls,accounting policies, financial reporting, internal audit function andindependent auditors.  The AuditCommittee also reviews the quality, independence and objectivity of theindependent and internal auditors.  TheAudit Committee has sole authority as to the retention, evaluation,compensation and oversight of the work of the independent auditors.  The independent auditors report directly tothe Audit Committee.  The Audit Committeealso has sole authority to approve all audit and non-audit services provided bythe independent auditors.  The charter ofthe Audit Committee is available at BGH’s website at *www.buckeyegp.com* by browsing to the “Corporate Governance”subsection of the “Investor Center” menu.

 

The AuditCommittee may act as a conflicts committee or a special committee at therequest of MainLine Management to determine matters that may present a conflictof interest between MainLine Management or its parent companies and BGH.

 

The AuditCommittee has established procedures for the receipt, retention and treatmentof complaints received regarding accounting, internal accounting controls orauditing matters and the confidential, anonymous submission by employees ofconcerns regarding questionable accounting or auditing matters.  These procedures are part of the BusinessCode of Conduct and are available at BGH’s website at *www.buckeyegp.com* by browsing to the “CorporateGovernance” subsection of the “Investor Center” menu.

 

***Compensation Committee,******Compensation CommitteeInterlocks and Insider Participation***

 

As a limitedpartnership that is listed on the New York Stock Exchange (“NYSE”), BGH is notrequired to have a compensation committee. However, because we were responsible for the payment of all compensationto our and Buckeye’s four most highly compensated named executive officers (See“Our Responsibility for Compensation” below), our Board of Directors concludedthat a compensation committee was appropriate, and the Compensation Committeewas formed in January 2007. The Compensation Committee currently iscomposed of Frank J. Loverro (Chairman), Oliver G. “Rick” Richard, III andFrank S. Sowinski. Messrs. Richard and Sowinski are independent directors(as that term is defined in the applicable NYSE rules and Rule 10A-3of the Exchange Act of 1934, as amended (“the Exchange Act”)) and non-employeedirectors (as that term is defined in Rule 16b-3 of the ExchangeAct).  Mr. Loverro is anon-independent director who is affiliated with BGH GP.

 

In 2008, theCompensation Committee determined and allocated compensation among BGH’s seniormanagement, including four of its named executive officers.  Among other things, in 2008 the CompensationCommittee was responsible for:

 

·      Approving actual salaries and incentiveawards for named executive officers;

 

·      Reviewing and approving the annualcompensation objectives for senior management;

 

·      Evaluating the performance of the namedexecutive officers in pursuing the goals and objectives approved by theCompensation Committee, as well as the goals and objectives set forth inBuckeye’s annual budget;

 

·      Reviewing and approving with the ChiefExecutive Officer or President general compensation guidelines for seniormanagement other than the named executive officers, including proposed salaryranges and merit increase guidelines; and

 

·      Overseeing any incentive compensationplans for senior management.

 

The CompensationCommittee meets several times throughout the year to act on theresponsibilities above. The Compensation Committee may also act by writtenconsent from time to time in response to events occurring between scheduledmeetings. The Compensation Committee may seek guidance or input from the ChiefExecutive Officer when making determinations about the compensation of thenamed executive officers other than the Chief Executive. The Chief ExecutiveOfficer and the President also may provide recommendations to the CompensationCommittee concerning the high-level allocation of incentive award pools amongthe 

 

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senior management otherthan named executive officers. The Chief Executive Officer and the Presidentalso may determine the salaries and amounts of individual incentive awards tosenior management members other than named executive officers. The charter ofthe Compensation Committee is available at BGH’s website at *www.buckeyegp.com* by browsing to the “Investor Center,Corporate Governance” menu.

 

In its two-yearexistence, the Compensation Committee has not routinely engaged compensationconsultants or relied on reports of such consultants in carrying out itsduties. The Compensation Committee of Buckeye GP did retain a compensationconsultant, Mercer, LLC, in 2008, however, to evaluate all aspects of ourexecutive compensation program in comparison to the market. See the discussionbelow under the heading “Compensation Discussion and Analysis — CompensationRestructuring” for more information.

 

Although Buckeyeis also an NYSE-listed limited partnership and is likewise not required to havea Compensation Committee, in order to conform to best governance procedures,the Board of Directors of its general partner formed a Compensation Committeein 2007. The committee is composed of three directors who are independent (asthat term is defined in the applicable NYSE rules and Rule 10A-3 ofthe Exchange Act) and non-employee directors (as that term is defined in Rule 16b-3of the Exchange Act), and two directors who are not independent. Theindependent directors are Oliver G. “Rick” Richard, III (Chairman), C.Scott Hobbs and Mark C. McKinley.  Thenon-independent directors are Michael B. Goldberg and Robb E. Turner, who areaffiliated with BGH GP.  In 2008, Mr. ClarkC. Smith served on the Board of Directors and on the Compensation Committee ofBuckeye GP.

 

***CorporateGovernance Matters***

 

BGH has adopted aCode of Ethics for Directors, Executive Officers and Senior Financial Employeesthat applies to, among others, the Chairman, President, Chief Financial Officerand Controller of MainLine Management, as required by Section 406 of theSarbanes Oxley Act of 2002.  Furthermore,BGH has adopted Corporate Governance Guidelines and a charter for its AuditCommittee and Compensation Committee. Each of the foregoing is available on BGH’s website at *www.buckeyegp.com*by browsing to the “Investor Center,Corporate Governance” menu.  BGH willprovide copies, free of charge, of any of the foregoing upon receipt of awritten request. BGH intends to disclose amendments to, or director and executiveofficer waivers from, the Code of Ethics, if any, on its website, or by Form 8-Kto the extent required.

 

You can also find information about BGH at the offices of the NYSE, 20Broad Street, New York, New York 10005 or at the NYSE’s Internet site (*www.nyse.com*). The NYSE requires the chief executive officerof each listed company to certify annually that he is not aware of anyviolation by the company of the NYSE corporate governance listing standards asof the date of the certification, qualifying the certification to the extentnecessary. The Chief Executive Officer of MainLine Management provided suchcertification to the NYSE in 2008 without qualification.  In addition, the certifications of MainLineManagement’s Chief Executive Officer and Chief Financial Officer required by Section 302of the Sarbanes-Oxley Act have been included as exhibits to this report**.**

 

***Communicationwith the Board of Directors***

 

A holder of BGH’sCommon Units or other interested party who wishes to communicate with the non-managementdirectors of MainLine Management may do so by contacting William H. Schmidt, Jr.,Vice President, General Counsel and Secretary, at the address or phone numberappearing on the front page of BGH’s Annual Report on Form 10-K.Communications will be relayed to the intended recipient of the Board ofDirectors except in instances where it is deemed unnecessary or inappropriateto do so pursuant to the procedures established by the Audit Committee. Anycommunications withheld will nonetheless be recorded and available for anydirector who wishes to review them.

 

**Item 11.****        *****Executive Compensation***

 

**Overview**

 

In Items 11 (Executive Compensation), 12 (Security Ownership of CertainBeneficial Owners and Management) and 13 (Certain Relationships and Related Transactions,and Director Independence), when referring to Buckeye GP Holdings L.P., we willuse the terms “BGH” “we,” “us,” “our” and other similar terms.

 

We are managed byour general partner, MainLine Management LLC, which we refer to as MainLineManagement.  Our general partner is 100%owned by BGH GP Holdings, LLC, which we refer to as BGH GP. We are ownedapproximately 62% by BGH GP, approximately 37% by the public, and approximately1% by members of our senior management. BGH GP is primarily owned by affiliates of ArcLight Capital Partners,LLC, Kelso & Company, and certain investment funds; along with certainmembers of our senior management.

 

We own 100% ofBuckeye GP LLC, which is the general partner of Buckeye Partners, L.P., whichwe call Buckeye.  Buckeye is a publiclytraded master limited partnership (NYSE: BPL) organized in 1986 under the lawsof the state of Delaware. We refer to Buckeye GP LLC as Buckeye GP.

 

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Buckeye Pipe LineServices Company, which we refer to as Services Company, employs almost all ofthe employees, who provide services for us including MainLine Management’sofficers.  Pursuant to a servicesagreement and an executive employment agreement, we and Buckeye reimbursedServices Company for all executive compensation costs and related benefits paidto MainLine Management’s executive officers in 2008.

 

**Compensation Discussion and Analysis**

 

***Named Executive Officers***

 

We do not have officers or directors. Our business is managed by the Board of Directors of our generalpartner, MainLine Management, and the executive officers of MainLine Managementperform all of our management functions. Thus, the executive officers of MainLine Management are our executiveofficers.  This Compensation Discussionand Analysis is focused on the total compensation of the executive officers ofMainLine Management. In 2008, our executive officers, whom we refer to as our “namedexecutive officers” were:

 

·      Forrest E. Wylie, Chairman and ChiefExecutive Officer;

·      Keith E. St.Clair, Senior VicePresident and Chief Financial Officer;

·      Stephen C. Muther, President; and

·      Eric A. Gustafson, Senior VicePresident and Chief Operating Officer.

 

In addition to our 2008 named executive officers, this CompensationDiscussion and Analysis sets forth information concerning the totalcompensation in 2008 of Vance E. Powers, who is currently Vice President,Finance and Controller of Services Company but who served through November 10,2008 as MainLine Management’s Acting Chief Financial Officer.

 

***Our Compensation Philosophy***

 

We believe the most effective compensation schemes for companies like usemphasize pay-for-performance for their named executive officers. Our executivecompensation scheme needs to be able to attract, retain and motivate skilledand experienced executives who can grow our business while maintaining our highstandards of customer service and safety. The most important performance metricfor us is whether our executives can increase our quarterly distributions toour Unitholders. The best way to motivate our executive officers to achievethis goal is to offer both short and long-term incentives, and the best way toalign our executives’ interests with those of our Unitholders is to use bothcash and equity awards to provide those incentives.

 

***Our Responsibility for Compensation in 2008***

 

Each of our named executive officers is also a named executive officer ofBuckeye in 2008. Pursuant to the terms of an Exchange Agreement that originatedin 1997 between Buckeye GP (which we own), Buckeye and several of Buckeye’ssubsidiaries, we are responsible for all 2008 compensation and fringe benefitcosts for Buckeye’s four most highly compensated officers, regardless ofwhether the services for which such officers are compensated were performed forus or for Buckeye, and Buckeye is responsible for the compensation of all otherofficers.  In 2008, we were responsible forthe compensation of Messrs. Wylie, St.Clair, Muther and Gustafson (withthe exception of some potential contractual severance payments that couldbecome payable to Mr. Muther upon termination of his employment, asfurther described under the heading “Payments upon Termination or Change inControl” below), but Buckeye was responsible for the compensation of Mr. Powersbecause Mr. Powers was not one of the four highest salaried officersduring such period.

 

***Compensation Restructuring***

 

Under the bifurcated compensation program described above, decisionsregarding management compensation were made by the Compensation Committees oftwo separate public companies. This divided responsibility for employeecompensation had the potential for the application of differing standardsacross the workforce and potentially affected the comparability of BGH’s andBuckeye’s financial results to their publicly-traded peers.  Beginning in November 2007, ourCompensation Committee and the Compensation Committee of Buckeye’s generalpartner began to study the overall compensation program of BGH and Buckeye tolook for ways to eliminate the disadvantages mentioned above and to betterallow us to implement our compensation philosophy for our named executiveofficers.

 

Following discussions with the Compensation Committee of Buckeye, theBuckeye Compensation Committee engaged a compensation consultant, Mercer LLC,to assist in that effort. The scope of Mercer’s engagement was limited to anassessment of the compensation of Buckeye’s 2008 named executive officers (whowere also the named executive officers of BGH) in comparison to a peer group(described in the next section) and two broader energy market surveys. Thepurpose of the Mercer

 

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engagement was not to receive recommendationsregarding the amount or form of executive compensation for 2008.

 

After furtherconsideration and review of the report of the compensation consultant, theCompensation Committees determined that the assumption by Buckeye of allofficer compensation was the optimal approach. Because the owner of our general partner controls both us and Buckeye,Buckeye’s Audit Committee, represented by independent counsel, acted as aspecial committee of Buckeye’s Board of Directors and assisted Buckeye’sCompensation Committee in negotiating the terms of the executive compensationassumption with the Board of Directors of our general partner.

 

On October 15, 2008,BGH and Buckeye entered into an amendment to the Exchange Agreement, and BGHentered into a Termination Agreement which terminated the executive employmentagreement, which together provided that Buckeye, rather than BGH, would becomedirectly responsible for all executive compensation liabilities arising on andafter January 1, 2009 in return for an annual fixed payment from BGH toBuckeye in the amount of $3,570,750.

 

During the negotiation ofthe restructuring, which took almost twelve months to complete and frequentlyrequired multiple committee meetings per month, the Compensation Committee ofour general partner did not make changes to the base salaries ofMessrs. Wylie, Muther or Gustafson (Mr. St.Clair was not hired untilNovember 2008).  After consideringwhether to adjust the salaries of Messrs. Wylie, Muther and Gustafson, ourCompensation Committee elected not to adjust such base salaries primarilybecause the salaries were considered sufficient to retain such executiveofficers and, following the restructuring, we would no longer be responsiblefor the payment of such salaries.  Our CompensationCommittee also considered the various other elements of compensation paid tothese named executive officers and, in light of the restructuring, determinedreevaluation of the appropriateness or amounts of such various other elementsof compensation, and reexamination of the effects each element has on theothers was not in order for 2008. The Compensation Committee of Buckeye’s generalpartner did approve an increase in the base salary of Mr. Powers for 2008based solely on the increase in his responsibilities during his temporaryappointment as acting Chief Financial Officer. Finally, Buckeye’s CompensationCommittee did not reevaluate the appropriateness or amounts of the variousother elements of compensation for Mr. Powers, and did not examine theeffects each element has on the others.

 

***Types of Compensation in 2008***

 

In 2008, the compensationpaid by Buckeye or us to our named executive officers consisted primarily ofsalary and, in the cases of Messrs. St.Clair and Powers, discretionarybonuses.  Our named executive officersalso benefited from contributions to their accounts under Buckeye’s broad-basedRetirement and Savings Plan and, in the cases of Messrs. Muther, Gustafsonand Powers, Buckeye’s broad-based Employee Stock Ownership Plan.  Mr. Powers also received an option grantto purchase 5,000 LP Units under Buckeye’s Unit Option and DistributionEquivalent Plan.  Finally, the totalcompensation in 2008 of our named executive officers (except forMr. St.Clair) also included the ongoing vesting of equity awards issued in2007 by BGH GP, the privately owned parent company of our general partner.

 

*Salary*

 

Thebase salaries of our named executive officers in 2008 were as follows:

** **
| **Name**          | ** ** | **Base Salary  in 2008** | ** ** |
|-------------------|------------|------------------------------------|------------|
| Forrest E. Wylie  |       | $                                  | 400,000    |   |
| Keith E. St.Clair |       | $                                  | 325,000    |   |
| Stephen C. Muther |       | $                                  | 300,000    |   |
| Eric A. Gustafson |       | $                                  | 300,000    |   |
| Vance E. Powers   |       | $                                  | 207,200    |   |

 

Exceptfor Mr. Powers’ salary, the salaries of our named executive officers werepaid by us.  Except as discussed belowfor Mr. St.Clair, none of BGH, our Compensation Committee, or Buckeye’sgeneral partner or its Compensation Committee determined these salaries basedon any benchmarking against those of similarly situated executives in peercompanies.

 

Mr. St.Clairwas hired on November 10, 2008, shortly after the completion of theexecutive compensation restructuring described above.  Buckeye’s Compensation Committee wasresponsible for setting the salary for Mr. St.Clair because due to theexecutive compensation restructuring, Buckeye would be responsible for payingMr. St.Clair’s salary on and after January 1, 2009.  In setting the compensation ofMr. St.Clair, Buckeye’s Compensation Committee used the report prepared byMercer, the compensation consultant, in connection with the evaluation of theexecutive compensation restructuring. The portion of the Mercer report reliedon by Buckeye’s Compensation Committee for these purposes contained data on thebase salaries of Chief Financial Officers at a peer group of nine otherpublicly traded pipeline master limited partnerships.  The companies in the peer group were: EnergyTransfer

 

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Partners, L.P., SunocoLogistics Partners L.P., Global Partners LP, Oneok Partners, L.P., Inergy,L.P., NuStar Energy, L.P., Magellan Midstream Partners, L.P., Genesis Energy,L.P. and Atlas Pipeline Holdings, L.P.

 

Mr. St.Clair’sbase salary was negotiated with Mr. St.Clair, but Buckeye’s CompensationCommittee determined that setting the salary above the median salary of thepeer group was essential to attracting a desirable candidate. In making thisdetermination, Buckeye’s Compensation Committee recognized that, unlike everycompany in the peer group, Buckeye did not have a Unitholder-approved equityincentive plan in which Mr. St.Clair could participate, although thecommittee did not give this factor any increased weight over any otherfactor.  According to the Mercer report,the base salary at the 50th percentile for Chief Financial Officers within thepeer group was $267,000 and the salary at the 75th percentile was $342,000.

 

*Bonuses*

 

In early 2009, Buckeye’sCompensation Committee approved bonus payments to Keith E. St.Clair and VanceE. Powers for their performance in 2008. Mr. St.Clair’s bonus was $72,000,and Mr. Powers was awarded $148,161.

 

In determining the amountof the bonus paid to Mr. St.Clair, Buckeye’s Compensation Committeeconsidered the speed with which Mr. St.Clair familiarized himself with ourand Buckeye’s financial statements, factors affecting our liquidity and capitalresources and our and Buckeye’s internal control over financial reporting inthe short time since his hire date, as well as the contributionsMr. St.Clair has made in the budgeting process for 2009 and hisinteractions with the independent public accountants and Audit Committees. Theamount was calculated to be equal to 130% of Mr. St.Clair’s annual salary,pro-rated for the two months in which he was employed.

 

In determining the amountof Mr. Powers’ bonus, Buckeye’s Compensation Committee considered the factthat Mr. Powers had served as our and Buckeye’s Acting Chief FinancialOfficer for almost the entire year. Buckeye’s Compensation Committee considered Mr. Powers’ salary tobe low compared to his responsibilities as our and Buckeye’s Acting Chief FinancialOfficer, and awarded him the bonus in order to compensate him for the diligenceand skill with which he carried out his increased responsibilities in 2008.

 

*Unit Option Plan*

 

In February 2008,Mr. Powers was granted an option to purchase 5,000 of Buckeye’s LP Unitsat an exercise price of $49.47 per LP Unit pursuant to Buckeye’s Unit Optionand Distribution Equivalent Plan (the “Option Plan”). The top four highestsalaried officers who were paid by us were not eligible to participate in theOption Plan. Mr. Powers was awarded the grant along with many of our andBuckeye’s other managers, based on the recommendation of Mr. Wylie andMr. Muther, who typically make recommendations to Buckeye’s Board ofDirectors with respect to the recipients and amounts of awards under the OptionPlan. Buckeye’s Compensation Committee approved the grant to Mr. Powersbased on the recommendation of Messrs. Wylie and Muther. The amount of thegrant was determined in the context of the grants made to all of the managersas a group.  Messrs. Wylie andMuther recommended a pool of approximately 143,500 options be awarded, and thenumber of LP Units subject to Mr. Powers’ option was consistent with othersenior managers in the group.

 

*Non-QualifiedDeferred Compensation*

 

Thenamed executive officers also received non-qualified deferred compensation in2008 in the form of contributions by us or Buckeye to their BenefitEqualization Plan accounts. The Benefit Equalization Plan is a non-qualifieddeferred compensation plan and provides that any employee whose companycontributions to qualified pension and savings plans have been limited due toIRS limits on compensation allowable for calculating benefits under qualifiedplans will receive an equivalent benefit under the Benefit Equalization Planfor company-contributed amounts they would have received under qualified plansif there were no IRS limits on compensation levels. All of our executiveofficers participated in this plan prior to us becoming a public company inAugust of 2006, and neither our Compensation Committee nor theCompensation Committee of Buckeye’s general partner has considereddiscontinuing their eligibility to participate in this plan since such date.

 

*OverrideUnits*

 

Inconnection with BGH GP’s purchase of a controlling interest in us in 2007, BGHGP granted our named executive officers (except for Mr. St.Clair) certainlimited liability company interests, called override units, in BGH GP. TheBoard of Directors of BGH GP determined the number of override units awarded tothe named executive officers and the vesting schedules of those override units.A description of the override units and their vesting schedules is contained inthe narrative discussion following the Summary Compensation Table below.  The BGH override units were neither awardedby us nor paid by us.

 

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***Compensation Committee Report***

 

Asdiscussed in the Compensation Discussion and Analysis, we were responsible forthe compensation of Messrs. Wylie, St.Clair, Muther and Gustafson.  For the period from January 1, 2008through November 10, 2008, Mr. Powers, in his capacity as ActingChief Financial Officer, was compensated by Buckeye and not by us.

 

Inlight of the foregoing, as required by Item 407(e) (5) of RegulationS-K, our Compensation Committee has reviewed and discussed the CompensationDiscussion and Analysis with our management and, based on such review anddiscussions, has recommended to the Board of Directors of our general partnerthat the Compensation Discussion and Analysis be included in this Annual Reporton Form 10-K.

 

THECOMPENSATION COMMITTEE

OFTHE BOARD OF DIRECTORS OF

MAINLINEMANAGEMENT LLC

 

Frank J. Loverro

Oliver G. “Rick”Richard, III

FrankS. Sowinski

 

**Summary Compensation Table**

 
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Unit**         | ** ** | **Option**       | ** ** | **Non-Equity  Incentive Plan** | ** ** | **All  Other**   | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------|------------|------------------|------------|-------------------------------------|------------|------------------|------------|------------|------------|
| **Name and**                                   | ** ** | **Fiscal** | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards**       | ** ** | **Awards**       | ** ** | **Compensation**                    | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| **Principal Position**                         | ** ** | **Year**   | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($) (1)** | ** ** | **($) (2)** | ** ** | **($) (3)**                    | ** ** | **($) (8)** | ** ** | **($)**    | ** ** |
| Forrest E. Wylie                                    |       | 2008       |       | 400,000    | ** ** | **—** |       | 544,960          | ** ** | **—**       | ** ** | **—**                          |       | 40,000           |       | 984,960    |       |
| *Chairman and Chief Executive Officer*              |       | 2007       |       | 200,000    | ** ** | **—** |       | 272,480          | ** ** | **—**       | ** ** | **—**                          |       | 12,693           |       | 485,173    |       |
|                                                |       |       |       |       |       |       |       |             |       |             |       |                                |       |             |       |       |       |
| Keith E. St.Clair (4)                               |       | 2008       |       | 37,500     |       | 72,000     |       | —           |       | —           |       | —                              |       | 1,875            |       | 111,375    |       |
| *Senior Vice President and Chief Financial Officer* |       |       |       |       |       |       |       |             |       |             |       |                                |       |             |       |       |       |
|                                                |       |       |       |       |       |       |       |             |       |             |       |                                |       |             |       |       |       |
| Stephen C. Muther (5)                               |       | 2008       |       | 305,770    |       | —     |       | 145,323          |       | —           |       | —                              |       | 40,378           |       | 491,471    |       |
| *President*                                         |       | 2007       |       | 305,770    | ** ** | **—** |       | 308,411          | ** ** | **—**       | ** ** | **—**                          |       | 50,872           |       | 665,053    |       |
|                                                |       | 2006       |       | 305,770    | ** ** | **—** |       | 690,410          |       | —           |       | 575,000                             |       | 57,040           |       | 1,628,220  |       |
|                                                |       |       |       |       |       |       |       |             |       |             |       |                                |       |             |       |       |       |
| Eric A. Gustafson (6)                               |       | 2008       |       | 300,000    |       | —     |       | 145,323          |       | —           |       | —                              |       | 40,378           |       | 485,701    |       |
| *Senior Vice President and*                         |       | 2007       |       | 300,000    | ** ** | **—** |       | 249,474          | ** ** | **—**       | ** ** | **—**                          |       | 114,697          |       | 664,171    |       |
| *Chief Operating Officer*                           |       | 2006       |       | 300,000    | ** ** | **—** |       | 517,807          |       | 5,201            |       | 87,500                              |       | 114,839          |       | 1,025,347  |       |
|                                                |       |       |       |       |       |       |       |             |       |             |       |                                |       |             |       |       |       |
| Vance E. Powers (7)                                 |       | 2008       |       | 207,200    |       | 148,161    |       | 90,827           |       | 12,588           |       | —                              |       | 113,865          |       | 572,641    |       |
| *Former Acting*                                     |       | 2007       |       | 177,672    |       | 35,000     |       | 104,351          |       | 15,468           |       | 108,750                             |       | 95,434           |       | 536,675    |       |
| *Chief Financial Officer and Controller*            |       |       |       |       |       |       |       |             |       |             |       |                                |       |             |       |       |       |

 

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(1)          Amounts reflect compensation expense recognized in thefinancial statements for the fiscal years ended December 31, 2008, 2007and 2006, in accordance with SFAS 123R, for two separate incentive unit awardprograms.   In 2008, the amounts relateto override units granted in 2007 by BGH GP. In 2007, the amounts relate to both: i) the management units of BGH andii) override units granted in 2007 by BGH GP*.  *In 2006, the amounts relate tothe management units of BGH.  See thenarrative discussions below titled “Buckeye GP Holdings L.P. Management Units”and “BGH GP Holdings, LLC Override Units” for the assumptions used in thevaluation of the fair value of the management and override units.

 

(2)          Amounts reflect compensation expense recognized in thefinancial statements for fiscal years ended December 31, 2008, 2007 and2006, in accordance with SFAS 123R, for option awards of Buckeye’s limitedpartner units made pursuant to the Buckeye Pipe Line Services Company UnitOption and Distribution Equivalent Plan. The top four highest salaried officers performing duties for our generalpartner, which in 2008 included Messrs. Wylie, St.Clair, Muther andGustafson, are not eligible for option awards under this program. However,Mr. Gustafson had outstanding option awards that were granted to him underthis program prior to his becoming one of the four highest salaried officers. Thefair value of unit options was estimated using the Black-Scholes option pricingmodel with the following assumptions for the years ended December 31, 2008,2007 and 2006, respectively:

 
| ** **                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected dividend yield                   |       | 6.3      | %          | 6.6      | %          | 6.9      | %          |
| Expected unit price volatility            |       | 16.0     | %          | 19.6     | %          | 20.7     | %          |
| Risk-Free interest rate                   |       | 2.7      | %          | 4.7      | %          | 4.6      | %          |
| Expected life (in years)                  |       | 4.8      |       | 6.5      |       | 6.5      |       |
| Weighted-average fair value at grant date |       | $        | 2.89       |     | $          | 5.07     |       | $ | 4.52 |   |
|                                           |            |          |            |          |            |          |            |  |  |  |

 

The expected dividendyield is based on 4.8 years of historic yields of LP Units.  The expected volatility is based upon 4.8years of historical volatility of Buckeye’s LP Units.  In accordance with SFAS 123R in 2006 and2007, Buckeye used the simplified method to calculate the expected life, whichwas the option vesting period of three years plus the option term of ten yearsdivided by two.  In compliance with SFAS123R, effective January 1, 2008, Buckeye now uses historical experience indetermining the expected life assumption used to value its options.  The risk-free interest rate is calculatedusing the U.S. Treasury yield curves in effect at the time of grant, for theperiods within the expected life of the options.

 

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(3)          Amount reported for 2007 for Mr. Powersrepresents an amount paid in 2008 for incentive goals achieved for the fiscalyear 2007.  The amounts reported for 2006for Messrs. Muther and Gustafson were paid in connection with thecompletion of our initial public offering.

 

(4)          Mr. St.Clair joined BGH on November 10,2008.

 

(5)          Effective February 17, 2009, Mr. Mutherresigned from his position of President of MainLine Management due to hispending retirement.  Mr. Muther willcontinue as employee of Services Company through June 30, 2009.

 

(6)          Effective February 17, 2009, Mr. Gustafsonresigned from his position as Senior Vice President and Chief Operating Officerof MainLine Management due to his pending retirement.  Mr. Gustafson is continuing as anemployee of Services Company for a limited transition period prior to hisretirement.

 

(7)          Mr. Powers currently serves as ServiceCompany’s Vice President, Finance and Controller.

 

(8)          For each named executive officer, the amountsin the column labeled “All Other Compensation” consist of:

 
| ** **        | ** ** | ** ** | ** ** | ** **              | ** ** | ** **       | ** ** | **Unit**                | ** ** | ** **              | ** ** | ** **         | ** ** |
|-------------------|------------|------------|------------|-------------------------|------------|------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **        | ** ** | ** ** | ** ** | **Savings**             | ** ** | ** **       | ** ** | **Options**             | ** ** | **Benefit**             | ** ** | **Total**          | ** ** |
| ** **        | ** ** | ** ** | ** ** | **Plan**                | ** ** | ** **       | ** ** | **Distribution**        | ** ** | **Equalization**        | ** ** | **All Other** | ** ** |
| ** **        | ** ** | **Fiscal** | ** ** | **Contributions**       | ** ** | **ESOP**         | ** ** | **Equivalents**         | ** ** | **Plan**                | ** ** | **Compensation**   | ** ** |
| **Name**          | ** ** | **Year**   | ** ** | **($) (a) *** | ** ** | **($) (b)** | ** ** | **($) (c) *** | ** ** | **($) (d) *** | ** ** | **($)**            | ** ** |
| Forrest E. Wylie  |       | 2008       |       | 23,000                  |       | —           |       | —                  |       | 17,000                  |       | 40,000             |       |
|              |       | 2007       |       | 12,693                  |       | —           |       | —                  |       | —                  |       | 12,693             |       |
|              |       |       |       |                    |       |             |       |                    |       |                    |       |               |       |
| Keith E. St.Clair |       | 2008       |       | 1,875                   |       | —           |       | —                  |       | —                  |       | 1,875              |       |
|              |       |       |       |                    |       |             |       |                    |       |                    |       |               |       |
| Stephen C. Muther |       | 2008       |       | 11,500                  |       | 23,628           |       | —                  |       | 5,250                   |       | 40,378             |       |
|              |       | 2007       |       | 11,250                  |       | 26,497           |       | —                  |       | 13,125                  |       | 50,872             |       |
|              |       | 2006       |       | 11,000                  |       | 22,744           |       | —                  |       | 23,296                  |       | 57,040             |       |
|              |       |       |       |                    |       |             |       |                    |       |                    |       |               |       |
| Eric A. Gustafson |       | 2008       |       | 11,500                  |       | 23,628           |       | —                  |       | 5,250                   |       | 40,378             |       |
|              |       | 2007       |       | 11,250                  |       | 26,497           |       | 63,825                  |       | 13,125                  |       | 114,697            |       |
|              |       | 2006       |       | 11,000                  |       | 22,744           |       | 60,033                  |       | 21,062                  |       | 114,839            |       |
|              |       |       |       |                    |       |             |       |                    |       |                    |       |               |       |
| Vance E. Powers   |       | 2008       |       | 11,500                  |       | 22,538           |       | 68,265                  |       | 11,562                  |       | 113,865            |       |
|              |       | 2007       |       | 9,684                   |       | 21,925           |       | 63,825                  |       | —                  |       | 95,434             |       |

 

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***Compensationawarded pursuant to this plan to Messrs. Wylie, St.Clair, Muther andGustafson was paid by us.  Compensationawarded to Mr. Powers pursuant to this plan was paid by Buckeye.**

 

(a)          Amounts represent a 5% company contribution tothe Buckeye Pipe Line Services Company Retirement and Savings Plan for each ofthe named executive officers on wages of up to $230,000 for 2008, $225,000 for2007 and $220,000 for 2006.  Messrs. Wylieand St.Clair also receive a dollar-for-dollar matching contribution on theircontributions to the retirement and savings plan up to 5% of their pay.

 

(b)         Amounts represent the value of Buckeye PipeLine Services Company stock allocated to each named executive officer, inaccordance with the terms of the Buckeye Pipe Line Services Company EmployeeStock Ownership Plan described in the accompanying narrative.

 

(c)          Amounts represent the payment of distributionequivalents under the Option Plan. Pursuant to the Option Plan, distribution equivalents were calculated bymultiplying (i) the number of Buckeye’s limited partner units subject tosuch options that have not vested by (ii) 200% of Buckeye’s per limitedpartner unit regular quarterly distribution. The number of unit options used as the basis for the payments in 2008was 3,700 for Mr. Powers. In 2007, 3,700 unit options were the basis forthe payment to Messrs. Powers and Gustafson.  In 2006, 3,700 unit options were the basisfor the payment to Mr. Gustafson.

 

(d)         Amounts represent contributions to the namedexecutive officer’s account under the Buckeye Pipe Line Services CompanyBenefit Equalization Plan. A description of the plan and the amounts ofcontributions credited to each named executive officer’s account in 2008 areset forth in the “2008 Nonqualified Deferred Compensation Table” and theaccompanying narrative discussion below.

 

***Salaries***

 

The base salaries of our named executive officers in2008 were as follows:

 

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| **Name**          | ** ** | **Base Salary  in 2008** | ** ** |
|-------------------|------------|------------------------------------|------------|
| Forrest E. Wylie  |       | $                                  | 400,000    |   |
| Keith E. St.Clair |       | $                                  | 325,000    |   |
| Stephen C. Muther |       | $                                  | 300,000    |   |
| Eric A. Gustafson |       | $                                  | 300,000    |   |
| Vance E. Powers   |       | $                                  | 207,200    |   |

 

**Exceptfor Mr. Powers’ salary for 2008, the salaries of our named executiveofficers were paid by us****.**  As discussedin the preceding Compensation, Discussion and Analysis, except with respect to Mr. St.Clair’ssalary, none of our general partner, its Compensation Committee, Buckeye’sgeneral partner or Buckeye’s Compensation Committee has engaged in anybenchmarking of these salaries against those of similarly situated executivesin peer companies.

 

***Muther Employment Agreement***

 

Weare a party to an amended and restated employment and severance agreement,dated as of October 25, 2007, with Mr. Muther.   Mr. Muther’s base salary under hisemployment agreement is not less than $300,000 per year (less applicable taxesand withholdings).   Mr. Muther’s employment agreement isterminable at any time for any reason by us or Mr. Muther, subject to theobligations of us and Buckeye to pay Mr. Muther severance under certaincircumstances. Pursuant to the employment agreement, Mr. Muther isemployed by Services Company.  Pursuantto the Exchange Agreement and the Executive Employment Agreement between us andServices Company, in 2008 we reimbursed Services Company for all payments to Mr. Mutherand the cost of Mr. Muther’s benefits under the employment agreement.  **In 2008, wewere responsible for Mr. Muther’s compensation pursuant to his employmentagreement (but Buckeye may be liable for certain severance payments describedin “Payments Upon Termination or Change in Control” below).**

 

***Buckeye GP Holdings L.P. Management Units***

 

Underthe provisions of SFAS 123R, in 2007 and 2006 we recognized a total of $4.6million of deferred compensation in connection with the accelerated vesting ofcertain management units. For a more detailed description of these management unitsand the acceleration of their vesting, please see the discussion under theheading “Buckeye GP Holdings L.P. Management Units” following the SummaryCompensation Table in our Annual Report on Form 10-K for the year ended December 31,2007, which was filed with the SEC on March 14, 2008.

 

***BGH GP Holdings, LLC Override Units***

 

Inconnection with its purchase of a controlling interest in us on June 25,2007, BGH GP granted certain limited liability company interests, calledOverride Units, to certain members of our management, including Messrs. Wylie,Muther, Gustafson, and Powers. Thelimited liability company agreement of BGH GP defines three types of OverrideUnits: Value A Units, Value B Units and Operating Units. BGH GP grantedOverride Units, with grant date fair values to our named executive officers, asfollows:

 

**Granted June 25, 2007:**

 
| **Name**          | ** ** | **Value A # of  Units** | ** ** | **Value B # of  Units** | ** ** | **Operating #  of Units** | ** ** | **Total # of  Units  Awarded** | ** ** |
|-------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|
| Forrest E. Wylie  |       | 637,381                                |       | 637,381                                |       | 637,381                             |       | 1,912,143                                |       |
| Stephen C. Muther |       | 169,968                                |       | 169,968                                |       | 169,968                             |       | 509,904                                  |       |
| Eric A. Gustafson |       | 169,968                                |       | 169,968                                |       | 169,968                             |       | 509,904                                  |       |
| Vance E. Powers   |       | 106,230                                |       | 106,230                                |       | 106,230                             |       | 318,690                                  |       |

 
|                           |   | **Value A** |   | **Value B** |   | **Operating** |   |
|--------------------------------|--------|------------------|--------|------------------|--------|---------------|--------|
| Grant Date Fair Value per unit |   | $                | 2.07   |             | $      | 1.17          |   | $ | 3.42 |   |
|                                |        |                  |        |                  |        |               |        |  |  |  |

 

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Forfeiture

 

TheOverride Units are generally subject to forfeiture upon the occurrence ofcertain events before benchmark dates, which events and dates vary based on thetype of Override Unit and the grantee. The Override Units owned by a named executive officer are subject toforfeiture if:

 

·                  such named executive officer’s employment isterminated for cause;

 

·                  such named executive officer’s employment isterminated due to death, disability or retirement (Value A Units and Value BUnits only); or

 

·                  such named executive officer’s employment isterminated for any other reason prior to the occurrence of an exit event (asdefined below) or the entry into a definitive agreement that would result in anexit event and an exit event does not occur within one year after thetermination of employment.

 

Forthe purposes of this discussion, an “exit event” generally includes the sale byArcLight, Kelso and their affiliates of their interests in BGH GP, the sale ofsubstantially 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.

 

Thetable below sets forth the percentages of each named executive officer’sOverride Units that are subject to forfeiture upon the occurrence of certainevents prior to the dates set forth in the table.

 
| **Named**              | ** ** | ** **                               | ** ** | ** **                       | ** ** | **Time Since Date of the Grant of Override Units** | ** ** |
|------------------------|------------|------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **Executive  Officer** | ** ** | **Unit Type**                       | ** ** | **Reason for  Forfeiture*** | ** ** | **Before 1  Year**                                                                    | ** ** | **1 Year** | ** ** | **18  Months** | ** ** | **2 Years** | ** ** | **30  Months** | ** ** | **3 Years** | ** ** | **42  Months** | ** ** | **4+  Years** | ** ** |
| Forrest E.  Wylie      |       | A &  B  Units  Operating  Units |       | Cause                            |       | 100                                                                                        | %          | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 100        | %                                | 75         | %                                                                                          | 62.5       | % | 50 | % | 37.5 | % | 25 | % | 12.5 | % | 0 | % |
|                   | Other      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | Cause      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 0          | %                                | 0          | %                                                                                          | 0          | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % |
|                   | Other      |                                     | 100        | %                                | 75         | %                                                                                          | 62.5       | % | 50 | % | 37.5 | % | 25 | % | 12.5 | % | 0 | % |
| Vance E.  Powers       |       | A &  B  Units  Operating  Units |       | Cause                            |       | 100                                                                                        | %          | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | Other      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | Cause      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 0          | %                                | 0          | %                                                                                          | 0          | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % |
|                   | Other      |                                     | 100        | %                                | 75         | %                                                                                          | 62.5       | % | 50 | % | 37.5 | % | 25 | % | 12.5 | % | 0 | % |
| Stephen C.  Muther     |       | A &  B  Units  Operating  Units |       | Cause                            |       | 100                                                                                        | %          | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | Other      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 50 | % | 37.5 | % | 25 | % | 12.5 | % | 0 | % |
|                   | Cause      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 0          | %                                | 0          | %                                                                                          | 0          | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % |
|                   | Other      |                                     | 100        | %                                | 75         | %                                                                                          | 62.5       | % | 50 | % | 37.5 | % | 25 | % | 12.5 | % | 0 | % |
| Eric A.  Gustafson     |       | A &  B  Units  Operating  Units |       | Cause                            |       | 100                                                                                        | %          | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | Other      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 50 | % | 37.5 | % | 25 | % | 12.5 | % | 0 | % |
|                   | Cause      |                                     | 100        | %                                | 100        | %                                                                                          | 100        | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|                   | DDR        |                                     | 0          | %                                | 0          | %                                                                                          | 0          | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % |
|                   | Other      |                                     | 100        | %                                | 75         | %                                                                                          | 62.5       | % | 50 | % | 37.5 | % | 25 | % | 12.5 | % | 0 | % |

 

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*                             “Cause” means termination of employment forcause.   “DDR” means termination ofemployment due to death, disability or retirement. Upon Mr. Wylie’sretirement (as opposed to the termination of his employment upon death ordisability), all of his Value A Units and Value B Units will be forfeited.  “Other” means termination of employment forany other reason.

 

Additionally,any Value A Units and Value B Units that remain subject to forfeiture at thetime of an exit event will be forfeited without payment.

 

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Distributions

 

The Override Units are entitled to share indistributions made by BGH GP under the circumstances set forth below.

 

Value A Units and Value B Units may onlyparticipate in distributions if the members of BGH GP that are affiliated withArcLight and Kelso, who we collectively refer to as the ArcLight Kelso Members,receive an internal rate of return (compounded annually) of at least 10% andthe ArcLight Kelso investment multiple is equal to or greater than 2.0.  The ArcLight Kelso investment multiple isgenerally the sum of all the distributions the ArcLight Kelso Members havereceived from BGH GP prior to the time in question, divided by the total amountof capital contributions to BGH GP that the ArcLight Kelso Members have madeprior to such time.

 

Additionally, all distributions on Value A Unitsand Value B Units are subject to the following performance criteria:

 

·      if the ArcLight Kelsoinvestment multiple is 2.0 or more, all Value A Units participate indistributions;

·      if the ArcLight Kelsoinvestment multiple is 3.5 or more, all Value B Units participate indistributions; and

·      if the ArcLight Kelsoinvestment multiple is greater than 2.0 but less than 3.5, a percentage of theValue B Units will participate in distributions based generally on a slidingscale with 0% participating at the 2.0 level and 100% participating at the 3.5level.

 

Subject to the ability of the board of BGH GP tochange such amounts, distributions may be $10.00 per Override Unit.  Such distributions may be made when and asdeclared by the board of BGH GP, to which we refer as interim distributions, oras a result of an exit event.  Furthermore,named executive officers who hold Value A Units or Value B Units that becomeeligible to participate in distributions upon satisfaction of the performancecriteria summarized above are entitled to cumulative priority “catch updistributions” in respect of earlier interim distributions not made on thoseValue A Units and Value B Units upon a subsequent interim distribution or adistribution in connection with an exit event.

 

Operating Units that are still subject toforfeiture at the time of a distribution do not participate in interimdistributions but are entitled to distributions in connection with an exitevent.  As with Value A Units and Value BUnits, distributions on Operating Units are equal to $10.00 per OperatingUnit.  Additionally, Operating Units thatare no longer subject to forfeiture are entitled to cumulative priority “catchup distributions” in respect of earlier interim distributions not made on suchOperating Units upon a subsequent interim distribution or distribution inconnection with an exit event.  Finally,distributions on Operating Units that are not subject to forfeiture are notsubject to the investment multiple performance criteria that are applicable toValue A Units and Value B Units.

 

Determinationof Fair Value

 

We valued the Override Units using the Monte Carlo simulation methodthat incorporated the market-based vesting condition into the grant date fairvalue of the unit awards as required by SFAS 123R.  The Monte Carlo simulation is a procedure toestimate future equity value from the time of the valuation date of June 25,2007 to the exit event using the following assumptions:

 

·      Current Equity Value of $10.00 per unit ortotal equity of $439.0 million, based on the initial capital contribution madeby the initial equity investors into BGH GP;

 

·      Expected Life of 5.5 years based on thehistorical average holding period for similar investments;

 

·      Risk Free Rate of 4.92% based on the USConstant maturity treasury rate for a term corresponding to the expected lifeof 5.5 years;

 

·      Volatility of 26%.  Since BGH GP’s primary assets are itsownership interest in BGH, volatility was estimated by using the volatility ofBGH, along with comparisons to the 5.5 year equity volatility of other firms inthe same industry as BGH; and

 

·      Because the likelihood of an interimdistribution is not probable due to the rigorous performance criteria,dividends of zero were assumed.

 

RequirementsWith Respect to Non-Competition and Non-Solicitation

 

The limited liability company agreement of BGH GP provides that, for acertain period of time certain holders of the Override Units, which includescertain of our named executive officers (referred to as the “Management Members”),may not become associated with or employed by any entity that is activelyengaged in any geographic area in which we, Buckeye GP, Buckeye or any ofBuckeye’s subsidiaries (collectively, the “Buckeye Entities”) does business inany business which is either in competition with the business of the BuckeyeEntities conducted at any time during the 12 months preceding the date suchManagement Member ceases to hold any equity interest in BGH GP or proposed tobe conducted by the Buckeye Entities in the Buckeye Entities’ business plan asin effect as of the date such Management Member ceases to hold any equityinterest in BGH GP.

 

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The limited liability company agreement further provides that noManagement Member shall directly or indirectly induce any employee of theBuckeye Entities to terminate employment with the Buckeye Entities or otherwiseinterfere with the employment relationship of the Buckeye Entities with anyperson who is or was employed by the Buckeye Entities. In addition, the limitedliability company agreement prohibits any Management Member from soliciting orotherwise attempting to establish for himself any business relationship withany person who is, or at any time during the 12-month period preceding the datesuch Management Member ceases to hold any equity interest in BGH GP was, acustomer, client or distributor of the Buckeye Entities.

 

***Retirementand Other Benefits***

 

The majority ofBuckeye’s regular full-time employees hired before September 16, 2004(including Messrs. Muther, Gustafson and Powers) participate in ServicesCompany’s employee stock ownership plan, or ESOP, which is a qualified plan.Services Company owns approximately 2.1 million of Buckeye’s limited partnerunits. The ESOP owns all of the outstanding common stock of Services Company,or approximately 2.1 million shares. Accordingly, one share of Services Company common stock is generallyconsidered to have a value equal to one of Buckeye’s limited partner units.Under the ESOP, Services Company common stock is allocated to employee accountsquarterly.  Individual employees areallocated shares based on the ratio of their eligible compensation to theaggregate eligible compensation of all ESOP participants.  Eligible compensation generally includes basesalary, overtime payments and certain bonuses. The value of shares accumulatedby an employee in the ESOP is payable to the employee or transferable to otherqualified plans in accordance with the terms of the ESOP plan upon terminationof the employee’s employment.

 

Services Companyalso sponsors a Retirement and Savings Plan through which it providesretirement benefits for substantially all of its regular full-time employees(including our named executive officers), except those covered by certain laborcontracts.  The retirement plan consistsof two components. Under the first component, Services Company contributes 5%of each eligible employee’s covered salary to an employee’s separate accountmaintained in the retirement plan.  Underthe second component, for all employees not participating in the ESOP, ServicesCompany makes a matching contribution into the employee’s separate account for100% of an employee’s contribution to the retirement plan up to 6% of anemployee’s eligible covered salary.  ForServices Company employees who participate in the ESOP, Services Company doesnot make a matching contribution.  Eachof our named executive officers receives the contribution equal to 5% of hissalary (subject to certain IRS limits) annually, and these amounts vest ratablyover a five year period.  **Except for Mr. Powers, in 2008, we were responsible for the namedexecutive officer compensation paid with respect to the contribution.**  Because each of Messrs. Muther,Gustafson and Powers participates in the ESOP, we do not make any matchingcontributions to the retirement plan on their behalf.  Because Messrs. Wylie and St.Clair donot participate in the ESOP, we do make matching contributions on their behalf.  **In 2008, we wereresponsible for the compensation paid to Messrs. Wylie and St.Clair withrespect to the matching contribution to their retirement and savings plans.**

 

Services Companyalso sponsors a Benefit Equalization Plan, which is described in detail in thenarrative discussion following the “Nonqualified Deferred Compensation Table”below. **Except for Mr. Powers, in 2008, we wereresponsible for the named executive officer compensation discussed in thatsection.**

 

**2008 Grants of Plan-Based Awards Table**

 
| ** **         | ** ** | ** **     | ** ** | **All Other  Option  Awards:  Number of  Units** | ** ** | **Exercise Price  of Option  Awards** | ** ** | **Grant Date Fair  Value of Unit and  Option Awards** | ** ** |
|--------------------|------------|----------------|------------|------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Grant Date** | ** ** | **(#) (1)**                                                | ** ** | **($)**                                         | ** ** | **($) (1)**                                                                         | ** ** |
| Forrest E. Wylie   | ** ** | **—**     | ** ** | **—**                                                 | ** ** | **—**                                      | ** ** | **—**                                                                          | ** ** |
| Keith E.  St.Clair | ** ** | **—**     | ** ** | **—**                                                 | ** ** | **—**                                      | ** ** | **—**                                                                          | ** ** |
| Stephen C.  Muther | ** ** | **—**     | ** ** | **—**                                                 | ** ** | **—**                                      | ** ** | **—**                                                                          | ** ** |
| Eric A.  Gustafson | ** ** | **—**     | ** ** | **—**                                                 | ** ** | **—**                                      | ** ** | **—**                                                                          | ** ** |
| Vance E. Powers    |       | 02/21/2008     |       | 5,000                                                      |       | 49.47                                           |       | 14,450                                                                              |       |

 

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(1)   As discussed below, this amount was awardedpursuant to the Unit Option and Distribution Equivalent Plan.  The distribution equivalent, as discussedbelow, was included in the Summary Compensation Table as “All OtherCompensation”.

 

***Option Plan***

 

The Option Plan provides for the grant of options to acquire Buckeye’slimited partnership units to certain of its and its affiliates’ officers andkey employees.  The Option Plan hashistorically been administered by the Board of Directors of Buckeye GP, but maybe administered by Buckeye GP’s CompensationCommittee in the future. Theboard or committee may authorize one or more officers of

 

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BuckeyeGP to designate optionees and determine the number of options to be received bysuch optionees, provided that the authorizing resolution specifies the totalnumber of options that may be so awarded. In practice, Buckeye’s executiveofficers usually recommend option grants to the Board of Directors of BuckeyeGP in February of each calendar year, and the Board of Directors considersand approves the appropriate grants.  Ourexecutive officers whose compensation is paid by us pursuant to the ExchangeAgreement described above are not eligible to receive unit option grants underthe Option Plan which, for 2008, included Messrs. Wylie, St.Clair, Mutherand Gustafson.

 

The Option Plan provides that options will generally vest three yearsafter the date of grant, provided the optionee remains an employee of Buckeyeor its affiliates at such time. Once an option becomes vested, the optionremains exercisable for a period of seven years from the date of vesting, orfor a shorter period specified by the Board of Directors of Buckeye GP or itsCompensation Committee.

 

The Option Plan also permits the Board of Directors of Buckeye GP or itsCompensation Committee to grant distribution equivalent rights in tandem withoption grants.  Distribution equivalentsprovide the optionee with an accrual of an amount, subject to certain distributiontargets set at the discretion of the Board of Directors of Buckeye GP or itsCompensation Committee, equal tothe regular quarterly distribution on the number of unvested units subject tothe option. Distribution equivalents are maintained in distribution equivalentaccounts on Buckeye’s books and records. Distribution equivalents cease to accrue when units subject to an optionvest.  No interest accrues or is payableto the balance in any distribution equivalent account.   Recent changes in tax laws have limited theeffectiveness of the Option Plan.  As aresult, Buckeye has developed a new plan for which Buckeye is seeking theapproval of the holders of Buckeye’s limited partnership units.

 

Historically, Buckeye’s Board of Directors has set certain distributiontargets for the payment of the accrued distribution equivalents to theoptionees.  The benchmark for thedistribution target is based on an increase in the cash distributions paid toholders of Buckeye’s limited partnership units over the three-year vestingperiod of such options. In the event that the distribution target is achieved,the distribution equivalents previously credited to an optionee’s account willbe paid to such optionee at 100% of the distribution equivalents.  If the stretch limit is achieved, 200% of thedistribution equivalents otherwise credited to the optionee’s account will bepaid to the optionee. If the threshold limit is achieved, only 50% of thedistribution equivalents will be paid to the optionee.  If the increase in the cash distributionspaid to holders of Buckeye’s limited partnership units over the three-yearvesting period of the options is below the threshold amount, the optionee willnot receive any distribution equivalents. Set forth below are the distribution targets for the increase in thecash distributions paid to holders of Buckeye’s limited partnership units overthe three-year vesting periods for options granted in 2008, 2007 and 2006:

 
| **2008, 2007 and 2006** | ** ** | ** ** | ** ** | ** **  | ** ** |
|----------------------------------------|------------|------------|------------|-------------|------------|
| Below $0.40/  unit                     |       |       |       | None        |       |
| Threshold                              |       | $0.40/unit |       | 50 percent  |       |
| Target                                 |       | $0.60/unit |       | 100 percent |       |
| Stretch                                |       | $0.75/unit |       | 200 percent |       |

 

In2008, cash distribution equivalents paid to holders of options that vested in2008 were $18.45 per unit.  The amountsand features of the 2008 unit option grant to Mr. Powers were approved byBuckeye’s Board of Directors in February 2008.  **Buckeye isresponsible for Mr. Powers’ compensation discussed in this section.**

 

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**2008 Outstanding Equity Awards at Fiscal Year-EndTable**

 
| ** **         | ** ** | ** **     | ** ** | **Option Awards**                                    | ** ** | **Unit Awards**                                                     | ** ** |
|--------------------|------------|----------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **         | ** ** | ** **     | ** ** | **Number of  Units  Underlying  Unexercised  Option (#)** | ** ** | **Number of  Units  Underlying  Unexercised  Option (#)  Unexercisable** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration** | ** ** | **Number of  Units  that  have not  Vested** | ** ** | **Market  Value of  Units  that  have not  Vested** | ** ** |
| **Name**           | ** ** | **Grant Date** | ** ** | **Exercisable**                                           | ** ** | **(1)**                                                                  | ** ** | **($)** | ** ** | **Date** | ** ** | **(#) (2) *** | ** ** | **($) (3) *** | ** ** |
| Forrest E. Wylie   |       | —         |       | —                                                    |       | —                                                                   |       | — |   | — |   | 1,673,125 |   | 4,415,457 |   |
|               |       |           |       |                                                      |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Keith E.  St.Clair |       | —         |       | —                                                    |       | —                                                                   |       | — |   | — |   | — |   | — |   |
|               |       |           |       |                                                      |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Stephen C.  Muther |       | —         |       | —                                                    |       | —                                                                   |       | — |   | — |   | 446,166 |   | 1,177,453 |   |
|               |       |           |       |                                                      |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Eric A.  Gustafson |       | —         |       | —                                                    |       | —                                                                   |       | — |   | — |   | 446,166 |   | 1,177,453 |   |
|               |       |           |       |                                                      |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Vance E. Powers    |       | 02/26/2004     |       | 3,700                                                     |       | —                                                                   |       | 42.10 |   | 02/26/2014 |   | 278,854 |   | 735,908 |   |
|               |       | 04/01/2005     |       | 3,700                                                     |       | —                                                                   |       | 45.88 |   | 04/01/2015 |   | — |   | — |   |
|               |       | 02/23/2006     |       | —                                                    |       | 3,700                                                                    |       | 44.73 |   | 02/23/2016 |   | — |   | — |   |
|               |       | 02/21/2007     |       | —                                                    |       | 3,500                                                                    |       | 50.36 |   | 02/21/2017 |   | — |   | — |   |
|               |       | 02/21/2008     |       | —                                                    |       | 5,000                                                                    |       | 49.47 |   | 12/31/2011 |   | — |   | — |   |

 

----

***Represents compensation that is neither awarded by usnor paid by us**.

 

(1)   These amounts relate to options to purchase Buckeye’s limited partnerunits under our the Option Plan.  Alloptions vest after the expiration of three years from the grant date of theoption and are exercisable for up to seven years after the vesting date, exceptfor those granted February 21, 2008, which expire on December 31,2011. Our named executive officers other than Mr. Powers do notparticipate in the Option Plan.

 

(2)   These amounts are unvested Override Unitsgranted by BGH GP, which units consist of Operating Units, Value A Units, andValue B Units.  At December 31,2008, Messrs. Wylie, Muther, Gustafson, and Powers had 398,363, 106,230,106,230, and 66,394 unvested Operating Units, respectively.   At December 31, 2008, Messrs. Wylie,Muther, Gustafson, and Powers had 637,381, 169,968, 169,968, and 106,230unvested Value A Units, respectively, and 637,381, 169,968, 169,968, and 106,230unvested Value B Units, respectively. The vesting of the Override Units is discussed above in thenarrative section titled “BGH GP Holdings, LLC Override Units”.

 

(3)   A value of $5.18 per unvested Operating Unitwas derived by using the closing market price per unit of our Common Units on December 31,2008.  The fair value of the Value A andValue B Units was $2.21 and $1.48 per unit, respectively. The fair values ofthe Value A and Value B Units were calculated using a Monte Carlo simulationmodel that was consistent with the method as described in the abovenarrative section titled **“**BGH GP Holdings, LLCOverride Units” but using December 31, 2008 as the valuation date.

 

**2008 OptionExercises and Units Vested Table**

 
| ** **         | ** ** | **Unit Awards** | ** ** |
|--------------------|------------|----------------------|------------|
| ** **         | ** ** | **Number of**   | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Units**            | ** ** | **Value** | ** ** |
| ** **         | ** ** | **Acquired on**      | ** ** | **Realized** | ** ** |
| ** **         | ** ** | **Vesting**          | ** ** | **on Vesting** | ** ** |
| **Name**           | ** ** | **(#) (1) ***        | ** ** | **($) (2) *** | ** ** |
| Forrest E. Wylie   |       | 239,018              |       | 1,893,817 |   |
| Keith E.  St.Clair |       | —               |       | — |   |
| Stephen C.  Muther |       | 63,738               |       | 505,018 |   |
| Eric A.  Gustafson |       | 63,738               |       | 505,018 |   |
| Vance E. Powers    |       | 39,836               |       | 315,636 |   |

 

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***Represents compensation that is neither awarded by usnor paid by us.**

 

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(1)   These amounts are vestedOperating Units granted by BGH GP.  Thevesting of the Operating Units is discussed above in the narrative sectiontitled **“**BGH GP Holdings, LLC Override Units”.

 

(2)   Represents an aggregate value of $1,489,877,$397,301, $397,301 and $248,313 with respect to Operating Units that vested on June 25,2008 and $403,940, $107,717, $107,717 and $67,323 with respect to OperatingUnits that vested on December 25, 2008 held by each of Messrs. Wylie,Muther, Gustafson and Powers, respectively. The values realized for the vested Operating Units were derived by usingour closing market price per Common Unit on the vesting date of such OperatingUnits, as applicable.

 

**2008 Nonqualified Deferred Compensation Table**

** **
| ** **          | ** ** | **Registrant**    | ** ** | **Aggregate**   | ** ** | **Aggregate**   | ** ** | **Aggregate**       | ** ** |
|---------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|---------------------|------------|
| ** **          | ** ** | **Contributions** | ** ** | **Losses**      | ** ** | **Withdrawals** | ** ** | **Balance at** | ** ** |
| ** **          | ** ** | **in Last**       | ** ** | **in Last**     | ** ** | **in Last**     | ** ** | **Last Fiscal**     | ** ** |
| ** **          | ** ** | **Fiscal Year**   | ** ** | **Fiscal Year** | ** ** | **Fiscal Year** | ** ** | **Year-End**        | ** ** |
| **Name**            | ** ** | **($) (1)**       | ** ** | **($)**         | ** ** | **($)**         | ** ** | **($) (2)**         | ** ** |
| Forrest E.  Wylie*  |       | 17,000            |       | (2,074          | )          | —          |       | 14,926              |       |
| Keith E.  St.Clair  |       | —            |       | —          |       | —          |       | —              |       |
| Stephen C.  Muther* |       | 5,250             |       | (67,922         | )          | —          |       | 398,160             |       |
| Eric A.  Gustafson* |       | 5,250             |       | (23,529         | )          | —          |       | 100,711             |       |
| Vance E. Powers     |       | 11,562            |       | (2,661          | )          | —          |       | 14,421              |       |

 

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***Represents compensation that is paid by us.**

 

(1)   These contributions in the last fiscal yearfor each named executive officer are included in the All Other Compensationcolumn of the Summary Compensation Table above.

(2)   The following amounts were previouslyreported as compensation in the Summary Compensation Table for previousyears:  Mr. Muther - $36,421 and Mr. Gustafson- $34,187.

 

The amounts reflected inthe table above were credited to accounts of the named executive officers underthe Buckeye Pipe Line Services Company Benefit Equalization Plan (the “EqualizationPlan”). The Equalization Plan is a non-qualified deferred compensation plan andprovides that any employee whose company contributions to qualified pension andsavings plans have been limited due to IRS limits on compensation allowable forcalculating benefits under qualified plans will receive an equivalent benefitunder the Equalization Plan for company contributed amounts they would havereceived under qualified plans if there were no IRS limits on compensationlevels.  Employee deferrals are not allowedunder the Equalization Plan.  Inaddition, the Equalization Plan provides that any employee with a balance inthe plan will be credited with earnings on that balance at a rate that isequivalent to the actual earnings that the employee realizes on his or herinvestments in the Buckeye Pipe Line Services Company Retirement and SavingsPlan. Employees may periodically change their investment elections in theRetirement and Savings Plan in accordance with its terms and the terms of thedocuments governing the investments in which they currently participate.Amounts accumulated by an employee in the Equalization Plan are payable to theemployee in a lump sum upon termination of employment.  A participating employee may also receive adistribution of all or a portion of his or her account balance in the event ofa “hardship” as defined in the plan document and upon determination by thecommittee that administers the plan, and an employee may receive payment of aportion (as described in the plan) of the employee’s account balance in theevent of the death of the employee.

 

The table below shows thefund options available under the Retirement and Savings Plan and their annualrate of return for the year ended December 31, 2008.

 

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| **Name of Fund**                              | ** ** | **Rate of Return** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| American Century  Income & Growth - Inst. Fund |       | -34.56                       | %          |
| American Century  Small Cap Value - Inst. Fund          |       | -27.54                       | %          |
| American Funds  Growth Fund of America - R4             |       | -39.07                       | %          |
| American Value  Portfolio                               |       | -36.11                       | %          |
| JPMorgan  SmartRetirement 2010-Inst.                    |       | -21.16                       | %          |
| JPMorgan  SmartRetirement 2015-Inst.                    |       | -25.57                       | %          |
| JPMorgan  SmartRetirement 2020-Inst.                    |       | -28.79                       | %          |
| JPMorgan  SmartRetirement 2030-Inst.                    |       | -33.69                       | %          |
| JPMorgan  SmartRetirement 2040-Inst.                    |       | -34.59                       | %          |
| JPMorgan  SmartRetirement Income-Inst.                  |       | -17.98                       | %          |
| JPMorgan Stable  Value                                  |       | 4.11                         | %          |
| Lord Abbett  Developing Growth - A Fund                 |       | -47.50                       | %          |
| Oakmark Equity  and Income Fund                         |       | -16.18                       | %          |
| PIMCO Total Return  Fund                                |       | 4.60                         | %          |
| SSgA S&P 500  Fund-D                                |       | -38.14                       | %          |
| SSgA MSCI EAFE  Index Fund-C                            |       | -47.82                       | %          |
| Templeton  Foreign - A Fund                             |       | -46.09                       | %          |

 

**Payments upon Termination or Change in Control**

 

*Severance and Continued Benefits*

 

**Mr. Wylie**

 

If Mr. Wylie’semployment were terminated involuntarily, he would be eligible for severancepayments under the Severance Pay Plan for Employees of Buckeye Pipe LineServices Company.  Subject to certainlimitations, upon an involuntary termination, Mr. Wylie would be entitledto receive a lump-sum severance payment equal to eight weeks of his base payplus two weeks’ base pay for each year of service over 4 years.  Except in the case of a change of control (asdefined in the plan), however, the severance payment cannot exceed one year’sbase pay, which for Mr. Wylie is $400,000. Assuming an involuntary termination of employment on December 31,2008, Mr. Wylie would receive severance payments equal to approximately$61,538.  If Mr. Wylie were to beinvoluntarily terminated within two years after a “change of control,” he wouldbe entitled to receive two times the severance payments he would have beenentitled to receive under the above formula, or approximately $123,077.  For the purposes of the severance pay plan, a“change of control” will occur if any person (as such term is used in sections13(d) and 14(d) of the Exchange Act), except us or our affiliatesbecomes the beneficial owner, or the holder of proxies, in the aggregate of 80%or more of our limited partner units then outstanding.

 

**Mr. St.Clair**

 

In connection with the appointment of Mr. St.Clair as Senior VicePresident and Chief Financial Officer of MainLine Management and Buckeye GP, Mr. St.Clairentered into a Severance Agreement, dated as of November 10, 2008, withBGH, Buckeye, and Services Company. Pursuant to the terms of the Severance Agreement, Mr. St.Clair isentitled to severance payments following (i) the termination of Mr. St.Clair’semployment by Services Company except if the termination is a result of (x) thecontinuous illness, injury or incapacity for a period of six consecutive monthsof Mr. St.Clair or (y) “Cause”, or (ii) a voluntary terminationof employment by Mr. St.Clair upon (I) the material failure ofServices Company to comply with and satisfy any of the terms of the SeveranceAgreement, (II) the significant reduction by Services Company of theauthority, duties or responsibilities of Mr. St.Clair, (III) theelimination of Mr. St.Clair from eligibility to participate in, or theexclusion of Mr. St.Clair from participation in, employee benefit plans orpolicies, except to the extent such elimination or exclusion is applicable toBuckeye GP’s named executive officers as a group, (IV) the reduction in Mr. St.Clair’sannual base compensation or the reduction in the annual target cash bonusopportunity for which Mr. St.Clair is eligible (unless such reduction in Mr. St.Clair’sannual target cash bonus opportunity is made in connection with similarreductions in the bonus opportunities of Buckeye GP’s named executive officersas a group), or (V) the transfer of Mr. St.Clair, without his expresswritten consent, to a location that is more than 100 miles from Houston,Texas.  Mr. St.Clair’s SeveranceAgreement provides for a lump-sum severance payment from Services Company inthe amount of Mr. St.Clair’s annual base salary at the time of terminationplus any annual target bonus opportunity for such year. Assuming a qualifyingtermination of employment on December 31, 2008, Mr. St.Clair wouldhave received a lump-sum severance payment equal to $325,000.

 

If Mr. St.Clair becomes eligible for severance payments pursuant tothe terms of his Severance Agreement, Services Company will also providecertain continued benefits to Mr. St.Clair under our medical and dentalplans and policies for a period of 12 months 

 

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followinghis termination.  Mr. St.Clair’seligibility to continue receiving such medical and dental benefits will ceaseif he obtains new employment that provides him with eligibility for medicalbenefits without a pre-existing condition limitation.  During the 12-month benefit period, ServicesCompany will pay Mr. St.Clair a monthly payment equal to the COBRA cost ofcontinued health and dental coverage, less the amount that Mr. St.Clairwould be required to contribute for heath and dental coverage if Mr. St.Clairwere an active employee.  On each date onwhich a monthly benefit payment is made, Services Company will also pay Mr. St.Clairan additional tax gross-up amount equal to the federal, state and local incomeand payroll taxes, if any, that Mr. St.Clair incurs on the benefit paymentand the gross-up payment.  For the purposesof the gross-up payment, the aggregate tax rate for the federal, state andlocal income and payroll taxes is assumed to be 25%.  The gross-up payments will cease when thebenefits payments cease.

 

For the purposes of Mr. St.Clair’s Severance Agreement, “Cause” isdefined as (i) habitual insobriety or substance abuse, (ii) engagingin acts of disloyalty to BGH or Buckeye including fraud, embezzlement, theft,commission of a felony, or proven dishonesty, or (iii) willful misconductof Mr. St.Clair in the performance of his duties, or the willful failureof Mr. St.Clair to perform a material function of his duties pursuant tothe terms of the Severance Agreement.

 

In addition to any applicable severance payments described above,assuming Mr. St.Clair was terminated as of December 31, 2008 undercircumstances that entitled him to receive the continued medical and dentalbenefits described above, the value of such benefits is estimated to beapproximately $14,226. In valuing these benefits, we used the estimated ratesapplicable under the Comprehensive Omnibus Budget Reconciliation Act (COBRA)for terminated employees.  Upontermination, all named executive officers would be entitled to coverage underCOBRA. COBRA coverage for Mr. St.Clair would begin upon the expiration ofhis benefit continuation period set forth above.

 

**Mr. Muther**

 

On October 25,2007, in connection with Mr. Muther becoming President of our generalpartner and of Buckeye’s general partner, we and Mr. Muther amended andrestated his employment and severance agreement. Mr. Muther’s employmentand severance agreement provides that we will pay severance payments and allow Mr. Mutherto continue certain medical and dental benefits following a termination of Mr. Muther’semployment by us (and our affiliates).Under the employment and severance agreement, Mr. Muther is entitled tothe payment of severance and the continuation of certain benefits following (a) aninvoluntary termination of Mr. Muther’s employment for any reason otherthan for “cause” or (b) a voluntary termination of employment by Mr. Mutherfor “good reason,” which includes an election by Mr. Muther to terminatehis employment between December 26, 2008 and June 25, 2010 followinga change of control in us or Buckeye (which includes the change of control thatoccurred on June 25, 2007 as discussed above). Under either of thesecircumstances, Mr. Muther would receive a cash severance payment from usof $2,000,000 at the time of his termination.  Assuming a qualifying termination of employment on December 31,2008, Mr. Muther would have received a lump-sum severance payment equal to$2,000,000.  In addition, we will providecertain continued medical and dental benefits to Mr. Muther under Buckeye’splans for a period of 18 months following his termination (36 months if histermination were to be in connection with a change of control). Mr. Muther’seligibility to continue receiving these medical and dental benefits will ceaseif Mr. Muther obtains new employment that provides him with eligibilityfor medical benefits without a pre-existing condition limitation.  Also, if the first day of the calendar monthon or following Mr. Muther’s 65th birthday will be less than 18 monthsafter his termination (36 months if his termination were to be in connectionwith a change of control), then the cash severance payment described above willbe reduced to an amount equal to a fraction of such amount, the numerator ofwhich is the number of days from the date of Mr. Muther’s termination tothe first day of the calendar month on or following Mr. Muther’s 65thbirthday and the denominator of which is 548 (1095 if Mr. Muther’stermination was in connection with a change of control). For purposes of Mr. Muther’semployment agreement, a “change of control” is defined as the acquisition(other than by our general partner and its affiliates) of 80 percent or more ofBuckeye’s limited partnership units, 51 percent or more of the general partnerinterests owned by Buckeye’s general partner or 50 percent or more of thevoting equity interest of Buckeye and Buckeye GP on a combined basis andincludes the change of control that occurred on June 25, 2007 as discussedabove.  Mr. Muther is also eligiblefor severance under the Severance Pay Plan for Employees of Buckeye Pipe LineServices Company, which is described below in the discussion regarding Mr. Gustafson.If Mr. Muther is terminated such that both plans are triggered, however,the amount of the payments he would receive pursuant to his employment andseverance agreement will be reduced by any amounts he receives pursuant to theseverance pay plan.   As of December 31,2008, the severance payable to Mr. Muther pursuant to his employment andseverance agreement exceeds the amount payable under the severance pay plan.

 

In addition to anyapplicable severance payments described above, assuming Mr. Muther wasterminated as of December 31, 2008 under circumstances that entitled himto receive the continued medical, dental and disability benefits describedabove, the value of such benefits is estimated to be approximately $14,963,except if the termination were in connection with a change of control, thevalue of his benefits would be approximately $29,925. In valuing thesebenefits, we used the estimated rates applicable under the ComprehensiveOmnibus Budget Reconciliation Act (COBRA) for terminated employees.  Upon termination, all named executiveofficers would be entitled to coverage under COBRA. COBRA coverage for Mr. Mutherwould begin upon the expiration of his benefit continuation periods set forthabove.

 

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**Mr. Gustafson**

 

If Mr. Gustafson’semployment were terminated involuntarily, he would be eligible for severancepayments under the Severance Pay Plan for Employees of Buckeye Pipe LineServices Company.  Subject to certainlimitations, upon an involuntary termination, Mr. Gustafson would beentitled to receive a lump-sum severance payment equal to eight weeks of hisbase pay plus two weeks’ base pay for each year of service over 4 years.  Except in the case of a change of control (asdefined in the plan), however, the severance payment cannot exceed one year’sbase pay, which for Mr. Gustafson is $300,000.  Assuming an involuntary termination ofemployment on December 31, 2008, Mr. Gustafson would receiveseverance payments equal to approximately $293,500.  If Mr. Gustafson were to beinvoluntarily terminated within two years after a “change of control,” he wouldbe entitled to receive one year’s base pay plus the severance pay allowance hewould have been entitled to receive under the above formula, or approximately$593,500.  For the purposes of theseverance pay plan, a “change of control” will occur if any person (as suchterm is used in sections 13(d) and 14(d) of the Exchange Act), exceptus or our affiliates becomes the beneficial owner, or the holder of proxies, inthe aggregate of 80% or more of Buckeye’s limited partner units thenoutstanding.

 

**Mr. Powers**

 

If Mr. Powers’employment were terminated involuntarily, he would also be eligible forseverance payments under the Severance Pay Plan for Employees of Buckeye PipeLine Services Company.  Subject tocertain limitations, upon an involuntary termination, Mr. Powers would beentitled to receive a lump-sum severance payment equal to eight weeks of hisbase pay plus two weeks’ base pay for each year of service over 4 years.  Except in the case of a change of control (asdefined in the plan), however, the severance payment cannot exceed one year’sbase pay, which for Mr. Powers was $207,200 in 2008.  Assuming an involuntary termination ofemployment on December 31, 2008, Mr. Powers would receive severancepayments equal to approximately $53,800. If Mr. Powers were to be involuntarily terminated within two yearsafter a “change of control,” he would be entitled to receive one year’s basepay plus the severance pay allowance he would have been entitled to receiveunder the above formula, or approximately $261,000.

 

*Plan Payouts*

 

Upon termination of employment, each named executive officer would becomeentitled to distributions of the aggregate balances of his benefitsequalization plan account and ESOP account. If such officers had beenterminated as of December 31, 2008, each of them would have been entitledto receive the amounts set forth opposite his name in the “Aggregate Balance atLast Fiscal Year End” column of the “Nonqualified Deferred Compensation Table”for his benefits equalization plan balance. As of December 31, 2008, thevalue of Mr. Muther’s ESOP account was $434,606, the value of Mr. Gustafson’sESOP account was $401,847 and the value of Mr. Powers’ ESOP account was$152,320.

 

Asnoted in the “Outstanding Equity Awards at Fiscal Year-End Table” above, Mr. Powersowns 12,200 unvested options to purchase Buckeye’s limited partnership unitspursuant to the Option Plan. Under the terms of the Option Plan, if Buckeyeexperiences a change of control as defined in the Option Plan, and theacquiring entity does not assume the options under the Option Plan or otherwiseprovide for options to purchase the acquiror’s equity securities of equalvalue, then Mr. Powers’ unvested options would become vested upon thechange of control. Upon vesting in connection with a change of control, Mr. Powerswould realize value equal to the number of his options that vested times theamount, if any, by which the then current market price of Buckeye’s limitedpartner units exceeds the exercise price for such options set forth in column (e) ofthe “Outstanding Equity Awards at Fiscal Year-End Table.” Under the OptionPlan, a change of control of Buckeye would occur if (1) holders of Buckeye’slimited partnership units approve a merger or consolidation of Buckeye with anyother entity, other than a merger or consolidation which would result inholders of Buckeye’s limited partnership units retaining at least 75% of thetotal equity interest of the surviving entity, as represented by the percentageof units or equity securities of us or such surviving entity held by holders ofBuckeye’s limited partnership units immediately after such merger orconsolidation, (2) a plan of complete dissolution of Buckeye is adopted orholders of Buckeye’s limited partnership units approve an agreement for thesale or disposition by Buckeye (in one transaction or a series of transactions)of all or substantially all of Buckeye’s assets, or (3) Buckeye GP isremoved, or any person or entity except one or more of the equity interestholders of Buckeye GP or any employee benefit plan of Buckeye GP, together withall affiliates of such person or entity, becomes the beneficial owner, or theholder of proxies, in the aggregate of 51% or more of Buckeye GP’s general partnerinterests.

 

*BGH GP Override Units*

 

Upon a sale of a controlling interest in us or BGH GP, our named executiveofficers may be entitled to participate in a distribution in connection with anexit event as described above under the heading “BGH GP Holdings, LLC OverrideUnits.” The amount of any such distribution is currently indeterminable, as itdepends on the purchase price for the transaction and also on the aggregateamount of distributions that have been made to the ArcLight Kelso Membersdescribed above prior to the effectiveness of the sale.

 

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As set forth above, certain percentages of each named executive officer’sOverride Units are subject to forfeiture upon the occurrence of certain events,subject to certain vesting dates. Termination of employment of a named executive officer due to death,disability or retirement will not subject the Operating Units to anyforfeiture, however.

 

**2008 Director Compensation Table**

 
| ** **                                        | ** ** | **Fees Earned or** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| **Name**                                          | ** ** | **Paid in Cash**             | ** ** |
| W. B.  Hauptfuhrer **                             |       | $                            | 26,666     |   |
| Christopher L.  Collins                           |       | —                       |       |
| John F. Erhard                                    |       | —                       |       |
| Joseph A. LaSala  (1)                             |       | 93,750                       |       |
| Frank J. Loverro                                  |       | —                       |       |
| Oliver G. “Rick”  Richard, III (1) |       | 63,334                       |       |
| Frank S.  Sowinski (1)                            |       | 103,750                      |       |
| Robb E. Turner                                    |       | —                       |       |
| Total                                             |       | $                            | 287,500    |   |

 

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**Mr. Hauptfuhrerresigned from his position on the Board of Directors of MainLine Management aswell as the Audit Committee on April 29, 2008.

 

(1)  Includes $20,000 for each of Messrs. Richard and Sowinski,and $25,000 for Mr. LaSala as Chairman, for serving on a Special Committeeto review and evaluate the terms and conditions of a proposed tender offer byBGH GP.

 

***Director Compensation***

 

In 2008, directorsof MainLine Management received an annual fee of $50,000 plus $1,250 for eachBoard of Directors and committee meeting attended.  Additionally, the Chairman of the AuditCommittee receives an annual fee of $10,000. Neither Mr. Wylie nor any of the non-independent members of theBoard of Directors receive any fees for services as a director.  Directors’ fees paid by our general partnerin 2008 to its directors amounted to $287,500. The directors’ fees werereimbursed by us.

 

**Item 12.****    *****Security Ownershipof Certain Beneficial Owners and Management and Related Unitholder Matters***

 

The followingtable sets forth certain information, as of March 9, 2009, concerning thebeneficial ownership of our Common and Management Units held by each directorof our general partner, the Chief Executive Officer of our general partner, thePresident and Chief Operating Officer of our general partner, the other namedexecutive officers of our general partner and by all directors and executiveofficers of our general partner as a group. All information with respect to beneficial ownership has been furnishedby the respective directors and executive officers, as the case may be. Theaddress for the individuals and entities for which an address is not otherwiseindicated is: c/o Buckeye Partners, L.P., Five TEK Park, 9999 Hamilton Blvd.,Breinigsville, PA 18031.

 

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| ** **                                                                  | ** ** | **Number of**    | ** ** | ** **            | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **BGH**               | ** ** | **Percent of**        | ** ** |
| ** **                                                                  | ** ** | **Common &** | ** ** | **Common &** | ** ** |
| ** **                                                                  | ** ** | **Management**        | ** ** | **Management**        | ** ** |
| **Name of Beneficial Owner:**                                               | ** ** | **Units (1)**         | ** ** | **Units**             | ** ** |
| Christopher L.  Collins                                                     |       | 17,513,737            |       | 61.9                  | %(2)(3)    |   |
| John F. Erhard                                                              |       |                  |       | —                |       |   |
| Eric A.  Gustafson                                                          |       | 45,000                |       | *                     | (4)        |   |
| Joseph A.  LaSala, Jr                                                       |       | —                |       | —                |       |   |
| Frank J. Loverro                                                            |       | 17,513,737            |       | 61.9                  | %(2)(3)    |   |
| Stephen C.  Muther                                                          |       | 50,000                |       | *                     | (5)        |   |
| Vance E. Powers                                                             |       | 10,000                |       | *                     |       |   |
| Oliver G. “Rick”  Richard, III                               |       | —                |       | —                |       |   |
| Clark C. Smith                                                              |       | —                |       | —                |       |   |
| Frank S.  Sowinski                                                          |       | 8,100                 |       | *                     |       |   |
| Keith E.  St.Clair                                                          |       | —                |       | —                |       |   |
| Robb E. Turner                                                              |       | 17,513,737            |       | 61.9                  | %(2)(3)    |   |
| Forrest E. Wylie                                                            |       | 17,513,737            |       | 61.9                  | %(2)(3)    |   |
| All directors  and executive officers as a group (consisting of 14 persons) |       | 17,577,837            |       | 62.1                  | %(6)       |   |
| **Other 5%  Unitholders:**                                                  |       |                  |       |                  |       |   |
| BGH GP Holdings                                                             |       | 17,513,737            |       | 61.9                  | %(2)(3)    |   |
| Goldman Sachs                                                               |       | 3,037,146             |       | 10.7                  | %(7)       |   |

 

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*Less than 1%

 

(1)  Unlessotherwise indicated, the persons named above have sole voting and investmentpower over the Common and Management Units reported.

 

(2)   IncludesManagement Units, which are convertible into Common Units, at the election ofthe holder, on a one-for-one basis.

 

(3)  IncludesCommon and Management Units owned by BGH GP Holdings, LLC, the sole member ofMainLine Management.  BGH GP is governedby a Board of Directors which includes Messrs. Collins, Loverro, Turnerand Wylie, each of whom is also a director of MainLine Management.  Therefore, each of these directors has sharedvoting and investment power over the securities indicated.  BGH GP is primarily owned by investmentpartnerships affiliated with ArcLight Capital Partners, LLC, Kelso &Company and certain other investment funds. The address of BGH GP is c/o ArcLight Capital Partners, LLC, 200Clarendon Street, 55th Floor, Boston, Massechusetts 02117.  Each of Messrs. Collins, Loverro,Turner, and Wylie expressly disclaims beneficial ownership of such Common andManagement Units of BGH.

 

(4)  Effective February 17,2009, Mr. Gustafson resigned from his position as Senior Vice Presidentand Chief Operating Officer of MainLine Management due to his pendingretirement. Mr. Gustafson iscontinuing as an employee of Services Company for a limited transition periodprior to his retirement.

 

(5)  Effective February 17,2009, Mr. Muther resigned from his position as President of MainLineManagement due to his pending retirement. Mr. Muther will continue as an employee of Services Company throughJune 30, 2009.

 

(6)  The17,513,737 Common and Management Units are included in the total only once.

 

(7)  TheGoldman Sachs Group, Inc. and Goldman, Sachs & Co. filedAmendment No. 2 to Schedule 13G on February 6, 2008, to report that,as of December 31, 2007, it had shared voting power over 101,707 CommonUnits of BGH, and beneficial ownership of, and shared dispositive power over2,935,439 Common Units of BGH, representing 10.7% of the total outstandingCommon Units of BGH, as of that date. The Goldman Sachs Group, Inc. and Goldman, Sachs & Co.have not filed a Schedule 13G in 2009 prior to March 9, 2009.  Based on the total number of Common Units ofBGH outstanding as of March 9, 2009, and the number of Common Unitsreported by the Goldman Sachs Group, Inc. and Goldman, Sachs &Co. as of December 31, 2007, it had 10.7% of the total outstanding CommonUnits of BGH.

 

**BuckeyePartners, L.P.**

 

Services Companyowns approximately 4.4 % of the outstanding LP Units as of March 9,2009.  No person or group is known to bethe beneficial owner of more than 5% of the LP Units as of March 9, 2009.

 

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The followingtable sets forth certain information, as of March 9, 2009, concerning thebeneficial ownership of LP Units by each director of our general partner, theChief Executive Officer of our general partner, the President and ChiefOperating Officer of our general partner, the other named executive officers ofour general partner and by all directors and executive officers of our generalpartner as a group. Such information is based on data furnished by the personsnamed. Based on information furnished to our general partner by such persons,no director or executive officer of our general partner owned beneficially, asof such date, more than 1% of any class of our equity securities or those ofour subsidiaries outstanding at that date. All information with respect tobeneficial ownership has been furnished by the respective directors, namedexecutive officers and executive officers, as the case may be. The address forthe individuals and entities for which an address is not otherwise indicatedis: c/o Buckeye Partners, L.P., Five TEK Park, 9999 Hamilton Blvd.,Breinigsville, PA 18031.

 
| ** **                                                                  | ** ** | **Number of**         | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|
| **Name**                                                                    | ** ** | **LP Units (1)** | ** ** |
| Christopher L.  Collins                                                     |       | 80,000                     | (2)        |
| John F. Erhard                                                              |       | 80,000                     | (2)        |
| Eric A.  Gustafson                                                          |       | 18,600                     | (3)        |
| Joseph A.  LaSala, Jr                                                       |       | 80,000                     | (2)        |
| Frank J. Loverro                                                            |       | 80,000                     | (2)        |
| Stephen C.  Muther                                                          |       | 23,600                     | (4)        |
| Vance E. Powers                                                             |       | 100                        |       |
| Oliver G. “Rick”  Richard, III                               |       | 80,750                     | (2)        |
| Clark C. Smith                                                              |       | 3,000                      |       |
| Frank S.  Sowinski                                                          |       | 85,500                     | (2)        |
| Keith E.  St.Clair                                                          |       | —                     |       |
| Robb E. Turner                                                              |       | 80,000                     | (2)        |
| Forrest E. Wylie                                                            |       | 82,500                     | (2)        |
| All directors  and executive officers as a group (consisting of 14 persons) |       | 102,350                    | (5)        |

 

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(1)          Unlessotherwise indicated, the persons named above have sole voting and investmentpower over the LP Units reported.

 

(2)          Includesthe 80,000 LP Units owned by Buckeye GP Holdings L.P., over which the indicatedpersons share voting and investment power by virtue of their membership on theBoard of Directors of MainLine Management LLC, the general partner of BuckeyeGP Holdings L.P.  Such individualsexpressly disclaim beneficial ownership of such LP Units.

 

(3) Effective February 17, 2009, Mr. Gustafson resigned from his positionas Senior Vice President and Chief Operating Officer of MainLine Management dueto his pending retirement.  Mr. Gustafsonis continuing as an employee of Services Company for a limited transitionperiod prior to his retirement.

 

(4) Effective February 17, 2009, Mr. Muther resigned from his position asPresident of MainLine Management due to his pending retirement.  Mr. Muther will continue as an employeeof Services Company through June 30, 2009.

 

(5)          The80,000 Units owned by Buckeye GP Holdings L.P. are included in the total onlyonce.

 

***Changes in Control***

*** ***

BGH is party to a $10.0 million credit agreement with SunTrust Bank.  Buckeye is not a party to this creditagreement. The credit agreement is secured by the pledge of the outstandinglimited liability company interests of MainLine Management.  If BGHdefaults on its obligations under its credit agreement, the lender couldexercise its rights under this pledge, which could result in a future change ofcontrol of BGH.

** **

**Item 13.     *Certain Relationships andRelated Transactions, and Director Independence***

*** ***

**General Partner Reimbursement andDistributions**

** **

***Reimbursement of General Partner Costs and Expenses***

 

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Our generalpartner manages us pursuant to our Agreement of Limited Partnership. Under thisagreement, our general partner and certain related parties are entitled toreimbursement of all direct and indirect costs and expenses related to managingus.

 

***Management Fee***

*** ***

Our general partner is entitled to be paid an annual management fee forcertain management functions it provides to Buckeye GP pursuant to a ManagementAgreement between our general partner and Buckeye GP. The management feeincludes an annual “Senior Administrative Charge” of not less than $975,000 andreimbursement for certain costs and expenses. The disinterested directors ofBuckeye GP approve the amount of the management fee on an annual basis.  In connection with the acquisition of all ofthe member interests in Lodi Gas from Lodi Holdings, L.L.C., an affiliate ofArcLight, MainLine Management, our general partner, agreed to forego payment ofthe Senior Administrative Charge effective June 25, 2007 through March 31,2009. The foregone payment was considered in the net purchase price allocationof the Lodi Gas acquisition.

 

***Ownership ofBuckeye GP***

*** ***

        Weown 100% of the membership interest of Buckeye GP. Our cash flows consistof distributions from Buckeye on the partnership interest Buckeye GP owns,which consists of the following:

 

·                  theincentive distribution rights in Buckeye;

 

·                  approximatelya 1% general partner interest in each of Buckeye Pipe Line, Laurel, Evergladesand BPH; and

 

·                  243,914 GPUnits in Buckeye.

 

        Wealso own 80,000 Buckeye LP Units, representing a de minimis limitedpartner interest in Buckeye.

 

        Buckeye GPmanages the operations and activities of Buckeye and indirectly manages theoperations and activities of Buckeye Pipe Line, Laurel, Everglades and BPH.

 

***Distribution Rights***

*** ***

Cash distributionsfrom Buckeye are generally made approximately 99.4% to its LP Unitholders(including the Buckeye LP Units we own), and approximately 0.6% to Buckeye GP,as holder of Buckeye’s GP Units. In addition, if distributions exceed thetarget levels in excess of the minimum quarterly distribution, Buckeye GP isentitled to receive incentive distributions equal to an increasing percentageof such cash distributions. Specifically, subject to certain limitations andadjustments, if a quarterly cash distribution from Buckeye on its LP Unitsexceeds a target of $0.325 per LP Unit, Buckeye will pay Buckeye GP, in respectof each outstanding Buckeye LP Unit, incentive distributions equal to (i) 15%of that portion of the distribution per Buckeye LP Unit which exceeds the targetquarterly amount of $0.325 but is not more than $0.35, plus (ii) 25% ofthe amount, if any, by which the quarterly distribution per Buckeye LP Unitexceeds $0.35 but is not more than $0.375, plus (iii) 30% of the amount,if any, by which the quarterly distribution per Buckeye LP Unit exceeds $0.375but is not more than $0.40, plus (iv) 35% of the amount, if any, by whichthe quarterly distribution per Buckeye LP Unit exceeds $0.40 but is not morethan $0.425, plus (v) 40% of the amount, if any, by which the quarterlydistribution per Buckeye LP Unit exceeds $0.425 but is not more than $0.525,plus (vi) 45% of the amount, if any, by which the quarterly distributionper Buckeye LP Unit exceeds $0.525. Buckeye GP is also entitled to an incentivedistribution, under a comparable formula, in respect of special cashdistributions exceeding a target special distribution amount per Buckeye LPUnit. The target special distribution amount generally means the amount which,together with all amounts distributed per Buckeye LP Unit prior to the specialdistribution compounded quarterly at 13% per annum, would equal $10.00 (theinitial public offering price of the LP Units split two-for-one) compoundedquarterly at 13% per annum from the date of the closing of Buckeye’s initialpublic offering in December 1986. Incentive payments paid by Buckeye forquarterly cash distributions totaled $39.0 million, $30.0 million and $24.9million in 2008, 2007 and 2006, respectively. No special cash distributionshave ever been paid by Buckeye.

 

        If Buckeye’s general partner withdrawsor is removed, and a successor general partner is elected by Buckeye’s limitedpartners, the successor general partner is required to buy Buckeye’s GP Unitsfor a cash price equal to the fair market value. The fair market value of theGP Units includes the value of all the rights associated with being Buckeye’sgeneral partner, including, without limitation, the general partner’s pro ratainterest in Buckeye and the right to receive incentive distributions.

 

        Upon Buckeye’s liquidation, thepartners, including Buckeye GP, will be entitled to receive liquidatingdistributions according to their particular capital account balances.

 

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As discussed, weown Buckeye GP, and, therefore benefit from payments made by Buckeye to BuckeyeGP, such as the distributions described above. Because we distribute substantiallyall of our available cash to our Unitholders quarterly and because certainmembers of management receive these distributions as Unitholders of us, thesemembers of management may have an indirect material interest in such payments.

 

**Transactions with Affiliates ofLehman Brothers**

** **

On September 15,2008, it was reported that Lehman Brothers filed for protection under Chapter11 of the federal Bankruptcy Code in the United States Bankruptcy Court in theSouthern District of New York.  Anaffiliate of Lehman Brothers owned a direct interest in BGH GP, affiliates ofLehman Brothers had provided investment and commercial banking and financialadvisory services to Buckeye, an affiliate of Lehman Brothers was a lenderunder Buckeye’s Credit Facility, and an affiliate of Lehman Brothers was acustomer of Lodi Gas.  BGH has consideredits relationships with Lehman Brothers and its affiliates and, and for thereasons set forth below, believes the Lehman Brothers bankruptcy and thepossible resulting effects on affiliates of Lehman Brothers will not have adirect material adverse effect on BGH. The BGH GP interest owned by anaffiliate of Lehman Brothers was a passive investment that did not entitle itsholder to any management or other control rights with respect to BGH GP,MainLine Management, BGH, Buckeye GP, or Buckeye.  Consequently, BGH believes that if theinterest in BGH GP is or has been transferred in connection with LehmanBrothers’ bankruptcy, such transfer will not adversely impact BGH.  An affiliate of Barclays PLC has acquired andis operating the investment banking business and certain financial servicesbusinesses of Lehman Brothers and its affiliates in North America and, as aresult, management does not expect any disruption with respect to these servicesthat Lehman Brothers and its affiliates have provided to Buckeye.  Lehman Brothers Bank, FSB, an affiliate ofLehman Brothers, has committed, as a lender, 3.3%, or $20.0 million, of Buckeye’s$600.0 million borrowing capacity under Buckeye’s Credit Facility, but recentlyhas not honored that commitment.  BGHdoes not believe that the reduction in capacity under Buckeye’s Credit Facilityresulting from the unavailability of Lehman Brothers Bank, FSB’s commitmentwill have any impact on Buckeye’s ability to meet its liquidity needs.  Finally, in October 2008, LehmanBrothers sold the Lehman Brothers affiliate that is a customer of Lodi Gas to athird party not affiliated with Lehman Brothers.

 

**Policies Regarding Related PartyTransactions**

** **

Except for compensation that we pay, the materialportions of which are described in this report, our policy is to avoidtransactions between us and our directors and officers (including members oftheir families) in which such persons would have a material interest.  In furtherance of this policy, we have adoptedCorporate Governance Guidelines, a Code of Ethics for Directors, ExecutiveOfficers and Senior Financial Employees and a Business Code of Conduct for allemployees, which generally require the reporting to management of transactionsor opportunities that constitute conflicts of interest so that they may beavoided. These guidelines and codes are available on our web site at *www.buckeyegp.com* by browsing to the “Corporate Governance”subsection of the “Investor Center” menu.

 

We also have a policy of avoiding transactions betweenus and holders of 5% or more of our Common Units.

 

Pursuant to our Corporate Governance Guidelines, anytransaction between us and our officers and directors or holders of 5% of moreof our Common Units that should be avoided pursuant to these policies must bereviewed and approved by our Board of Directors (other than any board memberhaving a material interest in the transaction in question). The Board ofDirectors will only approve transactions that are fair and reasonable to us.Our partnership agreement states that a transaction will be deemed fair andreasonable to us if it is approved by our Audit Committee, if it is on termsobjectively demonstrable to be no less favorable to us than those generallybeing provided to or available from unrelated third parties, or if it isotherwise determined to be fair to us, taking into account the totality of therelationships among the parties involved, including other transactions that maybe particularly favorable or advantageous to us.

 

**Director Independence**

 

Section 303A.00 of the NYSE Listed Company Manualstates that the NYSE listing standards requiring a majority of directors to beindependent do not apply to publicly traded limited partnerships like us.However, three of the general partner’s eight directors are “independent” asthat term is defined in the applicable NYSE rules and Rule 10A-3 of theExchange Act.  In determining theindependence of each director, our general partner has adopted certaincategorical standards. Our general partner’s independent directors asdetermined in accordance with those standards are Joseph A. LaSala, Jr., OliverG. “Rick” Richard, III and Frank S. Sowinski. Pursuant to such categorical standards, a director will not be deemedindependent if:

 

·                  the director is, or has been within the last threeyears, our employee, or an immediate family member is, or has been within thelast three years, our executive officer;

 

·                  the director has received, or has an immediate familymember who has received, during any twelve-month period within the last threeyears, more than $120,000 in direct compensation from us, other than directorand committee fees and pension or other forms of deferred compensation forprior service (provided such compensation is not contingent in any way oncontinued service);

 

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·                  (i) the director or an immediate family memberis a current partner of a firm that is our internal or external auditor; (ii) thedirector is a current employee of such a firm; (iii) the director has animmediate family member who is a current employee of such a firm and whoparticipates in the firm’s audit, assurance or tax compliance (but not taxplanning) practice; or (iv) the director or an immediate family member waswithin the last three years (but is no longer) a partner or employee of such afirm and personally worked on our audit within that time;

 

·                  the director or an immediate family member is, or hasbeen within the last three years, employed as an executive officer of anothercompany where any of our present executive officers at the same time serve orserved on that company’s Compensation Committee;

 

·                  the director is a current employee, or an immediatefamily member is a current executive officer, of a company that has madepayments to, or received payments from, us for property or services in anamount which, in any of the last three fiscal years, exceeds the greater of$1.0 million, or 2% of such other company’s consolidated gross revenues; or

 

·                  the director serves as an executive officer of acharitable organization and, during any of the past three fiscal years, we madecharitable contributions to the charitable organization in any single fiscalyear that exceeded $1.0 million or two percent, whichever is greater, of thecharitable organization’s consolidated gross revenues.

 

For the purposes of these categorical standards, the term “immediate familymember” includes a person’s spouse, parents, children, siblings, mothers andfathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, andanyone (other than domestic employees) who shares such person’s home.

 

***Meetings ofNon-Management Directors***

* *

Our non-management directors meet in executive session at least two timesper year outside of the presence of any management directors and any othermembers of our management who may otherwise be present.  During at least one session per year, onlyindependent directors are present.  Thedirectors present at each executive session select a presiding director forthat session.

 

***Director Attendance of Meetings***

 

Our general partner’s Board of Directors held twelve meetings in fiscalyear 2008. Each director attended more than 75% of the aggregate of the totalnumber of meetings of the board and the total number of meetings of thecommittees on which he served during the portions of the year that such personwas a director.

 

**Item 14.   *Principal AccountantFees and Services***

*** ***

The followingtable summarizes the aggregate fees billed to BGH by Deloitte &Touche, LLP, the member firm of Deloitte Touche Tohmatsu, and their respectiveaffiliates (collectively, the “Deloitte Entities”).

 
| ** **     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Audit fees (1) |       | $        | 304,000    |     | $          | 340,305 |   |
| Tax fees (2)   |       | 210,933  |       | 236,672  |       |
| Total          |       | $        | 514,933    |     | $          | 576,977 |   |

 

----

(1) Auditfees include fees for the audit of BGH’s consolidated financial statements aswell as the audit of the internal control over financial reporting, reviews ofBGH’s quarterly consolidated financial statements and comfort letters, consentsand other services related to Securities and Exchange Commission matters.

 

(2)  Tax feesconsist of fees for tax consultation and tax compliance services.

 

**Proceduresfor Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services ofIndependent Auditor**

** **

As outlined in itscharter, the Audit Committee of the Board of Directors is responsible forreviewing and approving, in advance, any audit and any permissible non-auditengagement or relationship between us and our independent auditors.  The Deloitte Entities’ engagement to conductour audit was pre-approved by the Audit Committee.  Additionally, all permissible non-auditservices by the Deloitte Entities have been reviewed and pre-approved by theAudit Committee, as outlined in the pre-approval policies and proceduresestablished by the Audit Committee.

 

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**PART IV**

** **

**Item 15.     *Exhibits and Financial Statement Schedules***

*** ***

(a)   The following documents are filed as a partof this Report:

 

(1) FinancialStatements — see Index to Financial Statements.

 

(2) Exhibits, including those incorporated byreference. The following is a list of exhibits filed as part of this AnnualReport on Form 10-K. Where so indicated by footnote, exhibits which werepreviously filed are incorporated by reference. For exhibits incorporated byreference, the location of the exhibit in the previous filing is indicated inparentheses.

 

**Exhibit Number(Referenced to Item 601 of Regulation S-K)**

 
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                    | ** ** | ** **     | ** ** | ** **   | ** ** | **Incorporated by reference** | ** ** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------|------------|-------------------------------|------------|
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                    | ** ** | ** **     | ** ** | **Filed**    | ** ** | ** **                    | ** ** | **Period** | ** ** | ** ** | ** ** | **Filing** | ** ** |
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                  | ** ** | **Registrant** | ** ** | **herewith** | ** ** | **Form**                      | ** ** | **ending** | ** ** | **Exhibit** | ** ** | **Date** | ** ** |
| 3.1         |       | Certificate of Limited  Partnership of Buckeye GP Holdings L.P., dated March 27, 2006                                                                                                                                                                                    |       | BGH            |       |         |       | S-1                           |       |   |   | 3.1 |   | 4/20/06 |   |
|        |       |                                                                                                                                                                                                                                                                          |       |           |       |         |       |                          |       |   |   |   |   |   |   |
| 3.2         |       | First Amended and  Restated Agreement of Limited Partnership of Buckeye GP Holdings L.P., dated  as of August 9, 2006                                                                                                                                                    |       | BGH            |       |         |       | 8-K                           |       |   |   | 3.1 |   | 8/14/06 |   |
|        |       |                                                                                                                                                                                                                                                                          |       |           |       |         |       |                          |       |   |   |   |   |   |   |
| 10.1        |       | Amended &  Restated Contribution, Conveyance and Assumption Agreement, dated as of  August 9, 2006, among the limited partners of MainLine L.P., MainLine  L.P., Buckeye GP LLC, Buckeye GP Holdings L.P., MainLine Management LLC, and  MainLine GP, Inc. |       | BGH            |       |         |       | 8-K                           |       |   |   | 10.1 |   | 8/14/06 |   |
|        |       |                                                                                                                                                                                                                                                                          |       |           |       |         |       |                          |       |   |   |   |   |   |   |
| 10.2        |       | Indenture, dated as of  July 10, 2003, between Buckeye Partners, L.P. and SunTrust Bank, as  Trustee                                                                                                                                                                     |       | BPL            |       |         |       | S-4                           |       |   |   | 4.1 |   | 9/19/03 |   |
|        |       |                                                                                                                                                                                                                                                                          |       |           |       |         |       |                          |       |   |   |   |   |   |   |
| 10.3        |       | First Supplemental  Indenture, dated as of July 10, 2003, between Buckeye Partners, L.P. and  SunTrust Bank, as Trustee                                                                                                                                                  |       | BPL            |       |         |       | S-4                           |       |   |   | 4.2 |   | 9/19/03 |   |
|        |       |                                                                                                                                                                                                                                                                          |       |           |       |         |       |                          |       |   |   |   |   |   |   |
| 10.4        |       | Second Supplemental  Indenture, dated as of August 19, 2003, between Buckeye Partners, L.P.  and SunTrust Bank, as Trustee                                                                                                                                               |       | BPL            |       |         |       | S-4                           |       |   |   | 4.3 |   | 9/19/03 |   |
|        |       |                                                                                                                                                                                                                                                                          |       |           |       |         |       |                          |       |   |   |   |   |   |   |
| 10.5        |       | Third Supplemental  Indenture, dated as of October 12, 2004, between Buckeye Partners, L.P.  and SunTrust Bank, as Trustee                                                                                                                                               |       | BPL            |       |         |       | 8-K                           |       |   |   | 4.1 |   | 10/14/04 |   |
|        |       |                                                                                                                                                                                                                                                                          |       |           |       |         |       |                          |       |   |   |   |   |   |   |
| 10.6        |       | Fourth Supplemental  Indenture, dated as of June 30, 2005, between Buckeye Partners, L.P. and  SunTrust Bank, as Trustee                                                                                                                                                 |       | BPL            |       |         |       | 8-K                           |       |   |   | 4.1 |   | 6/30/05 |   |

 

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| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                             | ** ** | ** **     | ** ** | ** **   | ** ** | **Incorporated by reference** | ** ** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------|------------|-----------------------------------------|------------|
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                             | ** ** | ** **     | ** ** | **Filed**    | ** ** | ** **                              | ** ** | **Period** | ** ** | ** ** | ** ** | **Filing** | ** ** |
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                           | ** ** | **Registrant** | ** ** | **herewith** | ** ** | **Form**                                | ** ** | **ending** | ** ** | **Exhibit** | ** ** | **Date** | ** ** |
| 10.7        |       | Fifth Supplemental Indenture, dated January 11  2008, between Buckeye Partners, L.P. and U.S. Bank National Association  (successor to SunTrust Bank)                                                                                                                                                             |       | BPL            |       |         |       | 8-K                                     |       |   |   | 4.1 |   | 1/11/08 |   |
|        |       |                                                                                                                                                                                                                                                                                                                   |       |           |       |         |       |                                    |       |   |   |   |   |   |   |
| 10.8        |       | Amended and Restated Agreement of Limited  Partnership of Buckeye Partners, L.P., dated as of April 14, 2008,  effective as of January 1, 2007                                                                                                                                                               |       | BPL            |       |         |       | 8-K                                     |       |   |   | 3.1 |   | 4/15/08 |   |
|        |       |                                                                                                                                                                                                                                                                                                                   |       |           |       |         |       |                                    |       |   |   |   |   |   |   |
| 10.9        |       | Amended and Restated Management Agreement between  MainLine L.P. and Buckeye Pipe Line Company, L.P., as amended and restated as  of August 9, 2006 (1)                                                                                                                                                           |       | BGH            |       |         |       | 8-K                                     |       |   |   | 10.5 |   | 8/14/06 |   |
|        |       |                                                                                                                                                                                                                                                                                                                   |       |           |       |         |       |                                    |       |   |   |   |   |   |   |
| 10.10       |       | Services Agreement, dated as of December 15,  2004, among Buckeye Partners, L.P., certain of its subsidiaries and Buckeye  Pipe Line Services Company                                                                                                                                                             |       | BPL            |       |         |       | 8-K                                     |       |   |   | 10.3 |   | 12/20/04 |   |
|        |       |                                                                                                                                                                                                                                                                                                                   |       |           |       |         |       |                                    |       |   |   |   |   |   |   |
| 10.11       |       | First Amendment to Services Agreement, dated as of  October 15, 2008, among Buckeye Partners, L.P., Buckeye Pipe Line  Services Company, and the subsidiary partnerships and limited liability  companies of Buckeye set forth on the signature pages thereto                                                |       | BPL            |       |         |       | 8-K                                     |       |   |   | 10.2 |   | 10/16/08 |   |
|        |       |                                                                                                                                                                                                                                                                                                                   |       |           |       |         |       |                                    |       |   |   |   |   |   |   |
| 10.12       |       | Fifth Amended and Restated Exchange Agreement, dated  as of October 15, 2008, among Buckeye GP Holdings L.P., Buckeye GP LLC,  Buckeye Partners, L.P., MainLine L.P., Buckeye Pipe Line Company, L.P.,  Laurel Pipe Line Company, L.P., Everglades Pipe Line Company, L.P., and  Buckeye Pipe Line Holdings, L.P. |       | BPL            |       |         |       | 10-K                                    |       | 12/31/08 |   | 10.6 |   | 3/2/09 |   |
|        |       |                                                                                                                                                                                                                                                                                                                   |       |           |       |         |       |                                    |       |   |   |   |   |   |   |
| 10.13       |       | Acknowledgement and Agreement, dated as of  May 6, 2002, between Buckeye Partners, L.P. and Glenmoor, Ltd.                                                                                                                                                                                                        |       | BGH            |       |         |       | S-1                                     |       |   |   | 10.13 |   | 4/20/06 |   |
|        |       |                                                                                                                                                                                                                                                                                                                   |       |           |       |         |       |                                    |       |   |   |   |   |   |   |
| 10.14*      |       | Amended and Restated Employment and Severance  Agreement, dated as of October 25, 2007, by and among Stephen C. Muther,  Buckeye GP Holdings L.P. and Buckeye Pipe Line Services Company                                                                                                                          |       | BGH            |       |         |       | 8-K                                     |       |   |   | 10.1 |   | 10/26/07 |   |

 

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| ** **  | ** ** | ** **                                                                                                                                                                                                          | ** ** | ** **     | ** ** | ** **   | ** ** | **Incorporated  by reference** | ** ** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------|------------|--------------------------------|------------|
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                          | ** ** | ** **     | ** ** | **Filed**    | ** ** | ** **                     | ** ** | **Period** | ** ** | ** ** | ** ** | **Filing** | ** ** |
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                                                        | ** ** | **Registrant** | ** ** | **herewith** | ** ** | **Form**                       | ** ** | **ending** | ** ** | **Exhibit** | ** ** | **Date** | ** ** |
| 10.15*      |       | Severance Agreement, dated  as of November 10, 2008, by and among Buckeye Partners, L.P., Buckeye GP  Holdings L.P., Buckeye Pipe Line Services Company, and Keith St.Clair.                                   |       | BGH            |       |         |       | 8-K                            |       |   |   | 10.1 |   | 11/10/08 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.16*      |       | Director Recognition  Program of Buckeye GP LLC                                                                                                                                                                     |       | BPL            |       |         |       | 10-K                           |       | 12/31/98 |   | 10.15 |   | 3/22/99 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.17*      |       | Amended and Restated  Management Agreement, dated as of December 15, 2004, among Buckeye GP  LLC and MainLine Sub LLC                                                                                          |       | BPL            |       |         |       | 8-K                            |       |   |   | 10.9 |   | 12/20/04 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.18*      |       | Amended and Restated Unit  Option and Distribution Equivalent Plan of Buckeye Partners, L.P., dated as  of April 24, 2002                                                                                      |       | BPL            |       |         |       | 10-Q                           |       | 3/31/02 |   | 10.11 |   | 5/9/02 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.19*      |       | Amended and Restated Unit  Option Loan Program of Buckeye Pipe Line Company dated as of April 24,  2002                                                                                                        |       | BPL            |       |         |       | 10-Q                           |       | 3/31/02 |   | 10.12 |   | 5/9/02 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.20       |       | Amended and Restated  Executive Employment Agreement, dated as of August 9, 2006, among  Buckeye GP LLC, MainLine Sub LLC, MainLine L.P., MainLine GP, Inc. and  Buckeye Pipe Line Services Company       |       | BGH            |       |         |       | 8-K                            |       |   |   | 10.7 |   | 8/14/06 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.21       |       | Termination Agreement,  dated as of October 15, 2008, among Buckeye GP LLC, Buckeye GP Holdings  L.P., MainLine L.P., MainLine GP, Inc, and Buckeye Pipe Line Services Company                                 |       | BGH            |       |         |       | 8-K                            |       |   |   | 10.2 |   | 10/16/08 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.22       |       | Credit Agreement, dated  August 9, 2006, among Buckeye GP Holdings L.P., as borrower, SunTrust  Bank, as administrative agent, and the lenders signatory thereto                                               |       | BGH            |       |         |       | 8-K                            |       |   |   | 10.8 |   | 8/14/06 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.23       |       | First Amendment to Credit  Agreement, dated as of May 18, 2007, by and among Buckeye GP Holdings  L.P., as borrower, SunTrust Bank, as administrative agent, and the lenders  signatory thereto                |       | BGH            |       |         |       | 10-Q                           |       | 6/30/07 |   | 10.2 |   | 7/30/07 |   |
|        |       |                                                                                                                                                                                                                |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.24       |       | Supplement to Pledge  Agreement - Additional Pledgor, dated as of September 15, 2006, among  Buckeye GP Holdings L.P., as borrower, SunTrust Bank, as administrative  agent, and the lenders signatory thereto |       | BGH            |       |         |       | 10-Q                           |       | 9/30/06 |   | 10.9 |   | 11/6/06 |   |
|             |            |                                                                                                                                                                                                                     |            |                |            |              |            |                                |            |  |  |  |  |  |  |  |

 

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| ** **  | ** ** | ** **                                                                                                                                                                                                                             | ** ** | ** **     | ** ** | ** **   | ** ** | **Incorporated  by reference** | ** ** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------|------------|--------------------------------|------------|
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                             | ** ** | ** **     | ** ** | **Filed**    | ** ** | ** **                     | ** ** | **Period** | ** ** | ** ** | ** ** | **Filing** | ** ** |
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                                                                                           | ** ** | **Registrant** | ** ** | **herewith** | ** ** | **Form**                       | ** ** | **ending** | ** ** | **Exhibit** | ** ** | **Date** | ** ** |
| 10.25       |       | Credit Agreement, dated November 13,  2006, among Buckeye Partners, L.P., as borrower, SunTrust Bank, as  administrative agent, and the lenders signatory thereto                                                                 |       | BPL            |       |         |       | 8-K                            |       |   |   | 10.1 |   | 11/16/06 |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.26       |       | First Amendment to Credit  Agreement, dated as of May 18, 2007, by and among Buckeye Partners,  L.P., as borrower, SunTrust Bank, as administrative agent, and the lenders  signatory thereto                                     |       | BGH            |       |         |       | 10-Q                           |       | 6/30/07 |   | 10.1 |   | 7/30/07 |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.27       |       | Second Amendment to Credit  Agreement, dated August 24, 2007 among Buckeye Partners, L.P., as  borrower, SunTrust Bank, as administrative agent, and the lenders signatory  thereto                                               |       | BGH            |       |         |       | 10-Q                           |       | 9/30/07 |   | 10.1 |   | 10/30/07 |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.28       |       | Third Amendment to Credit  Agreement, dated January 23, 2008, among Buckeye Partners, L.P., as  borrower, SunTrust Bank, as administrative agent, and the lenders signatory  thereto                                              |       | BPL            |       |         |       | 8-K                            |       |   |   | 10.1 |   | 1/28/08 |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.29       |       | Credit Agreement, dated as  of May 20, 2008, by and among Farm & Home Oil Company LLC,  Buckeye Energy Services LLC, BNP Paribas and other lenders party thereto                                                         |       | BPL            |       |         |       | 8-K                            |       |   |   | 10.1 |   | 5/23/08 |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.30       |       | First Amendment, dated as  of July 18, 2008, to the Credit Agreement, dated as of May 20,  2008, among Farm & Home Oil Company LLC, Buckeye Energy Services  LLC, BNP Paribas and other lenders party thereto       |       | BPL            |       |         |       | 8-K                            |       |   |   | 10.1 |   | 7/22/08 |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 10.31       |       | Second Amendment, dated as  of September 15, 2008, to the Credit Agreement, dated as of May 20,  2008, among Farm & Home Oil Company LLC, Buckeye Energy Services  LLC, BNP Paribas and other lenders party thereto |       | BPL            |       |         |       | 10-K                           |       | 12/31/08 |   | 10.1 |   | 3/2/09 |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 21.1        |       | List of subsidiaries of  Buckeye GP Holdings L.P.                                                                                                                                                                                      |       |           |       | X            |       |                           |       |   |   |   |   |   |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 23.1        |       | Consent of  Deloitte & Touche LLP                                                                                                                                                                                             |       |           |       | X            |       |                           |       |   |   |   |   |   |   |
|        |       |                                                                                                                                                                                                                                   |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 31.1        |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14 (a) under the Securities  Exchange Act of 1934                                                                                                             |       |           |       | X            |       |                           |       |   |   |   |   |   |   |
|             |            |                                                                                                                                                                                                                                        |            |                |            |              |            |                                |            |  |  |  |  |  |  |  |  |

 

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| ** **  | ** ** | ** **                                                                                                                | ** ** | ** **     | ** ** | ** **   | ** ** | **Incorporated  by reference** | ** ** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------|------------|--------------------------------|------------|
| **Exhibit** | ** ** | ** **                                                                                                                | ** ** | ** **     | ** ** | **Filed**    | ** ** | ** **                     | ** ** | **Period** | ** ** | ** ** | ** ** | **Filing** | ** ** |
| **Number**  | ** ** | **Exhibit Description**                                                                                              | ** ** | **Registrant** | ** ** | **herewith** | ** ** | **Form**                       | ** ** | **ending** | ** ** | **Exhibit** | ** ** | **Date** | ** ** |
| 31.2        |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934 |       |           |       | X            |       |                           |       |   |   |   |   |   |   |
|        |       |                                                                                                                      |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 32.1        |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350                                         |       |           |       | X            |       |                           |       |   |   |   |   |   |   |
|        |       |                                                                                                                      |       |           |       |         |       |                           |       |   |   |   |   |   |   |
| 32.2        |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350                                         |       |           |       | X            |       |                           |       |   |   |   |   |   |   |
|             |            |                                                                                                                           |            |                |            |              |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

* Represents management contract or compensatory plan or arrangement.

 

(1)          The Amended and RestatedManagement Agreement between MainLine L.P. and each of Everglades Pipe LineCompany, L.P., Laurel Pipe Line Company, L.P. and Buckeye Pipe Line Holdings,L.P. are not filed because they are identical to Exhibit 10.9 except forthe identity of the partnership.

 

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**SIGNATURES**

 

**Pursuantto the requirements of Section 13 of 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.**

 
|                        | BUCKEYE GP HOLDINGS  L.P.       |
|-----------------------------|---------------------------------|
|                        | (Registrant)                    |
|                        | By:                             | MainLine Management  LLC, |
|                        |                            | as General Partner |
|                        |                            |
| Dated: March 16,  2009 | By:                             | /s/ FORREST E. WYLIE |
|                        | Forrest  E. Wylie               |
|                        | *Chief Executive Officer*       |
|                        | *(Principal Executive Officer)* |
|                             |                                 |  |  |

 

**Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.**

 
| Dated: March 16,  2009 | By:      | /s/                                                  | CHRISTOPHER L. COLLINS                        |
|-----------------------------|----------|------------------------------------------------------|-----------------------------------------------|
|                        |     | Christopher L. Collins                               |
|                        |     | *Director*                                           |
|                        |     | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | JOHN F. ERHARD                                |
|                        |     | John F. Erhard                                       |
|                        |     | *Director*                                           |
|                        |     | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | JOSEPH A. LASALA                              |
|                        |     | Joseph A. LaSala                                     |
|                        |     | *Director*                                           |
|                        |     | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | FRANK J. LOVERRO                              |
|                        |     | Frank J. Loverro                                     |
|                        |     | *Director*                                           |
|                        |     | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | OLIVER G. “RICK”  RICHARD, III |
|                        |     | Oliver G. “Rick”  Richard, III        |
| * *                    | * * | *Director*                                           |
| * *                    | * * | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | FRANK S. SOWINSKI                             |
|                        |     | Frank S. Sowinski                                    |
|                        |     | *Director*                                           |
|                        |     | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | KEITH E. ST.CLAIR                             |
|                        |     | Keith E. St.Clair                                    |
|                        |     | *Senior Vice President and Chief  Financial Officer* |
|                        |     | *(Principal Financial Officer*                       |
|                        |     | *and Principal Accounting Officer)*                  |
|                        |     | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | ROBB E. TURNER                                |
|                        |     | Robb E. Turner                                       |
|                        |     | *Director*                                           |
|                        |     | * *                                             |
| Dated: March 16,  2009 | By:      | /s/                                                  | FORREST E. WYLIE                              |
|                        |     | Forrest E. Wylie                                     |
|                        |     | *Director*                                           |

 

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