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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

 

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

 

**For thequarterly period ended June 30, 2008 or**

** **

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

** **

**For thetransition period from                         to                           **

** **

**Commissionfile number 001-32963**

** **

**BUCKEYE GP HOLDINGS L.P.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **11-3776228**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (IRS Employer        |
| incorporation or  organization)  |       | Identification  No.) |

 

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

 

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

 

**Not Applicable**

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

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes x   No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “small reporting company” in Rule12b-2 of the Exchange Act. (Check one): 

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

 

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

 

As of July 24, 2008, there were 27,769,647 Common Units and 530,353Management Units outstanding.

 

 

 

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BUCKEYE GP HOLDINGS L.P.

INDEX

 
| ** **                          | ** **                                                                                                          | ** ** | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I-  FINANCIAL INFORMATION |                                                                                                                |       |
|                                |                                                                                                                |       |     |
| Item 1.                             | Condensed Consolidated  Financial Statements (Unaudited)                                                            |       |     |
|                                |                                                                                                                |       |     |
|                                | Condensed  Consolidated Statements of Income for the three and six months ended  June 30, 2008 and 2007        |       | 1        |
|                                |                                                                                                                |       |     |
|                                | Condensed  Consolidated Balance Sheets as of June 30, 2008 and December 31,  2007                         |       | 2        |
|                                |                                                                                                                |       |     |
|                                | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2008 and 2007              |       | 3        |
|                                |                                                                                                                |       |     |
|                                | Condensed  Consolidated Statement of Changes in Partners’ Capital for the six months  ended June 30, 2008 |       | 4        |
|                                |                                                                                                                |       |     |
|                                | Notes to Condensed Consolidated Financial Statements                                                                |       | 5        |
|                                |                                                                                                                |       |     |
| Item 2.                             | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         |       | 24       |
|                                |                                                                                                                |       |     |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 42       |
|                                |                                                                                                                |       |     |
| Item 4.                             | Controls and  Procedures                                                                                            |       | 44       |
|                                |                                                                                                                |       |     |
| PART II-  OTHER INFORMATION    |                                                                                                                | 45         |
|                                |                                                                                                                |       |
| Item 1.                             | Legal Proceedings                                                                                                   |       | 45       |
|                                |                                                                                                                |       |     |
| Item 1A.                            | Risk Factors                                                                                                        |       | 45       |
|                                |                                                                                                                |       |     |
| Item 6.                             | Exhibits                                                                                                            |       | 48       |

 

 

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Table of Contents

 

PART I - FINANCIALINFORMATION

 

Item1. CondensedConsolidated Financial Statements

 

**Buckeye GP Holdings L.P.**

**Condensed Consolidated Statementsof Income**

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

**(Unaudited)**

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                        | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenues:**                                                     |       |                             |       |                           |       |   |   |   |   |
| Product sales                                                     |       | $                                | 346,436    |                           | $          | 1,035 |   | $ | 587,482 |   | $ | 5,950 |   |
| Transportation  and other                                         |       | 146,112                          |       | 123,916                        |       | 285,342 |   | 243,945 |   |
| Total revenue                                                     |       | 492,548                          |       | 124,951                        |       | 872,824 |   | 249,895 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| **Costs  and expenses:**                                          |       |                             |       |                           |       |   |   |   |   |
| Cost of product  sales                                            |       | 341,591                          |       | 1,032                          |       | 578,203 |   | 5,876 |   |
| Operating  expenses                                               |       | 69,991                           |       | 62,577                         |       | 136,282 |   | 118,032 |   |
| Depreciation and  amortization                                    |       | 12,342                           |       | 10,001                         |       | 23,725 |   | 19,708 |   |
| General and  administrative                                       |       | 11,638                           |       | 7,127                          |       | 21,534 |   | 13,431 |   |
| Total costs and  expenses                                         |       | 435,562                          |       | 80,737                         |       | 759,744 |   | 157,047 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Operating income                                                  |       | 56,986                           |       | 44,214                         |       | 113,080 |   | 92,848 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| **Other  income (expense):**                                      |       |                             |       |                           |       |   |   |   |   |
| Investment  income                                                |       | 237                              |       | 334                            |       | 851 |   | 634 |   |
| Interest and  debt expense                                        |       | (18,270                          | )          | (13,104                        | )          | (36,448 | ) | (26,980 | ) |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Total other  (expense)                                            |       | (18,033                          | )          | (12,770                        | )          | (35,597 | ) | (26,346 | ) |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Income before  equity income and non-controlling interest expense |       | 38,953                           |       | 31,444                         |       | 77,483 |   | 66,502 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Equity income                                                     |       | 1,344                            |       | 2,258                          |       | 3,399 |   | 4,044 |   |
| Non-controlling  interest expense                                 |       | (34,980                          | )          | (29,571                        | )          | (69,716 | ) | (60,476 | ) |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| Net income                                                        |       | $                                | 5,317      |                           | $          | 4,131 |   | $ | 11,166 |   | $ | 10,070 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| **Net  income per partnership unit:**                             |       |                             |       |                           |       |   |   |   |   |
| Basic                                                             |       | $                                | 0.19       |                           | $          | 0.15 |   | $ | 0.39 |   | $ | 0.36 |   |
| Diluted                                                           |       | $                                | 0.19       |                           | $          | 0.15 |   | $ | 0.39 |   | $ | 0.36 |   |
|                                                              |       |                             |       |                           |       |   |   |   |   |
| **Weighted  average number of units outstanding:**                |       |                             |       |                           |       |   |   |   |   |
| Basic                                                             |       | 28,300                           |       | 28,073                         |       | 28,300 |   | 27,983 |   |
| Diluted                                                           |       | 28,300                           |       | 28,300                         |       | 28,300 |   | 28,300 |   |

 

See Notes tocondensed consolidated financial statements.

 

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** Buckeye GPHoldings L.P.**

**Condensed Consolidated BalanceSheets**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **Assets:**                                                                   |       |              |       |                  |       |
| Current assets:                                                               |       |              |       |                  |       |
|   Cash  and cash equivalents                                        |       | $                 | 45,572     |                  | $          | 94,486 |   |
|   Trade  receivables                                                |       | 100,879           |       | 47,598                |       |
|   Construction  and pipeline relocation receivables                 |       | 12,776            |       | 12,571                |       |
|   Inventories                                                       |       | 127,985           |       | 15,149                |       |
|   Prepaid  and other current assets                                 |       | 69,757            |       | 32,708                |       |
|   Total  current assets                                             |       | 356,969           |       | 202,512               |       |
|                                                                          |       |              |       |                  |       |
| Property, plant  and equipment, net                                           |       | 2,149,704         |       | 1,806,720             |       |
|                                                                          |       |              |       |                  |       |
| Goodwill                                                                      |       | 449,717           |       | 234,603               |       |
| Other  non-current assets                                                     |       | 115,528           |       | 110,491               |       |
|   Total  assets                                                     |       | $                 | 3,071,918  |                  | $          | 2,354,326 |   |
|                                                                          |       |              |       |                  |       |
| **Liabilities  and partners’ capital:**                                  |       |              |       |                  |       |
| Current  liabilities:                                                         |       |              |       |                  |       |
|   Line  of credit                                                   |       | $                 | 72,718     |                  | $          | — |   |
|   Current  portion of long-term debt                                |       | 6,349             |       | 6,289                 |       |
|   Accounts  payable                                                 |       | 59,891            |       | 20,368                |       |
|   Accrued  and other current liabilities                            |       | 126,360           |       | 78,902                |       |
|   Total  current liabilities                                        |       | 265,318           |       | 105,559               |       |
|                                                                          |       |              |       |                  |       |
|   Long-term  debt                                                   |       | 1,315,167         |       | 863,174               |       |
|   Other  non-current liabilities                                    |       | 87,589            |       | 81,120                |       |
|   Non-controlling  interest                                         |       | 1,169,997         |       | 1,066,143             |       |
|   Total  liabilities                                                |       | 2,838,071         |       | 2,115,996             |       |
|                                                                          |       |              |       |                  |       |
| Commitments and  contingent liabilities                                       |       | —            |       | —                |       |
|                                                                          |       |              |       |                  |       |
| **Partners’  capital:**                                                  |       |              |       |                  |       |
| General Partner-  Common Units                                                |       | 7                 |       | 7                     |       |
| Limited  Partners- Common Units                                               |       | 228,323           |       | 232,928               |       |
| Management Units                                                              |       | 3,066             |       | 3,156                 |       |
| Equity gains on  issuance of Buckeye Partners, L.P. limited partnership units |       | 2,451             |       | 2,239                 |       |
|   Total  partners’ capital                                     |       | 233,847           |       | 238,330               |       |
|   Total  liabilities and partners’ capital                     |       | $                 | 3,071,918  |                  | $          | 2,354,326 |   |

 

See Notes tocondensed consolidated financial statements.

 

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**Buckeye GP Holdings L.P.**

**Condensed Consolidated Statementsof Cash Flows**

**(In thousands)**

**(Unaudited)**

** **
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                      |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 11,166     |   | $ | 10,070 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Non-cash expense  for unit-based compensation                                      |       | 695                            |       | 1,179 |   |
| Value of ESOP  shares released                                                     |       | 1,671                          |       | 2,355 |   |
| Depreciation and  amortization                                                     |       | 23,725                         |       | 19,708 |   |
| Non-controlling  interest expense                                                  |       | 69,716                         |       | 60,476 |   |
| Equity earnings  from equity investments of Buckeye Partners, L.P.                 |       | (3,399                         | )          | (4,044 | ) |
| Distributions  from equity investments of Buckeye Partners, L.P.                   |       | 2,306                          |       | 3,589 |   |
| Amortization of  debt discount and option grants                                   |       | 820                            |       | 247 |   |
| Change in assets  and liabilities, net of amounts related to acquisitions:         |       |                           |       |   |   |
| Trade  receivables                                                                 |       | 14,059                         |       | 8,372 |   |
| Construction and  pipeline relocation receivables                                  |       | (205                           | )          | 236 |   |
| Inventories                                                                        |       | (19,505                        | )          | 227 |   |
| Prepaid and  other current assets                                                  |       | (30,394                        | )          | 1,828 |   |
| Accounts  payables                                                                 |       | 8,431                          |       | (4,770 | ) |
| Accrued and  other current liabilities                                             |       | 27,955                         |       | 3,393 |   |
| Other  non-current assets                                                          |       | (95                            | )          | 2,727 |   |
| Other  non-current liabilities                                                     |       | 1,533                          |       | (1,882 | ) |
| Total  adjustments from operating activities                                       |       | 97,313                         |       | 93,641 |   |
| Net cash  provided by continuing operations                                        |       | 108,479                        |       | 103,711 |   |
| Net cash  provided by discontinued operations                                      |       | 572                            |       | — |   |
| Net cash  provided by continuing and discontinued operations                       |       | 109,051                        |       | 103,711 |   |
|                                                                               |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                           |       |   |   |
| Capital  expenditures                                                              |       | (32,501                        | )          | (36,966 | ) |
| Acquisitions and  equity investments                                               |       | (610,616                       | )          | (39,320 | ) |
| Net expenditures  for disposal of property, plant and equipment                    |       | (103                           | )          | (167 | ) |
| Proceeds from  sale of discontinued operations                                     |       | 52,584                         |       | — |   |
| Net cash used in  investing activities                                             |       | (590,636                       | )          | (76,453 | ) |
|                                                                               |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                           |       |   |   |
| Debt issuance  costs                                                               |       | (1,886                         | )          | — |   |
| Net proceeds  from issuance of Buckeye LP Units                                    |       | 113,148                        |       | 82,171 |   |
| Proceeds from  exercise of Buckeye Partners, L.P. unit options                     |       | 278                            |       | 1,895 |   |
| Distributions to  non-controlling partners of Buckeye Partners, L.P.               |       | (77,338                        | )          | (61,302 | ) |
| Proceeds from  issuance of long-term debt and borrowings under credit facilities   |       | 611,050                        |       | 86,300 |   |
| Repayment of  long-term debt                                                       |       | (186,387                       | )          | (119,331 | ) |
| Settlement of  hedge                                                               |       | (9,638                         | )          | — |   |
| Distributions to  Limited Partners                                                 |       | (16,556                        | )          | (13,160 | ) |
| Net cash  provided by (used in) financing activities                               |       | 432,671                        |       | (23,427 | ) |
|                                                                               |       |                           |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                              |       | (48,914                        | )          | 3,831 |   |
| Cash and cash  equivalents —Beginning of year                                 |       | 94,486                         |       | 20,220 |   |
| Cash and cash  equivalents—End of period                                      |       | $                              | 45,572     |   | $ | 24,051 |   |
|                                                                               |       |                           |       |   |   |
| ***Supplemental  cash flow information:***                                         |       |                           |       |   |   |
| Cash paid during  the period for interest (net of amount capitalized)              |       | $                              | 26,942     |   | $ | 26,117 |   |
| Capitalized  interest                                                              |       | $                              | 620        |   | $ | 902 |   |
| Cash paid during  the period for income tax                                        |       | $                              | 531        |   | $ | 587 |   |
|                                                                               |       |                           |       |   |   |
| ***Non-cash  changes in assets and liabilities:***                                 |       |                           |       |   |   |
| Equity gains on  issuance of Buckeye LP Units                                      |       | $                              | 212        |   | $ | 235 |   |
| Hedge accounting                                                                   |       | $                              | 6,751      |   | $ | (118 | ) |

 

See Notes tocondensed consolidated financial statements.

 

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**Buckeye GP Holdings L.P.**

**Condensed Consolidated Statementof Partners’ Capital**

**(In thousands)**

**(Unaudited)**

 
| ** **                                        | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Equity**           | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-------------|------------|--------------|------------|----------------|------------|----------------------|------------|------------|------------|
| ** **                                        | ** ** | **General** | ** ** | **Limited**  | ** ** | ** **     | ** ** | **Gains on**    | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Partner** | ** ** | **Partners** | ** ** | ** **     | ** ** | **Issuance of** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Common**  | ** ** | **Common**   | ** ** | **Management** | ** ** | **Buckeye LP**  | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Units**   | ** ** | **Units**    | ** ** | **Units**      | ** ** | **Units**            | ** ** | **Total**  | ** ** |
| **Partners’  capital- January 1, 2008** |       | $           | 7          |         | $          | 232,928        |       | $                    | 3,156      |       | $          | 2,239 |   | $ | 238,330 |   |
| Net income*                                       |       |        |       | 10,957       |       | 209            |       |                 |       | 11,166     |       |
| 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 LP Units     |       |        |       |         |       |           |       | 212                  |       | 212        |       |
|                                              |       |        |       |         |       |           |       |                 |       |       |       |
| **Partners’  capital- June 30, 2008**   |       | $           | 7          |         | $          | 228,323        |       | $                    | 3,066      |       | $          | 2,451 |   | $ | 233,847 |   |

 

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* Comprehensive incomeequals net income.

 

See Notes tocondensed consolidated financial statements.

 

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.               BASIS OFPRESENTATION

 

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 which 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 byaffiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso &Company (“Kelso”), Lehman Brothers Holdings Inc. (“Lehman Brothers”), andcertain 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, 2008, Buckeye GP owned anapproximate 0.5% general partner interest in Buckeye.

 

Buckeye, through itssubsidiaries, owns and operates one of the largest independent refinedpetroleum products pipeline systems in the United States in terms of volumesdelivered, with approximately 5,400 miles of pipeline serving 17 states, andoperates an approximate 2,200 miles of pipeline under agreements with major oiland chemical companies. Buckeye also owns 63 refined petroleum productsterminals with aggregate storage capacity of approximately 22.9 million barrelsin 13 states.

 

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

 

OnFebruary 8, 2008, Buckeye acquired Farm & Home Oil Company LLC (“Farm &Home”).  Farm & Home sellsrefined petroleum products on a wholesale basis, principally in eastern andcentral Pennsylvania.  When Farm &Home was acquired, it also had retail operations, but Buckeye sold thoseoperations to a wholly owned subsidiary of Inergy, L.P. on April 15,2008.  The assets and liabilities andresults of operations of Farm & Home’s retail operations weredetermined to be discontinued operations effective on the Farm & Homeacquisition date of February 8, 2008 (see Note 3 for a furtherdiscussion).

 

The majority of theemployees who provide services to BGH, Buckeye and its subsidiaries areemployed by Buckeye Pipe Line Services Company (“Services Company”). ServicesCompany is reimbursed by BGH or Buckeye’s subsidiaries for the cost of theemployees who provide those services. BGH is responsible for the total compensation, including benefits, paidto the four highest salaried officers performing duties for Buckeye GP withrespect to the functions of operations, finance, legal, marketing, businessdevelopment, treasury, or performing the function of president of BuckeyeGP.  Buckeye is generally responsible forall other employee costs.  ServicesCompany is owned by an employee stock ownership plan (the “ESOP”). ServicesCompany owned approximately 4.5% of the publicly traded limited partner unitsof Buckeye (the “LP Units”) at June 30, 2008.

 

With the acquisitions ofLodi Gas and Farm & Home, BGH determined that it had two additionalreportable segments: Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, BGHconducts business in five reportable operating segments: Pipeline Operations;Terminalling and Storage; Natural Gas Storage; Energy Services; and OtherOperations.  See Note 14 for a moredetailed discussion of BGH’s operating segments.

 

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

 

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

 

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

 

Inthe opinion of management, the condensed consolidated financial statements ofBGH, which are unaudited except that the balance sheet as of December 31,2007 is derived from audited financial statements, include all adjustmentsnecessary to present fairly BGH’s financial position as of June 30, 2008,along with the results of operations for the three and six months ended June 30,2008 and 2007 and cash flows for the six months ended June 30, 2008 and2007.  The results of operations for thethree and six months ended June 30, 2008 are not necessarily indicative ofthe results to be expected for the full year ending December 31, 2008.

 

Certain prior year amounts for product sales and thecost of product sales have been reclassified in the statements of income toconform to the current-year presentation.

 

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

 

2. 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 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.

 

*EnvironmentalContingencies*

 

Inaccordance with its accounting policy, Buckeye recorded operating expenses of$2.7 million and $1.8 million for the three months ended June 30, 2008 and2007, respectively, and $4.6 million and $4.0 million for the six months ended June 30,2008 and 2007, respectively, related to environmental contingencies unrelatedto claims and proceedings.

 

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3.               BUSINESS COMBINATIONS AND DISCONTINUEDOPERATIONS

 

*Lodi Gas*

 

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

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

 

 

Of the contractual purchase price, $428.0 million was paid at closing andan additional $12.0 million was paid on March 6, 2008 upon receipt ofapproval from the California Public Utilities Commission for an expansionproject known as Kirby Hills Phase II. Buckeye acquired Lodi Gas because Buckeye’s management believes Lodi Gasrepresents an attractive opportunity to expand and diversify Buckeye’soperations into a new geographic area and a new commodity type, and willprovide Buckeye a platform for growth in the natural gas storage industry.

 

Buckeye has determined that the acquisition represented a business combinationunder the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations” (“SFAS No. 141”).  The application of SFAS No. 141 requires that the total purchaseprice be allocated to the fair value of the assets acquired and the liabilitiesassumed based on their fair values at the acquisition date, with amountsexceeding the fair values being recorded as goodwill. The purchase price hasbeen allocated, on a preliminary basis, to the tangible and intangible assets acquired,including goodwill, as follows (in thousands):

 
| ** **                     | ** ** | **January 18,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2008**             | ** ** |
| Current assets                 |       | $                    | 7,519      |   |
| Property, plant  and equipment |       | 276,879              |       |
| Goodwill                       |       | 170,005              |       |
| Current  liabilities           |       | (10,274              | )          |
| Other  liabilities             |       | (1,823               | )          |
|                           |       |                 |       |
| Allocated purchase price       |       | $                    | 442,306    |   |

 

Buckeye is in the process of finalizing the purchase price allocationbased on the valuations of plant, property and equipment and goodwill.  The final purchase price allocation willlikely adjust the preliminary amounts shown above.  Such changes may be material.  As discussed above, the activities of LodiGas are reported in a new operating segment called Natural Gas Storage.

 

*Farm & Home*

 

OnFebruary 8, 2008, Buckeye acquired all of the member interests of Farm &Home for approximately $146.0 million. On April 15, 2008, Buckeye completed the sale of the retailoperations of Farm & Home to a wholly owned subsidiary of Inergy, L.P.for approximately $52.6 million. The retail assets sold consisted primarily ofproperty, plant and equipment as well as inventory and receivables.  Buckeye recorded no gain or loss on the saleof Farm & Home’s retail operations. The retail operations of Farm & Home were not an integral partof Buckeye’s core operations and strategy, and the related retail assets andliabilities were determined to be discontinued operations on the date ofBuckeye’s acquisition of Farm & Home because Buckeye decided todispose of them as of that date. Revenues from discontinued operations for the period February 8,2008 to April 15, 2008 were approximately $19.0 million.

 

Buckeye acquired Farm & Home because Buckeye’s managementbelieves that the wholesale distribution operations of Farm & Homerepresent an attractive opportunity to further Buckeye’s strategy of improvingoverall profitability by increasing the utilization of Buckeye’s existingpipeline and terminal system infrastructure by marketing refined petroleum 

 

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products in areas served bythat infrastructure.  Buckeye hasdetermined that the acquisition represented a business combination under theprovisions of SFAS No. 141.  Theapplication of SFAS No. 141 requires that the total purchase price beallocated to the fair value of the assets acquired and the liabilities assumedbased on their fair values at the acquisition date, with amounts exceeding thefair values being recorded as goodwill. The purchase price has been allocated, on a preliminary basis, to thetangible and intangible assets acquired, including goodwill, as follows (inthousands):

 
| ** **                        | ** ** | **February 8,** | ** ** |
|-----------------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2008**             | ** ** |
| Cash                              |       | $                    | 2,816      |   |
| Trade  receivables                |       | 67,340               |       |
| Inventory                         |       | 91,654               |       |
| Prepaid and  other current assets |       | 9,746                |       |
| Property, plant  and equipment    |       | 29,660               |       |
| Goodwill                          |       | 45,109               |       |
| Other  non-current assets         |       | 1,844                |       |
| Assets held for  sale             |       | 51,750               |       |
| Debt                              |       | (100,000             | )          |
| Accounts payable                  |       | (31,097              | )          |
| Accrued expenses                  |       | (22,833              | )          |
|                              |       |                 |       |
| Allocated purchase price          |       | $                    | 145,989    |   |

 

Buckeyeis in the process of finalizing the purchase price allocation and will likelyadjust the preliminary amounts shown above. Such changes may be material.  Thefinal allocation may include amounts related to identifiable intangible assetssuch as trade names, customer relationships and covenants not-to-compete.  As discussed above, the operations of Farm &Home that were retained by Buckeye are reported in a new operating segmentcalled Energy Services.

 

*Proforma Unaudited Financial Results*

 

The following unaudited summarized pro forma consolidated incomestatement information for the three months ended June 30, 2007 and the sixmonths ended June 30, 2008 and 2007 assumes that the acquisitions of LodiGas and Farm & Home had occurred as of the beginning of the periodspresented.  The pro forma presentationbelow assumes that equity offerings by Buckeye that were used in part to fundthe acquisition of Lodi Gas occurred effective January 1, 2007.  In the 2008 pro forma presentation,approximately $2.6 million of disposition-related expenses incurred by Lodi Gasin the period from January 1, 2008 to January 17, 2008 (prior toBuckeye’s ownership) have been excluded because the inclusion of these expenseswould have distorted the financial results. For Farm & Home, the results of the retail operations have beenexcluded from both periods presented. These pro forma unaudited financialresults were prepared for comparative purposes only and are not indicative ofactual results that would have occurred if Buckeye had completed theseacquisitions as of the beginning of the periods presented or the results thatwill be attained in the future (in thousands, except per unit amounts):

 

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| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                   | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **Revenues:**                                                |       |                             |       |                           |       |   |   |
| As reported                                                  |       | $                                | 124,951    |                           | $          | 872,824 |   | $ | 249,895 |   |
| Pro forma  adjustments                                       |       | 257,277                          |       | 174,724                        |       | 574,403 |   |
|                                                         |       |                             |       |                           |       |   |   |
| Pro forma revenue                                            |       | $                                | 382,228    |                           | $          | 1,047,548 |   | $ | 824,298 |   |
|                                                         |       |                             |       |                           |       |   |   |
| **Net  Income:**                                             |       |                             |       |                           |       |   |   |
| As reported                                                  |       | $                                | 4,131      |                           | $          | 11,166 |   | $ | 10,070 |   |
| Pro forma  adjustments                                       |       | 1,187                            |       | (365                           | )          | 2,031 |   |
|                                                         |       |                             |       |                           |       |   |   |
| Pro forma net income                                         |       | $                                | 5,318      |                           | $          | 10,801 |   | $ | 12,101 |   |
|                                                         |       |                             |       |                           |       |   |   |
| **Pro  forma net income per common unit:**                   |       |                             |       |                           |       |   |   |
| Basic                                                        |       | $                                | 0.19       |                           | $          | 0.38 |   | $ | 0.43 |   |
| Diluted                                                      |       | $                                | 0.19       |                           | $          | 0.38 |   | $ | 0.43 |   |
|                                                         |       |                             |       |                           |       |   |   |
| **Pro  forma weighted average number of units outstanding:** |       |                             |       |                           |       |   |   |
| Basic                                                        |       | 28,073                           |       | 28,300                         |       | 27,983 |   |
| Diluted                                                      |       | 28,300                           |       | 28,300                         |       | 28,300 |   |

 

*Other Acquisitions*

 

On February 19, 2008, Buckeye acquired a refined petroleum productsterminal in Niles, Michigan and a 50% ownership interest in a refined petroleumproducts terminal in Ferrysburg, Michigan from an affiliate of ExxonMobilCorporation for approximately $13.9 million. Buckeye determined that the acquisition of the Niles, Michigan terminaland the 50% interest in the Ferrysburg, Michigan terminal should be accountedfor as acquisitions of assets rather than an acquisition of a business asdefined in SFAS No. 141. Accordingly, Buckeye has allocated, on a preliminary basis, the cost ofeach acquisition to the various tangible assets acquired, principally property,plant and equipment as follows (in thousands):

 
| ** **                                    | ** ** | **February 19,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2008**              | ** ** |
| Land                                          |       | $                     | 1,119      |   |
| Buildings                                     |       | 2,233                 |       |
| Machinery,  equipment, and office furnishings |       | 10,502                |       |
| Total                                         |       | $                     | 13,854     |   |

 

Buckeyeis in the process of finalizing the purchase price allocation and will likelyadjust the preliminary amounts shown above. Such changes may be material.

 

Effective May 1, 2008, Buckeye purchased the remaining 50% memberinterest in Wespac Pipe Lines - San Diego LLC from Kealine LLC not alreadyowned by Buckeye for $9.3 million. Buckeye is in the process of allocating the cost of the acquisition tothe various tangible assets acquired, principally property, plant andequipment.

 

On June 20, 2008, Buckeye acquired a refined petroleum productsterminal in Wethersfield, Connecticut from Hess Corporation for approximately$5.5 million.  Buckeye determined thatthe acquisition of the Wethersfield, Connecticut terminal should be accountedfor as an acquisition of assets rather than an acquisition of a business asdefined in SFAS 

 

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No. 141.  Accordingly, Buckeye is in the process ofallocating the cost of the acquisition to the various tangible assets acquired,principally property, plant and equipment.

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

Prepaidand other current assets consist of the following:

* *
| ** **             | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid  insurance     |       | $                       | 2,599      |                  | $          | 7,456 |   |
| Insurance  receivables |       | 7,378                   |       | 7,707                 |       |
| Ammonia  receivable    |       | 29,162                  |       | 7,505                 |       |
| Derivative Asset       |       | 9,943                   |       | —                |       |
| Other                  |       | 20,675                  |       | 10,040                |       |
| Total                  |       | $                       | 69,757     |                  | $          | 32,708 |   |

 

5.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other currentliabilities consist of the following:

 
| ** **                          | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Taxes - other  than income          |       | $                       | 15,341     |                  | $          | 8,026 |   |
| Accrued employee  benefit liability |       | 2,183                   |       | 2,183                 |       |
| Environmental  liabilities          |       | 9,005                   |       | 8,023                 |       |
| Interest                            |       | 25,333                  |       | 16,485                |       |
| Retainage                           |       | 1,862                   |       | 1,572                 |       |
| Payable for  ammonia purchase       |       | 12,207                  |       | 6,988                 |       |
| Compensation and  vacation          |       | 10,260                  |       | 11,939                |       |
| Hedge liability                     |       | 11,855                  |       | 7,187                 |       |
| Unearned revenue                    |       | 10,678                  |       | 1,439                 |       |
| Margin deposits                     |       | 4,894                   |       | —                |       |
| Other                               |       | 22,742                  |       | 15,060                |       |
| Total                               |       | $                       | 126,360    |                  | $          | 78,902 |   |

 

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6.DEBT AND CREDIT FACILITIES

 

Long - term debt consistsof the following:

 
| ** **                                                        | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                                                        | ** ** | **(In thousands)** | ** ** |
| **BGH:**                                                          |       |                    |       |                  |       |
| Revolving Line  of Credit                                         |       | $                       | —     |                  | $          | — |   |
| ***Services  Company:***                                          | ** ** | ** **              | ** ** | ** **            | ** ** |
| 3.60% ESOP Notes  due March 28, 2011                         |       | 17,561                  |       | 20,804                |       |
| Retirement  premium                                               |       | (377                    | )          | (518                  | )          |
| ***Buckeye:***                                                    | ** ** | ** **              | ** ** | ** **            | ** ** |
| 4.625% Notes due  July 15, 2013*                             |       | 300,000                 |       | 300,000               |       |
| 6.750% Notes due  August 15, 2033*                           |       | 150,000                 |       | 150,000               |       |
| 5.300% Notes due  October 15, 2014*                          |       | 275,000                 |       | 275,000               |       |
| 5.125% Notes due  July 1, 2017*                              |       | 125,000                 |       | 125,000               |       |
| 6.050% Notes due  January 15, 2018*                          |       | 300,000                 |       | —                |       |
| Borrowings under  Revolving Credit Facility                       |       | 157,000                 |       | —                |       |
| Total                                                             |       | 1,324,184               |       | 870,286               |       |
| Other, including  unamortized discounts and fair value hedges (1) |       | (2,668                  | )          | (823                  | )          |
| Subtotal                                                          |       | 1,321,516               |       | 869,463               |       |
| Less: current  maturities                                         |       | (6,349                  | )          | (6,289                | )          |
| **Total long-term debt**                                          |       | $                       | 1,315,167  |                  | $          | 863,174 |   |

 

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

 

(1) TheJune 30, 2008 and December 31, 2007 amounts include $1.2 million and$1.3 million, respectively, related to an adjustment to fair value associatedwith a hedge of fair value and ($3.8) million and ($2.1) million, respectively,in unamortized discounts.

 

The fair value of debt wasestimated to be $1,363.1 million at June 30, 2008 and $848.8 million at December 31,2007.  The value of the consolidated debtwas calculated using interest rates currently available to BGH, Buckeye, andServices Company for the issuance of debt with similar terms and remainingmaturities and approximate market values on the respective dates.

 

*BGH*

 

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 credit facility may be usedfor working capital and other partnership purposes. BGH has pledged all of thelimited liability company interests in Buckeye GP as security for itsobligations under the BGH Credit Agreement.  Borrowings under the BGH Credit Agreement bear interest under one of tworate options, selected by BGH, equal to either (i) the greater of (a) thefederal funds rate plus 0.5% and (b) SunTrust Bank’s prime commerciallending rate; or (ii) 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, 2008 and December 31, 2007.

 

The BGH Credit Agreementrequires BGH to maintain leverage and funded debt coverage ratios. The leverageratio covenant requires BGH to maintain, as of the last day of each fiscalquarter, a ratio of the total funded indebtedness of BGH and its RestrictedSubsidiaries (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 

 

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subsidiaries.  The funded debt coverage ratio covenantrequires BGH to maintain, as of the last day of each fiscal quarter, a ratio oftotal consolidated funded debt of BGH and all of its subsidiaries to theconsolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and all ofits subsidiaries, measured for the preceding twelve months, of not more than5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 inconnection with future acquisitions. At June 30, 2008, BGH’s funded debtcoverage ratio was 4.59 to 1.00.

 

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

* *

*Services Company*

 

Services Company had total debt outstanding of $17.2million and $20.3 million at June 30, 2008 and December 31, 2007,respectively, consisting of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”)due March 28, 2011 payable by the ESOP to a third-party lender. The 3.60%ESOP Notes were issued on May 4, 2004. The 3.60% ESOP Notes are collateralized by Services Company’s commonstock and are guaranteed by Services Company. In addition, Buckeye hascommitted that, in the event that the value of Buckeye’s LP Units owned byServices Company falls below 125% of the balance payable under the 3.60% ESOPNotes, Buckeye will fund an escrow account with sufficient assets to bring thevalue of the total collateral (the value of Buckeye’s LP Units owned byServices Company and the escrow account) up to the 125% minimum. Amountsdeposited in the escrow account are returned to Buckeye when the value ofBuckeye’s LP Units owned by Services Company returns to an amount that exceedsthe 125% minimum. At June 30, 2008, the value of Buckeye’s LP Units ownedby Services Company exceeded the 125% requirement.

 

*Buckeye Note*

 

OnJanuary 11, 2008, Buckeye sold $300.0 million aggregate principal amountof 6.05% Notes due 2018 (the “6.05% Notes”) in an underwritten publicoffering.  Proceeds from this offering,after underwriters’ fees and expenses, were approximately $298.0 million andwere used to partially pre-fund the Lodi Gas acquisition.  In connection with this debt offering,Buckeye settled the two forward-starting interest rates swaps discussed in Note7 below, which resulted in a settlement payment by Buckeye of $9.6 million thatis being amortized as interest expense over the ten year term of the 6.05%Notes.

 

*Buckeye**Credit Facility*

 

Buckeye has aborrowing capacity of $600.0 million under an unsecured revolving creditagreement (the “Credit Facility”), which may be expanded up to $800.0 millionsubject to certain conditions and upon the further approval of thelenders.   The Credit Facility’s maturitydate is August 24, 2012, which may be extended by Buckeye for up to twoadditional one-year periods. Borrowings under the Credit Facility bear interestunder one of two rate options, selected by Buckeye, equal to either (i) thegreater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’sprime rate plus an applicable margin, or (ii) LIBOR plus an applicablemargin. The applicable margin is determined based on the current utilizationlevel of the Credit Facility and ratings assigned by Standard & Poor’sand Moody’s Investor Services for Buckeye’s senior unsecured non-creditenhanced long-term debt.  At June 30,2008, Buckeye had $157.0 million in borrowings outstanding under the CreditFacility.  At December 31, 2007,Buckeye did not have any amounts outstanding under the Credit Facility.  At June 30, 2008 and December 31,2007, Buckeye had committed $1.3 million and $1.5 million in support of lettersof credit, respectively.  The obligationsfor letters of credit are not reflected as debt on Buckeye’s consolidatedbalance sheet.

 

The CreditFacility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to aprovision that allows for increases to 5.50 to 1.00 in connection with certainfuture acquisitions.  The Funded DebtRatio is calculated by dividing consolidated debt by annualized EBITDA,which is defined in the Credit Facility as earnings before interest, taxes, depreciation,depletion and amortization, in each case excluding the income of 

 

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certain majority-owned subsidiaries of Buckeye andequity investments (but including distributions from those majority-ownedsubsidiaries and equity investments).  Asdiscussed below, the Credit Facility was amended in January 2008 to, amongother things, change the definition of consolidated debt.  At June 30, 2008, Buckeye’s Funded DebtRatio was 4.28 to 1.00.  As provided forin the Credit Facility, the entire balance of Farm & Home’s line ofcredit, or $72.7 million, was excluded from the calculation of consolidateddebt and 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, 2008, Buckeye was not aware of any instances ofnoncompliance with the covenants under its Credit Facility.

 

On January 28, 2008, Buckeye entered into anamendment to the Credit Facility which permits Farm & Home and itswholly owned subsidiary, Buckeye Energy Services LLC (“BES”), to incur up to$250.0 million of secured indebtedness related to working capitalfinancing.  The Credit Facility, asamended, also permits these subsidiaries to (i) issue performance bondsnot to exceed $50.0 million, (ii) incur $5.0 million of equipment leaseobligations and liens on equipment, (iii) incur up to $5.0 million ofindebtedness owing to major oil companies, and (iv) loan or advance up to$5.0 million to retail distributors of transportation fuels.  Finally, the amendment states that the lesserof the amount of this debt or the sum of 90% of qualified inventory and 70% ofqualified accounts receivable held by these subsidiaries at the balance sheet datemay be excluded when calculating Buckeye’s Funded Debt Ratio as discussedabove.

 

*BuckeyeEnergy Services Credit Agreement*

 

On May 20,2008, Farm & Home and BES (the “Borrowers”) entered into a CreditAgreement, which was subsequently amended on July 18, 2008 (the “BESCredit Agreement”). The BES Credit Agreement, as amended, is with BNP Paribas,as Administrative Agent, Collateral Agent, and Lead Arranger and, the lendersnamed therein.  The BES Credit Agreement,as amended, provides for borrowings of up to $160.0 million, which amount maybe increased to $250.0 million subject to customary conditions, includingprocurement of the requisite lender commitments.  Under the BES Credit Agreement, borrowingsaccrue interest at the Borrowers’ election at (i) the Administrative Agent’sCost of Funds (as defined in the BES Credit Agreement) plus 1.75%, (ii) theEurodollar Rate (as defined in the BES Credit Agreement) plus 1.75% or (iii) theBase Rate (as defined in the BES Credit Agreement) plus 0.25%.  The BES Credit Agreement also permitsDaylight Overdraft Loans (as defined in the BES Credit Agreement), SwinglineLoans (as defined in the BES Credit Agreement) and letters of credit.  Such alternative extensions of credit aresubject to certain conditions as defined in the BES Credit Agreement.  The BES Credit Agreement is secured by lienson certain assets of the Borrowers, including their inventory, cash deposits(other than certain accounts), investments and hedging accounts, receivablesand intangibles.

 

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

 

The balanceoutstanding under the BES Credit Agreement was approximately $72.7 million at June 30,2008, all of which was classified as a current liability.  The BES Credit Agreement requires theBorrowers to meet certain financial covenants, which are summarized below:

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

 

At June 30,2008, the Borrowers’ Consolidated Tangible Net Worth (as defined in the BESCredit Agreement) and Consolidated Net Working Capital (as defined in the BESCredit Agreement) were $85.9 million and $51.1 million, respectively, and theMaximum Consolidated Leverage Ratio (as defined in the BES Credit Agreement) was1.53 to 1.0.

 

In addition, the BESCredit Agreement contains other covenants, including, but not limited to,covenants limiting the Borrowers’ ability to incur additional indebtedness, tocreate or incur certain liens on property, to consolidate, merge or 

 

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transfer assets, to make dividends or distributions, to dispose ofproperty, to make investments, to modify their risk management policy, or toengage in business activities materially different from those presentlyconducted.  At June 30, 2008, theBorrowers were not aware of any instances of noncompliance with the covenantsunder the BES Credit Agreement.

 

7.  DERIVATIVES

 

*CommodityDerivatives*

 

TheEnergy Services segment primarily uses exchange-traded petroleum futurescontracts to manage the risk of market price volatility on its petroleumproduct inventories and its fixed price sales contracts. The derivativecontracts used to hedge petroleum product inventories are classified as fairvalue hedges.  Changes in the fair valueof the inventory hedges are recorded in current period earnings along with therelated gain or loss on the hedged asset. Hedge ineffectiveness is measured quarterly based on the correlation ofchanges in fair value between the derivative contract and the hedged itemduring the hedge period. The Energy Services segment has elected not to usehedge accounting with respect to its fixed price sales contracts. Therefore,its fixed price sales contracts and the related futures contracts used tooffset those sales contracts are all marked-to-market on the balance sheet withgains and losses being recognized in earnings during the period.

 

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

 
| ** **                   | ** ** | **June 30,**       | ** ** |
|------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **2008**                | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| **Asset:**                   |       |                    |       |
| Futures  contracts           |       | $                       | 9,943      |   |
|                         |       |                    |       |
| Total                        |       | $                       | 9,943      |   |
|                         |       |                    |       |
| **Liabilities:**             | ** ** | ** **              | ** ** |
| Fixed price  sales contracts |       | $                       | (10,568    | ) |
| Inventory hedges             |       | (1,287                  | )          |
|                         |       |                    |       |
| Total                        |       | $                       | (11,855    | ) |

 

Substantiallyall of the liability noted above for unrealized losses of $1.3 million relatedto inventory hedges will be realized in the third quarter of 2008 as therelated inventory is sold.  Gainsrecorded in the second quarter on inventory hedges that were ineffective wereapproximately $0.2 million.  As of June 30,2008, open petroleum derivative contracts varied in duration, but did notextend beyond August 2009.

 

*Finance Derivatives*

 

InJanuary 2008, Buckeye terminated two forward-starting interest rate swapagreements associated with the 6.05% Notes and made a payment of $9.6 millionin connection with the termination.  Inaccordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” (“SFAS No. 133”), Buckeye has recorded the amount inother comprehensive income and will amortize the amount of the payment intointerest expense over the ten-year term of the 6.05% Notes.  Interest expense increased by $0.2 millionand $0.4 million for the three and six months ended June 30, 2008,respectively, as a result of the amortization of the termination payment.

 

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8.  FAIR VALUE MEASURMENTS

 

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

 

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

 

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

 

Level 2:  Level 2 inputs include the following:

 

·       Quoted prices in active markets forsimilar assets or liabilities.

·       Quoted prices in markets that are notactive for identical or similar assets or liabilities.

·       Inputs other than quoted prices, that areobservable for the asset or liability.

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

 

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

 

The followingtable sets forth the fair value measurement of BGH’s assets and liabilitiesthat are subject to SFAS No. 157 as of June 30, 2008:

 
| ** **                   | ** ** | **Fair Value Measurements Using** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | ** **                                       | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                   | ** ** | **Quoted Prices**                           | ** ** | **Other Observable** | ** ** | **Unobservable** | ** ** |
| ** **                   | ** ** | **in Active Markets**                  | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                   | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                   | ** ** | **(In thousands)**                          | ** ** |
| **Assets:**                  |       |                                             |       |   |   |   |   |
| Futures  contracts           |       | $                                                | 9,943      |   | $ | — |   | $ | — |   |
| Asset held in  trust         |       | 3,609                                            |       | — |   | — |   |
|                         |       |                                             |       |   |   |   |   |
| **Liabilities:**             |       |                                             |       |   |   |   |   |
| Fixed price  sales contracts |       | —                                           |       | (10,568 | ) | — |   |
| Inventory hedges             |       | (1,287                                           | )          | — |   | — |   |
| Total                        |       | $                                                | 12,265     |   | $ | (10,568 | ) | $ | — |   |

 

The value of theLevel 1 futures contracts and the inventory hedges noted above were based onquoted market prices obtained from the New York Mercantile Exchange.  The value of the Level 1 asset held in trustwas obtained from quoted prices from brokers. The value of the Level 2 fixed price sales contract liability was basedon observable market data related to the obligation to provide petroleumproducts.

 

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9.  EARNINGS PER UNIT

 

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

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic:                                          |       |                             |       |                           |       |   |   |   |   |
| Average common  units outstanding               |       | 27,770                           |       | 27,215                         |       | 27,770 |   | 27,077 |   |
| Average  management units outstanding           |       | 530                              |       | 858                            |       | 530 |   | 906 |   |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Average units  for basic                        |       | 28,300                           |       | 28,073                         |       | 28,300 |   | 27,983 |   |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Diluted:                                        |       |                             |       |                           |       |   |   |   |   |
| Units used for  basic calculation               |       | 28,300                           |       | 28,073                         |       | 28,300 |   | 27,983 |   |
| Dilutive effect  of additional management units |       | —                           |       | 227                            |       | — |   | 317 |   |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Average units  for diluted                      |       | 28,300                           |       | 28,300                         |       | 28,300 |   | 28,300 |   |

 

10.CASH DISTRIBUTIONS

 

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

 

On July 29,2008, MainLine Management declared a quarterly cash distribution of $0.31 perunit payable on August 29, 2008, to unitholders of record on August 8,2008.  The total cash distribution to BGHunitholders will be approximately $8.8 million.

 

11. UNIT-BASED COMPENSATION

 

*BGH GP Override Units*

 

Effective on June 25,2007, BGH GP instituted an equity incentive plan for certain members of seniormanagement of BGH GP and BGH.  Thisequity incentive plan includes both time-based and performance-based participationin the equity of BGH GP (but not in BGH) referred to as “Override Units”.  BGH determined that, under the requirementsof  provisions of SFAS No. 123(revised 2004), “Share-Based Payment” (“SFAS No. 123R”), BGH is requiredto reflect, as a compensation charge and corresponding contribution to commonunitholders’ equity, the fair value of this compensation.  BGH GP determined that the estimated fairvalue of such compensation for the three and six months ended June 30,2008 was $0.4 million and $0.7 million, respectively, and has recorded suchamounts as compensation expense and a capital contribution.  BGH is not a party to this plan and has noliabilities with respect to it.

 

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

 

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

 

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

 
| ** **                                                        | ** ** | **Compensation Cost for Override Units** | ** ** | ** **              | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                        | ** ** | **Value A  Units**                                      | ** ** | **Value B  Units** | ** ** | **Operating  Units** | ** ** | **Totals** | ** ** |
| Total fair value  of outstanding grants                           |       | $                                                            | 3,521      |                    | $          | 2,081 |   | $ | 5,608 |   | $ | 11,210 |   |
| Less: Expense  recorded from plan inception to June 30, 2008 |       | —                                                       |       | —                  |       | (1,286 | ) | (1,286 | ) |
| Potential future  compensation costs at June 30, 2008        |       | $                                                            | 3,521      |                    | $          | 2,081 |   | $ | 4,322 |   | $ | 9,924 |   |

 

----

| ** **                         | ** ** | **Value A** | ** ** | **Value B** | ** ** | **Operating** |   |   |   |
|------------------------------------|------------|-------------|------------|-------------|------------|---------------|--------|--------|--------|
| *2008 Wtd Avg  Fair Value per unit |       | $           | 2.22       |        | $          | 1.56          |   | $      | 2.97   |   |   |   |
|                                    |            |             |            |             |            |               |        |        |        |  |  |  |

 

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 estimates the future equity value from thetime of the initial valuation date of June 25, 2007 to the exit event. Theassumptions used to value the 2008 unit awards were as follow:

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

 

Compensation expense related to the Operating Unitsof approximately $1.4 million per year will be recognized in 2008, 2009 and2010.  The vesting of the Value A andValue B Units is contingent on a performance condition, namely the completionof the exit event as discussed above. Accordingly, no compensation expense for the Value A and Value B Unitswill be recorded until an exit event occurs.

* *

*Buckeye’s Unit Option and Distribution EquivalentPlan*

 

Buckeye sponsors aUnit Option and Distribution Equivalent Plan (the “Option Plan”), pursuant towhich it grants options to purchase LP Units at 100% of the market price of theLP Units on the date of grant to key employees of Services Company.  The options vest three years from the date ofgrant and expire ten years from the date of grant. As options are exercised,Buckeye issues new LP Units. Buckeye has not historically repurchased, and doesnot expect to repurchase in 2008, any of its LP Units.

 

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Effective January 1,2006, Buckeye adopted the fair value measurement and recognition provisions ofSFAS No. 123R.  Generally,unit-based compensation expense recognized in the first six months of 2008 and2007 is based on the grant date fair value estimated by using the Black-Scholesoption pricing model.  Buckeye recognizescompensation expense for awards granted on a straight-line basis over therequisite service period.

 

For the retirementeligibility provisions of the Option Plan, Buckeye follows the non-substantivevesting method and recognizes compensation expense immediately for optionsgranted to retirement-eligible employees, or over the period from the grantdate to the date retirement eligibility is achieved. Unit-based compensationexpense recognized in earnings for the three and six months ended June 30,2008 and 2007 is based upon options ultimately expected to vest. In accordancewith SFAS No. 123R, forfeitures have been estimated at the time of grantand will be revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures were estimated based upon historicalexperience.

 

The impact ofBuckeye’s Option Plan is immaterial to BGH’s consolidated financial statements.

 

*BGHManagement Units*

 

Priorto BGH’s initial public offering of its Common Units on August 9, 2006,the general partner was owned by MainLine, a privately held limitedpartnership. In May 2004, MainLine instituted a Unit Compensation Plan andissued 16,216,668 Class B Units to certain members of senior management.

 

Coincidentwith BGH’s initial public offering on August 9, 2006, the equity interestsof MainLine were exchanged for the equity interests of BGH.  The Class B Units of MainLine wereexchanged for 1,362,000 Management Units of BGH.  Pursuant to the terms of the exchange, 70%,or 953,400 Management Units, became vested immediately upon their exchange, andthe remaining 30%, or 408,600 Management Units, were expected to vest over athree year period. However, coincident with the sale of Carlyle/Riverstone BPLHoldings II, L.P.’s interests in BGH to BGH GP in June of 2007, all theremaining unvested Management Units became vested and were expensed.  There are no additional Management Unitsavailable for issue.  In the three andsix months ended June 30, 2007, BGH expensed approximately $1.0 millionand $1.1 million, respectively, related to the Management Units.

 

12.RELATED PARTY TRANSACTIONS

 

LehmanBrothers, which owns an interest in BGH GP, and its affiliates have provided,directly or indirectly, investment and commercial banking and financialadvisory services to Buckeye for which they received customary fees andcommissions.  An affiliate of LehmanBrothers is a lender under the Credit Facility and receives its respectiveshare of any repayment by Buckeye of amounts outstanding under the CreditFacility.  Lehman Brothers acted asBuckeye’s financial advisor in connection with the Lodi Gas and Farm &Home acquisitions.  Also, an affiliate ofLehman Brothers is a customer of Lodi Gas.

 

Asdiscussed in Note 3, on January 18, 2008, Buckeye acquired all the memberinterests of Lodi Gas. The Lodi Gas acquisition was a related party transactionbecause Lodi Gas was indirectly owned by affiliates of ArcLight.  Due toArcLight's indirect ownership interest in Buckeye GP, the Audit Committee ofBuckeye GP made up of independent directors and represented by independentlegal counsel and financial advisors, reviewed and approved the terms of theLodi Gas acquisition, including the purchase price, as fair and reasonable toBuckeye in accordance with Buckeye’s partnership agreement.

 

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

 

13.       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.

 

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

 

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Forthe three months ended June 30, 2008 and 2007, the components of the netperiodic benefit cost recognized by Buckeye for the RIGP and Retiree MedicalPlan were as follows:

 
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
| ** **                                | ** ** | **RIGP**                                            | ** ** | **Plan** | ** ** |
|                                      | ** ** | **(In  thousands )**                                | ** ** |
| Components of  net periodic benefit cost: |       |                                                |       |   |   |   |   |   |   |
| Service cost                              |       | $                                                   | 352        |   | $ | 248 |   | $ | 233 |   | $ | 100 |   |
| Interest cost                             |       | 478                                                 |       | 252 |   | 694 |   | 508 |   |
| Expected return  on plan assets           |       | (468                                                | )          | (205 | ) | — |   | — |   |
| Amortization of  prior service benefit    |       | (218                                                | )          | (114 | ) | (1,124 | ) | (860 | ) |
| Amortization of  unrecognized losses      |       | 155                                                 |       | 144 |   | 410 |   | 381 |   |
| Net periodic  benefit costs               |       | $                                                   | 299        |   | $ | 325 |   | $ | 213 |   | $ | 129 |   |

 

For the six monthsended June 30, 2008 and 2007, the components of the net periodic benefitcost recognized by Buckeye for the RIGP and Retiree Medical Plan were asfollows:

 
| ** **                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
| ** **                                | ** ** | **RIGP**                                          | ** ** | **Plan** | ** ** |
|                                      | ** ** | **(In  thousands )**                              | ** ** |
| Components of  net periodic benefit cost: | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                              |       | $                                                 | 705        |   | $ | 495 |   | $ | 465 |   | $ | 200 |   |
| Interest cost                             |       | 956                                               |       | 505 |   | 1,387 |   | 1,016 |   |
| Expected return  on plan assets           |       | (936                                              | )          | (410 | ) | — |   | — |   |
| Amortization of  prior service benefit    |       | (436                                              | )          | (227 | ) | (2,248 | ) | (1,719 | ) |
| Amortization of  unrecognized losses      |       | 311                                               |       | 287 |   | 821 |   | 762 |   |
| Net periodic  benefit costs               |       | $                                                 | 600        |   | $ | 650 |   | $ | 425 |   | $ | 259 |   |

 

Aminimum funding contribution is not required to be made to the RIGP during2008.  However, Buckeye has contributed$0.6 million to the RIGP voluntarily in 2008.

 

14.  SEGMENTINFORMATION

 

Withthe acquisitions of Lodi Gas and Farm & Home, BGH determined that ithas two additional reportable segments: Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, BGHconducts business in five reportable operating segments: Pipeline Operations;Terminalling and Storage; Natural Gas Storage; Energy Services; and OtherOperations. BGH also has certain consolidated-level assets, principallyconsisting of goodwill, which are not allocable to the individual reportingsegments because they are not used by the chief operating decision maker tomake operating decisions or to allocate resources.

 

*PipelineOperations:*

 

The PipelineOperations segment receives 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 Terminallingand Storage segment provides bulk storage and terminal throughputservices.  This segment has 55 refinedpetroleum products terminals with aggregate storage capacity of approximately21.4 million barrels in ten states.

 

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*NaturalGas Storage:*

 

The Natural Gas Storage segment provides natural gas storage servicesthrough the two natural gas storage facilities near Lodi, California that areowned and operated by Lodi Gas. Together, these facilities provide approximately 22 bcf of gas capacityand are connected to Pacific Gas and Electric’s intrastate gas pipelines thatservice natural gas demand in the San Francisco and Sacramento areas. Thesegment has approximately twenty-five customers.

 

The Natural Gas Storage segment’s revenues consist of lease revenuesand hub services revenues.  Leaserevenues consist of demand charges for the reservation of storage space underfirm storage agreements. The demand charge entitles the customer to a fixedamount of storage space and certain injection and withdrawal rights. Title tothe stored gas remains with the customer. Lease revenues are recognized asrevenue over the term of the related storage agreement.  Hub service revenues consist of a variety ofother storage services under interruptible storage agreements. Theseprincipally include park and loan transactions. Parks occur when gas from a customer is injected and stored for a specifiedperiod. The customer then has the right to withdraw its stored gas at a futuredate. Title to the gas remains with the customer.  Park revenues are recognized ratably over theterm of the agreement.  Loans occur whengas is delivered to a customer in a specified period. The customer then has theobligation to redeliver gas at a future date. Loan revenues are recognizedratably over the term of the agreement.

 

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

 

*EnergyServices:*

 

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

 

*OtherOperations:*

 

The OtherOperations segment consists primarily of Buckeye’s contract operation ofapproximately 2,200 miles of third-party pipeline systems, which are ownedprimarily by major oil and chemical companies and are located primarily inTexas and Louisiana.  This segment alsoperforms pipeline construction management services, typically for cost plus afixed fee, for these same customers.  TheOther Operations segment also includes Buckeye’s ownership and operation of anammonia pipeline and its majority ownership of the Sabina Pipeline in Texas.

 

Financialinformation about each segment is presented below. Each segment uses the sameaccounting policies as those used in the preparation of Buckeye’s condensedconsolidated financial statements. All inter-segment revenues, operating incomeand assets have been eliminated.  Allperiods are presented on a consistent basis.

 

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| ** **                      | ** ** | **Three Months Ended** | ** **   | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|--------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30,**                | ** **   | **June 30,**              | ** ** |
| ** **                      | ** ** | **2008**                         | ** **   | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(In thousands)**          | ** **   |
| Revenue:                        |       |                             |         |                           |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 98,887       |                           | $          | 92,427 |   | $ | 195,277 |   | $ | 186,178 |   |
| Terminalling and  Storage       |       | 27,114                           |         | 23,948                         |       | 54,746 |   | 47,536 |   |
| Natural Gas  Storage            |       | 15,186                           |         | —                         |       | 26,650 |   | — |   |
| Energy Services                 |       | 347,768                          |         | —                         |       | 582,315 |   | — |   |
| Other Operations                |       | 10,757                           |         | 8,576                          |       | 21,626 |   | 16,181 |   |
| Intersegment                    |       | (7,164                           | )            | —                         |       | (7,790 | ) | — |   |
| Total                           |       | $                                | 492,548      |                           | $          | 124,951 |   | $ | 872,824 |   | $ | 249,895 |   |
|                            |       |                             |         |                           |       |   |   |   |   |
| Operating  income:              |       |                             |         |                           |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 38,037       |                           | $          | 33,923 |   | $ | 73,567 |   | $ | 70,913 |   |
| Terminalling and  Storage       |       | 9,910                            |         | 8,136                          |       | 22,495 |   | 17,760 |   |
| Natural Gas  Storage            |       | 7,638                            |         | —                         |       | 12,382 |   | — |   |
| Energy Services                 |       | (313                             | )            | —                         |       | 1,343 |   | — |   |
| Other Operations                |       | 1,714                            |         | 2,155                          |       | 3,293 |   | 4,175 |   |
| Total                           |       | $                                | 56,986       |                           | $          | 44,214 |   | $ | 113,080 |   | $ | 92,848 |   |
|                            |       |                             |         |                           |       |   |   |   |   |
| Depreciation and  amortization: |       |                             |         |                           |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 8,587        |                           | $          | 8,220 |   | $ | 17,010 |   | $ | 16,207 |   |
| Terminalling and  Storage       |       | 1,390                            |         | 1,434                          |       | 2,745 |   | 2,739 |   |
| Natural Gas  Storage            |       | 1,561                            |         | —                         |       | 2,515 |   | — |   |
| Energy Services                 |       | 407                              |         | —                         |       | 671 |   | — |   |
| Other Operations                |       | 397                              |         | 347                            |       | 784 |   | 762 |   |
| Total                           |       | $                                |  12,342 |                           | $          |  10,001 |   | $ |  23,725 |   | $ |  19,708 |   |
|                                 |            |                                  |              |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|---------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **                | ** ** | **2008**                       | ** ** | **2007**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                      |       | **(In thousands)**        |       |       |       |   |   |
| Capital  expenditures:    |       |                           |       |       |       |   |   |   |   |
| Pipeline  Operations      |       | $                              | 13,844     |       | $          | 29,375 |   |   |   |   |   |
| Terminalling and  Storage |       | 7,217                          |       | 6,075      |       |   |   |   |   |
| Natural Gas  Storage      |       | 10,020                         |       | —     |       |   |   |   |   |
| Energy Services           |       | 1,420                          |       | —     |       |   |   |   |   |
| Other Operations          |       | —                         |       | 1,516      |       |   |   |   |   |
| Total                     |       | $                              | 32,501     |       | $          | 36,966 |   |   |   |   |   |
|                      |       |                           |       |       |       |   |   |   |   |
| Acquisitions:             |       |                           |       |       |       |   |   |   |   |
| Pipeline  Operations      |       | $                              | 9,264      |       | $          | 860 |   |   |   |   |   |
| Terminalling and  Storage |       | 19,461                         |       | 38,460     |       |   |   |   |   |
| Natural Gas  Storage      |       | 438,765                        |       | —     |       |   |   |   |   |
| Energy Services           |       | 143,126                        |       | —     |       |   |   |   |   |
| Total                     |       | $                              | 610,616    |       | $          | 39,320 |   |   |   |   |   |

 

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| ** **                | ** ** | **Assets**              | ** ** | **Goodwill**          | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **2008**                | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** |
| Assets:                   |       |                    |       |                  |       |   |   |   |   |
| Pipeline  Operations*     |       | $                       | 1,625,159  |                  | $          | 1,673,744 |   | $ | 198,632 |   | $ | 198,632 |   |
| Terminalling and  Storage |       | 397,321                 |       | 385,446               |       | 22,789 |   | 22,789 |   |
| Natural Gas  Storage      |       | 466,091                 |       | —                |       | 170,005 |   | — |   |
| Energy Services           |       | 267,675                 |       | —                |       | 45,109 |   | — |   |
| Other Operations          |       | 91,274                  |       | 74,462                |       | 13,182 |   | 13,182 |   |
| Consolidated-  level      |       | 224,398                 |       | 220,674               |       | — |   | — |   |
| Total                     |       | $                       | 3,071,918  |                  | $          | 2,354,326 |   | $ | 449,717 |   | $ | 234,603 |   |

 

----

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

 

15. RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  This statement clarified the definition offair value, establishes a framework for measuring fair value, and expands thedisclosures on fair value measurements. SFAS No. 157 was effective forfiscal years beginning after November 15, 2007 and interim periods withinthat year.

 

On February 12,2008, the FASB issued Financial Staff Position FAS 157-2, “Effective Date ofFASB Statement No. 157.” This Staff Position delays the effective date ofSFAS No. 157 for all nonfinancial assets and nonfinancial liabilities,except those that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually). The delay is intended toallow the FASB’s constituents additional time to consider the effect of thevarious implementation issues that have arisen, or that may arise, from theapplication of SFAS No. 157.  BGHadopted the non-delayed portion of SFAS No. 157 on January 1,2008.  See Note 8 for a furtherdiscussion.

 

In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities”  (“SFAS No. 159”).  SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value thatcurrently are not required to be measured at fair value.   SFAS No. 159 is effective no later thanfiscal years beginning after November 15, 2007. Effective on January 1, 2008, BGH adopted SFAS No. 159 and elected notto apply the fair value option under this standard.  As a result, SFAS No. 159 did not have animpact on BGH’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements-an amendment of ARB No. 51”(“SFAS No. 160”), which will be effective for fiscal years beginning afterDecember 15, 2008.  SFAS No. 160establishes accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.  BGH currently is assessing the impact theadoption of this pronouncement will have on its consolidated financialstatements.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141 (R)”), which willbe effective for fiscal years beginning after December 15, 2008.  SFAS No. 141 (R) requires anacquiring entity in a business combination to (i) recognize all (and only)the assets acquired and the liabilities assumed in the transaction, (ii) establishan acquisition-date fair value as the measurement objective for all assetsacquired and the liabilitiesassumed, (iii) disclose to investors and other users of the financialstatements all of the information they will need to evaluate and understand thenature of, and the financial effect of, the business combination, and (iv) recognizeand measure the goodwill acquired in the business combination or a gain from abargain purchase.  BGH currently is assessing the impact the adoption ofthis pronouncement will have on its consolidated financial statements.

 

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In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No.161”), which will be effective for fiscal years beginning after November 15,2008.   SFAS No. 161 changes thedisclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanceddisclosures about (i) how and why an entity uses derivative instruments, (ii)how derivative instruments and related hedging items are accounted for underSFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” andits related interpretations, and (iii) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  BGH currently is assessingthe impact the adoption of this pronouncement will have on its consolidatedfinancial statements.

 

16. SUBSEQUENT EVENTS

 

On July 16, 2008, Buckeye entered into a definitive agreement topurchase an ethanol and petroleum products terminal in Albany, New York fromLogiBio Albany Terminal, LLC.  Thepurchase price for the terminal will be $45.0 million, with an additional $1.5million payable if LogiBio Albany Terminal, LLC is successful in modifyingcertain long term contractual commitments related to the terminal and another$1.5 million payable if the terminal operations meet certain performance goalsover the next three years.  The terminalhas an active storage capacity of 1.8 million barrels.  The transaction is subject to customaryclosing conditions.  Buckeye expects tocomplete the purchase of the terminal in late August 2008.  This terminal will be reported in theTerminalling and Storage segment.

 

On July 31, 2008, Farm & Home was merged with and into itswholly owned subsidiary, BES, with BES continuing as the surviving entity.  This merger will not impact the operations ofthe Energy Services segment.

 

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

 

*Overview*

 

The following discussionprovides an analysis of the financial condition and results of operations forBuckeye GP Holdings L.P. (“BGH”) and each of BGH’s operating segments,including an overview of BGH’s liquidity and capital resources and otherrelated matters.  The followingdiscussion and analysis should be read in conjunction with (i) theaccompanying interim condensed consolidated financial statements and relatednotes and (ii) BGH’s consolidated financial statements, related notes, andmanagement’s discussion and analysis of financial condition and results ofoperations included in BGH’s Annual Report on Form 10-K for the year endedDecember 31, 2007.

 

*BuckeyeGP Holdings L.P.*

 

BGH’s limited partner units are owned approximately 62% by BGH GPHoldings, LLC (“BGH GP”), approximately 1% by certain members of seniormanagement and approximately 37% by the public. BGH owns andcontrols Buckeye GP LLC (“Buckeye GP”), which is the general partner of BuckeyePartners, L.P. (“Buckeye”), a publicly traded Delaware limitedpartnership.  BGH is managed by itsgeneral partner, MainLine Management LLC (“MainLine Management”).  BGH’s only cash-generating assets are itspartnership interests in Buckeye, comprised primarily of the following:

 

·     theincentive distribution rights in Buckeye;

 

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

 

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

 

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

 

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

 

BGH’s earnings andcash flows are, therefore, directly dependent upon the ability of Buckeye andits operating subsidiaries to make cash distributions to Buckeye’s unitholders.The actual amount of cash that Buckeye will have available for distributionwill depend primarily on Buckeye’s ability to generate earnings and cash flowsbeyond its working capital requirements.

 

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The followingtable summarizes BGH’s cash received for the three and six months ended June 30,2008 and 2007 as a result of its partnership interests in Buckeye:

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                        | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**          | ** ** |
| Incentive  distributions from Buckeye                                                             |       | $                                | 9,731      |                           | $          | 7,338 |   | $ | 18,657 |   | $ | 14,141 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s GP Units                           |       | 207                              |       | 195                            |       | 412 |   | 387 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 224                              |       | 237                            |       | 349 |   | 618 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s LP Units                            |       | 68                               |       | 64                             |       | 135 |   | 127 |   |
|                                                                                              |       | $                                | 10,230     |                           | $          | 7,834 |   | $ | 19,553 |   | $ | 15,273 |   |

 

*Buckeye Partners,L.P.*

* *

Buckeye owns andoperates one of the largest independent refined petroleum products pipelinesystems in the United States in terms of volumes delivered. Buckeye owns andoperates approximately 5,400 miles of pipeline and 63 active refined petroleumproducts terminals, with aggregate storage capacity of approximately 22.9million barrels. In addition, Buckeye operates and maintains approximately2,200 miles of other pipelines under agreements with major oil and chemicalcompanies. Through recent acquisitions of Lodi Gas Storage, L.L.C. (“Lodi Gas”)and Farm & Home Oil Company LLC (“Farm & Home”) in the firstquarter of 2008, Buckeye now owns and operates two major natural gas storagefacilities in northern California and markets refined petroleum products incertain areas served by Buckeye’s pipelines and terminals.

 

LodiGas owns and operates two natural gas storage facilities near Lodi,California.  Together, these facilitiesprovide approximately 22 billion cubic feet (“bcf”) of gas capacity and areconnected to Pacific Gas and Electric’s intrastate gas pipelines that servicenatural gas demand in the San Francisco and Sacramento areas (see Note 3 to thecondensed consolidated financial statements for a further discussion).  The Lodi Gas acquisition has allowed Buckeye to expandits operations on the West Coast substantially. Lodi Gas’s revenues are generated by fee-based storage contracts, themajority of which are comprised of firm storage agreements for specified levelsof injection and withdrawal service. Additional revenues are earned through interruptible services, calledhub services, for which Lodi Gas earns fees for storing a customer’s gas orloaning gas to a customer on an interruptible basis around Lodi Gas’s firm storagecommitments. Lodi Gas does not take title to the natural gas that it stores.

 

Farm & Home sells refined petroleum products on a wholesalebasis, principally in eastern and central Pennsylvania.  When Farm & Home was acquired, italso had retail operations, but Buckeye sold those operations to a wholly ownedsubsidiary of Inergy, L.P. on April 15, 2008.  The assets and liabilities and results ofoperations of Farm & Home’s retail operations were determined to bediscontinued operations effective on the Farm & Home acquisition dateof February 8, 2008 (see Note 3 to the condensed consolidated financialstatements for a further discussion).  The Farm & Home acquisition willhelp to advance Buckeye’s strategy of building a marketing business in areasserved by Buckeye’s existing logistics assets. On July 31, 2008, Farm & Home was merged with and into itswholly owned subsidiary, Buckeye Energy Services LLC, with Buckeye EnergyServices LLC continuing as the surviving entity.

 

Buckeye’s pipeline andterminal customers are U.S.-based major integrated oil companies, large refinedpetroleum products marketing companies, major end users of petroleum products,and chemical and utility companies.  LodiGas’s customers are major natural gas utility companies and natural gasmarketing and distribution companies. Farm & Home’s wholesale customers are primarily productwholesalers and major commercial users of refined petroleum products.

 

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With theacquisitions of Lodi Gas and Farm & Home, BGH determined that it hadtwo additional reportable segments, Natural Gas Storage and EnergyServices.  Effective in the first quarterof 2008, BGH conducted business in five reportable operating segments: PipelineOperations; Terminalling and Storage; Natural Gas Storage; Energy Services; andOther Operations.  See Note 14 to thecondensed consolidated financial statements for a more detailed discussion ofBuckeye’s operating segments.

 

*PendingAcquisition*

 

OnJuly 16, 2008, Buckeye entered into a definitive agreement to purchase anethanol and petroleum products terminal in Albany, New York from LogiBio AlbanyTerminal, LLC.  The purchase price forthe terminal will be $45.0 million, with an additional $1.5 million payable ifLogiBio Albany Terminal, LLC is successful in modifying certain long termcontractual commitments related to the terminal and another $1.5 millionpayable if the terminal operations meet certain performance goals over the nextthree years.  The terminal has an activestorage capacity of 1.8 million barrels. The transaction is subject to customary closing conditions.  This terminal will be reported in theTerminalling and Storage segment.  Buckeye expects to complete the purchaseof the terminal in late August 2008 and fund the purchase with availablecash and borrowings under Buckeye’s revolving credit agreement described under “Liquidityand Capital Resources” as discussed below.

 

*Results of Operations*

 

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

 

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

 

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

 

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

 

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

 

·                  Elimination of Intercompany Transactions—Intercompanyobligations and payments among Buckeye and its consolidated subsidiaries, BGH, andServices Company are reflected in Buckeye’s consolidated financial statementsbut are eliminated in BGH’s consolidated financial statements.

 

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Summary operating results for BGH were as follows:

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                | ** ** | **(In thousands)**          | ** ** |
| Revenue                                                   |       | $                                | 492,548    |                           | $          | 124,951 |   | $ | 872,824 |   | $ | 249,895 |   |
| Costs and  expenses                                       |       | 435,562                          |       | 80,737                         |       | 759,744 |   | 157,047 |   |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Operating income                                          |       | 56,986                           |       | 44,214                         |       | 113,080 |   | 92,848 |   |
| Other (expenses)                                          |       | (18,033                          | )          | (12,770                        | )          | (35,597 | ) | (26,346 | ) |
| Income before  equity income and non-controlling interest |       | 38,953                           |       | 31,444                         |       | 77,483 |   | 66,502 |   |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Equity income                                             |       | 1,344                            |       | 2,258                          |       | 3,399 |   | 4,044 |   |
| Non-controlling  interest expense                         |       | (34,980                          | )          | (29,571                        | )          | (69,716 | ) | (60,476 | ) |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Net income                                                |       | $                                | 5,317      |                           | $          | 4,131 |   | $ | 11,166 |   | $ | 10,070 |   |

 

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Revenues,operating income, total costs and expenses, and depreciation and amortizationby operating segment were as follows:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                           | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**          | ** ** |
| Revenue:                                                             |       |                             |       |                           |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 98,887     |                           | $          | 92,427 |   | $ | 195,277 |   | $ | 186,178 |   |
| Terminalling and  Storage                                            |       | 27,114                           |       | 23,948                         |       | 54,746 |   | 47,536 |   |
| Natural Gas  Storage                                                 |       | 15,186                           |       | —                         |       | 26,650 |   | — |   |
| Energy Services                                                      |       | 347,768                          |       | —                         |       | 582,315 |   | — |   |
| Other Operations                                                     |       | 10,757                           |       | 8,576                          |       | 21,626 |   | 16,181 |   |
| Intersegment                                                         |       | (7,164                           | )          | —                         |       | (7,790 | ) | — |   |
| Total                                                                |       | $                                | 492,548    |                           | $          | 124,951 |   | $ | 872,824 |   | $ | 249,895 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Operating  income:                                                   |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                                                  |       | $                                | 38,037     |                           | $          | 33,923 |   | $ | 73,567 |   | $ | 70,913 |   |
| Terminalling and  Storage                                            |       | 9,910                            |       | 8,136                          |       | 22,495 |   | 17,760 |   |
| Natural Gas  Storage                                                 |       | 7,638                            |       | —                         |       | 12,382 |   | — |   |
| Energy Services                                                      |       | (313                             | )          | —                         |       | 1,343 |   | — |   |
| Other Operations                                                     |       | 1,714                            |       | 2,155                          |       | 3,293 |   | 4,175 |   |
| Total                                                                |       | $                                | 56,986     |                           | $          | 44,214 |   | $ | 113,080 |   | $ | 92,848 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Total costs and  expenses (including depreciation and amortization): |       |                             |       |                           |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 60,850     |                           | $          | 58,504 |   | $ | 121,710 |   | $ | 115,265 |   |
| Terminalling and  Storage                                            |       | 17,204                           |       | 15,812                         |       | 32,251 |   | 29,776 |   |
| Natural Gas  Storage                                                 |       | 7,548                            |       | —                         |       | 14,268 |   | — |   |
| Energy Services                                                      |       | 348,081                          |       | —                         |       | 580,972 |   | — |   |
| Other Operations                                                     |       | 9,043                            |       | 6,421                          |       | 18,333 |   | 12,006 |   |
| Intersegment                                                         |       | (7,164                           | )          | —                         |       | (7,790 | ) | — |   |
| Total                                                                |       | $                                | 435,562    |                           | $          | 80,737 |   | $ | 759,744 |   | $ | 157,047 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Depreciation and  amortization:                                      |       |                             |       |                           |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 8,587      |                           | $          | 8,220 |   | $ | 17,010 |   | $ | 16,207 |   |
| Terminalling and  Storage                                            |       | 1,390                            |       | 1,434                          |       | 2,745 |   | 2,739 |   |
| Natural Gas  Storage                                                 |       | 1,561                            |       | —                         |       | 2,515 |   | — |   |
| Energy Services                                                      |       | 407                              |       | —                         |       | 671 |   | — |   |
| Other Operations                                                     |       | 397                              |       | 347                            |       | 784 |   | 762 |   |
| Total                                                                |       | $                                | 12,342     |                           | $          | 10,001 |   | $ | 23,725 |   | $ | 19,708 |   |

 

Second Quarter of 2008 compared to Second Quarter of 2007

 

Totalrevenues for the quarter ended June 30, 2008 were $492.5 million,approximately $367.5 million greater than revenue of $125.0 million for thesame period in 2007.  Of the $367.5million increase in revenue in the second quarter of 2008, $15.2 millionresulted from the addition of Lodi Gas’s operations and $347.8 million resultedfrom the addition of Farm & Home’s operations.  The results of Lodi Gas and Farm &Home are included below in the Natural Gas Storage and Energy Servicessegments, respectively. The balance of the revenue improvement of approximately$4.5 million was attributable to the remaining reporting segments as discussedbelow.

 

Pipeline Operations:

 

Revenues from PipelineOperations were $98.9 million in the second quarter of 2008 compared to $92.4million in the second quarter of 2007, an increase of $6.5 million.  This increase was primarily the result of:

 

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·                  Base transportation revenues increasing by $5.3million in the second quarter of 2008 as compared to the same period in 2007primarily as a result of tariff increases implemented on July 1, 2007 and May 1,2008.  The benefit of the tariffincreases was offset by reduced product volumes in the second quarter of2008.  Management believes the reducedvolumes in the second quarter of 2008 were caused primarily by reduced demandfor gasoline and distillate resulting from higher retail gasoline anddistillate prices, as well as the continued introduction of ethanol into retailgasoline products.  Total product volumesdeclined by 2.6% in the second quarter of 2008 compared to the second quarterof 2007; and

 

·                  A net increase in incidental revenues of $3.1 millionprincipally related to a product supply arrangement that was offset by areduction in revenue of $1.9 million principally related to the completion ofcontract services activities at customer facilities connected to Buckeye’srefined products pipelines.

 

During 2007, Buckeyeexperienced measurement shortages in connection with its pipeline productdeliveries in excess of historical variances. Based upon an investigation of these measurement issues, certaincorrective actions have been taken. Buckeye believes the measurement issues have, to a large extent, beenisolated and corrected, although continuing monitoring and evaluation ofproduct measurement issues will be required. Net pipeline overages and shortages were not material in the secondquarter of 2008.

 

Product volumestransported in Pipeline Operations for the quarter ended June 30, 2008 and2007 were as follows:

 
| ** **  | ** ** | **Average Barrels Per Day**          | ** ** |
|-------------|------------|-----------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended June 30,** | ** ** |
| **Product** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Gasoline    |       | 698,800                                             |       | 743,000 |   |
| Distillate  |       | 279,400                                             |       | 291,100 |   |
| Jet Fuel    |       | 371,900                                             |       | 363,400 |   |
| LPG’s  |       | 22,400                                              |       | 22,300 |   |
| NGL’s  |       | 22,100                                              |       | 19,800 |   |
| Other       |       | 12,100                                              |       | 4,200 |   |
| Total       |       | 1,406,700                                           |       | 1,443,800 |   |

 

In the secondquarter of 2008, certain of Buckeye’s operating subsidiaries in the PipelineOperations segment filed pipeline tariffs reflecting increased rates on averageof approximately 4.8%. These tariff rate increases are expected to generateapproximately $16.4 million in additional revenue on an annualized basis.

 

Terminalling and Storage:

 

Revenues from theTerminalling and Storage segment were $27.1 million in the second quarter of2008 compared to $23.9 million in the second quarter of 2007. The revenueincrease in the second quarter of 2008 compared to the second quarter of 2007of $3.2 million or 13.4% was primarily the result of:

 

·                  An approximate $3.0 million increase in base revenueprimarily related to increases in blending fees for product additives andproduct recoveries from vapor recovery units, which were offset by anapproximately 2.8% decline in throughput volumes in the second quarter of 2008compared to the second quarter of 2007; and

 

·                  Incremental revenue of $0.2 million due to theaddition of the operations of the Niles, Michigan terminal and a 50% interestin the Ferrysburg, Michigan terminal for the entire second quarter of 2008,each of which was acquired in the first quarter of 2008, as more fullydescribed in Note 3 to the accompanying condensed consolidated financial statements.

 

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Average daily throughput for the refined products terminals for thequarters ended June 30, 2008 and 2007 were as follows:

 
| ** **                   | ** ** | **Average Barrels Per Day**          | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                   | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                         |       |                                                |       |   |   |
| Refined products  throughput |       | 554,000                                             |       | 570,100 |   |

 

NaturalGas Storage:

 

Revenue from the Natural Gas Storage segment was $15.2million in the second quarter of 2008.  Approximately 69% of this revenuerepresented firm storage revenues and 31% represented hub services revenues.

 

EnergyServices:

 

Revenue from the Energy Services segment was $347.8million in the second quarter of 2008.  Revenue from the Energy Services segment was derived from the continuingoperations of Farm & Home, which Buckeye acquired on February 8,2008.  The retail operations, which weresold on April 15, 2008, were treated as discontinued operations for allperiods presented in 2008.  During theperiod, the continuing operations of Farm & Home sold approximately101.8 million gallons of product. Products sold include gasoline, propane, and petroleum distillates suchas heating oil, diesel fuel, and kerosene.

 

OtherOperations:

 

Revenue from the OtherOperations segment was $10.8 million in the second quarter of 2008 compared to$8.6 million in the second quarter of 2007. The revenue increase in the second quarter of 2008 of $2.2 million was primarilythe result of:

 

·                  An increase of $1.7 millionin pipeline maintenance and operating revenue related to additional operatingcontracts signed in the latter part of 2007; and

 

·                  An increase of $0.6 millionin construction management revenue related to these operating contracts.

 

*Operating Expenses:*

 

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

 
| ** **                     | ** ** | **Costs and Expenses**                    | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                     | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**                             | ** ** |
| Cost of product  sales         |       | $                                                   | 341,591    |   | $ | 1,032 |   |
| Payroll and  payroll benefit   |       | 28,561                                              |       | 24,827 |   |
| Depreciation and  amortization |       | 12,342                                              |       | 10,001 |   |
| Outside services               |       | 14,062                                              |       | 10,654 |   |
| Operating power                |       | 7,569                                               |       | 8,096 |   |
| Property and  other taxes      |       | 5,810                                               |       | 5,262 |   |
| Insurance and  casualty losses |       | 4,372                                               |       | 3,478 |   |
| Construction  management       |       | 1,780                                               |       | 3,010 |   |
| Supplies                       |       | 2,559                                               |       | 2,902 |   |
| Rentals                        |       | 4,813                                               |       | 3,333 |   |
| All other                      |       | 12,103                                              |       | 8,142 |   |
| Total                          |       | $                                                   | 435,562    |   | $ | 80,737 |   |

 

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Cost of product sales was $341.6 million in the secondquarter of 2008, which is an increase over the second quarter of 2007 of $340.6million.  Approximately $337.0 million ofthe increase was attributable to product sold by the Energy Services segment,which consists primarily of the operations of Farm & Home.  The remaining increase is principallyassociated with fuel purchases related to a product supply arrangement inBuckeye’s Pipeline Operations segment.

 

Payroll and payrollbenefits were $28.6 million in the second quarter of 2008, an increase of $3.7million compared to the second quarter of 2007. The operations of Lodi Gas and the Energy Services segment added $0.9million and $1.6 million of payroll and payroll benefits expense for theperiod.  In addition, there wereincreases in salaries and wages, which added $1.3 million of payroll andpayroll benefits expense for the period. The increases in salaries and wageswere primarily the result of an increase in the number of employees due toBuckeye’s expansion of its operations. BGH’s payroll expense also increased by $0.8 million due to an accrualrelated to executive compensation and charges for BGH GP’s equity incentiveplan.  In the second quarter of 2007, BGHexpensed $1.0 million related to non-cash unit based compensation expense.

 

Depreciation andamortization expense was $12.3 million in the second quarter of 2008, which isan increase of $2.3 million from the same period of 2007. The operations ofLodi Gas and the Energy Services segment added $1.7 million and $0.4 million ofdepreciation and amortization expense in the three months ended June 30,2008, respectively.  The remainingincrease in depreciation and amortization expense resulted from Buckeye’songoing maintenance and expansion capital program.

 

Outside services costswere $14.1 million in the second quarter of 2008, which is an increase of $3.4million from the second quarter of 2007. The operations of Lodi Gas and the Energy Services segment added $0.5million and $0.2 million of outside services costs in the three months ended June 30,2008, respectively.  An additional $2.7million is due to increases in activity on operations and maintenancecontracts.  Outside services costsconsist principally of third-party contract services for pipeline and terminalmaintenance activities.

 

Operating power costswere $7.6 million for the three months ended June 30, 2008, which was adecrease of $0.5 million from the three months ended June 30, 2007.  The decrease is primarily due to a decreasein power supply additive expense. Operating power consists primarily of electricity required to operatepipeline pumping facilities.

 

Property and other taxeswere $5.8 million in the second quarter of 2008, an increase of $0.5 millioncompared to the second quarter of 2007. The increase was primarily due to Lodi Gas operations, which added $0.6million in the three months ended June 30, 2008.

 

Insurance and casualtylosses were $4.4 million for the three months ended June 30, 2008, whichis an increase of $0.9 million from the three months ended June 30,2007.  Casualty losses increased by $0.6million in the second quarter of 2008, which is due to an increase in the costof remediating environmental incidents compared to the second quarter of2007.  Insurance costs increased by $0.3million, which is primarily due to the inclusion of the Lodi Gas and EnergyServices operations.

 

Construction managementcosts were $1.8 million in the second quarter of 2008, which is a decrease of$1.2 million from the second quarter of 2007. The decrease is primarily the result of the completion of a constructionproject at the Memphis International Airport in the first quarter of 2008.

 

Supplies expense was $2.6million for the three months ended June 30, 2008, which is a decrease of$0.3 million over the three months ended June 30, 2007.  The decrease is primarily due to a decreasein terminal additive purchases at terminals owned by Buckeye.

 

Rental expense was $4.8million in the second quarter of 2008, which is an increase of $1.5 millionover the second quarter of 2007.  Theoperations of Lodi Gas and the Energy Services segment added $1.5 million and $0.2million of rental expense in the three months ended June 30, 2008,respectively.

 

All other costs were$12.1 million in the three months ended June 30, 2008, an increase of $4.0million compared to $8.1 million in the same period in 2007.  The operations of Lodi Gas and the EnergyServices segment added 

 

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$0.6 million and $1.4 million of other costs, respectively, in thethree months ended June 30, 2008. Professional fees increased by $1.0 million.  The remainder of the increases related tovarious other pipeline operating costs.

 

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

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **June 30,**                | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(In thousands)**          | ** ** |
| Total cost and expenses: |       |                             |       |   |   |   |   |
| Attributable to  Buckeye                |       | $                                | 433,880    |   | $ | 78,694 |   |
| Elimination of  Buckeye deferred charge |       | (1,175                           | )          | (1,170 | ) |
| Net effect of  ESOP charges             |       | 880                              |       | 1,189 |   |
| Attributable to  BGH                    |       | 1,977                            |       | 2,024 |   |
| Total                                   |       | $                                | 435,562    |   | $ | 80,737 |   |

 

   Amountsattributable to BGH consist of the following:

 
| ** **            | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **June 30,**                | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **            | ** ** | **(In thousands)**          | ** ** |
| Attributable to  BGH: |       |                             |       |   |   |
| Payroll and  benefits |       | $                                | 1,287      |   | $ | 1,525 |   |
| Professional  fees    |       | 405                              |       | 239 |   |
| Other                 |       | 285                              |       | 260 |   |
| Total                 |       | $                                | 1,977      |   | $ | 2,024 |   |

 

Payroll and payrollbenefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye as well as allocations ofthe cost of Buckeye personnel performing administrative services directly forBGH.   BGH’s payroll expense decreased by$0.2 million in the second quarter of 2008 as compared to the second quarter of2007.  BGH’s payroll expense increased by$0.8 million due to an accrual related to executive compensation and chargesfor BGH GP’s equity incentive plan.  Inthe second quarter of 2007, BGH expensed $1.0 million related to non-cash unitbased compensation expense.  Other costsinclude certain state franchise taxes, insurance costs, depreciation andmiscellaneous other expenses.

 

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

 
| ** **                 | ** ** | **Other Income (Expense)**                | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                 | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(In thousands)**                             | ** ** |
| Investment income          |       | $                                                   | 237        |   | $ | 334 |   |
| Interest and  debt expense |       | (18,270                                             | )          | (13,104 | ) |
| Total                      |       | $                                                   | (18,033    | ) | $ | (12,770 | ) |
|                       |       |                                                |       |   |   |
| Equity income              |       | $                                                   | 1,344      |   | $ | 2,258 |   |

 

Other income (expenses) was a net expense of $18.0million in the second quarter of 2008, compared to a net expense of $12.8million during the second quarter of 2007. Investment income for the three months ended June 30, 2008 wasconsistent with investment income generated during the three months ended June 30,2007.

 

Interest and debt expensewas $18.3 million in the three months ended June 30, 2008, an increase of$5.2 million from the three months ended June 30, 2007.  Approximately $4.5 million of the increasewas attributable to expense associated with Buckeye’s $300.0 million inaggregate principal amount of notes due January 15, 2018, which wereissued 

 

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in January 2008.  Theremaining $0.7 million increase is due to interest expense related toactivities within the Energy Services segment.

 

Equity income decreasedby $0.9 million in the second quarter of 2008 compared to the second quarter of2007.  The decrease is primarily due todecreases in equity income earned from Buckeye’s approximate 20% interest inWest Texas LPG Pipeline Limited Partnership.

 

First Six Months of 2008 compared to First Six Months of 2007

 

Total revenues for the sixmonths ended June 30, 2008 were $872.8 million, approximately $622.9 milliongreater than total revenue of $249.9 million for the same period in 2007.  Of the $622.9 million increase in revenue in2008, $26.7 million resulted from the acquisition of Lodi Gas and $582.3million resulted from the acquisition of Farm & Home.  The results of Lodi Gas and Farm &Home are included below in the Natural Gas Storage and Energy Servicessegments, respectively. The balance of the revenue improvement was attributableto the remaining reporting segments as discussed below.

 

Pipeline Operations:

 

Revenues from Pipeline Operations were $195.3 millionin the six months ended June 30, 2008 compared to $186.2 million in thecorresponding period in 2007, an increase of $9.1 million.  This increase was primarily the result of:

 

·                  Basetransportation revenue increasing by $5.5 million in the first six months of2008 compared to the first six months of 2007 primarily as a result of tariffincreases implemented on May 1, 2008 and July 1, 2007. The benefit ofthe tariff increases were offset by reduced product volumes in the first sixmonths of 2008.  Management believes thereduced volumes in the first six months of 2008 were caused primarily byreduced demand for gasoline resulting from higher retail gasoline and distillateprices, reduced production at ConocoPhillips’ Wood River Refinery in the firstquarter of 2008 due to maintenance activities, as well as the continuedintroduction of ethanol into retail gasoline products.  Total product volumes declined by 3.7% in thefirst six months of 2008 compared to the first six months of 2007; and

 

·                  A net increasein incidental revenues of $6.0 million, which was principally related to aproduct supply arrangement that was offset by a reduction in revenue of $2.4million principally related to the completion of contract services activitiesat customer facilities connected to Buckeye’s refined products pipelines.

 

Product volumes transported in Pipeline Operations forthe six months ended June 30, 2008 and 2007 were as follows:

 
| ** **  | ** ** | **Average Barrels Per Day**        | ** ** |
|-------------|------------|---------------------------------------------------|------------|
| ** **  | ** ** | **Six Months Ended June 30,** | ** ** |
| **Product** | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Gasoline    |       | 670,000                                           |       | 715,200 |   |
| Distillate  |       | 308,400                                           |       | 327,900 |   |
| Jet Fuel    |       | 364,100                                           |       | 357,900 |   |
| LPG’s  |       | 18,900                                            |       | 21,200 |   |
| NGL’s  |       | 21,600                                            |       | 19,900 |   |
| Other       |       | 12,100                                            |       | 7,200 |   |
| Total       |       | 1,395,100                                         |       | 1,449,300 |   |

 

Terminalling and Storage:

 

Revenue from the Terminallingand Storage segment was $54.7 million in the first six months of 2008 comparedto $47.5 million for the same period in 2007. The revenue increase in the firstsix months of 2008 compared to the same period in 2007 of $7.2 million or 15.1%was primarily the result of:

 

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·                  An approximate$4.4 million increase in base revenue primarily related to increases inblending fees for product additives and product recoveries from vapor recoveryunits, which were offset by an approximately 2.7% decline in throughput volumesin the first six months of 2008 compared to the first six months of 2007; and

 

·                  Incrementalrevenue of $2.8 million due to the addition of operations of the Niles,Michigan terminal and a 50% interest in the Ferrysburg, Michigan terminal, eachof which was acquired in the latter part of the first quarter of 2008 (see Note3 to the accompanying condensed financial statements) combined with the effectof having a full six months of revenue in 2008 from six terminals that wereacquired at various times in the first quarter of 2007.

 

Average daily throughput for the refined products terminals for the sixmonths ended June 30, 2008 and 2007 was as follows:

 
| ** **                   | ** ** | **Average Barrels Per Day**        | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                   | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                         |       |                                              |       |   |   |
| Refined products  throughput |       | 538,100                                           |       | 553,100 |   |

 

 

NaturalGas Storage:

 

Revenue from the Natural Gas Storage segment was $26.7million in the first six months of 2008. Approximately 73% of thisrevenue represented firm storage revenues and 27% represented hub servicesrevenues.

 

EnergyServices:

 

Revenue from the Energy Services segment was $582.3million in the first six months of 2008. Substantially all of this revenue was derived from the continuingoperations of Farm & Home, which Buckeye acquired on February 8,2008.  During the first six months of2008, the continuing operations of Farm & Home sold approximately185.2 million gallons of products. Products sold include gasoline, propane, and petroleum distillates suchas heating oil, diesel fuel, and kerosene.

 

OtherOperations:

 

Revenue from the OtherOperations segment was $21.6 million in the first six months of 2008 comparedto $16.2 million in the first six months of 2007.  The revenue increase in 2008 of $5.4 millionwas primarily the result of:

 

·                  An increase of $3.0 million in pipelinemaintenance and operating revenue related to additional operating contractssigned in the latter part of 2007; and

 

·                  An increase of $2.8 million in constructionmanagement revenue related to these operating contracts.

 

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* *

*Operating Expenses:*

 

Costs and expenses forthe six months ended June 30, 2008 and 2007 were as follows:

 
| ** **                     | ** ** | **Costs and Expenses**                  | ** ** |
|--------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                     | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**                           | ** ** |
| Cost of product  sales         |       | $                                                 | 578,203    |   | $ | 5,876 |   |
| Payroll and  payroll benefit   |       | 56,567                                            |       | 48,453 |   |
| Depreciation and  amortization |       | 23,725                                            |       | 19,708 |   |
| Outside services               |       | 24,893                                            |       | 16,732 |   |
| Operating power                |       | 15,055                                            |       | 15,414 |   |
| Property and  other taxes      |       | 11,832                                            |       | 11,446 |   |
| Insurance and  casualty losses |       | 8,091                                             |       | 7,461 |   |
| Construction  management       |       | 4,801                                             |       | 4,704 |   |
| Supplies                       |       | 5,128                                             |       | 5,872 |   |
| Rentals                        |       | 8,866                                             |       | 5,944 |   |
| All other                      |       | 22,583                                            |       | 15,437 |   |
| Total                          |       | $                                                 | 759,744    |   | $ | 157,047 |   |

 

Cost of productsales was $578.2 million in the first six months of 2008, which is an increaseover the first six months of 2007 of $572.3 million.  Approximately $566.6 million of the increasewas attributable to products sold by the Energy Services segment.  The remaining increase is principallyassociated with fuel purchases related to a product supply arrangement inBuckeye’s Pipeline Operations segment.

 

Payroll andpayroll benefits were $56.6 million in the first six months of 2008, anincrease of $8.1 million compared to the first six months of 2007.  The operations of Lodi Gas and the EnergyServices segment added $1.8 million and $2.3 million of payroll and payrollbenefits expense in the first six months of 2008, respectively.  Increases in salaries, wages, and incentivebonuses of $3.2 million in the first six months of 2008 resulted primarily froman increase in the number of employees due to Buckeye’s expandedoperations.  In the first six months of2008, payroll and payroll benefits expense increased by $0.6 million due to adecrease in capitalized payroll and payroll benefits compared to the first sixmonths of 2007. BGH’s payroll expense increased by $1.5 million due to anaccrual related to executive compensation and charges for BGH GP’s equityincentive plan.  In the first six monthsof 2007, BGH expensed $1.0 million related to non-cash unit based compensationexpense.   ESOP related costs decreasedby $1.0 million in the first six months of 2008 as compared to the first sixmonths of 2007.

 

Depreciation andamortization expense was $23.7 million in the first six months of 2008, whichis an increase of $4.0 million over the first six months of 2007. Theoperations of Lodi Gas and the Energy Services segment added $2.8 million and$0.7 million of depreciation and amortization expense in the first six monthsof 2008, respectively.  The remainingincrease in depreciation and amortization expense resulted from Buckeye’songoing maintenance and expansion capital program.

 

Outside servicescosts were $24.9 million in the first six months of 2008, which is an increaseof $8.2 million over the first six months of 2007.  The operations of Lodi Gas and the EnergyServices segment added $2.2 million and $0.3 million of outside services costsin the first six months of 2008, respectively. Lodi Gas incurred approximately $1.4 million of outside services expenserelated to well work-over costs as a result of the heavy withdrawal season inthe first quarter.  Another approximately$4.5 million is due to increases in activity on operations and maintenancecontracts.  The remainder of the increaseis due to an increase in pipeline and terminal maintenance activities. Outsideservices costs consist principally of third-party contract services forpipeline and terminal maintenance activities.

 

Operating powercosts were $15.1 million for the first six months of 2008, which is a decreaseof $0.4 million from the first six months of 2007.  The decrease is primarily due to a decreasein power supply additive expense. Operating power consists primarily of electricity required to operatepipeline pumping facilities.

 

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Property and othertaxes were $11.8 million in the first six months of 2008, an increase of $0.4million compared to the first six months of 2007.  The operations of Lodi Gas and the EnergyServices segment added $1.0 million and $0.1 million, respectively, in thefirst six months of 2008.  Theseincreases were offset by a reduction of $0.6 million for excise taxes.

 

Insurance andcasualty losses were $8.1 million for the first six months of 2008, which is anincrease of $0.6 million from the first six months of 2007.  Casualty losses in the first six months of2008 remained consistent with the first six months of 2007. Insurance costsincreased by $0.6 million which is primarily due to the inclusion of theoperations of Lodi Gas and the Energy Services segment.

 

Constructionmanagement costs were $4.8 million in the first six months of 2008, which wasconsistent with construction management costs for the same period in 2007.

 

Supplies expensewas $5.1 million for the first six months of 2008, which is a decrease of $0.7million from the first six months of 2007. The decrease is primarily due to a decrease in terminal additivespurchases at Buckeye’s terminals.

 

Rental expense was$8.9 million in the first six months of 2008, which is an increase of $2.9million from the first six months of 2007. The operations of Lodi Gas and the Energy Services segment added $2.6million and $0.3 million of rental expense in the first six months of 2008,respectively.

 

All other costswere $22.6 million in the first six months of 2008, an increase of $7.1 millioncompared to the same period in 2007.  Theoperations of Lodi Gas and the Energy Services segment added $1.1 million and$2.6 million of other costs, respectively, in the first six months of2008.  Professional fees increased by$1.6 million.  The remainder of theincreases related to various other pipeline operating costs.

 

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

 
| ** **                              | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30,**              | ** ** |
| ** **                              | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(In thousands)**        | ** ** |
| Total cost and expenses: |       |                           |       |   |   |
| Attributable to  Buckeye                |       | $                              | 756,024    |   | $ | 153,365 |   |
| Elimination of  Buckeye deferred charge |       | (2,349                         | )          | (2,344 | ) |
| Net effect of  ESOP charges             |       | 1,845                          |       | 2,795 |   |
| Attributable to  BGH                    |       | 4,224                          |       | 3,231 |   |
| Total                                   |       | $                              | 759,744    |   | $ | 157,047 |   |

 

 

Amounts attributable toBGH consist of the following:

 
| ** **                     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **June 30,**              | ** ** |
| ** **                     | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**        | ** ** |
| Attributable to BGH: | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Payroll and  benefits          |       | $                              | 2,621      |   | $ | 2,151 |   |
| Professional  fees             |       | 988                            |       | 437 |   |
| Other                          |       | 615                            |       | 643 |   |
| Total                          |       | $                              | 4,224      |   | $ | 3,231 |   |

 

Payroll and payrollbenefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye as well as allocations ofthe cost of Buckeye personnel performing administrative services directly forBGH.   BGH’s payroll expense increased by$0.5 million in the first six months of 2008 as compared to the first sixmonths of 2007.  BGH’s payroll expenseincreased by $1.5 million due to an accrual related to executive compensationand charges for BGH GP’s equity incentive plan. In the first six months of 2007, BGH expensed $1.0 

 

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million related tonon-cash unit based compensation expense. Other costs include certain state franchise taxes, insurance costs,depreciation and miscellaneous other expenses.

 

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

 
| ** **                 | ** ** | **Other Income (Expense)**              | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                 | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(In thousands)**                           | ** ** |
| Investment  income         |       | $                                                 | 851        |   | $ | 634 |   |
| Interest and  debt expense |       | (36,448                                           | )          | (26,980 | ) |
| Total                      |       | $                                                 | (35,597    | ) | $ | (26,346 | ) |
|                       |       |                                              |       |   |   |
| Equity income              |       | $                                                 | 3,399      |   | $ | 4,044 |   |

 

Other income (expenses)was a net expense of $35.6 million in the first six months of 2008, compared toa net expense of $26.3 million during the first six months of 2007.  Investment income for the first six months of2008 was consistent with investment income generated during the first sixmonths of 2007.

 

Interest and debt expensewas $36.4 million in the first six months of 2008, an increase of $9.5 millionfrom the first six months of 2007. Approximately $8.6 million of the increase was attributable to expensesassociated with Buckeye’s $300.0 million in aggregate principal amount of notesdue January 15, 2018, which were issued in January 2008.  The remainder of the increase is due tointerest expense related to activity within the Energy Services segment.

 

Equity income decreasedby $0.6 million in the first six months of 2008 compared to the first sixmonths of 2007.  The decrease isprimarily due to decreases in equity income earned from Buckeye’s approximate20% interest in West Texas LPG Pipeline Limited Partnership.

 

*Liquidityand Capital Resources*

 

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

 

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

 

BGH’s principal use ofcash is the payment of its operating expenses and distributions to itsunitholders.  BGH generally makesquarterly cash distributions of substantially all of its available cash,generally defined as consolidated cash receipts less consolidated cashexpenditures and such retentions for working capital, anticipated cashexpenditures and contingencies as MainLine Management deems appropriate.  In the first six months of 2008, BGH paidcash distributions of $0.30 per unit on May 30, 2008 and $0.285 per uniton February 29, 2008.  In the firstsix months of 2007, BGH paid cash distributions of $0.24 per unit on May 31,2007 and $0.225 per unit on February 28, 2007.  Total cash distributed to BGH unitholders inthe six months ended June 30, 2008 was approximately $16.6 million. On July 29,2008, MainLine Management declared a distribution of $0.31 per unit to be paidon August 29, 2008 to unitholders of record as of August 8, 2008.This distribution is expected to be approximately $8.8 million.

* *

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* *

*Debt*

* *

*BGH*

 

BGH is party to a five-year, $10.0 million revolvingcredit facility with SunTrust Bank, as both administrative agent and lender(the “BGH Credit Agreement”).  See Note 6to BGH’s condensed consolidated financial statements for a description of theterms of the BGH Credit Agreement.

 

Services Company

 

Services Company hadtotal debt outstanding of $17.2 million and $20.3 million at June 30, 2008and December 31, 2007, respectively, consisting of 3.60% Senior SecuredNotes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOP to athird-party lender. See Note 6 to BGH’s condensed consolidated financialstatements for a description of the terms of the 3.60% ESOP Notes.

* *

*Buckeye Notes*

 

In January 2008,Buckeye issued $300.0 million of aggregate principal amount of 6.05% Notes due2018 (the “6.05% Notes”) as more fully described in Note 6 to the condensedconsolidated financial statements.

 

At June 30,2008, Buckeye had an aggregate amount of $1,379.7 million of debt, whichconsisted of $300.0 million of Buckeye’s 4.625% Notes due 2013 (the “4.625%Notes”), $275.0 million of Buckeye’s 5.300% Notes due 2014 (the “5.300% Notes”),$150.0 million of Buckeye’s 6.75% Notes due 2033 (the “6.75% Notes”), $125.0million of Buckeye’s 5.125% Notes due 2017 (the “5.125% Notes”), $300.0 millionof the 6.05% Notes, $157.0 million outstanding under Buckeye’s unsecuredrevolving credit agreement (the “Credit Facility”) and $72.7 millionoutstanding under the Buckeye Energy Services credit agreement (as discussedbelow). See note 6 to the condensed consolidated financial statements for moreinformation about the terms of the debt discussed above.

 

The fair value of Buckeye’saggregate debt was estimated to be $1,346.0 million at June 30, 2008 and$828.7 million at December 31, 2007. The values at June 30, 2008 and December 31, 2007 were basedon approximate market value on the respective dates.

 

Buckeye Credit Facility

 

Buckeye has a borrowingcapacity of $600.0 million under the Credit Facility, which may be expanded upto $800.0 million subject to certain conditions and upon further approval ofthe lenders.  The Credit Facilityrequires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.0 to 1.0 subject to aprovision that allows for increases to 5.5 to 1.0 in connection with certainfuture acquisitions.  The Funded DebtRatio is calculated by dividing consolidated debt by annualized EBITDA,which is defined in the Credit Facility as earnings before interest, taxes,depreciation, depletion and amortization, in each case excluding the income ofcertain majority-owned subsidiaries and equity investments (but includingdistributions from those majority-owned subsidiaries and equityinvestments).  At June 30, 2008,Buckeye’s Funded Debt Ratio was 4.28 to 1.0. As provided for in the CreditFacility, the entire balance of Farm & Home’s line of credit, or $72.7million, was excluded from the calculation of consolidated debt and the FundedDebt Ratio.

 

In addition, the CreditFacility contains other covenants including, but not limited to, limitingBuckeye’s ability to incur additional indebtedness, to create or incur certainliens on its property, to dispose of property material to its operations, andto consolidate, merge, or transfer assets. At June 30, 2008, Buckeye was not aware of any instances ofnoncompliance with the covenants under its Credit Facility.

 

See Note 6 to thecondensed consolidated financial statements for more information about theterms of the Credit Facility.

 

Buckeye Energy ServicesCredit Agreement

 

On May 20, 2008,Farm & Home and its wholly owned subsidiary, Buckeye Energy ServicesLLC (the “Borrowers”), entered into a Credit Agreement, which was subsequentlyamended on July 18, 2008 (the “BES Credit Agreement”). The BES CreditAgreement, as amended, is with BNP Paribas, as Administrative Agent,

 

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Collateral Agent, and Lead Arranger and the lenders named therein.   The facility provided by the BES CreditAgreement provides for borrowings of up to $160.0 million, which amount may beincreased to $250.0 million subject to customary conditions, includingprocurement of the requisite lender commitments.

 

The BES Credit Agreementrequires the Borrowers to comply with Minimum Consolidated Tangible Net Worth,Minimum Consolidated Net Working Capital and Maximum Consolidated LeverageRatio covenants, each as defined in the BES Credit Agreement.  At June 30, 2008, the Borrowers’Consolidated Tangible Net Worth and Consolidated Net Working Capital were $85.9million and $51.1 million, respectively, and their Consolidated Leverage Ratiowas 1.53 to 1.0.

 

In addition, the BESCredit Agreement contains other covenants, including, but not limited to,covenants limiting ability to incur additional indebtedness, to create or incurcertain liens on property, to consolidate, merge or transfer assets, to makedividends or distributions, to dispose of property, to make investments, tomodify their risk management policy, or to engage in business activitiesmaterially different from those presently conducted.  At June 30, 2008, the Borrowers were notaware of any instances of noncompliance with the covenants under the BES CreditAgreement.

 

See Note 6 to thecondensed consolidated financial statements for more information about theterms of the BES Credit Agreement.

* *

*Cash Flows from Operations*

 

The components of cashflows from operations for the six months ended June 30, 2008 and 2007 wereas follows:

 
| ** **                                         | ** ** | **Cash Flow from Operations**                        | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **For the Six Months Ended June 30,** | ** ** |
| ** **                                         | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                                             | ** ** |
| Net income                                         |       | $                                                                   | 11,166     |   | $ | 10,070 |   |
| Value of ESOP  shares released                     |       | 1,671                                                               |       | 2,355 |   |
| Depreciation and  amortization                     |       | 23,725                                                              |       | 19,708 |   |
| Non-controlling  interest                          |       | 69,716                                                              |       | 60,476 |   |
| Changes in  current assets and current liabilities |       | 341                                                                 |       | 9,286 |   |
| Changes in other  assets and liabilities           |       | 1,438                                                               |       | 845 |   |
| Other                                              |       | 422                                                                 |       | 971 |   |
| Net cash  provided by discontinued operations      |       | 572                                                                 |       | — |   |
| Total                                              |       | $                                                                   | 109,051    |   | $ | 103,711 |   |

 

Cash flows fromoperations were $109.1 million for the first six months of 2008 compared to$103.7 million for the first six months of 2007, an increase of $5.4 million.The primary causes of this increase are the improvement in net income for thefirst six months of 2008 compared to the first six months of 2007, increases indepreciation and amortization, cash provided by changes in other assets andliabilities, and cash provided by working capital.  The cash provided by discontinued operationsin 2008 is due to Farm & Home’s retail operations prior to their sale.

 

In the first sixmonths of 2008, cash provided by working capital resulted primarily from anincrease in accounts payable of $8.4 million and accrued and other currentliabilities of $28.0 million and a reduction of trade receivables of $14.1million. These increases were offset by an increase in inventories of $19.5million and prepaid and other current assets of $30.4 million.

 

The increase in accountspayable is due to activity from the operations of Lodi Gas and Farm &Home.  The increase in accrued and othercurrent liabilities is primarily due to an increase in accrued taxes, interestexpense, environmental liabilities, and expense related to activities on theammonia pipeline.  The reduction of tradereceivables is due to the timing of invoices as compared to year end.  Inventories increased primarily due to theacquisition of Farm &

 

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Home in February 2008.  The increase in prepaid and other currentassets is primarily due to an increase in the receivable related to activitieson the ammonia pipeline.

 

CashFlows from Investing Activities

 

Net cash used ininvesting activities for the six months ended June 30, 2008 and 2007 areas follows:

 
| ** **                                     | ** ** | **Investing Activities**                                       | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **For the Six Months Ended June 30,** | ** ** |
| ** **                                     | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(In thousands)**                                             | ** ** |
| Capital  expenditures                          |       | $                                                                   | (32,501    | ) | $ | (36,966 | ) |
| Acquisitions and  equity investments           |       | (610,616                                                            | )          | (39,320 | ) |
| Other                                          |       | (103                                                                | )          | (167 | ) |
| Proceeds from  sale of discontinued operations |       | 52,584                                                              |       | — |   |
| Total                                          |       | $                                                                   | (590,636   | ) | $ | (76,453 | ) |

 

In the first six monthsof 2008, Buckeye expended $438.8 million for Lodi Gas, $143.1 million for Farm &Home, and an aggregate of $28.7 million for the acquisitions of three terminalsin Niles and Ferrysburg, Michigan, and Wethersfield, Connecticut and theacquisition of the 50% member interest in Wespac Pipe Lines - San Diego LLCthat Buckeye did not already own.  SeeNote 3 to Buckeye’s condensed consolidated financial statements for a furtherdiscussion.

 

In the first six months of 2007, Buckeye expended$38.4 million primarily for the acquisition of six terminals and related assetsand $0.9 million for an additional investment in West Texas LPG PipelineLimited Partnership.

 

Capital expenditures aresummarized below:

 
| ** **                       | ** ** | **Capital Expenditures**                                       | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Six Months Ended June 30,** | ** ** |
| ** **                       | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                             | ** ** |
| Sustaining  capital expenditures |       | $                                                                   | (8,067     | ) | $ | (15,794 | ) |
| Expansion and  cost reduction    |       | (24,434                                                             | )          | (21,172 | ) |
| Total                            |       | $                                                                   | (32,501    | ) | $ | (36,966 | ) |

 

Buckeye incurred $8.1 million and $15.8 million ofsustaining capital expenditures and $24.4 million and $21.2 million ofexpansion and cost reduction expenditures in the first six months of 2008 andthe first six months of 2007, respectively. Expansion and cost reductionprojects in 2008 include ethanol and butane blending projects, the constructionof three additional tanks with capacity of 0.4 million barrels in Linden, NewJersey, and the expansion of Buckeye’s natural gas storage facilities known asKirby Hills Phase II.  Expansion and costreduction projects in 2007 include a capacity expansion project in Illinois tohandle additional LPG volumes as well as ongoing capacity improvements to thepipeline and terminal at the Memphis International Airport.

 

Given the slower pace ofspending this year to date, Buckeye expects to spend approximately $120 millionto $125  million in capital expenditures in 2008, of which approximately$31 million to $36 million is expected to relate to sustaining capital expendituresand $89 million is expected to relate to expansion and cost reductionprojects. Sustaining capital expenditures include renewals and replacement oftank floors and roofs and upgrades to station and terminalling equipment, fieldinstrumentation and cathodic protection systems.  Kirby Hills Phase II is Buckeye’s mostsignificant expansion project with anticipated 2008 expenditures in the rangeof $45 million to $50 million and total anticipated project expenditures in therange of $55 million to $60 million.

* *

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* *

*Cash Flows from Financing Activities*

 

During the firstsix months of 2007, BGH borrowed and repaid $1.3 million under the BGH CreditAgreement.  BGH has not borrowed underthe BGH Credit facility in the first six months of 2008.  BGH’s distributions to its unitholderstotaled $16.6 million in the first six months of 2008.

 

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

 

OnJanuary 11, 2008, Buckeye sold $300.0 million in aggregate principalamount of 6.05% Notes in an underwritten public offering.  Proceeds from this offering, afterunderwriters’ fees and expenses, were approximately $298.0 million and wereused to partially pre-fund the Lodi Gas acquisition.  In connection with this debt offering,Buckeye settled two interest rate swaps associated with the 6.05% Notes, whichresulted in a settlement payment by Buckeye of $9.6 million that is beingamortized as interest expense over the ten-year term of the 6.05% Notes.

 

During the first sixmonths of 2008 and 2007, Buckeye borrowed $313.0 million and $85.0 millionunder its Credit Facility, respectively, and repaid $156.0 million and $115.0million, respectively.  Net paymentsunder the BES Credit Agreement and Buckeye Energy Services, LLC’s previouscredit agreement were $27.3 million. Payments on the 3.60% ESOP Notes were $3.2 million for the six monthsended June 30, 2008 and 2007, respectively.

 

Distributions tonon-controlling interests, consisting primarily of Buckeye’s distributions toholders of its LP Units, were $77.3 million in the first six months of 2008compared to $61.3 million in the first six months of 2007.  The increase in distributions resulted fromincreases in the unit distribution rate and the issuance of 6.2 million LPUnits in the first six months of 2007 and 2.6 million LP Units in the first sixmonths of 2008.

#  

*Other Matters*

 

# AccountingPronouncements

#  

# See Note 15 to the condensed consolidated financialstatements for a description of certain recent 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,” within the meaning of the Private Securities Litigation Reform Actof 1995. Such statements use forward-looking words such as “anticipate,” “continue,”“estimate,” “expect,” “may,” “believe,” “will,” or other similar words,although some forward-looking statements are expressed differently. Thesestatements discuss future expectations and contain projections. Specificfactors that could cause actual results to differ from those in theforward-looking statements include, but are not limited to: (1) BGH’sability to pay distributions to its unitholders; (2) BGH’s expectedreceipt of distributions and incentive distributions from Buckeye; (3) anticipatedtrends in Buckeye’s business; (4) price trends and overall demand forrefined petroleum products and natural gas in the United States in general andin Buckeye’s service areas in particular (economic activity, weather,alternative energy sources, conservation and technological advances may affectprice trends and demands); (5) competitive pressures from othertransportation services or alternative fuel sources; (6) changes, if any,in laws and regulations, including, among others, safety, tax and accountingmatters or Federal Energy Regulatory Commission regulation of Buckeye’s tariffrates; (7) liability for environmental claims; (8) security issuesaffecting Buckeye’s assets, including, among others, potential damage to itsassets caused by vandalism, acts of war or terrorism; (9) constructioncosts, unanticipated capital expenditures and operating expenses to repair orreplace Buckeye’s assets; (10) availability and cost of insurance on BGH’sand Buckeye’s assets and operations; (11) Buckeye’s ability tosuccessfully identify and complete strategic acquisitions and make cost savingchanges in operations; (12) expansion in the operations of Buckeye’scompetitors; (13) Buckeye’s ability to integrate any acquired 

 

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operations intoits existing operations; (14) shut-downs or cutbacks at major refineriesthat use Buckeye’s services; (15) deterioration in Buckeye’s laborrelations; (16) regional economic conditions; (17) changes in realproperty tax assessments; (18) disruptions to the air travel system;(19) interest rate fluctuations and other capital market conditions;(20) credit risks associated with Buckeye’s customers; (21) BGH’sfuture results of operations; (22) BGH’s liquidity and ability to financeits activities; (23) market conditions in Buckeye’s industry;(24) conflicts of interest between Buckeye, its general partner and BGH;(25) the treatment of Buckeye or BGH as a corporation for federal incometax purposes or if BGH or Buckeye become subject to entity-level taxation forstate tax purposes; and (26) the impact of governmental legislation andregulation on BGH and Buckeye.

 

These factors are notnecessarily all of the important factors that could cause actual results todiffer materially from those expressed in any of our forward-lookingstatements. Other unknown or unpredictable factors could also have materialadverse effects on future results. Although the expectations in theforward-looking statements are based on our current beliefs and expectations,we do not assume responsibility for the accuracy and completeness of suchstatements. When considering forward-looking statements, you should keep inmind the risk factors discussed in Part II, Item 1A of this Form 10-Q andthe risk factors and other cautionary statements in BGH’s Annual Report on Form 10-Kfor 2007, including those described in the “Risk Factors” section of thatreport. Further, we undertake no obligation to update publicly anyforward-looking statement to reflect events of circumstances occurring afterthe date of this Form 10-Q.

#  

# Item 3. Quantitative andQualitative Disclosures About Market Risk

######  

###### MarketRisk – Trading Instruments

 

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

 

###### MarketRisk – Non-Trading Instruments

 

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

 

*CommodityRisk*

 

TheEnergy Services segment uses primarily exchange-traded petroleum futurescontracts to manage the risk of market price volatility on its petroleumproduct inventories and its fixed price sales contracts. The derivativecontracts used to hedge petroleum product inventories are classified as fairvalue hedges.  Changes in the fair valueof the inventory hedges are recorded in current period earnings along with therelated gain or loss on the hedged asset. Hedge ineffectiveness is measured quarterly based on the correlation ofchanges in fair value between the derivative contract and the hedged itemduring the hedge period. The Energy Services segment has elected not to usehedge accounting with respect to its fixed price sales contracts. Therefore,its fixed price sales contracts and the related futures contracts used tooffset those sales contracts, are all marked-to-market on the balance sheetwith gains and losses being recognized in earnings during the period.

 

Asof June 30, 2008, the Energy Services segment had derivative assets andliabilities as follows:

 

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| ** **                   | ** ** | **June 30,**  | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2008**           | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| **Asset:**                   |       |               |       |
| Futures  contracts           |       | $                  | 9,943      |   |
|                         |       |               |       |
| Total                        |       | $                  | 9,943      |   |
|                         |       |               |       |
| **Liabilities:**             | ** ** | ** **         | ** ** |
| Fixed price  sales contracts |       | $                  | (10,568    | ) |
| Inventory hedges             |       | (1,287             | )          |
|                         |       |               |       |
| Total                        |       | $                  | (11,855    | ) |

 

Substantiallyall of the liability noted above for unrealized losses of $1.3 million will berealized in the third quarter of 2008 as the related inventory is sold.  Gains recorded in the second quarter oninventory hedges that were ineffective were approximately $0.2 million.  As of June 30, 2008, open petroleumderivative contracts varied in duration, but did not extend beyond August 2009.

 

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

 
| ** **                                                            | ** ** | ** **                | ** ** | **Commodity**           | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | ** **                | ** ** | **Financial**           | ** ** |
| ** **                                                            | ** ** | ** **                | ** ** | **Instrument**          | ** ** |
| ** **                                                            | ** ** | **Resulting**             | ** ** | **Portfolio**           | ** ** |
| **Scenerio**                                                          | ** ** | **Classification**        | ** ** | **Fair Value**     | ** ** |
| ** **                                                            | ** ** | ** **                | ** ** | **(In thousands)** | ** ** |
| Fair value  assuming no change in underlying commodity prices (as is) |       | * Asset    |       | $                       | 8,656      |   |
| Fair value assuming  10% increase in underlying commodity prices      |       | Asset                     |       | $                       | 8,173      |   |
| Fair value  assuming 10% decrease in underlying commodity prices      |       | Asset                     |       | $                       | 9,167      |   |
| Fair value  assuming no change in underlying commodity prices (as is) |       | (Liability)               |       | $                       | (10,568    | ) |
| Fair value  assuming 10% increase in underlying commodity prices      |       | (Liability)               |       | $                       | (20,489    | ) |
| Fair value  assuming 10% decrease in underlying commodity prices      |       | (Liability)               |       | $                       | (688       | ) |

 

----

*represents the netposition on futures contracts and inventory hedges- $9,943 less 1,287 or$8,656.

 

The value of theopen futures contract positions noted above were based upon quoted marketprices obtained from the New York Mercantile Exchange.  The value of the fixed price sales contractliability was based on observable market data related to the obligation toprovide petroleum products

* *

*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 (i.e., the Credit Facility and the BES Credit Agreement).  Fair value risk represents the risk that the 

 

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value of the fixedportion of Buckeye’s financing arrangements will rise or fall depending onchanges in interest rates.  Cash flowrisk represents the risk that interest costs related to the Credit Facility andthe BES Credit Agreement will rise or fall depending on changes in interestrates.

 

Buckeye’s practicewith respect to derivative transactions related to interest rate risk has beento have each transaction authorized by the Board of Directors of Buckeye GP.

 

At June 30,2008, Buckeye had total fixed-rate debt obligations at face value of $1,150.0million, consisting of $125.0 million of the 5.125% Notes, $275.0 million ofthe 5.300% 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 30,2008 was approximately $1,116.3 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$74.2 million. Buckeye’s variable debt obligation was $157.0 million under theCredit Facility and $72.7 million under the BES Credit Agreement at June 30,2008.  Based on the balances outstandingat June 30, 2008, a 1% increase in interest rates would increase annualinterest expense by $2.3 million.

 

InJanuary 2008, Buckeye terminated two forward-starting interest rate swapagreements associated with the 6.05% Notes and made a payment of $9.6 millionin connection with the termination.  Inaccordance with FASB Statement No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”), Buckeye has recorded the amount in othercomprehensive income and will amortize the amount into interest expense overthe term of the loan.  Interest expenseincreased by $0.2 million and $0.4 million for the three and six months ended June 30,2008, respectively, as a result of the amortization of the termination payment.

 

Item 4. Controls and Procedures

 

(a)       Evaluation of Disclosure Controls andProcedures.

 

The management of MainLine Management, with theparticipation of its Chief Executive Officer and Acting Chief FinancialOfficer, evaluated the effectiveness of its disclosure controls and proceduresfor BGH as of the end of the period covered by this report.  Based on that evaluation, the Chief ExecutiveOfficer and Acting Chief Financial Officer concluded that MainLine Management’sdisclosure controls and procedures for BGH as of the end of the period coveredby this report are functioning 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 Acting Chief Financial Officer, asappropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absoluteassurance, however, that the objectives of the controls system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected. Inaddition, since Buckeye acquired Lodi Gas and Farm & Home in the firstquarter, management’s ability to effectively apply its disclosure controls andprocedures to Lodi Gas and Farm & Home is inherently limited by theshort period of time that management has had to evaluate their operations sincetheir respective acquisitions.

 

(b)       Changesin Internal Control over Financial Reporting

 

As discussed in Note 3 to thecondensed consolidated financial statements, Buckeye acquired Lodi Gas and Farm &Home in the first quarter of 2008. Management has begun the process of assessing internal control overfinancial reporting for these two acquisitions. Buckeye is still in the preliminary stages of this assessment for LodiGas and Farm & Home. No change in MainLine Management’s internalcontrol over financial reporting for BGH occurred during the most recent fiscalquarter with respect to BGH’s operations excluding Lodi Gas and Farm &Home that has materially affected, or is reasonably likely to materiallyaffect, management’ s internal control over financial reporting for BGH.

 

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PART II – OTHER INFORMATION

 

Item 1. 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**

 

The “Tax Risks toUnitholders” below replace the “Tax Risks to Unitholders” subsection thatappeared in the risk factors included in BGH’s Annual Report on Form 10-Kfor the year ended December 31, 2007. Except as set forth below, there have been no material changes in oradditions to the risk factors disclosed in Part I, Item 1A “Risk Factors”in BGH’s Annual Report on Form 10-K for the year ended December 31,2007.

** **

**Tax Risks toCommon Unitholders**

 

*BGH’s and Buckeye’s tax treatmentdepends on their status as a partnership for federal income tax purposes aswell as not being subject to a material amount of entity-level taxation byindividual states.  If the IRS were totreat either BGH or Buckeye as a corporation for federal income tax purposes orthey were to become subject to additional amounts of entity-level taxation forstate tax purposes, then BGH’s cash available for distribution to you would besubstantially reduced.*

 

The value of ourinvestment in Buckeye depends largely on Buckeye being treated as a partnershipfor federal income tax purposes, which requires that 90% or more of Buckeye’sgross income for every taxable year consist of qualifying income, as defined inSection 7704 of the Code. Buckeye may not meet this requirement or currentlaw may change so as to cause, in either event, Buckeye to be treated as acorporation for federal income tax purposes or otherwise be subject to federalincome tax. Moreover, the anticipated after-tax economic benefit of aninvestment in our common units depends largely on BGH being treated as apartnership for federal income tax purposes. BGH has not requested, and does not plan to request, a ruling from theIRS as to BGH’s or Buckeye’s treatment as a partnership for federal income taxpurposes.

 

Despite the fact thateach of BGH and Buckeye is a limited partnership under Delaware law, it ispossible in certain circumstances for a partnership such as BGH or Buckeye tobe treated as a corporation for federal income tax purposes. Although BGH doesnot believe based upon the current operations of BGH and Buckeye that eitherBGH or Buckeye is so treated, a change in BGH’s or Buckeye’s business (or achange in current law) could cause them to be treated as a corporation forfederal income tax purposes or otherwise subject them to taxation as an entity.

 

If either BGH or Buckeyewere treated as a corporation for federal income tax purposes, they would payfederal income tax on their taxable income at the corporate tax rate, which iscurrently a maximum of 35%, and would likely pay state income tax at varyingrates.  Distributions to BGH from Buckeyewould generally be taxed again as corporate distributions, and no income,gains, losses, deductions or credits would flow through to BGH.  Further, distributions to you would generallybe taxed again as corporate distributions as well, and no income, gains, lossesor deductions would flow through to you. Because a tax would be imposed upon BGH as a corporation, our cashavailable for distribution to you would be substantially reduced.  Therefore, treatment of either BGH or Buckeyeas a corporation would result in a material reduction in the anticipated cashflow and after-tax return to our holders of Common Units, likely causing asubstantial reduction in the value of our Common Units.

 

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Current law may changeso as to cause BGH or Buckeye to be treated as a corporation for federal incometax purposes or otherwise subject BGH or Buckeye to entity-level taxation.  At the federal level, legislation has been proposedthat would eliminate partnership tax treatment for certain publicly tradedpartnerships.  Although such legislationwould not apply to BGH or Buckeye as currently proposed, it could be amended priorto enactment in a manner that does apply to BGH or Buckeye.  BGH is unable to predict whether any of thesechanges or other proposals will ultimately be enacted.   Moreover, any modification to the federalincome tax laws and interpretations thereof may or may not be appliedretroactively.  Any such changes couldnegatively impact the value of an investment in our Common Units.  At the state level, because of widespreadstate budget deficits and other reasons, several states are evaluating ways tosubject partnerships to entity-level taxation through the imposition of stateincome, franchise and other forms of taxation. For example, Buckeye is required to pay Texas franchise tax at a maximumeffective rate of 0.7% of Buckeye’s gross income apportioned to Texas in theprior year.  Imposition of such a tax onBGH or Buckeye by any other state will reduce the cash available fordistribution to you.

 

Our partnershipagreement provides that if a law is enacted or existing law is modified orinterpreted in a manner that subjects us to taxation as a corporation orotherwise subjects us to entity-level taxation for federal, state or localincome tax purposes, the minimum quarterly distribution amount and the targetdistribution amounts may be adjusted to reflect the impact of that law on us.

 

*If the IRS contests the federalincome tax positions that BGH or Buckeye take, the market for our Common Unitsmay be adversely impacted and thecost of any IRS contest will reduce our cash available for distribution to you.*

 

BGH has not requested aruling from the IRS with respect to BGH’s treatment as a partnership forfederal income tax purposes or certain other matters that affect BGH.  Moreover, Buckeye has not requested anyruling from the IRS with respect to its treatment as a partnership for federalincome tax purposes or any other matter that affects Buckeye.  It may be necessary to resort toadministrative or court proceedings to sustain some or all of the positionstaken by BGH or Buckeye.  A court may notagree with some or all of the positions BGH or Buckeye take.  Any contest with the IRS may materially andadversely impact the market for BGH’s Common Units and Buckeye’s limitedpartnership units and the prices at which they trade.  In addition, the cost of any contest betweenBuckeye and the IRS will result in a reduction in cash available fordistribution to BGH and the costs of any contest between BGH and the IRS willbe borne indirectly by BGH’s unitholders and its general partner because thecosts will reduce BGH’s cash available for distribution.

 

*You will be required to pay taxeson your share of BGH’s income even if you do not receive any cash distributionsfrom BGH.*

 

Because BGH’sunitholders will be treated as partners to whom BGH will allocate taxableincome which could be different in amount than the cash BGH distributes, youwill be required to pay any federal income taxes and, in some cases, state andlocal income taxes on your share of BGH’s taxable income even if you receive nocash distributions from BGH.  You may notreceive cash distributions from BGH equal to your share of BGH’s taxable incomeor even equal to the actual tax liability that results from that income.

 

*Tax gain or loss on thedisposition of our Common Units could be more or less than expected.*

 

If you sell your Common Units, you will recognize again or loss equal to the difference between the amount realized and your taxbasis in those Common Units.  Becausedistributions in excess of your allocable share of BGH’s net taxable incomedecrease your tax basis in your Common Units, the amount, if any, of such priorexcess distributions with respect to the Common Units you sell will, in effect,become taxable income to you if you sell such Common Units at a price greaterthan your tax basis in those Common Units, even if the price you receive isless than your original cost. Furthermore, a substantial portion of the amount realized, whether ornot representing gain, may be taxed as ordinary income due to potentialrecapture items, including depletion and depreciation recapture.  In addition, because the amount realizedincludes a unitholder’s share of BGH’s nonrecourse liabilities, if you sellyour Common Units, you may incur a tax liability in excess of the amount ofcash you receive from the sale.

 

*Tax-exempt entities and non-U.S.persons face unique tax issues from owning Common Units that may result inadverse tax consequences to them.*

 

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Investment in CommonUnits by tax-exempt entities, such as employee benefit plans and individualretirement accounts (known as IRAs), and non-U.S. persons raises issues uniqueto them.  For example, virtually all ofBGH’s income allocated to organizations that are exempt from federal incometax, including IRAs and other retirement plans, will be unrelated businesstaxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxesat the highest applicable effective tax rate, and non-U.S. persons will berequired to file United States federal tax returns and pay tax on their shareof our taxable income.  If you are a taxexempt entity or a non-U.S. person, you should consult your tax advisor beforeinvesting in Common Units.

 

*BGH will treat each purchaser ofCommon Units as having the same tax benefits without regard to the actualCommon Units purchased.  The IRS maychallenge this treatment, which could adversely affect the value of the CommonUnits.*

 

Because BGH cannot matchtransferors and transferees of Common Units and because of other reasons, BGHhas adopted depreciation and amortization positions that may not conform to allaspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect theamount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount ofgain from your sale of Common Units and could have a negative impact on thevalue of Common Units or result in audit adjustments to your tax returns.

 

*BGH prorates items of income,gain, loss and deduction between transferors and transferees of Common Unitseach month based upon the ownership of Common Units on the first day of eachmonth, instead of on the basis of the date a particular Common Unit istransferred. The IRS may challenge this treatment, which could change theallocation of items of income, gain, loss and deduction among BGH unitholders.*

 

BGH prorates items ofincome, gain, loss and deduction between transferors and transferees of CommonUnits each month based upon the ownership of Common Units on the first day ofeach month, instead of on the basis of the date a particular Common Unit istransferred. The use of this proration method may not be permitted underexisting Treasury Regulations. If the IRS were to challenge this method or newTreasury Regulations were issued, BGH may be required to change the allocationof items of income, gain, loss and deduction among BGH’s unitholders.

 

*A unitholder whose Common Unitsare loaned to a “short seller” to cover a short sale of Common Units may beconsidered as having disposed of those Common Units. If so, the unitholderwould no longer be treated for tax purposes as a partner with respect to thoseCommon Units during the period of the loan and may recognize gain or loss fromthe disposition.*

 

Because a unitholderwhose Common Units are loaned to a “short seller” to cover a short sale ofCommon Units may be considered as having disposed of the loaned Common Units,the unitholder may no longer be treated for tax purposes as a partner withrespect to those Common Units during the period of the loan to the short sellerand the unitholder may recognize gain or loss from such disposition.  Moreover, during the period of the loan tothe short seller, any of BGH’s income, gain, loss or deduction with respect tothose Common Units may not be reportable by the unitholder and any cashdistributions received by the unitholder as to those Common Units could befully taxable as ordinary income. Unitholders desiring to assure their statusas partners and avoid the risk of gain recognition from a loan to a shortseller are urged to modify any applicable brokerage account agreements toprohibit their brokers from borrowing their Common Units.

 

*BGH will adopt certain valuationmethodologies that may result in a shift of income, gain, loss and deductionbetween the general partner and the unitholders.  The IRS may challenge this treatment, whichcould adversely affect the value of Common Units.*

 

When BGH issuesadditional Common Units or engages in certain other transactions, BGH willdetermine the fair market value of its assets and allocate any unrealized gainor loss attributable to BGH’s assets to the capital accounts of its unitholdersand its general partner.  BGH’smethodology may be viewed as understating the value of BGH’s assets.  In that case, there may be a shift of income,gain, loss and deduction between certain unitholders and the general partner,which may be unfavorable to such unitholders. Moreover, under BGH’s valuation methods, subsequent purchasers of CommonUnits may have a greater portion of their Internal Revenue Code Section 743(b) adjustmentallocated to BGH’s tangible assets and a lesser portion allocated to BGH’sintangible assets.  The IRS may challengeBGH’s valuation methods, or BGH’s allocation of the Section 743(b) adjustmentattributable to BGH’s tangible and intangible assets, and 

 

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allocationsof income, gain, loss and deduction between the general partner and certain ofour unitholders.  A successful IRSchallenge to these methods or allocations could adversely affect the amount oftaxable income or loss being allocated to BGH’s unitholders.  It also could affect the amount of gain fromBGH’s unitholders’ sale of Common Units and could have a negative impact on thevalue of the Common Units or result in audit adjustments to BGH’s unitholders’tax returns without the benefit of additional deductions.

 

*The sale or exchange of 50% ormore of BGH’s capital and profits interests during any twelve-month period willresult in the termination of BGH’s partnership for federal income tax purposes.*

 

BGH will be consideredto have terminated as a partnership for federal income tax purposes if there isa sale or exchange of 50% or more of the total interests in BGH’s capital andprofits within a twelve-month period.  Atermination would, among other things, result in the closing of BGH’s taxableyear for all unitholders, which would result in BGH filing two tax returns (andeach unitholder could receive two Schedules K-1 from BGH) for one fiscal yearand could result in a significant deferral of depreciation deductions allowablein computing BGH’s taxable income for the year in which the terminationoccurs.  In the case of a unitholderreporting on a taxable year other than a fiscal year ending December 31,the closing of BGH’s taxable year may also result in more than twelve months ofBGH’s taxable income or loss being includable in the unitholder’s taxableincome for the year of termination.  Atermination currently would not affect BGH’s classification as a partnershipfor federal income tax purposes, but instead, BGH would be treated as a newpartnership for tax purposes.  If treatedas a new partnership, BGH must make new tax elections and could be subject topenalties if BGH is unable to determine that a termination occurred.

 

*As a result of investing inCommon Units, you may become subject to state and local taxes and return filingrequirements in jurisdictions where Buckeye operates or owns or acquiresproperty.*

 

In addition to federalincome taxes, you will likely be subject to other taxes, including foreign,state and local taxes, unincorporated business taxes and estate, inheritance orintangible taxes that are imposed by the various jurisdictions in which Buckeyeconducts business or owns property now or in the future, even if you do notlive in any of those jurisdictions.  Youwill likely be required to file foreign, state and local income tax returns andpay state and local income taxes in some or all of these various jurisdictions.  Further, you may be subject to penalties forfailure to comply with those requirements. Buckeye owns property and conducts business in a number of states in theUnited States.  Most of these statesimpose an income tax on individuals, corporations and other entities. As Buckeyemakes acquisitions or expands its business, Buckeye may own assets or conductbusiness in additional states that impose a personal income tax.  It is your responsibility to file all UnitedStates federal, foreign, state and local tax returns.

 

Item 6. Exhibits

 

(a) Exhibits

 
| 10.1   |   | Amended  and Restated Agreement of Limited Partnership of Buckeye Partners, L.P.,  dated as of April 14, 2008, effective as of January 1, 2007  (incorporated by reference to Exhibit 3.1 to Buckeye Partners, L.P.’s  Current Report on Form 8-K filed on April 15, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Eighth  Amendment, dated April 15, 2008, by and among Farm & Home Oil  Company LLC, Univest National Bank and Trust Co., Wachovia Bank, National  Association, Fulton Bank and Citizens Bank of Pennsylvania to the Amended and  Restated Loan and Security Agreement, dated as of December 16, 2004,  among Farm & Home Oil Company, Univest National Bank and Trust Co.,  Wachovia Bank, National Association, and the Lenders named therein, as  amended by the First Amendment, dated January 10, 2005, the Second  Amendment, dated July 13, 2005, the Third Amendment, dated  August 19, 2005, the Fourth Amendment, dated December 7, 2005, the  Fifth Amendment, dated December 22, 2006, the Sixth Amendment, dated  November 20, 2007 and the Seventh Amendment, dated February 8, 2008  (incorporated by reference to Exhibit 10.1 to Buckeye Partners, L.P.’s  Quarterly Report on Form 10-Q for the quarter ended June 30, 2008). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Credit  Agreement, dated as of May 20, 2008, by and among Farm & Home  Oil Company LLC, Buckeye Energy Services LLC, BNP Paribas and other lenders  party thereto (incorporated by reference to Exhibit 10.1 to Buckeye  Partners, L.P.’s Current Report on Form 8-K filed on May 23, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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| 31.1   |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934.        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                              |
| 31.2   |   | Certification  of Acting Chief Financial Officer pursuant to Rule 13a-14(a) under  the Securities Exchange Act of 1934. |
|   |   |                                                                                                                              |
| 32.1   |   | Certification  of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350.                                               |
|   |   |                                                                                                                              |
| 32.2   |   | Certification  of Acting Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350.                                        |

 

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SIGNATURE

 

 

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

 

 
|                       | BUCKEYE  GP HOLDINGS L.P. |                            |
|----------------------------|---------------------------|---------------------------------|
|                       | (Registrant)              |                            |
|                       |                      |
|                       | By:                       | MainLine  Management LLC        |
|                       |                      | as General  Partner             |
|                       |                      |                            |
|                       |                      |                            |
| Date:  August 6, 2008 | By:                       | /s/ VANCE E.  POWERS            |
|                       |                      |                            |
|                       |                      | Vance  E. Powers                |
|                       |                      | Acting  Chief Financial Officer |
|                            |                           |                                 |  |

 

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