Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 March 31,  2009 or**                                                                                                                                                                                                                                                                                                        |
|       |                                                                                                                                                                                                                                                                                                                                                              |
| **o**      | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | **For the transition period from                              to                           ** |
|       |                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | **Commission file number 001-32963**                                                                                                                                                                                                                                                                                                                              |

 

**BUCKEYE GP HOLDINGS L.P.**

(Exact name of registrant asspecified 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 |       | (Zip Code)          |
| offices)                        |       |                |

 

**610-904-4000**

(Registrant’s Telephone Number, Including Area Code)

 

**Not Applicable**

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

 

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

 

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

 

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

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

 

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

 

As of April 30, 2009, there were 27,769,647Common Units and 530,353 Management Units outstanding.

 

 

 

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BUCKEYE GP HOLDINGS L.P.

INDEX

 
| ** **                          | ** **                                                                                                                      | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I-  FINANCIAL INFORMATION |                                                                                                                            |     |
|                                |                                                                                                                            |     |
| Item 1.                             | Condensed Consolidated  Financial Statements (Unaudited)                                                                        |     |   |
|                                |                                                                                                                            |     |   |
|                                | Condensed  Consolidated Statements of Income for the Three Months Ended March 31,  2009 and 2008                           |     | 1 |
|                                |                                                                                                                            |     |   |
|                                | Condensed  Consolidated Balance Sheets as of March 31, 2009 and December 31,  2008                                    |     | 2 |
|                                |                                                                                                                            |     |   |
|                                | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2009 and 2008                       |     | 3 |
|                                |                                                                                                                            |     |   |
|                                | Condensed  Consolidated Statement of Changes in Partners’ Capital for the Three Months  Ended March 31, 2009 and 2008 |     | 4 |
|                                |                                                                                                                            |     |   |
|                                | Notes to Condensed Consolidated Financial Statements                                                                            |     | 5 |
|                                |                                                                                                                            |     |   |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                     |     | 23 |
|                                |                                                                                                                            |     |   |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                     |     | 36 |
|                                |                                                                                                                            |     |   |
| Item 4.                             | Controls and  Procedures                                                                                                        |     | 38 |
|                                |                                                                                                                            |     |
| PART II-  OTHER INFORMATION    |                                                                                                                            |     |
|                                |                                                                                                                            |     |
| Item 1.                             | Legal Proceedings                                                                                                               |     | 39 |
|                                |                                                                                                                            |     |   |
| Item 6.                             | Exhibits                                                                                                                        |     | 39 |

 

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Tableof Contents

 

PART I- FINANCIAL INFORMATION

 

Item1.Condensed Consolidated Financial Statements

 

**BUCKEYE GP HOLDINGS L.P.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(In thousands, except per unit amounts)**

**(Unaudited)**

 
| ** **                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
|                                                              |       |                                                 |       |   |   |
| **Revenues:**                                                     |       |                                                 |       |   |   |
| Product sales                                                     |       | $                                                    | 268,779    |   | $ | 241,046 |   |
| Transportation and other                                          |       | 148,061                                              |       | 139,229 |   |
| Total revenue                                                     |       | 416,840                                              |       | 380,275 |   |
|                                                              |       |                                                 |       |   |   |
| **Costs and expenses:**                                           |       |                                                 |       |   |   |
| Cost of product sales                                             |       | 250,676                                              |       | 236,611 |   |
| Operating expenses                                                |       | 73,900                                               |       | 66,291 |   |
| Depreciation and amortization                                     |       | 13,364                                               |       | 11,383 |   |
| General and administrative                                        |       | 10,035                                               |       | 9,896 |   |
| Total costs and expenses                                          |       | 347,975                                              |       | 324,181 |   |
|                                                              |       |                                                 |       |   |   |
| Operating income                                                  |       | 68,865                                               |       | 56,094 |   |
|                                                              |       |                                                 |       |   |   |
| **Other income (expense):**                                       |       |                                                 |       |   |   |
| Investment income                                                 |       | 152                                                  |       | 614 |   |
| Interest and debt expense                                         |       | (17,403                                              | )          | (18,178 | ) |
| Total other expense                                               |       | (17,251                                              | )          | (17,564 | ) |
|                                                              |       |                                                 |       |   |   |
| Income before equity income                                       |       | 51,614                                               |       | 38,530 |   |
|                                                              |       |                                                 |       |   |   |
| Equity income                                                     |       | 2,082                                                |       | 2,055 |   |
| Net income                                                        |       | 53,696                                               |       | 40,585 |   |
| Less: Net income attributable to noncontrolling interest          |       | (43,547                                              | )          | (34,736 | ) |
|                                                              |       |                                                 |       |   |   |
| **Amounts attributable to Buckeye GP Holdings L.P.  unitholders** |       | $                                                    | 10,149     |   | $ | 5,849 |   |
|                                                              |       |                                                 |       |   |   |
| Net income per partnership unit:                                  |       |                                                 |       |   |   |
| Basic                                                             |       | $                                                    | 0.36       |   | $ | 0.21 |   |
| Diluted                                                           |       | $                                                    | 0.36       |   | $ | 0.21 |   |
|                                                              |       |                                                 |       |   |   |
| **Weighted average number of common units  outstanding:**         |       |                                                 |       |   |   |
| Basic                                                             |       | 28,300                                               |       | 28,300 |   |
| Diluted                                                           |       | 28,300                                               |       | 28,300 |   |

 

See Notes to condensed consolidated financial statements.

 

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**BUCKEYEGP HOLDINGS L.P.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Assets:**                                                                                        |       |               |       |                  |       |
| Current assets:                                                                                    |       |               |       |                  |       |
| Cash and cash equivalents                                                                          |       | $                  | 20,947     |                  | $          | 61,281 |   |
| Trade receivables, net                                                                             |       | 81,981             |       | 79,969                |       |
| Construction and pipeline relocation receivables                                                   |       | 18,437             |       | 21,501                |       |
| Inventories                                                                                        |       | 82,125             |       | 84,229                |       |
| Derivative assets                                                                                  |       | 45,249             |       | 97,375                |       |
| Prepaid and other current assets                                                                   |       | 69,986             |       | 75,406                |       |
| Total current assets                                                                               |       | 318,725            |       | 419,761               |       |
|                                                                                               |       |               |       |                  |       |
| Property , plant and equipment, net                                                                |       | 2,248,705          |       | 2,241,612             |       |
| Equity investments                                                                                 |       | 91,957             |       | 90,110                |       |
| Goodwill                                                                                           |       | 433,892            |       | 433,892               |       |
| Intangible assets, net                                                                             |       | 43,230             |       | 44,114                |       |
| Other non-current assets                                                                           |       | 29,278             |       | 33,608                |       |
| Total assets                                                                                       |       | $                  | 3,165,787  |                  | $          | 3,263,097 |   |
|                                                                                               |       |               |       |                  |       |
| **Liabilities and partners’ capital:**                                                        |       |               |       |                  |       |
| Current liabilities:                                                                               |       |               |       |                  |       |
| Line of credit                                                                                     |       | $                  | 50,000     |                  | $          | 96,000 |   |
| Current portion of long-term debt                                                                  |       | 6,264              |       | 6,294                 |       |
| Accounts payable                                                                                   |       | 30,439             |       | 42,098                |       |
| Derivative liabilities                                                                             |       | 25,109             |       | 48,623                |       |
| Accrued and other current liabilities                                                              |       | 95,932             |       | 116,464               |       |
| Total current liabilities                                                                          |       | 207,744            |       | 309,479               |       |
|                                                                                               |       |               |       |                  |       |
| Long-term debt                                                                                     |       | 1,361,663          |       | 1,453,425             |       |
| Other non-current liabilities                                                                      |       | 103,363            |       | 101,359               |       |
| Total liabilities                                                                                  |       | 1,672,770          |       | 1,864,263             |       |
|                                                                                               |       |               |       |                  |       |
| Commitments and contingent liabilities                                                             |       | —             |       | —                |       |
|                                                                                               |       |               |       |                  |       |
| **Buckeye GP Holdings L.P. capital:**                                                              |       |               |       |                  |       |
| General Partner - (2,830 common units outstanding as of March 31,  2009 and December 31, 2008)     |       | 7                  |       | 7                     |       |
| Limited Partners (27,766,817 common units outstanding as of March 31,  2009 and December 31, 2008) |       | 227,718            |       | 226,565               |       |
| Management Units (530,353 units outstanding as of March 31, 2009 and  December 31, 2008)           |       | 3,060              |       | 3,037                 |       |
| Equity gains on issuance of Buckeye Partners, L.P. limited partner  units                          |       | 2,544              |       | 2,451                 |       |
| Total Buckeye GP Holdings L.P. capital                                                             |       | 233,329            |       | 232,060               |       |
| Noncontrolling interest                                                                            |       | 1,259,688          |       | 1,166,774             |       |
| Total partners’ capital                                                                       |       | 1,493,017          |       | 1,398,834             |       |
|                                                                                               |       |               |       |                  |       |
| Total liabilities and partners’ capital                                                       |       | $                  | 3,165,787  |                  | $          | 3,263,097 |   |

 

See Notes to condensed consolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                    | 53,696     |   | $ | 40,585 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                 |       |   |   |
| Amortization of debt discount and unit-based compensation                          |       | 1,245                                                |       | 679 |   |
| Value of ESOP shares released                                                      |       | 183                                                  |       | 817 |   |
| Depreciation and amortization                                                      |       | 13,364                                               |       | 11,383 |   |
| Net changes in fair value of derivatives                                           |       | 4,103                                                |       | — |   |
| Deferred lease expense                                                             |       | 1,125                                                |       | — |   |
| Earnings from equity investments of Buckeye Partners, L.P.                         |       | (2,082                                               | )          | (2,055 | ) |
| Distributions from equity investments of Buckeye Partners, L.P.                    |       | 235                                                  |       | 500 |   |
| Change in assets and liabilities, net of amounts related to  acquisitions:         |       |                                                 |       |   |   |
| Trade receivables                                                                  |       | (2,012                                               | )          | 58 |   |
| Construction and pipeline relocation receivables                                   |       | 3,064                                                |       | 2,816 |   |
| Inventories                                                                        |       | 26,101                                               |       | 5,041 |   |
| Prepaid and other current assets                                                   |       | 5,422                                                |       | (5,104 | ) |
| Accounts payable                                                                   |       | (11,659                                              | )          | 1,397 |   |
| Accrued and other current liabilities                                              |       | (18,821                                              | )          | 1,619 |   |
| Other non-current assets                                                           |       | 2,466                                                |       | 2,774 |   |
| Other non-current liabilities                                                      |       | 2,343                                                |       | (427 | ) |
| Total adjustments from operating activities                                        |       | 25,077                                               |       | 19,498 |   |
| Net cash provided by operations                                                    |       | 78,773                                               |       | 60,083 |   |
|                                                                               |       |                                                 |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                                 |       |   |   |
| Capital expenditures                                                               |       | (20,976                                              | )          | (14,792 | ) |
| Acquisitions and equity investments, net of cash acquired                          |       | —                                               |       | (600,309 | ) |
| Net expenditures for disposal of property, plant and equipment                     |       | (42                                                  | )          | (33 | ) |
| Net cash used in investing activities                                              |       | (21,018                                              | )          | (615,134 | ) |
|                                                                               |       |                                                 |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                                 |       |   |   |
| Net proceeds from issuance of Buckeye Partners, L.P. limited partner  units        |       | 91,042                                               |       | 113,259 |   |
| Proceeds from issuance of long-term debt and borrowings under credit  facilities   |       | 30,000                                               |       | 576,050 |   |
| Payment of debt, net                                                               |       | (167,854                                             | )          | (142,724 | ) |
| Debt issuance costs                                                                |       | (13                                                  | )          | (351 | ) |
| Distributions to non-controlling partners of Buckeye Partners, L.P.                |       | (41,925                                              | )          | (37,267 | ) |
| Settlement payment of interest rate swaps                                          |       | —                                               |       | (9,638 | ) |
| Distributions to Limited Partners                                                  |       | (9,339                                               | )          | (8,066 | ) |
| Net cash (used in) provided by financing activities                                |       | (98,089                                              | )          | 491,263 |   |
|                                                                               |       |                                                 |       |   |   |
| Net decrease in cash and cash equivalents                                          |       | (40,334                                              | )          | (63,788 | ) |
| Cash and cash equivalents —Beginning of year                                  |       | 61,281                                               |       | 94,486 |   |
| Cash and cash equivalents—End of period                                       |       | $                                                    | 20,947     |   | $ | 30,698 |   |
| ***Supplemental cash flow information:***                                          |       |                                                 |       |   |   |
| Cash paid for interest (net of amount capitalized)                                 |       | $                                                    | 25,866     |   | $ | 17,770 |   |
| Capitalized interest                                                               |       | $                                                    | 1,281      |   | $ | 336 |   |
| Cash paid for income tax                                                           |       | $                                                    | 547        |   | $ | 180 |   |
| ***Non-cash changes in assets and liabilities:***                                  |       |                                                 |       |   |   |
| Capital additions accrued in property, plant, and equipment                        |       | $                                                    | (1,522     | ) | $ | — |   |
| Hedge accounting                                                                   |       | $                                                    | 372        |   | $ | 1,043 |   |

 

See Notes to condensed consolidated financial statements.

 

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**Buckeye GP Holdings L.P.**

**CondensedConsolidated Statement of Partners’ Capital**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                           | ** ** | **Buckeye GP Holdings L.P. unitholders** | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                                           | ** ** | ** **                                                   | ** ** | ** **   | ** ** | ** **     | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **General**                                                  | ** ** | **Limited**  | ** ** | ** **     | ** ** | **Gains on** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Partner**                                                  | ** ** | **Partners** | ** ** | ** **     | ** ** | **Issuance of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Common**                                                   | ** ** | **Common**   | ** ** | **Management** | ** ** | **Buckeye’s** | ** ** | **Noncontrolling** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Units**                                                    | ** ** | **Units**    | ** ** | **Units**      | ** ** | **LP Units** | ** ** | **Interest** | ** ** | **Total** | ** ** |
| **Partners’ capital- January 1, 2008**                     |       | $                                                            | 7          |         | $          | 232,928        |       | $ | 3,156 |   | $ | 2,239 |   | $ | 1,066,143 |   | $ | 1,304,473 |   |
| Net income*                                                          |       |                                                         |       | 5,739        |       | 110            |       |   |   | 34,736 |   | 40,585 |   |
| Distributions to Limited Partner - Common Units                      |       |                                                         |       | (7,915       | )          | (151           | )          |   |   |   |   | (8,066 | ) |
| Recognition of unit-based compensation charges                       |       |                                                         |       | 347          |       | 6              |       |   |   |   |   | 353 |   |
| Equity gains on issuance of Buckeye’s LP Units                  |       |                                                         |       |         |       |           |       | 212 |   | (212 | ) |   |   |
| Net proceeds from issuance of 2.6 million of Buckeye’s LP Units |       |                                                         |       |         |       |           |       |   |   | 113,259 |   | 113,259 |   |
| Distributions to noncontrolling interest                             |       |                                                         |       |         |       |           |       |   |   | (37,267 | ) | (37,267 | ) |
| Other                                                                |       |                                                         |       |         |       |           |       |   |   | 1,558 |   | 1,558 |   |
| **Partners’ capital- March 31, 2008**                      |       | $                                                            | 7          |         | $          | 231,099        |       | $ | 3,121 |   | $ | 2,451 |   | $ | 1,178,217 |   | $ | 1,414,895 |   |
| ** **                                                           |       |                                                         |       |         |       |           |       |   |   |   |   |   |   |
| **Partners’ capital-January 1, 2009**                      |       | $                                                            | 7          |         | $          | 226,565        |       | $ | 3,037 |   | $ | 2,451 |   | $ | 1,166,774 |   | $ | 1,398,834 |   |
| Net income*                                                          |       |                                                         |       | 9,959        |       | 190            |       |   |   | 43,547 |   | 53,696 |   |
| Distributions to Limited Partner - Common Units                      |       |                                                         |       | (9,164       | )          | (175           | )          |   |   |   |   | (9,339 | ) |
| Recognition of unit-based compensation charges                       |       |                                                         |       | 358          |       | 8              |       |   |   |   |   | 366 |   |
| Equity gains on issuance of Buckeye’s LP Units                  |       |                                                         |       |         |       |           |       | 93 |   | (93 | ) |   |   |
| Net proceeds from issuance of 2.6 million of Buckeye’s LP Units |       |                                                         |       |         |       |           |       |   |   | 91,042 |   | 91,042 |   |
| Distributions to noncontrolling interest                             |       |                                                         |       |         |       |           |       |   |   | (41,925 | ) | (41,925 | ) |
| Other                                                                |       |                                                         |       |         |       |           |       |   |   | 343 |   | 343 |   |
| **Partners’ capital-March 31, 2009**                       |       | $                                                            | 7          |         | $          | 227,718        |       | $ | 3,060 |   | $ | 2,544 |   | $ | 1,259,688 |   | $ | 1,493,017 |   |

 

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*  Comprehensive income equals netincome.

 

See Notes to condensed consolidated financialstatements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.               BASIS OFPRESENTATION

 

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

 

BGH’s onlybusiness is the ownership of Buckeye GP. Buckeye GP’s only business is the management of Buckeye and itssubsidiaries.  At March 31, 2009,Buckeye GP owned an approximately 0.5% general partner interest in Buckeye.

 

Buckeye has one of the largest independent refinedpetroleum products pipeline systems in the United States in terms of volumesdelivered, with approximately 5,400 miles of pipeline and 64 active productsterminals that provide aggregate storage capacity of approximately 24.7 millionbarrels. In addition, Buckeye operates and maintains approximately 2,400 milesof other pipelines under agreements with major oil and chemical companies.  Buckeye also owns and operates a majornatural gas storage facility in northern California which providesapproximately 33 billion cubic feet (“Bcf”) of gas storage capacity (including capacity provided pursuant to anearly completed expansion project) and is a wholesale distributor ofrefined petroleum products in the northeasternand midwestern United States in areas also served by Buckeye’s pipelinesand terminals.

 

Buckeye conducts business in five reportable operating segments:Pipeline Operations; Terminalling and Storage; Natural Gas Storage; EnergyServices; and Other Operations.  See Note15 for a more detailed discussion of Buckeye’s operating segments.

 

BuckeyePipe Line Services Company (“Services Company”) was formed in 1996 inconnection with the establishment of the Buckeye Pipe Line Services CompanyEmployee Stock Ownership Plan (the “ESOP”). At March 31, 2009, Services Company owned approximately 4.1% of thepublicly traded limited partnership units of Buckeye (the “LP Units”).  Services Company employs approximately 1,000people who provide services to the operating subsidiaries through which Buckeyeconducts its operations.  Approximately20 people are employed directly by Buckeye’s operating subsidiary, Lodi GasStorage, L.L.C. (“Lodi Gas”) and another approximately 20 people are employedby Buckeye’s operating subsidiary, Buckeye Albany Terminal LLC.  Pursuant to a services agreement entered intoin December 2004 (the “Services Agreement”), the operating subsidiariesreimburse Services Company for the costs of the services it provides.  Pursuant to the Services Agreement and anExecutive Employment Agreement, through December 31, 2008 executivecompensation costs and related benefits paid to Buckeye GP’s four highestsalaried officers were not reimbursed by Buckeye or its operating subsidiariesbut were reimbursed to Services Company by BGH. Effective January 1, 2009, Buckeye and its operating subsidiariesagreed to pay for all executive compensation and benefits earned by BuckeyeGP’s four highest salaried officers in return for an annual fixed payment fromBGH to Buckeye in the amount of $3.6 million.

 

On January 1, 2009, BGH adopted Emerging Issues Task Force(“EITF”) Issue No. 07-4, “Application of the Two-Class Method underFinancial Accounting Standards Board (“FASB”) Statement No. 128, Earningsper Share, to Master Limited Partnerships” (“EITF 07-4”).  BGH’s former practice was to calculate itsportion of Buckeye’s earnings based solely as if Buckeye’s net income wasentirely distributed.  The effect ofadopting EITF 07-4 is: (i) for periods when Buckeye’s net income exceedsdistributions, BGH’s net income will be the same as under BGH’s formeraccounting practice and (ii) for periods when Buckeye’s distributionsexceed net income, BGH’s reported earnings will be higher than under BGH’sformer practice.  These differences willbe material for those periods where there are material differences betweenBuckeye’s net income and the distributions it pays.

 

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On January 1, 2009, BGH adopted Statement of Financial AccountingStandards (“SFAS”) No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements-an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 established accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  These accountingand reporting standards require for-profit entities that prepare consolidatedfinancial statements to: (a) present noncontrolling interests as acomponent of equity, separate from the parent’s equity; (b) separatelypresent the amount of consolidated net income attributable to noncontrollinginterests in the income statement; (c) consistently account for changes ina parent’s ownership interests in a subsidiary in which the parent entity has acontrolling financial interest as equity transactions; (d) require anentity to measure at fair value its remaining interest in a subsidiary that isdeconsolidated; and (e) require an entity to provide sufficientdisclosures that identify and clearly distinguish between interests of theparent and interests of noncontrolling owners. Accordingly, for periods presented in these condensed consolidatedfinancial statements, BGH has reclassified its noncontrolling interestliability into partners’ capital on the condensed consolidated balance sheetsand has separately presented and allocated income attributable tononcontrolling interests on the condensed consolidated income statements.

 

On January 1,2009, BGH adopted SFAS 161, “Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133,” and hasincluded the expanded disclosures required by this statement in Note 8 to thesecondensed consolidated financial statements.

 

In June 2005,the EITF issued EITF Consensus 04-05 which requires general partners of alimited partnership to consolidate the limited partnership if the generalpartner is deemed to control the limited partnership. Using criteriaestablished in EITF Consensus 04-05, BGH has determined that consolidation ofBuckeye into BGH’s financial statements is appropriate.

 

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

 

BGH’s condensed consolidated balance sheet includesa non-controlling interest liability that reflects the portion of Buckeye ownedby its partners other than BGH and Services Company.  Similarly, BGH’s condensed consolidatedincome statements include non-controlling interest expense that reflects theportion of the earnings due to Buckeye’s partners other than BGH and ServicesCompany.

 

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

 

Pursuant to the rules and regulations of the Securities andExchange Commission, the condensed consolidated financial statements do notinclude all of the information and notes normally included with financialstatements prepared in accordance with accounting principles generally acceptedin 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, 2008 contained in BGH’s Annual Report on Form 10-Kas filed with the Securities and ExchangeCommission on March 16, 2009.

 

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2.CONTINGENCIES

 

*Claims and Proceedings*

 

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

 

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

 

*Environmental Contingencies*

 

In accordance with its accounting policy, Buckeye recorded operatingexpenses of $5.3 million and $2.0 million for the three months ended March 31,2009 and 2008, respectively, related to environmental contingencies unrelatedto claims and proceedings.

 

*Ammonia Contract Contingencies*

 

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

 

EPMEhas informed BGC that, notwithstanding the parties’ agreement, it will notcontinue to pay BGC for shortfalls created by the pass-through of ammonia costsin excess of ammonia revenues.  EPMEencouraged BGC to seek payment by invoking the $40.0 million guaranty made byEl Paso which guaranteed EPME’s obligations to BGC.  If EPME fails to reimburse BGC for theseshortfalls for a significant period during the remainder of the term of theammonia agreements, then such unreimbursed shortfalls could exceed the $40.0million cap on El Paso’s guaranty.  Tothe extent the unreimbursed shortfalls significantly exceed the $40.0 millioncap, the resulting costs incurred by BGC could adversely affect Buckeye’s andBGH’s financial position, results of operations, and cash flows.  Given the uncertainty of future ammoniaprices and EPME’s future actions, Buckeye is unable to estimate the amount ofany such losses.  Accordingly, Buckeyehas recorded no provision for losses in the accompanying condensed consolidatedfinancial statements because it is unable to determine whether or not a losshas been incurred or, if a loss has been incurred, a reasonable estimate orrange of estimates of the amount of such losses.   Buckeye is currently assessing its options,including potential recourse against EPME and El Paso, with respect to thismatter.

 

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3.  PREPAIDSAND OTHER CURRENT ASSETS

 

Prepaids and other currentassets consist of the following:

* *
| ** **            | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2009**                | ** ** | **2008**              | ** ** |
| ** **            | ** ** | **(In thousands)** | ** ** |
| Prepaid insurance     |       | $                       | 5,349      |                  | $          | 7,889 |   |
| Insurance receivables |       | 9,285                   |       | 5,101                 |       |
| Ammonia receivable    |       | 8,952                   |       | 12,058                |       |
| Margin deposits       |       | 24,837                  |       | 32,345                |       |
| Other                 |       | 21,563                  |       | 18,013                |       |
| Total                 |       | $                       | 69,986     |                  | $          | 75,406 |   |

 

4. INVENTORIES

 

Inventories consist of the following:

 
| ** **                 | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**                | ** ** | **2008**              | ** ** |
| ** **                 | ** ** | **(In thousands)** | ** ** |
| Refined petroleum products |       | $                       | 67,008     |                  | $          | 69,568 |   |
| Materials and supplies     |       | 15,117                  |       | 14,661                |       |
| Total                      |       | $                       | 82,125     |                  | $          | 84,229 |   |

 

Buckeye generally maintains two types of inventory.  Within the Energy Services segment, Buckeyeprincipally maintains refined petroleum products inventory, which consistsprimarily of gasoline, heating oil, and diesel fuel, which is valued at thelower of cost or market, unless such inventory is hedged.  At March 31, 2009 and December 31,2008, 74% and 78% of the inventory was hedged, respectively. Hedged inventoryis valued at current market prices with the change in value of the inventoryreflected in the condensed consolidated statements of income.  At March 31, 2009 and December 31,2008, 22% and 17% of the inventory was committed against fixed-priced salescontracts and such inventory was valued at the lower of cost or market,respectively.  The remaining inventorywas considered unhedged and represented approximately one day of sales.

 

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

 

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5.  INTANGIBLEASSETS, NET

 

Intangible assets, net consist of the following:

 
| ** **               | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2009**                | ** ** | **2008**              | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| Customer relationships   |       | $                       | 38,300     |                  | $          | 38,300 |   |
| Accumulated amortization |       | (3,404                  | )          | (2,662                | )          |
| Net carrying amount      |       | 34,896                  |       | 35,638                |       |
|                     |       |                    |       |                  |       |
| Customer contracts       |       | 11,800                  |       | 11,800                |       |
| Accumulated amortization |       | (3,466                  | )          | (3,324                | )          |
| Net carrying amount      |       | 8,334                   |       | 8,476                 |       |
| Total                    |       | $                       | 43,230     |                  | $          | 44,114 |   |

 

For the three months ended March 31,2009 and 2008, consolidated amortization expense related to intangible assetswas $0.9 million and $0.1 million, respectively.  Amortization expense related tointangible assets is expected to be approximately $3.8 million for each of thenext five years.

 

6.  ACCRUED AND OTHER CURRENTLIABILITIES

 

Accruedand other current liabilities consist of the following:

 
| ** **                                       | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2009**                | ** ** | **2008**              | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| Taxes - other than income                        |       | $                       | 16,906     |                  | $          | 14,092 |   |
| Accrued employee benefit liability (see Note 13) |       | 2,297                   |       | 2,297                 |       |
| Environmental liabilities                        |       | 13,617                  |       | 12,337                |       |
| Interest                                         |       | 16,449                  |       | 25,551                |       |
| Retainage                                        |       | 1,874                   |       | 1,405                 |       |
| Payable for ammonia purchase                     |       | 5,445                   |       | 9,373                 |       |
| Unearned revenue                                 |       | 10,260                  |       | 12,186                |       |
| Compensation and vacation                        |       | 9,832                   |       | 15,642                |       |
| Accrued capital expenditures                     |       | 3,380                   |       | 4,902                 |       |
| Other                                            |       | 15,872                  |       | 18,679                |       |
| Total                                            |       | $                       | 95,932     |                  | $          | 116,464 |   |

 

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7. DEBT AND CREDIT FACILITIES

 

Long - term debt consists of the following:

 
| ** **                                                       | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2009**                | ** ** | **2008**              | ** ** |
| ** **                                                       | ** ** | **(In thousands)** | ** ** |
| *BGH:*                                                           |       |                    |       |                  |       |
| BGH Credit Agreement                                             |       | $                       | —     |                  | $          | — |   |
| *Services Company:*                                              | ** ** | ** **              | ** ** | ** **            | ** ** |
| 3.60% ESOP Notes due March 28, 2011                         |       | 12,617                  |       | 14,255                |       |
| Retirement premium                                               |       | (207                    | )          | (258                  | )          |
| *Buckeye:*                                                       |       |                    |       |                  |       |
| 4.625% Notes due July 15, 2013*                             |       | 300,000                 |       | 300,000               |       |
| 6.750% Notes due August 15, 2033*                           |       | 150,000                 |       | 150,000               |       |
| 5.300% Notes due October 15, 2014*                          |       | 275,000                 |       | 275,000               |       |
| 5.125% Notes due July 1, 2017*                              |       | 125,000                 |       | 125,000               |       |
| 6.050% Notes due January 15, 2018*                          |       | 300,000                 |       | 300,000               |       |
| Borrowings under the Credit Facility                             |       | 208,000                 |       | 298,267               |       |
| Total  term debt                                                 |       | $                       | 1,370,410  |                  | $          | 1,462,264 |   |
| Other, including unamortized discounts and fair value hedges (1) |       | (2,483                  | )          | (2,545                | )          |
|                                                             |       |                    |       |                  |       |
| Subtotal long- term debt                                         |       | 1,367,927               |       | 1,459,719             |       |
| Less: current portion of long-term debt                          |       | (6,264                  | )          | (6,294                | )          |
|                                                             |       |                    |       |                  |       |
| Total  long-term debt                                            |       | $                       | 1,361,663  |                  | $          | 1,453,425 |   |

 

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*Buckeye makes semi-annual interest payments on these notes based on the ratesnoted above with the principal balances outstanding to be paid on or before thedue dates as shown above.

 

 (1) TheMarch 31, 2009 and December 31, 2008 amounts include $1.0 million and$1.1 million, respectively, related to an adjustment to fair value associatedwith a hedge of fair value and ($3.5) million and ($3.6) million, respectively,in unamortized discounts.

 

The fair value of debt was estimated to be$1,282.3 million at March 31, 2009 and $1,381.2 million at December 31,2008.  The fair values at March 31,2009 and December 31, 2008 were estimated primarily by comparing the historicmarket prices of Buckeye’s publicly issued debt with the market prices of othermaster limited partnerships’ publicly issued debt with similar credit ratingsand terms.

 

*BGH*

 

BGH is party to a five-year, $10.0 millionunsecured revolving credit facility with SunTrust Bank, as both**administrative agent and lender (the “BGHCredit Agreement”). The BGH Credit Agreement may be used for working capitaland other partnership purposes. BGH has pledged all of the limited liabilitycompany interests in Buckeye GP as security for its obligations under the BGHCredit Agreement.  Borrowings under theBGH Credit Agreement bear interest under one of two rate options, selected byBGH, equal to either (i) the greater of (a) the federal funds rateplus 0.5% and (b) SunTrust Bank’s prime commercial lending rate; or (ii) theLondon Interbank Official Rate (“LIBOR”), plus a margin which can range from0.40% to 1.40%, based on the ratings assigned by Standard & Poor’sRating Services and Moody’s Investor Services to the senior unsecurednon-credit enhanced long-term debt of BGH. BGH did not have amounts outstanding under the BGH Credit Agreement at March 31,2009 and December 31, 2008.

 

The BGH Credit Agreement requires BGH to maintainleverage and funded debt coverage ratios. The leverage ratio covenant requiresBGH to maintain, as of the last day of each fiscal quarter, a ratio of thetotal funded indebtedness of BGH and its Restricted Subsidiaries (as definedbelow), measured as of the last day of each fiscal quarter, to the aggregatedividends and distributions received by BGH and its Restricted Subsidiariesfrom Buckeye, plus all other cash received by BGH and the RestrictedSubsidiaries, measured for the preceding twelve months, less expenses, of notmore than 2.50 to 1.00. The BGH Credit Agreement defines “RestrictedSubsidiaries” as certain of BGH’s wholly owned 

 

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subsidiaries. The funded debt coverage ratio covenantrequires BGH to maintain, as of the last day of each fiscal quarter, a ratio oftotal consolidated funded debt of BGH and all of its subsidiaries to theconsolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and all ofits subsidiaries, measured for the preceding twelve months, of not more than5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 inconnection with future acquisitions. At March 31, 2009, BGH’s funded debtcoverage ratio was 4.19 to 1.00.

 

The BGH Credit Agreement contains other covenantsthat prohibit BGH from taking certain actions, including but not limited to,declaring dividends or distributions if any default or event of default hasoccurred or would result from such a declaration and limiting BGH’s ability toincur additional indebtedness, creating negative pledges and granting certainliens, making certain loans, acquisitions, and investments, making materialchanges to the nature of BGH and its Restricted Subsidiaries’ business, andentering into a merger, consolidation, or sale of assets.  At March 31, 2009, BGH was not aware ofany instances of noncompliance with the covenants under the BGH CreditAgreement.

 

*Services Company*

* *

Services Companyhad total debt outstanding of $12.4 million and $14.0 million at March 31,2009 and December 31, 2008, respectively, consisting of 3.60% SeniorSecured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by theESOP 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 March 31, 2009, the valueof Buckeye’s LP Units owned by Services Company exceeded the 125% requirement.

 

*Credit Facility*

 

Buckeye has a borrowing capacity of $600.0 million (including LehmanBrothers Bank, FSB’s $20.0 million commitment as a lender as discussed below)under an unsecured revolving credit agreement (the “Credit Facility”), whichmay be expanded up to $800.0 million subject to certain conditions and upon thefurther approval of the lenders.   TheCredit Facility’s maturity date is August 24, 2012, which may be extendedby Buckeye for up to two additional one-year periods. Borrowings under theCredit Facility bear interest under one of two rate options, selected byBuckeye, equal to either (i) the greater of (a) the federal fundsrate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin,or (ii) LIBOR plus an applicable margin. The applicable margin isdetermined based on the current utilization level of the Credit Facility andratings assigned by Standard & Poor’s and Moody’s Investor Servicesfor Buckeye’s senior unsecured non-credit enhanced long-term debt.  At March 31, 2009 and December 31,2008, Buckeye had $208.0 million and $298.3 million outstanding under theCredit Facility, respectively.  At March 31,2009 and December 31, 2008, Buckeye had committed $1.4 million and $1.3million in support of letters of credit, respectively.  The obligations for letters of credit are notreflected as debt on Buckeye’s condensed consolidated balance sheet.  The weighted average interest rate forborrowing outstanding under the Credit Facility was 1.9% at March 31,2009.

 

The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greaterthan 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to1.00 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated bydividing consolidated debt by annualized EBITDA, which is defined in theCredit Facility as earnings before interest, taxes, depreciation, depletion andamortization, in each case excluding the income of certain majority-ownedsubsidiaries of Buckeye and equity investments (but including distributionsfrom those majority-owned subsidiaries and equity investments).  As discussed below, the Credit Facility wasamended in January 2008 to, among other things, change the definition ofconsolidated debt.  At March 31,2009, Buckeye’s Funded Debt Ratio was 4.07 to 1.00.  As permitted by the Credit Facility, $50.0million of borrowings by Buckeye Energy Services LLC (“BES”) under its creditagreement (discussed below) were excluded from the calculation of the FundedDebt Ratio.

 

In addition, the Credit Facility contains other covenants including,but not limited to, covenants limiting Buckeye’s ability to incur additionalindebtedness, to create or incur liens on its property, to dispose of propertymaterial to its 

 

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operations,and to consolidate, merge or transfer assets. At March 31, 2009, Buckeye was not aware of any instances ofnoncompliance with the covenants under its Credit Facility.

 

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

 

LehmanBrothers Bank, FSB, an affiliate of Lehman Brothers Holdings Inc. (“LehmanBrothers”), has committed, as a lender under the Credit Facility, 3.3%, or$20.0 million, of Buckeye’s $600.0 million borrowing capacity under the CreditFacility but has not honored that commitment since October 2008. Buckeyedoes not believe that the reduction in capacity under the Credit Facility resulting from theunavailability of Lehman Brothers Bank, FSB’s commitment will impair Buckeye’sability to meet its liquidity needs.  At March 31,2009, approximately $5.3 million of the outstanding balance of the CreditFacility related to amounts previously funded by Lehman Brothers Bank, FSB.

 

*BES Credit Agreement*

 

BES has a credit agreement (the “BES Credit Agreement”) that providesfor borrowings 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 CreditAgreement, borrowings accrue interest, at BES’s election, at (i) theAdministrative Agent’s Cost of Funds (as defined in the BES Credit Agreement)plus 1.75%, (ii) the Eurodollar Rate (as defined in the BES CreditAgreement) plus 1.75% or (iii) the Base Rate (as defined in the BES CreditAgreement) plus 0.25%.  The BES CreditAgreement also permits Daylight Overdraft Loans (as defined in the BES CreditAgreement), Swingline Loans (as defined in the BES Credit Agreement) andletters of credit.  Such alternativeextensions of credit are subject to certain conditions as specified in the BESCredit Agreement.  The BES Credit Agreementis secured by liens on certain assets of BES, including its inventory, cashdeposits (other than certain accounts), investments and hedging accounts,receivables and intangibles.

 

The balances outstanding under the BES Credit Agreement were approximately$50.0 million and $96.0 million at March 31, 2009 and December 31,2008, respectively, all of which were classified as current liabilities.  The BES Credit Agreement requires BES to meetcertain financial covenants, which are summarized below (in millions, exceptfor the leverage ratio):

 
| **Borrowings**                     | ** ** | **Minimum**                    | ** ** | **Minimum**               | ** ** | **Maximum**             | ** ** |
|------------------------------------|------------|--------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **outstanding on**            | ** ** | **Consolidated Tangible** | ** ** | **Consolidated Net** | ** ** | **Consolidated**        | ** ** |
| **BES Credit Agreement** | ** ** | **Net Worth**             | ** ** | **Working Capital**  | ** ** | **Leverage Ratio** | ** ** |
| $150                               |       | $                              | 40         |                      | $          | 30                      |       | 7.0  to 1.0 |   |
| Above $150 up to $200              |       | 50                             |       | 40                        |       | 7.0  to 1.0             |       |
| Above $200 up to $250              |       | 60                             |       | 50                        |       | 7.0  to 1.0             |       |
|                                    |            |                                |            |                           |            |                         |            |  |  |

 

At March 31, 2009, BES’s Consolidated Tangible Net Worth (asdefined in the BES Credit Agreement) and Consolidated Net Working Capital (asdefined in the BES Credit Agreement) were $119.7 million and $73.4 million,respectively, and the Consolidated Leverage Ratio (as defined in the BES CreditAgreement) was 0.95 to 1.0.  The weightedaverage interest rate for borrowing outstanding under the BES Credit Agreementwas 2.3% at March 31, 2009.

 

Inaddition, the BES Credit Agreement contains other covenants, including, but notlimited to, covenants limiting BES’s ability to incur additional indebtedness,to create or incur certain liens on its property, to consolidate, merge ortransfer its assets, to make dividends or distributions, to dispose of itsproperty, to make investments, to modify its risk management policy, or toengage in business activities materially different from those presentlyconducted.  At March 31, 2009, BESwas not aware of any instances of noncompliance with the covenants under theBES Credit Agreement.

 

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8.  FINANCIAL INSTRUMENTS

 

*CommodityDerivatives*

 

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

 

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

 

Inorder to effectively fix the cost of natural gas purchases used to operateBuckeye’s turbine engines at its Linden location, in March 2009, thePipeline Operations segment bought natural gas futures contracts with termsthat coincide with the remaining term of an ongoing natural gas supply contract(April 2009 through August 2011) for a price of $5.47 per millionBritish thermal units (“MMBtu”).  Theaggregate notional quantity is approximately 1.0 MMBtu.  This transaction was designated as a cashflow hedge at inception.

 

*Finance Derivatives*

 

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

 

In October 2008,Buckeye borrowed approximately $50 million under the Credit Facility.  In order to hedge its variable interest raterisk with respect to the amount borrowed, Buckeye concurrently entered into aninterest rate swap agreement for a notional amount of $50 million.  Under the swap agreement, Buckeye paid afixed rate of interest of 3.15% for 180 days and, in exchange, received aseries of six monthly payments calculated based on the 30-day LIBOR rate ineffect at the beginning of each monthly period. The amounts received by Buckeyecorresponded to the 30-day LIBOR rates that Buckeye paid on the $50 millionborrowed under the Credit Facility.  Theswap settled on April 20, 2009. Buckeye had designated the swap agreement as a cash flow hedge on December 3,2008.  Changes in value between the tradedate and the designation date were recognized in earnings. On April 21,2009, Buckeye entered into a new interest rate swap agreement for an additional180 days on the same terms, except that Buckeye agreed to pay a fixed interestrate of 0.63%.

 

In January 2009,Buckeye entered into an additional interest rate swap agreement to hedge itsvariable-rate risk on an additional $50 million in borrowings under the CreditFacility. Under the swap agreement, Buckeye is paying a fixed interest rate of0.81% for 180 days and, in exchange, is receiving a series of six monthlypayments calculated based on the 30-day LIBOR rate in effect at the beginningof each monthly period. The amounts received by Buckeye correspond to the30-day LIBOR rates that Buckeye pays on the additional $50 million borrowedunder the Credit Facility. The swap will settle on the maturity date of thelast 30-day LIBOR period. Buckeye designated the swap agreement as a cash flowhedge at inception.

 

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

 

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As of March 31,2009, Buckeye had derivative assets and liabilities as follows (in thousands):

 
| ** **                                           | ** ** | **March 31, 2009** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | ** **                   | ** ** | ** ** | ** ** | **Derivative** | ** ** |
| **Derivatives NOT designated as**     | ** ** | **Assets**                   | ** ** | **(Liabilities)** | ** ** | **Net Carrying** | ** ** |
| **hedging instruments:**                        | ** ** | **Fair value**          | ** ** | **Fair value** | ** ** | **Value** | ** ** |
|                                                 |       |                         |       |   |   |   |   |
| Commodity  contracts consisting of fixed-price sales |       | $                            | 46,102     |   | $ | (335 | ) | $ | 45,767 |   |
| Commodity  contracts for fixed-price sales           |       | 9,396                        |       | (34,279 | ) | (24,883 | ) |
|                                                 |       |                         |       |   |   |   |   |
| **Derivatives  designated as hedging**               |       |                         |       |   |   |   |   |
| **instruments:**                                     |       |                         |       |   |   |   |   |
| Commodity  contracts for inventory                   |       | $                            | 7,044      |   | $ | (3,186 | ) | $ | 3,858 |   |
| Interest rate  contracts                             |       | —                       |       | (115 | ) | (115 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Total                                                |       |                         |       |   |   | $ | 24,627 |   |

 
| ** **                             |   | **March 31,** |   |
|----------------------------------------|--------|--------------------|--------|
| **Balance  Sheet Locations:**          |   | **2009**           |   |
| Derivative  assets                     |   | $                  | 45,249 |   |
| Other  non-current assets              |   | 4,602              |   |
| Derivative  liabilities                |   | (25,109            | )      |
| Accrued and  other current liabilities |   | (115               | )      |
|                                   |   |               |   |
| Total                                  |   | $                  | 24,627 |   |

 

Substantiallyall of the unrealized gain of $3.9 million at March 31, 2009 for commoditycontracts for inventory hedges will be realized in the second quarter of 2009as the related inventory is sold.  Gainsrecorded on inventory hedges that were ineffective were approximately $4.3million for the three months ended March 31, 2009.  As of March 31, 2009, open petroleumderivative contracts (represented by the fixed-price sales contracts andfutures contracts for fixed-price sales contracts noted above) varied induration, but did not extend beyond August 2010.  In addition, at March 31, 2009, Buckeyehad refined product inventories which it intends to use to satisfy a portion ofthe fixed-price sales contracts.

 

 For the three months ended March 31,2009, Buckeye recorded the following derivative activity in income as follows(in thousands):

 
| **Derivatives NOT designated as  hedging instruments:** | ** ** | **Gain or (Loss)  recognized in  income on  derivatives for  the three months  March 31, 2009** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| Product sales                                           | *          | $                                                                                                                                       | 13,295     |   |
|                                                    |       |                                                                                                                                    |       |
| Cost of product  sales                                  | *          | $                                                                                                                                       | (7,546     | ) |
|                                                    |       |                                                                                                                                    |       |
| **Derivatives  designated as**                          |       |                                                                                                                                    |       |
| **hedging  instruments:**                               |       |                                                                                                                                    |       |
| Cost of product  sales                                  | *          | $                                                                                                                                       | 27,648     |   |

 

----

* Commodity contracts

 

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9.  FAIR VALUE MEASUREMENTS

 

Fair valuemeasurements are characterized in one of three levels based upon the input usedto arrive at the measurement.  The threelevels include:

 

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

 

Level 2:  Level 2 inputs include the following:

 

·                  Quoted prices in active markets for similar assets orliabilities.

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

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

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

 

Level 3:  Level 3 inputs are unobservable inputs forthe asset or liability.

 

The followingtable sets forth the fair value measurement of Buckeye’s assets and liabilitiesas of March 31, 2009 and December 31, 2008:

 
| ** **                 | ** ** | **March 31, 2009**                      | ** ** | **December 31, 2008** | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Fair Value Measurements Using:** | ** ** |
| ** **                 | ** ** | ** **                                        | ** ** | **Significant**                 | ** ** | ** ** | ** ** | **Significant** | ** ** |
| ** **                 | ** ** | **Quoted Prices**                            | ** ** | **Other Observable**       | ** ** | **Quoted Prices** | ** ** | **Other Observable** | ** ** |
| ** **                 | ** ** | **in Active Markets**                   | ** ** | **Inputs**                      | ** ** | **in Active Markets** | ** ** | **Inputs** | ** ** |
| ** **                 | ** ** | **(Level  1)**                                    | ** ** | **(Level  2)**                  | ** ** | **(Level  1)** | ** ** | **(Level  2)** | ** ** |
| ** **                 | ** ** | **(In  thousands)**                               | ** ** |
| **Assets:**                | ** ** | ** **                                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commodity  derivatives     |       | $                                                 | 3,858      |                            | $          | 45,767 |   | $ | 25,225 |   | $ | 79,322 |   |
| Asset held in  trust       |       | 1,793                                             |       | —                          |       | 3,648 |   | — |   |
| **Liabilities:**           |       |                                              |       |                            |       |   |   |   |   |
| Interest rate  derivatives |       | —                                            |       | (115                            | )          | — |   | (333 | ) |
| Commodity  derivatives     |       | (24,883                                           | )          | —                          |       | (50,806 | ) | (1,045 | ) |
| Total                      |       | $                                                 | (19,232    | )                               | $          | 45,652 |   | $ | (21,933 | ) | $ | 77,944 |   |

 

The value of theLevel 1 commodity derivative assets and liabilities were based on quoted marketprices obtained from the New York Mercantile Exchange.  The value of the Level 1 asset held in trustwas obtained from quoted market prices. The value of the Level 2 commodity derivative assets and liabilitieswere based on observable market data related to the obligations to providepetroleum products. The value of the Level 2 interest rate derivative was basedon observable market data related to similar obligations. Buckeye has no assetsor liabilities that are measured using Level 3 inputs.

 

The commodity derivativeassets of $45.8 million and $79.3 million as of March 31, 2009 and December 31,2008, respectively, are net of credit valuation adjustments (“CVA”) of ($0.8)million and ($0.6) million, respectively. Because few of the Energy Services segment’s customers entering intothese fixed-price sales contracts are large organizations withnationally-recognized credit ratings, the Energy Services segment determinedthat a CVA, which is based on the credit risk of such contracts, isappropriate.  The CVA is based on thehistorical and expected payment history of each customer, the amount of productcontracted for under the agreement, and the customer’s historical and expectedpurchase performance under each contract.

 

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10.  EARNINGS PER UNIT

 

The followingtable is a reconciliation of the weighted average number of units used in thebasic and diluted earnings per unit calculations (in thousands):

 
| ** **                                      | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**                | ** ** | **2008**              | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| Basic:                                          | ** ** | ** **              | ** ** | ** **            | ** ** |
| Weighted average  common units outstanding      |       | 27,770                  |       | 27,770                |       |
| Weighted average  management units outstanding  |       | 530                     |       | 530                   |       |
| Units for basic                                 |       | 28,300                  |       | 28,300                |       |
|                                            |       |                    |       |                  |       |
| Diluted:                                        |       |                    |       |                  |       |
| Units used for  basic calculation               |       | 28,300                  |       | 28,300                |       |
| Dilutive effect  of additional management units |       | —                  |       | —                |       |
| Units for  diluted                              |       | 28,300                  |       | 28,300                |       |

 

11.CASH DISTRIBUTIONS

 

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

 

On April 30,2009, MainLine Management declared a quarterly cash distribution of $0.35 percommon unit payable on May 29, 2009, to unitholders of record on May 11,2009.  The total cash distribution to BGHunitholders will be approximately $9.9 million.

 

12. UNIT-BASED COMPENSATION

 

*BGH GP’s Override Units*

 

Effective on June 25, 2007,**BGH GP instituted an equity incentive plan for certainmembers of senior management of BGH GP and BGH. This equity incentive plan includes both time-based andperformance-based participation in the equity of BGH GP (but not in BGH)referred to as “Override Units”.  BGHdetermined that, under the requirements of SFAS 123R, “Share-Based Payment” (“SFAS123R”).  BGH is required to reflect, ascompensation expense and a corresponding contribution to common Unitholders’equity, the fair value of this compensation measured under the provisions ofSFAS 123R.  Compensation expense recordedwith respect to the Override Units in each quarter ended March 31, 2009and 2008 was $0.4 million.  BGH is notthe sponsor of this plan and has no liabilities with respect to it.

 

The Override Units consist ofthree equal tranches of units consisting of: Value A Units, ValueB Units and Operating Units.  TheOperating Units vest over four years semi-annually beginning with a one-yearcliff. The Value A Units generally vest based on the occurrence of an exitevent as discussed below and investment return of 2.0 times the originalinvestment along with an internal rate of return of at least 10%. The Value BUnits generally vest based on the occurrence of an exit event, an investmentreturn of 3.5 times the original investment and an internal rate of return ofat least 10% or they can vest on a pro-rata basis on an investment returnranging from 2.0 to 3.5 times the original investment and an internal rate ofreturn of at least 10%.

 

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

 

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

 

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

 

There have been no OverrideUnits granted in 2009.  The following isa summary of the activity of the Override Units as of March 31, 2009 (inthousands, except per unit amounts):

 
| ** **                             | ** ** | **Number of Override Units** | ** ** | ** **                  | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Value A Units**                 | ** ** | **Value B Units** | ** ** | **Operating  Units** | ** ** | **Total  Number of  Units  Awarded** | ** ** |
| Granted  June 25, 2007            |       | 1,530                                       |       | 1,530                       |       | 1,530 |   | 4,590 |   |
| Forfeited                              |       | (149                                        | )          | (149                        | )          | (149 | ) | (447 | ) |
| Outstanding at  December 31, 2007 |       | 1,381                                       |       | 1,381                       |       | 1,381 |   | 4,143 |   |
| Granted in the  first quarter of 2008  |       | 297                                         |       | 297                         |       | 297 |   | 891 |   |
| Granted in the  third quarter of 2008  |       | 85                                          |       | 85                          |       | 85 |   | 255 |   |
| Granted in the  first quarter of 2009  |       | —                                      |       | —                      |       | — |   | — |   |
| Outstanding at  March 31, 2009    |       | 1,763                                       |       | 1,763                       |       | 1,763 |   | 5,289 |   |

 
| ** **                                                         | ** ** | **Compensation costs for Override Units** | ** ** | ** **                  | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **Value A Units**                                   | ** ** | **Value B Units** | ** ** | **Operating  Units** | ** ** | **Totals** | ** ** |
| Total fair value  of all outstanding Override Units                |       | $                                                             | 3,664      |                        | $          | 2,163 |   | $ | 5,861 |   | $ | 11,688 |   |
| Less: Expense  recorded from plan inception to March 31, 2009 |       | —                                                        |       | —                      |       | 2,378 |   | 2,378 |   |
| Potential future  compensation costs at March 31, 2009        |       | $                                                             | 3,664      |                        | $          | 2,163 |   | $ | 3,483 |   | $ | 9,310 |   |

 
| **March 31,  2008**                               | ** ** | **Value A** | ** ** | **Value B** | ** ** | **Operating** |   |
|--------------------------------------------------------|------------|-------------|------------|-------------|------------|---------------|--------|
| Weighted average  fair value per Override Unit granted |       | $           | 2.07       |        | $          | 1.17          |   | $ | 3.42 |   |
|                                                        |            |             |            |             |            |               |        |  |  |  |

 

Compensation expense relatedto the Operating Units of approximately $1.3 million per year will berecognized in 2009 and 2010.  The vesting of the Value A and Value B Unitsis contingent on a performance condition, namely the completion of the exitevent as discussed above.  Accordingly, no compensation expense for theValue A and Value B Units will be recorded until an exit event occurs.

 

The Override Units were valued using the MonteCarlo simulation method that incorporated the market-based vesting conditioninto the grant date fair value of the unit awards as required by SFAS 123R.  The Monte Carlo simulation is a procedure toestimate the future equity value from the time of the valuation dates to theexit event.  The following assumptionswere used in the first quarter of 2008:

 
| ** **              | ** ** | **March 31,** | ** **    |
|-------------------------|------------|--------------------|---------------|
| ** **              | ** ** | **2008**           | ** **    |
| Current equity value    |       | $                  | 439.0 million |   |
| Expected life in years  |       | 5.5                |          |   |
| Risk-free interest rate |       | 4.92               | %             |   |
| Volatility              |       | 26.0               | %             |   |
| Dividends               |       | $                  | 0.00          |   |   |

 

*Buckeye’s Unit Option Plan*

 

Buckeyesponsors the Unit Option and Distribution Equivalent Plan (the “Option Plan”),pursuant to which it grants to employees options to purchase LP Units at 100%of the market price of the LP Units on the date of grant. Generally, the 

 

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options vest three yearsfrom the date of grant and expire ten years from the date of grant. As unitoptions are exercised, Buckeye issues new LP Units. Buckeye has nothistorically repurchased, and does not expect to repurchase in 2009, any of itsLP Units.

 

Generally,unit-based compensation expense recognized is based on the grant date fairvalue estimated by using the Black-Scholes option pricing model.  Buckeye recognizes compensation expense forawards granted on a straight-line basis over the requisite service period.

 

For the retirementeligibility provisions of the Option Plan, Buckeye follows the non-substantivevesting method and recognizes compensation expense immediately for optionsgranted to retirement-eligible employees, or over the period from the grantdate to the date retirement eligibility is achieved. Unit-based compensationexpense is based on options ultimately expected to vest. 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 to BGH’s consolidatedfinancial statements.

 

Due to regulations adoptedunder Internal Revenue Code Section 409A, holders of unit options grantedduring 2008 would have been subject to certain adverse tax consequences if theterms of the grant were not modified. Buckeye received the approval of theholders of unit options granted in 2008 to shorten the term of those options toavoid the adverse tax consequences under Section 409A.  Unit optionsgranted before January 1, 2008 were not impacted by the IRSregulations.  This modification will not have a material impact on Buckeye’sfinancial results.  Further, in light ofthese adverse tax consequences under Section 409A, Buckeye has adopted along-term incentive compensation plan that was approved by unitholders on March 20,2009 which is discussed in more detail below. Buckeye does not expect to issue any additional grants under the OptionPlan.

 

*Buckeye’sIncentive Plan*

 

On March 20, 2009,the 2009 Long-Term Incentive Plan of Buckeye Partners, L.P. (the “IncentivePlan”) was adopted.  The Incentive Plan,which is administered by the Compensation Committee of the Board of Directorsof Buckeye GP (the “Compensation Committee”), provides for the grant of PhantomUnits, Performance Units and, in certain cases, Distribution Equivalent Rightswhich provide the participant a right to receive payments based ondistributions made by Buckeye.  Phantom Units are notional LP Units thatare subject to service-based restrictions or other conditions established bythe Compensation Committee in its discretion.  Phantom Units entitle a participantto receive an LP Unit upon vesting.  Performance Units are notional LPUnits that are subject to the attainment of one or more performance goals, andwhich entitle a participant to receive LP Units upon vesting. Distribution Equivalent Rights are rights to receive a per-LP Unit cashdistribution, paid by Buckeye on its LP Units.

 

The number of LP Unitsthat may be granted under the Incentive Plan may not exceed 1,500,000, subjectto certain adjustments.  With regard to grants to any one individual in acalendar year, the number of LP Units that may be issued under the IncentivePlan will not exceed 100,000.  If LP Units are forfeited, terminated orotherwise not paid in full, the LP Units will again be available for purposesof the Incentive Plan.  Persons eligibleto receive grants under the Incentive Plan are (i) officers and employeesof Buckeye, Buckeye GP and any of their affiliates and (ii) independentmembers of the Board of Directors of Buckeye GP or of MainLine Management.  Phantom Units or Performance Units may begranted to participants at any time and from time to time as may be determinedby the Compensation Committee.  As of March 31,2009, no grants had been made under the Incentive Plan.

 

13.RELATED PARTY TRANSACTIONS

 

Buckeye pays MainLineManagement a senior administrative charge for certain management functionsperformed by affiliates of Buckeye GP. Buckeye incurred an administrativecharge of $0.5 million for the three months ended March 31, 2009 and2008.  In connection with the Lodi Gasacquisition, MainLine Management has foregone payment of the senioradministrative charge effective June 25, 2007 through March 31,2009.  This foregone payment wasreflected as a reduction in the purchase price of the Lodi Gasacquisition.  The independent directorsof Buckeye GP approve the amount of the senior administrative charge on anannual basis.

 

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Services Companyand Buckeye are considered related parties of BGH.  As discussed in Note 1, the condensedconsolidated financial statements for BGH include the accounts of ServicesCompany and Buckeye on a consolidated basis, and all intercompany transactionshave been eliminated.

 

14.       PENSIONS AND OTHER POSTRETIREMENTBENEFITS

 

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 hiredbefore January 1, 1986 a retirement benefit at least equal to the benefitthey would have received under a previously terminated defined benefit plan.Services Company’s policy is to fund amounts necessary to meet at least theminimum funding requirements of the Employee Retirement Income Security Act of1974.

 

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

 

Forthe three months ended March 31, 2009 and 2008, the components of the netperiodic benefit cost recognized by Buckeye for the RIGP and Retiree MedicalPlan were as follows:

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **RIGP**                                             | ** ** | **Retiree Medical  Plan** | ** ** |
| ** **                                | ** ** | **(In  thousands)**                                  | ** ** |
| Components of  net periodic benefit cost: | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                              |       | $                                                    | 208        |   | $ | 353 |   | $ | 105 |   | $ | 232 |   |
| Interest cost                             |       | 371                                                  |       | 478 |   | 492 |   | 694 |   |
| Expected return  on plan assets           |       | (191                                                 | )          | (468 | ) | — |   | — |   |
| Amortization of  prior service benefit    |       | (117                                                 | )          | (218 | ) | (860 | ) | (1,124 | ) |
| Amortization of  unrecognized losses      |       | 357                                                  |       | 156 |   | 261 |   | 410 |   |
| Net periodic  benefit costs               |       | $                                                    | 628        |   | $ | 301 |   | $ | (2 | ) | $ | 212 |   |

 

A minimum fundingcontribution is not required to be made to the RIGP during 2009.  However, on April 8, 2009, Buckeyevoluntarily contributed $0.3 million to the RIGP.

 

15.  SEGMENTINFORMATION

 

BGH conductsbusiness in five reportable operating segments: Pipeline Operations;Terminalling and Storage; Natural Gas Storage; Energy Services; and OtherOperations. BGH also has certain consolidated-level assets, principallyconsisting of goodwill, which are not allocable to the individual reportingsegments because they are not used by the chief operating decision maker tomake operating decisions or to allocate resources.

 

*PipelineOperations:*

 

The PipelineOperations segment receives refined petroleum products from refineries,connecting pipelines, and bulk and marine terminals and transports thoseproducts to other locations for a fee. This segment owns and operates approximately 5,400 miles of pipelinesystems in 17 states. This segment also has three refined petroleum productsterminals with aggregate storage capacity of approximately 0.5 million barrelsin three states.

 

*Terminallingand Storage:*

 

The Terminallingand Storage segment provides bulk storage and terminal throughputservices.  This segment has 56 productsterminals with aggregate storage capacity of approximately 23.3 million barrelsin ten states.

 

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*NaturalGas Storage:*

 

The Natural Gas Storage segment provides natural gas storage services ata natural gas storage facility in northern California that is owned andoperated by Lodi Gas.  The facilitycurrently provides approximately 33 Bcf of natural gas storage capacity(including capacity provided pursuant to a nearly completed expansion project)and is connected to Pacific Gas and Electric’s intrastate gas pipelines thatservice natural gas demand in the San Francisco and Sacramento areas.

 

The Natural Gas Storage segment’s revenues consist of lease revenuesand hub services revenues.  Leaserevenues consist of demand charges for the reservation of storage space underfirm storage agreements. The demand charge entitles the customer to a fixedamount of storage space and certain injection and withdrawal rights. Title tothe stored gas remains with the customer. Lease revenues are recognized asrevenue over the term of the related storage agreement.  Hub services revenues consist of a variety ofother storage services under interruptible storage agreements. These servicesprincipally include park and loan transactions. 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 are recognized ratably over theterm of the agreement.  Loans occur whengas is delivered 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.

 

The Natural Gas Storage segment does not trade or market natural gas.

 

*EnergyServices:*

 

The EnergyServices segment is a wholesaledistributor of refined petroleum products in the northeastern and midwestern United States.  The segment recognizes revenues when products are delivered. The segment’s products include gasoline,propane, and petroleum distillates such as heating oil, diesel fuel, andkerosene.  The segment also has fiveterminals with aggregate storage capacity of approximately 1.0 millionbarrels.  The segment’s customers consist principally of product wholesalers aswell as major commercial users of refined petroleum products.

 

*OtherOperations:*

 

The OtherOperations segment consists primarily of Buckeye’s contract operation ofapproximately 2,400 miles of third-party pipeline systems, which are ownedprincipally by major oil and chemical companies and are located primarily inTexas and Louisiana.  This segment alsoperforms pipeline construction management services, typically for cost plus afixed fee, for these same customers.  TheOther Operations segment also includes Buckeye’s ownership and operation of anammonia pipeline and its majority ownership of the Sabina Pipeline in Texas.

 

Financialinformation about each segment is presented below. Each segment uses the sameaccounting policies as those used in the preparation of BGH’s condensedconsolidated financial statements. All inter-segment revenues, operatingincome, and assets have been eliminated. All periods are presented on a consistent basis. All of BGH’s operationsand assets are conducted and located in the United States.

 

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| ** **                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                      | ** ** | **(In thousands)**                    | ** ** |
| Revenue:                        |       |                                  |       |   |   |
| Pipeline  Operations            |       | $                                     | 99,195     |   | $ | 96,389 |   |
| Terminalling and  Storage       |       | 30,643                                |       | 27,632 |   |
| Natural Gas  Storage            |       | 15,077                                |       | 11,464 |   |
| Energy Services                 |       | 268,480                               |       | 234,547 |   |
| Other Operations                |       | 9,125                                 |       | 10,869 |   |
| Intersegment                    |       | (5,680                                | )          | (626 | ) |
| Total                           |       | $                                     | 416,840    |   | $ | 380,275 |   |
|                            |       |                                  |       |   |   |
| Operating  income:              |       |                                  |       |   |   |
| Pipeline  Operations            |       | $                                     | 44,448     |   | $ | 35,529 |   |
| Terminalling and  Storage       |       | 10,657                                |       | 12,585 |   |
| Natural Gas  Storage            |       | 6,164                                 |       | 4,744 |   |
| Energy Services                 |       | 6,215                                 |       | 1,656 |   |
| Other Operations                |       | 1,381                                 |       | 1,580 |   |
| Total                           |       | $                                     | 68,865     |   | $ | 56,094 |   |
|                            |       |                                  |       |   |   |
| Depreciation and  amortization: |       |                                  |       |   |   |
| Pipeline  Operations            |       | $                                     | 8,839      |   | $ | 8,423 |   |
| Terminalling and  Storage       |       | 1,722                                 |       | 1,355 |   |
| Natural Gas  Storage            |       | 1,459                                 |       | 954 |   |
| Energy Services                 |       | 977                                   |       | 264 |   |
| Other Operations                |       | 367                                   |       | 387 |   |
| Total                           |       | $                                     | 13,364     |   | $ | 11,383 |   |
|                            |       |                                  |       |   |   |
| Capital  expenditures:          |       |                                  |       |   |   |
| Pipeline  Operations            |       | $                                     | 6,634      |   | $ | 6,820 |   |
| Terminalling and  Storage       |       | 5,641                                 |       | 2,959 |   |
| Natural Gas  Storage            |       | 6,375                                 |       | 3,249 |   |
| Energy Services                 |       | 730                                   |       | 685 |   |
| Other Operations                |       | 74                                    |       | 1,079 |   |
| Total                           |       | $                                     | 19,454     |   | $ | 14,792 |   |
|                            |       |                                  |       |   |   |
| Acquisitions:                   |       |                                  |       |   |   |
| Pipeline  Operations            |       | $                                     | —     |   | $ | — |   |
| Terminalling and  Storage       |       | —                                |       | 13,854 |   |
| Natural Gas  Storage            |       | —                                |       | 443,515 |   |
| Energy Services                 |       | —                                |       | 142,940 |   |
| Other Operations                |       | —                                |       | — |   |
| Total                           |       | $                                     | —     |   | $ | 600,309 |   |

 

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| ** **                | ** ** | **Assets**         | ** ** | **Goodwill**          | ** ** |
|---------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **2009**           | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** | **(In thousands)**    | ** ** |
| Assets:                   |       |               |       |                  |       | ** ** |   |   |   |
| Pipeline  Operations*     |       | $                  | 1,618,058  |                  | $          | 1,630,050 |   | $ | 198,632 |   | $ | 198,632 |   |
| Terminalling and  Storage |       | 470,337            |       | 473,806               |       | 51,386 |   | 51,386 |   |
| Natural Gas  Storage      |       | 502,897            |       | 503,278               |       | 169,560 |   | 169,560 |   |
| Energy Services           |       | 269,778            |       | 333,967               |       | 1,132 |   | 1,132 |   |
| Other Operations          |       | 76,389             |       | 93,309                |       | 13,182 |   | 13,182 |   |
| Consolidating-level       |       | 228,328            |       | 228,687               |       | — |   | — |   |
| Total                     |       | $                  | 3,165,787  |                  | $          | 3,263,097 |   | $ | 433,892 |   | $ | 433,892 |   |

 

----

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

 

16. RECENT ACCOUNTING PRONOUNCEMENT

 

There have been nosignificant developments to recently issued accounting standards, including theexpected dates of adoption and estimated effects on BGH’s consolidatedfinancial statements, from those disclosed in BGH’s 2008 Annual Report on Form 10-K,except for the following:

 

In April 2009,the FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies” (“FSP 141(R)-1”), to amend SFAS 141 (revised 2007) “BusinessCombinations.” FSP 141(R)-1 addresses the initial recognition, measurement andsubsequent accounting for assets and liabilities arising from contingencies ina business combination, and requires that such assets acquired or liabilitiesassumed be initially recognized at fair value at the acquisition date if fairvalue can be determined during the measurement period. If the acquisition-datefair value cannot be determined, the asset acquired or liability assumedarising from a contingency is recognized only if certain criteria are met.  FSP 141(R)-1 also requires that a systematicand rational basis for subsequently measuring and accounting for the assets orliabilities be developed depending on their nature. FSP 141(R)-1 will beeffective for assets or liabilities arising from contingencies in businesscombinations for which the acquisition date is during or after 2010.

 

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Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

*Overview*

 

The followingdiscussion provides an analysis of the financial condition and results ofoperations for Buckeye GP Holdings L.P. (“BGH”) and each of BGH’soperating segments, including an overview of BGH’s liquidity and capitalresources and certain other items related to BGH.  The following discussion and analysis shouldbe read in conjunction with (i) the accompanying interim condensedconsolidated financial statements and related notes and (ii) BGH’sconsolidated financial statements, related notes, and management’s discussionand analysis of financial condition and results of operations included in BGH’sAnnual Report on Form 10-K for the year ended December 31, 2008.

 

*BuckeyeGP Holdings L.P.*

 

BGH’s limited partner unitsare owned approximately 62% by BGH GP Holdings, LLC (“BGH GP”), approximately1% by certain members of senior management and approximately 37% by thepublic.  BGH owns and controls Buckeye GP LLC (“Buckeye GP”),which is the general partner of Buckeye Partners, L.P. (“Buckeye”), a publiclytraded Delaware limited partnership.  BGHis managed by its general partner, MainLine Management LLC (“MainLineManagement”), which is owned by BGH GP. BGH’s only cash-generating assets are its partnership interests inBuckeye, comprised primarily of the following:

 

·                  the incentive distribution rights inBuckeye;

 

·                  the general partner interests in Buckeye(representing 243,914 general partner units (the “GP Units”), or an approximate0.5% interest in  Buckeye);

 

·                  the indirect ownership of the generalpartner interests in certain of Buckeye’s operating subsidiaries (representingan 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 entitleBGH to receive amounts equal to specified percentages of the incremental amountof cash distributed 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, directlydependent upon the ability of Buckeye and its operating subsidiaries to makecash distributions to Buckeye’s unitholders. The actual amount of cash thatBuckeye will have available for distribution will depend primarily on Buckeye’sability to generate earnings and cash flows beyond its working capitalrequirements.

 

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The followingtable summarizes BGH’s cash received for the three months ended March 31,2009 and 2008 as a result of its partnership interests in Buckeye:

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**     | ** ** |
| ** **                                                                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**     | ** ** |
| Incentive  distributions from Buckeye                                                             |       | $                      | 10,505     |   | $ | 8,926 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s GP Units                           |       | 216                    |       | 204 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 362                    |       | 125 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s LP Units                            |       | 71                     |       | 67 |   |
|                                                                                              |       | $                      | 11,154     |   | $ | 9,322 |   |

 

*Buckeye Partners,L.P.*

* *

Buckeyehas one of the largest independent refined petroleum products pipeline systemsin the United States in terms of volumes delivered with approximately 5,400miles of pipeline and 64 active products terminals that provide aggregatestorage capacity of approximately 24.7 million barrels. In addition, Buckeyeoperates and maintains approximately 2,400 miles of other pipelines underagreements with major oil and chemical companies.  Buckeye also owns and operates a majornatural gas storage facility in northern California which provides approximately33 billion cubic feet (“Bcf”) of gas capacity (including capacity provided pursuant to a nearly completed expansionproject) and a wholesale distributor of refined petroleum products inthe northeastern and midwestern UnitedStates in areas also served by Buckeye’s pipelines and terminals.

 

BGH conductsbusiness in five reportable operating segments: Pipeline Operations;Terminalling and Storage; Natural Gas Storage; Energy Services; and OtherOperations.  See Note 15 to the condensedconsolidated financial statements for a more detailed discussion of BGH’soperating segments.

 

*Results of Operations*

 

The results of operations discussed below principallyreflect 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 in Buckeye—BGH’scondensed consolidated balance sheet includes a non-controlling interestliability that reflects the proportion of Buckeye owned by its partners otherthan BGH. Similarly, the ownership interests in Buckeye held by its partnersother than BGH are reflected in BGH’s condensed consolidated income statementas non-controlling interest expense. These non-controlling interest liabilitiesand expenses are not reflected in Buckeye’s condensed consolidated financialstatements.

 

·                  BGH’s capital structure—In addition to incorporatingthe assets and liabilities of Buckeye, BGH’s condensed consolidated balancesheet includes BGH’s own indebtedness and related debt placement costs, and thepartners’ capital on BGH’s balance sheet represents BGH’s partners’ capital asopposed to the capital reflected in Buckeye’s balance sheet, which reflects theownership interest of all its partners, including its owners other than BGH.Consequently, BGH’s income statement reflects additional interest expense,interest income, and debt amortization expense that is not reflected in Buckeye’sfinancial statements.

 

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

 

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·                  BGH’s general and administrative expenses—BGH incursgeneral and administrative expenses that are independent from Buckeye’soperations and are not reflected in Buckeye’s condensed consolidated financialstatements.

 

·                  Elimination of intercompany transactions—Intercompanyobligations and payments among Buckeye and its consolidated subsidiaries, BGHand Services Company are reflected in Buckeye’s consolidated financialstatements but are eliminated in BGH’s consolidated financial statements.

 

Summary operating results for BGH were as follows:

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **March 31,**     | ** ** |
| ** **                                                | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | **(In thousands)**     | ** ** |
| Revenue                                                   |       | $                      | 416,840    |   | $ | 380,275 |   |
| Costs and  expenses                                       |       | 347,975                |       | 324,181 |   |
|                                                      |       |                   |       |   |   |
| Operating income                                          |       | 68,865                 |       | 56,094 |   |
|                                                      |       |                   |       |   |   |
| Other expenses                                            |       | (17,251                | )          | (17,564 | ) |
|                                                      |       |                   |       |   |   |
| Income before  equity income                              |       | 51,614                 |       | 38,530 |   |
| Equity income                                             |       | 2,082                  |       | 2,055 |   |
| Net income                                                |       | 53,696                 |       | 40,585 |   |
|                                                      |       |                   |       |   |   |
| Less: Net income  attributable to noncontrolling interest |       | (43,547                | )          | (34,736 | ) |
|                                                      |       |                   |       |   |   |
| Amounts  attributable to BGH.                             |       | $                      | 10,149     |   | $ | 5,849 |   |

 

First Quarter of 2009compared to First Quarter of 2008

 

Consolidated:

 

Consolidatedincome attributable to BGH’s unitholders was $10.1 million in the first quarterof 2009 compared to $5.8 million in the first quarter of 2008.  The increase in income attributable to BGH’sunitholders was due to an increase in Buckeye’s net income.  The increase in Buckeye’s net income is aresult of three months of operations of the Energy Services segment, comparedto just over 11⁄2 months in the first quarter of 2008, resulting from Buckeye’sacquisition of Farm & Home Oil Company (“Farm & Home”) on February 8,2008.  Buckeye’s operations in the firstquarter of 2009 also include three months of operations of the Natural GasStorage segment, compared to approximately 21⁄2 months in the first quarter of2008, resulting from Buckeye’s acquisition of Lodi Gas Storage, LLC (“Lodi Gas”)on January 18, 2008.

 

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A summary ofoperating income by segment is as follows:

 
| ** **                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| *** ***                                                           | ** ** | **(In  thousands)**                   | ** ** |
| *Revenues:*                                                            |       |                                  |       |   |   |
| Pipeline  Operations                                                   |       | $                                     | 99,195     |   | $ | 96,389 |   |
| Terminalling and  Storage                                              |       | 30,643                                |       | 27,632 |   |
| Natural Gas  Storage                                                   |       | 15,077                                |       | 11,464 |   |
| Energy Services                                                        |       | 268,480                               |       | 234,547 |   |
| Other Operations                                                       |       | 9,125                                 |       | 10,869 |   |
| Intersegment                                                           |       | (5,680                                | )          | (626 | ) |
| Total                                                                  |       | $                                     | 416,840    |   | $ | 380,275 |   |
|                                                                   |       |                                  |       |   |   |
| *Total  costs and expenses (excluding depreciation and amortization):* | * *   | * *                              | * *   | * * | * * |
| Pipeline Operations                                                    |       | $                                     | 45,908     |   | $ | 52,437 |   |
| Terminalling and  Storage                                              |       | 18,264                                |       | 13,692 |   |
| Natural Gas  Storage                                                   |       | 7,454                                 |       | 5,766 |   |
| Energy Services                                                        |       | 261,288                               |       | 232,627 |   |
| Other Operations                                                       |       | 7,377                                 |       | 8,902 |   |
| Intersegment                                                           |       | (5,680                                | )          | (626 | ) |
| Total                                                                  |       | $                                     | 334,611    |   | $ | 312,798 |   |
|                                                                   |       |                                  |       |   |   |
| *Depreciation  and amortization:*                                      |       |                                  |       |   |   |
| Pipeline  Operations                                                   |       | $                                     | 8,839      |   | $ | 8,423 |   |
| Terminalling and  Storage                                              |       | 1,722                                 |       | 1,355 |   |
| Natural Gas  Storage                                                   |       | 1,459                                 |       | 954 |   |
| Energy Services                                                        |       | 977                                   |       | 264 |   |
| Other Operations                                                       |       | 367                                   |       | 387 |   |
| Total                                                                  |       | $                                     | 13,364     |   | $ | 11,383 |   |
|                                                                   |       |                                  |       |   |   |
| *Operating  income:*                                                   |       |                                  |       |   |   |
| Pipeline  Operations                                                   |       | $                                     | 44,448     |   | $ | 35,529 |   |
| Terminalling and  Storage                                              |       | 10,657                                |       | 12,585 |   |
| Natural Gas  Storage                                                   |       | 6,164                                 |       | 4,744 |   |
| Energy Services                                                        |       | 6,215                                 |       | 1,656 |   |
| Other Operations                                                       |       | 1,381                                 |       | 1,580 |   |
| Total                                                                  |       | $                                     | 68,865     |   | $ | 56,094 |   |

 

Pipeline Operations:

 

Revenue from the PipelineOperations segment was $99.2 million in the first quarter of 2009, which is anincrease of $2.8 million or 2.9% from the corresponding period in 2008. Thisoverall increase was driven by increased transportation and settlement revenueof $8.5 million that was significantly offset by a decrease in product sales of$5.9 million. The increase in transportation revenue resulted from three tariffincreases, which totaled 7.3% that were implemented on May 1, 2008, July 1,2008 and January 1, 2009.  The benefitof the tariff increases was partially offset by reduced transportation volumesof approximately 1% in 2009 as compared to 2008.  The decreased product sales were caused byreduced product volumes sold to a wholesale distributor.

 

Costs andexpenses, excluding depreciation and amortization, were $45.9 million for thePipeline Operations segment in the first quarter of 2009, which is a decreaseof $6.5 million from the corresponding period in 2008. This overall decreasewas driven primarily by reduced costs of product sales of $5.8 million as notedabove, along with reduced 

 

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pipeline integrityexpenses of $2.0 million. These expense reductions were offset primarily by anincrease in environmental remediation expense of $1.5 million.

 

Product volumestransported in the Pipeline Operations segment for the first quarter ended March 31,2009 and 2008 were as follows:

 
| ** **           | ** ** | **Average Barrels Per Day**           | ** ** |
|----------------------|------------|---------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
| **Product**          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                 |       |                                  |       |   |   |
| Gasoline             |       | 632,400                               |       | 641,500 |   |
| Distillate           |       | 353,100                               |       | 337,500 |   |
| Jet Fuel             |       | 333,300                               |       | 356,400 |   |
| LPG’s           |       | 14,400                                |       | 15,300 |   |
| Natural gas  liquids |       | 21,300                                |       | 21,100 |   |
| Other products       |       | 13,400                                |       | 11,700 |   |
| Total                |       | 1,367,900                             |       | 1,383,500 |   |

 

Terminalling and Storage:

 

Revenue from theTerminalling and Storage segment was $30.6 million in the first quarter of2009, which is an increase of $3.0 million or 10.9% from the correspondingperiod in 2008. This overall increase resulted primarily from $4.3 million ofrevenue in 2009 from terminals that were acquired at various times in2008.  Aggregate terminal volumes in thefirst quarter of 2009, however, were virtually unchanged from the first quarterof 2008.

 

Costs andexpenses, excluding depreciation and amortization, were $18.3 million for theTerminalling and Storage segment in the first quarter of 2009, which is anincrease of $4.6 million from the corresponding period in 2008. This overallincrease was driven primarily by additional operating expenses of $1.9 millionfrom the terminal acquisitions made in 2008, combined with $2.3 million forenvironmental remediation expenses. The remaining increase in expense of $0.4million was caused primarily by an increase in tank integrity expenses.

 

Average daily throughput for the refined products terminals for thequarters ended March 31, 2009 and 2008 were as follows:

 
| ** **           | ** ** | **Average Barrels Per Day**           | ** ** |
|----------------------|------------|---------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **           | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                 |       |                                  |       |   |   |
| Products  throughput |       | 521,000                               |       | 522,300 |   |

 

NaturalGas Storage:

 

Revenue from the NaturalGas Storage segment was $15.1 million in first quarter of 2009, which is anincrease of $3.6 million or 31.5% from the corresponding period in 2008. Thisoverall increase resulted primarily from the inclusion of a full three monthsof revenue in 2009 compared to approximately 21⁄2 months in the correspondingperiod in 2008, reflecting Buckeye’s purchase of Lodi Gas on January 18,2008, as well as increased hub services revenues in the first quarter of 2009driven by increased marketing efforts.

 

Costs andexpenses, excluding depreciation and amortization, were $7.5 million for theNatural Gas Storage segment in the first quarter of 2009, which is an increaseof $1.7 million from the corresponding period in 2008. As noted above, thisoverall increase is related to the timing of this acquisition in 2008.

 

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EnergyServices:

 

Financial resultsfor the Energy Services segment for the quarter ended March 31, 2009 and2008 are summarized below.

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **March 31,**     | ** ** |
| ** **                              | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                    |       |                   |       |   |   |
| Product sales                           |       | $                      | 268,480    |   | $ | 234,547 |   |
| Cost of product  sales                  |       | 255,574                |       | 230,086 |   |
| Gross margin                            |       | $                      | 12,906     |   | $ | 4,461 |   |
|                                    |       |                   |       |   |   |
| Gallons of  product sold (in thousands) |       | 205,200                |       | 83,400 |   |
| Average revenue  per gallon             |       | $                      | 1.31       |   | $ | 2.81 |   |
| Average cost per  gallon                |       | $                      | 1.25       |   | $ | 2.76 |   |
| Average gross  margin per gallon        |       | $                      | 0.06       |   | $ | 0.05 |   |

 

Buckeye believesthat the most relevant statistic in analyzing results of operations for theEnergy Services segment is gross margin. Energy Services strives to maintain a consistent margin per gallon onproduct sales irrespective of product cost, which can vary significantlydepending on market conditions.  In thefirst quarter of 2009, gross margin was $12.9 million compared to $4.5 millionin the comparable period in 2008.  Thisincrease resulted principally from higher product sales volumes in the firstquarter of 2009 compared to 2008. Increased product sales volumes resulted from the inclusion of a fullthree months of revenue in 2009 compared to just over 11⁄2 months in thecorresponding period in 2008, reflecting Buckeye’s purchase of Farm &Home on February 8, 2008.  Productsales volumes also increased as a result of substantial volumes of heating oildelivered in the first quarter as a result of a colder winter in EnergyServices’ principal Pennsylvania and New York markets in 2009 as compared to2008.  Further, substantial declines inthe price of heating oil in the second half of 2008 caused customers to delaypurchases of heating oil normally made in the fourth quarter into the firstquarter of 2009.

 

Energy Services’average margin per gallon improved to $0.06 per gallon from $0.05 per gallon inthe prior year, principally due to the benefit of fixed price contracts whichwere entered into in 2008 when prices were significantly higher but for whichdeliveries occurred in the first quarter of 2009.

 

Operatingexpenses, excluding cost of product sales and depreciation and amortization,were $5.7 million for the Energy Services segment in the first quarter of 2009,an increase of $3.3 million from the corresponding period in 2008.  The increase resulted from the inclusion ofthree months of operations in 2009 compared to just over 11⁄2 months in 2008.  In addition, professional fees increased by$0.7 million primarily as a result of consulting expenses associated withimplementing and integrating operational controls associated with the EnergyServices segment’s ongoing petroleum products marketing programs.

 

Other Operations:

 

Revenue for the Other Operations segment, which consists principally ofBuckeye’s contract operations and engineering services for third partypipelines, was $9.1 million in the first quarter of 2009 compared to $10.9million in thecorresponding period in 2008.  The decrease in revenues resulted fromreduced operating services revenues of $1.0 million reflecting a customer’stermination of a contract in the second quarter of 2008, along with reducedconstruction management revenue of $0.7 million associated with fewerengineering projects in process in the first quarter of 2009 compared to thesame period in the prior year.

 

Costs and expenses, excluding depreciation and amortization, were $7.4million for the Other Operations segment in the first quarter of 2009, areduction of $1.5 million from the corresponding period in 2008.  The reduction resulted from 

 

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reduced operating expensesassociated with the terminated contract as well as the reduced engineeringactivity in the first quarter of 2009.

 

Total depreciation andamortization:

 

Total depreciationand amortization expense for the three months ended March 31, 2009increased by $2.0 million compared to the same period in 2008, primarily duethe inclusion of a full quarter of depreciation in 2009 for acquisitions madein the Terminalling and Storage, Natural Gas Storage, and Energy Servicessegments at various times in 2008.

 

*Operating Expenses:*

* *

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

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **March 31,**     | ** ** |
| ** **                              | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **(In thousands)**     | ** ** |
| Attributable to  Buckeye                |       | $                      | 346,737    |   | $ | 322,143 |   |
| Elimination of  Buckeye deferred charge |       | (1,174                 | )          | (1,174 | ) |
| Net effect of  ESOP charges             |       | 399                    |       | 965 |   |
| Attributable to  BGH                    |       | 2,013                  |       | 2,247 |   |
| Total                                   |       | $                      | 347,975    |   | $ | 324,181 |   |

 

Amounts attributable to BGH consist of the following:

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **March 31,**     | ** ** |
| ** **             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **             | ** ** | **(In thousands)**     | ** ** |
| Salaries and  benefits |       | $                      | 1,187      |   | $ | 1,334 |   |
| Professional  fees     |       | 297                    |       | 583 |   |
| Other                  |       | 529                    |       | 330 |   |
| Total                  |       | $                      | 2,013      |   | $ | 2,247 |   |

 

As described in Note 1 tothe condensed consolidated financial statements, effective January 1, 2009,Buckeye and its operating subsidiaries agreed to pay for all executivecompensation and benefits earned by Buckeye GP’s four highest salaried officersin return for an annual fixed payment from BGH to Buckeye in the amount of $3.6million.  The $3.6 million consisted ofthe anticipated 2009 salaries, incentive compensation and benefits of theseexecutives plus 15% over such amounts. Salaries and benefits shown above for the first quarter of 2009 consistof the salaries, incentive compensation and benefits included in the $3.6million annual fixed payment, plus allocations of the cost of Buckeye personnelperforming administrative services directly for BGH.  Salaries and benefits in 2008 includesalaries and benefits for the four highest paid executives performing serviceson behalf of Buckeye which were paid for by BGH pursuant to the ServicesAgreement and an Executive Employment Agreement plus the allocatedadministrative salaries.

 

Other income(expense) for the three months ended March 31, 2009 and 2008 was asfollows:

 

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| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **March 31,**     | ** ** |
| ** **                 | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                 | ** ** | **(In thousands)**     | ** ** |
| Investment  income         |       | $                      | 152        |   | $ | 614 |   |
| Interest and  debt expense |       | (17,403                | )          | (18,178 | ) |
| Total                      |       | $                      | (17,251    | ) | $ | (17,564 | ) |

 

The reduction ininvestment income of $0.5 million for the three months ended March 31,2009 as compared to same period in 2008 was primarily the result of a declinein interest income caused by lower interest rates in 2009.

 

Similarly, thereduction of interest and debt expense of $0.8 million for the three monthsended March 31, 2009 was primarily the result of a decline in interestrates on a credit facility and a credit agreement in 2009 as compared to 2008 (discussedunder “Liquidity and Capital Resources” below).

 

*Liquidityand Capital Resources*

 

***BGH***

 

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

 

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

 

BGH’s principaluse of cash is the payment of its operating expenses and distributions to itsunitholders.  BGH generally makesquarterly cash distributions of substantially all of its available cash,generally defined as consolidated cash receipts less consolidated cashexpenditures and such retentions for working capital, anticipated cashexpenditures and contingencies as MainLine Management deems appropriate.  In the first three months of 2009, BGH paidcash distributions of $0.33 per unit on February 28, 2009.  In the first three months of 2008, BGH paidcash distributions of $0.285 per unit on February 29, 2008.  Total cash distributed to BGH unitholders inthe three months ended March 31, 2009 and 2008 was approximately $9.3million and $8.1 million, respectively.

 

On April 30,2009, MainLine Management declared a distribution of $0.35 per unit to be paidon May 29, 2009 to unitholders of record as of May 11, 2009. Thisdistribution is expected to be approximately $9.9 million.

 

***Buckeye***

 

Typically, Buckeye’sprincipal sources of liquidity are cash from operations, borrowings under itsunsecured revolving credit agreement (the “Credit Facility”) and proceeds fromthe issuance of LP Units.  Buckeye will,from time to time, issue debt securities to permanently finance amountsborrowed under the Credit Facility. Buckeye Energy Services (“BES”) funds its working capital needsprincipally from operations and a secured credit facility (the “BES CreditAgreement”).  Buckeye’s principal uses ofcash are capital expenditures, distributions to Unitholders and acquisitions asdescribed in “Cash Flows from Investing Activities” below.

 

In Buckeye’s annualreport on Form 10-K, which was filed on March 2, 2009, Buckeyedisclosed that, as a result of the financial credit crisis which emerged in thethird and fourth quarters of 2008, Buckeye had taken steps to preserve itsliquidity.  These steps includedmaintaining increased cash balances, reducing discretionary capitalexpenditures and 

 

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appropriately managingoperating and administrative expenses. In the first quarter of 2009, credit, capital markets and overalleconomic conditions remained difficult. However, credit and capital markets conditions improved enough thatcertain businesses with investment grade credit ratings were able to issuepublicly-traded debt and other master limited partnerships were able to issueequity.  Buckeye continued to evaluatethe condition of the debt and equity capital markets and, on March 31,2009, Buckeye sold and issued 2.6 million LP Units in an underwritten publicoffering at a net price of $35.08 per LP Unit, after underwriting discounts andcommissions of $1.17 per LP Unit, for net proceeds of approximately $91.0million.  Proceeds from this offeringwere used to reduce outstanding borrowings under the Credit Facility.  On April 29, 2009, the underwriters ofthe March 31 equity offering exercised their option to purchase anadditional 390,000 LP Units.  Similarly,Buckeye used the net proceeds from this offering of approximately $13.7 millionto reduce outstanding borrowings under the Credit Facility.

 

*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 7 to BGH’s condensed consolidatedfinancial statements for a description of the terms of the BGH CreditAgreement.

 

***ServicesCompany***

 

Services Companyhad total debt outstanding of $12.4 million and $14.0 million at March 31,2009 and December 31, 2008, respectively, consisting of 3.60% SeniorSecured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by theESOP to a first-party lender. See Note 7 to BGH’s condensed consolidatedfinancial statements for a description of the terms of the 3.60% ESOP Notes.

 

***Buckeye’sOutstanding Debt***

* *

At March 31,2009, Buckeye had an aggregate face amount of $1,408.0 million of debt, whichconsisted of $300.0 million of Buckeye’s 4.625% Notes due 2013 (the “4.625%Notes”), $275.0 million of 5.300% Notes due 2014 (the “5.300% Notes”), $150.0million of Buckeye’s 6.75% Notes due 2033 (the “6.75% Notes”), $125.0 millionof Buckeye’s 5.125% Notes due 2017 (the “5.125% Notes”), $300.0 million of the6.05% Notes due 2018 (the “6.05% Notes”), $208.0 million outstanding under theCredit Facility and $50.0 million outstanding under the BES Credit Agreement(as discussed below). See Note 7 to the condensed consolidated financialstatements for more information about the terms of the debt discussed above.

 

The fair value ofBuckeye’s aggregate debt was estimated to be $1,270.1 million at March 31,2009 and $1,367.7 million at December 31, 2008.  The fair values at March 31, 2009 and December 31,2008 were estimated primarily by comparing the historic market prices ofBuckeye’s publicly issued debt with the market prices of other master limitedpartnerships’ publicly issued debt that have similar credit ratings and terms.

 

***Buckeye Credit Facility***

 

Buckeye has aborrowing capacity of $600.0 million under the Credit Facility (includingLehman Brothers Bank, FSB’s commitment as a lender as discussed below), whichmay be expanded up to $800.0 million subject to certain conditions and uponfurther approval of the lenders.  TheCredit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greaterthan 5.0 to 1.0, subject to a provision that allows for an increase to 5.5 to1.0 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated bydividing consolidated debt by annualized EBITDA, which is defined in theCredit Facility as earnings before interest, taxes, depreciation, depletion andamortization, in each case excluding the income of certain majority-ownedsubsidiaries and equity investments (but including distributions from thosemajority-owned subsidiaries and equity investments).  At March 31, 2009, Buckeye’s Funded DebtRatio was 4.07 to 1.0.  At March 31,2009, Buckeye had committed $1.4 million in support of letters of credit.  The obligations for letters of credit are notreflected as debt on Buckeye’s consolidated balance sheet.  The weighted average interest rate forborrowing outstanding under the Credit Facility was 1.9% at March 31,2009.

 

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In addition, theCredit Facility contains other covenants including, but not limited to,covenants limiting Buckeye’s ability to incur additional indebtedness, tocreate or incur certain liens on its property, to dispose of property materialto its operations, and to consolidate, merge, or transfer assets.  At March 31, 2009, Buckeye was not awareof any instances of noncompliance with the covenants under the Credit Facility.

 

See Note 7 to theconsolidated financial statements for more information about the terms of theCredit Facility.

 

Lehman Brothers Bank, FSB, an affiliate of LehmanBrothers Holdings Inc., has committed, as a lender under the Credit Facility,3.3%, or $20.0 million, of Buckeye’s $600.0 million borrowing capacity underthe Credit Facility but has recently not honored that commitment. Buckeye doesnot believe that the reductionin capacity under the Credit Facility resulting from the unavailability ofLehman Brothers Bank, FSB’s commitment will impair Buckeye’s ability to meetits liquidity needs.  At March 31,2009, approximately $5.3 million of the outstanding balance of the Credit Facilityrelated to amounts previously funded by Lehman Brothers Bank, FSB.

 

***BESCredit Agreement***

 

On May 20,2008, BES entered into the BES Credit Agreement, which was subsequently amendedon July 18, 2008 and September 15, 2008.  The credit facility provided by the BESCredit Agreement provides for borrowings of up to $175.0 million, which amountmay be increased to $250.0 million subject to customary conditions, includingprocurement of the requisite lender commitments.

 

The BES CreditAgreement requires BES to meet certain financial covenants, which aresummarized below (in millions except for leverage ratio):

 
| **Borrowings**           | ** ** | **Minimum**               | ** ** | **Minimum**          | ** ** | **Maximum**        | ** ** |
|--------------------------|------------|---------------------------|------------|----------------------|------------|--------------------|------------|
| **outstanding on**       | ** ** | **Consolidated Tangible** | ** ** | **Consolidated Net** | ** ** | **Consolidated**   | ** ** |
| **BES Credit Agreement** | ** ** | **Net Worth**             | ** ** | **Working Capital**  | ** ** | **Leverage Ratio** | ** ** |
| $150                     |       | $                         | 40         |                 | $          | 30                 |       | 7.0 to 1.0 |   |
| Above $150 up to $200    |       | 50                        |       | 40                   |       | 7.0 to 1.0         |       |
| Above $200 up to $250    |       | 60                        |       | 50                   |       | 7.0 to 1.0         |       |
|                          |            |                           |            |                      |            |                    |            |  |  |

 

At March 31,2009, BES’s Consolidated Tangible Net Worth (as defined in the BES CreditAgreement) and Consolidated Net Working Capital (as defined in the BES CreditAgreement) were $119.7 million and $73.4 million, respectively, and theConsolidated Leverage Ratio (as defined in the BES Credit Agreement) was 0.95to 1.0.  The weighted average interestrate for borrowing outstanding under the BES Credit Agreement was 2.3% at March 31,2009.

 

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 March 31, 2009, Buckeye was not awareof any instances of noncompliance with the covenants under the BES CreditAgreement.

 

See Note 7 to theconsolidated financial statements for more information about the terms of theBES Credit Agreement.

 

Derivatives

 

See “Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk — Market Risk — Non-Trading Instruments” for a discussion ofcommodity derivatives used by Buckeye’s Energy Services segment.

 

In October 2008,Buckeye borrowed approximately $50 million under the Credit Facility.  In order to hedge its variable interest raterisk with respect to the amount borrowed, Buckeye concurrently entered into aninterest rate swap agreement for a notional amount of $50 million.  Under the swap agreement, Buckeye paid afixed interest rate of interest of 3.15% for 180 days and, in exchange,received a series of six monthly payments calculated based on the 30-day London

 

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Interbank Offered Rate (“LIBOR”)rate in effect at the beginning of each monthly period. The amounts received byBuckeye corresponded to the 30-day LIBOR rates that Buckeye paid on the $50million borrowed under the Credit Facility. The swap settled on April 20, 2009. Buckeye had designated the swap agreement as a cash flow hedge on December 3,2008.  Changes in value between the tradedate and the designation date were recognized in earnings. On April 21,2009, Buckeye entered into a new interest rate swap agreement for an additional180 days on the same terms as the interest rate swap agreement entered into in October 2008,except that Buckeye agreed to pay a fixed interest rate of 0.63%.

 

In January 2009,Buckeye entered into an additional interest rate swap agreement to hedge itsvariable rate risk on an additional $50 million in borrowing under the CreditFacility. Under the swap agreement, Buckeye is paying a fixed interest rate of0.81% for 180 days and, in exchange, is receiving a series of six monthlypayments calculated based on the 30-day LIBOR rate in effect at the beginningof each monthly period. The amounts received by Buckeye correspond to the 30-dayLIBOR rates that Buckeye pays on the additional $50 million borrowed under theCredit Facility. The swap will settle on the maturity date of the last 30-dayLIBOR period. Buckeye designated the swap agreement as a cash flow hedge atinception.

 

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

 

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 Paso Corporation (“El Paso”).  As part of the transaction, BGC assumed theobligations of EPME under several contracts involving monthly purchases andsales of ammonia.  EPME and BGC agreed,however, that EPME would retain the economic risks and benefits associated withthose contracts until their expiration at the end of 2012.  To effectuate this agreement, BGC passesthrough to EPME both the cost of purchasing ammonia under a supply contract andthe proceeds from selling ammonia under three sales contracts.  For the vast majority of monthly periodssince the closing of the pipeline acquisition, the pricing terms of the ammoniacontracts have resulted in ammonia costs exceeding ammonia sales proceeds.  The amount of the shortfall generallyincreases 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 toseek payment by invoking the $40.0 million guaranty made by El Paso whichguaranteed EPME’s obligations to BGC.  IfEPME fails to reimburse BGC for these shortfalls for a significant periodduring the remainder of the term of the ammonia agreements, then suchunreimbursed shortfalls could exceed the $40.0 million cap on El Paso’sguaranty.  To the extent the unreimbursedshortfalls significantly exceed the $40.0 million cap, the resulting costsincurred by BGC could adversely affect Buckeye’s financial position, results ofoperations, and cash flows.  Given theuncertainty of future ammonia prices and EPME’s future actions, Buckeye isunable to estimate the amount of any such losses.  Accordingly, Buckeye has recorded noprovision for losses in the accompanying consolidated financial statementsbecause it is unable to determine whether or not a loss has been incurred or,if a loss has been incurred, a reasonable estimate or range of estimates of theamount of such losses.   Buckeye iscurrently assessing its options, including potential recourse against EPME andEl Paso, with respect to this matter.

 

*Cash Flows from Operations*

* *

The components of cashflows from operations for the three months ended March 31, 2009 and 2008are as follows:

 

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| ** **                                     | ** ** | **Cash Flow from Operations** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| ** **                                     | ** ** | **(In thousands)**            | ** ** |
| Net income                                     |       | $                             | 53,696     |   | $ | 40,585 |   |
| Value of ESOP  shares released                 |       | 183                           |       | 817 |   |
| Depreciation and  amortization                 |       | 13,364                        |       | 11,383 |   |
| Net changes in  fair value of derivatives      |       | 4,103                         |       | — |   |
| Changes in  current assets and liabilities     |       | 2,095                         |       | 5,827 |   |
| Changes in  non-current assets and liabilities |       | 4,809                         |       | 2,347 |   |
| Other                                          |       | 523                           |       | (876 | ) |
| Total                                          |       | $                             | 78,773     |   | $ | 60,083 |   |

 

Cashflows from operations were $78.8 million for the first three months of 2009,which increased by $18.7 million compared to the first three months of 2008.The primary causes of this increase were the improvement in net income for thefirst three months of 2009 compared to the first three months of 2008 and cash providedby working capital.

 

For the three monthsended March 31, 2009, cash provided by working capital resulted primarilyfrom decreases in prepaid and other current assets of $5.4 million, decreasesin construction and pipeline relocation receivables of $3.1 million, anddecreases in inventories of $26.1 million. These cash sources were offset by decreases in accounts payable of $11.7million, decreases in accrued and other current liabilities of $18.8 million,and increases in trade receivables of $2.0 million.

 

Decreases in prepaid and other current assets were dueto a decrease in margin deposits partially offset by an increase in insurancereceivables related to environmental sites. The decrease in construction and pipeline relocation receivables is dueto a decrease in construction activity in the first quarter.  The decrease in inventory is primarily due toa decrease in the value of the refined petroleum products inventory in theEnergy Services segment, as commodity prices have declined at March 31,2009 as compared the year-end 2008.  Thedecrease in accounts payable is due to the timing of the payment of invoices ascompared to December 31, 2008.   Thedecrease in accrued and other current liabilities is due to the payment in thefirst quarter of 2009 of interest on long-term debt which had been accrued atyear end.  In addition, Buckeye hadaccrued ammonia purchases at year end which were paid in the first quarter of2009.  These decreases in accrued andother current liabilities were partially offset by an increase in accrued taxesand other income.  The increase in tradereceivables is due to the timing of collections as compared to amountsoutstanding at year end.

 

CashFlows from Investing Activities

 

Net cash used in investing activities for the threemonths ended March 31, 2009 and 2008 are as follows:

 
| ** **                                                      | ** ** | **Investing Activities** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                      | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| ** **                                                      | ** ** | **(In thousands)**       | ** ** |
| Capital  expenditures                                           |       | $                        | 20,976     |   | $ | 14,792 |   |
| Acquisitions and  equity investments                            |       | —                   |       | 600,309 |   |
| Net expenditures  for disposal of property, plant and equipment |       | 42                       |       | 33 |   |
| Total                                                           |       | $                        | 21,018     |   | $ | 615,134 |   |

 

In the threemonths ended March 31, 2008, Buckeye expended $443.5 million for Lodi Gas,$142.9 million for Farm & Home, and $13.9 million for the acquisitionsof terminals in Niles, Michigan and Ferrysburg, Michigan.

 

Capital expenditures are summarized below (net ofamounts accrued at March 31, 2009 and 2008):

 

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| ** **                       | ** ** | **Capital Expenditures**                      | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **For the Three Months Ended March 31,** | ** ** |
| ** **                       | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| ** **                       | ** ** | **(In  thousands)**                           | ** ** |
| Sustaining  capital expenditures |       | $                                             | (4,883     | ) | $ | (3,262 | ) |
| Expansion and  cost reduction    |       | (14,571                                       | )          | (11,530 | ) |
| Total                            |       | $                                             | (19,454    | ) | $ | (14,792 | ) |

 

Buckeye incurred $4.9million and $3.3 million of sustaining capital expenditures and $14.6 millionand $11.5 million of expansion and cost reduction expenditures in the firstthree months of 2009 and 2008, respectively. Expansion and cost reduction projects in 2009 included a natural gasstorage expansion project known as Kirby Hills Phase II, as well as ethanol andbutane blending projects at certain of the terminals as well as theconstruction of three additional tanks with capacity of 0.4 million barrels in Linden,New Jersey.  In 2008, expansion and costreduction projects included ethanol and butane blending projects and additionaltanks at Linden, New Jersey.

 

Buckeye expects to spend approximately $95.0 millionto $120.0 million in capital expenditures in 2009, of which approximately $20.0million to $30.0 million is expected to relate to sustaining capitalexpenditures and $75.0 million to $90.0 million is expected to relate toexpansion and cost reduction projects. Sustaining capital expenditures include renewals and replacement of tankfloors and roofs and upgrades to station and terminalling equipment, fieldinstrumentation and cathodic protection systems.  Major expansion and cost reductionexpenditures in 2009 will include the completion of an expansion project known as Kirby Hills Phase II, the completion ofthe construction of additional product storage tanks at Linden, New Jersey andthe construction of a 4.7 mile pipeline in central Connecticut to connectBuckeye’s pipeline in Connecticut to a third party’s electric generation plantwhich is currently under construction.

 

*Cash Flows from Financing Activities*

* *

BGH did not borrowany amounts under the BGH Credit Agreement in the first three months of 2009 orthe first three months of 2008.  BGH’sdistributions to its unitholders totaled $9.3 million and $8.1 million in thefirst three months of 2009 and 2008, respectively.

 

On March 31,2009, Buckeye issued 2.6 million LP Units in an underwritten public offering at$35.08 per LP Unit. Total proceeds from the offering, after underwriter’sdiscount of $1.17 per LP Unit and offering expenses, were approximately $91.0million, and were used to reduce amounts outstanding under the Credit Facility.

 

During the first threemonths of 2009 and 2008, Buckeye borrowed $30.0 million and $576.1 millionunder its Credit Facility, respectively, and repaid $120.3 million and $138.0million, respectively.  Buckeye repaid$46.0 million under the BES Credit Agreement during the three months ended March 31,2009 and $3.2 million under a line of credit that was in place prior to the BESCredit Agreement during the three months ended March 31, 2008.

 

Distributions tonon-controlling interests, consisting primarily of Buckeye’s distributions toholders of its LP Units, were $41.9 million in the first three months of 2009compared to $37.3 million in the first three months of 2008.  The increase in distributions resulted fromincreases in the unit distribution rate and the issuance of 2.6 million LPUnits in March 2008.

 

OTHER MATTERS

 

Accounting Pronouncement

 

See Note 16 to BGH’scondensed consolidated financial statements for a description of a recentaccounting pronouncement.

 

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Forward-Looking Information

 

The information contained above in this Management’sDiscussion and Analysis and elsewhere in this Form 10-Q includes“forward-looking statements.”  Suchstatements use forward-looking words such as “anticipate,” “continue,”“estimate,” “expect,” “may,” “believe,” “will,” or other similar words,although some forward-looking statements are expressed differently.  These statements discuss future expectationsand contain projections.  Specificfactors that could cause actual results to differ from those in theforward-looking statements include, but are not limited to:(1) BGH’s ability to paydistributions to its unitholders; (2) BGH’s expected receipt ofdistributions and incentive distributions from Buckeye; (3) anticipatedtrends in Buckeye’s business; (4) price trends and overall demand forrefined petroleum products and natural gas in the United States in general andin Buckeye’s service areas in particular (economic activity, weather,alternative energy sources, conservation and technological advances may affectprice trends and demands); (5) competitive pressures from othertransportation services or alternative fuel sources; (6) changes, if any,in laws and regulations, including, among others, safety, environmental, taxand accounting matters or Federal Energy Regulatory Commission regulation ofBuckeye’s tariff rates; (7) liability for environmental claims; (8) nonpaymentor nonperformance by Buckeye’s customers; (9) security issues affectingBuckeye’s assets, including, among others, potential damage to its assetscaused by vandalism, acts of war or terrorism; (10) construction costs,unanticipated capital expenditures and operating expenses to repair or replaceBuckeye’s assets; (11) availability and cost of insurance on BGH’s andBuckeye’s assets and operations; (12) Buckeye’s ability to successfullyidentify and complete strategic acquisitions and make cost saving changes inoperations; (13) expansion in the operations of Buckeye’s competitors;(14) Buckeye’s ability to integrate any acquired operations into itsexisting operations and to realize anticipated cost savings and efficiencies;(15) shut-downs or cutbacks at major refineries that use Buckeye’sservices; (16) deterioration in Buckeye’s labor relations;(17) regional economic conditions; (18) changes in real property taxassessments; (19) disruptions to the air travel system; (20) interestrate fluctuations and other capital market conditions; (21) BGH’s futureresults of operations; (22) BGH’s liquidity and ability to finance itsactivities; (23) market conditions in Buckeye’s industry;(24) conflicts of interest between Buckeye, its general partner and BGH;(25) the treatment of Buckeye or BGH as a corporation for federal incometax purposes or if BGH or Buckeye become subject to entity-level taxation forstate tax purposes; and (26) the impact of governmental legislation andregulation on BGH and Buckeye.

 

These factors are notnecessarily all of the important factors that could cause actual results todiffer materially from those expressed in any of our forward-lookingstatements.  Other unknown orunpredictable factors could also have material adverse effects on 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 consideringforward-looking statements, you should keep in mind the risk factors and othercautionary statements in BGH’s Annual Report on Form 10-K for 2008,including those described in the “Risk Factors” section of that report.  Further, we undertake no obligation to updatepublicly any forward-looking statement whether as a result of new informationor future events.

 

Item 3. Quantitative andQualitative Disclosures About Market Risk

 

Market Risk — Trading Instruments

 

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

 

Market Risk — Non-Trading Instruments

 

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

 

*Commodity Risk*

 

The Energy Servicessegment primarily uses exchange-traded petroleum futures contracts to managethe risk of market price volatility on its refined petroleum productinventories and its fixed-price sales contracts. The derivative contracts usedto hedge refined petroleum product inventories are designated as fair valuehedges.  Accordingly, Buckeye’s method ofmeasuring ineffectiveness will compare the changes in the fair value of the NewYork Mercantile 

 

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Exchange futurescontracts to the change in fair value of Buckeye’s hedged fuel inventory. Any difference between the amounts will be considered ineffectiveness andrecorded in current period earnings.

 

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

 

As of March 31,2009, the Energy Services segment had commodity derivative assets andliabilities as follows:

 
| ** **                                         | ** ** | **March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **2009**           | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| **Assets:**                                        |       |               |       |
| Fixed-price  sales contracts                       |       | $                  | 45,767     |   |
| Futures  contracts for inventory                   |       | 3,858              |       |
|                                               |       |               |       |
| **Liability:**                                     | ** ** | ** **         | ** ** |
| Futures  contracts for fixed-price sales contracts |       | (24,883            | )          |
|                                               |       |               |       |
| Total                                              |       | $                  | 24,742     |   |

 

Substantiallyall of the unrealized gain of $3.9 million at March 31, 2009 for inventoryhedges represented by futures contracts will be realized in the second quarterof 2009 as the related inventory is sold. Gains recorded on inventory hedges that were ineffective wereapproximately $4.3 million for the three months ended March 31, 2009.  As of March 31, 2009, open petroleumderivative contracts (represented by the fixed-price sales contracts andfutures contracts for fixed-price sales contracts noted above) varied induration, but did not extend beyond August 2010.  In addition, at March 31, 2009, Buckeyehad refined product inventories which it intends to use to satisfy a portion ofthe fixed-price sales contracts.

 

Based ona hypothetical 10% movement in the underlying quoted market prices of thecommodity financial instruments outstanding at the dates indicated in thefollowing table, the estimated fair value of portfolio of commodity financialinstruments would be 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              |       | $                  | 24,742     |   |
| Fair value  assuming 10% INCREASE in underlying commodity prices      |       | Asset              |       | $                  | 18,738     |   |
| Fair value  assuming 10% DECREASE in underlying commodity prices      |       | Asset              |       | $                  | 32,378     |   |

 

*InterestRate Risk*

 

Buckeye is exposedto risk resulting from changes in interest rates.  Buckeye does not have material foreignexchange risk.  Buckeye is exposed tofair value risk with respect to the fixed-rate portion of its financingarrangements (the 5.125% Notes, the 5.300% Notes, the 4.625% Notes, the 6.75%Notes and 6.05% Notes) and to cash flow risk with respect to its variable rateobligations (the Credit Facility and the BES Credit Agreement).  Fair value risk represents the risk that thevalue of the fixed portion of Buckeye’s financing arrangements will rise orfall depending on changes in interest rates. 

 

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Cash flow risk representsthe risk that interest costs related to the Credit Facility and the BES CreditAgreement will rise or fall depending on changes in interest rates.

 

At March 31,2009, Buckeye had total fixed-rate debt obligations at face value of $1,150.0million, consisting of $125.0 million of the 5.125% Notes, $275.0 million ofthe 5.300% Notes, $300.0 million of the 4.625% Notes, $150.0 million of the6.75% Notes and $300.0 million of the 6.05% Notes.  The fair value of these obligations at March 31,2009 was approximately $1,012.1 million. Buckeye estimates that a 1% decrease in rates for obligations of similarmaturities would increase the fair value of its fixed-rate debt obligations by$58.9 million. Buckeye’s variable debt obligation was $208.0 million under theCredit Facility and $50.0 million under the BES Credit Agreement at March 31,2009.  Based on the balances outstandingat March 31, 2009, a 1% increase or decrease in interest rates wouldincrease or decrease annual interest expense by $2.6 million.

 

Item 4. Controls and Procedures

 

(a)       Evaluation of Disclosure Controls andProcedures.

 

The management of MainLine Management, with theparticipation of its Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of its disclosure controls and procedures for BGHas of the end of the period covered by this report.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that MainLine Management’sdisclosure controls and procedures for BGH as of the end of the period coveredby this report are operating effectively to provide reasonable assurance thatthe information required to be disclosed by MainLine Management in reportsfiled on behalf of BGH 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 Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.  A controls system cannot provide absoluteassurance, however, that the objectives of the controls system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected.

 

(b)       Changesin Internal Control over Financial Reporting

 

There have been no changes inMainLine Management’s internal control over financial reporting for BGHoccurred during the most recent fiscal quarter with respect to BGH’s operationsthat has materially affected, or is reasonably likely to materially affect,management’s internal control over financial reporting for BGH.

 

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PART II— OTHER INFORMATION

 

Item1. Legal Proceedings

 

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 acting on behalf of the Illinois Environmental ProtectionAgency. The complaint alleges that Buckeye violated various Illinois stateenvironmental laws in connection with a product release from Buckeye’s terminallocated in Harristown, Illinois on or about June 11, 2006 and variousother product releases from Buckeye’s terminals and pipelines in the State ofIllinois during the period of 2001 through 2006. The complaint seeks to recoverstate oversight costs, damages, and civil penalties and seeks injunctive actionrequiring Buckeye to remediate the environmental contamination resulting fromthe product releases. Buckeye believes it has meritorious defenses to theallegations set forth in the complaint.

 

Item 6. Exhibits

 

(a) Exhibits

 

10.1 Severance Agreement,dated as of February 17, 2009, by and among Buckeye Partners, L.P.,Buckeye Pipe Line Services Company and Clark C. Smith (incorporated byreference to Exhibit 10.1 to Buckeye Partners, L.P.’s Current Report on Form 8-Kfiled on February 17, 2009).

 

10.2  Buckeye Partners, L.P. Annual IncentiveCompensation Plan (incorporated by reference to Exhibit 10.1 to BuckeyePartners, L.P.’s Current Report on Form 8-K filed on March 18, 2009).

 

10.3  Buckeye Partners, L.P. 2009 Long-Term IncentivePlan (incorporated by reference to Exhibit 10.3 to Buckeye Partners, L.P.’sQuarterly Report on Form 10-Q for the quarterly period ended March 31,2009 filed on May 6, 2009).

 

31.1 Certification ofChief Executive Officer pursuant to Rule 13a-14(a) under theSecurities Exchange Act of 1934.

 

31.2 Certification ofChief Financial Officer pursuant to Rule 13a-14(a) under theSecurities Exchange Act of 1934.

 

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

 

32.2 Certification ofChief 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: May 8, 2009 | By:                          | KEITH E. ST.CLAIR           |
|                   |                         | Keith E. St.Clair           |   |
|                   |                         | Chief Financial Officer     |   |
| * *               |                         | *(Principal Accounting and* |   |
| * *               |                         | *Financial  Officer)*       |   |
|                        |                              |                             |  |  |

 

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