**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**FORM 10-Q**

 

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

 

**Commission file number 001-32963**

 

**BUCKEYEGP HOLDINGS L.P.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                              | ** ** | **11-3776228**       |
|-------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of          |       | IRS Employer         |
| incorporation or  organization)           |       | Identification  No.) |
|                                      |       |                 |
| **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 fiscalyear, if changed since last report)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateweb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (**§**232.405of this chapter) during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  Yes  o  No  o

 

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

 

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

 

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

 

As of July 29,2009, there were 27,769,647 Common Units and 530,353 Management Unitsoutstanding.

 

 

 

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BUCKEYE GPHOLDINGS L.P.

INDEX

 
| ** **                          | ** **                                                                                                                   | **Page** |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I- FINANCIAL  INFORMATION |                                                                                                                         |
|                                |                                                                                                                         |     |
| Item 1.                             | Condensed Consolidated  Financial Statements (Unaudited)                                                                     |     |
|                                |                                                                                                                         |     |
|                                | Condensed Consolidated  Statements of Operations for the Three and Six Months Ended June 30,  2009 and 2008             | 3        |
|                                |                                                                                                                         |     |
|                                | Condensed Consolidated  Balance Sheets as of June 30, 2009 and December 31, 2008                                   | 4        |
|                                |                                                                                                                         |     |
|                                | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008                        | 5        |
|                                |                                                                                                                         |     |
|                                | Condensed Consolidated  Statement of Changes in Partners’ Capital for the Six Months Ended  June 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                                                                  | 48       |
|                                |                                                                                                                         |     |
| Item 4.                             | Controls and Procedures                                                                                                      | 50       |
|                                |                                                                                                                         |     |
| PART II- OTHER  INFORMATION    |                                                                                                                         |
|                                |                                                                                                                         |     |
| Item 1.                             | Legal Proceedings                                                                                                            | 51       |
|                                |                                                                                                                         |     |
| Item 1A.                            | Risk Factors                                                                                                                 | 51       |
|                                |                                                                                                                         |     |
| Item 6.                             | Exhibits                                                                                                                     | 51       |

 

2

----

 

PART I- FINANCIAL INFORMATION

 

Item1.Condensed Consolidated Financial Statements

 

**BUCKEYE GP HOLDINGS L.P.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| **Revenues:**                                                    |       |                   |       |                 |       |   |   |   |   |
| Product  sales                                                   |       | $                      | 201,777    |                 | $          | 346,436 |   | $ | 470,556 |   | $ | 587,482 |   |
| Transportation  and other                                        |       | 149,443                |       | 146,112              |       | 297,504 |   | 285,342 |   |
| Total  revenue                                                   |       | 351,220                |       | 492,548              |       | 768,060 |   | 872,824 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| **Costs and expenses:**                                          |       |                   |       |                 |       |   |   |   |   |
| Cost  of product sales                                           |       | 193,440                |       | 341,591              |       | 444,116 |   | 578,203 |   |
| Operating  expenses                                              |       | 68,842                 |       | 69,991               |       | 142,742 |   | 136,282 |   |
| Depreciation  and amortization                                   |       | 13,559                 |       | 12,342               |       | 26,923 |   | 23,725 |   |
| Asset  impairment expense                                        |       | 72,540                 |       | —               |       | 72,540 |   | — |   |
| General  and administrative                                      |       | 10,158                 |       | 11,638               |       | 20,193 |   | 21,534 |   |
| Reorganization  expense                                          |       | 28,113                 |       | —               |       | 28,113 |   | — |   |
| Total  costs and expenses                                        |       | 386,652                |       | 435,562              |       | 734,627 |   | 759,744 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| Operating  (loss) income                                         |       | (35,432                | )          | 56,986               |       | 33,433 |   | 113,080 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| **Other income (expense):**                                      |       |                   |       |                 |       |   |   |   |   |
| Investment  income                                               |       | 142                    |       | 237                  |       | 294 |   | 851 |   |
| Interest  and debt expense                                       |       | (16,236                | )          | (18,270              | )          | (33,639 | ) | (36,448 | ) |
| Total  other expense                                             |       | (16,094                | )          | (18,033              | )          | (33,345 | ) | (35,597 | ) |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| (Loss)  income before equity income                              |       | (51,526                | )          | 38,953               |       | 88 |   | 77,483 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| Equity  income                                                   |       | 3,142                  |       | 1,344                |       | 5,224 |   | 3,399 |   |
| Net  (loss) income                                               |       | (48,384                | )          | 40,297               |       | 5,312 |   | 80,882 |   |
| Less:  net loss (income) attributable to noncontrolling interest |       | 58,156                 |       | (34,980              | )          | 14,609 |   | (69,716 | ) |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| **Amounts attributable to Buckeye GP Holdings L.P.**             |       | $                      | 9,772      |                 | $          | 5,317 |   | $ | 19,921 |   | $ | 11,166 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| Net  income per partnership unit:                                |       |                   |       |                 |       |   |   |   |   |
| Basic                                                            |       | $                      | 0.35       |                 | $          | 0.19 |   | $ | 0.70 |   | $ | 0.39 |   |
| Diluted                                                          |       | $                      | 0.35       |                 | $          | 0.19 |   | $ | 0.70 |   | $ | 0.39 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| 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.

 

3

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**BUCKEYE GP HOLDINGS L.P.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                   | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **Assets:**                                                                                                  |       |              |       |                  |       |
| Current  assets:                                                                                             |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                   |       | $                 | 26,302     |                  | $          | 61,281 |   |
| Trade  receivables, net                                                                                      |       | 82,801            |       | 79,969                |       |
| Construction  and pipeline relocation receivables                                                            |       | 16,646            |       | 21,501                |       |
| Inventories                                                                                                  |       | 166,546           |       | 84,229                |       |
| Derivative  assets                                                                                           |       | 19,901            |       | 97,375                |       |
| Prepaid  and other current assets                                                                            |       | 98,787            |       | 75,406                |       |
| Total  current assets                                                                                        |       | 410,983           |       | 419,761               |       |
|                                                                                                         |       |              |       |                  |       |
| Property  , plant and equipment, net                                                                         |       | 2,176,140         |       | 2,241,612             |       |
| Equity  investments                                                                                          |       | 96,377            |       | 90,110                |       |
| Goodwill                                                                                                     |       | 432,170           |       | 433,892               |       |
| Intangible  assets, net                                                                                      |       | 42,346            |       | 44,114                |       |
| Other  non-current assets                                                                                    |       | 26,409            |       | 33,608                |       |
| Total  assets                                                                                                |       | $                 | 3,184,425  |                  | $          | 3,263,097 |   |
|                                                                                                         |       |              |       |                  |       |
| **Liabilities and partners’ capital:**                                                                  |       |              |       |                  |       |
| Current  liabilities:                                                                                        |       |              |       |                  |       |
| Line  of credit                                                                                              |       | $                 | 99,000     |                  | $          | 96,000 |   |
| Current  portion of long-term debt                                                                           |       | 6,236             |       | 6,294                 |       |
| Accounts  payable                                                                                            |       | 45,050            |       | 42,098                |       |
| Derivative  liabilities                                                                                      |       | 27,650            |       | 48,623                |       |
| Accrued  and other current liabilities                                                                       |       | 128,476           |       | 116,464               |       |
| Total  current liabilities                                                                                   |       | 306,412           |       | 309,479               |       |
|                                                                                                         |       |              |       |                  |       |
| Long-term  debt                                                                                              |       | 1,361,177         |       | 1,453,425             |       |
| Other  non-current liabilities                                                                               |       | 103,955           |       | 101,359               |       |
| Total  liabilities                                                                                           |       | 1,771,544         |       | 1,864,263             |       |
|                                                                                                         |       |              |       |                  |       |
| Commitments  and contingent liabilities                                                                      |       | —            |       | —                |       |
|                                                                                                         |       |              |       |                  |       |
| **Buckeye GP Holdings L.P. capital:**                                                                        |       |              |       |                  |       |
| General  Partner - (2,830 common units outstanding as of June 30, 2009 and  December 31, 2008)     |       | 7                 |       | 7                     |       |
| Limited  Partners (27,766,817 common units outstanding as of June 30, 2009 and  December 31, 2008) |       | 227,947           |       | 226,565               |       |
| Management  Units (530,353 units outstanding as of June 30, 2009 and  December 31, 2008)           |       | 3,066             |       | 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                                                                      |       | 233,577           |       | 232,060               |       |
| Noncontrolling  interest                                                                                     |       | 1,179,304         |       | 1,166,774             |       |
| Total  partners’ capital                                                                                |       | 1,412,881         |       | 1,398,834             |       |
|                                                                                                         |       |              |       |                  |       |
| Total  liabilities and partners’ capital                                                                |       | $                 | 3,184,425  |                  | $          | 3,263,097 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**BUCKEYE GP HOLDINGS L.P.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                             | ** ** | **June 30,**    | ** ** |
| ** **                                                                             | ** ** | **2009**             | ** ** | **2008** | ** ** |
| **Cash  flows from operating activities:**                                             |       |                 |       |   |   |
| Net  income                                                                            |       | $                    | 5,312      |   | $ | 80,882 |   |
| **Adjustments to reconcile net income to net cash provided by  operating activities:** |       |                 |       |   |   |
| Amortization  of debt discount and unit-based compensation                             |       | 2,812                |       | 1,515 |   |
| Value  of ESOP shares released                                                         |       | 380                  |       | 1,671 |   |
| Depreciation  and amortization                                                         |       | 26,923               |       | 23,725 |   |
| Asset  impairment expense                                                              |       | 72,540               |       | — |   |
| Net  changes in fair value of derivatives                                              |       | 4,672                |       | — |   |
| Deferred  lease expense                                                                |       | 2,250                |       | 1,301 |   |
| Reorganization  expense                                                                |       | 28,113               |       | — |   |
| Earnings  from equity investments of Buckeye Partners, L.P.                            |       | (5,224               | )          | (3,399 | ) |
| Distributions  from equity investments of Buckeye Partners, L.P.                       |       | 2,827                |       | 2,306 |   |
| Amortization  of RIGP and Retiree Medical Plan Costs                                   |       | 358                  |       | 1,552 |   |
| **Change in assets and liabilities, net of amounts related to  acquisitions:**         |       |                 |       |   |   |
| Trade  receivables                                                                     |       | (2,832               | )          | 14,059 |   |
| Construction  and pipeline relocation receivables                                      |       | 4,855                |       | (205 | ) |
| Inventories                                                                            |       | (27,742              | )          | (19,505 | ) |
| Prepaid  and other current assets                                                      |       | (17,692              | )          | (30,394 | ) |
| Accounts  payable                                                                      |       | 5,236                |       | 8,431 |   |
| Accrued  and other current liabilities                                                 |       | (5,506               | )          | 27,955 |   |
| Other  non-current assets                                                              |       | (7,069               | )          | (95 | ) |
| Other  non-current liabilities                                                         |       | 9,424                |       | (1,320 | ) |
| Total  adjustments from operating activities                                           |       | 94,325               |       | 27,597 |   |
| Net  cash provided by discontinued operations                                          |       | —               |       | 572 |   |
| Net  cash provided by continuing operations                                            |       | 99,637               |       | 109,051 |   |
|                                                                                   |       |                 |       |   |   |
| **Cash flows from investing activities:**                                              |       |                 |       |   |   |
| Capital  expenditures                                                                  |       | (39,819              | )          | (32,501 | ) |
| Acquisitions  and equity investments, net of cash acquired                             |       | (3,880               | )          | (610,616 | ) |
| Net  expenditures for disposal of property, plant and equipment                        |       | 21                   |       | (103 | ) |
| Proceeds  from sale of discontinued operations                                         |       | —               |       | 52,584 |   |
| Net  cash used in investing activities                                                 |       | (43,678              | )          | (590,636 | ) |
|                                                                                   |       |                 |       |   |   |
| **Cash flows from financing activities:**                                              |       |                 |       |   |   |
| Net  proceeds from issuance of Buckeye Partners, L.P. limited partner units            |       | 104,779              |       | 113,148 |   |
| Proceeds  from exercise of Buckeye Partners, L.P. units options                        |       | 38                   |       | 278 |   |
| Proceeds  from issuance of long-term debt and borrowings under credit facilities       |       | 80,333               |       | 611,050 |   |
| Payment  of debt, net                                                                  |       | (169,762             | )          | (186,387 | ) |
| Debt  issuance costs                                                                   |       | (18                  | )          | (1,886 | ) |
| Distributions  to non-controlling partners of Buckeye Partners, L.P.                   |       | (87,064              | )          | (77,338 | ) |
| Settlement  payment of interest rate swaps                                             |       | —               |       | (9,638 | ) |
| Distributions  to Limited Partners                                                     |       | (19,244              | )          | (16,556 | ) |
| Net  cash (used in) provided by financing activities                                   |       | (90,938              | )          | 432,671 |   |
| Net  decrease in cash and cash equivalents                                             |       | (34,979              | )          | (48,914 | ) |
| Cash  and cash equivalents—Beginning of year                                      |       | 61,281               |       | 94,486 |   |
| Cash  and cash equivalents—End of period                                          |       | $                    | 26,302     |   | $ | 45,572 |   |
| ***Supplemental cash flow information:***                                              |       |                 |       |   |   |
| Cash  paid for interest (net of amount capitalized)                                    |       | $                    | 33,349     |   | $ | 26,942 |   |
| Capitalized  interest                                                                  |       | 32,231               |       | 620 |   |
| Cash  paid for income tax                                                              |       | 1,298                |       | 531 |   |
| ***Non-cash changes in assets and  liabilities:***                                     |       |                 |       |   |   |
| Hedge  accounting                                                                      |       | 907                  |       | 6,751 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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**BUCKEYEGP HOLDINGS L.P.**

**CONDENSEDCONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Buckeye GP Holdings L.P. Unitholders** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                                            | ** ** | ** **                               | ** ** | ** **   | ** ** | ** **     | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **General**                              | ** ** | **Limited**  | ** ** | ** **     | ** ** | **Gains on** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Partner**                              | ** ** | **Partners** | ** ** | ** **     | ** ** | **Issuance of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Common**                               | ** ** | **Common**   | ** ** | **Management** | ** ** | **Buckeye’s** | ** ** | **Noncontrolling** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Units**                                | ** ** | **Units**    | ** ** | **Units**      | ** ** | **LP Units** | ** ** | **Interest** | ** ** | **Total** | ** ** |
| **Partners’  capital- January 1, 2008**                     |       | $                                        | 7          |         | $          | 232,928        |       | $ | 3,156 |   | $ | 2,239 |   | $ | 1,066,143 |   | $ | 1,304,473 |   |
| Net income*                                                           |       | —                                   |       | 10,957       |       | 209            |       | — |   | 69,716 |   | 80,882 |   |
| Distributions to Limited  Partner - Common Units                      |       | —                                   |       | (16,246      | )          | (310           | )          | — |   | — |   | (16,556 | ) |
| Recognition of  unit-based compensation charges                       |       | —                                   |       | 684          |       | 11             |       | — |   | — |   | 695 |   |
| Equity gains on issuance  of Buckeye’s LP Units                  |       | —                                   |       | —       |       | —         |       | 212 |   | (212 | ) | — |   |
| Net proceeds from  issuance of 2.6 million of Buckeye’s LP Units |       |                                     |       |         |       |           |       |   |   | 113,148 |   | 113,148 |   |
| Amortization of  Buckeye’s LP Unit options                       |       | —                                   |       | —       |       | —         |       | — |   | 274 |   | 274 |   |
| Exercise of limited  partner unit options                             |       | —                                   |       | —       |       | —         |       | — |   | 278 |   | 278 |   |
| Services Company’s  non-cash ESOP distributions                  |       | —                                   |       | —       |       | —         |       | — |   | (2,759 | ) | (2,759 | ) |
| Acquired noncontrolling  interest not previously owned                |       | —                                   |       | —       |       | —         |       | — |   | (1,539 | ) | (1,539 | ) |
| Distributions to  noncontrolling interest                             |       | —                                   |       | —       |       | —         |       | — |   | (77,338 | ) | (77,338 | ) |
| Other                                                                 |       | —                                   |       | —       |       | —         |       | — |   | 2,286 |   | 2,286 |   |
| **Partners’  capital- June 30, 2008**                       |       | $                                        | 7          |         | $          | 228,323        |       | $ | 3,066 |   | $ | 2,451 |   | $ | 1,169,997 |   | $ | 1,403,844 |   |
| ** **                                                            |       |                                     |       |         |       |           |       |   |   |   |   |   |   |
| **Partners’  capital-January 1, 2009**                      |       | $                                        | 7          |         | $          | 226,565        |       | $ | 3,037 |   | $ | 2,451 |   | $ | 1,166,774 |   | $ | 1,398,834 |   |
| Net income*                                                           |       | —                                   |       | 19,547       |       | 374            |       | — |   | (14,609 | ) | 5,312 |   |
| Distributions to Limited  Partner - Common Units                      |       | —                                   |       | (18,883      | )          | (361           | )          | — |   | — |   | (19,244 | ) |
| Recognition of  unit-based compensation charges                       |       | —                                   |       | 718          |       | 16             |       | — |   | — |   | 734 |   |
| Equity gains on issuance  of Buckeye’s LP Units                  |       | —                                   |       |         |       | —         |       | 106 |   | (106 | ) | — |   |
| Net proceeds from  issuance of 3.0 million of Buckeye’s LP Units |       |                                     |       |         |       |           |       |   |   | 104,779 |   | 104,779 |   |
| Amortization of  Buckeye’s LP Unit options                       |       | —                                   |       | —       |       | —         |       | — |   | 477 |   | 477 |   |
| Exercise of limited  partner unit options                             |       | —                                   |       | —       |       | —         |       | — |   | 38 |   | 38 |   |
| Services Company’s  non-cash ESOP distributions                  |       | —                                   |       | —       |       | —         |       | — |   | (3,122 | ) | (3,122 | ) |
| Distributions to  noncontrolling interest                             |       | —                                   |       | —       |       | —         |       | — |   | (87,064 | ) | (87,064 | ) |
| RIGP and Retiree Medical  Plan settlement/curtailment charge          |       |                                     |       |         |       |           |       |   |   | 7,971 |   | 7,971 |   |
| Other                                                                 |       | —                                   |       | —       |       | —         |       | — |   | 4,166 |   | 4,166 |   |
| **Partners’  capital-June 30, 2009**                        |       | $                                        | 7          |         | $          | 227,947        |       | $ | 3,066 |   | $ | 2,557 |   | $ | 1,179,304 |   | $ | 1,412,881 |   |

 

----

*  Comprehensive income equals net income.

 

See accompanying notes to condensed consolidated financial statements.

 

6

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

1.               BASISOF PRESENTATION

 

Buckeye GP Holdings L.P.(“BGH”) is a publicly traded (NYSE: BGH) master limited partnership organizedon June 15, 2006 under the laws of the state of Delaware.  BGH owns 100% of Buckeye GP LLC (“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.  BGH’s limited partnerunits are owned approximately 62% by BGH GP Holdings, LLC (“BGH GP”),approximately 1% by certain members of senior management and approximately 37%by the public. BGH GP is owned by affiliates of ArcLight Capital Partners, LLC(“ArcLight”), Kelso & Company (“Kelso”), and certain investment fundsalong with certain members of senior management of Buckeye GP.  MainLine Management LLC, a Delaware limitedliability company (“MainLine Management”), is the general partner of BGH, andis wholly owned by BGH GP.

 

BGH’s only business isthe ownership of Buckeye GP.  Buckeye GP’sonly business is the management of Buckeye and its subsidiaries.  At June 30, 2009, Buckeye GP owned anapproximately 0.5% general partner interest in Buckeye.

 

Buckeye has one of thelargest independent refined petroleum products pipeline systems in the UnitedStates in terms of volumes delivered, with approximately 5,400 miles ofpipeline and 64 active products terminals that provide aggregate storagecapacity of approximately 24.7 million barrels. In addition, Buckeye operatesand maintains approximately 2,400 miles of other pipelines under agreementswith major oil and chemical companies. Buckeye also owns and operates a major natural gas storage facility innorthern California which provides approximately 33 billion cubic feet (“Bcf”)of gas storage capacity and is a wholesale distributor of refined petroleumproducts in the northeastern andmidwestern United States in areas also served by Buckeye’s pipelines andterminals.

 

Buckeye conducts businessin five reportable operating segments: Pipeline Operations; Terminalling andStorage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 18 for a more detailed discussion ofBuckeye’s operating segments.

 

Buckeye Pipe LineServices Company (“Services Company”) was formed in 1996 in connection with theestablishment of the Buckeye Pipe Line Services Company Employee StockOwnership Plan (the “ESOP”).  At June 30,2009, Services Company owned approximately 4.0% of the publicly traded limitedpartner units of Buckeye (the “LP Units”). After the reorganization (as discussed in Note 3), Services Company willemploy approximately 850 people who provide services to the operating subsidiariesthrough which Buckeye conducts its operations. Approximately 15 people are employed directly by Buckeye’s operatingsubsidiary, Lodi Gas Storage, L.L.C. (“Lodi Gas”) and another approximately 16people are employed by Buckeye’s operating subsidiary, Buckeye Albany TerminalLLC.  Pursuant to a services agreemententered into in December 2004 (the “Services Agreement”), the operatingsubsidiaries reimburse Services Company for the costs of the services itprovides.  Pursuant to the ServicesAgreement and an Executive Employment Agreement, through December 31, 2008executive compensation costs and related benefits paid to Buckeye GP’s fourhighest salaried officers were not reimbursed by Buckeye or its operatingsubsidiaries but were reimbursed to Services Company by BGH.  Effective January 1, 2009, Buckeye andits operating subsidiaries agreed to pay for all executive compensation andbenefits earned by Buckeye GP’s four highest salaried officers in return for anannual fixed payment from BGH to Buckeye in the amount of $3.6 million.

 

BGH has determined that Services Company is avariable interest entity under the provisions of Financial Accounting StandardsBoard (“FASB”) Interpretation No. 46R “Consolidation of Variable InterestEntities” (“FIN No. 46R”). Using criteria established in FIN No. 46R,BGH has determined that Buckeye GP is the primary beneficiary of ServicesCompany, although 100% of the equity interest of Services Company is owned bythe ESOP.  Accordingly, as required byFIN No. 46R, Services Company has been consolidated in the financialstatements of BGH.

 

7

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

BGH’s condensedconsolidated balance sheet includes a noncontrolling interest capital accountthat reflects the portion of Buckeye owned by its partners other than BGH andServices Company.  Similarly, BGH’scondensed consolidated statements of operations includes income attributable tononcontrolling interest that reflects the portion of the earnings due toBuckeye’s partners other than BGH and Services Company.

 

In June 2005, the Emerging Issues Task Force (“EITF”)of the FASB issued EITF Consensus 04-05 which requires general partners of a limitedpartnership to consolidate the limited partnership if the general partner isdeemed to control the limited partnership. Using criteria established in EITFConsensus 04-05, BGH has determined that consolidation of Buckeye into BGH’sfinancial statements is appropriate.

 

In the opinion ofmanagement, the condensed consolidated financial statements of BGH, which areunaudited except that the balance sheet as of December 31, 2008 is derivedfrom audited financial statements, include all adjustments, consisting ofnormal recurring accruals, necessary to present fairly BGH’s financial positionas of June 30, 2009 along with the results of BGH’s operations for thethree and six months ended June 30, 2009 and 2008 and BGH’s cash flows forthe six months ended June 30, 2009 and 2008.  The results of operations for the three andsix months ended June 30, 2009 are not necessarily indicative of theresults to be expected for the full year ending December 31, 2009.

 

Certain prior year amounts have been reclassified inthe statement of cash flows to conform to the current-year presentation.

 

Pursuantto the rules and regulations of the Securities and Exchange Commission (“SEC”),the condensed consolidated financial statements do not include all of theinformation and notes normally included with financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America.  These condensed consolidatedfinancial statements should be read in conjunction with the consolidated financialstatements of BGH and the notes thereto for the year ended December 31,2008 contained in BGH’s Annual Report on Form 10-K as filed with the SEC on March 16, 2009.

 

*RecentlyAdopted Accounting Pronouncements*

 

On January 1, 2009,BGH adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51”(“SFAS 160”).  SFAS 160 establishedaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  These accounting and reporting standardsrequire for-profit entities that prepare consolidated financial statements to: (a) presentnoncontrolling interests as a component of equity, separate from the parent’sequity; (b) separately present the amount of consolidated net incomeattributable to noncontrolling interests in the income statement; (c) consistentlyaccount for changes in a parent’s ownership interests in a subsidiary in whichthe parent entity has a controlling financial interest as equity transactions; (d) requirean entity to measure at fair value its remaining interest in a subsidiary thatis deconsolidated; and (e) require an entity to provide sufficientdisclosures that identify and clearly distinguish between interests of theparent and interests of noncontrolling owners. 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.

 

OnJanuary 1, 2009, BGH adopted SFAS 161, “Disclosures about DerivativeInstruments and Hedging Activities — an amendment of FASB Statement No. 133,”and has included the expanded disclosures required by this statement in Note 11to these condensed consolidated financial statements.

 

In May 2009, theFASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”).  The objective of SFAS 165 is to establishgeneral standards of accounting for, and disclosure of, events that occur afterthe balance sheet 

 

8

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

date but before financialstatements are issued or are available to be issued.  SFAS 165 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.  SFAS 165 is effective for interim orannual periods ending after June 15, 2009. BGH implemented SFAS 165 during the quarter ended June 30, 2009 and evaluated forsubsequent events through July 30, 2009, the issuance date of itsfinancial statements. There were no subsequent events required to be recognizedor disclosed in the financial statements through such date.

 

*RecentlyIssued Accounting Pronouncements*

 

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

 

In June 2009, theFASB issued SFAS No.166, “Accounting for Transfers of Financial Assets — anAmendment of FASB Statement No. 140” (“SFAS 166”).  The objective of SFAS 166 is to improve therelevance, representational faithfulness, and comparability of the informationthat a reporting entity provides in its financial statements about a transferof financial assets; the effects of a transfer on its financial position,financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets.  SFAS 166 is effective as of the beginning ofeach reporting entity’s first annual reporting period that begins after November 15,2009, for interim periods within that first annual reporting period and forinterim and annual reporting periods thereafter. BGH is currently evaluatingthe impact the adoption of SFAS 166 will have on its condensedconsolidated financial statements.

 

InJune 2009, the FASB issued SFAS No. 167, “Amendments to FASBInterpretation No. 46(R)” (“SFAS 167”). The objective of SFAS 167 is to improve financial reporting by companiesinvolved with variable interest entities. SFAS 167 will require companies to perform an analysis to determinewhether the companies’ variable interest or interests give it a controllingfinancial interest in a variable interest entity.  SFAS 167 is effective as of the beginning ofeach reporting company’s first annual reporting period that begins after November 15,2009, for interim periods within that first annual reporting period, and forinterim and annual reporting periods thereafter.  Earlier application is prohibited. BGHis currently evaluating the impact the adoption of SFAS 167 will have onits condensed consolidated financial statements.

 

In June 2009, theFASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles” (the “Codification”). TheCodification will become the source of authoritative U.S. generally acceptedaccounting principles (“GAAP”) recognized by the FASB to be applied bynongovernmental entities. Rules and interpretive releases of the SEC underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. On the effective date of this Statement, the Codification will supersede allthen-existing non-SEC accounting and reporting standards. All othernon-grandfathered non-SEC accounting literature not included in the Codification will becomenon-authoritative. This statement is effective for financial statements issuedfor interim and annual periods ending after September 15, 2009.

 

9

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

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

 

Buckeye accounts forlong-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS 144”). This statement requires that long-livedassets and certain identifiable intangible assets to be held and used by anentity be reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. Thisstatement also requires that long-lived assets and certain intangible assets tobe disposed of be reported at the lower of the carrying amount or fair valueless cost to sell. Buckeye considers historical performance and future estimatedresults in its evaluation of potential impairment and then compares thecarrying amount of the asset to the estimated future cash flows expected toresult from the use of the asset. If the carrying amount of the asset exceedsthe estimated expected undiscounted future cash flows, Buckeye measures theamount of the impairment by comparing the carrying amount of the asset to itsfair value. The estimated fair value was based on a probability weightedcombination of income and market approaches.

 

Buckeyeowns and 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 pursuant to SFAS144 and an impairment evaluation resulted in a charge to earnings of $72.5million against the Pipeline Operations segment.

 

In June 2009,Buckeye’s board of directors authorized management to pursue the sale of theBuckeye NGL Pipeline. Accordingly, Buckeye reclassified the net assets andliabilities of the Buckeye NGL Pipeline to “Prepaid and other current assets”on the June 30, 2009 condensed consolidated balance sheet, as shown in Note4, and ceased depreciating the assets.

 

Net assets held for saleby Buckeye NGL Pipe Lines LLC are presented in Note 4.  The carrying amounts of the major classes ofassets and liabilities at June 30, 2009 were as follows (in thousands):

 
| Assets:                                |   |   |   |
|----------------------------------------|--------|--------|--------|
| Inventories                            |   | $      | 604    |   |
| Prepaid and other  current assets      |   | 64     |   |
| Property, plant and  equipment, net    |   | 8,639  |   |
| Assets held for sale                   |   | $      | 9,307  |   |
|                                   |   |   |   |
| Liabilities:                           |   |   |   |
| Accounts payable                       |   | $      | 2,284  |   |
| Accrued and other  current liabilities |   | 1,263  |   |
| Liabilities held for  sale             |   | $      | 3,547  |   |
|                                   |   |   |   |
| Net assets held for  sale              |   | $      | 5,760  |   |

 

Revenues for Buckeye NGLPipe Lines LLC for the three and six months ended June 30, 2009 were $3.2million and $6.5 million, respectively.

 

10

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

3.  REORGANIZATION

 

OnJuly 20, 2009, Buckeye announced the completion of a company-widereview.  During the period ended June 30,2009, Buckeye commenced a restructuring of its operations based on the findingsof the review, including a reorganization of its field operations to combinefive of its original pipeline and terminal districts into three districts, aswell as a restructuring of certain corporate functions and related corporatesupport functions.  These effortsredefined the roles and responsibilities of certain positions and called forthe elimination of resources devoted to such activities.  Approximately 260 positions are affected as aresult 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.Also, an additional approximate 180 employees will be impacted by theinvoluntary reduction in workforce under Buckeye’s ongoing severance plan.  The affected employees will receive severancebenefits, post-employment benefits including medical and dental coverage, andother services including retirement counseling and outplacement services.  Most terminations were effective as of July 20,2009.

 

Asof June 30, 2009, Buckeye has recorded a reorganization expense of $28.1million for the post-employment costs related to these restructuring activitieswhich include: (1) termination benefits pursuant to voluntary andinvoluntary severance plans of $16.0 million; (2) post-retirement benefits(see note 17) of $8.0 million; and (3) other related costs of $4.1million.  In connection with thisorganizational restructuring, Buckeye expects to incur additional expenses in2009 that are estimated to be between $2.0 to $4.0 million.

 

Theexpense incurred by segment for both the three and six months ended June 30,2009 is as follows (in thousands):

 
| Pipeline Operations       |   | $     | 23,054 |   |
|---------------------------|--------|-------|--------|--------|
| Terminalling and  Storage |   | 2,402 |   |
| Natural Gas Storage       |   | 291   |   |
| Energy Services           |   | 944   |   |
| Other Operations          |   | 1,422 |   |
| Total                     |   | $     | 28,113 |   |

 

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

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

 
| ** **                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Prepaid insurance         |       | $                 | 2,762      |                  | $          | 7,889 |   |
| Insurance receivables     |       | 9,008             |       | 5,101                 |       |
| Ammonia receivable        |       | 8,554             |       | 12,058                |       |
| Margin deposits           |       | 25,654            |       | 32,345                |       |
| Prepaid services          |       | 20,853            |       | —                |       |
| Net assets held for  sale |       | 5,760             |       | —                |       |
| Other                     |       | 26,196            |       | 18,013                |       |
| Total                     |       | $                 | 98,787     |                  | $          | 75,406 |   |

 

11

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

5.  INVENTORIES

 

Inventoriesconsist of the following (in thousands):

 
| ** **                                                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                               | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Refined petroleum  products (Ending inventory was 84.0 million and 47.7 million gallons at  June 30, 2009 and December 31, 2008, respectively) |       | $                 | 151,754    |                  | $          | 69,568 |   |
| Materials and supplies                                                                                                                                   |       | 14,792            |       | 14,661                |       |
| Total                                                                                                                                                    |       | $                 | 166,546    |                  | $          | 84,229 |   |

 

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 June 30,2009 and December 31, 2008, 89% 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 June 30,2009 and December 31, 2008, 8% and 17% of the inventory, respectively, wascommitted against fixed-priced sales contracts, and such inventory was valuedat the lower of cost or market, respectively. The remaining inventory was considered unhedged and representedapproximately one day of sales.

 

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

 

6.  INTANGIBLE ASSETS, NET

 

Intangibleassets, net consist of the following (in thousands):

 
| ** **                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                | ** ** | ** **        | ** ** | ** **            | ** ** |
| Customer relationships    |       | $                 | 38,300     |                  | $          | 38,300 |   |
| Accumulated  amortization |       | (4,146            | )          | (2,662                | )          |
| Net carrying amount       |       | 34,154            |       | 35,638                |       |
|                      |       |              |       |                  |       |
| Customer contracts        |       | 11,800            |       | 11,800                |       |
| Accumulated  amortization |       | (3,608            | )          | (3,324                | )          |
| Net carrying amount       |       | 8,192             |       | 8,476                 |       |
| Total                     |       | $                 | 42,346     |                  | $          | 44,114 |   |

 

Forthe three months ended June 30, 2009 and 2008, consolidated amortizationexpense related to intangible assets was $0.9 million and $0.1 million,respectively.  For the six months ended June 30,2009 and 2008, consolidated amortization expense related to intangible assetswas $1.8 million and $0.3 million, respectively.  Amortization expense related tointangible assets is expected to be approximately $3.8 million for each of thenext five years.

 

12

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

7.  EQUITY INVESTMENTS

 

Equityinvestments consist of the following (in thousands):

 
| ** **                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Investment  in West Shore Pipe Line Company (24.9% owned)                |       | $                 | 30,561     |                  | $          | 30,340 |   |
| Investment  in West Texas LPG Pipeline Limited Partnership (20.0% owned) |       | 50,760            |       | 44,471                |       |
| Investment  in Muskegon Pipeline LLC (40.0% owned)                       |       | 14,704            |       | 14,967                |       |
| Investment  in Transport4, LLC (25.0% owned)                             |       | 352               |       | 332                   |       |
| Total                                                                    |       | $                 | 96,377     |                  | $          | 90,110 |   |

 

Inthe first six 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.  Eighty percent of WT LPG is owned by ChevronPipe Line Co. and 20% is owned by Buckeye.

 

The following tablespresent the equity earnings for the unconsolidated affiliates noted above aswell as unaudited summarized income statement information (on a 100% basis),for the periods indicated (in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                 | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Equity  earnings:**                                      | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment in West  Shore Pipe Line Company                |       | $                      | 1,094      |                 | $          | 823 |   | $ | 2,197 |   | $ | 1,736 |   |
| Investment in West  Texas LPG Pipeline Limited Partnership |       | 1,835                  |       | 275                  |       | 2,419 |   | 1,048 |   |
| Investment in Muskegon  Pipeline LLC                       |       | 173                    |       | 224                  |       | 538 |   | 558 |   |
| Total                                                      |       | $                      | 3,102      |                 | $          | 1,322 |   | $ | 5,154 |   | $ | 3,342 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| **Summarized  income statement information:**              |       |                   |       |                 |       |   |   |   |   |
| Revenue                                                    |       | $                      | 32,316     |                 | $          | 28,685 |   | $ | 63,364 |   | $ | 58,115 |   |
| Costs and expenses                                         |       | 16,139                 |       | 21,507               |       | 31,852 |   | 38,758 |   |
| Non-operating expense                                      |       | 2,961                  |       | 2,394                |       | 5,867 |   | 5,070 |   |
| Net Income                                                 |       | 13,216                 |       | 4,784                |       | 25,645 |   | 14,287 |   |

 

13

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

8.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of thefollowing (in thousands):

 
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Taxes - other than  income          |       | $                 | 15,622     |                  | $          | 14,092 |   |
| Accrued employee  benefit liability |       | 2,297             |       | 2,297                 |       |
| Environmental  liabilities          |       | 10,331            |       | 12,337                |       |
| Interest                            |       | 24,946            |       | 25,551                |       |
| Retainage                           |       | 1,718             |       | 1,405                 |       |
| Payable for ammonia  purchase       |       | 2,498             |       | 9,373                 |       |
| Unearned revenue                    |       | 12,520            |       | 12,186                |       |
| Compensation and  vacation          |       | 11,666            |       | 15,642                |       |
| Accrued capital  expenditures       |       | 4,037             |       | 4,902                 |       |
| Reorganization                      |       | 18,787            |       | —                |       |
| Other                               |       | 24,054            |       | 18,679                |       |
| Total                               |       | $                 | 128,476    |                  | $          | 116,464 |   |

 

9.  CONTINGENCIES

 

*Claimsand Proceedings*

 

Buckeye and itssubsidiaries in the ordinary course of business are involved in various claimsand legal proceedings, some of which are covered by insurance. Buckeye isgenerally unable to predict the timing or outcome of these claims andproceedings. Based upon its evaluation of existing claims and proceedings andthe probability of losses relating to such contingencies, Buckeye has accruedcertain amounts relating to such claims and proceedings, none of which areconsidered material.

 

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

 

*EnvironmentalContingencies*

 

In accordance with itsaccounting policy, Buckeye recorded operating expenses of $1.2 million and $2.7million for the three months ended June 30, 2009 and 2008, respectively,and $6.6 million and $4.6 million for the six months ended June 30, 2009and 2008, respectively, related to environmental contingencies unrelated toclaims and proceedings.

 

*AmmoniaContract Contingencies*

 

On November 30,2005, Buckeye Gulf Coast Pipe Lines, L.P. (“BGC”), an operating subsidiary ofBuckeye, purchased an ammonia pipeline and other assets from El Paso MerchantEnergy-Petroleum Company (“EPME”), a subsidiary of El Paso Corporation (“ElPaso”).  As part of the transaction, BGCassumed the obligations of EPME under several contracts involving monthlypurchases and sales of ammonia.  EPME andBGC agreed, however, that EPME would retain the economic risks and benefitsassociated with those 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 

 

14

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

ammoniacontracts have resulted in ammonia costs exceeding ammonia sales proceeds.  The amount of the shortfall generallyincreases as the market price of ammonia increases.

 

EPME has informed BGCthat, notwithstanding the parties’ agreement, it will not continue to pay BGCfor shortfalls created by the pass-through of ammonia costs in excess ofammonia revenues.  EPME encouraged BGC toseek payment by invoking the $40.0 million guaranty made by El Paso whichguaranteed EPME’s obligations to BGC.  IfEPME fails to reimburse BGC for these shortfalls for a significant periodduring the remainder of the term of the ammonia agreements, then suchunreimbursed shortfalls could exceed the $40.0 million cap on El Paso’sguaranty.  To the extent the unreimbursedshortfalls significantly exceed the $40.0 million cap, the resulting costsincurred by BGC could adversely affect Buckeye’s financial position, results ofoperations, and cash flows.  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 the source of payment for the shortfalls,but has not clarified the extent to which it believes the guaranty has beenexhausted.  Given the uncertainty offuture ammonia prices and EPME’s future actions, Buckeye is unable to estimatethe amount of any such losses. Accordingly, Buckeye has recorded no provision for losses in theaccompanying condensed consolidated financial statements because it is unableto determine whether or not a loss has been incurred or, if a loss has beenincurred, a reasonable estimate or range of estimates of the amount of suchlosses.  Buckeye is assessing itsoptions, including potential recourse against EPME and El Paso, with respect tothis matter.

 

15

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

10.  DEBT AND CREDIT FACILITIES

 

Long-term debt consistsof the following (in thousands):

 
| ** **                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| *BGH:*                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| BGH Credit Agreement                                              |       | $                 | —     |                  | $          | — |   |
| *Services  Company:*                                              |       |              | ** ** | ** **            | ** ** |
| 3.60% ESOP Notes due  March 28, 2011                         |       | 11,098            |       | 14,255                |       |
| Retirement premium                                                |       | (263              | )          | (258                  | )          |
| *Buckeye:*                                                        |       |              |       |                  |       |
| 4.625% Notes due  July 15, 2013*                             |       | 300,000           |       | 300,000               |       |
| 6.750% Notes due  August 15, 2033*                           |       | 150,000           |       | 150,000               |       |
| 5.300% Notes due  October 15, 2014*                          |       | 275,000           |       | 275,000               |       |
| 5.125% Notes due July 1,  2017*                              |       | 125,000           |       | 125,000               |       |
| 6.050% Notes due  January 15, 2018*                          |       | 300,000           |       | 300,000               |       |
| Borrowings under the  Credit Facility                             |       | 209,000           |       | 298,267               |       |
| Total term debt                                                   |       | $                 | 1,369,835  |                  | $          | 1,462,264 |   |
| Other, including  unamortized discounts and fair value hedges (1) |       | (2,422            | )          | (2,545                | )          |
|                                                              |       |              |       |                  |       |
| Subtotal long- term  debt                                         |       | 1,367,413         |       | 1,459,719             |       |
| Less: current portion  of long-term debt                          |       | (6,236            | )          | (6,294                | )          |
|                                                              |       |              |       |                  |       |
| Total long-term debt                                              |       | $                 | 1,361,177  |                  | $          | 1,453,425 |   |

 

----

*                 Buckeye makessemi-annual interest payments on these notes based on the rates noted abovewith the principal balances outstanding to be paid on or before the due datesas show above.

(1)          The June 30, 2009 and December 31, 2008 amounts include $0.9million and $1.1 million, respectively, related to an adjustment to fair valueassociated with a hedge of fair value and ($3.3) million and ($3.6) million,respectively, in unamortized discounts.

 

The fair value of debt was estimated to be $1,307.1 million at June 30,2009 and $1,285.2 million at December 31, 2008.  The fair values at June 30, 2009and December 31, 2008 were estimated primarily by comparing the historicmarket prices of Buckeye’s publicly issued debt with the market prices of othermaster limited partnerships’ publicly issued debt with similar credit ratingsand terms.

 

*BGH Credit Agreement*

 

BGH is party to afive-year, $10.0 million unsecured revolving credit facility with SunTrustBank, as both**administrativeagent and lender (the “BGH Credit Agreement”). The BGH Credit Agreement may beused for working capital and other partnership purposes. BGH has pledged all ofthe limited liability company interests in Buckeye GP as security for itsobligations under the BGH Credit Agreement. Borrowings under the BGH Credit Agreement bear interest under one of tworate options, selected by BGH, equal to either (i) the greater of (a) thefederal funds rate plus 0.5% and (b) SunTrust Bank’s prime commerciallending rate; or (ii) the London Interbank Official Rate (“LIBOR”), plus amargin which can range from 0.40% to 1.40%, based on the ratings assigned byStandard & Poor’s Rating Services and Moody’s Investor Services to thesenior unsecured non-credit enhanced long-term debt of BGH.  BGH did not have amounts outstanding underthe BGH Credit Agreement at June 30, 2009 and December 31, 2008.

 

16

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

The BGH Credit Agreementrequires BGH to maintain leverage and funded debt coverage ratios. The leverageratio covenant requires BGH to maintain, as of the last day of each fiscalquarter, a ratio of the total funded indebtedness of BGH and its RestrictedSubsidiaries (as defined below), measured as of the last day of each fiscalquarter, to the aggregate dividends and distributions received by BGH and itsRestricted Subsidiaries from Buckeye, plus all other cash received by BGH andthe Restricted Subsidiaries, measured for the preceding twelve months, lessexpenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “RestrictedSubsidiaries” as certain of BGH’s wholly owned subsidiaries.  The funded debt coverage ratio covenantrequires BGH to maintain, as of the last day of each fiscal quarter, a ratio oftotal consolidated funded debt of BGH and all of its subsidiaries to theconsolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and all ofits subsidiaries, measured for the preceding twelve months, of not more than5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 inconnection with future acquisitions. At June 30, 2009, BGH’s funded debtcoverage ratio was 4.55 to 1.00.

 

The BGH Credit Agreementcontains other covenants that prohibit BGH from taking certain actions,including but not limited to, declaring dividends or distributions if anydefault 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 and itsRestricted Subsidiaries’ business, and entering into a merger, consolidation,or sale of assets.  At June 30,2009, BGH was not aware of any instances of noncompliance with the covenantsunder the BGH Credit Agreement.

 

*Services CompanyNotes*

* *

Services Company hadtotal debt outstanding of $10.8 million and $14.0 million at June 30, 2009and December 31, 2008, respectively, consisting of 3.60% Senior SecuredNotes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOP to athird-party lender. The 3.60% ESOP Notes were issued on May 4, 2004.  The 3.60% ESOP Notes are collateralized byServices Company’s common stock and are guaranteed by Services Company. Inaddition, Buckeye has committed that, in the event that the value of Buckeye’sLP Units owned by Services Company falls below 125% of the balance payableunder the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficientassets to bring the value of the total collateral (the value of Buckeye’s LPUnits owned by Services Company and the escrow account) up to the 125% minimum.Amounts deposited in the escrow account are returned to Buckeye when the valueof Buckeye’s LP Units owned by Services Company returns to an amount thatexceeds the 125% minimum. At June 30, 2009, the value of Buckeye’s LPUnits owned by Services Company exceeded the 125% requirement.

 

*Credit Facility*

 

Buckeye has a borrowing capacity of $600.0 million(including Lehman Brothers Bank, FSB’s $20.0 million commitment as a lender,which is discussed below) under an unsecured revolving credit agreement (the “CreditFacility”), which may be expanded up to $800.0 million subject to certainconditions and upon the further approval of the lenders.   The Credit Facility’s maturity date is August 24,2012, which may be extended by Buckeye for up to two additional one-yearperiods. Borrowings under the Credit Facility bear interest under one of tworate options, selected by Buckeye, equal to either (i) the greater of (a) thefederal funds rate plus 0.5% and (b) SunTrust Bank’s prime rate plus anapplicable margin, or (ii) LIBOR plus an applicable margin. The applicablemargin is determined based on the current utilization level of the Credit Facilityand ratings assigned by Standard & Poor’s and Moody’s InvestorServices for Buckeye’s senior unsecured non-credit enhanced long-termdebt.  At June 30, 2009 and December 31,2008, Buckeye had $209.0 million and $298.3 million outstanding under the CreditFacility, respectively.  At June 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 Buckeye’s condensed consolidated balance sheet.  The weighted average interest rate forborrowings outstanding under the Credit Facility was 0.63% at June 30,2009.

 

17

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

The Credit Facilityrequires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to aprovision that allows for increases to 5.50 to 1.00 in connection with certainfuture acquisitions.  The Funded 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 therein,in each case excluding the income of certain majority-owned subsidiaries ofBuckeye and equity investments (but including distributions from thosemajority-owned subsidiaries and equity investments).  At June 30, 2009, Buckeye’s Funded DebtRatio was 4.3 to 1.00.  As permitted bythe Credit Facility, $99.0 million of borrowings by Buckeye Energy Services LLC(“BES”) under its separate credit agreement (discussed below) and $72.5 millionrelated to the Buckeye NGL Pipeline impairment were excluded from thecalculation of the Funded Debt Ratio.

 

In addition, the CreditFacility contains other covenants including, but not limited to, covenantslimiting Buckeye’s ability to incur additional indebtedness, to create or incurliens on its property, to dispose of property material to its operations, andto consolidate, merge or transfer assets. At June 30, 2009, Buckeye was not aware of any instances ofnoncompliance with the covenants under the Credit Facility.

 

Lehman Brothers Bank, FSB, an affiliate ofLehman Brothers Holdings Inc. (“Lehman Brothers”), has committed, as a lenderunder the Credit Facility, 3.3%, or $20.0 million, of Buckeye’s $600.0 millionborrowing capacity under the Credit Facility but has not honored thatcommitment since October 2008. Buckeye does not believe that the reductionin capacity under the Credit Facility resulting from the unavailability ofLehman Brothers Bank, FSB’s commitment will impair Buckeye’s ability to meetits liquidity needs.  At June 30,2009, approximately $4.3 million of the outstanding balance of the CreditFacility related to amounts previously funded by Lehman Brothers Bank, FSB.

 

*BESCredit Agreement*

 

BES has a creditagreement (the “BES Credit Agreement”) that provides for borrowings of up to$175.0 million, which amount may be increased to $250.0 million subject tocustomary conditions, including procurement of the requisite lendercommitments.  Under the BES CreditAgreement, borrowings accrue interest, at BES’s election, at (i) theAdministrative Agent’s Cost of Funds (as defined in the BES Credit Agreement)plus 1.75%, (ii) the Eurodollar Rate (as defined in the BES CreditAgreement) plus 1.75% or (iii) the Base Rate (as defined in the BES CreditAgreement) plus 0.25%.  The BES CreditAgreement also permits Daylight Overdraft Loans (as defined in the BES CreditAgreement), Swingline Loans (as defined in the BES Credit Agreement) andletters of credit.  Such alternativeextensions of credit are subject to certain conditions as specified in the BESCredit Agreement.  The BES CreditAgreement is secured by liens on certain assets of BES, including itsinventory, cash deposits (other than certain accounts), investments and hedgingaccounts, receivables and intangibles.

 

The balances outstandingunder the BES Credit Agreement were approximately $99.0 million and $96.0million at June 30, 2009 and December 31, 2008, respectively, all ofwhich were classified as current liabilities. The BES Credit Agreement requires BES to meet certain financialcovenants, which are summarized below (in millions, except for the leverageratio):

 
| **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         |       |
|                           |            |                           |            |                      |            |                    |            |  |  |

 

18

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

At June 30, 2009,BES’s Consolidated Tangible Net Worth (as defined in the BES Credit Agreement)and Consolidated Net Working Capital (as defined in the BES Credit Agreement)were $118.6 million and $75.5 million, respectively, and the ConsolidatedLeverage Ratio (as defined in the BES Credit Agreement) was 1.44 to 1.0.  The weighted average interest rate forborrowing outstanding under the BES Credit Agreement was 2.1% at June 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 June 30, 2009, Buckeye was not awareof any instances of noncompliance with the covenants under the BES Credit Agreement.

 

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 will compare the change in fair value of the New YorkMercantile Exchange (“NYMEX”) futures contracts to the change in fair value ofBuckeye’s hedged fuel inventory.  Any difference between the amounts willbe considered ineffective and recorded in current period earnings.

 

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

 

In order to effectivelyfix the cost of natural gas purchases used to operate Buckeye’s turbine enginesat its Linden, New Jersey location, in March 2009, the Pipeline Operationssegment bought natural gas futures contracts with terms that coincide with theremaining term of an ongoing natural gas supply contract (April 2009through August 2011) for a price of $5.47 per million British thermalunits (“MMBtu”).  The aggregate notionalquantity is approximately 900,000 MMBtus. This transaction was designated as a cash flow hedge at inception.

 

*FinanceDerivatives*

 

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

 

In October 2008,Buckeye borrowed approximately $50.0 million under the Credit Facility.  In order to hedge its variable interest raterisk with respect to the amount borrowed, Buckeye concurrently entered into aninterest rate swap agreement for a notional amount of $50.0 million.  Under the swap agreement, Buckeye paid afixed rate of interest of 3.15% for 180 days and, in exchange, received aseries of six monthly payments based on the 30-day LIBOR rate in effect at thebeginning of each monthly period. The amounts received by Buckeye correspondedto the 30-day LIBOR rates that Buckeye paid on the $50.0 million borrowed underthe Credit Facility.  The swap settled onApril 20, 2009.  Buckeye haddesignated the swap agreement as a cash flow hedge on December 3,2008.  Changes in value between the tradedate and the designation date were recognized in earnings. On April 21,2009, Buckeye entered into a new interest rate swap agreement for an additional180 days on the same terms, except that Buckeye agreed to pay a fixed interestrate of 0.63%.

 

19

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

In January 2009,Buckeye entered into an additional interest rate swap agreement to hedge itsvariable-rate risk on an additional $50.0 million in borrowings under theCredit Facility. Under the swap agreement, Buckeye is paying a fixed interestrate of 0.81% for 180 days and, in exchange, is receiving a series of sixmonthly payments based on the 30-day LIBOR rate in effect at the beginning ofeach monthly period. The amounts received by Buckeye correspond to the 30-dayLIBOR rates that Buckeye pays on the additional $50.0 million borrowed underthe Credit Facility. The swap will settle on the maturity date of the last30-day LIBOR period. Buckeye designated the swap agreement as a cash flow hedgeat inception.

 

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

 

Thefollowing table sets forth the fair value of each classification of derivativeinstruments as of June 30, 2009 (in thousands):

 
| ** **                                                | ** ** | **June 30, 2009** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | ** **             | ** ** | ** ** | ** ** | **Derivative** | ** ** |
| ** **                                                | ** ** | **Assets**             | ** ** | **(Liabilities)** | ** ** | **Net Carrying** | ** ** |
| ** **                                                | ** ** | **Fair value**         | ** ** | **Fair value** | ** ** | **Value** | ** ** |
| ** **                                                | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Derivatives NOT designated as****hedging instruments:** | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed-price sales  contracts                              |       | $                      | 17,061     |   | $ | (4,302 | ) | $ | 12,759 |   |
| Futures contracts for  fixed-price sales contracts        |       | 11,073                 |       | (6,565 | ) | 4,508 |   |
|                                                      |       |                   |       |   |   |   |   |
| **Derivatives  designated as hedging****instruments:**    |       |                   |       |   |   |   |   |
| Futures contracts for  inventory                          |       | $                      | 1,515      |   | $ | (26,155 | ) | $ | (24,640 | ) |
| Futures contract for  natural gas                         |       | —                 |       | (376 | ) | (376 | ) |
| Interest rate contracts                                   |       | —                 |       | (52 | ) | (52 | ) |
|                                                      |       |                   |       |   |   |   |   |
| Total                                                     |       |                   |       |   |   | $ | (7,801 | ) |

 
| ** **                             | ** ** | **June 30,** | ** ** |
|----------------------------------------|------------|-------------------|------------|
| ** **                             | ** ** | **2009**          | ** ** |
| **Balance  Sheet Locations:**          | ** ** | ** **        | ** ** |
| Derivative assets                      |       | $                 | 19,901     |   |
| Derivative liabilities                 |       | (27,650           | )          |
| Accrued and other  current liabilities |       | (52               | )          |
|                                   |       |              |       |
| Total                                  |       | $                 | (7,801     | ) |

 

Substantiallyall of the unrealized loss of $24.6 million at June 30, 2009 for inventoryhedges represented by futures contracts will be realized by the first quarterof 2010 as the related inventory is sold. Gains recorded on inventory hedges that were ineffective wereapproximately $3.3 million and $7.6 million for the three and six months ended June 30,2009, respectively.  As of June 30,2009, open petroleum derivative contracts (represented by the fixed-price salescontracts and futures contracts for fixed-price sales contracts noted above)varied in duration, but did not extend beyond December 2010.  In addition, at June 30, 2009, Buckeyehad refined product inventories which it intends to use to satisfy a portion ofthe fixed-price sales contracts.

 

20

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

Thegains and losses on Buckeye’s derivative instruments for the three and sixmonths ended June 30, 2009 were as follows (in thousands):

 
| ** **                                                  | ** ** | **Gain or (Loss) Recognized in** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **Income on Derivatives**        | ** ** |
| ** **                                                  | ** ** | **Three Months Ended**           | ** ** | **Six Months Ended** | ** ** |
| ** **                                                  | ** ** | **June 30, 2009**           | ** ** | **June 30, 2009** | ** ** |
| **Derivatives  NOT designated as****hedging  instruments:** |       |                             |       |   |   |
| Product sales *                                             |       | $                                | 13,866     |   | $ | 571 |   |
|                                                        |       |                             |       |   |   |
| Cost of product sales *                                     |       | $                                | (19,007    | ) | $ | (11,461 | ) |
|                                                        |       |                             |       |   |   |
| **Derivatives  designated as****hedging  instruments:**     |       |                             |       |   |   |
| Cost of product sales *                                     |       | $                                | 31,251     |   | $ | 27,429 |   |
| Cost of product sales -  hedged inventory                   |       | $                                | (31,183    | ) | $ | (55,179 | ) |

 

----

* Commodity contracts

 

12.  FAIR VALUE MEASUREMENTS

 

Fair value measurementsare characterized in one of three levels based upon the input used to arrive atthe measurement.  The three levelsinclude:

 

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

 

Level 2:  Level 2 inputs include the following:

 

·                  Quoted prices inactive markets for similar assets or liabilities.

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

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

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

 

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

 

21

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

The following table setsforth financial assets and liabilities, measured at fair value on a recurringbasis as of the measurement date, June 30, 2009, and the basis for thatmeasurement, by level within the fair value hierarchy (in thousands):

 

*Recurring*

* *
| ** **                  | ** ** | **June 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       |       | $                      | 4,508      |                       | $          | 15,769 |   | $ | 25,225 |   | $ | 79,322 |   |
| Asset held in trust         |       | 1,793                  |       | —                     |       | 3,648 |   | — |   |
|                        |       |                   |       |                       |       |   |   |   |   |
| **Financial  Liabilities:** |       |                   |       |                       |       |   |   |   |   |
| Interest rate  derivatives  |       | —                 |       | (52                        | )          | — |   | (333 | ) |
| Commodity derivatives       |       | (24,640                | )          | (3,010                     | )          | (50,806 | ) | (1,045 | ) |
| Total                       |       | $                      | (18,339    | )                          | $          | 12,707 |   | $ | (21,933 | ) | $ | 77,944 |   |

 

The value of the Level 1commodity derivative assets and liabilities were based on quoted market pricesobtained from the NYMEX.  The value ofthe Level 1 asset held in trust was obtained from quoted market prices.  The value of the Level 2 commodity derivativeassets and liabilities were based on observable market data related to theobligations to provide petroleum products. The value of the Level 2 interestrate derivative was based on observable market data related to similarobligations.

 

The commodity derivativeassets of $15.8 million and $79.3 million as of June 30, 2009 and December 31,2008, respectively, are net of credit valuation adjustments (“CVA”) of ($0.8)million and ($0.6) million, respectively. Because few of the Energy Services segment’s customers entering intothese fixed-price sales contracts are large organizations withnationally-recognized credit ratings, the Energy Services segment determinedthat a CVA, which is based on the credit risk of such contracts, isappropriate.  The CVA is based on thehistorical and expected payment history of each customer, the amount of productcontracted for under the agreement, and the customer’s historical and expectedpurchase performance under each contract.

 

*Non-Recurring*

 

In addition, the netassets held for sale of $5.8 million, as discussed in Note 2, are Level 3assets and liabilities and are measured at fair value on a nonrecurring basisand are subject to fair value adjustments only in certain circumstances. Theestimated fair value was based on a probability weighted combination of incomeand market approaches as disclosed in Note 2.

 

13.  EARNINGS PER PARTNERSHIP UNIT

 

Basic and diluted netincome per partnership unit is calculated by dividing net income attributableto BGH by the weighted-average number of partnership units outstanding duringthe period.

 

22

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

The following table is areconciliation of the weighted average number of partnership units used in thebasic and diluted earnings per partnership unit calculations for the three andsix months ended June 30, 2009 and 2008 (in thousands):

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **June 30,**      | ** ** | **June 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 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.

 

On July 28, 2009,MainLine Management declared a quarterly cash distribution of $0.37 per unit tobe paid on August 31, 2009 to unitholders of record on August 7,2009. This distribution is expected to be approximately $10.5 million.

 

15.  RELATED PARTY TRANSACTIONS

 

Buckeye incurred a senioradministrative charge (the “charge”) for certain management services performedby affiliates of Buckeye GP of $0.5 million for the three months ended June 30,2008, and $0.5 million and $0.9 million for the six months ended June 30,2009 and 2008, respectively. The charge was waived indefinitely on April 1,2009.  As a result, there was no chargerecorded in the second quarter of 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.

 

16.  UNIT-BASED COMPENSATION PLANS

 

*BGH GP’s Override Units*

 

Effective on June 25,2007,**BGH GP instituted anequity incentive plan for certain members of senior management of BGH GP andBGH.  This equity incentive plan includesboth time-based and performance-based participation in the equity of BGH GP(but not in BGH) referred to as “Override Units”.  BGH determined that, under the requirementsof SFAS 123R, “Share-Based Payment” (“SFAS 123R”), BGH is required to reflect,as compensation expense and a corresponding contribution to Unitholders’equity, the fair value of this compensation measured under the provisions ofSFAS 123R.  Compensation expense withrespect to the Override Units was $0.4 million for both three month periodsended June 30, 2009 and 2008, and $0.7 million for both six month periodsended June 30, 2009 and 2008.  BGHis not the sponsor of this plan and has no liabilities with respect to it.

 

23

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

The Override Units consist of three equal tranchesof units consisting of: Value A Units,Value B Units and Operating Units.  TheOperating Units vest over four years semi-annually beginning with a one-yearcliff. The Value A Units generally vest based on the occurrence of an exitevent as discussed below, an investment return of 2.0 times the originalinvestment, and an internal rate of return of at least 10%. The Value B Unitsgenerally vest based on the occurrence of an exit event, an investment returnof 3.5 times the original investment and an internal rate of return of at least10% or they can vest on a pro-rata basis on an investment return ranging from2.0 to 3.5 times the original investment and an internal rate of return of atleast 10%.

 

Theabove-noted exit event is generally defined as the sale by ArcLight, Kelso and their affiliates of their interests inBGH GP, the sale of substantially all the assets of BGH GP and itssubsidiaries, or any other “extraordinary” transaction that the board ofdirectors of BGH GP determines is an exit event.

 

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

 

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

 

There have been no Override Units granted in2009.  The following is a summary of theactivity of the Override Units as of June 30, 2009 (in thousands, exceptper unit amounts):

 
| ** **                               | ** ** | **Number of Override Units** | ** ** | **Total Number**  | ** ** |
|------------------------------------------|------------|------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **Value A Units**            | ** ** | **Value B Units** | ** ** | **Operating  Units** | ** ** | **of Units  Awarded** | ** ** |
| Granted  June 25, 2007              |       | 1,530                        |       | 1,530             |       | 1,530 |   | 4,590 |   |
| Forfeited  in 2007                       |       | (149                         | )          | (149              | )          | (149 | ) | (447 | ) |
| Outstanding  at December 31, 2007   |       | 1,381                        |       | 1,381             |       | 1,381 |   | 4,143 |   |
| Granted  in the first quarter of 2008    |       | 297                          |       | 297               |       | 297 |   | 891 |   |
| Granted  in the third quarter of 2008    |       | 85                           |       | 85                |       | 85 |   | 255 |   |
| Forfeited  in the second quarter of 2009 |       | (170                         | )          | (170              | )          | (170 | ) | (510 | ) |
| Outstanding  at June 30, 2009       |       | 1,593                        |       | 1,593             |       | 1,593 |   | 4,779 |   |

 
| ** **                                                        | ** ** | **Compensation Costs for Override Units** | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ** **                                                        | ** ** | **Value A Units**                         | ** ** | **Value B Units** | ** ** | **Operating  Units** | ** ** | **Totals** | ** ** |
| Total  fair value of all outstanding Override Units               |       | $                                         | 3,664      |              | $          | 2,163 |   | $ | 5,861 |   | $ | 11,688 |   |
| Less:  Expense recorded from plan inception to June 30, 2009 |       | —                                    |       | —            |       | 2,746 |   | 2,746 |   |
| Estimated  future compensation costs at June 30, 2009        |       | $                                         | 3,664      |              | $          | 2,163 |   | $ | 3,115 |   | $ | 8,942 |   |

 
| **June 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 Unitsis contingent on a performance condition, namely the completion of the exitevent as discussed above.  Accordingly, no compensation expense for theValue A and Value B Units will be recorded until an exit event occurs.

 

24

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

TheOverride Units were valued using the Monte Carlo simulation method thatincorporated the market-based vesting condition into the grant date fair valueof the unit awards as required by SFAS 123R. The Monte Carlo simulation is a procedure to estimate the future equityvalue from the time of the valuation dates to the exit event.  The following assumptions were used in thefirst six months of 2008:

 
| ** **                          | ** ** | **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 distribution equivalentrights (“DERs”) which provide the participant a right to receive payments basedon distributions made by Buckeye on the LP Units. Phantom Units are notional LPUnits whose vesting is subject to service-based restrictions or otherconditions 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 applicable, equal to the perunit cash distribution paid by Buckeye on its LP Units. Generally, all 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 notexceed 100,000.  If awards are forfeited, terminated or otherwise not paidin full, 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 and from time to time as may be determinedby the Compensation Committee.

 

The fair value of boththe Performance Unit and Phantom Unit grants is based on the average marketprice of Buckeye’s LP Units on the date of grant adjusted for an estimatedforfeiture rate as appropriate. Compensation expense is estimated and recordedover the period the grants are earned, which is the vesting period.   Compensation expense estimates are updatedperiodically.  The aggregate compensationexpense recorded is based only on those awards that actually vest. The vestingof the 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 will be recorded as areduction of Limited Partners’ Capital on Buckeye’s condensed consolidatedbalance sheet.

 

25

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

*2009 LTIPAwards*

 

On April 30, 2009,the Compensation Committee granted 43,755 Phantom Units to employees, 18,000Phantom Units to independent directors, and 87,520 Performance Units toemployees. The vesting period for the Phantom Units is one year or three yearsof service for grants to directors or employees, respectively.  The vesting criteria for the PerformanceUnits is three years of service and the attainment of a performance goal (byBuckeye), defined in the award agreements as “distributable cash flow”, overthe three-year 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 three-year orone-year periods. The amount paid with respect to Phantom Unitdistributions was $0.05 million for the three months ended June 30,2009.  Distributions may be paidon Performance Units at the end of the three year vesting period. In such case,DERs will be paid on the number of LP Units for which the Performance Unitswill be settled.

 

The following table sets forth the LTIP activity forthe six months ended June 30, 2009:

 
| ** **                           | ** ** | **LTIP Units** | ** ** |
|--------------------------------------|------------|----------------|------------|
|                                 |       |           |       |
| Outstanding,  January 1, 2009   |       | —         |       |
| Granted (1)                          |       | 149,275        |       |
| Vested                               |       | —         |       |
| Forfeited                            |       | —         |       |
| Outstanding,  June 30, 2009 (2) |       | 149,275        |       |

 

----

(1)          The weighted averageprice per unit for the 2009 Phantom Unit and Performance Unit awards on thedate of grant of April 30, 2009, which is utilized in the calculation ofcompensation expense, was $39.06.

(2)          The aggregate intrinsicvalue of all outstanding LTIP units at June 30, 2009 was approximately $6.4million.

 

At June 30, 2009,Buckeye had approximately $4.9 million of unrecognized compensation expenserelated to unvested outstanding awards under the LTIP based upon the grant-datefair value of the awards.

 

*Buckeye’s Unit Option Plan*

 

Buckeye also sponsors the Unit Option andDistribution Equivalent Plan (the “Option Plan”), pursuant to which ithistorically granted to employees options to purchase LP Units at the marketprice of the LP Units on the date of grant. Generally, the options vest threeyears from the date of grant and expire ten years from the date of grant.

 

Due to regulations adopted under Internal Revenue CodeSection 409A, holders of unit options granted during 2008 would have beensubject to certain adverse tax consequences if the terms of the grant were notmodified. Buckeye received the approval of the holders of unit options grantedin 2008 to shorten the term of those options to avoid the adverse taxconsequences under Section 409A.  Unit options granted before January 1,2008 were not impacted by the IRS regulations.  This modification will nothave a material impact on Buckeye’s financial results.  Following the adoption of the LTIP on March 20,2009, Buckeye ceased making additional grants under the Option Plan. The impactof expenses associated with Buckeye’s Option Plan is immaterial to BGH’sconsolidated financial statements.

 

26

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

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

 

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

 

For the three monthsended June 30, 2009 and 2008, the components of the net periodic benefitcost recognized by Buckeye for the RIGP and Retiree Medical Plan were asfollows (in thousands):

 
| ** **                                | ** ** | **RIGP**               | ** ** | **Retiree Medical Plan** | ** ** |
|-------------------------------------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**   | ** ** |
| ** **                                | ** ** | **June 30,**      | ** ** | **June 30,**        | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Components of net  periodic benefit cost: | ** ** | ** **             | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                              |       | $                      | 207        |                     | $          | 352 |   | $ | 105 |   | $ | 233 |   |
| Interest cost                             |       | 369                    |       | 478                      |       | 491 |   | 694 |   |
| Expected return on plan  assets           |       | (189                   | )          | (468                     | )          | — |   | — |   |
| Amortization of prior  service benefit    |       | (118                   | )          | (218                     | )          | (859 | ) | (1,124 | ) |
| Amortization of  unrecognized losses      |       | 355                    |       | 155                      |       | 261 |   | 410 |   |
| Settlement/ curtailment  charge (1)       |       | 7,171                  |       | —                   |       | 800 |   | — |   |
| Net periodic benefit  costs               |       | $                      | 7,795      |                     | $          | 299 |   | $ | 798 |   | $ | 213 |   |

 

For the six months ended June 30,2009 and 2008, the components of the net periodic benefit cost recognized byBuckeye for the RIGP and Retiree Medical Plan were as follows (in thousands):

 
| ** **                                | ** ** | **RIGP**             | ** ** | **Retiree Medical Plan** | ** ** |
|-------------------------------------------|------------|----------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Six Months Ended** | ** ** | **Six Months Ended**     | ** ** |
| ** **                                | ** ** | **June 30,**    | ** ** | **June 30,**        | ** ** |
| ** **                                | ** ** | **2009**             | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Components of net periodic  benefit cost: | ** ** | ** **           | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                              |       | $                    | 415        |                     | $          | 705 |   | $ | 210 |   | $ | 465 |   |
| Interest cost                             |       | 740                  |       | 956                      |       | 983 |   | 1,387 |   |
| Expected return on plan  assets           |       | (380                 | )          | (936                     | )          | — |   | — |   |
| Amortization of prior  service benefit    |       | (235                 | )          | (436                     | )          | (1,719 | ) | (2,248 | ) |
| Amortization of unrecognized  losses      |       | 712                  |       | 311                      |       | 522 |   | 821 |   |
| Settlement/ curtailment  charge (1)       |       | 7,171                |       | —                   |       | 800 |   | — |   |
| Net periodic benefit  costs               |       | $                    | 8,423      |                     | $          | 600 |   | $ | 796 |   | $ | 425 |   |

 

----

(1)                Inconnection with Buckeye’s reorganization, $8.0 million of the aggregate amountof $28.1 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).

 

27

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

On April 8, 2009,Buckeye voluntarily contributed $0.3 million to the RIGP.  Buckeye expects to fund approximately $3.5million to the RIGP during the third quarter of 2009.

 

18.  SEGMENTINFORMATION

 

BGH conducts business infive reportable operating segments: Pipeline Operations; Terminalling andStorage; Natural Gas Storage; Energy Services; and Other Operations. BGH alsohas certain consolidated-level assets, principally consisting of goodwill,which are not allocable to the individual reporting segments because they arenot used by the chief operating decision maker to make operating decisions orto allocate resources.

 

*PipelineOperations:*

 

The Pipeline Operationssegment receives refined petroleum products from refineries, connectingpipelines, and bulk and marine terminals and transports those products to otherlocations for a fee.  This segment ownsand operates approximately 5,400 miles of pipeline systems in 17 states. Thissegment also has three refined petroleum products terminals with aggregatestorage capacity of approximately 0.5 million barrels in three states.

 

*Terminallingand Storage:*

 

The Terminalling andStorage segment provides bulk storage and terminal throughput services.  This segment has 56 products terminals withaggregate storage capacity of approximately 23.3 million barrels in ten states.

 

*NaturalGas Storage:*

 

TheNatural Gas Storage segment provides natural gas storage services at a naturalgas storage facility in northern California that is owned and operated by LodiGas.  The facility currently providesapproximately 33 Bcf of natural gas storage capacity and is connected toPacific Gas and Electric’s intrastate gas pipelines that service natural gasdemand in the San Francisco and Sacramento areas. The Natural Gas Storage segment does nottrade or market natural gas.

 

28

----

 

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

*EnergyServices:*

 

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

 

*OtherOperations:*

 

The Other Operationssegment consists primarily of Buckeye’s contract operation of approximately2,400 miles of third-party pipeline systems, which are owned principally bymajor oil and chemical companies and are located primarily in Texas andLouisiana.  This segment also performspipeline construction management services, typically for cost plus a fixed fee,for these same customers.  The OtherOperations segment also includes Buckeye’s ownership and operation of anammonia pipeline and its majority ownership of the Sabina Pipeline in Texas.

 

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

 

29

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

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

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                        | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| *Revenue:*                        |       |                   |       |                 |       |   |   |   |   |
| Pipeline Operations               |       | $                      | 98,175     |                 | $          | 98,887 |   | $ | 197,370 |   | $ | 195,277 |   |
| Terminalling and  Storage         |       | 29,429                 |       | 27,114               |       | 60,072 |   | 54,746 |   |
| Natural Gas Storage               |       | 16,672                 |       | 15,186               |       | 31,749 |   | 26,650 |   |
| Energy Services                   |       | 201,676                |       | 347,768              |       | 470,156 |   | 582,315 |   |
| Other Operations                  |       | 8,805                  |       | 10,757               |       | 17,930 |   | 21,626 |   |
| Intersegment                      |       | (3,537                 | )          | (7,164               | )          | (9,217 | ) | (7,790 | ) |
| Total                             |       | $                      | 351,220    |                 | $          | 492,548 |   | $ | 768,060 |   | $ | 872,824 |   |
|                              |       |                   |       |                 |       |   |   |   |   |
| *Operating  (loss) income :*      |       |                   |       |                 |       |   |   |   |   |
| Pipeline Operations               |       | $                      | (51,085    | )                    | $          | 38,037 |   | $ | (6,638 | ) | $ | 73,567 |   |
| Terminalling and  Storage         |       | 11,115                 |       | 9,910                |       | 21,772 |   | 22,495 |   |
| Natural Gas Storage               |       | 5,817                  |       | 7,638                |       | 11,981 |   | 12,382 |   |
| Energy Services                   |       | (1,432                 | )          | (313                 | )          | 4,784 |   | 1,343 |   |
| Other Operations                  |       | 153                    |       | 1,714                |       | 1,534 |   | 3,293 |   |
| Total                             |       | $                      | (35,432    | )                    | $          | 56,986 |   | $ | 33,433 |   | $ | 113,080 |   |
|                              |       |                   |       |                 |       |   |   |   |   |
| *Depreciation  and amortization:* |       |                   |       |                 |       |   |   |   |   |
| Pipeline Operations               |       | $                      | 8,984      |                 | $          | 8,587 |   | $ | 17,823 |   | $ | 17,010 |   |
| Terminalling and  Storage         |       | 1,866                  |       | 1,390                |       | 3,588 |   | 2,745 |   |
| Natural Gas Storage               |       | 1,243                  |       | 1,561                |       | 2,702 |   | 2,515 |   |
| Energy Services                   |       | 983                    |       | 407                  |       | 1,960 |   | 671 |   |
| Other Operations                  |       | 483                    |       | 397                  |       | 850 |   | 784 |   |
| Total                             |       | $                      | 13,559     |                 | $          | 12,342 |   | $ | 26,923 |   | $ | 23,725 |   |

 

30

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 
| ** **                | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|----------------------|------------|
| ** **                | ** ** | **June 30,**    | ** ** |
| ** **                | ** ** | **2009**             | ** ** | **2008** | ** ** |
| *Capital  additions:*     | ** ** | ** **           | ** ** | ** ** | ** ** |
| Pipeline Operations       |       | $                    | 12,001     |   | $ | 13,844 |   |
| Terminalling and  Storage |       | 10,662               |       | 7,217 |   |
| Natural Gas Storage       |       | 14,381               |       | 10,020 |   |
| Energy Services           |       | 1,797                |       | 1,420 |   |
| Other Operations          |       | 113                  |       | — |   |
| Total                     |       | $                    | 38,954     |   | $ | 32,501 |   |
|                      |       |                 |       |   |   |
| *Acquisitions:*           |       |                 |       |   |   |
| Pipeline Operations       |       | $                    | 10         |   | $ | 9,264 |   |
| Terminalling and  Storage |       | —               |       | 19,461 |   |
| Natural Gas Storage       |       | —               |       | 438,765 |   |
| Energy Services           |       | —               |       | 143,126 |   |
| Other Operations          |       | —               |       | — |   |
| Total                     |       | $                    | 10         |   | $ | 610,616 |   |

 
| ** **                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| *Assets:*                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| Pipeline Operations (1)       |       | $                 | 1,546,008  |                  | $          | 1,630,050 |   |
| Terminalling and  Storage     |       | 473,096           |       | 473,806               |       |
| Natural Gas Storage           |       | 516,141           |       | 503,278               |       |
| Energy Services               |       | 321,976           |       | 333,967               |       |
| Other Operations              |       | 73,416            |       | 93,309                |       |
| Consolidating-level           |       | 253,788           |       | 228,687               |       |
| Total                         |       | $                 | 3,184,425  |                  | $          | 3,263,097 |   |
|                          |       |              |       |                  |       |
| *Goodwill:*                   |       |              |       |                  |       |
| Pipeline Operations           |       | $                 | 198,632    |                  | $          | 198,632 |   |
| Terminalling and  Storage (2) |       | 49,619            |       | 51,386                |       |
| Natural Gas Storage           |       | 169,560           |       | 169,560               |       |
| Energy Services               |       | 1,177             |       | 1,132                 |       |
| Other Operations              |       | 13,182            |       | 13,182                |       |
| Total                         |       | $                 | 432,170    |                  | $          | 433,892 |   |

 

----

(1)        All equity investments are included inthe assets of the Pipeline Operations segment.

(2)        Goodwill decreased as of June 30,2009 from December 31, 2008 due to the finalization of the purchase priceallocation of a terminal in Albany, New York which was purchased on August 28,2008.  Goodwill decreased byapproximately $1.8 million and was allocated to property, plant, and equipmentas a result of the finalization of the purchase price allocation.

 

31

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

 

**OVERVIEW**

 

The followingdiscussion provides an analysis of the financial condition and results ofoperations for Buckeye GP Holdings L.P. (“BGH”) and each of BGH’soperating segments, including an overview of BGH’s liquidity and capitalresources and certain other items related to BGH.  The following discussion and analysis shouldbe read in conjunction with (i) the accompanying interim condensedconsolidated financial statements and related notes and (ii) BGH’sconsolidated financial statements, related notes, and management’sdiscussionandanalysisoffinancialconditionandresultsofoperationsincludedinBGH’sAnnualReportonForm10-KfortheyearendedDecember31,2008.

 

**BUCKEYEGP HOLDINGS L.P.**

 

BGH’s limited partner units are owned approximately62% by BGH GP Holdings, LLC (“BGH GP”), approximately 1% by certain members ofsenior management and approximately 37% by the public.  BGH owns and controls Buckeye GP LLC (“Buckeye GP”),which is the general partner of Buckeye Partners, L.P. (“Buckeye”), a publiclytraded Delaware limited partnership.  BGHis managed by its general partner, MainLine Management LLC (“MainLineManagement”), which is owned by BGH GP. BGH’s only cash-generating assets are its partnership interests inBuckeye, comprised primarily of the following:

 

·                  the incentive distribution rights in Buckeye;

·                  the general partner interests in Buckeye (representing243,914 general partner units (the “GP Units”), or an approximate 0.5% interestin  Buckeye);

·                  the indirect ownership of the general partnerinterests in certain of Buckeye’s operating subsidiaries (representing anapproximate 1% interest in each of such operating subsidiaries ); and

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

 

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

 

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

 

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

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                        | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                        | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Incentive distributions  from Buckeye                                                             |       | $                      | 11,466     |                 | $          | 9,731 |   | $ | 21,971 |   | $ | 18,657 |   |
| Distributions from the  ownership of 243,914 of Buckeye’s GP Units                           |       | 220                    |       | 207                  |       | 436 |   | 412 |   |
| Distributions from the  indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 534                    |       | 224                  |       | 896 |   | 349 |   |
| Distributions from the  ownership of 80,000 of Buckeye’s LP Units                            |       | 72                     |       | 68                   |       | 143 |   | 135 |   |
|                                                                                              |       | $                      | 12,292     |                 | $          | 10,230 |   | $ | 23,446 |   | $ | 19,553 |   |

 

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**BUCKEYE PARTNERS, L.P.**

 

Buckeye has one ofthe largest independent refined petroleum products pipeline systems in theUnited States in terms of volumes delivered with approximately 5,400 miles ofpipeline and 64 active products terminals that provide aggregate storagecapacity of approximately 24.7 million barrels. In addition, Buckeye operatesand maintains approximately 2,400 miles of other pipelines under agreementswith major oil and chemical companies. Buckeye also owns and operates a major natural gas storage facility innorthern California which provides approximately 33 billion cubic feet (“Bcf”)of gas capacity and a wholesale distributor of refined petroleum products inthe northeastern and midwestern UnitedStates in areas also served by Buckeye’s pipelines and terminals.

 

BGH conducts business infive reportable operating segments: Pipeline Operations; Terminalling andStorage; Natural Gas Storage; Energy Services; and Other Operations.  See Note 18 to the condensed consolidatedfinancial statements for a more detailed discussion of BGH’s operatingsegments.

 

**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.

 

The organizationalrestructuring includes a workforce reduction of approximately 260 employees, ornearly 25% of Buckeye’s workforce.  Theprogram was initiated in the second quarter and is expected to be substantiallycompleted by the end of 2009. From June 18 to June 29, 2009, Buckeyeoffered certain eligible employees the option of enrolling in a voluntary earlyretirement program, of which approximately 80 employees accepted. The remainingaffected positions were eliminated involuntarily under Buckeye’s ongoingseverance plan. The restructuring also will include the relocation of someemployees consistent with the goals of the reorganization. In connection withthis organizational restructuring, Buckeye incurred $28.1 million of expensesin the second quarter of 2009 and expects to incur additional expenses in 2009that are estimated to be $2.0 to $4.0 million (see Note 3 to the condensedconsolidated financial statements).

 

Buckeye also recorded anon-cash charge in the second quarter of 2009 of $72.5 million for a materialimpairment to its natural gas liquids pipeline system (the “Buckeye NGLPipeline”) that spans from Wattenberg, Colorado to Bushton, Kansas. Thisimpairment was the result of significant volume losses to a competitivepipeline system during the second quarter (see Note 2 to the condensed consolidatedfinancial statements).

 

**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 inBuckeye—BGH’s condensed consolidated balance sheet includes a noncontrollinginterest capital account that reflects the proportion of Buckeye owned by itspartners other than BGH. Similarly, the ownership interests in Buckeye held byits partners other than BGH are reflected in BGH’s condensed consolidated statementof operations as income attributable to noncontrolling interest. Thesenoncontrolling interest accounts are not reflected in Buckeye’s condensedconsolidated financial statements.

 

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

 

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·                  Inclusion of Buckeye Pipe Line Services Company—The financialstatements of Buckeye Pipe Line Services Company (“Services Company”), whichemploys the employees who manage and operate the assets of Buckeye, are consolidatedinto BGH’s financial statements. The financial statements of Buckeye do notinclude the financial statements of Services Company.

 

·                  BGH’s general and administrativeexpenses—BGH incurs general and administrative expenses that are independent fromBuckeye’s operations and are not reflected in Buckeye’s condensed consolidatedfinancial statements.

 

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

 

Summary operating results for BGH were as follows (in thousands):

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                                                          |       | $                      | 351,220    |                 | $          | 492,548 |   | $ | 768,060 |   | $ | 872,824 |   |
| Costs and expenses                                               |       | 386,652                |       | 435,562              |       | 734,627 |   | 759,744 |   |
| Operating (loss) income                                          |       | (35,432                | )          | 56,986               |       | 33,433 |   | 113,080 |   |
| Other expenses                                                   |       | (16,094                | )          | (18,033              | )          | (33,345 | ) | (35,597 | ) |
| (Loss) income before  equity income                              |       | (51,526                | )          | 38,953               |       | 88 |   | 77,483 |   |
| Equity income                                                    |       | 3,142                  |       | 1,344                |       | 5,224 |   | 3,399 |   |
| Net income                                                       |       | (48,384                | )          | 40,297               |       | 5,312 |   | 80,882 |   |
| Less: Net (income) loss  attributable to noncontrolling interest |       | 58,156                 |       | (34,980              | )          | 14,609 |   | (69,716 | ) |
| Amounts attributable to  BGH                                     |       | $                      | 9,772      |                 | $          | 5,317 |   | $ | 19,921 |   | $ | 11,166 |   |

 

34

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Asummary of financial information by segment is as follows (in thousands):

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| *Revenues:*                       | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pipeline Operations               |       | $                                    | 98,175     |                               | $          | 98,887 |   | $ | 197,370 |   | $ | 195,277 |   |
| Terminalling and  Storage         |       | 29,429                               |       | 27,114                             |       | 60,072 |   | 54,746 |   |
| Natural Gas Storage               |       | 16,672                               |       | 15,186                             |       | 31,749 |   | 26,650 |   |
| Energy Services                   |       | 201,676                              |       | 347,768                            |       | 470,156 |   | 582,315 |   |
| Other Operations                  |       | 8,805                                |       | 10,757                             |       | 17,930 |   | 21,626 |   |
| Intersegment                      |       | (3,537                               | )          | (7,164                             | )          | (9,217 | ) | (7,790 | ) |
| Total                             |       | $                                    | 351,220    |                               | $          | 492,548 |   | $ | 768,060 |   | $ | 872,824 |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| *Total  costs and expenses:*      |       |                                 |       |                               |       |   |   |   |   |
| Pipeline Operations               |       | $                                    | 149,260    |                               | $          | 60,850 |   | $ | 204,008 |   | $ | 121,710 |   |
| Terminalling and  Storage         |       | 18,314                               |       | 17,204                             |       | 38,300 |   | 32,251 |   |
| Natural Gas Storage               |       | 10,855                               |       | 7,548                              |       | 19,768 |   | 14,268 |   |
| Energy Services                   |       | 203,108                              |       | 348,081                            |       | 465,372 |   | 580,972 |   |
| Other Operations                  |       | 8,652                                |       | 9,043                              |       | 16,396 |   | 18,333 |   |
| Intersegment                      |       | (3,537                               | )          | (7,164                             | )          | (9,217 | ) | (7,790 | ) |
| Total                             |       | $                                    | 386,652    |                               | $          | 435,562 |   | $ | 734,627 |   | $ | 759,744 |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| *Depreciation  and amortization:* |       |                                 |       |                               |       |   |   |   |   |
| Pipeline Operations               |       | $                                    | 8,984      |                               | $          | 8,587 |   | $ | 17,823 |   | $ | 17,010 |   |
| Terminalling and  Storage         |       | 1,866                                |       | 1,390                              |       | 3,588 |   | 2,745 |   |
| Natural Gas Storage               |       | 1,243                                |       | 1,561                              |       | 2,702 |   | 2,515 |   |
| Energy Services                   |       | 983                                  |       | 407                                |       | 1,960 |   | 671 |   |
| Other Operations                  |       | 483                                  |       | 397                                |       | 850 |   | 784 |   |
| Total                             |       | $                                    | 13,559     |                               | $          | 12,342 |   | $ | 26,923 |   | $ | 23,725 |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| *Asset  impaiment expense:*       |       |                                 |       |                               |       |   |   |   |   |
| Pipeline Operations               |       | $                                    | 72,540     |                               | $          | — |   | $ | 72,540 |   | $ | — |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| *Reorganization  expense:*        |       |                                 |       |                               |       |   |   |   |   |
| Pipeline Operations               |       | $                                    | 23,054     |                               | $          | — |   | $ | 23,054 |   | $ | — |   |
| Terminalling and  Storage         |       | 2,402                                |       | —                             |       | 2,402 |   | — |   |
| Natural Gas Storage               |       | 291                                  |       | —                             |       | 291 |   | — |   |
| Energy Services                   |       | 944                                  |       | —                             |       | 944 |   | — |   |
| Other Operations                  |       | 1,422                                |       | —                             |       | 1,422 |   | — |   |
| Total                             |       | $                                    | 28,113     |                               | $          | — |   | $ | 28,113 |   | $ | — |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| *Operating  (loss) income:*       |       |                                 |       |                               |       |   |   |   |   |
| Pipeline Operations               |       | $                                    | (51,085    | )                                  | $          | 38,037 |   | $ | (6,638 | ) | $ | 73,567 |   |
| Terminalling and  Storage         |       | 11,115                               |       | 9,910                              |       | 21,772 |   | 22,495 |   |
| Natural Gas Storage               |       | 5,817                                |       | 7,638                              |       | 11,981 |   | 12,382 |   |
| Energy Services                   |       | (1,432                               | )          | (313                               | )          | 4,784 |   | 1,343 |   |
| Other Operations                  |       | 153                                  |       | 1,714                              |       | 1,534 |   | 3,293 |   |
| Total                             |       | $                                    | (35,432    | )                                  | $          | 56,986 |   | $ | 33,433 |   | $ | 113,080 |   |

 

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Second Quarter of 2009Compared to Second Quarter of 2008

 

*Consolidated*

 

Consolidated income attributable to BGH’s unitholders was $9.8 millionin the second quarter of 2009 compared to $5.3 million in the second quarter of2008. The increase in income attributable to BGH’s unitholders was due toincreases in Buckeye’s quarterly distribution. As mentioned above, the incentive distribution rights entitle BGH to receive amounts equalto specified percentages of the incremental amount of cash distributed by Buckeyeto the holders of Buckeye’s LP Units when target distribution levels for aquarter are exceeded.  As a result,increases in Buckeye’s distribution causes increases in income attributable toBGH’s unitholders.  In the second quarterof 2009, Buckeye paid a $0.90 per LP Unit distribution as compared to an $0.85per LP Unit distribution in the second quarter of 2008, which resulted in anincrease of $2.1 million inincentive distribution rights in the second quarter of 2009 as compared to thesecond quarter of 2008.

 

Revenue was $351.2million in the second quarter of 2009, which is a decrease of $141.3 million or28.7% from the corresponding period in 2008. This overall decrease was caused primarily by a decrease in revenue fromthe Energy Services segment of $146.1 million resulting from a reduction inpetroleum product prices in the current quarter, which correspondingly loweredthe cost of product sales.  Generally,revenues in the Pipeline Operations segment and Terminalling and Storagesegment remained constant, as volume declines were equally offset by tariffincreases.

 

Total costs and expenses were $386.7million in the second quarter of 2009, which is a decrease of $48.9 millionfrom the corresponding period in 2008. Total costs and expenses include the$72.5 million asset impairment expense and the $28.1 million reorganizationexpense (see Notes 2 and 3 to the condensed consolidated financialstatements).  Other factors impactingtotal costs and expenses include a decrease in petroleum product prices whichresulted in a $145.0 million decrease in the Energy Services segment’s cost ofproduct sales in the current quarter as compared to the corresponding periodlast year as well as delays in pipeline maintenance programs of $3.5 million inthe current quarter of 2009. Inaddition, depreciation and amortization increased by $1.2 million in the secondquarter of 2009 due toacquisitions made during 2008 and 2009.

 

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

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **June 30,**      | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Attributable to Buckeye                         |       | $                      | 385,728    |   | $ | 433,880 |   |
| Elimination of Buckeye  deferred charge         |       | (1,175                 | )          | (1,175 | ) |
| Net effect of ESOP  charges in Services Company |       | 246                    |       | 880 |   |
| Attributable to BGH                             |       | 1,853                  |       | 1,977 |   |
| Total                                           |       | $                      | 386,652    |   | $ | 435,562 |   |

 

Amounts attributable to BGH consist of the following(in thousands):

 
| ** **            | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **June 30,**      | ** ** |
| ** **            | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Salaries and benefits |       | $                      | 1,182      |   | $ | 1,287 |   |
| Professional fees     |       | 359                    |       | 405 |   |
| Other                 |       | 312                    |       | 285 |   |
| Total                 |       | $                      | 1,853      |   | $ | 1,977 |   |

 

As described in Note 1 tothe condensed consolidated financial statements, effective January 1, 2009,Buckeye and its operating subsidiaries agreed to pay for all executivecompensation and benefits earned by Buckeye GP’s four highest salaried officersin return for an annual fixed payment from BGH to Buckeye in the amount of $3.6million.  The $3.6 million consisted ofthe anticipated 2009 salaries, incentive compensation and benefits of theseexecutives plus 15%.  Salaries and benefitsshown above for 2009 consist of the anticipated 

 

36

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salaries, incentivecompensation and benefits included in the $3.6 million annual fixed payment,plus allocations of the cost of Buckeye personnel performing administrativeservices directly for BGH.  Salaries andbenefits costs in 2008 include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye under the prior arrangementplus the allocated administrative salaries.

 

BGH reported an operating loss of $35.4million in the second quarter of 2009 as compared to operating income of $57.0million in the second quarter of 2008 primarily as a result of reorganizationexpenses of $28.1 million and asset impairment expenses of $72.5 million (seeNotes 2 and 3 to the condensed consolidated financial statements) related to theoperations of Buckeye.  The remainder ofthe decrease is more fully described within the segments discussed below.

 

The currentquarter results also include a decrease of $2.0 million in interest and debtexpense from the second quarter 2008 amount of $18.0 million related tolower borrowing rates on Buckeye’s revolving credit facility and the Energy Services segment’s credit agreement andan increase in capitalized interest for the gas storage facility expansion.

 

Lossattributable to non-controlling interests, which represents the allocation ofBuckeye’s loss to its limited partner interests not owned by BGH, was $58.2million in the second quarter of 2009 as compared to income attributable tonon-controlling interest of $35.0 million in the second quarter of 2008.  The loss attributable to non-controllinginterests in the second quarter reflects Buckeye’s loss, which primarilyresulted from the reorganization and asset impairment expenses.

 

*PipelineOperations*

 

Revenue was $98.2 millionin the second quarter of 2009, which is a decrease of $0.7 million or 0.7% fromthe corresponding period in 2008. Despite a decrease in transportation volumesof 5.8%, net transportation revenues were up $3.1 million due to increasedtariffs and settlement revenues compared with the prior quarter. Revenues fromstorage, rentals, product sales and other incidental services were down $3.8million from the second quarter of 2008.

 

Total costs andexpenses were $149.3 million in the second quarter of 2009, which is anincrease of $88.4 million from the corresponding period in 2008. Total costsand expenses include the $72.5 million asset impairment expense and $23.1million of reorganization expense (see Notes 2 and 3 to the condensedconsolidated financial statements). Other factors impacting total costs and expenses include decreases inintegrity expenditures of $3.0 million, lower remediation and other expenses of$1.7 million and reduced costs of product sales of $2.9 million.

 

Product volumestransported in the Pipeline Operations segment for the second quarter of 2009and 2008 were as follows:

 
| ** **          | ** ** | **Average Barrels Per Day**          | ** ** |
|---------------------|------------|--------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **          | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| **Product**         |       |                                 |       |   |   |
| Gasoline            |       | 685,700                              |       | 698,800 |   |
| Distillate          |       | 245,400                              |       | 279,400 |   |
| Jet Fuel            |       | 345,100                              |       | 371,900 |   |
| LPG’s          |       | 18,800                               |       | 22,400 |   |
| Natural gas liquids |       | 20,500                               |       | 22,100 |   |
| Other products      |       | 10,000                               |       | 12,100 |   |
| Total               |       | 1,325,500                            |       | 1,406,700 |   |

 

*Terminallingand Storage*

 

Revenue was $29.4 millionin the second quarter of 2009, which is an increase of $2.3 million or 8.5%from the corresponding period in 2008. This overall increase resulted primarilyfrom $3.1 million of revenue in 2009 from terminals that were acquired atvarious times in 2008.  These increaseswere partially offset by a decrease in settlement revenue and an 11.9% volumedecrease in the second quarter of 2009 as compared to the second quarter of2008.

 

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Total costs and expenseswere $18.3 million in the second quarter of 2009, which is an increase of $1.1million from the corresponding period in 2008. Total costs and expenses include$2.4 million of reorganization expense (see Note 3 to the condensedconsolidated financial statements). Other factors impacting total costs andexpenses include an increase of $1.7 million of operating expenses associatedwith the terminals acquired at various times in 2008 offset by a reduction of$1.9 million for environmental remediation expenses and tank integrityexpenses.

 

Average daily throughputfor the refined products terminals for the second quarter of 2009 and 2008 wereas follows:

 
| ** **          | ** ** | **Average Barrels Per Day**          | ** ** |
|---------------------|------------|--------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **          | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|                |       |                                 |       |   |   |
| Products throughput |       | 489,400                              |       | 554,000 |   |

 

*NaturalGas Storage*

 

Revenue was $16.7 millionin the second quarter of 2009, which is an increase of $1.5 million or 9.8%from the corresponding period in 2008. Lease revenue increased $1.4 millionfrom the second quarter of 2008 while hub services and other revenue decreased$0.1 million.

 

Total costs and expenseswere $10.9 million in the second quarter of 2009, which is an increase of $3.3million from the corresponding period in 2008. Total costs and expenses include$0.3 million of reorganization expense (see Note 3 to the condensedconsolidated financial statements).  Theremaining increase in costs and expenses was primarily attributable to delaysin the completion of a natural gas storage expansion project known as the KirbyHills II project (the “Kirby Hills II project”).

 

*Energy Services*

 

Revenue was $201.7million in the second quarter of 2009, which is a decrease of $146.1 million or42.0% from the corresponding period in 2008. This overall decrease wasprimarily due to a decrease in petroleum product prices, which correspondinglylowered the cost of product sales, partially offset by a 31% increase involumes.

 

Total costs and expenseswere $203.1 million in the second quarter of 2009, which is a decrease of$145.0 million from the corresponding period in 2008. Total costs and expensesinclude $0.9 million of reorganization expense (see Note 3 to the condensedconsolidated financial statements). Other factors impacting total costs andexpenses include a decrease in petroleum product prices in the current quarteras compared to the same period last year.

 

*OtherOperations*

 

Revenue for the OtherOperations segment, which consists principally of Buckeye’s contract operationsand engineering services for third party pipelines, was $8.8 million in thesecond quarter of 2009 compared to $10.8 million in the corresponding period in2008.  The decrease in revenues resultedfrom reduced operating services revenues of $2.0 million reflecting a customer’stermination of a contract in the second quarter of 2008.

 

Total costs and expenseswere $8.7 million in the second quarter of 2009, which is a $0.4 milliondecrease from the corresponding period in 2008. Total costs and expenses include $1.4 million of reorganization expense(see Note 3 to the condensed consolidated financial statements). Other factorsimpacting total costs and expenses include reduced operating expensesassociated with the terminated customer contract discussed above.

 

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Six Months of 2009Compared to Six Months of 2008

 

*Consolidated*

 

Consolidated income attributable to BGH’s unitholders was $19.9 millionin the first six months of 2009 compared to $11.2 million in the first sixmonths of 2008. The increase in income attributable to BGH’s unitholders wasdue to increases in Buckeye’s quarterly distribution.  As mentioned above, the incentive distribution rights 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 a quarter are exceeded. As a result, increases in Buckeye’s distribution causes increases inincome attributable to BGH’s unitholders. In first six months of 2009, Buckeye paid distributions of $0.8875 and$0.90 per LP Unit as compared to distributions of the $0.8375 and $0.85 per LPUnit in the first six months of 2008, which resulted in an increase of $3.9 million in incentivedistribution rights in the first six months of 2009 as compared to the firstsix months of 2008.

 

Revenue was $768.1million in the first six months of 2009, which is a decrease of $104.8 millionor 12.0% from the corresponding period in 2008. This overall decrease was caused primarily by a decrease in revenuesfrom the Energy Services segment of $112.2 million. This decline reflects anoverall reduction in petroleum product prices in the first six months of 2009as compared to the corresponding period last year.  Increased volumes in the Terminalling andStorage segment partially offset the overall decrease in revenues.

 

Total costs and expenses were $734.6million in the first six months of 2009, which is a decrease of $25.1 millionfrom the corresponding period in 2008. Total costs and expenses include the$72.5 million asset impairment expense and the $28.1 million reorganizationexpense (see Notes 2 and 3 to the condensed consolidated financial statements).Other factors impacting total costs and expenses include a decrease in petroleumproduct prices which resulted in a $115.6 million decrease in the EnergyServices segment’s cost of product sales in the first six months of 2009 ascompared to the corresponding period last year as well as overall costmanagement efforts offset by operating costs for new terminals and the cost ofgas stored by third parties.  Inaddition, depreciation and amortization expense increased by $3.2 million inthe first six months of 2009 due to acquisitions made in 2008 and 2009.

 

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

 
| ** **                                      | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **June 30,**    | ** ** |
| ** **                                      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Attributable to Buckeye                         |       | $                    | 732,465    |   | $ | 756,024 |   |
| Elimination of Buckeye  deferred charge         |       | (2,349               | )          | (2,349 | ) |
| Net effect of ESOP charges  in Services Company |       | 645                  |       | 1,845 |   |
| Attributable to BGH                             |       | 3,866                |       | 4,224 |   |
| Total                                           |       | $                    | 734,627    |   | $ | 759,744 |   |

 

Amounts attributable to BGH consist of the following(in thousands):

 
| ** **            | ** ** | **Six Months Ended** | ** ** |
|-----------------------|------------|----------------------|------------|
| ** **            | ** ** | **June 30,**    | ** ** |
| ** **            | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Salaries and benefits |       | $                    | 2,369      |   | $ | 2,621 |   |
| Professional fees     |       | 656                  |       | 988 |   |
| Other                 |       | 841                  |       | 615 |   |
| Total                 |       | $                    | 3,866      |   | $ | 4,224 |   |

 

BGH reported operating income of $33.4million and $113.1 million in the first six months of 2009 and 2008,respectively. The decrease of $79.7 million primarily resulted from thereorganization expense of $28.1 million and asset impairment expense of $72.5million (see Notes 2 and 3 to the condensed consolidated financial statements)related to operations at Buckeye. The remainder of the decrease is more fullydescribed within the segments discussed below.

 

39

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The current periodresults also include a decrease of $2.8 million in interest and debt expensefrom $36.4 million in the same period in 2008 due to lower borrowing rates on Buckeye’srevolving credit facility and theEnergy Services segment’s credit agreement in 2009 as compared to 2008 and anincrease in capitalized interest for a gas storage facility expansion.

 

Lossattributable to non-controlling interests, which represents the allocation ofBuckeye’s loss (earnings) to its limited partner interests not owned by BGH,was $14.6 million in the first six months of 2009 as compared to incomeattributable to non-controlling interest of $69.7 million in the first six monthsof 2008.  The loss attributable tonon-controlling interests in the first six months of 2009 reflects Buckeye’sloss, which primarily resulted from the reorganization and asset impairmentexpenses.

 

*PipelineOperations*

 

Revenue was $197.4million in the first six months of 2009, which is an increase of $2.1 millionor 1.1% from the corresponding period in 2008. While transportation volumeswere down 3.5%, net transportation revenues were up $11.6 million due toincreased tariffs and settlement revenues compared with the prior year period.Revenues from product sales, rentals and other incidental services were down$9.5 million from the prior year period. The decreased product sales were theresult of reduced product volumes sold to a wholesale distributor.

 

Total costs and expenses were $204.0million in the first six months of 2009, which is an increase of $82.3 millionfrom the corresponding period in 2008. Total costs and expenses include the$72.5 million asset impairment expense and $23.1 million of reorganizationexpense (see Notes 2 and 3 to the condensed consolidated financialstatements).  Other factors impactingtotal costs and expenses include decreases in integrity program expenditures of$4.3 million, reduced costs of product sales and other services of $7.7million, partially offset by increased remediation expenses of $1.3 million.

 

Product volumestransported in the Pipeline Operations segment during the first six months of2009 and 2008 were as follows:

 
| ** **          | ** ** | **Average Barrels Per Day**        | ** ** |
|---------------------|------------|------------------------------------|------------|
| ** **          | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **          | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **Product**         |       |                               |       |   |   |
| Gasoline            |       | 659,200                            |       | 670,000 |   |
| Distillate          |       | 299,000                            |       | 308,400 |   |
| Jet Fuel            |       | 339,200                            |       | 364,100 |   |
| LPG’s          |       | 16,600                             |       | 18,900 |   |
| Natural gas liquids |       | 20,900                             |       | 21,600 |   |
| Other products      |       | 11,700                             |       | 12,100 |   |
| Total               |       | 1,346,600                          |       | 1,395,100 |   |

 

*Terminallingand Storage*

 

Revenue was $60.1million during the first six months of 2009, which is an increase of $5.3million or 9.7% from the corresponding period in 2008. This overall increaseresulted primarily from $7.4 million of revenue in the first six months of 2009from terminals that were acquired at various times in 2008.  Terminalling revenue increased by $5.0million as a result of increases in rates and terminalling services consistingprimarily of ethanol blending.  Theseincreases were partially offset by a decrease of $7.1 million resulting fromdecreases in settlement revenue and terminal volumes which declined 6.1%.

 

Total costs and expenseswere $38.3 million during the first six months of 2009, which is an increase of$6.0 million from the corresponding period in 2008. Total costs and expensesinclude $2.4 million of reorganization expense (see Note 3 to the condensedconsolidated financial statements). Other factors impacting total costs andexpenses include an increase of $3.2 million of operating expenses for theterminal acquisitions made at various times in 2008 and an increase inremediation expenses totaling $1.1 million.

 

40

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Average daily throughput for the refined products terminals during the first six months of 2009 and 2008 were as follows:

 
| ** **          | ** ** | **Average Barrels Per Day**        | ** ** |
|---------------------|------------|------------------------------------|------------|
| ** **          | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **          | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Products throughput |       | 505,100                            |       | 538,100 |   |

 

*NaturalGas Storage*

 

Revenue was $31.7million during the first six months of 2009, which is an increase of $5.1million or 19.1% from the corresponding period in 2008. This overall increaseresulted primarily from the inclusion of a full six months of revenue in 2009compared to approximately five and one half months in the corresponding periodin 2008, reflecting Buckeye’s purchase of Lodi Gas Storage, L.L.C. on January 18,2008, as well as increased hub services revenues in the first six months of2009 driven by increased marketing efforts.

 

Total costs andexpenses were $19.8 million during the first six months of 2009, which is anincrease of $5.5 million from the corresponding period in 2008. Total costs andexpenses include $0.3 million of reorganization expense (see Note 3 to thecondensed consolidated financial statements). Other factors impacting total costs and expenses include expensesrelated to the acquisition of Lodi Gas Storage, L.L.C., which experienced afull six months of activity in 2009 versus five and one half months in 2008.

 

*Energy Services*

 

Revenue was $470.2million in the first six months of 2009, which is a decrease of $112.2 millionor 19.3% 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 71% higher in volumesdue to the inclusion of a full six months of revenue in 2009 compared toapproximately four and one half months in the corresponding period in 2008 forthe acquisition of Farm & Home Oil Company LLC.

 

Total costs andexpenses were $465.4 million in the first six months of 2009, which is adecrease of $115.6 million from the corresponding period in 2008.  Total costs and expenses include $0.9 millionof reorganization expense (see Note 3 to the condensed consolidated financialstatements). Other factors impacting total costs and expenses include adecrease in commodity prices in the first six months of 2009 as compared to thesame period last year. This decrease was partially offset by the inclusion ofsix months of operations in 2009 for the acquisition of Farm & HomeOil Company LLC.

 

*OtherOperations*

 

Revenue for theOther Operations segment, which consists principally of Buckeye’s contractoperations and engineering services for third-party pipelines, was $17.9million during the first six months of 2009 compared to $21.6 million duringthe first six months of 2008.  Thedecrease in revenues resulted from reduced operating services and constructionrevenues of $3.7 million reflecting a customer’s termination of a contract inthe second quarter of 2008.

 

Total costs andexpenses were $16.4 million during the first six months of 2009, a reduction of$1.9 million from the corresponding period in 2008. Total costs and expensesinclude $1.4 million of reorganization expense (see Note 3 to the condensedconsolidated financial statements). Other factors impacting total costs and expenses include reducedoperating expenses associated with a terminated customer contract andconstruction contract activity.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

*BGH*

 

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

 

As noted in “BuckeyeGP Holdings L.P.” above, BGH’s only cash-generating asset is its ownershipinterest in Buckeye GP.  BGH’s cash flowis, therefore, directly dependent upon the ability of Buckeye and its operatingsubsidiaries to make cash distributions to Buckeye’s partners. The actualamount of cash that Buckeye will have available for distribution dependsprimarily on Buckeye’s ability to generate cash beyond its working capitalrequirements.  Buckeye’s primary futuresources of liquidity are operating cash flow, proceeds from borrowings underBuckeye’s revolving credit facility, and proceeds from the issuance of Buckeye’sLP Units or public debt.

 

BGH’s principaluse of cash is the payment of its operating expenses and distributions to its unitholders.  BGH generally makes quarterly cashdistributions of substantially all of its available cash, generally defined asconsolidated cash receipts less consolidated cash expenditures and suchretentions for working capital, anticipated cash expenditures and contingenciesas MainLine Management deems appropriate. In the first six months of 2009, BGH paid cash distributions of $0.35per unit on May 29, 2009 and $0.33 per unit on February 28,2009.  In the first six months of 2008,BGH paid cash distributions of $0.30 per unit on May 30, 2008 and $0.285per unit on February 29, 2008. Total cash distributed to BGH unitholders in the six months ended June 30,2009 and 2008 was approximately $19.3 million and $16.6 million, respectively.

 

On July 28,2009, MainLine Management declared a distribution of $0.37 per unit to be paidon August 31, 2009 to unitholders of record on August 7, 2009. Thisdistribution is expected to be approximately $10.5 million.

 

*Buckeye*

 

Typically, Buckeye’sprincipal sources of liquidity are cash from operations, borrowings under itsunsecured revolving credit agreement (the “Credit Facility”) and proceeds fromthe issuance of LP Units.  Buckeye will,from time to time, issue debt securities to permanently finance amounts borrowedunder the Credit Facility.  BuckeyeEnergy Services LLC (“BES”) funds its working capital needs principally fromoperations and a secured credit facility (the “BES Credit Agreement”).  Buckeye’s principal uses of cash are capitalexpenditures, distributions to LP Unit holders and acquisitions as described in“Cash Flows from Investing Activities” below.

 

In Buckeye’sAnnual Report on Form 10-K, which was filed on March 2, 2009, it wasdisclosed that, as a result of the financial credit crisis which emerged in thethird and fourth quarters of 2008, Buckeye had taken steps to preserve itsliquidity.  These steps includedmaintaining increased cash balances, reducing discretionary capitalexpenditures and appropriately managing operating and administrative expenses.  In the first six months of 2009, credit,capital markets and overall economic conditions remained difficult.  However, credit and capital marketsconditions improved enough that certain businesses with investment grade creditratings were able to issue publicly-traded debt and other master limitedpartnerships were able to issue equity. Buckeye continued to evaluate the condition of the debt and equitycapital markets and, on March 31, 2009, Buckeye sold and 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 $13.6 million toreduce outstanding borrowings under the Credit Facility.

 

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*Debt*

* *

*BGH*

* *

BGH is party to a five-year, $10.0 million revolving credit facilitywith SunTrust 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 $10.8 million and $14.0 million at June 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*

* *

At June 30,2009, Buckeye had an aggregate face amount of $1,458.0 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”), $209.0 million outstanding under the CreditFacility and $99.0 million outstanding under the BES Credit Agreement (asdiscussed below). See Note 10 to the condensed consolidated financialstatements for more information about the terms of the debt discussed above.

 

The fair value ofBuckeye’s aggregate long-term debt was estimated to be $1,296.2 million at June 30,2009 and $1,271.7 million at December 31, 2008.  The fair values at June 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 publicly issued debtof other master limited partnerships that has similar credit ratings and terms.

 

*BuckeyeCredit Facility*

 

Buckeye has aborrowing capacity of $600.0 million under the Credit Facility (includingLehman Brothers Bank, FSB’s commitment as a lender as discussed below), whichmay be expanded up to $800.0 million subject to certain conditions and uponfurther approval of the lenders.  TheCredit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greaterthan 5.0 to 1.0, subject to a provision that allows for an increase to 5.5 to1.0 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated bydividing consolidated debt by annualized EBITDA, which is defined in theCredit Facility as earnings before interest, taxes, depreciation, depletion andamortization, and other adjustments as defined, in each case excluding theincome of certain majority-owned subsidiaries and equity investments (butincluding distributions from those majority-owned subsidiaries and equityinvestments).  At June 30, 2009,Buckeye’s Funded Debt Ratio was 4.30 to 1.0. As permitted by the CreditFacility, $99.0 million of borrowings by BES under its separate credit agreement(discussed below) and $72.5 million related to the Buckeye NGL impairment wereexcluded from the calculation of the Funded Debt Ratio. At June 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 sheet.  The weighted average interest rate forborrowing outstanding under the Credit Facility was 0.63% at June 30,2009.

 

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 June 30, 2009, Buckeye was not awareof any instances of noncompliance with the covenants under the Credit Facility.See Note 10 to the consolidated financial statements for more information aboutthe terms of the Credit Facility.

 

Lehman Brothers Bank, FSB, an affiliate of LehmanBrothers Holdings Inc., has committed, as a lender under the Credit Facility,$20.0 million, or 3.3% of Buckeye’s $600.0 million borrowing capacity under theCredit Facility but has recently not honored that commitment. Buckeye does notbelieve that the reductionin 

 

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capacity under the CreditFacility resulting from the unavailability of Lehman Brothers Bank, FSB’scommitment will impair Buckeye’s ability to meet its liquidity needs.  At June 30, 2009, approximately $4.3million of the outstanding balance of the Credit Facility related to amountspreviously funded by Lehman Brothers Bank, FSB.

 

*BESCredit Agreement*

 

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

 

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

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

 

At June 30, 2009,BES’s Consolidated Tangible Net Worth (as defined in the BES Credit Agreement)and Consolidated Net Working Capital (as defined in the BES Credit Agreement)were $118.6 million and $75.5 million, respectively, and the ConsolidatedLeverage Ratio (as defined in the BES Credit Agreement) was 1.44 to 1.0.  The weighted average interest rate forborrowing outstanding under the BES Credit Agreement was 2.1% at June 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 June 30, 2009, Buckeye was not awareof any instances of noncompliance with the covenants under the BES CreditAgreement. See Note 10 to the consolidated financial statements for moreinformation 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.

 

In October 2008,Buckeye borrowed approximately $50.0 million under the Credit Facility.  In order to hedge its variable interest raterisk with respect to the amount borrowed, Buckeye concurrently entered into aninterest rate swap agreement for a notional amount of $50.0 million.  Under the swap agreement, Buckeye paid afixed rate of interest of 3.15% for 180 days and, in exchange, received aseries of six monthly payments based on the 30-day London Interbank OfferedRate (“LIBOR”) in effect at the beginning of each monthly period. The amountsreceived by Buckeye corresponded to the 30-day LIBOR that Buckeye paid on the$50 million borrowed under the Credit Facility. The swap settled on April 20, 2009. Buckeye had designated the swap agreement as a cash flow hedge on December 3,2008.  Changes in value between the tradedate and the designation date were recognized in earnings. On April 21,2009, Buckeye entered into another interest rate swap agreement for anadditional 180 days on the same terms as the interest rate swap agreemententered into in October 2008, except that Buckeye agreed to pay a fixedinterest rate of 0.63%. Buckeye designated the swap agreement as a cash flowhedge on the date the transaction occurred.

 

In January 2009,Buckeye entered into an additional interest rate swap agreement to hedge itsvariable rate risk on an additional $50.0 million in borrowing under the CreditFacility. Under the swap agreement, Buckeye is paying a fixed interest rate of0.81% for 180 days and, in exchange, is receiving a series of six monthlypayments based on the 30-day LIBOR in effect at the beginning of each monthlyperiod. The amounts received 

 

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by Buckeye correspond tothe 30-day LIBOR that Buckeye pays on the additional $50.0 million borrowedunder the Credit Facility. The swap agreement will settle on the maturity dateof the last 30-day LIBOR period. Buckeye designated the swap agreement as acash flow hedge at inception.

 

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

 

*Ammonia ContractContingencies*

 

On November 30, 2005, Buckeye GulfCoast Pipe Lines, L.P. (“BGC”), a subsidiary of Buckeye, purchased an ammoniapipeline and other assets from El Paso Merchant Energy-Petroleum Company (“EPME”),a subsidiary of El Paso Corporation (“El Paso”).  As part of the transaction, BGC assumed theobligations of EPME under several contracts involving monthly purchases andsales of ammonia.  EPME and BGC agreed,however, that EPME would retain the economic risks and benefits associated withthose contracts until their expiration at the end of 2012.  To effectuate this agreement, BGC passesthrough to EPME both the cost of purchasing ammonia under a supply contract andthe proceeds from selling ammonia under three sales contracts.  For the vast majority of monthly periodssince the closing of the pipeline acquisition, the pricing terms of the ammoniacontracts have resulted in ammonia costs exceeding ammonia sales proceeds.  The amount of the shortfall generallyincreases as the market price of ammonia increases.

 

EPME has informed BGCthat, notwithstanding the parties’ agreement, it will not continue to pay BGCfor shortfalls created by the pass-through of ammonia costs in excess ofammonia revenues.  EPME encouraged BGC toseek payment by invoking the $40.0 million guaranty made by El Paso whichguaranteed EPME’s obligations to BGC.  IfEPME fails to reimburse BGC for these shortfalls for a significant periodduring the remainder of the term of the ammonia agreements, then suchunreimbursed shortfalls could exceed the $40.0 million cap on El Paso’sguaranty.  To the extent the unreimbursedshortfalls significantly exceed the $40.0 million cap, the resulting costsincurred by BGC could adversely affect Buckeye’s financial position, results ofoperations, and cash flows.  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 the source of payment for the shortfalls,but has not clarified the extent to which it believes the guaranty has beenexhausted.  Given the uncertainty offuture ammonia prices and EPME’s future actions, Buckeye is unable to estimatethe amount of any such losses. Accordingly, Buckeye has recorded no provision for losses in theaccompanying condensed consolidated financial statements because it is unableto determine whether or not a loss has been incurred or, if a loss has beenincurred, a reasonable estimate or range of estimates of the amount of suchlosses.  Buckeye is assessing itsoptions, including potential recourse against EPME and El Paso, with respect tothis matter.

 

*Cash Flows fromOperations*

* *

The components of cashflows from operations for the six months ended June 30, 2009 and 2008 areas follows (in thousands):

 
| ** **                                     | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **June 30,**    | ** ** |
| ** **                                     | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Net income                                     |       | $                    | 5,312      |   | $ | 80,882 |   |
| Value of ESOP shares  released                 |       | 380                  |       | 1,671 |   |
| Depreciation and  amortization                 |       | 26,923               |       | 23,725 |   |
| Asset impairment  expense                      |       | 72,540               |       | — |   |
| Reorganization expense                         |       | 28,113               |       | — |   |
| Net changes in fair  value of derivatives      |       | 4,672                |       | — |   |
| Changes in current  assets and liabilities     |       | (43,681              | )          | 341 |   |
| Changes in non-current  assets and liabilities |       | 2,355                |       | (1,415 | ) |
| Other                                          |       | 3,023                |       | 3,275 |   |
| Net cash provided by  discontinued operations  |       | —               |       | 572 |   |
| Total                                          |       | $                    | 99,637     |   | $ | 109,051 |   |

 

45

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Cash flows fromoperations were $99.6 million for the first six months of 2009, which decreasedby $9.4 million compared to the first six months of 2008.

 

For the six months ended June 30, 2009, cash usedin working capital resulted primarily from increases in inventories of $27.7million, prepaid and other current assets of $17.7 million, and tradereceivables of $2.8 million, and a decrease in accrued and other currentliabilities of $5.5 million.  These cashuses were partially offset by an increase in accounts payable of $5.2 millionand a decrease in construction and pipeline relocation receivables of $4.9 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.  Increases in prepaidand other current assets are due to an increase in prepaid services within theNatural Gas Storage segment as well as an increase in customer deposits withinthe Energy Services segment.  Theincrease in trade receivables is due to the timing of collections as comparedto amounts outstanding at year end.  Thedecrease in accrued and other current liabilities is due to the payment ofaccrued ammonia purchases at year end which were paid in the first quarter of2009.  These decreases in accrued andother current liabilities were partially offset by an increase in accruedtaxes.  The increase in accounts payableis due to an increase in trading activity within the Energy Services segment.   The decrease in construction and pipelinerelocation receivables is due to a decrease in construction activity during thefirst six months of 2009.

 

CashFlows from Investing Activities

 

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

 
| ** **                                                      | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **June 30,**    | ** ** |
| ** **                                                      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Capital  expenditures                                           |       | $                    | (39,819    | ) | $ | (32,501 | ) |
| Acquisitions  and equity investments                            |       | (3,880               | )          | (610,616 | ) |
| Net  expenditures for disposal of property, plant and equipment |       | 21                   |       | (103 | ) |
| Proceeds from sale of  discontinued operations                  |       | —               |       | 52,584 |   |
| Total                                                           |       | $                    | (43,678    | ) | $ | (590,636 | ) |

 

Inthe first six 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. Eighty percent of WT LPG is owned by Chevron Pipe Line Co. and 20% isowned by Buckeye.

 

In thefirst six months of 2008, Buckeye expended $438.8 million for the acquisitionof Lodi Gas Storage, L.L.C., $143.1 million for the acquisition of Farm &Home Oil Company LLC, and an aggregate of $28.7 million for the acquisitions ofthree terminals in Niles and Ferrysburg, Michigan, and Wethersfield,Connecticut and the acquisition of the 50% member interest in WesPac Pipelines- San Diego LLC that Buckeye did not already own.

 

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

 
| ** **                       | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **June 30,**    | ** ** |
| ** **                       | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Sustaining capital  expenditures |       | $                    | (7,773     | ) | $ | (8,067 | ) |
| Expansion and cost  reduction    |       | (32,046              | )          | (24,434 | ) |
| Total                            |       | $                    | (39,819    | ) | $ | (32,501 | ) |

 

Buckeye incurred$7.8 million and $8.1 million of sustaining capital expenditures and $32.0million and $24.4 million of expansion and cost-reduction expenditures in thefirst six months of 2009 and 2008, respectively.  Expansion and cost reduction projects in 2009included the Kirby Hills II project, 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, NewJersey.  Expansion and cost-reductionprojects in 2008 included ethanol and butane blending projects, theconstruction of three additional tanks with capacity of 0.4 million barrels inLinden, New Jersey and the Kirby Hills II project.

 

Buckeye expects to spend approximately $80.0 millionto $110.0 million in capital expenditures in 2009, of which approximately $20.0million to $30.0 million is expected to relate to sustaining capitalexpenditures and $65.0 million to $80.0 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 the KirbyHills II project 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 six months of 2009 or 2008.  BGH’s distributions to its unitholderstotaled $19.3 million and $16.6 million in the first six months of 2009 and2008, respectively.

 

On March 31, 2009,Buckeye issued 2.6 million LP Units in an underwritten public offering at$35.08 per LP Unit. Total proceeds from the offering, after underwriter’sdiscount of $1.17 per LP Unit and offering expenses, were approximately $91.2million, 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 LP Units. Buckeye also used the net proceeds from this offering of approximately$13.6 million to reduce outstanding borrowings under the Credit Facility.

 

During the first sixmonths of 2009 and 2008, Buckeye borrowed $77.3 million and $313.0 millionunder its Credit Facility, respectively, and repaid $166.6 million and $156.0million, respectively.  Buckeye borrowed$3.0 million under the BES Credit Agreement during the six months ended June 30,2009.  In 2008, net payments under theBES Credit Agreement and BES’ previous credit agreement were $27.3 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 tonon-controlling interests, consisting primarily of Buckeye’s distributions toholders of its LP Units, were $87.1 million in the first six months of 2009compared to $77.3 million in the first six 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 six months of 2009.

 

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**OTHER MATTERS**

 

# *Accounting Pronouncements*

#  

See Note 1 to BGH’scondensed consolidated financial statements for a description of recentlyadopted and issued accounting pronouncements.

 

# *Forward Looking Statements*

#  

The information contained above in this Management’sDiscussion and Analysis and elsewhere in this Form 10-Q includes “forward-lookingstatements.”  Such statements useforward-looking words such as “anticipate,” “continue,” “estimate,” “expect,” “may,”“believe,” “will,” or other similar words, although some forward-lookingstatements are expressed differently. These statements discuss future expectations and containprojections.  Specific factors that couldcause actual results to differ from those in the forward-looking statementsinclude, but are not limited to:(1) BGH’s ability to pay distributions to itsunitholders; (2) BGH’s expected receipt of distributions and incentivedistributions from Buckeye; (3) anticipated trends in Buckeye’s business; (4) pricetrends and overall demand for 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 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 and neither engages inhedging activity 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.

 

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*CommodityRisk*

 

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

 

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

 

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

 
| ** **                                         | ** ** | **June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|
| ** **                                         | ** ** | **2009**          | ** ** |
| **Assets:**                                        | ** ** | ** **        | ** ** |
| Fixed-price sales  contracts                       |       | $                 | 12,759     |   |
| Futures contracts for  fixed-price sales contracts |       | 4,508             |       |
|                                               |       |              |       |
| **Liability:**                                     | ** ** | ** **        | ** ** |
| Futures contracts for  inventory                   |       | (24,640           | )          |
| Futures contract for  natural gas                  |       | (376              | )          |
| Total                                              |       | $                 | (7,749     | ) |

 

Substantially all of the unrealized loss of $24.6 million at June 30,2009 for inventory hedges represented by futures contracts will be realized bythe first quarter of 2010 as the related inventory is sold.  Gains recorded on inventory hedges that wereineffective were approximately $3.3 million and $7.6 million for the three andsix months ended June 30, 2009, respectively.  As of June 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 June 30, 2009, Buckeyehad refined product inventories which it intends to use to satisfy a portion ofthe fixed-price sales contracts.

 

Based ona hypothetical 10% movement in the underlying quoted market prices of thecommodity financial instruments outstanding at the dates indicated in thefollowing table, the estimated fair value of portfolio of commodity financialinstruments would be as follows (in thousands):

 
| ** **                                                            | ** ** | ** **         | ** ** | **Instrument**  | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|-----------------|------------|
| ** **                                                            | ** ** | **Resulting**      | ** ** | **Portfolio**   | ** ** |
| **Scenerio**                                                          | ** ** | **Classification** | ** ** | **Fair Value**  | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Gain (Loss)** | ** ** |
| Fair value assuming NO  CHANGE in underlying commodity prices (as is) |       | Liability          |       | $               | (7,749     | ) |
| Fair value assuming 10%  INCREASE in underlying commodity prices      |       | Liability          |       | $               | (24,886    | ) |
| Fair value assuming 10%  DECREASE in underlying commodity prices      |       | Asset              |       | $               | 11,686     |   |

 

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*InterestRate Risk*

 

Buckeye is exposedto risk resulting from changes in interest rates.  Buckeye does not have material foreignexchange risk.  Buckeye is exposed tofair value risk with respect to the fixed-rate portion of its financingarrangements (the 5.125% Notes, the 5.300% Notes, the 4.625% Notes, the 6.75%Notes and the 6.05% Notes) and to cash flow risk with respect to its variablerate 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 June 30,2009, Buckeye had total fixed-rate debt obligations at face value of $1,150.0million, consisting of $125.0 million of the 5.125% Notes, $275.0 million ofthe 5.300% Notes, $300.0 million of the 4.625% Notes, $150.0 million of the6.75% Notes and $300.0 million of the 6.05% Notes.  The fair value of these obligations at June 30,2009 was approximately $1,087.2 million. Buckeye estimates that a 1% decrease in rates for obligations of similarmaturities would increase the fair value of its fixed-rate debt obligations by$81.7 million. Buckeye’s variable debt obligation was $209.0 million under theCredit Facility and $99.0 million under the BES Credit Agreement at June 30,2009.  Based on the balances outstandingat June 30, 2009, a 1% increase or decrease in interest rates wouldincrease or decrease annual interest expense by $3.1 million.

 

Item 4. Controls and Procedures

 

(a)       Evaluation of Disclosure Controls andProcedures.

 

The management of MainLine Management, with theparticipation of its Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of its disclosure controls and procedures for BGHas of the end of the period covered by this report.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that MainLine Management’sdisclosure controls and procedures for BGH as of the end of the period coveredby this report are operating effectively to provide reasonable assurance thatthe information required to be disclosed by MainLine Management in reportsfiled on behalf of BGH under the Securities Exchange Act of 1934 is (i) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (ii) accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, as appropriateto allow timely decisions regarding required disclosure.  A controls system cannot provide absoluteassurance, however, that the objectives of the controls system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected.

 

(b)      Changesin Internal Control over Financial Reporting

 

There have been no changes inMainLine Management’s internal control over financial reporting for BGH duringthe most recent fiscal quarter with respect to BGH’s operations that hasmaterially affected, or is reasonably likely to materially affect, management’sinternal control over financial reporting for BGH.

 

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PART II— OTHER INFORMATION

 

Item1. Legal Proceedings

 

In March 2007,Buckeye was named as a defendant in an action entitled *Madigan v.Buckeye Partners, L.P.* filed in the U.S. District Court for theCentral District of Illinois. The action was brought by the State of IllinoisAttorney General acting on behalf of the Illinois Environmental ProtectionAgency. The complaint alleges that Buckeye violated various Illinois stateenvironmental laws in connection with a product release from Buckeye’s terminallocated in Harristown, Illinois on or about June 11, 2006 and variousother product releases from Buckeye’s terminals and pipelines in the State ofIllinois during the period of 2001 through 2006. The complaint seeks to recoverstate oversight costs, damages, and civil penalties and seeks injunctive actionrequiring Buckeye to remediate the environmental contamination resulting fromthe product releases. Buckeye believes it has meritorious defenses to theallegations set forth in the complaint.

 

Item 1A. Risk Factors

 

In addition to the factors included in BGH’s Annual Report on Form 10-Kfor 2008, the reader should also consider the following risk factor:

 

***Buckeye may not be able to realize the benefits of the organizationalrestructuring commenced in the second quarter of 2009, which could adverselyimpact Buckeye or our business and financial results.***

 

In the secondquarter of 2009, following Buckeye’s comprehensive “best practices” review of itsbusiness, Buckeye commenced a significant organizational restructuring designedto improve efficiencies and realize cost savings.  If Buckeye is unable tosuccessfully realize the efficiencies and benefits of Buckeye’s reorganization,Buckeye and our financial results may be adversely impacted.  In addition, if Buckeye is unable to successfully realize theoperational benefits of Buckeye’sreorganization, Buckeye’srelationships with customers, suppliers and employees, and, accordingly, Buckeyeand our business and results ofoperations, may be adversely affected.

 

Item 6. Exhibits

 

10.1  Full Waiver and Release of Claims, dated as ofMay 8, 2009, by Vance E. Powers (incorporated by reference to Exhibit 10.1to Buckeye Partners, L.P.’s Quarterly Report on Form 10-Q for thequarterly period ended June 30, 2009 filed on July 30, 2009).

 

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

 

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

 

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

 

32.2 Certification ofChief Financial Officer, Pursuant to 18 U.S.C. Section 1350.

 

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SIGNATURE

 

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

 

 
|                      |   | By:    | BUCKEYE GP HOLDINGS  L.P.      |
|---------------------------|--------|--------|--------------------------------|
|                      |   |   | (Registrant)                   |
|                      |   |   |                           |
|                      |   | By:    | MAINLINE MANAGEMENT LLC,       |
|                      |   |   | as General Partner             |
|                      |   |   |                           |
|                      |   |   |                           |
| Date: July 31,  2009 |   | By:    | /s/ Keith E. St.Clair          |
|                      |   |   | Keith E. St.Clair              |
|                      |   |   | Chief Financial Officer        |
|                      |   |   | *(Principal Accounting and*    |
|                      |   |   | *Principal Financial Officer)* |

 

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