**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 March 31, 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,  PA**                    |   | **18031**            |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

Registrant’s telephonenumber, 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 check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-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 May 5, 2008, there were 27,769,647 Common Units and 530,353Management Units outstanding.

 

 

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BUCKEYE GPHOLDINGS L.P.

INDEX

 
|                                    | **Page**                                                                                                    |
|------------------------------------|-------------------------------------------------------------------------------------------------------------|
| PART I- FINANCIAL INFORMATION |                                                                                                        |   |
|                               |                                                                                                        |
| Item  1.                           | Condensed Consolidated  Financial Statements (Unaudited)                                                    |   |
|                               |                                                                                                        |   |
|                               | Condensed  Consolidated Statements of Income for the three months ended March 31,  2008 and 2007       | 1 |
|                               |                                                                                                        |   |
|                               | Condensed  Consolidated Balance Sheets as of March 31, 2008 and December 31,  2007                | 2 |
|                               |                                                                                                        |   |
|                               | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2008 and 2007   | 3 |
|                               |                                                                                                        |   |
|                               | Condensed  Consolidated Statement of Partners’ Capital for the three months ended  March 31, 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                                                 | 37 |
|                               |                                                                                                        |   |
| Item 4.                            | Controls and  Procedures                                                                                    | 39 |
|                               |                                                                                                        |   |
| PART II-  OTHER INFORMATION   |                                                                                                        |
|                               |                                                                                                        |
| Item 1.                            | Legal Proceedings                                                                                           | 41 |
|                               |                                                                                                        |   |
| Item  6.                           | Exhibits                                                                                                    | 41 |
|                                    |                                                                                                             |  |  |

 

----

 

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** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                        | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Revenues:**                                                     |       |                             |       |   |   |
| Product sales                                                     |       | $                                | 241,046    |   | $ | 4,915 |   |
| Transportation  and other                                         |       | 139,229                          |       | 120,029 |   |
| Total revenue                                                     |       | 380,275                          |       | 124,944 |   |
|                                                              |       |                             |       |   |   |
| **Costs  and expenses:**                                          |       |                             |       |   |   |
| Cost of product  sales                                            |       | 236,611                          |       | 4,844 |   |
| Operating expenses                                                |       | 66,291                           |       | 55,455 |   |
| Depreciation and  amortization                                    |       | 11,383                           |       | 9,707 |   |
| General and  administrative                                       |       | 9,896                            |       | 6,304 |   |
| Total costs and  expenses                                         |       | 324,181                          |       | 76,310 |   |
|                                                              |       |                             |       |   |   |
| Operating income                                                  |       | 56,094                           |       | 48,634 |   |
|                                                              |       |                             |       |   |   |
| **Other  income (expense):**                                      |       |                             |       |   |   |
| Investment  income                                                |       | 614                              |       | 300 |   |
| Interest and  debt expense                                        |       | (18,178                          | )          | (13,876 | ) |
|                                                              |       |                             |       |   |   |
| Total other  (expense)                                            |       | (17,564                          | )          | (13,576 | ) |
|                                                              |       |                             |       |   |   |
| Income before  equity income and non-controlling interest expense |       | 38,530                           |       | 35,058 |   |
|                                                              |       |                             |       |   |   |
| Equity income                                                     |       | 2,055                            |       | 1,786 |   |
| Non-controlling  interest expense                                 |       | (34,736                          | )          | (30,905 | ) |
|                                                              |       |                             |       |   |   |
| Net income                                                        |       | $                                | 5,849      |   | $ | 5,939 |   |
|                                                              |       |                             |       |   |   |
| **Net  income per partnership unit:**                             |       |                             |       |   |   |
| Basic                                                             |       | $                                | 0.21       |   | $ | 0.21 |   |
| Diluted                                                           |       | $                                | 0.21       |   | $ | 0.21 |   |
|                                                              |       |                             |       |   |   |
| **Weighted  average number of units outstanding:**                |       |                             |       |   |   |
| Basic                                                             |       | 28,300                           |       | 27,891 |   |
| Diluted                                                           |       | 28,300                           |       | 28,300 |   |

 

See Notes tocondensed consolidated financial statements.

 

1

----

 

** Buckeye GPHoldings L.P.**

**Condensed Consolidated BalanceSheets**

**(In thousands)**

**(Unaudited)**

 
| ** **                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **Assets:**                                       |       |               |       |                  |       |
| Current assets:                                   |       |               |       |                  |       |
| Cash and cash  equivalents                        |       | $                  | 30,698     |                  | $          | 94,486 |   |
| Trade  receivables                                |       | 114,880            |       | 47,598                |       |
| Construction and  pipeline relocation receivables |       | 9,755              |       | 12,571                |       |
| Inventories                                       |       | 102,664            |       | 15,149                |       |
| Prepaid and  other current assets                 |       | 45,087             |       | 32,708                |       |
| Assets held for  sale                             |       | 51,572             |       | —                |       |
| Total current  assets                             |       | 354,656            |       | 202,512               |       |
|                                              |       |               |       |                  |       |
| Property, plant  and equipment, net               |       | 2,136,588          |       | 1,806,720             |       |
|                                              |       |               |       |                  |       |
| Goodwill                                          |       | 451,135            |       | 234,603               |       |
| Other  non-current assets                         |       | 112,438            |       | 110,491               |       |
| Total assets                                      |       | $                  | 3,054,817  |                  | $          | 2,354,326 |   |
|                                              |       |               |       |                  |       |
| **Liabilities  and partners’ capital:**      |       |               |       |                  |       |
| Current  liabilities:                             |       |               |       |                  |       |
| Line of credit                                    |       | $                  | 96,772     |                  | $          | — |   |
| Current portion  of long-term debt                |       | 6,381              |       | 6,289                 |       |
| Accounts payable                                  |       | 52,862             |       | 20,368                |       |
| Accrued and  other current liabilities            |       | 99,507             |       | 78,902                |       |
| Liabilities of  assets held for sale              |       | 648                |       | —                |       |
| Total current  liabilities                        |       | 256,170            |       | 105,559               |       |
|                                              |       |               |       |                  |       |
| Long-term debt                                    |       | 1,299,682          |       | 863,174               |       |
| Other  non-current liabilities                    |       | 84,070             |       | 81,120                |       |
| Non-controlling  interest                         |       | 1,178,217          |       | 1,066,143             |       |
| Total  liabilities                                |       | 2,818,139          |       | 2,115,996             |       |
|                                              |       |               |       |                  |       |
| Commitments and  contingent liabilities           |       | —             |       | —                |       |
|                                              |       |               |       |                  |       |
| **Partners’  capital:**                      |       |               |       |                  |       |
| General Partner-  Common Units                    |       | 7                  |       | 7                     |       |
| Limited  Partners- Common Units                   |       | 231,099            |       | 232,928               |       |
| Management Units                                  |       | 3,121              |       | 3,156                 |       |
| Equity gains on  issuance of                      |       |               |       |                  |       |
| Buckeye  Partners, L.P. limited partnership units |       | 2,451              |       | 2,239                 |       |
| Total partners’  capital                     |       | 236,678            |       | 238,330               |       |
| Total  liabilities and partners’ capital     |       | $                  | 3,054,817  |                  | $          | 2,354,326 |   |

 

See Notes tocondensed consolidated financial statements.

 

2

----

 

**Buckeye GP Holdings L.P.**

**Condensed Consolidated Statementsof Cash Flows**

**(In thousands)**

**(Unaudited)**

** **
| ** **                                                                         | ** ** | **Threee Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**                | ** ** |
| ** **                                                                         | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                         | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                 | 5,849      |   | $ | 5,939 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                              |       |   |   |
| Non-cash expense  for unit-based compensation                                      |       | 353                               |       | 127 |   |
| Value of ESOP  shares released                                                     |       | 817                               |       | 1,148 |   |
| Depreciation and  amortization                                                     |       | 11,383                            |       | 9,707 |   |
| Non-controlling  interest                                                          |       | 34,736                            |       | 30,905 |   |
| Equity earnings  from equity investments of Buckeye Partners, L.P.                 |       | (2,055                            | )          | (1,786 | ) |
| Distributions  from equity investments of Buckeye Partners, L.P.                   |       | 500                               |       | 1,276 |   |
| Amortization of  debt discount                                                     |       | 245                               |       | 12 |   |
| Amortization of  option grants                                                     |       | 81                                |       | 134 |   |
| Change in assets  and liabilities, net of amounts related to acquisitions:         |       |                              |       |   |   |
| Trade  receivables                                                                 |       | 58                                |       | 10,478 |   |
| Construction and  pipeline relocation receivables                                  |       | 2,816                             |       | 3,130 |   |
| Inventories                                                                        |       | 5,041                             |       | (214 | ) |
| Prepaid and  other current assets                                                  |       | (5,104                            | )          | 816 |   |
| Accounts payable                                                                   |       | 1,397                             |       | (11,126 | ) |
| Accrued and other  current liabilities                                             |       | 1,619                             |       | (2,827 | ) |
| Other  non-current assets                                                          |       | 2,774                             |       | 157 |   |
| Other  non-current liabilities                                                     |       | (427                              | )          | 297 |   |
| Total  adjustments from operating activities                                       |       | 54,234                            |       | 42,234 |   |
| Net cash  provided by operations                                                   |       | 60,083                            |       | 48,173 |   |
|                                                                               |       |                              |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                              |       |   |   |
| Capital  expenditures                                                              |       | (14,792                           | )          | (17,373 | ) |
| Acquisitions and  equity investments                                               |       | (600,309                          | )          | (38,468 | ) |
| Net expenditures  for disposal of property, plant and equipment                    |       | (33                               | )          | (72 | ) |
| Net cash used in  investing activities                                             |       | (615,134                          | )          | (55,913 | ) |
|                                                                               |       |                              |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                              |       |   |   |
| Debt issuance  costs                                                               |       | (351                              | )          | — |   |
| Net proceeds  from issuance of Buckeye Partners, L.P. limited partnership units    |       | 113,259                           |       | 82,404 |   |
| Proceeds from  exercise of Buckeye Partners, L.P. unit options                     |       | —                            |       | 1,016 |   |
| Distributions to  non-controlling partners of Buckeye Partners, L.P.               |       | (37,267                           | )          | (29,778 | ) |
| Repayment of  short-term debt                                                      |       | (3,229                            | )          | — |   |
| Proceeds from  issuance of long-term debt                                          |       | 576,050                           |       | 70,600 |   |
| Repayment of  long-term debt                                                       |       | (139,495                          | )          | (107,121 | ) |
| Settlement of  hedge                                                               |       | (9,638                            | )          | — |   |
| Distributions to  Limited Partners                                                 |       | (8,066                            | )          | (6,368 | ) |
| Net cash  provided by financing activities                                         |       | 491,263                           |       | 10,753 |   |
|                                                                               |       |                              |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                              |       | (63,788                           | )          | 3,013 |   |
| Cash and cash  equivalents —Beginning of year                                 |       | 94,486                            |       | 20,220 |   |
| Cash and cash  equivalents—End of period                                      |       | $                                 | 30,698     |   | $ | 23,233 |   |
|                                                                               |       |                              |       |   |   |
| ***Supplemental  cash flow information:***                                         |       |                              |       |   |   |
| Cash paid during  the period for interest (net of amount capitalized)              |       | $                                 | 17,770     |   | $ | 17,470 |   |
| Capitalized  interest                                                              |       | $                                 | 336        |   | $ | 415 |   |
| Cash paid during  the period for income tax                                        |       | $                                 | 180        |   | $ | 332 |   |
|                                                                               |       |                              |       |   |   |
| ***Non-cash  changes in assets and liabilities:***                                 |       |                              |       |   |   |
| Equity gains on  issuance of Buckeye Partners, L.P. units                          |       | $                                 | 212        |   | $ | 235 |   |
| Hedge accounting                                                                   |       | $                                 | 1,043      |   | $ | (59 | ) |

 

See Notes tocondensed consolidated financial statements.

 

3

----

 

**Buckeye GP Holdings L.P.**

**Condensed Consolidated Statementof Partners’ Capital**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Equity**           | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|--------------|------------|----------------|------------|----------------------|------------|------------|------------|
| ** **                                                | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Gains on**    | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **General** | ** ** | **Limited**  | ** ** | ** **     | ** ** | **Issuance of** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Partner** | ** ** | **Partners** | ** ** | ** **     | ** ** | **Buckeye**          | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Common**  | ** ** | **Common**   | ** ** | **Management** | ** ** | **Partners, L.P.**   | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Units**   | ** ** | **Units**    | ** ** | **Units**      | ** ** | **Units**            | ** ** | **Total**  | ** ** |
| **Partners’  capital- January 1, 2008**         |       | $           | 7          |         | $          | 232,928        |       | $                    | 3,156      |       | $          | 2,239 |   | $ | 238,330 |   |
| Net income*                                               |       | —      |       | 5,739        |       | 110            |       | —               |       | 5,849      |       |
| Distributions to  Limited Partner - Common Units          |       | —      |       | (7,915       | )          | (151           | )          | —               |       | (8,066     | )          |
| Recognition of  unit-based compensation charges           |       | —      |       | 347          |       | 6              |       | —               |       | 353        |       |
| Equity gains on  issuance of Buckeye Partners, L.P. units |       | —      |       | —       |       | —         |       | 212                  |       | 212        |       |
|                                                      |       |        |       |         |       |           |       |                 |       |       |       |
| **Partners’  capital- March 31, 2008**          |       | $           | 7          |         | $          | 231,099        |       | $                    | 3,121      |       | $          | 2,451 |   | $ | 236,678 |   |

 

----

* Comprehensiveincome equals net income.

 

See Notes tocondensed consolidated financial statements.

 

4

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**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.               BASIS OF PRESENTATION

 

Buckeye GPHoldings L.P. (“BGH”) is a publicly traded (NYSE: BGH) master limitedpartnership organized on June 15, 2006 under the laws of the state ofDelaware.  BGH owns 100% of Buckeye GPLLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”).  Buckeye is also a publicly traded (NYSE: BPL)master limited partnership 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”), and certainmembers of senior management.  MainLineManagement LLC, a Delaware limited liability company (“MainLine Management”),is the general partner of BGH, and is wholly owned by BGH GP.  BGH’s only business is the ownership ofBuckeye GP.  Buckeye GP’s only businessis the management of Buckeye and its subsidiaries.  At March 31, 2008, Buckeye GP owned anapproximate 0.5% general partner interest in Buckeye.

 

Buckeye owns andoperates one of the largest independent refined petroleum products pipelinesystems in the United States in terms of volumes delivered, with approximately5,400 miles of pipeline serving 16 states, and operates an approximate 2,700miles of pipeline under agreements with major oil and chemical companies.Buckeye also owns over 60 refined petroleum products terminals with aggregatestorage capacity of approximately 22.6 million barrels in 12 states. Throughits acquisitions of Lodi Gas Storage, L.L.C. (“Lodi Gas”) and Farm &Home Oil Company LLC (“Farm & Home”) in the first quarter of 2008,Buckeye added a major natural gas storage facility and a refined petroleumproducts marketing operation to its business.

 

Lodi Gas owns and operates two natural gas storage facilities near Lodi,California.  Together, these facilitiesprovide approximately 22 billion cubic feet (“bcf”) of working gas capacity andare connected to Pacific Gas and Electric’s intrastate gas pipelines thatservice natural gas demand in the San Francisco and Sacramento areas (see Note3 for a further discussion).  A substantial portion of Lodi Gas’ isrevenues are generated by fee-based storage contracts.

 

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 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 & Home acquisitiondate of February 8, 2008 (see Note 3 for a further discussion).

 

The majority ofthe employees 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 Buckeye GP.  Buckeye is generally responsible for allother employee costs.  Services Companyis owned by an employee stock ownership plan (the “ESOP”). Services Companyowned approximately 4.5% of the publicly traded limited partner units ofBuckeye (the “LP Units”) at March 31, 2008.

 

With theacquisitions of Lodi Gas and Farm & Home, BGH has two additionalreportable segments: Natural Gas Storage and Energy Services.  Effective in the first quarter of 2008, BGHcurrently conducts its business in five reportable operating segments: PipelineOperations; Terminalling and Storage; Natural Gas Storage; Energy Services; andOther Operations.  See Note 14 for a moredetailed discussion of BGH’s operating segments.

 

5

----

 

In June 2005, the Emerging Issues Task Force (the“EITF”) of the Financial Accounting Standards Board (“FASB”) issued EITFConsensus 04-05 which requires general partners of a limited partnership toconsolidate the limited partnership if the general partner is deemed to controlthe limited partnership. Using criteria established in EITF Consensus 04-05,BGH has determined that consolidation of Buckeye into BGH’s financialstatements is appropriate.

 

BGH has determined that Services Company is a variableinterest entity under the provisions of FASB Interpretation No. 46R —Consolidation of Variable Interest Entities (“FIN No. 46R”). Usingcriteria established in FIN No. 46R, BGH has determined that Buckeye GP isthe primary beneficiary of Services Company, although 100% of the equityinterest of Services Company is owned by the ESOP. Accordingly, as required byFIN No. 46R, Services Company has been consolidated in the financialstatements of BGH.

 

BGH’scondensed consolidated balance sheet includes a non-controlling interest liabilitythat reflects the portion of Buckeye owned by its partners other than BGH andServices Company.  Similarly, BGH’scondensed consolidated income statements include non-controlling interestexpense that reflects the portion of the earnings due to Buckeye’s partnersother than BGH and 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 March 31, 2008,along with the results of operations for the three months ended March 31,2008 and 2007 and cash flows for the three months ended March 31, 2008 and2007.  The results of operations for thethree months ended March 31, 2008 are not necessarily indicative of theresults to be expected for the full year ending December 31, 2008.

 

Certainprior year amounts for product sales and the cost of product sales have beenreclassified in the income statement to conform to the current-yearpresentation.

 

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*

 

Buckeyeand its subsidiaries in the ordinary course of business are involved in variousclaims and legal proceedings, some of which are covered by insurance. Buckeyeis generally 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.

 

6

----

 

*EnvironmentalContingencies*

 

Inaccordance with its accounting policy, Buckeye recorded operating expenses of$2.0 million and $2.2 million for the three months ended March 31, 2008and 2007, respectively, related to environmental contingencies unrelated toclaims and proceedings.

 

3.               BUSINESSCOMBINATIONS AND DISCONTINUED OPERATIONS

 

*Lodi Gas*

 

On January 18, 2008, Buckeye acquired all ofthe member interests in Lodi Gas from Lodi Holdings, L.L.C. The cost of LodiGas was approximately $447.1 million in cash and consisted of the following (inthousands):

 
| Contractual  purchase price             |   | $      | 440,000 |   |
|-----------------------------------------|--------|--------|---------|--------|
| Preliminary  working capital adjustment |   | 4,262  |    |
| Transaction fees                        |   | 2,794  |    |
|                                    |   |   |    |
| Total cash  purchase price              |   | $      | 447,056 |   |

 

Of the contractual purchase price, $428.0 millionwas paid at closing and an additional $12.0 million was paid on March 6,2008 upon receipt of approval from the California Public Utilities Commissionfor an expansion project known as Kirby Hills Phase II.  Buckeye acquired Lodi Gas because Buckeye’smanagement believes Lodi Gas represents an attractive opportunity to expand anddiversify Buckeye’s operations into a new geographic area, as well ascommodity, and will be able to provide Buckeye a platform for growth in thenatural gas storage industry.

 

Buckeye has determined that the acquisitionrepresented a business combination under the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 141 (“SFAS No. 141”).   The application of SFAS No. 141requires that the total purchase price be allocated to the fair value of theassets acquired and the liabilities assumed based on their fair values at theacquisition date, with amounts exceeding the fair values being recorded asgoodwill. The purchase price of approximately $447.1 million has beenallocated, on a preliminary basis, to the tangible and intangible assetsacquired, including goodwill, as follows (in thousands):

 
| ** **                     | ** ** | **January 18,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2008**             | ** ** |
| Cash                           |       | $                    | 2,516      |   |
| Other current  assets          |       | 2,326                |       |
| Property, plant  and equipment |       | 282,709              |       |
| Goodwill                       |       | 170,754              |       |
| Current  liabilities           |       | (9,426               | )          |
| Other  liabilities             |       | (1,823               | )          |
|                           |       |                 |       |
| Allocated  purchase price      |       | $                    | 447,056    |   |

 

Buckeye is in the process of finalizing the purchaseprice allocation based on the valuations of plant, property and equipment andgoodwill.  The final purchase priceallocation will likely 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*

 

On February 8, 2008, Buckeye acquired all ofthe member interests of Farm & Home for $145.5 million in cash.  Buckeye acquired Farm & Home becauseBuckeye’s management believes that the wholesale distribution operations ofFarm & Home represent an attractive opportunity to further Buckeye’sstrategy of improving overall profitability by 

 

7

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increasingthe utilization of Buckeye’s existing pipeline and terminal systeminfrastructure.  Buckeye has determinedthat the acquisition represented a business combination under the provisions ofSFAS No. 141.  The application ofSFAS No. 141 requires that the total purchase price be allocated to thefair value of the assets acquired and the liabilities assumed based on theirfair values at the acquisition date, with amounts exceeding the fair valuesbeing recorded as goodwill.  The purchaseprice has been allocated, on a preliminary basis, to the tangible andintangible assets acquired, including goodwill, as follows (in thousands):

 
| ** **                        | ** ** | **February 8,** | ** ** |
|-----------------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2008**             | ** ** |
| Cash                              |       | $                    | 2,816      |   |
| Trade  receivables                |       | 75,025               |       |
| Inventory                         |       | 94,113               |       |
| Prepaid and  other current assets |       | 6,214                |       |
| Property, plant  and equipment    |       | 50,770               |       |
| Goodwill                          |       | 64,378               |       |
| Other  non-current assets         |       | 3,297                |       |
| Debt                              |       | (100,000             | )          |
| Accounts payable                  |       | (31,097              | )          |
| Accrued expenses                  |       | (19,711              | )          |
|                              |       |                 |       |
| Allocated  purchase price         |       | $                    | 145,805    |   |

 

Buckeye is in the process of finalizing the purchaseprice allocation and will likely adjust the preliminary amounts shownabove.  Such changes may bematerial.  The final allocation mayinclude amounts related to identifiable intangible assets such as trade names,customer relationships and covenants not-to-compete.  As discussed above, the operations of theFarm & Home assets and liabilities that were retained by Buckeye arereported in a new operating segment called Energy Services.

 

On March 4, 2008, Buckeye entered into anagreement to sell the retail operations of Farm & Home to a whollyowned subsidiary of Inergy, L.P. for $42.0 million plus a customary workingcapital adjustment that is expected to be approximately $9.0 million.  The retail operations were not an integralpart of Buckeye’s core operations and financial results.  Buckeye completed the sale of the retailoperations on April 15, 2008. Effective on February 8, 2008, inconnection with Buckeye’s decision to sell Farm & Home’s retailoperations, the assets and related liabilities of the retail operations of Farm &Home were determined to be discontinued operations. The preliminary fair valuesof these assets and liabilities are as follows (in thousands):

 
| ** **                            | ** ** | **March 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **2008**           | ** ** |
| Assets held for  sale:                |       |               |       |
| Trade  receivables                    |       | $                  | 9,035      |   |
| Inventory                             |       | 2,978              |       |
| Prepaid and  other current assets     |       | 58                 |       |
| Property, plant  and equipment        |       | 20,901             |       |
| Goodwill                              |       | 18,600             |       |
| Total  discontinued assets            |       | $                  | 51,572     |   |
|                                  |       |               |       |
| Liabilities of  assets held for sale: |       |               |       |
| Obligations  under contracts          |       | $                  | (648       | ) |

 

Revenuesand net income from the retail operations for the period February 8 to March 31,2008 were $15.6 million and $1.4 million, respectively.

 

8

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Dueto the immaterial effect that Buckeye’s discontinued operations had withrespect to BGH’s results of operations, the results from Buckeye’s discontinuedoperations were recorded in non-controlling interest expense in BGH’s condensedconsolidated statement of income for the period ending March 31, 2008.

 

The following unaudited summarized pro forma consolidated incomestatement information for the quarters ended March 31, 2008 and 2007assumes that the acquisitions of Lodi Gas and Farm & Home had occurredas of the beginning of the period presented. 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 period presented or the results thatwill be attained in the future. (in thousands, except per unit amounts)

 
| ** **                                                  | ** ** | **(Unaudited)**    | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **March 31,** | ** ** |
| ** **                                                  | ** ** | **2008**           | ** ** | **2007** | ** ** |
| **Revenues:**                                               |       |               |       |   |   |
| As reported                                                 |       | $                  | 380,275    |   | $ | 124,944 |   |
| Pro forma  adjustments                                      |       | 174,723            |       | 317,126 |   |
|                                                        |       |               |       |   |   |
| Pro forma  revenue                                          |       | $                  | 554,998    |   | $ | 442,070 |   |
|                                                        |       |               |       |   |   |
| **Net  income:**                                            |       |               |       |   |   |
| As reported                                                 |       | $                  | 5,849      |   | $ | 5,939 |   |
| Pro forma  adjustments                                      |       | (874               | )          | 868 |   |
|                                                        |       |               |       |   |   |
| Pro forma net  income                                       |       | $                  | 4,975      |   | $ | 6,807 |   |
|                                                        |       |               |       |   |   |
| **Pro  forma net income per unit:**                         |       |               |       |   |   |
| Basic                                                       |       | $                  | 0.18       |   | $ | 0.24 |   |
| Diluted                                                     |       | $                  | 0.18       |   | $ | 0.24 |   |
|                                                        |       |               |       |   |   |
| **Pro  forma weighted average number of units oustanding:** |       |               |       |   |   |
| Basic                                                       |       | 28,300             |       | 27,891 |   |
| Diluted                                                     |       | 28,300             |       | 28,300 |   |

 

*Asset acquisition*

 

On February 19, 2008, Buckeye acquired arefined products terminal in Niles, Michigan and a 50% ownership interest in arefined products terminal in Ferrysburg, Michigan from an affiliate ofExxonMobil Corporation for approximately $13.9 million.  Buckeye determined that the acquisition ofthe Niles, Michigan terminal and the 50% interest in the Ferrysburg, Michiganterminal should be accounted for as acquisitions of assets rather than anacquisition of a business as defined in SFAS No. 141.  Accordingly, Buckeye has allocated, on apreliminary basis, the cost of each acquisition to the various tangible assetsacquired, principally property, plant and equipment as follows (in thousands):

 

9

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

 

Buckeye is in the process of finalizing the purchaseprice allocation and will likely adjust the preliminary amounts shown above andsuch changes may be material.

 

4.  PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consist of thefollowing:

* *
| ** **             | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid  insurance     |       | $                       | 5,016      |                  | $          | 7,456 |   |
| Insurance  receivables |       | 8,503                   |       | 7,707                 |       |
| Ammonia  receivable    |       | 11,055                  |       | 7,505                 |       |
| Derivative asset       |       | 3,614                   |       | —                |       |
| Other                  |       | 16,899                  |       | 10,040                |       |
| Total                  |       | $                       | 45,087     |                  | $          | 32,708 |   |

 

5.  ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other currentliabilities consist of the following:

 
| ** **                          | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Taxes - other  than income          |       | $                       | 15,735     |                  | $          | 8,026 |   |
| Accrued employee  benefit liability |       | 2,183                   |       | 2,183                 |       |
| Environmental  liabilities          |       | 8,671                   |       | 8,023                 |       |
| Interest                            |       | 16,850                  |       | 16,485                |       |
| Retainage                           |       | 1,805                   |       | 1,572                 |       |
| Payable for  ammonia purchase       |       | 11,259                  |       | 6,988                 |       |
| Compensation and  vacation          |       | 9,893                   |       | 11,939                |       |
| Hedge  liabilities                  |       | 557                     |       | 7,187                 |       |
| Unearned revenue                    |       | 4,943                   |       | 1,439                 |       |
| Other                               |       | 27,611                  |       | 15,060                |       |
| Total                               |       | $                       | 99,507     |                  | $          | 78,902 |   |

 

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6.DEBT AND CREDIT FACILITIES

 

Long-term debt consists of the following:

 
| ** **                                                        | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                                                        | ** ** | **(In thousands)** | ** ** |
| ***BGH:***                                                        |       |                    |       |                  |       |
| Revolving Line  of Credit                                         |       | $                       | —     |                  | $          | — |   |
| ***Services  Company:***                                          | ** ** | ** **              | ** ** | ** **            | ** ** |
| 3.60% ESOP Notes  due March 28, 2011                         |       | 19,236                  |       | 20,804                |       |
| Retirement  premium                                               |       | (445                    | )          | (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                       |       | 140,000                 |       | —                |       |
| Total                                                             |       | 1,308,791               |       | 870,286               |       |
| Other, including  unamortized discounts and fair value hedges (1) |       | (2,728                  | )          | (823                  | )          |
| Subtotal                                                          |       | 1,306,063               |       | 869,463               |       |
| Less: current  maturities                                         |       | (6,381                  | )          | (6,289                | )          |
| **Total  long-term debt**                                         |       | $                       | 1,299,682  |                  | $          | 863,174 |   |

 

----

(1) TheMarch 31, 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 ($3.9 million) and ($2.1 million), respectively,in unamortized discounts.

 

The fair value of debt wasestimated to be $1,401.5 million at March 31, 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*

 

BGHis a party to a five-year, $10.0 million unsecured revolving credit facilitywith SunTrust Bank, as both**administrativeagent and lender (the “BGH Credit Agreement”). The revolving credit facilitymay be used for working capital and other partnership purposes. BGH has pledgedall of the limited liability company interests in Buckeye GP as security forits obligations under the BGH Credit Agreement.   Borrowings under the BGH Credit Agreementbear interest under one of two rate options, selected by BGH, equal to either (i) thegreater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’sprime commercial lending rate; or (ii) the London Interbank Official Rate(“LIBOR”), plus a margin which can range from 0.40% to 1.40%, based on theratings assigned by Standard & Poor’s Rating Services and Moody’sInvestor Services to the senior unsecured non-credit enhanced long-term debt ofBuckeye.  BGH did not have amountsoutstanding under the BGH Credit Agreement at March 31, 2008 or December 31,2007.

 

TheBGH Credit Agreement requires BGH to maintain leverage and funded debt coverageratios. The leverage ratio covenant requires BGH to maintain, as of the lastday of each fiscal quarter, a ratio of the total funded indebtedness of BGH andits Restricted Subsidiaries (as defined below), measured as of the last day ofeach fiscal quarter, to the aggregate dividends and distributions received byBGH and its Restricted Subsidiaries from Buckeye, plus all other cash receivedby BGH and the Restricted Subsidiaries, measured for the preceding twelvemonths, less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreementdefines “Restricted Subsidiaries” as certain of BGH’s wholly ownedsubsidiaries.  The funded debt coverageratio covenant requires BGH to maintain, as of the last day of each fiscalquarter, a ratio of total consolidated funded debt of BGH and all of itssubsidiaries to consolidated Earnings Before Interest, Taxes, Depreciation andAmortization (“EBITDA”), as defined in the 

 

11

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BGH Credit Agreement, ofBGH and all of its subsidiaries, measured for the preceding twelve months, ofnot more than 5.25 to 1.00, subject to a provision for increases to 5.75 to1.00 in connection with future acquisitions. At March 31, 2008, BGH’sfunded debt coverage ratio was 4.6 to 1.00.

 

TheBGH Credit Agreement contains other covenants that prohibit BGH from takingcertain actions including, but not limited to, declaring dividends ordistributions if any default or event of default has occurred or would resultfrom such a declaration and limiting BGH’s ability to incur additionalindebtedness, creating negative pledges and granting certain liens, makingcertain loans, acquisitions and investments, making material changes to thenature of BGH and its Restricted Subsidiaries’ business, and entering into amerger, consolidation, or sale of assets. At March 31, 2008, BGH was in compliance with the covenants underthe BGH Credit Agreement.

 

*Services Company*

* *

Services Companyhad total debt outstanding of $18.8 million and $20.3 million at March 31,2008 and December 31, 2007, respectively, consisting of 3.60% SeniorSecured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by theESOP to a third-party lender. The 3.60% ESOP Notes were issued on May 4,2004.  The 3.60% ESOP Notes arecollateralized by Services Company’s common stock and are guaranteed byServices Company. In addition, Buckeye has committed that, in the event thatthe value of the LP Units owned by Services Company falls below 125% of thebalance payable under the 3.60% ESOP Notes, Buckeye will fund an escrow accountwith sufficient assets to bring the value of the total collateral (the value ofthe LP Units owned by Services Company and the escrow account) up to the 125%minimum. Amounts deposited in the escrow account are returned to Buckeye whenthe value of the LP Units owned by Services Company returns to an amount thatexceeds the 125% minimum. At March 31, 2008, the value of the LP Units ownedby Services Company exceeded the 125% requirement.

 

*Buckeye*

 

OnJanuary 11, 2008, Buckeye sold $300.0 million aggregate principal amountof 6.050% Notes due 2018 in an underwritten public offering. Proceeds from thisoffering, after underwriters’ fees and expenses, were approximately $298.0million and were used to reduce amounts outstanding under Buckeye’s creditfacility that had been drawn to partially pre-fund the Lodi Gasacquisition.  In connection with thisdebt offering, Buckeye settled the two forward-starting interest rates swapsdiscussed in Note 7 below. The settlement payment amounted to $9.6 million and isbeing amortized as interest expense over the ten-year term of this Note.

 

As with all of Buckeye’snotes set forth above, Buckeye makes semi-annualinterest payments with the principal balances outstanding to be paid on orbefore the due dates as shown above.

 

*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 March 31,2008, Buckeye had $140.0 million in borrowings outstanding under the CreditFacility.  At December 31, 2007,Buckeye did not have any amounts outstanding under the Credit Facility.  At March 31, 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.

 

TheCredit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greaterthan 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to1.00 in connection with certain future acquisitions.  The Funded Debt Ratio is calculated bydividing consolidated debt by annualized EBITDA as defined in the CreditFacility.  As discussed below, the CreditFacility was amended in January 2008.

 

12

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The Credit Facilitydefines EBITDA as earnings before interest, taxes, depreciation, depletion andamortization, in each case excluding the income of certain majority-ownedsubsidiaries and equity investments (but including distributions from thosemajority-owned subsidiaries and equity investments).  At March 31, 2008, Buckeye’s Funded DebtRatio was 4.20 to 1.00.  As provided forin the Credit Facility, the entire balance of Farm & Home’s line ofcredit, or $96.8 million, was excluded from the calculation of consolidateddebt and the Funded Debt Ratio.

 

Inaddition, the Credit Facility contains other covenants including, but notlimited to, limiting Buckeye’s ability to incur additional indebtedness, tocreate or incur certain liens on its property, to dispose of property materialto its operations and to consolidate, merge or transfer assets.  At March 31, 2008, Buckeye was incompliance with the covenants under its Credit Facility.

 

On January 28, 2008, Buckeye entered into anamendment to the Credit Facility which permits Farm & Home and certainother Buckeye subsidiaries to incur up to $250.0 million of securedindebtedness related to working capital financing.  The amendment also permits these subsidiariesto: (i) issue performance bonds not to exceed $50.0 million, (ii) incur$5.0 million of equipment lease obligations and liens on equipment, (iii) incurup to $5.0 million of indebtedness owing to major oil companies, and (iv) loanor advance up to $5.0 million to retail distributors of transportation fuels.  Finally, the amendment states that thelesser of the amount of this debt or the sum of 90% of qualified inventory and70% of qualified accounts receivable held by Farm & Home at thebalance sheet date may be excluded when calculating Buckeye’s Funded DebtRatio.

 

*Farm &Home Line of Credit*

 

Farm &Home is party to a Loan and Security Agreement, dated December 16, 2004,as amended, with a syndicate of banks (the “Farm & Home Agreement”).  On February 8, 2008, in connection withBuckeye’s acquisition of Farm & Home, Farm & Home enteredinto the Seventh Amendment to the Farm & Home Agreement, whichpermitted, among other things, Farm & Home to be acquired byBuckeye.  The Farm & HomeAgreement provides for a working capital line of credit of up to $100 million($140 million until April 30, 2008) with interest at Farm & Home’selection at either (i) the prime rate (as defined in the Farm &Home Agreement) minus 0.5% or (ii) LIBOR plus 1.35% on the first $50million of borrowings and LIBOR plus 1.65% for borrowings in excess of $50million.  The Farm & HomeAgreement also permits letters of credit up to $3.5 million.  The Farm & Home Agreement is securedby liens on substantially all of the assets of Farm & Home.

 

Thebalance outstanding under the Farm & Home Agreement was approximately$96.8 million at March 31, 2008, all of which was classified as a currentliability.  The Farm & HomeAgreement requires Farm & Home to maintain a tangible net worth,defined generally as the amount by which Farm & Home’s assets(excluding intangible assets and accumulated other comprehensive income orloss) exceed its liabilities, equal to $33.7 million for the period June 30,2007 through June 29, 2008 and thereafter equal to prior periods’ requiredtangible net worth plus 50% of Farm & Home’s net income, if positive,for the fiscal year then ended.  At March 31,2008, Farm & Home’s tangible net worth was $59.5 million.  Farm & Home also must maintain aratio of the sum of all indebtedness of Farm & Home to tangible networth of not greater than 2.50 to 1.00. At March 31, 2008, Farm & Home’s debt to tangible net worthratio was 1.63 to 1.00.  In addition,Farm & Home is required to maintain a ratio of pre-tax income tointerest expense of not less than 1.25 to 1.00. At March 31, 2008, Farm & Home’s pre-tax income tointerest expense ratio was 1.33 to 1.00.

 

TheFarm & Home Agreement also contains various negative covenants,including covenants restricting Farm & Home’s ability to merge orconsolidate with another entity, acquire other businesses, change its legalorganization or engage in a business or activities materially different thanits existing business.  On April 15,2008, Farm & Home received a waiver from the lending banks whichpermitted the sale of the retail operations and released the banks’ liens onthe assets of the retail operations.  At March 31,2008, Farm & Home was in compliance with the covenants under the Farm &Home Agreement.

 

13

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7.  DERIVATIVES

 

*Energy ServicesDerivatives*

 

Buckeye uses petroleum derivative contracts with respect tothe operations of Farm & Home to manage the effect of changing marketprices on future inventory purchases required to meet future fixed price salescommitments (“Firm Commitments”) and on future sales of products held ininventory (“Spot Inventory”).  All ofBuckeye’s petroleum derivative contracts are entered into for hedging purposes;that is, they are specifically matched in volume and maturity with the varioussales commitments of the business. Derivative contracts entered to hedge Firm Commitments are classified asCash Flow Hedges.  Derivative contractsentered into to hedge firm commitments on Spot Inventory positions areclassified as Fair Value Hedges.  Gainsand losses on petroleum derivative contracts are recognized in earnings in thecost of product sales as product is delivered or commitments are performedunder fixed price contracts.

 

All derivatives are recognized on the balance sheets at theirfair value.  On the date a derivativecontract is entered into, Buckeye designates the derivative as (1) a hedgeof a recognized asset or liability or of an unrecognized firm commitment (“FairValue Hedge”), or (2) a hedge of a forecasted transaction or of thevariability of cash flows to be received or paid related to a recognized assetor liability (“Cash Flow Hedge”). Changes in the fair value of a derivative that qualifies as a Fair ValueHedge are recorded in current period earnings along with the related gain orloss on the hedged asset or liability. Changes in the fair value of a derivative that qualifies as a Cash FlowHedge are recorded in other comprehensive income (loss) until earnings areaffected by the related variability of cash flows.  Cash flow hedge ineffectiveness, defined asthe extent to which the changes in the fair value of the derivative exceed thevariability of cash flows of the forecasted transaction, is recorded inearnings.

 

As of March 31, 2008, Buckeye had outstanding derivativecontracts used to hedge the variability of market prices of petroleumproducts.  The following table presentsunrealized gains on such derivatives as of March 31, 2008:

 
| ** **                                       | ** ** | **March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|
| ** **                                       | ** ** | **2008**           | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| Petroleum  derivatives used as Cash Flow Hedges  |       | $                  | 2,839      |   |
| Petroleum  derivatives used as Fair Value Hedges |       | 775                |       |
| Total                                            |       | $                  | 3,614      |   |

 

Substantially all of the gains noted above will be recordedin income over the next twelve months.

 

Gains or losses on hedges that were ineffective were notmaterial for the quarter ended March 31, 2008.  As of March 31, 2008, open petroleumderivative contracts varied in duration, but did not extend beyond May 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 FASB Statement No. 133 — “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS No. 133”), Buckeye has recordedthe amount in other comprehensive income and will amortize the amount of thepayment into interest expense over the ten-year term of the 6.05% Notes.  Interest expense increased by $0.2 millionfor the three months ended March 31, 2008 as a result of the amortizationof the termination payment.

 

InDecember 2004, Buckeye terminated an interest rate swap agreementassociated with the 4.625% Notes due July 15, 2013 and received proceedsof $2.0 million.  In accordance with SFAS No. 133, Buckeye deferredthe $2.0 million gain as an adjustment to the fair value of the hedged portionof Buckeye’s debt and is amortizing the gain as a reduction of interest expenseover the remaining term of the hedged debt.  Interest expense was reducedby $0.1 million during the three months ended March 31, 2008 and2007 related to the amortization of the gain on the interest rate swap.

 

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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 for similar assets orliabilities.

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

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

·                  Inputs that are derived primarily from, 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 that are subject toSFAS No. 157 as of March 31, 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:            |       |                                             |       |   |   |   |   |
| Derivative  assets |       | $                                                | 3,614      |   | $ | — |   | $ | — |   |
| Total              |       | $                                                | 3,614      |   | $ | — |   | $ | — |   |

 

BGH has determinedthat its assets subject to SFAS No. 157 are all “level one inputs”. Thevalue of the derivative assets shown above was determined by obtaining theprices of the underlying contracts as traded on the New York MercantileExchange.

 

15

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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** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** |
| ** **                                      | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Basic:                                          |       |                             |       |   |   |
| Average common  units outstanding               |       | 27,770                           |       | 26,938 |   |
| Average management  units outstanding           |       | 530                              |       | 953 |   |
|                                            |       |                             |       |   |   |
| Average units  for basic                        |       | 28,300                           |       | 27,891 |   |
|                                            |       |                             |       |   |   |
| Diluted:                                        |       |                             |       |   |   |
| Units used for  basic calculation               |       | 28,300                           |       | 27,891 |   |
| Dilutive effect  of additional management units |       | —                           |       | 409 |   |
|                                            |       |                             |       |   |   |
| Average units  for diluted                      |       | 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 April 29,2008, MainLine Management declared a quarterly cash distribution of $0.30 perunit payable on May 30, 2008 to unitholders of record on May 9,2008.  The total cash distribution to BGHunitholders will be approximately $8.5 million.

 

11. UNIT-BASED COMPENSATION

 

*BGH GP Override Units*

 

Effectiveon June 25, 2007,**BGH GP instituted an equity incentiveplan for certain members of senior management of BGH GP and BGH.  This equity incentive plan includes bothtime-based and performance-based participation in the equity of BGH GP (but notin BGH) referred to as “Override Units”. BGH determined that, under the requirements of  provisions of Statement of FinancialAccounting Standards 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), BGH is required toreflect, 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 months ended March 31, 2008 was$0.4 million, and has recorded such amount as compensation expense and acapital contribution for the quarter ended March 31, 2008. BGH is not a partyto this plan and has no liabilities with respect to it.

 

16

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The Override Units consist of three equal tranches ofunits: Value A Units; Value B Units; and Operating Units. The Override Unitsare subject to vesting restrictions and conditions precedent to participationin distributions which restrictions and conditions may be waived by the Boardof BGH GP. In addition, the Override Units are subject to forfeiture if agrantee resigns or is terminated for cause.

 

The following is a summary of the activity of theOverride Units as of March 31, 2008 (in thousands except per unitamounts):

** **
| ** **                                   | ** ** | **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 March 31, 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                            |       | $                                                            | 3,476      |                    | $          | 1,965 |   | $ | 5,742 |   | $ | 11,183 |   |
| Less: Expense  recorded from plan inception to March 31, 2008 |       | —                                                       |       | —                  |       | 943 |   | 943 |   |
| Potential future  compensation costs at March 31, 2008        |       | $                                                            | 3,476      |                    | $          | 1,965 |   | $ | 4,799 |   | $ | 10,240 |   |

 

----

| ** **           | ** ** | **Value A** | ** ** | **Value B** |   | **Operating** |   |   |   |
|----------------------|------------|-------------|------------|-------------|--------|---------------|--------|--------|--------|
| Fair Value per  unit |       | $           | 2.07       |        | $      | 1.17          |   | $      | 3.42   |   |   |   |
|                      |            |             |            |             |        |               |        |        |        |  |  |  |

 

The Override Units were valued using the MonteCarlo simulation method that incorporated the market-based vesting conditioninto the grant date fair value of the unit awards as required by SFAS123R.  The Monte Carlo simulationestimates the future equity value from the time of the valuation date of June 25,2007 to the exit event using the following assumptions:

 

·                  Current EquityValue of $10.00 per unit or total equity of $439.0 million, based on theinitial capital contribution made by the initial equity investors into BGH GP;

 

·                  Expected Lifeof 5.5 years based on the historical average holding period for similarinvestments;

 

·                  Risk Free Rateof 4.92% based on the U.S. constant maturity treasury rate for a termcorresponding to the expected life of 5.5 years;

 

·                  Volatility of26%.  Since BGH GP’s primary assets areits ownership interest in BGH, volatility was estimated by using the volatilityof BGH, along with comparisons to the 5.5 year equity volatility of other firmsin the same industry as Buckeye; and

 

17

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·                  Dividends ofzero were assumed as the likelihood of an interim distribution is not probabledue to the rigorous performance criteria.

 

Compensation expense related to the Operating Unitsof approximately $1.3 million per year will be recognized in 2008, 2009, 2010and 2011.  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.

 

Effective January 1, 2006, Buckeye adopted thefair value measurement and recognition provisions of SFAS No. 123R.  Generally, unit-based compensation expenserecognized in the first quarters of 2007 and 2008 is based on the grant datefair value estimated by using the Black-Scholes option pricing model.  Buckeye recognizes compensation expense forawards granted on a straight-line basis over the requisite service period.

 

For the retirement eligibility provisions of theOption Plan, Buckeye follows the non-substantive vesting method and recognizescompensation expense immediately for options granted to retirement-eligibleemployees, or over the period from the grant date to the date retirementeligibility is achieved. Unit-based compensation expense recognized in earningsfor the three months ended March 31, 2008 and 2007 is based upon optionsultimately expected to vest. In accordance with SFAS No. 123R, forfeitureshave been estimated at the time of grant and will be revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeitures were estimated based upon historical experience.

 

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 firstquarter of 2007, BGH expensed approximately $0.1 million related to theManagement 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 to ArcLight's indirect ownership interestin Buckeye GP, the Audit Committee of Buckeye GP made up of independentdirectors and represented by independent legal counsel and financial advisors,reviewed and approved the terms of the Lodi Gas acquisition, including thepurchase price, as fair and reasonable to Buckeye in accordance with Buckeye’spartnership agreement.

 

18

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

 

13.       PENSIONS AND OTHER POSTRETIREMENTBENEFITS

 

ServicesCompany, which employs the majority of Buckeye’s workforce, sponsors aretirement income guarantee plan  (the “RIGP”),which is a defined benefit plan, that generally guarantees employees hiredbefore January 1, 1986 a retirement benefit at least equal to the benefitthey would have received under a previously terminated defined benefit plan.Services Company’s policy is to fund amounts necessary to meet at least theminimum funding requirements of the Employee Retirement Income Security Act of1974.

 

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

 

For the threemonths ended March 31, 2008 and 2007, the components of the net periodicbenefit cost recognized by Buckeye for the RIGP and Retiree Medical Plan wereas follows:

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
| ** **                                | ** ** | **RIGP**                                             | ** ** | **Plan** | ** ** |
| ** **                                | ** ** | **(In thousands)**                              | ** ** |
| Components of  net periodic benefit cost: |       |                                                 |       |   |   |   |   |   |   |
| Service cost                              |       | $                                                    | 353        |   | $ | 248 |   | $ | 232 |   | $ | 100 |   |
| Interest cost                             |       | 478                                                  |       | 253 |   | 694 |   | 508 |   |
| Expected return  on plan assets           |       | (468                                                 | )          | (205 | ) | — |   | — |   |
| Amortization of  prior service benefit    |       | (218                                                 | )          | (114 | ) | (1,124 | ) | (860 | ) |
| Amortization of  unrecognized losses      |       | 156                                                  |       | 143 |   | 410 |   | 381 |   |
| Net periodic  benefit costs               |       | $                                                    | 301        |   | $ | 325 |   | $ | 212 |   | $ | 129 |   |

 

A minimum fundingcontribution is not required to be made to the RIGP during 2008.  However, on April 15, 2008 Buckeyevoluntarily contributed $0.3 million to the RIGP.

 

14.  SEGMENTINFORMATION

 

With theacquisitions of Lodi Gas and Farm & Home, BGH has two additionalreportable segments: Natural Gas Storage and Energy Services.  Based on the financial information providedto senior management, BGH has determined that its operations are appropriatelypresented in five reportable operating segments: Pipeline Operations;Terminalling and Storage; Natural Gas Storage; Energy Services; and OtherOperations.  BGH also has certainconsolidated-level assets, principally consisting of goodwill, which are notallocable to the individual reporting segments because they are not used by thechief operating decision maker to make operating decisions or to allocateresources.

 

*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 16 states. Thissegment also has three refined petroleum products terminals with aggregatestorage capacity of approximately 0.5 million barrels in three states.

 

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*Terminallingand Storage:*

 

The Terminallingand Storage segment provides bulk storage and terminal throughputservices.  This segment has approximately60 refined petroleum products terminals with aggregate storage capacity ofapproximately 22.1 million barrels in nine states.

 

*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 billion cubic feetof working gas storage capacity and are connected to Pacific Gas and Electric’sintrastate gas pipelines that service natural gas demand in the San Franciscoand Sacramento areas. The segment has approximately twenty-five customers.

 

The Natural Gas Storage segment has the following revenue sources:

 

·                  Lease Revenueswhich consist of demand charges for the reservation of storage space under firmstorage agreements. The demand charge entitles the customer to a fixed amountof storage space and certain injection and withdrawal rights. Title to thestored gas remains with the customer. Lease revenues are recognized as revenueover the term of the related storage agreement.

 

·                  Hub ServiceRevenues which consist of a variety of other storage services underinterruptible storage agreements. These principally include park and loantransactions.  Parks occur when gas froma customer is injected and stored for a specified period. The customer then hasthe right to withdraw its stored gas at a future date. Title to the gas remainswith the customer.  Park revenues arerecognized ratably over the term of the agreement.  Loans occur when gas is delivered to acustomer in a specified period. The customer then has the obligation toredeliver gas at a future date. Loans revenues are recognized ratably over theterm of the agreement.

 

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

 

*EnergyServices:*

 

The EnergyServices segment sells refinedpetroleum products on a wholesale basis principally in eastern and centralPennsylvania. The segment records revenues as products are delivered. The segment’s products include gasoline,propane and petroleum distillates such as heating oil, diesel fuel, andkerosene.  The segment has approximatelyone thousand customers which consist principally of product wholesalers as wellas major commercial users of these products.

 

*OtherOperations:*

 

The OtherOperations segment consists primarily of Buckeye’s contract operation ofapproximately 2,700 miles of third-party pipeline systems, which are ownedprimarily by major oil and chemical companies and are located in Texas andLouisiana.  This segment also performspipeline construction management services, typically for cost plus a fixed fee,for these same customers.  The OtherOperations segment also includes Buckeye’s ownership and operation of anammonia pipeline and its majority ownership of the Sabina Pipeline in Texas.

 

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

 

20

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| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(In thousands)**                          | ** ** |
| Revenue:                        |       |                                             |       |   |   |
| Pipeline  Operations            |       | $                                                | 96,389     |   | $ | 93,750 |   |
| Terminalling and  Storage       |       | 27,632                                           |       | 23,589 |   |
| Natural Gas  Storage            |       | 11,464                                           |       | — |   |
| Energy Services                 |       | 234,547                                          |       | — |   |
| Other Operations                |       | 10,869                                           |       | 7,605 |   |
| Intersegment                    |       | (626                                             | )          | — |   |
| Total                           |       | $                                                | 380,275    |   | $ | 124,944 |   |
|                            |       |                                             |       |   |   |
| Operating  income:              |       |                                             |       |   |   |
| Pipeline  Operations            |       | $                                                | 35,529     |   | $ | 36,988 |   |
| Terminalling and  Storage       |       | 12,585                                           |       | 9,625 |   |
| Natural Gas  Storage            |       | 4,744                                            |       | — |   |
| Energy Services                 |       | 1,656                                            |       | — |   |
| Other Operations                |       | 1,580                                            |       | 2,021 |   |
| Total                           |       | $                                                | 56,094     |   | $ | 48,634 |   |
|                            |       |                                             |       |   |   |
| Depreciation and  amortization: |       |                                             |       |   |   |
| Pipeline  Operations            |       | $                                                | 8,423      |   | $ | 7,988 |   |
| Terminalling and  Storage       |       | 1,355                                            |       | 1,305 |   |
| Natural Gas  Storage            |       | 954                                              |       | — |   |
| Energy Services                 |       | 264                                              |       | — |   |
| Other Operations                |       | 387                                              |       | 414 |   |
| Total                           |       | $                                                | 11,383     |   | $ | 9,707 |   |
|                            |       |                                             |       |   |   |
| Capital  expenditures:          |       |                                             |       |   |   |
| Pipeline  Operations            |       | $                                                | 6,820      |   | $ | 15,519 |   |
| Terminalling and  Storage       |       | 2,959                                            |       | 840 |   |
| Natural Gas  Storage            |       | 3,249                                            |       | — |   |
| Energy Services                 |       | 685                                              |       | — |   |
| Other Operations                |       | 1,079                                            |       | 1,014 |   |
| Total                           |       | $                                                | 14,792     |   | $ | 17,373 |   |
|                            |       |                                             |       |   |   |
| Acquisitions:                   |       |                                             |       |   |   |
| Terminalling and  Storage       |       | $                                                | 13,854     |   | $ | 38,468 |   |
| Natural Gas  Storage            |       | 443,515                                          |       | — |   |
| Energy Services                 |       | 142,940                                          |       | — |   |
| Total                           |       | $                                                | 600,309    |   | $ | 38,468 |   |

 

21

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| ** **                | ** ** | **Assets**              | ** ** | **Goodwill**            | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **March 31,**      | ** ** | **December 31,**   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **2008**                | ** ** | **2007**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** | **(In thousands)** | ** ** |
| Assets:                   |       |                    |       |                    |       |   |   |   |   |
| Pipeline  Operations*     |       | $                       | 1,605,935  |                    | $          | 1,673,744 |   | $ | 198,632 |   | $ | 198,632 |   |
| Terminalling and  Storage |       | 389,214                 |       | 385,446                 |       | 22,789 |   | 22,789 |   |
| Natural Gas  Storage      |       | 468,718                 |       | —                  |       | 170,754 |   | — |   |
| Energy Services           |       | 237,239                 |       | —                  |       | 45,778 |   | — |   |
| Other Operations          |       | 78,282                  |       | 74,462                  |       | 13,182 |   | 13,182 |   |
| Consolidated-  level      |       | 223,857                 |       | 220,674                 |       | — |   | — |   |
| Assets held for  sale**   |       | 51,572                  |       | —                  |       | 18,600 |   | — |   |
| Total                     |       | $                       | 3,054,817  |                    | $          | 2,354,326 |   | $ | 469,735 |   | $ | 234,603 |   |

 

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

** Goodwill in the amountof $18.6 million is included in the assets held for sale on the condensedconsolidated balance sheet.

 

15. RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements”.  This statement clarifies the definition offair value, establishes a framework for measuring fair value, and expands thedisclosures on fair value measurements. This statement does not require any new fair value measurements.  SFAS No. 157 was effective for fiscalyears beginning after November 15, 2007 and interim periods within thatyear.

 

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 the variousimplementation issues that have arisen, or that may arise, from the applicationof SFAS No. 157.  BGH adopted thenon-delayed portions of SFAS No. 157 on January 1, 2008.  See Note 8 for a further discussion.

 

In February 2007, the FASB issued SFAS No. 159 “The FairValue Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).  SFAS No. 159 permits entities to chooseto measure many financial instruments and certain other items at fair valuethat currently 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, BGHadopted SFAS No. 159 and elected not to apply the fair value option underthis standard.  As a result, SFAS No. 159did not have an impact 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 after December 15,2008.  SFAS No. 160 establishesaccounting and reporting standards for the noncontrolling interest in asubsidiary 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, theFASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS No. 141(R)”) which will be effective for fiscal years beginning after December 15,2008.  SFAS No. 141 (R) requiresan acquiring entity in a business combination to (i) recognize all (andonly) the assets acquired and the liabilities assumed in the transaction, (ii) establishan acquisition-date fair value as the measurement objective for all assetsacquired and theliabilities assumed, (iii) disclose toinvestors and other users of the financial statements all of the informationthey will need to evaluate and understand the nature of, and the financialeffect of, the business combination, and (iv) recognize and measure thegoodwill acquired in the business combination or a gain from a bargainpurchase.  BGH currently is assessing the impact the adoption of thispronouncement will have on its consolidated financial statements.

 

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In March 2008, the FASBissued SFAS No. 161 “Disclosures about Derivative Instruments and HedgingActivities” (“SFAS No. 161”), which will be effective for fiscal yearsbeginning after November 15, 2008.  SFAS No. 161 changes the disclosure requirements for derivativeinstruments and hedging activities. Entities are required to provide enhanced disclosures about (i) howand why an entity uses derivative instruments, (ii) how derivativeinstruments and related hedging items are accounted for under SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities” and its relatedinterpretations, and (iii) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  BGH currently is assessing theimpact the adoption of this pronouncement will have on its consolidatedfinancial statements.

 

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

 

RESULTS OF OPERATIONS

 

*Overview*

 

The following discussion provides an analysis of thefinancial condition and results of operations for Buckeye GP Holdings L.P. (“BGH”)and each of BGH’s operating segments, including an overview of BGH’sliquidity and capital resources and other related matters.  The following discussion and analysis shouldbe read in conjunction with the accompanying condensed consolidated financialstatements and related notes included in this report and BGH’s Annual Report onForm 10-K for the year ended December 31, 2007.

 

*BuckeyeGP Holdings L.P.*

 

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

 

·                  the incentive distribution rights inBuckeye;

 

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

 

·                  the indirect ownership of the generalpartner interests in certain of Buckeye’s operating subsidiaries (representingan approximate 1% interest in each of such operating subsidiaries ); and

 

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

 

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

 

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

 

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The followingtable summarizes BGH’s cash received for the three months ended March 31,2008 and 2007 as a result of its partnership interests in Buckeye:

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                                                        | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**          | ** ** |
| Incentive  distributions from Buckeye                                                             |       | $                                | 8,926      |   | $ | 6,803 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s GP Units                           |       | 204                              |       | 192 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 125                              |       | 381 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s LP Units                            |       | 67                               |       | 63 |   |
|                                                                                              |       | $                                | 9,322      |   | $ | 7,439 |   |

 

*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 more than 60 active refinedpetroleum products terminals, with aggregate storage capacity of approximately22.6 million barrels. In addition, Buckeye operates and maintains approximately2,700 miles of other pipelines under agreements with major oil and chemicalcompanies. Through the recent acquisitions of Lodi Gas Storage, L.L.C. (“LodiGas”) and Farm & Home Oil Company LLC (“Farm & Home”) in thefirst quarter of 2008, Buckeye now owns and operates a major natural gasstorage facility in northern California and markets refined petroleum productsin certain areas that are already served by Buckeye’s pipelines and terminals.

 

Lodi Gas owns and operates two natural gas storage facilities near Lodi,California.  Together, these facilitiesprovide approximately 22 billion cubic feet of working 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’ 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 firmstorage commitments. Lodi Gas does not take title to the natural gas that itstores.

 

Farm & Home sells refined petroleum products on a wholesale and,until April 15, 2008, a retail basis, principally in eastern and centralPennsylvania.  On March 4, 2008,Buckeye agreed to sell Farm & Home’s retail operations and will retainand operate only the acquired wholesale operations.  The assets and liabilities and results ofoperations of Farm & Home’s retail operations were determined to bediscontinued operations effective on the acquisition date of February 8,2008 (see Note 3 to the condensed consolidated financial statements for afurther discussion).  The Farm & Home acquisition willhelp to advance Buckeye’s strategy of building a marketing business in areasserved by Buckeye’s existing logistics assets.

 

Buckeye’s pipelineand terminals customers are U.S.-based major integrated oil companies, largerefined petroleum products marketing companies, major end users of petroleumproducts, and chemical and utility companies. Lodi Gas’s customers are major natural gas utility companies as well asnatural gas marketing and distribution companies.  Farm & Home’s wholesale customersare primarily product wholesalers as well as major commercial users of refinedpetroleum products

 

25

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With theacquisitions of Lodi Gas and Farm & Home, Buckeye determined that ithad two additional reportable segments, Natural Gas Storage and EnergyServices.  Effective in the first quarterof 2008, Buckeye now conducts business in five reportable operating segments:Pipeline Operations; Terminalling and Storage; Natural Gas Storage; EnergyServices; and Other Operations.  See Note14 to the condensed consolidated financial statements for a more detaileddiscussion of Buckeye’s operating segments.

 

*Results of Operations*

 

The results ofoperations discussed below principally reflect the activities of Buckeye. Sincethe accompanying condensed consolidated financial statements of BGH include theconsolidated results of Buckeye, BGH’s consolidated statements aresubstantially similar to Buckeye’s except 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 between Buckeye, its consolidated subsidiaries and BGHand Services Company are reflected in Buckeye’s consolidated financialstatements but are eliminated in BGH’s consolidated financial statements.

 

26

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Summary operating results for BGH were as follows:

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                | ** ** | **(In thousands)**          | ** ** |
| Revenue                                                   |       | $                                | 380,275    |   | $ | 124,944 |   |
| Costs and  expenses                                       |       | 324,181                          |       | 76,310 |   |
|                                                      |       |                             |       |   |   |
| Operating income                                          |       | 56,094                           |       | 48,634 |   |
| Other (expense)                                           |       | (17,564                          | )          | (13,576 | ) |
| Income before  equity income and non-controlling interest |       | 38,530                           |       | 35,058 |   |
| Equity income                                             |       | 2,055                            |       | 1,786 |   |
| Non-controlling  interest expense                         |       | (34,736                          | )          | (30,905 | ) |
|                                                      |       |                             |       |   |   |
| Net income                                                |       | $                                | 5,849      |   | $ | 5,939 |   |

 

27

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Revenues,operating income, total costs and expenses and depreciation by amortization byoperating segment were as follows:

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| ** **                                                            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                            | ** ** | **(In thousands)**          | ** ** |
| Revenue:                                                              |       |                             |       |   |   |
| Pipeline Operations                                                   |       | $                                | 96,389     |   | $ | 93,750 |   |
| Terminalling and  Storage                                             |       | 27,632                           |       | 23,589 |   |
| Natural Gas  Storage                                                  |       | 11,464                           |       | — |   |
| Energy Services                                                       |       | 234,547                          |       | — |   |
| Other Operations                                                      |       | 10,869                           |       | 7,605 |   |
| Intersegment                                                          |       | (626                             | )          | — |   |
| Total                                                                 |       | $                                | 380,275    |   | $ | 124,944 |   |
|                                                                  |       |                             |       |   |   |
| Operating  income:                                                    |       |                             |       |   |   |
| Pipeline  Operations                                                  |       | $                                | 35,529     |   | $ | 36,988 |   |
| Terminalling and  Storage                                             |       | 12,585                           |       | 9,625 |   |
| Natural Gas  Storage                                                  |       | 4,744                            |       | — |   |
| Energy Services                                                       |       | 1,656                            |       | — |   |
| Other Operations                                                      |       | 1,580                            |       | 2,021 |   |
| Total                                                                 |       | $                                | 56,094     |   | $ | 48,634 |   |
|                                                                  |       |                             |       |   |   |
| Total costs and  expenses (including depreciation  and amortization): |       |
| Pipeline  Operations                                                  |       | $                                | 60,860     |   | $ | 56,762 |   |
| Terminalling and  Storage                                             |       | 15,047                           |       | 13,964 |   |
| Natural Gas  Storage                                                  |       | 6,720                            |       | — |   |
| Energy Services                                                       |       | 232,891                          |       | — |   |
| Other Operations                                                      |       | 9,289                            |       | 5,584 |   |
| Intersegment                                                          |       | (626                             | )          | — |   |
| Total                                                                 |       | $                                | 324,181    |   | $ | 76,310 |   |
|                                                                  |       |                             |       |   |   |
| Depreciation and  amortization:                                       |       |                             |       |   |   |
| Pipeline  Operations                                                  |       | $                                | 8,423      |   | $ | 7,988 |   |
| Terminalling and  Storage                                             |       | 1,355                            |       | 1,305 |   |
| Natural Gas  Storage                                                  |       | 954                              |       | — |   |
| Energy Services                                                       |       | 264                              |       | — |   |
| Other Operations                                                      |       | 387                              |       | 414 |   |
| Total                                                                 |       | $                                | 11,383     |   | $ | 9,707 |   |

 

First Quarter of 2008 compared to First Quarter of 2007

 

Totalrevenues for the quarter ended March 31, 2008 were $380.3 million,approximately $255.4 million greater than revenue of $124.9 million for the sameperiod in 2007.  Of the $255.4 millionincrease in revenue in the first quarter of 2008, $11.5 million resulted fromthe acquisition of Lodi Gas and $234.5 million resulted from the acquisition ofFarm & Home.  The results ofLodi Gas and Farm & Home are included below in the Natural Gas Storageand Energy Services segments, respectively. The balance of the revenueimprovement of approximately $9.4 million was attributable to the remainingreporting segments as discussed below.

 

*Pipeline Operations:*

 

Revenue from PipelineOperations was $96.4 million in the first quarter of 2008 compared to $93.8million in the first quarter of 2007, resulting in an increase of $2.6million.  This increase was primarily theresult of:

 

28

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·                  Base transportation revenues being essentiallyunchanged compared to 2007 as the benefit of tariff increases implemented in Mayand July of 2007 were almost entirely offset by reduced product volumes in thefirst quarter of 2008.  Managementbelieves the reduced volumes in 2008 were caused primarily by reduced demandfor gasoline resulting from higher retail gasoline and distillate prices,reduced production at ConocoPhillips Wood River Refinery due to maintenanceactivities, as well as the continued introduction of ethanol into retailgasoline products.  Product volumesdeclined by 4.9% in the first quarter of 2008 compared to the first quarter of2007; and

 

·                  A net increase in incidental revenues of $1.5 millionwhich was principally related to a product supply arrangement, as well asincreased revenues of $0.8 million related to contract services activities atcustomer facilities connected to Buckeye’s refined products pipelines.

 

During2007, Buckeye experienced measurement shortages in connection with its pipelineproduct deliveries in excess of historical variances.  Based upon an investigation of thesemeasurement issues, certain corrective actions have been taken.  Buckeye believes the measurement issues have,to a large extent, been isolated and corrected, although continuing monitoringand evaluation of product measurement issues will be required.  Net pipeline overages and shortages were notmaterial in the first quarter of 2008.

 

Productvolumes transported in Pipelines Operations for the first quarter ended March 31,2008 and 2007 were as follows:

 
| ** **  | ** ** | **Average Barrels Per Day**           | ** ** |
|-------------|------------|------------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended March 31,** | ** ** |
| **Product** | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Gasoline    |       | 641,500                                              |       | 687,100 |   |
| Distillate  |       | 337,500                                              |       | 365,100 |   |
| Jet Fuel    |       | 356,400                                              |       | 352,300 |   |
| LPG’s  |       | 15,300                                               |       | 20,100 |   |
| NGL         |       | 21,100                                               |       | 20,000 |   |
| Other       |       | 11,700                                               |       | 10,100 |   |
| Total       |       | 1,383,500                                            |       | 1,454,700 |   |

 

*Terminallingand Storage:*

 

Revenue from theTerminalling and Storage segment was $27.6 million in the first quarter of 2008compared to $23.6 million in the first quarter of 2007. The revenue increase inthe first quarter of 2008 compared to the first quarter of 2007 of $4.0 million,or 16.9 %, was primarily the result of:

 

·                  An approximate $1.4 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 2.6% decline in throughput volumes in the first quarter of 2008compared to the first quarter of 2007; and

 

·                  Incremental revenue of $2.6 million due to theacquisition of an additional terminal and a 50% interest in a second terminalin the first quarter of 2008, as more fully described in Note 3 to theaccompanying condensed consolidated financial statements, as well as theinclusion for a full quarter of six terminals acquired in the first quarter of2007.

 

29

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Average daily throughput for the refined products terminals for thequarters ended March 31, 2008 and 2007 was as follows:

 
| ** **                   | ** ** | **Average Barrels Per Day**           | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **                   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                         |       |                                                 |       |   |   |
| Refined products  throughput |       | 522,300                                              |       | 536,000 |   |

 

*NaturalGas Storage:*

 

Revenue from the Natural Gas Storage segment was $11.5million since the acquisition of Lodi Gas on January 18, 2008. Approximately 79% of this revenuerepresented firm storage revenues and 21% hub services revenues.

 

*EnergyServices:*

 

Revenue from the Energy Services segment was $234.5million.  Substantially all of thisrevenue was derived from the continuing wholesale operations of Farm &Home since acquisition on February 8, 2008.  During the period, the wholesale operationsof Farm & Home sold approximately 83.4 million gallons ofproduct.  Products sold include gasoline,propane, and petroleum distillates such as heating oil, diesel fuel andkerosene.

 

*OtherOperations:*

 

Revenue from the OtherOperations segment was $10.9 million in the first quarter of 2008 compared to$7.6 million in the first quarter of 2007. The revenue increase in the first quarter of 2008 of $3.3 million wasprimarily the result of:

 

·                  An increase of$1.2 million in pipeline maintenance and operating revenue related toadditional operating contracts signed in the latter part of 2007; and

 

·                  An increase of$2.2 million in construction management revenue related to these operatingcontracts.

 

*OperatingExpenses:*

* *

Costs and expenses forthe three months ended March 31, 2008 and 2007 were as follows:

 
| ** **                     | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Cost of product  sales         |       | $                                | 236,611    |   | $ | 4,844 |   |
| Payroll and  payroll benefit   |       | 28,003                           |       | 23,168 |   |
| Depreciation and  amortization |       | 11,383                           |       | 9,707 |   |
| Outside services               |       | 10,831                           |       | 6,077 |   |
| Operating power                |       | 7,486                            |       | 7,318 |   |
| Property and  other taxes      |       | 6,022                            |       | 6,183 |   |
| Insurance and  casualty losses |       | 3,719                            |       | 3,983 |   |
| Construction  management       |       | 3,021                            |       | 1,695 |   |
| Supplies                       |       | 2,569                            |       | 2,969 |   |
| Rentals                        |       | 4,054                            |       | 2,611 |   |
| All other                      |       | 10,482                           |       | 7,755 |   |
| Total                          |       | $                                | 324,181    |   | $ | 76,310 |   |

 

30

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Costof product sales was $236.6 million in the first quarter of 2008, which is an increaseover the first quarter of 2007 of $231.8 million.  Approximately $229.5 million of the increasewas attributable to product sold by Farm & Home.  The remaining increase is principallyassociated with fuel purchases related to a product-supply arrangement.

 

Payrolland payroll benefits were $28.0 million in the first quarter of 2008, anincrease of $4.8 million compared to the first quarter of 2007.  The Lodi Gas and Farm & Homeoperations added $0.9 million and $0.7 million of payroll and payroll benefitsexpense in the three months ended March 31, 2008, respectively.  Increases in salaries and wages of $1.5million in the first quarter of 2008 resulted primarily from an increase in thenumber of employees due to Buckeye’s expanded operations and higher wagerates.  BGH’s payroll expense alsoincreased by $0.7 million due to an accrual related to executive compensationand charges for BGH GP’s equity incentive plan

 

Depreciationand amortization expense was $11.4 million in the first quarter of 2008, whichis an increase of $1.7 million over the first quarter of 2007. The Lodi Gas andFarm & Home operations added $1.0 million and $0.3 million ofdepreciation and amortization expense in the three months ended March 31,2008, respectively.  The remainingincrease in depreciation and amortization expense resulted from Buckeye’songoing maintenance and expansion capital program.

 

Outsideservices costs were $10.8 million in the first quarter of 2008, which is anincrease of $4.8 million over the first quarter of 2007.  The Lodi Gas and Farm & Homeoperations added $1.7 million and $0.1 million of outside services costs in thethree months ended March 31, 2008, respectively.  Lodi Gas incurred approximately $1.4 millionof outside services expense related to well work-over costs as a result of theheavy withdrawal season in the first quarter. Another approximately $1.4 million is due to increases in activity onoperations and maintenance contracts. The remainder of the increase is due to an increase in pipeline andterminal maintenance activities. Outside services costs consist principally ofthird-party contract services for pipeline and terminal maintenance activities.

 

Operatingpower costs were $7.5 million for the three months ended March 31, 2008,which was consistent with operating power costs in the three months ended March 31,2007.  Buckeye experienced an increase inpower rates, which was offset by a decrease in operating power usage due to adecrease in pipeline volumes in the first quarter of 2008.  Operating power consists primarily ofelectricity required to operate pipeline pumping facilities.

 

Propertyand other taxes were $6.0 million in the first quarter of 2008, a decrease of$0.1 million compared to the first quarter of 2007.  In the first quarter of 2007, Buckeyeexpensed $0.6 million of excise taxes that did not recur in the first quarterof 2008.  This decrease was offset byadditional property taxes from the Lodi Gas and Farm & Homeoperations, which added $0.4 million and $0.1 million, respectively, in thethree months ended March 31, 2008, respectively.

 

Insuranceand casualty losses were $3.7 million for the three months ended March 31,2008, which is a decrease of $0.3 million from the three months ended March 31,2007.  Casualty losses decreased by $0.5million due to the absence of any significant product release incidents in thefirst quarter of 2008.  Insurance costsincreased by $0.4 million which is primarily due to the inclusion of the LodiGas and Farm & Home operations.

 

Constructionmanagement costs were $3.0 million in the first quarter of 2008, which is anincrease of $1.3 million over the first quarter of 2007.  The increase is a result of an increase inconstruction activity in the first quarter of 2008.

 

Suppliesexpense was $2.6 million for the three months ended March 31, 2008, whichis a decrease of $0.4 million over the three months ended March 31,2007.  The decrease is primarily due to adecrease in terminal additives purchases at Buckeye’s terminals.

 

Rentalexpense was $4.1 million in the first quarter of 2008, which is an increase of$1.4 million over the first quarter of 2007. The inclusion of the Lodi Gas and Farm & Home operations added$1.1 million and $0.1 million of rental expense in the three months ended March 31,2008, respectively.

 

Allother costs were $10.5 million in the three months ended March 31, 2008,an increase of $2.7 million compared to $7.8 million in the same period in2007.  The inclusion of the Lodi Gas andFarm & Home operations added $0.5 million and $1.0 million of othercosts, respectively, in the three months ended March 31, 2008.  The remainder of the increases related tovarious other pipeline operating costs.

 

31

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Costs and expenses attributable to Buckeye, ServicesCompany and BGH were as follows:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **March 31,**               | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(In thousands)**          | ** ** |
| Total cost and expenses: |       |                             |       |   |   |
| Attributable to  Buckeye                |       | $                                | 322,143    |   | $ | 74,671 |   |
| Elimination of  Buckeye deferred charge |       | (1,174                           | )          | (1,174 | ) |
| Net effect of  ESOP charges             |       | 965                              |       | 1,606 |   |
| Attributable to  BGH                    |       | 2,247                            |       | 1,207 |   |
| Total                                   |       | $                                | 324,181    |   | $ | 76,310 |   |

 

Amounts attributable to BGH consist of the following:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **March 31,**               | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Attributable to BGH: |       |                             |       |   |   |
| Payroll and  benefits          |       | $                                | 1,334      |   | $ | 626 |   |
| Professional  fees             |       | 583                              |       | 198 |   |
| Other                          |       | 330                              |       | 383 |   |
| Total                          |       | $                                | 2,247      |   | $ | 1,207 |   |

 

Payrolland payroll benefits costs include salaries and benefits for the four highestpaid executives performing services on behalf of Buckeye as well as allocationsof the cost of Buckeye personnel performing administrative services directlyfor BGH. BGH’s payroll expense also increased by $0.7 million due to an accrualrelated to executive compensation and charges for BGH GP’s equity incentiveplan.  Other costs include certain statefranchise taxes, insurance costs, depreciation and miscellaneous otherexpenses.

 

Other income(expense) for the three months ended March 31, 2008 and 2007 was asfollows:

 
| ** **                 | ** ** | **Other Income (Expense)** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(In thousands)**              | ** ** |
| Investment  income         |       | $                                    | 614        |   | $ | 300 |   |
| Interest and  debt expense |       | (18,178                              | )          | (13,876 | ) |
| Total                      |       | $                                    | (17,564    | ) | $ | (13,576 | ) |
|                       |       |                                 |       |   |   |
| Equity income              |       | $                                    | 2,055      |   | $ | 1,786 |   |

 

Other income(expense) was a net expense of $17.6 million in the first quarter of 2008,compared to a net expense of $13.6 million during the first quarter of2007.  Investment income for the threemonths ended March 31, 2008 was consistent with investment incomegenerated during the three months ended March 31, 2007.

 

Interestand debt expense was $18.2 million in the three months ended March 31,2008, an increase of $4.3 million from the three months ended March 31,2007.  Approximately $4.1 million of theincrease was attributable to Buckeye’s $300.0 million in aggregate principalamount of notes due on January 15, 2018 which were issued in January 2008.  The remainder of the increase is due tointerest expense on the debt of Farm & Home that remained outstandingafter the acquisition.

 

32

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Equityincome increased by $0.3 million in the first quarter of 2008 compared to thefirst quarter of 2007.  The increase isprimarily due to increases in equity income earned from Buckeye’s approximate25% interest in West Shore Pipe Line Company and 20% interest in West Texas LPGPipeline Limited Partnership.

 

LIQUIDITY AND CAPITALRESOURCES

 

BGH’s currentlyhas no capital requirements apart from Buckeye’s capital requirements. Buckeye’scapital requirements consist of maintenance and capital expenditures,expenditures for acquisitions and debt service requirements.

 

As noted in “Overview”above, BGH’s only cash-generating asset is its partnership interests inBuckeye.  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 sources of liquidity areoperating cash flow, proceeds from borrowings under Buckeye’s revolving creditfacility and proceeds from the issuance of the LP Units or public debt.

 

BGH’s principaluse of cash is the payment of its operating expenses and distributions to itsunitholders.  BGH generally makesquarterly cash distributions of substantially all of its available cash,generally defined as consolidated cash receipts less consolidated cash expendituresand such retentions for working capital, anticipated cash expenditures andcontingencies as MainLine Management deems appropriate.  In the first three months of 2008 and 2007,BGH paid cash distributions of $0.285 per unit on February 29, 2008 and $0.225per unit on February 28, 2007, respectively.  Total cash distributed to BGH unitholders inthe first three months of 2008 was approximately $8.1 million. On April 29,2008, MainLine Management declared a distribution of $0.30 per unit to be paidon May 30, 2008 to unitholders of record as of May 9, 2008. Thisdistribution is expected to be approximately $8.5 million.

 

***Debt***

* *

*BGH*

* *

BGH is a party toa five-year, $10.0 million revolving credit facility with SunTrust Bank, asboth administrative agent and lender (the “BGH Credit Agreement”).  See Note 6 to BGH’s condensed consolidatedfinancial statements for a description of the terms of the BGH CreditAgreement.

 

*Services Company*

 

Services Companyhad total debt outstanding of $18.8 million and $20.3 million at March 31,2008 and December 31, 2007, respectively, consisting of 3.60% SeniorSecured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by theESOP to a third-party lender. See Note 6 to BGH’s condensed consolidatedfinancial statements for a description of the terms of the 3.60% ESOP Notes.

 

*Buckeye Notes*

* *

OnJanuary 11, 2008, Buckeye sold $300.0 million aggregate principal amountof 6.05% Notes due 2018 in an underwritten public offering.  Proceeds from this offering, afterunderwriters’ fees and expenses, were approximately $298.0 million and wereused to reduce amounts outstanding under Buckeye’s credit facility that weredrawn to partially pre-fund the Lodi Gas acquisition.

 

At March 31,2008, Buckeye had an aggregate amount of $1,386.8 million of debt, whichconsisted of $300.0 million of Buckeye’s 4.625% Notes due 2013, $275.0 millionof Buckeye’s 5.300% Notes due 2014, $150.0 million of Buckeye’s 6.75% Notes due2033, $125.0 million of Buckeye’s 5.125% Notes due 2017, $300.0 million of Buckeye’s6.05% Notes due 2018, $140.0 million outstanding under Buckeye’s unsecuredrevolving credit agreement (the “Credit Facility”) and $96.8 millionoutstanding under Farm & Home’s working capital facility.

 

33

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*Buckeye Credit Facility*

 

TheCredit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greaterthan 5.0 to 1.0 subject to a provision that allows for increases to 5.5 to 1.0in connection with certain future acquisitions. The Funded Debt Ratio is calculated by dividing consolidated debtby annualized EBITDA as defined in the Credit Facility.  The Credit Facility defines EBITDA asearnings before interest, taxes, depreciation, depletion and amortization, ineach case excluding the income of certain majority-owned subsidiaries andequity investments (but including distributions from those majority-ownedsubsidiaries and equity investments).  AtMarch 31, 2008, Buckeye’s Funded Debt Ratio was 4.2 to 1.0.

 

Inaddition, the Credit Facility contains other covenants including, but notlimited to, limiting Buckeye’s ability to incur additional indebtedness, tocreate or incur certain liens on its property, to dispose of property materialto its operations, and to consolidate, merge or transfer assets.  At March 31, 2008, Buckeye was incompliance with the covenants under its Credit Facility.

 

SeeNote 6 to the condensed consolidated financial statements for more informationabout the terms of the Credit Facility.

 

*Farm & Home Line ofCredit*

 

Farm &Home is party to a Loan and Security Agreement, dated as of December 16,2004, as amended, with a syndicate of banks (the “Farm & HomeAgreement”). The balance outstanding under the Farm & Home Agreementwas approximately $96.8 million at March 31, 2008, all of which wasclassified as a current liability.  TheFarm & Home Agreement requires Farm & Home to maintain atangible net worth, defined generally as the amount by which Farm &Home’s assets (excluding intangible assets and accumulated other comprehensiveincome or loss) exceed its liabilities, equal to $33.7 million for the period June 30,2007 through June 29, 2008 and thereafter equal to prior periods’ requiredtangible net worth plus 50% of Farm & Home’s net income, if positive,for the fiscal year then ended.  At March 31,2008, Farm & Home’s tangible net worth was $59.5 million.  Farm & Home also must maintain aratio of the sum of all indebtedness of Farm & Home to tangible net worthof not greater than 2.50 to 1.00.  At March 31,2008, Farm & Home’s indebtedness to tangible net worth ratio was 1.63to 1.00.  In addition, Farm &Home is required to maintain a ratio of pre-tax income to interest expense ofnot less than 1.25 to 1.00.  At March 31,2008, Farm & Home’s pre-tax income to interest expense ratio was 1.33to 1.00.

 

TheFarm & Home Agreement also contains various negative covenants,including covenants restricting Farm & Home’s ability to merge orconsolidate with another entity, acquire other businesses, change its legalorganization or engage in a business or activities materially different thanits existing business.  On April 15,2008, Farm & Home received a waiver from the lending banks whichpermitted the sale of the retail operations and released the banks’ liens onthe assets of the retail operations.  At March 31,2008, Farm & Home was in compliance with the covenants under the Farm &Home Agreement.

 

SeeNote 6 to the condensed consolidated financial statements for more informationabout the terms of the Farm & Home Agreement.

 

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* *

*Cash Flows fromOperations*

* *

The components of cashflows from operations for the three months ended March 31, 2008 and 2007were as follows:

 
| ** **                                           | ** ** | **Cash Flow from Operations**                           | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **For the Three Months Ended March 31,** | ** ** |
| ** **                                           | ** ** | **2008**                                                               | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                                                | ** ** |
| Net income                                           |       | $                                                                      | 5,849      |   | $ | 5,939 |   |
| Value of ESOP  shares released                       |       | 817                                                                    |       | 1,148 |   |
| Depreciation and  amortization                       |       | 11,383                                                                 |       | 9,707 |   |
| Non-controlling  interest                            |       | 34,736                                                                 |       | 30,905 |   |
| Changes in  current assets and current liabilities   |       | 5,827                                                                  |       | 257 |   |
| Changes in other  non-current assets and liabilities |       | 2,347                                                                  |       | 454 |   |
| Other                                                |       | (876                                                                   | )          | (237 | ) |
| Total                                                |       | $                                                                      | 60,083     |   | $ | 48,173 |   |

 

Cashflows from operations were $60.1 million for the first three months of 2008compared to $48.2 million for the first three months of 2007, an increase of $11.9million. The primary causes of this increase are the improvement in Buckeye’snet income for the period in 2008 compared to 2007 and favorable fluctuationsin working capital.  Cash provided byworking capital was $5.8 million in the first three months of 2008 compared tocash provided by working capital of $0.3 million in the first three months of2007.

 

Inthe first three months of 2008, cash provided by working capital resultedprimarily from reductions in construction and pipeline relocation receivablesof $2.8 million and inventories of $5.0 million and an increase in accountspayable of $1.4 million.  These cashflows were offset by an increase in prepaid and other current assets of $5.1million.  The decrease in constructionand pipeline relocation receivables is due to the timing of construction andpipeline relocation billings at year end. Inventories decreased due to a decrease of inventory for Farm &Home since its acquisition in February 2008.  The decrease in accounts payable is due tothe timing of invoices as compared to year end. The increase in prepaid and other current assets is due to an increasein the receivable related to activities on Buckeye’s ammonia pipeline.

 

In the first three months of 2007, cash provided byworking capital of $0.3 million resulted primarily from reductions in bothtrade and construction and pipeline relocation receivables of $13.6 millionthat were offset primarily by reductions in accounts payable of $11.1 millionand in accrued and other current liabilities of $2.8 million.

 

*CashFlows from Investing Activities*

 

Net cash used in investing activities for the threemonths ended March 31, 2008 and 2007 are as follows:

 
| ** **                           | ** ** | **Investing Activities**                                          | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **For the Three Months Ended March 31,** | ** ** |
| ** **                           | ** ** | **2008**                                                               | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(In thousands)**                                                | ** ** |
| Capital  expenditures                |       | $                                                                      | (14,792    | ) | $ | (17,373 | ) |
| Acquisitions and  equity investments |       | (600,309                                                               | )          | (38,468 | ) |
| Other                                |       | (33                                                                    | )          | (72 | ) |
| Total                                |       | $                                                                      | (615,134   | ) | $ | (55,913 | ) |

 

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Inthe three months ended March 31, 2008, Buckeye expended $443.5 million forLodi Gas, $142.9 million for Farm & Home, and $13.9 million forterminal acquisition in Niles, Michigan and Ferrysburg, Michigan.  See Note 3 to the condensed consolidatedfinancial statements for a further discussion.

 

In the three months ended March 31, 2007, Buckeyeexpended $38.5 million primarily for the acquisition of six terminals andrelated assets.

 

Capital expenditures are summarized below:

 
| ** **                       | ** ** | **Capital Expenditures**                                          | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Three Months Ended March 31,** | ** ** |
| ** **                       | ** ** | **2008**                                                               | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                                | ** ** |
| Sustaining  capital expenditures |       | $                                                                      | (3,262     | ) | $ | (7,170 | ) |
| Expansion and  cost reduction    |       | (11,530                                                                | )          | (10,203 | ) |
| Total                            |       | $                                                                      | (14,792    | ) | $ | (17,373 | ) |

 

Buckeyeincurred $3.3 million and $7.2 million of sustaining capital expenditures and$11.5 million and $10.2 million of expansion and cost reduction expenditures inthe first three months of 2008 and 2007, respectively. Expansion and costreduction projects in 2008 include ethanol and butane blending projects as wellas the construction of three additional tanks with capacity of 0.4 millionbarrels in Linden, New Jersey.  Expansionand cost reduction projects in 2007 include a capacity expansion project inIllinois to handle additional LPG volumes as well as ongoing capacity improvementsto the pipeline and terminal at the Memphis International Airport.

 

Buckeyeexpects to spend approximately $135 million in capital expenditures in2008, of which approximately $36 million is expected to relate to sustainingcapital expenditures and $99 million is expected to relate to expansion andcost reduction projects. Sustaining capital expenditures include renewals andreplacement of tank floors and roofs and upgrades to station and terminallingequipment, field instrumentation and cathodic protection systems.  Kirby Hills Phase II is Buckeye’s mostsignificant expansion project with budgeted expenditures for 2008 ofapproximately $42 million.

 

*Cash Flows fromFinancing Activities*

* *

During the firstthree months of 2007, BGH borrowed $0.6 million and repaid $0.6 million underthe BGH Credit Agreement.  BGH did notborrow any amounts under the BGH Credit facility in the first three months of2008.  BGH’s distributions to itsunitholders totaled $8.1 million in the first three months of 2008.

 

On March 26,2008, Buckeye issued 2.6 million LP Units in an underwritten public offering at$42.86 per LP Unit. Total proceeds from the offering, after underwriter’sdiscount of $1.79 per LP Unit and offering expenses, were approximately $113.3million, and were used to reduce amounts outstanding under the Credit Facility.

 

OnJanuary 11, 2008, Buckeye sold $300.0 million aggregate principal amountof 6.05% Notes in an underwritten public offering.  Proceeds from this offering, afterunderwriters’ fees and expenses, were approximately $298.0 million and wereused to reduce amounts outstanding under Buckeye’s credit facility that hadbeen drawn 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 this Note.

 

Duringthe first three months of 2008 and 2007, Buckeye borrowed $278.0 million and$70.0 million under its Credit Facility, respectively, and repaid $138.0million and $105.0 million, respectively.  Payments on the 3.60% Notes were $1.6 million and $1.5 million for thethree months ended March 31, 2008 and 2007, respectively.

 

Distributionsto non-controlling interests, consisting primarily of Buckeye’s distributionsto holders of its LP Units, were $37.3 million in the first three months of2008 compared to $29.8 million in the first three months of 2007.  The 

 

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increase in distributionsresulted from increases in the unit distribution rate and the issuance of 6.2million LP Units in 2007.

 

OTHER MATTERS

#  

Accounting Pronouncements

#  

# See Note 15 to the condensed consolidated financialstatements for a description of certain 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’s abilityto pay distributions to its unitholders; (2) BGH’s expected receipt ofdistributions and incentive distributions from Buckeye; (3) anticipatedtrends in Buckeye’s business; (4) price trends and overall demand forrefined petroleum products and natural gas in the United States in general andin Buckeye’s service areas in particular (economic activity, weather,alternative energy sources, conservation and technological advances may affectprice trends and demands); (5) competitive pressures from other transportationservices or alternative fuel sources; (6) changes, if any, in laws andregulations, including, among others, safety, tax and accounting matters orFederal Energy Regulatory Commission regulation of Buckeye’s tariff rates; (7) liabilityfor environmental claims; (8) security issues affecting Buckeye’s assets,including, among others, potential damage to its assets caused by vandalism,acts of war or terrorism; (9) construction costs, unanticipated capitalexpenditures and operating expenses to repair or replace Buckeye’s assets; (10) availabilityand cost of insurance on Buckeye’s assets and operations; (11) Buckeye’sability to successfully identify and complete strategic acquisitions and makecost saving changes in operations; (12) expansion in the operations ofBuckeye’s competitors; (13) Buckeye’s ability to integrate any acquiredoperations into its existing operations and to realize anticipated cost savingsand other efficiencies; (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) availability and cost of insurance on BGH’s and Buckeye’s assets andoperations; (21) BGH’s future results of operations; (22) BGH’sliquidity and ability to finance its activities; (23) market conditions inBuckeye’s industry; (24) conflicts of interest between Buckeye, itsgeneral partner and BGH; (25) the treatment of Buckeye or BGH as acorporation for federal income tax purposes or if BGH or Buckeye become subjectto entity-level taxation for state tax purposes; and (26) the impact ofgovernmental legislation and regulation 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 and other cautionary statements in BGH’s Annual Report onForm 10-K for 2007, including those described in the “Risk Factors”section of that report. Further, we undertake no obligation to update publiclyany forward-looking statement whether as a result of new information or futureevents.

 

# Item 3.Quantitative and Qualitative Disclosures About Market Risk

#  

*Market Risk – Trading Instruments*

 

Neither BGH nor Buckeye has any tradingderivative instruments and neither currently engages in hedging activity withrespect to trading instruments.

 

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*Market Risk – Other than Trading Instruments*

 

Buckeyeis exposed to financial market risk resulting from changes in commodity pricesand interest rates.  Buckeye does notcurrently have foreign exchange risk.

 

All derivatives are recognized on the balance sheets at theirfair value.  On the date a derivativecontract is entered into, Buckeye designates the derivative as (1) a hedgeof a recognized asset or liability or of an unrecognized firm commitment (“FairValue Hedge”), or (2) a hedge of a forecasted transaction or of thevariability of cash flows to be received or paid related to a recognized assetor liability (“Cash Flow Hedge”). Changes in the fair value of a derivative that qualifies as a Fair ValueHedge are recorded in current period earnings along with the related gain orloss on the hedged asset or liability. Changes in the fair value of a derivative that qualifies as a Cash FlowHedge are recorded in other comprehensive income (loss) until earnings areaffected by the related variability of cash flows.  Changes in the fair values of derivativesthat no longer qualify for hedge accounting are immediately recognized inincome.

 

Buckeye is exposed to commodity price risk with respect topurchases and sales of petroleum products, principally in its Energy Servicesoperating segment.  Buckeye usespetroleum derivative contracts to manage the effect of changing market priceson future inventory purchases required to meet future fixed price salescommitments (“Firm Commitments”) and on future sales of products held ininventory (“Spot Inventory”).  All ofBuckeye’s petroleum derivative contracts are entered into for hedging purposes;that is, they are specifically matched in volume and maturity with the varioussales commitments of the business. Derivative contracts entered to hedge Firm Commitments are classified asCash Flow Hedges.  Derivative contractsentered to hedge Spot Inventory positions are classified as Fair Value Hedges.Gains and losses on petroleum derivative contracts are recognized in earningsin the cost of product sales as product is delivered or commitments areperformed under fixed price contracts.

 

As of March 31, 2008, Buckeye had outstanding derivativecontracts used to hedge the variability of market prices of petroleumproducts.  The following table presentsunrealized gains on such derivatives as of March 31, 2008:

 
| ** **                                       | ** ** | **March 31,**      | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2008**                | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| Petroleum  derivatives used as Cash Flow Hedges  |       | $                       | 2,839      |   |
| Petroleum  derivatives used as Fair Value Hedges |       | 775                     |       |
| Total                                            |       | $                       | 3,614      |   |

 

Gains or losses on hedges that were ineffective were notmaterial for the quarter ended March 31, 2008.  As of March 31, 2008, open petroleumderivative contracts varied in duration, but did not extend beyond May 2009.

 

Based ona hypothetical 10% movement in the underlying quoted market prices of thecommodity financial instruments outstanding at March 31, 2008, the estimatedfair value of portfolio of commodity financial instruments would be as follows:

 

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| ** **                                                       | ** ** | ** **         | ** ** | **Commodity**           | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | ** **         | ** ** | **Financial**           | ** ** |
| ** **                                                       | ** ** | ** **         | ** ** | **Instrument**          | ** ** |
| ** **                                                       | ** ** | **Resulting**      | ** ** | **Portfolio**           | ** ** |
| **Scenario**                                                     | ** ** | **Classification** | ** ** | **Fair Value**     | ** ** |
| ** **                                                       | ** ** | ** **         | ** ** | **(In thousands)** | ** ** |
| ** **                                                       | ** ** | ** **         | ** ** | ** **              | ** ** |
| Fair value  assuming no change in underlying commodity prices    |       | Asset              |       | $                       | 3,614      |   |
| Fair value  assuming 10% increase in underlying commodity prices |       | (Liability)        |       | $                       | (1,525     | ) |
| Fair value  assuming 10% decrease in underlying commodity prices |       | Asset              |       | $                       | 8,759      |   |

 

Buckeye is exposed to riskresulting from changes in interest rates. Buckeye isexposed to fair value risk with respect to the fixed portion of its financingarrangements (the 5.125% Notes, the 5.30% Notes, the 4.625% Notes, the 6.750%Notes and 6.05% Notes) and to cash flow risk with respect to its variable rateobligations (the Credit Facility and the Farm & Home Agreement). Fairvalue risk represents the risk that the value of the fixed portion of Buckeye’sfinancing arrangements will rise or fall depending on changes in interestrates. Cash flow risk represents the risk that interest costs related to theCredit Facility and the Farm & Home Agreement will rise or falldepending on changes in interest rates.

 

At March 31,2008, Buckeye had total fixed-rate debt obligations having a face value of$1,150.0 million, consisting of $125.0 million of the 5.125% Notes, $275.0 millionof the 5.30% Notes, $300.0 million of the 4.625% Notes, $150.0 millionof the 6.750% Notes and $300.0 million of the 6.05% Notes. At March 31,2008, Services Company had fixed debt obligations of approximately $18.8million of its 3.60% ESOP Notes. The aggregate fair value of these fixed obligationsat March 31, 2008 was approximately $1,164.7 million.  A 1% decrease in rates for obligations ofsimilar maturities would have increased the aggregate fair value of theseobligations by $83.7 million at March 31, 2008.  Buckeye’s variable debt obligation was $140.0million under the Credit Facility and $96.8 million under the Farm &Home Agreement at March 31, 2008. Based on the balances outstanding at March 31, 2008, a 1% increaseor decrease in interest rates would increase or decrease annual interestexpense by $2.4 million.

 

InJanuary 2008, Buckeye terminated two forward-starting interest rate swapagreements associated with the 6.05% Notes due 2018 and made a payment of $9.6million in connection with the termination. In accordance with FASB Statement No. 133 – “Accounting forDerivative Instruments and Hedging Activities” (“SFAS No. 133”), Buckeyehas recorded the amount in other comprehensive income and will amortize theamount into interest expense over the term of the loan.  Interest expense increased by $0.2 millionfor the three months ended March 31, 2008 as a result of the amortizationof the termination payment.

 

InDecember 2004, Buckeye terminated an interest rate swap agreementassociated with the 4.625% Notes and received proceeds of $2.0 million.  In accordance SFAS No. 133, Buckeye hasdeferred the $2.0 million gain as an adjustment to the fair value of the hedgedportion of Buckeye’s debt and is amortizing the gain as a reduction of interestexpense over the remaining term of the hedged debt.  Accordingly, interest expense was reduced by$0.1 million for the three months ended March 31, 2008 and 2007,respectively.

 

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 

 

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(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 materially affect,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.

 

Item6. Exhibits

 

(a)     Exhibits

 

10.1  Fifth Supplemental Indenture, dated January 11,2008, between Buckeye Partners, L.P. and U.S. Bank National Association(successor to SunTrust Bank) (incorporated by reference to Exhibit 4.1 toBuckeye Partners, L.P.’s Current Report on Form 8-K filed on January 11,2008).

 

10.2  Third Amendment to Credit Agreement, dated January 23,2008, among Buckeye Partners, L.P., SunTrust Bank, as administrative agent, andthe lenders signatory thereto (incorporated by reference to Exhibit 10.1to Buckeye Partners, L.P.’s Current Report on Form 8-K filed on January 28,2008).

 

10.3  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, andthe 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 and the Sixth Amendment,dated November 20, 2007 (incorporated by reference to Exhibit 10.1 toBuckeye Partners, L.P.’s Current Report on Form 8-K filed on February 8,2008).

 

10.4  Seventh Amendment, dated February 8,2008, between Farm & Home Oil Company and Univest National Bank andTrust Co. to the Amended and Restated Loan and Security Agreement, dated December 16,2004, as amended (incorporated by reference to Exhibit 10.2 to BuckeyePartners, L.P.’s Current Report on Form 8-K filed on February 8,2008).

 

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

 

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

 

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

 

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

 

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SIGNATURE

 

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

 

 
|                     | BUCKEYE  GP HOLDINGS L.P.    |
|--------------------------|------------------------------|
|                     | (Registrant)                 |   |
|                     |                         |
|                     | By:  MainLine Management LLC |
|                     | as General Partner           |   |
|                     |                         |
|                     |                         |
| Date:  May 12, 2008 |                         | By: | /s/ VANCE E.  POWERS |
|                     |                         |
|                     |                         | Vance  E. Powers |
|                     |                         | Acting  Chief Financial Officer |
|                          |                              |  |  |  |  |  |

 

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