Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 
| **x**                                                                                                                                                                                                                                                                                             | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                        | ** ** | ** **                                                                                              |
| **For the quarterly period ended  September 30, 2008 or**                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                        | ** ** | ** **                                                                                              |
| **o**                                                                                                                                                                                                                                                                                             | ** ** | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
| ** **                                                                                                                                                                                                                                                                                        | ** ** | ** **                                                                                              |
| **For the transition period  from                     to                     ** |

 

**Commission file number 001-32963**

 

**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  No.) |

 

| **Five  TEK Park**                        | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **9999 Hamilton  Boulevard**              | ** ** | ** ** |
| **Breinigsville,  Pennsylvania**          | ** ** | **18031**  |
| (Address of  principal executive offices) |       | (Zip Code) |

 

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

 

**Not Applicable**

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  xNo  o

 

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

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

 

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

 

As of October 30,2008, there were 27,769,647 Common Units and 530,353 Management Unitsoutstanding.

 

 

 

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BUCKEYE GPHOLDINGS L.P.

INDEX

 
| ** **                          | ** **                                                                                                                | ** ** | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I-  FINANCIAL INFORMATION |                                                                                                                      |       |
|                                |                                                                                                                      |       |     |
| Item 1.                             | Condensed Consolidated  Financial Statements (Unaudited)                                                                  |       |     |
|                                |                                                                                                                      |       |     |
|                                | Condensed  Consolidated Statements of Income for the three and nine months ended  September 30, 2008 and 2007        |       | 1        |
|                                |                                                                                                                      |       |     |
|                                | Condensed  Consolidated Balance Sheets as of September 30, 2008 and  December 31, 2007                          |       | 2        |
|                                |                                                                                                                      |       |     |
|                                | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2008 and 2007              |       | 3        |
|                                |                                                                                                                      |       |     |
|                                | Condensed  Consolidated Statement of Changes in Partners’ Capital for the nine months  ended September 30, 2008 |       | 4        |
|                                |                                                                                                                      |       |     |
|                                | Notes to Condensed Consolidated Financial Statements                                                                      |       | 5        |
|                                |                                                                                                                      |       |     |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |       | 27       |
|                                |                                                                                                                      |       |     |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                               |       | 47       |
|                                |                                                                                                                      |       |     |
| Item 4.                             | Controls and  Procedures                                                                                                  |       | 49       |
|                                |                                                                                                                      |       |     |
| PART II- OTHER  INFORMATION    |                                                                                                                      |       |
|                                |                                                                                                                      |       |
| Item 1.                             | Legal Proceedings                                                                                                         |       | 51       |
|                                |                                                                                                                      |       |     |
| Item 1A.                            | Risk Factors                                                                                                              |       | 51       |
|                                |                                                                                                                      |       |     |
| Item 6.                             | Exhibits                                                                                                                  |       | 52       |

 

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Tableof Contents

 

PART I - FINANCIAL INFORMATION

 

Item1. CondensedConsolidated Financial Statements

 

**BuckeyeGP Holdings L.P.**

**Condensed Consolidated Statements of Income**

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

**(Unaudited)**

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                        | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenues:**                                                     |       |                             |       |                            |       |   |   |   |   |
| Product sales                                                     |       | $                                | 345,729    |                            | $          | 1,319 |   | $ | 933,211 |   | $ | 7,269 |   |
| Transportation  and other                                         |       | 150,441                          |       | 124,334                         |       | 435,783 |   | 368,279 |   |
| Total revenue                                                     |       | 496,170                          |       | 125,653                         |       | 1,368,994 |   | 375,548 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| **Costs  and expenses:**                                          |       |                             |       |                            |       |   |   |   |   |
| Cost of product  sales                                            |       | 334,959                          |       | 1,278                           |       | 913,163 |   | 7,154 |   |
| Operating  expenses                                               |       | 73,203                           |       | 60,605                          |       | 209,484 |   | 178,637 |   |
| Depreciation and  amortization                                    |       | 14,342                           |       | 10,411                          |       | 38,067 |   | 30,119 |   |
| General and  administrative                                       |       | 10,415                           |       | 7,137                           |       | 31,949 |   | 20,568 |   |
| Total costs and  expenses                                         |       | 432,919                          |       | 79,431                          |       | 1,192,663 |   | 236,478 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| Operating income                                                  |       | 63,251                           |       | 46,222                          |       | 176,331 |   | 139,070 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| **Other  income (expense):**                                      |       |                             |       |                            |       |   |   |   |   |
| Investment  income                                                |       | 294                              |       | 426                             |       | 1,145 |   | 1,060 |   |
| Interest and debt  expense                                        |       | (19,243                          | )          | (12,711                         | )          | (55,691 | ) | (39,691 | ) |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| Total other  (expense)                                            |       | (18,949                          | )          | (12,285                         | )          | (54,546 | ) | (38,631 | ) |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| Income before  equity income and non-controlling interest expense |       | 44,302                           |       | 33,937                          |       | 121,785 |   | 100,439 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| Equity income                                                     |       | 2,403                            |       | 2,222                           |       | 5,802 |   | 6,266 |   |
| Non-controlling  interest expense                                 |       | (39,471                          | )          | (31,081                         | )          | (109,187 | ) | (91,557 | ) |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| Net income                                                        |       | $                                | 7,234      |                            | $          | 5,078 |   | $ | 18,400 |   | $ | 15,148 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| **Net  income per partnership unit:**                             |       |                             |       |                            |       |   |   |   |   |
| Basic                                                             |       | $                                | 0.26       |                            | $          | 0.18 |   | $ | 0.65 |   | $ | 0.54 |   |
| Diluted                                                           |       | $                                | 0.26       |                            | $          | 0.18 |   | $ | 0.65 |   | $ | 0.54 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| **Weighted  average number of units outstanding:**                |       |                             |       |                            |       |   |   |   |   |
| Basic                                                             |       | 28,300                           |       | 28,300                          |       | 28,300 |   | 28,089 |   |
| Diluted                                                           |       | 28,300                           |       | 28,300                          |       | 28,300 |   | 28,300 |   |

 

See Notes tocondensed consolidated financial statements.

 

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**BuckeyeGP Holdings L.P.**

**Condensed Consolidated Balance Sheets**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **Assets:**                                                                   |       |                   |       |                  |       |
| Current assets:                                                               |       |                   |       |                  |       |
| Cash and cash  equivalents                                                    |       | $                      | 101,797    |                  | $          | 94,486 |   |
| Trade  receivables                                                            |       | 109,382                |       | 47,598                |       |
| Construction and  pipeline relocation receivables                             |       | 17,108                 |       | 12,571                |       |
| Inventories                                                                   |       | 118,447                |       | 15,149                |       |
| Prepaid and  other current assets                                             |       | 76,830                 |       | 32,708                |       |
| Total current  assets                                                         |       | 423,564                |       | 202,512               |       |
|                                                                          |       |                   |       |                  |       |
| Property, plant  and equipment, net                                           |       | 2,227,336              |       | 1,806,720             |       |
| Goodwill                                                                      |       | 406,054                |       | 234,603               |       |
| Customer  intangible assets, net                                              |       | 44,998                 |       | 9,044                 |       |
| Other  non-current assets                                                     |       | 108,869                |       | 101,447               |       |
| Total assets                                                                  |       | $                      | 3,210,821  |                  | $          | 2,354,326 |   |
|                                                                          |       |                   |       |                  |       |
| **Liabilities  and partners’ capital:**                                  |       |                   |       |                  |       |
| Current  liabilities:                                                         |       |                   |       |                  |       |
| Line of credit                                                                |       | $                      | 101,000    |                  | $          | — |   |
| Current portion  of long-term debt                                            |       | 6,322                  |       | 6,289                 |       |
| Accounts payable                                                              |       | 50,110                 |       | 20,368                |       |
| Accrued and  other current liabilities                                        |       | 154,535                |       | 78,902                |       |
| Total current  liabilities                                                    |       | 311,967                |       | 105,559               |       |
|                                                                          |       |                   |       |                  |       |
| Long-term debt                                                                |       | 1,408,660              |       | 863,174               |       |
| Other  non-current liabilities                                                |       | 88,516                 |       | 81,120                |       |
| Non-controlling  interest                                                     |       | 1,169,017              |       | 1,066,143             |       |
| Total  liabilities                                                            |       | 2,978,160              |       | 2,115,996             |       |
|                                                                          |       |                   |       |                  |       |
| Commitments and  contingent liabilities                                       |       | —                 |       | —                |       |
|                                                                          |       |                   |       |                  |       |
| **Partners’  capital:**                                                  |       |                   |       |                  |       |
| General  Partner-Common Units                                                 |       | 7                      |       | 7                     |       |
| Limited  Partners-Common Units                                                |       | 227,157                |       | 232,928               |       |
| Management Units                                                              |       | 3,046                  |       | 3,156                 |       |
| Equity gains on  issuance of Buckeye Partners, L.P. limited partnership units |       | 2,451                  |       | 2,239                 |       |
| Total partners’  capital                                                 |       | 232,661                |       | 238,330               |       |
| Total liabilities  and partners’ capital                                 |       | $                      | 3,210,821  |                  | $          | 2,354,326 |   |

 

See Notes tocondensed consolidated financial statements.

 

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**BuckeyeGP Holdings L.P.**

**Condensed Consolidated Statements of Cash Flows**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| ** **                                                                         | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 18,400     |   | $ | 15,148 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                            |       |   |   |
| Non-cash expense  for unit-based compensation                                      |       | 1,046                           |       | 1,468 |   |
| Value of ESOP  shares released                                                     |       | 2,119                           |       | 3,436 |   |
| Depreciation and  amortization                                                     |       | 38,067                          |       | 30,119 |   |
| Non-controlling  interest expense                                                  |       | 109,187                         |       | 91,557 |   |
| Earnings from  equity investments of Buckeye Partners, L.P.                        |       | (5,802                          | )          | (6,266 | ) |
| Distributions  from equity investments of Buckeye Partners, L.P.                   |       | 4,120                           |       | 5,717 |   |
| Amortization of  deferred financing fees and option grants                         |       | 1,230                           |       | 341 |   |
| Change in assets  and liabilities, net of amounts related to acquisitions:         |       |                            |       |   |   |
| Trade  receivables                                                                 |       | 5,556                           |       | 5,228 |   |
| Construction and  pipeline relocation receivables                                  |       | (4,537                          | )          | 1,831 |   |
| Inventories                                                                        |       | (8,288                          | )          | 408 |   |
| Prepaid and  other current assets                                                  |       | (37,104                         | )          | 3,174 |   |
| Accounts  payables                                                                 |       | (1,356                          | )          | (11,194 | ) |
| Accrued and  other current liabilities                                             |       | 52,506                          |       | (1,557 | ) |
| Other  non-current assets                                                          |       | 1,380                           |       | 1,625 |   |
| Other  non-current liabilities                                                     |       | 2,024                           |       | (5,216 | ) |
| Total  adjustments from operating activities                                       |       | 160,148                         |       | 120,671 |   |
| Net cash  provided by continuing operations                                        |       | 178,548                         |       | 135,819 |   |
|                                                                               |       |                            |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                            |       |   |   |
| Capital  expenditures                                                              |       | (67,890                         | )          | (51,712 | ) |
| Acquisitions and  equity investments                                               |       | (660,252                        | )          | (40,447 | ) |
| Net expenditures  for disposal of property, plant and equipment                    |       | (513                            | )          | (352 | ) |
| Proceeds from  sale of discontinued operations                                     |       | 52,584                          |       | — |   |
| Net cash used in  investing activities                                             |       | (676,071                        | )          | (92,511 | ) |
|                                                                               |       |                            |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                            |       |   |   |
| Debt issuance  costs                                                               |       | (1,886                          | )          | (178 | ) |
| Net proceeds  from issuance of Buckeye Limited Partnership Units                   |       | 113,111                         |       | 201,895 |   |
| Proceeds from  exercise of Buckeye Partners, L.P. unit options                     |       | 316                             |       | 2,124 |   |
| Distributions to  non-controlling partners in Buckeye Partners, L.P.               |       | (118,093                        | )          | (93,823 | ) |
| Issuance of  long-term debt and borrowings under credit facilities                 |       | 800,050                         |       | 137,500 |   |
| Repayment of  long-term debt                                                       |       | (253,699                        | )          | (256,435 | ) |
| Settlement of  hedge                                                               |       | (9,638                          | )          | — |   |
| Distributions to  Limited Partners                                                 |       | (25,327                         | )          | (20,234 | ) |
| Net cash  provided by (used in) financing activities                               |       | 504,834                         |       | (29,151 | ) |
|                                                                               |       |                            |       |   |   |
| Net increase in  cash and cash equivalents                                         |       | 7,311                           |       | 14,157 |   |
| Cash and cash  equivalents—Beginning of year                                  |       | 94,486                          |       | 20,220 |   |
| Cash and cash  equivalents—End of period                                      |       | $                               | 101,797    |   | $ | 34,377 |   |
|                                                                               |       |                            |       |   |   |
| ***Non-cash  investing and financing activities:***                                |       |                            |       |   |   |
| Capital  additions accrued in property, plant and equipment                        |       | $                               | 4,319      |   | $ | — |   |
| Equity gains on  issuance of Buckeye Partners, L.P. units                          |       | 212                             |       | 542 |   |
| Hedge accounting                                                                   |       | 504                             |       | (2,261 | ) |
| ***Supplemental  cash flow information:***                                         |       |                            |       |   |   |
| Cash paid during  the period for interest (net of amount capitalized)              |       | $                               | 54,090     |   | $ | 43,159 |   |
| Capitalized  interest                                                              |       | 1,087                           |       | 1,159 |   |
| Cash paid during  the period for income tax                                        |       | 868                             |       | 920 |   |

 

See Notes to condensedconsolidated financial statements.

 

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**BuckeyeGP Holdings L.P.**

**Condensed Consolidated Statement of Partners’Capital**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                    | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Equity**         | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------|------------|--------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                                                                    | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Gains on**       | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Issuance of**    | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Buckeye**        | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **General** | ** ** | **Limited**  | ** ** | ** **     | ** ** | **Partners, L.P.** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Partner** | ** ** | **Partners** | ** ** | ** **     | ** ** | **Limited**        | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Common**  | ** ** | **Common**   | ** ** | **Management** | ** ** | **Partnership**    | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Units**   | ** ** | **Units**    | ** ** | **Units**      | ** ** | **Units**          | ** ** | **Total**  | ** ** |
| **Partners’  capital-January 1, 2008**                              |       | $           | 7          |         | $          | 232,928        |       | $                  | 3,156      |       | $          | 2,239 |   | $ | 238,330 |   |
| Net income*                                                                   |       |        |       | 18,056       |       | 344            |       |               |       | 18,400     |       |
| Distributions to  Limited Partner - Common Units                              |       |        |       | (24,853      | )          | (474           | )          |               |       | (25,327    | )          |
| Recognition of unit-based  compensation charges                               |       |        |       | 1,026        |       | 20             |       |               |       | 1,046      |       |
| Equity gains on  issuance of Buckeye Partners, L.P. Limited Partnership Units |       |        |       |         |       |           |       | 212                |       | 212        |       |
|                                                                          |       |        |       |         |       |           |       |               |       |       |       |
| **Partners’  capital-September 30, 2008**                           |       | $           | 7          |         | $          | 227,157        |       | $                  | 3,046      |       | $          | 2,451 |   | $ | 232,661 |   |

 

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* Comprehensiveincome equals net income.

 

See Notes tocondensed consolidated financial statements.

 

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**BUCKEYEGP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

1.     BASISOF PRESENTATION

 

Buckeye GP Holdings L.P. (“BGH”) is a publicly traded(NYSE: BGH) master limited partnership organized on June 15, 2006 underthe laws of the state of Delaware. BGH owns 100% of Buckeye GP LLC (“BuckeyeGP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”). Buckeyeis also a publicly traded (NYSE: BPL) master limited partnership which wasorganized in 1986 under the laws of the state of Delaware. BGH’s limitedpartner units are owned approximately 62% by BGH GP Holdings, LLC (“BGHHoldings”), approximately 1% by certain members of senior management andapproximately 37% by the public. BGH Holdings is owned by affiliates ofArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company(“Kelso”), Lehman Brothers Holdings Inc. (“Lehman Brothers”), and certainmembers of senior management of Buckeye GP. MainLine Management LLC, a Delawarelimited liability company (“MainLine Management”), is the general partner ofBGH, and is wholly owned by BGH Holdings.

 

BGH’s only business isthe ownership of Buckeye GP. Buckeye GP’s only business is the management ofBuckeye and its subsidiaries. At September 30, 2008, Buckeye GP owned anapproximately 0.5% general partner interest in Buckeye.

 

Buckeye, through itssubsidiaries, 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 serving 17 states, andoperates an approximate 2,200 miles of pipeline under agreements with major oiland chemical companies. Buckeye also owns 64 active products terminals withaggregate storage capacity of approximately 24.7 million barrels in 13 states.

 

OnJanuary 18, 2008, Buckeye acquired Lodi Gas Storage, L.L.C. (“Lodi Gas”). LodiGas owns and operates two natural gas storage facilities near Lodi, California.Together, these facilities provide approximately 22 billion cubic feet (“bcf”)of gas capacity and are connected to Pacific Gas and Electric’s intrastate gaspipelines that service natural gas demand in the San Francisco and Sacramentoareas (see Note 3 for a further discussion).

 

OnFebruary 8, 2008, Buckeye acquired Farm & Home Oil Company LLC(“Farm & Home”), a seller of refined petroleum products on a wholesalebasis, principally in eastern and central Pennsylvania. When Farm &Home was acquired, it also had retail operations, but Buckeye sold thoseoperations to a wholly owned subsidiary of Inergy, L.P. on April 15, 2008.The assets and liabilities and results of operations of Farm & Home’sretail operations were determined to be discontinued operations effective onthe Farm & Home acquisition date of February 8, 2008 (see Note 3for a further discussion). On July 31, 2008, Farm & Home wasmerged with and into its wholly owned subsidiary, Buckeye EnergyServices LLC (“BES”), with BEScontinuing as the surviving entity. This merger did not impact the operationsof Buckeye.

 

With the acquisitions ofLodi Gas and Farm & Home, BGH determined that it had two additionalreportable segments: Natural Gas Storage and Energy Services. Effective in thefirst quarter of 2008, BGH conducts business in five reportable operatingsegments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage;Energy Services; and Other Operations. See Note 16 for a more detaileddiscussion 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 September 30, 2008, Services Company ownedapproximately 4.4% of the publicly traded limited partnership units of Buckeye(the “LP Units”). Services Company employs approximately 1,000 people whoprovide services to the operating subsidiaries through which Buckeye conductsits operations. Approximately 15 employees are employed directly by Lodi Gasand approximately 20 employees are employed by Buckeye Albany Terminal LLC (seeNote 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 Agreementand an Executive Employment Agreement, executive compensation costs and relatedbenefits paid to Buckeye GP’s four highest salaried officers are not reimbursedby Buckeye or its operating subsidiaries but are reimbursed to Services Companyby BGH. Buckeye and its operating subsidiaries have agreed to pay for all 

 

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executive compensationand benefits earned by Buckeye GP’s four highest salaried officers after January 1,2009 in return for an annual fixed payment from BGH.

 

In June 2005, the Emerging Issues Task Force (the “EITF”) of theFinancial Accounting Standards Board (“FASB”) issued EITF Consensus 04-05 whichrequires general partners of a limited partnership to consolidate the limitedpartnership if the general partner is deemed to control the limitedpartnership. Using criteria established in EITF Consensus 04-05, BGH hasdetermined that consolidation of Buckeye into BGH’s financial statements isappropriate.

 

BGH has determined that Services Company is a variable interest entityunder the provisions of FASB Interpretation No. 46R “Consolidation ofVariable Interest Entities” (“FIN No. 46R”). Using criteria established inFIN No. 46R, BGH has determined that Buckeye GP is the primary beneficiaryof Services Company, although 100% of the equity interest of Services Companyis owned by the ESOP. Accordingly, as required by FIN No. 46R, ServicesCompany has been consolidated in the financial statements of BGH.

 

BGH’s condensed consolidatedbalance sheet includes a non-controlling interest liability that reflects theportion of Buckeye owned by its partners other than BGH and Services Company. Similarly,BGH’s condensed consolidated income statements include non-controlling interestexpense that reflects the portion of the earnings due to Buckeye’s partnersother than BGH and Services Company.

 

Pursuant to the rules andregulations of the Securities and Exchange Commission, the condensedconsolidated financial statements do not include all of the information andnotes normally included with financial statements prepared in accordance withaccounting principles generally accepted in the United States of America. Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements of BGH and the notes thereto for the yearended December 31, 2007 contained in BGH’s Annual Report on Form 10-Kas filed with the Securities and ExchangeCommission on March 14, 2008.

 

Inthe opinion of management, the condensed consolidated financial statements ofBGH, which are unaudited except that the balance sheet as of December 31,2007 is derived from audited financial statements, include all adjustmentsnecessary to present fairly BGH’s financial position as of September 30,2008, along with the results of operations for the three and nine months ended September 30,2008 and 2007 and cash flows for the nine months ended September 30, 2008and 2007. The results of operations for the three and nine months ended September 30,2008 are not necessarily indicative of the results to be expected for the fullyear ending December 31, 2008.

 

Due to the acquisition ofFarm & Home in 2008 and its related product sales and cost of productsales, certain amounts from 2007 for product sales and cost of product saleshave been reclassified in the condensed consolidated statements of income toconform to the current-year presentation. In addition, at September 30,2008, BGH reclassified $36.4 million to customer relationships, which hadpreviously been classified as goodwill in connection with the acquisition ofFarm & Home. This reclassification resulted from the adjustment of thepreliminary purchase price allocation of Farm & Home as described inNote 3. In order to conform to the current presentation, BGH also reclassified$8.6 million and $9.0 million to customer relationships at September 30,2008 and December 31, 2007, respectively. The $8.6 million and $9.0million had previously been included in other noncurrent assets. See Note 6 foradditional discussion.

 

2.     CONTINGENCIES

 

*Claims and Proceedings*

 

Buckeye and itssubsidiaries in the ordinary course of business are involved in various claimsand legal proceedings, some of which are covered by insurance. Buckeye is generallyunable to predict the timing or outcome of these claims and proceedings. Basedupon its evaluation of existing claims and proceedings and the probability oflosses relating to such contingencies, Buckeye has accrued certain amountsrelating to such claims and proceedings, none of which are considered material.

 

In March 2007,Buckeye was named as a defendant in an action entitled *Madigan v.Buckeye Partners, L.P.* filed in the U.S. District Court for theCentral District of Illinois. The action was brought by the State of IllinoisAttorney General 

 

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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 environmental contaminationresulting from the product releases. Buckeye believes it has meritoriousdefenses to the allegations set forth in the complaint.

 

*Environmental Contingencies*

 

In accordance with its accounting policy, Buckeyerecorded operating expenses of $1.9 million and $2.2 million for the threemonths ended September 30, 2008 and 2007, respectively, and $6.5 millionand $6.2 million for the nine months ended September 30, 2008 and 2007,respectively, related to environmental contingencies unrelated to claims andproceedings.

 

*Ammonia Contract Contingencies*

 

On November 30, 2005, Buckeye GulfCoast Pipe Lines, L.P. (“BGC”), a subsidiary of Buckeye, 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 thetransaction, BGC assumed the obligations of EPME under several contractsinvolving monthly purchases and sales of ammonia. EPME and BGC agreed, however,that EPME would retain the economic risks and benefits associated with thosecontracts until their expiration at the end of 2012. To effectuate thisagreement, BGC passes through to EPME both the cost of purchasing ammonia undera supply contract and the proceeds from selling ammonia under three salescontracts. For each monthly period since the closing of the pipelineacquisition, the pricing terms of the ammonia contracts have resulted inammonia costs exceeding ammonia sales proceeds. The amount of the shortfallgenerally increases as 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 to seek payment by invoking the $40.0million guaranty made by El Paso which guaranteed 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 unreimbursed shortfalls significantly exceed the$40.0 million cap, the resulting costs incurred by BGC could adversely affectBuckeye’s financial position, results of operations, 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 hasrecorded no provision for losses in the accompanying condensed consolidated financialstatements because, using the criteria of Statement of Financial AccountingStandards (“SFAS”) No. 5 – “Accounting for Contingencies,” it is unable todetermine whether or not a loss has been incurred or, if a loss has beenincurred, a reasonable estimate or range of estimates of the amount of suchlosses. Buckeye is currently assessing potential recourse against EPME and ElPaso with respect to this matter.

 

3.     BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS

 

*Lodi Gas*

 

OnJanuary 18, 2008, Buckeye acquired all of the member interests in Lodi Gasfrom Lodi Holdings, L.L.C. The cost of Lodi Gas was approximately $442.3million in cash and consisted of the following (in thousands):

 
| Contractual  purchase price           |   | $      | 440,000 |   |
|---------------------------------------|--------|--------|---------|--------|
| Working capital  adjustments and fees |   | 2,306  |    |
|                                  |   |   |    |
| Total purchase price                  |   | $      | 442,306 |   |

 

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Ofthe contractual purchase price, $428.0 million was paid at closing and anadditional $12.0 million was paid on March 6, 2008 upon receipt ofapproval from the California Public Utilities Commission for an expansionproject known as Kirby Hills Phase II. Buckeye acquired Lodi Gas because Buckeye’smanagement believes Lodi Gas represents an attractive opportunity to expand anddiversify Buckeye’s operations into a new geographic area and a new commoditytype (natural gas), and will provide Buckeye a platform for growth in thenatural gas storage industry.

 

Buckeyehas determined that the acquisition represented a business combination underthe provisions of SFAS No. 141, “Business Combinations” (“SFAS No. 141”).The application of SFAS No. 141 requires that the total purchase price beallocated to the fair value of the assets acquired and the liabilities assumedbased on their fair values at the acquisition date, with amounts exceeding thefair values being recorded as goodwill. The purchase price has been allocated,on a preliminary basis, to the tangible and intangible assets acquired,including goodwill, as follows (in thousands):

 
| ** **                     | ** ** | **January 18,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2008**             | ** ** |
| Current assets                 |       | $                    | 7,486      |   |
| Property, plant  and equipment |       | 275,649              |       |
| Goodwill                       |       | 170,425              |       |
| Current  liabilities           |       | (9,604               | )          |
| Other  liabilities             |       | (1,650               | )          |
|                           |       |                 |       |
| Allocated purchase  price      |       | $                    | 442,306    |   |

 

Buckeyeis in the process of finalizing the purchase price allocation based on thevaluations of land lease agreements, potential asset retirement obligations,and goodwill. Changes from the preliminary purchase price allocation could bematerial. 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 $146.1 million. On April 15, 2008, Buckeyecompleted the sale of the retail operations of Farm & Home to a whollyowned subsidiary of Inergy, L.P. for approximately $52.6 million. The retailassets sold consisted primarily of property, plant, and equipment as well asinventory and receivables. Buckeye recorded no gain or loss on the sale of Farm &Home’s retail operations. The retail operations of Farm & Home werenot an integral part of Buckeye’s core operations and strategy, and the relatedretail assets and liabilities were determined to be discontinued operations onthe date of Buckeye’s acquisition of Farm & Home because Buckeyedecided to dispose of them as of that date. Revenues from discontinuedoperations for the period February 8, 2008 to April 15, 2008 wereapproximately $19.0 million.

 

Buckeyeacquired Farm & Home because Buckeye’s management believes that thewholesale distribution operations of Farm & Home represent anattractive opportunity to further Buckeye’s strategy of improving overallprofitability by increasing the utilization of Buckeye’s existing pipeline andterminal system infrastructure by marketing refined petroleum products in areasserved by that infrastructure. Buckeye has determined that the acquisitionrepresented a business combination under the provisions of SFAS No. 141. Theapplication of SFAS No. 141 requires that the total purchase price beallocated to the fair value of the assets acquired and the liabilities assumedbased on their fair values at the acquisition date, with amounts exceeding thefair values being recorded as goodwill. The purchase price has been allocated,on a preliminary basis, to the tangible and intangible assets acquired,including goodwill, as follows (in thousands):

 

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| ** **                                              | ** ** | **February 8,** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **2008**             | ** ** |
| Cash                                                    |       | $                    | 2,816      |   |
| Trade  receivables                                      |       | 67,340               |       |
| Inventory                                               |       | 93,332               |       |
| Prepaid and  other current assets                       |       | 6,166                |       |
| Property, plant  and equipment                          |       | 33,880               |       |
| Goodwill                                                |       | 1,026                |       |
| Customer  relationships                                 |       | 38,300               |       |
| Other  non-current assets                               |       | 1,844                |       |
| Assets held for  sale, net of liability of $0.7 million |       | 51,645               |       |
| Debt                                                    |       | (100,000             | )          |
| Accounts payable                                        |       | (31,097              | )          |
| Accrued expenses                                        |       | (19,127              | )          |
|                                                    |       |                 |       |
| Allocated purchase price                                |       | $                    | 146,125    |   |

 

Buckeyeis in the process of finalizing the purchase price allocation and may adjustthe preliminary amounts shown above for customer contracts and property, plantand equipment. Changes from the preliminary purchase price allocation could bematerial. As discussed above, the operations of Farm & Home that wereretained by Buckeye are reported in a new operating segment called EnergyServices. On July 31, 2008, Farm & Home was merged with and intoits wholly owned subsidiary, BES.

 

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*ProformaUnaudited Financial Results*

 

Thefollowing unaudited summarized pro forma consolidated income statementinformation for the three months ended September 30, 2007 and the ninemonths ended September 30, 2008 and 2007 assumes that the acquisitions ofLodi Gas and Farm & Home had occurred as of the beginning of the periodspresented. The pro forma presentation below assumes that equity offerings byBuckeye that were used in part to fund the acquisition of Lodi Gas occurredeffective January 1, 2007. In the 2008 pro forma presentation,approximately $2.6 million of disposition-related expenses incurred by Lodi Gasin the period from January 1, 2008 to January 17, 2008 (prior toBuckeye’s ownership) have been excluded because these expenses were anonrecurring item. For Farm & Home, the results of the retailoperations have been excluded from both periods presented. These pro formaunaudited financial results were prepared for comparative purposes only and arenot indicative of actual results that would have occurred if Buckeye hadcompleted these acquisitions as of the beginning of the periods presented orthe results that will be attained in the future (in thousands, except per unitamounts):

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                   | ** ** | **2007**                         | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Revenues:**                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** |
| As reported                                                  |       | $                                | 125,653    |                            | $          | 1,368,994 |   | $ | 375,548 |   |
| Pro forma  adjustments                                       |       | 239,768                          |       | 174,724                         |       | 814,171 |   |
|                                                         |       |                             |       |                            |       |   |   |
| Pro forma revenue                                            |       | $                                | 365,421    |                            | $          | 1,543,718 |   | $ | 1,189,719 |   |
|                                                         |       |                             |       |                            |       |   |   |
| **Net  Income:**                                             |       |                             |       |                            |       |   |   |
| As reported                                                  |       | $                                | 5,078      |                            | $          | 18,400 |   | $ | 15,148 |   |
| Pro forma adjustments                                        |       | 1,172                            |       | (310                            | )          | 3,203 |   |
|                                                         |       |                             |       |                            |       |   |   |
| Pro forma net income                                         |       | $                                | 6,250      |                            | $          | 18,090 |   | $ | 18,351 |   |
|                                                         |       |                             |       |                            |       |   |   |
| **Pro  forma net income per common unit:**                   |       |                             |       |                            |       |   |   |
| Basic                                                        |       | $                                | 0.22       |                            | $          | 0.64 |   | $ | 0.65 |   |
| Diluted                                                      |       | $                                | 0.22       |                            | $          | 0.64 |   | $ | 0.65 |   |
|                                                         |       |                             |       |                            |       |   |   |
| **Pro  forma weighted average number of units outstanding:** |       |                             |       |                            |       |   |   |
| Basic                                                        |       | 28,300                           |       | 28,300                          |       | 28,089 |   |
| Diluted                                                      |       | 28,300                           |       | 28,300                          |       | 28,300 |   |

 

*OtherAcquisitions*

 

OnFebruary 19, 2008, Buckeye acquired a refined petroleum products terminalin Niles, Michigan and a 50% ownership interest in a refined petroleum productsterminal in Ferrysburg, Michigan from an affiliate of ExxonMobil Corporationfor approximately $13.9 million. Buckeye determined that the acquisition of theNiles, Michigan terminal and the 50% interest in the Ferrysburg, Michiganterminal should be accounted for as acquisitions of assets rather than anacquisition of a business as defined in SFAS No. 141. The operations ofthe Niles, Michigan and Ferrysburg, Michigan terminals are reported in theTerminalling and Storage segment. Accordingly, Buckeye has allocated, on apreliminary basis, the purchase price of the acquisition to the varioustangible assets acquired, principally property, plant and equipment.

 

EffectiveMay 1, 2008, Buckeye purchased the remaining 50% member interest in WesPacPipe Lines - San Diego LLC from Kealine LLC not already owned by Buckeye for$9.3 million. The operations of WesPac Pipe Lines – San 

 

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DiegoLLC are reported in the Pipeline Operations segment. The purchase price wasallocated principally to property, plant and equipment.

 

OnJune 20, 2008, Buckeye acquired a refined petroleum products terminal inWethersfield, Connecticut from Hess Corporation for approximately $5.5 million.Buckeye determined that the acquisition of the Wethersfield, Connecticutterminal should be accounted for as an acquisition of assets rather than anacquisition of a business as defined in SFAS No. 141. The operations ofthis terminal are reported in the Terminalling and Storage segment. Thepurchase price was allocated principally to property, plant and equipment.

 

OnAugust 28, 2008, Buckeye invested another $2.8 million in West Texas LPGPipeline Limited Partnership.

 

OnAugust 28, 2008, Buckeye completed the purchase of an ethanol andpetroleum products terminal in Albany, New York from LogiBio Albany Terminal,LLC (the ‘‘Albany Terminal”). The purchase price for the terminal was $46.5million, with an additional $1.5 million payable if the terminal operationsmeet certain performance goals over the next three years. The Albany Terminalhas an active storage capacity of 1.8 million barrels. Buckeye acquired theAlbany Terminal because Buckeye believes that the Albany Terminal’s operationsrepresent an attractive opportunity to increase Buckeye’s participation in the ethanolservices market in the northeast United States. Buckeye has determined that theacquisition of the Albany Terminal represented a business combination under theprovisions of SFAS No. 141 and that the results of operations of theAlbany Terminal are immaterial with respect to a pro forma presentation. TheAlbany Terminal operations are reported in the Terminalling and Storagesegment. Buckeye is in the process of allocating the purchase price of theacquisition to the various tangible and intangible assets acquired which areexpected to be principally property, plant and equipment and customercontracts. Changes to the preliminary purchase price allocation could bematerial.

 

4.     PREPAIDS AND OTHER CURRENT ASSETS

 

Prepaidsand other current assets consist of the following:

* *
| ** **             | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid  insurance     |       | $                       | 1,302      |                  | $          | 7,456 |   |
| Insurance  receivables |       | 6,844                   |       | 7,707                 |       |
| Ammonia  receivable    |       | 7,285                   |       | 7,505                 |       |
| Derivative asset       |       | 32,672                  |       | —                |       |
| Margin deposits        |       | 11,579                  |       | —                |       |
| Other                  |       | 17,148                  |       | 10,040                |       |
| Total                  |       | $                       | 76,830     |                  | $          | 32,708 |   |

 

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5.     INVENTORIES

 

The major components ofinventories consist of the following:

 
| ** **              | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **              | ** ** | **(In thousands)** | ** ** |
| Refined products        |       | $                       | 103,864    |                  | $          | 333 |   |
| Materials and  supplies |       | 14,583                  |       | 14,816                |       |
| Total                   |       | $                       | 118,447    |                  | $          | 15,149 |   |

 

Approximately 90% of therefined petroleum product inventories are hedged (see Note 9) and are valued atmarket with the change in value of those inventories reflected in thestatements of income. Materials and supplies consists of pipes, valves, pumps,electronic components, drag reducing agent and other miscellaneous items thatare carried at the lower of cost or market based on the first-in, first-outmethod.

 

6.     CUSTOMER INTANGIBLE ASSETS

 

Customer intangibleassets include customer relationships and contracts. These intangible assetshave definite lives and are being amortized on a straight-line basis over theirestimated useful lives ranging from 12 to 25 years. The increase in thecarrying amount of customer relationships in 2008 resulted from the acquisitionof Farm & Home (see Note 3 for a further discussion). Customerintangibles, net consist of the following:

 
| ** **                       | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| Customer  relationships          |       | $                       | 38,300     |                  | $          | — |   |
| Accumulated  amortization        |       | (1,920                  | )          | —                |       |
| Net carrying  amount             |       | 36,380                  |       | —                |       |
|                             |       |                    |       |                  |       |
| Customer  contracts              |       | 11,800                  |       | 11,800                |       |
| Accumulated  amortization        |       | (3,182                  | )          | (2,756                | )          |
| Net carrying  amount             |       | 8,618                   |       | 9,044                 |       |
| Total customer  intangibles, net |       | $                       | 44,998     |                  | $          | 9,044 |   |

 

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7.     ACCRUEDAND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of thefollowing:

 
| ** **                          | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Taxes - other  than income          |       | $                       | 14,739     |                  | $          | 8,026 |   |
| Accrued employee  benefit liability |       | 2,183                   |       | 2,183                 |       |
| Environmental  liabilities          |       | 9,059                   |       | 8,023                 |       |
| Interest                            |       | 16,869                  |       | 16,485                |       |
| Retainage                           |       | 1,229                   |       | 1,572                 |       |
| Payable for  ammonia purchase       |       | 25,448                  |       | 6,988                 |       |
| Unearned revenue                    |       | 12,349                  |       | 1,439                 |       |
| Compensation and  vacation          |       | 12,098                  |       | 11,939                |       |
| Hedge liability                     |       | 20,707                  |       | 7,187                 |       |
| Accrued capital  expenditures       |       | 7,264                   |       | 2,945                 |       |
| Customer  deposits                  |       | 10,000                  |       | —                |       |
| Other                               |       | 22,590                  |       | 12,115                |       |
| Total                               |       | $                       | 154,535    |                  | $          | 78,902 |   |

 

8.     DEBT AND CREDIT FACILITIES

 

Long - term debt consistsof the following:

 
| ** **                                                        | ** **   | **September 30,**  | ** **   | **December 31,** | ** ** |
|-------------------------------------------------------------------|--------------|-------------------------|--------------|-----------------------|------------|
| ** **                                                        | ** **   | **2008**                | ** **   | **2007**              | ** ** |
| ** **                                                        | ** **   | **(In thousands)** | ** **   |
| ***BGH:***                                                        | *** *** | *** ***            | *** *** |
| Revolving Line  of Credit                                         |         | $                       | —       |                  | $          | — |   |
| ***Services  Company:***                                          | ** **   | ** **              | ** **   | ** **            | ** ** |
| 3.60% ESOP Notes  due March 28, 2011                         |         | 16,029                  |         | 20,804                |       |
| Retirement  premium                                               |         | (441                    | )            | (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  Revolving Credit Facility                       |         | 252,000                 |         | —                |       |
| Total                                                             |         | 1,417,588               |         | 870,286               |       |
| Other, including  unamortized discounts and fair value hedges (1) |         | (2,606                  | )            | (823                  | )          |
| Subtotal                                                          |         | 1,414,982               |         | 869,463               |       |
| Less: current  maturities                                         |         | (6,322                  | )            | (6,289                | )          |
| Total long-term debt                                              |         | $                       | 1,408,660    |                  | $          | 863,174 |   |

 

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*Buckeyemakes semi-annual interest payments on these notes with the principal balancesoutstanding to be paid on or before the due dates as shown above.

 

(1) TheSeptember 30, 2008 and December 31, 2007 amounts include $1.1 millionand $1.3 million, respectively, related to an adjustment to fair valueassociated with a hedge of fair value and ($3.7) million and ($2.1) million,respectively, in unamortized discounts.

 

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Thefair value of debt was estimated to be $1,293.0 million at September 30,2008 and $848.8 million at December 31, 2007. The value of theconsolidated debt was calculated using interest rates currently available toBGH, Buckeye, and Services Company for the issuance of debt with similar termsand remaining maturities and approximate market values on the respective dates.

 

*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 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 CreditAgreement bear interest under one of two rate options, selected by BGH, equalto either (i) the greater of (a) the federal funds rate plus 0.5% and(b) SunTrust Bank’s prime commercial lending rate; or (ii) the LondonInterbank Official Rate (“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 did not have amounts outstanding under theBGH Credit Agreement at September 30, 2008 or December 31, 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 coverage ratio covenant requires BGH to maintain,as of the last day of each fiscal quarter, a ratio of total consolidated fundeddebt of BGH and all of its subsidiaries to the consolidated EBITDA, as definedin the BGH Credit Agreement, of BGH and all of its subsidiaries, measured forthe preceding twelve months, of not more than 5.25 to 1.00, subject to a provisionfor increases to 5.75 to 1.00 in connection with future acquisitions. At September 30,2008, BGH’s funded debt coverage ratio was 4.91 to 1.00.

 

The BGH Credit Agreementcontains other covenants that prohibit BGH from taking certain actions, includingbut not limited to, declaring dividends or distributions if any default orevent of default has occurred or would result from such a declaration andlimiting BGH’s ability to incur additional indebtedness, creating negativepledges and granting certain liens, making certain loans, acquisitions, andinvestments, making material changes to the nature of BGH and its RestrictedSubsidiaries’ business, and entering into a merger, consolidation, or sale ofassets. At September 30, 2008, BGH was not aware of any instances ofnoncompliance with the covenants under the BGH Credit Agreement.

 

*Services Company*

* *

Services Company had total debt outstanding of $15.6million and $20.3 million at September 30, 2008 and December 31,2007, respectively, consisting of 3.60% Senior Secured Notes (the “3.60% ESOPNotes”) due March 28, 2011 payable by the ESOP to a third-party lender.The 3.60% ESOP Notes were issued on May 4, 2004. The 3.60% ESOP Notes arecollateralized by Services Company’s common stock and are guaranteed byServices Company. In addition, Buckeye has committed that, in the event thatthe value of Buckeye’s LP Units owned by Services Company falls below 125% ofthe balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrowaccount with sufficient assets to bring the value of the total collateral (thevalue of Buckeye’s LP Units owned by Services Company and the escrow account)up to the 125% minimum. Amounts deposited in the escrow account are returned toBuckeye when the value of Buckeye’s LP Units owned by Services Company returnsto an amount that exceeds the 125% minimum. At September 30, 2008, thevalue of Buckeye’s LP Units owned by Services Company exceeded the 125%requirement.

 

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*Buckeye Note*

 

OnJanuary 11, 2008, Buckeye sold $300.0 million aggregate principal amountof 6.05% Notes due 2018 (the “6.05% Notes”) in an 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 this debt offering, Buckeye settled the twoforward-starting interest rates swaps discussed in Note 9 below, which resultedin a settlement payment by Buckeye of $9.6 million that is being amortized asinterest expense over the ten year term of the 6.05% Notes.

 

*Credit Facility*

 

Buckeye has a borrowingcapacity of $600.0 million under an unsecured revolving credit agreement (the “CreditFacility”), which may be expanded up to $800.0 million subject to certainconditions and upon the further approval of the lenders.The Credit Facility’smaturity date is August 24, 2012, which may be extended by Buckeye for upto two additional one-year periods. Borrowings under the Credit Facility bearinterest under 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 September 30,2008, Buckeye had $252.0 million in borrowings outstanding under the CreditFacility. At December 31, 2007, Buckeye did not have any amountsoutstanding under the Credit Facility. At September 30, 2008 and December 31,2007, Buckeye had committed $1.3 million and $1.5 million in support of lettersof credit, respectively. The obligations for letters of credit are notreflected as debt on Buckeye’s consolidated balance sheet.

 

The Credit Facilityrequires 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 Debt Ratio is calculated by dividing consolidateddebt by annualized EBITDA, which is defined in the Credit Facility as earningsbefore interest, taxes, depreciation, depletion and amortization, in each caseexcluding the income of certain majority-owned subsidiaries of Buckeye andequity investments (but including distributions from those majority-ownedsubsidiaries and equity investments). As discussed below, the Credit Facilitywas amended in January 2008 to, among other things, change the definitionof consolidated debt. At September 30, 2008, Buckeye’s Funded Debt Ratiowas 4.51 to 1.00. As permitted by the Credit Facility, the entire outstandingbalance of BES’s line of credit at September 30, 2008, or $101.0 million,was excluded from the calculation of consolidated debt and the Funded DebtRatio.

 

In addition, the CreditFacility contains other covenants including, but not limited to, covenantslimiting Buckeye’s ability to incur additional indebtedness, to create or incurliens on its property, to dispose of property material to its operations, andto consolidate, merge or transfer assets. At September 30, 2008, Buckeyewas not aware of any instances of noncompliance with the covenants under itsCredit Facility.

 

On January 28, 2008, Buckeye entered into anamendment to the Credit Facility that permits BES to incur up to $250.0 millionof secured indebtedness related to working capital financing. The CreditFacility, as amended, also permits BES to (i) issue performance bonds notto exceed $50.0 million, (ii) incur $5.0 million of equipment leaseobligations and liens on equipment, (iii) incur up to $5.0 million ofindebtedness owing to major oil companies, and (iv) loan or advance up to$5.0 million to retail distributors of transportation fuels.Finally, the amendment states that the lesserof the amount of this debt or the sum of 90% of qualified inventory and 70% ofqualified accounts receivable held by BES at the balance sheet date may beexcluded when calculating Buckeye’s Funded Debt Ratio as discussed above.

 

Lehman Brothers Bank, FSB, an affiliate ofLehman Brothers Holdings Inc., has committed, as a lender under the CreditFacility, 3.3%, or $20.0 million, of Buckeye’s $600.0 million borrowingcapacity under the Credit Facility but recently has not honored thatcommitment. BGH 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. See Note 14 for a further discussion.

 

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*Buckeye Energy Services CreditAgreement*

 

On May 20, 2008,Farm & Home and BES entered into a Credit Agreement, which wassubsequently amended on July 18, 2008 (the “BES Credit Agreement”). TheBES Credit Agreement is with BNP Paribas, as Administrative Agent, CollateralAgent, and Lead Arranger and the lenders named therein. On July 31, 2008,Farm & Home was merged with and into BES, leaving BES as the soleborrower under the BES Credit Agreement. 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. Under the BES Credit Agreement, borrowings accrue interestat BES’s election at (i) the Administrative Agent’s Cost of Funds (asdefined in the BES Credit Agreement) plus 1.75%, (ii) the Eurodollar Rate(as defined in the BES Credit Agreement) plus 1.75% or (iii) the Base Rate(as defined in the BES Credit Agreement) plus 0.25%. The BES Credit Agreementalso permits Daylight Overdraft Loans (as defined in the BES Credit Agreement),Swingline Loans (as defined in the BES Credit Agreement) and letters of credit.Such alternative extensions of credit are subject to certain conditions asdefined in the BES Credit Agreement. The BES Credit Agreement is secured byliens on certain assets of BES, including their inventory, cash deposits (otherthan certain accounts), investments and hedging accounts, receivables andintangibles.

 

The BES Credit Agreementreplaced the credit agreement that Buckeye had assumed upon the acquisition ofFarm & Home.

 

The balance outstandingunder the BES Credit Agreement was approximately $101.0 million at September 30,2008, all of which was classified as a current liability. The BES CreditAgreement requires BES to meet certain financial covenants, which aresummarized below:

 
| ** **                            | ** ** | **Minimum**                    | ** ** | **Minimum**               | ** ** | **Maximum**             | ** ** |
|---------------------------------------|------------|--------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **Maximum**                           | ** ** | **Consolidated Tangible** | ** ** | **Consolidated Net** | ** ** | **Consolidated**        | ** ** |
| **Sub-Limit**                         | ** ** | **Net Worth**             | ** ** | **Working Capital**  | ** ** | **Leverage Ratio** | ** ** |
| $150,000,000                          |       | $                              | 40,000,000 |                      | $          | 30,000,000              |       | 7.0 to 1.0 |   |
| Above $150,000,000 up to $200,000,000 |       | 50,000,000                     |       | 40,000,000                |       | 7.0 to 1.0              |       |
| Above $200,000,000 up to $250,000,000 |       | 60,000,000                     |       | 50,000,000                |       | 7.0 to 1.0              |       |
|                                       |            |                                |            |                           |            |                         |            |  |  |

 

At September 30,2008, BES’s Consolidated Tangible Net Worth (as defined in the BES CreditAgreement) and Consolidated Net Working Capital (as defined in the BES CreditAgreement) were $113.7 million and $73.1 million, respectively, and theConsolidated Leverage Ratio (as defined in the BES Credit Agreement) was 1.43to 1.0.

 

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 September 30,2008, BES was not aware of any instances of noncompliance with the covenantsunder the BES Credit Agreement.

 

9.               DERIVATIVES

 

*CommodityDerivatives*

 

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. Thederivative contracts used to hedge refined petroleum product inventories areclassified as fair value hedges. Changes in the fair value of the inventoryhedges are recorded in current period earnings along with the related gain orloss on the hedged asset. Hedge ineffectiveness is measured quarterly based onthe correlation of changes in fair value between the derivative contract andthe hedged item during the hedge period. The Energy Services segment haselected not to use hedge accounting with respect to its fixed-price salescontracts. Therefore, its fixed-price sales contracts and the related futurescontracts used to offset those fixed-price sales contracts are all marked-to-marketon the balance sheet with gains and losses being recognized in earnings duringthe period.

 

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As of September 30,2008, the Energy Services segment had derivative assets and liabilities asfollows:

 
| ** **                                         | ** ** | **September 30,**  | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2008**                | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **Assets:**                                        | ** ** | ** **              | ** ** |
| Fixed-price  sales contracts                       |       | $                       | 21,472     |   |
| Futures  contracts for inventory                   |       | 11,200                  |       |
|                                               |       |                    |       |
|                                               |       | 32,672                  |       |
|                                               |       |                    |       |
| **Liability:**                                     | ** ** | ** **              | ** ** |
| Futures  contracts for fixed-price sales contracts |       | (20,707                 | )          |
|                                               |       |                    |       |
| Total                                              |       | $                       | 11,965     |   |

 

Substantiallyall of the asset noted above for unrealized gains of $11.2 million related toinventory hedges will be realized in the fourth quarter of 2008 as the relatedinventory is sold. Losses recorded on inventory hedges that were ineffectivewere approximately $0.8 million. As of September 30, 2008, open petroleumderivative contracts varied in duration, but did not extend beyond August 2009.

 

*Finance Derivatives*

 

InJanuary 2008, Buckeye terminated two forward-starting interest rate swapagreements associated with the 6.05% Notes and made a payment of $9.6 millionin connection with the termination. In accordance with SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS No. 133”),Buckeye has recorded the amount in other comprehensive income and will amortizethe amount of the payment into interest expense over the ten-year term of the6.05% Notes. Interest expense increased by $0.2 million and $0.7 million forthe three and nine months ended September 30, 2008, respectively, as aresult of the amortization of the termination payment.

 

In October 2008,subsequent to the date of the accompanying condensed consolidated financialstatements, Buckeye borrowed approximately $50 million under the CreditFacility. In order to hedge its variable interest rate risk with respect to theamount borrowed, Buckeye concurrently entered into an interest rate swapagreement with a bank for a notional amount of $50 million. Under the swapagreement, Buckeye will pay a fixed interest rate of 3.15% for 180 days and, inexchange, will receive a series of six monthly payments to be calculated basedon the 30-day LIBOR rate in effect at the beginning of each monthly period. Theamounts received by Buckeye will correspond to the 30 day LIBOR rates Buckeyeexpects to pay on the $50 million borrowed under the Credit Facility. The swapwill settle on the maturity date of the last 30-day LIBOR period. Buckeye has designatedthe swap agreement as a cash flow hedge at the inception of the agreement andelected to use the short-cut method provided for under SFAS No. 133.

 

10.         FAIR VALUE MEASUREMENTS

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).This statement clarifies the definition of fair value, establishes a frameworkfor measuring fair value, and expands the disclosures on fair valuemeasurements. SFAS No. 157 was effective for fiscal years beginning after November 15,2007 and interim periods within that year. BGH adopted SFAS No. 157 on January 1,2008.

 

Pursuant to SFAS No. 157,fair value measurements are characterized in one of three levels based upon theinput used to arrive at the measurement. The three levels include:

 

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Level 1: Level 1 inputsare quoted prices in active markets for identical assets or liabilities as ofthe reporting date. Active markets are those in which transactions for theasset or liability occur with sufficient frequency and volume to providepricing information on an ongoing basis.

 

Level 2: Level 2 inputsinclude the following:

 

·                  Quoted prices inactive markets for similar assets or liabilities.

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

·                  Inputs otherthan quoted prices, that are observable for the asset or liability.

·                  Inputs that arederived primarily from or corroborated by observable market data by correlationor other means.

 

Level3: Level 3 inputs are unobservable inputs for the asset or liability.

 

The following table setsforth the fair value measurement of BGH’s assets and liabilities that aresubject to SFAS No. 157 as of September 30, 2008:

 
| ** **                                         | ** ** | **Fair Value Measurements Using** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | ** **                                       | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                                         | ** ** | **Quoted Prices**                           | ** ** | **Other Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                         | ** ** | **in Active Markets**                  | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                                         | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                          | ** ** |
| **Assets:**                                        |       |                                             |       |   |   |   |   |
| Fixed-price  sales contracts                       |       | $                                                | —     |   | $ | 21,472 |   | $ | — |   |
| Futures  contracts for inventory                   |       | 11,200                                           |       |   |   | — |   |
| Asset held in  trust                               |       | 3,628                                            |       | — |   | — |   |
|                                               |       |                                             |       |   |   |   |   |
| **Liabilities:**                                   |       |                                             |       |   |   |   |   |
| Futures  contracts for fixed-price sales contracts |       | (20,707                                          | )          | — |   | — |   |
| Total                                              |       | $                                                | (5,879     | ) | $ | 21,472 |   | $ | — |   |

 

The value of the Level 1futures contracts for inventory and fixed-price sales contracts noted abovewere based on quoted market prices obtained from the New York MercantileExchange. The value of the Level 1 asset held in trust was obtained from quotedprices from brokers. The value of the Level 2 fixed-price sales contracts wasbased on observable market data related to the obligation to provide petroleumproducts.

 

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11.         EARNINGS PER UNIT

 

The following table is a reconciliation of theweighted average number of units used in the basic and diluted earnings perunit calculations (in thousands):

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                      | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic:                                          |       |                             |       |                            |       |   |   |   |   |
| Average common  units outstanding               |       | 27,770                           |       | 27,770                          |       | 27,770 |   | 27,308 |   |
| Average  management units outstanding           |       | 530                              |       | 530                             |       | 530 |   | 781 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Average units  for basic                        |       | 28,300                           |       | 28,300                          |       | 28,300 |   | 28,089 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Diluted:                                        |       |                             |       |                            |       |   |   |   |   |
| Units used for  basic calculation               |       | 28,300                           |       | 28,300                          |       | 28,300 |   | 28,089 |   |
| Dilutive effect  of additional management units |       | —                           |       | —                          |       | — |   | 211 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Average units  for diluted                      |       | 28,300                           |       | 28,300                          |       | 28,300 |   | 28,300 |   |

 

12.         CASH DISTRIBUTIONS

 

BGH generally makes quarterly cash distributions ofsubstantially all of its available cash, generally defined as consolidated cashreceipts less consolidated cash expenditures and such retentions for workingcapital, anticipated cash expenditures and contingencies as MainLine Managementdeems appropriate.

 

On October 28, 2008,MainLine Management declared a quarterly cash distribution of $0.32 per unitpayable on November 28, 2008, to unitholders of record on November 7,2008. The total cash distribution to BGH unitholders will be approximately $9.1million.

 

13.         UNIT-BASED COMPENSATION

 

*BGH Holdings’ Override Units*

 

Effective on June 25,2007, BGH Holdings instituted an equity incentive plan for certain members ofsenior management of BGH Holdings and BGH. This equity incentive plan includesboth time-based and performance-based participation in the equity of BGHHoldings (but not in BGH) referred to as “Override Units”. BGH determined that,under the requirements of provisions of SFAS No. 123 (revised 2004), “Share-BasedPayment” (“SFAS No. 123R”), BGH is required to reflect, as a compensation chargeand corresponding contribution to common unitholders’ equity, the fair value ofthis compensation. BGH Holdings determined that the estimated fair value ofsuch compensation for the three and nine months ended September 30, 2008was $0.4 million and $1.0 million, respectively, and has recorded such amountsas compensation expense and a capital contribution. BGH is not a party to thisplan and has no liabilities with respect to it.

 

The Override Unitsconsist of three equal tranches of units: Value A Units; Value B Units; andOperating Units. The Override Units are subject to vesting restrictions andconditions precedent to participation in distributions which restrictions andconditions may be waived by the Board of BGH Holdings. In addition, the OverrideUnits are subject to forfeiture if a grantee resigns or is terminated forcause.

 

The following is asummary of the activity of the Override Units as of September 30, 2008 (inthousands except per unit amounts):

 

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| ** **                                      | ** ** | **Override Units** | ** ** | **Total  Number of** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **Value A  Units** | ** ** | **Value B  Units**   | ** ** | **Operating  Units** | ** ** | **Units  Awarded** | ** ** |
| Available for  grant at January 1, 2008    |       | 744                     |       | 744                       |       | 744 |   | 2,232 |   |
| Granted                                         |       | (298                    | )          | (298                      | )          | (298 | ) | (894 | ) |
| Forfeited or  cancelled                         |       | —                  |       | —                    |       | — |   | — |   |
| Available for  grant at September 30, 2008 |       | 446                     |       | 446                       |       | 446 |   | 1,338 |   |

 
| ** **                                                             | ** ** | **Compensation Cost for Override Units** | ** ** | ** **              | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                             | ** ** | **Value A  Units**                                      | ** ** | **Value B  Units** | ** ** | **Operating  Units** | ** ** | **Totals** | ** ** |
| Total fair value  of outstanding grants                                |       | $                                                            | 3,521      |                    | $          | 2,081 |   | $ | 5,608 |   | $ | 11,210 |   |
| Less: Expense  recorded from plan inception to September 30, 2008 |       | —                                                       |       | —                  |       | 1,636 |   | 1,636 |   |
| Potential future  compensation costs at September 30, 2008        |       | $                                                            | 3,521      |                    | $          | 2,081 |   | $ | 3,972 |   | $ | 9,574 |   |

 
| ** **                                         | ** ** | **Value A** | ** ** | **Value B** | ** ** | **Operating** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------------|------------|------------------|------------|---------------|------------|------------|------------|
| 2008 Weighted  average fair value per unit granted |       | $                | 2.22       |             | $          | 1.56          |       | $          | 2.97       |   |   |   |
|                                                    |            |                  |            |                  |            |               |            |            |            |  |  |  |

 

The Override Units were valued 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 simulationestimates the future equity value from the time of the initial valuation dateof June 25, 2007 to the exit event. The assumptions used to value the 2008Override Unit awards were as follows:

 
| · | Current Equity Value of  $10.00 per unit or total equity of approximately $439.0 million, based on the  initial capital contribution made by the initial equity investors into BGH  Holdings;                                                                         |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                  |
| · | Expected Life of 5.0  years based on the historical average holding period for similar investments;                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                  |
| · | Risk Free Rate of 3.14%  based on the US constant maturity treasury rate for a term corresponding to  the expected life of 5.0 years;                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                  |
| · | Volatility of 36%.  Since BGH Holdings’ primary asset is its ownership interest in BGH,  volatility was estimated by using the volatility of BGH, along with  comparisons to the 5.0 year equity volatility of other firms in the same  industry as Buckeye; and |
|   |                                                                                                                                                                                                                                                                  |
| · | Because the likelihood  of an interim distribution is not probable due to the rigorous performance  criteria, dividends of zero were assumed.                                                                                                                         |

 

Compensation expenserelated to the Operating Units of approximately $1.4 million per year will berecognized in 2008, 2009, and 2010. The vesting of the Value A and Value BUnits is contingent on a performance condition, namely the completion of theexit event as discussed above. Accordingly, no compensation expense for theValue A and Value B Units will be recorded until an exit event occurs.

 

*Buckeye’s Unit Option and Distribution EquivalentPlan*

 

Buckeye sponsors a UnitOption and Distribution Equivalent Plan (the “Option Plan”), pursuant to whichit grants options to purchase LP Units at 100% of the market price of the LPUnits on the date of grant to key employees of Services Company. Generally, theoptions vest three years from the date of grant and expire ten years from thedate of

 

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grant. As options areexercised, Buckeye issues new LP Units. Buckeye has not historicallyrepurchased, and does not expect to repurchase in 2008, any of its LP Units.

 

Effective January 1, 2006, Buckeye adopted the fair valuemeasurement and recognition provisions of SFAS No. 123R. Generally,unit-based compensation expense recognized in the first nine months of 2008 and2007 is based on the grant date fair value estimated by using the Black-Scholesoption pricing model. Buckeye recognizes compensation expense for awardsgranted on a straight-line basis over the requisite service period.

 

For the retirement eligibility provisions of the Option Plan, Buckeyefollows the non-substantive vesting method and recognizes compensation expenseimmediately for options granted to retirement-eligible employees, or over theperiod from the grant date to the date retirement eligibility is achieved.Unit-based compensation expense recognized in earnings for the three and ninemonths ended September 30, 2008 and 2007 is based upon options ultimatelyexpected to vest. In accordance with SFAS No. 123R, forfeitures have beenestimated at the time of grant and will be revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. Forfeitures wereestimated based upon historical experience.

 

The impact of Buckeye’s Option Plan is immaterial toBGH’s consolidated financial statements.

 

*BGH Management Units*

 

Prior to BGH’s initialpublic offering of its Common Units on August 9, 2006, the general partnerof BPL was owned by MainLine L.P., a privately held limited partnership. In May 2004,MainLine L.P. instituted a Unit Compensation Plan and issued 16,216,668 Class BUnits to certain members of senior management.

 

Coincident with BGH’sinitial public offering on August 9, 2006, the equity interests ofMainLine L.P. were exchanged for the equity interests of BGH. The Class BUnits of MainLine L.P. were exchanged for 1,362,000 Management Units of BGH.Pursuant to the terms of the exchange, 70%, or 953,400 Management Units, becamevested immediately upon their exchange, and the remaining 30%, or 408,600Management Units, were expected to vest over a three year period. However,coincident with the sale of Carlyle/Riverstone BPL Holdings II, L.P.’sinterests in BGH to BGH Holdings in June of 2007, all the remainingunvested Management Units became vested and were expensed. There are noadditional Management Units available for issue. In the nine months ended September 30,2007, BGH expensed approximately $1.1 million related to the Management Units.

 

14.         RELATED PARTY TRANSACTIONS

 

Lehman Brothers, whichowns an interest in BGH Holdings, and its affiliates have provided, directly orindirectly, investment and commercial banking and financial advisory servicesto Buckeye for which they received customary fees and commissions. An affiliateof Lehman Brothers is a lender under the Credit Facility and receives itsrespective share of any repayment by Buckeye of amounts outstanding under theCredit Facility. Lehman Brothers acted as Buckeye’s financial advisor inconnection with the Lodi Gas and Farm & Home acquisitions. Also, anaffiliate of Lehman Brothers is a customer of Lodi Gas.

 

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. BGH has considered its relationships with LehmanBrothers and its affiliates and, for the reasons set forth below, believes theLehman Brothers bankruptcy and the possible resulting effects on affiliates ofLehman Brothers will not have a direct material adverse effect on BGH. The BGHHoldings interest owned by an affiliate of Lehman Brothers is a passiveinvestment that does not entitle its holder to any management or other controlrights with respect to BGH Holdings, MainLine Management, or BGH. Consequently,BGH believes that, if the interest in BGH Holdings is transferred in connectionwith Lehman Brothers’ bankruptcy, BGH will not be adversely impacted. Anaffiliate of Barclays PLC has acquired and is operating the investment bankingbusiness and certain financial services businesses of Lehman Brothers and itsaffiliates in North America and, as a result, management does not expect anydisruption with respect to these services Lehman Brothers and its affiliateshave provided to Buckeye. Lehman Brothers Bank, 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. BGH does not

 

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believe that thereduction in capacity under the Credit Facility resulting from theunavailability of Lehman Brothers Bank, FSB’s commitment will have any impacton Buckeye’s ability to meet its liquidity needs. Finally, Lehman Brothers hasentered into a binding agreement to sell the Lehman Brothers affiliate that isa customer of Lodi Gas to a third party not affiliated with Lehman Brothers. Theterms of that agreement were approved by the bankruptcy court in an order issuedon October 17, 2008, but the sale has not yet been consummated.

 

As discussed in Note 3,on January 18, 2008, Buckeye acquired all the member interests of LodiGas. The Lodi Gas acquisition was a related party transaction because Lodi Gaswas indirectly owned by affiliates of ArcLight. Due to ArcLight’s indirectownership interest in Buckeye GP, the Audit Committee of Buckeye GP made up ofindependent directors and represented by independent legal counsel andfinancial advisors, reviewed and approved the terms of the Lodi Gasacquisition, including the purchase price, as fair and reasonable to Buckeye inaccordance with Buckeye’s partnership agreement.

 

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

 

15.                                 PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

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

 

Services Company also providespost-retirement health care and life insurance benefits to certain of itsretirees (the “Retiree Medical Plan”). To be eligible for these benefits anemployee must have been hired prior to January 1, 1991 and must meetcertain service requirements. Services Company does not pre-fund itspostretirement benefit obligation.

 

For the three monthsended September 30, 2008 and 2007, the components of the net periodicbenefit cost recognized by Buckeye for the RIGP and Retiree Medical Plan wereas follows:

 
| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
| ** **                                                    | ** ** | **RIGP**                                                 | ** ** | **Plan** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                                  | ** ** |
| Components of  net periodic benefit cost: |       |                                                     |       |   |   |   |   |   |   |
| Service cost                                                  |       | $                                                        | 352        |   | $ | 111 |   | $ | 78 |   | $ | 302 |   |
| Interest cost                                                 |       | 477                                                      |       | 345 |   | 233 |   | 505 |   |
| Expected return  on plan assets                               |       | (468                                                     | )          | (238 | ) | — |   | — |   |
| Amortization of  prior service benefit                        |       | (217                                                     | )          | (113 | ) | (379 | ) | (859 | ) |
| Amortization of  unrecognized losses                          |       | 156                                                      |       | 112 |   | 139 |   | 309 |   |
| Net periodic  benefit costs                                   |       | $                                                        | 300        |   | $ | 217 |   | $ | 71 |   | $ | 257 |   |

 

For the nine months endedSeptember 30, 2008 and 2007, the components of the net periodic benefitcost recognized by Buckeye for the RIGP and Retiree Medical Plan were asfollows:

 

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| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | ** **                                              | ** ** | **Retiree Medical** | ** ** |
| ** **                                                        | ** ** | **RIGP**                                                | ** ** | **Plan** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                                 | ** ** |
| Components of net periodic benefit cost: |       |                                                    |       |   |   |   |   |   |   |
| Service cost                                                      |       | $                                                       | 1,057      |   | $ | 606 |   | $ | 543 |   | $ | 501 |   |
| Interest cost                                                     |       | 1,433                                                   |       | 850 |   | 1,621 |   | 1,521 |   |
| Expected return  on plan assets                                   |       | (1,404                                                  | )          | (648 | ) | — |   | — |   |
| Amortization of  prior service benefit                            |       | (653                                                    | )          | (340 | ) | (2,627 | ) | (2,578 | ) |
| Amortization of  unrecognized losses                              |       | 467                                                     |       | 399 |   | 959 |   | 1,072 |   |
| Net periodic  benefit costs                                       |       | $                                                       | 900        |   | $ | 867 |   | $ | 496 |   | $ | 516 |   |

 

A minimum fundingcontribution is not required to be made to the RIGP during 2008. However,Buckeye has contributed $0.9 million to the RIGP voluntarily in 2008.

 

16.         SEGMENT INFORMATION

 

With the acquisitions ofLodi Gas and Farm & Home, BGH determined that it has two additionalreportable segments: Natural Gas Storage and Energy Services. Effective in thefirst quarter of 2008, BGH conducts business in five reportable operatingsegments: Pipeline Operations; Terminalling and Storage; Natural Gas Storage;Energy Services; and Other Operations. BGH also has certain consolidated-levelassets, principally consisting of goodwill, which are not allocable to theindividual reporting segments because they are not used by the chief operatingdecision maker to make operating decisions or to allocate resources.

 

*Pipeline Operations:*

 

The Pipeline Operationssegment receives petroleum products from refineries, connecting pipelines, andbulk and marine terminals and transports those products to other locations fora 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.

 

*Terminalling and Storage:*

 

The Terminalling andStorage segment provides bulk storage and terminal throughput services. Thissegment has 56 products terminals with aggregate storage capacity of approximately23.2 million barrels in ten states.

 

*Natural Gas Storage:*

 

TheNatural Gas Storage segment provides natural gas storage services through thetwo natural gas storage facilities near Lodi, California that are owned andoperated by Lodi Gas. Together, these facilities provide approximately 22 bcfof gas capacity and are connected to Pacific Gas and Electric’s intrastate gaspipelines that service natural gas demand in the San Francisco and Sacramentoareas. The segment has approximately twenty-five customers.

 

TheNatural Gas Storage segment’s revenues consist of lease revenues and hubservices revenues. Lease revenues consist of demand charges for the reservationof storage space under firm storage agreements. The demand charge entitles thecustomer to a fixed amount of storage space and certain injection andwithdrawal rights. Title to the stored gas remains with the customer. Leaserevenues are recognized as revenue over the term of the related storageagreement. Hub services revenues consist of a variety of other storage servicesunder interruptible storage agreements. These principally include park and loantransactions. Parks occur when gas from a customer is injected and stored for aspecified period. The customer then has the right to withdraw its stored gas ata future date. Title to the gas remains with the customer. Park revenues arerecognized ratably over the term of the agreement. Loans occur when gas isdelivered to a customer in a specified period. The customer then has theobligation to redeliver gas at a future date. Loan revenues are recognizedratably over the term of the agreement.

 

TheNatural Gas Storage segment does not trade or market natural gas.

 

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*EnergyServices:*

 

The Energy Servicessegment sells refined petroleumproducts on a wholesale basis principally in eastern and central Pennsylvania.The segment records revenues after products are delivered. The segment’s products include gasoline,propane, and petroleum distillates such as heating oil, diesel fuel, andkerosene. The segment also has five terminals with aggregate storagecapacity of approximately 1.0 million barrels. The segment has approximately one thousand customers which consistprincipally of product wholesalers as well as major commercial users of theseproducts.

 

*Other Operations:*

 

The Other Operationssegment consists primarily of Buckeye’s contract operation of approximately2,200 miles of third-party pipeline systems, which are owned principally bymajor oil and chemical companies and are located primarily in Texas andLouisiana. This segment also performs pipeline construction managementservices, typically for cost plus a fixed 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.

 

Financial informationabout each segment is presented below. Each segment uses the same accountingpolicies as those used in the preparation of Buckeye’s condensed consolidatedfinancial statements. All inter-segment revenues, operating income, and assetshave been eliminated. All periods are presented on a consistent basis.

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                      | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(In thousands)**          | ** ** |
| Revenue:                        |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 91,439     |                            | $          | 92,067 |   | $ | 286,716 |   | $ | 278,244 |   |
| Terminalling and  Storage       |       | 33,003                           |       | 24,843                          |       | 87,749 |   | 72,379 |   |
| Natural Gas  Storage            |       | 16,762                           |       | —                          |       | 43,412 |   | — |   |
| Energy Services                 |       | 344,494                          |       | —                          |       | 926,809 |   | — |   |
| Other Operations                |       | 12,011                           |       | 8,743                           |       | 33,637 |   | 24,925 |   |
| Intersegment                    |       | (1,539                           | )          | —                          |       | (9,329 | ) | — |   |
| Total                           |       | $                                | 496,170    |                            | $          | 125,653 |   | $ | 1,368,994 |   | $ | 375,548 |   |
|                            |       |                             |       |                            |       |   |   |   |   |
| Operating  income:              |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 32,518     |                            | $          | 34,451 |   | $ | 106,085 |   | $ | 105,364 |   |
| Terminalling and  Storage       |       | 16,727                           |       | 9,513                           |       | 39,222 |   | 27,273 |   |
| Natural Gas  Storage            |       | 8,780                            |       | —                          |       | 21,162 |   | — |   |
| Energy Services                 |       | 3,870                            |       | —                          |       | 5,213 |   | — |   |
| Other Operations                |       | 1,356                            |       | 2,258                           |       | 4,649 |   | 6,433 |   |
| Total                           |       | $                                | 63,251     |                            | $          | 46,222 |   | $ | 176,331 |   | $ | 139,070 |   |
|                            |       |                             |       |                            |       |   |   |   |   |
| Depreciation and  amortization: |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 9,373      |                            | $          | 9,412 |   | $ | 26,383 |   | $ | 25,619 |   |
| Terminalling and  Storage       |       | 1,487                            |       | 824                             |       | 4,232 |   | 3,563 |   |
| Natural Gas  Storage            |       | 915                              |       | —                          |       | 3,430 |   | — |   |
| Energy Services                 |       | 2,151                            |       | —                          |       | 2,822 |   | — |   |
| Other Operations                |       | 416                              |       | 175                             |       | 1,200 |   | 937 |   |
| Total                           |       | $                                | 14,342     |                            | $          | 10,411 |   | $ | 38,067 |   | $ | 30,119 |   |

 

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| ** **                | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(In thousands)**         | ** ** |
| Capital  additions:       |       |                            |       |   |   |
| Pipeline Operations       |       | $                               | 24,704     |   | $ | 36,933 |   |
| Terminalling and  Storage |       | 17,326                          |       | 12,053 |   |
| Natural Gas  Storage      |       | 27,528                          |       | — |   |
| Energy Services           |       | 2,651                           |       | — |   |
| Other Operations          |       | —                          |       | 2,726 |   |
| Total                     |       | $                               | 72,209     |   | $ | 51,712 |   |
|                      |       |                            |       |   |   |
| Acquisitions:             |       |                            |       |   |   |
| Pipeline  Operations      |       | $                               | 12,040     |   | $ | 860 |   |
| Terminalling and  Storage |       | 66,187                          |       | 39,587 |   |
| Natural Gas  Storage      |       | 438,767                         |       | — |   |
| Energy Services           |       | 143,258                         |       | — |   |
| Other Operations          |       | —                          |       | — |   |
| Total                     |       | $                               | 660,252    |   | $ | 40,447 |   |
|                           |            |                                 |            |  |  |  |  |  |  |

 
| ** **                | ** ** | **Assets**              | ** ** | **Goodwill**          | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **2008**                | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** |
| Assets:                   |       |                    |       |                  |       |   |   |   |   |
| Pipeline  Operations*     |       | $                       | 1,622,136  |                  | $          | 1,673,744 |   | $ | 198,632 |   | $ | 198,632 |   |
| Terminalling and  Storage |       | 459,581                 |       | 385,446               |       | 22,789 |   | 22,789 |   |
| Natural Gas  Storage      |       | 478,190                 |       | —                |       | 170,425 |   | — |   |
| Energy Services           |       | 315,019                 |       | —                |       | 1,026 |   | — |   |
| Other Operations          |       | 109,489                 |       | 74,462                |       | 13,182 |   | 13,182 |   |
| Consolidated-  level      |       | 226,406                 |       | 220,674               |       | — |   | — |   |
| Total                     |       | $                       | 3,210,821  |                  | $          | 2,354,326 |   | $ | 406,054 |   | $ | 234,603 |   |

 

----

* All equity investmentsare included in the assets of Pipeline Operations.

 

17.         RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2006,FASB issued SFAS No. 157. SFAS No. 157 clarifies the definition offair value, establishes a framework for measuring fair value, and expands the disclosureson fair value measurements. SFAS No. 157 was effective for fiscal yearsbeginning after November 15, 2007 and interim periods within that year. InFebruary 2008, the FASB issued Financial Staff Position FAS 157-2, “EffectiveDate of FASB Statement No. 157” (“SFAS 157-2”). SFAS 157-2 delays theeffective date of SFAS No. 157 for all non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually). The delay is intended to allow the FASB’s constituents additionaltime to consider the effect of the various implementation issues that havearisen, or that may arise, from the application of SFAS No. 157. BGHadopted the non-delayed portion of SFAS No. 157 on January 1, 2008.See Note 10 for a further discussion.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value that currently are not required to be measured atfair value. SFAS No. 159 is effective no later than fiscal years beginningafter November 15, 2007. Effective on January 1, 2008, BGH adoptedSFAS No. 159 and elected not to apply the

 

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fairvalue option under this standard. As a result, SFAS No. 159 did not havean impact on BGH’s consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements-an amendment of ARB No. 51” (“SFAS No. 160”),which will be effective for fiscal years beginning after December 15,2008. SFAS No. 160 establishes accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. BGH currently is assessing the impact the adoption of thispronouncement will have on its consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFASNo. 141 (R)”), which will be effective for fiscal years beginning after December 15,2008. SFAS No. 141 (R) requires an acquiring entity in a businesscombination to (i) recognize all (and only) the assets acquired and theliabilities assumed in the transaction, (ii) establish an acquisition-datefair value as the measurement objective for all assets acquired and theliabilities assumed, (iii) disclose to investors and other users of thefinancial statements all of the information they will need to evaluate andunderstand the nature of, and the financial effect of, the businesscombination, and (iv) recognize and measure the goodwill acquired in thebusiness combination or a gain from a bargain purchase. BGH currently isassessing the impact the adoption of this pronouncement will have on itsconsolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities” (“SFAS No. 161”), which will be effective for fiscalyears beginning after November 15, 2008. SFAS No. 161 changes thedisclosure requirements for derivative instruments and hedging activities.Entities are required to provide enhanced disclosures about (i) how andwhy an entity uses derivative instruments, (ii) how derivative instrumentsand related hedging items are accounted for under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” and its relatedinterpretations, and (iii) how derivative instruments and related hedgingitems affect an entity’s financial position, financial performance, and cashflows. SFAS 161 will require BGH to prepare enhanced disclosures about itsderivative and hedging activities.

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS No. 162”). SFAS No. 162 is intended to improvefinancial reporting by identifying a consistent framework, or hierarchy, forselecting accounting principles to be used in preparing financial statementsthat are presented in conformity with U.S. generally accepted accountingprinciples (“GAAP”), for nongovernmental entities. SFAS No. 162establishes that the GAAP hierarchy should be imposed on the reporting entitiesbecause it is the entity, and not its auditor, that is responsible forselecting accounting principles for financial statements that are presented inconformity with GAAP. SFAS No. 162 is effective 60 days following the U.S.Securities and Exchange Commission’s approval of the Public Company AccountingOversight Board Auditing amendments to AU Section 411, The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles, andis only effective for nongovernmental entities.

 

On April 25, 2008,the FASB issued FASB Staff Position FAS 142-3 “Determination of the Useful Lifeof Intangible Assets” (“FAS 142-3”). FAS 142-3 amends the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of a recognized intangible asset under SFAS No. 142, “Goodwilland Other Intangible Assets.” FAS 142-3 is effective for financial statementsissued for fiscal years beginning after December 15, 2008, and interimperiods within those fiscal years. Early adoption is prohibited. BGH iscurrently reviewing the effects that FAS 142-3 will have on its consolidatedfinancial statements.

 

18.         SUBSEQUENT EVENT

 

On October 21, 2008,the directors of MainLine Management received an unsolicited proposal from BGHHoldings to acquire all of the outstanding Common Units of BGH that are notalready owned by BGH Holdings for $17.00 per Common Unit in cash. BGH Holdingscurrently owns approximately 62% of the Common Units in BGH.

 

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Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

*Overview*

 

The following discussionprovides an analysis of the financial condition and results of operations forBuckeye GP Holdings L.P. (“BGH”) and each of BGH’s operating segments,including an overview of BGH’s liquidity and capital resources and otherrelated matters. The following discussion and analysis should be read inconjunction with (i) the accompanying interim condensed consolidatedfinancial statements and related notes and (ii) BGH’s consolidatedfinancial statements, related notes, and management’s discussion and analysisof financial condition and results of operations included in BGH’s AnnualReport on Form 10-K for the year ended December 31, 2007.

 

*Buckeye GP Holdings L.P.*

 

BGH’s limited partner units are ownedapproximately 62% by BGH GP Holdings, LLC (“BGH Holdings”), approximately 1% bycertain members of senior management and approximately 37% by the public. BGHowns and controls Buckeye GP LLC (“Buckeye GP”), which is the general partnerof Buckeye Partners, L.P. (“Buckeye”), a publicly traded Delaware limitedpartnership. BGH is managed by its general partner, MainLine Management LLC (“MainLineManagement”), which is owned by BGH Holdings. BGH’s only cash-generating assetsare its partnership interests in Buckeye, comprised primarily of the following:

 
| · |   | the incentive  distribution rights in Buckeye;                                                                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                 |
| · |   | the general partner  interests in Buckeye (representing 243,914 general partner units (the “GP  Units”), or an approximate 0.5% interest in Buckeye);                                      |
|   |   |                                                                                                                                                                                                 |
| · |   | the indirect ownership  of the general partner interests in certain of Buckeye’s operating  subsidiaries (representing an approximate 1% interest in each of such  operating subsidiaries); and |
|   |   |                                                                                                                                                                                                 |
| · |   | 80,000 Buckeye limited  partner units (the “LP Units”).                                                                                                                                    |

 

The incentive distribution rights noted above entitle BGH to receiveamounts equal to specified percentages of the incremental amount of cashdistributed by Buckeye to the holders of Buckeye’s 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 (“ESOP”) areexcluded for the purpose of calculating incentive distributions. The targetdistribution levels begin at $0.325 and increase in steps to the highest targetdistribution level 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, directly dependent uponthe ability of Buckeye and its operating subsidiaries to make cashdistributions to Buckeye’s unitholders. The actual amount of cash that Buckeyewill have available for distribution will depend primarily on Buckeye’s abilityto generate earnings and cash flows beyond its working capital requirements.

 

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The following tablesummarizes BGH’s cash received for the three and nine months ended September 30,2008 and 2007 as a result of its partnership interests in Buckeye:

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                        | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**          | ** ** |
| Incentive  distributions from Buckeye                                                             |       | $                                | 9,990      |                            | $          | 7,558 |   | $ | 28,647 |   | $ | 21,699 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s GP Units                           |       | 210                              |       | 198                             |       | 622 |   | 585 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 459                              |       | 356                             |       | 808 |   | 974 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s LP Units                            |       | 69                               |       | 65                              |       | 204 |   | 192 |   |
|                                                                                              |       | $                                | 10,728     |                            | $          | 8,177 |   | $ | 30,281 |   | $ | 23,450 |   |

 

*Buckeye Partners,L.P.*

* *

Buckeye owns and operatesone of the largest independent refined petroleum products pipeline systems inthe United States in terms of volumes delivered. Buckeye owns and operatesapproximately 5,400 miles of pipeline and 64 active products terminals, withaggregate storage capacity of approximately 24.7 million barrels. In addition,Buckeye operates and maintains approximately 2,200 miles of other pipelinesunder agreements with major oil and chemical companies. Through the recentacquisitions of Lodi Gas Storage, L.L.C. (“Lodi Gas”) and Farm & HomeOil Company LLC (“Farm & Home”) in the first quarter of 2008, Buckeyenow owns and operates two major natural gas storage facilities in northernCalifornia and markets refined petroleum products in certain areas served byBuckeye’s pipelines and terminals.

 

LodiGas owns and operates two natural gas storage facilities near Lodi, California.Together, these facilities provide approximately 22 billion cubic feet (“bcf”)of gas capacity and are connected to Pacific Gas and Electric’s intrastate gaspipelines that service natural gas demand in the San Francisco and Sacramentoareas (see Note 3 to the condensed consolidated financial statements for afurther discussion). The Lodi Gas acquisition has allowed Buckeye tosubstantially expand its operations on the West Coast. In addition, in October 2008,Lodi Gas successfully began natural gas injection into an expansion of itsnatural gas storage reservoir known as Kirby Hills Phase II. The Kirby HillsPhase II storage expansion, when fully operational, will add an estimated 11bcf of natural gas storage capacity. The Kirby Hills Phase II expansion projectis expected to be fully operational in February 2009. Lodi Gas’s revenuesare generated by fee-based storage contracts, the majority of which arecomprised of firm storage agreements for specified levels of injection andwithdrawal service. Additional revenues are earned through interruptibleservices, called hub services, for which Lodi Gas earns fees for storing acustomer’s gas or loaning gas to a customer on an interruptible basis aroundLodi Gas’s firm storage commitments. Lodi Gas does not take title to thenatural gas that it stores.

 

WhenFarm & Home was acquired, it sold refined petroleum products on awholesale basis, principally in eastern and central Pennsylvania, and it alsohad retail operations. Buckeye sold Farm & Home’s retail operations toa wholly owned subsidiary of Inergy, L.P. on April 15, 2008. The assetsand liabilities and results of operations of Farm & Home’s retailoperations were determined to be discontinued operations effective on the Farm &Home acquisition date of February 8, 2008 (see Note 3 to the condensedconsolidated financial statements for a further discussion). On July 31,2008, Farm & Home was merged with and into its wholly ownedsubsidiary, Buckeye Energy Services LLC (“BES”), with BES continuing as thesurviving entity.

 

Buckeye’s pipeline andterminal customers are major integrated oil companies, large refined petroleumproducts marketing companies, major end users of petroleum products, andchemical and utility companies. Lodi Gas’s customers are major natural gasutility companies and natural gas marketing and distribution companies. BES’swholesale customers are primarily product wholesalers and major commercialusers of refined petroleum products.

 

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The acquisitions of LodiGas and Farm & Home added two additional reportable segments, NaturalGas Storage and Energy Services. Effective in the first quarter of 2008, BGHconducted business in five reportable operating segments: Pipeline Operations;Terminalling and Storage; Natural Gas Storage; Energy Services; and OtherOperations. See Note 16 to the condensed consolidated financial statements fora more detailed discussion of BGH’s operating segments.

 

*Results of Operations*

 

The results of operations discussed belowprincipally reflect the activities of Buckeye. Since the accompanying condensedconsolidated financial statements of BGH include the consolidated results ofBuckeye, BGH’s consolidated statements are substantially similar to Buckeye’sexcept as noted below:

 

·      Interest of non-controlling partners inBuckeye—BGH’s condensed consolidated balance sheet includes a non-controllinginterest liability that reflects the proportion of Buckeye owned by itspartners other than BGH. Similarly, the ownership interests in Buckeye held byits partners other than BGH are reflected in BGH’s condensed consolidatedincome statement as non-controlling interest expense. These non-controllinginterest liabilities and expenses are not reflected in Buckeye’s condensedconsolidated financial statements.

 

·      BGH’s capital structure—In addition toincorporating the assets and liabilities of Buckeye, BGH’s condensedconsolidated balance sheet includes BGH’s own indebtedness and related debtplacement costs, and the partners’ capital on BGH’s balance sheet representsBGH’s partners’ capital as opposed to the capital reflected in Buckeye’sbalance sheet, which reflects the ownership interest of all its partners,including its owners other than BGH. Consequently, BGH’s income statementreflects additional interest expense, interest income, and debt amortizationexpense that is not reflected in Buckeye’s financial statements.

 

·      Inclusion of Buckeye Pipe Line ServicesCompany—The financial statements of Buckeye Pipe Line Services Company (“ServicesCompany”), which employs the employees who manage and operate the assets ofBuckeye, are consolidated into BGH’s financial statements. The financialstatements of Buckeye do not include the financial statements of ServicesCompany.

 

·      BGH’s general and administrativeexpenses—BGH incurs general and administrative expenses that are independentfrom Buckeye’s operations and are not reflected in Buckeye’s condensedconsolidated financial statements.

 

·      Elimination of intercompanytransactions—Intercompany obligations and payments among Buckeye and itsconsolidated subsidiaries, BGH and Services Company are reflected in Buckeye’sconsolidated financial statements but are eliminated in BGH’s consolidatedfinancial statements.

 

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Summaryoperating results for BGH were asfollows:

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                | ** ** | **(In thousands)**          | ** ** |
| Revenue                                                   |       | $                                | 496,170    |                            | $          | 125,653 |   | $ | 1,368,994 |   | $ | 375,548 |   |
| Costs and  expenses                                       |       | 432,919                          |       | 79,431                          |       | 1,192,663 |   | 236,478 |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| Operating income                                          |       | 63,251                           |       | 46,222                          |       | 176,331 |   | 139,070 |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| Other (expenses)                                          |       | (18,949                          | )          | (12,285                         | )          | (54,546 | ) | (38,631 | ) |
| Income before  equity income and non-controlling interest |       | 44,302                           |       | 33,937                          |       | 121,785 |   | 100,439 |   |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| Equity income                                             |       | 2,403                            |       | 2,222                           |       | 5,802 |   | 6,266 |   |
| Non-controlling  interest expense                         |       | (39,471                          | )          | (31,081                         | )          | (109,187 | ) | (91,557 | ) |
|                                                      |       |                             |       |                            |       |   |   |   |   |
| Net income                                                |       | $                                | 7,234      |                            | $          | 5,078 |   | $ | 18,400 |   | $ | 15,148 |   |

 

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Tableof Contents

 

Revenues, operatingincome, total costs and expenses, and depreciation and amortization byoperating segment were as follows:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                           | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**          | ** ** |
| Revenue:                                                             |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 91,439     |                            | $          | 92,067 |   | $ | 286,716 |   | $ | 278,244 |   |
| Terminalling and  Storage                                            |       | 33,003                           |       | 24,843                          |       | 87,749 |   | 72,379 |   |
| Natural Gas  Storage                                                 |       | 16,762                           |       | —                          |       | 43,412 |   | — |   |
| Energy Services                                                      |       | 344,494                          |       | —                          |       | 926,809 |   | — |   |
| Other Operations                                                     |       | 12,011                           |       | 8,743                           |       | 33,637 |   | 24,925 |   |
| Intersegment                                                         |       | (1,539                           | )          | —                          |       | (9,329 | ) | — |   |
| Total                                                                |       | $                                | 496,170    |                            | $          | 125,653 |   | $ | 1,368,994 |   | $ | 375,548 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Operating  income:                                                   |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 32,518     |                            | $          | 34,451 |   | $ | 106,085 |   | $ | 105,364 |   |
| Terminalling and  Storage                                            |       | 16,727                           |       | 9,513                           |       | 39,222 |   | 27,273 |   |
| Natural Gas  Storage                                                 |       | 8,780                            |       | —                          |       | 21,162 |   | — |   |
| Energy Services                                                      |       | 3,870                            |       | —                          |       | 5,213 |   | — |   |
| Other Operations                                                     |       | 1,356                            |       | 2,258                           |       | 4,649 |   | 6,433 |   |
| Total                                                                |       | $                                | 63,251     |                            | $          | 46,222 |   | $ | 176,331 |   | $ | 139,070 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Total costs and  expenses (including depreciation and amortization): |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 58,921     |                            | $          | 57,616 |   | $ | 180,631 |   | $ | 172,880 |   |
| Terminalling and  Storage                                            |       | 16,276                           |       | 15,330                          |       | 48,527 |   | 45,106 |   |
| Natural Gas  Storage                                                 |       | 7,982                            |       | —                          |       | 22,250 |   | — |   |
| Energy Services                                                      |       | 340,624                          |       | —                          |       | 921,596 |   | — |   |
| Other Operations                                                     |       | 10,655                           |       | 6,485                           |       | 28,988 |   | 18,492 |   |
| Intersegment                                                         |       | (1,539                           | )          | —                          |       | (9,329 | ) | — |   |
| Total                                                                |       | $                                | 432,919    |                            | $          | 79,431 |   | $ | 1,192,663 |   | $ | 236,478 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Depreciation and  amortization:                                      |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 9,373      |                            | $          | 9,412 |   | $ | 26,383 |   | $ | 25,619 |   |
| Terminalling and  Storage                                            |       | 1,487                            |       | 824                             |       | 4,232 |   | 3,563 |   |
| Natural Gas Storage                                                  |       | 915                              |       | —                          |       | 3,430 |   | — |   |
| Energy Services                                                      |       | 2,151                            |       | —                          |       | 2,822 |   | — |   |
| Other Operations                                                     |       | 416                              |       | 175                             |       | 1,200 |   | 937 |   |
| Total                                                                |       | $                                | 14,342     |                            | $          | 10,411 |   | $ | 38,067 |   | $ | 30,119 |   |

 

ThirdQuarter of 2008 compared to Third Quarter of 2007

 

Total revenues for thequarter ended September 30, 2008 were $496.2 million, approximately $370.5million greater than revenue for the same period in 2007. Of the $370.5 millionincrease in revenue in the third quarter of 2008, $16.8 million resulted fromthe addition of Lodi Gas’s operations and $344.5 million resulted from theaddition of Farm & Home’s legacy wholesale operations. The results ofLodi Gas and Farm & Home’s legacy wholesale operations are includedbelow in the Natural Gas Storage and Energy Services segments, respectively.The balance of the revenue improvement of approximately $9.2 million wasattributable to the remaining reporting segments as discussed below.

 

Pipeline Operations:

 

Revenues from Pipeline Operations of $91.4 million inthe third quarter of 2008 slightly declined when compared to revenues fromPipeline Operations in the third quarter of 2007. The decrease of $0.6 millionor 0.1% was primarily the result of:

 

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| · |   | Transportation revenue being flat in the third  quarter of 2008 compared to the third quarter of 2007 as the benefit of the  tariff increases implemented on July 1, 2008 did not fully offset  reduced product volumes in the third quarter of 2008 as compared to the third  quarter of 2007. Management believes the reduced volumes in 2008 were caused  primarily by reduced demand for gasoline resulting from higher retail  gasoline prices, the continued introduction of ethanol into retail gasoline  products as well as reduced demand for distillates resulting from higher  retail distillate prices and adverse changes in the U.S. economy. Total  product volumes declined by 4.6% in the third quarter of 2008 compared to the  third quarter of 2007; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · |   | An approximate $2.7 million reduction in revenue  representing the settlement of overages and shortages on product deliveries;  and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · |   | A net increase in incidental revenues of $2.1  million, which was principally related to an increase in revenue of $1.9  million for contract service activities at customer facilities connected to  Buckeye’s refined products pipelines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

During 2007 and continuing into 2008, Buckeyeexperienced measurement shortages in connection with its pipeline productdeliveries in excess of historical variances. Based on an investigation ofthese measurement issues, certain corrective actions have been taken. Buckeyebelieves the measurement issues have, to a large extent, been isolated andgenerally corrected, although monitoring and evaluation of product measurementissues is continuing. Additionally, the cost of product downgrades which resultfrom the interface of different products in the pipeline has increased as aresult of the significant increases in the volatility of product prices.Buckeye has implemented a number of measures to mitigate the effects of theseissues, including tariff adjustments to allow for the equitable allocation ofoperational effects of transportation.

 

Product volumestransported in Pipelines Operations for the quarter ended September 30,2008 and 2007 were as follows:

 
| ** **  | ** ** | **Average Barrels Per Day**               | ** ** |
|-------------|------------|----------------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended September 30,** | ** ** |
| **Product** | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| Gasoline    |       | 682,500                                                  |       | 730,100 |   |
| Distillate  |       | 263,100                                                  |       | 274,000 |   |
| Jet Fuel    |       | 363,600                                                  |       | 376,100 |   |
| LPG’s  |       | 18,800                                                   |       | 18,600 |   |
| NGL’s  |       | 21,000                                                   |       | 21,100 |   |
| Other       |       | 11,400                                                   |       | 5,700 |   |
| Total       |       | 1,360,400                                                |       | 1,425,600 |   |

 

On May 1, 2008 and July 1,2008, certain of Buckeye’s operating subsidiaries in the Pipeline Operationssegment filed pipeline tariffs reflecting increased rates on average ofapproximately 4.8%. These tariff rate increases are expected to generateapproximately $16.4 million in additional revenue on an annualized basis.

 

Terminalling and Storage:

 

Revenues from the Terminalling and Storage segmentwere $33.0 million in the third quarter of 2008, which is an increase of $8.2million, or 33%, compared to the third quarter of 2007. The revenue increasewas primarily the result of:

 
| · |   | An approximate $4.2 million increase in revenue  primarily related to increases in blending fees for product additives and  product recoveries from vapor recovery units, which were offset by an  approximately 6.2% decline in terminal throughput volumes in the third  quarter of 2008 compared to the third quarter of 2007; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| · |   | Incremental revenue of $1.2 million in 2008 due to  the acquisitions of the Niles, Michigan, Ferrysburg, Michigan, and Albany,  New York terminals as more fully described in Note 3 to the accompanying  condensed consolidated financial statements; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                       |
| · |   | $2.8 million from the settlement, net of receivable,  of contractual product handling charges with a customer.                                                                                                                                             |

 

Averagedaily throughput for the products terminals for the quarters ended September 30,2008 and 2007 were as follows:

 
| ** **           | ** ** | **Average Barrels Per Day**               | ** ** |
|----------------------|------------|----------------------------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended September 30,** | ** ** |
| ** **           | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
|                 |       |                                                     |       |   |   |
| Products  throughput |       | 539,200                                                  |       | 575,100 |   |

 

NaturalGas Storage:

 

Revenue from the Natural Gas Storage segment was $16.8 million in the thirdquarter of 2008. Approximately 63.0%of this revenue represented firm storage revenues and 37.0% represented hubservices revenues.

 

EnergyServices:

 

Revenue from the Energy Services segment was $344.5 million in the third quarterof 2008. Revenue from the Energy Services segment was derived from Farm &Home’s legacy wholesale operations, which Buckeye acquired on February 8,2008. Farm & Home’s retail operations were sold on April 15,2008, and are treated as discontinued operations for all periods presented in2008. During the third quarter of 2008, approximately 105.9 million gallons ofproduct were sold. Products sold include gasoline, propane, and petroleumdistillates such as heating oil, diesel fuel, and kerosene.

 

OtherOperations:

 

Revenue from the OtherOperations segment was $12.0 million in the third quarter of 2008, which is anincrease of $3.3 million, or 37.9% compared to the third quarter of 2007. Therevenue increase was primarily the result of:

 

·      A reduction of $1.1 million in pipelineoperation and maintenance revenue related to the expiration of severalmaintenance contracts in 2008; and

 

·      An increase of $4.3 million in constructionmanagement revenue related to new construction contracts. These constructionactivities are principally conducted on a time and material basis.

 

*Operating Expenses:*

* *

Costs and expenses forthe three months ended September 30, 2008 and 2007 were as follows:

 

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| ** **                     | ** ** | **Costs and Expenses**                         | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended September 30,** | ** ** |
| ** **                     | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**                                  | ** ** |
| Cost of product  sales         |       | $                                                        | 334,959    |   | $ | 1,278 |   |
| Payroll and  payroll benefit   |       | 28,318                                                   |       | 24,334 |   |
| Depreciation and  amortization |       | 14,342                                                   |       | 10,411 |   |
| Outside services               |       | 10,111                                                   |       | 10,658 |   |
| Operating power                |       | 7,837                                                    |       | 7,744 |   |
| Property and  other taxes      |       | 6,050                                                    |       | 5,448 |   |
| Insurance and  casualty losses |       | 4,751                                                    |       | 3,442 |   |
| Construction  management       |       | 7,567                                                    |       | 1,609 |   |
| Supplies                       |       | 1,562                                                    |       | 2,357 |   |
| Rentals                        |       | 5,642                                                    |       | 2,989 |   |
| All other                      |       | 11,780                                                   |       | 9,161 |   |
| Total                          |       | $                                                        | 432,919    |   | $ | 79,431 |   |

 

Cost of product sales was$335.0 million in the third quarter of 2008, which is an increase over thethird quarter of 2007 of $333.7 million. Approximately $333.4 million of theincrease was attributable to product sold by the Energy Services segment, whichconsists primarily of the operations of Farm & Home’s legacy wholesaleoperations. The remaining increase is principally associated with fuelpurchases related to a product supply arrangement in Buckeye’s PipelineOperations segment.

 

Payroll and payrollbenefits were $28.3 million in the third quarter of 2008, an increase of $4.0million compared to the third quarter of 2007. The operations of the NaturalGas Storage and the Energy Services segments added $1.0 million and $1.9million of payroll and payroll benefits expense for the period, respectfully.In addition, increases in salaries, wages, and incentive compensation added$1.5 million for the period. The increases in salaries, wages, and incentivecompensation were primarily the result of an increase in the number ofemployees due to Buckeye’s expansion of its operations. BGH’s payroll expensealso increased by $0.4 million due to accruals related to executivecompensation and charges for BGH Holdings’ equity incentive plan. Theseincreases were offset by a decrease in ESOP related costs of $0.5 million forthe third quarter of 2008.

 

Depreciation andamortization expense was $14.3 million in the third quarter of 2008, which isan increase of $3.9 million over the third quarter of 2007. The operations ofthe Natural Gas Storage and the Energy Services segments added $1.0 million and$2.3 million of depreciation and amortization expense in the three months endedSeptember 30, 2008, respectively. The remaining increase in depreciationand amortization expense resulted from Buckeye’s ongoing maintenance andexpansion capital program.

 

Outside services costswere $10.1 million in the third quarter of 2008, which is a decrease of $0.6million over the third quarter of 2007. The operations of the Natural GasStorage and the Energy Services segments added $1.0 million and $0.2 million ofoutside services costs in the three months ended September 30, 2008,respectively. These increases were offset by a decrease in maintenance andpipeline integrity projects in the third quarter of 2008 as compared to thethird quarter of 2007. Outside services costs consist principally ofthird-party contract services for pipeline and terminal maintenance activities.

 

Operating power costswere $7.8 million for the three months ended September 30, 2008, and wereconsistent with operating power costs the three months ended September 30,2007. Operating power consists primarily of electricity required to operatepipeline pumping facilities.

 

Property and other taxeswere $6.1 million in the third quarter of 2008, an increase of $0.7 millioncompared to the third quarter of 2007, which was primarily due to theoperations of the Natural Gas Storage segment.

 

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Insurance and casualtylosses were $4.8 million for the three months ended September 30, 2008,which is an increase of $1.4 million from the three months ended September 30,2007. Casualty losses increased by $1.2 million due to an increase of $0.6million in the costs of remediating environmental incidents and $0.6 million inexpenses relating to a product contamination incident. Insurance costsincreased by $0.1 million, which is primarily due to the inclusion of theNatural Gas Storage and Energy Services operations.

 

Construction managementcosts were $7.6 million in the third quarter of 2008, which is an increase of$6.0 million from the third quarter of 2007. In the third quarter of 2008,Buckeye started three significant construction contracts, which are expected tobe completed in the fourth quarter of 2008.

 

Supplies expense was $1.6million for the three months ended September 30, 2008, which is a decreaseof $0.8 million from the three months ended September 30, 2007. Thedecrease is primarily due to a decrease in terminal additive purchases atterminals owned by Buckeye.

 

Rental expense was $5.6million in the third quarter of 2008, which is an increase of $2.6 million overthe third quarter of 2007. The operations of the Natural Gas Storage and theEnergy Services segments added $2.3 million and $0.2 million of rental expensein the three months ended September 30, 2008, respectively.

 

All other costs were $11.8million in the three months ended September 30, 2008, an increase of $2.6million compared to the same period in 2007. The operations of Lodi Gas and theEnergy Services segment operations added $1.6 million and $0.8 million of othercosts, respectively, in the three months ended September 30, 2008. Theremainder of the increases related to various other pipeline operating costs.

 

Costs and expensesattributable to Buckeye, Services Company and BGH were as follows:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(In thousands)**          | ** ** |
| Total cost and  expenses:               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Attributable to  Buckeye                |       | $                                | 431,719    |   | $ | 78,122 |   |
| Elimination of  Buckeye deferred charge |       | (1,174                           | )          | (1,174 | ) |
| Net effect of  ESOP charges             |       | 521                              |       | 1,063 |   |
| Attributable to  BGH                    |       | 1,853                            |       | 1,420 |   |
| Total                                   |       | $                                | 432,919    |   | $ | 79,431 |   |

 

Amounts attributable toBGH consist of the following:

 
| ** **            | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **September 30,**           | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **            | ** ** | **(In thousands)**          | ** ** |
| Attributable to  BGH: | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Payroll and  benefits |       | $                                | 1,282      |   | $ | 852 |   |
| Professional  fees    |       | 267                              |       | 217 |   |
| Other                 |       | 304                              |       | 351 |   |
| Total                 |       | $                                | 1,853      |   | $ | 1,420 |   |

 

Payroll and payrollbenefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye as well as allocations ofthe cost of Buckeye personnel performing administrative services directly forBGH. BGH’s payroll expense increased by $0.4 million in the third quarter of2008 as compared to the third quarter of 2007 due to accruals related toexecutive compensation. Other costs include certain state franchise taxes,insurance costs, depreciation and miscellaneous other expenses.

 

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Other income (expense)for the three months ended September 30, 2008 and 2007 was as follows:

 
| ** **                 | ** ** | **Other Income (Expense)**                     | ** ** |
|----------------------------|------------|----------------------------------------------------------|------------|
| ** **                 | ** ** | **Three Months Ended September 30,** | ** ** |
| ** **                 | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(In thousands)**                                  | ** ** |
| Investment  income         |       | $                                                        | 294        |   | $ | 426 |   |
| Interest and  debt expense |       | (19,243                                                  | )          | (12,711 | ) |
| Total                      |       | $                                                        | (18,949    | ) | $ | (12,285 | ) |
|                       |       |                                                     |       |   |   |
| Equity income              |       | $                                                        | 2,403      |   | $ | 2,222 |   |

 

Other income (expenses) was a net expense of $18.9million in the third quarter of 2008, compared to a net expense of $12.3million during the third quarter of 2007. Investment income for the threemonths ended September 30, 2008 was consistent with investment incomegenerated during the three months ended September 30, 2007.

 

Interest and debt expensewas $19.2 million in the three months ended September 30, 2008, anincrease of $6.5 million from the three months ended September 30, 2007.Approximately $4.5 million of the increase was attributable to expenseassociated with Buckeye’s $300.0 million in aggregate principal amount of the6.05% Notes due January 15, 2018 (the “6.05% Notes”), which were issued inJanuary 2008. Approximately $1.3 million of the increase is due tointerest expense related to the activities within the Energy Services segment.The remaining increase is primarily due to higher average balances outstandingon Buckeye’s revolving credit facility.

 

Equity income of $2.4million in the third quarter of 2008 was consistent with equity income in thesecond quarter of 2007.

 

FirstNine Months of 2008 compared to First Nine Months of 2007

 

Total revenues for the ninemonths ended September 30, 2008 were $1,369.0 million, approximately $993.5million greater than total revenue for the same period in 2007. Of the $993.5million increase, $43.4 million resulted from the acquisition of Lodi Gas and$926.8 million resulted from the acquisition of Farm & Home. Theresults of Lodi Gas’s operations and Farm & Home’s legacy wholesaleoperations are included below in the Natural Gas Storage and Energy Servicessegments, respectively. The balance of the revenue improvement of approximately$23.3 million was attributable to the remaining reporting segments as discussedbelow.

 

Pipeline Operations:

 

Revenues from Pipeline Operations were $286.7 millionin the nine months ended September 30, 2008 which is an increase of $8.5million or 3.0% from the corresponding period in 2007. This increase wasprimarily the result of:

 
| · |   | Transportation revenue increasing by $3.4 million in  the first nine months of 2008 compared to the first nine months of 2007  primarily as a result of tariff increases implemented on May 1, 2008 and  July 1, 2008. The benefit of the tariff increases were partially offset  by reduced product volumes in the first nine months of 2008 as compared to  the first nine months of 2007. Management believes the reduced volumes in the  first nine months of 2008 were caused primarily by reduced demand for  gasoline resulting from higher retail gasoline prices, reduced production at  ConocoPhillips’ Wood River Refinery in the first quarter of 2008 due to  maintenance activities, and the continued introduction of ethanol into retail  gasoline products as well as reduced demand for distillates resulting from  higher retail distillate prices and adverse changes in the U.S. economy.  Total product volumes declined by 4.0% in the first nine months of 2008  compared to the first nine months of 2007; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| · |   | A net increase in incidental revenues of $5.2  million, which was principally related to a product supply arrangement that  was offset by a reduction in revenue of $0.5 million principally related to  the completion of contract services activities at customer facilities  connected to Buckeye’s refined products pipelines; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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| · |   | An approximate $0.9 million reduction in revenue  representing the settlement of overages and shortages on product deliveries. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|

 

Product volumestransported in Pipelines Operations for the nine months ended September 30,2008 and 2007 were as follows:

 
| ** **  | ** ** | **Average Barrels Per Day**              | ** ** |
|-------------|------------|---------------------------------------------------------|------------|
| ** **  | ** ** | **Nine Months Ended September 30,** | ** ** |
| **Product** | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Gasoline    |       | 674,300                                                 |       | 720,200 |   |
| Distillate  |       | 293,200                                                 |       | 309,700 |   |
| Jet Fuel    |       | 364,000                                                 |       | 364,000 |   |
| LPG’s  |       | 18,800                                                  |       | 20,300 |   |
| NGL’s  |       | 21,400                                                  |       | 20,200 |   |
| Other       |       | 11,700                                                  |       | 6,800 |   |
| Total       |       | 1,383,400                                               |       | 1,441,200 |   |

 

Terminalling and Storage:

 

Revenue from the Terminalling and Storage segment was$87.7 million in the first nine months of 2008. The revenue increase in thefirst nine months of 2008 compared to the same period in 2007 was $15.4 millionor 21.2%, which was primarily the result of:

 
| · |   | An approximate $8.0 million increase in revenue  primarily related to increases in blending fees for product additives and  product recoveries from vapor recovery units, which were offset by an approximately  4.9% decline in throughput volumes in the first nine months of 2008 compared  to the first nine months of 2007;                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | Incremental revenue of $4.5 million due to the  acquisitions of the Niles, Michigan, Ferrysburg, Michigan, and Albany, New York  terminals in 2008 (see Note 3 to the condensed financial statements),  combined with the effect of having a full nine months of revenue in 2008 from  the six terminals that were acquired at various times in the first quarter of  2007; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | $2.8 million from the  settlement, net of receivable, of contractual product handling charges with a  customer.                                                                                                                                                                                                                                                                 |

 

Averagedaily throughput for the products terminals for the nine months ended September 30,2008 and 2007 was as follows:

 
| ** **           | ** ** | **Average Barrels Per Day**              | ** ** |
|----------------------|------------|---------------------------------------------------------|------------|
| ** **           | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **           | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                 |       |                                                    |       |   |   |
| Products  throughput |       | 537,600                                                 |       | 565,100 |   |

 

NaturalGas Storage:

 

Revenue from the Natural Gas Storage segment was $43.4 million in the first ninemonths of 2008. Approximately 69.0% ofthis revenue represented firm storage revenues and 31.0% represented hubservices revenues.

 

EnergyServices:

 

Revenue from the Energy Services segment was $926.8 million in the first ninemonths of 2008. Substantially all of this revenue was derived from Farm &Home’s legacy wholesale operations, which Buckeye acquired on February 8,2008. During the first nine months of 2008, approximately 370.9 million gallonsof products were sold. Products sold include gasoline, propane, and petroleumdistillates such as heating oil, diesel fuel, and kerosene.

 

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OtherOperations:

 

Revenue from the Other Operations segment was $33.6million in the first nine months of 2008, which is an increase of $8.7 millioncompared to the first nine months of 2007.The revenue increase in 2008 was primarily the result of:

 
| · |   | An increase of $1.9 million in pipeline operations and maintenance  revenue related to additional operating contracts signed in the latter part  of 2007; and                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                          |
| · |   | An increase of $7.0 million in construction management revenue  related to new construction contracts. These construction activities are  principally conducted on a time and material basis. |

 

*Operating Expenses:*

* *

Costs and expenses forthe nine months ended September 30, 2008 and 2007 were as follows:

 
| ** **                     | ** ** | **Costs and Expenses**                        | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|
| ** **                     | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                     | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**                                 | ** ** |
| Cost of product  sales         |       | $                                                       | 913,163    |   | $ | 7,154 |   |
| Payroll and  payroll benefit   |       | 84,885                                                  |       | 72,329 |   |
| Depreciation and  amortization |       | 38,067                                                  |       | 30,119 |   |
| Outside services               |       | 35,005                                                  |       | 27,389 |   |
| Operating power                |       | 22,892                                                  |       | 23,157 |   |
| Property and  other taxes      |       | 17,882                                                  |       | 16,893 |   |
| Insurance and  casualty losses |       | 12,842                                                  |       | 10,902 |   |
| Construction  management       |       | 12,368                                                  |       | 6,313 |   |
| Supplies                       |       | 6,690                                                   |       | 8,228 |   |
| Rentals                        |       | 14,508                                                  |       | 8,933 |   |
| All other                      |       | 34,361                                                  |       | 25,061 |   |
| Total                          |       | $                                                       | 1,192,663  |   | $ | 236,478 |   |

 

Cost of product sales was$913.2 million in the first nine months of 2008, which is an increase over thefirst nine months of 2007 of $906.0 million. Approximately $899.8 million ofthe increase was attributable to products sold by the Energy Services segment.The remaining increase is principally associated with fuel purchases related toa product supply arrangement in Buckeye’s pipeline operations segment.

 

Payroll and payrollbenefits were $84.9 million in the first nine months of 2008, an increase of$12.6 million compared to the first nine months of 2007. The Natural GasStorage and Energy Services segments added $3.0 million and $4.2 million ofpayroll and payroll benefits expense in the first nine months of 2008,respectively. Increases in salaries, wages, and incentive compensation of $4.7million in the first nine months of 2008 resulted primarily from an increase inthe number of employees due to Buckeye’s expanded operations. In the first ninemonths of 2008, payroll and payroll benefits expense increased by $0.7 milliondue to a decrease in capitalized payroll and payroll benefits compared to thefirst nine months of 2007. BGH’s payroll expense increased by $2.1 million dueto accruals related to executive compensation and charges for BGH Holdings’equity incentive plan. In the first nine months of 2007, BGH expensed $1.0million related to non-cash unit based compensation expense. ESOP related costsdecreased by $1.5 million in the first nine months of 2008 as compared to thefirst nine months of 2007.

 

Depreciation andamortization expense was $38.1 million in the first nine months of 2008, whichis an increase of $8.0 million over the first nine months of 2007. Theoperations of the Natural Gas Storage and the Energy Services segments added$3.7 million and $3.1 million of depreciation and amortization expense in thefirst nine months of 2008, respectively. The remaining increase in depreciationand amortization expense resulted from Buckeye’s ongoing maintenance andexpansion capital program.

 

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Outside services costswere $35.0 million in the first nine months of 2008, which is an increase of$7.6 million over the first nine months of 2007. The operations of the NaturalGas Storage and the Energy Services segments added $3.2 million and $0.6million of outside services costs in the first nine months of 2008,respectively. Lodi Gas incurred approximately $2.4 million of outside servicesexpense related to well work-over costs. Another approximately $3.9 million isdue to increases in activity on operations and maintenance contracts. Theremainder of the increase is due to an increase in pipeline and terminalmaintenance activities. Outside services costs consist principally ofthird-party contract services for pipeline and terminal maintenance activities.

 

Operating power costswere $22.9 million for the first nine months of 2008, which is a decrease of$0.3 million from the first nine months of 2007. The decrease is primarily dueto a reduction in expense associated with a lubricity additive which reducespumping requirements and the related electricity usage. Operating powerconsists primarily of electricity required to operate pipeline pumpingfacilities.

 

Property and other taxeswere $17.9 million in the first nine months of 2008, an increase of $1.0million compared to the first nine months of 2007. The operations of theNatural Gas Storage and the Energy Services segments added $1.7 million and$0.1 million, respectively, in the first nine months of 2008. These increaseswere offset by a reduction of $0.4 million for excise taxes.

 

Insurance and casualtylosses were $12.8 million for the first nine months of 2008, which is anincrease of $1.9 million from the first nine months of 2007. Casualty lossesincreased by $1.2 million in the first nine months of 2008, which is due to anincrease of $0.6 million in the cost of remediating environmental incidentscompared to the first nine months of 2007, as well as $0.6 million related to aproduct contamination incident that occurred in the third quarter of 2008.Insurance costs increased by $0.7 million which is primarily due to theinclusion of the operations of the Natural Gas Storage and the Energy Services segments.

 

Construction managementcosts were $12.4 million in the first nine months of 2008, which is an increaseof $6.1 million over the same period in 2007. In the third quarter of 2008,Buckeye started three significant construction contracts, which are expected tobe completed in the fourth quarter of 2008.

 

Supplies expense was $6.7million for the first nine months of 2008, which is a decrease of $1.5 millionfrom the first nine months of 2007. The decrease is primarily due to a decreasein terminal additives purchases at Buckeye’s terminals.

 

Rental expense was $14.5million in the first nine months of 2008, which is an increase of $5.6 millionfrom the first nine months of 2007. The operations of the Natural Gas Storageand the Energy Services segments added $4.9 million and $0.5 million of rentalexpense in the first nine months of 2008, respectively.

 

All other costs were$34.4 million in the first nine months of 2008, an increase of $9.3 millioncompared to the same period in the first nine months of 2007. The operations ofthe Natural Gas Storage and the Energy Services segments added $2.7 million and$3.5 million of other costs, respectively, in the first nine months of 2008.Professional fees increased by $2.6 million. The remainder of the increasesrelated to various other pipeline operating costs.

 

Costs and expensesattributable to Buckeye, Services Company, and BGH were as follows:

 
| ** **                              | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(In thousands)**         | ** ** |
| Total cost and expenses: |       |                            |       |   |   |
| Attributable to  Buckeye                |       | $                               | 1,187,744  |   | $ | 231,487 |   |
| Elimination of  Buckeye deferred charge |       | (3,523                          | )          | (3,523 | ) |
| Net effect of  ESOP charges             |       | 2,365                           |       | 3,863 |   |
| Attributable to  BGH                    |       | 6,077                           |       | 4,651 |   |
| Total                                   |       | $                               | 1,192,663  |   | $ | 236,478 |   |

 

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Amounts attributable toBGH consist of the following:

 
| ** **           | ** ** | **Nine Months Ended** | ** ** |
|----------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **September 30,**          | ** ** |
| ** **           | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **           | ** ** | **(In thousands)**         | ** ** |
| Payroll and benefits |       | $                               | 3,903      |   | $ | 3,003 |   |
| Professional  fees   |       | 1,255                           |       | 654 |   |
| Other                |       | 919                             |       | 994 |   |
| Total                |       | $                               | 6,077      |   | $ | 4,651 |   |

 

Payroll and payrollbenefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye as well as allocations ofthe cost of Buckeye personnel performing administrative services directly forBGH. BGH’s payroll expense increased by $2.1 million due to accruals related toexecutive compensation and charges for BGH Holdings’ equity incentive plan. Inthe first nine months of 2007, BGH expensed $1.0 million related to non-cashunit based compensation expense. Other costs include certain state franchisetaxes, insurance costs, depreciation, and miscellaneous other expenses.

 

Other income (expense)for the nine months ended September 30, 2008 and 2007 was as follows:

 
| ** **                 | ** ** | **Other Income (Expense)**                    | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                 | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(In thousands)**                                 | ** ** |
| Investment  income         |       | $                                                       | 1,145      |   | $ | 1,060 |   |
| Interest and  debt expense |       | (55,691                                                 | )          | (39,691 | ) |
| Total                      |       | $                                                       | (54,546    | ) | $ | (38,631 | ) |
|                       |       |                                                    |       |   |   |
| Equity income              |       | $                                                       | 5,802      |   | $ | 6,266 |   |

 

Other income (expense) was a net expense of $54.5million in the first nine months of 2008, compared to a net expense of $38.6million during the first nine months of 2007. Investment income for the firstnine months of 2008 was consistent with investment income generated during thefirst nine months of 2007.

 

Interest and debt expense was $55.7 million in thefirst nine months of 2008, an increase of $16.0 million from the first ninemonths of 2007. Approximately $13.2 million of the increase was attributable toexpenses associated with the 6.05% Notes which were issued in January 2008.The remainder of the increase is due to interest expense related to the workingcapital requirements of the Energy Services segment.

 

Equity income decreased by $0.5 million in the firstnine months of 2008 compared to the first nine months of 2007. The decrease isprimarily due to decreases in equity income earned from Buckeye’s interest inWest Texas LPG Pipeline Limited Partnership.

 

*Liquidity and Capital Resources*

 

BGH currently has nocapital requirements apart from Buckeye’s capital requirements. Buckeye’scapital requirements consist of maintenance and capital expenditures,expenditures for acquisitions, and debt service requirements.

 

Buckeye has sufficientborrowing capacity available to it under its $600.0 million revolving creditfacility (as discussed below) to fund its working capital and current internalgrowth projects with cash flow from operations and debt rather than equity.Consequently, despite the recent disruption to the general credit markets,Buckeye believes it has adequate liquidity available to it at this time.

 

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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 ofBuckeye and its operating subsidiaries to make cash distributions to Buckeye’spartners. The actual amount of cash that Buckeye will have available fordistribution depends primarily on Buckeye’s ability to generate cash beyond itsworking capital requirements. Buckeye’s primary future sources of liquidity areoperating cash flow, proceeds from borrowings under Buckeye’s revolving creditfacility, and proceeds from the issuance of Buckeye’s LP Units or public debt.

 

BGH’s principal use ofcash is the payment of its operating expenses and distributions to itsunitholders. BGH generally makes quarterly cash distributions of substantiallyall of its available 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. In the first nine months of 2008, BGH paid cash distributions of$0.31 per unit on August 29, 2008, $0.30 per unit on May 30, 2008,and $0.285 per unit on February 29, 2008. In the first nine months of2007, BGH paid cash distributions of $0.25 per unit on August 31, 2007,$0.24 per unit on May 31, 2007, and $0.225 per unit on February 28,2007. Total cash distributed to BGH unitholders in the nine months ended September 30,2008 was approximately $25.3 million.

 

On October 28, 2008,MainLine Management declared a distribution of $0.32 per unit to be paid on November 28,2008 to unitholders of record as of November 7, 2008. This distribution isexpected to be approximately $9.1 million.

 

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*Debt*

* *

*BGH*

* *

BGH is party to afive-year, $10.0 million revolving credit facility with SunTrust Bank, as bothadministrative agent and lender (the “BGH Credit Agreement”). See Note 8 to BGH’scondensed consolidated financial statements for a description of the terms ofthe BGH Credit Agreement.

 

Services Company

 

Services Company hadtotal debt outstanding of $15.6 million and $20.3 million at September 30,2008 and December 31, 2007, respectively, consisting of 3.60% SeniorSecured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by theESOP to a third-party lender. See Note 8 to BGH’s condensed consolidatedfinancial statements for a description of the terms of the 3.60% ESOP Notes.

 

*Buckeye’s Outstanding Debt*

* *

In January 2008,Buckeye issued $300.0 million of aggregate principal amount of 6.05% Notes due2018 (the “6.05% Notes”) as more fully described in Note 8 to the condensedconsolidated financial statements.

 

At September 30,2008, Buckeye had an aggregate amount of $1,503.0 million of debt, whichconsisted of $300.0 million of Buckeye’s 4.625% Notes due 2013 (the “4.625%Notes”), $275.0 million of Buckeye’s 5.300% Notes due 2014 (the “5.300% Notes”),$150.0 million of Buckeye’s 6.75% Notes due 2033 (the “6.75% Notes”), $125.0million of Buckeye’s 5.125% Notes due 2017 (the “5.125% Notes”), $300.0 millionof the 6.05% Notes, $252.0 million outstanding under its unsecured revolvingcredit agreement (as discussed below, the “Credit Facility”) and $101.0 millionoutstanding under BES’s secured revolving credit agreement. See Note 8 to thecondensed consolidated financial statements for more information about theterms of the debt discussed above.

 

The fair value of Buckeye’s aggregate debt wasestimated to be $1,277.0 million at September 30, 2008 and $828.7 millionat December 31, 2007. The values at September 30, 2008 and December 31,2007 were based on approximate market value on the respective dates.

 

Buckeye Credit Facility

 

Buckeye has a borrowing capacity of $600.0 millionunder the Credit Facility, which may be expanded up to $800.0 million subjectto certain conditions and upon further approval of the lenders. The CreditFacility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.0 to 1.0 subject to aprovision that allows for increases to 5.5 to 1.0 in connection with certainfuture acquisitions. The Funded Debt Ratio is calculated by dividing consolidateddebt by annualized EBITDA, which is defined in the Credit Facility as earningsbefore interest, taxes, depreciation, depletion and amortization, in each caseexcluding the income of certain majority-owned subsidiaries and equityinvestments (but including distributions from those majority-owned subsidiariesand equity investments). At September 30, 2008, Buckeye’s Funded DebtRatio was 4.51 to 1.0.

 

In addition, the Credit Facility contains othercovenants including, but not limited to covenants limiting Buckeye’s ability toincur additional indebtedness, to create or incur certain liens on itsproperty, to dispose of property material to its operations, and to consolidate,merge, or transfer assets. At September 30, 2008, Buckeye was not aware ofany instances of noncompliance with the covenants under its Credit Facility.

 

See Note 8 to thecondensed consolidated financial statements for more information about theterms of the Credit Facility.

 

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 the Credit Facility but recently hasnot honored that commitment. See below for a further discussion of Buckeye’srelationships with Lehman Brothers.

 

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Buckeye Energy ServicesCredit Agreement

 

On May 20, 2008, Farm & Home and BESentered into a Credit Agreement, which was subsequently amended on July 18,2008 (the “BES Credit Agreement”). The BES Credit Agreement, is with BNPParibas, as Administrative Agent, Collateral Agent, and Lead Arranger and otherlenders named therein. As discussed, on July 31, 2008, Farm &Home was merged with and into BES, leaving BES as the sole borrower under theBES Credit Agreement. The credit facility provided by the BES Credit Agreementprovides for borrowings of up to $175.0 million, which amount may be increasedto $250.0 million subject to customary conditions, including procurement of therequisite lender commitments.

 

The BES Credit Agreement requires BES to comply withMinimum Consolidated Tangible Net Worth, Minimum Consolidated Net WorkingCapital and Maximum Consolidated Leverage Ratio covenants, each as defined inthe BES Credit Agreement. At September 30, 2008, BES’s ConsolidatedTangible Net Worth (as defined in the BES Credit Agreement) and ConsolidatedNet Working Capital (as defined in the BES Credit Agreement) were $113.7million and $73.1 million, respectively, and the Consolidated Leverage Ratio(as defined in the BES Credit Agreement) was 1.43 to 1.0.

 

In addition, the BES Credit Agreement contains othercovenants, including, but not limited to, covenants limiting BES’s ability toincur additional indebtedness, to create or incur certain liens on itsproperty, to consolidate, merge or transfer its assets, to make dividends ordistributions, to dispose of its property, to make investments, to modify itsrisk management policy, or to engage in business activities materiallydifferent from those presently conducted. At September 30, 2008, BES wasnot aware of any instances of noncompliance with the covenants under the BESCredit Agreement.

 

See Note 8 to thecondensed consolidated financial statements for more information about theterms of the BES Credit Agreement.

 

Relationships with LehmanBrothers

 

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. An affiliate of Lehman Brothers owns a directinterest in BGH Holdings, which owns MainLine Management, the general partnerof BGH and approximately 62% of the limited partnership units of BGH.Affiliates of Lehman Brothers have provided investment and commercial bankingand financial advisory services to Buckeye, an affiliate of Lehman Brothers isa lender under the Credit Facility, and an affiliate of Lehman Brothers is acustomer of Lodi Gas. BGH has considered its relationships with Lehman Brothersand its affiliates and, for the reasons set forth below, believes the LehmanBrothers bankruptcy and the possible resulting effects on affiliates of LehmanBrothers will not have a direct material adverse effect on BGH. The BGHHoldings interest owned by an affiliate of Lehman Brothers is a passiveinvestment that does not entitle its holder to any management or other controlrights with respect to BGH Holdings, MainLine Management or BGH. Consequently,  BGH believes that, if the interest in BGHHoldings is transferred in connection or with Lehman Brothers’ bankruptcy, BGHwill not be adversely impacted. 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 theseservices that Lehman Brothers and its affiliates have provided to Buckeye.Lehman Brothers Bank, FSB, an affiliate of Lehman Brothers, has committed, as alender, 3.3%, or $20.0 million, of Buckeye’s $600.0 million borrowing capacityunder the Credit Facility but recently has not honored that commitment. BGHdoes not believe that the reduction in capacity under the 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,Lehman Brothers has entered into a binding agreement to sell the LehmanBrothers affiliate that is a customer of Lodi Gas to a third party notaffiliated with Lehman Brothers.The terms of that agreement were approved bythe bankruptcy court in an order issued on October 17, 2008, but the salehas not yet been consummated.

 

Ammonia ContractContingencies

 

On November 30, 2005, Buckeye GulfCoast Pipe Lines, L.P. (“BGC”), a subsidiary of Buckeye, purchased an ammoniapipeline and other assets from El Paso Merchant Energy-Petroleum Company (“EPME”),a subsidiary of El

 

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PasoCorporation (“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 theeconomic risks and benefits associated with those contracts until theirexpiration at the end of 2012. To effectuate this agreement, BGC passes throughto EPME both the cost of purchasing ammonia under a supply contract and theproceeds from selling ammonia under three sales contracts. For each monthlyperiod since the closing of the pipeline acquisition, the pricing terms of theammonia contracts have resulted in ammonia costs exceeding ammonia salesproceeds. The amount of the shortfall generally increases as the market price ofammonia 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 to seek payment by invoking the $40.0million guaranty made by El Paso which guaranteed 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 unreimbursed shortfalls significantly exceed the$40.0 million cap, the resulting costs incurred by BGC could adversely affectBuckeye’s financial position, results of operations, 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 hasrecorded no provision for losses in the accompanying condensed consolidated financialstatements because, using the criteria of Statement of Financial AccountingStandards (‘SFAS”) No. 5 – “Accounting for Contingencies,” it is unable todetermine whether or not a loss has been incurred or, if a loss has beenincurred, a reasonable estimate or range of estimates of the amount of suchlosses. Buckeye is currently assessing potential recourse against EPME and ElPaso with respect to this matter.

 

*Cash Flows from Operations*

* *

 The components of cash flows from operationsfor the nine months ended September 30, 2008 and 2007 were as follows:

 
| ** **                                         | ** ** | **Cash Flow from Operations**                              | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **For the Nine Months Ended September 30,** | ** ** |
| ** **                                         | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                                                   | ** ** |
| Net income                                         |       | $                                                                         | 18,400     |   | $ | 15,148 |   |
| Value of ESOP  shares released                     |       | 2,119                                                                     |       | 3,436 |   |
| Depreciation and  amortization                     |       | 38,067                                                                    |       | 30,119 |   |
| Non-controlling  interest                          |       | 109,187                                                                   |       | 91,557 |   |
| Changes in  current assets and current liabilities |       | 6,777                                                                     |       | (2,110 | ) |
| Changes in other  assets and liabilities           |       | 3,404                                                                     |       | (3,591 | ) |
| Other                                              |       | 594                                                                       |       | 1,260 |   |
| Total                                              |       | $                                                                         | 178,548    |   | $ | 135,819 |   |

 

Cash flows from operations were $178.5 million for thefirst nine months of 2008 which increased by $42.7 million compared to thefirst nine months of 2007. The primary causes of this increase were theimprovement in net income for the first nine months of 2008 compared to thefirst nine months of 2007 and cash provided by working capital.

 

In the first nine monthsof 2008, cash provided by working capital resulted primarily from a decrease intrade receivables of $5.6 million and an increase in accrued and other currentliabilities of $52.5 million. These cash flows were offset by increases inconstruction and pipeline relocation receivables of $4.5 million, inventoriesof $8.3 million, prepaid and other current assets of $37.1 million and areduction of accounts payable of $1.4 million.

 

The reduction of trade receivables is due to thetiming of invoices as compared to year end. The increase in accrued and othercurrent liabilities is primarily due to an increase in accrued taxes, environmentalliabilities, and expense related

 

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to activities on theammonia pipeline. The increase in construction and pipeline relocationreceivables is due to an increase in construction activity in the third quarterof 2008. Inventories increased primarily due to the acquisition of Farm &Home in February 2008. The increase in prepaid and other current assets isprimarily due to an increase in the value of derivative assets. The decrease inaccounts payable is due to the timing of the payment of invoices as compared toDecember 31, 2007.

 

Cash Flows fromInvesting Activities

 

Net cash used in investing activities for the ninemonths ended September 30, 2008 and 2007 are as follows:

 
| ** **                                     | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(In thousands)**                                                   | ** ** |
| Capital  expenditures                          |       | $                                                                         | (67,890    | ) | $ | (51,712 | ) |
| Acquisitions and  equity investments           |       | (660,252                                                                  | )          | (40,447 | ) |
| Other                                          |       | (513                                                                      | )          | (352 | ) |
| Proceeds from  sale of discontinued operations |       | 52,584                                                                    |       | — |   |
| Total                                          |       | $                                                                         | (676,071   | ) | $ | (92,511 | ) |

 

In the first nine monthsof 2008, Buckeye expended $438.8 million for Lodi Gas, $143.2 million for Farm &Home, and an aggregate of $75.5 million for the acquisitions of four terminalsin Albany, New York, Niles and Ferrysburg, Michigan, and Wethersfield,Connecticut and the acquisition of the 50% member interest in Wespac Pipe Lines- San Diego LLC that Buckeye did not already own. Buckeye also invested anadditional $2.8 million in West Texas LPG Pipeline Limited Partnership. SeeNote 3 to Buckeye’s condensed consolidated financial statements for a furtherdiscussion.

 

In the nine months ended September 30,2007, Buckeye expended $39.6 million primarily for the acquisition of sixterminals and related assets and $0.9 million for an additional investment inWest Texas LPG Pipeline Limited Partnership.

 

Capital expenditures are summarized below:

 
| ** **                       | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                                   | ** ** |
| Sustaining  capital expenditures |       | $                                                                         | (14,497    | ) | $ | (23,983 | ) |
| Expansion and  cost reduction    |       | (53,393                                                                   | )          | (27,729 | ) |
| Total                            |       | $                                                                         | (67,890    | ) | $ | (51,712 | ) |

 

Buckeye incurred $14.5 million and $24.0 million ofsustaining capital expenditures and $53.4 million and $27.7 million ofexpansion and cost reduction expenditures in the first nine months of 2008 andthe first nine months of 2007, respectively. Expansion and cost reductionprojects in 2007 included a capacity expansion project in Illinois to handleadditional LPG volumes as well as ongoing capacity improvements by WesPacPipelines – Memphis LLC at its Memphis International Airport facility. Expansionand cost reduction projects in 2008 include ethanol and butane blendingprojects, the construction of three additional tanks with capacity of 0.4million barrels in Linden, New Jersey, and an expansion project at Buckeye’snatural gas storage facilities in California known as Kirby Hills Phase II.

 

Buckeye expects to spend a total of approximately $110million to $115 million in capital expenditures in 2008, of whichapproximately $25 million to $28 million is expected to relate tosustaining capital expenditures and $85 million to $88 million is expectedto relate to expansion and cost reduction projects. Sustaining capitalexpenditures include

 

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renewals and replacementof tank floors and roofs and upgrades to station and terminalling equipment,field instrumentation and cathodic protection systems. Kirby Hills Phase II isBuckeye’s most significant expansion project with anticipated 2008 expendituresin the range of $50 million to $52 million and total anticipated projectexpenditures in the range of $55 million to $60 million.

 

*Cash Flows from Financing Activities*

 

During the first nine months of 2007, BGH borrowed $2.5 million andrepaid $1.9 million under the BGH Credit Agreement. BGH has not borrowed underthe BGH Credit Agreement in the first nine months of 2008. BGH’s distributionsto its unitholders totaled $25.3 million in the first nine months of 2008.

 

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.

 

OnJanuary 11, 2008, Buckeye sold $300.0 million in aggregate principalamount of 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. Inconnection with this debt offering, Buckeye settled two interest rate swapsassociated with the 6.05% Notes, which resulted in a settlement payment byBuckeye of $9.6 million that is being amortized as interest expense over theten-year term of the 6.05% Notes.

 

 During the first nine months of 2008 and 2007,Buckeye borrowed $501.0 million and $135.0 million under its Credit Facility,respectively, and repaid $249.0 million and $250.0 million, respectively. Netborrowings under the BES Credit Agreement and BES’s previous credit agreementwere $1.0 million in the first nine months of 2008. Payments on the 3.60% ESOPNotes were $4.7 million for the nine months ended September 30, 2008 and2007, respectively.

 

Distributions to non-controlling interests, consistingprimarily of Buckeye’s distributions to holders of its LP Units, were $118.1million in the first nine months of 2008 compared to $93.8 million in the firstnine months of 2007. The increase in distributions resulted from increases inthe unit distribution rate and the issuance of 6.2 million LP Units in thefirst nine months of 2007 and 2.6 million LP Units in the first nine months of2008.

 

*Other Matters*

 

# Accounting Pronouncements

 

# SeeNote 17 to the condensed consolidated financial statements for a description ofcertain recent accounting pronouncements.

#  

# Forward Looking Statements

 

Theinformation contained above in this Management’s Discussion and Analysis andelsewhere in this Form 10-Q includes “forward-looking statements,” withinthe meaning of the Private Securities Litigation Reform Act of 1995. Suchstatements use forward-looking words such as “anticipate,” “continue,” “estimate,”“expect,” “may,” “believe,” “will,” or other similar words, although someforward-looking statements are expressed differently. These statements discussfuture expectations and contain projections. Specific factors that could causeactual results to differ from those in the forward-looking statements include,but are not limited to: (1) BGH’s ability to pay distributions to itsunitholders; (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, tax andaccounting matters or Federal Energy Regulatory Commission regulation ofBuckeye’s tariff rates; (7) liability for environmental claims; (8) securityissues affecting Buckeye’s assets, including, among others, potential damage toits assets caused by vandalism, acts of war or terrorism; (9) constructioncosts, unanticipated capital expenditures and operating expenses to repair or replaceBuckeye’s assets; (10) availability and cost of insurance on BGH’s andBuckeye’s assets and operations;

 

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(11) Buckeye’sability to successfully identify and complete strategic acquisitions and makecost saving changes in operations; (12) expansion in the operations ofBuckeye’s competitors; (13) Buckeye’s ability to integrate any acquiredoperations into its existing operations; (14) shut-downs or cutbacks atmajor refineries that use Buckeye’s services; (15) deterioration inBuckeye’s labor relations; (16) regional economic conditions;(17) changes in real property tax assessments; (18) disruptions tothe air travel system; (19) interest rate fluctuations and other capitalmarket conditions; (20) credit risks associated with Buckeye’s customers;(21) BGH’s future results of operations; (22) BGH’s liquidity andability to finance its activities; (23) market conditions in Buckeye’sindustry; (24) conflicts of interest between Buckeye, its general partnerand BGH; (25) the treatment of Buckeye or BGH as a corporation for federalincome tax purposes or if BGH or Buckeye become subject to entity-leveltaxation for state tax purposes; and (26) the impact of governmentallegislation and regulation on BGH and Buckeye.

 

Thesefactors are not necessarily all of the important factors that could causeactual results to differ materially from those expressed in any of our forward-lookingstatements. Other unknown or unpredictable factors could also have materialadverse effects on future results. Although the expectations in theforward-looking statements are based on our current beliefs and expectations,we do not assume responsibility for the accuracy and completeness of suchstatements. When considering forward-looking statements, you should keep inmind the risk factors discussed in Part II Item 1A of this Form 10-Q,as well as the risk factors discussed in Part II Item 1A of BGH’s Form 10-Qfor the quarter ended June 30, 2008, and the risk factors and othercautionary statements in BGH’s Annual Report on Form 10-K for 2007,including those described in the “Risk Factors” section of that report.Further, we undertake no obligation to update publicly any forward-lookingstatement to reflect events or circumstances occurring after the date of this Form 10-Q.

 

# Item 3. Quantitative and QualitativeDisclosures About Market Risk

 

###### Market Risk – Trading Instruments

 

NeitherBGH nor Buckeye has any trading derivative instruments and does not engage inhedging activity with respect to trading instruments.

 

###### Market Risk – Non-Trading Instruments

######  

Buckeye is exposed to financial market risk resultingfrom changes in commodity prices and interest rates. Buckeye does not currentlyhave foreign exchange risk.

 

*Commodity Risk*

 

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. Thederivative contracts used to hedge refined petroleum product inventories areclassified as fair value hedges. Changes in the fair value of the inventoryhedges are recorded in current period earnings along with the related gain orloss on the hedged asset. Hedge ineffectiveness is measured quarterly based onthe correlation of changes in fair value between the derivative contract andthe hedged item during the hedge period. The Energy Services segment has electednot to use hedge accounting with respect to its fixed-price sales contracts.Therefore, its fixed-price sales contracts and the related futures contractsused to offset those fixed-price sales contracts are all marked-to-market onthe balance sheet with gains and losses being recognized in earnings during theperiod.

 

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As of September 30,2008, the Energy Services segment had derivative assets and liabilities asfollows:

 
| ** **                                         | ** ** | **September 30,**  | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **2008**                | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **Assets:**                                        |       |                    |       |
| Fixed-price  sales contracts                       |       | $                       | 21,472     |   |
| Futures  contracts for inventory                   |       | 11,200                  |       |
|                                               |       |                    |       |
|                                               |       | 32,672                  |       |
|                                               |       |                    |       |
| **Liability:**                                     | ** ** | ** **              | ** ** |
| Futures contracts  for fixed-price sales contracts |       | (20,707                 | )          |
|                                               |       |                    |       |
| Total                                              |       | $                       | 11,965     |   |

 

Substantiallyall of the asset noted above for unrealized gains of $11.2 million related toinventory hedges will be realized in the fourth quarter of 2008 as the relatedinventory is sold. Losses recorded on inventory hedges that were ineffectivewere approximately $0.8 million. As of September 30, 2008, open petroleumderivative contracts varied in duration, but did not extend beyond August 2009.

 

Based ona hypothetical 10% movement in the underlying quoted market prices of thecommodity financial instruments outstanding at September 30, 2008, theestimated fair value of the portfolio of commodity financial instruments wouldbe as follows:

 
| ** **                                                            | ** ** | ** **         | ** ** | **Commodity**           | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | ** **         | ** ** | **Financial**           | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Instrument**          | ** ** |
| ** **                                                            | ** ** | **Resulting**      | ** ** | **Portfolio**           | ** ** |
| **Scenerio**                                                          | ** ** | **Classification** | ** ** | **Fair Value**     | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **(In thousands)** | ** ** |
| Fair value  assuming no change in underlying commodity prices (as is) |       | Asset              |       | $                       | 11,965     |   |
| Fair value  assuming 10% increase in underlying commodity prices      |       | Asset              |       | $                       | 4,415      |   |
| Fair value  assuming 10% decrease in underlying commodity prices      |       | Asset              |       | $                       | 19,516     |   |

 

The value of the openfutures contract positions noted above were based upon quoted market pricesobtained from the New York Mercantile Exchange. The value of the fixed-pricesales contracts was based on observable market data related to the obligationto provide petroleum products to customers.

 

*Interest RateRisk*

 

Buckeye is exposed to risk resulting from changes ininterest rates. Buckeye does not have material foreign exchange risk. Buckeyeis exposed to fair value risk with respect to the fixed-rate portion of itsfinancing arrangements (the 5.125% Notes, the 5.300% Notes, the 4.625% Notes,the 6.75% Notes, and the 6.05% Notes) and to cash flow risk with respect to itsvariable rate obligations (the Credit Facility and the BES Credit Agreement).Fair value risk represents the risk that the value of the fixed portion ofBuckeye’s financing arrangements will rise or fall depending on changes ininterest rates. Cash flow risk represents the risk that interest costs relatedto the Credit Facility and the BES Credit Agreement will rise or fall dependingon changes in interest rates.

 

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Buckeye’s practice withrespect to derivative transactions related to interest rate risk has been tohave each transaction in connection with non-routine borrowings authorized bythe Board of Directors of Buckeye GP.

 

At September 30, 2008, Buckeye had totalfixed-rate debt obligations at face value of $1,150.0 million, consisting of$125.0 million of the 5.125% Notes, $275.0 million of the 5.300% Notes, $300.0million of the 4.625% Notes, $150.0 million of the 6.75% Notes and $300.0million of the 6.05% Notes. The fair value of these obligations atSeptember 30, 2008 was approximately $924.0 million. Buckeye estimatesthat a 1% decrease in rates for obligations of similar maturities wouldincrease the fair value of its fixed rate debt obligations by $55.4 million.Buckeye’s variable debt obligation was $252.0 million under the Credit Facilityand $101.0 million under the BES Credit Agreement at September 30, 2008. Basedon the balances outstanding at September 30, 2008, a 1% increase ininterest rates would increase annual interest expense by $3.5 million.

 

InJanuary 2008, Buckeye terminated two forward-starting interest rate swapagreements associated with the 6.05% Notes and made a payment of $9.6 millionin connection with the termination. In accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”),Buckeye has recorded the amount in other comprehensive income and will amortizethe amount into interest expense over the term of the loan. Interest expenseincreased by $0.2 million and $0.7 million for the three and nine months endedSeptember 30, 2008, respectively, as a result of the amortization of thetermination payment.

 

In October 2008,subsequent to the date of the accompanying condensed consolidated financialstatements, Buckeye borrowed approximately $50 million under the CreditFacility. In order to hedge its variable interest rate risk with respect to theamount borrowed, Buckeye concurrently entered into an interest rate swapagreement with a bank for a notional amount of $50 million. Under the swapagreement, Buckeye will pay a fixed interest rate of 3.15% for 180 days and, inexchange, will receive a series of six monthly payments to be calculated basedon the 30-day LIBOR rate in effect at the beginning of each monthly period. Theamounts received by Buckeye will correspond to the 30-day LIBOR rates Buckeyeexpects to pay on the $50 million borrowed under the Credit Facility. The swapwill settle on the maturity date of the last 30-day LIBOR period. Buckeye has designatedthe swap agreement as a cash flow hedge at the inception of the agreement andelected to use the short-cut method provided for under SFAS No. 133. 

 

Item 4. Controlsand Procedures

 

(a)                      Evaluationof Disclosure Controls and Procedures.

 

The management ofMainLine Management, with the participation of its Chief Executive Officer andActing Chief Financial Officer, evaluated the effectiveness of its disclosurecontrols and procedures for BGH as of the end of the period covered by thisreport. Based on that evaluation, the Chief Executive Officer and Acting ChiefFinancial Officer concluded that MainLine Management’s disclosure controls andprocedures for BGH as of the end of the period covered by this report arefunctioning effectively to provide reasonable assurance that the informationrequired to be disclosed by MainLine Management in reports filed on behalf ofBGH under the Securities Exchange Act of 1934 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 Acting Chief Financial Officer, asappropriate to allow timely decisions regarding disclosure. A controls systemcannot provide absolute assurance, however, that the objectives of the controlssystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected. In addition, since Buckeye acquired Lodi Gas and Farm &Home in the first quarter, management’s ability to effectively apply itsdisclosure controls and procedures to Lodi Gas and Farm & Home isinherently limited by the short period of time that management has had toevaluate their operations since their respective acquisitions.

 

(b)                     Changes in Internal Control over Financial Reporting

 

Asdiscussed in Note 3 to the condensed consolidated financial statements, Buckeyeacquired Lodi Gas and Farm & Home in the first quarter of 2008.Management is in the process of assessing internal control over financialreporting for these two acquisitions. No change in 

 

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MainLineManagement’s internal control over financial reporting for BGH occurred duringthe most recent fiscal quarter with respect to BGH’s operations excluding LodiGas and Farm & Home that has materially affected, or is reasonablylikely to materially affect, management’ s internal control over financialreporting for BGH.

 

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PART II– OTHER INFORMATION

 

Item1. Legal Proceedings

 

In March 2007, Buckeye was named as a defendantin an action entitled *Madigan v. BuckeyePartners, L.P*. filed in the U.S. District Court for the CentralDistrict of Illinois. The action was brought by the State of Illinois AttorneyGeneral acting on behalf of the Illinois Environmental Protection Agency. Thecomplaint alleges that Buckeye violated various Illinois state environmentallaws in connection with a product release from Buckeye’s terminal located inHarristown, Illinois on or about June 11, 2006 and various other productreleases from Buckeye’s terminals and pipelines in the State of Illinois duringthe period of 2001 through 2006. The complaint seeks to recover state oversightcosts, damages, and civil penalties and seeks injunctive action requiringBuckeye to remediate the environmental contamination resulting from the productreleases. Buckeye believes it has meritorious defenses to the allegations setforth in the complaint.

 

Item 1A. RiskFactors

 

The reader shouldcarefully consider, in connection with the other information in this report,the factors discussed in Part I, “Item 1A: Risk Factors” of BGH’s 2007Annual Report on Form 10-K, as well as the risk factors discussed inPart II, Item 1A of BGH’s Form 10-Q for the quarter endedJune 30, 2008. These factors could cause our actual results to differmaterially from those stated in forward-looking statements contained in thisdocument and elsewhere. In addition to the factors included in theForm 10-K for 2007 and Form 10-Q for the quarter ended June 30,2008, the reader should also consider the following risk factors:

 

*Our general partner has a call right that mayrequire you to sell your Common Units at an undesirable time or price.*

 

Our partnership agreementprovides that if at any time more than 90% of the outstanding Common Units areowned by our general partner and its affiliates, our general partner will havethe right, which it may assign to any of its affiliates or to us, but not theobligation, to acquire all, but not less than all, of the remaining CommonUnits held by unaffiliated persons at a price equal to the greater of(x) the average of the daily closing prices of the Common Units over the20 trading days preceding the date three days before notice of exercise of thecall right is first mailed and (y) the highest price paid by our generalpartner or any of its affiliates for Common Units during the 90-day periodpreceding the date such notice is first mailed. As a result, you may berequired to sell your Common Units at an undesirable time or price and may notreceive any return on your investment. You may also incur a tax liability upona sale of your Common Units.

 

Our general partner andits affiliates currently own approximately 63% of the Common and ManagementUnits. On October 21, 2008, however, BGH Holdings, the owner of ourgeneral partner, announced its intent to make a tender offer for all of ouroutstanding Common Units that are not already owned by BGH Holdings for $17.00per Common Unit in cash. BGH Holdings announced that, if the offer iscompleted, it would subsequently exercise its limited call right provided inour partnership agreement to acquire any remaining Common Units not owned by itat the same price per Common Unit paid in the offer.

 

*Buckeye’s business is exposed tocustomer credit risk, against which Buckeye may not be able to fully protect.*

 

Buckeye’s businesses are subject to the risks ofnonpayment and nonperformance by its customers. Buckeye manages its exposure tocredit risk through credit analysis and monitoring procedures, and sometimesuse letters of credit, prepayments and guarantees. However, these procedures andpolicies cannot fully eliminate customer credit risk, and to the extentBuckeye’s policies and procedures prove to be inadequate, it could negativelyaffect Buckeye’s financial condition and results of operations.

 

The marketing business in Buckeye’s Energy Services segmententers into sales contracts pursuant to which customers agree to buy refined petroleumproducts from Buckeye at a fixed-price on a future date. Given the recent dropin refined 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 sales contractswith Buckeye, which could increase the risk of their nonpayment ornonperformance. In addition, Buckeye 

 

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generally has entered into futures contracts to hedge its exposureunder these fixed-price sales contracts to increases in petroleum productprices. If current price levels remain lower than when Buckeye entered intothese futures contracts, then Buckeye will be required to make payments uponthe settlement thereof. Ordinarily, this settlement payment would be offset bythe payment received from the customer pursuant to the associated fixed pricesales contract. Buckeye will, however, be required to make the settlementpayment under the futures contract even if a fixed-price sales contractcustomer does not perform. Nonperformance under fixed-price sales contracts bya significant number of Buckeye’s customers could have a material adverseeffect on Buckeye’s financial condition and results of operations.

 

Item 6. Exhibits

 

(a)Exhibits

 

10.1First Amendment, dated as of July 18, 2008, to the Credit Agreement, datedas of May 20, 2008, among Farm & Home Oil Company LLC, BuckeyeEnergy Services LLC, BNP Paribas and other lenders party thereto (incorporatedby reference to Exhibit 10.1 to Buckeye Partners, L.P.’s Current Report onForm 8-K filed on July 22, 2008).

 

31.1Certification of Chief Executive Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.

 

31.2Certification of Acting Chief Financial Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.

 

32.1Certification of Chief Executive Officer, Pursuant to 18 U.S.C.Section 1350.

 

32.2Certification of Acting Chief Financial Officer, Pursuant to 18 U.S.C.Section 1350.

 

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SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                         | BUCKEYE GP HOLDINGS  L.P. |
|------------------------------|---------------------------|
|                         | (Registrant)              |
|                         |                      |
|                         |                      |
|                         | By:                       | MainLine Management LLC |
|                         |                      | as General Partner |
|                         |                      |   |
|                         |                      |   |
| Date: November 4,  2008 | By:                       | /s/ VANCE E. POWERS |
|                         |                      | Vance E. Powers |
|                         |                      | Acting Chief Financial  Officer |

 

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