Overview

The following discussion provides an analysis of the financial condition and results of operations for Buckeye GP Holdings L.P. ("BGH") and each of BGH's operating segments, including an overview of BGH's liquidity and capital resources and other related matters. The following discussion and analysis should be read in conjunction with (i) the accompanying interim condensed consolidated financial statements and related notes and (ii) BGH's consolidated financial statements, related notes, and management's discussion and analysis of financial condition and results of operations included in BGH's Annual Report on Form 10-K for the year ended December 31, 2007.

Buckeye GP Holdings L.P.

BGH's limited partner units are owned approximately 62% by BGH GP Holdings, LLC ("BGH Holdings"), approximately 1% by certain members of senior management and approximately 37% by the public. BGH owns and controls Buckeye GP LLC ("Buckeye GP"), which is the general partner of Buckeye Partners, L.P. ("Buckeye"), a publicly traded Delaware limited partnership. BGH is managed by its general partner, MainLine Management LLC ("MainLine Management"), which is owned by BGH Holdings. BGH's only cash-generating assets are its partnership interests in Buckeye, comprised primarily of the following:

† the incentive distribution rights in Buckeye;

† the general partner interests in Buckeye (representing 243,914 general partner units (the "GP Units"), or an approximate 0.5% interest in Buckeye);

† the indirect ownership of the general partner interests in certain of Buckeye's operating subsidiaries (representing an 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 entitle BGH to receive amounts equal to specified percentages of the incremental amount of cash distributed by Buckeye to the holders of Buckeye's LP Units (each, a "unitholder") when target distribution levels for each quarter are exceeded. The 2,573,146 LP Units originally issued to Buckeye's Employee Stock Ownership Plan ("ESOP") are excluded for the purpose of calculating incentive distributions. The target distribution levels begin at $0.325 and increase in steps to the highest target distribution level of $0.525 per eligible LP Unit. When Buckeye makes quarterly distributions above this level, the incentive distributions include an amount equal to 45% of the incremental cash distributed to each eligible unitholder for the quarter, or approximately 29.5% of total incremental cash distributed by Buckeye above $0.525 per LP Unit.

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

The following table summarizes BGH's cash received for the three and nine months ended September 30, 2008 and 2007 as a result of its partnership interests in Buckeye:

                                           Three Months Ended        Nine Months Ended
                                             September 30,             September 30,
                                           2008          2007         2008        2007
                                                         (In thousands)
Incentive distributions from Buckeye    $     9,990    $   7,558   $   28,647   $  21,699
Distributions from the ownership of
243,914 of Buckeye's GP Units                   210          198          622         585
Distributions from the indirect 1%
ownership in certain of Buckeye's
operating subsidiaries                          459          356          808         974
Distributions from the ownership of
80,000 of Buckeye's LP Units                     69           65          204         192
                                        $    10,728    $   8,177   $   30,281   $  23,450

Buckeye Partners, L.P.

Buckeye owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered. Buckeye owns and operates approximately 5,400 miles of pipeline and 64 active products terminals, with aggregate storage capacity of approximately 24.7 million barrels. In addition, Buckeye operates and maintains approximately 2,200 miles of other pipelines under agreements with major oil and chemical companies. Through the recent 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 now owns and operates two major natural gas storage facilities in northern California and markets refined petroleum products in certain areas served by Buckeye's pipelines and terminals.

Lodi Gas owns and operates two natural gas storage facilities near Lodi, California. Together, these facilities provide approximately 22 billion cubic feet ("bcf") of gas capacity and are connected to Pacific Gas and Electric's intrastate gas pipelines that service natural gas demand in the San Francisco and Sacramento areas (see Note 3 to the condensed consolidated financial statements for a further discussion). The Lodi Gas acquisition has allowed Buckeye to substantially expand its operations on the West Coast. In addition, in October 2008, Lodi Gas successfully began natural gas injection into an expansion of its natural gas storage reservoir known as Kirby Hills Phase II. The Kirby Hills Phase II storage expansion, when fully operational, will add an estimated 11 bcf of natural gas storage capacity. The Kirby Hills Phase II expansion project is expected to be fully operational in February 2009. Lodi Gas's revenues are generated by fee-based storage contracts, the majority of which are comprised of firm storage agreements for specified levels of injection and withdrawal service. Additional revenues are earned through interruptible services, called hub services, for which Lodi Gas earns fees for storing a customer's gas or loaning gas to a customer on an interruptible basis around Lodi Gas's firm storage commitments. Lodi Gas does not take title to the natural gas that it stores.

When Farm & Home was acquired, it sold refined petroleum products on a wholesale basis, principally in eastern and central Pennsylvania, and it also had retail operations. Buckeye sold Farm & Home's retail operations to a wholly owned subsidiary of Inergy, L.P. on April 15, 2008. The assets and liabilities and results of operations of Farm & Home's retail operations were determined to be discontinued operations effective on the Farm & Home acquisition date of February 8, 2008 (see Note 3 to the condensed consolidated financial statements for a further discussion). On July 31, 2008, Farm & Home was merged with and into its wholly owned subsidiary, Buckeye Energy Services LLC ("BES"), with BES continuing as the surviving entity.

Buckeye's pipeline and terminal customers are major integrated oil companies, large refined petroleum products marketing companies, major end users of petroleum products, and chemical and utility companies. Lodi Gas's customers are major natural gas utility companies and natural gas marketing and distribution companies. BES's wholesale customers are primarily product wholesalers and major commercial users of refined petroleum products.

The acquisitions of Lodi Gas and Farm & Home added two additional reportable segments, Natural Gas Storage and Energy Services. Effective in the first quarter of 2008, BGH conducted business in five reportable operating segments:
Pipeline Operations; Terminalling and Storage; Natural Gas Storage; Energy Services; and Other Operations. See Note 16 to the condensed consolidated financial statements for a more detailed discussion of BGH's operating segments.

Results of Operations

The results of operations discussed below principally reflect the activities of Buckeye. Since the accompanying condensed consolidated financial statements of BGH include the consolidated results of Buckeye, BGH's consolidated statements are substantially similar to Buckeye's except as noted below:

† Interest of non-controlling partners in Buckeye-BGH's condensed consolidated balance sheet includes a non-controlling interest liability that reflects the proportion of Buckeye owned by its partners other than BGH. Similarly, the ownership interests in Buckeye held by its partners other than BGH are reflected in BGH's condensed consolidated income statement as non-controlling interest expense. These non-controlling interest liabilities and expenses are not reflected in Buckeye's condensed consolidated financial statements.

† BGH's capital structure-In addition to incorporating the assets and liabilities of Buckeye, BGH's condensed consolidated balance sheet includes BGH's own indebtedness and related debt placement costs, and the partners' capital on BGH's balance sheet represents BGH's partners' capital as opposed to the capital reflected in Buckeye's balance sheet, which reflects the ownership 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's financial statements.

† Inclusion of Buckeye Pipe Line Services Company-The financial statements of Buckeye Pipe Line Services Company ("Services Company"), which employs the employees who manage and operate the assets of Buckeye, are consolidated into BGH's financial statements. The financial statements of Buckeye do not include the financial statements of Services Company.

† BGH's general and administrative expenses-BGH incurs general and administrative expenses that are independent from Buckeye's operations and are not reflected in Buckeye's condensed consolidated financial statements.

† Elimination of intercompany transactions-Intercompany obligations and payments among Buckeye and its consolidated subsidiaries, BGH and Services Company are reflected in Buckeye's consolidated financial statements but are eliminated in BGH's consolidated financial statements.

Summary operating results for BGH were as follows:

                                             Three Months Ended          Nine Months Ended
                                                September 30,              September 30,
                                              2008         2007          2008          2007
                                                             (In thousands)
Revenue                                    $  496,170    $ 125,653    $ 1,368,994    $ 375,548
Costs and expenses                            432,919       79,431      1,192,663      236,478

Operating income                               63,251       46,222        176,331      139,070

Other (expenses)                              (18,949 )    (12,285 )      (54,546 )    (38,631 )
Income before equity income and
non-controlling interest                       44,302       33,937        121,785      100,439

Equity income                                   2,403        2,222          5,802        6,266
Non-controlling interest expense              (39,471 )    (31,081 )     (109,187 )    (91,557 )

Net income                                 $    7,234    $   5,078    $    18,400    $  15,148

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

                                             Three Months Ended          Nine Months Ended
                                                September 30,              September 30,
                                              2008         2007          2008          2007
                                                             (In thousands)
Revenue:
Pipeline Operations                        $   91,439    $  92,067    $   286,716    $ 278,244
Terminalling and Storage                       33,003       24,843         87,749       72,379
Natural Gas Storage                            16,762            -         43,412            -
Energy Services                               344,494            -        926,809            -
Other Operations                               12,011        8,743         33,637       24,925
Intersegment                                   (1,539 )          -         (9,329 )          -
Total                                      $  496,170    $ 125,653    $ 1,368,994    $ 375,548

Operating income:
Pipeline Operations                        $   32,518    $  34,451    $   106,085    $ 105,364
Terminalling and Storage                       16,727        9,513         39,222       27,273
Natural Gas Storage                             8,780            -         21,162            -
Energy Services                                 3,870            -          5,213            -
Other Operations                                1,356        2,258          4,649        6,433
Total                                      $   63,251    $  46,222    $   176,331    $ 139,070

Total costs and expenses (including
depreciation and amortization):
Pipeline Operations                        $   58,921    $  57,616    $   180,631    $ 172,880
Terminalling and Storage                       16,276       15,330         48,527       45,106
Natural Gas Storage                             7,982            -         22,250            -
Energy Services                               340,624            -        921,596            -
Other Operations                               10,655        6,485         28,988       18,492
Intersegment                                   (1,539 )          -         (9,329 )          -
Total                                      $  432,919    $  79,431    $ 1,192,663    $ 236,478

Depreciation and amortization:
Pipeline Operations                        $    9,373    $   9,412    $    26,383    $  25,619
Terminalling and Storage                        1,487          824          4,232        3,563
Natural Gas Storage                               915            -          3,430            -
Energy Services                                 2,151            -          2,822            -
Other Operations                                  416          175          1,200          937
Total                                      $   14,342    $  10,411    $    38,067    $  30,119

Third Quarter of 2008 compared to Third Quarter of 2007

Total revenues for the quarter ended September 30, 2008 were $496.2 million, approximately $370.5 million greater than revenue for the same period in 2007. Of the $370.5 million increase in revenue in the third quarter of 2008, $16.8 million resulted from the addition of Lodi Gas's operations and $344.5 million resulted from the addition of Farm & Home's legacy wholesale operations. The results of Lodi Gas and Farm & Home's legacy wholesale operations are included below in the Natural Gas Storage and Energy Services segments, respectively. The balance of the revenue improvement of approximately $9.2 million was attributable to the remaining reporting segments as discussed below.

Pipeline Operations:

Revenues from Pipeline Operations of $91.4 million in the third quarter of 2008 slightly declined when compared to revenues from Pipeline Operations in the third quarter of 2007. The decrease of $0.6 million or 0.1% was primarily the result of:

† Transportation revenue being flat in the third quarter of 2008 compared to the third quarter of 2007 as the benefit of the tariff increases implemented on July 1, 2008 did not fully offset reduced product volumes in the third quarter of 2008 as compared to the third quarter of 2007. Management believes the reduced volumes in 2008 were caused primarily by reduced demand for gasoline resulting from higher retail gasoline prices, the continued introduction of ethanol into retail gasoline products as well as reduced demand for distillates resulting from higher retail distillate prices and adverse changes in the U.S. economy. Total product volumes declined by 4.6% in the third quarter of 2008 compared to the third quarter of 2007;

† An approximate $2.7 million reduction in revenue representing the settlement of overages and shortages on product deliveries; and

† A net increase in incidental revenues of $2.1 million, which was principally related to an increase in revenue of $1.9 million for contract service activities at customer facilities connected to Buckeye's refined products pipelines.

During 2007 and continuing into 2008, Buckeye experienced measurement shortages in connection with its pipeline product deliveries in excess of historical variances. Based on an investigation of these measurement issues, certain corrective actions have been taken. Buckeye believes the measurement issues have, to a large extent, been isolated and generally corrected, although monitoring and evaluation of product measurement issues is continuing. Additionally, the cost of product downgrades which result from the interface of different products in the pipeline has increased as a result of the significant increases in the volatility of product prices. Buckeye has implemented a number of measures to mitigate the effects of these issues, including tariff adjustments to allow for the equitable allocation of operational effects of transportation.

Product volumes transported in Pipelines Operations for the quarter ended September 30, 2008 and 2007 were as follows:

                   Average Barrels Per Day
              Three Months Ended September 30,
Product           2008                2007
Gasoline             682,500             730,100
Distillate           263,100             274,000
Jet Fuel             363,600             376,100
LPG's                 18,800              18,600
NGL's                 21,000              21,100
Other                 11,400               5,700
Total              1,360,400           1,425,600

On May 1, 2008 and July 1, 2008, certain of Buckeye's operating subsidiaries in the Pipeline Operations segment filed pipeline tariffs reflecting increased rates on average of approximately 4.8%. These tariff rate increases are expected to generate approximately $16.4 million in additional revenue on an annualized basis.

Terminalling and Storage:

Revenues from the Terminalling and Storage segment were $33.0 million in the third quarter of 2008, which is an increase of $8.2 million, or 33%, compared to the third quarter of 2007. The revenue increase was primarily the result of:

† An approximate $4.2 million increase in revenue primarily related to increases in blending fees for product additives and product recoveries from vapor recovery units, which were offset by an approximately 6.2% decline in terminal throughput volumes in the third quarter of 2008 compared to the third quarter of 2007;

† Incremental revenue of $1.2 million in 2008 due to the acquisitions of the Niles, Michigan, Ferrysburg, Michigan, and Albany, New York terminals as more fully described in Note 3 to the accompanying condensed consolidated financial statements; and

† $2.8 million from the settlement, net of receivable, of contractual product handling charges with a customer.

Average daily throughput for the products terminals for the quarters ended September 30, 2008 and 2007 were as follows:

Average Barrels Per Day Three Months Ended September 30, 2008 2007

Products throughput 539,200 575,100

Natural Gas Storage:

Revenue from the Natural Gas Storage segment was $16.8 million in the third quarter of 2008. Approximately 63.0% of this revenue represented firm storage revenues and 37.0% represented hub services revenues.

Energy Services:

Revenue from the Energy Services segment was $344.5 million in the third quarter of 2008. Revenue from the Energy Services segment was derived from Farm & Home's legacy wholesale operations, which Buckeye acquired on February 8, 2008. Farm & Home's retail operations were sold on April 15, 2008, and are treated as discontinued operations for all periods presented in 2008. During the third quarter of 2008, approximately 105.9 million gallons of product were sold. Products sold include gasoline, propane, and petroleum distillates such as heating oil, diesel fuel, and kerosene.

Other Operations:

Revenue from the Other Operations segment was $12.0 million in the third quarter of 2008, which is an increase of $3.3 million, or 37.9% compared to the third quarter of 2007. The revenue increase was primarily the result of:

† A reduction of $1.1 million in pipeline operation and maintenance revenue related to the expiration of several maintenance contracts in 2008; and

† An increase of $4.3 million in construction management revenue related to new construction contracts. These construction activities are principally conducted on a time and material basis.

Operating Expenses:

Costs and expenses for the three months ended September 30, 2008 and 2007 were as follows:

                                          Costs and Expenses
                                   Three Months Ended September 30,
                                        2008                 2007
                                            (In thousands)
Cost of product sales           $            334,959    $        1,278
Payroll and payroll benefit                   28,318            24,334
Depreciation and amortization                 14,342            10,411
Outside services                              10,111            10,658
Operating power                                7,837             7,744
Property and other taxes                       6,050             5,448
Insurance and casualty losses                  4,751             3,442
Construction management                        7,567             1,609
Supplies                                       1,562             2,357
Rentals                                        5,642             2,989
All other                                     11,780             9,161
            Total               $            432,919    $       79,431

Cost of product sales was $335.0 million in the third quarter of 2008, which is an increase over the third quarter of 2007 of $333.7 million. Approximately $333.4 million of the increase was attributable to product sold by the Energy Services segment, which consists primarily of the operations of Farm & Home's legacy wholesale operations. The remaining increase is principally associated with fuel purchases related to a product supply arrangement in Buckeye's Pipeline Operations segment.

Payroll and payroll benefits were $28.3 million in the third quarter of 2008, an increase of $4.0 million compared to the third quarter of 2007. The operations of the Natural Gas Storage and the Energy Services segments added $1.0 million and $1.9 million of payroll and payroll benefits expense for the period, respectfully. In addition, increases in salaries, wages, and incentive compensation added $1.5 million for the period. The increases in salaries, wages, and incentive compensation were primarily the result of an increase in the number of employees due to Buckeye's expansion of its operations. BGH's payroll expense also increased by $0.4 million due to accruals related to executive compensation and charges for BGH Holdings' equity incentive plan. These increases were offset by a decrease in ESOP related costs of $0.5 million for the third quarter of 2008.

Depreciation and amortization expense was $14.3 million in the third quarter of 2008, which is an increase of $3.9 million over the third quarter of 2007. The operations of the Natural Gas Storage and the Energy Services segments added $1.0 million and $2.3 million of depreciation and amortization expense in the three months ended September 30, 2008, respectively. The remaining increase in depreciation and amortization expense resulted from Buckeye's ongoing maintenance and expansion capital program.

Outside services costs were $10.1 million in the third quarter of 2008, which is a decrease of $0.6 million over the third quarter of 2007. The operations of the Natural Gas Storage and the Energy Services segments added $1.0 million and $0.2 million of outside services costs in the three months ended September 30, 2008, respectively. These increases were offset by a decrease in maintenance and pipeline integrity projects in the third quarter of 2008 as compared to the third quarter of 2007. Outside services costs consist principally of third-party contract services for pipeline and terminal maintenance activities.

Operating power costs were $7.8 million for the three months ended September 30, 2008, and were consistent with operating power costs the three months ended September 30, 2007. Operating power consists primarily of electricity required to operate pipeline pumping facilities.

Property and other taxes were $6.1 million in the third quarter of 2008, an increase of $0.7 million compared to the third quarter of 2007, which was primarily due to the operations of the Natural Gas Storage segment.

Insurance and casualty losses were $4.8 million for the three months ended September 30, 2008, which is an increase of $1.4 million from the three months ended September 30, 2007. Casualty losses increased by $1.2 million due to an increase of $0.6 million in the costs of remediating environmental incidents and $0.6 million in expenses relating to a product contamination incident. Insurance costs increased by $0.1 million, which is primarily due to the inclusion of the Natural Gas Storage and Energy Services operations.

Construction management costs were $7.6 million in the third quarter of 2008, which is an increase of $6.0 million from the third quarter of 2007. In the third quarter of 2008, Buckeye started three significant construction contracts, which are expected to be completed in the fourth quarter of 2008.

Supplies expense was $1.6 million for the three months ended September 30, 2008, which is a decrease of $0.8 million from the three months ended September 30, 2007. The decrease is primarily due to a decrease in terminal additive purchases at terminals owned by Buckeye.

Rental expense was $5.6 million in the third quarter of 2008, which is an increase of $2.6 million over the third quarter of 2007. The operations of the . . .