UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-32963

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 number)
One Greenway Plaza
Suite 600
Houston, TX		77046
(Address of principal executive offices)		(Zip Code)

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

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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 þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     As of August 3, 2010, there were 27,774,016 Common Units and 525,984 Management Units outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)			2
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (Unaudited)			4
Condensed Consolidated Statements of Partners’ Capital for the Six Months Ended June 30, 2010 and 2009 (Unaudited)			5
Notes to Unaudited Condensed Consolidated Financial Statements:
1. Organization and Basis of Presentation			6
2. Acquisition and Disposition			8
3. Commitments and Contingencies			9
4. Inventories			10
5. Prepaid and Other Current Assets			11
6. Equity Investments			11
7. Intangible Assets			12
8. Other Non-Current Assets			12
9. Accrued and Other Current Liabilities			13
10. Debt Obligations			13
11. Other Non-Current Liabilities			16
12. Derivative Instruments, Hedging Activities and Fair Value Measurements			17
13. Pensions and Other Postretirement Benefits			23
14. Unit-Based Compensation Plans			24
15. Related Party Transactions			26
16. Cash Distributions			27
17. Earnings Per Partnership Unit			27
18. Business Segments			27
19. Supplemental Cash Flow Information			29
20. Subsequent Event			29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			49
Item 4. Controls and Procedures			52
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 6. Exhibits			57
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BUCKEYE GP HOLDINGS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues:
Product sales		$	501,744			$	201,777			$	1,069,914			$	470,556
Transportation and other services			165,532				149,443				328,536				297,504
Total revenue			667,276				351,220				1,398,450				768,060
Costs and expenses:
Cost of product sales and natural gas storage services			498,645				193,440				1,068,382				444,116
Operating expenses			68,769				68,842				135,352				142,742
Depreciation and amortization			14,669				13,559				29,197				26,923
Asset impairment expense			—				72,540				—				72,540
General and administrative			13,254				10,158				24,089				20,193
Reorganization expense			—				28,113				—				28,113
Total costs and expenses			595,337				386,652				1,257,020				734,627
Operating income (loss)			71,939				(35,432	)			141,430				33,433
Other income (expense):
Investment income			85				142				240				294
Interest and debt expense			(21,350	)			(16,236	)			(43,006	)			(33,639	)
Total other expense			(21,265	)			(16,094	)			(42,766	)			(33,345	)
Income (loss) before earnings from equity investments			50,674				(51,526	)			98,664				88
Earnings from equity investments			2,764				3,142				5,416				5,224
Net income (loss)			53,438				(48,384	)			104,080				5,312
Less: net income (loss) attributable to noncontrolling interests			(41,931	)			58,156				(81,303	)			14,609
Net income attributable to Buckeye GP Holdings L.P.		$	11,507			$	9,772			$	22,777			$	19,921
Earnings per partnership unit:
Basic		$	0.41			$	0.35			$	0.80			$	0.70
Diluted		$	0.41			$	0.35			$	0.80			$	0.70
Weighted average number of common units outstanding:
Basic			28,300				28,300				28,300				28,300
Diluted			28,300				28,300				28,300				28,300

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE GP HOLDINGS L.P.

		June 30,				December 31,
		2010				2009
Assets:
Current assets:
Cash and cash equivalents		$	15,497			$	37,574
Trade receivables, net			113,576				124,165
Construction and pipeline relocation receivables			11,626				14,095
Inventories			275,174				310,214
Derivative assets			10,093				4,959
Assets held for sale			—				22,000
Prepaid and other current assets			68,574				104,251
Total current assets			494,540				617,258
Property, plant and equipment, net			2,237,598				2,238,321
Equity investments			98,568				96,851
Goodwill			432,124				432,124
Intangible assets, net			42,931				45,157
Other non-current assets			38,118				56,860
Total assets		$	3,343,879			$	3,486,571
Liabilities and partners’ capital:
Current liabilities:
Line of credit		$	194,179			$	239,800
Current portion of long-term debt			4,599				6,178
Accounts payable			64,352				56,723
Derivative liabilities			367				14,665
Accrued and other current liabilities			127,091				113,474
Total current liabilities			390,588				430,840
Long-term debt			1,421,181				1,500,495
Other non-current liabilities			128,280				102,942
Total liabilities			1,940,049				2,034,277
Commitments and contingent liabilities			—				—
Partners’ capital:
Buckeye GP Holdings L.P. capital:
General Partner (2,830 common units outstanding as of June 30, 2010 and December 31, 2009)			7				7
Limited Partners (27,771,186 common units outstanding as of June 30, 2010 and December 31, 2009)			234,257				236,545
Management (525,984 units outstanding as of June 30, 2010 and December 31, 2009)			3,182				3,225
Equity gains on issuance of Buckeye Partners, L.P. limited partner units			2,557				2,557
Total Buckeye GP Holdings L.P. capital			240,003				242,334
Noncontrolling interests			1,163,827				1,209,960
Total partners’ capital			1,403,830				1,452,294
Total liabilities and partners’ capital		$	3,343,879			$	3,486,571

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE GP HOLDINGS L.P.

		Six Months Ended
		June 30,
		2010				2009
Cash flows from operating activities:
Net income		$	104,080			$	5,312
Adjustments to reconcile net income to cash provided by operating activities:
Value of ESOP shares released			2,271				380
Depreciation and amortization			29,197				26,923
Asset impairment expense			—				72,540
Net changes in fair value of derivatives			(12,901	)			4,672
Non-cash deferred lease expense			2,117				2,250
Reorganization expense			—				28,113
Earnings from equity investments of Buckeye Partners, L.P.			(5,416	)			(5,224	)
Distributions from equity investments of Buckeye Partners, L.P.			3,700				2,827
Amortization of other non-cash items			5,060				3,170
Change in assets and liabilities:
Trade receivables			10,589				(2,832	)
Construction and pipeline relocation receivables			2,469				4,855
Inventories			28,065				(27,742	)
Prepaid and other current assets			36,962				(17,692	)
Accounts payable			7,629				5,236
Accrued and other current liabilities			11,058				(5,506	)
Other non-current assets			3,370				(7,069	)
Other non-current liabilities			3,701				9,424
Total adjustments from operating activities			127,871				94,325
Net cash provided by operating activities			231,951				99,637
Cash flows from investing activities:
Capital expenditures			(27,572	)			(39,819	)
Contributions to equity investments			—				(3,880	)
Net proceeds from disposal of property, plant and equipment			22,274				21
Net cash used in investing activities			(5,298	)			(43,678	)
Cash flows from financing activities:
Net proceeds from issuance of Buckeye Partners, L.P. limited partner units			—				104,779
Proceeds from exercise of Buckeye Partners, L.P. unit options			2,976				38
Repayment of long-term debt			(3,104	)			(3,162	)
Borrowings under credit facility			95,000				77,333
Repayments under credit facility			(173,000	)			(166,600	)
Net (repayments) borrowings under BES credit agreement			(45,621	)			3,000
Debt issuance costs			(3,227	)			(18	)
Costs associated with agreement and plan of merger			(1,547	)			—
Distributions paid to noncontrolling partners of Buckeye Partners, L.P.			(96,435	)			(87,064	)
Distributions paid to partners			(23,772	)			(19,244	)
Net cash used in financing activities			(248,730	)			(90,938	)
Net decrease in cash and cash equivalents			(22,077	)			(34,979	)
Cash and cash equivalents — Beginning of period			37,574				61,281
Cash and cash equivalents — End of period		$	15,497			$	26,302

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE GP HOLDINGS L.P.

		Buckeye GP Holdings L.P. Unitholders
														Equity Gains
		General				Limited								on Issuance
		Partner				Partner								of Buckeye’s
		Common				Common				Management				Limited				Noncontrolling
		Units				Units				Units				Partner Units				Interests				Total
Balance – January 1, 2009		$	7			$	226,565			$	3,037			$	2,451			$	1,166,774			$	1,398,834
Net income*			—				19,547				374				—				(14,609	)			5,312
Distributions paid to partners			—				(18,883	)			(361	)			—				—				(19,244	)
Recognition of unit-based compensation charges			—				718				16				—				—				734
Equity gains on issuance of Buckeye’s limited partner units			—				—				—				106				(106	)			—
Net proceeds from issuance of 3.0 million of Buckeye’s limited partner units			—				—				—				—				104,779				104,779
Amortization of Buckeye’s limited partner unit options			—				—				—				—				477				477
Exercise of limited partner unit options			—				—				—				—				38				38
Services Company’s non-cash ESOP distributions			—				—				—				—				(3,122	)			(3,122	)
Distributions paid to noncontrolling interests			—				—				—				—				(87,064	)			(87,064	)
Adjustment to funded status of benefit plans			—				—				—				—				7,971				7,971
Other			—				—				—				—				4,166				4,166
Balance – June 30, 2009		$	7			$	227,947			$	3,066			$	2,557			$	1,179,304			$	1,412,881
Balance – January 1, 2010		$	7			$	236,545			$	3,225			$	2,557			$	1,209,960			$	1,452,294
Net income*			—				22,350				427				—				81,303				104,080
Costs associated with agreement and plan of merger							(1,941	)			(37	)							(1,846	)			(3,824	)
Distributions paid to partners			—				(23,327	)			(445	)			—				—				(23,772	)
Recognition of unit-based compensation charges			—				630				12				—				—				642
Amortization of Buckeye’s limited partner unit options			—				—				—				—				3,596				3,596
Exercise of limited partner unit options			—				—				—				—				2,976				2,976
Services Company’s non-cash ESOP distributions			—				—				—				—				(2,639	)			(2,639	)
Distributions paid to noncontrolling interests			—				—				—				—				(96,435	)			(96,435	)
Change in value of derivatives			—				—				—				—				(36,600	)			(36,600	)
Investment in Buckeye’s limited partner units			—				—				—				—				4,503				4,503
Other			—				—				—				—				(991	)			(991	)
Balance – June 30, 2010		$	7			$	234,257			$	3,182			$	2,557			$	1,163,827			$	1,403,830

See Notes to Unaudited Condensed Consolidated Financial Statements.

BUCKEYE GP HOLDINGS L.P.

     Except for per unit amounts, or as otherwise noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are stated in thousands.

1. ORGANIZATION AND BASIS OF PRESENTATION

Partnership Organization

     Buckeye GP Holdings L.P. is a publicly traded Delaware master limited partnership (“MLP”), the common units (“Common Units”) of which are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “BGH.” We were organized on June 15, 2006 and own 100% of Buckeye GP LLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”). Buckeye is also a publicly traded Delaware MLP which was organized in 1986, and its limited partner units (“LP Units”) are separately traded on the NYSE under the ticker symbol “BPL.” Approximately 62% of our outstanding equity, which includes Common Units and management units (“Management Units”), are owned by BGH GP Holdings, LLC (“BGH GP”) and approximately 38% by the public. BGH GP is owned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”), and certain investment funds along with certain members of senior management of Buckeye GP. MainLine Management LLC, a Delaware limited liability company (“MainLine Management”), is our general partner and is wholly owned by BGH GP. As used in these Notes to Unaudited Condensed Consolidated Financial Statements, unless the context requires otherwise, references to “we,” “us,” “our” or "BGH” are intended to mean the business and operations of Buckeye GP Holdings L.P. on a consolidated basis, including those of Buckeye. References to “Buckeye” mean Buckeye Partners, L.P. and its consolidated subsidiaries.

     Our only business is the ownership of Buckeye GP. Buckeye GP’s only business is the management of Buckeye and its subsidiaries. At June 30, 2010, Buckeye GP owned an approximate 0.5% general partner interest in Buckeye.

     Buckeye owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered with approximately 5,400 miles of pipeline and 67 active products terminals that provide aggregate storage capacity of approximately 27.2 million barrels. In addition, Buckeye operates and maintains approximately 2,400 miles of other pipelines under agreements with major oil and gas, petrochemical and chemical companies, and performs certain engineering and construction management services for third parties. Buckeye also owns and operates a major natural gas storage facility in northern California, and is a wholesale distributor of refined petroleum products in the United States in areas also served by its pipelines and terminals. We, through Buckeye, operate and report in five business segments: Pipeline Operations; Terminalling & Storage; Natural Gas Storage; Energy Services; and Development & Logistics.

     Buckeye Pipe Line Services Company (“Services Company”) was formed in 1996 in connection with the establishment of the Buckeye Pipe Line Services Company Employee Stock Ownership Plan (the “ESOP”). At June 30, 2010, Services Company owned approximately 3.0% of Buckeye’s LP Units. Services Company employees provide services to Buckeye’s operating subsidiaries. Pursuant to a services agreement entered into in December 2004 (the “Services Agreement”), Buckeye’s operating subsidiaries reimburse Services Company for the costs of the services provided by Services Company.

Agreement and Plan of Merger

     On June 10, 2010, we and our general partner entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Buckeye, its general partner and Grand Ohio, LLC (“Merger Sub”), Buckeye’s subsidiary, pursuant to which Merger Sub will be merged into BGH, with BGH as the surviving entity (the “Merger”). In the transaction, the incentive compensation agreement (also referred to as the incentive distribution rights) held by Buckeye’s general partner will be cancelled, the general partner units held by Buckeye’s general partner (representing an approximate 0.5% general partner interest in Buckeye) will be converted to a non-economic general partner interest, all of the economic interest in us will be acquired by BPL and our unitholders will receive aggregate consideration of approximately 20.0 million of Buckeye’s LP Units.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The terms of the Merger Agreement were unanimously approved by the audit committee of the board of directors of our general partner (“Audit Committee”), and by the board of directors of Buckeye’s general partner. Additionally, our majority unitholder, BGH GP Holdings, LLC, and ArcLight Energy Partners Fund III, L.P., ArcLight Energy Partners Fund IV, L.P., Kelso Investment Associates VII, L.P., and KEP VI, LLC have executed a Support Agreement (“Support Agreement”) agreeing to vote in favor of the Merger and against any alternative transaction. The Support Agreement will automatically terminate if the board of directors of our general partner changes its recommendation to our unitholders with respect to the Merger or the Merger Agreement is terminated.

     After the Merger, the board of directors of Buckeye’s general partner is expected to consist of nine members, three of whom are expected to be the existing independent members of Buckeye’s Audit Committee, one of whom is expected to be the existing chief executive officer of Buckeye’s general partner and three of whom are expected to be the three existing independent members of the audit committee of the board of directors of our general partner. In addition, our general partner, which will own a non-economic general partner interest in us and will continue to be owned by BGH GP Holdings, LLC, will have the right and authority to designate two additional members of the board of directors, subject to reduction if BGH GP Holdings, LLC’s ownership of Buckeye’s LP Units drops below certain thresholds. The remaining seven members of Buckeye’s general partner’s board of directors will be elected by holders of its LP Units.

     The Merger Agreement is subject to, among other things, approval by the affirmative vote of the holders of a majority of Buckeye’s LP Units outstanding and entitled to vote at a meeting of the holders of Buckeye’s LP Units, approval by the (a) affirmative vote of holders of a majority of our Common Units and (b) affirmative vote of holders of a majority of our Common Units and management units, voting together as a single class, and the effectiveness of a registration statement on Form S-4 with respect to the issuance of Buckeye’s LP Units in connection with the Merger.

     The Merger will be accounted for as an equity transaction. Therefore, changes in our ownership interest as a result of the Merger will not result in gain or loss recognition. We will be considered the surviving consolidated entity for accounting purposes, while Buckeye will be the surviving consolidated entity for legal and reporting purposes.

     We and Buckeye incurred a total of $3.8 million of costs associated with the Merger during the three and six months ended June 30, 2010, of which $1.5 million has been paid. We charged these costs directly to partners’ capital.

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of our management, of a normal and recurring nature and necessary for a fair statement of our financial position as of June 30, 2010, and the results of our operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of results of our operations for the 2010 fiscal year. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). We have eliminated all intercompany transactions in consolidation. The consolidated financial statements also include the accounts of wholly-owned subsidiaries, as well as the accounts of Buckeye and Services Company, on a consolidated basis. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. These interim financial statements should be read in conjunction with our consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 2, 2010.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Reclassifications

     Certain prior year amounts have been reclassified in the condensed consolidated statements of cash flows to conform to the current-year presentation. The reclassification in the condensed consolidated statements of cash flows is as follows:

•

We have separately disclosed cash flows from the issuance of long-term debt and borrowings under our credit facilities for the six months ended June 30, 2009. These amounts had been included within the same line item in the 2009 period.

     This reclassification had no impact on net income (loss) or cash flows from operating, investing or financing activities.

Recent Accounting Developments

     Consolidation of Variable Interest Entities (“VIEs”). In June 2009, the Financial Accounting Standards Board (“FASB”) amended consolidation guidance for VIEs. The objective of this new guidance is to improve financial reporting by companies involved with VIEs. This guidance requires each reporting company to perform an analysis to determine whether the company’s variable interest or interests give it a controlling financial interest in a VIE. The new guidance was effective for us on January 1, 2010. The adoption of this guidance did not have an impact on our consolidated financial statements.

     Fair Value Measurements. In January 2010, the FASB issued guidance that requires new disclosures related to fair value measurements. The new guidance requires expanded disclosures related to transfers between Level 1 and 2 activities and a gross presentation for Level 3 activity. The new accounting guidance is effective for fiscal years and interim periods beginning after December 15, 2009, except for the new disclosures related to Level 3 activities, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The new guidance became effective for us on January 1, 2010, except for the new disclosures related to Level 3 activities, which will be effective for us on January 1, 2011. We have included the enhanced disclosure requirements regarding fair value measurements in Note 12.

2. ACQUISITION AND DISPOSITION

Refined Petroleum Products Terminals and Pipeline Assets Acquisition

     On November 18, 2009, we acquired from ConocoPhillips certain refined petroleum product terminals and pipeline assets for approximately $47.1 million in cash. In addition, we acquired certain inventory on hand upon completion of the transaction for additional consideration of $7.3 million. The assets include over 300 miles of active pipeline that provide connectivity between the East St. Louis, Illinois and East Chicago, Indiana markets and three terminals providing 2.3 million barrels of storage tankage. ConocoPhillips entered into certain commercial contracts with us concurrent with our acquisition regarding usage of the acquired facilities. We believe the acquisition of these assets has given us greater access to markets and refinery operations in the Midwest and increased the commercial value of these assets and certain of our existing assets to our customers by offering enhanced distribution connectivity and flexible storage capabilities. The operations of these acquired assets are reported in the Pipeline Operations and Terminalling & Storage segments. The purchase price has been allocated to the tangible and intangible assets acquired, as follows:

Inventory		$	7,287
Property, plant and equipment			44,400
Intangible assets			4,580
Environmental and other liabilities			(1,834	)
Allocated purchase price		$	54,433

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Sale of Buckeye NGL Pipeline

     Effective January 1, 2010, we sold our ownership interest in an approximately 350-mile natural gas liquids pipeline (the “Buckeye NGL Pipeline”) that runs from Wattenberg, Colorado to Bushton, Kansas for $22.0 million. The assets had been classified as “Assets held for sale” in our consolidated balance sheet at December 31, 2009 with a carrying amount equal to the proceeds received. Revenues for Buckeye NGL Pipeline for the three and six months ended June 30, 2009 were $3.2 million and $6.5 million, respectively.

3. COMMITMENTS AND CONTINGENCIES

Claims and Proceedings

     In the ordinary course of business, we are involved in various claims and legal proceedings, some of which are covered by insurance. We are generally unable to predict the timing or outcome of these claims and proceedings. Based upon our evaluation of existing claims and proceedings and the probability of losses relating to such contingencies, we have accrued certain amounts relating to such claims and proceedings, none of which are considered material.

     In April 2010, the Pipeline Hazardous Materials Safety Administration (“PHMSA”) proposed penalties totaling approximately $0.5 million in connection with a tank overfill incident that occurred at our facility in East Chicago, Indiana, in May 2005 and other related personnel qualification issues raised as a result of PHMSA’s 2008 Integrity Inspection. We are contesting the proposed penalty. The timing or outcome of this appeal cannot reasonably be determined at this time.

     On July 30, 2010, a putative class action was filed by a unitholder against BGH, MainLine Management, BGH GP, and each of MainLine Management’s directors in the District Court of Harris County, Texas under the caption Broadbased Equities v. Forrest E. Wylie, et. al. In the Petition, the plaintiff alleges that MainLine Management and its directors breached their fiduciary duties to BGH’s public unitholders by, among other things, acting to facilitate the sale of BGH to Buckeye in order to facilitate the gradual sale by BGH GP of its interest in BGH and failing to disclose all material facts in order that the BGH unitholders can cast an informed vote on the Merger Agreement. Among other things, the Petition seeks an order certifying a class consisting of all BGH unitholders, a determination that the action is a proper derivative action, damages in an unspecified amount, and an award of attorneys’ fees and costs. The defendants have not yet answered or otherwise responded to the Petition.

     On August 2, 2010, a putative class action was filed by a unitholder against BGH, MainLine Management, Grand Ohio, LLC, Buckeye, Buckeye GP, and each of MainLine Management’s directors in the District Court of Harris County, Texas under the caption Henry James Steward v. Forrest E. Wylie, et. al. In the Petition, the plaintiff alleges that MainLine Management and its directors breached their fiduciary duties to BGH’s public unitholders by, among other things, failing to disclose all material facts in order that the BGH unitholders can cast an informed vote on the Merger Agreement. The Petition also alleges that Buckeye, Buckeye GP and Grand Ohio, LLC aided and abetted the breaches of fiduciary duty. Among other things, the Petition seeks an order certifying a plaintiff class consisting of all of BGH unitholders, an order enjoining the Merger, rescission of the Merger, damages in an unspecified amount, and an award of attorneys’ fees and costs. Neither we nor the other defendants have yet answered or otherwise responded to the Petition.

     On August 2, 2010, a putative class action was filed by a unitholder against BGH, MainLine Management, BGH GP, ArcLight, Kelso, Buckeye, Buckeye GP and each of MainLine Management’s directors, in the District Court of Harris County, Texas under the caption Henry James Steward v. Forrest E. Wylie, et. al. In the Petition, the plaintiff alleges that MainLine Management and its directors breached their fiduciary duties to BGH’s public unitholders by, among other things, accepting insufficient consideration, failing to condition the Merger on a majority vote of public unitholders of BGH, and failing to disclose all material facts in order that the BGH unitholders can cast an informed vote on the Merger Agreement. The Petition also alleges that Buckeye, Buckeye GP, BGH GP, ArcLight and Kelso aided and abetted the breaches of fiduciary duty. Among other things, the Petition seeks an order certifying a class consisting of all of BGH’s unitholders, an order enjoining the Merger, damages in an unspecified amount, and an award of attorneys’ fees and costs. Neither we nor the other defendants have yet answered or otherwise responded to the Petition.

Environmental Contingencies

     In accordance with our accounting policy, we recorded operating expenses, net of insurance recoveries, of $2.5 million and $1.2 million during the three months ended June 30, 2010 and 2009, respectively, and $5.4 million and $6.6 million during the six months ended June 30, 2010 and 2009, respectively, related to environmental expenditures unrelated to claims and proceedings.

Ammonia Contract Contingencies

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

     EPME has informed BGC that, notwithstanding the parties’ agreement, it will not continue to pay BGC for shortfalls created by the pass-through of ammonia costs in excess of ammonia revenues. EPME encouraged BGC to seek payment by invoking a $40.0 million guaranty made by El Paso, which guaranteed EPME’s obligations to BGC. If EPME fails to reimburse BGC for these shortfalls for a significant period during the remainder of the term of the ammonia agreements, then such unreimbursed shortfalls could exceed the $40.0 million cap on El Paso’s guaranty. To the extent the unreimbursed shortfalls significantly exceed the $40.0 million cap, the resulting costs incurred by BGC could adversely affect our financial position, results of operations and cash flows. To date, BGC has continued to receive payment for ammonia costs under the contracts at issue. BGC has not called on El Paso’s guaranty and believes only BGC may invoke the guaranty. EPME, however, contends that El Paso’s guaranty is the

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

source of payment for the shortfalls, but has not clarified the extent to which it believes the guaranty has been exhausted. We have been working with EPME to terminate the ammonia sales contracts and ammonia supply contracts and, at no out of pocket cost to us, have terminated one of the ammonia sales contracts. Given, however, the uncertainty of future ammonia prices and EPME’s future actions, we continue to believe we have risk of loss and, at this time, are unable to estimate the amount of any such losses we might incur in the future. We are assessing our options in the event that we and EPME are unable to terminate the remaining contracts or otherwise mitigate the remaining risk, including potential recourse against EPME and El Paso, with respect to this matter.

Customer Bankruptcy

     One of our customers filed for bankruptcy in October 2009; approximately $4.2 million remained payable to us from the customer pursuant to a pre-bankruptcy contract. In June 2010, we entered into a settlement with the bankrupt customer and its largest creditor pursuant to which we expect to be paid at least $2.0 million upon the sale of certain of the customer’s assets within the bankruptcy proceedings, and we were released from both asserted and unasserted claims. At this time, we expect the sale of the assets to be completed, and the settlement payment to be made to us, in the third quarter of 2010. As a result of the settlement, our Development & Logistics segment recognized approximately $2.1 million in expense related to the write-off of a portion of the outstanding receivable balance during the three and six months ended June 30, 2010.

4. INVENTORIES

     Our inventory amounts were as follows at the dates indicated:

		June 30,				December 31,
		2010				2009
Refined petroleum products (1)		$	264,638			$	299,473
Materials and supplies			10,536				10,741
Total inventories		$	275,174			$	310,214

     At June 30, 2010 and December 31, 2009, approximately 95% and 99%, respectively, of our inventory was hedged. Hedged inventory is valued at current market prices with the change in value of the inventory reflected in our condensed consolidated statements of operations.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. PREPAID AND OTHER CURRENT ASSETS

     Prepaid and other current assets consist of the following at the dates indicated:

		June 30,				December 31,
		2010				2009
Prepaid insurance		$	2,435			$	7,088
Insurance receivables			11,238				13,544
Ammonia receivable			1,690				7,429
Margin deposits			7,921				21,037
Prepaid services			21,742				21,571
Unbilled revenue			2,469				13,201
Tax receivable			7,162				7,162
Prepaid taxes			4,001				2,213
Other			9,916				11,006
Total prepaid and other current assets		$	68,574			$	104,251

6. EQUITY INVESTMENTS

     We own interests in related businesses that are accounted for using the equity method of accounting. The following table presents our equity investments, all included within the Pipeline Operations segment, at the dates indicated:

				June 30,				December 31,
		Ownership		2010				2009
Muskegon Pipeline LLC		40.0%		$	14,514			$	15,273
Transport4, LLC		25.0%			373				379
West Shore Pipe Line Company		24.9%			30,526				30,320
West Texas LPG Pipeline Limited Partnership		20.0%			53,155				50,879
Total equity investments				$	98,568			$	96,851

     The following table presents earnings from equity investments for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Muskegon Pipeline LLC		$	227			$	173			$	571			$	538
Transport4, LLC			30				40				69				70
West Shore Pipe Line Company			1,294				1,094				2,501				2,197
West Texas LPG Pipeline Limited Partnership			1,213				1,835				2,275				2,419
Total earnings from equity investments		$	2,764			$	3,142			$	5,416			$	5,224

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Combined income statement data for the periods indicated for our equity method investments is summarized below:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues		$	35,754			$	32,846			$	67,299			$	64,414
Costs and expenses			20,343				16,543				36,244				32,613
Non-operating expense			3,461				2,961				7,038				5,869
Net income			11,950				13,342				24,017				25,932

7. INTANGIBLE ASSETS

     Intangible assets consist of the following at the dates indicated:

		June 30,				December 31,
		2010				2009
Customer relationships		$	38,300			$	38,300
Accumulated amortization			(7,115	)			(5,631	)
Net carrying amount			31,185				32,669
Customer contracts			16,380				16,380
Accumulated amortization			(4,634	)			(3,892	)
Net carrying amount			11,746				12,488
Total intangible assets		$	42,931			$	45,157

     For the three months ended June 30, 2010 and 2009, amortization expense related to intangible assets was $1.1 million and $0.9 million, respectively. For the six months ended June 30, 2010 and 2009, amortization expense related to intangible assets was $2.2 million and $1.8 million, respectively. Amortization expense related to intangible assets is expected to be approximately $4.5 million for each of the next five years.

8. OTHER NON-CURRENT ASSETS

     Other non-current assets consist of the following at the dates indicated:

		June 30,				December 31,
		2010				2009
Prepaid services		$	8,065			$	11,640
Derivative assets			—				17,204
Debt issuance costs			12,459				11,058
Insurance receivables			7,530				7,265
Other			10,064				9,693
Total other non-current assets		$	38,118			$	56,860

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. ACCRUED AND OTHER CURRENT LIABILITIES

     Accrued and other current liabilities consist of the following at the dates indicated:

		June 30,				December 31,
		2010				2009
Taxes – other than income		$	16,278			$	15,487
Accrued employee benefit liability			3,287				3,287
Environmental liabilities			11,549				10,799
Accrued interest			30,699				30,613
Payable for ammonia purchase			1,803				7,015
Deferred revenue			20,306				6,829
Compensation and vacation			9,748				11,385
Accrued capital expenditures			425				1,611
Reorganization			—				2,133
Deferred consideration			2,010				1,675
Other			30,986				22,640
Total accrued and other current liabilities		$	127,091			$	113,474

10. DEBT OBLIGATIONS

Long-term debt consists of the following at the dates indicated:

		June 30,				December 31,
		2010				2009
BGH:
BGH Credit Agreement		$	—			$	—
Services Company:
3.60% ESOP Notes due March 28, 2011			4,634				7,790
Retirement premium			(35	)			(87	)
Buckeye:
4.625% Notes due July 15, 2013 (1)			300,000				300,000
5.300% Notes due October 15, 2014 (1)			275,000				275,000
5.125% Notes due July 1, 2017 (1)			125,000				125,000
6.050% Notes due January 15, 2018 (1)			300,000				300,000
5.500% Notes due August 15, 2019 (1)			275,000				275,000
6.750% Notes due August 15, 2033 (1)			150,000				150,000
Credit Facility			—				78,000
BES Credit Agreement			194,179				239,800
Total debt			1,623,778				1,750,503
Other, including unamortized discounts and fair value hedges			(3,819	)			(4,030	)
Subtotal debt			1,619,959				1,746,473
Less: Current portion of long-term debt			(198,778	)			(245,978	)
Total long-term debt		$	1,421,181			$	1,500,495

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The fair values of our aggregate debt and credit facilities were estimated to be $1,677.2 million and $1,769.8 million at June 30, 2010 and December 31, 2009, respectively. The fair values of the fixed-rate debt were estimated by observing market trading prices and by comparing the historic market prices of our publicly-issued debt with the market prices of other MLPs’ publicly-issued debt with similar credit ratings and terms. The fair values of the variable-rate debt are their carrying amounts, as the carrying amount reasonably approximates fair value due to the variability of the interest rates.

BGH

     We have a five-year, $10.0 million unsecured revolving credit facility with SunTrust Bank, as both administrative agent and lender (the “BGH Credit Agreement”). The BGH Credit Agreement may be used for working capital and other partnership purposes. We have pledged all of the limited liability company interests in Buckeye GP as security for our obligations under the BGH Credit Agreement. Borrowings under the BGH Credit Agreement bear interest under one of two rate options, selected by us, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime commercial lending rate; or (ii) the London Interbank Offered Rate (“LIBOR”), plus a margin which can range from 0.40% to 1.40%, based on the ratings assigned by Standard & Poor’s Rating Services and Moody’s Investor Service to our senior unsecured non-credit enhanced long-term debt. At June 30, 2010 and December 31, 2009, there were no amounts outstanding under the BGH Credit Agreement.

     The BGH Credit Agreement requires us to maintain leverage and funded debt coverage ratios. The leverage ratio covenant requires us to maintain, as of the last day of each fiscal quarter, a ratio of the total funded indebtedness of us and our Restricted Subsidiaries (as defined below), measured as of the last day of each fiscal quarter, to the aggregate dividends and distributions received by us and the Restricted Subsidiaries from Buckeye, plus all other cash received by us and the Restricted Subsidiaries, measured for the preceding twelve months, less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “Restricted Subsidiaries” as certain of our wholly owned subsidiaries. The funded debt coverage ratio covenant requires us to maintain, as of the last day of each fiscal quarter, a ratio of us and all of our consolidated subsidiaries total consolidated funded debt to the consolidated EBITDA, as defined in the BGH Credit Agreement, of us and all of our subsidiaries, measured for the preceding twelve months, of not more than 5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 in connection with future acquisitions. At June 30, 2010, our funded debt coverage ratio was 4.31 to 1.00.

     The BGH Credit Agreement contains other covenants that prohibit us from taking certain actions, including but not limited to, declaring dividends or distributions if any default or event of default has occurred or would result from such a declaration and limiting our ability to incur additional indebtedness, creating negative pledges and granting certain liens, making certain loans, acquisitions, and investments, making material changes to the nature of us and our Restricted Subsidiaries’ business, and entering into a merger, consolidation, or sale of assets. At June 30, 2010, we were not aware of any instances of noncompliance with the covenants under the BGH Credit Agreement.

Services Company ESOP Notes

     Services Company had total debt outstanding of $4.6 million and $7.7 million at June 30, 2010 and December 31, 2009, respectively, consisting of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-party lender. The 3.60% ESOP Notes were issued on May 4, 2004. The 3.60% ESOP Notes are collateralized by Services Company’s common stock and are guaranteed by Services Company. In addition, Buckeye has committed that, in the event that the value of Buckeye’s LP Units owned by Services Company falls below 125% of the balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficient assets to bring the value of the total collateral (the value of Buckeye’s LP Units owned by Services Company and the escrow account) up to the 125% minimum. Amounts deposited in the escrow account are returned to Buckeye when the value of Buckeye’s LP Units owned by Services Company returns to an amount that exceeds the 125% minimum. At June 30, 2010, the value of Buckeye’s LP Units owned by Services Company exceeded the 125% requirement.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Credit Facility

     Buckeye has a borrowing capacity of $580.0 million under an unsecured revolving credit agreement (the “Credit Facility”) with SunTrust Bank, as administrative agent, which may be expanded up to $780.0 million subject to certain conditions and upon the further approval of the lenders. The Credit Facility’s maturity date is August 24, 2012, which Buckeye may extend for up to two additional one-year periods. Borrowings under the Credit Facility bear interest under one of two rate options, selected by Buckeye, equal to either (i) the greater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin, or (ii) LIBOR plus an applicable margin. The applicable margin is determined based on the current utilization level of the Credit Facility and ratings assigned by Standard & Poor’s Rating Services and Moody’s Investor Service for Buckeye’s senior unsecured non-credit enhanced long-term debt. At June 30, 2010, no amounts were outstanding under the Credit Facility, while at December 31, 2009, $78.0 million was outstanding under the Credit Facility.

     The Credit Facility requires Buckeye to maintain a specified ratio (the “Funded Debt Ratio”) of no greater than 5.00 to 1.00 subject to a provision that allows for increases to 5.50 to 1.00 in connection with certain future acquisitions. The Funded Debt Ratio is calculated by dividing consolidated debt by annualized EBITDA, which is defined in the Credit Facility as earnings before interest, taxes, depreciation, depletion and amortization, in each case excluding the income of certain of Buckeye’s majority-owned subsidiaries and equity investments (but including distributions from those majority-owned subsidiaries and equity investments). At June 30, 2010, Buckeye’s Funded Debt Ratio was approximately 3.86 to 1.00. As permitted by the Credit Facility, the $194.2 million of borrowings by Buckeye Energy Services LLC (“BES”) under its separate credit agreement (discussed below) was excluded from the calculation of the Funded Debt Ratio.

     In addition, the Credit Facility contains other covenants including, but not limited to, covenants limiting Buckeye’s ability to incur additional indebtedness, to create or incur liens on its property, to dispose of property material to its operations, and to consolidate, merge or transfer assets. At June 30, 2010, we were not aware of any instances of noncompliance with the covenants under Buckeye’s Credit Facility.

     At June 30, 2010 and December 31, 2009, Buckeye had committed $1.4 million in support of letters of credit. The obligations for letters of credit are not reflected as debt on our condensed consolidated balance sheets.

BES Credit Agreement

     BES had a credit agreement (the “BES Credit Agreement”) that provided for borrowings of up to $250.0 million with a maturity date of May 20, 2011. On June 25, 2010, BES amended and restated the BES Credit Agreement to increase the total commitments for borrowings available to BES up to $500.0 million. However, the maximum amount available to be borrowed under the amended and restated BES Credit Agreement is initially limited to $350.0 million. An accordion feature provides BES the ability to increase the commitments under the BES Credit Agreement to $500.0 million, subject to obtaining the requisite commitments and satisfying other customary conditions. In addition to the accordion, subject to BES’s satisfaction of certain financial covenants as set forth in the financial covenants table below, BES may, from time to time, elect to increase or decrease the maximum amount available for borrowing under the BES Credit Agreement in $5.0 million increments, but in no event below $150.0 million or above $500.0 million. The maturity date of the BES Credit Agreement is June 25, 2013. BES incurred $3.2 million of debt issuance costs related to the amendment, which will be amortized into interest expense over the term of the BES Credit Agreement.

     Under the BES Credit Agreement, borrowings accrue interest under one of three rate options, at BES’s election, equal to (i) the Administrative Agent’s Cost of Funds (as defined in the BES Credit Agreement) plus 2.25%, (ii) the Eurodollar Rate (as defined in the BES Credit Agreement) plus 2.25% or (iii) the Prime Rate (as defined in the BES Credit Agreement) plus 1.25%. The BES Credit Agreement also permits Daylight Overdraft Loans (as defined in the BES Credit Agreement), Swingline Loans (as defined in the BES Credit Agreement) and letters of credit. Such alternative extensions of credit are subject to certain conditions as specified in the BES Credit Agreement. The BES Credit Agreement is secured by liens on certain assets of BES, including its inventory, cash deposits (other than certain accounts), investments and hedging accounts, receivables and intangibles.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The balances outstanding under the BES Credit Agreement were approximately $194.2 million and $239.8 million at June 30, 2010 and December 31, 2009, respectively, both of which were classified as current liabilities in our condensed consolidated balance sheets. The BES Credit Agreement requires BES to meet certain financial covenants, which are defined in the BES Credit Agreement and summarized below (in millions, except for the leverage ratio):

Borrowings		Minimum				Minimum				Maximum
outstanding on		Consolidated Tangible				Consolidated Net				Consolidated
BES Credit Agreement		Net Worth				Working Capital				Leverage Ratio
$150		$	40			$	30			7.0 to 1.0
Above $150 up to $200		$	50			$	40			7.0 to 1.0
Above $200 up to $250		$	60			$	50			7.0 to 1.0
Above $250 up to $300		$	72			$	60			7.0 to 1.0
Above $300 up to $350		$	84			$	70			7.0 to 1.0
Above $350 up to $400		$	96			$	80			7.0 to 1.0
Above $400 up to $450		$	108			$	90			7.0 to 1.0
Above $450 up to $500		$	120			$	100			7.0 to 1.0

     At June 30, 2010, BES’s Consolidated Tangible Net Worth and Consolidated Net Working Capital were $121.3 million and $71.5 million, respectively, and the Consolidated Leverage Ratio was 2.3 to 1.0. The weighted average interest rate for borrowings outstanding under the BES Credit Agreement was 2.5% at June 30, 2010.

     In addition, the BES Credit Agreement contains other covenants, including, but not limited to, covenants limiting BES’s ability to incur additional indebtedness, to create or incur certain liens on its property, to consolidate, merge or transfer its assets, to make dividends or distributions, to dispose of its property, to make investments, to modify its risk management policy, or to engage in business activities materially different from those presently conducted. At June 30, 2010, we were not aware of any instances of noncompliance with the covenants under the BES Credit Agreement.

11. OTHER NON-CURRENT LIABILITIES

     Other non-current liabilities consist of the following at the dates indicated:

		June 30,				December 31,
		2010				2009
Accrued employee benefit liabilities (see Note 13)		$	45,799			$	45,837
Accrued environmental liabilities			18,891				19,053
Derivative liabilities			18,953				—
Deferred consideration			17,420				18,425
Deferred rent			11,275				9,158
Deferred revenue			7,082				1,532
Other			8,860				8,937
Total other non-current liabilities		$	128,280			$	102,942

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

     We are exposed to certain risks, including changes in interest rates and commodity prices, in the course of our normal business operations. We use derivative instruments to manage risks associated with certain identifiable and anticipated transactions. Derivatives are financial instruments whose fair value is determined by changes in a specified benchmark such as interest rates or commodity prices. Typical derivative instruments include futures, forward contracts, swaps and other instruments with similar characteristics. We have no trading derivative instruments and do not engage in hedging activity with respect to trading instruments.

     Our policy is to formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives used in a transaction are highly effective in offsetting changes in cash flows or the fair value of hedged items. A discussion of our derivative activities by risk category follows.

Interest Rate Derivatives

     Buckeye utilizes forward-starting interest rate swaps to manage interest rate risk related to forecasted interest payments on anticipated debt issuances. This strategy is a component in controlling its cost of capital associated with such borrowings. When entering into interest rate swap transactions, Buckeye becomes exposed to both credit risk and market risk. Buckeye is subject to credit risk when the value of the swap transaction is positive and the risk exists that the counterparty will fail to perform under the terms of the contract. Buckeye is subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the swaps. Buckeye manages its credit risk by only entering into swap transactions with major financial institutions with investment-grade credit ratings. Buckeye manages its market risk by associating each swap transaction with an existing debt obligation or a specified expected debt issuance generally associated with the maturity of an existing debt obligation.

     Buckeye’s practice with respect to derivative transactions related to interest rate risk has been to have each transaction in connection with non-routine borrowings authorized by the board of directors of Buckeye GP. In January 2009, Buckeye GP’s board of directors adopted an interest rate hedging policy which permits Buckeye to enter into certain short-term interest rate swap agreements to manage its interest rate and cash flow risks associated with its Credit Facility. In addition, in July 2009 and May 2010, Buckeye GP’s board of directors authorized Buckeye to enter into certain transactions, such as forward-starting interest rate swaps, to manage its interest rate and cash flow risks related to certain expected debt issuances associated with the maturity of existing debt obligations.

     Buckeye expects to issue new fixed-rate debt (i) on or before July 15, 2013, to repay the $300.0 million of 4.625% Notes that are due on July 15, 2013, and (ii) on or before October 15, 2014, to repay the $275.0 million of 5.300% Notes that are due on October 15, 2014, although no assurances can be given that the issuance of fixed-rate debt will be possible on acceptable terms. During 2009, Buckeye entered into four forward-starting interest rate swaps with a total aggregate notional amount of $200.0 million related to the anticipated issuance of debt on or before July 15, 2013 and three forward-starting interest rate swaps with a total aggregate notional amount of $150.0 million related to the anticipated issuance of debt on or before October 15, 2014. During the three months ended June 30, 2010, Buckeye entered into two forward-starting interest rate swaps with a total aggregate notional amount of $100.0 million related to the anticipated issuance of debt on or before July 15, 2013 and three forward-starting interest rate swaps with a total aggregate notional amount of $125.0 million related to the anticipated issuance of debt on or before October 15, 2014. The purpose of these swaps is to hedge the variability of the forecasted interest payments on these expected debt issuances that may result from changes in the benchmark interest rate until the expected debt is issued. During the three and six months ended June 30, 2010, unrealized losses of $34.9 million and $36.2 million, respectively, were recorded in Buckeye’s accumulated other comprehensive income (loss) to reflect the change in the fair values of the forward-starting interest rate swaps. Buckeye designated the swap agreements as cash flow hedges at inception and expects the changes in values to be highly correlated with the changes in value of the underlying borrowings.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Over the next twelve months, Buckeye expects to reclassify $1.0 million of accumulated other comprehensive loss as an increase to interest expense that was generated by forward-starting interest rate swaps terminated in 2008 associated with its 6.050% Notes.

Commodity Derivatives

     Our Energy Services segment primarily uses exchange-traded refined petroleum product futures contracts to manage the risk of market price volatility on its refined petroleum product inventories and its fixed-price sales contracts. The derivative contracts used to hedge refined petroleum product inventories are designated as fair value hedges. Accordingly, our method of measuring ineffectiveness compares the change in the fair value of New York Mercantile Exchange (“NYMEX”) futures contracts to the change in fair value of our hedged fuel inventory. Hedge accounting is discontinued when the hedged fuel inventory is sold or when the related derivative contracts expire. In addition, we periodically enter into offsetting exchange-traded futures contracts to economically close-out an existing futures contract based on a near-term expectation to sell a portion of our fuel inventory. These offsetting derivative contracts are not designated as hedging instruments and any resulting gains or losses are recognized in earnings during the period. Presentations of futures contracts for inventory designated as hedging instruments in the following tables have been presented net of these offsetting futures contracts.

     Our Energy Services segment has not used hedge accounting with respect to its fixed-price sales contracts. Therefore, our fixed-price sales contracts and the related futures contracts used to offset those fixed-price sales contracts are all marked-to-market on the condensed consolidated balance sheets with gains and losses being recognized in earnings during the period.

     In order to hedge the cost of natural gas used to operate our turbine engines at our Linden, New Jersey location, our Pipeline Operations segment bought natural gas futures contracts in March 2009 with terms that coincide with the remaining term of an ongoing natural gas supply contract (through July 2011). We designated the futures contract as a cash flow hedge at inception.

     The following table summarizes our commodity derivative instruments outstanding at June 30, 2010 (amounts in thousands of gallons, except as noted):

		Volume (1)								Accounting
Derivative Purpose		Current				Long-Term (2)				Treatment
Derivatives NOT designated as hedging instruments:
Fixed-price sales contracts			29,050				168			Mark-to-market
Futures contracts for fixed-price sales contracts			24,612				168			Mark-to-market
Futures contracts for inventory			2,777				—			Mark-to-market
Derivatives designated as hedging instruments:
Futures contracts for inventory			123,522				—			Fair Value Hedge
Futures contracts for natural gas (BBtu) (3)			360				30			Cash Flow Hedge

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The following table sets forth the fair value of each classification of derivative instruments at the dates indicated:

		June 30, 2010												December 31, 2009
										Derivative												Derivative
		Assets				(Liabilities)				Net Carrying				Assets				(Liabilities)				Net Carrying
		Fair value				Fair value				Value				Fair value				Fair value				Value
Derivatives NOT designated as hedging instruments:
Fixed-price sales contracts		$	5,213			$	(258	)		$	4,955			$	4,959			$	(3,662	)		$	1,297
Futures contracts for fixed-price sales contracts			1,492				(1,806	)			(314	)			7,594				(384	)			7,210
Futures contracts for inventory			3,336				(3,457	)			(121	)			—				—				—
Derivatives designated as hedging instruments:
Futures contracts for inventory			8,094				(2,748	)			5,346				1,992				(20,517	)			(18,525	)
Futures contracts for natural gas			—				(140	)			(140	)			312				—				312
Interest rate contracts			—				(18,953	)			(18,953	)			17,204				—				17,204
Total										$	(9,227	)										$	7,498

		June 30,				December 31,
Balance Sheet Locations:		2010				2009
Derivative assets		$	10,093			$	4,959
Other non-current assets			—				17,204
Derivative liabilities			(367	)			(14,665	)
Other non-current liabilities			(18,953	)			—
Total		$	(9,227	)		$	7,498

     Our hedged inventory portfolio extends to the first quarter of 2011. The majority of the unrealized income of $5.2 million at June 30, 2010 for inventory hedges represented by futures contracts will be realized by the third quarter of 2010 as the related inventory is sold. Gains recorded on inventory hedges that were ineffective were approximately $1.0 million and $3.3 million for the three months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009, gains recorded on inventory hedges that were ineffective were approximately $5.8 million and $7.6 million, respectively. At June 30, 2010, open refined petroleum product derivative contracts (represented by the fixed-price sales contracts and futures contracts for fixed-price sales contracts noted above) varied in duration, but did not extend beyond October 2011. In addition, at June 30, 2010, we had refined petroleum product inventories which we intend to use to satisfy a portion of the fixed-price sales contracts.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The gains and losses on our derivative instruments recognized in income were as follows for the periods indicated:

				Gain (Loss) Recognized in Income on Derivatives
				Three Months Ended								Six Months Ended
				June 30,								June 30,
		Location		2010				2009				2010				2009
Derivatives NOT designated as hedging instruments:
Fixed-price sales contracts		Product sales		$	6,268			$	(13,866	)		$	8,678			$	(571	)
Futures contracts for fixed-price sales contracts		Cost of product sales and natural gas storage services			(2,972	)			19,007				(3,466	)			11,461
Futures contracts for inventory		Cost of product sales and natural gas storage services			20				—				266				—
Derivatives designated as fair value hedging instruments:
Futures contracts for inventory		Cost of product sales and natural gas storage services		$	18,123			$	(31,251	)		$	13,213			$	(3,603	)

     The gains and losses reclassified from accumulated other comprehensive income (“AOCI”) to income and the change in value recognized in other comprehensive income (“OCI”) on our derivatives were as follows for the periods indicated:

				Gain (Loss) Reclassified from AOCI to Income
				Three Months Ended								Six Months Ended
				June 30,								June 30,
		Location		2010				2009				2010				2009
Derivatives designated as cash flow hedging instruments:
Futures contracts for natural gas		Cost of product sales and natural gas storage services		$	(96	)		$	(162	)		$	(168	)		$	(215	)
Futures contracts for refined petroleum products		Cost of product sales and natural gas storage services			—				(379	)			—				(146	)
Interest rate contracts		Interest and debt expense			(242	)			(164	)			(482	)			(656	)

		Change in Value Recognized in OCI on Derivatives
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Derivatives designated as cash flow hedging instruments:
Futures contracts for natural gas		$	85			$	46			$	(611	)		$	163
Interest rate contracts			(34,853	)			(158	)			(36,157	)			(157	)

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. Recognized valuation techniques employ inputs such as product prices, operating costs, discount factors and business growth rates. These inputs may be either readily observable, corroborated by market data or generally unobservable. In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the extent possible. Accordingly, we utilize valuation techniques (such as the income or market approach) that maximize the use of observable inputs and minimize the use of unobservable inputs.

     A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements based on the observability of inputs used to estimate such fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy. The characteristics of fair value amounts classified within each level of the hierarchy are described as follows:

	•		Level 1 inputs are based on quoted prices, which are available in active markets for identical assets or liabilities as of the reporting date. Active markets are defined as those in which transactions for identical assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
	•		Level 2 inputs are based on pricing inputs other than quoted prices in active markets and are either directly or indirectly observable as of the measurement date. Level 2 fair values include instruments that are valued using financial models or other appropriate valuation methodologies and include the following:

	§		Quoted prices in active markets for similar assets or liabilities.
	§		Quoted prices in markets that are not active for identical or similar assets or liabilities.
	§		Inputs other than quoted prices that are observable for the asset or liability.
	§		Inputs that are derived primarily from or corroborated by observable market data by correlation or other means.

•

Level 3 inputs are based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect the reporting entity’s own ideas about the assumptions that market participants would use in pricing an asset or liability (including assumptions about risk). Unobservable inputs are based on the best information available in the circumstances, which might include the reporting entity’s internally developed data. The reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort. Level 3 inputs are typically used in connection with internally developed valuation methodologies where management makes its best estimate of an instrument’s fair value.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recurring

     The following table sets forth financial assets and liabilities, measured at fair value on a recurring basis, as of the measurement dates, June 30, 2010 and December 31, 2009, and the basis for that measurement, by level within the fair value hierarchy:

		June 30, 2010								December 31, 2009
						Significant								Significant
		Quoted Prices				Other				Quoted Prices				Other
		in Active				Observable				in Active				Observable
		Markets				Inputs				Markets				Inputs
		(Level 1)				(Level 2)				(Level 1)				(Level 2)
Financial assets:
Fixed-price sales contracts		$	—			$	5,121			$	—			$	4,959
Futures contracts for inventory and fixed-price sales contracts			4,973				—				—				—
Asset held in trust			—				—				1,793				—
Interest rate derivatives			—				—				—				17,204
Financial liabilities:
Fixed-price sales contracts			—				(166	)			—				(3,662	)
Futures contracts for inventory and fixed-price sales contracts			(202	)			—				(11,003	)			—
Interest rate derivatives			—				(18,953	)			—				—
Total		$	4,771			$	(13,998	)		$	(9,210	)		$	18,501

     The value of the Level 1 derivative assets and liabilities were based on quoted market prices obtained from the NYMEX. The value of the Level 1 asset held in trust was obtained from quoted market prices. The value of the Level 2 derivative assets and liabilities were based on observable market data related to the obligations to provide petroleum products. The value of the Level 2 interest rate derivatives was based on observable market data related to similar obligations.

     The Level 2 derivative assets of $5.1 million and $5.0 million as of June 30, 2010 and December 31, 2009, respectively, are net of a credit valuation adjustment (“CVA”) of ($0.6) million and ($0.9) million, respectively. Because few of the Energy Services segment’s customers entering into these fixed-price sales contracts are large organizations with nationally-recognized credit ratings, the Energy Services segment determined that a CVA, which is based on the credit risk of such contracts, is appropriate. The CVA is based on the historical and expected payment history of each customer, the amount of product contracted for under the agreement and the customer’s historical and expected purchase performance under each contract.

BUCKEYE GP HOLDINGS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Non-Recurring

     Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following table presents the fair value of an asset carried on the condensed consolidated balance sheet by asset classification and by level within the valuation hierarchy (as described above) at the date indicated for which a nonrecurring change in fair value has been recorded during the three and six months ended June 30, 2009:

		June 30,																Total
		2009				Level 1				Level 2				Level 3				Losses
Assets held for sale (1)		$	5,760			$	—			$	—			$	5,760			$	72,540

     As a result of a loss in the customer base utilizing the Buckeye NGL Pipeline, we recorded a non-cash impairment charge of $72.5 million during the three and six months ended June 30, 2009. The estimated fair value was based on a probability-weighted combination of income and market approaches.

13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

     Services Company, which employs the majority of our workforce, sponsors a retirement income guarantee plan (“RIGP”), which is a defined benefit plan that generally guarantees employees hired before January 1, 1986 a retirement benefit based on years of service and the employee’s highest compensation for any consecutive 5-year period during the last 10 years of service or other compensation measures as defined under the respective plan provisions. The retirement benefit is subject to reduction at varying percentages for certain offsetting amounts, including benefits payable under a retirement and savings plan discussed further below. Services Company funds the plan through contributions to pension trust assets, generally subject to minimum funding requirements as provided by applicable law.

     Services Company also sponsors an unfunded post-retirement benefit plan (the “Retiree Medical Plan”), which provides health care and life insurance benefits to certain of its retirees. To be eligible for these benefits, an employee must have been hired prior to January 1, 1991 and meet certain service requirements.

     The components of the net periodic benefit cost for the RIGP and Retiree Medical Plan were as follows for the three months ended June 30, 2010 and 2009:

		RIGP								Retiree Medical Plan
		Three Months Ended								Three Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Service cost		$	65			$	207			$	117			$	105
Interest cost			227				369				786				491
Expected return on plan assets			(86	)			(189	)			—				—
Amortization of prior service benefit			(11	)			(118	)			(1,175	)			(859	)
Amortization of unrecognized losses			242				355				354				261
Settlement/curtailment charge (1)			—				7,171				—				800
Net periodic benefit costs		$	437			$	7,795			$	82			$	798