Table ofContents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

** **
| **x** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended September 30,2009 or**

** **
| **o** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

** **

**For the transition period from               to               **

** **

**Commissionfile number 001-32963**

** **

**BUCKEYE GP HOLDINGS L.P.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **11-3776228**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | IRS Employer        |
| incorporation or organization)           |       | Identification No.) |
|                                     |       |                |
| **One Greenway Plaza**                   | ** ** | ** **          |
| **Suite 600**                       | ** ** | ** **          |
| **Houston, TX**                          | ** ** | **77046**           |
| (Address of principal executive offices) |       | (Zip Code)          |

 

**(832) 615-8600**

(Registrant’sTelephone Number, Including Area Code)

 

**NotApplicable**

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

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (**§**232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes** **o**  **No o

 

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

 

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

 

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

** **

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

 

 

 

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Table of Contents

 

**BUCKEYEGP HOLDINGS L.P.**

**INDEX**

 
| ** **                          | ** **                                                                                                                        | **Page** |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I-  FINANCIAL INFORMATION |                                                                                                                              |
|                                |                                                                                                                              |     |
| Item 1.                             | Condensed Consolidated  Financial Statements (Unaudited)                                                                          |     |
|                                |                                                                                                                              |     |
|                                | Condensed Consolidated Statements of Operations for  the Three and Nine Months Ended September 30, 2009 and 2008             | 3        |
|                                |                                                                                                                              |     |
|                                | Condensed Consolidated Balance Sheets as of  September 30, 2009 and December 31, 2008                                   | 4        |
|                                |                                                                                                                              |     |
|                                | Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2009 and 2008                       | 5        |
|                                |                                                                                                                              |     |
|                                | Condensed Consolidated Statement of Changes in  Partners’ Capital for the Nine Months Ended September 30, 2009 and 2008 | 6        |
|                                |                                                                                                                              |     |
|                                | Notes to Condensed Consolidated Financial Statements                                                                              | 7        |
|                                |                                                                                                                              |     |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       | 32       |
|                                |                                                                                                                              |     |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                       | 50       |
|                                |                                                                                                                              |     |
| Item 4.                             | Controls and  Procedures                                                                                                          | 51       |
|                                |                                                                                                                              |     |
| PART II-  OTHER INFORMATION    |                                                                                                                              |
|                                |                                                                                                                              |
| Item 1.                             | Legal Proceedings                                                                                                                 | 52       |
|                                |                                                                                                                              |     |
| Item 1A.                            | Risk Factors                                                                                                                      | 52       |
|                                |                                                                                                                              |     |
| Item 6                              | Exhibits                                                                                                                          | 52       |

 

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Table of Contents

 

PART I - FINANCIALINFORMATION

 

Item 1. CondensedConsolidated Financial Statements (Unaudited)

 

**BUCKEYEGP HOLDINGS L.P.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| **Revenues:**                                             |       |                   |       |                   |       |   |   |   |   |
| Product sales                                             |       | $                      | 258,188    |                   | $          | 345,729 |   | $ | 728,744 |   | $ | 933,211 |   |
| Transportation and other services                         |       | 165,256                |       | 150,441                |       | 462,760 |   | 435,783 |   |
| Total revenue                                             |       | 423,444                |       | 496,170                |       | 1,191,504 |   | 1,368,994 |   |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| **Costs and expenses:**                                   |       |                   |       |                   |       |   |   |   |   |
| Cost of product sales and natural gas storage  services   |       | 258,507                |       | 334,959                |       | 702,623 |   | 913,163 |   |
| Operating expenses                                        |       | 66,100                 |       | 73,203                 |       | 208,842 |   | 209,484 |   |
| Depreciation and amortization                             |       | 13,138                 |       | 14,342                 |       | 40,061 |   | 38,067 |   |
| Asset impairment expense                                  |       | —                 |       | —                 |       | 72,540 |   | — |   |
| General and administrative                                |       | 9,814                  |       | 10,415                 |       | 30,007 |   | 31,949 |   |
| Reorganization expense                                    |       | 996                    |       | —                 |       | 29,109 |   | — |   |
| Total costs and expenses                                  |       | 348,555                |       | 432,919                |       | 1,083,182 |   | 1,192,663 |   |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| Operating income                                          |       | 74,889                 |       | 63,251                 |       | 108,322 |   | 176,331 |   |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| **Other income (expense):**                               |       |                   |       |                   |       |   |   |   |   |
| Investment income                                         |       | 65                     |       | 293                    |       | 359 |   | 1,144 |   |
| Interest and debt expense                                 |       | (20,391                | )          | (19,243                | )          | (54,030 | ) | (55,691 | ) |
| Total other expense                                       |       | (20,326                | )          | (18,950                | )          | (53,671 | ) | (54,547 | ) |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| Income before equity income                               |       | 54,563                 |       | 44,301                 |       | 54,651 |   | 121,784 |   |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| Equity income                                             |       | 3,807                  |       | 2,404                  |       | 9,031 |   | 5,803 |   |
| Net income                                                |       | 58,370                 |       | 46,705                 |       | 63,682 |   | 127,587 |   |
| Less: net income attributable to noncontrolling  interest |       | (47,275                | )          | (39,471                | )          | (32,666 | ) | (109,187 | ) |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| **Net income attributable to Buckeye  GP Holdings L.P.**  |       | $                      | 11,095     |                   | $          | 7,234 |   | $ | 31,016 |   | $ | 18,400 |   |
| ** **                                                |       |                   |       |                   |       |   |   |   |   |
| Net income per partnership unit:                          |       |                   |       |                   |       |   |   |   |   |
| Basic                                                     |       | $                      | 0.39       |                   | $          | 0.26 |   | $ | 1.10 |   | $ | 0.65 |   |
| Diluted                                                   |       | $                      | 0.39       |                   | $          | 0.26 |   | $ | 1.10 |   | $ | 0.65 |   |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| Weighted average number of common units  outstanding:     |       |                   |       |                   |       |   |   |   |   |
| Basic                                                     |       | 28,300                 |       | 28,300                 |       | 28,300 |   | 28,300 |   |
| Diluted                                                   |       | 28,300                 |       | 28,300                 |       | 28,300 |   | 28,300 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**BUCKEYEGP HOLDINGS L.P.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets:**                                                                                                       |       |                   |       |                  |       |
| Current  assets:                                                                                                  |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                        |       | $                      | 29,915     |                  | $          | 61,281 |   |
| Trade  receivables, net                                                                                           |       | 88,397                 |       | 79,969                |       |
| Construction  and pipeline relocation receivables                                                                 |       | 12,107                 |       | 21,501                |       |
| Inventories                                                                                                       |       | 227,414                |       | 84,229                |       |
| Derivative  assets                                                                                                |       | 17,402                 |       | 97,375                |       |
| Prepaid  and other current assets                                                                                 |       | 99,423                 |       | 75,406                |       |
| Total  current assets                                                                                             |       | 474,658                |       | 419,761               |       |
|                                                                                                              |       |                   |       |                  |       |
| Property  , plant and equipment, net                                                                              |       | 2,179,971              |       | 2,241,612             |       |
| Equity  investments                                                                                               |       | 98,729                 |       | 90,110                |       |
| Goodwill                                                                                                          |       | 432,170                |       | 433,892               |       |
| Intangible  assets, net                                                                                           |       | 41,461                 |       | 44,114                |       |
| Other  non-current assets                                                                                         |       | 43,446                 |       | 33,608                |       |
| Total  assets                                                                                                     |       | $                      | 3,270,435  |                  | $          | 3,263,097 |   |
|                                                                                                              |       |                   |       |                  |       |
| **Liabilities and partners’ capital:**                                                                       |       |                   |       |                  |       |
| Current  liabilities:                                                                                             |       |                   |       |                  |       |
| Line  of credit                                                                                                   |       | $                      | 149,600    |                  | $          | 96,000 |   |
| Current  portion of long-term debt                                                                                |       | 6,208                  |       | 6,294                 |       |
| Accounts  payable                                                                                                 |       | 36,528                 |       | 42,098                |       |
| Derivative  liabilities                                                                                           |       | 12,173                 |       | 48,623                |       |
| Accrued  and other current liabilities                                                                            |       | 123,426                |       | 116,464               |       |
| Total  current liabilities                                                                                        |       | 327,935                |       | 309,479               |       |
|                                                                                                              |       |                   |       |                  |       |
| Long-term  debt                                                                                                   |       | 1,423,923              |       | 1,453,425             |       |
| Other  non-current liabilities                                                                                    |       | 105,226                |       | 101,359               |       |
| Total  liabilities                                                                                                |       | 1,857,084              |       | 1,864,263             |       |
|                                                                                                              |       |                   |       |                  |       |
| Commitments  and contingent liabilities                                                                           |       | —                 |       | —                |       |
|                                                                                                              |       |                   |       |                  |       |
| **Buckeye GP Holdings L.P. capital:**                                                                             |       |                   |       |                  |       |
| General  Partner (2,830 common units outstanding as of September 30, 2009 and  December 31, 2008)       |       | 7                      |       | 7                     |       |
| Limited  Partners (27,766,817 common units outstanding as of September 30, 2009  and December 31, 2008) |       | 228,812                |       | 226,565               |       |
| Management  Units (530,353 units outstanding as of September 30, 2009 and  December 31, 2008)           |       | 3,080                  |       | 3,037                 |       |
| Equity  gains on issuance of Buckeye Partners, L.P. limited partner units                                         |       | 2,557                  |       | 2,451                 |       |
| Total  Buckeye GP Holdings L.P. capital                                                                           |       | 234,456                |       | 232,060               |       |
| Noncontrolling  interest                                                                                          |       | 1,178,895              |       | 1,166,774             |       |
| Total  partners’ capital                                                                                     |       | 1,413,351              |       | 1,398,834             |       |
| Total  liabilities and partners’ capital                                                                     |       | $                      | 3,270,435  |                  | $          | 3,263,097 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **September 30,** | ** ** |
| ** **                                                                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Cash flows from operating  activities:**                                             |       |                   |       |   |   |
| Net income                                                                             |       | $                      | 63,682     |   | $ | 127,587 |   |
| **Adjustments to reconcile net  income to net cash provided by operating activities:** |       |                   |       |   |   |
| Value of ESOP shares released                                                          |       | 768                    |       | 2,119 |   |
| Depreciation and amortization                                                          |       | 40,061                 |       | 38,067 |   |
| Asset impairment expense                                                               |       | 72,540                 |       | — |   |
| Net changes in fair value of derivatives                                               |       | (5,632                 | )          | — |   |
| Non-cash deferred lease expense                                                        |       | 3,375                  |       | 3,065 |   |
| Earnings from equity investments of Buckeye  Partners, L.P.                            |       | (9,031                 | )          | (5,802 | ) |
| Distributions from equity investments of Buckeye  Partners, L.P.                       |       | 4,281                  |       | 4,120 |   |
| Amortization of other non-cash items                                                   |       | 4,765                  |       | 4,130 |   |
| **Change in assets and liabilities,  net of amounts related to acquisitions:**         |       |                   |       |   |   |
| Trade receivables                                                                      |       | (8,428                 | )          | 5,556 |   |
| Construction and pipeline relocation receivables                                       |       | 9,394                  |       | (4,537 | ) |
| Inventories                                                                            |       | (90,579                | )          | (8,288 | ) |
| Prepaid and other current assets                                                       |       | (19,804                | )          | (37,104 | ) |
| Accounts payable                                                                       |       | (2,308                 | )          | (1,356 | ) |
| Accrued and other current liabilities                                                  |       | 8,196                  |       | 52,506 |   |
| Other non-current assets                                                               |       | (21,069                | )          | 1,380 |   |
| Other non-current liabilities                                                          |       | 14,469                 |       | (2,895 | ) |
| Total adjustments from operating activities                                            |       | 998                    |       | 50,961 |   |
| Net cash provided by operating activities                                              |       | 64,680                 |       | 178,548 |   |
|                                                                                   |       |                   |       |   |   |
| **Cash flows from investing  activities:**                                             |       |                   |       |   |   |
| Capital expenditures                                                                   |       | (58,803                | )          | (67,890 | ) |
| Acquisitions and equity investments, net of cash  acquired                             |       | (3,880                 | )          | (660,252 | ) |
| Net proceeds (expenditures) for disposal of  property, plant and equipment             |       | 1,248                  |       | (513 | ) |
| Proceeds from sale of discontinued operations                                          |       | —                 |       | 52,584 |   |
| Net cash used in investing activities                                                  |       | (61,435                | )          | (676,071 | ) |
|                                                                                   |       |                   |       |   |   |
| **Cash flows from financing  activities:**                                             |       |                   |       |   |   |
| Net proceeds from issuance of Buckeye Partners,  L.P. limited partner units            |       | 104,633                |       | 113,111 |   |
| Proceeds from exercise of Buckeye Partners, L.P.  units options                        |       | 1,901                  |       | 316 |   |
| Proceeds from issuance of long-term debt                                               |       | 273,210                |       | 298,050 |   |
| Borrowings under credit facilities                                                     |       | 348,320                |       | 502,000 |   |
| Repayments under credit facilities, net                                                |       | (597,717               | )          | (253,699 | ) |
| Debt issuance costs                                                                    |       | (2,138                 | )          | (1,886 | ) |
| Distributions to noncontrolling partners of Buckeye  Partners, L.P.                    |       | (133,104               | )          | (118,093 | ) |
| Settlement payment of interest rate swaps                                              |       | —                 |       | (9,638 | ) |
| Distributions to limited partners                                                      |       | (29,716                | )          | (25,327 | ) |
| Net cash provided by (used in) financing activities                                    |       | (34,611                | )          | 504,834 |   |
| Net increase (decrease) in cash and cash  equivalents                                  |       | (31,366                | )          | 7,311 |   |
| Cash and cash equivalents—Beginning of year                                       |       | 61,281                 |       | 94,486 |   |
| Cash and cash equivalents—End of period                                           |       | $                      | 29,915     |   | $ | 101,797 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**CONDENSED CONSOLIDATED STATEMENTOF PARTNERS’ CAPITAL**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Buckeye GP Holdings L.P. unitholders** | ** ** | ** **   | ** ** | ** **     | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **   | ** ** | ** **     | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **                               | ** ** | ** **   | ** ** | ** **     | ** ** | **Gains on** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **General**                              | ** ** | **Limited**  | ** ** | ** **     | ** ** | **Issuance of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **Partner**                              | ** ** | **Partners** | ** ** | ** **     | ** ** | **Buckeye’s** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **Common**                               | ** ** | **Common**   | ** ** | **Management** | ** ** | **Limited** | ** ** | **Noncontrolling** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **Units**                                | ** ** | **Units**    | ** ** | **Units**      | ** ** | **Partner Units** | ** ** | **Interest** | ** ** | **Total** | ** ** |
| **Partners’ capital -  January 1, 2008**                                 |       | $                                        | 7          |         | $          | 232,928        |       | $ | 3,156 |   | $ | 2,239 |   | $ | 1,066,143 |   | $ | 1,304,473 |   |
| Net income*                                                                        |       | —                                   |       | 18,056       |       | 344            |       | — |   | 109,187 |   | 127,587 |   |
| Distributions to Limited Partner - Common Units                                    |       | —                                   |       | (24,853      | )          | (474           | )          | — |   | — |   | (25,327 | ) |
| Recognition of unit-based compensation charges                                     |       | —                                   |       | 1,026        |       | 20             |       | — |   | — |   | 1,046 |   |
| Equity gains on issuance of Buckeye’s limited  partner units                  |       | —                                   |       | —       |       | —         |       | 212 |   | (212 | ) | — |   |
| Net proceeds from issuance of 2.6 million of Buckeye’s  limited partner units |       |  

—                           |       | —       |       | —         |       | — |   | 113,111 |   | 113,111 |   |
| Amortization of Buckeye’s limited partner unit  options                       |       | —                                   |       | —       |       | —         |       | — |   | 380 |   | 380 |   |
| Exercise of limited partner unit options                                           |       | —                                   |       | —       |       | —         |       | — |   | 316 |   | 316 |   |
| Services Company’s non-cash ESOP distributions                                |       | —                                   |       | —       |       | —         |       | — |   | (4,199 | ) | (4,199 | ) |
| Acquired noncontrolling interest not previously  owned                             |       | —                                   |       | —       |       | —         |       | — |   | (1,539 | ) | (1,539 | ) |
| Distributions to noncontrolling interest                                           |       | —                                   |       | —       |       | —         |       | — |   | (118,093 | ) | (118,093 | ) |
| Other                                                                              |       | —                                   |       | —       |       | —         |       | — |   | 3,923 |   | 3,923 |   |
| **Partners’ capital -  September 30, 2008**                              |       | $                                        | 7          |         | $          | 227,157        |       | $ | 3,046 |   | $ | 2,451 |   | $ | 1,169,017 |   | $ | 1,401,678 |   |
|                                                                               |       |                                     |       |         |       |           |       |   |   |   |   |   |   |
| **Partners’ capital -  January 1, 2009**                                 |       | $                                        | 7          |         | $          | 226,565        |       | $ | 3,037 |   | $ | 2,451 |   | $ | 1,166,774 |   | $ | 1,398,834 |   |
| Net income*                                                                        |       | —                                   |       | 30,434       |       | 582            |       | — |   | 32,666 |   | 63,682 |   |
| Distributions to Limited Partner - Common Units                                    |       | —                                   |       | (29,159      | )          | (557           | )          | — |   | — |   | (29,716 | ) |
| Recognition of unit-based compensation charges                                     |       | —                                   |       | 972          |       | 18             |       | — |   | — |   | 990 |   |
| Equity gains on issuance of Buckeye’s limited  partner units                  |       | —                                   |       | —       |       | —         |       | 106 |   | (106 | ) | — |   |
| Net proceeds from issuance of 3.0 million of Buckeye’s  limited partner units |       | —                                   |       | —       |       | —         |       | — |   | 104,633 |   | 104,633 |   |
| Amortization of Buckeye’s limited partner unit  options                       |       | —                                   |       | —       |       | —         |       | — |   | 1,210 |   | 1,210 |   |
| Exercise of limited partner unit options                                           |       | —                                   |       | —       |       | —         |       | — |   | 1,901 |   | 1,901 |   |
| Services Company’s non-cash ESOP distributions                                |       | —                                   |       | —       |       | —         |       | — |   | (4,740 | ) | (4,740 | ) |
| Distributions to noncontrolling interest                                           |       | —                                   |       | —       |       | —         |       | — |   | (133,104 | ) | (133,104 | ) |
| Benefit plans settlement/curtailment charge                                        |       | —                                   |       | —       |       | —         |       | — |   | 6,400 |   | 6,400 |   |
| Other                                                                              |       | —                                   |       | —       |       | —         |       | — |   | 3,261 |   | 3,261 |   |
| **Partners’ capital -  September 30, 2009**                              |       | $                                        | 7          |         | $          | 228,812        |       | $ | 3,080 |   | $ | 2,557 |   | $ | 1,178,895 |   | $ | 1,413,351 |   |

 

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* Comprehensive income equals net income.

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

1.     BASIS OF PRESENTATION

 

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 publicly traded (NYSE: BPL)master limited partnership that was organized in 1986 under the laws of thestate of Delaware.  Approximately 62% ofBGH’s limited partner units are owned by BGH GP Holdings, LLC (“BGH GP”) andapproximately 38% by the public. BGH GP is owned by affiliates of ArcLightCapital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”), andcertain investment funds along with certain members of senior management ofBuckeye GP.  MainLine Management LLC, aDelaware limited liability company (“MainLine Management”), is the generalpartner of BGH, and is wholly owned by BGH GP. BGH’s only business is theownership of Buckeye GP.  Buckeye GP’sonly business is the management of Buckeye and its subsidiaries. At September 30,2009, Buckeye GP owned an approximately 0.5% general partner interest inBuckeye. Buckeye operates and reports in five business segments: PipelineOperations; Terminalling and Storage; Natural Gas Storage; Energy Services; andOther Operations.  See Note 19 for a moredetailed discussion of Buckeye’s business segments.

 

Buckeye Pipe LineServices Company (“Services Company”) was formed in 1996 in connection with theestablishment of the Buckeye Pipe Line Services Company Employee StockOwnership Plan (the “ESOP”).  At September 30,2009, Services Company owned approximately 3.5% of the publicly traded limitedpartner units of Buckeye (the “LP Units”). Services Company employees provide services to the operatingsubsidiaries through which Buckeye conducts its operations.  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 Buckeye GP’sfour highest salaried officers in return for an annual fixed payment from BGHto Buckeye of $3.6 million.

 

BGH has determined that Services Company is a variableinterest entity, and Buckeye GP is the primary beneficiary of Services Company,although 100% of the equity interest of Services Company is owned by theESOP.  Accordingly, Services Company hasbeen consolidated in the financial statements of BGH.

 

BGH’s condensedconsolidated balance sheet includes a noncontrolling capital account thatreflects the portion of Buckeye owned by its partners other than BGH andServices Company.  Similarly, BGH’scondensed consolidated statements of operations include income attributable tononcontrolling interest that reflects the portion of the earnings due toBuckeye’s partners other than BGH and Services Company. BGH has determined thatconsolidation of Buckeye into BGH’s financial statements is appropriate, as BGHindirectly controls Buckeye through its ownership of Buckeye GP.

 

The accompanyingunaudited condensed consolidated financial statements reflect all adjustmentsthat are, in the opinion of  management,of a normal and recurring nature and necessary for a fair statement of itsfinancial position as of September 30, 2009, and the results of itsoperations and cash flows for the periods presented. The results of operationsfor the three and nine months ended September 30, 2009 are not necessarilyindicative of results of BGH’s operations for the 2009 fiscal year. BGH hasevaluated subsequent events through November 3, 2009, the date thefinancial statements were issued. The unaudited condensed consolidatedfinancial statements have been prepared pursuant to the rules andregulations of the U.S. Securities and Exchange Commission (“SEC”). Certaininformation and note disclosures normally included in annual financialstatements prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”) have been condensed or omitted pursuant to those rules andregulations. These interim financial statements should be read in conjunctionwith BGH’s consolidated financial statements and notes thereto presented in BGH’sAnnual Report on Form 10-K for the year ended December 31, 2008, asfiled with the SEC on March 16, 2009.

 

Certainprior year amounts have been reclassified in the statement of cash flows toconform to the current-year presentation.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

*RecentAccounting Developments*

 

On July 1, 2009, theFinancial Accounting Standards Board (“FASB”) established the AccountingStandards Codification (“ASC”) that has been codified under FASB ASC Topic 105,“Generally Accepted Accounting Principles,” as the single source forauthoritative nongovernmental GAAP. The ASC replaces other sources ofauthoritative GAAP with the exception of rules and interpretive releasesof the SEC, which will continue to be authoritative. The issuance of thisguidance is not intended to significantly change GAAP, but it requires ASCcitations in place of references to previous authoritative accountingliterature, except when such literature has not yet been incorporated into theASC. Following the issuance of the ASC, the FASB announced that it will nolonger issue new standards in the form of Statements, FASB Staff Positions orEmerging Issues Task Force Abstracts. Instead, it is FASB’s intent to issueAccounting Standards Updates (“ASU”). The FASB does not consider ASUs asauthoritative in their own rights. ASUs will serve only to update the ASC,provide background information about the guidance and provide the bases forconclusions on the change(s) in the ASC.

 

On January 1,2009, BGH adopted the guidance that has been codified under FASB ASC Topic 810,“Consolidations,” which established accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  These accounting andreporting 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 statements of operationsand condensed consolidated statements of partners’ capital.

 

On January 1,2009, BGH adopted the guidance that has been codified under FASB ASC Topic 815,“Derivatives and Hedging,” and has included the required enhanced qualitativeand quantitative disclosure requirements regarding derivative instruments inNote 11.

 

In April 2009,the FASB addressed the initial recognition, measurement and subsequentaccounting for assets and liabilities arising from contingencies in a businesscombination, and required that such assets acquired or liabilities assumed beinitially recognized at fair value at the acquisition date if fair value can bedetermined during the measurement period. If the acquisition-date fair valuecannot be determined, the asset acquired or liability assumed arising from acontingency is recognized only if certain criteria are met.  The guidance, codified under FASB ASC Topic805, “Business Combinations,” also required that a systematic and rationalbasis for subsequently measuring and accounting for such assets or liabilitiesbe developed depending on their nature. This guidance is effective for assetsor liabilities arising from contingencies in business combinations foracquisitions that are consummated on or after January 1, 2009.

 

In June 2009,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.166, “Accountingfor Transfers of Financial Assets — an Amendment of FASB Statement No. 140”(“SFAS 166”) (not yet integrated into the ASC). The objective of SFAS 166 is to improve the relevance, representationalfaithfulness, and comparability of the information that a reporting entityprovides in its financial statements about a transfer of financial assets; theeffects of a transfer on its financial position, financial performance, andcash flows; and a transferor’s continuing involvement, if any, in transferredfinancial assets.  SFAS 166 is effectiveas of the beginning of each reporting entity’s first annual reporting periodthat begins after November 15, 2009, for interim periods within that firstannual reporting period and for interim and annual reporting periodsthereafter. BGH is currently evaluating the impact the adoption ofSFAS 166 will have on its condensed consolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

In June 2009, the FASB issued SFAS No. 167, “Amendments toFASB Interpretation No. 46(R)” (“SFAS 167”) (not yet integrated into the ASC).  Theobjective of SFAS 167 is to improve financial reporting by companies involvedwith variable interest entities.  SFAS167 will require companies to perform an analysis to determine whether thecompanies’ variable interest or interests give it a controlling financialinterest in a variable interest entity. SFAS 167 is effective as of the beginning of each reporting company’sfirst annual reporting period that begins after November 15, 2009, forinterim periods within that first annual reporting period, and for interim andannual reporting periods thereafter. Earlier application is prohibited. BGH is currently evaluatingthe impact the adoption of SFAS 167 will have on its condensedconsolidated financial statements.

 

On July 1,2009, BGH adopted the guidance that has been codified under FASB ASC Topic 855,“Subsequent Events,” which establishes general standards of accounting for, anddisclosure of, events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued.  This guidance sets forth the period after thebalance sheet date during which management of a reporting entity shouldevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements, the circumstances under which an entityshould recognize events or transactions occurring after the balance sheet datein its financial statements, and the disclosures that an entity should makeabout events or transactions that occurred after the balance sheet date.

 

In August 2009,the FASB issued new guidance in the form of an ASU that has been codified underFASB ASC 820, “Fair Value Measurements and Disclosures,” that applies to themeasurement of liabilities at fair value. This new guidance provides clarification that in circumstances in whicha quoted price in an active market for an identical liability is not available,companies are required to measure fair value of the liability using one or bothof the following techniques:  (i) avaluation technique that uses the quoted price of an identical liability whentraded as an asset or quoted prices for similar liabilities or similarliabilities when traded as assets or (ii) a valuation technique consistentwith the fair value measurements guidance, such as an income approach or amarket approach.  This new guidance alsoclarifies that when estimating the fair value of a liability, companies are notrequired to include a separate input or adjustment to other inputs relating tothe existence of a restriction that prevents the transfer of a liability.  Additionally, this new guidance clarifiesthat both a quoted price in an active market for an identical liability at themeasurement date and the quoted price for an identical liability when traded asan asset in an active market when no adjustments to the quoted price of theasset are required are Level 1 fair value measurements.  This new guidance is effective for BGH forthe quarter ending December 31, 2009. BGH is currently evaluating the impact this new guidance will have onits condensed consolidated financial statements and disclosures.

 

2.  IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETSHELD FOR SALE

 

Buckeye ownsand operates an approximately 350-mile natural gas liquids pipeline (the “BuckeyeNGL Pipeline”) that runs from Wattenberg, Colorado to Bushton, Kansas. Duringthe second quarter of 2009, Buckeye received notification that several of itsshippers, which were currently using the Buckeye NGL Pipeline, intended tomigrate to a competing pipeline, which recently went into service.  This notification was accompanied by asignificant decline in shipment volumes as compared to historical averages.This loss in the customer base represented a triggering event, and animpairment evaluation resulted in a charge to earnings of $72.5 million againstthe Pipeline Operations segment.

 

In June 2009,Buckeye’s board of directors authorized management to pursue the sale of theBuckeye NGL Pipeline. Accordingly, Buckeye ceased depreciation of the assets asof July 1, 2009 and has reclassified the net assets and liabilities of theBuckeye NGL Pipeline to “Prepaid and other current assets” on the September 30,2009 condensed consolidated balance sheet, as shown in Note 4.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

The carrying amounts ofthe major classes of assets and liabilities held for sale by Buckeye NGL PipeLines LLC (“Buckeye NGL”) at September 30, 2009, were as follows (inthousands):

 
| Assets:                                |   |   |   |
|----------------------------------------|--------|--------|--------|
| Inventories                            |   | $      | 610    |   |
| Prepaid  and other current assets      |   | 1,581  |   |
| Property,  plant and equipment, net    |   | 8,639  |   |
| Assets  held for sale                  |   | 10,830 |   |
|                                   |   |   |   |
| Liabilities:                           |   |   |   |
| Accounts  payable                      |   | 3,261  |   |
| Accrued  and other current liabilities |   | 1,694  |   |
| Liabilities  held for sale             |   | 4,955  |   |
|                                   |   |   |   |
| Net  assets held for sale              |   | $      | 5,875  |   |

 

Revenues forBuckeye NGL for the three and nine months ended September 30, 2009, were$1.7 million and $8.2 million, respectively.

 

3.  REORGANIZATION

 

OnJuly 20, 2009, Buckeye announced the completion of a company-wide, “bestpractices” review.  During the periodended June 30, 2009, Buckeye commenced a restructuring of its operationsas a result of this review, including a reorganization of its field operationsto combine five of its original pipeline and terminal districts into threedistricts, as well as a restructuring of certain corporate functions andrelated corporate support functions. These efforts redefined the roles and responsibilities of certainpositions and called for the elimination of resources devoted to suchactivities.  Approximately 260 positionsare affected as a result of these restructuring activities.

 

Aspart of the restructuring efforts, Buckeye executed a reduction in forcecomprised of a Voluntary Early Retirement Plan (the “VERP”) and an involuntaryplan.  The terms of the VERP were agreedto by approximately 80 employees during the period ended June 30, 2009. Anadditional group of approximately 180 employees are being impacted by theinvoluntary reduction in workforce under Buckeye’s ongoing severance plan.  Affected employees receive severancebenefits, post-employment benefits including extended medical and dentalcoverage, and other services including retirement counseling and outplacementservices.  Most terminations wereeffective as of July 20, 2009.

 

Forthe nine months ended September 30, 2009, Buckeye recorded reorganizationexpense of $29.1 million for post-employment costs related to theserestructuring activities which include: (1) termination benefits pursuantto voluntary and involuntary severance plans of $16.7 million; (2) post-retirementbenefits (see Note 17) of $6.4 million; and (3) other related costs of$6.0 million.

 

Theexpense incurred by segment, including certain allocated amounts, for the threeand nine months ended September 30, 2009 is as follows (in thousands):

 
| ** **                | ** ** | **Three Months**       | ** ** | **Nine Months**        | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                | ** ** | **2009**               | ** ** | **2009**               | ** ** |
| Pipeline  Operations      |       | $                      | 518        |                   | $          | 23,572 |   |
| Terminalling  and Storage |       | 163                    |       | 2,565                  |       |
| Natural  Gas Storage      |       | 91                     |       | 382                    |       |
| Energy  Services          |       | 206                    |       | 1,150                  |       |
| Other  Operations         |       | 18                     |       | 1,440                  |       |
| Total                     |       | $                      | 996        |                   | $          | 29,109 |   |

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

Prepaidand other current assets consist of the following (in thousands):

* *
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Prepaid  insurance        |       | $                      | 1,864      |                  | $          | 7,889 |   |
| Insurance  receivables    |       | 10,526                 |       | 5,101                 |       |
| Ammonia  receivable       |       | 11,242                 |       | 12,058                |       |
| Margin  deposits          |       | 5,882                  |       | 32,345                |       |
| Prepaid  services         |       | 35,411                 |       | —                |       |
| Unbilled  revenue         |       | 8,871                  |       | 1,074                 |       |
| Net  assets held for sale |       | 5,875                  |       | —                |       |
| Other                     |       | 19,752                 |       | 16,939                |       |
| Total                     |       | $                      | 99,423     |                  | $          | 75,406 |   |

 

5.  INVENTORIES

 

Inventories consist of the following (in thousands):

 
| ** **                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                      | ** ** | ** **             | ** ** | ** **            | ** ** |
| Refined  petroleum products (1) |       | $                      | 212,380    |                  | $          | 69,568 |   |
| Materials  and supplies         |       | 15,034                 |       | 14,661                |       |
| Total                           |       | $                      | 227,414    |                  | $          | 84,229 |   |

 

----

(1)   Ending inventory was 114.4 million and47.7 million gallons of refined petroleum products at September 30, 2009and December 31, 2008, respectively.

 

Buckeye generallymaintains two types of inventory.  Withinthe Energy Services segment, Buckeye principally maintains refined petroleumproducts inventory, which consists primarily of gasoline, heating oil anddiesel fuel, which is valued at the lower of cost or market, unless suchinventory is hedged.  At September 30,2009 and December 31, 2008, 86% and 78% of the inventory was hedged,respectively. Hedged inventory is valued at current market prices with thechange in value of the inventory reflected in the condensed consolidatedstatements of operations.  At September 30,2009 and December 31, 2008, 11% and 17% of the inventory, respectively,was committed against fixed-priced sales contracts, and such inventory wasvalued at the lower of cost or market. The remaining inventory was considered unhedged and representedapproximately one day of sales.

 

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

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

6.  INTANGIBLE ASSETS, NET

 

Intangible assets, net consist of the following (in thousands):

 
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                | ** ** | ** **             | ** ** | ** **            | ** ** |
| Customer  relationships   |       | $                      | 38,300     |                  | $          | 38,300 |   |
| Accumulated  amortization |       | (4,889                 | )          | (2,662                | )          |
| Net  carrying amount      |       | 33,411                 |       | 35,638                |       |
|                      |       |                   |       |                  |       |
| Customer  contracts       |       | 11,800                 |       | 11,800                |       |
| Accumulated  amortization |       | (3,750                 | )          | (3,324                | )          |
| Net  carrying amount      |       | 8,050                  |       | 8,476                 |       |
|                      |       |                   |       |                  |       |
| Total                     |       | $                      | 41,461     |                  | $          | 44,114 |   |

 

For the three months ended September 30, 2009 and 2008, amortizationexpense related to intangible assets was $0.9 million and $0.1 million,respectively.  For the nine months ended September 30,2009 and 2008, amortization expense related to intangible assets was $2.7million and $0.4 million, respectively.  Amortization expense related tointangible assets is expected to be approximately $3.8 million for each of thenext five years.

 

7.  EQUITY INVESTMENTS

 

Equity investments consist of the following (in thousands):

 

| ** **                                  | ** ** | ** **    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|---------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **Ownership** | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                  | ** ** | ** **    | ** ** | ** **             | ** ** | ** **            | ** ** |
| West Shore Pipe Line Company                |       | 24.9          | %          | $                      | 30,640     |                  | $          | 30,340 |   |
| West Texas LPG Pipeline Limited Partnership |       | 20.0          | %          | 52,947                 |       | 44,471                |       |
| Muskegon Pipeline LLC                       |       | 40.0          | %          | 14,759                 |       | 14,967                |       |
| Transport4, LLC                             |       | 25.0          | %          | 383                    |       | 332                   |       |
| Total                                       |       |          |       | $                      | 98,729     |                  | $          | 90,110 |   |

 

Inthe first nine months of 2009, Buckeye invested an additional $3.9 million inWest Texas LPG Pipeline Limited Partnership (“WT LPG”) as Buckeye’s pro ratacontribution for an expansion project that was required to meet increasedpipeline demand caused by increased product production in the Fort Worth basinand East Texas regions. The expansion project consists of the construction of39 miles of 12-inch pipeline and the installation of multiple booster stations.The WT LPG expansion pipeline became operational in April 2009.  WT LPG is owned 80% by Chevron Pipe Line Co.and 20% by Buckeye.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

The following tablepresents equity earnings for unconsolidated affiliates for the three and ninemonths ended September 30, 2009 and 2008 (in thousands):

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| West Shore Pipe Line Company                |       | $                      | 1,204      |                   | $          | 1,124 |   | $ | 3,401 |   | $ | 2,860 |   |
| West Texas LPG Pipeline Limited Partnership |       | 2,187                  |       | 880                    |       | 4,606 |   | 1,928 |   |
| Muskegon Pipeline LLC                       |       | 385                    |       | 400                    |       | 923 |   | 958 |   |
| Investment in Transport4, LLC               |       | 31                     |       | —                 |       | 101 |   | 57 |   |
| Total                                       |       | $                      | 3,807      |                   | $          | 2,404 |   | $ | 9,031 |   | $ | 5,803 |   |

 

8.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other currentliabilities consist of the following (in thousands):

 
| ** **                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Taxes  - other than income          |       | $                      | 13,243     |                  | $          | 14,092 |   |
| Accrued  employee benefit liability |       | 2,297                  |       | 2,297                 |       |
| Environmental  liabilities          |       | 11,477                 |       | 12,337                |       |
| Interest                            |       | 18,086                 |       | 25,551                |       |
| Retainage                           |       | 1,284                  |       | 1,405                 |       |
| Payable  for ammonia purchase       |       | 8,347                  |       | 9,373                 |       |
| Unearned  revenue                   |       | 24,694                 |       | 12,186                |       |
| Compensation  and vacation          |       | 10,582                 |       | 15,642                |       |
| Accrued  capital expenditures       |       | 2,296                  |       | 4,902                 |       |
| Reorganization                      |       | 7,805                  |       | —                |       |
| Other                               |       | 23,315                 |       | 18,679                |       |
| Total                               |       | $                      | 123,426    |                  | $          | 116,464 |   |

 

9.  CONTINGENCIES

 

*Claimsand Proceedings*

 

BGH, Buckeye andtheir respective subsidiaries, in the ordinary course of business, are involvedin various claims and legal proceedings, some of which are covered byinsurance. BGH is generally unable to predict the timing or outcome of theseclaims and proceedings. Based upon its evaluation of existing claims andproceedings including the probability of losses which may result from suchcontingencies, BGH has accrued certain amounts relating to such claims andproceedings, none of which are considered material.

 

In March 2007,Buckeye was named as a defendant in an action entitled *Madigan v.Buckeye Partners, L.P.* filed in the U.S. District Court for the CentralDistrict of Illinois. The action was brought by the State of Illinois AttorneyGeneral acting on behalf of the Illinois Environmental Protection Agency. Thecomplaint alleged that Buckeye violated various Illinois state environmentallaws in connection with a product release from Buckeye’s terminal located inHarristown, Illinois on or about June 11, 2006 and various other productreleases from Buckeye’s terminals and pipelines in the State of Illinois duringthe period of 2001 through 2006. Pursuant to a Consent Decree that was filedwith the U.S. District Court for the Central District of Illinois on October 7,2009, Buckeye agreed to settle and compromise the disputed claims withoutadmitting any of the allegations set forth in the complaint. Under the terms ofthe Consent Decree, Buckeye paid approximately $0.4 million in October 2009to the Illinois 

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Environmental ProtectionAgency and agreed to continue to perform monitoring and certain remediationactivities at the sites involved, and the State of Illinois agreed to releaseBuckeye from any further liability with respect to the claims involved.

 

*EnvironmentalContingencies*

 

In accordance withits accounting policy, Buckeye recorded operating expenses of $2.2 million and$1.9 million for the three months ended September 30, 2009 and 2008,respectively, and $8.8 million and $6.5 million for the nine months ended September 30,2009 and 2008, respectively, related to environmental contingencies unrelatedto claims and proceedings.

 

*AmmoniaContract Contingencies*

 

On November 30, 2005, Buckeye GulfCoast Pipe Lines, L.P. (“BGC”), an operating subsidiary of Buckeye, purchasedan ammonia pipeline and other assets from El Paso Merchant Energy-PetroleumCompany (“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 vastmajority of monthly periods since the closing of the pipeline acquisition, thepricing terms of the ammonia contracts have resulted in ammonia costs exceedingammonia sales proceeds.  The amount ofthe shortfall generally increases as the market price of ammonia increases.

 

EPME has informed BGCthat, notwithstanding the parties’ agreement, it will not continue to pay BGCfor shortfalls created by the pass-through of ammonia costs in excess ofammonia revenues.  EPME encouraged BGC 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.  To date, BGChas continued to receive payment for ammonia costs under the contracts atissue. BGC has not called on El Paso’s guaranty and believes only BGC mayinvoke the guaranty. EPME, however, contends that El Paso’s guaranty is thesource of payment for the shortfalls, but has not clarified the extent to whichit believes the guaranty has been exhausted. Given the uncertainty of future ammonia prices and EPME’s futureactions, Buckeye is unable to estimate the amount of any such losses it mightincur in the future. Buckeye is assessing its options, including potentialrecourse against EPME and El Paso, with respect to this matter.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

10.  DEBT AND CREDIT FACILITIES

 

Long-term debtconsists of the following (in thousands):

 
| ** **                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| *BGH:*                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| BGH  Credit Agreement                                             |       | $                      | —     |                  | $          | — |   |
| *Services Company:*                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| 3.60%  ESOP Notes due March 28, 2011                         |       | 9,570                  |       | 14,255                |       |
| Retirement  premium                                               |       | (304                   | )          | (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               |       |
| 5.500%  Notes due August 15, 2019*                           |       | 275,000                |       | —                |       |
| Credit  Facility                                                  |       | —                 |       | 298,267               |       |
| BES  Credit Facility                                              |       | 149,600                |       | 96,000                |       |
|  Total  term debt                                            |       | $                      | 1,583,866  |                  | $          | 1,558,264 |   |
| Other,  including unamortized discounts and fair value hedges (1) |       | (4,135                 | )          | (2,545                | )          |
| Subtotal  long- term debt                                         |       | 1,579,731              |       | 1,555,719             |       |
| Less:  current portion of long-term debt                          |       | (155,808               | )          | (102,294              | )          |
|                                                              |       |                   |       |                  |       |
|  Total  long-term debt                                       |       | $                      | 1,423,923  |                  | $          | 1,453,425 |   |

 

----

*                 Buckeye makes semi-annual interestpayments on these notes based on the rates noted above with the principalbalances outstanding to be paid on or before the due dates as shown above.

 

The fair values ofaggregate debt and credit facilities wereestimated to be $1,569.8 million at September 30, 2009 and $1,381.2million at December 31, 2008.  Thefair values of the fixed-rate debt at September 30, 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 with similar credit ratings and terms. Thefair values of the variable-rate debt are their carrying amounts as thecarrying amount reasonably approximates fair value due to the variable interestrate.

 

On August 18,2009, Buckeye sold $275.0 million aggregate principal amount of 5.500% Notes due 2019 (the “5.500% Notes”) in an underwritten publicoffering. The notes were issued at 99.35% of their principal amount. Totalproceeds from this offering, after underwriters’ fees, expenses and debtissuance costs of $1.8 million, were approximately $271.4 million, andwere used to reduce amounts outstanding under Buckeye’s credit facility and forworking capital purposes.

 

*BGHCredit Agreement*

 

BGHhas a five-year, $10.0 million unsecured revolving credit facility withSunTrust Bank, as both**administrativeagent and lender (the “BGH Credit Agreement”). The BGH Credit Agreement may beused for working capital and other partnership purposes. BGH has pledged all ofthe limited liability company interests in Buckeye GP as security for itsobligations under the BGH Credit Agreement. Borrowings under the BGH Credit Agreement bear interest under one of tworate options, selected by BGH, equal to either (i) the greater of (a) thefederal funds rate plus 0.5% and (b) SunTrust Bank’s prime commerciallending rate; or (ii) the London Interbank 

 

15

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Tableof Contents

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Official Rate (“LIBOR”),plus a margin which can range from 0.40% to 1.40%, based on the ratingsassigned by Standard & Poor’s Rating Services and Moody’s InvestorServices to the senior unsecured non-credit enhanced long-term debt ofBGH.  BGH did not have any amounts outstandingunder the BGH Credit Agreement at September 30, 2009 and December 31,2008.

 

TheBGH Credit Agreement requires BGH to maintain leverage and funded debt coverageratios. The leverage ratio covenant requires BGH to maintain, as of the lastday of each fiscal quarter, a ratio of the total funded indebtedness of BGH andits Restricted Subsidiaries (as defined below), measured as of the last day ofeach fiscal quarter, to the aggregate dividends and distributions received byBGH and its Restricted Subsidiaries from Buckeye, plus all other cash receivedby BGH and the Restricted Subsidiaries, measured for the preceding twelvemonths, less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreementdefines “Restricted Subsidiaries” as certain of BGH’s wholly ownedsubsidiaries.  The funded debt coverageratio covenant requires BGH to maintain, as of the last day of each fiscalquarter, a ratio of total consolidated funded debt of BGH and all of itssubsidiaries to the consolidated EBITDA, as defined in the BGH CreditAgreement, of BGH and all of its subsidiaries, measured for the precedingtwelve months, of not more than 5.25 to 1.00, subject to a provision forincreases to 5.75 to 1.00 in connection with future acquisitions. At September 30,2009, BGH’s funded debt coverage ratio was approximately 4.9 to 1.00.

 

The BGH CreditAgreement contains other covenants that prohibit BGH from taking certainactions, including but not limited to, declaring dividends or distributions ifany default or event of default has occurred or would result from such adeclaration and limiting BGH’s ability to incur additional indebtedness,creating negative pledges and granting certain liens, making certain loans,acquisitions, and investments, making material changes to the nature of BGH andits Restricted Subsidiaries’ business, and entering into a merger,consolidation, or sale of assets.  At September 30,2009, BGH was not aware of any instances of noncompliance with the covenantsunder the BGH Credit Agreement.

 

*ServicesCompany ESOP Notes*

* *

Services Companyhad total debt outstanding of $9.3 million and $14.0 million at September 30,2009 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 September 30, 2009, thevalue of Buckeye’s LP Units owned by Services Company exceeded the 125%requirement.

 

*CreditFacility*

 

Buckeye has aborrowing capacity of $580.0 million under an unsecured revolving creditagreement (the “Credit Facility”), which may be expanded up to $780.0 millionsubject to certain conditions and upon the further approval of thelenders.  The Credit Facility’s maturitydate is August 24, 2012, which may be extended by Buckeye for up to twoadditional one-year periods. Borrowings under the Credit Facility bear interestunder one of two rate options, selected by Buckeye, equal to either (i) thegreater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’sprime rate plus an applicable margin, or (ii) LIBOR plus an applicablemargin. The applicable margin is determined based on the current utilizationlevel of the Credit Facility and ratings assigned by Standard & Poor’sand Moody’s Investor Services for Buckeye’s senior unsecured non-creditenhanced long-term debt. At September 30, 2009, no amounts wereoutstanding under the Credit Facility, while at December 31, 2008, $298.3million was outstanding under this facility.

 

16

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

The CreditFacility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to aprovision that allows for increases to 5.50 to 1.00 in connection with certainfuture acquisitions.  The Funded DebtRatio is calculated by dividing consolidated debt by annualized EBITDA,which is defined in the Credit Facility as earnings before interest, taxes,depreciation, depletion and amortization, and other adjustments as definedtherein, 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).  At September 30, 2009, Buckeye’s FundedDebt Ratio was approximately 4.5 to 1.00. As permitted by the Credit Facility, $149.6 million of borrowings byBuckeye Energy Services LLC (“BES”) under its separate credit agreement(discussed below) and $72.5 million related to the Buckeye NGL Pipelineimpairment (see Note 2) were excluded from the calculation of the Funded DebtRatio.

 

In addition, theCredit Facility contains other covenants including, but not limited to,covenants limiting Buckeye’s ability to incur additional indebtedness, tocreate or incur liens on its property, to dispose of property material to itsoperations, and to consolidate, merge or transfer assets.  At September 30, 2009, Buckeye was notaware of any instances of noncompliance with the covenants under the CreditFacility.

 

On August 21,2009, Buckeye Energy Holdings LLC (“BEH”), a wholly owned subsidiary ofBuckeye, bought the outstanding loans and commitments of Aurora Bank FSB (formerlyLehman Brother Bank, FSB), a lender under the Credit Facility, through a saleand assignment agreement. Concurrent with this transaction, Buckeye repaid the$213.5 million outstanding balance of the Credit Facility, plus accruedinterest and fees. The Credit Facility was subsequently amended to remove BEHas a lender by terminating its commitment in full, thus reducing the borrowingcapacity of the Credit Facility from $600.0 million to $580.0 million.

 

At September 30,2009 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 BGH’s condensed consolidated balance sheets.

 

*BESCredit Agreement*

 

BES has a creditagreement (the “BES Credit Agreement”) that, prior to August 2009,provided for borrowings of up to $175.0 million.  In August 2009, the BES Credit Agreementwas amended to provide for total borrowings of up to $250.0 million.  Under the BES Credit Agreement, borrowingsaccrue interest, at BES’s election, at (i) the Administrative Agent’s Costof Funds (as defined in the BES Credit Agreement) plus 1.75%, (ii) theEurodollar Rate (as defined in the BES Credit Agreement) plus 1.75% or (iii) theBase Rate (as defined in the BES Credit Agreement) plus 0.25%.  The BES Credit Agreement also permitsDaylight Overdraft Loans (as defined in the BES Credit Agreement), SwinglineLoans (as defined in the BES Credit Agreement) and letters of credit.  Such alternative extensions of credit aresubject to certain conditions as specified in the BES Credit Agreement.  The BES Credit Agreement is secured by lienson certain assets of BES, including its inventory, cash deposits (other than certainaccounts), investments and hedging accounts, receivables and intangibles.

 

The balancesoutstanding under the BES Credit Agreement were approximately $149.6 millionand $96.0 million at September 30, 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 defined in the BES Credit Agreement andsummarized below (in millions, except for the leverage ratio):

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

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

At September 30,2009, BES’s Consolidated Tangible Net Worth and Consolidated Net WorkingCapital were $124.0 million and $79.7 million, respectively, and theConsolidated Leverage Ratio was 1.65 to 1.0. The weighted average interest rate for borrowings outstanding under theBES Credit Agreement was 2.0% at September 30, 2009.

 

In addition, theBES Credit Agreement contains other covenants, including, but not limited to,covenants limiting BES’s ability to incur additional indebtedness, to create orincur certain liens on its property, to consolidate, merge or transfer itsassets, to make dividends or distributions, to dispose of its property, to makeinvestments, to modify its risk management policy, or to engage in businessactivities materially different from those presently conducted.  At September 30, 2009, Buckeye was notaware of any instances of noncompliance with the covenants under the BES CreditAgreement.

 

11.  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 compares the change in the fair value of New YorkMercantile Exchange (“NYMEX”) futures contracts to the change in fair value ofBuckeye’s hedged fuel inventory.

 

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.

 

In order to hedge thecost of natural gas used to operate Buckeye’s turbine engines at its Linden,New Jersey location, the Pipeline Operations segment bought natural gas futurescontracts in March 2009 with terms that coincide with the remaining termof an ongoing natural gas supply contract (April 2009 through August 2011)for a price of $5.47 per million British thermal units (“MMBtu”).  The aggregate notional quantity isapproximately 900,000 MMBtus.  Thistransaction was designated as a cash flow hedge at inception.

 

*Finance Derivatives*

 

Buckeye manages aportion of its interest rate exposure by utilizing interest rate swaps toeffectively convert a portion of its variable-rate debt into fixed-ratedebt.  Generally, Buckeye utilizesinterest rate swaps for specifically identified transactions.

 

On April 21, 2009,Buckeye entered into an interest rate swap agreement to hedge its variableinterest rate risk on $50.0 million in borrowings under the Credit Facility.Under the swap agreement, Buckeye paid a fixed rate of interest of 0.63% for180 days and, in exchange, received a series of six monthly payments based onthe 30-day LIBOR rate in effect at the beginning of each monthly period. Theamounts received by Buckeye corresponded to the 30-day LIBOR rates that Buckeyepaid on the $50.0 million borrowed under the Credit Facility.  On August 27, 2009, in conjunction withthe repayment of the outstanding balance under the Credit Facility, the swapwas terminated.  Buckeye had designatedthe swap agreement as a cash flow hedge at inception.

 

Buckeye plans toissue new fixed-rate debt (i) on or before July 15, 2013, to repaythe $300.0 million of 4.625% Notes that are due on July 15, 2013, and (ii) onor before October 15, 2014, to repay the $275.0 million of 5.300% Notesthat are due on October 15, 2014. During the third quarter of 2009, Buckeye entered into three forwardstarting interest rate swaps with a total aggregate notional amount of $150.0million related to the issuance of debt on or before July 15, 2013 andthree forward starting interest rate swapswith a total aggregate notional amount of $150.0 million related to theissuance of debt on or before October 15, 2014.  The purpose of these swaps is to hedge thevariability of the forecasted interest payments on these expected debtissuances that may result from changes in the benchmark interest rate until thedebt is issued. Unrealized losses of $2.7 million were recorded in accumulated 

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

other comprehensive lossto reflect the change in the fair values of the forward starting interest rate swaps as of September 30, 2009. Buckeye designated theswap agreements as cash flow hedges at inception and expects the changes invalues to be highly correlated with the changes in value of the underlyingborrowings.

 

In October 2009,Buckeye entered into another forward starting interest rate swap with a totalnotional amount of $50.0 million related to the issuance of fixed-rate debt onor before July 15, 2013.

 

The followingtable sets forth the fair value of each classification of derivativeinstruments as of September 30, 2009 (in thousands):

 

| ** **                                                         | ** ** | **September 30, 2009** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | ** **                  | ** ** | ** ** | ** ** | **Derivative** | ** ** |
| ** **                                                         | ** ** | **Assets**                  | ** ** | **(Liabilities)** | ** ** | **Net Carrying** | ** ** |
| ** **                                                         | ** ** | **Fair value**         | ** ** | **Fair value** | ** ** | **Value** | ** ** |
| ** **                                                         | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Derivatives NOT designated as hedging instruments:**        |       |                        |       |   |   |   |   |
| Fixed-price  sales contracts                                       |       | $                           | 13,668     |   | $ | (2,687 | ) | $ | 10,981 |   |
| Futures  contracts for fixed-price sales contracts                 |       | 8,684                       |       | (5,426 | ) | 3,258 |   |
|                                                               |       |                        |       |   |   |   |   |
| **Derivatives designated as hedging  instruments:** |       |                        |       |   |   |   |   |
| Futures  contracts for inventory                                   |       | $                           | 4,180      |   | $ | (13,752 | ) | $ | (9,572 | ) |
| Futures  contract for natural gas                                  |       | 590                         |       | — |   | 590 |   |
| Interest  rate contracts                                           |       | —                      |       | (3,777 | ) | (3,777 | ) |
|                                                               |       |                        |       |   |   |   |   |
| Total                                                              |       |                        |       |   |   | $ | 1,480 |   |
|                                                               |       |                        |       |   |   |   |   |
| ** **                                                         | ** ** | **September 30,**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **2009**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet Locations:**                             |       |                        |       |   |   |   |   |
| Derivative  assets                                                 |       | $                           | 17,402     |   |   |   |   |   |
| Other  non-current assets                                          |       | 28                          |       |   |   |   |   |
| Derivative  liabilities                                            |       | (12,173                     | )          |   |   |   |   |
| Other  non-current liabilities                                     |       | (3,777                      | )          |   |   |   |   |
|                                                               |       |                        |       |   |   |   |   |
| Total                                                              |       | $                           | 1,480      |   |   |   |   |   |

 

Substantially all of the unrealized loss of $9.6 million at September 30,2009 for inventory hedges represented by futures contracts will be realized bythe second quarter of 2010 as the related inventory is sold.  Gains recorded on inventory hedges that wereineffective were approximately $10.0 million and $17.7 million for the threeand nine months ended September 30, 2009, respectively.  As of September 30, 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 December 2010.  In addition, at September 30, 2009,Buckeye had refined product inventories which it intends to use to satisfy aportion of the fixed-price sales contracts.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

The gains and losses on Buckeye’s derivative instruments forthe three and nine months ended September 30, 2009 were as follows (inthousands):

 
| ** **                                    | ** ** | ** **                                              | ** ** | **Gain  (Loss) Recognized in** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | ** **                                              | ** ** | **Income  on Derivatives**     | ** ** |
| ** **                                    | ** ** | ** **                                              | ** ** | **Three  Months**              | ** ** | **Nine  Months** | ** ** |
| ** **                                    | ** ** | ** **                                              | ** ** | **Ended**                      | ** ** | **Ended** | ** ** |
| ** **                                    | ** ** | ** **                                              | ** ** | **September 30,**         | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | ** **                                              | ** ** | **2009**                       | ** ** | **2009** | ** ** |
| **Derivatives  NOT designated as**            | ** ** |                                                    |       |                           |       |   |   |
| **hedging  instruments**                      | ** ** | **Location**                                            |       |                           |       |   |   |
| Fixed-price sales contracts                   |       | Product  sales                                          |       | $                              | (3,937     | ) | $ | (3,367 | ) |
| Futures contracts fixed-price sales contracts |       | Cost of product sales and natural gas storage  services |       | 3,972                          |       | (7,489 | ) |
|                                          |       |                                                    |       |                           |       |   |   |
| **Derivatives  designated as**                | ** ** |                                                    |       |                           |       |   |   |
| **hedging  instruments**                      | ** ** | **Location**                                            |       |                           |       |   |   |
| Futures contracts for inventory               |       | Cost of product sales and natural gas storage  services |       | $                              | (4,273     | ) | $ | 23,157 |   |
| Futures contract for natural gas              |       | Cost of product sales and natural gas storage  services |       | 1,963                          |       | (53,216 | ) |
| Interest rate contracts                       |       | Interest and debt expense                               |       | (1,132                         | )          | (1,274 | ) |

 

12.  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 inputs are quoted prices in active markets foridentical 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 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 inputs are unobservable inputs for the assetor liability.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

*Recurring*

 

The followingtable sets forth financial assets and liabilities, measured at fair value on arecurring basis, as of the measurement dates, September 30, 2009 and December 31,2008, and the basis for that measurement, by level within the fair valuehierarchy (in thousands):

* *
| ** **                 | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | ** **                  | ** ** | **Significant**            | ** ** | ** ** | ** ** | **Significant** | ** ** |
| ** **                 | ** ** | **Quoted Prices**           | ** ** | **Other**                  | ** ** | **Quoted Prices** | ** ** | **Other** | ** ** |
| ** **                 | ** ** | **in Active**               | ** ** | **Observable**             | ** ** | **in Active** | ** ** | **Observable** | ** ** |
| ** **                 | ** ** | **Markets**                 | ** ** | **Inputs**                 | ** ** | **Markets** | ** ** | **Inputs** | ** ** |
| ** **                 | ** ** | **(Level 1)**               | ** ** | **(Level 2)**              | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** |
| **Financial Assets:**      | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commodity  derivatives     |       | $                           | 4,590      |                       | $          | 12,840 |   | $ | 25,225 |   | $ | 79,322 |   |
| Asset  held in trust       |       | 1,793                       |       | —                     |       | 3,648 |   | — |   |
|                       |       |                        |       |                       |       |   |   |   |   |
| **Financial Liabilities:** |       |                        |       |                       |       |   |   |   |   |
| Interest  rate derivatives |       | —                      |       | (3,777                     | )          | — |   | (333 | ) |
| Commodity  derivatives     |       | (10,314                     | )          | (1,859                     | )          | (50,806 | ) | (1,045 | ) |
| Total                      |       | $                           | (3,931     | )                          | $          | 7,204 |   | $ | (21,933 | ) | $ | 77,944 |   |

 

The value of theLevel 1 commodity derivative assets and liabilities were based on quoted marketprices obtained from the NYMEX.  Thevalue of the Level 1 asset held in trust was obtained from quoted marketprices.  The value of the Level 2commodity derivative assets and liabilities were based on observable marketdata related to the obligations to provide petroleum products. The value of theLevel 2 interest rate derivative was based on observable market data related tosimilar obligations.

 

The commodity derivativeassets of $12.8 million and $79.3 million as of September 30, 2009 and December 31,2008, respectively, are both net of a credit valuation adjustment (“CVA”) of($0.6) million.  Because few of the EnergyServices segment’s customers entering into these fixed-price sales contractsare large organizations with nationally-recognized credit ratings, the EnergyServices segment determined that a CVA, which is based on the credit risk ofsuch contracts, is appropriate.  The CVAis based on the historical and expected payment history of each customer, theamount of product contracted for under the agreement, and the customer’shistorical and expected purchase performance under each contract.

 

*Non-Recurring*

 

Certainnonfinancial assets and liabilities are measured at fair value on anonrecurring basis and are subject to fair value adjustments in certaincircumstances, such as when there is evidence of impairment.  The following table presents the fair valueof an asset carried on the condensed consolidated balance sheet by assetclassification and by level within the valuation hierarchy (as described above)at the date indicated for which a nonrecurring change in fair value has beenrecorded during the nine months ended September 30, 2009 (in thousands):

 
| ** **                            | ** ** | **September 30,** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                            | ** ** | **2009**               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Losses** | ** ** |
|                                  |       |                   |       |        |       |        |       |        |       |       |       |
| Prepaid  and other current assets (1) |       | $                      | 8,639      |        | $          | —      |       | $           | —     |       | $          | 8,639 |   | $ | 72,540 |   |
|                                       |            |                        |            |             |            |             |            |             |            |            |            |  |  |  |  |  |

 

----

(1)          Represents the property, plant andequipment included in net assets held for sale (see Note 2).

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

As a result of aloss in the customer base utilizing the Buckeye NGL Pipeline, Buckeye recordeda non-cash impairment charge of $72.5 million during the nine months ended September 30,2009.  The estimated fair value was basedon a probability-weighted combination of income and market approaches.

 

13.  EARNINGS PER UNIT

 

Basic and diluted netincome per unit is calculated by dividing net income attributable to BGH by theweighted-average number of partnership units outstanding during the period.

 

The followingtable is a reconciliation of the weighted average number of units used in thebasic and diluted earnings per partnership unit calculations for the three andnine months ended September 30, 2009 and 2008 (in thousands):

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                     | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Basic:                                         | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common units outstanding      |       | 27,770                 |       | 27,770                 |       | 27,770 |   | 27,770 |   |
| Weighted average management units outstanding  |       | 530                    |       | 530                    |       | 530 |   | 530 |   |
| Units for basic                                |       | 28,300                 |       | 28,300                 |       | 28,300 |   | 28,300 |   |
|                                           |       |                   |       |                   |       |   |   |   |   |
| Diluted:                                       |       |                   |       |                   |       |   |   |   |   |
| Units used for basic calculation               |       | 28,300                 |       | 28,300                 |       | 28,300 |   | 28,300 |   |
| Dilutive effect of additional management units |       | —                 |       | —                 |       | — |   | — |   |
| Units for diluted                              |       | 28,300                 |       | 28,300                 |       | 28,300 |   | 28,300 |   |

 

14.  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 November 2,2009, MainLine Management declared a quarterly cash distribution of $0.39 perunit to be paid on November 30, 2009 to unitholders of record on November 12,2009. This distribution is expected to be approximately $11.0 million.

 

15.  RELATED PARTY TRANSACTIONS

 

Buckeye incurred a senioradministrative charge for certain management services performed by affiliatesof Buckeye GP of $0.5 million for the three months ended September 30,2008, and $0.5 million and $1.4 million for the nine months ended September 30,2009 and 2008, respectively. The senior administrative charge was waivedindefinitely on April 1, 2009.  As aresult, there were no related charges recorded in the second and third quartersof 2009.

 

Services Company andBuckeye are considered related parties of BGH. As discussed in Note 1, the condensed consolidated financial statementsfor BGH include the accounts of Services Company and Buckeye on a consolidatedbasis, and all intercompany transactions have been eliminated.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

16.  UNIT-BASED COMPENSATION PLANS

 

*BGH GP’sOverride Units*

 

Effectiveon June 25, 2007,**BGH GP instituted an equity incentiveplan for certain members of senior management of BGH GP and BGH.  This equity incentive plan includes bothtime-based and performance-based participation in the equity of BGH GP (but notin BGH) referred to as “Override Units”. BGH is required to reflect, as compensation expense and a correspondingcontribution to unitholders’ equity, the fair value of this compensation.  Compensation expense with respect to theOverride Units was $0.3 million and $0.4 million for the three months ended September 30,2009 and 2008, respectively, and $1.0 million for each of the nine monthperiods ended September 30, 2009 and 2008. BGH is not the sponsor of this plan and has no liabilities with respectto it.

 

The Override Units consist of three equaltranches of units consisting of: Value A Units, Value B Units and OperatingUnits.  The Operating Units vest overfour years semi-annually beginning with a one-year cliff vesting. The Value AUnits generally vest based on the occurrence of an exit event as discussedbelow, an investment return of 2.0 times the original investment, and aninternal rate of return of at least 10%. The Value B Units generally vest basedon the occurrence of an exit event, an investment return of 3.5 times theoriginal investment and an internal rate of return of at least 10% or on apro-rata basis on an investment return ranging from 2.0 to 3.5 times theoriginal investment and an internal rate of return of at least 10%.

 

The above-noted exit event is generally defined as the sale by ArcLight**,** Kelsoand their affiliates of their interests in BGH GP, the sale of substantiallyall the assets of BGH GP and its subsidiaries, or any other “extraordinary”transaction that the board of directors of BGH GP determines is an exit event.

 

The investment return is calculated generally 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 to forfeitureif 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.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

No Override Units weregranted in 2009.  The following is asummary of the activity of the Override Units as of September 30, 2009 (inthousands, except per unit amounts):

 
| ** **                                                             | ** ** | **Number of Override Units**                                  | ** ** | **Total Number**            | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **Value A Units**                                             | ** ** | **Value B Units**           | ** ** | **Operating  Units** | ** ** | **of Units  Awarded** | ** ** |
| Outstanding at December 31, 2007                                  |       | 1,381                                                         |       | 1,381                       |       | 1,381 |   | 4,143 |   |
| Granted in 2008                                                        |       | 382                                                           |       | 382                         |       | 382 |   | 1,146 |   |
| Outstanding at December 31, 2008                                  |       | 1,763                                                         |       | 1,763                       |       | 1,763 |   | 5,289 |   |
| Forfeited in 2009                                                      |       | (276                                                          | )          | (276                        | )          | (223 | ) | (775 | ) |
| Outstanding at September 30, 2009                                 |       | 1,487                                                         |       | 1,487                       |       | 1,540 |   | 4,514 |   |
|                                                                   |       |                                                          |       |                        |       |   |   |   |   |
| ** **                                                             | ** ** | **Compensation Costs for Override Units** | ** ** | ** **                  | ** ** |
| ** **                                                             | ** ** | **Value A Units**                                   | ** ** | **Value B Units** | ** ** | **Operating  Units** | ** ** | **Totals** | ** ** |
| Total fair value of all outstanding Override Units                     |       | $                                                             | 3,092      |                        | $          | 1,839 |   | $ | 5,098 |   | $ | 10,029 |   |
| Less: Expense recorded from plan inception to September 30,  2009 |       | —                                                        |       | —                      |       | 3,002 |   | 3,002 |   |
| Estimated future compensation costs at  September 30, 2009        |       | $                                                             | 3,092      |                        | $          | 1,839 |   | $ | 2,096 |   | $ | 7,027 |   |
|                                                                   |       |                                                          |       |                        |       |   |   |   |   |
| **September 30, 2009**                                       | ** ** | **Value A**                                              | ** ** | **Value B**            | ** ** | **Operating** | ** ** | ** ** | ** ** |
| Weighted average fair value per Override Unit  granted                 |       | $                                                             | 2.07       |                        | $          | 1.17 |   | $ | 3.42 |   |   |   |

 

The vesting of the Value A and Value B Units iscontingent on a performance condition, namely the completion of the exit eventas discussed above.  Accordingly, no compensation expense for the Value Aand Value B Units will be recorded until an exit event occurs.

 

The Override Units were valued using the Monte Carlo simulation methodthat incorporated the market-based vesting condition into the grant date fairvalue of the unit awards.  The MonteCarlo simulation is a procedure to estimate the future equity value from the timeof the valuation dates to the exit event. The following assumptions were used in the 2008 period:

 
| ** **                         | ** ** | **June 30,** | ** ** |
|------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2008**          | ** ** |
| Current equity value (in millions) |       | $                 | 439.0      |   |
| Expected life in years             |       | 5.5               |       |
| Risk-free interest rate            |       | 4.92              | %          |
| Volatility                         |       | 26.0              | %          |
| Dividends                          |       | $                 | 0.00       |   |

 

*Buckeye’sLong-Term Incentive Plan*

 

On March 20, 2009,Buckeye’s 2009 Long-Term Incentive Plan (the “LTIP”) became effective.  The LTIP, which is administered by theCompensation Committee of the Board of Directors of Buckeye GP (the “CompensationCommittee”), provides for the grant of phantom units (“Phantom Units”),performance units (“Performance Units”) and in certain cases, distributionequivalent rights (“DERs”) which provide the participant a right to receivepayments based on distributions made by Buckeye on its LP Units. Phantom Unitsare notional LP Units whose vesting is subject to service-based restrictions orother conditions established by the Compensation Committee in its discretion. Phantom Units entitle a participant to receive an LP Unit, withoutpayment of an exercise price, upon vesting.  Performance Units arenotional LP Units whose vesting is subject to the attainment of one or moreperformance goals, and which entitle a participant to receive LP Units, withoutpayment of an exercise price, upon vesting. DERs are rights to receive a cashpayment per Phantom Unit or Performance Unit, as 

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

applicable, equal to theper unit cash distribution paid by Buckeye on its LP Units. Generally, LTIPawards granted automatically vest upon a change of control, as defined in theLTIP.

 

The number of LP Unitsthat may be granted under the LTIP may not exceed 1,500,000, subject to certainadjustments.   The number of LPUnits that may be granted to any one individual in a calendar year will not exceed100,000.  If awards are forfeited, terminated or otherwise not paid infull, the LP Units underlying such awards will again be available for purposesof the LTIP.  Persons eligible to receivegrants under the LTIP are (i) officers and employees of Buckeye, BuckeyeGP and any of their affiliates and (ii) independent members of the Boardof Directors of Buckeye GP or of MainLine Management.  Phantom Units or Performance Units may begranted to participants at any time as determined by the CompensationCommittee.

 

The fair values of boththe Performance Unit and Phantom Unit grants are based on the average marketprice of Buckeye’s LP Units on the date of grant adjusted for an estimatedforfeiture rate as appropriate. Compensation expense equal to the fair value ofthose Performance Unit and Phantom Unit awards that actually vest is estimatedand recorded over the period the grants are earned, which is the vestingperiod. Compensation expense estimates are updated periodically. The vesting ofthe Performance Unit awards is also contingent upon the attainment ofpredetermined performance goals, which, depending on the level of attainment,could increase or decrease the value of the awards at settlement. Quarterlydistributions paid on DERs associated with Phantom Units are recorded as areduction of Limited Partners’ Capital on Buckeye’s condensed consolidatedbalance sheets.

 

*2009 LTIPAwards*

 

During the nine monthsended September 30, 2009, the Compensation Committee granted 45,778Phantom Units to employees, 18,000 Phantom Units to independent directors, and91,872 Performance Units to employees. The vesting period for the Phantom Unitsis one year or three years of service for grants to directors or employees,respectively.  The vesting criteria forthe Performance Units are the attainment of a performance goal (by Buckeye),defined in the award agreements as “distributable cash flow per unit”, over athree-year period and remaining employed by Buckeye throughout such period.

 

Phantom Unit grantees will be paid quarterlydistributions on DERs associated with Phantom Units over their respectivevesting periods of one year or three years in the same amounts per Phantom Unitas distributions paid on Buckeye’s LP Units over those same one-year orthree-year periods. Theamount paid with respect to Phantom Unit distributions was $0.05 million and$0.1 million for the three and nine months ended September 30, 2009,respectively.  Distributionsmay be paid on Performance Units at the end of the three-year vesting period.In such case, DERs will be paid on the number of LP Units for which thePerformance Units will be settled.

 

Thefollowing table sets forth the LTIP activity for the nine months ended September 30,2009:

 
| ** **                                | ** ** | **LTIP Units** | ** ** |
|-------------------------------------------|------------|----------------|------------|
|                                      |       |           |       |
| Outstanding,  January 1, 2009        |       | —         |       |
| Granted  (1)                              |       | 155,650        |       |
| Vested                                    |       | (2,703         | )          |
| Forfeited                                 |       | (14,197        | )          |
| Outstanding,  September 30, 2009 (2) |       | 138,750        |       |

 

----

| (1) |   | The weighted average  fair value per unit for the 2009 Phantom Unit and Performance Unit awards on  the date of grant was $39.29. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The  aggregate intrinsic value of all outstanding LTIP units at September 30,  2009 was approximately $6.7 million.          |

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

At September 30,2009, approximately $4.1 million of compensation expense, based upon the fairvalue of the awards on the date of grant related to unvested outstanding awardsexpected to vest under the LTIP, has not yet been recognized by Buckeye.

 

*Buckeye’sUnit Option Plan*

 

Buckeyealso sponsors the Unit Option and Distribution Equivalent Plan (the “OptionPlan”), pursuant to which it historically granted to employees options topurchase LP Units at the market price of the LP Units on the date of grant.Generally, the options vest three years from the date of grant and expire tenyears from the date of grant. As unit options are exercised, Buckeye issues newLP Units to the holder. Buckeye has not historically repurchased, and does notexpect to repurchase in 2009, any of its LP Units.

 

Generally,compensation expense is recognized based on the fair value on the date of grantestimated using a Black-Scholes option pricing model.  Buckeye recognizes compensation expense forthese awards granted on a straight-line basis over the requisite serviceperiod.

 

Buckeye recognizes compensationexpense immediately for options granted to retirement-eligible employees, orover the period from the date of grant to the date retirement eligibility isachieved. Compensation expense is based on options ultimately expected to vestby estimating forfeitures at the date of grant based upon historical experienceand revising those estimates, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

 

Due to regulationsadopted under Internal Revenue Code Section 409A, holders of optionsgranted during 2008 would have been subject to certain adverse tax consequencesif the terms of the grant were not modified. Buckeye received the approval ofthe holders of options granted in 2008 to shorten the term of those options toavoid the adverse tax consequences under Section 409A.  Optionsgranted before January 1, 2008 were not impacted by the IRSregulations.  This modification did not have a material impact on Buckeye’sfinancial results.  Following theadoption of the LTIP on March 20, 2009, Buckeye ceased making additionalgrants under the Option Plan.

 

Buckeye recorded $0.5million and $0.1 million in compensation expense related to outstanding optionsfor the three months ended September 30, 2009 and 2008, respectively, and$1.0 million and $0.4 million for the nine months ended September 30, 2009and 2008, respectively.

 

17.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS

 

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

 

Services Companyalso provides post-retirement health care and life insurance benefits tocertain of its retirees (the “Retiree Medical Plan”). To be eligible for thesebenefits an employee must have been hired prior to January 1, 1991 andmeet certain service requirements. Services Company does not pre-fund itspost-retirement benefit obligation.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

For the threemonths ended September 30, 2009 and 2008, the components of the netperiodic benefit cost recognized by Buckeye for the RIGP and Retiree MedicalPlan were as follows (in thousands):

 
| ** **                                | ** ** | **RIGP**               | ** ** | **Retiree Medical Plan** | ** ** |
|-------------------------------------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**   | ** ** |
| ** **                                | ** ** | **September 30,** | ** ** | **September 30,**   | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Components  of net periodic benefit cost: | ** ** | ** **             | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                             |       | $                      | (44        | )                        | $          | 352 |   | $ | 37 |   | $ | 78 |   |
| Interest  cost                            |       | 146                    |       | 477                      |       | 419 |   | 233 |   |
| Expected  return on plan assets           |       | (47                    | )          | (468                     | )          | — |   | — |   |
| Amortization  of prior service benefit    |       | (47                    | )          | (217                     | )          | (679 | ) | (379 | ) |
| Amortization  of unrecognized losses      |       | 90                     |       | 156                      |       | 220 |   | 139 |   |
| Settlement/curtailment  gain (1)          |       | —                 |       | —                   |       | (1,571 | ) | — |   |
| Net  periodic benefit costs               |       | $                      | 98         |                     | $          | 300 |   | $ | (1,574 | ) | $ | 71 |   |

 

For the ninemonths ended September 30, 2009 and 2008, the components of the netperiodic benefit cost recognized by Buckeye for the RIGP and Retiree MedicalPlan were as follows (in thousands):

 
| ** **                                | ** ** | **RIGP**               | ** ** | **Retiree Medical Plan** | ** ** |
|-------------------------------------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Nine Months Ended**  | ** ** | **Nine Months Ended**    | ** ** |
| ** **                                | ** ** | **September 30,** | ** ** | **September 30,**   | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Components  of net periodic benefit cost: | ** ** | ** **             | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                             |       | $                      | 371        |                     | $          | 1,057 |   | $ | 247 |   | $ | 543 |   |
| Interest  cost                            |       | 886                    |       | 1,433                    |       | 1,402 |   | 1,621 |   |
| Expected  return on plan assets           |       | (427                   | )          | (1,404                   | )          | — |   | — |   |
| Amortization  of prior service benefit    |       | (282                   | )          | (653                     | )          | (2,397 | ) | (2,627 | ) |
| Amortization  of unrecognized losses      |       | 802                    |       | 467                      |       | 743 |   | 959 |   |
| Settlement/curtailment  charge (gain) (1) |       | 7,171                  |       | —                   |       | (771 | ) | — |   |
| Net  periodic benefit costs               |       | $                      | 8,521      |                     | $          | 900 |   | $ | (776 | ) | $ | 496 |   |

 

----

(1)               Inconnection with Buckeye’s reorganization, $6.4 million of the aggregate amountof $29.1 million of expenses incurred has been recorded as an adjustment to thefunded status of the RIGP and the Retiree Medical Plan, which representsettlement and curtailment adjustments (see Note 3).

 

Buckeyevoluntarily contributed $3.5 million and $3.8 million to the RIGP for the threeand nine months ended September 30, 2009, respectively.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

18.  OTHER SUPPLEMENTAL INFORMATION

 

Supplemental cashflows and non-cash transactions were as follows (in thousands):

 
| ** **                                            | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **September 30,** | ** ** |
| ** **                                            | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash  paid for interest (net of capitalized interest) |       | $                      | 59,101     |   | $ | 54,090 |   |
| Cash  paid for income taxes                           |       | 1,650                  |       | 868 |   |
| Capitalized  interest                                 |       | 2,906                  |       | 1,087 |   |
|                                                  |       |                   |       |   |   |
| Non-cash  investing and financing activities:         |       |                   |       |   |   |
| Hedge  accounting                                     |       | 1,266                  |       | 504 |   |
| Change  in capital expenditures in accounts payable   |       | (2,606                 | )          | 4,319 |   |
|                                                       |            |                        |            |  |  |  |  |

 

19.  SEGMENTINFORMATION

 

BGH, through Buckeye,reports and operates in five business 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 in three states with aggregate storage capacity of approximately 0.5million barrels.

 

*Terminallingand Storage*

 

The Terminallingand Storage segment provides bulk storage and terminal throughputservices.  This segment has 56 refinedpetroleum products terminals in ten states with aggregate storage capacity ofapproximately 23.3 million barrels.

 

*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 Storage, L.L.C.  Thefacility provides approximately 33 billion cubic feet of natural gas storagecapacity (including capacity provided pursuant to a nearly completed expansionproject) and is connected to Pacific Gas and Electric’s intrastate gaspipelines that service natural gas demand in the San Francisco and Sacramentoareas. 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.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

*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.

 

Each segment usesthe same accounting policies as those used in the preparation of BGH’scondensed consolidated financial statements. All inter-segment revenues,operating income, and assets have been eliminated.  All periods are presented on a consistentbasis. All of BGH’s operations and assets are conducted and located in theUnited States.

 

Financialinformation about each segment is presented below (in thousands):

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                       | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| *Revenue:*                       |       |                   |       |                   |       |   |   |   |   |
| Pipeline  Operations             |       | $                      | 96,714     |                   | $          | 91,439 |   | $ | 294,084 |   | $ | 286,716 |   |
| Terminalling  and Storage        |       | 34,036                 |       | 33,003                 |       | 94,108 |   | 87,749 |   |
| Natural  Gas Storage             |       | 28,576                 |       | 16,762                 |       | 60,325 |   | 43,412 |   |
| Energy  Services                 |       | 258,407                |       | 344,494                |       | 728,563 |   | 926,809 |   |
| Other  Operations                |       | 7,516                  |       | 12,011                 |       | 25,446 |   | 33,637 |   |
| Intersegment                     |       | (1,805                 | )          | (1,539                 | )          | (11,022 | ) | (9,329 | ) |
| Total                            |       | $                      | 423,444    |                   | $          | 496,170 |   | $ | 1,191,504 |   | $ | 1,368,994 |   |
|                             |       |                   |       |                   |       |   |   |   |   |
| *Operating income :*             |       |                   |       |                   |       |   |   |   |   |
| Pipeline  Operations             |       | $                      | 41,846     |                   | $          | 32,518 |   | $ | 35,208 |   | $ | 106,085 |   |
| Terminalling  and Storage        |       | 17,323                 |       | 16,727                 |       | 39,095 |   | 39,222 |   |
| Natural  Gas Storage             |       | 7,591                  |       | 8,780                  |       | 19,572 |   | 21,162 |   |
| Energy  Services                 |       | 5,620                  |       | 3,870                  |       | 10,404 |   | 5,213 |   |
| Other  Operations                |       | 2,509                  |       | 1,356                  |       | 4,043 |   | 4,649 |   |
| Total                            |       | $                      | 74,889     |                   | $          | 63,251 |   | $ | 108,322 |   | $ | 176,331 |   |
|                             |       |                   |       |                   |       |   |   |   |   |
| *Depreciation and amortization:* |       |                   |       |                   |       |   |   |   |   |
| Pipeline  Operations             |       | $                      | 8,659      |                   | $          | 9,373 |   | $ | 26,482 |   | $ | 26,383 |   |
| Terminalling  and Storage        |       | 1,813                  |       | 1,487                  |       | 5,401 |   | 4,232 |   |
| Natural  Gas Storage             |       | 1,241                  |       | 915                    |       | 3,943 |   | 3,430 |   |
| Energy  Services                 |       | 986                    |       | 2,151                  |       | 2,946 |   | 2,822 |   |
| Other  Operations                |       | 439                    |       | 416                    |       | 1,289 |   | 1,200 |   |
| Total                            |       | $                      | 13,138     |                   | $          | 14,342 |   | $ | 40,061 |   | $ | 38,067 |   |

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 
| ** **                                                     | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                     | ** ** | **September 30,** | ** ** |
| ** **                                                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| *Capital additions:*                                           | ** ** | ** **             | ** ** | ** ** | ** ** |
| Pipeline  Operations                                           |       | $                      | 21,952     |   | $ | 24,704 |   |
| Terminalling  and Storage                                      |       | 13,648                 |       | 17,326 |   |
| Natural  Gas Storage                                           |       | 16,911                 |       | 27,528 |   |
| Energy  Services                                               |       | 3,132                  |       | 2,651 |   |
| Other  Operations                                              |       | 554                    |       | — |   |
| Total  (1)                                                     |       | $                      | 56,197     |   | $ | 72,209 |   |
|                                                           |       |                   |       |   |   |
| *Acquisitions and equity investments,**net  of cash acquired:* |       |                   |       |   |   |
| Pipeline  Operations                                           |       | $                      | 3,880      |   | $ | 12,040 |   |
| Terminalling  and Storage                                      |       | —                 |       | 66,187 |   |
| Natural  Gas Storage                                           |       | —                 |       | 438,767 |   |
| Energy  Services                                               |       | —                 |       | 143,258 |   |
| Other  Operations                                              |       | —                 |       | — |   |
| Total                                                          |       | $                      | 3,880      |   | $ | 660,252 |   |
| ** **                                                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| *Assets:*                                                      | ** ** | ** **             | ** ** | ** ** | ** ** |
| Pipeline  Operations (2)                                       |       | $                      | 1,547,786  |   | $ | 1,630,050 |   |
| Terminalling  and Storage                                      |       | 485,655                |       | 473,806 |   |
| Natural  Gas Storage                                           |       | 568,297                |       | 503,278 |   |
| Energy  Services                                               |       | 362,172                |       | 333,967 |   |
| Other  Operations                                              |       | 75,620                 |       | 93,309 |   |
| Consolidating-level                                            |       | 230,905                |       | 228,687 |   |
| Total                                                          |       | $                      | 3,270,435  |   | $ | 3,263,097 |   |
|                                                           |       |                   |       |   |   |
| *Goodwill:*                                                    |       |                   |       |   |   |
| Pipeline  Operations                                           |       | $                      | 198,632    |   | $ | 198,632 |   |
| Terminalling  and Storage (3)                                  |       | 49,618                 |       | 51,386 |   |
| Natural  Gas Storage                                           |       | 169,560                |       | 169,560 |   |
| Energy  Services                                               |       | 1,178                  |       | 1,132 |   |
| Other  Operations                                              |       | 13,182                 |       | 13,182 |   |
| Total                                                          |       | $                      | 432,170    |   | $ | 433,892 |   |

 

----

| (1) |   | Amount includes ($2.6)  million and $4.3 million of non-cash changes in accruals for capital  expenditures for the nine months ended September 30, 2009 and 2008,  respectively.                                                                      |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | All equity investments  are included in the assets of the Pipeline Operations segment.                                                                                                                                                                     |
| (3) |   | Goodwill decreased by  $1.8 million as of September 30, 2009 from December 31, 2008 due to  the finalization of the purchase price allocation of a terminal in Albany,  New York; the difference was allocated to property, plant and equipment. |

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

20.  SUBSEQUENTEVENT

 

In September 2009,Buckeye entered into an agreement to acquire from ConocoPhillips certainrefined petroleum product terminals and pipeline assets for approximately $47.5million in cash.  The assets that Buckeyeagreed to acquire include over 300 miles of active pipeline that provideconnectivity between the East St. Louis, Illinois and East Chicago, Indianamarkets and three terminals providing 2.3 million barrels of storagetankage.  In addition, Buckeye willacquire certain inventory on hand upon completion of the transaction foradditional consideration, and ConocoPhillips has agreed to enter into certaincommercial contracts with Buckeye that are associated with the acquiredfacilities.  The transaction is currentlyexpected to occur in November 2009.

 

 

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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 results of operations for Buckeye GPHoldings L.P. (“BGH”) and for each of BGH’s business segments and anoverview of BGH’s liquidity and capital resources and certain other itemsrelated to BGH.  The following discussionand analysis should be read in conjunction with (i) the accompanyinginterim condensed consolidated 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.

 

Approximately 62% of BGH’s limited partner units areowned by BGH GP Holdings, LLC (“BGH GP”) and approximately 38% by the public. BGH owns and controls Buckeye GP LLC (“BuckeyeGP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”), apublicly traded Delaware limited partnership. BGH is 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 when targetdistribution levels for each quarter are exceeded. The 2,573,146 LP Unitsoriginally 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 distributed byBuckeye above $0.525 per LP Unit.

 

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

 

The following tablesummarizes BGH’s cash received for the three and nine months ended September 30,2009 and 2008 as a result of its partnership interests in Buckeye (inthousands):

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Incentive  distributions from Buckeye                                                             |       | $                      | 11,742     |                   | $          | 9,990 |   | $ | 33,713 |   | $ | 28,647 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s GP Units                           |       | 223                    |       | 210                    |       | 659 |   | 622 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 519                    |       | 459                    |       | 1,415 |   | 808 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s LP Units                            |       | 73                     |       | 69                     |       | 216 |   | 204 |   |
|                                                                                              |       | $                      | 12,557     |                   | $          | 10,728 |   | $ | 36,003 |   | $ | 30,281 |   |

 

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BGH, through Buckeye,operates and reports in five business segments: Pipeline Operations;Terminalling and Storage; Natural Gas Storage; Energy Services; and OtherOperations.  See Note 19 to the condensedconsolidated financial statements for a more detailed discussion of BGH’s businesssegments.

 

**RECENT DEVELOPMENTS**

 

In early 2009, Buckeyebegan a “best practices” review of its business processes and organizationalstructure to identify improved efficiencies and cost savings in response torapidly changing needs in the energy markets. This review culminated in theapproval of an organizational restructuring by the Board of Directors ofBuckeye GP.

 

The organizationalrestructuring includes a workforce reduction of approximately 260 employees, ornearly 25% of Buckeye’s workforce. The program was initiated in the secondquarter of 2009 and is expected to be substantially complete by the end of2009. From June 18 to June 29, 2009, Buckeye offered certain eligibleemployees the option of enrolling in a voluntary early retirement program,which approximately 80 employees accepted. The remaining affected positions arebeing eliminated involuntarily under Buckeye’s ongoing severance plan. Mostterminations were effective as of July 20, 2009. The restructuring willalso include the relocation of some employees consistent with the goals of thereorganization. Buckeye has incurred $29.1 million of expenses in connectionwith this organizational restructuring for the nine months ended September 30,2009 and expects to incur additional expenses of approximately $2.0 to $4.0million for the remainder of 2009 (see Note 3 to the condensed consolidatedfinancial statements).

 

Buckeye also recorded anon-cash charge of $72.5 million in the nine months ended September 30,2009 related to an impairment of its natural gas liquids pipeline system (the “BuckeyeNGL Pipeline”) that spans from Wattenberg, Colorado to Bushton, Kansas. Thisimpairment was the result of significant volume losses to a competitivepipeline system during the second quarter of 2009 (see Note 2 to the condensedconsolidated financial statements).

 

In September 2009,Buckeye entered into an agreement to acquire from ConocoPhillips certainrefined petroleum product terminals and pipeline assets for approximately $47.5million in cash.  The assets that Buckeyeagreed to acquire include over 300 miles of active pipeline that provideconnectivity between the East St. Louis, Illinois and East Chicago, Indianamarkets and three terminals providing 2.3 million barrels of storage tankage.  In addition, Buckeye will acquire certaininventory on hand upon completion of the transaction for additionalconsideration, and ConocoPhillips has agreed to enter into certain commercialcontracts with Buckeye that are associated with the acquired facilities.  The transaction is currently expected to occurin November 2009. Buckeye expects to fund the acquisition through cashflow from operations and borrowings under Buckeye’s existing credit facility.

 

**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 noncontrolling partners in Buckeye—BGH’scondensed consolidated balance sheets include a noncontrolling interest capitalaccount 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 statement ofoperations as income attributable to noncontrolling interest. Thesenoncontrolling interest accounts are not reflected in Buckeye’s condensedconsolidated financial statements.

·                  BGH’s capital structure—In addition to incorporatingthe assets and liabilities of Buckeye, BGH’s condensed consolidated balancesheets include 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 sheets, which reflect theownership interest of all its partners, including its owners other than BGH orBuckeye Pipe Line Services Company (“Services Company”). Consequently, BGH’sstatement of operations reflects additional interest expense, interest incomeand debt amortization expense that is not reflected in Buckeye’s financialstatements.

 

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·                  Inclusion of Services Company—The financial statementsof Services Company, which employs the employees who manage and operate theassets of Buckeye, are consolidated into BGH’s financial statements. Thefinancial statements of Buckeye do not include the financial statements ofServices Company.

·                  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 (in thousands):

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                                                   |       | $                      | 423,444    |                   | $          | 496,170 |   | $ | 1,191,504 |   | $ | 1,368,994 |   |
| Costs  and expenses                                       |       | 348,555                |       | 432,919                |       | 1,083,182 |   | 1,192,663 |   |
| Operating  income                                         |       | 74,889                 |       | 63,251                 |       | 108,322 |   | 176,331 |   |
| Other  expenses                                           |       | (20,326                | )          | (18,950                | )          | (53,671 | ) | (54,547 | ) |
| Income  before equity income                              |       | 54,563                 |       | 44,301                 |       | 54,651 |   | 121,784 |   |
| Equity  income                                            |       | 3,807                  |       | 2,404                  |       | 9,031 |   | 5,803 |   |
| Net  income                                               |       | 58,370                 |       | 46,705                 |       | 63,682 |   | 127,587 |   |
| Less:  net income attributable to noncontrolling interest |       | (47,275                | )          | (39,471                | )          | (32,666 | ) | (109,187 | ) |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| Net  income attributable to BGH                           |       | $                      | 11,095     |                   | $          | 7,234 |   | $ | 31,016 |   | $ | 18,400 |   |

 

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A summary of financialinformation by business segment is as follows (in thousands):

 
| ** **                       | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                       | ** ** | **2009**                     | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| *Revenues:*                      | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pipeline  Operations             |       | $                            | 96,714     |                         | $          | 91,439 |   | $ | 294,084 |   | $ | 286,716 |   |
| Terminalling  and Storage        |       | 34,036                       |       | 33,003                       |       | 94,108 |   | 87,749 |   |
| Natural  Gas Storage             |       | 28,576                       |       | 16,762                       |       | 60,325 |   | 43,412 |   |
| Energy  Services                 |       | 258,407                      |       | 344,494                      |       | 728,563 |   | 926,809 |   |
| Other  Operations                |       | 7,516                        |       | 12,011                       |       | 25,446 |   | 33,637 |   |
| Intersegment                     |       | (1,805                       | )          | (1,539                       | )          | (11,022 | ) | (9,329 | ) |
| Total                            |       | $                            | 423,444    |                         | $          | 496,170 |   | $ | 1,191,504 |   | $ | 1,368,994 |   |
|                             |       |                         |       |                         |       |   |   |   |   |
| *Total costs and expenses (1):*  |       |                         |       |                         |       |   |   |   |   |
| Pipeline  Operations             |       | $                            | 54,868     |                         | $          | 58,921 |   | $ | 258,876 |   | $ | 180,631 |   |
| Terminalling  and Storage        |       | 16,713                       |       | 16,276                       |       | 55,013 |   | 48,527 |   |
| Natural  Gas Storage             |       | 20,985                       |       | 7,982                        |       | 40,753 |   | 22,250 |   |
| Energy  Services                 |       | 252,787                      |       | 340,624                      |       | 718,159 |   | 921,596 |   |
| Other  Operations                |       | 5,007                        |       | 10,655                       |       | 21,403 |   | 28,988 |   |
| Intersegment                     |       | (1,805                       | )          | (1,539                       | )          | (11,022 | ) | (9,329 | ) |
| Total                            |       | $                            | 348,555    |                         | $          | 432,919 |   | $ | 1,083,182 |   | $ | 1,192,663 |   |
|                             |       |                         |       |                         |       |   |   |   |   |
| *Depreciation and amortization:* |       |                         |       |                         |       |   |   |   |   |
| Pipeline  Operations             |       | $                            | 8,659      |                         | $          | 9,373 |   | $ | 26,482 |   | $ | 26,383 |   |
| Terminalling  and Storage        |       | 1,813                        |       | 1,487                        |       | 5,401 |   | 4,232 |   |
| Natural  Gas Storage             |       | 1,241                        |       | 915                          |       | 3,943 |   | 3,430 |   |
| Energy  Services                 |       | 986                          |       | 2,151                        |       | 2,946 |   | 2,822 |   |
| Other  Operations                |       | 439                          |       | 416                          |       | 1,289 |   | 1,200 |   |
| Total                            |       | $                            | 13,138     |                         | $          | 14,342 |   | $ | 40,061 |   | $ | 38,067 |   |
|                             |       |                         |       |                         |       |   |   |   |   |
| *Asset impaiment expense:*       |       |                         |       |                         |       |   |   |   |   |
| Pipeline  Operations             |       | $                            | —     |                         | $          | — |   | $ | 72,540 |   | $ | — |   |
|                             |       |                         |       |                         |       |   |   |   |   |
| *Reorganization expense:*        |       |                         |       |                         |       |   |   |   |   |
| Pipeline  Operations             |       | $                            | 518        |                         | $          | — |   | $ | 23,572 |   | $ | — |   |
| Terminalling  and Storage        |       | 163                          |       | —                       |       | 2,565 |   | — |   |
| Natural  Gas Storage             |       | 91                           |       | —                       |       | 382 |   | — |   |
| Energy  Services                 |       | 206                          |       | —                       |       | 1,150 |   | — |   |
| Other  Operations                |       | 18                           |       | —                       |       | 1,440 |   | — |   |
| Total                            |       | $                            | 996        |                         | $          | — |   | $ | 29,109 |   | $ | — |   |
|                             |       |                         |       |                         |       |   |   |   |   |
| *Operating income:*              |       |                         |       |                         |       |   |   |   |   |
| Pipeline  Operations             |       | $                            | 41,846     |                         | $          | 32,518 |   | $ | 35,208 |   | $ | 106,085 |   |
| Terminalling  and Storage        |       | 17,323                       |       | 16,727                       |       | 39,095 |   | 39,222 |   |
| Natural  Gas Storage             |       | 7,591                        |       | 8,780                        |       | 19,572 |   | 21,162 |   |
| Energy  Services                 |       | 5,620                        |       | 3,870                        |       | 10,404 |   | 5,213 |   |
| Other  Operations                |       | 2,509                        |       | 1,356                        |       | 4,043 |   | 4,649 |   |
| Total                            |       | $                            | 74,889     |                         | $          | 63,251 |   | $ | 108,322 |   | $ | 176,331 |   |

 

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(1)          Includesdepreciation and amortization, asset impairment expense and reorganizationexpense.

 

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Third Quarter of 2009Compared to Third Quarter of 2008

 

*Consolidated*

 

Consolidated income attributable to BGH’s unitholders was $11.1 million in the third quarter of 2009 compared to $7.2 million in the third quarter of 2008. The increase in income attributable to BGH’s unitholderswas due to increases in Buckeye’s quarterly distribution. As mentioned above, theincentive distribution rights entitle BGH to receive amounts equal to specifiedpercentages of the incremental amount of cash distributed by Buckeye to theholders of Buckeye’s LP Units when target distribution levels for a quarter areexceeded. As a result, increases in Buckeye’s distribution cause increases inincome attributable to BGH’s unitholders. In the third quarter of 2009, Buckeyepaid a $0.9125 per LP Unit distribution as compared to an $0.8625 per LP Unitdistribution in the third quarter of 2008, which resulted in an increase of$1.8 million in incentive distribution rights in the third quarter of 2009 ascompared to the third quarter of 2008.

 

Revenue was $423.4million in the third quarter of 2009, which is a decrease of $72.8 million or14.7% from the corresponding period in 2008. This overall decrease was causedprimarily by a decrease in revenue from the Energy Services segment of $86.1million resulting from a reduction in petroleum product prices in the currentquarter. This decrease was partially offset by increased revenues from thePipeline Operations segment due to increased tariffs, increased Terminallingand Storage segment revenues from new terminals and increased Natural GasStorage segment revenues from increased marketing efforts. The Other Operationssegment reported lower revenue due to decreased construction activities.

 

Total costs and expenses were $348.6million in the third quarter of 2009, which is a decrease of $84.4 million or19.5% from the corresponding period in 2008. Generally, operating expenses weredown across all segments, with the exception of the Natural Gas Storagesegment. The decrease in total costs and expenses resulted primarily from adecrease in petroleum product prices, which resulted in an $87.8 milliondecrease in the Energy Services segment’s cost of product sales. In addition,there were lower operating expenses in the Pipeline Operations segment due todecreased costs associated with contract service activities and in the OtherOperations segment due to decreased construction activities, which contributedto the overall decrease in costs and expenses. The Natural Gas Storage segment experienced increased expensesassociated with certain hub services transactions stemming from delays in thestart-up of a natural gas storage expansion project known as Kirby Hills phaseII (the “Kirby Hills II project”) and general market conditions.

 

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

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **September 30,** | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Attributable  to Buckeye                        |       | $                      | 347,479    |   | $ | 431,719 |   |
| Elimination  of Buckeye deferred charge         |       | (1,174                 | )          | (1,174 | ) |
| Net  effect of ESOP charges in Services Company |       | 564                    |       | 521 |   |
| Attributable  to BGH                            |       | 1,686                  |       | 1,853 |   |
| Total                                           |       | $                      | 348,555    |   | $ | 432,919 |   |

 

Amounts attributable to BGH were as follows (inthousands):

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **September 30,** | ** ** |
| ** **             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Salaries  and benefits |       | $                      | 1,086      |   | $ | 1,282 |   |
| Professional  fees     |       | 103                    |       | 267 |   |
| Other                  |       | 497                    |       | 304 |   |
| Total                  |       | $                      | 1,686      |   | $ | 1,853 |   |

 

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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 of $3.6 million.  The $3.6 million annual fixed paymentconsisted of the anticipated 2009 salaries, incentive compensation and benefitsof these executives plus 15%.  Salariesand benefits shown above for 2009 consist of the anticipated salaries,incentive compensation and benefits included in the $3.6 million annual fixedpayment, plus allocations of the cost of Buckeye personnel performingadministrative services directly for BGH. Salaries and benefits costs in 2008 include salaries and benefits forthe four highest paid executives performing services on behalf of Buckeye underthe prior arrangement plus the allocated administrative salaries.

 

BGH reported operating income of $74.9million in the third quarter of 2009 as compared to operating income of $63.3million in the third quarter of 2008, which represented an increase of $11.6million, primarily as a result of lower operating cost across all segments,with the exception of the Natural Gas Storage segment. The remainder of theincrease is more fully described within the segments discussed below.

 

The thirdquarter of 2009 results also include an increase of $1.1 million in interest and debt expense from the third quarter 2008largely attributable to the issuance of $275.0 million aggregateprincipal amount of 5.500% Notesdue 2019 (the “5.500% Notes”) inAugust 2009.  In addition, depreciation and amortization decreased by $1.2 million due primarily to the cessation of depreciation related to theassets held for sale (see Note 2 to the condensed consolidated financialstatements).

 

Incomeattributable to noncontrolling interests, which represents the allocation ofBuckeye’s income to its limited partner interests not owned by BGH or ServicesCompany, was $47.3 million in the third quarter of 2009 as compared to incomeattributable to noncontrolling interests of $39.5 million in the third quarterof 2008.

 

*PipelineOperations*

 

Revenue was $96.7 millionin the third quarter of 2009, which is an increase of $5.3 million or 5.8% fromthe corresponding period in 2008. Despite a decrease in transportation volumesof 5.7%, including lower volumes from the Buckeye NGL Pipeline (see Note 2 tothe condensed consolidated financial statements), net transportation revenueswere up $7.8 million due to increased tariffs and settlement experiencecompared with the third quarter of 2008. Tariff increases of 3.7% and 3.8% wereimplemented on January 1, 2009 and July 1, 2009, respectively.Revenues from storage, rentals, product sales and other incidental serviceswere down $2.5 million from the third quarter of 2008, which is primarilyrelated to reduced contract service activities at customer facilities connectedto Buckeye’s refined product pipelines.

 

Total costs and expenses were $54.9million in the third quarter of 2009, which is a decrease of $4.1 million or6.9% from the corresponding period in 2008. Total costs and expenses include$0.5 million of reorganization expense (see Note 3 to the condensedconsolidated financial statements). Other factors impacting total costs andexpenses include decreases in costs associated with contract service activitiesat customer facilities connected to Buckeye’s refined product pipelines of $2.3million, a decrease in product costs of $1.5 million associated with fuelpurchases related to a product supply arrangement, a decrease in operatingpower costs of $1.1 million resulting from lower rates and volumes transported,a decrease in depreciation and amortization expense of $0.7 million and adecrease in remediation activities of $0.8 million. These decreases werepartially offset by an increase in integrity expenditures of $2.3 million.

 

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Product volumestransported in the Pipeline Operations segment for the three months ended September 30,2009 and 2008 were as follows:

 
| ** **           | ** ** | **Average Barrels Per Day** | ** ** |
|----------------------|------------|-----------------------------|------------|
| ** **           | ** ** | **Three Months Ended**      | ** ** |
| ** **           | ** ** | **September 30,**      | ** ** |
| ** **           | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| **Product**          |       |                        |       |   |   |
| Gasoline             |       | 666,900                     |       | 682,500 |   |
| Distillate           |       | 233,500                     |       | 263,100 |   |
| Jet  Fuel            |       | 350,000                     |       | 363,600 |   |
| LPGs                 |       | 17,700                      |       | 18,800 |   |
| Natural  gas liquids |       | 9,600                       |       | 21,000 |   |
| Other  products      |       | 5,000                       |       | 11,400 |   |
| Total                |       | 1,282,700                   |       | 1,360,400 |   |

 

*Terminallingand Storage*

 

Revenue was $34.0 millionin the third quarter of 2009, which is an increase of $1.0 million or 3.1% fromthe corresponding period in 2008. This overall increase resulted primarily from$2.6 million of revenue in 2009 from terminals that were acquired at varioustimes in 2008. This increase was partially offset by a decrease in settlementexperience and a 9.8% volume decrease in the third quarter of 2009 as comparedto the third quarter of 2008.

 

Total costs and expenseswere $16.7 million in the third quarter of 2009, which is an increase of $0.4million or 2.7% from the corresponding period in 2008. Total costs and expensesinclude $0.2 million of reorganization expense (see Note 3 to the condensedconsolidated financial statements). Other factors impacting total costs andexpenses include an increase of $0.9 million of operating expenses associatedwith the terminals acquired at various times in 2008, offset by a reduction of$0.6 million for environmental remediation expenses and payroll and payrollbenefit expenses.

 

Average daily throughputfor the refined products terminals for the three months ended September 30,2009 and 2008 were as follows:

 
| ** **               | ** ** | **Average Barrels Per Day** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **Three Months Ended**      | ** ** |
| ** **               | ** ** | **September 30,**      | ** ** |
| ** **               | ** ** | **2009**                    | ** ** | **2008** | ** ** |
|                     |       |                        |       |   |   |
| Third-party  throughput  |       | 442,700                     |       | 448,700 |   |
| Intersegment  throughput |       | 43,800                      |       | 90,500 |   |
| Products  throughput     |       | 486,500                     |       | 539,200 |   |

 

*NaturalGas Storage*

 

Revenue was $28.6 millionin the third quarter of 2009, which is an increase of $11.8 million or 70.5%from the corresponding period in 2008. Lease revenue increased $1.5 million andhub services and other revenue increased $10.3 million from the third quarterof 2008 due to increased marketing efforts.

 

Total costs and expenseswere $21.0 million in the third quarter of 2009, which is an increase of $13.0million or 162.9% from the corresponding period in 2008. Total costs andexpenses include $0.1 million of reorganization expense (see Note 3 to thecondensed consolidated financial statements). The increase in costs andexpenses was primarily attributable to certain hub services transactionsstemming from delays in the Kirby Hills II project and general marketconditions.

 

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*Energy Services*

 

Revenue was $258.4million in the third quarter of 2009, which is a decrease of $86.1 million or25.0% from the corresponding period in 2008. This overall decrease wasprimarily due to a decrease in petroleum product prices, which correspondinglylowers the cost of product sales, partially offset by a 30.8% increase involumes.

 

Total costs and expenseswere $252.8 million in the third quarter of 2009, which is a decrease of $87.8million or 25.8% from the corresponding period in 2008. Total costs andexpenses include $0.2 million of reorganization expense (see Note 3 to thecondensed consolidated financial statements). Other factors impacting totalcosts and expenses include a decrease in petroleum product prices in thecurrent quarter as compared to the same period last year.

 

Total volumes for theEnergy Services segment for the three months ended September 30, 2009 and2008 were as follows:

 
| ** **                    | ** ** | **Total Gallons**      | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **Three Months Ended** | ** ** |
| ** **                    | ** ** | **September 30,** | ** ** |
| ** **                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                          |       |                   |       |   |   |
| Sales  volumes (in thousands) |       | 138,500                |       | 105,900 |   |

 

*OtherOperations*

 

Revenue for the OtherOperations segment, which consists principally of Buckeye’s contract operationsand engineering services for third party pipelines, was $7.5 million in thethird quarter of 2009, which is a decrease of $4.5 million or 37.4% from thecorresponding period in 2008.  Thedecrease in revenues resulted from a reduction in construction contractrevenues.  These construction activitiesare principally conducted on a time and material basis.

 

Total costs and expenseswere $5.0 million in the third quarter of 2009, which is a decrease of $5.7million or 53.0% from the corresponding period in 2008.  Decreases in total costs and expensesresulting primarily from reduced operating expenses associated withconstruction contract activity of $4.8 million and lower maintenance expense of$0.4 million.

 

Nine Months of 2009Compared to Nine Months of 2008

 

*Consolidated*

 

Consolidated income attributable to BGH’s unitholders was $31.0 million in the first nine months of 2009 compared to $18.4 million in the first nine months of 2008.The increase in incomeattributable to BGH’s unitholders was due to increases in Buckeye’s quarterlydistribution.  As mentioned above, theincentive distribution rights entitle BGH to receive amounts equal to specifiedpercentages of the incremental amount of cash distributed by Buckeye to theholders of Buckeye’s LP Units when target distribution levels for a quarter areexceeded.  As a result, increases inBuckeye’s distributions cause increases in income attributable to BGH’sunitholders.  In the first nine months of2009, Buckeye paid distributions of $0.8875, $0.90 and $0.9125 per LP Unit ascompared to distributions of $0.8375, $0.85 and $0.8625 per LP Unit in thefirst nine months of 2008, which resulted in an increase of $5.7 million inincentive distribution rights in the first nine months of 2009 as compared tothe first nine months of 2008.

 

Revenue was $1,191.5million in the first nine months of 2009, which is a decrease of $177.5 millionor 13.0% from the corresponding period in 2008. This overall decrease wascaused primarily by a decrease in revenues from the Energy Services segment of$198.2 million due to an overall reduction in petroleum product prices in thefirst nine months of 2009 as compared to the corresponding period in 2008. Thisdecrease was partially offset by increased revenues from the PipelineOperations segment due to increased tariffs, increased Terminalling and Storagesegment revenues from new terminals and increased Natural Gas Storage segmentrevenues from increased marketing efforts. The Other Operations segment reported lower revenue due to decreasedconstruction activities.

 

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Total costs and expenses were $1,083.2million in the first nine months of 2009, which is a decrease of $109.5  million or 9.2% from the corresponding periodin 2008. Total costs and expenses reflect a decrease in petroleum productprices, which resulted in a $203.4 million decrease in the Energy Servicessegment’s cost of product sales in the first nine months of 2009 as compared tothe corresponding period in 2008.  Inaddition, total costs and expenses reflect the effectiveness of overall costmanagement efforts implemented in the first nine months of 2009. Thesedecreases in total costs and expenses were partially offset by a $72.5 millionasset impairment expense and a $29.1 million reorganization expense (see Notes2 and 3 to the condensed consolidated financial statements).  Other factors impacting total costs andexpenses include increased operating costs for new terminals in theTerminalling and Storage segment and increased expenses associated with certainhub services transactions stemming from delays in the Kirby Hills II project inthe Natural Gas Storage segment and general market conditions.

 

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

 
| ** **                                      | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **September 30,** | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Attributable  to Buckeye                        |       | $                      | 1,079,944  |   | $ | 1,187,744 |   |
| Elimination  of Buckeye deferred charge         |       | (3,523                 | )          | (3,523 | ) |
| Net  effect of ESOP charges in Services Company |       | 1,209                  |       | 2,365 |   |
| Attributable  to BGH                            |       | 5,552                  |       | 6,077 |   |
| Total                                           |       | $                      | 1,083,182  |   | $ | 1,192,663 |   |

 

Amounts attributable to BGH were as follows (inthousands):

 
| ** **             | ** ** | **Nine Months Ended**  | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **September 30,** | ** ** |
| ** **             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Salaries  and benefits |       | $                      | 3,455      |   | $ | 3,903 |   |
| Professional  fees     |       | 759                    |       | 1,255 |   |
| Other                  |       | 1,338                  |       | 919 |   |
| Total                  |       | $                      | 5,552      |   | $ | 6,077 |   |

 

BGH reported operating income of $108.3million and $176.3 million in the first nine months of 2009 and 2008,respectively. The decrease of $68.0 million primarily resulted from thereorganization expense of $29.1 million and asset impairment expense of $72.5million (see Notes 2 and 3 to the condensed consolidated financial statements)related to operations at Buckeye, partially offset by lower operating costs.

 

The current period results also include a decrease of $1.7million in interest and debt expensefrom $55.7 million in the sameperiod in 2008 largely attributable to lower borrowing rates onBuckeye’s revolving credit facilityand the Energy Services segment’s credit agreement in 2009 as compared to 2008and an increase in capitalized interest for a gas storage facility expansion.In addition, depreciation and amortization increased by $2.0 million due to acquisitions made during 2008.

 

Incomeattributable to noncontrolling interests, which represents the allocation ofBuckeye’s earnings to its limited partner interests not owned by BGH, was $32.7million in the first nine months of 2009 as compared to $109.2 million in thefirst nine months of 2008.

 

*PipelineOperations*

 

Revenue was $294.1million in the first nine months of 2009, which is an increase of $7.4 millionor 2.6% from the corresponding period in 2008. While transportation volumeswere down 4.2%, net transportation revenues were up $19.4 million due toincreased tariffs and settlement experience compared with the prior yearperiod. Revenues from product sales, rentals and other incidental services weredown $12.0 million from the prior year period. The 

 

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decrease in these revenues is primarily related to adecrease in product sales as a result of reduced product volumes sold to awholesale distributor and a decrease in contract service activities at customerfacilities connected to Buckeye’s refined product pipelines.

 

Total costs and expenses were $258.9million in the first nine months of 2009, which is an increase of $78.2 millionor 43.3% from the corresponding period in 2008. Total costs and expensesinclude $72.5 million of asset impairment expense and $23.6 million ofreorganization expense (see Notes 2 and 3 to the condensed consolidatedfinancial statements). Other factors impacting total costs and expenses includedecreases in (i) product costs of $10.4 million as a result of reducedproduct volumes sold to a wholesale distributor, (ii) contract serviceactivities of $1.1 million at customer facilities connected to Buckeye’srefined product pipelines, (iii) operating power of $1.6 million due to adecrease in rates and volumes, (iv) integrity program expenditures of $1.4million and (v) professional fees of $1.2 million.

 

Product volumestransported in the Pipeline Operations segment for the nine months ended September 30,2009 and 2008 were as follows:

 
| ** **           | ** ** | **Average Barrels Per Day** | ** ** |
|----------------------|------------|-----------------------------|------------|
| ** **           | ** ** | **Nine Months Ended**       | ** ** |
| ** **           | ** ** | **September 30,**      | ** ** |
| ** **           | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| **Product**          |       |                        |       |   |   |
| Gasoline             |       | 661,700                     |       | 674,300 |   |
| Distillate           |       | 277,000                     |       | 293,200 |   |
| Jet  Fuel            |       | 342,900                     |       | 364,000 |   |
| LPGs                 |       | 17,000                      |       | 18,800 |   |
| Natural  gas liquids |       | 17,100                      |       | 21,400 |   |
| Other  products      |       | 9,400                       |       | 11,700 |   |
| Total                |       | 1,325,100                   |       | 1,383,400 |   |

 

*Terminallingand Storage*

 

Revenue was $94.1million in the first nine months of 2009, which is an increase of $6.4 millionor 7.2% from the corresponding period in 2008. This overall increase resultedprimarily from $10.0 million of revenue in the first nine months of 2009 fromterminals that were acquired at various times in 2008.  These increases were partially offset by adecrease in settlement experience and an 8.5% decrease in terminal volumes inthe first nine months of 2009 as compared to the first nine months of 2008.

 

Total costs and expenseswere $55.0 million in the first nine months of 2009, which is an increase of$6.5 million or 13.4% from the corresponding period in 2008. Total costs andexpenses include $2.6 million of reorganization expense (see Note 3 to thecondensed consolidated financial statements). Other factors impacting totalcosts and expenses include an increase of $4.1 million of operating expensesfor the terminal acquisitions made at various times in 2008 and an increase inremediation expenses and integrity program expenditures totaling $1.1 million.

 

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Average daily throughput for the refined products terminals for the nine months ended September 30,2009 and 2008 were as follows:

* *
| ** **               | ** ** | **Average Barrels Per Day** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **Nine Months Ended**       | ** ** |
| ** **               | ** ** | **September 30,**      | ** ** |
| ** **               | ** ** | **2009**                    | ** ** | **2008** | ** ** |
|                     |       |                        |       |   |   |
| Third-party  throughput  |       | 445,600                     |       | 451,800 |   |
| Intersegment  throughput |       | 46,300                      |       | 85,800 |   |
| Products  throughput     |       | 491,900                     |       | 537,600 |   |

 

*NaturalGas Storage*

 

Revenue was $60.3million in the first nine months of 2009, which is an increase of $16.9 millionor 39.0% from the corresponding period in 2008. This overall increase resultedprimarily from increased hub services revenues in the first nine months of 2009driven by increased marketing efforts and the inclusion of a full nine monthsof revenue in 2009 compared to approximately eight and one half months in thecorresponding period in 2008, reflecting Buckeye’s purchase of Lodi GasStorage, L.L.C. (“Lodi Gas”) on January 18, 2008. Lease revenue increased$4.4 million and hub services and other revenue increased $12.5 million fromthe first nine months of 2008.

 

Total costs andexpenses were $40.8 million in the first nine months of 2009, which is anincrease of $18.5 million or 83.2% from the corresponding period in 2008. Totalcosts and expenses include $0.4 million of reorganization expense (see Note 3to the condensed consolidated financial statements). Other factors impacting totalcosts and expenses include expenses related to the acquisition of Lodi Gas,which experienced a full nine months of activity in 2009 versus eight and onehalf months in 2008, and increased expenses from certain hub servicestransactions stemming from delays in the Kirby Hills II project and generalmarket conditions.

 

*Energy Services*

 

Revenue was $728.6million in the first nine months of 2009, which is a decrease of $198.2 millionor 21.4% from the corresponding period in 2008. This overall decrease wasprimarily due to a decline in petroleum product prices, which correspondinglylowers the cost of products sales, partially offset by a 56.5% increase involumes due to the inclusion of a full nine months of revenue in 2009 comparedto approximately seven and one half months in the corresponding period in 2008for the acquisition of Farm & Home Oil Company LLC.

 

Total costs andexpenses were $718.2 million in the first nine months of 2009, which is adecrease of $203.6 million or 22.1% from the corresponding period in 2008.  Total costs and expenses include $1.2 millionof reorganization expense (see Note 3 to the condensed consolidated financialstatements). Other factors impacting total costs and expenses include a decreasein commodity prices in the first nine months of 2009 as compared to the sameperiod in 2008. This decrease was partially offset by the inclusion of ninemonths of operations in 2009 for the acquisition of Farm & Home OilCompany LLC.

 

Total sales volumes forthe Energy Services segment for the nine months ended September 30, 2009and 2008 were as follows:

 
| ** **                    | ** ** | **Total Gallons**      | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **Nine Months Ended**  | ** ** |
| ** **                    | ** ** | **September 30,** | ** ** |
| ** **                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                          |       |                   |       |   |   |
| Sales  volumes (in thousands) |       | 455,500                |       | 291,100 |   |

 

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*OtherOperations*

 

Revenue for theOther Operations segment, which consists principally of Buckeye’s contractoperations and engineering services for third-party pipelines, was $25.4million in the first nine months of 2009, which is a decrease of $8.2 millionor 24.4% from the corresponding period in 2008. The decrease in revenues resulted from reduced operating services andconstruction revenues of $8.2 million reflecting a customer’s termination of acontract in the second quarter of 2008 and a reduction in construction contractrevenues.  These construction activitiesare principally conducted on a time and material basis.

 

Total costs andexpenses were $21.4 million in the first nine months of 2009, which is adecrease of $7.6 million or 26.2% from the corresponding period in 2008. Totalcosts and expenses include $1.4 million of reorganization expense (see Note 3to the condensed consolidated financial statements). Other factors impactingtotal costs and expenses include reduced operating expenses associated with aterminated customer contract and construction contract activity.

 

**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.

 

BGH’s onlycash-generating asset is its ownership interest in Buckeye GP.  BGH’s cash flow is, therefore, directlydependent upon the ability of Buckeye and its operating subsidiaries to makecash distributions to Buckeye’s partners. The actual amount of cash thatBuckeye 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 cash flows from operations, proceeds from borrowings under Buckeye’srevolving credit facility and proceeds from the issuance of Buckeye’s LP Unitsor public debt.

 

BGH’s principaluses of cash are 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 nine months of 2009, BGH paidcash distributions of $0.37 per unit on August 31, 2009, $0.35 per unit onMay 29, 2009 and $0.33 per unit on February 28, 2009.  In the first nine months of 2008, BGH paidcash distributions of $0.31 per unit on August 29, 2008, $0.30 per unit onMay 30, 2008 and $0.285 per unit on February 29, 2008.  Total cash distributed to BGH unitholders inthe nine months ended September 30, 2009 and 2008 was approximately$29.7  million and $25.3 million,respectively.

 

On November 2,2009, MainLine Management declared a distribution of $0.39 per unit to be paidon November 30, 2009 to unitholders of record on November 12, 2009.This distribution is expected to be approximately $11.0 million.

 

*Buckeye*

 

Buckeye’sprincipal sources of liquidity are cash flows from operations, borrowings underits unsecured revolving credit agreement (the “Credit Facility”) and proceedsfrom the issuance of LP Units.  Buckeyewill, from time to time, issue debt securities to permanently finance amountsborrowed under the Credit Facility. Buckeye Energy Services LLC (“BES”) funds its working capital needsprincipally from cash flows from operations and a secured credit facility (the “BESCredit Agreement”).  Buckeye’s principaluses of cash are capital expenditures, distributions to LP unitholders andacquisitions as described in “Cash Flows from Investing Activities” below.

 

BGH’s AnnualReport on Form 10-K, which was filed on March 16, 2009, disclosedthat, as a result of the financial credit crisis which emerged in the third andfourth quarters of 2008, Buckeye had taken steps to preserve itsliquidity.  These steps includedmaintaining increased cash balances, reducing discretionary capitalexpenditures 

 

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and appropriatelymanaging operating and administrative expenses. Credit, capital markets and overall economic conditions remaineddifficult during the first nine months of 2009. However, economic conditions improved enough that certain businesseswith investment-grade credit ratings were able to issue publicly-traded debtand other master limited partnerships were able to issue equity.  Buckeye continued to evaluate the conditionof the debt and equity capital markets and, on March 31, 2009, issued 2.6million LP Units in an underwritten public offering at a net price of $35.08per LP Unit, after underwriting discounts and commissions of $1.17 per LP Unit,for net proceeds of approximately $91.2 million.  Proceeds from this offering were used toreduce 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.  Buckeyealso used the net proceeds from this offering of approximately $13.4 million toreduce outstanding borrowings under the Credit Facility. On August 18,2009, Buckeye sold 5.500% Notesin an underwritten public offering. The 5.500% Notes were issued at 99.35% oftheir principal amount. Total proceeds from the offering, after underwriters’fees, expenses and debt issuance costs of $1.8 million, were approximately$271.4 million, and were used to reduce amounts outstanding under theCredit Facility and for working capital purposes.

 

*Debt*

* *

*BGH*

* *

BGH has a five-year, $10.0 million revolving credit facility withSunTrust Bank, as both administrative agent and lender (the “BGH CreditAgreement”).  See Note 10 to BGH’scondensed consolidated financial statements for a description of the terms ofthe BGH Credit Agreement.

 

*Services Company*

 

Services Companyhad total debt outstanding of $9.3 million and $14.0 million at September 30,2009 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 10 to BGH’s condensed consolidatedfinancial statements for a description of the terms of the 3.60% ESOP Notes.

 

*Buckeye’sOutstanding Debt*

* *

At September 30,2009, Buckeye had an aggregate face amount of $1,574.6 million of debt, whichconsisted of $300.0 million of the 4.625% Notes due 2013 (the “4.625% Notes”),$275.0 million of the 5.300% Notes due 2014 (the “5.300% Notes”), $150.0million of the 6.75% Notes due 2033 (the “6.75% Notes”), $125.0 million of the5.125% Notes due 2017 (the “5.125% Notes”), $300.0 million of the 6.05% Notesdue 2018 (the “6.05% Notes”), the 5.500% Notes and $149.6 million outstandingunder the BES Credit Agreement (as discussed below). See Note 10 to thecondensed consolidated financial statements for more information about theterms of the debt discussed above.

 

The fair values ofBuckeye’s aggregate debt and credit facilities were estimated to be $1,560.6million at September 30, 2009 and $1,367.7 million at December 31,2008.  The fair values of the fixed-ratedebt at September 30, 2009 and December 31, 2008 were estimatedprimarily by comparing the historic market prices of Buckeye’s publicly-issueddebt with the market prices of other master limited partnerships’publicly-issued debt with similar credit ratings and terms. The fair values ofBuckeye’s variable-rate debt are their carrying amounts as the carrying amountreasonably approximates fair value due to the variable interest rate.

 

*BuckeyeCredit Facility*

 

Buckeye has aborrowing capacity of $580.0 million under the Credit Facility, which may beexpanded up to $780.0 million subject to certain conditions and upon furtherapproval of the lenders.  The CreditFacility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.0 to 1.0, subject to aprovision that allows for an increase to 5.5 to 1.0 in connection with certainfuture acquisitions.  The Funded DebtRatio is calculated by dividing consolidated debt by annualized EBITDA,which is defined in the Credit Facility as earnings before interest, taxes,depreciation, depletion and amortization, and other adjustments as defined, ineach case excluding the income of certain majority-owned subsidiaries andequity investments (but including distributions 

 

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from those majority-ownedsubsidiaries and equity investments).  AtSeptember 30, 2009, Buckeye’s Funded Debt Ratio was approximately 4.5 to1.0. As permitted by the Credit Facility, $149.6 million of borrowings by BESunder its separate credit agreement (discussed below) and $72.5 million relatedto the Buckeye NGL Pipeline impairment expense were excluded from thecalculation of the Funded Debt Ratio.  AtSeptember 30, 2009, no amounts were outstanding under the Credit Facility,while at December 31, 2008, $298.3 million was outstanding under thisfacility.

 

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 September 30,2009, Buckeye was not aware of any instances of noncompliance with thecovenants under the Credit Facility. See Note 10 to the condensed consolidatedfinancial statements for more information about the terms of the CreditFacility.

 

On August 21,2009, Buckeye Energy Holdings LLC (“BEH”), a wholly owned subsidiary ofBuckeye, bought the outstanding loans and commitments of Aurora Bank FSB(formerly Lehman Brother Bank, FSB), a lender under the Credit Facility,through a sale and assignment agreement. Concurrent with this transaction,Buckeye repaid the $213.5 million outstanding balance of the Credit Facility,plus accrued interest and fees. The Credit Facility was subsequently amended toremove BEH as a lender by terminating its commitment in full, thus reducing theborrowing capacity of the Credit Facility from $600.0 million to $580.0million.

 

At September 30,2009, 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 sheets.

 

*BESCredit Agreement*

 

On May 20,2008, BES entered into the BES Credit Agreement, which was subsequently amendedon July 18, 2008, September 15, 2008 and August 12, 2009.  The credit facility provided by the BESCredit Agreement provides for borrowings of up to $250.0 million.

 

The BES CreditAgreement requires BES to meet certain financial covenants, which are definedin the BES Credit Agreement and summarized below (in millions except forleverage 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 September 30,2009, BES’s Consolidated Tangible Net Worth and Consolidated Net WorkingCapital were $124.0 million and $79.7 million, respectively, and the ConsolidatedLeverage Ratio was 1.65 to 1.0.  Theweighted average interest rate for borrowings outstanding under the BES CreditAgreement was 2.0% at September 30, 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 September 30, 2009, Buckeye was notaware of any instances of noncompliance with the covenants under the BES CreditAgreement. See Note 10 to the condensed consolidated financial statements formore information about the terms of the BES 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.

 

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On April 21, 2009, Buckeyeentered into an interest rate swap agreement to hedge its variable interestrate risk on $50.0 million in borrowings under the Credit Facility. Under theswap agreement, Buckeye paid a fixed rate of interest of 0.63% for 180 daysand, in exchange, would receive a series of six monthly payments based on the30-day LIBOR rate in effect at the beginning of each monthly period. Theamounts received by Buckeye corresponded to the 30-day LIBOR rates that Buckeyepaid on the $50.0 million borrowed under the Credit Facility.  On August 27, 2009, in conjunction withthe repayment of the outstanding balance under the Credit Facility, the swapwas terminated.  Buckeye had designatedthe swap agreement as a cash flow hedge at inception.

 

Buckeye plans toissue new fixed-rate debt (i) on or before July 15, 2013, to repaythe $300.0 million of 4.625% Notes that are due on July 15, 2013, and (ii) onor before October 15, 2014, to repay the $275.0 million of 5.300% Notesthat are due on October 15, 2014. During the third quarter of 2009, Buckeye entered into three forwardstarting interest rate swaps with a total aggregate notional amount of $150.0million related to the issuance of debt on or before July 15, 2013 andthree forward starting interest rate swapswith a total aggregate notional amount of $150.0 million related to theissuance of debt on or before October 15, 2014.  The purpose of these swaps is to hedge thevariability of the forecasted interest payments on these expected debtissuances that may result from changes in the benchmark interest rate until thedebt is issued. Unrealized losses of $2.7 million were recorded in accumulatedother comprehensive loss to reflect the change in the fair values of the forward starting interest rate swaps as of September 30,2009. Buckeye designated the swap agreements as cash flow hedges at inceptionand expects the changes in values to be highly correlated with the changes invalue of the underlying borrowings.

 

In October 2009,Buckeye entered into another forward starting interest rate swap with a totalnotional amount of $50.0 million related to the issuance of fixed-rate debt onor before July 15, 2013.

 

*AmmoniaContract Contingencies*

 

On November 30, 2005, Buckeye GulfCoast Pipe Lines, L.P. (“BGC”), an operating subsidiary of Buckeye, purchasedan ammonia pipeline and other assets from El Paso Merchant Energy-PetroleumCompany (“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 which guaranteedEPME’s obligations to BGC.  If EPME failsto reimburse BGC for these shortfalls for a significant period during theremainder of the term of the ammonia agreements, then such unreimbursedshortfalls could exceed the $40.0 million cap on El Paso’s guaranty.  To the extent the unreimbursed shortfallssignificantly exceed the $40.0 million cap, the resulting costs incurred by BGCcould adversely affect Buckeye’s financial position, results of operations, andcash flows.  To date, BGC has continuedto receive payment for ammonia costs under the contracts at issue. BGC has notcalled on El Paso’s guaranty and believes only BGC may invoke the guaranty.EPME, however, contends that El Paso’s guaranty is the source of payment forthe shortfalls, but has not clarified the extent to which it believes theguaranty has been exhausted.  Given theuncertainty of future ammonia prices and EPME’s future actions, Buckeye isunable to estimate the amount of any such losses it might incur in the future.Buckeye is assessing its options, including potential recourse against EPME andEl Paso, with respect to this matter.

 

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*Cash Flows fromOperations*

* *

The components of cashflows from operations for the nine months ended September 30, 2009 and2008 are as follows (in thousands):

 
| ** **                                     | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **September 30,** | ** ** |
| ** **                                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net  income                                    |       | $                      | 63,682     |   | $ | 127,587 |   |
| Value  of ESOP shares released                 |       | 768                    |       | 2,119 |   |
| Depreciation  and amortization                 |       | 40,061                 |       | 38,067 |   |
| Asset  impairment expense                      |       | 72,540                 |       | — |   |
| Net  changes in fair value of derivatives      |       | (5,632                 | )          | — |   |
| Changes  in current assets and liabilities     |       | (103,529               | )          | 6,777 |   |
| Changes  in non-current assets and liabilities |       | (6,600                 | )          | (1,515 | ) |
| Other                                          |       | 3,390                  |       | 5,513 |   |
| Total                                          |       | $                      | 64,680     |   | $ | 178,548 |   |

 

Cash flows fromoperations were $64.7 million for the first nine months of 2009, a decrease of$113.9 million from the first nine months of 2008.

 

For the nine months ended September 30, 2009,cash used in working capital resulted primarily from increases in inventoriesof $90.6 million, prepaid and other current assets of $21.1 million and tradereceivables of $8.4 million.  These cashuses were partially offset by an increase in accrued and other currentliabilities of $14.0 million and a decrease in construction and pipelinerelocation receivables of $9.4 million.

 

Increases in inventoryare primarily due to an increase in inventory purchases which are hedged withfutures contracts that expire primarily in the winter months.  These inventory purchases were made for thepurposes of storing inventory through the summer and selling the inventory inthe next winter.  As a result of energymarket conditions, Buckeye significantly increased its physical inventorypurchases during the first nine months of 2009. The cash invested in inventories is expected to be recovered within thenext six months.  Increases in prepaidand other current assets are primarily due to an increase in prepaid serviceswithin the Natural Gas Storage segment and an increase in customer depositswithin the Energy Services segment, partially offset by a decrease in margindeposits on futures contracts in the Energy Services segment.  The increase in trade receivables is due tothe timing of collections as compared to amounts outstanding at December 31,2008.  The increase in accrued and othercurrent liabilities is primarily due to an increase in unearned revenues in theNatural Gas Storage segment. The decrease in construction and pipelinerelocation receivables is due to a decrease in construction activity during thefirst nine months of 2009.

 

*Cash Flows from Investing Activities*

 

Net cash used in investing activities for the ninemonths ended September 30, 2009 and 2008 are as follows (in thousands):

 
| ** **                                                              | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | **September 30,** | ** ** |
| ** **                                                              | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Capital expenditures                                                    |       | $                      | 58,803     |   | $ | 67,890 |   |
| Acquisitions  and equity investments                                    |       | 3,880                  |       | 660,252 |   |
| Net (proceeds)  expenditures for disposal property, plant and equipment |       | (1,248                 | )          | 513 |   |
| Proceeds  from sale of discontinued operations                          |       | —                 |       | (52,584 | ) |
| Total                                                                   |       | $                      | 61,435     |   | $ | 676,071 |   |

 

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Inthe first nine months of 2009, Buckeye invested an additional $3.9 million inWest Texas LPG Pipeline Limited Partnership (“WT LPG”) as Buckeye’s pro-ratacontribution for an expansion project that was required to meet increasedpipeline demand caused by increased product production in the Fort Worth basinand East Texas regions. The expansion project consists of the construction of39 miles of 12-inch pipeline and the installation of multiple boosterstations.  The WT LPG expansion pipelinebecame operational in April 2009. WT LPG is owned 80% by Chevron Pipe Line Co. and 20% by Buckeye.

 

In thefirst nine months of 2008, Buckeye expended $438.8 million for the acquisitionof Lodi Gas, $143.2 million for the acquisition of Farm & Home OilCompany LLC, and an aggregate of $75.5 million for the acquisition of fourterminals in Albany, New York, Niles and Ferrysburg, Michigan, andWethersfield, Connecticut and the acquisition of the 50% member interest inWesPac Pipelines — San Diego LLC that Buckeye did not already own.

 

Capital expenditures are summarized below (net ofamounts accrued at September 30, 2009 and 2008) (in thousands):

 
| ** **                       | ** ** | **Nine Months Ended**  | ** **   |
|----------------------------------|------------|------------------------|--------------|
| ** **                       | ** ** | **September 30,** | ** **   |
| ** **                       | ** ** | **2009**               | ** **   | **2008** | ** ** |
| Sustaining  capital expenditures |       | $                      |  11,869 |   | $ |  14,497 |   |
| Expansion  and cost reduction    |       | 46,934                 |         | 53,393 |   |
| Total                            |       | $                      |  58,803 |   | $ |  67,890 |   |

 

Buckeye incurred $11.9 million and $14.5 million ofsustaining capital expenditures and $46.9 million and $53.4 million ofexpansion and cost-reduction expenditures in the first nine months of 2009 and2008, respectively.  Expansion and costreduction projects in 2009 and 2008 included a natural gas storage expansionproject known as Kirby Hills Phase II, as well as ethanol and butane blendingprojects at certain of Buckeye’s terminals, and the construction of threeadditional tanks with capacity of 0.4 million barrels in Linden, New Jersey.

 

Buckeye expects to spend approximately $85.0 millionto $100.0 million in capital expenditures in 2009, of which approximately $20.0million to $25.0 million is expected to relate to sustaining capitalexpenditures and $65.0 million to $75.0 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.  In 2009, major expansion and cost-reductionexpenditures, which represent growth capital, include the completion of KirbyHills Phase II and will include the completion of the construction ofadditional product storage tanks at Linden, New Jersey and the construction ofa 4.7 mile pipeline in central Connecticut to connect Buckeye’s pipeline inConnecticut to a third party’s electric generation plant which is currentlyunder construction.

 

*Cash Flows fromFinancing Activities*

* *

BGH did not borrowunder the BGH Credit Agreement in the first nine months of 2009 or 2008.  BGH’s distributions to its unitholderstotaled $29.7 million and $25.3 million in the first nine months of 2009 and2008, respectively.

 

On August 18, 2009, Buckeye sold the 5.500% Notes in an underwritten publicoffering. The notes were issued at 99.35% of their principal amount. Totalproceeds from the offering, after underwriters’ fees, expenses and debtissuance costs of $1.8 million, were approximately $271.4 million, andwere used to reduce amounts outstanding under the Credit Facility and for workingcapital purposes.

 

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 $91.2million, and were used to reduce amounts outstanding under the CreditFacility.  On April 29, 2009, theunderwriters of the March 31 equity offering exercised their option topurchase an additional 390,000 

 

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LP Units.  Buckeye also used the net proceeds from thisoffering of approximately $13.4 million to reduce outstanding borrowings underthe Credit Facility.

 

During the first ninemonths of 2009 and 2008, Buckeye borrowed $160.7 million and $501.0 millionunder its Credit Facility, respectively, and repaid $459.0 million and $249.0million, respectively.  Buckeye borrowedand repaid $187.6 and $134.0 million, respectively, under the BES CreditAgreement during the nine months ended September 30, 2009.  In 2008, net payments under the BES CreditAgreement and BES’ previous credit agreement were $1.0 million. In January 2008,Buckeye received net proceeds of $298.0 million for the sale of the 6.05% Notesin an underwritten public offering to partially pre-fund the Lodi Gasacquisition.

 

Distributions tononcontrolling interests, consisting primarily of Buckeye’s distributions toholders of its LP Units, were $133.1 million in the first nine months of 2009compared to $118.1 million in the first nine months of 2008.  The increase in distributions resulted fromincreases in the unit distribution rate and the issuance of 3.0 million LPUnits in the first nine months of 2009.

 

**OTHER MATTERS**

 

# *Accounting Pronouncements*

#  

See Note 1 to BGH’scondensed consolidated financial statements for a description of recentaccounting developments.

 

# *Forward Looking Statements*

#  

The information containedabove in this Management’s Discussion and Analysis and elsewhere in this Form 10-Qincludes “forward-looking statements.” Such statements use forward-looking words such as “anticipate,” “continue,”“estimate,” “expect,” “may,” “believe,” “will,” or other similar words, althoughsome forward-looking statements are expressed differently.  These statements discuss future expectations and containprojections.  Specific factors that couldcause actual results to differ from those in the forward-looking statementsinclude, but are not limited to: (1) BGH’s ability to pay distributions toits unitholders; (2) BGH’s expected receipt of distributions and incentivedistributions from Buckeye; (3) anticipated trends in Buckeye’s business; (4) pricetrends and overall demand for petroleum products and natural gas in the UnitedStates in general and in Buckeye’s service areas in particular (economicactivity, weather, alternative energy sources, conservation and technologicaladvances may affect price trends and demands); (5) competitive pressuresfrom other transportation services or alternative fuel sources; (6) changes,if any, in laws and regulations, including, among others, safety,environmental, tax and accounting matters or Federal Energy RegulatoryCommission regulation of Buckeye’s tariff rates; (7) liability forenvironmental claims; (8) nonpayment or nonperformance by Buckeye’scustomers; (9) security issues affecting Buckeye’s assets, including,among others, potential damage to its assets caused by vandalism, acts of waror terrorism; (10) construction costs, unanticipated capital expendituresand operating expenses to repair or replace Buckeye’s assets;(11) nonpayment or nonperformance by Buckeye’s customers;(12) Buckeye’s ability to successfully identify and complete strategicacquisitions and make cost saving changes in operations; (13) expansion inthe operations of Buckeye’s competitors; (14) Buckeye’s ability tointegrate any acquired operations into its existing operations and to realizeanticipated cost savings and efficiencies; (15) shut-downs or cutbacks atmajor refineries that use Buckeye’s services; (16) deterioration inBuckeye’s labor relations; (17) regional economic conditions;(18) changes in real property tax assessments; (19) disruptions tothe air travel system; (20) interest rate fluctuations and other capitalmarket conditions; (21) BGH’s future results of operations; (22) BGH’sliquidity and ability to finance its activities; (23) market conditions inBuckeye’s industry; (24) availability and cost of insurance on BGH’s andBuckeye’s assets and operations; (25) conflicts of interest betweenBuckeye, its general partner and BGH; (26) the treatment of Buckeye or BGHas a corporation for federal income tax purposes or if BGH or Buckeye becomesubject to entity-level taxation for state tax purposes; (27) the impactof governmental legislation and regulation on BGH and Buckeye and (28) Buckeye’sability to realize the efficiencies expected to result from Buckeye’sreorganization.

 

These factors are not necessarily all ofthe important factors that could cause actual results to differ materially fromthose expressed in any of our forward-looking statements.  Other unknown or unpredictable factors couldalso 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 considering forward-lookingstatements, you should keep in mind the risk factors and other 

 

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cautionarystatements in BGH’s Annual Report on Form 10-K for 2008, including thosedescribed 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 and QualitativeDisclosures About Market Risk

#  

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

######  

NeitherBGH nor Buckeye has any trading derivative instruments or engages in hedgingactivity with respect to trading instruments.

 

###### *MarketRisk — Non-Trading Instruments*

######  

Buckeyeis exposed to financial market risk resulting from changes in commodity pricesand interest 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 compares the change in the fair value of New YorkMercantile Exchange futures contracts to the change in fair value of Buckeye’s hedged fuel inventory.

 

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 each reporting period.

 

As of September 30,2009, the Energy Services segment had commodity derivative assets andliabilities as follows (in thousands):

 
| ** **                                         | ** ** | **September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **2009**               | ** ** |
| **Assets:**                                        | ** ** | ** **             | ** ** |
| Fixed-price  sales contracts                       |       | $                      | 12,840     |   |
| Futures  contracts for fixed-price sales contracts |       | 4,000                  |       |
| Futures  contract for natural gas                  |       | 590                    |       |
|                                               |       |                   |       |
| **Liability:**                                     | ** ** | ** **             | ** ** |
| Futures  contracts for inventory                   |       | (10,314                | )          |
| Fixed-price  sales contracts                       |       | (1,859                 | )          |
| Total                                              |       | $                      | 5,257      |   |

 

Substantially all of the unrealized loss at September 30,2009 for inventory hedges represented by futures contracts will be realized bythe second quarter of 2010 as the related inventory is sold.  Gains recorded on inventory hedges that wereineffective were approximately $10.0 million and $17.7 million for the threeand nine months ended September 30, 2009, respectively.  As of September 30, 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 December 2010.  In addition, at September 30, 2009,Buckeye had refined product inventories which it intends to use to satisfy aportion of the fixed-price sales contracts.

 

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Based on a hypothetical 10% movement in the underlying quotedmarket prices of the commodity financial instruments outstanding at the datesindicated in the following table, the estimated fair value of portfolio ofcommodity financial instruments would be as follows (in thousands):

 
| ** **                                                            | ** ** | ** **         | ** ** | **Commodity**   | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|-----------------|------------|
| ** **                                                            | ** ** | ** **         | ** ** | **Financial**   | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Instrument**  | ** ** |
| ** **                                                            | ** ** | **Resulting**      | ** ** | **Portfolio**   | ** ** |
| **Scenerio**                                                          | ** ** | **Classification** | ** ** | **Fair Value**  | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Gain (Loss)** | ** ** |
| Fair  value assuming no change in underlying commodity prices (as is) |       | Asset              |       | $               | 5,257      |   |
| Fair  value assuming 10% increase in underlying commodity prices      |       | Liability          |       | $               | (15,685    | ) |
| Fair  value assuming 10% decrease in underlying commodity prices      |       | Asset              |       | $               | 26,199     |   |

 

*InterestRate Risk*

 

Buckeye is exposedto risk resulting from changes in interest rates.  Buckeye does not currently have foreignexchange risk.  Buckeye is exposed tofair value risk with respect to the fixed-rate portion of its financing arrangements(the 5.125% Notes, the 5.300% Notes, the 4.625% Notes, the 6.75% Notes, the6.05% Notes and the 5.500% Notes) and to cash flow risk with respect to itsvariable rate obligations (the Credit Facility and the BES Credit Agreement).  Fair value risk represents the risk that thevalue of the fixed portion of Buckeye’s financing arrangements will rise orfall depending on changes in interest rates. Cash flow risk represents the risk that interest costs related to theCredit Facility and the BES Credit Agreement will rise or fall depending onchanges in interest rates.

 

At September 30,2009, Buckeye had total fixed-rate debt obligations at face value of $1,425.0million, 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, $300.0 million of the 6.05% Notes and $275.0 million of the 5.500%Notes.  The fair value of thesefixed-rate obligations at September 30, 2009 was approximately $1,411.0million.  Buckeye estimates that a 1%decrease in rates for obligations of similar maturities would increase the fairvalue of its fixed-rate debt obligations by $87.6 million. Buckeye’s variabledebt obligation was $149.6 million under the BES Credit Agreement at September 30,2009.  Based on the balances outstandingat September 30, 2009, a 1% increase or decrease in interest rates wouldincrease or decrease annual interest expense by $1.5 million.

 

Item 4. Controls and Procedures

 

(a)       Evaluation of Disclosure Controls andProcedures.

 

The management ofMainLine Management, with the participation of its Chief Executive Officer andChief Financial Officer, evaluated the design and effectiveness of itsdisclosure controls and procedures for BGH as of the end of the period coveredby this report.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat MainLine Management’s disclosure controls and procedures for BGH as of theend of the period covered by this report are designed and operating effectivelyto provide reasonable assurance that the information required to be disclosedby MainLine Management in reports filed on behalf of BGH under the SecuritiesExchange Act of 1934 is (i) recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and (ii) accumulatedand communicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.  A controls system cannotprovide absolute assurance, however, that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within a company have been detected.

 

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(b)       Changesin Internal Control over Financial Reporting

 

There have been no changes in MainLine Management’s internal control overfinancial reporting for BGH during the most recent fiscal quarter with respectto BGH’s operations that has materially affected, or is reasonably likely tomaterially affect, management’s internal control over financial reporting forBGH.

 

PART II— OTHER INFORMATION

 

Item1. Legal Proceedings

 

For information on legalproceedings, see Part I, Item 1, Financial Statements, Note 9, “Contingencies”in the Notes to Condensed Consolidated Financial Statements included in thisQuarterly Report, which is incorporated into this item by reference.

 

Item 1A. RiskFactors

 

Security holders and potential investors in BGH’s securities shouldcarefully consider the risk factors set forth in Part I, “Item 1A. RiskFactors” of BGH’s Annual Report on Form 10-K for 2008 and in Part II,“Item 1A. Risk Factors” of BGH’s Quarterly Report on Form 10-Q for thequarter ended June 30, 2009 in addition to other information in suchreports and in this Quarterly Report. BGH has identified these risk factors as important factors that couldcause its actual results to differ materially from those contained in anywritten or oral forward-looking statements made by BGH or on its behalf.

 

Item6. Exhibits

 

(a)          Exhibits

 

4.1     Sixth Supplemental Indenture, dated August 18,2009, between Buckeye Partners, L.P. and U.S. Bank National Association(successor-in-interest to SunTrust Bank) (incorporated by reference to Exhibit 4.1to Buckeye Partners, L.P.’s Current Report on Form 8-K filed on August 24,2009).

 

10.1   Third Increase Agreement and Waiver datedas of August 12, 2009, to the Credit Agreement, dated as of May 20,2008, among Buckeye Energy Services LLC, BNP Paribas and other lenders partythereto (incorporated by reference to Exhibit 10.1 to Buckeye Partners, L.P.’sCurrent Report on Form 8-K filed on August 19, 2009).

 

10.2   Fourth Amendmentto Credit Agreement, dated August 21, 2009, among Buckeye Partners, L.P.,SunTrust Bank, as administrative agent, and the lenders signatory thereto(incorporated by reference to Exhibit 10.2 to Buckeye Partners, L.P.’sQuarterly Report on Form 10-Q for the quarterly period ended September 30,2009 filed on November 3, 2009).

 

31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) underthe Securities Exchange Act of 1934.

 

31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) underthe Securities Exchange Act of 1934.

 

32.1   Certification of Chief Executive Officer, Pursuant to18 U.S.C. Section 1350.

 

32.2   Certification of Chief Financial Officer, Pursuant to18 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.

 

 
|                         | By:    | BUCKEYE GP HOLDINGS  L.P.              |
|------------------------------|--------|----------------------------------------|
|                         |   | (Registrant)                           |
|                         |   |                                   |
|                         | By:    | MAINLINE MANAGEMENT  LLC,              |
|                         |   | as General Partner                     |
|                         |   |                                   |
|                         |   |                                   |
| Date: November 3,  2009 | By:    | /s/ Keith E. St.Clair                  |
|                         |   | Keith E. St.Clair                      |
|                         |   | Chief Financial Officer                |
| * *                     |   | *(Principal Accounting and  Principal* |
| * *                     |   | *Financial Officer)*                   |

 

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